M/s. AT & T Global Network Services (India) Pvt. Ltd., Gurgaon V. DCIT, New Delhi

ITA 2538/DEL/2014

• Counselvise Citation: [2017] 127 COUNSELVISE.COM (IT) 4438 (ITAT-DELHI)
• Duration Of Justice: 3 year(s) 4 month(s) 23 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 18-09-2017
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: I2
• Next Hearing Date: 19-07-2016
• Assessment Year: 2009-2010
• Appeal Filed On: 25-04-2014
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Keywords: Related party transaction; Capital asset; Depreciation; Transfer pricing; Business expenditure; Rectification of order; Opportunity of being heard; Principle of natural justice; International transaction; Additional evidence; Cost of acquisition; Initiation of penalty proceedings; Fair market value; Commercial expediency; Revised return; Revenue expenditure; Capital expenditure
• Section: 143(3); 142(1); 234B; 10B; 32; 69; 28; 154

Judgement Text

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 | P A G E 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 (INDIA) PVT LTD., VATIKA LOK - 1, BLOCK - A, GURGAON PAN:AAFCA8810L VS. DCIT, CIRCLE - 2(1), NEW DELHI (APPELLANT) (RESPONDENT) ITA NO. 2518/DEL/2015 (ASSESSMENT YEAR: 2009 - 10) DCIT, CIRCLE - 2(1), NEW DELHI VS. AT & T GLOBAL NETWORK SERVICES (INDIA) PVT LTD., 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 T M SHIVKUMAR, CIT DR DATE OF HEARING 06 /07/2017 DATE OF PRONOUNCEMENT 1 8 /09/2017 O R D E R PER PRASHANT MAHARISHI, A. M. 1. ASSESSEE FILED APPEAL NO 2538/DEL/2014 AGAINST THE ORDER OF DEPUTY COMMISSIONER OF INCOME TAX, CIRCLE - 2(1), 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 2 | P A G E HEREINAFTER REFERRED TO AS THE LD AO ] P ASSED 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 D ISPUTE 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 H AS 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. FINA NCIAL 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 N O. 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 FO R 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 FI LED 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. 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 | P A G E 3. GROUN D 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 INCU RRED 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 LEARNE D 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 SERV ICES 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 F ROM 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 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 4 | P A G E 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 200 9 - 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 L EARNED 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 FA CTS 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 APPELL ANT 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 A SSOCIATED 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. 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 | P A G E 8.4 THE LEARNED TPO/ AO/ DRP HAVE ERRED IN DISREGARDING THE ELABORATE DOCUMENTARY EVIDENCE SUBMITTED AS PART OF ASSESSMENT PROCEEDINGS TO ERRONEOUSLY ASSUME TH AT '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 COUR SE 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 EN HANCING 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 CIR CUMSTANCES 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/ - . 5. 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. I T ALSO PROVIDES ENTERPRISE MOBILITY, HOSTING, SECURITY AND BUSINESS CONTINUITY SOLUTIONS. ADDITIONALLY, IT OFFERS VARIOUS TYPES OF NETWORKING EXCHANGE, CONSULTING, AND INTEGRATION SOLUTIONS. 6. FOR THE YEAR, THE ASSESSEE FILED ITS ORIGINAL RETURN OF INCOME O N SEPTEMBER 30, 2009 DECLARING INCOME OF RS 19.39 CRORES. LATER ON, IT 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 6 | P A G E 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 I NCOME 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 ARMS LENGTH PRICE OF INTERNATIONAL TRANSACTIONS ENTERED INTO BY THE ASSESSEE WITH ITS ASSOCIATE ENTERPRISES. THE TRANSFER PRICING OFFICER PASSED OR DER U/S 92CA(3) OF THE ACT ON 24.01.2013 PROPOSING ADJUSTMENT. 7. THE AO INCORPORATING THE TRANSFER PRICING ADJUSTMENTS PASSED A DRAFT ASSESSMENT ORDER U/S 144C OF THE INCOME TAX ACT ON 11.03.2013 WHEREBY THE TOTAL INCOME WAS DETERMINED AT RS. 95,72,59,660/ - . 8. THE ASSESSEE FILED ITS OBJECTION BEFORE THE DISPUTE RESOLUTION PANEL WHO ISSUED DIRECTION U/S 144C ( 5) ON 30.12.2013. SUBSEQUENTLY, THE LD. AO ISSUED THE FINAL ASSESSMENT ORDER WHEREIN HE COMPUTED THE TOTAL INCOME OF THE APPELLANT AT RS. 80,39,91,690. P URSUANT TO RECTIFICATION APPLICATION FILED BY THE APPLICANT, THE LD. AO PASSED AN ORDER U/S 154 DATED 22.07.2014 . 9. FOLLOWING ADDITIONS/ ADJUSTMENTS WERE PROPOSED WHICH ARE CONTESTED BY THE RIVAL PARTIES IN THESE APPEALS : ADDITIONS AMOUNT RETURNED INCOME 30,58,21,372 FOREIGN EXCHANGE FLUCTUATION LOSS 65,28,578 INTEREST COST CAPITALIZATION 4,54,131 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 7 | P A G E 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 10. THEREFORE , ASSESSEE AGGRIEVED WITH THE ORDER PASSED BY THE ASSESSING OFFICER U/S 143(3) R.W.S 144C OF THE INCOME TAX ACT HAS PREFERRED APPEAL BEFORE US IN ITA NO. 2538/DEL/2014. 11. NOW WE FIRST COME TO THE APPEAL OF THE ASSESSEE IN ITA NO. 2538/DEL/2014. GROUND NO. 1 DOUBLE ADDITION ON ACCOUNT OF INCOME SUO MOTO OFFERED TO TAX IN THE REVISED RETURN OF INCOME GROUND NO. 2 DOUBLE DISALLOWANCE ON ACCOUNT OF EXCESS DEPRECIATION CLAIMED SUO MOTO WITHDRAWN IN THE REVISED RETURN OF INCOME 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 | P A G E 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 INFRUCT U OUS . 13. GROUND NO. 3 OF THE APPEAL OF ASSESSEE IS WITH RESPECT TO THE DISALLOWANCE OF INTEREST EXPENSES INCURRED ON EXTERNAL COMMERCIAL BORROWINGS. THE APPELLANT COMPANY HAD ENTERED INTO ECB LOAN FACILITY AGREEMENT WITH ITS HOLDING COMPANY I.E. AT & T GLOBAL NETW ORK HOLDINGS LLC TO AVAIL ECBS. THE BORROWINGS MADE WERE UTILIZED FOR PROCUREMENT OF CAPITAL GOODS, WHICH WERE USED BY THE APPELLANT IN THE COURSE OF ITS BUSINESS. DURING THE F.Y. 2008 - 09, THE APPELLANT CLAIMED INTEREST EXPENSE OF RS. 1,30,69,098 ON ACCOU NT OF INTEREST ON ECBS AVAILED FROM ITS HOLDING COMPANY. OF THIS INTEREST EXPENSE, AN AMOUNT OF RS. 1,26,14,967 WAS INCURRED ON ECBS OUTSTANDING AT THE BEGINNING OF THE YEAR AND THE BALANCE INTEREST EXPENSE OF RS. 4,54,131 WAS INCURRED ON ECBS AVAILED DURI NG THE YEAR. THE LD AO DISALLOWED THE INTEREST EXPENSE OF RS. 4,54,131 INCURRED TOWARDS ECBS AVAILED DURING THE YEAR BY INVOKING THE PROVISO TO SECTION 36(1)(III) OF THE ACT. THE AO OBSERVED THAT THE ECBS HAVE BEEN UTILIZED FOR ACQUISITION OF CAPITAL ASSE TS, AND THUS THE INTEREST INCURRED TILL THE DATE SUCH ASSETS HAVE BEEN PUT TO USE SHOULD BE DISALLOWED. THE AO WHILE DISALLOWING THE EXPENDITURE RELIED ON THE CASE OF BREEZE CONSTRUCTIONS (P.) LTD VS ITO, WARD 3(1) [ITA NO. 4779 OF 2011]. REASONS FOR DISA LLOWANCE BY THE LD AO ARE AS UNDER: - 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 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 9 | P A G E 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. 3 7, 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 BOR ROWED 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 INSER TED 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 BORROWE D 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 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 10 | P A G E 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 CA NNOT BE APPLIED IN THE INSTANT CASE. FURTHER THE HONBLE 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 CLE AR 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 A CQUIRED 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 N OT 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 CO NSTRUCTIONS (P.) LTD. V. INCOME - TAX OFFICER, WARD 3(1) IN IT APPEAL NO. 4779 (DELHI) O F 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 3 6(1)(III) CANNOT BE APPLIED IN THE CASE OF THE ASSESSEE, AS THERE WAS NO EXTENSION OF EXISTING BUSINESS IN THE ASSESSEES CASE. THE HONBLE BENCH HELD THAT: 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 11 | P A G E INTEREST PAID, IN RESPECT OF CAPITAL BORROWED FOR ACQUISITION OF AN ASSET FOR EXTENSION OF EXISTI NG 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 ORD ER 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 ASSESSEES ASE AS THERE WAS NO EXTENSION IN THE EXISTING BUSINESS OF THE ASSESSEES 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 SECT ION 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 BOR ROWED 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 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 | P A G E 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 PERI OD 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 ASSESSEES 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 ASSESSEES 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 T O 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 ASSE TS DURING THE YEAR AMOUNTS TO EXTENSION OF BUSINESS AND IN 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 13 | P A G E 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 DOESNT 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 A ND HENCE CANT 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 TABUL ATED 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 HA S CLAIMED THAT EXTENSION 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 14 | P A G E 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 TIL L 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 H AVE 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 TH E 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 AVAI LABLE 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 AS SESSEE 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 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 | P A G E SEPARATELY FOR FILING INACCURATE PARTICULARS OF INCOME AND THEREBY CONCEALING INCOME CHARGEABLE TO TAX. 14. A SSESSEE 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 ASSESSM ENT 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 BUSI NESS. 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 7 TH 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 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 16 | P A G E 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 PROVIS O 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 R UNS 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 HAV E 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 U SE 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. 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 17 | P A G E 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 : [PROVID ED 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 C APITAL 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 EXTENS ION 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 F ACT. 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 A SSESSEE HAS EXTENDED ITS OPERATIONS FROM THE PRESENT ACTIVITY TO ANOTHER ACTIVITY'. 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 18 | P A G E 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 EQUIPMEN T 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 TH E ACT HAS NO APPLICABILITY TO APPELLANTS CASE. 1.14 IN THIS REGARD, RELIANCE IS ALSO PLACED ON THE DECISION OF THE HONBLE 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 DI STINCTION 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 PH OSPHOROUS LIMITED (299 ITR 9). 1.15 WITH RESPECT TO THE DECISION OF THE DELHI BENCH OF THE HONBLE 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 W ITH 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 H OTEL. HOWEVER, THE OTHER APPROVALS AND INFRASTRUCTURE REQUIRED FOR THE CONSTRUCTION WERE NOT IN PLACE AT THE TIME OF CLAIMING SUCH EXPENDITURE, AND THUS THE TAXPAYERS CONSTRUCTION BUSINESS ITSELF HAD NOT COMMENCED. THE AFORESAID CASE DOES NOT DEAL WITH TH E 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 THE REOF 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. 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 19 | P A G E 1.16 FURTHER, THE FINANCE ACT, 2015 HAS REMOVED THE DISTINCTION IN ALLOWABILITY OF INTEREST IN CASE OF EXISTING BU SINESS 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 DIST INCTION 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 LEGISLA TURE WOULD NOT HAVE SOUGHT TO AMEND THE LAW TO REMOVE SUCH DISCREPANCY. FURTHER, THE APPELLANTS 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 CAPITAL IZED AND DEPRECIATION UNDER SECTION 32 OF THE ACT SHOULD BE ALLOWED THEREON. 16. THE LD DR RELIED UP ON THE ORDERS OF THE LD AO AND DIRECTION OF LD DRP. 17. WE HAVE CAREFULLY CONSIDERED THE RIVAL CONTENTIONS AND ALSO PERUSED THE FACTS OF THE CASE. P ROVISION OF SECTION 36(1)(III) IS REPRODUCED HEREAFTER: 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 ACQUI SITION 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 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 20 | P A G E ASSET TILL THE DATE ON WHICH SUCH ASSE T WAS FIRST PUT TO USE, SHALL NOT BE ALLOWED AS DEDUCTION.] 18. UNDISPUTEDLY ASSESSEE IS ENGAGED IN TELECOMMUNICATION BUSINESS. IT HAS COMMENCED ITS BUSINESS OPERATION ON APRIL 07, 2007. THE PRESENT SITUATION DEALS WITH THE CASE WHERE IN THE ASSESSEE HAS PUR CHASED CAPITAL GOODS FOR ITS EXISTING TELECOMMUNICATION BUSINESS. THE QUESTION THAT ARISES FOR CONSIDERATION HERE IS THAT WHETHER THE PROVISO TO SECTION 36(1)(III) WHICH DISALLOWS THE INTEREST PAID ON ACQUISITION OF AN ASSET FOR EXTENSION OF EXISTING BUSI NESS IS APPLICABLE TO THE PRESENT CASE OR NOT. IN THE PRESENT CASE, WHETHER THE ASSETS WERE ACQUIRED FOR EXTENSION OF BUSINESS OR NOT. THE WORD EXTENSION HAS NOT BEEN DEFINED IN THE INCOME - TAX ACT, 1961 AND ONE HAS TO RESORT TO THE POPULAR MEANING OF THE TERM. THE DICTIONARY MEANING OF THE WORD EXTEND IS A PART THAT IS ADDED TO SOMETHING TO ENLARGE OR PROLONG IT, ADDITION, ADD - ON, ADJUNCT, ADDENDUM, AUGMENTATION, SUPPLEMENT, APPENDAGE, APPENDIX; ANNEXE, SUPPLEMENTARY ETC. THE ASSESSEE SUBMITTED THAT THE ASSETS HAVE BEEN ACQUIRED ONLY IN CONNECTION WITH ITS EXISTING TELECOMMUNICATION BUSINESS. IN OUR VIEW, THERE IS A VERY THIN LINE OF DEMARCATION BETWEEN THE TERM EXPANSION AND EXTENSION, WHICH CAN BE DIFFERENTIATED BASIS THE FACTS AND EVIDENCES BROUGHT ON RECORD. NEITHER THE LD AO OR THE LD DRP HAS BROUGHT ANY EVIDENCE ON FACTS TO SUGGEST THAT THERE WAS AN EXTENSION OF BUSINESS DURING THE YEAR UNDER CONSIDERATION AND THE INTEREST PAID SHOULD BE DISALLOWED U/S 36(1)(III) OF THE ACT. FURTHER, THE ASSESSEE AL SO DISTINGUISHED THE DECISIONS RELIED UPON BY THE LOWER AUTHORITIES ON FACTS OF THE PRESENT CASE. WHILE ARRIVING AT THE ABOVE FINDING WE ALSO DRAW SUPPORT FROM THE DECISION OF HONBLE SUPREME COURT IN THE CASE OF DCIT VS. GUJARAT ALKALIES & CHEMICALS LTD. [2008] 299 ITR 85 (SC) CITED BY THE LD. AR WHEREIN IT WAS HELD THAT EXTENSION IMPLIES STARTING OF A NEW BUSINESS ACTIVITY. KEEPING IN VIEW THE ABOVE SAID MEANING WE ARE OF THE VIEW THAT THE TELECOM EQUIPMENT PURCHASED BY THE APPELLANT USING THE ECB LOAN S WAS FOR CONTINUATION OF THE EXISTING BUSINESS 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 21 | P A G E 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 ALLO WED. 19. GROUND NO. 4 OF THE APPEAL OF THE ASSESSEE IS REGARDING DISALLOWANCE OF EXPENSES OF CAPITAL NATURE CLAIMED AS REVENUE EXPENDITURE. DURING THE YEAR UNDER CONSIDERATION, AN INVOICE OF USD 87,724 WAS ISSUED BY NARUS INC. (VENDOR) FOR 25% VALUE OF THE P URCHASE ORDER PER AGREEMENT ON ACCOUNT OF ADDITIONAL IMPLEMENTATION SERVICE FOR INDIA INTERNATIONAL LONG DISTANCE (ILD) LAWFUL INTERCEPT (LI) PROJECT. SIMILARLY, INVOICES FOR USD 5,11,480 AND USD 92,750 RAISED BY NARUS ALSO PERTAIN TO LI PROJECT. THE L D AO OBSERVED THAT SINCE THESE SERVICES ARE FOR INTERNATIONAL LONG DISTANCE LAWFUL INTERCEPT PROJECT, THEY WOULD BE CAPITAL IN NATURE. ACCORDINGLY, THE PAYMENT MADE TO NARUS INC. OF RS. 3,47,45,337 WAS PROPOSED TO BE DISALLOWED BY GIVING FOLLOWING REASON I N THE DRAFT ASSESSMENT ORDER: - 10.1 WHILE PERUSING THE DETAILS AND CORRESPONDING INVOICES SUBMITTED BY THE ASSESSEE WITH RESPECT TO PROFESSIONAL SERVICE CHARGES OF RS 3,53,74,879 BEING IN THE NATURE OF EXPENSES PULLED IN MARCH, 2009 (DISCUSSED IN POINT 11 ABOVE), IT WAS OBSERVED THAT 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 A GREEMENT 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 PR OVIDER) 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 27.02.20 13 WAS ASKED TO FURNISH ITS REPLY IN THIS REGARD. IN RESPONSE TO THE SAME, THE 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 22 | P A G E 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 THE ABOVE DISCUSSION, SINCE T HE AFORESAID PAYMENTS MADE TO NARUS INC, ARE TOWARDS IMPLEMENTATION OF A PROJECT, WHICH SHOULD HAVE BEEN CAPITALIZED BUT HAVE BEEN INCORRECTLY CLAIMED AS REVENUE EXPENSE, THE ABOVE PAYMENTS (AMOUNTING IN TO RS 3,47,45,337) ARE BEING DISALLOWED. PENALTY PRO CEEDINGS U/S 271(1)(C) ARE INITIATED SEPARATELY FOR FILING INACCURATE PARTICULARS OF INCOME AND THEREBY CONCEALING INCOME CHARGEABLE TO TAX. 20. ON OBJECTION BEFORE LD DRP WHO VIDE DIRECTION DATED 30.12.2013 VIDE PARA NO. 11 HAS HELD AS UNDER: 11.1 THIS G ROUND 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 EQUIPM ENT 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 EX PENSES 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 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 23 | P A G E 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 EXPENDI TURE 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 . 21. THE LD AR PUT FORTH THE FOLLOWING ARGUMENTS: 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. T HE 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 CAP ITAL EXPENDITURE. WITHOUT PREJUDICE TO THE ABOVE, IT IS SUBMITTED THAT IN CASE THE HONBLE 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. 22. THE LD DR RELIED UP ON THE ORDERS OF THE LD AO AS WELL AS THE DIRECTIONS OF LD DRP AND ALSO AGREED THAT ON ALTERNATIVE CONTENTION OF THE 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 24 | P A G E 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 GRA NT 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 ASSE SSEE IS ALLOWED ON ALTERNATIVE ARGUMENTS WITH ABOVE DIRECTIONS. 24. GROUND NO. 5 OF THE APPEAL OF THE ASSESSEE IS REGARDING DISALLOWANCE OF INTEREST INCURRED ON SHORT TERM LOANS. DURING THE FINANCIAL YEAR, THE APPELLANT HAD TAKEN A WORKING CAPITAL LOAN OF RS. 80,77,12,489 FROM CITIBANK, WHICH WAS UTILIZED BY THE APPELLANT FOR THE PURPOSE OF ITS BUSINESS ACTIVITIES. FU RTHER, INTEREST EXPENSE OF RS. 77,76,965 WAS INCURRED ON SUCH LOANS WHICH WAS CLAIMED AS AN EXPENSE IN THE RETURN OF INCOME FOR THE AY 2009 - 10. BASIS THE CASH FLOW STATEMENT, THE LD AO HELD THAT THE ENTIRE SHORT TERM LOAN OF RS. 807, 71, 24, 891 HAS BEEN UTILIZED FOR THE PURPOSE OF INVESTMENT IN FIXED ASSETS OF THE COMPANY. PARTICULARS AMOUNT (RS.) NET CASH GENERATED FROM OPERATING ACTIVITIES 522,668,903 - NET CASH GENERATED FROM FINANCIAL ACTIVITIES 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 25 | P A G E ACTIVITIES INTEREST PAID (142,463,029/ - ) EXTERNAL COMMERCIAL BORROWINGS 202,300,000L - 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 (EXCLUDING CLOSING CASH IN HAND) 1,023,603,3391 - NET CASH USED IN INVESTING ACTIVITIES 1,144,803,090/ - 25. FURTHER, THE AO HAS REJECTED THE ARGUMENT OF THE ASSESSEE THAT CAPTIONED LOAN FUNDS WERE USED FOR BOTH WORKING CAPITAL REQUIREMENTS AS WELL AS FOR PURCHASE FIXED ASSETS BY HOLDING THAT THE CASH FLOW STATEMENT MAKES IT CLEAR THAT THE ENTIRE FUNDING OF CAPITAL EXPENDITURES WAS DONE FROM BORROWED FUNDS. THE ENTIRE INTEREST EXPENDITURE OF RS. 77 LACS WAS DISALLOWED BY HOLDING THAT THE ASSESSEE HAS NOT SUBMITTED T HE DETAILS OF ASSETS BEING PUT TO USE. THE RELEVANT FINDING OF THE LD. AO PROPOSED IN THE DRAFT ASSESSMENT ORDER IS GIVEN BELOW: 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 HONBLE 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 OPER ATIONS HOWEVER NO DETAILS FOR THE SAME WERE 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 26 | P A G E 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 ASS ETS. 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 A SSETS 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. 26. THE ASSESSEE PREFERRED OBJECTION BEFORE THE DISPUTE RESOLUTION PANEL WHO VIDE DIRECTION DATED 30.12.2013 VIDE PARA NO. 12.3 HAS HELD AS UNDER: 12.3 THE ISSUE HAS BEEN CONSIDERED BY THE PANEL. IN T HE 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 EX TENSION 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 TH E 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 DISALLOWED IS CONCERNED, THE CLAIM OF THE TAXPAYER HAS BEEN THAT RS. 84.60 CRORES WAS AVAILABLE TO IT AS FREE CASH FOR INVESTMENT INTO THE FIXED ASSETS. T HIS SUM IS COMPUTED 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, 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 27 | P A G E REPAYMENTS/PROCEEDS OF THE SHORT TERM LOANS, REPAYMENT OF SECURE LOAN ETC. ACCORDING TO THE ANNUAL ACCOU NTS 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 / - . 27. T HE CONTENTIONS OF AR ARE SIMILAR TO AS RAISE D IN SUPPORT OF GROUND NO. 3 ABOVE REGARDING DISALLOWANCE OF INTEREST ON EXTERNAL COMMERCIAL BORROWINGS. THEREFORE FOR THE SAKE OF BREVITY, THE CONTENTIONS HAVE NOT BEEN REPRODUCED HERE. 28. BEFORE US, THE LD. DR RELIED UPON FINDING OF THE LOWER AUTHORITIES. 29. S INCE IN GROUND NO. 3 ABOVE, WE HAVE ALREADY HELD THAT THERE HAS BEEN NO EXTENSION OF EXISTING BUSINESS, THE PROVISO TO SECTION 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 28 | P A G E 36(1)(III) IS NOT APPLICABLE IN THE FACTS OF THE PRESENT CASE. HENCE, THE ABOVE FINDING WOULD SQUARELY APPLY TO THE PRESENT GROUN D ALSO. IN THE RESULT THE SAID GROUND NO 5 OF THE APPEAL OF THE ASSESSEE IS ALLOWED. 30. GROUND NO. 6 OF THE APPEAL OF THE ASSESSEE IS REGARDING DISALLOWANCE OF CIRCUIT ACCRUALS. DURING THE YEAR UNDER CONSIDERATION, CIRCUIT CHARGES AGGREGATING TO RS. 192.22 CRORES (RS. 135.17 CRORES TOWARDS INFRASTRUCTURE COST AND RS. 57.05 CRORES TOWARDS LAST MILE CHARGES FOR SERVICES PROVIDED BY OTHER TELECOM OPERATORS) WERE INCURRED. INFRASTRUCTURE COST REPRESENTS BANDWIDTH CHARGES PAID TO OTHER TELECOM OPERATORS FOR PROVISION OF BANDWIDTH REQUIRED FOR TRANSMISSION OF DATA. LAST MILE CHARGES REPRESENT CHARGE S PAID TO OTHER TELECOM OPERATORS TOWARDS PROVISION OF TELECOM CONNECTIVITY SERVICES OVER THE LAST LEG OF COMMUNICATION I.E. FROM THE CUSTOMERS PREMISES TO POINT OF PRESENCE OF AGNS AND VICE - VERSA. AS PART OF THE MONTH - END ACCOUNTING PROCESS, THE APPELLAN T 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 INCLUDE EXPENSES INCURRED IN RELATION TO THE SERVICES RENDER ED DURING THE RELEVANT FINANCIAL YEAR, ESTIMATED ON A REASONABLE AND SCIENTIFIC BASIS, FOR WHICH BILLS/INVOICES ARE NOT RECEIVED DURING THE YEAR. AS A PRACTICE, ACCRUALS FOR A PARTICULAR MONTH ARE REVERSED IN THE SUCCEEDING MONTH WHEN FRESH ACCRUALS FOR TH E PERIOD BEGINNING FROM THE START OF THE YEAR TILL SUCH MONTH ARE MADE. DURING THE COURSE OF ASSESSMENT, IT WAS NOTICED FROM THE LEDGER ACCOUNTS SUBMITTED BY THE ASSESSEE THAT A LOT OF REVERSAL ENTRIES WERE PASSED IN THE AFORESAID LEDGERS. THE ASSESSEE WA S ASKED TO PRODUCE COMPLETE BOOKS OF ACCOUNTS ALONG WITH SUBSTANTIATING INVOICES AND VOUCHERS IN RESPECT OF INFRASTRUCTURE COST AND LAST MILE CHARGES. THE AO PROPOSED 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 29 | P A G E 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 BE EN 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 ASSESSE E 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 CLEA R 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 UP ON 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 CUR RENT ASSESSMENT YEAR. IN THIS REGARD, THE 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 30 | P A G E 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, VI DE 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 ASSE SSMENT 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 PROCEED INGS U/S 271(1)(C) ARE INITIATED SEPARATELY FOR FILING INACCURATE PARTICULARS OF INCOME AND THEREBY CONCEALING INCOME CHARGEABLE TO TAX. 31. THE ASSESSEE PREFERRED OBJECTION BEFORE THE DISPUTE RESOLUTION PANEL AND FURTHER SUBMITS INVOICES AGGREGATING TO RS. 1.97 CRORES BY WAY OF ADDITIONAL EVIDENCE. THE LD. DISPUTE RESOLUTION PANEL VIDE DIRECTION DATED 30.12.2013 VIDE PARA NO. 9.3 HAS HELD AS UNDER: 9.3.1 THE PANEL HAS PERUSED THE DRAFT ORDER AND THE SUBMISSIONS MADE BY THE TAXPAYER. THE DISALLOWANCE PROPOSE D BY THE AO IS FOR RS. 20.63 CRORES. OUT OF IT, THE AO HAS HIMSELF MENTIONED IN THE DRAFT ASSESSMENT ORDER THAT THE TAXPAYER PRODUCED INVOICES FOR RS.15.10 CRORES. BEFORE THE PANEL, THE TAXPAYER HAS SUBMITTED SOME MORE 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 31 | P A G E INVOICES AGGREGATING TO RS.1.97 CRORE S 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 AD DITION. 9.3.2 CONSIDERING THE FACTS AND CIRCUMSTANCES OF THE CASE, THE PANEL DIRECTS AS UNDER: (I) TO THE TAXPAYER: THE TAXPAYER IS DIRECTED TO SUBMIT COPY 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. (II) TO THE AO: THE AO IS DIRECTED TO: (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 BANDWI DTH 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 DEDUC TION 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. 32. AS PER DIRECTIONS OF DRP, THE ASSESSEE COMPANY WAS PROVIDED OPPORTUNITIES VIDE NOTICE U/S 142(1) OF THE I.T ACT, 1961 DATED 10.02.2014 TO BRING DOCUMENTARY EVIDENCE IN SUPPORT OF ITS CLAIM AND TO VERIFY THE GENUINENESS OF THE CLAIM . THE LD AR OF THE ASSESSEE COMPANY SUBMITTED ITS REPLY VIDE LETTER DATED 14.02.2014 AND DETAILS 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 32 | P A G E OF ADDITIONAL INVOICES ALONG WITH COPY OF INVOICES WERE PRODUCED AND VERIFIED. ON VERIFICATION IT WAS FO UND 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 EVI DENCES SUBMITTED THE ASSESSEE WAS GRANTED PARTIAL RELIEF. 33. BEFORE US, THE LD DR RELIED UPON THE FINDINGS OF THE LOWER AUTHORITIES WHEREAS THE AR PUT FORTH THE FOLLOWING CONTENTIONS: 4.3 INFRASTRUCTURE COST REPRESENTS BANDWIDTH CHARGES PAID TO OTHER TELECOM OP ERATORS 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 CUSTOMERS PREMISE S 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 B ETWEEN 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 REN DERED 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 FO R 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 EN D 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 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 33 | P A G E CONNECTION WITH THE CIRCUIT ACCRUALS. IN LIGHT OF THE ABOVE THE FACTS ARE SUBMITTED AS UNDER: CIRCUIT CHARGES B ACKGROUND 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 CUSTOMERS 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 FL OW 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 INTER FACE 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 S OFTWARE); 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 34 | P A G E 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), EX PECTED 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 PROCES S 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 TAR IFF CODE - INVOICE COST IS NOT VARYING MORE THAN USD 100 VIS - - 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 / RE SOLVED 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 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 35 | P A G E 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 AGAI NST 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: 4.8 A COMPUTA 4.9 DETAIL OF THE CIRCUIT ACCRUALS DISALLOWED IN THE FINAL ASSESSMENT ORDER IS AS UNDER: DISALLOWANCE IN TH E DRAFT ORDER RS. 19.91 CRORES TOTAL EXPENSE RS. 1 92. 22 CRORES ACTUAL PAYMENT = RS. 172.30 CRORES ACCRUALS FOR WHICH BILLS / EVIDENCES FOR REVERSALS SUBMITTED TO AO = RS. 15.10 CRORES ACCRUALS FOR WHICH NO BILLS / EVIDENCES FOR REVERSALS COULD BE SUBMITTED = RS. 2.87 CRORES (14% OF TOTAL ACCRUALS) ADDITIONAL EVIDENCE FILED BEFORE DRP AND RELIEF GRANTED = RS. 1 . 9 4 CRORE ACCRUALS BOOKED = RS. 19.92 CRORES 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 | P A G E 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 Y EAR 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. COM MISSIONER 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 COMPLIA NCE 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 TOWA RDS 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 E VIDENCE 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 REGAR D 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 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 37 | P A G E 34. WE HAVE CAREFULLY CONSIDER ED THE RIVAL CONTENTIONS AND PERUSED THE ORDER OF THE LD TPO/ AO/ DRP . THE ASSESSEE HAS EXPLAINED THE BASIS OF CREATING THE PROVISIONS FOR CIRCUIT ACCRUALS, WHICH IS CALCULATED AUTOMATICALLY AND SCIENTIFICALLY BY THE SOFTWARE. AS SUBMITTED ASSESSEE HAS B EEN FOLLOW ED THIS BASIS ON A GLOBAL BASIS. AS EXPLAINED BY THE APPELLANT, THE PROCESS IS SCIENTIFIC IN A WAY THAT AS AND WHEN A REQUEST FOR NEW CIRCUITS IS PLACED BY THE CUSTOMER TO APPELLANT, THE REQUEST IS CREATED IN FAVOUR OF THIRD PARTY VENDOR WHO I N 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). POST SUCH DELIVERY, THE ORDER GETS CLOSE AND THE INVENTORY OF CIRCUIT USAGE IS RECORDED IN GAIM ( GLOBAL ACCESS INVENTORY MANAGEMENT SYSTEM) . 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 CLOS ED, 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 T HE INVOICE/BILL DATA TO THE CIRCUIT INVENTORY AND EXPECTED COSTS. AS GAIM WORKS ON CALENDAR YEAR BASIS I.E. FROM JANUARY TO DECEMBER, THE ACCRUALS FOR THE PERIOD STARTING FROM JANUARY TO MARCH ARE EXCLUDED / ADDED ON PROPORTIONATE BASIS. ASSESSEE FURTHER E XPLAINED THAT 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; 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 38 | P A G E SERVICE PERIOD IS BEFORE CIRCUIT CEASE DATE; INVOICE TARIFF CODE MATCHES ORDER TARIFF CODE INVOICE COST IS NOT VARYING MORE THAN USD 100 VIS - - VIS THE EXPECTED COST INVOICE NUMBER IS UNIQUE FOR VENDOR THE INV OICES 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 CALCU LATE 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 A T 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. 35. WE FIND THAT THE PROCESS EXPLAINED IS ENTIRELY AUTOMATED PROCESS WHICH CAPTURES THE DETAILS VIS - - VIS EACH CIRCUIT, AMOUNT TO BE BOOKED AGAINST EACH CIRCUIT AND THE ACCRUAL TO BE CREATED. FURTHER, ASSESSEE HAS BEEN CREATING THE PROVISION ON AN YEAR ON YEAR BASIS IN ACCORDANCE WITH THE MERCANTILE SYSTEM OF ACCOUNTING IN ACCORDANCE WITH ACCOUNTING STANDARD ISSUED BY THE ICAI OTHERWISE CORRECT EXPENDITURE WOULD NOT BE CAPTURED AS PER THE MATCHING PRINCIPLE. THE ASSESSEE HAS ALSO DEMONSTRATED THROUGH EVIDENCES THAT THE PROVISION SO CREATED IS EITHER REVERSED OR EXPENSED OFF IN THE SUBSEQUENT YEAR. THE ASSESSEE HAS ALSO BEEN ABLE TO SUBMIT EVIDENCES FOR MOST OF THE REVERSALS BEFOR E THE LOWER AUTHORITIES. IT IS ALSO NOT THE CLAIM OF THE REVENUE THAT THE AMOUNT OF PROVISIONING MADE BY THE ASSESSEE IS INCORRECT OR NOT BASED ON PROPER DOCUMENTATION AND ESTIMATIONS. WE ALSO FIND THAT THE LOWER AUTHORITIES ALLOW THE ENTIRE CLAIM OF 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 39 | P A G E EXP ENDITURE 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 HONBLE 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. 36. GROUND NO. 7 OF THE APPEAL OF THE ASSESSEE IS REGARDING DISALLOWANCE OF CREDIT OF ADDITIONAL TDS CERTIFICATES. WE HAVE HEARD THE PARTIES ON THIS ISSUES , BOTH THE PARTIES AGREED THAT IF THE ADDITIONAL TDS CERTIFICATES OF THE ASSESSEE ARE PROPER THEN LD AO MAY VERIFY AND ALLOW THE C LAIM OF THE ASSESSEE IN ACCORDANCE WITH LAW. IN THIS REGARD, THE AO IS DIRECTED TO CHECK THE GENUINENESS OF THE TDS CERTIFICATES AND GIVE CREDIT OF THE SAME IN ACCORDANCE WITH THE PROVISION OF THE INCOME TAX ACT. THIS GROUND NO 7 OF APPEAL IS ALLOWED FOR STATISTICAL PURPOSES. 37. GROUND 8 OF THE APPEAL OF THE ASSESSEE RELATES TO TRANSFER PRICING MATTERS AND ITS SUB GROUND RELATE TO TRANSFER PRICING ADJUSTMENTS MADE IN THE HANDS OF THE ASSESSEE AT INR 34,51,15,661/ - OUT OF WHICH ADDITION ON ACCOUNT OF 25.16 CRORES IS ON ACCOUNT OF INTRA GROUP SERVICES AND 9.34 CRORES IS ON ACCOUNT OF ROYA LTY PAYMENTS. AS 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 40 | P A G E 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, WIRELE SS 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. 38. THE ASSESSEE ENTERED INTO FOLLOWING INTERNATIONAL TRANSACTIONS WITH ITS AE DURING AY 2009 - 10 WHICH ARE STIPULATED BELOW: 1. PROVISION OF NETWORK CONNECTIVITY SERVICES (INR 175.08 CR) CONSIDERED TO BE AT ALP BY TPO; 2. AVAILING OF INTRA GROUP SERVICES (INR 25.16 CR) TPO DETERMINED THE ALP AT INR 5.85 CR WHEREAS DRP DETERMINED THE ALP TO BE NIL; 3. PAYMENT OF ROYALTY (INR 9.34 CR) TPO DETERMINED THE ALP AT NIL WHICH WAS CONFIRMED BY HONBLE DRP; 4. INTEREST PAID ON ECB (INR 0.96 CR) CONSIDERED TO BE AT ALP BY TPO THE ONLY TWO INTERNATIONAL TRANSACTIONS IN DISPUTE ARE INTRA GROUP SERVICES AND PAYMENT OF ROYALTY. 39. THE ASSESSEE EXPLAINED THE SUMMARY OF INTRA GROUP SERVICES AND HOW THE ALP OF EACH SERVICE HAS BEEN DETERMINED BY THE TPO/DRP. BEFORE WE DISCUSS THE ISSUE IT IS IM PORTANT TO UNDERSTAND THE NATURE OF INTRA GROUP SERVICES. THE ASSESSEE SUBMITTED A DETAILED SYNOPSIS GIVING THE NATURE OF SERVICES, THE APPROACH ADOPTED BY THE ASSESSEE, THE BASIS OF 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 41 | P A G E ALLOCATION, AND THE APPROACH ADOPTED BY THE DRP IN DETERMINING THE ALP. 1. THESE SERVICES ARE DISCUSSED IN DETAIL IN SUCCEEDING PARAGRAPHS: A. GLOBAL CUSTOMER SERVICE CENTRE (GCSC) NATURE OF SERVICES 1.10 THE GCSC TEAM IS BASED OUT OF HONG KONG AND SINGAPORE 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 R EGION. 1.11 THE KEY FUNCTIONS PERFORMED BY GCSC IS PRIMARILY DIVIDED 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 TPOS O BSERVATION IN THE TP ORDER: REFER PAGE NO. 221 TO 224 OF THE APPEAL SET 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 42 | P A G E 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 1.12 DURING THE RELEVANT PERIOD, 32 PERCENT OF COST OF THE TEAM 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 1.13 THE COST PAID BY THE APPELLANT FOR GCSC SERVICES WAS BENCHMARKED FOLLOWING AN AGGREGATED APPROAC H USING THE TNMM. 1.14 THE APPELLANT HAD ALSO SUBMITTED A LIST OF THE TICKETS PROCESSED ALONG WITH NATURE OF PROBLEM RESOLVED HAS BEEN SUBMITTED AS EVIDENCE BEFORE THE LD. TPO/HONBLE DRP [REFER PAGE 207 TO PAGE 377 OF PAPERBOOK VOLUME - I]. APPROACH ADOPTED BY THE LD. TPO 1.15 THE LD. TPO REJECTED THE ARMS LENGTH NATURE OF THE 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 AN Y 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. 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 43 | P A G E 1.16 IT IS PERTINENT TO NOTE THAT THE APPROA CH 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 HONBLE DRP THE HONBLE DRP REJECTED THE ARMS 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 1.17 THE SERVICE DELIVERY TEAM IS RESPONSIBLE FOR PROCESSING CUSTOMER ORDERS AND HANDLIN G 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 TESTIN G 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 INTERM EDIARIES BETWEEN CUSTOMER AND CARE. 1.19 THE COST INCURRED BY THE SERVICE DELIVERY AND SERVICE MANAGEMENT TEAM IS ALLOCATED TO AGNS INDIA BASED ON THE NUMBER OF ORDERS PROCESSED FOR AGNS INDIA AS A PERCENT OF 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 44 | P A G E TOTAL NUMBER OF ORDERS PROCESSED FOR ASIA PACIFIC R EGION (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 TPOS 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 1.20 THIS COST HAS BEEN ALLOCATED ON THE BASIS OF NUMBER OF ORDERS PROCESSED FOR INDIA AS PERCENT AGE 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 D ELIVERY AND SERVICE MANAGEMENT IS INR 4.51CR AND INR 1.88CR, RESPECTIVELY. APPROACH ADOPTED BY THE APPELLANT 1.21 THE COST PAID BY THE APPELLANT FOR SERVICE DELIVERY AND SERVICE MANAGEMENT WAS BENCHMARKED FOLLOWING AN AGGREGATED APPROACH USING THE TNMM. APP ROACH ADOPTED BY THE LD. TPO 1.22 THE LD. TPO REJECTED THE ARMS LENGTH NATURE OF THE 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 R UNNING 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 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 45 | P A G E THE AVERAGE COST OF THE SERVICE DELIVERY AND SERVICE MANAGEMENT WHICH SHOULD HAVE BEEN ALLO CATED TO THE APPELLANT. 1.23 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 SCIENTIFI C BASIS. APPROACH ADOPTED BY THE HONBLE DRP THE HONBLE DRP REJECTED THE ARMS 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 1.24 THE GSE TEAM PROVIDES PRE - SALES SUPPORT TO THE GROUP 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. 1.25 THE GSE DIVISIO N IS SPLIT INTO TWO TEAMS, ONE ENGAGED IN 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. 1.26 THE COST OF THE GSE PRICING TEAM IS ALLOCATED TO AGNS 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 TEAMS COST WAS ALLOCATED TO AGNS INDIA. 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 46 | P A G E 1.27 THE COST INCURRED BY GSE PRE - SALES TEAM IS ALLOCATED TO 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 P AGE NO. 162 AND 163 OF PAPER BOOK VOL - I TPOS 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 1.28 THE COST INCURRED BY TECHNICAL ASSESSMENT TEAM IS 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 I NDIA. DURING THE RELEVANT PERIOD, THE AMOUNT ALLOCATED TO AGNS INDIA FOR GSE IS INR 1.46 CR. APPROACH ADOPTED BY THE APPELLANT 1.29 THE COST PAID BY THE APPELLANT FOR GSE WAS BENCHMARKED FOLLOWING AN AGGREGATED APPROACH USING THE TNMM. 1.30 THE APPELLANT HAD ALSO SUBMITTED A SAMPLE LIST OF THE 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/HONBLE DRP [REFER PAGE 378 TO 383 OF PAPERBOOK VOLUME - I]. APPROACH ADOPTED BY THE LD. TPO 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 47 | P A G E 1.31 THE LD. TPO REJECTED THE ARMS LENGTH NATURE OF THE 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 I S 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 HONBLE DRP THE HONBLE DRP REJECTED THE ARMS LENGTH NATURE OF THE AFORESAID TRANSACTION ON AN ARBITRARY BASIS AND HELD THE ALP TO BE NIL D. COUNTRY SERVICES NATURE OF SERVICES 1.33 THE COUNTRY SERVICES TEAM IS A CROSS FUNCTIONAL TEAM 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 A ND LIFE CYCLE MANAGEMENT OF AGN NODES. 1.34 THE COST OF COUNTRY SERVICES TEAM IS ALLOCATED TO AGNS 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 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 48 | P A G E TPOS OBSERVATI ON 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 1.35 THIS COST HAS BEEN ALLOCATED ON THE BASIS OF PERCENTAGE OF TI ME 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 1.36 THE COST PAID BY THE APPELLANT FOR COUNTRY SERVICES WAS BENCHMARKED FOLLOWING AN AGGREGATED APPR OACH USING THE TNMM. APPROACH ADOPTED BY THE LD. TPO 1.37 THE LD. TPO REJECTED THE ARMS LENGTH NATURE OF THE AFORESAID TRANSACTION IN AN ARBITRARY MANNER AND DETERMINED THE ALP AS NIL. 1.38 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 HONBLE DRP THE HONBLE DRP REJECTED THE ARMS LENGTH NATUR E OF THE AFORESAID TRANSACTION ON AN ARBITRARY BASIS AND HELD THE ALP TO BE 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 49 | P A G E E. IT SERVICES NATURE OF SERVICES 1.39 THE IT TEAM PROVIDES INTERNAL IT SUPPORT FUNCTION 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 TPOS 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 1.40 THIS COST HAS BEEN ALLOCATED ON THE BASIS OF NUMBER OF IT USERS IN INDIA AS PERCENTAGE OF NO. OF IT USERS IN ASIA 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 | P A G E PACIFIC (EXCL JAPAN). THE A MOUNT ALLOCATED TO AGNSI DURING THE RELEVANT PERIOD IS INR 1.20 CR. APPROACH ADOPTED BY THE APPELLANT 1.41 THE COST PAID BY THE APPELLANT FOR IT SERVICES WAS BENCHMARKED FOLLOWING AN AGGREGATED APPROACH USING THE TNMM. 1.42 THE APPELLANT HAD ALSO SUBMITTED A LIST OF IT INCIDENTS AND 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/HONBLE DRP. [ REFER PAGE 383 TO 413 AND PAGE 416 TO 423, RESPECTIVELY OF PAPER BOOK VOLUME - I]. APPROACH ADOPTED BY THE LD. TPO 1.43 THE LD. TPO REJECTED THE ARMS LENGTH NATURE IF THE 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 HONBLE DRP THE HONBLE DRP REJECTED THE ARMS LENGTH NATURE OF THE A FORESAID TRANSACTION ON AN ARBITRARY BASIS AND HELD THE ALP TO BE NIL F. BILLING SUPPORT NATURE OF SERVICES 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 51 | P A G E 1.45 THE BILLING TEAM IS RESPONSIBLE FOR RAISING INVOICES FOR ALL CUSTOMERS IN THE ASIA PACIFIC REGION (EXCLUDING JAPAN). AT&T GROUP HAS A TEAM OVER 37 P EOPLE 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 ADJUSTMENT S - 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 (EXC LUDING 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 TPOS 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 1.47 THIS COST HAS BEEN ALLOCATED ON THE BASIS OF NUMBER OF 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. 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 52 | P A G E APPROACH ADOPTED BY THE APPELLANT 1.48 THE COST PAID BY THE APPELLANT FOR BILLING SUPPORT SERVICES WAS BENCHMARKED FOLLOWING AN AGGREGATED APPROACH USING THE TNMM. 1.49 THE APPELLANT HAD ALSO SUBMITTED A SCREE NSHOT OF THE 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/HONBLE DRP [REFER PAGE 422 TO 424 OF PAPER BOOK VOLUME - I]. APPROACH ADOPTED BY THE LD. TPO 1.50 THE LD. TPO REJECTED THE ARMS LENGTH NATURE OF THE AFORESAID TRANSACTION IN AN ARBITRARY MANNER AND DETERMINED THE ALP AS NIL. 1.51 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 HONBLE DRP THE HONBLE DRP REJECTED THE ARMS LENGTH NATURE OF THE AFORESAID TRANSA CTION ON AN ARBITRARY BASIS AND HELD THE ALP TO BE NIL. G. PROJECT MANAGEMENT NATURE OF SERVICES 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 | P A G E 1.52 THE PROJECT MANAGEMENT TEAMS ARE BASED IN AUSTRALIA, HONG KONG AND SINGAPORE AND ARE RESPONSIBLE FOR MANAGING INSTALLATION AND DEPLOYMENT OF SITES ACROSS ASIA PACIFIC REGION. THE TEAM COMPRISES OF 9 PEOPLE. 1.53 THE PROJECT MANAGEMENT TEAM IS ENGAGED IN GENERAL PROJECT MANAGEMENT, MONITORING OF ALL IMPLEMENTATION ISSUES AND ADDRESSING FACED BY THE CUSTOMERS SUBMISSION BEFORE TPO: REFER PAGE 165 OF PAPER BOOK VOL - I TPOS 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 1.54 THIS COST HAS BEEN ALLOCATED ON THE BASIS OF N UMBER OF 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 PRO JECT 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 1.55 THE COST PAID BY THE APPELLANT FOR PROJECT MANAGEMENT SERVICES WAS BENCHMARKED FOLLOWING AN AGGREGATED APPROACH USING THE TNMM. APPROACH ADOPTED BY THE LD. TPO 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 54 | P A G E 1.56 THE LD. TPO REJECTED THE ARMS LENGTH NATURE OF THE AFORESAID TRANSACTION IN AN ARBITRARY MANNER AND DETERMINED THE ALP AS NIL. 1.57 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 HONBLE DRP THE HONBLE DRP REJECTED THE ARMS LENGTH NATURE OF THE AFORESAID TRANSACTION ON AN ARBITRARY BASIS AND HELD THE ALP TO BE NIL 1.58 IN THIS REGARD, THE APPELLANT HUMBLY SUBMITS THAT NO PRUDENT BUSINESSPERSON WOULD RENDER SUCH SERVICES FREE OF CHARGE. THEREFORE, IN ORDER TO DETERMINE THE FAIR P RICE OF THE SERVICES, THE COST IS ALLOCATED TO THE APPELLANT ON A SCIENTIFIC BASIS AS PER THE ALLOCATION METHODOLOGY DISCUSSED IN THE PRECEDING PARAS. 1.59 THE APPELLANT HUMBLY SUBMITS THAT THE AFORESAID SERVICES SATISFIES ALL THE TESTS WHICH ARE PERFORMED TO EXAMINE THE ALP OF THE PAYMENTS MADE: TEST/CRITERIA PURPOSE APPELLANTS CASE NEED TEST DID THE INDIAN ENTITY ACTUALLY NEED SUCH SERVICES AND REQUESTED FOR SUCH SERVICES? YES. THE ENTIRE BUSINESS IS DEPENDENT ON THESE SERVICES. SERVICES TEST DID THE INDIAN ENTITY RECEIVE THE SERVICES AND DID THE GROUP ENTITY HAD THE CAPABILITY TO YES. THE APPELLANT RECEIVED THE SERVICES PROVIDED BY THE AE 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 55 | P A G E PROVIDE SUCH SERVICES? BENEFIT TEST DID THE INDIAN ENTITY RECEIVE ANY BENEFIT FROM SUCH SERVICES? YES. THESE SERVICES ENSURE CONTINUITY IN BUSINESS OPERATIONS. COMPUTATIO N NAL TEST THIS IS THE TEST OF ALLOCATION AND THE BASIS OF CHARGE OF SUCH SERVICES TO THE INDIAN ENTITY THE COST OF RENDERING THESE SERVICES ARE ALLOCATED ON THE BASIS OF COST PLUS A MARK - UP OF SUCH COSTS. DOCUMENTATION TEST THIS TEST IS RELATED TO THE BACK - UP DOCUMENTATION AS MAINTAINED BY THE INDIAN ENTITY AND PRESENTED TO THE TAX AUTHORITIES FOR VERIFICATION IN RELATION TO THE ABOVE MENTIONED TESTS. THE APPELLANT HAS ALREADY SUBMITTED VARIOUS BACKUP DOCUMENTATIONS MAINTAINED IN RELATION TO THE ABOVE MENTIONED TESTS. [REFER PAGE 209 TO 426 OF PAPERBOOK VOLUME I] 1.60 TO SUPPORT ITS CASE, THE ASSESSEE ALSO SUBMITTED THE LEGAL SUBMISSIONS WHICH IS REPRODU CED AS UNDER: 2. LEGAL SUBMISSION: METHOD TO BE APPLIED FOR BENCHMARKING THE TRANSACTION I.E. CUP V/S TNMM 2.1 THE APPELLANT CARRIED OUT BENCHMARKING ANALYSIS FOR 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 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 56 | P A G E AND APPLIED CUP AS THE MOST APPROPRIATE METHOD FOR BENCHMARKING THE TRANSACTION OF SUPPORT SERVICES PROVIDED TO ITS AE. 2.2 AT THIS JUNCTURE, IT MAY BE PERTINENT TO QUOTE THE RELEVANT 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 A N INTERNATIONAL TRANSACTION RELEVANT SECTIONS OF THE ACT 92. (1) ANY INCOME ARISING FROM AN INTERNATIONAL TRANSACTION SHALL BE COMPUTED HAVING REGARD TO THE ARMS LENGTH PRICE. 92C. (1) THE ARMS 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; 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 57 | P A G E ( 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 EMPL OYED 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 UNCON TROLLED 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 TRANSACTI ONS, 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 T HE MOST RELIABLE 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 58 | P A G E 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).. 2.3 ON PERUSAL OF THE ABOVE PROVISIONS OF THE ACT AND RULES, YOUR HONOURS 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/HONBLE 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 AD OPTED 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 APPELLANTS CASE SHOULD BE TREATED AS A MOST APPROPRIATE METHOD FOR DETERMINING ALP OF SUPPORT SERVICES RECEIVED FROM THE AE. AGGREGATED APPROACH 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 59 | P A G E 2.5 THE APPELLANT SUBMITS THAT THE SUPPORT SERVICES IS A TRANSACTION CLOSELY LINKED WITH PROVISION OF NETWORK CONNECTIVITY SERVICES. IT CANNOT BE SEGREGAT ED 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 RECE IVED 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. 2.7 IT CAN BE SEEN FROM THE ABOVE DEFINITION THAT THE TRANSACTION INCLUDES CLOSELY LINKED TRANSACTIONS. THE APPELLANT SUBMITS THAT AFORESAID SUPPORT SERVICES ARE INTEGRAL TO THE CORE OPERATIONS OF RENDERING NETWORK CONNECTIV ITY SERVICES SINCE IN THE ABSENCE OF THE SUPPORT SERVICES, THE APPELLANTS ENTIRE BUSINESS OPERATIONS WOULD BE INTERRUPTED AND WOULD COME TO A STANDSTILL. THEREFORE, THE AFOREMENTIONED SERVICES ARE INDISPENSABLE FOR ENSURING CONTINUITY IN BUSINESS OPERATI ONS. HENCE, IT CAN BE REASONABLY CONSTRUED THAT THE SUPPORT SERVICES ARE CLOSELY LINKED TO THE PRIMARY TRANSACTION OF NETWORK CONNECTIVITY SERVICES. 2.8 THE APPELLANT RELIES ON THE DECISION OF HONBLE ITAT IN CASE 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) 2.9 THE APPELLANT ALSO RELIES ON THE JURISDICTIONAL HIGH COURT IN THE CASE OF SONY ERICSSON MO BILE COMMUNICATIONS INDIA PVT. LTD. AND OTHERS [ITA NO. 16/2014] WHEREBY IT HELD THAT THE AGGREGATION OF TRANSACTIONS IS DESIRABLE IN THE CASE 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 60 | P A G E WHERE THE TRANSACTIONS ARE INTER - LINKED. (REFER PARA 137 ON PAGE NO. 512 OF THE CASE LAW COMPENDIUM) 2.10 LASTLY THE APPELLANT WOULD LIKE TO DRAW ATTENTION TO OECD 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.' 2.11 ACCORDINGLY, BASED ON THE ABOVE FACTS AND LEGAL POSITIONS, 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 AR GUMENTS MADE BY THE TPO FOR APPLICATION OF CUP NEED FOR SERVICES: 2.12 AT THE OUTSET, THE APPELLANT SUBMITS THAT THE SUPPORT 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 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 61 | P A G E 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 HELPDE SK, 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 2.13 WITHOUT PREJUDICE TO THE ABOVE, THE APPELLANT WOULD LIKE TO 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 ARMS LENGTH OR NOT. 2.14 THE AFORE SAID ARGUMENT IS SUPPORTED BY THE PRINCIPLES LAID DOWN BY THE HONBLE 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) 2.15 THUS, THE APPELLANT SUBMITS THAT THE OBJECTIONS RAISED BY THE TPO/DRP THAT THERE IS NO NEED FOR SERVICES IS UNJUSTIFIED AND NOT TENABLE IN LAW. COMMERCIAL EXPEDIENCY 2.16 THE APPELLANT FURTHER SUBMITS THAT THE NATURE OF SERVICES TO BE AVAILED IS ENTIRELY PRE ROGATIVE 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. 2.17 THE AFORESAID ARGUMENT IS SUPPORTED BY THE OBSER VATIONS MADE BY THE HONBLE SUPREME COURT IN THE CASE OF COMMISSIONER OF INCOME - TAX VS. DHANRAJGIRJI RAJA 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 62 | P A G E NARASINGIRJI (91 ITR 544) (REFER PAGE NO. 114 OF THE CASE LAW COMPENDIUM) 2.18 FURTHER, THE RELIANCE CAN BE PLACED UPON THE RECENTLY PRONOUNCED DECISION OF THE HONBLE 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 DERIV ES A BENEFIT FROM THE SERVICE. THE HONBLE 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 ALS O 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) 2.19 THE APPELLANT SUBMITS THAT IT IS SETTLED LEGAL POSITION IN 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 2.20 THE APPELLANT SUBMITS THAT IT HAS DEMONSTRATED THE FACT THAT THE SERVICES WERE RENDERED BY THE AE AND THE SAME 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 63 | P A G E WAS FOR THE PURPOSE OF BUSINESS HENCE, THE DRP WAS UNJUSTIFIED IN TREATING THE VALUE OF THE SERVICES AT NIL. 2.21 THE MANDATE OF THE TPO/DRP UNDER THE ACT AND AS PER THE 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 APPLY ING 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 PRUDEN T FOR THE ASSESSEE TO HAVE INCURRED FOR THE SAME. 2.22 THE APPELLANT RELIES ON THE FOLLOWING JUDGEMENTS WHEREBY 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 S ERVICES 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 SPE CIFIC 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 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 64 | P A G E 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 HONBLE 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 2.24 THE APPELLANT SUBMITS THAT ONE OF THE CONTENTION OF THE HONBLE 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. 2.25 THE CONTENTION OF THE TPO/DRP THAT THE APPELLANT HAS FAILED TO SHOW ANY BENEFIT RECEIVED IS TOTALLY IRRELEVANT FOR THE REASON THAT WHETHER T HE 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. 2.26 IN THIS REGARD, THE APPELLANT RELIES ON THE DECISION OF BANGALORE TRIBUNAL IN THE CASE OF SAFRAN AEROSPACE IN DIA 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/HONBLE DRP THAT NO BENEFIT IS RECEIVED AND HENCE THE VALUE IS TREATED IS NIL, IS TOTALLY UNJUSTIFIED IN THE EYES OF THE LAW. CONCLUSION 2.28 IN THE PRESENT CASE, THE APPELLANT CATERS TO US MULTI NATIONAL 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 CUST OMERS AND ENSURES 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 65 | P A G E 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 CUSTOMERS 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. 2.29 THE APPELLANT SUBMITS THAT THE ENTIRE BUSINESS IS DEPENDENT UPON AVAILING SUCH SUPPORT S ERVICES 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 HONBLE DRP OF TREATI NG THE ARMS - LENGTH VALUE OF THE PAYMENT MADE FOR AVAILING SUCH SERVICES AT NIL, IS ARBITRARY, UNSUBSTANTIATED AND OUGHT TO BE STRUCK DOWN. 2.30 FURTHER, SINCE NO BENCHMARKING METHODOLOGY HAS BEEN ADOPTED BY THE TPO/HONBLE 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. 40. THE MAIN THRUST OF ASSESSEES SUBMISSION IS THAT IN RESPECT OF EACH INTRA GROUP SERVICES THE ASSESSE E HAS BEEN ABLE TO JUSTIFY THE BASIS OF ALLOCATION OF COST, NEED FOR SERVICE AND THE BENEFIT IT DERIVED OUT OF THESE SERVICES. IN SUPPORT OF ITS ARGUMENTS, THE ASSESSEE ALSO FILED THE BACK - UP DOCUMENTATION BEFORE THE LOWER AUTHORITIES FOR VERIFICATION. 41. T HE LD. DR ON THE OTHER HAND HAS SUPPORTED THE ORDER OF DRP AND AO AND SUBMITTED THAT 1) THAT THERE WAS NO NEED FOR SUCH SERVICES IN FIRST PLACE 2) EVEN IF THERE WAS NEED, THE ASSESSEE HAS NOT BEEN ABLE TO DEMONSTRATE THAT THE SERVICES HAVE BEEN RENDERED. 3) THE AS SESSEE HAS NOT BEEN ABLE TO MEET THE BENEFIT TEST. 4) ASSESSEE HAS NOT BEEN ABLE TO SUBSTANTIATE ITS CASE BY WAY OF PROPER DOCUMENTATION 5) SIMILAR DISALLOWANCE HAS ALREADY BEEN HELD IN AY 2008 - 09 42. WE HAVE CAREFULLY CONSIDERED THE RIVAL CONTENTIONS. BEFORE US, THE LD. AR HAS SUBMITTED COMPILATION OF PAPER BOOKS AND SYNOPSIS WHERE IN 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 66 | P A G E 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. 43. THE BRIEF FACTS ARE THAT THE APPELLANT CATERS TO US MULTINATIONAL ENTERPRISES AND TO RENDER SERVICES TO ITS CUSTOMERS, IT SAYS THAT IT NEEDS SUPPORT SERVICES SUCH AS TROUBLESHOOTING, N ETWORK ENGINEERING, SERVICE DELIVERY ETC. THIS HELPS IN RENDERING SEAMLESS SERVICES TO THE CUSTOMERS AND ENSURES DATA PRIVACY. FOR AVAILING THESE SERVICES, THE APPELLANT HAS ENTERED INTO A SERVICES AGREEMENT DATED 19TH MARCH, 2008 WITH AT&T COMMUNICATION S ERVICES INTERNATIONAL INC. (ACSI INC.). AS PER THE SAID AGREEMENT, ACSINC. SHALL RENDER THE AFORESAID SERVICES TO THE APPELLANT ON COST PLUS MARKUP. ASSESSEE PAID A SUM OF RS. 25.16 CRORES FOR AVAILING THESE SERVICES WHOSE ALP HAS BEEN DETERMINED AT NIL BY THE TPO/DRP BY HOLDING THAT THE ASSESSEE DID NOT OBTAIN ANY BENEFIT OUT OF SUCH SERVICES AND THE SERVICES PROVIDED BY THE FOREIGN AE WERE NOT REQUIRED. FURTHER, TPO ALSO HELD THAT SINCE THE ASSESSEE FAILED TO PROVIDE SUFFICIENT EVIDENCE ABOUT THE SERVIC ES RENDERED BY THE AE, THE ALP OF THIS INTERNATIONAL TRANSACTION WAS DETERMINED AT NIL. 44. P ROVISIONS OF THE INCOME TAX ACT FOR THE COMPUTATION OF ARMS LENGTH PRICE OF ANY INTERNATIONAL TRANSACTION PROVIDES AS UNDER : COMPUTATION OF INCOME FROM INTERNATIO NAL 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 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 67 | P A G E 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 EN TERPRISES, 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. 45. ACCORDING TO THE ABOVE PROVISIONS FOLLOWING PRINCIPLES EMERGE: - I. AN INTERNATIONAL TRANSACTION IS ENTERED IN TO BETWEEN TWO OR MORE ASSOCIATED ENTERPRISES FOR JOINTLY ACQUIRING OR DEVELOPING SOME PROPERTY OR FOR OBTAINING SERVICES. II. THE PARTIES TO TRANSACTION ENTER IN TO MUT UAL AGREEMENT OR ARRANGEMENT TO SHARE COST OR EXPENSES INCURRED OR TO BE INCURRED IN RESPECT OF JOINT PROPERTY. III. THE COST OR EXPENSES INCURRED SHOULD BE IN CONNECTION WITH A BENEFIT OR SERVICES OF FACILITY PROVIDED OR TO BE PROVIDED TO ANY ONE OR MORE OF SU CH ENTERPRISE. THE EXPECTATION OF MUTUAL BENEFIT IS IMPORTANT CONSIDERATION FOR THE ACCEPTANCE OF ARRANGEMENT FOR POOLING OF RESOURCES BY THE ENTERPRISES. IV. THE ENTERPRISES WOULD REQUIRE THAT EACH PARTICIPANT S PROPORTIONATE SHARE OF THE CONTRIBUTION IS CONSISTENT WITH THE PROPORTIONATE SHARE OF OVERALL BENEFITS EXPECTED TO BE RECEIVED FROM THE ARRANGEMENT. V. TRANSFER PRICE OF COST OR EXPENSES ALLOCATED OR APPORTIONED TO SUCH ENTERPRISE OR CONTRIBUTED BY SUCH ENTE RPRISE SHALL BE DETERMINED HAVING REGARD TO ARM S LENGTH PRICE OF SUCH BENEFIT, SERVICE OR FACILITY RECEIVED BY THE ENTERPRISE. IN ORDER TO SATISFY THE ARM S LENGTH PRICE A PARTICIPANT S CONTRIBUTIONS MUST BE CONSISTENT WITH THE WHAT INDEPENDENT ENTERPRISE WOULD HAVE AGREED TO CONTRIBUTE UNDER COMPARABLE CIRCUMSTANCES CONSIDERING THE BENEFITS IT EXPECTS TO DERIVE FROM THE AGREEMENT. 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 68 | P A G E 46. NOW WE PROCEED TO EXAMINE THE TRANSACTIONS IN DETAIL AS EXPLAINED BY THE ASSESSEE DURING THE COURSE OF HEARING: S. NO. PART ICULARS NATURE OF SERVICE BASIS OF ALLOCATION AMOUNTS (IN INR CR) 1 GLOBAL CUSTOMER SERVICE CENTRE (GCSC) THE GCSC TEAM IS BASED IN HONG KONG AND SINGAPORE AND IS ENGAGED IN MAINTENANCE AND FIXING REPAIRS OR OUTAGES FOR CUSTOMERS OF AGNSI AS WELL AS OTHER AT&T GROUP COMPANIES IN ASIA PACIFIC REGION. DURING FY 2009 - 10, THE GCSC TEAM PROCESSED OVER 26,600 TICKET S FOR AGNSI. INDIA RELATED FAULT TICKETS AS PERCENTAGE OF TOTAL FAULT TICKETS FOR ASIA PACIFIC (REFER TP ORDER ON PG 223 OF APPEAL SET) TEAM COMPRISES OF: 38 PEOPLE IN HONGKONG, AND OVER 86 IN SINGAPORE. INDIA RELATED FAULTS ACCOUNTED FOR 55% AND 32% I N THESE LOCATIONS RESPECTIVELY 14.88 2 GLOBAL SALES ENABLEMENT (GSE) THE GSE TEAM PROVIDES PRE - SALE SUPPORT SERVICES TO VARIOUS AT& T GROUP COMPANIES IN THE ASIA PACIFIC REGION. IT IS RESPONSIBLE FOR BUILDING CUSTOMIZED SOLUTIONS FOR CUSTOMERS AND PROVIDES SERVICES LIKE TECHNICAL DESIGN, INPUTS ON COMMERCIAL (PRICING) & LEGAL/ CONTRACTUAL ASPECTS OF THE BID. THE COST INCURRED BY TECHN ICAL ASSESSMENT TEAM IS 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. (REFER TP ORDER ON PG 226 OF APPEAL SET) PRICING TEAM: COMPRISES OF 5 PEOPLE. 10% OF GSE PRICING TEAM'S COST WAS ALLOCATED TO INDIA. PRE - SALES TEAM: COMPRISES OF 21 PEOPLE. 1.46 3 INFORMATION TECHNOLOGY THE IT TEAM PROVIDES INTERNAL IT SUPPORT FUNCTION INCLUDING HELPDESK, INTERNAL NETWORK MONITORING SUPPORT AND IT SYSTEM AND MAINTENANCE. NO. OF IT USERS IN INDIA AS PERCENTAGE OF NO. OF IT USERS IN ASIA PACIFIC (EXCL JAPAN) TEAM OF 21 PEOPLE BASED IN SINGAPORE. 1.2 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 69 | P A G E S. NO. PART ICULARS NATURE OF SERVICE BASIS OF ALLOCATION AMOUNTS (IN INR CR) (REFER TP ORDER ON PG 227 OF APPEAL SET) 4 BILLING SUPPORT THE BILLING TEAM IS RESPONSIBLE FOR RAISING INVOICES FOR ALL CUSTOMERS IN THE ASIA PACIFIC REGION (EXCLUDING JAPAN). NO. OF INDIA INVOICES AS PERCENTAGE OF NO. OF ASIA PACIFIC (EXCL JAPAN) (REFER TP ORDER ON PG 228 OF APPEAL SET) TEAM OF 37 PEOP LE BASED IN HONG KONG. TOTAL 62812 INVOICES WERE RAISED, 6344 RELATED TO INDIA 10.10% OF BILLING DEPTT COST WAS ALLOCATED TO INDIA 0.97 5 SERVICE DELIVERY AND SERVICE MANAGEMENT THE SERVICES DELIVERY TEAM IS RESPONSIBLE FOR PROCESSING CUSTOMER ORDERS AND HANDLING SERVICE PROVISIONING, SETTING UP AND CONFIGURING THE NETWORK AND TESTING THE SYSTEM. THE SERVICES MANAGEMENT TEAM IS RESPONSIBLE FOR ACCOUNT MANAGEMENT ACROSS ALL SERVICE DISCIPLINES. NO. OF ORDERS PROCESSED FOR INDIA AS PERCENTAGE OF NO. OF O RDERS PROCESSED FOR ASIA PACIFIC (EXCL JAPAN) (REFER TP ORDER ON PG 225 OF APPEAL SET) TEAM COMPRISES OF OVER 30 PEOPLE AE PROCESSED 4531 ORDERS, 555 PERTAINED TO INDIA 12.25% OF TOTAL COST WAS ALLOCATED TO INDIA 6.39 6 COUNTRY SERVICES THE COUNTRY SERVICES TEAM IS A CROSS - FUNCTIONAL TEAM PROVIDING IN - COUNTRY SUPPORT FOR OTHER FUNCTIONAL TEAMS, THAT INCLUDES PRE - SALES ARRANGEMENTS, CONTRACT MANAGEMENT, SERVICE DELIVERY, ORDER UPDATES, ON - GOING COMMUNICATION WITH CUSTOMERS AND LIFE CYCLE MANAGEMENT OF AGN NODES. PERCENTAGE OF TIME SPENT BY COUNTRY SERVICES TEAM ON AGNS INDIA (REFER TP ORDER ON PG 227 OF APPEAL SET) NO DETAILS 0.005 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 70 | P A G E S. NO. PART ICULARS NATURE OF SERVICE BASIS OF ALLOCATION AMOUNTS (IN INR CR) 7 PROJECT MANAGEMENT THE PROJECT MANAGEMENT TEAM BASED IN AUSTRALIA, HONG KONG AND SINGAPORE IS ENGAGED IN GENERAL PROJECT MANAGEMENT (TO MANAGE INSTALLATION AND DEPLOYMENT OF SITES ACROSS THE ASIA PACIFIC REGION), MONITORING OF ALL IMPLEMENTATION ISSUES AND ADDRESSING ISSUES BEING FACED BY CUSTOMERS. NO. OF INDIA SITES AS PERCENTAGE OF NO. OF ASIA PACIFIC (EXCL JAPAN) SITES (REFER TP ORDER ON PG 229 OF APPEAL SET) TEAM OF 9 PEOPLE TOTAL 998 SITES, 42 IN INDIA 4.2% OF TOTAL COST WAS ALLOCATED TO INDIA 0.24 TOTAL IGS 25.145 ROYALTY ADJUSTMENT 9.34 TOTAL ADJUSTMENT 34.49 47. T HROUGH THE ABOVE CHART THE ASSESSEE HAS SOUGHT TO EXPLAIN THE NATURE OF SERVICES AND THE BASIS OF ALLOCATION OF THE COST CHARGED BY THE AE FOR THESE INTRAGROUP SERVICES. REGARDING THE NEED TEST THE ASSESSEE EXPLAINED THAT THE SUPPORT REQUESTED BY THE ASSESSEE FROM THE AE WAS AIMED AT ACHIEVING THE FOLLOWING OBJECTIVES: MAINTENANCE AND FIXING REPAIRS OR OUTAGES FOR CUSTOMERS OF THE APPELLANT; PROCESSING CUSTOMER ORDERS AN D HANDLING SERVICE PROVISIONING; PRE - SALES SUPPORT, BUILDING CUSTOMIZED SOLUTIONS FOR CUSTOMERS AND PROVIDE SERVICES LIKE TECHNICAL DESIGN, INPUTS ON COMMERCIAL (PRICING) & LEGAL AND CONTRACTUAL ASPECTS OF THE BID, SPECIFICATION DESIGN, IDENTIFICATION OF CUSTOMER REQUIREMENTS ETC.; CONTRACT MANAGEMENT, SERVICE DELIVERY, ORDER UPDATES, ON - GOING COMMUN ICATION WITH CUSTOMERS AND LIFE CYCLE MANAGEMENT OF AGN NODES; I T SUPPORT FU NCTION INCLUDING HELPDESK, INTERNAL NETWORK MONITORING SUPPORT AND IT SYSTEM AND MAINTENANCE; 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 71 | P A G E REVIEW OF PRICING TERMS OF CONTRACTS, PROCESS INVOICES REVERSALS AND ADJUSTMENTS , RESOLVE CUSTOMER DISPUTES ETC.; AND GENERAL PROJECT MANAGEMENT, MONITORING OF A LL IMPLEMENTATION ISSUES ADDRESSING ISSUES BEING FACED BY CUSTOMERS 48. THE ASSESSEE ALSO CONTENDED THAT IN TELECOM BUSINESS CREDIBILITY, RELIABILITY AND SPEED OF DATA, NETWORK AND SYSTEM IS WHAT DEFINES THE USAGE OF NETWORK. SO THE ASSESSEE CONTENDED THAT IT WOULD RELY ON THE BEST OF RESOURCES AND SYSTEM WHICH IN THE INSTANT CASE IS AVAILABLE AT APAC LEVEL WITH THEIR RELATED PARTY. THE ASSESSEE WOULD NOT HAVE BEEN ABLE TO SUSTAIN IF A THIRD PARTY, WHICH MAY THROUGH SERVICES CANT CONTROL AND ENSURE THE ABOVE PARAMETERS. 49. ON APPRECIATION OF THE ABOVE FACTS IT IS APPARENT THAT LOOKING AT THE NATURE OF THE BUSINESS OF THE ASSESSEE AND THE KIND OF INDUSTRY THE ASSESSEE OPERATES IN, THE ASSESSEE HAS JUSTIFIED THAT SUCH SERVICES ARE REQUIRED. IT IS NOT THE CASE OF THE LD TPO THAT ASSESSEE IS HAVING THIS SERVICES THEREFORE THEY ARE DUPLICATIVE IN NATURE OR ARE IN NATURE OF SHAREHOLDERS SERVICES. IT IS PERTINENT TO NOTE THAT REQUIREMENT OF THE SERVICES SHOULD BE JUDGED FROM THE VIEWPOINT OF THE APPELLANT AS A BUS INESSPERSON . WE AGREE WITH THE ARGUMENT OF THE ASSESSEE THAT IF THE NETWORK RELATED PROBLEMS PREVENT THE CUSTOMERS FROM USING ITS SERVICES, THE ASSESSEE IS BOUND TO SUFFER REPUTATIONAL DAMAGE AND POTENTIAL LOSS TO BUSINESS. ADDRESSING THE CUSTOMERS PROBLE MS PROMPTLY AND BY A SPECIALIZED TEAM (WHICH MAY BE AN AE) SHOULD SATISFY THE BENEFIT TEST, AS THE ASSESSEE RECEIVED AN ECONOMIC BENEFIT TO MAINTAIN ITS BUSINESS OPERATION. THEREFORE IN THIS REGARD WE ARE OF THE VIEW THAT ASSESSEE HAS SUBSTANTIATED THAT TH ESE SERVICES ARE REQUIRED BY IT FOR ITS BUSINESS SUSTAINABILITY. THE ONLY ALLEGATION WHICH TPO / DRP MADE WAS THAT THE ASSESSEE HAS NOT BEEN ABLE TO SUBSTANTIATE NEED TEST BY WAY OF APPROPRIATE DOCUMENTATION AND HELD THAT THE ASSESSEE SHOULD HAVE AVAILED T HESE SERVICES FROM AN INDEPENDENT THIRD 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 72 | P A G E 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 G SE 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 SUBMITTE D 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 O F 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 THA T 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 HONBLE 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 HONBLE 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 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 73 | P A G E CANNOT BE ASK ED 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 ASS ESSEE 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 SE AMLESS 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 ADM INISTRATION 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 EC ONOMIES 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. 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 74 | P A G E 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 HER E. TO SUPPORT ITS CONTENTION, THE ASSESSEE HAS RELIED UPON THE DECISION OF THE HONBLE 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 AN ALYSIS TO DETERMINE THE ALP AND NOT TO DETERMINE WHETHER THE TAX PAYER DERIVES A BENEFIT FROM THE SERVICE. THE HONBLE 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 APPEL LANT 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 (DEL HI 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 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 75 | P A G E 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 CIT ED 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. 52. HOWEVER F OR DETERMINATION OF ARMS LENGTH PRICING, THE ASSESSEE HA S ADOPTED TNMM AS THE MOST APPROPRIATE METHOD. THE TPO HAS REJECTED TNMM AS THE MOST APPROPRIATE METHOD AND APPLIED THE CUP METHOD. FOR THIS TPO HAS NOT GIVEN ANY REASONING. IN FACT , TPO AND DRP HAS NOT BROUGHT OUT ANY DATA ON RECORD FOR BENCH MARKING OF I NTRA GROUP TRANSACTION AND TREATING THE VALUE OF SERVICES AS NIL BY APPLYING THE CUP METHOD WHICH IS AGAINST THE BASIC PRINCIPLES OF TP REGULATIONS. DATA AVAILABILITY S THE LIFE LINE OF ANY METHOD ADOPTED IN COMPARABILITY ANALYSIS. IF THERE IS NO DATA AV AILABLE IN THAT PARTICULARS METHOD THEN COMPARABILITY ANALYSIS UNDER THAT METHOD FAILS. IN A SCENARIO WHERE NO DATA IS AVAILABLE TO APPLY THE DIRECT METHODS, ONE HAS TO RESORT TO RESIDUARY METHODS FOR BENCHMARKING A TRANSACTION / GROUP OF TRANSACTION SUC H AS TNMM. CONSIDERING ALL THESE FACTORS THE APPELLANT ADOPTED TNMM TO BENCHMARK THE TRANSACTION. IN THE ABSENCE OF ANY JUSTIFICATION BY DRP/TPO FOR APPLICATION OF CUP, WE JUSTIFY THE USE OF TNMM AS THE MOST APPROPRIATE METHOD. 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 76 | P A G E 53. IN VIEW OF THE ABOVE FIND INGS, 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 EVIDENCE S 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 COMP ARABILITY ANALYSIS UNDER THE TNMM METHOD OF INTRA GROUP SERVICES, HE MUST EXAMINE THE COMPARABILITY ANALYSIS OF IGS ( INTRA GROUP SERVICES) AND DETERMINE ALP. 54. ANOTHER ISSUE WHICH HAS BEEN RAISED IS THE DISALLOWANCE OF ROYALTY PAYMENT WHICH IS PAID TO THE OVERSEAS ENTITY IN THE US. IN THE PRESENT CASE, THE APPELLANT ENTERED INTO AN UNDERSTANDING WITH ITS AE, NAMELY, AT&T CORP., VIDE AGREEMENT DATED MARCH 7, 2006 FOR THE USAGE OF AT&T BRAND. THE CONSIDERATION FOR USAGE BETWEEN BOTH THE PARTIES WAS AGREED @ 4% OF NET SALES. DURING THE YEAR UNDER CONSIDERATION THE APPELLANT PAID INR 9.34 CRORES AS ROYALTY TO ITS AE. WHILE BENCHMARKING OF ROYALTY TRANSACTION, THE APPELLANT ADOPTED TNMM AS THE MAM ON AN AGGREGATE BASIS ALONG WITH THE PROVISION OF NETWORK CONNECTIVITY SERVICES. ACCORDINGLY, IT DETERMINED THAT WHILE THE COMPARABLE COMPANIES HAVE EARNED AN ARITHMETIC MEAN OF 3.22%, THE APPELLANT EARNED 4.3%. ACCORDINGLY THE APPELLANT CONCLUDED THAT THE INTERNATIONAL TRANSACTION PERTAINING TO ROYALTY PAYMENT WAS AT ARMS LENGTH. THE APPELLANT ON A WITHOUT PREJUDICE BASIS ALSO DID THE BENCHMARKING OF ROYALTY BY APPLYING THE C UP METHOD TO DETERMINE THE CONTEMPORANEOUS INDUSTRY RATE OF ROYALTY FOR BRAND NAME PAID BY OTHER INDEPENDENT COMPANIES ON SIMILAR PRODUCTS. THE ASSESSEE 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 77 | P A G E CONCLUDED THAT EVEN BY APPLYING THE CUP METHOD THE PAYMENT OF ROYALTY WAS ADHERING TO INDIAN TP REGULAT IONS. 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. 55. WE HAVE GONE THROUGH THE RELEVANT FACTS OF THE CASE AND ARGUMENTS AND SUBMISSIONS ADVANCED BY BOTH THE PARTIES IN CONNECTION WITH THE DISALLOWANCE OF ROYALTY. IT WAS EXPLAINED TO US THAT THE ASSESSEE HAS BEEN GRANTED A NON - EXCLUSIVE, NON - TRANSFERABLE AND NON - LICENSABLE ROYALTY BEARING LICENSE A ND WAS ALSO GRANTED A RIGHT TO USE THE LICENSED MARKS IN RESPECT OF TELECOMMUNICATION SERVICES PROVIDED OVER AT&TS GLOBAL COMMUNICATION NETWORK. AN AGREEMENT TO THIS EFFECT WAS ENTERED INTO ON MARCH 7, 2006 AND IS ALREADY PLACED ON RECORD. THE CONSIDERATI ON FOR THE USAGE BETWEEN BOTH THE PARTIES WAS PRICED AT 4% OF NET SALES. FOR BENCHMARKING OF ABOVE TRANSACTION ASSESSEE FOLLOWED AN AGGREGATED APPROACH SINCE IN ITS VIEW ROYALTY PAYMENT WAS CLOSELY LINKED WITH THE PROVISION OF NETWORK CONNECTIVITY SERVICES AND CANNOT BE SEGREGATED. HENCE ASSESSEE BENCHMARKED THE ROYALTY TRANSACTION USING THE TNMM APPROACH. 56. IN SUPPORT OF THE ABOVE, ASSESSEE ALSO RELIED UPON THE DELHI BENCH OF THE TRIBUNAL IN THE CASE OF LUMAX INDUSTRIES LIMITED VS. ACIT (ITA NO. 4456/DEL /2012). RELEVANT EXTRACT IS PRODUCED AS UNDER: 33. THE TPO HAS MADE THE DISALLOWANCE IN QUESTION MAINLY ON THE BASIS OF THE BENEFIT TEST. IN THIS REGARD, IT IS SEEN THAT THE PAYMENT OF ROYALTY CANNOT BE EXAMINED DIVORCED FROM THE PRODUCTION AND SALES. ROYA LTY IS INEXTRICABLY LINKED WITH THESE ACTIVITIES. IN THE ABSENCE OF PRODUCTION AND SALE OF PRODUCTS, THERE WOULD BE NO QUESTION ARISING REGARDING PAYMENT OF ANY ROYALTY. RULE 10A(D) OF THE ITAT RULES DEFINES TRANSACTION AS A NUMBER OF CLOSELY LINKED TRAN SACTIONS. ROYALTY, THEN, IS A TRANSACTION CLOSELY LINKED WITH PRODUCTION AND SALES. IT CANNOT BE SEGREGATED FROM THESE ACTIVITIES OF AN ENTERPRISE, BEING EMBEDDED THEREIN. THAT BEING SO, ROYALTY CANNOT BE CONSIDERED AND EXAMINED IN ISOLATION ON A STANDALON E BASIS. ROYALTY IS TO BE CALCULATED ON A SPECIFIED AGREED BASIS, ON DETERMINING THE NET SALES WHICH, IN THE PRESENT CASE, ARE REQUIRED TO BE DETERMINED AFTER 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 78 | P A G E 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. 57. ON AN ALTERNATIVE BASIS, ASSESSEE ALSO SUBMITTED A DETAILED ANALYSIS BENCHMARKING THE ROYALTY TRANSACTION ON CUP BASIS IN THE TP DOCUMENTATION. THE FIND ING OF THE SEARCH RESULTED IN THE COMPARABLE WHICH WAS IDENTIFIED AS BELOW BY THE APPELLANT: SR. NO LICENSOR LICENSEE PERIOD OF EXISTENCE OF AGREEMENT PRODUCT DESCRIPTION RATE OF ROYALTY 1 MOTOROLA INC. USA FORWARD INDUSTRIES INC. USA EFFECTIVE FROM 1 JANUARY 2008 TRADEMARK LICENSE FOR THE USE OF MOTOROLA SIGNATURE AND M LOGO (EMSIGNIA) 7 PERCENT OF NET SALES 58. THE AFORESAID RESULT DEMONSTRATED THAT THE RATE OF ROYALTY PAID BY THE APPELLANT (4% OF NET SALES) IS LESSER THAN THAT PAID IN AN UNCONTROLLED ENVIRONMENT (7% OF NET SALES) AND HENCE IT WAS CONCLUDED THAT THE PAYMENT OF ROYALTY ADHERES TO THE ARMS LENGTH STANDARD ENVISAGED UNDER INDIAN TP REGULATIONS. SO IN VIEW OF THE ASSESSEE, THE PAYMENT OF ROYALTY TO ITS AE IS AT ARMS LENGTH UNDER BOTH THE ABOVE APPROACHES. 59. ON THE OTHER HAND TPO ALLEGED THAT THE ROYALTY PAYMENT BEING A SEPARATE CLASS OF TRANSACTIO N SHOULD BE BENCHMARKED SEPARATELY AND CANNOT BE AGGREGATED WITH THE OTHER TRANSACTIONS. IN HIS VIEW, ROYALTY PAYMENTS AND THE OTHER TRANSACTIONS ARE NOT CLOSELY LINKED AND AS SUCH ROYALTY PAYMENT IS NOT A SIGNIFICANT PART OF TOTAL COST AND DOES NOT HAVE M UCH BEARING ON ENTITY WISE PROFITABILITY HENCE TNMM CANNOT BE APPLIED. IN HIS VIEW THE ROYALTY TRANSACTION SHOULD HAVE BEEN BENCHMARKED USING THE CUP METHOD. 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 79 | P A G E 60. IT IS A MATTER OF RECORD THAT TPO NOWHERE DISPUTED THE ABOVE ALTERNATE ANALYSIS OR BROUGHT ON R ECORD ANY EVIDENCE TO COUNTER THE FINDINGS OF THE BENCHMARK ANALYSIS OF ROYALTY USING CUP. RATHER TPO/DRP PROCEEDED TO DETERMINE THE ALP AT NIL BY HOLDING THE NO BENEFIT EVER ACCRUED TO THE ASSESSEE BY PAYMENT OF THE ROYALTY . 61. TO JUSTIFY THE NEED TEST, THE ASSESSEE SUBMITTED THAT TRADE NAME `AT&T' HAS BEEN IN EXISTENCE SINCE THE FOUNDATION OF AT&T GROUP AND HAS EVOLVED OVER DECADES OF GROUPS' EXISTENCE. THE UNIQUENESS OF THESE INTANGIBLES LIES IN CONTINUOUS EXISTENCE EVEN THOUGH MANY TELECOMMUNICATION BR ANDS EXIST WITHIN INDIA AS WELL AS OUTSIDE INDIA, THE SAME CANNOT BE CONSIDERED AS SUBSTITUTES TO AT&T BRAND, SINCE EVERY BRAND HAS ITS OWN SPECIFIC FEATURES RESTRICTED TO ITS GROUP ENTITIES. EVERY BRAND HAS ITS OWN UNIQUE SELLING PROPOSITION [LISP), WHICH TENDS TO DIFFERENTIATE IT FROM OTHER AVAILABLE BRANDS IN THE MARKET, THEREBY CREATING A NICHE FOR ITSELF. A WELL DEFINED AND STRONG BRAND HELPS TO DRIVE SALES, BUILD CUSTOMER LOYALTY, CREATE BRAND VALUE, AND ACTS AS A CATALYST FOR BUSINESS GROWTH, SINCE I T DIFFERENTIATES THE PRODUCT OR SERVICE OFFERING OF A PARTICULAR COMPANY FROM OTHER AVAILABLE ALTERNATIVES IN THE OPEN MARKET. 62. TO JUSTIFY THE BENEFIT TEST ASSESSEE FURTHER SUBMITTED THAT INDIAN TELECOMMUNICATIONS INDUSTRY IS CHARACTERIZED BY SEVERAL TELEC OM PLAYERS SUCH AS BHARTI, IDEA, TATA, VODAFONE, ETC. IN SUCH A COMPETITIVE INDUSTRY, HAVING A BRAND NAME SUCH AS AT&T (WHICH IS A GLOBALLY RENOWNED BRAND) IMPACTS THE BUSINESS. IT IS NOTEWORTHY THAT FOR MORE THAN A CENTURY, AT&T GROUP HAS CONSISTENTLY PRO VIDED INNOVATIVE, RELIABLE, (NIGH - QUALITY PRODUCTS AND SERVICES AND EXCELLENT CUSTOMER CARE. IT IS ONE OF THE MOST STABLE AND TRUSTED NAME IN COMMUNICATION SERVICES AROUND THE GLOBE. IN 2009 AT&T WAS RANKED 14 OUT OF 500 IN THE TOP GLOBAL BRANDS IN THE WOR LD. THEREFORE, HAVING 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 80 | P A G E RIGHT TO USE AT&T TRADEMARK WHICH HAS 'A GLOBAL PRESENCE HAS HELPED THE ASSESSEE IN ATTRACTING MORE CUSTOMERS. 63. ASSESSEE FURTHER SUBMITTED THAT CUSTOMERS OFTEN SELECT BRANDED PRODUCT/ SERVICES DUE TO THEIR TRUST IN A VARIETY OF FACTOR S SIGNIFIED BY THE BRAND. CUSTOMERS LOOK UPON BRANDING AS AN IMPORTANT VALUE ADDED ASPECT OF A PRODUCT / SERVICE, AS IT OFTEN SERVES TO DENOTE A CERTAIN ATTRACTIVE QUALITY OR CHARACTERISTIC ONE CANNOT ENSURE :CONSISTENT QUALITY OF THE PRODUCT / SERVICE, ON E CANNOT CREATE A BRAND TRADEMARK PROMISE TO THE CUSTOMER THAT A STIPULATED QUALITY WILL BE MAINTAINED AND HENCE THE CUSTOMER CAN PURCHASE A BRANDED PRODUCT BELIEVING IN ITS QUALITY WHICH REDUCES HIS BURDEN IN MATTERS SUCH AS, TIME IN SEARCHING, EXAMINING FOR ENSURING QUALITY ETC. EVEN IN A THIRD PARTY SITUATION, NO PRUDENT BUSINESSMAN WOULD SHARE HIS REPUTED BRAND NAME/ TRADEMARK WITHOUT ANY CONSIDERATION. 64. ALTERNATIVELY, ASSESSEE ALSO SUBMITTED THAT IT IS A SETTLED POSITION OF LAW THAT THE BENEFIT TEST CA NNOT BE APPLIED BY TPOS TO DETERMINE THE ALP OF ANY INTERNATIONAL TRANSACTIONS. TO SUPPORT HIS CONTENTION THE ASSESSEE RELIED UPON THE JUDGMENT OF A COORDINATE BENCH LUMAX INDUSTRIES LIMITED VS. ACIT (ITA NO. 4456/DEL/2012). FURTHER ASSESSEE ALSO RELIED UP ON THE DECISION OF CIT VS CUSHMAN AND WAKEFIELD (INDIA) PVT LTD. (ITA 475/ 2012) FINDINGS OF WHICH WE HAVE ALREADY DISCUSSED ABOVE. WE HAVE ALREADY HELD WHILE DEALING THE ISSUE OF INTRA GROUP SERVICES THAT THE BENEFIT TEST CANNOT BE SEEN OR BE THE BASIS B Y THE TPO TO DETERMINE THE ALP OF A TRANSACTION AS IT IS TOTALLY THE TAXPAYERS PREROGATIVE. 65. WE THEREFORE ACCEPT THE PLEA OF ASSESSEE AND HOLD THAT THE LD TPO IS ONLY DUTY BOUND TO DETERMINE THE ALP OF THE ROYALTY PAYMENTS. 66. WITH RESPECT TO ANAL YSIS UNDER CUP METHOD BY THE LD TPO, WE FULLY AGREE WITH HIM IN REJECTING INTERNAL CUP AS IT PERTAINS TO RELATED 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 81 | P A G E PARTY TRANSACTIONS WHICH ARE BETWEEN ITS FELLOW AES. WE ALSO AGREE WITH HIM IN REJECTING EXTERNAL CUP DATA AS THE ASSESSEE HAS NOT SUBMIT TED ANY DATA REGARDING SIMILARITY IN TERMS AND CONDITIONS OF THE ROYALTY AGREEMENTS. HE ALSO RIGHTLY HELD THAT E VEN FROM THE LIMITED DATA SUBMITTED ARE FOR DIFFERENT INDUSTRIES/ GEOGRAPHICAL LOCATION /DURATION AND AMOUNTS. NO ANALYSIS OF THE ROYALTY AGREEM ENTS 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. 67. ACCORDING TO US TH E ROYALTY PAYMENTS NEEDS TO BE TESTED ON THE BASIS OF FACTUM AND QUANTUM BOTH ASPECTS. IT ALSO NEEDS TO BE LOOKED AT THE FUNCTIONS TO BE PERFORMED BY THE PARTIES FOR ROYALTY PAYMENTS. IT ALSO NEES TO BE LOOKED IN TO NATURE OF THE USE OF THE INTANGIBL ES WHICH ARE COVERED IN LICENSE AGREEMENT WITH AT&T CORP, PURSUANT TO WHICH IT WAS GRANTED THE RIGHT TO USE LICENSED MARKS IN MARKETING MATERIAL FOR PUBLICITY, ADVERTISING, SIGNS, PRODUCT BROCHURES, INSTRUCTION MANUALS AND IN OTHER FORM OF ADVERTISING. T HESE INTANGIBLES, WHICH ARE LICENSED TO AGNS INDIA, ARE KEY VALUE DRIVERS FOR THE BUSINESS AND BENEFIT IT BY ENABLING IT TO EXPAND ITS PRESENCE IN THE MARKETPLACE. WHAT WOULD BE THE DURATION OF PAYMENTS OF SUCH LICENSE ROYALTY IS ALSO DETERMINATIVE OF THE FACTOR OF THE PAYMENTS AS IT CANNOT ALSO CONTINUE FOR AN INDEFINITE PERIOD . IT MAY ALSO HAPPEN THAT INDIA BRAND BECAUSE O CONSUMER MAY BECOME BIGGER THAN AES BRAND. 68. AS THE ASSESSEE HAS ADOPTED THE TNMM WHICH IS CRUDE M ETHOD OF BENCHMARKING ROYALTY PAYMENTS AND LD TPO HAS DISREGARDED THE TRANSACTION ONLY ON THE BENEFIT ANALYSIS AND HAS ALSO REJECTED THE CUP BENCHMARKING OF THE ASSESSEE , WE ARE OF THE VIEW THAT THIS ISSUE NEEDS TO BE SET ASIDE TO THE FILE OF THE LD TPO TO DETERMINE THE ALP OF THE ROYALTY PAYMENTS AFRESH AFTER EXAMINING THE METHOD, COMPARABILITY AND THEN ALP AFRESH . ASSESSEE IS ALSO DIRECTED TO 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 82 | P A G E 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. 69. GROUND NO. 9 OF THE APPEAL OF THE ASSESSEE RELATES TO INITIATION OF PENALTY PROCEEDINGS AN D GROUND 10 OF THE AP PEAL OF THE ASSESSEE RELATES TO LEVY OF INTEREST U/S 234B AND 234D OF THE ACT 70. THESE GROUNDS ARE CONSEQUENTIAL IN NATURE. THE APPEAL BY ASSESSEE ON THESE GROUNDS IS THEREFORE PREMATURE AND NO INTERFERENCE IS CALLED FOR HENCE THEY ARE DISMISSED. 71. IN THE RE SULT APPEAL OF THE ASSESSEE IS PARTLY ALLOWED. 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 C LAIM 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 M ANY 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. 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 83 | P A G E (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 A ND 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 A ND 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 F OR 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 O THER 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. 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 84 | P A G E 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 US ED 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. 11 6,176,903/ - 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 73. THE ASSESSEE PREFERRED OBJECTION BEFORE THE DISPUTE RESOLUTION PANEL WHO VIDE DIRECTION DATED 30.12.2013 VIDE PARA NO. 8 HAS HELD AS UNDER: 8.1 IT IS IN RESPECT OF PROPOSED DISALLOWANCE OF RS. 11,61,76,903/ - PAID TO GROUP COMPANY NAMELY ACSI TOWARDS SUPPORT S ERVICES. THE AO HAS PROPOSED DISALLOWANCE OF EXPENSE OF FOLLOWING GROUNDS: THE SUPPORT SERVICE AGREEMENT BETWEEN THE TAXPAYER COMPANY AND AT&T COMMUNICATION SERVICES INDIA PVT. LIMITED (ACSI) WAS PREDATED JUST TO TRANSFER COST FROM THE GROUP COMPANY TO THE TAXPAYER COMPANY. THERE IS INSIGNIFICANT INCREASE IN THE EMPLOYEES COST OF ACSI WHICH SHOWS THAT NO ADDITIONAL EMPLOYEES WERE HIRED FOR PROVISION OF SUPPORT SERVICES TO THE TAXPAYER COMPANY. THERE IS OVERLAPPING OF FUNCTIONS AND DUPLICITY OF COST INCURRE D BY THE TAXPAYER COMPANY. THE BUSINESS PREMISES USED BY THE TAXPAYER COMPANY WERE ALREADY HIRED IN EARLIER YEARS BY ACSI. 8.2 THE LD AR EXPLAINED THAT THE ACSI, A GROUP COMPANY, WAS HAVING BUSINESS ACTIVITY IN INDIA FOR MORE THAN 10 YEARS. IT HAD FULLY D EVELOPED SUPPORT SERVICE FUNCTIONS LIKE 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 85 | P A G E 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. 74. BEFORE US, THE LD DR RELIED UPON THE DRAFT ASSESSMENT ORDER WHEREAS TH E AR PLACED THE FOLLOWING CONTENTIONS: 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 AGREEMEN T 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. 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 86 | P A G E 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 TRANSFE R 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 PAYME NTS TO OUTSIDE PARTIES FOR THE SAME FUNCTION WHICH WERE PERFORMED BY ACSI EMPLOYEES FOR THE APPELLANT. APPELLANTS 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 A GREEMENT 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 APPELLA NT 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 FUNCTION S (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 GROUPS INDIAN OPERATIONS. 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 87 | P A G E 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 SU CH FUNCTIONS. THIS WOULD HAVE RESULTED INTO DUPLICATION OF EFFORTS AND COSTS FOR THE GROUPS 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 BEI NG 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 TH E 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 EXP ENSES 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 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 88 | P A G E 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 N ECESSARY, 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 CARRYI NG 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 REASON ABLENESS 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 MAXIMIZ E 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 SUPP ORT 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 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 89 | P A G E 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 I N 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 BROUG HT ON RECORD BY THE DEPARTMENT TO DISPUTE THE SAID CLAIM. RATHER, THE DEPARTMENTS 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 MAKIN G 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 AVAIL ED 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 QUES TION 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) 76. RESPECTFULLY FOLLOWING THE PRINCIPLES LAID DOWN IN THE AFORESAID JUDICIAL PRECEDENTS, WE FIND THAT WHERE THE APPELLANT HAS ACTUALLY INCURRED THE AFORESAID SUPPORT SERVICES COST AND NO EVIDENCE HAS BEEN BROUGHT BY 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 90 | P A G E 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 1 8 /09/2017. - S D / - - S D / - (I.C.SUDHIR) (PRASHANT MAHARISHI) JUDICIAL MEMBER ACCOUNTANT MEMBER DATED: 1 8 /09/2017 A K KEOT CO PY FORWARDED TO 1. APPLICANT 2. RESPONDENT 3. CIT 4. CIT (A) 5. DR:ITAT ASSISTANT REGISTRAR ITAT, NEW DELHI