9911796707
TMI Blog2016 (1) TMI 1513X X X X Extracts X X X X X X X X Extracts X X X X ..... r: "1. That the Assessing officer erred on facts and in law in proposing to complete the assessment under section 144C/143(3) of the Income Tax Act, 1961 ('the Act") at an income of Rs. 243,55,56,670/- as against the income of Rs. 17,64,76,208/- returned by the assessee. 2 That the Assessing Officer erred on facts and in law in proposing an adjustment of Rs. 8,96,40,636 to the arm's length price of the 'international transaction" of "payment of corporate charges" on the basis of the order passed under section 92CA(3) of the Act by the Transfer Pricing Officer("TPO"). 2.1 That the Assessing Officer/the TPO erred on facts and in law in holding that arms length price of the international transactions regarding payment of corporate charges is at nil allegedly concluding that no recognizable benefit has been passed to the assessee and therefore there is no rationale for paying corporate charges the AE. 2.2 That the Assessing Officer/the TPO erred on facts and in law in not appreciating that the payment of corporate charges was validly benchmarked applying TNMM as most appropriate method and that no adverse inference could be drawn on this account. 2.3 That the A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion under that section by the Assessing Officer was unlawful. 5 That the Assessing Officer erred on facts and in law in levying interest under section 234B and section 234C of the Act. 6 That the Assessing Officer erred on facts and in law in initiating penalty proceedings under section 271(1)(c) of the Act." 3. Ground 1 is general in nature and therefore does not require any adjudication. 4. Ground No. 2 to 2.7 relate to adjustment of Rs. 8,96,40,636/- to the arm's length price of the 'international transaction" of "payment of corporate charges" under the cost allocation agreement entered into between the assessee and its AE (Aricent Inc.) 5. Briefly stated the facts are that assessee was formerly known as Hughes Software Services Ltd. It is a closely held public limited company incorporated on December 30, 1991. It was promoted by Hughes Network Systems Corporation Inc. USA and its subsidiaries. The erstwhile promoters of the assessee company, i.e., HNS Mauritius Holdings and Hughes Network Systems Inc., entered into a share purchase agreement with Flextronics Sales & Marketing I(L-A) Limited, Mauritius, whereby the entire shareholding was acquired by Flextronic ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t e) Corporate marketing-developing marketing content, PR road shows website design etc. f) Insurance for global operations 7. As per the appellant the corporate management costs incurred by the Aricent USA relate to the entire group and not specifically to the operations in USA. It has been claimed that nature of costs being incurred by Aricent USA for the aforesaid services are payroll, insurance, general office running expenses, etc. and in terms of cost sharing arrangement with the assessee, the aforementioned costs are allocated to various group entities including the appellant company. As per the appellant, the allocation of cost is on a rational basis to result in allocation of expenses in proportion to the benefit accruing to each group entity and, such allocation is also consistent with the US Transfer Pricing Regulations. 8. The TPO in his order, has held that there were no rendering of such services by the AE to the appellant for which any payment was required to be made and therefore, the payment made by the appellant to its AE was with a motive to shift profits out of India. Hence, applying CUP method, the arms length price of the transaction of payment of corpor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ite design, etc. l) Insurance for global operations. The corporate management cost incurred by the Aricent USA relate to the entire group and not specifically to the operations in USA. Nature of costs being incurred by Aricent USA for the aforesaid services, are, payroll, insurance, general office running expenses, etc. In terms of cost sharing arrangement with FSS, the aforementioned costs are charged out on allocation basis to the various group entities including FSS. The allocation of cost is on a rational basis to result in allocation of expenses in proportion to the benefit accruing to each group entity. Such allocation is also consistent with the US transfer Pricing Regulations. ........ The TPO contention that the AE has pool of the Indian management, the top management, i.e. CEO, CFO, Corporate Finance Director, Head HR, VP-IT etc., is incorrect and inconsistent with the fact on record, in as much as, the aforesaid team of senior management of was engaged in looking after the day-to-day affairs of the group companies including the assessee company. It would also be noted that the associated enterprises, Aricent US Inc. did not undertake any business activity ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 0% of such costs. c Insurance costs relatable to a particular geographical area shall be allocated to that area and then shared between all participants located in that area on the basis of sales. The costs not identifiable to any particular area shall be shared on the basis of sales of the participants. Cost specifically identifiable to the recipient will be charged only to the recipient. It would be appreciated from the cost sharing agreement, that the AE is charging a nominal amount of markup form the assessee and further only from the employee cost. On the other side, the assessee is availing wide range of expert managerial and administrative services from the AE on a cost sharing basis, as the actual cost is shared between a number of subsidiary companies of Aricent, USA. Further, a copy of income statement of AE i.e. Aricent, USA, also clearly states that the income profit of the company compromises only the mark-up earned above the services renders by it to its group companies and that too at a reasonable margin as calculated in the report of independent consultant viz., Delloite Tax LLP, USA." ii) Benefit to the assessee from corporate services rendered by the A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ent, USA charged a corporate fee calculated on actual plus 10% mark-up. The said transaction was bench marked by the assessee applying TNMM as the most appropriate method and OP/TC as the PLI. The OP/TC margin of the assessee is 27.01% against the average of OP/TC of 28 comparables using current year data at 13.69%. However, in the present case, the TPO disallowed the payment of the corporate charges on ad hoc basis without applying any of the prescribed method for benchmarking the aforesaid international transaction. Reliance is also placed on the decision of Mumbai Bench of the Tribunal in the case of CA Computer Associated Pvt. Ltd. vs. DCIT (ITA Nos. 5420 and 5421/Mum/2006), wherein, while deleting the adjustment made by the TPO by holding payment of royalty to be unjustified, the Hon'ble Tribunal held as under: "8. The manner in which the A.L.P is to be determined by any of the method prescribed in Sec. 92C in provided in Rule 10B of the I.T. Rules, 2961. After examining the parameters prescribed in Rule 10B, it can be seen that bad debts written off cannot be factor to determine the arm's length price of any international transaction. In our opinion, the TPO has excee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ines provide that in order to arrive at the most precise approximation of fair market value, the arm's length principle should, ideally be applied on a transaction- by- transaction basis. However, there are often situations where separate transaction are so closely linked or continuous that they cannot be evaluated adequately on a separate basis. vii) Adjustment on account of arms length price cannot exceed the maximum arms length price "It is respectfully submitted that the assessee has paid markup of 10% only on salary cost and no mark up has been paid on other expenses. The aforesaid markup of 10% on the salary cost has been paid in terms of benchmarking analysis undertaken by the consultant having regard to US Transfer Pricing Regulations. The allocation of cost amongst the group companies from Aricent US Inc. is as under: Allocated Expenses (US$) mark up (US$) Allocated Amount (US$) FSS 19,41,565 1,20,799 20,62,364 FutureSoft Inda 1,56,090 9,712 1,65,802 SSH Mauritius 83,241 5,179 88,420 SWS Azisa 27,750 1,727 29,477 SFT Cyprus -- -- -- Frog Germany 56,592 3,521 60,113 Frog Italy 7,350 457 7,807 Avnisoft 10,745 6 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... c D Buhrfeind, Senior Vice President - Human Resources, Aricent Group declaring the work performed by him during the year 2007-08 for the assessee - Annexure-III 4. Affidavit of Mr. Amit Shashank, Executive Vice President - Legal, Aricent Group declaring the work performed by him during the year 2007-08 for the assessee - Annexure-IV It is respectfully submitted in this regard as under:- Aricent US Inc. was formed in August 2006 to be the parent and holding company for a number of operating entities that were then owned by Flextronics International Ltd. and were in the process of being sold to a private equity consortium composed of KKR and Sequoia Capital. Aricent US Inc., it is submitted, was formed wholly for the purpose of managing business of group operating entities, which were engaged in the business of software engineering development and consulting and the selling and marketing thereof. The operating companies were located in a number of countries throughout the world, with India and the United States being the largest jurisdiction. The sale of the operating entities was effective as of September 1, 2006. KKR and Sequoia Capital hold their respective ownership sta ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t, VP of IT on its payroll who are engaged in for provision of such services. The executives in India are, in turn, the Vice Presidents for the various departments/ functions which were reporting to these functional heads. The TPO, however, concluded that there was no evidence for rendering of such management support services by the associated enterprises to the assessee and an independent party would not have made such a payment in an arm's length situation. The TPO, accordingly, applying CUP method determined the arm's length price of marketing support service as NIL and accordingly the income of the assessee was adjusted by a sum of Rs. 8,96,40,636. In order to rebut the aforesaid conclusion arrived at by the TPO, the assessee by way of additional evidence has sought to place on record Affidavit of the senior management of Aicent Group namely Mr. Richard Katz, Mr. Lydia Brown, Mr. Eric D Buhrfeind and Mr. Amit Shashank affirming and declaring work done by them pursuant to the agreement between the assessee and the associated enterprise i.e. Aricent US Inc. From perusal of the affidavits, it would be noted that, following services were rendered by them to the assessee: ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pellate authority has to examine and evaluate the same and mould the relief accordingly (ref. Pasupuleti Venkateswarlu vs. The Motor & General Traders. AIR 1975 SC 1409). Reliance is also placed on the decision of Hon'ble High Court in the matter of Text Hundred India Pvt. Ltd. vs. CIT (ITA No. 2077, 2061 and 2065/2010), wherein the plea for admission of additional evidence before the Tribunal was accepted by the Hon'ble High Court. Your Honour's attention is also invited to the decision of Mumbai Bench of the Tribunal in the case of UCB India Pvt. Ltd. vs. ACIT, Circle 7(3), Mumbai, 121 ITD 131, wherein it is held as under: Attention is further invited to the decision of the Hon'ble Tribunal in the case of NIT Ltd. vs. ACIT: (ITA No. 1871/Del/2009) wherein the fresh search submitted by the assessee even before the Tribunal was accepted. It is respectfully submitted that the aforesaid additional evidences sought to be placed on record in the form of affidavits, have bearing on transfer pricing dispute involved. In order to comply with the principles of natural justices and affording the assessee to defend/ represent his case, it is respectfully prayed that the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of TPO to decide the issues afresh after giving the assessee an opportunity of being heard and give proper reasons if the CUP method is proposed to be not considered." 16. Accordingly we set aside the issue in respect of TP adjustment to the file of TPO for denovo adjudication. Needless to say, the assessee will be allowed a reasonable opportunity of being heard in such proceedings. Thus grounds raised are therefore allowed for statistical purposes. 17. Ground No. 3 to 3 relate to disallowance of project expenses amounting to Rs. 39,15,46,619/- by holding the same to be capital expenditure. 18. The AO has noted that appellant vide letter dated 17.11.2010 submitted that aforesaid expenditure was incurred on various software development projects and, was not incurred for acquisition of any capital asset of an enduring benefit to the appellant. It was stated that expenses are routine expenses incurred in the course of business. However the Assessing Officer held that such an expenditure pertains to project which are yet to take off and, therefore are to be capitalized. 19. Before the DRP, appellant pointed out that aforesaid issue has been decided by the Tribunal in fav ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sulted in enduring benefit to be classified as capital expenditure. Hence, we set aside the order of the Assessing Officer on the issue and decide the issue in favour of the assessee." 21. We also take note that in the case of assessee for Assessment year 2003-04 the AO allowed the project expenses as revenue expenditure. However CIT u/s 263 held the same to be erroneous, which order was cancelled by Tribunal by an order dated 16.1.2009 and appeal filed before Hon'ble High Court by revenue also stands dismissed in order dated 30.9.2011 in ITA No. 738/2011. Further, SLP filed by revenue before Apex Court stands dismissed. We further note that appeal filed by revenue before Hon'ble High Court in ITA No. 1071/2011 for assessment year 2006-07 stands dismissed by order dated 20.12.2011. Thus respectfully following the above decisions, we allow the claim of the appellant and delete the disallowance made in the order. The grounds raised are accordingly allowed. 22. Grounds 4 to 4.1 relate to disallowance of deduction of Rs. 1,77,78,93,207/- under section 10B of the Act. 23. The facts in brief as relevant to the instant year are that units of the assessee company are set ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d for the reasons of not satisfying the requisites, the claim of deduction under s. 80HHE shall be allowed after providing opportunity to meet the requisites." 2. The above direction is, in our view, just and proper hence does not call for any interference especially when the question (whether the 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. No question of law much less a substantial question of law arises for our consideration in this appeal to warrant its admission. The appeal is accordingly dismissed in limine." 9. Respectfully following the precedent as above, we set aside the order of Assessing Officer and remit the issue back to his file to consider the issue afresh in light of the above discussion. Needless to add assessee should be granted adequate opportunity of being hearing." 26. Further appeal filed by revenue in ITA No. 1071/201 ..... X X X X Extracts X X X X X X X X Extracts X X X X
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