DCIT, CIRLCE- 1(1) (1), INTERNATIONAL TAXATION , NEW DELHI vs. AMERICAN EXPRESS BANKING CORP. (INDIA BRANCH), NEW DELHI

Receipt of back-office support services TNMM 50,118,358 from American Express Australia Ltd.

Receipt of back-office support services TNMM 2,327,141 from American Express International Inc. Hong Kong 4. Receipt of Global Card Services from TNMM 136,244,855 AEAL Australia 5. Receipt of risk management services TNMM 30,494,774 from American Express Travel Related Services Company 6. Receipt of transfer pricing services from TNMM 6,012,283 AETRS 7. Receipt of regional headquarter services TNMM 4,652,403 from AEII Singapore 8. Receipt of marketing services from TNMM 446,517,083 American Express Services India 9. Recovery of expenses from AEII N.A. 1,135,352 Singapore 10. Receipt of back office support services TNMM 6,251,594 from American Express Travel Related Services Company 11. Receipt of technical support services TNMM 333,211 from AESEL UK

The assessee benchmarked its international transactions on TNMM; however, the Ld. TPO applied CUP method. Objections raised by the assessee were addressed by the Ld. TPO as evident from his order. The assessee raised the issue of multiyear data as against current years’ data. However, the Ld. TPO, emphasizing on the Rule 10B(4) of the Income Tax Rules, had held that the multiyear data could be used only when the & 165/Del/2019 American Express Banking Corp. assessee had demonstrated that the data of current year were dependent on specific abnormal factors and thus, unreliable. However, the assessee had not brought on the record any evidence justifying such factors not only before us but also before the authorities below. The Ld. TPO had also held that the Rule 10B(4) of the Income Tax Rules did not mandate the use of multiyear data in general and that is why the Rule contains the word ‘may’ instead of ‘shall’. The Ld. TPO took the current year data placing reliance on following case laws: - a. Aztec Software Technology [294 ITR (AT) (32) (Bang) (SB)] b. Honeywell Ltd. [2009-TIOL-104-ITAT-Pune] c. Customer Services India (P) Ltd. [2009-TIOL-424-ITAT-Del] d. Schefenacker Motherson Ltd. [2009-TIOL-376-ITAT-Del] e. Geodis Overseas (P) Ltd. [2011-TII-34-ITAT-Del-TP] f. TNT India Pvt. Ltd. [2011-TII-39-ITAT-Bang-TP] g. NGC Network (India) Pvt. Ltd. [2011-TII-45-ITAT-Mum-Intl] h. ADP Private Limited [2011-TII-44-ITAT-Hyd-TP] i. Birla Soft Limited ]2011-TII-70-ITAT-Del-TP] j. Exxon Mobil Company India Pvt. Ltd. [2011-TII-68-ITAT-Mum-TP] k. Symantec Software Solutions Pvt. Ltd. [2011-TII-60-ITAT-Mum-TP l. ST Micro Electronics [2011-TII-ITAT-Del-TP) m. Haworth (India) Pvt. Ltd. [2011-TII-ITAT-Del-TP] n. Deloitte Consulting India Pvt. Ltd. [ITA No. 1082/Dyd./2010] & 165/Del/2019 American Express Banking Corp. o. Denso Haryana Pvt. Ltd. [2009-TIOL-696-HC-Del-IT]

The Ld. TPO questioned the choice of tested party. The assessee had taken its foreign AEs except one as tested party and compared the arm’s length margins of services with those of foreign comparables. However, the Ld. TPO had held the assessee as a tested party instead of its foreign AEs. Further, the Ld. TPO, keeping in view the Rule 10B(2)(d) of the Income Tax Rules and availability of data of foreign comparables in public domain might not be sufficient and accurate for proper benchmarking purpose, held that the domestic comparables should be better choice. To buttress the above inference, the Ld. TPO, keeping in view various market parameters, locations, market competitions, place of services rendered, etc., took the assessee as a tested party and indigenous comparables for benchmarking. Various shortcoming in the benchmarking done by the assessee were pointed out by the Ld. TPO. Thereafter, the Ld. TPO applied CUP method for determining the arm’s length margin. The relevant part of the Ld. TPO’s order reads as under: - Choice of method 20. In its reply to the show cause notice the assessee has stated that TNMM is the most appropriate method to be applied in the case. The assessee has objected to the use of CUP as the most appropriate method on the grounds that (i) the assessee does not render same or similar services to third parties (ii) the AEs do not receive same or similar services from third parties in India under similar conditions and (iii) there is no publicly available information of prices charged in independent transactions of similar or identical nature.

It may be useful to elaborate on the methodology used for the The assessee has entered into an application of CUP. international transaction of receipt of services. It has exchanged a price with the AEs, for this transaction. That price is nestled under the head of 'law charges and other expenses under the expense head of 'operating expenses' (schedule 16 to profit and loss account). This is a fact and not a figment of the TPOs imagination.

We now have an international transaction and we have a price. It just happens that the price appears as a cost in the assessee's accounts. The TPO has compared this price that the assessee has paid with the price that has been paid by the comparables. This completely fulfils the requirement of CUP under Rule 108(1). The TPO has not compared the price in absolute terms as that would not have been reasonable. The TPO has compared the price paid as a ratio of sales.

Therefore the use of CUP for benchmarking this class of international transactions is appropriate. It has already been brought out earlier in this order that the benchmarking approach that has been followed by the assessee, while suffering from some serious fallacies, does not in substance amount to a separate benchmarking of this international transaction.

The assessee has not provided any alternative approach. Therefore, for the merits of the methodology proposed by this office, it shall be persisted with.

The assessee has called the approach used by the TPO, the use of BLT. This name was not provided by the TPO. Without getting into the semantics, it is clarified, that the approach of setting up a comparison between the ratio of IGS payment to sales of the assessee with the ratio of similar expenses to sales of the comparables, is a mathematical tool to arrive at the arm's length price. All prescribed methods will necessarily require the deployment of an analytical tool to arrive at the arm's length price. 7 & 165/Del/2019 American Express Banking Corp.

The TPO has never mentioned BLT to be the method in the show cause notice. The method was and remains CUP.

The assessee has stated CUP is not applicable as the assessee does not render similar services to third parties and the AEs do not receive similar services from third parties. This argument of the assessee would have had some force if only internal CUP was acceptable under Indian transfer pricing rules. That is not the case. We can use prices exchanged between unrelated parties for the rendering/receipt of services between them. That is what the TPO has used in this case.

The assessee has in its reply contended that there is no relation between the services received and the sales that it makes. The assessee states that it is not necessary that all the benefits that the assessee receives through these services, be quantifiable in numbers or translate into increase in profits and sales. The assessee has also cited some judicial decisions to support its point.

At the outset, it may be clarified that the ratio for comparing this ratio lies in the fact that this service that has been obtained by both the assessee and the comparables in order to run their business. The point that the TPO was making in the show cause was related to the question as what should be the denominator in the ratio that was being applied by the TPO. The question was whether it should be cost or sales. It is reasonable to believe that the assessee and the comparables are obtaining these services because they have a business to run.

The argument that the assessee has taken that the benefit that it receives through these services need not be quantifiable in numbers. Such an argument does not belong to the world of arm's length behavior. It can be said with reasonable certainty that no independent party would make a payment of Rs.76 Crores unless there was a visible benefit. The assessee has quoted some portions of the OECD & 165/Del/2019 American Express Banking Corp. transfer pricing guidelines, 2010 (OECD TPG) to support its contention. Let us examine what the OECD TPG has to say about this.

Para 7.23 of the OECD TPG reads as below.

As can be seen above, the OECD TPG also does not foresee the exchange of services between the members of a MNE group without the promise of benefit. An entity within an MNE group is not expected to be a charitable organization that distributes its profits in the form of intra- group payments without any benefit accruing to it. If the assessee indeed contends that there is no foreseeable benefit it gets from this service, then it would be better to abandon this approach and simply reduce the ALP of this international transaction to 'nil'. Because no independent entity would make payment of such a huge amount if it gets no benefit in return.

The point that has been made by the OECD TPG is also found in United Nations Transfer Pricing Manual for Developing Countries (UN TP manual). Relevant portions of the UN TP manual read as below.

As can be seen the UN TP manual also accepts the possibility of such an international transaction existing only in the face of benefit flowing to the entity that receives the service.

The judicial decisions that the assessee has cited have been rendered in scenario's where the ALP of the international transaction 10 & 165/Del/2019 American Express Banking Corp. as this kind has been reduced to nil. That is not the proposed course of action in this order.

Be that as it may, ignoring the hasty arguments made by the assessee, this office has no quarrel with the assessee obtaining this service. It is assumed that the assessee is a mature commercial entity and would have carried out a benefit test before it sought these services. The question before the TPO is just how much the assessee ought to have paid for these services in an arm's length environment.

The assessee has made an objection to the use of Kotak Mahindra Ltd (Kotak) as a comparable. The assessee has made copious arguments against the use of this company as a comparable.

It may be mentioned here that this company was presented as a comparable by the assessee and not by this office. Second, it was mentioned in the show cause notice and is reiterated here that this debate is largely academic as it is not the objective of this office to test the overall margin of the assessee. Kotak is being used as a comparable to compare the level of relevant expenses to sales.

However, since the assessee has taken pains to make a case here, let us examine the issue. The assessee earned its incomes from interest income of various kinds. So does Kotak. The risks that the assessee faces are akin to the risks that Kotak faces in its segments. The different business segments of the assessee as per its TP report are - Charge and credit card business - Services in relation to Travel cards and - Acceptance of institutional deposits as defined by RBI

It must also be recognised that the assessee is a branch. In that capacity it shares the entrepreneurial risks of its head office. The notes to accounts to the audited accounts (see schedule 18) mention that the American Express Banking Corp has been granted license by the Reserve Bank of India to carry 11 & 165/Del/2019 American Express Banking Corp. out banking business in India. The assessee is the branch in India and the related FAR is carried on its shoulders. The details of the investments are described as bank would describe its investments. On going through these details, there is no doubt that the functions of the assessee are that of a bank. Therefore, Kotak is a good comparable.

The assessee has made an overall margin of 5% against 24% made by Kotak. Therefore, the analysis that this office set out to make, that is, to arrive at an arm's length level of expenditure to earn a margin as much as the assessee, can be made using Kotak as a comparable.

The assessee has sought that the expenditure under the head of other expenditure in the case of Kotak also be include to arrive at the arm's length level of expenditure. That is accepted as the assessee's IGS expense is also accounted for under this head. The amended calculation is given below. S. Name Operating Law charges Other expense Law and N. Income (INR) and Professional (INR) professional charges (INR) charges/Sales (%) A B C D=(B+C/A) 1. Kotak 61,414,352,000 1,796,162,000 2,464,593,000 6.93 Mahindra Bank Ltd. Transfer pricing proceedings of AE 44. The assessee has made a plea that since no transfer pricing adjustment has been made in one of the AEs providing the service, namely, American Express Services India Ltd (AESIL), the transactions with that AE should be deemed to be at arm's length.

The assessee must understand that if there is no action taken at one end of an international transaction, it does not presuppose that the transfer pricing proceeding in the case of the enterprise at the other end of the transaction is a dead letter. The transfer pricing proceedings in the assessee's case are independent of what happened in the case of AESIL. In the case of AESIL, this was a receipt transaction. It is only & 165/Del/2019 American Express Banking Corp. logical that the matter will be examined in the case of the entity making the payment, which is the assessee.

The assessee has relied upon the proviso of section 92C(4) to support its claim. Let us examine what the proviso says. It states

What this proviso lays down is that if that an adjustment is made in the case of one AE, that adjustment cannot be made a basis for an adjustment in the other case. It does not mean that if no adjustment is made in one case, no adjustment can be made in the other case. Therefore, the assessee's reliance on this proviso is misplaced.

The assessee has also made a plea that no adjustment is made as both the assessee and AEs in India like AESİL will be paying tax on the same income. It is a universally accepted possibility that transfer pricing adjustments can give rise to double taxation. There are other methods under Indian law (like Mutual Agreement Procedures) that will provide relief from double taxation. The assessee is encouraged to take recourse to those provisions. No relief can be provided under the transfer pricing rules. [Emphasis has been supplied by us] 7. Aggrieved, the assessee filed appeal, who, following her predecessor finding in preceding year; AY 2009-10, allowed relief of 50%. The Ld. TPO has determined the cost of Intra Group Services @ 50% of the adjustment as against NIL taken by the Ld. TPO on the reasoning that the assessee & 165/Del/2019 American Express Banking Corp. failed to corroborate its claim vis-à-vis services rendered by its AEs along with the basis of working the arm’s length margin of such transactions.

At the outset, the Ld. Counsel submitted that the assessee’s income did not consist mainly of interest income as in the case of Kotak Mahindra Ltd. (hereinafter, the ‘Kotak’. It was further submitted that the Kotak’s unadjusted arm’s length margin worked out at loss of (-) 76.47% on operating revenue of AY 2011-12, whereas it was profit in the present case. It was also submitted that the assessee’s case of AY 2009-10 were factually different than the present case; hence, the Ld. CIT(A) erred in placing reliance on the finding of the AY 2009-10. It was contended that the material brought before the Ld. TPO and the Ld. CIT(A) were enough to conclude that the assessee had received services from its AEs and made payments in lieu thereof only. It was contended that the Ld. CIT(A) erred in concluding that there was enough material on record to infer that some services were availed by the assessee. However, the Ld. TPO had held otherwise on same sets of facts and documents. Such contradictions clearly demonstrated that none authorities below had appreciated the case properly after analyzing the material on the record.

Per Contra, the Ld. CIT-DR submitted that the case in hand was quite similar to the assessee’s case of the AY 2009-10. It was specifically submitted that the assessee had failed to give any basis for the cost allocation for the receipt of claimed services from its AEs. The assessee had also failed to demonstrate that the sales achieved were indeed the result of services provided by its AEs. The Ld. CIT-DR further submitted that the assessee failed to bring any evidence before the Income Tax Authorities to show direct nexus between payment made in lieu of service provided to it and actual services provided by its AEs along with the costing thereof. Thus, in such circumstances, the Ld. TPO had rightly taken the cost of the services at NIL as against 50% held by the Ld. CIT(A), argued the Ld. CIT- DR. 9.1 The Ld. CIT-DR submitted that the assessee had received very generic service, if any, from its AEs as the assessee failed to demonstrate that it would had not performed had it not received such services. It was claimed by the assessee that the services received by it were broadly categorized as Technology Services, Risk Information Management, Head Quarter & Back Office support services etc. However, the assessee had not furnished any supporting documentary evidence establishing the receipt of & 165/Del/2019 American Express Banking Corp. the specific services from the AEs. The Ld. CIT-DR vehemently argued that the Ld. CIT(A) had not given any specific justification for allowing 50% relief. The impugned order could be termed as non-speaking order as it did not contain any categorical finding with reasoning in its operating part. Thus, he prayed for dismissal of the assessee’s appeal and allowance of the Revenue appeal. At most, in view of the finding of the coordinate bench of the Tribunal in the assessee’s case of the AY 2009-10, the Revenue appeal might be considered for reverting back to the Ld. CIT(A) for fresh adjudication, submitted the Ld. CIT-DR.

We have heard both parties and have perused the material available on the record. The first issue is the rejection of TP Study of the assessee. The Ld. TPO held that the tested party is the foreign AE except one. Those tested parties are service providers unlike the assessee. The selection of tested parties was questioned by the Ld. TPO on the basis of functionality along with the geographical area and various market factors affecting the overall pricing, margin and cost of the services. Further, the TPO has questioned the data of foreign comparables on the reasoning that the inaccuracy and insufficiency of data could not be ruled out. Before us, the Ld. Counsel did not bring any material on the record to rule out the Ld. TPO’s finding with respect to the inaccuracy and insufficiency of data of the tested parties and foreign comparables. In such circumstances, the Ld. TPO took assessee as the tested party and Indian Comparables as tested party.

Now the next issue is the adoption of CUP method instead of TNMM for benchmarking international transactions [Ground Nos. 4 to 7]. The Ld. Counsel arguments revolve around the issue of Bright Line Test, non- rendering of similar services to third parties by the assessee, non-receipt of similar services by AEs of the assessee from third parties and non- availability of information of prices charged in independent transactions of similar or identical nature in public domain. The Ld. TPO has compared the price that the assessee paid for receipt of services from its AEs with the price paid by the indigenous comparables. Since TP Study of the assessee was rejected by the Ld. TPO; therefore, the Ld. TPO applied CUP method for & 165/Del/2019 American Express Banking Corp. benchmarking particularly when the assessee failed to bring anything on the records suggesting alternative benchmarking approach. The Ld. TPO has categorically held that he has not applied the principle of Bright Line Test in the guise of CUP method. The Ld. TPO has done comparison between the ratio of Intra Group Services payment to sales of the assessee with the ratio of similar expenses to sales of the comparables. Here, the Ld. TPO has done comparison of the prices paid by the unrelated parties for rendering/receiving similar services amongst them. It is not a case of internal CUP.

The last issue is related to Kotak. Kotak as comparable is the choice of the assessee before the Ld. TPO. The issue of dispute revolves around the nature of services of Kotak vis-à-vis services of the assessee taken for comparison along with the pricing/costing of the same. We have heard both parties at length and have perused the material available on the records. We are of the considered view that Kotak is suitable comparison provided their similar services are compared amongst themselves along with the specific data in that regard only for arriving the correct benchmarking. Ordered accordingly.

We are of the considered view that the Revenue’s appeal is squarely covered by the decision of the Co-ordinate Bench in the & 6455/Del/2017 (order dated 07/08/2024). Respectfully following the reasoning given by the Co-ordinate Bench in the said decision (supra), the appeal of revenue is remitted back to the TPO for determined the adjustment accordingly.

In the result, both appeals are allowed for statistical purposes as above.