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TMI Blog2018 (12) TMI 518X X X X Extracts X X X X X X X X Extracts X X X X ..... he outset itself the Ld. Sr. Counsel for the assessee submitted that the issue raised in ground no.1 of the revenue is no longer res integra. According to him, this issue has already cropped up in AYs 2005-06 and 2006-07 and the Tribunal in assessee's own case for these Assessment Years in ITA Nos. 2222 & 2223/Kol/2010 was pleased to uphold similar action of the ld CIT (A) and against the same the revenue preferred an appeal before the Hon'ble High Court which has been dismissed by the Hon'ble High Court in GA No. 2314 of 2015 by order dated 08.01.2016 and thus Hon'ble High Court confirmed the order of the Tribunal. We note that the Tribunal in assessee's own case wherein the Ld. CIT(A) had deleted the addition made by the AO/TPO as per the transfer pricing adjustment made by them, was challenged by the revenue before this Tribunal for AYs. 2005-06 and 2006-07 wherein the Tribunal upheld the action of Ld. CIT(A) by holding as under: "13. We noted from factual aspects of the case that the TPO perceived that functional and risk profile of the assessee and its AEs are different in both the business models wherein the assessee assumes larger share of risks when contracts are entered ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r projects. The local presence of the AEs or it stand-alone financial or technical capabilities hardly influence the decision of the customer to sign the agreement with the AEs. The assessee stated that the possibility of a customer raising any claim for deficiency in administrative services are very remote, as they are rendered to the assessee as an internal arrangement and the customers are not affected by it. Only possibility of any customer raising a claim would be in respect of non-administrative services which are exclusively provided by ITA No. 2222 & 2223/Kol/10 ITC Infotech India .Ltd 16 the assessee irrespective of the business model. It was also emphasised that it is the assessee, which has adequate capital and technical expertise to bear the risks arising from deficiency in services, which neither 12A nor 12B possess. Thus even if a customer raises any claim on 12A/12B, such risk would be eventually passed on to the assessee. 14. There is contractual relationship among the assessee, its subsidiaries and third parties. The subsidiaries, based on agreement entered into with the assessee, engage in marketing of the IT service capabilities of the assessee in their respec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the purported allocation of risk and whether changes in the pattern of behaviour have been matched by changes in the contractual arrangements (emphasis added) Furthermore, in relation to contractual relationship and conduct of the contracting parties, para 5.3.2.30 states that: The conduct of the contracting parties is generally a result of the terms of the contract between them. The contractual relationship thus warrants careful analysis when computing the transfer price. Other than a written contract, the terms of the transactions may be found in correspondence and communications between the parties involved. In cases where the terms of the arrangement between the two parties are not explicitly defined, the contractual terms have to be deduced from their economic relationship and conduct. (emphasis added) It is also pertinent to mention at this juncture that the concept of business risk in transfer pricing context has been discussed at length in the recent amendments to the OECD Transfer Pricing Guidelines 2010 (hereinafter referred to as "OECD Guidelines") under the new Chapter IX (Transfer Pricing Aspects of Business Restructuring). As per this new guidance, para 9.10 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hether and how to manage the risk, internally or using an external provider. This would require the company to have people - employees or directors - who have the authority to, and effectively do, perform these control functions. Thus, when one party bears a risk, the fact that it hires another party to administer and monitor the risk on a day-to-day basis is not sufficient to transfer the risk to that other party." Further, the OECD Guidelines have also discussed on the issue of "risk allocation" and "financial capacity" in para 9.29 9.30 as follows: "Another relevant, although not determinative factor that can assist in the determination of whether a risk allocation in a controlled transaction is one which would have been agreed between independent parties in comparable circumstances is whether the riskbarer has, at the time when risk is allocated to it, the financial capacity to assume (i.e to take on) the risk. Where risk is contractually assigned to a party (hereafter 'the transferee) that does not have, at the time when the contract is entered into, the financial capacity to assume it, e.g. because it is anticipated that it will not have the capacity to bear the cons ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rative services which are being provided by the respondent u9nde both the business models. Claim for any deficiency in non-administrative services - The Ld. TPO, vide his order, has acknowledged the fact that the MSA very clearly envisage that the subsidiaries would sub-contract to the respondent the nonadministrative services and the provider of these non-administrative services, i.e., the respondent would be fully liable to the user, i.e., customer for the same. He further submitted that it has the adequate capital and the technical expertise to bear the risk that may arise for any deficiency in the services provided to the customers. The subsidiaries do not have adequate capital or technical expertise to bear such a risk. Thus, in our view, under the Business Model 2, as per terms of the MSA, in case a Customer raises any claim for non-performance of the non-administrative services, the subsidiaries would eventually pass on such risk to the assessee and the assessee has to bear such risk. The customers enter into contract with either the assessee or the subsidiaries for providing software development services. The contracts entered with customers also mention the expect ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssed one such concept in the area of risk management i.e., towards risk evaluation and quantification. In case of the assessee, there is an inherent transfer of risk by 12A / 12B to the assessee vide the MSA in relation to cases where the customer contacts directly with these. AEs and there are financial claims relating to the quality of deliverables. Such a transfer of risk through contractual arrangement is a common risk management practice in commercial world and should be duly recognized. The TPO made adjustment by determining a different revenue split [15% or 13% as the case may be] from the one followed by the respondent and 12A / 12B. Such an adjustment made by the TPO was without any basis or analysis. In relation to difference in clauses in the MSA between the assessee and 12A as referred to by the TPO for making an ad7 hoc adjustment, the assessee further drew our attention towards Clauses 4A (iii) and clause 4B (ii) of the MSA which provides for the same effect in relation to exclusion of certain administrative services to be performed, Clause 4B (ii) provides that: "if INFOTECH US subcontracts its obligation in accordance with this clause 4(B), the parties agree that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... do not find any illegality and infirmity in the orders and further we are of the opinion that a concurrent finding of fact on 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. The appeals are devoid of merits and the same are dismissed accordingly along with the applications being GA No. 2314 of 2015 and GA No. 2318 of 2015 respectively." 5. Therefore, respectfully following the order of the Hon'ble High Court in AYs 2005- 06 and 2006-07 and taking note of the Hon'ble jurisdictional High Court decision in assessee's own case, supra, we confirm the order of the Ld. CIT(A) and dismiss this ground of appeal of the revenue. 6. Next ground of appeal was raised by the revenue. The Ld. Sr. counsel drew our attention to the fact that this issue has also been adjudicated by the Tribunal for AY 2005-06 and 2006-07 wherein also the Tribunal upheld the action of the Ld. CIT(A) on similar facts and circumstances of the case. According to Ld. Sr. Counsel, this action of the Tribunal has not been appealed by the Departmen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... urpose of earning revenue though application in the process of customer servicing and does not result in any enduring benefit. It is also important to note that it is neither a stand along profit generating apparatus nor an income driving structure so as to classify the expenditure incurred towards the software as one on capital account. The application software, being the subject matter of appeal, assist the already set-up business vide enhancing its efficiency and hence can be reliably related to being on revenue account. List of software purchased are enclosed in assessee's paper book for AYs 2005-06 & AY 2006-07. On perusal of the same, we find that the parties from whom the software was acquired were Interwoven, Mercury Interactive (Singapore) Pvt. Limited, Sonata Information Technology and Tata Consultancy Services. All these companies specialize in application software which helps in increasing the efficiency of client deliverable. The details of payments made to M/s Interwoven clears that these are towards payment for renewal of software which the assessee was using for client deliverables. In view of these facts, we are of the view that software expenses are revenue in nat ..... X X X X Extracts X X X X X X X X Extracts X X X X
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