American Express Bankingcorporation (India Branch v. Assistant Director Of Income Tax, Circle 1(1),International Taxation, New Delhi

Signature Not Verified $~6 *IN THE HIGH COURT OF DELHI AT NEW DELHI %Date of Decision : 05.05.2025 +ITA 5/2025 AMERICAN EXPRESS BANKINGCORPORATION (INDIA BRANCH).....AppellantThrough:Mr Nageshwar Rao with Mr PratikRath, Advocates. versus ASSISTANT DIRECTOR OF INCOME TAX, CIRCLE 1(1),INTERNATIONAL TAXATION, NEW DELHI.....RespondentThrough:Mr Anant Mann, JSC for Mr RuchirBhatia,SSCwithMrAbhishekAnand, Advocate. CORAM:HON'BLE MR. JUSTICE VIBHU BAKHRUHON'BLE MR. JUSTICE TEJAS KARIA VIBHU BAKHRU, J. (ORAL) 1.The appellant [Assessee] has filed the present appeal under Section260A of the Income Tax Act, 1961 [the Act], inter alia, impugning an orderdated 07.08.2024 [impugned order] passed by the learned Income TaxAppellate Tribunal in ITA No.6253/Del/2017 in respect ofAssessment Year 2009-10. 2.The impugned order is a common order passed by the learned ITATin respect of cross appeals preferred by the parties (ITA No.6253/Del/2017 Signature Not Verified preferred by the Assessee and ITA No.6455/Del/2017 preferred by theRevenue) against the order dated 31.07.2017 passed by the learnedCommissioner of Income Tax (Appeals), Delhi -38 [CIT(A)]. The presentappeal filed by the Assessee is confined to the impugned order insofar as itrelates to the Assessee’s Appeal [ITA No.6253/Del/2017]. 3.The Assessee is a company incorporated under the laws of the UnitedStates of America and is engaged in the business of banking. The Assesseehad set up its Branch in India during the financial year 2007-08 afterobtaining the licence from the Reserve Bank of India for followingactivities: (i) credit card business; (ii) services in relation to travellers cheque; and (iii) acceptance of institutional deposits as defined by the RBI. 4.The Assessee filed its return of income for AY 2009-10 declaringtotal income of ₹52,74,06,080/-. The same was selected for scrutiny. 5.The Assessee had entered into international transaction with itsAssociate Enterprises [AEs] of a value of ₹320 Crores (Rupees 3.2 Billion). In view of the same, the Assessing Officer made a reference underSection 92CA(3) of the Act to the Transfer Pricing Officer fordetermining the Arms’ Length Price of the international transactions. 6.The TPO passed an order dated 23.01.2013 and made the transferpricing adjustment amounting to ₹24,30,24,147/- on account of the ALP of the international transaction as determined by it. The break-up of the said adjustment is set out below:- 7.Pursuant to the above adjustment, the AO passed the final assessmentorder dated 15.05.2013 under Section 143(3) read with Section 144C of theAct making the adjustment of the amount as determined by the TPO –₹24,30,24,147/-. 8.The Assessee appealed the final assessment order dated 15.05.2013before the CIT(A). The CIT(A) referred to the decisions of this court inCommissioner of Income Tax v. EKL Appliances Limited: (2012) 345 ITR241, as well as in Commissioner of Income Tax v. Cushman andWakefield India Pvt Ltd : Neutral Citation No.: 2015:DHC:4171-DB andheld that the TPO could not question the commercial wisdom of an assesseein entering into any international transaction; his jurisdiction was limited todetermining the ALP of the international transaction as referred to him.Notwithstanding the observations to the aforesaid effect, the CIT(A) alsoheld that it was not possible to quantify the value of the intra group servicesavailed by the Assessee in absence of any third party documentation anddirected that the adjustment on account of the international transactions relating to intra group services, be restricted to 50% of the adjustment asdirected by the TPO. 9.The CIT(A) also considered the Assessee’s challenge to theinclusion/exclusion of certain entities as comparables for determining theALP of international transactions relating to provision of IT enabledservices. relating to intra group services, be restricted to 50% of the adjustment asdirected by the TPO. 9.The CIT(A) also considered the Assessee’s challenge to theinclusion/exclusion of certain entities as comparables for determining theALP of international transactions relating to provision of IT enabledservices. 10.The Revenue appealed the CIT(A)’s decision before the learned ITATessentially, on the ground of inclusion of Cepha Imaging Private Limitedand R Systems International Limited as comparables for determining theALP. The Revenue also assailed the decision of the CIT(A) to direct theexclusion of Coral Hub Ltd., Cosmic Global Ltd., E Clerx Services Ltd. andICRA Online Ltd. as comparables on account of their functional dis-similarities. 11.The Assessee challenged the order of the CIT(A), inter alia, on theground that it erred in not considering that the conditions as specified underSection 92C(3) of the Act were not satisfied and, therefore, the TPO couldnot have proceeded to determine the ALP on the basis of the materialavailable with it. The Assessee also questioned the CIT(A)’s decision todetermine ALP for intra group services at 50 per cent of the value as withoutany basis. The Assessee also challenged the exclusion of M/s. CG VAKSoftware and Exports Ltd. as a comparable. 12.The learned ITAT did not find any fault with the CIT(A)’s decisionregarding exclusion / inclusion of the companies as comparable asserted bythe Revenue or the Assessee. However, insofar as the intra group services is concerned, the learned ITAT faulted the TPO for determining the ALP forintra group services as nil and concluded that some intra group services hadbeen received by the Assessee and, therefore, ALP of such services couldnot be determined as nil. 13.Although, the CIT(A) had also faulted TPO for considering the ALPof intra group services as nil, it had held that same should be determined as50 per cent of the said value. In view of the above, the learned ITATremanded the matter to the TPO for determining the ALP afresh. 14.The Assessee has projected the following questions of law forconsideration of this court: - “I. Whether Hon’ble Tribunal ought to have finally,and conclusively deleted adjustment made to transferprice paid by Appellant for intra group servicesprovided by Associated Enterprise? II. Whether impugned order is perverse, unlawful andillegal to the extent it does not follow principle laiddown by this Hon’ble Court viz, that without rejectingtransfer pricing study submitted by taxpayer arm’slength price cannot be substituted by Respondents?III. Without prejudice to above, whether impugnedorder is unlawful and invalid to the extent it does notfinallyandconclusivelydeletetransferpricingadjustment made to payment towards intra groupservicesbyarbitrarilychoosingCUPasMostappropriate method and further in declaring ALP asNIL without application of CUP as prescribed underthe Act? IV. Whether Hon’ble Tribunal erred in not deletingdetermination of ALP by first appellate Authority at adhoc 50 % and erred in exercising its power of remandin facts and circumstances of present case? V. Whether impugned order is perverse in remandingthe determination of arm’s length price of intra groupservices received without considering material and Signature Not Verified submissions on appeal record?” REASONS AND CONCLUSION 15.During the FY 2008-09, the Assessee had undertaken the followinginternational transactions: - *TNMM: Transactional Net Margin Method 16.The Assessee submitted transfer pricing study to establish that thepayments made for the services received (international transactions) were atALP. The Assessee benchmarked the international transactions by using theTransactional Net Margin Method with operating profit margin asthe profit level indicator . The Assessee had identified comparableentities from the commercial information databases namely Prowess andCapital Line. V. Whether impugned order is perverse in remandingthe determination of arm’s length price of intra groupservices received without considering material and Signature Not Verified submissions on appeal record?” REASONS AND CONCLUSION 15.During the FY 2008-09, the Assessee had undertaken the followinginternational transactions: - *TNMM: Transactional Net Margin Method 16.The Assessee submitted transfer pricing study to establish that thepayments made for the services received (international transactions) were atALP. The Assessee benchmarked the international transactions by using theTransactional Net Margin Method with operating profit margin asthe profit level indicator . The Assessee had identified comparableentities from the commercial information databases namely Prowess andCapital Line. 17.The TPO did not concur with the analysis undertaken by the Assesseeand undertook a fresh economic analysis. It rejectedsome of thecomparable companies identified by the Assessee on the following factors:(i) unavailability of the data for FY 2008-09; (ii) different accounting yearfilter; (iii) turnover filter of revenue for the relevant activity for less than ₹5 Crores; (iv) diminishing revenue filter; service income less than 75 per centof the total operating revenues;(v) persistent loss for the last three years; (vi)related party transactions being greater than 25 per cent of the operating Signature Not Verified revenues; and (vii) export revenue being less than 75 per cent of the totalsales. 18.The TPO computed the average net margin of comparable companiesat 29.91 per cent on operating cost as against 18.12 per cent determined bythe Assessee, in respect of the back office support services. The TPO alsodid not concur with the Assessee’s cost allocation of expenses by AEs wasat ALP. The TPO held that the Assessee had not established that it hadreceived any service and, therefore, determined the ALP for allocation ofcost of back office services as nil. 19.There is no cavil that the TPO’s finding that the ALP of back officeservices provided by the AEs was nil, is unsustainable. The CIT(A) as wellas the learned ITAT had returned concurrent findings to the effect that theAssessee received the services and therefore the ALP of such services couldnot be determined as nil. 20.As noted above, pursuant to the aforesaid finding, the learned ITAThas remanded the matter to the TPO for consideration afresh. 21.Mr Rao, the learned counsel appearing for the Assessee contendedthat the learned ITAT had failed to appreciate that the Assessee’s economicanalysis could not be rejected unless any of the grounds as set out in Section92C(3) of the Act are satisfied. 22.Sub-section (3) of Section 92C of the Act is set out below:- “92C. Computation of arm’s length price. (1) *********(2) ********* (3) Where during the course of any proceeding for theassessment of income, the Assessing Officer is, on thebasis of material or information or document in hispossession, of the opinion that- (a) the price charged or paid in an international transactionhasnotbeendeterminedinaccordance with sub-sections (1) and (2); or(b) any information and document relating toan international transaction have not been keptand maintained by the assessee in accordancewith the provisions contained in sub-section(1) of section 92-D and the rules made in thisbehalf; or (c) the information or data used in computationof the arm’s length price is not reliable orcorrect; or (d) the assessee has failed to furnish, within thespecified time, any information or documentwhich he has required to furnish by a noticeissued under sub-section (3) of section 92-D,the Assessing Officer may proceed to determine thearm’s length price in relation to the said internationaltransaction in accordance with sub-sections (1) and(2), on the basis of such material or information ordocument available with him: (c) the information or data used in computationof the arm’s length price is not reliable orcorrect; or (d) the assessee has failed to furnish, within thespecified time, any information or documentwhich he has required to furnish by a noticeissued under sub-section (3) of section 92-D,the Assessing Officer may proceed to determine thearm’s length price in relation to the said internationaltransaction in accordance with sub-sections (1) and(2), on the basis of such material or information ordocument available with him: Provided that an opportunity shall be given bythe Assessing Officer by serving a notice calling uponthe assessee to show cause, on a date and time to bespecified in the notice, why the arm’s length priceshould not be so determined on the basis of material orinformation or document in the possession of theAssessing Officer.” 23.The order passed by the TPO indicates that it did not concur with thedetermination of the transfer pricing study furnished by the Assessee. Forone, the TPO found that the filters used by the Assessee to select thecomparables are inapposite. 24.The TPO also issued the show cause notice dated 21.12.2012. In the said notice, the TPO had recorded the filters used by the Assessee and hadrecorded his comments in respect of such filters. The relevant extract of theshow cause notice dated 21.12.2012 is set out below: - study, it is found that following filters or criteria which includesome of filters applied by you and those considered appropriate bytheTPOmayleadtowardsselectingpropercomparablesfunctionally similar to that of the tested party. These filters and therationale for applying these filters is as follows. ……….” 25.The TPO also examined the comparables selected by the Assesseeand furnished his comments on the same. Some of the comparables wererejected whereas some of the comparable entities were accepted. In addition,the TPO also included certain comparable entities, which according to theTPO had qualified the filters as determined by it. The adjustment regardingthe provision of IT enabled services were based on the ALP determined onthe aforesaid basis. 26.Insofar as the intra group services is concerned, the TPO hadconcluded as under: - “19.4 In view of the foregoing, the discussion alreadymade above is summed up as follows: Inthiscase,theassesseehasfailedtosubstantiate that services have actually been renderedto it and benefit has actually been derived by it on thebasis of documentary evidence. In support of itscontention, the assessee has merely furnished copies ofcertain mails exchanged between the personnel of theGroup.Noneoftheabovereproducede-mailexchangesbetweentheemployeesestablishtherequirement/specific need of the assessee for theirservices, the benefit which has accrued to the assessee,or that an independent party would have been willingto pay another independent party for the servicespurported to be received by the assessee. The services received are incidental being innature of long association. It is evident from facts stated above that theassessee did not file any evidence to support a claim that these services were actually provided to theassessee at its request to meet the specific need of theassessee and that certain tangible and concrete benefitshave actually accrued to the assessee. Underuncontrolledcircumstancesanyindependent enterprise having skilled and sufficientlytrained manpower would, not have been willing to payany third party to do so. In my opinion, services whichare incidental or mere duplicity do not fall in thecategory of Intra group services. The services received are incidental being innature of long association. It is evident from facts stated above that theassessee did not file any evidence to support a claim that these services were actually provided to theassessee at its request to meet the specific need of theassessee and that certain tangible and concrete benefitshave actually accrued to the assessee. Underuncontrolledcircumstancesanyindependent enterprise having skilled and sufficientlytrained manpower would, not have been willing to payany third party to do so. In my opinion, services whichare incidental or mere duplicity do not fall in thecategory of Intra group services. However,withoutprejudicetotheabovediscussion, it may not be impossible, however, for agroup member to benefit incidentally from servicesbeing provided to one or more fellow affiliates. Forexample in this case, the assessee might be benefitedfrom services rendered by AE in general to its otherAEs. However, such incidental benefits do not giverise to Intra Group Services and cannot be regarded asgiving rise to arrangement subject to arm’s lengthpricing as stipulated in OECD TP guidelines paragraph7.13 under Chapter VII. These findings lead to anirresistibleconclusionthatpaymentsforliaisonservices allegedly provided by the AEs are not at arm’slength price.Moreover, it is seen from the details containedin the transfer pricing report of the assessee submittedunder Rule 10D that the assessee had not conductedFAR analysis in regards to these alleged services andhad failed to justify the functions performed by the AEfor these payments. This is probably a reason that thereceipt of alleged services have not been benchmarkedunder any of the five method prescribed under the Actin the Transfer Pricing report. Furthermore, the assessee has at the time ofrequisitioning the so-called services, not carried outany cost- benefit analysis at its end. No independentpartywouldagreetoincurexpenditurewithoutindependentlyascertainingthevalueofthegoods/services intended to be availed, in the marketand that too at the best negotiated prices. No sucheffort has been demonstrated to be made at the end of Signature Not Verified the assessee, which weighs heavily against the normalpractises of business prudence. In view of above findings, I am of theconsideredopinionthattheassesseehadmadepayments of Rs. 226,540,886/- to its AE for intra-group services which are not found to exist in thiscase. The arm’s length price of these alleged servicesis held to be nil on application of CUP method as nouncontrolled enterprise would have paid any amountfor services which do not tantamount to Intra groupservices with demonstrable benefits. The assessingofficer shall consequently increase the taxable income”of the assessee by an amount of Rs. 226,540,886/-. [emphasis added] 27.Additionally, the TPO also was of the view that the adjustment of Rs.453 was also required to be made on account of receivables. The tabularstatement setting out the break-up of the adjustment as determined by theTPO is reproduced below: - S.NNatureofALPALPAdjustmentinternationaldetermineddeterminedu/s 92CAtransactionby assesseeby the(INR)(INR)TPO (INR)1 Provisionof19959000021607280816,482,808ITenabledservices2 ReceivableNil4534533 IntraGroup226,540,886Nil226,540,886ServicesTotal24,30,24,147 28.There is no cavil that in the present case, the controversy essentiallyrevolves around the amount paid by the Assessee for intra group services. 29.As noted above, the Assessee had benchmarked the said internationaltransaction in relation to the allocation of such services by using TNMM asthe most appropriate method. However, the TPO held that the allegedservices were nil on an application of the Comparable Uncontrolled Price method. S.NNatureofALPALPAdjustmentinternationaldetermineddeterminedu/s 92CAtransactionby assesseeby the(INR)(INR)TPO (INR)1 Provisionof19959000021607280816,482,808ITenabledservices2 ReceivableNil4534533 IntraGroup226,540,886Nil226,540,886ServicesTotal24,30,24,147 28.There is no cavil that in the present case, the controversy essentiallyrevolves around the amount paid by the Assessee for intra group services. 29.As noted above, the Assessee had benchmarked the said internationaltransaction in relation to the allocation of such services by using TNMM asthe most appropriate method. However, the TPO held that the allegedservices were nil on an application of the Comparable Uncontrolled Price method. 30.As noted above, the CIT(A) as well as the learned ITAT had foundthat the Assessee had received services and, therefore, it was necessary thatthe ALP be determined. Undeniably, the transfer pricing study of theAssessee could not be rejected unless the conditions as set out in Section92C(3) of the Act were satisfied. It is the Assessee’s case that suchconditions are not satisfied and, therefore, the TPO cannot make anyadjustment on account of intra group services. However, the TPO hadproceeded on the basis that the Assessee has been unable to establish that ithad derived any benefits from such services and therefore, no independententity would pay for such services without any cost benefit analysis. 31.In the aforesaid circumstances it does not appear that the TPO hadexamined the transfer pricing analysis furnished by the Assessee regardingthe value of the services received. The CIT(A) as well as the learned ITAThad concurrently found that the Assessee had received intra group services.It is thus, necessary for the TPO to examine the transfer pricing studiesfurnished by the Assessee in that perspective. 32.There is no cavil that if the conditions as specified under Section92C(3) are not satisfied, the TPO cannot proceed to make any adjustment.In the present case, the learned ITAT has remanded the matter to the TPO to consider afresh as the TPO’s fundamental premise that the Assessee had notreceived any services, has been rejected. 33.In the circumstances, we find no infirmity in the learned ITAT’sdecision in remanding the matter to the TPO to consider afresh. Needless tostate the TPO is also required to consider whether any of the conditionsunder Section 92C(3) of the Act are satisfied before proceeding to maketransfer pricing adjustment on account of intra group services. 34.In view of the above, we do not find that any substantial question oflaw arises for consideration of this court. The appeal is, accordingly,dismissed. VIBHU BAKHRU, J MAY 05, 2025M TEJAS KARIA, J Click here to check corrigendum, if any