TMI Blog2024 (4) TMI 390X X X X Extracts X X X X X X X X Extracts X X X X ..... 2nd January, 2002, the only conclusion that can be drawn is that there was consensus ad idem between parties that royalty is to be paid with respect to the entire sales revenue of the assessee in regard to overseas clients of TP USA, including sales to third party customers for TP USA for which Revenue is received from TP USA. We are of the firm view that the addendum was entered upon to just bring more clarity to this understanding and it cannot be said that this post facto addendum was made with intention to undo the findings of DRP. We fail to appreciate the observations and findings of DRP that a subsequent agreement executed in 2014 can not go back and influence the transactions already effected much earlier on the strength of an earlier agreement, so as to determine whether the earlier transaction was carried out at Arm's Length Price or not. If such a position is allowed, then an assessee can modify an agreement at any time after the date of international transaction as per an earlier agreement and by changing the clauses and terms, seek to modify the Arm's Length price already determined for earlier years. If at all, such post facto agreements should only have prosp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... leaves no doubt that merely due to the fact of raising bills or invoices on the TP USA for services actually rendered to third party customers solicited by TP USA, the sales have to be considered to be one made to TP USA itself. Thus DRP and TPO both have fallen in error in first rejecting the Addendum as a piece of evidence showing the consistency of the conduct and the actual intentions of the parties to the agreement and then has made erroneous interpretation to the clauses of the Collaboration Agreement and the Licence Agreement to conclude that the assessee was providing services to the TP USA only and not to third parties for whom TP USA had, in fact, acted as intermediary. We are inclined to sustain the grounds. Consequently, the appeals of the assessee are allowed with consequential effect. - Shri Shamim Yahya, Accountant Member And Shri Anubhav Sharma, Judicial Member For the Assessee : Shri Ajay Vohra, Sr. Advocate, Shri Neeraj Jain, Advocate Shri Abhishek Aggarwal, AR For the Revenue : Shri Rajesh Kumar, CIT-DR ORDER PER ANUBHAV SHARMA, JM: These appeals are preferred by the Assessee against the orders dated 29.04.2022 passed u/s 254/143(3)/144C of the Income Tax Act, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e appellant license to use certain intangible property, know-how, customer relationship management (CRM) services, etc. on payment of royalty on accumulated gross revenue. The support systems and software used by the appellant including brand name of Teleperformance are proprietary brand, systems, services or tools of TP USA. 6. Accordingly, in terms of the above agreement dated 02-01-2002, the appellant during the relevant previous year paid royalty of Rs. 1,28,68,402 to TP USA. 7. The case of appellant is that in the transfer pricing document maintained for the year under consideration, for the purpose of benchmarking transaction of payment of royalty applying TNMM, the appellant has considered itself as the tested party and OP/OC as the PLI. The result of TNMM analysis is summarized herein below: Particulars OP/OC Average of OP/OC of 16 comparable companies 3.71% OP/OC of CRM 18.05% 8. Accordingly, since the operating profit ratio of the appellant on controlled transactions, i.e., 18.05% is higher than the average of operating profit margin in respect of comparable companies, i.e., 3.71%, the international transactions of payment of royalty entered into by it are considered bein ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f royalty is concerned, we have duly considered the assessee s application for admission of additional evidence which has been filed under Rule 29 of the Income Tax (Appellate Tribunal) Rules, 1963 and looking to the facts and circumstances, it is our considered opinion that this Addendum to the agreement goes to the very root of the matter and it will suitably assist the lower authorities to reach a logical conclusion on the issue. Since the lower authorities did not have the benefit of examining this document, the matter has to be necessarily restored to the file of the Assessing Officer/TPO for deciding the issue of royalty afresh after duly considering this agreement and after giving due opportunity to the assessee to present its case. Accordingly, ground no. 17 in assessee s appeal for assessment year 2008-09 also stands allowed for statistical purposes. 9. Coming to the assessee s appeal in ITA 1630/Del/2014, since we have already admitted additional evidence in respect of the issue pertaining to ALP of royalty in assessment year 2008-09, on identical reasoning, we admit additional evidence in this year as well. Since the lower authorities did not have the benefit of examinin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . 3. That the TPO/ DRP erred on facts and in law in making transfer pricing adjustment of Rs. 64,75,322 on account of difference in the arm s length price of the international transaction of payment of royalty of Rs. 1,28,68,402, allegedly holding that the appellant was not required to pay royalty in respect of services provided to the third party customer of associated enterprise. 4. That the TPO erred on facts and in law in rejecting the addendum to the agreement entered by the appellant with its associated enterprise, allegedly holding that the agreement is not registered or dated, not appreciating that (i) inter-company agreements are not required to be registered and (ii) the appellant has filed affidavit providing date of entering of addendum to the agreement between the parties. 5. That the DRP/TPO erred on facts and in law in not appreciating that the entire revenues of the appellant are from sale of services to third parties - whether such third parties are direct customers of the appellant or customers of the associated enterprise, and accordingly royalty was payable on the total revenue. 6. That the TPO erred on facts and in law in allegedly concluding that the intention ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... bility to tax depends upon the meaning and content of the language of the document embodying the transaction: - CIT v. Motor General Stores (P) Ltd.: 66 ITR 692 (SC) - CIT v. B.M. Kharwar: 72 ITR 603 (SC) 16. Ld. Sr. Counsel, has submitted that section 62 of the Indian Contract Act, 1872 provides for alteration in the original contract upon consent of the parties to the contract, meaning thereby, that as such, alteration in a contract is not prohibited under the law. He thus contended that as the payment of royalty on the aggregate revenues of the assessee is strictly in terms of the Agreement and, therefore, needs to be accepted to be at arm s length price. 17. Ld. Sr. Counsel has submitted that the two contracting parties, always had the intention that royalty has to be paid for use of intangible property, knowhow, customer relationship management (CRM) services, etc. with respect to entire sale revenues of the assessee, including sales to third party customers of TP USA for which revenue is received from TP USA. It is accordingly not open to the Revenue to sit in judgement and interpret the Agreement in a manner different from what was intended and agreed between the parties. He ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... substitute the same for another transaction as per their perception. Restructuring of legitimate business transaction would be an arbitrary exercise. This legal position stands affirmed in EKL Appliances Ltd. (supra). 20. On the other hand, Ld. DR has vehemently argued that as the agreement was very clear and specific and prohibited payment of royalty in respect of sales to AEs accordingly to circumvent the clauses of the agreement, the assessee has brought the addendum in 2014 which was basically submitted with the mala fide intention so that the adjustment made in the earlier assessment years can be deleted. He has relied the directions dated 29.11.2013 given by the DRP in the first round of proceedings and contended that DRP had made crystal clear that though the DRP has in principle allowed the royalty payment however based on the agreement of the assessee company with its AE has directed the AO to re compute the Royalty expenditure. The DRP has adopted the definition of Accumulated gross revenue and Affiliate from the agreement submitted by the assessee and held that based on the clauses of the agreement, the taxpayer is required to pay royalty only on the gross receipt from s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s to clarify the agreement signed on 02.01.2002. 23. We have taken into consideration the submission and the material on record. At outset we accept the plea of Ld. DR that in the first round the tribunal has merely admitted the additional evidence for providing opportunity to the AO/TPO for examining the issue and the Bench has not said anything on the merits/authenticity of the additional evidence. Certainly the evidentiary value of the additional evidence were open for view of AO/TPO. 24. In order to conveniently decide the controversy, we will like to reproduce the relevant clauses of the Licensing Agreement and the Addendum as follows:- 1.1. Accumulated Gross Revenue: Accumulated Gross Revenues shall mean the gross receipts from sales of services in the Territory by TP India to Third Parties less customary deductions, including: (a) transportation charges, including insurance: (b) sales or excise taxes, customs, duties, tariffs, and any other governmental charges imposed on the production, importation, exportation, use, or sale of the Services; (c) quantity and cash discounts allowed; (d) returns; and (e) allowances of credits to customers. 1.2 Affiliate or Affiliates Affiliat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , respectively, as stated in the Agreement. 2. NO OTHER AMENDMENTS: Except as expressly stated in this Addendum, all the terms and conditions of the Agreement shall remain in full force and effect. 25. In the present case, the rule of consistency is very material. Admittedly, in terms of Intangible and Proprietary Property and Licensing agreement dated 02-01-2002, the appellant is paying royalty on its entire sales since financial year 2002-03 and the transaction was accepted to be at arm s length price up to assessment year 2007-08. Further there is no dispute that the underlying agreement and business model of the appellant has remained consistent for all these years and accordingly, such transaction of payment of royalty ought to be accepted for the year under consideration too on rule of consistency. However, we accept it not as one of the principle of res judicata but as establishing the consistency in the conduct of parties to the transaction, which is relevant to interpret and construe the transaction, agreement and the addendum. 26. It comes up that TPO has held that that the agreement and the addendum to the agreement in not registered/ dated and that the addendum is a pos ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... citals, any separate supplementary or collateral, oral agreement cannot be pleaded. The discrepancies pointed by Ld. DR, with regard to manner of execution of addendum, are not of much consequence, when parties are themselves not questioning the document. Revenue is not alleging the document to be false but only the intention of execution post facto is questioned. 29. Secondly, the ld. TPO has emphasized on the fact that the addendum to the agreement was entered on 22nd August 2014 as a post-facto arrangement to dilute the finding of the DRP. The relevant part being: .the intention of the appellant to modify the terms of the original agreement w.r.t. the definition of third parties is to nullify the interpretation given by the DRP w.r.t. the definition in its direction for the A.Y. 2009-10. The post-facto arrangement, therefore, has been entered into by the parties to avoid any tax liability that has arisen/ may arise on account of the ongoing TP proceeding for the A.Y(s) concerned. 30. In this regard, it comes up that appellant does not dispute the fact post facto agreement the addendum was entered. We have taken into consideration the facts and circumstances and the submissions a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... bill(s) raised by CRM INDIA within 30 days of the date of the bill In US Dollars through the regular banking channel. Advance amounts, if any, paid by TPUSA, which may be outstanding in the books of CRM INDIA to the credit of TPUSA, may be adjusted from the billed amount before the remittance is made by TPUSA. 5.9 TPUSA may, at it discretion, pay CRM INDIA advance against future Services to be rendered by CRM INDIA for the clients of TPUSA. Such advance fees shall be adjusted against the amount payable by TPUSA from the bills raised by CRM INDIA for services provided to clients of TPUSA. 31. It can be seen that these clauses as reproduced above make it explicit that a subsidiary in India was being established not for catering any local business, but, the assessee was supposed to provide services to clients of TP USA. These clauses categorically and conclusively lead us to believe that fundamental intention of the parties was that TP USA was supposed to solicit the work which was to be executed by the assessee. There is no material before us on record nor there is any case of the AO that apart from the work solicited by TP USA the assessee company had procured any work outside India ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ty is payable in respect of sales to AEs (including affiliates.) 36. Next the TPO has held that the services rendered by the Appellant to a third party customer on behalf of its AE are to be considered as sales made to AE. Also, because the bill(s) raised by the assessee to its AE was for the services rendered to the client of the AE, the Appellant was not required to pay the royalty on it. On behalf of assessee it is reiterated that in the case of the appellant, the parties to the agreement, viz, TP USA and the appellant are ad idem that royalty needs to be paid on sale of services rendered by the appellant to third party customers of TP USA. 37. We have already concluded that in the understanding of the two contracting parties, it was always the intention that royalty has to be paid for use of intangible property, know-how, customer relationship management (CRM) services, etc. with respect to entire sale revenues of the appellant, including sales to third party customers of TP USA for which revenue is received from TP USA. 38. As we consider the Foreign Collaboration Agreement clause 5 with subclauses, it becomes clear that TP USA had agreed to pay for the services provided by th ..... X X X X Extracts X X X X X X X X Extracts X X X X
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