TaxTMI 
TaxTMI 
2016 (8) TMI 324
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....xpayer at an income of Rs. 2,04,97,83,446 by making following additions/disallowances:- Particular Amount (in Rs.) Adjus Adjustment on account of arm's length price of: ITes Rs..55,11,71,637 Royalty Rs.28,36,01,903 Rs. 83,47,73,540 Disall Disallowance of prior period expenses Rs. 54,33,214 Disallowance of deduction under section 10A Rs. 8,40,63,585 3. The business activities of the assessee is that IBM Daksh is the leading provider of BPO services to Fortune 500 companies in the transaction processing and customer care services segments. Daksh offers remote support services including customer care and technical support through multiple communication channels, back-end transaction processing, outbound collections, telemarketing and web based services including real-time chat. IBM Daksh's unique 'co-sourcing' model and 100 percent BPO focus the enabled IT to re-engineer processes and also provide value-added services. The international transactions entered into are tabulated below:- S. No. Types of International Transaction Total Value of Transaction (Amount in Rs.) 1 Impor Import of capital Equipments 18,444,842 2 Provisi Provision of ....
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....ethod. Hence, TPO determined the ALP of the transaction relating to Royalty to be at "Nil" and thus, proposed as an adjustment of Rs. 28,36,01,903/-. 5. Aggrieved, the assessee raised objections before the DRP. The objections raised by the assessee and the subsequent adjudication by the DRP thereon are as under: i. The assessee's objection before the DRP was whether in the facts of the case, the AO/TPO was right in using assesment year data, as against multiple year data selected by the tax payer. The DRP rejecting the assessee's objection held that it is always advisable to use current year data only unless there are compelling reasons to adopt previous year data for the comparability analysis. ii. The assessee's second objection before the DRP was whether the AO/TPO's action by applying the various filters was right in rejecting few of tax payer's comparables and including new comparables, while making the comparability analysis. In this regard, the DRP - a) Upheld the TPO's action of rejecting companies having ITes income of less than 75% of the total income as such companies would not be functionally similar to that of the assessee. b) Upheld the TPO's action of rejecti....
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.... issue, the assessee objected to the proposal disallowance of prior period expenses amounting to Rs. 54,33,214/-. This objection of the assessee was also rejected. 6. The assessment order u/s 144C r.w.s. 143(3) was consequently passed on 25.02.2014 at a total income of Rs. 2,01,86,30,817/-. Aggrieved, the assessee has raised the following grounds of appeal before us: "That on the facts and circumstances of the case, and in law: 1. The assessment order passed by the Learned Assessing Officer ('Ld. AO') pursuant to the directions of Learned Dispute Resolution Panel ('Ld. DRP') is bad in law and void ab-initio. 2. The Ld. AO (following the directions of the Ld. DRP), erred on facts and in law in enhancing the income of the Appellant by Rs. 52,00,18,918 holding that the international transaction pertaining to provision of business process outsourcing ('BPO') services do not satisfy the arm's length principle envisaged under the Income-tax Act, 1961 ('the Act'), and in doing so have grossly erred in: 2.1 rejecting the Transfer Pricing ('TP') documentation maintained by the Appellant and in invoking provisions of 92C(3) of the Act contending that the information or data u....
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.... the order in contrast with the recent judicial pronouncements in this regard; and 3.2 holding that as per the facts of the case of the Appellant, no independent party would have paid made a payment for royalty. 4. On the facts and in the circumstances of the case and in law, the Ld. AO erred in reducing telecommunication charges of Rs. 251,278,420 from the export turnover in recomputing the deduction allowable under section 10A of the Act. 4.1 The Ld. AO erred in law in reducing telecommunication charges of Rs. 251,278,420 only from the export turnover and not making any corresponding reduction in the total turnover while re computing the deduction under section 10A of the Act. 5. On the facts and in the circumstances of the case and in law, the Ld. AO erred in disallowing prior period expenses of Rs. 5,433,214, without appreciating that the same were crystallized during Financial Year 2008-09. 5.1 That on the facts and in circumstances of the case , the Ld. AO ought to be directed to enhance the deduction under section 10A/10AA of the Act by increasing the profit of the 10 A/ 10 AA undertaking by the amount of disallowance of prior period expenses. 6. The Ld. AO has g....
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....earch Pvt. Ltd. vs. ITO in ITA No. 159/Hyd./2014 for the exclusion of Acropetal Technologies Ltd. (Seg.), Cosmic Global Ltd., Eclerx Services Ltd. and Infosys BPO Ltd. Reliance was further placed on the decision of the Hyderabad Bench in Hyundai Motors India Engineering P. Ltd. vs. DCIT in ITA No. 255/Hyd/2014 for the exclusion of Acropetal Technologies Ltd. (seg.), Cosmic Global Ltd., Eclerx Services Ltd. and Infosys BPO Ltd. from the list of comparables. The Ld. AR also relied on numerous other decisions of the co-ordinate Benches of the Tribunal for the exclusion of these four companies from the list of comparables. On Coral Hub (formerly known as Vishal Information Technology), the Ld. AR submitted that the same ought to be excluded and reliance was placed on the decisions of the Hon'ble Delhi High Court in the Rampgreen Solutions Pvt. Ltd. vs. CIT in ITA No. 102/2015. 9. On the issue of Royalty (ground No. 3), the Ld. AR drew our attention to pages 702/707 of the paper book containing the relevant portions of the marketing royalty agreement executed between IBM World Trade Corporation and IBM Daksh Business Process Services Pvt. Ltd. The Ld. AR submitted that the Royalty has ....
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.... of the global IBM group, IBM Daksh has access to standard IBM policies and procedures, which are used in the selling process and service delivery. The use of standard IBM global policies and procedures ensure that the quality of its services and offerings are consistent across all IBM entities globally. These IBM policies and procedures are created and owned by IBM U.S. and are acquired by IBM Daksh from IBM U.S. IBM Daksh tailors these tools and procedures to suit the local environment in order to better service their customers. It was submitted that IBM Daksh is continuously dependent on the technology and innovation which IBM Corporation conducts at their end. There is a clear nexus between the technologies, intangibles, trademarks, etc. owned by IBM and the services rendered by IBM Daksh. IBM Daksh would not be in a position to operate in the Indian market, without the support of the intangibles licensed to it. 10. On the issue of benefits being reaped from the payment of royalty, it was submitted that IBM Daksh has been reaping the benefits of the continuous R&D activities which IBM Corporation engages in. As IBM's intangibles are proprietary and integral to the solution....
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....k'. If it has value, it can generate licensing revenue and boost a company's bottom line. It was submitted that approximately three-quarters of the total market capitalization of fortune 500 enterprises in the late 1990's is accounted for in intangibles such as patents, trademarks, know-how and customer relationships. The exportation of intangible assets to the United States has reached such a magnitude that the level of royalty income and license fees paid to US corporations tripled from 1990 to 2004. To substantiate these statistics, it is sufficient to mention that Round Island One, Microsoft's intellectual property holding company located in Ireland, earned nearly USD 9 billion in taxable income by exploiting intangible assets acquired via cost-sharing agreements entered into with its US parent. 11. The Ld. AR submitted that the entire royalty payment was disallowed because as per the TPO, the benefit test was not satisfied. He relied on the decision of the Hon'ble Delhi High Court in the case of EKL Appliances in ITA No. 1068/2011 & 1070/2011 for the proposition that the Tax Department cannot dictate to the tax payer whether to incur a particular expenditure o....
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....y be sent back to the TPO to determine the exact benefit which had accrued to the assessee so as to compute the royalty which could be allowed. On the issue of prior period items/expenses, the Ld. DR relied on the findings of the DRP. 15. We have heard the rival submissions and perused the material on record. Coming to the issue of comparables, it is seen from the Transfer Pricing Study (Pg 374 of the Paper Book) that the business units (BU) at IBM Daksh are categorized as under - - Telecom BU catering to clients engaged in telecommunications - eCom & Travel BU catering to clients engaged in online retail sales, travel and hospitality - Tech support BU catering to clients engaged in technical support - Banking, Financial and Insurance BU catering to clients engaged in banking, finance and insurance - Mumbai BU catering to clients engaged in telecom, insurance, internet service provider, travel and overseeing Pune centre - Bangalore BU catering to clients engaged in finance and accounting - Talent and Transformation BU constituted to meet the head count requirements of other BU's The TP Report further specifies that IBM Daksh provides services using the following channels -....
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....ssessee company which is engaged in providing low end ITES enabled call centre services to its AE. The fact Eclerx Services Ltd. is providing high end services involving special knowledge and domain expertise is evident from the company's own reply to the notice u/s 133(6) which is placed at pages 976 to 979 of the paper book filed by the assessee. The Hon'ble Special Bench of the Tribunal in case of Maersk Global Centre (India) (P.) Ltd. v. Asstt. CIT [20141 147 ITD 83/43 taxmann.com 100 (Mum.) had excluded Eclerx Services Pvt. Ltd. from the list of comparables for the reason that it is providing high end services involving specialised knowledge and domain expertise and same cannot be compared with companies which are mainly engaged in providing low end services to group companies. The relevant finding of the Hon'ble Tribunal read as follows:- "In so far as M/s eClerx Services Limited is concerned, the relevant information is available in the form of annual report for financial year 2007-08 placed at page 166 to 183 of the paper book. A perusal of the same shows that the said company provides data analytics and data process solutions to some of the largest brands in....
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....he direction of the DRP." The above ruling of the Special Bench is equally applicable to the facts of the assessee case as is evident from the functional profile of the assessee company. For the aforesaid reasons, we direct that Eclerx Services Ltd. be excluded from the final list of comparables. (iii) Cosmic Global Ltd - The assessee has relied on the decision of the ITAT Delhi Bench in Mercer Consulting (India) Pvt. Ltd. vs DCIT in ITA 966/Del/2014 for the exclusion of this company whereas it is the department's plea that this company was originally included in the list of comparables by the assessee itself and hence the assessee is precluded from raising objection to the same. In this regard, we are of the considered opinion that the law does permit either of the parties to raise a ground not taken earlier but first time before the Tribunal and its past conduct will not have any adverse bearing on its rights if the adjudication of that issue goes to the root of the entire matter. We therefore permit the assessee to raise objections against this comparable but in the interest of justice restore the adjudication on the inclusion/exclusion of this company from the final set of c....
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....ting margin of eClerx, thus, could not be included to arrive at an ALP of controlled transactions, which were materially different in its content and value. In Maersk Global Centers (India) Pvt. Ltd. {supra), the Special Bench of the Tribunal had noted the same and had, thus, excluded eClerx as a comparable. It is further observed that the comparability of eClerx had also been examined by the Hyderabad Bench of the Tribunal in M/s Capital Iq Information Systems (India) (P.) Ltd. v. Additional Commissioner of Income-tax (supra), wherein, the Tribunal directed the exclusion of eClerx as a comparable for the reason that it was engaged in providing KPO Services and further that it had also returned supernormal profits. 38. In our view, even Vishal could not be considered as a comparable, as admittedly, its business model was completely different. Admittedly, Vishal's expenditure on employment cost during the relevant period was a small fraction of the proportionate cost incurred by the Assessee, apparently, for the reason that most of its work was outsourced to other vendors/service providers. The DRP and the Tribunal erred in brushing aside this vital difference by observing th....
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....on actually undertaken by the associated enterprises as it has been structured by them, using the methods applied by the taxpayer insofar as these are consistent with the methods described in Chapters II and III. In other than exceptional cases, the tax administration should not disregard the actual transactions or substitute other transactions for them. Restructuring of legitimate business transactions would be a wholly arbitrary exercise the inequity of which could be compounded by double taxation created where the other tax administration does not share the same views as to how the transaction should be structured. 1.37 However, there are two particular circumstances in which it may, exceptionally, be both appropriate and legitimate for a tax administration to consider disregarding the structure adopted by a taxpayer in entering into a controlled transaction. The first circumstance arises where the economic substance of a transaction differs from its form. In such a case the tax administration may disregard the parties' characterization of the transaction and recharacterise it in accordance with its substance. An example of this circumstance would be an investment in an associ....
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...." 17. The significance of the aforesaid guidelines lies in the fact that they recognise that barring exceptional cases, the tax administration should not disregard the actual transaction or substitute other transactions for them and the examination of a controlled transaction should ordinarily be based on the transaction as it has been actually undertaken and structured by the associated enterprises. It is of further significance that the guidelines discourage restructuring of legitimate business transactions. The reason for characterisation of such re-structuring as an arbitrary exercise, as given in the guidelines, is that it has the potential to create double taxation if the other tax administration does not share the same view as to how the transaction should be structured. 18. Two exceptions have been allowed to the aforesaid principle and they are (i) where the economic substance of a transaction differs from its form and (ii) where the form and substance of the transaction are the same but arrangements made in relation to the transaction, viewed in their totality, differ from those which would have been adopted by independent enterprises behaving in a commercially ration....
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....here is no receipt of income. Whatever is a proper outgoing by way of expenditure must be debited irrespective of whether there is receipt of income or not. That is the plain requirement of proper accounting and the interpretation of Section 57(iii) cannot be different. The deduction of the expenditure cannot, in the circumstances, be held to be conditional upon the making or earning of the income." It is noteworthy that the above observations were made in the context of Section 57(iii) of the Act where the language is somewhat narrower than the language employed in Section 37(1) of the Act. This fact is recognised in the judgment itself. The fact that the language employed in Section 37(1) of the Act is broader than Section 57(iii) of the Act makes the position stronger. 20. In the case of Sassoon J. David & Co. Pvt. Ltd. v. CIT, (1979) 118 ITR 261 (SC), the Supreme Court referred to the legislative history and noted that when the Income Tax Bill of 1961 was introduced, Section 37(1) required that the expenditure should have been incurred "wholly, necessarily and exclusively" for the purposes of business in order to merit deduction. Pursuant to public protest, the word "necessar....
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....tated above, even on merits the disallowance of the entire brand fee/ royalty payment was not warranted. The assessee has furnished copious material and valid reasons as to why it was suffering losses continuously and these have been referred to by us earlier. Full justification supported by facts and figures have been given to demonstrate that the increase in the employees cost, finance charges, administrative expenses, depreciation cost and capacity increase have contributed to the continuous losses. The comparative position over a period of 5 years from 1998 to 2003 with relevant figures have been given before the CIT (Appeals) and they are referred to in a tabular form in his order in paragraph 5.5.1. In fact there are four tabular statements furnished by the assessee before the CIT (Appeals) in support of the reasons for the continuous losses. There is no material brought by the revenue either before the CIT (Appeals) or before the Tribunal or even before us to show that these are incorrect figures or that even on merits the reasons for the losses are not genuine." 18. Similarly, the Hon'ble Delhi High Court has opined in CIT vs. Cushman and Wakefield (India)(P) Ltd 367 ITR ....
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....d and cannot be justified on the facts of the case. Therefore, we are not in a position to uphold any of the contentions raised by TPO in his order. Likewise, the disallowance of various service fees including reimbursements made by assessee to AE. Since we do not find any valid reason for TPO to disallow these expenditures, we have no other go than to set aside the entire order of the TPO which is based on wrong presumptions- and propositions. DRP unfortunately, even though consisted of three senior officers, did not apply its mind to the valid objections raised by assessee. In view of this, without deciding the merits of various issues, we set aside the orders and direct the TPO to re-consider the entire order and analyse them in fresh, first by determining the most appropriate method and then analyzing the transactions under the provisions of the TP. The orders of the TPO/DRP on the TP issues are therefore set aside and the entire issue on TP analysis is restored to the file of AO for fresh consideration. The grounds raised are accordingly allowed for statistical purposes." 20. The Visakhapatnam Bench of the ITAT has opined in the case of LG Polymers India (P) Ltd. Vs ACIT in ....
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....t the payment of royalty cannot be examined divorced from the production and sales. Royalty is inextricably linked with these activities. In the absence of production and sale of products, there would be no question arising regarding payment of any royalty. Rule 10A (d) defines 'transaction' as a number of closely linked transactions. Royalty, then, is a transaction closely linked with production and sales. It cannot be segregated from these activities of an enterprise, being embedded therein. That being so, royalty cannot be considered, and examined in isolation on a standalone basis. Royalty is to be calculated on a specified agreed basis, on determining the net sales which, in the present case, are required to be determined after excluding the amounts of standard bought out components, etc., since such net sales do not stand recorded by the assessee in its books of account. Therefore, it is our considered opinion that the assessee was correct in employing an overall TNMM for examining the royalty....." 22. In the case of DCIT - LTU vs CLSA India Ltd. (2013) 33 taxmann.com 260 (Mumbai Tribunal), the Bench held that CUP method cannot be applied if the relevant information is....