TaxTMI 
TaxTMI 
2017 (2) TMI 650
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....lution Panel (hereinafter referred as the 'DRP')/Transfer Pricing Officer (hereinafter referred as 'the TPO') are bad in law and void ab initio. 2. That, on the facts and in law, the Dispute Resolution Panel erred in assuming jurisdiction to enhance the total income assessed by the Assessing Officer in the draft assessment order. 2.1 Without prejudice, on the facts and in law, the Dispute Resolution Panel erred in not granting a proper opportunity of being heard and thereby violating the well settled principles of audi alteram partem. 3. That, on the facts and in law, the Assessing Officer/Transfer Pricing Officer/Dispute Resolution Panel erred in making/proposing/upholding an addition to the total income of Rs. 75,40,19,301 under Chapter X of the Income-tax Act, 1961 (hereinafter referred as 'the Act'). 4. That, on the facts and in law, the Assessing Officer/Transfer Pricing Officer/Dispute Resolution Panel erred in making/proposing/upholding the transfer pricing adjustment of Rs. 75,40,09,515 on account of advertisement, marketing and sales promotion expenses. 4.1 That, on the facts and in law, the Assessing Off....
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....ive advertisement, marketing and promotion expenses allegedly incurred by the appellant, the Transfer Pricing Officer/Dispute Resolution Panel erred in using the following companies as comparables : (i) Cosmic Global Ltd. (ii) Informed Technologies India Ltd. 5.1 That, on the facts and in law, the Transfer Pricing Officer erred in not using the comparable companies used by him in proceedings relating to the earlier assessment years. 6. That, without prejudice on the facts and in law, the Transfer Pricing Officer/Dispute Resolution Panel erred in making/upholding the applicability of a mark-up of PLR + 2.5 per cent. (i.e., 15 per cent.) on the alleged excessive advertisement, marketing and promotion expenses incurred by the appellant on behalf of the associated enterprise. 7. That, on the facts and in law, the Transfer Pricing Officer/Assessing Officer/Dispute Resolution Panel erred in proposing/making/upholding an adjustment of Rs. 9,786 on account of notional interest attributable to delayed payments receivable from the associated enterprise. 8. That, on the facts and in law, the Transfer Pricing Officer/Dispute Resolution Pane....
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....eneral in nature as it challenges the entire addition made under Chapter X of the Act. Ground Nos. 4 to 5.1 challenge the addition of Rs. 75.40 crores made by the Assessing Officer/Transfer Pricing Officer under Chapter X of the Act on account of advertisement, marketing and selling expenses (AMP). Ground Nos. 6 and 7 challenge the action of the lower authorities in making an addition of Rs. 9,786 under Chapter X of the Act on account of notional interest attributable to delayed payments receivable from the associated enterprise. Ground No. 8 challenges the action of the lower authorities in adopting a non-aggregation approach while performing benchmarking analysis on the international transactions entered into by the appellant. In ground No. 8, the appellant is aggrieved by the action of the Assessing Officer in disallowing the deduction under section 10A of the Act on data processing receipts of Rs. 22.60 crores pertaining to unit II of the appellant. Ground No. 9 challenges the levy of interest under section 234B and section 234D of the Act. Both parties agree that the levy of interest will be consequential in the nature. Since no specific adjudication is required on this issue ....
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....ellant had resulted in creation of marketing intangibles for which it should have been suitably compensated by the associated enterprise to the extent of excessive advertisement, marketing and promotion expenditure incurred vis-a-vis comparable companies. Accordingly, he applied bright line test (BLT) to determine the arm's length price of the advertisement, marketing and promotion expenses. The Transfer Pricing Officer considered the fact that in the year under consideration the percentage of advertisement, marketing and promotion (including payment for incentives) with revenue of the appellant was 39.12 per cent., whereas the percentage of advertisement, marketing and promotion with revenue of comparable companies was 0.08 per cent. Accordingly, the Transfer Pricing Officer held that the appellant had spent a sum of Rs. 65,41,24,677 on promotion of marketing intangibles owned by associated enterprise. Thereafter, applying a mark-up of PLR + 2.5 per cent. a cumulative adjustment on account of brand building of Rs. 75,40,09,515 was proposed by the Transfer Pricing Officer in his order dated January 16, 2013. In performing the above benchmarking analysis the comparable set chose....
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.... 6. Expenditure on AMP is allowable as revenue deduction even if it results in indirect benefit to third party/associated enterprise. 7. There are no deeming provisions in the Indian transfer pricing corresponding to the US Regulations. 8. Adjustment, even otherwise, not sustainable, as it is not based on any of the methods prescribed in the transfer pricing regulations. 9. Payment of incentive is because 'commercial expediency' and it is for wholly and exclusively for the business and is an allowable expense. Reliance is placed on among other on the following decisions, viz.- (a) S. A. Builders Ltd. v. CIT (Appeals) [2007] 288 ITR 1 (SC); [2006-TIOL-179-SC-IT] (b) Sassoon J. David and Co. Pvt. Ltd. v. CIT [1979] 118 ITR 261 (SC); [2002-TII-36-SCINTL] (c) CIT v. Adidas India Marketing (P.) Ltd. [2010] 195 Taxman 256 (Delhi); [2009-TII-37-HC-DEL-INTL] (d) Nestle India Ltd. v. Deputy CIT [2007-TII-4- ITAT-DEL-TP] (I. T. A. No. 2755/Delhi/2003) 10. Expenses of Rs. 61.70 crores on incentives given to the sub scribers in India is in the loyalty agreement so that the subscribers commits to use Amadeus ....
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....bution agreement between the taxpayer and the associated enterprise which is almost the same, on basis of which in the year under consideration the taxpayer is getting distribution fee in their order, vide paragraphs 23.3 and 23.4, have held that Amadeus India is a full fledged agent of its associated enterprise. The headnote of the said decision for the sake of clarity are reproduced hereunder : 'It is commonly accepted principle that an enterprise should be treated as having a permanent establishment in a State if there is under it a person acting for it, even though the enterprise may not have a fixed place of business. Thus, there can be two forms of permanent establishment : (i) fixed place or (ii) through the dependent agent. What an enterprise can do directly but if not so done directly but done through an agent appointed for the purpose it will be deemed to have been done indirectly. Even in such a situation it can be said that the enterprise carrying on the business through the efforts of such agent and, hence, can be said to have established a permanent establishment. However, all the persons other than agent of an independent status cannot be deemed to be a ....
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....ers into contract literally in the name of enterprise. The para applies equally to an agent who concludes contracts which are binding on the enterprise even if those contracts are not actually in the name of enterprise. The appellant in order to enhance its business operations has appointed AIPL as its agent who promotes the "Amadeus products" in India. AIPL in its turn has appointed various subscribers for use of "Amadeus products". Though the revenue flows only from participants who have entered into participating carrier agreement with the appellant, yet the revenue could not have been generated but for the subscribers using the "Amadeus products". In a way the revenue is generated from the participants but only on the basis of use of CRS by the subscribers. But for such use no revenue would accrue to the appellant. Thus, the agreements entered into by the AIPL with the subscribers under an authority granted to it are contracts relating to operations which constitute business proper and not merely in the nature of internal operations. Such contracts are habitually exercised and there is nothing on record to suggest that such authority was cancelled at any point of time. Therefor....
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....d promotion expenditure incurred by the taxpayer, there existed transaction between the taxpayer and the foreign associated enterprise under which the taxpayer incurred advertisement, marketing and promotion expenses towards promotion of brand which is legally owned by the foreign entity. Thus, from the above discussions, we agree with the Transfer Pricing Officer's approach that taxpayer has incurred extraordinary expenses for the promotion and development of 'Amadeus' brand and, therefore, has helped in creation of marketing intangible in India. 5.3.6 The taxpayer has further contended that the advertisement, marketing and promotion activities carried by it did not amount to international transaction as no transaction was made with the associated enterprise. This doubt, have been clarified by the amendment of the Income-tax Act by the Finance Act, 2012, through the Explanation below section 92B to provide the definition of the expression 'international transaction' and 'intangible property'. The relevant extract of the Explanation is given below : . . . . 5.3.7 Thus, this Panel, confirm the action of the Transfer Pricing Offi....
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....s and Amadeus India has been granted right to use those proprietary marks. (c) It is evident from paragraph 11.01 of article of the agreement that the assessee is not only responsible for providing access to the subscribers to the Amadeus products but is also required to promote the Amadeus products in the territory assigned to the assessee in other words the assessee shall market, promote and sale the product of the associated enterprise in India. (d) It is amply clear from the term and condition as noted in paragraph 10.02 and clause (b) of paragraph 10.05 of the agreement that the assessee shall provide marketing support to the assessee with appropriate marketing and development resources, communication facilities and promotion material at no cost to the assessee. (e) Upon expiration or termination of this agreement pursuant to article XIV of this agreement, Amadeus India shall cease to be an authorised distributor of the Amadeus products. (f) Upon the termination of the agreement Amadeus India will immediately discontinue the distribution of all Amadeus products and the use of the Amadeus systems, all licensed proprietary marks, and any names....
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.... in this regard was invited to the following objections raised before the learned Dispute Resolution Panel : "J.3 Herein, the assessee submits that the learned Transfer Pricing Officer has erred in concluding in para 5.2 of the transfer pricing order that the assessee is providing marketing support services by giving reference to paragraphs 10.02 and 10.05(b) of the distribution agreement. To the contrary, the said paragraphs of distribution agreement provide that the associated enterprise shall provide marketing and development resources and promotional materials to the assessee and not vice versa. There is no additional cost/free charged by the associated enterprise from the assessee for providing such services. The paragraphs 10.02 and 10.05(b) are reproduced hereunder for your reference : '10.02 Amadeus shall provide Amadeus India with appropriate marketing and development resources of the Amadeus group and the communications facilities of the Amadeus system and the full range of Amadeus products as they become available in accordance with the terms of applicable licences and subject to technical constraints. 10.05 Amadeus shall provide Amadeus In....
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....rts to promote Amadeus products subject to commercial constraints. All the strategic decision regarding promotional activities like how much to invest, when to invest and ways to invest are taken by Amadeus India. Further, it is emphasised that the assessee has incurred marketing expenses as an entrepreneur and not as a contract service provider. M.2 The learned Transfer Pricing Officer has misinterpreted paras 10.02 and 10.05 of the distribution agreement to conclude that Amadeus Spain was required to reimburse the advertisement, marketing and promotion expenses incurred by the assessee in terms of the said paragraphs but has not reimbursed any cost, the said paras merely obligates Amadeus Spain to provide marketing materials, marketing and development resource of the Amadeus group, communication facilities of the Amadeus system, i.e., CRS itself and Amadeus products. The assessee does get these marketing supports from Amadeus Spain time to time. Further, the Amadeus website (www.amadeus.com) maintained by Amadeus Spain, is an important means of promotion of products and services offered by Amadeus Spain. The cost of maintaining and upgrading of the website is borne by as....
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....ut the same would be subject to fresh negotiations upon termination. Even otherwise it was submitted by the learned authorised representative that events occurring on termination of the agreement are not relevant in determining whether there existed a transaction of brand promotion in the year under consideration. In this regard, our attention was invited to the decision of the honourable jurisdictional High Court of Delhi in the case of Sony Ericsson Mobile Communications India P. Ltd. v. CIT reported in [2015] 374 ITR 118 (Delhi). The learned authorised representative further submitted that the onus is on the Tax Department to demonstrate existence of an arrangement, agreement, understanding or action in concert between the appellant and its associated enterprise for incurring of brand promotion expenses on its behalf so that a "transaction" requiring benchmarking under the provision of Chapter X can be presumed on facts of the instant case. In support of his submissions following decisions of the honourable jurisdictional High Court were relied upon and a gist of conclusions drawn therein was submitted as under : "1. Maruti Suzuki India Ltd. v. CIT reported in [2016] 38....
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....not to be made by deducing difference between "excessive advertisement, marketing and promotion expenditure". . . page 50, paragraph 34 - "Transaction" cannot be presumed because of mere relationship between the parties. . . page 51, paragraph 37 - Burden on the Revenue . . . page 51, paragraph 38/page 53, paragraph 47 - Maruti Suzuki [2016] 381 ITR 117 (Delhi) followed page 51, paragraph 41 - Mere incidental benefit to associated enterprise will also not bring a "transaction" for advertisement, marketing and promotion expenses into existence. . . page 52, paragraph 46 3. Honda Siel Power Products Ltd. v. Deputy CIT reported in [2016] 7 ITR-OL 22 (Delhi); [2016] 237 Taxman 304 (Delhi) (pages 1 to 17) - Manufacturer and distributor. . . page 5, paragraph 3 - In Sony no dispute regarding existence of international trans action . . . page 11, paragraph 22 - Onus on the Revenue. . . page 11, paragraph 23 - Barring bright line test no material/evidence with revenue to show that there existed a transaction . . . page 12, paragraph 25 - Maruti Suzuki and Whirlpool followed. . . . pages 14 to 16 ....
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....d in [2015-TII-11-HC-Del-TP] 6. On the contrary, the learned Commissioner of Income-tax (Departmental representative) Shri D. K. Mishra relied upon the orders passed by the authorities below and submitted that the issue of benchmarking advertisement, marketing and promotion expenses be restored back to the file of the learned Transfer Pricing Officer/Assessing Officer. It was submitted that the above judicial pronouncements of the honourable Delhi High Court were not available with the Transfer Pricing Officer at the stage of his adjudication and, hence, an opportunity be provided to the Transfer Pricing Officer for re-examination of the aspect involving existence of a "transaction" on brand promotion. 7. In his rejoinder it was submitted by the learned authorised representative that it is well-settled that an appellate court ought not to remand a matter unless the authority below had not gone into the merits of the case and had not recorded findings on all the issues. It was his submission that all the necessary facts for adjudication of the above jurisdictional aspect are already on record. It was submitted that both the authorities below, i.e., the learned Transfer Pricing....
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....ertisement, marketing and promotion expenses by the associated enterprise can it be held that there was an "international transaction" only on the basis that the advertisement, marketing and promotion expenditure, incurred by the appellant, would have benefited the associated enterprise, who owned the brands used by the appellant. The learned authorised representative has rightly submitted that this is a jurisdictional issue, which requires a foremost adjudication and only if the answer to this issue is against the appellant that the matter then required a de novo adjudication in the light of the jurisdictional High Court decision in the case of Sony Ericsson Mobile Communications [2015] 374 ITR 118 (Delhi). The above line of adjudication is also supported by the decision of the honourable jurisdictional High Court in the case of Diakin Airconditioning India P. Ltd. [2016-TII-42-HC-DEL-TP] wherein it is held as under : "Accordingly, the court directs as under : (a) The impugned order dated October 8, 2015, passed by the Income-tax Appellate Tribunal in I. T. A. No. 5090/DEL/2010 for the assessment year 2006-07 is set aside and the said appeal is restored to the fi....
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.... Eyecare (India) Pvt. Ltd.'s case [2016] 381 ITR 227 (Delhi) as under (page 251) : "A reading of the heading of Chapter X ('Special provisions relating to avoidance of tax') and section 92(1) which states that any income arising from an international transaction shall be computed having regard to the arm's length price and section 92C(1) which sets out the different methods of determining the arm's length price, makes it clear that the transfer pricing adjustment is made by substituting the arm's length price for the price of the transaction. To begin with there has to be an international transaction with a certain disclosed price. The transfer pricing adjustment envisages the substitution of the price of such international transaction with the arm's length price. Under sections 92B to 92F, the pre-requisite for commencing the transfer pricing exercise is to show the existence of an international transaction. The next step is to determine the price of such transaction. The third step would be to determine the arm's length price by applying one of the five price discovery methods specified in section 92C. The fourth step would be to ....
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....uses (b) and (c) above cannot be read disjunctively. Even if resort is had to the residuary part of clause (b) to contend that the AMP spend of BLI is 'any other transaction having a bearing' on its 'profits, incomes or losses', for a 'transaction' there has to be two parties. Therefore, for the purposes of the 'means' part of clause (b) and the 'includes' part, of clause (c), the Revenue has to show that there exists an 'agreement' or 'arrangement' or 'understanding' between BLI and B&L, USA whereby BLI is obliged to spend excessively on AMP in order to promote the brand of B&L, USA. As far as the legislative intent is concerned, it is seen that certain transactions listed in the Explanation under clauses (i)(a) to (e) to section 92B are described as an 'international transaction'. This might be only an illustrative list, but significantly it does not list advertisement, marketing and promotion spending as one such transaction. In Maruti Suzuki India Ltd. [2016] 381 ITR 117 (Delhi), one of the submissions of the Revenue was (page 144) : 'The mere fact that the service or benefit has been ....
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....jective or purpose the idea of "person acting in concert" is as meaningless as criminal conspiracy without any agreement to commit a criminal offence. The idea of "persons acting in concert" is not about a fortuitous relationship coming into existence by accident or chance. The relationship can come into being only by design, by meeting of minds between two or more persons leading to the shared common objective or purpose of acquisition of substantial acquisition of shares, etc., of the target company. It is another matter that the common objective or purpose may be in pursuance of an agreement or an understanding, formal or informal; the acquisition of shares, etc., may be direct or indirect or the persons acting in concert may co-operate in actual acquisition of shares, etc., or they may agree to co-operate in such acquisition. Nonetheless, the element of the shared common objective or purpose is the sine qua non for the relationship of "persons acting in concert" to come into being.' The transfer pricing adjustment is not expected to be made by deducing from the difference between the 'excessive' AMP expenditure incurred by the assessee and the advertisement....
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.... one. To the question whether there is any "machinery" provision for determining the existence of an international transaction involving advertisement, marketing and promotion expenses, Mr. Srivastava only referred to section 92F(ii) which defines arm's length price to mean a price "which is applied or proposed to be applied in a transaction between persons other than associated enterprise in uncontrolled conditions". Since the reference is to "price" and to "uncontrolled conditions" it implicitly brings into play the bright line test. In other words, it emphasises that where the price is something other than what would be paid or charged by one entity from another in uncontrolled situations then that would be the arm's length price. The court does not see this as a machinery provision particularly in light of the fact that the bright line test has been expressly negatived by the court in Sony Ericsson. Therefore, the existence of an international transaction will have to be established dehors the bright line test. . . . What is clear is that it is the "price" of an international transaction which is required to be adjusted. The very existence of an international t....
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....ia Ltd. [2016] 381 ITR 117 (Delhi) the court further explained the absence of a machinery provision qua the advertisement, marketing and promotion expenses by the following analogy (page 149) : 'As an analogy, and for no other purpose, in the context of a domestic transaction involving two or more related parties, reference may be made to section 40A(2)(a) under which certain types of expenditure incurred by way of payment to related parties is not deductible where the Assessing Officer "is of the opinion that such expenditure is excessive or unreasonable having regard to the fair market value of the goods". In such event, "so much of the expenditure as is so considered by him to be excessive or unreasonable shall not be allowed as a deduction". The Assessing Officer in such an instance deploys the "best judgment" assessment as a device to disallow what he considers to be an excessive expenditure. There is no corresponding "machinery" provision in Chapter X which enables an Assessing Officer to determine what should be the fair "compensation" an Indian entity would be entitled to if it is found that there is an international transaction in that regard. In practical ter....
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.... to promote its own business. The submission of the learned Transfer Pricing Officer that clauses 10.02, 10.05, 11.01 and article XVI of the agreement indicate the existence of a "transaction" for brand promotion is not supported by contents of those clauses. The appellant's objections before the learned Dispute Resolution Panel, which we have quoted above, are acceptable. These clauses nowhere provide that the appellant will be incur ring brand promotion expenses for and on behalf of its associated enterprise or solely for its business purposes and interests. The agreement dated October 1, 2004, between the appellant and its associated enterprise is based upon the revenue sharing model in which 46 per cent. revenue is being shared by Amadeus Spain with the appellant and, hence, it is difficult to visualise that the appellant will not be incurring routine advertisement expenses in its entrepreneur capacity. Excluding the payment of incentives, which in the earlier years have been held, to be pure selling expenses the ratio of the AMP/sales of the appellant is mere 2.29 per cent. The learned authorised representative is also right in relying upon the decision of the honourable j....
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....e (India) Pvt. Ltd. [2016] 381 ITR 227 (Delhi) wherein it is held that (page 253) ". . . As far as the legislative intent is concerned, it is seen that certain transactions listed in the Explanation under clauses (i)(a) to (e) to section 92B are described as an 'international transaction'. This might be only an illustrative list but significantly it does not list advertisement, marketing and promotion spending as one such transaction . . ." hence the amendments to section 92B by the Finance Act, 2012, also do not support the case of the Revenue lastly on the observations made by the learned Dispute Resolution Panel that since the appellant is a dependent agency permanent establishment of its associated enterprise, hence, all its expenses on advertisement, marketing and promotion are being incurred by it for the benefit of associated enterprise we would like to state that this is also entirely irrelevant. While alleging as the above the learned Dispute Resolution Panel has not appreciated that the appellant has been held to be a dependent agent permanent establishment of Amadeus Spain for determination of Amadeus Spain's income, which is taxable in India. Moreover, we ma....
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....e Act for the said advertisement, marketing and promotion spent. The addition of Rs. 75,40,09,515 is, therefore, directed to be deleted. Ground Nos. 4 to 4.4 are therefore allowed. Considering our conclusions above ground Nos. 5 and 5.1 do not require any adjudication. 9. The next issue arising out of ground Nos. 7 and 8 of the appeal requiring our discussion pertains to an adjustment of Rs. 9,786 on account of notional interest attributable to the delayed payments receivable from the associated enterprise. In this regard, the learned Transfer Pricing Officer records in his order that on the year end the appellant has receivables from its associated enterprise implying that the payment for invoices raised by it have not been realised within the stipulated time as provided in the invoice/agreement. The learned Transfer Pricing Officer records that this is a separate international transaction requiring a fresh benchmarking analysis. The learned Transfer Pricing Officer further records that as per the market practice such receivables ought to have been realised within 30 days of the invoice and any excess period of credit requires a compensation of delayed interest at 15.77 per cen....
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....technology enabled services. Thus, without conceding on the issue of chargeability of interest, the assessee has proposed the calculation of interest accruing to the assessee to start after such days considered as the arm's length credit period from the date of raising of the invoice. This Panel is in agreement in principle with this argument of the assessee for determination of the arm's length credit period. Accordingly, the Transfer Pricing Officer/Assessing Officer is directed to verify and recompute the credit period based on the principle of average credit period extended to the comparable accepted finally by this Panel, the delay beyond which will be subjected to chargeability of interest. The third issue, i.e., considered at (iii) relates to charging of interest at the rate of 15.77 per cent. of the outstanding balance computed as receivables by the Transfer Pricing Officer. In paragraph 12.14 on page 89 of his order, the Transfer Pricing Officer has assigned 300 basis points to be added to the prime lending rate of SBI to take into account the various factors/risks as discussed in detail in his order. The Transfer Pricing Officer has also mentioned about v....
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....ed. The Transfer Pricing Officer/Assessing Officer is, accordingly, directed to verify the amount of receivables : (i) in case the aggregate amount of receivables from the associated enterprise does not exceed Rs. 50 crores, apply the base rate of SBI as on 30th June of the relevant previous year plus 150 basis points, and (ii) in case the aggregate amount of receivables from the associated enterprise exceeds Rs. 50 crores, apply base rate of SBI as on 30th June of the relevant previous year plus 300 basis points." 10. During the course of hearing before us it was submitted by the learned authorised representative that considering the recent pronouncement by the Mumbai Income-tax Appellate Tribunal in the case of Rusabh Diamonds v. Asst. CIT reported in [2016] 48 ITR (Trib) 707 (Mum); [2016] 178 TTJ (Mum) 425; [2016-TII-196-ITAT-MUM-TP], the learned Dispute Resolution Panel has erred in opining the first issue against the appellant. The learned Commissioner of Income-tax (Departmental representative), on the other hand, placed reliance upon the orders passed by the authorities below. 11. We have considered the arguments advanced by the parties and perused the material availab....
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....y such hypothesis and generalities. There is nothing on the records, to show such exclusions on the facts of this case. In any event, setting off of interest expenditure with interest on account of delay in realisation of debts, even if so, is not too common an occurrence and more of exceptions than the rule. The apprehensions of the Revenue are purely hypothetical and, therefore, devoid of legally sustainable merits. (paragraph 16) In view of these discussions, as also bearing in mind entirety of the case, no arm's length price adjustments can be made, in respect of delay in relation of sale proceeds. Such being conclusion, there is no need to address the specific factual arguments advanced by the asses see. In effect thus the grievance of the assessee, is upheld and direct the Assessing Officer to delete the impugned arm's length price adjustment. (paragraph 17) Explanation to section 92B There is, however, one more aspect of the matter for which the impugned arm's length price adjustment must be deleted. (paragraph 19) It is noted that everything hinges on application of the Explanation to section 92B, vide Finance Act, 2012, thoug....
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.... Well, if the 2012 amendment does not add anything or expand the scope of international transaction defined under section 92B, assuming that it indeed does not this provision has already been judicially interpreted, and the matter rests there unless it is reversed by a higher judicial forum. However, if the 2012 amendment does increase the scope of international transaction under section 92B, there is no way it could be implemented for the period prior to this law coming on the statute, i.e., May 28, 2012. The law is well settled. It does not expect anyone to perform an impossibility. (paragraph 38) It is for this reason that the Explanation to section 92B, though stated to be clarificatory and stated to be effective from April 1, 2002, has to be necessarily treated as effective from at best the assessment year 2013-14. In addition to this reason, in the light of the Delhi High Court's guidance in the case of DIT v. New Skies Satellite BV [2016] 382 ITR 114 (Delhi); 68 taxmann.com 8; [2016-TII-6-HC-DEL-INTL] also, the amendment in the definition of international transaction under section 92B, to the extent it pertains to the issuance of corporate guarantee being outs....
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....tion/deduction under section 10A/10B of the Income- tax Act, 1961. The company set up the another undertaking at a physically separate location situated at D-1, Local Shopping Centre No. 2, Vasant Vihar, New Delhi. The assessee-company was granted approval for setting up this new 100 per cent. export oriented under taking, vide letter No. STPIN/APP/682005/200575/31516 dated June 8, 2005, for which the requisite application, etc., was submitted in April, 2005. This undertaking started commercial operations with effect from April, 2005, with new business orders, new employees and new plant and machinery, this is the fourth year of operation of this undertaking under the Software Technology Parks of India Scheme. This new undertaking is engaged in the business of export (by transmission outside India through data communication link) of data processing/IT enabled services which are all duly certified by STPI- refer SOFTEX FORMS submitted to and/or certified by the Software Technology Parks of India-photocopy of which are attached to the annexed details of 'data processing software/information technology enabled exports and realisation thereof for the financial yea....
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....t the main income of the taxpayer does not comply to the provisions of section 10A of the Income-tax Act. From the computation of the income provided with the return of income and submitted before the Panel it is observed that your company has considered Rs. 400,424,626 as the profits and gains eligible for exemption under section 10A of the Income-tax Act and, accordingly, an exemption of Rs. 200,281,699 has been claimed from the income of the taxpayer. 3. In view of the above, you are requested to show cause why the exemption claimed under section 10A on the profit mentioned in paragraph 3 above should not be disallowed as per the requirements of the provisions of the Act. In case, you do not agree to the above proposition, you are requested to substantiate your reasons along with factual evidences and legal support. You are also requested to substantiate your reasons along with factual evidences and legal support. You are also requested to furnish the details of top 25 personnel employed by you drawing highest salaries in the following format. Name of the employee Designation Qualification Experiences Remuneration ....
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....79 ITD 407 (Delhi). The learned Dispute Resolution Panel, however, was not satisfied. It was held by the learned Panel that from a perusal of the agreement dated October 1, 2004, entered into between Amadeus Spain and the appellant services to be provided as per articles II and XI were in the nature of marketing and distribution of products owned by Amadeus Spain and, hence, there was no software being exported by the appellant. The learned Dispute Resolution Panel further observed that there was no export of any data or software carried out by the appellant and for carrying out support services for providing the access to Amadeus System, trouble shooting, training, help desk, etc., it was being compensated by way of information technology support fee, centre fee. During the course of hearing before the Panel CFO of the appellant-company, Mrs. Kamal Chakravarty appeared and apprised the modus operandi of the appellant's export activities, however, the learned Dispute Resolution Panel was not impressed and did not find any substance in the answers provided by the CFO. Further, from the details of employees furnished by the appellant, the learned Dispute Resolution Panel inferred....
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.... 12. During the course of hearing on November 28, 2013, it was informed by the CFO of the company that the taxpayer was having its branches at 29 stations and was spread all over the country except North-East. As observed from annexure III to Form 3CA, the assessee is having branches at Agra, Ahmedabad, Baroda, Bangalore, Bombay, Calcutta, Cochin, Calicut, Chandigarh, Delhi, Haryana, Goa, Guahati, Hyderabad, Jallandhar, Jaipur, Kanpur, Lucknow, Madras, Manga lore, Pune, Trivandrum, Varanasi, Indore, Coimbatore, Trichi, Rajkot, Nagpur, Srinagar and various offices of Delhi. Out of these, work carried out at software technology parks locations only at Delhi. The taxpayer was also required to furnish the details of the employees at all the branch offices, however, the same was not furnished. From the network of branches all over the country, where software export is not carried out, it becomes amply clear that the taxpayer is engaged in the activity of marketing and distribution of Amadeus Spain products. 13. The taxpayer has entered into loyalty agreement with various subscribers, i.e., travel agents. Three of such agreements have been enclosed with letter dated October ....
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.... carrying out marketing and distribution functions. These are as under : . . . 17. The above details make it amply clear that the receipt of Rs. 1,64,98,72,986 is in the nature of distribution fee received by the taxpayer. As per the provisions of section 10A, profit derived from such amount is not eligible for deduction under the given section. 18. The taxpayer AIPL has referred to the decision of Income-tax Appellate Tribunal in its own case for the assessment year 1996-97 Asst. CIT v. Amadeus India P. Ltd. reported in [2002] 257 ITR (AT) 23 (Delhi); [2001] 79 ITD 407 (Delhi) to claim that the Income-tax Appellate Tribunal had held that the activities of the taxpayer in producing and exporting software within section 80HHE of the Act entitles it to be claimed deduction under section 80HHE of the Act. It is claimed that the taxpayer has been exporting 'computer programme' to Amadeus Spain. This argument of the taxpayer has been perused by the Panel. It is seen that the taxpayer AIPL has not been exporting actually any software. It is rather an agent of the foreign company and has earned income under the name of distribution agreement fro....
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....ware or any other product but for facilitating the business of foreign company in India. At the cost of repetition, this Panel carrying strength from the order of the High Court in the case of its associated enterprise holds that : (a) Amadeus India is totally dependent on the associated enterprise. (b) Amadeus India's business is to provide data processing and software development services together with relative distribution of 'Amadeus products' to various subscriber of India. (c) Amadeus India functionally as well as financially is entirely dependent on the associated enterprise. (d) Amadeus India have the authority from the associated enterprise (in view of the distribution agreement) to conclude the contract with subscriber on behalf of the associated enterprise, that means what could have been done by associated enterprise directly also is being done by Amadeus India. (e) Amadeus India has been appointed as an agent who promotes 'Amadeus products' in India by appointing various subscribers for the use of 'Amadeus products'. (f) The revenue which is earned by the associated enterprise on account ....
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....". It was submitted by him that in the year under consideration as well as in earlier years no products of Amadeus Spain were being purchased and sold by the appellant. It was submitted that the sole activity performed by the appellant was that of providing the travel agents an access to the Amadeus CRS system. As such it was claimed by him that the Dispute Resolution Panel has given undue importance to the term "distribution" mentioned in the agreement. As per the learned authorised representative, like in the earlier years this year too the sole activity carried on by the appellant was to provide software connectivity for providing an access of Amadeus CRS to travel agents and for this as per the agreement it received 46 per cent. of revenue earned by Amadeus Spain. It was submitted by the learned authorised representative that software connectivity is provided by the appellant, by rendering information technology enabled services data processing services to Amadeus Spain. It was clarified by the learned authorised representative that the term "distribution" mentioned in the agreement was never activated and the agreement was implemented between the parties only vis-a-vis the dat....
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....ntative that the dependent agent (DA) and the dependent agency permanent establishment (DAPE) are two separate taxable entities as per law. It was submitted that in Amadeus Global Travel Distribution reported in [2008] 113 TTJ (Delhi) 767 ); [2010-TII-202-ITAT-DEL-INTL] the Tribunal was called upon to examine the taxability of Amadeus Spain's income in India and that activities of the appellant, which was the dependent agent, was not a subject- matter of dispute before the Income-tax Appellate Tribunal. In support of this the learned authorised representative relied upon the decision of the Mumbai Income-tax Appellate Tribunal in the case of Deputy DIT, International Taxation v. Set Satellite (Singapore) Pte Ltd. reported in [2008] 307 ITR (AT) 181 (Mum); [2007] 106 ITD 175 (Mum); [2007-TII-11-ITAT- MUM-INTL]. 13.2 The learned authorised representative, thereafter, submitted that the learned Dispute Resolution Panel has selectively referred to the factual material submitted by the appellant before it, vide submissions dated November 29, 2013. In this regard, it was submitted that the learned Dispute Resolution Panel has only reproduced the details of top 25 employees, wherea....
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.... towards the submissions dated March 4, 2005 (copy enclosed at pages 466 to 468 of paper book) wherein during the course of assessment proceedings for the assessment year 2002-03 it is submitted by the appellant as under : "A detailed note has already been submitted on the nature of activities of the assessee-company. For conducting the main activity of the assessee-company the branches/liaison offices provide the desired assistance, which can be summarised as under- (a) Training to travel agents : Provides training to agency staff on use of the reservation software with reference to the specific programmes on the host computer for them to effectively access the database on the host system and use the reservation system software. (b) Collation of raw data : Branch/liaison offices collect various raw data in their area, i.e., agency data for software connectivity, profile modification requests, software access change requests, etc., collate the data so collected and forward to operations office in Delhi for processing online in the host. Branches also act as a local contact point in case of software problems, connectivity related issues and forward all suc....
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....im for deduction under section 10A of the Act. The learned Dispute Resolution Panel at page 6 notes that the terms of distribution agreement applicable during the year under consideration "are almost the same" as applicable in the assessment years 1996-97 and 1997- 98, when export deductions were for the first time claimed by the appellant. While examining the claim for deduction under section 80HHE and section 10A vis-a-vis unit I, a co-ordinate Bench of the Tribunal in the appellant's own case has noted the following crucial facts and conclusions which are reproduced as under : Expert opinion of STPI authorities on appellants activities In view of the reply of the assessee, the Assessing Officer referred the issue to Software Technology Park, Noida (STP for abbreviation) vide letter dated February 23, 1998, to clarify, inter alia, whether the information being sent abroad by the assessee was a "programme" or "data" and "data entry transaction". The Assistant Director (Tech) of STP, vide his letter dated February 26, 1998, replied as under : "M/s. Amadeus (India) (P.) Ltd. is involved in data procession activity/data entry jobs. They have a main computer in ....
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....r : "According to the details given by you, M/s. Amadeus India Pvt. Ltd. is merely collating information (data) from customers and doing bit of processing (collating) and forwarding the collated information (not any software programme) to its German counterpart." 30. This information was communicated to the assessee-company. In response to which the assessee had stated that NIC has given their opinion on the basis of information about the assessee given to them by the Assessing Officer. If the Assessing Officer himself has not put the correct facts before the NIC the opinion is bound to be incorrect. In this connection the assessee had stated that following points mentioned in the letter of NIC were not correct. 1. The appellant-company (Amadeus India) is not a subsidiary of Amadeus Germany. It is an independent company doing work for Amadeus Global Travel Distribution. 2. NIC has erred in stating that Amadeus India does message switching. This message switching, i.e., connecting to host centres, is done by SITA Telecommunication. They, in turn, are using VSNL. 3. Amadeus India does not merely collect information from....
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....ter received from the software technology park but he was of view that as the finding of the software technology parks was based on customs notification and not any notification under the Income-tax Act the same was not applicable in the Income-tax proceedings. We differ with the Assessing Officer in this regard. As per Explanation (b) of section 80HHE "computer software" means any "computer programme". But once the scope of the words "computer programme" was not explained in section 80HHE we have to go by the global meaning of the word. The doctrine of pari materia is very relevant for this purpose. As per this doctrine the Explanation/meaning of a particular word could be imported if the same was not contrary to the provisions of the importer Act. Department of Electronics, Government of India, the Customs Department, Department of Revenue, National Informatics Centre, Planning Commission and the ESC were authorised Government/Government controlled organisations from where the meaning of a particular word could be imported. This will be in consonance with the doctrine of pari materia. We, therefore, feel that the meaning of the words "software development", computer programme cou....
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....a-computer at Erding in Germany, so as to enable the travel agents in its marketing region draw on the available information for their benefit. Its activities are to issue instructions to the master-computer to recognise the operators, identify them and provide them access to specific portions of the database. There can be no doubt whatever, for the reasons discussed above, that the assessee manufactures, produces and exports software within the meaning of the three specified sections of the Act. It is open to it to claim exemption under any one of these sections and as is well established by pertaining to interpretation of taxing statutes is entitled to choose that one which is most favourable to it in any particular assessment year. 15.1 The above conclusions of the co-ordinate Bench clearly highlight the nature of data processing activities carried on by the appellant. We find no reason for not following the above binding precedent. Moreover, the Tax Department has also accepted the above decision. The learned Dispute Resolution Panel has vehemently harped upon the fact that the nature of activities carried on by the appellant is solely distribution and marketing and not expo....
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....ed Dispute Resolution Panel takes note of top 25 employees but omits to take into consideration crucial fact that the director of the appellant-company, Shri Ankur Bhatia, is a software engineer with 16 years of experience. Moreover, the division-wise break up of the total employees strength has also partially been reproduced by the learned Dispute Resolution Panel in its order. The appellant, vide submissions dated November 29, 2011, has submitted following details : Division-wise break-up of total staff strength Division Number Operations 518 Accounts/Administration 40 Business development 103 Marketing and corporate communications 8 Utility staff 78 Total 747 Name of division No. of software engineers in the division No. of software engineers in the division No. of data processors/other personnel providing services eligible under section 10A No. Minimum required qualification No. Minimum required qualification No. Minimum required qualification 75 BSc-Eng, BE., BCA, B. Tech or similar qualification 18 Diploma in software application/programming or simi....
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....the Reserve Bank of India. There was no evidence brought on record at any stage that the Indian branches had exceeded the limits prescribed for it by the Reserve Bank of India. As long as the Indian officers were conducting the operations within the restricted area and so long as those activities were not considered by the Reserve Bank of India, which is the concerned authority as amounting to anything other than carrying on of liaison work no inference adverse to the assessee can be drawn or is possible to draw. To repeat what all that was done by the assessee fell within the parameters of supplying of information which is preparatory to and auxiliary to the formation of the final contracts." The appellant has clarified the above that like the earlier years in the year under consideration also the sole activity carried on by it was that of providing the travel agents an access to the Amadeus CRS System by rendering information technology enabled services data processing services. The facts on record also show that the appellant has not carried on any "distribution" functions though the agreement provided to the same. The Dispute Resolution Panel's action in the presen....
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....e 195 of 307 ITR (AT)) : "The particular difficulty in the case of a dependent agent permanent establishment is that dependent agent permanent establishment itself is hypothetical because there is no establishment-permanent or transient-of the general enterprise in the permanent establishment State. The hypothetical permanent establishment, therefore, must be visualised on the basis of presence of the general enterprise as projected through the permanent establishment, which in turn depends on functions performed, assets used and risks assumed by the general enterprise in respect of the business carried on through the permanent establishment. The dependent agent permanent establishment and dependent agent has to be, therefore, be treated as two distinct taxable units. The former is a hypothetical establishment, taxability of which is on the basis of revenues of the activities of the general enterprise attributable to the permanent establishment, in turn based on the FAR analysis of the dependent agent permanent establishment, minus the payments attributable in respect of such activities, in simple words, whatever are the revenues generated on account of functional analysis....
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....to refer to the decision of Amadeus Global Travel Distribution S. A. (supra) wherein the Tribunal has held as under : ". . . Thus where the entire activity of an enterprise are not carried out in a Contracting State where the permanent establishment is situated, than only so much of the profit as is attributable to the functions carried through the permanent establishment can be taxable in such source State. While dealing with the question as to what is such part of income as is reasonably attributable to the operations carried out in India, we have held that only 15 per cent. of the revenue generated from the bookings made within India is taxable in India. The same proportion has to be adopted here while computing profit attributable to the permanent establishment. We have also held that since the payment to the agent in India is more than what is the income attributable to the permanent establishment in India, it extinguish the assessment as no further income is taxable in India. It is to be noted that even in the first assessment framed by the Assessing Officer, the entire expenses in the form of remuneration paid to AIPL was held as allowable deduction and was reduced ....
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.... section 10AA of the Act. The learned Commissioner of Income-tax (Appeals) has met out the objections raised by the Assessing Officer to justify his denial of the claimed deduction. The services rendered by the assessee to Galileo have been compared by the learned Commissioner of Income-tax (Appeals) with the services rendered by Amadeus India to Amadeus group of companies. If we compare the working of the assessee with Amadeus India undisputedly was in the same line of business. In the case of Amadeus India (supra), the Income-tax Appellate Tribunal has held that the Amadeus India was performing the functions of a programme exporter. They do not add more entries to the database as done by the travel agent. In fact, it has no direct interest in adding to, or drawing extracts from the database built into the computers like the several operators all the world over but what it does actually is to supplement the function of the Amadeus group by preparing and transmitting programs to the latter for the incorporation into the portion or 'partition' in its mega computers at Erding in Germany, so as to enable the travel agent in marketing reason drawn on the available information f....
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.... and conversion software, data processing, the profit and loss account show data processing software export, software development services income, auditor's report has certified that the assessee has been engaged in the development of computer software and information technology enabled product and services. The auditor's report also talks about the revenue depicted under data processing software has been/is being certified by the Office of Development Commissioner, Noida, Noida special economic zone. Export as per the Special Economic Zones Act, 2005 in relation to the 'special economic zones' means taking goods, or providing services out of India from a special economic zones means taking goods, or providing services out of India from a special economic zone by land, sea, air or by any other mode whether physical or otherwise. And above all, as per section 51 of the Special Economic Zones Act, notwithstanding anything inconsistent therewith contained in any other law for the time being in force, the provisions of the Special Economic Zones Act will prevail. We, thus, do not find infirmity in the first appellate order in coming to the conclusion that the assessee i....
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...., of the overseas entities (Amadeus or Galileo) by preparing and transmitting the locally generated travel related data to them for incorporation and synthesis into the core database, maintained in the mega computers overseas, so as to enable travel agents (operating within the assessee's marketing region) to draw on the available and updated information, for their benefit. The assessees issued instructions to the respective master computer (of Amadeus or Galileo) to enable recognition that identification of tour operators and facilitate access to them of specific portion (segment) of the composite data basis. CRS is a system connected with a database carrying various kinds of information pertaining to several airlines and other travel services provides is used for booking airlines tickets, cabs, hotels and like travel facilities across the globe. Airlines hotels, cabs agencies and other services providers pay fee to the overseas entities (Amadeus or Galileo) for bookings made by employing the CRS. The assessee process the data generated by their accredited travel agent in India, at their respective software technology parks unit and align and interface such information as per ....