2025 (5) TMI 685 - AT - Income Tax

Deduction of bad debts u/s 36(1)(vii) - HELD THAT - As it is a fact on record that assessee has rendered the services in FY 2017-18 and they reached a settlement in FY 2018-19 i.e. in AY 2019-20. The basic grievance of the AO was that assessee should have written off the bad debt in AY 2019-20. It is a fact on record that non-recovery of abovesaid amount has become bad debt and yes no doubt assessee should have claimed the same in AY 2019-20 however assessee has claimed as bad debt only in AY 2020-21. It does not change the character of the bad debt and considering the tax rate being same in both the FYs it amounts to revenue neutral. Therefore there is no bar in claiming the ascertained bad debt in the current assessment year. Accordingly we are inclined to allow the claim of the assessee and ground no.4 is allowed. Allowability of Data Field Costs - AO sustained the addition with the observation that the said expenditure represented regular expenditure incurred by the assessee from year to year which is clearly covered under the provisions of section 2(22)(e) and it is not any trade advance - HELD THAT - We observed that AO has mentioned in his order that there is conflict between income received by the assessee market research fee and the expenditure. After careful consideration we are of the view that assessee is collecting fees after conducting data with the help of various agencies and the fees would be collected from its clients are regarded as market research fees and related expenditure on collection of data regarded as data fee cost expenditure. The data field expenditure are the related expenditure incurred by the assessee in support submitted the relevant agreements entered with various agencies and assessee incurs cost on collection of data pays incentives to retailers for sharing their data and expenditure on deposits etc. and incurring of expenditure on data field cost is a direct business expenditure incurred by the assessee in collecting the information and directly correlates with the market research fees collected by the assessee. In our considered view it is the running expenditure incurred by the assessee and it is also fact on record that the same is duly audited. Therefore we are inclined to allow the grounds raised by the assessee. TP Adjustment - TPO rejected the economic analysis functional profile of comparables and filters applied by the assessee in the TP documentation and proceeded to reject five comparables of the assessee and selected 13 new comparables proposed - HELD THAT - We are inclined to allow the grounds raised by the assessee on the issue of persistent loss which cannot be applied in the case of Pratissad Communications Pvt. Ltd. which has registered profit in FY 2018-19. Accordingly we direct the AO/TPO to include this comparable company as comparable with the assessee company. Not considering the other income in the case of the assessee which is in relation to liabilities - In the case laws relied on by the assessee in the case of Tetra Pak India Pvt. Ltd. 2023 (10) TMI 43 - BOMBAY HIGH COURT we observed that the company normally made gross provisions towards doubtful debts and when it reverses the provisions it was treated as operating income. Similar view was expressed in other decisions as well. However in the present case no doubt assessee has written back the provisions no longer required as other income we observed that the assessee has only allocated the cost between the two divisions AE and non-AE segment. They are not able to demonstrate how the provisions written back directly linked to the business of the AE rather they allocated the total written back of liabilities on the basis of revenue from the clients. The general allocation of right back between segments cannot be treated as operating income of the relevant segment i.e. AE segment. Therefore we are not inclined to accept the submissions of the assessee. Therefore the case law relied on by the assessee is distinguishable.

Summary

1. ISSUES PRESENTED and CONSIDERED

The core legal questions considered by the Tribunal in this appeal include:

- Whether the final assessment order dated 19.07.2024 passed under sections 143(3), 144C(13), and 144B of the Income Tax Act, 1961, following directions of the Dispute Resolution Panel (DRP), is valid or barred by limitation under section 153 of the Act.

- Whether the Assessing Officer (AO) erred in determining the total income by making additions and disallowances as against the income declared by the assessee.

- Whether the disallowance of bad debts written off during the year was justified under section 36(1)(vii) of the Act.

- Whether the disallowance of data field costs, including payments to a related party treated as deemed dividend under section 2(22)(e) of the Act, was justified.

- Whether the Transfer Pricing Officer (TPO) and DRP erred in their transfer pricing adjustments, including selection and rejection of comparable companies, choice of profit level indicators, and treatment of other income in computing the arm's length price.

- Whether the levy of interest under sections 234A and 234B and initiation of penalty proceedings under section 270A for under-reporting of income were justified (though these were not pressed by the assessee).

2. ISSUE-WISE DETAILED ANALYSIS

Limitation and Validity of Assessment Order

The assessee challenged the validity of the assessment order and DRP directions on the ground of limitation under section 153 of the Act, relying on precedent that limits the time for passing assessment orders. However, at the hearing, the assessee did not press this ground and it was dismissed accordingly. Thus, no detailed adjudication was undertaken on this issue.

Disallowance of Bad Debts Written Off (Section 36(1)(vii))

Legal Framework and Precedents: Section 36(1)(vii) allows deduction of bad debts written off in the accounts, provided the debt was previously included in income. The CBDT Circular No. 12/2016 clarified that the debt need not be proved irrecoverable beyond doubt, but writing off in books suffices. Judicial precedents cited include TRF Ltd. v. CIT (SC), CIT v. Modi Telecommunication Ltd. (Delhi HC), and others establishing that writing off in books and prior inclusion in income are sufficient conditions.

Court's Interpretation and Reasoning: The assessee claimed bad debts of INR 1,18,83,088 relating to services rendered to Gionee India Pvt. Ltd. in FY 2017-18, with the amount included in income for that year. The settlement with Gionee was in FY 2018-19, but the bad debts were written off in FY 2019-20 (AY 2020-21). The AO disallowed the claim on the ground that the write-off should have been done in AY 2019-20, and no documentary evidence was submitted to prove irrecoverability or recovery efforts.

The Tribunal observed that the timing of write-off does not alter the character of the bad debt, and since the tax rate was the same in both years, the delay was revenue neutral. It also emphasized that commercial judgment regarding timing of write-off is not subject to interference by revenue authorities, citing AWB India Pvt. Ltd. v. Addl. CIT. The Tribunal accepted the submission that the bad debts were written off in books and previously included in income, fulfilling statutory conditions.

Application of Law to Facts: The Tribunal applied the statutory provisions and judicial principles, holding that the assessee's claim was valid despite the timing difference. The absence of adverse comments on inclusion of income in earlier years was noted.

Treatment of Competing Arguments: The AO's reliance on timing and lack of recovery efforts was rejected as the commercial decision on timing was respected, and the evidentiary burden was deemed fulfilled by the assessee's submissions and ledger accounts.

Conclusion: The disallowance of bad debts was set aside and the deduction was allowed.

Disallowance of Data Field Costs and Deemed Dividend Issue (Section 2(22)(e))

Legal Framework and Precedents: Section 2(22)(e) treats certain payments to shareholders as deemed dividends if they are loans or advances not in the ordinary course of business. CBDT Circular No. 19/2017 clarified that trade advances in ordinary course are excluded. Judicial precedents (CIT v. Ambassador Travels P. Ltd., CIT v. Raj Kumar, and others) establish that routine business payments for services are not deemed dividends.

Court's Interpretation and Reasoning: The AO treated payment of INR 4,33,56,115 to Nielsen India Pvt. Ltd., a related party shareholder with 49.9% shareholding, as deemed dividend under section 2(22)(e), alleging diversion of funds. The assessee argued these were payments for genuine services rendered in the ordinary course of business, supported by agreements, invoices, and reports demonstrating the nature of services (audit and data provision). The Tribunal noted that the AO did not demonstrate how the payments constituted loans or advances or were not at arm's length.

The Tribunal relied on the CBDT circular and judicial precedents to hold that such payments for services in the ordinary course of business cannot be treated as deemed dividends. The related party disclosure in balance sheet and Form 3CED further supported transparency and genuineness.

Application of Law to Facts: The Tribunal found the payments were for routine business services, adequately documented, and not loans or advances. Hence, section 2(22)(e) was not attracted.

Treatment of Competing Arguments: The AO's view was rejected for lack of cogent evidence that the payments were anything other than business expenses. The Tribunal emphasized the need for specific reasons to treat such payments as deemed dividends, which were absent.

Conclusion: The addition under section 2(22)(e) was deleted and the disallowance of data field costs on this ground was set aside.

Disallowance of Data Field Costs on Grounds of Business Purpose

Legal Framework and Precedents: Section 37 allows deduction of expenses incurred wholly and exclusively for business. Judicial precedents (Sasoon J David & Co. Pvt. Ltd. v. CIT, CIT v. Dalmia Cement, and others) affirm that commercial expediency and business nexus are key for allowance.

Court's Interpretation and Reasoning: The AO disallowed INR 15,04,75,422 of data field costs alleging lack of genuineness, incomplete documentation, and conflicts between receipts and expenses. The assessee submitted detailed ledger accounts, agreements, invoices, and explained the business model involving retail store audits, data collection, and report generation for clients. The Tribunal accepted that the data field costs represented direct business expenditure necessary for the core business.

The Tribunal noted that the AO's concerns regarding invoice dates and mode of raising invoices were addressed by the assessee's explanation of commercial practices and billing based on actual services rendered. The Tribunal also rejected the AO's observation regarding related party Basarsoft Bilgi Teknolojileri A.S. as it was not a related party and properly accounted for.

Application of Law to Facts: The Tribunal applied the principle that expenses incurred with direct nexus to business activities and supported by documentation should be allowed. The factual matrix showed the expenditure was genuine and necessary for business operations.

Treatment of Competing Arguments: The AO's doubts about genuineness and conflicts were outweighed by the detailed evidence and business rationale provided by the assessee. The Tribunal held that the AO failed to establish any basis for disallowance.

Conclusion: The disallowance of data field costs was deleted and the expenditure was allowed.

Transfer Pricing Adjustments

Legal Framework and Precedents: Transfer pricing provisions under sections 92 to 92F require international transactions between associated enterprises to be at arm's length price (ALP). The Transactional Net Margin Method (TNMM) is a recognized method. Selection of comparables and filters must be reasonable and consistent with judicial precedents.

Court's Interpretation and Reasoning: The TPO rejected the assessee's benchmarking analysis using TNMM and selected Operating Profit/Total Cost as net profit indicator, rejecting some comparables including Pratisaad Communications Pvt. Ltd. on grounds of persistent loss. The DRP modified the list of comparables partially. The Tribunal examined the issue of persistent loss filter applied to Pratisaad Communications Pvt. Ltd., noting it had profits in one of the three years under consideration.

The Tribunal relied on the precedent that persistent loss filter applies only if losses are in three consecutive years and that presence of profit in any one year precludes exclusion. Accordingly, it directed inclusion of Pratisaad Communications Pvt. Ltd. as comparable.

Regarding the treatment of other income (liabilities no longer required written back), the assessee contended such income should be treated as operating income for computing profit level indicators, relying on recent judicial pronouncements. The Tribunal found that the allocation of written-back liabilities to the associated enterprise segment was on a general revenue basis without direct linkage to business operations, distinguishing the cited precedents. Hence, the claim to treat such income as operating income was rejected.

Application of Law to Facts: The Tribunal applied transfer pricing principles and judicial precedents to ensure comparables are appropriately selected and filters correctly applied. It also scrutinized the nature of income for profit margin computation.

Treatment of Competing Arguments: The Tribunal accepted the assessee's argument on persistent loss filter but rejected the claim on treatment of other income due to lack of direct nexus.

Conclusion: The Tribunal allowed the inclusion of Pratisaad Communications Pvt. Ltd. as comparable and directed AO/TPO accordingly, but dismissed the claim to treat liabilities written back as operating income for transfer pricing purposes.

Interest and Penalty Proceedings

The assessee did not press the grounds relating to levy of interest under sections 234A and 234B and penalty under section 270A. These grounds were dismissed accordingly without detailed adjudication.

3. SIGNIFICANT HOLDINGS

"The decision to write off the irrecoverable amount during the captioned AY 2020-21, was a strategic business decision made by the Appellant. This action was undertaken following careful commercial judgment and evaluation of the financial circumstances surrounding the irrecoverable amount. The Appellant exercised its discretion in determining that the amount in question was unlikely to be recovered and, therefore, deemed it prudent to reflect this in the financial accounts for the specified period. This decision aligns with standard business practices, where entities routinely assess the recoverability of receivables and make informed decisions to write off amounts that are deemed uncollectible, ensuring the financial statements accurately represent the entity's financial position."

"In view of the above it is, a settled position that trade advances, which are in the nature of commercial transactions, would not fall within the ambit of the word 'advance' in section 2(22)(e) of the Act. Accordingly, henceforth, appeals may not be filed on this ground by Officers of the Department and those already filed, in Courts/Tribunals may be withdrawn/not pressed upon." (CBDT Circular No. 19/2017)

"If in any of the three previous financial years, if a company has made a profit, then it shall not be excluded by applying the persistent loss filter."

Core principles established include:

• Commercial judgment regarding timing of write-off of bad debts is respected, and deduction under section 36(1)(vii) is allowable if debts were written off in books and previously included in income.
• Payments for services rendered in ordinary course of business to related parties are not deemed dividends under section 2(22)(e).
• Data field costs incurred directly and exclusively for business are allowable expenses under section 37.
• Transfer pricing comparables should not be excluded solely on persistent loss filter if profit is recorded in any of the relevant years.
• Allocation of written-back liabilities without direct nexus to business segment is insufficient to treat such income as operating income for transfer pricing purposes.

Final determinations:

• Bad debts written off were allowed as deduction.
• Disallowance of data field costs and addition as deemed dividend were deleted.
• Pratisaad Communications Pvt. Ltd. was directed to be included as comparable for transfer pricing.
• Claim to treat liabilities written back as operating income was rejected.
• Grounds relating to limitation, interest, and penalty were dismissed or not pressed.