M/s Social Media India Limited, Hyderabad V. Asst.CIT, Hyderabad

ITA 1711/HYD/2012

• Counselvise Citation: 171122514 RSA 2012
• Duration Of Justice: 10 month(s) 11 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 04-10-2013
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: A
• Assessment Year: 2008-2009
• Appeal Filed On: 23-11-2012
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: MAYA MAHESWARI
• Keywords: Depreciation; Transfer pricing; Business expenditure; International transaction; Cost of acquisition; Valuation report
• Section: 143(3); 234B; 37(1)

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL HYDERABAD BENCH A, HYDERABAD BEFORE SHRI B. RAMAKOTAIAH, ACCOUNTANT MEMBER AND SHRI SAKTIJIT DEY, JUDICIAL MEMBER ITA NO. 1711/HYD/2012 ASSESSMENT YEAR : 2008-09 SOCIAL MEDIA INDIA LTD., HYDERABAD. PAN: AALCS0774M VS. ASST. COMMISSIONER OF INCOME- TAX, CIRCLE 3(2), HYDERABAD. (APPELLANT) (RESPONDENT) ASSESSEE BY : SHRI PVSS PRASAD REVENUE BY : SMT. MAYA MAHESWARI DATE OF HEARING : 26-09-2013 DATE OF PRONOUNCEMENT : 04-10-2013 ORDER PER B. RAMAKOTAIAH, A.M.: THIS APPEAL PREFERRED BY THE ASSESSEE IS DIRECTED A GAINST THE ORDER OF THE AO PASSED U/S 143(3) READ WITH SECTION 144C(5),DATED 26-09-2013 IN PURSUANCE TO THE DIRECTIONS OF THE DI SPUTE RESOLUTION PANEL (DRP), HYDERABAD. ASSESSEE IS CONTESTING TRAN SFER PRICING ADJUSTMENTS MADE BY THE TPO AS CONFIRMED BY THE DRP AND HAS RAISED 8 GROUNDS OF APPEAL, WHICH ARE AS FOLLOWS: 1. THE LEARNED ACIT (A) IS ERRONEOUS IN LAW AND ON THE FACTS OF THE CASE. 2. THE LEARNED AO/TPO ARE NOT JUSTIFIED IN LAW IN R EJECTING COMPARABLE UNCONTROLLED PRICE (CUP) METHOD AS MOST APPROPRIATE METHOD (MAM) ADOPTED BY THE ASSESSEE-CO MPANY AND TREATING ARMS LENGTH PRICE (ALP AS NIL IN RESP ECT OF PURCHASE OF WEB PORTAL NAMELY WWW.BHARATHSTUDENT.CO M OF RS. 3,67,82,683/-. THE LEARNED TPO OUGHT TO HAVE ACCEPT ED THE VALUATION REPORT BY THE INDEPENDENT VALUER AS EXTER NAL CUP. 2 ITA NO. 1711/HYD/2012 SOCIAL MEDIA INDIA LTD. 3.THE LEARNED AO ERRED IN DISALLOWING THE DEPRECIAT ION ON INTANGIBLE ASSET CONSIDERING THE TPOS ORDER. THE L EARNED AO OUGHT TO HAVE ALLOWED DEPRECIATION ON THE WEB PORTA L COST. 4. THE LEARNED DISPUTE RESOLUTION PANEL (DRP) IS NO T JUSTIFIED IN LAW IN DENYING THE COST INCURRED BY THE APPELLAN T OF RS. 3,67,82,683/- AS COST OF THE WEBSITE BY ATTRIBUTING UNSUSTAINABLE REASONS AND BY OVERLOOKING THE COMMERCIAL WISDOM OF THE APPELLANT COMPANY. 5. THE LEARNED AO/TPO ARE NOT JUSTIFIED IN QUESTION ING COMMERCIAL WISDOM OF THE ASSESSEES DECISION TO INC UR THE EXPENDITURE TOWARDS MARKET PROMOTION EXPENSES OF RS . 53,88,834/-. THE LEARNED AO/TPO OUGHT TO HAVE ALLOW ED MARKET PROMOTION EXPENSES INCURRED BY THE ASSESSEE. 6. THE LEARNED AO HAS ERRED IN LEVYING INTEREST U/S 234B OF THE ACT ON ADDITIONAL INCOME ARISING DUE TO TRANSFER PR ICING ADJUSTMENT BY COMPLETELY DISREGARDING THE PROVISION S OF THE ACT AND THE JUDICIAL PRECEDENCE. 7. THE LEARNED DISPUTE RESOLUTION PANEL (DRP) LEGAL LY ERRED IN MERELY ENDORSING AO/TPOS ACTION IN RESPECT OF ISSUE S EXPLAINED IN THE EARLIER GROUNDS. 8. ANY OTHER GROUND THAT MAY BE URGED AT THE TIME O F HEARING WITH THE PREVIOUS APPROVAL OF THE HONBLE TRIBUNAL. 2. BRIEFLY STATED, ASSESSEE SOCIAL MEDIA INDIA LTD. IS A DEEMED PUBLIC LTD. COMPANY WHEREIN 96% OF THE EQUITY IS HE LD BY NORTHGATE TECHNOLOGIES LTD. AND 4% IS HELD BY THE PROMOTERS O F THE COMPANY. ASSESSEE IS ENGAGED IN CARRYING ON BUSINESS OF PROV IDING ONLINE INFORMATION, ADVERTISEMENT AND MASS MEDIA COMMUNICA TION. FOR THE AY 2008-09, ASSESSEE FILED ITS RETURN OF INCOME DE CLARING LOSS OF RS. 44,60,778/-. ASSESSEE HAS REPORTED INTERNATIONAL TR ANSACTIONS DONE WITH AE AND FILED AUDIT REPORT ALONG WITH TRANSFER PRICING STUDY REPORT, COPIES OF INVOICES IN RESPECT OF TRANSACTIONS WITH AES AND AGREEMENTS, AND ALSO JUSTIFICATION FOR PRICE CHARGE D FOR ACQUIRING WEB PORTAL IN THE COURSE OF PROCEEDING. A REFERENCE U/S 92CA(3) OF THE IT ACT, 1961 HAS BEEN MADE TO TRANSFER PRICING OFFICER (TPO), HYDERABAD. THE TPO EXAMINED THE TRANSACTIONS OF AS SESSEE WITH AE WITH REFERENCE TO THE PURCHASE PRICE OF WEB PORTAL, NAMELY, 3 ITA NO. 1711/HYD/2012 SOCIAL MEDIA INDIA LTD. WWW.BHARATHSTUDENT.COM OF RS. 3,67,82,683/-, WHICH WAS CAPITALIZED IN THE BOOKS OF ACCOUNT BUT CLAIMED DEPRECIATION AT 25% ON THE INTANGIBLE PROPERTY ACQUIRED. IN SUPPORT, ASSESSEE FILED AN INDEPENDENT VALUATION REPORT OBTAINED FROM M/S GRAN T THORNTON, INDEPENDENT VALUER AS AN EXTERNAL CUP. THE TPO DID NOT AGREE WITH THE SAID AMOUNT ON THE REASON THAT THE ASSESSEE HAS NOT VALUED THE ASSET PROPERLY AND HAS NOT ANSWERED THE QUESTIONS R AISED BY HIM AND DETERMINED THE ARMS LENGTH PRICE (ALP) AT NIL TH EREBY DISALLOWING THE DEPRECIATION CLAIMED AT RS. 45,97,835/- ON THE INTANGIBLE ASSET. IN ADDITION, ASSESSEE ALSO CLAIMED TO HAVE MADE PAYMEN T TO AN EXTENT OF RS. 53,88,834/- TOWARDS MARKET PROMOTION EXPENSE S TO ITS AE AXILL EUROPE LTD. IT WAS SUBMITTED TO THE TPO THAT THIS W AS INCURRED TOWARDS PAYMENT TO AXILL EUROPE LTD FOR REIMBURSEME NT OF SUBSCRIPTION CHARGES MADE BY THEM TO COMSCORE FOR R S. 2,66,018/- AND PAYMENT TOWARDS CLICKSOR.COM OF RS. 51,22,516/- TOWARDS PROMOTION OF WEBSITE WWW.BHARATHSTUDENT.COM. THE TP O, ON THE REASON THAT THE ASSESSEE HAS NOT FURNISHED THE BENE FIT, DETERMINED THE ALP AT NIL THEREBY DISALLOWING THE ENTIRE AMOUN T. 3. THE ASSESSEE OBJECTED TO THE ABOVE ADJUSTMENTS B EFORE THE DRP. THE DRP AFTER CONSIDERING THE OBJECTIONS OF TH E ASSESSEE, REJECTED THE ADJUSTMENT MADE TOWARDS PURCHASE OF WE BSITE VIDE PARA 26 OF ITS ORDER, AS UNDER: 26. COMING TO THE PURE QUESTION OF THE ARMS LENGTH PRICE, GRANT THORNTON DID APPLY THREE METHODS AND CAME OUT WITH THE PRICE OF RS. 5,38,31,832/- ON COST METHOD. AS AGAIN ST THAT, THE ASSESSEE PURCHASED THE WEBSITE AT RS. 3,67,82,683/- . SO, BY THIS RECKONING THE PRICE PAID BY THE ASSESSEE WAS S UBSTANTIALLY LOWER THAN THE VALUATION PRICE. GIVEN THAT, THE WEB SITE PURCHASE CAN BE CONSIDERED AT ARMS LENGTH. BUT SINCE THE MA JOR ISSUES WERE NOT ANSWERED BY THE ASSESSEE THE VALUE OF THE WEBSITE IS TAKEN AT NIL, AS DETERMINED BY THE TPO. THE PURCHAS E PRICE OF THE WEBSITE OF RS. 367,82,683/- WAS NOT DEBITED TO THE PROFIT AND LOSS ACCOUNT. THEREFORE, AN ADDITION TO THE INC OME IS NOT CALLED FOR. HOWEVER, THE DEPRECIATION ON THE CAPITA L EXPENDITURE WAS RIGHTLY DISALLOWED. THE AO IS DIRECTED TO KEEP THESE DIRECTIONS IN MIND WHILE IMPLEMENTING THE ORDERS OF THIS PANEL. 4 ITA NO. 1711/HYD/2012 SOCIAL MEDIA INDIA LTD. 4. WITH REFERENCE TO THE MARKET PROMOTION EXPENSES ALSO, THE DRP REJECTED THE SAME BY STATING AS UNDER: 27. THE TPO TREATED THE ARMS LENGTH PRICE OF PAYMEN T MADE TOWARDS MARKET PROMOTION EXPENSES FOR RS. 53,88,834 /- AT RS. NIL BY TREATING THE TRANSACTION AS INTRA-GROUP SE RVICES. THE ASSESSEE COMPANY AVAILED ADVERTISING AND MARKETING SERVICES FROM AXILL EUROPE LTD., ITS AE. AN AMOUNT OF RS. 53 ,88,834/- WAS INCURRED TOWARDS THE SAME BY AE AND WAS PAID BY THE ASSESSEE AT COST I.E. WITHOUT MARK UP AS DETAILED I N THE TRANSFER PRICING REPORT. THE ADVERTISING AND MARKETING SERVI CES WERE AVAILED FOR PROMOTING SOCIAL MEDIA EXCHANGE. THE TP O HAS THUS ADJUDGED THE VALUE OF THIS SERVICE ON THE BENEFIT P RINCIPLE. 28. A STANDARD INVOLVING A WILLINGNESS TO PAY OR EX ISTENCE OF A BENEFIT (BENEFIT RULE), AS ENUNCIATED IN THE OECD G UIDELINES AND US REGULATIONS IS, BY FAR, THE MOST IMPORTANT F ACTOR THAT DETERMINES WHETHER A RELATED-PARTY SERVICE RECIPIEN T WOULD PAY FOR AN INTRA-GROUP SERVICE AND, THEREFORE, WHETHER THE SERVICE PROVIDER CAN JUSTIFY A CHARGE FOR THE PROVISION OF THE INTRA-GROUP SERVICES. THE OBJECTIVE OF THE BENEFIT RULE IS NOT ONLY TO DETERMINE THE QUANTUM OF BENEFIT, BUT ALSO THE RELA TIVE PROXIMITY OF THE BENEFIT DERIVED TO THE INTRA-GROUP SERVICES RENDERED (I.E. USING A PROXIMATE-END-DIRECT STANDARD. THEREFORE, O NE SHOULD DETERMINE HOW DIRECT OR REMOTE THE BENEFITS DERIVED ARE IN RELATION THE ACTIVITY PERFORMED UNDER THE GUISE OF INTRA-GROUP SERVICES. A DIRECT OR PERCEIVED BENEFIT FROM THE SE RVICE RENDERED MUST BE IDENTIFIED. CONSEQUENTLY, ALLOCATI ONS ARE NOT TO BE MADE IF PROBABLE BENEFIT TO OTHER MEMBERS IS SO INDIRECT OR REMOTE THAT UNRELATED PARTIES WOULD NOT HAVE CHA RGED FOR SIMILAR SERVICES. THE IDEA BEHIND QUOTING THESE OEC D GUIDELINES IS TO INDICATE THE PRINCIPLES THAT NEED TO BE FOLLOWED IN THE BENCHMARKING OF INTERNATIONAL TRANSACTION RE LATED TO PAYMENT ON ACCOUNT OF AVAILING OF INTRA-GROUP SERVI CES. THEREFORE, THE USE OF THE BENEFIT PRINCIPLE IS NO T EXACTLY MISPLACED. THE TAXPAYER WILL NEED TO SHOW THAT THE SERVICES THAT IT HAS RECEIVED HAVE PROVIDED AN EXCLUSIVE BENEFIT TO IT AND ARE NOT IN THE NATURE OF SHAREHOLDER SERVICES, WHICH IS OFTEN THE REMARK OF THE TAXPAYER. 29. SINCE THE ASSESSEE COULD NOT COME OUT IN A SATI SFACTORY MANNER TO SATISFY THE BENEFIT PRINCIPLE, THE TP ADJ USTMENT AT NIL BY THE TPO IS UPHELD. 5. AGGRIEVED BY THE ORDER OF THE DRP, THE ASSESSEE HAS RAISED THE GROUNDS ON THE TWO ISSUES IN GROUND NOS. 2 TO 4 & 5 TO 7( SUPRA). 5 ITA NO. 1711/HYD/2012 SOCIAL MEDIA INDIA LTD. GROUND NOS. 1 & 8 ARE GENERAL IN NATURE, HENCE, NEE D NO ADJUDICATION. 6. THE LEARNED COUNSEL FOR THE ASSESSEE REFERRING T O THE INDEPENDENT VALUATION REPORT DATED 5 TH OCTOBER, 2007 PROVIDED BY GRANT THORNTON, SUBMITTED THAT THE DRP HAS WRONGLY TAKEN THE VALUATION AT RS. 5,38,31,832/- BASED ON THE TPOS O BSERVATION WHEN IN FACT THE VALUATION MADE BY THE SAID VALUER WAS A T INDIAN RUPEES 3,67,82,683/-; (AT GBP 453848 AT THE CONVERSION OF 81.0462 PER ONE GBP). THE LEARNED COUNSEL, THEREFORE, SUBMITTED THA T THE OBSERVATION OF THE DRP THAT GRANT THORNTON ARRIVED AT THE PRICE ON COST METHOD AT HIGHER PRICE IS NOT CORRECT AND IN FACT OUT OF THE THREE METHODS LISTED BY GRANT THORNTON IN THE ABSENCE OF BUSINESS ACTIVI TY ON THAT INTANGIBLE ASSET, THE EXCESS EARNING METHOD, MARKET APPROACH AND INCOME APPROACH WERE NOT ACCEPTED AND VALUATION WAS BASED ON THE COST INCURRED BY AE AXILL EUROPE LTD. IT WAS SUBMIT TED THAT SINCE THE SAME WAS ACTUAL COST INCURRED BY THE AE AT WHICH TH E ASSESSEE PURCHASED, THE TPO IS NOT CORRECT IN DETERMINING TH E VALUE AT NIL. FURTHER, HE RELIED ON THE ORDERS OF THE COORDINATE BENCH OF ITAT, MUMBAI BENCH IN CASE OF THYSSEN KRUPP INDUSTRIES IN DIA (P.) LTD., [2012] 27 TAXMANN.COM 334 (MUM.) WHEREIN IT WAS HEL D THAT THE TPO CANNOT DETERMINE THE ALP AT NIL AS JURISDICTION PRO VIDED TO HIM IS TO DETERMINE THE ALP ON THE TRANSACTIONS UNDER THE MET HODS PROVIDED UNDER THE ACT. FURTHER, HE RELIED ON THE DECISION O F THE COORDINATE BENCH OF ITAT, BANGALORE BENCH A IN THE CASE OF F ESTO CONTROLS (P.) LTD., [2013] 30 TAXMNANN.COM 16 (BANG.) WHEREI N THE SAME PRINCIPLE WAS REITERATED. HE ALSO REFERRED TO ITAT MUMBAI DECISION IN CASE OF SC ENVIRO AGRO INDIA LTD., VS. DCIT [2013] 34 TAXMANN.COM 127 (MUM.) WHEREIN ALSO SIMILAR PRINCIPLES WERE LA ID OUT THAT THE RULE DOES NOT AUTHORIZE THE TPO TO DISALLOW ANY EXPENDIT URE. 7. WITH REFERENCE TO THE DETERMINATION OF ALP AT NI L ON MARKET PROMOTION EXPENSES TO ITS AE, IT WAS THE CONTENTION OF THE LEARNED 6 ITA NO. 1711/HYD/2012 SOCIAL MEDIA INDIA LTD. COUNSEL FOR THE ASSESSEE THAT THIS AMOUNT WAS ONLY REIMBURSEMENT OF EXPENSES PAID TO THIRD PARTY COMSCORE.COM AND NO SE RVICES HAVE BEEN RENDERED BY AE AND, THEREFORE, THE OBSERVATION OF THE TPO AS WELL AS BY THE DRP THAT THE ASSESSEE HAS NOT JUSTIF IED ON BENEFIT PRINCIPLE DOES NOT ARISE, AS SERVICES WERE RENDERED BY THIRD PARTY AND PAYMENTS WERE ROUTED THROUGH THE AE AND EXPENDITURE IS NOTHING BUT REIMBURSEMENT OF THE EXPENSES. HE REFERRED TO THE L EDGER COPIES OF AXILL EUROPE LTD AND THE DEBIT NOTES RAISED IN THIS REGARD PLACED BEFORE THE TPO AS WELL AS BEFORE THE DRP TO ESTABLI SH THAT THE EXPENDITURE IS NOTHING BUT REIMBURSEMENT OF EXPENSE S AND THERE ARE NO SERVICES RENDERED BY THE AE TO ASSESSEE. HE REL IED ON THE SAME CASES REFERRED ABOVE ON THE PRINCIPLE THAT THE ALP CANNOT BE DETERMINED AT NIL. 8. THE LEARNED DR, HOWEVER, REFERRED TO THE DETAILE D ORDER OF THE TPO AND DRP TO SUBMIT THAT ASSESSEE HAS NOT ANSWERE D THE QUESTIONS RAISED BY THE AUTHORITIES, THEREFORE, IN THE ABSENCE OF INFORMATION, THE AUTHORITIES WERE JUSTIFIED IN DETE RMINING THE ALP AT NIL. 9. WE HAVE CONSIDERED THE RIVAL CONTENTIONS AND PER USED THE PAPER BOOKS ON RECORD RUNNING INTO PAGES 513 IN TW O VOLUMES. AS SEEN FROM THE RECORD, ASSESSEE HAS CONDUCTED STUDY REPORT AND PLACED NECESSARY INVOICES, DETAILS, REPORTS BEFORE THE TPO. AS RIGHTLY POINTED OUT BY THE DRP, THE ASSESSEE HAS CAPITALIZE D THE PURCHASE PRICE OF THE WEBSITE AND HAS NOT DEBITED TO THE P&L A/C, THEREFORE, THE ADDITION OF THE INCOME AS DETERMINED BY THE TPO WAS NOT CALLED FOR. HOWEVER, THE DISALLOWANCE OF DEPRECIATION IN THIS C ASE IS ALSO NOT WARRANTED. WE ARE UNABLE TO UNDERSTAND ON WHAT REAS ON THE DEPRECIATION WAS RIGHTLY DISALLOWED AS HELD BY TH E DRP. FIRST OF ALL, AS SEEN FROM THE ORDER OF THE DRP, THEY HAVE ARRIVE D AT THE CONCLUSION THAT THE WEB PURCHASE WAS AT ALP. HOWEV ER, THEY AGREED WITH THE TPO FOR DETERMINING THE VALUE AT NIL ON T HE REASON THAT THE 7 ITA NO. 1711/HYD/2012 SOCIAL MEDIA INDIA LTD. MAJOR ISSUES WERE NOT ANSWERED BY THE ASSESSEE. WE ARE UNABLE TO UNDERSTAND WHAT MAJOR ISSUES WERE RAISED BY THE TPO , WHICH WENT UNANSWERED. ON A QUESTION WAS RAISED BY THE TPO TH AT WHETHER THERE IS ANY NEED FOR PURCHASE OF SUCH INTANGIBLE, WE ARE OF THE VIEW THAT WHAT IS TO PURCHASE AND WHAT NOT TO PURCHASE I S NOT IN THE DOMAIN OF THE AO, BECAUSE IT IS A BUSINESS DECISION OF THE ASSESSEE COMPANY AND ACCORDINGLY, WHEN ASSESSEE PURCHASED AN INTANGIBLE ASSET, WHAT IS REQUIRED UNDER THE LAW IS TO EXAMINE WHETHER THE PRICE PAID BY THE ASSESSEE IS ARMS LENGTH PRICE OR NOT. T HE TPO HAS NO ROLE TO PLAY IN EXAMINING THE DECISION OF COMMERCIAL NAT URE. ANOTHER QUESTION RAISED, AS LISTED OUT IN PARA 24 OF THE DR PS ORDER, IS THAT WHETHER THE SO-CALLED INTANGIBLE IS ACTUALLY DELIVE RED AND IF DELIVERED WHAT ARE THE COMMENSURATE BENEFITS TO THE TAXPAYER ON ITS USE. WE FIND THAT THERE IS NO DISPUTE WITH REFERENCE TO THE DELIVERY OF THE INTANGIBLE ASSET AS THE ASSESSEE HAS DONE BUSINESS ON THIS WEBSITE. IN FACT, IT WAS SUBMITTED AND ALSO RECORDED BY THE DRP VIDE PARAS 15 & 16 IN ITS ORDER, ABOUT THE VISITS TO THE SITE AND ALSO THAT ASSESSEE COMPANY GENERATED REVENUES OF RS. 4.47 CRORES CONST ITUTING 45% OF THE TOTAL REVENUES FROM BHARATSTUDENT.COM. EVEN AFT ER EXPLAINING THAT THE INTANGIBLE ASSET WAS ACTUALLY USED BY THE ASSES SEE IN EARNING THE REVENUES TO THE COMPANY OF RS. 4.47 CRORES, WHAT EL SE IS REQUIRED TO ESTABLISH IS NOT UNDERSTANDABLE. FURTHER, THE ASSES SEE ALSO FURNISHED THE VALUATION REPORT WHERE THE VALUER ADOPTED THE C OST METHOD AND THE ASSESSEE HAS PAID ONLY THE COST INCURRED BY AE. AS SEEN FROM THE ORDER OF DRP, THE DRP STATED THAT VALUER ARRIVED AT THE COST OF WEBSITE AT RS. 5,38,31,832/-, AS AGAINST THE COST V ALUED BY THE VALUER AT RS. 3,67,82,863/-. WE ARE UNABLE TO UNDERSTAND FROM WHERE THE SAID PRICE WAS TAKEN UP BY THE TPO/DRP. BE THAT AS IT MAY, THE ASSESSEE HAS PAID ONLY THE COST PRICE TO ITS AE AND JUSTIFIED THE SAME BY PROVIDING A VALUATION REPORT AS EXTERNAL CUP. NO THING HAS BEEN BROUGHT ON RECORD BY THE TPO OR BY THE DRP TO DETER MINE THE ALP AGAINST THE VALUE SHOWN BY THE ASSESSEE. IN THE ABS ENCE OF ANY COUNTER REPORT BY THE TPO/DRP OR SEPARATE VALUATION DONE BY THE 8 ITA NO. 1711/HYD/2012 SOCIAL MEDIA INDIA LTD. TPO, THE ASSESSEES VALUATION HAS TO BE ACCEPTED AS IT WAS SUPPORTED BY AN INDEPENDENT VALUER, WHO DETERMINED THE COST PRICE ON THE ACTUAL EXPENDITURE INCURRED BY THE AE. CONS IDERING THE TOTALITY OF THE FACTS OF THE CASE, WE ARE OF THE OPINION THA T THE WEBSITE PURCHASED BY THE ASSESSEE HAS TO BE CONSIDERED AT A RMS LENGTH. TO THIS EXTENT, THE OBSERVATION OF THE DRP STANDS CONF IRMED BY US. THERE IS EVIDENCE ON RECORD THAT THE WEBSITE WAS USED BY THE ASSESSEE IN THE BUSINESS AND EARNED MORE THAN THE COST PAID DUR ING THE YEAR AND OFFERED THE SAME AS ITS INCOME. SINCE THE SAID WEBS ITE WAS USED IN THE BUSINESS, THERE IS NO NECESSITY FOR DISALLOWING DEPRECIATION AND, ACCORDINGLY, WE DIRECT THE AO TO ACCEPT THE ASSESSE ES PURCHASE COST AND ALLOW THE DEPRECIATION AS CLAIMED. GROUND NOS. 2,3 & 4 PERTAIN TO THIS ISSUE ARE ALLOWED. 10. WITH REFERENCE TO THE MARKET PROMOTION EXPENSES OF RS. 53,88,834/-, AS SEEN FROM THE RECORD, THESE AMOUNTS ARE REIMBURSEMENT OF THE EXPENSES PAID TO THIRD PARTY F OR SERVICES RENDERED BY THEM IN MARKETING THE WEBSITE. THESE D ETAILS WERE PLACED BEFORE THE AO/TPO AND DRP. HOWEVER, THE TPO AND DRP CONSIDERED IT AS INTRA-GROUP SERVICES AND ANALYSED THE SAME ON THE BENEFIT PRINCIPLE. WE ARE NOT ENTERING INTO THE ARG UMENT OR ANALYSIS OF THE BENEFIT PRINCIPLE TO DETERMINE THE SERVICES AS PER THE OECD GUIDELINES. SINCE IT IS REIMBURSEMENT OF EXPENDITUR E, THE ISSUE OF BENEFIT PRINCIPLE MAY NOT ARISE IN THIS CASE. WE AR E OF THE OPINION THAT BOTH THE TPO AND DRP WENT ON WRONG CONSIDERATION IN DETERMINING THE MARKET PROMOTION EXPENSES AT NIL, TREATING THE TRANSACTION AS INTRA-GROUP SERVICE. FIRST OF ALL, AS HELD BY THE H ONBLE DELHI HIGH COURT IN CASE CIT VS. EKL APPLIANCES LTD., [2012] 24 TAXMANN.COM 199 (DELHI), THE TPO HAS NO POWER TO RESTRICT THE A LP AT NIL, BUT IS SUPPOSED TO HAVE DETERMINED THE ALP OF THE INTERNAT IONAL TRANSACTION AS PER THE METHODS PROVIDED. THE HONBLE HIGH COURT HELD AS FOLLOWS: 19. THERE IS NO REASON WHY THE OECD GUIDELINES SHO ULD NOT BE TAKEN AS A VALID INPUT IN THE PRESENT CASE I N JUDGING 9 ITA NO. 1711/HYD/2012 SOCIAL MEDIA INDIA LTD. THE ACTION OF THE TPO. IN FACT, THE CIT (APPEALS) H AS REFERRED TO AND APPLIED THEM AND HIS DECISION HAS BEEN AFFIR MED BY THE TRIBUNAL. THESE GUIDELINES, IN A DIFFERENT FORM , HAVE BEEN RECOGNIZED IN THE TAX JURISPRUDENCE OF OUR COU NTRY EARLIER. IT HAS BEEN HELD BY OUR COURTS THAT IT IS NOT FOR THE REVENUE AUTHORITIES TO DICTATE TO THE ASSESSEE AS T O HOW HE SHOULD CONDUCT HIS BUSINESS AND IT IS NOT FOR THEM TO TELL THE ASSESSEE AS TO WHAT EXPENDITURE THE ASSESSEE CA N INCUR. WE MAY REFER TO A FEW OF THESE AUTHORITIES T O ELUCIDATE THE POINT. IN EASTERN INVESTMENT LTD. V. CIT, (1951) 20 ITR 1, IT WAS HELD BY THE SUPREME COURT T HAT 'THERE ARE USUALLY MANY WAYS IN WHICH A GIVEN THING CAN BE BROUGHT ABOUT IN BUSINESS CIRCLES BUT IT IS NOT FOR THE COURT TO DECIDE WHICH OF THEM SHOULD HAVE BEEN EMPLOYED W HEN THE COURT IS DECIDING A QUESTION UNDER SECTION 12(2 ) OF THE INCOME TAX ACT'. IT WAS FURTHER HELD IN THIS CASE T HAT' IT IS NOT NECESSARY TO SHOW THAT THE EXPENDITURE WAS A PR OFITABLE ONE OR THAT IN FACT ANY PROFIT WAS EARNED'. IN CIT V. WALCHAND & CO. ETC., (1967) 65 ITR 381, IT WAS HELD BY THE SUPREME COURT THAT IN APPLYING THE TEST OF COMMERCI AL EXPEDIENCY FOR DETERMINING WHETHER THE EXPENDITURE WAS WHOLLY AND EXCLUSIVELY LAID OUT FOR THE PURPOSE OF BUSINESS, REASONABLENESS OF THE EXPENDITURE HAS TO BE JUDGED FROM THE POINT OF VIEW OF THE BUSINESSMAN AND NOT OF TH E REVENUE. IT WAS FURTHER OBSERVED THAT THE RULE THAT EXPENDITURE CAN ONLY BE JUSTIFIED IF THERE IS CORRE SPONDING INCREASE IN THE PROFITS WAS ERRONEOUS. IT HAS BEEN CLASSICALLY OBSERVED BY LORD THANKERTON IN HUGHES V . BANK OF NEW ZEALAND, (1938) 6 ITR 636 THAT 'EXPENDITURE IN THE COURSE OF THE TRADE WHICH IS UN-REMUNERATIVE IS NON E THE LESS A PROPER DEDUCTION IF WHOLLY AND EXCLUSIVELY M ADE FOR THE PURPOSES OF TRADE. IT DOES NOT REQUIRE THE PRES ENCE OF A RECEIPT ON THE CREDIT SIDE TO JUSTIFY THE DEDUCTION OF AN EXPENSE'. THE QUESTION WHETHER AN EXPENDITURE CAN B E ALLOWED AS A DEDUCTION ONLY IF IT HAS RESULTED IN A NY INCOME OR PROFITS CAME TO BE CONSIDERED BY THE SUPREME COU RT AGAIN IN CIT V. RAJENDRA PRASAD MOODY, (1978)115 IT R 519, AND IT WAS OBSERVED AS UNDER:- 'WE FAIL TO APPRECIATE HOW EXPENDITURE WHICH IS OTH ERWISE A PROPER EXPENDITURE CAN CEASE TO BE SUCH MERELY BECA USE THERE IS NO RECEIPT OF INCOME. WHATEVER IS A PROP ER OUTGOING BY WAY OF EXPENDITURE MUST BE DEBITED IRRESPECTIVE OF 'WHETHER THERE IS RECEIPT OF INCOME OR NOT. THAT IS THE PLAIN REQUIREMENT OF PROPER ACCOUNTING AND THE INTERPRETATION OF SECTION 57(III} CANNOT BE DIFFERE NT. THE DEDUCTION OF THE EXPENDITURE CANNOT, IN THE CIRCUMS TANCES, BE HELD TO BE CONDITIONAL UPON THE MAKING OR EARNIN G OF THE INCOME.' 10 ITA NO. 1711/HYD/2012 SOCIAL MEDIA INDIA LTD. IT IS NOTEWORTHY THAT THE ABOVE OBSERVATIONS WERE M ADE IN THE CONTEXT OF SECTION 57(III) OF THE ACT WHERE TH E LANGUAGE IS SOMEWHAT NARROWER THAN THE LANGUAGE EMPLOYED IN SECTION 37(1) OF THE ACT. THIS FACT IS RECOGNIZED I N THE JUDGMENT ITSELF. THE FACT THAT THE LANGUAGE EMPLOYE D IN SECTION 37(1) OF THE ACT IS BROADER THAN SECTION 57 (III) OF THE ACT MAKES THE POSITION STRONGER. 20. IN THE CASE OF SASSOON J. DAVID & CO. PVT. LT D. V. CIT, (1979) 118 ITR 261 (SC), THE SUPREME COURT REFERRED TO THE LEGISLATIVE HISTORY AND NOTED THAT WHEN THE INCOME TAX BILL OF 1961 WAS INTRODUCED, SECTION37(1) REQUIRED THAT THE EXPENDITURE SHOULD HAVE BEEN INCURRED 'WHOLLY, NECE SSARILY AND EXCLUSIVELY' FOR THE PURPOSES OF BUSINESS IN O RDER TO MERIT DEDUCTION. PURSUANT TO PUBLIC PROTEST, THE WO RD 'NECESSARILY' WAS OMITTED FROM THE SECTION. 21. THE POSITION EMERGING FROM THE ABOVE DECISIONS IS THAT IT IS NOT NECESSARY FOR THE ASSESSEE TO SHOW THAT A NY LEGITIMATE EXPENDITURE INCURRED BY HIM WAS ALSO INC URRED OUT OF NECESSITY. IT IS ALSO NOT NECESSARY FOR THE ASSESSEE TO SHOW THAT ANY EXPENDITURE INCURRED BY HIM FOR TH E PURPOSE OF BUSINESS CARRIED ON BY HIM HAS ACTUALLY RESULTED IN PROFIT OR INCOME EITHER IN THE SAME YEAR OR IN A NY OF THE SUBSEQUENT YEARS. THE ONLY CONDITION IS THAT THE EXPENDITURE SHOULD HAVE BEEN INCURRED 'WHOLLY AND EXCLUSIVELY' FOR THE PURPOSE OF BUSINESS AND NOTHIN G MORE. IT IS THIS PRINCIPLE THAT INTER ALIA FINDS EXPRES SION IN THE OECD GUIDELINES, IN THE PARAGRAPHS WHICH WE HAVE QU OTED ABOVE. 22. EVEN RULE 10B(1)(A) DOES NOT AUTHORIZE DISALLOW ANCE OF ANY EXPENDITURE ON THE GROUND THAT IT WAS NOT NEC ESSARY OR PRUDENT FOR THE ASSESSEE TO HAVE INCURRED THE SA ME OR THAT IN THE VIEW OF THE REVENUE THE EXPENDITURE WAS UN- REMUNERATIVE OR THAT IN VIEW OF THE CONTINUED LOSS ES SUFFERED BY THE ASSESSEE IN HIS BUSINESS, HE COULD HAVE FARED BETTER HAD HE NOT INCURRED SUCH EXPENDITURE. THESE ARE IRRELEVANT CONSIDERATIONS FOR THE PURPOSE OF RU LE L0B. WHETHER OR NOT TO ENTER INTO THE TRANSACTION IS FOR THE ASSESSEE TO DECIDE. THE QUANTUM OF EXPENDITURE CAN NO DOUBT BE EXAMINED BY THE TPO AS PER LAW BUT IN JUDG ING THE ALLOWABILITY THEREOF AS BUSINESS EXPENDITURE, HE HA S NO AUTHORITY TO DISALLOW THE ENTIRE EXPENDITURE OR A P ART THEREOF ON THE GROUND THAT THE ASSESSEE HAS SUFFERED CONTIN UOUS LOSSES. THE FINANCIAL HEALTH OF ASSESSEE CAN NEVER BE A CRITERION TO JUDGE ALLOWABILITY OF AN EXPENSE; THER E IS CERTAINLY NO AUTHORITY FOR THAT. WHAT THE TPO HAS D ONE IN 11 ITA NO. 1711/HYD/2012 SOCIAL MEDIA INDIA LTD. THE PRESENT CASE IS TO HOLD THAT THE ASSESSEE OUGHT NOT TO HAVE ENTERED INTO THE AGREEMENT TO PAY ROYALTY/ BRA ND FEE, BECAUSE IT HAS BEEN SUFFERING LOSSES CONTINUOUSLY. SO LONG AS THE EXPENDITURE OR PAYMENT HAS BEEN DEMONSTRATED TO HAVE BEEN INCURRED OR LAID OUT FOR THE PURPOSES OF BUSINESS, IT IS NO CONCERN OF THE TPO TO DISALLOW THE SAME ON ANY EXTRANEOUS REASONING. AS PROVIDED IN THE OECD GUIDE LINES, HE IS EXPECTED TO EXAMINE THE INTERNATIONAL TRANSAC TION AS HE ACTUALLY FINDS THE SAME AND SUITABLE ADJUSTMENT BUT A WHOLESALE DISALLOWANCE OF THE EXPENDITURE, PARTICUL ARLY ON THE GROUNDS WHICH HAVE BEEN GIVEN BY THE TPO IS NOT CONTEMPLATED OR AUTHORIZED. 11. THE PRINCIPLES LAID DOWN BY THE HONBLE DELHI H IGH COURT IN THE AFORESAID CASE EQUALLY APPLY TO THE FACTS OF THE CA SE UNDER CONSIDERATION. THE TPO HAS TO EXAMINE THE PRICE P AID BY THE ASSESSEE AND DETERMINE THE ALP UNDER THE PROVISIONS OF TRANSFER PRICING AND ITS RULES. IT DOES NOT AUTHORIZE THE TP O TO DISALLOW ANY EXPENDITURE ON THE GROUND THAT IT WAS NOT NECESSARY OR PRUDENT FOR THE ASSESSEE TO HAVE INCURRED THE SAME NOR ON THE REASO N THAT THE ASSESSEE HAS NOT JUSTIFIED THE BENEFIT PRINCIPLE. FOR THESE REASONS, WE ARE NOT INCLINED TO APPROVE THE ACTION OF TPO/DR P. HOWEVER, SINCE THEY HAVE NOT EXAMINED THAT THIS EXPENDITURE IS ONLY REIMBURSEMENT OF EXPENDITURE. IN ORDER TO EXAMINE T HIS ASPECT, WE DIRECT THE AO TO EXAMINE THE NATURE OF EXPENDITURE AND IF THE AMOUNT IS ONLY REIMBURSEMENT PAID THROUGH AE TO THIRD PART Y FOR THEIR SERVICES, WE DIRECT THE AO TO ALLOW THE EXPENDITURE AS CLAIMED AFTER DUE VERIFICATION. WITH THESE DIRECTIONS THE ORDERS OF THE TPO AND DRP ON THE ISSUE ARE SET ASIDE AND EXAMINATION OF T HE EXPENDITURE/CLAIM OF REIMBURSEMENT IS RESTORED TO T HE FILE OF THE AO. THE GROUNDS 5 TO 7 RAISED ON THIS ISSUE ARE ALLOWE D FOR STATISTICAL PURPOSES. 12 ITA NO. 1711/HYD/2012 SOCIAL MEDIA INDIA LTD. 12. IN THE RESULT, APPEAL OF THE ASSESSEE IS ALLOWE D FOR STATISTICAL PURPOSES. PRONOUNCED IN THE OPEN COURT ON 04-10-2013. SD/- SD/- (SAKTIJIT DEY) (B. R AMAKOTAIAH) JUDICIAL MEMBER ACCOUNT ANT MEMBER HYDERABAD, DATED: 4 TH OCTOBER, 2013. KV COPY TO:- 1) M/S SOCIAL MEDIA INDIA LTD., C/O PRASAD & PRASAD , CAS., FLAT NO. 301, MJ TOWERS, 8-2-698, ROAD NO. 12, BANJARA H ILLS, HYDERABAD 500 034. 2) ACIT, CIRCLE 3(2), HYDERABAD. 3) DRP, HYDERABAD. 4) DIT INTERNATIONAL TAXATION, HYDERABAD 5) THE DEPARTMENTAL REPRESENTATIVE, I.T.A.T ., HYDERABAD.