NESS TECHNOLOGIES (INDIA) PVT. LTD., MUMBAI V. DCIT CENT. CIR. 6(1), MUMBAI

ITA 872/MUM/2017

• Counselvise Citation: [2017] 128 COUNSELVISE.COM (IT) 0634 (ITAT-MUMBAI)
• Duration Of Justice: 3 month(s) 17 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 25-05-2017
• Appeal Filed By: Assessee
• Bench Allotted: Not Allotted
• Assessment Year: 2012-2013
• Appeal Filed On: 07-02-2017
• Court: TRIBUNAL
• Department Lawyers: MALATHI SRIDHAR
• Keywords: Transfer pricing; International transaction; Application of stay
• Section: 143(3)

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL K , BENCH MUMBAI BEFORE SHRI R.C.SHARMA, AM & SHRI PAWAN SINGH , JM ITA NO. 872 / MUM/20 1 7 S.A.NO.292/MUM/2017 (ARISING OUT OF ITA NO.872/MUM/2017) (ASSESSMENT YEAR: 2012 - 13) M/S. NESS TECHNOLOGIES (INDIA) PVT. LTD., UNIT NO.501, INTERFACE, NEW LINK ROAD, MALAD (W), MUMBAI 400 064 VS. DCIT CENT - CIT 6(1), MUMBAI 400 021 PAN/GIR NO. AAACA9649L APPELLANT ) .. RESPONDENT ) ASSESSEE BY SHRI M.P.LOHIA REVENUE BY SHRI MALATHI SRIDHAR DATE OF HEARING 25/05 /201 7 DATE OF PRONOUNCEME NT 25 / 05 /201 7 / O R D E R PER BENCH THIS IS AN APPEAL FILED BY THE ASSESSEE AGAINST THE ORDER OF DCIT CENTER CIRCLE 6(1), MUMBAI FOR THE A.Y.2012 - 13 IN THE MATTER OF ORDER PASSED U/S. 143(3) R.W.S.144C OF THE IT ACT. 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 WHICH PERTAINS TO REIMBURSEMENT OF EXPENSES GIVEN BY AE TO THE ASSESSEE AND THE ADJUSTM ENT MADE BY AO WHILE PASSING THE ORDER U/S.92CA(1) OF THE IT ACT. ITA NO. 872/MUM/2017 & S.A.NO.292/MUM/2017 M/S. NESS TECHNOLOGIES (INDIA) PVT. LTD., 2 3. IT WAS ARGUED BY LEARNED AR THAT TPO ERRED IN MAKING A TRANSFER PRICING ADJUSTMENT OF RS.2,43,29,305 IN RELATION TO THE INTERNATIONAL TRANSACTION OF REIMBURSEMENT OF EXPENSES RECEIVED BY THE ASSESSEE FROM THE AE DISREGARDING THE 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 TRIBUNAL 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 MA Y 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 THE ASSESSING OFFICER ON ACCOUNT OF TRANSFER PRICING ADJUSTMENT IN RELATION TO THE INTERNATIONAL TRANSACTIONS OF REIMBURSEMENT O F EXPENSES RECEIVED BY THE ASSESSEE FROM ITS ASSOCIATED ENTERPRISES. IN BRIEF, THE RELEVANT FACTS IN ORDER TO APPRECIATE THE SAID CONTROVERSY CAN BE SUMMARIZED AS FOLLOWS. DURING THE YEAR UNDER CONSIDERATION, ASSESSEE HAD INCURRED CERTAIN EXPENSES ON BEHAL F OF ITS ASSOCIATED ENTERPRISES, WHICH WAS SUBSEQUENTLY RECOVERED FROM THE ASSOCIATED ENTERPRISES ON COST TO COST BASIS WITHOUT ANY MARK - UP. SUCH REIMBURSEMENTS, WHICH TOTALLED TO RS.31,95,12,842/ - , WERE IN THE NATURE OF COST OF TRAVEL, ACCOMMODATION, VI SA EXPENSES, PER DIEM AND OTHER DAY TO DAY EXPENSES. ON BEING SHOW CAUSED BY THE TRANSFER PRICING OFFICER AS TO WHY SUCH RECOVERIES BE NOT SUBJECT TO SERVICE CHARGE OF 10%, ASSESSEE EXPLAINED THAT IT WAS A STANDARD PRACTICE TO RECOVER CERTAIN OUT OF POCKET EXPENSES INCURRED DURING THE COURSE OF RENDERING SERVICES TO THE CLIENTS ON A COST TO COST BASIS AND THAT IT WAS ONLY FOR ADMINISTRATIVE CONVENIENCE THAT THE PAYMENTS TOWARDS SUCH EXPENSES WERE INITIALLY MADE BY THE ASSESSEE AND LATER ON RECOVERED. THE TR ANSFER PRICING OFFICER WAS NOT SATISFIED WITH THE EXPLANATION FURNISHED BY THE ASSESSEE. THE TRANSFER PRICING OFFICER OBSERVED THAT THERE WAS AN ELEMENT OF SERVICE IN SUCH AN ARRANGEMENT AND FURTHER NOTED THAT SUCH EXPENSES WERE RECOVERED BY THE ASSESSEE F ROM ITS ASSOCIATED ENTERPRISES AFTER A CERTAIN TIME LAG, DURING WHICH PERIOD IT HAD TO BEAR THE FINANCIAL COSTS. ITA NO. 872/MUM/2017 & S.A.NO.292/MUM/2017 M/S. NESS TECHNOLOGIES (INDIA) PVT. LTD., 3 FOR THE AFORESAID REASONS, THE TRANSFER PRICING OFFICER ADDED 10% MARK - UP AS MEANS TO COMPENSATE THE ASSESSEE WHICH CAME TO RS.3,19,51,284/ - AN D 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 EARNING OF ANY SERVICE CHARGE. BEFORE US, LD. REPRESENTATIVE FOR THE ASSESSEE ALSO REFERRED TO VOLUMINOUS MATERIAL PLACED IN THE PAPER BOOK, WHICH WAS ALSO AVAILABLE TO THE LOWER AUTHORITIES, TO POINT OUT THAT THERE WAS NO PROFIT - ELEMENT IN S UCH ARRANGEMENT OF RECOVERY OF OUT OF POCKET EXPENSES.. 13.2 ON THE OTHER HAND, LD. DEPARTMENTAL REPRESENTATIVE APPEARING FOR THE REVENUE EMPHASISED THAT THERE WAS A CONSIDERABLE TIME LAG BETWEEN THE INCURRING OF SUCH EXPENDITURE BY THE ASSESSEE COMPANY AN D ITS ULTIMATE RECOVERY FROM THE ASSOCIATED ENTERPRISES AND, THEREFORE, IT REFLECTED INCURRENCE OF FINANCIAL COST BY THE ASSESSEE, WHICH OUGHT TO HAVE BEEN COMPENSATED BY THE ASSOCIATED ENTERPRISES, AND, THEREFORE, THE TRANSFER PRICING ADJUSTMENT IN THIS R EGARD MADE BY THE TPO/ASSESSING OFFICER IS JUSTIFIED. 13.3 WE HAVE CONSIDERED THE RIVAL SUBMISSIONS. AT THE OUTSET, IN OUR CONSIDERED OPINION, IT WOULD BE APPROPRIATE TO CULL OUT APPROPRIATE FACTS WHICH ARE RELEVANT TO DECIDE THE CONTROVERSY. NOTABLY, ASSE SSEE IS RENDERING SERVICES TO ITS ASSOCIATED ENTERPRISES ABROAD FOR WHICH IT IS TO BE COMPENSATED ON A COST PLUS MARK - UP 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, VISA, PER DIEM AND OTHER DAY - TO - DAY EXPENSES, WHICH WERE EXPENDED BY ITS PERSONNEL. FURTHER, ASSESSEE ALSO INCURRED CERTAIN OUT OF POCKET EXPENSES ON THE SPECIFIC REQUEST OF ITS ASSOCIATED ENTERPRISES. THE RESPONS IBILITY FOR THE AFORESAID TYPE OF EXPENSES WAS OF THE ASSOCIATED ENTERPRISES BUT THE PAYMENT TOWARDS THESE COSTS WERE INITIALLY MADE BY THE ASSESSEE AND THEREAFTER, RECOVERIES WERE MADE FROM THE ASSOCIATED ENTERPRISES. BEFORE THE DRP, ASSESSEE ALSO POINTED OUT THAT SUCH EXPENSES, WHICH ARE RECOVERED BY IT FROM ITS ASSOCIATED ENTERPRISES, ARE IN - TURN RECOVERED BY THE ASSOCIATED ENTERPRISES FROM ITA NO. 872/MUM/2017 & S.A.NO.292/MUM/2017 M/S. NESS TECHNOLOGIES (INDIA) PVT. LTD., 4 THE ULTIMATE CLIENTS ON A COST TO COST BASIS. IN THIS CONTEXT, ASSESSEE FURNISHED SAMPLE COPIES OF DEBIT NOTES RAIS ED BY IT ON ITS ASSOCIATED 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 SUBSTANTIATE THAT THERE WAS ONE TO ONE CO - RELATION AND THA T THE ENTIRE EXERCISE DID NOT INVOLVE ANY ELEMENT 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 AUTHORITIES. AT THE TIME OF HEARIN G, 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 T HE 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, FR OM 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. 5. WE HAD CAREFULLY GONE THROUGH THE ORDER OF THE TRIBUNAL IN ASSESSEES OWN CASE FOR THE A.Y.2011 - 12 AND FOUND THAT EXACTLY SIMILAR ISSUE WAS DEALT BY THE TRIBUNAL AND ADDITION MADE O N TRANSFER PRICING ADJUSTMENT WAS DELETED BY OBSERVING THAT IT WAS SIMPLY REIMBURSEMENT OF EXPENSES. 6. LEARNED DR DID NOT RAISE ANY OBJECTION WITH REGARD TO ISSUE BEING COVERED BY THE ORDER OF THE TRIBUNAL. RESPECTFULLY FOLLOWING THE OR D ER OF THE TRIBUNAL, WE DIRECT THE AO TO DELETE THE ADDITION SO MADE ON ACCOUNT ITA NO. 872/MUM/2017 & S.A.NO.292/MUM/2017 M/S. NESS TECHNOLOGIES (INDIA) PVT. LTD., 5 OF REIMBURSEMENT OF EXPENSES OF RS.2,43,21,305/ - . IN THE RESULT, APPEAL OF THE ASSESSEE IS A LLOWED IN PART IN TERMS INDICATED HEREINABOVE. S.A.NO.292/MUM/2017: 7. AS WE HAVE ALREADY DECIDED THE APPEAL OF THE ASSESSEE ON MERIT, THE STAY APPLICATION BECOMES INFRUCTUOUS THEREFORE, DISMISSED IN LIMINI. 8. IN THE RESULT, APPEAL IS ALLOWED IN PART IN TERMS INDICATED HEREINABOVE WHEREIN STAY APPLICATION IS DISMISSED. O RDER PRONOUNCED IN THE OPEN COURT ON THIS 25 / 05 /2017 S D/ - ( PAWAN SINGH ) S D/ - ( R.C.SHARMA ) JUDICIAL MEMBER ACCOUNTANT MEMBER MUMBAI ; DATED 25 / 05 /201 7 KARUNA SR. PS COPY OF THE ORDER FORWARDED TO : BY ORDER, ( ASSTT. REGISTRAR) ITAT, MUMBAI 1. THE APPELLANT 2. THE RESPONDENT. 3. THE CIT(A), MUMBAI. 4. CIT 5. DR, ITAT, MUMBAI 6. GUARD FILE. //TRUE COPY//