2021 (7) TMI 157 - AT - Income Tax

TP Adjustment - Arm's Length Price - royalty to the Associated Enterprises (AE) - contention raised by the ld. DR for the Revenue based upon the findings returned by the ld. TPO/DRP in Assessment Year 2006-07 that no evidence has been brought on record by the taxpayer to prove rendition of services - HELD THAT - Following the order passed by the coordinate Bench of the Tribunal in taxpayer s own case for AY 2005-06 2020 (12) TMI 723 - ITAT DELHI we are of the considered view that ld. TPO/DRP have erred in treating the value of the transaction at nil by ignoring the entire evidence brought on record by the taxpayer without making any analysis or bringing on record evidence to support their findings that no material benefit has been received by the taxpayer and order is also not supported with any evidence to prove that taxpayer s business could be managed and operated by exclusion of various technical operating and strategic services extended by the AE to the taxpayer. So, in these circumstances, addition made by the TPO and confirmed by the ld. DRP for AY 2006-07 is ordered to be deleted. Addition u/s 40(a)(ia) - payment of salary to non-resident - global account management expenses - HELD THAT - As decided in own case 2020 (12) TMI 723 - ITAT DELHI we are of the considered view that the amount paid by the taxpayer to M/s. Expeditors International of Washington Inc. on account of global account management expenses cannot be treated as payment of salary to non-resident but it was in the nature of reimbursement of expenses which cannot be subjected to deduction for TDS, provision u/s 40(a) of the Act being not applicable. We are of the considered view that amount of expenses incurred by the taxpayer on account of VSAT charges cannot be treated as charges for consultancy or technical services and as such, cannot be subjected to deduction of tax under section 40(a) of the Act. Consequently, order passed by the AO/DRP in AY 2006-07 is not sustainable, hence ordered to be set aside and addition made on account of global account management charges and VSAT charges are ordered to be deleted. Disallowing the lease line uplinking Charges (VSAT charges) as royalty in view of the Explanation 6 to section 9(1)(vi) - HELD THAT - In view of the decision rendered in case of Engineering Analysis Centre of Excellence Pvt. Ltd. 2021 (3) TMI 138 - SUPREME COURT wherein it is held that unilateral amendment as made in the domestic law cannot be read into Treaty. Hon ble Apex Court decided that Explanation 6 to section 9(1)(vi) is not applicable to the facts and circumstances of the case. Unilateral amendment in Act cannot be read in as DTAA. Consequently, addition made by the AO and confirmed by the ld. CIT (A) in AY 2008-09 is ordered to be deleted Excess depreciation claimed by the taxpayer on UPS, printer, etc. - as per AO depreciation on computer accessories @15% as against 60% claimed by the taxpayer - HELD THAT - As decided in own case 2020 (12) TMI 723 - ITAT DELHI we are of the considered view that taxpayer is entitled for depreciation @ 60% because computers cannot be run without its accessories i.e. UPS, printer, etc. Education cess (EC) and Secondary and Higher Education Cess (SHEC) paid on the income tax was an allowable deduction for computing total income - HELD THAT - Following the decision rendered in case of Sesa Goa Ltd. 2020 (3) TMI 347 - BOMBAY HIGH COURT and order passed by the coordinate Bench of the Tribunal in case of Sicpa India Pvt. Ltd. 2020 (4) TMI 425 - ITAT DELHI we are of the considered view that education cess and secondary higher education cess is an allowable deduction being not hit by the provisions of section 40(a)(ii) of the Act.

Issues Involved:
1. Jurisdictional error in reference to Transfer Pricing Officer (TPO)
2. Addition to income by re-computing arm's length price (ALP) of international transactions
3. Determination of arm's length price of royalty transactions
4. Disallowance of Global Account Management (GAM) charges
5. Disallowance of VSAT uplinking charges
6. Depreciation rate on UPS and printers
7. Validity of initiation of penalty proceedings under section 271(1)(c)
8. Allowability of education cess as a deduction

Detailed Analysis:

1. Jurisdictional Error in Reference to TPO:
The taxpayer contended that the Assessing Officer (AO) did not record any reasons in the draft assessment order to justify the reference to the TPO for computing the arm's length price, as required under section 92CA(1) of the Income Tax Act. This issue was not specifically addressed in the judgment, indicating no separate finding was necessary.

2. Addition to Income by Re-computing ALP of International Transactions:
The AO made an addition of ?18,11,13,059 to the taxpayer's income by re-computing the ALP of international transactions. The Tribunal found that the taxpayer had provided sufficient evidence to justify the transactions, and the TPO's conclusions were not supported by adequate analysis or evidence. Therefore, the addition was deleted.

3. Determination of Arm's Length Price of Royalty Transactions:
The TPO had determined the ALP of royalty transactions to be nil, arguing that the taxpayer did not derive material benefits from the services for which the royalty was paid. However, the Tribunal noted that the taxpayer had consistently followed the same business model since FY 2001, with the royalty payments approved by the Reserve Bank of India (RBI). The Tribunal upheld the taxpayer's method of applying the Transactional Net Margin Method (TNMM) for benchmarking and deleted the addition made by the TPO.

4. Disallowance of Global Account Management (GAM) Charges:
The AO disallowed GAM charges on the grounds that they were consultancy/technical fees subject to tax deduction at source (TDS). The Tribunal, following previous rulings in the taxpayer's favor, held that the GAM charges were reimbursements and not subject to TDS under section 40(a). The disallowance was deleted.

5. Disallowance of VSAT Uplinking Charges:
The AO treated VSAT uplinking charges as royalty liable to tax and disallowed them under section 40(a). The Tribunal, referring to the Supreme Court's decision in Engineering Analysis Centre of Excellence Pvt. Ltd. vs. CIT, held that unilateral amendments in domestic law could not be read into the Indo-US DTAA. The disallowance was deleted.

6. Depreciation Rate on UPS and Printers:
The AO allowed depreciation on UPS and printers at 15% instead of 60%. The Tribunal, following its own decision in the taxpayer's case for AY 2005-06, held that these items are integral to the computer system and entitled to 60% depreciation. The disallowance was deleted.

7. Validity of Initiation of Penalty Proceedings under Section 271(1)(c):
This issue was not specifically addressed in the judgment, indicating no separate finding was necessary.

8. Allowability of Education Cess as a Deduction:
The taxpayer argued that education cess and secondary and higher education cess should be allowed as deductions. The Tribunal, following the Bombay High Court's decision in Sesa Goa Ltd. vs. JCIT, held that these cesses are not covered under section 40(a)(ii) and are allowable as deductions. The AO was directed to allow these deductions.

Conclusion:
The Tribunal allowed the taxpayer's appeals and dismissed the Revenue's appeals, providing detailed reasons for each issue based on the evidence and legal precedents. The taxpayer's method of benchmarking international transactions and the treatment of specific expenses were upheld, and the disallowances made by the AO were deleted.

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