9911796707
TMI Blog2016 (1) TMI 1513X X X X Extracts X X X X X X X X Extracts X X X X ..... The assessee was prevented by sufficient cause as these documents could not be procured before the assessment proceedings. Accordingly we set aside the issue in respect of TP adjustment to the file of TPO for denovo adjudication. Needless to say, the assessee will be allowed a reasonable opportunity of being heard in such proceedings. Thus grounds raised are therefore allowed for statistical purposes. Nature of expenses - disallowance of project expenses by holding the same to be capital expenditure - HELD THAT:- We also take note that in the case of assessee for Assessment year 2003-04 the AO allowed the project expenses as revenue expenditure. However CIT u/s 263 held the same to be erroneous, which order was cancelled by Tribunal by an order [ 2009 (1) TMI 535 - ITAT DELHI ] and appeal filed before Hon ble High Court by revenue also stands dismissed in order .Further, SLP filed by revenue before Apex Court stands dismissed. Decided in favour of assessee. Disallowance of deduction u/s 10B - HELD THAT:- We take note that in the case of appellant for assessment year 2006-07 wherein held set aside the orders of the authorities below on this point and restore the matter back to the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... arges was validly benchmarked applying TNMM as most appropriate method and that no adverse inference could be drawn on this account. 2.3 That the Assessing officer/the TPO erred on facts and in law in computing adjustment on account of international transaction of payment of corporate charges without applying any prescribed methods, thereby, violating the basic principles of TP regulations. 2.4 That the Assessing Officer/the TPO erred one facts and in law in holding that the entire arrangement of the payment of corporate charges is designed to shift profits outside India. 2.5 That the Assessing Officer/The TPO grossly misunderstood and misinterpreted the facts of the cost allocation agreement entered into between the assessee and its AE (Aricent Inc.) 2.6 That the Assessing Officer/the TPO erred on facts and in law in not appreciating that the expenditure on the payment of corporate charges was wholly and exclusively for the purpose of business of the assessee. 2.7 That the Assessing Officer erred in law in not aggregating the transaction of payment of corporate charges with other similar international transactions and erroneously benchmarking it separately. 3 That the Assessing Of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... L-A) Limited, Mauritius, whereby the entire shareholding was acquired by Flextronics Sales marketing (L-A) Limited, Mauritius. Flextronics sold all the software entities globally through a equity consortium. Their consortium was sold to KKR and Sequia Capital and was named as Aricent . Aricent did not exist prior to year 2006. The assessee company is engaged in the business of production of computer software products and provision of software development services for communication industry, through the various 100% Export Oriented Unit (EOUs) set up in software technology park at Gurgaon and Bangalore. The assessee in the course of carrying on of its software development business has entered into the various international transactions with its AE s. The international transactions undertaken by the assessee were established to be at arm s length applying Transactional Net Margin Method ( TNMM ), as the most appropriate method. For application of TNMM, operating profit to total cost (OP/TC) was considered as the base or the profit level indicator. The result of benchmarking analysis is summarized as under: Average of PLI of 28 comparable companies 13.69% PLI of appellant 27.01% 6. Si ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s length price of the transaction of payment of corporate charges was taken at Nil. The relevant extract of the order of the TPO is reproduced below: 1 The assessee has not availed such services from an independent party. The AE has not provided such services to an unrelated entity. Hence a comparison from an independent perspective is not available. 2 As for the cost benefit test, the assessee has not been able to provide any evidence that he has received a benefit that he would not have achieved on his own. 3 The assessee carries out most of the software development for the group. Hence the remaining group has more to depend on the assessee than the other way round 4 The functions and risks of the assessee show that the assessee in any case carries out all the functions that the global management team is stated to be doing. Hence, the assessee should not be expected to pay for a duplicate of its efforts. It may be mentioned finally that the AE is a Cayman Islands entity. Being in a tax heaven, the entire arrangement appears to be designed to transfer profits out of India. Hence by the application of CUP the arms length price in respect of the transaction of availing of corporate ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aged in the management of the day-to-day affairs of the assessee company. Further it would also be appreciated that these senior managerial personnel would otherwise have been on the roll of the assessee company and the entire cost of such employees would, in any case, have been incurred by the assessee. It is respectfully submitted that all functional heads of the assessee company are on the pay roll of Aricent Inc. USA, who participate in the day-to-day management of the company and undertake major strategic decisions. The concerned department in India engaged in the various operations, report to these functional heads from time to time and the performance of the company is reviewed periodically by the functional heads. Apart from performing major strategic management functions, these key personnel are guiding the overall management of their functional areas: The assessee has placed on records, a copy of report dated 12.2.2007 prepared by an independent consultant, viz. Deloitte Tax LLP, USA detailing the administrative services rendered by Aricent Inc. USA and explaining the basis of allocation of cost amongst the group companies. The services rendered by Aricent USA Inc. are ex ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mes from US, so management team being in US and not in India is closer to the customer location thereby resulting in better relationship for customers of the assessee company. It would further be noted that during the relevant previous year the total revenue of the assessee increased to Rs. 871,78,93,100/- from Rs. 635,03,17,939/- in the preceding previous year giving an inclination of 37% in a short span of time. Consequently, the net profit margin increased to Rs. 182,36,16,055/- from Rs. 148,62,48,823/- in the preceding previous year showing an effect of 23% approx. Further, it would be appreciated that the assessee company, a software development service, provider, has its operations in 11 countries through 9 branches and 32 subsidiary companies. Further, customers of the assessee company were scattered in 30 countries. The assessee company, it is reiterated, as part of the Aricent group, is projected as global software development services provider in the communications domain including telecom. In view of the global customer base and wide functions of engineering software services, it was imperative for the assessee company to structure its global operation under the centrali ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Price determined by the TPO and adopted by the Assessing Officer to the extent of royalty payable t the CA Inc Management, USA is not as per the procedure prescribed and same cannot be sustained. We, there, direct the Assessing Officer to adopt the Arm s Length Price of the royalty payable to CA Inc Management, USA as declared by the assessee in both the year . Therefore, it is submitted that, as per the Transfer Pricing Regulation, the mandate for the TPO is to determine the arm s length price of the international transaction applying the most appropriate method of the five methods prescribed under Regulation. In other words, under the Transfer Pricing regulations, the TPO is required to determine the arm s length price of the international transaction considering that such transaction has actually been undertaken by the assessee. In the present case the TPO disallowed the payment of the corporate charge an ad hoc basis without applying properly method for benchmarking the aforesaid international transaction. The benchmarking of share of administrative expenses, therefore, is to be undertaken within the aforesaid framework of the Transfer Pricing regulation, in India. In other wor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ance was placed on the following judgments: - Global Vantedge (P) Ltd. vs. DCIT ITA No. 2763 and 2764/D/2009 (Del) - Kyungshin Industrial Motherson Ltd. vs. DCIt ITA Nno. 1396/D/2009 Without prejudice, in the case of the assessee since the associated enterprise earn/retained only USD 120799 equivalent to Rs. 52,50,528/- in respect of international transactions of allocation of cost for the administrative services, in terms of the aforesaid decision of the Hon ble Tribunal, the adjustment on account of the difference in the arm s length price of such international transactions at best is to be restricted to Rs. 52,50,528 11. The DRP however rejected the claim of the appellant on the following basis: The DRP has considered all the objection in totality. For accepting payments relating to intra group costs, certain conditions must be fulfilled. The DRP has perused the submission made during the hearing and TPO s conclusions. We find that these payments have been evaluated on four broad parameters viz. 1 Evidence that services have been rendered 2 Whether the assessee has benefitted from them 3 Are they duplicate in nature 4 Whether the assessee would have paid the same charges to an u ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ommunications US, Aricent Technologies US, Aricent communications Private Ltd(India) and in subsequent years also included Aricent Mexico, Aricent Technologies UK, Aricent Technologies Denmark ApS, and DataLinx Corporation (US) (collectively, Operating Subsidiaries ). The majority of these operating subsidiaries employ software engineers skilled in the area of telecommunications as well as selling and marketing personnel. each of the entities respective charters is to provide software engineering and consulting service chatters is to provide software engineering and consulting services to tier one global equipment manufacturers, device manufacturers and/ or service providers. However, post the sale of the operating subsidiaries, Aricent US Inc s goal, was to centralize these operating subsidiaries under one organizational charter headed by a management team primarily located in the US. This restructuring was undertaken to provide to a global customer base engaged in the communications sector a compelling value proposition as under: a) An experienced management team based in the US, b) A wide offering of engineering software services given the combined offering of skills provided by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , profitability and financial ratios; h) Explore areas of focus with internal auditors for Aricent India and prepare action plan based on the findings in the internal audit report; i) Overseeing activities of shared services group, which is pool of resources responsible for expenses booking, accounts payable, fixed assets accounting, auditing, financial reporting, revenue recognition etc. j) Ensuring implementation of financial policies for Aricent India; k) Overseeing financial processes, reviewing and approving any exceptions to the policy; and l) Overseeing statutory compliances. From perusal of the affidavit, it would be appreciated that the associated enterprise has provided wide spectrum of corporate management and strategic services to the assessee. On the basis of such affidavits, it would be appreciated that the assessee has received services from the associated enterprise in term of management support services agreement entered between the parties and the alleged finding of the TPO that there was no evidence of receipt of such services by the assessee does not hold good. The aforesaid affidavit of the key managerial personnel, on the pay roll of Aricent Inc., USA, is bein ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion. 15. We have considered the submission and perused the material placed on record. A coordinate bench of the Tribunal in the case of sister concern of the assessee in the case of Hughes Systique India (P) Ltd. vs. ACIT in ITA No. 5420/D/2011 and 6057/D/2012 A.Y. 2007- 08 and 2008-09 dated 5.7.2013 had admitted additional evidence and held as under: 14. We have heard rival contentions and perused the material available on record. Firstly, we should adjudicate whether the additional evidence should be admitted or not. The claim of the assessee is that these documents came in its possession after the assessment. In our view, the aspect of applicability of CUP method has not been properly dealt with by DRP and TPO also did not consider CUP method for bench marking of international transaction. As the facts emerge, the order of DRP does not throw effective light to reject the assessee s CUP method. The plea of the assessee is that the documents have been subsequently procured and are necessary for proper ascertainment of T.P. adjustment. Under these circumstances, we are of the view that assessee s application for admission of additional evidence deserves to be admitted. The assessee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s amounting to ₹ 1,93,12,834 holding the same to be capital expenditure incurred on projects which were yet to take off. It has further been urged that Assessing Officer did not appreciate that the said project expenses were routine expenditure incurred on training in the course of carrying on of business and are allowable as deduction. 11. On this issue, the Assessing Officer noted that assessee has claimed expenditure of ₹ 1,93,12,834 on account of project expenses. Assessing Officer asked the Assessee to explain as to why the same should not be capitalized. Assessee submitted that company has incurred the expenses in respect of various software development projects. Such expenses were routine business expenses incurred in the course of software business. Such expenses were not incurred for acquisition of any capital asset nor resulted in enduring benefit of capital field to be recorded as capital expenditure. The Assessing Officer did not accept the above submission. He proceeded to hold the same to be capital expenditure and disallowed the same. 12. Against this order, assessee is in appeal before us. 13. We have heard both the counsels and perused the record. We fi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... STPI units, the assessee was debarred from claiming exemption under section 10B of the Act in the assessment year 2003-04 or any other subsequent assessment year(s) for other STPI units by relying upon the provisions of sub-section (5) of section 80HHE of the Act. 24. Before DRP the appellant relied upon the judgment of jurisdictional High Court in the case of CIT vs. Legato Systems India (P) Ltd. vs. ITO 203 CTR 101 and, decision of Tribunal in the case of appellant for Assessment year 2003-04, 2004-05 and 2006-07. The DRP however rejected the objection on the ground that appeal before High Court has not acquired legal finality. 25. Having considered the submission, we take note that in the case of appellant for assessment year 2006-07, identical issue was remitted to the filed AO by observing in order dated 21.1.2011 as under: 8. It was submitted by the learned counsel for the assessee that the issue is squarely covered in favour of the assessee by the decision of Hon'ble jurisdictional High Court in the case of CIT vs. Legato Systems India Pvt. Limited, 203 CTR 101 (Del.). The order of Hon'ble High Court in this regard is as under :- The Tribunal has recorded a finding ..... X X X X Extracts X X X X X X X X Extracts X X X X
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