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Income Tax Appellate Tribunal, DELHI ‘I-1’ BENCH,
Before: SHRI N.K. BILLAIYA, & SHRI N.K. CHOUDHARY
PER N.K. BILLAIYA, ACCOUNTANT MEMBER,
This appeal by the assessee is preferred against the order dated 30.10.2019 framed u/s 143(3) r.w.s. 144C of the Income tax Act, 1961 [hereinafter referred to as 'The Act' for short] pertaining to assessment year 2015-16.
The substantive grievances of the assessee can be divided into two parts viz:
(i) Additions made on account of TP issues, and (ii) Additions made on corporate issues.
The representatives of both the sides were heard at length, the case records carefully perused and with the assistance of the ld. Counsel, we have considered the documentary evidences brought on record in the form of PB in light of Rule 18(6) of ITAT Rules and have also perused the judicial decisions relied upon by both the sides
Briefly stated, the facts of the case are that the appellant is a wholly owned subsidiary of GBT III BV, Netherlands and is engaged in the business of arranging travel for domestic customers within and outside India by facilitating services entailing booking of air tickets, accommodation, cab, conference rooms, catering services, management of corporate events, public relation services etc. The holding company GBT III BV is a joint venture between American Express Company, USA (Amex, in short) and Certares LP effective from 01.07.2014, with each group holding 50% share in it. Prior to 01.07.2014, Global Business Travel (GBT), was the corporate travel segment of Amex.
In March 2014, as per an agreement entered into between Amex and GBT III BV, Amex spun off its travel business segment and transferred GBT assets, operations, employees and shares of certain Amex affiliates to GBT III BV. Pursuant to a business transfer agreement between American Express India Pvt Ltd (AEIPL) and the appellant, corporate travel business division of AEIPL was transferred to the appellant vide a slump sale on a going concern basis effective from 01.06.2014. In lieu of the same, the appellant had paid a consideration of Rs 45,48,85,303/- to AEIPL.
With this factual background, the following international transactions were done by the appellant with its AEs:
S. Amount (In Method Profit Level Description of the transactions Indicator Selectio INR) No (PLI) n Provision of operational and business support 12,19,13,731 TNMM OP/TC 1. services Provision of travel support services 128,112,973 2.
3. Provision of Transition Support services(Reverse 5,02,32,920 TSA) 4. Miscellaneous Income 7,55,047 r 5. OP/TC Reimbursement of data processing charges 44,85,990 TNMM 6. Incentive from travel supplier 17,38,94,891 7. Availing of Transition Support services (Forward 32,08,78,406 TSA) 8. Availing of Regional headquarter services(RHQ) 1,01,90,154 Issue of share capital 99,00,00,000 Other 9. method
Transaction no. 1 pertains to global business of the appellant for which it has earned 15% net profit and Transactions 2 to 8 pertain to India business for which the appellant has earned 13.4% net profit margin on cost. The income from the India business comprises of fee from corporate customers and non-negotiated revenue from airlines and hotels. Further, it receives support from the AE if it is unable to meet the targeted profit margins as per the Global Transfer Pricing Policy.
During the course of TP assessment proceedings, the TPO proposed additions on account of:
(a) Provision of operational and business support services amounting to Rs. 34,55,989/- by including / excluding certain comparable companies;
(b) Disallowance of availing forward TSA under a master transitional service agreement and Regional Headquarter
Services amounting to Rs.33,10,68,560/.
The TPO applied Comparable Uncontrolled Price (CUP) method to determine the arm’s length price to be NIL. The TPO was of the strong belief that the assessee has failed to provide any cogent evidence to demonstrate that services were received by the assessee and, according to the TPO, it is only a clandestine methodology adopted for collusion to shift the profits from Indian territory. The TPO further observed that the assessee has failed to establish any direct nexus between increase in business and profitability as a result of availing of these services. According to the TPO, the assessee did not gain any advantage or benefit as a result of availing of these services.
Therefore, the whole purpose of receiving these services is defeated.
The TPO further observed that the assessee itself was performing these services, hence there was no need for the appellant to avail services from its AEs. The TP adjustment carried out by the TPO can be understood from the following chart:
No. of Arm’s Margin of Quantum of Transaction the Compara- Length Addition (in Appellan bles Margin INR) t Provision of operational 7 18.26% 15% 34,55,989 and business support services Availing of Forward TSA 331,068,560 NA Nil NA and RHQ services
The assessee raised strong objections before the DRP but without any success.
Before us, the ld. counsel for the assessee vehemently stated that the TPO and the DRP have taken two contradictory views, in as much as, both of them have accepted the ALP of the fee received by the assessee and at the same time, disallowed fee paid under same Master TSA Agreement. It is the say of the ld. counsel for the assessee that once TNMM has been accepted as most appropriate method for transactions aggregated together, both the authorities grossly erred in picking out one international transaction and subjecting it to CUP method.
The ld. counsel for the assessee further stated that payment for availing forward TSA and RHQ services made by the assessee to its AEs forms cost base of the assessee. The global transfer pricing policy ensures that the assessee earns an assured margin of 3% of the net revenue. It is the say of the ld. counsel for the assessee that if forward TSA charges are taken to be NIL, profit margin of the assessee would exceed 40% of the costs, which is an absurdly high profit margin.
Per contra, the ld. DR vehemently supported the findings of the TPO. It is the say of the ld. DR that the assessee is not supporting its claim by way of demonstrative documentary evidence and emails correspondence filed by the assessee are very cryptic. Therefore, for want of documentary evidences, there is no error in the finding of the TPO>
We have given thoughtful consideration to the orders of the authorities below and the rival contentions. There is no dispute that TNMM has been accepted as the most appropriate method. It is equally true that the TPO has singled out one transaction and applied CUP as most appropriate method.
16. The Hon'ble High Court of Delhi in the case of Magneti Marelli Powertrain India Pvt Ltd 389 ITR 469 has held that when intra group services are linked to the main business activity of the company, they should be bench marked by adopting TNMM. The relevant findings of the Hon'ble High Court read as under:
17. As far as the second question is concerned, the TPO accepted TNMM applied by the assessee, as the most appropriate method in respect of all the international
transactions including payment of royalty. The TPO, however, disputed application of TNMM as the most appropriate method for the payment of technical assistance fee of Rs. 38,58,80,000 only for which Comparable Uncontrolled Price ("CUP") method was sought to be applied. Here, this court concurs with the assessee that having accepted the TNMM as the most appropriate, it was not open to the TPO to subject only one element, i.e payment of technical assistance fee, to an entirely different (CUP) method. The adoption of a method as the most appropriate one assures the applicability of one standard or criteria to judge an international ITA 350/2014 Page 20 transaction by. Each method is a package in itself, as it were, containing the necessary elements that are to be used as filters to judge the soundness of the international transaction in an ALP fixing exercise. If this were to be disturbed, the end result would be distorted and within one ALP determination for a year, two or even five methods can be adopted. This would spell chaos and be detrimental to the interests of both the assessee and the revenue. The second question is, therefore, answered in favour of the assessee; the TNMM had to be applied by the TPO/AO in respect of the technical fee payment too.”
In our considered opinion, the lower authorities erred in questioning the need and benefit arrived by the assessee from payment in respect of availing of services from its AE. All that is required to be seen is as to whether there was actual rendition of services or not. We have carefully gone through the emails and invoices placed in the paper book vis a vis TSA Agreement. In our considered opinion, these documentary evidences clearly show the rendition of services by the AE to the appellant company. Moreover, the TPO himself has accepted the fees received by the assessee from rendering these services. We fail to understand why the payments have been subjected to different treatments.
18. The Hon'ble High Court of Delhi in the case of EKL Appliances 345 ITR 241 has held that the TPO does not have power to adjudicate the allowance/disallowance of expenditure incurred by the assessee thereby demolishing the need and benefit derived by the assessee.
The relevant findings of the Hon'ble High Court read as under:
“15. It seems to us that the decision taken by the Tribunal is the right decision. The TPO applied the CUP method while examining the payment of brand fee/ royalty. The CUP method which in its expanded form is known as "comparable uncontrolled price" method is provided for in Rule 10B(1)(a) of the Income Tax Rules, 1962. It is one of the methods recognised for determining the ALP in relation to an international transaction. Rule 10B(1) says that for the purposes of Section 92C(2), the ALP shall be determined by any one of the five methods, which is found to be the most appropriate method, and goes on to lay down the manner of determination of the ALP under each method. The five methods recognized by the rule are (i) comparable uncontrolled price method (CUP), (ii) re-sale price method, (iii) cost plus method, (iv) profit split method and (v) transactional net marginal method (TNMM). The manner by which the ALP in relation to an international transaction is determined under CUP is prescribed in clause (a) of the sub-rule (1) of Rule 10B. The following three steps have been prescribed: -
"(a) comparable uncontrolled price method, by which,
(i) the price charged or paid for property transferred or services provided in a comparable uncontrolled transaction, or a number of such transactions, is identified;
(ii) such price is adjusted to account for differences, if any, between the international transaction and the comparable uncontrolled transactions or between the enterprises entering into such transactions, which could materially affect the price in the open market;
(iii) the adjusted price arrived at under sub- clause (ii) is taken to be an arm's length price in respect of the property transferred or services provided in the international transaction;"
The Organization for Economic Co-operation and Development („OECD‟, for short) has laid down "transfer pricing guidelines" for Multi-National Enterprises and Tax Administrations. These guidelines give an introduction to the arm‟s length price principle and explains article 9 of the OECD Model Tax Convention. This article provides that when conditions are made or imposed between two associated enterprises in their commercial or financial relations which differ from those which would be made between independent enterprises then any profit which would, but for those conditions, have accrued to one of the enterprises, but, by reason of those conditions, if not so accrued, may be included in the profits of that enterprise and taxed accordingly. By seeking to adjust the profits in the above manner, the arm‟s length principle of pricing follows the approach of treating the members of a multi-national enterprise group as operating as separate entities rather than as inseparable parts of a single unified business. After referring to article 9 of the model convention and stating the arm‟s length principle, the guidelines provide for "recognition of the actual transactions undertaken" in paragraphs 1.36 to 1.41. Paragraphs 1.36 to 1.38 are important
and are relevant to our purpose. These paragraphs are re- produced below: -
"1.36 A tax administration's examination of a controlled transaction ordinarily should be based on the transaction actually undertaken by the associated enterprises as it has been structured by them, using the methods applied by the taxpayer insofar as these are consistent with the methods described in Chapters II and III. In other than exceptional cases, the tax administration should not disregard the actual transactions or substitute other transactions for them. Restructuring of legitimate business transactions would be a wholly arbitrary exercise the inequity of which could be compounded by double taxation created where the other tax administration does not share the same views as to how the transaction should be structured. 1.37 However, there are two particular circumstances in which it may, exceptionally, be both appropriate and legitimate for a tax administration to consider disregarding the structure adopted by a taxpayer in entering into a controlled transaction. The first circumstance arises where the economic substance of a transaction differs from its form. In such a case the tax administration may disregard the parties' characterization of the transaction and re-characterise it in accordance with its substance. An example of this circumstance would be an investment in an associated enterprise in the form of interest-bearing debt when, at arm's length, having regard to the economic circumstances of the borrowing company, the investment would not be expected to be structured in this way. In this case it might be appropriate for a tax administration to characterize the investment in accordance with its economic substance with the result that the loan may be treated as a subscription of capital. The second circumstance arises where, while the form and substance of the transaction are the same, the arrangements made in relation to the transaction, viewed in their totality, differ from those which would have been adopted by independent enterprises behaving in a commercially rational manner and the actual structure practically impedes the tax administration from determining an appropriate transfer price. An example of this circumstance would be a sale under a long-term contract, for a lump sum payment, of unlimited entitlement to the intellectual property rights arising as a result of future research for the term of the contract (as previously indicated in paragraph 1.10). While in this case it may be proper to respect the transaction as a transfer of commercial property, it would nevertheless be appropriate for a tax administration to conform the terms of that transfer in their entirety (and not simply by reference to pricing) to those that might reasonably have been expected had the transfer of property been the subject of a transaction involving independent enterprises. Thus, in the case described above it might be appropriate for the tax administration, for example, to adjust the conditions of the agreement in a commercially rational manner as a continuing research agreement.
1.38 In both sets of circumstances described above, the character of the transaction may derive from the relationship between the parties rather than be determined by normal commercial conditions as may have been structured by the taxpayer to avoid or minimize tax. In such cases, the totality of its terms would be the result of a condition that would not have been made if the parties had been engaged in arm's length dealings. Article 9 would thus allow an adjustment of conditions to reflect those which the parties would have attained had the transaction been structured in accordance with the economic and commercial reality of parties dealing at arm's length."
17. The significance of the aforesaid guidelines lies in the fact that they recognise that barring exceptional cases, the tax administration should not disregard the actual transaction or substitute other transactions for them and the examination of a controlled transaction should ordinarily be based on the transaction as it has been actually undertaken and structured by the associated enterprises. It is of further significance that the guidelines discourage re-structuring of legitimate business transactions. The reason for characterisation of such re- structuring as an arbitrary exercise, as given in the guidelines, is that it has the potential to create double taxation if the other tax administration does not share the same view as to how the transaction should be structured.
Two exceptions have been allowed to the aforesaid principle and they are (i) where the economic substance of a transaction differs from its form and (ii) where the form and substance of the transaction are the same but arrangements made in relation to the transaction, viewed in their totality, differ from those which would have been adopted by independent enterprises behaving in a commercially rational manner.
19. There is no reason why the OECD guidelines should not be taken as a valid input in the present case in judging the action of the TPO. In fact, the CIT (Appeals) has referred to and applied them and his decision has been affirmed by the Tribunal. These guidelines, in a different form, have been recognized in the tax jurisprudence of our country earlier. It has been held by our courts that it is not for the revenue authorities to dictate to the assessee as to how he should conduct his business and it is not for them to tell the assessee as to what expenditure the assessee can incur. We may refer to a few of these authorities to elucidate the point. In Eastern Investment Ltd. v. CIT, (1951) 20 ITR 1, it was held by the Supreme Court that "there are usually many ways in which a given thing can be brought about in business circles but it is not for the Court to decide which of them should have been employed when the Court is deciding a question under Section 12(2) of the Income Tax Act". It was further held in this case that "it is not necessary to show that the expenditure was a profitable one or that in fact any profit was earned". In CIT v. Walchand & Co. etc., (1967) 65 ITR 381,
it was held by the Supreme Court that in applying the test of commercial expediency for determining whether the expenditure was wholly and exclusively laid out for the purpose of business, reasonableness of the expenditure has to be judged from the point of view of the businessman and not of the Revenue. It was further observed that the rule that expenditure can only be justified if there is corresponding increase in the profits was erroneous. It has been classically observed by Lord Thankerton in Hughes v. Bank of New Zealand, (1938) 6 ITR 636 that "expenditure in the course of the trade which is unremunerative is none the less a proper deduction if wholly and exclusively made for the purposes of trade. It does not require the presence of a receipt on the credit side to justify the deduction of an expense". The question whether an expenditure can be allowed as a deduction only if it has resulted in any income or profits came to be considered by the Supreme Court again in CIT v. Rajendra Prasad Moody, (1978) 115 ITR 519, and it was observed as under: -
"We fail to appreciate how expenditure which is otherwise a proper expenditure can cease to be such merely because there is no receipt of income. Whatever is a proper outgoing by way of expenditure must be debited irrespective of whether there is receipt of income or not. That is the plain requirement of proper accounting and the interpretation of Section 57(iii) cannot be different. The deduction of the expenditure cannot, in the circumstances, be held to be conditional upon the making or earning of the income."
It is noteworthy that the above observations were made in the context of Section 57(iii) of the Act where the language is somewhat narrower than the language employed in Section 37(1) of the Act. This fact is recognised in the judgment itself. The fact that the language employed in Section 37(1) of the Act is broader than Section 57(iii) of the Act makes the position stronger.
In the case of Sassoon J. David & Co. Pvt. Ltd. v. CIT, (1979) 118 ITR 261 (SC), the Supreme Court referred to the legislative history and noted that when the Income Tax Bill of 1961 was introduced, Section 37(1) required that the expenditure should have been incurred "wholly, necessarily and exclusively" for the purposes of business in order to merit deduction. Pursuant to public protest, the word "necessarily" was omitted from the section.
21. The position emerging from the above decisions is that it is not necessary for the assessee to show that any legitimate expenditure incurred by him was also incurred out of necessity. It is also not necessary for the assessee to show that any expenditure incurred by him for the purpose of business carried on by him has actually resulted in profit or income either in the same year or in any of the subsequent years. The only condition is that the expenditure should have been incurred "wholly and exclusively" for the purpose of business and nothing more. It is this principle that inter alia finds expression in the OECD guidelines, in the paragraphs which we have quoted above.
22. Even Rule 10B(1)(a) does not authorise disallowance of any expenditure on the ground that it was not necessary or prudent for the assessee to have incurred the same or that in the view of the Revenue the expenditure was unremunerative or that in view of the continued losses suffered by the assessee in his business, he could have fared better had he not incurred such expenditure. These are irrelevant considerations for the purpose of Rule 10B. Whether or not to enter into the transaction is for the assessee to decide. The quantum of expenditure can no doubt be examined by the TPO as per law but in judging the allowability thereof as business expenditure, he has no authority to disallow the entire expenditure or a part thereof on the ground that the assessee has suffered continuous losses. The financial health of assessee can never be a criterion to judge allowability of an expense; there is certainly no authority for that. What the TPO has done in the present case is to hold that the assessee ought not to have entered into the agreement to pay royalty/ brand fee, because it has been suffering losses continuously. So long as the expenditure or payment has been demonstrated to have been incurred or laid out for the purposes of business, it is no concern of the TPO to disallow the same on any extraneous reasoning. As provided in the OECD guidelines, he is expected to examine the international transaction as he actually finds the same and then make suitable adjustment but a wholesale disallowance of the expenditure, particularly on the grounds which have been given by the TPO is not contemplated or authorised.
23. Apart from the legal position stated above, even on merits the disallowance of the entire brand fee/ royalty payment was not warranted. The assessee has furnished copious material and valid reasons as to why it was suffering losses continuously and these have been referred to by us earlier. Full justification supported by facts and figures have been given to demonstrate that the increase in the employees cost, finance charges, administrative expenses, depreciation cost and capacity increase have contributed to the continuous losses. The comparative position over a period of 5 years from 1998 to 2003 with relevant figures have been given before the CIT (Appeals) and they are referred to in a tabular form in his order in paragraph 5.5.1. In fact there are four tabular statements furnished by the assessee before the CIT (Appeals) in support of the reasons for the continuous losses. There is no material brought by the revenue either before the CIT (Appeals) or before the Tribunal or even before us to show that these are incorrect figures or that even on merits the reasons for the losses are not genuine.
24. We are, therefore, unable to hold that the Tribunal committed any error in confirming the order of the CIT (Appeals) for both the years deleting the disallowance of the brand fee/ royalty payment while determining the ALP. Accordingly, the substantial questions of law are answered in the affirmative and in favour of the assessee and against the Revenue. The appeals are accordingly dismissed with no order as to costs.”
Considering the facts of the case in totality in light of the judicial decisions referred to hereinabove, we do not find any merit in the TP adjustment of Rs. 33,10,68,560/-. The Assessing Officer/TPO is, accordingly, directed to delete the same. Grounds relating to TP adjustments with all its sub grounds are allowed.
20. Now we will address to the corporate tax additions. First addition is in respect of disallowance of depreciation on good will amounting to Rs. 10,93,97,864/-.
As mentioned elsewhere, the assessee had entered into a Local Business Transfer Agreement with AMEX on 01.06.2014 to acquire its Corporate Travel Division. The said division was acquired on a slump sale as a going concern basis and was part of a global restructuring exercise. The appellant company had paid a consideration of Rs. 45,48,85,303/- towards the acquisition of Corporate Travel Division, which comprised of net assets worth Rs. 1,72,93,846/-. The consideration paid over and above the value of net assets acquired was accounted as ‘good will’ and, accordingly, depreciation was claimed on the same.
In support of this transaction, the assessee submitted a valuation report obtained by Amex dated 09.06.2014 wherein the fair valuation of various assets/business divisions to be transferred to various GBT entities worldwide was determined. The said report provided the fair valuation of the corporate division of Amex at USD 7.7 million as on 31.12.2013 for slump sale. Another report from an independent valuer was also obtained who confirmed the value of Corporate Travel Division of Amex at Rs. 45,48,85,404/- and pursuant to this, the assessee paid consideration of Rs. 45,48,85,303/-.
Another report was also obtained dated 25.07.2014 from the local valuer for supporting the consideration paid for acquiring corporate travel division. The said valuation report had estimated the fair value of the corporate travel division to be in the range of 47.11 crores to 50.72 crores as on 01.06.2014. All these valuation reports are part of the paper book.
At this point, it would be pertinent to mention that Amex has paid capital gain tax on receiving consideration of Rs. 45,48,85,404/-.
The main reason for dismissing the claim of depreciation by the Assessing Officer is that in none of the valuation reports, good will has been separately mentioned.
Objections raised by the assessee before the DRP were dismissed.
Before us, the ld. counsel for the assessee reiterated what has been stated before the lower authorities.
The ld. DR strongly supported the findings of the Assessing Officer.
We have given thoughtful consideration to the orders of the authorities below and have carefully gone through the valuation reports mentioned elsewhere, which are part of the paper book filed before us. It is true that in none of the valuation reports, goodwill has been separately valued. But it is equally true that the assessee has paid consideration over and above the fair value of the assets of Amex.
In our considered opinion, differential amount represents payment towards goodwill.
We do not concur with the observations of the DRP that the assessee, with the motive of reducing profits in form of depreciation, had entered into this transaction. In our considered view, no prudent business man would pay a sum of Rs. 45.48 crores to claim depreciation of Rs. 10.93 crores over a period of five years, not to mention that the Amex have confirmed that they have paid capital gain tax on the consideration paid by the assessee to acquire Corporate Travel Division.
Further, we find that the Assessing Officer has confused himself with the valuation report of the independent valuer with another report wherein the value of the transferred business had been determined at negative value of Rs. 1.9 million. We find that this valuation report was prepared only for FEMA purposes to justify the determination of price of shares issued by the assessee to its share holders.
In so far as the depreciation of good will is concerned, this issue is by now well settled by the decision of the Hon'ble Supreme Court in the case of Smifs Securities Ltd 348 ITR 203 wherein the Hon'ble Apex Court has held that good will acquired on amalgamation [being the difference between cost of assets and consideration paid] is a capital right and thus eligible for depreciation u/s 32 of the Act.
Considering the facts of the case in totality, in the light of decision of the Hon'ble Supreme Court [supra], we direct the Assessing Officer to allow claim of depreciation. This ground is, accordingly, allowed.
Next disallowance relates to claim of bad debts amounting to Rs. 2,25,26,524/-.
Facts relating to this grievance show that in the acquisition of corporate travel division, the assessee had also acquired receivables of Rs. 37.04 crores besides other assets and liabilities. Out of these receivables, the assessee was unable to recover Rs. 2.25 crores from certain parties. The same was written off as bad debts in the profit and loss account.
During the course of scrutiny assessment proceedings, the Assessing Officer noticed that the bad debts are related to very brand conscious entities, which by no stretch of imagination can be made as bad debts. The Assessing Officer further observed that the assessee has not furnished convincing explanation for considering these entities as bad debts. The Assessing Officer issued notice u/s 133(6) of the Act to Amex and on receiving no reply, disallowed the claim of bad debts which was upheld by the DRP.
There is no dispute that on the acquisition of Corporate Travel Division, the appellant company also acquired receivables. It is also not in dispute that out of the receivables, the receivables amounting to Rs. 2.25 crores from certain parties could not be recovered. It is a settled proposition of law that to claim bad debt, all that is required for the assessee is to actually write off the debts in his books of account. The receivables written off by the appellant company were erstwhile receivables to Amex duly reflected in their balance sheet and, therefore, it can be safely presumed that the receivables were part of business profits of the Amex.
In our considered opinion, the assessee has successfully discharged its onus and has fulfilled the conditions laid down u/s 36 of the Act. We, therefore, do not find any reason why the write off of bad debts should not be allowed. We, accordingly, direct the Assessing Officer to allow the claim of bad debts.
Other grounds are consequential in nature.
In the result, the appeal of the assessee in is allowed.
The order is pronounced in the open court on 31.01.2020.