TMI Blog2021 (9) TMI 1139X X X X Extracts X X X X X X X X Extracts X X X X ..... 2018 (7) TMI 380 - KARNATAKA HIGH COURT] that provision for bad and doubtful debts should be taken as operating expenses while computing profit level indicator of the comparable companies. In the light of the aforesaid decisions which have been cited at the time of hearing of the appeal, we are of the view that the claim of the assessee deserves to be accepted. Accordingly, ground No.4(h) raised by the assessee has to be allowed and is hereby allowed. Consequent to the aforesaid conclusion, portion of para 11 of the order of the Tribunal dated 24.06.2021 given in bold letters in the earlier part of this order will stand substituted by the observations made in Paragraph 6 to 10 of this order as paragraph 11.1 to 11.5 and the remaining part of paragraph 11 will stand substituted as paragraph 11.6. Miscellaneous petition is allowed to the extent indicated above. - MP No.69/Bang/2021 (in IT(TP)A No.2751/Bang/2017) - - - Dated:- 24-9-2021 - Shri N.V. Vasudevan, Vice-President And Shri B. R. Baskaran, Accountant Member For the Applicant : Shri. Padam Chand Khincha, CA For the Respondent : Shri. Sankar Ganesh, JCIT(DR)(ITAT), Bengaluru ORDER PER N. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... orities: Sl. No. Appellate Forum/Income Tax Ground Taken/Submission Made Paper book Reference 1. TPO Submissions made stating that bad and doubtful debts to be considered as operating in nature. Page 203-205 2. DRP Ground of Objection 9 in Annexure 9 to Form 35A- Provision for bad and doubtful debts are operating in nature. Page 106-109 3. DRP Additional Submissions. Page 497 4. DRP The DRP order deals with this matter at page 11 of its order dated 11.09.2017 Page 45 It has been submitted that the observations of the tribunal in the order that the grounds relating to treatment of provisions for doubtful debts was not raised before any lower authority or appellate forum is incorrect and thus constitutes a mistake apparent from record liable to rectification as specified u ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mbai Tribunal held that provision for doubtful debts is to be considered as non-operating in nature because it is only a provision. While working out the operating profit, only items of receipts and expenditure, which have direct relation for determining the profit have to be taken into account. In the case of Four Soft Ltd. v. Dy. CIT [2011] 142 TTJ 358/[2012] 16 ITR (Trib.) 73 (Hyd.), it was held that for computing the net margin of the assessee for the purposes of transfer pricing, only the cost related to the transaction with the AEs has to be considered and that bad debts/reimbursements have to be excluded. Thus the expenses excluded by the TPO were in the nature of non-operating expenses. Therefore, we do not find any infirmity in the approach of the TPO. Hence, the objection is not found acceptable. Accordingly, we do not find merit in the plea that the margin computation of M/s CG VAK, ICRA Techno Analytics Ltd, L T Infotech, Persistent Systems Tech Mahindra are erroneous. 7. Learned Counsel for the assessee brought to our notice the decision of the ITAT, Bengaluru Bench, in the case of Maxim India Integrated Circuit Design Pvt. Ltd., Vs. DCIT in IT(TP)A No.1573/Ba ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... doubtful debts was discussed as under:- 51. As regards provision for doubtful debts, ld. counsel submitted that provision for doubtful debts are a part of the operating activities of a business. The accounting standards issued by the ICAI require that accounting policies must be governed by the principles of prudence . Provisions should be made for all known liabilities and losses even though the amount cannot be determined with certainty and represents only the basic estimate in the light of available information. Para 6 of Accounting Standard-l defines accrual as the assumption that revenues and costs are accrued, i.e., recognized as they are earned or incurred and recorded in the financial statements of the period to which they relate. 52. Thus, going with the abovementioned facts and statutory provisions, when the making of provisions is very much in the interest of business to show the true and fair view and statutorily required, it cannot be said that such provisions are of non-operating nature. Such provisions are made to comply with the requirements of statute. 53. The learned TPO treated provision for doubtful debts as non-operating referring to the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tly excluded by the TPO to work out the operating profit of the comparable party and accordingly the operating profit ratio of the said entity has been rightly taken by the TPO. Thus, we notice that the above said decision was also rendered in a different context. However, there should not be any dispute that if the provision for doubtful debts is taken as operating expenses in the hands of the assessee, then the said expenditure has to be taken so in the case of comparable companies also. 16. Accordingly, following the decision rendered by the co-ordinate bench in the case of Brocade Systems (P) Ltd (supra) and Rolls Royce India (P) Ltd (supra), we direct the AO/TPO to consider Provision for doubtful debts as an operating expense. 8. Learned Counsel brought to our notice the decision of the Tribunal rendered in the case of ACI Worldwide Solutions Pvt. Ltd., Vs. DCIT in IT(TP)A No.1893/Bang/2017 order dated 27.09.2019 wherein this Tribunal decided identical issue in favour of the assessee by following the decision of the Hon ble Karnataka High Court in the case of Pr.CIT Vs. Business Process Outsourcing India Pvt. Ltd., (2018) taxcorp (DT) 73195 (HC Karnataka) ..... X X X X Extracts X X X X X X X X Extracts X X X X
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