M/S VERIZON INDIA PVT. LTD.,,NEW DELHI vs. DCIT, NEW DELHI

This appeal by the assessee is preferred against the order of the ld. CIT(A) - 44, New Delhi dated 03.09.2015 pertaining to assessment year 2008-09.

Grievances of the assessee can be summarised as under: a) Transfer Pricing [TP] adjustment; b) Disallowance u/s 40(a)()ia) of the Income-tax Act, 1961 [hereinafter referred to as 'the Act' for short]; c) Disallowance of reimbursement of conference call charges;

In addition to the above, vide application dated 18.02.2019, the assessee has raised an additional ground in relation to the main ground against the TP adjustment and with this additional ground, the assessee contends for exclusion of Priya Ltd as comparable company based on subsequent judicial precedents in this regard.

We will first address to the additional ground raised by the assessee.

Facts on record show that the assessee itself has included Priya Ltd as a comparable company. Now the assessee contends that Priya is functionally not a comparable company and relies upon subsequent judicial decisions of the co-ordinate benches. In our considered opinion, whether a company is a good comparable or not is purely a question of fact and no point of law is involved. In our considered view, the additional ground raised by the assessee is not tenable in law in the light of the decision of the Hon'ble Supreme Court in the case of NTPC 229 ITR 383. Since the inclusion or otherwise of a comparable company requires examination of new facts, hence there is no merit in the contention of the assessee. The additional ground so raised by the assessee is dismissed.

Coming to the alternative plea of the assessee, in relation to the allocation of unallocated expenses in the segmental reporting of Priya Ltd, we find force in the contention of the ld. counsel for the assessee.

The TPO observed that the assessee has incorrectly corrected the segmental margin of Priya Ltd. The assessee has treated the indenting segment as comparable and has allocated the unallocated expenses amounting to Rs. 1,63,21,400/- in the ratio of gross margin when it should have been allocated in the proportion of segmental revenue to total revenue. The TPO did not concur with this allocation of the assessee. The TPO found that the ratio of segmental revenue to total revenue is 27.06%. Accordingly, out of total unallocated expense of Rs. 1,63,21,400/-, a sum of Rs. 1,01,06,889/- has been allocated to the indenting segment. The TPO computed the segmental operating as under: Segmental operating revenue Rs. 18688202 Less: Allocated Expenses Rs. 5923000 Unallocated Expenses Rs. 4183889 Total operating expenses Rs. 10106889 Operating Profit Rs. 8581313 OP/TC Rs. 84.90%

The ld. CIT(A), while deciding the issue, analysed the segmental result to arrive at direct cost allocated in these two segments i.e. indenting segment and trading segment of Priya Ltd, which is as under:

The ld. CIT(A) further observed as under:

The ld. DR strongly relied upon the aforesaid findings of the ld. CIT(A).

The ld. counsel for the assessee drew our attention towards the chart exhibited elsewhere and pointed out that if the contention of the TPO is accepted, then it would result into absurd profitability margin in as much as the indenting segment is showing margin of 84.92% whereas the trading segment is showing loss of minus 2.85%. Whereas, if the gross profit ratio is adopted for allocation of unallocated expenses, then the indenting segment would show margin of 24.22% and trading segment would show a margin of 7.39%.

We have heard the rival submissions and have given thoughtful consideration to the orders of the authorities below. We find that the cost of allocation done by the ld. CIT(A) is adopted from the audited financial results of the assessee exhibited at page 506 of the paper book. Moreover, the exercise done by the ld. CIT(A) has nothing to do with unallocated expenses. We find that while analysing the expenses debited under the head ‘Other expense”, the ld. CIT(A) has completely ignored the fact that sales promotion expenses of Rs. 40,7,174/- is nothing but directly related to the indenting segment in as much as the commission earned by the assessee is in foreign currency and is directly related to the indenting segment. We find that the first appellate authority has simply presumed that the other expenses pertained to only trading segment.

We find that on identical set of facts in assessment year 2005-06, the ld. CIT(A) himself has approved the allocation key on the basis of gross profit margin for unallocated expenses. The ld. CIT(A) has declined to follow the decision of his predecessor given in assessment year 2005-06 because he is of the view that his predecessor has not apparently analysed the financial results of Priya Ltd before arriving at the conclusion. We do not find any force in this finding of the ld. CIT(A). In assessment year 2005-06, the then ld. CIT(A) had considered the following chart:

After considering the aforementioned chart, the ld. CIT(A) accepted the contention that the allocation key should be on the basis of gross profit margin for unallocated expenses.

After considering the facts in totality, in light of the factual matrix exhibited elsewhere, we are of the considered opinion that the allocation key on the basis of gross profit margin is correct. We accordingly direct the Assessing Officer/TPO to allocate unallocated expenses on the basis of gross profit margin. Accordingly, this alternative ground is allowed.

Ground No. 2 has not been pressed. The same is dismissed as not pressed.

Facts relating to Ground No. 3 are that during the course of assessment proceedings, the A.O observed that the assessee has paid conference call charges payable to its AE, namely, Verizon, Hong Kong. The assessee was asked to explain why the same should not be disallowed u/s 40(a)(ia) of the Act.

The assessee, in its reply, contended that conference charges payment was made taxable in India as royalty by retrospective amendment by Explanation 6 of section 9(1) of the Act. Therefore, during the period of payment, there was no such definition of royalty. Accordingly, the said sum was not taxable in India, hence there is no question of deduction of tax u/s 195 of the Act. It was further pointed out that the payment is in the nature of reimbursement, therefore, there is no element of income in the hands of the payee and hence section 195 of the Act does not apply on the facts of the case.

The contention of the assessee did not find any favour with the Assessing Officer who was of the strong belief that Explanation 6 to section 91 of the Act is clarificatory in nature and has been given a retrospective effect.

The ld. DR has also highlighted this fact by stating that the definition of Royalty u/s 91 of the Act always included impugned payment and it is only by way of clarification Explanation 6 has been inserted.

The Assessing Officer has also dismissed the alternative contention of the assessee that the payment is nothing but reimbursement. The Assessing Officer was of the opinion that the purpose of payment is important since such conference charges is royalty in India, therefore, the same is taxable in India.

The Assessing Officer further observed that merely because the payment is made first by the group concern of the assessee and then recovered from the assessee, does not alter the taxability of royalty.

We have given a thoughtful consideration to the orders of the authorities below. There is no dispute that the impugned payment is governed by Explanation 6 section 91 as it existed before Finance Act, 2012. It is only after Finance Act 2012 Explanation 4, 5 and 6 to section 91 have been inserted with retrospective effect. In our considered opinion, the assessee could not be held to be liable to deduct tax at source by relying on subsequent amendments.

Similar view taken by the co-ordinate bench at Kolkata in the case of SDV International Logistics Ltd in 708 and 712/Kol/2016 reported in 172 ITD 505.

Coming to the issue of reimbursement, we find that there is no dispute that Verizon Hong Kong [AE of the assessee] has made payment and subsequently, cost was recovered from the assessee company which can be understood from the chart annexed as Annexure which will form part of this order.

Considering the facts of the case in hand in totality, in the light of decision of the co-ordinate bench [supra], we are of the considered opinion that no liability to deduct tax at source arose on the impugned payment qua insertion of Explanation to section 91 of the Act. Moreover, being reimbursement, no liability to deduct tax at source arose. Accordingly, Ground No. 3 is allowed.

Facts relating to Ground No. 4 are that during the course of scrutiny assessment proceedings, the Assessing Officer noticed that the assessee has incurred travelling expenses amounting to 80,38,766/-. The Assessing Officer further noticed that other than local travelling expenses of Rs. 80.38 lakhs, foreign travelling expenses were also booked amounting to Rs. 14,95,607/-. The Assessing Officer observed that the assessee has not provided details of some of the travelling expenses and further observed that there was no need for the assessee to take foreign travelling as major functions involved providing local contact point for customers in India and supporting the requirements of local customers in India.

Before the CIT(A), the assessee submitted complete details of travelling and conveyance expenditure such as complete ledger providing details of air fare, visa charges for foreign travel, sample invoice of air fare and cabs hired by the assessee and detail breakup of travelling and conveyance expenses. It was pointed out that all the details and vouchers are certified by the internal auditor and final accounts are duly audited by statutory auditors. It was further contended that the assessee provided services to its customer on a cost plus basis. Therefore, the entire cost has been duly compensated by its AEs.

After considering the facts and detailed submissions, the ld. CIT(A) held as under:-

Before us, the ld. AR reiterated what has been stated before the lower authorities.

Per contra, the ld. DR strongly supported the findings of the CIT(A).

We have given a thoughtful consideration to the orders of the authorities below. We find that even the first appellate authority has dismissed the reasoning of the Assessing Officer that no foreign travel is required by the employee of the assessee for its business.

We find that the CIT(A) has categorically observed that few bills issued by Auto Quick [P] Ltd are in the name of M/s Verizon Business, the AE of the appellant. As theses invoices are not in the name of the appellant, the CIT(A) observed that the expenditure cannot be stated to pertain to the appellant.

The CIT(A) directed the Assessing Officer to verify the bills and vouchers in respect of travelling and conveyance expenses. If the bills and vouchers are not in the name of the assessee, the disallowance should be restricted to the extent of such bills/vouchers. We do not find any error or infirmity in such directions of the CIT(A). The assessee is directed to produce all the bills/vouchers for verification and the Assessing Officer is directed to verify the same and if some invoices/bills are not found in the name of the assessee, only such expenses should be disallowed. With these directions, Ground No. 4 is partly allowed.

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