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Income Tax Appellate Tribunal, MUMBAI BENCH “K”, MUMBAI
Before: SHRI M. BALAGANESH & SMT. KAVITHA RAJAGOPAL
ORDER Per Kavitha Rajagopal (JM):
This appeal has been filed by the assessee against the order passed by the DCIT dated 31/01/2014 for Assessment Year 2009-10 under section 143(3) r.w.s. 144C(13) of the Income-tax Act, 1961 (the Act).
The brief facts are that the assessee company is engaged in the business of rendering consultancy services such as business strategy, marketing and sales strategy, portfolio strategy, international business development, project
2 ITA 1870/Mum/2014 positioning, etc . to its clients. The assessee is a wholly-owned subsidiary of BCG Holding Corporation Company, USA which is an international strategy consulting firm which has its operation in all the major cities across the world. The company started its operation in India since May, 2000. The assessee deals with clients, who are into the business of healthcare consumer goods, industrial goods, energy utility, financial services and high technology and commission. The assessee’s case was taken up for scrutiny assessment and order under section 144(3) r.w.s. 144C(13) of the Income-tax Act, 1961 was passed. The assessee filed its objection before Ld.DRP.
The AO / TPO made adjustments in respect of three transactions pertaining to licence fees paid by the assessee for using the time and billing software, regional training administration and coordination and cost allocation and information technology intra group cost allocation to the assessee. The TPO determined the value of these transactions at Nil except in the case of regional training, administration and co-ordination where the sum of Rs.50 lakhs was allowed by the TPO. The Assessing Officer made some addition to the total income apart from the adjustments in TP proceedings. The assessee disputed the order of the Assessing Officer before the Disputes Resolution Panel-II(DRP), Mumbai and the DRP, vide order dated 30/12/2013 confirmed the addition made by the AO / TPO. Still aggrieved, the assessee is in appeal before the Tribunal, with the following grounds of appeal:-
“1. On facts and in the circumstances of the case and in law, the Deputy Commissioner of Income Tax 3(1) ('the learned AO') / Additional Commissioner of Income -tax II(6)('the learned TPO'), under the directions of the Hon'ble Dispute Resolution Panel-II ('the Hon'ble DRP') erred in holding the arm's length price of the Appellant's international transaction of payment of license fees for time and billing software at Nil instead of Rs. 2,31,54,274 as determined by the Appellant.
3 ITA 1870/Mum/2014
2. On facts and in the circumstances of the case and in law, the learned AO / TPO, under the directions of the Hon'ble DRP erred in holding the arm's length price of the Appellant's international transaction of payment of regional administration, regional co-ordination and worldwide training cost allocation at Nil instead of Rs. 4,21,32,081 as determined by the Appellant.
3. On facts and in the circumstances of the case and in law, the learned AO / TPO, under the directions of the Hon'ble DRP erred in determining the arm's length price . of the Appellant's international transaction of payment of information technology cost allocation on an adhoc basis at Rs. 50,00,000 instead of Rs. 4,29,27,940 as determined the Appellant.
4. On facts and in the circumstances of the case and in law, the learned AO, under the directions of the Hon'ble DRP erred in disallowing the foreign travel expenses of Rs. 15,85,847.
5. On the facts and in the circumstances of the case and in law, the learned AO erred in short-granting TDS credit by Rs. 4,10,94,623.
The Appellant prays that the learned AO be directed to grant TDS credit of Rs. 4,10,94,631.
6. On the facts and in the circumstances of the case and in law, the learned AO erred in charging interest under section 234D of the Act of Rs. 62,75,067.
7. On the facts and in the circumstances of the case and in law, the learned AO erred in initiating penalty proceeding under section 274 read with sections 271(l)(c) of the Act.” Grounds 1 to 3 :
Ground 1 pertains to the adjustment made by the TPO in regard to the licence fees paid for time and billing software. The assessee has paid Rs.2,31,54,274/- as licence fee to BCG Holding Corporation, USA. The assessee has adopted CUP method to benchmark this transaction by taking AE as tested party. The prices of similar software module licensed by Oracle Corporation was used as comparable uncontrolled price (CUP). It was alleged that the annual
4 ITA 1870/Mum/2014 charge for the Oracle modules was Rs.9,34,937/- whereas the adjustment on account of additional function in respect of BCG system was USD 1,73,94,264/- in which case, the difference in comparison between the two transactions were huge. It was further stated that the assessee failed to prove as to in what ways it was superior to the Oracle system thereby holding that the payment of royalty with regard to the licence fees paid for time and billing software is unwarranted and determined the ALP at Nil. The Ld.DRP upheld the findings of AO / TPO in spite of submission of additional evidences by the assessee substantiating that royalty paid was at arm’s length. The assessee had also submitted various other related agreements entered into by three parties, which are similar to the impugned transaction. The three comparables were rejected by the TPO and the same was upheld by the DRP for the following reasons:-
(1) The agreement with QUIKCAT Inc. was rejected by the TPO on the ground that the agreement was undated and pertained to Japan, Australia and Newzealand. Further it was submitted that the said comparable was related to software programme and profit so earned were used for other activities thereby stating that the transaction of QUIKCAT Inc. is different from that of the assessee’s which uses billing software for its own purpose and not for the purpose of distribution.
(2) The second comparable was that of Postal Software Inc., a US company which was also rejected on the ground that the agreement was undated making the applicability for relevant year as doubtful and was also rejected on the ground that it relates to marketing and sale modules.
5 ITA 1870/Mum/2014 (3) The third agreement was that of Oracles which was rejected on the ground that the royalty charged in this case was only 1% and the agreement pertains to sales addendum. Further to this, this comparable was also rejected on the ground that the assessee could not produce the original agreement for evaluating comparability.
5. The Ld.DRP upheld the TPOs decision on rejecting the three comparables for want of details thereby upholding the action of the AO / TPO action in treating the ALP for the impugned transaction at Nil.
Ground 2 pertains to the assessee’s international transaction of payment of regional administration, regional co-ordination and worldwide training cost allocation which was determined by AO / TPO and under the directions of Hon’ble DRP at Nil instead of Rs.4,21,32,081/- as determined by the assessee. This pertains to the recomputation of ALP for the impugned transaction of regional administration, regional co-ordination and worldwide training cost allocation a sum of Rs.1,12,34,445/- which was supported by adequate evidences and no adjustments were made with regard to the said amount whereas for the remaining adjustment of Rs.4,21,32,081/- was made by the AO / TPO on the ground that there was no satisfactory supporting evidences for the same. The Ld.DRP upheld the decision of the AO / TPO.
Ground 3 pertains to determination of arm’s length price of assessee’s international transaction for payment of information technology cost allocation on an adhoc basis and made adjustment of Rs.3,79,27,940/- on the ground that instead of Rs.4,29,27,940/- on the ground that it was an inferior cost allocation where the assessee has estimated Rs.1.29 crores for allowing its employees to use
6 ITA 1870/Mum/2014 certain commonly used software, which, according to the AO / TPO was much more than what a company in ordinarily uncontrolled situation would spend for the same. The AO / TPO had made allocation of Rs.50 lakhs for purchase and use of these softwares which includes the remuneration of personnel required to install and educate the staff for using the same and thereby disregarding the arm’s length price determined by the assessee. The Ld.DRP upheld the decision of the AO / TPO.
During the appellate proceedings, the Ld.Senior Counsel for the assessee contended that the AO / TPO has not prescribed any method for determination of ALP; therefore, the ALP determined by the assessee by using CUP method should be accepted. The Ld.Senior Counsel further stated that the issues in grounds 1, 2, & 3 are squarely covered by the decision of the co-ordinate bench of this Tribunal in assessee’s own case for A.Y. 2008-09 in dated 31/07/2020.
The Ld.DR, on the other hand, contended that the AO / TPO has not disputed the CUP followed by the assessee and further stated that the decision of Hon’ble ITAT for A.Y. 2008-09 will not apply to the impugned assessment year and relied upon the decisions of the lower authorities.
We have heard the rival submissions and perused the relevant materials on record and considered the judicial precedents cited before us by both the parties. It is evident that the AO / TPO in his order under section 92CA(3) dated 29/01/2013 has not adopted any of the prescribed methods in determining the ALP for payment of time and billing software licence, regional administration, regional co-ordination and worldwide training cost allocation and for the payment
7 ITA 1870/Mum/2014 of information technology cost allocation. Though the AO / TPO has not disputed the CUP method adopted by the assessee, the AO / TPO has not considered the ALP determined by the assessee using the said method nor has he prescribed any alternate method for determining the ALP for the said transactions. The assessee has relied on the decision of the co-ordinate bench of this Tribunal in assessee’s own case for A.Y. 2008-09 in dated 31/07/2020. He has further relied on another decision of the co-ordinate bench in the case of ACIT vs Netafim India P Ltd in ITA No.1874/Mum/2011 order dated 25/04/2019 wherein identical issue has been decided by the Tribunal in favour of the assessee. It is admitted that in the transfer pricing study report, where all the international transactions of the assessee have been aggregated and have been benchmarked applying CUP as the most appropriate method. The AO / TPO has rejected the benchmarking made by the assessee in the transfer pricing study report for the reason that the assessee has not provided complete details of the cost incurred by the AE for the impugned transactions. We are of the considered opinion that the TPO should have determined the ALP of the impugned international transactions by applying anyone of the prescribed methods, but the TPO has failed to do so.
It is also noted that the AO / TPO has not considered the judicial precedents cited by the assessee in the following cases:-
CIT VS Kodak India Pvt Ltd dated 11/07/2016;
2. CIT vs Johnson & Johnson Ltd dated 03/04/2017;
3. CIT vs Merck Ltd dated 08/08/2016; and 8 ITA 1870/Mum/2014 4. CIT vs Lever Exports Ltd (2017) 78 taxmann.com 88
Boston Consulting Group (India) Pvt Ltd - order dated 31/07/2020. 12. That being the case, the determination of arm’s length price at Nil in grounds 1 & 2 and at Rs.50 lakhs on adhoc basis in ground 3 is contrary to the provisions of the Act. Resultantly, the benchmarking done by the assessee is more acceptable and the transactions of the assessee with its AE for the services availed is held to be at arm’s length. In view of the same, grounds 1 to 3 are allowed. 13. Ground 4 pertains to disallowance of foreign travel expenses of R.15,85,847/-. It was alleged by the Assessing Officer that various family members of the employees visited foreign countries for which cost was incurred by the assessee in the previous year under consideration. The Assessing Officer rejected this claim for deduction on the ground that the assessee was unable to bring any supporting evidence to prove that the impugned expenditure was for business purpose, though the evidences produced by the assessee that travel of family members of the employees of assessee to foreign countries was for business prospects, was not accepted by the Assessing Officer and thereafter upheld by the Ld.DRP. 14. The assessee has contended that these expenses were incurred in connection with spouses and children of the assessee’s employees, who accompanied the employees for the worldwide office meetings conducted by BCG every year. The asssessee submitted that the families of the employees are invited in order to bring networking and bonding within the personnel which aids in strengthening of ties resulting in mutual sharing of ideas and perceptions. The 9 ITA 1870/Mum/2014 assessee further submitted that the assessee has paid fringe benefit tax on this foreign travel expenses. This claim of the assessee was rejected by the Assessing Officer and further upheld by the Ld.DRP.
Before us, the Ld.Senior Counsel contended that identical expenses were claimed in earlier years and there is a decision of the co-ordinate bench of this Tribunal in assessee’s own case for A.Y. 2008-09 in order dated 31/07/2020. The Ld.Senior Counsel further stated that fringe benefit tax was paid for the said expenses and cited judicial precedents wherein it was held that disallowance cannot be made if fringe benefit tax was paid.
The Ld.DR, on the other hand, relied on the decision of the lower authorities.
Having heard both the rival submissions and perused the materials on record, it is evident that the foreign travel expenses for the family of the employees disallowed by the Assessing Officer pertains to the family members of the employees, who are other than the employees of the assessee. Admittedly, the assessee had no supporting evidences to substantiate its claim. Following the decision of the co-ordinate bench of this Tribunal, we direct the Assessing Officer to verify the claim of the assessee that if fringe benefit tax has been paid by the assessee, in order to allow the claim and thereby pass consequential orders as per the provisions of the Act.
Grounds 5 and 6 are not pressed before us; hence dismissed.
Ground 7 pertaining to initiation of penalty under section 271(1)(c) is premature; hence, dismissed.
10 ITA 1870/Mum/2014 20. The assessee has also raised an additional ground, which, during the appellate proceedings, was not pressed before us by the Ld.Senior Counsel for the assessee. Therefore, the same is dismissed.
In the result, appeal of the assessee is partly allowed.
Order pronounced in the open court on 15th July, 2022.