* IN THE HIGH COURT OF DELHI AT NEW DELHI + I.T.A. Nos ...

ITA Nos.1068 & 1070/2011 of 25

* IN THE HIGH COURT OF DELHI AT NEW DELHI

+ I.T.A. Nos.1068/2011 & I.T.A. Nos.1070/2011

Reserved on: 22nd

February, 2012

% Date of Decision: 29th March, 2012

CIT ..... Appellant

Through: Mr. Kamal Sawhney, Sr.

Standing Counsel and Mr. Amit

Shrivastava, Advocate

versus

EKL APPLIANCES LTD ..... Respondent

Through: Mr. V.P. Gupta, Mr. Bassant

Kumar and Mr. Anuj Bansal,

Advocates.

CORAM:

HON'BLE MR. JUSTICE SANJIV KHANNA

HON'BLE MR. JUSTICE R.V. EASWAR

1. Whether Reporters of local papers may be allowed to see the judgment?

2. To be referred to the Reporters or not ? Yes

3. Whether the judgment should be reported in the Digest? Yes

R.V. EASWAR, J.:

In these appeals filed under Section 260A of the Income Tax

Act, 1961 („Act‟, for short) the Commissioner of Income Tax

challenges the common order passed by the Income Tax Appellate

http://www.itatonline.org

ITA Nos.1068 & 1070/2011 of 25

Tribunal („Tribunal‟, for short) on 11.02.2011 for the assessment

years 2002-03 and 2003-04.

2. The appeals arise this way. The assessee is a public limited

company engaged in the business of manufacturing of refrigerators,

washing machines, compressor and spares thereof and also trading

all these items and microwaive ovens, dish washers, cooking ranges,

air conditioners and spares thereof. In respect of the assessment

years 2002-03 and 2003-04, it filed returns of income declaring

losses amounting to ` 148,23,80,117/- and ` 1,14,59,660/-

respectively. The Assessing Officer noticed that there were

international transactions entered into by the assessee during the

relevant previous years and accordingly invoked the provisions of

Section 92CA(3) of the Act and referred the question of

determination of the Arms Length Price („ALP‟, for short) to the

Transfer Pricing Officer („TPO‟, for short). The TPO examined the

matter in considerable detail and noticed that AB Electrolux, Sweden

held 76% of the assessee‟s equity as on 31.03.2002 and out of the

balance, 26% was held by the local joint venture partners and the

balance 18% was held by the public. He noted that the turnover of

the assessee for the assessment year 2003-04 amounted to ` 440.97

crores including trading sales of ` 48.29 crores pertaining to goods

partly imported from the associated enterprises and also purchased


ITA Nos.1068 & 1070/2011 of 25

locally. The major international transactions undertaken by the

assessee were also noticed by him and he has listed the same at page

2 of the order passed by him on 20.03.2006 under Section 92CA (3)

of the Act. It is noticed from the order that there are 13 types of

international transactions entered into by the assessee in the previous

relevant year 2003-04. The TPO accepted all of them to be Arm‟s

Length Transactions, except the payment of brand fee/ royalty of `

3,42,97,940/-. The corresponding figure for the assessment year

2002-03 is ` 3,99,51,000/-. We may clarify that the revenue has

filed before us the order passed by the TPO for the assessment year

2003-04 on 20.03.2006, but the order passed by the TPO for

assessment year 2002-03 has not been made available. This,

however, is not material because it is common ground that the facts

and the controversy arising in both the assessment years are the same

so far as the ALP is concerned. Reverting to the order of the TPO,

he considered the payment of brand fee/ royalty by the assessee to

the associated enterprise namely AB Electrolux, Sweden under an

agreement dated 01.10.1998 to be unjustified.

3. It is necessary to narrate the order of the TPO on this aspect in

some detail in order to appreciate the precise controversy. We have

already noted that the brand fee payment was made under an

agreement dated 01.10.1998. The assessee was to pay brand fee at


ITA Nos.1068 & 1070/2011 of 25

the rate of 0.50% of the net sales under the brand name of

“Kelvinator”. The payment was to be made to M/s. White

Consolidated Inc. of Ohio, USA. However, the payment of the fee

was waived till 01.01.2002 as advertising and launch support. On

27.09.2002, the agreement was modified to give effect to the new

name of M/s. White Consolidated INC. It was thereafter known as

Electrolux Home Products INC. The modified agreement also

recognized the amalgamation of Electrolux Voltas Pvt. Ltd. with

Electrolux Kelvinator Ltd. Another change made in the agreement

was to change the brand fee to 1% of the net sales. The agreement

was to remain in force till 31.12.2008. It was under this agreement

that the assessee paid ` 3,42,97,910/- as brand fee for the assessment

year 2003-04 and ` 3,99,51,000/- for the assessment year 2002-03.

4. The TPO obtained the financial statements of the assessee

since the commencement of commercial production and examined

the same and set out the crucial figures in the form of following

table: -

Year Profit/ (loss)

(Rs.)

Turnover

(Rs.)

Brand fee/

Royalty (Rs.)

1996-97 (23.4) cr 68 cr 3 lac

1997-98 (17.2) cr 215 cr 3.27 cr

1998-99 (8.19) cr 312 cr 6.78 cr


ITA Nos.1068 & 1070/2011 of 25

1999-2000 2.75 cr 298 cr 7.23 cr

2000-01 (39.5) cr 314 cr 6.64 cr

2001-02 (149.8) cr 481 cr 5.08 cr

2002-03 (195.1) cr. 428 cr 3.42 cr

5. From the figures shown above the TPO noticed that the

assessee has been incurring huge losses year after year except for the

financial year 1999-2000 and considering the perpetual losses, “the

payment of royalty to the Associate Enterprise did not appear

justified, as the technical knowhow/ brand fee agreements with A.E.

had not benefited the assessee company in achieving profits from its

operations”. The TPO further noted that the assessee itself stopped

the payment from 01.10.1998 till 01.01.2002 and thus “the

justification for payment of brand fee during the year under reference

becomes questionable”.

6. Having reached the aforesaid conclusion, the TPO called upon

the assessee to submit the justification for the payment of brand fee.

The assessee submitted a detailed reply raising the following points:

(i) The payment of brand fee should be examined on merits

for each year;


ITA Nos.1068 & 1070/2011 of 25

(ii) The Associated Enterprise („A.E.‟, for short) had

received similar brand fee from M/s. Fisher and Paykel

Industries Limited, an unrelated party in New Zealand, and this

transaction was comparable with the assessee‟s transaction

with the A.E. and thus there cannot be any doubt regarding

genuineness of the ALP;

(iii) The transaction was certified by M/s. Ernst and Young,

the certification firm of global repute, who has stated that the

fee paid by the assessee is lower than the uncontrolled brand

fee;

(iv) The allowance of brand fee as expenditure does not

depend on the profitability of the concern, but on the utility of

the brand name and the technical knowhow in respect of which

the payment is made. The payment may not immediately

result in profits but since the company is in business with the

motive to earn profit, it has to incur all such expenditure that

would be in the interest of its business. The brand fee payment

is a legitimate expenditure which, had it not been incurred,

would have seriously affected the operations of the assessee. It

would have hampered the availability of the brand name

“Kelvinator”.


ITA Nos.1068 & 1070/2011 of 25

(v) It was due to availability of the brand name that the

assessee was able to achieve substantial increase in its turnover

as shown in the table set out above. Had it not been for the

brand name there would have been more losses because of

higher fixed cost coupled with lower sales.

7. The TPO considered the reply of the assessee containing the

justification for the payment of brand fee. He conceded that there

was an increase in the turnover but observed that it has not resulted

in any profit to the assessee. According to him, despite the payment

of the brand fee for several years, the assessee has not been able to

make a turnaround. He further held that the fact that the A.E. had

charged similar brand fee from another company in New Zealand did

not prove that the price paid by the assessee for obtaining the use of

the brand name and the technical knowhow represented the ALP. He

was of the view that the assessee had to demonstrate the actual

benefit derived by it by using the brand name which it had failed to

do. The continuous losses according to the TPO showed that the

assessee did not benefit in any way from the brand fee payment. For

these reasons, the TPO held that the brand fee payment made by the

assessee to the A.E. was unjustified and the ALP of the transactions

should be taken as nil. He accordingly held that the brand fee


ITA Nos.1068 & 1070/2011 of 25

payment of ` 3,42,97,940/- should be added back to the total income

of the assessee.

8. A similar order would appear to have been passed by the TPO

for the assessment year 2002-03 also by which the brand fee/ royalty

payment on ` 3,99,51,000/- was added back to the income of the

assessee.

9. Under Section 92CA (4) of the Act, the Assessing Officer is

bound by the directions given by the TPO in respect of the ALP.

Accordingly, the Assessing Officer, for both the years under appeal

disallowed and added back the brand fee/ royalty payment made by

the assessee to the A.E. while completing the assessments under

Section 143(3) of the Act.

10. The assessee preferred appeals to the CIT (Appeals) in respect

of both the assessment years and questioned the determination of the

ALP and the disallowance of the brand fee/ royalty payment. The

appeal for the assessment year 2002-03 was disposed of vide order

dated 27.07.2009 whereas the appeal for the assessment year 2003-

04 was disposed of by the order dated 27.11.2009. Though, two

separate orders have been passed by the CIT (Appeals), the

reasoning and conclusions are the same. We, therefore, proceed to

notice the findings of the CIT (Appeals) in a consolidated manner.


ITA Nos.1068 & 1070/2011 of 25

Before the CIT (Appeals) the assessee would appear to have raised

several objections including the objection to the reference made to

the TPO which according to the assessee was done mechanically by

the Assessing Officer. On this point the CIT (Appeals) found

himself unable to agree with the assessee‟s objections, having regard

to the judgment of this Court in the case of CIT v. Bankam

Investment Ltd. (1994) 208 ITR 52. Thereafter he addressed the

question whether the TPO was right in rejecting the economic

analysis of the transaction undertaken by the assessee for the

determination of the ALP vis-a-vis payment of royalty/ brand fee, in

a situation where losses were being incurred continuously by it. He

noted the assessee‟s economic analysis in great detail and recorded

the following findings for the assessment year 2002-03: -

(i) The assessee was forced to upgrade its technology with

the advent of tough competition from makers of frost free

refrigerators and large number of entrants in the refrigerator

market. Once the technology was upgraded by clearing the

usage of technical knowhow for payment of brand fee/ royalty

the assessee was able to reduce the losses to a significant

extent. Therefore, the claim of the TPO that by securing the

use of the technical knowhow the assessee did not benefit was

not correct;


ITA Nos.1068 & 1070/2011 of 25

(ii) There was significant increase in the operating losses on

account of the increase in the employees‟ cost, finance charges,

administrative expenses, depreciation and installed capacity.

In this regard the comparative statement filed by the assessee

to show the expenses over a period of 5 years, the assets

acquired during the aforesaid period, the loans incurred over

the said period, etc. was examined by the CIT (Appeals) who

found that the statement supported the claim of the assessee

regarding huge increase in the costs/ expenses. He also found

that the acquisition by the assessee of other companies such as

Intron Ltd. and Electrolux India Ltd. had also contributed to

the losses;

(iii) From the schedule of unsecured loans furnished in the

form of table over the period between 1999 to 2002, it is found

that there was huge increase of financial costs from ` 5.12

crores in 1997 to 41.10 crores in 2002. This was solely on

account of the increase in the unsecured loan from ` 15.89

crores to ` 397.92 crores in the year 2002;

(iv) Similarly, there was increase in the depreciation costs

from ` 6.03 crores in 1997 to ` 67-88 crores in 2002 on


ITA Nos.1068 & 1070/2011 of 25

account of increase in the gross block of the assets from `

46.81 crores in 1997 to ` 326.23 crores in 2002;

(v) The figures furnished by the assessee showed that though

it was deriving gross profit from the operations, it was

suffering losses due to expenses and other factors. The losses

show significant reduction after technical upgradation in the

year 2000. Therefore, it would not be inappropriate to state

that the assessee started deriving significant monetary benefits

due to the technical upgradation received under the

collaboration agreement with the A.E.;

(vi) The OECD guidelines on Transfer Pricing Regulations

require that business strategies are relevant for determining the

comparability of prices between controlled and uncontrolled

transactions. The TPO has disregarded the business and

commercial realities and strategies and has acted in a

mechanical manner ignoring the economic circumstances

surrounding the transaction;

(vii) It is not open to the TPO to question the judgment of the

assessee as to how it should conduct its business and regarding

the necessity or otherwise of incurring the expenditure in the

interest of its business. It is entirely the choice of the assessee


ITA Nos.1068 & 1070/2011 of 25

as to from whom it contemplates to source its technology or

technical knowhow and as to what steps should be taken to

meet the competition prevalent in the market and to stave off

the competitors. This is the domain of the businessman and the

TPO has no say in the matter. As held by the Supreme Court

in S.A. Builders Ltd. v. CIT (2006) 289 ITR 26 (SC) the

Revenue cannot justifiably claim to place itself in the arm chair

of businessman or in the position of the Board of Directors and

assume the role to decide how much is the reasonable

expenditure having regard to the circumstances of the case.

In respect of the assessment year 2003-04 more or less the

same findings were recorded by the CIT (Appeals). In fine, he held

that the royalty/ brand fee payment for acquisition of use of technical

knowhow was incurred for genuine business purposes and should be

allowed even if the assessee had suffered continuous losses in the

business. The losses are partly due to internal and external factors

and according to the CIT (Appeals) it is difficult to “subscribe to the

TPO’s view that if there was financial crunch then the appellant

should have discontinued to payment to the A.E. on Brand Fee and

the payment of royalty on acquisition of technical knowhow/ brand

fee has not resulted in any financial benefit to the appellant”.


ITA Nos.1068 & 1070/2011 of 25

11. Thus for both the assessment years under appeal the CIT

(Appeals) decided the issue in favour of the assessee. The Revenue

preferred appeals before the tribunal for both the years. ITA

No.4878/Del/2009 was the appeal for the assessment year 2002-03.

The Tribunal after noticing the facts and the rival contentions in

some detail, agreed with the decision of the CIT (Appeals) that the

royalty/ brand fee payment was justified and held that the TPO was

totally wrong in disallowing the same on the footing that the assessee

suffered continuous losses.

12. For the assessment year 2003-04, the Revenue‟s appeal in ITA

No.421/Del/2010 was dismissed by the Tribunal which held that the

brand fee/ royalty payment cannot be disallowed by the TPO while

determining the ALP. In doing so, the Tribunal followed its decision

for the assessment year 2002-03 in the appeal filed by the department

in ITA No.4878/Del/2009.

13. In ITA Nos.1068/2011 and 1070/2011 before us the Revenue

has challenged the decision of the Tribunal by which it upheld the

decision of the CIT (Appeals) deleting the disallowance of brand fee/

royalty payment for the assessment years 2003-04 and 2002-03

respectively while computing the ALP.


ITA Nos.1068 & 1070/2011 of 25

14. On the submissions made by both the sides, the following

substantial questions of law are framed: -

ASSESSMENT YEAR 2003-04

“Whether on the facts and in the circumstances of the case and

on a proper interpretation of Section 92CA of the Act and Rule

10B(1)(a) of the Income Tax Rules, 1962, the Tribunal was

right in confirming the order of the CIT (Appeals) deleting the

disallowance of the brand fee/ royalty payment of ` 3,42,97,940/- made by the assessee to its Associated

Enterprise, while determining the Arm‟s Length Price”?

ASSESSMENT YEAR 2002-03

“Whether on the facts and in the circumstances of the case and

on a proper interpretation of Section 92CA of the Act and Rule

10B(1)(a) of the Income Tax Rules, 1962, the Tribunal was

right in confirming the order of the CIT (Appeals) deleting the

disallowance of the brand fee/ royalty payment of ` 3,99,51,000/- made by the assessee to its Associated

Enterprise, while determining the Arm‟s Length Price”?

15. It seems to us that the decision taken by the Tribunal is the

right decision. The TPO applied the CUP method while examining

the payment of brand fee/ royalty. The CUP method which in its

expanded form is known as “comparable uncontrolled price” method

is provided for in Rule 10B(1)(a) of the Income Tax Rules, 1962. It

is one of the methods recognised for determining the ALP in relation

to an international transaction. Rule 10B(1) says that for the


ITA Nos.1068 & 1070/2011 of 25

purposes of Section 92C(2), the ALP shall be determined by any one

of the five methods, which is found to be the most appropriate

method, and goes on to lay down the manner of determination of the

ALP under each method. The five methods recognized by the rule

are (i) comparable uncontrolled price method (CUP), (ii) re-sale

price method, (iii) cost plus method, (iv) profit split method and (v)

transactional net marginal method (TNMM). The manner by which

the ALP in relation to an international transaction is determined

under CUP is prescribed in clause (a) of the sub-rule (1) of Rule 10B.

The following three steps have been prescribed: -

“(a) comparable uncontrolled price method, by which,

(i) the price charged or paid for property

transferred or services provided in a comparable

uncontrolled transaction, or a number of such

transactions, is identified;

(ii) such price is adjusted to account for

differences, if any, between the international

transaction and the comparable uncontrolled

transactions or between the enterprises entering

into such transactions, which could materially

affect the price in the open market;

(iii) the adjusted price arrived at under sub-

clause (ii) is taken to be an arm’s length price in

respect of the property transferred or services

provided in the international transaction;”


ITA Nos.1068 & 1070/2011 of 25

16. The Organization for Economic Co-operation and

Development („OECD‟, for short) has laid down “transfer pricing

guidelines” for Multi-National Enterprises and Tax Administrations.

These guidelines give an introduction to the arm‟s length price

principle and explains article 9 of the OECD Model Tax Convention.

This article provides that when conditions are made or imposed

between two associated enterprises in their commercial or financial

relations which differ from those which would be made between

independent enterprises then any profit which would, but for those

conditions, have accrued to one of the enterprises, but, by reason of

those conditions, if not so accrued, may be included in the profits of

that enterprise and taxed accordingly. By seeking to adjust the

profits in the above manner, the arm‟s length principle of pricing

follows the approach of treating the members of a multi-national

enterprise group as operating as separate entities rather than as

inseparable parts of a single unified business. After referring to

article 9 of the model convention and stating the arm‟s length

principle, the guidelines provide for “recognition of the actual

transactions undertaken” in paragraphs 1.36 to 1.41. Paragraphs 1.36

to 1.38 are important and are relevant to our purpose. These

paragraphs are re-produced below: -


ITA Nos.1068 & 1070/2011 of 25

“1.36 A tax administration’s examination of a controlled

transaction ordinarily should be based on the

transaction actually undertaken by the associated

enterprises as it has been structured by them, using the

methods applied by the taxpayer insofar as these are

consistent with the methods described in Chapters II and

III. In other than exceptional cases, the tax

administration should not disregard the actual

transactions or substitute other transactions for them.

Restructuring of legitimate business transactions would

be a wholly arbitrary exercise the inequity of which

could be compounded by double taxation created where

the other tax administration does not share the same

views as to how the transaction should be structured.

1.37 However, there are two particular circumstances

in which it may, exceptionally, be both appropriate and

legitimate for a tax administration to consider

disregarding the structure adopted by a taxpayer in

entering into a controlled transaction. The first

circumstance arises where the economic substance of a

transaction differs from its form. In such a case the tax

administration may disregard the parties’

characterization of the transaction and re-characterise

it in accordance with its substance. An example of this

circumstance would be an investment in an associated

enterprise in the form of interest-bearing debt when, at

arm’s length, having regard to the economic

circumstances of the borrowing company, the

investment would not be expected to be structured in this

way. In this case it might be appropriate for a tax

administration to characterize the investment in

accordance with its economic substance with the result


ITA Nos.1068 & 1070/2011 of 25

that the loan may be treated as a subscription of capital.

The second circumstance arises where, while the form

and substance of the transaction are the same, the

arrangements made in relation to the transaction,

viewed in their totality, differ from those which would

have been adopted by independent enterprises behaving

in a commercially rational manner and the actual

structure practically impedes the tax administration

from determining an appropriate transfer price. An

example of this circumstance would be a sale under a

long-term contract, for a lump sum payment, of

unlimited entitlement to the intellectual property rights

arising as a result of future research for the term of the

contract (as previously indicated in paragraph 1.10).

While in this case it may be proper to respect the

transaction as a transfer of commercial property, it

would nevertheless be appropriate for a tax

administration to conform the terms of that transfer in

their entirety (and not simply by reference to pricing) to

those that might reasonably have been expected had the

transfer of property been the subject of a transaction

involving independent enterprises. Thus, in the case

described above it might be appropriate for the tax

administration, for example, to adjust the conditions of

the agreement in a commercially rational manner as a

continuing research agreement.

1.38 In both sets of circumstances described above, the

character of the transaction may derive from the

relationship between the parties rather than be

determined by normal commercial conditions as may

have been structured by the taxpayer to avoid or

minimize tax. In such cases, the totality of its terms


ITA Nos.1068 & 1070/2011 of 25

would be the result of a condition that would not have

been made if the parties had been engaged in arm’s

length dealings. Article 9 would thus allow an

adjustment of conditions to reflect those which the

parties would have attained had the transaction been

structured in accordance with the economic and

commercial reality of parties dealing at arm’s length.”

17. The significance of the aforesaid guidelines lies in the fact that

they recognise that barring exceptional cases, the tax administration

should not disregard the actual transaction or substitute other

transactions for them and the examination of a controlled transaction

should ordinarily be based on the transaction as it has been actually

undertaken and structured by the associated enterprises. It is of

further significance that the guidelines discourage re-structuring of

legitimate business transactions. The reason for characterisation of

such re-structuring as an arbitrary exercise, as given in the

guidelines, is that it has the potential to create double taxation if the

other tax administration does not share the same view as to how the

transaction should be structured.

18. Two exceptions have been allowed to the aforesaid principle

and they are (i) where the economic substance of a transaction differs

from its form and (ii) where the form and substance of the

transaction are the same but arrangements made in relation to the


ITA Nos.1068 & 1070/2011 of 25

transaction, viewed in their totality, differ from those which would

have been adopted by independent enterprises behaving in a

commercially rational manner.

19. There is no reason why the OECD guidelines should not be

taken as a valid input in the present case in judging the action of the

TPO. In fact, the CIT (Appeals) has referred to and applied them

and his decision has been affirmed by the Tribunal. These

guidelines, in a different form, have been recognized in the tax

jurisprudence of our country earlier. It has been held by our courts

that it is not for the revenue authorities to dictate to the assessee as to

how he should conduct his business and it is not for them to tell the

assessee as to what expenditure the assessee can incur. We may

refer to a few of these authorities to elucidate the point. In Eastern

Investment Ltd. v. CIT, (1951) 20 ITR 1, it was held by the Supreme

Court that “there are usually many ways in which a given thing can

be brought about in business circles but it is not for the Court to

decide which of them should have been employed when the Court is

deciding a question under Section 12(2) of the Income Tax Act”. It

was further held in this case that “it is not necessary to show that the

expenditure was a profitable one or that in fact any profit was

earned”. In CIT v. Walchand & Co. etc., (1967) 65 ITR 381, it was

held by the Supreme Court that in applying the test of commercial


ITA Nos.1068 & 1070/2011 of 25

expediency for determining whether the expenditure was wholly and

exclusively laid out for the purpose of business, reasonableness of

the expenditure has to be judged from the point of view of the

businessman and not of the Revenue. It was further observed that

the rule that expenditure can only be justified if there is

corresponding increase in the profits was erroneous. It has been

classically observed by Lord Thankerton in Hughes v. Bank of New

Zealand, (1938) 6 ITR 636 that “expenditure in the course of the

trade which is unremunerative is none the less a proper deduction if

wholly and exclusively made for the purposes of trade. It does not

require the presence of a receipt on the credit side to justify the

deduction of an expense”. The question whether an expenditure can

be allowed as a deduction only if it has resulted in any income or

profits came to be considered by the Supreme Court again in CIT v.

Rajendra Prasad Moody, (1978) 115 ITR 519, and it was observed

as under: -

“We fail to appreciate how expenditure which is

otherwise a proper expenditure can cease to be such

merely because there is no receipt of income. Whatever

is a proper outgoing by way of expenditure must be

debited irrespective of whether there is receipt of

income or not. That is the plain requirement of proper

accounting and the interpretation of Section 57(iii)

cannot be different. The deduction of the expenditure


ITA Nos.1068 & 1070/2011 of 25

cannot, in the circumstances, be held to be conditional

upon the making or earning of the income.”

It is noteworthy that the above observations were made in the context

of Section 57(iii) of the Act where the language is somewhat

narrower than the language employed in Section 37(1) of the Act.

This fact is recognised in the judgment itself. The fact that the

language employed in Section 37(1) of the Act is broader than

Section 57(iii) of the Act makes the position stronger.

20. In the case of Sassoon J. David & Co. Pvt. Ltd. v. CIT, (1979)

118 ITR 261 (SC), the Supreme Court referred to the legislative

history and noted that when the Income Tax Bill of 1961 was

introduced, Section 37(1) required that the expenditure should have

been incurred “wholly, necessarily and exclusively” for the purposes

of business in order to merit deduction. Pursuant to public protest,

the word “necessarily” was omitted from the section.

21. The position emerging from the above decisions is that it is not

necessary for the assessee to show that any legitimate expenditure

incurred by him was also incurred out of necessity. It is also not

necessary for the assessee to show that any expenditure incurred by

him for the purpose of business carried on by him has actually

resulted in profit or income either in the same year or in any of the

subsequent years. The only condition is that the expenditure should


ITA Nos.1068 & 1070/2011 of 25

have been incurred “wholly and exclusively” for the purpose of

business and nothing more. It is this principle that inter alia finds

expression in the OECD guidelines, in the paragraphs which we have

quoted above.

22. Even Rule 10B(1)(a) does not authorise disallowance of any

expenditure on the ground that it was not necessary or prudent for the

assessee to have incurred the same or that in the view of the Revenue

the expenditure was unremunerative or that in view of the continued

losses suffered by the assessee in his business, he could have fared

better had he not incurred such expenditure. These are irrelevant

considerations for the purpose of Rule 10B. Whether or not to enter

into the transaction is for the assessee to decide. The quantum of

expenditure can no doubt be examined by the TPO as per law but in

judging the allowability thereof as business expenditure, he has no

authority to disallow the entire expenditure or a part thereof on the

ground that the assessee has suffered continuous losses. The

financial health of assessee can never be a criterion to judge

allowability of an expense; there is certainly no authority for that.

What the TPO has done in the present case is to hold that the

assessee ought not to have entered into the agreement to pay royalty/

brand fee, because it has been suffering losses continuously. So long

as the expenditure or payment has been demonstrated to have been


ITA Nos.1068 & 1070/2011 of 25

incurred or laid out for the purposes of business, it is no concern of

the TPO to disallow the same on any extraneous reasoning. As

provided in the OECD guidelines, he is expected to examine the

international transaction as he actually finds the same and then make

suitable adjustment but a wholesale disallowance of the expenditure,

particularly on the grounds which have been given by the TPO is not

contemplated or authorised.

23. Apart from the legal position stated above, even on merits the

disallowance of the entire brand fee/ royalty payment was not

warranted. The assessee has furnished copious material and valid

reasons as to why it was suffering losses continuously and these have

been referred to by us earlier. Full justification supported by facts

and figures have been given to demonstrate that the increase in the

employees cost, finance charges, administrative expenses,

depreciation cost and capacity increase have contributed to the

continuous losses. The comparative position over a period of 5 years

from 1998 to 2003 with relevant figures have been given before the

CIT (Appeals) and they are referred to in a tabular form in his order

in paragraph 5.5.1. In fact there are four tabular statements furnished

by the assessee before the CIT (Appeals) in support of the reasons

for the continuous losses. There is no material brought by the

revenue either before the CIT (Appeals) or before the Tribunal or


ITA Nos.1068 & 1070/2011 of 25

even before us to show that these are incorrect figures or that even on

merits the reasons for the losses are not genuine.

24. We are, therefore, unable to hold that the Tribunal committed

any error in confirming the order of the CIT (Appeals) for both the

years deleting the disallowance of the brand fee/ royalty payment

while determining the ALP. Accordingly, the substantial questions

of law are answered in the affirmative and in favour of the assessee

and against the Revenue. The appeals are accordingly dismissed

with no order as to costs.

(R.V. EASWAR)

JUDGE

(SANJIV KHANNA)

JUDGE

MARCH 29, 2012

hs


IN THE INCOME TAX APPELLATE TRIBUNAL

“L” BENCH, MUMBAI

BEFORE SHRI J. SUDHAKAR REDDY, ACCOUNTANT MEMBER, AND

SHRI VIJAY PAL RAO, JUDICIAL MEMBER

ITA no. 579, 1272, 1273/Mum./2011 (Assessment Year : 2006-07, 2004-05, 2005-06)

ITA no. 3910, 3911/Mum./2009

(Assessment Year : 2002-03, 2003-04)

Deloitte Consulting India Pvt. Ltd. Fairmont, Level-2 Hiranandani Business Park Powai, Mumbai 400 076 PAN – AACCM6469N

………….………. Appellant

v/s

DCIT / Income Tax Officer Circle / Ward–2(2)(3), Aayakar Bhavan 101, Maharshi Karve Marg Mumbai 400 020

..…….………. Respondent

Assessee by : Mr. Arvind Sonde Revenue by : Mr. Jitendra Yadav a/w Mrs. Malathi Sridharan

Date of Hearing – 25.01.2012

Date of Order – 30.03.2012

O R D E R

PER J. SUDHAKAR REDDY, A.M.

These appeals preferred by the assessee, are directed against the

impugned separate orders passed by the Commissioner (Appeals) for

assessment years 2002-03 to 2006-07 respectively. As the issues arising in

all these appeals are common, for the sake of convenience, they are heard

together and are being disposed off by way of this consolidated order.


DELOITTE CONSULTING INDIA PVT. LTD.

2

Facts in brief:-

2. The facts of the instant appeals, as far as merits of the Transfer Pricing

Adjustment is concerned, have been brought out by the Transfer Pricing

Officer (for short “TPO”) in his order 10th February 2005, passed under

section 92CA(3) of the Income Tax Act, 1961 (for short "the Act") for

assessment year 2002-03 and the same is extracted below for ready

reference:-

“3. Business of the assessee

3.1 The assessee is a joint-venture company between Mastek Ltd and Deloitte Consulting with Mastek and its affiliates holding 50.1% of the share capital and the balance 49.9% being held by Deloitte and its affiliates. Deloitte Consulting is a limited partnership registered in New York. It is one of the worlds leading management consulting firms. Mastek, the other shareholder, is a publicly held in Indian information technology application outsourcing company.

3.2 The assessee was incorporated as a private limited company on 30th July 2001. The Joint-venture was formed for the establishment

and operation of an offshore development centre for the provision of both offshore and on-site information technology and other related services. 3.3 The assessee has entered into a software development service agreement with Deloitte to provide the software related services to Deloitte. Deloitte enters into consulting assignments with its US clients. For such assignments, the areas pertaining to software

development and information technology services are provided by the assessee in terms of the contract between the assessee and Deloitte

only when the assessee possesses the requisite resources to provide such services. The assessee provides both offshore and on-site service

under the contract with Deloitte. The offshore services are provided through Mastek and on-site services would be provided through Majesco, a US based company and a subsidiary of Mastek. 3.4 The role played by the two joint-venture partners in the company is as follows: (a) Deloitte plays •the lead role in the generation of sales, in the

management and delivery of projects and managing and maintaining the company’s customer relationships.

(b) Mastek provides and manage the company’s infrastructural facilities, the operations including recruitment, training, administration and support as a part of its current and future facilities as well as delivery capability and project quality. http://www.itatonline.org


3

The entire turnover of the assessee represents earnings received from Deloitte for providing software development and information technology services. 4. International Transactions: The various international transactions entered into by the assessee during the previous year are as follows:-

(a) The assessee has rendered software development and

information technology services to Deloitte, amounting to Rs 9.15 crores. In respect of the services the assessee is liable to receive the payment in 60 days time. The assessee bears all the risks relating to performance, market and foreign exchange. The services are priced mostly on time and material basis. (b) The second international transactions refers to the value of on- site charges paid by the assessee to Majesco, i.e., the US based

subsidiary of Mastek amounting to Rs 4.27 crores. The on-site services rendered Majesco amounted to 47% of the total operating revenue of

the assessee during the previous year. (c) The third international transactions refers to reimbursement made to Deloitte, on account of marketing services rendered by them amounting to Rs 1.6 crores. These costs represent 18.33% of the total operating revenue of the assessee. 5. The assessee has adopted the transaction net margin method to

benchmark international transactions. For this purpose, it has filed a study report in the course of the transfer pricing proceedings, which

explains how the arms length Price has been determined in respect of each of the international transactions. In this connection, the assessee has undertaken an analysis of the functions performed, assets employed and the risks assumed by it and its associated enterprise in respect of each of the international transactions The object of undertaking such an of the analysis is to characterise the assessee as well as the associate entity, so that comparable transactions can be identified based on the character of the assessee. The procedure followed is described as under:-”

3. We extract the facts, as brought out by the TPO, relating to the third

international transaction, as there is no dispute in the first and the second

international transactions before the Tribunal.

“5.3 Functions Performed in Respect of the Third Transaction-

Deloitte has deployed three senior managers to undertake full-time marketing for the assessee. Deloitte identifies client opportunities and

the new or existing opportunities that can be undertaken by using offshore model. In this connection, the partners and senior managers of Deloitte, reach out to the assigned senior managers and involving http://www.itatonline.org


4

them in the sale process. The senior managers add content to the proposal and validate it for correctness using the offshore model. These managers also attend the oral presentation and demonstrate the offshore delivery model and capabilities. The assigned managers identify the appropriate on-site/offshore team and monitor the status and quality of engagement. The assigned managers would also check onto the accounting and the invoicing process. In this connection, it is stated that Deloitte charges without any markup, the salary costs

including other benefits as well as out-of pocket expenses in respect of the senior managers to the assessee. The assessee claims the said

expenses as marketing expenses on its books. 6.2 In respect of the third transaction, the assessee has explained that Deloitte assists the assessee in generation of sales, management and delivery of projects, and in managing and maintaining customer relationships. For this purpose, it is explained that three senior managers have been assigned by Deloitte to undertake full-time marketing only for the assessee. It is explained that, the cost incurred

on the assignment of the three senior managers consisting of their salary and related expenditure, is charged by Deloitte on actual basis.

It is further stated that if the assessee had appointed marketing personnel to carry out its own marketing activities, it would have had to pay for the same. Further, it is stated that as Deloitte has not charged markup for the services, the said amount fulfills the requirements of arms length. 8. The third transaction relating to cost allocation was also examined and in this connection letters dated September 15, 2004,

September 30, 2004 and 11 Jan 2005 were issued to the assessee to explain why the allocation is proper and establish the various benefits

derived by the assessee on account of which the costs are being allocated to it. In this connection, the assessee has made its detailed submissions in the letters dated October 8, 2004, October 1., 2004, November 16, 2004, November 30, 2004, December 15, 2004, January 6, 2005, January 17, 2005, January 25, 2005, January 28, 2005 and January 31, 2005.”

4. Thereafter, the TPO observed as follows:-

“9. From the above submissions of the assessee, the main contentions

that have been made by it are as follows. 1. The first of contention of the assessee is that the allocation consists

of only costs and there is no mark up embedded in the same. Citing this reason the assessee contends that the cost represents the arms

length price for the charge on account of marketing expenses made to the assessee. 2. The assessee contends that it has derived valuable benefit on account of these costs and hence their allocation to it is proper. In this regard the assessee explains that its business has significantly increased on account of the efforts of the three senior managers http://www.itatonline.org


5

whose costs have been allocated. It is also explained that if the assessee were to undertake the marketing function on its own it would have had to incur significant expenses. 3. The assessee relies upon the confirmation dated the 3 Jan 2005 and contends that the cost allocation is in accordance with the joint- venture, agreement and is hence duly authorised by all the concerned parties.

4. The assessee explains that though 17 persons were engaged in the

business of marketing the offshore capabilities by Deloitte, only the cost relating to three persons have been charged to the assessee. It is also explained that these three persons were wholly engaged in marketing the offshore capabilities of Deloitte. 10. The various submissions made by the assessee, the relevant issues in this regard are examined as follows:

(a) The role of the respective parties relating to the software development activity carried on by the assessee has been discussed in

details at para-5.1 at the earlier pages. From perusal of the same it is evident that the role of Deloitte is to market and generate sales and manage the delivery of projects and customer relationships. The role of the assessee is to actually execute the project and deliver the output to the associate entity. As already explained, Deloitte is getting remunerated for the marketing function performed by it. This is evident from the fact that the Deloitte enters into the contract with the end customers. Though the assessee has been unable to provide the

details of the price charged by Deloitte on the end customers for the services rendered by it, it is fair to presume that Deloitte charges a

suitable markup as considered proper by it on the amount billed by the assessee while billing the end clients. Considering the fact that Deloitte is separately being compensated for the marketing function performed by it, the logical consequence is that all costs for the purpose of marketing are to be borne by it only. Hence, there is no basis or justification for allocating any part of those costs to the assessee. (b) The assessee’s role under its contract with Deloitte has also been explained in Para 5.1. From the same it is clear that the assessee’s role is to undertake the execution of the project and render the

software development services. The assessee has already explained that it has not entered into any third party transactions during the

previous year nor has it explored the possibility at any time. When the assessee is not required to undertake the marketing function in terms of the Master services agreement, there is no reason for any allocation of the marketing costs to the assessee. It is clear that both the parties have clearly demarcated roles to play under the software services agreement and both are compensated for the same accordingly. Just as the assessee is not allocating any part of its costs for software development to Deloitte, similarly there is no reason for Deloitte to

allocate any part of the costs incurred by it in order to perform the role agreed by it under the software agreement.



6

(c) One of the main consideration in the case of intra-group services is to show that some valuable service has in fact been received by one of the parties. In this case accordingly the assessee had been requested to produce evidence to show that valuable services were received by it against the cost allocation. In this connection the only evidence produced by the assessee consists of various e-mails exchanged between the various employees of the assessee company and the three senior managers of Deloitte whose costs have been allocated. On

an examination of these e-mails it is found that they predominantly deal with issues relating to billing and invoicing. In most of the e-mails

furnished the senior managers are advising the assessee regarding the manner of billing. A number of e-mails also relate to follow up with the clients in connection with pending bills. In this connection assessee’s letter dated November 30, 2004 clearly mentions that the three persons were actively involved in accounting and invoicing besides making presentation and marketing the JV’s offshore capabilities. However as already explained at Para 5.1 the risk on account of accounts receivable lies on Deloitte and not the assessee. It is the

responsibility of Deloitte to collect the revenue from its customers and as far as the assessee is concerned it is to receive all payments from

Deloitte within 60 days of invoicing. In such a situation there seems to be no reason why the costs relating to persons who are coordinating for the purpose of prompt collection of bills from the customers should be allocated to the assessee. (d) The next important issue to consider is whether the AE has derived any benefit out of these costs. The assessee however is silent on the benefits derived by the associate entity by the undertaking of

marketing functions even though it was specifically requested to provide its submissions in this regard. Even though the assessee may

be silent in this regard, it is quite obvious that the AE has benefited from the joint-venture association with the assessee. Just as the assessee is able to get the clients located in US, the associate entity is also able to leverage on its ability to provide software services at lower costs due to off-shoring and hence in a position to get more consultancy assignments in this manner. Hence besides the fact that the AE. was anyway responsible to perform the marketing function under the software services agreement, it is also evident that it also benefited by offering the offshore model to its clients:-

(e) The next important issue to consider is the documentation maintained by the assessee on the basis of which the cost allocation

has been made. In this connection the assessee could not produce any separate agreement entered into which defines the scope of the marketing cost sharing arrangement. The assessee primarily relies on clause 9 of the joint-venture agreement. Joint-venture agreement clearly provides that both the parties can second their employees to the assessee company with the approval of at least one director of each of “A” group and “B” group of the board of the assessee company. In the event of such secondment the agreement permits the

reimbursement of salary costs. However in the given case the assessee has admitted that there was no formal secondment of the

employees. Hence, the cost allocation is not strictly is not strictly in http://www.itatonline.org


7

accordance with the terms of the joint venture agreement. The confirmation dated 3rd January 2005, obtained in the course of the transfer pricing proceedings after the issue regarding the agreement was raised, cannot constitute a contemporaneous evidence, in support of the transaction. The approval of the board of the assessee company for the payment cannot act as - a substitute for a formal arrangement specifying the services that would be rendered and the costs that would be reimbursed, such agreement being entered into before the

transaction. In related party situations, the fact that the transaction is duly authorized by the Board of he assessee company or the overseas

entity in itself does not establish that the transaction is at arm’s length. In a third party situation, no entity will accept the burden of the costs incurred by the other party unless a specific agreement is reached before the costs are incurred and the agreement specifies the nature and purpose of the costs and the respective share of each party in it. (f) From all these submissions of the assessee it is seen that although

the charge is stated as a pure cost allocation, from the assessee’s perspective the same is in fact a charge on the assessee for marketing

services. It is only the quantum of the charge which is linked with the costs incurred in the hands of the overseas entity. 11. In view of the above facts, it is held that the marketing costs incurred and allocated by Deloitte to the assessee does not result in rendering of any service to the assessee. The entire costs of all the 17 marketing personnel of Deloitte is on account of the functions to be performed by Deloitte under the Software Services agreement.

Deloitte is being compensated adequately for these functions. In an arm’s length situation, a software services provider who renders

services to only one client and who is not even exploring the possibility of providing services to any other third party is not likely to undertake any significant marketing whether on its own or through any other third party. Further, the assessee cannot obtain any sale unless Deloitte outsources the same to the assessee. Hence, any increase in assessee’s sales is because it is able to provide good services at lower costs and Deloitte finds if profitable to procure the same from the assessee. 12. Hence, it is held that no service is rendered in respect of the

amount paid on account of cost allocation by the assessee. The Arm’s Length Price for the same is hence determined at Nil. The total income

of the assessee hence increases by Rs. 1,66,06,651/-. 13. It is hereby clarified that the findings and discussions made in this order are applicable only in respect of Reference received for A.Y. 2002-03 and not for subsequent assessment years.”

5. The Assessing Officer passed his order dated 28th February 2005 under

section 143(3), and made an adjustment in consonance of the order dated

10th February 2005, passed by the TPO under section 92CA(3) of the Act. http://www.itatonline.org


8

6. Aggrieved, the assessee carried the matter in appeal, wherein before

the Commissioner (Appeals), the assessee submitted that specialization in

software development services was in specific areas and that the growth is

dependent on the ability of the marketing personnel of Deloitte to identify

and sell the product that could be executed by the assessee and that

Deloitte, as earmarked, some of its personnel whose role was to market the

off-shore model of their joint venture. It was claimed that these earmarked

personnel had exclusively performed the activity of marketing the off-shore

model of the appellant. It justified this arrangement and argued that only

salary and other travel related costs of three persons were reimbursed. It

was claimed that the costs allocation was in accordance with the joint

venture agreement.

7. The Commissioner (Appeals) rejected the contentions of the assessee

on various grounds. He held that –

(i) the role of Deloitte has to market and generate sales as

well as to manage customer relations and ensure delivery as well

as billing and that this was already defined as per the agreement

between Deloitte and assessee;

(ii) it is clear that the marketing function has been allocated to

Deloitte and the role of the assessee is only to execute the

project on behalf of the Deloitte, as per agreement, and deliver

the out put to them. The cost of marketing incurred by the

Deloitte is recovered from end customers by way of price

charged to them;

(iii) the assessee refused to file details of marked-up earned by

Deloitte on sales made to end customers and, hence, the TPO

has rightly assumed that Deloitte had suitably, marked-up the

price charged to the end customers, so as to recover marketing

cost; http://www.itatonline.org


9

(iv) Procedure described in clause (9) of the agreement for

secondment of employees was not followed and, hence, there is

no secondment;

(v) that the role of the assessee, in its agreement with

Deloitte, is limited to provide software and the information

technology services in respect of the project assigned to it by

Deloitte and to deliver the said output to Deloitte which, in turn,

was responsible for delivery of the same to the end customer

and that it is the Deloitte which is responsible for generation of

sales and maintenance of customer relationship and under those

circumstances, there is no logic for reimbursement of marketing

cost by the assessee to Deloitte. There is no stipulation in the

existing agreement towards sharing of marketing cost;

8. The Commissioner (Appeals), vide Para-11 of his order, held as

follows:-

“11. To sum-up in brief, the defacto function of the appellant is only to provide software and I.T. Services to none other than Deloitte and only to Deloitte. Hence, the appellant cannot have any function to perform in the field of marketing because its whole and sole market is its Associate Enterprise namely Deloitte. In other words, the appellant’s sole market area is restricted to Deloitte. Therefore, there is no justification for any allocation by the appellant, of the marketing costs to itself in respect of any such costs incurred by Deloitte.”

9. The Commissioner (Appeals) held that the Arm’s Length Price (for

short “ALP”) of the said international transaction between the assessee and

Deloitte, was properly determined by the TPO at “nil”. Aggrieved, the

assessee is in appeal before the Tribunal.

10. The ground of appeal raised by the assessee for assessment year

2002-03, are extracted below:-

“Ground 1: Erroneous upward adjustment of Rs. 1,66,06,651 to the arm’s length price determined by the Appellant is bad in law http://www.itatonline.org


10

1.1 The order passed by the Deputy Commissioner of Income Tax-2(2), Mumbai (“AO”) under section 143(3) of the Income-tax Act, 1961 (‘the Act’) and the Commissioner of Income-tax (Appeals) — XXXII Mumbai [‘the CIT(A)’] under section 250 of the Act, are bad in law and on facts. 1.2 The learned CIT(A) erred in upholding the order of the AO making

an addition of Rs.1,66,06,651/- to the total income of the Appellant in respect of the reimbursements made by the Appellant to its associated

enterprise - Deloitte Consulting LP, USA (Deloitte). 1.3 The learned CIT(A) erred in facts in confirming that no services were rendered to the Appellant by the seconded personnel of Deloitte during the said assessment year. 1.4 Based on facts and circumstances of the case, the learned CIT(A) erred in law in not demonstrating the motive of the Appellant to shift

profits outside India by manipulating the prices charged in its international transactions.

1.5 The CIT(A) erred in law and facts in disregarding the decision of Hon’ble Supreme Court in the case of Shahzada Nand & Sons, 108 ITR 358. Ground 2: Reference to the Transfer Pricing Officer is bad in law 2.1 The learned CIT(A) erred in law in not considering the fact that the

AO did not record any reasons to show the conditions mentioned in clause (a) to (d) of Section 92C(3) of the Act were satisfied, before

making a reference of the Appellant’s case to the TPO under section 92CA(l) of the Act and therefore the Appellant prays that the reference made by the AO to the TPO was not in accordance with the law. Ground 3: Other Grounds 3.1 The learned CIT(A) erred in confirming levy of interest under section 234B of the Act. 3.2 The learned CIT(A) erred in confirming the initiation of penalty

proceedings under section 271(1)(c) of the Act.”

11. Before us, the learned Counsel, Mr. Arvind Sonde, submitted that he is

not advancing any arguments on grounds no.1.4, 1.5 and 2. Thus, these

grounds are dismissed as “not pressed”.

12. Ground no.3, is on the levy of interest under section 234B of the Act.

This is dismissed as levy of interest is mandatory and consequential. Ground



11

no.3.2, is on the issue of initiation of penalty under section 271(1)(c). This is

dismissed as not maintainable.

13. This leaves us with grounds no.1.1, 1.2 and 1.3. Ground no.1.1, is

general in nature. We now consider grounds no.1.2 and 1.3.

14. The learned Counsel for the assessee explained the facts of the case at

length. He pointed out that the joint venture agreement dated 18th July

2001, was the pre-incorporation agreement and it was for fulfilling the

conditions stipulated in the joint venture agreement that the assessee

company was incorporated on 30th July 2001, as a private limited company.

He drew the attention of the Bench that the joint venture agreement which is

at Page-104 of assessee’s paper book between “Deloitte Consulting L.I”, and

“Masket Limited” dated 18th July 2001. He also referred to the master service

agreement between Deloitte and the assessee company, as well as the

service agreement between the assessee company and Masket Ltd. He

submitted that the newly incorporated company was required to ratify the

joint venture agreement. He explained that the Deloitte was conducting the

front office operations and Masket Ltd. was to perform the back office

operation, to put it in common parlance. He referred to various

responsibilities and obligation of the parties as per agreement. He drew

specific attention to clauses 9.1.1. to 9.1.4 of the joint venture agreement

which deals with “personnel”. He emphasized that the agreement does not

provide for any mark-up and it is a case of cost reimbursement. He pointed

out that out of 17 personnel in the marketing field, the cost of only three

persons was sought to be collected as reimbursement from the assessee. He

referred to the order dated 24th March 2004, passed under section 201(1),

201(A) of the Act, by the Jt. Director of Income Tax, Range-3, which is

placed at Page-185 of the assessee’s paper book and submitted that the fact

that this is a reimbursement, was accepted by the Revenue. He argued that

it is a case of pure reimbursement of actual expenditure and, hence, the

question of determining ALP does not arise.

15. He further submitted that – http://www.itatonline.org


12

(i) the scope of TPO is to compute the ALP and it is a domain

of the Assessing Officer to determine as to whether a particular

expenditure is allowable or not. He argued that the TPO is not

empowered to disallow the expenditure and under section

92CA(1) r/w section 92F(ii) of the Act; the only power given to

the TPO is to determine ALP. He referred to the plain language in

the Act and the CBDT instructions dated 20th May 2003, and

argued that the determination of assessable income has not

been outsourced to the TPO and that this remains the domain of

the Assessing Officer. He relied on the following case laws:-

� Honda Siel Cars India Ltd. vs. ACIT, (2010) 001 ITR

(Trib.) 497 (Del.); and

� Sony India P. Ltd. vs Central Board of Direct Taxes, [2007] 288 ITR 052 (Del.).

(ii) the second proposition argued is that, the joint venture

agreement was prior to the incorporation of the assessee

company and that this joint venture puts an obligation on

the assessee post incorporation to reimburse the

marketing costs and, hence, the payment is justified. He

relied on the following case laws:-

� Philip John Plasket Thomas v/s CIT, [1963] XLIX ITR (SC)

97.

(iii) that this is a case of reimbursement of expenses and,

hence, no reference can be made to the TPO. He relied on

the following case laws for various propositions which we

would be dealing in due course. Following case laws have

been relied upon by the learned Counsel:-

� Cushman & Wakefield India Pvt. Ltd. v/s ACIT, 2011-TII-

121-ITAT-DEL-TP;

� Aricent Technologies (Holding) Ltd. v/s DCIT, [2011] 9

Taxman.com 287 (Del.); http://www.itatonline.org


13

� Dresser-Rand India P. Ltd. v/s ACIT, [2011] 13 Taxman.com (Trib.) 82 (Mum.); and

� Aztec Software & Technology Services Ltd. v/s ACIT,

[2007] 107 ITD (Banglore) 141 (SB).

(iv) that if it is a case of Revenue that it is only a job work

done for Deloitte, then the reimbursement should not be

taken as a separate international transaction and margin

should be accordingly computed, by aggregating these

transactions with the other transactions.

He submitted figures and calculations to demonstrate that

in such a case, operating margin would be more than the

ALP accepted by the TPO. He tried to demonstrate that

both the entities have transacted at ALP. On a query from

the Bench, the learned Counsel fairly conceded that these

arguments were not advanced either before the TPO or the

Assessing Officer or the first appellate authority and that

such a claim was not made in the TP study.

(v) The last proposition was that the TPO has neither adopted

any method to determine the ‘ALP’ as expenditure incurred

nor has she taken any comparable. Thus, he submitted

that the order passed by the TPO is bad-in-law.

16. For assessment year 2003-04, the learned Counsel submitted that the

arguments for the assessment year 2002-03, are adopted for this year.

17. For assessment years 2004-05, 2005-06 and 2006-07, the learned

Counsel submitted that the situation is different as the decision of Bangalore

Bench of the Tribunal in I-Gate Global Solutions Ltd. v/s ACIT, [2007] 112

TTJ (Bang.) 1002, was available and, hence, the assessee chose to file

revised return of income for assessment years 2004-05 and 2005-06 offering

the TP adjustment as income and claimed exemption under section 10A. The

adjustments made by the TPO, is not in dispute in these years. For the http://www.itatonline.org


14

assessment year 2006-07, he submitted that in the original return of income

itself, the assessee has suo-motu made the adjustment of ALP increased its

income and filed its return of income and claimed exemption under section

10A. He relied on the decision of Bangalore co-ordinate bench of the Tribunal

in I-Gate Global Solutions Ltd. (supra) and argued that the issue is covered

and the assessee should be granted exemption under section 10A, for the

assessment years 2004-05, 2005-06 and 2006-07. On a query from the

Bench, he admitted that no fresh form no.3CEB, had been filed. He

submitted that the Assessing Officer has wrongly ignored the revised return

of income filed by the assessee for assessment years 2004-05 and 2005-06.

18. Learned Departmental Representatives, Mrs. Malathi Sridharan, along

with Mr. Jitendra Yadav, representing the Revenue, opposed the contentions

of the learned Counsel for the assessee and pointed out that the learned

Counsel has raised a number of new issues which were never argued either

before the TPO or before the Assessing Officer or before the CIT(A). They

pointed out that the assessee has not raised these issues in the grounds of

appeal. She submitted that, in fact, no arguments were advanced on

grounds no.1.4, 1.5, 2 and 3. Mr. Jitendra Yadav, submitted that on factual

issue as to whether any services were rendered, the learned Counsel has not

led any contemporaneous evidence, as pointed out by the Commissioner

(Appeals) in his order and that the assessee has not raised any ground of

appeal on this issue. He once again drew the attention of the Bench to

various clauses in the joint venture agreement, which is placed at assessee’s

paper book Page-104, master service agreement between Deloitte and the

assessee company, service agreement between the assessee company and

Mastek Ltd. He submitted that for arriving at ALP, it is necessary for the TPO

to examine these agreements and submitted that the TPO has rightly relied

on these agreements to determine the ALP at “nil”.

19. The learned Departmental Representative filed a paper book running

into 45 pages and submitted that –



15

(i) the joint venture agreement is only an in-principle

commitment of the joint venture partners to commit

various resources to the assessee;

(ii) Mastek Ltd. agrees to play a lead role in accordance with

the terms of service agreement and Deloitte agrees that it

will play a lead role in terms of master service agreement.

That the joint venture agreement is only an in-principle

agreement, whereas functions were to be performed

strictly in terms of service agreement and master service

agreement and, hence, the argument that the assessee

has an obligation to reimburse certain expenditure as per

the joint venture agreement which is a pre-incorporation

agreement is factually incorrect. He referred to Para-2 of

master service agreement which is placed at the paper

book Page-(8) filed by the Revenue and pointed out the

service that are to be provided to Deloitte by the assessee

and to Para-3 at Page-9, listing out the functions to be

preformed by the Deloitte. He contended that as per Para-

3(b), which is at Revenue’s paper book Page-10, the

assessee is not to impede or interfere with a contractual

relationship between the client and Deloitte. The assessee

has no role of interacting to modify, cancel, renew or

extend the contract even after expiry of agreement unless

Deloitte expressly permit them in writing. Thus, it was

submitted that it was an effective separation between the

assessee and the client as regards marketing and sales

function and that the entire market risk is to be borne by

the Deloitte only;

(iii) the assessee has to bill Deloitte on an hourly basis and the

Deloitte is supposed to pay within sixty days of invoice

date irrespective of whether the Deloitte has received the



16

payments from the clients, unless there are issues relating

to quality. Hence, billing risk is exclusive with Deloitte;

(iv) entire sales of the assessee is only to Deloitte and, hence,

it has no marketing and sales functions to be preformed;

(v) billing was purely on hourly basis by the assessee to

Deloitte and Deloitte enjoyed the mark-up in its billing to

clients. The mark-up was not disclosed and it should be

presumed that mark-up was also for performing marketing

and sales function.

(vi) on the basis of joint venture agreement and master

service agreement and the recitals therein, there is no

mandate whatsoever on the assessee to bear market risk

as well billing risk. That the sales function, the market

function and the billing function are exclusive domain of

Deloitte and there is absolutely no role for the assessee as

per the mandate of this agreement. Hence, no expenditure

was required to be incurred on marketing and, hence, the

ALP is “nil”.

20. Without prejudice to the above submissions, it was argued that even if

there is a mandate as per the agreements, the procedures described for

secondment of employees was not followed and this proves that there is no

secondment at all. The confirmation at assessee’s paper book at pages-123

to 125, was, according to the learned Departmental Representative, not

contemporaneous evidence, as it was executed at a later date that too at

three different places.

21. Attention of the bench was drawn to the e-mails placed at Pages-138

to 182 of the assessee’s paper book and it was submitted that all those e-

mails, which the assessee sought to file as contemporaneous evidence to

prove rendering of services by three employees of Deloitte to the assessee



17

company, are rightly rejected as evidence, as the e-mails disclose that these

three persons were dealing only with billing related activities and nothing

else. The e-mails, according to the learned Departmental Representative,

reflect the billing process, checking and granting of approval of these bills

and the follow up of bills from the client. Thus, he submitted that there is no

sales and marketing services rendered by these three persons of Deloitte to

the assessee company as claimed.

22. On legal issue, the learned Departmental Representative submitted

that – (i) the assessee, in the transfer pricing review, stated that there are

three distinct classes of international transactions. Two of these class of

international transactions have been separately bench marked by the

assessee except the third class of international transaction; (ii) that

provisions of sections 92(2) and section 92F, mandate that cost allocation

has to be at ALP and bench marking of the cost of services has to be made

at rates available to the assessee in the market; (iii) that the assessee has

failed to apply any method to determine ALP in the case of the third class of

international transactions in dispute and, hence, failed to discharge the onus

that lay on it. Reliance was placed on the decision of Aztec Software &

Technology Services Ltd. (supra); (iv) when the assessee failed to discharge

its onus, then the Assessing Officer is empowered under section 92C(3) to

proceed with determination of ALP; (v) when, admittedly, there are three

sets of international transactions, they cannot be clubbed as it would

tantamount to following entity level approach which is not permitted; (vi)

that the ALP can be determined at “nil”, when no services are rendered,

reliance was placed on the decision of a Bangalore co-ordinate bench in ITA

no.352/Bang./2009, M/s. Gemplus India Pvt. Ltd. v/s ACIT, order dated 21st

October 2010, 2010-TII-55-ITAT-BANG-TP; (vii) that the contention of the

assessee that its claim of reimbursement was accepted in proceedings under

section 201 of the Act, it is argued that this does not act as a bar on

investigation by the TPO and his arriving at the ALP. Reliance was placed on

the judgment of Hon'ble Jurisdictional High Court in Aditya Birla Nuvo Ltd.



18

v/s DCIT, [2011] 12 Taxman.com 141 (Bom.) and submitted that these

sections operate in different fields.

23. On the argument that the disallowance of expenditure is the domain of

the Assessing Officer, learned Departmental Representative submitted that

the TPO determined the ALP at “nil” and that he had neither made any

disallowance nor had he stepped into the shoes of the Assessing Officer. He

disputed the argument that once the Assessing Officer refers a transaction to

the TPO for determining ALP, allowability of expenditure under section 37 of

the Act, is a forgone conclusion, by submitting that as per the instruction of

CBDT, the moment the international transactions crosses a particular thresh

hold, the Assessing Officer is bound to make a reference to the TPO

automatically and, hence, it cannot be a case of application of mind. Reliance

was placed on OECD guidelines and it was submitted that the TP

adjustments would not effect underlining contractual obligation, even when

there is no intent to maximize or avoid tax. She distinguished the case laws

relied upon by the learned Counsel for the assessee and submitted that the

decision of the Tribunal in Dresser-Rand India P. Ltd. (supra) is on cost

contribution and the case of Cushman & Wakefield India Pvt. Ltd. (supra),

there was no dispute as to whether services were available.

24. The learned Departmental Representative, Mrs. Malathi Sridharan,

arguing on the revised return of income submitted that the assessee, in its

TP study, has not amended the ALP and that the ALP computed by the TPO

stands. In the revised return of income, she pointed out that only marketing

expenses were disallowed and added to income and no specific TP

adjustment was done. She drew the attention of the Bench at paper book

Pages-56 to 90 for assessment year 2005-06, and paper book Pages-17 to

54, for assessment year 2006-07 and submitted that the assessee merely

made an enhanced claim under section 10A, by adding back its claim of

expenditure. She pointed out that for the three assessment years i.e., 2004-

05, 2005-06 and 2006-07, the assessee has not challenged the upward

adjustment made by the TPO. She distinguished the Bangalore Bench



19

decision of the Tribunal in I-Gate Global Solutions Ltd. (supra) by submitting

that there the assessee determined the ALP and made an upward revision in

its return of income and whereas in the case of hand, ALP was not revised.

She referred to various sections of the Act, and the objects sought to be

achieved by the legislature while introducing the TP provisions and pointed

out that the entire object is to prevent shifting of profits and argued that

this object would not be achieved if claim under section 10A, is granted. She

pointed out that in Aztec Software & Technology Services Ltd. (supra), the

Tribunal referred to further consequences then mere shifting of profits. She

pointed out that the return of income for assessment year 2004-05 was filed

beyond one year and that for both the assessment years 2004-05 and 2005-

06, the revised returns of income cannot be admitted as there is no omission

or a wrong statement in the original return of income. He relied on a number

of case laws in support of her contentions. She further submitted that the

findings of the Commissioner (Appeals) at Page-6, Para-3.3.4, on the

allowability for deduction under section 10A, have not been disputed by the

learned Counsel for the assessee. She pointed out that the conditions

stipulated under section 10A, have not been fulfilled.

25. Learned Counsel for the assessee, in reply, submitted that there are no

fresh grounds of appeal raised and that the ground raised is broad enough to

cover fresh arguments raised before the Tribunal. He submitted that both

the payments and receipts by Deloitte to the assessee company have to be

considered as a whole and when properly analysed, it should be taken as a

single set-of transactions. He countered various arguments of the learned

Departmental Representative by submitted that – (i) interface with client is

allowed to the assessee only after an agreement is entered between the

client and Deloitte and (ii) that the role of three persons is to explain the

capacities of the assessee to clients and get business through Deloitte; (ii)

there is no written agreement or legal requirement prescribed for

secondment of employees and confirmation is good evidence; (iii) that what

is paid by the assessee to Deloitte is at best a discount given by assessee to



20

Deloitte from the bills raised by it. He distinguished the decisions relied on by

the learned Departmental Representative.

26. Rival contentions heard. On a careful consideration of the facts and

circumstances of the case and on a perusal of the papers on record, as well

as the case laws cited before us, we hold as follows:-

27. In the TP study, for assessment year 2002-03, the assessee has

described the operations as follows:-

“Application Development and Implementation

Application Management Offshore Development Outsourcing

Conversion and Migration”

Entire turnover of MDOCDC represents earnings from Deloitte for

providing software development and I.T. services.

28. At Page-16 of the TP report, it is stated as follows:-

“3.3 International transactions of Masket Deloitte Offshore

Development Company Ltd.

The following international transactions undertaken during the financial

year ended March 31, 2002, have been reviewed in this report.

1) Software development and information technology services provided by MDCODC to Deloitte;

2) Software development and information technology services

provided by Majesco to MDCODC and 3) Marketing services provided by Deloitte to MDCODC.”

29. At Page-28 of the TP report, the transactions in question i.e. No.3, is

described as follows:-

Transaction 3: Marketing Services rendered by Deloitte to MDCODC Deloitte has deployed its three senior managers to undertake full time marketing for MDCODC Deloitte identifies client opportunities, either new opportunities or existing opportunities, to be delivered using the

offshore model. In this connection, Partners/Senior Managers of http://www.itatonline.org


21

Deloitte reach out to the assigned senior managers and involve them in the sales process. “The assigned senior managers add content to the proposal and validate it for correctness using the offshore model. The assigned managers would also attend the oral presentation arid propose and/or demonstrate the offshore delivery model and capabilities. Once the engagement execution is underway the assigned managers would

identify the appropriate onsite/offshore team mix as proposed in the proposal, and monitor the status and quality of the engagement. The

assigned managers would also check on the accounting and the invoicing processes.

In connection with the assignment of the senior managers, Deloitte

would cross-charge (without any mark up) the salary cost (including other benefits as well as their out of pocket expenses) of the said

senior managers to MDCODC. MDCODC claims the said expenses as marketing expenses in its books.”

30. Thereafter, at Page-20 of the TP report, it is stated as follows:-

“Search for Internal Comparables

Internal Transactions occur when either (Majesco/Deloitte) or MDCODC engages in similar transactions with unrelated entities. internal Cornparables relevant to the transaction between MDCODC. and (Maiscc/Deloie) would include the following:

• MDCODC providing contract software services to unrelated parties.

• Deloitte contracting software services to unrelated parties. • Majesco providing contract software services to unrelated parties Based on our discussions with the management of MDCODC, we have been informed that MDCODC does not render any software services to third parties (either in India or outside India). The management further informed that the software services rendered by Majesco to MDCODC are not similar to the services provided by Majesco to third

parties. Also, the management has informed us that the software services obtained by Deloitte from third parties are not similar to the

services obtained by Deloitte from MDCODC. This is primarily on account of requirements of different skill-sets, experience, knowledge

levels, complexity of the software projects handled, risk bearing capabilities, etc. The Management also informed that MDCODC was the sole entity in India providing offshore software services to Deloitte. In absence of internal comparables a search was carried out for external comparables.” (Emphasis own)

31. At Page-39 of the TP report, it is concluded as follows:-

“Transaction 3 - Marketing services rendered by Deloitte to MDCODC http://www.itatonline.org


22

As mentioned in the functional analysis, as per terms of the software services and l.T Service agreement, Deloitte wifl assist in generation of sales, in the management and delivery of projects and in managing and maintaining the customer relationships. In this regard, Deloitte has assigned its three senior managers to undertake full time marketing only for MDCODC. Deloitte identifies client opportunities, either new opportunities or

existing opportunities, to be delivered using the offshore model. In this connection, Partners/Senior Managers of Deloitte reach Out to the

assigned senior managers and involve them in the sales process. The assigned senior managers add content to the proposal and validate it for correctness using the offshore model. The assigned managers would also attend the oral presentation and propose and/or demonstrate the offshore delivery model and capabilities. Once the engagement execution is underway the assigned managers would identify the appropriate onsite/offshore team mix as proposed in the proposal, and monitor the status and quality of the engagement. The

assigned managers would also check on the accounting and the invoicing processes.

The cost incurred on the assignment of senior managers, which includes salary costs and other related expenditure are cross-charged to MDCODC by Deloitte at actual cost. The Indian transfer pricing legislation has not commented on the manner for determining an aim’s length price in respect of transactions involving reimbursement, however a gainful reference can be drawn

from the OECD Guidelines in this regard which state that:

In this respect we may state that the OED guidelines provide that

7.36: When an associated enterprise is acting only as an agent or intermediary in the provision of services, it is important in applying the cost plus method that the return or mark-up is appropriate for the performance of an agency function rather than for the performance of the service themselves. In such a case, it may not be appropriate to determine arm’s length pricing as a mark-up on the cost of the services but rather on the costs of the agency function itself or alternatively, depending on the type of comparable data being used

the mark-up on the cost of services should be lower than would be appropriate for the performance of the services themselves. For

example, an associated enterprise may incur the costs of renting advertising space on behalf of group members, costs that the group members would have incurred directly had they been independent in such a case, it may well be appropriate to pass on these costs on the group recipients without a mark-up and to apply a mark-up only to the costs incurred by the intermediary in performing its agency function.” In the present transaction, MDCODC would have had to appoint

marketing personnel to carry out its marketing activities had DELLOITE not provided its personnel for the same. So it can be said that the cost

incurred on these personnel would have been incurred by MDCODC http://www.itatonline.org


23

even if the personnel were appointed independently and since DELLOITE does not charge any mark up for these services so the amount that has been claimed as expense in India would have been the same even if independent personnel were to be appointed. So it can be said that cost reimbursement by MDCODC to DELLOIT is at arm’s length.”

32. Thereafter, at Page-41, it is stated as follows:-

“Transfer 3 – Marketing services rendered by Deloitte to MDCODC Given the key attribute of inter-company services, in our view the above transaction does not amount to rendering of intra-group services but merely that of direct recharge of cost without any element of mark-up.”

33. From the above, it is clear that the assessee company admits that – (i)

marketing services provided by the Deloitte to the assessee company is a

separate class of international transactions between the assessee and

Deloitte; (iii) It is also clear that the assessee company’s entire revenue are

only from Deloitte and that too for job work. It is not a case where the

contracts from clients are passed on to the assessee on a back-to-back

basis. Only a portion of the work obtained by Deloitte from the client, where

the assessee has the required skill and capabilities i.e., that certain job work

is given by Deloitte to the assessee; (iv) billing is done on an hourly basis;

(vi) there is no work or job that the assessee company has obtained from

any third party for all these assessment years directly or indirectly i.e., the

assessee does not render any software services to any third party either in

India or outside India.

34. On these facts, we now consider the arguments of the learned Counsel

for the assessee.

35. The first proposition is that, the assessee has a legal obligation to

make the payment and that legal obligation arises from the joint venture

agreements, which is a pre-incorporation agreement which is binding. This

argument is to be rejected as “ALP” has to be determined irrespective of any

contractual obligation undertaken by the parties. If it is held that the TP http://www.itatonline.org


24

provisions do not apply whenever there is a legal obligation to pay, then the

entire objective of the provisions will be defeated. The issue which the TPO

requires to adjudicate is not whether the assessee has a legal obligation to

pay and whether the payment made is for the purpose of business etc, but

only to determine the ALP of the transaction i.e., to examine as to whether

the transactions are at arm’s length. If the transactions are, in the opinion of

the TPO, not at arm’s length, the required adjustment has to be made, as

provided in the Act, irrespective of the fact that the expenditure is allowable

under other provisions of the Act.

36. The second argument of the learned Counsel that the TPO is not

empowered to disallow the expenditure and that the very reference to the

TPO by the Assessing Officer presumes that the amount in question is

allowable under section 37 of the Act and certain case laws were relied upon

for this proposition.

37. We are unable to persuade ourselves to agree to this proposition for

the reasons that the CBDT, by way of a circular, has directed the Assessing

Officer to refer to all transactions beyond a specified limit, to the TPO for

determining ALP. When the Assessing Officer has no discretion in the matter,

in view of the binding nature of CBDT instructions dated 20th May 2003,

directing all the officers of the Department to refer the matters to the TPO

for determination of ALP where the aggregate value of international

transactions exceeds ` 5,00,00,000, the Assessing Officer has a very limited

role. He has to mechanically follow these instructions. There is no application

of mind. There is no formation of any opoinion at the stage of reference.

Thus, to presume that he has allowed a particular expenditure under section

37, does not seem to be the right view of the matter. In any event, this is

not a case where the TPO or the Assessing Officer made a disallowance

under section 37 of the Act. It is a case where an adjustment has been made

under section 92C(4) of the Act, after the TPO determined the ALP at nil

under section 92CA(3). Hence this argument is devoid of merit.



25

38. The assessee, while filing its revised return of income, for assessment

years 2004-05 and 2005-06 and original return of income for assessment

year 2006-07, has suo-motu made a disallowance under section 37. It was

not a case of adjustment made under section 92C(4). The TP reports were

not revised.

39. On the issue as to whether the TPO is empowered to determine the

ALP at “nil”, we find that the Bangalore Bench of the Tribunal in Gemplus

India Pvt. Ltd. (supra), held that the assessee has to establish before the

TPO that the payments made were commensurate to the volume and quality

service and that such costs are comparable. When commensurate benefit

against the payment of services is not derived, then the TPO is justified in

making an adjustment under ALP.

40. In the case on hand, the TPO has determined the ALP at “nil” keeping

in view the factual position as to whether in a comparable case, similar

payments would have been made or not in terms of the agreements. This is

a case where the assessee has not determined the ALP. The burden is

initially on the assessee to determine the ALP. Thus, the argument of the

assessee that the TPO has exceeded his jurisdiction by disallowing certain

expenditure, is against the facts. The TPO has not disallowed any

expenditure. Only the ALP was determined. It was the Assessing Officer who

computed the income by adopting the ALP decided by the TPO at “nil”.

41. On the argument that the assessee was not having an Associate

Enterprise as on the date of obligation entered into by way of joint venture

agreements and reliance placed on the judgment of Hon'ble Supreme Court

in Philip John Plasket Thomas (supra), are of the opinion that this is of no

relevance. On the issue of order U/s 201(1), he hold that it is of no relevance

as these sections operate in different fields.

42. On the argument that reimbursement of expenses need not be referred

to the TPO, for determination of ALP, we find that the Special Bench of the

Tribunal in Aztec Software & Technology Services Ltd. (supra), considered http://www.itatonline.org


26

the issue and decided the same against the assessee. The Tribunal observed

as follows:-

“It is a case of reimbursement of expenditure incurred by an agent for

its principal. There is a force in the argument of the Revenue that if the CIT(A) had considered it to be the case of reimbursement, then he should have asked the assessee to furnish the ALP of reimbursement

transaction.”

43. We also find that the Bangalore Bench of the Tribunal in M/s. Gemplus

India Pvt. Ltd. (supra), held as follows:-

that:

+ the function of the TPQ is to compare the payments made by the

assessee company for services received if any and to see whether those payments are comparable. In a given scenario, the TPO has to

examine whether the payments were ALP conducive. Therefore it is very imperative on the part of the assessee to establish before the TPO that the payments were made commensurate to the volume and quality of services an such costs are comparable. In the present case, the payment terms, as pointed out by the TPO, are independent of the nature or volume of services; + the TPO is also justified in making a pertinent observation that the

expenses are apportioned by Singapore affiliate among different country centers on the basis of their own agreements and not on the

basis of the actual services rendered to the individual units; + the TPO has made a clear finding that there are no details available on record in respect of the nature of services rendered by Singapore affiliate to the assessee company. Therefore, the TPO is justified in holding that the assessee has not proved any commensurate benefits against the payments of service charges to the Singapore affiliate. The TPO is justified in making the adjustment of ALP under se. 92CA of the

Act. [emphasis own]

44. In our view, the case law applies on all fours to the facts of this case.

It is very imperative on the part of the assessee, to establish before the TPO,

that the payments made were commensurate to the volume and quality of

services and such costs are comparable. No such efforts was made. No ALP

was computed by the assessee.

45. As held by the Assessing Officer, as well as the Commissioner

(Appeals), the assessee has not furnished evidence to prove that these three http://www.itatonline.org


27

personnel have rendered marketing services to the assessee company. In

fact, the assessee company has no revenue which has been derived as a

result of these marketing expenses. At the cost of repetition, we state that in

the TP report, the company’s submission is recorded at Page-30, and it

states that the software services obtained by the Deloitte from the third

party, are not similar to the services obtained by the Deloitte from the

assessee company on account of requirements of different skill, experience,

knowledge level, complexity of software projects handled, risk bearing

capacity, etc. The entire revenue of the assessee are from the Deloitte. The

evidence filed in support of the fact that services are rendered in the form of

e-mails show that they are not e-mails relating to marketing, but that they

relate only to billing. As rightly pointed out by the learned Departmental

Representative, the assessee has no role in interacting with the client to

modify, cancel, renew or extend the contract. The assessee cannot, even

after expiry of the agreement between the Deloitte and its client, supply

services without written consent of Deloitte. Deloitte has to pay the assessee

irrespective of it getting payment or not within sixty days of raising invoices.

Deloitte is responsible for generation of sales management, delivery of

projects, maintaining customer relationship and billing and collection. The

assessee has no market risk. The argument of the learned Counsel for the

assessee that these three marketing personnel project the capabilities of the

assessee company so that Deloitte gets work, is not supported by any

evidence and, hence, without basis. In our view, under similar circumstances

a uncontrolled comparable company would not incur such expenditure.

Hence, the ALP is rightly determined at “nil”. As no expenditure would have

been incurred, there is no necessity to apply a particular method to arrive at

such conclusion. In fact, by all the five methods or any one of them, when

applied to the fact that there is no necessity of payment, the result of “nil”

ALP will come.

46. We respectfully following the view of the Special Bench of the Tribunal

on the issue a well as the findings of the co-ordinate bench in the matter

cited supra and dismiss these arguments of the learned Counsel for the http://www.itatonline.org


28

assessee, that in case of reimbursement, no ALP should be determined and

no reference is to be made to TPO. No such exception is given in the Act.

47. Coming to the case laws relied on by the learned Counsel in Cushman

& Wakefield India Pvt. Ltd. (supra), we find that the facts are different. The

assessee, in that case, had six types of international transactions and it has

adopted “Cup” method in its TP study. The question before the Tribunal was

whether the Assessing Officer was right in holding that the services availed

by the assessee are not intra-group services and, hence, no remuneration

should have been paid by the assessee to its associated enterprises. On

facts, the Tribunal held that it cannot be said that there is complete absence

of evidence and that the assessee has submitted evidence in respect of

services obtained by it from Mr. Rayden Vraganza, in respect of revenue

earned by the assessee. They came to a conclusion that what cost has been

incurred by the assessee, is only a reimbursement. These are factual matters

and have no bearing on the facts of our case. In the case on hand, the

finding of fact is that no evidence has been filed in support of rendering of

marketing of services by three personnel of Deloitte to the assessee.

48. In Aricent Technologies (Holding) Ltd. (supra), the facts are different

and it deals with amount paid as incentive to the employees of the assessee

company by parent company. This case law has no relevance to the issue.

49. Coming to the decision of the Tribunal in Dresser-Rand India P. Ltd.

(supra), the Tribunal was dealing with an issue of cost contribution. The

allegation was that the allocation of expenditure was excessive. The Tribunal,

on facts, came to a conclusion that the assessee has indeed received the

services from A.E. we find that it held that even the cost contribution

arrangement should be consistent with arm’s length principle. This finding

supports the case of the Revenue. It held that the assessee’s share of overall

contribution to the cost is required to be consistent with the benefit expected

to be received as an independent enterprise which would assign to the

contribution in hypothetically similar situation. In our opinion, this case law

does not help the case of the assessee. On the contrary, it fortifies the http://www.itatonline.org


29

argument of the Revenue that even in the case of reimbursement, ALP has

to be decided.

50. Coming to the Bangalore Bench of the Tribunal in I-Gate Global

Solutions Ltd. (supra), the Tribunal held that if the assessee itself discloses

income at ALP, which is more than the price shown in the book, it is not a

case of enhancement within the meaning of proviso to section 92C(4). Due

to determination of ALP by the assessee at a higher figure, and the assessee

will be entitled to exemption under section 10A, on such declared income.

The Tribunal was not concerned with the issue as to whether the conditions

specified under section 10A, were fulfilled by the assessee or not. In the case

on hand, the assessee has not complied with the provisions of section 10A,

to the tune of income by way of adjustment of ALP. In fact, the assessee

enhanced its income, not by making adjustment of ALP, by filing a revised TP

report, but only by suo-motu disallowing certain expenditure U/s 37. Section

10A(i) reads as follows:-

“Special provision in respect of newly established undertakings in free trade zone, etc.

10A. (1) Subject to the provisions of this section, a deduction of such profits and gains as are derived by an undertaking from the export of articles or things or computer software for a period of ten consecutive assessment years beginning with the assessment year relevant to the previous year in which the undertaking begins to manufacture or

produce such articles or things or computer software, as the case may be, shall be allowed from the total income of the assessee :

Provided that where in computing the total income of the undertaking

for any assessment year, its profits and gains had not been included by application of the provisions of this section as it stood immediately

before its substitution by the Finance Act, 2000, the undertaking shall be entitled to deduction referred to in this sub-section only for the unexpired period of the aforesaid ten consecutive assessment years :

Provided further that where an undertaking initially located in any free trade zone or export processing zone is subsequently located in a special economic zone by reason of conversion of such free trade zone or export processing zone into a special economic zone, the period of ten consecutive assessment years referred to in this sub-section shall be reckoned from the assessment year relevant to the previous year in which the [undertaking began to manufacture or produce such articles



30

or things or computer software] in such free trade zone or export processing zone :

[Provided also that for the assessment year beginning on the 1st day of April, 2003, the deduction under this sub-section shall be ninety per cent of the profits and gains derived by an undertaking from the export of such articles or things or computer software :

Provided also that no deduction under this section shall be allowed to any undertaking for the assessment year beginning on the 1st day of

April, 2012 and subsequent years.”

51. The C.I.T (A) at page 6 para 3. 3.4 of his order for assessment year

2006-07, held that the income arising out of the adjustment is not derived

by the undertaking from expert. This finding that requirement of section

10A, have not been compiled with by the assessee, is not not being factually

controverted by the learned Counsel. Thus, this finding has to be upheld for

all the assessment years. The other requirements of section 10`A’ are also

not complied with, which on these adjustments. Hence the assessee is not

entitled to deductions under section 10 ‘A’.

52. Coming to the argument that all the three types of international

transactions have to be aggregated and ALP determined, we find that the

assessee is raising this issue for the first time before the Tribunal. In the TP

report, distinction was made and it is admitted by the assessee that each

type of transaction is different. Only because certain advantage would occur

by clubbing transactions, fresh and innovative arguments are being raised to

justify the claim of the assessee. This cannot be admitted as it is against the

facts stated by the assessee before the authorities below. In fact, in the TP

report, the nature of each class of transaction was discussed and differences

brought out.

53. On filing of the revised return of income, we agree with the contention

of the learned Departmental Representative that the Assessing Officer was

right in not taking cognizance of the same for the reason that the assessee

has not pointed out that the revised return of income were filed for the

reason that there was an omission or a wrong statement. Reliance was http://www.itatonline.org


31

rightly placed by the learned Departmental Representative on the following

case laws:-

� Shahibag Entrepreneurs Pvt. Ltd. vs CIT [1994] 210 ITR 998 (Guj.);

� S.S. Naganand v/s JCIT, [2004] 088 ITD 607 (Bang.).

54. For all these reasons, we uphold the order of the Commissioner

(Appeals) and dismiss the appeal the grounds raised by the assessee for all

the years under appeal.

55. In the result, assessee’s appeals for all the years under appeal are

dismissed.

Order pronounced in the open Court on 30th March 2012.

/-Sd/- VIJAY PAL RAO

JUDICIAL MEMBER

Sd/-/- J. SUDHAKAR REDDY

ACCOUNTANT MEMBER

MUMBAI, DATED: 330th March 2012.

Copy to:

(1) The Assessee;

(2) The Respondent;

(3) The CIT(A), Mumbai, concerned;

(4) The CIT, Mumbai City concerned;

(5) The DR, “L” Bench, ITAT, Mumbai.

TRUE COPY BY ORDER Pradeep J. Chowdhury ASSISTANT REGISTRAR Sr. Private Secretary ITAT, MUMBAI BENCHES, MUMBAI


* IN THE HIGH COURT OF DELHI AT NEW DELHI + I.T.A. Nos ...

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