TaxTMI 
TaxTMI 
2014 (3) TMI 496
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....Act. 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 under section 35ABB be granted for amortized expenses. ....
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....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 and in law in disallowing emplo....
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....sition 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 `Profits and gains of business or profession'. 14. We have also noted that it is an undisputed position, as evident from the computations reproduced in the assessment order itself, that the amounts claimed as a deduction represent the actual exercise o....
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....oceedings, 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 have been added back and consequently, total amount paid to the vendor as lease rental, i.e. Rs 510.40,49,662 has been claimed as revenue deduction. Similarly, the company had an arrangement with Nortel Networks India Pvt Ltd for outsourcing its call centre activity. While the company has accounted for Nortel outsourcing agreement as finance lease, following AS 19, the company had added fixed assets by Rs 38,18,94,395 and provided for depreciation amounting to Rs 2,16,52,503 thereon. Additionally, Rs 6,07,80,057, ....
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....her 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 assessing officer failed to appreciate that there was no obligation to deduct tax at source since the interest paid to ABN Amro Bank, Stockholm, was not chargeable to tax in India under the provisions of the Act read with the overriding provisions of Article 11 of the applicable DTAA. 5.2 That the assessing officer failed to appreciate that the appellant being under bona fide belief that ABN Amro being tax resident of Sweden was eligible for benefits available under the DT....
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....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 in respect of its Swedish sourced income only. Reliance was also placed on the letter dated 17th April 2008 received from the Swedish Tax Authority, in terms of exchange of information provisions under the Indo Swedish tax treaty, which confirmed that the Stockholm branch of ABN Amro bank is liable to income tax Sweden within the meanings of the tax treaty, i.e. Article 7, and that it not a resident of Sweden as required by Article 4 of the treaty. ....
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....arly 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 the DTAA, as far as 'domicile test' is concerned, in common law, 'domicile' has a somewhat restricted meaning, denoting a fixed and lasting attachment to a country or state with its own separate legal system-one only in each case-which initially is acquired by birth ('domicile by origin'), and capable of being altered later by a personal decision ('domicile by choice'). In the case before us, the assessee....
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....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 also of the considered view that cases before us clearly fail on this test. 25. In view of the above discussions and bearing in mind the fact that ABN-S did not have any locality related attachment in Sweden which could lead to residence type taxation on global basis, in our considered view, ABN-S cannot be treated as tax resident of Indo Swedish tax treaty. Accordingly, the benefit of Article 11 (3) of Indo Swedish tax treaty cannot....
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....st, 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 treaties that India has with the jurisdictions in which original lenders are resident in. Once again, we have to acknowledge the fact that learned counsel for the assessee has filed elaborate documentation in support of their stand about tax residency status of beneficial owners of the interest paid by the assessee and has also addressed the arguments on merits, but, in the absence of this aspect of the matter having been examined by....
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....rs 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 194H of the Act. 6.5 That the assessing officer failed to appreciate that no tax could have possibly been deducted at source by the appellant under section 194H of the Act, as income accruing in the hands of the distributors was indeterminable. 6.6 That the assessing officer failed to appreciate that in the absence of any actual payment or credit of any amount in the books of the appellant, the machinery provisions c....
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....al 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 with his distributors, that flow of payment is in the reverse direction which is contrary to the concept of commission payment and that the assessee had a bonafide belief that section 40(a)(ia) will not come into play as the distributors have honoured their tax liability. However, as the issue is covered against the assessee by direct decision of Hon'ble jurisdictional High Court, we are not inclined to deal with all these arguments. Respectfully following the esteemed views of Hon'ble jurisdictional High Court, We hold that the assessee was required to deduct tax at source from the commission so allowed by the assessee, and, accordingly, his failure to do so is to ....
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....r 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 pointed out to the learned counsel for the assessee, he invited our attention to the following observations made by Their Lordships in this judgment: 8. There is one more aspect that requires to be gone into. It is the contention of respondent No. 1 herein that interconnect agreement between, let us say, M/s Bharti Cellular Ltd. and BSNL in these cases is based on obligations and counter obligations, which is called a "revenue sharing contract". According to respondent No. 1, s. 194J of the Act is not attracted in the case of "revenue sharing contract". According to respondent No. 1, in such contracts there is only sharing of revenue and, therefore, payments by revenue sharing cannot constitute "fees" under s. 194J of the Act. This submission is not accepted by the Department. We leave it there because this submission has not been examined by the Tribunal. (Emphasis by underlining supplied by us) 35. Learned counsel for the assessee then made elaborate submission....
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....mounting to Rs 3,46,00,000, in respect of fixed line service, but, instead of treating it as a revenue receipt taxable as income, has amortized the same over estimated period of customer's relationship, as derived from estimated customer churn period, in accordance with the Generally Accepted Accounting Policies. The assessee also relied upon the exposure draft of technical guide on revenue recognition for telecommunication operators, as issued by the Institute of Chartered Accountants of India. It was also noted that activation fees was also accounted on similar basis and that direct activation cost is also deferred and amortized over the same period as of activation revenue. None of these submissions, however, impressed the Assessing Officer. He was of the view that there is no specific recommendation, in the said exposure draft, with regard to non refundable security deposit and that the activation fees cannot be treated as in parity with non refundable security deposit since activation fees is in the nature of 'joining fees' for being eligible to use the services. The assessee also raised an objection before the DRP but without any success. It was in this backdrop t....
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....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 and in law in not considering volume discount while benchmarking the international transaction of sale of carriage and termination of voice traffic. 9.4 Without prejudice that the assessing officer/TPO erred on facts and in law in not appreciating that Singapore, like US, too, is a high income economy as opposed to Malaysia, which, therefore, cannot be characterized in the same economic bracket as Singapore. 9.5 Without prejudice that the assessing officer/TPO erred on facts and in law in not holding that that transaction of payment and receipt for carriage and termination of voice traffic being closely linked and ought to have been benchmarked together. 9.6 Without prejudice, that the assessing officer/TPO erred on facts and in law in not appreciating that the international transaction of sale of carriage and termination of voice traffic is to be regarded as at arm's length applying Transactional Net Margin Method (TNMM). 43. To adjudicate on grievances against this addition, only ....
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....$ 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. Aggrieved, assessee carried the matter before the Dispute Resolution Panel, but without any success. Relying upon rule 10B (2)(d), the DRP concluded that, "(f)or the purpose of comparability using CUP as a method, the requirement is that the comparables should be from same geographic location, as the associated enterprise is" and since "there was no company in Singapore with which the assessee was dealing with, other than the associated enterprise", the TPO has rightly "selected the geographically closest country i.e. Malaysia, with which the assessee was having international transaction of the same type". It is in this background that the Assessing Officer has made the impugned addition of Rs 7,14,84,331 aggrieved by which the assessee is in appeal before us. 46. We have heard the rival contentions, perused the material on record, including elaborate written submissions filed by the assessee, and duly considered factual matrix of the case as also the applicable legal position. 47. The ....
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....cluding 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, between the transactions being compared, or between the enterprises entering into such transactions are likely to materially affect the price or cost charged to paid in, or the profit arising from, such transactions in the open market; or (ii) reasonably accurate adjustments can be made to eliminate the material effects of such differences. .......................... .......................... (Emphasis supplied by us now) 48. A plain reading of the above provisions would show that geographical location of the market is one of the significant factor to the extent comparability of uncontrolled comparable transaction is to be judged, inter alia, on the basis of "conditions prevailing in the markets in which the respective parties to the transactions operate, including ....
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....s 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 above, a difference in geographical location of the market, unless resulting in different market conditions, is not a reason good enough to reject a comparable under the CUP method. There is no mention whatsoever of any commercial differences, i.e. differences in market conditions, in the market of the uncontrolled transaction and the intra AE transaction. Since the TPO has rejected these comparables, the onus is on him to demonstrate that the market conditions are so different that the uncontrolled transactions cease to be comparable with the intra AE transactions. Not only that this onus is not discharged, there is not even a suggestion that the market conditions of the uncontrolled transactions are materially different. In view ....
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....nterest 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 of 14% p.a. as against interest rate of 7.33% p.a. charged by the appellant. 10.1 That the assessing officer/TPO erred on facts and in law in disregarding internal comparable uncontrolled transaction, placed on record, for benchmarking of international transaction of payment of interest applying CUP method. 10.2 Without prejudice, that the assessing officer/TPO erred on facts and in law in not appreciating that the international transaction of interest on loans advanced to the associated enterprises, denominated in foreign currency, was required to be benchmarked considering the rate prevailing in the international market, viz., LIBOR rate. 10.3 Without prejudice, that the assessing officer/TPO erred on facts and in law in not appreciating....
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....loans are given from surplus funds to unrelated parties under similar situations as that of the subsidiaries" and that, "since the tested party is taxpayer, the prevalent interest that could be earned by the taxpayer by advancing loan to an unrelated party in India with the same weak financial health as that of the taxpayer's subsidiaries is considered". It was in this backdrop, and after an elaborate survey of Indian financial market, that the TPO opined that a rate of interest of 14% could be considered reasonable and representative of market after considering corporate bond market and financial health of the subsidiary. When it was put to the assessee, the assessee objected to the same, inter alia, on the ground that the loans were in foreign currencies, and therefore interest rate on rupee loans have no relevance, that interest has been charged from the subsidiaries over and above the costs of borrowings and in accordance with the international market standards, and that comparison with BBB grade bonds, as was done by the TPO, was not warranted as the advances were to assessee's subsidiaries. None of these submissions impressed the TPO. He was of the view that costs of ....
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.... to be based on sound methodology and needs no interference. 59. It was in this backdrop that the Assessing Officer made an ALP adjustment of Rs 10,11,786 to the interest charged from the AEs in respect of loans given to them. The assessee is aggrieved and is in appeal before us. 60. We have heard the rival contentions, perused the material on record, including elaborate written submissions filed by the assessee, and duly considered factual matrix of the case as also the applicable legal position. 61. We have noted, as has been noted in the assessment order, DRP order and TPO orders as well, that the advances to subsidiaries are in foreign currencies i.e. in British Pounds, US Dollars and Canadian Dollars. In these circumstances, the interest rates on rupee bonds and debts, which has been extensively referred to in the order of the TPO, have no relevance at all. It is only elementary that interest is nothing but time value of money and when inflation pressure on a currency is lower, as is the case with most strong currencies, the time value of money, i.e. interest, tends to be lower too. Therefore, comparing interest rate on rupee loans cannot at all be compared with inter....
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....es taken by the assessee. When a Transfer Pricing Officer rejects comparables taken by the assessee, he has to set out specific, cogent and legally sustainable reasons for doing so. On this point, therefore, the stand of the Assessing Officer cannot be accepted. 63. As for the second adjustment of 300 points for transaction cost, this adjustment is sought to be justified by the following observations of the TPO: 7.9 Transaction Cost The company, which is considering a foreign currency loan, has to bear an additional transaction cost in each year. This is because under Reserve bank of India norms, it is mandatory for borrowers to buy such forward contracts and thus banks insist that the borrower must book a forward dollar contract to hedge the position. Forward cover is assort of insurance against currency fluctuations. If the borrower does not take such cover and the rupee depreciates against the dollar, costs will go up substantially as it would need to buy dollars from the market for repaying the loan. During the FY 2006-07, the forward premia increased reflecting growing interest rate differential in view of the increased domestic interest rates. In....
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....n 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 currency loan, if given to the AE for its credit standing/rating. 66. We see no substance in this adjustment either. The TPO has taken the lender as the tested party, and yet made adjustments for higher risks on account of assumed lack of security and increased risk of single party dealing. This approach overlooks the fact that the assessee has advanced monies to its subsidiaries which are under its management and control- a factor which substantially reduces the risk rather than increasing it. On these facts, it is difficult to understand, much less approve, any rationale for adjustment on account of higher risks. On this point also, we see no merits in the stand of the TPO. 67. We have taken note of the fact that the assessee's claim is that his borrowings in the same or similar currencies are at much lower costs. Such a rate, as is noted by a coordinate bench in the case of VVF Limited v. DCIT (2010 TII 04 ITAT MUM TP), constitutes acceptable internal CUP. While holding so, ....