IBM India Private Limited, Bangalore V. The Deputy Commissioner of Income Tax, Circle-3(1)(1), Bangalore

ITTPA 870/BANG/2022

• Counselvise Citation: [2022] 103 COUNSELVISE.COM (IT) 8672 (ITAT-BANGALORE)
• Duration Of Justice: 1 month(s) 22 day(s)
• Appeal Type: Income Tax (Transfer Pricing) Appeal
• Pronouncement Date: 10-11-2022
• Appeal Filed By: Assessee
• Order Result: PartlyAllowed
• Bench Allotted: A
• Next Hearing Date: 26-10-2022
• Assessment Year: 2018-2019
• Appeal Filed On: 19-09-2022
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Keywords: Transfer pricing; Business expenditure; Double taxation relief; Opportunity of being heard; International transaction; TDS; Set aside
• Section: 37; 263; 28; 90; 143(3); 92D; 92B; 10AA; 37(1); 43; 13; 119; 22

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL “A” BENCH : BANGALORE BEFORE SHRI N.V. VASUDEVAN, VICE PRESIDENT AND Ms. PADMAVATHY S, ACCOUNTANT MEMBER IT(TP)A No.868 to 870/Bang/2022 Assessment year : 2016-17 to 2018-19 IBM India Private Limited, 12, Subramanya Arcade, Bannerghatta Road, Bangalore - 560 029. PAN : AAACI 4403L Vs. The Deputy Commissioner of Income Tax, Circle 3(1)(1), Bangalore. APPELLANT RESPONDENT Appellant by : Shri Ajay Rotti, CA Respondent by : Shri K. Sankar Ganesh, Jt.CIT(DR)(ITAT), Bangalore. Date of hearing : 27.10.2022 Date of Pronouncement : 11.11.2022 O R D E R Per Padmavathy S., Accountant Member These appeals are against the separate final orders of assessment passed by the Deputy Commissioner of Income Tax, Circle 3(1)(1), Bangalore (“the AO”) u/s. 143(3) r.w.s. 144C(13) of the Income-tax Act, 1961 [the Act] dated 31.07.2022 for the assessment years 2016-17 to 2018-19. Since common issues are urged in these appeals, they were heard together and are being disposed of by this common order, for the sake of convenience. IT(TP)A No.868 to 870/Bang/2022 Page 2 of 40 2. The assessee herein is a group company of M/s IBM Organization. It functions include providing services to its group companies and undertaking distribution of group company’s products. It is engaged in the business of trading, leasing and financing of computer hardware, maintenance of computer equipment. It also provides software related services. The AO proposed various additions in the draft assessment orders of all three years, which were objected to by the assessee before Ld DRP. After receipt of directions from Ld DRP, the AO completed the assessments of these years by making various additions. The assessee has preferred these appeals against the assessment orders so passed by the AO for all three years. 3. The common issues contented through various grounds in these appeals are tabulated below - Issue AY 2016-17 AY 2017-18 AY 2018-19 Assessment order bad in law Ground No.1 Ground No.1 Ground No.1 Reliance on Draft assessment order of AY 2009-10 for making adjustments Ground No.2 Ground No.2 Ground No.2 Denial of relief u/s.10AA Ground No.3 Ground No.3 Ground No.3 Disallowance of payments to AEs and third parties u/s.40(a) Ground No.4 Ground No.4 Ground No.4 Disallowance of ESOP expenses Ground No.5 Ground No.5 Ground No.5 Rejection of claim for refund of excess DDT N/A N/A Ground 6 Transfer Pricing adjustment N/A Ground 6 to 10 Ground 7 to 11 Variance in total income as computed in final assessment order N/A N/A Ground 12 Non-grant of credit for Ground No.6 Ground No.11 Ground No.13 IT(TP)A No.868 to 870/Bang/2022 Page 3 of 40 entire TDS Non-grant of credit for entire TCS N/A N/A Ground No.14 Non-grant of deduction u/s.80G Ground No.7 N/A N/A Short grant of Foreign Tax Credit (without prejudice) Ground No.8 Ground No.12 Ground No.15 Initiation of Penalty proceedings Ground No.9 Ground No.13 Ground No.16 Interest u/s.234B & 234C Ground No.10 Ground No.14 Ground No.17 Consequential Relief Ground No.11 Ground No.15 Ground No.18 IT(TP)A No.868/Bang/2022 4. We will first take up the appeal for the assessment year 2016-17. The assessee filed the return of income for AY 2016-17 on 26.11.2016 declaring an income of Rs.2830,42,32,680. The case was selected for scrutiny under CASS and the notice u/s.143(2) was duly served on the assessee. Since the assessee company has international transactions, a reference was made to the Transfer Pricing Officer (TPO) for computation of Arm’s Length Price of the transactions the assessee had with the Associated Enterprise (AE). The TPO made an adjustment towards Advertisement and Marketing (AMP) expenses for an amount of Rs.40,05,98,097. The AO after incorporating the TP adjustment made the following additions / disallowances. Sl. No. Particulars Amount INR 1 Denial of relief u/s.10AA 532,03,67,618 2 Disallowance of payments made to AE and third parties without TDS 424,25,59,887 3 Disallowance of ESBP expenses 273,90,00,000 IT(TP)A No.868 to 870/Bang/2022 Page 4 of 40 5. The assessee filed its objections before the DRP who gave relief to the assessee by deleting the TP adjustment and remitting issues back to AO for verification of details pertaining to other additions / disallowances. The AO passed the final assessment order revising the additions / disallowances and this appeal is against the final order of assessment passed by the AO pursuant to the DRP directions. 6. Ground no.1 is general. In Ground no.2, the assessee is questioning the action of the AO in placing reliance on the “draft assessment order” passed for AY 2009-10 in drawing adverse conclusions in AY 2016-17. However, at the time of hearing, the ld AR did not press this ground. Accordingly, the ground no.2 is dismissed as not pressed. Denial of relief u/s.10AA of the Act – Ground No.3 7. Ground No.3 relates to the rejection of claim made 10AA of the Act. The assessee had claimed deduction of Rs.532,03,67,618 u/s 10AA of the Act in respect of various units. The AO rejected both the claims on the ground that the assessee has failed to comply with various conditions prescribed in those sections for allowing deduction. The AO after recording the various discrepancies, held that the assessee is not entitled for deduction of Rs.532,03,67,618 u/s 10AA of the Act. The AO has summarised his conclusion paragraph 9.4 at page 31 of the assessment order:- “1. The Assessee company could not substantiate its claim of manufacture and export of computer software from eligible IT(TP)A No.868 to 870/Bang/2022 Page 5 of 40 SEZ unit as brought out in the discussion held earlier. Section 10AA gives tax benefit on the profits and gains derived by an undertaking from export of computer software that has been manufactured from eligible SEZ units. 2. And so owing to the inability of the Assessee to bring on record facts which shows that it has complied with all the regulations laid down, as is the case here, it becomes difficult to allow the claim made, when in fact, lot of anomalies pertaining to its functioning have been clearly brought out and detailed in the earlier para. 3. Regarding transmission of data from eligible SEZ units to outside India also the Assessee could not clearly bring out the relevant facts which could be different from what has been presented earlier. The issue of VSNL and the contradictory submissions having been made by the assessee to different authorities still remains the same as in the past as no new evidences or documents are brought on record to prove otherwise. 4. The scheme of STPI notified by Government of India was not scrupulously followed/ adhered to by IBM India Pvt. Ltd. Not even a single software development agreement was registered by IBM India Pvt. Ltd with any of the STPI units. For the onsite development of computer software the company was unable to establish the direct nexus between the eligible unit and the client. 5. The DOU's/SOWs was found not registered with any of the SEZ unit as was the case in the past. 6. The MSA and ICA have clearly revealed the fact that the undertakings commenced the business activity after 2004-05 and thus were not new undertakings that began to manufacture or produce the computer software. Rather all such undertakings have continued the business which was already in existence. It is violation of sub-section (2) of section 10A. 7. It has also been established that unit wise P&L account is not reliable document. The CA who has issued a certificate IT(TP)A No.868 to 870/Bang/2022 Page 6 of 40 about the true and correct nature of the unit wise P&L account has admitted in sworn statement that it did not reflect the true and correct profit. And though the Assessee pointed out that this should not be a factor for disallowance in the light of judgments quoted, it is hereby clarified that this is only one amongst a host of other reasons as brought out, why the exemption claim u/s 10AA is being denied to the Assessee.” 8. The DRP after considering the various submissions of the assessee held as under – “2.3.5 Having considered the submissions, it is seen that similar issue has arisen in the previous assessment years 2014-15. The assessee has raised similar objections and also made similar submissions during the DRP proceedings for the assessment years 2014-15. Considering that, the facts are being similar to the previous year, we are of the considered opinion that the view taken by the DRP for the assessment year 2014-15 holds good in rejecting the claim of the assessee and upholding the action of the AO in disallowing the claim of the assessee for relief under section 10AA of the Act. The directions of the DRP are assessment year 2014-15 are reproduced as under: "Having considered the submissions, we note that the assessee has registered only the MSA Agreement entered in 2004 with the STPI authorities. This is merely an umbrella agreement and does not refer to the nature of services rendered. It was represented that the assessee rendered services only to its AEs, and that the nature of services rendered were as per DOU and SOW entered with the parties. It was conceded that these DOUs & SOWs were not registered with the STPI authorities and thus we note that the compliance to the requirements of sec 10AA are not met. In view of such non-registration, the AO's inference that the assessee continued with the existing business cannot be faulted with. We also note that the assessee failed to match the accounting invoices with the Softex forms and thereby failed to satisfy the AO as to the correctness of the claim of deduction. It was contended that the invoices clearly specify the nature of services to be software consultancy, technical support fee, but the IT(TP)A No.868 to 870/Bang/2022 Page 7 of 40 invoices were not produced for verification. In view of these deficiencies, we concur with the AO's opinion that the scheme of STPI notified by the Government of India was not scrupulously followed / adhered to by the assessee and hence we are inclined to uphold the decision of the AO in making the impugned disallowance." 2.3.6 Further, in order to examine whether the convertible foreign exchange was brought into India and it represented consideration received for the export of computer software, the DRP during the current year proceedings has provided several opportunities to the assessee to produce the necessary documents and evidences. The assessee has not produced any documents and evidences before us but only stated that the assessee may be allowed production of the evidences before the AO as these evidences are voluminous in nature. As a matter of principle of natural justice, the NFAC/AO was requested to verify the documents and cause necessary verification vide this office letter dated 09.03.2022. The assessee, also during the DRP hearing simply stated that the documents being voluminous in nature could not be produced for verification and requested to direct the AO to examine the issue and conclude accordingly. Regarding the remanded issues, the NFAC/AO has been again asked to expedite the proceedings vide this office letter dated 28.04.2022 and 24.05.2022. However, no response has been received as yet. Therefore, the DRP proceeds to decide the issue based on the information available on record. 2.3.7 The DRP has given several opportunities to the assessee to produce the relevant documents and the evidences in support of its claim for relief under section 10AA of the Act. Considering the failure on the part of the assessee to produce the relevant documents and cogent evidences in support of its claim this panel is of the considered opinion that the assessee failed to prove the receipt of sale proceeds of computer software exported out of India being brought into India in convertible foreign exchange, The assessee states that it has given the documents evidencing the receipt of software income in convertible foreign exchange in the form of EEFC account extracts. Similarly, the assessee has given common inter-company accounting system invoices mapped to SOFTEX forms, letter from RBI reinstating the approval for bank account outside India etc., in order substantiate its claim of tax IT(TP)A No.868 to 870/Bang/2022 Page 8 of 40 holiday u/s. 10AA. All these documents have already been submitted by the assessee to the AO during the assessment proceedings, which have not been processed by the AO. The AO is therefore, directed to verify the same and compute the 10AA accordingly on the basis of the documents furnished.” 9. In effect, the Ld DRP has given its directions with regard to the allegation of splitting/reconstruction of existing undertakings and remitted the back to the AO with a direction to verify the reconciliation of payments received with the turnover reported by the assessee, compliance on reporting requirements of turnover through statutory forms, letter from RBI reinstating the approval for Bank account outside India etc. 10. Accordingly in conformity with the directions of the DRP, the AO issued a notice u/s.142(1) to the assessee with regard to the examination of the details. In response the assessee filed the report of an independent auditor with the transactional audit report of the export transactions. The AO after examination of the report, has recorded the finding that out of the total export turnover of USD 2428.56 million, an amount of USD 2384.57 was realized by the assessee for the year under consideration. However the AO did not give any relief to the assessee and retained the addition made towards relief u/s.10AA. 11. The ld AR brought to our 6attention that the alleged violations pointed out by the AO have been addressed by the Tribunal in the assessee’s own case in IT(TP)ANo.725/Bang/2018 dated 31.7.2020 relating to AY 2013-14. IT(TP)A No.868 to 870/Bang/2022 Page 9 of 40 12. The Ld DR relied on the decision of the lower authorities. 13. We notice that the coordinate bench of the Tribunal in assessee own case has considered the issue of relief u/s.10AA on various grounds alleged by the AO. The various issues based on which the AO denied the relief u/s.10AA and the relevant discussions made by the Tribunal are extracted below:- Assessee is engaged in software development activity A.5 We have perused submissions advanced by both sides in light of records placed before us. Objection raised by authorities below is that, assessee did not establish by way of documentary evidences regarding services rendered to its AE's globally, and that, these were in the nature of software development services. It has been alleged by revenue that, MSA dated 1-1-2004, was the only document registered with STPI/SEZ authorities, which do not specify the scope of work. We place reliance upon Circular no. 01/2013, dated 17-1-2013 issued by CBDT, wherein, necessity to have separate master service agreement for each work contract and to what extent it is relevant has been dealt with as under: "(2)........ (i)........... (a)......... (b)......... (ii) Whether it is necessary to have separate master service agreement (MSA) for each work contract and to what extent it is relevant. As per the practice prevalent in the software development industry, generally two types of agreement entered into between the Indian IT(TP)A No.868 to 870/Bang/2022 Page 10 of 40 software developer and the foreign client. Master Service Agreement (MSA) is an initial general agreement between a foreign client and the Indian software developers setting out the broad and general terms and conditions of business under the umbrella of which specific an individual Statement of Work (SOW) are formed. These SOW, is in fact, enumerate the specific scope and nature of the particular task or project that has to be rendered by a particular unit under the overall ambit of the MSA. Clarification has been sought whether more than one SOW can be executed under the ambit of a particular MSA and whether SOW should be given preceded and over MSA. The matter has been examined. It is clarified that the tax benefit under section 10 AA, 10 AA and 10 B would not be denied merely on the ground that a separate and specific MSA does not exist for each SOW. The SOW would normally prevail over MSA in determining the eligibility for tax benefits unless the assessing officer is able to establish that there has been splitting up or reconstruction of an existing business or non-fulfilment of any other prescribed condition." From the above, it is clear that, benefit under section 10A,10AA and 10 B cannot be denied as separate and specific MSA does not exist for each SOW. Be that as it may, from SOFTEX forms placed in paper book at page 536 onwards, columns 7 specifically reveals, export contract/purchase order, being filed with SEZ. We also note that, each form consist enclosures, like copies of export contract, royalty agreement, communication from foreign customers. Submissions by Ld. Standing Counsel for revenue is thus found to be contrary to SEZ approvals placed at page 782 onwards of paper book volume 3. Ld. Standing Counsel for revenue also placed reliance on Circular no. 1/2013 dated 17/01/2013 issued by CBDT, which addresses various requirements for being eligible to claim deduction under section 10AA of the Act, but did not bring to our notice, anything contrary except for saying that assessee did not file separate SOW with SEZ. Ld. Counsel submitted that, assessee claimed deduction under section 10AA of the Act for year under consideration, however, for purposes of IT(TP)A No.868 to 870/Bang/2022 Page 11 of 40 definition of 'computer software', one has to refer to Explanation 2 to Section 10A(8) of the Act. Ld. Counsel submitted that 'computer software' for purposes of section 10AA would mean: "(i) "computer software" means,- (a) any computer program recorded on any disk, tape, perforated media or other information storage devices;or (b) any customised electronic Data or any product or service of similar nature, as may be notified by the board, which is transmitted or exported from India to any place outside India by any means." We note that transfer pricing adjustment proposed by Ld. TPO was in respect of payments received on account of services rendered by assessee under software development segment. Therefore, it cannot be held that services rendered by assessee, does not fall under software development service segment. So, to allege that, assessee was providing miscellaneous services, is like blowing hot and cold at the same time. Revenue has not been able to prove anything contrary by way of documentary evidences on this aspect before us. Therefore, this objection raised by revenue does not hold good in eyes of law and is rejected. Evidence of data transmission and export of software outside India B.7 We have perused submissions advanced by both sides in light of records placed before us. It is observed that, coordinate bench of this Tribunal for assessment year 2008-09 (supra) has already taken a view that declaration on STPI forms should be held to be sufficient in this regard. Further, we agree with Ld. Counsel that, for purpose of eligibility of claim under section 10AA of the Act, this objection does not have any relevance. Therefore, respectfully following the same, this objection raised by authorities below is rejected at the threshold. IT(TP)A No.868 to 870/Bang/2022 Page 12 of 40 Non submission of accounting invoices to STPI/SEZ authorities / Non approval by SEZ authorities C.8.3 In the present facts of the case assessee placed on record approvals obtained by SEZ authorities which has not been rejected. It is noticed that nothing has been brought on record by Ld. Standing Counsel to show that alleged units ceases to be an eligible unit registered with SEZ authority. Further we refer to the decision relied upon by Ld. Counsel in case of Nippon Electronics (supra) by Hon'ble Karnataka High Court and Tata Communications Internet Services Ltd. (supra) by Hon'ble Delhi High Court. C.8.4 Respectfully following aforestated decision we agree with submissions of Ld. Counsel that, in absence of any adverse action by SEZ Authorities, no presumption could be drawn that assessee violated any requirements under the scheme. We refer to decision of Ahmedabad Tribunal in case of ITO v. E-Infotech Ltd. [2000] 124 TTJ 176, to support the aforestated view. This Tribunal in the said case has held asunder: "As regards violation of norms of STPI, we are of the view that unless violation of conditions of approval, impinge on conditions for grant of deduction under the relevant provisions of the Act, there is no ground for denial of deduction. In this case the status of tax bear as hundred percent EOU and under STPI scheme continues. For the default, already penalty has been imposed by concerned authorities" Facts in present case is more stronger than facts based upon which Hon'ble Ahmedabad Tribunal. Nothing has been placed on record by Revenue to show that approvals relied upon by Ld. Counsel referred to herein above has been rejected by SEZ authority. Therefore, respectfully following ratio laid down by Hon'ble Supreme Court in case of Gestetner Duplicators (P.) Ltd. (supra), it was not open for authorities below to assume any violation under SEZ Act, 2005 so long as certificates of approval/renewal of units are not withdrawn by a process known to law. We are therefore of opinion that this objection raised by Ld. AO does not hold good in test of law. IT(TP)A No.868 to 870/Bang/2022 Page 13 of 40 Separate books of account and unit wise P&L account not maintained E.4.4 In view of the above, respectfully following observations by this Tribunal in asst. year 2008-09, we are of the view that there is no requirement for maintaining separate books of account for claiming deduction under section 10A/10AA of the Act, and books of account maintained by assessee is sufficient to enable computation of profits of various SEZ units. Further the circular issued by CBDT dated 17-1-2013 (supra) also clarifies that there is no requirement in law to maintain separate books of account and the same cannot be insisted upon. We therefore do not find any merit in this objection raised by Ld. AO. Assessee continued existing business through SEZ units by splitting and reconstruction F.5.1 It is submitted by assessee that, there was only a change in name of assessee. Ld. AO has not been able to establish by way of any material evidences that such change in name, resulted in formation of a new undertaking for denial of exemption, otherwise entitled to assessee. In present case, Assessee started claiming exemption under section 10A from assessment year 2000-01. Ld. Counsel placed reliance upon decision of Hon'ble Delhi High Court in case of Tata communication Internet Services Ltd. (supra), wherein, Hon'ble Court upheld the view taken by thins Tribunal that, conditions mentioned in section 80IA(3) of the Act, which is parimateria to section 10AA (4) of the Act, cannot be considered for every year of the claim of deduction under section 80 IA of the Act, but can be considered only in the year of formation of business. This preposition has been accepted by DRP in assessment year 2011-12 in assessee's own case. It is also noted that the amalgamation took place during the year 2004 as approved by Hon'ble Karnataka High Court, by order dated 25-9-2004, and accordingly, units stood already transferred. We also draw support from decision of Mumbai Tribunal in case of Piramal Health Care Ltd. v. Dy. CIT in [IT Appeal no. 1257 (Mum) of 2014, dated 7-5-2019], wherein, Honble Bench decided an identical issue under section 80 IC(4), which is pari materia to section 10AA(4). We IT(TP)A No.868 to 870/Bang/2022 Page 14 of 40 have perused decision of Hon'ble Supreme Court in case of ACE Multi Axes Systems Ltd. (supra), relied by Ld. Standing Cousel for revenue. Hon'ble Supreme Court in this case was considering claim u/s.80IB(2). Hon'ble Court observed asunder: "12. The scheme of the statute does not in any manner indicate that the incentive provided has to continue for 10 consecutive years irrespective of continuation of eligibility conditions. Applicability of incentive is directly related to the eligibility and not de hors the same. If an industrial undertaking does not remain small scale undertaking or if it does not earn profits, it cannot claim the incentive. No doubt, certain qualifications are required only in the initial assessment year, e.g. requirements of initial constitution of the undertaking. Clause 2 limits eligibility only to those undertakings as are not formed by splitting up of existing business, transfer to a new business of machinery or plant previously used. Certain other qualifications have to continue to exist for claiming the incentive such as employment of particular number of workers as per sub-clause 4(i) of clause 2 in an assessment year. For industrial undertakings other than small scale industrial undertakings, not manufacturing or producing an article or things specified in 8th Schedule is a requirement of continuing nature." Hon'ble Supreme Court, categorically observed in above referred paragraph that, condition regarding formation are required to be established in the initial year alone. On the basis of above discussions, that the satisfaction of conditions in section 10AA(4) are required to be satisfied in the year of formation, we hold, this objection raised by Ld. AO does not hold good for the year under consideration. Verification of receipts of sale proceeds of computer software exported outside India, being brought in convertible foreign exchange 6.11 As observed in detail by coordinate bench of Pune Tribunal, following ratio laid down therein, we hold that assessee is eligible to claim deduction under section 10AA, on incremental income arisen IT(TP)A No.868 to 870/Bang/2022 Page 15 of 40 pursuant to APA dated 29-12-2016. We direct DRP to grant deduction under section 10AA of the Act, to the extent of sale proceeds received from export of software services, brought into India in convertible foreign exchange within stipulated period. Accordingly, this issue is set aside to DRP for verification verify and to allow claim of assessee as directed hereinabove, r.w., our observations in para D.9.4 hereinabove 14. We also notice that the AO has selectively considered the issues restored by the DRP. The DRP vide para 2.3.7 of the order extracted in the earlier part of the order, has directed the AO to verify the details with regard to (i) Receipt of software income in convertible foreign exchange (ii) Common inter-company accounting system invoices mapped SOFTEX forms. (iii)Letter from RBI reinstating the approval for bank account outside India 15. The DRP has mentioned that these documents have been submitted before the AO during assessment proceedings which have not been processed and therefore directed the AO to verify these details and accordingly compute the 10AA on the basis of documents furnished. We also notice that the AO has verified only the receipt of software income wherein he has recorded the finding that out of the total export turnover of USD 2428.56 million, an amount of USD 2384.57 was realized by the assessee for the year under consideration. We further notice that the AO has mentioned that though the details are examined since the DRP has already rejected the claim of 10AA deduction, the analysis of details will not have material effect in the IT(TP)A No.868 to 870/Bang/2022 Page 16 of 40 final order. We are unable to appreciate this finding of the AO which is apparently wrong. The DRP has directed the AO to verify the above listed details and re-compute the relief u/s.10AA whereas the AO without following the directions have retained the same addition even after recording the finding that the major portion of the software income is received into the bank account in convertible foreign exchange. 16. Considering the relevant findings of the coordinate bench of the Tribunal in assessee’s own case for AY 2013-14, it is clear that the Tribunal has rejected all the contentions of the revenue with regard to the alleged violations and restored the issue only with respect to verification of receipts of sale proceeds in convertible foreign exchange into India. For the year under consideration, it is noticed that the AO has verified these details and has given a clear finding in page 55 & 56 of final assessment order, though he has not reworked the relief u/s.10AA. In view of this discussion and considering the decision of the Tribunal in assessee’s own case, we allow deduction u/s.10AA to assessee relatable to sale proceeds from export of software development services. The AO is directed to compute the relief u/s.10AA and deleted the addition accordingly. This ground is allowed in favour of the assessee. IT(TP)A No.868 to 870/Bang/2022 Page 17 of 40 Payments made to AEs and third parties without TDS – Ground No.4 17. The AO observed that during the year under consideration, the assessee has paid substantial amount to various AEs and third parties. Based on the details furnished by the assessee the AO noticed an amount of Rs.611,92,32,304 is paid without deducting TDS. The assessee submitted before the AO that these are payments towards cost to cost reimbursements and other payments on which there is no liability to deduct tax. The AO after considering the submissions made a disallowance of Rs.424,25,60,246 the breakup of which is as given below – S.No Particulars Amount in INR 1 Immigration related reimbursements 1,37,06,42,309 2 Stock Option reimbursements 1,89,04,83,899 3 Assignee related reimbursements 88,99,98,596 4 Third party reimbursements and Others 1,39,57,887 5 Travel related reimbursements 2,95,75,021 6 Business profits 4,79,03,856 7 Others (1,322) 8 Grand Total 4,24,25,60,246 18. On further objections raised the DRP held that – “ ‘2.4.10 In this regard, it is stated that the assessee had submitted the following documents in support of his claim before the AO, which were not taken into consideration by the AO. 1. sample copies of invoices along with relevant form/ certificate (reimbursements and others) for amounts on which tax has not been IT(TP)A No.868 to 870/Bang/2022 Page 18 of 40 deducted at source, during the course of the assessment proceeding vide submission dated July 14, 2021. 2. Invoice-wise summary of the sample ESBP cross charge payments made by the us to IBM US along with corresponding bank reference numbers and relevant extracts of the bank statement were submitted on July 14, 2021. 3. Details of travel/ immigration/ visa related expense reimbursement along with sample supporting documents were furnished on July 14, 2021 4. Sample copies of declarations for non-existence of Permanent Establishment (`PE), tax residency certificate, purchase orders for third party vendors who do not have a PE in India were furnished. 2.4.11 The AO vide this office letter dated 09.03.2022 was also directed to verify the documents and give a remand report to us. The remand report has not yet been received. Therefore, AO is directed to verify the contention of the assessee that these expenses are reimbursement on cost-to-cost basis and if found in order delete the addition made.’ 19. As per the directions of the DRP, the AO analyzed the various aspects of the payments based on the details furnished by the assessee and gave partial relief to the assessee as under – S. No. Particulars Amounts proposed to be disallowed in the Draft order Amounts in the nature of Reimbursement on Cost to Cost basis examined as per the directions of DRP order Amounts proposed to be disallowed in this order 1 Immigration related reimbursements 137,06,42,309125,56,56,552 11,49,85,757 2 Stock Option reimbursements 189,04,83,899189,04,83,899 - 3 Assignee related reimbursements 88,99,98,596- 88,99,98,596 4 Third party reimbursements and Others 1,39,57,887- 1,39,57,887 5 Travel related reimbursements 2,95,75,021 - 2,95,75,021 IT(TP)A No.868 to 870/Bang/2022 Page 19 of 40 6 Business profits/ Make available clause benefit (Technical Services) 4,79,03.857- 4-79.03,857 7 Others (1,322)(1322) - Grand Total 424,25,60,246314,61,39,129 109,64,21,117 20. The ld AR submitted that during the proceedings for AY 2013- 14, the coordinate bench of the Tribunal in assessee’s own case has set aside the matter to the DRP with the following observations – “8.7.6. Ld. Counsel, however submitted that voluminous details were submitted by assessee, which has not been considered by Ld.AO, while passing impugned order. We have perused observations of this Tribunal for assessment year 2008-09 wherein, Hon’ble Bench remanded the issue to DRP for fresh consideration and decision. Respectfully, following the same, we remand the issue to DRP with similar direction to consider the claim of assessee in light of evidences filed, after affording opportunity of being heard in accordance with law. Assessee is directed to file invoices raised in support of payments made by assessee to relevant parties. Assessee is at liberty to file all relevant details/evidences to substantiate its claim. DRP is then directed to verify nature of payment in the light of invoices filed by assessee. DRP is also directed to analyse payment made to non-residents on which tax has not been deducted at source in light of Explanation 2 to section 195. DRP shall grant proper opportunity of being heard to assessee.” 21. The ld AR also submitted that the DRP further remanded the matter to the AO and upon verification of the submissions of the assessee with regard to these payments, the AO held that substantial payments (immigration, travel Other reimbursements etc.) made by the assessee are in the nature of reimbursement of expenses (Page 16 of the remand report, page 622 of paper book 2). The ld AR therefore IT(TP)A No.868 to 870/Bang/2022 Page 20 of 40 prayed that since the payments in the year under consideration are covered by the decision of Hon’ble Tribunal in assessee’s own case for the current year also the issue can be remanded back to the DRP for further verification. 22. We heard ld D.R and perused the record. Out of the total disallowance as listed in the table above assignee related reimbursements for an amount of Rs.88,99,98,596 is towards reimbursements of salary expenses to IBM overseas companies towards its seconded employees. 23. The assessee had submitted that these are reimbursement of salary cost to the AEs and these salary cost has already been subject to withholding of tax u/s.192 while making the payments to employees. The AO had treated the same as fees for technical services and the said treatment is confirmed by the DRP. We notice that the co-ordinate bench in AY 2013-14, has remitted the entire issue of reimbursements to AEs and third parties to the file of Ld DRP and respectfully following the same we restore the issue for the year under consideration with similar directions. With regard to the reimbursement of secondment cost to the AEs, the coordinate bench of the Tribunal in the case of M/s. Goldman Sachs Services Pvt. Ltd vs DCIT (IT(IT)A Nos. 362 to 369 & 338 to 345/Bang/2020 dated 29.04.2022) had held that the reimbursement made by the assessee in India to overseas entity, towards the seconded employees cannot be IT(TP)A No.868 to 870/Bang/2022 Page 21 of 40 regarded as “Fee For technical Services”. Therefore the DRP while considering the issue of assignee fees reimbursements is directed to consider the decision of the coordinate bench in the case of Goldman Sachs Services Pvt. Ltd (supra). Needless to say that the assessee be given an opportunity of being heard. It is ordered accordingly. Disallowance of ESOP expenses – Ground No.5 24. Ld.AR submitted that under the Employee Share Based Plan ('ESBP') of IBM US, identified employees of IBM India who were eligible for stock options. It is submitted that as per the arrangement, the cost incurred by IBM US under ESBP is cross charged to IBM India. The cost incurred by IBM US is the difference between the market value of shares on the date of issue of shares to the employees of IBM India and the actual grant price. The assessee recorded such cost as expense in the books of account. It is submitted that the cost incurred by IBM India in relation to ESBP are employee related costs, and these expenses are incurred at the behest of IBM India to retain, motivate and award its employees. It is thus submitted that the ESBP costs are deductible as business expenditures. 25. The Ld.AR also submitted that, as per the APA (page 1521 & 1522 of paper book 4), the operating expenses in relation to the export services include the ESBP cross charges and therefore, it was submitted that, if one arm of the Government accepted the transactions, the other arm of the Government must also respect the same. The revenue authorities however disallowed the amount under the ESBP IT(TP)A No.868 to 870/Bang/2022 Page 22 of 40 and also disallowed as a part of disallowance of payments to AEs thereby leading to a double disallowance of the same expense. 26. The ld AR further submitted that the copies of invoices raised by IBM US evidencing cross charges made by IBM US to IBM India towards ESBP expenses have already been submitted before the lower authorities (Page 1177 to 1247 of paper book 4). 27. The ld AR placed reliance is placed on various decisions in favour of the assessee in this regard. The ld AR also submitted that the coordinate bench in assessee’s own case for AY 2015-16 has considered the allowability of ESBP expenses and held in favour of the assessee. (i) Dy. CIT v. Accenture Services (P.) Ltd. [IT Appeal No. 4540 (Mum.) of 2008, dated 23-3-2010] (ii) Novo Nordisk India (P.) Ltd. v. Dy.CIT [2014] 42 taxmann.com 168 / 63 SOT 242 (Bang. - Trib.) (iii) CIT v. Biocon Ltd. [2020] 121 taxmann.com 351/[2021] 276 Taxman 1/430 ITR 151 (Kar.) (iv) Apollo Tyres Ltd. v. CIT [2002] 122 Taxman 562/255 ITR 273 (SC) 28. On the contrary, the Ld.DR relied on orders passed by authorities below. 29. We heard both the parties and perused the materials on record. We notice that the coordinate bench in assessee’s own case for AY 2015-16 (IT(TP)A No.289/Bang/2021 dated 14.02.2022) has considered the same issue and held that – IT(TP)A No.868 to 870/Bang/2022 Page 23 of 40 “10. The issue of deductibility of ESOP expense issue is covered in favour of the assessee by following judicial precedents of various High court/Tribunals, including Special Bench: • Delhi High Court - Pr. CIT v. Lemon Tree Hotels (P.) Ltd. [2019] 104 taxmann.com 26 SLP granted by SC in Pr. CIT v. Lemon Tree Hotels (P.) Ltd. [2019] 104 taxmann.com 27/262 Taxman 311 (SC) "1. .............................. since the ITAT followed the previous judgments in CIT v. PVP Ventures Ltd. [2012] 23 taxmann.com 286/211 Taxman 554 (Mad.) the expenditure had to be allowed. ........................... 2. Although the Revenue urges that in terms of Circular No. 9 of 2007, the expenditure ought not to be allowed given that actual expenditure towards acquisition of shares, and not mere allotment of shares by the employer can be considered as a permissible deduction, this Court is of the opinion that such an argument is untenable; that was the rationale of disallowance in this case. What the Revenue urges essentially is that the unless the employer/assessee acquires the shares from a third party, it cannot claim any deduction and that expenditure claimed for allotment or issue of ESOP is merely notional. This Court is of the opinion that such an argument ignores the realities of functioning of commercial entities who would then be asked to purchase shares from market place or third party at prevailing rates instead of allotting them. 3. For above reasons, no question of law arises." • Hon'ble Delhi High Court - Pr. CIT v. New Delhi Television Ltd. [2018] 99 taxmann.com 401/[2017] 398 ITR 57 (Delhi) • Hon'ble Madras High Court - CIT v. PVP Ventures Ltd. [2012] 23 taxmann.com 286/211 Taxman 554 (Mad.) "11. .............. On the issue of expenditure of Rs. 66.82 lakhs towards the issue of shares to the employees stock option is concerned, the Tribunal pointed out that the shares were issued to the employees only for the interest of the business of the assessee to induce employees to work in the best interest of the assessee. The allotment of shares was done by the assessee in strict compliance with SEBI regulations, which mandate that the difference between the market prices and the price at which the option is exercised by the IT(TP)A No.868 to 870/Bang/2022 Page 24 of 40 employees is to be debited to the profit and loss . . . the Tribunal in its order stated that it was a benefit conferred on the employee. So far as the company is concerned, once the option was given and exercised by the employee, the liability in this behalf got ascertained. This was recognised by the SEBI and the entire employees stock option plan was governed by the guidelines issued by the SEBI. On the facts thus found, the Tribunal held that it was not a case of contingent liability depending on the various factors on which the assessee had no control. The expenditure in this behalf was an ascertained liability, thus the expenditure incurred being on lines of the SEBI Guidelines, there could be no interference in the relief granted by the assessing authority for the expenditure arising on account of the employees' stock option plan. This expenditure incurred as per the SEBI Guidelines and granted by the Officer could not be considered as erroneous one calling for the exercise of jurisdiction under section 263 of the Act." • Bangalore Special Bench - Biocon Ltd. v. Dy. CIT (LTU) [2013] 35 taxmann.com 335/[2014] 144 ITD 21 "9.2.6 It is quite basic that the object of issuing shares can never be lost sight of. Having seen the rationale and modus operandi of the ESOP, it becomes out-and-out clear that when a company undertakes to issue shares to its employees at a discounted premium on a future date, the primary object of this exercise is not to raise share capital but to earn profit by securing the consistent and concentrated efforts of its dedicated employees during the vesting period. Such discount is construed, both by the employees and company, as nothing but a part of package of remuneration. In other words, such discounted premium on shares is a substitute to giving direct incentive in cash for availing the services of the employees. There is no difference in two situations viz., one, when the company issues shares to public at market price and a part of the premium is given to the employees in lieu of their services and two, when the shares are directly issued to employees at a reduced rate. In both the situations, the employees stand compensated for their effort. The sole object of issuing shares to employees at a discounted premium is to compensate them for the continuity of their services to the company. By no stretch of imagination, we can describe such discount as either a short capital receipt or a capital expenditure. It is nothing but the employees cost incurred by the company. The substance of this transaction is disbursing IT(TP)A No.868 to 870/Bang/2022 Page 25 of 40 compensation to the employees for their services, for which the form of issuing shares at a discounted premium is adopted. 9.2.7. it is pertinent to note that this section does not restrict paying out of expenditure in cash alone. Section 43 contains the definition of certain terms relevant to income from profits of business or profession covering sections 28 to 41. Section 37 obviously falls under Chapter IV-D. Sub-section (2) of section 43 defines "paid" to mean: "actually paid or incurred according to the method of accounting upon the basis of which the profits or gains are computed under the head 'profits and gains of business or profession'." When we read the definition of the word "paid" u/s 43(2) in juxtaposition to section 37(1), the position which emerges is that it is not only paying of expenditure but also incurring of the expenditure which entails deduction u/s 37(1) subject to the fulfilment of other conditions by undertaking to issue shares at discounted premium, the company does not pay anything to its employees but incurs obligation of issuing shares at a discounted price on a future date in lieu of their services, which is nothing but an expenditure u/s 37(1) of the Act 9.3.6 if some of the options remain unvested or are not exercised, the discount hitherto claimed as deduction is required to be reversed and offered for taxation in such later year. We, therefore, hold that the discount in relation to options vesting during the year cannot be held as a contingent liability. 10.8 Reverting to the questions of 'when' and 'how much' of deduction for discount on options is to be granted, we hold that the liability to pay the discounted premium is incurred during the vesting period and the amount of such deduction is to be found out as per the terms of the ESOP scheme by considering the period and percentage of vesting during such period. We, therefore, agree with the conclusion drawn by the tribunal in S.S.I. Ltd.'s case (supra) allowing deduction of the discounted premium during the years of vesting on a straight line basis, which coincides with our above reasoning. 12.2 It would be imperative to highlight certain points having bearing on the issue which have come to our notice during the course of hearing. The AO is directed to look, inter alia, into these aspects in quantifying the amount of eligible deduction. a. The assessee- company was a closely held company in the previous year relevant to the assessment year 2003-2004 and as such there was no question of the listing of its shares and having some market price at the time of IT(TP)A No.868 to 870/Bang/2022 Page 26 of 40 grant of options. Ordinarily, the amount of discount on premium which is written off over the vesting period represents the market price of the shares listed on the stock exchange on the date of grant of option as reduced by the price at which option is given to the employees. However, presently there is no availability of any market price of such shares on the date of grant of option as the company came to be listed on a stock exchange in a subsequent year. On a pointed query, the ld. AR furnished the details of such claim by showing that it granted 71,510 options with discount of Rs. 909 per option making total discount at Rs. 6.50 crore. He stated that the face value of shares is at Rs. 10 against which the deduction for discounted premium over the vesting period has been claimed at Rs. 909, meaning thereby that the market price of the share on the date of grant of option was taken at Rs. 919. No material worth the name has been placed on record to indicate as to how a share with face value of Rs. 10 has been valued at Rs. 919 for claiming deduction towards discount at Rs. 909 per share. This aspect of valuation of shares at Rs. 919 per share needs to be examined by the Assessing Officer. b. We have held above that the deduction of the discounted premium is to be claimed over the vesting period. The way in which the assessee has claimed deduction runs contrary even to the SEBI Guidelines, which also provide for deduction on straight line basis. The manner of the assessee's claiming deduction has resulted in needlessly increasing the amount of deduction for the first year at the cost of deduction for the subsequent three years. It needs to be set right by apportioning the total amount of the discounted premium evenly over the vesting period of four years." To summarize, Special Bench held that discount on the issue of ESOPs cannot be inter-alia treated as capital expenditure and held that being part of package of remuneration to employees, the obligation incurred for issuing shares to employees at a discounted price at a future date in lieu of their services, is an allowable deduction under section 37(1) of the Act. The Hon'ble Tribunal further held that incurring liabilities towards the discounted premium, which is compensation to employees, is directly linked with the span of services put in by each employee and liability to issue stock options at discount is incurred during the vesting period and the amount of deduction is to be calculated as per the terms of the ESOP scheme, hence the discount was deductible over the vesting period. Further the Special Bench pointed out that the liability for discounts which arose or were incurred during the vesting period IT(TP)A No.868 to 870/Bang/2022 Page 27 of 40 required adjustment due to the fact that the actual discount could only be determined at market price when the employees exercise their options. The assessee should make a suitable downward or upward adjustment at that time." 11. Before coordinate bench of this Tribunal in case of Novo Nordisk India (P.) Ltd. (supra) similar issue arose on identical facts like that of assessee. This Tribunal relied on (i) Sassoon J. David & Co. (P.) Ltd. v. CIT [1979] 1 Taxman 485/118 ITR 261 (SC) and (ii) Mysore Kirloskar Ltd. v. CIT [1987] 30 Taxman 467/166 ITR 836 (Kar.) The Tribunal held that the expenditure in question was wholly and exclusively used for the purpose of the business of the assessee and motivated its workforce and allowed the deduction u/s 37(1) of the Act. Respectfully following the above view, we direct to grant deduction to assessee on ESPO expenses in accordance with law, based on the principles laid down in the decision referred hereinabove. Accordingly this ground raised by assessee stands allowed.” 30. Respectfully following the various judicial precedence discussed above and the principles laid down therein, we hold that the ESBP expenses incurred by the assessee is and allowable expense and the disallowance is hereby deleted. 31. Ground no.6 relates to the claim of short credit of TDS and Ground no.7 pertains to Non-grant of deduction u/s.80G. We restore these issues to the file of AO for examining the claim of the assessee. 32. Ground nos.8 to 11 are either general or consequential. Hence they do not require any specific adjudication. IT(TP)A No.868 to 870/Bang/2022 Page 28 of 40 IT(TP)A No.869/Bang/2022 33. We shall now take up the appeal filed by the assessee for AY 2017-18. The assessee filed the return of income for AY 2017-18 on 28.11.2017 declaring an income of Rs.3147,66,59,140. The case was selected for scrutiny under CASS and the notice u/s.143(2) was duly served on the assessee. Since the assessee company has international transactions, a reference was made to the Transfer Pricing Officer (TPO) for computation of Arm’s Length Price of the transactions the assessee had with the Associated Enterprise (AE). The TPO made an adjustment towards Advertisement and Marketing (AMP) expenses for an amount of Rs.66,05,94,103. The AO after incorporating the TP adjustment made the following additions / disallowances. Sl.No. Particulars Amount INR 1 Denial of relief u/s.10AA 557,74,72,045 2 Disallowance of payments made to AE and third parties without TDS 298,81,05,782 3 Disallowance of ESBP expenses 52,94,10,972 34. The assessee filed its objections before the DRP who gave partial relief to the assessee in TP adjustment and remitting issues back to AO for verification of details pertaining to other additions / disallowances. The AO passed the final assessment order revising the additions / disallowances as per below table and this appeal is against the final order of assessment passed by the AO pursuant to the DRP directions. IT(TP)A No.868 to 870/Bang/2022 Page 29 of 40 Sl.No. Particulars Amount INR 1 Denial of relief u/s.10AA 557,74,72,045 2 Disallowance of payments made to AE and third parties without TDS 85,22,98,240 3 Disallowance of ESBP expenses 52,94,10,972 4 TP adjustment 33,72,33,087 35. Ground No.1 is general in nature. The Ground no.2 is not pressed by Ld A.R. 36. Ground no.3 relates to the disallowance of deduction claimed u/s 10A and 10AA of the Act. For the year under consideration also the AO has verified the receipt of sale proceeds of software export in convertible foreign exchange as per the directions of the DRP and has recorded the finding that out of the total export turnover of USD 3686.34 million an amount of USD 3672.82 millions was realized by the assessee during the year under consideration. Similar to AY 2016- 17, the AO did not give any relief u/s.10AA based on these receipts in the final order of assessment. Following the decision rendered by us in the preceding paragraph in AY 2016-17, we allow deduction u/s.10AA to assessee relatable to sale proceeds from export of software development services with similar directions to the AO. This ground is allowed in favour of the assessee. 37. Ground no.4 relates to disallowance of payments to AEs and third parties. Following the decision rendered by us in the preceding paragraph in AY 2016-17, we restore this issue to the file of DRP with similar directions. IT(TP)A No.868 to 870/Bang/2022 Page 30 of 40 38. Ground 5 pertains to disallowance of ESOP expenses. Following the decision rendered by us in the preceding paragraph in AY 2016-17, we deleted the disallowance made towards ESOP expenses and allow the issue in favour of the assessee. Transfer Pricing adjustment 39. The assessee is contending the TP adjustment through Ground no.6 to 10. The TPO observed that for distribution segment associate has also carried out advertisement, marketing and sales promotion activities. The TPO was of the view that the assessee needs to become adequately compensated for such additional functions undertaken by it and therefore separately benchmarked the AMP functions. The AO thus proposed adjustment to by estimating the AMP expenditure at 0.44% of the sales based on the arithmetic mean of AMP expenses to sales of plain vanilla comparables selected by the TPO. The TPO also worked out the mark up on non-routine AMP expenses for comparables to arrive at the weighted average mediate percentage of 13.12%. Since the assessee has not charged any price towards AMP expenses the TPO arrived at a TP adjustment of Rs.66,05,94,103 as related to non-routine AMP which was attributed to the development of intangibles owned by AE. 40. The DRP gave marginal relief to the assessee towards estimated percentage of AMP expenses and comparables. The TPO accordingly arrived at the revised TP adjustment at Rs.33,72,33,087 which was IT(TP)A No.868 to 870/Bang/2022 Page 31 of 40 incorporated in the final order of assessment passed by the AO. Aggrieved by the said order, the assessee is in appeal before us. 41. The ld AR submitted that the coordinate bench of the Tribunal in the case of Himalaya Drug Co vs DCIT (2020) 119 taxmann.com 421 has considered a similar issue where it is held that in the absence of any agreement with the AE, there cannot be any adjustment towards AMP expenses. The Ld.AR relied on following decisions submitted that incurring of AMP expenses does not constitute an international transaction : i. Acer India Private Limited in IT (TP) a number 27/B/2017 ii. Essilor India (P.) Ltd. v. Dy. CIT [2016] 68 taxmann.com 311 (Bang. - Trib.) iii. DCIT v. Nike India (P.) Ltd. [IT (TP) Appeal No. 232 (Bang.) of 2014] 42. The ld DR relied on the orders of the lower authorities. 43. We heard both the parties. We notice that the coordinate bench in assessee’s own case for AY 2015-16, has considered a similar issue and held that – “15. We refer to para 101 of the decision of the Hon'ble Delhi High Court in case of Sony Ericsson Mobile Communications India (P.) Ltd. v. CIT [2015] 55 taxmann.com 240/231 Taxman 113/374 ITR 118 wherein the Hon'ble Court held that, once the TPO accepts and adopts TNM Method and then chooses to treat a particular expenditure like AMP as a separate international transaction without bifurcation and segregation, it would lead to an unusual and incongruous results as AMP is the cost or expense and is not diverse. It is factored in the net profit of the interlinked transaction. This would be also in consonance with rule 10B(1)(e), which IT(TP)A No.868 to 870/Bang/2022 Page 32 of 40 mandates only arriving at the net profit margin by comparing the profits and loss account of the tested party with the comparable. The TNM Method proceeds on the assumption that functions, assets and risk being broadly similar and once suitable adjustments have been made, all things get taken into account and stand reconciled when computing the net profit margin. Once the comparables pass the functional analysis test and adjustments have been made, then the profit margin as declared when matches with the comparables would result in affirmation of the transfer price as the arm's length price. Then to make a comparison of a horizontal item without segregation would be impermissible. Under sections 92B to 92F, the pre-requisite for commencing the TP exercise is to show the existence of an international transaction. The next step is to determine the price of such transaction. The third step would be to determine the ALP by applying one of the five price discovery methods specified in Section 92C. The fourth step would be to compare the price of the transaction that is shown to exist with that of the ALP and make the TP adjustment by substituting the ALP for the contract price. Section 92B defines 'international transaction' as under : "Meaning of international transaction. 92B(1): For the purposes of this section and sections 92, 92C, 92D and 92E, "international transaction" means a transaction between two or more associated enterprises, either or both of whom are non-residents; in the nature of purchase, sale or lease of tangible or intangible property, or provision of services, or lending or borrowing money, or any other transaction having a bearing on the profits, income, losses or assets of such enterprises, and shall include a mutual agreement or arrangement between two or more associated enterprises for the allocation or apportionment of, or any contribution to, any cost or expense incurred or to be incurred in connection with a benefit, service or facility provided or to be provided to anyone or more of such enterprises. (2) A transaction entered into by an enterprise with a person other than an associated enterprise shall, for the purposes 'of sub-section (1), be deemed to be a transaction entered into between two associated enterprises, if there exists a prior agreement in relation to' the relevant IT(TP)A No.868 to 870/Bang/2022 Page 33 of 40 transaction between such other person and the associated enterprise, or the terms of the relevant transaction are determined in substance between such other person and the associated enterprise." 16. Thus, under section 92B(1)an 'international transaction' means- (a) a transaction between two or more AEs, either or both of whom are non-resident (b) the transaction is in the nature of purchase, sale or lease of tangible or intangible property or provision of service or lending or borrowing money or any other transaction having a bearing on the profits, incomes or losses of such enterprises, and (c) shall include a mutual agreement or arrangement between two or more AEs for allocation or apportionment or contribution to the any cost or expenses incurred or to be incurred in connection- with the - benefit, service or facility provided or to be provided to one or more of such enterprises. Clauses (b) and (c) above cannot be read disjunctively. Even if resort is had to the residuary part of clause (b) to contend that the AMP spend of assessee is "any other transaction having a bearing" on its "profits, incomes or losses", for a 'transaction' there has to be two parties. Therefore for the purposes of the 'means' part of clause (b) and the 'includes' part of clause (c), the Revenue has to show that there exists an 'agreement' or 'arrangement' or' 'understanding' between assessee and its AE, whereby assessee is obliged to spend excessively on AMP in order to promote the brand of AE in India. As far as the legislative intent is concerned, it is seen that certain transactions listed in the Explanation under clauses (i) (a) to (e) to section 92B are described as an 'International transaction'. This might be only an illustrative list, but significantly' it does not list AMP spending as one such transaction. The Courts held that the existence of an international transaction will have to be established de hors the BLT, the - burden is on the Revenue to first show the existence of an international transaction. The objective of Chapter X is to make adjustments to the price of an international transaction which the AEs involved may seek to shift from IT(TP)A No.868 to 870/Bang/2022 Page 34 of 40 one jurisdiction to another. An 'assumed' price cannot form the reason for making an ALP adjustment. Since a quantitative adjustment is not permissible for the purposes of a TP adjustment under Chapter X, equally it cannot be permitted in respect of AMP expenses either. 17. Be that as it may, we find that the DRP categorically observed that assessee has not furnished any documents to substantiate the argument of their existing no arrangement between assessee and the AE towards the brand promotion, which is beneficial to the AE. It is also observed by the DRP that assessee has not established that the AMP spend pertained to other segments also. Accordingly, in the interest of justice, we remand this issue to the Ld.AO/TPO to verify the aspect based on the documents/evidences submitted by the assessee. In the event the it is found that the expenditure is factored in net cost for computing margin, no separate adjustment needs to be made. Accordingly, this ground of appeal stands allowed for statistical purposes.” 44. For the year under consideration, the DRP has given a finding that the assessee has not furnished any documentation with regard to the various pleas such as AMP expenses pertain to respective segments etc. Therefore respectfully following the decision of coordinate bench on assessee’s own case for AY 2015-16 we remand this issue to the AO/TPO to verify the aspect based on the documents/evidences submitted by the assessee with similar direction that in the event it is found that the expenditure is factored in net cost for computing margin, no separate adjustment needs to be made. Accordingly, this ground of appeal stands allowed for statistical purposes. IT(TP)A No.868 to 870/Bang/2022 Page 35 of 40 45. Ground no. 11 is in respect of TDS credit not granted to assessee. We direct the AO to grant the credit for TDS deducted on verification in accordance with law. Grounds Nos. 12 to 15 are consequential in nature and do not require separate adjudication. IT(TP)A No.870/Bang/2022 46. We shall now take up the appeal filed by the assessee for AY 2018-19. The assessee filed the return of income for AY 2018-19 on 29.11.2018 declaring an income of Rs.3931,81,24,560. The case was selected for scrutiny under CASS and the notice u/s.143(2) was duly served on the assessee. Since the assessee company has international transactions, a reference was made to the Transfer Pricing Officer (TPO) for computation of Arm’s Length Price of the transactions the assessee had with the Associated Enterprise (AE). The TPO made an adjustment towards Advertisement and Marketing (AMP) expenses for an amount of Rs.99,26,36,695. The AO after incorporating the TP adjustment made the following additions / disallowances. Sl.No. Particulars Amount INR 1 Denial of relief u/s.10AA 557,74,72,045 2 Disallowance of payments made to AE and third parties without TDS 14,74,81,447 3 Disallowance of ESBP expenses 69,26,11,610 47. The assessee filed its objections before the DRP stating that the amount of relief u/s.10AA denied by the AO in the draft assessment order is wrong and the correct amount of 10AA deduction claimed by the assessee is Rs.650,13,12,892. The DRP gave partial relief to the IT(TP)A No.868 to 870/Bang/2022 Page 36 of 40 assessee in TP adjustment and remitted the others issues back to AO for verification of details pertaining to other additions / disallowances. The AO passed the final assessment order revising the additions / disallowances as per below table and this appeal is against the final order of assessment passed by the AO pursuant to the DRP directions. Sl.No. Particulars Amount INR 1 Denial of relief u/s.10AA 650,13,12,892 2 Disallowance of payments made to AE and third parties without TDS 14,74,81,447 3 Disallowance of ESBP expenses 69,26,11,610 4 TP adjustment 20,11,96,715 48. Ground No.1 is general in nature. The Ground no.2 is not pressed by Ld A.R. 49. Ground no.3 relates to the disallowance of deduction claimed u/s 10A and 10AA of the Act. For the year under consideration also the AO has verified the receipt of sale proceeds of software export in convertible foreign exchange as per the directions of the DRP and has recorded the finding that out of the total export turnover of USD 3011.53 million an amount of USD 3039.53 million was realized by the assessee during the year under consideration. Similar to AY 2016- 17, the AO did not give any relief u/s.10AA based on these receipts in the final order of assessment. Following the decision rendered by us in the preceding paragraph in AY 2016-17, we allow deduction u/s.10AA to assessee relatable to sale proceeds from export of software development services with similar directions to the AO. This ground is allowed in favour of the assessee. IT(TP)A No.868 to 870/Bang/2022 Page 37 of 40 50. Ground no.4 relates to disallowance of payments to AEs and third parties. Following the decision rendered by us in the preceding paragraph in AY 2016-17, we restore this issue to the file of DRP with similar directions. 51. Ground 5 pertains to disallowance of ESOP expenses. Following the decision rendered by us in the preceding paragraph in AY 2016-17, we deleted the disallowance made towards ESOP expenses and allow the issue in favour of the assessee. Rejection of claim for refund of excess DDT paid – Ground 6 52. Ground 6 with regard to rejection of claim for refund of excess Dividend Distribution Tax (DDT) paid. The ld AR submitted that the Assessee is a subsidiary of IBM WTC which is a tax resident of the United States and 99.99% of the equity shares of assessee are held by IBM WTC. During Assessment Year 2018-19, the assessee declared dividend to IBM WTC and had paid the DDT at the rate of 20.36% as per the provisions of section 115-O of the Act as per details given below – Date of declaration of interim dividend Amount of dividend declared, distributed and paid - INR DDT paid at 20.36% - INR February 9, 2018 1566,44,27,844 318,92,77,509 March 26, 2018 1566,44,27,844 318,92,77,509 Total 3132,88,55,688 637,85,55,018 53. It is the claim of the Assessee that the Assessee beings a subsidiary of IBM WTC, US and since IBM WTC is a tax resident of IT(TP)A No.868 to 870/Bang/2022 Page 38 of 40 the US that dividend received by IBM WTC is subject to Article 10 of Double Taxation Avoidance Agreement ("DTAA") between India and US. It is the plea of the Assessee that having regard to the provisions of Article 10 of DTAA between India and US read with section 90 of the Act, dividends declared by the Assessee is subject to dividend tax rate of 15% as per Article 10 of DTAA, as opposed to effective tax rate of 20.36% discharged by the Assessee. Therefore the Assessee has prayed for appropriate relief in the ground raised before the Tribunal. 54. We heard the heard the rival submissions and perused the material on record. The ld AR in support of the above line of reasoning, relied on a decision of the coordinate bench in the case of Giesecke & Devrient India Pvt Ltd Vs ACIT [(2020) 120 taxmann.com 338 (Del). We however notice that the correctness of the aforesaid decision has been doubted by another Division Bench at Mumbai in the case of DCIT, Mumbai Circle 11(3)1), Mumbai Vs. Tata Oil India (P) Ltd., and an order of reference dated 23.6.2021 recommending constitution of a Special Bench to decide the issue has been made to the Hon’ble President of the Tribunal. We find that on this issue, there has been conflicting views and the matter has been referred by the Mumbai Bench of ITAT for constitution of a larger Bench. In the light of the development, we are of the view that it would be just and appropriate to set aside this issue to the AO for consideration afresh in the light of the law and the outcome of the decision of larger bench on the issue after affording the assessee opportunity of being heard. IT(TP)A No.868 to 870/Bang/2022 Page 39 of 40 55. Ground nos.7 to 11 pertain to TP adjustment made towards AMP expenses. Following the decision rendered by us in the preceding paragraph in AY 2017-18, we restore this issue to the file of TPO/AO with similar directions. 56. Ground no.12 relate to variance in total income as computed in final assessment order, Ground 13 is with respect to non-grant of credit for entire TDS, and Ground 14 pertains to non-grant of credit for entire TCS. We restore these issues to the file of AO for examining the claim of the assessee and allow after examination in accordance with law. 57. Grounds Nos. 15 to 18 are consequential in nature and do not require separate adjudication. 58. In the result, the assessee’s appeals for AY 2016-17 to 2017-18 are partly allowed. Pronounced in the open court on this 11 th day of November, 2022. Sd/- Sd/- ( N V VASUDEVAN ) ( PADMAVATHY S ) VICE PRESIDENT ACCOUNTANT MEMBER Bangalore, Dated, the 11 th November, 2022. /Desai S Murthy / IT(TP)A No.868 to 870/Bang/2022 Page 40 of 40 Copy to: 1. Appellant 2. Respondent 3. CIT 4. CIT(A) 5. DR, ITAT, Bangalore. By order Assistant Registrar ITAT, Bangalore.