2012 (6) TMI 597 - AT - Income Tax

Transfer Pricing - adjustment to ALP - assessee, joint-venture company between Mastek Ltd and Deloitte Consulting, formed for establishment and operation of an offshore development centre for provision of both offshore and on site information technology and other related services - various international transactions entered into by the assessee includes reimbursement made to Deloitte, on account of marketing services rendered by way of assignment of three senior managers by Deloitte to undertake full-time marketing only for assessee - Cost incurred on assignment of said managers consisted of their salary and related expenditure, charged by Deloitte on actual basis - TPO held that marketing costs incurred and allocated by Deloitte to assessee did not result in rendering of any service to assessee and, therefore, determined ALP for same, at Nil assessee contesting the same - Held that - It is very imperative on the part of the assessee, to establish before the TPO, that the payments made were commensurate to the volume and quality of services and such costs are comparable. No such efforts was made. No ALP was computed by the assessee. In present case, Deloitte is responsible for generation of sales management, delivery of projects, maintaining customer relationship and billing and collection. The assessee has no market risk. In fact, assessee company has no revenue which has been derived as a result of these marketing expenses. Under similar circumstances a uncontrolled comparable company would not incur such expenditure. Hence, the ALP is rightly determined at nil . On contention of assessee that TPO is not empowered to disallow the expenditure and that the very reference to the TPO by the AO presumes that the amount in question is allowable u/s 37 it is held that Assessing Officer has no discretion in the matter, in view of the binding nature of CBDT instructions dated 20th May 2003, directing for referral of matters to the TPO for determination of ALP where the aggregate value of international transactions exceeds ₹ 5,00,00,000. Further, TPO has not disallowed any expenditure, only the ALP was determined. It was the Assessing Officer who computed the income by adopting the ALP decided by the TPO at nil . It is also held that ALP has to be determined irrespective of any contractual/legal obligation undertaken by parties. Deduction u/s 10A - dis-allowance in respect of income arising out of the adjustment - Held that - Since income arising out of the adjustment is not derived by the undertaking from expert. Hence, requirement of section 10A, have not been compiled with resulting in non-entitlement of deductions u/s 10A - Decided in favor of Revenue

Issues Involved:
1. Transfer Pricing Adjustment.
2. Determination of Arm's Length Price (ALP).
3. Allowability of marketing expenses.
4. Reference to Transfer Pricing Officer (TPO).
5. Levy of interest under section 234B.
6. Initiation of penalty proceedings under section 271(1)(c).
7. Revised return of income and its implications.
8. Eligibility for exemption under section 10A.

Issue-wise Detailed Analysis:

1. Transfer Pricing Adjustment:
The core issue pertains to the Transfer Pricing Adjustment made by the TPO for the assessment years 2002-03 to 2006-07. The TPO scrutinized the international transactions between the assessee and its associated enterprise, Deloitte, particularly focusing on the marketing services rendered by Deloitte to the assessee. The TPO concluded that the marketing costs allocated by Deloitte to the assessee did not result in any service being rendered to the assessee. Consequently, the TPO determined the ALP for the marketing services at nil, leading to an upward adjustment in the assessee's income.

2. Determination of Arm's Length Price (ALP):
The TPO's determination of the ALP at nil was based on the analysis that Deloitte was already compensated for its marketing functions through the mark-up charged to end customers. The TPO noted that the assessee did not provide sufficient evidence to prove that the marketing services were rendered. The Tribunal upheld this view, emphasizing that the assessee failed to demonstrate that the payments made were commensurate with the volume and quality of services received. The Tribunal referenced the Bangalore Bench's decision in Gemplus India (P.) Ltd., which supports the TPO's approach in determining ALP at nil when no substantial services are rendered.

3. Allowability of Marketing Expenses:
The Tribunal rejected the assessee's contention that the marketing expenses were justified as per the joint venture agreement. The Tribunal clarified that the determination of ALP is independent of any contractual obligation to pay. The Tribunal also observed that the assessee did not furnish adequate evidence to substantiate the rendering of marketing services by Deloitte's personnel. The emails provided by the assessee were found to be related to billing activities rather than marketing services.

4. Reference to Transfer Pricing Officer (TPO):
The assessee argued that the reference to the TPO was not justified as the Assessing Officer did not record reasons to show that the conditions mentioned in section 92C(3) were satisfied. The Tribunal dismissed this argument, noting that the CBDT's instructions mandated the reference to the TPO for transactions exceeding a specified threshold. The Tribunal held that the Assessing Officer's reference to the TPO was mechanical and did not imply the allowability of the expenditure under section 37.

5. Levy of Interest under Section 234B:
The Tribunal dismissed the assessee's ground challenging the levy of interest under section 234B, stating that the levy of interest is mandatory and consequential.

6. Initiation of Penalty Proceedings under Section 271(1)(c):
The Tribunal dismissed the assessee's ground challenging the initiation of penalty proceedings under section 271(1)(c), stating that the ground was not maintainable.

7. Revised Return of Income and Its Implications:
For the assessment years 2004-05 to 2006-07, the assessee filed revised returns of income, offering the TP adjustment as income and claiming exemption under section 10A. The Tribunal noted that the revised returns were not admitted as the assessee did not fulfill the conditions specified under section 10A. The Tribunal upheld the Assessing Officer's decision to ignore the revised returns, citing case laws that support the rejection of revised returns when there is no omission or wrong statement in the original return.

8. Eligibility for Exemption under Section 10A:
The Tribunal held that the assessee was not entitled to the exemption under section 10A for the income arising out of the TP adjustment. The Tribunal agreed with the Commissioner (Appeals) that the income from the adjustment was not derived from the export of articles or things or computer software, as required under section 10A. Additionally, the Tribunal noted that the assessee did not comply with other conditions specified under section 10A.

Conclusion:
The Tribunal dismissed the appeals filed by the assessee for all the assessment years under consideration, upholding the TPO's determination of the ALP at nil for the marketing services rendered by Deloitte. The Tribunal also upheld the levy of interest under section 234B and the initiation of penalty proceedings under section 271(1)(c). The Tribunal rejected the revised returns of income filed by the assessee and denied the exemption under section 10A for the income arising from the TP adjustment.

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