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TMI Blog2015 (12) TMI 959X X X X Extracts X X X X X X X X Extracts X X X X ..... catering to the needs of global scientific engineering community, is also the parent company of M/s. Systat Software Inc.,US (SSI-US) and M/s. Systat Software Inc.,UK (SSI-UK). It had international transactions worth Rs. 27,98,59,603/- for export of software, Rs. 7,15,27,453/- on expenditure for services and Rs. 2,10,61,199/- for import of services, with these AEs. These transactions were reported in form 3CEB filed along with return of income. As per the annual report of the assessee, margin on came to 50.4%. In other words, the Profit Level Indicators (PLI), viz., profit before interests and tax were 50.4% of the total costs. 2.1 For evaluating the international transactions entered with the AE, Assessing Officer made reference u/s.92CA to the TPO. TPO based on the replies given by the assessee and the TP documentation furnished by it, was of the opinion that the profit level indicator of the tax payer was higher than the PLI worked out by him for the transactions relating to export of software and import of service. However, vis-à-vis the apportionment of expenditure for services obtained from AEs, the amount of which came to Rs. 7,15,27,453/-, the learned TPO was of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... expenditure need not be charged to the group entities. As per the DRP, it was necessary to show that direct benefit was derived out of the payments made to the AE, commensurate with such payments. Hence according to the DRP, ALP of such services was rightly treated as nil. Reasons for coming to the above conclusions given by the DRP are summarized hereunder : (i) Tax payer was unable to prove rendering of services by AE ; (ii) No documentations were furnished by the assessee, for justifying the payments made by it to the AE, nor were any comparison done by it with similar independent transactions ; (iii) If the expenditure was incurred by the AEs for the benefit of the group as a whole, charging of such expenditure on the assessee or all entities in the group was not required, since the benefit of the expenditure were also be available to all the members of the group. The assessment was thereafter completed by making an addition of Rs. 7,15,27,453/- as ALP adjustment. 6. Now before us, the learned AR strongly assailing the orders of the authorities below submitted that the expenditure allocated or apportioned by M/s. SSI-US, comprised of the following : (a) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ribution Agreement entered with SSI-US on 01.04.2004 placed at pages 210 to 217 of the paper book ; (v) Sales and Distribution Support Services Agreement entered with SSI-UK on 15.07.2005, placed at pages 218 to 220 of the paper book ; and (vi) Credit notes issued by the assessee in favour of SSI-UK, placed at pages 221 to 224 of the paper book. 7. Continuing his argument, ld.AR submitted that the conclusion reached by the lower authorities that assessee had not received any services from the two AEs was entirely wrong in the fact of the documents produced. In any case according to him, to say that the ALP of the services received by the assessee from AE was zero cannot be accepted in view of the decision of the coordinate bench of this Tribunal in the case of Fosroc Chemical India (P.) Ltd. v. Dy. CIT [IT (TP) A.1256/BNG.)/2011, dated 05.04.2013] and Festo Controls (P.) Ltd. v. Dy. CIT [2014] 150 ITD 305/[2013] 30 taxmann.com 16 (Bang. - Trib.). The AR also pointed out that the TPO had not made any ALP adjustment with regard to the similar transactions entered by the assessee in the previous year relevant to A. Y. 2005-06. Copy of the order dt 17.07.2008 of the TP ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dered by AE to it and there are no documentations to show any services to have been received from AE, in our opinion it will be fair conclusion that no services were in fact rendered the by AEs to the assessee. There is no dispute that both the AEs were subsidiaries of the assessee. Therefore, the agreements between such subsidiaries, which have been brought before us as well as lower authorities for justifying the payments could be best considered only as self-effectuating documents. There was considerable onus on the assessee to show that actual services were rendered by its subsidiaries. It is a well settled principle of law that a court has to go into substance and not be satisfied with the and form has to get behind the smoke screen to find the true state of affairs. In our opinion, the assessee was unable to show any services to have been received from sister concerns. When no services were received then lower authorities in our opinion were justified in considering the ALP to be zero. 10. Coming to the decisions relied on by the Ld. AR viz., Fosrock Chemicals India (P.) Ltd. (supra) and Festo Controls (P.) Ltd. (supra), in the former case, the personnel of the AE had visite ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... here was no reconstitution / reorganization. SSAPL did not have any outstanding contracts or obligations which were taken over by the assessee. As per the assessee, the said company did not own any software proprietary licence at all. Assessee also relied on the profit and loss account of SSAPL for the year ended 31.03.2006 in support of its contention that major part of the revenue of the said company were for software services. As per the assessee plant and machinery taken over from SSAPL were less than 20% of the cost of new machinery installed by the assessee. Further, as per the assessee, sale proceeds in respect of exports were all received by it and it had satisfied every condition required for claiming a deduction u/s.10A of the Act. 14. However, the DRP was not impressed by the above argument. According to them assessee had taken over assets as well as employees of SSAPL and this was clear from the business transfer agreement dt 26.12.2005. Hence, as per the DRP, the claim of the assessee was on a reconstituted / reorganized business. They upheld the view taken by the Assessing Officer. Assessment was therefore completed by the Assessing Officer denying the claim of deduc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . We have perused the orders and considered the rival submissions. There is no dispute that the business transfer agreement through which assessee purchased the business of SSAPL was entered on 26.12.2005. It is also not disputed that this is a sole unit on which the assessee had preferred claim for deduction u/s.10A of the Act. What was taken over by assessee through this deed of business transfer is set out in clause (i) of agreement dt 26.12.2005 and reproduced by us hereunder : 'Now, therefore, in consideration of the mutual covenants hereinafter recited, the sufficiency of which is hereby acknowledged, the parties agree as follows : 1. Sale and Transfer : 1.1 The vendor hereby sells, transfers, grants, conveys and assigns fully and absolutely to the purchaser all the right, title and interest in the following business, assets and liabilities : 1.1.1 On-going contracts and projects for development of software and related rights and obligations 1.1.2 Identified employees 1.1.3 Furniture, fixture, moveable assets, equipment, computers, telephone instruments and connections etc 1.1.4 Sundry debtors 1.1.5 Sundry creditors 1.1.6 STPI Registration of the Develop ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ll as the STPI were already in existence when the business of the STPI was acquired by the assessee. Deduction u/s.10A of the Act was already claimed by the assessee for the very same STPI unit in A. Y. 2006-07. It was allowed as well. Copy of the assessment order for A. Y. 2006-07, placed at pages 287 to 298 of the paper book specifically say that deduction u/s.10A of Rs. 9,96,95,076/- was being granted to it. That assessee has preferred such a claim and it was already considered by the Assessing Officer is clear from para 6 of the assessment order, relevant part of which is reproduced by us hereunder : "6. The assessee-company claimed deduction u/s.10A of the I. T. Act, 1961. In support of this, it had filed Form 56F. From this form it was noticed that the assessee has not deduction communication expenses incurred for delivery of software outside India. In this context, the assessee was asked to furnish the details of the communication expenses attributable to export turnover of the eligible undertaking. The issue of deducting the communication expenses from the export turnover alone while calculating the deduction u/s.10A was discussed with the assessee. The assessee contended ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... - was disallowance required to be made u/s.14A of the Act. Though the assessee was put on notice, it seems it did not give any explanation to the Assessing Officer. He proposed an addition of Rs. 113,91,75,666/-. 21. Before the DRP first argument of the assessee that the sum of Rs. 113,91,75,666/- was expenditure incurred by it in relation to the STPI unit and was in no way related to any investments giving rise to exempt income. As per the assessee out of the total investments, Rs. 64,66,54,847/-were investments in its foreign subsidiaries. Out of the balance, Rs. 3,30,857/- were in mutual funds and Rs. 15,43,62,943/- alone were invested in Indian subsidiaries. As per the assessee in so far as investments made in foreign subsidiaries were concerned, the income that could arise from such holdings were taxable under the Act and therefore, Sec.14A could not be applied. Further as per the assessee average investments that could result in exempt income would be Rs. 12,29,87,773/-. Therefore the interest disallowance that could be there under Rule 8D(2)(ii) would be only Rs. 41,36,290/- and under Rule 8D(2)(iii) would be Rs. 6,14,939/-aggregating to Rs. 47,51,229/-. As per the assessee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Such interest would normally fall under the head ' income from other sources'. No doubt, in assessee's case the Assessing Officer has not considered the interest receipt separately under the head 'income from other sources'. But this will not, in our opinion, change the nature of the transaction or character of the receipts. Rule 8D(2) prescribes application of the formula set out therein on the expenditure incurred by way of interest which is not directly attributable to any particular income or receipt. There is no case for the assessee that the interest expenditure of Rs. 335,169,433/- incurred by it were attributable to any particular income or receipt. There is nothing in the said rule which would allow for netting of interest. Rule 8D(2)(ii) states expenditure by way of interest. If we allow netting of interest income on such expenditure, it would be equivalent to adding something which is not there in the Rule book. Especially so, since interest received was not from any business activity but from FDs. We are, therefore, of the opinion that application of Rule 8D does not allow for netting of any interest income with interest expenditure. We therefore fi ..... X X X X Extracts X X X X X X X X Extracts X X X X
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