9911796707
TMI Blog2011 (1) TMI 161X X X X Extracts X X X X X X X X Extracts X X X X ..... th pricing. The Assessing Officer asked the assessee to explain why the difference between these book values should not be brought to tax. Considering assessee's reply, the Assessing Officer was not satisfied and he found that the addition made by the TPO in this regard was appropriate. The assessee has agitated this matter before the DRP which has adjudicated the matter as under :- "2. Arm's Length Price u/s. 92 CA(3): 2.1 In this case, the TPO passed transfer pricing order u/s 92CA(3) of I.T. Act on 17.09.2009 by making upward adjustment of Rs. 1,97,96,990/- on the Arm's length price of International Transactions. While making this adjustment, the TPO has observed that the assessee has received payment towards technical services rendered to its AE. The plea by the assessee that it is an incentive paid to employees is a colourable device to avoid paying a mark-up on these payments. The OP/TC margin of the assessee is 27.95%, excluding the international transaction of Rs. 106,608,194, as the assessee has not disclosed the receipt as an international transaction. Since the payment has been made without any mark-up, such payment is not at arm's length. The assessee has shown a prof ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... go. Such payment in the garb of incentive has been made only to the Indian subsidiary. The reason of not directly paying the incentive to the employees could not be satisfactorily explained by the assessee. It could also not be explained as to why some employees have been paid in excess of the supposed target incentive. There is enough force in the observation of the TPO that no AE shall make a payment without any service /reason of profit. There was enough reason of staying back of the employees of the assessee company because being taken over by an International Corporation was more advantageous to them. The assessee has relied on a letter written "by President-and M.D. to one of the employees and responses on Frequently Asked Questions (FAQs) for such a huge payment, which doesn't appear to be logical. Therefore observation of the TPO that there was no policy document, based on which this payment was made is very correct. Thus, we find no compelling reasons to interfere with the order of TPO and the Assessing Officer and hence the same are confirmed." 4. We have heard both the counsels and perused the record. Learned counsel for the assessee further submitted that in the FIRC ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 2004, issued to the employees at the time of the grant of the above incentive is enclosed at pages 318 to 320 of our submissions. The incentive plan was issued which states the following scheme: (a) 10% to be paid on October 1, 2004 (b) 15 % to be paid on April 1, 2005 (c) 25% to be paid on October 1, 2005 (d) 25% to be paid on April 1, 2006 (e) 25% to be paid on October 1, 2006 As per the letter issued to the employees, 10% of the incentive was to be paid during assessment year 2005-06, 40% during assessment year 2006-07 and 50% during assessment year 2007-08. The payments of the aforesaid incentive were also evidenced by (i) FIRC, (ii) details of disbursement to the employees, and (iii) reconciliation of the amount received from the AE and disbursement to the employees. Also note No. 7 in the audited accounts clearly provides the factum of receipt of the amount from Flextronics International Limited, Singapore towards payment of incentives to the employees. The grounds on which the TPO proposed an adjustment is contended in seriatim as under: (1) Comments of TPO (i) It will be noted that such payments are a r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pellant for distribution of such incentive payment. It would be appreciated that it was not practical for the foreign company to remit funds individually to numerous employees in India directly by taking their individual bank details. Further, it is submitted that the assessee did not book any income or expense for the incentive paid by the parent company and the same also did not impact the profits of the appellant. (5) Comments of TPO (vi) It will be noticed in the table at Annexure-I, some employees have been paid in excess of the supposed "target incentive". Reply: The incentives given to the employees were computed based on the basis of the predetermined targets which are detailed on pages 367 to 370. It is pertinent to note that few employees have also been paid lesser amount than the target incentive. The reason for such difference in the target incentive and the actual payment is the fact that the incentives are computed on some benchmarks instituted for the employees. (6) Comments of TPO (vii) Towards the end of the list, the names of some employees are missing. Admittedly all money has not been paid out. USD 9,247 remains with TPO Order the appellant. The names of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessee is considerably higher than the average of the comparables. Only payment of incentives to the assessee's employees by the parent company subsequent to take over has been subjected to enhancement/markup. We find considerable cogency in the submission of the assessee. The amount involved has been paid as incentive to employees of the assessee company by the parent company. This has been done pursuant to the take over to provide incentive to the employees of the assessee company to remain in the employment. It is not understandable how payment in one-go would be better than spreading over several years, which has been cited as one of the objections of the TPO. In our opinion, spreading it over several years is a more better way to provide incentive. The revenue's contention that the payment has been made for services rendered is based on surmises as nothing has been produced to show that it is a payment for services rendered to the parent company. All the documentary evidence in this regard supports the case of the assessee. We further find that no adjustment in this regard has been made in earlier assessment year 2005-06 and subsequent assessment year 2007-08 wherein also si ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ee's receipt and payment as assessee's expenses still the PLI would be favourable as comparable to the average comparables. Hence, we set aside the order of Assessing Officer and decide the issue in favour of assessee. 5. The next issue raised is that the Assessing Officer erred in disallowing deduction u/s 10B amounting to Rs. 1,35,11,53,643 following order passed u/s 143(3) read with section 263 of the Act dated 28.12.2008 for assessment year 2003-04 holding that deduction was not admissible. 6. On this issue, the Assessing Officer noted that assessee company has claimed an exemption of Rs. 1,35,11,53,643 u/s 10B of the Act. He further noted that in view of the disallowance of the exemption claimed for the assessment year 2003-04 vide order dated 28.12.2008 u/s 143(3) read with section 263, assessee was required to justify the exemption so claimed in the year under consideration. The Assessing Officer enquired as under :- "You have claimed deduction u/s 10B of the IT Act to the extent of Rs. 38,83,45,866/-. Please furnish evidence to justify the claim of deduction u/s 10B in respect of all the units as deduction u/s 80HHE has been claimed in earlier year. The deduction u/s 10B ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... peal 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. 10. The last issue is that the AO erred in making disallowance of project expenses amounting to Rs. 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 Rs. 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 inc ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
