TaxTMI 
TaxTMI 
2012 (6) TMI 597
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....e Income Tax Act, 1961 (for short "the Act") for assessment year 2002-03 and the same is extracted below for ready reference:- "3. Business of the assessee 3.1 The assessee is a joint-venture company between Mastek Ltd and Deloitte Consulting with Mastek and its affiliates holding 50.1% of the share capital and the balance 49.9% being held by Deloitte and its affiliates. Deloitte Consulting is a limited partnership registered in New York. It is one of the worlds leading management consulting firms. Mastek, the other shareholder, is a publicly held in Indian information technology application outsourcing company. 3.2 The assessee was incorporated as a private limited company on 30th July 2001. The Joint-venture was formed for the establishment and operation of an offshore development centre for the provision of both offshore and on-site information technology and other related services. 3.3 The assessee has entered into a software development service agreement with Deloitte to provide the software related services to Deloitte. Deloitte enters into consulting assignments with its US clients. For such assignments, the areas pertaining to software development and informatio....
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....ow the arms length Price has been determined in respect of each of the international transactions. In this connection, the assessee has undertaken an analysis of the functions performed, assets employed and the risks assumed by it and its associated enterprise in respect of each of the international transactions The object of undertaking such an of the analysis is to characterise the assessee as well as the associate entity, so that comparable transactions can be identified based on the character of the assessee. The procedure followed is described as under:-" 3. We extract the facts, as brought out by the TPO, relating to the third international transaction, as there is no dispute in the first and the second international transactions before the Tribunal. "5.3 Functions Performed in Respect of the Third Transaction- Deloitte has deployed three senior managers to undertake full-time marketing for the assessee. Deloitte identifies client opportunities and the new or existing opportunities that can be undertaken by using offshore model. In this connection, the partners and senior managers of Deloitte, reach out to the assigned senior managers and involving them in the sale p....
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....ation consists of only costs and there is no mark up embedded in the same. Citing this reason the assessee contends that the cost represents the arms length price for the charge on account of marketing expenses made to the assessee. 2. The assessee contends that it has derived valuable benefit on account of these costs and hence their allocation to it is proper. In this regard the assessee explains that its business has significantly increased on account of the efforts of the three senior managers whose costs have been allocated. It is also explained that if the assessee were to undertake the marketing function on its own it would have had to incur significant expenses. 3. The assessee relies upon the confirmation dated the 3 Jan 2005 and contends that the cost allocation is in accordance with the joint-venture, agreement and is hence duly authorised by all the concerned parties. 4. The assessee explains that though 17 persons were engaged in the business of marketing the offshore capabilities by Deloitte, only the cost relating to three persons have been charged to the assessee. It is also explained that these three persons were wholly engaged in marketing the offshore ca....
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....oftware agreement. (c) One of the main consideration in the case of intra-group services is to show that some valuable service has in fact been received by one of the parties. In this case accordingly the assessee had been requested to produce evidence to show that valuable services were received by it against the cost allocation. In this connection the only evidence produced by the assessee consists of various e-mails exchanged between the various employees of the assessee company and the three senior managers of Deloitte whose costs have been allocated. On an examination of these e-mails it is found that they predominantly deal with issues relating to billing and invoicing. In most of the e-mails furnished the senior managers are advising the assessee regarding the manner of billing. A number of e-mails also relate to follow up with the clients in connection with pending bills. In this connection assessee's letter dated November 30, 2004 clearly mentions that the three persons were actively involved in accounting and invoicing besides making presentation and marketing the JV's offshore capabilities. However as already explained at Para 5.1 the risk on account of accoun....
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....er pricing proceedings after the issue regarding the agreement was raised, cannot constitute a contemporaneous evidence, in support of the transaction. The approval of the board of the assessee company for the payment cannot act as - a substitute for a formal arrangement specifying the services that would be rendered and the costs that would be reimbursed, such agreement being entered into before the transaction. In related party situations, the fact that the transaction is duly authorized by the Board of he assessee company or the overseas entity in itself does not establish that the transaction is at arm's length. In a third party situation, no entity will accept the burden of the costs incurred by the other party unless a specific agreement is reached before the costs are incurred and the agreement specifies the nature and purpose of the costs and the respective share of each party in it. (f) From all these submissions of the assessee it is seen that although the charge is stated as a pure cost allocation, from the assessee's perspective the same is in fact a charge on the assessee for marketing services. It is only the quantum of the charge which is linked with the c....
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.... other travel related costs of three persons were reimbursed. It was claimed that the costs allocation was in accordance with the joint venture agreement. 7. The Commissioner (Appeals) rejected the contentions of the assessee on various grounds. He held that - (i) the role of Deloitte has to market and generate sales as well as to manage customer relations and ensure delivery as well as billing and that this was already defined as per the agreement between Deloitte and assessee; (ii) it is clear that the marketing function has been allocated to Deloitte and the role of the assessee is only to execute the project on behalf of the Deloitte, as per agreement, and deliver the out put to them. The cost of marketing incurred by the Deloitte is recovered from end customers by way of price charged to them; (iii) the assessee refused to file details of marked-up earned by Deloitte on sales made to end customers and, hence, the TPO has rightly assumed that Deloitte had suitably, marked-up the price charged to the end customers, so as to recover marketing cost; (iv) Procedure described in clause (9) of the agreement for secondment of employees was not followed and, hence, there....
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....rming that no services were rendered to the Appellant by the seconded personnel of Deloitte during the said assessment year. 1.4 Based on facts and circumstances of the case, the learned CIT(A) erred in law in not demonstrating the motive of the Appellant to shift profits outside India by manipulating the prices charged in its international transactions. 1.5 The CIT(A) erred in law and facts in disregarding the decision of Hon'ble Supreme Court in the case of Shahzada Nand & Sons, 108 ITR 358. Ground 2: Reference to the Transfer Pricing Officer is bad in law 2.1 The learned CIT(A) erred in law in not considering the fact that the AO did not record any reasons to show the conditions mentioned in clause (a) to (d) of Section 92C(3) of the Act were satisfied, before making a reference of the Appellant's case to the TPO under section 92CA(l) of the Act and therefore the Appellant prays that the reference made by the AO to the TPO was not in accordance with the law. Ground 3: Other Grounds 3.1 The learned CIT(A) erred in confirming levy of interest under section 234B of the Act. 3.2 The learned CIT(A) erred in confirming the initiation of penalty proceedings....
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....s a case of pure reimbursement of actual expenditure and, hence, the question of determining ALP does not arise. 15. He further submitted that - (i) the scope of TPO is to compute the ALP and it is a domain of the Assessing Officer to determine as to whether a particular expenditure is allowable or not. He argued that the TPO is not empowered to disallow the expenditure and under section 92CA(1) r/w section 92F(ii) of the Act; the only power given to the TPO is to determine ALP. He referred to the plain language in the Act and the CBDT instructions dated 20th May 2003, and argued that the determination of assessable income has not been outsourced to the TPO and that this remains the domain of the Assessing Officer. He relied on the following case laws:- Honda Siel Cars India Ltd. v. Asstt. CIT [2010] 1 ITR (Trib.) 497/[2011] 129 ITD 200 (Delhi); and Sony India (P.) Ltd. v. CBDT [2007] 288 ITR 52/[2006] 157 Taxman 125 (Delhi). (ii) the second proposition argued is that, the joint venture agreement was prior to the incorporation of the assessee company and that this joint venture puts an obligation on the assessee post incorporation to reimburse the marketing costs and....
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.... in these years. For the assessment year 2006-07, he submitted that in the original return of income itself, the assessee has suo-motu made the adjustment of ALP increased its income and filed its return of income and claimed exemption under section 10A. He relied on the decision of Bangalore co-ordinate bench of the Tribunal in I-Gate Global Solutions Ltd. (supra) and argued that the issue is covered and the assessee should be granted exemption under section 10A, for the assessment years 2004-05, 2005-06 and 2006-07. On a query from the Bench, he admitted that no fresh form no.3CEB, had been filed. He submitted that the Assessing Officer has wrongly ignored the revised return of income filed by the assessee for assessment years 2004-05 and 2005-06. 18. Learned Departmental Representatives, Mrs. Malathi Sridharan, along with Mr. Jitendra Yadav, representing the Revenue, opposed the contentions of the learned Counsel for the assessee and pointed out that the learned Counsel has raised a number of new issues which were never argued either before the TPO or before the Assessing Officer or before the CIT(A). They pointed out that the assessee has not raised these issues in the groun....
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....nt as regards marketing and sales function and that the entire market risk is to be borne by the Deloitte only; (iii) the assessee has to bill Deloitte on an hourly basis and the Deloitte is supposed to pay within sixty days of invoice date irrespective of whether the Deloitte has received the payments from the clients, unless there are issues relating to quality. Hence, billing risk is exclusive with Deloitte; (iv) entire sales of the assessee is only to Deloitte and, hence, it has no marketing and sales functions to be preformed; (v) billing was purely on hourly basis by the assessee to Deloitte and Deloitte enjoyed the mark-up in its billing to clients. The mark-up was not disclosed and it should be presumed that mark-up was also for performing marketing and sales function. (vi) on the basis of joint venture agreement and master service agreement and the recitals therein, there is no mandate whatsoever on the assessee to bear market risk as well billing risk. That the sales function, the market function and the billing function are exclusive domain of Deloitte and there is absolutely no role for the assessee as per the mandate of this agreement. Hence, no expenditure....
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....onal transactions, they cannot be clubbed as it would tantamount to following entity level approach which is not permitted; (vi) that the ALP can be determined at "nil", when no services are rendered, reliance was placed on the decision of a Bangalore co-ordinate bench Gemplus India (P.) Ltd. v. Asstt. CIT, in ITA no.352/Bang./2009, order dated 21st October 2010, (vii) that the contention of the assessee that its claim of reimbursement was accepted in proceedings under section 201 of the Act, it is argued that this does not act as a bar on investigation by the TPO and his arriving at the ALP. Reliance was placed on the judgment of Hon'ble Jurisdictional High Court in Aditya Birla Nuvo Ltd. v. Dy. DIT, [2011] 12 Taxman.com 141/200 Taxman 437 (Bom.) and submitted that these sections operate in different fields. 23. On the argument that the disallowance of expenditure is the domain of the Assessing Officer, learned Departmental Representative submitted that the TPO determined the ALP at "nil" and that he had neither made any disallowance nor had he stepped into the shoes of the Assessing Officer. He disputed the argument that once the Assessing Officer refers a transaction to t....
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....of profits. She pointed out that the return of income for assessment year 2004-05 was filed beyond one year and that for both the assessment years 2004-05 and 2005-06, the revised returns of income cannot be admitted as there is no omission or a wrong statement in the original return of income. He relied on a number of case laws in support of her contentions. She further submitted that the findings of the Commissioner (Appeals) at Page-6, Para-3.3.4, on the allowability for deduction under section 10A, have not been disputed by the learned Counsel for the assessee. She pointed out that the conditions stipulated under section 10A, have not been fulfilled. 25. Learned Counsel for the assessee, in reply, submitted that there are no fresh grounds of appeal raised and that the ground raised is broad enough to cover fresh arguments raised before the Tribunal. He submitted that both the payments and receipts by Deloitte to the assessee company have to be considered as a whole and when properly analysed, it should be taken as a single set-of transactions. He countered various arguments of the learned Departmental Representative by submitted that - (i) interface with client is allowed to....
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....ose and/or demonstrate the offshore delivery model and capabilities. Once the engagement execution is underway the assigned managers would identify the appropriate onsite/offshore team mix as proposed in the proposal, and monitor the status and quality of the engagement. The assigned managers would also check on the accounting and the invoicing processes. In connection with the assignment of the senior managers, Deloitte would cross-charge (without any mark up) the salary cost (including other benefits as well as their out of pocket expenses) of the said senior managers to MDCODC. MDCODC claims the said expenses as marketing expenses in its books." 30. Thereafter, at Page-20 of the TP report, it is stated as follows:- "Search for Internal Comparables Internal Transactions occur when either (Majesco/Deloitte) or MDCODC engages in similar transactions with unrelated entities. internal Cornparables relevant to the transaction between MDCODC. and (Maiscc/Deloie) would include the following: * MDCODC providing contract software services to unrelated parties. * Deloitte contracting software services to unrelated parties. * Majesco providing contract software servi....
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.... MDCODC by Deloitte at actual cost. The Indian transfer pricing legislation has not commented on the manner for determining an aim's length price in respect of transactions involving reimbursement, however a gainful reference can be drawn from the OECD Guidelines in this regard which state that: In this respect we may state that the OED guidelines provide that 7.36: When an associated enterprise is acting only as an agent or intermediary in the provision of services, it is important in applying the cost plus method that the return or mark-up is appropriate for the performance of an agency function rather than for the performance of the service themselves. In such a case, it may not be appropriate to determine arm's length pricing as a mark-up on the cost of the services but rather on the costs of the agency function itself or alternatively, depending on the type of comparable data being used the mark-up on the cost of services should be lower than would be appropriate for the performance of the services themselves. For example, an associated enterprise may incur the costs of renting advertising space on behalf of group members, costs that the group members would ha....
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....greements, which is a pre-incorporation agreement which is binding. This argument is to be rejected as "ALP" has to be determined irrespective of any contractual obligation undertaken by the parties. If it is held that the TP provisions do not apply whenever there is a legal obligation to pay, then the entire objective of the provisions will be defeated. The issue which the TPO requires to adjudicate is not whether the assessee has a legal obligation to pay and whether the payment made is for the purpose of business etc, but only to determine the ALP of the transaction i.e., to examine as to whether the transactions are at arm's length. If the transactions are, in the opinion of the TPO, not at arm's length, the required adjustment has to be made, as provided in the Act, irrespective of the fact that the expenditure is allowable under other provisions of the Act. 36. The second argument of the learned Counsel that the TPO is not empowered to disallow the expenditure and that the very reference to the TPO by the Assessing Officer presumes that the amount in question is allowable under section 37 of the Act and certain case laws were relied upon for this proposition. 37....
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....e, is against the facts. The TPO has not disallowed any expenditure. Only the ALP was determined. It was the Assessing Officer who computed the income by adopting the ALP decided by the TPO at "nil". 41. On the argument that the assessee was not having an Associate Enterprise as on the date of obligation entered into by way of joint venture agreements and reliance placed on the judgment of Hon'ble Supreme Court in Philip John Plasket Thomas (supra), are of the opinion that this is of no relevance. On the issue of order U/s 201(1), he hold that it is of no relevance as these sections operate in different fields. 42. On the argument that reimbursement of expenses need not be referred to the TPO, for determination of ALP, we find that the Special Bench of the Tribunal in Aztec Software & Technology Services Ltd. (supra), considered the issue and decided the same against the assessee. The Tribunal observed as follows:- "It is a case of reimbursement of expenditure incurred by an agent for its principal. There is a force in the argument of the Revenue that if the CIT(A) had considered it to be the case of reimbursement, then he should have asked the assessee to furnish the ....
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....nts of different skill, experience, knowledge level, complexity of software projects handled, risk bearing capacity, etc. The entire revenue of the assessee are from the Deloitte. The evidence filed in support of the fact that services are rendered in the form of e-mails show that they are not e-mails relating to marketing, but that they relate only to billing. As rightly pointed out by the learned Departmental Representative, the assessee has no role in interacting with the client to modify, cancel, renew or extend the contract. The assessee cannot, even after expiry of the agreement between the Deloitte and its client, supply services without written consent of Deloitte. Deloitte has to pay the assessee irrespective of it getting payment or not within sixty days of raising invoices. Deloitte is responsible for generation of sales management, delivery of projects, maintaining customer relationship and billing and collection. The assessee has no market risk. The argument of the learned Counsel for the assessee that these three marketing personnel project the capabilities of the assessee company so that Deloitte gets work, is not supported by any evidence and, hence, without basis. ....
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.... a conclusion that the assessee has indeed received the services from A.E. we find that it held that even the cost contribution arrangement should be consistent with arm's length principle. This finding supports the case of the Revenue. It held that the assessee's share of overall contribution to the cost is required to be consistent with the benefit expected to be received as an independent enterprise which would assign to the contribution in hypothetically similar situation. In our opinion, this case law does not help the case of the assessee. On the contrary, it fortifies the argument of the Revenue that even in the case of reimbursement, ALP has to be decided. 50. Coming to the Bangalore Bench of the Tribunal in I-Gate Global Solutions Ltd. (supra), the Tribunal held that if the assessee itself discloses income at ALP, which is more than the price shown in the book, it is not a case of enhancement within the meaning of proviso to section 92C(4). Due to determination of ALP by the assessee at a higher figure, and the assessee will be entitled to exemption under section 10A, on such declared income. The Tribunal was not concerned with the issue as to whether the condit....