2024 (7) TMI 631 - AT - Income Tax

TP adjustment - re- characterisation of the functionality of the Assessee in the Information Technology ( IT ) segment - assessee is a wholly owned Subsidiary of Google International LLC, USA with a registered office in Bangalore and has STPI units at Hyderabad and Gurgaon, and is engaged in the business of providing ITeS services; IT Services; and marketing and distributing Ad Words - HELD THAT - Appendix I (c ) to the APA of the PB that, the agreements considered between the assessee and the AE s are dated 01/01/2006, 01/04/2004 and 12/12/2005 for the services rendered under IT Services, ITeS Services and Google AdWords programme distribution. Thus it is clear that these agreements have been considered to analyse the FAR of the international transactions in the years of APA. We further note that these are the same agreements relied by the assessee before the Ld.TPO and DRP to explain the FAR of the services rendered by the assessee to the AE s under the three segments, for which rollback benefit is sought for. The Income tax Rules provide that, if the International Transactions are same in the year of APA and in the past year than both the parties, assessee and CBDT may agree for applying the agreements contained in APA agreed. An APA also provides complete guideline in respect of the international transaction, whose ALP is to be determined by applying appropriate transfer pricing methodology. . We therefore remand the issue back to the Ld.AO/TPO. The Ld.AO/TPO is directed to examine the facts closely and conclude the issue of applicability of APA to the year under consideration in principle. The Ld.AO/TPO is also directed to consider the above cited decisions relied by the Ld.AR reproduced herein above of this Tribunal as well Hon ble Delhi High Court for the legal proposition of deciding the issue in the light of APA. Comparable selection - Acentia Technologies Ltd.,eClerx Services Ltd. and Infosys BPO Ltd. - As these are not fit comparable for a captive service provider like assessee. We therefore direct the Ld.AO/TPO to exclude the alleged three comparables from the final list. TP computed by the Ld.AO/TPO in the distribution segment - MAM Application of PSM OR RPSM - TPO reduced the adjustment under the distribution segment by applying PSM instead of RPSM - HELD THAT - We note that the DRP has already directed the separating the ITeS segment with the Distribution segment and to independently benchmark the distribution segment by adopting TNMM as MAM. Further we note that the Ld.AO/TPO has not thereafter bench marked the distribution segment in accordance with the transfer pricing principles. We therefore remand the issue of determination of ALP of distribution segment to the LD.AO/TPO. We direct the Ld.AO/TPO to benchmark the distribution segment by adopting TNMM as MAM and to compute the ALP of the transaction in accordance with law. Needless to say that the proper opportunity of being heard must be granted to the assessee. Rejection of Books - HELD THAT - As for the year under consideration, the revenue authorities did not point out any discrepancy in the books of accounts of the assessee, no reason to uphold the rejection of the books of account. Holding the assessee to be Dependent Agent Permanent Establishment ( DAPE ) of Google Ireland - HELD THAT - As relying on assessee s own case .. 2023 (7) TMI 1432 - ITAT BANGALORE , we hold that the assessee cannot be treated as a dependent agent of Google Ireland. Income deemed to accrue or arise in India - treating the payments made to Google Ireland as Royalty/ fees for technical services ( FTS ) - HELD THAT - As relying on own 2023 (7) TMI 1432 - ITAT BANGALORE we hold that the assessee cannot be treated as a dependent agent of Google Ireland and the payments made to Google Ireland cannot be treated as FTS or Royalty. Computation of Deduction u/s 10A - HELD THAT - We direct the Ld.AO to recompute the deduction available to the assessee under section 10 A of the Act as per the directions of Hon ble Supreme Court in case of CIT vs. HCL Technologies 2018 (5) TMI 357 - SUPREME COURT that has upheld the decision of Hon ble Karnataka High Court in case of CIT vs. TATA Elxsi 2011 (8) TMI 782 - KARNATAKA HIGH COURT Unallocated expenditure for Accropetal Technologies Ltd., chosen by the Ld.TPO under the IT segment by treating the assessee as a KPO - HELD THAT - As TPO already remanded the issue of bench marking the IT segment to the Ld.AO/TPO in accordance with the APA with a direction not to consider the assessee to be a KPO under the IT segment. It is also directed to use TNMM as the MAM for determining the arms length of the transaction. As we have remanded the entire issue to the Ld.TPO for computing the ALP of IT segment de novo as per the directions, the issue of comparables also stands remanded. The comparables are therefore to be selected to be in accordance with law. Attribution of additional profits - HELD THAT - As we have already held while considering Issue 4 that assessee cannot be held to be a dependent agent permanent establishment of Google Ireland, the income earned by Google Ireland cannot be taxed in India as business profits. Under such circumstances, the issue of attribution does not arise. Deduction u/s allowed on the income earned under ITeS segment - DR submitted that the Ld.AO allowed deduction u/s 10A in respect of the income earned by the assessee under ITeS segment without carrying out necessary verification - HELD THAT - Admittedly, the necessary criteria to claim eligibility under section 10A in respect of the income earned by the assessee under ITeS segment has not been verified by the Ld.AO. In the interest of justice we remand this issue to the Ld.AO to verify the invoices, the service work order and any other documents related to rendition of ITeS services and the necessary documents to verify if the payment has been received by the assessee in India in foreign currency in respect of the ITeS services rendered. Assessee is directed to furnish all relevant information in support of the claim.

Summary

Issues Involved:

1. Transfer Pricing Issues
2. Corporate Tax Issues
3. Disallowance of Payments
4. Miscellaneous Issues
5. Revenue's Appeal

Detailed Analysis:

1. Transfer Pricing Issues:

- Rejection of Transfer Pricing Documentation: The Tribunal found that the Assessing Officer (AO), Transfer Pricing Officer (TPO), and Dispute Resolution Panel (DRP) erred in rejecting the transfer pricing documentation maintained by the appellant and making adjustments for international transactions. The Tribunal remanded the issue back to the AO/TPO to examine the facts closely and consider the applicability of the Advance Pricing Agreement (APA) for the year under consideration.

- Use of Single Year Data: It was held that using single-year data without considering multiple-year data was incorrect. The Tribunal directed the AO/TPO to re-evaluate the data used for determining the arm's length price (ALP).

- Selection of Comparables: The Tribunal directed the exclusion of certain companies, such as Accentia Technologies, eClerx Services Ltd., and Infosys BPO Ltd., from the list of comparables for being functionally different from the appellant.

- Provision for Bad Debts: The Tribunal found that the provision for bad debts should not be considered a non-operating cost in computing net margins under the Transactional Net Margin Method (TNMM).

- Risk Mitigation: The Tribunal acknowledged that the appellant operates as a risk-mitigated service provider and directed the AO/TPO to consider this in their analysis.

- Adjustment for Working Capital Differences: The Tribunal directed the AO/TPO to make necessary adjustments for differences in working capital between the appellant and comparables.

- Re-characterization of Activities: The Tribunal disagreed with the re-characterization of the appellant's activities as Knowledge Process Outsourcing (KPO) instead of software services and directed the AO/TPO to benchmark the IT segment using TNMM.

2. Corporate Tax Issues:

- Rejection of Books of Accounts: The Tribunal found that the AO erred in rejecting the duly audited books of accounts of the appellant without proper justification. This issue was decided in favor of the appellant based on previous Tribunal decisions.

3. Disallowance of Payments:

- Payments to Google Ireland Ltd.: The Tribunal held that the amounts payable to Google Ireland Ltd. for the purchase of advertisement space were not chargeable to tax in India. The appellant was not considered a Dependent Agent Permanent Establishment (DAPE) of Google Ireland Ltd., and the payments were not treated as royalties or fees for technical services (FTS).

4. Miscellaneous Issues:

- Levy of Interest and Penalty Proceedings: The Tribunal noted that these issues were consequential and did not require adjudication at this stage.

5. Revenue's Appeal:

- Application of Residual Profit Method: The Tribunal found that the DRP erred in not accepting the application of the residual profit method. The Tribunal directed the AO/TPO to benchmark the distribution segment using TNMM as the Most Appropriate Method (MAM).

- Exclusion of Coral Hub: The Tribunal directed the exclusion of Coral Hub from the list of comparables under the IT segment.

- Attribution of Additional Profits: Since the appellant was not considered a DAPE of Google Ireland, the issue of attribution of additional profits did not arise.

- Deduction under Section 10A: The Tribunal directed the AO to recompute the deduction under section 10A as per the directions of the Hon'ble Supreme Court in the case of Tata Elxsi Ltd.

- Verification of ITeS Segment: The Tribunal remanded the issue of deduction under section 10A for the ITeS segment to the AO for verification of necessary criteria.

Conclusion:

The Tribunal allowed the appeals partly in favor of the appellant, directing the AO/TPO to re-evaluate various issues in light of the Tribunal's findings and applicable legal precedents. The revenue's appeal was also partly allowed for statistical purposes, with specific directions for re-evaluation and verification.