TMI Blog2015 (3) TMI 401X X X X Extracts X X X X X X X X Extracts X X X X ..... lly/admittedly in clinical research and manufacture of bio products and other products, there is no clear basis on which the TPO concluded that this company was mainly in the business of providing software development services. We therefore accept the plea of the Assessee that this company ought not to have been considered as comparable. KALS Information Systems Ltd - Held that:- TPO has drawn conclusions on the basis of information obtained by issue of notice u/s. 133(6) of the Act. This information which was not available in public domain could not have been used by the TPO, when the same is contrary to the annual report of this company as highlighted by the Assessee in its letter dated 21.6.2010 to the TPO. We also find that this company was developing software products and not purely or mainly software development service provider. We therefore accept the plea of the Assessee that this company is not comparable. Accel Transmatic Ltd. - This company was not comparable in the case of the assessees engaged in software development services business. Accepting the argument of the ld. counsel for the assessee, we hold that the aforesaid company should be excluded as comparables ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he assessee, hence, should be excluded from the list of comparable parties. Megasoft Ltd - In the present case factors for abnormal profits have not been highlighted by the Assessee. In such circumstances it is not possible to accept the submission of the Assessee to exclude this company for the purpose of comparison. Thus the adjustment to be made by way of transfer pricing adjustment and the consequent addition to the total income will be a sum of ₹ 17,32,27,953 and the AO is directed to restrict the addition accordingly. TP adjustment in the Support Services segment of the Appellant - ICC International Agencies Ltd. selected as comparable - Held that:- As can be seen from the functional profile of ICC International Agencies Ltd. given by the assessee, which is not disputed by the TPO, that it does trading and also acts as commission agent for machineries used textiles industry. As against this, the functional profile of the assessee, as we have already seen, is only giving support services. Keeping in mind the functions and risk analysis, it is not possible to compare the assessee with ICC International Agencies Ltd. If ICC International Agencies Ltd. is not take ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l expenses of employees who travelled for projects of 10A unit and allocate expenses on the basis of available evidence direct or circumstantial. As far as software licenses are concerned, the basis of allocation on the basis of ratio of average head count of 10A unit to the average head count of all units as a whole. The Assessee has done so because software licenses were used both for 10A project and non-10A unit. In such circumstances, the basis of allocation by the Assessee is held to be proper. As far communication expenses are concerned the basis of allocation by the Assessee on the basis of ratio of average head count of the 10A unit to the average head count of all units as a whole is no valid basis. As rightly held by the AO, Communication expenses may be dependent not only on the employee strength but also on the projects allocated to each unit. In the absence of any other details allocating those expenses on the basis of turnover is only accepted method. We therefore are of the view that the AO's basis of allocation has to be upheld.- Decided partly in favour of assessee. Computer software expenses - revenue v/s capital - Held that:- This issue requires re-e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Contract Software Development segment of the Appellant and in doing so grossly erred in; 4.1 Upholding the act of the learned TPO of collecting information of the companies by exercising power granted to him under section 133(6) of the Act. 4.2 Upholding the addition of liability no longer required written back in the operating cost as well in the operating income while computing the arm's length price. 4.3 Ignoring the limited risk nature of the services provided by the Appellant as detailed in the TP documentation and in upholding the conclusion of the learned TPO that no adjustment on account of risk differential is required while determining the Arm's Length Price of the international transactions of the Appellant, but for an adjustment towards differences in the working capital position between the Appellant and the entrepreneurial comparable companies. 4.4 That the learned AO and the learned Panel erred in not considering the advances received from the Associated Enterprises as trade payables in determination of working capital adjustment and consequently erred in not providing an appropriate adjustment towards work ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... les greater than 50% to select companies engaged in services - retained 3 Companies with ratio of research and development expenses to sales greater than 3 % indicating possible ownership of intangibles and/or significant activities not involved in pure service provision -rejected 4 Companies with ratio of net fixed assets to sales greater than 200% were excluded 5 Companies that had average sales of less than ₹ 1 crore during the time period - rejected 6 Companies with net worth less than zero - rejected 7 Companies with ratio of sum of advertising, marketing and distribution expenses to sales less than or equal to 3% - retained NOTE: TPO resorted to his own study and rejected all the filters applied by Logica. B.4. Comparables selected by Logica and their arithmetic mean: SI. No Name of the Company Mark up on cost 1 1 Bodhtree Consulting Ltd 18% ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Comparable at SI. No. 7 was rejected on the ground of different year ending and employee cost 25% of revenues; 1 Comparable at SI. No.4 was rejected on the ground that there was no financial data available for FY 2006-07; and 1 Comparable at SI. No. 1 was rejected on the ground of abnormal profitability B.5. Filters applied by the TPO in his TP study: Prowess Database: Step Description No. of Companies Resulted No. of Companies Eliminated 1 No. of companies resulted by the key word Computer Software 801 2 The companies for which the data is available for the FY 2006-07 477 324 3 The companies which have service income 403 74 4 The companies whose turnover is more than ₹ 1 crore 302 101 5 The companies whose service income is more than 75% of the revenues 292 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... E-Zest Solutions Ltd. 36.12 36.70 6 Flextronics Software Systems Ltd. (Segment) 25.31 25.73 7 Geometric Ltd. (Segment) 10.71 10.33 8 Helto Matheson Information Technology Ltd. 36.63 35.03 9 iGate Global Solutions Ltd 7.49 6.33 10 Infosys Technologies Ltd 40.30 39.62 11 Ishir Infotech Ltd. 30.12 31.07 12 KALS Information Systems Ltd. 30.55 24.10 13 LGS Global Ltd. 15.75 15.86 14 Lucid Software Ltd 19.37 17.74 15 Media Soft Solutions Pvt. Ltd 3.66 2.31 16 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... djustment suggested by the TPO. The AO accordingly made the addition by way of TP adjustment to the total income of the assesse in the final assessment order. Against the order of the AO, the assessee has raised ground Nos. 2 to 4 before the Tribunal. 7. We have heard the submissions of the ld. counsel for the assessee and the ld. DR. The first and foremost submission of the ld. counsel for the assessee was that the TPO while working out the Profit Level Indicator (PLI) of the operating cost/total cost, arrived at a percentage of 6.88% as follows:- Revenue Rs.234,26,60,885/- Less: Operating expenses Rs.219,19,46,556/- Operating profit Rs.15,07,14,329/- Operating profit /total cost 6.88% 8. The ld. counsel for the assessee brought to our notice that a sum of ₹ 4,27,16,385 was reversal of expenses and these had to be reduced from the operating and other expenses. In this regard, the ld .counsel for the assessee pointed out that while making the adjustment to the ALP, the AO took the operating cost at ₹ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sessee was that out of the 26 comparables, comparables at Sl.No.1, 2, 3 12 have to be rejected as they were held to be functionally not similar to a software services provider as held by this Tribunal in the case of Trilogy E-business Software India (P.) Ltd. v. Dy. CIT [2013] 140 ITD 540/29 taxmann.com 310 (Bang). The relevant paragraphs 39 to 50 of the aforesaid order of the Tribunal are as follows:- '(b) Avani Cimcon Technologies Ltd. 39. As far as this company is concerned, the plea of the Assessee has been that this company is functionally different from the assessee. Based on the information available in the company's website, which reveals that this company has developed a software product by name DX change , it was submitted that this company would have revenue from software product sales apart from rendering of software services and therefore is functionally different from the assessee. It was further submitted that the Mumbai Bench of the Tribunal to the decision in the case of Telcordia Technologies Pvt. Ltd. v. ACIT - ITA No.7821/Mum/2011 wherein the Tribunal accepted the assessee's contention that this company has revenue from sof ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ns made on behalf of the Assessee and are of the view that the same deserves to be accepted. The reasons given by the Assessee for excluding this company as comparable are found to be acceptable. The decision of ITAT (Mumbai) in the case of Telcordia Technologies Pvt. Ltd. v . ACIT ( supra )also supports the plea of the assessee. We therefore accept the plea of the Assessee to reject this company as a comparable. (c) Celestial Labs Ltd. 42. As far as this company is concerned, the stand of the assessee is that it is absolutely a research development company. In this regard, the following submissions were made:- In the Director's Report (page 20 of PB-Il), it is stated that the company has applied for Income Tax concession for in-house R D centre expenditure at Hyderabad under section 35(2AB) of the Income Tax Act. As per the Notes to Accounts - Schedule 15, under Deferred Revenue Expenditure (page 31 of PB-II), it is mentioned that, Expenditure incurred on research and development of new products has been treated as deferred revenue expenditure and the same has been written off in 10 years equally yearly installments from the year in whi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l labs is also in the field of research in pharmaceutical products and should be considered as comparable. As rightly submitted by the learned counsel for the Assessee, the discovery is in relation to a software discovery of new drugs. Moreover the company also is owner of the IPR. There is however a reference to development of a molecule to treat cancer using bio-informatics tools for which patenting process was also being pursued. As explained earlier it is a diversified company and therefore cannot be considered as comparable functionally with that of the Assessee. There has been no attempt made to identify and eliminate and make adjustment of the profit margins so that the difference in functional comparability can be eliminated. By not resorting to such a process of making adjustment, the TPO has rendered this company as not qualifying for comparability. We therefore accept the plea of the Assessee in this regard. 44. It was submitted that the learned DR in the above case vehemently argued that this company is into research in pharmaceutical products. The ITAT concluded that this company is owner of IPR, it has software for discovery of new drugs and has develop ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f bio products and other products as stated in the DRHP. There is no reference to any reply by Celestial labs to the above clarification of the TPO. The TPO without any basis has however concluded that the business mentioned in the DRHP are the services or businesses that would be started by utilizing the funds garnered though the Initial Public Offer (IPO) and thus in no way connected with business operations of the company during FY 06-07. We are of the view that in the light of the submissions made by the Assessee and the fact that this company was basically/admittedly in clinical research and manufacture of bio products and other products, there is no clear basis on which the TPO concluded that this company was mainly in the business of providing software development services. We therefore accept the plea of the Assessee that this company ought not to have been considered as comparable. (d) KALS Information Systems Ltd. 46. As far as this company is concerned, the contention of the assessee is that the aforesaid company has revenues from both software development and software products. Besides the above, it was also pointed out that this company is engaged in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t this company is not comparable. (e) Accel Transmatic Ltd. 48. With regard to this company, the complaint of the assessee is that this company is not a pure software development service company. It is further submitted that in a Mumbai Tribunal Decision of Capgemini India (F) Ltd v. Ad. CIT 12 Taxman.com 51, the DRP accepted the contention of the assessee that Accel Transmatic should be rejected as comparable. The relevant observations of DRP as extracted by the ITAT in its order are as follows: In regard to Accel Transmatics Ltd. the assessee submitted the company profile and its annual report for financial year 2005-06 from which the DRP noted that the business activities of the company were as under. (i) Transmatic system - design, development and manufacture of multifunction kiosks Queue management system, ticket vending system (ii) Ushus Technologies - offshore development centre for embedded software, network system, imaging technologies, outsourced product development (iii) Accel IT Academy (the net stop for engineers)-training services in hardware and networking, enterprise system management, embedded system, V ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ompany, and, therefore, such a company cannot be considered as tested party. Even as per the information received in response to notice under Section 133(6), the company has described its business as software development company or pure software development service provider. This information itself is very vague as the segmental details of operating revenue has not been made available to examine how much is the ratio of sale from software product and sale of software service and development. Looking to the fact that it has developed a software product named as Muulam which is used for civil engineering structures and the product development expenditure itself is substantial vis-a-vis the capital employed by the said company, this criteria for being taken as comparable party, gets vitiated. For the purpose of comparability analysis, it is essential that the characteristics and the functions are by and large similar as that of the assessee company and T.P. analysis/study can be made with fewest and most reliable adjustment. If a company has employed heavy capital in development of a product then profitability in the sale of product would be entirely different from the company, who ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ot be compared with the company which is a captive unit of its parent company assuming only limited currency risk. In view of the above finding, we hold that the Infosys cannot be taken as a comparable for determining the arms length price in the case of the assessee. 7.5 Wipro Ltd.-IT Services Seqment ('Wipro'): This company is also a global IT Company having varieties of service and products and looking to the magnitude of its operations, sales and expenses, the same cannot be taken into consideration for comparability analysis. Moreover, 67% of its sales relates to its product which are sold on premium resulting into higher profitability, therefore, cannot be compared with the assessee company at all. There are several judgments of ITAT which have been referred in para 6.5 above, that Wipro cannot be taken as comparable case for comparable case with the company like assessee. In view of these facts and the reasoning given in the case of lnfosys, we hold that Wipro also cannot be considered as a comparability analysis, hence, would not be included in the list of the comparable entities as identified by the TPO. 14. As far as comparable at Sl.No.6 24 are conc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ken as a comparable, while comparable at Sl.No.24 viz., Tata Elxsi Ltd. should be rejected as a comparable. 16. On the above submissions of the ld. counsel for the assessee, the ld. DR submitted that as far as functional comparability is concerned, it is not enough only to look at the fact that in the decisions relied upon by the ld. counsel for the assesse, also dealt with the case of software development and the assessee is also a software developer rendering software development services. It was his submission that the aforesaid companies even if they are engaged in providing software services, can be engaged in different sectors to which they cater, like software development in telecommunication, automobile manufacturing sector, etc. It was his submission that it was also necessary to consider as to whether the sectors in which the comparable chosen by the TPO belong and the sector to which the Assessee caters. 17. We have considered the submissions of the ld. counsel for the assessee and the ld. DR. We are of the view that the comparables which are sought to be excluded by the ld. counsel for the assessee have been held to be not comparable with the case of software serv ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... customizing the packaged software. The company also explained that 30 to 40% of the product software would constitute packaged product and around 50% to 60% would constitute customized capabilities and expenses related to travelling, boarding and lodging expense. Based on the above reply, the TPO proceeded to hold that the comparable company was mainly into customization of software products developed (which was akin to product software) internally and that the portion of the revenue from development of software sold and used for customization was less than 25% of the overall revenues. The TPO therefore held that less than 25% of the revenues of the comparable are from software products and therefore the comparable satisfied TPO's filter of more than 75% of revenues from software development services. The basis on which the TPO arrived at the PLI of 60.23% is given at page-115 and 116 of the order of the TPO. It is clear from the perusal of the same that the TPO has proceeded to determine the PLI at the entity level and not on the basis of segmental data. 25. In the order of the TPO, operating margin was computed for this company at 60.23%. It is the complaint of the assess ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 9.64% 4 Sasken Communication 22.16% 10.57% 5 Tata Elxsi 26.51% 26.47% 29. In case of all the above comparables, the learned TPO has used segmental margins for comparability purpose. In all these cases, the revenues from software development exceeded 75% of the total revenues of the entity. Considering margins of Megasoft at the entity level would be inconsistent with the TPO's position in case of other comparables. It was submitted that a different approach was adopted in case of Megasoft possibly because in case of Megasoft, the margins at the entity level are higher than that at the segment level; whereas in case of other comparables (Eg: Kals, Sasken, Tata Elxsi, Geometric, R Systems) margins at the segment level were higher. It was submitted that learned TPO's approach is arbitrary and without basis. The Assessee therefore submitted that if at all Megasoft is considered as comparable then only the segmental margins, if at all, should be used for comparability purpose. Both the segments being substantially diffe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... TAT Bang-TP had observed as follows: 86. At the cost of repetition, we have to say that extreme cases should not be included in samples and extreme comparables mean not only the positive higher side but also the lower side. In the list of 22 comparables, many of them are having very low margin rate, not only less than 10 or 5, even below that. We have already considered that the agreement entered into by the assessee with its German associate concern has contemplated a compensation of cost plus 6 per cent, or 1.5 times of the total wages bill, whichever is higher. This point we have to consider in the light of the fact that the assessee is working in a risk mitigated environment. That is why we have agreed with the argument of the assessee-company that there may not be extreme profits in the case of the assessee. When extremes are excluded from the samples, all sorts of extremes should be avoided. Otherwise, samples selected for comparative study may not be representative. 33. Even in the aforesaid decision the point that has been emphasized is that when the margins of comparable companies are either extremely low or high, the approach should be to eliminate ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... profits should be excluded may be in tune with the principles enunciated in OECD guidelines but cannot be said to be in tune with Indian TP regulations. However, if there are specific reasons for abnormal profits or losses or other general reasons as to why they should not be regarded as comparables, then they can be excluded for comparability. It is for the Assessee to demonstrate existence of abnormal factors. 36. In the present case factors for abnormal profits have not been highlighted by the Assessee. In such circumstances it is not possible to accept the submission of the Assessee to exclude this company for the purpose of comparison. 37. The next plea of the Assessee is that if at all this company is considered as a comparable then the segmental margin of 23.11% (which is the margin for software service segment) alone should be considered for comparability. On the above submission, we find that the TPO considered the segmental margin (Software service segment) in the case of Geometric, Kals Info systems, R Systems, Sasken Communication and Tata Elxsi. Before DRP the Assessee pointed out that the segmental margin of 23.11% alone should be taken for comparability. The DR ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at there is bound to be a difference between the Assessee and Megasoft and the profit arising to the Megasoft as a result of the existence of the software product segment and no finding has been given that reasonably accurate adjustments can be made to eliminate the material effects of such differences. For this reason, we are inclined to hold that the profit margin of 23.11% which is the margin of the software service segment be taken for comparability. In view of the above conclusion, we do not wish to go into the question as to whether less than 25% of the revenues of the comparable are from software products and therefore the comparable satisfied TPO's filter of more than 75% of revenues from software development services.' 19. As far as comparables at Sl.No.7 11 are concerned, it is not in dispute before us that the related party transaction in the case of companies exceed 15% and in view of the decision of the Tribunal in the case of 24/7 Customer.Com (P.) Ltd. v. Dy. CIT [2013] 21 ITR 514/28 taxmann.com 258 (Bang.), that where the RPT exceeds 15%, such companies should not be taken as comparables, we hold that companies at Sl.Nos. 7 and 11 of the list of the com ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 343.57 22.17 21.77 15 S I P Technologies Exports Ltd. 3.80 13.90 11.42 16 Thirdware Solutions Ltd. (Segment) 36.08 25.12 22.21 ARITHMETIC MEAN 18.32 17.06 E.1.5. + / - 5% of the Net Margin of the Assessee for software development services: Particulars Margin Net Margin of the Assessee (Pl. see para E.1.1 above) 9% +5% of the Assessee's Margin 14.45%/ -5% of the Assessee's Margin 3.55% E.1.6. Computation of arm's length price on the basis of the above arithmetic mean and the adjustment to be made: Arm's Length Mean Margin 18.32 Less: Working Capital Adjustment 1.26 Adjusted mean margi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 2 Companies with ratio of other operating income to sales greater than 50% to select companies engaged in services - retained 3 Companies with ratio of research and development expenses to sales greater than 3 % indicating possible ownership of intangibles and/or significant activities not involved in pure service provision -rejected 4 Companies with the ratio of net fixed assets to sales greater than 200% were excluded 5 Companies that had average sales of less than ₹ 1 crore during the time period - rejected 6 Companies with net worth less than zero - rejected 7 Companies with ratio of sum of advertising, marketing and distribution expenses to sales less than or equal to 3% - retained NOTE: TPO resorted to his own study and rejected all the filters applied by Logica. C.4. Comparables selected by Logica for marketing support services and their arithmetic mean: SI. No Name of the Company ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 78.67% 4 Empire Industries Ltd 23.98% ARITHMETIC MEAN 30.57% C.7. Computation of arm's length price by TPO and the adjustment made: Arm's Length Mean Margin 30.57% Operating Cost 7,49,82,500/- Arms Length Margin (30.57% of Operating Cost) Arms Length Price (ALP)130.57% of Operating Cost 9,79,04,650/- Price Received 8,26,30,922/- Short fall being adjustment u/s. 92CA 1,52,73,728/- 23. The AO in his draft assessment order suggested an addition to the adjustment suggested by the TPO. The Assessee filed objections to the addition as suggested in the draft assessment order before the DRP. The DRP however, confirmed the addition suggested by the TPO. The AO accordingly in the fair order made an addition by way of TP adjustment a sum of ₹ 1,52,73,728 suggested by the TPO. Aggrieved by the aforesaid order ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... The Assessee pointed out yet another significant difference between the entrepreneurial commission agent and the Assessee. LogicaGroup would compensate the Assessee irrespective of the materialisation of its marketing efforts whereas, a commission agent necessarily have to effect a sale to earn a commission. 25. The ld. counsel for the assessee focused his attention on comparability chosen by the TPO viz., ICC International Agencies Ltd. The functional profile of this company has been dealt with by the TPO at page No.260 of his order. In his objection before the TPO, the assessee submitted as follows:- International Agencies Ltd is primarily engaged in trading of embroidery accessories, embroidery spares and embroidery machines. The company also provides indenting services to the textile industry. Your goodself in the Notice considered the indenting services segment of ICC International Agencies Ltd as a comparable to the support services segment of the Assessee. The type of services provided by the company under indenting agency services is not available both in the Annual Report and websites. As such there is a lack of information available in the public do ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... PO. We accordingly hold that in respect of the international transactions of rendering marketing support services, the price received by the assessee is at arm's length and no adjustment is called for. Ground No.5 raised by the assessee is accordingly allowed. 29. Grounds 7 8 raised by the assessee reads as follows:- 7. The learned AO and learned Panel has erred in proposing that the expenditure incurred by the Company has to be apportioned between 10A Unit and non 10A Unit based on the turnover of the respective units; 8. The learned AO and learned Panel has erred in proposing to reduce the deduction under section 10A of the Income-tax Act, 1961 ('Act') with respect to 10A Unit from ₹ 12,288,462 to ₹ 9,012,411 and thereby increasing the profits of non 10A Unit from ₹ 174,739,357 to ₹ 178,015,408. 30. The assessee claimed deduction u/s. 10A of the Act on a sum of ₹ 122,88,462. In arriving at this profit, the assessee had allocated common expenses between 10A and non-10A units. The assessee's explanation of the basis of allocation and the AO's reason for rejecting the same was as follows:- Assessee& ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... roject of 10A unit. The hotel expenses included under the head 'Travelling and Conveyance expenses' are allocated on proportionate basis i.e., travel expenditure of 10A unit to the total travel expenditure of all units as a whole. On hotel expenses included under the head Travelling and Conveyance expenses , the AO was of the view that the allocation is arbitrary and that the same deserves to be rejected as the Assessee has not maintained hotel expenses on STPI employees and Non STPI employees. (f) Software licenses The software licenses are allocated based on the ratio of average head count of the 10A unit to the average head count of all units as a whole. On the above allocation the AO was of the view that the same cannot be accepted because the STPI and Non-STPI units had difference premises. The software used in STPI and Non-STPI can therefore, be easily identified. The Assessee's failure to do so can only lead to the inference that the basis of allocation is wrong. (g) Legal and professional charges The professional fees included under the head 'Le ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n-Sec.10A units alone because the above expenses would also relate to Sec.10A unit. The AO held that by allocating all other common expenses to Non-Sec.10A unit the taxable income of Non-Sec.10A unit will get reduced and Sec.10A unit profit which is exempt will get increased thereby ultimately conferring benefit of lesser tax to the Assessee. 31. The AO however did not accept the plea of the assessee and he reallocated the entire expenses on the basis of turnover of 10A and non-10A units as follows:- The total expenses incurred during the year ₹ 239,73,64,419 Expenses proportionately divided: Expenses for STPI - ₹ 18,34,77,726 Expenses for non-STPI - ₹ 221,38,86,693 STPI UNIT NON-STPI UNIT Income (turnover) 19,26,96,057 237,28,87,705 Expenses 18,00,61,426 221,73,02,993 Net Profit 1,26,34,631 15,55,84,712 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... xpenses are not referable to the employees, they have been wholly allocated to non-10A unit. We are of the view that wherever common expenses are not relatable to employees, they have to be allocated only on the basis of turnover, as that would be the best available yardstick. 36. As far as common expenses which are referable to employees, we find that the Hon'ble Delhi High court in the case of EHPT India (P.) Ltd. (supra) dealt with an identical issue. The question before the Hon'ble Court was as to whether the method adopted by the assessee, namely, that of apportioning the indirect expenses between the STP unit and the non-STP domestic unit on the basis of the head-count is an unreasonable method. The Hon'ble Court found that such method followed by the Assessee was not question by the Revenue in the past. On the above factual background, the Hon'ble Court laid down that in such cases the proper course for the revenue would be to examine whether the method which is canvassed for acceptance is the one (a) which has been consistently accepted by both the parties, namely, the assessee and the revenue in the past; (b) which is a reasonable method having regard ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r as travel and conveyance expenses are concerned, the basis of allocation is on the basis of employees travelling for projects of 10A unit. There can be no objection for this allocation. As far as hotel expenses included in Travel and conveyance expenses is concerned, the basis of allocation is proportionate basis i.e., travel expenditure of 10A unit to the total travel expenditure. As rightly contended on behalf of the revenue when the details of persons travelling for project of 10A unit is available there should be no difficulty in identifying the hotel expenses of employees travelling for project of 10A unit. But allocating such costs on the basis of turnover would also be not appropriate. We are of the view that it would be just and appropriate to set aside the order of the AO on this issue and direct the Assessee to give the details of hotel expenses of employees who travelled for projects of 10A unit and allocate expenses on the basis of available evidence direct or circumstantial. 39. As far as software licenses are concerned, the basis of allocation on the basis of ratio of average head count of 10A unit to the average head count of all units as a whole. The Assessee h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Project based A8-AP changes IFSC Code RBI AMC 70,000 Project based Octroi charges - crystal report developer RBI Project 14,300 Project based Pur of crystal report developer RBI Proj 42,640 Project based Pur of Net advantage subscription 64,480 Project based TOTAL 2,94,28,480 44. It was claimed by the assessee that the aforesaid expenses are revenue in nature and should be allowed as deduction. The AO, however, was of the view that the expenditure was capital in nature and that the assessee would be entitled to claim only depreciation. Accordingly, the claim of the assessee for deduction u/s. 10A on entire expenditure was rejected by the AO. The order of the AO was confirmed by the DRP. 45. Before us, the ld. counsel for the relied on the decision of the Special Bench of ITAT in the case of Amway India Enterprises v. DCIT (2008) 301 ITR (AT) 1 (Del)wherein principles to be applied ..... X X X X Extracts X X X X X X X X Extracts X X X X
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