9911796707
TMI Blog2025 (4) TMI 132X X X X Extracts X X X X X X X X Extracts X X X X ..... Income Tax Act, 1961 (Act"), partly confirming the adjustments proposed by the Deputy Commissioner of Income Tax, Circle 17(1) New Delhi ("AO') in the draft assessment order and the learned AO has accordingly erred in passing the assessment order under section 143(3) read with section 144C of the Act. Each of the ground is referred to separately, which may kindly be considered independent of each other. 1. On Amortization Of Revenue Based License Fee u/s 35ABB Of The Act 1.1. On the facts and circumstances of the case and in law, the learned AO/DRP has erred in treating the annual revenue share based license fee of Rs 2,05,38,20,412, payable by the Appellant to Department of Telecom (DoT), as a 'capital" expenditure being consideration for obtaining the telecom license and hence, amortisable u/s 35ABB of the Act 2. Disallowance of depreciation claimed on the addition to fixed assets on account of Asset Restoration Cost (ARC) obligation. 2.1. On the facts and circumstances of the case and in law, the learned AG DRP has erred in disallowing the depreciation amounting to Rs 5,10,79,752 claimed on fixed assets on account of ARC obligation. 2.2. On the facts and circ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ment of technical experts recorded in the context of IUC services in the case of the VMSL, it has been stated that the carriage of calls is an automatic activity and human intervention, if any, is required only at the stage of inter-connect set-up, capacity enhancement, monitoring, maintenance, fault identification, repair, etc. 4.5. On the facts and in the circumstances of the case and in law, the learned AO/DRP has erred in ignoring the statement of technical experts recorded by the income-tax authorities in Coimbatore during proceedings conducted in the case of a group company of the Appellant - Vodafone Cellular Limited, in context of roaming services, wherein it has been clearly observed that roaming services are automated service requiring no human intervention. 4.6. On the facts and in the circumstances of the case and in law and without prejudice to Grounds 4.2 to 4.5, the learned AO/DRP has erred in not holding that characterization of a payment must be done having regard to the dominant purpose/intention of the payment. Grounds with respect to applicability of section 40(a)(ia) - these grounds are without prejudice to the grounds stated above with respect to applica ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... amount which remains payable at the end of the year which stands at "NIL". 5.5. On the fact and in the circumstances of the case and in law and without prejudice to the Grounds 5.1 to 5.4, the learned AO/DRP has erred in not adjudicating and holding that the insertion of second proviso to section 40(a)(ia) of the Act vide Finance Act, 2012 is curative in nature and its benefit should be extended to the past years and accordingly the leaned AO be directed to allow benefit of the same after verification of supporting documents to be submitted by the Appellant and accordingly, the learned AO be directed. 5.5.1. to allow deduction in respect of the proposed disallowance of Rs 1,30,33,61,238 made under section 40(a)(ia) of the Act for the subject AY in the subsequent year's, basis the conditions prescribed in the second proviso to section 40(a)(ia) of the Act. 5.5.2 to allow deduction in the subject AY (i.e. AY 2009-10) for the similar disallowance made in prior year's basis the conditions prescribed in the second proviso to section 40(a)(ia) of the Act. 6 On Disallowance of Penalty paid to DoT 6.1. On the facts and circumstances of the case and in law, the learned AO ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e economic analysis undertaken by the Appellant to determine the arm's length price ('ALP") of the royalty payments made to AFs. 9.3. On the facts and the circumstances of the case and in law, the learned TPO/AO/DRP has grossly erred in holding without any basis that the Appellant has not derived any economic or commercial benefits from the royalty payments to AEs and in determining the ALP of said transaction as "Nil' without application of any transfer pricing method mentioned prescribed under Section 92C of the Act. 10. Transfer Pricing Adjustment-Reimbursement of advertisement & marketing spend 10.1. On the facts and the circumstances of the case and in law, the Hon'ble DRP has grossly erred in confirming the adjustments aggregating to Rs. 2,84,68,27,994 made by the learned AO and the learned TPO under section 92CA of the Act pertaining to the alleged excessive advertising, marketing and promotion (AMP") expenses incurred by the Appellant. 10.2. On the facts and the circumstances of the case and in law, the learned TPO/AO/DRP erred in holding AMP expenditure as a separate international transaction between the Appellant and AEs under Section 92B of the Ac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ) incurred by the Appellant for providing the alleged service in the nature of brand promotion as contended by the learned TPO/AO and confirmed by the Hon'ble DRP. 11. Non-grant of full credit in respect of Tax Deducted at Source (TDS') On the facts and in the circumstances of the case and in law, the learned AO has erred in granting credit for TDS of Rs 61,00,63,817 instead of Rs 65,58,50,566 claimed by the Appellant in its revised return of income for the subject AY. 12. Non-grant of Minimum Alternate Tax ('MAT') credit On the facts and in the circumstances of the case and in law, the learned AO be directed to allow MAT credit brought forward from past AYs against the tax liability under normal provisions for the subject AY. 13. Levy of interest under section 234B, 234D and withdrawal of 244A of the Act On the facts and in circumstances of the case and in law, the learned AO has erred in in levying interest under section 234B, 234D and withdrawal of section 244A of the Act. 14. Initiation of Penalty Proceedings u/s 271(1)(c) of the Act On the facts and in circumstances of the case and in law, the learned AO has erred in initiating penalty proceedin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... passed by the Hon'ble Delhi Bench of the Tribunal calling for a remand report from the TPO w.r.t. the issue of transfer pricing adjustment on royalty payment but marking some adverse observations in the matter. Writ Petition [bearing WP(C) No. 4467 of 2019] filed by the Appellant with the Hon'ble Delhi High Court challenging the interim Order dated 25 March 2019 passed by the Hon'ble Tribunal. 29th April 2019 Order passed by the Delhi High Court directing the Hon'ble Tribunal to decide the aforesaid 2 issues. 15th May 2019 Letter filed by the Appellant with the TPO furnishing a fresh comparability analysis and the search analysis for determining the ALP on the royalty payment. 29th August 2019 Remand Report issued by the TPO. 16th September 2019 Rebuttals to the Remand Report filed by the Appellant. Following a request from the Income-tax Department, the Hon'ble President, via an Order dated 17 August 2020, transferred the captioned appeal (along with other related appeals of the assessee) from the Delhi Bench to the Mumbai Bench of the Hon'ble Tribunal. Initially, the cross-appeals for the relevant year were decided by the Hon'ble ITAT ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 9 related Transfer Pricing adjustment relating to payment of royalty: 4.1. During the alleged assessment year, the assessee paid royalty for use of trademark/ trade name to the following Associated Enterprises ['AES']: Name of the AE Amount of royalty paid (in Rs.) Rate of royalty Agreement Vodafone Ireland Marketing Limited ['VIML'] 7,64,77,939 0.30% of the net service revenues for the use of 'Vodafoneʼ trademark / trade name Trademark Licence Agreement dated 19 December 2008 (effective date - 29 June 2007) (refer page Nos.178 to 195 of paper book Volume I dated 17 October 2014 Rising Group Limited ['RGL'] 3,82,38,969 0.15% of the net service revenues for the use of 'Essar' trademark trade name Trademark License Agreement dated 19 December 2008 (effective date - 29 June 2007) (refer page Nos. 196 to 208 of the paper book Volume I dated 17 October 2014) 4.2. The assessee inter-alia benchmarked the aforesaid transaction of payment of royalty using the Comparable Uncontrolled Price ['CUP'] as the most appropriate method wherein it selected the license agreement entered into between 'Motorola Inc., USA' ['Motorola' ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... influence the preference of a subscriber. Thus, it is the attributes related to the service provider which forms the basis or reason for a customer for preferring any particular service provider over another. 4.5. The DRP vide its Directions dated 18/12/2013 upheld the findings of the TPO and held that there are considerable differences between the royalty agreement for Motorola and between the AEs and the assessee and, hence, the Motorola. transaction cannot be treated as a CUP, Further, the DRP held the assessee has failed to provide any evidence to show how the royalty payment has benefitted its business and, hence, upheld the findings of the TPO of treating the ALP of the royalty transaction as Nil. 4.6. Considering the DRP Directions, the Ld. AO in terms of the final assessment order dated 30/01/2014 inter-alia made an addition of Rs. 11,47,16,908/- to the income of the assessee being the TP adjustment made by the TPO on the transaction of royalty payments. 4.7. Thereafter, pursuant to the order of the assessee's case ITAT-Delhi Bench bearing ITA No. 1950/Del/2014 date of pronouncement 14/03/2018 and the Hon'ble Delhi High Court's Order dated 01/06/2018, the co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ction with the other Group entity. He also stated that a copy of the said agreement used as internal CUP has not been furnished by the assessee. 4.12. In response thereto, the assessee vide letter dated 16/09/2019 filed its rebuttals to the Remand Report and pointed out flaws in the Remand Report issued by the TPO. The assessee also pointed out that because of the confidentiality clause in the Agreement the internal CUP agreement was not filed and even otherwise the TPO during the course of the Remand proceedings had never called for the same but, nonetheless, it filed a copy of the same with the Bench and the Ld. DR. The assessee prayed that the rate of royalty of 0.70% to 1.70% arrived at by applying internal CUP should be accepted as the ALP and, in the alternative, to accept the fresh comparables submitted by it with the mean of 5.20% arrived at by applying external CUP. 4.13. Shri Pardiwalla, the Ld. AR for assessee argued that the payment of royalty for the use of "Vodafone' and 'Essar' trademark and trade name is purely a business decision of the assessee which cannot be questioned by the TPO. He statedthat the commercial expediency of the expenditure incurred ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uthority for that. What the TPO has done in the present case is to hold that the assessee ought not to have entered into the agreement to pay royalty/brand fee, because it has been suffering losses continuously. So long as the expenditure or payment has been demonstrated to have been incurred or laid out for the purposes of business, it is no concern of the TPO to disallow the same on any extraneous reasoning. As provided in the OECD guidelines, he is expected to examine the international transaction as he actually finds the same and then make suitable adjustment but a wholesale disallowance of the expenditure, particularly on the grounds which have been given by the TPO is not contemplated or authorised. 23. Apart from the legal position stated above, even on merits the disallowance of the entire brand fee/royalty payment was not warranted. The assessee has furnished copious material and valid reasons as to why it was suffering losses continuously and these have been referred to by us earlier. Full justification supported by facts and figures have been given to demonstrate that the increase in the employees cost, finance charges, administrative expenses, depreciation cost and ca ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l in an uncontrolled situation. He further referred to certain OECD guidelines issued in this regard. He observed that TPO has completely disregarded the business and commercial strategy/realities behind the transaction and acted in a completely mechanical manner without giving regard to the economic circumstances surrounding the transaction and the business decision taken by the assessee. Further learned Commissioner of Income Tax (Appeals) opined that TPO cannot question the judgment of the assessee as to when it is necessary and expedient to expand its business, when and from whom or from which sources the technology or technical know how is to be taken and at what cost etc., or what steps should be taken to meet the needs of the market forces and to face the competitors etc. Learned Commissioner of Income Tax (Appeals) held that royalty payment was incurred for genuine business purpose and the disallowance were uncalled for and unjustified". 9. The above discussions show that there was a business necessity for the assessee to make the impugned royalty payment to its AE. Hence we do not find any merit in the decisions of TPO/DRP in holding that the impugned royalty payment tra ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e Trademark License Agreement is given and it is stated that the said agreement has been entered into with an affiliate of the Virgin Group. The aforesaid documents form a part of Annexure-C to the letter dated 16 September 2019 being the rebuttals filed by the assessee to the remand report issued by the TPO. 5.1. Reliance in this regard is placed on the decision of the coordinate bench of ITAT-Ahmedabadin the case 'Vodafone West Limited' for the A.Y. 2009-10 bearing ITA No. 909/Ahd/2014 dated 17/11/2016. In this case too, the Tribunal while affirming the DRP Directions held that the transfer pricing adjustment w.r.t. payment of royalty proceeded on the basis of a related party transactions/ agreement is not inasmuch as is not permissible in law and, therefore, dismissed the revenue's appeal. The Hon'ble DRP vide Directions dated 20 December 2013 held that the agreement of 'Virgin Enterprises Ltd.' relied on by the TPO is not applicable since it had entered into an agreement for payment of royalty with its related party i.e. "Virgin Mobile USA LLC". 5.2. The Ld. ARrespectfully relies on the Third Member decision of the ITAT Mumbai in the case of Technimon ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... branding agreement entered into between VIML and OGF represents a comparable uncontrolled transaction for determining the ALP of payment of royalty. 6.3. The Ld. AR has pointed in the letter 16/11/2019, submits that no opportunity was granted by the TPO to produce a copy of the agreement. Be that as it may, the Appellant submits that it had furnished a copy of the agreement entered into between VIML and OGF to the TPO vide the said letter dated 16 September 2019. However, thereafter, the TPO did not provide any comments on the selection of the internal CUP by the assessee. Further, for an agreement to be considered as an "internal CUP" it is not necessary that the assesseehas to enter into the same with an unrelated 3 party. Even an agreement entered into by the AE of an assessee with a 3rd party can be considered as an "internal CUP". This aspect of the matter has been ignored by the TPO while rejecting the said comparable. 6.4. Thus, it is submitted that basis the said royalty agreement, since the payment of royalty made by it at 0.30% to VIML and 0.15% to RGL of net service revenues for grant of right to use 'Vodafone' and 'Essar trademark and trade name respective ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e 4 comparable. This fact is evidenced from the search criteria adopted which is contained in the fresh search analysis submitted. It is also submitted that fresh analysis has been conducted by analysingin excess of 280 transactions/ agreements and the accept-reject matrix evidence that these companies could not meet the strict comparability criteria. The assessee's position is justified owing to the failure of the TPO to himself offer any comparable(s). Thus, in view of the foregoing and in the alternative, the Ld. AR submits that the arm's length royalty rate of 5.20% arrived at by applying external CUP should be treated as ALP and, thus, the royalty paid by the assessee at the rate of 0.30% and 0.15% would also be at arm's length. 7. The Ld. AR argued that determination of ALP at Nil without applying any one of the prescribed methods is not permissible. The Ld. AR submits that the TPO has considered the ALP of transaction of payment of royalty at Nil without applying any one of the methodsprovided for in section 92C read with rule 108 of theRule. 7.1. Reliance in this regard is placed on the following illustrative list of decisions wherein it has been held that det ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... med by the tested party, ie., the appellant and the comparables. As the CUP method requires strong similarity in the function, asset and risk analysis, the comparable selected by the appellant were very divergent from the functions of the appellant. The TPO thereafter, made an independent analysis and has stated in the Remand Report that the royalty agreement between Virgin Enterprises Ltd. and Virgin Mobile USA LLC as a valid comparable having close similarity in the functions performed, where the royalty was paid at the rate of 0.25% for the use of the Virgin' brand name. The Ld. Counsel has taken the objection that this comparable proposed by the TPO in the Remand Report is a related party transaction between two Associated Enterprises (AE) and therefore relying on certain judicial precedence, thus, not a valid comparable. The decisions relied upon by the Ld. Counsel are distinguishable on facts. In this regard, I place reliance on the decision of the Hon'ble ITAT Mumbai in M/s. Bayer Material Science Pvt. Ltd. ITA no.7977/MUM/2010 dated 16.12.2011 wherein it was held that 'when the very purpose of these provisions is to determine the Arm's Length Price and the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nsfer Pricing adjustment relating to AMP expenditure): 11.1.During the alleged previous year, the assessee had incurred the following expenses aggregating Rs. 282.24 crores under the expense heads of 'distribution expenses' and 'advertisement/ sales promotion expense'. These expenses were incurred in relation to the provision of the telecommunication services: Particulars Amount (in Rs.) A. Distribution expenses 1. Sales commission and incentives to distributors 142,32,99,755 2. Expeses o packaging kits, pre-paid recharge coupon, dealer training, etc. 48,64,69,617 Sub-total 190,97,69,372 B.Advertisement / Sales promotion expenses 1. Advertising 79,93,97,108 2. Market Research 1,57,36,493 3. Website expenses & Marketing overheads 33,41,051 4. Promotion expenses - Merchandise 2,42,64,609 5. Promotion - Others 6,99,68,511 Sub-total 91,27,07,772 Total 282,24,77,144 11.2. The TPO in terms of the Order dated 20/01/2013 alleged that the aforesaid expenses of Rs. 282.24 crores result in creating a marketing tangible for the 'Vodafone' and 'Essar' trademark/ trade name and, thus, the assessee ought to have been reimbursed by i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gencies do not charge different rates for advertisements for unbranded services vis-à-vis advertisements for branded services. Thus, it is evident that there is no expenditure incurred towards trademark/trade name.It is further submitted that basis the functions performed, and risks assumed, it has been characterised as a full-fledged telecom service provider engaged in the provision of telecommunication services. However, while determining the appropriateness of AMP expenses, the TPO has characterised the assesseeas a distributor without providing any reasons for the same, thereby, leading to an inaccurate transfer pricing analysis. It is submitted that it a long-settled jurisprudence that the business model chosen by the assessee has to be respected and it is not open to the revenue to dictate any other model to the assessee. The application of bright line method does not take into consideration the impact of various factors on deciding the appropriateness of the level of AMP expenses incurred by an assessee. The TPO has not established functional similarities between the assessee and the comparable chosen by him for application of bright line method and, thus, bright lin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ant previous years. In the aforesaid facts and circumstances the transfer pricing addition made by the Assessing Officer in respect AMP Expenditure of INR 22,01,14,350/- cannot be sustained and is, therefore, deleted. Ground No. 7.3 raised by the Assessee is allowed and Ground No. 7.4 to 7.8 are dismissed as being infructuous .. " 11.7. Attention is also invited to the judgement of the Hon'ble Delhi High Court in the case of CIT v/s. Whirlpool of India Ltd. (2016) 381 ITR 154 (Delhi) wherein too the Hon'ble High Court held that the TPO cannot proceed to determine the ALP of AMP expenditure by inferring the existence of an international transaction based on bright line test if he has not been able to demonstrate with tangible material if there is an international transaction involving AMP expenditure between the assessee and its AE. It is further submitted that the SLP filed by the Revenue challenging the aforesaid decision of the Hon'ble High Court stands dismissed by the Supreme Court vide in recent order dated 20/11/2024 reported in (2024)169 taxmann.com 95 (SC). 11.8. The Ld. Dr argued and stated that with respect to the adjustment relating to AMP argued that the i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... not within the realm of the provisions of Chapter X. 74. The problem with the Revenue's approach is that it wants every instance of an AMP spend by an Indian entity which happens to use the brand of a foreign AE to be presumed to involve an international transaction ...... 75. 76. As explained by the Supreme Court in CIT v. B.C. Srinivasa Setty [1981] 128 ITR 294/5 Taxman 1 and PNB Finance Ltd. v. CIT [2008] 307 ITR 75/175 Taxman 242 (SC) in the absence of any machinery provision, bringing an imagined international transaction to tax is fraught with the danger of invalidation. In the present case, in the absence of there being an international transaction involving AMP spend with an ascertainable price, neither the substantive nor the machinery provision of Chapter X are applicable to the transfer pricing adjustment exercise ...... " 11.10. We heard the rival submission and considered the documents available record. The revenue has not demonstrated, through any material or tangible evidence, that there exists an understanding, arrangement, or concerted action between the assessee and its AEs for promoting trademarks or trade names owned by the AEs. This failure to estab ..... X X X X Extracts X X X X X X X X Extracts X X X X
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