M/S. IBM INDIA PRIVATE LIMITED,BANGALORE vs. ASSISTANT COMMISSIONER OF INCOME-TAX, BANGALORE

IN THE INCOME TAX APPELLATE TRIBUNAL ‘A’ BENCH : BANGALORE BEFORE SHRI. CHANDRA POOJARI, ACCOUNTANT MEMBER AND SMT. BEENA PILLAI, JUDICIAL MEMBER IT(TP)A No. 625/Bang/2017 Assessment Year : 2012-13 M/s. IBM India Pvt. Ltd., The Assistant No. 12, Subramanya Commissioner of Arcade, Income-tax, Bannerghatta Road, Circle 3 (1)(1), Bangalore – 560 029. Vs. Bangalore. PAN: AAACI4403L APPELLANT RESPONDENT & IT(TP)A No. 1016/Bang/2019 Assessment Year : 2014-15 M/s. IBM India Pvt. Ltd., The Joint No. 12, Subramanya Commissioner of Arcade, Income-tax, Bannerghatta Road, Special Range-4, Bangalore – 560 029. Vs. Bangalore. PAN: AAACI4403L APPELLANT RESPONDENT Assessee by : Shri Ajay Roti, CA : Shri K.V. Arvind, Standing Revenue by Counsel Date of Hearing : 03-02-2022 Date of Pronouncement : 14-02-2022

Page 2 of 21 IT(TP)A Nos. 625/Bang/2017 & 1016/Bang/2019 ORDER PER BEENA PILLAI, JUDICIAL MEMBER Present appeals by the assessee have been filed by assessee against the final assessment orders u/s. 143(3) r.w.s. 144C(13) of the Act dated 28.03.2019 passed by the Ld.JCIT, Special Range- 4, Bangalore for A.Y. 2014-15 and 30.01.2017 passed by the Ld.ACIT, Circle – 3 (1)(1), Bangalore for A.Y. 2012-13. The above appeals are disposed of by way of a common order as common issues arises on identical facts. For the sake of convenience, we are reproducing the grounds raised by assessee for Assessment Year 2012-13. “The grounds stated hereunder are independent of and without prejudice to one another. The Appellant submits as under: 1. Assessment order bad in law 1.1. At the outset, M/s IBM India Private Limited (hereinafter referred to as 'the Appellant' or 'the Company') prays that the order dated 30 January 2017, passed under section 143(3) read with section 144C(13) of the Income-tax Act, 1961 ('Act'), by the learned Assistant Commissioner of Income-tax, Circle — 3(1)(1), Bangalore ('ACIT'), be struck down as invalid, as the order is bad in law and on facts. 2. Reliance on the Draft Assessment Order ('DAO') of AY 2009-10 for making adjustments for AY 2012-13 2.1. The learned ACIT and the Hon'ble Dispute Resolution Panel ('DRP') have erred in law and on facts by placing reliance on the DAO of AY 2009-10. Specifically, the learned ACIT and Hon'ble DRP have erred: a) In not following the settled legal principle of res judicata not applying to income-tax proceedings; b) In not appreciating the fact that the order on which the learned ACIT had placed reliance was a draft assessment order; c) In not appreciating the fact that the DAO on which the learned ACIT has placed reliance on had been stayed by the Hon`ble Karnataka High Court and subsequently set aside on 18 July 2016; and

Page 3 of 21 IT(TP)A Nos. 625/Bang/2017 & 1016/Bang/2019 d) In placing reliance on the DAO of AY 2009-10 without application of mind and without taking cognizance of the submissions/ arguments put forth during the assessment proceedings of AY 2012-13. 3. Denial of relief under section 10AA of the Act 3.1. The learned ACIT and the Hon'ble DRP have erred in law and on facts in denying the relief claimed by the Appellant under section 10AA of the Act of INR 234,15,24,187. 3.2. The learned ACIT has erred in law and on facts by holding that the Appellant did not have any evidence for manufacture and export of computer software from eligible units in Special Economic Zone ('SEZ'). 3.3. The learned ACIT has erred in law and on facts by concluding that the Appellant had made contrary submissions in connection to transmission or export computer software outside India from its SEZ units without taking cognizance of the submissions made by the Appellant. 3.4. The learned ACIT has erred in law and on facts by concluding that the various obligations and procedures prescribed under the SEZ schemes regulations have not been adhered to and that for claiming tax benefit the same has to be complied with. 3.5. The learned ACIT has erred in law and on facts in holding that the unit wise P&L account submitted by the Appellant in relation to the eligible units was not a reliable document for allowing claim under section 10AA of the Act. 3.6. The Hon'ble DRP has erred in law and on facts by concluding that the Appellant failed to furnish the necessary information supported by the documents to establish the claim 'undertaking-wise'. 3.7. The learned ACIT has erred in law and on facts in holding that the undertakings were not independent and that they were formed by the splitting up and reconstruction of business already in existence. 3.8. The Hon'ble DRP has erred in law in adopting a view that expenses on freight, telecommunication charges or insurance attributable to the delivery of articles outside India, or expenses, if any, incurred in foreign exchange in rendering of services (including computer software) outside India, have to

Page 4 of 21 IT(TP)A Nos. 625/Bang/2017 & 1016/Bang/2019 be excluded from 'export turnover' but not 'total turnover' for computing deduction under section 10AA of the Act. 4. Disallowance of amounts under section 37(1) which have been disallowed suo moto by the Appellant under section 40(a) of the Act 4.1. The learned ACIT and Hon'ble DRP have erred in law and on facts in disallowing an amount of INR 359,66,16,945 under section 37(1) by holding the same to not be genuine business expenditure. 4.2. The learned ACIT has erred in law and on facts by not appreciating that the basis of year-end provisions, as furnished by the Appellant, demonstrate that the same are for liabilities which have arisen/ been incurred, and therefore, the same cannot be disallowed by under section 37(1) of the Act. 4.3. The learned ACIT has erred in law and on facts by holding in the remand report that the fact that the provisions have been reversed subsequently signifies that the expenses provided for in the books are no more required. In doing so, the learned ACIT has failed to appreciate that the subsequent reversal is for accounting purpose (reporting correct profit for the given year), and the invoices received subsequently and which have been offset by the reversal, corroborate the fact that the liability has been incurred in the current year. 4.4. The learned ACIT has erred in law and on facts by holding in the remand report that the accounting practice adopted by the Company could result in merger of expense of different periods in the books. In doing so, the learned ACIT has failed to appreciate that the entries passed by the Company ensures that the matching principle is followed, and in case the provision exceeds the invoices received subsequently, the excess provision would be offered to tax in the subsequent year and there is no loss to the Revenue. 4.5. The Hon'ble DRP has erred in law in directing the learned ACIT to carry out further verification which is not permissible in view of section 144C(8) of the Act which clearly states that the DRP shall not issue any direction for further enquiry and passing of assessment order.

Page 5 of 21 IT(TP)A Nos. 625/Bang/2017 & 1016/Bang/2019 4.6. Without prejudice to the above, the Hon'ble DRP has erred in law by directing the learned ACIT to carry out further verification since it disregards the remand report of the learned ACIT wherein it has been clearly stated that the Appellant has submitted evidence in support of expenditure claimed. 5. Disallowance under section 40(a) of the Act in respect of payments to Associated Enterprises 5.1. The learned ACIT and the Hon'ble DRP have erred in law and on facts in disallowing payments made by the Appellant to its Associated Enterprises ('AEs') amounting to INR 639,80,49,228 under section 40(a) since the same does not represent income chargeable to tax under the provisions of the Act. 5.2. The learned ACIT and the Hon`ble DRP have erred in law and on facts in placing reliance on the sworn statement which does not pertain to the current year, in holding that the certificates issued by the CA are not reliable and disallowing the amount for the current year. 5.3. The Hon'ble DRP has erred in law by directing the learned ACIT to undertake further verification of samples for reimbursements of INR 336,76,37,991, despite receiving a remand report, which is not permissible in view of section 144C(8) of the Act which clearly states that the DRP shall not issue any direction for further enquiry and passing of assessment order. 5.4. Without prejudice to the above, the Hon'ble DRP has erred in law by directing the learned ACIT to carry out further verification since it disregards the remand report of the learned ACIT wherein it has been clearly stated that the claim of the Appellant has been found to be correct. 5.5. The learned ACIT and the Hon'ble DRP have erred in facts and in law in disallowing the payment of INR 292,25,47,936 made to IBM Singapore on account of non-deduction of tax at source by treating the sum as 'royalty'. 6. Disallowance of depreciation on leased assets 6.1. The learned ACIT and the Hon'ble DRP have erred in law and on facts in disallowing the depreciation on leased assets (net of lease rental and interest) amounting to INR 24,08,97,422 by not following the decision of the Hon'ble Supreme Court of

Page 6 of 21 IT(TP)A Nos. 625/Bang/2017 & 1016/Bang/2019 India in ICDS Ltd v. CIT [2013] 350 ITR 527 (SC) and other judicial precedents. 7. Assessment and reference to Transfer Pricing Officer are bad in law 7.1 The learned ACIT/ Additional Commissioner of Income Tax, Transfer Pricing, 1(3) ['TPO'] erred in law and on facts in making an addition of INR 919,49,90,290 to the total income of the Appellant on account of adjustment to the arm's length price with respect to export services transaction entered into by the Appellant with its AEs. 7.2 The learned ACIT/ TPO erred in law and on facts as he failed to establish that the Appellant shifted profits outside India. The Honorable DRP erred in upholding the actions of the learned ACIT/ TPO. 8. Determination of arm's length price by the TPO / ACIT / DRP 8.1 The Hon'ble DRP erred on facts and in law in retaining Datamatics Global Services Limited, Genesys International Corporation Limited, IC R A Techno Analytics Limited, and Spry Resources India Private Limited, despite having identified functional differences between the aforesaid comparables and the Appellant. The learned ACIT/ TPO also erred in proposing the aforesaid companies as comparable in the order issued under Section 92CA Act. 8.2 The learned ACIT/ TPO erred on facts and in law in considering Infosys Limited, Larsen & Toubro Infotech Limited, and Persistent Systems Limited as functionally comparable to the export services rendered by the Appellant. The Hon'ble DRP further erred in upholding the actions of the learned ACIT/ TPO, without considering the differences between the functional and risk profile of the aforesaid companies' and the Appellant's export of services segment. 8.3 The learned ACIT / TPO erred on facts in selecting IC R A Techno Analytics Limited as a comparable in the order issued under Section 92CA of the Act, even though the said company failed the related party transaction filter of 25% applied by the TPO herself. The Hon'ble DRP further erred in upholding the actions of the learned ACIT/ TPO.

Page 7 of 21 IT(TP)A Nos. 625/Bang/2017 & 1016/Bang/2019 8.4 The learned ACIT/ TPO erred on facts in selecting Persistent Systems Limited as a comparable in the order issued under Section 92CA, even though the said company had peculiar economic circumstances during FY 2011-12. The Hon'ble DRP further erred in upholding the actions of the ACIT/ TPO. 8.5 The learned ACIT/ TPO erred on facts in wrongly computing the net-cost plus margin of Persistent Systems Limited and Spry Resources India Private Limited. The Hon'ble DRP further erred in upholding the actions of the learned ACIT/ TPO. 8.6 The Hon'ble DRP and the ACIT/ TPO erred in law and on facts in rejecting LGS Global Limited on the premise that the company fails the employee cost filter of 25% on sales applied by the TPO, without considering the employee cost captured by the company under other heads of expenditure. The Hon'ble DRP and the ACIT/ TPO further erred in not exercising powers under Section 133(6) of the Act for obtaining employee cost data to establish comparability between LGS Global Limited and the export services function performed by the Appellant. 8.7 The Hon'ble DRP and the ACIT/ TPO erred in law and on facts in rejecting Akshay Software Technologies Limited and Evoke Technologies Limited as functionally not comparable to the export services rendered by the Appellant. 8.8 The Hon'ble DRP and the ACIT/ TPO erred in law and on facts in rejecting Helios & Matheson Information Technology Limited and R Systems Limited on the premise of having a different financial year ending (i.e. other than 31 March 2012). 8.9 The learned ACIT/ TPO grossly erred on facts and in law in rejecting the filters and search process adopted by the Appellant in the Transfer Pricing Study without considering the Appellant's facts. Further, the learned ACIT/ TPO also erred on facts and in law by conducting a fresh benchmarking analysis in respect of export services provided by the Appellant and wrongly comparing the Appellant's activities with companies operating as full-fledged entrepreneurs without considering the differences in functions performed, assets employed and risks assumed by the Appellant vis-à-vis comparable companies.

Page 8 of 21 IT(TP)A Nos. 625/Bang/2017 & 1016/Bang/2019 9. Erroneous data used by the ACIT / TPO 9.1 The learned ACIT/ TPO has erred in law in using data, which was not contemporaneous and which was not available in the public domain at the time of conducting the transfer pricing study by the Appellant. The Hon'ble DRP has erred in upholding the actions of the learned ACIT/ TPO. 9.2 The learned ACIT/ TPO erred in law and on facts in disregarding the application of multiple- year data while computing the margins of comparable companies. The Hon'ble DRP erred in upholding the actions of the learned ACIT/ TPO. 10. Non-allowance of appropriate adjustments to the comparable companies, by the ACIT/ TPO 10.1 The learned ACIT/ TPO erred in law and on facts in not allowing appropriate adjustments under Rule 10E3 to account for, inter a/ia, differences in (i) accounting practices, (ii) marketing expenditure, (iii) research and development expenditure, and (iv) risk profile between the Appellant and the comparable companies. The Hon'ble DRP erred in upholding the actions of the learned ACIT/ TPO. 11. Disallowance under section 14A of the Act 11.1. The learned ACIT and the Hon'ble DRP have erred in law and on facts in disallowing expenditure amounting to INR 94,36,812 without appreciating that the Appellant has not earned any exempt income during the year. 11.2. The learned ACIT has erred in law and on facts, by not discharging the onus of establishing the incurrence of some expenditure in relation to earning exempt income, before invoking the provisions of Rule 8D read with section 14A of the Act. 11.3. The learned ACIT and the Hon'ble DRP have erred in law and on facts in not considering the evidence on record and by not following the judicial precedents. 11.4. Without prejudice to the above, it is submitted that in computing the amount of disallowance as per Rule 8D, the learned ACIT has erroneously considered interest on assets taken on lease as part of amount of indirect interest pertaining to tax exempt investment. 12. Initiation of Penalty Proceedings 12.1. The learned ACIT has erred in initiating penalty proceedings under section 271 of the Act.

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Page 10 of 21 IT(TP)A Nos. 625/Bang/2017 & 1016/Bang/2019 4. Ground No. 2- It has been submitted that this ground in both Assessment Years was rejected by this Tribunal for Assessment Year 2013-14 by observing as under: “4.4.5 We note that, this Tribunal for assessment year 2008-09(supra), dealt with all objections raised by authorities below, which are common for year under consideration to deny deduction u/s.10AA. Ld.AO for year under consideration, has referred to final assessment order passed for AY:2008-09. Therefore, in our view, it will be a futile exercise to set aside the issue to Ld.AO for fresh decision as suggested by both sides, when the issue stands squarely covered order of this Tribunal in great detail, for AY:2008-09 (supra). Accordingly this objection raised by assessee stands rejected.” Respectfully following the above view, this ground raised by assessee in both the appeals stands dismissed. 5. Ground No. 3 (Both Assessment Years) – It is submitted that, this Tribunal in Assessment Year 2013-14 had examined the various aspects of the relief claimed u/s. 10AA of the Act and held it in our favour of assessee, subject to the proceeds having been brought into India in convertible foreign exchange. It is submitted that this Tribunal remanded only one aspect to the DRP i.e. to verify whether the sale proceeds have been brought into India in convertible foreign exchange by IBM India. The Ld.Standing Counsel relied on orders passed by authorities below. We have perused the submissions advanced by both sides in the light of records placed before us. This Tribunal observed and held as under. “D.9.4. Respectfully following the same, we remand this issue to DRP to verify receipts if sale proceeds of computer software exported out of India, being brought into India in

Page 11 of 21 IT(TP)A Nos. 625/Bang/2017 & 1016/Bang/2019 convertible foreign exchange. DRP is at liberty to examine whether, convertible foreign exchange brought into India represents consideration received for export of computer software. Accordingly, this objection is remanded to DRP.” “6.11. As observed in detail by coordinate bench of Pune Tribunal, following ratio laid down therein, we hold that assessee is eligible to claim deduction under section 10AA, on incremental income arisen pursuant to APA dated 29/12/2016. We direct DRP to grant deduction under section 10AA of the Act, to the extent of sale proceeds received from export of software services, brought into India in convertible foreign exchange within stipulated period. Accordingly, this issue is set aside to DRP for verification verify and to allow claim of assessee as directed hereinabove, r.w., our observations in para D.9.4 hereinabove.” Respectfully following the same this ground stands remanded as indicated hereinabove. 6. Ground No. 4 in A.Y. 2012-13 and ground nos. 5 & 6 in A.Y. 2014-15 is in respect of disallowance under section 37(1) in respect of amounts that was suo moto disallowed by assessee u/s. 40(a). The Ld.Standing Counsel relied on orders passed by authorities below. We have perused the submissions advanced by both sides in the light of records placed before us. This issue has been considered by this Tribunal in Assessment Year 2013-14 as under: “7.14.6.DRP shall then verify the detaild filed by assessee, in respect of disallowances made under section 40 (a) for non-deduction of TDS: I. DRP shall verify the nature of provisions created by assessee in preceding year (AY:2012-13), and year

Page 12 of 21 IT(TP)A Nos. 625/Bang/2017 & 1016/Bang/2019 under consideration that is disallowed under section 40 (a) of the Act. II. DRP shall verify if, TDS applies on amounts mentioned in provision account vis-a-vis the vendor invoice, and that, if, TDS has been complied with in accordance with the relevant provision in the year under consideration; III. DRP shall verify if any vendor have provided for a 'NIL' withholding/lower withholding certificate from the Department as per section 197 of the Act. IV. DRP shall verify there is any vendor invoice on which TDS provision doesn't apply. 7.15. Base on above discussions and observation for relevant year, respectfully following the view taken by Hon'b1e Bench for AY:2008-09, we set aside for these issue to DRP for fresh consideration. Needless to say that, proper opportunity of being heard must be granted to assessee and these issues must be decided having regard to evidences/documents filed by assessee, in accordance with law. We also direct DRP to consider the alternate submission advanced by Ld. Counsel of allowing the claim of assessee to the extent the payments are mapped with the provisions, invoices and TDS made and deposited with the Government. Accordingly, we aside Ground 4 & 9 back to DRP.” Respectfully following the above, we set aside this issue back to the DRP. 7. Ground No. 5 in A.Y. 2012-13 and ground no. 4 in A.Y. 2014-15 – The Ld.AR submitted that this payment of Rs.292,25,47,936/- for A.Y. 2012-13 is towards payments to IBM Singapore for shrink wrapped software. The Ld.Standing Counsel relied on orders passed by authorities below. We have perused the submissions advanced by both sides in the light of records placed before us. This issue has been considered by Coordinate Bench of this Tribunal for Assessment Year 2013-14 as under:

Page 13 of 21 IT(TP)A Nos. 625/Bang/2017 & 1016/Bang/2019 “8.7.6. Ld.Counsel, however submitted that voluminous details were submitted by assessee, which has not been considered by Ld.AO, while passing impugned order. We have perused observations of this Tribunal for assessment year 2008-09 wherein, Hon'ble Bench remanded the issue to DRP for fresh consideration and decision. Respectfully, following the same, we remand the issue to DRP with similar direction to consider the claim of assessee in light of evidences filed, after affording opportunity of being heard in accordance with law. Assessee is directed to file invoices raised in support of payments made by assessee to relevant parties. Assessee is at liberty to file all relevant details/evidences to substantiate its claim. DRP is then directed to verify nature of payment in the light of invoices filed by assessee. DRP is also directed to analyse payment made to nonresidents on which tax has not been deducted at source in light of Explanation 2 to section 195. DRP shall grant proper opportunity of being heard to assessee. Accordingly this ground raised by assessee stands allowed for statistical purposes.” Respectfully following the above, we remand the issue back to DRP. The DRP is also directed to verify the details filed by applying the principles laid down by Hon’ble Supreme Court in case of Engineering Analysis Centre of Excellence (P.) Ltd. reported in (2021) 432 ITR 471. 8. Ground No. 6 in A.Y. 2012-13 –Ld.AR submitted that this Tribunal in the order for Assessment Year 2013-14 has examined identical issues on similar facts remanded to the Ld.AO to verify the details furnished by the assessee and consider the claim giving cognizance to Hon’ble Supreme Court decision in the case of ICDS Ltd. vs. CIT reported in (2013) 29 taxmann.com 129. The Ld.Standing Counsel relied on orders passed by authorities below. We have perused the submissions advanced by both sides in the light of records placed before us.

Page 14 of 21 IT(TP)A Nos. 625/Bang/2017 & 1016/Bang/2019 This Tribunal observed as under: “9.8.2 In the interest of Justice, we remit this issue too Ld.AO for proper verification of all details filed by assessee and to consider claim in accordance with ratio laid down by Hon’ble Supreme Court in case of ICDS Ltd vs CIT (supra). Needless to say that proper opportunity of being heard must be provided to assessee in accordance with law. Accordingly this ground raised by assessee stands allowed for statistical purposes.” Respectfully following the same, we remand this issue to Ld.AO with similar direction as above. 9. The Ld.AR submitted that assessee do not wish to press the issues raised in Ground nos. 7 to 10 (A.Y. 2012-13). Accordingly these grounds raised by assessee are dismissed as not pressed. 10. The issue raised in Ground no. 11 (A.Y. 2012-13) is disallowance u/s. 14A of the Act. The Ld.Standing Counsel relied on orders passed by authorities below. We have perused the submissions advanced by both sides in the light of records placed before us. The Tribunal observed as under: “10.4.1 It is noted that admittedly there is no exempt income earned by assessee during the year under consideration. Therefore respectfully following Hon’ble Delhi High Court in case of Cheminvest Ltd. vs. CIT, disallowance under section 14A stands deleted. Accordingly this ground raised by assessee stands allowed.” Admittedly for year under consideration 11. Ground nos. 12 to 14 (A.Y. 2012-13) are consequential in nature.

Page 15 of 21 IT(TP)A Nos. 625/Bang/2017 & 1016/Bang/2019 Accordingly the appeal filed by the assessee for Assessment Year 2012-13 stands allowed as indicated hereinabove. 12. Ground no. 7 (A.Y. 2014-15)- The Tribunal has examined the matter and has directed the Ld.AO to verify whether the software expense is of the category of revenue expenditure, and if so, allow claim of complete amount in the current Assessment Year. Ld. Assessing Officer is further directed that depreciation at 60% be allowed for all other computer software capitalized. The Tribunal observed as under: “11.4.2 Based on above discussions and respectfully following decision of coordinate bench in case of Infosys Ltd. vs. ACIT (supra), we direct Ld.AO to consider the claim of assessee. Ld.AO is directed to verify if there is any software purchased that falls in the category of revenue expenditure, as then the question of granting depreciation would not arise. In respect of the other computer software that are capitalized, depreciation is to be granted to assessee at 60%. Needless to say that proper opportunity must be granted to assessee in accordance with law. Accordingly this ground raised by assessee stands allowed for statistical purposes.” 13. Ground Nos. 8 to 18 (A.Y. 2014-15) –AMP Adjustment For Assessment Year 2014-15, one additional issue on AMP adjustment has been raised by assessee. The Ld.TPO observed that for distribution segment associate has also carried out advertisement, marketing and sales promotion activities. The learned TPO was of the view that a sissy needs to become adequately compensated for such additional functions undertaken by it and therefore separately benchmarked the AMP functions. 14. The learned AO thus proposed adjustment to by estimating the expenditure at 0.63% of the sales based on the comparables

Page 16 of 21 IT(TP)A Nos. 625/Bang/2017 & 1016/Bang/2019 selected by the learned PPO. The learned TPO observed that assessee had spent 5.91% on the gross sale and therefore the excess expenditure incurred was held to be related to non-routine AMP which was attributed to the development of intangibles owned by AE. The DRP upheld the actions of learned PPO and the learned a while passing the impugned order made addition towards the AMP spending the hands of assessing. Aggrieved by the order of learned.AO, assessee is in appeal before us. The Ld.AR submitted that the AMP spend id to enhance the market share of assessee’’s brand in India. It has been submitted that the expenses per team to respective business segment of assessee and cannot be attributed only towards export and distribution segment as has been done by the revenue authorities. The Ld.AR relying on following decisions submitted that incurring of AMP expenses does not constitute an international transaction: Acer India Private Limited in IT (TP) a number 27/B/2017 Essilor India Private Limited in IT (TP) to number 29/the/2014 and 227/B/2015 DCI to versus Nike India Private Limited in IT (TP) a number 232/B/2014 Himalaya drug company vs. DCI reported in (2020) 119 taxmann.com 421 On the contrary, the Ld.Standing Counsel relied on orders passed by authorities below.

Page 17 of 21 IT(TP)A Nos. 625/Bang/2017 & 1016/Bang/2019 We have perused the submissions advanced by both sides in the light of records placed before us. We refer to para 101 of the decision of the Hon'ble Delhi High Court in case of Sony Ericsson Mobile Communications India P. Ltd. v. CIT, 374 ITR 118 wherein the Hon'ble Court held that, once the TPO accepts and adopts TNM Method and then chooses to treat a particular expenditure like AMP as a separate international transaction without bifurcation and segregation, it would lead to an unusual and incongruous results as AMP is the cost or expense and is not diverse. It is factored in the net profit of the interlinked transaction. This would be also in consonance with Rule 10B(1)(e), which mandates only arriving at the net profit margin by comparing the profits and loss account of the tested party with the comparable. The TNM Method proceeds on the assumption that functions, assets and risk being broadly similar and once suitable adjustments have been made, all things get taken into account and stand reconciled when computing the net profit margin. Once the comparables pass the functional analysis test and adjustments have been made, then the profit margin as declared when matches with the comparables would result in affirmation of the transfer price as the arm's length price. Then to make a comparison of a horizontal item without segregation would be impermissible. Under Sections 92B to 92F, the pre-requisite for commencing the TP exercise is to show the existence of an international transaction. The next step is to determine the price of such transaction. The third step would be to determine the ALP by applying one of the five price discovery methods specified in Section 92C. The fourth step would be to compare the price of the transac’s tion that is shown

Page 18 of 21 IT(TP)A Nos. 625/Bang/2017 & 1016/Bang/2019 to exist with that of the ALP and make the TP adjustment by substituting the ALP for the contract price. 15. Section 92B defines ‘international transaction’ as under: Meaning of international transaction. 92B(1): For the purposes of this section and sections 92, 92C, 92D and 92E, “international transaction” means a transaction between two or more associated enterprises, either or both of whom are non- residents; in the nature of purchase, sale or lease of tangible or intangible property, or provision of services, or lending or borrowing money, or any other transaction having a bearing on the profits, income, losses or assets of such enterprises, and shall include a mutual agreement or arrangement between two or more associated enterprises for the allocation or apportionment of, or any contribution to, any cost or expense incurred or to be incurred in connection with a benefit, service or facility provided or to be provided to anyone or more of such enterprises. (2) A transaction entered into by an enterprise with a person other than an associated enterprise shall, for the purposes ‘of subsection (1), be deemed to be a transaction entered into between two associated enterprises, if there exists a prior agreement in relation to’ the relevant transaction between such other person and the associated enterprise, or the terms of the relevant transaction are determined in substance between such other person and the associated enterprise.” Thus, under Section 92B(1) an ‘international transaction’ means- (a) a transaction between two or more AEs, either or both of whom are non-resident (b) the transaction is in the nature of purchase, sale or lease of tangible or intangible property or provision of service or lending or borrowing money or any other transaction having a bearing on the profits, incomes or losses of such enterprises, and

Page 19 of 21 IT(TP)A Nos. 625/Bang/2017 & 1016/Bang/2019 (c) shall include a mutual agreement or arrangement between two or more AEs for allocation or apportionment or contribution to the any cost or expenses incurred or to be incurred in connection- with the – benefit, service or facility provided or to be provided to one or more of such enterprises. Clauses (b) and (c) above cannot be read disjunctively. Even if resort is had to the residuary part of clause (b) to contend that the AMP spend of assessee is “any other transaction having a bearing” on its “profits, incomes or losses”, for a ‘transaction’ there has to be two parties. Therefore for the purposes of the ‘means’ part of clause (b) and the ‘includes’ part. of clause (c), the Revenue has to show that there exists an ‘agreement’ or ‘arrangement’ or’ ‘understanding’ between assessee and its AE, whereby assessee is obliged to spend excessively on AMP in order to promote the brand of AE in India. As far as the legislative intent is concerned, it is seen that certain transactions listed in the Explanation under clauses (i) (a) to (e) to Section 92B are described as an ‘International transaction’. This might be only an illustrative list, but significantly’ it does not list AMP spending as one such transaction. The Courts held that the existence of an international transaction will have to be established de hors the BLT, the – burden is on the Revenue to first show the existence of an international transaction. 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. Since a

Page 20 of 21 IT(TP)A Nos. 625/Bang/2017 & 1016/Bang/2019 quantitative adjustment is not permissible for the purposes of a TP adjustment under Chapter X, equally it cannot be permitted in respect of AMP expenses either. Be that as it may, we find that the DRP categorically observed that assessee has not furnished any documents to substantiate the argument of their existing no arrangement between assessee and the AE towards the brand promotion, which is beneficial to the AE. It is also observed by the DRP that assessee has not established that the AMP spend pertained to other segments also. Accordingly, in the interest of justice, we remand this issue to the Ld.AO/TPO to verify the aspect based on the documents/evidences submitted by the assessee. In the event the it is found that the expenditure is subsumed in net cost for computing margin, no separate adjustment needs to be made. Accordingly, this ground of appeal stands allowed for statistical purposes. 16. Grounds 19-21 are consequential in nature and therefore need not be adjudicated. In the result, appeal by the assessee for A.Y. 2012-13 and A.Y. 2014-15 stands partly allowed for statistical purposes. Order pronounced in the open court on 14th February, 2022.

Sd/- Sd/- (CHANDRA POOJARI) (BEENA PILLAI) Accountant Member Judicial Member Bangalore, Dated, the 14th February, 2022. /MS /

Page 21 of 21 IT(TP)A Nos. 625/Bang/2017 & 1016/Bang/2019 Copy to: 1. Appellant 4. CIT(A) 2. Respondent 5. DR, ITAT, Bangalore 3. CIT 6. Guard file

By order

Assistant Registrar, ITAT, Bangalore