TMI Blog2012 (6) TMI 597X X X X Extracts X X X X X X X X Extracts X X X X ..... the volume and quality of services and such costs are comparable. No such efforts was made. No ALP was computed by the assessee. In present case, Deloitte is responsible for generation of sales management, delivery of projects, maintaining customer relationship and billing and collection. The assessee has no market risk. In fact, assessee company has no revenue which has been derived as a result of these marketing expenses. Under similar circumstances a uncontrolled comparable company would not incur such expenditure. Hence, the ALP is rightly determined at "nil". On contention of assessee that TPO is not empowered to disallow the expenditure and that the very reference to the TPO by the AO presumes that the amount in question is allowable u/s 37 it is held that Assessing Officer has no discretion in the matter, in view of the binding nature of CBDT instructions dated 20th May 2003, directing for referral of matters to the TPO for determination of ALP where the aggregate value of international transactions exceeds ₹ 5,00,00,000. Further, TPO has not disallowed any expenditure, only the ALP was determined. It was the Assessing Officer who computed the income by adopting th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 information technology services are provided by the assessee in terms of the contract between the assessee and Deloitte only when the assessee possesses the requisite resources to provide such services. The assessee provides both offshore and on-site service under the contract with Deloitte. The offshore services are provided through Mastek and on-site services would be provided through Majesco, a US based company and a subsidiary of Mastek. 3.4 The role played by the two joint-venture partners in the company is as follows: ( a ) Deloitte plays the lead role in the generation of sales, in the management and delivery of projects and managing and maintaining the company's customer relationships. ( b ) Mastek provides and manage the company's infrastructural facilities, the operations including recruitment, training, administration and support as a part of its current and future facilities as well as deliver ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s 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 process. The senior managers add content to the proposal and validate it for correctness using the offshore model. These managers also attend the oral presentation and demonstrate the offshore delivery model and capabilities. The assigned managers identify the appropriate on-site/offshore team and monitor the status and quality of engagement. The assigned managers would also check onto the accounting and the invoicing process. In this connection, it is stated that Deloitte charges without any markup, the salary costs including other benefits as well as out-of pocket expenses in respect of the senior managers to the assessee. The assessee claims the said expenses as marketing expenses on its books. 6.2 In respect of the third transaction, the assessee has explained that Deloitte assists the assessee in generation of sales, managemen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t-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 capabilities of Deloitte. 10. The various submissions made by the assessee, the relevant issues in this regard are examined as follows: ( a ) The role of the respective parties relating to the software development activity carried on by the assessee has been discussed in details at para-5.1 at the earlier pages. From perusal of the same it is evident that the role of Deloitte is to market and generate sales and manage the delivery of projects and customer relationships. The role of the assessee is to actually execute the project and deliver the output to the associate entity. As already explained, Deloitte is getting remunerated for the marketing function performed by it. This is evident from the fact that the Deloitte enters into the contract with the end customers. Though the assessee h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 accounts receivable lies on Deloitte and not the assessee. It is the responsibility of Deloitte to collect the revenue from its customers and as far as the assessee is concerned it is to receive all payments from Deloitte within 60 days of invoicing. In such a situation there seems to be no reason why the costs relating to persons who are coordinating for the purpose of prompt collection of bills from the customers should be allocated to the assessee. ( d ) The next important issue to consider is whether the AE has derived any benefit out of these costs. The assessee however is silent on the benefits derived by the associate entity by the undertaking of marketing functions even though it was specifically requested to provide its submissions in this regard. Even thou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 costs incurred in the hands of the overseas entity. 11. In view of the above facts, it is held that the marketing costs incurred and allocated by Deloitte to the assessee does not result in rendering of any service to the assessee. The entire costs of all the 17 marketing personnel of Deloitte is on account of the functions to be performed by Deloitte under the Software Services agreement. Deloitte is being compensated adequately for these functions. In an arm's length situation, a software services provider who renders services to only one client and who is not even exploring the possibility of providing services to any other third party is not likely to undertake any significant marketing whether on its own or through any other t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he 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 is no secondment; ( v ) that the role of the assessee, in its agreement with Deloitte, is limited to provide software and the information technology services in respect of the project assigned to it by Deloitte and to deliver the said output to Deloitte which, in turn, was responsible for delivery of the same to the end customer and that it is the Deloitte which is responsible for generation of sales and maintenance of customer relationship and under those circumstances, there is no logic for reimbursement of marketing cost by the assessee to Deloitte. There is no stipulation in the existing agreement towards sharing of marketing cost; 8. The Commissioner (Appeals), vide Para- ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 under section 271(1)(c) of the Act. 11. Before us, the learned Counsel, Mr. Arvind Sonde, submitted that he is not advancing any arguments on grounds no.1.4, 1.5 and 2. Thus, these grounds are dismissed as not pressed . 12. Ground no.3, is on the levy of interest under section 234B of the Act. This is dismissed as levy of interest is mandatory and consequential. Ground no.3.2, is on the issue of initiation of penalty under section 271(1)(c). This is dismissed as not maintainable. 13. This leaves us with grounds no. 1.1, 1.2 and 1.3. Ground no.1.1, is general in nature. We now consider ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gued 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, hence, the payment is justified. He relied on the following case laws:- Philip John Plasket Thomas v. CIT [1963] 49 ITR 97 (SC). ( iii ) that this is a case of reimbursement of expenses and, hence, no reference can be made to the TPO. He relied on the following case laws for various propositions which we would be dealing in due course. Following case laws have been relied upon by the learned Counsel :- Cushman Wakefield India (P.) Ltd. v. Asstt. CIT [2012] 135 ITD 242/19 taxmann.com 108 (Delhi) Aricent Technologies (Holding) Ltd. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 5-06 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 grounds of appeal. She submitted that, in fact, no arguments were advanced on grounds no.1.4, 1.5, 2 and 3. Mr. Jitendra Yadav, submitted that on factual issue as to whether any services were rendered, the learned Counsel has not led any contemporaneous evidence, as pointed out by the Commissioner (Appeals) in his order and that the assessee has not raised any ground of appeal on this issue. He once again drew the attention of the Bench to various clauses in the joint venture agreement, which is plac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd, 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 was required to be incurred on marketing and, hence, the ALP is nil . 20. Without prejudice to the above submissions, it was argued that even if there is a mandate as per the agreements, the procedures described for secondment of employees was not followed and this proves that there is no secondment at all. The confirmation at assessee's paper book at pages-123 to 125, was, according to the learned Departmental Representative, not contemporaneous ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t 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 the TPO for determining ALP, allowability of expenditure under section 37 of the Act, is a forgone conclusion, by submitting that as per the instruction of CBDT, the moment the international transactions crosses a particular thresh hold, the Assessing Officer is bound to make a reference to the TPO automatically and, hence, it cannot be a case of application of mind. Reliance was placed on OECD guidelines and it was submitted ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 the assessee only after an agreement is entered between the client and Deloitte and (ii) that the role of three persons is to explain the capacities of the assessee to clients and get business through Deloitte; (ii) there is no written agreement or legal requirement prescribed for secondment of employees and confirmation is good evidence; (iii) that what is paid by the assessee to Deloitte is a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 services to unrelated parties Based on our discussions with the management of MDCODC, we have been informed that MDCODC does not render any software services to third parties (either in India or outside India) . The management further informed that the software services rendered by Majes ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e 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 have incurred directly had they been independent in such a case, it may well be appropriate to pass on these costs on the group recipients without a mark-up and to apply a mark-up only to the costs incurred by the intermediary in performing its ag ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t 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. We are unable to persuade ourselves to agree to this proposition for the reasons that the CBDT, by way of a circular, has directed the Assessing Officer to refer to all transactions beyond a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 ALP of reimbursement transaction. 43. We also find that the Bangalore Bench of the Tribunal in Gemplus India (P.) Ltd. ( supra ), ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... apacity, 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. In our view, under similar circumstances a uncontrolled comparable company would not incur such expenditure. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 conditions specified under section 10A, were fulfilled by the assess ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 51. The C.I.T(A) at page 6 para 3. 3.4 of his order for assessment year 2006-07, held that the income arising out of the adjustment is not derived by the undertaking from expert. This finding that requirement of section 10A, have not been compiled with by the assessee, is not not being factually controverted by the learned Counsel. Thus, this finding has to be upheld for all the assessment years. The other requirements of section 10 'A' are also not complied with, which on these adjustments. Hence the assessee is not entitled to deductions under section 10 'A'. 52. Coming to the argument that all the three types of international transactions have to be aggregated and ALP determined, we find that the assessee is raising this issue for the first time before the Tribunal. In the TP report, distinction was made and it is admitted by the assessee that each type of transaction is different. Only because certain advantage would occur by clubbing transactions, fresh and innovative arguments are being raised to justify the claim of the assessee. This cannot be admitted as it is against the facts stated by the assessee before the authorities below. In fact, in ..... X X X X Extracts X X X X X X X X Extracts X X X X
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