2019 (1) TMI 1128 - AT - Income Tax

TPA - assessee to be treated as tested party and all international transactions have to be aggregated for bench marking purpose - Held that - Transfer Pricing Officer himself in the orders passed in assessee s own case for assessment years 2011 12 to 2014 15, has not only accepted the AEs as the tested party but also accepted the foreign comparables proposed by the assessee. Even, in the advance pricing agreement dated 3rd August 2015, the Department has accepted the AEs as the tested parties insofar as it relates to fees paid towards management and marketing services rendered by them - As regards the contention of the learned Departmental Representative that the learned Commissioner (Appeals) has not properly considered the comparability of the foreign comparables on account of different financial years, it is relevant to observe, the Transfer Pricing Officer never rejected the foreign comparables proposed by the assessee on the issue of different financial year ending. In fact, the Transfer Pricing Officer has not at all gone into far analysis of the foreign comparables proposed by the assessee since he treated the assessee as the tested party and, therefore selected separate sets of comparables. Therefore, we are unable to accept the submissions of the learned Departmental Representative for restoring the issue to the Assessing Officer / Transfer Pricing Officer for reconsideration. In view of the aforesaid, we uphold the order of the learned Commissioner (Appeals) on these issues by dismissing the grounds raised. Contract migration cost not be considered for calculating the operating margin - CIT-A held that the migration cost relating to Travelocity contract being an exceptional and onetime cost, should not be treated as part of operating cost for computing the profitability of the assessee - Held that - Notably, identical issue came up for consideration before the Tribunal in assessee s own case for assessment year 2004 05 and Tribunal while deciding the issue has held that the cost incurred by the assessee is purely in the nature of reimbursement without any mark up. Hence, cannot be treated as part of operating cost. Thus, the Tribunal ultimately upheld the decision of the learned Commissioner (Appeals) on the issue. There being no difference in fact brought to our notice by the learned Departmental Representative in the impugned assessment year we uphold the decision of the learned Commissioner (Appeals) on the issue. Arm s length price of guarantee fee to 0.5% of the guarantee value - Held that - The facts and material on record clearly reveal that the loan from Travelocity was availed by WNS (Holding) Ltd., one of the AEs of the assessee. It is also not disputed that the assessee has provided guarantee for such loan. Thus, it cannot be denied that some amount of benefit / service was provided by the assessee to its AE towards guarantee for loan which may not have been provided to an unrelated party. In these circumstances, in our view, determination of arm s length price @ 0.5%, is reasonable. It is necessary to observe, though, there is a cleavage in the opinion of different benches of the Tribunal whether provision of corporate guarantee comes within the purview of international transaction or not, however, the Hon ble Jurisdictional High Court in case of Everest Kanto Cylinder ltd. vs. DCIT (2015 (5) TMI 395 - BOMBAY HIGH COURT) has upheld determination of ALP of guarantee commission @0.5%. Addition on account of determination of arm s length price of interest for extended credit period - delayed payment to AEs towards marketing support services rendered by them - Held that - The assessee has explained such delay to be on account of late receipt of payment by the AEs from the overseas customers. It is also evident, the assessee has also made delayed payment to AEs towards marketing support services rendered by them. Therefore, there is delay in making payments from both sides. As observed by the learned Commissioner (Appeals), after factually verifying the outstanding creditor and debtor position on account of payment / receipts relating to the AEs there is no loss to the assessee in real terms. As could be seen, the Transfer Pricing Officer while charging notional interest on the extended credit facility to the AEs has completely ignored the delayed payment made by the assessee to the AEs. Thus, as could be seen, no extra benefit has been provided to the AEs on account of extended credit facility. Further, it is the contention of the assessee before us that as a matter of policy, the assessee does not charge any interest either from the AEs or from the third parties towards extended credit period. Allowance of assessee s claim of deduction u/s 10A - scope of omission in act - Held that - The omission of section 10A(9) of the Act will operate retrospectively as if the said sub section never existed in the statute. It is relevant to observe, when identical issue came up for consideration before the Tribunal in assessee s own case in assessment year 2003 04, the Tribunal in the order passed 2016 (3) TMI 24 - ITAT MUMBAI has held that the omission of sub section (9) of section 10A of the Act, would effectively mean that the said provision never existed in the statute and accordingly allowed assessee s claim under section 10A - Tribunal in its order passed in 2012 (8) TMI 432 - ITAT MUMBAI upheld the decision of the Assessing Officer in allowing assessee s claim of deduction under section 10A of the Act by holding that omission of sub section (9) of section 10A of the Act by Finance Act, 2003, would effectively mean that the provision never existed in the statute. Facts being identical, respectfully following the decisions of the Co ordinate Bench in assessee s own case, we uphold the decision of the learned Commissioner (Appeals) on the issue Depreciation on intangible asset representing acquisition of business contract - Held that - AO while completing assessment under section 143(3) of the Act also allowed assessee s claim of depreciation. However, learned Commissioner of Income Tax revised the assessment order under section 263 of the Act. Subsequently, while deciding assessee s appeal against the said order the Tribunal quashed the order passed under section 263 and restored the assessment order. Thus, in effect, assessee s claim of depreciation in respect of intangible asset became final. In any case of the matter, there is no dispute that by acquiring M/s. Town and Country Assistance Ltd. the assessee has also acquired contractual rights which, no doubt, is a valuable commercial right. Therefore, it comes within the meaning of intangible asset as per section 32(1)(ii) r/w Explanation 3(b) of the Act. Hence, depreciation claimed by the assessee is allowable. TDS u/s 195 - disallowance made under section 40(a)(i) on account of payment of marketing and management fees to WNS N.A. and WNS U.K. without deducting tds - India- UK DTAA - Held that - Payments made by the assessee are not for making available any technical services by the AEs. Thus, it was held by the Tribunal that the payment made cannot be treated as fees for technical services under the relevant tax treaties. It is also relevant to observe, while deciding appeals relating to WNS N.A. and WNS U.K. concerning taxability of marketing and management fees paid by the assessee, the Tribunal 2012 (3) TMI 630 - ITAT MUMBAI has held that such payment not being in the nature of fees for technical services is not taxable. The aforesaid decision of the Tribunal was also upheld by the Hon ble Jurisdictional High Court -Assessing Officer himself while completing the assessment in assessee s own case for assessment year 2006 07 and 2007 08 in pursuance to the directions of the DRP has not made any disallowance under section 40(a)(i) of the Act for non deduction of tax at source on account of payment of marketing and management fees. In view of the aforesaid, we hold that the order passed by the learned Commissioner (Appeals) requires no interference. Deduction u/s 10A in respect of the profits of eligible units without setting off losses relating to other non eligible units - Held that - The issue does not required deliberation at length in view of the ratio laid down by the Hon ble Supreme Court in Yokogawa India Ltd. 2016 (12) TMI 881 - SUPREME COURT . In fact, the DRP following the aforesaid decision of the Hon ble Supreme Court has decided the issue in favour of the assessee stating that though Section 10A, as amended, is a provision for deduction, the stage of deduction would be while computing the gross total income of the eligible undertaking under Chapter IV of the Act and not at the stage of computation of the total income under Chapter VI. Ad hoc disallowance made out of administrative expenses - Held that - Disallowance to 10% of the total expenditure claimed by the assessee under the head Others to be confirmed. Disallowance of set off and carry forward of unabsorbed loss and depreciation of earlier years - Held that - The aforesaid dispute arose for the in assessee s own case in assessment years 2001 02 2002 03 and 2003 04. The Tribunal, while deciding the issue held that the provisions of section 10A(6)(ii) of the Act are applicable only after the holiday period is over and directed the Assessing Officer to allow the claim of the assessee. Accordingly, we direct the Assessing Officer to factually verify and allow assessee s claim as per the directions of the Tribunal in the earlier assessment years, as referred to above. TPA - selection / rejection of certain comparables by the Transfer Pricing Officer - Held that - Referring to ITES segment of assessee thus companies functionally dissimilar with that of assessee need to be deselected from final list.

Summary

Issues Involved:

1. Benchmarking of International Transactions
2. Contract Migration Cost
3. Guarantee Fee
4. Interest for Extended Credit Period
5. Deduction under Section 10A
6. Depreciation on Intangibles
7. Disallowance under Section 40(a)(i)
8. Set-off and Carry Forward of Unabsorbed Loss and Depreciation
9. Selection/Rejection of Comparables

Issue-wise Detailed Analysis:

1. Benchmarking of International Transactions:
The Revenue challenged the decision of the Commissioner (Appeals) in treating Associated Enterprises (AEs) as tested parties instead of the assessee. The Tribunal upheld the Commissioner (Appeals)’s decision, noting that the AEs carry out simpler functions with lower risks compared to the assessee, thus making them suitable as tested parties. The Tribunal also observed that the Transfer Pricing Officer (TPO) had accepted this approach in subsequent years and in the Advance Pricing Agreement.

2. Contract Migration Cost:
The Revenue contested the exclusion of contract migration cost from operating costs. The Commissioner (Appeals) and the Tribunal held that the migration cost related to the Travelocity contract was an exceptional and one-time cost, and therefore, should not be included in the operating costs for computing the profitability of the assessee.

3. Guarantee Fee:
The TPO had computed the guarantee commission at 1.5% of the guarantee value, but the Commissioner (Appeals) reduced it to 0.5%. The Tribunal upheld this decision, considering the facts that the loan was utilized by the assessee itself and the Hon’ble Jurisdictional High Court had upheld a similar determination of ALP of guarantee commission at 0.5%.

4. Interest for Extended Credit Period:
The TPO had charged interest for the extended credit period allowed to AEs. The Commissioner (Appeals) deleted the addition, noting that the assessee had also made delayed payments to AEs and that the net effect of outstanding creditor and debtor positions did not result in any real loss to the assessee. The Tribunal upheld this decision.

5. Deduction under Section 10A:
The Assessing Officer disallowed the deduction under Section 10A due to a change in ownership. The Commissioner (Appeals) allowed the deduction, holding that the omission of sub-section (9) of Section 10A by the Finance Act, 2003, should be applied retrospectively. The Tribunal upheld this decision, following its earlier rulings in the assessee’s own case for previous years.

6. Depreciation on Intangibles:
The Assessing Officer disallowed the depreciation on intangibles acquired through the purchase of a company. The Commissioner (Appeals) allowed the depreciation, treating the acquired business contracts as intangible assets. The Tribunal upheld this decision, noting that the contractual rights acquired were valuable commercial rights and thus qualified as intangible assets under Section 32(1)(ii) of the Act.

7. Disallowance under Section 40(a)(i):
The Assessing Officer disallowed payments made to AEs for marketing and management fees under Section 40(a)(i) for non-deduction of tax at source. The Commissioner (Appeals) deleted the disallowance, holding that the payments could not be treated as fees for technical services under the relevant tax treaties. The Tribunal upheld this decision, following its earlier rulings and those of the Hon’ble Jurisdictional High Court.

8. Set-off and Carry Forward of Unabsorbed Loss and Depreciation:
The Assessing Officer disallowed the set-off and carry forward of unabsorbed depreciation and business loss. The Tribunal directed the Assessing Officer to allow the claim as per the Tribunal’s earlier decisions, which held that Section 10A(6)(ii) is applicable only after the holiday period is over.

9. Selection/Rejection of Comparables:
The Tribunal made a detailed analysis of the comparables selected/rejected by the TPO and the assessee. It excluded several companies from the list of comparables under both ITES and Software Development Services segments, based on factors such as functional dissimilarity, high RPT, different financial year ending, and involvement in high-end KPO services. The Tribunal directed the Assessing Officer/TPO to re-determine the ALP of the international transactions with the AEs, considering the Tribunal’s observations.

Conclusion:
The Tribunal upheld several decisions of the Commissioner (Appeals), providing detailed reasoning for each issue. The Tribunal’s comprehensive analysis emphasized the importance of functional comparability, proper benchmarking, and adherence to judicial precedents in transfer pricing matters.