CRM SERVICES INDIA PRIVATE LIMITED,NEW DELHI vs. DCIT, CIRCLE-4(2), NEW DELHI

In order to undertake the business as explained above, the appellant has entered Foreign collaboration agreement dated 02-01-2002 [Pages 208 to 213 of the paper book] with its associated enterprise which agrees that the appellant will provide services to customers of TP USA in different parts of the world through its facility situated in India. In terms of the agreement, TP USA, in addition to providing marketing, information technology and systems support to the appellant company and training to the employees, would provide management support and on-site technical assistance and training to ensure international standard of service.

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

The appellant has also entered into an Intangible and Proprietary Property and Licensing agreement’ (“the Agreement”) dated 02-01-

The case of appellant is that in the transfer pricing document maintained for the year under consideration, for the purpose of benchmarking transaction of payment of royalty applying TNMM, the appellant has considered itself as the tested party and OP/OC as the PLI. The result of TNMM analysis is summarized herein below: Particulars OP/OC Average of OP/OC of 16 comparable companies 3.71% OP/OC of CRM 18.05%

Accordingly, since the operating profit ratio of the appellant on controlled transactions, i.e., 18.05%is higher than the average of operating profit margin in respect of comparable companies, i.e., 3.71%, the international transactions of payment of royalty entered into by it are considered being at arm’s length.

It comes up that earlier in the first round of proceedings, the ld. TPO accepted the transaction of provision of call center services to be at arm’s length price applying TNMM as demonstrated above. The ld. TPO, however, applied 3

The parties have post facto entered into the addendum to the Intangible and Proprietary Property and Licensing agreement dated 02-01-2002 with TPUSA (enclosed at Pages 233-235 of Paper book), which is effective retrospectively, i.e. from 02-01-2002. The said addendum to the agreement was filed before the ITAT as additional evidence in terms of Rule 29 of the Income Tax (Appellate Tribunal) Rules, 1963. The Co-ordinate Bench in the appellate order dated 14.05.2018 passed for the year under consideration, set aside the issue to the file of TPO in the following terms - 4

Accordingly, the issue which was left to be considered in the set aside proceedings was to verify whether the royalty paid by the appellant to the associated enterprise for services rendered to unrelated third parties are covered 5

The ld.DRP vide directions dated 14.03.2022sustained the adjustment made by ld.TPO. Therefore, before us the assessee is in appeal raising the following grounds:-

Heard and perused the record.

It is submitted by Ld. Sr. Counsel that for the services rendered to third parties, who are clients of TP USA, the assessee receives payment for the services rendered to such third parties from TP USA. Since the services are 8

Ld. Sr. Counsel has relied on the proposition of law, that the agreement entered into between the parties is to be strictly construed and there is no scope of intending or implying anything while constructing the clauses of the agreement. Reliance is placed on the following decisions, for the proposition that in the absence of a suggestion of any bad faith or fraud, the liability to tax depends upon the meaning and content of the language of the document embodying the transaction:

Ld. Sr. Counsel, has submitted that section 62 of the Indian Contract Act, 1872 provides for alteration in the original contract upon consent of the parties to the contract, meaning thereby, that as such, alteration in a contract is not prohibited under the law. He thus contended that as the payment of royalty on the aggregate revenues of the assessee is strictly in terms of the Agreement and, therefore, needs to be accepted to be at arm’s length price.

Ld. Sr. Counsel has submitted that the two contracting parties, always had the intention that royalty has to be paid for use of intangible property, know- how, customer relationship management (CRM) services, etc. with respect to entire sale revenues of the assessee, including sales to third party customers of TP USA for which revenue is received from TP USA. It is accordingly not open to the Revenue to sit in judgement and interpret the Agreement in a manner different from what was intended and agreed between the parties. He has submitted that the appellant is free to conduct business in the manner that appellant deems fit and the commercial or business expediency of incurring any expenditure is to be seen from the appellant’s point of view. Attention was drawn to the following judgments for supporting the aforsaid contentios; - CIT vs. Malayalam Plantations Limited: 53 ITR 140 (SC) - CIT v. Walchand& Co. etc. (1967) 65 ITR 381 - J K Woollen Manufacturers v. CIT: 72 ITR 612(SC) - CIT v. Birla Cotton Spg. And Wvg. Mills Ltd.: 82 ITR 166 (SC) - Madhav Prasad Jatia v. CIT U.P.: 118 ITR 200 (SC) - S.A. Builders Ltd. vs. CIT : 288 ITR 1 (SC) - CIT V. Bharti Televentures Ltd: 331 ITR 502 (Del) - CIT vs. Padmani Packaging (P) Ltd. : 155 Taxmann 268 (Del) - CIT v. Rockman Cycle Industries Ltd.: 331 ITR 401 (P&H) (FB) - CIT vs. EKL Appliances Ltd. : ITA No. 1068/2011 & 1070/2011 (Del HC) - CIT v. Dalmia Cement (P.) Ltd: 254 ITR 377 (Del)

Ld. Sr. Counsel, refered to the Hon’ble Supreme Court judgment in the case of Vodafone International Holdings B.V. vs. Union of India &Anr., 341 ITR 1, wherein, the apex Court after considering the jurisprudence that has developed in India and England over the years, on the issue of tax avoidance and tax evasion, permissible and impermissible transaction, sham, bogus and 10

Ld. Sr. Counsel has then relied the Hon’ble Delhi High Court judgement in the case of CIT vs EKL Appliances Ltd. (ITA No 1068/2011 & 1070/2011) and submitted that in the context of transfer pricing, Hon’ble High Court has held that barring exceptional cases, the tax administration should not disregard / re-characterize the actual transaction or substitute other transactions for them. Similarly, he relied the Hon’ble High Court judgment in the case of Sony Ericsson Mobile Communications 374 ITR 118, where Hon’ble High Court has held as under: “147. Tax authorities examine a related and associated parties transaction as actually undertaken and structured by the parties. Normally, tax authorities cannot disregard the actual transaction or substitute the same for another transaction as per their perception. Restructuring of legitimate business transaction would be an arbitrary exercise. This legal position stands affirmed in EKL Appliances Ltd. (supra).”

On the other hand, Ld. DR has vehemently argued that as the agreement was very clear and specific and prohibited payment of royalty in respect of sales to AEs accordingly to circumvent the clauses of the agreement, the assessee has brought the "addendum" in 2014 which was basically submitted with the mala fide intention so that the adjustment made in the earlier assessment years can be deleted. He has relied the directions dated 29.11.2013 given by the DRP in the first round of proceedings and contended that DRP had made crystal clear that 11

Ld. DR has pointed out that the assessee has filed an undated addendum before the Hon’ble ITAT as additional evidence somewhere in 2014-2015 which was basically a post facto arrangement to change certain clauses of the agreement it has signed with its AE on 02.01.2002 and the intention behind this addendum was to somehow avoid the tax liability which has arisen because of DRP directions on the interpretation of clauses of the agreement. Thus by way of an undated, incomplete and invalid addendum with no mention of place, how it was signed etc. which came to surface only in 2015 i.e. at least 12-13 years after signing of agreement, the assessee has tried to change the conditions stipulated in the agreement with its AEs. As the AEs own entire share holding of the assessee company, this practice of changing the conditions in agreement was nothing but proves the collusive nature of transactions between the assessee company and its AE. In fact, by perusing the very sequence of events/dates, the only inference which can be drawn is that by an addendum the assessee tried to avoid the tax liability which has been imposed on it by the TPO/DRP based on the simple literal construction of the clauses of the agreement.

Ld. DR has questioned the authenticity and genuineness of the addendum filed by assessee as an additional evidence and for that relied the questions raised by the TPO. Ld. DR has also questioned the authenticity of the addendum, by submitting that when the assessee was asked to prove its authenticity by the TPO, the asessee has submitted a so called affidavit (page 214 to 216) dated 27.11.2020 by one Mr. Aditya Arora, director of CRM Services., in fact as the addendum was signed between four different entities located at four difference places on earth how can an affidavit be filed by one person of the Indian entity clarifying the contractual terms and conditions of the agreement which was part of four companies, because in the affidavit it is nowhere mentioned that Mr. Aditya Arora is authorized by all the four companies to clarify the agreement signed on 02.01.2002.

We have taken into consideration the submission and the material on record. At outset we accept the plea of Ld. DR that in the first round the tribunal has merely admitted the additional evidence for providing opportunity to the AO/TPO for examining the issue and the Bench has not said anything on the merits/authenticity of the additional evidence. Certainly the evidentiary value of the additional evidence were open for view of AO/TPO.

In order to conveniently decide the controversy, we will like to reproduce the relevant clauses of the Licensing Agreement and the Addendum as follows:- “1.1. Accumulated Gross Revenue: Accumulated Gross Revenues” shall mean the gross receipts from sales of services in the Territory by TP India to Third Parties less customary deductions, including: (a) transportation charges, including insurance: (b) sales or excise taxes, customs, duties, tariffs, and any other governmental charges imposed on the production, importation, exportation, use, or sale of the Services; (c) quantity and cash discounts allowed; (d) returns; and (e) allowances of credits to customers.” 13

In the present case, the rule of consistency is very material. Admittedly, in terms of Intangible and Proprietary Property and Licensing agreement dated 02-01-2002, the appellant is paying royalty on its entire sales since financial year 2002-03 and the transaction was accepted to be at arm’s length price up to assessment year 2007-08. Further there is no dispute that the underlying agreement and business model of the appellant has remained consistent for all these years and accordingly, such transaction of payment of royalty ought to be accepted for the year under consideration too on rule of consistency. However, we accept it not as one of the principle of res judicata but as establishing the consistency in the conduct of parties to the transaction, which is relevant to interpret and construe the transaction, agreement and the addendum.

It comes up that TPO has held that that the agreement and the addendum to the agreement in not registered/ dated and that the addendum is a post facto exercise to avoid tax liability arising out of TP proceedings undertaken in the first round of proceedings. This is the basic controversy. As to if the addendum has to be left out of consideration for determining the ALP of the transaction. 15

Rule 10B(2) of the Rules, which provides for comparability of a transaction with uncontrolled price, also suggest that the contractual terms of the inter-company agreement has to be considered whether or not such terms are formal or in writing, as under:- “(2) For the purposes of sub-rule (1), the comparability of an international transaction [or a specified domestic transaction] with an uncontrolled transaction shall be judged with reference to the following, namely:— (a) the specific characteristics of the property transferred or services provided in either transaction; (b) the functions performed, taking into account assets employed or to be employed and the risks assumed, by the respective

Accordingly, there is no requirement under the provisions of the Act to have an underlying agreement, much less a registered or notarized agreement for undertaking an international transaction with the group companies. The mutual conduct of parties over the time is often determinative of actual intentions. In case of any ambiguity, the conduct is the best evidence to establish the real intention and effect of respective promises. The restriction is only that contrary to the written recitals, any separate supplementary or collateral, oral agreement cannot be pleaded. The discrepancies pointed by Ld. DR, with regard to manner of execution of addendum, are not of much consequence, when parties are themselves not questioning the document. Revenue is not alleging the document to be false but only the intention of execution post facto is questioned.

Secondly, the ld. TPO has emphasized on the fact that the addendum to the agreement was entered on 22nd August 2014 as a post-facto arrangement to dilute the finding of the DRP. The relevant part being:

In this regard, it comes up that appellant does not dispute the fact post facto agreement the addendum was entered. We have taken into consideration the facts and circumstances and the submissions and we find that more than the Intangible and Proprietary Licence Agreement dated 2nd January, 2002, the Foreign Collaboration Agreement dated 2nd January, 2002 between the TP USA and the assessee is of more significance. In this collaboration agreement, the relevant para 4.1, 5.1 to 5.9 read as under:-

It can be seen that these clauses as reproduced above make it explicit that a subsidiary in India was being established not for catering any local business, but, the assessee was supposed to provide services to clients of TP USA. These clauses categorically and conclusively lead us to believe that fundamental intention of the parties was that TP USA was supposed to solicit the work which was to be executed by the assessee. There is no material before us on record nor there is any case of the AO that apart from the work solicited by TP USA the assessee company had procured any work outside India on its own. When these clauses are read along with the licensing agreement dated 2nd January, 2002, the only conclusion that can be drawn is that there was consensus ad idem between parties that royalty is to be paid with respect to the entire sales revenue of the assessee in regard to overseas clients of TP USA, including sales to third party customers for TP USA for which Revenue is received from TP USA. We are of the firm view that the addendum was entered 20

We fail to appreciate the observations and findings of DRP that a subsequent agreement executed in 2014 can not go back and influence the transactions already effected much earlier on the strength of an earlier agreement, so as to determine whether the earlier transaction was carried out at Arm's Length Price or not. If such a position is allowed, then an assessee can modify an agreement at any time after the date of international transaction as per an earlier agreement and by changing the clauses and terms, seek to modify the Arm's Length price already determined for earlier years. If at all, such post facto agreements should only have prospective effect as far as determination of Arm's length price of international transactions is concerned.

The addendum does not set forth any new terms or conditions, but, as we discussed earlier, the addendum only crystalises the conduct of parties and when it is related back to the date of original agreement dated 02.01.2002, it does not post facto recognize anything, which is proved to be, not, originally agreed.

Next, relying the earlier order of DRP, the TPO has observed that services rendered through TP USA fall under the category services rendered through an affiliate. In this regard, it is submitted on behalf of the assessee that “sales through TP USA “differs” from the sales made through an affiliate.”

As we take into consideration the definition reproduced earlier of ‘Affiliate’ and the definition of ‘Third Party’ in the original agreement or the Addendum, it becomes clear that the ‘Affiliates’ refers to an entity other than “Party to this Agreement.” TP USA being the holding company cannot be

Next the TPO has held that the services rendered by the Appellant to a third party customer on behalf of its AE are to be considered as sales made to AE. Also, because the bill(s) raised by the asseessee to its AE was for the services rendered to the client of the AE, the Appellant was not required to pay the royalty on it. On behalf of assessee it is reiterated that in the case of the appellant, the parties to the agreement, viz, TP USA and the appellant are ad idem that royalty needs to be paid on sale of services rendered by the appellant to third party customers of TP USA.

We have already concluded that in the understanding of the two contracting parties, it was always the intention that royalty has to be paid for use of intangible property, know-how, customer relationship management (CRM) services, etc. with respect to entire sale revenues of the appellant, including sales to third party customers of TP USA for which revenue is received from TP USA.

As we consider the Foreign Collaboration Agreement clause 5 with sub- clauses, it becomes clear that TP USA had agreed to pay for the services provided by the assessee to the overseas clients of TP USA. Sub-clause 5.7 specifically mentions that the bills can be raised by the assessee on TP USA. This clause 5 of the Collaboration Agreement leaves no doubt that merely due to the fact of raising bills or invoices on the TP USA for services actually rendered to third party customers solicited by TP USA, the sales have to be considered to be one made to TP USA itself.

In the light of the aforesaid discussion, we are of the considered view that ld. DRP and TPO both have fallen in error in first rejecting the Addendum as a piece of evidence showing the consistency of the conduct and the actual intentions of the parties to the agreement and then has made erroneous interpretation to the clauses of the Collaboration Agreement and the Licence Agreement to conclude that the assessee was providing services to the TP USA only and not to third parties for whom TP USA had, in fact, acted as intermediary. We are inclined to sustain the grounds. Consequently, the appeals of the assessee are allowed with consequential effect.