ASST CIT 9(2)(1), MUMBAI vs. CANVASM TECHNOLOGIES LTD, MUMBAI

O R D E R Per Shri B.R. Baskaran, A.M. : The revenue has filed this appeal challenging the order dated 16.02.2015 passed by Ld CIT(A)-55, Mumbai and it relates to the assessment year 2009-10. 2.0 The grounds raised by the revenue read as under : i) "Whether on the facts and in the circumstances of the case, the Ld. CIT-(A) erred in not appreciating that the documentary evidence were furnished before the TPO to establish the provision of services of onsite computer consulting and programming support". ii) "Whether on the facts and in the circumstances of the case, the Ld. CIT-(A) erred in not appreciating the 'fact that the assessee could not demonstrate the cost benefit arising to it on account of such huge payment of Rs. 14.77 crores". iii) "Whether on the facts and in the circumstances of the case, the Ld. CIT-(A) erred in not discussing merits of the application of external TNMM, adopted as the most appropriate method by the TPO". iv) "Whether on the facts and in the circumstances of the case, the Ld. C/T-(A) erred in fact and in law in relying upon non audited figures of AE and Non AE segments for determining comparability on the basis of internal TNMM".

3.0 In effect, the revenue is challenging the relief granted by the learned CIT (Appeals) in respect of addition relating to Transfer Pricing Issue.

4.0 The facts of the case are stated as below :

4.1 The assessee herein is a joint venture company of M/s Tech Mahindra Limited and M/s Motorola Cyprus Holding Limited. It is engaged in the business of development of computer software and it also provides end to end Information Technology Services and Solutions to the telecom industry. The assessee herein has established a wholly owned subsidiary named CanvasM (America) Inc. in USA (Associated Enterprise).

4.2 The assessee has entered into following international transactions with its Associated Enterprises (AE) during the year under consideration:-

(a) Receipts from sub-contracting of Computer consulting And Programming services provided to its AE - Rs.18.19 crores (b) Payments for onsite computer consulting and Programming support services - Rs.14.77 crores.

4.3 The assessee has entered into an agreement with Associated Enterprise (AE) for availing onsite software development services and computer consultancy and programming support services in USA. In addition to the above, the AE also acts as marketing arm of the assessee in USA, i.e., the AE carries out sales promotion and marketing activity on behalf of the assessee, negotiates with business clients and also enters into contract with clients in USA for development and modification of software and other related services. The AE charges all costs it incurs for the performance of onsite portion of software development work upon the assessee on cost to cost basis. 4.4 As per the Contractual agreement, the AE would sub-contract the works secured by it from third party customers to the assessee herein. The AE would collect entire revenue from the clients located in United States; retains 5% of the value of the contract for services rendered by it and remits the balance amount to the assessee. During the year under consideration, the assessee hs received Rs.18.19 crores from its AE. Besides the above, the AE also charges the direct cost incurred in the performance of onsite portion of the contract in USA and the same is reimbursed by the assessee on cost to cost basis. During the year under consideration, it has reimbursed Rs.14.77 crores to its AE. 4.5 In the Transfer Pricing Study, the assessee aggregated both the above said transactions, viz, receipts for software services and payments for expenses and accordingly carried out its Transfer Pricing Study. The assessee had selected its AE as “tested party”. The TPO did not accept the same and accordingly directed the assessee to prepare fresh TP study taking itself as tested party. In the revised TP Study, the assessee adopted Transaction Net Margin Method (TNMM) as Most Appropriate Method (MAM) and Operating Margin to Operating Revenue (OM/OR) as “Profit level indicator” (PLI). The assessee selected nine comparable companies whose average margin of operating margin was 2.38%. The operating margin declared by the assessee 3.70%. Accordingly, the assessee submitted that the International Transactions entered by it with its AE are at arm’s length. 4.6 The Transfer Pricing Officer (TPO), however, took the view that aggregation of both the transactions is not correct. Accordingly he rejected the Transfer Pricing study of the assessee. 4.7 With regard to the reimbursement of expenses of Rs.14.77 Crores, in the absence of any documentary evidence to prove receipt of services, the TPO determined the arm’s length price of the same as NIL. 4.8 With regard to receipt of Rs.18.19 Crores for software development services, the TPO selected his own comparable companies, whose average margin was 28.90%. According to this margin, the transfer pricing adjustment was required to be computed at Rs.15.40 crores. Since the TPO had taken the ALP of reimbursement of expenses amounting to Rs.14.77 Crores as NIL, he proceeded to compute revised margin of the assessee by excluding the above said expenditure of Rs.14.77 Crores and the same worked out to 41.57%. Since the revised margin was more than the mean average margin of comparable companies, he held that no adjustment is required in respect of software development services provided by the assessee to its AE. 4.9 Accordingly, the TPO held that the T.P adjustment is required to be made in respect of reimbursement of expenses only at Rs.14.77 crores. Without prejudice to the above, the TPO held that, if the above said transfer pricing adjustment of Rs.14.77 Crores is deleted or modified by appellate authorities, then the T.P adjustment of Rs.15.40 Crores in respect of software development services is required to be made. 4.10 However the A.O. completed the assessment by making addition of Rs.15.40 Crores towards Transfer Pricing Adjustment.

5.0 The Ld CIT(A) upheld the view of TPO that the assessee should be selected as tested party. We have noticed earlier that the TPO had adopted external TNMM for bench marking the transactions. However, Ld CIT(A) changed the methodology and adopted internal TNMM as most appropriate method. He noticed that the transaction with AE had resulted in a net margin of 3.70%, while the net margin on the transactions entered with Non-AEs at international level was (-) 3.99%. It is pertinent to note that the Ld CIT(A) accepted the “reimbursement of expenses of Rs.14.77 crores” as operating expenses. Accordingly, the Ld CIT(A) deleted the transfer pricing adjustment of Rs.15.40 crores. Aggrieved, the revenue has filed this appeal. 6.0 The Ld D.R submitted that the Ld CIT(A) has changed Most Appropriate Method without confronting the same with AO/TPO. She submitted that the Ld CIT(A) should have remanded the matter to AO/TPO for his comments. She further submitted that the TPO had determined the international transaction of reimbursement of expenses of Rs.14.77 crores as NIL. However, the Ld CIT(A) has allowed the expenses in full without verifying the fact of receipt of services. Accordingly, the Ld D.R submitted that the entire issue requires fresh examination at the end of Ld CIT(A) duly confronting the issues with AO/TPO. 7.0 On the contrary, the Ld A.R submitted that the issues contested in this appeal is fully covered by the decision rendered by the co-ordinate bench in the assessee’s own case in relating to AY 2008-09. He submitted that the Tribunal has upheld the order of Ld CIT(A) in adopting “Internal TNMM” as most appropriate method and aggregation of international transactions. 8.0 We heard rival contentions and perused the record. It is the case of Ld A.R that the issue contested by the revenue in this appeal is fully covered by the order passed by the co-ordinate bench in the assessee’s own case. However, it is the contention of the Ld D.R that the Ld CIT(A) has changed Most Appropriate Method without confronting the same with AO/TPO. Further