TMI Blog2019 (11) TMI 1112X X X X Extracts X X X X X X X X Extracts X X X X ..... u/s 14A of the Act is directed to be deleted. Disallowance of bad debts - HELD THAT:- Sum of ₹ 28,22,76,596/- was undoubtedly the outstanding trade receivables from CTE Inc. as on 31st March, 2013. The Board Resolution dated 28th December, 2012 is placed at page 630 of the paper book, which stated that it is resolved to sell the equity shares of Smart Shift Group Ltd. Mauritius to Smart Shift Group Inc. and also to write off trade receivables/bad debts due from the Subsidiary company i.e. CTE Inc. USA with respect to services provided by the company during the period October, 2011 to September, 2012 . The balance of the trade receivables were received by assessee company, apparently after sale of the shares. However, the date of sale of shares is not on record. Since what is written off as bad debts is trade receivables, we agree with the contention of the Ld.Counsel for the assessee that the nature of the transaction would not change and it is a bad debt which is not recoverable from CTE Inc. which has been written off and has to be allowed as a deduction. TP Adjustment - provision of software development services - HELD THAT:- Insertion of Explanation to Sec.92B ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e contention of the assessee that even if notional interest is to be charged, the same has to be charged at Libor+ interest rates as the receivables are in foreign currency. Therefore, we set aside the issue of computing interest on outstanding receivables with a direction to the TPO to consider only such receivables which are beyond the credit period agreed to by the parties in the agreement and only if such outstanding receivables have not been taken into consideration while computing the working capital adjustment and interest on such outstanding receivables shall be calculated at Libor+ interest rate only. Grounds allowed for statistical purposes. Adjustment on account of reimbursement of expenses received - assessee has not received any reimbursement of expenses - HELD THAT:- We find that the TPO has made ALP adjustment of 23.77% to arrive at adjustment of ₹ 51,71,659/-. DR also agreed that if it is reimbursement of expenses by assessee and not receipt by the assessee, then, adjustment cannot be made but however he submitted that this needs verification by the AO. Therefore, regarding the submissions of assessee that there are no receipts of reimbursement expenses b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e circumstances we deem it fit and proper to remand the issue to the file of TPO with a direction to consider the precedents on this issue - ITA No. 208/Hyd./2018 - - - Dated:- 19-11-2019 - Smt. P. Madhavi Devi, Judicial Member And Shri S. Rifaur Rahman, Accountant Member For the Assessee : Sh. P. Murali Mohana Rao, A.R. For the Revenue : Sh. YVST Sai, CIT, D.R. ORDER PER SMT. P. MADHAVI DEVI, J.M. The present appeal is filed by the assessee against final assessment order dated 28.11.2017 passed by the Dy.CIT, Circle 1(2), Hyderabad pertaining to the Assessment Year 2013-14. 2. Facts of the case in brief are that, the assessee company engaged in the business of Software Development Services, e-filed its return of income for the A.Y. 2013-14 on 30.11.2013, admitting a total loss of ₹ 22,71,41,652/- under normal provisions of the I.T.Act, and book loss of ₹ 48,37,09,885/- under the provisions of Sec.115JB of the Income Tax Act, 1961 (the Act for short). Subsequently, the assessee filed its revised return of income on 28.3.2016, admitting total loss of ₹ 1 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ost appropriate method. 2.1. Erred in not following the procedure laid down under the provisions of section 92C of the Act relating to the 'Computation of arms length price' for analyzing the said transaction. 2.2. DRP Erred in enhancing the ALP adjustment to ₹ 4,61,30,226/- from ₹ 3,24,48,315/- without issuing any show cause notice to the assessee. Incorrect rejection of Transfer Pricing Documentation 2.3. Erred in not appreciating the fact that the assessee company has prepared Transfer Pricing Documentation as per section 92C of the Act and Rule 10D of the IT Rules by complying all the provisions of the section. 2.4. Erred in rejecting the TP Documentation maintained by the assessee without assigning any cogent reasons for rejection. 2.5. Erred in not appreciating the fact that TP Documentation is not an exact science and arriving at the exact comparables to the assessee company is not possible. 2.6. Erred in rejecting the search process of the assessee and conducting a fresh search by arriving at final set of 6 comparables which are func ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ithin ALP. Incorrect application of search process and filters by the TPO 2.12. Erred in rejecting the search process applied by the tax payer in accordance with section 92C and Rule 10D of IT Rules and there by undertaking an independent search by applying inappropriate filters and arriving at functionally dissimilar comparables. 2.13. Erred in rejecting the comparability analysis carried out by the assessee in accordance with section 92C of the Act and also for the fact that, the assessee has offered its detailed rebuttals against the rejection of its comparables by the TPO on certain grounds which does not stand to the test of appeal. 2.14. Erred in applying the fresh search process by rejecting the search carried out by the assessee company and arrived at final 6 comparables for the purpose of comparability, which are not correct comparables to the assessee company. 2.15. Erred in not considering the submissions made by the assessee in relation to rejection of comparables selected by the TPO. Incorrect selection of 6 companies as final comparables by the TP ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... bles are accrued from the sale of services rendered to the AE during the normal course of business and hence it cannot be equated to the term 'capital financing' as interpreted in section 92B of the Act. 3.2. Erred in not following the procedure laid down under the provisions of Section 92C of the Act relating to the' Computation of Arm s Length Price'. 3.3. Erred in not appreciating the fact that the outstanding receivables relate to the provision of services and not in the nature of any advance/loans. These are closely linked to the provision of services and hence have to be aggregated for the purpose of economic analysis. 3.4. Erred in not appreciating the fact that the assessee has not charged interest on receivables irrespective of whether the sales are made to AE or Non-AE. 3.5. Erred in re-characterizing the nature of transaction from 'Receivables' to 'loan' which is not permissible u/ s. 145 of the Act. 3.6. Erred in considering SBI interest rates as PLI for charging interest on outstanding receivables without appreciating the fact that the assessee is into t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e fact that the CTE Inc, USA is incurring loss and was not able to pay debts. 5.4. Erred in not appreciating the fact that the assessee has already offered the said amount of bad debts now written off to tax in the earlier years. 5.5. Erred in incorrectly observing that the amount due from CTEL Inc, USA has been written off as a condition for sale of assessee's stake in SSGL to Smart Shift group Inc. USA and not on the ground that they are irrecoverable. 5.6. Erred in considering the amount written off as capital loss, without appreciating the fact that the transaction is related to regular business operations and purely in the nature of revenue. 5.7. Erred in questioning the modality of the business as to how the assessee has to do business. It is in the domain of the assessee to carry the business operations the way it wanted to and the away it felt prudent and profitable. 5.8. Erred in not appreciating the fact that the assessee has entered the transactions complying with the provisions of the Act and has not violated any provisions. 5.9. Erred in not appreciating the fact t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 6.7. Erred in not bringing any cogent reasoning and supporting material on record to show the nexus between the interest bearing funds being utilized to make the investments in Mutual funds. 6.8. Erred in confirming the action of the AO in adopting the average value of investment at ₹ 13,71,30,313/ - instead of restricting the same to the amount of investment the income there from which do not form part of total income, which is not correct and bad in law. 6.9. Erred in not appreciating the fact that the AO has already examined the issue in respect of dividend income earned from current investments and found that the assessee has not incurred any expenditure towards the same and opined that the provisions of section 14A are not applicable. 6.10. Without prejudice to the above, erred in disallowing an amount of ₹ 10,68,463/ - instead of restricting the disallowance to the extent of income claimed/ earned as exempt during the year. Additional Grounds of Appeal Without prejudice to the grounds no. 1 to 8 filed on 30.01.2018, herewith we submit: Each of the grounds o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... set of comparables as it is functionally dissimilar i.e. into development of software product. 16. The Ld.TPO/AO/DRP erred in not excluding RS Software India Ltd from the final set of comparables, since it is has huge onsite expenses and is functionally dissimilar. 17. The Ld.TPO/ AO/DRP erred in facts by treating the reimbursements payable as reimbursements receivable and charging interest on same. 18. The Ld.TPO/ AO/DRP ought to have appreciated that the receivables of the assessee were not outstanding for a period more than 180 days and that the Rl3l allows dues outstanding to be recovered within 1 year from the date of sale. 19. Without prejudice to the above, that working capital adjustment itself takes the impact of outstanding receivable on profitability. Accordingly no separate adjustment is warranted on outstanding receivables. 20. The AO erred in making disallowance u/s. 14A of the Act for an amount of ₹ 10,68,463 without appreciating the fact that the assessee has not earned any income which does not form part of the total income. 21. The AO erred in not considerin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g Infomile Technologies Limited as comparable company, despite satisfying all the relevant filters for inclusion into the final comparables. 28. The assessee may add, alter or modify any other point to the Grounds of appeal at any time before or at the time of hearing of the appeal. 2.3. The Ld.DR however, opposed the admission of additional grounds of appeal stating that they are factual issues which need verification and, therefore, cannot be raised as additional grounds at this stage of the proceedings. 3. Having regard to rival contentions and material placed on record, we find that there are 7 issues involved in this appeal while the assessee has raised as many as 28 grounds with grounds 7 to 28 as additional grounds. When this was pointed out at the time of hearing, the Ld.Counsel for the assessee submitted that the assessee is only arguing on the main grounds relating to each of the issues and submitted that the other sub-grounds are arguments in support of each of the ground, and, therefore, they need not be considered as separate grounds. 3.1. The Ld.DR also agreed for the same, and, therefore, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ccordingly ground nos. 21 and 22 are treated as allowed for statistical purposes. 6. As regards ground no.6, against the disallowance u/s 14A of the Act, we find that the AO has disallowed interest expenditure of ₹ 10,68,463/- u/s 14A of the Act. He has also categorically observed that the assessee has not earned any exempt income i.e. dividend income during the relevant A.Y. The Ld.Counsel for assessee submitted that the assessee company has not derived any dividend income which is exempt from tax during the relevant Previous Year (P.Y.), and, therefore, no disallowance u/s 14A is called for. In support of his contention, he placed reliance on following case laws. (i) CIT (Central) vs. Chettinad Logistics (P) Ltd. (2018) 5 taxmann.com 250(SC); (ii) ITAT Hyderabad Bench decisions in : (a) vide ITA no.1302/Hyd.2015 in the case of Pratishta Industries Ltd. Vs. DCIT, Circle 16(3); (b) vide ITA Nos. 1931 1932/Hyd2017 in the case of M/s Lanco Hydro Power Ltd. Vs. ACIT He, therefore, prayed that disallowances u/s 14A may be deleted. 6.1. Ld.DR, on the other hand, suppo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ₹ 28.41 crores was written off as a pre-condition for said sale, he held that the preconditions for allowing deduction u/s 36(1)(vii) are not fulfilled in the case of assessee. He, therefore, held that the amount so written off consequent to sale of assessee s stake in CTE Inc., is in the capital field. Thus, he held that the loss arising from such transaction is a capital loss, and, therefore, cannot be allowed as a deduction u/s 37 of the Act. Such disallowance was also made in the final assessment order and the assessee is in appeal before us. 7.1. The Ld.Counsel for the assessee submitted that the amounts receivable from CTE Inc. USA were trade receivables and because CTE Inc. was a loss making company and could not repay the same and had gone into negative net worth, a decision was taken by the Board to write off part of the debt, and accordingly passed a resolution, and the balance was paid by Smart Shift Group Company, which has taken over the shares of CTE Inc. He submitted that the decision to sell the shares of the company and also to write off the debt was a commercial decision and hence cannot be interfered with and the nature of the transaction ca ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 7; 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 belated receipts. The assessee replied that outstanding receivables are consideration for the international transactions for providing Software Development Services, and was not in the nature of any advance or loans. He submitted that these are closely linked with services, and are linked with sales and services for the purpose of economic analysis. It was also submitted that the assessee was a fully funded entity and sales and receipts are from running accounts and working capital adjustment was worked out after considering the true impact of such outstanding receivables. It was also contended that no interest was charged even on non-AE transactions and therefore no interest should be charged on the AE transactions. 8.5. The TPO however did not accept assessee s contentions and observed that with the insertion of Explanation to S.92B of the Act, , receivables have become an international transaction. He observed that the working capital adjustment only takes i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 reliance upon the ITAT Hyderabad Bench decision in the case of Hacket Group India Ltd. (supra). 8.9. The fourth argument is that no interest on receivables can be charged when proceeds are received within 180 days from the date of invoice as allowed by RBI to receive the proceedings in foreign exchange. In support of this contention, he placed reliance on the following: (i) ITAT Hyderabad bench decision in the case of GSS Infotech Ltd. Vs ACIT in ITA 602/Hyd/2017; and (ii) Cura Technologies Ltd. In ITA 301/Hyd/2017 8.10. Alternatively, the Ld.Counsel for the assessee has also submitted that even if notional interest is to be charged, the same cannot be bench marked at SBI Term Deposit rates, but should be charged at Libor + interest rates, as the receivables are in foreign currency. In support of this contention, he placed reliance on the d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 annexed to the assessment order. Therefore we are not able to come to any conclusion whether working capital adjustment has taken into consideration, the interest on receivables. Further, the argument of the DR is at the trade receivables at the beginning and end of the year are only taken into consideration while computing working capital adjustment but not outstanding receivables during the relevant F.Y. As pointed out by the Ld.DR and also from the agreement, the credit period as agreed to between the parties is only 1 to 3 months, but the period of delay in the receivables is not given either by the TPO or by the DRP or even by the assessee before the authorities below. Period of realisation is also not given by assessee, therefore, we are not able to give any finding on the delay in realisation and we h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 20,435,773 83,286 75,939 198,567 39,494,248 11.1. Having considered the rival contentions and on perusal of records, we find that the TPO has made ALP adjustment of 23.77% to arrive at adjustment of ₹ 51,71,659/-. The Ld.DR also agreed that if it is reimbursement of expenses by assessee an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 by submitting that after applying the filter of employees cost more than 25% of total turnover no further adjustment need be made. He submitted that even if some adjustment is made, it cannot be made ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... was required as per Rule 10b in case of difference in capacity utilisation by assessee. In view of the same, we deem it fit and proper to set aside the issue to the file of AO/TPO with the direction to the assessee to furnish relevant documents in support of its claim and the AO/TPO shall make necessary adjustment on account of employee filter to the assessee s margin or the margin of the comparables according to the information available with the TPO. 14.2. Accordingly ground of appeal relating to this issue is treated as allowed for statistical purposes. 15. As regards comparables are concerned, we find that assessee is seeking exclusion of comparable companies by relying upon various decisions of this Coordinate Bench to which we both are signatories and he is also seeking inclusion of some comparables by relying on certain decisions wherein they have been directed to be included. For A.Y. 2013-14, wherein under similar circumstances, we have directed exclusion and inclusion of these companies, we find that there would be very few companies or rather no companies at all left for the T.P. analysis subsequent to such exclusions. Under these circumsta ..... X X X X Extracts X X X X X X X X Extracts X X X X
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