TMI Blog2016 (11) TMI 1402X X X X Extracts X X X X X X X X Extracts X X X X ..... authorities to take a position and infer notionally about recovery of mark-up or profit element in the hands of assessee. It has also been brought out that it is a standard practice in the I.T. Industry to recover out of pocket expenses incurred during the course of providing services for the clients on a cost to cost basis. Under these circumstances, in our view, the Transfer Pricing Officer erred in proceeding to infer a non-existent understanding between assessee and its associated enterprises so as to impute income qua the instant transaction in terms of section 92(1) of the Act. Another pertinent fact which has not been rebutted by the Revenue before us is to the effect that in similar situation, from assessment year 2004-05 to 2010-11, no transfer pricing adjustment has been made by the Assessing Officer in relation to the International Transactions on recovery of expenses. Determination of arm’s length price for the service charges at 10% of the expenses recovered - Held that:- Section 92C prescribes the manner of determination of the arm’s length price and sub-section (1) thereof specifically lays down various methods by which the determination of arm’s length price has ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cing adjustment of ₹ 26,29,86,783 to the total income of the Appellant on the premise that the international transactions entered by the Appellant with its associated enterprises (' AE') were not at arm's length; Reference made to the Transfer Pricing Officer 3. erred in referring the Appellant's case to the Learned Transfer Pricing Officer ('TPO') under Section 92CA(1) of the act, without satisfying the conditions specified therein; Rejection of economic analysis undertaken by the Appellant and using single year data 4. erred in rejecting the transfer pricing analysis undertaken by the Appellant under Section 92C of the Act using 3 year weighted average data of comparables and determining the arm's length margin/ price using data only for financial year ('FY') 2010-11, which was not available to the Appellant at the time of complying with the transfer pricing documentation requirements; Selection/Rejection of comparables 5. erred in applying certain rejection criteria/ filters, in an arbitrary, subjective and erroneous manner for the purpose of selection of comparable companies; 6. erred in rejecting cert ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ements of the company was used by the Appellant wherein the impact of related party transactions is eliminated; Additional Comparables introduced by the Learned TPO 14. erred in considering Acropetal Technologies Limited as a comparable without appreciating that the company is functionally different, owns significant intangibles and has earned supernormal profits and/ or having exceptional year of performance during FY 20 I 0-11; 15. erred in considering E-Infochips Limited as a comparable without appreciating that the company is functionally different and has earned supernormal profits and! or having exceptional year of performance during FY 2010-11; 16. erred in considering iGate Global Solutions Limited as a comparable without appreciating that the company is functionally different and operates under peculiar circumstances during the year; 17. erred in considering Persistent Systems Solutions Limited as a comparable without appreciating that the company is functionally different; 18. erred in considering Infosys Limited as comparable to the Appellant without appreciating that the said company is functionally different, earned super normal profits, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ppellant craves leave to add, alter, amend or delete the above ground of appeal at or before the time of hearing of the appeal, so as to enable the Hon'ble Income tax Appellate Tribunal to decide this appeal according to law. REVENUE S GROUNDS OF APPEAL:- 1. Whether, on facts and circumstances of the case, the DRP is justified in directing the assessing Officer to include M/s CAT technology Ltd and M/s CG-VAK software Exports Ltd as comparables despite the fact that said comparables were also engaged in the business of 'medical transcription' and 'IT Consultancy activities wherein, the assessee is engaged in providing software development services to its group entities. 2. Whether, on facts and circumstances of the case, the DRP is justified in directing in directing the A0 to include M/s CAT technologies Ltd and M/s CG-VAK software Exports Ltd as com parables despite the fact that said com parables having lesser turnover vis-a-vis with the turnover of the assessee ignoring the recent decision of the jurisdictional high court in the case of M/s Pentair water India P Ltd in Tax appeal no. 18 of 2015 dated 16/09/2015, wherein the Honorable high cou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ernational transactions as under:- (i) Provision for software development services Rs.33,30,47,046/- (ii)Recovery of expenses (Service Charges) - ₹ 3,19,51,284/- Total : ₹ 36,48,98,332/- 4.1 The Assessing Officer passed a draft assessment order dated 11/2/2015 under section 143(3) r.w.s. 144C of the Act proposing an adjustment of ₹ 36,48,98,332/- to the returned income against which assessee raised objections by approaching the Dispute Resolution Panel (DRP) on various grounds. The DRP accepted some of the objections raised by the assessee and vide its order dated 27/11/2015 directed the Assessing Officer to rework the adjustment in order to work-out the arm's length price of the international transactions. Accordingly, in compliance with the directions of the DRP, the Assessing Officer has recomputed the adjustment to the international transactions for Provision to software development services at ₹ 23,10,35,499/- instead of ₹ 33,30,47,046/- worked out by the Transfer Pricing Officer. In so far as the adjustment of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f the international transactions in order to determine it s arm's length price. The Assessing Officer, however, has determined an amount of ₹ 23,10,35,499/-, which was required to be added so as to bring the stated value of the transactions to its arm's length price relating to the international transactions for Provision of software development services. On this aspect assessee has raised multiple Grounds of appeal but in the course of hearing, arguments have been confined to three Grounds of appeal which we deal hereinafter. 6. By way of Ground of appeal No.15, the plea of the assessee is that M/s. M/s.E-Infochips Limited has been wrongly included in the list of comparables because the said concern is functionally dissimilar. It is pointed out that the said concern is engaged in rendering variety of services, i.e. software development services, sale of software products and I.T enabled services; and, further that no segmental data is available in respect of different segments, whereas the assessee is rendering pure software development services to its associated enterprises. On this aspect, Ld. Representative for the assessee referred to para 11.2.2 of the order ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... see. In fact, at the time of hearing, Ld. Representative for the assessee had relied upon the decision of the Delhi Bench of the Tribunal in the case of Saxo India Pvt. Ltd. vs. ACIT, ITA No.6148/Del/2015 dated 5th February, 2016, wherein under an identical situation, M/s.E-Infochips Limited has been found to be incomparable to a concern engaged in rendering pure software development services. Notably, the Tribunal has referred to the Annual Report of the said concern and made the following observations:- 10.2 After considering the rival submissions and perusing the relevant material on record, we find that the Annual report of this company is available in the paper book with its Profit and loss account at page 1025, Schedule of Income indicates its operating revenue from software development, hardware maintenance, information technology, consultancy etc. Revenue from hardware maintenance stands at ₹ 3.92 crore, which has been considered by the Transfer Pricing Officer himself as sale of products. Such sale of products constitutes 15% of total revenue. There is no segmental information available as regards the revenue from sale of products and revenue from software devel ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssee i.e. providing software development services. 9.2 On this aspect, we have carefully considered the rival submissions. A pertinent point raised by the assessee is to the effect that on the basis of level of respective turnovers, the said concern is incomparable. It has been pointed out that the turnover of the assessee is to the tune of ₹ 359,61,45,000/-, whereas M/s. Infosys Limited has a turnover of about ₹ 25,385.00 crores for the year under consideration. In this context, it was put to the parties in the course of hearing as to whether any turnover filter was applied either by the assessee in its Transfer Pricing Study or by the Transfer Pricing Officer in the course of the transfer pricing proceedings. In response, it has been stated before us that no turnover filter was used either by the assessee in its Transfer Pricing Study or by the Transfer Pricing Officer while selecting the comparables for the purpose of benchmarking the international transaction of software development services. Therefore, in this background, it would be inappropriate at this stage to device a new filter and reject/accept a concern as comparable because it would not be feasible to s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... spect incomparable to the activities of the assessee. For the said reasons, we do not find any justification for inclusion of the said concern and the same is hereby directed to be excluded from the final set of comparables. Thus, on this aspect also assessee succeeds. 10. The next point argued by the assessee is way of Ground of appeal No.19, whereby it is pointed out that Wipro Technology Services Ltd., has been wrongly included as a comparable without appreciating that the said concern is functionally dissimilar and is operating under peculiar economic circumstances. In this context, it is seen that the Transfer Pricing Officer in para 4.1.6 has discussed the issue, and accordingly to him, the said concern is comparable to the assessee because it has reported revenues from software development and technology infra-services. Similarly, while dealing with the objection of the assessee, the DRP has affirmed the stand of the Transfer Pricing Officer on the ground that the activities of the said concern are broadly comparable to that of the assessee. 10.1 Against the aforesaid stand of the Revenue, the Ld. Representative for the assessee pointed out that the said concern was ea ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s and proceeded to include it in the final set of comparables. 16.2. We have heard the rival submissions. Page 57 of the TPO s order is reproduction of the assessee s contention about the related party transactions as under :- Wipro Technology Services Limited (formerly Citi Technology Services Limited) ( the Company ) was incorporated on 15 September, 2004. The entire share capital of the Company was held by Citicorp Banking Corporation, a company incorporated under laws of Delaware, USA, upto 20 January, 2009. Wipro Limited (Wipro) executed an agreement with Citigroup Inc. for acquiring all of Citigroup interest in the Company w.e.f. 21 January 2009. On 21 January 2009, Wipro signed a master service agreement (MSA) with Citigroup Inc. for the delivery of technology infrastructure services and application development and maintenance services for the period of six years. The MSA provides for the delivery of at least $500 million in service revenues over the period of the contract. After the acquisition by Wipro, the name of the Company was changed to Wipro Technology Services Limited ( WTS or the Company ) on 16 March 2009. 16.3. It is observed from the above con ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... prior agreement in relation to the relevant transaction between the third person and the AE or the terms of the relevant transaction are determined in substance between the third person and the AE. When we consider section 92B(2) in combination with Rule 10A(a), it follows that the transaction between non-AEs shall be construed as a transaction between two AEs, if there exists a prior agreement in relation to the relevant transaction between third person and the AE. If such an agreement exists, the third person is also considered as an AE and the transaction with such third person becomes international transaction within the meaning of section 92B. Once there is a transaction between two associated enterprises, it ceases to be an uncontrolled transaction and, thereby, goes out of reckoning under Rule 10B(1)(e)(ii). 16.5. Adverting to the facts of the instant case, we find that Wipro Technology Services Ltd. earned a revenue from Master services agreement with Citigroup Inc. for the delivery of technology infrastructure services. This agreement was, in fact, executed between the assessee s AE, Wipro Ltd., and Citigroup Inc., a third person. This unfolds that the transaction o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nsactions executed by Wipro Technology Services Ltd. are in terms of an arrangement with related parties at the time of initiation of the arrangement, though in the relevant period, the relationship had undergone a change. The Delhi Tribunal in the case of Saxo India Pvt. Ltd.(supra) has clearly brought out that in the light of the structuring of the transaction, the transactions executed by Wipro Technology Services Ltd. do not qualify to be uncontrolled transactions and, therefore, the same cannot be considered for the purposes of comparability analysis having regard to the provisions of Rule 10B(1)(e)(ii) of the Rules. In view fo the aforesaid discussion, we, therefore, direct the Assessing Officer/TPO to exclude the said concern from the final set of comparables. 12. At the time of hearing, it was pointed out by the Ld. Representative for the assessee that if assessee succeeds on the exclusion of the aforesaid three concerns from the final set of comparables, the margin of the assessee would fall within +/-5% range vis-a-vis margin of the residual comparables and thus, in view of the proviso to section 92C(2) of the Act no addition would survive. It has also been pointed o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing Officer observed that there was an element of service in such an arrangement and further noted that such expenses were recovered by the assessee from its associated enterprises after a certain time lag, during which period it had to bear the financial costs. For the aforesaid reasons, the Transfer Pricing Officer added 10% mark-up as means to compensate the assessee which came to ₹ 3,19,51,284/- and such amount was determined as income in the hands of the assessee. 13.1 Before us, the Ld. Representative for the assessee vehemently pointed out that the lower authorities have not appreciated the facts in their proper perspective. It has been explained that the impugned expenses relate to cost of travel, accommodation, visa expenses, per diem and other day to day expenses, which were incurred by the assessee s employees in the course of rendering services or other such expenses incurred on the specific request of the associated enterprises. Since the associated enterprises were responsible for such costs, assessee initially incurred the expenditure but later on recovered it from the associated enterprise and that there was no service element involved so as to justify earn ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ises. The aforesaid material is placed at pages 518 to 612 of the Paper Book and which was also before the lower authorities. At the time of hearing, the Ld. Representative for the assessee had also referred to page 613 to 645 of the Paper Book, wherein are placed copies of assessee s arrangement with the associated enterprises and also the sample agreements between the associated enterprises and the ultimate clients, which prescribe that all impugned travel and related expenses are separately chargeable on a cost to cost basis. All this material clearly brings out a pertinent feature that in the entire transaction involving payment of expenditure by the assessee, its recovery from the associated enterprises, which-in turn recovers it from the end clients, there is no involvement of any profit-element in the hands of the associated enterprises. Therefore, it would be wrong on the part of the income tax authorities to take a position and infer notionally about recovery of mark-up or profit element in the hands of assessee. It has also been brought out that it is a standard practice in the I.T. Industry to recover out of pocket expenses incurred during the course of providing service ..... X X X X Extracts X X X X X X X X Extracts X X X X
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