AMADEUS INDIA PVT. LTD.,NEW DELHI vs. ADDL. CIT, NEW DELHI

IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCH: ‘I-2’, NEW DELHI BEFORE SH. VIJAY PAL RAO, JUDICIAL MEMBER AND SH. O.P. KANT, ACCOUNTANT MEMBER ITA No. 1835/Del/2015 Assessment Year: 2010-11 Vs. Addl. CIT, Range-2, New Delhi M/s. Amadeus India Pvt. Ltd., E- 9, Connaught House, Connaught Place, New Delhi. PAN : AAACA0364L (Appellant) (Respondent) Appellant by Sh. Tarandeep Singh, Adv. Respondent by Sh. H.S. Choudhary, CIT(DR) Date of hearing 03.08.2017 Date of pronouncement 23.10.2017 ORDER PER O.P. KANT, A.M.:

This appeal by the assessee is directed against order dated 20/03/2015 passed by the Addl. Commissioner of Income Tax, Range-2, New Delhi (hereinafter referred as ‘the Assessing Officer’) under section 143(3) read with section 144C(13) of the Income-tax Act, 1961 (in short ‘the Act’) for assessment year 2010-11. The impugned order was passed consequent to the direction of Ld. Dispute Resolution Panel (DRP) dated 30/12/2014 under section 145C(5) of the Act. The grounds of appeal raised by the assessee are reproduced as under:

2 ITA No. 1835/Del/2015 [hereinafter referred as the “TPO”] are bad in law and void ab- initio. 1.1 Without prejudice, on facts and in law, the AO/DRP erred in not granting a proper opportunity of being heard and thereby violating the settled principals of audi alteram partem. 2. That on facts and in the law the AO/TPO/DRP erred in making/proposing/upholding an addition to total income of Rs. 81,16,72,668/- under Chapter X of the Income Tax Act, 1961 [hereinafter referred as “the Act”]. 3. That on facts and in law the AO/TPO/DRP erred in making/proposing/upholding Transfer Pricing adjustment of Rs 80,79,61,592/- on account of Advertisement, Marketing and sales promotion expenses. 3.1 That on facts and in law the TPO/DRP erred in not appreciating that in absence of a “transaction” as envisaged under section 92F of the Act between appellant and its AE for brand promotion or for establishing a marketing intangible the TPO had no jurisdiction to propose an adjustment on account AMP expenses. 3.2 That on facts and in law the TPO erred in holding and the DRP inter alia erred in upholding/observing that the: (i) Appellant had incurred AMP expenditure of Rs. 70,41,05,962/- on promotion of proprietary marks and for development of marketing intangible for the benefit of AE. (ii) AMP expenditure of Rs. 70,41,05,962/- incurred by the assessee is an “International Transaction" u/s 92B of the Act. (iii) Expenditure of Rs 67,38,69,124/- incurred by the assesse on payment of incentives to subscribers is in the nature of AMP. (iv) AE is directly benefited by any expenditure incurred by assesse on AMP (v) Legal ownership of the marketing intangible would get transferred to the AE without any consideration on termination of the Distribution Agreement; (vi) That the appellant is not a full-fledged independent distributor. 3.3 That on facts and in law the AO/TPO/DRP erred in not appreciating that benchmarking on the basis of expenses incurred by an assessee is not recognizable as per the provisions of Chapter X.

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5 ITA No. 1835/Del/2015 That the appellant prays for leave to add, alter, amend and/or vary the ground(s) of appeal at or before the time of hearing.

6 ITA No. 1835/Del/2015 2.2 Amadeus India executes contract with travel agents (hereinafter referred as “subscribers”) for providing software access of Amadeus Spain’s CRS. Amadeus Spain remunerates the assessee i.e. Amadeus India for the services rendered by it by spreading the net revenue received by the Amadeus Spain from providers of various travel related services (such as airlines, hotels, car rentals etc) for using the CRS platform for display, distribution, sale of providers product( airline tickets or hotels rooms etc) attributable to the assessee’s territory in their agreed ratio as per the agreement. The territory of assessee includes Indian subcontinent. The assessee company established its subsidiaries in Indian subcontinent with offices in Dhaka, Colombo and Kathmandu. 2.3 For the year under consideration, the assessee filed its return of income electronically declaring income of Rs.34,10,82,523/- on 30/09/2010. In the return of income, the assessee claimed deduction u/s 10A of the Act, amounting to Rs.37,23,15,615/-. The case was selected for scrutiny and notice under section 143(2) of the Act was issued and complied with. The Assessing Officer observed that in the year under consideration, the assessee has entered into international transaction with the AEs as under: International Name of Associated Enterprises Value (INR) Transactions Amadeus IT Group S.A 216,09,25,127.00 Amadeus Marketing (UK) Ltd. 11,13,900.00 Amadeus Asia Ltd 19,17,160.00 Provision of IT enabled services Amadeus Saudi Arabia Ltd. 3,52,164.00 Amadeus Qatar WLL 25,66,850.00 Amadeus Gulf 3,45,017.00 Global Travel Distribution Bangla 3,95,27,001.00 Pvt. Ltd. Data Processing Services received Amadeus Lanka Pvt. Ltd. 3,95,61382.00 Amadeus Nepal Pvt. Ltd 1,80,000,00.00 Reimbursement of Amadeus Marketing (UK) Ltd. 3,63,625.00 Expenses by AEs Amadeus Syria 1,33,954.00 Total 226,48,06,180.00

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2.4 In order to determine, the arm’s length price of international transactions entered into by the assessee, the Assessing Officer made a reference to the Transfer Pricing Officer (TPO). In its transfer pricing study, the assessee followed Transaction Net Margin Method (TNMM) to justify the arm’s length price of international transaction pertaining to provision of IT enabled services with its AE and accordingly it compared the net operating profit/total cost(OP/TC) earned by it with the mean of OP/TC of comparable companies selected by it and concluded that the OP/TC of the assessee being higher than the mean of OP/TC of comparable companies, the international transaction was at arm’s length and no adjustment was required. The TPO examined the benchmarking process applied by the assessee and accepted the ‘TNMM’ as the most appropriate method for benchmarking of the international transaction of the assessee, however, he excluded/included certain comparables by applying certain filters. The mean OP/TC of the final comparable set selected by the TPO was 35.98 percent but the OP/TC of the assessee was 38.78%, which being higher than the OP/TC computed by the Ld. TPO, he did not propose any adjustment on this account. 2.5 The Ld. TPO, however, observed that the assessee had incurred more than normal sales and marketing expenses to build “Amadeus” brand in India, which is legally owned by “Amadeus Spain”. According to the ld. TPO, in the instant case, incurring of such sales and marketing expenses constituted an “International transaction” between the assessee and its AE. The learned TPO held that the assessee should have been reimbursed with appropriate markup on such additional marketing expenses. In his order, the learned TPO computed the said more than normal marketing expenses (i.e. bright line) by comparing the advertisement, marketing and promotion expenses (AMP) as a

8 ITA No. 1835/Del/2015 percentage to sales of the assessee with the average AMP% of comparable companies finally selected by him for benchmarking the functions of the assessee. Thereafter, by adding a further markup of 14.88%, the TPO computed the final adjustment on the said ‘brand promotion’ transactions functions which is summarized as under:

S. N. Companies AMP/Sales 1. Accentia Technologies Ltd. 0 2. Cosmic Global Ltd. 0.17 3. Eclerx Services Ltd. 0.2 4. Fortune Infotech ltd. 0.21 5. Igate Global solutions Ltd. 0.28 6. Infosys B P O ltd. 0.12 7. T C S E-Serve International Ltd. 0.01 8. T C S E-Serve Ltd. 0.01 9. e4e Healthcare 2.09 10. Omega Healthcare 0 AVG 0.31 Value of Gross Sales 225,38,80,071 AMP / Sales of the Comparables 0.31 Amount that represent bright line 69,87,028 Expenditure on AMP by assessee 73,22,79,463 Expenditure in excess of bright line 72,52,92,435 PLI 14.88 Markup 10,79,23,514 Cumulative addition 83,32,15,949

The TPO in his order also proposed an adjustment of Rs 37,87,911/- on account of notional interest income attributable to delayed payments receivable from the AE. In this regard, the TPO records that on the year end appellant has receivables from its AEs implying that the payment for invoices raised by it have not been realized within the stipulated time as provided in the invoice / agreement. TPO therefore holds that this is a separate international transaction which requires a fresh bench marking analysis. TPO further records that as per market practice such receivables ought to have been realized within 30 days of the invoice and any excess period of credit requires a compensation of delayed interest @ 14.88% (i.e., the arm's length level of interest). With the above conclusions Ld. TPO proposed an adjustment of Rs 37,87,911/-. Total adjustments proposed under Chapter X of the Act by the Transfer Pricing Officer, are as under:

9 ITA No. 1835/Del/2015 Adjustment for excessive AMP Rs 83,32,15,949/- Adjustment for receivables Rs 37,87,911/- Total Rs 83,70,03,860/-

2.6 Subsequently, the Assessing Officer passed the draft assessment order dated 29th of March 2014, wherein the TP additions made by the TPO were incorporated. In the draft assessment order, the Assessing Officer also proposed following addition/disallowances:

(i) Disallowance u/s 10A of Rs 23,56,47,319/- In the return of income, the assessee claimed deduction u/s 10A of the Act of Rs.37,23,15,615/-. The said deduction was claimed vis-a-vis data processing/ITeS Activities carried on by the Unit II operated by the assessee. During the course of assessment AO examined following particulars from the segmented profit & loss account submitted by the assessee:

SI. Income Unit-I Unit-ll Total No. 1 172,23,63,772 27,91,48,215 200,15,11,987 Data processing receipts / Software Export Services 2. IT Support Services 4,08,064 16,45,94,331 16,50,02,395 - 3. Call Centre receipt 11,13,900 11,13,900 4. Other Income 7,89,85,298.11 72,66,491.46 8,62,51.789.57 Total 180,28,71,034.11 45,10,09,037.46 225,38,80.07.57

It has been held by the AO in the draft assessment order that the data processing receipts/software export receipts of Rs.27,91,48,215/- pertaining to Unit II are not eligible for claim of deduction u/s 10A of the Act. In support of his conclusions AO has extensively relied upon the findings recorded by DRP in

10 ITA No. 1835/Del/2015 assessee’s own case for AY 2009-10 wherein identical claim has been disallowed by the DRP for the first time alleging that no export activity was being carried out by the assessee corresponding to the data processing receipts credited in Unit II and that the same merely represents remuneration from normal distribution activities carried on by the assessee under the distribution agreement with its AE.

(ii) Disallowance u/s 14A of Rs.7,10,677/- During the course of assessment the AO show caused the assessee to submit as to why disallowance u/s 14A of the Act read with Rule 8D be not made. It was submitted by the assessee that during the year under consideration no exempt income has been earned by it and hence this was not a case wherein section 14A was applicable. The AO however, did not accede to the submissions made by the assessee and by restoring to provisions of Rule 8D, he computed the disallowance u/s 14A at Rs.7,10,677/-.

(iii). Addition on account of interest accrued u/s 244A were at Rs.16,20,444/-

2.7 Aggrieved with the draft assessment order proposed by the Assessing Officer, the assessee filed its objections before the Dispute Resolution Panel (DRP) as per the provisions of section 144C(2) of the Act, on 01/05/2014. The findings of the DRP in its order dated 30.12.2014 are summarized as under:

11 ITA No. 1835/Del/2015 (a) Transfer pricing adjustment on account of AMP Expenses – Following Special Bench decision in case of LG Electronics India Ltd. reported in 140 ITD 41(Del)(SB), DRP held that there existed an “international transaction” as per provision of section 92B and a “transaction” as per provisions of section 92F between the applicant and its AE for brand promotion. DRP also upheld the action of TPO in applying Transfer pricing provision in benchmarking the alleged transaction of brand promotion of marketing intangibles on a stand- alone basis by applying the Bright Line Method. DRP, however, held that the comparable companies selected by the TPO for bench marking the alleged international transaction of brand promotion was not appropriate. DRP directed the TPO to conduct a fresh search. The following companies were finally selected by the TPO as comparable:

S. No. Name of the Company AMP/Sales% Accel Frontline Services Ltd. 0.14 1. Indian Railway Catering & Tourism Corporation 1.3 2. Ltd. 3. Mukta Arts Ltd. 0.42 4. Nikmo Entertainment Ltd. 4.6 5. Odyssey Corporation Ltd. 0.00 Overseas Development & Employment Promotion 0.36 6. Consultants 7. Overseas manpower Corporation ltd. 0.68 8. Rangappa Kamat Group of Hotels ltd. 3.31 9. S&T Corporation ltd. 0.97 S R S Ltd. 0.29 10. 11. Sahara Infrastructure & Housing Ltd. 1.00 12. Tamil Nadu Trade Promotion Organization 0.8 13. Usha Breco Ltd. 4.97 14. Vista Entertainment Ltd. 3.16 15. Adrenalin Esystem Ltd. 6.74 16. Interworld Digital Ltd. 0.10 17. NSE IT Ltd. 0.01 18. Newgen Software Technologies Ltd. 2.03 19. Nucleus Software Exports Ltd. 1.03 20. Powersoft Global Solutions Ltd. 0.35

12 ITA No. 1835/Del/2015 21. Supertech Solutions Ltd. 0.00 22. Accentia Technologies Ltd. 0.00 23. Coskmic Global Ltd. 0.17 24. Eclerx Service Ltd. 0.2 25. Fortune Infotech Ltd. 0.21 26. Igate Global Solutions Ltd. 0.28 27. Infosys BPO ltd. 0.12 28. TCS E-serve International Ltd. 0.01 29. TCS E-serve Ltd. 0.01 30. e-4-3 Healthcare (also known as Nittany 2.09 Outsourcing Service Pvt. Ltd.) 31. Omega Healthcare 0.00 32. Aditya Birla Minacs Worldwide Ltd. 0.00 33. Informed Technology India Ltd. 2.75 34. Datamatrics Financial Services Ltd. 2.71 35. Jeevan Softech Ltd. 1.22 AVG 1.25

The DRP also upheld the use of a mark-up of 14.88% in identifying the arm’s length price of the alleged excessive bright lines spent. During DRP proceedings it was claimed by the assessee that out of the total AMP expenditure of Rs.73,22,79,463/- debited by it in the P&L Account, payment of incentives to travel agents was Rs.67,38,69,124/. It was claimed by the assessee that the payment of incentive was a selling expense and hence it should not form part of the AMP expenditure. In support of the claim assessee relied upon orders passed by ITAT in its own case for AYs 2007-08 & 2008- 09. This contention was, also rejected by the DRP observing/concluding as under:-

“The taxpayer has relied upon the decision of Hon’ble ITAT wherein such expenditure has not been included in the AMP adjustment. This Panel has verified and ascertained that on this issue department has preferred appeal before the Hon’ble Delhi High Court. Accordingly, this Panel does not call for any interference on this issue to the TO’s order. ”

13 ITA No. 1835/Del/2015 (b) Transfer Pricing Adjustment on account of receivables – On this issue also the DRP upheld that the alleged transaction of notional interest on overdue receivables is a “transaction” which requires separate bench marking as per the Indian transfer pricing provision. The DRP further upheld the action of TPO in keeping a threshold arm’s length limit of 30 days wherein after the overdue receivables ought to have been recovered by the applicant. As regards interest rate applicable the DRP directed as under:-

“The TPO/AO is accordingly directed to verify the amount of receivables :(i) in case the aggregate amount of receivable from the AEs does not exceed Rs.50 crores, apply Prime Lending Rate of SBI as on 30th June of relevant previous year plus 150 basis points (ii) in case the aggregate amount of receivables from the AEs exceeds Rs.50 crores, apply prime Lending Rate of SBI as on 30th June of relevant previous year plus 300 basis points. ”

(c) Disallowance of deduction u/s 10A on Data Processing Activity of Unit II – The DRP uphold the action of AO in making the disallowance following the directions issued by it in assessee’s own case for A.Y. 2009-10.

(d) Disallowance u/s 14A – The disallowance of Rs.7,10,677/- made by the AO invoking provision of section 14A read with Rule 8D was upheld by the DRP.

(e) Addition on account of interest on Income Tax refund u/s 244A– The said addition was also upheld by the DRP.

2.8 The TPO thereafter passed an order dated 29th January, 2015 giving effect to the above directions issued by DRP. In this order the

14 ITA No. 1835/Del/2015 cumulative adjustments made u/s 92CA post DRP directions were computed by the TPO as under :-

TP adjustment on account of AMP expenditure Rs.80,79,61,592/- TP adjustment on account of receivables Rs. 37,11,076/- Total Rs.81,16,72.668/-

2.9 The AO thereafter has passed the final assessment order dated 23rd February, 2015 assessing the total income of the assessee at Rs.139,03,88,366/-.

2.10 Aggrieved with the additions/disallowances made in the order of the Assessing Officer dated 23/02/2015, the assessee is in appeal before the Tribunal raising the grounds as reproduced above. 3. The ground No. 1 and 2 of the appeal being general in nature, we are not required to adjudicate specifically and accordingly dismissed as infructuous. 4. In grounds No. 3 and 4, the assessee has challenged adjustment on account of AMP expenses. 4.1 Before us, the learned counsel submitted that issue in dispute is covered in favour of the assessee by the order of the Tribunal for assessment year 2009-10 i.e. immediately preceding year. The Ld. counsel submitted that in the year under consideration, the learned TPO has relied on the same agreement between the assessee and AE, which was relied by the TPO in assessment year 2009-10. He further submitted that order of the Tribunal in assessment year 2009-10 has been further upheld by the Hon’ble jurisdictional High Court and therefore issue being covered in favour of the assessee, the ground of the assessee might be allowed.

15 ITA No. 1835/Del/2015 4.2 On the other hand, the Ld. CIT(DR) referred to page 2 of the TPO’s order and submitted that assessee was engaged primarily in providing data processing and related activities to its AE. The Ld. CIT(DR) further referred to page 2 of the DRP’s order and submitted that entire revenue of the assessee is received from the AE on the basis of split of total revenue received from travel related service providers between the assessee and ‘Amadeus Spain’ in a ratio of 46:54. The Ld. CIT(DR) also referred to the order of the Tribunal in ITA No. 1804/Del/2014 for assessment year 2009-10 and submitted that the Tribunal has considered the expert opinion of STPI authorities on the activities of the assessee and on page 59 of the order of the Tribunal, has extracted the said opinion and according to which the nature of activity of the assessee is a data entry/data processing job for its AE. In view of the activities of the assessee company of date entry/data processing job, the Ld. CIT(DR) submitted that the assessee has provided only services to its AE and so there was no question of incurring any AMP expenses by the assessee. The Ld. CIT(DR) submitted that assessee has been wrongly recognized as distributor. The learned CIT(DR) referred to the finding of the Tribunal in assessment year 2009-10, while adjudicating the allowability of deduction under section 10A of the Act. The Tribunal on page 68 and 69 of the said order has noted that the assessee has not carried on any distribution functions though the agreement provided for same. The Tribunal further noted that DRP in the present case was motivated by the distribution part of the agreement which was not actually carried on by the assessee. The Tribunal also noted that the assessee renders no service to the travel agent but does render data processing services only to ‘Amadeus Spain’ and for this it is being remunerated on the profit sharing basis.

16 ITA No. 1835/Del/2015 4.3 In view of the observations of the Tribunal, the Ld. CIT(DR) submitted that the Tribunal in assessment year 2009-10 while dealing the AMP expenses characterized the assessee as distributor, while dealing with the deduction under section 10A, held that the assessee is not a distributor. The Ld. CIT(DR) submitted that assessee is neither distributor nor manufacturer. According to the Ld. CIT(DR) the Tribunal in assessment year 2009-10 has without appreciating the facts of the case properly, relied on the decision of the jurisdictional High Court in the case of Bausch & Lomb Eyecare India Private Limited Vs. Addl. CIT (2016) 381 ITR 227 (Del.) and held that in the case of the assessee incurring of alleged abnormal AMP expenses is not an international transaction. 4.4 We have heard the rival submission and perused the relevant material on record. The Ld. CIT(DR) has argued that that assessee being only service provider, the abnormal AMP expenses has benefited the ‘Amadeus’ brand of AE only and thus apparently it constituted an international transaction between the assessee and the AE. There might be some substance in the arguments of the Ld. CIT(DR), however, the issue in dispute has already been adjudicated by the Tribunal in ITA No. 1804/Del/2009 in immediately preceding assessment year i.e. 2009-10 as under:

“8. We have considered the submissions made by the parties and have also perused the material available on record. Undisputedly the main data processing and subsidiary distribution activities of the appellant have been held to be at ALP applying TNMM. Provision of IT enabled services to AE under the agreement has been thoroughly benchmarked by TPO. MAM being TNMM has not been doubted and after an in-depth analysis of comparable companies selected by the appellant and by tinkering with same the Ld TPO has given a finding that OP/OC of assessee is 20.27% & OP/OC of revised comparable set is 23.94%. No adjustment made on this account has been made as the difference is within + 5% range. Ld TPO however has segregated AMP expenses and held that being an independent

17 ITA No. 1835/Del/2015 transaction it requires to be benchmarked independently. In these circumstances, in our opinion, the fundamental question to be answered is to decide as to whether in absence of any agreement, arrangement or understanding for either incurring AMP expenses on behalf or for benefit of the AE or for payment of AMP expenses by the AE can it be held that there was an “international transaction” only on the basis that AMP expenditure, incurred by the appellant, would have benefitted the AE, who owned the brands used by the appellant. Ld AR has rightly submitted that this is a jurisdictional issue, which requires a foremost adjudication and only if answer to this issue is against the appellant that the matter then required a de- novo adjudication in light of Jurisdictional High Court decision in case of Sony Mobile Communications (supra). Above line of adjudication is also supported by the decision of Hon’ble Jurisdictional High Court in case of Diakin Air-conditioning India Private Ltd. (supra) wherein it is held as under: “Accordingly, the Court directs as under (a) The impugned order dated 8th October, 2015 passed by the IT AT in ITA No. 5090/Del/2010 for the AY 2006-07 is set aside and the said appeal is restored to the file of the ITAT; (b) The ITAT will first decide the question regarding the existence of an international transaction involving AMP expenses between the Assessee and its AE. This question will not be remanded by the ITAT to any other authority for decision. If the said question is answered in favour of the Assessee, then no other question would arise. If answered against the Assessee, then the ITAT will decide the further issues that arise in the appeal in accordance with law. ” 8.1 Case records further show that both the lower authorities have categorically given a finding that there existed a “transaction” for brand promotion between appellant and its AE. This is also under challenge before us. Hence it cannot be said that necessary facts are not on record. With regard to the submissions of the Ld DR that the issue of AMP be restored back to the file of Ld. TPO, we would like to state that since facts necessary to determination are on record the law laid down by Hon’ble Jurisdictional High Court has to be given effect to. It is not even the argument of Ld CIT(DR) that any fresh fact is required for such a determination. Under the circumstances a direction for remand is not called for. Hon’ble Jurisdictional High Court in various cases have highlighted the tests

18 ITA No. 1835/Del/2015 to be applied for ascertaining whether there exists a transaction for brand promotion in a particular case. Ld AR has impartially summarized the relevant propositions from these decisions in his note, which we have reproduced above. We find that in the cases of Maruti Suzuki India Ltd. (supra), Whirlpool of India Ltd. (supra), Bausch & Lomb Eyecare (India) (P.) Ltd. (supra) Hon'ble High Court on the issue of AMP expenses has deliberated upon extensively on each and every argument raised by the TPO/DRP and has analyzed the same threadbare. We would like to reproduce relevant portion of the judgment of Bausch & Lomb Eyecare (India) (P.) Ltd.’s case (supra) as under: 53. A reading of the heading of Chapter X [‘Computation of income from international transactions having regard to arm's length price"] and Section 92(1) which states that any income arising from an international transaction shall be computed having regard to the ALP and Section 92C(1) which sets out the different methods of determining the ALP, makes it clear that the transfer pricing adjustment is made by substituting the ALP for the price of the transaction. To begin with there has to be an international transaction with a certain disclosed price. The transfer pricing adjustment envisages the substitution of the price of such international transaction with the ALP. 54. Under Sections 92B to 92F, the pre-requisite for commencing the TP exercise is to show the existence of an international transaction. The next step is to determine the price of such transaction. The third step would be to determine the ALP by applying one of the five price discovery methods specified in Section 92C. The fourth step would be to compare the price of the transaction that is shown to exist with that of the ALP and make the TP adjustment by substituting the ALP for the contract price. 55. Section 92B defines 'international transaction' as under: "Meaning of international transaction. 928.(1) For the purposes of this section and sections 92, 92C, 92D and 92E, "international transaction" means a transaction between two or more associated enterprises, either or both of whom are non-residents; in the nature of purchase, sale or lease of tangible or intangible property, or provision of services, or lending or borrowing money, or any other transaction having a bearing on the profits, income, losses

19 ITA No. 1835/Del/2015 or assets of such enterprises, and shall include a mutual agreement or arrangement between two or more associated enterprises for the allocation or apportionment of, or any contribution to, any cost or expense incurred or to be incurred in connection with a benefit service or facility provided or to be provided to anyone or more of such enterprises. (2) A transaction entered into by an enterprise with a person other than an associated enterprise shall, for the purposes 'of sub-section (1), be deemed to be a transaction entered into between two associated enterprises, if there exists a prior agreement in relation to' the relevant transaction between such other person and the associated enterprise, or the terms of the relevant transaction are determined in substance between such other person and the associated enterprise." 56. Thus, under Section 92B(1) an 'international transaction' means— (a) a transaction between two or more AEs, either or both of whom' are nonresident (b) the transaction is in the nature of purchase, sale or lease of tangible or intangible property or provision of service or lending or borrowing money or any other transaction having a bearing on the profits, incomes or losses of such enterprises, and (c) shall include a mutual agreement or arrangement between two or more AEs for allocation or apportionment or contribution to the any cost or expenses incurred or to be incurred in connection- with the - benefit, service or facility provided or to be provided to one or more of such enterprises. 57. Clauses (b) and (c) above cannot be read disjunctively. Even if resort is had to the residuary part of clause (b) to contend that the AMP spend of BLI is "any other transaction having a bearing" on its "profits, incomes or losses", for a 'transaction' there has to be two parties. Therefore for the purposes of the 'means' part of clause (b) and the 'includes' part, of clause(c), the Revenue has to show that there exists an 'agreement' or 'arrangement' or' 'understanding' between BLI - and B&L, USA whereby BLI is obliged to spend excessively on AMP in order to promote the brand of B&L, USA. As far as the legislative intent is concerned, it is seen that certain transactions listed in the Explanation under clauses (i)(a) to (e) to Section 92B are described as an 'International transaction'. This might be only an illustrative list, but significantly it does not list AMP spending as one such transaction.

20 ITA No. 1835/Del/2015

21 ITA No. 1835/Del/2015 meaningless as criminal conspiracy without any agreement to commit a criminal offence. The idea of "persons acting in concert" is not about a fortuitous relationship coming into existence by accident or chance. The relationship' can come into being only by design, by meeting of minds between two or more persons leading to the shared common objective or purpose of acquisition of substantial acquisition of shares etc. of the target company. It is another matter that the common objective or purpose may be in pursuance of an agreement' or an understanding, formal or informal; 'the acquisition of shares etc. may be direct or indirect or the persons acting in concert may cooperate in actual acquisition of shares etc. or they may agree to, cooperate in such acquisition. Nonetheless, the element of the shared common objective or purpose is the sine qua non for the relationship of "persons acting in concert" to come into being." 60. The transfer pricing adjustment is not expected to be made by deducing from the difference between the 'excessive' AMP expenditure incurred by the Assessee and the AMP expenditure of a comparable entity that an international transaction exists and then proceeding to make the adjustment of the difference in order to determine the value of such AMP expenditure incurred, for the AE. In any event, after the decision in Sony Ericsson (supra), — the question of applying the BLT to determine the existence-of an-international transaction involving AMP expenditure does not arise. 61. There is merit in the contention of the Assessee that a distinction is required to be drawn between a 'function' and a 'transaction' and that every expenditure forming part of the function, cannot be construed as a transaction’. Further, the Revenue's attempt at re-characterising the AMP expenditure incurred as a transaction by itself when it has neither been identified as such by the Assessee or legislatively recognised in the Explanation to Section 92B runs counter to legal position explained in CIT v. EKL Appliances Ltd. (supra) which required a TPO "to examine the 'international transaction’ as he actually finds the same." 62. In the present case, the mere fact that B&L, USA through B&L, South Asia, Inc holds 99.9% of the share of the Assessee will not ipso facto lead to the conclusion that the mere increasing

22 ITA No. 1835/Del/2015 of AMP expenditure by the Assessee involves an international transaction in that regard with B&L, USA. A similar contention by the Revenue, namely the fact that even if there is no explicit arrangement, the fact that the benefit of such AMP expenses would also encure to the AE is itself self sufficient to infer the existence of an international transaction has been negatived by the Court in Maruti Suzuki India Ltd. (supra) as under: "68. The above submissions proceed purely on surmises and conjectures and if accepted as such will lead to sending the tax authorities themselves on a wild-goose chase of what can at best be described as a 'mirage1. First of all, there has to be a clear statutory mandate for such an exercise. The Court is unable to find one. To the question whether there is any 'machinery' provision for determining the existence of an international transaction involving AMP expenses, Mr. Srivastava only referred to Section 92F(ii) which defines ALP to mean a price "which is applied or proposed to be applied in a transaction between persons other than AEs in uncontrolled conditions", Since the reference is to 'price' and to 'uncontrolled conditions' it implicitly brings into play the BLT. In other words, it emphasises that where the price is something other than what would be paid or charged by one entity from another in uncontrolled situations then that would be the ALP. The Court does not see this as a machinery provision particularly in light of the fact that BLT has been expressly negative by the Court in Sony Ericsson. Therefore, the existence of an international transaction will have to be established de-hors the BLT. 70. What is clear is that it is the 'price' of an international transaction which is required to be adjusted. The very existence of an international transaction cannot be presumed by assigning some price to it and then deducing that since it is not an ALP, an adjustment had to be made. The burden is on the Revenue to first show the existence of an international transaction. Next, to ascertain the disclosed 'price' of such transaction and thereafter ask whether it is an ALP. If the answer to that is in the negative the TP adjustment should follow. The objective of Chapter X is to make adjustments to the price of an international transaction which the AEs involved may seek to shift from

23 ITA No. 1835/Del/2015 one jurisdiction to another. An 'assumed' price cannot form the reason for making an ALP adjustment." 71. Since a quantitative adjustment is not permissible for the purposes of a TP adjustment under Chapter X, equally it cannot be permitted in respect of AMP expenses either. As already noticed hereinbefore, what the Revenue has sought to do in the present case is to resort to a quantitative adjustment by first determining whether the AMP spend of the Assessee on application of the BLT, is excessive, thereby evidencing the existence of an international transaction involving the AE. The quantitative determination forms the very basis for the entire TP exercise in the present case. 74. The problem with the Revenue's approach is that it wants every instance of an AMP spend by an Indian entity which happens to use the brand of a foreign AE to be presumed to involve an international transaction. And this, notwithstanding that this is not one of the deemed international transactions listed under the Explanation to Section 928 of the Act. The problem does not stop here. Even if a transaction involving an AMP spend for a foreign AE is able to be located in some agreement, written (for e.g., the sample agreements produced before the Court by the Revenue) or otherwise, how should a Transfer Pricing Officer proceed to benchmark the portion of such, AMP spend that the India entity should be compensated. 63. Further, in Maruti Suzuki India Ltd. (supra) the Court further explained the absence of a 'machinery provision qua AMP expenses by the following analogy: "75. As an analogy; and for no other purpose; in the context of a domestic transaction involving two or more related parties, reference may be made to Section 40A(2)(a) under which certain types of expenditure incurred b. way of payment to related parties is not deductible where the AO is of the opinion that such expenditure is excessive or unreasonable having regard to the fair market value of the goods." In such event, so much of the expenditure as is so considered by him to be excessive or unreasonable shall not be allowed as a deduction." The AO in such an instance deploys the 'best

24 ITA No. 1835/Del/2015 judgment' assessment as a device to disallow what he considers to be an excessive expenditure. There is no corresponding 'machinery, provision in Chapter X which enables an AO to determine what should be the fair 'compensation' an Indian entity would be entitled to if it is four: that there is an International transaction in that regard. In practical terms absent a-clear statutory guidance, this may encounter further difficulties The strength of a brand, which could be product specific, may be "impacted by numerous other imponderables not limited to the nature of the industry, the geographical peculiarities, economic trends both international and domestic, the consumption patterns, market behaviour and so on. A simplistic approach using one of the modes similar to re ones contemplated by Section 92C may not only be legally impermissible but will lend itself to arbitrariness. What is then needed is a clear statutory scheme encapsulating the legislative policy and mandate which pro: the necessary checks against arbitrariness while at the same time addressing the apprehension of tax avoidance."

25 ITA No. 1835/Del/2015 failed to prove that the appellant by incurring AMP expenses wanted to benefit the AE and not to promote its own business. Submission of Ld TPO that clauses 10.02, 10.5, 11.01 and Article XVI of the agreement indicate existence of a “transaction” for brand promotion is not supported by contents of those clauses. Appellant’s objections before the learned DRP, which we have quoted above, are acceptable. These clauses nowhere provide that the appellant will be incurring brand promotion expenses for and on behalf of its AE or solely for its business purposes and interests. Agreement dated 01st October 2004 between appellant and its AE is based upon revenue sharing model in which 46% revenue is being shared by Amadeus Spain with the appellant and hence it is difficult to visualize that appellant will not be incurring routine advertisement expenses in its entrepreneur capacity. Excluding payment of incentives, which in earlier years have been held, to be pure selling expenses the ratio of AMP/Sales of the appellant is mere 2.29%. Ld AR is also right in relying upon the decision of Hon’ble Jurisdictional High Court in case of Sony Mobile Communications (supra) for submitting that events which would transpire on termination of distribution might require a TP adjustment at that stage but the same will be immaterial to presume existence of an agreement, arrangement or understanding in the year under consideration. In this regard Hon’ble High Court at para 153 of its reported judgment has been pleased to be hold as under: “153. Economic ownership of a brand is an intangible asset, just as legal ownership. Undifferentiated, economic ownership brand valuation is not done from moment to moment but would be mandated and required if the assessed is deprived, denied or transfers economic ownership. This can happen upon termination of the distribution-cum-marketing agreement or when economic ownership gets transferred to a third party. Transfer Pricing valuation, therefore, would be mandated at that time. The international transaction could then be made a subject matter of transfer pricing and subjected to tax. ” 8.3 As held above appellant has raised objections before the learned DRP that none of the above clauses of the agreement make it mandatory for the appellant to incur brand promotion expenses for and on behalf of the AE. Ld DRP has not disturbed these objections but has upheld the case of Ld TPO on some other grounds i.e (i) by relying upon Special Bench decision in case of LG Electronics reported in 140 ITD 41(Del)(SB), (ii) by holding that since appellant is a Dependent Agency PE of its AE hence all the expenses on AMP

26 ITA No. 1835/Del/2015 are being incurred by it for the benefit of AE and (iii) by relying upon amended provisions of section 92B. We do not find any substance in the above approach of the Ld DRP. Decision of Special Bench in LG Electronics (supra) is no more good law post above decisions of the Jurisdictional High Court. We have already reproduced above findings of Jurisdictional High Court in case of Bausch & Lomb Eyecare (India) (P.) Ltd (supra) wherein it is held that “ As far as the legislative intent is concerned, it is seen that certain transactions listed in the Explanation under clauses (i)(a) to (e) to Section 92B are described as an 'International transaction'. This might be only an illustrative list, but significantly' it does not list AMP spending as one such transaction ” hence amendments to section 92B by Finance Act 2012 also do not support the case of the Revenue. Lastly on the observations made by the Ld. DRP that since the appellant a Dependent Agency PE of its AE, hence all its expenses on AMP are being incurred by it for the oenefit of AE we would like to state that this is also entirely irrelevant. While alleging as above the Ld DRP has not appreciated that appellant has been held to be a Dependent Agent Permanent Establishment of Amadeus Spain for determination of Amadeus Spain’s income, which is taxable in India. Moreover, we may refer here decision of Hon’ble Jurisdictional High Court in case of Whirlpool of India Ltd (supra) wherein it is held by the Hon’ble High Court as under: "37. The provisions under Chapter X do envisage a 'separate entity concept'. In other words, there cannot be a presumption that in the present case since WOIL is a subsidiary of Whirlpool USA, all the activities of WOIL are in fact dictated by Whirlpool USA. Merely because Whirlpool USA has a financial interest, it cannot be presumed that AMP expense incurred by the WOIL are at the instance or on behalf of Whirlpool USA. There is merit in the contention of the Assessee that the initial onus is on the Revenue to demonstrate through some tangible material that the two parties acted in concert and further that there was an agreement to enter into an international transaction concerning AMP expenses. 46. As already mentioned, merely because there is an incidental benefit to Whirlpool USA, it cannot be said that the AMP expenses incurred by WOIL was for promoting the brand of Whirlpool USA. As mentioned in Sassoon J. David (supra) "the fact that somebody other than the Assessee is also benefited by the expenditure should not come in the way of an expenditure being allowed by way of a deduction under Section 10(2)(xv) of

27 ITA No. 1835/Del/2015 the Act (Indian Income Tax Act, 1922) if it satisfies otherwise the tests laid down by the law" 8.4 Considering the material facts like absence of an agreement, arrangement or understanding between the appellant and its AE for sharing AMP expenses or for incurring AMP expenses for sole benefit of the AE, payments made by the appellant under the head AMP to the domestic parties cannot be termed as an “international transaction” specifically when the Ld TPO has not been able to prove that expenses incurred were not for the business carried out by the appellant in India. We are thus of the opinion that the TPO had wrongly invoked the provisions of Chapter X of the Act for the said AMP spent. Addition of Rs 75,40,09,515/- is therefore directed to be deleted. Ground Nos 4 to 4.4 are therefore allowed. Considering our conclusions above ground nos 5 and 5.1 do not require any adjudication.”

4.5 In the year under consideration there is no change in facts and circumstances as compared to the Assessment year 2009-10 and the agreement relied upon in assessment year 2009-10 between the parties is continued in the year under consideration also. 4.6 In assessment year 2009-10, the Hon’ble jurisdictional High Court in ITA 154/2017 dated 26/04/2017 has upheld the finding of the Tribunal. The relevant finding of the Hon’ble High Court is reproduced as under:

“3. The first issue concerns the deletion of the transfer pricing adjustment of Rs.75,40,09,515/- on account of Advertising, Marketing and Sales Promotion Expenses (AMP Expenses) relying upon the decisions of this Court including the decision in Bausch & Lomb Eyecare (India) Pvt. Ltd. Vs. Additional Commissioner of Income Tax (2016) 381 ITR 227 (Del.) 4. As far as the above issue is concerned, it is covered by the earlier decisions of this Court against the Revenue. This court is not inclined to frame any substantial question of law on this issue.”

4.7 Respectfully, following the above finding of the Tribunal (supra) and Hon’ble jurisdictional High Court (supra), that abnormal expenses

28 ITA No. 1835/Del/2015 incurred under the head AMP cannot be termed as international transaction and thus the AO had wrongly invoked the provisions of Chapter X of the Act for the said AMP spent, thus the addition of Rs.80,79,61,592/- is therefore directed to be deleted. The ground Nos. 3 to 3.3 are therefore allowed. In view of our conclusion above, the ground Nos. 4 to 4.2 do not require any adjudication. 5. The next issue arising out of ground Nos. 5 and 6 of the appeal pertains to an adjustment of Rs.37,11,076/- on account of notional interest attributable to delayed payments receivable from the AE. 5.1 The Ld. counsel of the assessee submitted that the Tribunal in assessment year 2009-10 has held that no ALP adjustment can be made in respect of delay in realization of sale proceeds. He said that issue in dispute is covered by the order of the Tribunal for assessment year 2009-10 in favour of the assessee and the Revenue has not filed any further appeal before the Hon’ble High Court against the said finding of the Tribunal and accordingly requested for deletion of addition in dispute. 5.2 Ld. CIT(DR), on the other hand, relied on the finding of the lower authorities and submitted that any receivable outstanding more than the normal period of the trade, per se is an international transactions and should be benchmarked. 5.3 We have heard the rival submission and perused the relevant material on record. We find that the Tribunal (supra) in assessment year 2009-10 has adjudicated the issue in dispute as under:

“11. We have considered the arguments advanced by the parties and perused the material available on record. Undisputedly, in the present case benchmarking of main international transactions applying TNMM has been accepted by the TPO. Considering this, we find that the ratio laid down by Mumbai ITAT in Rusabh Diamonds case (supra) is clearly applicable to the facts of instant case. In the said judgment it has been held by a coordinate bench of Tribunal as under (head notes from taxamnn.com):-

29 ITA No. 1835/Del/2015

“The interest income is an integral part of the PBIT inasmuch as interest income, in cases other than finance companies, is required to be included in the 'other income' and thus affects the profit before interest and taxes. While profit before interest and taxes does not take into account 'interest expenditure', it does take into account 'interest income' because the interest income is part of the ‘other income’, under pre-amended as well as post amended Schedule VI to the Companies Act, which is duly taken into account into computation of PBIT. In a way PBIT is a misnomer, as while PBIT does not take into account interest expenditure, it does take into account interest income- appearing in the other income. Once the profitability, as per PBIT, is found to be comparable, there cannot be a separate adjustment for interest income on delayed realization which is an integral part of the PBIT figure. [Para 12] As for the revenue's suggestion that it is to be verified whether the comparables include interest income, if any, all one can say is that the statutory provisions require the interest income, unless it is an interest income of the finance and banking companies, to be included in the other income which is taken into account for computing PBIT. The presumption, therefore, is that the accounts are drawn up as per the statutory requirements, and the exclusions from 'other income' are specifically discussed on the facts of each case, and as such constitute integral part of the transfer pricing documentation. There is nothing on record to show these exclusions. [Para 15] As regards the contention that normally all interest incomes are excluded in the computation of PBIT as such incomes rarely constitute operational income, there is no need to be guided by such hypothesis and generalities. There is nothing on the records, to show such exclusions on the facts of this case. In any event, setting off of interest expenditure with interest on account of delay in realization of debts, even if so, is not too common an occurrence and more of exceptions than the rule. The apprehensions of the revenue are purely hypothetical and, therefore, devoid of legally sustainable merits. [Para 16] In view of these discussions, as also bearing in mind entirety of the case, no ALP adjustments can be made, in respect of delay in realization of sale proceeds. Such being conclusion, there is no need to address the specific factual arguments advanced by

30 ITA No. 1835/Del/2015 the assessee in effect thus the grievance of the assessee, is upheld and direct the Assessing Officer to delete the impugned arm's length price adjustment [Para 17] Explanation to section 92B There is, however, one more aspect of the matter for which the impugned ALP adjustment must be deleted. [Para 19] It is noted that everything hinges on application of Explanation to section 92B, vide Finance Act 2012, though with retrospective effect from 1-4- 2002. [Para 20] The amendment so made by the Finance Act, 2012, stated to be with retrospective effect 1-4-2002, inserts an Explanation to section 92B. In plain words, this amendment inter alia implies that capital financing of any type, including by way of 'deferred payment or receivable or any other debt arising during the course of business' will constitute an international transaction under section 92B. Going by this definition "any debts arising during the course of business" will constitute an international transaction. A trade debt is, accordingly, covered by this definition. However, since the assessment year that one is dealing with is prior to the assessment year 2012-13, the next important question is whether this amendment could be held to be applicable in the assessment year before as well. Undoubtedly, the amendment is said to be retrospective but then the question really is whether just stating the law to be retrospective will make it retrospective in effect. [Para 29] It is very important to bear in mind the fact that right now one is dealing with amendment of a transfer pricing related provision which is in the nature of a SAAR (specific anti-abuse rule), and that every anti-abuse legislation, whether SAAR (specific anti- abuse rule) or GAAR (general anti-abuse rule), is a legislation seeking the taxpayers to organize their affairs in a manner compliant with the norms set out in such anti-abuse legislation. An anti-abuse legislation does not trigger the levy of taxes; it only tells you what behavior is acceptable or what is not acceptable. What triggers levy of taxes is non-compliance with the manner in which the anti-abuse regulations require the taxpayers to conduct their affairs. In that sense, all anti-abuse legislations seek a certain degree of compliance with the norms set out

31 ITA No. 1835/Del/2015 therein. It is, therefore, only elementary that amendments in the anti-abuse legislations can only be prospective. It does not make sense that someone tells you today as to how you should have behaved yesterday, and then goes on to levy a tax because you did not behave in that manner yesterday. [Para 36] When this is put to the Department, his stock reply is that the amendment only clarifies the law, it does not expand the law. [Para 37] Well, if the 2012 amendment does not add anything or expand the scope of international transaction defined under section 92B, assuming that it indeed does not this provision has already been judicially interpreted, and the matter rests there unless it is reversed by a higher judicial forum. However, if the 2012 amendment does increase the scope of international transaction under section 92B, there is no way it could be implemented for the period prior to this law coming on the statute, i.e., 28-5-2012. The law is well settled. It does not expect anyone to perform an impossibility. [Para38] It is for this reason that the Explanation to section 92B, though stated to be clarificatory and stated to be effective from 1-4- 2002, has to be necessarily treated as effective from at best the assessment year 2013- 14. In addition to this reason, in the light of Delhi High Court's guidance in the case of DIT v. New Skies Satellite BV [2016] 382 ITR 114/68 taxmann.com 8 also, the amendment in the definition of international transaction under section 92B, to the extent it pertains to the issuance of corporate guarantee being outside the scope of 'international transaction' cannot be said to be retrospective in effect. The fact that it is stated to be retrospective, in the light of the aforesaid guidance of Delhi High Court would not alter the situation, and it can only be treated as prospective in would not alter the situation, and it can effect i.e. with effect from 1-4-2012 onwards. [Para 39] For the detailed reasons set out above, the amendment in section 92B, at least to the extent it dealt with the question of issuance of corporate guarantees, is effective from 1-4-2012. The assessment year being an assessment year prior to that date, the amended provisions of section 92B have no application in the matter. [Para 43]” Respectfully following the above, ground Nos.7 & 8 of the Appeal are allowed and the AO is directed to delete addition of Rs.9,786/-.”

32 ITA No. 1835/Del/2015

5.4 It is not disputed that the Revenue has not filed any appeal before the Hon’ble High Court against the above decision of the Tribunal on the issue in dispute. 5.5 Thus, Respectfully following the finding of the Tribunal on the issue in dispute, we allow the ground Nos. 5 and 6 of the appeal and direct the Assessing Officer to delete the addition of Rs.37,11,076/-. In view of conclusion above, the remaining ground Nos. 7, 7.1 and 8 do not require any adjudication. 6. The next issue which require our deliberation arises out of ground Nos. 9 to 9.3 of the appeal and pertains to disallowance of deduction under section 10A of the Act amounting to Rs.28,52,77,453/-. 6.1 The facts in respect of issue in dispute are that the assessee claimed deduction under section 10A of the Act amounting to Rs.37,23,15,615/-, which is hundred percent deduction of the profit of Unit-II of the assessee. The total turnover of the undertaking for unit –II was shown at Rs.45,07,29,722/- out of which turnover of Rs.28,52,77,453/-pertain to data processing receipts and turnover of Rs.16,54,52,269/- pertain to IT support services. The Assessing Officer proposed to allow deduction under section 10A with reference to the IT support services of Rs.16,54,52,268/- only as against the claim of the assessee on the export turnover of Rs.44,37,42,546/- computed in form No. 56F. After considering the submission of the assessee, the Assessing Officer rejected the exemption in respect data processing receipt holding that revenue was received by the assessee on account of distribution agreement and in not on account of any software, data processing fee etc., accordingly, he restricted the deduction to the extent of Rs.13,66,68,296/- and disallowed the balance deduction claimed by

33 ITA No. 1835/Del/2015 the assessee. The Ld. DRP upheld the disallowance made by the Assessing Officer. 6.2 Learned counsel of the assessee submitted before us that issue in dispute is covered in favour of the assessee by the order of the Tribunal (supra) in assessment year 2009-10, which has been further upheld by the Hon’ble jurisdictional High Court in ITA 154/2017 dated 22/05/2017. 6.3 Learned CIT(DR), on the other hand, relied on the order of the Assessing Officer and the DRP and submitted that activity of the relevant unit of the assessee is not eligible for deduction under section 10A of the Act. 6.4 We have heard the rival submission and perused the relevant material on record. We find that Tribunal (supra) while adjudicating the issue of deduction under section 10A of the Act, in para-15 of the order, has relied on the coordinate bench decision in assessee’s own case for assessment year 1996-97 and 1997-98 and also decision of the Tribunal in the case of M/s Interglobe Technology Contents Private Limited for assessment year 2007-08 to assessment year 2010-11 in ITA Nos. 419/Del/2011, 5830/Del/2011, 1463/Del/2013 and 6144/Del/2013. The relevant finding of the Tribunal is reproduced as under: “15.1 Above conclusions of coordinate bench clearly highlight the nature of data processing activities carried on by the appellant. We find no reason for not following the above binding precedent. Moreover tax department has also accepted the above decision. Ld DRP has vehemently harped upon the fact that nature of activities carried on by the appellant is solely distribution and marketing and not export oriented. We are unable to convince ourselves in this regard. Similar allegations were raised by the AO in his order of assessment for AYs 1997-98 and 1998-99. On further appeal ITAT in AY 1997-98 and the learned CIT(A) in 1998-99 following ratio propounded in 79 ITD 407(Del) has allowed appellant’s claim for deduction u/s 10A in those years. Even these orders have been accepted by the tax department and there is no further challenge thereto. Ld DRP’s action in enhancing the total income in AY 2009- 10 and disallowing the claim for deduction u/s 10A in the instant

34 ITA No. 1835/Del/2015 case is contrary to the decision of Hon’ble Jurisdictional High Court of Delhi in case of Neo Poly Pack (P) Limited reported in 245 ITR 492(Del) wherein the Hon’ble Court has held as under: “………we are of the view that no fault can be found with the order of the Tribunal declining to make reference on the proposed question. It is true that each assessment year being independent of each other, the doctrine of res judicata does not strictly apply to the income-tax proceedings, but where an issue has been considered and decided consistently in a number of earlier assessment years in a particular manner, for the sake of consistency, the same view should continue to prevail in the subsequent years unless there is some material change in facts. In the present case, the learned counsel for the revenue has not been able to point out even a single distinguishing feature in respect of the assessment year in question which could have prompted the Assessing Officer to take a view different from the earlier assessment years in which the same income was brought to tax as income from business." 15.2 Even otherwise on merits we are unable to sustain the view adopted by Ld DRP. Ld AR is justified in submitting that the learned DRP has written factually incorrect findings in its order. Moreover the details ,filed by the appellant have also been partially taken into consideration. Ld DRP takes note of top 25 employees but omits to take into consideration crucial fact that director of appellate company Shri Ankur Bhatia is a Software Engineer with 16 years of experience. Moreover division wise break up of total employee strength has also partially been reproduced by Ld DRP in its order. Appellant vide submissions dated 29th November 2011 has submitted following details: Division wise break up of total staff strength Operations 518 Accounts / Admin 40 Business Development 103 Marketing and corporate communication 8 Utility Staff 13 Total 747

35 ITA No. 1835/Del/2015 Name of No. of software No. of software No. of data processors / other division engineers in the division engineers in the personnel providing services division eligible u/s 10A

No. No. No. Minimum Minimum Minimum required required required qualification qualification qualification 75 18 425 Varies as per job BSc-Eng, B.E., Diploma in profile and experience BCA, B. Tech or software similar application/ qualification programming or similar qualification

Above details clearly show that appellant did possess requisite technical staff for carrying out data processing activities. We further observe that Ld DRP has erroneously been influenced by the fact that appellant is having branches in various locations. Facts on record clearly show that those branches belong to Unit I and not to Unit II. As regards Unit II the STPI registration has been granted to the appellant only for one location i.e Vasant Vihar, New Delhi. Ld AR has also drawn our attention towards application seeking STPI registration wherein it is stated that applicant will not have any STP unit in any other location (refer page 447 of paper book). Annual return to STPI authorities also clarify that Unit II was operating only from one location. Registration granted by STPI Authorities to UNIT II is solely for manufacture of "Computer Software / IT Enabled Services”. Once STPI authorities do not doubt the factum of export activities of Unit II, we failed to apprehend how learned DRP can take a contrary view. We may refer here to the decision of Special Bench of Tribunal in case of Mitsui & Co. reported in 39 ITD 59(Del)(SB), wherein it is held as under: “One is not to be led away by the enormity of the expenditureincurred in running an office in India. That would depend upon the level of the country to which the office belongs. We have to judge the expenditure incurred from that angle and not from our angle. It is not the case of the Revenue that the expenditure incurred was so camouflaged as to cover the expenditure incurred in a trading activity to show it as expenditure incurred on liaison activity. Nor is it the case of the Revenue that the work carried on by the assessee in India which

36 ITA No. 1835/Del/2015 according to them amounted to trading activity produced income in India or anywhere else. Ibis expenditure incurred in India was met out of the remittances received by the Indian Branches again through the Reserve Bank of India. There was no evidence brought on record at any stage that the Indian Branches had exceeded the limits prescribed for it by the Reserve Bank of India. As long as the Indian Officers were conducting the operations within the restricted area and so long as those activities were not considered by the Reserve Bank of India, which is the concerned authority as amounting to anything other than carrying on of liaison work no inference adverse to the assessee can be drawn or is possible to draw. To repeat what all that was done by the assessee fell within the parameters of supplying of information which is preparatory to and auxiliary to the formation of the final contracts. ” Appellant has clarified above that like earlier years in the year under consideration also the sole activity carried on by it was that of providing the travel agents an access to the Amadeus CRS System by rendering ITeS data processing services. Facts on record also show that the appellant has not carried on any “distribution” functions though the agreement provided for same DRP’s action in the present case is motivated by the “distribution” part of agreement which was not actually carried on by the appellant. Since fee to be paid to appellant as per Annexure A of the agreement was defined in aconsolidated manner probably that has lead to the present confusion in Ld DRP’s action of making disallowance of deduction u/s 10A. As held by the Tribunal in appellant’s own case for AY 1996-97 (supra) it merely provides ITeS services to Amadeus Spain. Appellant renders no services to the travel agents but does render data processing services only to Amadeus Spain and for this it is being remunerated on a profit sharing basis. The meaning ascribed to term “distribution” by Ld DRP in this year has formed part of appellant’s agreements % with Amadeus Spain since inception from AY 1996-97. Hence it does not wipe out the past history of the case. It is admitted by learned DRP that facts are common and there is no change in modus operandi. Hence action of learned DRP in now doubting the claim made when after a detailed technical examination of appellant’s activities, eligibility of its sole data processing activity for claiming deduction u/s 10A has already been settled by the Tribunal in AY 1996-97 and accepted by tax department is unsustainable.

37 ITA No. 1835/Del/2015 15.3 The view adopted by Ld DRP has further been influenced by the fact that Amadeus Spain has a PE in India in form of Amadeus India Private Limited (i.e the appellant). We find that this fact is totally irrelevant in adjudication of appellant’s claim for deduction u/s 10A. Foreign company’s DAPE and DA are two separate taxable entities as per law. DAPE is a creation of Article 5 of the relevant DTAA, wherein the object is to tax profits of foreign company in the source state. This distinction has efficiently been highlighted by a Coordinate Bench of tribunal in case of Set Satellite (Singapore) (supra) as under: “11. The particular difficulty in the case of a dependent agent permanent establishment is that DAPE itself is hypothetical because there is no establishment-permanent or transient of the GE in the PE state. The hypothetical PE, therefore, must be visualized on the basis of presence of the GE as projected through the PE, which in turn depends on functions performed, assets used and risks assumed by the GE in respect of the business carried on through the PE. The DAPE and DA has to be, therefore, be treated as two distinct taxable units. The former is a hypothetical establishment, taxability of which is on the basis of revenues of the activities of the GE attributable to the PE, in turn based on the FAR analysis of the DAPE, minus the payments attributable in respect of such activities. In simple words, whatever are the revenues generated on account of functional analysis of the DAPE are to be taken into account as hypothetical income of the said DAPE, and deduction is to be provided in respect of all the expenses incurred by the GE to earn such revenues, including, of course, the remuneration paid to the DA. The second taxable unit in this transaction is the DA itself, but this taxability is in respect of the remuneration of the DA. The provisions of the tax treaty are silent on this issue, and rightly so, because the taxability of the DA is quite distinct of the taxability of the enterprise of the contracting state which is in respect of PE of such an enterprise. At the cost of repetition, it is not the DA who constitutes PE of the GE, but it is by the virtue of a DA that the GE is deemed to have a PE, a DAPE though, in the other contracting state. We are of the considered view that in addition of the taxability of the DA in respect of remuneration earned by him, which is in accordance with the domestic law and which has nothing to do with the taxability of the foreign enterprise of which he is dependent agent, the foreign enterprise is also taxable in India, in terms of the provisions of Article 7 of the tax treaty, in respect of the profits attributable to the

38 ITA No. 1835/Del/2015 dependent agent permanent establishment. As we have elaborated earlier in this order, a dependent agent permanent establishment is distinct from the dependent agent. While computing the profits of this dependent agent permanent establishment, a deduction is to be allowed for the remuneration paid to the dependent agent as that is cost of operation of the dependent agent permanent establishment and as it has been incurred for generating the revenues attributable to such hypothetical permanent establishment ” Tribunal has also maintained the above distinction while deciding the case of Amadeus Spain. A deduction has been allowed to Amadeus Spain for 46% revenue it has passed on to the appellant, as it is a legitimate business expense of Amadeus Spain and income taxable in hands of the appellant. It will be relevant here to refer to the decision of Amadeus Spain (supra) wherein Tribunal has held as under: " ………Thus where the entire activity of an enterprise are not carried out in a Contracting State where the PE is situated, than only so much of the profit as is attributable to the functions carried through the PE can be taxable in such source State. While dealing with the question as to what is such part of income as is reasonably attributable to the operations carried out in India, we have held that only 15% of the revenue generated from the bookings made within India is taxable in India. The same proportion has to be adopted here while computing profit attributable to the PE. We have also held that since the payment to the agent in India is more than what is the income attributable to the PE in India, it extinguish the assessment as no further income is taxable in India. It is to be noted that even in the first assessment framed by the Assessing Officer, the entire expenses in the form of remuneration paid to AIPL was held as allowable deduction and was reduced while computing the income of appellant If that be the case, the income attributable to PE in India being less than the remuneration paid to the dependent agent, it extinguishes the assessment and requires no further exercise for computation of income. We accordingly hold so and in view of the same the income of the appellant for assessment years 1997-98 and 1998-99 will be 'Nil'.” 15.4 Before concluding we would like to mention over here that identical issue had also came up for the consideration of the Tribunal in case of M/s Interglobe Technology Quotient Private

39 ITA No. 1835/Del/2015 Limited for AYs 2007-08 to 2010-11 in ITA Nos. 419/Del/2011, 5830/Del/2011, 1463/Del/2013 and 6144/Del/2013. Vide order dated 26th July 2016 division bench of this Tribunal allowed the claim for deduction u/s 10A of the Act by M/s Interglobe Quotient, which is a competitor of the appellant. Both the assessees have similar business model and are rendering data processing activity. Factual allegations levied by the authorities below are also same. In the said order, after following Tribunal’s decision of appellant for AY 1996-97 (supra), the Tribunal has opined as under: “We find that the learned CIT(Appeals) while dealing with the issue has basically followed the decision of the IT AT in the case of Amadeus India (supra). He has elaborately discussed the terms of distribution agreement between the assessee and Galileo and has compared the activities of the assessee with that of Amadeus India before coming to the conclusion that the assessee before us is very much eligible for claiming deduction under section 10AA of the Act with this finding that the Assessing Officer was not justified in denying the claimed deduction under section 10AA of the Act in the present case. In para No.5.2, the Learned CIT(Appeals) firstly has discussed the terms of distribution agreement and on the basis of those description of services, he has come to the conclusion that the assessee had undertaken export of software /data processing services at the rate of % of GDP as part of the distribution services provided to Galileo and the consideration paid by Galileo for such services qualified for deduction under section 10AA of the Act. The Learned CIT (Appeals) has met out the objections raised by the Assessing Officer to justify his denial of the claimed deduction. The services rendered by the assessee to Galileo have been compared by the Learned CIT(Appeals) with the services rendered by Amadeus India to Amadeus Group of Companies. If we compare the working of the assessee with Amadeus India undisputedly was in the same line of business. In the case of Amadeus India (supra), the ITAT has held that the Amadeus India was performing the functions of a program exporter. They do not add more entries to the data base as done by the travel agent. In fact, it has no direct interest in adding to, or drawing extracts from the data base built into the computers like the several operators all the world over but what it does actually is to supplement the function of the Amadeus Group by preparing and transmitting programs to the latter for the incorporation into the portion or "partition” in its mega - computers at Erding in Germany, so as to enable the travel agent in marketing reason

40 ITA No. 1835/Del/2015 drawn on the available information for their benefit. Its activities are to issue instructions to the master computer to recognize the operators, identify them and provide them excess to specific portion of the data base. There can be no doubt whatever, for the reasons discussed above that the assessee manufactures, produces and export software within the meaning of the three specified sections of the Act. It is open to it to claim exemption under any of these sections and as is well established by pertaining to interpretation of taxing statute it is entitled to choose that one which is most favourable to it in any particular assessment year, held the IT AT. The IT AT in that case also noted some material facts that assessee company submits their monthly returns for export to the competent authority which has accepted the same in discharge of export obligation. The ITAT noted further that the export of software as per the statutory requirement are also declared on exporters declaration form SOFTES (specimen of SOFTES Form has been filed). The competent authority Le., Department of Electronics authorized official also certified that the software described in the SOFTES form was actually transmitted and the export value declared by the exporter has been found to be in order and accepted by the authorized officer. Similar are the functions of the assessee in the present case before us and similar types of certificates have been issued to the assessee about the transmission of software and the export value declared by the exporter has been found to be in order and accepted by the authorized officer. We are thus of the view that the Learned CIT(Appeals) was justified in equating the facts of the present case with that of the Amadeus India, also in the same line of business and following the decision of the IT AT on an identical issue, in the case of Amadeus India, in para No. 5.2 of the first appellate order reproduced hereinabove, the Learned CIT(Appeals) has summarized the fulfillment of all the requirements of the eligibility of the deduction claimed under sec. 10AA of the Act in the case of the assessee, which we are not reiterating here for the sale of brevity. Besides, Software export dealer action form shows the assessee in the data entry jobs and conversion software, data processing, the profit and loss account show data processing software export, software development services income, auditor’s report has certified that the assessee has been engaged in the development of computer software and information technology enabled product and services. The auditor’s report also talks about the Revenue depicted under data processing software” has been / is being certified by the

41 ITA No. 1835/Del/2015 Office of Development Commissioner, Noida, Noida Special Economic Zone. Export as per the Special Economic Zones Act, 2005” in relation to the “Special Economic Zones” means taking goods, or providing services out of India from a Special Economic Zones” means taking goods, or providing services out of India from a Special Economic zone by land, sea air or by any other mode whether physical or otherwise. And above all, as per section 51 of the SEZ, Act, notwithstanding anything inconsistent therewith contained in any other law for the time being in force, the provisions of SEZ Act will prevail. We thus do not find infirmity in the first appellate order in coming to the conclusion that the assessee is very much eligible for the claimed deduction under sec. 10AA of the Act in view of the of decision of the ITAT in the case of Amadeus India (surpa). The Learned CIT(Appeals) was thus right in deleting the disallowance made by the Assessing Officer in this regard. 7.6 The above view that the assessee is eligible for claimed deduction under sec. 10AA of the Act is also strengthened by the decision of CESTAT, New Delhi Bench in the case of Acquire Service (P) Ltd. vs. Commissioner of Service tax (supra). In that case like the present assessee before us, the assessee were 100% EOUs registered with software technology park and were granted exemption under income-tax for export of computer software. The assessee therein were parts of a group of companies i.e., Amadeus or Galileo. These groups had evolved and were maintaining a computer reservation system (CRS), the requisite software and a huge database comprising a variety of information relating to several airlines and other travel services provides, for providing international travel related facilities. The core computer system/server were established at overseas locations at US, Germany or Spain as the case may be. The travel agent, with a computer, merely accesses or utilizes travel information drawn from the data base of the computers. The travel agent also adds to, and alters the data available on the computer when he books a ticket (or other travel facilities like cab services, accommodation at hotels/resorts etc.) for a customer by feeding in the data regarding the customer such as airlines, hotel, local travel fare, tickets, the several intermediary and eventual destination; and the nature of services to be provided etc. This data enters the composite data based stream and becomes available to other operators via computers operating on Amadeus or Galileo system, all over the world, whenever a fulfilling transactions occurs at the travel agents end.

42 ITA No. 1835/Del/2015 The assessee’s role like the present assessee before us, was occupying the position of hyphen between the overseas Amadeus and Galileo which have conceived, evolved, maintained and operates the CRS (Computer Reservation System) facility on the one hand; and travel agent on the other. What the to assessee do, is to supplement functions, of the overseas entities (Amadeus or Galileo) by preparing and transmitting the locally generated travel related data to them for incorporation and synthesis into the core data base, maintained in the mega computers overseas, so as to enable travel agents (operating within the assessee’s marketing region) to draw on the available and updated information, for their benefit. The assessees issued instructions to the respective master computer (of Amadeus or Galileo) to enable recognition that identification of tour operators and facilitate access to them of specific portion (segment) of the composite data basis. CRS is a system connected with a data base carrying various kinds of information pertaining to several airlines and other travel services provides is used for booking airlines tickets, cabs hotels and like travel facilities across the globe. Airlines hotels, cabs agencies and other services providers pay fee to the overseas entities (Amadeus or Galileo) for bookings made by employing the CRS. The assessee process the data generated by their accredited travel agent in India, at their respective STP unit and align and interface such information as per protocols of the CRS systems of the overseas entitles-Amadeus or Galileo. On successful booking of a ticket or others travels related facilities by accredited travel agents, the relevant data is processed by the assessees and fed into the data overseas, employing internet facilities and activities amounting to computer data processing. For providing this service, assessees received data processing fees from the overseas entities in convertible foreing exchange, assessees however receive no fee/consideration from either the airlines, the travel agents or from hotels etc. the CESTAT has thus come to the conclusion that assessees promote/market CRS services provide by the Overseas entities (Amadeus/ Galileo) but do so through computers date processing, amounting to information technology services. 7.7 The functions of assessee have also been discussed by the ITAT in the case of Galileo International Inc. vs. DCIT (supra) deciding the issue of holding of any permanent establishment of Galileo International Inc. in India to examine its income to be

43 ITA No. 1835/Del/2015 taxable in India. This decision of the IT AT has been upheld by the Hon’ble High Court. 7.8 The Hon’ble Delhi High Court in the case of CIT vs. M.L. Outsourcing Services (P) Ltd. (supra) in the para No. 9 of the decision has been pleased to make observation on the CBDT Notification No. S0890(E) dated 26.09.2000 in relation to deduction under sec. 10A, reproduced as under: “9. A perusal of the said notification would indicate that the Board has included several distinct types of services under the expression, “product or services” in the fifteen clauses. The Board, in the notification has understood that product or services, to be included within clause (b) of Explanation 2 to Section 10A, need not be computer software as understood in the common parlance of even customized electronic data, as generally understood. Any product or service of similar nature would include in its ambit, product and services which were enabled by, i.e. would rely upon, or are driven by information technology. This becomes clear when we refer to the wide ambit of the divergent and varied services covered in the different clauses like, “(ii) call centres...(viii) human resources services...(viii) insurance claim processing... (xii) remote maintenance” and “(XIV) support centres”. These services would not necessarily and primarily involve customized data processing, but nevertheless, these are information technology enables services. In case of call entres, queries and questions from a customer of a third company are answered by an employee of the assessee based in India. The said task is performed with the aid and help of information technology but it would not be a case of customized electronic data service or export thereof. Similar exercise may be undertaken in case of remote maintenance or support centers, which answer queries and gives suggestions by e-mails or through voice and/or video communications. These services would not normally involve processing or sending customized electronic data abroad yet these are information technology enabled services and specifically covered under the Notification". 7.9 In view of the above discussion, we find that the Learned CIT(Appeals) has rightly held that the assessee is eligible for the

44 ITA No. 1835/Del/2015 claimed deduction under sec. 10AA of the Income-tax Act, 1961.” 16. Following the above view, we direct the Assessing Officer to allow the claimed deduction u/s 10A of the Income-tax Act, 1961 on Unit II of the appellant.”

6.5 The Hon’ble jurisdictional High Court in ITA 154 of 2017 dated 22/05/2017 upheld the finding of the Tribunal on the issue in dispute. The relevant finding of the Hon’ble Delhi High Court is reproduced as under:

“Conclusion of ITA 154 of 2017 (AIPL) 32. The Court finds that the impugned order of the ITAT in the case of AIPL for AY 2009-10 on the issue of allowing the deduction under Section 10A of the Act suffers from no legal infirmity either in its analysis of the legal provisions or in its conclusions. The Court is not inclined to frame any question of law on the issue concerning a Section 10A deduction in the appeal of the Revenue against AIPL for AY 2009-10.

6.6 Thus, Respectfully following the decision of the Tribunal and Hon’ble jurisdictional High Court, we direct the Assessing Officer to allow the deduction claimed under section 10A of the Act by the assessee. The Ground Nos. 9 to 9.3 of the appeal are accordingly allowed in favour of the assessee. 7. In ground Nos. 10 and 10.1, the assessee has challenged disallowance of Rs.7,10,677/- under section 14A of the Act read with rule 8D of the Income Tax Rules. 7.1 Before us, the Ld. counsel of the assessee submitted that in the year under consideration no tax-free income was earned by the assessee and hence disallowance under section 14A was not applicable in view of the decision of the Hon’ble Delhi High Court in the case of Cheminvest Ltd. Vs. CIT reported in 378 ITR 33(Del).

45 ITA No. 1835/Del/2015 7.2 The Ld. CIT(DR) though relied on the finding of the lower authorities, he could not controvert the fact that there was no tax-free income earned during the year. 7.3 We have heard the rival submission and perused the relevant material on record including the decision of the Hon’ble Delhi High Court in the case of Cheminvest Ltd (supra). The finding of the Hon’ble High Court is reproduced as under:

“23. In the context of the facts enumerated hereinbefore the Court answers the question framed by holding that the expression 'does not form part of the total income' in Section 14A of the envisages that there should be an actual receipt of income, which is not includible in the total income, during the relevant previous year for the purpose of disallowing any expenditure incurred in relation to the said income. In other words, Section 14A will not apply if no exempt income is received or receivable during the relevant previous year.”

7.4 Thus, respectfully following the above decision of the Hon’ble High Court, the Assessing Officer is directed to delete the disallowance of Rs.7,10,677/- under section 14A of the Act. The ground Nos. 10 to 10.1 are therefore allowed. In view of the ground Nos. 10.0 & 10.1 allowed, the ground No. 10.2 is not required to be adjudicated upon. 8. In ground No. 11 the assessee has challenged assessing of interest on income tax refund of Rs.16,20,444/- pertaining to assessment year 2007-08 as income from other sources 8.1 The facts in respect of issue in dispute are that in September, 2009, the assessee received interest under section 244A of the Act amounting to Rs.16,20,444/- in respect of assessment year 2007-08, which the assessee did not account for as its income in the year under consideration. The contention of the assessee was that said interest was withdrawn in subsequent years and, therefore, same cannot be said to have been actually earned by the assessee company and consequently

46 ITA No. 1835/Del/2015 the question of declaring the same as income does not arise. The AO made the addition of interest of Rs.16,20,444/- in the year under consideration and which was upheld by the Ld.DRP. 8.2 Before us, the learned counsel submitted that interest has been subsequently withdrawn therefore no income could have been taxed in the hands of the assessee in the year under consideration. In support of the contention the learned counsel relied on the decision of the Hon’ble Karnataka High Court in the case of Venkatesh Dutt Vs. CIT, reported in 226 taxmann 117 (Kar). The Ld. counsel also relied on the decision of the special bench of the Tribunal in the case of Avade Trading, 100 ITD 131. 8.3 On the contrary, the Ld. CIT(DR) submitted that if the said interest has been withdrawn in subsequent year, than assessee may be allowed deduction in that year but in the year under consideration the income was enjoyed by the assessee and therefore same was liable for tax. Alternatively, he requested to restore the matter back to the file of the Assessing Officer to consider the issue-in-dispute in the light of the decision cited by the assessee. 8.4 We have heard the rival submission and perused the relevant material on record. In the instant case the fact that the interest was withdrawn in the year under consideration itself or in the subsequent year, is not clear from the order of the authorities below. It is also not clear what is the amount which has been withdrawn subsequently. The relevant ITNS-150 has not been produced before us. In the facts and circumstances of the case, we feel it appropriate to restore the issue to the file of the Assessing Officer for adjudication after appreciation of the facts and in the light of the decision cited by the Ld. counsel of the assessee. The assessee shall be afforded adequate opportunity of being

47 ITA No. 1835/Del/2015 heard. The ground of appeal is accordingly allowed for statistical purpose. 9. The ground No. 12 being consequential in nature, we are not required to adjudicate upon. 10. The ground No. 13, being general in nature we are not required to adjudicate upon. 11. In the result, appeal of the assessee is allowed partly for statistical purposes. The decision is pronounced in the open court on 23rd Oct., 2017.

Sd/- Sd/- (VIJAY PAL RAO) (O.P. KANT) JUDICIAL MEMBER ACCOUNTANT MEMBER Dated: 23rd October, 2017. RK/-(D.T.D) Copy forwarded to: 1. Appellant 2. Respondent 3. CIT 4. CIT(A) 5. DR Asst. Registrar, ITAT, New Delhi