TMI Blog2019 (8) TMI 552X X X X Extracts X X X X X X X X Extracts X X X X ..... assessee s own order, Ground Nos. 1 to 1.6 are allowed. Transfer pricing adjustment with respect to payment of royalty - HELD THAT:- In the present Assessment Year, it is observed that the benefit test cannot be applied to determine the ALP of international transaction. TPO only has to examine as to whether the payment based on the agreement adheres to the arm s length principle or not. Thus, the issue is identical therefore we direct the TPO to determine ALP of the royalty payment in accordance with law. Needless to say the assessee be given opportunity of hearing by following principles of natural justice. Ground nos. 2 to 2.7 partly allowed for statistical purposes Disallowance on account of circuit accruals - HELD THAT:- In the present Assessment Year also as like [ 2017 (9) TMI 1257 - ITAT DELHI] the assessee is following the same method of accruing circuit charges. Since the year-end circuit accruals created by the assessee represent accruals towards normal business expenditure incurred by the assessee for the relevant assessment year and recorded in accordance with the matching principle, deduction in respect therefore should be allowed. The assessee company produ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... isions of Section 35ABB of the Act. The assessee s case is squarely covered by the decision of Hon'ble Delhi High Court in the case of CIT vs. Bharti Hexacom Limited [ 2010 (8) TMI 332 - SUPREME COURT] - It is also important to note that in one of the preceding year on same facts, the DRP allowed the claim of the licence fees on revenue basis u/s 37(1) of the Act. Thus, the issue is identical and therefore Ground Nos. 6 to 6.3 are allowed. TDS u/s 194I - Disallowance on account of non-deduction of tax on lease line expenses - HELD THAT:- 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 and is not for use of any asset involved in provision of such facility covered under Section 194I - The assessee company is not in possession as well as not in control of the equipments which were used for providing internet and communication facilities, therefore, there was a clear absence of the element of leasing of equipments, as a fall out of which the applicability of the provisions of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n (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-determining the ALP of the said transaction as NIL ; 1.5 disregarding the receipt of services by the Appellant from its AEs which is contrary to the facts of the present year as well as to the stand taken by the Ld.TPO in prior year despite no change in the nature of services involved. Further, the Ld. TPO erred in contending that the services received are duplicative and stewardship in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... alysis 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 ₹ 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 accrues circuit charges on scientific basis. 3.3 On the facts, in circumstances of the case and in law, the Ld. AO/ DRP failed to appreciate that as per the accounting standards notified under section 145(2) of the Act, the Appellant was required to mak ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s of ₹ 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 ₹ 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 substantiate that support services were rendered by ACSI to the Appellant company. 5.3 On the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d in law, the Ld. AO erred in not 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 Indi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ervice 20,39,45,028 Nil 20,39,45,028 2. Payment of royalty 29,12,83,073 20,75,39,190 8,37,43,883/- Total 28,76,88,911/- The Assessing Officer accordingly enhance the income of the assessee by 28,76,88,911/-. Against the draft order the assessee company 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 ₹ 28,76,88,911/- on account of arm s length price determined by the TPO. The Assessing Officer further made addition of ₹ 61,11,589/- on account of circuit accruals. The Assessing Officer made addition of ₹ 8,94,42,969/- on account of other than circuit accruals. The assessing officer made disallowance of ₹ 8,25,71,385/- in respect of support se ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... endition test. The Tribunal also upheld the TNMM to be the most appropriate method. The relevant observations of the Tribunal from para 49 onwards read as under:- 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 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 th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cted 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, 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 assess ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ome 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 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 busine ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mpugned assessment year has only entered into agreement for one service only, namely global customer service centre, therefore, following the decision of the Tribunal in assessee s own case for the assessment year 2009-10 which has been followed by the Tribunal in assessee s own case for assessment years 2010-11 and 2011-12 and in absence of any distinguishable features brought before us by the Revenue, we hold that the addition made by the Assessing Officer/TPO and upheld by the DRP is not sustainable. We accordingly set aside the order of the Assessing Officer/TPO and direct them to delete the addition. The transfer pricing grounds raised by the assessee are accordingly allowed. In the present assessment year, the assessee company 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 66. With respect to analysis under CUP method by the ld TPO, we fully agree with him in rejecting internal CUP as it pertains to related party transactions which are between its fellow AEs. We also agree with him in rejecting external CUP data as the assessee has not submitted any data regarding similarity in terms and conditions of the royalty agreements. He also rightly held that even from the limited data submitted are for different industries/ geographical location /duration and amounts. No analysis of the royalty agreements between the various parties and the accompanying circumstances and conditions therein has been done by assessee. We also agree that even a minor difference in royalty agreement may have a significant effect on the royalty rates. 67. According to us the royalty payments needs 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 materi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... circuit accruals, the Ld. AR submitted that the same is covered in assessee s favour vide order passed in Assessment Year 2009-10, 2010-11, 2011-12, 2012-13 and 2013-14 as well as 2008-09. 11. The Ld. DR relied upon the orders of TPO/DRP/AO. 12. We have heard both the parties and perused all the relevant material available on record. The Tribunal in Assessment Year 2013-14 held as under :- 17. We have considered the rival arguments made by both the sides and perused the orders of the authorities below. We find the Assessing Officer made a disallowance of ₹ 40,02,308/- on account of circuit accruals credited towards band width and last mile services availed by the assessee on the ground that the assessee did not file the requisite supporting documents. It is the submission of the ld. counsel for the assessee that the assessee follows mercantile system 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 t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r 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 approved for payment. The validation checks include: Circuit ID exists in inventory for vendor; Invoice date is after circuit activation date; Service period is before circuit cease date; Invoice tariff code matches order tariff code Invoice cost is not varying more than USD 100 vis- -vis the expected cost Invoice number is unique for vendor The invoices for which validation is completed with no discrepancies or for which the discrepancies identified, the same are logged / resolved via dispute 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is 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. 18. Since the facts of the instant case are identical to the facts of the case decided by the tribunal in assessee s own case for assessment year 2009-10 which has been followed in subsequent assessment years i.e., assessment year 2010-11 and 2011-12, therefore, in absence of any contrary material brought to our notice, we hold that the Assessing Officer is not justified in making addition on account of circuit accruals. We, therefore, direct the Assessing Officer to delete the addition. The ground raised by the assessee on this issue is accordingly allowed. In the present Assessment Year also the assessee is following the same method of accruing circuit charges. Since the year-end circuit accruals created by the assessee represent accruals towards normal business expenditure incurred by the assessee 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... principle. The assessee has demonstrated through evidences that the provision so created is either reversed or expensed off in the subsequent year. The assessee has also been able to submit evidences for most of the reversals before the lower authorities. We also find that the lower authorities allowed the entire claim of expenditure in the next year when such reversals are made. Thus, this practice of disallowing the claim of year end accrual in the year of creation and allowing it in the next year is nothing but a timing difference. It also proves that the AO is not disputing the claim of expenses rather just deferring the claim to next year. Hence, in accordance with the mercantile provisions it should be allowed in the year of creation itself. 25. We find the above decision has again been followed by the Tribunal in assessee s own case for assessment year 2011-12. Since the facts of the impugned assessment year are identical to the facts of the case decided by the Tribunal in assessee s own case for assessment year 2010-11 and 2011- 12, therefore, respectfully following the decision of the Tribunal in assessee s own case for preceding three assessment years, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eement 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 evidence has been brought on record by the Department to dispute the said claim. Rather, the Department's claim is merely based on suspicion as also noted by the DRP while deleting the above disallowance. We also find that even otherwise, both ACSI and appellant are profit making entities and hence, there was no tax incentive for the parties to deflate the revenues earned by appellant. The decision was totally based on commercial considerations. By transferring the cost from ACSI to appellant no added tax advantage is being availed by appellant. We are also of the view that commercial expediency of a particular expenditure incurred by a businessman should be examined from the perspective of the business person and no third party, including the tax authorities, is entitled to question th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Nos. 6 to 6.3 relating to disallowance on account of annual share based license fee, the Ld. AR submitted that the issue is squarely covered by the Tribunal s order in assessment year 2010-11, 2012-13 and 2013-14. 20. The Ld. DR relied upon the order of the TPO, DRP and assessing officer. 21. We have heard both the parties and perused all the relevant material available on record. The Tribunal in A.Y. 2012-13 and 2013-14 held as under :- 35. We have considered the rival arguments made by both the sides and perused the orders of the authorities below. We find identical issued had come up before the Tribunal in assessee s own case for assessment year 2010-11. We find the Tribunal in ITA No.1059/Del/2015, order dated 18th September, 2017, has discussed the issue and allowed the claim of the assessee by observing as under:- 21. We have carefully considered the rival contentions and also perused the facts of the case as well as the decisions relied upon by the appellant. We agree with the contention of the assessee that the expense of ₹ 24,55,13,201/- incurred towards revenue share based license fee for maintenan ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Section 35ABB of the Act. The assessee 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 also 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 one of the preceding year on same facts, the DRP allowed the claim of the licence fees on revenue basis u/s 37(1) of the Act. Thus, the issue is identical and therefore Ground Nos. 6 to 6.3 are allowed. 22. As regards Ground No. 7.1 relating to disallowance on account of nondeduction of tax on lease line expenses, the Ld. AR submitted that the issue is squarely covered in favour of assessee vide Tribunal s order in assessment year 2012-13 and 2013-14. 23. The Ld. DR relied upon the orders of TPO, DRP and Assessing Officer. 24. We have heard both the parties and perused all the relevant material available on record. The Tribunal for A.Y. 2012-13 held as under :- 42. We have considered the rival arguments made ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to TDS u/s 194-I. 9.1. On the additional ground of deduction u/s 80 IA(iv), he submitted that any disallowances made by the A.O. would go to increase the income and consequently the assessee would be eligible for deduction u/s 80 IA on such increased profits. He relied on the order in the case of Gem Plus Jewellery India Pvt. Ltd. (2011) reported in 330 ITR 175 (Bom) in support of his contentions. For levy of interest u/s 234C, he recorded that such interest is levied only on returned income and not on assessed income. 9.2. In reply, the Ld.D.R., though not leaving his ground, submitted that he relies on the order of the A.O. and the reasoning thereof for disallowance made u/s 40A(i)(a) of the Act. 9.3. On the additional grounds the Ld.D.R. submitted that the A.O. may be directed to examine the same, if the Tribunal chose to admit these grounds. 10. Rival contentions heard. On a careful consideration of the facts and circumstances of the case and on a perusal of the papers on record and orders of the authorities below, case laws cited, we hold as follows. 11. We first take up corporate tax ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mendment made with retrospective effect cannot fasten liability on the assessee. That being the case assessee cannot be treated as assessee in default. The decisions relied upon by the ld. AR support this view. As far as the observation of the ld. CIT(A) that the payment made otherwise is covered u/s. 194I, we must observe in case of Hero Moto Corp. Ltd. (supra)and Global India (supra), the tribunal has held that the broadband/lease line facilities provided by the service provider for transmission of data does not come in the category of payment made towards rent for equipment, plant and machinery. Therefore, respectfully following the decisions of the ITAT, we set aside the order of the ld. CIT(A) on this issue. Grounds raised are allowed. 43. We find the Hon'ble Karnataka High Court in the case of Vodafone South Ltd. (supra), while deciding an identical issue, has observed as under:- 8. We have heard Mr.K.V.Aravind, learned counsel appearing for the appellants - Revenue in all the appeals. The learned Counsel relied upon two decisions of the Apex Court for canvassing the contention that the roaming charges paid by the assessee to the othe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n be termed as technical services . 11. In our view, the contention is not only misconceived, but is on non existent premise, because the subject matter of the present appeals is not roaming services provided by mobile service provider to its subscriber or customer, but the subject matter is utilization of the roaming facility by payment of roaming charges by one mobile service provider Company to another mobile service provider Company. Hence, we do not find that the observations made are of any help to the Revenue. 12. As such, even if we consider the observations made by the Apex Court in the case of Bharti Cellular Limited, supra, whether use of roaming service by one mobile service provider Company from another mobile service provider Company, can be termed as technical services or not, is essentially a question of fact. The Tribunal, after considering all the material produced before it, has found that roaming process between participating entities is fully automatic and does not require any human intervention. Coupled with the aspect that the Tribunal has relied upon the decision of the Delhi High Court for taking support of its view. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of notional foreign exchange loss, the Ld. AR submitted that the Tribunal statistically allowed the ground in assessment year 2012-13 having exactly similar facts with the direction to the Assessing Officer to verify the documents filed before the Tribunal during the course of hearing. The Ld. AR submitted that the said direction was followed for Assessment Year 2013-14 by the Tribunal. 26. The Ld. DR relied upon the orders of TPO, DRP and Assessing Officer. 27. We have heard both the parties and perused all the relevant material available on record. The Tribunal in A.Y. 2013-14 held as under :- 55. We have considered the rival arguments made by both the sides and perused the orders of the authorities below. We have also considered the various decisions cited before us. We find the Assessing Officer disallowed the foreign exchange fluctuation loss of ₹ 4,80,06,052/- on the ground that the assessee failed to demonstrate the genuineness of the loss. We find the DRP also upheld the action of the Assessing Officer and the Assessing Officer, in the final order, has disallowed the same. It is the submission of the ld. counsel for t ..... X X X X Extracts X X X X X X X X Extracts X X X X
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