NESS TECHNOLOGIES (INDIA) PRIVATE LIMITED,MUMBAI vs. DEPUTY COMMISSIONER OF INCOME TAX CENTRAL CIRCLE-6(1), MUMBAI

Order u/s.254(1)of the Income-tax Act,1961(Act) लेखा लेखा सद�य लेखा लेखा सद�य सद�य राजे�� सद�य राजे�� राजे�� केकेकेके अनुसार राजे�� अनुसार अनुसार /PER RAJENDRA, AM- अनुसार Challenging the order dated 31/8/2017 of the Assessing Officer (AO) passed in pursuance of directions of the Dispute Resolution Panel (DRP),the assessee has filed the present appeal. The assessee has also filed an application for staying the demand for the year under consideration.We are adjudicating both the matters together. 2.Assessee-company, engaged in the business of software development export and IT enabled services,filed its return of income on 28/11/2013 declaring total income of Rs.43.60 crores. During the assessment proceedings,the AO found that the assessee had entered into International Transactions (IT.s) with its Associate Enterprise (AE). He made a reference to Transfer Pricing Officer (TPO) to determine the arms- length-price (ALP) of the IT.s . The TPO proposed adjustment of Rs.21.65 crores .After receiving the order of the TPO he issued a draft order to the assessee, who challenged it before the DRP-II , Mumbai. In pursuance of

2.1.Effective Ground of appeal

(GOA) is about making transfer pricing adjustment of Rs.1.19 crores to the total income of the assessee.The TPO/AO held that IT.s of reimbursement of expenses paid by the AE to the assessee were not at arm’s length. Representatives of both the sides agreed that identical issue has been deliberated upon and decided by the Tribunal in two AY.s (ITA No.696/Mum/2016 AY.2011-12 dtd. 11/11/2016 and dtd.25/5/2017,AY.2012-13). We would like to reproduce the relevant portion of the order of the Tribunal dtd 25/5/2017 (supra) . “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 adjustment made by AO while passing the order u/s.92CA(1) of the IT Act.

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 assessee’s 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 may 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 of 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 behalf 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, visa 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 Transfer 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 from its associated enterprises after a certain time lag, during which period it had to bear the financial costs. 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/- 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

SA/451/M/17 alongwith (13-14)-Ness Technologies (India) Pvt.Limited 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. Departmental Representative appearing for the Revenue emphasised that there was a considerable time lag between the incurring of such expenditure by the assessee company and 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 regard 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, 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, assessee 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 corelation 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.

SA/451/M/17 alongwith (13-14)-Ness Technologies (India) Pvt.Limited Respectfully following the same, we decide the first effective Ground of Appeal (Grounds 1- 8) in favour of the assessee . 3.Second effective ground is about levy of interest u/s.234B of the Act amounting to Rs.21.11 lakhs.The Authorised Representative (AR) stated that the assessee had paid more than 90% of the assessed tax as advance tax/TDS, that it had filed rectification application in that regard, that the AO had not disposed off the same. 3.1.If the assessee had already paid about 90% of the assessed tax,it would not be liable to pay interest as per provisions of section 234B of the Act. The AO is directed to verify the claim and pass the rectification order within 6 weeks of receipt of our order. Second ground is allowed in favour of the assessee ,in part. 4.Last Ground of appeal is about initiation of penalty proceedings u/s. 271(1)(c ) of the Act.Treating the Ground as premature,we dismiss the same.

SA/451/Mum/2017 (AY -2013-14) : 5.As we have already decided the appeal on merits, so we are treating the stay application as fructuous and dismiss it.