EREVMAX TECHNOLOGIES PVT. LTD.,KOLKATA V. D.C.I.T./A.C.I.T., TP-1, , KOLKATA

ITA 2551/KOL/2024

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The case involves Erevmax Technologies Pvt. Ltd., which appealed against the orders of the lower tax authorities concerning transfer pricing adjustments and disallowance of bad debts. The primary disputes were the adjustment of Rs. 1,76,78,365 concerning the export of software and IT services to its Associated Enterprise (AE) in the USA, and the addition of Rs. 9,73,70,939 as bad debts. The assessee argued that the Profit Split Method (PSM) was the most appropriate method for determining ALP, contrary to the Transactional Net Margin Method (TNMM) adopted by the TPO. The TPO's adjustment was based on a comparability analysis of uncontrolled comparable companies. Regarding bad debts, the assessee claimed that the debts were written off due to the financial distress of the AE exacerbated by the COVID-19 pandemic, which the tax authorities disputed.

• Counselvise Citation: [2025] 140 COUNSELVISE.COM (IT) 782276 (ITAT-KOLKATA)
• Duration Of Justice: 10 month(s) 14 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 27-10-2025
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: C
• Assessment Year: 2021-2022
• Appeal Filed On: 13-12-2024
• Other Referred Cases: Google India (P) Ltd Vs Joint Director of Income-tax (International Taxation). Range-1 Bengaluru
• Laws Referred To: Income Tax Act, 1961
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Keywords: Set aside; Transfer pricing; International transaction; Bad and doubtful debts; Related party transaction

Judgement Text

"IN THE INCOME TAX APPELLATE TRIBUNAL “C” BENCH, KOLKATA SHRI GEORGE MATHAN, JUDICIAL MEMBER SHRI SANJAY AWASTHI, ACCOUNTANT MEMBER I.T.A. No. 2551/Kol/2024 (Assessment Year : 2021-2022) Erevmax Technologies Pvt. Ltd., DLF IT Park, 12th Floor, Major Arterial Road - 700156 [PAN: AABCE0655M] ……..…...…………….... Appellant vs. DCIT/ACIT, TP-1, Aayakar Bhawan Poorva, 110 Shanti Pally, E.M. Bypass, Kolkata - 700107 ................................ Respondent Appearances by: Assessee represented by : Indernil Banerjee, FCA Department represented by : Praveen Kishore, CIT-DR Date of concluding the hearing : 26.08.2025 Date of pronouncing the order : 27.10.2025 O R D E R PER SANJAY AWASTHI, ACCOUNTANT MEMBER: 1. The present appeal arises from Ld. AO’s Order dated 30.10.2024, passed u/s 143(3), r.w.s. 144C(13), r.w.s. 144B of the Income Tax Act, 1961 (hereafter “the Act”). In this case, the points of dispute resolve around Arm’s Length Adjustment (ALP) of price with respect to export of software and IT services to Associated Enterprise (AE) located in USA, at Rs. 1,76,78,365/-, and an addition in respect of bad debts at Rs. 9,73,70,939/- for the year under consideration. 1.1 In this case, the assessee provides tourism related software services to one Erevmax Inc. of USA, which is the AE. As per a service agreement between the assessee and the AE (duly placed before us in the paper book), Printed from counselvise.com 2 ITA No. 2551/Kol/2024 Erevmax Technologies Pvt. Ltd. the assessee bills the AE at a mark-up of 5% on cost. The assessee had followed the Profit Split Method (PSM) of pricing such exports and has disclosed the calculation of receipts on that basis is the Return of Income. However, the Ld. TPO has substituted the PSM with the Transactional Net Margin Method (TNMM) and worked out an upward adjustment of Rs. 1,76,78,365/- with the following observations: “6.3 The assessee had relied on the Profit Split Method (PSM) and objected on the TNMM method applied by the undersigned as the Most Appropriate Method (MAM) On perusal of details as submitted by the assessee company, it was observed by the undersigned that the PSM method has not been properly applied, as the assessee has failed apply proper method to reach at ALP of the transactions. It is an accepted principle that PSM is applicable in cases involving transfer of unique intangibles or in multiple transactions which are so interrelated that they cannot be evaluated separately for the purpose of determining the arm's length price of any one transaction. 6.4 PSM evaluates whether the allocation of the combined profit or loss attributable to one or more controlled transactions is arm's length by reference to the relative value of each controlled taxpayer's contribution to that combined profit or loss. This method is typically applied in complex situations when other available methods such as the CUP or the TNMM) are not sufficient to price the functions performed 6.5 The undersigned would like to draw reference on the judgment of ITAT BANGALORE BENCH 'C' in the case of Google India (P) Ltd Vs Joint Director of Income- tax (International Taxation). Range-1 Bengaluru (2018) 93 laxmann.com 183 (Bangalore Trib. wherein it was held that it is settled proposition of law that Profit Solit Method (PSM) can be adopted as most appropriate method in cases involving multiple inter-related international transactions which cannot be evaluated separately. 6.6 The business of the assessee company does not require deployment of assets and functions of different entities located in different geographical locations in order to ultimately deliver services and revenues was generated through combined efforts in respect of transactions aggregated with assessee's business transaction, 6.7 In the instant case, the assessee company is related to the information technology sector consists of all the companies or entities offering IT-enabled services, IT services, software products, e-commerce facilities etc. The assessee has entered into a service agreement with Erevmax Inc. USA(AE) where, in consideration of the software development and ITES services rendered, the latter shall pay to the former the amount billed. In such a circumstance of services neither the parties to the transactions are providing unique intangible nor the transactions are so Interlinked that it cannot be evaluated separately by applying other method i.e. TNMM. 6.8 With respect to the international transaction of export of software &ITes services, the undersigned has determined the arm's length price/margin by adopting Transactional Net Margin Method (\"TNMM\") as the most appropriate method (\"MAM\") with a profit level indicator (\"PLI\") of 'Operating Profit (\"OP\")/ Operating Cost (\"OC\"). As part of the TNMM analysis, the undersigned has undertaken comparability Printed from counselvise.com 3 ITA No. 2551/Kol/2024 Erevmax Technologies Pvt. Ltd. analysis for uncontrolled comparable companies on public database, applied the relevant filters, arrived at 11 (eleven) comparable companies to the assessee in respect of the transaction undertaken by the assessee.” 1.2 Regarding the disallowance of bad debts, relevant portions from the Ld. AO’s order, where he quotes the DRP’s findings, deserve to be extracted for perspective: “For the addition in respect of issue of Bad debt for under reporting of income in consequence of mis-reporting - Rs.9,73,70,939/-: The matter has been considered. The TPOS order clearly brings out that the claimed bad debts were related to occurrence of an extraordinary event i.e. Covid Pandemic that led to settlement of debt transaction between assessee and its AE. The transaction led to complete erosion of profits of the assessee entity le. against a business turnover of Rs. 10.54 crores, bad debts written off were Rs. 9.73 crores. Being a related party transaction and that too a foreign AE, the rigour of provisions of the Income-tax Act for admissibility of claim of bad debt should have been scrupulously fulfilled by the assessee entity. Assessee has furnished documentary evidence of correspondence with the parent AE stating that it was in dire needs of business funds that were due to it. These indicate that there was no real need to write off the related party transaction when assessee was itself in critical stage of funds for business. Thereafter, vide Board Resolution, assessee decided to write off the pending debt. The minutes are extracted as under……… Thereafter, to improve the financial viability of the Parent AE during the time of COVID, assessee wrote-off the debtor balance for the period prior to March, 2020. Thus, write off exercise was made by the assessee not from its own business perspective but of the Parent AE. Under these circumstances, the AO has correctly proposed disallowance of claim of bad debt under section 36(1) (vii) of the Act. Accordingly, these objections are hereby rejected.” 2.0 Aggrieved with both these actions, the assessee has approached the ITAT with the following grounds of appeal: “1. That the Assessment Order, passed u/s 143(3)/144C(13) incorporating, as well, the Transfer Pricing Order/TP Order, passed u/s 92CA(3), consequent to the endorsement of thereof, by the Ld. DRP. for being based on, misperceived, fallacious and also prejudiced reasonings and conclusions and equally significantly, after complete disregard of several crucial evidence and pertinent judicial pronouncements, would deserve total reversal and nullification, so as to render all the additions and disallowances, effected therein, fully repealed. Re: Transfer Pricing Issue-Addition of Rs.17678365.00 a) That in the light of the facts and the law, Ld. TPO/DRP has grossly erred in rejecting the Profit Split Method/PSM of benchmarking the Appellant's International Transactions entered into with US based AE, and arbitrarily substituting the same with Transactional Net Margin Method/TNMM as the MAM, after omitting to appreciate, from the Financials, including that of the AE as well as the TPSR, the integrated and complementary nature of activities of the Printed from counselvise.com 4 ITA No. 2551/Kol/2024 Erevmax Technologies Pvt. Ltd. Appellant and the AE, the full applicability of PSM method of income attribution. b) That in the light of the facts and the law, Ld. TPO/DRP has grossly erred in effecting an addition of Rs. 17678365/- on the ground of the alleged deficiency in regard to the Mark up, determined an 16.85% of OC, based on TNMM Method applied to the data of some Companies viewed as Comparable, after failing to appreciate, in the light of duly produced Consolidated Financial Statement Tax Returns of the US based AE and Split Financials of the Appellant and the AE, that actual profit margin of the AE, derived from unrelated parties, had not only been significantly lower than the mark up allowed to the Appellant but also caused it to suffer loss. c) That in the light of the facts and the law, The Ld. TPO/DRP while effecting the addition of Rs.176788365/- on the alleged ground of deficiency as to profitability Mark-up, has totally disregarded the proven fact of actual cost based revenue sharing resulting in almost Nil Income Loss at the end of AE, the excess mark up to the Appellant and accordingly, by means of this addition, has caused in the assessment of grossly notional, fictional and never earned income, in violation of the fundamental principle of 'Real Income theory and its absolute applicability to Chapter X and thus, Transfer Pricing Mechanism. d) Even otherwise, without prejudice to the foregoing grounds, for the sake of justice and fairness. even if the TNMM Method is considered as the Most Appropriate Method, in view of availability of the complete Financials, Tax Returns of the Appellant and the AE, not ever disproved by the Ld. TPO/DRP, the TPO may be directed to re-work the ALP, solely based on Internal TNMM Method, in the light of the actual cost incurred and revenue, eventually derived from external/ unrelated entities. Grounds relating to disallowance of Bad Debt-Rs.97370939/- a) That the Ld. Faceless Assessment Unit/DRP, have grossly erred in disallowing and negating the claim of Bad Debt on the most arbitrary, superficial and unlawful reasonings, after not only adopting some contrary, erroneous, prejudiced stand with regard to such claim, but also evidently disregarding some of the most fundamental evidence and the Judicial and Administrative pronouncements. b) That the Ld. FAU/DRP, have fallen into grave error in not allowing the Bad Debt Claim of Rs. Rs.97370939/- which had, vide Sec. 36(1)(vii) read with Sec. 36(2), called for full admissibility as such, in view of the proven fulfillment by the Appellant, of three mandatory criteria, i.e., (a) the amount being a debt or part thereof, b) such debt having represented Income (Turnover in the present case) considered in some earlier year, vide Sec. 36(2) and lastly, c) being written off in the Books as irrecoverable. c) That the Ld. FAU/DRP have grossly erred and simply misdirected themselves by abruptly assuming that the Bad Debt claim had been effected to help out the AE Debtor facing COVID related hardships, after turning a blind eye to the evidence as to explicit and emphatic refusal of such debtor to pay such debt despite regular demands and insistence, the Resolution of the Board to treat the debt as bad, the compliance with rigours of FEMA regulations as regards such Write off, given the involvement of Foreign Exchange, the compliance with RBI prescribed norms and corresponding approval, granted in this regard. d) That on the facts and circumstances of the case and in law, the FAU/DRP was Printed from counselvise.com 5 ITA No. 2551/Kol/2024 Erevmax Technologies Pvt. Ltd. not at all justified in negating the claim for Bad Debt in view of the proven compliance with Sec. 36(1)(vii)/Sec. 36(2) and also the according of Approval to the Write Off of such Debt involving FEMA by the Representative Bank of RBI, after due satisfaction with the above statute, credibility of the records, Auditor's Certificate and adherence to the existing RBI prescribed Regulations. e) That on the facts and circumstances of the case and in law, the FAU/DRP have grossly erred in arbitrarily requiring the Appellant to prove the debt becoming bad, after not appreciating that in the light of Amendment introduced in sec. 36(1)(vii)/36(2), vide the Amendment Act of 1987, read with various judicial pronouncements (including that of Supreme Court) and also CBDT Circular, only the write off of some debt originating from previously considered and accounted for income, had been the mandate, and as such, the onus of proving the fact of its becoming bad had been dispensed with. f) That the Appellant craves leave to go for additional grounds, modify and not press any one or more the aforementioned grounds, either before or during the Appeal Hearing.” 2.1 Before us the Ld. AR argued with the help of two detailed paper books containing various essential documents and several case laws. To properly comprehend the substance of the Ld. AR’s arguments, it is necessary to extract the relevant portions from his written submissions: “As per the Service Agreement, executed in between the Appellant and the AE (Erevmax Inc, USA), vide Page 41, a mark-up of 5% on cost had been allowed by the AE for the purpose of billing. Accordingly, in the light of Cost and Billing Summary (Page 33 and 34), forming part of the Transfer Pricing Study Report (Page 1-50), the on the total cost of Rs.100261865.06, a mark-up @ 5% of Rs. 5013093.00 had been added, to as to constitute a Export value of Software Services of Rs.105274958.31 / 1420680.00 $ (Page 34 Cost, Mark-up and Billing Summary and Audited Accounts Page 177). The Appellant had followed the Profit Split Method / PSM of Pricing of such Export and accordingly, in Form 3CEB (Page 3) such method had been duly disclosed. Again in the Transfer Pricing Study Report (vide Page 29), due to availability of respective/standalone figures of Turnover, Cost and Profit as well as the consolidated figures thereof, vide Page 35, the reason for following Split Method had been restated. However, on the perusal of the Transfer Pricing Study Report (Page 6-32) and its Annexures, especially Cost and Billing Summary (Page 33-34) and Consolidated Turnover and Profitability Statement (Page 35), and also the Audited Financials of the Erevmax Inc., USA / AE providing consolidated figures, the Ld. TPO had raised the following queries. The DRP, vide Page 7 of its Order, endorsed the observation of the TPO, by echoing the observations of the Ld. TPO. Its observations are as under Proper Economic Analysis had not been made. Printed from counselvise.com 6 ITA No. 2551/Kol/2024 Erevmax Technologies Pvt. Ltd. The Appellant as a Captive Software Service Provider, had provided SDS/ITeS services to its AE, which after some value addition by AE had been sold to end customer. PSM is not applicable unless the service or transaction relates to Unique Intangibles or Transactions of Repeated Nature. Even the Group Profit had not been compared with any external comparable to verify the Profit Split. As a result, the adoption of TNMM Method, the comparison of the Profitability rate with eleven external comparable companies Transfer Pricing Order, and the consequent determination of ALP amount of Rs.17678365/- being 16.85% of the Turnover of the Appellant of Rs. 105274894/-, had been proper and thus, deserved endorsement and confirmation. The Appellant had furnished respected replies to both the TPO and the DRP, by means of separate submissions. A kind perusal of the said respective replies would highlight the fallacies in their stand.” The Ld. AR relied on a plethora of case laws to canvass the point that PSM was the best method to compute ALP and not TNMM, as adopted by the Ld. TPO. 2.2 Regarding the issue of bad debt, the Ld. AR has relied on the express provisions of section 36(i)(vii) and 36(2) of the Act to stress the point that receivables from the AE had to be written off as it was unable to pay amounts owed to it due to financial hardship. Some extracts from the submissions may be mentioned: “During the relevant previous year a sum of Rs.97370939.37 (equivalent to US$ of 1290974 converted @ Rs.75.4244 / Dollar) that had remained unpaid since the earlier year, from the Assesses's customer i.e., M/s Erevmax Inc., of 37, North Orange Avenue, Suite 500, Orlando, Florida, 32801, USA, had been written off as Bad Debt in its Books of Account and accordingly, debited in the Profit and Loss Account as such. Given such Write-off, deduction under section 36(1)(vii) in relation to the same had been claimed in the Return in relation to current assessment year. The aforesaid grounds are concerned with such disallowance. So from above documentary evidence, filed with the Assessment Unit /DRP, the following facts would be absolutely clear. a) The amount of Rs.97370939/- had been factually and evidently written off as bad through Journal and Ledger entries. This apart because of this write off, the Debtors' Balance as on 31/03/2021 had declined to Rs. 116142773.72 (Page 110). b) The same had been given effect to in the Audited Profit and Loss Account (Page 177). Printed from counselvise.com 7 ITA No. 2551/Kol/2024 Erevmax Technologies Pvt. Ltd. c) RBI Approval had been obtained in compliance with FEMA (Page 105,106.107). d) So, in terms of sec. 36(1)(vii), subject to Sec. 36(2), for allowability of Bad Debt, the only and sole requirement under the Act is to write it the Accounts of the Assessee (and nothing more). e) Sec. 36(2) necessitates that Bad Debt so written off would be allowable u/s 36(1)(vii), provided the same has been previously considered as Income. In the above tabulation, with the help of prior year's revenue ledger (Page 111) and Audited Profit/Loss Account (177), it has been corroborated how the Bad Debt Amount written off of Rs.97370939/-had evidently formed part of prior year's Revenue from Export Services. So, the condition mandated by sec. 36(2) has been fulfilled, so as to warrant it it allowability. allowability\" The Ld. AR also pointed out correspondence with the AE (pages 92- 99 and pages 100-103 of paper book). It was argued that the AE is the assessee’s only customer and hence the assessee was inclined to accept the writing off of bad debts instead of engaging in precipitate legal action with the AE. The Ld. AR also pointed out that huge losses were incurred by AE (page 133 of the paper book) on account of the COVID-19 pandemic. 3. The Ld. DR, on the other hand, supported the order of Ld. AO/TPO/DRP and pointed out that the PSM as a method for ALP was not sustainable as it could be used only in exceptional circumstances, for instance when there are several inter-related international transactions which cannot be evaluated separately. The Ld. DR supported the Ld. TPO’s methodology by stating that this was not the case with the assessee. Regarding the issue of writing off of bad debts, it was the submission that the recoverable amounts belonged to FY 2019-20, when there was no significant impact of the COVID pandemic. It was pointed out that the correspondence in this regard had been ongoing as early as 02.01.2020 (page 99 of the paper book). Thus, it was not an understandable reason to blame the COVID pandemic for losses of the AE. It was the further submission that it was not readily understandable that the assessee was willing to bear losses on its own to support the AE, ostensibly to be able to continue doing business with it. 4. We have carefully considered the rival submissions, perused the Printed from counselvise.com 8 ITA No. 2551/Kol/2024 Erevmax Technologies Pvt. Ltd. contents of the two paper books filed by the Ld. AR and have also diligently perused the order of authorities below. We may take up each of the two issues individually at first. 4.1 Regarding the TP adjustment it is seen that the assessee’s contention is two-fold – that the PSM is the best suited method and the comparable entities considered and adopted by the Ld. TPO are not specifically related to tourism software development. On these two issues it deserves to be said that the assessee has not convincingly demonstrated how the transactions involve “unique intangibles” and “multiple inter-related international transactions” which cannot be evaluated separately, which could justify adoption of the PSM. Also, it is felt that the end use (tourism sector) of software developed may not be critical in determining whether a comparable selected by the Ld. TPO is appropriate or not, but it is the size and scale of operations, including the peculiar geographies involved, which may be more relevant. It is seen that the TP report prepared by the assessee (placed in the paper book) does not clearly rely on any comparable entities for demonstrating ALP. Rather reliance has been placed on the agreement signed between the assessee and the AE to indicate that the formula prescribed therein is supported by PSM and hence should be adopted. It is visible that while the TPO has given cogent reasons for adopting TNMM, while rejecting the PSM, the assessee has not clearly indicated as to why the revenue mechanism laid down in the contractual agreement between the assessee and the AE should be adopted as such. Since this is an exclusively factual issue, we deem it fit that this issue should be re- examined by the Ld. AO/TPO, whereby the assessee must give its own comparable entities and demonstrate conclusively why the TNMM should not be adopted. The Ld. TPO/AO would be expected to judicially consider such submissions. 4.2 Regarding the issue of bad debts, we are aware of the specific mandate provided to the assessee under the provisions of section 36(1)(vii) Printed from counselvise.com 9 ITA No. 2551/Kol/2024 Erevmax Technologies Pvt. Ltd. and 36(2) of the Act. However, the peculiar facts surrounding this issue leave us considering whether the bad debts written off are not clearly commercial transactions gone wrong, but a method to enrich the AE at the expense of the assessee, the losses being incurred by the AE notwithstanding. At this juncture, we need to mention that the payments (impugned) receivable pertaining to AY 2020-21, belonged to a period when the COVID pandemic had affected only the last one or two months of the relevant financial year (FY 2019-20). If the contract between the assessee and the AE, which appears to from the bedrock of the assessee’s attempt at justifying the ALP, was strictly adhered to then the payments for services rendered would have been duly remitted as per Articles 3 and 4 of the Contract (at pages 36-41 of the paper book), much before the full impact of the COVID Pandemic. This writing off of bad debts has effectively reduced the profits of the assessee and has left an adverse mark on the balance sheet for several future years as well. Thus, this issue along, with the TP adjustment issue, have to be considered holistically. We may draw strength from the case of Mcdowell and Co. Ltd. reported in 154 ITR 148 (SC), in which a Constitution Bench of the Hon’ble Apex Court has mandated lifting of the “Corporate Veil” to determine where legitimate tax planning ends and evasion begins. 4.3 Summing up the findings in paragraphs 4.1 and 4.2 (supra), it needs to be reiterated that the Ld. AO’s order is set aside and remanded back to the Ld. AO/TPO for determining a fair ALP, with the assessees cooperation, and to also for re-visiting the issue of bad debts in light of the extant provisions of the Act, as well as the contractual obligations between the two parties, especially when the impugned receivables pertain to a period when there was either no impact of COVID or there was, at best, negligible impact. Also, the Ld. AO/TPO must examine the impact of such write off on the ALP. Printed from counselvise.com 10 ITA No. 2551/Kol/2024 Erevmax Technologies Pvt. Ltd. 5. In result, appeal of the assessee is partly allowed for statistical purposes. Order pronounced on 27.10.2025 Sd/- Sd/- (George Mathan) (Sanjay Awasthi) Judicial Member Accountant Member Dated: 27.10.2025 AK, Sr. P.S. Copy of the order forwarded to: 1. Appellant 2. Respondent 3. Pr. CIT 4. CIT(A) 5. CIT(DR) //True copy// By order Assistant Registrar, Kolkata Benches Printed from counselvise.com "