M/S ACI WORLWIDE SOLUTIONS PRIVATE LIMITED ,BANGALORE vs. DEPUTY COMMISSIONER OF INCOME TAX CIRCLE-1(1)(2), BANGALORE

This is an appeal by the assessee against the final order dated 25.07.2017 passed by the DCIT, Circle - 1(1)(2), Bengaluru, under section 143(3) r.w.s. 144C of the Income Tax Act, 1961 (Act) for the Assessment Year 2013-14. The only issue that arises for consideration in this appeal by the assessee is with regard to the correctness of determination of Arms Length Price (ALP) of the international transaction for rendering software development services (SWD) by the assessee to its Associated Enterprises (AE) under the provisions of section 92 of the Act.

The assessee provides SWD services to its AE. For the services so rendered, the assessee received a sum of Rs.19,36,24,825/-. Besides the aforesaid international transaction, there were also other international transactions and those international transactions were considered by the Transfer Pricing Officer (TPO) to be at arms length. The operating profit to operating cost of the assessee in SWD services segment was arrived at by the assessee at 13%. The assessee, in its TP study, had chosen 5 comparable companies. The average mean of profit margin of those comparable companies was 12.52%. The assessee chose transaction net margin method (TNMM) as the most appropriate method for determination of the ALP. The assessee claimed that its profit margins were higher than that of the comparable companies and therefore the price received for the international transaction should be regarded as at arm’s length. The TPO accepted 1 comparable company chosen by the assessee and on his own selected 6 other comparable companies and computed the adjustment on account of determination of ALP as follows:-

The assessee filed objections before the DRP. The DRP rejected 3 out of the 7 comparable companies chosen by the assessee. After the order of the DRP, the computation of ALP stood revised as follows:-

The revised adjustment was incorporated by the AO in the final order of the assessment against which the assessee has filed the present appeal before the Tribunal.

Before the Tribunal, the learned Counsel for the assessee made a limited request of adjudication for exclusion of only one comparable company retained by the DRP and has also prayed that while working out the profit margin of the comparable companies, the TPO has excluded the provision for bad and doubtful debts as part of operating expenditure and doing so was incorrect.

As far the exclusion of 1 comparable company retained by the DRP is concerned, the company which the assessee seeks to exclude is L & T Infotech

We have considered the rival submissions and are of the view that in the light of the decision pointed out by the learned DR, the issue of comparability of this company should be sent back to the AO / TPO for fresh examination as was directed by the Tribunal in the case of CGI Information Systems and Management Consultants Pvt. Ltd., (supra). We hold and direct accordingly.

As far as the exclusion of provision of bad and doubtful debts from the operating cost of the comparable companies is concerned, the learned Counsel for the assessee brought to our notice that while considering the international transaction in the distribution segment, the TPO has himself considered provision for bad and doubtful debts as part of the operating expenditure and by the same logic he should have treated provision for bad and doubtful debts as part of the operating cost in the hands of the comparable companies also. As far as the software development segment of the assessee is concerned, there is no provision for bad and doubtful debts. The learned Counsel for the assessee filed before us copy of the decision of the Hon’ble Karnataka High Court in the case of Principal CIT Vs. Business Process Outsourcing India Pvt. Ltd., (2018) taxcorp (DT) 73195 (HC Karnataka) wherein in an appeal against the order of the Tribunal holding that provision for bad and doubtful debts should be considered as part of IT(TP)A No.1893/Bang/2017 Page 6 of 6 the operating expenditure, the Hon’ble High Court confirmed the order of the Tribunal and dismissed the appeal of the Revenue as one not giving rise to any substantial question of law.

In the light of the aforesaid decision, we are of the view that provision for bad and doubtful debts should be treated as operating expense while computing the PLI OP/OC of the comparable companies which ultimately remains for comparison. We hold and direct accordingly.

All other grounds were not pressed for adjudication.

In the result, appeal of the assessee is partly allowed.