M/S. AT & T GLOBAL NETWORK SERVICES (INDIA) PVT. LTD.,GURGAON vs. DCIT, NEW DELHI

AT & T Global Network Services (India) Pvt Ltd V DCIT ITA No 2538/Del/2014 (A) & ITA NO 2518/Del/2014 (D) A Y 2009-10

INCOME TAX APPELLATE TRIBUNAL DELHI BENCH ―I-2‖: NEW DELHI BEFORE SHRI I.C.SUDHIR, JUDICIAL MEMBER AND SHRI PRASHANT MAHARISHI, ACCOUNTANT MEMBER

ITA No. 2538/Del/2014 (Assessment Year: 2009-10)

AT & T Global Network Services DCIT, (India) Pvt Ltd., Circle-2(1), Vs. Vatika Lok-1, Block-A, Gurgaon New Delhi PAN:AAFCA8810L (Appellant) (Respondent)

ITA No. 2518/Del/2015 (Assessment Year: 2009-10)

DCIT, AT & T Global Network Services Circle-2(1), (India) Pvt Ltd., Vs. New Delhi Vatika Lok-1, Block-A, Gurgaon PAN:AAFCA8810L (Appellant) (Respondent)

Assessee by : Shri Kanchan Kaushal, CA Shri Aditya Gupta, CA Shri Sandeep Puri, CA Ms. Chinu Bhasin, CA Revenue by: Shri N C Swain CIT DR Shri TM Shivkumar, CIT DR Date of Hearing 06/07/2017 Date of pronouncement 18/09/2017

O R D E R PER PRASHANT MAHARISHI, A. M.

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AT & T Global Network Services (India) Pvt Ltd V DCIT ITA No 2538/Del/2014 (A) & ITA NO 2518/Del/2014 (D) A Y 2009-10 hereinafter referred to as the ld AO ] passed u/s 143(3) read with section 144C of the Income Tax Act, 1961[ Hereinafter referred to as ‗The Act‘] in pursuance of the direction issued by the Dispute Resolution Panel [ hereinafter referred to the ‗Ld DRP‘] u/s 144C(5) of the Act dated 30.12.2013. 2. For the same year, the Revenue has also filed an appeal in ITA No. 2518/ Del/2013. 3. The assessee has raised the following grounds of appeal in ITA No. 2538/Del/2014 for the Assessment Year 2009-10:- ―1. Ground No. 1 - Double addition on account of income suo moto offered to tax in the income 1.1 On the facts and Circumstances of the case, the learned AO has erred in making addition of Rs. 109,111,565 on account of income relating to financial year 2008-09 (i.e. financial year relevant to tire subject assessment Wear) reported as prior period income in the financial statement for the subsequent financial year (i.e. Financial year 2009-10 relevant to AY 2010- 11) 1.2 On the facts and circumstances of the case, the learned AO has erred in not taking cognizance of the fact that the aforesaid amount was suo moto offered to tax by the Appellant in the revised return of income filed for the subject assessment year and hence, such amount cannot be added again. 2. Ground No. 2 - Double disallowance on account of excess depreciation claimed suo moto withdrawn in the revised return of income 2.1 On the facts and circumstances of the case, the learned Assessing Officer has erred in disallowing excess tax depreciation claim bf Rs 22,89758 on import of capital goods. 2.2 On the facts and circumstances of the case, the learned AO has erred in not taking cognizance of the fact that the aforesaid claim was suo moto withdrawn by the Appellant in its revised return of income filed for the subject assessment year and hence, the aforesaid amount cannot be disallowed again. Since the aforesaid addition/ disallowance (covered in Ground I and 2 above) have resulted from mistakes apparent from record, a rectification application has been filed by the Appellant with the learned AO for rectification of the impugned assessment order and deletion of the above addition/ disallowance. Ground 1 and 2 shall not be pressed v\here the rectification application is allowed by the learned AO.

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AT & T Global Network Services (India) Pvt Ltd V DCIT ITA No 2538/Del/2014 (A) & ITA NO 2518/Del/2014 (D) A Y 2009-10 3. Ground No. 3 - Disallowance of interest incurred on External Commercial Borrowings ('ECBs') 3.1 On the facts and circumstances of the case and in law, the learned AO/ Hon'ble DRP has erred in making a disallowance of Rs 454,131 towards interest expenditure incurred in relation to the ECBs availed by the Appellant for acquisition of fixed assets, by invoking the proviso to section 36( 1 )(iii) of the Act. 3.2 Without prejudice to the above ground, on the facts and circumstances of the case and in law, the learned AO has erred in not allowing depreciation under section 32 of the Act on the disallowed interest amount, by not adding the same to the actual cost of the acquired fixed assets. 4. Ground No. 4 - Disallowance of expenses of capital nature claimed as revenue expenditure 4.1 On the facts and circumstances of the case and in law, the learned AO/ Hon'ble DRP has erred disallowing an amount of Rs 34,745,337 as capital expense debited to the profit and loss account since the invoices contain reference to Lawful intercept ('LI') project. 4.2 On the facts and circumstances of the case and in law, the learned AO/ Hon'ble DRP has erred in not taking cognizance of the fact that the above expenses relate to post implementation professional and training services provided by Narus Inc.. including demonstration of equipment before regulatory bodies in relation to equipment supplied. 4.3 Without prejudice to the above grounds, on the facts and circumstances of the case and in law the learned AO/ Hon'ble DRP has erred in not allowing depreciation under section 32 of the Act on the above expenditure. 5. Ground No. 5- Disallowance of interest incurred on short term loans 5.1 On the facts and circumstances of the case, the learned AO/ Hon'ble DRP has erred in disallowing interest expense of Rs 7,776,975 incurred on short term loans availed by the Appellant, by invoking the proviso to section 36(l)(iii) of the Act. 5.2 Without prejudice to the above ground, on the facts and circumstances of the case and in law, the learned AO/ Hon'ble DRP has failed to take cognizance of the fact that the short term loans were availed by the Appellant both for the purposes of funding its working capital requirements and acquisition of fixed assets, which is clearly evident from the cash flow statement of the Appellant, and hence, disallowance of the entire interest expenditure is unjustified and untenable in law. 5.3 Without prejudice to the above grounds, on the facts and circumstances of the case and in law, the learned AO has erred 3 | P a g e

AT & T Global Network Services (India) Pvt Ltd V DCIT ITA No 2538/Del/2014 (A) & ITA NO 2518/Del/2014 (D) A Y 2009-10 in not allowing depreciation under section 32 of the Act on the aforesaid interest disallowed for the subject assessment year. 6. Ground No. 6-Disallowance of circuit accruals 6.1 On the facts and circumstances of the case and in law, the learned AO/ Hon'ble DRP has erred in making a disallowance of Rs 28,715,900 on account of year-end accruals created towards bandwidth and last mile services availed by the Appellant during the financial year relevant to the subject assessment year. 6.2 Without prejudice to the above grounds, on the facts and circumstances of the case and in law, the learned AO/ Hon'ble DRP has erred in not holding that since such year-end accruals have been reversed in the subsequent financial year (i.e. FY 2009-10), the same should be allowed as tax deductible expenditure for the subsequent financial year. 7. Ground No. 7- Short grant of credit in respect of taxes deducted at source ('TDS') 7.1 On the facts and circumstances of the case and in law. the learned AO has erred in considering TDS credit of Rs 104,707,907 as against TDS credit of Rs 147,292,033 claimed by the Appellant in the return of income filed, while determining the tax and interest liability for the subject assessment year. 7.2 On the facts and circumstances of the case and in law, the learned AO has erred in not allowing credit in respect of additional TDS certificates (in addition to the TDS credit claimed in return of income) for Rs 5,239,237 filed by the Appellant. 8. Ground No. 8 - Grounds relating to Transfer Pricing Matters That, on the facts and circumstances of the case and in law: 8.1 the learned TPO/AO/ DRP have erred in making an addition of INR 345,115.661 under section 92CA of the Act to the total income of the Appellant on account of adjustment in arm's length price ("ALP") of the international transactions pertaining to availing of intra-group services and payment of royalty (hereinafter referred to as "impugned transactions") entered into by the Appellant with its associated enterprises ("AEs"). 8.2 the learned TPO/ AO/ DRP have erred in not accepting the economic analysis undertaken by the Appellant in accordance with the provisions of the Act read with the Income- tax Rules, 1962 ("the Rules") in respect of the impugned transactions and instead, conducting a fresh economic analysis to hold that the same are not at arm's length. 8.3 the learned TPO/ AO/ DRP have erred in applying the Comparable Uncontrolled Price ("CUP") method and determining the ALP of the impugned transactions as NIL, without identifying any uncontrolled comparable transactions. 4 | P a g e

AT & T Global Network Services (India) Pvt Ltd V DCIT ITA No 2538/Del/2014 (A) & ITA NO 2518/Del/2014 (D) A Y 2009-10 8.4 the learned TPO/ AO/ DRP have erred in disregarding the elaborate documentary evidence submitted as part of assessment proceedings to erroneously assume that 'no benefit' has been conferred upon the Appellant from the impugned transactions. 8.5 the learned TPO/ AO/ DRP have erred in disregarding the supplementary analysis furnished by the Appellant in respect of the impugned transactions during the course of assessment proceedings which further corroborates the arm's length nature of the said international transactions entered into with its AEs. 8.6 the learned DRP has erred in not providing the Appellant with an opportunity of being heard before enhancing the adjustment in respect of availing of intra-group services and consequently the total income of the Appellant, thereby vitiating the principles of natural justice. 9. Ground No. 9- Initiation of penalty proceedings 9.1 On the facts and circumstances of the case and in law, the learned AO has erred in initiating penalty proceedings under section 271(l)(c) of the Act against the Appellant on account of the above adjustments made in the assessment order. 10. Ground No. 10- Levy of interest under section 234B and 234D of the Act 10.1 On the facts and circumstances of the case and in law, the learned AO has erred in charging interest under section 234B and 234D of the Act.‖ 4. The revenue has raised the following grounds of appeal for the Assessment Year 2009-10:- ―1. Whether on the facts and in the circumstances of the case the ld DRP has erred in deleting the disallowance of support services expenditure amounting to Rs. 11,61,76,093/-.‖

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AT & T Global Network Services (India) Pvt Ltd V DCIT ITA No 2538/Del/2014 (A) & ITA NO 2518/Del/2014 (D) A Y 2009-10 revised its return declaring income of Rs. 30.58 crores on 31.03.2011. In the revised return of income, it offered to tax a sum of Rs. 10.91 crores that had been shown as prior period income in the financial statements of AY 2010-11. Subsequently, the return was picked up for the scrutiny and notice u/s 143(2) was issued on 07.01.2011. During the course of assessment proceedings, reference u/s 92CA of the Act was also made by the ld. AO to the Transfer Pricing Officer to determine the arm‘s length price of international transactions entered into by the assessee with its Associate Enterprises. The Transfer Pricing Officer passed order u/s 92CA(3) of the act on 24.01.2013 proposing adjustment.

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AT & T Global Network Services (India) Pvt Ltd V DCIT ITA No 2538/Del/2014 (A) & ITA NO 2518/Del/2014 (D) A Y 2009-10 Income pertaining to current year reported in next year 10,91,11,565 Excess Depreciation 22,89,758 Prior Period Expenditure 5,63,316 Capex claimed as revenue expenses 3,47,45,337 Interest Expenditure on short term loans 13,46,070 Circuit charges 2,87,15,900 TPO Addition 34,51,15,661 Total Additions 52,88,70,316 Less: Credit for circuit charges 3,08,00,000 Assessed Income 80,38,91,688

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AT & T Global Network Services (India) Pvt Ltd V DCIT ITA No 2538/Del/2014 (A) & ITA NO 2518/Del/2014 (D) A Y 2009-10 12. The above two grounds have been disposed off by the rectification order dated 22.07.2014 passed by the Assessing Officer, hence have not been pressed by the Ld. AR and therefore they are dismissed as infructuous.

―3.4 The reply of the assessee has been considered and same is found not acceptable in view of the following facts:

A. First argument of the assessee that issue does not fall within the proviso to section 36(1)(iii) of the Act is not correct. The assessee has failed to understand the provisions of section 8 | P a g e

AT & T Global Network Services (India) Pvt Ltd V DCIT ITA No 2538/Del/2014 (A) & ITA NO 2518/Del/2014 (D) A Y 2009-10 36(1)(iii). The case law of Core Health Care Ltd. relied upon by the assessee pertained to AY 1992-93 i.e. prior to insertion of proviso to section 36(1)(iii). It is important to stress here that in the judgment relied upon by the assessee. The ratio of the judgment is as under:

―Sec. 36(1) (iii) of the Income-tax Act, 1961, has to be read on its own terms: it is a code of itself It makes no distinction between money borrowed to acquire a capital asset or a revenue asset. All that the section requires is that the assessee must borrow capital and the purpose of the borrowing must be for business, which is carried on by the assessee in the year of account. Unlike Sec. 37, which expressly excludes an expense of a capital nature, Sec. 36(1) (‗iii) emphasizes the user of the capital and not the user of the asset which comes into existence as a result of the capital and not the user of the asset which comes into existence as a result of the borrowed capital. The Legislature has, therefore, made no distinction in Sec. 36(1) (‗iii) between ―capital borrowed for a revenue purpose‖ and capital borrowed for a capital purpose ―. An assessee is entitled to claim interest paid on borrowed capital provided that the capital is used for business purpose irrespective of what may be the result of using the capital which the assessee has borrowed. ―Actual cost‖ of an asset has no relevancy in relation to Sec. 36(1) (iii).

The proviso inserted in Sec. 36(1) (iii) by the Finance Act, 2003, w.e.f April 1, 2004, will operate prospectively.

Held accordingly, that the assessee was entitled to deduction U/s 36(1) (iii,) prior to its amendment by the Finance Act, 2003, in relation to money borrowed for purchase of machinery even though the assessee had not used the machinery in the year of borrowing.‖

In short, the above amendments have been made by the Finance Act, 2003, and all the said amendments have been made operational w.e.f April 1, 2004. Therefore, the proviso inserted in Sec. 36(1) (iii) has to be read as prospectively and w.e.f April 1, 2004. As stated above, we are not concerned with the

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AT & T Global Network Services (India) Pvt Ltd V DCIT ITA No 2538/Del/2014 (A) & ITA NO 2518/Del/2014 (D) A Y 2009-10 interpretation or applicability of the applicability of the said proviso to Sec. 36(1) (iii) w.e. f. April 1, 2004. In the present case‖. (Para 11)

From above it is clear that reliance placed by the assessee on the judgment of Core Health Care Ltd is not acceptable as it was in respect of AY 1992-93 i.e. prior to amendments in section 36(1)(iii) and cannot be applied in the instant case. Further the Hon‘ble Supreme Court of India in the order had expressly stated that it was not concerned with the interpretation or applicability of the proviso to section 36(1)(iii) and the whole argument of the assessee is based on this, therefore the facts of this case are distinguishable and not at all relevant to the case of the assessee.

B. Another argument of the assessee is that Section 36(1)(iii) of the Act, read with the Proviso to the said section makes it clear that the primary condition for disallowance of interest expense on funds borrowed for acquisition of an asset is that such asset should have been acquired for the purpose of extension of the business. It is further been stated that since capital goods acquired by the assessee (using the ECB proceeds) have been acquired for use in the existing business activity of provision of telecommunication services and not for the purpose of starting another business activity, acquisition of such capital goods dies not result into extension of the business of the asset and thus, proviso to section 36(1)(iii) has no applicability in the instant case.

It is may be pertinent to refer the recent jurisdictional decision of the ITAT DELHI BENCH ‗A‘ in the case of Breeze Constructions (P.) Ltd. v. income-tax Officer, Ward 3(1) in IT Appeal No. 4779 (Delhi) of 2011 [assessment year 2007-08 dated May 4, 2012, wherein the assessee stated that its entire business has been set up and therefore, contended that proviso of section 36(1)(iii) cannot be applied in the case of the assessee, as there was no extension of existing business in the assessee‘s case. The Hon‘ble bench held that:

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AT & T Global Network Services (India) Pvt Ltd V DCIT ITA No 2538/Del/2014 (A) & ITA NO 2518/Del/2014 (D) A Y 2009-10

―interest paid, in respect of capital borrowed for acquisition of an asset for extension of existing business or profession; for any period beginning from the date on which the capital was borrowed for acquisition of the asset till the date on which such asset was first put to use, shall not be allowed as deduction. By implication this proviso is also applicable when assets are acquired for new business. If the proviso is interpreted to signs‘ that the same will not be applicable to such acquisition of assets, it will defeat the whole purpose of the proviso.‖

The relevant Para 7.3 & 7.4 of the ITAT order are reproduced;

―7.3 Ld. Commissioner of Income Tax (Appeals) has further observed that the interest expenditure is not allowable as per section 36(1) (‗iii) of the Act. This is due to the proviso to clause 36(1) (iii) which was inserted by the Finance Act, 2003, with effect from 1.4.2004. Ld. Commissioner of Income Tax (Appeals) observed that the object of the proviso is to disallow interest paid for acquiring an asset even for extension of the existing business till the date on which it is brought to use irrespective of the accounting treatment adopted by the assessee in its book. In this regard, Ld. counsel of the assessee had contended that proviso to clause 36(1) (iii) cannot be applied to the assessee‗s ase as there was no extension in the existing business of the assessee‗s case. Ld. Counsel has pleaded that the entire business has been setup and there is no extension involved. So he claimed that the proviso is not applicable in the case of the assessee. We can gainfully refer the provision of section 36(1) (iii) in this regard. The said section read as under:-

―(iii) the amount of the interest paid in respect of capital borrowed for the purposes of the business or profession: Provided that any amount of the interest paid, in respect of capital borrowed for acquisition of an asset for extension of existing business or profession (whether capitalized in the books of account or not,); for any period beginning from the date on which the capital was borrowed for acquisition of the asset till 11 | P a g e

AT & T Global Network Services (India) Pvt Ltd V DCIT ITA No 2538/Del/2014 (A) & ITA NO 2518/Del/2014 (D) A Y 2009-10 the date on which such asset was first put to use, shall not be allowed as deduction.

Explanation — Recurring subscriptions paid periodically by shareholders, or subscribers in Mutual Benefit Societies which fulfill such conditions as may be prescribed, shall be deemed to be capital borrowed within the meaning of the clause.‖

7.4 A reading of the above makes it amply clear that interest paid, in respect of capital borrowed for acquisition of an asset for extension of existing business or profession; for any period beginning from the date on which the capital was borrowed for acquisition of the asset till the date on which the capital was borrowed for acquisition of the asset till the date on which such asset was first put to use, shall not be allowed as deduction. By implication this proviso is also applicable when assets are acquired for new business. If the proviso is interpreted to signify that the same will not be applicable to such acquisition of assets, it will defeat the whole purpose of the proviso. Thus, we find that Ld. Counsel of the assessee‘s plea that proviso is not applicable, is not sustainable. In the background of the aforesaid discussion and precedent, Ld. Commissioner of Income Tax (Appeals) has passed a reasonable order which does not need any interference on our part and accordingly, we uphold the same. As regard the assessee‘s alternative submission the expenditure involved be allowed to be capitalized, we find that the same is acceptable. Hence, we that the disallowed expenditure be allowed to be capitalized.‖ Therefore the facts of this case are squarely applicable to the facts of the case of the assessee.

C. Another argument of the assessee is that Section 36(l)(iii) of the act read with the Proviso to the said section makes it clear that the primary condition for disallowance of interest expense on funds borrowed for acquisition of an asset is that such asset should have been acquired for the purpose of extension of the business. It has been discussed earlier that acquisition of fixed assets during the year amounts to extension of business and in

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AT & T Global Network Services (India) Pvt Ltd V DCIT ITA No 2538/Del/2014 (A) & ITA NO 2518/Del/2014 (D) A Y 2009-10 any case as Delhi ITATs decision the proviso to section 36(1)(iii) is even applicable to a new business. Therefore in either scenario the interest paid on ECB loan will get disallowed till the date the asset acquired has been put to actual use.

D. The assessee company has relied upon the case laws for proving that its case doesn‘t fall within the meaning of proviso of section 36(1)(iii).

-Gujarat Alchemic and Chemicals Ltd [2008] 295 ITR 85 (SC) - Shah Theaters (P) Ltd. [1988] 169 ITR 499, - Kanhiram Ramgopal vs CIT [1988] 170 ITR 41 (MP)

It is important to mention here that the facts of the above mentioned case laws relied upon by the assessee are different from the facts of the present case and hence can‘t be applied to the assessee.

E. The assessee has claimed that extension of existing undertaking was not present in the instant case is not correct. The details of fixed assets of the assessee company as on 01.04.2008 & 3 1.03.2009 are tabulated below for your, reference:

Data tabulated above clearly and earnestly lead to the conclusion that the company has extended its business and same falls within the purview of proviso to section 36(1)(iii) of the Income tax Act, 1961. The assessee has claimed that extension

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AT & T Global Network Services (India) Pvt Ltd V DCIT ITA No 2538/Del/2014 (A) & ITA NO 2518/Del/2014 (D) A Y 2009-10 of existing undertaking was not present in the instant case is not correct.

Hence, in view of the above discussion the plea taken by the assessee is not acceptable and the proviso to section 36(1)(iii) gets attracted for both set up of new business as well as for extension of the business (as held in the judgment of Humble ITAT Delhi Bench in the case of Breeze Constructions (P) Ltd v. Income-tax Officer, Ward 3(1) in IT Appeal No. 4779 (Delhi) of 2011) and interest expenditure till the date of put to use shall be added to the cost of the asset.

3.5 The assessee has failed to furnish any details relating to the date put to use of the assets acquired by using the ECBs availed during the year. It is important here to highlight that though the assessee has stated that the ECBs availed have been used for purchasing capital goods, but it has been unable to provide the date of put to use of such purchased assets. It is difficult to understand how a company such as the assessee does not have the details of put to use of the assets purchased by utilizing the ECBs obtained during the year. In absence of submission of any details by the assessee, I am constrained to assume that none of the assets purchased by using the ECBs obtained during the current assessment year were put to use before April 1, 2009 and hence, the computation of interest to be allowed has been done on the basis of the assumption that the purchased capital assets were put to use on April 1, 2009.

3.6 From the details available on record, it is seen that ECBs amounting to Rs. 102,860,000 were availed on March 2, 2009 and a similar amount (of Rs 102,860,000) was taken on March 19, 2009. Accordingly, in absence of date of put to use of the capital assets acquired by suing the aforesaid ECBs availed during the year, date of out to use of such assets has been taken as April 1, 2009 and interest expenditure of Rs 4,54,131/-, relating to ECBs availed during the year, is being disallowed and added back to the total income of the assessee company. The above amount is also added to the costs of fixed assets of the assessee. Penalty proceedings u/s 271(1)(c) are initiated

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AT & T Global Network Services (India) Pvt Ltd V DCIT ITA No 2538/Del/2014 (A) & ITA NO 2518/Del/2014 (D) A Y 2009-10 separately for filing inaccurate particulars of income and thereby concealing income chargeable to tax.‖ 14. Assessee preferred objection before the DRP who vide direction dated 30.12.2013 vide Para No. 7 has held as under:

―7.1 The taxpayer has objected to the proposed disallowance of interest expense of Rs. 4,54,131/- incurred on external commercial borrowings (ECB) for acquisition of fixed assets by invoking proviso to section 36(1)(iii) of the Act. Without prejudice the above claim, the taxpayer has pointed out that the AO did not allow depreciation u/s 32 on such interest expenditure by not adding the same to the cost of acquisition of fixed assets. The taxpayer is further submitted that depreciation u/s 32 shall be allowed on the disallowance of interest expenditure of Rs.22,16,117/- made in assessment year 2008-09.

7.2 The AO has proposed disallowance of interest as in his opinion the deductibility of interest is hit by the proviso to section 36(1)(iii) of the Act for the reason that the taxpayer has used the borrowed fund for extension of its business.

7.3 It was submitted before the Panel that the taxpayer company had availed of ECB loan facility for the procurement of capital goods required for expansion of existing business of the taxpayer. It was contended that the interest was paid in respect of capital borrowed for the purpose of business and was thus an allowable deduction because the company had commenced its business on 7th April, 2007. It was contended that the distinction has to be drawn between 'expansion' and "extension' of the business. The taxpayer was in the telecom business & continued with the same activity. The acquisition of capital assets for growth of the existing business is not hit by the proviso to section 36(1) (iii) of the Act. Reliance was placed on the decision of ITAT in

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AT & T Global Network Services (India) Pvt Ltd V DCIT ITA No 2538/Del/2014 (A) & ITA NO 2518/Del/2014 (D) A Y 2009-10 the case of ITW Signode 110 TTJ 170 wherein it has been held that the term 'extension' connotes that the taxpayer has extended its operations from present activity to another activity.

7.4 The issue has been considered by the Panel. In the proviso to section 36(1)(iii), the word ―extension‖ has been used which is to be taken as synonymous to the word ―expansion‖ held in case of Nahar Poly Films Ltd. Vs. CIT, Ludhiana 201 Taxmann 304 (P&H). The word ‗expansion‘ is not different from ‗extension‘ of business and therefore, the interest expenditure on the utilization of borrowed funds for the acquisition of new assets, from the date of its acquisition till the date when the asset is put to use, is to be disallowed. Moreover, the claim of the taxpayer runs counter to the legislative intent. The Panel declines to interfere with the proposed disallowance.

So far as the claim of allowability of depreciation on the amount of Rs.4,54,131/- is concerned, the AC is directed to verify if the relevant assets have been put to use during the year or not and proceed accordingly. However, if the claim is allowed, the AO clearly specify in the assessment order that the benefits so allowed is subject to the final decision by the appellate authorities on this matter of disallowance of interest of Rs.4,54,131/-.

So far the request of the taxpayer for allowing depreciation u/s 32 on the interest disallowed in AY 2008-09 of Rs. 22,16,117/- is concerned, the AO is directed to verify if the relevant assets have been put to use or not, either during FY 2007-08 or FY 2008-09 and proceed accordingly. However, if the claim is allowed, the AO shall clearly specify in the assessment order that the benefits so allowed is subject to the final decision by the appellate authorities on this matter of disallowance of interest of Rs.22,16,117/- made in AY 2008-09.‖

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AT & T Global Network Services (India) Pvt Ltd V DCIT ITA No 2538/Del/2014 (A) & ITA NO 2518/Del/2014 (D) A Y 2009-10 15. Before us, the ld DR relied upon the orders of the lower authorities whereas the AR put forth the following contentions:

―1.8 Section 36(1)(iii) of the Act provides that the amount of interest paid in respect of capital borrowed for the purpose of business or profession shall be allowed as a tax deductible expense. Section 36(1)(iii) of the Act reads as under: ―36(1) The deductions provided for in the following clauses shall be allowed in respect of the matters dealt with therein, in computing the income referred to in Section 28 – (i) and (ii)****** (iii) the amount of the interest paid in respect of capital borrowed for the purposes of the business or profession : [Provided that any amount of the interest paid, in respect of capital borrowed for acquisition of an asset for extension of existing business or profession (whether capitalised in the books of account or not); for any period beginning from the date on which the capital was borrowed for acquisition of the asset till the date on which such asset was first put to use, shall not be allowed as deduction.]‖ 1.9 Thus, the primary condition for disallowance of interest expense on funds borrowed for acquisition of an asset is that such assets should have been acquired for the purpose of extension of the business. However, in the present case, the assets have been utilized by the appellant for carrying on its existing telecommunication business and not for the purpose of extension of such business. 1.10 In the present case, the capital goods acquired by utilization of ECBs were telecom equipment. That the Appellant is engaged in the business of provision of telecommunication connectivity services to its customers is an undisputed fact. Thus, the capital assets were not utilized for extension of business but for carrying on the existing business. 1.11 The Hyderabad bench of the Hon'ble Tribunal in the case of ITW Signode 110 TTJ 170, has held that the term extension "connotes that the assessee has extended its operations from the present activity to another activity".

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AT & T Global Network Services (India) Pvt Ltd V DCIT ITA No 2538/Del/2014 (A) & ITA NO 2518/Del/2014 (D) A Y 2009-10 1.12 Further, the principle that 'Extension' of a business implies starting of a new business activity has been affirmed in the following judicial precedent:  DCIT vs. Gujarat Alkalies & Chemicals Ltd. [2008] 299 ITR 85 (SC), wherein setting-up of a new plant for producing a new chemical, Phosphoric Acid by an assessee engaged in Chemical manufacturing has been held as extension of existing business. 1.13 Thus, the telecom equipment purchased by the appellant using the ECB loans were for continuation of the existing telecommunication connectivity business and thus would not constitute extension of business, thereby not falling under the purview of proviso to section 36(1)(iii) of the Act has no applicability to appellant‗s case. 1.14 In this regard, reliance is also placed on the decision of the Hon‘ble Supreme Court in the case of CIT vs. Core Health Care Ltd (298 ITR 194)(SC) wherein it has been held that Section 36(1)(iii) makes no distinction between capital borrowed for revenue or capital purposes. Any expenditure incurred in respect of capital borrowed for the purpose of business shall be allowed deduction. Similar observation has been made by the Apex Court in the case of United Phosphorous Limited (299 ITR 9). 1.15 With respect to the decision of the Delhi Bench of the Hon‘ble Tribunal in the case of Breeze Constructions (P.) Ltd, basis which the Ld. AO has made the aforesaid disallowance, it is submitted that the issue involved was with respect to allowability of interest expenditure incurred before commencement of the business itself. In the said case, the taxpayer had incurred interest expenses for loan obtained for payment of lease in respect of a land taken for construction of a hotel. However, the other approvals and infrastructure required for the construction were not in place at the time of claiming such expenditure, and thus the taxpayer‘s construction business itself had not commenced. The aforesaid case does not deal with the issue of extension of business rather the Hon'ble Tribunal has disallowed the interest expense on the basic premise that since the business was not set-up/ commenced during the year, the question of allowability of any expenditure incurred in respect thereof does not arise at all. Thus, the said decision relied upon by the Ld. AO is distinguishable on facts and not applicable in the present case.

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AT & T Global Network Services (India) Pvt Ltd V DCIT ITA No 2538/Del/2014 (A) & ITA NO 2518/Del/2014 (D) A Y 2009-10 1.16 Further, the Finance Act, 2015 has removed the distinction in allowability of interest in case of existing business and in case of extension of existing business. It has deleted the words "for extension of existing business or profession" from the proviso to Section 36(1)(iii). Thus, it is evident that prior to the aforesaid amendment, there was admittedly a distinction between ―capital borrowed for the purposes of the business or profession‖ and ―capital borrowed for acquisition of an asset for extension of existing business or profession‖. Had there not been a distinction between the aforesaid terms, the legislature would not have sought to amend the law to remove such discrepancy. Further, the appellant‘s case clearly falls in the category of the former, i.e. ―capital borrowed for the purposes of the business or profession‖ as the appellant has not started a new activity/ line of business using the ECB loans. Thus, the disallowance of interest on ECBs made by the Ld. AO is bad in law and ought to be deleted. 1.17 Accordingly, in the light of the above factual and legal background of the case, the action of the Ld. AO in making an addition of Rs. 4.54 Lacs in view of the proviso to Section 36(1)(iii) of the Act is totally erroneous and warrants to be deleted. 1.18 Without prejudice, where the aforesaid interest amount is disallowed, the same should be allowed to be capitalized and depreciation under section 32 of the Act should be allowed thereon.‖

iii) the amount of the interest paid in respect of capital borrowed for the purposes of the business or profession : [Provided that any amount of the interest paid, in respect of capital borrowed for acquisition of an asset for extension of existing business or profession (whether capitalised in the books of account or not); for any period beginning from the date on which the capital was borrowed for acquisition of the

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AT & T Global Network Services (India) Pvt Ltd V DCIT ITA No 2538/Del/2014 (A) & ITA NO 2518/Del/2014 (D) A Y 2009-10 asset till the date on which such asset was first put to use, shall not be allowed as deduction.]

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AT & T Global Network Services (India) Pvt Ltd V DCIT ITA No 2538/Del/2014 (A) & ITA NO 2518/Del/2014 (D) A Y 2009-10 only and not for the extension of business. Hence, the said proviso to Section 36(1)(iii) does not apply to the facts of the present case. In the result, the ground No. 3 of the appeal of the assessee is allowed.

―10.1 While perusing the details and corresponding invoices submitted by th in invoice no. 1369 dated 5th January 2009 for USD 87,724 raised by Narus (the service provider) it has been that 25% of the P0 per Agreement on account of Additional Implementation Service International Long Distance (ILD) Lawful Intercept (LI) Project. As these services Implementation of International Long Distance (ILD) Lawful Intercept (LI) Project and hence are undoubtedly in the nature of Capital Expenditure. Further this amount is being paid as first 25% of P0 as per Agreement which indicates that the project has not been completed and until the project is completed these should have been shown as Capital Work in Progress. Similarly Invoice no. 1407 dated 18th March 2009 for USD 5, 11,480 raised by Narus (the service provider) also pertains to LI project mentioned above and accordingly seems to be for capital nature project which should have been capitalized with the cost of the project. Similarly Invoice no. 1419 dated 26th March 2009 for USD 92,750 raised by Narus (the service provider) being 35% for LI Project also pertains to LI project mentioned above and accordingly seems to be for capital nature project which should have been capitalized with the cost of the project. 10.2 The assessee, vide notice dated 27.02.2013 was asked to furnish its reply in this regard. In response to the same, the 21 | P a g e

AT & T Global Network Services (India) Pvt Ltd V DCIT ITA No 2538/Del/2014 (A) & ITA NO 2518/Del/2014 (D) A Y 2009-10 assessee vide its reply dated March 1, 2013, has merely submitted that these expenses are in respect of post implementation training services provided by Narus Inc. However, the assessee has not been able to justify the above claim with any documentary evidence. 10.3 In view of claimed as revenue expense, the above payments (amounting in to Rs 3,47,45,337) are being disallowed. Penalty proceedings u/s 271(1)(c) are initiated separately for filing inaccurate particulars of income and thereby concealing income chargeable to tax.‖

―11.1 This ground relates to the capital expenditure which has been claimed as revenue expenditure by the taxpayer. The AO observed that the taxpayer claimed revenue expenditure on Lawful Intercept (LI) Project. The invoices have been raised by Narus Inc. (the service provider). The last invoice for the year bearing no. 1419 dated 26.3.2009 is for 35% of the LI Project. The AO did not agree with the submission of the taxpayer that all the expenses so claimed are in respect of post implementation professional and training services provided by Narus Inc. as no documentary evidence was submitted. 11.2 The taxpayer has submitted that claim made by it is fully allowable for the reason that the expenditure is for post installation activity being demonstration of equipment before regulatory bodies and professional & training services provided by Narus Inc. In the alternative, the taxpayer has requested for allowing depreciation u/s 32 of the Act. 11.3 The claim of the taxpayer has been examined. It is a fact that the expenses on account of the equipment purchased for the LI Project have been capitalized by the taxpayer. The impugned expenditure is also for the same project on demonstration of equipment before the regulatory bodies, training etc. and the relevant charges have been

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AT & T Global Network Services (India) Pvt Ltd V DCIT ITA No 2538/Del/2014 (A) & ITA NO 2518/Del/2014 (D) A Y 2009-10 raised by the service provider as a percentage of the various mile stones for the said project. Under these facts it cannot be said that the invoices under reference, being certain percentages of the purchase order, are not related to the expenditure of capital nature. The action of the AO on this account is therefore, approved.

So far as the alternative claim is concerned, the AO is directed to verify if the LI Project was completed by 31.03.2009 and if so, it satisfies the conditions for allowance of depreciation u/s 32 or not and take action accordingly.‖

―2.8 The expense cannot be disallowed merely because the invoice makes reference to the ILD/ LI project. 2.9 In this regard, it is submitted that Narus Inc. provides the intelligence, context, and control services which the network operators need to protect the data against cyber threats and to ensure information security. The appellant being a network operator providing telecommunication services needs to protect the data it transmits and thus requires the intelligence/control services to maintain the integrity and confidentiality for data transmission. The invoices of Narus Inc. furnished at pages 151-153 of PB Volume II) clearly make it evident that the said expenditure is a regular business expenditure incurred by the appellant in the normal functioning of its connectivity business and hence should not be considered as capital expenditure. Without prejudice to the above, it is submitted that in case the Hon‘ble Bench does not allow the aforesaid expenses incurred post implementation towards professional and training services, the same should be allowed to be capitalized and depreciation under section 32 of the Act on the same should be allowed to be claimed.‖

AT & T Global Network Services (India) Pvt Ltd V DCIT ITA No 2538/Del/2014 (A) & ITA NO 2518/Del/2014 (D) A Y 2009-10 allowance of deprecation the claim of the assessee may be allowed if it is held that the expenses are capital in nature. 23. We have carefully considered the rival contentions and examined the facts of the case. In the absence of the evidence to substantiate that the payment is made for post implementation of project, we agree with the finding arrived at by the Ld. AO that the payment is for a capital asset. In view of the same, the ground of appeal is hereby dismissed. However, while giving effect to our order, the AO is directed to grant depreciation u/s 32 of the Act on the claim of the assessee after verification. Needless to say that assessee be given an opportunity of hearing and producing working of the claim of the depreciation with respect to the actual cost of the assets and amount of depreciation and rates of depreciation allowance applicable on it. In view of this The ground no 4 of the appeal of the assessee is allowed on alternative arguments with above directions.

Particulars Amount (Rs.) Net Cash Generated from Operating 522,668,903- Activities Net Cash Generated from Financial Activities

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AT & T Global Network Services (India) Pvt Ltd V DCIT ITA No 2538/Del/2014 (A) & ITA NO 2518/Del/2014 (D) A Y 2009-10 Activities

Interest Paid (142,463,029/-) 202,300,000l- External commercial Borrowings

Net Movement in Short Term Loan 807,712,4891- 67,549,460/- Total Cash Generated during the year ,390,218,363/- Less: Closing Cash in hand 366,615,0241- Total Cash Generated During the year 1,023,603,3391- (Excluding Closing Cash in Hand) Net Cash Used in Investing Activities 1,144,803,090/-

―11.6 Hence in view of the above discussion the plea by the assessee is not acceptable and the proviso to section 36(1)(iii) gets attracted for both set up of new business as well as for extension of the business (Refer judgment of Hon‘ble ITAT Delhi Bench ‗A‘ in the case of Breeze Constructions (P.) Ltd. v. income-tax officer, ward 3(1) in IT Appeal No. 4779 (Delhi) of 2011) and interest expenditure till the date of first put to use shall be added to the cost of the asset. It is clear from the summarized cash flow statement given above that entire interest expenditure was incurred for acquisition/ installation etc. of capital assets/capital expenditure. The assessee in its reply has mentioned that the captioned loan funds were used for both purposes i.e. for meeting working that capital requirements and for acquisition of fixed assets for carrying out its business operations however no details for the same were

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AT & T Global Network Services (India) Pvt Ltd V DCIT ITA No 2538/Del/2014 (A) & ITA NO 2518/Del/2014 (D) A Y 2009-10 furnished. It is important here to highlight that though the assessee has stated that the loan was used for purchasing capital goods, but it has been unable to provide the date of put to use of such purchased assets. It is difficult to understand how a company such as the assessee does not have the details of put to use of the assets purchased by utilising the loans obtained during the year. 11.7 As the assessee has not submitted the details of put to use of assets acquired by using the short term loans availed during the year, April 1, 2009 is considered as the date of put to use of such assets. Accordingly, based on an assumption that loans taken at last would have been utilised for acquiring the fixed assets, interest expense of Rs 7,776,975 is disallowed.‖

―12.3 The issue has been considered by the Panel. In the proviso to section 36(1)(iii), the word ―extension‖ has been used which is to be taken as synonymous to the word ―expansion‖ as held in case of Nahar Poly Films Ltd. Vs. CIT, Ludhiana 201 Taxmann 304 (P&H). The word ‗expansion‘ is not different from ‗extension‘ of business and therefore, the interest expenditure on the utilization of borrowed funds for the acquisition of new assets, from the date of its acquisition till the date when the asset is put to use, is to be disallowed. Moreover, the claim of the taxpayer runs counter to the legislative intent. The Panel therefore, holds that the appropriate disallowance towards interest deserves to be made. So far as the quantum of the short term loans the interest of which is to be by the taxpayer as under:

However, it is noticed that the above computation cannot be said to be correct computation for the reasons that: (i) the taxpayer has not considered the other components of cash flow from financing activities namely interest paid, 26 | P a g e

AT & T Global Network Services (India) Pvt Ltd V DCIT ITA No 2538/Del/2014 (A) & ITA NO 2518/Del/2014 (D) A Y 2009-10 repayments/proceeds of the short term loans, repayment of secure loan etc. According to the Annual accounts of the company, net cash generated from financing activities is Rs. 86.75 crores, which has been rightly taken by the AO in para 11.1 of the Draft order. (ii) The taxpayer has also not reduced the closing cash in hand of Rs. 36.66 crores while working out the available cash flow. In view of the above, the figure of Rs. 84.61 crores as available cash for investment in fixed assets as claimed by the taxpayer is not acceptable. The AO has already made a detailed working of available cash flow in para 11.1 of the Draft order which is found to be in order. Moreover, it is seen that the total ECB raised during the year of Rs. 20.23 crores and the net short term loans of Rs. 80.77 crores has been separately shown to work out the net movement of short term loan at Rs. 86.75 crores. Thus, the taxpayer claimed that ECB of Rs. 20.23 crores should be part of the available cash flow has already been allowed by the AO and no further benefit of the same can be given now. So far as the claim of allow ability of depreciation on the amount of Rs. 77,76,975/- is concerned, the AO is directed to verify if the respective assets have been put to use during the year or not and proceed accordingly. However, if the claim is allowed, the AO shall clearly specify in the assessment order that the benefits so allowed is subject to the final decision by the appellate authorities on this matter of disallowance of interest of Rs. 77,76,975/-.‖

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AT & T Global Network Services (India) Pvt Ltd V DCIT ITA No 2538/Del/2014 (A) & ITA NO 2518/Del/2014 (D) A Y 2009-10 36(1)(iii) is not applicable in the facts of the present case. Hence, the above finding would squarely apply to the present ground also. In the result the said ground no 5 of the appeal of the assessee is allowed.

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AT & T Global Network Services (India) Pvt Ltd V DCIT ITA No 2538/Del/2014 (A) & ITA NO 2518/Del/2014 (D) A Y 2009-10 disallowance of Rs. 19,91,52,615 by giving following reason in the draft assessment order:-

―7.4 In addition to the above, the assessee also produced ledgers, invoices, vouchers in relation to the expenses incurred during the current assessment year, which have been perused and verified and do not support the submission of the assessee. The reply of the assessee company is devoid of any merits. It may be noted that the assessee himself has been able to produce invoices for only Rs 15.10 crores out of the total year end accrual of Rs 20.63 crores and invoices for the balance amount have not been furnished. This itself proves that the assessee does not have the invoices for the balance amount and there is no basis of recording the year-end accruals. Further, a number of invoices submitted by the assessee, forming part of the aforesaid amount Rs 15.10 crores, are dated October 2008, November 2008, December 2008, January 2009, February 2009 i.e. more than 30 days before the close of the current assessment year. As a general practice the invoices in respect of expenses incurred are received within a period of 30 days from the date of rendering of services in all businesses. In the present case, it is not understandable as to why the invoices remained unpaid till the closure of the current assessment year. It is important to highlight that the assessee has not been able to substantiate that these invoices were actually paid in the subsequent year and it appears that these invoices form part of the payments made during the current assessment year itself.

7.5 In view of the above discussion, it is clear that the assessee has made excess provision for circuit charges which is not supported by any supporting/ workings and hence, the aforesaid accrual of Rs 20.63 crores is being disallowed. Even the invoices amounting to Rs 15.10 crores cannot be relied upon in view of the discrepancies highlighted above.

7.6 The assessee has raised a further contention that circuit charges of Rs 187,042,096 disallowed in the draft assessment order of the earlier assessment year should be allowed as a deduction in the current assessment year. In this regard, the

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AT & T Global Network Services (India) Pvt Ltd V DCIT ITA No 2538/Del/2014 (A) & ITA NO 2518/Del/2014 (D) A Y 2009-10 assessee has submitted that since the aforesaid circuit accruals, as on March 31, 2008, were reversed in the current assessment year deduction for the same should be allowed. In this regard, since the claim for the aforesaid expenditure was not allowed in the previous year since these provisions were not supported by any workings/ Invoices/ vouchers, the same should not be allowed as a deduction in the current assessment year also.

7.7 In addition to the above, vide letter dated February 18, 2013, it was submitted by the assessee that circuit charges of Rs 7,205,063 proposed for disallowance in the earlier assessment year, based on the observation of the special auditor that such expenses relate to the current assessment year, should be allowed as a deduction in the current assessment year. The submission of the assessee has been considered. Since the aforesaid expenses were disallowed in the preceding assessment year on account of the fact that such expenses relate to the current assessment year, deduction in respect of the above expense of Rs 7,205,063 is allowed.

7.8 In view of the above discussion and the facts of the case, disallowance of Rs 19,91,52,615 is made for the current assessment year. Penalty proceedings u/s 271(1)(c) are initiated separately for filing inaccurate particulars of income and thereby concealing income chargeable to tax.‖

AT & T Global Network Services (India) Pvt Ltd V DCIT ITA No 2538/Del/2014 (A) & ITA NO 2518/Del/2014 (D) A Y 2009-10 invoices aggregating to Rs.1.97 crores by way of additional evidence for the period relating to FY 2008-09. The taxpayer has also made out its case for the relief of the corresponding amount of Rs.3.08 crores, which has been disallowed by the AO in AY 2008-09 as it tantamount to the double addition. 9.3.2 Considering the facts and circumstances of the case, the Panel directs as under: To the taxpayer: The taxpayer is directed to submit copy (i) of such invoices to the AO with in the 7 days of receipt of this order, so that AO may get adequate time to make verification, and assist the AO in the process of verification.

To the AO: The AO is directed to: (ii) (a) Make verification of the additional invoices aggregating to Rs.1.97 crores and in case he is satisfied with the veracity of their crystallization during FY 2008-09, to exclude the corresponding amount being the expenses accrued during FY 2008-09 for bandwidth usage availed of by the taxpayer, (b) exclude the sum of Rs.15.10 crores, which stands verified by him during the course of assessment proceedings, being the expenses accrued during FY 2008- 09 for bandwidth usage availed of by the taxpayer, (c) allow the deduction for Rs.3.08 crores, being the amount disallowed in AY 2008-09 by the AO himself, for the reason that the said amount is part and partial of the total circuit accrual (provision) made during FY 2007-08 of Rs.154.88 crores and which has been reversed on 1.4.2008. However, the AO shall clearly record in the draft order that the said relief is subject to the fact that in case the taxpayer gets relief by any Higher judicial authority on this account in AY 2008-09 (where the said amount has been disallowed as of now), the relief allowed in AY 2009- 10 gets automatically withdrawn.‖

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AT & T Global Network Services (India) Pvt Ltd V DCIT ITA No 2538/Del/2014 (A) & ITA NO 2518/Del/2014 (D) A Y 2009-10 of additional invoices along with copy of invoices were produced and verified. On verification it was found that copies of invoices of Rs.1,94,36,715/- were produced by the AR of the assessee company which were found correct. Therefore, credit of additional invoices of Rs.1,94,36,715/- was allowed to the assessee company. Hence, in view of the additional evidences submitted the assessee was granted partial relief.

4.3 Infrastructure cost represents bandwidth charges paid to other telecom operators for provision of bandwidth required for transmission of data. Last mile charges represent charges paid to other telecom operators towards provision of telecom connectivity services over the last leg of communication i.e. from the customer‘s premises to point of presence of AGNS and vice-versa. For instance, a Multinational Corporation having its offices at different locations across India contracts with the appellant for providing connectivity between its offices at various locations. Each segment between offices at two different locations constitutes a circuit and has a unique circuit ID. The appellant is engaged to provide connectivity for all such circuits of the company/customers. 4.4 As part of the month-end accounting process, the appellant accrues expenses incurred up till the end of a particular month based on the liability incurred/crystallized and estimated expense based on the orders placed for various circuits. Such accruals thus include expenses incurred in relation to the services rendered during the relevant financial year, estimated on a reasonable and scientific basis, for which bills/invoices are not received during the year. 4.5 As a practice, accruals for a particular month are reversed in the succeeding month when fresh accruals for the period beginning from the start of the year till such month are made. All the payments made against the aforesaid accruals are accounted for in an account namely prepaid circuit ledgers and later on reduced from the circuits accrual account at the end of the month. 4.6 Before embarking on the merits of the case, it is important to highlight the accounting procedure followed by the company in

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AT & T Global Network Services (India) Pvt Ltd V DCIT ITA No 2538/Del/2014 (A) & ITA NO 2518/Del/2014 (D) A Y 2009-10 connection with the circuit accruals. In light of the above the facts are submitted as under: Circuit Charges – Background Circuit Charges are incurred towards infrastructure cost and last mile charges for services provided by other telecom operators. Broadly Circuit Charges are classified into following two categories: a. Infrastructure cost: This represents bandwidth charges paid to local Indian telecom operators for provision of bandwidth required for transmission of data. b. Last mile charges: This represent charges paid to other telecom operators towards provision of telecom connectivity services over the last leg of communication i.e. from the customer‘s premises to point of presence of AT&T Global Network Services India Private Limited (appellant) and vice-versa.

System for recording Circuit accruals  Circuit charges are recorded through a system called GAIM (Global Access Inventory Management System) on a worldwide basis.  GAIM is a highly automated system and is used by appellant as an operational tool to manage inter-alia circuit inventory and perform vendor invoice validation relating to such circuits. a) Process flow for booking the Circuit charges in GAIM The process undertaken for booking the Circuit charges across the world is explained briefly as below:

 As and when a requests for new circuits is placed by the customer to appellant, a request is created through another system called NGGNI(Next Generation Global Network International) in favour of third party vendor who in turn is required to provide service.  Such requests are converted into orders by the Customer Access Provisioning Team who act as primary interface with the vendors with regard to ordering and delivery of the circuits;  Order is placed with the vendor to deliver circuit at a particular address and at a particular time;  Accordingly, vendor delivers the circuit (along with necessary hardware and software);

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AT & T Global Network Services (India) Pvt Ltd V DCIT ITA No 2538/Del/2014 (A) & ITA NO 2518/Del/2014 (D) A Y 2009-10  Post such delivery, the order gets close and the inventory of circuit usage is recorded in GAIM. GAIM contains various details relating to the circuit, such as Circuit ID number, activation date, tariff codes (rental, usage, one time charge), expected monthly cost, location of circuit, etc.;  Once the order is closed, the liability to pay the vendor arises;  Invoice received by the vendor are entered into GAIM manually or uploaded from electronic files;  Thereafter, invoices are validated in GAIM before payment. During invoice validation, GAIM automatically compares the invoice/bill data to the circuit inventory and expected costs;  The validation process also identifies any discrepancies which have to be resolved via the dispute management process before the invoice can be approved for payment.  The validation checks include: - Circuit ID exists in inventory for vendor; - Invoice date is after circuit activation date; - Service period is before circuit cease date; - Invoice tariff code matches order tariff code - Invoice cost is not varying more than USD 100 vis-à-vis the expected cost - Invoice number is unique for vendor  The invoices for which validation is completed with no discrepancies or for which the discrepancies identified, the same are logged / resolved via dispute management process, are approved for payment.  At the month end, two files are generated i.e. General Ledger Expense Feed and General Ledger Accruals Feed.  For creating the General Ledger Expense Feed file GAIM selects all invoice costs for the current or prior period where the invoice payment status is accepted.  General Ledger Accruals Feed file contains only current year expense and is a year to date (YTD) file. As GAIM works on calendar year basis i.e. from January to December, thus the accruals for the period starting from January to March are excluded / added on proportionate basis. b) Logic used by GAIM to calculate the Circuit Accruals

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AT & T Global Network Services (India) Pvt Ltd V DCIT ITA No 2538/Del/2014 (A) & ITA NO 2518/Del/2014 (D) A Y 2009-10 The logic used by GAIM to calculate the accrual includes the following key steps:

 Circuit Accruals are calculated for both active and ceased circuits taking into account the activation date and the cease date i.e. no accruals will be posted prior to the activation date or after the cease date.  For the current and prior period GAIM will look at each tariff code for each circuit to determine if there is any invoice cost and circuit accruals are booked accordingly. Prior year expenses are tracked each month and matched against the prior year accrual balance brought forward manually. Accordingly, only the current year accrual balances are booked in the profit and loss account. 4.7 The break up of actual expense and year end accruals are given below:

Total Expense – Rs. 192.22 Crores

Actual Payment = Rs. Accruals Booked 172.30 Crores = Rs. 19.92 Crores

4.8 A computa Additional evidence Accruals for which no bills / Accruals for which evidences for reversals bills / evidences for filed before DRP and could be submitted = Rs. reversals submitted relief granted = Rs. 1.94 Crore 2.87 Crores (14% of total to AO = Rs. 15.10 Accruals) Crores

4.9 Detail of the circuit accruals disallowed in the final assessment order is as under: Disallowance in the Draft Order Rs. 19.91 crores 35 | P a g e

AT & T Global Network Services (India) Pvt Ltd V DCIT ITA No 2538/Del/2014 (A) & ITA NO 2518/Del/2014 (D) A Y 2009-10 Less: Relief allowed by DRP after verification of invoices Rs. 17.04 crores Disallowance for the AY 2009-10 Rs. 2.87 crores Less: credit allowed for AY 2009-10 Rs. 3.08 crores Credit allowable during the AY 2009-10 Rs. 20.84 Lacs 4.10 Basis the detailed process of recording circuit accruals, it may be appreciated that the circuit accruals are accounted on the basis of established scientific mechanism. The appellant follows this method of accruing circuit charges each year and the practice is in line with the business activity of the appellant industry. Thus, similar to warranty provisions, which are estimated on scientific methodology and based on consistent trend and are allowable expenses, the circuit accruals are an integral part of the appellant's business functions and should be allowed, since it is a year on year unavoidable feature. In this regard attention is placed on the decision of Hon'ble Supreme Court in the case of M/s Rotork Controls India (P) Ltd. vs. Commissioner of Income-tax (314 ITR 62) wherein the Apex Court after analyzing the provisions of the Act and accounting principles in detail laid the controversy to rest by holding that warranty expenses provided by the assessee on scientific basis in compliance with the accrual basis of accounting are allowable as deduction in the relevant financial year and no disallowance in this regard can be made by the revenue authorities. 4.11 Since the year-end circuit accruals created by appellant represent accruals towards normal business expenditure incurred by appellant for the relevant financial year and recorded in accordance with the matching principle, deduction in respect thereof should be allowed to the appellant. 4.12 Appellant has been able to produce documentary evidence subsequent utilization/reversal of more than 85% of the expenses represented by year – end circuit accruals, which itself evidences that even the balance accruals have also been created on a reasonable basis and hence, no disallowance in this regard can be made against appellant. 4.13 Accordingly, the allegation of the Ld. AO that no documentary evidence has been produced by the appellant in respect of the circuit accruals is erroneous and the addition warrants to be deleted

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AT & T Global Network Services (India) Pvt Ltd V DCIT ITA No 2538/Del/2014 (A) & ITA NO 2518/Del/2014 (D) A Y 2009-10

AT & T Global Network Services (India) Pvt Ltd V DCIT ITA No 2538/Del/2014 (A) & ITA NO 2518/Del/2014 (D) A Y 2009-10  Service period is before circuit cease date;  Invoice tariff code matches order tariff code  Invoice cost is not varying more than USD 100 vis-à-vis the expected cost  Invoice number is unique for vendor The invoices for which validation is completed with no discrepancies or for which the discrepancies identified, the same are logged / resolved via dispute management process, are approved for payment. The assessee also explained the logic used by GAIM to calculate the Circuit Accrual for both active and ceased circuits taking into account the activation date and the cease date i.e. no accruals will be posted prior to the activation date or after the cease date. For the current and prior period GAIM will look at each tariff code for each circuit to determine if there is any invoice cost and circuit accruals are booked accordingly. Prior year expenses are tracked each month and matched against the prior year accrual balance brought forward manually. Accordingly, only the current year accrual balances are booked in the profit and loss account.

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AT & T Global Network Services (India) Pvt Ltd V DCIT ITA No 2538/Del/2014 (A) & ITA NO 2518/Del/2014 (D) A Y 2009-10 expenditure in the next year when such reversals are made. Thus, we are of the view that this practice of disallowing the claim of circuit accrual in the year of creation and allowing it in the next year is nothing but a timing difference. The fact that the expenses are allowed in the subsequent year also proves that the lower authorities have not disputed the incurrence of such expenses. Hence, in accordance with the mercantile provisions it should be allowed in the year of creation itself. The assessee has also drawn reference to the principles laid down by the Hon‘ble Apex Court in the case of M/s Rotork Controls India (P) Ltd (314 ITR 62) and M/s Bharat Earth Movers (245 ITR 428). According to us the provision for circuit accruals is made in compliance of accounting standards issued by the Institute of Chartered Accountants of India and also on a proper scientific basis backed by documentation. Therefore , we hold that the circuit accruals are created on scientific basis and thus needs to be allowed in the year of creation on accrual basis. In the result the ground No. 6 of the appeal is allowed.

AT & T Global Network Services (India) Pvt Ltd V DCIT ITA No 2538/Del/2014 (A) & ITA NO 2518/Del/2014 (D) A Y 2009-10 mentioned earlier, The appellant offers wireless, high-speed internet access, Wi-Fi, local and long distance voice communication solutions. It specializes in wholesale services for carriers, systems integrators, and cables, content, wireless and internet service providers. It also provides enterprise mobility, hosting, security and business continuity solutions. Additionally, it offers various types of networking exchange, consulting, and integration solutions.

The only two international transactions in dispute are ‗intra group services‘ and ‗Payment of Royalty‘.

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AT & T Global Network Services (India) Pvt Ltd V DCIT ITA No 2538/Del/2014 (A) & ITA NO 2518/Del/2014 (D) A Y 2009-10 allocation, and the approach adopted by the DRP in determining the ALP.

These services are discussed in detail in succeeding paragraphs: 1.

A. Global Customer Service Centre (‗GCSC‘) Nature of services

The GCSC team is based out of Hong Kong and Singapore 1.10 and comprise of over 38 people and over 86 people respectively, and is engaged in maintenance and fixing repairs or outages for customers of the Appellant and other group companies in the Asia Pacific region.

The key functions performed by GCSC is primarily divided 1.11 into two parts: a. Ticket handling which includes the following services: - Review ticket status Customer handling verification - Check action real time - Manual CON notification - Detection and management of major incidents - Creating a case ticket - - Creating and linking GenChild tickets with Master ticket - Stopping the clock on a ticket - Updating next check time - Document all ticket related communication - Document diagnostics, troubleshooting efforts in the ticket - Manage ticket queue b. PD/Triage CPE verification - Diagnostics and troubleshooting - Problem determination - - Assemble appropriate team to address ticket - Review asset history

Submission before TPO: Refer page no. 160 and 161 of Paper book Vol-I TPO‘s observation in the TP order: Refer page no. 221 to 224 of the Appeal set

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AT & T Global Network Services (India) Pvt Ltd V DCIT ITA No 2538/Del/2014 (A) & ITA NO 2518/Del/2014 (D) A Y 2009-10 DRP Submission: Refer page no. 113 to 117 of the Appeal Set DRP Directions: Refer page no. 42 and 43 of Appeal Set

Basis of allocation

During the relevant period, 32 percent of cost of the team 1.12 based in Singapore and 55 percent of the cost team based in Hong Kong was allocated to the AGNS India. This cost has been allocated on the basis of India related fault tickets as percentage of total fault tickets for Asia Pacific. The GCSC team processed over 26,000 tickets for AGNS India. The amount allocated to AGNSI during the relevant period is INR 14.88cr.

Approach adopted by the Appellant

The cost paid by the Appellant for GCSC services was 1.13 benchmarked following an aggregated approach using the TNMM.

The Appellant had also submitted a list of the tickets 1.14 processed along with nature of problem resolved has been submitted as evidence before the Ld. TPO/Hon‘ble DRP [refer page 207 to page 377 of Paperbook Volume - I].

Approach adopted by the Ld. TPO

The Ld. TPO rejected the arm‘s length nature of the 1.15 aforesaid transaction in an arbitrary manner and held that the average cost per month of GCSC should be INR 75,000 (INR 50,ooo salary cost plus INR 25,000 running cost) without giving any cogent reasons. Assuming that 48 employees would be required for rendering aforesaid services, the Ld. TPO determined INR 4.32 cr as the average cost of the GCSC which should have been allocated to the Appellant.

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AT & T Global Network Services (India) Pvt Ltd V DCIT ITA No 2538/Del/2014 (A) & ITA NO 2518/Del/2014 (D) A Y 2009-10 It is pertinent to note that the approach adopted by the Ld. 1.16 TPO is arbitrary and without any reasoning. However, the allocation methodology adopted by the AEs/Appellant is based on commercial/business realities and on a scientific basis.

Approach adopted by the Hon‘ble DRP

The Hon‘ble DRP rejected the arm‘s length nature of the aforesaid transaction on an arbitrary basis and held the ALP to be NIL.

B. Service delivery and service management Nature of services

The service delivery team is responsible for processing 1.17 customer orders and handling service provisioning. The AE has a team of over 78 people for service delivery and over 30 people for service management. Once the contract has been signed with the customer, the service delivery team is responsible for setting up, configuring and testing the network. Some of the key functions performed by Service delivery team are: - Ensuring all information is in place so as to start processing a customer order - Project coordination for project implementation and site deployment - Performing technical checks to ensure that systems run properly Data maintenance and engineering -

1.18 The service management team is responsible for account management across all service disciplines. It comprises account/service managers serving customer order requests, acting as intermediaries between customer and CARE.

The cost incurred by the service delivery and service 1.19 management team is allocated to AGNS India based on the number of orders processed for AGNS India as a percent of

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AT & T Global Network Services (India) Pvt Ltd V DCIT ITA No 2538/Del/2014 (A) & ITA NO 2518/Del/2014 (D) A Y 2009-10 total number of orders processed for Asia Pacific region (excluding Japan). During the relevant period, 12.25 percent of the total cost of the service delivery team was allocated to AGNS India.

Submission before TPO: Refer page 162 of Paper book Vol-I TPO‘s observation in the TP order: Refer page no. 224 and 225 of the Appeal set DRP Submission: Refer page no. 117 to 119 of the Appeal Set DRP Directions: Refer page no. 42 and 43 of Appeal Set

Basis of allocation

This cost has been allocated on the basis of number of 1.20 orders processed for India as percentage of No. of orders processed for Asia Pacific (excluding Japan). The AE processed 308 orders for service delivery and 555 orders for service management pertaining to AGNS India. During the relevant period, the amount allocated to AGNS India for service delivery and service management is INR 4.51cr and INR 1.88cr, respectively.

Approach adopted by the Appellant

The cost paid by the Appellant for service delivery and 1.21 service management was benchmarked following an aggregated approach using the TNMM.

Approach adopted by the Ld. TPO

The Ld. TPO rejected the arm‘s length nature of the 1.22 aforesaid transaction in an arbitrary manner and held that the average cost per month of the aforesaid services should be INR 75,000 (INR 50,ooo salary cost plus INR 25,000 running cost) without giving any cogent reasons. Assuming that 14 employees would be required for rendering aforesaid services, the Ld. TPO determined INR 1.26 cr as 44 | P a g e

AT & T Global Network Services (India) Pvt Ltd V DCIT ITA No 2538/Del/2014 (A) & ITA NO 2518/Del/2014 (D) A Y 2009-10 the average cost of the service delivery and service management which should have been allocated to the Appellant.

It is pertinent to note that the approach adopted by the Ld. 1.23 TPO is arbitrary and without any reasoning. However, the allocation methodology adopted by the AEs/Appellant is based on commercial/business realities and on a scientific basis.

Approach adopted by the Hon‘ble DRP

The Hon‘ble DRP rejected the arm‘s length nature of the aforesaid transaction on an arbitrary basis and held the ALP to be NIL

C. Global Sales Enablement (‗GSE‘) Nature of services

The GSE team provides pre-sales support to the group 1.24 companies in the Asia Pacific region. It is responsible for building customised solutions for customers and provides services like technical design, inputs on pricing and legal/contractual aspects of the bid.

The GSE division is split into two teams, one engaged in 1.25 pre-sales support, specification design, identification of customer requirements etc. and the other team assists AGNS India in pricing of the services to be provided to the customer. The pre sales team comprises of 21 people and pricing team comprises of 5 people.

The cost of the GSE pricing team is allocated to AGNS 1.26 India on the basis of number of pricing requests related to India as a percentage of total pricing requests. During the relevant period, 10 percent of the GSE pricing team‘s cost was allocated to AGNS India.

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AT & T Global Network Services (India) Pvt Ltd V DCIT ITA No 2538/Del/2014 (A) & ITA NO 2518/Del/2014 (D) A Y 2009-10 The cost incurred by GSE pre-sales team is allocated to 1.27 AGNS India on the basis of number of pre-sales requests also keeping in mind the time spent related to India.

Submission before TPO: Refer page no. 162 and 163 of Paper book Vol-I TPO‘s observation in the TP order: Refer page no. 225 and 226 of the Appeal set DRP Submission: Refer page no. 119 to 121 of the Appeal Set DRP Directions: Refer page no. 42 and 43 of Appeal Set

Basis of allocation

The cost incurred by Technical assessment team is 1.28 allocated on the basis of percentage of pre-sales requests and time spent related to India respectively. This cost incurred by GSE pricing team is allocated as a percentage of pricing requests related to India. During the relevant period, the amount allocated to AGNS India for GSE is INR 1.46 cr.

Approach adopted by the Appellant

The cost paid by the Appellant for GSE was benchmarked 1.29 following an aggregated approach using the TNMM.

The Appellant had also submitted a sample list of the 1.30 projects / assignments on which the GSE pricing team assisted AGNSI on pricing and deals in respect of which design architects of GSE team resolved the design requests of the Appellant have been submitted as evidence before Ld. TPO/Hon‘ble DRP [refer page 378 to 383 of Paperbook Volume - I].

Approach adopted by the Ld. TPO

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AT & T Global Network Services (India) Pvt Ltd V DCIT ITA No 2538/Del/2014 (A) & ITA NO 2518/Del/2014 (D) A Y 2009-10 The Ld. TPO rejected the arm‘s length nature of the 1.31 aforesaid transaction and held that the average cost of the aforesaid services should be INR 75,000 per month per employee without substantiating the same. Assuming that 3 employees would be required for rendering aforesaid services, the Ld. TPO determined INR 0.27cr as the average cost of the GSE which should have been allocated to the Appellant.

1.32 It is pertinent to note that the approach adopted by the Ld. TPO is arbitrary and without any reasoning. However, the allocation methodology adopted by the AEs/Appellant is based on commercial/business realities and on a scientific basis.

Approach adopted by the Hon‘ble DRP

The Hon‘ble DRP rejected the arm‘s length nature of the aforesaid transaction on an arbitrary basis and held the ALP to be NIL

D. Country services Nature of services

The country services team is a cross –functional team 1.33 providing in – country support for other functional teams. The team is based out of Hong Kong and Singapore and renders support services in the nature of pre-sales arrangements, contract management, service delivery, order updates, on-going communication with customers and life cycle management of AGN nodes.

The cost of country services team is allocated to AGNS 1.34 India on the basis of percentage of time spent by country services team on AGNS India.

Submission before TPO: Refer page 163 of Paper book Vol-I

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AT & T Global Network Services (India) Pvt Ltd V DCIT ITA No 2538/Del/2014 (A) & ITA NO 2518/Del/2014 (D) A Y 2009-10 TPO‘s observation in the TP order: Refer page no. 226 and 227 of the Appeal set DRP Submission: Refer page no. 121 of the Appeal Set DRP Directions: Refer page no. 42 and 43 of Appeal Set

Basis of allocation

This cost has been allocated on the basis of percentage of 1.35 time spent by Country services team on AGNS India. The amount allocated to AGNSI during the relevant period is INR 0.005 cr.

Approach adopted by the Appellant

The cost paid by the Appellant for country services was 1.36 benchmarked following an aggregated approach using the TNMM.

Approach adopted by the Ld. TPO

The Ld. TPO rejected the arm‘s length nature of the 1.37 aforesaid transaction in an arbitrary manner and determined the ALP as NIL.

It is pertinent to note that the approach adopted by the Ld. 1.38 TPO is arbitrary and without any reasoning. However, the allocation methodology adopted by the AEs/Appellant is based on commercial/business realities and on a scientific basis. Approach adopted by the Hon‘ble DRP

The Hon‘ble DRP rejected the arm‘s length nature of the aforesaid transaction on an arbitrary basis and held the ALP to be NIL.

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AT & T Global Network Services (India) Pvt Ltd V DCIT ITA No 2538/Del/2014 (A) & ITA NO 2518/Del/2014 (D) A Y 2009-10

E. IT Services Nature of services

The IT team provides internal IT support function 1.39 including helpdesk, internal network monitoring support and IT systems and maintenance. Some of the services rendered by the India team are as follows:

- Creation of email ids for employees - Development and maintenance of online systems - For eg: leave application system Assistance in troubleshooting - Setting up of conference halls including video conferences - Maintenance of internet - Addressing of any issues in sending of emails or problems - faced while making calls

The cost of IT team is allocated to India based on the number of IT users in India as a percentage of total number of IT users in Asia Pacific region (excluding Japan). AT&T group has a team over 21 people based out of Singapore.

Submission before TPO: Refer page 163 and 164 of Paper book Vol-I TPO‘s observation in the TP order: Refer page no. 227 of the Appeal set DRP Submission: Refer page no. 122 to 124 of the Appeal Set DRP Directions: Refer page no. 42 and 43 of Appeal Set

Basis of allocation

This cost has been allocated on the basis of number of IT 1.40 users in India as percentage of No. of IT users in Asia

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AT & T Global Network Services (India) Pvt Ltd V DCIT ITA No 2538/Del/2014 (A) & ITA NO 2518/Del/2014 (D) A Y 2009-10 Pacific (excl Japan). The amount allocated to AGNSI during the relevant period is INR 1.20 cr.

Approach adopted by the Appellant

The cost paid by the Appellant for IT services was 1.41 benchmarked following an aggregated approach using the TNMM.

The Appellant had also submitted a list of IT incidents and 1.42 IT requests raised by AGNSI which was subsequently resolved by the IT support team during FY 2008-09 has been submitted as evidence before Ld. TPO/Hon‘ble DRP. [Refer page 383 to 413 and page 416 to 423, respectively of Paper book Volume - I].

Approach adopted by the Ld. TPO

The Ld. TPO rejected the arm‘s length nature if the 1.43 aforesaid transaction in an arbitrary manner and determined the ALP as NIL.

1.44 It is pertinent to note that the approach adopted by the Ld. TPO is arbitrary and without any reasoning. However, the allocation methodology adopted by the AEs/Appellant is based on commercial/business realities and on a scientific basis.

Approach adopted by the Hon‘ble DRP

The Hon‘ble DRP rejected the arm‘s length nature of the aforesaid transaction on an arbitrary basis and held the ALP to be NIL

F. Billing support Nature of services

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AT & T Global Network Services (India) Pvt Ltd V DCIT ITA No 2538/Del/2014 (A) & ITA NO 2518/Del/2014 (D) A Y 2009-10

The billing team is responsible for raising invoices for all 1.45 customers in the Asia Pacific region (excluding Japan). AT&T group has a team over 37 people based out of Hong Kong. The functions performed by the billing team are as follows: Review pricing terms of the contracts; - Setting up of systems for different products and services - after notification from delivery team; - Monitor billing inventory and ensure that invoices are raised on contractual intervals - Compare actual services installed with services contracted - Answer questions from clients/customers regarding disputes/disconnection - Resolve customer disputes - Process invoices reversals and adjustments - Determine penalty/termination charges Intimate delivery team about termination -

1.46 The cost of the billing team is allocated to AGNS India based on the number of invoices raised for India as a percentage of total invoices raised for Asia Pacific region (excluding Japan). During the relevant period, 10.1 percent of the billing cost was allocated to AGNS India.

Submission before TPO: Refer page no. 164 and 165 of Paper book Vol-I TPO‘s observation in the TP order: Refer page no. 227 and 228 of the Appeal set DRP Submission: Refer page no. 124 and 125 of the Appeal Set DRP Directions: Refer page no. 42 and 43 of Appeal Set

Basis of allocation

This cost has been allocated on the basis of number of 1.47 India invoices as percentage of No. of Asia Pacific (excluding Japan). During the year AE raised a total of 62,812 invoices out of which 6,344 invoices were related to AGNS India. The amount allocated to AGNSI during the relevant period is INR 0.97 cr.

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AT & T Global Network Services (India) Pvt Ltd V DCIT ITA No 2538/Del/2014 (A) & ITA NO 2518/Del/2014 (D) A Y 2009-10

Approach adopted by the Appellant

The cost paid by the Appellant for billing support services 1.48 was benchmarked following an aggregated approach using the TNMM.

The Appellant had also submitted a screenshot of the 1.49 system through which the invoice is raised, the screenshot of the database through which AGNSI extracts the invoices and sample invoice is submitted as an evidence before Ld. TPO/Hon‘ble DRP [refer page 422 to 424 of Paper book Volume - I].

Approach adopted by the Ld. TPO

The Ld. TPO rejected the arm‘s length nature of the 1.50 aforesaid transaction in an arbitrary manner and determined the ALP as NIL.

It is pertinent to note that the approach adopted by the Ld. 1.51 TPO is arbitrary and without any reasoning. However, the allocation methodology adopted by the AEs/Appellant is based on commercial/business realities and on a scientific basis.

Approach adopted by the Hon‘ble DRP

The Hon‘ble DRP rejected the arm‘s length nature of the aforesaid transaction on an arbitrary basis and held the ALP to be NIL.

G. Project management

Nature of services

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AT & T Global Network Services (India) Pvt Ltd V DCIT ITA No 2538/Del/2014 (A) & ITA NO 2518/Del/2014 (D) A Y 2009-10 The project management teams are based in Australia, 1.52 Hong Kong and Singapore and are responsible for managing installation and deployment of sites across Asia Pacific region. The team comprises of 9 people.

The project management team is engaged in general 1.53 project management, monitoring of all implementation issues and addressing faced by the customers

Submission before TPO: Refer page 165 of Paper book Vol-I TPO‘s observation in the TP order: Refer page no. 228 and 229 of the Appeal set DRP Submission: Refer page no. 125 of the Appeal Set DRP Directions: Refer page no. 42 and 43 of Appeal Set

Basis of allocation

This cost has been allocated on the basis of number of 1.54 India sites as percentage of number of Asia Pacific (excl Japan) sites. During 2008, 42 sites were operational in AGNS India out of total of 998 sites in the Asia Pacific region. During the relevant period, 4.2 percent of the total cost of the project management team was allocated to AGNS India. The amount allocated to AGNSI during the relevant period is INR 0.24 cr.

Approach adopted by the Appellant

The cost paid by the Appellant for project management 1.55 services was benchmarked following an aggregated approach using the TNMM.

Approach adopted by the Ld. TPO

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AT & T Global Network Services (India) Pvt Ltd V DCIT ITA No 2538/Del/2014 (A) & ITA NO 2518/Del/2014 (D) A Y 2009-10 The Ld. TPO rejected the arm‘s length nature of the 1.56 aforesaid transaction in an arbitrary manner and determined the ALP as NIL.

It is pertinent to note that the approach adopted by the Ld. 1.57 TPO is arbitrary and without any reasoning. However, the allocation methodology adopted by the AEs/Appellant is based on commercial/business realities and on a scientific basis.

Approach adopted by the Hon‘ble DRP

The Hon‘ble DRP rejected the arm‘s length nature of the aforesaid transaction on an arbitrary basis and held the ALP to be NIL

In this regard, the Appellant humbly submits that no 1.58 prudent businessperson would render such services free of charge. Therefore, in order to determine the fair price of the services, the cost is allocated to the Appellant on a scientific basis as per the allocation methodology discussed in the preceding paras.

The Appellant humbly submits that the aforesaid services 1.59 satisfies all the tests which are performed to examine the ALP of the payments made:

Test/Criteria Purpose Appellant‘s case Need test Did the Indian entity Yes. The entire business actually need such is dependent on these services and services. requested for such services? Services test Did the Indian entity Yes. The Appellant receive the services received the services and did the group provided by the AE entity had the capability to

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AT & T Global Network Services (India) Pvt Ltd V DCIT ITA No 2538/Del/2014 (A) & ITA NO 2518/Del/2014 (D) A Y 2009-10 provide such services? Benefit test Did the Indian entity Yes. These services receive any benefit ensure continuity in from such services? business operations. Computationnal This is the test of The cost of rendering test allocation and the these services are basis of charge of allocated on the basis of such services to the cost plus a mark-up of Indian entity such costs. Documentation This test is related The Appellant has already test to the back-up submitted various documentation as backup documentations maintained by the maintained in relation to Indian entity and the above mentioned presented to the tax tests. [refer page 209 to authorities for 426 of Paperbook Volume verification in – I] relation to the above mentioned tests.

To support its case, the assessee also submitted the legal 1.60 submissions which is reproduced as under:

Method to be applied for benchmarking the transaction i.e. CUP v/s TNMM

The Appellant carried out benchmarking analysis for 2.1 payment of support services on an aggregated basis under TNMM method. It is hereby submitted that due to close inter-linkages of the support services paid by the Appellant with the core service activity carried out by it i.e. provision of network connectivity services, it was considered appropriate to assess the impact of all the international related party transactions of the Appellant at the operating level. The TPO however rejected the aggregated approach

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AT & T Global Network Services (India) Pvt Ltd V DCIT ITA No 2538/Del/2014 (A) & ITA NO 2518/Del/2014 (D) A Y 2009-10 and applied CUP as the most appropriate method for benchmarking the transaction of support services provided to its AE.

At this juncture, it may be pertinent to quote the relevant 2.2 Sections of the Income tax Act, 1961 (‗the Act‘) and Rules of the Income Tax Rules, 1962 (‗the Rules‘), dealing with the issue of selecting the most appropriate method for determining the ALP of an international transaction – Relevant sections of the Act ―92. (1) Any income arising from an international transaction shall be computed having regard to the arm‘s length price.‖ ―92C. (1) The arm‘s length price in relation to an international transaction or specified domestic transaction shall be determined by any of the following methods, being the most appropriate method………………….‖ Relevant provisions of the Rules ―10B . (1) For the purposes of sub-section (2) of section 92C, the arm's length price in relation to an international transaction or a specified domestic transaction shall be determined by any of the following methods, being the most appropriate method, in the following manner, namely :— (a) comparable uncontrolled price method, by which,— (i) the price charged or paid for property transferred or services provided in a comparable uncontrolled transaction, or a number of such transactions, is identified; (ii) such price is adjusted to account for differences, if any, between the international transaction or the specified domestic transaction and the comparable uncontrolled transactions or between the enterprises entering into such transactions, which could materially affect the price in the open market;

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AT & T Global Network Services (India) Pvt Ltd V DCIT ITA No 2538/Del/2014 (A) & ITA NO 2518/Del/2014 (D) A Y 2009-10 (iii) the adjusted price arrived at under sub-clause (ii) is taken to be an arm's length price in respect of the property transferred or services provided in the international transaction or the specified domestic transaction (e) transactional net margin method, by which,— (i) the net profit margin realised by the enterprise from an international transaction or a specified domestic transaction entered into with an associated enterprise is computed in relation to costs incurred or sales effected or assets employed or to be employed by the enterprise or having regard to any other relevant base; (ii) the net profit margin realised by the enterprise or by an unrelated enterprise from a comparable uncontrolled transaction or a number of such transactions is computed having regard to the same base; (iii) the net profit margin referred to in sub-clause (ii) arising in comparable uncontrolled transactions is adjusted to take into account the differences, if any, between the international transaction or the specified domestic transaction and the comparable uncontrolled transactions, or between the enterprises entering into such transactions, which could materially affect the amount of net profit margin in the open market; (iv) the net profit margin realised by the enterprise and referred to in sub-clause (i) is established to be the same as the net profit margin referred to in sub-clause (iii); (v) the net profit margin thus established is then taken into account to arrive at an arm's length price in relation to the international transaction or the specified domestic transaction‖ ―Most appropriate method.

10C. (1) For the purposes of sub-section (1) of section 92C, the most appropriate method shall be the method which is best suited to the facts and circumstances of each particular international transaction or specified domestic transaction, and which provides the most reliable

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AT & T Global Network Services (India) Pvt Ltd V DCIT ITA No 2538/Del/2014 (A) & ITA NO 2518/Del/2014 (D) A Y 2009-10 measure of an arm's length price in relation to the international transaction or the specified domestic transaction, as the case may be. (2) In selecting the most appropriate method as specified in sub- rule (1), the following factors shall be taken into account, namely:— (a)………… (b)………… (c) the availability, coverage and reliability of data necessary for application of the method; (d)…………. (e)…………‖ (f)………..

On perusal of the above provisions of the Act and Rules, 2.3 Your Honour‘s may kindly observe that the fundamental requirement for application of application of CUP method (as adopted by the TPO) is finding the ―price‖ of a comparable uncontrolledtransaction for benchmarking the transaction. In absence of availability of any comparable data for benchmarking purpose, the application of this method fails. The Appellant most humbly submits that since the Ld. TPO/Hon‘ble DRP has not brought any data on record for benchmarking the transaction, treating the value of services as NIL by application of CUP method is against the TP regulations. 2.4 The Appellant submits that in such a scenario when no data is available to apply the direct methods, one has to resort to residuary methods for benchmarking a transaction / group of transaction such as ‗TNMM‘. Considering all these factors the Appellant adopted TNMM to benchmark the transaction, but on an aggregated basis (specific submission on application of aggregated approach is stated in paras below). Thus the Appellant submits that TNMM in the facts of the Appellant‘s case should be treated as a ‗most appropriate method‘ for determining ALP of support services received from the AE. Aggregated approach

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AT & T Global Network Services (India) Pvt Ltd V DCIT ITA No 2538/Del/2014 (A) & ITA NO 2518/Del/2014 (D) A Y 2009-10 The Appellant submits that the support services is a 2.5 transaction closely linked with provision of network connectivity services. It cannot be segregated from these activities of an enterprise, being embedded therein. Thus, support services cannot be considered / benchmarked in isolation on a standalone basis. Overall TNMM is thus a correct method for benchmarking the transaction of support services received from the AE.

2.6 At this juncture, it may be pertinent to quote the relevant Rule dealing with the under consideration –

Relevant provisions of the Rules

10A. For the purposes of this rule and rules 10AB to 10E,—

(d) "transaction" includes a number of closely linked transactions.

It can be seen from the above definition that the 2.7 ‗transaction‘ includes closely linked transactions. The Appellant submits that aforesaid support services are integral to the core operations of rendering network connectivity services since in the absence of the support services, the Appellant‘s entire business operations would be interrupted and would come to a standstill. Therefore, the aforementioned services are indispensable for ensuring continuity in business operations. Hence, it can be reasonably construed that the support services are closely linked to the primary transaction of network connectivity services.

The Appellant relies on the decision of Hon‘ble ITAT in case 2.8 of Demag Cranes & Components (ITA No. 1683/PN/2011) where it has upheld the aggregation of closely linked transactions. (Refer Para 31 on Page no. 110 of the Case Law Compendium) (Para 31, Page 22of the order)

The Appellant also relies on the jurisdictional High Court 2.9 in the case of Sony Ericsson Mobile Communications India Pvt. Ltd. and others [ITA No. 16/2014] whereby it held that the aggregation of transactions is desirable in the case

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AT & T Global Network Services (India) Pvt Ltd V DCIT ITA No 2538/Del/2014 (A) & ITA NO 2518/Del/2014 (D) A Y 2009-10 where the transactions are inter-linked. (Refer Para 137 on Page no. 512 of the Case Law Compendium) Lastly the Appellant would like to draw attention to OECD 2.10 Guidelines 1.42 which states that:

"Ideally, in order to arrive at the most precise approximation of fair market value, the arm's length principle should be applied on a transaction-by-transaction basis. However, there are often situations where separate transactions are so closely linked or continuous that they cannot be evaluated adequately on a separate basis. Such transactions should be evaluated together using the most appropriate arm's length method or methods."

Accordingly, based on the above facts and legal positions, 2.11 it is submitted that the payment for support services are inter-connected with the provision of network connectivity services undertaken by the Company and thus the Appellant prays before Your Honours to kindly consider the economic analysis conducted for the network connectivity services along with support services by the company and accept the aggregated approach adopted for benchmarking the transaction.

Rebuttal of each arguments made by the TPO for application of CUP

Need for services:

At the outset, the Appellant submits that the support 2.12 requested by the Appellant from its AE was aimed at achieving the following objectives:

 Maintenance and fixing repairs or outages for customers of the Appellant;  Processing customer orders and handling service provisioning;  Pre-sales support, building customized solutions for customers and provide services like technical design, inputs on commercial (pricing) & legal and contractual 60 | P a g e

AT & T Global Network Services (India) Pvt Ltd V DCIT ITA No 2538/Del/2014 (A) & ITA NO 2518/Del/2014 (D) A Y 2009-10 aspects of the bid, specification design, identification of customer requirements etc.;  Contract management, service delivery, order updates, on- going communication with customers and life cycle management of AGN nodes;  IT support function including helpdesk, internal network monitoring support and IT system and maintenance;  Review of pricing terms of contracts, process invoices reversals and adjustments, resolve customer disputes etc.; and  General project management, monitoring of all implementation issues addressing issues being faced by customers

Without prejudice to the above, the Appellant would like to 2.13 most humbly submit that nowhere the Transfer Pricing provisions require the Appellant to demonstrate the need of availing such services. The Transfer Pricing provisions only requires ascertaining whether the price paid for such services is at arm‘s length or not. 2.14 The aforesaid argument is supported by the principles laid down by the Hon‘ble Mumbai ITAT in the case of DresserRand India Private Limited vs. ACIT ITA No. 8753 / Mum / 2010. (Refer Para 8 on Page no. 131 of the Case Law Compendium)

Thus, the Appellant submits that the objections raised by 2.15 the TPO/DRP that there is no need for services is unjustified and not tenable in law.

Commercial Expediency

The Appellant further submits that the nature of services 2.16 to be availed is entirely prerogative of the tax payer and his commercial wisdom which cannot be questioned even by a tax authority and it is not always necessary to co-relate the benefits received and the amount paid for the services.

The aforesaid argument is supported by the observations 2.17 made by the Hon‘ble Supreme Court in the case of Commissioner of Income-tax vs. Dhanrajgirji Raja

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AT & T Global Network Services (India) Pvt Ltd V DCIT ITA No 2538/Del/2014 (A) & ITA NO 2518/Del/2014 (D) A Y 2009-10 Narasingirji (91 ITR 544)(Refer Page no. 114 of the Case Law Compendium)

Further, the reliance can be placed upon the recently 2.18 pronounced decision of the Hon‘ble Delhi High Court in the case of CIT vs Cushman and Wakefield (India) Pvt Ltd. (ITA 475/ 2012), wherein, it was held that the authority of the TPO is to conduct a TP analysis to determine the ALP and not to determine whether the tax payer derives a benefit from the service. The Hon‘ble Delhi High Court has opined that the determination of benefit to the tax payer is not in the domain of the TPO. (Refer Para 34 on Page no. 89 and 90 of the Case Law Compendium)

In this regard, the Appellant also relies on the following judicial precedents:

- Ericsson India Private Limited vs Dy CIT [ITA No. 5141/Del/2011 (Delhi ITAT)] (Refer Para 29 on Page no. 175 to 178 of the Case Law Compendium) - CIT v. EKL Appliances Ltd. [2012] 345 ITR 241 (Delhi) (Refer Para 10 on Page no. 141 to 143 of the Case Law Compendium) Hive Communication Pvt. Ltd. (ITA No.306/2011) - (Refer Para 7 on Page no. 205 of the Case Law Compendium) - Commissioner of Income Tax vs. Cushman and Wakefield (India) P. Ltd. (269 CTR 16) (Del.) - (Refer Para 36 on Page no. 90 and 91 of the Case Law Compendium) The Appellant submits that it is settled legal position in 2.19 law that the revenue authorities cannot challenge the commercial expediency / wisdom of the Appellant. Thus the challenge of the TPO/DRP questioning the wisdom of the Appellant is unjustified and not tenable in law.

ALP of an international transaction cannot be NIL

The Appellant submits that it has demonstrated the fact 2.20 that the services were rendered by the AE and the same

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AT & T Global Network Services (India) Pvt Ltd V DCIT ITA No 2538/Del/2014 (A) & ITA NO 2518/Del/2014 (D) A Y 2009-10 was for the purpose of business hence, the DRP was unjustified in treating the value of the services at NIL. The mandate of the TPO/DRP under the Act and as per the 2.21 relevant Rules is just to determine the value of international transaction by benchmarking it as per the methods provided u/s 92C(2) of the Act. The wholesale disallowance of any payment without applying any method or using any comparable uncontrolled transaction for benchmarking the transaction is giving arbitrary powers to the TPO/DRP. Even Rule 10B(1)(a) does not authorize disallowance of expenditure on the ground that it was not necessary or prudent for the assessee to have incurred for the same. The Appellant relies on the following judgements whereby 2.22 it has been categorically held that value of international transaction cannot be treated as ‗Nil‘ – McCann Erickson India P. Ltd. Vs. Addl. (ITA No. – 5871/De1/2o11) (Del.) (Refer Para 9 on Page no. 324 and 325 of the Case Law Compendium)

– AWB India Pvt. Ltd. Vs. DCIT (ITA No. 648o/De1/2o12) (Del.) (Refer Para 15 to 18 on Page no. 37 to 38 of the Case Law Compendium) DCIT vs. M/s. Diebold Software Services Pvt. Ltd (ITA No. – 4347/Del/2o12) (Del.) (Refer Para 5 on Page no. 120 of the Case Law Compendium) – Platinum Guild India Private Limited vs. DCIT (ITA No. 7720/Mum/2012) (Mum.) (Refer Para 10 on Page no. 391 of the Case Law Compendium) Merck Ltd. Vs. DCIT (148 ITD 513) (Mum.) – (Refer Para 24.5 to 24.7 on Page no. 353 and 354 of the Case Law Compendium) 2.23 Based on the legal principles enunciated above it is concluded that the TP adjustment can be made by the TPO/DRP only by applying any specific method as stated u/s 92C(2) of the Act. In facts of the present case even though the TPO/DRP mentions that CUP should be used

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AT & T Global Network Services (India) Pvt Ltd V DCIT ITA No 2538/Del/2014 (A) & ITA NO 2518/Del/2014 (D) A Y 2009-10 for benchmarking the transaction, the method is not applied in its true sense, since no comparable uncontrolled transaction is used for benchmarking the transaction. According to Hon‘ble DRP since no benefit is received the value of transaction is treated as NIL, which is unjustified and not tenable under the TP Regulations. Benefit Test The Appellant submits that one of the contention of the 2.24 Hon‘ble DRP to treat the value of services as NIL is that no benefit is received by the Appellant. The Appellant most humbly submits that the ‗benefit test‘ cannot be applied to determine the ALP of transaction. The domain of the TPO/DRP is only to examine as to whether the payment based on the agreement adheres to the arm's length principle or not. The contention of the TPO/DRP that the Appellant has 2.25 failed to show any benefit received is totally irrelevant for the reason that whether the expenses incurred for the services, benefits the assessee in monetary terms or not has no role to play in determining the ALP of the services. In this regard, the Appellant relies on the decision of 2.26 Bangalore Tribunal in the case of Safran Aerospace India P. Ltd. vs. DCIT (ITA No. 1261/Bang/2010) (Refer Para 8.3 on Page no. 399 of the Case Law Compendium)

2.27 In view of the principle laid down by the above judgment it can be concluded that ‗benefit test‘ cannot be a criteria for benchmarking the ALP of any international transaction. Hence, the contention of the TPO/Hon‘ble DRP that no benefit is received and hence the value is treated is NIL, is totally unjustified in the eyes of the law.

Conclusion

In the present case, the Appellant caters to US 2.28 multinational enterprises and it is obvious that in order to ensure business continuity, the Appellant would need back bone support services such as troubleshooting, network engineering, service deliver etc. This helps in rendering seamless services to the customers and ensures

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AT & T Global Network Services (India) Pvt Ltd V DCIT ITA No 2538/Del/2014 (A) & ITA NO 2518/Del/2014 (D) A Y 2009-10 data privacy which builds trust and lasting relationships with the customers. Further, due to level of confidentiality which needs to be maintained for protecting the sensitive data relating to customer‘s bank account, medical status, etc., it would be preposterous to even think that the Appellant would avail such services through a local service provider in India and put the entire business at risk.

The Appellant submits that the entire business is 2.29 dependent upon availing such support services from the AEs, which is marked up again while billing to the AE in the form of network support services. The Appellant has submitted all the relevant documents to prove that the services were rendered & hence, the action of the Hon‘ble DRP of treating the arms-length value of the payment made for availing such services at NIL, is arbitrary, unsubstantiated and ought to be struck down. Further, since no benchmarking methodology has been 2.30 adopted by the TPO/Hon‘ble DRP, the benchmarking adopted by the Appellant in its TP study i.e. TNMM on an aggregated basis, should be adopted and the adjustment made on the values of support services should be deleted.

AT & T Global Network Services (India) Pvt Ltd V DCIT ITA No 2538/Del/2014 (A) & ITA NO 2518/Del/2014 (D) A Y 2009-10 the submissions made before the TPO and DRP were submitted. He further relied on several judicial precedents on the issues. Ld. AR also submitted several judicial precedents, which are also noted in his submissions. We have considered them in detail.

Computation of income from international transaction having regard to arm's length price. 92. (1) Any income arising from an international transaction shall be computed having regard to the arm's length price. Explanation.—For the removal of doubts, it is hereby clarified that the allowance for any expense or interest arising from an international transaction shall also be determined having regard to the arm's length price. (2) Where in an international transaction [or

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AT & T Global Network Services (India) Pvt Ltd V DCIT ITA No 2538/Del/2014 (A) & ITA NO 2518/Del/2014 (D) A Y 2009-10 specified domestic transaction], two or more associated enterprises enter into a mutual agreement or arrangement 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 any one or more of such enterprises, the cost or expense allocated or apportioned to, or, as the case may be, contributed by, any such enterprise shall be determined having regard to the arm's length price of such benefit, service or facility, as the case may be.

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AT & T Global Network Services (India) Pvt Ltd V DCIT ITA No 2538/Del/2014 (A) & ITA NO 2518/Del/2014 (D) A Y 2009-10

Amounts S. Particulars Nature of service Basis of Allocation (in INR No. Cr) Team The GCSC team is based in comprises of: Hong Kong and Singapore 38 people in India related fault and is engaged in Hongkong, tickets as maintenance and fixing and over 86 in Global percentage of repairs or outages for Singapore. customer total fault tickets customers of AGNSI as well 1 service for Asia Pacific 14.88 as other AT&T group India related Centre companies in Asia Pacific faults (‗GCSC‘) (Refer TP Order region. During FY 2009-10, accounted for on Pg 223 of the GCSC team processed 55% and 32% Appeal Set) over 26,600 tickets for in these AGNSI. locations respectively The cost incurred by Technical assessment team is allocated on The GSE team provides the basis of Pricing Team: pre-sale support services to percentage of pre- comprises of 5 various AT&T group sales requests people. 10% of companies in the Asia and time spent GSE pricing Pacific region. It is related to India team's cost Global Sales responsible for building respectively. was allocated 2 Enablement customized solutions for This cost 1.46 to India. (‗GSE‘) customers and provides incurred by GSE services like technical pricing team is Pre-Sales design, inputs on allocated as a Team: commercial (pricing) & percentage of comprises of legal/ contractual aspects pricing requests 21 people. of the bid. related to India. (Refer TP Order on Pg 226 of Appeal Set) No. of IT users in The IT team provides India as internal IT support function Team of 21 percentage of No. Information including helpdesk, 3 people based 1.2 of IT users in Asia technology internal network in Singapore. Pacific (excl monitoring support and IT Japan) system and maintenance.

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AT & T Global Network Services (India) Pvt Ltd V DCIT ITA No 2538/Del/2014 (A) & ITA NO 2518/Del/2014 (D) A Y 2009-10

Amounts S. Particulars Nature of service Basis of Allocation (in INR No. Cr) (Refer TP Order on Pg 227 of Appeal Set)

Team of 37 people based in Hong Kong. No. of India invoices as Total 62812 The billing team is percentage of No. invoices were responsible for raising of Asia Pacific raised, 6344 Billing 4 invoices for all customers in (excl Japan) related to 0.97 support the Asia Pacific region India (excluding Japan). (Refer TP Order on Pg 228 of 10.10% of Appeal Set) billing deptt cost was allocated to India Team No. of orders The services delivery team comprises of processed for is responsible for over 30 people India as processing customer orders percentage of No. and handling service AE processed Service of orders provisioning, setting up and 4531 orders, delivery and processed for Asia 5 configuring the network 555 pertained 6.39 service Pacific (excl and testing the system. The to India management Japan) services management team is responsible for account 12.25% of (Refer TP Order management across all total cost was on Pg 225 of service disciplines. allocated to Appeal Set) India The country services team is a cross-functional team Percentage of providing in-country time spent by support for other functional Country services teams, that includes pre- team on AGNS Country sales arrangements, 6 India No details 0.005 services contract management, service delivery, order (Refer TP Order updates, on-going on Pg 227 of communication with Appeal Set) customers and life cycle management of AGN nodes.

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AT & T Global Network Services (India) Pvt Ltd V DCIT ITA No 2538/Del/2014 (A) & ITA NO 2518/Del/2014 (D) A Y 2009-10 Amounts S. Particulars Nature of service Basis of Allocation (in INR No. Cr) The project management Team of 9 team based in Australia, people Hong Kong and Singapore No. of India sites is engaged in general as percentage of Total 998 project management (to No. of Asia Pacific sites, 42 in Project manage installation and (excl Japan) sites 7 India 0.24 management deployment of sites across the Asia Pacific region), (Refer TP Order 4.2% of total monitoring of all on Pg 229 of cost was implementation issues and Appeal Set) allocated to addressing issues being India faced by customers. Total IGS 25.145

Royalty 9.34 Adjustment Total Adjustment 34.49

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AT & T Global Network Services (India) Pvt Ltd V DCIT ITA No 2538/Del/2014 (A) & ITA NO 2518/Del/2014 (D) A Y 2009-10  Review of pricing terms of contracts, process invoices reversals and adjustments, resolve customer disputes etc.; and  General project management, monitoring of all implementation issues addressing issues being faced by customers

AT & T Global Network Services (India) Pvt Ltd V DCIT ITA No 2538/Del/2014 (A) & ITA NO 2518/Del/2014 (D) A Y 2009-10 party in India rather than from its AE. After going through the fact and submissions placed on record we are of the view that the assessee has satisfied the need/benefit test for availing these services from its AE. Regarding the rendition of the services by the AE, the appellant submitted before the TPO, the copy of inter-company agreements, tickets processed by GCSC, sample list of project assignment on which GCSC team assisted the assessee, list of deals on which GSE presales team assisted the assessee. The assessee also explained the allocation key with details of teams spread across different countries, copies of invoices etc. For the purposes of substantiating the services rendered by the assessee it has submitted the details of all the service rendered by the AE to the assessee as in the paper book same are placed on sample basis. Therefore, assessee has placed substantial material evidencing the receipt of the services. Regarding the receipt of the services from AE, the assessee can be asked to maintain and produce the evidence of receipt of services, which a businessperson keeps and maintains regarding services related from the third party. The burden cannot be higher on the assessee for evidencing the receipt of services of higher level merely because the services have been rendered by its AE. Against these evidence placed by the assessee before the lower authorities ld. DRP has merely stated that assessee has not been able to provide sufficient evidence and that the AE has provided such services to the assessee. We failed to understand what ‗sufficient evidence‘ was and what was lacking in the case of the assessee. We could not find any instances placed where the TPO / DRP held that the evidence placed by the assessee are not substantiated by rendition of service by the AE. The assessee has also relied on the Hon‘ble Delhi Tribunal in the case of GE Money Financial Services Pvt Ltd. Vs ACIT in ITA No. 5882/Del-2010 and TNS India Pvt. Ltd. V. ACIT: (2014) 32 ITR (Trib.) 44 (Hyd. )whereby on similar facts the Hon‘ble Delhi Tribunal has rejected the plea of the Revenue and has held that for receipt of services, rendering of services must be seen from the view point of the assessee and further assessee 72 | P a g e

AT & T Global Network Services (India) Pvt Ltd V DCIT ITA No 2538/Del/2014 (A) & ITA NO 2518/Del/2014 (D) A Y 2009-10 cannot be asked to keep and maintain evidences of services rendered by AE higher than which is expected from a businessman receiving services from an unrelated provider. Respectfully the following the decision of the coordinate the bench we are of the view that the assessee has justified the receipt of the services and satisfied the rendition test. Regarding the benefit test, the assessee submitted that owing to the nature of industry it operates in it requires specialized knowledge and experience in order to provide seamless services to customers. It has inherent risks and advantages that can be effectively harnessed only through sharing of resources and efficiencies that are inbuilt in-scale. Accordingly, availability of support in terms of strategy, data usage and administration is essential and indispensable for the assessee in order to achieve cost efficiency and normal functioning of its business operations. For this reason, the assessee is availing such essential services from its AEs. For this purpose, the assessee had entered into an agreement with its AE. These functions or services, if not availed from the AEs, would have to be undertaken by the assessee itself. However, due to very nature of network connectivity services and in order to achieve better economies of scale and synergies, these functions are centralized within the AE of the assessee which renders such services. It is, therefore, clear that such services confer a benefit on the assessee. While examining the arm's length nature of the impugned international transaction, the learned TPO has applied cost-benefits test and attempted to map the benefits received against payment made for such services. While he has concurred with the assessee's contentions regarding receipt of benefits in respect of several services, for certain other services, he has erroneously believed that no benefits have been received and re-determined the ALP on that basis, without appreciating that the same have benefitted the assessee and accordingly, warrant a payment.

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AT & T Global Network Services (India) Pvt Ltd V DCIT ITA No 2538/Del/2014 (A) & ITA NO 2518/Del/2014 (D) A Y 2009-10 50. The assessee has also argued that the TPO is only empowered to determine the ALP of international transaction. It was argued that there is no legal requirement or mandate for any taxpayer to necessarily undertake a cost-benefits analysis and a mere absence of such analysis should not necessarily lead to a pre-conceived notion that no benefits have been received by the assessee and should not form a basis to disallow the said payment. We also hasten to add that that for determination of ALP , the benefit to the user must arise otherwise, it fails the basic test of determining ALP. If there is no benefit to the user naturally nobody would pay for the services and hence ALP of such transaction is always Nil because they are worthless. Such is not the case here. To support its contention, the assessee has relied upon the decision of the Hon‘ble Delhi High Court in the case of CIT vs Cushman and Wakefield (India) Pvt Ltd. (ITA 475/ 2012), wherein, it was held that the authority of the TPO is to conduct a TP analysis to determine the ALP and not to determine whether the tax payer derives a benefit from the service. The Hon‘ble Delhi High Court has opined that the determination of benefit to the tax payer is not in the domain of the TPO. In this regard, the Appellant also placed reliance on the following judicial precedents to bring home the point that the benefit test needs to be satisfied from the view point of assessee and business prudence :

a. Ericsson India Private Limited vs Dy CIT [ITA No. 5141/Del/2011 (Delhi ITAT)] b. CIT v. EKL Appliances Ltd. [2012] 345 ITR 241 (Delhi) c. Hive Communication Pvt. Ltd. (ITA No.306/2011) d. Commissioner of Income Tax vs. Cushman and Wakefield (India) P. Ltd. (269 CTR 16) (Del.) 51. The above decisions unanimously holds that in reaching the conclusion that whether an independent entity would have paid for such services neither the revenue nor the court must question the

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AT & T Global Network Services (India) Pvt Ltd V DCIT ITA No 2538/Del/2014 (A) & ITA NO 2518/Del/2014 (D) A Y 2009-10 commercial wisdom of the assessee or replace its own assessment of the commercial viability of the transaction. The judicial precedents also stipulate that the duty of the Ld. TPO is restricted to determine the ALP of the international transaction and that he cannot replace his views with the views of the assessee. Respectfully following the binding precedent cited above we are of the view that benefit test for determination of Arms length Price is to be viewed from the perspective of the assessee and businessman and not from the perspective of revenue. In this case appellant has demonstrated the benefit which it is expected to derive from the various services rendered by its AE and ld. TPO has erred in replacing with its own judgment of the benefit derived by the assessee, we reject this approach.

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AT & T Global Network Services (India) Pvt Ltd V DCIT ITA No 2538/Del/2014 (A) & ITA NO 2518/Del/2014 (D) A Y 2009-10 53. In view of the above findings, we hold that for intra group services (where the evidences have been furnished), the assessee has satisfied the need, benefit and rendition test. However we would also like to mention that out of seven services the assessee has not furnished evidences for following three services namely- country services, information technology, project management. In the absence of any evidences, the test of necessity, need and rendition cannot be commented upon and the assessee is given an opportunity to furnish the evidences for these three services before the AO/TPO for necessary verification. The ld TPO may examine them and decide the issue with respect to those services in accordance with law. With respect to the method as the ld TPO has not examined the comparability analysis under the TNMM method of Intra Group services, he must examine the comparability analysis of IGS ( intra Group Services) and determine ALP.

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AT & T Global Network Services (India) Pvt Ltd V DCIT ITA No 2538/Del/2014 (A) & ITA NO 2518/Del/2014 (D) A Y 2009-10 concluded that even by applying the CUP method the payment of royalty was adhering to Indian TP regulations. The TPO rejected the TNMM approach and adopted CUP as the most appropriate method. Further TPO also concluded that since the payment of royalty is not resulting into any benefit its ALP was determined at NIL.

AT & T Global Network Services (India) Pvt Ltd V DCIT ITA No 2538/Del/2014 (A) & ITA NO 2518/Del/2014 (D) A Y 2009-10 excluding the amounts of standard bought out components, etc., since such net sales do not stand recorded by the assessee in its books of account. Therefore, it is our considered opinion that the assessee was correct in employing an overall TNMM for examining the royalty. The TPO worked out the difference in the PLI of the outside party (the assessee) at 4.09% and the comparables at 7.05%. This has not been shown to fall outside the permissible range.

Sr. No Licensor Licensee Period of Product description Rate of existence of royalty agreement 1 Motorola Forward Effective from 1 Trademark license for the use of 7 percent of Inc. USA Industries January 2008 MOTOROLA signature and M logo net sales Inc. USA (Emsignia)

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AT & T Global Network Services (India) Pvt Ltd V DCIT ITA No 2538/Del/2014 (A) & ITA NO 2518/Del/2014 (D) A Y 2009-10 right to use AT&T trademark which has 'a global presence has helped the assessee in attracting more customers.

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AT & T Global Network Services (India) Pvt Ltd V DCIT ITA No 2538/Del/2014 (A) & ITA NO 2518/Del/2014 (D) A Y 2009-10 party transactions which are between its fellow AEs. We also agree with him in rejecting external CUP data as the assessee has not submitted any data regarding similarity in terms and conditions of the royalty agreements. He also rightly held that even from the limited data submitted are for different industries/ geographical location /duration and amounts. No analysis of the royalty agreements between the various parties and the accompanying circumstances and conditions therein has been done by assessee. We also agree that even a minor difference in royalty agreement may have a significant effect on the royalty rates.

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AT & T Global Network Services (India) Pvt Ltd V DCIT ITA No 2538/Del/2014 (A) & ITA NO 2518/Del/2014 (D) A Y 2009-10 support its ALP determination afresh after submitting the detailed answer to all the questions raised by the ld TPO in para no 9 of his order except the benefit test. Hence this ground no 8 of the appeal is allowed with above directions.

ITA No. 2518/2014 ( D) 72. Now we now come to the grounds of Departmental Appeal. The first ground of department appeal is with respect of support service expenditure. The appellant has incurred support service expenditure of Rs. 1,161,76,903 paid to its group company i.e. AT&T Communication Services India Private Limited (‗ACSI‘) for support services rendered by it. The AO observed that the assessee failed to justify the claim and that the aforesaid charges have been paid merely to increase the costs of the assessee and reduce the income for the current AY. The AO proposed an adjustment of Rs. 1,161,76,903 in the draft assessment order by giving following reasons: ―6.5 In many instances there is overlapping and duplication of work as under: (a) HR related services have been stated as received by the assessee from AT&T CSI. It has been noted on scrutiny of the ledger accounts that separate payments have been made directly by the assessee for such services.

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AT & T Global Network Services (India) Pvt Ltd V DCIT ITA No 2538/Del/2014 (A) & ITA NO 2518/Del/2014 (D) A Y 2009-10 (b) Similarly the legal and Tax functions have been described by the assessee vide its reply dated 25.07.2012 as under:-

―Legal function‖- The Legal function is entrusted with the responsibility of providing legal advice and legal support to the business and support functions including inter-alia drafting, negotiating and finalizing contracts and legal documents; managing secretarial work, ensuring adherence to legal compliances such as maintenance of register and records and required legal filings with the authorities. Legal team leads matters involving litigation and dispute resolution work, assists; provides legal opinions and clarifications and operational and transactional legal support to the business.

―Tax Function‖ -Tax function is primarily focused on ensuring adherence to compliances required under different direct and indirect tax law such as income tax, service tax, customs duty etc. tax function in also responsible for handling tax related matters pending before various authorities and their litigation also, it is involved in planning for future tax strategies, keeping the business informed for the changes in the tax laws and for supporting business decisions from a tax perspective as and when called upon.‖

For the above functions as well, the assessee has made direct payments to outside parties, which goes on to substantiate that payments were being made to outside parties though it has been claimed that the above functions were performed by AT&T CSI employees for AGNS.

It may be important to point out here that the assessee has paid separate fees for ECB certifications to M/s S.R. Batliboi & Associates in addition to the fees for various audits conducted by them. Similarly, separate fee has been paid for many other legal, taxation and professional services separately including fee for tally data entry to M/s R.P. Narang & Co. Technical Fees to M/s Netlogic Infotech Pvt. Ltd. and to other parties/professionals.

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6.6 The assessee has claimed the deduction for GRE costs, which represents costs allocated by AT&T CSI towards premises taken on rent by AT&T CSI and shared by the assessee company. It has been discussed in the assessment order for the previous year that the premises taken on rent by AT&T CSI have been used by AT&T CSI for its own business purpose. However, portion of such costs have been allocated to the assessee company without any justifiable basis.

6.7 In view of the discussions made above, the expenditure on account of support service cost of Rs. 116,176,903/- is being disallowed and added back to the total income of the assessee company. Penalty proceedings u/s 271(1)(c) are initiated separately for filing inaccurate particulars of income and thereby concealing income chargeable to tax‖

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AT & T Global Network Services (India) Pvt Ltd V DCIT ITA No 2538/Del/2014 (A) & ITA NO 2518/Del/2014 (D) A Y 2009-10 Legal, HR, International Public Affairs, and Global Strategy etc. The allocation of expenses was on the basis of services received by the taxpayer company from ACSI. It has also submitted that both companies are tax-paying so this is not an arrangement for tax avoidance.

8.3 The Panel has examined the issue. The AO has not demonstrated that services were not rendered by ACSI. He has raised some suspicion. The taxpayer company, on the other hand, has demonstrated the services were received. The claim of the taxpayer on this account has been allowed by the Panel in assessment year 2008-09. The AO has not brought out any new facts for the current year which are distinguishable from the preceding year. In view of it, the claim made by the taxpayer deserves to be allowed as incurring of expenses is not in dispute. The AO is directed to delete the proposed disallowance and modify the order accordingly.‖

―5.2 The appellant has incurred support service expenditure of Rs. 1,161,76,903 paid to its group company i.e. AT&T Communication Services India Private Limited (‗ACSI‘) for support services rendered by it. 5.3 The appellant commenced its business operations during AY 2008-09 and did not have its own support service functions such as tax, legal, finance, HR etc., which are necessary and imperative for any business organization to carry on its business. 5.4 ACSI, a group company of appellant and an entity in operations for more than 10 years by then, was having fully developed support services functions. Accordingly, since such functions were already housed in ACSI, appellant entered into a support services agreement with ACSI for provision of the aforesaid support services to appellant. 5.5 The agreement filed by in appellant for service support cannot be relied upon as it has been signed on 30.11.2007 but dated 01.04.2007 and as such its authenticity is doubtful. 85 | P a g e

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5.6 As per the terms of agreement the billing has to be done on monthly basis but the first invoice is raised for 01.04.2007 till 30.11.2007 and no monthly invoices were raised till November 2007 which suggests that it is an afterthought just to transfer some expenses from ACSI to the company. 5.7 Apart from invoices and agreement, the appellant has not been able to provide any evidence to substantiate that support services were provided by ACSI to the appellant. 5.8 The appellant has also made payments to outside parties for the same function which were performed by ACSI employees for the appellant. Appellant‘s Submissions before the DRP 5.9 ACSI, a group company of appellant and an entity in operations for more than 10 years by then, was having fully developed support services functions. Accordingly, since such functions were already housed in ACSI, appellant entered into a support services agreement with ACSI for provision of the aforesaid support services to appellant. The agreement was intended to achieve optimum utilization of the existing resources available with the group and to mitigate the costs that would have been incurred by appellant in establishing its own support services functions. Copy of support service agreement entered into between ACSI and appellant for provision of support services was also submitted before the learned AO (Enclosed at Page 36 – 47 of Paper book Volume - II). 5.10 It is clear from the support service agreement, activities performed by ACSI under support service agreement are essential and integral to any business organization. Existence of a business organization without presence of such support functions (such as legal, tax, HR, IPA support services etc.) cannot be assumed. 5.11 It was further submitted that the aforesaid support functions were already established and housed in ACSI and had appellant not availed such services from ACSI, it would have been required to establish separate teams of its own to perform such functions. This would have resulted into duplication of efforts and costs for the group‘s Indian operations.

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AT & T Global Network Services (India) Pvt Ltd V DCIT ITA No 2538/Del/2014 (A) & ITA NO 2518/Del/2014 (D) A Y 2009-10 5.12 Accordingly, support services cost of Rs. 116,176,903 was allocated by ACSI to appellant, towards support services rendered by ACSI to appellant. 5.13 Invoices, along with the basis of allocation of expenses incurred by ACSI, workings of the amounts so invoiced by ACSI to appellant and tax deducted at source thereon (the same can also be verified from the quarterly withholding tax statements filed by appellant) were submitted before the learned AO 5.14 No business would be able to carry out its business operations efficiently and effectively without the support of the above functions and the business exigency of such costs cannot be questioned merely on account of the fact that such costs are incurred by a sister concern of appellant and then allocated to appellant based on a scientific and reasonable basis. The aforesaid support functions were already established and housed in ACSI and had appellant not availed such services from ACSI, it would have been required to establish separate teams of its own to perform such functions. This would have resulted into duplication of efforts and costs for the group‘s Indian operations. 5.15 At this juncture, it may not be out of place but noteworthy to mention that both ACSI and appellant are profit making entities and hence, there was no tax incentive for the parties to deflate the revenues earned by appellant. By transferring the cost from ACSI to appellant no added tax advantage is being availed by appellant. 5.16 Further regarding commercial expediency of the said support services expenditure it is submitted that commercial expediency of a particular expenditure incurred by a businessman would be examined from the perspective of the business person and no third party, including the tax authorities, is entitled to question the commercial reasoning/justification of the expenditure so incurred. The Courts have also held that the Revenue authorities do not have the power to disallow expenses on the ground of reasonableness of expenditure or benefit arising there from. 5.17 Reliance in this regard is placed on the following judicial precedents: -CIT v. Panipat Woollen & General Mills Co Ltd (103 ITR 66) (Supreme Court) "That in order to determine the question of reasonableness of the expenditure, the test of commercial expediency would 87 | P a g e

AT & T Global Network Services (India) Pvt Ltd V DCIT ITA No 2538/Del/2014 (A) & ITA NO 2518/Del/2014 (D) A Y 2009-10 have to be adjudged from the point of view of the businessman and not of the income-tax department. It is well settled that the court in order to construe on agreement has to look to the substance or the essence of it rather than to its form." -CIT v. Sales Magnesite (P) Ltd [1995) 214 ITR 1 "To hold it to be an expenditure allowable as a deduction under section 37, it is not essential that it should be necessary, legally or otherwise, to incur the same or that it should directly and immediately benefit the business of the assessee. Even expenditure incurred voluntarily on the ground of commercial expediency and in order indirectly to facilitate the carrying on of the business would be deductible under this section. The question whether it was necessary for commercial expediency or not is a question that has to be decided from the point of view of the businessman and not by the subjective standard of reasonableness of the Revenue." -Binodiram Balchand vs. Commissioner of Income Tax (48 1TR 548) -Calcutta Landing and Shipping Co Ltd vs. CIT (65 ITR 1) (Cal High Court) 5.18 The Hon'ble jurisdictional High Court of Delhi, in the case of CIT Vs B Dalmia Cement Ltd (254 ITR 377) held that reasonableness of the business expenditure can be judged only from the point of view of a businessman. No businessman can be compelled to maximize his profits. 5.19 Applying the principles laid down in the aforesaid judicial precedents to the present case, it clear that once it is established that appellant has actually incurred the aforesaid support services cost for the purposes of availing support services rendered by ACSI no expenditure cannot be disallowed on the premise of commercial expediency/ need for incurring such expenditure.‖ 75. We have carefully considered the rival contentions and perused the facts of the case. The facts of the case as explained by the appellant are that, ACSI, a group company of appellant and an entity in operations for more than 10 years by then, was having developed support services functions. Accordingly, since such functions were already housed in ACSI, appellant entered into a support services

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AT & T Global Network Services (India) Pvt Ltd V DCIT ITA No 2538/Del/2014 (A) & ITA NO 2518/Del/2014 (D) A Y 2009-10 agreement with ACSI for provision of the aforesaid support services to appellant. We have gone through the submission of the assessee and find that necessary evidences in the form of the support service agreement, invoices, the details of payments made and the bank statements evidencing the payment thereof have been furnished by the assessee to prove the genuineness of the expenses. We find that no evidence has been brought on record by the Department to dispute the said claim. Rather, the Department‘s claim is merely based on suspicion as also noted by the DRP while deleting the above disallowance. We also find that even otherwise, both ACSI and appellant are profit making entities and hence, there was no tax incentive for the parties to deflate the revenues earned by appellant. The decision was totally based on commercial considerations. By transferring the cost from ACSI to appellant no added tax advantage is being availed by appellant. We are also of the view that commercial expediency of a particular expenditure incurred by a businessman should be examined from the perspective of the business person and no third party, including the tax authorities, is entitled to question the commercial reasoning/justification of the expenditure so incurred. Reliance in this regard is placed on the following judicial precedents furnished by the assessee: i. CIT v. Panipat Woollen & General Mills Co Ltd (103 ITR 66) (Supreme Court) ii. CIT v. Sales Magnesite (P) Ltd [1995) 214 ITR 1 iii. Binodiram Balchand vs. Commissioner of Income Tax (48 1TR 548) iv. Calcutta Landing and Shipping Co Ltd vs. CIT (65 ITR 1) (Cal High Court) v. CIT Vs B Dalmia Cement Ltd (254 ITR 377)

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AT & T Global Network Services (India) Pvt Ltd V DCIT ITA No 2538/Del/2014 (A) & ITA NO 2518/Del/2014 (D) A Y 2009-10 the Department to controvert the same, such expenditure cannot be disallowed merely on suspicion. We affirm the finding of the ld DRP on this issue. In view of the above, the appeal of the revenue on this ground is dismissed. 77. In the result, appeal of the assessee is partly allowed and appeal of the revenue is dismissed. 78. Order pronounced in the open court on 18/09/2017. -Sd/- -Sd/- (I.C.SUDHIR) (PRASHANT MAHARISHI) JUDICIAL MEMBER ACCOUNTANT MEMBER Dated:18/09/2017 A K Keot Copy forwarded to 1. Applicant 2. Respondent 3. CIT 4. CIT (A) 5. DR:ITAT ASSISTANT REGISTRAR ITAT, New Delhi

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