TMI Blog2019 (3) TMI 1594X X X X Extracts X X X X X X X X Extracts X X X X ..... he TPO to adopt the same and therefore, confirm the order of the TPO on this issue. Thus, ground of appeal is rejected. Errors in computation of operating profit margins of companies selected by the TPO as comparables - as submitted that in the case of CG-VAK Software Exports Ltd, L T Infotech and Persistent Systems Ltd, the TPO has not considered the provision for doubtful debts as operating expense and in the case of Mindtree Ltd, the unallocated expenses have been erroneously considered - HELD THAT:- On the issue of Mindtree Ltd, the ld DR did not object to the remand of the issue to the AO. We therefore, direct the AO to follow the directions of the DRP on this issue and recompute the margin of the said company. Provision for bad and doubtful debts we find that in the case of Alliance Global Services IT India Pvt. Ltd [ 2015 (3) TMI 883 - ITAT HYDERABAD] in the case of M.s Kenexa Technologies (P) Ltd [ 2014 (11) TMI 587 - ITAT HYDERABAD] has held that the provision for bad and doubtful debts is part of operating expenses. The Tribunal has directed the TPO to allow the same. Similarly, in the case of TNS India Pvt. Ltd, the Tribunal has directed the TPO therein, to treat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sen Toubro Infotech Ltd - the company is functionally dissimilar and that it develops in-house intangibles, has strong brand value, is involved in diversified operations which includes products and also performs R D Activities. He submitted that the Revenue of the L T ranges to ₹ 3,613/- crores and therefore, the scale operation is incomparable. As we have already held that the turnover filter of 10 times of the tolerance range is a relevant filter we direct the AO/TPO to exclude this company also from the final list of comparables. Since we have already excluded the four companies, we direct the TPO to recompute the ALP of the comparables and if the average margin falls within +_3%, then no further companies are to be taken. However, if it does not fall within the said range, the TPO shall reconsider the assessee s contentions on comparability of the companies in Ground and pass a reasoned order on their comparability after giving the assessee a fair opportunity of hearing. - ITA No. 2039/Hyd/2017 - - - Dated:- 15-3-2019 - Smt. P. Madhavi Devi, Judicial Member AND Shri S.Rifaur Rahman, Accountant Member For the Appellant : Shri Rishi Harlalka ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... said companies at 19.76% and after allowing working capital adjustment of 2.8%, he arrived at the ALP of 17.15% and proposed the adjustment u/s 92CA of ₹ 1,41,89,289. 5. Accordingly, the draft assessment order was passed, against which, the assessee preferred its objections before the DRP. The DRP, however, confirmed the order of the TPO and in accordance with the same, final assessment order was passed and the assessee is in appeal before us against the final assessment order by raising the following grounds of appeal: On the facts and in the circumstances of the case and in law, the Id. Assessing Officer ( AO ), the Id. Transfer Pricing Officer ( TPO ) and Hon'ble Dispute Resolution Panel ( DRP ) have erred in: 1. Passing the order, which is bad on facts and in law. 2. Not allowing the use of multiple year data as prescribed under Rule 10B of the Income-tax Rules, 1962 (the Rules). 3. Incorrectly rejecting the appellant's Transfer Pricing study. 4. Making factually incorrect statements in TP order regarding Functions performed, Assets employed and Risks assumed by the Appellant. 5. Incorrectly re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... od allowed to Associated Entity is not excessive. 18. Jot considering LIBOR based rates for charging notional interest on outstanding receivables. The Appellant submits that the above grounds are independent and without prejudice to one another. The appellant craves leave to add to or alter, by deletion, substitution or otherwise, the above grounds of appeal at any time before or during the hearing of the appeal . 6. At the time of hearing, the learned Counsel for the assessee submitted that the assessee does not wish to press grounds 1, 2, 3, 4, 6, 11 and 12. They are accordingly rejected as not pressed. 7. As regards Ground No.5, the learned Counsel for the assessee submitted that the assessee s gross turnover was ₹ 19.00 crores out of which, the turnover of the international transaction itself was ₹ 17,40,35,667/- and the balance of the turnover i.e. ₹ 1.83 crores was from non-AE transactions. He submitted that the non-AE Companies were also into similar line of business and the services rendered by the assessee to such parties are also similar. Therefore, he pleaded before the AO to consider the internal TNMM as the most ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as the most appropriate method. Therefore, we do not see any reason to direct the TPO to adopt the same and therefore, confirm the order of the TPO on this issue. Thus, ground of appeal No.5 is rejected. 10. As regards Ground No.10, it is the case of the assessee that there are errors in computation of operating profit margins of companies selected by the TPO as comparables. He submitted that in the case of CG-VAK Software Exports Ltd, L T Infotech and Persistent Systems Ltd, the TPO has not considered the provision for doubtful debts as operating expense and in the case of Mindtree Ltd, the unallocated expenses have been erroneously considered as ₹ 62,41,60,300/- instead of ₹ 96.40 crores. He submitted that in the case of Mindtree Ltd, the ld DRP had directed the AO to examine the issue, by the AO has not done so while passing the final assessment order. 11. On the issue of Mindtree Ltd, the ld DR did not object to the remand of the issue to the AO. We therefore, direct the AO to follow the directions of the DRP on this issue and recompute the margin of the said company. 12. As regards the provision for bad and doubtful debts, the ld Coun ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssessee as well as comparables as part of the operating expenses. Ground of appeal No.10 is accordingly treated as partly allowed. 15. As regards Grounds of appeal Nos. 13 to 18, i.e. treating the outstanding receivables from Associated Entity as a separate international transaction and bringing the interest thereon to tax, the ld Counsel for the assessee submitted that the average period of credit given by the assessee is 79 days as against the companies selected by the assessee wherein the credit period is 156 days and in the case of companies selected by the TPO, it was 81 days. He submitted that the average period of credit in the I.T. Industry is 114 days. He also submitted that the assessee is a debt free company and the credit terms in both the AE and non-AE transactions are similar. Therefore, he submitted that the outstanding receivables ought not to have been treated as international transaction. Further, he also submitted that the AO, while computing the working capital adjustment, has also taken note of the average of the payments of payables and receivables and therefore, the same cannot again be taken as a separate international transaction. He placed relian ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h are their major strengths. He referred to the non-routine intangibles possessed by the company such as patents for mobile solutions in USA. He submitted that the DRP has rejected the objections of the assessee holding that the companies cannot be rejected only because they have high turnover and that the assessee failed to establish the material differences on margin due to presence of IPRs and Brand Value. In support of his contention that this company is not comparable, the ld Counsel for the assessee placed reliance upon the following decisions: A) M/s. G.T. Nexus Software Pvt Ltd vs. DCIT IT(TP)A No.409/Bang/2016 for the ay 2011-12 B) CIT vs. Agnity India Technologies Pvt. Ltd (TS 189 HC 2013 (DEL) TP (AY 2006- 07 C) Adaptec (India) Pvt. Ltd (ITA No.1758/Hyd/2012 (AY 2008-09) D) Nebulae Technologies Pvt Ltd vs. DCIT (ITA No.2144/Hyd/2011 (AY.2007-08) E) GS Research Center P Ltd vs. ACIT (ITA No.411/Hyd/2015)(AY 2010-11) F) Invensys Development Centre India P Ltd vs. DCIT (ITA No.383/Hyd/2014 (AY 2009-10). 18.2 The ld DR, on the other hand, supported the orders of the authorities below and placed reliance up ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is company are almost similar to the objections in the case of RS Software India Ltd, such as diversified activities; incomparable scale of operations, the Revenue being ₹ 1608 crores and ownership of non-routine intangibles, branding and payments etc., As held in the case of RS Software India Ltd, this company has to be excluded from the final list of comparables due to its high turnover and also owning of non-routine intangibles. iii) Persistent Systems Ltd 18.5 As regards Persistent Systems Ltd, the objection of the assessee that it is not only functionally dissimilar as it develops software products and is involved in diversified operations, but it also owns intangibles worth INR 24.00 crores and has incomparable scale of operations with the Revenue being ₹ 990/- crores. The ld DR s objections are almost similar as in the case of RS Software India Ltd and according to the DR, the said companies are also functionally similar. 18.6 We find that we have considered the high turnover filter as a relevant factor and if the turnover of the company in comparison to that of the rate of assessee, is more than 10 times tolerance range, then it ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e chart and also in the caselaw which are mentioned in the chart. When a query was raised by us as to whether exclusion of the above 4 companies from the final list of comparables would result in assessee s margin falling within +_3% of the assessee s margins and therefore, it would be necessary even to adjudicate the grounds of appeal, the learned Counsel for the assessee submitted that if the above companies are excluded, then it would not require these companies to be included in the final list of comparables. Since we have already excluded the four companies, we direct the TPO to recompute the ALP of the comparables and if the average margin falls within +_3%, then no further companies are to be taken. However, if it does not fall within the said range, the TPO shall reconsider the assessee s contentions on comparability of the companies in Ground Nos. 8 9 and pass a reasoned order on their comparability after giving the assessee a fair opportunity of hearing. 20. In the result, Grounds of appeal No.8 9 are treated as allowed for statistical purposes. 21. In the result, assessee s appeal is partly allowed. Order pronounced in the Open Court on ..... X X X X Extracts X X X X X X X X Extracts X X X X
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