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TMI Blog2016 (11) TMI 1402X X X X Extracts X X X X X X X X Extracts X X X X ..... f 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 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pricing 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 certain comparables s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ellant 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, owns significant intangibles, brand/ proprietary products ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng 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 court has held that the turnover would be the relevant criteria for the selection of the com parables. 3. Whether, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nses (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 ₹ 3,19,51,284/- proposed by the Transfer Pricing Officer on account of international transactions of Recovery of expenses is concerned, the same has been confirmed by the DRP. Accordingly, the Assessing Officer has passed a final assessment orde ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 of DRP and pointed out that the said concern was primarily engaged in providing IT enabled services and products and, therefore, it is wrongly directed by the DRP that the said concern is includible as a comparable. It is also pointed out that the said con ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tuation, 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 development segment. As the assessee is simply engaged in rendering software development services and there is no sale of any software products, this company, in our considered opi8nion, ceases to be comparable. It is obvious that from the common pool of income from ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 see as to whether the other concerns which were a part of the accept-reject matrix qualify such new filter or not?. We may hasten to add here that we are not proposing to say that the turnover filter is not a relevant filter. The only point we are trying to make is that it ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 earlier owned by the Citi Group (i.e. upto financial year 2008-09) and was engaged in providing I.T Services only to the Citi Group entities. Subsequently, from January, 2009 onwards the said concern was taken over by Wipro group and even after such take-over the said concern continue ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ogy 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 contention reproduced in the TPO's order that Wipro Technology Services Ltd., which was earlier Citi Technology Services Ltd., was held by Citi Corp. Banking Corporation, USA upto 20th January, 2009. Wipro Ltd., parent company of the assessee, executed an agreement with Citi Group Inc., for acquirin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n 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 of earning revenue from software development support and maintenance services by Wipro Technology Services Ltd., is an international transaction because of the application of section 92B(2) i.e., there exists a prior agreement in relation to such transaction between Citigroup Inc. (third person) and Wipr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 out that even the Grounds raised in the appeal of the Revenue on the aspect of transfer pricing adjustment would also be rendered in fructuous inasmuch as , even if the Ground of appeal of the Revenue is allowed, still the margin of the assessee would fall within +/- 5% range vis-a-vis the margin of the comparables con ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 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 such arrangement of recovery of out of pocket expenses.. 13.2 On the other hand, Ld. Dep ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X
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