TMI Blog2011 (1) TMI 161X X X X Extracts X X X X X X X X Extracts X X X X ..... lowable once the deduction is claimed u/s 80HHE of the IT Act in view of provisions of sub-section 5 of section 80HHE. - Issue remitted back to AO - If assessee satisfies the pre-requisites stipulated for the purpose of getting benefit under s. 10A is a matter left to be determined by the AO. So also the entitlement of the assessee to seek deduction under s. 80HHE having been left to be determined by the AO, subject to assessee’s satisfying the pre-requisites stipulated for the grant of such a benefit under the said provision. Project expenses - assessee has claimed expenditure of ₹ 1,93,12,834 on account of project expenses. Assessing Officer asked the Assessee to explain as to why the same should not be capitalized. Assessee submitted that company has incurred the expenses in respect of various software development projects. Such expenses were routine business expenses incurred in the course of software business. Such expenses were not incurred for acquisition of any capital asset nor resulted in enduring benefit of capital field to be recorded as capital expenditure - Held that: - It is undisputed that the aforesaid amount was spent for training of the personnel. By any s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e without any mark-up, such payment is not at arm s length. The assessee has shown a profit margin of 27.95% (OP/TC). This is the more appropriate PLI in the case of the assessee as sales are made to AE and that makes it a controlled transaction. Therefore a mark up of 27.95% has been applied to the payment of Rs. 106,608,194 received by the assessee holding it to be payment received for render service. Accordingly the upward adjustment of Rs. 2,97,96,990/ - has been made. While reaching to this conclusion, the TPO has made following observations :- (i) The method used is CUP or TNMM depending on the transaction. The assessee had used OP / sales as the PLI. However, for the applying the mark-up, OP /TC has been used. (ii) The amount, received from the AE, which the assessee claims to be incentive to be paid to employees, has been treated as payment of services rendered. 2.2 The assessee has not accepted the above adjustments in the Arm s length price of International Transactions and has objected to the same. It has been submitted that pursuant to taking over of the assessee company by Flextronics International Singapore Pte Ltd., the latter has decided to pay an incenti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cord. Learned counsel for the assessee further submitted that in the FIRC submitted to the RBI, it has been clearly mentioned that these are incentive payments. It is for the department to prove that the payments are received against the services rendered by the assessee. Moreover, in earlier assessment year 2005-06 and subsequent assessment year 2007-08, assessment was done u/s 143(3) and no adjustment in this regard was done. Even if we rework the computation, the same would be at the higher side. We find that in the transfer pricing documentation, various international transactions were benchmarked applying Transactional Net Margin Method (TNMM) as the most appropriate method. In the transfer pricing documentation for the purpose of applying TNMM, the operating profit margin of the assessee was compare with the operating profit margin of comparable companies. The result of the benchmarking analysis is summarised as under :- OP/TC% OP/Sales% Average of PLI of 63 comparable companies 15.78% 11.29% PLI of FSS 27.95% 21.85% The TPO in his order held that the payment of incentive to employees is towards technical s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... seriatim as under: (1) Comments of TPO (i) It will be noted that such payments are a regular feature, every year starting from FY 2004-05 to FY 2006-07. (ii) If it actually was an incentive payment, it could have been made at one go. But this is not the case. Reply: It is submitted that the objective of incentive paid by the associated enterprise was to retain the employees of the appellant which constituted core asset in a software business. Since, it was anticipated that some of the employees may leave the organization pursuant to the takeover, as per the letter issued to the employees, 10% was to be paid during assessment year 2005-06, 40% during assessment year 2006-07 and 50% during assessment year 2007-08. (2) Comments of TPO (iii) The appellant had been asked to provide details whether there was any stated policy document in this regard. The appellant has not submitted (TPO Order) any such document. Reply: The appellant had placed on record copy of letter issued to the employees (Refer pages 318 to 321), which clearly states that the Flextronics International Singapore, Pte., Ltd. and the appellant have decided to grant incentive to the employees comprising ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing. Admittedly all money has not been paid out. USD 9,247 remains with TPO Order the appellant. The names of certain employees were inadvertently omitted from the list of employees submitted to the TPO. The complete list of employees has been attached at pages 271 to 283. It is submitted that the balance amount of USD 9,247 left with the appellant is on account of exchange rate fluctuation. The balance amount has been transferred to the income of the company in assessment year 2008-09 and has accordingly been taxed. (7) Comments of TPO (viii) Some of the employees who are supposed to have received the payment are said to be based in Germany. It does not seem logical that the money will first be remitted to India and will then flow to Germany. As stated at (v) above, the payment could have directly been remitted to Germany. Reply: It is submitted that the appellant also has an office in Germany and therefore, certain employees are based in Germany to carry out onsite assignments at the customer locations. Such employees being related to Indian entity, it is therefore imperative that payment is supposed to be made by the associated enterprise to the appellant only and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t in this regard has been made in earlier assessment year 2005-06 and subsequent assessment year 2007-08 wherein also similar incentives were paid and the facts were identical. The payment has been done in order to provide incentive in order to retain the employees which would ensure the continued profitability of the assessee company. There is no merit in TPO s comment that the payments of incentives could have been made directly to the employees and there was no need to use the assessee as a conduit. Assessee has rightly pointed out that payment from a foreign company cannot be made directly to employees of other company in India even if it is an associated company. The TPO s comment that some employees have been paid in excess of the supposed "target incentive". This is not a very cogent basis. Assessee has pointed out that there are also instances where few employees are paid lesser amount than the target incentive. Reasons for such differences has been said to be the fact that incentives are computed on some benchmark instituted for the employees. The TPO s comment that all amount has not been spent as US $ 9,247 remained has been controverted by the assessee by submitting tha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eduction u/s 10B in respect of all the units as deduction u/s 80HHE has been claimed in earlier year. The deduction u/s 10B is not allowable once the deduction is claimed u/s 80HHE of the IT Act in view of provisions of sub-section 5 of section 80HHE. Also furnish the details of deduction claimed unit wise in earlier years either u/s 80HHE and 10B." The assessee responded and submitted copies of Form No. 56G in respect of all the units on the income of which the exemption was claimed. The Assessing Officer held that in view of the detailed discussion made by DCIT, Circle 11(1), New Delhi vide his order, assessee s claim of exemption of Rs. 38,83,45,866/- stands disallowed. 7. Against this order, the assessee is in appeal before us. 8. It was submitted by the learned counsel for the assessee that the issue is squarely covered in favour of the assessee by the decision of Hon ble jurisdictional High Court in the case of CIT v. Legato Systems India Pvt. Limited, 203 CTR 101 (Del.). The order of Hon ble High Court in this regard is as under :- "The Tribunal has recorded a finding of fact that the respondent-assessee was not an old unit already in existence so as to be disentitle ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pment projects. Such expenses were routine business expenses incurred in the course of software business. Such expenses were not incurred for acquisition of any capital asset nor resulted in enduring benefit of capital field to be recorded as capital expenditure. The Assessing Officer did not accept the above submission. He proceeded to hold the same to be capital expenditure and disallowed the same. 12. Against this order, assessee is in appeal before us. 13. We have heard both the counsels and perused the record. We find that assessee vide its letter dated November 6, 2009 submitted in the paper book page No. 229 and duly explained that Rs. 1,93,12,834 was in respect of training of various personnel and such expenses were routine expenses incurred in the course of carrying on software business. In this connection, assessee also referred to Hon ble Apex Court decision in the case of Empire Jute Mills, 224 ITR 1, and several other case laws. We have carefully considered the submissions. It is undisputed that the aforesaid amount was spent for training of the personnel. By any stretch of imagination, these expenses cannot be said to have resulted in enduring benefit to be classi ..... X X X X Extracts X X X X X X X X Extracts X X X X
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