UCWEB MOBILE PRIVATE LIMITED,GURGAON vs. ASSESSMENT UNIT, INOCOME TAX DEPARTMENT, GURGAON

Thereafter, the AO passed the draft assessment order under section 144C(1) of the Act dt. 29.08.2023 wherein total adjustments of ₹ 43,60,48,214/- towards transfer pricing were proposed by TPO. Against such order, assessee filed objections before learned DRP who vide its order dated 29.05.2024 partly accepted the objections raised by appellant and directed the TPO for making certain modifications in its order. In compliance, the TPO passed the order giving effect to the directions given by ld. DRP u/s 144C of the Act on 21.06.2024 wherein total T.P. adjustments of ₹ 34,37,80,273/- were computed by the TPO. The Assessing Officer thereafter, passed the final assessment order u/s 143(3) r.w.s. 144C(13) r.w.s 144B of the Act, dated 27.06.2024 wherein total income of the assessee is assessed at ₹ 62,36,67,760/- by Page | 2 34,37,80,273/- to the total income of the appellant.

Interest paid on Compulsorily Convertible Debentures ('CCDs') 4.1. Ld. DRP/ TPO/ AO have wrongly re-characterized CCDs as equity, making an upward transfer pricing adjustment of INR 6,00,00,000/-.

Interest paid on outstanding receivables. 5.1. Ld. DRP/TPO/AO have erred in holding inter-company receivables arising out of and part of regular business transaction, as separate international transaction. Erred in contradicting its own stand that TNNM is tolerant to minor aspects and further erred in making an upward adjustment of INR 26,22,731/- to the total income of Appellant in the garb of applying Comparable Uncontrolled Price ("CUP"). 5.2. Ld. DRP/TPO/AO erred in re-characterizing outstanding receivables as a loan extended by Appellant to its associated enterprise and imputing interest on same. 5.3. Ld. DRP/TPO/AO have arbitrarily considered LIBOR @ 2.06% plus ad hoc 550 basis points spread to LIBOR for benchmarking imaginary transaction of outstanding receivables.

Reselling of designated UC Singapore service 6.1. Without prejudice to other Grounds of appeal, adjustment made in Impugned Order pursuant to unlawful direction of Ld. DRP in violation of section 144C (8) deserves to be deleted on this limited ground. Further, as statutory time limits prescribed for completing DRP proceeding has expired no second innings would be justified so as to enable one an advantage of its own deliberate violation of law. 6.2. Ld. DRP/ TPO/AO have erred in law and facts, by not accepting the economic analysis undertaken by the Appellant for the determination of arm's length price ("ALP") in connection with reselling segment and proposing an upward adjustment of INR 23,03,82,629/-. 6.3. Ld. DRP/TPO/AO have incorrectly accepted - Ten Times Online Pvt. Ltd., Wizard E-marketing Pvt. Ltd., and Integra Software Services Pvt. Ltd. as comparables to assessee. Page | 5 6.4. Ld. DRP/ΤΡΟ/ΑO have erred in treating foreign exchange gain as non-operating while computing tested party margin by reference to extraneous assumption and factors and by ignoring FAR analysis specific to the transaction under consideration. That Ld. AO has erred in law and in fact, by levying an interest of INR 35,65,965 in the assessment order under section 234A of the Act. That Ld. AO has erred in law and in fact, by levying an interest of INR 5,87,66,765/- in the assessment order under section 234B of the Act. That Ld. AO has erred in law and in fact, by levying an interest of INR 4,19,969/- in the assessment order under section 234C of the Act.”

After careful consideration of the facts and arguments of both the parties, to decide this issue, we first examine the provisions of section 92CA(1) of the Act which are as under: 92CA. Reference to Transfer Pricing Officer (1) Where any person, being the assessee, has entered into an international transaction or specified domestic transaction in any previous year, and the Assessing Officer considers it necessary or expedient so to do, he may, with the previous approval of the Principal Commissioner or Commissioner, refer the computation of the arm's length price in relation to the said international transaction or specified domestic transaction under section 92C to the Transfer Pricing Officer. (10) …….…. Explanation.—For the purposes of this section, "Transfer Pricing Officer" means a Joint Commissioner or Deputy Commissioner or Assistant Commissioner authorised by the Board to perform all or any of the functions of an Assessing Page | 7 Officer specified in sections 92C and 92D in respect of any person or class of persons.

Sub-section (3) of section 144B of the Act, provides the scope and role of various units under faceless assessment such as National Faceless Assessment Centre (NFAC), Regional Faceless Assessment Centres, Assessment Units (AU), Verification Units (VU), Technical Units (TU) and Review Unit (RU). The relevant role of Technical Units (TU) as defined in clause (v) of sub-section (3) of section 144B is as under (v) technical units, as it may deem necessary to facilitate the conduct of faceless assessment, to perform the function of providing technical assistance which includes any assistance or advice on legal, accounting, forensic, information technology, valuation, transfer pricing, data analytics, management or any other technical matter which may be required in a particular case or a class of cases, under this section; 10. Section 92CA(1) of the Act empowers the Assessing Officer to make reference to TPO for the computation of arm's length price of international transactions. Further, the TPO as defined in explanation to section 92CA to be the person authorized by board to perform functions of AO specified in section 92C. In sub-section 3 of section 144B, roles of Technical unit is clearly spelt out according to which, functions of technical unit includes assistance or advice on transfer pricing issues. During the course of performing such function, the technical unit can obtain advice from the TPO on the issue of determination of Arm’s Length price of international transaction as they are expert in this field. Thus, the reference by technical unit to TPO is in accordance with the provisions of the Act and therefore, consequent orders passed are not barred by limitations.

Per contra, Ld.CIT DR for the Revenue supported the order of the lower authorities and submits that the assessee is engaged in the business of reselling of services and software for which the expenses were incurred on account of AMP expenses. These expenses were directly for the benefit of the AE as ultimately its product has got the publicity and therefore, the same deserves to be held as international transactions. He further submits that as per the TP SR, the US Singapore (AE) influences the AMP expenses incurred by the assessee as it has the sole discretion of providing the guidelines and policies for marketing and further, evaluate the performance of the assessee in the marketing activities. The Ld.CIT DR further submits that the AE has substantively involved in discharging the marketing and selling functions performed by the assessee. Thus, the said activity has enhanced the brand value of the AE and therefore, is correctly treated as an international transaction. He further submits that the judgment in the case of Sony Ericson (supra) is challenged by the Revenue before the Hon’ble Supreme Court therefore, the same could not be applied as such. He finally supports the order of the AO & DRP in making the AMP adjustments.

Mr. Srivastava submitted that Section 92F (ii) which defines ALP to mean a price "which is applied or proposed to be applied in a transaction between persons other than associated enterprises in uncontrolled conditions" could be construed as a machinery provision. But then that provision refers to ‘price’ and to ‘uncontrolled conditions’. It implicitly brings into play the BLT. In other words, it emphasises that where the price is something other than what would be paid or charged by one entity from another in uncontrolled situations then that would be the ALP. BLT as a determinative tool has been expressly invalidated by the Court in Sony Ericsson (supra).Therefore, it is not possible to view this as a machinery provision. The existence of an international transaction will have to be established de hors the BLT. There is nothing in the Act which indicates how, in the absence of the BLT, one can discern the existence of an international transaction as far as AMP expenditure is concerned.

Again in Maruti Suzuki India Ltd. (supra) the Court held: "The very existence of an international transaction cannot be presumed by assigning some price to it and then deducing that since it is not an ALP, an 'adjustment' has to be made. The burden is on the Revenue to first show the existence of an international transaction. Next step is to ascertain the disclosed 'price' of such a transaction and thereafter ask whether it is at ALP. If the answer to that is in the negative the TP adjustment should follow. The objective of Chapter X is to make adjustments to the price of an international transaction which the AEs involved may seek to shift from one jurisdiction to another. An 'assumed' price cannot form the reason for making an ALP adjustment."

As regards allowing the entire expenditure under Section 37 of the Act, there is an obvious contradiction which was attributed to be resolved by the ITAT in the impugned order by asking the TPO to rework the AMP expenses into that which was incurred for building the brand of the foreign AE and that which was incurred wholly or exclusively for the benefit of the WOIL. In Sony Ericsson (supra) this was sought to be explained by stating that Section 37 and Chapter X operate in different domains and merely because an expense was incurred wholly or exclusively for the Indian entity it would not mean that it is also not incurred for the foreign AE. The question then is to what extent the Indian entity should be compensated for the expenses incurred by it on behalf of the foreign AE. What will then be required to be benchmarked is not the AMP expenditure but the extent to which the Indian entity must be compensated.

Further in Maruti Suzuki India Ltd. (supra) this Court observed: "As an analogy, and for no other purpose, in the context of a domestic transaction involving two or more related parties, reference may be made to Section 40A (2) (a) under which certain types of expenditure incurred by way of payment to related parties is not deductible where the AO "is of the opinion that such expenditure is excessive or unreasonable having regard to the fair market value of the goods." In such event, "so much of the expenditure as is so considered by him to be excessive or unreasonable shall not be allowed as a deduction." The AO in such an instance deploys the 'best judgment' assessment as a device to disallow what he considers to be an excessive expenditure. There is no corresponding 'machinery' provision in Chapter X which enables an AO to determine what should be the fair 'compensation' an Indian entity would be entitled to if it is found that there is an international transaction in that regard. In practical terms, absent a clear statutory guidance, this may encounter further difficulties. The strength of a brand, Page | 15 which could be product specific, may be impacted by numerous other imponderables not limited to the nature of the industry, the geographical peculiarities, economic trends both international and domestic, the consumption patterns, market behaviour and so on. A simplistic approach using one of the modes similar to the ones contemplated by Section 92C may not only be legally impermissible but will lend itself to arbitrariness. What is then needed is a clear statutory scheme encapsulating the legislative policy and mandate which provides the necessary checks against arbitrariness while at the same time addressing the apprehension of tax avoidance."

The decisions in CIT v. B.C. Srinivasa Setty (1981) 128 ITR 294 (SC) and PNB Finance Ltd. v. CIT (2008) 307 ITR 75 (SC) make it explicit that in the absence of any machinery provision, bringing an imagined transaction to tax is not possible. Here, therefore, where the existence of an international transaction involving AMP expense with an ascertainable price is unable to be shown to exist, even if such price is nil, Chapter X provisions cannot be invoked to undertake a TP adjustment exercise.

As already mentioned, merely because there is an incidental benefit to Whirlpool USA, it cannot be said that the AMP expenses incurred by WOIL was for promoting the brand of Whirlpool USA. As mentioned in Sassoon J David (supra) "the fact that somebody other than the Assessee is also benefitted by the expenditure should not come in the way of an expenditure being allowed by way of a deduction under Section 10 (2) (xv) of the Act (Indian Income Tax Act, 1922) if it satisfies otherwise the tests laid down by the law”. Conclusion 47. For the aforementioned reasons, the Court is of the view that as far as the present appeals are concerned, the Revenue has been unable to demonstrate by some tangible material that there is an international transaction involving AMP expenses between WOIL and Whirlpool USA. In the absence of that first step, the question of determining the ALP of such a transaction does not arise. In any event, in the absence of a machinery provision it would be hazardous for any TPO to proceed to determine the ALP of Page | 16 BLT has been negatived by this Court as a valid method of determining the existence of an international transaction and thereafter its ALP.

Question (i) in the Assessee's appeal viz., "Was there an international transaction between WOIL and its AE involving the AMP expenses within the meaning of Section 92B of the Act read with Section 92F(v) of the Act?" is answered in the negative, i.e., in favour of the Assessee and against the Revenue. Consequently Question (ii) in the Assessee's appeal is not required to be answered. Further, the only question framed in the Revenue’s Appeal viz., "Whether the ITAT erred in deleting the addition of Rs. 180,73,10,769 made by the AO/TPO on account of AMP expenses under Section 37 of the Act?" is answered in the negative, i.e. in favour of the Assessee and against the Revenue.

The impugned order of the ITAT and the corresponding orders of the DRP and the TPO, on the above issues are hereby set aside. The appeal of the Assessee, of 2015 is allowed and the appeal of the Revenue, of 2014 is dismissed in the above terms, but in the circumstances with no orders as to costs.”

In view of the above discussion and by respectfully following the judgment of Hon’ble Jurisdictional High Court in the case of Maruti Suzuki India Ltd. vs CIT [2016] 381 ITR 117 (Delhi), Sony Ericson Communications India Pvt.Ltd. vs CIT (supra) & CIT vs Whirlpool of India Ltd. (supra) and further the judgment of Co-ordinate Bench in Widex India (supra), we hold that AMP expenditure are not international transaction and consequent adjustments under BLT method on protective and on substantive basis under TNMM intensity method are not in accordance with provisions of law and therefore, the same are hereby deleted. Ground No.3 to 3.8 of the assessee are allowed.

Ground No.4 relates to the action of AO/TPO/DRP wherein the authorities have wrongly re-characterized CCDs as equity and making TP adjustment of ₹ 6 crores.

Before us, Ld.AR of the assessee submits that CCDs were issued for a period of 20 years and till its conversion, the same are to be characterized as a debt. He further submits that the nature of instrument is to be seen in present circumstances and cannot be characterized on a future event which is even not certain. He further submits that in terms of debenture agreement, they remain the debt and therefore, the AO/TPO is incorrect in re-characterize the CCDs as equity. The Ld.AR further submits that CCDs are nothing but debt till conversion Page | 19 TP adjustments made of interest paid by determining the ALP at NIL is incorrect. For this, he placed reliance on the following judgements:- a. Praxair India (P.) Ltd. vs. Deputy Commissioner of Income-tax, [2023] 153 taxmann.com 715 (Bangalore - Trib.) - Paras 13-16 b. WeWork India Management (P.) Ltd. vs. DCIT, [2023] 150 taxmann.com 432 (Bangalore - Trib.) -Paras 20- 24 c. CAE Flight Training (India) (P.) Ltd. vs. DCIT, [2023] 150 taxmann.com 276 (Bangalore - Trib.) -Paras 10- 11 d. Religare Finvest Ltd. vs. DCIT, 33-37.

It is thus submitted by Ld.AR that it is a settled law that ALP of a transaction cannot be benchmarked as NIL by applying CUP method without comparing the same within uncontrolled transaction therefore, he prayed for the deletion of the adjustment made by the AO/TPO and upheld by the DRP.

On the other hand, Ld.CIT DR supported the order of the lower authorities and submits that the arrangement made by the assessee in terms of debenture subscription agreement is nothing but an arrangement to shift the profits to the AE. He further submits that the AE has a right to convert the CCDs into equity even before the period of 20 years and therefore, this transaction is having all characters of being an equity investment. He further submits that as per guidelines of OECD in such a scenario keeping the well known legal principal of primacy “substance over form in consider tax authorities can opt for re-characterization of financial instrument to safeguard the interest of the Revenue”. He also placed reliance on the observations of TPO/DRP in this regard and Page | 20 requested for the confirmation of the same looking to the fact that the assessee is running in heavy loss where it is paying interest to its AE on the debt funds which itself creates doubt about the transaction.

We have heard the rival submissions and perused the material available on record. In this case, the assessee had issued CCDs to its AE in order to get the financial assistance as it was having shortage of funds. The very nature of CCDs is loan and the interest paid on the same cannot be questioned which was made under commercial expediency. As nowhere in the Act, debt or equity is defined therefore, the rule of interpretation requires that the term is to be understood in their ordinary sense. The CCDs are distinct and separate from the share capital and the debenture holder has no rights whatsoever as were available to the equity shareholders. The benefits and objections associated with both the instruments are different. Section 2(30) of the Companies Act, 2013 provides the definition of “debenture” which is as under:- “debenture include debenture stock, bonds or any other instrument of a company evidencing a debt, whether constituting a charge on the assets of the company or not.” 24.1. The term “share” is defined in section 2(84) of the Companies Act, 2013 which is as under:- “Share” means share in the share capital of a company and includes stock.” 24.2. Further in the SEBI guidelines, the term “debt instrument” has been defined as under:- “Debt-instrument” means an instrument which creates or acknowledges indebtedness, and includes debenture, stock, bonds and such other securities of a body corporate, Page | 21 whether constituting a charge on the assets of the body corporate or not.” 24.3. It is thus clear that if a debt instrument, there must be a character of in-debtness and it is not to be seen about the nature of the repayment or settlement of such debt in future. We further find force in the arguments of the assessee wherein the assessee has made out a chart of the key features of debt & equity and their application to the case of the assessee which is tabulated herein below:-

The Co-ordinate Bench of ITAT, Bangalore in the case of M/s. Embassy One Developers Pvt.Ltd. vs DCIT in & 2240/Bang/2018 wherein the Co-ordinate Bench observed as under:- 25. “.....................................In our considered opinion, such definition of the term convertible debentures cannot be applied in other context such as allowability of interest on such debentures during pre-conversion period or regarding payment of dividend on such convertible debentures during pre-conversion period or regarding granting of voting rights to the holders of such convertible debentures before the date of conversion, If you ask a question as to whether Page | 23 dividend can be paid on such convertible debentures in a period before the date of conversion or whether such holders of convertible debentures can be granted voting rights at par with voting rights of share holders during re- conversion period, the answer will be a big NO. On the same analogy, in our considered opinion, the answer of this question is also a big NO as to whether interest paid on convertible debentures for pre-conversion period con be said to be interest on equity and interest on debentures allowable u/s. 36(1)(iii) of the IT Act."

Further, the Bombay High Court in the case of Kirloskar Pneumatic Co.Limited vs Commissioner of Surtax [1994] 210 ITR 485 (Bombay) has held that CCDs continues to be debt till is repaid or discharged. The debt would acquire the character of the equity and become part of the paid up capital of the company only in the eventuality of the conversion of debentures into equity. Thus, we could safely conclude that CCDs issued by the assessee partake the character of debt until the conversion into equity. Further, it is a fact that no voting rights are ever exits to the CCDs holders and further no dividend is payable to them until the conversion of the CCD into equity. 26.1. In view of the above, in our considered opinion, CCDs issued by the assessee cannot be characterized as the equity and therefore, action of the AO/TPO in treating the same as equity and by applying the CUP method, no interest is allowed is not correct and therefore, adjustment made of ₹ 6 crores on this account is hereby deleted.

Ld.AR submitted that the AO/TPO has erred in applying LIBOR @ 2.06% plus 500 basis point for benchmarking the transactions of outstanding receivables. It is submitted by Ld.AR for the assessee that the outstanding receivables are ancillary to primary business transactions of the appellant and therefore, the same could not be separately benchmarked. He further submits that only one invoice of four invoices was realised beyond the credit period and therefore, it not fair to allege the existence of any intent on the part of assessee in providing any benefit to the AE by allowing the delayed payment. He further placed reliance on the judgment of Hon’ble Jurisdictional High Court in the case of PCIT vs Kusum Healthcare Pvt.Ltd. [2017] 398 ITR 66 (Delhi).

On the other hand, Ld.CIT DR for the Revenue supports the order of AO/TPO/DRP and submits that there was a delay in recovery of outstanding receivables and therefore, the lower authorities have rightly make the adjustment on account of delayed payment of receivables which deserves to be upheld.

We have heard the rival contentions and perused the material available on record. It is seen that the transaction is with AEs with respect to purchase and sales therefore, they are come in the purview of international transaction as defined in Explanation 2 section 292B of the Act. It is further seen that the assessee has only one bill where the payment was received delayed and while working out the transfer pricing adjustment, Page | 25 AO has not allowed the working capital adjustment for taken into account the impact of outstanding receivables. The Hon’ble Delhi High Court in the case of Kusum Health Care Ltd. (supra) has held that the assessee has already factored the impact of the receivables on the working capital and thereby on its pricing/profitability, any further adjustment only on the basis of outstanding receivable would have distorted the pick and re-characterization of the transaction.

In view of these facts and by respectfully following the judgmenet of Jurisdictional High Court in the case of Kusum Healthcare (supra), we find that the adjustment made by the AO/TPO is not in accordance with law and therefore, the same is hereby deleted.

Ground Nos.2 & 6 are in relation to the adjustment made on account of reselling of designated UC Singapore services herein upward adjustment of ₹ 23,03,82,629/- is made.

In Ground No.2, the assessee has challenged the action of DRP in directing the TPO for reconsideration of the comparables mentioned by the assessee in TPSR.

On perusal of the facts and circumstances of the case, we find that the TPO has rejected the assessee’s comparables on summary basis and while deciding this issue, DRP in para 19.3 of the order directed the TPO to re-consider the comparables and decide the issue accordingly. Section 144C(8) of the Act provides that the DRP may confirm, reduce or enhance the variation proposed however it has not granted any power to DRP to set aside the issue to decide denovo afresh.

In the result, the appeal of the assessee is partly allowed. Order pronounced in the open court on 30th May, 2025.