TaxTMI 
TaxTMI 
2023 (4) TMI 79
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....t case. 3. We have heard rival submissions and perused the materials available on record. Zedo (India) Pvt. Ltd was incorporated in September 2002 and registered under the Indian Companies Act 1956. Its software development centre is in Andheri, Mumbai. It is engaged in the development of software Zedo Inc and providing digital advertising related services to third party client in India. The assessee had rendered software development services to its AE and the said international transaction is benchmarked by the assessee using Transactional Net Margin Method (TNMM) as the Most Appropriate Method (MAM) by applying Operating Profit / Total Cost (OP/TC) as the Profit Level Indicator (PLI) in its Transfer Pricing Study Report (TPSR). The assessee used six comparables in its TPSR and compared its PLI of 15.04% with the comparable margins ranging from 9.01% to 15%. The assessee conducted search process and identified the following comparables together with its margins as under:- S.No. Company Name 3 year weighted unadjusted Average 1. CG-VAK Software & Exports Ltd. 9.01 2 Otco International Ltd. 15.00 3. RS Software (India) Ltd. 20.26 4. Sasken Communications Technologies ....
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....is comparable would be 9.43%. Now, the question that arises for our consideration is as to whether provision for doubtful debts could be considered as operating expense. Admittedly, the provision for doubtful debts had arose in respect of sales made by the assessee. The audited financial statements for the year ended 31/03/2015 are enclosed in pages 108-123 of the paper book, Volume 2 filed before us. From the perusal of the same, we find that the said company had debited a sum of Rs.43,98,574/- on account of provision for doubtful debts under 'operating expenses' in its profit and loss account. We also find from the schedule of trade receivables in the balance sheet of this comparable, there is a note attached towards provision for doubtful debts as under:- iii.Provision for Doubtful Debts: The Company evaluates all customer dues for collectability. The need for provisions is assessed based on various factors including collectability, present market indicators pertaining to the relevant country which could affect the ability to settle. Provisions are made for debtor dues exceeding one year or longer from the date of invoice as at the date of the balance sheet. The company pur....
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.... as deduction. This conclusion goes to prove that the said provision for doubtful debts can always be only an ascertained liability arising in the normal course of business of any assessee. This proposition has not been considered in the decision of Chennai Tribunal referred to supra and hence, we are not inclined to follow the same. The issue as to whether the provision for doubtful debts could be considered as an operating expenses was subject matter of adjudication by the Co-ordinate Bench of the Pune Tribunal in the case of Extentia Information Technology (P) Ltd vs. Dy. Commissioner of Income Tax, Circle-1(2), Pune reported in 116 taxmann.com 567 wherein it was held as under:- "34. Having discussed the inclusion or otherwise of the above referred three companies in the list of comparables, now we proceed to determine the correctness of the profit margin of two comparables, namely, CG-VAK Software and Exports Ltd. and Exilant Technologies Ltd. 35. The assessee has not disputed the per se inclusion of these two companies in the list of comparables. The only quarrel is on the computation of their OP/OC. To be precise, the question is about the treatment given by the authorit....
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....l of the financial statements of ICRA Techno Analytics Ltd (now known as Nihilent Analytics Ltd) for the year ended 31/03/2016, the said comparable company has got huge asset base of Rs.14.14 Crores. The company could be considered as a good comparable with that of the assessee company for the purpose of benchmarking its international transactions based on FAR analysis i.e. functions performed, assets employed and risks undertaken. In the instant case, the said comparable has got an asset base of Rs.14.14 Crores whereas the assessee company before us has got an asset base of only Rs.1.34 Crores. It is elementary that company having huge asset base would be able to command a better margin on the prices of goods or services rendered based on huge economies of scale and volume of operations. Hence, based on one of the parameters of FAR analysis i.e. assets employed, we hold that this comparable would not be a good comparable with that of the assessee company. Hence, the ld. TPO / AO is directed to exclude the same from the final set of comparables while re-working the ALP of the international transaction. (c) Inclusion of Sasken Communications and Technologies Ltd. and TVS Infotech L....