The Delhi Bench of the Income – tax Appellate Tribunal (Delhi Tribunal), in the case of Vertex Customer Services (India) Pvt. Ltd. (the taxpayer) held that exclusion of provision of doubtful debts from the operating expenses being a debatable issue and considering full disclosure made by the taxpayer; the taxpayer could not be held liable for penalty.
Facts of the Case
- The taxpayer was engaged in the business of running call centre. From the financial services provided, the taxpayer incurred a loss to the tune of Rs. 4.27 crores on account of costs related to excess capacity, costs incurred being first year of operations and also a provision of doubtful debts of Rs. 2.3 crores.
- The provision for doubtful debts pertained to the net costs of services rendered by the taxpayer to the parent company which was ultimately wound up.
- The debatable issue was whether the provision for doubtful debts should be considered as a part of the operating expenses.
- The transfer pricing officer (TPO) did not accept the exclusion of provision for doubtful debts from the computation of operating expenses and made an addition of Rs. 2.5 crores and initiated penalty proceedings under Section 271(1)(c) of the Indian Income –tax Act, 1961 (the Act) on the grounds that the taxpayer had not disclosed true operating costs as well as comparable profit margin which resulted in suppression of income and higher claim of loss
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