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Income Tax Appellate Tribunal, “J” BENCH, MUMBAI
Before: SHRI PRASHANT MAHARISHI & SHRI SANDEEP SINGH KARHAIL
The present appeal has been filed by the assessee challenging the final assessment order dated 05/03/2022, passed under section 143(3) r/w section 144C(13) r/w section 144B of the Income Tax Act, 1961 (“the Act”), pursuant to the directions dated 27/01/2022, issued by the learned Dispute Resolution Panel (“learned DRP”) under section 144C(5) of the Act, for the assessment year 2017–18.
In this appeal, the assessee has raised following grounds:
“GROUNDS OF APPEAL
NESS digital Engineering (India) P. Ltd. ITA No.825/Mum./20122
Based on the facts and in the circumstances of the case and in law, the Appellant respectfully craves leave to prefer an appeal against the order passed by the Addl. Dy Asst. Commissioner of Income-Tax Income Tax Officer, National e-Assessment Centre, Delhi Learned AO'], under Section 14303) row.s 144C(13) of the Income-tax Act, 1961 (Act) (Assessment order), in pursuance of the directions issued by Dispute Resolution Panel-2 (Hon'ble DRP), Mumbai, on the following grounds:
On the facts and circumstances of the case and in law, the Learned AO, based on the directions of the Home DRP has: General Ground 1. erred in assessing the total income of the Appellant at Rs.39,81,32,740 against Rs. 38.97.59.900 as declared by the Appellant in its return of income; Passing order beyond statutory due date 2. erred in passing the final assessment order on 5. March 2022 which is beyond the statutory due date of 28. February 2022 for passing the order (ie. within one month from the end of the month in which the DRP order is received i.e.
27. January 2022) and thereby entire assessment is bad in law; Transfer Pricing Grounds 3. erred in making a transfer pricing adjustment of Rs 83,72.844 to the total income of the Appellant on the premise that the international transaction of recovery of reimbursement of expenses paid by Associated Enterprise (AE) to Appellant were not at arm's length; Reference made to the Transfer Pricing Officer 4. 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: Adjustment made to international transaction of reimbursement of expenses given by AE to Appellant 5. erred in making a transfer pricing adjustment of Rs 83.72.844 in relation to the international transaction of reimbursement of expenses received by the Appellant from the AE disregarding the fact that these expenses were primarily the liability of the AE and were incurred initially by the Appellant only for administrative convenience; 6. should have appreciated that in the aforesaid reimbursement of expenses, there was no service/ income element and expenses were reimbursed on cost to cost basis and the same being not the expense of Appellant were not routed through profit and loss account;
NESS digital Engineering (India) P. Ltd. ITA No.825/Mum./20122
7. erred in arbitrarily imputing a profit element of 10% in the international transaction of recovery of expenses without appreciating that the AEs themselves recover such expenses from third parties at cost and accordingly, there is no profit element at any step of the transaction; 8. erred in not adopting one of the methods prescribed under Section 92C of the Act read with Rule 10B of the Income Tax Rules to determine the arm's length price of the international transaction of recovery of expenses; 9. erred in arbitrarily levying a mark-up of 10% on the expenses recovered by the Appellant without providing any rationale/ basis for arriving at the said mark-up; Interest under Section 234 of the Act 10. erred in levying interest of Rs 4,87,188 under Section 234C of the Act, 11. without prejudice to the above, erred in erroneously computing interest under Section 2340 Rs 4,87,188 against Rs 3,14,145;. Penalty Proceedings 12. erred in initiating penalty proceedings under Section 274 read with section 270A of the Ac.”
At the outset, learned Representative appearing for the parties submitted that only addition surviving post learned DRP’s directions is pertaining to transfer pricing adjustment amounting to Rs. 83,72,844 in respect of reimbursement of expenses received from associated enterprises. Further, the learned Representatives fairly agreed that this issue is covered by decision of coordinate bench of the Tribunal in assessee’s own case in Ness Digital Engineering (India) Pvt. Ltd. Vs ACIT, in ITA No. 1084/Mum./2021, for assessment year 2016–17.
We find that, in aforesaid case, the coordinate bench of Tribunal vide its order dated 25/08/2022 allowed the appeal filed by the assessee on this issue, by observing as under:
“4. We have heard both the parties and perused the records. At the outset, the Ld. AR of the assessee brought to our notice that similar issue is permeating from earlier years from AY. 2011-12 onwards wherein the assessee's action of recovering expenses from its AEs on cost to cost basis without mark-up was interfered by TPO who had fixed mark-up 10% to compensate the assessee (as in this case) and similarly the DRP also had confirmed the same. And the NESS digital Engineering (India) P. Ltd. ITA No.825/Mum./20122 assessee challenged the action for AY. 2011-12 before this Tribunal and the Tribunal for [ITA. No.696/Mum/2016 & IT(TP) A. No.1006/Mum/2016] by order dated 11.11.2016 was pleased to delete the impugned adjustment/addition made by TPO/DRP by holding as under: - "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, assessee 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 responsibility 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 the ultimate clients on a cost to cost basis. In this context, assessce furnished sample copies of debit notes raised 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 that 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 hearing, 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 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. 13.4 Another aspect which emerges from the order of the TPO is as follows. After considering the factual matrix, the TPO has proceeded to determine the arm's length price for the service charges at 10% of the expenses recovered. Ostensibly, the income arising from an international transaction is liable to be computed, having regard to the arm's length price as mandated in section 92(1) of the Act. Section 92C prescribes the manner of determination of the arm's length price and sub-section (1) thereof specifically lays down various methods by which the determination of arm's length price has to be made. It is quite clear Page | 4
NESS digital Engineering (India) P. Ltd. ITA No.825/Mum./20122 that there is no adhocism permissible in the manner of computation of arm's length price of an international transaction, whereas the action of the Transfer Pricing Officer in considering the arm's length price @10% of the expenses recovered is not only adhoc but it also does not conform to any of the methods prescribed in section 92C(1) of the Act. On this count itself, the action of the TPO is suspect, even if, it is to be understood that the impugned transaction was an international transaction requiring computation of income having regard to its arm's length price. 13.5 Considered in the aforesaid light, in our considered opinion, the action of the Transfer Pricing Officer/Assessing Officer in making an addition of Rs.3,19,51,284/- deserves to be set-aside. We hold so. Thus, in so far as Ground of Appeal
No.22 & 23 are concerned, the same are allowed."
5. Per contra, the Ld. DR relied on the order of the TPO/DRP but could not controvert the aforesaid decision of the Tribunal in assessee's own case for AY. 2011-12 and could not point out any change in facts or law in respect of this AY. 2016-17.
6. After having heard both parties and having carefully gone through the order of the Tribunal in assessee's own case on the issue in hand for AY. 2011-12 which has been followed in subsequent years wherein Tribunal deleted the adjustment/addition made on transfer pricing adjustment by observing that assessee received only the actual reimbursement of expenses and no mark-up as done by the TPO/DRP was warranted. And since the Ld. DR could not point out any change in facts or law in the aforesaid order in assessee's own case for AY. 2011-12 vis-à-vis that of this assessment year AY 2016-17, we direct the AO to delete the addition made on account of reimbursement expenses of Rs. 73,69,403/-.”
We further find that the learned DRP rejected the objections filed by the assessee on this issue by following its directions rendered in assessee’s own case in immediately preceding year i.e. assessment year 2016–17, after noting that the material facts and circumstances as well as applicable law have not undergone any change when compared to the earlier assessment years.
This issue is recurring in nature and has been decided in favour of assessee by the decision of the coordinate bench of Tribunal for preceding assessment years. Thus, respectfully following the order passed by the coordinate bench of the Tribunal in assessee’s own case cited supra, we uphold the plea of the assessee and direct the AO/TPO to delete the impugned transfer pricing adjustment on account of reimbursement of expenses. As a result, grounds No. 3, 5 to 9 raised in assessee’s appeal are allowed.
NESS digital Engineering (India) P. Ltd. ITA No.825/Mum./20122
Ground No. 1 is general in nature and therefore, need no separate adjudication.
Ground No. 2 was not pressed during the course of hearing. Therefore, the same is dismissed as not pressed.
Ground No. 4 is rendered academic in nature in view of our aforesaid findings and therefore, same need no separate adjudication.
Grounds No. 10 and 11 pertain to levy of interest under section 234C of the Act, which is consequential in nature. Therefore, the said grounds are allowed for statistical purpose.
Ground no. 12 is pertaining to initiation of penalty proceedings, which is premature in nature and therefore is dismissed.
In the result, appeal by the assessee is partly allowed for statistical purpose. Order pronounced in the open Court on 07/11/2022