REDTECH NETWORK INDIA PRIVATE LIMITED,KOLKATA vs. ACIT, CIRCLE - 2(2), KOLKATA , KOLKATA

IN THE INCOME TAX APPELLATE TRIBUNAL KOLKATA ‘C’ BENCH, KOLKATA (Before Sri J. Sudhakar Reddy, Accountant Member & Sri S.S. Godara, Judicial Member) Assessment Year: 2013-14 Redtech Network India Private Limited.......................................................……………….…......Appellant Godrej Waterside 5th Floor Unit-504 Sector-V Salt Lake City Kolkata – 700 091 [PAN : AABCB 5398 J] Vs. Asstt. Commissioner of Income Tax, Circle-2(2), Kolkata……....................………....…....Respondent Appearances by: Shri Ajit Korde, Advocate, appeared on behalf of the assessee. Dr. P.K. Srihari, CIT Sr. D/R, appearing on behalf of the Revenue. Date of concluding the hearing : October 14th, 2019 Date of pronouncing the order : November 27th, 2019 ORDER Per J. Sudhakar Reddy, AM :-

This appeal filed by the assessee is directed against the order of Assessing Officer passed u/s 143(3) r.w.s. 144C(5) of the Income Tax Act, 1961 (the ‘Act’), dt. 22/09/2017, for the Assessment Year 2013-14.

Assessment Year: 2013-14 Redtech Network India Private Limited Redtech Network India Private Limited 3. The Assessing Officer in the impugned assessment order determined the total The Assessing Officer in the impugned assessment order determined the total The Assessing Officer in the impugned assessment order determined the total income of the assessee company at Rs.5,92,58,090/ income of the assessee company at Rs.5,92,58,090/-, as against the total income of , as against the total income of Rs.48,26,110/- declared by the assessee company in its return of income for the lared by the assessee company in its return of income for the lared by the assessee company in its return of income for the Assessment Year 2013-14 e 14 e-filed on 26/11/2013. While doing so, the Assessing Officer filed on 26/11/2013. While doing so, the Assessing Officer made an addition/adjustment under the Transfer Pricing (TP) provisions of made an addition/adjustment under the Transfer Pricing (TP) provisions of made an addition/adjustment under the Transfer Pricing (TP) provisions of Rs.3,19,39,211/- on the following t on the following three international transactions:- a) Software Development Services Software Development Services b) Outstanding receivable in excess of 60 days. Outstanding receivable in excess of 60 days. c) Guarantee fees paid to the Associate Enterprises (AEs) Guarantee fees paid to the Associate Enterprises (AEs)

The Assessing Officer further disallowed the claim of write off The Assessing Officer further disallowed the claim of write off The Assessing Officer further disallowed the claim of write off, of long term investment, and also made disallowance u/s 14A of the Act. He disallowance u/s 14A of the Act. He disallow disallowed the claim of bad debts.

“1. Erroneous determination of arm's length price in relation 1. Erroneous determination of arm's length price in relation to softwa to software development services 1.1. On the facts and circumstances of the case and in law, the AO/ TPO erred in not following the e facts and circumstances of the case and in law, the AO/ TPO erred in not following the e facts and circumstances of the case and in law, the AO/ TPO erred in not following the directions of the DRP and erroneously included comparable companies for the purpose of directions of the DRP and erroneously included comparable companies for the purpose of directions of the DRP and erroneously included comparable companies for the purpose of computing the arm's length price computing the arm's length price 1.2. On the facts and circumstances of the cas 1.2. On the facts and circumstances of the case and in law, the AO/ TPO erred in not being e and in law, the AO/ TPO erred in not being consistent in the interpretation of the DRP directions and cherry picked comparable companies consistent in the interpretation of the DRP directions and cherry picked comparable companies consistent in the interpretation of the DRP directions and cherry picked comparable companies while giving effect to the directions for computing the arm's length price while giving effect to the directions for computing the arm's length price 1.3. Without prejudice to the above, on t 1.3. Without prejudice to the above, on the facts and circumstances of the case, the AO/ TPO and he facts and circumstances of the case, the AO/ TPO and the DRP erred in law by rejecting comparable companies selected by the Appellant in the transfer the DRP erred in law by rejecting comparable companies selected by the Appellant in the transfer the DRP erred in law by rejecting comparable companies selected by the Appellant in the transfer pricing report for the international transactions of the Appellant pricing report for the international transactions of the Appellant 1.4. Without prejudice to the above 1.4. Without prejudice to the above, on the facts and circumstances of the case, the AO/ TPO and , on the facts and circumstances of the case, the AO/ TPO and the DRP erred in selecting certain comparable companies which have different functional and the DRP erred in selecting certain comparable companies which have different functional and the DRP erred in selecting certain comparable companies which have different functional and risk profile as compared to the Appellant; risk profile as compared to the Appellant; 1.5. Without prejudice to the above, on the facts and circu 1.5. Without prejudice to the above, on the facts and circumstances of the case and in law, the mstances of the case and in law, the AO/ TPO and the DRP erred in rejecting / modifying the filters applied by the Appellant for AO/ TPO and the DRP erred in rejecting / modifying the filters applied by the Appellant for AO/ TPO and the DRP erred in rejecting / modifying the filters applied by the Appellant for determining the comparability analysis determining the comparability analysis 2. Erroneous transfer pricing adjustment on account of outstanding receivable in Erroneous transfer pricing adjustment on account of outstanding receivable in Erroneous transfer pricing adjustment on account of outstanding receivable in excess of 60 days considering it as deemed loan to its AE of 60 days considering it as deemed loan to its AE 2.1. On the facts and circumstances of the case and in law, the AO/ TPO and DRP erred in treating . On the facts and circumstances of the case and in law, the AO/ TPO and DRP erred in treating . On the facts and circumstances of the case and in law, the AO/ TPO and DRP erred in treating accounts receivable as a separate international transaction and treating the same as deemed accounts receivable as a separate international transaction and treating the same as deemed accounts receivable as a separate international transaction and treating the same as deemed loan on which notional interest was charged; notional interest was charged; Assessment Year: 2013-14 Redtech Network India Private Limited Redtech Network India Private Limited 2.2. On the facts and circumstances of the case and in law, the AO/ TPO and DRP erred in not 2.2. On the facts and circumstances of the case and in law, the AO/ TPO and DRP erred in not 2.2. On the facts and circumstances of the case and in law, the AO/ TPO and DRP erred in not appreciating the fact that transaction of receivable and payables has already been benchmarked appreciating the fact that transaction of receivable and payables has already been benchmarked appreciating the fact that transaction of receivable and payables has already been benchmarked with the international transaction o with the international transaction of "Sale of software development services" after undertaking f "Sale of software development services" after undertaking financial adjustments as warranted by Indian TP regulations; financial adjustments as warranted by Indian TP regulations; 2.3. Without prejudice to the above, on the facts and circumstances of the case and in law, the 2.3. Without prejudice to the above, on the facts and circumstances of the case and in law, the 2.3. Without prejudice to the above, on the facts and circumstances of the case and in law, the AO/ TPO and DRP erred in applying an a AO/ TPO and DRP erred in applying an ad-hoc credit spread of 6.00% on the alleged Loan; hoc credit spread of 6.00% on the alleged Loan; 2.4. Without prejudice to the above, on the facts and circumstances of the case, the AO/ TPO and 2.4. Without prejudice to the above, on the facts and circumstances of the case, the AO/ TPO and 2.4. Without prejudice to the above, on the facts and circumstances of the case, the AO/ TPO and DRP erred in considering an ad DRP erred in considering an ad-hoc average credit period of the Industry without any basis to hoc average credit period of the Industry without any basis to determine the outstanding receivable on which adjustment was made determine the outstanding receivable on which adjustment was made on account of notional on account of notional interest; 3. The learned DRP and TPO/ AO erred in making transfer pricing adjustment on account 3. The learned DRP and TPO/ AO erred in making transfer pricing adjustment on account 3. The learned DRP and TPO/ AO erred in making transfer pricing adjustment on account of the guarantee fees paid to the associated enterprise of the guarantee fees paid to the associated enterprise 3.1. On the facts and circumstances of the case and in law, the AO/ TPO and DRP 3.1. On the facts and circumstances of the case and in law, the AO/ TPO and DRP 3.1. On the facts and circumstances of the case and in law, the AO/ TPO and DRP erred in concluding that the corporate guarantee issued by the Appellant in favor of AE is an concluding that the corporate guarantee issued by the Appellant in favor of AE is an concluding that the corporate guarantee issued by the Appellant in favor of AE is an international transaction international transaction 3.2. On the facts and circumstances of the case and in law, the AO/ TPO and DRP erred in not 3.2. On the facts and circumstances of the case and in law, the AO/ TPO and DRP erred in not 3.2. On the facts and circumstances of the case and in law, the AO/ TPO and DRP erred in not appreciating the fact that corporate guar appreciating the fact that corporate guarantee extended to AE is in the nature of shareholder's antee extended to AE is in the nature of shareholder's activity and results in direct and proximate benefit to Appellant; activity and results in direct and proximate benefit to Appellant; 3.3. Without prejudice to the above contentions, on the facts and circumstances of the case and in 3.3. Without prejudice to the above contentions, on the facts and circumstances of the case and in 3.3. Without prejudice to the above contentions, on the facts and circumstances of the case and in law, the AO/ TPO and DRP erred in law, the AO/ TPO and DRP erred in arbitrarily levying a guarantee commission of 3% and arbitrarily levying a guarantee commission of 3% and consequently making a transfer pricing adjustment; consequently making a transfer pricing adjustment; 3.4. Without prejudice to the above contentions, on the facts and circumstances of the case and in 3.4. Without prejudice to the above contentions, on the facts and circumstances of the case and in 3.4. Without prejudice to the above contentions, on the facts and circumstances of the case and in law, the AO/ TPO and DRP erred in arbitrarily reject law, the AO/ TPO and DRP erred in arbitrarily rejecting the CUP analysis as provided by ing the CUP analysis as provided by Appellant without any basis i.e. a rate of 1.5% which would have paid to its bank for identical Appellant without any basis i.e. a rate of 1.5% which would have paid to its bank for identical Appellant without any basis i.e. a rate of 1.5% which would have paid to its bank for identical arrangement under similar circumstances; arrangement under similar circumstances; Corporate Tax grounds 4. Erroneous disallowance in relation to bad debt and write 4. Erroneous disallowance in relation to bad debt and write 4. Erroneous disallowance in relation to bad debt and write off of sundry balances/advances totalling to INR 19,21,498 balances/advances totalling to INR 19,21,498 4.1. On the facts and circumstances of the case and in law, the AO/ TPO and DRP erred in not 4.1. On the facts and circumstances of the case and in law, the AO/ TPO and DRP erred in not 4.1. On the facts and circumstances of the case and in law, the AO/ TPO and DRP erred in not appreciating that the bad debts and sundry advances written off are business losses incurred by appreciating that the bad debts and sundry advances written off are business losses incurred by appreciating that the bad debts and sundry advances written off are business losses incurred by the Appellant in the course of business and thus deductible under section 37 of the Act while pellant in the course of business and thus deductible under section 37 of the Act while pellant in the course of business and thus deductible under section 37 of the Act while computing the income for the subject year. computing the income for the subject year.

5. Initiation of penalty proceedings 5. Initiation of penalty proceedings 5.1. The Appellant submits that based on the facts and the circumstances of the case, 5.1. The Appellant submits that based on the facts and the circumstances of the case, 5.1. The Appellant submits that based on the facts and the circumstances of the case, there was no basis for the AO to propose to initiate penalty proceedings under section 271(1) (C) of the Act. no basis for the AO to propose to initiate penalty proceedings under section 271(1) (C) of the Act. no basis for the AO to propose to initiate penalty proceedings under section 271(1) (C) of the Act. The Appellant submits that the above grounds are independent and without prejudice to one The Appellant submits that the above grounds are independent and without prejudice to one The Appellant submits that the above grounds are independent and without prejudice to one another. The Appellant desires leave to add to or alte The Appellant desires leave to add to or alter, by deletion, substitution or otherwise, any or all of r, by deletion, substitution or otherwise, any or all of the above grounds of objections, at any time before or during the hearing of the Appeal. the above grounds of objections, at any time before or during the hearing of the Appeal. the above grounds of objections, at any time before or during the hearing of the Appeal. 4.1. The assessee further raised the following two additional grounds of appeal: The assessee further raised the following two additional grounds of appeal: The assessee further raised the following two additional grounds of appeal:-

Assessment Year: 2013-14 Redtech Network India Private Limited Redtech Network India Private Limited “2.5. For similar nature of third party receivables if there is no change of interest, then the For similar nature of third party receivables if there is no change of interest, then the For similar nature of third party receivables if there is no change of interest, then the transaction with the AE would meet the arm’s length requirement vis transaction with the AE would meet the arm’s length requirement vis-a-vis . the transactions . the transactions with the unrelated third parties. with the unrelated third parties. 2.6. Without prejudice to the ground ab Without prejudice to the ground above and Ground 2 originally filed before ITAT, the ove and Ground 2 originally filed before ITAT, the appellant humbly submit that computation of average days of realization period of appellant humbly submit that computation of average days of realization period of appellant humbly submit that computation of average days of realization period of receivables for the final list of comparable companies should be considered as the bench mark receivables for the final list of comparable companies should be considered as the bench mark receivables for the final list of comparable companies should be considered as the bench mark credit period for determinati credit period for determination of arm’s length price.”

“13. We have heard the rival submissions. The ld AR before us stated that out of the total 8 13. We have heard the rival submissions. The ld AR before us stated that out of the total 8 13. We have heard the rival submissions. The ld AR before us stated that out of the total 8 comparables chosen by the ld TPO finally , if the comparables of E. comparables chosen by the ld TPO finally , if the comparables of E.-Infochips Bangalore Ltd Infochips Bangalore Ltd and Thirdware Solutions Ltd are excluded, then the assessee's margin wou and Thirdware Solutions Ltd are excluded, then the assessee's margin would be at ALP when ld be at ALP when compared to that of other comparables, subject to variation of (+) / ( compared to that of other comparables, subject to variation of (+) / (-) 5% and subject to ) 5% and subject to working capital adjustments to be given for the remaining 6 comparables. The ld DR argued working capital adjustments to be given for the remaining 6 comparables. The ld DR argued working capital adjustments to be given for the remaining 6 comparables. The ld DR argued that let this issue be sent back to the file of the ld TP that let this issue be sent back to the file of the ld TPO to verify the services rendered by these O to verify the services rendered by these two companies to prove the arguments of the ld AR. We find that the annual reports of the two companies to prove the arguments of the ld AR. We find that the annual reports of the two companies to prove the arguments of the ld AR. We find that the annual reports of the respective two comparables are very much on record and there is no need to send back the respective two comparables are very much on record and there is no need to send back the respective two comparables are very much on record and there is no need to send back the same to the file of the ld TPO for same to the file of the ld TPO for his verification. These annual reports were also placed before his verification. These annual reports were also placed before the lower authorities and objections were also filed by the assessee. The same were the lower authorities and objections were also filed by the assessee. The same were the lower authorities and objections were also filed by the assessee. The same were completely ignored by the ld TPO while finalizing the list of comparables. We find that the ld completely ignored by the ld TPO while finalizing the list of comparables. We find that the ld completely ignored by the ld TPO while finalizing the list of comparables. We find that the ld DRP had directed the ld TPO to include E ted the ld TPO to include E- Infochips Bangalore Ltd only if the segmental data Infochips Bangalore Ltd only if the segmental data is available for the same. But the ld TPO misconstrued the said direction by holding that since is available for the same. But the ld TPO misconstrued the said direction by holding that since is available for the same. But the ld TPO misconstrued the said direction by holding that since the segmental data is not available for E the segmental data is not available for E-Infochips Bangalore Ltd, the same is e Infochips Bangalore Ltd, the same is eligible to be included as comparable. This understanding of the ld TPO is unwarranted and is against the included as comparable. This understanding of the ld TPO is unwarranted and is against the included as comparable. This understanding of the ld TPO is unwarranted and is against the directions of the ld DRP. We also find that the ld AR placed on record that the said company directions of the ld DRP. We also find that the ld AR placed on record that the said company directions of the ld DRP. We also find that the ld AR placed on record that the said company has significant related party transactions of 24.55% on to has significant related party transactions of 24.55% on total operating revenues. Moreover, tal operating revenues. Moreover, the ld AR also pointed out that the said comparable is engaged in sale of products, software the ld AR also pointed out that the said comparable is engaged in sale of products, software the ld AR also pointed out that the said comparable is engaged in sale of products, software development and IT enabled services and hence segmental data would be very crucial for development and IT enabled services and hence segmental data would be very crucial for development and IT enabled services and hence segmental data would be very crucial for comparison of the margins with the assesse comparison of the margins with the assessee for software development alone. Moreover the e for software development alone. Moreover the said company had incurred significant expenditure on account of R&D during the year. The said company had incurred significant expenditure on account of R&D during the year. The said company had incurred significant expenditure on account of R&D during the year. The details are enclosed in pages 1098 to 1105 of the paper book. Moreover, the said comparable details are enclosed in pages 1098 to 1105 of the paper book. Moreover, the said comparable details are enclosed in pages 1098 to 1105 of the paper book. Moreover, the said comparable had been excluded by the ord had been excluded by the order of this tribunal in assessee's own case for the Asst Year 2011 er of this tribunal in assessee's own case for the Asst Year 2011- 12. Hence we hold that the said company is functionally not comparable and hence deserves 12. Hence we hold that the said company is functionally not comparable and hence deserves 12. Hence we hold that the said company is functionally not comparable and hence deserves to be excluded from the final list of comparables. to be excluded from the final list of comparables.

13.1. With regard to Thirdware Solutions Ltd, th 13.1. With regard to Thirdware Solutions Ltd, the said company is engaged in the provision of e said company is engaged in the provision of information technology enabled services (ITES) along with software product development information technology enabled services (ITES) along with software product development information technology enabled services (ITES) along with software product development and provision of software development services. Segmental break up of revenue attributable and provision of software development services. Segmental break up of revenue attributable and provision of software development services. Segmental break up of revenue attributable to software development services to software development services and ITES is not available. The said company has significant and ITES is not available. The said company has significant related party transactions of 23.13% on total operating revenues. The de related party transactions of 23.13% on total operating revenues. The details are enclosed in ails are enclosed in pages 1115 to 1120 of the paper book. In view of these distinguishing features vis a vis the pages 1115 to 1120 of the paper book. In view of these distinguishing features vis a vis the pages 1115 to 1120 of the paper book. In view of these distinguishing features vis a vis the assessee company, we hold that the same is not functionally comparable and in the absence of company, we hold that the same is not functionally comparable and in the absence of company, we hold that the same is not functionally comparable and in the absence of segmental data for determining the margin derived on account of software development segmental data for determining the margin derived on account of software development segmental data for determining the margin derived on account of software development services and by applying RPT filter, the said comparable deserves to be excluded from and by applying RPT filter, the said comparable deserves to be excluded from and by applying RPT filter, the said comparable deserves to be excluded from the final list of comparables.”

Assessment Year: 2013-14 Redtech Network India Private Limited Redtech Network India Private Limited 9. Consistent with the view taken therein, we direct the exclusion of both these Consistent with the view taken therein, we direct the exclusion of both these Consistent with the view taken therein, we direct the exclusion of both these companies from the list of comparable companies ies from the list of comparable companies for the purpose of computation of for the purpose of computation of ALP of the international transaction in relation to software ALP of the international transaction in relation to software development services. development services. The assessee claims that, the TP adjustment made in this regard would have to be deleted the TP adjustment made in this regard would have to be deleted the TP adjustment made in this regard would have to be deleted, if these two companies are excluded from the list of comparable companies. The TPO may are excluded from the list of comparable companies. The TPO may are excluded from the list of comparable companies. The TPO may verify this claim of the assessee verify this claim of the assessee and allow the claim if found correct. In the result, this In the result, this ground of the assessee is allowed for statistical purposes. ground of the assessee is allowed for statistical purposes.

Assessment Year: 2013-14 Redtech Network India Private Limited Redtech Network India Private Limited 11. We first consider the proposition of law laid down by We first consider the proposition of law laid down by the Hon’ble Delhi High the Hon’ble Delhi High Court in the case of Pr. CIT vs. Kusum Health Care Pvt. Ltd. in ITA 765/2016, judgment dt. Pr. CIT vs. Kusum Health Care Pvt. Ltd. in ITA 765/2016, judgment dt. Pr. CIT vs. Kusum Health Care Pvt. Ltd. in ITA 765/2016, judgment dt. 25/04/2017, wherein, it was held as follows: wherein, it was held as follows:-

“10. The Court is unable to agree with the above submissions. The inclusion in “10. The Court is unable to agree with the above submissions. The inclusion in “10. The Court is unable to agree with the above submissions. The inclusion in the Explanation to Section 92 to Section 92B of the Act of the expression “receivables” B of the Act of the expression “receivables” does not mean that de hors the context every item not mean that de hors the context every item of “receivables” appearing in the appearing in the accounts of an entity, which may have dealings with foreign AEs would accounts of an entity, which may have dealings with foreign AEs would accounts of an entity, which may have dealings with foreign AEs would automatically be characterised as an interna automatically be characterised as an international transaction. There may be tional transaction. There may be a delay in collection of monies for supplies made, even beyond the agreed limit, a delay in collection of monies for supplies made, even beyond the agreed limit, a delay in collection of monies for supplies made, even beyond the agreed limit, due to a variety of factors which will have to be investigated on a case to case due to a variety of factors which will have to be investigated on a case to case due to a variety of factors which will have to be investigated on a case to case basis. Importantly, the impact this would have on the working basis. Importantly, the impact this would have on the working capital of the capital of the Assessee will have to be studied. In other words, there has to be a proper Assessee will have to be studied. In other words, there has to be a proper Assessee will have to be studied. In other words, there has to be a proper inquiry by the TPO by analysing the statistics over a period of time to discern a inquiry by the TPO by analysing the statistics over a period of time to discern a inquiry by the TPO by analysing the statistics over a period of time to discern a pattern which would indicate that vis pattern which would indicate that vis-à-vis the receivables for the supplies vis the receivables for the supplies made to an AE, the arrangement reflects an international transaction intended o an AE, the arrangement reflects an international transaction intended o an AE, the arrangement reflects an international transaction intended to benefit the AE in some way. to benefit the AE in some way.

11. As regards the other contentions, we find that where the working capital As regards the other contentions, we find that where the working capital As regards the other contentions, we find that where the working capital adjustment is considered by the A.O, it takes care of the interest on receivables adjustment is considered by the A.O, it takes care of the interest on receivables adjustment is considered by the A.O, it takes care of the interest on receivables as well. This aspect has been considered by the Tribunal at Delhi in the case of as well. This aspect has been considered by the Tribunal at Delhi in the case of as well. This aspect has been considered by the Tribunal at Delhi in the case of Kusum Healthcare (P.) Ltd., (supra) which has been confirmed by the Hon'ble (P.) Ltd., (supra) which has been confirmed by the Hon'ble (P.) Ltd., (supra) which has been confirmed by the Hon'ble High Court of Delhi and at para 14 of its order has held as under: High Court of Delhi and at para 14 of its order has held as under:

14. As mentioned earlier, the differential impact of working "14. As mentioned earlier, the differential impact of working "14. As mentioned earlier, the differential impact of working capital of the assessee vis capital of the assessee vis-à-vis its comparables has already been vis its comparables has already been factored in the pricing/profitability of the assessee and factored in the pricing/profitability of the assessee and factored in the pricing/profitability of the assessee and therefore, any further adjustment to the margins of the assessee therefore, any further adjustment to the margins of the assessee therefore, any further adjustment to the margins of the assessee on the pretext of outstanding receivables is unwarranted and on the pretext of outstanding receivables is unwarranted and on the pretext of outstanding receivables is unwarranted and wholly unjustified." wholly unjustified."

by Assessee in both the In view of the above, we allow the grounds raised by Assessee in both the In view of the above, we allow the grounds raised by Assessee in both the assessment years and delete the additions so made. assessment years and delete the additions so made.”

12. Consistent with the view taken therein, we uphold the contention of the assessee he view taken therein, we uphold the contention of the assessee he view taken therein, we uphold the contention of the assessee that the working capital adjustment in this case, subsumes the adjustment that is that the working capital adjustment in this case, subsumes the adjustment that is that the working capital adjustment in this case, subsumes the adjustment that is required to be made on account of required to be made on account of interest on outstanding receivables. Hence, this outstanding receivables. Hence, this adjustment made by the TPO adjustment made by the TPO is hereby deleted and this Ground of the assessee is is hereby deleted and this Ground of the assessee is allowed. The other arguments raised by the assessee are left open for adjudication at allowed. The other arguments raised by the assessee are left open for adjudication at allowed. The other arguments raised by the assessee are left open for adjudication at the proper time.

13. The third adjustment made is with respect to the international transaction of The third adjustment made is with respect to the international transaction of The third adjustment made is with respect to the international transaction of guarantee fees paid to Associate Enterprises (AEs). d to Associate Enterprises (AEs).

14. After hearing rival contention, we find that the assessee has offered 1.5.% as After hearing rival contention, we find that the assessee has offered 1.5.% as After hearing rival contention, we find that the assessee has offered 1.5.% as corporate guarantee to its AEs, which is based on an internal CUP, which is the corporate guarantee to its AEs, which is based on an internal CUP, which is the corporate guarantee to its AEs, which is based on an internal CUP, which is the guarantee rate charged by the IDBI to the assessee company. guarantee rate charged by the IDBI to the assessee company. Even under the Safe Even under the Safe Harbor Rules, if the guaran Harbor Rules, if the guarantee is provided to a subsidiary and the commission or fee the commission or fee declared is at the rate not less than one per cent per annum on the amount of guarantee. declared is at the rate not less than one per cent per annum on the amount of guarantee. declared is at the rate not less than one per cent per annum on the amount of guarantee. In this case, 1.5% rate of commission is rate of commission is charged by the assessee. In our view, this see. In our view, this should be considered as at arm’s length. The TPO has determined the ALP at three per cent, on be considered as at arm’s length. The TPO has determined the ALP at three per cent, on be considered as at arm’s length. The TPO has determined the ALP at three per cent, on an adhoc basis. After considering the facts and circumstances of the case, we direct the an adhoc basis. After considering the facts and circumstances of the case, we direct the an adhoc basis. After considering the facts and circumstances of the case, we direct the deletion of this adjustment as in our view. In the result, this ground of the assessee is result, this ground of the assessee is allowed.

15. We now take up the corporate ground We now take up the corporate grounds i.e., disallowance of bad debt and write disallowance of bad debt and write off of sundry balances/advances. off of sundry balances/advances. 15.1. The assessee had claimed an amount of Rs.12,72,479/ The assessee had claimed an amount of Rs.12,72,479/-, as a deduction on , as a deduction on account of bad debts written off and Rs.49,96,733/ debts written off and Rs.49,96,733/- as a deduction on account of sundry as a deduction on account of sundry balances written off. The Assessing Officer disallowed these amounts on the ground that balances written off. The Assessing Officer disallowed these amounts on the ground that balances written off. The Assessing Officer disallowed these amounts on the ground that Assessment Year: 2013-14 Redtech Network India Private Limited Redtech Network India Private Limited the assessee has not substantiated the same. He held that the assessee has to prove that the assessee has not substantiated the same. He held that the assessee has to prove that the assessee has not substantiated the same. He held that the assessee has to prove that the debts are connected with the business and profession and that they should be ebts are connected with the business and profession and that they should be ebts are connected with the business and profession and that they should be routed through the profit and loss account. The assessee claims that both these the profit and loss account. The assessee claims that both these the profit and loss account. The assessee claims that both these conditions have been fulfilled by it fulfilled by it.

The DRP held as follows: The DRP held as follows:-

Against the disallowance the asses Against the disallowance the assessee moved before the Hon’ble DRP see moved before the Hon’ble DRP-2, New Delhi who in its decision dated 09.08.2017 observed that: Delhi who in its decision dated 09.08.2017 observed that:- The claim of Rs.12,647/ The claim of Rs.12,647/- regarding employees having left with regarding employees having left with balances cannot be termed as revenue expenditure. No supporting balances cannot be termed as revenue expenditure. No supporting balances cannot be termed as revenue expenditure. No supporting evidence was provided. Similarl evidence was provided. Similarly, no supporting evidence was y, no supporting evidence was provided for intra group receivable of Rs.3,48,645/ provided for intra group receivable of Rs.3,48,645/-. For the amount . For the amount receivable of Rs.15,60,871/ receivable of Rs.15,60,871/- from clients also, the year in which the from clients also, the year in which the amount was offered for tax is not given. The three amounts have been amount was offered for tax is not given. The three amounts have been amount was offered for tax is not given. The three amounts have been rightly disallowe rightly disallowed by the AO, in absence of details. Regarding the claim of Rs.43,47,715/ Regarding the claim of Rs.43,47,715/-, the ‘A’ submitted that , the ‘A’ submitted that it was the amount of input credit of CENVAT which cannot be utilized it was the amount of input credit of CENVAT which cannot be utilized it was the amount of input credit of CENVAT which cannot be utilized by the assessee being an export oriented company. The amount is by the assessee being an export oriented company. The amount is by the assessee being an export oriented company. The amount is therefore excess input cre therefore excess input credit amount. By writing it off, the ‘A’ is also dit amount. By writing it off, the ‘A’ is also waiving off any probability of utilizing the credit in case of any waiving off any probability of utilizing the credit in case of any waiving off any probability of utilizing the credit in case of any change of circumstances. In view of the submission of the ‘A’, the AO is change of circumstances. In view of the submission of the ‘A’, the AO is change of circumstances. In view of the submission of the ‘A’, the AO is directed to allow the amount after verifying the total written off ti directed to allow the amount after verifying the total written off ti directed to allow the amount after verifying the total written off till A.Y. 2013-14. Subsequently, the assessee vide its letter dated 05.09.2017 provided the Subsequently, the assessee vide its letter dated 05.09.2017 provided the Subsequently, the assessee vide its letter dated 05.09.2017 provided the details and documents showing the amount of service tax receivables written off details and documents showing the amount of service tax receivables written off details and documents showing the amount of service tax receivables written off by the assessee during F Y 2012 by the assessee during F Y 2012-13. The submission of the assessee has been perused The submission of the assessee has been perused and it is found that the and it is found that the assessee has written off an amount of Rs.43,47,714/ assessee has written off an amount of Rs.43,47,714/- towards service tax towards service tax receivables during F Y 2012 receivables during F Y 2012-13. Considering the same and the direction of the 13. Considering the same and the direction of the Hon’ble DRP-2, New Delhi, the claim of the assessee is partially allowed and 2, New Delhi, the claim of the assessee is partially allowed and 2, New Delhi, the claim of the assessee is partially allowed and disallowance of write- -off of bad debt and sundry balances is restricted to off of bad debt and sundry balances is restricted to Rs.19,21,498/- (Rs.62,69,212 (Rs.62,69,212- Rs.43,47,714).

15.1.1. Thus, the Assessing Officer in the final assessment order restricted the Thus, the Assessing Officer in the final assessment order restricted the Thus, the Assessing Officer in the final assessment order restricted the disallowance to Rs.12,647/ disallowance to Rs.12,647/- being amounts paid to employees, which cannot be es, which cannot be recovered and amount of Rs.3,48,645/ recovered and amount of Rs.3,48,645/- receivable from group entities and an amount of receivable from group entities and an amount of Rs.15,60,871/- receivable from clients. receivable from clients.

Assessment Year: 2013-14 Redtech Network India Private Limited Redtech Network India Private Limited In our view, the receivables from clients and intra group entities have definitely the receivables from clients and intra group entities have definitely the receivables from clients and intra group entities have definitely been routed through the pr been routed through the profit and loss account. Otherwise they would not be trade Otherwise they would not be trade receivables. The balances in employee accounts, who have left are also not receivables. receivables. The balances in employee accounts, who have left are also not receivables. receivables. The balances in employee accounts, who have left are also not receivables.

15.2. The Hon’ble Supreme Court in the case of The Hon’ble Supreme Court in the case of TRF India vs. CIT (2010) 323 ITR 397 TRF India vs. CIT (2010) 323 ITR 397 (SC) has held as follows:-

Section 36(1)(vii) of the Income of the Income-tax Act, 1961 - Bad debts - Assessment years 1990 Assessment years 1990- 91, 1993-94 and 1994-95 95 - Whether after 1-4-1989, it is not necessary for ass 1989, it is not necessary for assessee to establish that debt, in fact, has become irrecoverable; it is enough if bad debt is to establish that debt, in fact, has become irrecoverable; it is enough if bad debt is to establish that debt, in fact, has become irrecoverable; it is enough if bad debt is written off as irrecoverable in accounts of assessee written off as irrecoverable in accounts of assessee - Held, yes - Whether where Whether where Assessing Officer had not examined whether, in fact, bad debt or part thereof was Assessing Officer had not examined whether, in fact, bad debt or part thereof was Assessing Officer had not examined whether, in fact, bad debt or part thereof was written off in accounts of assessee, matter was to be remitted back to Assessing written off in accounts of assessee, matter was to be remitted back to Assessing written off in accounts of assessee, matter was to be remitted back to Assessing Officer for de novo consideration of above mentioned aspect only Officer for de novo consideration of above mentioned aspect only”

Kolkata, the Kolkata, the 27th day of November, 2019 9.