Global One India Pvt. Ltd., New Delhi v. ACIT, New Delhi

ITA 5571/DEL/2011 | 2007-2008
Pronouncement Date: 15-04-2014 | Result: Partly Allowed

Appeal Details

RSA Number 557120114 RSA 2011
Assessee PAN AABCG2558B
Bench Delhi
Appeal Number ITA 5571/DEL/2011
Duration Of Justice 2 year(s) 4 month(s) 6 day(s)
Appellant Global One India Pvt. Ltd., New Delhi
Respondent ACIT, New Delhi
Appeal Type Income Tax Appeal
Pronouncement Date 15-04-2014
Appeal Filed By Assessee
Order Result Partly Allowed
Bench Allotted I
Tribunal Order Date 15-04-2014
Date Of Final Hearing 30-07-2013
Next Hearing Date 30-07-2013
Assessment Year 2007-2008
Appeal Filed On 09-12-2011
Judgment Text
IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCHES : I NEW DELHI BEFORE SHRI A.D.JAIN JM AND SHRI J.SUDHAKAR REDDY A.M. ITA NOS. 5571/DEL/2011 ASSESSMENT YEAR : 2007-08 AND ITA NO.5896/DEL/2012 ASSESSMENT YEAR 2008-09 GLOBAL ONE INDIA P.LTD. VS. ACIT CIRCLE 12(1) DSO 601-603 607-608 NEW DELHI 6 TH FLOOR DLF SOUTH COURT SAKET NEW DELHI AABCG 2558 B (APPELLANT) (RESPONDENT) APPELLANT BY:- SHRI RAHUL KUMAR MITRA C.A. RESPONDENT BY:- SHRI PEEYUSH JAIN CIT D.R.(T.P.) O R D E R PER J.SUDHAKAR REDDY AM BOTH THESE APPEALS ARE FILED BY THE ASSESSEE AND AR E DIRECTED AGAINST SEPARATE ORDERS OF THE ACIT CIRCLE 12(1) NEW DELHI FOR THE ASSESSMENT YEAR 2007-08 DT. 31.10.2011 AND ORDER OF THE DY.CIT CIR CLE 12(1) NEW DELHI DT. 22.10.2012 FOR THE ASSESSMENT YEAR 2008-09 BOTH P ASSED U/S 143 R.W.S. 144C OF THE ACT. AS THE ISSUES ARISING IN BOTH THESE A PPEALS ARE COMMON FOR THE ITA NOS. 5571/DEL/2011 & ITA 5896/DEL/2012 A.YS. 2007-08 / 2008-09 GLOBAL ONE INDIA P.LTD. NEW DELHI 2 SAKE OF CONVENIENCE THEY ARE HEARD TOGETHER AND A RE DISPOSED OF BY WAY OF THIS COMMON ORDER. 2. FACTS IN BRIEF :- THE ASSESSEE IS A COMPANY INCORPORATED IN INDIA AND IS A SUBSIDIARY OF EGN BV NETHERLANDS. THE ASSESSEE COMPANY IS ENGAGED IN PROVIDING INTERNET AND RELATED NETWORK SERVICES TO THE GROUPS CUSTOMERS IN INDIA. THE SERVICES OFFERED BY GLOBE ONE INDIA INC LUDE INTERNET DIRECT CONNECTIONS INSTALLATION/CONFIGURATION OF ROUTERS ETC. AND FULLY MANAGED SUPPORT SOLUTIONS DEVELOPED AROUND THE BASIC NETWOR K SERVICES. THE PARENT COMPANY EGN BV IS CONFIRMED AND REGISTERED UNDER THE LAWS OF THE NETHERLANDS. THE ASSESSEE COMPANY FILED A TRANSFER PRICING REPORT ALONG WITH ITS RETURN OF INCOME ON 30.10.2007 DECLARING NIL IN COME. LATER THE ASSESSEE FILED A REVISED RETURN OF INCOME ON 31.3.2009 DE CLARING INCOME OF RS.19 29 436/-. A REFERENCE WAS MADE U/S 92CA(1) TO THE TPO-I(2) FOR DETERMINATION OF ARMS LENGTH PRICE OF THE INTERNA TIONAL TRANSACTIONS UNDERTAKEN BY THE ASSESSEE. THE TPO IN HIS ORDER REJECTED THE PROFIT SPLIT METHOD ADOPTED BY THE ASSESSEE COMPANY AS THE MOST APPROPR IATE METHOD AND ADOPTED THE TNMM METHOD AND DETERMINED AN UPWARD ADJUSTMENT OF RS.9 46 20 328/- TO BE MADE TO THE ARMS LENGTH PRICE FOR THE ASSESSMEN T YEAR 2007-08 AND A RS. 13 47 02 724/- UPWARD ADJUSTMENT FOR THE ASSESSMEN T YEAR 2008-09. THE ASSESSEE APPROACHED THE DRP WITHOUT SUCCESS. AG GRIEVED THE ASSESSEE IS BEFORE US. ITA NOS. 5571/DEL/2011 & ITA 5896/DEL/2012 A.YS. 2007-08 / 2008-09 GLOBAL ONE INDIA P.LTD. NEW DELHI 3 2.1. THE OTHER ISSUES THAT ARISE FOR OUR CONSIDERATION IN THESE APPEALS ARE DISALLOWANCE U/S 40A(IA) AND LEVY OF INTEREST U/S 234B OF THE ACT. 2.2 . THE ASSESSEE AS PART OF THE EQUANT BV GROUP PR OVIDES SEAMLESS NET WORK CONNECTIVITY TO ITS CUSTOMERS ACROSS LOC ATIONS/COUNTRIES. FOR SERVICE OF PARTICULAR CUSTOMERS THE NET WORK CONNECTIVITY WHICH IS OWNED AND DEPLOYED BY THE OTHER OPERATING ENTITIES OF THE EQUANT GROUP HAVE TO BE USED. THE ASSESSEE HAS SUBMITTED THE FOLLOWING AS THE BACKGR OUND OF ITS BUSINESS. BACKGROUND OF BUSINESS AND BENCH MARKING METHODOL OGY OF THE APPELLANT : THE BUSINESS ACTIVITIES RELATING TO IN PROVIDING IN TERNET AND RELATED NETWORK SERVICES BY THE APPELLANT ARE EXPLAINED IN BRIEF BE LOW: AS AN EXAMPLE CUSTOMER A IS HAVING OFFICE IN GURGA EON AND DELHI AND THESE TWO OFFICES WOULD SEND AND RECEIVE EMAIL COMMUNICATION WITH ITS OVERSEAS OFFICES THROUGH THE CIRCUIT CONNECTIVITY AS PROVIDED BY THE LOCAL INCENSED SERVICE PROVIDER. A) INCOMING EMAIL FROM OVERSEAS OFFICES OF CUSTOMER A TO THE OFFICES AT GURGAON AND NEW DELHI:- (I) EMAIL MOVES FROM CUSTOMER HEAD OFFICE AT INTERNATION AL DESTINATION TO EQUANT AES NODE. FROM EQUANT AES NODE THE EMAIL TRAVELS THROUGH INTERNATIONAL LINK PROVIDED BY FLAG TELECOM. (II) FLAG TELECOM TERMINATES THE EMAIL AT A LANDING STAT ION IN INDIA I.E. AT MUMBAI. (III) FROM OTHER TELECOM LICENSE SERVICE PROVIDER NET WOR K ARRANGEMENT (I.E. BHARTI/RELIANCE) AT GURGAON/DELHI AGAIN LOCAL LICENSE TELECOM SERVICE PROVIDERS PICK UP THE EMAI L AND TERMINATE AT CUSTOMER A GURGAON AND DELHI SITE. (B) OUTGOING EMAIL FROM CUSTOMER A OFFICES AT GURGA EON AND NEW DELHI TO OTHER OVERSEAS OFFICES:- (I) LOCAL LICENSED TELECOM SERVICE PROVIDERS LIKE B HARTI RELIANCE ETC. PICKS UP THE EMAIL FROM CUSTOMER A OFFICES AT GURGAON AND DELHI AND TERMINATES THE SAME AT LICENSED TELECOM LICENSE SERVICE PROVIDER NETWORK A RRANGEMENT AT GURGAON/DELHI. ITA NOS. 5571/DEL/2011 & ITA 5896/DEL/2012 A.YS. 2007-08 / 2008-09 GLOBAL ONE INDIA P.LTD. NEW DELHI 4 (II) FROM TELECOM LICENSE SERVICE PROVIDER NETWORK ARRANGEMENT AT GURGAON THE EMAIL WOULD BE PICKED UP BY LOCAL TELECOM SERVICE P ROVIDER I.E. VSNL ETC. FOR TERMINATION AT MUMBAI LANDING STATION. (III)FROM MUMBAI LANDING STATION THE FLAG TELECOM ARRANGES TO PICK EMAIL OF CUSTOMER A FOR ONWARD DELIVERANCE TO THE OVERSEAS O FFICES OF CUSTOMER A THROUGH EQUANT OVERSEAS AES NET WORK. GLOBALLY THE EQUANT GROUP IS A RECOGNIZED LEADER IN TELECOM SERVICES AND PROVIDES GLOBAL INTEGRATED AND CUSTOMIZED COMMUNIC ATION INFRASTRUCTURE SOLUTIONS THAT ENABLE THE KEY BUSINESS PROCESS OF I TS CUSTOMERS; THE GROUP OPERATES THE WORLDS LARGEST SEAMLESS DAT A NET WORK IN MORE THAN 220 COUNTRIES AND TERRITORIES. OVER THE YEARS EQUANT H AS SUCCESSFULLY INTEGRATED SEVERAL DIFFERENT NET WORKS INTO ONE AND HAS CONSOL IDATED ENTITIES SUCH THAT TODAY EQUANT CONDUCTS BUSINESS IN MOST COUNTRIES VI S A SINGLE MULTI FUNCTIONAL ENTITY THAT PROVIDES A FULL RANGE OF SOLUTIONS AND SERVICES; CUSTOMERS CONTRACTS OF THE GROUP ARE FOR PROVISION OF INTEGRATED SERVICES ON EQUANTS GROUPS NET WORK WHICH IS SPREAD ACROSS THE GLOBE; EQUANT OPERATES AS A GLOBALLY ORGANIZED COMPANY WITH CRITICAL CUSTOMER FACING AND REVENUE GENERATING ACTIVITIES BEING UNDERTAKEN BY THE GROUPS VARIOUS OPERATING ENTITIES ACROSS THE GLOBE (INCLUDING GOIP L IN INDIA). ACCORDINGLY EACH OF THE OPERATING ENTITIES (INCLUDING GOIPL) THAT OW N OR OPERATE ELEMENTS OF THE NETWORK CONTRIBUTE TO THE GLOBAL NETWORK; IN MANY CASES THE EQUANT GROUP DEALS DIRECTLY WITH THE ONE LOCATION OF ITS CUSTOMER TO COMPLETE THE SALES CONTRACT AND INVOICE THE CUSTOMER CENTRALLY FOR ALL SERVICES IN ALL COUNTRIES. GENERALLY ONLY ONE EQUANT GROUP ENTITY RECORDS THE REVENUES GENERATED FROM THE MULTINATIONAL CUSTOMER; UNDERLYING COSTS OF PROVIDING SERVICES ARE GENERATE D ACROSS THE SPAN OF THE EQUANT GROUP WHICH CREATES A MISMATCH BETWEEN WHERE THE REVENUE IS RECORDED AND WHERE THE EXPENSES ARE INCURRED TO PRO VIDE THE SERVICES; ITA NOS. 5571/DEL/2011 & ITA 5896/DEL/2012 A.YS. 2007-08 / 2008-09 GLOBAL ONE INDIA P.LTD. NEW DELHI 5 IN SOME CASES THE CUSTOMERS DECISION MAKERS ARE SPREAD BETWEEN DIFFERENT COUNTRIES AND REQUIRE THE SERVICES TO BE BILLED BE TWEEN MORE THAN ONE LOCATION BUT NOT NECESSARILY ALL THE LOCATIONS WHERE THE S ERVICES ARE PROVIDED THIS AGAIN RESULTS IN A MISMATCH BETWEEN WHERE THE REVEN UES ARE RECORDED AND WHERE THE SERVICES ARE PROVIDED; EACH OF THE ENTITIES IN THE EQUANT GROUP IS RELIANT U PON THE OTHER FUNCTIONS TO GENERATE GLOBAL PROFITS OR LOSSES FOR EQUANT GROUP THE SERVICES AND INVESTMENTS MADE BY EACH OF THESE ENTITIES IS OF A NON ROUTINE NATURE; THE KEY INDUSTRY SUCCESS FACTORS FOR THE BUSINESS O F THE EQUANT GROUP ARE : PRICE/COMPETITION; NETWORK CAPABILITY; GLOBAL FOOTPRINT/SPAN AND; PERFORMANCE RELIABILITY; SERVICE QUALITY; VALUE ADDED SERVICES/SOLUTIONS OFFERED. THE VARIOUS OPERATING ENTITIES OF THE EQUANT GROUP O WN/ DEPLOY THE NECESSARY LEG OF THE NETWORK FOOTPRINT IN THEIR RESPECTIVE CO UNTRY/JURISDICTION; EACH OF THE ENTITIES THAT OWNS OR OPERATES ELEMENTS OF THE NETWORK CONTRIBUTES TO THE GLOBAL EQUANT NETWORK. ACCORDINGLY ALL EQUAN T OPERATIONAL ENTITIES SHARE THE BENEFITS AND RISKS OF THE INCREASED DEMAND FOR EQUANT SOLUTIONS AND SERVICES TOGETHER WITH THE BENEFITS AND RISKS UNDERTAKEN IN INVESTING EXPANDING AND MAINTAINING A GLOBAL TELE COMMUNICATIONS NET WORK; IN LINE WITH THE GROUPS GLOBAL OPERATION MODEL FO R PROVISION OF SERVICES THE APPELLANT UTILIZES THE GLOBAL NETWORK FOOTPRINT FOR CONNECTING THE CUSTOMERS OUTSIDE THE INDIAN TERRITORY. AS GOIPL USES THE GL OBAL NETWORK FOR PROVIDING INTERNET SERVICES TO THE GROUPS CUSTOMERS IT IS EV IDENT THAT EQUANT IS TRULY A GLOBAL SEAMLESS ORGANIZATION. THE OPERATIONS OF THE EQUANT ARE THUS HIGHLY INTER R ELATED INVOLVING UNIQUE SERVICES AND RELATED INTANGIBLES. GIVEN THE GLOBAL LY INTEGRATED NATURE OF THE TELECOMMUNICATION SERVICES THAT ARE PROVIDED TO CUS TOMERS AND THE HIGH VALUE ITA NOS. 5571/DEL/2011 & ITA 5896/DEL/2012 A.YS. 2007-08 / 2008-09 GLOBAL ONE INDIA P.LTD. NEW DELHI 6 CUSTOMER FACING ACTIVITIES OF EACH OPERATING ENTITY INCLUDING GOIPL FOR TRANSFER PRICING PURPOSES IT WAS CONCLUDED THAT THE TRANSAC TIONS OF GOIPL WITH ITS GROUP COMPANIES ARE HIGHLY INTER RELATED AND INVOLVE UNIQ UE SERVICES AND RELATED INTANGIBLES. THIS FUNCTIONAL PROFILE IS NOT DISPUTED BY THE REVE NUE BEFORE US. 3 . THE ASSESSEE ADOPTED THE PROFIT SPLIT METHOD ( PSM) AS THE MOST APPROPRIATE METHOD (MAM) FOR DETERMINING THE AR MS LENGTH PRICE(ALP) OF THE INTERNATIONAL TRANSACTIONS BASED ON RESIDUAL PROFIT ANALYSIS REFERRED TO IN THE T.P. REGULATIONS. 3.1. THE STEPS ADOPTED BY THE ASSESSEE ARE AS FOLLOWS: STEP-I: DETERMINATION OF THE CONSOLIDATED GLOBAL O PERATING PROFITS/LOSS OF THE EQ GROUP FROM THE GLOBAL TELE COMMUNICATION OPERATIONS . STEP-II: ALLOCATING BASIC ARMS LENGTH RETURN TO EA CH OF THE OPERATING ENTITY FOR UNDERTAKING THE ROUTINE SUPPORT SERVICES. THE RETU RN IN QUESTION IS CALCULATED BY BENCH MARKING THE SAME WITH COMPARABLES WHICH ARE R OUTINE SUPPORT SERVICE PROVIDERS IN INDIA. STEP-III: RESIDUAL PROFITS/LOSS IS DETERMINED BY D EDUCTING THE ROUTINE ARMS LENGTH RETURN OF ALL THE GROUP ENTITIES FROM THE CO NSOLIDATED PROFITS OF THE GROUP. STEP-IV: THE RESIDUAL PROFITS/LOSSES IS ALLOCATED A MONG THE OPERATING ENTITIES IN PROPORTION TO THE RELATIVE CONTRIBUTION MADE BY EAC H SUCH ENTITY TO THE COMBINED GLOBAL PROFITS/LOSS. RELATIVE CONTRIBUTION HAS TO BE DETERMINED BASED ON THE CONTRIBUTION OF EACH ENTITY TO THE KEY VALUE DRIVER S WHICH ARE SALES AND ITA NOS. 5571/DEL/2011 & ITA 5896/DEL/2012 A.YS. 2007-08 / 2008-09 GLOBAL ONE INDIA P.LTD. NEW DELHI 7 MARKETING OPERATIONS/NET WORK OPERATIONS AND FIELD OPERATIONS IDENTIFIED BY THE BUSINESS WITH EQUAL WEIGHT BASED ON THE DETAILED FU NCTIONAL ANALYSIS. 3.2 . THE SUBMISSIONS OF THE ASSESSEE ARE THAT THE OPER ATIONS OF THE GROUP ARE HIGHLY INTEGRATED INTERCONNECTED AND INTRINSICALLY LINKED WHEREIN ONE GROUP ENTITY RECORDS THE REVENUES GENERATED WHEREAS ANO THER GROUP ENTITY INCURS THE EXPENDITURE FOR PROVIDING THE SERVICES AND THAT MUL TIPLE ENTITIES ARE INVOLVED IN THE TRANSACTION AND THAT IN SUCH A FACTUAL SITUATI ON ONLY PSM IS THE M.A.M. 3.3 . THE T.P.O. ISSUED A SHOW CAUSE NOTICE PROPOSING AD OPTION OF TRANSACTIONAL NET MARGIN METHOD (TNMM) AS THE MOST APPROPRIATE METHOD (M.A.M.) FOR BENCH MARKING THE INTERNATIONAL TRANS ACTIONS IN PLACE OF PROFIT SPLIT METHOD (PSM) ADOPTED BY THE ASSESSEE. THE ASSESSEE FILED A DETAILED REPLY. THE T.P.O. REJECTED THE CONTENTIONS OF THE ASSESSEE THAT P.S.M. IS THE M.A.M. HE HELD THAT TNMM IS THE M.A.M. 3.4 . THE FINDINGS/OBJECTIONS OF THE TPO ARE SUMMARIZED BELOW. (1) PSM HAS NOT BEEN APPLIED CORRECTLY AS EVEN IN PSM Y OU ARE SUPPOSED TO SHOW BY BENCH MARKING AGAINST EXTERNAL COMPARABLES THAT YOUR INTERNATIONAL TRANSACTIONS ARE AT ARMS LENGTH. YO U HAVE NOT DONE SO. (2) ONLY EXTERNAL COMPARABLES ARE USED FOR BENCH MARKIN G WHAT YOU CLAIM TO BE ROUTINE SERVICES. (3) IN T.P. REPORT IT HAS BEEN CLAIMED THAT AMONG THE U NIQUE INTANGIBLES/VALUE ADDED SERVICES UNDERTAKEN BY YOU ARE SALES AND MARKETING ACTIVITIES. YOUR AUDITED FINANCIALS SHOW THAT YOU HAVE SPENT ONLY RS.3 128 853/- ON ADVERTISEMENT AND SALE PROMO TION OUT OF TOTAL EXPENSE OF RS.620 423 787. HENCE IT DOES NOT APPEA R THAT YOU ARE CARRYING OUT ANY SIGNIFICANT SALES/MARKETING ACTIVI TY OF MUCH SIGNIFICANCE. PERSONNEL EXPENSES ARE ALSO ONLY RS.64 107 400. ITA NOS. 5571/DEL/2011 & ITA 5896/DEL/2012 A.YS. 2007-08 / 2008-09 GLOBAL ONE INDIA P.LTD. NEW DELHI 8 (4) THE LARGEST HEAD OF EXPENSES OF RS.292 432 061 IS R ECURRING HEAD INSTALLATION CHARGE UNDER THE ACCOUNT HEAD CIRCUIT EXPENSES. THEREFORE YOUR MAIN ACTIVITY IS PROVIDING INTERNET AND RELATE D NETWORK SERVICES. (5) DESCRIPTION OF FIELD OPERATION DOES NOT CONSTRICTIV E ANY UNIQUE INTANGIBLES AND VALUE ADDED SERVICES. THIS IS A VERY ROUTINE E XERCISE WHICH ANY SERVICE PROVIDER WILL UNDERTAKE. THE TPO FURTHER HELD THAT: I. IT IS POSSIBLE TO DETERMINE THE COST INCURRED BY T HE INDIAN ENTITY SEPARATELY AND HENCE IT SHOULD BE BENCH MARKED ON A STANDALONE BASIS AND NOT BY USING PSM. II. EARLIER YEARS TP ORDERS CANNOT BE RELIED UPON AS TH ERE IS NO RES JUDICATA IN TAX PROCEEDINGS; III. ACCEPTANCE OF PSM IN OTHER JURISDICTIONS IS OF NO C ONSEQUENCE SINCE APPLICABILITY OF PSM IS TO BE JUDGED WITH REFERENCE TO INDIAN TP REGULATIONS AND NOT THE TP REGULATIONS IN OTHER COU NTRIES. IV. PSM CANNOT BE APPLIED IN THE ABSENCE OF RELIABLE EX TERNAL MARKET DATA FOR BENCH MARKING INTERNATIONAL TRANSACTIONS; V. THE ASSESSEE HAS NOT PUT FORTH ANY EVIDENCE OF ANY INTANGIBLE CREATED BY IT BASED ON WHICH IT CAN JUSTIFY THE APP LICATION OF PSM; VI. THE ASSESSEE HAS NOT BEEN ABLE TO PROVE THAT ITS O PERATIONS ARE INTEGRATED TO DISPROVE THE APPLICABILITY OF TNNM; VII. THE KEY VALUE DRIVERS IDENTIFIED BY THE ASSESSEE AR E ROUTINE IN NATURE AND DO NOT LEAD TO CREATION OF ANY UNIQUE IN TANGIBLE AND MARKETING EXPENSES ARE VERY LOW EVEN THOUGH THEY CO NSTITUTE A KEY DRIVER COST; VIII. THE ASSESSEE HAS NOT BEEN ABLE TO DEMONSTRATE ANY U NUSUAL REASONS FOR THE LOSSES EARNED BY IT DURING THE RELE VANT FY IX. ASSESSEES ARRANGEMENT WITH THE AE AS BORNE OUT IN THE AGREEMENT DOES NOT JUSTIFY THE USE OF PSM ON ACCOUNT OF THE F OLLOWING REASONS: (A) AS PER THE AGREEMENT ASSESSEES AE IS THE ADMINISTR ATOR WHO DECIDES HOW MUCH PAYMENT IS TO BE MADE BY EACH AE IN CLUDING THE ASSESSEE; (B) ADMINISTRATORS DECISION SHALL BE BINDING IN THE EV ENT OF DISPUTES BETWEEN THE AES; ITA NOS. 5571/DEL/2011 & ITA 5896/DEL/2012 A.YS. 2007-08 / 2008-09 GLOBAL ONE INDIA P.LTD. NEW DELHI 9 (C) THE ADMINISTRATOR ALONE SHALL HAVE THE RIGHT TO ACC ESS THE RECORDS OF THE AES AND NOT VICE VERSA; X. THE ASSESSEE HAS APPLIED PSM IN THE TP STUDY FOR TH E FIRST TIME; XI. THE ASSESSEE IS RELYING ON PSM MERELY TO CAMOUFLAGE ITS LOSSES AT THE NET LEVEL; XII. EVEN THOUGH THE CIRCUIT EXPENSES ARE A KEY DRIVER T HE ASSESSEE HAS NOT MAINTAINED ANY RECORD/EVIDENCE OF SUCH EXPE NSES AS IS CLEAR FROM ASSESSEES NOTES TO ACCOUNT TO THE AUDIT ED FINANCIAL STATEMENTS; XIII. ASSESSEE IS NOT PROVIDING ANY UNIQUE INTANGIBLE IF IT IS OUTSOURCING THE LAST MILE CONNECTIVITY TO UNRELATED PARTIES AND WITH UNRELATED PARTIES PARTICIPATING IN THE VALUE CHAIN THERE IS N O PLACE FOR ANY SEAMLESS OPERATIONS BETWEEN THE ASSESSEE AND ITS AES . 3.5 . THE DRP UPHELD THE CONCLUSION DRAWN BY THE TPO T HAT TNMM IS THE MOST APPROPRIATE METHOD. THE ASSESSING OFFICER PASSED A N ORDER U/S 143(3) R.W.S. 144(C) OF THE ACT CARRYING OUT THE ADJUSTMENTS DETE RMINED BY THE TPO IN HIS ORDER U/S 92CA(3) ON 12.10.2010 AND MADE AN ADJUSTM ENT OF RS.9 46 20 328/-. THE ASSESSING OFFICER ALSO MADE CERTAIN DISALLOWANC ES U/S 40A(I) OF THE ACT. 3.6 . THE LD.COUNSEL MR.RAHUL KUMAR MITRA DISPUTED THE O BJECTIONS RAISED BY THE TPO AND SUBMITTED AS FOLLOWS. THE 'KEY VALUE DRIVERS' I.E. SALES & MARKETING OPE RATIONS NETWORK OPERATIONS AND FIELD OPERATIONS HAVE BEEN IDENTIFIED. BASED O N A DETAILED FUNCTIONAL ANALYSIS AND ARE NOTHING BUT THOSE 'FUNCTIONS' PERF ORMED WITH THE CONCOMITANT 'ASSETS' AND 'RISKS' THAT ARE CRUCIAL FOR SUCCESS I N THE INDUSTRY IN WHICH THE APPELLANT OPERATES. FURTHER AGAIN BASED ON A DETAILED FUNCTIONAL ANALY SIS EACH OF THE VALUE DRIVERS IS DETERMINED TO BE EQUALLY IMPORTANT FOR THE GLOBA L OPERATIONS OF THE GROUP AND HENCE EACH DRIVER HAS BEEN GIVEN EQUAL WEIGHT. ACC ORDINGLY THE RESIDUAL GROUP PROFIT/LOSS IS DIVIDED EQUALLY AMONG EACH OF THE VA LUE DRIVERS. FURTHER WHILE APPLYING RPSM ESPECIALLY IN A SCENA RIO WHEREIN THE FUNCTIONS PERFORMED OR SERVICES RENDERED ARE UNIQUE IN NATURE AND COMPARABLES ARE NOT AVAILABLE EASILY FOR DETERMINING THE MANNER IN WHIC H PROFIT HAS TO BE SPLIT ITA NOS. 5571/DEL/2011 & ITA 5896/DEL/2012 A.YS. 2007-08 / 2008-09 GLOBAL ONE INDIA P.LTD. NEW DELHI 10 RELIANCE HAS TO BE PLACED ON SOME OTHER INDICIA SUC H AS COSTS FOR DETERMINING HOW THE RESIDUAL PROFIT MUST BE ALLOCATED. THIS APP ROACH IS SUPPORTED BY OECD GUIDELINES UN'S PRACTICAL MANUAL ON TRANSFER PRICI NG FOR DEVELOPING COUNTRIES ('UN TP MANUAL') AS WELL AS US TREASURY REGULATIONS . FOR YOUR HONOURS' REFERENCE ENCLOSED HEREWITH AS APPENDICES TO THIS ANNEXURE ARE: A) THE RELEVANT EXTRACTS OF CHAPTER II (PART III: T RANSACTIONAL PROFIT METHODS) ON TP METHODS OF OECD GUIDELINES B) THE RELEVANT EXTRACTS OF CHAPTER VI (SECTION 6.3 .13: PROFIT SPLIT METHOD) ON TP METHODS OF UN TP MANUAL C) THE RELEVANT EXTRACTS OF US TREASURY REGULATIONS PARA 4.182-6 (C)(3)(I)(B) MOREOVER EACH OF THE ABOVE COSTS THAT ARE RELIED U PON TO MEASURE THE CONTRIBUTIONS TO KEY 'VALUE DRIVERS' ARE FROM FINAN CIALS AND ARE FULLY BASED ON THE ACTUAL COSTS/ EXPENSES BORNE BY THE VARIOUS ENTITIES. THEY REPRESENT THIRD PARTY COSTS DETERMINED BASED ON FULL-FLEDGED NEGOTI ATIONS IN THE OPEN MARKET. THE LD TPO HAS ALSO RAISED AN OBJECTION TO APPLICAT ION OF THE RESIDUAL PSM ON THE GROUND THAT THE MARKETING EXPENDITURE INCURRED BY THE APPELLANT IS MERELY RS 31 28 853 OUT OF A TOTAL EXPENSE OF RS 62 04 23 787 WHERE AS THE PERSONNEL EXPENSES ARE MERELY RS 6 41 07 400. TO THE EXTENT GOIPL HAS LOW MARKETING COST ITS CONT RIBUTION TO THE SALES AND MARKETING DRIVER IS ALSO LOW WHICH HAS IN EFFECT R ESULTED IN A LOWER ATTRIBUTION OF LOSSES TO GOIPL CONSIDERING THAT THERE ARE LOSSES A T THE GROUP LEVEL IN THIS FY. THE LD TPO HAS ARGUED THAT SINCE APPELLANT'S LARGES T HEAD OF EXPENSE OF RS 292 432 061 IS 'RECURRING HEAD INSTALLATION CHARGE' UNDER THE HEAD CIRCUIT EXPENSES IT IS CLEAR THAT APPELLANT'S MAIN ACTIVIT Y IS PROVIDING INTERNET AND RELATED SERVICES. EVEN THE APPELLANT AGREES THAT ITS MAIN ACTIVITY IS PROVISION OF INTERNET AND RELATED SERVICES. HOWEVER THE IMPORTANT POINT IS T HAT OWING TO THE INTEGRATED NATURE OF APPELLANT'S OPERATIONS IT IS PSM AND NOT TNNM THAT IS THE MOST APPROPRIATE METHOD FOR BENCHMARKING APPELLANT'S INT ERNATIONAL TRANSACTIONS CONNECTED WITH THE PROVISION OF INTERNET AND RELATE D SERVICES. THE CIRCUIT EXPENSES ARE INCURRED BY THE APPELLANT AS PART OF ITS ACTIVITIES/ ROLE OF PROVIDING THE NETWORK/ CONNECTIVITY FOR THE INDIA L EG OF THE GLOBAL NETWORK. THE ITA NOS. 5571/DEL/2011 & ITA 5896/DEL/2012 A.YS. 2007-08 / 2008-09 GLOBAL ONE INDIA P.LTD. NEW DELHI 11 FACT THAT CIRCUIT EXPENSES INCURRED BY THE APPELLAN T DURING THE YEAR ARE SIGNIFICANT CAN IN NO WAY LEAD TO A CONCLUSION THAT PSM IS NOT THE MOST APPROPRIATE METHOD IN THE INSTANT CASE. THE LD TPO HAS ALSO STATED IN THE NOTICE THAT THE D ESCRIPTION OF THE 'FIELD OPERATIONS' IN THE TP STUDY IS NOT REFLECTIVE OF AN Y UNIQUE INTANGIBLES OR VALUE ADDED SERVICES BUT REFLECTS SERVICES THAT ARE ROUTI NE IN NATURE. IN THIS REGARD IT IS SUBMITTED THAT FIELD OPERATIO NS CONSTITUTE ONE OF THE KEY DRIVERS OF THE BUSINESS. THE FIELD OPERATIONS AND I NTEGRATION SERVICES ('FOIS') TEAMS ARE THE INTERFACE/ EQUANT'S PRESENCE AT CUSTOM ER SITES AROUND THE GLOBE AND ARE RESPONSIBLE FOR DELIVERING QUALITY SERVICES TO CUSTOMERS IN ALL COUNTRIES OF OPERATION. BECAUSE THE FIELD OPERATION PERSONNEL AR E IN DIRECT CONTACT WITH THE CUSTOMERS ON REGULAR BASIS THROUGH THE QUALITY TH EY BRING IN THEIR WORK OR SERVICE DELIVERY THEY ALSO CONTRIBUTE IN A SIGNIFIC ANT MANNER TO THE BUSINESS OPERATIONS OF THE GROUP AND ALSO HELP THE GROUP IN IDENTIFYING NEW BUSINESS OPPORTUNITIES. THUS THE FIELD OPERATION IS ALSO A SIGNIFICANT VALUE DRIVER OF THE GROUP'S BUSINESS. THE APPELLANT IS THE JOINT ENTREPRENEUR IN THE BUSI NESS AND NOT A LOW RISK CAPTIVE UNIT. EVEN IF THE COSTS INCURRED BY AN ENTREPRENEUR CAN BE IDENTIFIED THE RETURN ATTRIBUTABLE TO IT CANNOT BE ASCERTAINED BY APPLYIN G TNNM AND COMPARING IT WITH OTHER INDEPENDENT COMPARABLES/ ENTREPRENEURS. APPELLANT'S OPERATIONS ARE HIGHLY INTEGRATED IT IS ALSO NOT POSSIBLE TO DIRECTLY IDENTIFY THE REVENUE THAT IS ATTRIBUTABLE TO APPELLANT'S EFFORTS IN INDIA. APPELLANT'S BUSINESS IS INTEGRATED OTHER PARAMET ERS FOR APPLICABILITY OF PSM ALSO HAVE TO BE CONSIDERED - NOT POSSIBLE TO ID ENTIFY REVENUE STREAMS ATTRIBUTABLE TO ANY SPECIFIC OPERATING ENTITY WHICH IS WHY THE TOTAL GROUP REVENUE NECESSARILY HAS TO BE APPORTIONED BETWEEN THE DIFF ERENT OPERATING ENTITIES BASED ON KEY VALUE DRIVERS AS IS DONE UNDER PSM. MERE DETERMINATION OF THE COSTS CANNOT IMPLY THAT TNNM CAN BE APPLIED IN THE INSTANT CASE. THIS DOES NOT ANY-HOW ENABLE AN IDENT IFICATION OF APPELLANT'S CORRESPONDING SHARE IN THE GROUP REVENUE AND/ OR PROFIT/ LOSS. IN FY 2004-05 (I.E. AY 2005-06) AND FY 2005-06 (I .E. AY 2006-07) THE APPELLANT'S CASE WAS PICKED UP FOR DETAILED TP SCRU TINY. IN BOTH THE YEARS THE TP BASIS OF THE APPELLANT WAS EXAMINED IN DETAIL AND T POS HAD SOUGHT VOLUMINOUS ITA NOS. 5571/DEL/2011 & ITA 5896/DEL/2012 A.YS. 2007-08 / 2008-09 GLOBAL ONE INDIA P.LTD. NEW DELHI 12 INFORMATION/ EXPLANATION ON THE MANNER IN WHICH PSM WAS APPLIED FOR DETERMINING THE ARM'S LENGTH PRICE. AFTER ANALYSING AND EVALUATING THE DETAILED SUBMISSIONS PUT FORWARD BY THE APPELLANT THE LD TP O'S PREDECESSORS REACHED AN INFORMED CONCLUSION AS TO THE APPROPRIATENESS OF PS M FOR BENCHMARKING APPELLANT'S INTERNATIONAL TRANSACTIONS. THE PRINCIPLE OF RES-JUDICATA IS VERY MUCH APPLIC ABLE TO TAX MATTERS AS WELL SO LONG AS THERE IS NO MATERIAL CHANGE IN THE FACTS AN D CIRCUMSTANCES SURROUNDING THE CASE IN THE DIFFERENT YEARS IN QUESTION. TO REBUT THE APPLICABILITY OF RES-JUDICATA THE L D TPO HAS RELIED UPON THE TRIBUNAL RULING IN THE CASE OF CARRARO INDIA LTD VS . DCIT (2008 - TIOL - 519- ITAT - DEL). HOWEVER THE SAID DECISION DOES NOT AN YWHERE STATE THAT THE PRINCIPLE OF RES-JUDICATA IS NOT APPLICABLE TO TAX MATTERS BUT RATHER HIGHLIGHTS THAT DURING EACH YEAR 'FACTS AND CIRCUMSTANCES' ARE TO B E EXAMINED BEFORE APPLYING THE SAID PRINCIPLE. FURTHER THE APPLICABILITY OF THE PRINCIPLE OF RE S-JUDICATA IS SUPPORTED BY SEVERAL DECISIONS OF THE APEX COURT. THE HON'BLE SUPREME CO URT HAS CLEARLY LAID DOWN THAT WHERE A FUNDAMENTAL ASPECT PERMEATING THROUGH THE DIFFERENT ASSESSMENT YEARS HAS BEEN FOUND AS A FACT ONE WAY OR THE OTHER AND THE PARTIES HAVE ALLOWED THE POSITION TO BE SUSTAINED BY NOT CHALLEN GING THE ORDER IT IS NOT ALLOWED TO CHANGE THE POSITION IN ANY SUBSEQUENT YE AR. THERE IS NO JUSTIFICATION FOR TAKING A DIFFERENT VIEW ON A FUNDAMENTAL ISSUE I.E. CHOICE OF THE TP METHOD WHEN THERE ARE SIMILAR FACT S. GIVEN THAT THERE HAS BEEN NO CHANGE IN THE NATURE A ND TERMS OF THE INTERNATIONAL TRANSACTIONS ENTERED INTO BY THE APPE LLANT OVER THE YEARS THERE IS NO JUSTIFICATION FOR TAKING A DIFFERENT VI EW ON A FUNDAMENTAL ISSUE I.E. CHOICE OF THE TP METHOD WHEN THERE ARE SIMILAR FACTS AND HENCE IN LINE WITH THE EARLIER YEARS PSM SHOULD BE ACCEPTED AS THE MOST APPROPRIATE METHOD EVEN FOR THE CURRENT FY. TP REGULATIONS IN DIFFERENT JURISDICTIONS ARE SIMIL AR IN SUBSTANCE - TODAY THE TP PRINCIPLES ACCEPTED AND APPLIED INTERNATIONA LLY ARE LARGELY SIMILAR BEING MOSTLY BASED ON THE OECD GUIDELINES PUBLISHED AND REVIEWED BY OECD FROM TIME TO TIME. INDIAN COURTS/ TRIBUNAL HAVE IN MANY CASES REFERRED TO OVERSEAS TP LEGISLATIONS/ JURISPRUDENCE TO SEEK GUIDANCE ON VARIOUS TP ISSUES. ITA NOS. 5571/DEL/2011 & ITA 5896/DEL/2012 A.YS. 2007-08 / 2008-09 GLOBAL ONE INDIA P.LTD. NEW DELHI 13 THE UNDERLYING BASIS FOR APPLICABILITY OF PSM IS S AME/SIMILAR AS PER THE OECD GUIDELINES US REGULATIONS AND THE INDIAN TP RE GULATIONS APPLICABLE IN CASE OF INTEGRATED TRANSACTIONS INVOLVING UNIQUE INTANGIBLES. TO THE EXTENT THE GLOBAL POLICY OF THE GROUP BASED ON PSM HAS BEEN ACCEPTED IN OTHER COUNTRIES AS WELL EVEN THOUGH SUC H ACCEPTANCE IS BASED ON THEIR TP REGULATIONS IT RAISES A STRONG PRESUMP TION OF THE CONFORMITY OF THE EQUANT GROUP POLICY (BASED ON PSM) WITH THE A RM'S LENGTH PRINCIPLE ENSHRINED IN THE INDIAN TP REGULATIONS. NON-ACCEPTANCE OF PSM WOULD IMPLY THAT INDIA IS THE ONLY EXCEPTION: GLOBALLY WHEREVER THE REVENUE AUTHORITIES HAVE AUD ITED/ TESTED THE INTER- COMPANY TRANSACTION PRICING/ TP POLICY/METHOD FOR T HE EQUANT GROUP PSM HAS BEEN ACCEPTED AND NO ADVERSE INFERENCE HAS BEEN DRAWN EITHER IN RELATION TO THE APPLICATION OF THE METHOD OR THE TR ANSFER PRICES. APPELLANT UNDERSTANDS THAT REVENUE AUDITS HAVE BEEN COMPLETED IN COUNTRIES INCLUDING FRANCE BELGIUM ITALY THAILAND ETC. HE NCE SHOULD YOUR HONOURS' ACCEPT LD TPO'S APPROACH TO BENCHMARKING A PPELLANT'S INTERNATIONAL TRANSACTIONS USING TNNM THE TAXI TP TREATMENT OF THE APPELLANT IN INDIA SHALL BE THE ONLY EXCEPTION TO W HAT IS OTHERWISE A UNIVERSAL ACCEPTANCE OF THE GLOBAL TP POLICY OF THE EQUANT GROUP. THE KEY VALUE DRIVERS ARE NOT THE OUTCOME OF THE AP PELLANT'S SUBJECTIVE EVALUATION BUT THE RESULT OF AN OBJECTIVE INDUSTRY AND FUNCTIONAL ANALYSIS UNDERTAKEN BY THE APPELLANT WHICH CLEARLY BEARS OUT THE MAIN INDUSTRY CHARACTERISTICS. HERE THE APPELLANT WOULD LIKE TO R EITERATE THE SUBMISSION MADE BEFORE THE LD TPO TO HIGHLIGHT THE FACT THAT I T HAS INDEED RELIED UPON THE EXTERNAL MARKET DATA IN THE APPLICATION OF PSM. THE KEY VALUE DRIVERS' I.E. SALES & MARKETING OPE RATIONS NETWORK OPERATIONS AND FIELD OPERATIONS HAVE BEEN IDENTIFI ED BASED ON A DETAILED FUNCTIONAL ANALYSIS AND ARE NOTHING BUT THOSE 'FUNC TIONS' PERFORMED WITH THE CONCOMITANT 'ASSETS' AND 'RISKS' THAT ARE CRUCI AL FOR SUCCESS IN THE INDUSTRY IN WHICH THE APPELLANT OPERATES. FURTHER AGAIN BASED ON A DETAILED FUNCTIONAL ANAL YSIS EACH OF THE VALUE DRIVERS IS DETERMINED TO BE EQUALLY IMPORTANT FOR T HE GLOBAL OPERATIONS OF THE GROUP AND HENCE EACH DRIVER HAS BEEN GIVEN EQ UAL WEIGHT. ACCORDINGLY THE RESIDUAL GROUP PROFIT/LOSS IS DIVI DED EQUALLY AMONG EACH OF THE VALUE DRIVERS. ITA NOS. 5571/DEL/2011 & ITA 5896/DEL/2012 A.YS. 2007-08 / 2008-09 GLOBAL ONE INDIA P.LTD. NEW DELHI 14 FURTHER WHILE APPLYING RPSM ESPECIALLY IN A SCEN ARIO WHEREIN THE FUNCTIONS PERFORMED OR SERVICES RENDERED ARE UNIQUE IN NATURE AND COM PARABLES ARE NOT AVAILABLE EASILY FOR DETERMINING T HE MANNER IN WHICH PROFIT HAS TO BE SPLIT RELIANCE HAS TO BE PLACED O N SOME OTHER INDICIA SUCH AS COSTS FOR DETERMINING HOW THE RESIDUAL PROFIT MU ST BE ALLOCATED. IN THE INSTANT CASE ACTUAL COSTS INCURRED BY THE VARIOUS O PERATING ENTITIES IS CONSIDERED AS KEY VALUE DRIVER COST. THIS APPROACH IS SUPPORTED BY OECD GUIDELINES AS WELL AS US REGULATIONS. MOREOVER EAC H OF THE ABOVE COSTS THAT ARE RELIED UPON TO MEASURE THE CONTRIBUTIONS T O KEY 'VALUE DRIVERS' ARE FROM FINANCIALS AND ARE FULLY BASED ON THE ACTUAL C OSTS/ EXPENSES BORNE BY THE VARIOUS ENTITIES. THEY REPRESENT THIRD PARTY CO STS DETERMINED BASED ON FULL-FLEDGED NEGOTIATIONS IN THE OPEN MARKET. HERE THE APPELLANT WOULD LIKE TO DRAW REFERENCE T O DETAILED DESCRIPTION OF THE GROUP OVERVIEW AND THE INTEGRATED NATURE OF APPELLANT'S OPERATIONS AS DISCUSSED IN THE SUBMISSION FILED IN THE DRP APP LICATION. FURTHER ON THE CONTRIBUTION OF KEY VALUE DRIVERS IN THE DETAI LED SUBMISSION FILED BEFORE THE LD TPO IT WAS ALSO CLEARLY EXPLAINED HOW EACH VALUE DRIVER CONTRIBUTES TO THE BUSINESS/ CREATION OF A UNIQUE I NTANGIBLES I.E. THE NETWORK FIELD OPERATIONS SALES AND MARKETING ETC . FURTHER AS SUBMITTED BEFORE THE LD TPO THE TOTAL KEY DRIVER COST CONSTI TUTES AS MUCH AS ONE- FOURTH (APPROX) OF THE TOTAL EXPENSES FOR THE APPEL LANT WHICH IS NOT AN INSIGNIFICANT AMOUNT CONTRARY TO WHAT HAS BEEN CONT ENDED BY THE LD TPO. HENCE THE ASSERTIONS MADE BY THE LD TPO THAT KEY V ALUE DRIVERS IDENTIFIED BY THE APPELLANT ARE COMPLETELY ROUTINE AND DO NOT LEAD TO CREATION OF ANY UNIQUE INTANGIBLES COMPLETELY BASEL ESS. THE APPELLANT HAD FURNISHED BEFORE THE TPO DETAILE D REASONS/ EXPLANATION FOR LOSSES BEING MADE BY THE EQUANT GROU P AT THE GLOBAL LEVEL. HENCE THE OBSERVATION OF THE LD TPO ON ABSE NCE OF ANY CREDIBLE REASONS FOR LOSSES IS COMPLETELY INCORRECT. COMMERC IAL REASONS FOR LOSSES INCLUDE: - (A) PREVALENT MARKET TRENDS IN THE GLOBAL TELECOMMUNICA TIONS INDUSTRY THE EQUANT GROUP OPERATES IN A VERY DYNAMIC HIGHLY COMP ETITIVE AND FRAGMENTED MARKET THAT IS IN A CONSTANT STAGE OF CH ANGE AND IS EXPERIENCING CONTINUOUS EROSION OF PRICES FOR TELEC OMMUNICATIONS CONNECTIVITY. (B) IN THE LAST DECADE THE TELECOMMUNICATIONS MARKET H AS GONE THROUGH SIGNIFICANT CHANGES AT AN INCREDIBLY RAPID PACE. BA NKRUPTCY FILINGS AND ITA NOS. 5571/DEL/2011 & ITA 5896/DEL/2012 A.YS. 2007-08 / 2008-09 GLOBAL ONE INDIA P.LTD. NEW DELHI 15 CONSOLIDATION TRENDS DURING THE RECENT FEW YEARS HI GHLIGHT THE TRANSITION IN THE INDUSTRY. (C) IN THE RECENT YEARS THE TELECOMMUNICATIONS MARKET HAS MOVED AWAY FROM THE NEED TO UTILIZE SPECIFIC DATA NETWORKS AS THE INTERNET IS BECOMING CHEAPER AND MORE SECURE FOR SENDING DATA. FURTHER THE CURRENT STATE INTERNET SERVICES PROVIDER ('ISP') INDUSTRY A LSO FINDS CUSTOMERS NOT DEMONSTRATING LOYALTY TO ANY PARTICULAR SERVICE PRO VIDER AS INTERNET SERVICES ARE INCREASINGLY VIEWED AS A COMMODITY PRO DUCT. (D) CONSEQUENTLY MARGINS AVAILABLE IN PROVIDING BASIC NETWORK AND DATA TRANSMISSION SERVICES HAVE FALLEN DRAMATICALLY AND A RELIANCE SOLELY ON SUCH DATA TRANSMISSION ACTIVITY IS NO LONGER A VIAB LE BUSINESS OPTION FOR TELECOM SERVICE PROVIDERS. THE NETWORK CAPACITY MAR KET HAS BECOME VERY PRICE COMPETITIVE AND IT IS BECOMING DIFFICULT TO GENERATE PROFITS FROM THE SALE OF 'PLAIN VANILLA' NETWORK USAGE. (E) THE TRENDS/ MOVEMENTS IN THE TELECOMMUNICATIONS IND USTRY CLEARLY REFLECT THAT THE PRICING FOR PURE NETWORK OPERATING SERVICE S HAS BECOME A COMMODITY LEADING TO SEVERE CONSTRAINTS ON MARGINS FROM EQUANT'S CUSTOMERS AND COMPETITORS. BECAUSE OF THIS CHANGE EQUANT IS FACING AN ENORMOUS CHALLENGE WITH THE FOCUS MOVING AWAY FROM THE SIMPLE YET INCREDIBLY RISKY INVESTMENT FOR THE PROVISION OF NE TWORK CAPACITY AS THE VALUE IN NETWORK TRANSPORT HAS DECREASED AND WILL C ONTINUE TO DO SO TO BECOME A TOTAL TELECOMMUNICATIONS SOLUTIONS BASED C OMPANY. HE FURTHER SUBMITTED THAT (I) THE INTER-COMPANY AGREEMENT DOES NOT GIVE ANY DISCR ETIONARY POWER TO THE ADMINISTRATOR TO DETERMINE THE INTRA-GROUP PAYM ENTS. RATHER THE PAYMENTS ARE TO BE MADE IN ACCORDANCE WITH THE ARM' S LENGTH PRINCIPLE (AND IN CONSONANCE WITH THE OECD GUIDELINES). (II) SIMILARLY IN RELATION TO DISPUTES IT IS PROVIDED AS PER PARA 6.6 OF THE AGREEMENT THAT IN THE EVENT AN AE AND THE ADMINISTRA TOR ARE NOT ABLE TO REACH ANY AGREEMENT EVEN AFTER MAKING REASONABLE EF FORTS FOR THE SAME THE DISPUTES BETWEEN THE AE AND THE ADMINISTRATOR WO ULD BE REFERRED TO AN ARBITRATOR WHOSE DECISION SHALL BE BINDING ON TH E PARTIES. MOREOVER THE ARBITRATOR WOULD ALSO BE APPOINTED JOINTLY BY T HE ADMINISTRATOR AND THE DISPUTING PARTY. (III) THE LAST POINT OF THE TPO ON THE POWER TO HAVE ACC ESS TO RECORDS IS MERELY A PROCEDURAL ASPECT IN THE ADMINISTRATION OF THE AGREEMENT AND NOT IMPLY ABSENCE OF ANY POWER/ SAY OF THE AES IN TH E ADMINISTRATION OF ITA NOS. 5571/DEL/2011 & ITA 5896/DEL/2012 A.YS. 2007-08 / 2008-09 GLOBAL ONE INDIA P.LTD. NEW DELHI 16 AGREEMENT/ ALLOCATION MECHANISM. FURTHER THE APPEL LANT DOES ACCESS TO THE METHODOLOGY/BASIS FOLLOWED BY THE ADMINISTRATOR FOR CARRYING OUT THE RPSM. ALSO THE RPSM WORKINGS ARE ALSO SHARED BY AD MINISTRATOR WITH THE APPELLANT AND THE SAME WERE ALSO FILED WITH THE LD TPO DURING THE AUDIT PROCEEDINGS AND THE WORKINGS ARE SHARED THE APPELLA NT. HENCE HE ARGUED THAT THE OBSERVATIONS MADE BY THE LD TPO ARE INCORRECT. ON FACTS HE SUBMITTED THAT : BOTH THE STATEMENTS OF THE TPO IN THIS REGARD ARE FACTUALLY INCORRECT SINCE NEITHER HAS THE PSM BEEN APPLIED IN THE TP STUDY F OR THE FIRST TIME NOR IS IT A DEVICE TO CAMOUFLAGE THE LOSSES OF THE APPELLA NT. PSM BASED MODEL IS FOLLOWED BY THE EQUANT GROUP GLO BALLY FOR THE SETTING OF TRANSFER PRICES. THIS MODEL IS CLEARLY BORNE OUT FROM THE INTER- COMPANY AGREEMENT WHICH WAS PUT IN PLACE LONG BEFOR E THE FY 2006-07 I.E. THE AGREEMENT WAS EFFECTIVE FROM JANUARY I 20 04. THE TP DOCUMENTATION IS MERELY A WRITTEN MANIFESTATION OF THIS MODEL AND DRAWN UP FOR COMPLIANCE UNDER THE TP REGULATIONS. FURTHER THE TP MODEL BASED ON PSM HAS ALSO BEEN ACCEPTED BY THE LD. TPO'S PRED ECESSORS IN THE PRIOR YEARS. AT THE OUTSET IT NEEDS TO BE STRESSED THAT THE CI RCUIT EXPENSES PERTAINING TO PROVISION OF LAST MILE CONNECTIVITY IS NOT A KEY DRIVER COST. THE EQUANTS GROUP'S CORE ASSET IS THE GLOBAL NETWORK THAT CONNE CTS OVERSEAS ENTITIES TO THE 'POINT OF SUPPLY' AND IN WHICH ALL THE GROUP ENTITIES HAVE INVESTED HEAVILY AND WHICH ALSO IS THE UNIQUE INTANGIBLE EMP LOYED BY THE GROUP. IN THE ENTIRE PROCESS OF INTERNATIONAL COMMUNICATI ON THE MOST IMPORTANT ROLE IS THAT OF TRANSMITTING AND RECEIVING THE SIGN ALS FROM ONE COUNTRY TO ANOTHER WHICH IS THE ROLE PERFORMED BY THE GLOBAL N ETWORK WHICH IS DEVELOPED AND MAINTAINED BY THE EQUANT GROUP. AS REC OGNIZED BY THE LD.TPO IN THE TP ORDER ITSELF LAST MILE CONNECTIVI TY IS MERELY A SMALL PART OF THE ENTIRE NETWORKING PROCESS AND ITS OUTSOURCIN G DOES NOT NEGATE THE IMPORTANCE OF GLOBAL NETWORK AS AN INTANGIBLE. MERELY BECAUSE THE APPELLANT OUTSOURCES THE LAST M ILE CONNECTIVITY TO THIRD PARTY INTERNET SERVICE PROVIDERS DOES NOT DET RACT FROM THE IMPORTANCE OF THE GLOBAL NETWORK IN WHICH THE EQUAN T GROUP (INCLUDING GOIPL) HAS HEAVILY INVESTED AND IT IS THE COST PERT AINING TO THE GLOBAL NETWORK CONSTITUTES THE KEY DRIVER. HERE IT IS REIT ERATED THAT EACH EQUANT OPERATING ENTITY (INCLUDING GOIPL) ASSUMES THE SIGN IFICANT RISKS ASSOCIATED ITA NOS. 5571/DEL/2011 & ITA 5896/DEL/2012 A.YS. 2007-08 / 2008-09 GLOBAL ONE INDIA P.LTD. NEW DELHI 17 WITH MAKING AN INVESTMENT IN THE GLOBAL NETWORK AND ALSO ASSUME THE OVERALL RESPONSIBILITY VIS-A-VIS THE CUSTOMERS FOR ENSURING EFFECTIVE / ERROR FREE SERVICES. 4. THE LD.D.R. MR.PEEYUSH JAIN ON THE OTHER HAND OPP OSED THE CONTENTIONS OF THE ASSESSEE AND REFERRED TO THE ASS ESSMENT ORDER FOR THE A.Y. 2009-10 WHERE THE A.O. HAS LEFT A NOTE. HE SUBMITS THAT PSM IS NOT THE MOST APPROPRIATE METHOD(MAM). HE REFERRED TO PAGE 260 O F THE ASSESSEES PAPER BOOK WHEREIN IN THE EXECUTIVE SUMMARY OF T.P. STU DY FOR THE F.Y. 2006-07 IT IS SPECIFICALLY STATED AT PARA 1.4.2 BY THE AUDITORS THAT THEIR RECOMMENDATIONS ON THE ISSUE OF M.A.M. ARE BASED ON FACTS AS ON 31. 3.2007 AND THAT THE METHODOLOGY AND THE MAM MAY HAVE TO BE REVIEWED IN CASE OF CHANGE IN THE FACTS AND CIRCUMSTANCES OF THE CASE TO DRIVE HOME THE POINT THAT IT IS NOT MANDATORY TO FOLLOW PSM AS THE MAM ADOPTED IN THE PREVIOUS YEARS IN THIS YEAR ALSO EVEN IF THE SAME IS ACCEPTED BY THE T.P.O. HE ARGUED THAT IT IS WELL SETTLED THAT THE BURDEN OF PROOF IS ON THE ASSESSEE TO PROVE THAT ITS INTERNATIONAL TRANSACTIONS WITH ITS ASSOCIATED ENTERPRISE ARE AT ARMS LENGTH. HE REFERRED TO THE ORDER OF THE TPO AND SUBMITTED THAT THE APPLICA TION OF PSM BY THE ASSESSEE IS NOT AS PER RULE 10B(1)(D). HE REFERRED TO PAGE 180 OF THE PAPER BOOK AND POINTED OUT TO THE DETAILS GIVEN THEREIN OF THE A.E. AND ALL THE INTERNATIONAL TRANSACTIONS ENTERED INTO BY THE ASSESSEE AND POINTED OUT THAT THEY ARE OF (I) PURCHASE OF EQUIPMENT (II) TELECOM CHARGES AND (III) REIMBURSEMENT OF EXPENSES IN TWO CASES. HE SUBMITTED THAT PURCHASE OF EQUIPMENT IS NOT SERVICE ITA NOS. 5571/DEL/2011 & ITA 5896/DEL/2012 A.YS. 2007-08 / 2008-09 GLOBAL ONE INDIA P.LTD. NEW DELHI 18 AND HENCE PSM CANNOT BE APPLIED. HE QUESTIONED WH ETHER PSM CAN BE THE MOST APPROPRIATE METHOD FOR PURCHASE OF EQUIPMENT. IT IS ONLY IN THE CASE OF TELECOM CHARGES WHICH IS RECEIVED BY THE ASSESSEE FROM EQUANT IRELAND THAT PSM MAY POSSIBLY BE APPLIED AND IN THAT CASE THE PR OFITS OF BOTH THE ENTERPRISE HAVE TO BE CONSIDERED. HE VEHEMENTLY CONTENDED THA T THE INTRA TRANSFER PRICING POLICY OF THE GROUP CANNOT BE COMPARED AND CANNOT BE CONSIDERED AS A BENCH MARK. HE RELIED ON THE TPOS ORDER AND THE SHOW C AUSE NOTICE GIVEN BY THE T.P.O. AND SUBMITTED THAT THIS IS A CASE WHERE THE KEY DRIVERS ARE NOT APPLIED CORRECTLY. HE QUESTIONED AS TO WHAT ARE THE UNIQU E INTANGIBLES. HE SUBMITTED THAT LOSSES ARE BEING BROUGHT FORWARD IN THIS CASE AND REFERRED TO PAGE 3 OF THE TPOS ORDER AND RELIED ON THE FINDINGS THEREIN AND CONTENDED THAT LOSSES CANNOT BE APPORTIONED TO THE ASSESSEE. HE SUBMITTE D THAT THE BASIS OF ALLOCATION IS NOT REASONABLE AND THAT THE ASSESSEE HAS NOT JU STIFIED THE SAME. ON THE TPO ACCEPTING PSM IN THE EARLIER YEARS HE SUBMITTED TH AT IT MIGHT PROBABLY BE A MISTAKE AND THERE IS NO RES JUDICATA IN TAX PROCEED INGS. HE POINTED THAT THE LAW ALLOWS THE TPOS TO CHANGE AND ARRIVE AT THE CORRE CT MOST APPROPRIATE METHOD WHEN HE IS CONVINCED THAT A CHANGE IS REQUIRED. HE QUESTIONED THAT IF THE CASE OF THE ASSESSEE IS THAT THERE WAS A MARK UP THEN T HE ASSESSEE HAVING A LOSS CANNOT BE EXPLAINED. ON A QUERY FROM THE BENCH AS TO WHETHER ERRORS IN APPLYING THE METHOD SHOULD BE CORRECTED OR THE MET HOD ITSELF SHOULD BE REJECTED HE SUBMITTED THAT IF THE ERRORS ARE SUCH THAT GO TO THE ROOT OF THE METHOD TO BE APPLIED IN SUCH CASES THE TPO HAS TO CHANGE TO THE MOST ITA NOS. 5571/DEL/2011 & ITA 5896/DEL/2012 A.YS. 2007-08 / 2008-09 GLOBAL ONE INDIA P.LTD. NEW DELHI 19 APPROPRIATE METHOD. HE CONTENDED THAT THE ASSESSEE HAS PLUG IN CLIENT AND HAS NO UNIQUE INTANGIBLES. HE RELIED ON EACH AND EV ERY FINDING OF THE T.P.O. WHICH ARE BROUGHT OUT IN THE EARLIER PART OF THIS O RDER AND SUBMITTED THAT THE T.P.OS ORDER AS CONFIRMED BY THE DRPS ORDER H AS TO BE UPHELD. 4.1. IN REPLY THE LD.COUNSEL FOR THE ASSESSEE MR.RAHUL MITRA SUBMITTED THAT THE VERY CATEGORIZATION OF THE ASSESSEE IS WR ONGLY UNDERSTOOD BY THE LD.D.R. AND THAT THE ASSESSEE IS NOT A SERVICE PRO VIDER AND THAT HE IS AN ENTREPRENEUR. HE CONTENDED THAT IF PSM IS NOT COR RECTLY APPLIED THEN THE REMEDY IS TO CORRECT THE SAME AND NOT REJECT THE M ETHOD ITSELF. HE POINTED OUT THAT THE ALLOCATION WAS ON A SCIENTIFIC BASIS AND THAT IF THE TPO FOUND FAULT WITH IT HE COULD HAVE SUGGESTED A DIFFERENT METHOD OF A LLOCATION WHICH HE FELT APPROPRIATE RATHER THAN REJECT THE METHOD. HE CON TENDED THAT NET WORKING IS AN INTANGIBLE AND THE ASSESSEE IS AN INDEPENDENT ENTRE PRENEUR AND TRANSACTIONS ARE INTER RELATED HENCE PSM IS APPLICABLE. 4.2 . JOINING THE THE LD.D.R. MR.PEEYUSH JAIN SUBMITTE D THAT THE ENTIRE GROUP HAS 100 ENTITIES AND WHEN THE ASSESSEE HAS TR ANSACTIONS ONLY WITH TWO ENTITIES HOW COULD THE ENTIRE GROUP PROFITS BE APP ORTIONED? HE SUBMITTED THAT ONLY SUCH ENTITIES AS ARE INVOLVED IN THE INTERNA TIONAL TRANSACTIONS SHOULD BE CONSIDERED. HE VEHEMENTLY CONTENDED THAT PSM WAS N OT APPLIED BY THE ASSESSEE AS PER THE REQUIREMENT OF RULE 10(A)(A) AS RESIDUAL PROFITS ALLOCATION ARE NOT BENCH MARKED. ITA NOS. 5571/DEL/2011 & ITA 5896/DEL/2012 A.YS. 2007-08 / 2008-09 GLOBAL ONE INDIA P.LTD. NEW DELHI 20 4.3. THE LD.COUNSEL FOR THE ASSESSEE ADMITTED THAT PSM HAS NOT BEEN APPLIED AS PER THE REQUIREMENTS OF THE INCOME TAX ACT READ WITH RULES TO THE EXTENT THAT RESIDUAL PROFITS ALLOCATION WAS NOT BEN CH MARKED. BUT HE SUBMITTED THAT NOWHERE IN THE WORLD BENCH MARKING OF RESIDUA L PROFITS FOR ALLOCATION IS REQUIRED. HE RELIED ON VARIOUS COMMENTARIES IN SUP PORT OF THE SAME. HE REFERRED TO THE DECISION OF THE CHENNAI BENCH OF TH E TRIBUNAL IN THE CASE OF ASENDAS (INDIA) PVT.LTD. VS. DCIT IN ITA NO.1736/M ADRAS/2011 ORDER DATED 02 ND JANUARY 2013 AND SUBMITTED THAT THE TRIBUNAL HAS ADOPTED A VALUATION METHODOLOGY NOT GIVEN IN THE RULES AS A MATTER O F EXCEPTION. HE RELIED ON INTERPRETATION OF STATUTES AND SUBMITTED THAT THE T RIBUNAL IS ENTITLED TO PUT LIFE AND FORCE INTO THE LANGUAGE OF THE SECTION SO AS T O IRON OUT THE CREASES. HE RELIED ON A NUMBER OF DECISIONS OF THE HONBLE SUPR EME COURT AND HIGH COURTS FOR THE PROPOSITION THAT THE TRIBUNAL CAN READ DOWN THE LAW IN CERTAIN CIRCUMSTANCES AND ARGUED THAT THIS IS ONE SUCH CIRC UMSTANCE. ALTERNATELY HE RELIED ON RULE 10(A)(B) WHICH W AS INTRODUCED W.E.F. 1.4.2012 GIVING THE ASSESSEE A CHOICE TO ADOPT ANY OTHER RECOGNIZED METHOD AND SUBMITTED THAT THIS RULE IS RETROACTIVE AS IT IS PROCEDURAL IN NATURE. HENCE HE SUBMITS THAT THE METHOD ADOPTED BY THE ASSESSEE IS A RECOGNIZED METHOD AND HAS TO BE ACCEPTED AS MAM UNDER RULE 10(A)(B). 4.4. THE LD.D.R. REPLIED STATING THAT THE SIXTH METHOD IS PROSPECTIVE AND IS APPLICABLE W.E.F. 1.4.2012 AND NO ARMS LENGTH CAN BE DETERMINED WITHOUT BENCH ITA NOS. 5571/DEL/2011 & ITA 5896/DEL/2012 A.YS. 2007-08 / 2008-09 GLOBAL ONE INDIA P.LTD. NEW DELHI 21 MARKING WITH COMPARABLES. HE SUBMITTED THAT THE TR IBUNAL CANNOT READ DOWN ENACTMENTS AND HAS TO SIMPLY ENFORCE THE LAW AS EN ACTED BY THE PARLIAMENT. 5. ON THE CORPORATE TAX ISSUES THE ASSESSEE FILED TWO ADDITIONAL GROUNDS WHICH ARE AS FOLLOWS. GROUND NO.10: THAT THE LDAO HAS ERRED ON FACTS AN D IN LAW IN CHARGING INTEREST U/S 234C OF THE ACT ON THE ASSESSED INCOME OF IR 27 2 043 590/-. 10.1. WITHOUT APPRECIATING THAT INTEREST U/S 234C IS LEVIABLE ON THE TAX ON RETURNED INCOME I.E. TAX ON THE TOTAL INCOME DECLAR ED IN THE RETURN OF INCOME AND NOT ON THE ASSESSED INCOME AS PER THE PROVISION S OF S.234C OF THE ACT. 10.2. AS THERE IS NO MENTION OF THE LEVY OF INTER EST U/S 234C OF THE ACT IN THE ASSESSMENT ORDER AND THEREBY IGNORING THE JUDICIAL PRECEDENTS WHEREIN IT HAS BEEN HELD THAT INTEREST U/S 234C COULD BE LEVIED ON LY WHEN THERE IS SPECIFIC MENTION IN THE ASSESSMENT ORDER THAT INTEREST U/S 2 34C IS LEVIABLE. 11. WITHOUT PREJUDICE TO GROUND NUMBERS 1 TO 5 AND WITHOUT ACCEPTING THE ADDITIONS MADE BY THE LD.AO IN ANY MANNER WHATSOEVE R THE LD.AO HAS ERRED IN NOT ALLOWING DEDUCTION U/S 80-IA(4) OF THE ACT FROM THE GROSS TOTAL INCOME (AS ASSESSED). 6. LD.COUNSEL SUBMITTED THAT THESE ARE LEGAL GROUNDS W HICH DO NOT REQUIRE ANY INVESTIGATION INTO THE FACTS OF THE CAS E AND UNDER THESE CIRCUMSTANCES HE ARGUED THAT THE SAME MAY BE ADMIT TED. 6.1 . THE LD.D.R. SUBMITTED THAT THE ASSESSEE HAS NOT C LAIMED A DEDUCTION U/S 80-I EITHER IN THE ORIGINAL RETURN OF INCOME OR IN THE REVISED ITA NOS. 5571/DEL/2011 & ITA 5896/DEL/2012 A.YS. 2007-08 / 2008-09 GLOBAL ONE INDIA P.LTD. NEW DELHI 22 RETURN OF INCOME AND HENCE SUBMITTED THAT THE ADDIT IONAL GROUNDS MAY BE REJECTED. 7 . AFTER HEARING RIVAL CONTENTIONS WE FIND THAT BOT H THE GROUNDS RAISED ARE LEGAL GROUNDS AND THAT NO FRESH INVESTIG ATION INTO FACTS IS REQUIRED. WHEN ALL FACTS ARE ON RECORD IN OUR VIEW THESE GR OUNDS HAVE TO BE ADMITTED BEING LEGAL GROUNDS BY FOLLOWING THE JUDGEMENT OF HONBLE SUPREME COURT IN THE CASE OF NATIONAL THERMAL POWER CO.LTD. VS. CIT( 1998) REPORTED IN 229 ITR 383 (SC). IN THE RESULT WE ADMIT THE ADDITIONAL GROUNDS. 8. GROUND NO.5 TO 9 ARE GROUNDS CONNECTED WITH CORPOR ATE TAX ISSUES. 9. THE LD.COUNSEL FOR THE ASSESSEE SUBMITTED THAT THE A.O. DISALLOWED PAYMENTS MADE FOR LEASE LINES AS THE ASSESSEE HAS NOT DEDUCTED TAX AT SOURCE U/S 40(A)(I)(A). THE A.O. DISALLOWED THE SAME BY H OLDING THAT LEASE LINES WERE TECHNICALLY SPEAKING EQUIPMENT AND PAYMENT FOR TA KING THESE LINES ON LEASE IS COVERED U/S 194-I AND THAT THE ASSESSEE HIMSELF HAS DESCRIBED THE PAYMENT HAS BEEN MADE TOWARDS LEASE LINES. THE LD.COUNSEL RELIED ON THE DECISION OF THE DELHI HIGH COURT IN THE CASE OF ASIA SATELLITE TELE COMMUNICATION CO. 332 ITR 340(DEL)C AND SUBMITTED THAT THE ISSUE IS COVERED IN HIS FAVOUR. HE RELIED ON THE DECISION OF THE MUMBAI TRIBUNAL IN THE CASE OF VODAFONE S.R.LTD. 135 TTJ 182 AND SUBMITTED THAT SUCH PAYMENTS ARE NOT FOR TH E USE OF EQUIPMENT AND THEREFORE NOT LIABLE TO TDS U/S 194-I. ITA NOS. 5571/DEL/2011 & ITA 5896/DEL/2012 A.YS. 2007-08 / 2008-09 GLOBAL ONE INDIA P.LTD. NEW DELHI 23 9.1. ON THE ADDITIONAL GROUND OF DEDUCTION U/S 80 IA(IV) HE SUBMITTED THAT ANY DISALLOWANCES MADE BY THE A.O. WOULD GO TO INCREASE THE INCOME AND CONSEQUENTLY THE ASSESSEE WOULD BE ELIGIBLE FOR DED UCTION U/S 80 IA ON SUCH INCREASED PROFITS. HE RELIED ON THE ORDER IN THE C ASE OF GEM PLUS JEWELLERY INDIA PVT.LTD. (2011) REPORTED IN 330 ITR 175 (B OM) IN SUPPORT OF HIS CONTENTIONS. FOR LEVY OF INTEREST U/S 234C HE R ECORDED THAT SUCH INTEREST IS LEVIED ONLY ON RETURNED INCOME AND NOT ON ASSESSED INCOME. 9.2. IN REPLY THE LD.D.R. THOUGH NOT LEAVING HIS GR OUND SUBMITTED THAT HE RELIES ON THE ORDER OF THE A.O. AND THE REA SONING THEREOF FOR DISALLOWANCE MADE U/S 40A(I)(A) OF THE ACT. 9.3. ON THE ADDITIONAL GROUNDS THE LD.D.R. SUBMITTED THAT THE A.O. MAY BE DIRECTED TO EXAMINE THE SAME IF THE TRIBUNA L CHOSE TO ADMIT THESE GROUNDS. 10. RIVAL CONTENTIONS HEARD. ON A CAREFUL CONSIDERATIO N OF THE FACTS AND CIRCUMSTANCES OF THE CASE AND ON A PERUSAL OF T HE PAPERS ON RECORD AND ORDERS OF THE AUTHORITIES BELOW CASE LAWS CITED W E HOLD AS FOLLOWS. 11. WE FIRST TAKE UP CORPORATE TAX ISSUES WHICH IS GROU ND NO.5 FOR THE A.Y. 2007-08. THE ASSESSEE IS A LICENSED INTERNET PROVIDER. DURING THE YEAR IT PROCURED DOMESTIC HALF CIRCUIT FACILITY TO ITS CU STOMERS FROM TELECOM SERVICE PROVIDERS LIKE BSNL MTNL AND INTERNATIONAL HALF CIRCUIT FACILITY FROM FLAG ATLANTIC AT FRANCE. THESE ARE STANDARD FACILITIES PROVIDED FOR TRANSMISSION OF DATA BY THOSE ORGANISATIONS. THE ISSUE IS WHETHER TAX SHOULD BE DEDUCTED AT ITA NOS. 5571/DEL/2011 & ITA 5896/DEL/2012 A.YS. 2007-08 / 2008-09 GLOBAL ONE INDIA P.LTD. NEW DELHI 24 SOURCE U/S 194 I FROM PAYMENTS MADE FOR USE OF SUCH STANDARD FACILITIES. THE HONBLE DELHI HIGH COURT IN THE CASE OF ASIA SATE LLITE VS. CIT REPORTED IN 332 ITR 340 AND THE HONBLE MADRAS HIGH COURT IN THE CASE OF SKYCELL COMMUNICATIONS LTD. VS. DCIT REPORTED IN 351 ITR 53 (MADRAS) HAVE ADJUDICATED THE ISSUE IN FAVOUR OF THE ASSESSEE. R ESPECTFULLY FOLLOWING THE SAME WE HOLD THAT PAYMENTS MADE TOWARDS USE OF STANDARD FACILITY WHEN THE LESSEE IS NOT HAVING ANY DOMAIN OR CONTROL OR POSSESSORY R IGHTS OVER SUCH FACILITY CANNOT BE CATEGORIZED AS USE OF ASSETS FOR THE PURP OSE OF THE ACT. 11.1 . RESPECTFULLY FOLLOWING THE ORDER OF THE JURISDICT IONAL HIGH COURT ON THIS ISSUE WE ALLOW THIS GROUND OF APPEAL OF THE ASSESS EE. IN THE RESULT GROUND NO.5 FOR THE A.Y. 2007-08 IS ALLOWED. 12. GROUND NO.6 FOR A.Y. 2007-08 IS ON THE ISSUE OF THE ASSESSING OFFICER NOT GRANTING THE BENEFIT OF CARRY FORWARD OF BUSINESS LOSSES AND UNABSORBED DEPRECIATION TO THE ASSESSEE. AFTER HEARING BOT H THE PARTIES AS THIS IS A FACTUAL MATTER AND AS THE SAME IS NOT ADJUDICATED B Y THE LOWER AUTHORITIES AND AS THIS IS A LEGAL CLAIM WE SET ASIDE THE SAME TO THE FILE OF THE A.O. FOR FRESH ADJUDICATION IN ACCORDANCE WITH LAW. IN THE RESULT THIS GROUND IS ALLOWED FOR STATISTICAL PURPOSES. 13. GROUND NO.7 FOR THE A.Y. 2007-08 AND GROUND NO.6 FO R THE A.Y. 2008-09 ARE GENERAL IN NATURE. GROUND NO.8 FOR T HE A.Y. 2007-08 AND GROUND NO.7 FOR THE A.Y. 2008-09 ARE AGAINST THE LEVY OF INTEREST U/S 234B. LEVY OF INTEREST IS MANDATORY AND CONSEQUENTIAL. HENCE THESE GROUNDS ARE DISMISSED. ITA NOS. 5571/DEL/2011 & ITA 5896/DEL/2012 A.YS. 2007-08 / 2008-09 GLOBAL ONE INDIA P.LTD. NEW DELHI 25 14. GROUND NO.9 FOR THE A.Y. 2007-08 AND GROUND NO.9 FO R THE A.Y. 2008-09 ARE ON THE INITIATION OF PENALTY U/S 271(1) (C ) OF THE ACT. THE SAME IS DISMISSED AS PREMATURE. 15. GROUND NO.8 FOR THE A.Y. 2008-09 IS AGAINST THE A.O . NOT ALLOWING CREDIT OF TDS AND CHARGE OF INTEREST. AS THIS IS A FACTUAL MATTER THE SAME IS SET ASIDE TO THE FILE OF THE A.O. FOR VERIFICATION AND DISPOSAL IN ACCORDANCE WITH LAW. THIS LEAVES US WITH GROUND NO. 1 TO 4 IN BOTH THE A YS WHICH IS AGAINST THE TRANSFER PRICING ADJUSTMENTS AS WELL AS THE ADDIT IONAL GROUNDS ADMITTED BY US. 16. THE ADDITIONAL GROUND IS REGARDING CLAIM OF DEDU CTION U/S 80I. HAVING ADMITTED THIS GROUND BY APPLYING THE DECISION OF T HE HONBLE SUPREME COURT IN THE CASE OF NTPC LTD. WE DEEM IT APPROPRIATE TO RE MIT THE MATTER TO THE FILE OF THE ASSESSING OFFICER FOR FRESH ADJUDICATION IN ACC ORDANCE WITH LAW. SIMILARLY THE ADDITIONAL GROUNDS RAISED ON LEVY ON INTEREST U/S 234 WE ALSO SET ASIDE THIS ADDITIONAL GROUND TO THE FILE OF THE AO FOR FRESH ADJUDICATION IN ACCORDANCE WITH LAW. 16.1. IN THE RESULT THESE GROUNDS ARE ALLOWED FOR STATIS TICAL PURPOSES. 17. WE NOW TAKE UP THE ISSUE OF TRANSFER PRICING ADJUS TMENT WHICH ARE GROUND NOS. 1 TO 4. 17.1. A PERUSAL OF THE FUNCTION OF THE ASSESSEE COMPANY DEMONSTRATES THAT THE TRANSACTIONS OF THE COMPANY ARE HIGHLY INTEGRAT ED AND INTERRELATED. IT INVOLVES MORE THAN ONE ENTERPRISE TO COMPLETE A TRA NSACTION. THIS IS A CASE WHERE A TRANSACTION PASSES THROUGH A NUMBER OF A.ES AND FOR A TRANSACTION TO ITA NOS. 5571/DEL/2011 & ITA 5896/DEL/2012 A.YS. 2007-08 / 2008-09 GLOBAL ONE INDIA P.LTD. NEW DELHI 26 FRUCTIFY EACH ENTITY MAKES A CONTRIBUTION. THE VA RIOUS PARTIES WHICH MAKE A CONTRIBUTION TO THE TRANSACTION SHARE THE REVENUES THAT ARISE AS A CONSEQUENCE TO SUCH CONTRIBUTION. THE DIFFERENT ENTITIES ARE A LSO ASSOCIATED ENTERPRISES. THE FACT IS THAT THE EQUANT GROUP RELIES ON THE FUNCTI ONS OF EACH OF THE ENTITIES OF THE GROUP TO GENERATE REVENUES AND EACH OF THE OPE RATING ENTITIES OF THE EQUANT GROUP DEPLOYS THE NECESSARY ASSETS AND FUNCT ION REQUIRED AT EACH STEP FOR NETWORK FOOT PRINT. EACH ENTITY OWNS ASSE TS AND ALSO EMPLOYS MAN POWER WITH THE HELP OF WHICH THEY OPERATE DIFFEREN T LOCATIONS OF THE NETWORK AND THUS CONTRIBUTE TO THE GLOBAL EQUANT NETWORK. 17.2. THUS KEEPING IN VIEW THE ABOVE WE COME TO A CON CLUSION THAT THE NATURE OF THE ASSESSEES OPERATIONS IS INTEGRAT ED INTERCONNECTED AND INTERDEPENDENT. ON THESE FACTS WE HAVE TO DECIDE AS TO WHAT IS THE MAM UNDER THE FACTS AND CIRCUMSTANCES. 17.3. BEFORE US THERE ARE TWO METHODS FOR CONSIDERATION I.E. PSM AND TNMM. THE SPECIAL BENCH OF THE TRIBUNAL IN THE CASE OF AZTECH SOFTWARE AND TECHNOLOGIES SERVICES LTD. VS. ACIT REPORTED IN 107 ITD AT PAGE STATES AS FOLLOWS: PROFIT SPLIT METHOD (PSM) RULE 10B (1) (D) PRESCRIBES PSM AS FOLLOWS: (I) THE COMBINED NET PROFIT OF THE ASSOCIATED ENTERPRIS ES ARISING FROM THE INTERNATIONAL TRANSACTION IN WHICH THEY AR E ENGAGED IS DETERMINED; (II) THE RELATIVE CONTRIBUTION MADE BY EACH OF THE ASS OCIATED ENTERPRISES TO THE EARNING OF SUCH COMBINES NET PRO FIT IS THEN EVALUATED ON THE BASIS OF THE FUNCTIONS PERFORMED ASSETS ITA NOS. 5571/DEL/2011 & ITA 5896/DEL/2012 A.YS. 2007-08 / 2008-09 GLOBAL ONE INDIA P.LTD. NEW DELHI 27 EMPLOYED OR TO BE EMPLOYED AND RISKS ASSUMED BY EAC H ENTERPRISE AND ON THE BASIS OF RELIABLE EXTERNAL MA RKET DATA WHICH INDICATES HOW SUCH CONTRIBUTION WOULD BE EVAL UATED BY UNRELATED ENTERPRISES PERFORMING COMPARABLE FUNCTIO NS IN THE SIMILAR CIRCUMSTANCES; (III) THE COMBINED NET PROFIT IS THEN SPLIT AMONGST THE E NTERPRISES IN PROPORTION TO THEIR RELATIVE CONTRIBUTIONS AS EVAL UATED UNDER SUB CLAUSE(II); (IV) THE PROFIT THUS APPORTIONED TO THE ASSESSEE IS TAKE N INTO ACCOUNT TO ARRIVE AT AN ARMS LENGTH PRICE IN RELAT ION TO THE INTERNATIONAL TRANSACTION; 181. THIS METHOD MAY BE APPLICABLE IN CASE WHERE TRANSAC TIONS INVOLVED TRANSFER OF UNIQUE INTANGIBLE OR ANY MULT IPLE INTERRELATED INTERNATIONAL TRANSACTIONS WHICH CANN OT BE EVALUATED SEPARATELY FOR DETERMINING THE ALP OF ANY ONE TRANSACTION. 182. THE PROFIT SPLIT METHOD FIRST IDENTIFIES THE PROFIT TO BE SPLIT FOR THE ASSOCIATED ENTERPRISE FROM THE CONTROLLED TRANS ACTIONS IN WHICH THE ASSOCIATED ENTERPRISES ARE ENGAGED. IT TH EN SPLITS THOSE PROFITS BETWEEN THE ASSOCIATED ENTERPRISES ON AN ECONOMICALLY VALID BASIS THAT APPROXIMATES THE DIVI SIONS OF PROFITS THAT WOULD HAVE BEEN ANTICIPATED AND REFLEC TED IN AN AGREEMENT TRANSACTIONS OR A RESIDUAL PROFIT INTENDE D TO REPRESENT THE PROFIT THAT CANNOT READILY BE ASSIGNE D TO ONE OF THE PARTIES SUCH AS THE PROFIT ARISING FROM HIGH V ALUE SOMETIMES UNIQUE INTANGIBLES. 183. THE CONTRIBUTION OF EACH ENTERPRISE IS BASED UPON A FUNCTIONAL ANALYSIS AND VALUED TO THE EXTENT POSSIBLE BY ANY A VAILABLE RELIABLE EXTERNAL MARKET DATA. THE FUNCTIONAL ANALY SIS IS AN ANALYSIS OF THE FUNCTIONS PERFORMED (TAKING INTO AC COUNT ASSETS USED AND RISKS ASSUMED) BY EACH ENTERPRISE. THE EXT ERNAL MARKET CRITERIA MAY INCLUDE FOR EXAMPLE PROFIT SP LIT PERCENTAGES OR RETURNS OBSERVED AMONG INDEPENDENT ENTERPRISES WITH COMPARABLE FUNCTIONS. ITA NOS. 5571/DEL/2011 & ITA 5896/DEL/2012 A.YS. 2007-08 / 2008-09 GLOBAL ONE INDIA P.LTD. NEW DELHI 28 17.4 . THE OECD TRANSFER PRICING GUIDELINE FOR MULTINATI ONAL ENTERPRISES AND TAX ADMINISTRATION IN CHAPTER 2 ON TRANSFER PRICING MET HODS AT PAGE 93 PARA C.1 STATES AS FOLLOWS: C.1 IN GENERAL 2.108 THE TRANSACTIONAL PROFIT SPLIT METHOD SEEKS TO ELIM INATE THE EFFECT ON PROFITS OF SPECIAL CONDITIONS MADE OR IMPOSED IN A CONTROLLED TRANSACTION (OR IN CONTROLLED TRANSACTIONS THAT ARE APPROPRIATE TO AGGREGATE UNDER THE PRINCIPLES OF PARAGRAPHS 3.9-3. 12) BY DETERMINING THE DIVISION OF PROFITS THAT INDEPENDEN T ENTERPRISES WOULD HAVE EXPECTED TO REALIZE FROM ENGAGING IN THE TRANSACTION OR TRANSACTIONS. THE TRANSACTIONAL PROFIT SPLIT METHOD FIRST IDENTIFIES THE PROFITS TO BE SPLIT FOR THE ASSOCIATED ENTERPRI SES FROM THE CONTROLLED TRANSACTIONS IN WHICH THE ASSOCIATED ENT ERPRISES ARE ENGAGED (THE COMBINED PROFITS). REFERENCES TO PR OFITS SHOULD BE TAKEN AS APPLYING EQUALLY TO LOSSES. SEE PARAGRA PHS 2.124-2.131 FOR A DISCUSSION OF HOW TO MEASURE THE PROFITS TO B E SPLIT. IT THEN SPLITS THOSE COMBINED PROFITS BETWEEN THE ASSOCIATE D ENTERPRISES ON AN ECONOMICALLY VALID BASIS THAT APPROXIMATES TH E DIVISION OF PROFITS THAT WOULD HAVE BEEN ANTICIPATED AND REFLEC TED IN AN AGREEMENT MADE AT ARMS LENGTH. SEE PARAGRAPHS 2.13 2-2.145 FOR A DISCUSSION OF HOW TO SPLIT THE COMBINED PROFITS. 17.5. ON RESIDUAL ANALYSIS ANALYSES IT IS STATED AS FO LLOWS: C.3.2.2 RESIDUAL ANALYSES 2.121 A RESIDUAL ANALYSIS DIVIDES THE COMBINED PROFITS FR OM THE CONTROLLED TRANSACTIONS UNDER EXAMINATION IN TWO STAGES. IN TH E FIRST STAGE EACH PARTICIPANT IS ALLOCATED AN ARMS LENGTH REMUNERATI ON FOR ITS NON-UNIQUE CONTRIBUTIONS IN RELATION TO THE CONTROLLED TRANSAC TIONS IN WHICH IT IS ENGAGED. ORDINARILY THIS INITIAL REMUNERATION WOULD BE DETERMINED BY APPLYING ONE OF THE TRADITIONAL TRANSACTION METHODS OR A TRANSACTIONAL NET MARGIN METHOD BY REFERENCE TO THE REMUNERATION OF COMPARABLE TRANSACTIONS BETWEEN INDEPENDENT ENTERPRISES. THUS IT WOULD GENERALLY NOT ACCOUNT FOR THE RETURN THAT WOULD BE GENERATED BY ANY UNIQUE AND VALUABLE CONTRIBUTION BY THE PARTICIPANTS. IN THE S ECOND STAGE ANY RESIDUAL PROFIT (OR LOSS) REMAINING AFTER THE FIRST STAGE DIVISION WOULD BE ALLOCATED AMONG THE PARTIES BASED ON AN ANALYSIS OF THE FACTS AND ITA NOS. 5571/DEL/2011 & ITA 5896/DEL/2012 A.YS. 2007-08 / 2008-09 GLOBAL ONE INDIA P.LTD. NEW DELHI 29 CIRCUMSTANCES FOLLOWING THE GUIDANCE AS DESCRIBED AT PARAGRAPHS 2.132- 2.145 FOR SPLITTING THE COMBINED PROFITS. 2.122 AN ALTERNATIVE APPROACH TO HOW TO APPLY A RESIDUAL ANALYSIS COULD SEEK TO REPLICATE THE OUTCOME OF BARGAINING BETWEEN INDEPEN DENT ENTERPRISES IN THE FREE MARKET. IN THIS CONTEXT IN THE FIRST STAG E THE INITIAL REMUNERATION PROVIDED TO EACH PARTICIPANT WOULD CORRESPOND TO TH E LOWEST PRICE AN INDEPENDENT SELLER REASONABLY WOULD ACCEPT IN THE C IRCUMSTANCES AND THE HIGHEST PRICE THAT THE BUYER WOULD BE REASONABLY WI LLING TO PAY. ANY DISCREPANCY BETWEEN THESE TWO FIGURES COULD RESULT IN THE RESIDUAL PROFIT OVER WHICH INDEPENDENT ENTERPRISES WOULD BARGAIN. IN THE SECOND STAGE THE RESIDUAL ANALYSIS THEREFORE COULD DIVIDE THIS P OOL OF PROFIT BASED ON AN ANALYSIS OF ANY FACTORS RELEVANT TO THE ASSOCIATED ENTERPRISES THAT WOULD INDICATE HOW INDEPENDENT ENTERPRISES MIGHT HAVE SPL IT THE DIFFERENCE BETWEEN THE SELLERS MINIMUM PRICE AND THE BUYERS MAXIMUM PRICE. 2.123 IN SOME CASES AN ANALYSIS COULD BE PERFORMED PERHA PS AS PART OF A RESIDUAL PROFIT SPLIT OR AS A METHOD OF SPLITTING P ROFITS IN ITS OWN RIGHT BY TAKING INTO ACCOUNT THE DISCOUNTED CASH FLOW TO THE PARTIES TO THE CONTROLLED TRANSACTIONS OVER THE ANTICIPATED LIFE O F THE BUSINESS. ONE OF THE SITUATION IN WHICH THIS MAY BE AN EFFECTIVE MET HOD COULD BE WHERE A START-UP IS INVOLVED CASH FLOW PROJECTIONS WERE CA RRIED OUT AS PART OF ASSESSING THE VIABILITY OF THE PROJECT AND CAPITAL INVESTMENT AND SALES COULD BE ESTIMATED WITH A REASONABLE DEGREE OF CERT AINTY. HOWEVER THE RELIABILITY OF SUCH AN APPROACH WILL DEPEND ON THE USE OF AN APPROPRIATE DISCOUNT RATE WHICH SHOULD BE BASED ON MARKET BENC HMARKS. IN THIS REGARD IT SHOULD BE NOTED THAT INDUSTRY WIDE RISK PREMIUMS USED TO CALCULATE THE DISCOUNT DO NOT DISTINGUISH BETWEEN P ARTICULAR COMPANIES LET ALONE SEGMENTS OF BUSINESS AND ESTIMATES OF THE RE LATIVE TIMING OF RECEIPTS CAN BE PROBLEMATIC. SUCH AN APPROACH THER EFORE WOULD REQUIRE CONSIDERABLE CAUTION AND SHOULD BE SUPPLEMENTED WHE RE POSSIBLE BY INFORMATION DERIVED FROM OTHER METHODS. 17.6. THE UNITED NATIONS PRACTICAL MANUAL ON TRANSFER PRICING FOR DEVELOPING COUNTRIES CHAPTER VI TRANSFER PRICIN G METHODS STATES AS FOLLOWS: 6.3.13.1. THE PROFIT SPLIT METHOD IS TYPICALLY APP LIED WHEN BOTH SIDES OF THE CONTROLLED TRANSACTION CONTRIBUTES SIGNIFICANT INTA NGIBLE PROPERTY. THE PROFIT IS TO BE DIVIDED SUCH AS IS EXPECTED IN A JOINT VENTURE R ELATIONSHIP. ITA NOS. 5571/DEL/2011 & ITA 5896/DEL/2012 A.YS. 2007-08 / 2008-09 GLOBAL ONE INDIA P.LTD. NEW DELHI 30 6.3.13.2. THE PROFIT SPLIT METHOD SEEKS TO ELIMINAT E THE EFFECT ON PROFITS OF SPECIAL CONDITIONS MADE OR IMPOSED IN A CONTROLLED TRANSACTION(OR IN CONTROLLED TRANSACTIONS THAT IT IS APPROPRIATE TO AGGREGATE) B Y DETERMINING THE DIVISION OF PROFITS THAT INDEPENDENT ENTERPRISES WOULD HAVE EXP ECTED TO REALIZE FROM ENGAGING IN THE TRANSACTION OR TRANSACTIONS. FIGURE 5 ILLUSTRATE THIS. 6.3.13.3 THE PROFIT SPLIT METHOD STARTS BY IDENTIFY ING THE PROFITS TO BE DIVIDED BETWEEN THE ASSOCIATED ENTERPRISES FROM THE CONTROLLED TRANSACTIONS. SUBSEQUENTLY THESE PROFITS ARE DIVIDED BETWEEN THE ASSOCIATED ENTERPRISES BASED ON THE RELATIVE VALUE OF EACH ENTERPRISES CO NTRIBUTION WHICH SHOULD REFLECT THE FUNCTIONS PERFORMED RISKS INCURRED AND ASSETS USED BY EACH ENTERPRISE IN THE CONTROLLED TRANSACTIONS. EXTERNAL MARKET DATE (E.G. PROFIT SPLIT PERCENTAGES AMONG INDEPENDENT ENTERPRISES PERFORMIN G COMPARABLE FUNCTIONS) SHOULD BE USED TO VALUE EACH ENTERPRISES CONTRIBUT ION IF POSSIBLE SO THAT THE DIVISION OF COMBINED PROFITS BETWEEN THE ASSOCIATED ENTERPRISES IS IN ACCORDANCE WITH THAT BETWEEN INDEPENDENT ENTERPRISES PERFORMIN G FUNCTIONS COMPARABLE TO THE FUNCTIONS PERFORMED BY THE ASSOCIATED ENTERPRIS ES. THE PROFIT SPLIT METHOD IS APPLICABLE TO TRANSFER PRICING ISSUES INVOLVING TAN GIBLE PROPERTY INTANGIBLE PROPERTY INTANGIBLE PROPERTY TRADING ACTIVITIES O R FINANCIAL SERVICES. 17.7. RESIDUAL ANALYSIS IS STATED AS FOLLOWS: 6.314.7 THE RESIDUAL PROFIT SPLIT METHOD IS USED MO RE IN PRACTICE THAN THE CONTRIBUTION APPROACH FOR TWO REASONS. FIRSTLY THE RESIDUAL APPROACH BREAKS UP A COMPLICATED TRANSFER PRICING PROBLEM INTO TWO MANAG EABLE STEPS. THE FIRST STEP DETERMINES A BASIC RETURN FOR ROUTINE FUNCTIONS BAS ED ON COMPARABLES. THE SECOND STEP ANALYSIS RETURNS TO OFTEN UNIQUE INTANG IBLE ASSETS BASED NOT ON COMPARABLES BUT ON RELATIVE VALUE WHICH IS IN MANY CASES A PRACTICAL SOLUTION. SECONDLY POTENTIAL CONFLICT WITH THE TAX AUTHORITI ES IS REDUCED BY USING THE TOW STEP RESIDUAL APPROACH SINCE IT REDUCES THE AMOUNT OF PROFIT THAT IS TO BE SPLIT IN THE POTENTIALLY MORE CONTROVERSIAL SECOND STEP. 6.3.17.3. IN STEP 1 OF THE RESIDUAL ANALYSIS A BAS IC RETURN FOR THE MANUFACTURING FUNCTION IS DETERMINED FOR COMPANY A AND COMPANY B. SPECIALLY A BENCHMARKING ANALYSIS IS PERFORMED TO SEARCH FOR COMPARABLE INDEPENDENT MANUFACTURES WHICH DO NOT OWN VALUABLE INTANGIBLE P ROPERTY. THE RESIDUAL PROFIT WHICH IS THE COMBINED PROFITS OF COMPANY A AND COMP ANY B AFTER DEDUCTING THE BASIS (ARMS LENGTH ) RETURN FOR THE MANUFACTURING FUNCTION IS THEN DIVIDED BETWEEN COMPANY A AND COMPANY B. THIS ALLOCATION IS BASED ON RELATIVE R & D EXPENSE WHICH ARE ASSUMED TO BE A RELIABLE KEY TO M EASURE THE RELATIVE VALUE OF EACH COMPANYS INTANGIBLE PROPERTY. SUBSEQUENTLY T HE NET PROFITS OF COMPANY A AND COMPANY B ARE CALCULATED IN ORDER TO WORK BACK TO A TRANSFER PRICE. ITA NOS. 5571/DEL/2011 & ITA 5896/DEL/2012 A.YS. 2007-08 / 2008-09 GLOBAL ONE INDIA P.LTD. NEW DELHI 31 17.8. IN PRACTICAL GUIDE TO U.S.TRANSFER PRICING BY ROB ERT T COLE CHAPTER 10 PSM AUTHORED BY ARLOW N.HIGINBOTHAM PG NOS.10-52 IT IS STATED AS FOLLOWS: THUS TO SUMMARIZE RPSM PROVIDES A TEST OF ARMS LENGTH TRANSFER PRICING BETWEEN VALUE- ADDED STAGES OF AN INTEGRATE D ENTERPRISE THAT IS CONSISTENT WITH THE SEPARATE ENTERPRISE STANDARD UN DER CONDITIONS OF RESOURCE MOBILITY AND COMPETITIVE CAPITAL AND PRODUCT MARKET S. BY VALUING FUNCTIONAL ACTIVITIES AND CAPITAL IN TERMS OF THE COMPETITIVE NORMS OF THE MARKET PLACE RPSM ATTRIBUTES EXTRA- NORMAL PROFIT OR LOSS IN PRO PORTION TO THE RELATIVE INVESTMENT COST (OR OTHER VALUATION) OF THE NON-ROU TINE INTANGIBLE ASSETS TO WHICH SUCH EXTRAORDINARY PROFITS PERTAINS. THIS APP ROACH IS CONSISTENT WITH THE IRS STATUTORY OBJECTIVE U/S 482 OF REQUIRING CONSID ERATION FOR INTANGIBLE PROPERTY TRANSFERRED IN A CONTROLLED TRANSACTION TO BE COMME NSURATE WITH THE INCOME ATTRIBUTABLE TO THE INTANGIBLE. IT IS ALSO CONSISTE NT WITH THE RESULT THAT WOULD OBTAIN AT ARMS LENGTH UNDER A HYPOTHETICAL JOINT V ENTURE AGREEMENT BETWEEN THE DIFFERENT PARTIES CONTRIBUTING THEIR RESPECTIVE INV ESTMENTS OF FUNCTIONAL AND ENTREPRENEURIAL CAPITAL. 17.9. RESIDUAL PROFIT SPLIT METHOD IN THE BOOK U.S.TRA NSFER PRICING BY HARLOW N.HIGINBOTAM AT CHAPTER 10 IT IS STATED AS FOLLOWS : 10.04 RESIDUAL PROFIT SPLIT METHOD AS ILLUSTRATED IN FIGURE 10-2 RPSM PROCEEDS IN TWO STEPS: STEP 1: FUNCTIONAL CAPITAL IS PROVIDED A RETURN DER IVED FROM DATA FOR FUNCTIONAL COMPARABLES I.E. INDEPENDENT COMPANIES PERFORMING SIMILAR ROUTINE MANUFACTURING OR DISTRIBUTION FUNCTIONS; AND STEP 2:THE REMAINING RESIDUAL OPERATING PROFIT OR LOSS IS ALLOCATED BASED ON RESIDUAL ENTREPRENEURIAL CAPITAL SO AS TO EQUALI ZE THE RATE OF RETURN ON SUCH CAPITAL ADJUSTED FOR MARKET DIFFERENCES IN THE COS T OF CAPITAL. IN ACTUAL PRACTICE IMPLEMENTATION OF THE RPSM CONC EPT OUTLINED ABOVE INVOLVES THE DETERMINATION OF A NUMBER OF INTERRELATED VALUA TIONS OF FUNCTIONAL AND ENTREPRENEURIAL ACTIVITIES IN DIFFERENT COUNTRIES A ND ECONOMIC CIRCUMSTANCES. THE EXISTING IRS REGULATIONS PROVIDE RELATIVELY LITTLE SPECIFIC GUIDANCE CONCERNING THESE VALUATIONS AND THUS LEAVE OPEN THE QUESTION OF HOW BEST TO DETERMINE THE RELATIVE VALUE OF EACH CONTROLLED TAXPAYERS CONTR IBUTION TO THE SUCCESS OF THE RELEVANT BUSINESS ACTIVITY IN A MANNER THAT REFLECT S THE FUNCTIONS PERFORMED RISKS ASSUMED AND RESOURCES EMPLOYED BY EACH PARTICIPANT IN THE RELEVANT BUSINESS ACTIVITY CONSISTENT WITH THE COMPARABILITY PROVISI ONS OF 1.482- 1(D) (3). ITA NOS. 5571/DEL/2011 & ITA 5896/DEL/2012 A.YS. 2007-08 / 2008-09 GLOBAL ONE INDIA P.LTD. NEW DELHI 32 18. WE NOW CONSIDER TNMM. IN AZTEK SOFTWARE AND TECH NOLOGY SERVICES (SUPRA) THE TNMM IS STATED AS FOLLOWS. TRANSACTIONAL NET MARGIN METHOD (TNMM) : RULE 10(B)(1)(E) DESCRIBES TNMM AS UNDER: (I) THE NET PROFIT MARGIN REALIZED BY THE ENTERPRISE FR OM AN INTERNATIONAL TRANSACTION ENTERED INTO WITH AN ASSOCIATED ENTERPR ISE IS COMPUTED IN RELATION TO COSTS INCURRED OR SALES EFFECTED OR ASS ETS EMPLOYED OR TO BE EMPLOYED BY THE ENTERPRISE OR HAVING REGARD TO ANY OTHER RELEVANT BASE; (II) THE NET PROFIT MARGIN REALIZED BY THE ENTERPRISE OR BY AN UNRELATED ENTERPRISE FROM A COMPARABLE UNCONTROLLED TRANSACTI ON OR A NUMBER OF SUCH TRANSACTIONS IS COMPUTED HAVING REGARD TO THE SAME BASE; (III) THE NET PROFIT MARGIN REFERRED TO IN SUB CLAUSE (II ) ARISING IN COMPARABLE UNCONTROLLED TRANSACTIONS IS ADJUSTED TO TAKE INTO ACCOUNT THE DIFFERENCES IF ANY BETWEEN THE INTERNATIONAL TRAN SACTION AND THE COMPARABLE UNCONTROLLED TRANSACTIONS OR BETWEEN TH E ENTERPRISES ENTERING INTO SUCH TRANSACTIONS WHICH COULD MATERI ALLY AFFECT THE AMOUNT OF NET PROFIT MARGIN IN THE OPEN MARKET; (IV) THE NET PROFIT MARGIN REALIZED BY THE ENTERPRISE AN D REFERRED TO IN SUB CLAUSE (I) IS ESTABLISHED TO BE THE SAME AS THE NET PROFIT MARGIN REFERRED TO IN SUB CLAUSE (III); (V) THE NET PROFIT MARGIN THUS ESTABLISHED IS THEN TAKE N INTO ACCOUNT TO ARRIVE AT AN ARMS LENGTH PRICE IN RELATION TO THE INTERNA TIONAL TRANSACTION. THE TNMM REQUIRES ESTABLISHING COMPARABILITY AT A B ROAD FUNCTIONAL LEVEL. IT REQUIRES COMPARISON BETWEEN NET MARGINS DERIVED FRO M THE OPERATION OF THE UNCONTROLLED PARTIES AND NET MARGIN DERIVED BY AN A E ON SIMILAR OPERATION. UNDER THIS METHOD THE NET PROFIT MARGIN REALIZED B Y AN AE FROM AN INTERNATIONAL TRANSACTION IS COMPUTED IN RELATION TO A PARTICULAR FACTOR SUCH AS COSTS INCURRED SALES ASSETS UTILIZED ETC. THE NET PROFIT MARGIN REALIZED BY AN AE IS COMPARED WITH NET PROFIT MARGIN OF THE UNCONTROLLED TRANSACT IONS TO ARRIVE AT THE ALP. THE TNMM IS SIMILAR TO RPM AND CPM TO THE EXTENT THAT I T INVOLVES COMPARISON OF MARGIN EARNED IN A CONTROLLED SITUATION WITH MARGIN S EARNED FROM COMPARABLE UNCONTROLLED SITUATION. THE ONLY DIFFERENCE IS THA T IN THE RPM AND CPM METHODS COMPARISON IS OF MARGINS OF GROSS PROFITS AND WHEREAS IN TNMM THE COMPARISON IS ON MARGINS OF NET PROFIT. ITA NOS. 5571/DEL/2011 & ITA 5896/DEL/2012 A.YS. 2007-08 / 2008-09 GLOBAL ONE INDIA P.LTD. NEW DELHI 33 TNMM REQUIRES COMPARISON BETWEEN NET MARGINS DERIVE D FROM THE OPERATIONS OF THE UNCONTROLLED PARTIES AND NET MARGINS DERIVED BY AN AE FROM SIMILAR OPERATIONS. NET MARGIN IS INDICATED BY THE RATE OF RETURN ON SALES OR COST OR OPERATING ASSETS AND THIS FORMS THE BASIS FOR TNMM . A FUNCTIONAL ANALYSIS OF THE TESTED PARTY OR THE INDEPENDENT ACTIONS ARE COMPARA BLE AND THE ADJUSTMENTS THAT ARE REQUIRED TO BE MADE TO OBTAIN RELIABLE RES ULTS. THE TESTED PARTY WOULD HAVE TO CONSIDER OTHER FACTORS LIKE COST OF ASSETS OF COMPARABLE COMPANIES ETC. WHILE APPLYING THE RETURN ON ASSETS MEASURE. ORDIN ARILY THE TESTED PARTY HAS TO BE THE PARTY PROVIDED SERVICES BECAUSE IT IS ON THE BASIS OF RATE OF RETURN ON SALES OR COST OR OPERATING ASSETS THAT TRANSACTIONA L MARGIN IS COMPUTED. THESE PARAMETERS GENERALLY AVAILABLE IN THE CASE OF PARTY PROVIDING SERVICE 18.1 . THE IN ITS REVIEW OF COMPARABILITY AND METHODS DT. 22 ND JULY 201 0 IN PART III B TRANSACTIONAL NET MARGIN METHOD B I PAGE 33 PARAS 2.58 TO 2.59 HELD AS UNDER. B. TRANSACTIONAL NET MARGIN METHOD B.1. IN GENERAL 2.58 THE TRANSACTIONAL NET MARGIN METHOD EXAMINES T HE NET PROFIT RELATIVE TO AN APPROPRIATE BASE (E.G. COSTS SALES ASSETS) THA T A TAXPAYER REALIZES FROM A CONTROLLED TRANSACTION (OR TRANSACTIONS THAT ARE APPROPRIATE TO AGGREGATE UNDER THE PRINCIPLES OF PARAGRAPHS 3.9 3.12). THUS A TRANSACTIONAL NET MARGIN METHOD OPERATES IN A MANNER SIMILAR TO THE COST PLU S AND RESALE PRICE METHODS. THIS SIMILARITY MEANS THAT IN ORDER TO BE APPLIED R ELIABLY THE TRANSACTIONAL NET MARGIN METHOD MUST BE APPLIED IN A MANNER CONSISTEN T WITH THE MANNER IN WHICH THE RESALE PRICE OR COST PLUS METHOD IS APPLI ED. THIS MEANS IN PARTICULAR THAT THE NET PROFIT INDICATOR OF THE TAX PAYER FROM THE CONTROLLED TRANSACTION ( OR TRANSACTIONS THAT ARE APPROPRIATE TO AGGREGATE UND ER THE PRINCIPLES OF PARAGRAPHS 3.9-3.12) SHOULD IDEALLY BE ESTABLISHED BY REFERENCE TO THE NET PROFIT INDICATOR THAT THE SAME TAX PAYER EARNS IN COMPAR ABLE UNCONTROLLED TRANSACTIONS I.E. BY REFERENCE TO INTERNAL COMPAR ABLES (SEE PARAGRAPHS 3.27- 3.35). A FUNCTIONAL ANALYSIS OF THE CONTROLLED AND UNCONTROLLED TRANSACTIONS IS REQUIRED TO DETERMINE WHETHER THE TRANSACTIONS ARE COMPARABLE AND WHAT ADJUSTMENTS MAY BE NECESSARY TO OBTAIN RELIABLE RES ULTS. FURTHER THE OTHER REQUIREMENTS FOR COMPARABILITY AND IN PARTICULAR T HOSE OF PARAGRAPHS 2.69-2.75 MUST BE APPLIED. ITA NOS. 5571/DEL/2011 & ITA 5896/DEL/2012 A.YS. 2007-08 / 2008-09 GLOBAL ONE INDIA P.LTD. NEW DELHI 34 2.59. A TRANSACTIONAL NET MARGIN METHOD IS UNLIKELY TO BE RELIABLE IF EACH PARTY TO A TRANSACTION MAKES VALUABLE UNIQUE CONTRIBUTIO NS SEE PARAGRAPH 2.4. IN SUCH A CASE A TRANSACTIONAL PROFIT SPLIT METHOD WI LL GENERALLY BE THE MOST APPROPRIATE METHOD SEE PARAGRAPH 2.109 . HOWEVER A ONE-SIDED METHOD (TRADITIONAL TRANSACTION METHOD OR TRANSACTIONAL NE T MARGIN METHOD) MAY BE APPLICABLE IN CASES WHERE ONE OF THE PARTIES MAKES ALL THE UNIQUE CONTRIBUTIONS INVOLVED IN THE CONTROLLED TRANSACTION WHILE THE O THER PARTY DOES NOT MAKE ANY UNIQUE CONTRIBUTION. IN SUCH A CASE THE TESTED PA RTY SHOULD BE THE LESS COMPLEX ONE. SEE PARAGRAPHS 3.18-3.19 FOR A DISCUSSION OF THE NOTION OF TESTED PARTY. 18.2 . IN THE WORKING DRAFT OF A CHAPTER OF THE PRACTICA L MANUAL IN TRANSFER PRICING FOR DEVELOPING COUNTRIES IN CHAPTER 5 TRAN SFER NET MARGIN METHOD IS DISCUSSED AT PARA 2.1. TRANSACTIONAL NET MARGIN METHOD 2.1. DEFINITION AND CHOICE OF TESTED PARTY THE TRANSACTIONAL NET MARGIN METHOD (TNMM) IS A P ROFIT BASED METHOD THAT CAN BE USED TO APPLY THE ARMS LENGTH PRINCIPLE. THE T NMM CAN BE APPLIED ON EITHER THE RELATED PARTY MANUFACTURER OR THE RELATED PARTY DISTRIBUTOR AS THE TESTED PARTY FOR TRANSFER PRICING PURPOSES. THE TNMM EXAMINES THE NET PROFIT MARGIN RELATIVE TO AN APPROPRIATE BASE (E.G. COSTS SALES ASSETS) THAT A TAX PAYER REALIZES FRO M A CONTROLLED TRANSACTION (OR TRANSACTIONS THAT ARE APPROPRIATE TO BE AGGREGATED) . THE PROFIT MARGIN INDICATORS ARE DISCUSSED IN PARAGRAPH 2.3 BELOW. THE TNMM COMPARES THE NET PROFIT MARGIN (RELATIVE T O AN APPROPRIATE BASE) THAT THE TESTED PARTY EARNS IN THE CONTROLLED TRANSACTIO NS TO THE SAME NET PROFIT MARGINS EARNED BY THE TESTED PARTY IN COMPARABLE UN CONTROLLED TRANSACTIONS OR ALTERNATIVELY BY INDEPENDENT COMPARABLE COMPANIES. AS SUCH THE TNMM IS A MORE INDIRECT METHOD THAN THE COST PLUS/RESALE PRIC E METHOD THAT COMPARES GROSS MARGINS. IT IS ALSO A MUCH MORE INDIRECT METH OD THAN THE CUP METHOD THAT COMPARES PRICES BECAUSE IT USES NET PROFIT MARGINS TO DETERMINE (ARMS LENGTH) PRICES. ONE SHOULD BEAR IN MIND THAT MANY FACTORS MAY AFFECT NET PROFIT MARGINS BUT MAY HAVE NOTHING TO DO WITH TRANSFER P RICING. ITA NOS. 5571/DEL/2011 & ITA 5896/DEL/2012 A.YS. 2007-08 / 2008-09 GLOBAL ONE INDIA P.LTD. NEW DELHI 35 THE TNMM IS USED TO ANALYSE TRANSFER PRICING ISSUE S INVOLVING TANGIBLE PROPERTY INTANGIBLE PROPERTY OR SERVICES. WHEN THE TNMM IS APPLIED ON CONTROLLED TRANSACTIONS INVOLVING TANGIBLE PROPERTY THE TESTE D PARTY IN THE ANALYSIS CAN EITHER BE THE RELATED PARTY MANUFACTURER OR THE REL ATED PARTY DISTRIBUTOR. THE CHOICE OF THE TESTED PARTY DEPENDS ON THE AVAILABIL ITY OF COMPARABLE DATA. THIS USUALLY IMPLIES THAT THE TNMM IS APPLIED TO THE LEA ST COMPLEX OF THE RELATED PARTIES INVOLVED IN THE CONTROLLED TRANSACTION BEC AUSE GENERALLY MORE COMPARABLE DATA WILL THEN BE IN EXISTENCE AND FEWER ADJUSTMENTS WILL BE REQUIRED TO ACCOUNT FOR DIFFERENCES IN FUNCTIONS AND RISKS B ETWEEN THE CONTROLLED AND UNCONTROLLED TRANSACTIONS. IN ADDITION THE TESTED PARTY SHOULD NOT OWN VALUABLE INTANGIBLE PROPERTY. THIS BY THE WAY IS ALSO THE REASON WHY IT IS RECOMMENDED TO SELECT THE LEAST COMPLEX ENTITY FOR THE APPLICAT ION OF THE COST PLUS METHOD OR RESALE PRICE METHOD. 18.3 . THE TRANSFER PRICING IN THE CASE AT HAND HA S APPLIED THE TNMM METHOD. WHILE DOING SO AT PARA 3.7 HE CONSIDER ED THE OBJECTION OF THE ASSESSEE TO THE USE OF TNMM AS THE MAM. HE OBSERVED AS FOLLOWS: THAT THE ASSESSEES BUSINESS DOES NOT HAS ANY INT EGRATION WITH THE OTHER GROUP ENTITIES HAS ALREADY BROUGHT IN SUFFICIENT DETAILS IN THE EARLIER PART OF THIS ORDER. THE ASSESSEE RUNS ITS BUSINESS INDEPENDENTLY IN IN DIA. FOR THE DEPLOYMENT OF THEIR PARTY ENTITIES FOR THE PROLIFERATION OF ITS N ETWORK SERVICES THERE IS NOTHING ON RECORD TO SHOW THAT THE ASSESSEE IS GETTING ANY HELP OR LEVERAGE FROM THE OTHER GROUP ENTITIES. THE ASSESSEE IS NEGOTIATING WITH THE INDIAN REGULARATORS ALL BY ITSELF. THE ASSESSEE IS OPERATING IN INDIA AS A STANDALONE ENTITY FOR SETTING UP THE OPERATIONAL REQUIREMENTS IN INDIA. THEREFORE THERE IS NO CASE TO SAY THAT TNMM DOES NOT QUALIFY TO BE THE MAM FOR ITS REASON. ITA NOS. 5571/DEL/2011 & ITA 5896/DEL/2012 A.YS. 2007-08 / 2008-09 GLOBAL ONE INDIA P.LTD. NEW DELHI 36 18.4 . IN OUR VIEW THE TPO HAS ERRED ON FACTS. THE R EVENUES IN THE CASE OF THE ASSESSEE ARE GENERATED IN A TRANSACTION WHE RE THERE IS CONTRIBUTION FROM MULTIPLE ENTITIES. IT IS TRUE THAT THE ASSESSEE RU NS ITS BUSINESS INDEPENDENTLY IN INDIA. THIS LEADS TO A CONCLUSION THAT THE ASSESSE E IS AN INDEPENDENT ENTREPRENEUR . BUT WHEN A TRANSACTION IS INTEGRATE D AND INTERRELATED AND WHEN COSTS ARE INCURRED BY MULTIPLE ENTITIES AND THE REV ENUES ARE TO BE APPORTIONED TO MULTIPLE ENTITIES THEN THE FACTUAL CONCLUSIONS OF THE T.P.O HAVE TO BE VACATED. 18.5 . TRANSACTION NET MARGIN METHOD COMPARES THE PROFI T MARGIN OF TAX PAYER ARISING FROM A NON ARMS LENGTH TRANSACTION OR A GROUP OF SUCH SIMILAR TRANSACTIONS WITH THE PROFIT MARGIN REALIZED BY THE ASSESSEE WITH ITS A.E. ON A SIMILAR TRANSACTION WHEREAS THE PSM ALLOCATES OPE RATING PROFITS OR LOSSES FROM CONTROLLED TRANSACTIONS ON THE PRINCIPLE OF RELA TIVE CONTRIBUTIONS MADE BY EACH PARTY IN CREATING THE COMBINED REVENUES. 18.6. THE OBJECTION OF THE ASSESSEE IS THAT THE TNMM D OES NOT TAKE INTO ACCOUNT COMMERCIAL/BUSINESS REASONS FOR LOSSES. TH E TPO REJECTED THIS ARGUMENT. HE HELD THAT THE ASSESSEE HAS NOT BEEN AB LE TO IDENTIFY THE REASONS THAT HAS LEAD TO INCURRANCE OF LOSS. HE CONCLUDED AS FOLLOWS: THE ADMINISTRATOR CAN EXAMINE THE RECORDS OF THE O PERATING ENTITY BUT NOT VICE VERSA IN ANY DISPUTE THE DECISION OF THE ADMINIST RATOR SHALL BE BINDING. NO INDEPENDENT ENTITY WOULD HAVE AGREED TO SUCH TERMS NOR WOULD IT HAVE AGREED TO BE TIED DOWN BY THE FINANCIAL PERFORMANCE OF AN OTHER ENTITY/ENTITIES OVER ITA NOS. 5571/DEL/2011 & ITA 5896/DEL/2012 A.YS. 2007-08 / 2008-09 GLOBAL ONE INDIA P.LTD. NEW DELHI 37 WHICH/WHOM IT HAS LITTLE OR NO CONTROL. THE ASSE SSEES ARRANGEMENT WITH THE A.E. AND THE USE OF PSM TO JUSTIFY ITS FINANCIAL RES ULT DOES NOT ANSWER THE ARMS LENGTH PRINCIPLE. 18.7 . IN OUR VIEW THE ARGUMENT OF THE ASSESSEE THAT I N CASES WHERE THERE ARE COMMERCIAL LOSSES TNMM CANNOT BE APPLIED CANNOT BE ACCEPTED AS A GENERAL RULE. TO THIS EXTENT WE AGREE WITH THE CO NCLUSIONS OF THE T.P.O. T.N.M.M. CAN BE APPLIED EVEN IN CASES WHERE THERE A RE COMMERCIAL OR OTHER LOSSES. AT BEST SUITABLE ADJUSTMENTS MAY BE ASKE D FOR. ON THE ROLE OF THE ADMINISTRATOR WE WILL BE DISCUSSING THE SAME SEPARA TELY. 18.8. THE NEXT OBJECTION OF THE ASSESSEE IS THAT TNMM CANNOT BE USED FOR BENCH MARKING RETURNS EARNED BY THE NUMBER OF COMPLEX ENTITIES/ENTREPRENEUR WHERE EACH MAKE VALUABLE UN IQUE CONTRIBUTIONS. THE TPO HAS NOT SPECIFICALLY DEALT WITH THIS OBJECTION OF THE ASSESSEE. WE FIND MUCH FORCE IN THIS CONTENTION OF THE ASSESSEE AND AGREE WITH THE SAME. WE ARE SUPPORTED BY OECD GUIDELINES ON THIS ISSUE. AT PAR A 2.59 OF THE OECD GUIDELINES IT IS STATED AS FOLLOWS: A TRANSACTIONAL NET MARGIN METHOD IS UNLIKELY TO BE RELIABLE IF EACH PARTY TO A TRANSACTION MAKES VALUABLE UNIQUE CONTRIBUTIONS S EE PARAGRAPH 2.4. IN SUCH A CASE A TRANSACTIONAL PROFIT SPLIT METHOD WILL GENE RALLY BE THE MOST APPROPRIATE METHOD ( SEE PARAGRAPH 2.109) . IN SUCH A CASE A TRANSACTIONAL PROFIT SPLIT METHOD WILL GENERALLY BE THE MOST APPROPRIATE METHO D. 18.9 EVEN OTHERWISE WE FIND THAT THE TPO HAS WHILE AD OPTING THE TNMM METHOD CONSIDERED FOUR COMPARABLES I.E. (I) CITY ONLINE SERVICES LTD. (II) HCL INFINET LTD. (III) SIFY LTD. AND (IV) SOUTHE RN ONLINE BIO TECHNOLOGIES LTD. ITA NOS. 5571/DEL/2011 & ITA 5896/DEL/2012 A.YS. 2007-08 / 2008-09 GLOBAL ONE INDIA P.LTD. NEW DELHI 38 18.10. IN ALL THESE CASES THE OPERATING PROFIT AT THE ENTITY LEVEL HAS BEEN TAKEN FOR THE PURPOSE OF BENCH MARKING WITH TH E ENTITY LEVEL PROFITS OF THE ASSESSEE AND ADJUSTMENTS WERE MADE. TNMM DOES NOT CONTEMPLATE BENCH MARKING AT THE ENTITY LEVEL. THE RULES CONTEMPLATE BENCH MARKING AT THE TRANSACTION LEVEL. FOR THIS PROPOSITION WE DRAW ST RENGTH FROM THE FOLLOWING CASE LAWS: (I) UCB INDIA (P) LTD. VS. ACIT 30 SOT 95 (MUM); (II) A.C.I.A. VS. TES DIAM 37 SOT 341. THUS WE ARE UNABLE TO UPHOLD THE ORDER OF THE T.P. O ON THIS GROUND ALSO. HENCE FOR ALL THESE REASONS T.N.M.M. IS HELD AS NOT THE M.A.M. IN THE FACTS AND CIRCUMSTANCES OF THE CASE. 19. IN THE CASE AT HAND WE ARE OF THE CONSIDERED OPI NION THAT THE PROFIT SPLIT METHOD (PSM) IS THE M.A.M FOR THE REASON THAT THE ASSESSEE GENERATES REVENUE OUT OF OPERATIONS THAT ARE HIGHLY INTEGRAT ED. WHEN ONE TRANSACTION (EXAMPLE TRANSMITTING DATA FROM A DESTINATION IN O NE COUNTRY TO A DESTINATION IN A DIFFERENT COUNTRY IN A SECURED MANNER) REQU IRES DEPLOYMENT OF ASSETS AND FUNCTIONS OF DIFFERENT ENTITIES LOCATED IN DIFFERE NT GEOGRAPHICAL LOCATIONS TO ULTIMATELY DELIVER SERVICES AND WHEN SUCH COMBINE D EFFORTS GENERATE REVENUES THE MAM FOR DETERMINING ARMS LENGTH PRICE IS PRO FIT SPLIT METHOD (PSM). 19.1. IN OUR CONSIDERED OPINION THE TRANSFER PRICING OFFICER IS WRONG IN REJECTING PSM ON THE GROUND THAT IT IS NOT POSSIB LE TO DETERMINE THE COST INCURRED BY THE INDIAN ENTITY SEPARATELY. THE COST INCURRED BY THE ASSESSEE IS ITA NOS. 5571/DEL/2011 & ITA 5896/DEL/2012 A.YS. 2007-08 / 2008-09 GLOBAL ONE INDIA P.LTD. NEW DELHI 39 AVAILABLE ON RECORD. THE ENTITY MAINTAINS BOOKS AND THE SAME ARE SUBJECT TO AUDIT. WHAT IS TO BE SEEN IS THE CONTRIBUTION OF T HE ENTITIES RESOURCES TO A TRANSACTION OR TO A SERIES OF SIMILAR TRANSACTION S. IN OUR VIEW THIS FINDING IS NOT CORRECT. HENCE THIS GROUND OF THE T.P.O. TAK EN FOR REJECTING APPLICATION OF PSM AS THE MAM IS NOT SUSTAINABLE. THE TRANSFER PRICING OFFICER HAD AFTER A DETAIL ENQUIRY IN THE EARLIER ASSESSMENT YEARS ACCEPTED PSM AS THE MAM. TH IS BEING SO IN OUR VIEW REJECTION OF THIS METHOD ON THE GROUND THAT RESJUDI CATA DOES NOT APPLY TO INCOME TAX PROCEEDINGS IS NOT CORRECT. RECENTLY THE HONBLE SUPREME COURT IN THE CASE OF CIT VS. EXCEL INDUSTRIES LTD. HAS HELD T HAT THE REVENUE CANNOT BE ALLOWED TO FLIP-FLOP ON THE ISSUE. CONSISTENCY SHOU LD BE A RULE RATHER THAN AN EXCEPTION. THERE ARE A NUMBER OF OTHER DECISIONS ON THIS ISS UE. SUFFICE IT TO SAY THAT THE T.P.O. IN THIS CASE HAS NOT BROUG HT OUT ANY VALID REASONS TO DEPART FROM THE EARLIER VIEW OF HIS PREDECESSOR. 19.2. THE TPOS OPINION THAT ACCEPTANCE OF PSM IN OT HER JURISDICTIONS AS OF NO CONSEQUENCE TO OUR MIND IS ALSO INCORRECT. NO DOUBT THE ARMS LENGTH PRICE HAS TO BE DETERMINED WITH REFERENCE TO THE IN DIAN TRANSFER PRICING REGULATIONS ONLY. AT THE SAME TIME GUIDANCE CAN BE TAKEN FROM OECD COMMENTARIES UN GUIDELINES AND OTHER SUCH LITERATU RE.. THE HONBLE SUPREME COURT ON A NUMBER OF OCCASIONS DID REFER TO COM MENTARIES OF OECD UN ETC. WHILE ARRIVING AT CONCLUSIONS. ONE SUCH CASE IS A ZADI BACHAO ANDOLAN 184 CTR SC 450. EVEN THE INDIAN TRANSFER PRICING REGULATION RECOGNIZE THIS ASPECT AS ITA NOS. 5571/DEL/2011 & ITA 5896/DEL/2012 A.YS. 2007-08 / 2008-09 GLOBAL ONE INDIA P.LTD. NEW DELHI 40 EVIDENT FROM THE INTRODUCTION OF RULE 10 AB WHICH ALLOWS THE USE OF ANY OTHER METHOD WHICH IS GENERALLY ACCEPTED FOR DETERMINING ALP. 20. ON THE T.P.OS OBJECTION THAT RELIABLE EXTERNAL M ARKET DATA IS NOT AVAILABLE WE FIND THAT THE ASSESSEE HAS GIVEN COMP ARABLES WHILE DETERMINING ALP OF THE BASIC ROUTINE RATE OF RETURN. AT THI S FIRST STAGE THE REQUIREMENT OF IDENTIFYING COMPARABLES AND BENCH MARKING THE SAME WITH THE BASIC RATE OF RETURN ADOPTED BY THE ASSESSEE IS MET. THE TPO SHO ULD HAVE EXAMINED THE COMPARABLES TAKEN BY THE ASSESSEE WHILE ALLOCATING THE BASIC RATE OF RETURN TO EACH OF THE OPERATING ENTITY FOR UNDERTAKING THE SERVICES AND IF HE WAS NOT SATISFIED WITH THESE COMPARABLES OR WAS OF THE OP INION THAT THE ALP SHOULD BE DIFFERENT HE SHOULD HAVE GIVEN ADEQUATE REASONS AND NOT HAVE ADOPTED FRESH COMPARABLES. ON THE OBJECTION OF THE T.P.O. THAT THE ASSESSEE HAS NOT PUT FORTH ANY EVIDENCE THAT IT HAS UNIQUE INTANGIBLES WE HO LD THAT PSM CAN BE ADOPTED AS MAM UNDER THE DOMESTIC TP REGULATIONS EVEN I N CASES INVOLVING MULTIPLE INTERRELATED INTERNATIONAL TRANSACTIONS WHICH CANN OT BE EVALUATED SEPARATELY FOR DETERMINING ALP OF ANY ONE TRANSACTION. WHEN THE TRANSACTION INVOLVES CONTRIBUTIONS OF MULTIPLE ENTITIES AND ARE INTEGRAT ED AND INTERRELATED AND THEY CANNOT BE SEPARATELY EVALUATED FOR THE PURPOSE OF D ETERMINING ALP OF ANY ONE TRANSACTION THE PSMP IS THE MAM. HENCE IN O UR VIEW USE OF UNIQUE INTANGIBLES IS NOT A MUST FOR ADOPTING PSM. IN AN Y EVENT WE HAVE CONSIDERED THE FACTS OF THIS CASE AND WE HAVE ELSEWHERE IN THIS ORDER GIVEN A FINDING THAT THE ASSESSEE DOES POSSESS UNIQUE INTANGIBLES I N THE FIELD OF DATA TRANSFER ITA NOS. 5571/DEL/2011 & ITA 5896/DEL/2012 A.YS. 2007-08 / 2008-09 GLOBAL ONE INDIA P.LTD. NEW DELHI 41 AND COMMUNICATIONS AND COMPARING THE OPERATIONS W ITH A SIMPLE E MAIL AND AS A PLUG IN OPERATOR IS NOT FACTUALLY CORRECT. IF TH E ASSESSEE IS HELD TO BE A SIMPLE EMAIL OPERATOR THEN IT IS TO BE EXPLAINED AS TO WH Y REPUTED GLOBAL ENTEPRISES WOULD PAY THEM FOR DATA TRANSMISSION WHEN E MAIL I S FREE. THE ASSESSEE DOES OFFER UNIQUE SERVICES AS COMPARED TO AN ORDINARY EMA IL SERVICE AND IT IS THESE UNIQUE SERVICES WHICH ARE ITS INTANGIBLES. 20.1. WE ALSO HOLD THAT THE FACTUM OF THE ASSESSEE HA VING A LOSS IS NO GROUND TO REJECT PSM AS THE MAM. THE DECISION AS TO WHAT IS THE MAM DOES NOT DEPEND ON THE FACTOR AS TO WHETHER AN AS SESSEE HAS A LOSS OR HAS A PROFIT. ON THE OBJECTION OF THE T.P.O. REJECTING T HE ALLOCATION DONE BY THE ADMINISTRATOR WE FIND THAT THE ARRANGEMENT WITH TH E AE UNDER THE AGREEMENT DEMONSTRATES THAT THE ADMINISTRATOR DOES NOT HAVE ABSOLUTE DISCRETIONARY POWER TO DETERMINE INTER GROUP PAYMENT. THE AGREEM ENT PROVIDES THAT DISPUTES IF NOT REASONABLY RESOLVED CAN BE REFER RED FOR ARBITRATION. THUS THE CONCLUSION DRAWN BY THE T.P.O. IS ERRONEOUS. IN O UR VIEW THIS CANNOT BE A GROUND FOR REJECTION OF PSM. THE CONCLUSION OF THE T.P.O. THAT THE PSM IS ADOPTED ONLY TO CAMOUFLAGE THE LOSS AT THE NET LE VEL IS MERELY AN ALLEGATION WHICH IN OUR VIEW IS NOT SUBSTANTIATED OR DEM ONSTRATED BY THE T.P.O. AND HENCE IS DEVOID OF MERIT. 20.2. WHEN DETERMINING AS TO WHICH IS THE MAM THE TPO IS REQUIRED TO PRIMARILY EXAMINE THE FUNCTIONAL PROFILE OF THE ASS ESSEE AND THE NATURE OF THE ITA NOS. 5571/DEL/2011 & ITA 5896/DEL/2012 A.YS. 2007-08 / 2008-09 GLOBAL ONE INDIA P.LTD. NEW DELHI 42 INTERNATIONAL TRANSACTION AND HAVING UNDERTAKEN S UCH AN EXERCISE WE ARE OF THE VIEW THE PSM IS THE MAM. 20.3. THE CONTENTION OF THE LD. DEPARTMENTAL REPRESENT ATIVE THAT THE ASSESSEE IS AN E MAIL SERVICE PROVIDER AND THAT T HE ASSESSEE IS A PLUG IN ENTITY IS NOT SUPPORTED BY ANY DOCUMENTATION. THI S SUBMISSION IN OUR VIEW IS NOT FACTUALLY CORRECT. IF THE ASSESSEE DID NOT HAVE ANY UNIQUE INTANGIBLES THEN NO CLIENT WOULD HAVE ENGAGED THEM FOR TRANSMISSION OF ANY DATA AS THE USUAL INTERNET FACILITY AND E-MAIL FACILITY ARE AVAILABLE FREE OF COST. BUT FOR THESE UNIQUE INTANGIBLES NOBODY WOULD UTILIZE THE SERVICES OF THE ASSESSEE COMPANY AND ITS ASSOCIATE ENTERPRISES. THE CLAIM OF THE ASSESSEE TH AT IT HAS CERTAIN TECHNOLOGIES WHICH MAINTAIN THE SECRECY AND CONFIDENTIALITY OF A COMMUNICATION AND ALSO ENSURES SAFE SECURE AND TIMELY DELIVERY IS HAVIN G SIGNIFICANT SUBSTANCE. ON THESE FACTS WE COME TO THE CONCLUSION THAT THE A SSESSEE DOES HAVE UNIQUE INTANGIBLES IN THE FIELD OF DATA TRANSFER AND COMMU NICATIONS. 20.4 . THE TPOS PRIMARY OBJECTION IS THAT PSM METHOD HAS NOT BEEN CORRECTLY APPLIED. IT IS THE VIEW OF THE T.P.O. THAT BENCH MA RKING WITH THE HELP OF COMPARABLES IS NOT DONE WHILE ALLOCATING RESIDUARY PROFITS. WE WOULD DEAL WITH THIS ISSUE IN THE LATER PART OF THIS ORDER. IN OUR VIEW THE TPO OUGHT NOT TO REJECT THE METHOD ITSELF WHEN HE FEELS THAT IT IS NOT CORRECTLY APPLIED. THE PROPER COURSE AVAILABLE TO HIM IS TO APPLY THIS METHOD IN THE MANNER IN WHICH HE FEELS IT SHOULD HAVE BEEN APPLIED. 20.5. THE ASSESSEE IN THIS CASE HAS ADOPTED RESIDUARY P ROFIT SPLIT METHOD. ITA NOS. 5571/DEL/2011 & ITA 5896/DEL/2012 A.YS. 2007-08 / 2008-09 GLOBAL ONE INDIA P.LTD. NEW DELHI 43 AS EXPLAINED IN VARIOUS COMMENTARIES RESIDUAL PSM INVOLVES: I) DETERMINATION OF ROUTINE RETURN II) ALLOCATION OF RESIDUARY PROFITS. AT THE STAGE OF DETERMINATION OF ROUTINE PROFITS AS ALREADY STATED BENCH MARKING HAS TO BE DONE BY THE ASSESSEE WITH RELIAB LE EXTERNAL MARKET DATA FROM UNCONTROLLED TRANSACTIONS. 20.6 . COMING TO THE ALLOCATION OF RESIDUARY PROFITS IN OUR VIEW THOUGH THE RULES DO SUGGEST THAT BENCHMARKING SHOULD BE DONE W ITH EXTERNAL UNCONTROLLED TRANSACTIONS WE FIND THAT THIS IS AN IMPOSSIBILIT Y IN THIS CASE AS IT IS NOT POSSIBLE TO GET A COMPARABLE. ON A PERUSAL OF THE VARIOUS COMMENTARIES WE ARE OF THE VIEW THAT SUCH ALLOCATION CAN BE DONE BASED ON HOW MUCH EACH INDEPENDENT ENTERPRISE MIGHT HAVE CONTRIBUTED. RELA TIVE CONTRIBUTION HAS TO BE DETERMINED BASED ON KEY VALUE DRIVERS. BENCH MARK ING AT THIS STAGE IS NOT PRACTICABLE AS COMPARABLES HAVING SIMILAR MULTIPLE INTERRELATED AND INTEGRATED TRANSACTIONS WOULD BE DIFFICULT TO FIND. THUS IN OUR VIEW IN SUCH A SITUATION A HARMONIOUS INTERPRETATION OF THE PROVISIONS IS REQU IRED TO MAKE THE RULE WORKABLE SO AS TO ACHIEVE THE DESIRED RESULT OF D ETERMINATION OF THE ALP. THE SECONDARY STAGE OF ALLOCATION OF RESIDUARY PROFITS IS TO BE DONE ON THE BASIS OF CONTRIBUTION OF EACH ENTITY AS STATED IN THE COMME NTARIES AND GUIDELINES REFERRED ABOVE AS THESE ARE GENERALLY ACCEPTED . 20.7. THE ARGUMENT OF THE LD. COUNSEL OF THE ASSESSEE THAT THE PROVISIONS HAVE TO BE READ DOWN CANNOT BE ACCEPTED AS LAW HA S TO BE INTERPRETED AS ITA NOS. 5571/DEL/2011 & ITA 5896/DEL/2012 A.YS. 2007-08 / 2008-09 GLOBAL ONE INDIA P.LTD. NEW DELHI 44 PROVIDED IN THE STATUTE. NEVERTHELESS TO MAKE THE PROVISIONS WORKABLE A HARMONIOUS INTERPRETATION IS THE REQUIREMENT AS H ELD BY THE SUPREME COURT IN CIT VS. J.H.GOTLA REPORTED IN 156 ITR 985. SUCH H ARMONIOUS INTERPRETATION IN OUR VIEW DOES NOT TANTAMOUNT TO MISREADING THE PR OVISIONS OR TO THE READING DOWN OF A PROVISION. BOTH THE OECD TRANSFER PRICIN G GUIDELINES AS WELL AS THE UN DRAFT METHOD OF TRANSFER PRICING FOR DEVELOPING COUNTRIES SUGGEST THAT AN ALLOCATION OF RESIDUAL PROFITS UNDER PSM SHOULD BE DONE BASED ON CONTRIBUTIONS BY EACH ENTITY. 20.8. WE HAVE ALREADY EXTRACTED THE OECD TRANSFER PRICIN G GUIDELINES AT PARA 17.4. AT PARA 2.121 IT IS STATED AS FOLLOWS: IN THE SECOND STAGE ANY RESIDUAL PROFIT (OR LOSS) REMAINING AFTER THE FIRST STAGE DIVISION WOULD BE ALLOCATED AMONG THE PARTIES BASED ON AN ANALYSIS OF THE FACTS AND CIRCUMSTANCES FOLLOWING THE GUIDANCE AS DESCRIBED AT PARAGRAPHS 2.32 TO 2.1 45 FOR SPLITTING THE COMBINED PROFITS. THE PARAGRAPHS READ AS FOLLOWS. C.3.4. HOW TO SPLIT THE COMBINED PROFITS C.3.4.1. IN GENERAL 2.132 : THE RELEVANCE OF COMPARABLE UNCONTROLLED TR ANSACTIONS OR INTERNAL DATA AND THE CRITERIA USED TO ACHIEVE AN ;ARMS LE NGTH DIVISION OF THE PROFITS DEPEND ON THE FACTS AND CIRCUMSTANCES OF THE CASE. IT IS THEREFORE NOT DESIRABLE TO ESTABLISH A PRESCRIPTIVE LIST OF CRITERIA OR ALL OCATION KEYS. SEE PARAGRAPHS 2.115-2.117 FOR GENERAL GUIDANCE ON THE CONSISTENCY OF THE DETERMINATION OF THE SPLITTING FACTORS. IN ADDITION THE CRITERIA OR ALL OCATION KEYS USED TO SPLIT THE PROFIT SHOULD: BE REASONABLY INDEPENDENT OF TRANSFER PRICING POL ICY FORMULATION I.E. THEY SHOULD BE BASED ON OBJECTIVE DATA (E.G. SALES TO IN DEPENDENT PARTIES) NOT ON ITA NOS. 5571/DEL/2011 & ITA 5896/DEL/2012 A.YS. 2007-08 / 2008-09 GLOBAL ONE INDIA P.LTD. NEW DELHI 45 DATA RELATING TO THE REMUNERATION OF CONTROLLED TRA NSACTIONS (E.G. SALES TO ASSOCIATED ENTERPRISES) AND BE SUPPORTED BY COMPARABLES DATA INTERNAL DATA OR BOTH. C.3.4.2 RELIANCE ON DATA FROM COMPARABLE UNCONTROLL ED TRANSACTIONS 2.133 ONE POSSIBLE APPROACH IS TO SPLIT THE COMBINE D PROFITS BASED ON THE DIVISION OF PROFITS THAT ACTUALLY RESULTS FROM COMP ARABLE UNCONTROLLED TRANSACTIONS. EXAMPLES OF POSSIBLE SOURCES OF INFORM ATION ON UNCONTROLLED TRANSACTIONS THAT MIGHT USEFULLY ASSIST THE DETERMI NATION OF CRITERIA TO SPLIT THE PROFITS DEPENDING ON THE FACTS AND CIRCUMSTANCES O F THE CASE INCLUDE JOINT- VENTURE ARRANGEMENTS BETWEEN INDEPENDENT PARTIES UN DER WHICH PROFITS ARE SHARED SUCH AS DEVELOPMENT PROJECTS IN THE OIL AND GAS INDUSTRY; PHARMACEUTICAL COLLABORATIONS CO-MARKETING OR CO-PROMOTION AGREEM ENTS; ARRANGEMENTS BETWEEN INDEPENDENT MUSIC RECORD LABELS AND MUSIC A RTISTS; UNCONTROLLED ARRANGEMENTS IN THE FINANCIAL SERVICES SECTOR; ETC. C.3.4.3 ALLOCATION KEYS 2.134 IN PRACTICE THE DIVISION OF THE COMBINED PRO FITS UNDER A TRANSACTIONAL PROFIT SPLIT METHOD IS GENERALLY ACHIEVED USING ONE OR MORE ALLOCATION KEYS. DEPENDING ON THE FACTS AND CIRCUMS TANCES OF THE CASE THE ALLOCATION KEY CAN BE A FIGURE (E.G. A 30%-70% SPLI T BASED ON EVIDENCE OF A SIMILAR SPLIT ACHIEVED BETWEEN INDEPENDENT PARTIES IN COMPARABLE TRANSACTIONS) OR A VARIABLE (E.G. RELATIVE VALUE OF PARTICIPANT'S MARKETING EXPENDITURE OR OTHER POSSIBLE KEYS AS DISCUSSED BELOW). WHERE MORE THAN ONE ALLOCATION KEY IS USED IT WILL ALSO BE NECESSARY TO WEIGHT THE ALLOCATION KEYS USED TO DETERMINE THE RELATIVE CONTRIBUTION THAT EACH ALLOCATION KEY REPR ESENTS TO THE EARNING OF THE COMBINED PROFITS. 2.135 IN PRACTICE ALLOCATION KEYS BASED ON ASSETS/ CAPITAL (OPERATING ASSETS FIXED ASSETS INTANGIBLE ASSETS CAPITAL EMPLOYED) OR COS TS (RELATIVE SPENDING AND/OR INVESTMENT IN KEY AREAS SUCH AS RES EARCH AND DEVELOPMENT ENGINEERING MARKETING) ARE OFTEN USED. OTHER ALLOC ATION KEYS BASED FOR INSTANCE ON INCREMENTAL SALES HEADCOUNTS (NUMBER OF INDIVID UALS INVOLVED IN THE KEY FUNCTIONS THAT GENERATE VALUE TO THE TRANSACTION) TIME SPENT BY A CERTAIN GROUP OF EMPLOYEES IF THERE IS A STRONG CORRELATION BETWE EN THE TIME SPENT AND THE ITA NOS. 5571/DEL/2011 & ITA 5896/DEL/2012 A.YS. 2007-08 / 2008-09 GLOBAL ONE INDIA P.LTD. NEW DELHI 46 CREATION OF THE COMBINED PROFITS NUMBER OF SERVERS DATA STORAGE FLOOR AREA OF RETAIL POINTS ETC. MAY BE APPROPRIATE DEPENDING ON THE FACTS AND CIRCUMSTANCES OF THE TRANSACTIONS. ASSET-BASED ALLOCATION KEYS 2.136 ASSET-BASED OR CAPITAL-BASED ALLOCATION KEYS CAN BE USED WHERE THERE IS A STRONG CORRELATION BETWEEN TANGIBLE OR INTANGIBLE A SSETS OR CAPITAL EMPLOYED AND CREATION OF VALUE IN THE CONTEXT OF THE CONTROLLED TRANSACTION. SEE PARAGRAPH 2.145 FOR A BRIEF DISCUSSION OF SPLITTING THE COMBI NED PROFITS BY REFERENCE TO CAPITAL EMPLOYED. IN ORDER FOR AN ALLOCATION KEY TO BE MEANINGFUL IT SHOULD BE APPLIED CONSISTENTLY TO ALL THE PARTIES TO THE TRAN SACTION. SEE PARAGRAPH 2.98 FOR A DISCUSSION OF COMPARABILITY ISSUES IN RELATION TO ASSET VALUATION IN THE CONTEXT OF THE TRANSACTIONAL NET MARGIN METHOD WHICH IS AL SO VALID IN THE CONTEXT OF THE TRANSACTIONAL PROFIT SPLIT METHOD. 2.137 ONE PARTICULAR CIRCUMSTANCE WHERE THE TRANSAC TIONAL PROFIT SPLIT METHOD MAY BE FOUND TO BE THE MOST APPROPRIATE METHOD IS T HE CASE WHERE EACH PARTY TO THE TRANSACTION CONTRIBUTES VALUABLE UNIQUE INT ANGIBLES. INTANGIBLE ASSETS POSE DIFFICULT ISSUES IN RELATION BOTH TO THEIR IDE NTIFICATION AND TO THEIR VALUATION. IDENTIFICATION OF INTANGIBLES CAN BE DIFFICULT BECA USE NOT ALL VALUABLE INTANGIBLE ASSETS ARE LEGALLY PROTECTED AND REGISTERED AND NOT ALL VALUABLE INTANGIBLE ASSETS ARE RECORDED IN THE ACCOUNTS. AN ESSENTIAL PART OF A TRANSACTIONAL PROFIT SPLIT ANALYSIS IS TO IDENTIFY WHAT INTANGIBLE ASSETS ARE CONTRIBUTED BY EACH ASSOCIATED ENTERPRISE TO THE CONTROLLED TRANSACTION AND THEIR RELATIVE VALUE. GUIDANCE ON INTANGIBLE PROPERTY IS FOUND AT CHAPTER VI OF THESE GUIDELINES. SEE ALSO THE EXAMPLES IN THE ANNEX TO CHAPTER VI 'EXAMPLES TO ILL USTRATE THE TRANSFER PRICING GUIDELINES ON INTANGIBLE PROPERTY AND HIGHLY UNCERT AIN VALUATION'. COST-BASED ALLOCATION KEYS 2.138 AN ALLOCATION KEY BASED ON EXPENSES MAY BE AP PROPRIATE WHERE IT IS POSSIBLE TO IDENTIFY A STRONG CORRELATION BETWEE N RELATIVE EXPENSES INCURRED AND RELATIVE VALUE ADDED. FOR EXAMPLE MARKETING EX PENSES MAY BE AN APPROPRIATE KEY FOR DISTRIBUTORS-MARKETERS IF ADVER TISING GENERATES MATERIAL MARKETING INTANGIBLES E.G. IN CONSUMER GO ODS WHERE THE VALUE OF MARKETING INTANGIBLES IS AFFECTED BY ADVERTISING. R ESEARCH AND DEVELOPMENT EXPENSES MAY BE SUITABLE FOR MANUFACTURERS IF THEY RELATE TO THE DEVELOPMENT OF ITA NOS. 5571/DEL/2011 & ITA 5896/DEL/2012 A.YS. 2007-08 / 2008-09 GLOBAL ONE INDIA P.LTD. NEW DELHI 47 SIGNIFICANT TRADE INTANGIBLES SUCH AS PATENTS. HOWE VER IF FOR INSTANCE EACH PARTY CONTRIBUTES DIFFERENT VALUABLE INTANGIBLES T HEN IT IS NOT APPROPRIATE TO USE A COST-BASED ALLOCATION KEY UNLESS COST IS A RELIAB LE MEASURE OF THE RELATIVE VALUE OF THOSE INTANGIBLES. REMUNERATION IS FREQUENTLY US ED IN SITUATIONS WHERE PEOPLE FUNCTIONS ARE THE PRIMARY FACTOR IN GENERATING THE COMBINED PROFITS. 2.139 COST-BASED ALLOCATION KEYS HAVE THE ADVANTAGE OF SIMPLICITY. IT IS HOWEVER NOT ALWAYS THE CASE THAT A STRONG CORRELATION EXIST S BETWEEN RELATIVE EXPENSES AND RELATIVE VALUE AS DISCUSSED IN PARAGRAPH 6.27. ONE POSSIBLE ISSUE WITH COST- BASED ALLOCATION KEYS IS THAT THEY CAN BE VERY SENS ITIVE TO ACCOUNTING CLASSIFICATION OF COSTS. IT IS THEREFORE NECESSARY TO CLEARLY IDENTIFY IN ADVANCE WHAT COSTS WILL BE TAKEN INTO ACCOUNT IN THE DETERM INATION OF THE ALLOCATION KEY AND TO DETERMINE THE ALLOCATION KEY CONSISTENTLY AM ONG THE PARTIES. TIMING ISSUES 2.140 ANOTHER IMPORTANT ISSUE IS THE DETERMINATION OF THE RELEVANT PERIOD OF TIME FROM WHICH THE ELEMENTS OF DETERMINATION OF THE ALL OCATION KEY (E.G. ASSETS COSTS OR OTHERS) SHOULD BE TAKEN INTO ACCOUNT. A D IFFICULTY ARISES BECAUSE THERE CAN BE A TIME LAG BETWEEN THE TIME WHEN EXPENSES AR E INCURRED AND THE TIME WHEN VALUE IS CREATED AND IT IS SOMETIMES DIFFICUL T TO DECIDE WHICH PERIOD'S EXPENSES SHOULD BE USED. FOR EXAMPLE IN THE CASE O F A COST-BASED ALLOCATION KEY USING THE EXPENDITURE ON A SINGLE-YEAR BASIS M AY BE SUITABLE FOR SOME CASES WHILE IN SOME OTHER CASES IT MAY BE MORE SUI TABLE TO USE ACCUMULATED EXPENDITURE (NET OF DEPRECIATION OR AMORTIZATION W HERE APPROPRIATE IN THE CIRCUMSTANCES) INCURRED IN THE PREVIOUS AS WELL AS THE CURRENT YEARS. DEPENDING ON THE FACTS AND CIRCUMSTANCES OF THE CASE THIS DE TERMINATION MAY HAVE A SIGNIFICANT EFFECT ON THE ALLOCATION OF PROFITS AMO NGST THE PARTIES. AS NOTED AT PARAGRAPHS 2.116-2.117 ABOVE THE SELECTION OF THE ALLOCATION KEY SHOULD BE APPROPRIATE TO THE PARTICULAR CIRCUMSTANCES OF THE CASE AND PROVIDE A RELIABLE APPROXIMATION OF THE DIVISION OF PROFITS THAT WOULD HAVE BEEN AGREED BETWEEN INDEPENDENT PARTIES. C.3.4.4 RELIANCE ON DATA FROM THE TAXPAYER'S OWN OP ERATIONS ('INTERNAL DATA') 2.141 WHERE COMPARABLE UNCONTROLLED TRANSACTIONS OF SUFFICIENT RELIABILITY ARE LACKING TO SUPPORT THE DIVISION OF THE COMBINED PRO FITS CONSIDERATION SHOULD BE ITA NOS. 5571/DEL/2011 & ITA 5896/DEL/2012 A.YS. 2007-08 / 2008-09 GLOBAL ONE INDIA P.LTD. NEW DELHI 48 GIVEN TO INTERNAL DATA WHICH MAY PROVIDE A RELIABL E MEANS OF ESTABLISHING OR TESTING THE ARM'S LENGTH NATURE OF THE DIVISION OF PROFITS. THE TYPES OF SUCH INTERNAL DATA THAT ARE RELEVANT WILL DEPEND ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND SHOULD SATISFY THE CONDITIONS OUTLINED IN THIS SECTION AND IN PARTICULAR AT PARAGRAPHS 2.116-2.117 AND 2.132. THEY WILL FREQUEN TLY BE EXTRACTED FROM THE TAXPAYERS' COST ACCOUNTING OR FINANCIAL ACCOUNTING. 2.142 FOR INSTANCE WHERE AN ASSET-BASED ALLOCATIO N KEY IS USED IT MAY BE BASED ON DATA EXTRACTED FROM THE BALANCE SHEETS OF THE PARTIES TO THE TRANSACTION. IT WILL OFTEN BE THE CASE THAT NOT ALL THE ASSETS OF THE TAXPAYERS RELATE TO THE TRANSACTION AT HAND AND THAT ACCORDIN GLY SOME ANALYTICAL WORK IS NEEDED FOR THE TAXPAYER TO DRAW A 'TRANSACTIONAL' B ALANCE SHEET THAT WILL BE USED FOR THE APPLICATION OF THE TRANSACTIONAL PROFI T SPLIT METHOD. SIMILARLY WHERE COST-BASED ALLOCATION KEYS ARE USED THAT ARE BASED ON DATA EXTRACTED FROM THE TAXPAYERS' PROFIT AND LOSS ACCOUNTS IT MAY BE NECE SSARY TO DRAW TRANSACTIONAL ACCOUNTS THAT IDENTIFY THOSE EXPENSES THAT ARE RELA TED TO THE CONTROLLED TRANSACTION AT HAND AND THOSE THAT SHOULD BE EXCLUD ED FROM THE DETERMINATION OF THE ALLOCATION KEY. THE TYPE OF EXPENDITURE THAT IS TAKEN INTO ACCOUNT (E.G. SALARIES DEPRECIATION ETC.) AS WELL AS THE CRITER IA USED TO DETERMINE WHETHER A GIVEN EXPENSE IS RELATED TO THE TRANSACTION AT HAND OR IS RATHER RELATED TO OTHER TRANSACTIONS OF THE TAXPAYER (E.G. TO OTHER LINES O F PRODUCTS NOT SUBJECT TO THIS PROFIT SPLIT DETERMINATION) SHOULD BE APPLIED CONSISTENTLY TO ALL THE PARTIES TO THE TRANSACTION. SEE ALSO PARAGRAPH 2.98 FOR A DISCUSSION OF VALUATION OF ASSETS IN THE CONTEXT OF THE TRANSACTIONAL NET MARGIN METHOD WHERE THE NET PROFIT IS WEIGHTED TO ASSETS WHICH IS ALSO RELEVANT TO THE VALUATION OF ASSETS IN THE CONTEXT OF A TRANSACTION AL PROFIT SPLIT WHERE AN ASSET- BASED ALLOCATION KEY IS USED. 2.143 INTERNAL DATA MAY ALSO BE HELPFUL WHERE THE A LLOCATION KEY IS BASED ON A COST ACCOUNTING SYSTEM E.G. HEADCOUNTS INVOLVED IN SOME ASPECTS OF THE TRANSACTION TIME SPENT BY A CERTAIN GROUP OF EMPLO YEES ON CERTAIN TASKS NUMBER OF SERVERS DATA STORAGE FLOOR AREA OF RETA IL POINTS ETC. 2.144 INTERNAL DATA ARE ESSENTIAL TO ASSESS THE VAL UES OF THE RESPECTIVE CONTRIBUTIONS OF THE PARTIES TO THE CONTROLLED TRAN SACTION. THE DETERMINATION OF SUCH VALUES SHOULD RELY ON A FUNCTIONAL ANALYSIS TH AT TAKES INTO ACCOUNT ALL THE ECONOMICALLY SIGNIFICANT FUNCTIONS ASSETS AND RISK S CONTRIBUTED BY THE PARTIES TO ITA NOS. 5571/DEL/2011 & ITA 5896/DEL/2012 A.YS. 2007-08 / 2008-09 GLOBAL ONE INDIA P.LTD. NEW DELHI 49 THE CONTROLLED TRANSACTION. IN THOSE CASES WHERE TH E PROFIT IS SPLIT ON THE BASIS OF AN EVALUATION OF THE RELATIVE IMPORTANCE OF THE FUN CTIONS ASSETS AND RISKS TO THE VALUE ADDED TO THE CONTROLLED TRANSACTION SUCH EVA LUATION SHOULD BE SUPPORTED BY RELIABLE OBJECTIVE DATA IN ORDER TO LIMIT ARBITR ARINESS. PARTICULAR ATTENTION SHOULD BE GIVEN TO THE IDENTIFICATION OF THE RELEVA NT CONTRIBUTIONS OF VALUABLE INTANGIBLES AND THE ASSUMPTION OF SIGNIFICANT RISKS AND THE IMPORTANCE RELEVANCE AND MEASUREMENT OF THE FACTORS WHICH GAVE RISE TO T HESE VALUABLE INTANGIBLES AND SIGNIFICANT RISKS. 2.145 ONE POSSIBLE APPROACH NOT DISCUSSED ABOVE IS TO SPLIT THE COMBINED PROFITS SO THAT EACH OF THE ASSOCIATED ENTERPRISES PARTICIP ATING IN THE CONTROLLED TRANSACTIONS EARNS THE SAME RATE OF RETURN ON THE C APITAL IT EMPLOYS IN THAT TRANSACTION. THIS METHOD ASSUMES THAT EACH PARTICIP ANT'S CAPITAL INVESTMENT IN THE TRANSACTION IS SUBJECT TO A SIMILAR LEVEL OF RI SK SO THAT ONE MIGHT EXPECT THE PARTICIPANTS TO EARN SIMILAR RATES OF RETURN IF THE Y WERE OPERATING IN THE OPEN MARKET. HOWEVER THIS ASSUMPTION MAY NOT BE REALIS TIC. FOR EXAMPLE IT WOULD NOT ACCOUNT FOR CONDITIONS IN ;CAPITAL MARKETS AND COULD IGNORE OTHER RELEVANT ASPECTS THAT WOULD BE REVEALED BY A FUNCTIONAL ANAL YSIS AND THAT SHOULD BE TAKEN INTO ACCOUNT IN A TRANSACTIONAL PROFIT SPLIT. PARA 6.3.14 STEP 2: ALLOCATION OF RESIDUAL PROFIT (I.E. PROFIT REMAINING AFTER STEP 1) BETWEEN THE ASSOCIATED ENTERPRISES BASED ON THE FACTS AND CIRCUMSTANCES. IF THE RESIDUAL PROFIT IS ATTRIBUTABLE TO INTANGIBLE P ROPERTY THEN THE ALLOCATION OF THIS PROFIT SHOULD BE BASED ON THE RELATIVE VALUE OF EAC H ENTERPRISES CONTRIBUTIONS OF INTANGIBLE PROPERTY. 20.9. IN THE UN TRANSFER PRICING MANUAL CHAPTER VI AT PARA 6.3.17.4 IT IS STATED AS FOLLOWS. THE PSM INVOLVES THE DETERMINATION OF THE FACTORS THAT BRING ABOUT THE COMBINED PROFIT SETTING A RELATIVE WEIGHT TO EACH FACTOR AND CALCULATING THE ALLOCATION OF PROFITS BETWEEN THE ASSOCIATED ENTERP RISES. THE CONTRIBUTION ANALYSIS IS DIFFICULT TO APPLY BECAUSE EXTERNAL MA RKET DATA THAT REFLECT HOW INDEPENDENT ENTERPRISES WOULD ALLOCATE THE PROFITS IN SIMILAR CIRCUMSTANCES IS USUALLY NOT AVAILABLE. THE FIRST STEP OF THE RESID UAL ANALYSIS OFTEN INVOLVES THE USE OF THE TNMM TO CALCULATE A RETURN AND IS NOT IN ITSELF MORE COMPLICATED THAN THE TYPICAL APPLICATION OF TNMM. THE SECOND S TEP IS HOWEVER AN ITA NOS. 5571/DEL/2011 & ITA 5896/DEL/2012 A.YS. 2007-08 / 2008-09 GLOBAL ONE INDIA P.LTD. NEW DELHI 50 ADDITIONAL STEP AND OFTEN RAISES DIFFICULT ADDITION AL ISSUES RELATING TO THE VALUATION OF INTANGIBLES. 20.10 . IN THE TEXT FOR TRANSFER PRICING REGULATIONS OF U S TREASURY IT IS GIVEN AS FOLLOWS. ALLOCATE RESIDUAL PROFIT. THE ALLOCATION OF INCOME TO THE CONTROLLED TAXPAYERS' ROUTINE CONTRIBUTIONS WILL NOT REFLECT PROFITS ATTR IBUTABLE TO THE CONTROLLED GROUP'S VALUABLE INTANGIBLE PROPERTY WHERE SIMILAR PROPERTY IS NOT OWNED BY THE UNCONTROLLED TAXPAYERS FROM WHICH THE MARKET RETURN S ARE DERIVED. THUS IN CASES WHERE SUCH INTANGIBLES ARE PRESENT THERE NORM ALLY WILL BE AN UNALLOCATED RESIDUAL PROFIT AFTER THE ALLOCATION OF INCOME DESC RIBED IN PARAGRAPH(C)(3)(I)(A) OF THIS SECTION. UNDER THIS SECOND STEP THE RESIDUAL PROFIT GENERALLY SHOULD BE DIVIDED AMONG THE CONTROLLED TAXPAYERS BASED UPON T HE RELATIVE VALUE OF THEIR CONTRIBUTIONS OF INTANGIBLE PROPERTY TO THE RELEVAN T BUSINESS ACTIVITY THAT WAS NOT ACCOUNTED FOR AS A ROUTINE CONTRIBUTION . THE RELATIVE VALUE OF THE INTANGIBLE PROPERTY CONTRIBUTED BY EACH TAXPAYER MAY BE MEASUR ED BY EXTERNAL MARKET BENCHMARKS THAT REFLECT THE FAIR MARKET VALUE OF SU CH INTANGIBLE PROPERTY. ALTERNATIVELY THE RELATIVE VALUE OF INTANGIBLE CON TRIBUTIONS MAY BE ESTIMATED BY THE CAPITALIZED COST OF DEVELOPING THE INTANGIBLES AND ALL RELATED IMPROVEMENTS AND UPDATES LESS AN APPROPRIATE AMOUNT OF AMORTIZA TION BASED ON THE USEFUL LIFE OF EACH INTANGIBLE. FINALLY IF THE INTANGIBLE DEVE LOPMENT EXPENDITURES OF THE PARTIES ARE RELATIVELY CONSTANT OVER TIME AND THE U SEFUL LIFE OF THE INTANGIBLE PROPERTY OF ALL PARTIES IS APPROXIMATELY THE SAME THE AMOUNT OF ACTUAL EXPENDITURES IN RECENT YEARS MAY BE USED TO ESTIMAT E THE RELATIVE VALUE OF INTANGIBLE CONTRIBUTIONS. IF THE INTANGIBLE PROPERT Y CONTRIBUTED BY ONE OF THE CONTROLLED TAXPAYERS IS ALSO USED IN OTHER BUSINESS ACTIVITIES(SUCH AS TRANSACTIONS WITH OTHER CONTROLLED TAXPAYERS) AN APPROPRIATE AL LOCATION OF THE VALUE OF THE INTANGIBLES MUST BE MADE AMONG ALL THE BUSINESS ACT IVITIES IN WHICH IT IS USED. 20.11 . A PERUSAL OF THE ABOVE DEMONSTRATES THAT THERE IS A GENERAL CONSENSUS ON THE PRINCIPLES OF ALLOCATION OF RESID UAL SURPLUS. HENCE WE ARE INCLINED TO ACCEPT THE FOLLOWING SUBMISSIONS OF THE ASSESSEE. ITA NOS. 5571/DEL/2011 & ITA 5896/DEL/2012 A.YS. 2007-08 / 2008-09 GLOBAL ONE INDIA P.LTD. NEW DELHI 51 1. IT IS AN ADMITTED FACT THAT AS PER RULE 10B(1) (D) OF THE IT RULES INDIA PRESCRIBES THAT AN ASSESSEE CAN ADOPT - A. EITHER A CONTRIBUTION PSM NAMELY WHERE THE ENTI RE SYSTEMS PROFITS ARE SPLIT AMONGST THE VARIOUS AES WHO ARE PARTIES TO THE TRANSACTIONS IN QUESTION; OR B. A RESIDUAL PSM NAMELY WHERE EACH OF THE AES WH O ARE PARTIES TO THE TRANSACTIONS IN QUESTION ARE FIRST ASSIGNED RO UTINE/ BASIC RETURNS FOR THE ROUTINE FUNCTIONS PERFORMED BY THEM; AND THEREA FTER THE RESIDUAL PROFITS ARE SPLIT AMONGST THE AES HOWEVER IN A MA NNER THAT WHETHER OR NOT AN ASSESSEE ADOPTS A CONTRIBUTION PSM OR A RESI DUAL PSM THE PROFITS WOULD NEED TO BE SPLIT AMONGST THE VARIOUS AES WHO ARE PARTIES TO THE TRANSACTIONS IN QUESTION ON THE BASIS OF RELIABLE EXTERNAL MARKET DATA WHICH INDICATES HOW UNRELATED PARTIES WOULD HAVE SP LIT SUCH PROFITS IN SIMILAR CIRCUMSTANCES. 2. IN OTHER WORDS AS PER RULE 10B(L)(D) OF THE IT RULES A CONTRIBUTION OR RESIDUAL PSM WOULD NEED TO BE SUPPLEMENTED BY A COM PARABLE PSM. 3. THE TERMINOLOGIES NAMELY 'CONTRIBUTION PSM' 'R ESIDUAL PSM' AND 'COMPARABLE PSM' HAVE NOT BEEN USED IN THE IT ACT OR RULES HOWEVER THEY CAN BE FOUND IN THE TP GUIDELINES OF OECD [PAR AGRAPHS 2.108 TO 2.1491 AND UN [PARAGRAPHS 6.3.13.1 TO 6.3.181 BY R EFERRING TO THE SIMILARITY OF THE MANNER OF APPLICATION OF THE SAID METHODS AS CONTAINED IN THE OECD AND UN TP GUIDELINES; AND ALSO IN THE I T RULES. 4. HAVING SAID THAT PSM PRESCRIBED BY THE IT RULES OF INDIA IS QUITE UNIQUE AS COMPARED TO BOTH OECD AND UN TP GUIDELIN ES NAMELY THAT BOTH OECD AND UN PROVIDE FLEXIBILITY TO THE TAXPAYE R TO ADOPT ANY OF THE FOLLOWING SUB-METHODS UNDER THE OVERALL PSM NAMELY CONTRIBUTION PSM RESIDUAL PSM OR COMPARABLE PSM WHEREAS THE INDIAN IT RULES MANDATORILY REQUIRE A TAXPAYER TO ADOPT A COMPARABL E PSM TO SUPPLEMENT EITHER A CONTRIBUTION OR RESIDUAL PSM. 5. SUCH PRESCRIPTION TO MANDATORILY USE COMPARABLE PSM TO SPLIT ENTREPRENEURIAL PROFITS BY THE INDIAN TP REGULATIO NS ACTUALLY WOULD MAKE THE PSM VIRTUALLY REDUNDANT IN MOST CASES SINCE I T IS NOT POSSIBLE TO OBTAIN RELIABLE MARKET DATA ON THIRD PARTY BEHAVIOR IN THE MATTER OF SPLITTING PROFITS EXCEPT FOR IN SOME RARE CASES OF JOINT VENTURE ARRANGEMENTS. HOWEVER IN CASES OF TRANSACTIONS INV OLVING EITHER ITA NOS. 5571/DEL/2011 & ITA 5896/DEL/2012 A.YS. 2007-08 / 2008-09 GLOBAL ONE INDIA P.LTD. NEW DELHI 52 CONTRIBUTION OR EXPLOITATION OF INTANGIBLES BY ALL THE PARTIES TO THE TRANSACTION OR WHERE SUCH TRANSACTIONS ARE EXTREMEL Y INTERRELATED OF THE TYPES AS IN THE CASE OF THE APPELLANT WHERE KNOWLE DGE OF THIRD PARTY BEHAVIOR IS IMPOSSIBLE TO POSSESS BUT WHERE THE CA SE OTHERWISE DESERVES THE TREATMENT OF PSM THEN THE PRESCRIPTION TO MAND ATORILY USE A COMPARABLE PSM WOULD RENDER THE WHOLE MACHINERY OF PSM UNDER THE INDIAN TP REGULATIONS A NULLITY & IMPOSSIBLE TO BE IMPLEMENTED. 6. THIS IS EXACTLY WHAT THE UN HAS PROVIDED IN ITS TP GUIDELINES RELATING TO COMPARABLE PSM NAMELY THAT SUCH METHOD IS SELDOM USED SINCE RELIABLE EXTERNAL MARKET DATE ON THIRD PARTY BEHAVIOR IN THE MATTER OF SPLITTING PROFITS ARE OFTEN NOT AVAILABLE [PARAGRAP H 6.3.15 OF UN TP GUIDELINES]. 7. DESCRIBING THE COMPARABLE PSM THE OECD HELD IN ITS GUIDELINES THAT EXTERNAL DATA FOR COMPARABLE PSM CAN BE AVAILABLE I N CASES OF JOINT VENTURE AGREEMENTS BETWEEN INDEPENDENT PARTIES UNDE R WHICH PROFITS ARE SHARED SUCH AS DEVELOPMENT PROJECTS IN THE OIL AND GAS INDUSTRY; PHARMACEUTICAL COLLABORATIONS; CO-MARKETING OR CO-P ROMOTION AGREEMENTS; ARRANGEMENTS BETWEEN INDEPENDENT MUSIC RECORD LABEL S AND MUSIC ARTISTS; UNCONTROLLED ARRANGEMENTS IN THE FINANCIAL SERVICES SECTOR; ETC [PARAGRAPH 2.133 OF THE OECD TP GUIDELINES]. 8. THUS TYPICALLY COMPARABLE PSM CAN BE APPLIED I N INDUSTRIES WHERE JOINT VENTURE ARRANGEMENTS EXIST. HOWEVER FOR INDU STRIES LIKE THE ONE OF TELECOMMUNICATION CONNECTIVITY SERVICES CARRIED ON BY THE EQUANT OR GLOBAL ONE GROUP WHERE THE KEY INTANGIBLE USED BY THE GRO UP IS THE PROPRIETARY NETWORK WITHOUT WHICH THE SERVICES CANNOT BE RENDE RED; AND THUS EXISTENCE OF JOINT VENTURE ARRANGEMENTS BETWEEN THI RD PARTIES IS NOT CONCEIVABLE THE APPLICATION OF COMPARABLE PSM WOUL D BE AN IMPOSSIBILITY. 9. THE OECD FURTHER ACKNOWLEDGES THAT WHERE COMPARA BLE UNCONTROLLED TRANSACTIONS OF SUFFICIENT RELIABILITY ARE LACKING TO SUPPORT THE DIVISION OF THE COMBINED PROFITS CONSIDERATION SHO ULD BE GIVEN TO INTERNAL DATA WHICH MAY PROVIDE A RELIABLE MEANS OF ESTABLI SHING OR TESTING THE ARM'S LENGTH NATURE OF THE DIVISION OF PROFITS MEA NING THAT RESORT TO EITHER CONTRIBUTION OR RESIDUAL PSM MAY BE MADE WITHOUT T HE SAME HAVING TO PASS THROUGH THE COMPULSORY RIGORS OF COMPARABLE PS M [PARAGRAPH 2.141 OF THE OECD TP GUIDELINES]. ITA NOS. 5571/DEL/2011 & ITA 5896/DEL/2012 A.YS. 2007-08 / 2008-09 GLOBAL ONE INDIA P.LTD. NEW DELHI 53 10. FURTHER MANY OF THE GLOBAL TP SPECIALISTS HAVE COMMENTED ON THE LACK OF RELIABLE THIRD PARTY DATA WHICH OFTEN REND ERS COMPARABLE PSM IMPOSSIBLE TO APPLY FOR SPLITTING PROFITS AMONGST R ELATED PARTIES EXCEPT FOR IN THE LIMITED CASES OF JOINT VENTURE ARRANGEMENTS AND DETERMINATION OF ROYALTY WHERE AGAIN THE SPLIT OF PROFITS BETWEEN THE LICENSOR AND THE LICENSEE CAN BE DISCERNIBLE ON THE FACE OF ACCOUNTS . EXTRACTS FROM A FEW OF THE SAID ARTICLES/ BOOKS ARE REPRODUCED BELOW FOR E ASE OF REFERENCE - A. J.P. WARNER AND H.B. MCCAWLEY TRANSFER PRICING: THE CODE AND THE REGULATIONS NOTE 70 AT A-144; AND T. HORST. PROFI T SPLIT METHODS 0 60 TAX NOTES (1993) AT 335 - 'THE COMPARABLE PROFIT SPLIT METHOD IS RARELY APPLIED AS INFORMATION ON COMPARABLE REFERENCE TRA NSACTIONS WILL NOT NORMALLY BE AVAILABLE.' B. TRANSFER PRICING AND CORPORATE TAXATION: PROBLEM S PRACTICAL IMPLICATIONS - CHAPTER 3.5 - PAGE 31 - AUTHORED BY ELIZABETH A. KING - ' .... PRACTITIONERS RARELY USE COMPARABLE PROFIT SPLIT ME THOD BECAUSE PAIRS OF SUFFICIENTLY COMPARABLE COMPANIES CAN RARELY BE FOU ND.' C. PRACTICAL GUIDE TO U.S. TRANSFER PRICING ROBERT T. COLE CHAPTER 10 PROFIT SPLIT METHOD AUTHORED BY HARLOW N. HIGINBOTH AM; PAGE NUMBER 10- 52: - 'NUMEROUS COMMENTATORS HAVE CITED DIFFICULTIE S IN IDENTIFYING AND DOCUMENTING INFORMATION ON COMPARABLE INDEPENDENT T RANSACTIONS AS POTENTIALLY INSURMOUNTABLE OBSTACLE TO THE PRACTICA L REALIZATION OF CPSM. THIS PESSIMISTIC VIEWPOINT OVERLOOKS A RELATIVELY V OLUMINOUS BODY OF EVIDENCE AND EXPERIENCE IN THE INTELLECTUAL PROPERT Y AREA WHERE SUCH CALCULATIONS ARE ROUTINELY IF SOMEWHAT ROUGHLY AP PLIED IN VALUING LICENSE TRANSACTIONS'. D. TRANSFER PRICING RULES AND COMPLIANCE HANDBOOK - PAGE NUMBER 33 - 0.2 COMPARABLE PROFIT SPLIT METHOD - AUTHORED BY MARC M. LEVEY C. WRAPPE STEVEN AND STEVEN C. WRAPPE - ' .... THE USE OF COMPARABLE PROFIT SPLIT METHOD WILL BE LIMITED BECAUSE IT WILL TYPICA LLY BE DIFFICULT TO FIND COMPARABLE COMPANIES ENGAGED IN TRANSACTIONS THAT A RE SIMILAR TO THOSE OF BOTH THE BUYER AND THE SELLER AND DATA DELINEATING HOW THE INDEPENDENT PARTIES SHARED THE COMBINED PROFITS FROM A COMPARAB LE TRANSACTION RARELY EXISTS. FINDING A COMPARABLE TRANSACTION IS MADE MO RE DIFFICULT BECAUSE THE REGULATIONS PROVIDE THAT THE COMPARABILITY DEGR EE OF SIMILARITY NOT ONLY OF THE FUNCTION RISK BUT ALSO OF CONTRACTUAL TERM S.' 11. IN VIEW OF THE ABOVE DISCUSSIONS EMANATING FROM THE OECD AND UN TP GUIDELINES; AND ALSO COMMENTARIES OF SEVERAL TRA NSFER PRICING EXPERTS IT ITA NOS. 5571/DEL/2011 & ITA 5896/DEL/2012 A.YS. 2007-08 / 2008-09 GLOBAL ONE INDIA P.LTD. NEW DELHI 54 IS EVIDENT THAT COMPARABLE PSM IS RARELY USED INTER NATIONALLY IN VIEW OF LACK OF RELIABLE EXTERNAL DATA WITH RESPECT TO THIR D PARTY BEHAVIOR TO SPLIT PROFITS; AND OECD AND UN CLEARLY GIVE TAXPAYERS AN OPTION TO ADOPT ANYONE OF THE THREE SUB- METHODS UNDER THE OVERALL PSM NAMELY CONTRIBUTION PSM RESIDUAL P'SM AND COMPARABLE PSM WITHOUT REQUIRING THE CONTRIBUTION AND RESIDUAL PSMS TO MANDATORILY P ASS THROUGH THE SANITY OF COMPARABLE PSM BEING A MANDATE GIVEN UNDER THE INDIAN TP REGULATIONS IN THE FORM OF RULE10OB(I)(D) OF THE I T RULES. THUS SUCH COMPULSORY MANDATE WOULD RENDER THE ENTIRE MECHANIS M PSM UNWORKABLE IN INDIA EVEN IN THE MOST DESERVING OF CASES. 12. IT IS A GOLDEN AND ACCEPTED RULE OF JURISPRUDEN CE THAT AN INTERPRETATION WHICH MAKES A STATUTE OR RULE UNWOR KABLE OR IMPOSSIBLE TO BE COMPLIED WITH SHOULD BE AVOIDED; AND RECOURSE N EED TO HAVE TO THE INTERPRETATION WHICH WOULD MAKE THE STATUTE OR RUL E WORKABLE AND ALSO SUBSERVE THE PURPOSE FOR WHICH IT HAS BEEN ENACTED. IN THIS CONNECTION REFERENCE IS INVITED TO THE RULING OF THE HON'BLE S UPREME COURT IN THE CASE OF SUPERINTENDENT OF TAXES VS. ONKARMAL NATHUMAL TR UST [AIR 1975 SC 2065] WHERE IT HAS BEEN HELD THAT 'THE LAW IN ITS MOST POSITIVE AND PEREMPTORY INJUNCTIONS IS UNDERSTOOD TO DISCLAIM AS IT DOES IN ITS GENERAL APHORISMS ALL INTENTION OF COMPELLING PERFORMANCE OF THAT WHICH IS IMPOSSIBLE' ... WHERE THE LAW CREATES A DUTY OR CHA RGE AND THE PARTY IS DISABLED TO PERFORM IT WITHOUT ANY DEFAULT IN HIM AND HAS NO REMEDY OVER THERE THE LAW WILL IN GENERAL EXCUSE HIM; AND THOUGH IMPOSSIBILITY OF PERFORMANCE IS IN GENERAL NO EXCUSE FOR NOT PERFORM ING AN OBLIGATION WHICH A PARTY HAS EXPRESSLY UNDERTAKEN BY CONTRACT YET WHEN THE OBLIGATION IS ONE IMPLIED BY LAW IMPOSSIBILITY OF PERFORMANCE IS A GOOD EXCUSE. 13. THE REQUIREMENT CONTAINED IN RULE 10B(1)(D) OF THE IT RULES OF MANDATORY ADOPTION OF COMPARABLE PSM IN ALL CASES O F PSM IS A LACUNA WHICH RENDERS THE ENTIRE SCHEME OR MECHANISM OF PSM VIRTUALLY REDUNDANT OTIOSE AND IMPOSSIBLE TO COMPLY WITH EVE N IN THE MOST DESERVING OF CASES NAMELY WHERE THERE CAN BE NO DO UBT THAT THE AES WHO ARE PARTIES TO THE TRANSACTIONS IN QUESTION CONTRI BUTE AND EXPLOIT NON- ROUTINE OR UNIQUE INTANGIBLES OR THE TRANSACTIONS ARE SO INTERRELATED THAT THEY CANNOT BE EVALUATED SEPARATELY FOR THE PURPOSE S OF DETERMINING THE ALP THEREOF. 14. NOW IT IS SUBMITTED THAT SUCH LACUNA IS CURAB LE EVEN BY MAINTAINING AND WITHOUT DISTURBING THE OVERALL SPIRIT AND CONCE PT OF PSM AS ENSHRINED IN RULE 10B(1)(D) OF IT RULES AND AS ALSO UNDERSTO OD IN THE OECD AND UN ITA NOS. 5571/DEL/2011 & ITA 5896/DEL/2012 A.YS. 2007-08 / 2008-09 GLOBAL ONE INDIA P.LTD. NEW DELHI 55 TP GUIDELINES THROUGH INTERPRETING RULE 10B(1)(D) IN A MANNER THAT THE SAME PROVIDES AN OPTION AND NOT COMPULSORY MANDATE TO APPLY A COMPARABLE PSM IN A CASE WHERE RELIABLE EXTERNAL DA TA TO GAUGE THIRD PARTY BEHAVIOR IS IMPOSSIBLE TO BE OBTAINED. 15. IN THIS CONNECTION REFERENCE IS INVITED TO THE RULING OF THE HONBLE SC RENDERED IN THE CASE OF M.PENTIAH AND OTHERS VS. MU DDALA VEERAMALLAPPA AND OTHERS (1961 AIR 1107) WHERE THE HONBLE COURT QUOTED WITH APPROVAL THE FAMOUS WORDS ON INTERPRETATION OF STA TUTES SAID BY LORD DENNING IN THE CASE OF SEAFORD COURT ESTATES LTD. V S. ASHER(1) NAMELY : WHEN A DEFECT APPEARS A JUDGE CANNOT SIMPLY FOLD H IS HANDS AND BLAME THE DRAFTSMAN. HE MUST SET TO WORK ON THE CONSTRUC TIVE TASK OF FINDING THE INTENTION OF PARLIAMENT.. AND THEN HE MUST SUPP LEMENT THE WRITTEN WORD SO AS TO GIVE FORCE AND LIFE TO THE INTENTIO N OF THE LEGISLATURE. .A JUDGE SHOULD ASK HIMSELF THE QUESTION HOW IF THE MAKERS OF THE ACT HAD THEMSELVES COME ACROSS THIS RUCK IN THE TEX TURE OF IT THEY WOULD HAVE STRAIGHTENED IT OUT? HE MUST THEN DO AS THEY WOULD HAVE DONE. A JUDGE MUST NOT ALTER THE MATERIAL OF WHICH THE ACT IS WOVEN BUT HE CAN AND SHOULD IRON OUT THE CREASES. 16. IN OTHER WORDS IN CASE THE HONBLE TRIBUNAL PE RCEIVES THAT THE REQUIREMENT CONTAINED IN RULE 10B(1)(D) OF THE IT R ULES OF MANDATORY ADOPTION OF COMPARABLE PSM IN ALL CASES OF PSM ACTU ALLY RENDERS THE ENTIRE SCHEME OR MECHANISM OF PSM VIRTUALLY REDUNDANT OTI OSE AND IMPOSSIBLE TO COMPLY WITH EVEN IN THE MOST DESERVING OF CASES NAMELY WHERE THERE CAN BE NO DOUBT THAT THE AES WHO ARE PARTIES TO TH E TRANSACTIONS IN QUESTION CONTRIBUTE AND EXPLOIT NON ROUTINE OR UNI QUE INTANGIBLES OR THE TRANSACTIONS ARE SO INTER RELATED THAT THEY CANNOT BE EVALUATED SEPARATELY FOR THE PURPOSE OF DETERMINING THE ALP THEREOF HOW EVER WHERE RELIABLE EXTERNAL DATA TO GAUGE THIRD PARTY BEHAVIOR IS IMPO SSIBLE TO BE OBTAINED THEN THE REQUIREMENT FOR ADOPTION OF COMPARABLE PSM SHOULD BE DISPENSED WITH AND THE ASSESSEE SHOULD BE GIVEN AN OPTION TO ADOPT A RESIDUAL OR CONTRIBUTION PSM WHEN SUCH SUB-METHODS OF PSM ARE OTHERWISE ACCEPTED GLOBALLY BOTH UNDER THE OECD AND UN TP GUIDELINES AND ALSO IN RULE 10B(1)(D) ITSELF. 17. IT IS SUBMITTED THAT APPLYING SUCH AN INTERPRE TATION WOULD NOT TANTAMOUNT TO ALTERING THE OVERALL MECHANISM OF PSM UNDER THE INDIAN TP REGULATIONS BUT WOULD MERELY SUPPLEMENT LIFE AND F ORCE INTO RULE 10B(1)(D) OF THE IT RULES IN ORDER TO MAKE THE MECHANISM OF PSM ACTUALLY WORKABLE IN INDIA AND NOT RENDERED OTIOSE ON THE GROUND OF IMPOSSIBILITY OF PERFORMANCE. ITA NOS. 5571/DEL/2011 & ITA 5896/DEL/2012 A.YS. 2007-08 / 2008-09 GLOBAL ONE INDIA P.LTD. NEW DELHI 56 20.12. IN VIEW OF THE ABOVE DISCUSSION WE ARE OF THE CON SIDERED OPINION THAT THE TPO SHOULD DETERMINE THE ALP BY ADOPTING RESIDUAL PSM AS THE MAM AND BY ALLOCATING RESIDUAL PROFITS BASED ON THE REL ATIVE VALUE OF EACH ENTERPRISES CONTRIBUTION AS SUGGESTED IN VARIOUS COMMENTARIES . 20.13. IN ANY EVENT THE LEGISLATURE HAS INTRODUCED R ULE 10AB BY THE IT(SIXTH AMENDMENT) RULES 2012 W.E.F. 1.4.2012 UNDER THE SU B HEAD OTHER METHOD OF DETERMINATION OF ALP. THIS IS EXTRACTED FOR READY REFERENCE. RULE 10AB: FOR THE PURPOSES OF CLAUSE (F) OF SUB SECTION(1) OF SECTION 92C THE OTHER METHOD FOR DETERMINATION OF THE ARMS LENGTH PRICE IN RELATION TO AN INTERNATIONAL TRANSACTION SHALL BE ANY METHOD WHICH TAKES INTO ACCOUNT THE PRICE WHICH HAS BEEN CHARGED OR PAID OR WOULD HAVE BEEN CHARGED OR PAID FOR THE SAME OR SIMILAR UNCONTROLLED TRANSACTION WITH OR B ETWEEN NON-ASSOCIATED ENTERPRISES UNDER SIMILAR CIRCUMSTANCES CONSIDERI NG ALL THE RELEVANT FACTS. WHILE INTRODUCING THE AMENDMENT THE CBDT CIRCULAR IS REFERRED TO BELOW. THE CENTRAL BOARD OF DIRECT TAXES VIDE NOTIFICATI ON NO.18/2012 (F.NO.142/5/2012-TLP) DT. 25 TH MAY 2012 INTRODUCED THE SIXTH METHOD IN TP REFERRED TO AS THE OTHER METHOD WITH EFFECT FROM 1 ST APRIL 2012 I.E. ON AND FROM THE ASSESSMENT YEAR 2012-13 THROUGH INSERTING RULE 10AB READ WITH CLAUSE (F) OF RULE 10B(1) OF THE IT RULES. THE SAI D OTHER METHOD IS LIKE AN OMNIBUS OR RESIDUAL ONE IN THE SENSE THAT IT REFER S TO ANY METHOD WHICH TAKES INTO ACCOUNT THE PRICE CHARGED OR PAID OR WHICH WOU LD HAVE BEEN CHARGED OR PAID FOR SIMILAR UNCONTROLLED TRANSACTIONS WITH OR BETWEEN NON-AES WOULD HAVE BEEN CHARGED OR PAID FOR SIMILAR UNCONTROLLED TRANSACTIONS WITH OR BETWEEN NON AES UNDER SIMILAR CIRCUMSTANCES CONSI DERING ALL THE RELEVANT FACTS. THUS THE SAID OTHER METHOD WOULD IDEALLY OPERATE WHERE NONE OF THE METHODS SPECIFIED UNDER THE IT ACT AND RULES WOULD APPLY W ITH REFERENCE TO THE DESCRIPTIONS/DEFINITIONS PROVIDED IN RULE 10B(1) OF THE IT RULES YET THERE IS A COMPELLING NEED TO ARRIVE AT THE ALP OF ANY TRANSAC TION BETWEEN AES AS PER THE REQUIREMENTS OF THE TP REGULATIONS COUCHED IN CHAP TER X OF THE IT ACT. ITA NOS. 5571/DEL/2011 & ITA 5896/DEL/2012 A.YS. 2007-08 / 2008-09 GLOBAL ONE INDIA P.LTD. NEW DELHI 57 THOUGH THE NOTE DOES NOT INDICATE MUCH AS TO THE PU RPOSE IT CAN BE SEEN THAT THE PURPOSE AND OBJECTIVE OF INTRODUCTION OF THIS R ULE IS TO DETERMINE THE ARMS LENGTH PRICE WHENEVER THE METHODS SUGGESTED RESU LT IN PRACTICAL DIFFICULTIES BY ADOPTING GENERALLY ACCEPTED METHODS WHICH ARE NOT S PECIFICALLY LISTED. IT IS A PROCEDURAL PROVISION AIMED AT ARRIVING AT THE ALP . THUS IN OUR IT IS RETROACTIVE. ALP IDEALLY SHOULD BE THE SAME IN THE PREVIOUS YEARS AS IN THE SUBSEQUENT YEARS WHEN THE FACTS AND CIRCUMSTANCES A RE THE SAME IRRESPECTIVE OF THE METHOD ADOPTED FOR ARRIVING AT THE SAME. ON E CANNOT BE HEARD SAYING THAT THE ALP ARRIVED BY ONE METHORD CANNOT BE ACC EPTABLE FOR THE EARLIER YEAR AS THAT METHOD WAS NOT NOTIFIED BY THE CBDT. IN OUR VIEW ARMS LENGTH PRICE SHOULD BE THE SAME WITH MINOR VARIATIONS. WHEN A NEW METHOD IS ALLOWED WITH THE OBJECTIVE OF ENABLING DETERMINATION OF THE PROP ER ALP IN OUR COMPREHENSION SUCH A PROVISION OPERATES RETROACTI VELY AND CAN BE USED TO DETERMINE THE ALP IN THE EARLIER ASSESSMENT YEARS A LSO. WHEN THE AIM AND OBJECT OF INTRODUCING A RULE ALLOWING THE ASSESSE E TO ADOPT ANY OTHER METHOD FOR DETERMINING THE ALP BY INTRODUCING S.10AB IS TO REMOVE UNINTENDED PRACTICAL DIFFICULTIES AND ONLY TO ENABLE PROPER D ETERMINATION OF THE ALP THE RULE IN OUR VIEW HAS TO BE CONSIDERED AS RETROACT IVE AND THUS RETROSPECTIVE. 20.14. THE LD.COUNSEL FOR THE ASSESSEE HAS RELIED ON THE DECISION OF I.T.A.T. CHENNAI BENCH IN THE CASE O F ACENDAS INDIA P.LTD. VS. DCIT IN ITA 1736/MDS/2011 AND THE DECISION OF T HE BANGALORE BENCH OF THE TRIBUNAL IN THE CASE OF TALLY SOLUTIONS P.LTD. VS. DCIT IN ITA 1235/BNG/2010 FOR THE PROPOSITION THAT SUITABLE ADJUSTMENTS AND METHODOLOGY PRESCRIBED FOR EVALUATION OF AN INTERNATIONAL TRANS ACTION ARE PERMISSIBLE AND THAT THE PRESCRIBED METHODS MAY NOT B E RIGIDLY FOLLOWED AS WAS ITA NOS. 5571/DEL/2011 & ITA 5896/DEL/2012 A.YS. 2007-08 / 2008-09 GLOBAL ONE INDIA P.LTD. NEW DELHI 58 DONE IN THOSE CASES.. HE HAS ALSO RELIED ON THE DE CISION OF HONBLE SUPREME COURT IN THE CASE OF ALLIED MOTORS P.LTD. VS. CIT 224 ITR 677(SC). 20.15. THESE DECISIONS SUPPORT THE CONTENTIONS OF THE ASS ESSEE. THUS WE HOLD THAT RULE 10AB CAN BE APPLIED FOR THE IMPUG NED AYS ALSO FOR DETERMINING THE ALP . 21. IN VIEW OF THE ABOVE DISCUSSION THIS ISSUE IS REM ITTED TO THE FILE OF THE AO FOR FRESH ADJUDICATION IN LINE WITH THE OBSERVATION S MADE BY THIS BENCH ON THIS ISSUE. IN THE RESULT THIS GROUND OF TRANSFER PRIC ING ADJUSTMENT FOR BOTH THE AYS IS SET ASIDE TO THE FILE OF THE ASSESSING OFFICER. 22. IN THE RESULT THE APPEALS FOR BOTH THE ASSESSMENT YEARS ARE ALLOWED IN PART. ORDER PRONOUNCED IN THE OPEN COURT ON 15 TH APRIL 2014. SD/- SD/- (A.D. JAIN) (J.SUDHAKAR REDDY) JUDICIAL MEMBER ACCOUNTANT MEMBER DATED: THE 15 TH APRIL 2014 *MANGA ITA NOS. 5571/DEL/2011 & ITA 5896/DEL/2012 A.YS. 2007-08 / 2008-09 GLOBAL ONE INDIA P.LTD. NEW DELHI 59 COPY OF THE ORDER FORWARDED TO: 1. APPELLANT; 2.RESPONDENT; 3.CIT; 4.CIT (A); 5.DR; 6.GUARD FILE BY ORDER ASST. REGISTRAR