CASE LAW

2016-TII-494-ITAT-DEL-TP

AMADEUS INDIA PVT LTD Vs ACIT: DELHI ITAT (Dated: September 21, 2016)

Income tax - Sections 10A, 92B, 92F(v), 143(3) & 144C.

Keywords - ALP - AMP adjustment - Bright Line test - delayed receivables from AE - Dependent agent PE - distribution fee - international transaction & notional interest.

Whether in the absence of any arrangement for either incurring AMP expenses on behalf or for benefit of the AE or for payment of AMP expenses by the AE, it can be held that there was an "international transaction", only on the basis that AMP expenditure, incurred by the assessee, and that would have benefitted its AE, which owned the brands used by the assessee - NO: ITAT

Whether payments made by the assessee under the head 'AMP' to the domestic parties can be termed as an "international transaction", in the absence of any agreement between the assessee and its AE for either sharing or incurring of AMP expenses for sole benefit of the AE, when the TPO has failed to prove that expenses incurred were not for the business carried out by assessee in India - NO: ITAT

Whether an ALP adjustment can be made in respect of delay in realisation of sale proceeds from AEs - NO: ITAT

Whether it is open to the DRP to take a contrary view, once the STPI authorities had confirmed the factum of export activities carried out by the assessee at its different Units - NO: ITAT

Whether the action of DRP in doubting the claim of deduction u/s 10A for present year, can be sustained, when after a detailed technical examination of assessee's activities, eligibility of its sole data processing activity for claiming deduction u/s 10A has already been settled by the ITAT in previous A.Ys and accepted by tax department - NO: ITAT

A) The assessee's major business activity concerns of providing connectivity to host system by creation, modification or up gradation of computer programs online. It had a data processing centre which provides the above services to the AE. During the concerned year, the assessee had reported international transactions comprising of provision of IT enabled services and reimbursement of expenses. TPO has accepted the benchmarking of the above-declared international transactions, however, he was of the opinion that there was a transaction between assessee and its AE for promotion of Amadeus Brand in India for which the assessee incurred an excessive AMP expense. He was of the opinion that AMP expenditure incurred by the assessee had resulted in creation of marketing intangibles for which it should have been suitably compensated by its AEto the extent of excessive expenses vis-a-vis comparable companies. Accordingly, he applied Bright Line test to determine ALP of the said expenses. He held that the assessee had spent a sum of Rs.65,41,24,6771/- on promotion of marketing intangibles owned by AE, and therefore, applying a mark up of PLR + 2.5% a cumulative adjustment on account of brand building of Rs.75,40,09,5151/- was proposed by the TPO.

B) The TPO recorded that on the year end, the assessee had receivables from its AEs implying that the payment for invoices raised by it have not been realized within the stipulated time as provided in the agreement. The TPO recorded this as a separate international transaction requiring fresh benchmarking analysis. He further noted that as per market practice such receivables ought to have been realized within 30 days of the invoice and any excess period of credit requires a compensation of delayed interest @ 15.77%. With the above conclusions, the TPO proposed an adjustment of Rs.3,08,653/-.

C) The assessee was carrying on data processing activities from two units i.e., Unit I & Unit II. Unit I had already exhausted the period of exemption u/s 10A and during the concerned year, the claim for deduction u/s 10A was made by the assessee only as regards Unit II which was located in New Delhi. Along with the return of income, a certificate from a Chartered Accountant in Form 56F as per statutory requirements was also submitted in which it was certified that during the year under consideration assessee had made claim for deduction u/s 10A on data processing receipts of Rs.25,36,64,616/- being that eligible export turnover of Unit II. Therefore, out of the total data processing receipts of Rs. 1,64,98,72,986/- credited by the assessee in its P&L A/c, deduction u/s 10A had been claimed for an export turnover of Rs.25,36,64,616/- pertaining only to Unit II. Although the AO accepted such claim, however, the DRP was of the opinion that from perusal of Agreement entered into between Amadeus Spain and assessee, services to be provided were in the nature of marketing and distribution of products owned by Amadeus Spain and hence, there was no software being exported by the assessee. The DRP concluded that since as per the agreement, assessee was appointed as a National Marketing Agent, the remuneration received by it as per the Agreement was not in the nature of software development but a Distribution fee for promotion of business conducted by Amadues Spain.

Having heard the parties, the Tribunal held that,

AMP expenses

+ undisputedly the main data processing and subsidiary distribution activities of the assessee have been held to be at ALP applying TNMM. Provision of IT enabled services to AE under the agreement has been thoroughly benchmarked by TPO. MAM being TNMM has not been doubted and after an in-depth analysis of comparable companies selected by the assessee and by tinkering with same the TPO has given a finding that OP/OC of assessee is 20.27% & OP/OC of revised comparable set is 23.94%. No adjustment made on this account has been made as the difference is within .±. 5% range. The TPO however has segregated AMP expenses and held that being an independent transaction it requires to be benchmarked independently. In these circumstances, the fundamental question to be answered is to decide as to whether in absence of any agreement, arrangement or understanding for either incurring AMP expenses on behalf or for benefit of the AE or for payment of AMP expenses by the AE can it be held that there was an "international transaction" only on the basis that AMP expenditure, incurred by the assessee, would have benefitted the AE, who owned the brands used by the assessee. The AR has rightly submitted that this is a jurisdictional issue, which requires a foremost adjudication and only if answer to this issue is against the assessee that the matter then required a de-novo adjudication. Case records further show that both the lower authorities have categorically given a finding that there existed a "transaction" for brand promotion between assessee and its AE. This is also under challenge before this Tribunal. Hence it cannot be said that necessary facts are not on record. With regard to the submissions of the DR that the issue of AMP be restored back to the file of TPO, we would like to state that since facts necessary to determination are on record the law laid down by Jurisdictional High Court has to be given effect to. It is not even the argument of CIT that any fresh fact is required for such a determination. Under the circumstances a direction for remand is not called for;

+ the clauses of the agreement nowhere provide that the assessee will be incurring brand promotion expenses for and on behalf of its AE or solely for its business purposes and interests. Such agreement is based upon revenue sharing model in which 46% revenue is being shared by Amadeus Spain with the assessee and hence it is difficult to visualize that assessee will not be incurring routine advertisement expenses in its entrepreneur capacity. Excluding payment of incentives, which in earlier years have been held, to be pure selling expenses, the ratio of AMP/Sales of the assessee is mere 2.29%. Although the DRP has not disturbed the objections of assessee, however upheld that finding of TPO by holding that since assessee is a Dependent Agency PE of its AE hence all the expenses on AMP are being incurred by it for the benefit of AE. While alleging as above the DRP has not appreciated that assessee has been held to be a Dependent Agent PE of Amadeus Spain for determination of Amadeus Spain's income, which is taxable in India. Absence of an agreement, arrangement or understanding between the assessee and its AE for sharing AMP expenses or for incurring AMP expense for sole benefit of the AE, payments made by the assessee under the head 'AMP' to the domestic parties cannot be termed as an "international transaction" specifically when the TPO has not been able to prove that expenses incurred were not for the business carried out by the assessee in India. This Tribunal is therefore of the opinion that the TPO had wrongly invoked the provisions of Chapter X of the Act for the said AMP spent. Addition of Rs.75,40,09,515/- is therefore directed to be deleted;

Notional interest from AE

+ undisputedly, in the present case benchmarking of main international transactions applying TNMM has been accepted by the TPO. Considering this, we find that the ratio laid down by Mumbai ITAT in Rusabh Diamonds case is clearly applicable to the facts of instant case. In the said judgment, it has been held by the coordinate bench that no ALP adjustment can be made in respect of delay in realisation of sale proceeds from AEs. Therefore, respectfully following the above, the AO is directed to delete addition of Rs.9,786/-;

Distribution fee vis-a-vis Deduction u/s 10A

+ it is seen that various decisions of coordinate bench clearly highlight the nature of data processing activities carried on by the assessee. This Tribunal finds no reason for not following such binding precedent. Moreover tax department has also accepted the said decisions. The DRP has vehemently harped upon the fact that nature of activities carried on by the assessee is solely distribution and marketing and not export oriented. This Tribunal is unable to convince itself in this regard. Similar allegations were raised by the AO in his order of assessment for AYs 1997-98 and 1998-99. On further appeal ITAT following ratio propounded in 79 ITO 407(Del) has allowed assessee's claim for deduction u/s 10A in those years. Even these orders have been accepted by the Tax Department and there is no further challenge thereto. The AR is justified in submitting that the DRP has written factually incorrect findings in its order. Moreover the details, filed by the assessee have also been partially taken into consideration. The DRP takes note of top 25 employees but omits to take into consideration crucial fact that director of assessee company i.e., Ankur Bhatia is a Software Engineer with 16 years of experience. Moreover division wise break up of total employee strength clearly show that assessee did possess requisite technical staff for carrying out data processing activities. We further observe that DRP has erroneously been influenced by the fact that assessee is having branches in various locations. Facts on record clearly show that those branches belong to Unit I and not to Unit II. As regards Unit II the STPI registration has been granted only for one location New Delhi. The AR has also drawn our attention towards application seeking STPI registration wherein it is stated that applicant will not have any STP unit in any other location. Annual return to STPI authorities also clarify that Unit II was operating only from one location. Registration granted by STPI Authorities to UNIT II is solely for manufacture of "Computer Software IT Enabled Services". Once STPI authorities donot doubt the factum of export activities of Unit II, we fail to apprehend how DRP can take contrary view;

+ the DRP's action in the present case is motivated by the "distribution" part of agreement which was not actually carried on by the assessee. Since fee to be paid to assessee was qefined in a consolidated manner probably that has lead to the present confusion in DRP's action of making disallowance of deduction u/s 10A. As held by the Tribunal in assessee's own case for AY 1996-97, it merely provides ITeS services to Amadeus Spain. Assessee renders no services to the travel agents but does render data processing services only to Amadeus Spain and for this it is being remunerated on a profit sharing basis. The meaning ascribed to term "distribution" by DRP in this year has formed part of assessee's agreements with Amadeus Spain since inception from AY 1996-97. Hence it does not wipe out the past history of the case. It is admitted by DRP that facts are common and there is no change in modus operandi. Hence action of DRP in now doubting the claim made when after a detailed technical examination of appellant's activities, eligibility of its sole data processing activity for claiming deduction u/s 10A has already been settled by the Tribunal in AY 1996-97 and accepted by tax department is unsustainable. The view adopted by DRP has further been influenced by the fact that Amadeus Spain has a PE in India in form of Amadeus India Private Limited i.e the assessee. We find that this fact is totally irrelevant in adjudication of assessee's claim for deduction u/s 10A. Foreign company's DAPE and DA are two separate taxable entities as per law. DAPE is a creation of Article 5 of the relevant DT AA, wherein the object is to tax profits of foreign company in the source state. We therefore direct the AO to allow the claimed deduction u/s 10A on Unit II of the assessee.

Assessee's appeal partly allowed