1. Heard Md. Nizammudin, learned Counsel appearing on behalf of the appellant as well as Mr. J.P. Khaitan, learned Senior Counsel who had put up appearance on behalf of the respondent. During the assessment years 2005-06 and 2006-07, the assessees have filed its income tax returns claiming therein Rs. 6,25,88,125/- and Rs. 6,52,70,749/- respectively towards Arm''s Length Price on its international transactions by adopting Cost Plus Method undertaken as the said transaction fulfils the requisite conditions as enumerated under Section 12A and 12B. The assessing authority did not agree and disallow the same and added towards its income. Being aggrieved thereof, the assessee has preferred an appeal and the First Appellate Authority while setting aside the findings so recorded by the assessing authority in disallowing the TPO have observed as under:
"I have considered the transfer pricing documentation maintained by the appellant, the appellant''s submission and the rebuttal of the Remand Report by the Appellant and the observations and the Remand Report of the TPO.
After perusing the above, I hold that:
That appellant, in compliance with the law, prepared and maintained the TP Report for computing the arm''s length price of its international transactions. As embodied in the TP Report, the appellant has adopted the Cost Plus Method as the most appropriate method to establish the arm''s length price of the relevant transactions undertaken by the appellant with 12A and 12B while selecting 12A and 12B as the ''tested party''.
From the facts and documents presented before me, I find that the appellant''s business arrangement with its foreign subsidiaries can be categorized into the following two revenue sharing models:
Model 1-In this model, the agreement are executed between the appellant and the overseas customers. In cases where the appellant retains 75 of the revenue and pays 25% of the revenue to its subsidiaries 12A/12B for the marketing the administrative support services provided by them in terms of the Master Service Agreement entered into between the appellant and the AE''s namely 12A/12B.
Model 2-In this model, the agreements are executed between 12A/12B raise the invoice on the customer and the appellant raised a back-to-back invoice for the 75% of the revenue on 12/12B in terms of the Master Service Agreement.
Evidently 12A or 12B retains 25% of the revenue towards marketing and administrative support services provided by them and the appellant continuous as the delivery engine of the group and retains 75% of the revenue. In both the above two models the appellant undertakes and assumes significant and analogous functions and risks and consequently undertakes full responsibility for the delivery of all IT development services to a customer. I agree with the appellant''s submissions, which has been reproduced in detail above, that under both the above scenarios, the functional and risk profiles of 12A and 12B remain the same. Incidentally, 12A and 12B do not have the technical competencies and financial capabilities to bear any loss arising in the form of bad debt or delivery failure; and would need to revert back to the appellant in case any such events occur. It is a fundamental principle of transfer pricing that risks should be allocated to the entity, which has greater control over the same and also, who has the financial capabilities to bear the same. In the instant case, I find that 12A and 12B do not have technical competencies or financial capacity to manage or bear risks arising out of bad debts or delivery failure resulting in non performance of the contract. The entire capabilities and financial strength in this regard lie with the Appellant in India and thus, as per the very conduct of the parties while doing business, it can be said that the Appellant bars the full risk of such maters under either of the two models, as enunciated above. The TPO observed that the foreign customers, while entering into the contracts with 12A or 12B would be in a position to hold such entities responsible for failure of delivery/non-performance of the contract and thus in cases of such direct dealings, 12A and 12B bear greater risk as compared to the other model where the customers enter into contracts directly with the appellant. In my view, this logic is flawed. The determinant factor is not whether the customers can hold 12A or 12B responsible for failure of performance, but whether, as per the functional, asset and risk profiles of the three entities, namely the appellant, 12A and 12B, if 12A and 12B do not have the necessary confidence and functional strength to bear such risks, and thereby the risk should be awarded to such party under an arm''s length dealing. In my view, base upon the documents submitted by the appellant and the arguments put forward before me, under either of the two situations, the functional, asset and risk profiles of 12A and 12B remain the same and the major risks relatable to bad debt and delivery failure/non-performance, always remain with the appellant, irrespective of the two business models.
I find that the TPO had in-principle accepted the remuneration model of 25% revenue sharing in case where the customers enter into contract with 12A and 12B. I also find that the remuneration model of 25% revenue sharing has been substantiated and justified by the appellant to be at arm''s length, by carrying out proper comparability analysis, as part of the documentation submitted with the TPO. Since, in my view, based upon the reasoning given above, the functional and risk profile of 12A and 12B remain the same under either of the two models, namely even where the customers enter into the contracts directly with the appellant, the same remuneration model of 25% revenue sharing should also apply in such business scenario. I cannot agree with the TPO''s arbitrary fixation of the remuneration model of 13% / 15% revenue sharing in the later scenario, namely whether the customers enter into contracts directly with the appellant, since the same appears to be without any basis whatsoever. Further, as discussed above, the logic of the TPO in coming to the conclusion of difference in functional and risk profiles under the two scenarios, appear to be erroneous. I also find support from the decisions of the Hon''ble Mumbai Tribunal rendered in the case of DCIT 9(2) Vs. M/s. Indo American Jewellery Ltd. (ITA No. 6194/Mum/2008) and ITO 10(3)(4) Vs. M/s. Zyds Atlanta Healthcare Pvt. Ltd. (ITA No. 3311 & 3312/Mum/2008), which have been relied upon by the appellant that of the appellant enjoys tax holiday or exemption with respect to its export profits, then any presumption of shifting of profits by the ape to overseas associated entities through mechanics of transfer pricing, would prima-facie stand defeated, since the moot question remains why would an assessee shift profits to a tax paying jurisdiction, when, by retaining the profits in India, he would have enjoyed full tax exemption on the same.
In view of the above findings, I delete the addition of Rs. 6,25,88,125 and allow this ground of the Appellant."
2. Being aggrieved, the revenue went to second appeal and the Second Appellate Authority after going through the entire records and perusing the terms and conditions of the contract which has been entered into between the appellant and associated enterprise''s 12A/12B affirmed the findings so recorded by the First Appellate Authority and thus dismissed the appeal.
Being aggrieved thereof, the department has preferred the instant appeal on the following questions of law in IT AT 96 of 2015:
(i) Whether on the facts and in the circumstances of the case Ld. Tribunal has erred in law as well as on facts in holding that the adjustment made by the TPO of Rs. 6,25,88,125/- on account of Account Management charges is arbitrary without proper appreciation of facts and without proper appreciation of facts and without specify any basis for allowing relief to the assessee on this issue?
(ii) Whether on the facts and in the circumstances of the case Ld. Tribunal has erred in law as well as on facts in holding that the adjustment made by the TPO of Rs. 6,25,88,125/- on account of Account Management charges is arbitrary without considering fact that even if the issue enjoys certain tax benefits, the adjustments in Arm''s Lengh Price would still be made?
(iii) Whether on the facts and in the circumstances of the case Ld. Tribunal has erred in law as well as on facts in holding that the adjustment made by the TPO of Rs. 6,25,88,125/- on account of Account Management charges is arbitrary without considering the fact that the foreign clients choose to bypass assesses foreign subsidiaries which indicates that by action in this manner, the foreign clients reduced their risk perception?
(iv) Whether on the facts and in the circumstances of the case conclusion arrived at by the Ld. Tribunal in granting the aforesaid relief to the assessee, is perverse?
3. Being aggrieved thereof, the department has preferred the instant appeal on the following questions of law in IT AT 95 of 2015:
(i) Whether on the facts and in the circumstances of the case Ld. Tribunal has erred in law as well as on facts in holding that the adjustment made by the TPO of Rs. 6,52,70,749/- on account of Account Management charges is arbitrary without proper appreciation of facts and without proper appreciation of facts and without specify any basis for allowing relief to the assessee on this issue?
(ii) Whether on the facts and in the circumstances of the case Ld. Tribunal has erred in law as well as on facts in holding that the adjustment made by the TPO of Rs. 6,52,70,749/- on account of Account Management charges is arbitrary without considering fact that even if the issue enjoys certain tax benefits, the adjustments in Arm''s Lengh Price would still be made?
(iii) Whether on the facts and in the circumstances of the case Ld. Tribunal has erred in law as well as on facts in holding that the adjustment made by the TPO of Rs. 6,52,70,749/- on account of Account Management charges is arbitrary without considering the fact that the foreign clients choose to bypass assesses foreign subsidiaries which indicates that by action in this manner, the foreign clients reduced their risk perception?
(iv) Whether on the facts and in the circumstances of the case conclusion arrived at by the Ld. Tribunal in granting the aforesaid relief to the assessee, is perverse?
4. The submission of the appellant that the adjustment of TPO towards Account of Management charges is arbitrary has been dealt by the First as well as the Second Appellate Authority and a concurrent finding of fact has been recorded that the TPO in principle accepted the remuneration model of 25% revenue sharing and the same has been substantiated and justified by the documents so submitted before the authorities below. Further, the genuineness of the documents which were relied on by the authorities have not been doubted by the Department.
5. Thus, in view of the above, we do not find any illegality and infirmity in the orders and further we are of the opinion that a concurrent finding of fact on the basis of the documents on records was recorded by the First Appellate Authority as well as the Second Appellate Authority. Accordingly, no question of law arises out of the judgment rendered by the authorities below. The appeals are devoid of merits and the same are dismissed accordingly along with the applications being GA No. 2314 of 2015 and GA No. 2318 of 2015 respectively.
