TaxTMI 
TaxTMI 
TaxTMI 
2017 (9) TMI 1257
X X X X Extracts X X X X
X X X X Extracts X X X X
.... 1 - Double addition on account of income suo moto offered to tax in the income 1.1 On the facts and Circumstances of the case, the learned AO has erred in making addition of Rs. 109,111,565 on account of income relating to financial year 2008-09 (i.e. financial year relevant to tire subject assessment Wear) reported as prior period income in the financial statement for the subsequent financial year (i.e. Financial year 2009-10 relevant to AY 2010- 11) 1.2 On the facts and circumstances of the case, the learned AO has erred in not taking cognizance of the fact that the aforesaid amount was suo moto offered to tax by the Appellant in the revised return of income filed for the subject assessment year and hence, such amount cannot be added again. 2. Ground No. 2 - Double disallowance on account of excess depreciation claimed suo moto withdrawn in the revised return of income 2.1 On the facts and circumstances of the case, the learned Assessing Officer has erred in disallowing excess tax depreciation claim bf Rs. 22,89758 on import of capital goods. 2.2 On the facts and circumstances of the case, the learned AO has erred in not taking cognizance of the fact that the aforesaid c....
X X X X Extracts X X X X
X X X X Extracts X X X X
....9;ble DRP has erred in disallowing interest expense of Rs. 7,776,975 incurred on short term loans availed by the Appellant, by invoking the proviso to section 36(l)(iii) of the Act. 5.2 Without prejudice to the above ground, on the facts and circumstances of the case and in law, the learned AO/ Hon'ble DRP has failed to take cognizance of the fact that the short term loans were availed by the Appellant both for the purposes of funding its working capital requirements and acquisition of fixed assets, which is clearly evident from the cash flow statement of the Appellant, and hence, disallowance of the entire interest expenditure is unjustified and untenable in law. 5.3 Without prejudice to the above grounds, on the facts and circumstances of the case and in law, the learned AO has erred in not allowing depreciation under section 32 of the Act on the aforesaid interest disallowed for the subject assessment year. 6. Ground No. 6-Disallowance of circuit accruals 6.1 On the facts and circumstances of the case and in law, the learned AO/ Hon'ble DRP has erred in making a disallowance of Rs. 28,715,900 on account of year-end accruals created towards bandwidth and last mile....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ly assume that 'no benefit' has been conferred upon the Appellant from the impugned transactions. 8.5 the learned TPO/ AO/ DRP have erred in disregarding the supplementary analysis furnished by the Appellant in respect of the impugned transactions during the course of assessment proceedings which further corroborates the arm's length nature of the said international transactions entered into with its AEs. 8.6 the learned DRP has erred in not providing the Appellant with an opportunity of being heard before enhancing the adjustment in respect of availing of intra-group services and consequently the total income of the Appellant, thereby vitiating the principles of natural justice. 9. Ground No. 9- Initiation of penalty proceedings 9.1 On the facts and circumstances of the case and in law, the learned AO has erred in initiating penalty proceedings under section 271(l)(c) of the Act against the Appellant on account of the above adjustments made in the assessment order. 10. Ground No. 10- Levy of interest under section 234B and 234D of the Act 10.1 On the facts and circumstances of the case and in law, the learned AO has erred in charging interest under section ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....Interest cost capitalization 4,54,131 Income pertaining to current year reported in next year 10,91,11,565 Excess Depreciation 22,89,758 Prior Period Expenditure 5,63,316 Capex claimed as revenue expenses 3,47,45,337 Interest Expenditure on short term loans 13,46,070 Circuit charges 2,87,15,900 TPO Addition 34,51,15,661 Total Additions 52,88,70,316 Less: Credit for circuit charges 3,08,00,000 Assessed Income 80,38,91,688 10. Therefore, assessee aggrieved with the order passed by the Assessing Officer u/s 143(3) r.w.s 144C of the Income Tax Act has preferred appeal before us in ITA No. 2538/Del/2014. 11. Now we first come to the appeal of the assessee in ITA No. 2538/Del/2014. Ground No. 1 -- Double addition on account of income suo moto offered to tax in the revised return of income Ground No. 2 -- Double disallowance on account of excess depreciation claimed suo moto withdrawn in the revised return of income 12. The above two grounds have been disposed off by the rectification order dated 22.07.2014 passed by the Assessing Officer, hence have not been pressed by the Ld. AR and therefore they are dismissed as infructuous. 13. Ground ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....the capital and not the user of the asset which comes into existence as a result of the capital and not the user of the asset which comes into existence as a result of the borrowed capital. The Legislature has, therefore, made no distinction in Sec. 36(1) (iii) between "capital borrowed for a revenue purpose" and capital borrowed for a capital purpose . "An assessee is entitled to claim interest paid on borrowed capital provided that the capital is used for business purpose irrespective of what may be the result of using the capital which the assessee has borrowed. "Actual cost" of an asset has no relevancy in relation to Sec. 36(1) (iii). The proviso inserted in Sec. 36(1) (iii) by the Finance Act, 2003, w.e.f April 1, 2004, will operate prospectively. Held accordingly, that the assessee was entitled to deduction U/s 36(1) (iii,) prior to its amendment by the Finance Act, 2003, in relation to money borrowed for purchase of machinery even though the assessee had not used the machinery in the year of borrowing." In short, the above amendments have been made by the Finance Act, 2003, and all the said amendments have been made operational w.e.f April 1, 2004. Therefore, the prov....
X X X X Extracts X X X X
X X X X Extracts X X X X
....d for acquisition of the asset till the date on which such asset was first put to use, shall not be allowed as deduction. By implication this proviso is also applicable when assets are acquired for new business. If the proviso is interpreted to signs' that the same will not be applicable to such acquisition of assets, it will defeat the whole purpose of the proviso." The relevant Para 7.3 & 7.4 of the ITAT order are reproduced; 7.3 Ld. Commissioner of Income Tax (Appeals) has further observed that the interest expenditure is not allowable as per section 36(1) (iii) of the Act. This is due to the proviso to clause 36(1) (iii) which was inserted by the Finance Act, 2003, with effect from 1.4.2004. Ld. Commissioner of Income Tax (Appeals) observed that the object of the proviso is to disallow interest paid for acquiring an asset even for extension of the existing business till the date on which it is brought to use irrespective of the accounting treatment adopted by the assessee in its book. In this regard, Ld. counsel of the assessee had contended that proviso to clause 36(1) (iii) cannot be applied to the assessee's ase as there was no extension in the existing business of t....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... the assessee. C. Another argument of the assessee is that Section 36(l)(iii) of the act read with the Proviso to the said section makes it clear that the primary condition for disallowance of interest expense on funds borrowed for acquisition of an asset is that such asset should have been acquired for the purpose of extension of the business. It has been discussed earlier that acquisition of fixed assets during the year amounts to extension of business and in any case as Delhi ITATs decision the proviso to section 36(1)(iii) is even applicable to a new business. Therefore in either scenario the interest paid on ECB loan will get disallowed till the date the asset acquired has been put to actual use. D. The assessee company has relied upon the case laws for proving that its case doesn't fall within the meaning of proviso of section 36(1)(iii). -Gujarat Alchemic and Chemicals Ltd [2008] 295 ITR 85 (SC) - Shah Theaters (P) Ltd. [1988] 169 ITR 499, - Kanhiram Ramgopal vs CIT [1988] 170 ITR 41 (MP) It is important to mention here that the facts of the above mentioned case laws relied upon by the assessee are different from the facts of the present case and hence can....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ount (of Rs. 102,860,000) was taken on March 19, 2009. Accordingly, in absence of date of put to use of the capital assets acquired by suing the aforesaid ECBs availed during the year, date of out to use of such assets has been taken as April 1, 2009 and interest expenditure of Rs. 4,54,131/-, relating to ECBs availed during the year, is being disallowed and added back to the total income of the assessee company. The above amount is also added to the costs of fixed assets of the assessee. Penalty proceedings u/s 271(1)(c) are initiated separately for filing inaccurate particulars of income and thereby concealing income chargeable to tax. 14. Assessee preferred objection before the DRP who vide direction dated 30.12.2013 vide Para No. 7 has held as under: 7.1 The taxpayer has objected to the proposed disallowance of interest expense of Rs. 4,54,131/- incurred on external commercial borrowings (ECB) for acquisition of fixed assets by invoking proviso to section 36(1)(iii) of the Act. Without prejudice the above claim, the taxpayer has pointed out that the AO did not allow depreciation u/s 32 on such interest expenditure by not adding the same to the cost of acquisition of ....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... so allowed is subject to the final decision by the appellate authorities on this matter of disallowance of interest of Rs. 4,54,131/-. So far the request of the taxpayer for allowing depreciation u/s 32 on the interest disallowed in AY 2008-09 of Rs. 22,16,117/- is concerned, the AO is directed to verify if the relevant assets have been put to use or not, either during FY 2007-08 or FY 2008-09 and proceed accordingly. However, if the claim is allowed, the AO shall clearly specify in the assessment order that the benefits so allowed is subject to the final decision by the appellate authorities on this matter of disallowance of interest of Rs. 22,16,117/- made in AY 2008-09. 15. Before us, the ld DR relied upon the orders of the lower authorities whereas the AR put forth the following contentions: 1.8 Section 36(1)(iii) of the Act provides that the amount of interest paid in respect of capital borrowed for the purpose of business or profession shall be allowed as a tax deductible expense. Section 36(1)(iii) of the Act reads as under: "36(1) The deductions provided for in the following clauses shall be allowed in respect of the matters dealt with therein, in computing the incom....
X X X X Extracts X X X X
X X X X Extracts X X X X
....preme Court in the case of CIT vs. Core Health Care Ltd (298 ITR 194)(SC) wherein it has been held that Section 36(1)(iii) makes no distinction between capital borrowed for revenue or capital purposes. Any expenditure incurred in respect of capital borrowed for the purpose of business shall be allowed deduction. Similar observation has been made by the Apex Court in the case of United Phosphorous Limited (299 ITR 9). 1.15 With respect to the decision of the Delhi Bench of the Hon'ble Tribunal in the case of Breeze Constructions (P.) Ltd, basis which the Ld. AO has made the aforesaid disallowance, it is submitted that the issue involved was with respect to allowability of interest expenditure incurred before commencement of the business itself. In the said case, the taxpayer had incurred interest expenses for loan obtained for payment of lease in respect of a land taken for construction of a hotel. However, the other approvals and infrastructure required for the construction were not in place at the time of claiming such expenditure, and thus the taxpayer's construction business itself had not commenced. The aforesaid case does not deal with the issue of extension of busin....
X X X X Extracts X X X X
X X X X Extracts X X X X
....italised in the books of account or not); for any period beginning from the date on which the capital was borrowed for acquisition of the asset till the date on which such asset was first put to use, shall not be allowed as deduction.] 18. Undisputedly assessee is engaged in telecommunication business. It has commenced its business operation on April 07, 2007. The present situation deals with the case where in the assessee has purchased capital goods for its existing telecommunication business. The question that arises for consideration here is that whether the proviso to Section 36(1)(iii) which disallows the interest paid on acquisition of an asset for extension of existing business is applicable to the present case or not. In the present case, whether the assets were acquired for extension of business or not. The word ―extension has not been defined in the Income-tax Act, 1961 and one has to resort to the popular meaning of the term. The dictionary meaning of the word "extend" is a part that is added to something to enlarge or prolong it, addition, add-on, adjunct, addendum, augmentation, supplement, appendage, appendix; annexe, supplementary etc. The assessee submitted t....
X X X X Extracts X X X X
X X X X Extracts X X X X
....Intercept (LI) Project. As these services Implementation of International Long Distance (ILD) Lawful Intercept (LI) Project and hence are undoubtedly in the nature of Capital Expenditure. Further this amount is being paid as first 25% of P0 as per Agreement which indicates that the project has not been completed and until the project is completed these should have been shown as Capital Work in Progress. Similarly Invoice no. 1407 dated 18th March 2009 for USD 5, 11,480 raised by Narus (the service provider) also pertains to LI project mentioned above and accordingly seems to be for capital nature project which should have been capitalized with the cost of the project. Similarly Invoice no. 1419 dated 26th March 2009 for USD 92,750 raised by Narus (the service provider) being 35% for LI Project also pertains to LI project mentioned above and accordingly seems to be for capital nature project which should have been capitalized with the cost of the project. 10.2 The assessee, vide notice dated 27.02.2013 was asked to furnish its reply in this regard. In response to the same, the assessee vide its reply dated March 1, 2013, has merely submitted that these expenses are in respect of p....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... 21. The ld AR put forth the following arguments: "2.8 The expense cannot be disallowed merely because the invoice makes reference to the ILD/ LI project. 2.9 In this regard, it is submitted that Narus Inc. provides the intelligence, context, and control services which the network operators need to protect the data against cyber threats and to ensure information security. The appellant being a network operator providing telecommunication services needs to protect the data it transmits and thus requires the intelligence/control services to maintain the integrity and confidentiality for data transmission. The invoices of Narus Inc. furnished at pages 151-153 of PB Volume II) clearly make it evident that the said expenditure is a regular business expenditure incurred by the appellant in the normal functioning of its connectivity business and hence should not be considered as capital expenditure. Without prejudice to the above, it is submitted that in case the Hon'ble Bench does not allow the aforesaid expenses incurred post implementation towards professional and training services, the same should be allowed to be capitalized and depreciation under section 32 of the Act on the....
X X X X Extracts X X X X
X X X X Extracts X X X X
....cted the argument of the assessee that captioned loan funds were used for both working capital requirements as well as for purchase fixed assets by holding that the cash flow statement makes it clear that the entire funding of capital expenditures was done from borrowed funds. The entire interest expenditure of Rs. 77 Lacs was disallowed by holding that the assessee has not submitted the details of assets being put to use. The relevant finding of the ld. AO proposed in the draft assessment order is given below: 11.6 Hence in view of the above discussion the plea by the assessee is not acceptable and the proviso to section 36(1)(iii) gets attracted for both set up of new business as well as for extension of the business (Refer judgment of Hon'ble ITAT Delhi Bench 'A' in the case of Breeze Constructions (P.) Ltd. v. income-tax officer, ward 3(1) in IT Appeal No. 4779 (Delhi) of 2011) and interest expenditure till the date of first put to use shall be added to the cost of the asset. It is clear from the summarized cash flow statement given above that entire interest expenditure was incurred for acquisition/ installation etc. of capital assets/capital expenditure. The assesse....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... activities is Rs. 86.75 crores, which has been rightly taken by the AO in para 11.1 of the Draft order. (ii) The taxpayer has also not reduced the closing cash in hand of Rs. 36.66 crores while working out the available cash flow. In view of the above, the figure of Rs. 84.61 crores as available cash for investment in fixed assets as claimed by the taxpayer is not acceptable. The AO has already made a detailed working of available cash flow in para 11.1 of the Draft order which is found to be in order. Moreover, it is seen that the total ECB raised during the year of Rs. 20.23 crores and the net short term loans of Rs. 80.77 crores has been separately shown to work out the net movement of short term loan at Rs. 86.75 crores. Thus, the taxpayer claimed that ECB of Rs. 20.23 crores should be part of the available cash flow has already been allowed by the AO and no further benefit of the same can be given now. So far as the claim of allow ability of depreciation on the amount of Rs. 77,76,975/- is concerned, the AO is directed to verify if the respective assets have been put to use during the year or not and proceed accordingly. However, if the claim is allowed, the AO shall clea....
X X X X Extracts X X X X
X X X X Extracts X X X X
....o produce complete books of accounts along with substantiating invoices and vouchers in respect of infrastructure cost and last mile charges. The AO proposed disallowance of Rs. 19,91,52,615 by giving following reason in the draft assessment order:- 7.4 In addition to the above, the assessee also produced ledgers, invoices, vouchers in relation to the expenses incurred during the current assessment year, which have been perused and verified and do not support the submission of the assessee. The reply of the assessee company is devoid of any merits. It may be noted that the assessee himself has been able to produce invoices for only Rs. 15.10 crores out of the total year end accrual of Rs. 20.63 crores and invoices for the balance amount have not been furnished. This itself proves that the assessee does not have the invoices for the balance amount and there is no basis of recording the year-end accruals. Further, a number of invoices submitted by the assessee, forming part of the aforesaid amount Rs. 15.10 crores, are dated October 2008, November 2008, December 2008, January 2009, February 2009 i.e. more than 30 days before the close of the current assessment year. As a general pr....
X X X X Extracts X X X X
X X X X Extracts X X X X
....) are initiated separately for filing inaccurate particulars of income and thereby concealing income chargeable to tax. 31. The assessee preferred objection before the Dispute Resolution Panel and further submits invoices aggregating to Rs. 1.97 crores by way of additional evidence. The Ld. Dispute Resolution Panel vide direction dated 30.12.2013 vide para No. 9.3 has held as under: 9.3.1 The Panel has perused the draft order and the submissions made by the taxpayer. The disallowance proposed by the AO is for Rs. 20.63 crores. Out of it, the AO has himself mentioned in the draft assessment order that the taxpayer produced invoices for Rs. 15.10 crores. Before the Panel, the taxpayer has submitted some more invoices aggregating to Rs. 1.97 crores by way of additional evidence for the period relating to FY 2008-09. The taxpayer has also made out its case for the relief of the corresponding amount of Rs. 3.08 crores, which has been disallowed by the AO in AY 2008-09 as it tantamount to the double addition. 9.3.2 Considering the facts and circumstances of the case, the Panel directs as under: (i) To the taxpayer: The taxpayer is directed to submit copy of such invoices to the AO....
X X X X Extracts X X X X
X X X X Extracts X X X X
....m operators towards provision of telecom connectivity services over the last leg of communication i.e. from the customer's premises to point of presence of AGNS and vice-versa. For instance, a Multinational Corporation having its offices at different locations across India contracts with the appellant for providing connectivity between its offices at various locations. Each segment between offices at two different locations constitutes a circuit and has a unique circuit ID. The appellant is engaged to provide connectivity for all such circuits of the company/customers. 4.4 As part of the month-end accounting process, the appellant accrues expenses incurred up till the end of a particular month based on the liability incurred/crystallized and estimated expense based on the orders placed for various circuits. Such accruals thus include expenses incurred in relation to the services rendered during the relevant financial year, estimated on a reasonable and scientific basis, for which bills/invoices are not received during the year. 4.5 As a practice, accruals for a particular month are reversed in the succeeding month when fresh accruals for the period beginning from the start ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....corded in GAIM. GAIM contains various details relating to the circuit, such as Circuit ID number, activation date, tariff codes (rental, usage, one time charge), expected monthly cost, location of circuit, etc.; * Once the order is closed, the liability to pay the vendor arises; * Invoice received by the vendor are entered into GAIM manually or uploaded from electronic files; * Thereafter, invoices are validated in GAIM before payment. During invoice validation, GAIM automatically compares the invoice/bill data to the circuit inventory and expected costs; * The validation process also identifies any discrepancies which have to be resolved via the dispute management process before the invoice can be approved for payment. * The validation checks include: - Circuit ID exists in inventory for vendor; - Invoice date is after circuit activation date; - Service period is before circuit cease date; - Invoice tariff code matches order tariff code - Invoice cost is not varying more than USD 100 vis-à-vis the expected cost - Invoice number is unique for vendor * The invoices for which validation is completed with no discrepancies or for which the discrepancies i....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ppellant's business functions and should be allowed, since it is a year on year unavoidable feature. In this regard attention is placed on the decision of Hon'ble Supreme Court in the case of M/s Rotork Controls India (P) Ltd. vs. Commissioner of Income-tax (314 ITR 62) wherein the Apex Court after analyzing the provisions of the Act and accounting principles in detail laid the controversy to rest by holding that warranty expenses provided by the assessee on scientific basis in compliance with the accrual basis of accounting are allowable as deduction in the relevant financial year and no disallowance in this regard can be made by the revenue authorities. 4.11 Since the year-end circuit accruals created by appellant represent accruals towards normal business expenditure incurred by appellant for the relevant financial year and recorded in accordance with the matching principle, deduction in respect thereof should be allowed to the appellant. 4.12 Appellant has been able to produce documentary evidence subsequent utilization/reversal of more than 85% of the expenses represented by year - end circuit accruals, which itself evidences that even the balance accruals have als....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ate is after circuit activation date; * Service period is before circuit cease date; * Invoice tariff code matches order tariff code * Invoice cost is not varying more than USD 100 vis-à-vis the expected cost * Invoice number is unique for vendor The invoices for which validation is completed with no discrepancies or for which the discrepancies identified, the same are logged / resolved via dispute management process, are approved for payment. The assessee also explained the logic used by GAIM to calculate the Circuit Accrual for both active and ceased circuits taking into account the activation date and the cease date i.e. no accruals will be posted prior to the activation date or after the cease date. For the current and prior period GAIM will look at each tariff code for each circuit to determine if there is any invoice cost and circuit accruals are booked accordingly. Prior year expenses are tracked each month and matched against the prior year accrual balance brought forward manually. Accordingly, only the current year accrual balances are booked in the profit and loss account. 35. We find that the process explained is entirely automated process which captures....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... and give credit of the same in accordance with the provision of the Income -tax Act. This ground no 7 of appeal is allowed for statistical purposes. 37. Ground 8 of the Appeal of the Assessee relates to Transfer Pricing Matters and its sub ground relate to transfer pricing adjustments made in the hands of the assessee at INR 34,51,15,661/- out of which addition on account of 25.16 crores is on account of intra group services and 9.34 crores is on account of royalty payments. As mentioned earlier, The appellant offers wireless, high-speed internet access, Wi-Fi, local and long distance voice communication solutions. It specializes in wholesale services for carriers, systems integrators, and cables, content, wireless and internet service providers. It also provides enterprise mobility, hosting, security and business continuity solutions. Additionally, it offers various types of networking exchange, consulting, and integration solutions. 38. The assessee entered into following international transactions with its AE during AY 2009-10 which are stipulated below: 1. Provision of network Considered to be at ALP by connectivity services (INR TPO; 175.08 cr) 2. Availing of intra grou....
X X X X Extracts X X X X
X X X X Extracts X X X X
....percent of the cost team based in Hong Kong was allocated to the AGNS India. This cost has been allocated on the basis of India related fault tickets as percentage of total fault tickets for Asia Pacific. The GCSC team processed over 26,000 tickets for AGNS India. The amount allocated to AGNSI during the relevant period is INR 14.88cr. Approach adopted by the Appellant 1.13 The cost paid by the Appellant for GCSC services was benchmarked following an aggregated approach using the TNMM. 1.14 The Appellant had also submitted a list of the tickets processed along with nature of problem resolved has been submitted as evidence before the Ld. TPO/Hon'ble DRP [refer page 207 to page 377 of Paperbook Volume - I]. Approach adopted by the Ld. TPO 1.15 The Ld. TPO rejected the arm's length nature of the aforesaid transaction in an arbitrary manner and held that the average cost per month of GCSC should be INR 75,000 (INR 50,ooo salary cost plus INR 25,000 running cost) without giving any cogent reasons. Assuming that 48 employees would be required for rendering aforesaid services, the Ld. TPO determined INR 4.32 cr as the average cost of the GCSC which should have been alloc....
X X X X Extracts X X X X
X X X X Extracts X X X X
....nt allocated to AGNS India for service delivery and service management is INR 4.51cr and INR 1.88cr, respectively. Approach adopted by the Appellant 1.21 The cost paid by the Appellant for service delivery and service management was benchmarked following an aggregated approach using the TNMM. Approach adopted by the Ld. TPO 1.22 The Ld. TPO rejected the arm's length nature of the aforesaid transaction in an arbitrary manner and held that the average cost per month of the aforesaid services should be INR 75,000 (INR 50,ooo salary cost plus INR 25,000 running cost) without giving any cogent reasons. Assuming that 14 employees would be required for rendering aforesaid services, the Ld. TPO determined INR 1.26 cr as the average cost of the service delivery and service management which should have been allocated to the Appellant. 1.23 It is pertinent to note that the approach adopted by the Ld. TPO is arbitrary and without any reasoning. However, the allocation methodology adopted by the AEs/Appellant is based on commercial/business realities and on a scientific basis. Approach adopted by the Hon'ble DRP The Hon'ble DRP rejected the arm's length nature of t....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... the arm's length nature of the aforesaid transaction and held that the average cost of the aforesaid services should be INR 75,000 per month per employee without substantiating the same. Assuming that 3 employees would be required for rendering aforesaid services, the Ld. TPO determined INR 0.27cr as the average cost of the GSE which should have been allocated to the Appellant. 1.32 It is pertinent to note that the approach adopted by the Ld. TPO is arbitrary and without any reasoning. However, the allocation methodology adopted by the AEs/Appellant is based on commercial/business realities and on a scientific basis. Approach adopted by the Hon'ble DRP The Hon'ble DRP rejected the arm's length nature of the aforesaid transaction on an arbitrary basis and held the ALP to be NIL D. Country services Nature of services 1.33 The country services team is a cross -functional team providing in - country support for other functional teams. The team is based out of Hong Kong and Singapore and renders support services in the nature of pre-sales arrangements, contract management, service delivery, order updates, on-going communication with customers and life cycle ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....l set DRP Submission: Refer page no. 122 to 124 of the Appeal Set DRP Directions: Refer page no. 42 and 43 of Appeal Set Basis of allocation 1.40 This cost has been allocated on the basis of number of IT users in India as percentage of No. of IT users in Asia Pacific (excl Japan). The amount allocated to AGNSI during the relevant period is INR 1.20 cr. Approach adopted by the Appellant 1.41 The cost paid by the Appellant for IT services was benchmarked following an aggregated approach using the TNMM. 1.42 The Appellant had also submitted a list of IT incidents and IT requests raised by AGNSI which was subsequently resolved by the IT support team during FY 2008-09 has been submitted as evidence before Ld. TPO/Hon'ble DRP. [Refer page 383 to 413 and page 416 to 423, respectively of Paper book Volume - I]. Approach adopted by the Ld. TPO 1.43 The Ld. TPO rejected the arm's length nature if the aforesaid transaction in an arbitrary manner and determined the ALP as NIL. 1.44 It is pertinent to note that the approach adopted by the Ld. TPO is arbitrary and without any reasoning. However, the allocation methodology adopted by the AEs/Appellant is based on com....
X X X X Extracts X X X X
X X X X Extracts X X X X
....424 of Paper book Volume - I]. Approach adopted by the Ld. TPO 1.50 The Ld. TPO rejected the arm's length nature of the aforesaid transaction in an arbitrary manner and determined the ALP as NIL. 1.51 It is pertinent to note that the approach adopted by the Ld. TPO is arbitrary and without any reasoning. However, the allocation methodology adopted by the AEs/Appellant is based on commercial/business realities and on a scientific basis. Approach adopted by the Hon'ble DRP The Hon'ble DRP rejected the arm's length nature of the aforesaid transaction on an arbitrary basis and held the ALP to be NIL. G. Project management Nature of services 1.52 The project management teams are based in Australia, Hong Kong and Singapore and are responsible for managing installation and deployment of sites across Asia Pacific region. The team comprises of 9 people. 1.53 The project management team is engaged in general project management, monitoring of all implementation issues and addressing faced by the customers Submission before TPO: Refer page 165 of Paper book Vol-I TPO's observation in the TP order: Refer page no. 228 and 229 of the Appeal set DRP Sub....
X X X X Extracts X X X X
X X X X Extracts X X X X
....location and the basis of charge of such services to the Indian entity The cost of rendering these services are allocated on the basis of cost plus a mark-up of such costs. Documentation test This test is related to the back-up documentation as maintained by the Indian entity and presented to the tax authorities for verification in relation to the above mentioned tests. The Appellant has already submitted various backup documentations maintained in relation to the above mentioned tests. [refer page 209 to 426 of Paperbook Volume - I] 1.60 To support its case, the assessee also submitted the legal submissions which is reproduced as under: 2. Legal Submission: Method to be applied for benchmarking the transaction i.e. CUP v/s TNMM 2.1 The Appellant carried out benchmarking analysis for payment of support services on an aggregated basis under TNMM method. It is hereby submitted that due to close inter-linkages of the support services paid by the Appellant with the core service activity carried out by it i.e. provision of network connectivity services, it was considered appropriate to assess the impact of all the international related party transactions of the....
X X X X Extracts X X X X
X X X X Extracts X X X X
....rgin realised by the enterprise or by an unrelated enterprise from a comparable uncontrolled transaction or a number of such transactions is computed having regard to the same base; (iii) the net profit margin referred to in sub-clause (ii) arising in comparable uncontrolled transactions is adjusted to take into account the differences, if any, between the international transaction or the specified domestic transaction and the comparable uncontrolled transactions, or between the enterprises entering into such transactions, which could materially affect the amount of net profit margin in the open market; (iv) the net profit margin realised by the enterprise and referred to in sub-clause (i) is established to be the same as the net profit margin referred to in sub-clause (iii); (v) the net profit margin thus established is then taken into account to arrive at an arm's length price in relation to the international transaction or the specified domestic transaction "Most appropriate method. 10C. (1) For the purposes of sub-section (1) of section 92C, the most appropriate method shall be the method which is best suited to the facts and circumstances of each particular inter....
X X X X Extracts X X X X
X X X X Extracts X X X X
....of the Rules 10A. For the purposes of this rule and rules 10AB to 10E,-- (d) "transaction" includes a number of closely linked transactions. 2.7 It can be seen from the above definition that the transaction' includes closely linked transactions. The Appellant submits that aforesaid support services are integral to the core operations of rendering network connectivity services since in the absence of the support services, the Appellant's entire business operations would be interrupted and would come to a standstill. Therefore, the aforementioned services are indispensable for ensuring continuity in business operations. Hence, it can be reasonably construed that the support services are closely linked to the primary transaction of network connectivity services. 2.8 The Appellant relies on the decision of Hon'ble ITAT in case of Demag Cranes & Components (ITA No. 1683/PN/2011) where it has upheld the aggregation of closely linked transactions. (Refer Para 31 on Page no. 110 of the Case Law Compendium) (Para 31, Page 22of the order) 2.9 The Appellant also relies on the jurisdictional High Court in the case of Sony Ericsson Mobile Communications India Pvt. Ltd. and othe....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ke to most humbly submit that nowhere the Transfer Pricing provisions require the Appellant to demonstrate the need of availing such services. The Transfer Pricing provisions only requires ascertaining whether the price paid for such services is at arm's length or not. 2.14 The aforesaid argument is supported by the principles laid down by the Hon'ble Mumbai ITAT in the case of Dresser Rand India Private Limited vs. ACIT ITA No. 8753 / Mum / 2010. (Refer Para 8 on Page no. 131 of the Case Law Compendium) 2.15 Thus, the Appellant submits that the objections raised by the TPO/DRP that there is no need for services is unjustified and not tenable in law. Commercial Expediency 2.16 The Appellant further submits that the nature of services to be availed is entirely prerogative of the tax payer and his commercial wisdom which cannot be questioned even by a tax authority and it is not always necessary to co-relate the benefits received and the amount paid for the services. 2.17 The aforesaid argument is supported by the observations made by the Hon'ble Supreme Court in the case of Commissioner of Income-tax vs. Dhanrajgirji Raja Narasingirji (91 ITR 544)(Refer Page no. 11....
X X X X Extracts X X X X
X X X X Extracts X X X X
....whereby it has been categorically held that value of international transaction cannot be treated as 'Nil' - - McCann Erickson India P. Ltd. Vs. Addl. (ITA No. 5871/De1/2o11) (Del.) (Refer Para 9 on Page no. 324 and 325 of the Case Law Compendium) - AWB India Pvt. Ltd. Vs. DCIT (ITA No. 648o/De1/2o12) (Del.) (Refer Para 15 to 18 on Page no. 37 to 38 of the Case Law Compendium) - DCIT vs. M/s. Diebold Software Services Pvt. Ltd (ITA No. 4347/Del/2o12) (Del.) (Refer Para 5 on Page no. 120 of the Case Law Compendium) - Platinum Guild India Private Limited vs. DCIT (ITA No. 7720/Mum/2012) (Mum.) (Refer Para 10 on Page no. 391 of the Case Law Compendium) - Merck Ltd. Vs. DCIT (148 ITD 513) (Mum.) (Refer Para 24.5 to 24.7 on Page no. 353 and 354 of the Case Law Compendium) 2.23 Based on the legal principles enunciated above it is concluded that the TP adjustment can be made by the TPO/DRP only by applying any specific method as stated u/s 92C(2) of the Act. In facts of the present case even though the TPO/DRP mentions that CUP should be used for benchmarking the transaction, the method is not applied in its true sense, since no comparable uncontrolled transaction is used fo....
X X X X Extracts X X X X
X X X X Extracts X X X X
....illing to the AE in the form of network support services. The Appellant has submitted all the relevant documents to prove that the services were rendered & hence, the action of the Hon'ble DRP of treating the arms-length value of the payment made for availing such services at NIL, is arbitrary, unsubstantiated and ought to be struck down. 2.30 Further, since no benchmarking methodology has been adopted by the TPO/Hon'ble DRP, the benchmarking adopted by the Appellant in its TP study i.e. TNMM on an aggregated basis, should be adopted and the adjustment made on the values of support services should be deleted. 40. The main thrust of assessee's submission is that in respect of each intra group services the assessee has been able to justify the basis of allocation of cost, need for service and the benefit it derived out of these services. In support of its arguments, the assessee also filed the back-up documentation before the lower authorities for verification. 41. The Ld. DR on the other hand has supported the order of DRP and AO and submitted that 1) That there was no need for such services in first place 2) Even if there was need, the assessee has not been able ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ises enter into a mutual agreement or arrangement for the allocation or apportionment of, or any contribution to, any cost or expense incurred or to be incurred in connection with a benefit, service or facility provided or to be provided to any one or more of such enterprises, the cost or expense allocated or apportioned to, or, as the case may be, contributed by, any such enterprise shall be determined having regard to the arm's length price of such benefit, service or facility, as the case may be. 45. According to the above provisions following principles emerge:- i. An international Transaction is entered in to between two or more associated enterprises for jointly acquiring or developing some property or for obtaining services. ii. The parties to transaction enter in to mutual agreement or arrangement to share cost or expenses incurred or to be incurred in respect of joint property. iii. The cost or expenses incurred should be in connection with a benefit or services of facility provided or to be provided to any one or more of such enterprise. The expectation of mutual benefit is important consideration for the acceptance of arrangement for pooling of resources by th....
X X X X Extracts X X X X
X X X X Extracts X X X X
....Information technology The IT team provides internal IT support function including helpdesk, internal network monitoring support and IT system and maintenance. No. of IT users in India as percentage of No. of IT users in Asia Pacific (excl Japan) (Refer TP Order on Pg 227 of Appeal Set) Team of 21 people based in Singapore. 1.2 4. Billing support The billing team is responsible for raising invoices for all customers in the Asia Pacific region (excluding Japan). No. of India invoices as percentage of No. of Asia Pacific (excl Japan) (Refer TP Order on Pg 228 of Appeal Set) Team of 37 people based in Hong Kong. Total 62812 invoices were raised, 6344 related to India 10.10% of billing deptt cost was allocated to India 0.97 5. Service delivery and service management The services delivery team is responsible for processing customer orders and handling service provisioning, setting up and configuring the network and testing the system. The services management team is responsible for account management across all service disciplines. No. of orders processed for India as p....
X X X X Extracts X X X X
X X X X Extracts X X X X
....network monitoring support and IT system and maintenance; * Review of pricing terms of contracts, process invoices reversals and adjustments, resolve customer disputes etc.; and * General project management, monitoring of all implementation issues addressing issues being faced by customers 48. The assessee also contended that in telecom business credibility, reliability and speed of data, network and system is what defines the usage of network. So the assessee contended that it would rely on the best of resources and system which in the instant case is available at APAC level with their related party. The assessee would not have been able to sustain if a third party, which may through services can't control and ensure the above parameters. 49. On appreciation of the above facts it is apparent that looking at the nature of the business of the assessee and the kind of industry the assessee operates in, the assessee has justified that such services are required. It is not the case of the ld TPO that assessee is having this services therefore they are duplicative in nature or are in nature of shareholders' services. It is pertinent to note that requirement of the services....
X X X X Extracts X X X X
X X X X Extracts X X X X
....vices to the assessee. We failed to understand what ‗sufficient evidence' was and what was lacking in the case of the assessee. We could not find any instances placed where the TPO / DRP held that the evidence placed by the assessee are not substantiated by rendition of service by the AE. The assessee has also relied on the Hon'ble Delhi Tribunal in the case of GE Money Financial Services Pvt Ltd. Vs ACIT in ITA No. 5882/Del-2010 and TNS India Pvt. Ltd. V. ACIT: (2014) 32 ITR (Trib.) 44 (Hyd. )whereby on similar facts the Hon'ble Delhi Tribunal has rejected the plea of the Revenue and has held that for receipt of services, rendering of services must be seen from the view point of the assessee and further assessee cannot be asked to keep and maintain evidences of services rendered by AE higher than which is expected from a businessman receiving services from an unrelated provider. Respectfully the following the decision of the coordinate the bench we are of the view that the assessee has justified the receipt of the services and satisfied the rendition test. Regarding the benefit test, the assessee submitted that owing to the nature of industry it operates in it re....
X X X X Extracts X X X X
X X X X Extracts X X X X
....he assessee has relied upon the decision of the Hon'ble Delhi High Court in the case of CIT vs Cushman and Wakefield (India) Pvt Ltd. (ITA 475/ 2012), wherein, it was held that the authority of the TPO is to conduct a TP analysis to determine the ALP and not to determine whether the tax payer derives a benefit from the service. The Hon'ble Delhi High Court has opined that the determination of benefit to the tax payer is not in the domain of the TPO. In this regard, the Appellant also placed reliance on the following judicial precedents to bring home the point that the benefit test needs to be satisfied from the view point of assessee and business prudence : a. Ericsson India Private Limited vs Dy CIT [ITA No. 5141/Del/2011 (Delhi ITAT)] b. CIT v. EKL Appliances Ltd. [2012] 345 ITR 241 (Delhi) c. Hive Communication Pvt. Ltd. (ITA No.306/2011) d. Commissioner of Income Tax vs. Cushman and Wakefield (India) P. Ltd. (269 CTR 16) (Del.) 51. The above decisions unanimously holds that in reaching the conclusion that whether an independent entity would have paid for such services neither the revenue nor the court must question the commercial wisdom of the assessee or repla....
X X X X Extracts X X X X
X X X X Extracts X X X X
....hree services before the AO/TPO for necessary verification. The ld TPO may examine them and decide the issue with respect to those services in accordance with law. With respect to the method as the ld TPO has not examined the comparability analysis under the TNMM method of Intra Group services, he must examine the comparability analysis of IGS ( intra Group Services) and determine ALP. 54. Another issue which has been raised is the disallowance of royalty payment which is paid to the overseas entity in the US. In the present case, the Appellant entered into an understanding with its AE, namely, AT&T Corp., vide agreement dated March 7, 2006 for the usage of 'AT&T' brand. The consideration for usage between both the parties was agreed @ 4% of net sales. During the year under consideration the Appellant paid INR 9.34 crores as royalty to its AE. While benchmarking of royalty transaction, the appellant adopted TNMM as the MAM on an aggregate basis along with the provision of network connectivity services. Accordingly, it determined that while the comparable companies have earned an arithmetic mean of 3.22%, the appellant earned 4.3%. Accordingly the appellant concluded that the i....
X X X X Extracts X X X X
X X X X Extracts X X X X
....mbedded 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. The TPO worked out the difference in the PLI of the outside party (the assessee) at 4.09% and the comparables at 7.05%. This has not been shown to fall outside the permissible range. 57. On an alternative basis, assessee also submitted a detailed analysis benchmarking the royalty transaction on CUP basis in the TP documentation. The finding of the search resulted in the comparable which was identified as below by the appellant: Sr. No Licensor Licensee Period of existence of agreement Product description Rate of royalty 1. Motorola Inc. USA Forward Industries Inc. USA Effective from 1 January 2008 Trademark license for the ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....try is characterized by several telecom players such as Bharti, Idea, Tata, Vodafone, etc. In such a competitive industry, having a brand name such as AT&T (which is a globally renowned brand) impacts the business. It is noteworthy that for more than a century, AT&T Group has consistently provided innovative, reliable, (nigh-quality products and services and excellent customer care. It is one of the most stable and trusted name in communication services around the globe. In 2009 AT&T was ranked 14 out of 500 in the top global brands in the world. Therefore, having right to use AT&T trademark which has 'a global presence has helped the assessee in attracting more customers. 63. Assessee further submitted that customers often select branded product/ Services due to their trust in a variety of factors signified by the brand. Customers look upon branding as an important value added aspect of a product / service, as it often serves to denote a certain attractive quality or characteristic one cannot ensure :consistent quality of the product / service, one cannot create a brand Trademark promise to the customer that a stipulated quality will be maintained and hence the customer can p....
X X X X Extracts X X X X
X X X X Extracts X X X X
....orm of advertising. These intangibles, which are licensed to AGNS India, are key value drivers for the business and benefit it by enabling it to expand its presence in the marketplace. What would be the duration of payments of such license royalty is also determinative of the factor of the payments as it cannot also continue for an indefinite period . It may also happen that India brand because of consumer may become bigger than AE's brand. 68. As the assessee has adopted the TNMM which is crude method of benchmarking royalty payments and Ld TPO has disregarded the transaction only on the benefit analysis and has also rejected the CUP benchmarking of the assessee , we are of the view that this issue needs to be set aside to the file of the ld TPO to determine the ALP of the royalty payments afresh after examining the method, comparability and then ALP afresh. Assessee is also directed to support its ALP determination afresh after submitting the detailed answer to all the questions raised by the ld TPO in para no 9 of his order except the benefit test. Hence this ground no 8 of the appeal is allowed with above directions. 69. Ground no. 9 of the appeal of the Assessee relates ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....is involved in planning for future tax strategies, keeping the business informed for the changes in the tax laws and for supporting business decisions from a tax perspective as and when called upon. For the above functions as well, the assessee has made direct payments to outside parties, which goes on to substantiate that payments were being made to outside parties though it has been claimed that the above functions were performed by AT&T CSI employees for AGNS. It may be important to point out here that the assessee has paid separate fees for ECB certifications to M/s S.R. Batliboi & Associates in addition to the fees for various audits conducted by them. Similarly, separate fee has been paid for many other legal, taxation and professional services separately including fee for tally data entry to M/s R.P. Narang & Co. Technical Fees to M/s Netlogic Infotech Pvt. Ltd. and to other parties/professionals. 6.6 The assessee has claimed the deduction for GRE costs, which represents costs allocated by AT&T CSI towards premises taken on rent by AT&T CSI and shared by the assessee company. It has been discussed in the assessment order for the previous year that the premises taken on r....
X X X X Extracts X X X X
X X X X Extracts X X X X
....wed as incurring of expenses is not in dispute. The AO is directed to delete the proposed disallowance and modify the order accordingly.‖ 74. Before us, the ld DR relied upon the draft assessment order whereas the AR placed the following contentions: "5.2 The appellant has incurred support service expenditure of Rs. 1,161,76,903 paid to its group company i.e. AT&T Communication Services India Private Limited ('ACSI') for support services rendered by it. 5.3 The appellant commenced its business operations during AY 2008-09 and did not have its own support service functions such as tax, legal, finance, HR etc., which are necessary and imperative for any business organization to carry on its business. 5.4 ACSI, a group company of appellant and an entity in operations for more than 10 years by then, was having fully developed support services functions. Accordingly, since such functions were already housed in ACSI, appellant entered into a support services agreement with ACSI for provision of the aforesaid support services to appellant. 5.5 The agreement filed by in appellant for service support cannot be relied upon as it has been signed on 30.11.2007 but dated 01.0....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... ACSI, workings of the amounts so invoiced by ACSI to appellant and tax deducted at source thereon (the same can also be verified from the quarterly withholding tax statements filed by appellant) were submitted before the learned AO 5.14 No business would be able to carry out its business operations efficiently and effectively without the support of the above functions and the business exigency of such costs cannot be questioned merely on account of the fact that such costs are incurred by a sister concern of appellant and then allocated to appellant based on a scientific and reasonable basis. The aforesaid support functions were already established and housed in ACSI and had appellant not availed such services from ACSI, it would have been required to establish separate teams of its own to perform such functions. This would have resulted into duplication of efforts and costs for the group's Indian operations. 5.15 At this juncture, it may not be out of place but noteworthy to mention that both ACSI and appellant are profit making entities and hence, there was no tax incentive for the parties to deflate the revenues earned by appellant. By transferring the cost from ACSI to....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... once it is established that appellant has actually incurred the aforesaid support services cost for the purposes of availing support services rendered by ACSI no expenditure cannot be disallowed on the premise of commercial expediency/ need for incurring such expenditure." 75. We have carefully considered the rival contentions and perused the facts of the case. The facts of the case as explained by the appellant are that, ACSI, a group company of appellant and an entity in operations for more than 10 years by then, was having developed support services functions. Accordingly, since such functions were already housed in ACSI, appellant entered into a support services agreement with ACSI for provision of the aforesaid support services to appellant. We have gone through the submission of the assessee and find that necessary evidences in the form of the support service agreement, invoices, the details of payments made and the bank statements evidencing the payment thereof have been furnished by the assessee to prove the genuineness of the expenses. We find that no evidence has been brought on record by the Department to dispute the said claim. Rather, the Department's claim is me....