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TMI Blog2019 (8) TMI 552X X X X Extracts X X X X X X X X Extracts X X X X ..... g so have grossly erred in: 1.1 Disregarding the judicial pronouncement/ finding of the Hon'ble ITAT in Appellant's own case for AY 2009-10, AY 2010-11 and AY 2011-12 wherein the Hon'ble ITAT has concluded the mentioned issue in favour of the Appellant. 1.2 Rejecting the combined transaction approach of benchmarking adopted by the Appellant in its TP documentation (i.e. aggregating availing of intra-group services with provision of network support services) and proceeding to determine the arm's length price of international transaction pertaining to availing of intra-group services from its AEs on a standalone basis; 1.3 Arbitrarily applying Comparable Un-controllled Price ('CUP') method as the most appropriate method as against Transactional Net Margin Method ("TNMM') applied by the Appellant in its Transfer Pricing documentation; 1.4 Disregarding the elaborate documentary evidence submitted as part of assessment proceedings to erroneously assume that 'no benefit' hasd been conferred upon the Appellant from the international transactions pertaining to availing of intra-group services and thereafter re-determining the ALP of the said transaction as 'NIL'; 1.5 disrega ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rolled Price ('CUP') method to benchmark the payment of royalty transaction submitted by the Appellant without giving any cogent reasons; 2.6. undertaking fresh benchmarking analysis using Royaltvstat database and selecting agreements which are not comparable to the royalty payment made by the Appellant to its AEs. 2.7. not providing the detailed search process alongwith backup documentation such as accept-reject matrix to provide Appellant an opportunity to evaluate the appropriateness of the benchmarking analysis. 3. Disallowance of circuit accruals 3.1 On the facts, in circumstances of the case and in law, the Ld. AO /DRP erred in making a disallowance of Rs. 61,11,589 on account of circuit accruals created towards bandwidth and last mile services availed by the Appellant company, ignoring that the accruals were based on a reasonable and scientific basis. 3.2 On the facts, in circumstances of the case and in law, the Ld. AO failed to appreciate that the Appellant follows mercantile system of accounting and accrues circuit charges on scientific basis. 3.3 On the facts, in circumstances of the case and in law, the Ld. AO/ DRP failed to appreciate that as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to the above, on the facts, in circumstances of the case and in law, where any disallowance is made in respect of the aforesaid accruals for the year under consideration, deduction in respect of the disallowed amount should be allowed in the subsequent year(s) in which such accruals were reversed or utilized. Therefore, any disallowance on account of year-end accrual is unjustified. 5. Disallowance of Support Service Expenditure 5.1 On the facts, in circumstances of the case and in law, the Ld. AO/DRP erred in disallowing the legitimate business expenditure being in the nature of support service expenses of Rs. 8,25,71,385 paid to AT&T Communication Services India Private Limited ('ACSI'). 5.2 On the facts, in circumstances of the case and in law, the Lei. AO/DRP erred in not taking cognizance of the submissions made by Appellant and the documentary and circumstantial evidence/ proof produced by the Appellant, which duly substantiate that support services were rendered by ACSI to the Appellant company. 5.3 On the facts, in circumstances of the case and in law, the Ld.AO/DRP erred in ignoring that the aforesaid disallowance on account of support service expen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f penalty proceedings 11.1 On the facts, in the circumstances of the case and in law, the Ld. AO erred in initiating penalty proceedings under Section 271(1)(c) of the Act against the Appellant on account of the above adjustments made in the impugned final assessment order. All above grounds are without prejudice to each other. The Appellant craves leave to add, amend, vary, omit or substitute any of the aforesaid grounds of appeal at any time before or at the time of hearing of the appeal. The Appellant prays that appropriate relief be granted based on the said grounds of appeal and the facts and circumstances of the case." 3. The assessee company was incorporated in India on 25.10.2005 with an objective to provide telecommunication services in India and has obtained International Long Distance (ILD), National Long Distance (NLD) and Internet Service Provider (ISP) license from the Department of Telecommunication (DoT). Pursuant to the NLD/ILD licenses granted by the DoT, AGNS commenced International and National Long Distance services during F.Y. 2007-08 i.e. A.Y. 2008-09. The assessee entered into service agreements with its customers in India for provision of end-to-end ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he Assessing Officer further made addition of Rs. 61,11,589/- on account of circuit accruals. The Assessing Officer made addition of Rs. 8,94,42,969/- on account of other than circuit accruals. The assessing officer made disallowance of Rs. 8,25,71,385/- in respect of support service expenditure. The Assessing Officer also made disallowance of Rs. 57,74,87,020/- in respect of license fee. The Assessing Officer also made addition of Rs. 12,66,08,117/- towards lease line expenses. The Assessing Officer finally made disallowance of Rs. 1,29,47,531/- on account of foreign exchange loss. Thus, the Assessing Officer assessed income of Rs. 3,85,335,887/-. 4. As regards Ground Nos. 1 to 1.6 relating to transfer pricing adjustment relating to intra group services, the Ld. AR submitted that the said issue has been decided by the Tribunal in assessee's own case for Assessment Year 2009-10, 2010-11, 2011-12, 2012-13 and 2013-14. The Tribunal discussed the facts, material, and evidences in detail and upheld that the assessee satisfied the need, benefit and rendition days. The Tribunal upheld TNMM to be the most appropriate method. 5. The Ld. DR relied upon the order of the TPO, DRP and asse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... enefit test, as the assessee received an economic benefit to maintain its business operation. Therefore in this regard we are of the view that assessee has substantiated that these services are required by it for its business sustainability. The only allegation which TPO / DRP made was that the assessee has not been able to substantiate need test by way of appropriate documentation and held that the assessee should have availed these services from an independent third party in India rather than from its AE. After going through the fact and submissions placed on record we are of the view that the assessee has satisfied the need/benefit test for availing these services from its AE. Regarding the rendition of the services by the AE, the appellant submitted before the TPO, the copy of intercompany agreements, tickets processed by GCSC, sample list of project assignment on which GCSC team assisted the assessee, list of deals on which GSE presales team assisted the assessee. The assessee also explained the allocation key with details of teams spread across different countries, copies of invoices etc. For the purposes of substantiating the services rendered by the assessee it has submitte ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cost efficiency and normal functioning of its business operations. For this reason, the assessee is availing such essential services from its AEs. For this purpose, the assessee had entered into an agreement with its AE. These functions or services, if not availed from the AEs, would have to be undertaken by the assessee itself. However, due to very nature of network connectivity services and in order to achieve better economies of scale and synergies, these functions are centralized within the AE of the assessee which renders such services. It is, therefore, clear that such services confer a benefit on the assessee. While examining the arm's length nature of the impugned international transaction, the learned TPO has applied costbenefits test and attempted to map the benefits received against payment made for such services. While he has concurred with the assessee's contentions regarding receipt of benefits in respect of several services, for certain other services, he has erroneously believed that no benefits have been received and re-determined the ALP on that basis, without appreciating that the same have benefitted the assessee and accordingly, warrant a payment. 50 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ength Price is to be viewed from the perspective of the assessee and businessman and not from the perspective of revenue. In this case appellant has demonstrated the benefit which it is expected to derive from the various services rendered by its AE and ld. TPO has erred in replacing with its own judgment of the benefit derived by the assessee, we reject this approach. 52. However for determination of arms Length pricing, the assessee has adopted TNMM as the most appropriate method. The TPO has rejected TNMM as the most appropriate method and applied the CUP method. For this TPO has not given any reasoning. In fact, TPO and DRP has not brought out any data on record for bench marking of intra group transaction and treating the value of services as NIL by applying the CUP method which is against the basic principles of TP regulations. Data availability s the life line of any method adopted in comparability analysis. If there is no data available in that particulars method then comparability analysis under that method fails. In a scenario where no data is available to apply the direct methods, one has to resort to residuary methods for benchmarking a transaction / group of transac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... vices for which it had entered into agreement, only one service namely Global Customer Services Center was availed. The assessee submitted the list of the tickets processed along with nature of problem resolved and the relevant evidence was also submitted before the Assessing Officer. Thus, the facts are identical in the present Assessment year as well to that of earlier Assessment Years i.e. 2009-10, 2010-11, 2011- 12, 2012-13 and 2013-14. Since the issue is identical in the present assessment year by assessee's own order, Ground Nos. 1 to 1.6 are allowed. 7. As regards Ground Nos. 2 to 2.7 relating to transfer pricing adjustment with respect to payment of royalty, the Ld. AR submitted that the same is partially covered in favour of the assessee in assessment year 2009-10 wherein Tribunal directed TPO not to question on benefit and to compute ALP. The Ld. AR further submitted that fresh bench marking analysis was undertaken by the TPO, wherein royalty rate was determined at 2.85% instead of 4% of sales. The Ld. AR further submitted that non-comparable royalty agreement has been contested before this Tribunal in this particular year by the assessee. The Ld. AR further submitted t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... her form of advertising. These intangibles, which are licensed to AGNS India, are key value drivers for the business and benefit it by enabling it to expand its presence in the marketplace. What would be the duration of payments of such license royalty is also determinative of the factor of the payments as it cannot also continue for an indefinite period. It may also happen that India brand because o consumer may become bigger than AE's brand. 68. As the assessee has adopted the TNMM which is crude method of benchmarking royalty payments and Ld TPO has disregarded the transaction only on the benefit analysis and has also rejected the CUP benchmarking of the assessee , we are of the view that this issue needs to be set aside to the file of the ld TPO to determine the ALP of the royalty payments afresh after examining the method, comparability and then ALP afresh. Assessee is also directed to support its ALP determination afresh after submitting the detailed answer to all the questions raised by the ld TPO in para no 9 of his order except the benefit test. Hence this ground no 8 of the appeal is allowed with above directions." 60.1 Respectfully following the decision of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r and no adverse finding has been given by the Assessing Officer/DRP. We find merit in the arguments advanced by the ld. counsel for the assessee. We find identical issue had come up before the Tribunal in assessee's own case for assessment year 2009-10. We find the Tribunal has discussed the issue at para 34 and 35 of the order and held that the circuit accruals are credited on scientific basis and thus needs to be allowed in the year of creation on accrual basis. The relevant observation in the order of the Tribunal reads as under:- "34. We have carefully considered the rival contentions and perused the order of the ld TPO/ AO/ DRP. The assessee has explained the basis of creating the provisions for circuit accruals, which is calculated automatically and scientifically by the software. As submitted assessee has been followed this basis on a global basis. As explained by the appellant, the process is scientific in a way that as and when a request for new circuits is placed by the customer to appellant, the request is created in favour of third party vendor who in turn is required to provide service. Such requests are converted into orders by the Customer Access Provisioning Tea ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... st the prior year accrual balance brought forward manually. Accordingly, only the current year accrual balances are booked in the profit and loss account. 35. We find that the process explained is entirely automated process which captures the details vis-à-vis each circuit, amount to be booked against each circuit and the accrual to be created. Further, assessee has been creating the provision on an year on year basis in accordance with the mercantile system of accounting in accordance with accounting standard issued by the ICAI otherwise correct expenditure would not be captured as per the matching principle. The assessee has also demonstrated through evidences that the provision so created is either reversed or expensed off in the subsequent year. The assessee has also been able to submit evidences for most of the reversals before the lower authorities. It is also not the claim of the revenue that the amount of provisioning made by the assessee is incorrect or not based on proper documentation and estimations. We also find that the lower authorities allow the entire claim of expenditure in the next year when such reversals are made. Thus, we are of the view that this pr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... egards Ground Nos. 4 to 4.5 relating to disallowance on account of year end accruals, the Ld. AR submitted that the issue is squarely covered in favour of the assessee vide Tribunal order in Assessment Years 2010-11, 2011- 12, 2012-13 and 2013-14 as well as squarely covered by the order of the Tribunal in assessee's sister concern for Assessment Year 2010-11. 14. The Ld. DR relied upon the order of TPO/ DRP/ AO. 15. We have heard both the parties and perused all the relevant material available on record. The Tribunal in A.Y. 2012-13 held as under:- "24. We have considered the rival arguments made by both the sides and perused the orders of the authorities below. We find the Assessing Officer in the instant case, disallowed an amount of Rs. 1.39 crores on account of non-submission of supporting documents relating to the year ending provisions of out-standings. It is the submission of the ld. counsel for the assessee that when the assessee follows mercantile system of accounting and accounts all its expenses pertaining to the year in accordance with the matching principle and was able to substantiate with evidence to the satisfaction of the Assessing Officer in case of more th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssee for the financial year relevant to the present assessment year, deduction in respect thereof has to be allowed to the assessee. The facts are identical in the present Assessment year as well to that of earlier Assessment Year which is decided by the Tribunal in A,Y. 2010-11. Therefore, Ground Nos. 4 to 4.5 are allowed. 16. As regards Ground Nos. 5 to 5.3 relating to disallowance on account of support services, the Ld. AR submitted that the issue is squarely covered in favour of the assessee vide Tribunal's order for assessment year 2009-10, 2010-11 and 2013-14. 17. The Ld. DR relied upon the order of the TPO, DRP and Assessing Officer. 18. We have heard both the parties and perused all the relevant material available on record. The Tribunal in A.Y. 2013-14 held as under :- "30. After hearing both the sides, we find the assessee has incurred support service expenditure of Rs. 11,87,48,765/- paid to its group company i.e., AT&T Communication Services India Pvt. Ltd. (ACSI) for support services rendered by it. The Assessing Officer disallowed the support services charges of Rs. 11.87 crores on account of non-submission of supporting documents. We find identical issue was ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the principles laid down in the aforesaid judicial precedents, we find that where the appellant has actually incurred the aforesaid support services cost and no evidence has been brought by the Department to controvert the same, such expenditure cannot be disallowed merely on suspicion. We affirm the finding of the ld DRP on this issue. In view of the above, the appeal of the revenue on this ground is dismissed. 31. Since the assessee had not submitted the requisite details before the Assessing Officer, therefore, we restore this issue to the file of the Assessing Officer with a direction to give an opportunity to the assessee to submit the details and decide the issue in the light of the decision of the Tribunal for A.Y. 2009-10 as reproduced above. This ground by the assessee is accordingly allowed for statistical purposes." In the present assessment year also AT&T Communication Services India Pvt. Ltd. (ACSI) which is a group company of the assessee and the assessee company entered into support service agreement, and activities performed by ACSI under support service agreement are essential and integral part. Support services cost of Rs. 8.25 crores which was allocated by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... decision of Hon'ble Delhi High Court in the case of CIT vs. Bharti Hexacom Limited [2014] 265 CTR 130 (Delhi) other case laws relied upon by the appellant as cited above. The Ld. DR could not controvert that how this issue is not squarely covered by the decision of the jurisdictional High Court. It is also important to note that in the immediately succeeding year on same facts, the DRP has allowed the claim of the licence fees on revenue basis u/s 37(1) of the Act. In view of the above facts and respectfully following the decision of the Hon'ble jurisdictional High Court we allow the claim of the assessee. In the result the ground No. 4 of the appeal is allowed." 36. Merely because the Revenue has filed SLP against the order of the Delhi High Court, the same cannot, in our opinion, be a ground to take a contrary view than the view taken by the Hon'ble High Court unless and until the same is reversed or stayed by the Hon'ble Apex Court. Therefore, respectfully following the decision of the Tribunal in assessee's own case for assessment year 2010-11, the disallowance made by the Assessing Officer on account of annual revenue share based licence fee is deleted. The ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ission of data and is not for use of any asset involved in provision of such facility covered u/s 194I of the IT Act. It is also the submission of the ld. counsel for the assessee that the assessee was neither in possession nor control of the equipments which were used for providing internet and communication facilities and, therefore, there was a clear absence of the element of leasing of equipments and, therefore, the provisions of section 194I cannot be applied. We find merit in the above argument of the ld. counsel. We find identical issue had come up before the coordinate Bench of the Tribunal in the case of Global One India (P) Ltd.(supra). We find the Tribunal at para 9 to 11 of the order has decided the issue in favour of the assessee by observing as under:- "9. The Ld. Counsel for the assessee submitted that the A.O. disallowed payments made for lease lines, as the assessee has not deducted tax at source u/s 40(A)(i)(a). The A.O. disallowed the same by holding that lease lines were, technically speaking, equipment and payment for taking these lines on lease, is covered u/s 194-I and that the assessee himself has described the payment has been made towards lease lines. T ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g any domain or control or possessory rights over such facility, cannot be categorized as use of assets for the purpose of the Act. 11.1. Respectfully following the order of the Jurisdictional High Court on this issue, we allow this ground of appeal of the assessee. In the result ground no.5 for the A.Y. 2007-08 is allowed." 42.1 We find Mumbai Bench of the Tribunal in the case of Alok Industries Ltd. (supra) has also decided an identical issue in favour of the assessee by observing as under:- "16. We have considered the submissions of the parties and perused the materials on record. Undisputedly, the assessee has paid the amount in question to Sify Ltd. towards use of internet/lease license charges. As could be seen, in a number of judicial precedents, some of which have been cited before us, it has been held that payment made towards broadband/lease line charges is not in the nature of royalty so as to attract the provisions of section 194J. Since, the services rendered are not in the nature of technical service as envisaged u/s. 194J, the ld. CIT(A) has attempted to rope in the payment u/s. 194I by referring to the definition of 'process' as provided under Expla ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... spect which may require further examination of the evidence and therefore, the matter was remanded back to the Assessing Officer. Further, in the impugned order of the Tribunal, after considering the above referred decision of Bharti Cellular Limited, the Tribunal has further not only considered the opinion, but found that as per the said opinion the roaming process between participating entities is fully automatic and does not require any human intervention. Therefore, we do not find that the aforesaid decision in the case of Bharti Cellular Limited, would be of any help to the appellants - Revenue. 10. In the another decision of the Apex Court, in the case of Kotak Securities Limited, the matter was pertaining to the charges of the Stock Exchange and the Apex Court, ultimately, found that no TDS on such payment was deductible under Section 194J of the Act. But the learned Counsel for the appellants - Revenue attempted to contend that in paragraphs 7 and 8 of the above referred decision of the Apex Court, it has been observed that if a distinguishable and identifiable service is provided, then it can be said as a "technical services". Therefore, he submitted that in the present ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Assessing Officer is directed to delete the disallowance. The ground raised by the assessee on this issue is accordingly allowed." It is pertinent to note that the lease line charges were paid to the telecom service provider for faster connectivity services through dedicated lease line. As such the payment had been made for availing facility of connectivity services from vendors required for transmission of data and is not for use of any asset involved in provision of such facility covered under Section 194I of the Act. The assessee company is not in possession as well as not in control of the equipments which were used for providing internet and communication facilities, therefore, there was a clear absence of the element of leasing of equipments, as a fall out of which the applicability of the provisions of Section 194I stood excluded. Thus, the nature of payment is not at all related to any equipment, therefore, assessee is not require to deduct tax at source under the statutory provisions of Section 194I of the Act. This issue is identical and covered in favour of the assessee, in A.Y. 2012-13 and 2013-14. Accordingly the Assessing Officer is directed to delete this addition. ..... X X X X Extracts X X X X X X X X Extracts X X X X
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