Document Fragment View

Matching Fragments

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% 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:

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 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"

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 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.
"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 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.