ITAT upheld bundled approach for benchmarking for interlinked transactions

Cisco Systems Capital (India) Private Limited Vs DCIT (ITAT Bangalore)

The assessee grievance is bundled approach for benchmarking should be accepted. At the outset, the ld. AR submitted that the TPO has accepted the bundled approach of aggregation of payment of fees for administrative support services in the preceding years (i.e. from the incorporation year to AY 2015-16). Also, the Tribunal in its order passed for the AY 2015-16 dated April 8, 2021 has accepted the bundled transaction approach adopted by the Assessee. There has been no change in the functions, assets and risk analysis in the current year vis-a-vis preceding years. In this context, the Assessee submits that the rejection of the consistent approach adopted by the Assessee which has been accepted by the TPO in preceding years is incorrect. Given the fact that primary transaction of purchase of networking equipment for lease has been considered at arm’s length, the claim of the TPO that the impugned specified domestic transaction should be separately benchmarked is erroneous and unjustified.

Accordingly, it was submitted that as the assessee’s primary transaction of import of equipment from AE (Appellant’s margin 5.90%) has been accepted at arm’s length after considering the payment of administrative and marketing support services as part of operating cost, no separate adjustment is warranted in respect of the same.

This issue came up for consideration in assessee’s own case in AY 2015-16 in IT(TP)A No.2614/Bang/2019 and by order dated 8.4.2021 the Tribunal held as under:-

“6.7 It is also an admitted fact that assessee has been carrying out these activities in a bundled format in the preceding years which has not been objected by the Ld.TPO/AO. Further that all these expenses incurred by assessee towards administrative expenses and sales and marketing expenses stands subsumed in the operating expenses under TNMM for computing the arm’s length margin of the international transaction, a separate benchmarking may not be necessary. However all these things deserves verification at the end of Ld.AO/TPO. The Ld.AO/TPO shall verify the transactions as indicated hereinabove. In the event the expenses are subsumed under TNMM we do not find any necessity for a separate benchmarking.

Taking a consistent view, we hold that payment of administrative and marketing support services is part of the operating cost, no separate adjustment is warranted.

FULL TEXT OF THE ORDER OF ITAT BANGALORE

This appeal by the assessee is directed against the order of the Assessing Officer dated 31.3.2021 passed u/s. 143(3) r.w.s. 144C(13) r.w.s. 144(3A) & 143(3B) of the Income-tax Act, 1961 [the Act] for the assessment year 2016-17.

2. The assessee company is engaged in the business of leasing and finance. The assessee company filed Form No 3CEB indicating the international transactions u/s 92 of Income Tax Act. The case was referred to the TPO on 28/05/2018with prior approval of Pr. CIT-2, Bangalore with letter dated 23/05/2018 to determine the Arm’s length price. The TPO passed an order u/s 92CA of the IT Act on 31/10/2019 making Transfer pricing adjustment of Rs. 14,59,70,160 in respect of the international transactions entered by the Assessee with its associated enterprises during the previous year. Accordingly, an amount of Rs. 14,59,70,160 is added to the income of the assessee and brought to tax in the draft assessment order as follows:-

3. Aggrieved from the draft order, the assessee raised objection against the addition arising out of TPO order u/s 144C(2)(b) before the DRP. The DRP after taking into consideration the submission of the assessee, issued directions to the TPO u/s 144C(5) of the Act order dated 19.02.2021 to re-compute the margin of 8 comparables. Consequently, the TPO has recomputed the Arm’s Length Price and the adjustment as under:

4. Thus, an addition of Rs.14,78,43,56/- was made to the income of the assessee. Against this, the assessee is in appeal before us.

5. The assessee has raised the following grounds of appeal:-

“Based on the facts and circumstances of the case and in law, Cisco Systems Capital (India) Private Limited (hereinafter referred to as “the Appellant” or “Cisco Capital” or “the Company”), respectfully craves leave to prefer an appeal against the order passed by the Additional / Joint / Deputy / Assistant Commissioner of Income Tax/ Income-tax Officer, National e-Assessment Centre, Delhi [hereinafter referred to as the “learned Assessing Officer” or the “learned AO”] under section 143(3) read with section 144C(13) and 144C(13) read with sections 143(3A) and 143(3B) of the Act (“impugned order”) for Assessment Year (“AY”) 2016-17 dated 31 March 2021, in pursuance of the directions issued by Dispute Resolution Panel (hereinafter referred to as the “Hon’ble DRP”), Bangalore dated 19 February 2021 under section 144C(5) of the Act inter-alia on the following grounds which are without prejudice to each other:

That on the facts and circumstances of the case and in law:

A. Grounds of appeal relating to corporate tax matters Disallowance of depreciation on assets given under finance lease:

1. The learned AO has erred in law and in fact by disregarding the ownership status of Cisco Capital India in relation to the assets leased out by it under finance lease, thereby disallowing the claim for depreciation made by Cisco Capital India in the return of income.

2. Without prejudice to the above grounds, the learned AO has erred in law and in fact, by not allowing depreciation on the opening written down value (`WDV’) of the block of assets leased out under finance lease arrangement, pursuant to allowance of depreciation on the same block of assets for some of the prior years.

Not allowing set-off of brought forward depreciation loss:

3. The learned AO has erred in law by re-computing the total income of the appellant without giving effect to the set off of brought forward depreciation loss from the prior years.

B. Grounds of appeal in relation to transfer pricing matters Initiating scrutiny proceedings in relation to Specified domestic transaction, not considering amendment made by Finance Act – 2017

4. The learned AO/TPO has erred in law and fact, by initiating scrutiny proceedings in relation to the specified domestic transaction of payment made by the Appellant towards the fees for administrative support services to the AE, disregarding the deletion of clause (i) of section 92BA of the Act by virtue of amendment by the Finance Act, 2017 w.e.f April 1, 2017.

Transfer pricing adjustment on account of re-characterization of payment made for administration support services

Treating payment for administrative support services to Cisco Systems India Private Limited (‘Cisco India’) as an International transaction

5. The learned TPO/AO has failed to appreciate the fact that the agreement between Cisco Capital and Cisco India for availing of administrative support services (which was in the nature of outsourcing of services to Cisco India or deputation services by Cisco India to Cisco Capital) is bona-fide arrangement and the same cannot be treated as an international transaction under section 92B of the Act.

Alleging that Appellant has an arrangement with Cisco India and Cisco Systems International BV (“CSI By”) whereby Appellant has rendered marketing, sales and administrative support services to CSI BV

6. The learned TPO/A0 has erred in law and fact by ignoring the fact that the appellant has not rendered any service to CSI BV.

7. The learned TPO/A0 has erred in law and fact by alleging a hypothetical international transaction under section 92B of the Act, wherein marketing, sales and administrative support services (which was in the nature of outsourcing of services to Cisco India or deputation services by Cisco India to Cisco Capital) are allegedly rendered by Cisco Capital and re-characterizing the payment made for these services to Cisco India as a transaction entered into pursuant to an understanding/ arrangement between Cisco Capital, Cisco India and CSI BV.

8. The learned TPO/AO has erred in law and fact by ignoring that in absence of an arrangement/ understanding between Cisco Capital, Cisco India and CSI BV, the adjustment is outside the purview of the jurisdiction of learned AO/ TPO, as the alleged Advertising Marketing Promotion (AMP’) transaction and further determining a mark-up though it is not an ‘international transaction’

Bundled Approach for benchmarking should be accepted

9. Without prejudice, the learned TPO/A0 has erred, in law and in fact, by not appreciating that once the net margin is tested for arm’s length price under Transactional Net Margin Method (“TNMM”) method (including administrative fees paid to Cisco India), it pr-supposes that the various items of income and expenditure considered in the process of arriving at the net profit are also at arm’s length and therefore no separate adjustment in respect of particular item of expenditure.

Considering Administrative/ Selling expenses as part of AMP expenses

10. Without prejudice, the learned TPO/ AO has erred, in law and in fact, considering certain pure administrative and selling expenses as AMP expenses, and therefore adjustment made considering such expenditure is unwarranted;

Rejection of benchmarking analysis undertaken by Appellant

11. Without prejudice to the other grounds, the learned AO/TPO have erred, in law and in fact by

a) not appreciating the economic analysis undertaken by the Appellant in accordance with the provisions of the Act read with Income Tax Rules, 1962,

b) rejecting the transfer pricing approach identified by the Appellant in its transfer pricing documentation report maintained,

c) conducting a fresh economic analysis for identification of comparables (with unreasonable comparability criteria) and determining of the ALP in connection with the impugned specified domestic transaction.

Rejection of Non-comparable companies

12. Without prejudice, the learned TPO/ AO has erred, in law and in fact, by selecting certain companies as comparable companies ignoring the fact that the companies are functionally different:

a) Goldmine Advertising Limited

b) Pressman Advertising Limited

c) Ugam Solutions Private Limited

d) Majestic Research Service and Solutions Limited

e) Killick Agencies & Marketing Limited

f) Scarecrow Communications Limited

13. Without prejudice, the learned TPO/ AO has erred, in law and in fact, by selecting certain companies as comparable companies ignoring the fact that the companies are rejected on RPT filter:

a) Majestic Research Service and Solutions Limited

14. Without prejudice, the learned TPO/ AO has erred, in law and on facts, in erroneously selecting the companies that has high fluctuating profit trend as comparable i.e. Killick Agencies & Marketing Limited.

15. Without prejudice, the learned TPO/ AO has erred, in law and on facts, in erroneously computing the operating margins of certain comparables. Initiation of penalty proceedings under section 271(1)(c) of the Act

16. The learned AO has erred in law and in fact, in proposing to initiate penalty proceedings under section 271(1)(c) of the Act for various proposed disallowances / additions.

The Appellant submits that each of the above grounds is independent and without prejudice to one another.

The Appellant craves leave to add, alter, amend, vary, omit or substitute any of the aforesaid grounds of appeal at any time before or at the time of hearing of the appeal, so as to enable the Hon’ble Tribunal to decide on the appeal in accordance with the law.”

6. Grounds No.1 & 2 are regarding disallowance of depreciation on assets under finance lease. In the return of income filed for AY 2016-17, Cisco Capital India has claimed depreciation under the Act on the networking equipment leased out under finance lease arrangement. Given that section 32 of the Act would require satisfaction of twin conditions (viz. ownership and put to use for business purpose) for allowance of depreciation under the Act, the AO referring to the decision of the Hon’ble Supreme Court in the case of Asea Brown Boveri Ltd. Vs. Industrial Finance Corporation of India & Ors. in CA 3574 of 1998 dated October 27, 2004 was of the view that Cisco Capital India being the lessor of such equipment given out on finance lease arrangement could not be regarded as owner of such assets. Accordingly, the AO without calling for any relevant information concluded that Cisco Capital India could not be regarded as the owner of the assets given out on finance lease transaction, and accordingly, has disallowed the depreciation claimed by the assessee in respect of such assets.

7. The AO while computing disallowance has disallowed depreciation claimed on assets given on Finance Lease amounting to INR 292,18,10,840. However, the assessee in its return of income filed, had offered to tax the lease rentals received from customers. The AO reduced the corresponding lease rentals amounting INR 430,95,18,616 from the depreciation added back and disallowed a net sum of INR 138,77,07,776. The DRP where the Hon’ble DRP upheld the position taken by the AO.

8. The ld. AR submitted at the outset that similar disallowance of depreciation on assets given under finance lease was made by the CIT for AY 2008-09 in assessee’s own case, by initiating proceedings under section 263 of the Act. The Tribunal quashed the proceedings under section 263 on the ground that the AO had applied his mind and had examined the issue on allowability of depreciation on assets given on financial lease in detail. Aggrieved, the department had filed appeal before Hon’ble Karnataka High Court in ITA No.29/2019 dated 18 June 2021, which has upheld the order of ITAT in relation to quashing 263 proceedings initiated by learned CIT. While doing so, the Hon’ble High Court not only held that action of CIT was not proper but also examined the matter on the merits including examining terms of financial lease agreements and comparing it lease agreements in case of ICDS etc. and held that even on the facts and merits of the case, Assessee is entitled for depreciation on financial lease assets. After examining the terms of financial lease with facts in case of Apex court in case of ICDS (Supra) and Hon’ble Karnataka High Court in case of Hewlett Packard India Sales Pvt Ltd (ITA No.142/2013) dated 30 November 2020, it was held that since terms of arrangement entered into by assessee are similar to facts of case of ICDS (Supra) and Hewlett Packard (Supra), the assessee is eligible to claim depreciation on Assets given on finance lease. The findings of Hon’ble High Court is as under:-

“18. This court has minutely scanned the entire record and clauses of agreement in the case before the Supreme Court in M/s ICDS Ltd (supra) as well as in the case of Hewlett Packard India Sales Pvt Ltd (supra) and in the case of the assessee, in the present case, with regard to ownership, inspection, repossession of the equipment on default, delivery of equipment on expiry of lease and ownership at the end of the lease period, are similar and therefore it is the assessee alone who can claim depreciation, as rightly held by the assessing officer. The clauses relating to lease have already been interpreted by the Supreme Court in the case of M/s ICDS Ltd(Supra) and it has been held that the assessee is entitled to the benefit of depreciation on leased assets under section 32 or the Act of 1961 and therefore, the substantial question of law involved in the present appeal is no longer res integra and is squarely covered by the decision of the Hon’ble Supreme Court in M/s ICDS Ltd (Supra) as well as the judgement delivered by the Division bench of this court in case of Hewlett Packard India Sales Pvt Ltd (Supra).”

9. The ld. AR further submitted that the Tribunal in Assessee’s own case for AY 2011-12 and AY 2013-14 dated June 7, 2019 has held that the decision in the case of M/s Asea Brown Boveri Ltd Vs. Industrial Finance Corporation of India & Ors in CA 3574 of 1998 dated October 27, 2004 as relied on by the Department is not on the issue of claim of depreciation of assets given on financial lease under the Act and was rendered in an appeal under section 10 of the Special Court Act, 1992. Further, the Tribunal also observed that the decision of the Hon’ble Supreme Court in the case of ICDS (supra) was delivered much after the judgement of in the case of Asea Brown Boveri Ltd (supa). Accordingly, the Tribunal has reversed the findings in the final assessment order dated November 24, 2017 and remanded the matter back to AO’s file for fresh adjudication with a direction to the assessee to produce the copies of the lease agreements called for by the AO. Also, the Tribunal had directed that if the terms & conditions mentioned in these agreements are similar to the terms and conditions considered by the Hon’ble Supreme Court in the case of ICDS Ltd. (supra) and if there are no material variations in the contracts, then depreciation has to be granted to the assessee as claimed.

10. Pursuant to the order of the Tribunal case for AY 2011-12 and AY 2013-14, the AO has passed the order giving effect for AY 2011-12 recently on September 13, 2021 wherein the AO has examined the agreements signed by assessee with the lessees and recorded the findings that the facts in assessee’s case are also similar to facts in case of ICDS Ltd (supra). The AO has held that the assessee has also sold the assets given under finance lease arrangement to the Lessees at the end of the lease term which reinforces that the ownership of the assets under finance lease arrangement lies with the Lessor, i.e., the assessee and hence, assessee only is eligible to claim depreciation on assets given under finance lease arrangement.

11. Further, the ld. AR submitted that that following the decisions for AY 2011-12 and AY 2013-14, the Bangalore Tribunal in relation to the aforesaid issue for AY 2012-13, AY 2014-15 and AY 2015-16 as well, has remanded the matter back to the file of the AO with similar directions as provided in AY 2011-12 & AY 2013-14. The order giving effect to the same is pending with learned AO.

12. In view of the above submissions, it was prayed that the disallowance may be deleted.

13. After hearing both the parties, we find that similar issue came up for consideration before the Tribunal in assessee’s own case for AYs 2011-12 & 2013-14 in IT(TP)A No.291/Bang/2018 & 688/Bang/2016 and the Tribunal vide order dated 7.6.2019 held as follows:-

“Disallowance of claim of depreciation on equipment leased by the assessee under financial lease arrangement

6. The AO in this case has not followed the binding judgment of Hon’ble Supreme Court in the case of ICDS Ltd. V CIT [Civil Appeal No.3282 of 2008). He has from page 6 onwards in his order recorded views contrary to the ratio laid down by the Hon’ble Supreme Court. This cannot be approved. He relied on the judgment of Hon’ble Supreme Court in the case of M/s. Asea Brown Boveri Ltd. v. Industrial Finance Corporation of India & Ors. in CA 3574 of 1998 dated October 27, ,2004. This judgment is not on the issue of claim of depreciation of assets given on financial lease under the Income-Tax Act, 1961 [“the Act”]. This judgment was rendered in an appeal under section 10 of the Special Courts (Trials of Offences relating to Transactions in Securities) Act, 1992. In fact, the judgment of Hon’ble Supreme Court in the case of ICDS Ltd. (supra) has been delivered much after the judgment in the case of Asea Brown Boveri Ltd (supra). Hence, these findings of the ld. AO, which were approved by the DRP are hereby reversed as these are not in accordance with law.

7. Be it as it may, as at page 18 of the final assessment order for the AY 2011-12, the AO records that the assessee was asked to produce copies of agreements and that the assessee had only produced a few of them. We agree with the argument of the ld. DR that at least some more agreements have to be produced for examination before the AO, so that the submissions of the assessee that, the terms of the agreement in these financial leases are similar to the terms of the agreement considered by the Hon’ble Supreme Court in the case of ICDS Ltd. (supra) is correct or not.

8. In view of the above discussion, we set aside the issue to the file of the AO for fresh adjudication in accordance with law. The assessee is directed to produce copies of those agreements which the AO may call for. The AO shall examine these agreements and if the terms & conditions mentioned in these agreements are similar to the terms and conditions mentioned in the agreements considered by the Hon’ble Supreme Court in the case of ICDS Ltd. (supra) and if there are no material variations in the contracts, then depreciation has to be granted to the assessee as claimed. With these observations, we set aside this issue to the file of AO for fresh adjudication in accordance with the law.”

14. Respectfully following the above order of the Tribunal, we are inclined to remit the issue to the file of Assessing Officer for fresh decision with similar directions.

15. Ground No.3 by the assessee is with regard to not allowing set-off of brought forward depreciation loss. In the return of income, the assessee had claimed set off of brought forward depreciation losses amounting to INR 55,51,76,688 pertaining to AY 2013-14 and INR 174,42,76,795 pertaining to AY 2013-14 aggregating to INR 229,94,53,483. The AO denied the same. The DRP in its directions directed the AO to pass the order giving effect to the Tribunal order for AYs 2008-09, 2009-10 & 2013­14 and thereafter provide set off of brought forward losses. However, the AO while passing the final assessment order cited that on completion of assessments for AY 2013-14 & AY 2014-15, the income has resulted in positive and therefore no set off of brought forward losses is available to the assessee for the said years.

16. We have heard both the parties and perused the material on record on this issue. The AO has passed the Order giving effect to the Tribunal Order for the AYs 2008-09 & 2009-10 wherein the AO has provided carry forward of cumulative losses up to INR 102,00,76,634. Further the same has also been utilized against the total income in the draft OGE to Tribunal order passed for the AYs 2011-12 amounting to INR 38,54,91,246. In view of the above, the assessee is eligible as per the Order giving effect passed for earlier years to claim the set off of brought forward depreciation loss from prior years. Accordingly the AO is directed to allow the brought forward depreciation loss.

17. With regard to ground Nos. 4 to 8 and 10 to 16, the ld. AR fairly conceded that these grounds are only academic and does not require any adjudication. Accordingly, these grounds are dismissed.

18. By ground No.9, the assessee grievance is bundled approach for benchmarking should be accepted. At the outset, the ld. AR submitted that the TPO has accepted the bundled approach of aggregation of payment of fees for administrative support services in the preceding years (i.e. from the incorporation year to AY 2015-16). Also, the Tribunal in its order passed for the AY 2015-16 dated April 8, 2021 has accepted the bundled transaction approach adopted by the Assessee. There has been no change in the functions, assets and risk analysis in the current year vis-a-vis preceding years. In this context, the Assessee submits that the rejection of the consistent approach adopted by the Assessee which has been accepted by the TPO in preceding years is incorrect. Given the fact that primary transaction of purchase of networking equipment for lease has been considered at arm’s length, the claim of the TPO that the impugned specified domestic transaction should be separately benchmarked is erroneous and unjustified. In this regard, reliance is also placed on the following decision wherein bundled transaction approach has being upheld:-

• Sony Ericsson Mobile Communications India Private Limited (231 Taxman 113) (Delhi HC)
• Delhi High Court decision in case of Maruti Suzuki India Limited, 129 DTR 25 (Del)
• Sony Mobile Communications (ITA No 6410/Del/2012) affirmed by Delhi High Court in (2019) 104 CCH 0355 Del HC
• Audco India Ltd (264 Taxman 237) (Bombay High Court)
• Bangalore Tribunal in the case of M/s. Forsoc Chemicals India Private Limited vs. ACTT [IT(TP)A No.1813/Bang/2013)
• Bangalore Tribunal in case of M/s Parametrics Technology Private Limited Vs DCIT, ITA No.359(Bang)/2016

19. Accordingly, it was submitted that as the assessee’s primary transaction of import of equipment from AE (Appellant’s margin 5.90%) has been accepted at arm’s length after considering the payment of administrative and marketing support services as part of operating cost, no separate adjustment is warranted in respect of the same.

20. We have both the parties. This issue came up for consideration in assessee’s own case in AY 2015-16 in IT(TP)A No.2614/Bang/2019 and by order dated 8.4.2021 the Tribunal held as under:-

“6.7 It is also an admitted fact that assessee has been carrying out these activities in a bundled format in the preceding years which has not been objected by the Ld.TPO/AO. Further that all these expenses incurred by assessee towards administrative expenses and sales and marketing expenses stands subsumed in the operating expenses under TNMM for computing the arm’s length margin of the international transaction, a separate benchmarking may not be necessary. However all these things deserves verification at the end of Ld.AO/TPO. The Ld.AO/TPO shall verify the transactions as indicated hereinabove. In the event the expenses are subsumed under TNMM we do not find any necessity for a separate benchmarking.

Accordingly these grounds raised by assessee stands partly allowed.”

21. Taking a consistent view, we hold that payment of administrative and marketing support services is part of the operating cost, no separate adjustment is warranted. This ground of the assessee is partly allowed.

22. In the result, the appeal of the assessee is partly allowed for statistical purposes.

Pronounced in the open court on this 8^th day of November, 2021.