2019 (4) TMI 1298 - AT - Income Tax

Transfer pricing adjustment - Comparable selection - HELD THAT - Vishal Information Technologies Ltd. - business model of the company is totally different from the assessee, as, it does not undertake the work itself but out sources it to third party vendors. This fact is clearly discernible from the low employee cost of the company which is evident from the financial statements filed in the paper book. Maple e solutions Ltd. company cannot be treated as comparable due to unreliability of its financial data - the margin of the assessee would be within 5% of the average margin of the rest of the comparables, we do not intend to examine the acceptability or otherwise of Datamatics Financial Services Ltd., Gold Stone Infratec Ltd., Asit C. Mehta Financial Services Ltd., as comparables to the assessee which is left open for adjudication, if arises, in any other assessment year in future. This ground is partly allowed. TP adjustment - interest paid on delayed settlement of traveler s cheques (TCs) and pre paid cards (PPCs) - Difference in interest rates - assessee has paid interest at LIBOR plus 200 basis points - HELD THAT - The computation of interest by the Transfer Pricing Officer on the basis of RBI ECB rate is flawed since the interest paid by the assessee are to AEs located in foreign countries. In view of the aforesaid, we hold that the interest paid by the assessee to the AEs is at arm's length. The decisions relied upon by the learned Authorised Representative also support this view. Accordingly, the addition made is deleted. Ground is allowed. Addition on account of bad debt - embezzled by one of the employees of the company - Non filing of FIR before the Police - HELD THAT - The auditors have specifically mentioned about the embezzlement of fund by the employee. Further, the internal note of the company also bears testimony to the fact of the embezzlement. Non filing of FIR before the Police may be due to various reasons. Therefore, for that reason alone, assessee s claim that the amount in question was embezzled cannot be rejected. Having held so, it is seen from the auditor s report that out of the amount of ₹ 15,23,996, the company could recover an amount of ₹ 4,70,000, and the balance amount of ₹ 10,53,996, could not be recovered. Thus, the quantum of loss suffered by the assessee is ₹ 10,53,996 and not ₹ 11,24,899, as claimed by the assessee. Further, though the loss incurred by the assessee on account of embezzlement may not be allowable as bad debt but certainly it has to be allowed as business loss. In view of the aforesaid, we direct the Assessing Officer to allow deduction for an amount of ₹ 10,53,996. Ground is partly allowed.

Summary

Issues Involved:
1. Addition on account of transfer pricing adjustment for ITES.
2. Addition on account of transfer pricing adjustment relating to interest paid on delayed settlement of traveler’s cheques and pre-paid cards.
3. Addition on account of bad debt claimed as business loss.

Detailed Analysis:

1. Addition on account of transfer pricing adjustment for ITES:
- Facts: The assessee, an Indian company and a wholly owned subsidiary of Travelex Plc, U.K., provides ITES to its overseas Associated Enterprise (AE). The assessee used the Transactional Net Margin Method (TNMM) with operating profit/total cost (OP/TC) as the profit level indicator (PLI) and selected 20 comparables with an arithmetic mean of 9.93%. The assessee's margin was 16.04%, claiming it to be at arm's length. The Transfer Pricing Officer (TPO) rejected the assessee's comparables and selected 13 new comparables with an arithmetic mean of 24%, leading to an upward adjustment of ?66,55,541.
- DRP's Role: The Dispute Resolution Panel (DRP) rejected the assessee's objections.
- Tribunal's Decision: The tribunal directed the exclusion of Vishal Information Technologies Ltd. and Maple e-solutions Ltd. from the list of comparables due to differences in business models and unreliable financial data, respectively. This adjustment brought the assessee's margin within ±5% of the average margin of the remaining comparables, partly allowing the ground.

2. Addition on account of transfer pricing adjustment relating to interest paid on delayed settlement of traveler’s cheques and pre-paid cards:
- Facts: The assessee paid interest to its AEs for delayed settlement of TCs and PPCs at 6.75% per annum. The TPO restricted the rate to 5.50% based on RBI's ECB rate, resulting in an adjustment of ?4,38,499.
- DRP's Role: The DRP upheld the TPO's adjustment.
- Tribunal's Decision: The tribunal held that the interest paid by the assessee at LIBOR plus 200 basis points was at arm's length and that the TPO's reliance on RBI's ECB rate was flawed. The addition was deleted, allowing the ground.

3. Addition on account of bad debt claimed as business loss:
- Facts: The assessee claimed a deduction of ?11,24,899 as bad debt, which was actually an amount embezzled by an employee. The Assessing Officer disallowed the claim due to lack of evidence like FIR and proper documentation.
- DRP's Role: The DRP sustained the addition.
- Tribunal's Decision: The tribunal accepted the embezzlement claim based on the auditor's report and internal notes, allowing the loss as a business loss but limited the deduction to ?10,53,996, the actual unrecovered amount. This ground was partly allowed.

Conclusion:
- The tribunal's order resulted in a partial allowance of the appeal, with specific directions to exclude certain comparables and accept the embezzled amount as a business loss within the specified limits. The order was pronounced in open court on 05.04.2019.