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TMI Blog2018 (10) TMI 1265X X X X Extracts X X X X X X X X Extracts X X X X ..... s-a-vis business generated by the assessee during the year, which in our opinion is no reason for making disallowance keeping in view factual matrix of the case and the explanation submitted by the assessee. We are of the considered view that no disallowance of 20% of the salary expenses is warranted keeping in view factual matrix of the case, which we order deletion .- Decided in favour of the assessee. Additions made u/s. 92 - assessee has purchased software for ₹ 3.2 crore from its foreign parent company based in Shanghai, China which was sold by the assessee for ₹ 3.2 crore to HCL Technologies Limited , without any mark-up for the assessee - Held that:- The contention of the assessee that it has not incurred any expenses nor it did any value addition to software supplied by the foreign parent company cannot be prima-facie accepted on its face value based on material on record and it is for the assessee to support the same with cogent evidences. The complete details to that effect are not placed by the assessee before the authorities below as well before us. Restore the matter back to file of the AO for denovo determination of the issue on merits in accordance wit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... #39;s business is of Installation of software and its applications, During the financial year 2009-10 the assesses has entered into business relationship with HCL Technologies which requires software to be installed and training to be given to its staff. The assessee requires to incur travel expenditure for Engineers to HCL Technologies to provide onsite training and installing services. The local travelling is provided for this contract. The assessee's holding company is in China which requires assessee's Managing Director Mr. Ashish Shah is travel overseas for meetings and for obtaining training which is a prerequisite for business in India. The AO was not satisfied with the replies submitted by the assessee. The AO observed that part of travelling expenses included foreign travelling and further some of the expenses were also incurred for training of its staff. The AO observed that part of the expenses incurred by the assessee were personal in nature while some of the expenses were in the nature of the capital expenses , which led to disallowance of expenses to the tune of 50% of the expenses claimed by the assessee . 4. The assessee filed first appeal bef ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... business guests and details were given which are placed in paper book page no. 1 to 27 . It was submitted that no reason and justification for disallowance of 50% of the expenses were given by both the authorities below. The AR of the assessee submitted that the assessee is subsidiary company of a foreign company . It was submitted that the assessee is professionally managed company and is engaged in providing technical support to the companies to whom the foreign parent company sold equipment / software. It was submitted that the foreign company sold software to HCL Technologies Ltd. through assessee company and assessee is to provide technical support to the said HCL Technologies Ltd.. It was submitted by learned counsel for the assessee that the expenses have been incurred for travelling of employees/guests while coming on visit to India for business purposes. It was submitted that none of the travelling expenses incurred by the assessee were personal in nature nor were these expenses capital in nature. It was submitted that the authorities below allowed 50% of the expenses while the rest of 50% of the expenses were disallowed by Revenue. The learned DR submitted that the assess ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 48,584 972 PF Employer contribution 7,07,774 3,22,633 1,44,20,103 68,95,081 The assessee had stated to have incurred travelling expenses to the tune of ₹ 29,95,103/- with respect to its employees as well business guests travels, of which 50% of the expenses were disallowed by the AO. however Ld. CIT(A) was of view that the travelling expenses claimed by the assessee in its books of accounts and in return of income filed with the Revenue, were to tune of ₹ 23.95 lac instead of ₹ 29.95 lacs as made out by the AO and hence the learned CIT(A) directed for disallowance of 50% of the said travelling expenses aggregating to the tune of ₹ 23.95 lacs incurred by the assessee. The Revenue is not in appeal as to part relief granted by learned CIT(A) which was more of an correcting of an error in taking the correct figure of actual travel expenses incurred by the assessee. We have observed that assessee has submitted complete details as to the travelling expenses which are placed in paper book page no. 1 to 27. T ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of travel expenses. The authorities did in-fact allowed 50% of the travel expenses and it is not a case that entire disallowance of travel expenses were made holding to be non-genuine, personal or capital in nature. No further enquiry was made by lower authorities to bring on record cogent material of discredit version of the assessee to justify disallowance of 50% of travel expenses being personal or capital in nature warranting/justifying disallowance under the provisions of the 1961 Act. Under these circumstances based on appreciation of entire material on record, the assessee did discharge its burden by placing entire material on record and no addition is warranted towards disallowance of 50% of the travelling expenses and we hereby order deletion of additions as were made by the AO and confirmed by Ld. CIT(A). We decide this issue in ground no. 1 in favour of the assessee. The assessee succeeds on this ground. We order accordingly. 7. The second disallowance made by Revenue concerns itself with disallowance of salary expenses to the tune of ₹ 24,70,578/- being 25% (sic. 20%) of the salary expenses debited by the assessee to P L account which was added by the AO in an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... income earned against the expenses incurred is disproportionate. iii) During the financial year 2009-10 the assessee received a contract from HCL Technologies and the contract is for a period of 3 years. Being the initial years of the company it is very likely the company -would have high overheads and salary cost as compared to income being at low levels as customer responses and successful contracts take time. Therefore we respectfully submit that the Ld.AO has disallowed the expenses of ₹ 24,70,578/- arbitrarily by just stating that expenses incurred are disproportionate to the income without finding any discrepancy in the details of expenses filed . The learned CIT(A) rejected the contentions of the assessee vide appellate order dated 20-08-2015, by holding as under:- 5.2. I have carefully considered the facts and circumstances of the case. The P L Account for the A.Y. 2009-10 relevant to present assessment year is as under:- Income 31.03.10 Rs. 31.03.09 Rs. 1 Service charges 24,00,000 0 Sales of Software License ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that the expenses of staff salary and allowances have more than doubled when compared to earlier year despite a marginal increase in bonus payments. The AO has asked the appellant to furnish full details of the expenditure claimed of ₹ 12,352,891. After careful examination, the AO during the course of assessment proceedings, has made a proposal for a disallowance of 2/3 of such expenditure, vide his order sheet entry dated 4.2.2013. However while concluding the assessment, in the light of the explanation submitted, the AO has restricted the disallowance to only 20% (20% of ₹ 12,352,891 is ₹ 24,70,578) even though he has mentioned the disallowance at 25% in the assessment order. Since the appellant has failed to demonstrate properly to the satisfaction of the AO that the entire expenditure was meant for business, the disallowance made by the AO found to be reasonable. Even before me also the learned AR has not given any further evidence to show that the entire expenditure debited under the head staff salary and allowance was incurred only for business purpose. In view of the above discussion I conform the addition made by the AO. The ground is dismissed. 9. A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... jointly with HCL Technologies Limited to National Insurance Company Limited in accordance with the Tripartite contract and this sub-contractor agreement . The tripartite agreement is entered between assessee, HCL Technologies Limited and National Insurance Company Limited wherein the assessee is OEM-CI consortium partner of HCL Technologies Limited , the prime tenderer , for the RFP No. #NIC/IT/RFP/1/2008 dated 7th May 2008 for implementing and commissioning the Enterprise Architecture Solutions for Insurance‟ issued by National Insurance Company Limited for which tripartite agreement was entered into by and between assessee, National Insurance Company Limited and HCL Technologies Limited . The assessee acquired software license from its foreign parent company for ₹ 3.20 crores for meeting its obligation which was then supplied to HCL Technologies Limited for an amount of ₹ 3.20 crores for ultimate supply to National Insurance Company Limited. The said sale and purchase was routed through assessee‟s books of accounts and payments were made and received through assessee‟s bank account, albeit for both the sale and purchase the value of the software was ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... doubted by the Revenue except that it is only considered excessive. The Revenue has not brought on record comparative analysis of other independent entities to bring on record cogent material to prove that the salaries paid to these employees were excessive. The only grievance of the revenue is that the said salary expenses were on the higher side vis-a-vis business generated by the assessee during the year, which in our opinion is no reason for making disallowance keeping in view factual matrix of the case and the explanation submitted by the assessee. We are of the considered view that no disallowance of 20% of the salary expenses is warranted keeping in view factual matrix of the case, which we order deletion . This issue raised in ground number 2 is decided in favour of the assessee. We order accordingly. 11. The third addition concern itself with additions made u/s. 92 of the Act, wherein the AO observed that the assessee has purchased software for ₹ 3.2 crore from its foreign parent company based in Shanghai, China which was sold by the assessee for ₹ 3.2 crore to HCL Technologies Limited , without any mark-up for the assessee . The assessee submitted before t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ies a)For sale of software for ₹ 3.2 crores and b) Service contract for implementation, training and maintenance of software. The sale of software is a licence held by assesee's principal company and the order was obtained from HCL Technologies because of the license held by the principal company. The sale of licence to HCL Technologies does not give rise to profit of asessee company as the licence is held by principal company and there were no efforts made by the asessee company in the sale of this licence. ii) Carrying out FAR analysis (functions performed, assets employed and risk assumed), no profit accrues to assessee company on sale of license to HCL Technologies. iii) The assessee company's role is in the second part of contract relating to implement of software, training of staff at HCL Technologies and maintenance of software. In the second part of the contract, assessee company received full support from the principal company for execution of the contract and technical assistance was given at Nil cost. The replies of the assessee did not found favour with Ld. CIT(A) , who dismissed the appeal of the assessee by holding as under:- 6.2. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gies Ltd. and mark up of 10% was added to the income of the assessee u/s. 92 of the Act. It was submitted that Revenue has not doubted purchases and also no reference was made by the AO to TPO and no TP study was conducted by the Revenue. It was submitted that the assessee purchased the said software from its holding company and sold the same to HCL Technologies Ltd. at the same value i.e. ₹ 3.20 crores . It was submitted that only billing was done by the assessee company while the HCL Technologies Ltd. downloaded the software directly from the websites of the foreign parent company of the assessee. It was submitted that since the assessee did not incur any expenses nor any value additions were done by the assessee to software sold, hence no mark-up was added. It was submitted that additions were made to the tune of 10% as mark up on the sale of software by the learned AO which was later confirmed by learned CIT(A) . It was submitted that services contract/AMC were awarded to the assessee vide sub- contractor agreement dated 21.11.2008 and the assessee benefited from the said sub-contractor agreement awarded in its favour for rendering of services/maintenance/AMC. It is claim ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... HCL Technologies Limited for an amount of ₹ 3.20 crores for ultimate supply to National Insurance Company Limited. The said sale and purchase was routed through assessee‟s books of accounts and payments were made and received through assessee‟s bank account, albeit for both the sale and purchase the value of the software was ₹ 3.20 crores and the assessee did not earned any income/mark-up on it. The assessee earned ₹ 24 lacs from its foreign parent company for services during the year under consideration . The assessee is contending that the assessee has not done any value addition to the software supplied by parent company to HCL Technologies Limited for making ultimate delivery to National Insurance Company Limited and the said software was directly downloaded by HCL Technologies Limited from the website of foreign parent company of the assessee based at Shanghai, China without intervention of the assessee to be ultimately supplied to National Insurance Company Limited under an contractual obligation as stipulated in the agreements . Thus, a claim is made out that no expenses were incurred by the assessee for supply of software as well no value addit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... partner in the tripartite agreement for supply and services/maintenance/ AMC of software and it is the assessee who has entered into all agreements in India. The assessee is a separate tax entity in contradistinction with its foreign parent company based in Shanghai, China. As could be seen from the sub-contractor agreement dated 21.11.2008, a large number obligations are placed on the assessee with respect to sale of software to be made to HCL Technologies Limited for ultimate user by National Insurance Company Limited, even post sale of software. The assessee being consortium partner has to execute and undertaken vast activities by way of participating in RFP, tendering, negotiations etc which include huge efforts and expertise . This entail huge costs both in terms of time , manpower, expertise and cost and involves use of infrastructure including manpower and travelling to participate in the tender and finally after going through all the stipulated processes and procedures to win the tender in its favour outcasting rivals. Thus, the costs associated and incurred in connection with participation in and finally winning tender both direct and indirect costs enter Profit and Loss ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ated responsibilities upon itself in contradistinction to its parent company. Entire revenue model followed by the assessee in its wisdom wherein purchase and sale of software is made without any mark-up as detailed above after winning RFP from National Insurance Company Limited is to be evaluated on the touchstone of commercial prudence and expediency to see that it does not transgress those limits and boundaries as set out by doctrine of commercial expediency to shift profits to foreign tax jurisdiction while Indian tax jurisdiction is burdened with costs. In this situation protection granted by doctrine of commercial jurisprudence shall fail and revenue will be definitely entitle to lift the veil and see behind the smoke screen , the true colours of transaction entered into by the assessee with a view to shift profits to foreign tax jurisdiction. After all commercial expediency involves working in a manner which is commercial expedient for the tax-payer and not to work in the manner so as to shift profits to its foreign parent company and erode tax base in India. There is no such vested right in the assessee to work under the garb of commercial expediency in a manner prejudicial ..... X X X X Extracts X X X X X X X X Extracts X X X X
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