Transfer Pricing Appeal: ITES Margin Adjusted, Interest Payment Ruled Arm's Length, Bad Debt Deduction Limited

The tribunal partially allowed the appeal in the case involving transfer pricing adjustments for ITES and interest paid on delayed settlement of traveler's cheques and pre-paid cards. It directed the exclusion of certain comparables for ITES adjustments, bringing the margin within an acceptable range. Additionally, it ruled that the interest paid was at arm's length, overturning the TPO's adjustment. Regarding the bad debt claimed as a business loss, the tribunal accepted the embezzlement claim but limited the deduction to the actual unrecovered amount. The order was pronounced on 05.04.2019.

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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 Rs. 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 Rs. 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 Rs. 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 Rs. 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.

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