CRM SERVICES INDIA PVT. LTD.,NEW DELHI vs. DCIT, NEW DELHI

ORDER

Per N. K. Saini, AM:

1. That the assessing officer / Dispute Resolution Panel (DRP) erred on facts and in law in completing the assessment under section 144C/143(3) of the Income- tax Act, 1961 (‘the Act’) at an income of Rs. 9,80,28,905 as against income of Rs.8,75,02,380 returned by the appellant.

2. That the assessing officer/DRP erred on facts and in law in making a transfer pricing adjustment of Rs. 1,05,26,525 allegedly on account of the difference in the arms length price of the international transaction of payment of royalty of Rs.1,93,77,390 holding that the appellant was not required to pay royalty in respect of services provided to the associated enterprise. 2.1 That the assessing officer/DRP erred on facts and in law in holding that in 2 terms of ‘Intangible and Proprietary Property and Licensing agreement’ (“the Agreement”) dated 02-01-2002, royalty was required to be paid only on the proportionate sales made to unrelated third parties. 2.2 That the assessing officer/DRP erred on facts and in law in not appreciating that the entire revenues of the appellant are from sale of services to third parties - whether such third parties are direct customers of the assessee or customers of the associated enterprise, and accordingly royalty was payable on the total revenue. 2.3 That the assessing officer/DRP erred on facts and in law in making a transfer pricing adjustment of Rs. 1,05,26,525 undertaking cost benefit analysis to determine the arms length price of payment of royalty without appreciating that cost-benefit analysis is not a prescribed method under Rule 10B of Income Tax Rules, 1963. 2.3 That the assessing officer/TPO erred on facts and in law in applying CUP method for benchmarking the transaction of payment of royalty without placing on record any comparable data for comparison. 2.5 That the assessing officer/TPO erred on facts and in law in not appreciating that the transaction of payment of royalty has already been benchmarked applying TNM method as the most appropriate method and accordingly, no adjustment is required to be made on this account. 2.6 Without prejudice, that the assessing officer/DRP erred on facts and in law in not appreciating that the payment of royalty was made in respect of sale of services to the customers of the associated enterprise in terms of the agreement and was incurred wholly and exclusively for purposes of business.

Re: Application for admission of additional evidence in terms of Rule 29 of the Income-tax (Appellate Tribunal) Rules, 1963. It is respectfully submitted as under:

3 The present appeal has been filed by the applicant, CRM Services India Pvt. Ltd., a wholly owned subsidiary company of TP USA Inc. (“TP USA”), engaged in the business of providing voice-based call centre services to the customers. In the aforesaid appeal, the applicant has challenged the action of the Assessing Officer/ Dispute Resolution Panel in holding that in terms of ‘Intangible and Proprietary Property Licensing agreement’ (“the Agreement”) dated 02-01-2002 entered by the applicant with its associated enterprise, royalty was required to be paid only on the proportionate sales made to unrelated third parties. The applicant craves leave to place on record Addendum to Intangible and Proprietary Property and Licensing agreement (hereinafter referred to as “the Addendum”), by way of additional evidence. The said Addendum effective 02nd January, 2002 seeks to set out in unequivocal and unambiguous terms, the understanding between the parties and the actual conduct of business as undertaken between them. The reasons for filing the aforesaid document as additional evidence under Rule 29 of the Income-tax (Appellate Tribunal) Rules, 1963 (‘the Rules’) are briefly stated hereunder: In terms of the foreign collaboration agreement dated 02-01-2002 entered into with TP USA, the applicant provides services to customers of TP USA in different parts of the world through its facility situated in India. In terms of the foreign collaboration agreement, the applicant provide voice based call centre services to third parties, which are customers of TP USA, viz., Washington Mutual, Telus, San-disc, etc.

It would be appreciated that the associated enterprise of the applicant, TP USA solicits business from various customers (‘third parties’), which business is then performed by the applicant in India. For the services rendered to such clients of TP USA, the applicant receives payment from TP USA.

In terms of the collaboration agreement, TP USA, in addition to providing marketing, information technology and systems support to the applicant company and training to the employees, would provide management support and on-site technical assistance and training to ensure international standard of service.

Further, in terms of paragraph 5 of the foreign collaboration agreement dated 02- 01-2002, TPUSA pays to the applicant for the voice based call centre services on the basis of hourly rates agreed in advance for each of the clients of TPUSA, to whom service is provided.

The applicant has also entered into an ‘Intangible and Proprietary Property and Licensing agreement’ (“the Agreement”) dated 02-01-2002 with TPUSA, Teleperformance Group Inc., a Daleware Corporation, (TGI) and SR Teleperformance, a company incorporated in France (SRTP). The said agreement provides the applicant license to use certain intangible property, know-how, customer relationship management (CRM) services, etc. on payment of royalty.

4 Accordingly, in terms of the aforesaid agreement, the applicant had, during the relevant previous year, paid royalty of Rs. 1,05,26,525 after certain deductions as provided in the agreement) to TP USA, for work done for 3rd party clients of TPUSA.

The transfer pricing officer (‘TPO’) benchmarked the international transaction of payment of royalty, taking the ALP at nil, allegedly concluding that no benefit is received by the applicant from use of such brand name and technology. Arguments on merits of the said adjustment have been addressed in the objections filed before the Hon’ble Panel.

Hon’ble DRP, in its directions dated 16.12.2014, however, has held that royalty is allowed to be payable by the applicant only in respect to services rendered to unrelated third parties holding as under:

(i) The royalty amount payable to AE is proportionately only to sales to third parties and not to payable in respect of sales to AEs. In this regard, you are directed to furnish: (a) The detail of royalty paid to the AE during the year. (b) This royalty apportioned in the ratio of revenue receipt of the taxpayer from AE and non AE. Submit also evidences in respect of sales receipt from AE and non-AE. Hon'ble DRP, in its directions interpreted the following clauses of the royalty agreement while sustaining addition made by the TPO. The said clauses reads as under:

“3. ROYALTY PAYMENT

3.1 Compensation: a. Payment of Annual Royalty. Subject to Section 3.2 below, as consideration for the rights granted under this Agreement, TP India shall pay to TP USA an annual royalty (the “Royalty”) payable in monthly instalments in an amount equal to two percent (2%) (the “Royalty Rate) of the aggregate Accumulated Gross Revenues of TP India. The Royalty shall be paid to TP USA within ten (10) days following the end of each month, based upon the aggregate Accumulated Gross Revenues of TP India from the immediately preceding month and any of the aggregate Accumulated Gross Revenues of TP India from any other prior months with respect to which the Royalty has not been paid. At the time the Royalty is paid, TP India shall also provide such documentation of the aggregate Accumulated Gross Revenues of TP India in the form of the Royalty Notice. Any unpaid Royalties shall accrue and be payable by TP India

5 as soon as cash is available. The parties hereby agree that no dividends shall be declared or paid by TP India if any Royalties remain unpaid and outstanding. ” The term “accumulated gross revenues” in clause 3.1 is defined in clause 1.1 of the Agreement as under: “1.1 Accumulated Gross Revenues “Accumulated Gross Revenues” shall mean the gross receipts from sales of services in the Territory by TP India to Third Parties less customary deductions, including: (a) transportation charges, including insurance: (b) sales or excise taxes, customs, duties, tariffs, and any other governmental charges imposed on the production, importation, exportation, use, or sale of the Services; (c) quantity and cash discounts allowed; (d) returns; and (e) allowances of credits to customers. ” Clause 1.15 of the Agreement defines the term “third party” as follows:

“1.15 Third Party or Third Parties “Third Party” or “Third Parties” shall mean any entity other than a party to this Agreement or an Affiliate.”

From a conjoint reading of the aforesaid clauses, DRP concluded that the applicant is obliged to make payment of royalty to TP USA for use of the “Teleperformance” trade mark and logo. Accordingly, royalty paid to TP USA qua revenues received from TP USA from sale of services on the ground that the same not being part of sale of services to third parties did not form part of “accumulated gross revenues” and accordingly no royalty was payable with respect to such sale of services. The DRP, however, it is respectfully submitted, did not correctly appreciate the business of the applicant and the modus operandi followed by the parties to the agreement. It is respectfully submitted that in the case of the applicant, TP USA solicits business from various customers (third parties), which business is then performed by the applicant in India. For the services rendered to third parties, who are clients of TP USA, the applicant receives payment for the services rendered to such third parties from TP USA. Since the services are rendered to third parties, notwithstanding that the revenues are received from TP USA, the same are considered as part of ‘accumulated gross revenues’ on which royalty is calculated.

6 It would therefore be appreciated that royalty is to be paid by the applicant on direct sales by the applicant to third parties as well sales to third parties (who are customers of TP USA) for and on behalf of TP USA. In other words, the entire revenues of the applicant are from sale of services to third parties - whether such third parties are direct customers of the applicant or customers of TP USA to whom services are directly rendered by the applicant. It would be appreciated that the parties to the agreement, viz., TP USA and the applicant are ad idem that royalty needs to be paid on sale of services rendered by the applicant to third party customers of TP USA. In the understanding of the two contracting parties, it was always the intention that royalty has to be paid for use of intangible property, knowhow, customer relationship management (CRM) services, etc. with respect to entire sale revenues of the applicant, including sales to third party customers of TP USA for which revenue is received from TP USA. It is accordingly not open to the Revenue to sit in judgment and interpret the Agreement in a manner different from what was intended and agreed between the parties.

Therefore, the parties in order to set out in unequivocal and unambiguous terms, the understanding and the real intention of the parties to the agreement, have post facto entered into the addendum to the Intangible and Proprietary Property and Licensing agreement dated 02-01-2002 with TPUSA, which is effective retrospectively, i.e. from 02-01-2002, providing as under: “1.15 Third Party or Third Parties “Third Party” or “Third Parties” shall mean any entity or entities to which TP India has rendered services either directly or indirectly through and Affiliate but shall exclude direct services to and for the individual benefit of a party to this Agreement or and Affiliate.” In the aforesaid circumstances, by way of the present petition, the Addendum to the Intangible and Proprietary Property and Licensing agreement entered into by the applicant with TPUSA is being placed for the first time before the Hon’ble Tribunal as additional evidence. The aforesaid agreement is essential to correctly appreciate the effective understanding and the real intention of the parties to the agreement. The same is being placed on record to rebut the conclusion arbitrarily arrived at by the lower authorities on a wrong interpretation of the terms of the agreement without regard to the actual conduct of business.

Your Honour’s kind attention is invited to the decision of the jurisdictional Delhi High Court in the case of CIT vs. Text Hundred India Pvt. Ltd.: 239

7 CTR 263. In that case, their Lordships held that Rule 29, permitting the Tribunal to admit additional evidence is made to enable the Tribunal to admit any additional evidence which would be necessary to do substantial justice in the matter. Their Lordships further observed that the various procedures, including that relating to filing of additional evidence, is handmade for justice and justice should not be allowed to be choked only because of some inadvertent error or omission on the part of one of the parties to lead evidence.

The relevant observations of the Court are reproduced hereunder: “13. The aforesaid case law clearly lays down a neat principle of law that discretion lies with the Tribunal to admit additional evidence in the interest of justice once the Tribunal affirms the opinion that doing so would be necessary for proper adjudication of the matter. This can be done even when application is filed by one of the parties to the appeal and it need not to be a suo moto action of the Tribunal. The aforesaid rule is made enablins the Tribunal to admit the additional evidence in its discretion if the Tribunal holds the view that such additional evidence would be necessary to do substantial justice in the matter. It is well settled that the procedure is handmade of justice and justice should not be allowed to be choked only because of some inadvertent error or omission on the part of one of the parties to lead evidence at the appropriate stage. Once it is found that the party intending to lead evidence before the Tribunal for the first time was prevented by sufficient cause to lead such an evidence and that this evidence would have material bearing on the issue which needs to be decided by the Tribunal and ends of justice demand admission of such an evidence, the Tribunal can pass an order to that effect.” (emphasis supplied). Reliance is also placed in that regard on the following decisions: CIT v. Hewlett Packard India: 314 ITR 55 (Del HC) CIT v. Chandra Kant Sahu Bhai: 202 Taxman 262 (Del HC) CIT v. Betterways Finance: ITA 995 of 2009 (Del HC) Jatia Investment Co v. CIT: 206 ITR 718 (Cal HC) Electra (Jaipur) Ltd v. IAC: 26 ITD 236 (Del ITAT) Y. W. C. A. of India vs IAC: 29 ITD 620 (Del ITAT)

The applicant, it is respectfully submitted, in the course of the proceedings before the TPO and DRP filed several documents and made elaborate submissions in support of arm’s length price of international transaction of payment of royalty to the associated enterprise. It is respectfully submitted that it was only on the receipt of the direction of DRP that the applicant came to know about the adverse inferences sought to be drawn by the DRP. The applicant

8 thereafter, in order to rebut the inference drawn by the lower authorities, has entered in the addendum to the Intangible and Proprietary Property and Licensing agreement which set out in unequivocal and unambiguous terms, the understanding and the real intention of the parties to the agreement, which is now sought to be placed on record as additional evidence. It is respectfully submitted that the aforesaid additional evidence is relevant to appreciate the substance of the arrangement between the applicant and associated enterprises, which goes to the root of the matter for determining the arm’s length price of international transaction of royalty. It would also be appreciated that this is the first appeal before the Hon’ble Tribunal against the impugned assessment order. It is, therefore, respectfully prayed that, in terms of discretion vested in your Honour’s in rule 29 of the Income-tax (Appellate Tribunal) Rules 1963, the aforesaid papers/documents placed on record by way of additional evidences may kindly be admitted and taken into consideration while adjudicating the above appeal. The applicant trusts that its request shall be acceded to.”

7.2 Since the Ld. AR has stated that if ground nos. 3 and 17 are decided in favour of the assessee, the other grounds will become academic in nature, we are not proceeding to hear the arguments of either of the parties on the remaining grounds at the present moment. We, however, note that the assessee will be at liberty to raise these grounds again before the Tribunal at a future date, if it is so required.

8. In the result, the assessee’s appeal stands partly allowed for statistical purposes in terms of our directions as contained in the preceding paragraphs.