TaxTMI 
TaxTMI 
2017 (9) TMI 1257
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.... the Assessment Year 2009-10:- 1. Ground No. 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 Ground No. 2 - Double disallowance on account of excess depreciation claimed suo moto withdrawn in the revised return of income 2.1 On the facts and circumstances of the case, the learned Assessing Officer has erred in disallowing excess tax depreciation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, t....
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....und No. 5- Disallowance of interest incurred on short term loans 5.1 On the facts and circumstances of the case, the learned AO/ Hon'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 c....
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....sactions as NIL, without identifying any uncontrolled comparable transactions. 8.4 the learned TPO/ AO/ DRP have erred in disregarding the elaborate documentary evidence submitted as part of assessment proceedings to erroneously 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....
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....t, the Ld. AO passed an order u/s 154 dated 22.07.2014 . 9. Following additions/ adjustments were proposed which are contested by the rival parties in these appeals: Additions Amount Returned Income 30,58,21,372 Foreign Exchange Fluctuation loss 65,28,578 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 inc....
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.... of itself It makes no distinction between money borrowed to acquire a capital asset or a revenue asset. All that the section requires is that the assessee must borrow capital and the purpose of the borrowing must be for business, which is carried on by the assessee in the year of account. Unlike Sec. 37, which expressly excludes an expense of a capital nature, Sec. 36(1) (iii) emphasizes the user of 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 according....
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.... entire business has been set up and therefore, contended that proviso of section 36(1)(iii) cannot be applied in the case of the assessee, as there was no extension of existing business in the assessee's case. The Hon'ble bench held that: "Interest paid, in respect of capital borrowed for acquisition of an asset for extension of existing business or profession; 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. 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 ....
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....e aforesaid discussion and precedent, Ld. Commissioner of Income Tax (Appeals) has passed a reasonable order which does not need any interference on our part and accordingly, we uphold the same. As regard the assessee's alternative submission the expenditure involved be allowed to be capitalized, we find that the same is acceptable. Hence, we that the disallowed expenditure be allowed to be capitalized. Therefore the facts of this case are squarely applicable to the facts of the case of 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 ....
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....put to use of the assets purchased by utilizing the ECBs obtained during the year. In absence of submission of any details by the assessee, I am constrained to assume that none of the assets purchased by using the ECBs obtained during the current assessment year were put to use before April 1, 2009 and hence, the computation of interest to be allowed has been done on the basis of the assumption that the purchased capital assets were put to use on April 1, 2009. 3.6 From the details available on record, it is seen that ECBs amounting to Rs. 102,860,000 were availed on March 2, 2009 and a similar amount (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 partic....
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....terest expenditure on the utilization of borrowed funds for the acquisition of new assets, from the date of its acquisition till the date when the asset is put to use, is to be disallowed. Moreover, the claim of the taxpayer runs counter to the legislative intent. The Panel declines to interfere with the proposed disallowance. So far as the claim of allowability of depreciation on the amount of Rs. 4,54,131/- is concerned, the AC is directed to verify if the relevant assets have been put to use during the year or not and proceed accordingly. However, if the claim is allowed, the AO 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. 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 subjec....
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....affirmed in the following judicial precedent: * DCIT vs. Gujarat Alkalies & Chemicals Ltd. [2008] 299 ITR 85 (SC), wherein setting-up of a new plant for producing a new chemical, Phosphoric Acid by an assessee engaged in Chemical manufacturing has been held as extension of existing business. 1.13 Thus, the telecom equipment purchased by the appellant using the ECB loans were for continuation of the existing telecommunication connectivity business and thus would not constitute extension of business, thereby not falling under the purview of proviso to section 36(1)(iii) of the Act has no applicability to appellant's case. 1.14 In this regard, reliance is also placed on the decision of the Hon'ble Supreme 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....
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....totally erroneous and warrants to be deleted. 1.18 Without prejudice, where the aforesaid interest amount is disallowed, the same should be allowed to be capitalized and depreciation under section 32 of the Act should be allowed thereon. 16. The LD DR relied up on the orders of the ld AO and direction of ld DRP. 17. We have carefully considered the rival contentions and also perused the facts of the case. Provision of Section 36(1)(iii) is reproduced hereafter: iii) the amount of the interest paid in respect of capital borrowed for the purposes of the business or profession : [Provided that any amount of the interest paid, in respect of capital borrowed for acquisition of an asset for extension of existing business or profession (whether capitalised 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 a....
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....n Service for India International Long Distance (ILD) Lawful Intercept (LI) Project. Similarly, invoices for USD 5,11,480 and USD 92,750 raised by Narus also pertain to LI project. The ld AO observed that since these services are for International Long Distance Lawful Intercept Project, they would be capital in nature. Accordingly, the payment made to Narus Inc. of Rs. 3,47,45,337 was proposed to be disallowed by giving following reason in the draft assessment order:- "10.1 While perusing the details and corresponding invoices submitted by th in invoice no. 1369 dated 5th January 2009 for USD 87,724 raised by Narus (the service provider) it has been that 25% of the P0 per Agreement on account of Additional Implementation Service International Long Distance (ILD) Lawful 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. Simi....
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....s on account of the equipment purchased for the LI Project have been capitalized by the taxpayer. The impugned expenditure is also for the same project on demonstration of equipment before the regulatory bodies, training etc. and the relevant charges have been raised by the service provider as a percentage of the various mile stones for the said project. Under these facts it cannot be said that the invoices under reference, being certain percentages of the purchase order, are not related to the expenditure of capital nature. The action of the AO on this account is therefore, approved. So far as the alternative claim is concerned, the AO is directed to verify if the LI Project was completed by 31.03.2009 and if so, it satisfies the conditions for allowance of depreciation u/s 32 or not and take action accordingly. 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....
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....s which was claimed as an expense in the return of income for the AY 2009-10. Basis the Cash Flow Statement, the ld AO held that the entire Short Term Loan of Rs. 807, 71, 24, 891 has been utilized for the purpose of investment in Fixed Assets of the Company. Particulars Amount (Rs.) Net Cash Generated from Operating Activities 522,668,903- Net Cash Generated from Financial Activities 67,549,460/- Activities Interest Paid (142,463,029/-) External commercial Borrowings - 202,300,000l Net Movement in Short Term Loan 807,712,4891- Total Cash Generated during the year 390,218,363/- Less: Closing Cash in hand 366,615,0241- Total Cash Generated During the year 1,023,603,3391- (Excluding Closing Cash in Hand) Net Cash Used in Investing Activities 1,144,803,090/- 25. Further, the AO has rejected 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 expend....
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.... from 'extension' of business and therefore, the interest expenditure on the utilization of borrowed funds for the acquisition of new assets, from the date of its acquisition till the date when the asset is put to use, is to be disallowed. Moreover, the claim of the taxpayer runs counter to the legislative intent. The Panel therefore, holds that the appropriate disallowance towards interest deserves to be made. So far as the quantum of the short term loans the interest of which is to be by the taxpayer as under: However, it is noticed that the above computation cannot be said to be correct computation for the reasons that: (i) the taxpayer has not considered the other components of cash flow from financing activities namely interest paid, repayments/proceeds of the short term loans, repayment of secure loan etc. According to the Annual accounts of the company, net cash generated from financing 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 figur....
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....e last leg of communication i.e. from the customer's premises to point of presence of AGNS and vice-versa. 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 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. As a practice, accruals for a particular month are reversed in the succeeding month when fresh accruals for the period beginning from the start of the year till such month are made. During the course of assessment, it was noticed from the ledger accounts submitted by the assessee that a lot of reversal entries were passed in the aforesaid ledgers. The assessee was asked to 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:- ....
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....ons were not supported by any workings/ Invoices/ vouchers, the same should not be allowed as a deduction in the current assessment year also. 7.7 In addition to the above, vide letter dated February 18, 2013, it was submitted by the assessee that circuit charges of Rs. 7,205,063 proposed for disallowance in the earlier assessment year, based on the observation of the special auditor that such expenses relate to the current assessment year, should be allowed as a deduction in the current assessment year. The submission of the assessee has been considered. Since the aforesaid expenses were disallowed in the preceding assessment year on account of the fact that such expenses relate to the current assessment year, deduction in respect of the above expense of Rs. 7,205,063 is allowed. 7.8 In view of the above discussion and the facts of the case, disallowance of Rs. 19,91,52,615 is made for the current assessment year. Penalty proceedings u/s 271(1)(c) 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 invoi....
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....rovided opportunities vide notice u/s 142(1) of the I.T Act, 1961 dated 10.02.2014 to bring documentary evidence in support of its claim and to verify the genuineness of the claim. The ld AR of the assessee company submitted its reply vide letter dated 14.02.2014 and details of additional invoices along with copy of invoices were produced and verified. On verification it was found that copies of invoices of Rs. 1,94,36,715/- were produced by the AR of the assessee company which were found correct. Therefore, credit of additional invoices of Rs. 1,94,36,715/- was allowed to the assessee company. Hence, in view of the additional evidences submitted the assessee was granted partial relief. 33. Before us, the ld DR relied upon the findings of the lower authorities whereas the AR put forth the following contentions: 4.3 Infrastructure cost represents bandwidth charges paid to other telecom operators for provision of bandwidth required for transmission of data. Last mile charges represent charges paid to other telecom 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 AG....
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.... * GAIM is a highly automated system and is used by appellant as an operational tool to manage inter-alia circuit inventory and perform vendor invoice validation relating to such circuits. a) Process flow for booking the Circuit charges in GAIM The process undertaken for booking the Circuit charges across the world is explained briefly as below: * As and when a requests for new circuits is placed by the customer to appellant, a request is created through another system called NGGNI(Next Generation Global Network International) in favour of third party vendor who in turn is required to provide service. * Such requests are converted into orders by the Customer Access Provisioning Team who act as primary interface with the vendors with regard to ordering and delivery of the circuits; * Order is placed with the vendor to deliver circuit at a particular address and at a particular time; * Accordingly, vendor delivers the circuit (along with necessary hardware and software); * Post such delivery, the order gets close and the inventory of circuit usage is recorded in GAIM. GAIM contains various details relating to the circuit, suc....
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....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. 4.7 The break up of actual expense and year end accruals are given below: 4.9 Detail of the circuit accruals disallowed in the final assessment order is as under: Disallowance in the Draft Order Rs. 19.91 crores Less: Relief allowed by DRP after verification of invoices Rs. 17.04 crores Disallowance for the AY 2009-10 Rs. 2.87 crores Less: credit allowed for AY 2009-10 Rs. 3.08 crores Credit allowable during the AY 2009-10 Rs. 20.84 Lacs 4.10 Basis the detailed process of recording circuit accruals, it may be appreciated that the circuit accruals are accounted on the basis of established scientific mechanism. The appellant follows this method of accruing circuit charges each year and the practice is in line with the business activity of the appellant industry. Thus, similar to warranty provisions, which are estimated on scientific methodology and based on consiste....
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.... the vendor to deliver circuit at a particular address and at a particular time. Accordingly, vendor delivers the circuit (along with necessary hardware and software). Post such delivery, the order gets close and the inventory of circuit usage is recorded in GAIM( Global Access Inventory management system) . 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. As GAIM works on calendar year basis i.e. from January to December, the accruals for the period starting from January to March are excluded / added on proportionate basis. Assessee further explained that the validation process also identifies any discrepancies which have to be resolved via the dispute management process before the invoice can be app....
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....ng it in the next year is nothing but a timing difference. The fact that the expenses are allowed in the subsequent year also proves that the lower authorities have not disputed the incurrence of such expenses. Hence, in accordance with the mercantile provisions it should be allowed in the year of creation itself. The assessee has also drawn reference to the principles laid down by the Hon'ble Apex Court in the case of M/s Rotork Controls India (P) Ltd (314 ITR 62) and M/s Bharat Earth Movers (245 ITR 428). According to us the provision for circuit accruals is made in compliance of accounting standards issued by the Institute of Chartered Accountants of India and also on a proper scientific basis backed by documentation. Therefore , we hold that the circuit accruals are created on scientific basis and thus needs to be allowed in the year of creation on accrual basis. In the result the ground No. 6 of the appeal is allowed. 36. Ground no. 7 of the appeal of the Assessee is regarding disallowance of credit of additional TDS certificates. We have heard the parties on this issues , both the parties agreed that if the additional TDS certificates of the assessee are proper then ld....
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....s based out of Hong Kong and Singapore and comprise of over 38 people and over 86 people respectively, and is engaged in maintenance and fixing repairs or outages for customers of the Appellant and other group companies in the Asia Pacific region. 1.11 The key functions performed by GCSC is primarily divided into two parts: a. Ticket handling which includes the following services: - Review ticket status - Customer handling verification - Check action real time - Manual CON notification - Detection and management of major incidents - Creating a case ticket - Creating and linking GenChild tickets with Master ticket - Stopping the clock on a ticket - Updating next check time - Document all ticket related communication - Document diagnostics, troubleshooting efforts in the ticket - Manage ticket queue b. PD/Triage - CPE verification - Diagnostics and troubleshooting - Problem determination - Assemble appropriate team to address ticket - Review asset history Submission before Submission before TPO: Refer page ....
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.... the contract has been signed with the customer, the service delivery team is responsible for setting up, configuring and testing the network. Some of the key functions performed by Service delivery team are: - Ensuring all information is in place so as to start processing a customer order - Project coordination for project implementation and site deployment - Performing technical checks to ensure that systems run properly - Data maintenance and engineering 1.18 The service management team is responsible for account management across all service disciplines. It comprises account/service managers serving customer order requests, acting as intermediaries between customer and CARE. 1.19 The cost incurred by the service delivery and service management team is allocated to AGNS India based on the number of orders processed for AGNS India as a percent of total number of orders processed for Asia Pacific region (excluding Japan). During the relevant period, 12.25 percent of the total cost of the service delivery team was allocated to AGNS India. Submission before TPO: Refer page 162 of Paper book Vol-I TPO's obser....
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....ts AGNS India in pricing of the services to be provided to the customer. The pre sales team comprises of 21 people and pricing team comprises of 5 people. 1.26 The cost of the GSE pricing team is allocated to AGNS India on the basis of number of pricing requests related to India as a percentage of total pricing requests. During the relevant period, 10 percent of the GSE pricing team's cost was allocated to AGNS India. 1.27 The cost incurred by GSE pre-sales team is allocated to AGNS India on the basis of number of pre-sales requests also keeping in mind the time spent related to India. Submission before TPO: Refer page no. 162 and 163 of Paper book Vol-I TPO's observation in the TP order: Refer page no. 225 and 226 of the Appeal set DRP Submission: Refer page no. 119 to 121 of the Appeal Set DRP Directions: Refer page no. 42 and 43 of Appeal Set Basis of allocation 1.28 The cost incurred by Technical assessment team is allocated on the basis of percentage of pre-sales requests and time spent related to India respectively. This cost incurred by GSE pricing team is allocated as a percentage of pricing req....
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....and 43 of Appeal Set Basis of allocation 1.35 This cost has been allocated on the basis of percentage of time spent by Country services team on AGNS India. The amount allocated to AGNSI during the relevant period is INR 0.005 cr. Approach adopted by the Appellant 1.36 The cost paid by the Appellant for country services was benchmarked following an aggregated approach using the TNMM. Approach adopted by the Ld. TPO 1.37 The Ld. TPO rejected the arm's length nature of the aforesaid transaction in an arbitrary manner and determined the ALP as NIL. 1.38 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. E. IT Services Nature of services 1.39 The IT team provides internal IT support function including helpdesk, internal network ....
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....ion on an arbitrary basis and held the ALP to be NIL F. Billing support Nature of services 1.45 The billing team is responsible for raising invoices for all customers in the Asia Pacific region (excluding Japan). AT&T group has a team over 37 people based out of Hong Kong. The functions performed by the billing team are as follows: - Review pricing terms of the contracts; - Setting up of systems for different products and services after notification from delivery team; - Monitor billing inventory and ensure that invoices are raised on contractual intervals - Compare actual services installed with services contracted - Answer questions from clients/customers regarding disputes/disconnection - Resolve customer disputes - Process invoices reversals and adjustments - Determine penalty/termination charges - Intimate delivery team about termination 1.46 The cost of the billing team is allocated to AGNS India based on the number of invoices raised for India as a percentage of total invoices raised for Asia Pacific region (excluding Japan). During the relevant period, 10.1 p....
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....no. 228 and 229 of the Appeal set DRP Submission: Refer page no. 125 of the Appeal Set DRP Directions: Refer page no. 42 and 43 of Appeal Set Basis of allocation 1.54 This cost has been allocated on the basis of number of India sites as percentage of number of Asia Pacific (excl Japan) sites. During 2008, 42 sites were operational in AGNS India out of total of 998 sites in the Asia Pacific region. During the relevant period, 4.2 percent of the total cost of the project management team was allocated to AGNS India. The amount allocated to AGNSI during the relevant period is INR 0.24 cr. Approach adopted by the Appellant 1.55 The cost paid by the Appellant for project management services was benchmarked following an aggregated approach using the TNMM. Approach adopted by the Ld. TPO 1.56 The Ld. TPO rejected the arm's length nature of the aforesaid transaction in an arbitrary manner and determined the ALP as NIL. 1.57 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 base....
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....e 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 Appellant at the operating level. The TPO however rejected the aggregated approach and applied CUP as the most appropriate method for benchmarking the transaction of support services provided to its AE. 2.2 At this juncture, it may be pertinent to quote the relevant Sections of the Income tax Act, 1961 ('the Act') and Rules of the Income Tax Rules, 1962 ('the Rules'), dealing with the issue of selecting the most appropriate method for determining the ALP of an international transaction - Relevant sections of the Act ― 92. (1) Any income arising from an international transaction shall be computed having regard to the arm's length price. ― 92C. (1) The arm's length price in relation to an international transaction or specified domestic transaction shall be determined by any of the following methods, being the most appropriate method...................... Relevant provisions of the Rules ―10B . (1) For the purposes of sub-section (2) of....
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....he 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 international transaction or specified domestic transaction, and which provides the most reliable measure of an arm's length price in relation to the international transaction or the specified domestic transaction, as the case may be. (2) In selecting the most appropriate method as specified in sub- rule (1), the following factors shall be taken into account, namely:-- (a)............ (b)............ (c) the availability, coverage and reliability of data necessary for application of the method; (d)............. (e)............ (f)........... 2.3 On perusal of the above provisions of the Act and Rules, Your Honour's may kindly observe that the fundamental requirement for application of application of CUP method (as adopted by the TPO) is finding the "price" of a comparable uncontrolled transaction for benchmarking the transa....
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.... 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 others [ITA No. 16/2014] whereby it held that the aggregation of transactions is desirable in the case where the transactions are inter-linked. (Refer Para 137 on Page no. 512 of the Case Law Compendium) 2.10 Lastly the Appellant would like to draw attention to OECD Guidelines 1.42 which states that: "Ideally, in order to arrive at the most precise approximation of fair market value, the arm's length principle should be applied on a transaction-by-transaction basis. However, there are often situations where separate transactions are so closely linked or continuous that they cannot be evaluated adequately on a separate basis. Such transactions should be evaluated together using the most appropriate arm's length method or methods." 2.11 Accordingly, based on the above facts and legal positions, it is submit....
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....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. 114 of the Case Law Compendium) 2.18 Further, the reliance can be placed upon the recently pronounced 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. (Refer Para 34 on Page no. 89 and 90 of the Case Law Compendium) In this regard, the Appellant also relies on the following judicial precedents: - Ericsson India Private Limited vs Dy CIT [ITA No. 5141/Del/2011 (Delhi I....
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....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 for benchmarking the transaction. According to Hon'ble DRP since no benefit is received the value of transaction is treated as NIL, which is unjustified and not tenable under the TP Regulations. Benefit Test 2.24 The Appellant submits that one of the contention of the Hon'ble DRP to treat the value of services as NIL is that no benefit is received by the Appellant. The Appellant most humbly submits that the benefit test' cannot be applied to determine the ALP of transaction. The domain of the TPO/DRP is only to examine as to whether the payment based on the agreement adheres to the arm's length principle or not. 2.25 The contention of the TPO/DRP....
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....9;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 to demonstrate that the services have been rendered. 3) The assessee has not been able to meet the benefit test. 4) Assessee has not been able to substantiate its case by way of proper documentation 5) Similar disallowance has already been held in AY 2008-09 42. We have carefully considered the rival contentions. Before us, the Ld. AR has submitted compilation of paper books and synopsis where in the submissions made before the TPO and DRP were submitted. He further relied on several judicial precedents on the issues. Ld. AR also submitted several judicial precedents, which are also noted in his submissions.....
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....ternational 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 the enterprises. iv. The enterprises would require that each participant's proportionate share of the contribution is consistent with the proportionate share of overall benefits expected to be received from the arrangement. v. Transfer price of cost or expenses allocated or apportioned to such enterprise or contributed by such enterprise shall be determined having regard to Arm's length price of such benefit, service or facility received by the enterprise. In order to satisfy the arm's length price a participant's contributions must be ....
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....l 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 percentage of No. of orders processed for Asia Pacific (excl Japan) (Refer TP Order on Pg 225 of Appeal Set) Team comprises of over 30 people AE processed 4531 orders, 555 pertained to India 12.25% of total cost was allocated to India 6.39 6. Country services The country services team is a cross-functional team providing in-country support for other functional teams, that includes pre-sale....
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....eing 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 should be judged from the viewpoint of the appellant as a businessperson. We agree with the argument of the assessee that if the network related problems prevent the customers from using its services, the assessee is bound to suffer reputational damage and potential....
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.... 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 requires specialized knowledge and experience in order to provide seamless services to customers. It has inherent risks and advantages that can be effectively harnessed only through sharing of resources and efficiencies that are inbuilt in-scale. Accordingly, availabil....
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.... 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 replace its own assessment of the commercial viability of the transaction. The judicial precedents also stipulate that the duty of the Ld. TPO is restricted to determine the ALP of the international transaction and that he cannot replace hi....
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....rability 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 international transaction pertaining to royalty payment was at arm's length. The appellant on a without prejudice basis also did the benchmarking of royalty by applying the CUP method to determine the contemporaneous industry ....
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....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 use of MOTOROLA signature and M logo (Emsignia) 7 percent of net sales 58. The aforesaid result demonstrated that the rate of royalty paid by ....
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....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 purchase a branded product believing in its quality which reduces his burden in matters such as, time in searching, examining for ensuring quality etc. Even in a third....
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....esence 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 to Initiation of penalty proceedings and Ground 10 of the appeal of the Assessee relates to levy of interest u/s 234B and 234D of the Act 70. These gro....
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....ting 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 rent by AT&T CSI have been used by AT&T CSI for its own business purpose. However, portion of such costs have been al....
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....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 01.04.2007 and as such its authe....
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.... allocation of expenses incurred by 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....
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.... 5.19 Applying the principles laid down in the aforesaid judicial precedents to the present case, it clear that 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 evide....