CAMBRIDGE TECHNOLOGY ENTERPRISES LIMITED,HYDERABAD vs. DEPUTY COMMISSIONER OF INCOME TAX, CIRCLE-1(2), HYDERABAD

IN THE INCOME TAX APPELLATE TRIBUNAL HYDERABAD ‘B’ BENCH : Hyderabad

Before Smt. P. Madhavi Devi, Judicial Member And Shri S. Rifaur Rahman, Accountant Member

ITA No. 208/Hyd./2018 Assessment Year: 2013-14 Cambridge Technology Enterprises Ltd. Vs. DCIT, Circle 1(2) Unit No.04-03, Level 4, Block 1 Hyderabad Cyber Pearl, Hitech City Madhapur Hyderabad 500 081 PAN: AAACU3358G (Appellant) (Respondent)

For Assessee: Sh. P. Murali Mohana Rao, A.R. For Revenue: Sh. YVST Sai, CIT, D.R. Date of Hearing : 19/08/19 Date of Pronouncement 19/11/19

O R D E R 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 Rs.22,71,41,652/- under normal provisions of the I.T.Act, and book loss of Rs.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

ITA No.208/Hyd./2018 AY 2013-14 M/s Cambridge Technology Enterprises Ltd.

28.3.2016, admitting total loss of Rs.18,38,13,823/- and long term capital loss of Rs.41,72,410/- and book loss of Rs.38,37,98,111/- under the provisions of Sec.115JB of the Act. Initially, the return was processed u/s 143(1), but subsequently it was taken up for scrutiny under CASS. 2.1. During the assessment proceedings u/s 143(3) of the Act, the AO observed that the assessee had entered into international transactions during the F.Y. relevant to A.Y. before us. Therefore, for the determination of the Arm’s Length Price (ALP) of the said transactions, the AO referred the matter to Transfer Pricing Officer (TPO) u/s 92CA of the Act. The TPO passed the order u/s 92CA(3) of the Act on 31/10/2016 proposing TP adjustment of Rs.4,80,85,483/-. In accordance with such proposal, the draft assessment order dated 30.12.2016 was proposed to assess the total income at Rs.8,02,21,873/- including the transfer pricing adjustment. The assessee filed its Objections before the Dispute Resolution Panel (DRP) Bangalore, and the DRP, vide directions dated 19.9.2017, directed the AO/TP to exclude certain companies from the final list of comparables and also granted partial relief with regard to other issues. Consequently, the final assessment order dated 28.11.2017 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 not appreciating the fact that the reference made by the AO suffers from jurisdictional error as the AO did not record any reasons in the draft assessment order based on which he reached the conclusion that it was "expedient and necessary" to refer the matter to the TPO for computation of the arm's length price, as is required under section 92CA (1) of the Act. 2. Erred in making an arm's length adjustment for a sum of Rs.4,61,30,226/- towards provision of software development services to Cambridge Technology Enterprises Inc, without appreciating the fact that the assessee has benchmarked the transaction using Transactional Net Margin Method (TNMM) as the most 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 Rs.4,61,30,226/- from Rs.3,24,48,315/- without issuing any show cause notice to the assessee.

ITA No.208/Hyd./2018 AY 2013-14 M/s Cambridge Technology Enterprises Ltd.

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 functionally dissimilar to the assessee company 2.7. Erred in rejecting the economic analysis submitted by the assessee by showing inappropriate reasons, not supported by any material evidence, which is not correct. 2.8. Erred in not considering the comparables selected by the assessee in the TP documentation while determining the ALP adjustment in respect of software development services. Incorrect Operating Margin Calculation of assessee 2.9. Erred in calculating the operating profit and PLI of the assessee at Rs.1,76,40,476/- and PLI (OP/OC) of 8.21% instead of accepting the assessee’s operating margin of Rs.6,29,96,056/- and PLI (OP/OC) of 37.18%. 2.10. Erred in calculating the incorrect operating margin of the assessee by considering certain non operating items as operating expenses. 2.10.1. Erred in considering underutilization cost of Rs.3,03,12,062/ - as operating cost while calculating operating margin of the assessee, without appreciating the fact that the said expenditure is an extra ordinary in nature and not related with the transaction of software development service with AE. 2.10.2 Erred in considering consultancy charges of Rs.1,05,07,684/- as operating cost while calculating operating margin of the assessee, without appreciating the fact that the same is not related to the transaction of software development service with AE. 2.10.3. Erred in considering the cost of software licenses of Rs.14,32,799/- as operating cost, while calculating operating margin of the assessee, without considering the fact that this expenditure is not related to the transactions with AE. 2.10.4. Erred in considering the miscellaneous expenditure of Rs.20,60,123/- as operating cost, while calculating operating margin of the assessee. 2.10.5. Erred in considering the bank charges of Rs.4,42,912/- as operating cost while calculating operating margin of the assessee, without appreciating the fact that it forms part of finance cost which is non-operating in nature. 2.11. Erred in not appreciating the fact that the assessee has compared its PLI of 37.18% with the comparables PLI of 3.06% (comparables selected by assessee) and found the above transaction is within ALP.

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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 2.16. Erred in including RS Software (India) Ltd. In the final list of comparables which is functionally dissimilar and has turnover more than Rs.200 crores. 2.17. Erred in including “Mindtree Ltd.” In the final list of comparables which is functionally dissimilar and has turnover more than Rs.200 crores. 2.18. Erred in including "CG - VAK Software & Exports Ltd" in the final list of comparables which is functionally dissimilar. 2.19. Erred in including "Persistent Systems Ltd" in the final list of comparables which is functionally dissimilar, no clear segmental information, has turnover more than Rs. 200 crores, has high brand value and a gigantic company having super normal profits. 2.20. Erred in including "Info beans Technologies" in the final list of comparables which is functionally dissimilar and has no clear segmental information. 2.21. Erred in including "Larsen & Toubro Infotech Ltd" in the final list of comparables which is functionally dissimilar, has no clear segmental information has high brand value and is a gigantic company. Risk Adjustment and Working Capital Adjustment 2.22. Erred in calculating adjusted Arm's Length Margin (ALM) of assessee company at 23.77% (ALM at 19.96% - WCA at (-) 3.81 %) after making working capital adjustment of (-) 3.81 % and not providing for any risk adjustment by depriving off the benefit of (+)/ (-) 5% in terms of proviso to section 92C (2) of the Act. 2.22.1. Erred in not providing risk adjustment to the assessee while calculating operating margin, without appreciating the fact that the element of risk borne by the assessee company is different from that of the comparables. 2.22.2. Erred in determining the ALP at 23.77% by making negative working capital adjustment of -3.81%, without appreciating the fact that the working capital requirement of the assessee company is different from that of the comparables. 3. Erred in making an adjustment of Rs. 69,65,127/- towards arms length adjustment of receivables, without appreciating the fact that the assessee has not charged any interest on delayed payments received from both AE and Non-AE.

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3.1. Erred in not appreciating the fact that the outstanding receivables 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 the business of banking. 4. Erred in treating 'Reimbursement of expenditure' as 'Outstanding Receivables' and making ALP adjustment. 4.1. DRP erred in considering the reimbursement of expenses as outstanding receivables and proposing enhancement without issuing any show cause notice to the assessee. 4.2. Erred in not appreciating the fact that the reimbursement of expenditure is incurred by the assessee on cost to cost basis and that no mark-up can be charged on it. 4.3. Ought to have appreciated the fact that the transaction relating to reimbursement of expenditure / outstanding receivables is not an international 4.4. Erred in making ALP adjustment with respect to the transaction of reimbursement of expenditure, without appreciating the fact that the same is not routed through P&L A/ c and is a mere book entry. Hence, no adjustment can be made in this regard. 4.5. Erred in aggregating the fact that the judgment of ITAT, Hyderabad in assessee's own case for the AY 2009-10, AY 2010-11 & 2011-12 directing to delete the entire addition made towards reimbursement as the same is not debited to the books of the assessee company. 5. Erred in disallowing bad debts of Rs, 21,48,81,750/- without appreciating the fact that the same is related to the sales made during the course of business and has become irrecoverable and is to be allowed as per section 36(1)(vii) of the Act. 5.1. Erred in not appreciating the fact that the bad debt referred above was offered to tax earlier years relating to services provided to CTE Inc, USA. Since the assessee's debtor CTE Inc., USA was making losses and was not able to pay debts to the assessee, the Board of Directors has decided to write off the same in the books of accounts during the year under consideration. 5.2. Erred in not following the provisions of section 36(1) (vii) of the IT Act relating to Bad debts and treated the same as capital loss, without appreciating the fact that the same is related to business of assessee, which was offered to tax as income on mercantile system. 5.3. Erred in not appreciating the fact that the sale amount which has become irrecoverable has been written off in the books of account during the year due to the fact that the CTE Inc, USA is incurring loss and was not able to pay debts.

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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 that assessee has written off the amount with prior approval of the Board of Directors, wherein it was directed to write off the amount due from CTE Inc., USA. 5.10. Erred in not appreciating the fact that CTE Inc.. USA has negative working capital and is not in a position to repay these outstanding trade debts to the assessee. 5.11. Erred in not appreciating the fact that advance made to CTE Inc., was in the ordinary course of business of the assessee as a part of the business activity and that debt emerges from that activity can be allowed as a bad debt and treated as a revenue loss. 6. Erred in making disallowance of Rs. 10,68,463/- u/s. 14A of the Act without appreciating the fact that the provisions of section 14A cannot be applied to the investments from which no income is earned which do not form part of total income of the assessee during the year under consideration. 6.1. Erred in not appreciating the fact that no interest bearing funds were used for the purpose of investments made by the appellant and no expenditure has been incurred by the assessee on the funds invested there from which the dividend income received. 6.2. Erred in applying Rule 8D of IT Rules, 1962 read with section 14A of the Act without recording satisfaction. 6.3. Erred in disallowing certain expenditure u/ s. 14A, without giving a finding that the expenditure by way of interest booked is not genuine and or a part of the expenditure is relatable to the investment in non-taxable income generating asset. 6.4. Erred in not appreciating the fact that the assessee has neither earned any dividend income from the investments made during the year under consideration nor was there any exemption claimed on such income. 6.5. Erred in rejecting the contention of the assessee that the borrowed funds on which interest has been paid, have been utilized for specific purpose i.e. for meeting the working capital requirements and there is no direct nexus between the loan and it's utilization for investment, the income there from which is exempt. 6.6. Erred in not appreciating the fact that the investment is made out of assessee's own funds in view of business expediency and for which purpose section 14A cannot be invoked.

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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 Rs. 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 Rs.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 of appeal is mutually exclusive, independent and without prejudice to other. 7. 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 !TAT for the first time. 8. The Ld.TPO/AO/DRP erred in making negative working capital adjustment without appreciating that the assessee is a debt-free company and it doesn't bear any capital risk. 9. The Ld.TPO/AO/DRP ought to have allowed under utilisation of capacity adjustment as there is a difference in level of capacity utilization of assessee and level of capacity utilization of comparables. Accordingly, adjustment would be required to be made to profit margin of comparable on account of difference in capacity utilization in terms of rule10-B(1)(e)(iii) 10. The Ld.TPO/AO/DRP ought to have appreciated that the excess capacity cost is non operating cost in nature because it does not generate any revenue on a regular basis and the assessee has to maintain excess staff capacity as company cannot quickly hire people with required skills, knowledge and experience. 11. The Ld.TPO/AO/DRP erred in not appreciating the fact that the comparable companies do not bear any idle costs in terms of excess staff capacity costs whereas the assessee company incurs significant idle employee cost. 12. The Ld.TPO/AO/DRP erred in not including the following 2 comparable companies, Cignity Technologies Ltd and Spry Resources India Pvt. Ltd, despite satisfying all the relevant filters for inclusion into the final comparables. 13. The Ld.TPO/ AO/DRP erred in not excluding the Larsen and Tubro Infotech Ltd, from the final set of comparables, since it is functionally dissimilar, has High turnover & no segmental information is available. 14. The Ld.TPO/ AO/DRP erred in not excluding the Persistent Systems Ltd, from the final set of comparables, although it is functionally dissimilar, engaged in software product development, no segmental information is available.

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2.2. Further vide letter dated 30.8.2018, the assessee has sought admission of the grounds sl.nos. 7 to 24 as additional grounds and vide letter dated 26.11.2018, grounds of appeal nos. 25 to 28 also as additional grounds of appeal. The assessee sought admission of these additional grounds on the ground that they are on questions of law with regard to which all necessary facts are on record. In support of his argument for admission of the same, the Ld.Counsel for the assessee placed reliance on the decision of Hon’ble Supreme Court in the case of NTPC vs. CIT reported in 229 ITR 383 (SC) and submitted as under: “In addition to grounds no.1 to 6, and additional grounds 7 to 24 of appeal filed on 30.01.18 and 30.8.18 respectively, herewith we submit:

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Each of the grounds of appeal is mutually exclusive, independent and without prejudice to other. 25. 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. 26. The Ld.TPO/AO/DRP erred in not including Sankhya lnfotech Limited as comparable company, despite satisfying all the relevant filters for inclusion into the final comparables. 27. The ld. TPO/AO/DRP erred in not including 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, we proceed to decide the grounds issue-wise and shall refer to only such additional grounds arguments which are advanced by the Ld.Counsel for the assessee during the course of arguments as and when required in respect of each of the issues involved and shall decide their admissibility at such time. We shall start with the least complicated issues. 4. As regards ground no. 23 relating to TDS credit, we find that all the relevant facts are part of record and, therefore, needs to be admitted as both the parties agreed that the issue should be remitted to the file of A.O. for verification. The Ld.Counsel for assessee submitted that the assessee is 9

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eligible for TDS credit of Rs.94,71,936/-, where as, the AO allowed TDS of Rs.84,903/- only. He submitted that the assessee was eligible for TDS credit of the amalgamating company i.e. M/s Cambridge Technology India Pvt. Ltd. (‘CTIPL’ for short) and since the AO has accepted the revised return of income taking into consideration the aggregate income of the amalgamated company i.e. M/s Cambridge Tech. Enterprises Pvt. Ltd. (CTEPL for short), entire TDS credit of Rs.94,71,936/- (of both the companies) has to be allowed. 4.1. After hearing both the parties, we admit this ground and since we find that this issue needs verification by the AO as to whether the TDS reported in the revised return of income also contained the TDS made by M/s CTIPL, we deem it fit and proper to remand the issue to the file of the AO with a direction to verify the claim of assessee and allow the same if it is in accordance with law. 4.2. Thus, ground no.23 is treated as allowed for statistical purposes. 5. As regards ground nos. 21 and 22 relating to MAT credit, it is the case of the assessee that the assessee is eligible for MAT credit of Rs.35,38,541/- which is pertaining to AYs 2009-10 and 2010-11 against the tax payable and submitted that the AO, while calculating the tax payable, has not considered and has not allowed the MAT credit to the company. 5.1. Ld.DR also agreed that the same may be allowed to assessee after verification. 5.2. Therefore, we admit these grounds and deem it fit and proper to remand the issue to the file of AO for verification and allowance of MAT credit to the assessee in accordance with law. Accordingly 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 Rs.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

ITA No.208/Hyd./2018 AY 2013-14 M/s Cambridge Technology Enterprises Ltd. 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, supported the orders of authorities below and placed reliance on the CBDT Circular No.5/2013. 6.2. Having regard to rival contentions and material placed on record, we find that this issue is covered in favour of the assessee by various decisions of the Tribunal and also the judgement of Hon’ble Delhi High Court in the case of Chemivest Pvt. Ltd. (2015) 378 ITR 33 (Del), wherein it was held that no disallowance u/s 14A is called for when there is no exempt income earned by assessee during respective FY. Respectfully following the same, the disallowance made u/s 14A of the Act is directed to be deleted. In the result, ground no.6 is allowed. 7. As regards ground no.5 against disallowance of bad debts, the brief facts are that the assesseee is the parent company of the Cambridge Enterprises Inc. Both the companies entered into a service agreement dated 1st April,2011 in terms of which, the assessee has been rendering software services to its 100% subsidiary, CTE Inc. USA, and the outstanding trade receivables as on 31st March, 2013 from CTE Inc. USA, were Rs.28,72,76,596/-. These receivables were due from the months of December, 2011. Since CTE Inc. USA, was a loss making company and had huge accumulated losses in its books with negative worth to the extent of Rs.41.25 crores as on 31st March, 2012, and was not in a position to repay

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the outstanding trade debts to the assessee, the assessee decided to sell its stock in this company to Smart Shift Group Inc. USA (SSGI in short). As a condition for the sale, the assessee was required to write off its dues amounting to Rs.21,48,81,750/- outstanding for the period of December, 2011 to September, 2012 from CTE Inc., USA and the balance was to be paid to the assessee by the purchaser i.e. SSGI. Under these circumstances, the assessee wrote off the trade receivables due from CTE Inc. and debited the same to the Profit and Loss account as bad debts written off under the head ‘other operative expenses’. The AO, however, observed that the amounts due from CTE Inc. USA, have been written off as a condition for sale of assessee’s stock and not on the ground that they are irrecoverable. Observing that the CTE Inc. USA is a Subsidiary Company of the assessee company and that the entire dues of Rs.28.72 crores were not written off, but only part of dues amounting to Rs.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 cannot be changed. He placed reliance on the decision of Hon’ble Supreme Court in the case of S.A. Builders Ltd. Vs. CIT(A) reported in 288 ITR 1 (SC) in support of this contention.

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7.2. The Ld.DR, on the other hand, vehemently supported the orders of the authorities below. 7.3. Having regard to the rival contentions and the material placed on record, we find that a sum of Rs.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. 7.4. Therefore, ground no.5 is allowed. 8. As regards the transfer pricing adjustment, we find that the TPO has proposed adjustment towards the following. (i) provision of software development services : Rs.3,24,48,315/-; (ii) reimbursement of expenses : Rs.51,70,659/- and (iii) interest on receivables Rs.1,04,66,509/-. 8.1. Against interest on receivables, the assessee has raised ground no.3 and additional grounds no.18 and 19. 8.2. We find that grounds no.18 and 19 are additional grounds of appeal and are only arguments in support of ground no.3. Since all facts are on record, we deem it fit and proper to admit these grounds and adjudicate the same along with ground no.3.

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8.4. Brief facts of the case are that the assessee filed Form no.3 CEB along with its return of income and on perusal of the same, the TPO observed that the assessee has receivables of Rs.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 into account the payables as well as receivables at the end of the year but does not take into account the delay in receivables within the year. Thus, the TPO charged interest @ 14.45% on the outstanding receivables and proposed adjustment of Rs.1,04,66,509/-. Against this adjustment, assessee preferred its objections before the DRP. The DRP confirmed the order of the TPO, but granted partial relief by directing the AO to apply the applicable interest rates on short term deposits during the relevant year instead of 14.45% adopted by the TPO. The DRP further directed the AO to restrict the adjustment for delay in payment till the end of the relevant F.Y. and also to consider invoices raised in the earlier FY in respect of which, the payments are received during the FY relevant to the AY before us. In accordance with these directions of DRP, the final assessment order was passed, against which, assessee is in appeal before us.

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8.6. The Ld.Counsel for assessee, while agreeing that interest on receivables is an international transaction during the relevant A.Y., submitted that since the assessee is not charging interest on receivables from both the AEs and non-AE consistently, charging of interest on delayed payments during the relevant AY would only put a burden on the client thereby affecting the realisation of receivables and consequently, the functioning of the business. According to him, non-charging of any interest from its AE by assessee is also a consistent practice followed by the assessee. He placed reliance on the Coordinate Bench decision in the case of Value Labs vs. DCIT in ITA no.475/2017 in support of his contention. He also submitted that no adjustment of interest on receivables was made by TPO during the AYs 2010- 11/2011-12/2012-13, considering the same to be at arm’s length. 8.7. The second argument by Ld.Counsel is that working capital adjustment itself takes into account, the impact of interest on receivables and accordingly no separate adjustment is required to be made towards the interest on the receivables. In support of his contention, he placed reliance upon the following decisions. (i) EPAM Systems India (P) Ltd. Vs ACIT (2018) 100 Taxmann.com 335 (Hyd- Trib.) (ii) Open Text Corporation India P Ltd. Vs DCIT in ITA no. 232/Hyd/2016 (iii) Hacket 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:

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(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 decision of ITAT in the case of GSS Infotech Ltd. (supra). 9. The Ld.DR, on the other hand, supported the orders of the authorities below and submitted that as per the agreement between the assessee and its AE, period of credit is only from one month to three months, and, therefore, the interest on receivables beyond the credit period is to be brought to tax. He submitted that on insertion of Explanation to S.92B, it is an international transaction and, therefore, ALP of such transaction has to be determined. Ld.DR submitted that the assessee’s contention that the credit period should be 180 days as RBI allows receipt of consideration in Foreign Exchange within 180 days, is also not acceptable because the RBI’s direction to allow the receipt of foreign exchange is only regulatory and is not for determination of ALP. He submitted that the argument of the assessee that it is not charging interest on trade payables as well as receivables from both AE and Non-AE parties, and, therefore, it should not be charged interest on its receivables is no longer a valid argument after amendment of S.92B of the Act. Further, he submitted that the decisions relied upon by Ld.Counsel for assessee are for AYs prior to amendment of S.92B, and, therefore, the same are not applicable to the case of the assessee. He also placed reliance upon the following decision in support of his contention. PrCIT vs. Bachtel India P Ltd. In ITA 379/2016 (Del H.C.) dt.16.5.2017 10. Having regard to rival contentions and material placed on record, we find that by insertion of Explanation to Sec.92B of the I.T.Act, interest on receivables has become international transaction with retrospective effect from 1.4.2002. However, even if the said insertion is to be considered as

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prospective in nature, since it is inserted by Finance Act, 2012, it is very much applicable to the A.Y. before us i.e. A.Y. 2013-14. Therefore, all the decisions which are relied upon by Ld.Counsel for the assessee pertaining to the A.Ys prior to the amendment, are not applicable to the case of the assessee. The argument that the assessee has not charged interest on receivables from both AEs and Non-AEs and, therefore, no adjustment on interest receivables should be made by the TPO cannot be accepted. Both the interest on receivables as well as interest on payables are 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 hold that when there is mentioned a Clause the agreement for credit period, it will apply and any period after that period has to be taken into consideration for determining the interest on receivables. Therefore, we are of the opinion that the AO/TPO has to compute the interest on receivables only of such receivables which have exceeded the credit period agreed to by the parties in the agreement and not on the entire outstanding receivables at the end of the year. Further the assessee’s contention that the assessee is not paying interest on trade payables or advances from non-AE customers

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also cannot hold water after amendment by the Finance Act, 2002. Further, we also agree with the 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. 10.2. Assessee’s additional grounds of appeal nos. 3, 18 and 19 are treated as allowed for statistical purposes. 11. As regards the adjustment amounting to Rs.51,71,659/- on account of reimbursement of expenses received as raised in ground no.4, and additional ground no.17, the Ld.Counsel for assessee submitted that the assessee has not received any reimbursement of expenses but in fact it had to make payment to its AEs, which has erroneously been considered by the AO as receipt by the assessee. He has drawn our attention to page 507 of the paper book, which contains Note-7 i.e. other current liabilities for FY 2012- 13, wherein it is mentioned that “CTE Inc. reimbursement payable” of Rs.2,04,35,773/- and also to page 32 of the TPO’s order wherein the TPO has recorded that the reimbursement received is of Rs.2,04,35,773/-. For the sake of ready reference, the relevant table is reproduced hereunder. Note No.7: Other Current Liabilities

Sl. Particulars As at 31.3.2013 As at 31.3.2012 No. I. a) Inter Company loans & advances 81,372,300 b) Rent Deposit received from CTIPL c) CTE-Trust ESOP 1,000,000 d) CTE Inc Exp Reimbursement payables e) Provision for dividend 18,700,683 18,700,683 f) Share Refund g) Other payables - 20,435,773 Total Other Current Liabilities 83,286 83,286 75,939 75,939 1,645,700 198,567 102,877,908 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 Rs.51,71,659/-. The Ld.DR also agreed that if it is

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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 but are paid by the assessee to its AE, we deem it fit and proper to remit the issue to the file of AO to verify whether this amount of Rs.2,04,35,773/- is payment by assessee to its AE and if it is found to be so, no adjustment shall be made on this account. Thus, grounds of appeal no.4 and 17 are allowed. 12. As far as the TP adjustment on account of provision of SDS is concerned, the assessee has adopted TNMM as the most appropriate method for its TP study and has arrived at 3.06% margin of a comparable companies against its own margin of 20% and, therefore, treated the transaction to be at ALP. The AO, however, arrived at OP/OC at 8.21%. TPO rejected the assessee’s TP study and conducted his own search and arrived at 9 companies as comparables. The assessee submitted its objections to the TPO against the companies selected by TPO and also sought inclusion of certain companies selected by the assessee. The TPO, however, rejected assessee’s objections and considered only the companies selected by him, as final set of comparables and arrived at average margin of 19.96% as against 8.21% of assessee and after allowing working capital adjustment of – 3.81%, he proposed adjustment of Rs.3,24,48,315/-. 12.1. Aggrieved, the assessee preferred its objections before the DRP, which granted partial relief by directing exclusion of 3 companies from final list of comparables i.e. CTIL Limited, Tata Elxsi and Kals Information Systems. The DRP also rejected the assessee’s claim of inclusion of certain companies viz., Cigniti Technologies Ltd., Spry Resources India P Ltd., Sankhya Infotech Ltd. and Infomile technologies Ltd. 12.2. Therefore, assessee is in appeal before us seeking exclusion and inclusion of certain companies which were taken by assessee but rejected by the TPO. For this purpose, assessee has raised ground nos.2, and additional ground nos. 13, 14, 15 and 16 which are for exclusion of companies ; and ground nos. 8, 12, 26 and 27 for inclusion of the companies and ground nos.

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9 and 11 for certain adjustments while arriving at average margin of the comparable companies. 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 to assessee’s margin, but the adjustment has to be made to the margins of the comparable companies. 13. Having regard to rival contentions and material placed on record, we find that the employee cost of the assessee 65:20 against the employee cost of comparables of 54.45%. 13.1. We find that the assessee had taken this objection before the TPO but the TPO had rejected the same without making any comments on merits. Even before the DRP the assessee had raised objection no.4b, but the DRP held that extra employee cost is normal instant in this type of business and is necessitated by business dynamics. It was also held that the assessee has

ITA No.208/Hyd./2018 AY 2013-14 M/s Cambridge Technology Enterprises Ltd. not furnished robust documentation to justify such claim and that there is no difference in FAR analysis as to such unusual additional cost to be met to perform its functions. The DRP therefore, rejected the claim of the assessee. 14. The Co-Ordinate Bench of this Tribunal in Planet Online Pvt. Ltd. in ITA 279/Hyd/2016 to which both of us are signatories, at para 8 of the order has held as under. “8. On going through the material on record and having regard to the rival contentions, we find that the DRP has retained Persistent Systems & Solutions Ltd. Persistent Systems Ltd. And Sasken Communication Technologies Ltd. As comparables and the average ratio of the employee cost to sales of these three companies is 58% as against the employee cost of the assessee at 76% and the difference is 18%. This difference is not negligible to be ignored. Every difference which is likely to affect the comparability analysis has to be taken note of and suitable adjustment has to be made to bring the comparables on par with the assessee for comparing of their operating margin. In view of the same, we deem it fit and proper to remit this issue also to the file of the AO with a direction to make suitable adjustment to the employee cost of the assessee if there is any underutilisation of employees available with the assessee and thereafter re-compute the operating margin of the comparables for arriving at their average margin. Ground of appeal no.3h is accordingly treated as allowed for statistical purposes.” 14.1. The Hon’ble Bombay High Court in the case of Petro Eraldite Pvt. Ltd. 92 taxmann.com 438 cited (supra) also has held that capacity adjustment 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.

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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 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, and arrive at the relevant comparables for arriving at ALP adjustment. Thus these grounds are treated as partly allowed. 16. In the result assessee’s appeal stand partly allowed. Order pronounced in Open Court on 19th November,2019. Sd/- Sd/- (S.RIFAUR RAHMAN) (P MADHAVI DEVI) ACCOUNTANT MEMBER JUDICIAL MEMBER Dated: 19th November, 2019. *GMV

ITA No.208/Hyd./2018 AY 2013-14 M/s Cambridge Technology Enterprises Ltd.