TaxTMI 
TaxTMI 
2016 (8) TMI 727
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....es and now diversified into production and distribution of 3D stereoscopic animated feature films. The assessee-company filed its return of Income on 12.10.2010 and the same was processed u/s 143(1) of the Act. The case was selected for scrutiny under CASS and Notice u/s 143(2) dated 07.09.2011 was issued and served on the assessee. Subsequently notices u/s 143(2) & 142(1) calling for information were issued. Profile of the AE: 2.1 The company, DQE Plc., Isle of Mann, is the holding company of DQE (Mauritius) Ltd., Mauritius. The DQE (Mauritius) Ltd. is the holding company of DQE (International) Ltd., (assessee). The DQE (International) Ltd., is the holding company of DQE (Ireland) Ltd. 2.2 As per the audited statement of accounts, the financials of the assessee are as under: Description Amount (In Rs.) Operating Revenue 1,48,52,58,323 Operating Cost 1,17,85,17,865 Operating Profit 30,67,40,458 OP/OR (%) 20.65 OP/OC (%) 26.03 2.3 After verifying the information submitted/available and after taking into consideration the order of the TPO, the assessment was completed as under: 2.4 Since the international transaction with A....
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....the total profits of DQ Ireland to DQ India, when the profits of DQ Ireland include revenue generated from several intangible assets while the appellant has sold only one Intangible asset i.e., Jungle Book. 7. Without prejudice to ground no.5 the Ld. DRP/AO is erroneous in allocating 80% of profit on sale of IP to DQ India when the tax on sale of such capital asset was already paid in India by DQ India. 8. The Ld. DRP/AO are not justified in questioning the commercial wisdom of the appellant' decision to incur the expenditure towards management consultancy fees of Rs. 3,70,53,448/-.The Ld DRP/AO ought to have considered the tangible and direct benefit derived by the appellant by incurring the management consultancy fees and ought to have allowed the same as complying with arms length principle. 9. The Ld. DRP/AO legally erred in making an adjustment of Rs. 7,73,699/- on reimbursement of expenses received of Rs. 77,36,985/- which was arrived at by applying the mark up @ 10 percent. The Ld DRP/AO ought to have appreciated the fact that expense incurred on behalf of DQ Entertainment Ireland our Associated Enterprise towards expenses were purely at cost and is not a servic....
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....not be substituted for changing valuation. Valuation should always be appreciated and accepted as a reasonable exercise at the time when it was made. It is not supposed to be analyzed 3 to 4 years down the line. If actual revenues are higher by substituting the same, the valuation will go up. In the converse if actuals are lower, the valuation will go down. According to assessee, this sort of valuation of substituting actual values against projected values is nowhere accepted in the world. Assessee submitted that it is well aware about the huge fluctuation in the global market place. The projection is based on the assumptions based on normal market scenario and it is based on which any valuation exercise is completed and accepted world-Wide. The situation would have had been same even if the transaction was done with a third party (as against related party), Global market scenario has always been volatile and will always be volatile in the future, This was the reason for which projections of 15 years has been considered, which perhaps enables ups and downs over a period of time, it will be normalized. The assessee relied on the decision of the Jurisdictional Tribunal in the case of....
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..... 42,16,190/- was offered as short term capital gains. Further the Ld. TPO/AO erred in allocating 80% of capital gains to DQ India when tax on sale of such capital asset was already paid by DQ India. 8.3 The ld. AR submitted that the valuation by applying DCF method or any other method is always applied by considering projections of revenues (which were based on the detailed market expectation on that particular date) which cannot be tinkered at a later point of time by substituting actuals. Nowhere such an approach is technically accepted.. 8.4 Ld. AR referred to the decision of the ITAT, Bangalore in the case of In Tally Solutions (P.) Ltd. v. DCIT [2011} 14 taxmann.com 19 (Bang.) wherein the Hon'ble Bangalore Tribunal held as under: "The excess earning method is the method that is adopted by the TPO. We see no infirmity in adoption of this method for the simple reason that the relevant data is available with reasonable accuracy, closing in on real valuation of a software product. This valuation is upheld by the US courts while arriving at the sale value of a software product. Further, the valuation under the method mainly revolves around discounted cash flow DCF ana....
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.... in the price, the TPO is justified in concluding that the transaction is not at arm's length. The TPO is well within his powers as provided in para 9.87 & 9.88 of QECD Transfer Pricing Guidelines and substituted his own prices for the actual transaction undertaken as the difference in valuation was substantial. 10. Considered the submissions of both the parties and perused the material facts on record as well as the orders of revenue authorities. The assessee had sold 'IP' to its "AE" after considering the independent valuation from two valuers and arrived at the sale consideration. No doubt the projections were submitted by assessee for such valuation. Now, the revenue has no problem with the valuation but they are replacing the projected values with actual values. The question arises, whether the action of the revenue was justified for replacing the projection with actuals after three years down the line ? Ld. AR submitted two case laws before us. The first being the valuation submitted by the independent valuers has to be adopted without any modification as held in Social Media India Ltd. Vs. ACIT (ITA No. 1711/Hyd/2012). The coordinate bench of this Tribunal held that "....
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.... after 3 or 4 years down the line. Accordingly, the grounds raised by assessee are allowed. 11. As regards ground Nos. 5 to 7, the TPO has apportioned the profit of the AE based on the ownership arising out of exploitation of intangibles. The findings of TPO are extracted below: "7.3.1 Before carrying out the economic analysis the following issues have jointly and severally impacted the international transactions undertaken by the taxpayer. Economic Substance: The OECD in its Draft Handbook on Transfer Pricing Risk Assessment in Chapter 3 on Assessing When Transfer Pricing Risk Exists And When it Does Not in para 3.2.1.7 under Transfer or Use of intangibles to/for Related parties stated that an intangible may be of great significance because the economic return on the intangible can be substantial. When incomeproducing intangibles are transferred, determining their arm's length value Is crucial. There are various reports which suggest that importance of IPRs (including trademarks, patents, copy rights) to business has increased. These are usually the 'key value drivers' within international groups. 30% of world trade relates goods and services are associated with....
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....les'. Of the multinationals surveyed, over half indicated that such intangibles have been recognized in the books and records where development cost is borne which suggest that the location of the people performing the key .functions (development, enhancement, maintenance and protection) have not been used to determine where to allocate the intangible related returns. The UN TP Manual also recommends establishing the economic and legal ownership of the intangible. It suggests that in some cases an enterprise which does not have legal ownership 0' an intangible may nevertheless be entitled to a share of the returns from its exploitation. Some countries refer to this notion as "economic ownership". Substance over Form: The issue of substance-over-form is a much debated subject the world over. Revenue authorities in several jurisdictions have struck down tax avoidance or planning that lacks commercial substance. The legislation that has been formulated to disregard these transactions is collectively referred to as General Anti- Avoidance Rules (GAAR). Some countries, including UK and USA, have vigorous judicial anti-avoidance doctrines and no statuary GAAR, while othe....
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....t the label given by the parties cannot be determinative because it is, for the court to decide whether the amount is trade discount or not, whatever be the name given to it. Even more important in this context is to refer to the Accounting Standard- 1 issued by the Institute of Chartered Accountants of India and Central Government, wherein it is mentioned that the primary consideration in presentation of financial statements and selection of accounting policies by a business enterprise is that it should represent a true and fair view of the state of affairs and profit and loss account of the enterprise. The major considerations governing the selection and application are prudence, substance over form and materiality. Accordingly, the accounting treatment and presentation in financial statements of transactions and events should be governed by their substance and not merely by the legal form. Thus, substance should take precedence over its legal form. In any commercial transaction, substance must be recognized rather than its form. The decision of State of Andhra Pradesh v. Kane Elevators India Ltd. (2005) 181 ELT 156 (Supreme Court) can also be relied upon where apex court h....
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....erprises at the time of the transaction or at any future date." The OECD in its Draft Handbook on Transfer Pricing Risk Assessment in Chapter 3 on Assessing When Transfer Pricing Risk Exists And when It Does Not in para 3.2.1.9 under Business Restructurings has stated that the business structures and transactions flows adopted in connection with restructuring an MNE's business need careful consideration. There are two aspects of such transactions to be considered. The first is the restructuring transaction itself. The transfer of assets, including intangibles, in connection with such transactions can give rise to difficult valuation and other transfer pricing issues. Often these transactions involve efforts to move valuable assets into more tax favoured environments. Risk assessment should seek to identify such transactions and evaluate the potential exposures. OECD TPG in Chapter 9 has dealt with the issue of business restructuring. Business restructuring is defined as cross border redeployment by a MNE of functions, assets and / or risks and may involve cross border transfer of valuable intangibles. Business restructuring typically accompanied by reallocation of profits am....
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....ons and may have been structured by the taxpayer to avoid or minimize tax. In such cases, the totality of its terms would be the result of a condition that would not have been made if the parties had been engaged in arm's length transactions. Article 9 would thus allow an adjustment of conditions to reflect those which the parties would have attained had the transaction been structured in accordance with the economic and commercial reality of parties transacting at arm's length." Further in para 1.67 commenting that AEs may and frequently do conclude arrangements of a specific nature that are not or are very rarely reencountered between independent parties and that in such circumstances the tax administration would have to determine what underlying reality is behind a contractual arrangement in applying the arm's length principle. BEPS: Intangibles have been highlighted as a particular area of concern in the 2013 OECD publication addressing Base Erosion and Profit Shifting (BEPS), which states that the "current rules produce undesirable results from a policy perspective". The OECD draft guidance is expected to be finalized in 2014. The OECD's work on intang....
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....companies pay. Some of them might consider most of the acquisitions unjustified, In some cases deeming Governments responsible for incoherent tax policies and for designing tax systems that provide incentives for BEPS. In Chapter 4, the report has further highlighted the need for the determination of the relevant share of profits which will be subjected to taxation. The issue of jurisdiction to tax is closely linked with the one of measurement of profit: once it has been established that a share of an enterprise's profits can be considered to originate from a country and that the country should be allowed to tax it. In the same chapter the report states that one of the underline assumptions of the arm's length principle is that the more extensive the functions/assets/ risks of one party to the transaction, the greater its expected remuneration will be and vice-versa. This therefore, creates an incentive to shift functions/assets/ risks to where there returns are taxed more favorably. While it may be difficult to shift underline functions, the risks and ownership of tangible and intangible assets may, by their very nature, be easier to shift. Many corporate tax structures....
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....e developed will also require alignment of returns with value creation. This work will be co-ordinated with the work on interest expense deductions and other financial payments: Action Point 10 - Other high risk transactions Develop rules to prevent BEPS by engaging in transactions which would not, or would only very rarely, occur between third parties. This will involve adopting transfer pricing rules or special measures to: (i) clarify the circumstances in which transactions can be recharacterised; (ii) clarify the application of transfer pricing methods, in particular profit splits, in the context of global value chains; and (iii) provide protection against common types of base eroding payments, such as management fees and head office expenses. 7.3.2 Therefore in view of the above discussion which has an impact over the profits arising from the exploitation of the intangible consequent to the legal transfer of the IP and also taking guidance from para 9.190 of the OECD TPG, under the example "Example (B): Transfer of valuable intangibles to a shell company", it was felt that the taxpayer also needs to get its rightful share in the profit. This will be clear after the fo....
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....nimation as against a stark contrast to India artists who mostly have experience writing for live action feature films and, therefore, do not have the know-how to adopt their writing to animation. Foreign artists also have the technical expertise of animation writing, which includes understanding the structure of episodes, development of characters, understanding the current market for animation, quick turn around on an episode to episode basis and development of stories from a logline to beat outline to the final script. Alongwith this write-up, the taxpayer provided the profiles of few artists such as Jimmy Hibbert, Chris Trengrove and James Mason. However, the facts of the case as understood by the TPO appear different. As per the financial statement of DQE Ireland, in the notes to the accounts it is mentioned that there are no employees during the year apart from the directors. The company is thus functioning with only two or three persons (if the marketing manager is also an employee) and has been able to generate revenue of 4 million Euros in its first year of operations. The only activity carried out by the company is hiring of artists. The copyrights valued at Euro 812,1....
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.... the company and the details of vast library of IPs. The annual report starts with the note on 'Celebrating a decade of excellence' and goes on to list the achievement and awards won over a period of time. In the Chairman's statement, Shri Tapaas Chakravarti, Chairman, MD and CEO of the company states that22 "GLOBAL FOOTPRINT I am proud to report that the credibility of your company has been established amongst the elite entertainment fraternity worldwide as recognized by the achievement of the highest international quality standards and timely deliveries by its professional, creative and highly motivated workforce. DQE's reach and networking is truly global partnering with the best in India, Europe, North America, Australia and New Zealand, Asia, the Middle East and Africa as well as CIS countries. Licensing of Jungle Book TV rights in over 160 countries is fine proof of DOE's global sales, distribution and licensing reach. The Company has a strong presence for high quality development in the US, the UK, France, the Philippines with a large work force of over 3000+ in India alone. I believe that one of the most important differentiators of the Company ....
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.... account the above facts, it appears appropriate that the profit earned by DQE Ireland ought to be rightfully attributed to DQE India. Also realizing that the taxpayer has earned a meager profit of Rs. 42,17,810/- on the sale of IP, it was, therefore, proposed to apply Profit Split Method (PSM) to bring the appropriate profit earned from the use of IP to India. A show cause notice was issued to the taxpayer on 09.01.2014 and the compliance was requested by 20.01.2014. The taxpayer sought a short adjournment upto 24.01.2014 which was granted. The PSM may be applicable when the various entities, involved in controlled transactions in which the associated enterprises are engaged, have significant intangible assets and/or operations of the entities are highly integrated, sharing more or less proportionately in the risks associated with the design, production and sale of applicable product that cannot be evaluated on a separate basis. The ICAI TPG notes illustrates the situation where PSM may be useful- "6.20 Typical transactions where the profit-split method may be used are transactions involving: (a) integrated services provided by more than one enterprise for e.g. in case of....
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....ermined based on the returns earned by comparable independent enterprises for comparable transactions or, more frequently, functions. In practice TNMM is used to determine the appropriate return in Step 1 of the residual analysis; and 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 property then the allocation of this profit should be based on the relative value of each enterprise's contributions of intangible property. 6.3.14.5. The residual analysis is typically applied to cases where both sides of the controlled transaction contribute valuable intangible property to the transaction. For example Company X manufactures components using valuable intangible property and sells these components to a related Company Y which uses the components and also uses valuable intangible property to manufacture final products and sells them to customers. The first step of a residual analysis would allocate 0 basic (arm's length) return to Company X for its manufacturing function and a basic (arm's length) return to Company....
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.... its valuable IP to be sold at a low value which has the potential of earning huge revenues unless it is a distress sale Having said so, no independent enterprise would allow its rightful share of profit to be retained by another enterprise. Accordingly the computation is as under- Particulars DQE India DQE Ireland Total (Euro) Total (INR @ Rs. 70 per Euro) Operating Cost 0 Marketing Expenses-42,172 Admn. Expenses - 40,079 Total - 128,950 128,950 90,26,500 Step 1 : Allocation of profit on routine contributions Profit Allocation 0 10% of OC, being routine marketing and administrative functions - 12,895 12,895 9,02,650 Balance profit 0 1,156,523- 12,896 = 1,143,628 1,143,628 8,00,53,960 Step 2 : Allocation of profit on IP contribution Profit on sale of IP 42,17,810 0 8,42,71,770 Further allocation based on FAR 80% of 8,42,71,770 = 6,74,17,416 20% 8,42,71,770 = 1,68,54,340 8,42,71,770 Justification for 80:20 split: As made out above, DQE India is headed by leading persons in Animation Industry having as many as 8 directors with a trained and skilled combined....
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....ntangible asset is sold and is at arms length, there arises no question of joint ownership. 13.1 Ld. AR submitted that Ld TPO had made an adjustment of Rs. 6,74,17,416/- towards profit attributable to appellant company in connection with sale of Intangible asset. This addition was based on the overall revenue generated by the Associated Enterprise DQ Ireland which included other Intangible assets. He submitted that the Intangible asset is sold in September, 2009 and no revenue is generated between April 2009 to September 2009 either in the hands of DQ India or in the hands of DQ Ireland, hence apportioning revenue to DQ India is factually incorrect and legally unsustainable. It is submitted that the revenue from the IP 'Jungle Book' was started generating from last quarter of FY 2009-10, i.e. during January 2010 to March 2010 when the ownership of the intangible asset was with DQ Ireland and therefore revenue generated from the intangible asset wholly belongs to DQ Ireland. 13.2 Ld. AR submitted that TPO considering the financials of DQ Ireland apportioned revenue to DQ India, the basis of allocation is as under: Particulars Amount Amount P.B.T. of DQ Ireland for ....
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.... 14. Ld. DR submitted that it is the submission of the taxpayer that PSM is only applicable when the intangible is jointly owned by both the AEs and the taxpayer. In this regard, the TPO observed that the sale of the intangible asset to AE is in the nature of business restructuring. Under this particular restructuring there is a transfer of asset including intangible. Often these transactions involved efforts to move valuable assets into the tax favoured nation like Ireland and therefore, there was incentive to transfer the intangible asset in the development stage itself. The TPO also highlighted the issue of BEPS examining the substance, substance over form and recharacterization to conclude that the arrangements of the specific nature such as transfer of intangibles are not reencountered between the Indian entity and in such circumstances the tax administration would have to determine all the underlying reality is behind the contractual arrangement in applying the ALP principle. The TPO .observed that the DQ Ireland has only two directors and one employee. The only activity carried out by the company is hiring of artists. The copyrights valued at Euro 812,182 were purchased by....
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.... observed that it is therefore, improbable to imagine that such an established company would sell an IP at a relatively low price which would be earning substantial revenue in the coming years. The revenue of DQE Ireland has increased from Euros 4 million to Euros 7.8 million within a span of 1 year of acquiring the IP. It is possible that the taxpayer has purposefully shifted the revenue earning potential IP to a low tax regime jurisdiction where within a year of its incorporation, it has earned substantial revenue, which has further increased substantially in the subsequent years. The tax rate for corporate is 12.50% in Ireland as against the tax rate in India at 33.99%. Apparently the company is a shell company. It is also noticed that in the following years a few more IPRs have been shifted to Ireland AE, but the production work is again assigned back to the taxpayer. Thus both the AE and the taxpayer are involved at some stages in the exploitation of the IP even after the legal ownership of the IP is transferred. The TPO therefore rightly applied PSM. 14.3 As regards the profit sharing ratio of 80:20, ld. DR submitted that the reasons thereof are that DQE India is headed by....
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....nvolving the above IP (jungle book) to consider that there exists a international transaction. Once, the IP is sold and Arm's length price is determined, the "IP" becomes the property of "AE". The assessee has no locus standi to claim any benefit neither the revenue. 15.2 The revenue has grievances on the arrangement and existences of group companies. There is no doubt, there exists tax planning. There can be tax planning within the four corners of the taxation laws. There is enough mechanism in the existing Act and also there is DTAA - arrangement with Ireland, which will take care of the situations of tax avoidance. The revenue has not brought any cogent evidence to prove that there exists any tax avoidance. In our considered view, the action of the TPO is not justified and accordingly, the grounds raised by assessee are allowed. 16. As regards ground No. 8 regarding payment towards management consultancy service fee of Rs. 3,70,53,448/-, it is observed that the assessee has paid management consultancy charges of Rs. 3,70,53,448/- to its AE, DQ Mauritius for availing management consultancy services. In view of the assessee's failure to substantiate with supporting evide....
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.... NIL. 19. When the assessee raised objection before the DRP, the DRP following its decision in AY 2008-09 and 2009-10, rejected ground of objection of the assessee. In AY 2008-09 and 2009-10, the DRP held as follows: "Thus, it is seen that DQE Mauritius will identify those costs of its officers and consultants who are chiefly involved in providing management and supporting services to DQE India. Their costs will be allocated across DQE Mauritius and DQE India based on shares of agreed budgeted sales. DQE Mauritius will pass through at cost any major items of third party expenses to which it has not added value. All costs will be marked up with a profit element of 5%. Thus, detailed budgeting and documentation needs to be maintained for the services being rendered by the AE. These records, if produced before the TPO would throw more clarity and proof for the actual rendering of services. Therefore, this panel directs that the TPO shall call for those appropriate records for which the assessee shall extend full cooperation and then come to a determination whether the sum paid of Rs. 3,19,23,085/- to its holding company, DQ Mauritius on account of management consultancy servi....
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.... 20.4 Ld. AR submitted that the assessee has provided the detailed breakup of expenditure along with the invoices by DQ Mauritius for the AY 2010-11 as asked for by the TPO (Pg.202 to 206 of Paper Book) The Breakup of Management Consultancy Fees is as under: Particulars Amount (in USD) Administration charges 12,900 Audit Fee 4,600 Consultancy charges 7,32,570 Total 7,50,070 Add 5% 37,504 Grand Total 7,87,574 20.5 Ld. AR submitted that the Ld TPO determined the ALP at Nil without considering the details of expenditure provided by the assessee. 20.6 Ld. AR submitted that test of commercial expediency for determining whether the expenditure was necessary and reasonable has to be adjudged from the point of view of the businessman and not of the revenue. Expenditure can never be linked to the income earnings ability or the value addition the expenditure has bought into the business as the same cannot be quantified. Hence, the legitimacy of expenditure cannot be questioned. For this proposition he relied on the following decisions: 1. Dresser-Rand India (P) Ltd. Vs. Addl.CIT (2011) 47 SOT 423 (Mum). 2. Ericsson India Pvt. Lt....
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....hereas the foreign exchange loss of US$ 3,21,000 cannot be considered as intra group service. We notice from the documents placed on record that instead of quarterly bills being raised as per the agreement, DQE Mauritius has raised only one bill for the whole of the year, which was placed at page 170 of the Paper Book. As can be seen from the details of payments made, placed at page 171 of the Paper Book, the amount of US$ 799,174 charged on 31-03- 08 was paid in three installments of US$ 3,00,000 on 14-09- 2010, US $ 1,99,174 on 25-10-2010 and US$ 3,00,000 on 04-01- 2011. It is noticed that even though invoice was raised on 31-03- 2008 for whole year instead of quarterly billing, the payments were made from September, 2010 to January, 2011 with substantial delay. The reasons for such delayed payments were not explained. Therefore, we are of the view, that in the given circumstances, the foreign exchanges losses or gains in the hands of DQE Mauritius cannot be considered as services rendered by the DQE Mauritius to assessee which should be on it's own account. To the extent of the above amount, we are in agreement with the observation of the TPO in para 8.3 of his letter dt. 08....
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....rtant customers. These projects have been executed by DQ India over the period. Further the business of DQ India is growing with the support of BOD of DQ Plc. However, the BOD of DQ Plc., includes members from the animation field, children entertainment field and those from the financial and legal background. Their experience and critical actions have enabled DQ India to exploit business opportunities which enabled growth in the company. The details of BOD from whom it had received advice and guidance - - Tapaas Chakravarti - Chairman & CEO - K Balasubramanian - Non Executive Director - Theresa Plummer Andrews - Non Executive Direc - Anthony BM Good - Non Executive Director - Sanjay Saxena - Non Executive Director It is seen from the submission that DOE Mauritius has the following key management personal - 1. Tapaas Chakravarti - Director 2. Marc Yan Fook Cheong - Director 3. Li Fap Kien Kam Young - Director As per the Annual Report of the taxpayer following are the directors - 1. Tapaas Chakravarti - CMD & CEO 2. Akula Ramakrishan - Additional Director 3. Lakshminarayan Nagu - Additional Director 4. Rashmi Chakravarti - Additional Director....
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....submitted. After analyzing the case laws and assessee's own case in the earlier year, the coordinate bench of this Tribunal has adjudicated that management consultancy charges have to be allowed as per the MoU and OECD guidelines. Respectfully following the earlier decision, we are inclined to allow the grounds raised by the assessee. Accordingly, ground No. 8 is allowed. 23. As regards ground No. 9 pertaining to mark up on travel and other expenses reimbursed by the AE of Rs. 77,36,985/-, it is observed that DQE India had incurred expenses on behalf of DQE Ireland in the nature of travel & other expenses. DQE India recovered the same from DQE Ireland on the basis of actual costs incurred. It was explained by assessee to the Ld. TPO that, reimbursement of travel and other expenses were incurred solely on behalf of DQE Ireland, This transaction did not impact the P&L of DQ India and that it was at cost and did not amount to any service rendered. The assessee raised bills against DQE (Ireland) at cost, and explained to Ld. TPO that it is in general practice among group companies to incur expenses on behalf of group companies and to recover the same at cost, and that these transact....
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....justment of Rs. 7,73,699/- to the profit of the assessee company. 26.2 Ld. AR submitted that according to Black's Law "reimburse means to pay back, to make restoration, to repay that expended, to indemnify or make whole". As per Concise Oxford Dictionary the term reimburse means "repay (a person who has expended money) or repay( a person's expenses)" In view of the above definition being reimbursement of actual cost there is no income element in embedded in such payment and is merely in the nature of reimbursement. Hence to apply a markup of 10% based on the profit earned by the assessee is factually and legally incorrect. 26.3 Ld. AR submitted that in M/s. Cognizant Technology Solutions India Pvt. Ltd v, ACIT ITA Nos.114 & 2100(Mds)/2011 the Bench held that "The next issue raised by the assessee is against the addition made by the Transfer Pricing Officer on the ground of reimbursement of expenses. The Transfer Pricing Officer has made a mark up of 5 per cent on certain travel cost incurred by the assessee and reimbursed by its associate enterprise and treated as additional income to be taxed as part of transfer pricing adjustment. But the fact is that the reimbursem....