NESS TECHNOLOGIES (INDIA) PRIVATE LIMITED, MUMBAI V. DEPUTY COMMISSIONER OF INCOME TAX CENTRAL CIRCLE-6(1), MUMBAI

ITA 6099/MUM/2017

• Counselvise Citation: [2017] 126 COUNSELVISE.COM (IT) 9089 (ITAT-MUMBAI)
• Duration Of Justice: 13 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 17-10-2017
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: Not Allotted
• Assessment Year: 2013-2014
• Appeal Filed On: 04-10-2017
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: JAYANT KUMARV VIDHYADHAR
• Assessee Lawyers: M P LOHIA NIKHIL TIWARI
• Keywords: Transfer pricing; Rectification of order; International transaction; Application of stay
• Section: 234B

Judgement Text

, INCOME-TAX APPELLATE TRIBUNAL -KBENCH MUMBAI , , , BEFORE S/SHRI RAJENDRA,ACCOUNTANT MEMBER AND RAM LAL NEGI,JUDICIAL MEMBER ./I.T.A./6099/MUM/2017, /ASSESSMENT YEAR: 2013-14 NESS TECHNOLOGIES (INDIA) PVT.LTD. (NESS INDIA) UNIT NO.501, INTERFACE, NEW LINK ROAD, MALAD (W),MUMBAI-400 064. PAN:AAACA 9649 L VS. DCIT-CENTRAL CIRCLE-6(1) MUMBAI. ( /APPELLANT ) ( / RESPONDENT ) SA NO.451/MUM/2017 ARISING OUT OF ./I.T.A./6099/MUM/2017, /ASSESSMENT YEAR: 2013-14 NESS TECHNOLOGIES (INDIA) PVT.LTD. (NESS INDIA) UNIT NO.501, INTERFACE, NEW LINK ROAD, MALAD (W),MUMBAI-400 064. PAN:AAACA 9649 L VS. DCIT-CENTRAL CIRCLE-6(1) MUMBAI. ( /APPELLANT ) ( / RESPONDENT ) REVENUE BY: S/SHRI JAYANT KUMAR/V. VIDHYADHAR- DR ASSESSEE BY: S/SHRI M.P. LOHIA/NIKHIL TIWARI / DATE OF HEARING: 17.10.2017 / DATE OF PRONOUNCEMENT: 17.10.2017 ,1961 254(1) ORDER U/S.254(1)OF THE INCOME-TAX ACT,1961(ACT) / PER RAJENDRA, AM - CHALLENGING THE ORDER DATED 31/8/2017 OF THE ASSESS ING OFFICER (AO) PASSED IN PURSUANCE OF DIRECTIONS OF THE DISPUTE RESOLUTION PANEL (DRP),TH E ASSESSEE HAS FILED THE PRESENT APPEAL. THE ASSESSEE HAS ALSO FILED AN APPLICATION FOR STAY ING THE DEMAND FOR THE YEAR UNDER CONSIDERATION.WE ARE ADJUDICATING BOTH THE MATTERS TOGETHER. 2. ASSESSEE-COMPANY, ENGAGED IN THE BUSINESS OF SOFTWA RE DEVELOPMENT EXPORT AND IT ENABLED SERVICES,FILED ITS RETURN OF INCOME ON 28/11/2013 D ECLARING TOTAL INCOME OF RS.43.60 CRORES. DURING THE ASSESSMENT PROCEEDINGS,THE AO FOUND THAT THE ASSESSEE HAD ENTERED INTO INTERNATIONAL TRANSACTIONS (IT.S) WITH ITS ASSOCIAT E ENTERPRISE (AE). HE MADE A REFERENCE TO TRANSFER PRICING OFFICER (TPO) TO DETERMINE THE ARM S- LENGTH-PRICE (ALP) OF THE IT.S . THE TPO PROPOSED ADJUSTMENT OF RS.21.65 CRORES .AFTER R ECEIVING THE ORDER OF THE TPO HE ISSUED A DRAFT ORDER TO THE ASSESSEE, WHO CHALLENGED IT BE FORE THE DRP-II , MUMBAI. IN PURSUANCE OF SA/451/M/17 ALONGWITH ITA NO.6099/MUM/2017 (13-14)-NESS TECHNOLOGIES (IND IA) PVT.LIMITED 2 THE DIRECTIONS OF THE DRP,DTD.20/06/2017 THE AO FIN ALISED THE INCOME OF THE ASSESSEE, U/S 143(3)R.W.S.144C(13)OF THE ACT,AT RS.44.80 CRORES. 2.1. EFFECTIVE GROUND OF APPEAL (GOA) IS ABOUT MAKING TR ANSFER PRICING ADJUSTMENT OF RS.1.19 CRORES TO THE TOTAL INCOME OF THE ASSESSEE.THE TPO /AO HELD THAT IT.S OF REIMBURSEMENT OF EXPENSES PAID BY THE AE TO THE ASSESSEE WERE NOT A T ARMS LENGTH. REPRESENTATIVES OF BOTH THE SIDES AGREED THAT IDENT ICAL ISSUE HAS BEEN DELIBERATED UPON AND DECIDED BY THE TRIBUNAL IN TWO AY.S (ITA NO.696/MU M/2016 AY.2011-12 DTD. 11/11/2016 AND ITA NO.872/MUM/2017 DTD.25/5/2017,AY.2012-13). WE WOULD LIKE TO REPRODUCE THE RELEVANT PORTION OF THE ORDER OF THE TRIBUNAL DTD 25/5/2017 (SUPRA) . 2. EVEN THOUGH ASSESSEE HAS TAKEN 11 GROUNDS, THE RELEVANT GROUNDS WHICH WERE PRESSED DURING THE COURSE OF HEARING ARE GROUND NO.4 TO 8 W HICH PERTAINS TO REIMBURSEMENT OF EXPENSES GIVEN BY AE TO THE ASSESSEE AND THE ADJUST MENT MADE BY AO WHILE PASSING THE ORDER U/S.92CA(1) OF THE IT ACT. 3. IT WAS ARGUED BY LEARNED AR THAT TPO ERRED IN MA KING A TRANSFER PRICING ADJUSTMENT OF RS.2,43,29,305 IN RELATION TO THE INTERNATIONAL TRA NSACTION OF REIMBURSEMENT OF EXPENSES RECEIVED BY THE ASSESSEE FROM THE AE DISREGARDING T HE FACT THAT THE EXPENSES WERE PRIMARILY THE LIABILITY OF THE AE AND WERE INCURRED INITIALLY BY THE ASSESSEE ONLY FOR ADMINISTRATIVE CONVENIENCE. 4. LEARNED AR PLACED ON RECORD THE ORDER OF THE TRI BUNAL IN ASSESSEES OWN CASE FOR THE IMMEDIATE PRECEDING AY 2011-12 IN ITA NO.696 & 1006 /MUM/2016 DATED11/11/2016 WHEREIN EXACTLY SIMILAR ISSUE WAS DEALT BY THE TRIBUNAL AND THE ADDITION SO MADE WAS DELETED. THE PRECISE OBSERVATION OF THE TRIBUNAL WAS AS UNDER:- 13. NOW WE MAY CONSIDER GROUNDS OF APPEAL NO. 22 & 23 IN THE APPEAL OF THE ASSESSEE, WHICH RELATE TO AN ADDITION OF RS.2,19,51,284/- MADE BY T HE ASSESSING OFFICER ON ACCOUNT OF TRANSFER PRICING ADJUSTMENT IN RELATION TO THE INTERNATIONAL TRANSACTIONS OF REIMBURSEMENT OF EXPENSES RECEIVED BY THE ASSESSEE FROM ITS ASSOCIATED ENTERP RISES. IN BRIEF, THE RELEVANT FACTS IN ORDER TO APPRECIATE THE SAID CONTROVERSY CAN BE SUMMARIZED A S FOLLOWS. DURING THE YEAR UNDER CONSIDERATION, ASSESSEE HAD INCURRED CERTAIN EXPENS ES ON BEHALF OF ITS ASSOCIATED ENTERPRISES, WHICH WAS SUBSEQUENTLY RECOVERED FROM THE ASSOCIATE D ENTERPRISES ON COST TO COST BASIS WITHOUT ANY MARK-UP. SUCH REIMBURSEMENTS, WHICH TOT ALLED TO RS.31,95,12,842/- , WERE IN THE NATURE OF COST OF TRAVEL, ACCOMMODATION, VISA EXPEN SES, PER DIEM AND OTHER DAY TO DAY EXPENSES. ON BEING SHOW CAUSED BY THE TRANSFER PRIC ING OFFICER AS TO WHY SUCH RECOVERIES BE NOT SUBJECT TO SERVICE CHARGE OF 10%, ASSESSEE EXPL AINED THAT IT WAS A STANDARD PRACTICE TO RECOVER CERTAIN OUT OF POCKET EXPENSES INCURRED DUR ING THE COURSE OF RENDERING SERVICES TO THE CLIENTS ON A COST TO COST BASIS AND THAT IT WAS ONL Y FOR ADMINISTRATIVE CONVENIENCE THAT THE PAYMENTS TOWARDS SUCH EXPENSES WERE INITIALLY MADE BY THE ASSESSEE AND LATER ON RECOVERED. THE TRANSFER PRICING OFFICER WAS NOT SATISFIED WITH THE EXPLANATION FURNISHED BY THE ASSESSEE. THE TRANSFER PRICING OFFICER OBSERVED THAT THERE WA S AN ELEMENT OF SERVICE IN SUCH AN ARRANGEMENT AND FURTHER NOTED THAT SUCH EXPENSES WE RE RECOVERED BY THE ASSESSEE FROM ITS ASSOCIATED ENTERPRISES AFTER A CERTAIN TIME LAG, DU RING WHICH PERIOD IT HAD TO BEAR THE FINANCIAL COSTS. FOR THE AFORESAID REASONS, THE TRANSFER PRIC ING OFFICER ADDED 10% MARK-UP AS MEANS TO COMPENSATE THE ASSESSEE WHICH CAME TO RS.3,19,51,28 4/- AND SUCH AMOUNT WAS DETERMINED AS INCOME IN THE HANDS OF THE ASSESSEE. 13.1 BEFORE US, THE LD. REPRESENTATIVE FOR THE ASSE SSEE 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, ACC OMMODATION, VISA EXPENSES, PER DIEM AND OTHER DAY TO DAY EXPENSES, WHICH WERE INCURRED BY T HE 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 SA/451/M/17 ALONGWITH ITA NO.6099/MUM/2017 (13-14)-NESS TECHNOLOGIES (IND IA) PVT.LIMITED 3 WAS NO SERVICE ELEMENT INVOLVED SO AS TO JUSTIFY EA RNING OF ANY SERVICE CHARGE. BEFORE US, LD. REPRESENTATIVE FOR THE ASSESSEE ALSO REFERRED TO VO LUMINOUS MATERIAL PLACED IN THE PAPER BOOK, WHICH WAS ALSO AVAILABLE TO THE LOWER AUTHORITIES, TO POINT OUT THAT THERE WAS NO PROFIT-ELEMENT IN SUCH ARRANGEMENT OF RECOVERY OF OUT OF POCKET EX PENSES.. 13.2 ON THE OTHER HAND, LD. DEPARTMENTAL REPRESENTA TIVE APPEARING FOR THE REVENUE EMPHASISED THAT THERE WAS A CONSIDERABLE TIME LAG B ETWEEN THE INCURRING OF SUCH EXPENDITURE BY THE ASSESSEE COMPANY AND ITS ULTIMATE RECOVERY F ROM THE ASSOCIATED ENTERPRISES AND, THEREFORE, IT REFLECTED INCURRENCE OF FINANCIAL COS T BY THE ASSESSEE, WHICH OUGHT TO HAVE BEEN COMPENSATED BY THE ASSOCIATED ENTERPRISES, AND, THE REFORE, THE TRANSFER PRICING ADJUSTMENT IN THIS REGARD MADE BY THE TPO/ASSESSING OFFICER IS JU STIFIED. 13.3 WE HAVE CONSIDERED THE RIVAL SUBMISSIONS. AT T HE OUTSET, IN OUR CONSIDERED OPINION, IT WOULD BE APPROPRIATE TO CULL OUT APPROPRIATE FACTS WHICH ARE RELEVANT TO DECIDE THE CONTROVERSY. NOTABLY, ASSESSEE IS RENDERING SERVICE S TO ITS ASSOCIATED ENTERPRISES ABROAD FOR WHICH IT IS TO BE COMPENSATED ON A COST PLUS MARK-U P BASIS AND SUCH TRANSACTIONS HAVE BEEN SEPARATELY BENCH-MARKED. IN THE COURSE OF RENDERING SUCH SERVICES, ASSESSEE ALSO INCURRED CERTAIN COSTS RELATING TO TRAVEL, ACCOMMODATION, VI SA, PER DIEM AND OTHER DAY-TO-DAY EXPENSES, WHICH WERE EXPENDED BY ITS PERSONNEL. FURTHER, ASSE SSEE ALSO INCURRED CERTAIN OUT OF POCKET EXPENSES ON THE SPECIFIC REQUEST OF ITS ASSOCIATED ENTERPRISES. THE RESPONSIBILITY FOR THE AFORESAID TYPE OF EXPENSES WAS OF THE ASSOCIATED EN TERPRISES BUT THE PAYMENT TOWARDS THESE COSTS WERE INITIALLY MADE BY THE ASSESSEE AND THERE AFTER, RECOVERIES WERE MADE FROM THE ASSOCIATED ENTERPRISES. BEFORE THE DRP, ASSESSEE AL SO POINTED OUT THAT SUCH EXPENSES, WHICH ARE RECOVERED BY IT FROM ITS ASSOCIATED ENTERPRISES , ARE IN-TURN RECOVERED BY THE ASSOCIATED ENTERPRISES FROM THE ULTIMATE CLIENTS ON A COST TO COST BASIS. IN THIS CONTEXT, ASSESSEE FURNISHED SAMPLE COPIES OF DEBIT NOTES RAISED BY IT ON ITS AS SOCIATED ENTERPRISES ALONGWITH COPIES OF THE CORRESPONDING DEBIT NOTES RAISED BY THE ASSOCIATED ENTERPRISES ON THE ULTIMATE CLIENTS. THE AFORESAID WAS CANVASSED BY THE ASSESSEE TO SUBSTANT IATE THAT THERE WAS ONE TO ONE CORELATION AND THAT THE ENTIRE EXERCISE DID NOT INVOLVE ANY EL EMENT OF PROFIT OR MARK-UP IN THE HANDS OF THE ASSOCIATED ENTERPRISES. THE AFORESAID MATERIAL IS PLACED AT PAGES 518 TO 612 OF THE PAPER BOOK AND WHICH WAS ALSO BEFORE THE LOWER AUTHORITIE S. AT THE TIME OF HEARING, THE LD. REPRESENTATIVE FOR THE ASSESSEE HAD ALSO REFERRED T O 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 ENTERP RISES AND THE ULTIMATE CLIENTS, WHICH PRESCRIBE THAT ALL IMPUGNED TRAVEL AND RELATED EXPE NSES 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, I TS 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 ENTER PRISES. THEREFORE, IT WOULD BE WRONG ON THE PART OF THE INCOME TAX AUTHORITIES TO TAKE A POSITI ON 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 O UT OF POCKET EXPENSES INCURRED DURING THE COURSE OF PROVIDING SERVICES FOR THE CLIENTS ON A C OST 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 E NTERPRISES SO AS TO IMPUTE INCOME QUA THE INSTANT TRANSACTION IN TERMS OF SECTION 92(1) OF TH E ACT. ANOTHER PERTINENT FACT WHICH HAS NOT BEEN REBUTTED BY THE REVENUE BEFORE US IS TO THE EF FECT THAT IN SIMILAR SITUATION, FROM ASSESSMENT YEAR 2004-05 TO 2010-11, NO TRANSFER PRI CING ADJUSTMENT HAS BEEN MADE BY THE ASSESSING OFFICER IN RELATION TO THE INTERNATIONAL TRANSACTIONS ON RECOVERY OF EXPENSES. 5. WE HAD CAREFULLY GONE THROUGH THE ORDER OF THE T RIBUNAL IN ASSESSEES OWN CASE FOR THE A.Y.2011-12 AND FOUND THAT EXACTLY SIMILAR ISSUE WA S DEALT BY THE TRIBUNAL AND ADDITION MADE ON TRANSFER PRICING ADJUSTMENT WAS DELETED BY OBSER VING THAT IT WAS SIMPLY REIMBURSEMENT OF EXPENSES. 6. LEARNED DR DID NOT RAISE ANY OBJECTION WITH REGA RD TO ISSUE BEING COVERED BY THE ORDER OF THE TRIBUNAL. RESPECTFULLY FOLLOWING THE ORDER OF T HE TRIBUNAL, WE DIRECT THE AO TO DELETE THE ADDITION SO MADE ON ACCOUNT REIMBURSEMENT OF EXPENS ES OF RS.2,43,21,305/-. IN THE RESULT, APPEAL OF THE ASSESSEE IS ALLOWED IN PART IN TERMS INDICATED HEREINABOVE. SA/451/M/17 ALONGWITH ITA NO.6099/MUM/2017 (13-14)-NESS TECHNOLOGIES (IND IA) PVT.LIMITED 4 RESPECTFULLY FOLLOWING THE SAME, WE DECIDE THE FIRS T EFFECTIVE GROUND OF APPEAL (GROUNDS 1- 8) IN FAVOUR OF THE ASSESSEE . 3. SECOND EFFECTIVE GROUND IS ABOUT LEVY OF INTEREST U/S.234B OF THE ACT AMOUNTING TO RS.21.11 LAKHS.THE AUTHORISED REPRESENTATIVE (AR) S TATED THAT THE ASSESSEE HAD PAID MORE THAN 90% OF THE ASSESSED TAX AS ADVANCE TAX/TDS, TH AT IT HAD FILED RECTIFICATION APPLICATION IN THAT REGARD, THAT THE AO HAD NOT DISPOSED OFF THE S AME. 3.1. IF THE ASSESSEE HAD ALREADY PAID ABOUT 90% OF THE ASSESSED TAX,IT WOULD NOT BE LIABLE TO PAY INTEREST AS PER PROVISIONS OF SECTION 234B OF THE ACT. THE AO IS DIRECTED TO VERIFY THE CLAIM AND PASS THE RECTIFICATION ORDER WITHIN 6 WEE KS OF RECEIPT OF OUR ORDER. SECOND GROUND IS ALLOWED IN FAVOUR OF THE ASSESSEE ,IN PART. 4. LAST GROUND OF APPEAL IS ABOUT INITIATION OF PENALT Y PROCEEDINGS U/S. 271(1)(C ) OF THE ACT.TREATING THE GROUND AS PREMATURE,WE DISMISS THE SAME. SA/451/MUM/2017 (AY -2013-14) : 5. AS WE HAVE ALREADY DECIDED THE APPEAL ON MERITS, SO WE ARE TREATING THE STAY APPLICATION AS FRUCTUOUS AND DISMISS IT. AS A RESULT, APPEAL FILED BY THE ASSESSEE IS PARTLY ALLOWED AND STAY APPLICATION STANDS DISMISSED. ! ' #$ ! . ORDER PRONOUNCED IN THE OPEN COURT ON 17 TH OCTOBER, 2017. 17 , 2017 SD/- SD/- ( / RAM LAL NEGI ) ( #%& / RAJENDRA ) % '' / JUDICIAL MEMBER / ACCOUNTANT MEMBER MUMBAI; /DATED : 17.10 .2017. JV.SR.PS. / COPY OF THE ORDER FORWARDED TO : 1. APPELLANT / 2. RESPONDENT / 3. THE CONCERNED CIT(A)/ , 4. THE CONCERNED CIT / 5. DR A BENCH, ITAT, MUMBAI / , , . . . 6. GUARD FILE/ //TRUE COPY// / BY ORDER, / DY./ASST. REGISTRAR , /ITAT, MUMBAI.