TaxTMI 
TaxTMI 
2016 (8) TMI 324
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....ional transactions, proposed to assess the taxpayer 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 (Am....
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....by applying most appropriate method. Further, relying on "the principle of benefit test", TPO held the CUP to be the most appropriate method. 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 les....
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....jected to the AO's proposal to reduce communication charges of Rs. 25,12,78,420/- from the Export Turnover for the purpose of claiming deduction u/s 10A. This objection of the assessee was overruled by the DRP. vii. Further, on the corporate tax 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 In....
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....isaged under the Act and in doing so have grossly erred in: 3.1 holding that the Appellant did not receive any tangible benefit in lieu of the payment of royalty; thereby challenging the commercial wisdom of the Appellant in making payment for royalty and passing 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 o....
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....Bench of the ITAT in BNY Mellon International Operations vs. DCIT in ITA No. 23/PN/2014 for the exclusion of E-clerx Services Ltd. and Cosmic Global Ltd. from the list of comparables. Reliance was further placed on the decision of the Hyderabad Bench of the ITAT in Excellence Data Research 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....
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....sing activities in support of the IBM logo, trademarks, and trade names and therefore owns all of the IP associated with them. IBM worldwide subsidiaries do not own these intangibles but licenses the right to use them to conduct their sales, marketing and services activities. Being part 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....
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....ternational software companies to fashion brands, character brands, publishing firms, artists and performers, companies worldwide engage in licensing tangibles and unique, valuable intangibles including innovative technologies, brands, know-how, customer lists or simply a certain 'look'. 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 a....
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....n the Annual Reports of the disputed companies in support of his argument. It was submitted that the functional profile of all these companies was similar to that of the assessee and hence the same were correctly selected by the TPO. On the issue of Royalty, the Ld. DR submitted that the issue may 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 ser....
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....i Bench of the ITAT in iQor India Services P. Ltd Vs. ITO in ITA Nos. 5934 and 6034/Del/2012 have held as under:- "Eclerx Services Ltd. Eclerx is engaged in providing data analytics services with expertise in financial service and retail and manufacturing. The service provided by the company are high end in nature involving special knowledge and domain expertise and therefore, not functionally comparable with the assessee 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....
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.... compared with the functional profile of M/s eClerx Services Pvt. Ltd. and Mold-Tek Technologies Ltd., it is difficult to find out any relatively equal degree of comparability and the said entities cannot be taken as comparables for the purpose of determining ALP of the transactions of the assessee company with its AEs. We, therefore, direct that these two entities be excluded from the list of 10 comparables finally taken by the AO/TPO as per the 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....
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....dle and back-office support, portfolio risk management services and various critical data management services. Clearly, the aforesaid services are not comparable with the services rendered by the Assessee. Further, the functions undertaken (i.e. the activities performed) are also not comparable with the Assessee. In our view, the Tribunal erred in holding that the functions performed by the Assessee were broadly similar to that of eClerx or Vishal. The operating 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. ....
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....rable parts of a single unified business. After referring to article 9 of the model convention and stating the arm‟s length principle, the guidelines provide for recognition of the actual transactions undertaken" in paragraphs 1.36 to 1.41. Paragraphs 1.36 to 1.38 are important and are relevant to our purpose. These paragraphs are reproduced below: - "1.36 A tax administration's examination of a controlled transaction ordinarily should be based on the transaction 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 appr....
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....tions as may have been structured by the taxpayer to avoid or minimize tax. In such cases, the totality of its terms would be the result of a condition that would not have been made if the parties had been engaged in arm's length dealings. Article 9 would thus allow an adjustment of conditions to reflect those which the parties would have attained had the transaction been structured in accordance with the economic and commercial reality of parties dealing at arm's length." 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 ....
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....rade. It does not require the presence of a receipt on the credit side to justify the deduction of an expense. The question whether an expenditure can be allowed as a deduction only if it has resulted in any income or profits came to be considered by the Supreme Court again in CIT v. Rajendra Prasad Moody , (1978) 115 ITR 519, and it was observed as under: - "We fail to appreciate how expenditure which is otherwise a proper expenditure can cease to be such merely because there 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 broade....
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....ed to have been incurred or laid out for the purposes of business, it is no concern of the TPO to disallow the same on any extraneous reasoning. As provided in the OECD guidelines, he is expected to examine the international transaction as he actually finds the same and then make suitable adjustment but a wholesale disallowance of the expenditure, particularly on the grounds which have been given by the TPO is not contemplated or authorised. 23. Apart from the legal position stated 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. I....
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....ee-company. The TPO's analysis of AMP expenses are also not correct. Even though Italcementi Group was being used from earlier years, AMP expenses of current year also included in this, which is not correct. Moreover, Italcementi Group itself is a 50% shareholder in the assessee-company from the beginning. Therefore, it cannot be stated that 'Zuari Cements' is exclusive brand owner of the Birla Group in exclusion of Italcementi Group. The entire approach by the TPO is biased 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 e....
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....covers within its ambit the royalty transactions in question too and hence the Department's contention for applying the CUP method is erroneous. We draw support from the decision of the Mumbai Bench of the Tribunal in Cadbury India Ltd. vs ACIT in I.T.A. No. 7408/Mum/2010 and I.T.A. No. 7641/Mum/2010 wherein the Bench has upheld the use of TNMM for royalty by holding: "33. The TPO has made the disallowance in question mainly on the basis of the benefit test. In this regard, it is seen that 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....