THE BOSTON CONSULTING GROUP (I) P.LTD,MUMBAI vs. ASST CIT 3(1), MUMBAI

ORDER PER N.K. PRADHAN, A.M. This is an appeal filed by the assessee. The relevant assessment year is 2008-09. The appeal is directed against the order passed by the Asst. Commissioner of Income Tax, Circle 3(1), Mumbai (in short ‘AO’) u/s 143(3) r.w.s. 144C(13) of the Income Tax Act 1961, (the ‘Act’).

On the facts and circumstances of the case and in law, the AO erred in concluding the assessment u/s 143(3) r.w.s. 144C(13) of the Act, as follows:

The Boston Consulting Group. 1. determining the arm's-length price of the Appellant's international transaction of payment of license fees for time and billing software at Nil instead of Rs.1,62,74,359/- as determined by the Appellant. 2. determining the arm's length price of the Appellant's international transaction of payment of regional administration and regional co- ordination cost allocation at Nil instead of Rs.2,83,61,859/- as determined by the Appellant. 3. determining the arm's length price of the Appellant’s international transaction of payment of information technology cost allocation at Rs.50,00,000/- instead of Rs.260,06,610/- as determined by the Appellant. 4. deeming an adjustment of Rs.15,20,688 on account of late recovery of expenses from associated enterprises. 5. disallowing the foreign travel expenses of Rs.7,41,721. 6. erred in not granting credit of Tax Deducted at Source of Rs.1,91,87,629 pertaining to income offered to tax in AY 2008-09.

 Provision of Management Consultancy Service;  Payment of License Fees for Time and Billing Software;  Regional Training, Administration and Co-ordinate Cost Allocation;

The Boston Consulting Group. Information Technology Cost Allocation;  Worldwide Training Cost Allocation;  Global Finance Cost Allocation; and  Reimbursement of expense received and paid.

The appellant has adopted the Comparable Uncontrolled Price (‘CUP’) method to determine the arm’s length price (ALP) in respect of the above international transactions entered by it with its AEs. The Transfer Pricing Officer (TPO) has made an adjustment in respect of the following international transactions :

Amount of adjustment International Transaction entered into with AEs (Rs.) Payment of License Fees for Time and Billing 16,274,359 Software Regional and Worldwide Training cost allocation 37,307,488 Information Technology Cost Allocation 21,006,610 Reimbursement of Expenses recovered 1,520,688 Total Transfer Pricing Adjustment 76,109,145 The AO passed an order u/s 143(3) r.w.s. 144C(13) making an adjustment of Rs.6,78,51,641/- towards transfer pricing.

In addition to the above transfer pricing adjustments, the AO made an addition of Rs.7,41,721/- (foreign travel expenses) in the order u/s 143(3) r.w.s. 144C(13).

The Boston Consulting Group. We begin with the 1st transfer pricing adjustment made by the AO. During the year under consideration, the appellant has paid Rs.1,62,74,359/- to BCG Holding Corporation, USA towards licenses for time and billing software. The ALP of the payment has been determined by using CUP as a method for benchmarking and for this purpose, the price of a similar software module licensed by Oracle Corporation was used as a comparable uncontrolled price. Before the TPO, the appellant submitted that BCG Holding Corporation, USA has developed a state-of-the-art time and billing system with electronic time sheet capabilities, with an intention to integrate BCGs Worldwide Reporting System and facilitate international co-ordination. The BCG Holding Corporation has provided the license to the appellant vide a technology licensing and assistance agreement dated 01.01.2005 in consideration for royalty @ USD 2750 per employee per annum which has resulted in the payment of aforesaid amount of Rs.1.62 crore during the year. However, the TPO was not convinced with the above submission of the assessee and made an adjustment of the entire amount, considering the value of the transactions to be Nil. While making the disallowance, the TPO has stated that the software had been installed many years ago and its shelf life had expired. The AO following the direction of the DRP made an adjustment of Rs.1,62,74,359/-.

The 2nd adjustment made by the TPO is towards regional cost allocation. The facts are that BCG Hong Kong is the hub for providing regional training, administration and co-ordination assistance to each of the BCG entities in the Asia Pacific Region (within which BCG India falls) so that the activities of those entities are synchronized with worldwide policies of BCG

The Boston Consulting Group. BCG are adhered to, thus enabling the provision of seamless services to all clients. The appellant has executed regional cost allocation agreement dated 01.01.2002 with BCG Hong Kong. The appellant submitted before the TPO that the expenses incurred by BCG Hong Kong for organizing and/or imparting training to the employees of various BCG entities in the Asia Pacific Region were allocated to each entity based on the cost per attendee, while the expenses incurred in connection with assisting in administrative methods are allocated based on the time spent on each entity for rendering such assistance. The TPO was not convinced with the above submission of the appellant on the ground that the claim is not fully supported by evidence. Further, the TPO noted that the appellant failed to produce complete details and explanation in respect of 26 personnel ; further failed to justify any other services received from BCG Hong Kong. Therefore, the TPO made an addition of Rs.3,73,07,488/-. As per the direction of the DRP, the AO restricted the disallowance to Rs.2,90,49,984/-.

The 3rd adjustment made by the TPO is in respect of payment for information technology. During the year under consideration, the appellant has paid Rs.2,60,06,610/- to the parent company in USA towards information technology cost allocation. The appellant submitted before the TPO that BCG Inc. acts as a hub for providing centralized network and project management and other aspects of information technology. It also submitted that BCG Inc. besides providing software application for use by the appellant, also provides global connectivity to BCG affiliates via Wide Area Network (WAN). Also the appellant stated before the TPO that there are dedicated persons within the infrastructure group for providing services across the globe regarding data

The Boston Consulting Group. base administration, data centre services, integrated services etc. Further, it was explained to the TPO by the appellant that IT support has benefited it (the appellant) in increasing its efficiency, expansion, accessibility and service quality etc. and that the allocation of further expenses has been made on the basis of head count for the year under consideration. However, the TPO was not convinced with the above submission of the appellant on the ground that it is a glaring instance of unfair cost allocation where the appellant has remitted Rs.2,60,06,610/- for allowing its employees to use certain commonly used softwares, thereby paying much more than what a company in ordinary uncontrolled situation would like to spend for the purpose. The TPO treated Rs.50,00,000/- as ALP for availing the above services under the head information technology. Thus he made an adjustment of balance amount of Rs.2,10,06,610/-. The AO following the order of the DRP made an addition of Rs.2,10,06,610/-.

The Boston Consulting Group. No. 6762/Mum/2012), Howden Insurance Brokers India Pvt. Ltd. v. DCIT (ITA No. 6997/Mum/2012), Schneider Electric India Private Limited v. DCIT (ITA No. 209/Ahd/2015), Hansraj Mathuradas v. ITO (ITA No. 2397/Mum/2010) and Painterior India v. ACIT (ITA No. 2732/Mum/2012).

Regarding the 2nd adjustment, the Ld. DR submits that as the appellant failed to file the complete supporting evidence, the AO has rightly made an addition of Rs.2,90,49,984/-.

Regarding the 3rd adjustment, the Ld. DR explains that the TPO has rightly made the allocation of Rs.50,00,000/- and disallowed the balance of Rs.2,10,06,610/-.

An examination of the order of the TPO made u/s 92CA(3) dated 20.10.2011 clearly indicates that while making the adjustment of The Boston Consulting Group. Rs.1,62,74,359/- (payment for time and billing software license), Rs.3,73,07,488/- (regional and worldwide training) and Rs.2,10,06,610/- (payment for information technology cost allocation), he has not adopted any of the prescribed method.

In the case of M/s Lever India Exports Ltd. (supra), the Hon’ble Bombay High Court has held that the jurisdiction of the TPO is specific and limited i.e. to determine the ALP of an international transaction in terms of Chapter X of the Act r.w. Rule 10A to 10E of the Income Tax Rules. It further held that the ad-hoc determination of ALP by the TPO dehors section 92C of the Act cannot be sustained.

In M/s Merck Ltd. (supra), the respondent-assessee had entered into an agreement with its AE to provide technical knowhow/consultancy in 12 fields as indicated therein for a consideration of Rs.1.57 crores. The respondent- assessee availed services of its AE during the subject year (AY 2003-04) only in 3 out of 12 fields listed in the agreement. The TPO, therefore, proceeded to hold that the entire consideration of Rs.1.57 crore is attributable to the 3 technical services which the respondent-assessee availed of and held that no consideration was payable in respect of 9 services provided for in the agreement. Thus the entire payment of Rs.1.57 crore was attributable only to the 3 services availed out of the 12 listed out in the agreement. It further held that only Rs.40 lacs could be considered as ALP attributable to 3 services and made adjustment of Rs.1.17 crore resulting in its addition to the taxable income. In appeal, the CIT(A) upheld addition of Rs.1.17 crores made and taxable income consequent to the adjustment made on account of technical knowhow/consultancy agreement. On further appeal, the Tribunal upheld the The Boston Consulting Group. AO/TPO to determine the value of the services received by the respondent-assessee in respect of the 3 services which it had availed from its AE before holding that the ALP in this case is Rs.40 lacs. The Tribunal further held that “consideration payable for the services availed of by the respondent-assessee to determine the ALP was not carried out”. On appeal by the Revenue, the Hon’ble Bombay High Court held that :

Consequently, the finding of the Assessing Officer attributing nil value to nine of the services listed in the agreement which were not availed of by the Respondent- Assessee in the present facts was not justified. Moreover, not adopting one of the mandatorily prescribed methods to determine the ALP in respect of fees of technical services payable by the Respondent-Assessee to its AE, make the entire Transfer pricing Agreement unsustainable in law.

In M/s Johnson & Johnson Ltd. (supra), the Tribunal allowed the respondent-assessee’s appeal before it by deleting the addition of Rs.200.82 lacs being the transfer pricing adjustment on account of sales promotion and publicity expenses being payable by the respondent-assessee’s parent M/s Johnson & Johnson, USA. This on the ground that the TPO has, while holding that the parent company should share this expenditure on publicity and sales promotion as it benefits therefrom, as higher sales result in higher royalty, has not determined the ALP by following any of the methods prescribed u/s 92C(1) of the Act r.w. Rule 10B. On appeal by the revenue, the Hon’ble Bombay High Court held that :

(ii) The TPO is obliged under the law to determine the ALP by following any one of the prescribed methods of determining the ALP as detailed in Section 92C(1) of The Boston Consulting Group. Act. In this case, there is nothing on record to indicate that the TPO had applied any one of the prescribed methods in Section 92C(1) of the Act to determine the ALP before disallowing the payment of Rs.200.82 lakhs incurred by the Respondent on account of publicity and sales management as being excessive and/or payable by its parent, M/s. Johnson & Johnson, USA.

(iii) The impugned order holds that transfer pricing adjustment done by disallowing the payment, on the basis of an assumption that it is excessive, is an action completely dehors the provisions of transfer pricing adjustment found in chapter X of the Act. The determination of the ALP has to be done only by following one of the methods prescribed under the Act.

(iv) In view of the above, as the Revenue has not acted in accordance with the clear mandate of law, the questions as proposed does not give rise to any substantial question of law. Thus, not entertained.”

In M/s Kodak India Pvt. Ltd. (supra), the above position of law is reiterated by the Hon’ble Bombay High Court.

As mentioned earlier, we notice that the TPO/AO has arrived at the ALP by not adopting any of the methods prescribed u/s 92C of the Act in respect of (i) payment of license fees for time and billing software, (ii) payment of regional administration and regional co-ordination cost allocation and (iii) payment of information technology cost allocation.

In view of the above factual scenario, we are of the considered view that the ratio laid down by the Hon’ble Bombay High Court in Lever India Exports Ltd.; Merck Ltd.; Johnson & Johnson Ltd. and Kodak India Pvt .Ltd. mentioned hereinabove is squarely applicable to the facts of the case. Therefore, following the same, we allow the 1st, 2nd and 3rd ground of appeal.

The Boston Consulting Group.

From the details filed by the appellant, the TPO observed that out of the total receivable reimbursements from AEs of Rs.3,64,95,404/-, it has recovered Rs.1,78,74,722/- in the month of April 2008 i.e. one month after the end of the financial year. However, the remaining amount of Rs.1,86,20,673/- was recovered on 5.12.2008, after a gap of 8 months. The TPO calculated an adjustment, by charging interest @ 12.25% which comes to Rs.15,20,688/-. The AO has followed the order of the TPO.

As regards, the adjustments on reimbursement of expenses, the AO has accepted most of the reimbursement to make an adjustment only on account of interest not charged on recovery of expenses. This does not seem to be valid in principle as there is no discussion or evidence that the payment to be made to the AE is also charged interest on delay by the assessee. Since, expenses are recovered both ways, interest cannot be charged only on one side by the assessee from the AE.

It is further explained that after the above mentioned observations, the DRP should have issued directions for deleting the adjustment. However, it is stated in the DRP's order that the adjustment of Rs.15,20,688/- should be made. It appears that there is an inadvertent error in the DRP's order while issuing directions on this issue. In the subsequent year i.e. AY 2009-10, the DRP has deleted the adjustment. There is no appeal by the Department in AY 2009-10. From AY 2010-11, the TPO has not made this adjustment.

The Boston Consulting Group. In view of the above, the Ld. counsel submits this issue be set aside to the file of the TPO to decide the same as per the stand of the Department in subsequent years i.e. from AY 2009-10 onwards.

On the other hand, the Ld. DR supports the order passed by the TPO/AO.

During the course of assessment proceedings, the AO noticed that the assessee has claimed deduction of Rs.7,41,721/- on account of ‘foreign travel expenses’ which were incurred for other than employees. Observing that the assessee was not able to bring out adequate evidence to justify its claim of business expediency, the AO made a disallowance of the above amount by relying on the decision of the Hon’ble Gujarat High Court in Shahibag Entrepreneurs Ltd. 215 ITR 810.

The Boston Consulting Group. sufficient networking and bonding within the personnel of the entire group. Thus it is stated that the appellant is a corporate entity and incurs such expenses on its employees which it finds expedient from a business and employee morale perspective.

On the other hand, the Ld. DR submits that the addition of Rs.7,41,721/- made by the AO which is based on facts of the case be affirmed.

As no supporting evidence has been filed before us, we confirm the disallowance of Rs.7,41,721/- made by the AO. However, we direct the AO to verify the claim of the appellant that fringe benefit tax has been paid on the above and make consequential order as per the provisions of the Act.

The Boston Consulting Group. which deals with pronouncement of orders. Let us in this light revert to the prevailing situation in the country. On 24th March, 2020, a nationwide lockdown was imposed for 21 days to prevent the spread of Covid-19 epidemic, and this lockdown was extended from time to time. As a matter of fact, even before this formal nationwide lockdown, the functioning of the Income Tax Appellate Tribunal at Mumbai was severely restricted on account of lockdown by the Maharashtra Government, and on account of strict enforcement of health advisories with a view of checking spread of Covid-19. The epidemic situation in Mumbai being grave, there was not much of a relaxation in subsequent lockdowns also. In any case, there was unprecedented disruption of judicial work all over the country. As a matter of fact, it has been such an unprecedented situation, causing disruption in the functioning of judicial machinery, that Hon'ble Supreme Court of India, in an unprecedented order in the history of India and vide order dated 6.5.2020 read with order dated 23.3.2020, extended the limitation to exclude not only this lockdown period but also a few more days prior to, and after, the lockdown by observing that "In case the limitation has expired after 15.03.2020 then the period from 15.03.2020 till the date on which the lockdown is lifted in the jurisdictional area where the dispute lies or where the cause of action arises shall be extended for a period of 15 days after the lifting of lockdown". Hon'ble Bombay High Court, in an order dated 15th April 2020, has, besides extending the validity of all interim orders, has also observed that, "It is also clarified that while calculating 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", and also The Boston Consulting Group. "arrangement continued by an order dated 26th March 2020 till 30th April 2020 shall continue further till 15th June 2020".

The Hon’ble Bombay High Court itself has, vide judgment dated 15th April 2020, held that "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".

Viewed thus, the exception to 90 day time limit for pronouncement of orders inherent in Rule 34(5)(c) clearly comes into play in the present case.