TaxTMI 
TaxTMI 
2025 (4) TMI 132
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....s erred in passing the order under section 144C(5) of the Income Tax Act, 1961 (Act"), partly confirming the adjustments proposed by the Deputy Commissioner of Income Tax, Circle 17(1) New Delhi ("AO') in the draft assessment order and the learned AO has accordingly erred in passing the assessment order under section 143(3) read with section 144C of the Act. Each of the ground is referred to separately, which may kindly be considered independent of each other. 1. On Amortization Of Revenue Based License Fee u/s 35ABB Of The Act 1.1. On the facts and circumstances of the case and in law, the learned AO/DRP has erred in treating the annual revenue share based license fee of Rs 2,05,38,20,412, payable by the Appellant to Department of Telecom (DoT), as a 'capital" expenditure being consideration for obtaining the telecom license and hence, amortisable u/s 35ABB of the Act 2. Disallowance of depreciation claimed on the addition to fixed assets on account of Asset Restoration Cost (ARC) obligation. 2.1. On the facts and circumstances of the case and in law, the learned AG DRP has erred in disallowing the depreciation amounting to Rs 5....
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.... the facts and in the circumstances of the case and in law and without prejudice to Ground 43, the learned AO/DRP has erred in not appreciating that even as per the statement of technical experts recorded in the context of IUC services in the case of the VMSL, it has been stated that the carriage of calls is an automatic activity and human intervention, if any, is required only at the stage of inter-connect set-up, capacity enhancement, monitoring, maintenance, fault identification, repair, etc. 4.5. On the facts and in the circumstances of the case and in law, the learned AO/DRP has erred in ignoring the statement of technical experts recorded by the income-tax authorities in Coimbatore during proceedings conducted in the case of a group company of the Appellant - Vodafone Cellular Limited, in context of roaming services, wherein it has been clearly observed that roaming services are automated service requiring no human intervention. 4.6. On the facts and in the circumstances of the case and in law and without prejudice to Grounds 4.2 to 4.5, the learned AO/DRP has erred in not holding that characterization of a payment must be done having regard to the dominant ....
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....of prepaid SIM cards/talktime, 5.4. On the facts and in the circumstances of the case and in law and without prejudice to Grounds 5.1 to 5.3, the learned AO/DRP has erred in not restricting the disallowance u/s 40(a)(ia) of the Act to the amount which remains payable at the end of the year which stands at "NIL". 5.5. On the fact and in the circumstances of the case and in law and without prejudice to the Grounds 5.1 to 5.4, the learned AO/DRP has erred in not adjudicating and holding that the insertion of second proviso to section 40(a)(ia) of the Act vide Finance Act, 2012 is curative in nature and its benefit should be extended to the past years and accordingly the leaned AO be directed to allow benefit of the same after verification of supporting documents to be submitted by the Appellant and accordingly, the learned AO be directed. 5.5.1. to allow deduction in respect of the proposed disallowance of Rs 1,30,33,61,238 made under section 40(a)(ia) of the Act for the subject AY in the subsequent year's, basis the conditions prescribed in the second proviso to section 40(a)(ia) of the Act. 5.5.2 to allow deduction in the subject AY (i.e. AY 2....
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....ts aggregating to Rs 11,47,16,908 made by the learned AO and the Additional Director of Income-tax, Transfer Pricing Officer-II(4), New Delhi ('learned TPO) under section 92CA of the Act on account of the royalty payments made to associated enterprises ('AES") 9.2.On the facts and the circumstances of the case and in law, the learned TPO/AO/DRP has erred in rejecting the economic analysis undertaken by the Appellant to determine the arm's length price ('ALP") of the royalty payments made to AFs. 9.3. On the facts and the circumstances of the case and in law, the learned TPO/AO/DRP has grossly erred in holding without any basis that the Appellant has not derived any economic or commercial benefits from the royalty payments to AEs and in determining the ALP of said transaction as "Nil' without application of any transfer pricing method mentioned prescribed under Section 92C of the Act. 10. Transfer Pricing Adjustment-Reimbursement of advertisement & marketing spend 10.1. On the facts and the circumstances of the case and in law, the Hon'ble DRP has grossly erred in confirming the adjustments aggregating to Rs. 2,84,68,27,994....
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....ts and in law, in holding that the Appellant has rendered a service to its AE by incurring excessive AMP expenses and hence should have charged an additional mark-up of 15.46% on the alleged excessive AMP expenses from the AEs. Further, while doing so, the learned TPO/AO/DRP erred in appreciating that if at all a mark-up of 15.46% has to be applied, then the same should have been applied only on the value-added expenses (excluding third party costs) incurred by the Appellant for providing the alleged service in the nature of brand promotion as contended by the learned TPO/AO and confirmed by the Hon'ble DRP. 11. Non-grant of full credit in respect of Tax Deducted at Source (TDS') On the facts and in the circumstances of the case and in law, the learned AO has erred in granting credit for TDS of Rs 61,00,63,817 instead of Rs 65,58,50,566 claimed by the Appellant in its revised return of income for the subject AY. 12. Non-grant of Minimum Alternate Tax ('MAT') credit On the facts and in the circumstances of the case and in law, the learned AO be directed to allow MAT credit brought forward from past AYs against the tax liability und....
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....ppellant and the Revenue. Appeal [bearing ITA No.660 of 2018] filed by the Appellant before the Hon'ble Delhi High Court challenging the Order dated 14 March 2018 passed by the Hon'ble Tribunal. 01^st June 2018 Order passed by the Hon'ble Delhi High Court holding that the Tribunal was not justified in remanding the matter and inter-alia directing the Hon'ble Tribunal to decide the issues pertaining to transfer pricing adjustment on royalty payment an Advertising, Marketing and Promotion ('AMP') expenditure. 25^th March 2019 Interim Order passed by the Hon'ble Delhi Bench of the Tribunal calling for a remand report from the TPO w.r.t. the issue of transfer pricing adjustment on royalty payment but marking some adverse observations in the matter. Writ Petition [bearing WP(C) No. 4467 of 2019] filed by the Appellant with the Hon'ble Delhi High Court challenging the interim Order dated 25 March 2019 passed by the Hon'ble Tribunal. 29^th April 2019 Order passed by the Delhi High Court directing the Hon'ble Tribunal to decide the aforesaid 2 issues. 15^th May 2019 Letter filed by the Appellant with the TPO furni....
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....r the relevant year.The TPO submitted a Remand Report dated 29/08/2019 to the Tribunal. In response, the assessee filed rebuttals via a letter dated 16/09/2019. The Ld. AR prayed for that pursuant to the orders dated 01 June 2018 and 29/04/2019 by the Hon'ble Delhi High Court, the following two issues remain to be adjudicated by the Tribunal: a. Transfer pricing adjustment related to the ALP determination of royalty payments related Ground No. 9. b. Transfer pricing adjustment concerning the AMP expenditure to establish whether it constitutes an international transaction related Ground no-10. 4. Ground of appeal No. 9 related Transfer Pricing adjustment relating to payment of royalty: 4.1. During the alleged assessment year, the assessee paid royalty for use of trademark/ trade name to the following Associated Enterprises ['AES']: Name of the AE Amount of royalty paid (in Rs.) Rate of royalty Agreement Vodafone Ireland Marketing Limited ['VIML'] 7,64,77,939 0.30% of the net service revenues for the use of 'Vodafoneʼ trademark / trade name Trademark Licence Agreement dated 19 December 2008 (effective date - 29 ....
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....agreement with its AEs and hence, royalty rate paid by the assessee was not fed based on expected benefit accruing from the use of trademark trade name; • the assessee did not provide any details of the royalty rates in the industry; and • the increase in the sales of the assessee cannot be solely attributed to the big brands. A subscriber's choice of service provider is not exclusively dependent on a particular trademark/ trade name. Varied factors like overall service quality, free calls, free SMS's networks capability, reliability of services, network innovations, low rates charges, accessibility, promotion with discounts, refund and free samples, geographic network coverage, customer care, family and friends influence the preference of a subscriber. Thus, it is the attributes related to the service provider which forms the basis or reason for a customer for preferring any particular service provider over another. 4.5. The DRP vide its Directions dated 18/12/2013 upheld the findings of the TPO and held that there are considerable differences between the royalty agreement for Motorola and between the AEs and the assessee and, hence, the Motoro....
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....le in respect of 'Vodafone' brand wherein royalty at the rate of 0.25% has been charged and on which detailed discussions have been made in the orders passed by the TPO for the AY 2013-14 to 2015-16 and also confirmed by the DBP for the AY 2013-14. 4.11. Further, in the said Remand Report, the TPO alleged that none of the comparable selected by the assessee by applying external CUP are comparable in true sense and the search conducted by the Appellant has not yielded correct results. With respect to the comparable agreement used by the assessee as an internal CUP, the TPO rejected the same by stating that no details of this transaction were given during the course of proceedings earlier and observed that the assessee has not entered into any transaction with the other Group entity. He also stated that a copy of the said agreement used as internal CUP has not been furnished by the assessee. 4.12. In response thereto, the assessee vide letter dated 16/09/2019 filed its rebuttals to the Remand Report and pointed out flaws in the Remand Report issued by the TPO. The assessee also pointed out that because of the confidentiality clause in the Agreement the internal CUP agre....
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....he assessee to have incurred the same or that in the view of the Revenue the expenditure was unremunerative or that in view of the continued losses suffered by the assessee in his business, he could have fared better had he not incurred such expenditure. These are irrelevant considerations for the purpose of Rule 108. Whether or not to enter into the transaction is for the assessee to decide. The quantum of expenditure can no doubt be examined by the TPO as perlaw but in judging the allowability thereof as business expenditure, he has no authority to disallow the entire expenditure or a part thereof on the ground that the assessee has suffered continuous losses. The financial health of assessee can never be a criterion to judge allowability of an expense; there is certainly no authority for that. What the TPO has done in the present case is to hold that the assessee ought not to have entered into the agreement to pay royalty/brand fee, because it has been suffering losses continuously. So long as the expenditure or payment has been demonstrated to have been incurred or laid out for the purposes of business, it is no concern of the TPO to disallow the same on any extraneous reasonin....
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.... payment and also the viability of the same. There should not be any doubt that these aspects are normally considered by the management of the company while making business decisions ....... ". " ... 8. In the case of Dy. CIT v. Ekla Appliances [2011] 45 SOT 7 (Delhi) (URO), the TPO determined the ALP for the royalty payment to be Nil, primarily on the ground that the assessee has not been benefited from the technical Know how and the assessee was incurring losses continuously. The Hon'ble ITAT approved the observations made by the learned CIT(A) in that case in the following lines: "14.2 In this regard, learned Commissioner of Income Tax (Appeals) further mentioned that it is an acknowledged fact that transfer pricing has more to do with economic principles and business conditions that prevail in an uncontrolled situation. He further referred to certain OECD guidelines issued in this regard. He observed that TPO has completely disregarded the business and commercial strategy/realities behind the transaction and acted in a completely mechanical manner without giving regard to the economic circumstances surrounding the transaction and the business decision take....
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....see submits that the transaction between 'Virgin Enterprises Ltd.' and 'Virgin Mobile USA LLC' considered by the TPO in his Remand Report is a 'controlled transaction' i.e. between two AEs and, hence, cannot be taken as a comparable to benchmark the international transaction. Attention in this regard is invited to the following: • page No. 118 (running page No. 123 of the said document) of Form S-1 being the Registration Statement under the Securities Act of 1933 filed by 'Virgin Mobile USA' with the Securities and Exchange Commission' of the United States of America wherein the reference to the 'Virgin Trademark License Agreement' is given; and • page No. F-28 being the Notes to Consolidated Financial Statements of Virgin Mobile USA' wherein a reference to the amendment to the Trademark License Agreement is given and it is stated that the said agreement has been entered into with an affiliate of the Virgin Group. The aforesaid documents form a part of Annexure-C to the letter dated 16 September 2019 being the rebuttals filed by the assessee to the remand report issued by the TPO. 5.1. Reliance in this ....
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....e royalty rate for the year under consideration. In terms of the fresh analysis conducted by the assessee, it determined royalty rate of 0.70% -1.70% by way of an internal CUP and a rate a rate of 5.20% by using certain external CUP. In reference to Internal CUP: 6.1. The assessee considered the agreement entered into between VIML and OG FJARSKIPTI EHF ['OGF'] as a valid internal uncontrolled comparable transaction for payment of royalty. This agreement has been entered into between VIML (AE) and OGF an independent third party (telecommunication service provider). VIML entered into a brandingagreement with OGF for grant of right to use of Vodafone trademark and trade name and the royalty rate was fixed between 0.70% -1.70% of total annual revenues of OGF. 6.2. The Ld. AR further submits that OGF is not a part of the Vodafone Group and, thus, the branding agreement entered into between VIML and OGF represents a comparable uncontrolled transaction for determining the ALP of payment of royalty. 6.3. The Ld. AR has pointed in the letter 16/11/2019, submits that no opportunity was granted by the TPO to produce a copy of the agreement. Be that as it may, the Appellant....
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....ty by the assesseeat 0.30% and 0.15% of net service revenues is at an arm's length since the rate at which the assessee has paid royalty is less than the mean arm's length rate of 5.20% of the external comparable agreements. The TPO in his Remand Report has observed that none of the comparable selected by the assessee applying external CUP are comparable in the true sense and the search conducted by the assessee has not yielded correct results. 6.6. The Ld. AR has pointed out in its letter dated 16/09/2019, submits that the TPO has merely rejected the comparable selected by the assessee on flimsy grounds without giving any cogent reasons and without even himself producing or even attempting to provide an alternative set of comparable. It is submitted that while conducting a fresh search the assessee has diligently followed the directions of the Tribunal in terms of using industry codes specified and, then, selected the 4 comparable. This fact is evidenced from the search criteria adopted which is contained in the fresh search analysis submitted. It is also submitted that fresh analysis has been conducted by analysingin excess of 280 transactions/ agreements and the ac....
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....rowth including increase in footprint in the market and thus, the ALP at zero by the TPO is erroneous. The Ld. Counsel has further submitted that the use of Vodafone' Brand has resulted in the financial growth including increase in footprint in the market and thus, the ALP at zero by the TPO is erroneous. In this regard, I rely on the order of the Ld. DRP and TPO wherein it has been clearly established that regardless of the use of Vodafone' Brand, the assessee has not provided any evidence to show how the royalty payment has benefitted its business and so the ALP of the transaction has been determined at NIL 2. Use of Single Comparable chosen by the TPO as per the Remand Report- The TPO in the Remand Report dated 29.08.2019 has discussed the comparables selected by the appellant using Powerk database for computing the ALP of royalty transactions under the Comparable Uncontrolled Price method (CUP) and has rejected all of the comparables due to differences in the functions performed by the tested party, ie., the appellant and the comparables. As the CUP method requires strong similarity in the function, asset and risk analysis, the comparable selected by the app....
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....ved from external CUP agreements through a fresh search, is also treated as an appropriate ALP. Respectfully reliance is placed on the judgment in EKL Appliances Ltd. (supra), which establishes that Rule 10B(1)(a) of the Rules does not permit the disallowance of any expenditure on the grounds of necessity or prudence. Additionally, we respectfully rely on the Third Member decision in Technimont ICB Pvt. Ltd. (supra), wherein it was held that the ALP of an international transaction must be determined exclusively by comparing it with comparable uncontrolled transactions and not with a controlled transaction. The determination of ALP at 'Nil' without applying any of the prescribed methods is unjustified. Accordingly, the adjustments aggregating to Rs.11,47,16,908/- made by the Ld. AO are deleted. In light of the above, the order of the DRP is set aside, and the assessee's ground of appeal is allowed. 10. In the result, the appeal of the assesseeGround no-9is allowed. 11. Ground of appeal No. 10 (Transfer Pricing adjustment relating to AMP expenditure): 11.1.During the alleged previous year, the assessee had incurred the following expenses aggregating Rs. 282.24....
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.... the transaction of AMP expenditure. 11.4.Mr.Pardiwalla submits that the revenue has not discharged the onus cast on it by bringing any material on record to prove that there is an understanding / arrangement or an action in concert between the assessee and the AEs for promotion of trademark/ trade name owned by the AEs. The AMP expenses have been incurred as a function as part of the assessee's roles and responsibilities as a service provider and not under a separate arrangement/ agreement with the AEs to promote brands owned by such AEs. The assessee has the license to provide telecommunication services in India and the AEs cannot provide such services in India since it does not have such license and, hence, the AMP expenses have been incurred as a function by the assessee. 11.5.The assessee further submits that no cost/ income can be attributed only to 'brand promotion'. The entire advertisement expenditure incurred by the assessee was intended to reach out to the subscriber base in order to inform them about the different services rendered by it. The advertisement agencies do not charge different rates for advertisements for unbranded services vis-à-vis....
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....he case of Maruti Suzuki India Limited Vs Commissioner of Income Tax: [2016] 381 ITR 117 (Delhi) it has been held by the Hon'ble Delhi High Court that the existence of AMP Expenditure, being an international transaction, will have to be established de hors the bright line test. In absence of any written agreement, whether any arrangement existed or the Assessee along with its AE acted in concert would depend upon the facts and circumstances of each case. Where an assessee denies existence of international transaction in case of AMP Expenditure, as is the case in the present appeal, the onus would be on the Assessing Officer to bring out facts, circumstances, policy or conduct to support existence of an international transaction. In the present case, there is nothing on record to show or infer the existence of international transaction. We also note that in the subsequent assessment years (ie. Assessment Year 2012-13, 2013-14 & 2014-15) no adverse inference was drawn and no transfer pricing adjustment has been made in relation to advertisement, marketing and promotion expenses incurred during the relevant previous years. In the aforesaid facts and circumstances the transfer pric....
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....ransaction and benchmarking it by adopting the most appropriate method." 11.9.This issue too, as was argued during the course of the hearing, has been addressed by the Hon'ble Delhi High Court in the case of Maruti Suzuki India Limited (supra) - relevant portion of the same is extracted hereunder for ready reference: "73. ..... The argument of the Revenue, however, is that while such AMP expense may be wholly and exclusively for the benefit of the Indian entity, it also enures to building the brand of the foreign AE for which the foreign AE is obliged to compensate the Indian entity. The burden of the Revenue's song is this: an Indian entity, whose AMP expense is extraordinary (or 'non- routine') ought to be compensated by the foreign AE to whose benefit also such expense ensures. The 'non-routine' AMP spend is taken to have 'subsumed' the portion constituting the 'compensation' owed to the Indian entity by the foreign AE. In such a scenario what will be required to be benchmarked is not the AMP expense itself but to what extent the Indian entity must be compensated. That is not within the realm of the provisions of Chapter X. ....