PRITHVI INFORMATION SOLUTIONS LIMITED, HYDERABAD,HYDERABAD vs. ACIT, CIRCLE-16(2), HYDERABAD, HYDERABAD

2. Erred in rejecting the objection raised, without considering the facts submitted by appellant.

3. Erred in applying TNMM Method as the most appropriate method in determining the arms length price in respect of transaction relating to provision of software Consultancy Services.

4. Ought to have appreciated that CUP is the appropriate method for calculating arms length price instead of TNMM method.

5. Ought to have followed the procedure laid down under the provisions of section 92C of the Act in the Computation of arms length price for analysing the said transaction. Addition of Rs. 4,30,29,173/- towards bad debts written off :-

6. Erred in disallowing the expenditure of bad debts written off of Rs. 4,30,29,173/- without following the ratio laid down by the Supreme Court in case of TRF ltd. VS CIT (2010) 323 ITR 397 (SC).

7. Ought to have appreciated the fact that assessee has complied with all the conditions laid down for allowing the bad debts written off.

5.1 The assessee has also raised additional grounds as under :

“ 9. The Hon. ITAT is requested to kindly admit the grounds which are taken for the first time before them, as per the ratio laid down by the Hon. Supreme court or India in the case of National Thermal Power Corporation Limited vs. CIT [1998] 229 ITR 383 (SC).

10. The Ld. AO ought to have appreciated that as per section 144C of the Act, upon receipt of the directions u/s 144C(5) of the act the assessing officer should pass the relevant final assessment order within one month from the end of the month in which such directions is received.

11. The Ld. AO ought to have appreciated that directions u/s 144C(5) was passed on 08.12.2014 and time limit to pass the final assessment order should be within one month from the end of the month in which direction u/s 144C(5) of the Act is received i.e. on or before 31.01.2015.

12. The Ld. AO erred in passing the Final assessment order u/s 143(3) r.w.s 92CA(3) r.w.s 144C(5) of the Act after the expiry of time limit i.e. passed on 26.02.2015 which is invalid and bad-in-law.

13. Without prejudice to the above grounds, as per section 144C of the Act DRP shall pass the directions u/s 144C(5) of the Act within 9 months from the end of the month in which the draft assessment order has passed.

14. Without prejudice to the above grounds, in the present case draft assessment order was passed on 28.03.2014 and the time limit to pass the directions u/s 144C(5) of the Act by DRP was 31.12.2014.

16. The Appellant may add or alter or amend or modify ort substitute or delete and/or rescind all or any of the grounds of appeal at any time before or at the time of appeal.” 5.2 In this context the Ld. AR submitted that, the additional grounds so raised are admissible in view of judgment rendered by the Hon’ble Supreme Court in the case of National Thermal Power Co. Ltd. v. CIT (1998) 229 ITR 383 (SC). The prayer for admission of additional grounds noted above which are not in memorandum of appeal are being admitted for adjudication in terms of Rule 11 of the ITAT Rules owing to the fact that objections raised in additional grounds are legal in nature for which relevant facts are stated to be emanating from the existing records.

6. The brief facts of the case are that, the assessee is a company engaged in the business of Software Development Services (“SDS”). It filed its return of income for the assessment year 2010–11 on 27.09.2010 declaring total income of Rs.5,21,55,160/- under normal provisions and book profits of Rs.8,09,10,977/- under section 115JB of the Income Tax Act, 1961 (“the Act”). The case of the assessee was selected for scrutiny and notice under section 143(2) of the Act was issued on 19.09.2011. In view of involvement of international transactions, the matter was referred to the Learned Transfer Pricing Officer (“Ld. TPO”) under section 92CA of the Act for determining the arm’s length price. The Ld. TPO, vide order dated 21.01.2014, proposed an adjustment of Rs.17,56,28,648/- on account of SDS and Rs.7,32,25,840/- on account of interest on interest‑free loan. In addition to above, the Ld. AO made a non‑TP addition of Rs.4,30,29,173/- on account of bad debts written off. Accordingly, the Ld. AO passed the draft assessment order under section 143(3) r.w.s. 92CA(3) of the Act on 28.03.2014.

7. Aggrieved with the draft assessment order of Ld. AO, the assessee preferred objections before the Ld. DRP, which issued directions under section 144C(5) of the Act on 08.12.2014. In accordance with the directions of Ld. DRP, the Ld. TPO revised the proposed adjustment to Rs.15,71,57,265/- for SDS and retaining the adjustment of Rs.1,99,65,250/- for interest on interest‑free loan. In conformity with the directions, the Ld. AO passed the final assessment order on 26.02.2015 under section 143(3) r.w.s. 92CA(3) r.w.s. 144C(5) of the Act, making total TP additions of Rs.17,71,22,515/- and non‑TP addition of Rs.4,30,29,173/- on account of bad debts written off.

8. Aggrieved with the final assessment order of Ld. AO, the assessee is in appeal before this Tribunal. At the outset, the Ld. AR submitted that, the following issues are only involved out of the grounds of the appeal : a) The final assessment order passed by Ld. AO is barred by limitation. b) Total TP additions of Rs.17,71,22,515/- made by Ld. AO. c) Non‑TP addition of Rs.4,30,29,173/- made by Ld. AO on account of bad debts written off.

“5. Accordingly, a draft assessment order dated 28.03.2014 is prepared and duly served on the assessee company. Based on the draft assessment order, the assessee company has preferred an appeal before Hon’ble DRP and same is disposed vide order dated 08.12.2014, which is received in this office on 06.01.2015 given the following directions.” 11.1 On perusal of above, we found that the final assessment order of Ld. AO specifically records the receipt of directions of Ld. DRP on 06.01.2015. Further, the assessee has not placed on record any cogent documentary evidence to demonstrate receipt prior to 06.01.2015. Mere presumptions based on office location or proximity cannot dislodge a clear factual recording in the assessment order. It is a settled principle that factual statements in official records carry a presumption of correctness unless rebutted by credible evidence; suspicion, however strong, cannot substitute proof.

11.2 We have also gone through the judgment of the Hon’ble Telangana High Court in Rapiscan Systems Private Limited (supra) as cited before us. On perusal, we find that the ratio proceeds on a specific factual premise that the Ld. DRP directions were uploaded on the portal, and therefore the date of upload was to be treated as the date of receipt by the Ld. AO. In the present case, no material has been produced to show that the Ld. DRP uploaded the directions on the portal. On the contrary, the record indicates physical receipt by the Ld. AO on 06.01.2015. Consequently, the factual foundation that triggered the rule in Rapiscan Systems Pvt. Ltd. (supra) is absent here. We therefore hold that the reliance placed by the assessee on Rapiscan Systems Pvt. Ltd. (supra) is misplaced and distinguishable on facts.

11.3 Therefore, reckoning the date of receipt as 06.01.2015, the time limit under section 144C(13) of the Act expires on 28.02.2015. Accordingly, we are of the considered view that the final assessment order dated 26.02.2015 has been passed within the prescribed period. The objection on limitation accordingly fails and is rejected.

14.1 Considering the above, and in the interest of natural justice, we deem it fit to set aside the issue relating to TP adjustment of Rs.15,71,57,265/- on account of SDS to the file of the Ld. AO/TPO for de novo adjudication. The Ld. AO/TPO is directed to grant adequate opportunity of being heard to the assessee and to permit filing of additional evidence or explanation, if any, and thereafter pass a speaking order.

15. With regard to the TP adjustment of Rs.1,99,65,250/- on account of Interest on Interest-free Loan, the Ld. AR submitted that the adjustment has been wrongly made by the Ld. AO. It was pointed out that the amount relates to investments made by the assessee in its group entities i.e. (a) Rs.59,05,37,783/- in Prithvi Information Inc., USA and (b) Rs.72,24,179/- in Prithvi Middle East WLL. It was argued that these are capital investments in subsidiaries, and not loans or advances, hence outside the scope of section 92B of the Act. The Ld. AR invited our attention to the Related Party Transactions forming part of the Annual Report (page no. 44 of the paper book), where these amounts have been disclosed under the column “Investments.” It was further submitted that the investments were made out of interest- free funds, and hence no benchmarking is required. As regards Prithvi Information Inc., USA, it was contended that although the amount was shown as loans and advances in the year under consideration, it was subsequently converted into equity. Accordingly, the Ld. AR prayed before the bench to delete the addition made by the Ld. AO.

17.1 On perusal of above, we found that there are investments in subsidiary companies of Rs.40.42. We have also gone through the disclosure at page no. 44 of the paper book, under “Related Party Transactions,” which is to the following effect :

17.2 On perusal of above, we found that the assessee has disclosed investment in Prithvi Solutions Inc., USA of Rs.48,80,31,500/- under “subsidiary companies” and investment in Prithvi Middle East WLL of Rs.87,48,215/- under “joint ventures”. As far as investment in subsidiary companies are concerned, the amount as per Schedule No. 7 on Investments (page no. 24 of the paper book) is Rs.40.42 with Prithvi Information Inc., however the amount as per disclosure at page no. 44 of the paper book, under “Related Party Transactions” is Rs.48,80,31,500/- with Prithvi Solutions Inc. Hence, there is a clear contradiction within the same annual report regarding the quantum of investments as well as the name of the company. Further, while the assessee has contended that investment in Prithvi Middle East WLL is in the nature of investment in subsidiary companies, the disclosure at page nos. 24 & 44 of the paper book categorises it as an investment in a joint venture. However, there is no difference in quantum of investment in this respect, as found in the case of investment in subsidiary company.

17.3 We also find that the Ld. AO/TPO has not specifically linked or reconciled the impugned amounts with the audited financials, nor provided a clear break-up as to whether the same forms part of “investments” or “loans and advances.” Similarly, the contention of the assessee that the investment in Prithvi Information Inc., USA was later converted into equity has not been supported by any evidence on record. In view of these contradictions and lack of clarity, we consider it appropriate to set aside the adjustment of Rs.1,99,65,250/- on account of interest on interest-free loan to the file of the Ld. AO/TPO. The Ld. AO/TPO is directed to re-verify the nature of the impugned amounts by linking them with the audited financials of the assessee, obtain necessary break-up, and give a clear finding as to whether the same is in the nature of investments or loans/advances. The assessee shall be afforded adequate opportunity of being heard and liberty to furnish necessary evidence in support of its contentions.

Accordingly, in the facts and circumstances of the case, we set aside the addition of Rs.4,30,29,173/- on account of bad debts written off, and remit the matter back to the file of the Ld. AO for fresh adjudication in line with the Ld. DRP’s directions. The Ld. AO is directed to provide adequate opportunity of being heard to the assessee and to permit production of necessary evidence or explanation. The assessee, in turn, shall cooperate fully and furnish the required details.