UCWEB MOBILE PRIVATE LIMITED,GURGAON V. ASSESSMENT UNIT, INOCOME TAX DEPARTMENT, GURGAON

ITA 3945/DEL/2024

AI Insights

The case involves UCWEB Mobile Pvt. Ltd., which appealed against the final assessment order passed by the AO under sections 143(3), 144C(13), and 144B of the Income Tax Act, 1961, for the assessment year 2020-21. The primary contention was regarding the transfer pricing adjustments made by the TPO, which included substantial adjustments for AMP expenses and interest on CCDs. The Tribunal examined the validity of these adjustments, particularly focusing on whether AMP expenses constituted international transactions and the correct characterization of CCDs. The Tribunal's decision was influenced by precedents and judicial interpretations that questioned the application of the Bright Line Test (BLT) and the treatment of CCDs as equity.

• Counselvise Citation: [2025] 140 COUNSELVISE.COM (IT) 396996 (ITAT-DELHI)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 30-05-2025
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: I
• Assessment Year: 2020-2021
• Other Referred Cases: Sony Ericson Mobile Communications India (P) Ltd. vs CIT, Maruti Suzuki India Ltd. vs Commissioner of Income Tax, Whirlpool of India Ltd. vs CIT, Widex India Pvt.Ltd. vs ACIT, Samsung India Electronics Pvt.Ltd. vs DCIT, Praxair India (P.) Ltd. vs Deputy Commissioner of Income-tax, WeWork India Management (P.) Ltd. vs DCIT, CAE Flight Training (India) (P.) Ltd. vs DCIT, Religare Finvest Ltd. vs DCIT, Embassy One Developers Pvt.Ltd. vs DCIT, Kirloskar Pneumatic Co.Limited vs Commissioner of Surtax
• Laws Referred To: Income Tax Act, 1961
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: DHARM VEER SINGH
• Assessee Lawyers: NAGESWAR RAO; PARTH
• Keywords: Set aside; Transfer pricing; International transaction; Depreciation; Fair market value; Commercial expediency; Gift; Period of limitation; Tangible material; Date of conversion
• Section: 143(3); 234B; 37; 92B; 92C; 92D; 92F

Judgement Text

"IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCH, ‘I’: NEW DELHI BEFORE SHRI MAHAVIR SINGH, VICE PRESIDENT & SHRI MANISH AGARWAL, ACCOUNTANT MEMBER ITA No.3945/Del/2024 [Assessment Year: 2020-21] UCWEB Mobile Pvt.Ltd., Tara Complex, Shop No.9, 2nd Floor, Udyog VIhar, Phase-1, Near Police Station, Industrial Complex, Dundahera S.O Gurgaon, Harayan-122016. Vs Assessment Unit, Income Tax Department, Delhi National Faceless Assessment Center, Ministry of Finance, North Block, New Delhi-110002 PAN-AABCU5282A Revenue Assessee Appellant by Shri Nageswar Rao, Adv. & Shri Parth, Adv Respondent by Shri Dharm Veer Singh, CIT DR Date of Hearing 10.03.2025 Date of Pronouncement 30.05.2025 ORDER PER MANISH AGARWAL, AM, This appeal is filed by the assessee against the order passed by the AO u/s 143(3) r.w.s. 144C(13) r.w.s. 144B of the Income Tax Act, 1961 (“the Act”) dated 27.06.2024 for A.Y. 2020-21. 2. Brief facts of the case are that assessee is a private limited company and had filed its return of income on 13.02.2021 declaring total income at ₹ 27,98,87,490/-. The case was selected for compulsory scrutiny by way of issue of notice u/s 143(2) of the Act. The assessee company was a limited risk distributor and was engaged in procuring designated services of UCWeb Singapore Pte. Ltd. for reselling to third party customers in India. Further, the appellant also provides customer support services to clients in India which includes 2 ITA No.3945/Del/2024 Page | 2 telephone support, customer enquiries, complaints handling and other after sales support. On receiving the reference for determining Arm’s Length Price (“ALP”) of international transactions entered by the appellant with its Associated Enterprises (AE), the TPO has passed the order on 28.07.2023, making adjustments to the returned income of the appellant for following transactions: A. Advertising, marketing and promotion (AMP) expenses by applying intensity approach ₹ 7,23,37,023/- (substantive basis) B. AMP expenses by applying bright line test (BLT) ₹ 48,61,72,050/- (protective basis) C. Disallowance of interest paid on compulsory convertible debentures (CCDs) ₹ 6,00 crores D. Interest on outstanding receivables ₹ 51,60,859/- E. Reselling of designated UC Singapore services ₹ 29,81,50,332/-. 3. Thereafter, the AO passed the draft assessment order under section 144C(1) of the Act dt. 29.08.2023 wherein total adjustments of ₹ 43,60,48,214/- towards transfer pricing were proposed by TPO. Against such order, assessee filed objections before learned DRP who vide its order dated 29.05.2024 partly accepted the objections raised by appellant and directed the TPO for making certain modifications in its order. In compliance, the TPO passed the order giving effect to the directions given by ld. DRP u/s 144C of the Act on 21.06.2024 wherein total T.P. adjustments of ₹ 34,37,80,273/- were computed by the TPO. The Assessing Officer thereafter, passed the final assessment order u/s 143(3) r.w.s. 144C(13) r.w.s 144B of the Act, dated 27.06.2024 wherein total income of the assessee is assessed at ₹ 62,36,67,760/- by 3 ITA No.3945/Del/2024 Page | 3 making transfer pricing adjustments of ₹ 34,37,80,273/- to the total income of the appellant. 4. Aggrieved by the assessment order, assessee is in appeal before the Tribunal. The grounds of appeal taken by the assessee are as under: “Based on the facts and circumstances of the case and in law, Appellant respectfully craves, leave to prefer an appeal under Section 253(1)(d) of the Income-tax Act, 1961 (\"the Act\") against final assessment order dated 27.06.2024 (\"Impugned Order\") issued under Section 43(3) read with Section 144C(13) of the Act, by Assessment Unit, Income Tax Department (\"AO\") in pursuance of the Directions dated 29.05.2024 issued under Section 144C(5) by the Ld. Dispute Resolution Panel-1, New Delhi (\"DRP\"), on the following grounds which are without prejudice to each other: 1. Impugned order is time barred, invalid and bad in law as reference made to Ld. Transfer Pricing Officer (\"TRO\") does not appear to be in accordance with law and same would directly impact all timelines prescribed under the Act. 2. Impugned order is bad in law also for the reason that some Direction's issued by Ld. DRP are directly contrary to section 144C (8). 2.1. Without prejudice to the above, The Ld. TPO in the order giving effect to the DRP Directions erred in applying the service income filter for deciding the comparability of the companies considered by the Appellant in its TP documentation. Transfer Pricing Grounds 3. Attribution of AMP Expenses (\"Advertisement, Marketing, and Promotion expenses\") towards creation of marketing and customer related intangibles 3.1. Ld. DRP/TPO/AO have wrongly considered that routine AMP expense incurred by Appellant is an international transaction and that the AMP expenses are incurred at the behest of the Associated Enterprises (\"AE\"). 4 ITA No.3945/Del/2024 Page | 4 3.2. Ld. DRP/ TPO/AO failed to appreciate that advertising and marketing activity performed by the Appellant is a part of its role as a distributor. Further, Ld. DRP/TPO/AO erred in making adjustment by convoluted/speculative logic by reference to irrelevant material and presumptions including that of 'depreciation and amortisation expenses' etc. 3.3 Ld. DRP/ΤΡΟ/ΑO erred in concluding that expenses incurred by Appellant resulted in the creation and development of the intangibles, thereby, benefitting AEs. 3.4. Ld. DRP/ TPO/ AO have erred in proposing an upward adjustment of INR 53,34,57.313 / on a protective basis by applying invalid Bright Line Test (\"BLT') contrary to decisions of Hon'ble Courts. 3.5. Ld. DRP/TPO/AO have erred in selecting functionally dissimilar companies viz Vector E-Commerce Pvt. Ltd. UBM India Pvt. Ltd. and Adfactors P.R. Pvt. Ltd., as comparables in the marketing support segment for determination of BLT adjustment. 3.6. Impugned order erred in selecting functionally dissimilar companies like K7 Computing Pvt. Ltd and Innova Thinklabs Ltd., for making intensity adjustment of INR 5,07,74,913/-, where intensity adjustment itself stands invalidated by coordinate bench of this Hon'ble Tribunal to be mirror image of BLT. 3.7. Impugned order erred in adopting contradictory and ad hoc stand by alleging AMP as separate international transaction while agreeing the same to be a function of distribution. 3.8. Impugned order further erred in making adjustment euphemistically labelling same as intensity adjustment to one of line items of expenditure in course of application of Transaction Net Margin Method (\"TNNM\") as Most Appropriate Method. 4. Interest paid on Compulsorily Convertible Debentures ('CCDs') 4.1. Ld. DRP/ TPO/ AO have wrongly re-characterized CCDs as equity, making an upward transfer pricing adjustment of INR 6,00,00,000/-. 5 ITA No.3945/Del/2024 Page | 5 4.2. Ld. DRP/ TPO/AO have erred in law and facts, by questioning the commercial rationale/ expediency of the appellant to justify re-charactering the transaction. 4.3. Impugned order erred in re-writing the transaction and further in arbitrarily concluding ALP of interest to be NIL totally ignoring express prescription under Chapter X of the Act. 5. Interest paid on outstanding receivables. 5.1. Ld. DRP/TPO/AO have erred in holding inter-company receivables arising out of and part of regular business transaction, as separate international transaction. Erred in contradicting its own stand that TNNM is tolerant to minor aspects and further erred in making an upward adjustment of INR 26,22,731/- to the total income of Appellant in the garb of applying Comparable Uncontrolled Price (\"CUP\"). 5.2. Ld. DRP/TPO/AO erred in re-characterizing outstanding receivables as a loan extended by Appellant to its associated enterprise and imputing interest on same. 5.3. Ld. DRP/TPO/AO have arbitrarily considered LIBOR @ 2.06% plus ad hoc 550 basis points spread to LIBOR for benchmarking imaginary transaction of outstanding receivables. 6. Reselling of designated UC Singapore service 6.1. Without prejudice to other Grounds of appeal, adjustment made in Impugned Order pursuant to unlawful direction of Ld. DRP in violation of section 144C (8) deserves to be deleted on this limited ground. Further, as statutory time limits prescribed for completing DRP proceeding has expired no second innings would be justified so as to enable one an advantage of its own deliberate violation of law. 6.2. Ld. DRP/ TPO/AO have erred in law and facts, by not accepting the economic analysis undertaken by the Appellant for the determination of arm's length price (\"ALP\") in connection with reselling segment and proposing an upward adjustment of INR 23,03,82,629/-. 6.3. Ld. DRP/TPO/AO have incorrectly accepted - Ten Times Online Pvt. Ltd., Wizard E-marketing Pvt. Ltd., and Integra Software Services Pvt. Ltd. as comparables to assessee. 6 ITA No.3945/Del/2024 Page | 6 6.4. Ld. DRP/ΤΡΟ/ΑO have erred in treating foreign exchange gain as non-operating while computing tested party margin by reference to extraneous assumption and factors and by ignoring FAR analysis specific to the transaction under consideration. That Ld. AO has erred in law and in fact, by levying an interest of INR 35,65,965 in the assessment order under section 234A of the Act. That Ld. AO has erred in law and in fact, by levying an interest of INR 5,87,66,765/- in the assessment order under section 234B of the Act. That Ld. AO has erred in law and in fact, by levying an interest of INR 4,19,969/- in the assessment order under section 234C of the Act.” 5. Ground No. 1 is in relation to the limitation as according to assessee, the reference made to the TPO was not in accordance with law. 6. Before us, ld.AR of the assessee submitted that the order is barred by limitation as reference made to TPO was invalid. He drew our attention to the order of TPO wherein in First para of the order, the TPO observed that reference was received from AO-Technical Unit for determining the ‘Arm’s Length Price’ u/s 92CA(3) in respect to the International transactions entered into by the assessee. He further submits that as per section 144B of the Act, there is no provision that Technical Unit can make reference to TPO, as Technical Unit itself is authorised to perform functions of providing technical assistance on transfer pricing issues and itself is a Technical Unit. Thus, delegation by one Technical Unit under faceless regime to TPO is not permissible as per the provisions of Act. Under these circumstances, ld. AR submits that extended period of limitation u/s 153(4) of the Act of Twelve months (12 months) 7 ITA No.3945/Del/2024 Page | 7 would not be available in absence of valid reference to TPO. He thus prayed that the order being barred by limitation and therefore, deserves to be quashed. 7. Per contra, the ld. CIT DR submits that under faceless assessment regime, there is no difference between the AO who completed the assessment and AO technical unit and both are functioning to complete / assists the assessment proceedings. According to ld. CIT DR, there is no error in making reference to the TPO by the AO-Technical Unit who assisted the AO - Assessment unit on technical issues to complete the assessment and in this process, has made reference to TPO for determination of arm’s length price of international transactions. Thus, the consequent proceedings are not barred by limitations and he prayed accordingly. 8. After careful consideration of the facts and arguments of both the parties, to decide this issue, we first examine the provisions of section 92CA(1) of the Act which are as under: 92CA. Reference to Transfer Pricing Officer (1) Where any person, being the assessee, has entered into an international transaction or specified domestic transaction in any previous year, and the Assessing Officer considers it necessary or expedient so to do, he may, with the previous approval of the Principal Commissioner or Commissioner, refer the computation of the arm's length price in relation to the said international transaction or specified domestic transaction under section 92C to the Transfer Pricing Officer. (10) …….…. Explanation.—For the purposes of this section, \"Transfer Pricing Officer\" means a Joint Commissioner or Deputy Commissioner or Assistant Commissioner authorised by the Board to perform all or any of the functions of an Assessing 8 ITA No.3945/Del/2024 Page | 8 Officer specified in sections 92C and 92D in respect of any person or class of persons. 9. Sub-section (3) of section 144B of the Act, provides the scope and role of various units under faceless assessment such as National Faceless Assessment Centre (NFAC), Regional Faceless Assessment Centres, Assessment Units (AU), Verification Units (VU), Technical Units (TU) and Review Unit (RU). The relevant role of Technical Units (TU) as defined in clause (v) of sub-section (3) of section 144B is as under (v) technical units, as it may deem necessary to facilitate the conduct of faceless assessment, to perform the function of providing technical assistance which includes any assistance or advice on legal, accounting, forensic, information technology, valuation, transfer pricing, data analytics, management or any other technical matter which may be required in a particular case or a class of cases, under this section; 10. Section 92CA(1) of the Act empowers the Assessing Officer to make reference to TPO for the computation of arm's length price of international transactions. Further, the TPO as defined in explanation to section 92CA to be the person authorized by board to perform functions of AO specified in section 92C. In sub-section 3 of section 144B, roles of Technical unit is clearly spelt out according to which, functions of technical unit includes assistance or advice on transfer pricing issues. During the course of performing such function, the technical unit can obtain advice from the TPO on the issue of determination of Arm’s Length price of international transaction as they are expert in this field. Thus, the reference by technical unit to TPO is in accordance with the provisions of the Act and therefore, consequent orders passed are not barred by limitations. 9 ITA No.3945/Del/2024 Page | 9 Accordingly, Ground of appeal No. 1 of the assessee is dismissed. 11. Ground No.3 is with respect to the action of the AO in considering the AMP expenses incurred by the appellant as international transaction and further holding that the AMP expenses are incurred on behalf of the Associated Enterprises (“AE”) and therefore, an addition of ₹ 7,27,37,023/- was made on substantive basis by applying TNMM Intensity approach and further addition of ₹ 48,61,72,050/- was made on protective basis by applying bright line test (“BLT”). The assessee has also challenged the action of the AO/TPO in selecting the functionally dissimilar companies as comparable for determination of BLT adjustment and further challenged the action of the AO/TPO in making intensity adjustment in the course of application of TNMM as most appropriate method. 12. Before us, Ld.AR for the assessee submitted that the assessee is engaged in the business of distributing UC principal’s designated services in India which includes the following activities:- (i) Local distribution and sales of the designated UC Principal services in India; (ii) Business development assist in the acquisition of local business partners; (iii) Local operation e.g. local language translation etc. 13. In the distribution activities, the assessee also provides customers support services to the clients in India which includes telephone support, customer enquiries, complaints- 10 ITA No.3945/Del/2024 Page | 10 handling and other after sales support as required under the relevant customer care programs of UC principal, as required by the relevant customers. The shareholding of the assessee company is mainly with UC Mobile New World Ltd. who is having 99.19% holding of the equity of the assessee company. In the TP SR, assessee has not reported the transaction of advertising, marketing and promotion (\"AMP”) activities as international transaction and thus no benchmarking was done for the same. The Ld.AR for the assessee further submits that there is no agreement between the assessee and its AE with regard to the AMP activities and the assessee has performed the AMP function as a part of its role as responsibility of a distributor. The assessee has undertaken AMP expenses to sale designated UC Singapore services in India. Such expenditure includes the expenses towards design and video production, membership fees, sponsorship fees, events marketing, TC commercials, outdoor advertisements, cinema advertisings, free gifts, coupons, endorsements, cash incentives, content planning etc. and were incurred to locate and gain market for the services provided by the assessee so as to increase its sales. Ld.AR for the assessee further submitted that without incurring of AMP expenses, the assessee company would not be able to make its customers aware about the services rendered by it. The Ld.AR further submits that the TPO has made two adjustments as (i) on protective basis by using BLT method and (ii) on substantive basis by intensity method applying TNMM as MAM. Ld AR for the assessee further submits that the intensity method is the mirror image of BLT and none of the method expressly mentioned in the Act. 11 ITA No.3945/Del/2024 Page | 11 In BLT method, expenditure incurred by the appellant towards AMP is limited to percentage incurred by comparable companies while in intensity the expenditure incurred towards AMP comparable companies is mark up to similar percentage. He further submits that the BLT approach has been held as not a proper method by the Hon’ble Jurisdictional High Court in the case of Sony Ericson Mobile Communications India (P) Ltd. vs CIT [2015] 374 ITR 118 (Delhi) & further by the Co-ordinate Bench of ITAT, Delhi in following cases and therefore, requested to delete the addition made on protective basis:- a. MSD Pharmaceuticals (P.) Ltd. vs ACIT [2017] 88 taxmann.com 54 (Delhi-Trib.); b. Toshiba India (P.) Ltd. vs ACIT [2018] 95 taxmann.com 344 (Delhi-Trib.); c. Nikon India (P.) Ltd. vs DCIT [2018] 95 taxmann.com 537 (Delhi-Trib.); and d. Casio India Company (P.) Ltd. vs DCIT [2019] 102 taxmann.com 492 (Delhi-Trib.) 14. With regard to intensity method, Ld.AR submits that it is a mirror image of BLT and relied upon the judgement of Co-ordinate Bench of ITAT, Chandigarh in the case of M/s. Widex India Pvt.Ltd. vs ACIT [2019] reported in 108 taxmann.com 125 (Chandigarh-Trib.). He further drew our attention to the judgment of Samsung India Electronics Pvt.Ltd. vs DCIT [2020] 120 taxmann.com 283 (Delhi-Trib.) wherein the order of M/s. Widex India Pvt.Ltd. (supra) was followed by the Co-ordinate Bench of ITAT, Delhi. He thus prayed for the AMP expenses were incurred wholly and exclusively for the purposes of business and ultimately for the 12 ITA No.3945/Del/2024 Page | 12 benefit of the assessee company to boost up its sales and such expenses cannot be benefited to AE in any manner. Therefore, the AMP expenses should not be held as international transaction and no adjustment is required to be made. He, therefore, prayed for the deletion of the additions made a substantive basis as well as on protective basis. 15. Per contra, Ld.CIT DR for the Revenue supported the order of the lower authorities and submits that the assessee is engaged in the business of reselling of services and software for which the expenses were incurred on account of AMP expenses. These expenses were directly for the benefit of the AE as ultimately its product has got the publicity and therefore, the same deserves to be held as international transactions. He further submits that as per the TP SR, the US Singapore (AE) influences the AMP expenses incurred by the assessee as it has the sole discretion of providing the guidelines and policies for marketing and further, evaluate the performance of the assessee in the marketing activities. The Ld.CIT DR further submits that the AE has substantively involved in discharging the marketing and selling functions performed by the assessee. Thus, the said activity has enhanced the brand value of the AE and therefore, is correctly treated as an international transaction. He further submits that the judgment in the case of Sony Ericson (supra) is challenged by the Revenue before the Hon’ble Supreme Court therefore, the same could not be applied as such. He finally supports the order of the AO & DRP in making the AMP adjustments. 13 ITA No.3945/Del/2024 Page | 13 16. We have heard the rival submissions and perused the material available on record. In this case, the AO has made protective adjustment by following the BLT for AMP expenses. The Hon’ble Jurisdictional High Court in the case of Sony Ericson (supra) holding the BLT approach of computing transfer pricing adjustment of AMP expenses as invalid. Further, the Hon’ble High Court in the case of CIT vs Whirlpool of India Ltd. [2016] 381 ITR 154 (Delhi) held as under:- 39. “It is in this context that it is submitted, and rightly, by the Assessee that there must be a machinery provision in the Act to bring an international transaction involving AMP expense under the tax radar. In the absence of any clear statutory provision giving guidance as to how the existence of an international transaction involving AMP expense, in the absence of an express agreement in that behalf, should be ascertained and further how the ALP of such a transaction should be ascertained, it cannot be left entirely to surmises and conjectures of the TPO. 40. Mr. Srivastava submitted that Section 92F (ii) which defines ALP to mean a price \"which is applied or proposed to be applied in a transaction between persons other than associated enterprises in uncontrolled conditions\" could be construed as a machinery provision. But then that provision refers to ‘price’ and to ‘uncontrolled conditions’. It implicitly brings into play the BLT. In other words, it emphasises that where the price is something other than what would be paid or charged by one entity from another in uncontrolled situations then that would be the ALP. BLT as a determinative tool has been expressly invalidated by the Court in Sony Ericsson (supra).Therefore, it is not possible to view this as a machinery provision. The existence of an international transaction will have to be established de hors the BLT. There is nothing in the Act which indicates how, in the absence of the BLT, one can discern the existence of an international transaction as far as AMP expenditure is concerned. 14 ITA No.3945/Del/2024 Page | 14 41. Recently this Court has in its decision dated 11th December 2014 in ITA No. 110 of 2014 (Maruti Suzuki India Ltd. v. Commissioner of Income Tax) while interpreting the provisions of Chapter X of the Act observed: \"the only TP adjustment authorised and permitted by Chapter X is the substitution of the ALP for the transaction price or the contract price. It bears repetition that each of the methods specified in S.92C (1) is a price discovery method. S.92C (1) thus is explicit that the only manner of effecting a TP adjustment is to substitute the transaction price with the ALP so determined. The second proviso to Section 92C (2) provides a 'gateway' by stipulating that if the variation between the ALP and the transaction price does not exceed the specified percentage, no TP adjustment can at all be made. Both Section 92CA, which provides for making a reference to the TPO for computation of the ALP and the manner of the determination of the ALP by the TPO, and Section 92CB which provides for the \"safe harbour” rules for determination of the ALP, can be applied only if the TP adjustment involves substitution of the transaction price with the ALP. Rules 10B, 10C and the new Rule 10AB only deal with the determination of the ALP. Thus for the purposes of Chapter X of the Act, what is envisaged is not a quantitative adjustment but only a substitution of the transaction price with the ALP.\" 42. Again in Maruti Suzuki India Ltd. (supra) the Court held: \"The very existence of an international transaction cannot be presumed by assigning some price to it and then deducing that since it is not an ALP, an 'adjustment' has to be made. The burden is on the Revenue to first show the existence of an international transaction. Next step is to ascertain the disclosed 'price' of such a transaction and thereafter ask whether it is at ALP. If the answer to that is in the negative the TP adjustment should follow. 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 one jurisdiction to 15 ITA No.3945/Del/2024 Page | 15 another. An 'assumed' price cannot form the reason for making an ALP adjustment.\" 43. As regards allowing the entire expenditure under Section 37 of the Act, there is an obvious contradiction which was attributed to be resolved by the ITAT in the impugned order by asking the TPO to rework the AMP expenses into that which was incurred for building the brand of the foreign AE and that which was incurred wholly or exclusively for the benefit of the WOIL. In Sony Ericsson (supra) this was sought to be explained by stating that Section 37 and Chapter X operate in different domains and merely because an expense was incurred wholly or exclusively for the Indian entity it would not mean that it is also not incurred for the foreign AE. The question then is to what extent the Indian entity should be compensated for the expenses incurred by it on behalf of the foreign AE. What will then be required to be benchmarked is not the AMP expenditure but the extent to which the Indian entity must be compensated. 44. Further in Maruti Suzuki India Ltd. (supra) this Court observed: \"As an analogy, and for no other purpose, in the context of a domestic transaction involving two or more related parties, reference may be made to Section 40A (2) (a) under which certain types of expenditure incurred by way of payment to related parties is not deductible where the AO \"is of the opinion that such expenditure is excessive or unreasonable having regard to the fair market value of the goods.\" In such event, \"so much of the expenditure as is so considered by him to be excessive or unreasonable shall not be allowed as a deduction.\" The AO in such an instance deploys the 'best judgment' assessment as a device to disallow what he considers to be an excessive expenditure. There is no corresponding 'machinery' provision in Chapter X which enables an AO to determine what should be the fair 'compensation' an Indian entity would be entitled to if it is found that there is an international transaction in that regard. In practical terms, absent a clear statutory guidance, this may encounter further difficulties. The strength of a brand, 16 ITA No.3945/Del/2024 Page | 16 which could be product specific, may be impacted by numerous other imponderables not limited to the nature of the industry, the geographical peculiarities, economic trends both international and domestic, the consumption patterns, market behaviour and so on. A simplistic approach using one of the modes similar to the ones contemplated by Section 92C may not only be legally impermissible but will lend itself to arbitrariness. What is then needed is a clear statutory scheme encapsulating the legislative policy and mandate which provides the necessary checks against arbitrariness while at the same time addressing the apprehension of tax avoidance.\" 45. The decisions in CIT v. B.C. Srinivasa Setty (1981) 128 ITR 294 (SC) and PNB Finance Ltd. v. CIT (2008) 307 ITR 75 (SC) make it explicit that in the absence of any machinery provision, bringing an imagined transaction to tax is not possible. Here, therefore, where the existence of an international transaction involving AMP expense with an ascertainable price is unable to be shown to exist, even if such price is nil, Chapter X provisions cannot be invoked to undertake a TP adjustment exercise. 46. As already mentioned, merely because there is an incidental benefit to Whirlpool USA, it cannot be said that the AMP expenses incurred by WOIL was for promoting the brand of Whirlpool USA. As mentioned in Sassoon J David (supra) \"the fact that somebody other than the Assessee is also benefitted by the expenditure should not come in the way of an expenditure being allowed by way of a deduction under Section 10 (2) (xv) of the Act (Indian Income Tax Act, 1922) if it satisfies otherwise the tests laid down by the law”. Conclusion 47. For the aforementioned reasons, the Court is of the view that as far as the present appeals are concerned, the Revenue has been unable to demonstrate by some tangible material that there is an international transaction involving AMP expenses between WOIL and Whirlpool USA. In the absence of that first step, the question of determining the ALP of such a transaction does not arise. In any event, in the absence of a machinery provision it would be hazardous for any TPO to proceed to determine the ALP of 17 ITA No.3945/Del/2024 Page | 17 such a transaction since BLT has been negatived by this Court as a valid method of determining the existence of an international transaction and thereafter its ALP. 48. Question (i) in the Assessee's appeal viz., \"Was there an international transaction between WOIL and its AE involving the AMP expenses within the meaning of Section 92B of the Act read with Section 92F(v) of the Act?\" is answered in the negative, i.e., in favour of the Assessee and against the Revenue. Consequently Question (ii) in the Assessee's appeal is not required to be answered. Further, the only question framed in the Revenue’s Appeal viz., \"Whether the ITAT erred in deleting the addition of Rs. 180,73,10,769 made by the AO/TPO on account of AMP expenses under Section 37 of the Act?\" is answered in the negative, i.e. in favour of the Assessee and against the Revenue. 49. The impugned order of the ITAT and the corresponding orders of the DRP and the TPO, on the above issues are hereby set aside. The appeal of the Assessee, ITA No. 228 of 2015 is allowed and the appeal of the Revenue, ITA No. 610 of 2014 is dismissed in the above terms, but in the circumstances with no orders as to costs.” 16.1. With regard to the intensity approach, the Co-ordinate Bench of the Chandigarh in the case of Widex India (supra) by disapproving the BLT method has observed as under:- 18.2. “We will come to the decisions and the provisions subsequently as first we must also set out the other applicable, well settled legal position namely that the Hon'ble Delhi High Court in the case of Sony Ericsson also unambiguously held that Bright Line Test was an act of judicial legislation and the Court held that by validating the bright line test, the Special Bench in LG Electronics case went beyond Chapter-X of the Act. The Court while arriving at the conclusion was conscious of the international tax jurisprudence and was constrained to hold that even international tax jurisprudence and commentaries do not recognize the bright line test for bifurcation of routine and non routine expenses. The purpose why we feel the need to address which we thought was a well settled legal position 18 ITA No.3945/Del/2024 Page | 18 is on account of the resort to the bright line test not only by the TPO despite the available judicial opinion to the contrary but this lapse, we note unfortunately was not addressed by the DRP also who instead have tried to do some skillful tip toeing around the issue and did not clearly refer to the settled legal position thereon and left the conclusion arrived at by the Hon'ble High Court in ambiguity. When we consider how “Intensity approach” as a method which has been carved out by the DRP which we have referred to in the earlier part of this order while adverting to the objections posed by the taxpayer, we find ourselves in agreement to the objections posed and we have no hesitation in holding that what applies to bright line test fully applies to the Intensity approach as worked out in the facts of the present case as it is a reverse of bright line test as its mirror image. The said mental acrobatics and athletics do not have any judicial sanction and cannot be approved.” 17. In view of the above discussion and by respectfully following the judgment of Hon’ble Jurisdictional High Court in the case of Maruti Suzuki India Ltd. vs CIT [2016] 381 ITR 117 (Delhi), Sony Ericson Communications India Pvt.Ltd. vs CIT (supra) & CIT vs Whirlpool of India Ltd. (supra) and further the judgment of Co-ordinate Bench in Widex India (supra), we hold that AMP expenditure are not international transaction and consequent adjustments under BLT method on protective and on substantive basis under TNMM intensity method are not in accordance with provisions of law and therefore, the same are hereby deleted. Ground No.3 to 3.8 of the assessee are allowed. 18. Ground No.4 relates to the action of AO/TPO/DRP wherein the authorities have wrongly re-characterized CCDs as equity and making TP adjustment of ₹ 6 crores. 19 ITA No.3945/Del/2024 Page | 19 19. Brief facts of the case are that during the FY 2016-17, ₹ 175 crores CCDs were issued by the appellant to US Mobile New World @ interest of 12%, the same is tabulated as under:- Debenture subscription agreement dated 26.07.2016 [Pg.70/FPB] 04.11.2016 [Pg 86/FPB] Number of CCDs 1,20,00,000 38,00,00,000 Face value of each CCD INR 10/- INR 10/- Issue dated 01.08.2016 04.11.2016 Conversion date Not later than 20 years Not later than 20 years Conversion rate (Equity: CCD) 1:1 0.11:1 20. Later, the said CCDs were transferred by US Mobile New World to US Singapore on 21.02.2017. During the year, the assessee has paid a sum of ₹ 6 crores to UC Singapore as interest on such CCDs. The assessee has benchmarked the transaction by applying marked CUP method wherein set of 10 comparables, the interest rate was ranging between 8.5 to 12 % of 10% and the assessee had paid interest @ 12 %. Thus, the same was treated at ALP and no adjustment is proposed by the assessee. However, the TPO has alleged that the actual nature of CCDs is of equity and determined the ALP of interest paid at NIL and made an adjustment of ₹ 6 crores to the income of the appellant. The DRP has confirmed the action of TPO. 21. Before us, Ld.AR of the assessee submits that CCDs were issued for a period of 20 years and till its conversion, the same are to be characterized as a debt. He further submits that the nature of instrument is to be seen in present circumstances and cannot be characterized on a future event which is even not certain. He further submits that in terms of debenture agreement, they remain the debt and therefore, the AO/TPO is incorrect in re-characterize the CCDs as equity. The Ld.AR further submits that CCDs are nothing but debt till conversion 20 ITA No.3945/Del/2024 Page | 20 and therefore, the TP adjustments made of interest paid by determining the ALP at NIL is incorrect. For this, he placed reliance on the following judgements:- a. Praxair India (P.) Ltd. vs. Deputy Commissioner of Income-tax, [2023] 153 taxmann.com 715 (Bangalore - Trib.) - Paras 13-16 b. WeWork India Management (P.) Ltd. vs. DCIT, [2023] 150 taxmann.com 432 (Bangalore - Trib.) -Paras 20- 24 c. CAE Flight Training (India) (P.) Ltd. vs. DCIT, [2023] 150 taxmann.com 276 (Bangalore - Trib.) -Paras 10- 11 d. Religare Finvest Ltd. vs. DCIT, ITA No. 4796/DEL/2017-Paras 33-37. 22. It is thus submitted by Ld.AR that it is a settled law that ALP of a transaction cannot be benchmarked as NIL by applying CUP method without comparing the same within uncontrolled transaction therefore, he prayed for the deletion of the adjustment made by the AO/TPO and upheld by the DRP. 23. On the other hand, Ld.CIT DR supported the order of the lower authorities and submits that the arrangement made by the assessee in terms of debenture subscription agreement is nothing but an arrangement to shift the profits to the AE. He further submits that the AE has a right to convert the CCDs into equity even before the period of 20 years and therefore, this transaction is having all characters of being an equity investment. He further submits that as per guidelines of OECD in such a scenario keeping the well known legal principal of primacy “substance over form in consider tax authorities can opt for re-characterization of financial instrument to safeguard the interest of the Revenue”. He also placed reliance on the observations of TPO/DRP in this regard and 21 ITA No.3945/Del/2024 Page | 21 requested for the confirmation of the same looking to the fact that the assessee is running in heavy loss where it is paying interest to its AE on the debt funds which itself creates doubt about the transaction. 24. We have heard the rival submissions and perused the material available on record. In this case, the assessee had issued CCDs to its AE in order to get the financial assistance as it was having shortage of funds. The very nature of CCDs is loan and the interest paid on the same cannot be questioned which was made under commercial expediency. As nowhere in the Act, debt or equity is defined therefore, the rule of interpretation requires that the term is to be understood in their ordinary sense. The CCDs are distinct and separate from the share capital and the debenture holder has no rights whatsoever as were available to the equity shareholders. The benefits and objections associated with both the instruments are different. Section 2(30) of the Companies Act, 2013 provides the definition of “debenture” which is as under:- “debenture include debenture stock, bonds or any other instrument of a company evidencing a debt, whether constituting a charge on the assets of the company or not.” 24.1. The term “share” is defined in section 2(84) of the Companies Act, 2013 which is as under:- “Share” means share in the share capital of a company and includes stock.” 24.2. Further in the SEBI guidelines, the term “debt instrument” has been defined as under:- “Debt-instrument” means an instrument which creates or acknowledges indebtedness, and includes debenture, stock, bonds and such other securities of a body corporate, 22 ITA No.3945/Del/2024 Page | 22 whether constituting a charge on the assets of the body corporate or not.” 24.3. It is thus clear that if a debt instrument, there must be a character of in-debtness and it is not to be seen about the nature of the repayment or settlement of such debt in future. We further find force in the arguments of the assessee wherein the assessee has made out a chart of the key features of debt & equity and their application to the case of the assessee which is tabulated herein below:- 23 ITA No.3945/Del/2024 Page | 23 25. The Co-ordinate Bench of ITAT, Bangalore in the case of M/s. Embassy One Developers Pvt.Ltd. vs DCIT in ITA Nos. 2239 & 2240/Bang/2018 wherein the Co-ordinate Bench observed as under:- 25. “.....................................In our considered opinion, such definition of the term convertible debentures cannot be applied in other context such as allowability of interest on such debentures during pre-conversion period or regarding payment of dividend on such convertible debentures during pre-conversion period or regarding granting of voting rights to the holders of such convertible debentures before the date of conversion, If you ask a question as to whether 24 ITA No.3945/Del/2024 Page | 24 dividend can be paid on such convertible debentures in a period before the date of conversion or whether such holders of convertible debentures can be granted voting rights at par with voting rights of share holders during re- conversion period, the answer will be a big NO. On the same analogy, in our considered opinion, the answer of this question is also a big NO as to whether interest paid on convertible debentures for pre-conversion period con be said to be interest on equity and interest on debentures allowable u/s. 36(1)(iii) of the IT Act.\" 26. Further, the Bombay High Court in the case of Kirloskar Pneumatic Co.Limited vs Commissioner of Surtax [1994] 210 ITR 485 (Bombay) has held that CCDs continues to be debt till is repaid or discharged. The debt would acquire the character of the equity and become part of the paid up capital of the company only in the eventuality of the conversion of debentures into equity. Thus, we could safely conclude that CCDs issued by the assessee partake the character of debt until the conversion into equity. Further, it is a fact that no voting rights are ever exits to the CCDs holders and further no dividend is payable to them until the conversion of the CCD into equity. 26.1. In view of the above, in our considered opinion, CCDs issued by the assessee cannot be characterized as the equity and therefore, action of the AO/TPO in treating the same as equity and by applying the CUP method, no interest is allowed is not correct and therefore, adjustment made of ₹ 6 crores on this account is hereby deleted. 25 ITA No.3945/Del/2024 Page | 25 27. Ground No.5 is with respect to interest receivable and by making addition of ₹ 26,22,731/- by applying CUP method as against TNMM. 28. Ld.AR submitted that the AO/TPO has erred in applying LIBOR @ 2.06% plus 500 basis point for benchmarking the transactions of outstanding receivables. It is submitted by Ld.AR for the assessee that the outstanding receivables are ancillary to primary business transactions of the appellant and therefore, the same could not be separately benchmarked. He further submits that only one invoice of four invoices was realised beyond the credit period and therefore, it not fair to allege the existence of any intent on the part of assessee in providing any benefit to the AE by allowing the delayed payment. He further placed reliance on the judgment of Hon’ble Jurisdictional High Court in the case of PCIT vs Kusum Healthcare Pvt.Ltd. [2017] 398 ITR 66 (Delhi). 29. On the other hand, Ld.CIT DR for the Revenue supports the order of AO/TPO/DRP and submits that there was a delay in recovery of outstanding receivables and therefore, the lower authorities have rightly make the adjustment on account of delayed payment of receivables which deserves to be upheld. 30. We have heard the rival contentions and perused the material available on record. It is seen that the transaction is with AEs with respect to purchase and sales therefore, they are come in the purview of international transaction as defined in Explanation 2 section 292B of the Act. It is further seen that the assessee has only one bill where the payment was received delayed and while working out the transfer pricing adjustment, 26 ITA No.3945/Del/2024 Page | 26 the AO has not allowed the working capital adjustment for taken into account the impact of outstanding receivables. The Hon’ble Delhi High Court in the case of Kusum Health Care Ltd. (supra) has held that the assessee has already factored the impact of the receivables on the working capital and thereby on its pricing/profitability, any further adjustment only on the basis of outstanding receivable would have distorted the pick and re-characterization of the transaction. 31. In view of these facts and by respectfully following the judgmenet of Jurisdictional High Court in the case of Kusum Healthcare (supra), we find that the adjustment made by the AO/TPO is not in accordance with law and therefore, the same is hereby deleted. 32. Ground Nos.2 & 6 are in relation to the adjustment made on account of reselling of designated UC Singapore services herein upward adjustment of ₹ 23,03,82,629/- is made. 33. In Ground No.2, the assessee has challenged the action of DRP in directing the TPO for reconsideration of the comparables mentioned by the assessee in TPSR. 34. On perusal of the facts and circumstances of the case, we find that the TPO has rejected the assessee’s comparables on summary basis and while deciding this issue, DRP in para 19.3 of the order directed the TPO to re-consider the comparables and decide the issue accordingly. Section 144C(8) of the Act provides that the DRP may confirm, reduce or enhance the variation proposed however it has not granted any power to DRP to set aside the issue to decide denovo afresh. 27 ITA No.3945/Del/2024 Page | 27 35. Looking to these facts, we set aside the findings of DRP on this issue and direct the DRP to decide the objections raised by the assessee with respect to the comparables as in accordance with law. As a result, Ground No.2 of the assessee is allowed and the other issued taken in Ground No.6 became academic and not adjudicated. With these directions, Ground No.2 & 6 on merits of the adjustment made are partly allowed. 36. In the result, the appeal of the assessee is partly allowed. Order pronounced in the open court on 30th May, 2025. Sd/- Sd/- [MAHAVIR SINGH] [MANISH AGARWAL] VICE PRESIDENT ACCOUNTANT MEMBER Dated 30.05.2025 *Amit Kumar, Sr.P.S.* Copy forwarded to: 1. Appellant 2. Respondent 3. CIT 4. CIT(Appeals) 5. DR: ITAT ASSISTANT REGISTRAR ITAT, NEW DELHI "