Xchanging Solutions Limited Vs DCIT (ITAT Bangalore)
Claim of non-recovery of advances to employees/vendors as business loss was remanded back to AO
Conclusion: Giving advance to the employees as well as vendors were essential and wholly and exclusively linked to the business of the assessee. Since AO had not examined the claim of deduction u/s 37(1) r.w.s. 28, it was deemed appropriate to restore the issue to the files of AO for de novo consideration.
Held: Assessee had given advances to the employees against their salary for meeting expenses on food and travel while working on clients deliverables / projects. Further, some advances were also given to various vendors / service providers for carrying out various services in connection with the operations of assessee. Certain advances could not be recovered from the employees who had left the services of assessee and also from the vendors due to various reasons. The advances which could not be recovered had been written of to the profit and loss account of assessee for the relevant assessment year and claimed as allowable expenses / business loss in terms of section 37(1) r.w.s. 28. The advances given by assessee was disallowed by AO for the reason that it was not for the purpose of business and the claim of bad debt was not permissible as the same had not been offered as income in the previous year. It was held that the claim made by assessee was not towards bad debt u/s 36(1)(vii), but under the provisions of section 28 as business or trade loss. Giving advance to the employees as well as vendors were essential and wholly and exclusively linked to the business of the assessee. The loss if any is an incidental business loss. Further, the advances given to the vendors, which was non-recoverable, was also allowable as business loss. Since AO had not examined the claim of deduction u/s 37(1) r.w.s. 28, it was deemed appropriate to restore the issue to the files of AO for de novo consideration.
FULL TEXT OF THE ORDER OF ITAT BANGALORE
This appeal at the instance of the assessee is directed against final assessment order dated 22.10.2018 passed u/s 143(3) r.w.s. 144C of the I.T.Act. The relevant assessment year is 2014-2015.
2. The assessee has raised various grounds and sub-grounds. However, during the course of hearing, the learned AR limited his submission to grounds No.4.6(d), 4.11 to 4.14, 5.1 and 5.2. The surviving grounds read as follows:-
“Transfer Pricing Issue :
4.6 (d) applying only the lower turnover filter of less than INR 1 crore as a comparability criterion and not applying a higher threshold limit for turnover filter.
4.11 The learned DRP/AO/TPO have erred in law and facts by determining a transfer pricing adjustment on account of interest on outstanding receivables amounting to INR 1,20,83,994.
4.12 Without prejudice to our ground of objection 4.11 above, the learned DRP/AO/TPO have erred in law and in facts by not appreciating that the outstanding trade receivables from its AE’s is arising from the provision of software development services transaction which is to be considered as closely linked to such transaction and should not be tested separately from arm’s length perspective.
4.13 Without prejudice to our ground of objection 4.11 above, the learned DRP/AO/TPO have erred in law and in facts by re-characterizing the outstanding receivables as on 31 March 2014 as a separate international transaction.
4.14 Without prejudice to our ground of objection 4.11 above, the learned DRP/AO/TPO have erred in law and in facts, by not considering that once the working capital adjustment is granted, if appropriately takes into account the delayed / outstanding receivable and separate TP adjustment is unwarranted.
Corporate Tax Issue :
5.1 The learned DRP/AO has erred in law and on facts in disallowing advances written off aggregating to INR 74,70,129 by holding that the advances were not for the purpose of the business, without having regard to the submission made by the Appellant during the assessment proceedings that the underlying advances were made in the regular course of the business, on revenue account and thus, the write off of such advances is allowable under Section 37(1) read with Section 28 of the Act is business / trading loss.
5.2 The learned DRP/AO has erred in law and on facts, in making an ad-hoc disallowance of 10% of the per diem allowance granted to the employees computed at INR 7,97,471 due to non-collation of bills, without having regard to the jurisdictional High Court decision in the case of CIT v. Symphony Marketing Solutions India (P) Ltd (388 ITR 457) and the fact of actual incurrence of expenditure by the Appellant through reimbursement to employees.”
3. The brief facts of the case are as follows:
The assessee is a private limited company having its registered office in Bangalore. The assessee has operating subsidiaries in USA, UK, Germany, France, Japan, Australia, Singapore and Malaysia. For the relevant assessment year 2014-2015, the assessee had entered into an international transaction for provision for software services to its Associate Enterprises (AEs) as well as non-AEs. During the course of assessment proceedings, the case was referred to Transfer Pricing Officer (TPO) to determine Arm’s Length Price (ALP) of Software Development (SWD). The Transfer Pricing Officer (TPO) passed order dated 30.10.2017 u/s 92CA of the I.T.Act determining transfer pricing adjustment of Rs.7,75,64,059 in respect of SWD services and Rs.1,20,83,994 in respect of interest on delayed receipts of trade receivables from its AEs. Pursuant to the TPO’s order, draft assessment order dated 22.12.2017 was issued by the Assessing Officer (AO) incorporating the aforesaid transfer pricing adjustment.
4. Aggrieved, the assessee filed objections before the Dispute Resolution Panel (DRP). The DRP vide its directions dated 05.09.2018 partly allowed the objections raised by the assessee. Pursuant to the DRP’s directions, final assessment order dated 22.10.2018 was passed incorporating the TP adjustment, which was re-worked out to Rs.6,76,49,378. The adjustment pertaining to corporate tax remained unchanged at Rs.74,70,129 and Rs.7,97,471.
5. Aggrieved by the final assessment order, the assessee has filed this appeal before the Tribunal.
We shall first adjudicate the transfer pricing issue.
Software Development Services to AE [Ground No.4.6(d)]
6. The net margin on cost earned by the assessee and the comparison of the TP analysis undertaken by the assessee and the TPO are as follows:-
Net margin on cost earned by the assessee as computed by the TPO in the TP order:
