TaxTMI 
TaxTMI 
2025 (6) TMI 488
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....llant also provides customer support services 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 learn....
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....st of the Associated Enterprises ("AE"). 3.2. Ld. DRP/ TPO/AO failed to appreciate that advertising and marketing activity performed 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 Lt....
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....d no second innings would be justified so as to enable one an advantage of its own deliberate violation of law. 6.2. Ld. DRP/ TPO/AO have erred in law and facts, by not accepting the economic analysis undertaken by the Appellant for the determination 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 l....
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....nt so to do, he may, with the previous approval of the Principal Commissioner or Commissioner, refer the computation of the arm's length price in relation to the said international transaction or specified domestic transaction under section 92C to the Transfer Pricing Officer. (10) ........... Explanation.-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 technica....
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....ration e.g. local language translation etc. 13. In the distribution activities, the assessee also provides customers support services to the clients in India which includes telephone support, customer enquiries, complaints10 handling and other after sales support as required under the relevant customer care programs of UC principal, as required by the relevant customers. 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, out....
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....nnot be benefited to AE in any manner. Therefore, the AMP expenses should not be held as international transaction and no adjustment is required to be made. He, therefore, prayed for the deletion of the additions made a substantive basis as well as on protective basis. 15. Per contra, Ld.CIT DR for the Revenue supported the order of the lower authorities and submits that the assessee is engaged 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 the....
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....cently this Court has in its decision dated 11th December 2014 in ITA No. 110 of 2014 (Maruti Suzuki India Ltd. v. Commissioner of Income Tax) while interpreting the provisions of Chapter X of the Act observed: "the only TP adjustment authorised and permitted by Chapter X is the substitution of the ALP for the transaction price or the contract price. It bears repetition that each of the methods specified in S.92C (1) 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 ne....
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....aving regard to the fair market value of the goods." In such event, "so much of the expenditure as is so considered by him to be excessive or unreasonable shall not be allowed as a deduction." The AO in such an instance deploys the 'best judgment' assessment as a device to disallow what he considers to be an excessive expenditure. There is no corresponding 'machinery' provision in Chapter X which enables an AO to determine what should be the fair '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 ....
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...."Whether the ITAT erred in deleting the addition of Rs. 180,73,10,769 made by the AO/TPO on account of AMP expenses under Section 37 of the Act?" is answered in the negative, i.e. in favour of the Assessee and against the Revenue. 49. The impugned order of the ITAT and the corresponding orders of the DRP and the TPO, on the above issues are hereby set aside. The appeal of the Assessee, ITA No. 228 of 2015 is allowed and the appeal of the Revenue, ITA No. 610 of 2014 is dismissed in the above terms, 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 Cou....
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....subscription agreement dated 26.07.2016 [Pg.70/FPB] 04.11.2016 [Pg 86/FPB] Number of CCDs 1,20,00,000 38,00,00,000 Face value of each CCD INR 10/- INR 10/- Issue dated 01.08.2016 04.11.2016 Conversion date Not later than 20 years Not later than 20 years Conversion rate (Equity: CCD) 1:1 0.11:1 20. Later, the said CCDs were transferred by US Mobile New World to US Singapore on 21.02.2017. During the year, the assessee has paid a sum of Rs. 6 crores to UC Singapore as interest on such CCDs. The 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 ....
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.... on record. In this case, the assessee had issued CCDs to its AE in order to get the financial assistance as it was having shortage of funds. The very nature of CCDs is loan and the interest paid on the same cannot be questioned which was made under commercial expediency. As nowhere in the Act, debt or equity is defined therefore, the rule of interpretation requires that the term is to be understood in their ordinary sense. The CCDs are distinct and separate from the share capital and the debenture holder has no rights whatsoever as were available to the equity shareholders. The 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....
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....t in nature. 5. Intent of the parties - Debtor creditor relationship and existence of financial covenants and security Identity of interest between creditor and debtor Debt As per the terms and conditions in the intercompany CCD agreement, it is clear that there is a clear identification of the AE and UC India as the creditor and debtor with identified interest payment obligations on UC India. 6. Ability of corporation to obtain credit from outside sources Debt While UC India did not obtain any third- party loan, in an independent scenario, an entity would rationally consider lending funds with interest receipts, to an entity having zero-debt 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, ....
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....rred in applying LIBOR @ 2.06% plus 500 basis point for benchmarking the transactions of outstanding receivables. It is submitted by Ld.AR for the assessee that the outstanding receivables are ancillary to primary business transactions of the appellant and therefore, the same could not be separately benchmarked. He further submits that only one invoice of four invoices was realised beyond the credit period and therefore, it not fair to allege the existence of any intent on the part of assessee in providing any benefit to the AE by allowing the delayed payment. He further placed reliance on the judgment of Hon'ble Jurisdictional High Court in the case of PCIT vs Kusum Healthcare Pvt.Ltd. [2017] 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 theref....