2015 (1) TMI 922 - AT - Income Tax

Transfer pricing adjustment - markup of 9% on the entire cost of high value services as the payment to Jeena cannot be a pass through cost as stated by the assessee as held by TPO - Held that - The compensation paid to the assessee is based on functions performed by it, i.e. rendering of custom clearance services to the AE on the operation costs incurred by it and not on the cost of services sourced from the third party in India. Thus, TP adjustment by applying 9% mark-up on the cost of customs clearance service rendering through Jeena cannot be made for bench marking the ALP of the assessee and accordingly such adjustments stands deleted. - Decided in favour of assessee. Disallowance of bad debts written off a business loss - Held that - Once, the assessee was unable to recover the amount, then it has to be allowed as bad debts. Even if such amount is not allowed as bad debts then the same has to be allowed as business loss as held by the Hon ble Bombay High Court in the case of Harshad J Choksi (2012 (8) TMI 710 - BOMBAY HIGH COURT). Further, in CIT V/s Shreyas S Morakhia (2012 (3) TMI 103 - BOMBAY HIGH COURT), in the context of share broker, it was held that unrealized value of shares from the clients can be claimed as bad debts u/s 36(1)(vii) of the Act, as the brokerage from the clients is taken to the profit and loss account, therefore, the same is to be allowed as bad debts. Here in this case also, the assessee is earning services fees for rendering such services and if any such amount paid by the assessee on behalf of the parties remained unrecoverable, then the same can be allowed as bad debts. Thus, from both the angles, we do not find any reason to confirm the disallowance of ₹ 28,76,102, and accordingly, the same is deleted.- Decided in favour of assessee.

Summary

Issues Involved:
1. Validity of assessment order against a non-existent entity.
2. Transfer pricing adjustment of Rs. 1,55,35,432.
3. Disallowance of bad debts/business loss of Rs. 28,76,102.
4. Non-granting of credit for taxes deducted at source amounting to Rs. 27,55,636 (not pressed).

Detailed Analysis:

1. Validity of Assessment Order Against a Non-Existent Entity:
The assessee argued that the assessment order against Federal Express India Private Limited was invalid as the entity had merged with the appellant. This issue was not adjudicated upon and was treated as dismissed.

2. Transfer Pricing Adjustment of Rs. 1,55,35,432:
The main issue was the transfer pricing adjustment related to the mark-up earned by the appellant on payments made to third-party service providers for customs clearance of high-value packages. The appellant coordinated these services through Jeena & Co. due to the lack of a requisite license. The appellant charged a 9% mark-up on the coordination services, but the TPO included the entire payment to Jeena in the cost base, which led to a transfer pricing adjustment.

The appellant argued that the payment to Jeena was a "pass-through cost" and should not be included in the cost base for applying the mark-up. The Tribunal referred to the Delhi High Court's decision in 'Li and Fung India Pvt Ltd V/s CIT,' which held that the cost incurred by third parties should not be included in the cost base for determining the arm's length price (ALP). The Tribunal concluded that the appellant's role was limited to coordinating services, and the payment to Jeena was reimbursed by the AE, making it a pass-through cost. Therefore, the transfer pricing adjustment was deleted.

3. Disallowance of Bad Debts/Business Loss of Rs. 28,76,102:
The assessee claimed a deduction for bad debts written off, which was disallowed by the AO on the grounds that the assessee did not maintain records of individual clients and did not prove that the debts had become bad. The Tribunal noted that the amounts written off were towards payments of duties and taxes made on behalf of clients, which were subsequently unrecoverable. The Tribunal held that these amounts should be allowed as bad debts or alternatively as business loss, citing the Bombay High Court's decisions in 'Harshad J Choksi V/s CIT' and 'CIT V/s Shreyas S Morakhia.' Consequently, the disallowance of Rs. 28,76,102 was deleted.

4. Non-Granting of Credit for Taxes Deducted at Source:
The assessee did not press this ground, and it was treated as dismissed.

Conclusion:
The appeal was partly allowed, with the Tribunal deleting the transfer pricing adjustment of Rs. 1,55,35,432 and the disallowance of bad debts/business loss of Rs. 28,76,102. The issue regarding the validity of the assessment order against a non-existent entity was treated as dismissed, and the ground related to the non-granting of credit for taxes deducted at source was not pressed.