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2016 (2) TMI 406 - CALCUTTA HIGH COURT

2016 (2) TMI 406 - CALCUTTA HIGH COURT - [2016] 384 ITR 380 - Transfer pricing adjustment - Armís Length Price on its international transactions by adopting Cost Plus Method undertaken as the said transaction fulfils the requisite conditions as enumerated under Section 12A - Held that:- The submission of the appellant that the adjustment of TPO towards Account of Management charges is arbitrary has been dealt by the First as well as the Second Appellate Authority and a concurrent finding of fact .....

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the basis of the documents on records was recorded by the First Appellate Authority as well as the Second Appellate Authority.

Accordingly, no question of law arises out of the judgment rendered by the authorities below. - GA 2314 of 2015, ITAT 96 of 2015, GA 2318 of 2015, ITAT 95 of 2015 - Dated:- 8-1-2016 - RAJIV SHARMA AND SHIVAKANT PRASAD, JJ. For The Appellant : Md. Nizammuddin, Adv. For The Respondent : Mr. J.P. Khaitan, Sr. Adv. Ms. Nilanjana Banerjee Pal, Adv. The Court : Hea .....

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conditions as enumerated under Section 12A and 12B. The assessing authority did not agree and disallow the same and added towards its income. Being aggrieved thereof, the assessee has preferred an appeal and the First Appellate Authority while setting aside the findings so recorded by the assessing authority in disallowing the TPO have observed as under: I have considered the transfer pricing documentation maintained by the appellant, the appellant s submission and the rebuttal of the Remand Re .....

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ing 12A and 12B as the tested party . From the facts and documents presented before me, I find that the appellant s business arrangement with its foreign subsidiaries can be categorised into the following two revenue sharing models: Model 1- In this model, the agreement are executed between the appellant and the overseas customers. In cases where the appellant retains 75 of the revenue and pays 25% of the revenue to its subsidiaries 12A/12B for the marketing the administrative support services p .....

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s the delivery engine of the group and retains 75% of the revenue. In both the above two models the appellant undertakes and assumes significant and analogous functions and risks and consequently undertakes full responsibility for the delivery of all IT development services to a customer. I agree with the appellant s submissions, which has been reproduced in detail above, that under both the above scenarios, the functional and risk profiles of 12A and 12B remain the same. Incidentally, 12A and 1 .....

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inancial capacity to manage or bear risks arising out of bad debts or delivery failure resulting in non performance of the contract. The entire capabilities and financial strength in this regard lie with the Appellant in India and thus, as per the very conduct of the parties while doing business, it can be said that the Appellant bars the full risk of such maters under either of the two models, as enunciated above. The TPO observed that the foreign customers, while entering into the contracts wi .....

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ofiles of the three entities, namely the appellant, 12A and 12B, if 12A and 12B do not have the necessary confidence and functional strength to bear such risks, and thereby the risk should be awarded to such party under an arm s length dealing. In my view, base upon the documents submitted by the appellant and the arguments put forward before me, under either of the two situations, the functional, asset and risk profiles of 12A and 12B remain the same and the major risks relatable to bad debt an .....

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he TPO. Since, in my view, based upon the reasoning given above, the functional and risk profile of 12A and 12B remain the same under either of the two models, namely even where the customers enter into the contracts directly with the appellant, the same remuneration model of 25% revenue sharing should also apply in such business scenario. I cannot agree with the TPO s arbitrary fixation of the remuneration model of 13% /15% revenue sharing in the later scenario, namely whether the customers ent .....

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(ITA No.3311 & 3312/Mum/2008), which have been relied upon by the appellant that of the appellant enjoys tax holiday or exemption with respect to its export profits, then any presumption of shifting of profits by the ape to overseas associated entities through mechanics of transfer pricing, would prima-facie stand defeated, since the moot question remains why would an assessee shift profits to a tax paying jurisdiction, when, by retaining the profits in India, he would have enjoyed full tax .....

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. Being aggrieved thereof, the department has preferred the instant appeal on the following questions of law in ITAT 96 of 2015 : i) Whether on the facts and in the circumstances of the case Ld. Tribunal has erred in law as well as on facts in holding that the adjustment made by the TPO of ₹ 6,25,88,125/- on account of Account Management charges is arbitrary without proper appreciation of facts and without proper appreciation of facts and without specify any basis for allowing relief to th .....

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as on facts in holding that the adjustment made by the TPO of ₹ 6,25,88,125/- on account of Account Management charges is arbitrary without considering the fact that the foreign clients choose to bypass assesses foreign subsidiaries which indicates that by action in this manner, the foreign clients reduced their risk perception? iv) Whether on the facts and in the circumstances of the case conclusion arrived at by the Ld. Tribunal in granting the aforesaid relief to the assessee, is perver .....

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the assessee on this issue? ii) Whether on the facts and in the circumstances of the case Ld. Tribunal has erred in law as well as on facts in holding that the adjustment made by the TPO of ₹ 6,52,70,749/- on account of Account Management charges is arbitrary without considering fact that even if the issue enjoys certain tax benefits, the adjustments in Arm s Lengh Price would still be made? iii) Whether on the facts and in the circumstances of the case Ld. Tribunal has erred in law as wel .....

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