TaxTMI 
TaxTMI 
2025 (6) TMI 488
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.... to clients in India which includes telephone support, customer enquiries, complaints handling and other after sales support. On receiving the reference for determining Arm's Length Price ("ALP") of international transactions entered by the appellant with its Associated Enterprises (AE), the TPO has passed the order on 28.07.2023, making adjustments to the returned income of the appellant for following transactions: A. Advertising, marketing and promotion (AMP) expenses by applying intensity approach Rs. 7,23,37,023/- (substantive basis) B. AMP expenses by applying bright line test (BLT) Rs. 48,61,72,050/- (protective basis) C. Disallowance of interest paid on compulsory convertible debentures (CCDs) Rs. 6,00 crores D. Interest on outstanding receivables Rs. 51,60,859/- E. Reselling of designated UC Singapore services Rs. 29,81,50,332/-. 3. Thereafter, the AO passed the draft assessment order under section 144C(1) of the Act dt. 29.08.2023 wherein total adjustments of Rs. 43,60,48,214/- towards transfer pricing were proposed by TPO. Against such order, assessee filed objections before learned DRP who vide its order dated 29.05.2024 partly accepted the objections raised b....
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....d by the Appellant is a part of its role as a distributor. Further, Ld. DRP/TPO/AO erred in making adjustment by convoluted/speculative logic by reference to irrelevant material and presumptions including that of 'depreciation and amortisation expenses' etc. 3.3 Ld. DRP/ΤΡΟ/ΑO erred in concluding that expenses incurred by Appellant resulted in the creation and development of the intangibles, thereby, benefitting AEs. 3.4. Ld. DRP/ TPO/ AO have erred in proposing an upward adjustment of INR 53,34,57.313 / on a protective basis by applying invalid Bright Line Test ("BLT') contrary to decisions of Hon'ble Courts. 3.5. Ld. DRP/TPO/AO have erred in selecting functionally dissimilar companies viz Vector E-Commerce Pvt. Ltd. UBM India Pvt. Ltd. and Adfactors P.R. Pvt. Ltd., as comparables in the marketing support segment for determination of BLT adjustment. 3.6. Impugned order erred in selecting functionally dissimilar companies like K7 Computing Pvt. Ltd and Innova Thinklabs Ltd., for making intensity adjustment of INR 5,07,74,913/-, where intensity adjustment itself stands invalidated by coordinate bench of this Hon'ble Tribunal to be mi....
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.... of arm's length price ("ALP") in connection with reselling segment and proposing an upward adjustment of INR 23,03,82,629/-. 6.3. Ld. DRP/TPO/AO have incorrectly accepted - Ten Times Online Pvt. Ltd., Wizard E-marketing Pvt. Ltd., and Integra Software Services Pvt. Ltd. as comparables to assessee. 6.4. Ld. DRP/ΤΡΟ/ΑO have erred in treating foreign exchange gain as non-operating while computing tested party margin by reference to extraneous assumption and factors and by ignoring FAR analysis specific to the transaction under consideration. That Ld. AO has erred in law and in fact, by levying an interest of INR 35,65,965 in the assessment order under section 234A of the Act. That Ld. AO has erred in law and in fact, by levying an interest of INR 5,87,66,765/- in the assessment order under section 234B of the Act. That Ld. AO has erred in law and in fact, by levying an interest of INR 4,19,969/- in the assessment order under section 234C of the Act." 5. Ground No. 1 is in relation to the limitation as according to assessee, the reference made to the TPO was not in accordance with law. 6. Before us, ld.AR of the assessee submitted that the order i....
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....For the purposes of this section, "Transfer Pricing Officer" means a Joint Commissioner or Deputy Commissioner or Assistant Commissioner authorised by the Board to perform all or any of the functions of an Assessing Officer specified in sections 92C and 92D in respect of any person or class of persons. 9. Sub-section (3) of section 144B of the Act, provides the scope and role of various units under faceless assessment such as National Faceless Assessment Centre (NFAC), Regional Faceless Assessment Centres, Assessment Units (AU), Verification Units (VU), Technical Units (TU) and Review Unit (RU). The relevant role of Technical Units (TU) as defined in clause (v) of sub-section (3) of section 144B is as under (v) technical units, as it may deem necessary to facilitate the conduct of faceless assessment, to perform the function of providing technical assistance which includes any assistance or advice on legal, accounting, forensic, information technology, valuation, transfer pricing, data analytics, management or any other technical matter which may be required in a particular case or a class of cases, under this section; 10. Section 92CA(1) of the Act empowers the Assessing Offic....
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....stomers. The shareholding of the assessee company is mainly with UC Mobile New World Ltd. who is having 99.19% holding of the equity of the assessee company. In the TP SR, assessee has not reported the transaction of advertising, marketing and promotion ("AMP") activities as international transaction and thus no benchmarking was done for the same. The Ld.AR for the assessee further submits that there is no agreement between the assessee and its AE with regard to the AMP activities and the assessee has performed the AMP function as a part of its role as responsibility of a distributor. The assessee has undertaken AMP expenses to sale designated UC Singapore services in India. Such expenditure includes the expenses towards design and video production, membership fees, sponsorship fees, events marketing, TC commercials, outdoor advertisements, cinema advertisings, free gifts, coupons, endorsements, cash incentives, content planning etc. and were incurred to locate and gain market for the services provided by the assessee so as to increase its sales. Ld.AR for the assessee further submitted that without incurring of AMP expenses, the assessee company would not be able to make its custo....
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.... in the business of reselling of services and software for which the expenses were incurred on account of AMP expenses. These expenses were directly for the benefit of the AE as ultimately its product has got the publicity and therefore, the same deserves to be held as international transactions. He further submits that as per the TP SR, the US Singapore (AE) influences the AMP expenses incurred by the assessee as it has the sole discretion of providing the guidelines and policies for marketing and further, evaluate the performance of the assessee in the marketing activities. The Ld.CIT DR further submits that the AE has substantively involved in discharging the marketing and selling functions performed by the assessee. Thus, the said activity has enhanced the brand value of the AE and therefore, is correctly treated as an international transaction. He further submits that the judgment in the case of Sony Ericson (supra) is challenged by the Revenue before the Hon'ble Supreme Court therefore, the same could not be applied as such. He finally supports the order of the AO & DRP in making the AMP adjustments. 16. We have heard the rival submissions and perused the material available ....
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....is a price discovery method. S.92C (1) thus is explicit that the only manner of effecting a TP adjustment is to substitute the transaction price with the ALP so determined. The second proviso to Section 92C (2) provides a 'gateway' by stipulating that if the variation between the ALP and the transaction price does not exceed the specified percentage, no TP adjustment can at all be made. Both Section 92CA, which provides for making a reference to the TPO for computation of the ALP and the manner of the determination of the ALP by the TPO, and Section 92CB which provides for the "safe harbour" rules for determination of the ALP, can be applied only if the TP adjustment involves substitution of the transaction price with the ALP. Rules 10B, 10C and the new Rule 10AB only deal with the determination of the ALP. Thus for the purposes of Chapter X of the Act, what is envisaged is not a quantitative adjustment but only a substitution of the transaction price with the ALP." 42. Again in Maruti Suzuki India Ltd. (supra) the Court held: "The very existence of an international transaction cannot be presumed by assigning some price to it and then deducing that since it is not an AL....
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....r 'compensation' an Indian entity would be entitled to if it is found that there is an international transaction in that regard. In practical terms, absent a clear statutory guidance, this may encounter further difficulties. The strength of a brand, which could be product specific, may be impacted by numerous other imponderables not limited to the nature of the industry, the geographical peculiarities, economic trends both international and domestic, the consumption patterns, market behaviour and so on. A simplistic approach using one of the modes similar to the ones contemplated by Section 92C may not only be legally impermissible but will lend itself to arbitrariness. What is then needed is a clear statutory scheme encapsulating the legislative policy and mandate which provides the necessary checks against arbitrariness while at the same time addressing the apprehension of tax avoidance." 45. The decisions in CIT v. B.C. Srinivasa Setty (1981) 128 ITR 294 (SC) and PNB Finance Ltd. v. CIT (2008) 307 ITR 75 (SC) make it explicit that in the absence of any machinery provision, bringing an imagined transaction to tax is not possible. Here, therefore, where the existence of ....
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....erms, but in the circumstances with no orders as to costs." 16.1. With regard to the intensity approach, the Co-ordinate Bench of the Chandigarh in the case of Widex India (supra) by disapproving the BLT method has observed as under:- 18.2. "We will come to the decisions and the provisions subsequently as first we must also set out the other applicable, well settled legal position namely that the Hon'ble Delhi High Court in the case of Sony Ericsson also unambiguously held that Bright Line Test was an act of judicial legislation and the Court held that by validating the bright line test, the Special Bench in LG Electronics case went beyond Chapter-X of the Act. The Court while arriving at the conclusion was conscious of the international tax jurisprudence and was constrained to hold that even international tax jurisprudence and commentaries do not recognize the bright line test for bifurcation of routine and non routine expenses. The purpose why we feel the need to address which we thought was a well settled legal position is on account of the resort to the bright line test not only by the TPO despite the available judicial opinion to the contrary but this lapse, we note unf....
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....he assessee has benchmarked the transaction by applying marked CUP method wherein set of 10 comparables, the interest rate was ranging between 8.5 to 12 % of 10% and the assessee had paid interest @ 12 %. Thus, the same was treated at ALP and no adjustment is proposed by the assessee. However, the TPO has alleged that the actual nature of CCDs is of equity and determined the ALP of interest paid at NIL and made an adjustment of Rs. 6 crores to the income of the appellant. The DRP has confirmed the action of TPO. 21. Before us, Ld.AR of the assessee submits that CCDs were issued for a period of 20 years and till its conversion, the same are to be characterized as a debt. He further submits that the nature of instrument is to be seen in present circumstances and cannot be characterized on a future event which is even not certain. He further submits that in terms of debenture agreement, they remain the debt and therefore, the AO/TPO is incorrect in re-characterize the CCDs as equity. The Ld.AR further submits that CCDs are nothing but debt till conversion and therefore, the TP adjustments made of interest paid by determining the ALP at NIL is incorrect. For this, he placed reliance o....
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.... benefits and objections associated with both the instruments are different. Section 2(30) of the Companies Act, 2013 provides the definition of "debenture" which is as under:- "debenture include debenture stock, bonds or any other instrument of a company evidencing a debt, whether constituting a charge on the assets of the company or not." 24.1. The term "share" is defined in section 2(84) of the Companies Act, 2013 which is as under:- "Share" means share in the share capital of a company and includes stock." 24.2. Further in the SEBI guidelines, the term "debt instrument" has been defined as under:- "Debt-instrument" means an instrument which creates or acknowledges indebtedness, and includes debenture, stock, bonds and such other securities of a body corporate, whether constituting a charge on the assets of the body corporate or not." 24.3. It is thus clear that if a debt instrument, there must be a character of in-debtness and it is not to be seen about the nature of the repayment or settlement of such debt in future. We further find force in the arguments of the assessee wherein the assessee has made out a chart of the key features of debt & equity and their application....
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....t in its capital structure with such terms and conditions that exist in the inter-company CCD agreement of UC India, in accordance with its business purpose and commercial requirements. 7. Failure of debtor to repay Equity In case of UC India, there is clear obligation to repay the CCDs after 20 years and these are compulsorily convertible. Further, accelerated conversion is also provided in case of a failure to pay as a consequence of certain events as discussed earlier. 25. The Co-ordinate Bench of ITAT, Bangalore in the case of M/s. Embassy One Developers Pvt.Ltd. vs DCIT in ITA Nos. 2239 & 2240/Bang/2018 wherein the Co-ordinate Bench observed as under:- 25. ".....................................In our considered opinion, such definition of the term convertible debentures cannot be applied in other context such as allowability of interest on such debentures during pre-conversion period or regarding payment of dividend on such convertible debentures during pre-conversion period or regarding granting of voting rights to the holders of such convertible debentures before the date of conversion, If you ask a question as to whether dividend can be paid on such convertible deben....
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....017] 398 ITR 66 (Delhi). 29. On the other hand, Ld.CIT DR for the Revenue supports the order of AO/TPO/DRP and submits that there was a delay in recovery of outstanding receivables and therefore, the lower authorities have rightly make the adjustment on account of delayed payment of receivables which deserves to be upheld. 30. We have heard the rival contentions and perused the material available on record. It is seen that the transaction is with AEs with respect to purchase and sales therefore, they are come in the purview of international transaction as defined in Explanation 2 section 292B of the Act. It is further seen that the assessee has only one bill where the payment was received delayed and while working out the transfer pricing adjustment, the AO has not allowed the working capital adjustment for taken into account the impact of outstanding receivables. The Hon'ble Delhi High Court in the case of Kusum Health Care Ltd. (supra) has held that the assessee has already factored the impact of the receivables on the working capital and thereby on its pricing/profitability, any further adjustment only on the basis of outstanding receivable would have distorted the pick and re....