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TMI Blog2012 (5) TMI 206X X X X Extracts X X X X X X X X Extracts X X X X ..... sy 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. Applicability of cases decided u/s 40A(2)(a) - held that:- though presently not the subject matter of dispute, that the case laws which are already in public domain in respect of deciding the disallowances made u/s. 40A(2)(a) of the Act can be helpful. We have expressed this opinion because in a difficult Transfer Pricing case, primarily because of the complexity of the facts, even the best intentioned tax-payer can make an honest mistake and like-wise the best intentioned 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. Human Resource Management ('HRM') s Services / Secondment services between AEs- for enabling the AEs to provide 'onsite' service, the assessee has seconded its employees to those AEs. - held that:- The assessee has ma ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... held that:- AO erred in not appreciating the fact that each eligible undertaking is an independent and distinctive business that required deduction to be computed specific to eligible undertaking instead of considering net profits of the assessee. Ld. AO ought to have granted deduction u/s 10A of the Act without setting off losses of eligible and non - eligible undertakings against profits of eligible undertaking while computing deduction u/s 10A of the Act. - IT APPEAL NO. 3120 (AHD.) OF 2010 - - - Dated:- 29-2-2012 - MUKUL KR. SHRAWAT, A. MOHAN ALANKAMONY, JJ. S.N. Soparkar for the Appellant. V.K. Gupta and Kartar Singh for the Respondent. ORDER Mukul Kr. Shrawat, Judicial Member This appeal has been filed on 24/11/2010 by the Assessee on Form No. 36B, i.e. "appeal memorandum" u/s. 253(1)( d ) of the IT Act directly against the assessment order dated 26/10/2010 passed u/s. 143(3) r.w.s. 144C of the I.T. Act. To decide several issues raised before us; certain orders of the Revenue authorities were involved, passed for the year under consideration, chronologically as follows:- (1) An order of 92CA(3) of IT Act dated 12/10/2009 by ACIT (TPO)-I, Ahmeda ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ( i ) Software Services, 299,33,35,552 ( ii ) Common Infrastructure costs 1,15,79,429 ( iii ) Reimbursement of travel other costs 1,45,24,952 2 Majesco Mastek New jersey ( i ) Software services 35,17,44,575 ( ii ) Reimbursement of travel other costs 2,16,23,772 3 Mastek GMBH Germany ( i ) Software services 4,01,61,499 ( ii ) Reimbursement of travel other costs 6,24,149 4 Mastek Asia Pacific Pte Ltd. Singapore ( i ) Software services 2,52,66,475 ( ii ) Reimbursement of personal and other costs 9,49,748 5. Mastek Msc Sdn Bhd, Malaysia ( i ) Software services 2,25,45,120 ( ii ) Reimbursement of travel other costs 17,04,627 6. Carretek LLC, USA ( i ) Provision of information technology enabled services 5,04,84,337 ( ii ) Reimbursement of actual costs for data lines travel others costs 2,33,04,757 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hile selecting the comparables and thereafter provided the benefit of necessary adjustments in accordance with Rule 10B(3) of the Income-tax Rules, 1962. iv. Without prejudice to the above, the Ld. AO erred in law and on facts in making an adjustment to the arm's length price of the said international transactions without giving benefit of the proviso to Section 92C(2) of the Act. ( B ) Order of TPO: 3. From the order of the TPO, it is evident and undisputed that Mastek Ltd. i.e. is the appellant (in short hereinafter referred to as "MIL") was incorporated on 14/05/1982. The appellant is a global information technology services provider. The appellant is offering software development and its related services. The appellant has overseas subsidiaries or Associated Enterprises (AE). For overseas clients, the appellant provides services through its AEs situated outside India. The services includes offshore services and onsite services. One of the subsidiary is Mastek UK Ltd. (in short MUK). At this juncture, our attention was drawn that MUK has worked as a 'Distributor' of the software services to the customers in the country UK, and this is one of the controversy raised b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ctivities". Further, as per TPO, certain functions, such as, negotiation of contracts, signing of contracts, fixation of time schedule, etc. as listed in (6) (7) above, were nothing but "Front Office Activities". 3.3. The TPO has also discussed the "Risk Profile of MUK". According to TPO, the market risk, service liability risk, technology risk, credit risk, man-power risk and foreign exchange risk, were remained with MIL. TPO had even stated that normal distributor's risk like inventory risk, foreign exchange risk and profit risk were not existed with MUK. According to TPO, MUK did not receive the delivery of services or the delivery of product but those were directly delivered to the third party, i.e. clients. 3.4. We have also noted that the TPO had made a comment that the agreement between the assessee and MUK were in respect of fixation of arm's length price. The profits or returns on the transactions were alleged to have given the risk coverage to MUK and it was fixed after the charging of expenses incurred by MUK. The assessee MIL has agreed upon to transfer the money accordingly. Hence, as per TPO the MUK was like a captive office of the assessee-company. Further, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ince the basis of attribution of profit was considered by the TPO as a value addition on expenses, hence the said method was held as "Cost Plus" basis. 3.7. The TPO has also discussed the comparables chosen by the assessee. He has mentioned the defects in those comparables. The TPO, thereupon, has drawn a conclusion that the referred comparable companies were in product-distribution and not in service-delivery- activity. Those companies were stated to be dealers of patented softwares and, therefore, it was treated by the TPO that FAR did not match with MUK. A show cause was issued and in compliance the assessee has taken the following issues; reproduced by the TPO as follows:- "( a ) As a distributor, assessee takes normal risk related to business risk except risk related to inventory. ( b ) The assessee enters into negotiation with the buyer and strikes a deal and signs the contract, it is carrying out selling functions. ( c ) The compensation to a distributor should be reimbursement of operating cost plus volume related commission. ( d ) Employee's qualification and strength and in this regard the assessee submits case studies saying involvement of MUK employees r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd others are also being paid by the assessee company. ( b ) The assessee has stated that MUK enters into negotiations with the buyer and strikes a sale i.e. concludes the contract and further signs contract as its functions. Merely doing this function without assuming related risk does not mean carrying out those functions independently which are required to be remuneratd as such. It is clear from Annexure A B that final price for any contract to the third party is decided by assessee company in consultation with MUK and MUK merely signs those contract on assessee's behalf. Merely stating that these contract6s have been entered into by MUK is not the substance of all those contracts but merely the form in which they are entered. All the sales specification and terms of delivery and time scale for delivery are to be first provided by the assessee which is incorporated in the agreement as per the direction of the assessee company. ( c ) The assessee has stated that a distributor should be compensated for reimbursement of its operating cost plus volume related commission is not normal system of compensation. There may be reimbursement of certain expenses which a principal may ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing following data: ( i ) Standard Poor's Compustat ( ii ) Mergent's Vs Public Companies and ( iii ) Disclosure The following industrial classification codes were used for economic criteria, advertising agencies; advertising not classified elsewhere, business consulting services and business consulting services not classified elsewhere. The companies which were classified inactive and closed and similar companies having less that US $ 1.5 mn were excluded and manual qualitative screening were carried out rejecting the companies having non-comparable functions, non comparable services, persistent loss makers and merger/inactive were excluded. This data base resulted in arithmetic mean of comparables at 5.6% on cost. However, arithmetic mean of the comparable companies found out by the assessee company at 6.02% has been used for computation of arm's length price for marketing/front end office activities of the MUK. Total expenses of MUK (in pounds) 82,11,483 Mark up 6.02% as discussed above 4,94,331 Operating profit added to sales price of assessee (2860974 494 331) 23,66,643 Converted into I ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as to be taken into consideration. It has been held by the Kerala High Court in the case reported in 190 ITR 32 (Ker) "While interpreting the meaning of a word, the court in the absence of the statutory definition will have to consider its meaning in the manner in which it is understood generally by those who deal with the subject in question" Thus, the net profit normally means profit before tax, computed in accordance with the accounting principles. However, any item of income or expenditure which has no bearing on the amount of the transactions under examination have to be excluded or included as the case may be. Some of these items may be as dividend income and interest income, which are not directly related to the transactions. ( c ) Thus, under TNMM, in the first step, net operating margin from international transaction is computed in relation to the appropriate base. In the second step, net operating margin of the uncontrolled transactions are identified. In the third step the net operating margin of uncontrolled transaction are adjusted to take into account the differences, if any, between the international transaction and the comparable uncontrolled transaction or bet ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e ALP. The DRP has referred CBDT Circular No.12 dated 23/08/2001(251 ITR 15 (St.) specifying that the AO should not make any adjustment to the price shown by the assessee if such price is within that range. DRP has thereafter mentioned that the ALP of the International transaction as undertaken by the assessee had fallen beyond the said margin of 5%, therefore, the AO was correct in invoking the relevant provisions for the adjustment. For this legal proposition, case law cited was - Global Vantadge ( P. ) Ltd. v. Dy. CIT [2010] 37 SOT 1 [Delhi]. (C) Appellant's argument: 4. During the proceedings before us, Shri S N Soparkar, Ld. Counsel for the assessee has narrated the facts of the case and submitted that the A.O. had erred in not giving due regard to the contentions of the assessee and confirmed the additions proposed by the TPO. The Ld. Counsel explained the grounds raised in the appeal and proceeded to make various arguments summarized as follows: ( a ) The Ld. Counsel stated that the assessee derived maximum revenues from the UK market. From 1.1.2005, the business model of the assessee had undergone a change. This was keeping in perspective inter alia the HMR ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... del by stating that MUK started performing selling activities on a large scale as against marketing activities it performed in the past. Prior to 1.1.2005, MUK acted as a marketing services provider for offshore services performed by the assessee. As regards the onsite activities, MUK performed the same on its own account but obtained certain technical support services from MIL. From 1.1.2005, MUK acted as a distributor of software service capabilities of MIL and entered into a fresh agreement titled "Distribution Agreement" which was made effective 1 January 2005 and the old services agreement titled as 'Services Agreement" was terminated. ( c ) The Ld. Counsel explained that the compensation to MUK which was a derivative figure, was based on the market back-up approach. Therefore the computation to MUK was worked out on the basis of the Revenue generated and the said working was demonstrated by the TPO through an example in the order; already mentioned supra. ( d ) Another plank of argument of The Ld. Counsel is that the entire income earned by MIL from its transactions with MUK was exempt under section 10A of the Act, as a result of which, there was no shifting of the tax ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... re was no agency relationship between MUK and MIL, which was evident from Para 6.1 of the Distribution Agreement. The relationship was on principal to principal basis; iv . He then referred to the agreement entered into by MUK with the customer and stated that MIL does not feature at all in the said third party agreement, which further demonstrates the point that entire risks and responsibilities vis-a-vis third party was borne by MUK; v . He discussed the Article 4 - Pricing and Invoicing clause of the Distribution Agreement along with Exhibit 1 to demonstrate 5.52% compensation mechanism for MUK; vi . He pointed out that selling activities (negotiating and concluding contracts) performed by MUK were value added functions separate from marketing and front office. MUK takes independent decisions as regards pricing to customers and is not acting like an agent of MIL. vii . He further stated that selling activity is very critical to any business function and does need focused attention. In this regard, he brought out the organizational structure of the sales team as well as the employee data, their qualification, designation and roles in MUK. He pointed out that MU ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the assessee from its group entity(ies). However, the officer did not avail of this opportunity. Further, the assessee placed various submission on record for its claim. The Hon'ble Tribunal held that the officer had been less than fair in his observations that the requisite details and supporting material, evidence and information were not furnished by the assessee. ( g ). Reverting back to the main reason of disallowance; the functions performed by MUK, in nutshell were reiterated as follows: Identifying customers; Establishing contacts; Soliciting enquiries; Managing customer relationships; Appointment of agencies or engaging into advertisement and sales promotion; Negotiation of contracts and signing of contracts on concluding; Agreeing the scope deliverables and time schedules with the customers The Ld. Counsel has emphasized on the last two functions, which are in the nature of selling functions. Marketing activity is just a subset of the entire selling functions. Negotiation of contracts, taking a decision on the same and concluding the contracts is an important part of the selling function and commands a reward muc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... olved in fixing the price. MIL'S involvement is nowhere brought out even in the third party agreement that MIL has entered into with its customers in UK. It is incorrect on the part of the TPO to state that MUK signs the contracts on behalf of the assessee(MIL). Even in a third party scenario, the distributor would always consult with the manufacturer to find out as to when would the required goods be made available. Similarly, in the instant case if MUK consults MIL to find out the time scale for delivery, it would not undermine its role as a distributor. As regards the employee profile submitted before the TPO, the TPO has again erroneously stated that providing a highly qualified team is merely a marketing exercise, which provides comfort to third parties. According to the Ld. Counsel, the TPO has never examined any key employees of MUK and has arrived at this conclusion without any proper findings to this regard. Fixed compensation for MUK: The Ld. Counsel vehemently argued that just because MUK was compensated at 5.52%, it cannot be treated as a marketing / front office entity. Contracts have to be recognised. Legally binding agreements cannot be disregarded without ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he average commission as a total percentage to the salary was around 40%. In this regard, the TPO incorrectly linked the same to the fact that MUK was a 100% subsidiary of MIL and any profit earned by it will benefit the assessee company if the same was repatriated as dividend to the assessee company. The Ld. Counsel stated that this aspect had no connection to the point being discussed that if the employees who are earning commission linked to sales generated by them to increase the overall revenues of MUK, why would MUK be not compensated on return on sales basis. ( l ) Comparability analysis : The Ld Counsel stated that the TPO has incorrectly compared MUK's operations with the comparability analysis carried out for US market. The assessee had submitted the details about UK comparability . The Ld. Counsel stated that even if MUK is to be treated as a marketing services provider, though obviously without accepting, the comparables performing similar functions in UK market need to be treated as comparables and not US market. The UK comparables, if adopted, reflected an arithmetic mean of 11.96%. Further, the benefit of (+/-)5% as provided in proviso to Section 92C(2) should ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... model changed later, the assesses replied stating that functions were wrongly identified and later corrected. iii. The Ld. DR stated that the financials of the UK units, which is now presented by the Ld. Counsel was never produced before the TPO and so it is difficult to comment on its authenticity. Even if the same needs to be relied upon, the workings should be made after allocation of common costs incurred by MIL. iv. The main argument as per the Ld. DR was to establish that whether MUK would conclude the contracts on their own or would they take help from India? Also given the answer that without the help and support from MIL not a single contract could be completed on its own by MUK. v . The Ld. DR further denied the allegations that no persons from MUK were interviewed. He stated that the persons were called but the assessee never produced the same. He also categorically mentioned that the same has been noted on the proceedings sheet. vi. According to the Ld. DR, MUK on a stand-alone basis is not able to fix up the price, as also the time of delivery; and for that has to necessarily consult MIL. Delivery of the software has always taken place from MIL to t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ate method, or as regards tested party. The dispute was more to do with the Functions, Assets and Risks analysis of MUK and MIL and the characterisation of MUK that flows from the same as to whether MUK should be treated as full fledged distributor or marketing support services provider. b. HMRC Guidelines: - In relation to the HMRC guidelines relied upon by the Ld. Counsel for the assessee, the TPO stated that those were mere guidelines and neither binding on the TPO nor assessee or MUK either. d. Fixation of 5,52%: - Even after the authorities repeatedly asked for as to how was 5.52% fixed for MUK, the Ld. Counsel never responded to the same. e. Customers interaction with MUK:- According to the Ld. DR, it is too far fetched statement that the customers in UK would know only MUK and not MIL, This is because, MIL has given performance guarantees to such customers. Also, MUK uses MIL's brand to market the services. Finally, the deliveries are taking place directly from MIL to the customers. f. Commission to employees of MUK:- The Ld. DR vehemently argued that this plea was taken for the first time by the assessee before the Tribunal. The assessee has ne ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as according to him the same was never submitted before the TPO. xiii . The Ld. CIT DR Mr. Gupta has proceeded on the characterization of MUK. He discussed the real characteristics of a distributor and stated that MUK never falls within that loop. Price fixation between MIL and MUK is never on a Principal - to - Principal basis. This is because, MUK will always inform MIL about the expenditure incurred in a particular month and accordingly, MIL shall raise the invoice on MUK. The Ld. DR stated that the price for customer is always fixed by MIL and MUK will accordingly never incur any loss. MUK shall always get a fixed rate of return viz: 5.52% and shall accordingly not assume any risk. xiv. As regards the technical services are concerned, the same are provided by MIL. The after sales service is the responsibility of MIL and its UK Branch and not that of MUK. This is further supported as there are no technical people in MUK to carry out any technical support services after sales. The Ld. DR highlighted that as regards the functions of MUK, which have been submitted by the assessee, the functions relating to after sales services have not been discussed. The team of MUK thou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s than 1% in UK on a turnover of Rs. 300 crores as against 5.52% left currently. Considering the functions performed by MUK, this would be incorrect to expect out of MUK. If foreign entities would perform similar activities whilst operating through their subsidiaries in India, would the Government of India ever allow them to earn less than 1% of the total revenues generated out of India. d. Customer relationship: - As regards the Ld. DR's argument that customers in UK would know MIL, the Ld. Counsel stated the following points: i. Any third party distributor would display the brand of a manufacturer; ii. Performance guarantee is given by MIL to a customer of MUK and not to all the customers. Further, the contracts are entered into by MUK with third party customers and MUK is obligated towards the third party for the terms and conditions of such contract. iii. MIL under no circumstances is ever issuing any letter to MUK supporting / rejecting the terms of the agreement between MUK and third parties, which proves that MIL does not interfere in the process when MUK signs the contracts with the customers in UK. e. Employees of MUK: - MUK sells based on ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 30 in relation to Marubeni India Pvt. Ltd. and stated that the assessee's case is not to claim standard deduction of +/-5%. In the assessee's case, the assessee is within the +/-5% range. (F) Conclusion :- 7. We have heard the submissions of both the sides at a considerable length. It is to be stated at the outset itself that the preliminary issue is whether the MUK is to be considered as carrying on "distribution operations" as contested by the appellant, or whether the MUK is to be considered as carrying on "marketing services" as held by the Revenue Department. Based upon the TPO's findings and DRP's directions, the AO had treated MUK as a "Marketing Support Services Company". To examine the correct nature of the services performed by MUK, we have gone through the "Master Agreement" dated 30/03/2005, refer page (235) of paper-book. This Agreement was between Mastek Ltd., an Indian Corporation (referred as "Mastek" in short MIL ), Ahmedabad and Mastek UK Ltd. (MUK), A United Kingdom Corporation, UK. The said Agreement was effective from 01/01/2005. In the preamble, it is stated that from 01/01/2005, "Mastek" has changed its business model for UK operations. Consequently, " ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ngth return on the revenues received from its customers in UK for its distribution activities performed. MUK is to earn arm's length return commensurate with its functions and risk. 7.3 Article 4.3 prescribes that at the end of each month Mastek shall determine the total transfer price due from MUK for services rendered during that month and shall issue an invoice in GBP for payment to MUK. It was agreed upon that the service fees shall be payable by MUK within 60 days of receipt of invoice issued by Mastek India Ltd. (MIL). 7.4 Before us, Abhishek Auto industries Ltd. ( supra ) cited wherein the Tribunal has made a clear verdict that written agreements which are duly executed by the respective parties based on commercial expediency cannot be disregarded without giving any cogent reason. In the present appeal, it has not been disputed that the said Master Agreement was not genuine or it was sham/fake. It is a settled proposition that commercial transactions are in the domain of the business-man and the Revenue Department cannot intervene in the realm of intricacies of commercial expediencies involved, hence it is improper to ignore the terms conditions incorporated ther ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that due to deployment of the said team the revenue has increased substantially, therefore, it is meaningful to hold that the MUK in fact is in a position to independently negotiate the terms with the customers and handle the customers in respect of fixing of time schedule and the scope of deliverables. 10. Once we have examined that aspect, therefore we are not in agreement with the TPO that MUK is merely a customer facing entity and simply meant for the marketing of assessee's business. We are of the view that there was no direct evidence in the hands of the TPO to say that the assessee was simply a selling agent and that it appears that the TPO had proceeded on a presumption that the MUK has acted as a selling agent for the year under consideration. His presumption is primarily based upon one fact that there was a fixed percentage of award given by MIL to MUK; which in his opinion is prevalent in selling agent's case. We have examined this thought of the TPO in depth. Even in the case of a distributor, it is expected from a distributor to consult with the manufacturer or the main concern while finalizing a contract so that the negotiation should be in line with the requireme ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ia. That borrowings were after the issuance of guarantee to the Bank by Mastek. But in return MUK has given performance guarantee. All these information, thus indicated that MUK has acted as a distributor and not merely a front office concern of MIL. We can therefore hold that only one criteria of fixed percentage of compensation/ award agreed to be given to MUK must not be measured as a sole criteria to interrupt the status of MUK from "Distributor" to " selling agent". 13. There was an objection that due to the change in the business model, there was a fall in the profits of MIL from 26% to 12%. In this regard, a vehement contention was made by ld. AR Mr. Soparkar that on one hand, the Revenue has argued that there was no significant change in the business model and on the other hand, Revenue has alleged that there was a fall in the profit due to change in the business model. It was explained that due to change in the business model, there was also a change in the profitability. According to ld. AR, there was an overall increase in profit due to increase in turnover and that the said change has resulted into excess profit of MIL group. Due to the change in the business model, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er mark-up than the one declared by the assessee. In the said case, in regard to clinical trial services performed by the assessee, the TPO after examining the various aspects, concluded that the mark up to 5% over cost was not as per arm's length price and as per TPO the same should have been 17.14% on the basis of comparables. The assessee had adopted Transactional Net Margin Method (TNMM) and in order to examine the appropriateness of this method the TPO resorted to Comparable Uncontrolled Price method (CUP) along with TNMM.(Identical is position in the present appeal as argued before us.) The first appellate authority has held that 17.14% mark up was required to be adjusted before it could be made applicable for determining the arm's length price in regard to international transactions entered into by the assessee. When the matter was carried before the Tribunal, it was held that the profits were exempt u/s.10B and in no way benefitted by charging 5% mark up as against 17.14% fixed by the TPO and that the profits of the AEs being subject to tax out of country's jurisdiction, therefore there was no necessity for the assessee to transfer the profits in any overseas jurisdiction. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is is to be provided on functional similarities rather than on products similarities. This observation of OECD is helpful to this assessee. The assessee has selected few comparables pertaining to the software industry. Those comparables were involved in distribution activities and can be said to be functionally similar, therefore there ought not to be any reason on the part of the TPO to reject such bench-mark. We are aware that the TPO had selected marketing services for bench-mark. He has identified certain comparables, but all were performing the operations in US. The arithmetic mean of those US marketing comparables was 6.02% and thereupon the impugned adjustment were worked out by the TPO. However, as far as the question of adjustment based upon certain comparables are concerned, it is a well-known law that the same should be close to the facts of the case and nearest to the business model of the assessee. Naturally, if one has to select the comparables between UK and US bench-marks, then in the present case only UK bench-mark can be said to be most appropriate and most suitable comparable. We, therefore, do not endorse the bench-marking of TPO being based upon US comparables. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... elected party should be least complex and should not be unique, so that prima facie cannot be distinguished from potential uncontrolled comparables. 17. We have also examined the exact nature of the adjustment as proposed by TPO on the basis of the figures involved. Total expenses of MUK was stated to be ₤ 82,11,483. The mark-up as per TPO was 6.02% i.e. 4,94,331. Hence, as per TPO only this much profit ought to have been earned by the assessee. As against that, the operative profit of MUK was 28,60,974. Therefore, as per TPO the excess operating profit transferred was (28,60,974 - 4,94,331) ₤ 23,66,643. Hence, as per TPO, the MUK has earned excess profit of 23,66,643 and after converting the same into Rupees an upward adjustment was made. The figures as mentioned have been taken from the audited financial statement of MUK for the year ended 30th June, 2006. We have been informed that as per the P L A/c. of MUK ended on 31/03/2006, the revenue was 4,98,26,033 and the Mastek billing was 3,82,63,673. The expenses, such as, administrative cost, selling, travelling, communication, etc. were 88,13,223. The total of the billing and the expenses was thus 4,70,76,896. This ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nal Net Margin Method)method and what method would be accepted as the most appropriate method? Reference made of Sec.92C(1) of the Act r.w.r.10B(1)(e). However, all methods, such as TNMM, etc., other than CUP, are the methods that enable the determination of ALP on the basis of respective margins earned by comparable uncontrolled companies. The Regulations have been provided that where more than one price is determined by the most appropriate method, the ALP shall be taken to be the arithmetic mean of such prices. Therefore, ld.AR has suggested such an alternate practical approach to arrive at such ALP. The same could be used to compute the arithmetic mean of margins of comparable companies and apply the same to the appropriate base of MUK to determine the ALP. The arithmetic mean of the margins of the comparable companies was obtained and bench-marking analysis was stated to be as under:- Arm's Length OM Particulars Percentages Arithmetic Mean of the comparable companies 4.62% Median 2.11% Upper Quartile 3.59% Lower Quartile 0.68% We have been informed that in respect of the software services ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... was made by the Bench of Rule 10B(3) which provides that "an uncontrolled transaction shall be comparable to an international transaction if (i) none of the differences, if any, between the transactions being compared, or between the enterprises entering into such transactions are likely to materially affect the price or cost charged or paid in, or the profit arising from, such transactions in the open maker; or (ii) reasonably accurate adjustments can be made to eliminate the material effects of such differences". We therefore add that the business strategies must also be examined in determining comparability for transfer pricing purposes. If the business model are fundamentally different, then naturally no comparison is possible. The right recourse thereafter is that the impact of differences be eliminated so as to arrive at a most near comparison. In respect of the adjustments in the case of Sony India ( P .) Ltd . ( supra ) the observation is that, quote "while comparing controlled and uncontrolled transactions or enterprises, one has to look for the differences and whether such differences are likely to affect the price, cost charged or paid or profit arising from the tran ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the group and more particularly the judicial relationship between different entities of same group are to be seen. The function that needs to be identified while carrying comparison as per OECD guidelines includes design, manufacturing, assembling, research and development, servicing, purchasing, distribution, marketing, advertising, transportation, financial and management activities. It is also necessary to examine as to what is the principal function of the entities. The analysis of comparison should consider total aspects employed and assets used to earn profit. The risk assumed by respective parties is a very important consideration. It is a simple principle of economics that the greater the risk, the greater the expected return (compensation). If there are material and significant differences in the risk involved, then the comparables identified are not correct as appropriate adjustments for differences in such cases are not possible. Therefore, while performing searches for potential comparable companies, not only turnover and operating profit but functions performed and risk profile are to be considered. However, it can always be shown on the given facts of the case that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ions were not kept in mind by the TPO. The Bench has even mentioned that when TNMM is applied to determine arm's length price as per OECD guidelines, functional profile, assets, assumed risk of controlled and uncontrolled transactions as per Rules are to be seen while screening. Since it was found that there was wide difference, then it was held that it was a clear pointer to the fact that the method adopted by the TPO was faulty. Similarities and dissimilarities of the transactions under comparison are to be scrutinized to see differences of situations, circumstances and environment. Even it is evident from Rule 10B that while comparing transactions or even comparing enterprises if applying TNMM, the differences which are likely to materially affect the price, cost charged or paid, or the profit in the open market, all these points are to be taken into consideration with the sole idea to make a reasonable and as much as possible accurate adjustments. If the differences are such that they cannot be subject to evaluation, then such transactions are to be eliminated for the purposes of comparison. 18. In the light of the above discussion and the case laws cited, we are tempted to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t of controversy because of the dynamics, such as, turnover difference or the quantity difference or the geographical difference or the difference in the profiles, etc. etc. which do not match exactly with the business pattern of the assessee in question. In a philosophical manner we comment that it is like searching two identical human beings, whether ever made by Almighty, on earth. Therefore, while deciding such issue, in the case of Asstt. CIT v. Dufon Laboratories ( supra ), the Respected Coordinate Bench has concluded that due to lack of similarity with the comparable transactions, the transaction with the AE was at arm's length and that there was no case of making adjustment. Therefore the transfer pricing schedule of the assessee in the light of FAR analysis should be very accurate and ALP has to be determined of an international transaction in a very systematic manner and a fair adjustment has to be made. The I.T. Act has otherwise adopted a very fair approach while drafting this Chapter and thus included Sec. 92C(3) for the purpose that TPO has to communicate to the taxpayer which one of the four conditions prescribed in this section are satisfied which render the T ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f persons which are said to be related to the assessee or connected with the entity. So this section says that where an assessee incurs any expenditure in respect of which payment has been made to any person, as listed therein and the AO is of the opinion that such expenditure is excessive or unreasonable having regard to the fair market value of the goods, services, facilities for which the payment is made or the legitimate needs of the business, or the benefit derived by accruing to him therefrom, so much of the expenditure as is so considered by the AO to be excessive or unreasonable shall not be allowed as a deduction. As far as the implementation of Section 40A(2)(a) is concerned, a series of judgement of several Courts are available. Those decisions have laid down the guidelines in respect of determination of an amount whether to be treated as excessive or unreasonable having regard to the fair market value of the goods. Even in the transfer pricing cases, Rule 10B and Rule 10C also indicate the same method as well as the analogy while relying upon or comparing the uncontrolled transaction. These Rules also prescribe that while comparing the international transaction, then co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or tax benefit to this assessee. The adjustment as made by the TPO is hereby reversed and, accordingly, the AO is directed to delete the impugned addition while computing the total income of the assessee. This ground No.1 is allowed. 19. Ground No. 2 reads as under:- 2. GROUND NO. 2 - Human Resource Management ('HRM') s Services/Secondment services i . The Ld. AO has erred in law and on facts in alleging the HRM function to be an international transaction and thereby making an adjustment of Rs. 2,92,22,683. ii . The Ld. AO has erred in law and on facts by not taking cognizance of the fact that the said issue has been decided in favour of the Appellant by the orders of the Hon'ble Commissioner of Income Tax (Appeals), Ahmedabad ['CIT(A)'] for assessment year 2005-06, 2004-05, 2003-04 and 2002-03. iii . Without prejudice to the above, the Ld. AO has erred in law and on facts by disregarding the counter claims submitted by the appellant and the argument of making adjustment on a flat fee basis. ( A ) Facts : 19.1. The observation of the AO was that the services rendered by the assessee were for the benefit of its Associate Enterprises by seconding emplo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... bs. On such occasions, it may make a request to the assessee to provide required manpower. ( b ) The assessee then identifies suitable persons and second them to the AE location as per the requirements placed. ( c ) Once the persons are seconded, they cease to be on the assessee's payrolls. They are immediately shifted to the respective AEs payrolls, and hence their salary costs are borne by the AEs. ( d ) After the secondment, the assessee has nothing to do with the work performed by the seconded employees. The entire on-site billings relatable to the work done by them, belongs to the respective AEs. ( e ) The persons seconded may either be newly recruited employee or existing employees, of the assessee company. ( f ) From time to time, the persons seconded may return to the payrolls of the assessee upon completion of the project for which they were sent abroad. However, there is no hard and fast rule in this regard. It is the discretion of the AEs to send back the employees depending upon their ability to absorb them with adequate work. 20.1. The assessee's contention was that the said HRM function was not a separate function and it was a part of the software s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nded Rs. 2,70,47,217 Arm's length price for the human resource Management services Rs. 2,92,22,683 Adjustment to the total income (i.e. income to be increased) Rs. 2,92,22,683 21. As far as the opinion of the ld. DRP is concerned, it was observed that since the assessee itself has paid 8.33% of annual salary to other recruitment agencies, therefore the CUP method applied by the TPO was correct. An argument was raised before the DRP that as against 148 employees which were seconded during the F.Y. 2005-06, out of them, 92 employees had returned back to assessee-company. Hence, it was argued that those employees were the responsibility of the assessee. Sometimes, such employees add to the idle bench-strength of the assessee. It has also been mentioned that in the earlier Assessment Years such an addition was deleted by the CIT(A). The DRP was not convinced and held that the assessee had kept a pool of skilled and trade employees keeping in view the secondment requirement of the AEs. Therefore, such function of the assessee is a separate from its core business activity of providing software services. According to DRP secondment services ar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... providing 'onsite' software development and related services. To enable AEs to provide 'onsite' services to their customers, the assessee is sending the employees 'offshore'. Such secondment of employees brings back more 'offshore' work to the assessee. The result of such secondment of employees could be seen from the fact that there was remarkable increase in 'offshore' revenue generated from UK. Ld. AR has also argued that MIL cannot be termed as a recruitment agency. The MIL has more than 3000 employees on its pay roll, however, only 148 persons were sent abroad on secondment for temporary period. Ld. AR has also informed that out of them about 92 employees have returned back during the year. He has also informed that the secondment period ranges from 12 to 24 months. He has therefore vehemently argued that such HRM function was nothing but an integral part of software business. He has vehemently opposed the view of the TPO that such HRM function was a separate service for which an added cost should have been charged by MIL from its AEs. The Ld. AR has highlighted that the said matter is covered in favour of the assessee by the orders of Ld. CIT(A) for the AY 2005-06, AY 2004-05 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ECD case law relied upon was Cheminova India Ltd. Asstt. CIT [2007] 17 SOT 453 (Mum). In respect of the alternate suggestion of adjustment, he has placed reliance on Boston Scientific International BV India v. Asstt. DIT [2010] 40 SOT 11 (Mum)(URO). Finally, ld.counsel made a point that even if MIL was to charge for secondments, then the income would otherwise exempt u/s.10A of I.T. Act being inextricably linked with the main activity of software development services. 25. From the side of the Revenue, ld. DR has supported the action of the AO. He has pleaded that the services rendered by the assessee under HRM function is quite broad in nature and such recruitment, selection, training, etc. should be properly compensated. Ld. DR has harped upon the point that MIL has in fact maintained a bunch of qualified persons and on requirement seconded them to AEs and if need be called back to India and if need be again reabsorbed by AEs. For this facility, the assessee should have asked for a margin of profit to arrive at the arm's length price of this transaction. In respect of the compensation computed; ld. DR has mentioned that the direct quantitative indicator of the HRM servic ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... employment rights. The payment of fees or remuneration depends upon the 'secondment agreement' from party to party, but the primary liability is of the 'seconder'. Now the argument is that by such secondment of trained employees, in return, the assessee has substantially been benefited and because of the 'onsite' services provided by AEs, in the result, there was more 'offshore' work was generated for the assessee. As far as the assessee is concerned, its 'offshore' revenue has admittedly increased. A fundamental question has cropped up because of TPO's decision that whether the HRM function can be said to be an integral part of the overall software development services of the assessee? If we consider the overall scenario and the globalization of such services, then what is apparent is that the entities which are in the business of software development have to engage technically expert employees. Those employees perform their duties 'onsite' as well as sometime 'offshore'. Such entrepreneurs provide cushion to those employees if they have been sent abroad for an 'onsite' deployment. Whether it was justifiable on the part of the TPO to hair-split these two activities? As far as our ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... request of AEs. At the time of recruitment there was no surety given of their off-shore appointment immediately but they could be seconded at a later stage. Hence at first instance, none of the expense relate to the employees was meant for sending them to AEs. The purpose of recruitment at the first stage is their in-house absorption. No part of the expenditure was on behalf of AE hence there was no transaction which could be alleged as International Transaction. We find this explanation a reasonable explanation because admittedly there was no international transaction with AEs for charging the HRM services but the TPO had made out a case that there ought to be some mark up and hence he has opined for an addition in the total income. There was no such case that an upward adjustment was recommended by the TPO in respect of an international transaction already executed between the parties. 27. The assessee has made out a case that by such an arrangement of sending the employees to AEs, in return assessee has also been benefited. Employees, after returning, are with upgraded skills, better experience, update knowledge and with a better delivery skills. This is one part of the adva ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... has erred in law and on facts in alleging the credit period granted to the AE's as an international transaction and made an adjustment of Rs. 1,122,281 by charging notional interest on excess credit granted to the associated enterprises. ii. The Ld AO has erred in law and on facts by not taking cognizance of the fact that the said issue has been decided in favour of the Appellant by the order of the Hon'ble CIT(A) for assessment year 2005-06 and 2004-05. l. The Ld. AO ought to have appreciated that: the appellant has not charged any interest to the third parties even though the payments have been received beyond the normal credit period; the appellant has not paid any interest to the third parties for services, if any, availed and the payments would have been made beyond the normal credit period; the appellant is a zero debt company having no borrowings from external sources; this is an Industry practice, which is followed by your appellant. iv. Without prejudice to the above the Ld. AO/the Additional Commissioner of Income-tax, Transfer Pricing-l, Ahmedabad. ('Ld. TPO') has erred in law and on facts by disregarding the appellant's coun ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... poned payments received. For this counter claim, reliance was placed on Boston Scientific International BV. India ( supra ). In the past for A.Y. 2005-06 and A.Y. 2004-05, a view has already been taken by ld. CIT(A) in favour of the assessee, ld. AR has informed. 29. From the side of the Revenue, ld. DR has supported the action of the TPO. Rather, we have enquired the position of recovery by AEs that whether third parties have made late payments, but that question could not be answered by the Revenue. 30. Once it is an admitted fact that the MIL is a debt free company and that there was no interest burden on the assessee, then it cannot be justifiable to presume that the borrowed funds have been utilized to pass on that facility to AEs. Revenue has also not brought on record that the assessee has found paying interest to its creditors or its suppliers on delayed payments. The moot question is that in deciding this issue; a commercial consideration and market practice has to be taken into account. Naturally, even as per the OECD(TP) guidelines, now worth mentioning, it has been subscribed that to ensure a healthy relationship and to maintain a long business transaction, su ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ppellant's own case for earlier Assessment Years ('AY's) viz. AY 1999-2000 to 2005-06 and the same has been confirmed by the Hon'ble Income-tax Appellate Tribunal - C Bench, Ahmedabad ('ITAT') for earlier AYs 1999-00 and 2000-01. 31.1 The opening remark of the AO was that while calculating the deduction u/s.10A of IT Act, the assessee has reduced the amount of "other income", however, not reduced "foreign exchange gain". Therefore the AO has issued a show-cause notice to restrict the claim of deduction u/s.10A by the amount of foreign exchange gain. In compliance, assessee has submitted that the assessee is in export of software development and the change in the rate of foreign currency has intimate connection with the export business activity. The accounting entry for exports are generally passed on that date when the invoice are made. On the date of the invoice, as per the prevailing exchange rate, entry is recorded in the account. However, the export proceeds are generally realized after the gap of sometime. The gain in exchange rate is therefore recorded on the date of realization. The said difference is duly accounted for in the books of accounts as "exchange rate differ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 254/179 Taxman 326 (SC), Pandian Chemicals Ltd. v. CIT [2003] 262 ITR 278/129 taxman 539 (SC) and Sterling Foods v. CIT 237 ITR 579/104 Taxman 204 (SC), it was observed that for the purpose of claiming deduction u/s.10A, it is not only required to establish that it was business profit of an Industrial Undertaking but also required to establish that such profits are derived from the business activity of that Industrial Undertaking. Further, a decision of Cambay Electric Supply Industrial Co. v. CIT [1978] 113 ITR 84 (SC) has also been cited and finally held that the gain on "foreign exchange" was not eligible for deduction u/s.10A of I.T. Act. Conclusion: 31.4 After hearing both the sides, in brief, in respect of this legal ground in the light of the facts narrated hereinabove, we have noticed that the issue stood decided in favour of the assessee vide an order of ITAT "C" Bench Ahmedabad bearing ITA Nos. 2762/Ahd/2003 09/Ahd/2004(By Revenue), ITA Nos. 1688 and 4352/Ahd/2003 tiled as Mastek Ltd. v. Asst. CIT for AYs 2000-01 1999-2000, dated 17/06/2008 and finally held as under:- "16.4 As regards income on account of exchange rate fluctuation, Hon'ble Gu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to earning exempt income The Ld. AO ought to have appreciated the following: i. Rule 8D of the Rules creates a departure from settled principles and goes beyond the object and scope of section 14A(1) of the Act. ii. The Hon'ble Mumbai High Court in the case of Godrej Boyce Mfg Co Ltd, Mumbai v Dy. Commissioner of Income Tax [2010 TIOL 564] (MUM) has held that Rule 8D of the Rules is prospective in nature and as such, shall apply with effect from AY 2008-09. 33.1 The assessee has earned dividend income of Rs. 7,65,60,202/-. It was observed by the AO that as per the provisions of Section 14A an expenditure related to the income which does not form part of the total income should be disallowed. Rule 8D prescribed the amount of disallowance, it was quoted. The assessee was asked to explain as to why the "proportionate interest expenses" and "administrative expenses" incurred for earning the said exempt income should not be disallowed by applying Rule 8D of IT Rules. The assessee has submitted that no part of the investment was made out of borrowed funds. It was explained that the company had sufficient funds in hand. The entire investment was made out of its ow ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (3) were made applicable with effect from 01/04/2007. The proviso was inserted with retrospective effect from 11/05/2001, however Rule 8D was inserted by the Income Tax (Fifth Amendment), Rules, 2008 by publication in the Gazette dated 24/03/2008, relevant findings are reproduced below:- "( a ) The ITAT had recorded a finding in the earlier assessments that the investments in shares and mutual funds have been made out of own funds and not out of borrowed funds and that there is no nexus between the investments and the borrowings. However, in none of those decisions was the disallowability of expenses incurred in relation to exempt income earned out of investments made out of own funds considered. Moreover, under Section 14A, expenditure incurred in relation to exempt income can be disallowed only if the assessing officer is not satisfied with the correctness of the expenditure claimed by the assessee. In the present case, no such exercise has been carried out and, therefore, the Tribunal was justified in remanding the matter. ( b ) Section 14A was introduced by the Finance Act 2001 with retrospective effect from 1 April 1962. However, in view of the proviso to that Section, t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d is a charge on a component of the profits of the company. The company is chargeable to tax on its profits as a distinct taxable entity and it pays tax in discharge of its own liability and not on behalf of or as an agent for its shareholders. In the hands of the shareholder as the recipient of dividend, income by way of dividend does not form part of the total income by virtue of the provisions of Section 10(33). Income from mutual funds stands on the same basis; ( iii ) The provisions of sub sections (2) and (3) of Section 14A of the Income Tax Act 1961 are constitutionally valid; ( iv ) The provisions of Rule 8D of the Income Tax Rules as inserted by the Income Tax (Fifth Amendment) Rules 2008 are not ultra vires the provisions of Section 14A, more particularly sub section (2) and do not offend Article 14 of the Constitution; ( v ) The provisions of Rule 8D of the Income Tax Rules which have been notified with effect from 24 March 2008 shall apply with effect from Assessment Year 2008-09; ( vi ) Even prior to Assessment Year 2008-09, when Rule 8D was not applicable, the Assessing Officer has to enforce the provisions of sub section (1) of Section 14A. For that purpo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e following: i. The services availed by UK branch from non-residents have been rendered and utilized outside India and as such, the payments made by UK branch to nonresidents does not accrue or arise in India in terms of section 9(1)(vii) of the Act. Hence, the said payments to non-residents by UK branch are not chargeable to tax under the provisions of the Act. ii. Without prejudice to the fact that such income of non-resident does not accrue or arise in India under the provisions of the Act, even as per Double Taxation Avoidance Agreement ('DTAA') between India and UK, the payments made by UK branch to non-residents are not liable to tax in India. iii. Without prejudice to the above, even otherwise, if the expenses would have been paid by the appellant, the same would not have been treated as Fees for Technical Services ('FTS') liable to tax in India as Article 13 of India - UK DTAA requires that in order to treat the services as FTS, the same should make available technical knowledge, experience, skill know-how or processes, or consist of the development and transfer of a technical plan or technical design. The services provided by the non-residents to the UK ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... te legal entity formed under the UK Regulations. The same is evident from Article 7(2) of India - UK DTAA, which states that where an Indian entity carries on business in the UK through a PE situated therein, the profits which that PE might be expected to make if it were a distinct and separate enterprise. Further, Circular No. 740 dated 17 April 1996 states that branch of a foreign company/concern in India is a separate entity for the purposes of taxation. Applying the same logic, foreign branch of an Indian Entity has to be treated as a separate legal entity." 35.2 It was contested before the AO that the services were availed by UK branch from non-residence. Those services were rendered as well as utilized outside India. According to assessee, there was no application of section 195 on the said payment. It was also contested that as per DTAA with UK the assessee was not under obligation to deduct TDS. The AO was not convinced and after analyzing section 195 of IT Act and the provisions of section 9(1)(i) and section 9(1)(vii) held that the payment was in the nature of "Fees for Technical Services" ('FTS'). He has mentioned that in section 9(1)(vii) the word used is the servic ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sue in favour of the assessee. Our attention was drawn by ld. AR on some of the observation of ld. CIT(A) while deciding this issue for A.Y. 2005-06. The main thrust was that the services was (i) availed by the UK branch and the services (ii) rendered by non-residents and that the services was also (iii) utilized outside India. It has also been argued that the said services were not "make available" to assessee. The technical knowledge or the skill had not remained with the assessee. Ld. CIT(A) has expressed that as per clause (b) of section 9(1)(vii) an exception has prescribed that where fees are payable in respect of services utilized in a business carried on by such person outside India or for the purpose of making income from any source outside India. According to ld. CIT(A), UK branch was considered as a "permanent establishment in UK". He has referred Article 7 of UK DTAA to hold that the profit is charged to tax attributable to branch operations in UK. In his view, the UK branch is a separate legal entity formed under UK regulations. In his opinion, after the combined reading of exception laid down in section 9(1)(vii)(b) along with India-UK DTAA the consultancy charges pai ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the facts of the case are concerned, the said 19 parties are (i) not the resident of India and they also (ii) do not have 'PE' in India. It has also not been found by the AO that except the TDS provision, was there any other provision under Act due to which the said parties could be held chargeable to tax in India. 36.1 The next step is the application of Section 9 of IT Act which prescribes deeming provision to decide accrual of an income in India. Because of the deeming provision section 9(1) of IT Act says that certain incomes shall be deemed to accrue or arise in India, such as, any income from any business connection in India or an income from any property in India. Vide Explanation-1(b), an exception is that in the case of a non-resident, no income shall be deemed to accrue or arise in India to him from operations which are confined to the purchase of goods in India for the purpose of export. An issue has therefore been raised that the professional charges paid by the UK Branch of the assessee to various entities which are non-resident, then whether it can be held that an income has deemingly accrued in India. As far as the assessee's vehement contention is that the AO s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... services were provided from outside India. And these services have also been utilized outside India. These services were in fact rendered in UK for carrying out "onsite" work at UK. The Hon'ble Supreme Court in the case of Ishikawajma-Harima Heavy Industries Ltd. ( supra ) has opined that whatever was payable by a resident to a non-resident by way of technical fees would not always come within the purview of section 9(1)(vii). According to the Hon'ble Court, it must have sufficient territorial nexus with India so as to furnish a basis for imposition of tax. If any service has been rendered outside India, then the other condition for taxability is that it must be utilize in India. The Hon'ble Apex Court has therefore said that two conditions for taxability are that firstly, rendered in India and secondly, utilized in India. As far as the instant case is concerned, it is not in dispute that services from the foreign consultants were neither rendered in India nor utilized in India. Our attention has been drawn on an insertion of an Explanation below Section 9(2) of IT Act and for ready reference, reproduce below:- " Explanation - For the removal of doubts, it is hereby declared ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... annual salary of the persons seconded. As such, recruitment and training expenses cannot be again disallowed. iv. The aforesaid issue has been decided in favour by the Hon'ble CIT(A) in appellant's own case in AY 2005-06. 37.1 It was noticed that the assessee had incurred an amount of Rs. 2,36,00,496/- for recruitment and training expenses. In compliance of show-cause, it was informed that the nature of business of the assessee is to provide services to customers which constitute composite deliverables as well as "onsite" - "offshore" services. Therefore, to provide "onsite" software development services to customers, the technical support and the technical services of technical staff is required. It was categorically stated before the AO that none of the recruitment and training expenses have been specifically incurred to train the employees only for the purpose of deputation to its subsidiaries. The expenditure has been incurred at organizational level. The HR Department of the Company on a continuous basis is indulged in recruitment programmes, training programmes, so as to retain the talent of technical persons. The assessee has explained the business rationale behin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the employees for the company need not be only from the fresh recruits but also from the onsite employees returning during the concerned year. 37.3 On the other hand, from the side of the Revenue, the ld. DR supported the order of the AO. 38. On hearing the submissions of both the sides, we are of the conscientious view that in a situation where the requisite detail in respect of training of employees and the genuineness of the expenditure was very much before the AO and in respect of these two reasons, no disallowance was suggested, then it was unjustifiable on the part of the AO to say that a 20% recruitment and training expenses would be disallowed on mere presumption that it was not wholly beneficial to the assessee. There is no evidence in the possession of the AO to hold that a particular expenditure on training was not business related. In fact, the argument of the assessee appears to be logical that considering the nature of the services provided a training of the technical staff is always a business necessity and because of the trained staff the assessee's revenue has substantially gone up. In the absence of any adverse material, we are not inclined to approve s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... undertaking while computing deduction u/s 10A of the Act. Appellant craves leave to add, amend, alter, change, delete and edit the above ground of appeal before or at the time of the hearing of the appeal. 39.1 Ground No.8 and the Additional Ground both are connected, hence to be decided in a consolidated manner as under. 39.2 Though the assessee has raised this issue before us, but even on query from the Bench, exact facts and figures have not been produced. The AO has simply mentioned that the assessee's eligible u/s. 10A of Rs. 72,98,75,578/-. The connected calculation or the computation as made by the AO is not before us. Even the calculation of the assessee is not available, so that we can ascertain the correct quantums in appeal. Rather, it is strange to note that the assessee has claimed the deduction u/s.10A of lower amount and the AO has held that the eligible amount was higher. If it was so, then there should not be any grievance of the assessee. The only information before us in respect of the claim of deduction u/s.10A is as under:- Particulars Amount (Rs.) Mahape unit 59,63,47,583 Pune Unit 1,75,61,530 ..... X X X X Extracts X X X X X X X X Extracts X X X X
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