TMI Blog2022 (6) TMI 1232X X X X Extracts X X X X X X X X Extracts X X X X ..... g capital adjustment in comparable prices. It was held by the Tribunal that in case after giving necessary adjustment, the international transaction of the assessee is found to be at arm s length, then there is no question of separate adjustment on account of allowing credit period from receivables from AE. Taking a consistent stand, we direct the AO / TPO to redo the transfer pricing analysis in respect of interest on outstanding receivables by taking into account the directions of the Tribunal in assessee s own case. Advances to the employees against their salary for meeting expenses on food and travel while working on clients deliverables / projects - advances which could not be recovered has been written of to the profit and loss account of the assessee for the relevant assessment year and claimed as allowable expenses / business loss in terms of section 37(1) r.w.s. 28 - HELD THAT:- The claim made by the assessee is not towards bad debt u/s 36(1)(vii) of the I.T.Act, but under the provisions of section 28 of the I.T.Act as business or trade loss. Giving advance to the employees as well as vendors were essential and wholly and exclusively linked to the business of the a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sment order dated 22.10.2018 passed u/s 143(3) r.w.s. 144C of the I.T.Act. The relevant assessment year is 2014-2015. 2. The assessee has raised various grounds and sub-grounds. However, during the course of hearing, the learned AR limited his submission to grounds No.4.6(d), 4.11 to 4.14, 5.1 and 5.2. The surviving grounds read as follows:- Transfer Pricing Issue : 4.6 (d) applying only the lower turnover filter of less than INR 1 crore as a comparability criterion and not applying a higher threshold limit for turnover filter. 4.11 The learned DRP/AO/TPO have erred in law and facts by determining a transfer pricing adjustment on account of interest on outstanding receivables amounting to INR 1,20,83,994. 4.12 Without prejudice to our ground of objection 4.11 above, the learned DRP/AO/TPO have erred in law and in facts by not appreciating that the outstanding trade receivables from its AE s is arising from the provision of software development services transaction which is to be considered as closely linked to such transaction and should not be tested separately from arm s length perspective. 4.13 Without prejudice to our ground of objection 4.11 above ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sessment order dated 22.12.2017 was issued by the Assessing Officer (AO) incorporating the aforesaid transfer pricing adjustment. 4. Aggrieved, the assessee filed objections before the Dispute Resolution Panel (DRP). The DRP vide its directions dated 05.09.2018 partly allowed the objections raised by the assessee. Pursuant to the DRP s directions, final assessment order dated 22.10.2018 was passed incorporating the TP adjustment, which was re-worked out to Rs.6,76,49,378. The adjustment pertaining to corporate tax remained unchanged at Rs.74,70,129 and Rs.7,97,471. 5. Aggrieved by the final assessment order, the assessee has filed this appeal before the Tribunal. We shall first adjudicate the transfer pricing issue. Software Development Services to AE [Ground No.4.6(d)] 6. The net margin on cost earned by the assessee and the comparison of the TP analysis undertaken by the assessee and the TPO are as follows:- Net margin on cost earned by the assessee as computed by the TPO in the TP order: Particulars Amount (INR) Operating income 59,69,92,471 Operating cost ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ercent of turnover were rejected. Comparables selected by TPO and their arithmetic mean: Sl No. Particulars Margin (%) 1 Infosys Limited 36.13% 2 Larsen Toubro Infotech Limited 24.61% 3 Mindtree Limited 20.43% 4 Persistent Systems Limited 35.10% 5 RS Software (India) Limited 24.25% 6 Cigniti Technologies Limited 27.62% 7 SQS India BFSI Limited 22.37% 8 Thirdware Solutions Limited 44.68% Arithmetic Mean 29.40% Computation of arm s length price by the TPO and the adjustment made: Particulars Amount (INR) Arm s Length Mean Margin 29.40% ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... i) Zynga Game Network India Pvt. Ltd. [IT(TPA) No.36/Bang/2019 6.4 The learned AR submitted that if the above proposition is accepted, the following six companies has to be excluded from the list of comparables, namely, (i) Larsen Toubro Infotech Limited, (ii) Mindtree Limited, (iii) Persistent Systems Limited, (iv) R S Software (India) Limited, (v) Infosys Systems Limited, and (vi) Thirdware Solutions Limited. 6.5 The learned Departmental Representative supported the orders of the Income Tax Authorities. 6.6 We have heard rival submissions and perused the material on record. The AO / TPO had excluded companies having turnover of less than Rs.1 crore, however, the AO / TPO has not put upper limit to turnover for exclusion of companies having high turnover. The company having very high turnover cannot be compared to the company like the assessee, whose turnover is only Rs.56.11 crore. This proposition has been accepted by the Hon ble Bombay High Court in the case of CIT v. Pentair Water Private Limited in ITA No.18/2018 (judgment dated 16.09.2015). The recent orders of the Bangalore Bench of the Tribunal in the case of M/s.Zynga Game Network India Private Limited v. DCIT ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... jurisdictional High Court. We however find that the Hon'ble Bombay High Court in the case of Pentair Water India (P.) Ltd. (supra) has taken the view that turnover is a relevant criterion for choosing companies as comparable companies in determination of ALP in transfer pricing cases. There is no decision of the jurisdictional High Court on this issue. In the circumstances, following the principle that where two views are available on an issue, the view favourable to the Assessee has to be adopted, we respectfully follow the view of the Hon'ble Bombay High Court on the issue. Respectfully following the aforesaid decision, we uphold the order of the DRP excluding 5 companies from the list of comparable companies chosen by the TPO on the basis that the 5 companies turnover was much higher compared to that the Assessee. 17.8 In view of the above conclusion, there may not be any necessity to examine as to whether the decision rendered in the case of Genisys Integrating Systems (I) (P.) Ltd. (supra) by the ITAT Bangalore Bench should continue to be followed. Since arguments were advanced on the correctness of the decisions rendered by the ITAT Mumbai and Bangalore Benches tak ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ingly we direct Ld. AO/TPO to exclude Tata Elxi Ltd (Seg.), Mindtree Ltd., Larsen and Toubro Infotech Ltd., RS Software (India) Ltd., Persistent Systems Ltd., Nihilent Technologies Ltd., Infosys Ltd., Cybage software Pvt.Ltd. for having high turnover as compared to a captive service provider like assessee. 6.7 As mentioned earlier, the assessee s turnover is Rs.56.11 crore. The turnover of the six companies for the relevant assessment year, which the assessee is seeking to exclude are as follows:- Sl No. Name of the company Turnover (Rs. In crore) 1 Larsen Toubro Infotech Limited 4,643.94 2 Mindtree Limited 3,031.60 3 Persistent Systems Limited 1,184.12 4 R S Software (India) Limited 351.88 5 Infosys Systems Limited 44,341.00 6 Thirdware Solutions Limited 206.76 6.8 In view of the judicial pronoun ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t year 2008-2009 reads as follows:- 23. We have heard the learned Counsel for the assessee as well as learned Departmental Representative and considered the relevant material on record. At the outset we note that this issue has been considered and decided by this Tribunal in a series of decisions including the decision in the case of M/s. Dell International Services India Pvt. Ltd. Vs. JCIT in ITA No.308/Bang/2015 Dt.17.6.2016 wherein the Tribunal has considered this issue in para 7 as under : 7. We have considered the rival submissions and relevant material on record. At the outset, we note that allowing a credit period on receivable from AE is not an independent international transaction however, it is part of the main international transaction of providing software development services by the assessee to its AEs. There are series of decisions wherein the Tribunal has considered this transaction as part of the main international transaction between the assessee and its AE and therefore the treatment of the same at the time of determining the arm s length of the international transaction has to be given in the shape of allowing the necessary adjustment in the comparable ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... duced by applying the interest rate of 7% instead of 18.816% applied by the TPO. The first issue raised by the assessee is whether the aggregate period extended by the assessee to the AE which is more than the average credit period extended to the nonAE would constitute international transaction. We are of the view that after the insertion of explanation to section 92B(1), the payment or deferred payment or receivable or any debt arising during the course of business fall under the expression international transaction as per explanation. Therefore, in view of the expanded meaning of the international transaction as contemplated under clause (i) (e) of explanation to section 92B(1), the delay in realization of dues from the AE in comparison to non-AE would certainly falls in the ambit of international transaction. However, this transaction of allowing the credit period to AE on realization of sale proceeds is not an independent international transaction but it is a closely linked or continuous transaction along with sale transaction to the AE. The credit period allowed to the party depends upon various factors which also includes the price charged by the assessee from purchaser. The ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ring the main international transaction being sale to the AE will give distorted result by disregarding the price charged by the assessee from AE. Though extra period allowed for realization of sale proceeds from the AE is an international transaction, however, for the purpose of determining the ALP, the same has to be clubbed or aggregated with the sale transactions with the AE. Even by considering it as an independent transaction the same has to be compared with the internal CUP available in the shape of the credit allowed by the assessee to non AE. When the assessee is not making any difference for not charging the interest from AE as well as nonAE then the only difference between the two can be considered is the average period allowed along with outstanding amount. If the average period multiplied by the outstanding amount of the AE is at arm s length in comparison to the average period of realization and multiplied by the outstanding from non AEs then no adjustment can be made being the transaction is at arm s length. The third aspect of the issue is that the arm s length interest for making the adjustment. Both the TPO and DRP has taken into consideration the lending rates, h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by the Hon ble Tribunals : Mercer Consulting India Pvt. Ltd. [TS-170-ITAT-2014(DEL)] Mentor Graphics (Noida) Private Limited [109 ITD 101] Egain communication (P) Ltd. [ITA No. 1685/PN/2007] Sony India (Pvt.) ltd. [2011-TII-43-ITAT-DEL-TP] Capgemini India Private Limited [TS-45-ITAT-2013(Mum)-TP] 8. In view of the above, a working adjustment appropriately takes into account the outstanding receivable. Therefore, the assessee has undertaken a working capital adjustment to reflect these differences by adjusting for differences in working capital and thereby, profitability of each comparable company. Accordingly, while calculating the working capital adjusted, operating margin on costs of the comparable companies, the impact of outstanding receivables on the profitability has been taken into account. If the pricing/ profitability of the assessee are more than the working capital adjusted margin of the comparables, then additional imputation of interest on the outstanding receivables is not warranted. 9. The assessee had undertaken a working capital adjustment for the comparable companies selected in its transfer pricing report which was al ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mparable price. In case after giving the necessary adjustment the international transaction of the assessee is found at arm s length then there is no question of separate adjustment on account of allowing credit period on receivable from the AE. 7.5 Taking a consistent stand, we direct the AO / TPO to redo the transfer pricing analysis in respect of interest on outstanding receivables by taking into account the directions of the Tribunal in assessee s own case for assessment year 2008-2009 (supra). It is ordered accordingly. 7.6 In the result, Grounds No.4.11 to 4.14 are allowed for statistical purposes. Corporate Tax Issues (Ground No.5.1) 8. The assessee had given advances to the employees against their salary for meeting expenses on food and travel while working on clients deliverables / projects. Further, some advances were also given to various vendors / service providers for carrying out various services in connection with the operations of the assessee. Certain advances could not be recovered from the employees who had left the services of the assessee and also from the vendors due to various reasons. The advances which could not be recovered has been writt ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ences before the A.O. The A.O. is directed to dispose of the matter expeditiously after affording a reasonable opportunity of hearing to the assessee. 8.5 Hence, ground No.5.1 is allowed for statistical purposes. Ground No.5.2 9. The company paid aggregate amount of Rs.79,74,715 as per diem to the employees travelling for business / official purposes outside India to cover actual expenses of meals, travel, laundry and miscellaneous expenses etc. The Assessing Officer disallowed on an adhoc basis 10% of the per diem allowance granted to the employees, thereby making a disallowance of Rs.7,97,471. The relevant observation of the A.O. in the draft assessment order in making adhoc disallowance of 10% of the per diem reads as follows:- 7. The assessee has granted per diem allowance to its directors and employees to meet out official expenses. But the assessee has not sought any proof of the expenditure from its employees. It has merely furnished the basis of arriving at the expenditure. The question of whether the expenditure has actually been incurred or the extend to which it was actually incurred or whether it was incurred for business purposes could not be verified ..... 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