REGUS BUSINESS CENTRE P. LTD,MUMBAI vs. ITO 13(3)(1), MUMBAI

The brief facts of the case as emanating from records are: The assessee is engaged in the business of establishing operating, managing and controlling Business Centres in India. During the period relevant to assessment year under appeal, the assessee entered into international transactions, as well as domestic transactions with its Associated Enterprises (AEs). The international transactions entered into by the assessee during financial year 2011-12 are as under:-

Shri Percy Pardiwalla, appearing on behalf of the assessee submitted that the assessee had paid for intra-group services rendered by the regional head quarter. The head quarter charges were paid for providing support services in respect of finance, management and operations, global sale, marketing and public relations, need based legal services, etc. The ld. Authorized Representative of the assessee submitted that the TPO applied CUP to benchmark Arm’s Length Price (ALP) of the aforesaid international transaction. Thereafter, the TPO applied ‘benefit test’ on intra-group services rendered and held that the assessee has failed to show the benefit derived from the services and determined the ALP of such services as Nil. The ld. Authorized Representative of the assessee submitted that now it is a well settled legal position that the ALP of the intra-group services cannot be ‘Nil’. The ld. Authorized Representative of the assessee further contended that the TPO had erred in applying ‘benefit test’. The Tribunal in various decisions has held that applying ‘benefit test’ on intra-group services is unjustified. The ld. Authorized Representative of the assessee prayed that the issue can be restored to the TPO for applying most appropriate method for determining ALP of intra-group services.

Per contra, Shri Uodal Raj Singh, representing the Department vehemently defended the assessment order and the directions of the DRP. The ld. Departmental Representative submitted that the assessee has failed to substantiate the services received and the benefit derived by the assessee from such services.

We have heard the submissions made by rival sides and have perused the orders of authorities below. We have also considered the decisions, on which the ld. Authorized Representative of the assessee has placed reliance.

The first issue in appeal is in respect of adjustment made on account of intra-group services. The assessee has purportedly received support services from its regional headquarter primarily in the areas of management of human resources, sale, debt management and collection, advertisement and marketing, legal services, etc. The TPO applied ‘benefit test’ on the intra-group services received by the assessee and determined the ALP of such services at ‘Nil’. We find that the TPO has failed to properly analyse the support services received by the assessee from its regional headquarter. Further, the settled legal position now is that the ALP of intra group services cannot be determined at ‘Nil’. The ‘benefit test’ analysis which was earlier accepted has now been held to be redundant. The Tribunal in the case of Merck Ltd. v. Dy. CIT 179 TTJ 121 has held the concept of ‘benefit test’ as irrelevant. The Tribunal held that by applying befit test ALP of intra-group services cannot be determined at ‘Nil’. Thereafter, in various decisions by the Tribunal the application of benefit test analysis has been rejected. Thus, we deem it appropriate to restore the issue back to the file of TPO for fresh adjudication and for determination of ALP of intra-group services by applying most appropriate method specified in section 92C of the Act. Ground No.1 of the appeal is thus, allowed for statistical purposes.

In ground No.2 of the appeal, the assessee has assailed adjustment in respect of reimbursement of expenses. The ground No.2 is connected to ground No.1 as the adjustment made on account of alleged reimbursement of expenses is in respect of intra-group services. Since we have restored ground No.1 to the TPO, we deem it appropriate to restore ground No.2 of the appeal as well, to the TPO for de-novo adjudication after affording reasonable opportunity of hearing to the assessee, in accordance with law. In the result, ground No.2 of the appeal is allowed for statistical purposes.

The ground No.3 of the appeal is against adjustment made in respect of loans extended by the assesse to domestic group companies, held as ‘deemed International Transaction’. It is an undisputed fact that the assessee had entered into transactions for extending loans and providing services to the group entities based in India. Before proceeding further, it would be relevant to refer to the meaning of ‘international transaction’ as defined under the Act. The expression ‘International Transaction’ has been defined in section 92B of the Act. The provisions of the section as they were applicable in AY 2012-13 are reproduced herein below:- Section 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 any one or more of such enterprises.

A bare perusal of the meaning of “international transaction” defined in section 92B (1) would show that a transaction would fall within the ambit of international transaction if, either or both the associated enterprises are non- resident. In the present case none of the AEs i.e. neither the assessee nor the domestic group companies with which the assessee had entered into transaction are non-residents. All the companies are domestic entities and are subject to tax under the provisions of the Act.

In the case of CIT vs. Kodak India (P) Ltd. (supra), the assesse had sold its imaging business to M/s. Carestream Health India Ltd. during the period relevant to AY 2007-08. The transaction was between two domestic non Associated Enterprises. The TPO held that the transaction is International Transaction within the meaning of section 92B (2) as the overseas holding company of the assesee and Carestream Health India Ltd. had entered into global agreement for sale of business prior to sale of imaging business by the assesse to Carestream Health India Ltd. The Tribunal observed that the transaction is not covered by the definition of ‘International Transaction’ and hence, the provisions of section 92B (2) would not get attracted. The Tribunal inter alia held that prior to amendment to Section 92B (2) of the Act w.e.f. 1-4- 2015 such a transaction was not deemed to be an International Transaction. The findings of the Tribunal were upheld by the Hon’ble High Court.

In our considered view the findings of the lower authorities are based on conjectures and surmises. The authorities below have travelled too far to bring the transactions between the assesse and domestic entities within the domain of ‘deemed international transaction’ under section 92B (2) of the Act (prior to amendment). We find merit in ground no.3 of the appeal, according the same is allowed.

The ground no.4 of the appeal is general in nature and hence requires no adjudication.

In the result, appeal of the assessee is partly allowed.

This appeal was heard on 10/02/2020. As per Rule 34(5) of the Income Tax (Appellate Tribunal) Rules, 1963, (ITAT Rules, 1963), the order was required to be “ordinarily” pronounced within a period of 90 days from the date of conclusion of the hearing of appeal. The instant appeal was heard prior to the lockdown declared by the Hon’ble Prime Minister on 24-03-2020 in view of COVID-19 pandemic. The lockdown was forced due to extra ordinary circumstances caused by world wide spread of COVID-19. Thereafter, the lockdown was extended from time to time. Therefore, the pronouncement of order beyond the period of 90 days from the date of hearing is not under “ordinary” circumstances. The Co-ordinate Bench of the Tribunal in the case of DCIT vs. JSW Ltd., for A.Y 2013-14 decided on 14/05/2020, under identical circumstances, after considering the provisions of Rule 34(5) of the ITAT Rules, 1963, judgements rendered By Hon’ble Apex Court and the Hon’ble Bombay High Court on the issue of time limit for pronouncement of orders by the Tribunal and the circumstances leading to lockdown held:- “10. In the light of the above discussions, we are of the considered view that rather than taking a pedantic view of the rule requiring pronouncement of orders within 90 days, disregarding the important fact that the entire country was in lockdown, we should compute the period of 90 days by excluding at least the period during which the lockdown was in force. We must factor ground realities in mind while interpreting the time limit for the pronouncement of the order. Law is not brooding omnipotence in the sky. It is a pragmatic tool of the social order. The tenets of law being enacted on the basis of pragmatism, and that is how the law is required to interpreted. The interpretation so assigned by us is not only inconsonance with the letter and spirit of rule 34(5) but is also a pragmatic approach at a time when a disaster, notified under the Disaster Management Act 2005, is causing unprecedented disruption in the functioning of our justice delivery system. Undoubtedly, in the case of Otters Club Vs DIT [(2017) 392 ITR 244 (Bom)], Hon’ble Bombay High Court did not approve an order being passed by the Tribunal beyond a period of 90 days, but then in the present situation Hon’ble Bombay High Court itself has, vide judgment dated 15th April 2020, held that directed “while calculating the time for disposal of matters made time- bound by this Court, the period for which the order dated 26th March 2020 continues to operate shall be added and time shall stand extended accordingly”. The extraordinary steps taken suo motu by Hon’ble jurisdictional High Court and Hon’ble Supreme Court also indicate that this period of lockdown cannot be treated as an ordinary period during which the normal time limits are to remain in force. In our considered view, even without the words “ordinarily”, in the light of the above analysis of the legal position, the period during which ITA No. 6103 and lockout was in force is to excluded for the purpose of time limits set out in rule 34(5) of the Appellate Tribunal Rules, 1963. Viewed thus, the exception, to 90-day time-limit for pronouncement of orders, inherent in rule 34(5)(c), with respect to the pronouncement of orders within ninety days, clearly comes into play in the present case. Of course, there is no, and there cannot be any, bar on the discretion of the benches to refix the matters for clarifications because of considerable time lag

The appeal of the assessee is partly allowed. Order pronounced under Rule 34(4) of the Income Tax (Appellate Tribunal) Rules, 1962, by placing the details on the notice board.