TMI Blog2014 (3) TMI 496X X X X Extracts X X X X X X X X Extracts X X X X ..... 629 - ITAT BANGALORE] followed - The difference between the fair market value of the shares and the amount receivable from the employee at the time of issue/or exercise of the Employee Stock Option, debited to the profit and loss account is allowed partly in the year under consideration and partly in the earlier assessment year – Decided in favour of Assessee. Disallowance of lease charges – Held that:- The Assessing Officer has not given any adjudication on merits and nor has he dealt with the contentions of the assessee by way of a speaking order - The Assessing Officer and the DRP have simply followed the order of the earlier years, and the matter for that year stands restored to the file of the Assessing Officer - in such a situation, it will be inappropriate to deal with the matter on merits – thus, the matter is remitted back to the AO for adjudication – Decided in favour of Assessee. Article 11 of Indo-Sweden DTAA – Obligation to deduct TDS - Held that:- ABN-S did not have any locality related attachment in Sweden which could lead to residence type taxation on global basis - ABN-S cannot be treated as tax resident of Indo Swedish tax treaty – thus, the benefit of Arti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t tax at source from the commission so allowed by the assessee and failure to do so is to be visited with the consequence of disallowance under section 40(a)(ia) r.w.s. 194 H - The disallowance is thus confirmed – Decided against Assessee. Deduction u/s 40(a)(ia) of the Act - Roaming and other telecom charges - Whether the amounts paid for roaming charges will attract tax deduction at source under section 194 J of the Act – Held that:- The decision in CIT v. Bharti Cellular Limited [2010 (8) TMI 332 - Supreme Court of India] followed - the matter was remanded to the Assessing Officer (TDS) with certain directions for de novo adjudication - the authorities below have not examined the matter at any of the stages nor this specific argument was taken before them – thus, the matter remitted back to the AO for fresh adjudication – Decided in favour of Assessee. Non-refundable security added to tax – Held that:- The non-refundable security deposit received from the landline subscribers is in respect of the services rendered by the assessee over the period in which the connection is in use, and, therefore, its being amortized over the estimated customer churn period is in consonance ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... set out the specific basis of this rate - There is no material for vague observations about weak financials of the subsidiaries which are not supported by any specific facts and proceed on sweeping generalizations and assumptions, to reject the comparables taken by the assessee - When a Transfer Pricing Officer rejects comparables taken by the assessee, he has to set out specific, cogent and legally sustainable reasons for doing so. The TPO overlooks the fact that such a transaction cost is relevant only to the domestic borrower who borrows in foreign currency from outside India - It has nothing to do with the arm's length interest rate for foreign currency borrowing by an overseas subsidiary - In any event, the interest rate is independent of incidental costs, and since TPO has taken lender as the tested party, the transaction cost to the borrower is wholly irrelevant - This adjustment is devoid of any legally sustainable basis. The TPO has taken the lender as the tested party, and yet made adjustments for higher risks on account of assumed lack of security and increased risk of single party dealing - The approach overlooks the fact that the assessee has advanced monies to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... material facts are like this. During the course of the assessment proceedings, the Assessing Officer noted that the assessee has debited Rs 1638,42,89,000 towards licence fees and spectrum charges, out of which Rs 1157,17,09,913 represent licence fees. The Assessing Officer noted that in earlier years also, similar payments towards licence fees were disallowed but amortization granted under section 35ABB of the Act. It was in this backdrop that the Assessing Officer required the assessee to show cause as to the licence fees not be disallowed as a revenue expenses, and deduction under section 35ABB be granted for amortized expenses. The assessee pointed out that similar disallowances for the earlier years have been disallowed by the Tribunal, and, as such, the issues is settled in favour of the assessee. However, since the matter was in appeal before Hon'ble High Court, and to keep the issue alive, the Assessing Officer disallowed Rs 1157,17,09,913 but allowed a deduction of Rs 2,90,49,95,380 on account of amortization of expenses. The assessee did raise the grievance before the Dispute Resolution Panel, but without any success. Accordingly, a net disallowance of Rs 866,67,12,15 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ent order passed for the assessment year 2008-09, pursuant to DRP having taken note of these developments, no such disallowance has been made. A copy of Hon'ble Supreme Court's order dismissing the SLP has also been filed before us. In view of these discussions, as also bearing in mind entirety of the case, we direct the Assessing Officer to delete this disallowance of Rs 4,18,10,255 as well. 10. Ground No. 2 is also thus allowed. 11. In the ground no. 3, the assessee has raised the following grievance: 3. That the assessing officer erred on facts and in law in disallowing employee compensation expenses of Rs.11,96,23,407 incurred on account of actual issuance of shares to employees under the Employee Stock Option Plan(s) ('ESOP') claimed deduction under section 37(1) of the Act, holding the same to be capital in nature. 3.1 That the assessing officer failed to appreciate that the appellant claimed the aforesaid employee compensation expense only on actual exercise of option(s) and issuance of shares to the employees. 3.2 That the assessing officer further failed to appreciate that since grant of option and issuance of sh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f grant of option and the market price at the time of exercise of option. No accounting principle can be determinative in the matter of computation of total income under the Act. The question before the special bench is thus answered in affirmative by holding that discount on issue of Employee Stock Options is allowable as deduction in computing the income under the head `Profits and gains of business or profession'. 14. We have also noted that it is an undisputed position, as evident from the computations reproduced in the assessment order itself, that the amounts claimed as a deduction represent the actual exercise of options. In this view of the matter, and in view of the principles laid down in Special Bench decision in the case of Biocon Ltd. (supra), we uphold the grievance of the assessee. The disallowance of Rs 11,96,23,407 must also, therefore, be deleted. We order so. 15. Ground No. 3 is also allowed. 16. In ground no. 4, the assessee has raised the following grievance: 4. That the assessing officer erred on facts and in law in disallowing lease charges aggregating to Rs.129,62,06,055 paid to M/s. IBM India and M/s Nortel Networks India (P) L ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d under the said composite contract. However, while computing under the normal provisions of the Act, these amounts have been added back and consequently, total amount paid to the vendor as lease rental, i.e. Rs 510.40,49,662 has been claimed as revenue deduction. Similarly, the company had an arrangement with Nortel Networks India Pvt Ltd for outsourcing its call centre activity. While the company has accounted for Nortel outsourcing agreement as finance lease, following AS 19, the company had added fixed assets by Rs 38,18,94,395 and provided for depreciation amounting to Rs 2,16,52,503 thereon. Additionally, Rs 6,07,80,057, being Norton call centre expenses, were debited to the legal and professional charges. All these amounts debited to the profit and loss account were, however, added back in the process of computing profits under normal provisions of the Act, and amounts paid to the vendor as lease rental, aggregating to Rs 17,35,61,495, were claimed as a deduction. The assessee's grievance to the DRP did not yield any success. The DRP rejected the grievance and observed as follows: The assessee has objected to addition on account of the lease rent paid to M/s IBM and M ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... N Amro Bank, Stockholm, on its own account and in trust for other lenders under section 40(a)(i) of the Act. 5.1 That the assessing officer failed to appreciate that there was no obligation to deduct tax at source since the interest paid to ABN Amro Bank, Stockholm, was not chargeable to tax in India under the provisions of the Act read with the overriding provisions of Article 11 of the applicable DTAA. 5.2 That the assessing officer failed to appreciate that the appellant being under bona fide belief that ABN Amro being tax resident of Sweden was eligible for benefits available under the DTAA and the alleged non deduction of tax at source did not attract invoking of section 40(a)(i) of the Act. 5.3 That the assessing officer erred on facts and in law in not appreciating that the interest paid on loans procured from ABN Amro, which were subsequently novated by ABN Amro in favour of third parties ('the new lenders'), who were tax residents of the respective countries, was, in any case, not liable to tax in India in terms of relevant Article of the respective Tax Treaty and consequently, there was no default in not deducting tax at source. 5.4 Without prejudice, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by the Assessing Officer on the ground that the ABN Amro Bank NV was in fact a Dutch resident and it had a limited tax liability in Sweden in respect of its Swedish sourced income only. Reliance was also placed on the letter dated 17th April 2008 received from the Swedish Tax Authority, in terms of exchange of information provisions under the Indo Swedish tax treaty, which confirmed that the Stockholm branch of ABN Amro bank is liable to income tax Sweden within the meanings of the tax treaty, i.e. Article 7, and that it not a resident of Sweden as required by Article 4 of the treaty. It appears that the demands under section 201(1) r.w.s 195 were also raised on the assessee which are right now pending in appeal before this Tribunal. It was in this backdrop of facts that the claim of deduction for interest paid to ABN Amro Bank, amounting to Rs 87,83,92,587 was disallowed under section 40(a)(i). The assessee's objection, raised before the DRP, was also rejected. Aggrieved by the disallowance so made, the assessee is in appeal before us. 23. We have heard the rival contentions, perused the material on record and duly considered facts of the case in the light of the applicabl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ds, such a person cannot be treated as 'resident of one of the states' for the purposes of the DTAA. Coming to specific tests laid down in the DTAA, as far as 'domicile test' is concerned, in common law, 'domicile' has a somewhat restricted meaning, denoting a fixed and lasting attachment to a country or state with its own separate legal system-one only in each case-which initially is acquired by birth ('domicile by origin'), and capable of being altered later by a personal decision ('domicile by choice'). In the case before us, the assessee-companies were incorporated in United Kingdom and there is nothing on record to even remotely suggest that the assessee-company was domiciled in the Netherlands. Since there can only be one country of domicile and since the assessee-companies are already domiciled in United Kingdom by the virtue of its incorporation in that country, the assessee-companies cannot be said to be domiciled in the Netherlands. Coming to the 'residence test', it is admittedly not the assessee's case that the assessee-companies are residents of Netherlands. Similarly, it is also not in dispute that 'place of effe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... be covered by the scope of expressions 'any other criterion of similar nature' in terms of art. 4(1) of the Indo-Netherlands DTAA. We are also of the considered view that cases before us clearly fail on this test. 25. In view of the above discussions and bearing in mind the fact that ABN-S did not have any locality related attachment in Sweden which could lead to residence type taxation on global basis, in our considered view, ABN-S cannot be treated as tax resident of Indo Swedish tax treaty. Accordingly, the benefit of Article 11 (3) of Indo Swedish tax treaty cannot be applicable on the ground that the interest remittances are made to ABN-S. However, for the reasons we will now set out, the mere fact that the interest has been remitted to ABN-S and that the benefit of Article 11(3) of Indo Swedish tax treaty or benefit of Article 11(3) of the Indo Dutch tax treaty are not available in respect of these remittances, does not imply that the amounts so paid are taxable in India. 26. We find that there is no dispute about the fact that the ABN- S, was arranger of the loan and there were also other financial institutions termed as 'original lenders' who had actu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ned in the light of factual findings to be so arrived at, and in the light of the applicable legal position as per the relevant provisions of the tax treaties that India has with the jurisdictions in which original lenders are resident in. Once again, we have to acknowledge the fact that learned counsel for the assessee has filed elaborate documentation in support of their stand about tax residency status of beneficial owners of the interest paid by the assessee and has also addressed the arguments on merits, but, in the absence of this aspect of the matter having been examined by the authorities below, we are not inclined to deal with the matter on merits. In our considered view, the right course of action is to identify the factual aspects to be looked into, set out the legal principles, and remit the matter to the file of the Assessing Officer for adjudication de novo by way of a speaking order, in accordance with the law and after giving yet another fair and reasonable opportunity of hearing to the assessee. While doing so, the Assessing Officer shall specifically deal with all the contentions of the assessee as the assessee may raise before him. We order so. 27. Learned cou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g that no 'income' per se accrued in favour of the distributor, requiring deduction of tax at source under section 194H of the Act. 6.5 That the assessing officer failed to appreciate that no tax could have possibly been deducted at source by the appellant under section 194H of the Act, as income accruing in the hands of the distributors was indeterminable. 6.6 That the assessing officer failed to appreciate that in the absence of any actual payment or credit of any amount in the books of the appellant, the machinery provisions contained in section 40(a)(ia) of the Act failed and accordingly, the appellant was not required to deduct tax at source. 6.7 That the assessing officer further failed to appreciate that disallowance under section 40(a)(ia) of the Act was, in any case, not warranted, since non-deduction of tax at source was on account of bona fide view taken by the appellant. 6.8 That the assessing officer further failed to appreciate that disallowance under section 40(a)(ia) of the Act should have, if at all, been restricted to the amount remaining as payable as on the last date of the relevant previous year. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ncept of commission payment and that the assessee had a bonafide belief that section 40(a)(ia) will not come into play as the distributors have honoured their tax liability. However, as the issue is covered against the assessee by direct decision of Hon'ble jurisdictional High Court, we are not inclined to deal with all these arguments. Respectfully following the esteemed views of Hon'ble jurisdictional High Court, We hold that the assessee was required to deduct tax at source from the commission so allowed by the assessee, and, accordingly, his failure to do so is to be visited with the consequence of disallowance under section 40(a)(ia) r.w.s. 194 H. The disallowance is thus confirmed. 32. Ground No. 6 is thus dismissed. 33. In ground no. 7, the assessee has raised the following grievance: 7. That the assessing officer erred on facts and in law in disallowing under section 40(a)(ia) of the Act roaming charges of Rs.2,47,31,57,620 paid to other telecom operators. 7.1 That the assessing officer erred on facts and in law in holding that roaming charges paid by the appellant were on account of technical services provided by other telecom operator ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... unter obligations, which is called a revenue sharing contract . According to respondent No. 1, s. 194J of the Act is not attracted in the case of revenue sharing contract . According to respondent No. 1, in such contracts there is only sharing of revenue and, therefore, payments by revenue sharing cannot constitute fees under s. 194J of the Act. This submission is not accepted by the Department. We leave it there because this submission has not been examined by the Tribunal. (Emphasis by underlining supplied by us) 35. Learned counsel for the assessee then made elaborate submissions on the proposition that the payment of roaming charges to the other operators is a revenue sharing contract. He begun by pointing out that the roaming services are rendered to assessee's subscriber and not the assessee, and the assessee only shares a part of the charges recovered from the subscriber, and proceeded to argue the matter at length on merits. However, as the authorities below have not examined this matter at any of the stages nor this specific argument was taken before them, we are not inclined to take up this plea for adjudication on merits for the first time directly before t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tivation cost is also deferred and amortized over the same period as of activation revenue. None of these submissions, however, impressed the Assessing Officer. He was of the view that there is no specific recommendation, in the said exposure draft, with regard to non refundable security deposit and that the activation fees cannot be treated as in parity with non refundable security deposit since activation fees is in the nature of 'joining fees' for being eligible to use the services. The assessee also raised an objection before the DRP but without any success. It was in this backdrop that an addition of Rs 3,46,00,000 was made by the Assessing Officer. The assessee is aggrieved and is in appeal before us. 39. We have heard the rival contentions, perused the material on record and duly considered factual matrix of the case as also the applicable legal position. 40. We find that the non refundable security deposit received from the landline subscribers is in respect of the services rendered by the assessee over the period in which the connection is in use, and, therefore, its being amortized over the estimated customer churn period is in consonance with generally acce ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssing officer/TPO erred on facts and in law in not holding that that transaction of payment and receipt for carriage and termination of voice traffic being closely linked and ought to have been benchmarked together. 9.6 Without prejudice, that the assessing officer/TPO erred on facts and in law in not appreciating that the international transaction of sale of carriage and termination of voice traffic is to be regarded as at arm's length applying Transactional Net Margin Method (TNMM). 43. To adjudicate on grievances against this addition, only a few material facts need to be taken not of. The assessee before us is in the business of providing telecommunication services in India. In the course of business so carried out in India, the assessee provides its customers facilities for making calls to, and receiving calls from, the overseas subscribers. However, the assessee's own network is used, in such overseas calls, only to the extent domestic segment of these calls. When a customer of the assessee makes the call abroad, the assessee's network carries the call till the shores of India, and, thereafter, call is transferred to the overseas operator. Similarly, so far ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... se , the TPO has rightly selected the geographically closest country i.e. Malaysia, with which the assessee was having international transaction of the same type . It is in this background that the Assessing Officer has made the impugned addition of Rs 7,14,84,331 aggrieved by which the assessee is in appeal before us. 46. We have heard the rival contentions, perused the material on record, including elaborate written submissions filed by the assessee, and duly considered factual matrix of the case as also the applicable legal position. 47. The short point that needs to be adjudicated in this case thus narrows down to the issue whether, for the purposes of applying CUP method, all the internal comparables are to be taken into account or whether only one of these comparables, namely sale to Maxis International (Malaysia), is to be taken into account. In order to decide this question, it is useful to take a look at rule 10 B(2)(d) which is reproduced below: 10B. Determination of arm's length price under section 92C. (1) For the purposes of sub-section (2) of section 92C, the arm's length price in relation to an international transaction shall be determined by any ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g of the above provisions would show that geographical location of the market is one of the significant factor to the extent comparability of uncontrolled comparable transaction is to be judged, inter alia, on the basis of conditions prevailing in the markets in which the respective parties to the transactions operate, including the geographical location and size of the markets, the laws and Government orders in force, costs of labour and capital in the markets, overall economic development and level of competition and whether the markets are wholesale or retail . Clearly, however, it is certainly not geographical location per se which is determinative of the comparability of the uncontrolled transaction. Geographical location, by itself, is not an important factor for deciding comparability of an uncontrolled transaction, its importance lies in being one of the factors which could affect the market conditions in which respective parties operate. Unless market conditions, in which uncontrolled transactions have taken place, are materially different vis- -vis conditions in which international transaction has taken place, and such a difference is on account of geographical location ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on him to demonstrate that the market conditions are so different that the uncontrolled transactions cease to be comparable with the intra AE transactions. Not only that this onus is not discharged, there is not even a suggestion that the market conditions of the uncontrolled transactions are materially different. In view of these discussions, as also bearing in mind entirety of this case, the very basis of exclusion of other comparables is devoid of legally sustainable reasons. 50. There is one more reason, on the facts of this case, which leads us to the same conclusion. 51. It is important to bear in mind the fact that even though end consumer of an international call being made to India could be in Singapore, Malaysia, Brazil, US or anywhere else outside India, the international transaction by the assessee is a business to business service with respect to Indian market. It is only Indian domestic segment of an international call for which the assessee has charged the international call provider. As we have noted earlier, the international call provider carries the incoming call to Indian upto Indian shore and the assessee carries the international call from Indian shores ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rnational transaction of interest on loans advanced to the associated enterprises, denominated in foreign currency, was required to be benchmarked considering the rate prevailing in the international market, viz., LIBOR rate. 10.3 Without prejudice, that the assessing officer/TPO erred on facts and in law in not appreciating that the rate of interest charged by the appellant was at arm's length in view of the fact that the interest received from its associated enterprises was higher than rate of return on investments in fixed deposits and corporate bonds. 10.4 That the assessing officer/TPO erred on facts and in law in alleging that the financial health of the associated enterprises was weak and further in determining the credit rating of the associated enterprises as ranging between BB to D, being high risk category, without providing any cogent or germane reason for the same. 10.5 That the assessing officer/TPO erred in relying upon the rate of interest charged by various domestic banks on advancement of foreign currency loans obtained by the TPO under section 133(6) of the Act, without affording opportunity to the appellant to rebut the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ancial health of the subsidiary. When it was put to the assessee, the assessee objected to the same, inter alia, on the ground that the loans were in foreign currencies, and therefore interest rate on rupee loans have no relevance, that interest has been charged from the subsidiaries over and above the costs of borrowings and in accordance with the international market standards, and that comparison with BBB grade bonds, as was done by the TPO, was not warranted as the advances were to assessee's subsidiaries. None of these submissions impressed the TPO. He was of the view that costs of borrowings were wholly irrelevant for the purpose of deciding ALP of the borrowing costs, that the risks for a single transaction is much more than the risks taken by banks in multiple client situation, that the additional costs are liable to be incurred for forward exchange contracts to hedge the position and that rate adjustments are also required to be done for the absence of any security. He also referred to the CRISIL information regarding interest to BBB grade bonds which was 15.13% in the relevant period. However, he adopted the rate of 14% as ALP of the intra AE borrowings by observing a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... em. The assessee is aggrieved and is in appeal before us. 60. We have heard the rival contentions, perused the material on record, including elaborate written submissions filed by the assessee, and duly considered factual matrix of the case as also the applicable legal position. 61. We have noted, as has been noted in the assessment order, DRP order and TPO orders as well, that the advances to subsidiaries are in foreign currencies i.e. in British Pounds, US Dollars and Canadian Dollars. In these circumstances, the interest rates on rupee bonds and debts, which has been extensively referred to in the order of the TPO, have no relevance at all. It is only elementary that interest is nothing but time value of money and when inflation pressure on a currency is lower, as is the case with most strong currencies, the time value of money, i.e. interest, tends to be lower too. Therefore, comparing interest rate on rupee loans cannot at all be compared with interest rates on strong currencies like GBP, USD and CAD. All these erudite discussions about Indian bond market and interest rate are thus wholly irrelevant. As for TPO's observation to the effect that the tested party being ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... annot be accepted. 63. As for the second adjustment of 300 points for transaction cost, this adjustment is sought to be justified by the following observations of the TPO: 7.9 Transaction Cost The company, which is considering a foreign currency loan, has to bear an additional transaction cost in each year. This is because under Reserve bank of India norms, it is mandatory for borrowers to buy such forward contracts and thus banks insist that the borrower must book a forward dollar contract to hedge the position. Forward cover is assort of insurance against currency fluctuations. If the borrower does not take such cover and the rupee depreciates against the dollar, costs will go up substantially as it would need to buy dollars from the market for repaying the loan. During the FY 2006-07, the forward premia increased reflecting growing interest rate differential in view of the increased domestic interest rates. In March, 2007, three month forward premium was at 5.12% p.a., from a low of less than one percent per annum in July, 2006. Thus on an average, the 3-month forward premium can be considered as 3% p.a. for the FY 2006-07. Thus a company availing foreign currency lo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ance in this adjustment either. The TPO has taken the lender as the tested party, and yet made adjustments for higher risks on account of assumed lack of security and increased risk of single party dealing. This approach overlooks the fact that the assessee has advanced monies to its subsidiaries which are under its management and control- a factor which substantially reduces the risk rather than increasing it. On these facts, it is difficult to understand, much less approve, any rationale for adjustment on account of higher risks. On this point also, we see no merits in the stand of the TPO. 67. We have taken note of the fact that the assessee's claim is that his borrowings in the same or similar currencies are at much lower costs. Such a rate, as is noted by a coordinate bench in the case of VVF Limited v. DCIT (2010 TII 04 ITAT MUM TP), constitutes acceptable internal CUP. While holding so, the co-ordinate bench has, inter alia, observed as follows: On the given facts, in our considered view, it would be appropriate to accept internal CUP, i.e. the rate at which the assessee has resorted to foreign exchange borrowings from the ICICI, as arm's length price under CUP ..... X X X X Extracts X X X X X X X X Extracts X X X X
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