Income Tax Appellate Tribunal - Delhi
Dcit, New Delhi vs M/S. Arkadin Confer India Pvt. Ltd., ... on 20 January, 2020
IN THE INCOME TAX APPELLATE TRIBUNAL
DELHI BENCH: 'I-1' NEW DELHI
BEFORE SHRI R.K. PANDA, ACCOUNTANT MEMBER
&
SHRI K.NARASIMHA CHARY, JUDICIAL MEMBER
ITA No. 6037/Del/2015
Assessment Year: 2011-12
DCIT, Circle- 3(1), Vs Arkadin Confer India Pvt. Ltd.,
New Delhi. B-106, Sector -2, Noida.
PAN: AABCD 9889L
Appellant Respondent
Assessee by Sh. B. Ramanjaneyulu, Sr. DR
Revenue by Sh. Sudhir Kumar Dash, CA &
Sh. Akash Kumar, C.A.
Date of Hearing 09.01.2020
Date of Pronouncement 20.01.2020
ORDER
PER K. NARASIMHA CHARY, JM
Challenging the order dated 10/08/2015 in appeal No. 361/14-15 passed by the learned Commissioner of Income Tax (Appeals)-1, New Delhi ("Ld. CIT(A)"), for assessment year 2011-12, in the case of M/s ArkadinConfer India Private Limited ("the assessee"), Revenue preferred this appeal on the following effective ground:-
"1. Whether the Ld CIT(A) has erred in law in deleting addition of Rs.7,05,54,285/- made by the A.O. on account of ALP.2
2. Brief facts of the case are that the assessee is a subsidiary of Arkadin SA, France and is mainly engaged in the business of global collaboration service of complete range of remote solutions from audio, web and videoconferencing to Unified Communications. For the assessment year 2011-12 it had filed its return of income on 23/11/2011 declaring nil income after setting off the brought forward losses to the tune of Rs.85,25,735/-and book profit of Rs.56,65,560/-, which it had revised on 17/5/2012 at the same income. Assessee had, however, paid the taxes on the book profits.
3. During the course of assessment proceedings, learned Assessing Officer noticed that the assessee company entered into international transaction with its Associated Enterprises ("AEs") to the tune of Rs.7,05,54,285/-as submitted in report under section 92E of the Income Tax Act, 1961 (for short "the Act") in form No. 3CEB. Learned Assessing Officer sought information from the assessee on as many as 10 points and the assessment order reveals that the assessee had furnished all such information as required by the learned Assessing Officer. Learned Assessing Officer did not think it fit to accept the explanation offered by the assessee for the following reasons:-
i) "There is no evidence that the services have actually been provided. The assessee company has failed miserably to demonstrate the need for these services as also the receipt of the same.
ii) There is no basis / evidence for revenue claimed to have been generated from the alleged services.
iii) The assessee company has failed to establish any direct nexus, whatsoever, of any kind, which may help its case of having 3 received the business from its AE as a result of services provided by the AE.
iv) The assessee company has failed to establish that its associated enterprises have specifically dedicated service centres for the assessee company. The AE was not prohibited from rendering services to third parties as well.
v) Moreover, it is not disputed that the activities for which it is paying, are also performed by itself. Under the OECD guidelines, no intra-group service should be found for activities undertaken by one ground member that merely duplicate a service that another group member is performing for itself, or that is being performed for such other group member by a third party.
Moreover, even if it is presumed without conceding that business exigencies do permit third party involvement in spite of its own endeavour, in no case is there is scope for duplicity of services. Moreover, the cost of such services, if any, would need to be identified to prove that it has no overpaid its AE than what would have been paid under arm's length circumstances."
4. Learned Assessing Officer, therefore, held that the assessee company could not show that there was in fact receipt of services, the payment commensurate with the benefit and such payments benefited the assessee directly and tangibly. Learned Assessing Officer therefore, reached a conclusion that the assessee failed to substantiate as to when and how the various services were requisitioned from the AE's, whether the services were actually needed by it, whether the same were actually received by it by producing contemporaneous documentary evidence, at the time of entering into the agreement or at the time of availing the services, if reallyavailed, what benchmarking analysis was done, what cost benefit analysis was done particularly when a user payment was made by it to the AE's and therefore, determined the arm's-length price 4 of the international transaction at nil and added the sum of Rs.7,05,54,285/-to the income of the assessee.
5. Aggrieved by such a finding, assessee preferred an appeal before the Ld. CIT(A). Ld. CIT(A) on a reappraisal of the entire material before him recorded that initially the assessee was having 60 ports and was providing services to the customers with the help of local equipments resulting in incurring losses; that, therefore, it came into contact with the French company called Arkadin SA which had presence world over and had established itself as foremost communication service provider and subsequently, assessee had become a subsidiary of Arkadin SA; that once the assessee had become subsidiary of Arkadin SA, the assessee got business from all the subsidiaries of Arkadin spread world over and also came into contact with the telecommunication service provider like Orange, Tata Communications, Verizon Business Service, Reliance Communications etc; that the assessee also received bridge equipment from the parent company and software and hardware for providing world-class services to the customers; that by virtue of said collaboration the assessee has gotten more than 3000 ports and has got customer list all over the world; that with the help of holding company assessee company's Revenue has increased manifold and the company has become profitable; that the payments made to the holding company for managerial services, lease rental for the equipment supplied and royalty for use of trademark are based on the agreements entered into by the assessee with the holding company and wholly and exclusively for the business of the assessee's company; that these payments were made 5 through banking channels after deducting the applicable taxes; and that, therefore, the genuineness of these payments cannot be doubted.
6. Ld. CIT(A) further found that out of Rs.7,05,54,285/-added by the learned Assessing Officer, the payments of Rs.1,14,44,038/-made towards ITFS and Rs.14,00,598/-towards IT services made to Arkadin SA, France were also included; whereas these payments were made further utilising international toll-free service and international toll services. Such an addition of Rs.7,05,54,285/-also includes a sum of Rs.1,17,38,993/- which is in fact income and another sum of Rs. 3,34,75,286/-which was in fact reimbursement and not claimed as expense in the P&L Account. As a matter of fact, Ld. CIT(A) found that the reimbursements were the payments made by the assessee to reliance for ITFS services on behalf of the Arkadin SA and these payments were made to reliance for the ITFS services utilised by the associated enterprise and reimbursement by them to the assessee.
7. Ld. CIT(A) further found that the managerial remuneration to Arkadin was paid according to the formula "P% of CT" where P represents the percentage, CT represent the consolidated entry turnover excluding VAT and other taxes of the customer; that the royalty paid towards use of trademark of the holding company was through the agreement dated 22/2/2008 in terms of which a licence was granted to the assessee for using the trademark and the assessee had to pay 1% royalty to the license or on the net sales. Considering all these aspects, Ld. CIT(A) reached a conclusion that the findings of the learned Assessing Officer in respect of the payments stating that those payments were without any business purpose and without any commensuratebenefit to the assessee 6 are not based on any cogent material and without bringing any adverse material on record and, therefore, the observations made by the learned Assessing Officer were without any basis and the disallowance of the payment to the Arkadin SA, France for the services provided is not justified. Ld. CIT(A), accordingly, deleted the addition. Revenue is, therefore, before us in this appeal.
8. Ld. DR placed heavy reliance on the assessment order and submitted that it is unlikely that the assessee should have entered into an agreement without carrying out any cost benefit analysis; that the services mentioned by the assessee are more in the nature of shareholder services as they were meant to ensure that the overall policies/procedure of the taxpayer were in consonance with the global UAE policies/procedure; that no documentary evidence was produced before the Assessing Officer to satisfy the benefitand rendition test; and that the Ld. CIT(A) is not justified in looking into the papers submitted by the assessee behind the back of the learned Assessing Officer. Ld. DR further submitted that absolutely there is no material to show that the assessee company was in fact invaded the impugned services from the Associated Enterprises ("AEs") or that in fact such services were rendered resulting in the direct benefit to the assessee. For these reasons, he submitted that the order of the Ld. CIT(A) suffers perversity and deserves to be reversed.
9. Per contra, Ld. AR drew our attention to paragraph No. 5.2 of the assessment order where the Assessing Officer clearly extracted the response of the assessee to all the points raised by the learned Assessing Officer. He further submitted that this clearly establishes that the 7 assessee submitted all the relevant documents before the Assessing Officer, but the Assessing Officer failed to appreciate them in their proper perspective. He further submitted that even according to the learned Assessing Officer the value of international transaction involved in this matter exceeds 5 crores and in terms of the instruction No. 3/2003, dated 20/5/2003 issued by the CBDT, where the aggregate value of the international transaction exceeds Rs. 5 crores, the case should be picked up for scrutiny and reference under section 92CA of the Act be made to the Ld. TPO. His further submission is that any adjustment in respect of the arm's length price of an international transaction made in violation of this instruction is bad under law in view of the decision of the Hon'ble Apex Court in the case of Ld. PCIT vs. M/s SG Asia Holdings (India) Private Limited in Civil Appeal No. 6144 of 2019 by order dated 13/08/2018. He further submitted that in respect of the subsequent years where the assessment under section 143(3) of the Act took place, the matter was referred to the Ld. Transfer Pricing Officer in consonance with law, and no adverse view was taken by the Ld. TPO on this international transaction.
10. We have gone through the record in the light of the submissions made on either side. There is no dispute on the facts recorded by the Ld. CIT(A) to the effect that originally the assessee was having 60 ports and was providing services to the customers with the help of local equipment; that the said business was not found remunerative and was incurring losses; that in such situation the assessee came into contact with the French company, namely, Arkadin SA which has presence all over the world and has established itself as a leader in communication 8 service to the customers; that subsequently the assessee had become a subsidiary of Arkadin SA; and that once the assessee had become the subsidiary of Arkadin SA, it secured business for all the subsidiaries of Arkadin SA spread all over the world resulting in the assessee acquiring more than 3000 ports and a long list of customers all over the world and its Revenue is increasing by leaps and bounds. Ld. DR does not controvert these facts.
11. During the year the assessee made certain payments to its Associated Enterprises ("AEs"), and the learned Assessing Officer estimated the same to be to the tune of Rs.7,05,54,285/-. On verification of the record, Ld. CIT(A) found that this amount includes a sum of Rs.1,17,38,993/-which is not an expense but in fact an income. Ld. CIT(A) further found that an amount of Rs. 3,34,75,286/-is not claimed by the assessee in its P&L account and is only the amount of reimbursement which the assessee incurred towards payments to reliance for the ITFS services, but utilised by the Associated Enterprises ("AEs") and therefore such sum was reimbursed by the AE's. As a matter of fact, these two amounts were not to be included in the disallowed expenses. This conclusion of the Ld. CIT(A) also could not be controverted by the Ld. DR.
12. It is, therefore, clear that it is the balance amount that was available after deducting the above two amounts representing the income and the reimbursement, that alone reflects the service charges paid by the assessee to its Associated Enterprises ("AEs"). According to the assessee, all these amounts were paid pursuant to the agreements and the services covered by these amounts were infact utilised by the assessee to serve its own clients; that without availing such services from 9 Arkadin SA, the assessee would not be in a position to provide any services to its customers; that it is only basing on such services as received from the Arkadin SA the assessee was able to provide its services to the customers locally and worldwide to earn the Revenue, which they have declared in the computation of income. The contention of the assessee although has been that the French company enjoyed concessional charges on Balkar consumption in respect of utilisation of the communication lines and facilities obtained from the custodians of the lines such as Orange, Reliance Communication, Tata Communications, Verizon Business Service and some others and it was so explained to the learned Assessing Officer when a specific query raised. Further case of the assessee has been that the trademark comprising of the intellectual properties of Arkadin SA France was utilised, and all the subsidiaries of Arkadin SA France utilised the trademark of Arkadin to advance and promote their business interests; that the trademark as used in the sale of services to the customers was the property of Arkadin SA, France and so the assessee not only did the business on that platform but also had a great deal of business falling to it from other subsidiaries of the Arkadinas a company spread all over the world; that on its own the assessee had neither the software nor the ability or capacity or the know- how for arranging and providing services to its clients and it is only because of its collaboration with the Arkadin SA, France, the assessee was able to get not only the equipment but also the know-how and even the clientele for rendering all the services.
13. Specific contention of the assessee all through is that the services availed of by the assessee from its Associated Enterprises ("AEs") were 10 mostly intangible and incapable of documentation in respect of company advisory and technical help with the staff of Arkadin SA, France used to provide on a continuous basis; that the only tangible item available with the assessee to prove the conduct of business by providing services to Association of Arkadin SA, France was the possession with it of the Spectacle Bridge and the associated equipment and the technical knowhow availed of for operating the same; and that the entire business has been undertaken and carried out in the name of Arkadin SA, France by utilising invariably the trademark in all the bills. Our specific attention is brought to the explanation offered by the assessee before the Ld. CIT(A) and forming part of the impugned order wherein the need for availing the services and the consequent payment for such services was enumerated.
14. Ld. CIT(A) considered all these contentions in detail. Insofar as the payment is concerned, it was done through banking channels and insofar as the purpose of payment is concerned it is well supported by the agreements between the assessee and the holding company, which proves that such purpose was wholly and exclusively for the business of the assessee company. On a consideration of the submissions made on behalf of the assessee, we are of the considered opinion that the payments were made for business purpose and the Revenues earned and declared by the assessee show the proportion of benefit, because the assessee travelled from losses to profit after their collaboration with the Arkadin SA, France.
15. Proof of putting is in the eating. The travel of assessee from losses to profits pursuant to the collaboration with the Arkadin SA, France is 11 evident. Its acquisition of not only the equipment but also the technical knowhow cannot be presumed to be without any cost. As rightly pointed out by the Ld. CIT(A), the findings of the Assessing Officer that the payments were made without any business purpose and without any commensurate benefit to the assessee are not based on any cogent material and without bringing any adverse material on record. We are in agreement with the Ld. CIT(A) in his findings that the Assessing Officer failed to specify how the payments made by the assessee were not in commensurate with the services obtained by the assessee and such findings are without any basis. The very fact of the Assessing Officer disallowing the income and the reimbursement which does not pass through the P&L account while disallowing the expenses shows that the disallowance was made by the learned Assessing Officer without any proper verification of the material facts available on record.
16. Apart from this, we find strength in the submission of the Ld. AR that inasmuch as the learned Assessing Officer noticed that the value of the international transaction exceeds Rs. 5 crores, pursuant to the instruction No. 3/2003, dated 20/5/2003, the matter should have been referred to the Ld. Transfer Pricing Officer for determination of the Arms Length Price ("ALP") of the international transaction, and for not doing so the adjustment on account of ALP cannot be sustained. In the case of M/s SG Asia Holdings (India) Private Limited (supra) the Tribunal held that the transfer pricing adjustment made by the learned Assessing Officer was contrary to the mandatory instructions issued by CBDT in its instruction No. 3/2003 dated 20/5/2003 and such a finding was affirmed by the Hon'ble High Court. When the Revenue preferred appeal, Hon'ble 12 Supreme Court while referring to the instruction No. 3/2003 held that in view of the guidelines issued by the CBDT instruction No. 3/2003, the Tribunal was right in observing that by not making reference to Ld. TPO, the Assessing Officer had breached the mandatory instructions issued by the CBDT and declined to find the conclusion so arrived by the Tribunal to be incorrect.
17. Viewing from any angle, we find that the impugned order does not suffer any illegality or irregularity and does not invite any interference in this appeal. We accordingly find the grounds of appeal as devoid of merits and the appeal is liable to be dismissed. We order accordingly.
18. In the result, appeal of the Revenue is dismissed.
Order pronounced in the Open Court on 20th January, 2020.
Sd/- Sd/-
(R.K. PANDA) (K. NARASIMHA CHARY)
ACCOUNTANT MEMBER JUDICIAL MEMBER
Dated: 20/01/2020
Copy forwarded to:
1. Appellant
2. Respondent
3. CIT
4. CIT(Appeals)
5. DR: ITAT
ASSISTANT REGISTRAR
ITAT NEW DELHI