TMI Blog2017 (2) TMI 650X X X X Extracts X X X X X X X X Extracts X X X X ..... payments receivable from the associated enterprise - Held that:- Undisputedly, in the present case the benchmarking of the main international transactions applying the transactional net margin method has been accepted by the Transfer Pricing Officer. Considering this, we find that the ratio laid down by the Mumbai Income-tax Appellate Tribunal in Rusabh Diamonds' case [2016 (4) TMI 400 - ITAT MUMBAI] is clearly applicable to the facts of instant case as held No ALP adjustments can be made, on the facts of this case, in respect of delay in realization of sale proceeds. The amendment in Section 92B, at least to the extent it dealt with the question of issuance of corporate guarantees, is effective from 1st April 2012. The assessment year before us being an assessment year prior to that date, the amended provisions of Section 92 B have no application in the matter. - Decided in favour of assessee. Disallowance of deduction under section 10A - Held that:- Dispute Resolution Panel's action in enhancing the total income in the assessment year 2009-10 and disallowing the claim for deduction under section 10A in the instant case is contrary to the decision of the honourable jurisdictio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aw, the Dispute Resolution Panel erred in not granting a proper opportunity of being heard and thereby violating the well settled principles of audi alteram partem. 3. That, on the facts and in law, the Assessing Officer/Transfer Pricing Officer/Dispute Resolution Panel erred in making/proposing/upholding an addition to the total income of ₹ 75,40,19,301 under Chapter X of the Income-tax Act, 1961 (hereinafter referred as 'the Act'). 4. That, on the facts and in law, the Assessing Officer/Transfer Pricing Officer/Dispute Resolution Panel erred in making/proposing/upholding the transfer pricing adjustment of ₹ 75,40,09,515 on account of advertisement, marketing and sales promotion expenses. 4.1 That, on the facts and in law, the Assessing Officer/Transfer Pricing Officer/Dispute Resolution Panel erred in not appreciating that in the absence of a 'transaction' as envisaged under section 92F of the Act between the appellant and its associated enterprise for brand promotion or for establishing a marketing intangible the Transfer Pricing Officer had no jurisdiction to propose adjustment on account of advertisement, marketing and promotion expen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt years. 6. That, without prejudice on the facts and in law, the Transfer Pricing Officer/Dispute Resolution Panel erred in making/upholding the applicability of a mark-up of PLR + 2.5 per cent. (i.e., 15 per cent.) on the alleged excessive advertisement, marketing and promotion expenses incurred by the appellant on behalf of the associated enterprise. 7. That, on the facts and in law, the Transfer Pricing Officer/Assessing Officer/Dispute Resolution Panel erred in proposing/making/upholding an adjustment of ₹ 9,786 on account of notional interest attributable to delayed payments receivable from the associated enterprise. 8. That, on the facts and in law, the Transfer Pricing Officer/Dispute Resolution Panel erred in not appreciating that once the international transactions executed by the appellant under the distribution agreement with Amadeus Spain have been accepted to be at the arm's length price applying the transactional net margin method as the most appropriate method then no further adjustment on account of advertising, marketing and promotional expenditure (hereinafter referred to as 'AMP') or notional interest attributable to delayed paym ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ttributable to delayed payments receivable from the associated enterprise. Ground No. 8 challenges the action of the lower authorities in adopting a non-aggregation approach while performing benchmarking analysis on the international transactions entered into by the appellant. In ground No. 8, the appellant is aggrieved by the action of the Assessing Officer in disallowing the deduction under section 10A of the Act on data processing receipts of ₹ 22.60 crores pertaining to unit II of the appellant. Ground No. 9 challenges the levy of interest under section 234B and section 234D of the Act. Both parties agree that the levy of interest will be consequential in the nature. Since no specific adjudication is required on this issue ground No. 9 is rejected as such. Broadly following the additions/disallowances are required our adjudication in the present case : (a) Transfer pricing adjustment on account of the AMP adjustment of ₹ 75,40,09,515. (b) Transfer pricing adjustment of ₹ 9,786 on account of notional interest attributable to delayed receivables from the associated enterprises. (c) Disallowance under section 10A of the Act 4. The first issue in dispu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er side. He was of the opinion that the advertisement, marketing and promotion expenditure incurred by the appellant had resulted in creation of marketing intangibles for which it should have been suitably compensated by the associated enterprise to the extent of excessive advertisement, marketing and promotion expenditure incurred vis-a-vis comparable companies. Accordingly, he applied bright line test (BLT) to determine the arm's length price of the advertisement, marketing and promotion expenses. The Transfer Pricing Officer considered the fact that in the year under consideration the percentage of advertisement, marketing and promotion (including payment for incentives) with revenue of the appellant was 39.12 per cent., whereas the percentage of advertisement, marketing and promotion with revenue of comparable companies was 0.08 per cent. Accordingly, the Transfer Pricing Officer held that the appellant had spent a sum of ₹ 65,41,24,677 on promotion of marketing intangibles owned by associated enterprise. Thereafter, applying a mark-up of PLR + 2.5 per cent. a cumulative adjustment on account of brand building of ₹ 75,40,09,515 was proposed by the Transfer Prici ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ectively and such does not result in benefit nor does it create any intangible for the associated enterprise. 5. Such expenditure has not been incurred at the instance of the associated enterprise. 6. Expenditure on AMP is allowable as revenue deduction even if it results in indirect benefit to third party/associated enterprise. 7. There are no deeming provisions in the Indian transfer pricing corresponding to the US Regulations. 8. Adjustment, even otherwise, not sustainable, as it is not based on any of the methods prescribed in the transfer pricing regulations. 9. Payment of incentive is because 'commercial expediency' and it is for wholly and exclusively for the business and is an allowable expense. Reliance is placed on among other on the following decisions, viz.- (a) S. A. Builders Ltd. v. CIT (Appeals) [2007] 288 ITR 1 (SC); [2006-TIOL-179-SC-IT] (b) Sassoon J. David and Co. Pvt. Ltd. v. CIT [1979] 118 ITR 261 (SC); [2002-TII-36-SCINTL] (c) CIT v. Adidas India Marketing (P.) Ltd. [2010] 195 Taxman 256 (Delhi); [2009-TII-37-HC-DEL-INTL] (d) Nestle India Ltd. v. Deputy CIT [2007-TII-4- ITAT-DEL-TP] (I. T. A. No. 2755/Delhi/ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 02-ITAT-DEL-INTL] which has been upheld by the Delhi High Court also. The honourable Income-tax Appellate Tribunal, after going through in detail the distribution agreement between the taxpayer and the associated enterprise which is almost the same, on basis of which in the year under consideration the taxpayer is getting distribution fee in their order, vide paragraphs 23.3 and 23.4, have held that Amadeus India is a full fledged agent of its associated enterprise. The headnote of the said decision for the sake of clarity are reproduced hereunder : 'It is commonly accepted principle that an enterprise should be treated as having a permanent establishment in a State if there is under it a person acting for it, even though the enterprise may not have a fixed place of business. Thus, there can be two forms of permanent establishment : (i) fixed place or (ii) through the dependent agent. What an enterprise can do directly but if not so done directly but done through an agent appointed for the purpose it will be deemed to have been done indirectly. Even in such a situation it can be said that the enterprise carrying on the business through the efforts of such agent and, hence, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... anted to it. The phrase authority to conclude contracts on behalf of the enterprise does not confine to application of paragraph 4 to an agent who enters into contract literally in the name of enterprise. The para applies equally to an agent who concludes contracts which are binding on the enterprise even if those contracts are not actually in the name of enterprise. The appellant in order to enhance its business operations has appointed AIPL as its agent who promotes the Amadeus products in India. AIPL in its turn has appointed various subscribers for use of Amadeus products . Though the revenue flows only from participants who have entered into participating carrier agreement with the appellant, yet the revenue could not have been generated but for the subscribers using the Amadeus products . In a way the revenue is generated from the participants but only on the basis of use of CRS by the subscribers. But for such use no revenue would accrue to the appellant. Thus, the agreements entered into by the AIPL with the subscribers under an authority granted to it are contracts relating to operations which constitute business proper and not merely in the nature of internal operat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a P. Ltd. [2013] 22 ITR (Trib) 1 (Delhi) [SB] which stated that due to the excessive advertisement, marketing and promotion expenditure incurred by the taxpayer, there existed transaction between the taxpayer and the foreign associated enterprise under which the taxpayer incurred advertisement, marketing and promotion expenses towards promotion of brand which is legally owned by the foreign entity. Thus, from the above discussions, we agree with the Transfer Pricing Officer's approach that taxpayer has incurred extraordinary expenses for the promotion and development of 'Amadeus' brand and, therefore, has helped in creation of marketing intangible in India. 5.3.6 The taxpayer has further contended that the advertisement, marketing and promotion activities carried by it did not amount to international transaction as no transaction was made with the associated enterprise. This doubt, have been clarified by the amendment of the Income-tax Act by the Finance Act, 2012, through the Explanation below section 92B to provide the definition of the expression 'international transaction' and 'intangible property'. The relevant extract of the Explanation i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (b) Amadeus Global owns the proprietary marks in connection with Amadeus products and Amadeus India has been granted right to use those proprietary marks. (c) It is evident from paragraph 11.01 of article of the agreement that the assessee is not only responsible for providing access to the subscribers to the Amadeus products but is also required to promote the Amadeus products in the territory assigned to the assessee in other words the assessee shall market, promote and sale the product of the associated enterprise in India. (d) It is amply clear from the term and condition as noted in paragraph 10.02 and clause (b) of paragraph 10.05 of the agreement that the assessee shall provide marketing support to the assessee with appropriate marketing and development resources, communication facilities and promotion material at no cost to the assessee. (e) Upon expiration or termination of this agreement pursuant to article XIV of this agreement, Amadeus India shall cease to be an authorised distributor of the Amadeus products. (f) Upon the termination of the agreement Amadeus India will immediately discontinue the distribution of all Amadeus products and the use o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... appellant before the learned Dispute Resolution Panel. Our attention in this regard was invited to the following objections raised before the learned Dispute Resolution Panel : J.3 Herein, the assessee submits that the learned Transfer Pricing Officer has erred in concluding in para 5.2 of the transfer pricing order that the assessee is providing marketing support services by giving reference to paragraphs 10.02 and 10.05(b) of the distribution agreement. To the contrary, the said paragraphs of distribution agreement provide that the associated enterprise shall provide marketing and development resources and promotional materials to the assessee and not vice versa. There is no additional cost/free charged by the associated enterprise from the assessee for providing such services. The paragraphs 10.02 and 10.05(b) are reproduced hereunder for your reference : '10.02 Amadeus shall provide Amadeus India with appropriate marketing and development resources of the Amadeus group and the communications facilities of the Amadeus system and the full range of Amadeus products as they become available in accordance with the terms of applicable licences and subject to technical ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e to apply its best efforts to promote Amadeus products subject to commercial constraints. All the strategic decision regarding promotional activities like how much to invest, when to invest and ways to invest are taken by Amadeus India. Further, it is emphasised that the assessee has incurred marketing expenses as an entrepreneur and not as a contract service provider. M.2 The learned Transfer Pricing Officer has misinterpreted paras 10.02 and 10.05 of the distribution agreement to conclude that Amadeus Spain was required to reimburse the advertisement, marketing and promotion expenses incurred by the assessee in terms of the said paragraphs but has not reimbursed any cost, the said paras merely obligates Amadeus Spain to provide marketing materials, marketing and development resource of the Amadeus group, communication facilities of the Amadeus system, i.e., CRS itself and Amadeus products. The assessee does get these marketing supports from Amadeus Spain time to time. Further, the Amadeus website (www.amadeus.com) maintained by Amadeus Spain, is an important means of promotion of products and services offered by Amadeus Spain. The cost of maintaining and upgrading of the we ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the same would be subject to fresh negotiations upon termination. Even otherwise it was submitted by the learned authorised representative that events occurring on termination of the agreement are not relevant in determining whether there existed a transaction of brand promotion in the year under consideration. In this regard, our attention was invited to the decision of the honourable jurisdictional High Court of Delhi in the case of Sony Ericsson Mobile Communications India P. Ltd. v. CIT reported in [2015] 374 ITR 118 (Delhi). The learned authorised representative further submitted that the onus is on the Tax Department to demonstrate existence of an arrangement, agreement, understanding or action in concert between the appellant and its associated enterprise for incurring of brand promotion expenses on its behalf so that a transaction requiring benchmarking under the provision of Chapter X can be presumed on facts of the instant case. In support of his submissions following decisions of the honourable jurisdictional High Court were relied upon and a gist of conclusions drawn therein was submitted as under : 1. Maruti Suzuki India Ltd. v. CIT reported in [2016] 381 ITR 11 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt, marketing and promotion expenditure . . . page 50, paragraph 34 - Transaction cannot be presumed because of mere relationship between the parties. . . page 51, paragraph 37 - Burden on the Revenue . . . page 51, paragraph 38/page 53, paragraph 47 - Maruti Suzuki [2016] 381 ITR 117 (Delhi) followed page 51, paragraph 41 - Mere incidental benefit to associated enterprise will also not bring a transaction for advertisement, marketing and promotion expenses into existence. . . page 52, paragraph 46 3. Honda Siel Power Products Ltd. v. Deputy CIT reported in [2016] 7 ITR-OL 22 (Delhi); [2016] 237 Taxman 304 (Delhi) (pages 1 to 17) - Manufacturer and distributor. . . page 5, paragraph 3 - In Sony no dispute regarding existence of international trans action . . . page 11, paragraph 22 - Onus on the Revenue. . . page 11, paragraph 23 - Barring bright line test no material/evidence with revenue to show that there existed a transaction . . . page 12, paragraph 25 - Maruti Suzuki and Whirlpool followed. . . . pages 14 to 16 4. Bausch and Lomb Eyecare (India) Pvt. Ltd. v. Addl. CIT reported in [2016] 381 ITR 227 (Delhi); [2015-TII- ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e orders passed by the authorities below and submitted that the issue of benchmarking advertisement, marketing and promotion expenses be restored back to the file of the learned Transfer Pricing Officer/Assessing Officer. It was submitted that the above judicial pronouncements of the honourable Delhi High Court were not available with the Transfer Pricing Officer at the stage of his adjudication and, hence, an opportunity be provided to the Transfer Pricing Officer for re-examination of the aspect involving existence of a transaction on brand promotion. 7. In his rejoinder it was submitted by the learned authorised representative that it is well-settled that an appellate court ought not to remand a matter unless the authority below had not gone into the merits of the case and had not recorded findings on all the issues. It was his submission that all the necessary facts for adjudication of the above jurisdictional aspect are already on record. It was submitted that both the authorities below, i.e., the learned Transfer Pricing Officer and the learned Dispute Resolution Panel have categorically given a conclusion that there existed a transaction in the instant case for brand pr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that the advertisement, marketing and promotion expenditure, incurred by the appellant, would have benefited the associated enterprise, who owned the brands used by the appellant. The learned authorised representative has rightly submitted that this is a jurisdictional issue, which requires a foremost adjudication and only if the answer to this issue is against the appellant that the matter then required a de novo adjudication in the light of the jurisdictional High Court decision in the case of Sony Ericsson Mobile Communications [2015] 374 ITR 118 (Delhi). The above line of adjudication is also supported by the decision of the honourable jurisdictional High Court in the case of Diakin Airconditioning India P. Ltd. [2016-TII-42-HC-DEL-TP] wherein it is held as under : Accordingly, the court directs as under : (a) The impugned order dated October 8, 2015, passed by the Income-tax Appellate Tribunal in I. T. A. No. 5090/DEL/2010 for the assessment year 2006-07 is set aside and the said appeal is restored to the file of the Income-tax Appellate Tribunal ; (b) The Income-tax Appellate Tribunal will first decide the question regarding the existence of an international tr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o avoidance of tax') and section 92(1) which states that any income arising from an international transaction shall be computed having regard to the arm's length price and section 92C(1) which sets out the different methods of determining the arm's length price, makes it clear that the transfer pricing adjustment is made by substituting the arm's length price for the price of the transaction. To begin with there has to be an international transaction with a certain disclosed price. The transfer pricing adjustment envisages the substitution of the price of such international transaction with the arm's length price. Under sections 92B to 92F, the pre-requisite for commencing the transfer pricing exercise is to show the existence of an international transaction. The next step is to determine the price of such transaction. The third step would be to determine the arm's length price by applying one of the five price discovery methods specified in section 92C. The fourth step would be to compare the price of the transaction that is shown to exist with that of the arm's length price and make the transfer pricing adjustment by substituting the arm's len ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 'profits, incomes or losses', for a 'transaction' there has to be two parties. Therefore, for the purposes of the 'means' part of clause (b) and the 'includes' part, of clause (c), the Revenue has to show that there exists an 'agreement' or 'arrangement' or 'understanding' between BLI and B L, USA whereby BLI is obliged to spend excessively on AMP in order to promote the brand of B L, USA. As far as the legislative intent is concerned, it is seen that certain transactions listed in the Explanation under clauses (i)(a) to (e) to section 92B are described as an 'international transaction'. This might be only an illustrative list, but significantly it does not list advertisement, marketing and promotion spending as one such transaction. In Maruti Suzuki India Ltd. [2016] 381 ITR 117 (Delhi), one of the submissions of the Revenue was (page 144) : 'The mere fact that the service or benefit has been provided by one party to the other would by itself constitute a transaction irrespective of whether the consideration for the same has been paid or remains payable or there is a mutual agreement to not charge any c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hip coming into existence by accident or chance. The relationship can come into being only by design, by meeting of minds between two or more persons leading to the shared common objective or purpose of acquisition of substantial acquisition of shares, etc., of the target company. It is another matter that the common objective or purpose may be in pursuance of an agreement or an understanding, formal or informal; the acquisition of shares, etc., may be direct or indirect or the persons acting in concert may co-operate in actual acquisition of shares, etc., or they may agree to co-operate in such acquisition. Nonetheless, the element of the shared common objective or purpose is the sine qua non for the relationship of persons acting in concert to come into being.' The transfer pricing adjustment is not expected to be made by deducing from the difference between the 'excessive' AMP expenditure incurred by the assessee and the advertisement, marketing and promotion expenditure of a comparable entity that an international transaction exists and then proceeding to make the adjustment of the difference in order to determine the value of such advertisement, marketing an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fines arm's length price to mean a price which is applied or proposed to be applied in a transaction between persons other than associated enterprise in uncontrolled conditions . Since the reference is to price and to uncontrolled conditions it implicitly brings into play the bright line test. In other words, it emphasises that where the price is something other than what would be paid or charged by one entity from another in uncontrolled situations then that would be the arm's length price. The court does not see this as a machinery provision particularly in light of the fact that the bright line test has been expressly negatived by the court in Sony Ericsson. Therefore, the existence of an international transaction will have to be established dehors the bright line test. . . . What is clear is that it is the price of an international transaction which is required to be adjusted. 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 arm's length price, an 'adjustment' has to be made. The burden is on the Revenue to first show the existence of an international tra ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t of a domestic transaction involving two or more related parties, reference may be made to section 40A(2)(a) under which certain types of expenditure incurred by way of payment to related parties is not deductible where the Assessing Officer is of the opinion that such expenditure is excessive or unreasonable having 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 Assessing Officer 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 Assessing Officer 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, e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lant's objections before the learned Dispute Resolution Panel, which we have quoted above, are acceptable. These clauses nowhere provide that the appellant will be incur ring brand promotion expenses for and on behalf of its associated enterprise or solely for its business purposes and interests. The agreement dated October 1, 2004, between the appellant and its associated enterprise is based upon the revenue sharing model in which 46 per cent. revenue is being shared by Amadeus Spain with the appellant and, hence, it is difficult to visualise that the appellant will not be incurring routine advertisement expenses in its entrepreneur capacity. Excluding the payment of incentives, which in the earlier years have been held, to be pure selling expenses the ratio of the AMP/sales of the appellant is mere 2.29 per cent. The learned authorised representative is also right in relying upon the decision of the honourable jurisdictional High Court in the case of Sony Ericsson Mobile Communications [2015] 374 ITR 118 (Delhi) for submitting that events which would transpire on termination of distribution require a transfer pricing adjustment at that stage but the same will be immaterial to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ational transaction'. This might be only an illustrative list but significantly it does not list advertisement, marketing and promotion spending as one such transaction . . . hence the amendments to section 92B by the Finance Act, 2012, also do not support the case of the Revenue lastly on the observations made by the learned Dispute Resolution Panel that since the appellant is a dependent agency permanent establishment of its associated enterprise, hence, all its expenses on advertisement, marketing and promotion are being incurred by it for the benefit of associated enterprise we would like to state that this is also entirely irrelevant. While alleging as the above the learned Dispute Resolution Panel has not appreciated that the appellant has been held to be a dependent agent permanent establishment of Amadeus Spain for determination of Amadeus Spain's income, which is taxable in India. Moreover, we may refer here the decision of the honourable jurisdictional High Court in the case of Whirlpool of India Ltd. [2016] 381 ITR 154 (Delhi) wherein it is held by the honourable High Court as under (pages 175, 179 of 381 ITR): The provisions under Chapter X do envisage a & ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he next issue arising out of ground Nos. 7 and 8 of the appeal requiring our discussion pertains to an adjustment of ₹ 9,786 on account of notional interest attributable to the delayed payments receivable from the associated enterprise. In this regard, the learned Transfer Pricing Officer records in his order that on the year end the appellant has receivables from its associated enterprise implying that the payment for invoices raised by it have not been realised within the stipulated time as provided in the invoice/agreement. The learned Transfer Pricing Officer records that this is a separate international transaction requiring a fresh benchmarking analysis. The learned Transfer Pricing Officer further records that as per the market practice such receivables ought to have been realised within 30 days of the invoice and any excess period of credit requires a compensation of delayed interest at 15.77 per cent. (i.e., the arm's length level of interest). With the above conclusions the learned Transfer Pricing Officer proposed an adjustment of ₹ 3,08,653. 9.1 Being aggrieved the appellant filed detailed objections before the learned Dispute Resolution Panel. The le ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Panel is in agreement in principle with this argument of the assessee for determination of the arm's length credit period. Accordingly, the Transfer Pricing Officer/Assessing Officer is directed to verify and recompute the credit period based on the principle of average credit period extended to the comparable accepted finally by this Panel, the delay beyond which will be subjected to chargeability of interest. The third issue, i.e., considered at (iii) relates to charging of interest at the rate of 15.77 per cent. of the outstanding balance computed as receivables by the Transfer Pricing Officer. In paragraph 12.14 on page 89 of his order, the Transfer Pricing Officer has assigned 300 basis points to be added to the prime lending rate of SBI to take into account the various factors/risks as discussed in detail in his order. The Transfer Pricing Officer has also mentioned about various risks to be assumed by the assessee. The assessee in turn, in the paper book has submitted that the essence emanating from various rulings cited by it is that, the currency in which the loan is denominated is a key determinant in identifying the relevant interest rate to be used for benchma ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... us year plus 150 basis points, and (ii) in case the aggregate amount of receivables from the associated enterprise exceeds ₹ 50 crores, apply base rate of SBI as on 30th June of the relevant previous year plus 300 basis points. 10. During the course of hearing before us it was submitted by the learned authorised representative that considering the recent pronouncement by the Mumbai Income-tax Appellate Tribunal in the case of Rusabh Diamonds v. Asst. CIT reported in [2016] 48 ITR (Trib) 707 (Mum); [2016] 178 TTJ (Mum) 425; [2016-TII-196-ITAT-MUM-TP], the learned Dispute Resolution Panel has erred in opining the first issue against the appellant. The learned Commissioner of Income-tax (Departmental representative), on the other hand, placed reliance upon the orders passed by the authorities below. 11. We have considered the arguments advanced by the parties and perused the material available on record. Undisputedly, in the present case the benchmarking of the main international transactions applying the transactional net margin method has been accepted by the Transfer Pricing Officer. Considering this, we find that the ratio laid down by the Mumbai Income-tax Appellate ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... an the rule. The apprehensions of the Revenue are purely hypothetical and, therefore, devoid of legally sustainable merits. (paragraph 16) In view of these discussions, as also bearing in mind entirety of the case, no arm's length price adjustments can be made, in respect of delay in relation of sale proceeds. Such being conclusion, there is no need to address the specific factual arguments advanced by the asses see. In effect thus the grievance of the assessee, is upheld and direct the Assessing Officer to delete the impugned arm's length price adjustment. (paragraph 17) Explanation to section 92B There is, however, one more aspect of the matter for which the impugned arm's length price adjustment must be deleted. (paragraph 19) It is noted that everything hinges on application of the Explanation to section 92B, vide Finance Act, 2012, though with retrospective effect from April 1, 2002. (paragraph 20) The amendment so made by the Finance Act, 2012, stated to be with retrospective effect April 1, 2002, inserts an Explanation to section 92B. In plain words, this amendment, inter alia, implies that capital financing of any type, including by way ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rease the scope of international transaction under section 92B, there is no way it could be implemented for the period prior to this law coming on the statute, i.e., May 28, 2012. The law is well settled. It does not expect anyone to perform an impossibility. (paragraph 38) It is for this reason that the Explanation to section 92B, though stated to be clarificatory and stated to be effective from April 1, 2002, has to be necessarily treated as effective from at best the assessment year 2013-14. In addition to this reason, in the light of the Delhi High Court's guidance in the case of DIT v. New Skies Satellite BV [2016] 382 ITR 114 (Delhi); 68 taxmann.com 8; [2016-TII-6-HC-DEL-INTL] also, the amendment in the definition of international transaction under section 92B, to the extent it pertains to the issuance of corporate guarantee being outside the scope of 'international transaction', cannot be said to be retrospective in effect. The fact that it is stated to be retrospective, in the light of the aforesaid guidance of the Delhi High Court would not alter the situation, and it can only be treated as prospective in effect, i.e., with effect from April 1, 2012, onwar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e-company was granted approval for setting up this new 100 per cent. export oriented under taking, vide letter No. STPIN/APP/682005/200575/31516 dated June 8, 2005, for which the requisite application, etc., was submitted in April, 2005. This undertaking started commercial operations with effect from April, 2005, with new business orders, new employees and new plant and machinery, this is the fourth year of operation of this undertaking under the Software Technology Parks of India Scheme. This new undertaking is engaged in the business of export (by transmission outside India through data communication link) of data processing/IT enabled services which are all duly certified by STPI- refer SOFTEX FORMS submitted to and/or certified by the Software Technology Parks of India-photocopy of which are attached to the annexed details of 'data processing software/information technology enabled exports and realisation thereof for the financial year ended March 31, 2009, in annexure AA with which photocopies of FIRCs are also attached as evidence for having realised the exports turnover in convertible foreign exchange 'within a period of six months from the end of the previous y ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... your company has considered ₹ 400,424,626 as the profits and gains eligible for exemption under section 10A of the Income-tax Act and, accordingly, an exemption of ₹ 200,281,699 has been claimed from the income of the taxpayer. 3. In view of the above, you are requested to show cause why the exemption claimed under section 10A on the profit mentioned in paragraph 3 above should not be disallowed as per the requirements of the provisions of the Act. In case, you do not agree to the above proposition, you are requested to substantiate your reasons along with factual evidences and legal support. You are also requested to substantiate your reasons along with factual evidences and legal support. You are also requested to furnish the details of top 25 personnel employed by you drawing highest salaries in the following format. Name of the employee Designation Qualification Experiences Remuneration 4. Please also provide the details of various divisions in your ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 96-97 Asst. CIT v. Amadeus India P. Ltd. reported in [2002] 257 ITR (AT) 23 (Delhi); [2001] 79 ITD 407 (Delhi). The learned Dispute Resolution Panel, however, was not satisfied. It was held by the learned Panel that from a perusal of the agreement dated October 1, 2004, entered into between Amadeus Spain and the appellant services to be provided as per articles II and XI were in the nature of marketing and distribution of products owned by Amadeus Spain and, hence, there was no software being exported by the appellant. The learned Dispute Resolution Panel further observed that there was no export of any data or software carried out by the appellant and for carrying out support services for providing the access to Amadeus System, trouble shooting, training, help desk, etc., it was being compensated by way of information technology support fee, centre fee. During the course of hearing before the Panel CFO of the appellant-company, Mrs. Kamal Chakravarty appeared and apprised the modus operandi of the appellant's export activities, however, the learned Dispute Resolution Panel was not impressed and did not find any substance in the answers provided by the CFO. Further, from the de ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ,728 is in the nature of distribution fee as explicitly provided in the agreement. 12. During the course of hearing on November 28, 2013, it was informed by the CFO of the company that the taxpayer was having its branches at 29 stations and was spread all over the country except North-East. As observed from annexure III to Form 3CA, the assessee is having branches at Agra, Ahmedabad, Baroda, Bangalore, Bombay, Calcutta, Cochin, Calicut, Chandigarh, Delhi, Haryana, Goa, Guahati, Hyderabad, Jallandhar, Jaipur, Kanpur, Lucknow, Madras, Manga lore, Pune, Trivandrum, Varanasi, Indore, Coimbatore, Trichi, Rajkot, Nagpur, Srinagar and various offices of Delhi. Out of these, work carried out at software technology parks locations only at Delhi. The taxpayer was also required to furnish the details of the employees at all the branch offices, however, the same was not furnished. From the network of branches all over the country, where software export is not carried out, it becomes amply clear that the taxpayer is engaged in the activity of marketing and distribution of Amadeus Spain products. 13. The taxpayer has entered into loyalty agreement with various subscribers, i.e., travel ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of this distribution agreement makes it clear that the taxpayer is carrying out to expansion of the marketing and distribution of Amadeus Spain products in such countries. . . . From the above, it is construed that the taxpayer is engaged in marketing and promotion activities of Amadeus Spain. 16. The taxpayer at various stages of all the proceedings as evident from its submissions from time to time has made averments which indicate the nature of activity of the taxpayer of carrying out marketing and distribution functions. These are as under : . . . 17. The above details make it amply clear that the receipt of ₹ 1,64,98,72,986 is in the nature of distribution fee received by the taxpayer. As per the provisions of section 10A, profit derived from such amount is not eligible for deduction under the given section. 18. The taxpayer AIPL has referred to the decision of Income-tax Appellate Tribunal in its own case for the assessment year 1996-97 Asst. CIT v. Amadeus India P. Ltd. reported in [2002] 257 ITR (AT) 23 (Delhi); [2001] 79 ITD 407 (Delhi) to claim that the Income-tax Appellate Tribunal had held that the activities of the taxpayer in producing a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... self held that the taxpayer AIPL is only an agent of the foreign company and the remuneration received by it in the form of distribution fee is for the services rendered by it in India on behalf of the foreign company. A dependent agent gets remuneration for the task performed by it on behalf of its foreign company. A dependent agent gets remuneration for the task performed by it on behalf of its principal and the said remuneration is not for the export of software or any other product but for facilitating the business of foreign company in India. At the cost of repetition, this Panel carrying strength from the order of the High Court in the case of its associated enterprise holds that : (a) Amadeus India is totally dependent on the associated enterprise. (b) Amadeus India's business is to provide data processing and software development services together with relative distribution of 'Amadeus products' to various subscriber of India. (c) Amadeus India functionally as well as financially is entirely dependent on the associated enterprise. (d) Amadeus India have the authority from the associated enterprise (in view of the distribution agreement) to co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... im under section 10A. 13. During the course of hearing before us it was submitted by the learned authorised representative that the Dispute Resolution Panel has given several factually incorrect findings in its order. It was submitted by the learned authorised representative that the agreement with Amadeus Spain at the relevant point of time envisaged two separate activities, namely, distribution of Amadeus products and access to Amadeus System . It was submitted by him that in the year under consideration as well as in earlier years no products of Amadeus Spain were being purchased and sold by the appellant. It was submitted that the sole activity performed by the appellant was that of providing the travel agents an access to the Amadeus CRS system. As such it was claimed by him that the Dispute Resolution Panel has given undue importance to the term distribution mentioned in the agreement. As per the learned authorised representative, like in the earlier years this year too the sole activity carried on by the appellant was to provide software connectivity for providing an access of Amadeus CRS to travel agents and for this as per the agreement it received 46 per cent. of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ideration unit II is functioning in similar terms, however, as a separate and independent unit. It is submitted that this fact has also not been doubted by the learned Dispute Resolution Panel. 13.1 Rebutting the Dispute Resolution Panel's reliance on the Tribunal order in the case of Amadeus Global Travel Distribution S. A. reported in [2008] 113 TTJ (Delhi) 767; [2010-TII-202-ITAT-DEL-INTL], it was submitted by the learned authorised representative that the dependent agent (DA) and the dependent agency permanent establishment (DAPE) are two separate taxable entities as per law. It was submitted that in Amadeus Global Travel Distribution reported in [2008] 113 TTJ (Delhi) 767 ); [2010-TII-202-ITAT-DEL-INTL] the Tribunal was called upon to examine the taxability of Amadeus Spain's income in India and that activities of the appellant, which was the dependent agent, was not a subject- matter of dispute before the Income-tax Appellate Tribunal. In support of this the learned authorised representative relied upon the decision of the Mumbai Income-tax Appellate Tribunal in the case of Deputy DIT, International Taxation v. Set Satellite (Singapore) Pte Ltd. reported in [2008] ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and profitability of the two units for the financial years 2005- 06 to 2007-08 is depicted in annexure XI attached. The learned authorised representative further submitted that the functions performed by the branches pertaining to unit I has also been investigated by the learned Assessing Officer during the course of assessment proceedings for the assessment year 2002-03. In this regard our reference was invited towards the submissions dated March 4, 2005 (copy enclosed at pages 466 to 468 of paper book) wherein during the course of assessment proceedings for the assessment year 2002-03 it is submitted by the appellant as under : A detailed note has already been submitted on the nature of activities of the assessee-company. For conducting the main activity of the assessee-company the branches/liaison offices provide the desired assistance, which can be summarised as under- (a) Training to travel agents : Provides training to agency staff on use of the reservation software with reference to the specific programmes on the host computer for them to effectively access the database on the host system and use the reservation system software. (b) Collation of raw data ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... was submitted by the learned Commissioner of Income-tax (Departmental representative) that the principles of res judicata are not applicable to Income-tax proceedings and each assessment year has to be examined on its own. 15. We have considered the submissions made by the parties and have also gone through the material available on record. In our opinion, the appellant merits to succeed in its claim for deduction under section 10A of the Act. The learned Dispute Resolution Panel at page 6 notes that the terms of distribution agreement applicable during the year under consideration are almost the same as applicable in the assessment years 1996-97 and 1997- 98, when export deductions were for the first time claimed by the appellant. While examining the claim for deduction under section 80HHE and section 10A vis-a-vis unit I, a co-ordinate Bench of the Tribunal in the appellant's own case has noted the following crucial facts and conclusions which are reproduced as under : Expert opinion of STPI authorities on appellants activities In view of the reply of the assessee, the Assessing Officer referred the issue to Software Technology Park, No ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e (for Customs Act) it would be appropriate that benefit under section 80HHE be extended to M/s. Amadeus. In case of any doubt the matter be referred to the Department of Electronics before any decision is taken. Expert appointed by the Assessing Officer, i.e., National Information Center (NIC) not made aware of complete facts by the Assessing Officer. 29. The Assessing Officer also made reference to National Informatics Centre, Planning Commission who, vide their letter dated February 9, 1998, intimated the Assessing Officer as under : According to the details given by you, M/s. Amadeus India Pvt. Ltd. is merely collating information (data) from customers and doing bit of processing (collating) and forwarding the collated information (not any software programme) to its German counterpart. 30. This information was communicated to the assessee-company. In response to which the assessee had stated that NIC has given their opinion on the basis of information about the assessee given to them by the Assessing Officer. If the Assessing Officer himself has not put the c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ferred to the Department of Electronics before any decision is taken in this regard. Expert reports followed by the Income-tax Appellate Tribunal 26. We also find that when the Assessing Officer was not satisfied with the explanation of the assessee he had made a reference to software technology park. The Assistant Director, Software Technology Parks of India, vide his letter dated February 26, 1998, had replied to the Assessing Officer which is reproduced in the body of this order earlier. They had confirmed that the nature of activity of the assessee is as data entry/data processing job which was a software development programme as defined by the Customs Notification No. 10/96, dated February 17, 1997, issued by the Ministry of Finance, Department of Revenue. The Assessing Officer took note of the letter received from the software technology park but he was of view that as the finding of the software technology parks was based on customs notification and not any notification under the Income-tax Act the same was not applicable in the Income-tax proceedings. We differ with the Assessing Officer in this regard. As per Explanation (b) of sectio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... working on the system all over the world. A view may perhaps be taken that what the travel agent does is not programming as he merely makes use of adds to or alters the information on the database but does not touch the process by which such information is brought on to the host computer. 35. The assessee which occupies a position mid-way between the two fulfils, it will be clear from the facts stated above, the functions of a programme exporter, it does not add mere entries to the database as done by the travel agent. In fact it has no direct interest in adding to, or drawing extracts from the database built into the computer like the several operators all the world over. What it does actually is to supplement the functions of the Amadeus group by preparing and transmitting programmes to the latter for incorporation into portions or partitions in its mega-computer at Erding in Germany, so as to enable the travel agents in its marketing region draw on the available information for their benefit. Its activities are to issue instructions to the master-computer to recognise the operators, identify them and provide them access to specific po ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er assessment years in a particular manner, for the sake of consistency, the same view should continue to prevail in subsequent years unless there is some material change in the facts. In the present case, the learned counsel for the revenue has not been able to point out even a single distinguishing feature in respect of the assessment year in question which could have prompted the Assessing Officer to take a view different from the earlier assessment years in which the same income was brought to tax as income from business. 15.2 Even otherwise on the merits we are unable to sustain the view adopted by the learned Dispute Resolution Panel. The learned authorised representative is justified in submitting that the learned Dispute Resolution Panel has written factually incorrect findings in its order. Moreover, the details, filed by the appellant have also been partially taken into consideration. The learned Dispute Resolution Panel takes note of top 25 employees but omits to take into consideration crucial fact that the director of the appellant-company, Shri Ankur Bhatia, is a software engineer with 16 years of experience. Moreover, the division-wise break up of the total empl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y that unit II was operating only from one location. Registration granted by the Software Technology Parks of India authorities to unit II is solely for manufacture of computer software/information technology enabled services . Once the Software Technology Parks of India authorities do not doubt the factum of export activities of unit II, we fail to apprehend how the learned Dispute Resolution Panel can take a contrary view. We may refer here to the decision of the Special Bench of the Tribunal in the case of Inspecting Assistant Commissioner v. Mitsui and Co. Ltd. reported in [1991] 39 ITD 59 (Delhi) [SB] wherein it is held as under : . . . One is not to be led away by the enormity of the expenditure incurred in running an office in India. That would depend upon the level of the country to which the office belongs. We have to judge the expenditure incurred from that angle and not from our angle. It is not the case of the Revenue that the expenditure incurred was so camouflaged as to cover the expenditure incurred in a trading activity to show it as expenditure incurred on liaison activity. Nor is it the case of the Revenue that the work carried on by the assessee in India wh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... past history of the case. It is admitted by the learned Dispute Resolution Panel that the facts are common and there is no change in the modus operandi. Hence, the action of the learned Dispute Resolution Panel in now doubting the claim made when after a detailed technical examination of the appellant's activities, eligibility of its sole data processing activity for claiming the deduction under section 10A has already been settled by the Tribunal in the assessment year 1996-97 and accepted by the Tax Department is unsustainable. 15.3 The view adopted by the learned Dispute Resolution Panel has further been influenced by the fact that Amadeus Spain has a permanent establishment in India in the form of Amadeus India P. Ltd., (i.e., the appellant). We find that this fact is totally irrelevant in adjudication of the appellant's claim for deduction under section 10A. The foreign company's dependent agency permanent establishment and dependent agent are two separate taxable entities as per law. Dependent agency permanent establishment is a creation of article 5 of the relevant Double Taxation Avoidance Agreement, wherein the object is to tax profits of foreign company in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , a dependent agent permanent establishment though, in the other Contracting State. We are of the considered view that in addition of the taxability of the dependent agent in respect of remuneration earned by him, which is in accordance with the domestic law and which has nothing to do with the taxability of the foreign enterprise of which he is dependent agent, the foreign enterprise is also taxable in India, in terms of the provisions of article 7 of the Tax Treaty, in respect of the profits attributable to the dependent agent permanent establishment. As we have elaborated earlier in this order, a dependent agent permanent establishment is distinct from the dependent agent. While computing the profits of this dependent agent permanent establishment, a deduction is to be allowed for the remuneration paid to the dependent agent as that is cost of operation of the dependent agent permanent establishment and as it has been incurred for generating the revenues attributable to such hypothetical permanent establishment . . . The Tribunal has also maintained the above distinction while deciding the case of Amadeus Global Travel Distribution S. A. A deduction has been allowed to Amad ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ering data processing activity. The factual allegations levied by the authorities below are also the same. In the said order, after following the Tribunal's decision of the appellant for the assessment year 1996-97 (supra), the Tribunal has opined as under : We find that the learned Commissioner of Income-tax (Appeals) while dealing with the issue has basically followed the decision of the Income-tax Appellate Tribunal in the case of Amadeus India (supra). He has elaborately discussed the terms of distribution agreement between the assessee and Galileo and has compared the activities of the assessee with that of Amadeus India before coming to the conclusion that the assessee before us is very much eligible for claiming deduction under section 10AA of the Act with this finding that the Assessing Officer was not justified in denying the claimed deduction under section 10AA of the Act in the present case. In paragraph 5.2, the learned Commissioner of Income-tax (Appeals), firstly, has discussed the terms of the distribution agreement and on the basis of those description of services, he has come to the conclusion that the assessee had undertaken export of software/data proces ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d on exporters declaration form SOFTES (specimen of SOFTES Form has been filed). The competent authority, i.e., Department of Electronics authorised official also certified that the software described in the SOFTES form was actually transmitted and the export value declared by the exporter has been found to be in order and accepted by the authorised officer. Similar are the functions of the assessee in the present case before us and similar types of certificates have been issued to the assessee about the transmission of software and the export value declared by the exporter has been found to be in order and accepted by the authorised officer. We are thus of the view that the learned Commissioner of Income-tax (Appeals) was justified in equating the facts of the present case with that of the Amadeus India, also in the same line of business and following the decision of the Income-tax Appellate Tribunal on an identical issue, in the case of Amadeus India, in paragraph 5.2 of the first appellate order reproduced hereinabove, the learned Commissioner of Income-tax (Appeals) has summarised the fulfilment of all the requirements of the eligibility of the deduction claimed under section 1 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d a huge database comprising a variety of information relating to several airlines and other travel services provides, for providing international travel related facilities. The core computer system/server were established at overseas locations at the US, Germany or Spain as the case may be. The travel agent, with a computer, merely accesses or utilises travel information drawn from the database of the computers. The travel agent also adds to, and alters the data available on the computer when he books a ticket (or other travel facilities like cab services, accommodation at hotels/resorts, etc.) for a customer by feeding in the data regarding the customer such as airlines, hotel, local travel fare, tickets, the several intermediary and eventual destination; and the nature of services to be provided, etc. This data enters the composite databased stream and becomes available to other operators via computers operating on Amadeus or Galileo system, all over the world, whenever a fulfilling transactions occurs at the travel agents end. The assessee's role like the present assessee before us, was occupying the position of hyphen between the overseas Amadeus and Galileo which have con ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... any permanent establishment of Galileo International Inc. in India to examine its income to be taxable in India. This decision of the Income-tax Appellate Tribunal has been upheld by the honourable High Court. 7.8 The honourable Delhi High Court in the case of CIT v. ML Outsourcing Services (P) Ltd. [2014] 271 CTR (Delhi) 553 in the paragraph 9 of the decision has been pleased to make observation on the Central Board of Direct Taxes Notification No. S. O. 890(E), dated September 26, 2000 ([2000] 245 ITR (St.) 102), in relation to deduction under section 10A, reproduced as under : '9. A perusal of the said notification would indicate that the Board has included several distinct types of services under the expression, 'product or service of similar nature, information technology enabled product or services' in the fifteen clauses. The Board, in the notification, has used the expression, 'information technology enabled product or services'. Thus, the Board has understood that product or services, to be included within clause (b) of Explanation 2 to section 10A, need not be computer software as understood in the common parlance or even customised electron ..... X X X X Extracts X X X X X X X X Extracts X X X X
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