TECHSOURCE SERVICES P.LTD,MUMBAI vs. ITO RG 9(3)(3), MUMBAI

Order u/s.254(1)of the Income-tax Act,1961(Act) लेखा सद�, राजे� के अनुसार/ PER Rajendra A.M.- Challenging the orders dated 06.08.2014 of the CIT(A)- 15,Mumbai,the Assessee has filed present appeal for the above mentioned assessment year (AY). Assessee-company, engaged in the business of rendering technical and software support services,filed its return of income on 30.11.2011,declaring total income at Rs.30,690/-.The Assessing Officer(AO)completed the assessment u/s.143(3) of the Act,on 07.02.2014, determining its income at Rs.3.36 lakhs. 2.First effective ground of appeal deals with adjustment of Rs.3.06 lakhs. During the assessment proceedings,the AO found that the assessee had entered into international transactions(IT.s)with its Associated Enterprises (AE.s) worth Rs. 12.54 lakhs. He directed the assessee to furnish the details of transactions and the method adopted for determining the Arm’s Length Price (ALP).The assessee stated that it had applied Cost Plus Method (CPM) for determining the ALP on the basis of the agreement entered into with the AE.s.,that the basis adapted as per the agreement was the markup of 23.45% on the salary and rent expenses incurred by the assessee.The AO directed the assessee to explain as to why the markup should not be applied to the entire cost incurred since the assessee was rendering the exclusive services to the AE.s.In its reply,the assessee stated that it had filed the audit report erroneously,that due to changes in the shareholding patterns and the directors of the AE.s it could be concluded that it had not entered into any IT.s with the AE.s. In its support the assessee submitted a copy of certificate issued by the chartered accountant of the foreign

6966/M/14-Techsource Services Pvt.Ltd. entity. As per the AO,the assessee did not file an explanation with regard to proposed markup adjustment.Considering the available material,the AO held that assessee had not submitted any documentary evidence like transfer of shares,appointment of new directors to substantiate its claim,that the certificate of the chartered accountant of the foreign entity was without any authority,that one of the directors in the company was the existing director and shareholder in the assessee company is on the close of the balance sheet date i.e. 31/03/2011,that the audit report was filed almost after one and half year from the date of entry of the shareholders/directors of the foreign entities, that there was no reason as to why the assessee had not disclosed such vital facts of the time of filing the audit report. He rejected the claim of the assessee and held that the two entities were AE.s of the assessee and the transactions entered by it with them were squarely covered under the definition of IT within the meaning of provisions of section 92 of the Act. 2.1.As regards the proposed adjustment and working of CPM, the AO held that the assessee had not submitted any explanation as to why other than salary and rent had not been included in the invoices raised and the markup had been charged thereon,that the assessee was into service sectors and was providing software related services to the AE’s involving lead restrictive utilities, that the method followed by the assessee was not in accordance with the provisions of the Act, that the entire cost was required to be taken into consideration for applying markup under the CPM, that the assessee had failed to do so, that total amount of expenditure debited to the P&L account had to be considered as qualifying amount for the markup on the invoices to be raised on AE’s as per the method applied by it. He found that assessee had debited total expenditure of Rs.12,63,947/-, that it had considered salary and rental expenses amounting to Rs. 10.15 lakhs. By applying the mark-up at the rate of 23.45% on the total expenditure,the AO worked out the gross value of the transaction at Rs. 15.60 lakhs and made an upward adjustment of Rs. 3.06 lakhs to the total income of the assessee under section 92C (4) of the Act.

3.Aggrieved by the order of the AO, the assessee preferred an appeal before the First Appellate Authority(FAA).Before him,the assessee made elaborate submissions contending that Star Brands Ltd.(Star) and Dynamic Technologies Ltd (DTL) were not the AE.s covered by the definition under section 92 of the Act, that the auditors had erroneously included them in the list of AE.s.,that the certificate from auditor of the foreign entity was filed in that regard, that markup could not be adjusted for total expenses of the assessee,that same was to 6966/M/14-Techsource Services Pvt.Ltd. be applied for specified expenses as per the contractual relationship of the assessee,that even if the stand of the AO was to be applied the markup could be charged of Rs.58,154/-only. After considering the submission of the assessee and the assessment order, he held that the assessee had argued that Star and DTL were not its AE.s,that it had merely submitted a copy of certificate issued by the chartered accountant of the AE,that the certificate was not supported by any documentary evidence like transfer of shares,that the argument was not acceptable, that even during the stays of appellate proceedings the assessee had not filed any documentary evidence, that the returns filed in India by one of the directors prove that there was no change in the shareholding pattern of the foreign entities, that the audit report filed by the assessee also mentioned that the assessee had entered into transaction with its AE’s namely Star and DTL,that assessee had not filed any certificate/confirmation from the auditors who had signed Form number 3 CEB stating that the above-mentioned two companies were not the AE.s of the assessee. He further held that the assessee had not filed an explanation with regard to markup rate of 23.45% for the expenses other than salary and rent,that the assessee had not produced any documentary evidence with regard to annual reports of the other companies for verification, that it had not filed any TP study report during the assessment proceedings for the appellate proceedings, that it had not followed the provisions of section 92, that the assessee had not discharged its primary onus of benchmarking the transaction. He referred to the case of Aztec Software and Technology Services Ltd. (294 ITR-AT-32) and upheld the order of the AO.

4.Before us,the Authorised Representative (AR) argued that Star and DTL were not AE.s, that there was error in the audit report.On a specific query by the Bench about contacting and correcting the auditor the alleged incorrect audit report the AR could not throw any light. The Departmental Representive (DR) supported the order of the AO and the FAA. With regard to the mark up ,the AR argued that the assessee had not incurred any expenditure for the year under consideration except for rent and salary, that the AO was not justified in including further three items for mark-up.The DR left the issue to the discretion of the Bench.

5.We have heard the rival submissions and perused the material available on record. We find that the assessee had filed audited accounts for year under appeal along with its return of income,that it had claimed that IT.s were entered into with its AE.s, that later on it claimed that Star and DTL were not its AE.s,that no documentary evidence was produced before the revenue authorities in support of its claim,that it did not file any confirmation or certificate 3

6966/M/14-Techsource Services Pvt.Ltd. from the auditors about the incorrectness of the audit report especially about the existence of AE.s.Therefore,we are of the opinion that order of the FAA does not suffer from any legal infirmity.Confirming the same, we decide the first ground of appeal against the assessee.