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TMI Blog2012 (6) TMI 597X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 information technology services are provided by the assessee in terms of the contract between the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... onnection, 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 process. The senior managers add content to the proposal and validate it for correctness using the offshore model. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 capabilities of Deloitte. 10. The various submissions made by the assessee, the relevant issues in this regard are examined as foll ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... act 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 accounts receivable lies on Deloitte and not the assessee. It is the responsibility of Deloitte to collect the revenue from its customers and as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nsaction. 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 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 b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 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 res ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... arned 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 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... main 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, 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 c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 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 conte ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... respective 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 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 f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... inate 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 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 i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 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 requirem ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d 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 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 Majesco to MDCODC are not similar to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 agency function." In the present transaction, MDCODC would have had to appoint marketing ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... efeated. 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 specified limit, to the TPO for determining ALP. When the Assessing Officer has no discretion in the matter, in view of the binding nature of CBDT instructions ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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), held as follows:- that: + the function of the TPQ is to compare the payments made by the assessee company for services received if any and to see whether those payments are comparable. In a given scenario, the TPO has to examine whe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nted 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. Hence, the ALP is rightly determined at "nil". As no expenditure would have been incurred, there is no necessity to apply a particular method to arrive at such conclusion. In fact, by all the five methods or any one of them, when applied to the fact that there is no ne ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s 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 assessee or not. In the case on hand, the assessee has not complied with the provisions of section 10A, to the tune of income by way of adjustment of ALP. In fact, the assessee enhanced its income, not by making adjustment of ALP, by filing a revised TP report, but only by suo-motu disallowing certain expenditure U/s 37. Section 1 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 the TP report, the nature of each class of transaction was discussed and differences brought out. 53. On filing of the revised return of income, we agree with the contention of the learned Departmental Representative that the Assessing Officer was right in not taking cognizance of the same for the reason that the assessee has not pointed out that the revised return of income were ..... X X X X Extracts X X X X X X X X Extracts X X X X
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