AT & T GLOBAL NETWORK SERVICES (INDIA) PRIVATE LIMITED,NEW DELHI vs. ACIT SPECIAL RANGE-1, NEW DELHI

आदेश आदेश / ORDER आदेश आदेश PER SUSHMA CHOWLA, JM: The appeal filed by assessee is against order of Assessing Officer dated 28.06.2019 relating to assessment year 2015-16 against the order passed under section 144 r.w.s 143(3) of the Income-tax Act, 1961 (in short ‘the Act’).

2. The assessee has raised following grounds in this appeal:-

Transfer Pricing Grounds

That on the facts and circumstances of the case, and in law, the Ld. AO (following the directions of the Ld. DRP), erred on facts and in law in enhancing the income of the Appellant by INR 11,30,68,317/- and holding that the international transaction pertaining to payment of royalty does not satisfy the arm's length principle envisaged under the Act, and in doing so have grossly erred in: 2.1. rejecting the combined transaction approach of benchmarking adopted by the Appellant in its TP documentation (i.e. aggregating payment of royalty, availing of intra-group services with provision of network support services) and proceeding to determine the arm's length price of international transaction pertaining to payment of royalty from its AEs on a standalone basis by rejecting TNMM as the most appropriate method; 2.2. holding that the Appellant did not receive tangible benefit in lieu of the payment of royalty thereby challenging the commercial wisdom of the Appellant in making payment for royalty and passing the order in contrast with the recent judicial pronouncements in this regard; 2.3. erroneously holding that the Appellant is incurring losses at the net level and that as per the facts of the case of the Appellant, no independent party would have made a payment for royalty; 2.4. disregarding the judicial pronouncement/ finding of the Hon'ble ITAT in Appellant's own case for the AY 2009-10, AY 2010- 11 and AY 2013-14 and merely placing reliance on past year orders passed by the DRP; 2.5. arbitrarily rejecting the supplementary analysis using Comparable Uncontrolled Price ('CUP') method to benchmark the payment of royalty transaction submitted by the Appellant without giving any cogent reasons; 2.6. undertaking fresh benchmarking analysis using Royaltystat database and selecting agreements which are not comparable to the royalty payment made by the Appellant to its AEs. 2.7. not providing the detailed search process along with backup documentation such as accept-reject matrix to provide Appellant an opportunity to evaluate the appropriateness of the benchmarking analysis.

3. Disallowance of circuit accruals 3.1. On the facts, in circumstances of the case and in law, the Ld. AO/DRP erred in making a disallowance of INR 10,95,20,722 on account of circuit accruals created towards bandwidth and last mile services availed by the Appellant company, ignoring that the accruals were based on a reasonable and scientific basis.

3.2. On the facts, in circumstances of the case and in law, the Ld. AO failed to appreciate that the Appellant follows mercantile system of accounting and accrues circuit charges on scientific basis. 3.3. On the facts, in circumstances of the case and in law, the Ld. AO/DRP failed to appreciate that as per the accounting standards notified under section 145(2) of the Act, the Appellant was required to make provision for circuit accruals for the subject financial year. 3.4. On the facts, in circumstances of the case and in law, the Ld. AO/DRP erred in not appreciating that the Appellant produced evidences to the extent of more than 99.50% for utilisation/reversal made in subsequent years and no adverse finding has been given by Ld.AO/DRP on the same. 3.5. On the facts, in circumstances of the case and in law, the Ld. AO/DRP erred in ignoring the claim of reversals of circuit accruals of INR 10,88,55,005 made in the subsequent years, submitted before the Ld. AO/DRP. 3.6. Without prejudice to the above, on the facts, in circumstances of the case and in law, where any disallowance is made in respect of the aforesaid accruals for the year under consideration, deduction in respect of the disallowed amount should be allowed in the subsequent year(s) in which such accruals were reversed or utilised. 3.7. On the facts, in circumstances of the case and in law, the Ld.AO/DRP erred in ignoring that the aforesaid disallowance of circuit accruals has been deleted by the Hon'ble ITAT in Appellant's own case for assessment years 20(18-09 to AY 2014-15. Therefore, any disallowance on account of circuit accrual is not tenable.

4. Disallowance of year-end accruals

4.1. On the facts, in circumstances of the case and in law, the Ld. AO/DRP erred in making a disallowance of INR 100,82,744 on account of year-end accruals representing accruals created towards normal business expenditure incurred by the Appellant ignoring that the accruals were based on a reasonable basis. 4.2. On the facts, in circumstances of the case and in law, the Ld. AO/DRP failed to appreciate that as per the accounting standards notified under section 145(2) of the Act, the Appellant was required to make provision for all liabilities/expenses for the subject financial year. 4.3. On the facts, in circumstances of the case and in law, the Ld. AO/DRP erred in not appreciating that the Appellant produced evidences to the extent of more than 99.99% for utilisation/reversal made in subsequent years and no adverse finding has been given by Ld.AO/DRP on the same. 4.4. On the facts, in circumstances of the case and in law, the Ld. AO/DRP erred in ignoring the claim of reversals of year end accruals of INR 1,40,69,895 made in the subsequent years, submitted before the Ld. AO/DRP. 4.5. Without prejudice to the above, on the facts, in circumstances of the case and in law, where any disallowance is made in respect of the aforesaid accruals for the year under consideration, deduction in respect of the disallowed amount should be allowed in the subsequent year(s) in which such accruals were reversed or utilized. 4.6. On the facts, in circumstances of the case and in law, the Ld.AO/DRP erred in ignoring that the aforesaid disallowance of year- end accruals has been deleted by the Hon'ble ITAT in Appellant's own case for AY 2010-11 to AY 2014-15.

Therefore, any disallowance on account of year-end accrual is unjustified. 5. Disallowance of Support Service Expenditure 5.1. On the facts, in circumstances of the case and in law, the Ld. AO/DRP erred in disallowing the legitimate business expenditure being in the nature of support service expenses of INR 10,22,08,983 paid to AT&T' Communication Services India Private Limited ('ACSL). 5.2. On the facts, in circumstances of the case and in law, the Ld. AO/DRP erred in not taking cognizance of the submissions made by Appellant and the documentary and circumstantial evidence/ proof produced by the Appellant, which duly substantiate that support services were rendered by ACSI to the Appellant company. 5.3. On the facts, in circumstances of the case and in law, the Ld.AO/DRP erred ignoring that the aforesaid disallowance on account of support service expenditure has been deleted by the Hon'ble ITAT tor assessment years 2008-09, 2009-10, 2010-11 and 2011-12.

6. Disallowance of annual revenue share based license fee

6.1. On the facts, in the circumstances of the case and in law, the Ld. AO/DRP erred n disallowing an amount of INR 44,57,84,302 (being disallowance of expense debited in AY 2015-16 amounting to INR 62,97,33,498 less credit of 1NR 5,24,77,792 being 12th part of disallowance in AY 2015-16 and credit of INR 13.14,71,401 cumulatively for AY 2010-11 to AY 2014-15) under the head licence fees debited to Profit & Loss Account by holding that annual license fee is not allowable as a revenue expenditure and it should be amortised under section 55ABB of the Act. 6.2. On the facts, in the circumstances of the case and in law, the Ld. AO/DRP erred in not following the judgment of the Hon'ble jurisdictional Delhi High Court in the case of Bharti Hexacom Ltd. [2014] 265 CTR 130 (Delhi) wherein it was held that annual revenue share based license fee paid by the telecom operators is revenue expenditure, allowable under section 37(1) of the Act and not a capital expenditure amortizable under section 35ABB of the Act. 6.3. On the facts, in the circumstances of the case and in law, the Ld. AO/DRP erred in ignoring that the aforesaid disallowance has been deleted by the Hon'ble ITAT in Appellant's own case for AY 2010-11, AY 2012-13, AY 2013-14 and AY 2014-15.

7. Disallowance of Lease line charges on account of non- deduction of tax at source 7.1. On the facts, in the circumstances of the case and in law, the Ld. AO/DRP erred in making disallowance of INR 1,31,66,943 under section 40(a)(ia) of the Act on account of non-deduction of tax at source under section 1941 of the Act cm lease line expenses of INR 4,38,89,811 incurred by Appellant. 7.2. On the facts, in the circumstances of the case and in law, the Ld. AO/DRP erred in ignoring that the aforesaid disallowance has been deleted by the Hon'ble ITAT in Appellant's own case for AY 2012-13, AY 2013-14 and AY 2014-15.

8.1. On the facts, in the circumstances of the case and in law, the Ld. AO erred in not granting complete credit of taxes deducted at source to the Appellant. 9. Levy of interest under section 234B and 234C of the Act

9.1. On the facts in the circumstances of the case and in law, the Ld. AO erred in incorrectly charging interest under section 234B and 234C of the Act.

10.1. On the facts, in the circumstances of the case and in law, the Ld. AO erred in initiating penalty proceedings under Section 274(1)(c) of the Act against the Appellant on account of the above adjustments made in the impugned final assessment order. All the above grounds are without prejudice to each other. The Appellant craves leave to add, amend, vary, omit or substitute any of the aforesaid grounds of appeal at any of the aforesaid grounds of appeal at any time before or at the time of hearing of the appeal. The Appellant praxes that appropriate relief be granted based on the said grounds of weal and the facts and circumstances of the case.”

The Assessing Officer made reference u/s 92CA(1) of the Act to the Transfer Pricing Officer (TPO) to determine the Arm’s Length Price (“ALP”) of the international transactions undertaken by the assessee. The TPO first determined the Arm’s Length Price of the intra group services availed by the assessee. The TPO was of the view that the assessee had not received any benefit from such services and hence, the Arm's Length Price of the alleged services were held to be NIL, on application of Comparable Uncontrolled Price (‘CUP’) method. The Assessing Officer was directed to make an upward adjustment of Rs.17,83,93,654/-. With regard to the royalty payment made by the assessee to its AEs, wherein the plea of the assessee was that similar adjustment made in Assessment Year 2009-10 has been deleted by the Tribunal, the TPO noted that the assessee had benchmarked the transactions relating to payment of royalty under the Transactional Net Margin Method (“TNMM”), after aggregating the same with other transactions. The TPO was of the view that the same had to be benchmarked separately and could not be aggregated with other transactions. He further observed that CUP method as suggested by the assessee is not to be applied. He was of the view that royalty transaction was to be benchmarked by applying the benefit test which was internationally accepted method. In the final analysis, the TPO observed that the assessee had neither benchmarked the transaction properly by applying the most appropriate method nor it had furnished its requisite information; hence, the Arm's Length Price of the said transaction was taken at NIL by applying CUP. He then vide para 6.2 referred to Comparable License Agreements for technology of trade-market (bundled)

IP and taking an average of 2.48 % after making search on royaltystat determined the Arm's Length Price at 2.85 % of net sales and the upward adjustment was made by him at Rs.11,30,68,317/-. The Assessing Officer proposed draft assessment order against which the assessee filed objection before Dispute Resolution Panel (“DRP”) on the ground that there were no change in the facts of the case as in earlier years i.e Assessment Years 2009-10, 2013-14 & 2014-15. The DRP rejected the same. The Assessing Officer in the final assessment order thus, upheld the said adjustment of Rs.29.15 crores.

8. Other addition made in the hands of the assessee was on account of the accrual outstanding other than circuit accrual totaling to Rs.1,00,82,744/- and disallowance of support service expenditure of Rs.10,22,08,983/-.

10. Further, the assessee had also paid lease line charges wherein it had deducted the tax at source under the provision of section 194J of the Act. However, the Assessing Officer was of the view that the assessee was liable to deduct tax at source u/s 194I of the Act and for such failure to deduct tax at source, the assessee was held to be in default and hence, an addition of Rs.1,31,66,943/- was made to the income of the assessee. All these adjustments/disallowances/additions were proposed in the draft assessment order and the DRP following its directions in the earlier years i.e. Assessment Years 2009-10, 2013-14 & 2014-15 had upheld the aforesaid additions. The Assessing Officer in the final assessment order disallowed the above said amounts and completed the assessment in the hands of the assesse against which the assessee is in appeal before us.

(a) relating to Assessment Year 2008-09, vide order dated 18.09.2017; (b) ITA No.1059/Del/2015 relating to Assessment Year 2010-11, vide order dated 18.09.2017 (c) ITA No.292/Del/2016 relating to Assessment Year 2011-12, vide order dated 18.09.2017 (d) ITA No.5535/Del/2016 and 7115/Del/2017 relating to Assessment Years 2012-13 and 2013-14, vide order dated 27.05.2019

(e) relating to Assessment Year 2014-15, vide order dated 18.07.2017.

The TPO rejected both the analysis of the assessee and applied Comparable Uncontrolled Price method only and undertook fresh search wherein he concluded that arms’ length payment @ 2.48% of net sales and made an upward adjustment of Rs.11.30 crores. The grievance of the assessee before us is that the TPO did not share the search process result and hence, did not allow an opportunity for hearing to the assessee to rebut his findings and also did not consider the comparables picked up by the assessee. The second grievance of the assessee is before us that the DRP acknowledged that the facts were similar to the earlier years, placed reliance on the orders of the earlier years and upheld the addition.

15. Next issue raised in this appeal vide Ground Nos. 3 to 3.7 is against the disallowance made on account of Circuit Accruals. The assessee was following consistent method of accounting wherein on a scientific basis, the assessee is estimating the expenses to be incurred on account of circuit accruals. The said accounting is through an automated system, which is used by the assessee as an operational tool and such method is followed by all the connected companies of the group worldwide. The assessee claimed the said expenditure as business expenditure. Further, the assessee also following recognized method wherein the actual expenditure incurred against the accrual/provisions for the year is accounted for in the subsequent year. This approach adopted by the assessee in recognizing the provision of circuit accruals was not accepted by the Assessing Officer/ DRP on the ground that similar disallowance was made in the earlier years. We find that the Tribunal has consistently from Assessment Years 2009-10 to 2014-15 allowed the claim of the assessee in entirely. The relevant findings of the Tribunal in the Assessment Year 2014-15 are at pages 19-23 (part), which are being referred but not being reproduced for the sake of brevity. The assessee has also furnished evidence of the services provided in the subsequent year against the aforesaid accruals and in view thereof, we find no merit in the orders of the authorities below in making aforesaid disallowance in the hands of the assessee. Consequently, Ground Nos. 3 to 3.7 raised by the assessee in this appeal are thus, allowed.

16. Now, coming to the next issue raised vide Ground Nos. 4 to 4.6 which is similar to the Ground No.3 i.e. here the accrual are other than circuit accruals. The assessee was following systematic method of accounting from year to year and was creating year end accruals towards normal business expenditure and was debiting the expenditure when paid or reversed in the subsequent years. The said details were furnished before the authorities below and the AR for the assessee has also referred to them before us. The Tribunal in Assessment Year 2014-15 relying on the orders of the Tribunal in the case of the assessee in earlier years had allowed the claim of the assessee vide paras 13 to 15 at pages 23 to 25 (part) of its order. Following the same parity of reasoning, we hold that the said expenditure is duly allowable in the hands of the assessee. We are referring to the findings of the Tribunal at pages 23 to 25. For the sake of brevity, the same are not reproduced. Thus, Ground Nos. 4 to 4.6 raised by the assessee in this appeal are allowed.

17. Next disallowance made in the case of the assessee is support service expenses which is raised vide Ground Nos. 5 to 5.3. The assessee had incurred the said expenditure of support services totaling to Rs.10.22 crores which was paid to the group company. The assessee claims that it had availed the said services from the group company in different fields of operation, which was necessary and imperative for carrying on its business. No mark up was charged on the said services provided by the AE. The availment of the support services from the AE was through support services agreement. The assessee claims that the allocation of cost of Rs.10.22 crores is to be allowed in its hands. In this regard, we find that the issue has also been decided by the Tribunal in assessee’s own case in earlier years and the Tribunal vide paras 16 to 18 at pages 25 to 27 in Assessment Year 2014-15 had decided the said issue. While deciding the said issue, the Tribunal has remitted the same to the file of Assessing Officer with the direction to consider the evidences filed by the assessee of availment of support services from its AE. The AR for the assessee pointed out that all these evidences were duly filed before the authorities below. However, following the same parity and reasoning as in Assessment Year 2014-15, we remit the issue back to the Assessing Officer to carry out the necessary verification exercise and decide the issue in accordance with our direction in the earlier years. We are relying on the findings of the Tribunal order vide page 16 to 18 and the same are not reproduced for the sake of brevity. Thus, Ground Nos. 5 to 5.3 raised by the assessee are allowed.

18. The next issue raised in Ground Nos. 6 to 6.3 is against the addition made on account of disallowance of annual revenue share based license fee of Rs.44,57,84,302/-. The assessee during the year under consideration had incurred expenditure of Rs.62.97 crores towards annual revenue share based license fee for maintenance and user of the telecom licence payable to the Department of Telecom. The assessee for its operations in India had acquired the telecom licences from Financial Year 2006-07 as per the agreement with Department of Telecom. One time entry fee of Rs.5 crore was paid by the assessee in Financial Year 2006-07 which was capitalized and is being amotorized under the provision of section 35BB of the Act. The assessee was granted telecom license for initial term of 20 years upon the payment of one time entry fee.

However, the license holder as per the Rules of DoT is also required to pay recurring fee on periodic basis towards use of the telecom services, which during the year under consideration were Rs.62.97 crores. The assessee claimed the said expenditure to be its revenue expenditure. However, the Assessing Officer applied the provisions of section 35BB of the Act and amortized the expenditure over the remaining life of the licence i.e 15 years, resulting in disallowance of Rs.44.57 crores.

The claim of the assessee was that the lease line services were standard automatic services which were availed by any telecom service provider for the transmission of data and was not under any exclusive arrangement.

The Assessing Officer was of the view that the taxes on such expenditure was to be withheld u/s 194I of the Act. We find that similar issue of non- deduction of tax on lease line expenses arose before the Tribunal in earlier years in assessee’s own case. The Tribunal in Assessment Year 2014-15 vide paras 22 to 24 at pages 29 to 35 has decided the issue and concluded by holding as under:-

Assessment Year: 2015-16 23. The next issue vide Ground No.8 is non-granting complete credit of taxes deducted at source. The Ld. AR for the assessee pointed out that even an application u/s 154 of the Act was pending before the Assessing Officer in this regard. We direct the Assessing Officer to allow credit of TDS in the hands of the assessee as per the available data. Thus, Ground No.8 raised by the assessee is allowed.

24. The next Ground No.9 is against the charging of interest u/s 234B and 234C of the Act which is consequential in nature, hence the same is dismissed.

Order pronounced in the open court on 22nd day of October, 2019.