M/S. CISCO SYSTEMS CAPITAL (INDIA) PRIVATE LIMITED,BANGALORE vs. ASSISTANT COMMISSIONER OF INCOME TAX,SPECIAL RANGE-2, BANGALORE

PER BEENA PILLAI, JUDICIAL MEMBER Present appeal has been filed by assessee against order dated 28/10/2019 passed by Ld.AO under section 143 (3) for assessment year 2015-16 on following grounds of appeal:-

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Brief facts of the case are as under: 2. The assessee is a private limited company incorporated under the provisions of Companies Act 1956, and registered as a non-banking financial company with the RBI of India. Assessee is responsible for providing end to end financial solutions to the customers of Cisco in India by variety of financing options. Primarily, operations of assessee comprises of providing finance to third-party customers by way of operating lease agreements, finance lease agreements and loans to purchase networking equipment from Cisco SI BV/third-party resellers.

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2.1. For the year under consideration, assessee filed its return of income declaring ‘nil’ income on 29/11/2015 after setting off brought forward losses. The case was selected for scrutiny and relevant statutory notices were issued to the assessee. Subsequently, the assessee filed revised return of income on 28/03/2017 declaring ‘nil’ total income after setting off brought forward losses. The Ld.AO observed that assessee had international transaction of Rs.10 crore or more in earlier assessment year and the issue was pending in appeal. Accordingly, the relevant assessment year was referred to transfer pricing officer for computing the arm’s length price as per provisions of section 92CA of the Act. 2.2. Upon receipt of reference, the Ld.TPO called for economic details of the international transaction entered into between assessee and its AE. The Ld. TPO on verification of the details filed by assessee, did not make any adjustment to the international transaction entered into by assessee. However, in relation to the specified domestic transaction pertaining to administration support services availed from the domestic AE that is Cisco Systems India Pvt. Ltd. (hereinafter referred to as CISCO India). The Ld. TPO called upon assessee to show cause as to why the combined transaction approach method adopted by the assessee should not be rejected. The

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Ld.TPO recharacterised the administrative support service payment made to Cisco India by assessee is a transaction entered into, pursuant to an understanding between assessee, Cisco India and the AE. The Ld.TPO rejected the combined transaction approach method adopted by assessee for the following reasons:- • The specified domestic transaction in relation to payment by the assessee towards fees for administrative support services to Cisco India is on account of indirect rendering of marketing and sales support services to the AE, pursuant to understanding between assessee, Cisco India and the AE. • The transaction in relation to payment towards fees for administrative support service to Cisco India was to be analysed separately but the same was not carried out and was aggregated with leasing services. • The margins of the same were not computed and as such the TPO proposed 6 companies as comparables with OP/OC as the PLI with median of 10.21%.

2.3. The comparables selected by the Ld.TPO are as under:- Sl. Name of the comparable Average % No. 1 Asian Business Conferences Ltd. - 48.11

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exhibitions 2 Goldmine Advertising Ltd. 4.89 3 Concept Public Relations India Ltd. 7 4 Pressman Advertising Ltd. 13.42 5 Scarecrow Communications Ltd. 23.53 6 Killick Agencies and Marketing Ltd. 24.17 35th Percentile 7% 50th Percentile 10.21% 65th Percentile 13.42% 2.4. The Ld.TPO thus proposed an adjustment of Rs.13,88,20,763/- by considering the ALP of assessee at 10.21% in relation to the Administrative Support Service. 2.5. Upon receipt of the Transfer Pricing order passed by the Ld.TPO, the Ld.AO passed the draft assessment order on 17/12/2018 under section 143(3) read with section 144C(1) of the Act by making: • Disallowance of depreciation claimed by assessee on assets leased out, under the finance lease arrangement amounting to Rs.58,51,55,196/-. • Disallowance of set off of brought forward depreciation loss amounting to Rs.112,07,33,348/-. 2.6. On receipt of the draft assessment order, assessee filed objections before the DRP. Before DRP assessee filed additional evidences. However the DRP following its order for assessment year 2011-12 to 2014-15, upheld disallowance of depreciation claimed by assessee on assets leased out under finance lease arrangement. The DRP also rejected the alternate plea of assessee to grant depreciation on the opening WDV of the

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block of assets leased out under finance lease arrangement. 2.7. The DRP further disallowed set off of brought forward depreciation loss by following its own order for assessment year 2009-10 to 2014-15. 2.8. In respect of the Transfer Pricing adjustment, the DRP excluded one comparable, being M/s Asian Business Conference Exhibitions Ltd. The DRP observed as under:- “The DRP on analyzing the group overview and TP documentation maintained, has concluded that Cisco Capital only assumes routine market risk associated with Interest and capital risk and does not bear market risk for product sales. Further the DRP has also stated that the FAR analysis of the Appellant and AEs indicate that marketing functions and market risks are borne by the manufacturing entity CSI BV and marketing function is not envisaged for Cisco Capital. The DRP has stated that all the intangibles developed from the marketing efforts incurred through Cisco Capital belong to CSI BV, though the expenses relating thereto are borne by Cisco Capital and an independent third party would not bear such costs without adequate compensation towards costs and services provided. Having said so, the DRP held that the TPO is justified in analyzing the transaction separately, as the compensation towards marketing function cannot be examined in combination with the leasing activity and therefore the segregated approach of the TPO and consequent fresh analysis is upheld. In relation to the plea of the Appellant that the fees paid to Cisco India in relation to the administrative and marketing & sales support services has been considered as operating in nature while analyzing the leasing activity transaction and accordingly the same is to be considered to be at arm's length, the DRP held that the Appellant is not prejudiced by the same as the leasing transaction has already been found to be at Arm's Length.”

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2.9. On receipt of the DRP directions, the Ld.AO passed final assessment order by making addition of Rs.1,85,02,38,966/-. Aggrieved by the order passed by the Ld.AO, assessee preferred appeal before this Tribunal. 3. Ground No.1-2 is raised challenging disallowance of depreciation on assets given under finance lease. 3.1. The Ld.AR at the outset submitted that coordinate bench of this Tribunal in assessee’s own case for assessment year 2011-12 and 2013-14 in IT(TP)A No.219/B/2018 and 688/B/2016 dated 07/06/2019 considered similar issue by following decision of Hon’ble Supreme Court in case of ICDS vs CIT in Civil Appeal No.3282 of 2008. Subsequently, for assessment year 2014-15 in IT(TP)A No.149/Bang/2019 by order dated 29/05/2020 and for assessment year 2012-13 in ITA (TP) A No. 180/Bang/2017 by order dated 09/10/2020, this Tribunal had remanded the issue back to ld. AO for fresh decision after verifying if the terms and conditions mentioned in the lease agreement are similar to the terms and conditions that are mentioned by Hon’ble Apex Court in case of ICDS vs CIT (supra). It was directed by this Tribunal that in the event there is no material variation in the context, then depreciation must be granted to assessee as claimed.

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3.2. As the department has not been able to bring out any factual difference for the year under consideration vis-a- vis the preceding assessment years, we also remand this issue back to the Ld.AO with similar direction. Accordingly these ground raised by assessee stands allowed for statistical purposes. 4. Ground No. 3 is raised against not allowing set off of brought forward depreciation loss. 4.1. The Ld.AR submitted that, in the return of income filed by assessee, it had claimed set off of brought forward depreciation of loss amounting to Rs.28,54,47,236/- pertaining to assessment year 2009-10 and Rs.83,52,86,117/- pertaining to assessment year 2013- 14, totalling to Rs.1,12,07,33,535/-. The Ld.AO while passing the draft assessment order denied the claim of assessee. The Ld.AO while passing final assessment order noted that that on completion of assessment for assessment year 2008-09, 2009-10 and 2013-14, the income has resulted in positive, and therefore no set-off of brought forward losses is available for assessee for the said years. 4.2. The Ld.AR submitted that, the Ld.AO has not given effect to the orders (hereinafter referred to as OGE) passed by coordinate bench of this Tribunal for assessment years 2008-09, 2009-10 and 2013-14.

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4.3. The Ld.CIT.DR placed reliance on orders passed by authorities below. We have perused the details placed on record in light of submission advanced by both sides. 4.4. We note that, as the OGE to the orders passed by this Tribunal in the preceding assessment years are pending with Ld.AO, the relief granted by this Tribunal was not available with the Ld.AO while passing the impugned order for year under consideration. It is noted that the ld. AO does not dispute regarding availability of set off of brought forward loss to assessee if any in the preceding year while computing income for the year under consideration. Therefore, set off of brought forward losses is to be granted, if there is loss for assessment years 2008-09, 2009-10 and 2013-14, after passing the OGE to the orders of this Tribunal for assessment years2008-09, 2009-10 and 2013-14. 4.5. We accordingly direct the Ld.AO to pass the order giving effect to all the previous years from assessment year 2008-09 to assessment year 2014-15 and thereafter to provide the set off of brought forward losses. Accordingly, this ground raised by assessee stands allowed for statistical purposes. 5. Ground No. 4 is against the transfer pricing addition made on account of re-characterisation of payment made

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towards administration and support services by assessee to Cisco India. 5.1. Primarily, the Ld.AR of assessee objected for considering the specified domestic transaction within the ambit of section 92B of the Act. It has been submitted that clause (i) of 92BA stands admitted by virtue of amendment in Finance Act, 2017, with effect from the 01/04/2017, and accordingly, the transaction under consideration would fall out of the ambit of applicability of transfer pricing provisions. 5.2. The Ld.AR gave brief background of the transaction as under: It has been submitted that, assessee is in the business of financing the purchase of networking equipment under operating/Finance leasing arrangements or by way of loan for purchase of networking equipment. It is submitted that in the scenario of third-party customer services, the customers approach the AE/third-party resellers to purchases for equipments and negotiate on price and other terms and conditions. Where such 3rd parties have sufficient funds to purchase equipment, the third-party customers would make an outright purchase of equipment. In the event the third-party customers to not have sufficient funds for the purchase, they would consider the option to take loan financing/lease financing

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approach. It has been submitted that the customer may either choose to avail such services from a third-party financer or approach assessee to finance the equipment by way of loan/lease. 5.3. It has been submitted by the Ld.AR that the third- party customers are not obliged to avail such financing services from assessee exclusively, and it is the discretion of the customer to decide whether they want to avail lease/loan financing arrangement from assessee or other financers. 5.4. The Ld.AR vehemently submitted that assessee is an independent entity and acts in the capacity of an enterprise in the business of providing leasing and financing services to the third-party customers. It is also submitted that assessee bears all the entrepreneurial risk associated with its business and therefore responsible for all the functions integral to the leasing/financing business of Cisco. He submitted that since assessee do not have its own staff/employees, it avails services of Cisco India for administrative, marketing and sales support services like accounting, data processing, helping marketing and promotion on financial services. It was submitted that, assessee entered into agreement with Cisco India in order to avail administrative support services and marketing and sales support services which

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was in the nature of outsourcing of services by Cisco India for promotion and marketing of assessee’s own business, which is leasing and financing services. It is also submitted that, the customer base of assessee comprises only of third-party customers who purchase networking equipment either from third-party resellers or Cisco group entities. It was thus submitted that Cisco India provides necessary administrative and marketing and sales support services required to carry out the day-to-day affairs of business of assessee. And that the said services enable functioning of the business of assessee smoothly. It was submitted that, for such services rendered by Cisco India, assessee paid sum of Rs.12,59,60,224/- based on cost plus arrangement and the same was disclosed as a specified domestic transaction in Form 3CEB. 5.5. It has been submitted that, it is neither an international transaction, nor could be deemed to be an international transaction. He submitted that it is a transaction between two domestic entities. 5.6. It has been submitted by the Ld.AR that, section 92B of the Act covers the transaction which actually exists between two associated enterprises and that the provision that does not deal with an hypothetical transaction and therefore the authorities below cannot presuppose an international transaction between assessee and its

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associated enterprises. In support of, the Ld.AR placed reliance on decision of Hon’ble Delhi High Court in case of Maruti Suzuki India & Anr. vs CIT & Anr. reported in (2015) 129 TTR 25. The ratio laid down in this decision has been followed in the decision of Hon’ble Pune Tribunal in case of Dover India Pvt. Ltd. vs DCIT in ITA No.411/PUN/2014. 5.7. Ld.AR thus submitted that, the arrangement between assessee and Cisco India for availing of administrative support services and marketing support services since assessee do not have employees or administrative setup lease a bona fide arrangement between the two, and the same cannot be treated as an international transaction under section 92B of the Act. 5.8. The next proposition argued by the Ld.AR was that, the bundled approach for benchmarking the transaction is to be accepted as the transaction of purchase of equipment from the AE by assessee for financing arrangement is held to be at arms length by the Ld.TPO. It is also been submitted that the marketing and sales support services availed by assessee from Cisco India is integral to the main business of assessee and the same has to be considered as a closely linked transaction to the principle transaction that is leasing services. Such combined transaction has been adopted by considering

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the entity level TNMM as most appropriate method and the subject payment has been determined to be at arm’s length in the Transfer Pricing documentation. Ld.AR also submitted that the PLI adopted by assessee is OP/OE wherein while computing the operating profits the impugned payment made to Cisco India has been considered as operating expenditure. 5.9. He thus submitted that the Ld.TPO has already considered the above expenditure towards administrative and marketing and sales support services as an operating expenses while computing the margin of assessee which is consistently accepted by the Ld.TPO in the preceding assessment years. It has been submitted by the Ld.AR that the Ld.TPO has already accepted the margin of assessee at 6.62% as against the comparables at 7.75% which falls within +3% in respect of the international transaction being, purchase of networking equipment for release by assessee from the AE. 5.10. The next submission made by the Ld.AR was against considering the administrative/selling expenses as a part of AMP expenses. It has been submitted that these expenses are incurred by assessee for carrying out day-to-day business activities and for general administrative and management of the company in the

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nature of travel expenses, salary, infrastructure facilities etc which cannot be treated as marketing expenses. 5.11. On the contrary the Ld. CIT DR relied on orders passed by authorities below. 5.12. We have perused submissions advanced by both sides in light of records placed before us. The Ld.AR had raised a preliminary issue regarding the concerned transaction not falling within the ambit of transfer pricing provisions. In this context, reference was made to coordinate bench of this Tribunal in case of M/s Texport Overseas Pvt. Ltd vs DCIT in IT(TP)A No. 2213/B/2018 by order dated 12/09/2018 wherein, this Tribunal only referred to the omission of clause (i) to section 92BA by virtue of Finance Act 2017. The said clause was omitted w.e.f. 01/04/2017. Coordinate bench of this Tribunal relied on the decision of Hon’ble Supreme Court in case of Kolhapur Canesugar Works Ltd. and General Finance Co. vs ACIT. 5.13. Hon’ble Supreme Court in these cases examined the status of pending proceedings, where, a provision in the rule has been omitted. Hon’ble Supreme Court categorically laid down that, if there is a provision by way of a saving clause considering situation of pending proceedings, then, such pending proceedings shall

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continue and be disposed of under the old Rule, as if, such Rule has not been deleted or omitted. 5.14. We note in case of M/s Texport overseas Pvt. Ltd vs DCIT (supra) provision of section 40A has not been considered, wherein, a corresponding amendment took place by way of Finance Act, 2017. The omitted provision under section 92BA read as under: “(i) any expenditure in respect of which payment has been made or is to be made to a person referred to in clause (b) of subsection (2) of section 40A”. We now refer to proviso to section 40A, that is inserted by Finance Act 2017 w.e.f. 01/04/2016 that reads as under: “Provided that foreign assessment year commencing on or before 1st day of April, 2016 no disallowance, on account of any expenditure being excessive or unreasonable having regard to the fair market value shall be made in respect of a specified domestic transaction referred to in section 92BA, if such transaction is at arms length price as defined in clause (ii) of section 92F”. 5.15. On combined reading of the omitted provisions and the inserted proviso to section 40A, it is amply clear that the new proviso to section 40A is a saving clause by virtue of which, any specified transaction on or before 01.04.2016 has to be tested as per the provisions of section 92C. 5.16. We therefore respectfully following the ratio laid down by Hon’ble Supreme Court in case of Kolhapur Canesugar works Ltd. and General Finance Co. vs ACIT, hold that as the transaction under consideration is prior

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to 1/04/2016, has to pass through the tests laid down under the Transfer Pricing provisions. Accordingly ground for raised by assessee stands dismissed. 6. Grounds 5-10: These grounds are considered together as these are 3 propositions argued by the Ld.AR. 6.1. On going through the business scenario explained by the Ld.AR, assessee purchases goods from its AE which is sold to third-party customers who approach assessee for financial assistance for purchasing Cisco equipments. As assessee do not have its own staff, Cisco India provides administrative support services and marketing and sales support services. It has been submitted that assessee is an entrepreneur performing independent function for providing financing/leasing of Cisco equipments for third- party customers. 6.2. The question that arises in this present scenario whether assessee could have deployed its own employees for the day to day administrative functions and marketing services on its own. The query being raised by the bench, the Ld.AR submitted that, assessee sought administrative assistance and marketing and sales support assistance from Cisco India for ease of business. As Cisco India already had its own manpower which could be utilised for carrying out day-to-day activities of assessee.

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6.3. In our view, being a full-fledged entrepreneur, there was no need for assessee to seek assistance from Cisco India and could have employed its own employees to carry out all such administrative and marketing and sales support functions. In the Transfer Pricing documents, nothing is placed on record to establish the need of such assistance as assessee had its own infrastructure facilities. 6.4. The Ld.AR submitted that there are bundled transactions inextricably linked with leasing activities. The Ld.AR submitted that, the expenses incurred by assessee by way of payment made to Cisco India is subsumed in the operating expenses considered for computing arm’s length price of international transaction between assessee and its associated enterprise, wherein Cisco equipments were purchased by assessee from AE for leasing. The Ld.AR submitted by way of oral and written submissions that not all third-party customers, approach assessee for financing activities and that, such third-party customers enter into transaction first with AE for purchase of Cisco equipments directly. 6.5. We have analysed the business working model of assessee. Many issues remain unascertained are as under:-

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• Are there third party customers to whom assessee sells the products directly? • Are the third party customers referred to hereinabove restricted to Indian customers? 6.6. In our view the transaction needs to be bench marked separately and there has to be a segregation based on the customers who approach assessee for financing/leasing after entering into agreement with the AE, and the leasing/financing activity that assessee has with the third-party customers independently. In our view, only such services that assessee is rendering to third-party for assisting them in financing/leasing, wherein the third-party directly enter into agreement with the AE could be considered to be interlinked with the international transaction entered into by assessee with its AE. 6.7. It is also an admitted fact that assessee has been carrying out these activities in a bundled format in the preceding years which has not been objected by the Ld.TPO/AO. Further that all these expenses incurred by assessee towards administrative expenses and sales and marketing expenses stands subsumed in the operating expenses under TNMM for computing the arm’s length margin of the international transaction, a separate benchmarking may not be necessary. However all these

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things deserves verification at the end of Ld.AO/TPO. The Ld.AO/TPO shall verify the transactions as indicated hereinabove. In the event the expenses are subsumed under TNMM we do not find any necessity for a separate benchmarking. Accordingly these grounds raised by assessee stands allowed for statistical purposes. Ground No.11-12 are the alternative argument raised by assessee which becomes academic now. Ground No.13 is consequential and therefore do not require any adjudication. In the result appeal filed by assessee stands allowed for statistical purposes. Order Pronounced on this day of 8th April, 2021. Sd/- Sd/- ( CHANDRA POOJARI ) ( BEENA PILLAI ) ACCOUNTANT MEMBER JUDICIAL MEMBER

Bangalore, Dated, the 8th April, 2021. /Desai S Murthy / cpy: VMS

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Copy to:

By order

Assistant Registrar ITAT, Bangalore.