CWT INDIA P.LTD,MUMBAI vs. DCIT (OSD) RG 8(1), MUMBAI

IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI BENCHES “K”, MUMBAI BEFORE SHRI R.C. SHARMA (AM) AND SHRI RAM LAL NEGI (JM) Assessment Year: 2009-10 Assessment Year: 2010-11 Assessment Year: 2011-12 & Assessment Year: 2012-13 M/s CWT India Private Limited, The Assistant Commissioner of Unit No. 2, Raheja Centre, Income Tax-9(2)(2), Ground Floor, Aayakar Bhavan, Free Press Journal Marg, Vs. Mumbai - 400020 Nariman Point, Mumbai – 400021 PAN : AAACI7084H (Appellant) (Respondent)

Assessee by : Shri Mukesh Butani/ Shreyash Shah (ARs)

Shri Jayant Kumar (CIT-DR)/ Revenue by : Saurabh Deshpande / Arun Kumar Singh (DR) Date of Hearing: 01/02/2019 Date of Pronouncement: 01/05/2019 आदेश / O R D E R PER RAM LAL NEGI, JM These appeals have been filed by the assessee against the assessment orders passed by the Assessing Officer (AO) u/s 143(3) read with section 144C(1) of the Income Tax Act. (For short ‘the Act’) pursuant to the directions Assessment Years: 2009-10 2010-11, 2011-12 & 2012-13

dated 31.10.2013, 24.09.2014, 09.12.2015 and 25.11.2016 passed by the Ld. Dispute Resolution Panel-I (DRP), Mumbai, pertaining to the Assessment Years 2009-10, 2010-11, 2011-12 and 2012-13 respectively. 2. Brief facts of the case are that the assessee company filed its return of income for the assessment year under consideration declaring the total income of Rs. 2,25,97,199/-. Since the case was selected for scrutiny, the AO issued notice u/s 143 (2) and 142 (1) of the Act. In response thereof the authorized representative (AR) of the assessee appeared before the AO and furnished the details and discussed the case. It was noticed that the assessee had entered into international transactions with its associate enterprises (AEs), the AO referred the transactions mentioned in the audit report in the Form No. 3CEB to the Transfer Pricing Officer (TPO) for determining the arm’s length price. The Ld. TPO passed order u/s 92CA (3) of the Act making upward adjustment of Rs. 15,36,55,898/-. Accordingly, the AO passed draft assessment order u/s 143(3) read with section 144C (1) of the Act determining the total income of the assessee company to Rs. 17,66,17,220/- after making inter alia addition of Rs. 15,36,55,898/- on account of transfer pricing adjustment, Rs. 3,48,598/- treating the software expenditure as capital expenditure instead of revenue expenditure claimed by the assessee. 3. Against the draft assessment order, the assessee filed objections before the Ld. Dispute Resolution Panel-I (DRP) challenging the addition made on account of transfer pricing adjustment in terms of order passed by the Ld. TPO and the addition made by AO by treating the software expenditure as capital expenditure rejecting the claim of the assessee. The Ld. DRP after hearing the assessee rejected the contentions/claims of the assessee and upheld both the additions vide order dated 31.10.2013 passed u/s 144C(5) of the Act. Pursuant to the said order, the AO passed assessment order u/s 143(3) read with section Assessment Years: 2009-10 2010-11, 2011-12 & 2012-13

144C (13) of the Act, determining the total income of the assessee at Rs. 17,61,51,890/-. 4. The assessee has challenged the impugned order on the following effective grounds:-. 1. “That on the facts and circumstances of the case and in law, the AO has erred in assessing the income of the Appellant under normal provisions of the Act at INR 17,61,51,890 as against the returned income of INR 2,25,97,199, computed under the provisions of section 115JB of the Act. 2. That on facts and circumstances of the case and in law, the AO/TPO erred in making and the DRP further erred in upholding an adjustment of Rs. 15,36,55,898, in respect of international transactions undertaken during year, alleging that the same were not at arm’s length in terms of the provisions of Sections 92C(1) and 92C(2) of the Act read with the Rule 10B of the Income-tax Rules, 1962 (“the Rules”). 3. Transfer Pricing (“TP”) adjustment in respect of payment of fee for obtaining technical assistance amounting to INR 15,36,55,898. 3.1 That on the facts and circumstances of the case and in law, the AO/DRP/TPO have erred in making an arbitrary adjustment of INR 15,36,55,898 in respect of international transaction pertaining to payments made to associated enterprise (“AE”) for receipt of technical assistance, alleging that the same were not at arm’s length and determining the arm’s length price (“ALP”) to be Nil. 3.2 That on the facts and circumstances of the case and in law, the AO/DRP/TPO have erred in arbitrarily rejecting the economic analysis and methodology adopted by the Appellant, being Transactional Net Margin Method (‘TNMM’), being the most appropriate method for benchmarking the international transaction pertaining to payments to AE for receipt of technical assistance and further erred in not Assessment Years: 2009-10 2010-11, 2011-12 & 2012-13

applying any of the methods prescribed under the Act read with rule 10B of the Rules.

4.1 That on the facts and circumstances of the case and in law, the TPO erred in proposing and the DRP further erred in upholding an adjustment of INR 12,47,94,537, on protective basis, in respect of the international transactions pertaining to provision of customer support, data updation and travel related services alleging the same to be not at arm’s length.

4.2 That on the facts and circumstances of the case and in law, the AO/DRP/TPO erred in arbitrarily rejecting certain comparable companies selected by the Appellant, which were functionally comparable and further erred in selecting certain companies as comparables, which were functionally not comparable with the Appellant. 4.3 That on the facts and circumstances of the case and in law, the DRP erred in not rejecting the comparables as selected by the TPO, being Thomas Cook and Crown Tours Limited, on the ground that no specific ground of objections was raised by the Appellant in its objections filed before the DRP in this regard.

4.4 That on the facts and circumstances of the case and in law, the TPO erred in not following the binding directions of DRP to recompute the quantum of adjustment at transaction level rather than at the entity level as per Rule 10B of the Rules, in respect of provision of customer support, data updation and travel related services. Assessment Years: 2009-10 2010-11, 2011-12 & 2012-13

of direction issued by the Ld. DRP u/s 144C(5) of the Act. Before us, the Ld. counsel for the assessee submitted that the assessee company was a joint venture of Carlson Wagonlit Travels (CWT) and AFL Limited, wherein CWT and AFL Ltd. were holding 76% and 24% shares respectively. In May, 2008 the assessee company seized to be a joint venture and became a wholly owned subsidiary of CWT Holdings N.V. The assessee company CWT India’s operations in India comprise of the legacy travel management solutions and the regional business travel centre (RBTC) services. During the year under consideration, the assessee entered into international transactions with its AEs in respect of provision of customer support, data updating and travel related services. 6. The Ld. counsel submitted that assessee company provides call registration, reservation and booking services to Hewlett Packard (HP), its subsidiaries and affiliates residing in Singapore, Australia, India and New Zealand. Registration services entail HP employees making request for travel bookings and hotels reservations via calls, emails and self booking tools. The request is registered with the assessee and processed by the assessee. After receiving request for reservations, CWT India provides options for domestic, international airlines and hotels based on HP’s travel policies. The bookings are made as per the lowest possible fares rentals that HP worldwide is entitled to. Once the booking details are confirmed the tickets are issued by group entities in respective countries. The mode of delivery of tickets is generally electronic except in exceptional cases. Hence, the overseas enterprises are responsible for issuing the tickets for HP in Asia Pacific region. In the process of invoicing, the assessee generates invoices to the overseas entities for reservation services rendered to HP. Hence, CWT India does not raise any invoices on the HP client but helps in generating such invoices of the overseas associate enterprises. The Ld. counsel further submitted that the assessee company also entered into a support service agreement with CWT Inc (USA) for provision of NORAM Assessment Years: 2009-10 2010-11, 2011-12 & 2012-13

service which includes processing of domestic and international refunds, Issuing airline tickets that require manual intervention and issuing airline ticket exchanges. The assessee is engaged in providing data updating services to its associated enterprises entered into services legal agreement with international organizations and companies such as International Trade Centre (ITC), World Health Organization (WHO) etc. Under the agreement, the AEs are responsible for providing ticket from anywhere in the world via CWT group network. CWT India issues ticket to employees of the said companies and international organizations travelling in India. The company is remunerated by the associated enterprises for providing such services. 7. The Ld. counsel further contended that there are two types of services delivery risk one pertaining to non conformity of services with regard to the standards set by the overseas associated enterprises and second related to the risk arising in providing such services to the client. Therefore, in relation to customer support, data updation and travel related services, both CWT India and overseas associated enterprises bear service delivery risk. Although CWT India does not directly enter into contract with the customer but any decline in the business of the group would have an adverse impact on CWT India. The Ld. counsel further submitted that the capacity utilization risk arises due to inadequate utilization of resources by the company provisions of services requires sizeable investment in infrastructure, in terms of premises, equipment, connectivity, personnel etc. Generally, the risk is to be borne by the entity making investment. However, in the present case the CWT India is liable to bear the capacity utilization risk. Any cost pertaining to the inefficiencies of CWT India will be excluded for the purposes of arriving at the cost base on which a mark-up is to be paid by the associated enterprises. Apart from that, the risk due to foreign exchange fluctuation is borne by CWT India. Similarly, the Government policy risk i.e., adverse changes in policies of the Indian government with respect to tax rates, tax holidays, subsidies or any legislative Assessment Years: 2009-10 2010-11, 2011-12 & 2012-13

or documentation requirements may directly or indirectly affect the projected profitability of CWT India and CWT Global. Thus, both CWT India and associated enterprises were market risk. The Ld. counsel further submitted that CWT India is being remunerated by its associated enterprises which belong to the same group are not likely to default on payments. On the other hand, since the AEs will be earning their revenues from third parties, they are subject to credit risk. 8. To enable the provisions of the aforesaid services to its AE, the assessee availed technical services from AE CWT Singapore Pvt. Ltd., CWT Hongkong, CWT Thailand, CWT New Zealand and others. These services were provided under different agreements entered with AEs for availing management, sale and marketing, financial treasury, general managements, information technology, human resources, industrial relation and other related services. For the services availed by the assessee, the AEs raised invoices amounting to Rs. 15,36,55,898/- and the amounts to the AEs were paid through banking channels. The assessee included the expenses incurred in relation to the said services in its operational expenses for the purpose of benchmarking. The Ld. counsel for the assessee invited our attention to the transfer pricing report submitted before the Ld. TPO and the Ld. DRP. As per the said report the assessee availed regional account management services, regional sale and marketing services, information technology and human resources related services from CWT Singapore. The assessee availed solution related services from the solutions group CWT Singapore. Similarly, the assessee also availed similar services from CWT Australia, Hongkong, Thailand, New Zealand and other AEs. 9. The Ld. counsel further submitted that in the light of the aforesaid facts, the Ld. TPO has wrongly held that there are discrepancies in the TP report submitted by the assessee and some of the comparables selected by the assessee are found to be non comparable. Few of the companies which were Assessment Years: 2009-10 2010-11, 2011-12 & 2012-13

rejected by the assessee in its accept reject matrix are functionally similar to the assessee company and they should have been selected as comparables. In response to the show cause notice issued by the TPO, the assessee submitted the detailed reply and explained that how the information or data used in computation of the arm’s length price is reliable. 10. The Ld. counsel further submitted that the Ld. DRP has wrongly upheld the transfer pricing adjustment made by the Ld. TPO in violation of the provisions of the Income Tax Act and the Rules. Since, the Ld. TPO had wrongly rejecting the TP study report treated the arm’s length price of fee paid for technical services as Nil, Ld. DRP ought to have allowed the objections filed by the assessee. The Ld. counsel further pointed out that TPO has not used any method prescribed and determined the arm’s length price of fee paid for technical services as nil on the ground that the assessee has failed to establish that the payments were actually made for technical services. The Ld. Counsel relying on the judgment of the Hon’ble Bombay High Court in the case of CIT vs. Merck Limited 389 ITR 70 (Bom), CIT vs. Lever India Exports Ltd. 78 taxmann.com 88 (Bombay High Court) submitted that not adopting of one of the prescribed methods by the Ld. TPO for determining ALP in respect of fees of technical services payable by the assessee to its AEs makes the entire transfer pricing agreement unsustainable in law. In the light of the principles of law laid down by the jurisdictional High Court the ad hoc determination of ALP by the TPO in contravention of the provisions of the Act cannot be sustained. The Ld. counsel further relying on the judgment of the Hon’ble Bombay High Court in the case of CIT vs. Johnson and Johnson Ltd. 80 taxman. Com 337 (Bom) submitted that the TPO was required to determine the ALP by following one of the methods prescribed u/s 92C r.ws. rule 10B of the Income Tax Rules. The Ld. counsel further submitted that in view of the law laid down by the Hon’ble Bombay High Court discussed above, the entire addition is liable to be deleted. Assessment Years: 2009-10 2010-11, 2011-12 & 2012-13

updation and travel related services. The Ld. DR further submitted that the documents submitted by the assessee are of general nature in the form of e- mail communication, templates and presentations, which have no evidentiary value. The evidence adduced by the assessee only prove the incidental and passive association benefits and do not prove the need for the services in question and expenditure on such services.

7.5% for rendering finance and treasury general management, human resources services in its operation and information technology and information delivery. The assessee submitted the detail cost benefit analysis of payment to Singapore based AE for availing technical services. The contention of the assessee is that it has benchmarked the transaction on whole entity basis. The assesse’s margins are comparable with the margins earned by the comparable companies. Therefore, the payment fees for availing technical assistance can be said to be at arm’s length. The assessee has submitted the copy of Service Agreement in which it is mentioned that the segment is made effective from 1st April, 2008. As per the agreement, apart from the operations and information technology and information delivery (MIS), services shall include account management, solutions, sales and marketing, finance and treasury, general management, human resources services, industrial relations and other services as the parties may agree. As per the compensation clause fee is to be paid to CWS-HQ which should be calculated by reference to the cost incurred by CWS- HQ. It is also mentioned therein that an initial mark-up of 10% will be charged on these costs. The additional evidence produced before the Tribunal explains as to how costs were allocated to various entities of the group and how the percentage was applied to the assessee. 16. We notice that the Ld. TPO has rejected the claim of the assessee inter alia on the ground that the assessee has failed to prove that the AEs rendered services for which payments in question were made and the assessee has failed to quantify the services in terms of actual expenditure incurred and benefits derived there from. The relevant paras of the TPO’s order read as under:

“To conclude, firstly the taxpayer has to prove that the services are rendered. The texture did not prove it substantially. The second aspect of intergroup services is the quantification of such services in terms of actual expenditure incurred and commensurate benefits derived there from. The suspect is also not prove by the taxpayer. Even if we assume that the above Assessment Years: 2009-10 2010-11, 2011-12 & 2012-13

services are incurred the quantum of such services would not be to the extent of Rs. 15,36,55,898/-. The assessee in its reply to show cause notice has submitted that the assessee has incurred the expenditure in its own rights to further its business interest and it is free to determined the manner in which it should carry out its business. Further, it is submitted that it is not the prerogative of the TPO to question the commercial wisdom of the taxpayer in incurring these expenses and question the business judgment of the taxpayer. On this issue it is clarified that the TPO is not questioning assessee’s commercial wisdom or business judgment but he’s duty-bound to find the arms length price of the International transactions of receipt of technical services by the assessee it is the TPO prerogative and duty to determine the benefits derived by the assessee in a controlled rejection and the price which could have been paid by the assessee if it had taken such services from a third-party. Hence, in the light of the discussion, the arms length price of the fee paid for technical services is treated as RS nil due to inadequacy of the taxpayer’s argument and the entire payment of fee paid for technical services of Rs. 15,36,55,898/- is treated as an adjustment u/s 92 CA.”

before the Hon’ble High Court was whether on the facts and in the circumstances of the case and in law the ITAT was justified in deleting the addition in respect of disallowance of software expenditure as capital. In the said case, the Tribunal had held that the software expenditure is revenue expenditure. Similarly, in the case of CIT v. Asahi India Safety Glass Ltd. (Supra), the question before the Hon’ble Delhi High Court was that whether the Tribunal was correct in holding that expenditure incurred by the assessee on account of software and official expenses was the revenue expenditure. The Hon’ble High Court after hearing the rival contentions of the parties decided this issue in affirmative and in favour of the assessee. 21. In the present case the assessee has acquired license to use the software, therefore there is no transfer of ownership of the software to the assessee. The license fee was not paid for obtaining any right for coping the software or right to sell/ transfer or otherwise deal in such software. So far as the test of enduring benefit is concerned the assessee has purchased various software applications for using day-to-day operations of the business. With the advancement of technology innovation, the software becomes outdated and accordingly same are updated from time to time. So far as the functional test is concerned, the advantage derived by the assessee is not in the capital field of revenue so as to treat the same as capital expenditure. The advantage consists merely in facilitating the appellant’s trading operations in carrying out the business more effectively and has not resulted in creating a profit earning apparatus for the assessee. Moreover, there is no change in the fixed capital base of the business by purchases of license to use the software.

authorities below is contrary to the principles of law laid down in the aforesaid cases. Hence following the ratio of law laid down by the Hon’ble High Courts in the aforesaid case, we set-aside the findings of the AO based on the directions issued by the Ld. DRP and allow this ground of appeal. Accordingly we direct the AO to delete the addition by treating the same as revenue expenditure.

Further, on the facts and circumstances of the case and in law, the AO/DRP/TPO have erred in the following: 2.1 Rejecting the economic analysis and methodology adopted by the Appellant, being Transactional Net Margin Method (‘TNMM’), being the most appropriate method for benchmarking the international transaction pertaining to payments to AE for receipt of technical assistance and further erred in not Assessment Years: 2009-10 2010-11, 2011-12 & 2012-13

applying any of the methods prescribed under the Act read with rule 10B of the Rules.

2.2 Making an adjustment in respect of international transaction by determining the arm’s length price (“ALP”) to be Nil and deciding the deduction of the expense. 2.3 Ignoring the provisions of Rule 10B while applying Comparable Uncontrolled Price (“CUP”) methodology in determining ALP for receipt of services. 2.4 Not sharing the relevant material/information relied upon while applying CUP as most appropriate method. 2.5 Questioning the commercial expediency/wisdom of the Appellant. 2.6 Not considering the benefit derived by the Appellant from receipt of technical services and disregarding the documentation submitted by the Appellant. 2.7 Considering travel related expenses in the value of international transactions of technical services while determining the adjustment.

It is prayed that it be held that the aforesaid international transaction is at arm’s length and accordingly, the AO be directed to delete the adjustment.

Other grounds: 3. On the facts and circumstances of the case and in law, the AO/DRP erred in treating the software expenditure after depreciation, amounting to INR 8,70,546 as capital in nature. Assessment Years: 2009-10 2010-11, 2011-12 & 2012-13

10 aforesaid, consistent with our findings, we allow this ground of appeal of the assessee and direct the AO to delete the addition of Rs. 8,70,546/- made by treating the software expenditure as capital expenditure. Hence, this ground of appeal is allowed. 7. Vide Ground No. 4, the assessee has challenged the action of AO of charging interest u/s 234A, 234B and 234D of the Act. Since, this ground of appeal is of consequential nature, we do not consider it necessary to decide the said ground at this stage. The facts of the present case are similar to the facts of the assessee’s case for the A.Y. 2009-10 and 2010-11 aforesaid except the amount of transfer pricing adjustment involved and the amount of expenditure incurred on purchase of software license. Since, we have discussed the facts of the case in the assessee’s appeal for the A.Y. 2009-10 aforesaid, we do not consider it necessary to repeat the same here once again. In the present case, the AO determined the income of the assessee for the assessment year under consideration at Rs. 49,73,70,470/- as against the return income of Rs. 21,48,52,460/- after inter alia making addition of Rs. 28,25,18,009/- on account of arm’s length price adjustment in pursuance of order u/s 92CA (3) passed by the Ld. TPO and further confirmed by the Ld. DRP. Aggrieved by the impugned order passed by the AO, the assessee filed objection against the said order before the Ld. DRP. The Ld. DRP after hearing the assessee rejected the objections and confirmed the additions of Rs. 28,25,18,009/-. The assessee is in appeal before the Tribunal against the findings of the authorities below. 2. The assessee has challenged the impugned order on the following effective grounds:-. 1. “On the facts and circumstances of the case and in law, the orders passed by the AO/Transfer Pricing Assessment Years: 2009-10 2010-11, 2011-12 & 2012-13

Officer (‘TPO’) and directions issued by the Dispute Resolution Panel (DRP) are not in accordance with law and is contrary the facts and circumstances of the present case and in violation of the principles of equity and natural justice.

4.1 Rejecting the economic analysis and methodology adopted by the Appellant, being Transactional Net Margin Method (‘TNMM’), as the most appropriate method for benchmarking the international transaction pertaining to payments to AE for receipt of technical assistance at entity level.

4.2 Determining the arm’s length price (“ALP”) as Nil without proper application of any transfer pricing method prescribed under section 92C of the Act read with Rule 10B of the Rule of the Income Tax Rules, 1962 (“the Rules”). 4.3 Not sharing the relevant material/information relied upon while determining the arm’s length price. Assessment Years: 2009-10 2010-11, 2011-12 & 2012-13

4.4 Questioning the commercial expediency/wisdom of the Appellant for incurring of expenditure in respect of receipt of technical assistance. 4.5 Not acknowledging the fact that the service were actually received by the Appellant. 4.6 Not appreciating and disregarding the back-up documentary evidence/information provided to substantiate the need and benefits derived from receipt of technical assistance from AE by the Appellant during the course of the proceedings. 4.7 Arbitrarily relying on the DRP directions of AY 2011- 12 in Appellant’s own case, without proper examination of the facts and circumstances of AY 2012-13 and concluding that the material placed on the record by the Appellant in the instant AY is similar to the documentary evidences submitted in the previous AY without proper examination. Other grounds: 5. That the learned AO has erred on the facts and circumstances of the case and in law, in levying the interest under section 234B of the Act mechanically and without recording any satisfactory reasons for the same. 6. That AO/DRP has grossly erred on the facts and circumstances of the case and in law by initiating the penalty proceedings under section 271(1)(c) read with section 274 of the Act and stating that the Appellant has furnished inaccurate particulars of income leading to concealment of income. 3. During pendency of the present appeal the assessee revised ground No. 1 of the appeal and raised the legal issue contending that since the Ld. TPO in has not served any show cause notice as per the provisions of proviso to sub section 3 of section 92C of the Act or not provided a reasonable opportunity of Assessment Years: 2009-10 2010-11, 2011-12 & 2012-13

being heard to the assessee to rebut the arguments/evidence relied upon, the transfer pricing adjustment is bad in law. The revised ground reads as under:-

“On the facts and circumstances of the case and in law, the orders passed by the AO/Transfer Pricing Officer (‘TPO’) and directions issued by the Dispute Resolution Panel (DRP) are not in accordance with law and is contrary the facts and circumstances of the present case and in violation of the principles of equity and natural justice. a) In general and b) In specific, the Ld. TPO grossly was violated the principle of natural justice by failing to give show cause notice under the proviso to section 92C(3) of the Act and or provide any reasonable opportunity to the appellant to rebut the arguments evidence relied upon and or other grounds taken for making adjustment in arm’s length principle.

is arbitrary and contrary to the law laid down by the Hon’ble Supreme Court. The Ld. counsel further submitted that since the Ld. TPO has failed to comply with the statutory provisions, the transfer pricing adjustment made by him is liable to be set aside. 6. On the other hand, the Ld. DR submitted that since the assessee has participated in the entire TP proceedings before the Ld. TPO, the assessee cannot raise this issue and even if the Ld. TPO has not served the notice in terms of the aforesaid proviso, the proceeding will not be vitiated as this irregularity is covered by section 292BB of the Act, which says that where the assessee has appeared in any proceedings in any enquiry relating to assessment or reassessment which shall be deemed that any notice under any provisions of the Act which is required to be served upon him has been duly served upon him in accordance with the provisions of the Act. 7. In rebuttal the Ld. counsel for the assessee submitted that the provisions of section 292BB do not apply in the present case as the presumption u/s 292BB is regarding service of notice and not regarding issuance of the notice. In the present case since the Ld. TPO had not issued any notice in compliance of the aforesaid provision no question of its service does arise. The Ld. counsel further relied on the judgment of the Mumbai ITAT in the case of Suresh Export (2017) 88 taxmann.com 374 in which the Tribunal, relying on the decision of the jurisdictional High Court in the case of CIT vs. Geno Pharmaceuticals Ltd. (2013) 32 taxman.com 162 has held that issuance of service of jurisdictional notice u/s 143 (2) is mandatory and in the absence of the same, the assessment framed would be void-ab-initio. In the light of the aforesaid judgment, the Ld. counsel submitted that section 292BB is applicable in case where the service of notice is in question. Since, in this the Ld. TPO has not issued by the authority concern, this section will not apply. Assessment Years: 2009-10 2010-11, 2011-12 & 2012-13

the assessee. The cases relied upon by the assessee are on different points. Hence we do not find any merit in the contention of the assessee. We accordingly dismiss this ground of appeal of the assessee. 10. Ground No. 2 and 3 are general in nature, hence, we do not deem it necessary to adjudicate the same separately. 11. Vide Ground No. 4 to 4.7 the assessee has challenged the action of AO in making addition of Rs. 28,25,18,009/- on account of transfer pricing adjustment in pursuance of direction dated 25.11.2016 passed by the Ld. DRP u/s 144C(5) of the Act. The general contention of the parties in the present appeal are similar to the contentions of the parties raised in the assessee’s appeal for the A.Y. 2009-10 and 2010-11 discussed above. During the previous year relevant to the assessment year under consideration the assessee entered into different agreement with its AEs for availing the services relating to account management, solutions, sales and marketing, finance and treasury, human resource services, industrial relation and other services as the party may agree. During the year relevant to the assessment year under consideration, the assessee availed the aforesaid services from CWT, Singapore in terms of the agreement entered with the CWT, Singapore. 12. Before us, the Ld. counsel for the assessee submitted that during the relevant year, the assessee had paid Rs. 28,25,18,009/- to CWT, Singapore. The Ld. counsel further submitted that it is not the case of the revenue that this amount was not paid by the assessee to its AE. The Ld. counsel further pointed out that the assessee has filed the details of nature of service and details of benefits received from the AE and also need for services in different fields of operational activities in order to demonstrate the arm’s length price. The assessee has also furnished the TP study report benchmarking the transaction by using Transaction Net Margin Method (TNMM) and selecting the AE as a tested party. As per the TP report, the margin of the tested party is 7.5 – 10%, whereas the arm’s length margin of the comparables selected by the Assessment Years: 2009-10 2010-11, 2011-12 & 2012-13

assessee is 24.83%. Since, the margin of tested party is less than the margin of the comparable companies, the assessee has benchmarked the transaction as arm’s length. The Ld. counsel further pointed out that the assessee has established the genuineness of the expenditure and its allocation among various group entities by furnishing CPA certificate duly issued by the competent person. The Ld. counsel further argued that the analysis of the TPO is not based on evidence on record and in accordance with the provisions of the Act. The Ld. TPO has wrongly computed the arm’s length price of the international transaction at Nil. In the present case, since the Ld. TPO has wrongly applied CUP method the Ld. DRP ought to have set aside the order passed by the Ld. TPO. The Ld. counsel for the assessee relying on the decision of the Pune Bench of the Tribunal in the case of Emerson Climate Technologies (India) Ltd. vs. DCIT 2018 90 taxman.com 125 submitted that in the present case the CUP method cannot be applied as most appropriate methods because the transaction is intra group i.e. between the AEs. The Ld TPO has not brought on record any comparable for applying CUP methods for benchmarking the transaction. The Ld. counsel further pointed out that the assessee has furnished apart from other details, the financial of the comparables including the description of services provided by the seven comparables selected by the assessee in its TP study report available at page No. 805 to 807 of the paper book. 13. On the other hand, the Ld. DR relying on the order passed by the AO in terms of the directions issued by the Ld. DRP submitted that the Ld. TPO by applying CUP rightly considered the arm’s length price at Nil as the services rendered by the AE has not substantially benefitted to the assessee being the AE. The Ld. DR placing reliance on the order of the ITAT, Mumbai in the case of Deloitte Consulting India Pvt. Ltd. 22 taxmann.com 107, held that an uncontrolled comparable company would not incur such expenditure, therefore the arms length price is rightly determined at Nil. The Ld. DR further pointed Assessment Years: 2009-10 2010-11, 2011-12 & 2012-13

out that the TP study of the assessee has only established the arms length price of the markup charge by the AE without demonstrating the need of such services. The Ld. DR further pointed out that the TP study report has been prepared by using multiple year data, hence the arm’s length price determined by the assessee is not acceptable. The Ld. DR further pointed out that the ranges of the seven comparables are from 4.56% to 44.98%, average of which comes to 24.83%. Since, the assessee has not provided the margin of the comparable pertaining to the assessment year under consideration, the Ld. TPO has rightly rejected the arms length price determined by the assessee. The Ld. DR further submitted that the copy of emails, presentation and templates submitted by the assessee before the authorities below have no evidentiary value. The Ld. DR further submitted that since the TPO has rightly held the arms length price at Nil by following the appropriate method, the Ld. DRP has rightly affirmed the findings of the Ld. TPO. Therefore, there is no infirmity in the impugned order to interfere with. 14. We have heard the rival submissions and gone through the relevant material on record including the cases relied upon by the parties in the light of the rival contentions of the parties. The assessee company was a joint venture of 76:24 between Carlson Wagonlit Travels (CWT) and AFL Ltd. in the year 2008, the assessee company seized to be a joint venture and became 100% subsidiary of CWT Holdings N V. Post exit of AFL, there was need to provide operational strategic and advisory support to the assessee company to ensure that the assessee is benefitted by the processes followed by CWT group of company worldwide. The said services were provided by the AEs for which the asseseee entered into agreement with its AE CWT, Singapore. The aim of providing services to the assessee was to achieve the objective of development of its business in the Indian market, implementation of cost effective process, improvement of financial performance, establishing robust control, establishing Assessment Years: 2009-10 2010-11, 2011-12 & 2012-13

best in class HR practices, develop strong global customer business and established its identity in the Indian market. 15. In order to demonstrate the justification of benefits derived by the assessee from the services rendered by its AE, the assessee has placed on record, the details of the services availed, details of benefit derived and the functions performed by the assessee. As per the details furnished by the assessee, the assessee placed on record the copies of e-mail, correspondences, templates and presentation to establish that by availing the services from the AEs the assessee could perform its function effectively in the fields of regional sales and marketing, operation management, finance and treasury, human resources, Information Technology and Information delivery system. The assessee has further submitted that details of benefit derived from the AE which includes: a) Regional sales and marketing – As per the details furnished by the assessee, CWT India was benefitted from the support provided by CWT Singapore in generating new business opportunities and other engagements with its new clients. Further, CWT India received regular assistance from its AE on making pricing instructions to the prospective clients. b) Operation Management – The services rendered by the AE benefitted the assessee in implementation of new system modules and solutions in India improving business efficiency in terms of web security, flexible central management and powerful logging. c) Finance and treasury – CWT India received assistance in preparing annual budgets, key performance indicators,, measures to reduce cost, updation of templates such as invoice ensuring consistency with group standards. d) Human resources – CWT India also received access to the newly launched Policy application for all the employees enabling conducive working Assessment Years: 2009-10 2010-11, 2011-12 & 2012-13

culture. Further, assistance was received in relation to the compensation setting as per market standards and on replacement of various positions. e) Information technology and information delivery system – CWT India further received benefits from the support provided by AE in relation to migration on a new software platform along with specific instructions on the installation. 16. Thus, the assessee has produced the documentary evidence to demonstrate that it has availed services in the aforesaid fields. The assessee has further established the needs for services in the different fields discussed above. As per the settled law, it is the assessee, who has to decide as to how the business affairs are to be arranged. Accordingly, the TPO cannot question on the commercial expediency of the assessee. The evidence on record prima facie shows that the assessee has availed the services aforesaid in order to carry on its operations which are highly technical in nature. The case law relied upon by the Ld. DR is distinguishable on the facts. Hence, in the light of the aforesaid discussion, we do not find merit in the contention of the Ld. DR.

services, howsoever token or irrelevant services as he may consider these services to be, are rendered and find out consideration for the same, the CUP method cannot have any application. His perception that these services are worthless is of no relevance. It is not his job to decide whether a business enterprise should have incurred a particular expense or not. A business enterprise incurs the expenditure on the basis of what is commercially expedient and what is not commercially expedient. As held by Hon'ble jurisdictional High Court in the case of CIT v. EKL Appliances Ltd. [2012] 345 ITR 241/209 Taxman 200/24 taxmann.com 199 (Delhi), "Even Rule 10B(1)(a) does not authorize disallowance of any expenditure on the ground that it was not necessary or prudent for the assessee to have incurred the same". 16. The very foundation of the action of the TPO is thus devoid of legally sustainable merits. There is no dispute that the impugned payments are made under an arrangement with the AE to provide certain services. It is not even the TPO's case that the payments for these services were not made for specific services under the contract but he is of the view that either the services were useless or there was no evidence of actual services having been rendered. As for the services being useless, as we have noted above, it is a call taken by the assessee whether the services are commercially expedient or not and all that the TPO can see is at what price similar services, whatever be the worth of such services, are actually rendered in the uncontrolled conditions. 17. As for the evidence for each of the service stated in the agreement, it is not even necessary that each of the service, which is specifically stated in the agreement, is rendered in every financial period. The actual use of services depends on whether or not use of such services was warranted by the business situations whereas payments under contracts are made for all such services as the user may require during the period covered. As long as agreement is not found to be a sham agreement, the value of the services covered under the agreement cannot be taken as 'nil' just because these services were not actually required by the assessee. In any case, having perused the material on record, we are satisfied that the services were Assessment Years: 2009-10 2010-11, 2011-12 & 2012-13

actually rendered under the agreement and these services did justify the impugned payments. 18. We are also of the considered view that in the absence of prerequisites for application of CUP method being absent in the present case, it was not open to the TPO to disregard the TNMM employed by the assessee. No defects have been pointed out in application or relevance of TNMM in this case. Under these circumstances, the TPO's impugned action cannot meet our judicial approval. 18. The assessee has submitted the copies of the agreements entered with CWT, Singapore. The allocation key applied by the AE to allocate cost of services provided by the AE is one of the accepted methods and the same cannot be rejected without rebutting the same. The assessee has taken CWT, Singapore (AE) as tested party and pointed out that the cost of services is at arm’s length price determined by adopting TNMM. The assessee has further taken the comparables keeping in view the similar business models.

accordance with Rule 10B of the Income Tax Rules. The assessee has also demonstrated as to why the foreign AE should be selected as tested party in its TP study. Under these circumstances, we find merit in the contention of the Ld. counsel for the assessee that the assessee has rightly selected its AE as tested party for benchmarking the transaction. The assessee has submitted that it has submitted the complete financials of comparable selected for benchmarking the transactions. To identify the companies comparable to CWT Singapore, the assessee has used one source ‘One Source Global Business Browser’ (International data base) containing business information on 20 million large and medium size companies in the world. In the aforesaid backdrop, there is no justification of rejecting TNMM method adopted by the assessee. We therefore, hold that the assessee has rightly applied TNMM as the most appropriate methods within the meaning of Rule 10B of the Rules. In our considered view, the Ld. TPO has wrongly applied CUP method and determined the arm’s length price at Nil. As has been held in the case of AWB India Pvt. Ltd. (supra) the basic condition for applying CUP method is the availability of price of the similar product and service in uncontrolled conditions on the basis of which arms length price under CUP method can be determined. Hence, in the light of the facts of the case and the findings of the Delhi Bench of the Tribunal, we do not find any infirmity in the selection of TNMM by the assessee for benchmarking the transactions. We have already held that the assessee has rightly selected the AE as tested party. Thus, the international transactions of payment of fees for technical assistance services is to be benchmarked by comparing the margins of the CWT, Singapore (tested party) with the margins of seven entities selected by the assessee as comparables. The Ld. counsel has further pointed out that the comparable companies are engaged in the similar kind of services. 20. Hence, we find substance in the contention of the Ld. counsel for the assessee, however, since the TPO has not verified the margins shown by the Assessment Years: 2009-10 2010-11, 2011-12 & 2012-13

assessee vis-à-vis the companies selected by the assessee as comparables, we respectfully following the decision of the Pune Bench of the Tribunal in the case of Emerson Climate Technologies (India) Ltd (supra), restore this issue to the file of AO/TPO for a limited purpose of verification as to whether the margin of the tested party is at arm’s length to the margins of the comparable companies. Needless to say, that the authorities shall give a reasonable opportunity of being heard to the assessee while deciding the said issue. The facts and the issues involved relating to transfer pricing are identical to the facts of the case and the transfer pricing issue involved in the present case except the quantum of amount involved. Hence, we do not consider it necessary to reproduce the facts of the case at the cost of repetition. In the present case, the AO made adjustment of Rs. 19,09,35,751/- on account of transfer pricing issue in connection with technical assistance services pursuant to the DRP directions issue u/s 144C(5) of the Act.

by the DRP are in violation of section 144C(8) of the Act. 3. On the facts and circumstances of the case and in law, the AO has erred in assessing the income of the Appellant under normal provisions of the Act at INr 28,61,45,690 as against the returned income of INR 7,28,47,809. Transfer Pricing Adjustment 4. On the facts and circumstances of the case and in law, the transfer pricing adjustment of INR 19,09,35,751. 5. On the facts and circumstances of the case and in law, the AO/DRP/TPO while making an adjustment of INR 19,09,35,751 in respect of international transactions of payment for receipt of technical assistance by the Appellant to the Associated Enterprise (‘AE’) during the relevant assessment year erred in following

5.1 Rejecting the economic analysis and methodology adopted by the Appellant, being Transactional Net Margin Method (‘TNMM’), as the most appropriate method for benchmarking the international transaction pertaining to payments to AE for receipt of technical assistance at entity level.

5.2 Arbitrarily determining the arm’s length price without proper application of the Transfer pricing method prescribed under Section 92C of the Act read with Rule 10B of the Rules.

5.3 Determining the arm/s length price (“ALP”) to be Nil.

5.4 Not sharing the relevant material/information relied upon while determining the arm’s length price. Assessment Years: 2009-10 2010-11, 2011-12 & 2012-13

5.5 Questioning the commercial expediency/wisdom of the Appellant and disregarding the robust voluminous data as submitted by the Appellant.

5.6 Not considering the benefit derived by the Appellant from receipt of technical services.

It is prayed that it be held that the aforesaid international transaction is at arm’s length and accordingly, the AO be directed to delete the adjustment.

Other grounds: 6. On the facts and circumstances of the case and in law, the AO/DRP has erred in disallowing the claim of credit card receivable written off amounting to INR 2,35,20,834 and treating it as the income of the appellant. 7. On the facts and circumstances of the case and in law, the AO has erred in levying interest under sections 234B.

It is prayed and relief claimed by the Appellant that it beheld that the aforesaid adjustments are bad in law and the AO be directed to delete the adjustment.”

credit card banks, the assessee took a decision to right of the said amount as bad debts. The Ld. counsel relying on the decision of the Hon’ble Supreme Court in the case of TRF Ltd. vs. CIT 323 ITR 297 in which it has been held that the assessee is not required to prove that debt has become irrecoverable and merely writing off the same in the books of account is sufficient. The Ld. counsel further relying on the decision of the Hon’ble Bombay High Court in the case of CIT vs. Shreyas Morakhia 342 ITR 285 (Bom) submitted that the AO has wrongly rejected the claim of the assessee. 8. On the other hand, the Ld. DR relying on the assessment order supported the action of the AO and submitted that since the assessee has failed to satisfy the condition mentioned in section 36(2) of the Act, the AO has rightly rejected the contention of the assessee. 9. We have gone through the entire material on record in the light of the rival contentions of the parties. We notice that the Ld. DRP, by following the ratio of law laid down by the Hon’ble Supreme Court in the case of TRF Ltd. (supra) has directed the AO to examine as to whether the condition u/s 36(2) of the Act are satisfied in the case of the assessee. We further notice that the AO has rejected the contention of the assessee holding that the assessee has not furnished any supporting details or proof to substantiate its claim that the income from the clients offered for taxation in the respective years. As pointed out by the Ld. counsel for the assessee has reflected the entire transaction in its books of account and since the assessee has been following the accrual system of accounting the income for the respective years were offered to tax by the assessee. However, the AO has rejected the contention of the assessee without assigning any reason. In the case of the CIT vs. Shreyas Morakhya (supra), the question before the Hon’ble Bombay High Court was whether the assessee who was a share broker was entitled to deduction by way of bad debts u/s 36(1) (vii) r.w.s. 36(2) of the Act in respect of the amount which could not be recovered from its clients in respect of transaction effected by him on behalf Assessment Years: 2009-10 2010-11, 2011-12 & 2012-13

of his client. The Hon’ble Bombay High Court decided the issue in affirmative and in favour of the assessee. Keeping in view the contention of the assessee, we deem it appropriate to send this issue back to the file of AO for verifying that whether the conditions of section 36(2) are fulfilled in the present case. We further direct the AO to decide the issue in the light of the decision of the jurisdictional High Court discussed above. AO is further directed to afford a reasonable opportunity of being heard to the assessee. In the result, appeals filed by the assessee for assessment years 2009- 10, 2010-11, 2011-12 and 2012-13 are partly allowed. Order pronounced by listing on the notice board of the Bench under rule 34(4) of the Appellate Tribunal Rules, 1963. (R.C. SHARMA) JUDICIAL MEMBER म ुंबई Mumbai; दिन ुंक Dated: 01/05/2019 Alindra, PS आदेश प्रतितिति अग्रेतिि/Copy of the Order forwarded to : 1. अपील र्थी / The Appellant 2. प्रत्यर्थी / The Respondent. 3. आयकर आय क्त(अपील) / The CIT(A)- 4. आयकर आय क्त / CIT 5. दिभ गीय प्रदिदनदि, आयकर अपीलीय अदिकरण, म ुंबई / DR, ITAT, Mumbai 6. ग र्ड फ ईल / Guard file.

आदेशानुसार/ BY ORDER, सत्य दपि प्रदि //// उि/सहायक िंजीकार (Dy./Asstt.