9911796707
TMI Blog2012 (5) TMI 206X X X X Extracts X X X X X X X X Extracts X X X X ..... medabad. (A) Facts 2. The appellant is a Domestic Limited Company incorporated in India on 14th May-1982. As informed the appellant is a Software Development Company and worked as a global information Technology Services Provider. The services were "off-shore" as well as "on site" services; hence operated through its subsidiaries at other countries, viz. USA, UK, Germany, Singapore, Malaysia. It is informed that the assessee-company provides composite deliverables to the clients One of its Associate Enterprise (in short A.E.) is Mastek U.K. Ltd. (in short MUK) is a 100% subsidiary; established in the year 1992. This said A.E. is contributing substantial revenue and for the year under consideration stated to be 60% of the total Revenue of the Mastek group. 2.1. The assessee-company has filed the return for A.Y. 2006-07 on 31.10.2006 declaring total income at Rs. 61,28,140/-, however the assessment was made u/s. 144C r.w.s. 143(3) vide an order dated 26.10.2010 on assessed income of Rs. 22,46,55,290/-; hence challenged in this appeal. It was found by the Revenue Department that International Transaction was involved with an Associate Enterprise (A.E.), therefore referred to Transf ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ent suggested by T.P.O. Rs. 21,65,90,064 All the three adjustments and other additions made in the impugned assessment order are now under appeal, therefore, the ground-wise adjudication is as under:- On the facts and circumstances of the case and in law, the Additional Commissioner of Income-tax Range-4, Ahmedabad ('Ld. AO') erred in concluding the assessment under section 143(3) of the Income tax Act, 1961 ('the Act') read with section 144C of the Act on the basis of directions issued under section 144C(5) of the Act by the Hon'ble Dispute Resolution Panel, as follows: 1. GROUND NO. 1 - Re-computation of the Arm's Length Price ('ALP') of the international transactions of software services distributed by Mastek (UK) Limited ('MUK') i. The Ld. AO has erred in law and on facts in relation to the re-computation of the ALP of the international transactions of software services distributed by MUK (associated enterprise) by making an adjustment of Rs. 18,62,45,100. ii. The Ld. AO has erred in law and on facts in disregarding the distribution operations of MUK and considering the operations of MUK as that of a marketing service provider, without givi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt with MUK. That agreement has been referred to as "Master Agreement" dated 30/03/2005. From the side of the assessee, FAR analysis was furnished. That analysis shall be discussed in the later part of this order. Meanwhile it is worth to mention that on the basis of the said FAR analysis the contention of the assessee before the TPO was that the MUK has functioned as a "distributor". The distribution activities of MUK were, such as, identifying the customers, establishing contacts, soliciting enquiries, managing of relationship. All these activities were performed in UK and MUK was appointing advertising agencies for advertisement of software services in newspaper journals, etc. It was informed that the MUK has entered into contracts and negotiated with the customers in UK. On signing of the contract, MUK has provided all requisite details, time limit of completion, warranty period and other specific commitments. The assessee has also furnished the details of all other functions performed by MUK on one hand ,and on the other hand, the functions performed by MIL. On the basis of the FAR analysis the TPO had summarized the functions performed by MUK as below:- (1) Identifying ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the basis of the third party receipts after considering MUK as a front office. Lastly, according to him, expenses would have been borne by the MUK, had it functioned as an independent distributor. 3.5. Thereafter, the TPO has discussed one of the clause of the agreement with MUK through which it was agreed upon that MUK shall be entitled to retain an arm's length return on the revenues received from customers in UK. At the end of each month, Mastek India used to determine the total transfer price due from MUK for services rendered during that month and then issue an invoice in Great Britain Pounds. On the basis of information, the TPO has cited an example of the compensation for MUK and the related transfer price of Mastek India in the following manner:- GBP Revenue from UK Client 1000 Less: Front office cost of MUK 200 Arm's length percentage of Revenues as determined from time to time 55 Transfer price for Mastek 745 Note : Front Office Costs shall include Personal cost Travel, lodging, Local conveyance Sales promotion PR & Mktg Consulting Seminar & Conveyance Insurance Rent, rates, taxes Legal & Prof fee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as compared to MUK which is merely customer facing entity and marketing assessee's business using goodwill and name of the assessee company. It is the assessee company which is more involved in getting a contract in fixing competitive pricing and taking profit risk. It can be seen from the financial statement of the assessee company that it is receiving fluctuating margins on each contract whereas MUK has been assured of a fixed return irrespective of the fact whether the assessee is earning profit or incurring losses on a particular contract. In addition to the above, it is the assessee company which bears product/service liability risk, technology risk, manpower risk and foreign exchange risk. Further Assessee Company assumes all credit risk of the MUK even credit risk lies with Assessee Company. Under the circumstances, MUK cannot be said to be an entity having normal business risk as of independent distributor and can be said as captive office customer facing entity of the assessee. As discussed earlier, the Assessee Company has entered into an agreement with MUK by agreement dated 30/3/2005 called as 'Master Agreement' where it can be seen that all the risk and consequently a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ll fledged strategy business team which was not only selling and promoting items but also taking strategic decision in respect of the sales. The assessee has not submitted what strategic decisions or whether all strategic decisions required in respect of sale was being taken by that team only. Providing a very highly qualified team is merely a marketing exercise which provides comfort to third party clients and presence of the assessee company in the UK. Any marketing strategy requires providing comfort to the clients and showing to others including clients that the assessee company is competent in carrying out all technical projects and has support services near to it. Signing of contract in UK and presence of competent team is clearly marketing exercise for software service business. (e) The assessee has further relied on Transfer Pricing Guidelines of UK Revenue authorities which also supports under sign's contention that remuneration should be based on risk taken by the entity. (f) The assessee has relied upon decision of honorable Kolkata ITAT in the case of Development Consultant Pvt Ltd that model, similar to the distribution of services was accepted by the Tri ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... acts, agreement on price, scope of deliverables or the time schedule were the functions though undertaken by the MUK but only with reference to the feedback received by the Mastek India Ltd. They have endorsed the view of the TPO that the MUK had functioned as a front office of the assessee. According to DRP, only a fixed profit was settled as per the terms of the agreement between the assessee-company and MUK. The MUK was admittedly remunerated at 5.5% of the revenue received as a third party sale price. According to DRP if MUK was working as a distributor, then there should not be a fixed profit but the profit should kept on changing. They have stated that the selling price could not be fixed by MUK and, therefore, MUK could not be considered as an independent entrepreneur. The assessee had made contentions in respect of the adjustment made by the TPO with reference to Rule 10B(1)(e), 10B(2) and 10B(3) of the Income-tax Rules. However, the contention of the assessee connected in this regard were negated in the following manner:- "(a) From the plain reading of the aforesaid rule, it is crystal clear that profit level indicator (PLI) prescribed under TNMM is the net operatin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... change in PLI in those circumstances. 3.12. DRP has further referred that the assessee has followed TNMM method for bench-marking its transactions. It was observed that TNMM method emphasizes the adoption of net margin from various transactions. The profit level indicator adopted should indicate the real and not notional profit. Any indicator which may either indicate increase profit or reduce loss due to non-consideration of certain factors, according to DRP, do not represent the actual state of affairs. According to them, bench-marking done, therefore have no meaning. They also ruled out that as per Rule 10B(10)(e)(iii) the items of expenses which were proportionately higher should also not be allowed. Ld. DRP has rather commented that the assessee had not given any kind of working as to how and as to what kind of adjustment would be warranted. They have held that the bench-marking analysis conducted by the TPO did not require any intervention. 3.13. The assessee has pleaded to grant benefit of "proviso" to section 92C(2) of the Act. This proviso prescribes that where more than one price is determined by the most appropriate method, the arm's length price shall be taken to be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... al, entrepreneurial part of any trade rather than a low level service type activity. Such cases may range from a small representational office with a few employees, to a large presence involving hundreds of staff. In the selling world, even a relatively small concern would expect some form of reward related to the sales made. The larger the presence, the more unlikely it is that the company is just providing a service. It is of course possible to think of services that might be provided to someone carrying on the business of selling, for example the selling company will very likely pay someone to advertise their goods. However, the act of soliciting and securing a sale goes beyond the provision of services to the selling activity; instead it is a fundamental aspect of the selling activity itself. A cost plus method of reward is unlikely to be appropriate A better way of establishing an arm's length reward will be to use a price linked to the sale of the goods. As with other cases involving selling activity, you should consider whether there is another party trading (eg a UK permanent establishment of a foreign principal)." The Ld. Counsel thus highlighted that the UK Revenue au ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng the power to enjoy the fruits of such transactions i.e. the income so generated. In the instant case, the entire income even if brought back to India in the first place would have never suffered a single rupee of tax. (e) In addition to above, the Ld. Counsel relied upon the following to support the fact that there was no reason for shifting of tax base by MIL, which is enjoying Section 10A benefits: * Circular No. 12 dated August 12, 2001 [251 ITR(St.) 15]; * Circular No. 14 dated November 09, 2001 [252 ITR(St) 65] - Para 55, which brings the objective of introducing TP regulations. The same has also been discussed in the case of Moser Baer as discussed above; * Asstt. CIT v. Dufon Laboratories [2010]-39-SOT-59-(Mum) - Para 13 and Para 29; * Dy. CIT v. Indo American Jewellery [2010] 41 SOT 1 (Mum) * Phillips Software Centre (P.) Ltd. v. Asstt. CIT [2008] 26 SOT 226 (Bang) (f) The Ld. Counsel for the assessee during the course of the proceedings filed a written synopsis of the arguments. Referring to this synopsis, the Ld. Counsel for the assessee referred to various ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... were part of legal and finance. ix. After a sale contract is concluded, MUK informs MIL of the specifications and the terms of the contract. Accordingly, MIL'S role would start only after MUK has concluded the customer contract. The customer contracts may be discussed at times with MIL before concluding. However this is from the perspective of only aligning with the group's business policies and goals. This is in accordance with any third party distributors who would need to consult with the manufacturers to find out as to when the required goods would be made available. The contracts between MUK and the UK customer were independent and not entered into on behalf of MIL. MIL was providing the software services as per the contract terms entered into between MUK and the customers. x. He drew our attention to the case studies prepared for AY 2006-07, which clearly depicted the work performed by MUK through its employees on major clients in UK. The case studies explained the complexities of the nature of work involved and the involvement of the employees of MUK in carrying out selling activities in addition to marketing. xi The Ld. Counsel then ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a third party, would it not claim adequate compensation towards marketing intangibles owned by it. (i). The Ld. Counsel then pointed out that after considering the selling functions performed, MUK should be characterised as a distributor and not a mere marketing services provider. The said characterization was adopted by the assessee and documented in the TP Study Report. In this regard, the Ld. Counsel relied upon the following case laws: * Bechtel India (P.) Ltd. v. Dy. CIT [2011] 46 SOT 427/12 taxmann.com 299 (Delhi) Para 12, wherein it was held that entity characterisation should be done after proper FAR analysis of the assessee and only thereafter, the comparables should be selected; * Development Consultants (P.) Ltd. v. Dy. CIT [2008] 23 SOT 455 (Kol) - Para 10, wherein the characterisation of the "Distribution of services" has been taken into cognizance by the authorities. Further a passing reference was made by the Kolkatta ITAT in the said case that the margins of a distributor of services should be based on sales. (j). In addition to above, the Ld. Counsel made several other points to support the assessee's position, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d. [2010] 192 Taxman 211 326 ITR 1 (SC) ♦ Sony India (P.) Ltd. v. Dy. CIT [2008] 114 ITD 448 (Delhi). In this regard, Ld. Counsel questioned that would the Revenue department agree to give fluctuating returns to MUK and would that be treated arm's length ? * Comfort letter to third parties: The Ld. Counsel argued that even in a third party scenario the manufacturer of goods would always give guarantee about the products manufactured. In the instant case, if MIL has given comfort letter to third parties, it is for its own performance and this by no way dilutes the role of MUK as a distributor of services. * Case studies depicting complexities in selling activities: The Ld. Counsel has explained the role of employees of MUK in negotiating and concluding complex projects in UK and ensuring the timely delivery for the same. According to the Ld. Counsel the TPO's order is absolutely silent in this regard. Even as regards the HMRC guidance produced before us, according to the Ld. Counsel, the TPO has not dealt with the same in his order. * Marketing / Front Office: The Ld. Counsel stated that the TPO was not ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hat Ld. CIT DR has not objected and accepted the said fallacy. About DRP's observation Ld. Counsel has briefly mentioned that the said order is nothing but a copy-paste of the TPO's order as also the submissions of the assessee, hence the points discussed therein has already been attended by him. (m) Basis of Study : About search strategy for uncontrolled comparables it is informed that renowned external data- bases were consulted namely FAME ( by Bureau Van Dijk), Standard & Poor's Research Insight, Compustat Global Data, Primark's disclosure Worldscope and on the basis of the study filtered out the non-comparables. He has thus pleaded that the primary onus as casted upon by CBDT Circular No.14 of 2001 dated 9.11.2001 (252 ITR 65)(St.) to substantiate the arm's length price was duly discharged. (n) Main customer : Ld. AR has emphasized that the main customer in UK is British Telecome ( BT) and the sales accounted were 40 million pounds i.e. 311 crores apx. Such an organization U.K. Government might not negotiate and assign the job to a front office entity or a marketing entity, argued before us. (D) Revenue's argument 5. The ld. Commissioners Shri V.K. Gupta and Sh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... et analysis was carried out by the assessee and re-emphasized that without MIL's name, MUK will not be able to sell the contracts to third parties in UK. ix. Further, MIL has also given performance guarantee to the customers in UK, which further strengthens the point that MUK acts like a marketing support service provider. x. As per the conclusion of the Functions, Assets and Risks analysis, it is MIL which is primarily responsible to the customer and acts like an entrepreneur. xi. Further, the rate of the compensation for MUK is also fixed at 5.52% every month. xii. Then, the Ld. DR put up his contentions against the arguments put forward by the Ld Counsel for the assessee, can be summarized as follows: a. No shifting of profits:- The Ld. DR stated that the transfer pricing provisions are attracted as soon as there are international transactions. The Ld. AO/TPO is not required to see the motive for entering into an international transaction. There is nothing specified in the law as to whether the onus lies on Revenue to demonstrate that the profit shifting motive was prevalent in relation to a particular international transaction. The ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ording to the Ld. DR, the assessee never submitted the details of UK comparable until the TPO placed his order for DIT's approval. He pointed out that the assessee gave his replies but never gave any replies in relation to the UK comparables. The details given by the assessee were submitted late and not within the time given in the show cause. As per the Ld. DR, the procedure is to send the draft order for DIT's approval, which would take a gap of around 5 to 6 working days. The Ld. DR further stated that the TPO used the same report of the assessee, which was prepared in relation to another subsidiary in USA having similar business model and where same functions were carried out. The Ld. DR agreed that UK comparables can be used and offered that the TPO would be happy to re-look into the same and revert back within a week's time. According to the Ld. DR, whether one uses UK / US comparables, in an arms' length situation the margins would be very close and not vitiate on a larger basis. As regards the comparability analysis carried out by the assessee, the Ld. DR stated that the assessee identified the companies engaged in distribution of software products and not software services ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n the Rejoinder, the Ld. Counsel for the Assessee responded to the aforesaid arguments and the same are summarized below: a. Shifting of tax base:- The Ld. Counsel clarified that the point raised by him was not to challenge the jurisdiction of the TP Regulations but was more from a commercial perspective and in his view it is an important point to be considered as to why would a businessman not bring all the profits in India, when the same were exempt and continue to pay taxes at a rate of 30% in UK by parking these profits there. He further emphasized that the Delhi High Court's ruling need to be respected. . The judgement of ITAT viz: Aztec Software (supra) relied upon by the TPO has no application. The Ld. Counsel emphasized that this issue should be dealt from the commercial aspect. b. HMRC's guidance:- In this regard, the Ld. Counsel emphatically stated that as MUK is a taxable entity in UK, the guidelines of HMRC are applicable to UK. It would be incorrect on the part of the TPO, who represents Government of India, to state that guidance of HMRC is a mere guidance and any guidance given by the CBDT in India is in fact a law. Given the circumstances, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... stomer by MIL:- The software solutions developed by Mastek are customised software solutions and will always have to be put up at the customer's site by MIL. This does not give any right to MIL to raise any invoices on customers directly. Deliveries directly to the customers will have no bearing on the case as to whether MUK acts as a distributor or a mere marketing services provider. g. Commission to the employees:- It was incorrect on the part of the Ld. DR to state that this was never discussed before the TPO. This aspect has been very much discussed with the TPO and placed on record. Page 1242 of the Paper Book No. IV reflects the same. h. Show Cause Notice:- The Ld. Counsel stated that it was no where brought out in the show cause notice of the TPO that he shall use US comparables. The UK comparables were given on 6th October 2009. Further, the same were also given to the Ld. DRP and a copy of the same was again marked to the TPO. The Ld. Counsel also highlighted that the TPO raised queries regarding the database and search strategy used and also requested for financials of the UK marketing service providers. All of this information was duly submitted ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ibution activities for the software development and information technology services. On-site and off-shore services to be performed by "Mastek". MUK has accepted to perform such distribution activities but for consideration as recorded therein below in the said Agreement. Relevant portion is reproduced below. "Whereas with effect from January 1, 2005, Mastek has changed its business model for the UK operations. Consequently, Mastek has started providing onsite software services to MUK's customers in the UK, through Mastek Ltd., -UK Branch, which were earlier provided by MUK. Whereas henceforth Mastek engages and retains MUK to perform the distribution activities for the Software Development and Information Technology Services (onsite and / or offshore) to be performed by Mastek. Whereas, MUK is willing and committed to perform such distribution activities for consideration as recorded in this Agreement. Now, therefore, in consideration of the premises and of the terms hereinafter set fort, the Parties hereto agree as follows: Article 1 - Appointment Subject to the provisions of this Agreement, Mastek hereby appoints MUK as its distributor and MUK hereby accepts such appointme ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the impugned Master Agreement date 30.3.2005 was executed and that what was the necessity to substitute the existing business pattern. In this regard, ld.AR has referred Her Majesty of Revenue and Customs ('HMRC'). 8. Relevant portion of HMRC is reproduced below:- "It is of course possible to think of services that might be provided to someone carrying on the business of selling for example the selling company will very likely pay someone to advertise their goods. However, the act of soliciting and securing a sale goes beyond the provision of services to the selling activity; instead it is a fundamental aspect of the selling activity itself. A cost plus method of reward is unlikely to be appropriate. A better way of establishing an arm's length reward will be to use a price linked to the sale of the goods." 8.1 In the light of the above, the stand of the of the assessee is that UK Revenue Authorities have expected that entities performing the role of the distributor would need to be compensated on the return on sale basis and not cost plus basis. In the said guidelines it was made clear that a "selling entity" could be rewarded on sale basis. Since the assessee has changed its ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ncentive to generate more revenue. 11. One must not overlook a basic fact that the MIL had changed its business model in respect of UK operations. Before us, the percentage of award/ compensation paid to other Associate Enterprises is informed. The geographical revenue was compared and it was found that out of the other Associate Enterprises the revenue generated by MUK from UK was highest at 60%. Because of the substantial growth in business in UK and substantial increase in revenue, it was a business decision to change the business pattern. Therefore with effect from 01/01/2005 Mastek has changed its business model for UK operations. Consequently, the Mastek has started performing 'on-site' software services in the UK through a UK branch which was earlier provided by MUK. As a result, Mastek has engaged and also retained MUK to perform the distribution activities for software services to be performed by Mastek 'on-site' and 'off-shore' Vide said agreement MUK was therefore appointed as a distributor. The international transaction entered into between Mastek and MUK were summarized before us as follows:- Sr. No. Nature Value (INR) 1. Software services (distributed by M ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... also it is a general market phenomenon that whenever there is high turn over there is decline in profit ratio so as to sustain the market competition as also to garner more business. This universal realty thus supports the stand of the appellant. 14. An another argument has also been raised that there was no advantage in shifting of profit from India to UK. A vehement contention was raised that once the entire income of MIL is subject to special benefit as prescribed u/s.10A and there was NIL incidence of tax, then there was no justifiable reason to park the profits in UK. It was informed by the ld.AR that in UK the assessee would suffer tax @ 30%, hence there was no logic to shift the profit. At that juncture, ld. CIT DR Mr. V.K. Gupta has referred Aztech Software & Technology Services Ltd. (supra) reported as (109 TTJ 892) ( 107 ITD 141)(Bang)(SB) for a legal proposition that any adjustment on account of transfer pricing would not qualify for the special benefit prescribed u/s.10A of I.T. Act. Ld. AR has opposed and pleaded that once the transaction was ALP transaction, then there was no requirement of any adjustment and hence there was no requirement of rejection of benefit of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , whether it could lead to a conclusion that the said entity was a marketing or front office entity. Though undisputedly a legally binding agreement must not be disregarded but that agreement has to be understood and taken into account as a whole and not in piece-meal. A decision of Abhishek Auto Industries Ltd. (supra) has been referred. It is also worth to refer Azadi Bachavo Andolan & Anr. (supra). An another fact has also been brought that the MUK had prescribed commission to its employees on sales. The employees who have earned commission on sales have generated more revenue to MUK. The progressive figures of revenue generation during the year under consideration has been brought on record and informed about the trend followed in the years to come in comparison to the revenue generation in the past. Since the MUK had made all endeavours and efforts to improve the revenue generation, therefore, in our considered opinion, it was not appropriate to characterize MUK as a 'marketing services provider' instead of a 'distributor'. In our humble opinion, MUK was rightly characterized as a distributor of services. 16. The TPO has discussed a comparability analysis to determine whether ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ormed. Then risk profile is also required to be compared. We may like to add that there are so many perspectives which are required to be compared and in this connection the Hon'ble Courts have also suggested so, such as, comparison of functional profile, similarity in respect of assets employed and a thorough screening of the comparables etc. Hence, in the present case, it is necessary to consider an analysis that whether the comparables selected by the TPO had analogous functional profile to that of functional profile of the assessee. It is true that functional profile and assets & risk analysis was made available but that is to be correctly understood in the light of the nature of International transaction carried out by the assessee with the said AE. A similar problem was considered by ITAT Delhi Bench in the case of Bechtel India (P.) Ltd. (supra) where the assessee stated to be engaged in the business of providing electronic data support service to AE and the difficulty arose that the said function was compared with the companies engaged in the business of development of software. So the question was that whether a minute examination of functional profile is necessary for the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... amount was 2450.82. However, the total revenue of MUK was 3333.78. The front office cost of MUK was 699.60. Thereafter, the Operative Profit of MUK was calculated as 183.36. This amount of OP is 5.5%. For the entire period, the MUK's operating margin was uniform at 5.5%. In this regard, invoices have been placed before us. On the basis of the said figures it was certified; after economic analysis; that "the most appropriate method" for the assessee was TNMM method. It has also been certified that the application of TNMM requires the selection of an appropriate Profit Level Indicator (PLI). The PLI measures the relationship between profit and cost incurred or revenue earned or assets employed. In the instant case, the Return On Sales (ROS) to bench mark the profit or return on the operations by MUK was selected to reliably measure the income of the tested party. It was decided that the said revenue was earned had it dealt with uncontrolled parties at arm's length. As far as the Operating profit Margin (OM) is concerned, the ratio of operating profit to sales is normally a good indicator of total return to the business activity. This measure accounts for operating expenses as well a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... representative of the industry. Rather, we may like to comment that the DRP being a high-power and highly qualified consortium of high-ranking Revenue Officers, therefore their order should be precise on the issues raised and must not be lacking in reasoning. Though the present order of the DRP cannot be said to be a laconic order or a cursory order but devoid of precisely handling the issues raised by the TPO and confronted by the assessee. 17.2. We are aware that the selection of comparables and selection of similar transactions is not easy to find out and a difficult task to pick up exactly identical business model. Only an endeavour should be made so that the comparables should match with the assessee as close/near as possible. In the case of Schefenacker Motherson Ltd. v. ITO [2009] 123 TTJ 509 (Delhi) an observation has been made that a similar transaction is not easy to find. An attempt is to be made to find entities carrying similar functions. Their profit margins or the mean of the such profit margins is required to be taken into account and, therefore, required to be compared with the profit margin with the "tested party". FAR has been suggested as a step to achieve suc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t step in the determination of arm's length price is to analyse the specific characteristics of the controlled transaction whether it relates to transfer of goods, services or intangibles. Without proper study of specific characteristics of controlled transaction, no meaningful comparison or location of comparable is possible. For example, a mere consideration that controlled transaction relates to "software supply" is not sufficient as there are hundreds of softwares with different characteristics which materially affect their open market value. The characteristics that are the property, its quality, reliability and availability (supply). In case of provisions of services, the nature and extent of services and where tangible property is involved for comparison, the form of transaction. To put it in other words, all the characteristics of the controlled transaction which are likely to affect its open market value must be taken into account. The study should include analysis of functions, risks and assets of the controlled transaction for correct location of similar or nearly similar characteristics in uncontrolled transactions. Specific characteristics are necessary to carry search ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sks like market risk, contract risk, credit and collection risk and risk of infringement of intellectual property are being ignored here. If there are differences which can be adjusted, then adjustments are required to be made. If the differences between the companies are so material that adjustment is not possible, then comparables are required to be rejected. Further in the analysis numerous ratio are applied, depending on the specific of the comparables. The search may include the following: Inventory/sales; operating assets to total assets, fixed assets to total sales, fixed assets to number of employees, operating expenses to sale, cost of sales.- Aztech Software & Technology Services Ltd. v. Asstt. CIT [2007] 109 TTJ (Bang) (SB) 892 relied on. (emphasis given) (Paras 26 to 27.3)" It is important to note that in the said reported judgement, the "tested party" was developing specific software for its parent-company. The software developed by the tax-payer was used in-house for integrating the sale with other software components developed by itself. The whole software supported the hardware manufactured by the parent and sold as a package in the open market. The roll of the te ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nerally the allegation is that by ordering the prices charged and paid in intra-group transaction the modes operandi leads to erosion of tax revenue in India. Naturally, for the purpose of determination of arm's length price of an international transaction a very fair method has to be adopted and that our tax-payers must not be put to avoidable hardship in the implementation of these regulations. We have to keep in mind the preliminary objective as it was propounded vide a Circular No. 14 dated November 09, 2001 (252 ITR 65 St) that Section 92 provides that if an income is arising from an International transaction between AE; shall be computed having regard to the arm's length price. Section 92 therefore only deals specifically with the cross boarder transaction and also prescribes an adjustment to be made to the profits of a resident. A distinction at this juncture has to be read that the relevant provisions provide for adjustment of profits rather than adjustment of prices. A general awareness is about the procedure that primary onus is on tax-payer to determine an arm's length price in accordance with the Rules. Section 92C provides the arm's length price in relation to an inter ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s and we proceed to adjudicate on the issues in the sequence which has been argued by the rival parties before us. The learned counsel for the assessee has argued that the tax payable by it in India is lower than the tax rate applicable to its AE in the Netherlands. Since the assessee is availing the benefit under s. 10A of the Act, one cannot take a simplistic view on the matter of tax avoidance. In this connection the learned Departmental Representative has drawn reference to the proviso to s. 92C(4). Relying on OECD Guidelines, the Departmental Representative has mentioned that the consideration of transfer pricing should not be confused with the consideration of problems of tax avoidance, even though transfer pricing policies may be used for such purposes. In this connection, it was pointed out that by not declaring proper profits in India, the assessee is indirectly reducing its liability to DDT. The Special Bench of the Tribunal, in the case of Aztec Software (supra), has concluded that the AO/TPO need not prove the motive of shifting of profits outside India for making a transfer pricing adjustment. The assessee had generally argued that one of the factors driving any motive ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tax-examiner, may genuinely draw wrong conclusion. OECD TP guidelines thus suggest, first, tax examiners are to be flexible because precision may be unrealistic and, second, commercial judgment or business expediency or trade realities do play a vital role in the application of arm's length principle. 18.2. Under the totality of the facts and circumstances of the case, first we hereby hold that considering the FAR analysis, risk factor and the business model as well as the terms and conditions of the Master Agreement incorporated in the light of the changed circumstances of UK, the AE, i.e. MUK has functioned as a distributor in UK. Once we have held so, then the question arises that the assessee has rightly reimbursed "front office" cost to MUK. We are of the conscientious view that the TPO has not raised any question or doubted the payment of "front office" cost. Next we hereby hold that if an agreement in its totality has not been held a sham agreement, then there was no justification to disbelieve one of the clause, in the present case, the clause of profit reimbursement of 5.5% to MUK. It was a mutual decision of the parties to the agreement to fix the percentage of profit f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er evaluating those candidates, they have been given general as well as technical training. According to TPO, the assessee was responsible for maintaining a pool of skilled manpower. The TPO has taken a view that it was clear from the functions performed that the assessee has performed human resource function. Therefore, according to TPO, it was essential to bench-mark the Human Resource Services separately. He has observed that the direct quantitative indicator of the human resource management services rendered by the assessee to its AEs is the number of persons deputed by the assessee from year to year, on secondment basis. No doubt the services rendered by the assessee under the head "human resource management" is much more than merely providing manpower, as it is also responsible for training, performance evaluation, administrative functions etc. The assessee actually maintains a ready pool of skilled manpower from which persons are made available to the AE whenever required by them. The assessee in effect bears the bench cost for the whole group. However, the assessee should at least be remunerated for the service of providing suitable manpower as and when required by the AEs. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssee is in turn is required to recruit further manpower to fill up the gap. It is also common that those seconded-personnel may return, after the agreed time, back to assessee-company, however at the time of return those employees become the employees of the assessee-company. It has also been explained that during the period of secondment the assessee had to perform certain administrative functions regarding those employees. On the other hand, those AEs are responsible only for payment of the employment cost of the seconded employees and AEs are not responsible to pay for related expenses. As per TPO, due to the said reason that the assessee-company had to incur certain administrative expenses, therefore required a mark up for the secondment of employees. Therefore, TPO has expressed that arm's length test is to be applied for such integral services. According to him, in similar type of cases where in-bound seconded employees has been received by the related party, then besides paying employment cost a 20% mark up has been considered for the purpose of covering such administrative work. He has, therefore, expressed that in respect of the secondment function carried out by the asses ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er of Reference made to the Transfer Pricing Officer under section 92CA(1) of the Income Tax Act, 1961." 23. From the side of the Revenue, ld. DRs Mr. V.K. Gupta and Mr. Kartar Singh have vehemently objected that, while seeking approval, the said transaction has duly been communicated and it is incorrect on the part of the assessee to raise an objection in this regard. Ld. DRs have referred a letter dated 31/08/2009 in this regard which was an internal correspondence, relevant portion is extracted below:- "2. In addition the transactions mentioned in the above letter, perusal of records reveals that the assessee has made further payments to associate enterprise in respect of HRM Functions and has also allowed credit period for amounts outstanding with its associate enterprise which tantamount to making finance available to such enterprises for the duration of the credit period. These transactions are not mentioned in Form 3CEB furnished by the assessee. It is requested that the above issues may also be taken up while determining arm's length price in relation to the international transactions". 24. Having heard the submissions of both the sides and after examining the record, w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessee incurs certain administrative costs in relation to providing HRM services. This would mean that the TPO has regarded Comparable Uncontrolled Price Method ('CUP') as the most appropriate method. Application of CUP method requires stricter comparability between the controlled and uncontrolled transactions. In order to draw the comparability, the provisions of the Rules 10B(2) and 10B(3) need to be considered. He has referred transfer pricing guidelines issued by Organisation for Economic Cooperation and Development (in short OECD) and mentioned that the business strategies are required to be examined in determining comparability for transfer pricing purposes, such as, product development, innovation, input of existing and plant labour loss, etc. and such business strategies may need to be taken into account when determining the comparability of controlled and uncontrolled transactions. He has also stated that HRM function are altogether different "function of recruitment service provider". He has stated that a critical difference is that the assessee in HRM function gives training to the employees. As against that, a recruitment provider do not give any training. The assess ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lopment. The Associate Enterprises are also in the business of providing related services for software development 'onsite'. Facts have revealed that for enabling the AEs to provide 'onsite' service, the assessee has seconded its employees to those AEs. 26.1 To deal with this problem it is better to first examine the correct meaning of this notion i.e. " Secondment" and have found that a 'secondment' takes place when an employee or a group of employees are temporarily assigned to work for an another organization. The 'secondment' is a practice through which one entity makes the services of it's employee/ employees available to another entity for a short period of time, while continuing to treat that person as it's employee either by remunerating him or by not removing from the roll of employment. Possible reasons for the 'secondment' are viz. career development, to gain new skill/ experience, enabling such employee to remain with the parent-employer so as to preserve benefits such as pension benefit etc., income generation for the parent-employer, to provide cover for off-shore short term projects, to provide cover for short term absence etc. The idea behind a' secondment arrangem ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... re development project 'onsite'. Such facility is provided by the Head Office, i.e. MIL. In return, MIL has also heaped the prize i.e. high revenue generation. By displaying different FAR, the TPO had made an attempt to distinguish the two activities. Nevertheless, the law prescribes that FAR should be appropriately documented, so that the correct figures is in the knowledge of the Revenue Department. 26.2. As far as the commercial and business expediency is concerned, we have been informed that the ld. CIT(A) in past four years has decided this issue in favour of the assessee. It was held that in the business interest of the assessee to second its employees to its AEs, the MIL has seconded the employees. However, the allegation of the TPO is that the AEs have been benefited from such secondments. Be that the position, even if it was so, that an Associate Enterprise is benefited, then there should not be any scope to draw an adverse inference that MIL should also snatch the profit out of the pockets of AEs. As long as the MIL has got his pound of flash and disclosed better revenue generation, there should not be any objection to the revenue. 26.3. As far as the non-mentioning of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... have recovered some compensation on secondments. It is not a correct approach because one has to examine the business strategies and the business model of an Enterprise and if it is found that other benefits are much higher than the small amount of compensation, then naturally applying a common business acumenship, no compensation or mark-ups should be asked for. In the present case as well, facts and figures have revealed that following the said business strategy the business growth as a whole was much higher than the impugned compensation amount. This allegation is also to be ruled out that those very employees were otherwise regular employees of the assessee-company and they have been absorbed after their return for the period for which they were sent abroad and worked "offshore" with AEs. It is true that such employees are the regular group of experts but they have been paid by AEs when worked on-site abroad, which means the burden of salary for the "offshore" period was in fact borne by AEs, otherwise to maintain bunch of trained employees the MIL had to incur the expenditure on salary. Therefore, there was an argument of counter claims and in support reliance was placed on Bo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ffirmed with the finding that the AE had retained the sale consideration beyond a stipulated time, hence, the assessee was entitled for compensation in the form of interest. 28.3 Ld. AR Mr. S.N. Soparkar stated that though a working was provided to TPO but that was made only to comply with the directions but there was no concession or acceptance was offered. As far as challenging the jurisdiction of the TPO is concerned, the same has already been dismissed by us in above paras. Ld. AR has informed that MIL is a debt free company. The company had issued paid up and subscribed capital of about Rs. 7 crores. The company has reserves of Rs. 198 crores. The company has no unsecured loans. The bank charges or lease rentals and financial cost was only Rs. 25 lacs. It is not the case that the assessee has charged interest for late payments from any other party. Likewise, the assessee has also not paid interest to its suppliers for any such delay in payment. Non-charging of compensation of interest is stated to be the market practice of this Industry. Referring one of the guidelines of OECD (para 1.29), it is prescribed that no interest could be charged on delayed payment on commercial con ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ration. If the AEs have not charged interest to third parties for late recoveries, would it be reasonable to expect MIL to recover the interest from the AEs. Likewise if MIL is not paying interest on advance/preponment of payment to AE then was it justifiable to levy interest on few days delay? In response to this, the Ld. DR has stated that since MIL and its AEs were undisputedly dealing on a principal to principal basis, so it would not matter whether the AEs have recovered the same from their customers. This argument is not appropriate in our humble belief. If the AEs are not recovering interests from third parties for late recoveries, then in the instant case it would be too much to expect the assessee to charge the interest from the AEs. There is no rationale to inflict upon the assessee, merely on presumption, that he ought to have charged the interest from it's AEs. We therefore hold that there was no justification to presume that there was a shift of profit to avoid tax in India. This ground is allowed. 31. Ground No. 4 reads as under:- 4. Ground No. 4 - Excluding exchange fluctuation gain while computing deduction under section 10A of the Act The Ld. AO has erred in law ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e of Smt. Sujata Grover v. Deputy Commissioner of Income Tax (2001) (74 TTJ 347) 6. Decision of the Hon'ble Mumbai ITAT in the case of CMC Limited, Mumbai v. The DCIT, Spl. Range - 36, Mumbai (ITA No. 4811/Mum/1998)." 31.2 The AO was not convinced and held that on perusal of computation of deduction u/s.10A, it was noticed that the assessee has himself reduced "interest on deposit", "dividend income", etc. from the eligible profit of the business for section 10A deduction. However, the assessee has not excluded "foreign exchange gain". According to him, for the purpose of section 10A, profit derived from export business are eligible. According to him, "foreign exchange gain" was not the profit derived from export business. The AO has also referred a decision of ITAT Ahmedabad pronounced in assessee's own case for A.Y. 2002-03 for the proposition that in respect of "other income", the stand of the Department for the purpose of computation u/s.10A was upheld and held as not allowable. However, in respect of the issue of "exchange gain" the Tribunal has held that the "exchange gain" is a part of the export business of the assessee. Against the said decision, the Revenue ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ction under section 10A should not be allowed in respect of such exchange gain. No contrary decision has been brought to our notice. However, in the case under consideration, it is not evident from the order of lower authorities as to whether or not gain due to difference in exchange rate is on account of exports or otherwise. In these circumstances, we vacate the findings of ld. CIT(A) and restore the matter to the file of the AO with the directions to ascertain the nature of gain. In the even such gain is derived from the export of goods or articles manufactured or produced by the taxpayer, exemption/deduction u/s.10A or 80HHE as the case may be, should be allowed in accordance with law after allowing sufficient opportunity to the taxpayer. Thus, grounds of the Revenue relating to exemption/deduction u/s.10A and 80HHE of the Act in respect of profits on exchange fluctuation are disposed of as indicated hereinbefore for these two assessment years. 32. Once the respected coordinate bench of the Tribunal has already restored this ground back to the file of the AO with certain directions, therefore it is not proper for us to deal this very issue independently for the year under cons ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Rule 8D, which according to him was applicable for the year under consideration, he has computed expenditure in relation to the income which did not form part of the total income and a proportionate computation was made. Finally a disallowance u/s.14A of Rs. 20,39,041/- was taxed. The DRP has referred Daga Capital Management 117 ITD 169 (Mum.) and held that the disallowance was rightly made. 34. Having heard the submissions of both the sides, as far as the decision of Daga Capital Management (supra) is concerned, the legal view taken therein has now been reversed by Hon'ble Bombay High Court pronounced in the case of Godrej & Boyce Mfg. Co. Ltd. Mumbai v. Dy. CIT [2010] 328 ITR 81/194 Taxman 23 (Bom)]. In this judgement at the end, the Hon'ble Court has recapitulated the conclusion and pronounced that a finding is required whether the investment in shares is made out of own funds or out of borrowed funds. A nexus is required to be established between the investments and the borrowings. In section 14A of the Act expenditure incurred in relation to exempted income is to be disallowed only if the Assessing Officer is satisfied with the expenditure claimed by the assessee pertaining t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y of statutory disallowance in certain cases. There, the decisions of the Tribunal in the earlier years would have no relevance in considering disallowance in assessment year 2002-2003 in the light of Section 14A of the Act. 73. For the reasons which we have indicated, we have come to the conclusion that under Section 14A(1) it is for the Assessing Officer to determine as to whether the assessee had incurred any expenditure in relation to the earning of income which does not form part of the total income under the Act and if so to quantify the extent of the disallowance. The Assessing Officer would have to arrive at his determination after furnishing an opportunity to the assessee to produce its accounts and to place on the record all relevant material in support of the circumstances which are considered to be relevant and germane. For this purpose and in light of our observations made earlier in this section of the judgment, we deem it appropriate and proper to remand the proceedings back to the Assessing Officer for a fresh determination. Conclusion : 74. Our conclusions in this judgment are as follows ; (i) Dividend income and income from mutual funds falling wit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rom mutual funds which does not form part of the total income as contemplated under Section 14A. The Assessing Officer can adopt a reasonable basis for effecting the apportionment. While making that determination, the Assessing Officer shall provide a reasonable opportunity to the assessee of producing its accounts and relevant or germane material having a bearing on the facts and circumstances of the case." (emphasis given) On the basis of above decision, we are also of the view that it depends on the facts of each case. Admittedly, the fact of the present case was that the Assessing Officer had not enquired the issue in the light of the above legal pronouncement. Specially the pronouncement of the Hon'ble Bombay High Court was not available at that time, hence, the Assessing Officer's assessment order was devoid of merits as also the law applicable. Now we have got certain guidelines, though can not be said to be exhaustive or complete, but on these lines, the Assessing Officer is expected henceforth to compute the correct disallowance, needless to say after providing an adequate opportunity of hearing to the assessee. Therefore, the matter is restored to be decided afresh, henc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... AO that the assessee has made payment to 19 parties, listed in the assessment order, for software consultation and recruitment services. The payment to the extent of Rs. 12,26,18,416/- was made without deduction of tax. A show cause was issued as to why the disallowance under the provisions of section 40(a)(i) should not be made in respect of the said payment. The explanation of the assessee was that the MIL is executing software development project in UK through its branch set up in UK. During the course of execution of software development project, the UK branch has incurred various expenses. The payments to those parties for the said expenditure have been directly made by the UK branch from its bank account in UK. The submission of the assessee was as follows:- "2.1 Assessee's branch in UK is a separate and distinct entity: a. It is submitted that the UK branch is considered as a Permanent Establishment ('PE') of Mastek in the UK and accordingly charged to tax in terms of Article 7 of India - UK Double Taxation Avoidance Agreement ('DTAA') on profits attributable to branch operations in the UK. As per Article 7(5) of India - UK DTAA, in the determination of the pr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Explanation is to bring certain income of non-residents to tax in India if the source is in India. According to AO, the source is MIL, an Indian Company. From the side of the Assessee, CBDT Circular 740 was cited for the argument that the branch of a foreign company in India being treated as a separate entity, likewise branch of the assessee in UK should be considered as a separate non-resident entity. However, the AO was not convinced and stated that the branch in UK is only a branch as well as part and parcel of Indian Company. The AO has also mentioned that the alleged payment which was made through the branch was not accounted as transferred to branch but accounted as such in the name of the payees. According to him, the expenditure was incurred by the assessee-company. The AO has finally concluded as under:- "7.20 In view of the above facts and legal position it is held that the assessee was under obligation to deduct tax from the payments made to non resident for consultancy and training and recruitment which it had failed to discharge. Therefore the expenditure claimed under recruitment and training and consultancy paid to non resident is disallowed and added back to incom ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... also not in dispute that the payment was made to 19 (Nineteen) parties and all of them are not Indian Residents. It is also not in dispute that the nature of expenses were, namely, "Recruitment Services", "Training Services" and "Software Consulting". Before DRP, the assessee has described the party-wise nature of services. Relevant pages of DRP are page Nos. 141 to 147, referred so as to understand the description of said services rendered. Section 40(a)(i) of the Act was invoked. This section starts with an obstante clause that notwithstanding of anything to the contrary in sections 30 to 38, certain amounts shall not be deducted in computing the income chargeable under the head "profits & gains of business" in the case of an assessee any interest, royalty, fees for technical services or other some chargeable under this Act which is payable outside India or in India to a non-resident on which tax is deductible at source under Chapter XVII-B of Act, but such tax at source has not been deducted or after deduction has not been paid. The emphasis of argument is that the said sum should be "chargeable under the Act". This aspect has to be seen thoroughly because this phrase is used in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed Kingdom with no business presence in India. The A.O. while drawing adverse conclusion has not brought any fact on record to controvert the claim of the app in this regard. I am of the view that the professional fees payable to should be considered as business income of the said entities and in the absence of PE in India, the same would n9ot be liable to tax in India. Since such income of non-residents is not liable to tax in India, the provision of section 195 of the IT Act are not attracted on such payments and consequently no disallowance can be made under section 40(a)(i) of the I.T. Act." 36.2 This is the one aspect which has been argued and the other aspect was that on such income the deeming provisions of section 9 do not apply because the impugned income do not accrue or arise in India. In this regard, section 9(1)(vii)(b) has been cited and reproduced below:- "Income deemed to accrue or arise in India 9.(1) The following incomes shall be deemed to accrue or arise in India:- ** ** ** (vii) income by way of fees for technical services payable by- (a) .. (b) A person who is a resident, except where the fees are payable in respect of services uti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the said Statute. We therefore hold since the services in question were neither "availed" nor "rendered" and even not "utilized" in India, therefore no tax was required to be deducted at source. Rest of the issues about the nature of the FTS and whether it was made available to the assessee are alternate plea of the assessee and need not to be addressed because on the preliminary question of "chargeability", the issue stands decided in favour of the assessee. This ground of the assessee is therefore allowed. 37. Ground No.7 reads as under: 7. Ground No. 7 - Disallowance of 20% of recruitment and training expenses The Ld. AO has erred in law and on facts in disallowing 20% of recruitment and training expenses amounting to Rs. 47,20,099 on the ground that such expenses have been incurred on employees deputed to overseas subsidiaries. The Ld. AO ought to have appreciated the following: i. None of the recruitment and training expenses have been specifically incurred to recruit or train employees for the purpose of deputation to its subsidiaries. The expenses incurred are general in nature and have been incurred at an organizational level for its entire staff. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Company. In his opinion, such persons deployed outside India may or may not come back and may be absorbed by AE. In such a situation, the benefits of recruitment and training have been enjoyed by AEs of the Company outside India. The AO has therefore held that 20% of the recruitment and training expenses has to be disallowed being not incurred wholly and exclusively for the purpose of the assessee's business. He has therefore disallowed a sum of Rs. 47,20,099/-, however, and also held that the said disallowance cannot be added while computing the deduction u/s.10A of the IT Act. 37.2 In this regard, ld. Counsel has submitted that none of the recruitment and training expenses have been specifically incurred to recruit or train employees for the purpose of deputation to its subsidiaries. The expenses incurred are general in nature and have been incurred at an organizational level for all staff. Therefore there is no direct linkage of recruitment and training expenses with employees deputed to its subsidiaries. The ld. Counsel further pointed out that on an ongoing basis, the significant risk in the software industry where the assessee operates is to manage attrition and hence re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g is an independent and distinctive business unit and deduction under section 10A should be computed specific to eligible undertaking instead of computing such deduction after considering net business profits of the assessee (including losses of eligible and non-eligible units) as a whole. ii. Losses of eligible and non-eligible undertakings cannot be set off against profits of eligible undertaking while computing deduction under section 10A of the Act. Each of the above grounds of appeal is distinct, independent and separate and without prejudice to the other grounds of appeal. Your appellant craves leave to add to and/or to amend and/or to modify and/or to cancel any one or more grounds of appeal at any time before or at the time of hearing. Additional Ground of Appeal Appellant craves leave to raise this additional ground of appeal before the Hon'ble ITAT. This is a legal ground and therefore as per the decision of Hon'ble Supreme Court in the case of National Thermal Power (229 ITR 383), it can be raised before the Hon'ble ITAT. Ld. AO erred in law and on facts in computing deduction u/s 10A of the Act considering the net profit of all units taken together i.e. afte ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... erred to in Section 72(1) or Section 74(1) or Section 4(3) shall be carried forward or set off so far as such loss relates to the business undertaking and such loss relates to any of the assessment years ending before 1st day of April-2001. In respect of this legal controversy, few case laws have been cited as follows:- (i) Scientific Atlanta India Technology (P.) Ltd. v. Asstt. ACIT [2010] 38 SOT 252 (Chennai) ITAT (SB) (ii) Techspan India (P.) Ltd. v. ITO [2007] 283 ITR 212/158 Taxman 182 (Delhi) There is one more decision of Cap Gemini India Pvt. Ltd. v. Addl. CIT [2011] 46 SOT 195/12 taxmann.com 1 (Mum.). According to the amended scheme the profits of the Unit eligible for deduction would form part of the income computed under the head "profits and gains of business". The deduction is therefore required to be made at the stage of computing the income and, hence, first it is required to arrive at the figure of "gross total income" as defined u/s.80B (5) of I.T. Act. The said gross total income is to be computed in accordance with all the provisions of the Act, including Section 10B as well, except Chapter VIA of the Act. In the context of set off of loss for ..... X X X X Extracts X X X X X X X X Extracts X X X X
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