Income Tax Appellate Tribunal - Delhi
Flextronics Software Systems Ltd., New ... vs Assessee on 7 January, 2016
IN THE INCOME TAX APPELLATE TRIBUNAL
(DELHI BENCH 'I-1' : NEW DELHI)
BEFORE SHRI S.V.MEHROTRA, ACCOUNTANT MEMBER
and
SHRI A.T. VARKEY, JUDICIAL MEMBER
ITA No.5550/Del./2011
(ASSESSMENT YEAR : 2007-08)
M/s. Flextronics Software Systems Ltd, vs. DCIT,
(Now Aricent Technologies (Holdings) Ltd, Circle- 11 (1),
5, Jain Mandir Marg (Annex), New Delhi
Connaught Place
New Delhi.
(PAN : AAACH0152P)
(APPELLANT) (RESPONDENT)
ASSESSEE BY : Shri Ajay Vohra Sr. Advocate
REVENUE BY :
ORDER
PER A.T. VARKEY, JUDICIAL MEMBER :
This appeal is directed against the order dated 30.10.2011 passed u/s 143(3) read with section 144C of the Income Tax Act, 1961 (hereinafter also called 'the Act') for the assessment year 2007-08. Before we proceed to decide this appeal, we may point out that after the hearing of the appeal was over on 09.10.2015, ld. CIT DR (Admn.) forwarded a letter received by him, from the Addl.CIT DR that her name may not be included in the body of the order because she was there only to seek adjournment. However, we were made to 2 ITA No.5550/Del/2011 understand that the issues involved in the appeal are covered, so we proceeded with the hearing and decide not to affix the name of Addl. CIT DR.
2. The grounds raised by the appellant in this appeal are as under:
"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 Assessing officer/the TPO erred on facts and in law in computing adjustment on account of international transaction of payment of corporate charges without applying any prescribed methods, thereby, violating the basic principles of TP regulations.
2.4 That the Assessing Officer/the TPO erred one facts and in law in holding that the entire arrangement of the payment of corporate charges is designed to shift profits outside India.
2.5 That the Assessing Officer/The TPO grossly misunderstood and misinterpreted the facts of the cost allocation agreement entered into between the assessee and its AE (Aricent Inc.) 2.6 That the Assessing Officer/the TPO erred on facts and in law in not appreciating that the expenditure on the payment of corporate charges was wholly and exclusively for the purpose of business of the assessee.3 ITA No.5550/Del/2011
2.7 That the Assessing Officer erred in law in not aggregating the transaction of payment of corporate charges with other similar international transactions and erroneously benchmarking it separately.
3 That the Assessing Officer erred on facts and in law in making disallowance of project expenses amounting to Rs. 39,15,46,619/- allegedly treating the same to be capital expenditure incurred on projects which were yet to take off.
3.1 That the Assessing Officer erred on facts and in law in not appreciating that project expenses amounting to Rs. 39,15,46,619/- are routine expenditure incurred in the course of carrying on of business and are allowable as deduction.
3.2 Without prejudice, the Assessing Officer erred on facts and in law in not allowing depreciation on the said alleged capital expenditure. 3.3 Without prejudice the Assessing Officer erred on facts and in law in not re-computing the deduction admissible under section 10B of the Act on account of the disallowance of training expenses of Rs.3915,46,619/-. 4 That the Assessing Officer erred on facts and in law in disallowing deduction under section 10B of the Act amounting to Rs.1,77,78,3,207/- giving effect to the order passed under section 263 of the Act by the Commissioner of Income Tax for assessment year 2003-04. 4.1 That the Assessing Officer erred on facts and in law in not appreciating that the claim of deduction under section 10B of the Act by the assessee was in accordance with the provisions of that section and the disallowance of deduction 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.
4ITA No.5550/Del/2011
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 Flextronics Sales & marketing (L-A) Limited, Mauritius. Flextronics sold all the software entities globally through a equity consortium. Their consortium was sold to KKR and Sequia Capital and was named as "Aricent". Aricent did not exist prior to year 2006. The assessee company is engaged in the business of production of computer software products and provision of software development services for communication industry, through the various 100% 5 ITA No.5550/Del/2011 Export Oriented Unit (EOUs) set up in software technology park at Gurgaon and Bangalore. The assessee in the course of carrying on of its software development business has entered into the various international transactions with its AE's. The international transactions undertaken by the assessee were established to be at arm's length applying Transactional Net Margin Method ("TNMM"), as the most appropriate method. For application of TNMM, operating profit to total cost (OP/TC) was considered as the base or the profit level indicator. The result of benchmarking analysis is summarized as under:
Average of PLI of 28 comparable companies 13.69% PLI of appellant 27.01%
6. Since the operating profit margin of appellant at 27.01% was higher than the average of operating profit ratio of 13.69% comparable companies, all the international transactions entered into by the assessee were, therefore considered at arm's length applying TNMM. The assessee in the relevant previous year paid a sum of Rs. 8,96,40,636/- to Aricent, USA towards corporate charges. The Aricent Inc. USA Cayman Islands entity, was formed in August 2006 6 ITA No.5550/Del/2011 to be the parent and holding company for a number of operating entities that were then owned by Flextronics International Ltd. These operating entities are engaged in the business of software engineering development and consulting and the selling and marketing thereof. The basis of the payment is under an agreement for the allocation of cost dated 28.9.2010 between appellant and Aricent Inc. Under the agreement, according to the appellant Aricent USA provided the following corporate management support services to the group companies including the assessee:
a) Accounting & Finance-Financial reviews, group financial projects/forecasting, etc.
b) Tax-Tax, regulatory compliance
c) legal-Customer contracts, global compliance assurance
d) Treasury-cash management, banking (loan syndication), debt management
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, 7 ITA No.5550/Del/2011 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 corporate charges was taken at Nil. The relevant extract of the order of the TPO is reproduced below:
"1 The assessee has not availed such services from an independent party. The AE has not provided such services to an unrelated entity. Hence a comparison from an independent perspective is not available.
2 As for the cost benefit test, the assessee has not been able to provide any evidence that he has received a benefit that he would not have achieved on his own.8 ITA No.5550/Del/2011
3 The assessee carries out most of the software development for the group. Hence the remaining group has more to depend on the assessee than the other way round 4 The functions and risks of the assessee show that the assessee in any case carries out all the functions that the global management team is stated to be doing. Hence, the assessee should not be expected to pay for a duplicate of its efforts. It may be mentioned finally that the AE is a Cayman Islands entity. Being in a tax heaven, the entire arrangement appears to be designed to transfer profits out of India. Hence by the application of CUP the arms length price in respect of the transaction of availing of corporate support services is held to be 'nil. The assessing officer shall accordingly enhance the income of the assessee by Rs. 8,96,40,636/-."
9. The TPO therefore vide order u/s 92CA(3) of the Act dated 27.9.2010 proposed an addition of Rs. 8,96,40,636/- on the ground that, administrative/corporate charges paid by the assessee to its AE has no recognizable value and the arms length price in respect of the transaction was taken at Nil.
10. Before the DRP, the appellant contended that addition proposed by the TPO is not sustainable for the following reasons:
"i) Change in global business model and scope of services provided by the AE Scope of services Corporate Management Support Services:
It is respectfully submitted that, the US associated enterprise, viz., Aricent USA provided the following corporate management support services to the group companies including the assessee:
g) Accounting & Finance - Financial reviews, group financial project
forecasting etc.
h) Tax - Tax, regulatory compliance.
9
ITA No.5550/Del/2011
i) Legal - Customer contracts, compliance assurance.
j) Treasury - cash management, Banking (loan syndication), debt
management.
k) Corporate marketing - developing marketing content, PR, road shows
website 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 theassessee company. It would also be noted that the associated enterprises, Aricent US Inc. did not undertake any business activity of its own and was solely engaged in the management of the day-to-day affairs of the assessee company. Further it would also be appreciated that these senior managerial personnel would otherwise have been on the roll of the assessee company and the entire cost of such employees would, in any case, have been incurred by the assessee. It is respectfully submitted that all functional heads of the assessee company are on the pay roll of Aricent Inc. USA, who participate in the day-to-day management of the company and undertake major strategic decisions. The concerned department in India engaged in the various operations, report to these functional heads from time to time and the performance of the company is reviewed periodically by the functional heads. Apart from performing major strategic management functions, these key personnel are guiding the overall management of their functional areas:
The assessee has placed on records, a copy of report dated 12.2.2007 prepared by an independent consultant, viz. Deloitte Tax LLP, USA detailing the administrative services rendered by Aricent Inc. USA and explaining the basis of allocation of cost amongst the group companies. The services rendered by Aricent USA Inc. are explained in detail in the report issued by Deloitte Tax LLP, USA. In addition, the assessee also submitted vide letter dated 17.9.2010, some of the communications to demonstrate the services rendered by the AE.10 ITA No.5550/Del/2011
It would also be appreciated that as per the cost sharing agreement between the assessee and the AE, Aricent USA, the corporate charges is calculated on actual basis only expect for personnel related expenses on which the AE charges 10% mark-up of the cost. The relevant extract of cost sharing agreement is reproduced hereunder:
"4 Allocation of costs 4.1 The recipient agrees to share the costs as under; a All actual costs other than those referred to in sub-clause (b) below relating to accounting and finance, executive management, tax, legal, treasury and corporate marketing services shall be shared on the basis of sales for the relevant period/quarter of the participants.
b All costs on personnel related expenses viz, salaries and benefits incurred by Aricent in providing the accounting and finance, executive management, tax, legal treasury and corporate marketing services would be shared on the basis of sales plus a markup of 10% of such costs. c Insurance costs relateable 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 AE It would also be appreciated that more than40% business comes from US, so management team being in US and not in India is closer to the customer location thereby resulting in better relationship for customers of the assessee company.
It would further be noted that during the relevant previous year the total revenue of the assessee increased to Rs. 871,78,93,100/- from Rs. 635,03,17,939/- in the preceding previous year giving an inclination of 37% in a short span of time. Consequently, the net profit margin increased to Rs. 182,36,16,055/- from Rs. 148,62,48,823/- in the preceding previous year showing an effect of 23% approx.
Further, it would be appreciated that the assessee company, a software development service, provider, has its operations in 11 countries through 9 branches and 32 subsidiary companies. Further, customers of the assessee company were scattered in 30 countries. The assessee company, it is reiterated, as part of the Aricent group, is projected as global software development services provider in the communications domain including telecom. In view of 11 ITA No.5550/Del/2011 the global customer base and wide functions of engineering software services, it was imperative for the assessee company to structure its global operation under the centralized management team looking after its affairs"
iii) Commercial and Business expediency of incurring any expenditure It is respectfully submitted that there is no bar under the Act to have transactions with the group companies. The assessee is free to conduct business in the manner most suitable to it and the commercial or business expediency of incurring any expenditure is to be seen from the assessee's point of view.
Reliance was drawn on the following judgments:
- J K Woolen Manufacturers vs. CIT 72 ITR 612 (SC) - CIT vs. Dalmia Cement (P) Ltd. 254 ITR 377 (Del) - CIT vs. Padmani Packaging (P) ltd. 155 Taxmann 268 (Del) - S.A. Builders Ltd. vs. CIT 288 ITR 1 (SC) - UOI vs. Azadi Bachao Andolan 263 ITR 706 (SC) iv) No application of transfer pricing method by the TPO
"It is submitted that the expenditure on payment of administrative/ corporate fee of Rs. 89,640,636 were incurred by the assessee, in the course of its business of provision of software development. In consideration of the administrative and marketing services rendered to the assessee company, Aricent, 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 exceeded his limitation by following the method which is not authorized under the Act or rules. We, therefore, hold that the Arm's Length Price determined by the TPO and adopted by the Assessing Officer to the extent of royalty payable t the CA Inc Management, USA is not as per the procedure prescribed and same cannot be sustained. We, there, direct the Assessing Officer to adopt the Arm's Length Price of the royalty payable to CA Inc Management, USA as declared by the assessee in both the year".
Therefore, it is submitted that, as per the Transfer Pricing Regulation, the mandate for the TPO is to determine the arm's length price of the international transaction applying the most appropriate method of the five methods prescribed under Regulation. In other words, under the Transfer Pricing regulations, the TPO is required to determine the arm's length price of the international transaction considering that such transaction has actually been undertaken by the assessee.
12ITA No.5550/Del/2011 In the present case the TPO disallowed the payment of the corporate charge an ad hoc basis without applying properly method for benchmarking the aforesaid international transaction.
The benchmarking of share of administrative expenses, therefore, is to be undertaken within the aforesaid framework of the Transfer Pricing regulation, in India. In other words, the benchmarking analysis of the share administrative expenses should be under taken after applying any of the five prescribed methods.
In is further submitted that the assessee has applied Transactional Net Margin Method (TNMM) for determining the arm's length price of payment of to Aricent Inc., USA, being the most appropriate method in the facts and in the circumstances of the case and aforesaid payments are established to be arm's length applying such most appropriate method.
i) Payment of administrative/corporate fees to be benchmarked aggregating it with closely linked transactions In this regard, it would be appreciated that Aricent USA charged a share of administrative expenses as corporate charges from the assessee only on actual basis plus 10% mark - up and the assessee is making such payment in lieu of receiving a wide scope of services from Aricent, USA. The all such services as rendered by Aricnet USA is a necessary expense for the business of assessee for development of computer software products.
The OECD guidelines 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 mark up (US$) Allocated
Expenses Amount
(US$) (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 10,745 669 11,414
SWS Emuzed 1,13,389 7,055 1,20,444
Frog US 4,20,895 26,187 4,47,082
13
ITA No.5550/Del/2011
28,17,617 1,75,305 29,92,922
USD INR
Allocated expenses 19,41,565 8,43,90,108
Mark Up 1,20,799 52,50,528
Total amount 20,62,364 8,96,40,636
Reliance was placed on the following judgments:
- Global Vantedge (P) Ltd. vs. DCIT ITA No. 2763 and 2764/D/2009 (Del)
- Kyungshin Industrial Motherson Ltd. vs. DCIt ITA Nno. 1396/D/2009 Without prejudice, in the case of the assessee since the associated enterprise earn/retained only USD 120799 equivalent to Rs. 52,50,528/- in respect of international transactions of allocation of cost for the administrative services, in terms of the aforesaid decision of the Hon'ble Tribunal, the adjustment on account of the difference in the arm's length price of such international transactions at best is to be restricted to Rs.52,50,528"
11. The DRP however rejected the claim of the appellant on the following basis:
"The DRP has considered all the objection in totality. For accepting payments relating to intra group costs, certain conditions must be fulfilled. The DRP has perused the submission made during the hearing and TPO's conclusions. We find that these payments have been evaluated on four broad parameters viz.
1 Evidence that services have been rendered 2 Whether the assessee has benefitted from them 3 Are they duplicate in nature 4 Whether the assessee would have paid the same charges to an unrelated party On all four grounds we find that the assessee has not been able to establish its case and thus find no reason to disturb the order of TPO. The objections are rejected."
12. Before us during the course of hearing the learned counsel moved an application for admission of additional evidence in terms of Rule 29 of the Income Tax Rules 1963 wherein it has been stated as under:
14ITA No.5550/Del/2011
"In this regard, the assessee seeks to place on record the following by way of additional evidences:
1. Affidavit of Mr. Richard Katz, Vice President - Finance, Aricent Group declaring the work performed by him during the year 2007-08 for the assessee- Annexure-1
2. Affidavit of Mr. Lydia Brown, Vice President - Global controller Finance declaring the work performed by him during the year 2007-08 for the assessee - Annexure-II
3. Affidavit of Mr. Eric 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 stakes directly in Aricent Inc. and the operating entities are structured as wholly- owned subsidiaries include Aricent nomenclature. These indirect wholly - owned subsidiaries include Aricent Technologies (Holdings) Ltd ("ATHL" or "Assessee" - India), Aricent Technologies (Beijing) Ltd, Aricent Japan Ltd., Aricent South Africa (Pty) Ltd., Aricent Ukraine Ltd., Aricent UK Ltd., Aricent Communications US, Aricent Technologies US, Aricent communications Private Ltd(India) - and in subsequent years also included Aricent Mexico, Aricent Technologies UK, Aricent Technologies Denmark ApS, and DataLinx Corporation (US) (collectively, "Operating Subsidiaries"). The majority of these 15 ITA No.5550/Del/2011 operating subsidiaries employ software engineers skilled in the area of telecommunications as well as selling and marketing personnel. each of the entities' respective charters is to provide software engineering and consulting service chatters is to provide software engineering and consulting services to tier one global equipment manufacturers, device manufacturers and/ or service providers.
However, post the sale of the operating subsidiaries, Aricent US Inc's goal, was to centralize these operating subsidiaries under one organizational charter headed by a management team primarily located in the US. This restructuring was undertaken to provide to a global customer base engaged in the communications sector a compelling value proposition as under:
a) An experienced management team based in the US,
b) A wide offering of engineering software services given the combined offering of skills provided by each operating subsidiary,
c) The scale of resources, and
d) The choice of a variety of locations around the world (low-
cost and/ or near shore at which services could be performed for customers) Consequently, the US associated enterprise, viz. Aricent Inc. USA was formed on 1st September, 2006 for the providing following corporate management support services to the group companies including the assessee:
i) Business Development Services: ii) Corporate Management Services iii) Finance Services: iv) HR Services: v) IT Services: vi) Legal Services: vii) Marketing Services: viii) Sales Support Services:
It is respectfully submitted that, Aricent USA has the CEO,CFO, General Counsel, VP of Worldwide Sales, VP of marketing, Treasure, VP of Business Development, 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. 16 ITA No.5550/Del/2011 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:
a) Reviewing budgets and variance analysis; b) Propose cost- optimization strategies and targets; c) Reviewing cash position and ensure that there is no disruption in operations, d) Responsible for currency hedging and risk positions e) Reviewing all material expenditure by Finance, IT, administration and procurement functions; f) Participate in all strategic discussions and decisions for the Group; g) Reviewing financial analysis, accounting, profitability and financial ratios; h) Explore areas of focus with internal auditors for Aricent India
and prepare action plan based on the findings in the internal audit report;
i) Overseeing activities of shared services group, which is pool of resources responsible for expenses booking, accounts payable, fixed assets accounting, auditing, financial reporting, revenue recognition etc.
j) Ensuring implementation of financial policies for Aricent India;
k) Overseeing financial processes, reviewing and approving any exceptions to the policy; and l) Overseeing statutory compliances.
From perusal of the affidavit, it would be appreciated that the associated enterprise has provided wide spectrum of corporate 17 ITA No.5550/Del/2011 management and strategic services to the assessee. On the basis of such affidavits, it would be appreciated that the assessee has received services from the associated enterprise in term of management support services agreement entered between the parties and the alleged finding of the TPO that there was no evidence of receipt of such services by the assessee does not hold good. The aforesaid affidavit of the key managerial personnel, on the pay roll of Aricent Inc., USA, is being placed on record by way of additional evidence in order to rebut the finding of the TPO and to demonstrate that facts that the entire activities of such individuals based in US, were devoted to business operation of the assessee in India.
It would be appreciated that the assessee in order to rebut the finding of the assessing officer/ TPO and to support the arms length price of international transaction of payment of corporate charges to the associated enterprise has collected the aforesaid additional evidence from its associated enterprise, which is now placed before the Hon'ble Panel by way of additional evidence.
Prayer:
It is respectfully submitted that if subsequent events occur, the appellate 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.18 ITA No.5550/Del/2011
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 additional evidence in question called for being admitted in terms of rule 29 of the Income - tax Appellate Tribunal Rules and taken into consideration while adjudicating aforesaid grounds of appeals."
13. It is submitted that the learned AR further submitted identical was a situation in the case of Hughes Systique India (P) Ltd. ITA No. 5420/D/2011 and 6057/D/2012 A.Ys 2007-08 and 2008-09 wherein too additional evidence was filed and such was admitted thereafter issue was restore to the file of AO for fresh consideration.
15. We have considered the submission and perused the material placed on record. A coordinate bench of the Tribunal in the case of sister concern of the assessee in the case of Hughes Systique India (P) Ltd. vs. ACIT in ITA No. 5420/D/2011 and 6057/D/2012 A.Y. 2007- 08 and 2008-09 dated 5.7.2013 had admitted additional evidence and held as under:
"14. We have heard rival contentions and perused the material available on record. Firstly, we should adjudicate whether the additional evidence should be admitted or not. The claim of the assessee is that these documents came in its possession after the assessment. In our view, the aspect of applicability of CUP method 19 ITA No.5550/Del/2011 has not been properly dealt with by DRP and TPO also did not consider CUP method for bench marking of international transaction. As the facts emerge, the order of DRP does not throw effective light to reject the assessee's CUP method. The plea of the assessee is that the documents have been subsequently procured and are necessary for proper ascertainment of T.P. adjustment. Under these circumstances, we are of the view that assessee's application for admission of additional evidence deserves to be admitted. The assessee was prevented by sufficient cause as these documents could not be procured before the assessment proceedings. After having admitted the additional evidence, the question before us is whether to consider the additional evidence at our level or send it back to TPO for consideration of this material and decide the issue afresh. On this score, we find merit in the alternate plea raised by ld. CIT(DR) that in this eventuality the issue about T.P. adjustments should be restored back to the file of TPO. Assessee has no objection on that.
In view thereof, we set aside ground nos. 2 & 3 above in respect of T.P. adjustments for both the years back to the file 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.
20ITA No.5550/Del/2011
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 favour of assessee for Assessment year 2003-04, 2004-05 and 2006-07 and, no disallowance has been made for Assessment year 2005-06. The DRP however rejected the objection on the basis that the appeal filed by department before High Court has not acquired a legal finality.
20. Having considered the submission, we take note that coordinate bench in the case of assessee in ITA No. 4699/Del/2010 A.Y. 2006- 07 by an order dated 21.1.2011 in the case of appellant has held as under:
"10. The last issue is that the AO erred in making disallowance of project expenses amounting to ` 1,93,12,834 holding the same to be capital expenditure incurred on projects which were yet to take off. It has further been urged that Assessing Officer did not appreciate that 21 ITA No.5550/Del/2011 the said project expenses were routine expenditure incurred on training in the course of carrying on of business and are allowable as deduction.
11. On this issue, the Assessing Officer noted that 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. 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 ` 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 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 22 ITA No.5550/Del/2011 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 up in Software Technology Park of India. These units have been claiming provision under section 80HHE of the Act and from assessment year 2002-03 under section 10B of the Act. The AO following the order passed for assessment year 2003-04 giving effect the order u/s 263 of the Act passed by the Commissioner of Income Tax in that year has denied deduction u/s 10B of the Act. In the said order under section 263 of the Act for assessment year 2003-04, deduction under section 10B was denied on 23 ITA No.5550/Del/2011 the basis that since the assessee had claimed deduction under section 80HHE for certain STPI units, the assessee was debarred from claiming exemption under section 10B of the Act in the assessment year 2003-04 or any other subsequent assessment year(s) for other STPI units by relying upon the provisions of sub-section (5) of section 80HHE of the Act.
24. Before DRP the appellant relied upon the judgment of jurisdictional High Court in the case of CIT vs. Legato Systems India (P) Ltd. vs. ITO 203 CTR 101 and, decision of Tribunal in the case of appellant for Assessment year 2003-04, 2004-05 and 2006-07. The DRP however rejected the objection on the ground that appeal before High Court has not acquired legal finality.
25. Having considered the submission, we take note that in the case of appellant for assessment year 2006-07, identical issue was remitted to the filed AO by observing in order dated 21.1.2011 as under:
"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 vs. Legato Systems India Pvt. Limited, 203 CTR 24 ITA No.5550/Del/2011 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 disentitled to the benefit of exemption under s.10A of the IT Act. It has, on that finding, remitted the matter back to the AO with the following directions : "We, therefore, set aside the orders of the authorities below on this point and restore the matter back to the file of the AO with a direction to allow exemption under s. 10A in both the years in case the assessee is found to have satisfied all other requisites envisaged in the scheme of s. 10A of the Act. In case the exemption under s. 10A cannot be allowed 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."
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26. Further appeal filed by revenue in ITA No. 1071/2011 for assessment year 2006-07 stands dismissed by Hon'ble High Court in an order dated 20.12.2011. Accordingly, we set aside the assessment order and restore the issue to the file of Assessing officer to consider the issue afresh in light of the above discussion. The AO should provide adequate proper adequate opportunity to the appellant company. Grounds raised are accordingly allowed for statistical purposes.
27. Ground 5 relating to levy of interest u/s 234B and u/s 234C is consequential.
28. Ground 6 relates to initiation of penalty u/s 271(1)(c) is premature and is therefore dismissed.
29. In the result, the appeal filed by the assessee is partly allowed. Order pronounced in the Open Court on this 7th day of January, 2016.
Sd/- sd/-
(S. V. MEHROTRA) (A. T. VARKEY)
ACCOUNTANT MEMBER JUDICIAL MEMBER
Dated: the 7th day of January, 2016
TS
26
ITA No.5550/Del/2011
Copy forwarded to
1. Applicant
2. Respondent
3. CIT
4. CIT (A)-IX, New Delhi.
5. DR:ITAT
ASSISTANT REGISTRAR
ITAT, New Delhi