TaxTMI 
TaxTMI 
2014 (3) TMI 496
X X X X Extracts X X X X
X X X X Extracts X X X X
....; 1.1 That the assessing officer failed to appreciate that the license fee being recurring expenditure, paid as fixed percentage of gross revenues, was allowable as revenue deduction in its entirety. 1.2 That the assessing officer erred on facts and in law in not following the binding decisions of the Tribunal in the appellant's own case for the earlier assessment years 2000-01 to 2002-03, 2004-05 and 2005-06 in gross violation of principles of judicial discipline. 3. So far as this ground of appeal is concerned, the relevant material facts are like this. During the course of the assessment proceedings, the Assessing Officer noted that the assessee has debited Rs 1638,42,89,000 towards licence fees and spectrum charges, out of which Rs 1157,17,09,913 represent licence fees. The Assessing Officer noted that in earlier years also, similar payments towards licence fees were disallowed but amortization granted under section 35ABB of the Act. It was in this backdrop that the Assessing Officer required the assessee to show cause as to the licence fees not be disallowed as a revenue expenses, and deduction unde....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... law in not following the binding decisions of the Delhi High Court in the appellant's own case for the earlier assessment years 2001-02 to 2003-04 and 2004-05 in gross violation of principles of judicial discipline. 9. So far as this issue is concerned, it is sufficient to take note of the admitted position that deletion of similar disallowances by this Tribunal has now received finality inasmuch as the revenue's appeals before the Hon'ble High Court, as also special leave petition before Hon'ble Supreme Court, have been dismissed. As a matter of fact, in the assessment order passed for the assessment year 2008-09, pursuant to DRP having taken note of these developments, no such disallowance has been made. A copy of Hon'ble Supreme Court's order dismissing the SLP has also been filed before us. In view of these discussions, as also bearing in mind entirety of the case, we direct the Assessing Officer to delete this disallowance of Rs 4,18,10,255 as well. 10. Ground No. 2 is also thus allowed. 11. In the ground no. 3, the assessee has raised the following grievance: 3. That the assessing officer erred on facts a....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... assessee by a Special Bench decision in the case of Biocon Ltd v. DCIT (144 ITD SB 21) wherein the Tribunal has, inter alia, held as follows: 11.3 We, therefore, sum up the position that the discount under ESOP is in the nature of employees cost and is hence deductible during the vesting period w.r.t. the market price of shares at the time of grant of options to the employees. The amount of discount claimed as deduction during the vesting period is required to be reversed in relation to the unvesting/lapsing options at the appropriate time. However, an adjustment to the income is called for at the time of exercise of option by the amount of difference in the amount of discount calculated with reference the market price at the time of grant of option and the market price at the time of exercise of option. No accounting principle can be determinative in the matter of computation of total income under the Act. The question before the special bench is thus answered in affirmative by holding that discount on issue of Employee Stock Options is allowable as deduction in computing the income under the head `Pr....
X X X X Extracts X X X X
X X X X Extracts X X X X
....als disallowed in the earlier assessment year(s) consistent with the finding given in the said assessments that the transaction entered into by the appellant was in the nature of finance lease on which depreciation was allowable under the provisions of the Act. 17. The relevant material facts, so far as this grievance of the assessee is concerned, are like this. The assessee is engaged in the business of telecommunication providing landline, cellular and broadband services etc. During the course of assessment proceedings, the Assessing Officer noticed that the assessee had entered a composite agreement with IBM India for provision of information technology, and that the assessee has accounted for this composite outsourcing agreement as finance lease, following Accounting Standard 19. Accordingly, in the books of accounts of the assessee, an addition has been made for Rs 194,01,07,865, and depreciation thereon amounting to Rs 140,48,58,730 has been charged. It was further noted that additionally an amount of Rs 206,20,45,487 was debited on account of services rendered under the said composite contract. However, while computing under the normal provisions of the Act, these amounts h....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... Officer and the DRP have simply followed the order of the earlier years, and the matter for that year stands restored to the file of the Assessing Officer. In our considered view, in such a situation, it will be inappropriate for us to deal with the matter on merits. We, therefore, deem it fit and proper to remit the matter to the file of the Assessing Officer for adjudication on merits, by way of a speaking order specifically dealing with contentions of the assessee and after giving yet another opportunity of hearing to the assessee. We also make it clear that the assessee shall have the liberty to take up all the related issues, as the assessee may deem fit, and the Assessing Officer will be required to deal with all these contentions. We remit the matter to the file of the Assessing Officer with these directions. 20. Ground no 4 is thus allowed for statistical purposes. 21. In ground no. 5, the assessee has raised the following grievance: 5. That the assessing officer erred on facts and in law in disallowing interest of Rs.87,83,92,587 paid to ABN Amro Bank, Stockholm, on its own account and in trust for other lenders under section 40(a)(i) of the Act. 5.1 That the assessin....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ntered into a multilateral agreements. The parties to these agreements were the assessee (the borrower), ABN Amro Bank Stockholm branch (the arranger) and the financial institutions actually funding the loan (the original lenders). These agreements were guaranteed by t EKN. The assessee's case was that since the assessee made the payment of interest to ABN Amro Bank NV, Stockholm branch, and since, in terms of Article 11(3) of the India Sweden Double Taxation Avoidance Agreement (229 ITR Statute 11) any interest paid, on borrowings endorsed by EKN, to a Swedish resident is not taxable in India, the assessee was not required to withhold any taxes under section 195. The assessee had also produced a certificate dated 11th September 2002 from the Swedish tax authorities to the effect that ABN Amro Bank NV Branch, Stockholm, is "a company resident in Sweden within meanings of the convention to avoid double taxation between Sweden and India" and that "the company is registered for taxes as a firm under number 516401-9761". This plea was rejected by the Assessing Officer on the ground that the ABN Amro Bank NV was in fact a Dutch resident and it had a limited tax liability in Sweden i....
X X X X Extracts X X X X
X X X X Extracts X X X X
....16. Art. 4(1) of the Indo-Dutch DTAA clearly provides that "for the purpose of this Convention, the term 'resident of one of the states' means any person who, under the laws of that state, is liable to taxation therein by reasons of his domicile, residence, place of management or any other criterion of a similar nature". The requirements for fiscal domicile cannot be satisfied by mere liability to tax in that country, but as clearly provided by art. 4(1) of the Indo-Dutch DTAA, such a liability to taxation has to be on account of domicile, residence, place of management or any other criterion of a similar nature. The question, then, is as to what are the connotations of these terms and whether source taxability of dividend income per se can generate 'treaty entitlements' of the country in which such taxes on dividends have been paid. The wordings of art. 4(1) leave no doubt about the fact that merely because a person is tax-payer in one of the countries which are party to the Indo-Dutch DTAA, i.e. in India or in Netherlands, such a person cannot be treated as 'resident of one of the states' for the purposes of the DTAA. Coming to specific tests laid down in ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....entary to the Double Taxation Conventions, the term 'other criterion of similar nature' makes clear that the enumerated criterion of domestic law which attracts tax liability are no more than examples for the rule, but Dr. Vogel has further stated that, "The term should be understood to mean any locality-related attachment that attracts residence-type taxation." An illustration given in this commentary refers to "statutory seat which, under German law, serves as an alternative point of attachment in the absence of a place of management within the domestic territory." We are in considered agreement with Dr. Vogel's observation that 'any other criterion of similar nature' should be understood to mean any locality related attachment that attracts residence type taxation. In the light of these discussions, it is clear that only 'locality related attachment' ('locality related' being the genus to which expressions 'domicile' 'residence' and 'place of effective management' belong) can be covered by the scope of expressions 'any other criterion of similar nature' in terms of art. 4(1) of the Indo-Netherlands DTAA. We are ....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... also be taxed in the State in which it arises and according to the laws of that State, but if the recipient is the beneficial owner of the interest, the tax so charged shall not exceed 10 per cent of the gross amount, amongst other, in the cases of the interest on loans made or guaranteed by a bank or other financial institution carrying on bona fide banking or financing business. It is thus beyond doubt that the taxation of interest, even according to the revenue authorities, is being done in the hands of the beneficial owner. In these circumstances, the authorities below were clearly in error in treating ABN Amro Bank as recipient and as beneficial owner of the entire interest paid by the assessee remitted to ABN-S In our considered view, even though such interest is remitted to ABN-S, since ABN -S has mainly acted as a conduit, it is to be treated as having been paid to the beneficial owners of such interest i.e. original lenders under the financing arrangement - though through the ABN-S. The taxability of interest is to be examined in the light of factual findings to be so arrived at, and in the light of the applicable legal position as per the relevant provisions of the tax t....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ssessing officer erred on facts and in law in holding that discount/trade margin given to the distributors on retail price of the prepaid products was in the nature of commission expense, on which tax was required to be deducted at source under section 194H of the Act. 6.2 That the assessing officer erred on facts and in law in holding that the business relationship between the appellant and distributors of prepaid products was in the nature of agency as against actual relationship of principal to principal, which does not fall within the purview of section 194H of the Act. 6.3 That the assessing officer erred on facts and in law in not appreciating that the appellant sold, on principal to principal basis, prepaid card/coupons, which comprised of the 'right to use airtime', a marketable product capable of being transferred, and consequently, the provisions of section 194H of the Act were not applicable Without Prejudice 6.4 That the assessing officer erred on facts and in law in not appreciating that no 'income' per se accrued in favour of the distributor, requiring deduction of tax at source under section 1....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... explanation was that since the transactions between the assessee and the distributors were in the nature of principal to principal transactions, these transactions were outside the ambit of Section 194 H, and, accordingly, disallowance under section 40(a)(ia) does not come into play. This explanation, however, was brushed aside by the Assessing Officer on the ground that, on materially identical facts and in the case of CIT Vs Idea Cellular Limited (325 ITR 148), Hon'ble Delhi High Court has decided the issue against the assessee. The assessee carried his objection to this disallowance before the DRP but without any success. The assessee is not satisfied and is in appeal before us. 31. Having heard the rival contentions and having perused the material on record, and having noted that the issue is covered against the assessee by Hon'ble High Court decisions in the case of Idea Cellular Ltd (supra) as in assessee's own case, we see no reasons to interfere in the matter. Learned counsel for the assessee has pointed out that there is no element of agency, that talk time is traded and distributed, that it's a principal to principal relationship that the assessee has wi....
X X X X Extracts X X X X
X X X X Extracts X X X X
....; 7.5 That in any case deduction in respect of the amount of discount on which tax has ultimately been paid by the payees/distributors, either in the year under consideration or in the year of filing their return of income, ought to have been allowed in view of amendment to section 40(a)(ia) of the Act. 7.6 That the assessing officer should be directed to allow deduction in respect of the amount of roaming charges on which tax has ultimately been paid by the payees/recipient, either in the year under consideration or in the year of filing of their return of income, in view of the amendment to section 40(a)(ia) of the Act. 34. It is important to take note of the fact that the issue as to whether the amounts paid for roaming charges will attract tax deduction at source under section 194 J was before Hon'ble Supreme Court in assessee's own case, reported as CIT v. Bharti Cellular Limited (330 ITR 239), and the issue was decided against the assessee in principle but the matter was remanded to the Assessing Officer (TDS) with certain directions for de novo adjudication. When this was poi....
X X X X Extracts X X X X
X X X X Extracts X X X X
....sessee has raised the following grievances: 8. That the Assessing officer erred on facts and in law in bringing to tax a sum of Rs.3,46,00,000, being non refundable security deposits received from customers in the assessment year under consideration. 8.1 That the assessing officer failed to appreciate that since the service were to be rendered over the span of the customer relationship period, the entire amount received by the appellant did not represent income which accrued in the assessment year under consideration. 8.2 Without prejudice, that the assessing officer failed to appreciate that the amount of security deposit was ultimately offered to tax in the subsequent assessment years and the entire exercise of seeking to disturb the year of taxability of income was, in any case, revenue neutral. 38. During the course of assessment proceedings, the Assessing Officer noted that the assessee had received non refundable deposits amounting to Rs 3,46,00,000, in respect of fixed line service, but, instead of treating it as a revenue receipt taxable as income, h....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... addition made by the Assessing Officer. We direct the AO to delete the same. The assessee gets the relief accordingly. 41. Ground No. 8 is thus allowed. 42. In ground no. 9, the assessee has raised the following grievance: 9. That the assessing officer/TPO erred on facts and in law in making addition/adjustment of Rs.7,14,84,331 on account of the alleged difference in arm's length price of international transaction of sale of carriage and termination of voice traffic to the associated enterprise in Singapore, viz., Singapore Communications Ltd. (Singtel). 9.1 That the assessing officer/TPO erred on facts and in law in holding that the rate charged to Singtel for sale of carriage and termination of voice traffic could only be compared with the rate charged by the appellant to the unrelated party, located in Malaysia, viz., Maxis International, which was geographically closer. 9.2 That the assessing officer/TPO erred on facts and in law in not appreciating that geographical location of the customer has no bearing on the rate charged by the appellant for sale of carriage and termination of voice traffic. 9.3 Without prejudice that the assessing officer/TPO erred on facts an....
X X X X Extracts X X X X
X X X X Extracts X X X X
....action is entered into within tolerance range of +/- 5% of arm's length price computed on the basis of Internal Comparable Uncontrolled Prices available with the assessee as the assessee has entered into similar arrangement with various other operators worldwide and the arithmetic mean of such prices is only US $ 0.061, as against US $ 0.060 charged to the AE i.e. Singtel. This plea of the assessee has been rejected by the Transfer Pricing Officer on the ground that, for the purpose of valid CUP analysis, the rate charged to the AE should be the compared with non AE in the same market or the geographically nearest market. 45. It was in this backdrop that the Transfer Pricing Officer concluded that the rates charged to Singtel should be compared with the rates charged to a Malaysian company, i.e. Maxis International, and that all other cases of Europe and USA based telecommunication operators should be rejected for CUP analysis. The TPO also noted that the assessee has charged US $ 0.071, in the cases of Maxis International, and, therefore, the valid arm's length price, under CUP method, is US $ 0.071. On this basis an ALP adjustment of Rs 7,14,84,331 was computed. Aggrieve....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ransaction; ** ** ** (2) For the purposes of sub-rule (1) the comparability of an international transaction with an uncontrolled transaction shall be judged with reference to the following, namely : (a) the specific characteristics of the property transferred or services provided in either transaction; (b) the functions performed, taking into account assets employed or to be employed and the risks assumed, by the respective parties to the transactions; (c) the contractual terms (whether or not such terms are formal or in writing) of the transactions which lay down explicitly or implicitly how the responsibilities, risks and benefits are to be divided between the respective parties to the transactions; (d) conditions prevailing in the markets in which the respective parties to the transactions operate, including the geographical location and size of the markets, the laws and Government orders in force, costs of labour and capital in the markets, overall economic development and level of competition and whether the markets are wholesale or retail. (3) An uncontrolled transaction shall be comparable to an international transaction if- (i) none of the differences, if any,....
X X X X Extracts X X X X
X X X X Extracts X X X X
....rket in which the market in which controlled transactions have taken place. In a situation in which there are indeed material differences, including, of course, for the reason of geographical location and size of markets, in our humble understanding, those uncontrolled transactions cannot constitute valid comparables for benchmarking similar transactions between the AEs. In our considered view, merely because markets of uncontrolled transactions and controlled transactions are at different locations, and irrespective of the geographical distance between the markets, the transactions in such markets do not cease to be good comparables for determining the arm's length price under the CUP method. In the light of this analysis, let us revert to the facts of the case before us. 49. The assessee has used as many as thirty internal comparables for the purpose of determining arm's length price under the CUP method. These comparables are in respect of transactions with operators from various parts of the world. The TPO has rejected all but one of these comparables on the ground that the remaining comparables are with respect to geographically different markets but, as we have seen ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ation of price for Indian segment of such a call is concerned. 52. As we have upheld the determination of arm's length price by the assessee, on the basis of CUP method as discussed above, we see no need to deal with other arguments by the assessee. 53. In view of the above discussions, as also bearing in mind entirety of the case, we deem it fit and proper to delete the impugned ALP adjustment of Rs 7,14,84,331 in respect of sale of 'carriage and termination of voice traffic'. The assessee gets the relief accordingly. 54. Ground No. 9 is thus allowed. 55. The second transfer pricing issue in this appeal is assessee's grievance against arm's length price adjustment of Rs 10,11,786 on account of interest on inter corporate deposits with the AEs. This grievance is raised by way of the grounds of appeal no. 10, as set out in the modified grounds of appeal, as reproduced below: 10. That the assessing officer/TPO erred on facts and In law in making addition/adjustment of Rs.10,11,786 on account of the alleged difference in interest charged on loan advanced to associated enterprises by applying interest rate ....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... excessive. 56. The relevant material facts, so far as this grievance of the assessee is concerned, are like this. The assessee has advanced following loans to its associated enterprises: Name of AE Loan Currency Amount in I Rs Rate of interest Bharti Airtel USA USD 4,35,90,000 7.33% p.a. Bharti Airtel UK GBP 42,27,000 7.33% p.a. Bharti Airtel Canada CAD 28,15,000 7.33% p.a. 57. The assessee's claim that the loans have been advanced at an arm's length price as, according to CUP method and on the basis of external comparables, the arm's length interest rate in such situations is LIBOR plus 160 points which works out to 6.82% whereas the assessee has charged interest @ 7.33%. The Transfer Pricing Officer was not impressed by this claim. He was of the view that, ".....the arm's length interest is to be determined by following CUP method wherein the interest rate is determined under the circumstances in which the taxpayer and the subsidiaries are operating, i.e. what is the interest rate that would have been earned if such loans are given from surplus funds to unrelated parties under similar situations as that of the subsidiaries" and that, "since the ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....el. It was also contended by the assessee that interest charged is comparable based upon the rates charged by the foreign financial institution on foreign loans taken by the assessee company. The DRP rejected the objections and, inter alia, stated as follows: As regards the comparability, the DRP has considered the arguments of the assessee and has examined the findings of the TPO in his order dated 12.10.2010. The assessee has used the CUP which is LIBOR +1.60%. The TPO has noted that the loans have been given in Indian currency and the same have been benchmarked using LIBOR which was not found to be in accordance with the comparability principles established by the TPO. The TPO also noted that the assessee company has taken loans from unrelated parties. The TPO was of the view that the loans given by the assessee company cannot be benchmarked using LIBOR as a CUP. Having considered the arguments of the assessee and the findings of the TPO, the DRP is of the view that the TPO has rightly rejected the CUP used by the assessee. The rate of 14% charged by the TPO as a CUP is found to be based on sound methodology and needs no interference. 59. It was in this backdrop that the Asse....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ng figure, towards lack of security and lender not being in the business of borrowing and lending money. 62. As far as the first adjustment is concerned, while the TPO has adopted the rate as 4% over LIBOR rate, he has not set out the specific basis of this rate. He has mentioned about some information gathered from websites of financial institutions which, according to him, states that, "for the foreign currency denominated term loans, the maximum rate of interest is 4% over 6 months LIBOR", and then proceeded to adopt this maximum interest rate as a fair basis for his computing the arm's length price. On the other hand, the assessee has taken two specific comparables of USD borrowings, i.e. L&T and Seri Infrastructure, on the interest rate of LIBOR + 150 bps and 1.4% to 1.7% band over LIBOR respectively. There is no material whatsoever, save and except for vague observations about weak financials of the subsidiaries - which are not supported by any specific facts and proceed on sweeping generalizations and assumptions, to reject the comparables taken by the assessee. When a Transfer Pricing Officer rejects comparables taken by the assessee, he has to set out specific, cogent....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ney, his risk is higher in advancing loan to a single customer than a bank, which spreads its risk among its various customers. Thus, the difference between banker and non-banker is to be kept in mind while arriving at the arm's length CUP rate based on bank rates. 7.11 Adjustment for security Usually, bankers extending loans in foreign currency also insist on sufficient security. In this case, no security is offered by the AE. Keeping in view the financial health of the subsidiary, it may not be in a position to offer security. Thus an adjustment is required to be made for not offering a security. This may be computed as the difference between the interest rates prevailing for the bonds of equivalent credit rating of the AE and sovereign government bonds in the country in which the AE is located. This can also be considered as the guarantee cost payable to the taxpayer for giving guarantee for equivalent amount of loan given to the AE i.e. the rate differential for the difference in interest spread between the credit rating of the taxpayer and the AE. Thus after the above analysis, the equivalent interest rate is the interest rate including the transaction cost for a foreign....