TMI Blog2017 (9) TMI 1153X X X X Extracts X X X X X X X X Extracts X X X X ..... the ld AO has disallowed the above amount as the assessee has not produced the relevant basis of making the above provision the issue needs to be set aside to the file of the ld AO with a direction to the assessee to produce the basis of above provisionsing before the ld AO , who may verify the same and if found in accordance with the above finding and if pertaining to the impugned assessment year allow the claim of the assessee. Disallowance of annual revenue shares based license fee - Held that:- We agree with the contention of the assessee that the expense incurred towards revenue share based license fee for maintenance and usage of telecom license payable to Department of Telecom is a recurring fee paid by the license holder on periodic basis towards maintenance and use of the license and the benefit of the same does not extend beyond the close of the year. Further, it is also relevant to note here benefit of the revenue share based license fees paid during one financial year cannot be extended to the subsequent financial year, for which license fee is to be paid separately upon the adjusted gross revenues of such subsequent year. Therefore, payment of the aforesaid annual ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ernal Commercial Borrowings (ECBs) 1.1 On the facts and circumstances of the case and in law, the learned AO/ Hon'ble DRP has erred in making a disallowance of ₹ 80,62.508 towards interest expenditure incurred in relation to the ECBs availed by the Appellant for acquisition of fixed assets , by invoking the proviso to section 36(l)(iii) of the Act. 1.2 Without prejudice to the above ground, on the facts and circumstances of the case and in law, the learned AO has erred in not allowing depreciation under section 32 of the Act on the disallowed interest amount, by not adding the same to the actual cost of the fixed assets. 1.3 Without prejudice to above grounds, on the facts and circumstances of the case and in law, the learned AO has erred in not allowing depreciation under section 32 of the Act on the interest expenditure, amounting to ₹ 2,216,117 and ₹ 454,131, disallowed in the preceding assessment years (i.e. AY 2008-09 and AY 2009-10 respectively). 2. Ground No. 2 - Disallowance of circuit accruals 2.1 On the facts and circumstances of the case and in law, the learned AO/ Hon'ble DRP has erred in making a disallowance of ₹ 3,217,25 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing to Transfer Pricing Matters: That, on the facts and circumstances of the case and in law: 6.1 The learned Transfer Pricing Officer ('TPO')/ AO/ DRP have erred in making an addition of INR 345,442,141 under section 92CA of the Act to the total income of the Appellant on account of adjustment in arm's length price ('ALP') of the international transactions pertaining to availing of intra-group services, payment of royalty and imputed interest on outstanding inter-company receivables 6.2 The learned AO/ TPO/ DRP have erred, on facts and circumstances of the case and in law, in rejecting the combined transaction approach of benchmarking adopted by the assessee in its TP documentation and proceeding to determine the arm's length price of international transactions pertaining to availing of intra-group services and payment of royalty with its AEs on a standalone basis by rejecting Transactional Net Margin Method ('TNMM') as the most appropriate method. 6.3 The learned AO/ TPO/ DRP have erred, on facts and circumstances of the case and in law, in arbitrarily selecting Comparable Uncontrolled Price ('CUP') method as the most appropriat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... w, the learned AO has erred in initiating penalty proceedings under section 271(l)(c) of the Act against the Appellant on account of the above adjustments made in the assessment order. 3. The revenue has raised the following grounds of appeal in ITA No. 1778/Del/2015 for the Assessment Year 2010-11: 1. On the facts and in the circumstances of the case, the ld DRP erred in deleting the addition of ₹ 119912445/- made on account of disallowance of support services expenditure. 4. Assessee filed its original return of income on 14.10.2010 declaring income of ₹ 32.95 crores. The return of income was revised on 03.01.2012 declaring an income of ₹ 34.77 crores. Subsequently, the return was picked up for the scrutiny and notice u/s 143(2) was issued on 24.08.2011. During the course of assessment proceedings reference u/s 92CA of the Act was also made by the ld. AO to the ld Transfer Pricing Officer to determine the arm's length price of international transactions entered into by the assessee with its Associate Enterprises. The Transfer Pricing Officer passed order u/s 92CA(3) of the act on 16.12.2013 proposing adjustment of ₹ 34,54,47,310/- .The Assessi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to us the during the F.Y. 2009-10, the appellant company claimed interest expense of ₹ 2.82 crores on account of interest on ECBs availed from its holding company. Of this interest expense, an amount of ₹ 2.01 crores was incurred on ECBs outstanding at the beginning of the year (USD) and the balance interest expense of ₹ 80.62 lacs was incurred on ECBs availed during the year.On the other hand the Ld. AO disallowed the interest expense of ₹ 80,62,508 incurred towards ECBs availed during the year by invoking the proviso to section 36(1)(iii) of the Act. 7. We have gone through the relevant facts of the case and arguments and submissions advanced by both the parties in connection with the disallowance towards ECBs availed during the year. This ground of appeal has already been decided in AY 2009-10 in I.T.A. No. 2538/Del/2014 even dated vide ground no 3 of that appeal. As submitted by the assessee/DR, since there is no change in facts in this year from the facts in preceding year, accordingly, the findings given therein para no 18 of that order where the claim of the assessee is allowed . hence for this year too we direct the ld AO to disallow the above dis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Particulars Accrual as on 31.03.2010 Accrual control account 4.17 crores Salary Payable 0.08 crores SIP accruals 0.16 crores Total 4.41 crores 12. Out of the above year end accruals, AO has disallowed year-end accruals of ₹ 0.24 crores for salary accrual and SIP accrual on account of non- submission of supporting documents and/ or non-deduction of tax at source. The ld AO in the draft assessment order made the following findings: 11.2 The assessee company submitted invoices in respect of Accrual Control Account amounting to ₹ 4,17,83,759/- which were verified and found to be correct. As regards Provisions made for Salary Payable and SIP Accruals, the AR of the assessee company could not provide documentary evidence, i.e invoices for the payments made even after providing sufficient opportunities. Thus, the amount of ₹ 23,68,651 (Rs. 8,18,364 + ₹ 15,50,287) was added to the income of the assessee company on account of Provisions made during the year u ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he said amount should be create a right to receive / enforce payment of such income' in favor of the payee. However, since creation of the year-end accruals does not result in accrual of income to vendor, the same cannot trigger a withholding tax liability on the part of the Appellant. 4.7 The Bangalore Bench of Hon'ble Tribunal in the case of DCIT vs. Telco Construction Equipment Co. held that year end provisions did not attract tax withholding provisions as the tax payer credited the amount of commission payable to provision account and not to respective agents account. 4.8 It is further submitted that the machinery/ procedural provisions specified in relation to tax deduction at source such as issuance of TDS certificates to the recipient, filing of the quarterly TDS statements etc. also presuppose existence of an identified recipient and quantification of amount. 4.9 Hence, to conclude the Ld. AO has overlooked the evidences/ information filed by the Appellant and such disallowance in the hands of the appellant is totally erroneous and liable to be deleted. 15. The Ld. DR vehemently relied upon the finding of the lower authorities. 16. We have carefully ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e case of M/s GE India Technology Centre P. Ltd. Vs. CIT and another 327 ITR 456 (SC) held that if payment is not assessable to tax there is no question of tax at source being deducted. We also draw support from decisions relied upon by the assessee during the course of hearing to buttress its argument that no withholding tax obligation arises on the provisions: a. DIT vs. Ericsson Communication Ltd (2015) 378 ITR 395 (Del.) b. Karnataka Power Transmission Corporation Pvt Ltd vs DCIT (2016) 383 ITR 59 (Kar.) c. Dishnet Wireless Ltd vs. DCIT ( Chennai Tribunal) 172 TTJ 394 ld DR Could not point out any contrary decision . Therefore respectfully following the above decisions and in light of the factual matrix of the case we are of the considered view that since creation of the year end accruals does not result accrual of income to an identified vendor, the same cannot trigger a withholding tax liability on the part of the appellant. However as the ld AO has disallowed the above amount as the assessee has not produced the relevant basis of making the above provision the issue needs to be set aside to the file of the ld AO with a direction to the assessee to produce the bas ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on before the Ld. AO and the DRP, however, the same was not favorably considered merely for the reason that the Revenue has filed a Special Leave Petition before the Hon'ble Supreme Court of India against this favourable ruling of the Delhi High Court. Further the assessee also submitted that the license fees has been allowed by the DRP in the subsequent year. The AO disallowed the Appellant's claim of revenue share based license fee as an allowable expense u/s 37(1) of the Act on the premise that the same is liable to be amortized as per the provisions of Section 35ABB of the Act over the remaining life of the license (17 years). Thus, a deduction for the proportionate claim of ₹ 23.11 crores (24,55,13,201 x 16/17) has been disallowed. The ld AO has capitalized the annual revenue share based license fee merely on the basis that the revenue department has filed a Special Leave Petition against the order of the Hon'ble Delhi High Court in the case of CIT vs. Bharti Hexacom Limited [2014] 265 CTR 130 (Delhi), which is squarely applicable to the Appellant's case and to keep the issue alive The AO in the draft assessment order made the following findings: The ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... urse of hearing, submitted as under : 5.1. It is the basic and fundamental submission of the Appellant that the annual revenue share based license fee incurred by the appellant is a business expenditure allowable u/s 37 of the Act. Such expenditure has been incurred by the Appellant towards maintenance and usage of the telecom license, and not for acquiring a right to operate telecommunication services and thus would not attract the provisions of Section 35ABB of the Act. 5.2. The benefit of the license annual revenue share based license fee (payable on a quarterly basis) is exhausted at the end of the relevant financial year and does not extend beyond the close of such year. Benefit of the revenue share based license fees paid during one financial year cannot be extended to the subsequent financial year, for which license fee is to be paid separately upon the adjusted gross revenues of such subsequent year. Therefore, payment of the aforesaid annual fee cannot be said to confer any right of an enduring nature upon appellant. 5.3. It is submitted that the action of the Ld. AO in applying the provisions of section 35ABB is grossly erroneous and liable to be reversed for the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Act. It is submitted that the said provision, being an enabling and not a disabling provision, needs be confined to that consideration which would otherwise be disallowed as being capital expenditure. 5.7. The Appellant's case is squarely covered by the decision of the Hon'ble Delhi High Court in the case of CIT vs. Bharti Hexacom Limited [2014] 265 CTR 130 (Delhi) pronounced on 19th December 2013, wherein it has been unequivocally and categorically held that license fee paid under the revenue share regime is clearly a tax deductible expenditure and has to be allowed under section 37 of the Act. [Copy enclosed at page 1345 of Paper-book Volume - III]. Relevant extracts of the decision are as under: 35. The license acquired was initially for 10 years and the term was extended under the 1999 policy to 20 years but this itself does not justify treating the licence fee paid on revenue sharing basis under the 1999 policy as a capital expense made to acquire an asset. As observed in Empire Jute Co. Ltd. (supra), the enduring benefit test has limitation and cannot be mechanically applied without considering the commercial or business aspects. Practical and pragmatic view an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he basis of strength of subscribers. It means what is the strength of subscribers the license fee has to be calculated on the basis of the same subject to minimum payment year- wise. On the basis of strength of subscribers revenue is generated and on that basis license fee is quantified which has a direct link with the revenue generation. The Assessing Officer has also noticed in his order that merely because the quantification of license fee was done on a specified formula and is linked to the revenue earned by the Assessee, does not ipso facto make the license fee a revenue expenditure. Once it is established that license fee is linked to the revenue earned by the Assessee then it cannot be said that this is a capital expenditure in nature because the same is linked with the revenue generation. Therefore, for this reason alone the Assessee is entitled for deduction of entire expenditure which is allowable u/s 37(1) of the Act. 5.9. The above view has also been affirmed by the Mumbai Tribunal in the case of Bharti Airtel Ltd vs. ACIT in ITA No 398/Mum/2006 dated June 25, 2010, wherein it was held that deduction for annual license fee paid to the Department of Telecommunications ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e reversed and liable to be quashed. 20. However, the ld DR vehemently relied upon the finding of the draft assessment order. 21. We have carefully considered the rival contentions and also perused the facts of the case as well as the decisions relied upon by the appellant. We agree with the contention of the assessee that the expense of ₹ 24,55,13,201/- incurred towards revenue share based license fee for maintenance and usage of telecom license payable to Department of Telecom is a recurring fee paid by the license holder on periodic basis towards maintenance and use of the license and the benefit of the same does not extend beyond the close of the year. Further, it is also relevant to note here benefit of the revenue share based license fees paid during one financial year cannot be extended to the subsequent financial year, for which license fee is to be paid separately upon the adjusted gross revenues of such subsequent year. Therefore, payment of the aforesaid annual fee cannot be said to confer any right of an enduring nature upon appellant. We are convinced that the appellant's case is squarely covered by the decision of Hon'ble Delhi High Court in the ca ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... are partly allowed. 26. Ground No. 6.8 and 6.9 deals with addition made by TPO/DRP by imputing notional interest on outstanding receivables amounting to ₹ 5,91,755. The assessee made detailed submissions contending that the TPO/DRP erred in treating the inter-company receivables as loan given by the assessee to its AE. Assessee further argued that the TPO/DRP did not appreciate the bonafide nature of the agreement i.e. Provision of network connectivity services between the assessee and its AE and proceeded to benchmark the same by applying CUP. The summary of the submissions made by the assessee are as under: 6. Factual Submission Approach adopted by Appellant 6.1 During FY 2009-10, the Appellant rendered network connectivity services to the customers of its AEs for which the AEs compensated the Appellant on a cost plus basis. As on March 31, 2010, the Appellant had outstanding receivables to the tune of INR 104,101,286. The Appellant submits that the outstanding receivables are emanating from the primary transaction of provision of network connectivity services and hence, there is no need to benchmark the same separately. 6.2 The Ld. TPO/Hon'ble DRP erroneously ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 08 of the Case Law Compendium) -VIP Industries Ltd. Vs. ACIT (ITA 526/Mum/2014) (Refer Para 11 on Page no. 650 and 651 of the Case Law Compendium) -Nimbus Communications Ltd (145 ITD 582) (Mum.) (Refer Para 20 on Page no. 366 of the Case Law Compendium) 7.5 Therefore, the adjustment on account of imputing notional interest on outstanding receivables is unsubstantiated and ought to be deleted. No impact on profitability 7.6 The Appellant submits that its pricing to its AEs in the form of markup factors in the additional credit period availed by the AEs and the same is evidenced by its margins which is higher than the arithmetic mean of margins of comparable companies selected in the TP Study. This would mean that though the AEs in certain situations may be making the payments beyond the normal credit period offered, there is no impact on the profitability of the Appellant. Thus the Appellant submits that as a result of not realizing the debts from AEs within a specified period, there has been no impact on the Appellant's profits or income. The average credit period allowed to the third party customers is shown below: Average receivable days of comparable co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... te till the last day of the relevant financial year i.e. 31 March, 2010. Interest to be calculated based on LIBOR 7.9 Without prejudice to our submissions above, even if outstanding debit balance is considered as an international transaction, such a debit balance may at best be treated as a short term credit facility extended by the Appellant to its AEs. In such a scenario the interest to be charged on such a facility would need to be calculated from the perspective of the borrower (in our case the AEs) since a borrower would take a decision to borrow based on the rates and commercial terms prevailing in the international market, and specifically his own jurisdiction. 7.10 Accordingly, if an Indian enterprise is providing any funding to an overseas enterprise, the interest rate would need to be based on the currency of the loan (for e.g. LIBOR), the comparable interest rates in the overseas jurisdiction and having regard to the commercial and economic factors such as determination of the level of risk for the borrower, risk for specific debt characteristics prevailing in that country. Approach adopted by the Ld. TPO 7.11 However, The Ld. TPO treated the outstand ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... icial precedents, the Appellant submits that the transfer pricing adjustment made by the TPO/DRP should be deleted for the following reasons as explained above: No interest cost incurred by the Appellant during the year since it has no borrowing. No interest is charged from the third parties i.e. in an uncontrolled transaction. Moreso, there is no agreement for charging interest for overdue receivables from the AE. 7.16 Without prejudice to the above, the Appellant submits that even if the interest is levied it should be from the prospective of the borrower and not the lender. 27. On the other hand the Ld. DR relied on the orders of lower authorities. 28. We have considered the facts and submission brought on record by both the parties. The main crux of assessee's submission is that the transfer pricing officer could not have re-characterized the over-due receivables as loan. In view of the assessee the provisions of clause (i)(c) of Explanation to Section 92B(1) specifically covers delay in realization of dues from its AE as an international transaction and hence the same could not be re-characterised as loan as done by the TPO/DRP. The assessee also ar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... st ground of Department appeal is with respect of Support Service Expenditure. 35. The appellant company incurred support service expenditure of ₹ 11,91,12,445/- paid to its group company i.e. AT T Communication Services India Private Limited ( ACSI ) for support services. The said expenditure was proposed to be disallowed in the draft assessment. However, DRP deleted the addition of ₹ 11,99,12,445/- made on account of disallowance of support service expenditure. Both the parties confirmed that the issue involved in this appeal is identical to issues involved in the appeal of the revenue for Ay 2009-10. They also said that their arguments also remained the same on this issue. 36. We have gone through the relevant facts of the case and arguments and submissions advanced by both the parties in connection with the disallowance towards support service expenditure. The same are not repeated here for the sake of brevity as the said issue has already been dealt with in the appeal of revenue for AY 2009-10. 37. This ground of appeal has already been decided in AY 2009-10 in I.T.A. No. 2518/del/2014 in appeal of revenue for AY 2009-10 where in the ground of revenue was ..... X X X X Extracts X X X X X X X X Extracts X X X X
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