GSS INFOTECH LIMITED ,HYDERABAD vs. INCOME TAX OFFICER, WARD-2(2), HYDERABAD

IN THE INCOME TAX A PPELLATE TRIBUNAL HYDERABAD BENCH ‘A', HYDERABAD BEFORE SMT. P. MADHAVI DEVI, JUDICIAL MEMBER AND SHRI A. MOHAN ALANKAMONY, ACCOUNTANT MEMBER

ITA No. 2255/Hyd/2017 and 2367/Hyd/2018 Assessment Years: 2013-14 & 2014-15 GSS Infotech Ltd., vs. Dy. Commissioner of Hyderabad. Income-tax, Circle – 2(2), Hyderabad. PAN – AADCM 6759Q Appellant Respondent Assessee by: Shri P. Murali Mohan Rao Revenue by: Smt. Y.V.S.T. Sai Date of hearing: 29/10/2019 Date of pronouncement: 23/01/2020 O R D E R PER P. MADHAVI DEVI, J.M.:

ITA No. 2255/Hyd/2017 for AY 2013-14 This is an assessee’s appeal against the order of AO dated 27/10/2017 passed u/s 143(3) rws 144C(13) of the IT Act, 1961.

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2.1 The TPO, vide order dated 31/10/2016, has proposed transfer pricing adjustment of Rs. 1,66,39,383/- towards provision of ITES; Rs. 15,08,074 for shortfall on account of interest on loans given by the assessee to AE; and Rs. 3,07,69,885/- towards interest on outstanding receivables. Thus the total adjustment proposed by the TPO was Rs. 4,89,17,342/-. In accordance with the TPO’s order, a draft assessment order was proposed by the AO, in which, in addition to the TP adjustments, AO also disallowed the advances written off of Rs. 7,79,15,000/-. Assessee filed its objections to the DRP against the proposed draft assessment order.

2.2 The DRP granted partial relief to the assessee by directing the AO to reduce operating cost of the international transaction by the finance charges of Rs. 39,46,598/- for computing operating margin of the assessee from the international trasnaction. The AO while passing final assessment order, however, did not give effect to the directions of the DRP. Other additions and disallowances proposed by the AO in the draft assessment order were confirmed by the DRP and accordingly, final assessment order was passed, against which the assessee is in appeal before us by raising the following grounds of appeal:

“Each of the grounds of appeal is mutually exclusive of, independent and without prejudice to other. Based on the facts and the circumstances of the case and in law, the learned Assessing Officer (AO), learned Transfer Pricing Officer (TPO) and the Honourable Dispute Resolution Panel (DRP)- 1. Erred in making an addition of Rs. 1,66,39,383/- towards Adjustment u/s. 92CA towards provision of IT Enabled services to GSS Infotech Inc without

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appreciating the fact that Comparable Uncontrolled Price (CUP) is selected as the most appropriate method. Incorrect Rejection of Transfer Pricing Documentation 1.1 Erred in rejecting the TP documentation, benchmarking analysis and economic analysis submitted by the appellant by showing inappropriate reasons and not supported by any material evidence, which is not correct. 1.2 Erred in not appreciating the fact that the company has billed its services on hourly basis in the past years and the same has been followed by the appellant in the year under consideration. 1.3 Erred in not appreciating the fact that appellant's turnover with AE and Non-AE of Rs. 10,89,93,166/- and Rs. 19,67,23,559/- respectively which clearly explains that the manpower employed has worked on regular basis & upon satisfaction the customers has availed services. CUP is the most appropriate method 1.4 Erred in rejecting the CUP method adopted by assessee wherein the price charged per hour to AE was compared with price charged per hour to Non-AE under similar circumstances and no ALP adjustment is required to be made. However the CUP method is rejected by TPO/DRP on the ground that the manpower cannot be compared exactly and CUP requires strict comparison. 1.5 Erred in questioning the efficiency of the employees of the appellant without appreciating the fact that the appellant has its own business policies of recruiting employees who are efficient. 1.6 Erred in not appreciating the fact that the provisions of section 92C and Rule 10B(1)(a) clearly explain the manner of computation of Arms Length Price of the International Transaction. 1.7 Erred in not appreciating the fact that as per OECD Guidelines, CUP method is the most direct method which provides a reliable measure for determining arm’s

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length result for the controlled transaction and is preferable over all other methods. Alternative analysis under TNMM 1.8 Erred in rejecting the internal TNMM method adopted by the appellant wherein the margin earned with AE of 37.54 % was compared with margin earned with Non-AE of 37.54% as per the segment audited report and found that no ALP adjustment is required to be made. 1.8.a. Erred in not following Rule 10B(1)(e) of The Transfer Pricing Rules which provides that, the net margin of the appellant under TNMM should be calculated only in respect of transactions entered with the AE and not the overall operating margin. Incorrect benchmarking of overall margin instead of transaction level margin with AE submitted in segmental audit report by the assessee 1.9 Erred in comparing overall margin of the assessee of 13.61% instead of transaction level margin with AE of 37.54% with the average PLI of the comparables selected by TPO of 22.30%. 1.9.a. Erred in not appreciating the fact" that the margin earned from the AE transactions is as per the segment audited report. Incorrect computation of Operating Margin of assessee 1.10 Erred in calculating the operating margin and Profit level Indicator (PU) of the appellant at Rs.4,98,81,997/- and 13.61% respectively instead of Rs.9,13,25,001/- and 28.08%. 1.10.a. Erred in taking the operating cost of the appellant of Rs. 36,66,28,406/- as against the correct amount of Rs. 32,51,85,402/-. 1.10.b. Erred in including the borrowing cost of Rs.39,46,598/- as operating in nature without considering the fact that it is a part of Financial cost and shall not be included in the operating cost while calculating the operating margin of the appellant.

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1.10.c. Erred in not excluding the extra capacity cost of Rs.3,74,96,407/- from the operating cost while calculating the operating margin of the appellant. 1.10.d. Erred in not appreciating the fact that the employee cost is not incurred for the transactions with AEs. Hence, the PU of the appellant should be calculated before extra capacity cost by following Rule 10B of the Income Tax Rules. 1.10.e. Erred in not appreciating the fact that the ratio of employee cost to Operating cost has been increased as that of previous years and accordingly the appellant claimed 20% of the employee cost as extra capacity cost. 1.10.f. Erred in not considering the fact that the appellant company expected growth in the business and employed excess staff in expectation of projects in India, but unfortunately due to reduction in sales certain employees remained on bench and the appellant incurred excess cost. Incorrect application of independent search by TPO 1.11 Erred in carrying of independent search by applying inappropriate filters which resulted in selection of companies which are not comparable to appellant. 1.11.a. Erred in applying the basic industry search filter as "ITES and BPO" as against "Software Consultancy or Software Development" which is business of appellant. 1.11.b. Erred in adopting the search criteria as "ITES, BPO, Call centre" instead of appreciating the fact that the appellant company is not appearing the entire list of 223 companies (as per capitaline database) and 268 companies (as per prowess database) and the same is appearing in the software development services. 1.11.c. Erred in applying only the filter "Companies having turnover <Rs.1 Cr should be excluded" without applying the filter "Companies having turnover >Rs. 200 Cr to the excluded" since the appellant's turnover is Rs. 41.65 Cr. 1.11.d. Erred in applying the filter "Companies who have more than 25% related party transactions (sales as well as expenditure combined) of the sales were excluded"

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without appreciating the fact that the appellant's related party transactions are Rs. 10,28,78,914/- and the sales of the appellant amounts to Rs.39,87,66,843/- accordingly the ratio of related party transactions to the sales arrives at 25.79%. 1.11.e. Erred in applying the filter "Companies whose ITES income <75% of the total turnover are to be excluded" without appreciating the fact that the ppellant has no income from ITES. 1.11.f. Erred in applying the filter "Companies whose Export sale from ITES is less than 25% of the total sales are to be excluded" without appreciating the fact that the appellant has not earned any income from ITES. Incorrect selection of comparable companies by TPO 1.12 Erred in selecting final 7 incomparable companies for the purpose of comparability 1.12.a. Erred in selecting "Acropetal Technologies Limited (seg)" as final comparable without appreciating the fact that the said company is functionally dissimilar, has extra ordinary events and has no segmental details. 1.12.b. Erred in selecting Microgenetics Ltd" as final comparable without appreciating the fact that the said company is functionally dissimilar. 1.12.c. Erred in selecting "Infosys B P 0" as final comparable without appreciating the fact that the said company is functionally dissimilar. high turnover of more than Rs. 200Cr, NIC activity and code is different, high operating margin and has extra ordinary events. 1.12.d. Erred in selecting "Microland Ltd" as final comparable without appreciating the fact that the said company is functionally dissimilar and having turnover more than Rs. 200 Cr. 1.12.e. Erred in selecting "Capgemini Business Systems (India) Ltd" as final comparable without appreciating the fact that the said company is functionally dissimilar, with different NIC code and activity and having turnover of more than Rs. 200 Cr.

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1.12.f. Erred in selecting "e4e Healthcare Ltd" as final comparable without appreciating the fact that the said company is functionally dissimilar and having different NIC code and activity. 1.12.g. Erred in selecting "Hartron Communications Limited (seg)" as final comparable without appreciating the fact that the said company is functionally dissimilar and having different NIC code and activity. 1.12.h. Erred in not considering the submissions made by the appellant in relation to rejection of comparables selected by the TPO. Risk and Working Capital adjustment 1.13 Erred in not providing risk adjustment and calculating adjusted Arm's Length Margin (ALM) of appellant company at 30.94% (ALM at 22.30% - WCA at (-)8.64 %) after making working capital adjustment of (-) 8.64 % in terms of proviso to section 92C(2) of the Act. 1.13.a. Erred in making an adjustment towards Receivables and working capital which tantamount to double taxation. 1.13.b. Erred in not appreciating the fact that the working capital adjustment itself indicates making an adjustment on net of current assets and current liabilities and ought to have appreciated that the Sundry Debtors are part of Receivables. 1.13.c. Erred in considering the entire receivables and payables of the comparables while computing the negative working capital adjustment without appreciating that certain portion of the comparable receivables were out of sales made to third parties and the same could not be considered while computing the working capital cycle of the appellant. 1.13.d. Erred in not appreciating the fact that the appellant is functioning under a limited risk environment whereas the comparable companies are working in a different functional profile, the risk adjustments while calculating the PLI of the appellant company should be given. 1.13.e. Erred in rejecting the appellant's claim for risk adjustment by stating that risk is a by-product of the

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function and is not an independent factor to be considered separately. 2. Erred in making an addition of Rs.15,08,074/- towards interest to be charged @LIBOR+3% on the advances given to AE without appreciating the fact that the appellant has not charged any interest during the year under consideration. 2.1 Erred in not appreciating the fact that the transaction relating to advance for investment and doesn't fall under the purview of Transfer Pricing uls 92B, as no income is generated from the transaction of providing loans and advances to the subsidiaries of the appellant company. 2.2 Erred in re-characterization of 'advance for investment' as 'Loans' which is not permissible under section 145 of the Act. 2.3 Erred in not appreciating the fact that the advances had been advanced by the appellant to its AE as a matter of commercial prudence to further its business interests as a shareholder for any financial incapacitation of the subsidiaries would jeopardize the investments of the taxpayer. 2.4 Erred in not appreciating the fact that the advances given to the AE are with the intention of investment and was never lent for earning interest. 2.5 Erred in not appreciating the fact that the advances to the AE were made from the free reserves available with the appellant and no borrowed funds were used for this purpose. 2.6 Erred in not appreciating the fact that the appellant has used the funds raised through the Initial Public Offer (IPO) in March 2008, wherein it was mentioned as a primary objective that such funds were raised for the purpose of investments in further acquisitions in USA for the growth of the company. 2.7 Erred in not appreciating the fact that the USA subsidiary does not have any deposits or other interest yielding investments, that it may be inferred that the parent company transferred funds in order to avoid interest income, while the subsidiary enjoyed income from interest based on interest free funds received from the parent company.

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4.1 Erred in considering the advances of 7,79,50,0001- given to the following parties as capital in nature: a. Real Marketing Private Limited - Rs. 5,00,00,000/- b. Vashatkara Soft Solutions Pvt Ltd - Rs. 2,00,00,000/- c. Kanchan Traders - Rs. 28,00,000/- d. Paragon Tradex Overseas (P) Ltd - Rs. 51,50,000/- 4.2 Erred in not appreciating the fact that an advance of Rs. 5,00,00,000/- given to Real Marketing Private Limited in the financial year 2008-09 is towards setting up business operations and is wholly and exclusively related to the business. 4.3 Erred in not appreciating the fact that an advance of Rs. 2,00,00,000/- given to Vashatkara Soft Solutions Pvt Ltd during FY 2010-11 is for buying a Software Product- on computerization of Libraries. 4.4 Erred in not appreciating the fact that an advance of Rs. 28,00,000/- given to Kanchan Traders is towards advance for setting up operations in Visakhapatnam. 4.5 Erred in not appreciating the fact that an advance of Rs. 51,50,000/- given to Paragon Tradex Overseas (P) Ltd for the purpose of setting up Joint venture business operations overseas. 4.6 Erred in not appreciating the fact that the appellant has satisfied all the conditions for claiming deduction for advances written off of Rs. 7,79,50,000/- under section 37(1) of Income Tax Act. 4.7 Erred in not appreciating the fact that advances written off are in the nature of business loss as defined u/s 28 of the Act and hence allowable as business expenses.

4.9 Erred in not appreciating the fact that trade advanced were made during the course of its business by the appellant, any loss on account of recoverability would automatically fall under the category of trade debt I receivable and hence is allowable as business loss.

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4.10 Erred in not appreciating the fact that the advance was given for the purpose of expansion of business of the appellant company and which ultimately have bought appellant new business opportunities. In view of the same, loss incurred in form of advances written off should be allowed as business expenditure. 4.11 Ought to have appreciated the fact that the assessee has written off the amount in compliance with the accounting standard. 5. Erred in initiating penalty proceedings u/s. 271(1) (c) r.w.s 274, 271AA & 271BA of the Income Tax Act. The appellant 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 assessee has also filed a petition to admit the following additional grounds:

Without prejudice to the grounds no. 1 to 5 filed on 28.12.2017, herewith we submit: Each of the grounds of appeal is mutually exclusive, independent and without prejudice to other. 6. We would like to submit that as per the ratio laid down by the Hon'ble Supreme Court of India in the case of National Thermal Power Co. Ltd vs. CIT (1998) 229 ITR 383 (SC) the ITAT has jurisdiction to examine the question of law which though not arose before the lower authorities but arose before the ITAT for the first time. 7. The Ld. ITO/AO erred in not following the directions of the DRP while computing the operating cost of the assessee. 8. The Ld.TPO himself in his order u/s. 92CA(3) of the act for the A Y 2014-15 has excluded Hartron Communication Ltd from the list of comparables. 9. The Ld. TPO/AO/DRP erred by not including following companies as comparables i. ACE BPO Services Limited ii. Inforrned Technologies India Limited

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iii Jindal Intellicom Limited iv. Crystal Voxx Limited 10. The Ld. TPO/AO/DRP erred by not including companies which are functionally comparable and meets the filters applied by the TPO. 11. The Ld. TPO/AO/DRP erred by not appreciating that Informed Technologies Limited and Jindal Intellicom Limited are considered as comparable by the TPO in earlier assessment years in the appellant's own case. 12. The Ld. AO/DRP ought to have appreciated the fact that working capital adjustment itself takes the impact of outstanding receivable on profitability. Accordingly no separate adjustment is warranted on outstanding receivables.”

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4.1 The ld. counsel for the assessee has argued that the net margin of the assessee from the international transaction was 37.54% as against 22.31% of the domestic operations. He submitted that by taking domestic sales also into consideration, margin of the assessee has been arrived at 14.84%. He has also drawn our attention to the turnover from domestic sales as well as export sales to demonstrate that there was no exchange gain in domestic sales whereas there was exchange gain in respect of AE and non-AE transactions of export sales, which has reduced the margin of the domestic sales to 20.89% as against the margin of the export sales to 37.54%. He submitted that though the assessee has raised objections before the DRP, the DRP failed to consider and adjudicate this issue.

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4.2 The ld. DR was also heard, who supported the orders of the authorities below.

4.3 Having considered the rival contentions and material on record, we are in agreement with the contention of the ld. counsel for the assessee that for TP adjustment, it is only the margin of the international transaction that has to be considered and not entity level margin of the assessee, particularly, when the assessee is having both domestic as well as international transactions with both AE and non-AE companies. Therefore, we direct the AO to consider only margins of the international transactions of the assessee with its AE and if it is found that the margin of the assessee at 37.54% is correct and if the negative working capital adjustment (-) 8.64% is given, the margin of the assessee would fall within +/- 3% of the margin of the comparables, then the international transaction of the assessee should be considered to be at ALP and no adjustment would be required. Therefore, ground of appeal No. 1.9 is treated as allowed for statistical purposes.

4.4 Further, the AO is also required to give effect to the directions of DRP by reducing the finance charges from the operating cost. Therefore, the AO is directed to recompute the ALP by making necessary adjustments as directed by the DRP and by taking operating margin of the international transactions only into consideration.

4.5 Since we have set aside the issue of computation of the margin of the assessee, and if it would fall within +/- 3% of the comparables, no adjustment would be required, we are not going into acceptability or otherwise of the functional dissimilarities of the comparables challenged by the assessee

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as it would only result in an academic exercise at this stage. Thus, Grounds against comparables adopted by the TPO are also not adjudicated at this stage.

5.1 The AO however, was not convinced with the assessee’s contentions and held that the assessee has failed to establish the tangible and direct benefits it has received from the interest free loans given to its AE. He observed that since the assessee has given interest free loans, the interest rate should be considered on the basis of US Libor rates prevalent in the FY 2012-13. Accordingly, he arrived at the rate of 3.94% per annum and computed the interest at Rs. 15,08,074/-. The

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DRP confirmed the said adjustment and final assessment order was passed and the assessee is in appeal before us.

5.2 The ld. counsel for the assessee reiterated the submissions made before the authorities below and submitted that the advances were made as investments towards share capital and not as interest free loans as considered by the TPO. He submitted that recharacterizing the nature of transaction from advances to loan is not permissible u/s 145 of the Act and that the TPO cannot change the method of accounting followed by the assessee company. It was submitted that the money was invested in the 100% owned subsidiary by way of equity outside India and, therefore, no interest can be charged thereon. Further, he submitted that since the transaction is of capital nature, it cannot be considered as an international transaction u/s 92B of the Act. He also argued that the assessee has not derived any income out of this transaction and as per the provisions of transfer pricing, it cannot be considered as an international transaction and, therefore, ALP cannot be determined u/s 92C of the IT Act. He submitted that the advance given to AE, has subsequently been converted into equity and shares were allotted to the assessee company and, therefore, no interest can be charged on the same. In this connection, he placed reliance on decision of the Tribunal in the assessee’s own case in ITA No. 267/Hyd/2014 in support of his contention that no interest can be charged.

5.3 The ld. DR, on the other hand, submitted that as per the Explanation to section 92B w.e.f. 01/04/2002 included in the Statute by way of Finance Act, 2012, capital financing is also an international transaction and, therefore, interest on such capital financing is to be considered as an international

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transaction and the TPO/DRP have rightly adopted the LIBOR + basis points as reasonable rate of interest on capital financing and, therefore, no interference is called for in the orders of revenue authorities.

5.4 Having regard to the rival contentions and material on record, we find that the inclusion of the Explanation by the Finance Act, 2012 is applicable for the AY before us, according to which, capital financing has become an international transaction and in such a case, the ALP has to be determined for such transaction. We find that the TPO has adopted LIBOR + basis points as reasonable rate of interest and since the loan is given to a foreign company, we do not see any reason to interfere with the rate of LIBOR + basis points for charging interest on the advances given by the assessee, which has later been converted into capital introduced by the assessee. Therefore, assessee’s ground against such addition is rejected.

6.1 The DRP sustained the disallowance made by the AO and the assessee is in second appeal before us.

6.2 The total disallowance of Rs. 7,79,50,000/- consists of the following: i) Advance of Rs. 5 crores given to Real Marketing Pvt. Ltd.

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ii) An amount of Rs. 3,40,00,000/- paid to Vashatkara Soft Solutions Pvt. Ltd. and a portion of the same i.e. Rs. 2 crores is relevant to the AY before us. iii) An amount of Rs. 28,00,000/- paid to Kanchan Traders towards advance for setting up operations in Visakhapatnam iv) The sum advanced to Paragon Trades Overseas Pvt. Ltd., towards advance for setting up of joint venture business operations overseas. The ld. counsel for the assessee submitted that a sum of Rs. 5 crores was given to Real Marketing Pvt. Ltd. for buying office premises at Ahmedabad as the assessee wanted to expand its business operations and subsequently, it was noticed that the land which was intended to be purchased had pending litigation. It is submitted that payees requested for balance payment of Rs. 3 crores for clearing all the pending litigation and completing the sale transaction. In these circumstances, the management thought it prudent not to invest further money into the transaction and requested for refund of advance paid. He submitted that since the Real Marketing was not able to refund the money, they agreed to get software contracts for the assessee in Dubai and Bangladesh where they had extensive marketing ties. It is submitted that it is due to their effort that the assessee was able to bag the contract for implementing the project relating to computerization of IT division of Government of Bangladesh and that under these circumstances, the company has decided to write off the amount as it was not able to recover the amount from Real Marketing. Further, ld. counsel for the assessee submitted that the above expenditure has been incurred for construction of a new facility for extension of existing project but since subsequently it was abandoned due to non-feasibility of the project, the expenditure incurred till the date of conclusion by the Board of Directors to withdraw such construction, is to be treated as revenue expenditure. He submitted that the amount

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written off is therefore, allowable u/s 37(1) of the Act, as it has been incurred wholly and exclusively for the purpose of business. In support of his contention, he relied on the decision of the Hon’ble High Court of Calcutta in the case of Binani Cement Ltd. Vs. CIT, 60 Taxmann.com 384.

6.3 As regards the advance of Rs. 3,40,00,000/- paid to Vashatkara Soft Solutions Pvt. Ltd. for buying application software for computerization of libraries, it was submitted that assessee was participating in tenders to bag certain projects for computerization of libraries in AP and since the application software was not delivered as per the agreed terms, the assessee company has asked for recovery of the advance paid. It was submitted that the payee contended that it has delivered software as per agreed terms and since the amount could not be recovered despite following it up for several years, the Board of Directors decided to write off the corresponding amount of Rs. 2 crores attributable to the FY 2012-12. It was further submitted that the application software was not an operating system software and that it could be loaded on to an existing computer system and it could be uninstalled depending upon the need and exigency of the assessee’s business. Thus, according to him, the expenditure incurred for acquiring application software is revenue in nature and advances given for such application software which was subsequently written off, should be allowed as revenue loss. In support of this contention, he relied on the decision of the Ho’ble High Court of Delhi in the case of Maruti Udyog Ltd. Vs. CIT, 88 Taxmann.com 98.

6.4 As regards the advance of Rs. 28,00,000/- given to Kanchan Traders, it is the case of the assessee that this advance was given for setting up its operations in

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Visakhapatnam, i.e. to set up necessary infrastructure facilities like payment of advance for the premises, setting up 100 work stations and management cabins. It was submitted that since the anticipated contract was not received and the amount incurred was lost, it was claimed as revenue loss. It is submitted that the expenditure, incurred for building up infrastructure facilities which are subsequently abandoned, has to be treated as revenue expenditure and is allowable as expenditure u/s 37(1) of the Act as it was incurred wholly and exclusively for the purpose of business. In support of this contention, he relied on the following decisions: 1. Hon’ble High Court of Calcutta In the case of Binani cement Ltd. Vs. CIT (supra) 2. Hon’ble ITAT Cochin in the case of Apollo Tyres Ltd. Vs. ACIT, 88 Taxmann.com 656. 6.5 As regards the advance given to Paragon Tradex Overseas Pvt. Ltd., it is submitted that the advances were given for setting up of Joint Venture business operations overseas and that the amounts were paid in three trenches to the payees. It is submitted that later on, these plans had to be shelved due to sluggish market conditions. Since the assessee could not recover the amounts from the said company, it had to be written off and the loss incurred by the assessee was in connection with the business of the assessee and, therefore, was eligible for deduction u/s 37(1) of the Act. In support of this contention, he placed reliance on the decision of the Hon’ble ITAT, Calcutta in the case of IMS Ld. Vs. DCIT in ITA No. 813/Kol/2009.

6.6 Thus, he prayed for deletion of the disallowance made by the AO on this account.

6.7 The ld. DR, on the other hand, supported the orders of revenue authorities and has drawn our attention to the

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findings of AO and DRP that the assessee has not filed any details or the evidence in support of the claims made by the assessee. He submitted that the expenditure incurred by the assessee is in the nature of capital field and, therefore, it cannot be allowed as revenue loss. The ld. DR has also filed additional evidence to demonstrate that the expenditure incurred on these companies to whom advances have been given by the assessee are in the businesses which are totally unconnected to the business carried on by the assessee and, hence, business expediency is not proved. The ld. AR objected to the additional evidence filed by the ld. DR and submitted that the AO has not doubted the genuineness of the expenditure but has only held it to be of capital nature and that ld. DR cannot change the stand now at this stage before the Tribunal. Therefore, according to the ld. AR, the question before the Tribunal is only the nature of transaction and not the genuineness of the transaction.

6.8 Having regard to the rival contentions and material on record, we find that the AO has disallowed the claim of advances written off by the assessee. The assessee has made oral submissions before the AO about the purpose of advances and the AO has held it to be in capital field. However, the AO has not materially examined the business expediency or otherwise of these expenses. Even the DRP has confirmed the order of AO without really going into the nature of the transactions. Since the relevant details are also not filed before us, as regards the real nature of the transactions, we deem it fit and proper to remand the issue to the file of the AO with a direction to the assessee to file all the necessary details before the AO, who shall then examine the nature of the transactions and reconsider the allowability of

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such expenditure. Therefore, this ground of appeal is treated as allowed for statistical purposes.

7.1 The ld. DR, however, supported the orders of the authorities below and argued that non charging of interest

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from AEs or non-AEs by the assessee will not determine the ALP of the transaction. He also argued that the working capital adjustment takes care of only the opening and closing balances of the trade receivables and not the delay in receivables during the relevant financial year. Therefore, he justified the adjustment made towards interest on receivables.

7.2 With regard to rate of interest charged by the AO and TPO at Indian Banks PLR @ 14.45%, the ld. counsel for the assessee made an alternate argument that the rate of interest should be charged only at LIBOR + basis points, since the receivables are from foreign AE.

7.3. Having regard to the rival contentions and material on record, we find that vide Finance Act of 2012, interest on receivables has become an international transaction and the amendment is very much applicable to the AY before us.

7.4 In view of the above, we deem it fit and proper to hold that interest on receivables is an international transaction and credit period as agreed to by the parties should be allowed and on any receivables after such credit period, interest should be charged. If the receivables are in foreign exchange, the assessee is liable to charge interest on receivables at Libor + basis points for the relevant FY. However, if the working capital adjustment has taken into consideration, the interest on delayed receivables beyond the agreed credit period or ninety days from the date of the invoice, no separate adjustment is required. Further, in this case, the AO/TPO has granted credit period of only 30 days in the year. Therefore, the AO/TPO is directed to recompute the interest on such receivables which exceeded 90 days and by applying the rate

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of interest at LIBOR + basis points. Accordingly, the grounds raised on this issue are treated as allowed for statistical purposes.

ITA No. 2367/Hyd/2018 for AY 2014-15 9. This is the assessee’s appeal against the order of AO dated 30/10/2018 passed u/s 143(3) rws 92CA(3) and 144C(13) of the IT Act, 1961. In this appeal, the assessee has raised the following grounds of appeal:

S.No. Grounds of Appeal 1. The ld. AO erred in not passing the Draft Assessment order as per the procedure laid down u/s. 144C(1) of the Act. The Ld. AO erred in not appreciating the fact that issuance of notice of demand U/s. 156 of the Act and Penalty notices u/s. 271AA, 271BA and 271(1)(c) along 2. with the draft assessment order dated 15.12.2017, would tantamount to passing of Final Assessment Order. The Ld.TPO/DRP erred in rejecting the TP Documentation maintained by the assessee without properly appreciating the submissions made by the assessee Erred in rejecting the search applied by the taxpayer which was made in accordance with section 92C and Rule 10D of IT, Rules and there by undertaking an independent search by applying inappropriate filters and 3.1 arriving at functionally dissimilar comparables. 3. Erred in rejecting the TP documentation, benchmarking analysis and economic analysis submitted by the assessee by showing inappropriate 3.2 reasons and not supported by any material evidence, which is not correct. Erred in rejecting the TP documentation without appreciating the fact that the assessee has maintained all the details and relevant documents in 3.3 respect of additions, merely by stating that there are certain defects and the comparables of the assessee are also not properly selected. The Ld. TPO/AO/DRP erred in making Arms Length Price Adjustment towards international transaction of Sale of Services to AE Erred in rejecting Comparable Uncontrollable Price Method (CUP) 4. adopted by assessee as the most appropriate method for bench marking 4.1 the transaction of sale. 4.1.1 Erred in not following Rule 10B(1)(a) of the Income Tax Rules, 1962 which clearly explains the manner of computation of ALP.

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4.1.2 Ought to have appreciated the fact that the company has billed its services on hourly basis in the past years and the same has been followed by the assessee in the year under consideration for the transaction of sale of services. 4.1.3 Erred in questioning the efficiency of the employees of the assessee without appreciating the fact that the assessee has its own business policies of recruiting employees who are efficient. Erred in rejecting the internal TNMM method adopted by the assessee as alternative method. 4.2.1 Erred in making ALP adjustment without appreciating the fact that the assessee has adopted internal TNMM wherein margin earned in respect of Export sale transactions with AE was compared with margin earned with Non AE and same was found to be within 4.2 ALP. 4.2.2 Erred in rejecting the segmental audit report submitted by the assessee. 4.2.3 Ought to have appreciated the fact that the assessee has got audited the segment results relating to margin earned with AE and Non-AE. Erred in making adjustment at entity level without restricting the same to transaction with associated enterprises 4.3.1 Erred in adopting the assessee’s entity level margin instead of margin earned in respect of transaction with AE of 35.30% as PLI for comparing with the average PLI of the external comparables. 4.3.2 The TPO ought to have followed Rule 10B(1)(e) of The Transfer 4.3 Pricing Rules which provides that, the net margin of the assessee under TNMM should be calculated only in respect of transactions entered with the AE. 4.3.3 The TPO ought to have appreciated the fact that the provisions of section 92C of the Act relates to computation of ALP in respect of the transactions entered with AE and not the transactions entered with Non-AE. Erred in incorrectly computing the operating margin of the assessee at 27.06% instead at 28.08% 4.4.1 Erred in computing the operating cost of the assessee at Rs. 40,90,42,706/- whereas the actual operating cost of the assessee 4.4 at Rs. 40,58,10,196/- 4.4.2 Erred in taking Borrowing cost of Rs. 32,32, 510/- as operating cost without appreciating the fact that it is a part of the financial cost of the assessee Erred in rejecting the alternative analysis made by the assessee by adopting the TNMM method in respect of transaction of sale of services of Rs. 8,55,31,530/- with AE 4.5.1 Erred in not considering the fact that the overall PLI earned by assessee of 28.08% and the segment margin of 35.30% earned in respect of transactions with AE is much higher than the average PLI of 10 comparables of 7.10%. 4.5.2 Ought to have conducted the search process by selecting 4.5 ‘Software Development Consultancy Services’ under industry as the assessee is into the business of information technologies service provider, specialized in IT Consultancy, IT Infrastructure management services and enterprise application integration, cloud computing. 4.5.3 Erred in adopting the search criteria as “ITES, BPO, Call center” instead of appreciating the fact that the assessee company is not appearing the entire list of 353 companies (as per Capitaline database) and 326 companies (as per prowess database) and the

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same is appearing in the software development services. Erred in applying incorrect search process, filters and thereby arriving inappropriate comparables. 4.6.1 Erred in including “Microgenetics Systems Ltd” in the list of final comparable without appreciating the fact that the said company is in medical transcription service which is functionally dissimilar to the assessee company. 4.6.2 Erred in including “Infosys B P O” in the final list of comparable without appreciating the fact that the said company is functionally dissimilar, high turnover of more than Rs. 200 Cr, High risk undertaking and High Brand value. 4.6.3 Erred in including “Microland Ltd” in the final comparables list without appreciating the fact that the said company is functionally dissimilar and having turnover more than Rs. 200 Cr. 4.6.4 Erred in selecting “Eclerx Services Ltd” as final comparable without appreciating the fact that the said company is having 4.6 acquisition which has huge impact, functionally dissimilar to assessee, with different NIC code and activity, having turnover of more than Rs. 200 Cr and has no clear segmental report in the financial statements. 4.6.5 Erred in selecting “Crossdomain Solution Private Limited” as final comparable without appreciating the fact that the said company is functionally dissimilar, Non availability of Complete Annual Report.

4.6.6 Erred in selecting “MPS Limited” as final comparable without appreciating the fact that the said company is into Publishing solutions which is functionally dissimilar to assessee, huge changes in Work in Progress, has Huge R & D expenditure. 4.6.7 Erred in not giving cogent reasons for rejections of comparables selected during the search process conducted by assessee. The Ld. TPO/AO/DRP erred in making an addition towards interest on the outstanding advances given by the assessee to the AE adopting SBI Interest rate. 5.1 Erred in not appreciating the fact that the advance are given towards investment out of business expediency and for administrative convenience on which no interest was accrued to the taxpayer during the year under consideration. 5.2 Erred in law by disregarding the fact that the advances had been advanced as a share holder interest due to the fact that any financial incapacitation of the subsidiaries would jeopardize the investments of the assessee. 5.3 Erred in re-characterization of ‘advance for investment’ as ‘Loans’ which is not permissible under section 145 of the Act. 5. 5.4 Ought to have appreciated the fact that the interest free advances given to the AE were in the nature of Share Application Money and is in the nature of Quasi Equity as per the terms of agreement and was never intended to be lent for earning interest. 5.5 Ought to have appreciated the fact that the nature of advance is towards investment and in the earlier year ITAT order it has already held that if the advance was for investment no ALP adjustment has to be made. 5.6 Ought to have accepted that the transaction relating to investments in subsidiaries is not covered by the provisions of section 92B of the IT Act. 5.7 Ought to have appreciated the fact that the advances to the AE were made from the free reserves available with the assessee and no borrowed funds were used for this purpose. 5.8 Ought to have appreciated that the assessee has used the funds raised through the Initial Public Offer (IPO) in March 2008, wherein it was

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mentioned as a primary objective for raising such funds were for the purpose of investments in further acquisitions in USA for the growth of the company. 5.9 Ought to have considered the fact that the USA subsidiary does not have any deposits or other interest yielding investments, that it may be inferred that the parent company transferred funds in order to avoid interest income, while the subsidiary enjoyed income from interest based on interest free funds received from the parent company. The Ld. TPO/AO/DRP erred in making ALP Adjustment towards Interest on Receivables taking short term deposit rate of SBI on hypothetical and notional basis without there being any material on record 6.1 Erred in re-characterizing the nature of transaction from ‘Receivable’ to ‘loan’ which is not permissible u/s. 145 of the Act. 6.2 Ought to have appreciated the fact that the amendment in the 2012 Finance Act does not cover outstanding receivables arising out of a assessee’s sale transaction as the word ‘capital financing’ used there is particularly refers to loans or advances during the normal course of business, whereas in Assessee’s case, these are outstanding receivables arising out of services rendered but not capital financing. 6.3 Ought to have appreciated the fact that the outstanding receivables relate to sale and not in the nature of any advance/loans and therefore it cannot come under the purview of ‘International Transaction’ as defined u/s 92B of the Act. 6.4 Erred in the re-characterization of the nature of transaction from ‘Receivables’ to ‘loan’ which is not permissible u/s. 145 of the Act. According to Sec. 145 of the Income Tax Act, 1961, the TPO cannot change the character of the transaction followed by the assessee company and accordingly cannot re-characterize the nature of asset, (i.e., treating receivables as loan/advance) as it is not permitted in the eyes of law. 6.5 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’ 6.6 Ought to have appreciated the fact that, the assessee has adopted 6. TNMM method for determining the ALP of its transactions and the operating margin of the assessee is much higher than its comparables, hence any adjustment with regard to ALP affecting the operating margin would be unjustifiable and against the provisions of Section 92C of the Act. 6.7 Ought to have appreciated the fact that sales to AE includes a substantial profit element with interest aspect being embedded in it and therefore, interest on receivables cannot be coined as a separate international transaction as envisaged u/s 92B of the Act. 6.8 Ought to have appreciated the fact that the assessee is following a policy of not charging interest on receivables irrespective of the fact that whether the sales are made to AE or Non-AE. 6.9 Ought to have appreciated the fact that working capital adjustment itself takes the impact of outstanding receivable on profitability. Accordingly no separate adjustment is warranted on outstanding receivables. 6.10 Erred in facts and law in only allowing ad-hoc credit period of 45 days and ought to have appreciate that the Reserve Bank of India allows a period of nine months for receipt of export proceedings. 6.11 Erred both in facts and in law in not appreciating the fact that the Appellant also received advances/trade payables on which no interest was paid. 6.12 Ought to have appreciated the fact that no ALP adjustment is required to be made in a case where after reducing the amount of notional interest charged on outstanding receivables from operating profit, the margin of comparable is less than the margin of the assessee.

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6.13 Ought to have appreciated the fact that allowing of extended credit period to the associated enterprises is closely linked to the determination of sale price, which is in-turn base to arrive at the margins of the assessee. 6.14 Erred in calculating interest on the whole amount of Accounts receivable of the current year is arbitrary and illegal since the amount is not income attributable to current year. 6.15 Erred in not appreciating that the Hon’ble ITAT in Assessee’s own case for the Asst. Year 2010-11 decided in favour of the assessee and did not charge interest on receivables. 6.16 Erred in overlooking the fact that the receivables has been carried forward from the last year and only the receivables accrued during the year should be taken into consideration. The Ld. AO /DRP erred in disallowing an amount towards bad debts written off. 7.1 Erred in disallowing an amount of Rs.7,88,71,537/- which consists of bad debts for an amount of Rs. 3,95,55,509/- written off u/s.36(1)(vii) of the Act and business advances written off of Rs.3,93,16,028/- claimed as deduction u/s.37(1) of the Act. 7.2 Ought to have appreciated the fact that the bad debt written off of Rs. 2,56,65,945/- are against supplies made by Branches in Bangladesh, Dubai and USA against Invoices raised by the company which were already credited to Profit & Loss account of earlier years and now written off since the same are not recoverable. 7.3 Ought to have appreciated the fact that the bad debt written off of Rs. 3,93,309/- are against supply of services in respect of Aadhar Project which were credited to Profit & Loss account in earlier years and are now written off as not recoverable 7.4 Ought to have appreciated the fact that the bad debt written off of Rs.1,34,96,255/- are towards Reduction in Bills and towards Penalties for delayed execution of Gujarat Aadhar Project, which were credited to Profit & Loss account in earlier years and are now written off as not recoverable 7.5 Ought to have appreciated the fact that the business advance written off of Rs.1,48,00,000/- was paid to Vashtakara Soft Solutions Pvt. Ltd. for Development of Software Product in Library Management. 7. 7.6 Erred in not appreciating the fact that expenditure incurred for development of application software is revenue expenditure. 7.7 Ought to have appreciated the fact that the business advances written off of Rs. 1,40,00,000/- was paid to SQL Star International Limited(SQL) in March 2011, Which became a sick company, thus amount given was not recoverable and are now written off. 7.8 Ought to have appreciated the fact that the business advance written off of Rs. 1,05,16,028/- given to GSS IT Solutions Private Limited in the financial year 2009-10 to 2011-12 become irrecoverable and written off. 7.9 Ought to have appreciated the fact that the trade advances were given in the course of the business for business expediency and are allowable u/s. 36(1)(vii) of the Act. 7.10 Ought to have appreciated the fact that the advance was given for the purpose of expansion of business of the assessee company and which ultimately have bought assessee new business opportunities. 7.11 Ought to have appreciated the fact that trade advances were made during the course of its business by the assessee and any loss on account of recoverability would automatically fall under the category of trade debt / receivable and hence is allowable as business loss. 7.12 Erred in not appreciating that the assessee has satisfied all the conditions for claiming deduction for advances written off u/s. 37(1) of Income Tax Act. 7.13 Erred in not appreciating the fact that advances written off are in the

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nature of business loss as defined u/s 28 of the Act and hence allowable as business expenses. 7.14 Ought to have appreciated the fact that the assessee has written off the amount in compliance with the accounting standard. 7.15 Erred in not following the directions of the Hon’ble DRP given u/s. 144C(5) of the Act without appreciating that they are binding. 7.16 Erred in not accepting the submissions made by the assessee and in completing the assessment. Erred in making disallowance of Rs. 2,62,93,938/- U/s. 14A of the Act 8.1 Erred in invoking the provisions of section 14A without appreciating the fact that the assessee has not earned any income which does not part of 8. total income for the year under consideration. 8.2 Erred in not following the decision of the Apex Court in the case of Commissioner of income tax(central) 1 Vs. Chettinad Logistics (P.) Ltd. 9. Erred in making disallowance of expenses of Rs. 29,02,790/- . 9.1 Erred in making an ad-hoc disallowance of amounts of expenses in the nature of travelling, conveyance and other expenses purely on surmise and without recording a reasonable and justifiable basis for the same. 9.2 Erred in adopting an ad-hoc rate of 10% on the expenses incurred for the purpose of disallowance on estimate basis, which is baseless & not justifiable by law. 9.3 Erred in making the disallowance merely on the ground that the vouchers and bills for the said expenses were not produced before the AO. 10. However, since the accounts of the company in question along with bills and vouchers have been regularly maintained and audited by statutory auditors u/s. 44AB of the Act, the legitimacy and nature of the expenses cannot be suspected, unless the AO points out significant discrepancies on the expenses incurred. 9.4 Ought to have appreciated that the said expenses were incurred wholly and exclusively for the purpose of business and thus are allowable expenditures u/s 37 of the Income Tax Act. 11. Erred in initiating penalty proceedings u/s. 271(1) (c) r.w.s 274, 271AA & 271BA of the Income Tax Act.

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ground 4, are against filters adopted by the TPO and computation of operating margin of the assessee by taking entity level results and not the results of the international transactions alone. Grounds are also against the comparables selected by the TPO.

12.1 We find that similar issue has arisen in assessee’s own case for AY 2013-14 (supra) and for the detailed reasons given therein, we set aside the issues raised in ground No. 4 to the file of AO/TPO with a direction to decide the same in line with the directions given in AY 2013-14. This ground is treated as allowed for statistical purposes.

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17.1 The ld. DR was also heard. Having gone through the assessment order, we find that the only reason given by the AO is that the assessee has not furnished its books of account along with bills and vouchers for verification. Before the DRP, the assessee had stated that all the books of account were produced before the AO and the DRP had directed the assessee to file the necessary evidence within 7 days of the receipt of the order before the AO, failing which, the disallowance made by the AO is sustained. The AO has observed that the assessee has not produced any bills and vouchers and supporting documents for verification. Since the assessee has failed to substantiate its claim by way of documentary evidence before the authorities below or before us, we see no reason to interfere with the order of the AO. Thus, the disallowance made by the AO is confirmed and this ground of the assessee is rejected.

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Pronounced in the open court on 23rd January, 2020.

Sd/- Sd/- (A. MOHAN ALANKAMONY) (P. MADHAVI DEVI) ACCOUNTANT MEMBER JUDICIAL MEMBER

Hyderabad, dated 23rd January, 2020 kv