VODAFONE INDIA SERVICES PRIVATE LIMITED ,MUMBAI V. INCOME-TAX OFFICER, MUMBAI

ITA 4710/MUM/2024

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Vodafone India Services Private Ltd. appealed against the final assessment order passed by the Assistant Commissioner of Income-tax, which included significant additions to the appellant's income based on transfer pricing adjustments. The Tribunal examined the adjustments made by the Transfer Pricing Officer (TPO) and the directions of the Dispute Resolution Panel (DRP), which upheld the TPO's adjustments. The appellant contested the selection of comparable companies and the application of different financial year ends for benchmarking. The Tribunal noted the existence of a Bilateral Advance Pricing Agreement (BAPA) with the UK AE, which was not similarly established with the USA AE, and thus directed the adoption of the BAPA terms for the USA transactions. The Tribunal also addressed the issue of non-grant of credit for tax on regular assessment as reflected in Form 26AS.

• Counselvise Citation: [2025] 140 COUNSELVISE.COM (IT) 35091 (ITAT-MUMBAI)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 28-02-2025
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: J
• Assessment Year: 2020-2021
• Other Referred Cases: J.P. Morgan Services India (P.) Ltd. v. Dy. CIT, Pr. CIT v. J.P. Morgan Services India (P.) Ltd., CGI Information Systems Management Consultants (P.) Ltd. v. Dy. CIT, Tesco Bengaluru (P.) Ltd. v. Dy. CIT, IQVIA RDS (India) (P.) Ltd.
• Laws Referred To: Income Tax Act
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: PANKAJ KUMAR
• Assessee Lawyers: SIDDHESH CHAUGULE; RECHARACTERIZING ENTIRE
• Keywords: Transfer pricing; International transaction; Principle of natural justice; TDS; Notional interest; Validity of assessment; FORM 26AS
• Section: 119; 153; 274; 234B; 144C; 92D

Judgement Text

"` IN THE INCOME TAX APPELLATE TRIBUNAL “J” BENCH, MUMBAI BEFORE SMT. BEENA PILLAI (JUDICIAL MEMBER) AND SHRI RENU JAUHRI (ACCOUNTANT MEMBER) I.T.A. No.4710/Mum/2024 Assessment Year: 2020-21 Vodafone India Services Private Ltd. 201-206 Above Corp Bank, Shiv Smriti, 2nd Floor, 49/A Annie Besant Road Mumbai, Worli S.O, Mumbai-400018. PAN: AAACZ1849D Vs. The Assistant Commissioner of Income-tax. Circle 8(3)(1), Aayakar Bhawan, Maharshi Karve Road, New Marine Lines, Churchgate, Mumbai-400020. (Appellant) (Respondent) Appellant by Shri. Siddhesh Chaugule Respondent by Shri. Pankaj Kumar, SR. D.R. Date of Hearing 20.02.2025 Date of Pronouncement 28.02.2025 ORDER Per: Smt. Beena Pillai, J.M.: The Present appeal filed by the assessee arises out of final assessment order dated 19/07/2024 passed by the assessment unit of income tax department under section 143 (3) read with 2 ITA No. 4710/Mum/2024; A.Y. 2020-21 Vodafone India Services Private Limited section 144C (13) read with section 144B of the act on following grounds of appeal: “1.1. On the facts and in the circumstances of the case and in law, the learned Transfer Pricing Officer (Ld. TPO) and the learned Assessing Officer (Ld. AO) under directions issued by the Hon'ble Dispute Resolution Panel ('DRP'), erred in making an addition to the Appellant's total income of INR 120,98,26,878/- 1.2. On the facts and circumstances of the case and in law, the Ld. AO has erred in not passing the final assessment order dated 19 July 2024 as per the directions of the Hon'ble DRP Panel as prescribed in section 144C (10) and 144C (13), thereby rendering the assessment order being null & void and liable to be quashed. 1.3. On the facts and circumstances of the case and in law, the Hon'ble DRP has erred in issuing directions in violation to provisions of section 144C(8), read with the explanation thereto, by directing the AO to compute and adopt margins of comparable companies as per law. Accordingly, the directions of the Hon'ble DRP are bad in law and ought to be quashed. Consequently, the final assessment order is bad in law and ought to be quashed. 1.4. On the facts and circumstances of the case and in law, the final assessment order dated 19 July 2024 is issued beyond the time limit as prescribed u/s 153 of the Act. Consequently, the final assessment order is time barred and deserves to be quashed. 2. Ground No. 2- Transfer Pricing - Provision of ITeS Services 2.1. On the facts and in the circumstances of the case and in law, the Ld. AO/National Faceless Assessment Centre ('NFAC\") and the Ld. TPO, erred in making an addition of INR 1,20,75,56,772 in respect of provision of ITeS services to the Appellant's total income based on the provisions of the Act and the Hon'ble DRP further erred in upholding/confirming the action of the learned AO /ΤΡΟ 3 ITA No. 4710/Mum/2024; A.Y. 2020-21 Vodafone India Services Private Limited 2.2. The NaFAC/Ld. TPO erred in ignoring the persuasive nature of earlier agreed Bilateral Advance Pricing Agreement between the Assessee and the Central Board of Direct Taxes ('CBDT') in relation with the international transaction pertaining to 'Provision of ITeS Services'. 2.3. The NaFAC/Ld. TPO erred in rejecting comparable companies selected by the Assessee based on the contemporaneous data in the transfer pricing study report maintained as per section 92D of the Act read with Rule 10D of the Rules, for benchmarking the aforesaid international transactions. 2.3.1.By arbitrarily applying additional adhoc filters of selecting companies having 'turnover within the range of 1/10th to 10 times of assessee's turnover, and 'Revenue from Exports >75% of total Revenue from operations\". 2.3.2. Without appreciating that the comparable companies selected by the Assessee and rejected by the Ld. TPO are functionally comparable companies passing all the quantitative and qualitative filters adopted by the Assessee. 2.3.3. In arbitrarily rejecting companies with different financial year ending (ie other than 31\" March 2020) and in inconsistently applying such filters 2.4. On the facts and in the circumstances of the case and in law, the learned TPO erred, and the Hon'ble DRP further erred in upholding / confirming the action of the TPO in cherry-picking additional companies for benchmarking international transactions of the Appellant. 2.4.1. Without sharing a search strategy adopted for selection of alleged comparable companies during the course of assessment proceedings thereby adopting an ad hoc, arbitrary and inconsistent approach for benchmarking. 4 ITA No. 4710/Mum/2024; A.Y. 2020-21 Vodafone India Services Private Limited 2.4.2. Without considering submission of the Assessee whereby the additional companies are not functionally comparable to the functions performed by the Assessee. 2.5. On the facts and in the circumstances of the case and in law, the learned TPO erred and the Hon'ble DRP further erred in not upholding the without prejudice contention of the Appellant to adopt the margin of alleged comparable companies computed based on the annual report. 2.6. Without prejudice to above, the NaFAC/Ld. TPO erred in not adjudicating the rectification application dated 19 June 2024 filed by the Assessee. 3. Ground No. 3- Transfer Pricing - Interest on Recovery of Expenses 3.1. The NaFAC/Ld. TPO erred in making an adjustment of INR 22,70,106 to the income of the Appellant by re-characterizing entire recovery of expenses as a loan granted by the Appellant to the Associated Enterprise ('AE'). 3.2. The Ld. TPO erred in law in not issuing show cause notice in relation with the adjustment made pertaining to interest on Recovery of expenses, thereby breaching the principle of natural justice and rendering the Assessment proceedings and the TPO's order to be void, bad in law and the adjustment made thereto is liable to be quashed. 3.3. The NaFAC/TPO has erred in computing the arm's length price of the international transactions relating to recovery of expenses without adopting any of the methods prescribed under section 92C(1) of the Act, for the purpose of benchmarking the said transaction, thereby adopting ad-hoc and arbitrary approach with a pre-determined mindset of making an adjustment to the income of the Assessee. 3.4. The NaFAC/Ld. TPO further erred in 5 ITA No. 4710/Mum/2024; A.Y. 2020-21 Vodafone India Services Private Limited 3.4.1. Applying the contentions of the Appellant of earlier year in the current year, without appreciating the facts are dissimilar in current year. 3.4.2. Disregarding the fact that reimbursement of expenses does not include element of services 3.4.3. Erred in failing to appreciate that Appellant is a debt free company and thereby no interest bearing funds were used to pass on the benefit in the form of extended credit period to AE. 3.5. Without prejudice to above, the Ld. AO/TPO erred in adopting State Bank of India (SBI) Prime Lending Rate ('PLR') at 13.30 percent for entire year as the Arm's length rate of interest as against London Inter Bank Offer Rate ('LIBOR')/ suitable foreign currency benchmark rate to charge interest on overdue receivables pertaining to international transaction of recovery of expenses. 3.6. Without prejudice to the above grounds, the Ld. AO/TPO erred in computing interest on the recovery of expenses without considering general credit period followed by the Company in the inter-company transactions. Ground No. 4; Non-grant of credit of INR 1,26,04,504 being tax on regular assessment reflecting in Form 26AS 4.1. On the facts and in the circumstances of the case and in law, the Ld. AO has erred in not granting credit of line items reflecting in Form 26AS as tax paid on regular assessment dated 06 June 2023 amounting to INR 1,26,04,504. 5. Ground No. 5: Levy of additional interest u/s. 234B and Penalty u/s. 274 read with section 270A of the Act 5.1. On the facts and in the circumstances of the case and in law, the Ld. AO has erred in levying the consequential additional interest under Section 234B of the Act. 6 ITA No. 4710/Mum/2024; A.Y. 2020-21 Vodafone India Services Private Limited 5.2. Without prejudice to the above, the Ld. AO erred in computing incorrect interest under Section 234B of the Act. 5.3. On the facts and in the circumstances of the case and in law, the learned AO has erred in initiating penalty proceedings under section 274 read with section 270A of the Act, without appreciating the fact that the additions made by the Ld. AO are not in accordance with the law. The Appellant prays that the additions made by the Ld. TPO/Ld. AO under the directions of the Hon'ble DRP be deleted and consequential relief be granted.” Brief facts of the case are as under: 2. Assessee is engaged in the business of providing call centre services, finance and accounting shared services, human resource shared services, information technology services, networking support services and Vodafone solutions (collectively known as information technology enabled services) to the operating companies of Vodafone globally. 2.1 The Ld.AR submitted that, during the year under consideration assessee provided IT enabled services to following associated enterprises: 1. Vodafone Group Services Ltd 2. Celfocus Solucoes Informaticas Para Telecommunications, S.A. 3. Cable and Wireless India Ltd-India branch 2.2 The Ld.AR submitted that, assessee computed its margin at entity level to 16.89% by using TNMM as most appropriate method and profit level indicator to be operating profit to operating cost. Assessee identified set of 12 comparable with 7 ITA No. 4710/Mum/2024; A.Y. 2020-21 Vodafone India Services Private Limited average median of 8.63%. The assessee thus held its transaction with the associated enterprises to be at arms length. The Ld.TPO disagreed with benchmarking carried out by the assessee. The Ld.TPO shortlisted asset set of 5 comparables with average margin of 24.47%. 2.3 He submitted that, Ld.TPO passed order under section 92CA(3) of the act, by determining arms length prize of the international transactions at entity level by proposing adjustment of Rs.120,75,56,772/-. 2.4 The Ld.TPO further observed that, assessee paid Rs.1,14,93,592/- and Rs.55,74,875/- to its AE’s being Vodafone Group Services Ltd., and Vodafone Ltd being reimbursement of costs incurred by these AE’s towards payroll cost, travel and accommodation Exeter which does not get included in the provision of any services and it was a pure reimbursement without any mark-up. 2.5 The Ld.TPO benchmarked the transaction by applying SBI prime lending rate and thus charged notional interest at 13.30%, for 365 days. The Ld.TPO thus proposed an adjustment of Rs.22,70,106/-. 3. On receipt of the transfer pricing order, the Ld.AO passed draft assessment order on 25/09/2023, incorporating the proposed adjustment. 3.1 Against the draft assessment order, assessee preferred objections before the DRP. 4. The DRP upheld the comparables selected by the Ld.TPO under the ITeS segment. The DRP thus upheld the adjustments 8 ITA No. 4710/Mum/2024; A.Y. 2020-21 Vodafone India Services Private Limited proposed by the Ld.TPO. The DRP also upheld the notional interest computed on the reimbursed cost at 13.3%. 4.1 On receipt of the DRP directions, the Ld.AO passed the impugned order by making addition in the hands of the assessee’s at ₹120,98,26, 878/- Aggrieved by the order of the Ld.AO, the assessee is in appeal before this Tribunal. 5. Ld.AR has filed letter dated to 10/02/2025 indicating the bilateral advance pricing agreement (BAPA) being executed between the assessee CBDT on 22/01/2025 concluding the arms length prize of the international transaction between assessee and Vodafone group services (UK AE) Ltd for following 3 segments: • Provision of ITeS services • Reimbursement and recovery of expenses paid/received: and • Trade advances received in relation to aforementioned transactions. 5.1 The Ld.AR has also filed copy of the BAPA dated 22/01/2025. He submitted that as per clause 6 of the agreement, the all above covered transactions will be treated as under: a) The international transaction related to provision of ITeS shall be considered to be at arms length, if the operating profit margin (in relation to operating expenses) of the applicant in each previous year covered by this agreement is 16%. b) The covered transactions of reimbursement of expenses by the applicant to its AE, to the extent linked to the provision of ITeS shall be treated as part of operating expenses as maintained in clause 1 (c ) above. However, reimbursement of expenses by the applicant to its AE’s, which are not linked to the provision of ITeS, shall not be treated as part of operating expenses and shall only. Burst at cost. 9 ITA No. 4710/Mum/2024; A.Y. 2020-21 Vodafone India Services Private Limited c) Similarly, recovery of expenses by the applicant from the tea, the extent linked to the provision of ITeS, shall also be treated as part of operating expenses as mentioned in clause 1 (c ) above. However, recovery of expenses by the applicant from its AE’s which are not linked to the provision of ITeS, shall not be treated as part of operating expense and shall only be recovered at cost. 5.2 The Ld.AR submitted that issues pertaining to ITeS services, regarding reimbursement of cost and trade advances received in relation to transactions with the UK AE has been accepted between the competent authorities at 16%. 6. The Ld.AR the submitted that in respect of the other two AE, located in USA the segmental details of the international transaction that remains to be adjudicated as under: S.No. Nature of TP addition name of AE Amount in INR 1. Provision of ITeS services Celfocus Solucoes Informaticas Para Telecommunications S.A. 44,87,225 2. Provision of ITeS services Cable and Wireless India Ltd- India branch 94,896 3. Interest on recovery expenses Vodafone Ltd 741,458 6.1 The Ld.AR at this juncture submitted that, assessee is agreeable to adopt margin as per BAPA entered with the UK AE, in respect of above transactions entered into between the assessee and US AE. The Ld.AR also submitted that, there is no factual distinction in the transaction between assessee had UK AE and USA-AE in so far as the functions, assets and risks assumed are concerned. 6.2 On the contrary, the Ld.DR did not raise any objection to the prayer of the assessee. 10 ITA No. 4710/Mum/2024; A.Y. 2020-21 Vodafone India Services Private Limited We have perused the submissions advanced by both sides in light of records placed before us. 7. It is noted that bilateral APA is drawn between the assessee, UK AE, the tax authorities of India and foreign tax administration after consideration of relevant aspects giving rise to transfer pricing adjustment. Admittedly, there has been no such mutual agreement or advance pricing agreement between assessee and USA AE. 7.1 We note that, the assessee as well as Ld.TPO considered both UK AE and USA-AE transaction at entity level to bench mark the international transactions in transfer pricing study report as well ass orders u/s.92(A)(3). Such kind of approach is based on the assumption of fact that there is no material changes in respect of the functions performed, assets owned and risks assumed by the assessee in the international transactions with USA & UK AE. It is further noted that, the assessee computed the margin at entity level to be 16.63% as against the margin computed by the Ld.AO/TPO at 23%. 7.2 In the BAPA agreement entered between assessee & UK AE in the margin of ITeS segment is accepted to be 16%. Assessee is now seeking to apply the same rate in respect of the ITeS transaction with USA AE. It is noted that such an approach has been analysed by coordinate of this Tribunal in case of J.P. Morgan Services India (P.) Ltd. v. Dy. CIT IN ITA No.784 /Mum/ 2014, vide order dated 31-1-2017. The revenue preferred appeal against this decision before Hon'ble Bombay High Court. Hon'ble Bombay High Court in case of Pr. CIT v. J.P. Morgan Services India (P.) Ltd. Reported in (2019) 105 taxmann.com 40. The said 11 ITA No. 4710/Mum/2024; A.Y. 2020-21 Vodafone India Services Private Limited decision stands approved by Hon'ble Supreme Court in Pr. CIT v. J.P. Morgan Services India (P.) Ltd. Reported in (2020) 119 taxmann.com 414. 7.3 Further, it is noted that, such view has also been taken by benches of this Tribunal in following decisions: • Decision of Hon’ble Bangalore Tribunal in case of CGI Information Systems Management Consultants (P.) Ltd. v. Dy. CIT [IT (TP) Appeal No. 1117 (Bang.) of 2011, dated 15-2-2017] • Decision of Hon’ble Bangalore Tribunal in case of Tesco Bengaluru (P.) Ltd. v. Dy. CIT [IT (TP) Appeal No. 262 (Bang.) of 2014, dated 25-10- 2021] • Decision of Hon'ble Ahmedabad Tribunal in case of IQVIA RDS (India) (P.) Ltd. in IT(TP)A No. 3161/Ahd/2010 7.4 We therefore direct the Ld.AO/TPO to adopt rates for transaction of assessee with USA AE as per rate agreed under Bilateral APA with UK AE and compute the adjustment accordingly. Accordingly, Grounds 2-3 raised by assessee relating to the UK transaction stands resolved in accordance with BAPA vide agreement dated 122/01/2025 in respect of the covered transactions and grounds related to transfer pricing adjustment in respect of USA-AE transaction stands disposed off as per the directions herein above. Accordingly these grounds raised by the assistance partly allowed for statistical purposes. 8. Ground No.4 raised by the assessee is relating to non-grant of credit of tax on regular assessment reflecting on Form 26 AS. The Ld.AR filed before us form 26AS reflecting certain TDS that is not considered while computing outstanding tax liability in the hands of the assessee. 12 ITA No. 4710/Mum/2024; A.Y. 2020-21 Vodafone India Services Private Limited We direct the Ld.AO/TPO to provide the credit of TDS as per Form 26 AS. Accordingly this ground raised by the assessee stands particular for statistical purposes. 9. Ground No.5 raised by the assessee is for levy of additional interest under section 234B and penalty under section 274 read with section 270 A of the act. These are consequential in nature and therefore do not require any education. 10. The Ld.AR has submitted that Ground No.1 raised by the assessee is challenging the validity of assessment order passed to be barred by limitation under section 153 of the act. 10.1 As we have already considered the issue on merits of the addition based on the bilateral advance pricing agreement with the AE in USA, no further grievance arise to the assessee. We accordingly do not intend to decide this issue and leave it open holding it to be academic at the stage. In the result of the appeal filed by the assessee stands partly allowed as indicated herein above. Order pronounced in the open court on 28/02/2025 Sd/- Sd/- (RENU JAUHRI) (BEENA PILLAI) Accountant Member Judicial Member Mumbai: Dated: 28/02/2025 Poonam Mirashi, Stenographer Copy of the order forwarded to: 13 ITA No. 4710/Mum/2024; A.Y. 2020-21 Vodafone India Services Private Limited (1)The Appellant (2) The Respondent (3) The CIT (4) The CIT (Appeals) (5) The DR, I.T.A.T. True Copy By order (Asstt. Registrar) ITAT, Mumbai "