TaxTMI 
TaxTMI 
2019 (8) TMI 552
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....Income-tax Act, 1961 ('the Act'), and in doing so have grossly erred in: 1.1 Disregarding the judicial pronouncement/ finding of the Hon'ble ITAT in Appellant's own case for AY 2009-10, AY 2010-11 and AY 2011-12 wherein the Hon'ble ITAT has concluded the mentioned issue in favour of the Appellant. 1.2 Rejecting the combined transaction approach of benchmarking adopted by the Appellant in its TP documentation (i.e. aggregating availing of intra-group services with provision of network support services) and proceeding to determine the arm's length price of international transaction pertaining to availing of intra-group services from its AEs on a standalone basis; 1.3 Arbitrarily applying Comparable Un-controllled Price ('CUP') method as the most appropriate method as against Transactional Net Margin Method ("TNMM') applied by the Appellant in its Transfer Pricing documentation; 1.4 Disregarding the elaborate documentary evidence submitted as part of assessment proceedings to erroneously assume that 'no benefit' hasd been conferred upon the Appellant from the international transactions pertaining to availing of intra-group services and thereafter re....
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.... past year orders passed by the DRP; 2.5. arbitrarily rejecting the supplementary analysis using Comparable Uncontrolled Price ('CUP') method to benchmark the payment of royalty transaction submitted by the Appellant without giving any cogent reasons; 2.6. undertaking fresh benchmarking analysis using Royaltvstat database and selecting agreements which are not comparable to the royalty payment made by the Appellant to its AEs. 2.7. not providing the detailed search process alongwith backup documentation such as accept-reject matrix to provide Appellant an opportunity to evaluate the appropriateness of the benchmarking analysis. 3. Disallowance of circuit accruals 3.1 On the facts, in circumstances of the case and in law, the Ld. AO /DRP erred in making a disallowance of Rs. 61,11,589 on account of circuit accruals created towards bandwidth and last mile services availed by the Appellant company, ignoring that the accruals were based on a reasonable and scientific basis. 3.2 On the facts, in circumstances of the case and in law, the Ld. AO failed to appreciate that the Appellant follows mercantile system of accounting and....
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....llowance at Rs. 8,94,42,969 instad of Rs. 8,33,31,110 (i.e. total accrual of Rs. 37,43,09,016 less details submitted of Rs. 24,97,62,018 less additional evidences of Rs. 4,12,15,888) 4.5 Without prejudice to the above, on the facts, in circumstances of the case and in law, where any disallowance is made in respect of the aforesaid accruals for the year under consideration, deduction in respect of the disallowed amount should be allowed in the subsequent year(s) in which such accruals were reversed or utilized. Therefore, any disallowance on account of year-end accrual is unjustified. 5. Disallowance of Support Service Expenditure 5.1 On the facts, in circumstances of the case and in law, the Ld. AO/DRP erred in disallowing the legitimate business expenditure being in the nature of support service expenses of Rs. 8,25,71,385 paid to AT&T Communication Services India Private Limited ('ACSI'). 5.2 On the facts, in circumstances of the case and in law, the Lei. AO/DRP erred in not taking cognizance of the submissions made by Appellant and the documentary and circumstantial evidence/ proof produced by the Appellant, which duly substan....
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....ot granting credit of taxes deducted at source to the Appellant. 10. Levy of interest under section 234B and 234C of the Act 10.1 On the facts in the circumstances of the case and in law, the Ld. AO erred in incorrectly charging interest under section 234B and 234C of the Act. 11. Initiation of penalty proceedings 11.1 On the facts, in the circumstances of the case and in law, the Ld. AO erred in initiating penalty proceedings under Section 271(1)(c) of the Act against the Appellant on account of the above adjustments made in the impugned final assessment order. All above grounds are without prejudice to each other. The Appellant craves leave to add, amend, vary, omit or substitute any of the aforesaid grounds of appeal at any time before or at the time of hearing of the appeal. The Appellant prays that appropriate relief be granted based on the said grounds of appeal and the facts and circumstances of the case." 3. The assessee company was incorporated in India on 25.10.2005 with an objective to provide telecommunication services in India and has obtained International Long Distance (ILD), National Long Distance (NLD) and Internet Se....
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....pany filed objection before DRP. The DRP vide its order dated 20.08.2018 disposed of the objections. The DRP rejected the objections filed by the assessee against transfer pricing adjustment proposed in the draft assessment order. Thus, the assessing officer made addition of Rs. 28,76,88,911/- on account of arm's length price determined by the TPO. The Assessing Officer further made addition of Rs. 61,11,589/- on account of circuit accruals. The Assessing Officer made addition of Rs. 8,94,42,969/- on account of other than circuit accruals. The assessing officer made disallowance of Rs. 8,25,71,385/- in respect of support service expenditure. The Assessing Officer also made disallowance of Rs. 57,74,87,020/- in respect of license fee. The Assessing Officer also made addition of Rs. 12,66,08,117/- towards lease line expenses. The Assessing Officer finally made disallowance of Rs. 1,29,47,531/- on account of foreign exchange loss. Thus, the Assessing Officer assessed income of Rs. 3,85,335,887/-. 4. As regards Ground Nos. 1 to 1.6 relating to transfer pricing adjustment relating to intra group services, the Ld. AR submitted that the said issue has been decided by the Tribunal in as....
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....iewpoint 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 loss to business. Addressing the customer's problems promptly and by a specialized team (which may be an AE) should satisfy the benefit test, as the assessee received an economic benefit to maintain its business operation. Therefore in this regard we are of the view that assessee has substantiated that these services are required by it for its business sustainability. The only allegation which TPO / DRP made was that the assessee has not been able to substantiate need test by way of appropriate documentation and held that the assessee should have availed these services from an independent third party in India rather than from its AE. After going through the fact and submissions placed on record we are of the view that the assessee has satisfied the need/benefit test for availing these services from its AE. Regarding the rendition of the services by the AE, the appellant submitted before the TPO, the copy of intercompany agreements, tickets pr....
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....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, availability of support in terms of strategy, data usage and administration is essential and indispensable for the assessee in order to achieve cost efficiency and normal functioning of its business operations. For this reason, the assessee is availing such essential services from its AEs. For this purpose, the assessee had entered into an agreement with its AE. These functions or services, if not availed from the AEs, would have to be undertaken by the assessee itself. However, due to very nature of network connectivity services and in order to achieve better economies of scale and synergies, these functions are centralized within the AE of the assessee which renders such services. It is, therefore, clear that such services confer a benefit on the assessee. While examining the arm's length nature of the impugned international transaction, the learned TPO has applied costbenefits test and attempted to map the benefits received against payment made for s....
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....ssee 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 his views with the views of the assessee. Respectfully following the binding precedent cited above we are of the view that benefit test for determination of Arms length Price is to be viewed from the perspective of the assessee and businessman and not from the perspective of revenue. In this case appellant has demonstrated the benefit which it is expected to derive from the various services rendered by its AE and ld. TPO has erred in replacing with its own judgment of the benefit derived by the assessee, we reject this approach. 52. However for determination of arms Length pricing, the assessee has adopted TNMM as the most appropriate method. The TPO has rejected TNMM as the most appropriate method and applied the CUP method. For this TPO has not given any reasoning. In fact, TPO and DRP has not brought out any data on record for bench marking of intra group transaction and treating the value of services as NIL by applying the CUP ....
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....any provided network connectivity services to customers of its AEs, For rendering services, the assessee availed support services from AEs for which it entered into a Services Agreement dated 01.07.2011 with Interwise Asia Pacific Pte Ltd. As per the said agreement, Interwise Asia Pacific Pte Ltd. shall render the aforesaid services to the assessee on cost plus markup. During the year under consideration, out of the many services for which it had entered into agreement, only one service namely Global Customer Services Center was availed. The assessee submitted the list of the tickets processed along with nature of problem resolved and the relevant evidence was also submitted before the Assessing Officer. Thus, the facts are identical in the present Assessment year as well to that of earlier Assessment Years i.e. 2009-10, 2010-11, 2011- 12, 2012-13 and 2013-14. Since the issue is identical in the present assessment year by assessee's own order, Ground Nos. 1 to 1.6 are allowed. 7. As regards Ground Nos. 2 to 2.7 relating to transfer pricing adjustment with respect to payment of royalty, the Ld. AR submitted that the same is partially covered in favour of the assessee in assessmen....
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....s to be tested on the basis of factum and quantum both aspects. It also needs to be looked at the functions to be performed by the parties for royalty payments. It also nees to be looked in to nature of the use of the intangibles which are covered in License Agreement with AT&T Corp, pursuant to which it was granted the right to use licensed marks in marketing material for publicity, advertising, signs, product brochures, instruction manuals and in other form 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 o 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 asid....
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....stem of accounting and accrues circuit charges on scientific basis. It is also his submission that as per the accounting standards notified u/s 145(2) of the Act, the assessee is required to make provision for circuit accruals for the subject financial year. It is also his submission that the assessee has provided evidence to the extent of almost 98% of the expenses represented by year end circuit accruals for utilization/reversal of circuit accruals made in subsequent year and no adverse finding has been given by the Assessing Officer/DRP. We find merit in the arguments advanced by the ld. counsel for the assessee. We find identical issue had come up before the Tribunal in assessee's own case for assessment year 2009-10. We find the Tribunal has discussed the issue at para 34 and 35 of the order and held that the circuit accruals are credited on scientific basis and thus needs to be allowed in the year of creation on accrual basis. The relevant observation in the order of the Tribunal reads as under:- "34. We have carefully considered the rival contentions and perused the order of the ld TPO/ AO/ DRP. The assessee has explained the basis of creating the provisions for cir....
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....spute 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 the details vis-à-vis each circuit, amount to be booked against each circuit and the accrual to be created. Further, assessee has been creating the provision on an year on year basis in accordance with the mercantile system of accounting in accordance with accounting standard issued by the ICAI otherwise correct expenditure would not be captured as per the matching principle. The assessee has ....
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....sessee for the relevant assessment year and recorded in accordance with the matching principle, deduction in respect therefore should be allowed. The assessee company produced documentary evidence of utilization/reversal of the expenses represented by year-end circuit accruals, which shows that even the balance accruals have also been created on a reasonable basis and hence, no disallowance in this regard can be made against the assessee. Thus, the issue is identical to the earlier Assessment Years and therefore Ground Nos. 3 to 3.6 are allowed. 13. As regards Ground Nos. 4 to 4.5 relating to disallowance on account of year end accruals, the Ld. AR submitted that the issue is squarely covered in favour of the assessee vide Tribunal order in Assessment Years 2010-11, 2011- 12, 2012-13 and 2013-14 as well as squarely covered by the order of the Tribunal in assessee's sister concern for Assessment Year 2010-11. 14. The Ld. DR relied upon the order of TPO/ DRP/ AO. 15. We have heard both the parties and perused all the relevant material available on record. The Tribunal in A.Y. 2012-13 held as under:- "24. We have considered the rival arguments made by both the sides ....
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....ssment year 2010-11 and 2011- 12, therefore, respectfully following the decision of the Tribunal in assessee's own case for preceding three assessment years, we hold that the disallowance made by the Assessing Officer is not justified. Accordingly, the same is directed to be deleted. The ground raised by the assessee is accordingly allowed." In the present Assessment Year also the assessee company is following the mercantile system of accounting and since the year end accruals created by the assessee represent accruals towards normal business expenditure incurred by the assessee for the financial year relevant to the present assessment year, deduction in respect thereof has to be allowed to the assessee. The facts are identical in the present Assessment year as well to that of earlier Assessment Year which is decided by the Tribunal in A,Y. 2010-11. Therefore, Ground Nos. 4 to 4.5 are allowed. 16. As regards Ground Nos. 5 to 5.3 relating to disallowance on account of support services, the Ld. AR submitted that the issue is squarely covered in favour of the assessee vide Tribunal's order for assessment year 2009-10, 2010-11 and 2013-14. 17. The Ld. DR relied upon the order ....
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....on and no third party, including the tax authorities, is entitled to question the commercial reasoning/justification of the expenditure so incurred. Reliance in this regard is placed on the following judicial precedents furnished by the assessee: i. CIT v. Panipat Woollen & General Mills Co Ltd (103 ITR 66) (SC) ii. CIT v. Sales Magnesite (P) Ltd [1995) 214 ITR 1 iii. Binodiram Balchand vs. Commissioner of Income Tax (48 1TR 548) iv. Calcutta Landing and Shipping Co Ltd vs. CIT (65 ITR 1) (Cal High Court) v. CIT Vs B Dalmia Cement Ltd (254 ITR 377) 76. Respectfully following the principles laid down in the aforesaid judicial precedents, we find that where the appellant has actually incurred the aforesaid support services cost and no evidence has been brought by the Department to controvert the same, such expenditure cannot be disallowed merely on suspicion. We affirm the finding of the ld DRP on this issue. In view of the above, the appeal of the revenue on this ground is dismissed. 31. Since the assessee had not submitted the requisite details before the Assessing Officer, therefore, we restore this issue to the file o....
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....com is a recurring fee paid by the license holder on periodic basis towards maintenance and use of the license and the benefit of the same does not extend beyond the close of the year. Further, it is also relevant to note here benefit of the revenue share based license fees paid during one financial year cannot be extended to the subsequent financial year, for which license fee is to be paid separately upon the adjusted gross revenues of such subsequent year. Therefore, payment of the aforesaid annual fee cannot be said to confer any right of an enduring nature upon appellant. We are convinced that the appellant's case is squarely covered by the decision of Hon'ble Delhi High Court in the case of CIT vs. Bharti Hexacom Limited [2014] 265 CTR 130 (Delhi) other case laws relied upon by the appellant as cited above. The Ld. DR could not controvert that how this issue is not squarely covered by the decision of the jurisdictional High Court. It is also important to note that in the immediately succeeding year on same facts, the DRP has allowed the claim of the licence fees on revenue basis u/s 37(1) of the Act. In view of the above facts and respectfully following the decision o....
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....We find the Assessing Officer disallowed an amount of Rs. 6,50,79,639/- paid by the assessee on account of leaseline expenses which were paid to other telecom operators for provision of telecom connectivity service required for transmission of data on the ground that the assessee failed to deduct tax at source as per the provisions of section 194I of the Act. It is the submission of the ld. counsel for the assessee that the leaseline charges are paid to the telecom service provider for faster connectivity service through dedicated leaseline and, therefore, such payment has been made for availing the facility of connectivity services from vendors required for transmission of data and is not for use of any asset involved in provision of such facility covered u/s 194I of the IT Act. It is also the submission of the ld. counsel for the assessee that the assessee was neither in possession nor control of the equipments which were used for providing internet and communication facilities and, therefore, there was a clear absence of the element of leasing of equipments and, therefore, the provisions of section 194I cannot be applied. We find merit in the above argument of the ld. counsel. W....
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....vice Providers like BSNL, MTNL, and international half circuit facility from Flag, Atlantic, at France. These are standard facilities provided for transmission of data by those organisations. The issue is whether tax should be deducted at source u/s 194 I from payments made for use of such standard facilities. The Hon'ble Delhi High Court, in the case of Asia Satellite vs. CIT, reported in 332 ITR 340 and the Hon'ble Madras High Court, in the case of Skycell Communications Ltd. vs. DCIT, reported in 351 ITR 53 (Madras) have adjudicated the issue in favour of the assessee. Respectfully following the same, we hold that payments made towards use of standard facility, when the lessee is not having any domain or control or possessory rights over such facility, cannot be categorized as use of assets for the purpose of the Act. 11.1. Respectfully following the order of the Jurisdictional High Court on this issue, we allow this ground of appeal of the assessee. In the result ground no.5 for the A.Y. 2007-08 is allowed." 42.1 We find Mumbai Bench of the Tribunal in the case of Alok Industries Ltd. (supra) has also decided an identical issue in favour of the assesse....
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....e decision of the Apex Court in the case of Commissioner of Income-tax-4, Mumbai vs. Kotak Securities Limited, reported at [2016] 67 taxmann.com 356 (SC) and it was submitted that if the observations made by the Apex Court in the above referred decisions are considered, the decision of the Tribunal would be unsustainable and consequently, the questions may arise for consideration before this Court in the present appeals. 9. We may record that in the decision of the Apex Court in the case of Bharti Cellular Limited (supra) the Apex Court after having found that whether human intervention is required in utilizing roaming services by one telecom mobile service provider Company from another mobile service provider Company, is an aspect which may require further examination of the evidence and therefore, the matter was remanded back to the Assessing Officer. Further, in the impugned order of the Tribunal, after considering the above referred decision of Bharti Cellular Limited, the Tribunal has further not only considered the opinion, but found that as per the said opinion the roaming process between participating entities is fully automatic and does not require any human inter....
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....by the Tribunal in reaching to the aforesaid conclusion. Apart from the above, the questions are already covered by the above referred decision of the Delhi High Court, which has been considered by the Tribunal in the impugned decision. 14. In view of the above, we do not find that any substantial question of law would arise for consideration. Hence, the appeals are dismissed." 44. The various other decisions relied on by the ld. counsel for the assessee also support its case. In view of the above discussion, we hold that the assessee is not liable for withholding tax u/s 194I of the Act on account of payment of leaseline charges to other telecom operators for provision of telecom connectivity services required for transmission of data. Accordingly the Assessing Officer is directed to delete the disallowance. The ground raised by the assessee on this issue is accordingly allowed." It is pertinent to note that the lease line charges were paid to the telecom service provider for faster connectivity services through dedicated lease line. As such the payment had been made for availing facility of connectivity services from vendors required for transmission of data ....