AI OCR 
TaxTMI 
TaxTMI 
TaxTMI 
2019 (11) TMI 1112
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....s of Rs. 41,72,410/- and book loss of Rs. 38,37,98,111/- under the provisions of Sec.115JB of the Act. Initially, the return was processed u/s 143(1), but subsequently it was taken up for scrutiny under CASS. 2.1. During the assessment proceedings u/s 143(3) of the Act, the AO observed that the assessee had entered into international transactions during the F.Y. relevant to A.Y. before us. Therefore, for the determination of the Arm's Length Price (ALP) of the said transactions, the AO referred the matter to Transfer Pricing Officer (TPO) u/s 92CA of the Act. The TPO passed the order u/s 92CA(3) of the Act on 31/10/2016 proposing TP adjustment of Rs. 4,80,85,483/-. In accordance with such proposal, the draft assessment order dated 30.12.2016 was proposed to assess the total income at Rs. 8,02,21,873/- including the transfer pricing adjustment. The assessee filed its Objections before the Dispute Resolution Panel (DRP) Bangalore, and the DRP, vide directions dated 19.9.2017, directed the AO/TP to exclude certain companies from the final list of comparables and also granted partial relief with regard to other issues. Consequently, the final assessment order dated 28.11.2017 was pa....
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.... supported by any material evidence, which is not correct. 2.8. Erred in not considering the comparables selected by the assessee in the TP documentation while determining the ALP adjustment in respect of software development services. Incorrect Operating Margin Calculation of assessee 2.9. Erred in calculating the operating profit and PLI of the assessee at Rs. 1,76,40,476/- and PLI (OP/OC) of 8.21% instead of accepting the assessee's operating margin of Rs. 6,29,96,056/- and PLI (OP/OC) of 37.18%. 2.10. Erred in calculating the incorrect operating margin of the assessee by considering certain non operating items as operating expenses. 2.10.1. Erred in considering underutilization cost of Rs. 3,03,12,062/ - as operating cost while calculating operating margin of the assessee, without appreciating the fact that the said expenditure is an extra ordinary in nature and not related with the transaction of software development service with AE. 2.10.2 Erred in considering consultancy charges of Rs. 1,05,07,684/- as operating cost while calculating operating margin of the assessee, without appreciating the fact that the same is not rel....
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....d in including "CG - VAK Software & Exports Ltd" in the final list of comparables which is functionally dissimilar. 2.19. Erred in including "Persistent Systems Ltd" in the final list of comparables which is functionally dissimilar, no clear segmental information, has turnover more than Rs. 200 crores, has high brand value and a gigantic company having super normal profits. 2.20. Erred in including "Info beans Technologies" in the final list of comparables which is functionally dissimilar and has no clear segmental information. 2.21. Erred in including "Larsen & Toubro Infotech Ltd" in the final list of comparables which is functionally dissimilar, has no clear segmental information has high brand value and is a gigantic company. Risk Adjustment and Working Capital Adjustment 2.22. Erred in calculating adjusted Arm's Length Margin (ALM) of assessee company at 23.77% (ALM at 19.96% - WCA at (-) 3.81 %) after making working capital adjustment of (-) 3.81 % and not providing for any risk adjustment by depriving off the benefit of (+)/ (-) 5% in terms of proviso to section 92C (2) of the Act. 2.22.1. Erred in not providing risk ....
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....k-up can be charged on it. 4.3. Ought to have appreciated the fact that the transaction relating to reimbursement of expenditure / outstanding receivables is not an international 4.4. Erred in making ALP adjustment with respect to the transaction of reimbursement of expenditure, without appreciating the fact that the same is not routed through P&L A/ c and is a mere book entry. Hence, no adjustment can be made in this regard. 4.5. Erred in aggregating the fact that the judgment of ITAT, Hyderabad in assessee's own case for the AY 2009-10, AY 2010-11 & 2011-12 directing to delete the entire addition made towards reimbursement as the same is not debited to the books of the assessee company. 5. Erred in disallowing bad debts of Rs, 21,48,81,750/- without appreciating the fact that the same is related to the sales made during the course of business and has become irrecoverable and is to be allowed as per section 36(1)(vii) of the Act. 5.1. Erred in not appreciating the fact that the bad debt referred above was offered to tax earlier years relating to services provided to CTE Inc, USA. Since the assessee's debtor CTE Inc., USA was mak....
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.... 6. Erred in making disallowance of Rs. 10,68,463/- u/s. 14A of the Act without appreciating the fact that the provisions of section 14A cannot be applied to the investments from which no income is earned which do not form part of total income of the assessee during the year under consideration. 6.1. Erred in not appreciating the fact that no interest bearing funds were used for the purpose of investments made by the appellant and no expenditure has been incurred by the assessee on the funds invested there from which the dividend income received. 6.2. Erred in applying Rule 8D of IT Rules, 1962 read with section 14A of the Act without recording satisfaction. 6.3. Erred in disallowing certain expenditure u/ s. 14A, without giving a finding that the expenditure by way of interest booked is not genuine and or a part of the expenditure is relatable to the investment in non-taxable income generating asset. 6.4. Erred in not appreciating the fact that the assessee has neither earned any dividend income from the investments made during the year under consideration nor was there any exemption claimed on such income. 6.5. Erred in rejecting t....
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.... assessee and level of capacity utilization of comparables. Accordingly, adjustment would be required to be made to profit margin of comparable on account of difference in capacity utilization in terms of rule10-B(1)(e)(iii) 10. The Ld.TPO/AO/DRP ought to have appreciated that the excess capacity cost is non operating cost in nature because it does not generate any revenue on a regular basis and the assessee has to maintain excess staff capacity as company cannot quickly hire people with required skills, knowledge and experience. 11. The Ld.TPO/AO/DRP erred in not appreciating the fact that the comparable companies do not bear any idle costs in terms of excess staff capacity costs whereas the assessee company incurs significant idle employee cost. 12. The Ld.TPO/AO/DRP erred in not including the following 2 comparable companies, Cignity Technologies Ltd and Spry Resources India Pvt. Ltd, despite satisfying all the relevant filters for inclusion into the final comparables. 13. The Ld.TPO/ AO/DRP erred in not excluding the Larsen and Tubro Infotech Ltd, from the final set of comparables, since it is functionally dissimilar, has High turnover & no s....
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....018, the assessee has sought admission of the grounds sl.nos. 7 to 24 as additional grounds and vide letter dated 26.11.2018, grounds of appeal nos. 25 to 28 also as additional grounds of appeal. The assessee sought admission of these additional grounds on the ground that they are on questions of law with regard to which all necessary facts are on record. In support of his argument for admission of the same, the Ld.Counsel for the assessee placed reliance on the decision of Hon'ble Supreme Court in the case of NTPC vs. CIT reported in 229 ITR 383 (SC) and submitted as under: "In addition to grounds no.1 to 6, and additional grounds 7 to 24 of appeal filed on 30.01.18 and 30.8.18 respectively, herewith we submit: Each of the grounds of appeal is mutually exclusive, independent and without prejudice to other. 25. We would like to submit that as per the ratio laid down by the Hon'ble supreme Court of India in the case of National Thermal power Co. Ltd vs. CIT (1998) 229 ITR 383 (SC) the ITAT has jurisdiction to examine the question of law which though not arose before the lower authorities but arose before the ITAT for the first time. 26. The Ld....
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....y i.e. M/s Cambridge Tech. Enterprises Pvt. Ltd. (CTEPL for short), entire TDS credit of Rs. 94,71,936/- (of both the companies) has to be allowed. 4.1. After hearing both the parties, we admit this ground and since we find that this issue needs verification by the AO as to whether the TDS reported in the revised return of income also contained the TDS made by M/s CTIPL, we deem it fit and proper to remand the issue to the file of the AO with a direction to verify the claim of assessee and allow the same if it is in accordance with law. 4.2. Thus, ground no.23 is treated as allowed for statistical purposes. 5. As regards ground nos. 21 and 22 relating to MAT credit, it is the case of the assessee that the assessee is eligible for MAT credit of Rs. 35,38,541/- which is pertaining to AYs 2009-10 and 2010-11 against the tax payable and submitted that the AO, while calculating the tax payable, has not considered and has not allowed the MAT credit to the company. 5.1. Ld.DR also agreed that the same may be allowed to assessee after verification. 5.2. Therefore, we admit these grounds and deem it fit and proper to remand the issue to the file of AO for verification and all....
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....ad huge accumulated losses in its books with negative worth to the extent of Rs. 41.25 crores as on 31st March, 2012, and was not in a position to repay the outstanding trade debts to the assessee, the assessee decided to sell its stock in this company to Smart Shift Group Inc. USA (SSGI in short). As a condition for the sale, the assessee was required to write off its dues amounting to Rs. 21,48,81,750/- outstanding for the period of December, 2011 to September, 2012 from CTE Inc., USA and the balance was to be paid to the assessee by the purchaser i.e. SSGI. Under these circumstances, the assessee wrote off the trade receivables due from CTE Inc. and debited the same to the Profit and Loss account as bad debts written off under the head 'other operative expenses'. The AO, however, observed that the amounts due from CTE Inc. USA, have been written off as a condition for sale of assessee's stock and not on the ground that they are irrecoverable. Observing that the CTE Inc. USA is a Subsidiary Company of the assessee company and that the entire dues of Rs. 28.72 crores were not written off, but only part of dues amounting to Rs. 28.41 crores was written off as a pre-condition for sa....
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....coverable from CTE Inc. which has been written off and has to be allowed as a deduction. 7.4. Therefore, ground no.5 is allowed. 8. As regards the transfer pricing adjustment, we find that the TPO has proposed adjustment towards the following. (i) provision of software development services : Rs. 3,24,48,315/-; (ii) reimbursement of expenses : Rs. 51,70,659/- and (iii) interest on receivables Rs. 1,04,66,509/-. 8.1. Against interest on receivables, the assessee has raised ground no.3 and additional grounds no.18 and 19. 8.2. We find that grounds no.18 and 19 are additional grounds of appeal and are only arguments in support of ground no.3. Since all facts are on record, we deem it fit and proper to admit these grounds and adjudicate the same along with ground no.3. 8.4. Brief facts of the case are that the assessee filed Form no.3 CEB along with its return of income and on perusal of the same, the TPO observed that the assessee has receivables of Rs. 7,24,32,590/- at the end of the year. Assessee was, therefore, asked to submit details of raising the invoice and subsequent receipt and also proposed to charge interest @ 14.45% p.a. on such....
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....-charging of any interest from its AE by assessee is also a consistent practice followed by the assessee. He placed reliance on the Coordinate Bench decision in the case of Value Labs vs. DCIT in ITA no.475/2017 in support of his contention. He also submitted that no adjustment of interest on receivables was made by TPO during the AYs 2010-11/2011-12/2012-13, considering the same to be at arm's length. 8.7. The second argument by Ld.Counsel is that working capital adjustment itself takes into account, the impact of interest on receivables and accordingly no separate adjustment is required to be made towards the interest on the receivables. In support of his contention, he placed reliance upon the following decisions. (i) EPAM Systems India (P) Ltd. Vs ACIT (2018) 100 Taxmann.com 335 (Hyd-Trib.) (ii) Open Text Corporation India P Ltd. Vs DCIT in ITA no. 232/Hyd/2016 (iii) Hacket Group India Ltd. In ITA no.2039/Hyd/2017 8.8. The third argument put forward is that no interest can be charged on the receivables when the assessee is not paying any interest on trade payables or advances from the non-AE customers. In support of his contention, he placed rel....
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.... placed on record, we find that by insertion of Explanation to Sec.92B of the I.T.Act, interest on receivables has become international transaction with retrospective effect from 1.4.2002. However, even if the said insertion is to be considered as prospective in nature, since it is inserted by Finance Act, 2012, it is very much applicable to the A.Y. before us i.e. A.Y. 2013-14. Therefore, all the decisions which are relied upon by Ld.Counsel for the assessee pertaining to the A.Ys prior to the amendment, are not applicable to the case of the assessee. The argument that the assessee has not charged interest on receivables from both AEs and Non-AEs and, therefore, no adjustment on interest receivables should be made by the TPO cannot be accepted. Both the interest on receivables as well as interest on payables are to be considered as international transactions, the AO is required to refer to the TPO for determining the ALP. 10.1. As regards the argument that the working capital adjustment takes into account the impact of interest on receivables and accordingly no separate adjustment is required, we find that in the case of the assessee the working capital adjustment is not annexe....
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....17, the Ld.Counsel for assessee submitted that the assessee has not received any reimbursement of expenses but in fact it had to make payment to its AEs, which has erroneously been considered by the AO as receipt by the assessee. He has drawn our attention to page 507 of the paper book, which contains Note-7 i.e. other current liabilities for FY 2012-13, wherein it is mentioned that "CTE Inc. reimbursement payable" of Rs. 2,04,35,773/- and also to page 32 of the TPO's order wherein the TPO has recorded that the reimbursement received is of Rs. 2,04,35,773/-. For the sake of ready reference, the relevant table is reproduced hereunder. Note No.7: Other Current Liabilities Sl. No. Particulars As at 31.3.2013 As at 31.3.2012 I. a) Inter Company loans & advances b) Rent Deposit received from CTIPL c) CTE-Trust ESOP d) CTE Inc Exp Reimbursement payables e) Provision for dividend f) Share Refund g) Other payables Total Other Current Liabilities 81,372,300 1,000,000 18,700,683 - 83,286 75,939 1,645,700 102,877,908 18,700,683  ....
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....and additional ground nos. 13, 14, 15 and 16 which are for exclusion of companies ; and ground nos. 8, 12, 26 and 27 for inclusion of the companies and ground nos. 9 and 11 for certain adjustments while arriving at average margin of the comparable companies. 12.3. The Ld.Counsel for the assessee submitted that while conducting FAR analysis, it is noticed that employee cost of the assessee is at 65.20% as against employee cost of comparables at 54.45%, if all the companies which are sought to be excluded or included are taken together. He submitted that since assessee's employee cost was much higher, suitable adjustment should be made while computing the ALP. 12.4. For this purpose, he placed reliance on the following decisions of Coordinate Benches of the Tribunal: (i) Planet Online P Ltd. Vs ACIT in ITA 279/Hyd./2016 (ii) Bombay High Court ruling in case of Petro Araldite P Ltd.93 taxmann.com 438 (iii) Class India Ltd. 62 taxmann.com 173 He submitted that after providing adjustment for employees cost to comparables, the average margin of comparables would come to 6.53% as against adjustment of 11.56%. 12.5. Ld.DR, however opposed this ground ....