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TMI Blog2019 (3) TMI 326X X X X Extracts X X X X X X X X Extracts X X X X ..... s issued by Ld. Disputes Resolution Panel (DRP) vide order dated 31st December, 2015. 2.1 Following grounds of appeal have been raised:- "1. That on facts and in law the orders passed by the Assessing Officer (hereinafter referred as the "AO") / Dispute Resolution Panel (hereinafter referred as the "DRP) / Transfer Pricing Officer (hereinafter referred as the "TPO") are bad in law and void abinitio. 1.1 Without prejudice, on facts and in law, the TPO/DRP erred in not granting a proper opportunity of being heard and thereby violating the settled principals of audi alteram partem. 2. That on facts and in law the AO/TPO/DRP erred in making / proposing/upholding an addition to total income of Rs. 114,98,39,926/- under Chapter X of the Income Tax Act, 1961 (hereinafter referred as "the Act"). 3. That on facts and in law the AO/TPO/DRP erred in making / proposing/upholding Transfer Pricing adjustment of Rs. 114,98,39,926/- on account of Advertisement, Marketing and sales promotion expenses 3.1. That on facts and in law the AO/TPO/DRP erred in not appreciating that in absence of a "transaction" as envisaged under section 92F of the Act between appellant and its AE for brand prom ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 7.1 Without prejudice, that on facts and in law the TPO/DRP 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 ALP applying TNMM 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 payments receivable from the AE was called for. 8. Without prejudice, that on facts and in law the AO/TPO/DRP erred in not appreciating that the alleged transactions of AMP and notional interest are "closely linked" with the main activities carried out under the Distribution Agreement and hence they cannot be segregated and benchmarked on a stand-alone basis. 9. That on facts and in law the AO/ DRP erred in restricting allowance for deduction u/s 10A of the Act to Rs. 59,39,683/- as against a deduction of Rs. 17,70,80,634/- claimed by the appellate in its return of income. 9.1 That on facts and in law the AO/DRP erred in holding / upholding that Data Processing Receipts pertaining to Unit-II are not eligible for claiming bene ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... /s Amadeus Spain on 1st October, 2004. The main activity of the assessee is to provide connectivity to the subscribers in India to the host the CRS system by creation/modification/up-gradation of computer programmes online. The assessee has a data processing centre, which provides the above services to the deemed AE. In the Transfer Pricing (TP) Study, the assessee has declared the following international transactions with its deemed AE: Nature of Transaction Method Value (Rs) Provision of Information Technology Enabled Services (ITeS) TNMM 231,71,32,514 Receipt of Data Processing Services 9,40,17,116 2.6 In the Transfer Pricing study, the assessee had followed the Transaction Net Margin Method (TNMM) to substantiate the Arm's Length Price (ALP) of above disclosed international transaction/s pertaining to provision of ITES Services with its deemed AE and accordingly it compared the net operating profit/total cost (OP/TC) earned by it with the mean OP/TC of the comparable companies selected by it and concluded that since the OP/TC of the assessee is higher than the mean OP/TC of comparable companies, the disclosed international transaction are at Arms' Length Price. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 142 and para 147, page 111 The burden is on the assessed to select and justify the method adopted and the arm's length price declared under sub-section (3) to section 92C, the Assessing Officer can proceed to determine the arm's length price in accordance with Section 92C(1) and (2) on the basis of material, Information or documents in his possession, if any of the circumstances mentioned in clauses (a) to (d) are satisfied - The AMP expenses incurred by the assessee, qua independent parties, are domestic transaction and not international transaction as defined in section 92B of the Act. AMP expense is an international transaction. (Paras 52 & 53 of the judgment) : The TPO has jurisdiction to determine the ALP of the international transaction of AMP expenses (para 50 of the judgment); Discussion under the heading C para 51-57, the substantial question of law answered in favor of Revenue. AO/TPO can segregate AMP expenses as an independent international transaction, but only after elucidating the grounds and reasons for not accepting the bunching adopted by the assessed and examining and giving benefit of set off under 92(3). Assessee is already remunerated for the a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ricted only to domestic companies using any foreign brand (para 120); If no comparables having performed both the functions in a similar manner are available, then, suitable adjustment should be made to bring international transactions and comparable transactions at par [para 194(iii)]; If adjustment is not possible or comparable is not available, then, the TNMM on entity level should not be applied [Paras 100, 121, 194(iii) & (vi)] For determining the ALP of these transactions in a bundled manner, suitable comparables having undertaken similar activities of distribution of the products and also incurring of AMP expenses, should be chosen [Paras 194(i), (ii), (viii) & others]; The choice of comparables cannot be restricted only to domestic companies using any foreign brand [Para 120]; Arbitrary Mark up PLR cannot be the basis for computing markup on AMP expenses as an international transaction. Mark-up as per sub-clause (ii) to rule 10B(1)(c) would be comparable gross profit on the cost or expenses incurred as AMP. The mark-up has to be benchmarked with comparable uncontrolled transactions or transactions for providing similar service/product. The Revenue's stand in some ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e exists a "transaction" for brand promotion in the instant case is now settled by appellate orders passed in case of 'A' for earlier assessment years. Kind reference in this regard is invited to the decision of Hon'ble ITAT in for AY 09-10 reported in 52 ITR(T) 83 {copy enclosed at pages 409 to 447 of PB filled in Stay Nos 475 & 476/Del/2018}. Hon'ble ITAT after considering the facts of the case has held that in absence of a "transaction" for brand promotion between 'A' and its AE no TP adjustment for alleged AMP expenses can be made. Kind reference is invited to following extracts of Hon'ble ITAT decision: (a) TPO accepts that "International Transaction" for Provision of ITeS Services are at ALP applying TNMM....page 421, para 8 (b) Jurisdictional Issue questioning existence of "transaction" for brand promotion merely premised benefit to AE taken up for consideration.....page 421-422, para 8 (c) Argument of DR praying for remand rejected. Held, that all necessary facts are on record - effect is to be given to decisions of Jurisdictional High Court which are direct on this issue....page 422, para 8.1 (d) Jurisdictional High Court decisions in case of Maruti Suzuki India Lt ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... age 408, paras 7 and 8." 4. On the other hand, the Ld. CIT (DR) vehemently opposed the submissions made by the Ld. AR. By relying on the orders passed by the TPO and the Ld. DRP it was submitted by him that the lower authorities have, for fair reasons, concluded that there exists an international transaction between the assessee and its AE for brand promotion. 5.0 We have carefully considered the submissions made by both the sides and have also perused the material available on record. It is seen that the issue in dispute has been decided in favour of the assessee by the coordinate Bench of this Court in earlier assessment years and the order passed by the coordinate Bench for A.Y.2009-10 has also been upheld by the Hon'ble Jurisdictional High Court. In earlier years the issue in dispute has been decided in favour of the assessee by the coordinate Bench by taking into consideration the following decisions of the Hon'ble Jurisdictional High Court:- (i) Maruti Suzuki India Ltd. vs. CIT reported in 381 ITR 117 (Delhi); (ii) CIT vs. Whirlpool of India Ltd. reported in 381 ITR 154 (Delhi); (iii) Honda Siel Power Products Ltd. vs. Dy. CIT reported in 237 Taxman 304 (Delhi); (iv) B ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 (supra). The above line of adjudication is also supported by the decision of the honourable jurisdictional High Court in the case of Diakin Air-conditioning India (P.) Ltd. (supra) 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 transaction involving AMP expenses between the assessee and its associated enterprise. This question will not be remanded by the Income-tax Appellate Tribunal to any other authority for decision. If the said question is answered in favour of the assessee, then no other question would arise. If answered against the assessee, then the Income-tax Appellate Tribunal will decide ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ength 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 length price for the contract price. Section 92B defines 'international transaction' as under: '92B. Meaning of international transaction.-(1) For the purposes of this section and sections 92, 92C, 92D and 92E, "international transaction" means a tr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... '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 compensation for the service or benefit'. This was negatived by the court by pointing out (page 144): 'Even if the word "transaction" is given its widest connotation, and need not involve any transfer of money or a written agreement as suggested by the Revenue, and even if reso ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 and promotion expenditure incurred, for the associated enterprise. In any event, after the decision in Sony Ericsson [2015] 374 ITR 118 (Delhi), the question of applying the bright line test to determine the existence of an international transaction involving the advertisement, marketing and promo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n 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 transaction. Next, to ascertain the disclosed "price" of such transaction and thereafter ask whether it is an arm's length price. If the answer to that is in the negative the transfer pricing adjustment should follow. The objective of Chapter X is to make adjustments to the price of an international tr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aving 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, economic trends both international and domestic, the consumption patterns, market behaviour and so on. A simplistic approach using one of the modes similar to the ones contemplated by section 92C may not only be legally impermissible but will lend itself to arbitrariness. What is then needed is a clear statutory s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d 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 (supra) 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 presume the existence of an agreement, arrangement or understanding in the year under consideration. In this regard the honourable High Court at paragraph 153 of its reported judgment has been pleased to be hold as under (page 217): "Economic ownership of a brand is an intangible asset, just as legal ownership. Undifferentiated, econo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. (supra) 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 'separate entity concept'. In other words, there cannot be a presumption that in the present case since WOIL is a subsidiary of Whirlpool USA, all the activities of WOIL are in fact dictated by Whirlpool USA. Merely because Whirlpool USA has a financial interest, it cannot be presumed that the advertisement, marketing and promotion expense incurred by the WOIL are at the instance or on behalf ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he transfer pricing adjustment of Rs. 75,40,09,515/- on account of Advertising, Marketing and Sales Promotion Expenses (AMP Expenses) relying upon the decisions of this Court including the decision in Bausch & Lomb Eyecare (India) Pvt. Ltd. vs. Additional Commissioner of Income Tax (2016) 381 ITR 227 (Del). 4. As far as the above issue is concerned, it is covered by the earlier decisions of this Court against the Revenue. This Court is not inclined to frame any substantial question of law on this issue." 5.3 Respectfully following the above binding precedents, it is concluded that the TPO has wrongly invoked the provisions of Chapter X of the Act. The addition of Rs. 114.89 crores, is therefore, directed to be deleted. Ground Nos. 3 & 3.1 are, therefore, allowed. Considering our conclusions, other grounds challenging various other facets of the impugned addition do not require any adjudication as having become in fructuous. 6.0 The next issue in dispute arising out of grounds 7, 7.1 & 8 of the Appeal pertains to the Transfer Pricing Adjustment of Rs. 8,98,683/- on account of alleged transaction for Notional Interest attributable to delayed payments receivable from the AE. In t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Pr. CIT vs. Kusum Healthcare Pvt. Ltd. reported in 2017-TII-28-HC-DEL-TP. 8.0 On the other hand, the Ld. CIT (DR) opposed the arguments and contentions taken by the Ld. AR. Relying on orders passed by the lower authorities, it was submitted by him that the reasoning given by the Ld. DRP requires no interference. However, on query being raised by the Bench, the Ld. CIT (DR) was fair enough to admit that in earlier assessment years, identical issue has been decided in favour of the assessee and that the department has accepted the order passed by the coordinate Bench for A.Y. 2009-10 on this issue. 9.0 We have carefully considered the submissions made and perused the material available on record. It is observed that the coordinate Bench in A.Y. 2009-10 had adjudicated upon the identical issue in favour of the assessee as under:- "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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pprehensions 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 assessee. 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 of 'deferred payment or r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... saction 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, onwards. (paragraph 39) For the detaile ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a TPO concluding that the figure of receivables beyond 180 days constitutes an international transaction by itself. With the Assessee having already factored in the impact of the receivables on the working capital and thereby on its pricing/profitability vis-à-vis that of its comparables, any further adjustment only on the basis of the outstanding receivables would have distorted the picture and re-characterised the transaction. This was clearly impermissible in law as explained by this Court in CIT v. EKL Appliances Ltd. (2012) 345 ITR 241 (Delhi)" 9.2 Respectfully following the above binding precedents, grounds 7 & 7.1 are allowed and the AO is directed to delete the addition of Rs. 8,98,683/-. 10.0 The next issue which requires our deliberations pertains to disallowance of deduction u/s 10A of the Act. This issue is raised in Ground Nos. 9, 9.1, 9.2 & 9.3 of the appeal. The relevant facts in this regard are that in the computation of income, deduction u/s 10A of the Act amounting to Rs. 17,70,80,624/- has been claimed by the assessee. During the course of assessment, unit-wise computation of total income was filed by the assessee and on perusal of that, the AO records ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... AYs 2009-10 and 2010-11. References: * AY 2009-10 ITAT order reported in 52 ITR(T) 83 {copy enclosed at pages 409 to 447 of PB filled in Stay Nos 475 & 476/Del/2018} relevant issue discussed at page 430, para 12 onwards and conclusions are at pages 437 to 447, para 15 to 16. * ITAT order for AY 09-10 on this issue has been upheld by Hon'ble Delhi High Court vide order dated 22.05.2017 in ITA 154/2017 {copy enclosed at pages 493 to 514 relevant conclusions at page 507, para 32} . AY 2010-11 ITAT order dated 23.10.2017 in ITA No. 1835/Del/2015 {copy enclosed at pages 448 to 492 of PB filled in Stay Nos 475 & 476/Del/2018} relevant issue discussed at page 479, para 6 onwards and conclusions are at pages 480 to 491 at paras 6.4 to 6.6." 12.0 On the other hand, the Ld. DR was unable to controvert the above arguments. The Ld. DR relied upon orders passed by the lower authorities. 13.0 We have heard the rival submissions and also perused the material available on record. It is seen that the coordinate Bench of Tribunal, while adjudicating upon the issue of deduction u/s 10A of the Act in A.Y. 2009-10, has relied upon the decision in the assessee/appellant's own case for A.Ys.1 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ncome from business." 15.2 Even otherwise on merits we are unable to sustain the view adopted by Ld DRP. Ld AR is justified in submitting that the learned DRP has written factually incorrect findings in its order. Moreover the details, filed by the appellant have also been partially taken into consideration. Ld DRP takes note of top 25 employees but omits to take into consideration crucial fact that director of appellate company Shri Ankur Bhatia is a Software Engineer with 16 years of experience. Moreover division wise break up of total employee strength has also partially been reproduced by Ld DRP in its order. Appellant vide submissions dated 29th November 2011 has submitted following details: .... ...... Above details clearly show that appellant did possess requisite technical staff for carrying out data processing activities. We further observe that Ld DRP has erroneously been influenced by the fact that appellant is having branches in various locations. Facts on record clearly show that those branches belong to Unit I and not to Unit II. As regards Unit II the STPI registration has been granted to the appellant only for one location i.e Vasant Vihar, New Delhi. Ld ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing services. Facts on record also show that the appellant has not carried on any "distribution" functions though the agreement provided for same DRP's action in the present case is motivated by the "distribution" part of agreement which was not actually carried on by the appellant. Since fee to be paid to appellant as per Annexure A of the agreement was defined in aconsolidated manner probably that has lead to the present confusion in Ld DRP's action of making disallowance of deduction u/s 10A. As held by the Tribunal in appellant's own case for AY 1996-97 (supra) it merely provides ITeS services to Amadeus Spain. Appellant renders no services to the travel agents but does render data processing services only to Amadeus Spain and for this it is being remunerated on a profit sharing basis. The meaning ascribed to term "distribution" by Ld DRP in this year has formed part of appellant's agreements % with Amadeus Spain since inception from AY 1996-97. Hence it does not wipe out the past history of the case. It is admitted by learned DRP that facts are common and there is no change in modus operandi. Hence action of learned DRP in now doubting the claim made when after ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t is not the DA who constitutes PE of the GE, but it is by the virtue of a DA that the GE is deemed to have a PE, a DAPE though, in the other contracting state. We are of the considered view that in addition of the taxability of the DA 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" Tribunal has also maintained the above distinction while deciding the case of Amadeus Spain. A deductio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 96-97 (supra), the Tribunal has opined as under: "We find that the learned CIT(Appeals) while dealing with the issue has basically followed the decision of the IT AT 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 para No.5.2, the Learned CIT(Appeals) firstly has discussed the terms of 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 processing services at the rate of % of GDP as part of the distribution services provided to Galileo and the consideration paid by Galileo for such services qualified for deduction under section 10AA of the Act. The Learned CIT (Appeals) has met out the objections raised by the Assessing Officer to j ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tificates 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 authorized officer. We are thus of the view that the Learned CIT(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 IT AT on an identical issue, in the case of Amadeus India, in para No. 5.2 of the first appellate order reproduced hereinabove, the Learned CIT(Appeals) has summarized the fulfillment of all the requirements of the eligibility of the deduction claimed under sec. 10AA of the Act in the case of the assessee, which we are not reiterating here for the sale of brevity. Besides, Software export dealer action form shows the assessee in the data entry jobs and conversion software, data processing, the profit and loss account show data processing software export, software development services income, auditor's report has certified that the assessee has been engaged in the development of computer software and information technology enabled product and services. The auditor's report also ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... vel fare, tickets, the several intermediary and eventual destination; and the nature of services to be provided etc. This data enters the composite data based 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 conceived, evolved, maintained and operates the CRS (Computer Reservation System) facility on the one hand; and travel agent on the other. What the to assessee do, is to supplement functions, of the overseas entities (Amadeus or Galileo) by preparing and transmitting the locally generated travel related data to them for incorporation and synthesis into the core data base, maintained in the mega computers overseas, so as to enable travel agents (operating within the assessee's marketing region) to draw on the available and updated information, for their benefit. The assessees issued instructions to the respective master computer (of Amadeus or Galileo) to enable recognition that identifica ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... se (b) of Explanation 2 to Section 10A, need not be computer software as understood in the common parlance of even customized electronic data, as generally understood. Any product or service of similar nature would include in its ambit, product and services which were enabled by, i.e. would rely upon, or are driven by information technology. This becomes clear when we refer to the wide ambit of the divergent and varied services covered in the different clauses like, "(ii) call centres...(viii) human resources services...(viii) insurance claim processing... (xii) remote maintenance" and "(XIV) support centres". These services would not necessarily and primarily involve customized data processing, but nevertheless, these are information technology enables services. In case of call entres, queries and questions from a customer of a third company are answered by an employee of the assessee based in India. The said task is performed with the aid and help of information technology but it would not be a case of customized electronic data service or export thereof. Similar exercise may be undertaken in case of remote maintenance or support centers, which answer queries and gives suggestion ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ) are bad in law and void abinitio. 2. That on facts and in law the TPO/DRP erred in not appreciating that in absence of a "transaction" as envisaged under section 92F of the Act between appellant and its AE for brand promotion or for establishing a marketing intangible, the TPO had no jurisdiction to propose an adjustment on account of AMP expenses. 3. That the Transfer Pricing adjustment of Rs. 200,12,15,476/- on account of Advertisement, Marketing and Sales Promotion (AMP) expenses being the aggregate of : (i) Protective Adjustment Rs. 96,63,03,610/- (ii) Substantive Adjustment Rs. 103,39,11,866/- is bad in law, illegal and uncalled or both on facts and in law. 3.1 That on facts and in law the DRP erred in : (a) Enhancing the TP adjustment vis-à-vis protective/substantive basis without issuing any show cause notice. (b) Observing that the appellant has not furnished complete / adequate details in reply to the investigation directed to be conducted vide letter dated 19th October, 2016. (c) Issuing directions contrary to provisions of section 144C(8) of the Act. 3.2 That on facts and in law the TPO/DRP erred in ignoring and not following the orders of Ho ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g that use of "Bright Line Method" is supported by Rule 10AB of Income Tax Rules. 7. That on facts and in law the TPO/AO/DRP erred in making/upholding substantive TP adjustment on account of AMP expenses invoking "Cost Plus Method". 7.1 That Without prejudice, on facts and in law the TPO/DRP erred in making/upholding the applicability of a markup of 45.97% on the alleged excessive AMP expenses incurred by the appellant on behalf of the Associated Enterprise. 8. That without prejudice on facts and in law the TPO/DRP erred in making/upholding the applicability of a markup of 45.97% on the alleged excessive AMP expenses incurred by the appellant on behalf of the Associated Enterprise. 9. That on facts and in law the AO/DRP erred in making / upholding disallowance of Rs. 27,01,152/- u/s 14A of the Act. 9.1 That on facts and in law the AO/DRP erred in not appreciating that provisions of section 14A are not applicable as no exempt income was earned by the appellant during the year under consideration. 10. That on facts and in law the AO erred in levying interest u/s 234B & 234C of the Act." 15.1 As is apparent, the following two issues are involved in this appeal:- (i) Tra ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Department. The Hon'ble High Court in the case of Vodafone India Services Pvt. Ltd. have held that proceedings before the DRP are continuation of assessment proceedings, and the final assessment order is passed only after the directions of the DRP. A similar view has been taken in several decisions of the Hon'ble ITAT. The recent amendment in the Income Tax Act only strengthens the view that the DRP is an administrative, rather than an appellate body., 2. In certain case, the Hon'ble Delhi High Court has decided the issue against the Revenue. As discussed above, the Department has filed SLP in the Hon'ble Supreme Court against these decisions and the decision of the Hon'ble Supreme Court is awaited. In Sony Ericsson, the Department's SLP in the Hon'ble Supreme Court on this issue has been admitted and the decision of the Hon'ble Supreme Court is awaited. With the highest respect to the Hon'ble High Court's decision in these cases, we are constrained to observe that if the AO's decision on this issue is not approved by the DRP following the Hon'ble High Court's decision in these cases, this would result in a fait accompli, because after the amendment w.e.f. 1.6.2016, the AO canno ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aid down a methodology for making an adjustment on account of AMP intensity and has issued directions to the TPO accordingly. Highlighting the above background, it was submitted by the Ld. AR that post issuance of directions by the Ld DRP, vide letter dated 10th January, 2017, the assessee/appellant submitted the necessary details for AMP Intensity Adjustment before the TPO as under:- "In continuation to our letter dated 5th January, 2017 on the above mentioned subject and as instructed by you to provide AMP intensity adjustment calculations as per formula provided by DRP in its directions dated 20th December, 2016. Please find enclosed herewith Calculation of AMP intensity Adjustment as per DRP Directions for AY 2012-13 - marked as Annexure A. As is evident from the attached calculation, difference in intensity of amp is negative so no adjustment is required to be done for Assessee since its AMP expenses are loss than the comparables. Further, just to bring on record, for ALP purpose prescribed formula is OP/OC and not NP/Sales, even so Assessee's NP/Sales is much higher than the comparables." 15.8 It is submitted by the Ld AR that the above submissions have been accepted b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... w taken by the Department in earlier year and should not be misconstrued as the Department having accepted the exclusion of this comparable, even when this is actually not the case. 3. In view of the above discussion, this issue is decided as follows: (i) If the Department has accepted the decision of the DRP on this issue in AY 2011-12, and has also accepted the decisions of the Hon'ble Delhi High Court in Cheminvest and Holcim, the disallowance under section 14A shall be deleted following the decision of the DRP in AY 2011-12 and these decisions of the Hon'ble High Court. (ii) If the Department has not accepted the decision of the DRP on the issue in AY 2011-12, or has not accepted the decision of the Hon'ble Delhi High Court in Cheminvest and Holcim, the disallowance under section 14A is upheld. It is possible that the DRP's decision and these decisions of the Hon'ble High Court have not been accepted on merits however, no appeal is filed because of low tax effect. In such a case, as the DRP's decision on this issue has not been accepted on merits, the disallowance shall be upheld." 15.12 Since undisputedly, there is no exempt income derived by assessee/appellant in the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at on facts and in law the TPO erred in holding and the DRP inter alia erred in upholding / observing that : (i) Appellant had incurred AMP expenditure totaling to Rs. 20,21,41,620/- on promotion of proprietary marks and for development of marketing intangible for the benefit of AE. (ii) AMP expenditure of Rs. 20,21,41,620/- incurred by the assessee is an "International Transaction" u/s 92B of the Act. (iii) Expenditure of Rs. 18,19,16,969/- incurred by the assessee on payment of incentives to subscribers is in the nature of AMP. (iv) By incurring excess / extraordinary AMP expense the appellant had rendered intra group services to its AE. (v) AE is directly benefited by any expenditure incurred by assessee on AMP. (vi) AE directs the AMP strategy and the expenditure incurred by appellant in India. (vii) Legal ownership of the marketing intangible would get transferred to the AE without any consideration on termination of the Distribution Agreement. (viii) Appellant has failed to furnish any material to demonstrate that it enjoyed economic ownership of brand. (ix) Appellant has failed to show that for excessive AMP expenditure it was compensated by the AE ..... X X X X Extracts X X X X X X X X Extracts X X X X
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