Referred Sections:
Section 143(3) of the Income Tax Act, 1961
Section 145(2) of the Act,
Section 35ABB of the Act.
Section 37(1) of the Act
Section 40(a)(i) of the Act
Section 234B and 234C of the Act
Section 271(1)(c) of the Act
Section 92B of the Act.
Section 194I of the Act.
Referred Cases / Judgments:
Money Financial Services Pvt Ltd. Vs ACIT in ITA No. 5882/Del-2010
TNS India Pvt. Ltd. V. ACIT
CIT vs Cushman and Wakefield (India) Pvt Ltd. (ITA 475/ 2012),
Ericsson India Private Limited vs Dy CIT [ITA No. 5141/Del/2011 (Delhi ITAT)]
CIT v. EKL Appliances Ltd. [2012] 345 ITR 241 (Delhi)
Commissioner of Income Tax vs. Cushman and Wakefield (India) P. Ltd. (269 CTR 16) (Del.)
CIT v. Panipat Woollen & General Mills Co Ltd (103 ITR 66) (SC)
CIT v. Sales Magnesite (P) Ltd [1995) 214 ITR 1
Binodiram Balchand vs. Commissioner of Income Tax (48 1TR 548)
Calcutta Landing and Shipping Co Ltd vs. CIT (65 ITR 1) (Cal High Court)
CIT Vs B Dalmia Cement Ltd (254 ITR 377)
CIT vs. Bharti Hexacom Limited [2014] 265 CTR 130
Satellite vs. CIT, reported in 332 ITR 340
Mumbai vs. Kotak Securities Limited, reported at [2016]
Delhi vs. Bharti Cellular Limited, reported at [2010] 193 Taxman 97 (SC);
1 ITA No. 7001/Del/2018
IN THE INCOME TAX APPELLATE TRIBUNAL
DELHI BENCH: `I-1' NEW DELHI
BEFORE SHRI N. K. BILLAIYA, ACCOUNTANT MEMBER
AND
MS SUCHITRA KAMBLE, JUDICIAL MEMBER
I.T.A. No. 7001/DEL/2018 (A.Y. 2014-15)
AT & T Global Network Vs. Additional Commissioner of
Services (India) Income Tax
Private Limited Special Range-1
Mohan Dev House, Tolstoy New Delhi
Marg,
New Delhi - 110001
(APPELLANT) (RESPONDENT)
Appellant by Sh. Kanchun Kaushal, AR
Respondent by Sh. Sanjay I. Bara, CIT-DR
Date of Hearing 15.07.2019
Date of Pronouncement 18.07.2019
ORDER
PER SUCHITRA KAMBLE, JM
This appeal is filed against the order dated 28.09.2018 passed by
Additional Commissioner of Income Tax, Special Bench-1, New Delhi u/s 144C
read with section 143(3) of the Income Tax Act, 1961 for assessment year
2014-15.
2. The grounds of appeal are as under:-
"1. TP adjustment with respect to receipt of Intra-Group Services
That on the facts and circumstances of the case, and in law, the Ld. AO
(following the directions of the Ld. DRP), erred on facts and in law in
enhancing the income of the Appellant by INR 20,39,45,028/- holding that the
international transaction pertaining to receipt of intra-group services do not
satisfy the arm's length principle envisaged under the Income-tax Act, 1961
2 ITA No. 7001/Del/2018
(`the Act'), and in doing 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 Uncontrollled 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 disregarding the receipt of services by the Appellant from its AEs which is
contrary to the facts of the present year as well as to the stand taken by the
Ld.TPO in prior year despite no change in the nature of services involved.
Further, the Ld. TPO erred in contending that the services received are
duplicative and stewardship in nature, ignoring the documentation and
evidences submitted by the Appellant; which contradicts his own contention
that the services have actually not been received;
1.6 arbitrarily challenging the veracity of the contractual service agreement
disregarding the actual conduct of the Appellant in the availing of intra-group
services from AEs basis the elaborate documentary evidences submitted as
part of assessment proceedings.
3 ITA No. 7001/Del/2018
2. TP adjustment with respect to payment of royalty
That on the facts and circumstances of the case, and in law, the Ld. AO
(following the directions of the Ld. DRP), erred on facts and in law in
enhancing the income of the Appellant by INR 8,37,43,883/- and holding that
the international transaction pertaining to payment of royalty does not satisfy
the arm's length principle envisaged under the Act, and in doing so have
grossly erred in:
2.1. rejecting the combined transaction approach of benchmarking adopted by
the Appellant in its TP documentation (i.e. aggregating payment of royalty,
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 payment of royalty from its AEs on a standalone
basis bv rejecting TNMM as the most appropriate method;
2.2. holding that the Appellant did not receive tangible benefit in lieu of the
payment of royalty thereby challenging the commercial wisdom of the
Appellant in making payment for royalty and passing the order in contrast
with the recent judicial pronouncements in this regard;
2.3. erroneously holding that the Appellant is incurring losses at the net level
and that as per the facts of the case of the Appellant, no independent partv
would have made a payment for royalty;
2.4. disregarding the judicial pronouncement/ finding of the Hon'ble 1TAT in
Appellant's own case for the AY 2009-10 and merely placing reliance on past
year orders passed by the DRP;
2.5. arbitrarily rejecting the supplementary analysis using Comparable
Uncontrolled 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.
4 ITA No. 7001/Del/2018
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 per the accounting standards notified under
section 145(2) of the Act, the Appellant was required to make provision for
circuit accruals for the subject financial year.
3.4 On the facts, in circumstances of the case and in law, the Ld. AO/DRP
erred in not appreciating that the Appellatn produced evidences to the extent
of more than 98% for utilization/reversal of circuit accruals done in
subsequent years and no adverse finding has been given by the Ld. AO/DRP
on the same.
3.5 Without prejudice 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.
3.6 On the facts, in circumstances of the case and in law, the Ld. AO/ DRP
erred in ignoring that the aforesaid disallowance of circuit accruals has been
deleted by the Hon'ble ITAT in Appellant's own case for assessment years
2009-10, 2010-11 and 2011-12.]
4. Disallowance of year-end accruals
5 ITA No. 7001/Del/2018
4.1 On the facts, in circumstances of the case and in law, the Ld. AO/DRP
erred in making a disallowance of Rs. 8,94,42,969 on account of year-end
accruals representing accruals created towards normal business expenditure
incurred by the Appellant ignoring that the accruals were based on a
reasonable basis.
4.2 On the facts, in circumstances of the case and in law, the Ld.
AO/DRP failed to appreciate that as per the accounting standards notified
under section 145(2) of the Act, the Appellant was required to make provision
for all liabilities/expenses for the subject financial year.
4.3 On the facts, in circumstances of the case and in law, the Ld.
AO/DRP erred in not appreciating that the Appellant produced evidences to
the extent of more than 77% for utilization/reversal made in subsequent years
and no adverse finding has been given by Ld. AO/DRP on the same.
4.4 Without prejudice to the above, on the facts and circumstances of the
case, the Ld. AO grossly erred in making excess disallowance of Rs.
61,11,859. The Ld. AO erred in computing the disallowance at Rs.
8,94,42,969 instad of Rs. 8,33,31,110 (i.e. total accrual of Rs. 37,43,09,016
less details submitted of Rs. 24,97,62,018 less additional evidences of Rs.
4,12,15,888)
4.5 Without prejudice 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').
6 ITA No. 7001/Del/2018
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 expenditure has been deleted by the Hon'ble 1TAT for
assessment years 2009-10, 2010-11 and 2011-12.
6. Disallowance of annual revenue share based license fee
6.1. On the facts, in the circumstances of the case and in law, the Ld. AO/DRP
erred in disallowing an amount of Rs. 57,74,87,020 (being disallowance of
Rs. 62,56,10,938 in AY 2014-15 less credit of Rs. 4,81,23,918 for AY 2014-
15) under the head licence fees debited to Profit & Loss Account by holding
that annual license fee is not allowable as a revenue expenditure and it
should be amortised under section 35ABB of the Act.
6.2. On the facts, in the circumstances of the case and in law, the Ld. AO/DRP
erred in not following the judgment of the Hon'ble jurisdictional Delhi High
Court in the case of Bharti Hexacom Ltd. [2014] 265 CTR 130 (Delhi) wherein
it was held that annual revenue share based license fee paid by the telecom
operators is revenue expenditure, allowable under section 37(1) of the Act and
not a capital expenditure amortizable under section 35ABB of the Act.
6.3. On the facts, in the circumstances of the case and in law, the Ld. AO/DRP
erred in ignoring that the aforesaid disallowance has been deleted by the
Hon'ble ITAT in Appellant's own case for assessment year 2010-11.
7 ITA No. 7001/Del/2018
7. Disallowance of Lease line charges on account of non-deduction of
tax at source
7.1 On the facts, in the circumstances of the case and in law, the Ld. AO/DRP
erred in making disallowance under section 40(a)(i) of the Act on account of
non-deduction of tax at source on lease line expenses of Rs 12,66,08,117
incurred by Appellant, completely ignoring the fact that the impugned
payments were made to resident parties.
8. Disallowance of foreign exchange loss
8.1 On the facts, in the circumstances of the case and in law, the Ld. AO
grossly erred in making disallowance of Rs. 1,29,47,531 on account of foreign
exchange loss arising on revenue account.
9. Non-grant of credit for taxes deducted at source
9.1 On the facts, in the circumstances of the case and in law, the Ld. AO erred
in not granting credit of taxes deducted at source to the Appellant.
10. Levy of interest under section 234B and 234C of the Act
10.1 On the facts in the circumstances of the case and in law, the Ld. AO
erred in incorrectly charging interest under section 234B and 234C of the Act.
11. Initiation of 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.
8 ITA No. 7001/Del/2018
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 telecom connectivity services to such
customers for transmission of data from source locations in India to destination
locations within/outside India as per the terms and conditions in the respective
licenses. The assessee company filed return of income on 28.11.2014 declaring
an income of Rs. 2,76,72,33,820/- under normal provisions of the Income Tax
Act, 1961. The case was selected for scrutiny. Notice u/s 143(2) of the Act was
issued on 01.09.2016. Subsequently, notice u/s 142(1) of the Act along with
questionnaire was issued on 01.09.2016. Fresh notice u/s 142(1) was issued on
11.07.2017. In compliance thereto CA of the Assessee company attended the
assessment proceedings from time to time and filed necessary details which was
examined and place on record by the Assessing Officer. During the previous
year under consideration the assessee entered into international transactions
with associated enterprises within the meaning of Section 92B of the Act. The
details of said transactions were mentioned in Form No. 3CEB filed by the
assessee. The case was referred to the Transfer Pricing Officer as per provisions
of Section 92CA(1) of the Act after taking statutory approval from the
Commissioner of Income Tax for computation of arm's length price in relation to
the international transactions. Subsequently, an order u/s 92CA(3) of the Act
was passed by Transfer Pricing Officer (TPO) on 25.10.2017 wherein an
adjustment of Rs. 28,76,88,911/- attributable to difference in arm's length
price of the international transactions entered by the assessee with associated
9 ITA No. 7001/Del/2018
enterprises has been made.
S.No. Nature of ALP ALP Adjustment
international determined by determined by u/s. 92CA(Rs.)
transaction taxpayer (Rs.) this office (Rs.)
1. Intra Group 20,39,45,028 Nil 20,39,45,028
Service
2. Payment of 29,12,83,073 20,75,39,190 8,37,43,883/-
royalty
Total 28,76,88,911/-
The Assessing Officer accordingly enhance the income of the assessee by
28,76,88,911/-. Against the draft order the assessee company filed objection
before DRP. The DRP vide its order dated 20.08.2018 disposed of the
objections. The DRP rejected the objections filed by the assessee against
transfer pricing adjustment proposed in the draft assessment order. Thus, the
assessing officer made addition of Rs. 28,76,88,911/- on account of arm's
length price determined by the TPO. The 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
10 ITA No. 7001/Del/2018
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 assessing officer.
6. We have heard both the parties and perused all the relevant material
available on record. The Tribunal in assessment year 2013-14 held as under :-
"10. We have considered the rival arguments and perused the orders of the
Assessing Officer/TPO/DRP. We find the assessee, in the instant case, has
benchmarked the cost paid by the assessee for GCSC services using
combined transaction approach and using TNMM method as the most
appropriate method with Operating Profit/Operating Cost as profit level
indicator. Since the OP/TC was 23.15% which was significantly higher than
the arithmetic mean of OP/TC of 6.35% earned by comparable companies, the
assessee considered the transaction to be at arm's length. We find the TPO
rejected the aggregation approach adopted by the assessee under TNMM and
adopted CUP as the most appropriate method in the absence of comparable
data. The TPO further held that the assessee was not able to prove the
receipt of the benefits and demonstrate the arm's length nature. The TPO
accordingly determined the ALP of the aforesaid services at nil on ad hoc
basis which has been upheld by the DRP.
11. We find identical issue had come up before the Tribunal in
assessee's own case for assessment year 2009-10 wherein the Tribunal,
after considering the facts, material evidences, etc., held that the assessee
satisfies the need benefit and rendition test. The Tribunal also upheld the
TNMM to be the most appropriate method. The relevant observations of the
Tribunal from para 49 onwards read as under:-
"49. On appreciation of the above facts it is apparent that looking at the
nature of the business of the assessee and the kind of industry the
assessee operates in, the assessee has justified that such services are
11 ITA No. 7001/Del/2018
required. It is not the case of the ld TPO that assessee is having this
services therefore they are duplicative in nature or are in nature of
shareholders' services. It is pertinent to note that requirement of the
services should be judged from the viewpoint of the appellant as a
businessperson. We agree with the argument of the assessee that if the
network related problems prevent the customers from using its services,
the assessee is bound to suffer reputational damage and potential loss to
business. Addressing the customer's problems promptly and by a
specialized team (which may be an AE) should satisfy the benefit 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 inter-
company 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 submitted the details of all the
service rendered by the AE to the assessee as in the paper book same are
placed on sample basis. Therefore, assessee has placed substantial
material evidencing the receipt of the services. Regarding the receipt of the
services from AE, the assessee can be asked to maintain and produce the
evidence of receipt of services, which a businessperson keeps and
12 ITA No. 7001/Del/2018
maintains regarding services related from the third party. The burden
cannot be higher on the assessee for evidencing the receipt of services of
higher level merely because the services have been rendered by its AE.
Against these evidence placed by the assessee before the lower authorities
ld. DRP has merely stated that assessee has not been able to provide
sufficient evidence and that the AE has provided such services to the
assessee. We failed to understand what sufficient evidence' was and
what was lacking in the case of the assessee. We could not find any
instances placed where the TPO / DRP held that the evidence placed by
the assessee are not substantiated by rendition of service by the AE. The
assessee has also relied on the Hon'ble Delhi Tribunal in the case of GE
Money Financial Services Pvt Ltd. Vs ACIT in ITA No. 5882/Del-2010 and
TNS India Pvt. Ltd. V. ACIT: (2014) 32 ITR (Trib.) 44 (Hyd. )whereby on
similar facts the Hon'ble Delhi Tribunal has rejected the plea of the
Revenue and has held that for receipt of services, rendering of services
must be seen from the view point of the assessee and further assessee
cannot be asked to keep and maintain evidences of services rendered by
AE higher than which is expected from a businessman receiving services
from an unrelated provider. Respectfully the following the decision of the
coordinate the bench we are of the view that the assessee has justified the
receipt of the services and satisfied the rendition test. Regarding the
benefit test, the assessee submitted that owing to the nature of industry it
operates in it requires specialized knowledge and experience in order to
provide seamless services to customers. It has inherent risks and
advantages that can be effectively harnessed only through sharing of
resources and efficiencies that are inbuilt in-scale. Accordingly, availability
of support in terms of strategy, data usage and administration is essential
and indispensable for the assessee in order to achieve 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
13 ITA No. 7001/Del/2018
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 cost-
benefits 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. The assessee has also argued that the TPO is only empowered to
determine the ALP of international transaction. It was argued that there is
no legal requirement or mandate for any taxpayer to necessarily undertake
a cost-benefits analysis and a mere absence of such analysis should not
necessarily lead to a pre-conceived notion that no benefits have been
received by the assessee and should not form a basis to disallow the said
payment. We also hasten to add that that for determination of ALP , the
benefit to the user must arise otherwise, it fails the basic test of
determining ALP. If there is no benefit to the user naturally nobody would
pay for the services and hence ALP of such transaction is always Nil
because they are worthless. Such is not the case here. To support its
contention, the assessee has relied upon the decision of the Hon'ble Delhi
High Court in the case of CIT vs Cushman and Wakefield (India) Pvt Ltd.
(ITA 475/ 2012), wherein, it was held that the authority of the TPO is to
conduct a TP analysis to determine the ALP and not to determine whether
the tax payer derives a benefit from the service. The Hon'ble Delhi High
Court has opined that the determination of benefit to the tax payer is not in
14 ITA No. 7001/Del/2018
the domain of the TPO. In this regard, the Appellant also placed reliance on
the following judicial precedents to bring home the point that the benefit
test needs to be satisfied from the view point of assessee and business
prudence :
a. Ericsson India Private Limited vs Dy CIT [ITA No. 5141/Del/2011 (Delhi
ITAT)]
b. CIT v. EKL Appliances Ltd. [2012] 345 ITR 241 (Delhi)
c. Hive Communication Pvt. Ltd. (ITA No.306/2011)
d. Commissioner of Income Tax vs. Cushman and Wakefield (India) P. Ltd.
(269 CTR 16) (Del.)
51. The above decisions unanimously holds that in reaching the conclusion
that whether an independent entity would have paid for such services
neither the revenue nor the court must question the commercial wisdom of
the assessee or replace its own assessment of the commercial viability of
the transaction. The judicial precedents also stipulate that the duty of the
Ld. TPO is restricted to determine the ALP of the international transaction
and that he cannot replace his views with the views of the assessee.
Respectfully following the binding precedent cited above we are of the view
that benefit test for determination of Arms length 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
15 ITA No. 7001/Del/2018
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 transaction such as `TNMM'.
Considering all these factors the Appellant adopted TNMM to benchmark
the transaction. In the absence of any justification by DRP/TPO for
application of CUP, we justify the use of TNMM as the most appropriate
method.
53. In view of the above findings, we hold that for intra group services
(where the evidences have been furnished), the assessee has satisfied the
need, benefit and rendition test. However we would also like to mention
that out of seven services the assessee has not furnished evidences for
following three services namely- country services, information technology,
project management. In the absence of any evidences, the test of
necessity, need and rendition cannot be commented upon and the
assessee is given an opportunity to furnish the evidences for these three
services before the AO/TPO for necessary verification. The ld TPO may
examine them and decide the issue with respect to those services in
accordance with law. With respect to the method as the ld TPO has not
examined the comparability analysis under the TNMM method of Intra
Group services, he must examine the comparability analysis of IGS ( intra
Group Services) and determine ALP.
12. Since the assessee in the impugned assessment year has only entered
into agreement for one service only, namely global customer service centre,
therefore, following the decision of the Tribunal in assessee's own case for the
assessment year 2009-10 which has been followed by the Tribunal in
assessee's own case for assessment years 2010-11 and 2011-12 and in
absence of any distinguishable features brought before us by the Revenue,
we hold that the addition made by the Assessing Officer/TPO and upheld by
the DRP is not sustainable. We accordingly set aside the order of the
16 ITA No. 7001/Del/2018
Assessing Officer/TPO and direct them to delete the addition. The transfer
pricing grounds raised by the assessee are accordingly allowed."
In the present assessment year , the assessee company provided
network connectivity services to customers of its AEs, For rendering services,
the assessee availed support services from AEs for which it entered into a
Services Agreement dated 01.07.2011 with Interwise Asia Pacific Pte Ltd. As
per the said agreement, Interwise Asia Pacific Pte Ltd. shall render the
aforesaid services to the assessee on cost plus markup. During the year under
consideration, out of the many services 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 that the direction given in Assessment Year 2009-10
were followed by the Tribunal in Assessment Years 2010-11 and 2013-14.
8. The Ld. DR relied upon the order of TPO, DRP and assessing Officer.
17 ITA No. 7001/Del/2018
9. We have heard both the parties and perused all the relevant material
available on record. The Tribunal in Assessment Year 2013-14 held as under :-
"60. Ground of appeal No.1 to 1.06 relates to transfer pricing adjustment
relating to intra group services. After hearing both the sides we find that the
above grounds relating to intra group services are identical to Ground of
appeal No.1 to 1.7 in ITA No.5535/Del/2016. We have already decided the
issue and the grounds raised by the assessee have been allowed. Following
similar reasonings, the above grounds by the assessee are allowed. So far as
the TP adjustment on account of payment of Royalty is concerned, as per
ground of appeal No.1.7 to 1.10 we find, the Tribunal in assessee's own case
for A.Y. 2009-10 has observed as under:-
"65. We therefore accept the plea of assessee and hold that the ld TPO is
only duty bound to determine the ALP of the royalty payments.
66. With respect to analysis under CUP method by the ld TPO, we fully
agree with him in rejecting internal CUP as it pertains to related party
transactions which are between its fellow AEs. We also agree with him in
rejecting external CUP data as the assessee has not submitted any data
regarding similarity in terms and conditions of the royalty agreements. He
also rightly held that even from the limited data submitted are for different
industries/ geographical location /duration and amounts. No analysis of
the royalty agreements between the various parties and the accompanying
circumstances and conditions therein has been done by assessee. We also
agree that even a minor difference in royalty agreement may have a
significant effect on the royalty rates.
67. According to us the royalty payments needs to be tested on the basis
of factum and quantum both aspects. It also needs to be looked at the
functions to be performed by the parties for royalty payments. It also nees
to be looked in to nature of the use of the intangibles which are covered in
License Agreement with AT&T Corp, pursuant to which it was granted the
right to use licensed marks in marketing material for publicity, advertising,
18 ITA No. 7001/Del/2018
signs, product brochures, instruction manuals and in other 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 Tribunal, we hold that the
TPO cannot apply benefit test and is only required to determine the ALP of the
royalty payment. Accordingly, we restore the issue to the file of the TPO to
determine the ALP of the Royalty payment in accordance with the law and
after giving due opportunity of being heard to the assessee. We hold and
direct accordingly. These grounds of appeal No.1.7 to 1.10 are allowed for
statistical purposes."
In the present Assessment Year, it is observed that the benefit test
cannot be applied to determine the ALP of international transaction. The TPO
only has to examine as to whether the payment based on the agreement
adheres to the arm's length principle or not. Thus, the issue is identical
therefore we direct the TPO to determine ALP of the royalty payment in
accordance with law. Needless to say the assessee be given opportunity of
19 ITA No. 7001/Del/2018
hearing by following principles of natural justice. Ground nos. 2 to 2.7 partly
allowed for statistical purposes.
10. As regards Ground Nos. 3 to 3.6 relating to disallowance on account of
circuit accruals, the Ld. AR submitted that the same is covered in assessee's
favour vide order passed in Assessment Year 2009-10, 2010-11, 2011-12,
2012-13 and 2013-14 as well as 2008-09.
11. The Ld. DR relied upon the orders of TPO/DRP/AO.
12. We have heard both the parties and perused all the relevant material
available on record. The Tribunal in Assessment Year 2013-14 held as under :-
"17. We have considered the rival arguments made by both the sides and
perused the orders of the authorities below. We find the Assessing Officer
made a disallowance of Rs.40,02,308/- on account of circuit accruals credited
towards band width and last mile services availed by the assessee on the
ground that the assessee did not file the requisite supporting documents. It is
the submission of the ld. counsel for the assessee that the assessee follows
mercantile system of accounting and accrues circuit charges on scientific
basis. It is also his submission that as per the accounting standards notified
u/s 145(2) of the Act, the assessee is required to make provision for circuit
accruals for the subject financial year. It is also his submission that the
assessee has provided evidence to the extent of almost 98% of the expenses
represented by year end circuit accruals for utilization/reversal of circuit
accruals made in subsequent year 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:-
20 ITA No. 7001/Del/2018
"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 Team who act as primary interface with the vendors with
regard to ordering and delivery of the circuits. Order is placed with the
vendor to deliver circuit at a particular address and at a particular time.
Accordingly, vendor delivers the circuit (along with necessary hardware
and software). Post such delivery, the order gets close and the inventory of
circuit usage is recorded in GAIM( Global Access Inventory management
system) . GAIM contains various details relating to the circuit, such as
Circuit ID number, activation date, tariff codes (rental, usage, one time
charge), expected monthly cost, location of circuit, etc. Once the order is
closed, the liability to pay the vendor arises. Invoice received by the vendor
are entered into GAIM manually or uploaded from electronic files.
Thereafter, invoices are validated in GAIM before payment. During invoice
validation, GAIM automatically compares the invoice/bill data to the circuit
inventory and expected costs. As GAIM works on calendar year basis i.e.
from January to December, the accruals for the period starting from
January to March are excluded / added on proportionate basis. Assessee
further explained that the validation process also identifies any
discrepancies which have to be resolved via the dispute management
process before the invoice can be approved for payment. The validation
checks include:
· Circuit ID exists in inventory for vendor;
21 ITA No. 7001/Del/2018
· Invoice date is after circuit activation date;
· Service period is before circuit cease date;
· Invoice tariff code matches order tariff code
· Invoice cost is not varying more than USD 100 vis-à-vis the expected cost
· Invoice number is unique for vendor
The invoices for which validation is completed with no discrepancies or for
which the discrepancies identified, the same are logged / resolved via
dispute management process, are approved for payment. The assessee
also explained the logic used by GAIM to calculate the Circuit Accrual for
both active and ceased circuits taking into account the activation date and
the cease date i.e. no accruals will be posted prior to the activation date or
after the cease date. For the current and prior period GAIM will look at
each tariff code for each circuit to determine if there is any invoice cost and
circuit accruals are booked accordingly. Prior year expenses are tracked
each month and matched against 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
22 ITA No. 7001/Del/2018
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 practice of disallowing the
claim of circuit accrual in the year of creation and allowing it in the next
year is nothing but a timing difference. The fact that the expenses are
allowed in the subsequent year also proves that the lower authorities have
not disputed the incurrence of such expenses. Hence, in accordance with
the mercantile provisions it should be allowed in the year of creation itself.
The assessee has also drawn reference to the principles laid down by the
Hon'ble Apex Court in the case of M/s Rotork Controls India (P) Ltd (314
ITR 62) and M/s Bharat Earth Movers (245 ITR 428). According to us the
provision for circuit accruals is made in compliance of accounting
standards issued by the Institute of Chartered Accountants of India and
also on a proper scientific basis backed by documentation. Therefore , we
hold that the circuit accruals are created on scientific basis and thus needs
to be allowed in the year of creation on accrual basis. In the result the
ground No. 6 of the appeal is allowed."
18. Since the facts of the instant case are identical to the facts of the
case decided by the tribunal in assessee's own case for assessment year
2009-10 which has been followed in subsequent assessment years i.e.,
assessment year 2010-11 and 2011-12, therefore, in absence of any
contrary material brought to our notice, we hold that the Assessing Officer
is not justified in making addition on account of circuit accruals. We,
therefore, direct the Assessing Officer to delete the addition. The ground
raised by the assessee on this issue is accordingly allowed."
In the present Assessment Year also the assessee is following the same
method of accruing circuit charges. Since the year-end circuit accruals created
by the assessee represent accruals towards normal business expenditure
incurred by the assessee for the relevant assessment year and recorded in
23 ITA No. 7001/Del/2018
accordance with the matching principle, deduction in respect therefore should
be allowed. The assessee company produced documentary evidence of
utilization/reversal of the expenses represented by year-end circuit accruals,
which shows that even the balance accruals have also been created on a
reasonable basis and hence, no disallowance in this regard can be made
against the assessee. Thus, the issue is identical to the earlier Assessment
Years and therefore Ground Nos. 3 to 3.6 are allowed.
13. As regards 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
outstandings. 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 than 95% of the expenses represented by
year end accruals, therefore, no disallowance is called for. We find identical
issue had come up before the Tribunal in assessee's own case for assessment
year 2010-11. We find the Tribunal vide ITA No.1059/Del/2015, order dated
24 ITA No. 7001/Del/2018
18th September, 2017, has discussed the issue and deleted the addition by
observing as under:-
"16. We have carefully considered the rival contentions and also perused
the facts of the case. The assessee has explained the basis of creating the
provisions for year-end accruals. As explained by the appellant, we note
that the assessee has been creating the provision on any year on year
basis in accordance with the mercantile system of accounting otherwise
correct expenditure would not be captured as per the matching principle.
The assessee has 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. We also find that the lower authorities
allowed the entire claim of expenditure in the next year when such
reversals are made. Thus, this practice of disallowing the claim of year
end accrual in the year of creation and allowing it in the next year is
nothing but a timing difference. It also proves that the AO is not disputing
the claim of expenses rather just deferring the claim to next year. Hence, in
accordance with the mercantile provisions it should be allowed in the year
of creation itself."
25. We find the above decision has again been followed by the Tribunal
in assessee's own case for assessment year 2011-12. Since the facts of the
impugned assessment year are identical to the facts of the case decided by
the Tribunal in assessee's own case for assessment year 2010-11 and 2011-
12, therefore, respectfully following the decision of the Tribunal in assessee's
own case for preceding three assessment years, we hold that the
disallowance made by the Assessing Officer is not justified. Accordingly, the
same is directed to be deleted. The ground raised by the assessee is
accordingly allowed."
In the present Assessment Year also the assessee company is following the
mercantile system of accounting and since the year end accruals created by the
25 ITA No. 7001/Del/2018
assessee represent accruals towards normal business expenditure incurred by
the assessee 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 decided by the Tribunal in assessee's own case
for assessment year 2009-10 in ITA No.2538/Del/2014, order dated
18.09.2017. We find the Tribunal has discussed the issue at para 75 and 76
of the order and the appeal of the Revenue has been dismissed by observing
as under:
"75. We have carefully considered the rival contentions and perused the
facts of the case. The facts of the case as explained by the appellant are
that, ACSI, a group company of appellant and an entity in operations for
more than 10 years by then, was having developed support services
26 ITA No. 7001/Del/2018
functions. Accordingly, since such functions were already housed in ACSI,
appellant entered into a support services agreement with ACSI for
provision of the aforesaid support services to appellant. We have gone
through the submission of the assessee and find that necessary evidences
in the form of the support service agreement, invoices, the details of
payments made and the bank statements evidencing the payment thereof
have been furnished by the assessee to prove the genuineness of the
expenses. We find that no evidence has been brought on record by the
Department to dispute the said claim. Rather, the Department's claim is
merely based on suspicion as also noted by the DRP while deleting the
above disallowance. We also find that even otherwise, both ACSI and
appellant are profit making entities and hence, there was no tax incentive
for the parties to deflate the revenues earned by appellant. The decision
was totally based on commercial considerations. By transferring the cost
from ACSI to appellant no added tax advantage is being availed by
appellant. We are also of the view that commercial expediency of a
particular expenditure incurred by a businessman should be examined
from the perspective of the business person and no third party, including
the tax authorities, is entitled to question the commercial
reasoning/justification of the expenditure so incurred. Reliance in this
regard is placed on the following judicial precedents furnished by the
assessee:
i. CIT v. Panipat Woollen & General Mills Co Ltd (103 ITR 66) (SC)
ii. CIT v. Sales Magnesite (P) Ltd [1995) 214 ITR 1
iii. Binodiram Balchand vs. Commissioner of Income Tax (48 1TR 548)
iv. Calcutta Landing and Shipping Co Ltd vs. CIT (65 ITR 1) (Cal High
Court)
v. CIT Vs B Dalmia Cement Ltd (254 ITR 377)
76. Respectfully following 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
27 ITA No. 7001/Del/2018
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 ACSI to the assessee
towards support services rendered by the ACSI to assessee company. The
assessee company submitted all the invoices and the related evidences before
the Assessing Officer. But the same was not taken into account by the
Assessing Officer. Therefore, it will be appropriate to remand back this issue to
the file of the Assessing Officer by giving opportunity of hearing to the assessee
by following principles of natural justice. Thus, Ground Nos. 6 to 6.3 are partly
allowed for statistical purpose.
19. As regards Ground Nos. 6 to 6.3 relating to disallowance on account of
annual share based license fee, the Ld. AR submitted that the issue is squarely
covered by the Tribunal's order in assessment year 2010-11, 2012-13 and
2013-14.
20. The Ld. DR relied upon the order of the TPO, DRP and assessing officer.
21. We have heard both the parties and perused all the relevant material
28 ITA No. 7001/Del/2018
available on record. The Tribunal in A.Y. 2012-13 and 2013-14 held as under :-
"35. We have considered the rival arguments made by both the sides and
perused the orders of the authorities below. We find identical issued had
come up before the Tribunal in assessee's own case for assessment year
2010-11. We find the Tribunal in ITA No.1059/Del/2015, order dated 18th
September, 2017, has discussed the issue and allowed the claim of the
assessee by observing as under:-
"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 Rs.
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 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
29 ITA No. 7001/Del/2018
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 ground
raised by the assessee is accordingly allowed."
It is pertinent to note here that the annual revenue share based license
fee incurred by the assessee is a business expenditure allowable u/s 37 of the
Income Tax Act, 1961. This expenditure was incurred by the assessee company
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. The assessee's case is squarely covered
by the 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 also 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 one of the preceding year on same
facts, the DRP allowed the claim of the licence fees on revenue basis u/s 37(1)
of the Act. Thus, the issue is identical and therefore Ground Nos. 6 to 6.3 are
allowed.
22. As regards Ground No. 7.1 relating to disallowance on account of non-
deduction of tax on lease line expenses, the Ld. AR submitted that the issue is
squarely covered in favour of assessee vide Tribunal's order in assessment year
2012-13 and 2013-14.
23. The Ld. DR relied upon the orders of TPO, DRP and Assessing Officer.
24. We have heard both the parties and perused all the relevant material
available on record. The Tribunal for A.Y. 2012-13 held as under :-
30 ITA No. 7001/Del/2018
"42. We have considered the rival arguments made by both the sides and
perused the orders of the authorities below. We have also considered the
various decisions cited before us. We find the Assessing Officer disallowed
an amount of Rs.6,50,79,639/- paid by the assessee on account of leaseline
expenses which were paid to other telecom operators for provision of telecom
connectivity service required for transmission of data on the ground that the
assessee failed to deduct tax at source as per the provisions of section 194I of
the Act. It is the submission of the ld. counsel for the assessee that the
leaseline charges are paid to the telecom service provider for faster
connectivity service through dedicated leaseline and, therefore, such payment
has been made for availing the 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 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. The Ld.
Counsel relied on the decision of the Delhi high court in the case of Asia
Satellite Tele Communication Co. 332 ITR 340(Del)C and submitted that
31 ITA No. 7001/Del/2018
the issue is covered in his favour. He relied on the decision of the Mumbai
Tribunal in the case of "Vodafone S.R.Ltd." 135 TTJ 182 and submitted
that such payments are not for the use of equipment and, therefore, not
liable to TDS u/s 194-I.
9.1. On the additional ground of deduction u/s 80 IA(iv), he submitted
that any disallowances made by the A.O. would go to increase the income
and consequently the assessee would be eligible for deduction u/s 80 IA
on such increased profits. He relied on the order in the case of "Gem Plus
Jewellery India Pvt. Ltd." (2011) reported in 330 ITR 175 (Bom) in support
of his contentions. For levy of interest u/s 234C, he recorded that such
interest is levied only on returned income and not on assessed income.
9.2. In reply, the Ld.D.R., though not leaving his ground, submitted
that he relies on the order of the A.O. and the reasoning thereof for
disallowance made u/s 40A(i)(a) of the Act.
9.3. On the additional grounds the Ld.D.R. submitted that the A.O. may
be directed to examine the same, if the Tribunal chose to admit these
grounds.
10. Rival contentions heard. On a careful consideration of the facts and
circumstances of the case and on a perusal of the papers on record and
orders of the authorities below, case laws cited, we hold as follows.
11. We first take up corporate tax issues which is ground no.5 for the
A.Y. 2007-08. The assessee is a licensed internet provider. During the year
it procured, domestic half circuit facility to its customers from Telecom
Service Providers like BSNL, MTNL, and international half circuit facility
from Flag, Atlantic, at France. These are standard facilities provided for
transmission of data by those organisations. The issue is whether tax
should be deducted at source u/s 194 I from payments made for use of
such standard facilities. The Hon'ble Delhi High Court, in the case of Asia
Satellite vs. CIT, reported in 332 ITR 340 and the Hon'ble Madras High
Court, in the case of Skycell Communications Ltd. vs. DCIT, reported in
351 ITR 53 (Madras) have adjudicated the issue in favour of the assessee.
32 ITA No. 7001/Del/2018
Respectfully following the same, we hold that payments made towards
use of standard facility, when the lessee is not having 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 Explanation (6) to section 9(1)(vi).
However, the said amendment was made by Finance Act, 2012 w.r.e.f.
01.6.1976. Thus, as per existing provision, when the assessee made the
payment there was no liability to deduct tax at source by treating it as
royalty. The amendment made with retrospective effect cannot fasten
liability on the assessee. That being the case assessee cannot be treated
as assessee in default. The decisions relied upon by the ld. AR support
this view. As far as the observation of the ld. CIT(A) that the payment
made otherwise is covered u/s. 194I, we must observe in case of Hero
Moto Corp. Ltd. (supra)and Global India (supra), the tribunal has held that
the broadband/lease line facilities provided by the service provider for
transmission of data does not come in the category of payment made
33 ITA No. 7001/Del/2018
towards rent for equipment, plant and machinery. Therefore, respectfully
following the decisions of the ITAT, we set aside the order of the ld. CIT(A)
on this issue. Grounds raised are allowed."
43. We find the Hon'ble Karnataka High Court in the case of Vodafone
South Ltd. (supra), while deciding an identical issue, has observed as under:-
"8. We have heard Mr.K.V.Aravind, learned counsel appearing for the
appellants - Revenue in all the appeals. The learned Counsel relied upon
two decisions of the Apex Court for canvassing the contention that the
roaming charges paid by the assessee to the other service provider can be
said as `technical services'; one was the decision of the Apex Court in the
case of Commissioner of Income-tax, Delhi vs. Bharti Cellular Limited,
reported at [2010] 193 Taxman 97 (SC); and the another was the decision
of the Apex Court in the case of Commissioner of Income-tax-4, Mumbai vs.
Kotak Securities Limited, reported at [2016] 67 taxmann.com 356 (SC) and
it was submitted that if the observations made by the Apex Court in the
above referred decisions are considered, the decision of the Tribunal would
be unsustainable and consequently, the questions may arise for
consideration before this Court in the present appeals.
9. We may record that in the decision of the Apex Court in the case of
Bharti Cellular Limited (supra) the Apex Court after having found that
whether human intervention is required in utilizing roaming services by
one telecom mobile service provider Company from another mobile service
provider Company, is an aspect 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
34 ITA No. 7001/Del/2018
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 case, roaming services to be provided to a
particular mobile subscriber by a mobile Company is a customize based
service and therefore, distinguishable and separately identifiable and
hence, it can be termed as "technical services".
11. In our view, the contention is not only misconceived, but is on non
existent premise, because the subject matter of the present appeals is not
roaming services provided by mobile service provider to its subscriber or
customer, but the subject matter is utilization of the roaming facility by
payment of roaming charges by one mobile service provider Company to
another mobile service provider Company. Hence, we do not find that the
observations made are of any help to the Revenue.
12. As such, even if we consider the observations made by the Apex Court
in the case of Bharti Cellular Limited, supra, whether use of roaming
service by one mobile service provider Company from another mobile
service provider Company, can be termed as "technical services" or not, is
essentially a question of fact. The Tribunal, after considering all the
material produced before it, has found that roaming process between
participating entities is fully automatic and does not require any human
intervention. Coupled with the aspect that the Tribunal has relied upon the
decision of the Delhi High Court for taking support of its view.
13. In our view, the Tribunal is ultimately fact finding authority and has
held that the roaming process between participating company cannot be
termed as technical services and, therefore, no TDS was deductible. We do
not find that any error has been committed by the Tribunal in reaching to
the aforesaid conclusion. Apart from the above, the questions are already
covered by the above referred decision of the Delhi High Court, which has
been considered by the Tribunal in the impugned decision.
14. In view of the above, we do not find that any substantial question of
law would arise for consideration. Hence, the appeals are dismissed."
44. The various other decisions relied on by the ld. counsel for the
assessee also support its case. In view of the above discussion, we hold that
the assessee is not liable for withholding tax u/s 194I of the Act on account of
payment of leaseline charges to other telecom operators for provision of
35 ITA No. 7001/Del/2018
telecom connectivity services required for transmission of data. Accordingly
the 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. Ground No. 7.1 is
allowed.
25. As regards ground no. 8 relating to disallowance on account of notional
foreign exchange loss, the Ld. AR submitted that the Tribunal statistically
allowed the ground in assessment year 2012-13 having exactly similar facts
with the direction to the Assessing Officer to verify the documents filed before
the Tribunal during the course of hearing. The Ld. AR submitted that the said
direction was followed for Assessment Year 2013-14 by the Tribunal.
26. The Ld. DR relied upon the orders of TPO, DRP and Assessing Officer.
27. 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 :-
36 ITA No. 7001/Del/2018
"55. We have considered the rival arguments made by both the sides and
perused the orders of the authorities below. We have also considered the
various decisions cited before us. We find the Assessing Officer disallowed
the foreign exchange fluctuation loss of Rs.4,80,06,052/- on the ground that
the assessee failed to demonstrate the genuineness of the loss. We find the
DRP also upheld the action of the Assessing Officer and the Assessing Officer,
in the final order, has disallowed the same. It is the submission of the ld.
counsel for the assessee that the additional evidences filed now will
substantiate the genuineness of the loss. Considering the totality of the facts
of the case and in the interest of justice, we admit the additional evidences
filed before the Bench at the time of hearing and restore the issue to the file of
the Assessing Officer with a direction to go through the same and decide the
issue as per fact and law after giving due opportunity of being heard to the
assessee. We hold and direct accordingly. Ground of appeal No.9 of the
assessee is accordingly allowed for statistical purposes."
In the present year, the assessee company has given break up of foreign
exchange loss of Rs. 1.29 crores which is claimed in return of income as a tax
deductible expense. The loss is on account of exchange fluctuation in debtors,
creditors, and other items which are revenue in nature. Therefore, such loss is
allowable expenditure u/s 37(1) of the Act. But the Assessing officer has not
taken into account the submissions and the evidences provided by the
Assessee during the assessment proceedings. Therefore, it will be appropriate
to remand back this issue to the file of the Assessing Officer. Needless to say,
the assessee be given opportunity of hearing. Ground No. 8 is allowed.
28. As regards to Ground No. 9, the Assessing Officer is directed to grant
credit of taxes deducted at source to the assessee after verifying the same. This
issue is remanded back to the file of the Assessing Officer. The Assessee be
given opportunity of hearing by following principles of natural justice. Ground
37 ITA No. 7001/Del/2018
No. 9 is partly allowed for statistical purpose.
29. As regards to Ground Nos. 10 and 11 are consequential, hence at this
juncture are not adjudicated upon.
30. In result, appeal of the assessee is partly allowed for statistical purpose.
Order pronounced in the Open Court on 18th JULY, 2019.
Sd/- Sd/-
(N. K. BILLAIYA) (SUCHITRA KAMBLE)
ACCOUNTANT MEMBER JUDICIAL MEMBER
Dated: 18/07/2019
*Binita*
Copy forwarded to:
1. Appellant
2. Respondent
3. CIT
4. CIT(Appeals)
5. DR: ITAT
ASSISTANT REGISTRAR
ITAT NEW DELHI
38 ITA No. 7001/Del/2018
Date of dictation 15.07.2019
Date on which the typed draft is placed before the 16.07.2019
dictating Member
Date on which the typed draft is placed before the
Other Member
Date on which the approved draft comes to the Sr.
PS/PS
Date on which the fair order is placed before the
Dictating Member for pronouncement
Date on which the fair order comes back to the Sr.
PS/PS
Date on which the final order is uploaded on the
website of ITAT
Date on which the file goes to the Bench Clerk
Date on which the file goes to the Head Clerk
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