TMI Blog2018 (11) TMI 1822X X X X Extracts X X X X X X X X Extracts X X X X ..... the Act. We therefore set aside the action of the AO. Thus, the ground of the assessee is allowed and the Revenue is dismissed. Disallowance of expenditure in respect of RSA token expenses - revenue or capital expenditure - HELD THAT:- Expenditure incurred on RSA tokens is for the purpose of business operations and for conducting the business in an efficient manner. In such a situation, we are of the view that the expense is a revenue expenditure and therefore, the AO was not justified in disallowing RSA token expenses. We accordingly hold that the RSA token expense to be of revenue in nature and direct the AO to allow the expenditure. We further direct the AO to take into consideration the depreciation already granted while allowing the claim of RSA token expenses. Thus, the ground No.2 of the assessee is allowed. - ITA No.89/PUN/2018, ITA No.310/PUN/2018 - - - Dated:- 27-11-2018 - MS. SUSHMA CHOWLA, JM AND SHRI ANIL CHATURVEDI, AM For the Assessee : Shri Percy Pardiwala. For the Revenue : Shri Avadesh Kumar. ORDER PER ANIL CHATURVEDI, AM : 1. These cross-appeals filed by assessee and Revenue emanate out of the order of Commissioner of Income-Ta ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ments were proposed by the TPO in respect of international transactions with the A.Es., the profitability of the assessee company needs to be reviewed in respect of excess profit shown by the assessee. He was of the view that the deduction claimed u/s 10AA of the Act was required to be restricted in view of the provisions of Sec.10AA(9) r.w.s. 80IA(10) of the Act as assessee had shown profit margin of 28% as against the profit margin of the comparable companies at 16.34%. The assessee was therefore asked to show cause as to why the excess profit of 11.66% (being difference between 28% and 16.34%) should not be excluded from the profit of the eligible business u/s 10AA of the Act for the purpose of allowing deduction. In response, assessee made detailed submissions which were not found acceptable to the AO. AO was of the view that due to close business connection between the assessee and the group Companies, assessee had shown more than the ordinary profits in respect of 10AA Units. He was of the view that the ordinary profits as seen from the comparable companies furnished by the assessee were 16.34% as against the assessee s margin of 28%. He thereafter computed more than ordinary ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of excess profit u/s 10AA(9) r.w.s. 80IA(10) of the Act ? 6. We first proceed with deciding the assessee s appeal in ITA No.89/PUN/2018. 6.1 Since, the ground No.1 of assessee s appeal is inter-connected with the grounds of Revenue s appeal, both the grounds are considered together. 6.2 Before us, Ld.A.R. reiterated the submissions made before AO and Ld.CIT(A) and further submitted that assessee is engaged in the business of rendering software services and ITeS services to Amdocs Development. Ltd., (ADL) through its SEZ Unit. The services rendered to ADL are charged by the assessee on an hourly basis. He submitted that the hourly rates charged by the assessee have remained constant over a period of time and in support of which he placed a chart of the hourly rates charged for different grades of employees in earlier and current financial year. He further submitted that profit margin is a function of volume of business and the costs incurred and any movement upward or downward either in the volume of business and the costs incurred has a direct impact on the profit margin. He further submitted that due to efficiencies in the fixed costs and operational efficiencies on acco ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e is a close connection between the assessee carrying on eligible business with any other person business (2) there is business transaction between the assessee carrying on eligible business and the other person (3) the business between the two are so arranged that the assessee earns more than the ordinary profits which might be expected to arise in such eligible business. If the above conditions are satisfied then the AO can determine the profits as may be reasonably deemed to have been derived from eligible business and grant the deduction. Thus in other words, the AO shall have to examine the fulfillment of the 3 conditions namely, close connection , arrangement and more than ordinary profits in the course of business while examining assessee s claim of deduction u/s 10AA of the Act and satisfaction of all the aforesaid 3 conditions are mandatory before invocation of Sec.80IB(10) of the Act. In the present case, the close connection between the assessee and its A.Es is an undisputed fact. However no material has been brought on record to indicate that the course of business was so arranged so as to inflate the profit so as to indicate the inflation of profits with the inten ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n more than ordinary profits which might be expected to arise in such eligible business, the Assessing Officer shall while computing profits and gains on such business for the purpose of deduction under this section take the amounts of profits as may be reasonably deem to have been arrived there from. Thus, in other words the Assessing Officer shall have to examine the close connection , arrangement and more than ordinary profits in the course of business while examining assessee s claim of deduction u/s. 10A of the Act. All the three conditions have to be satisfied before invoking the provisions of section 80IA(10) of the Act. 8. In the present case we find that the Assessing Officer has come to the conclusion that there is a close connection between the assessee and its overseas AE as the assessee is wholly owned subsidiary of parent company i.e. AE. However, the Assessing Officer has failed to substantiate from documents on record that there is arrangement between the assessee and its overseas AE resulting in assessee having more than ordinary profits from units eligible for deduction u/s. 10A and 10AA of the Act. A perusal of assessment order shows that it is only ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 0A(7) r.w.s. 80-IA(10) of the Act. In this context, we may refer to the decision of the Chennai Bench of the Tribunal in the case of Visual Graphics Computing Services India (P) Ltd. vs. ACIT, 148 TTJ 621 (Chennai), wherein following discussion is relevant :- We heard both sides in detail and considered the issue. As far as the present case is concerned, the Transfer Pricing Officer has made a categorical finding that the operating profit reported by the assessee is higher than the profit worked out on the basis of arm's length price. The Transfer Pricing Officer, therefore, concluded that no transfer pricing adjustment is called for in the present case. The Assessing Officer has made the reference to the Transfer Pricing Officer under section 92CA. The reference is made for the purpose of computing income arising from an international transaction with regard to the arm's length price as provided in section 92. Therefore, it is to be seen that the scope and extent of reference made by the Assessing Officer to the Transfer Pricing Officer is confined to the singular purpose stated in section 92. Sections 92A, 92B, 92C, 92CB, 92D, 92E and section 92F are all precisely def ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in various orders of the Tribunal. The Income-tax Appellate Tribunal, Chennai A Bench in the case of Tweezerman (India) P. Ltd. v. Addl. CIT [2010] 4 ITR (Trib) 130 (Chennai) (133 TTJ 308) has considered the matter in detail and held that the reduction of eligible profits of an assessee as done by the Assessing Officer by invoking the provisions of section 80-IA(10) read with section 10B(7), in the context of the Transfer Pricing Officer's order is unsustainable. The Tribunal has held that the Assessing Officer was not justified to invoke the provisions of section 80-IA(10) read with section 10B(7) so as to reduce the eligible profits on the basis of the arm's length price computed by the Transfer Pricing Officer without showing how he determined that the assessee had shown more than ordinary profits . As rightly argued by learned senior counsel the arm's length price is determined on the basis of the most appropriate method. The most appropriate method is chosen either on profit basis method or price basis method. In the latter ease, profits are not at all considered. In that method, profit is only a derivative of prices. When profits itself is not worked out, ho ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the case of H.P. Global Soft Ltd. (supra) and our discussion in the earlier part of this order. 34. In view of the aforesaid, we conclude by holding that in the present case, the Assessing Officer has not proved that any arrangement had been arrived between the parties which resulted in higher profits. Consequently, the re-working of the profits by Assessing Officer by invoking section 10A r.w.s. 80- IA(10) of the Act is not justified. The action of the Assessing Officer to restrict the deduction u/s 10A of the Act to ₹ 7,74,60,281/- as against the claim of ₹ 36,35,09,382/- is hereby set-aside. Thus, assessee succeeds on this aspect. 10. Similar view has been taken by Co-ordinate Bench of Tribunal in the cases of Tata Johnson Controls Automotive Limited Vs. Dy. Commissioner of Income Tax (supra) and Racold Thermo Limited Vs. Addl. Commissioner of Income Tax (supra). 11. The ld. DR has failed to rebut the decisions rendered by Co-ordinate Bench of Tribunal wherein disallowances of deduction made u/s. 10A under similar circumstances have been reversed and additions deleted. In view of the aforesaid facts, we are of the view that the AO was not justified in w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the computer system, they are entitle to depreciation at the higher rate of 60 percent. 12. Accordingly, relying upon the above decision of Hon ble Delhi High Court, the AO is directed to delete the addition of ₹ 9,98,324/- and allow depreciation @ 60% as claimed by the appellant. Accordingly, ground No.3 is allowed. Aggrieved by the order of Ld.CIT(A), assessee is now in appeal before us. 9. Before us, Ld.A.R. reiterated the submissions made before AO and Ld.CIT(A) and further submitted that RSA tokens are used by the assessee for the purpose of providing wireless / remote access to assessee s internal network. He submitted that RSA token essentially is an authentication mechanism which consists of a token assigned to a computer user that generates an authentication code for accessing the network remotely / wirelessly. He submitted that RSA token cannot perform any function on standalone basis and only displays authentication code for accessing the assessee s internal network remotely. He submitted that it does not form essential part of the networking system installed at the appellant s office premises but only provides an additional security for accessing networ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h a primary test, but cannot be applied without reference to the practical business and commercial considerations. It has been further held that enduring benefit test fails if the main purpose of the expense is to facilitate business operations, increase profitability and conduct the business in an efficient manner, while leaving the capital assets untouched. The Courts have held that to decide whether the expenditure is revenue expenditure, the proper approach should be to determine as to what was the predominant purpose or intention of incurring the expenditure ? If the predominant purpose of incurring the expenditure was the carrying on the business, the incidental advantage of that expenditure cannot affect its revenue character. Considering the totality of the facts and the ratio of various decisions of Hon ble Apex Court and High Courts, we are of the view that the expenditure incurred on RSA tokens is for the purpose of business operations and for conducting the business in an efficient manner. In such a situation, we are of the view that the expense is a revenue expenditure and therefore, the AO was not justified in disallowing RSA token expenses. We accordingly hold that t ..... X X X X Extracts X X X X X X X X Extracts X X X X
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