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TMI Blog2015 (12) TMI 959X X X X Extracts X X X X X X X X Extracts X X X X ..... en lower authorities in our opinion were justified in considering the ALP to be zero. The assessee has not been able to show any services having been rendered by the AE to it. As to the claim of the assessee that natural justice was denied to it, we find that a number of opportunities were given by not only the DRP but also the TPO. Even during the remand proceedings before the TPO the assessee was unable to show any TP documentation with regard to the TP services rendered by AE - Decided against assessee Disallowance u/s.10A - Held that:- The reason why assessee was denied the deduction claimed u/s.10A of the Act on the export benefits received from this unit was that it was formed by splitting up or reconstruction of a business already in existence. By virtue of the agreement mentioned supra, we cannot say that there was a split up or reconstruction of a business already in existence. There is neither any split up or reconstruction of business of the assessee nor SSAPL. Thus we hold that deduction u/s.10A could not have been denied - Decided in favour of assessee Disallowance u/s.14A - Held that:- Interest ordinarily cannot be considered as having nexus with the business o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ,UK (SSI-UK). It had international transactions worth ₹ 27,98,59,603/- for export of software, ₹ 7,15,27,453/- on expenditure for services and ₹ 2,10,61,199/- for import of services, with these AEs. These transactions were reported in form 3CEB filed along with return of income. As per the annual report of the assessee, margin on came to 50.4%. In other words, the Profit Level Indicators (PLI), viz., profit before interests and tax were 50.4% of the total costs. 2.1 For evaluating the international transactions entered with the AE, Assessing Officer made reference u/s.92CA to the TPO. TPO based on the replies given by the assessee and the TP documentation furnished by it, was of the opinion that the profit level indicator of the tax payer was higher than the PLI worked out by him for the transactions relating to export of software and import of service. However, vis- -vis the apportionment of expenditure for services obtained from AEs, the amount of which came to ₹ 7,15,27,453/-, the learned TPO was of the opinion that the assessee was unable to substantiate the outgo through any credible TP documentation. The sum of ₹ 7,15,27,453/- mainly consisted ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... yments made to the AE, commensurate with such payments. Hence according to the DRP, ALP of such services was rightly treated as nil. Reasons for coming to the above conclusions given by the DRP are summarized hereunder : (i) Tax payer was unable to prove rendering of services by AE ; (ii) No documentations were furnished by the assessee, for justifying the payments made by it to the AE, nor were any comparison done by it with similar independent transactions ; (iii) If the expenditure was incurred by the AEs for the benefit of the group as a whole, charging of such expenditure on the assessee or all entities in the group was not required, since the benefit of the expenditure were also be available to all the members of the group. The assessment was thereafter completed by making an addition of ₹ 7,15,27,453/- as ALP adjustment. 6. Now before us, the learned AR strongly assailing the orders of the authorities below submitted that the expenditure allocated or apportioned by M/s. SSI-US, comprised of the following : (a) Management fee for the month of April, May and June Rs.11.002,500 (b) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he following agreements : (i) Management Services Agreement entered with SSI-US on 01.04.2005 placed at pages 197 to 199 of the paper book ; (ii) Software Manufacturing Agreement entered with SSI - US on 01.04.2004, placed at pages 200 to 205 of the paper book ; (iii) Invoice/debit Notes raised by SSI-US, placed at page 206 to 209 of the paper book ; (iv) Software distribution Agreement entered with SSI-US on 01.04.2004 placed at pages 210 to 217 of the paper book ; (v) Sales and Distribution Support Services Agreement entered with SSI-UK on 15.07.2005, placed at pages 218 to 220 of the paper book ; and (vi) Credit notes issued by the assessee in favour of SSI-UK, placed at pages 221 to 224 of the paper book. 7. Continuing his argument, ld.AR submitted that the conclusion reached by the lower authorities that assessee had not received any services from the two AEs was entirely wrong in the fact of the documents produced. In any case according to him, to say that the ALP of the services received by the assessee from AE was zero cannot be accepted in view of the decision of the coordinate bench of this Tribunal in the case of Fosroc Chemical Indi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s issued by the assessee in favour of SSI-UK. It simply states that the credits were for commission for UK channel distributors' revenue or revenue share of Europe channel. In our opinion, none of these documents would go to show any services to have been actually rendered by the AE to the assessee. When assessee is not able to bring on record anything to show any services to have been rendered by AE to it and there are no documentations to show any services to have been received from AE, in our opinion it will be fair conclusion that no services were in fact rendered the by AEs to the assessee. There is no dispute that both the AEs were subsidiaries of the assessee. Therefore, the agreements between such subsidiaries, which have been brought before us as well as lower authorities for justifying the payments could be best considered only as self-effectuating documents. There was considerable onus on the assessee to show that actual services were rendered by its subsidiaries. It is a well settled principle of law that a court has to go into substance and not be satisfied with the and form has to get behind the smoke screen to find the true state of affairs. In our opinion, the a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e to a conclusion that claim of the assessee u/s.10A of the Act was in relation to a restructured / reconstituted business. He proposed a disallowance of ₹ 90,11,87,334/-. 13. Before DRP, argument of the assessee was that SSAPL was granted approval for setting up a STPI unit on 16.08.2005. The said licence was transferred to the assessee on 06.01.2006. As per the assessee when it took over the business there was no reconstitution / reorganization. SSAPL did not have any outstanding contracts or obligations which were taken over by the assessee. As per the assessee, the said company did not own any software proprietary licence at all. Assessee also relied on the profit and loss account of SSAPL for the year ended 31.03.2006 in support of its contention that major part of the revenue of the said company were for software services. As per the assessee plant and machinery taken over from SSAPL were less than 20% of the cost of new machinery installed by the assessee. Further, as per the assessee, sale proceeds in respect of exports were all received by it and it had satisfied every condition required for claiming a deduction u/s.10A of the Act. 14. However, the DRP was not ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... xman 129/21 taxmann.com 23. 16. Per contra, the learned DR submitted that assessee had not satisfied the conditions enumerated in sub-section (2) of section 10A of the Act. The claim u/s.10A of the Act was preferred on export sales from a STPI unit taken over by the assessee lock, stock and barrel. Therefore, according to the DR, lower authorities were justified in denying the claim of deduction to the assessee. 17. We have perused the orders and considered the rival submissions. There is no dispute that the business transfer agreement through which assessee purchased the business of SSAPL was entered on 26.12.2005. It is also not disputed that this is a sole unit on which the assessee had preferred claim for deduction u/s.10A of the Act. What was taken over by assessee through this deed of business transfer is set out in clause (i) of agreement dt 26.12.2005 and reproduced by us hereunder : 'Now, therefore, in consideration of the mutual covenants hereinafter recited, the sufficiency of which is hereby acknowledged, the parties agree as follows : 1. Sale and Transfer : 1.1 The vendor hereby sells, transfers, grants, conveys and assigns fully and absolutely ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 1 and Explanation 2 to sub-section (2) of section 80-I shall apply for the purposes of clause (iii) of this sub-section as they apply for the purposes of clause (ii) of that sub-section. The only clause which could possibly be attracted is sub-clause (iii). We cannot say that the undertaking on which the assessee preferred the claim of deduction u/s.10A was formed by transfer of a new business, machinery or plant. Assessee as well as the STPI were already in existence when the business of the STPI was acquired by the assessee. Deduction u/s.10A of the Act was already claimed by the assessee for the very same STPI unit in A. Y. 2006-07. It was allowed as well. Copy of the assessment order for A. Y. 2006-07, placed at pages 287 to 298 of the paper book specifically say that deduction u/s.10A of ₹ 9,96,95,076/- was being granted to it. That assessee has preferred such a claim and it was already considered by the Assessing Officer is clear from para 6 of the assessment order, relevant part of which is reproduced by us hereunder : 6. The assessee-company claimed deduction u/s.10A of the I. T. Act, 1961. In support of this, it had filed Form 56F. From this form i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dication. Ground no.10 is dismissed. 19. The last issue raised by the assessee appears in its grounds 11 and 12 and it is on a disallowance of ₹ 47,51,229/- made u/s.14A of the Act. 20. Assessee had claimed exempt income of ₹ 8,87,677/-. The opening value of its investments were ₹ 34,47,20,392/- and the closing value was ₹ 80,13,48,647/-. Statutory auditors of the assessee in their Tax audit Reports mentioned that a disallowance of ₹ 113,91,75,666/- was disallowance required to be made u/s.14A of the Act. Though the assessee was put on notice, it seems it did not give any explanation to the Assessing Officer. He proposed an addition of ₹ 113,91,75,666/-. 21. Before the DRP first argument of the assessee that the sum of ₹ 113,91,75,666/- was expenditure incurred by it in relation to the STPI unit and was in no way related to any investments giving rise to exempt income. As per the assessee out of the total investments, ₹ 64,66,54,847/-were investments in its foreign subsidiaries. Out of the balance, ₹ 3,30,857/- were in mutual funds and ₹ 15,43,62,943/- alone were invested in Indian subsidiaries. As per the assesse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ee which is relevant on this issue is reproduced hereunder : Schedule - 18 : Interest Financial Charges (Net) Fixed Loans .. 173,928,588 Others .. 161,240,845 335,169433 Less : Interest received on Fixed Deposit (TDS : ₹ 42,115,670) .. 202,511,511 [Previous Year TDS : ₹ 23,858,403] Balance ..132,357,922 It is clear from the narration in the (above) schedule that interest received were on FDs. In our opinion such interest ordinarily cannot be considered as having nexus with the business of the assessee. Such interest would normally fall under the head ' income from other sources'. No doubt, in assessee's case the Assessing Officer has not considered the interest receipt separately under the head 'income from other sources'. But this will not, in our opinion, change the nature of the transaction or character of the receipts. Rule 8D(2) prescribes application of the formula set out therein on the expendit ..... X X X X Extracts X X X X X X X X Extracts X X X X
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