Aricent Technologies (Holdings) Ltd., New Delhi v. DCIT, New Delhi

ITA 4699/DEL/2010 | 2006-2007
Pronouncement Date: 21-01-2011 | Result: Allowed

Appeal Details

RSA Number 469920114 RSA 2010
Assessee PAN AAACH0152P
Bench Delhi
Appeal Number ITA 4699/DEL/2010
Duration Of Justice 2 month(s) 24 day(s)
Appellant Aricent Technologies (Holdings) Ltd., New Delhi
Respondent DCIT, New Delhi
Appeal Type Income Tax Appeal
Pronouncement Date 21-01-2011
Appeal Filed By Assessee
Order Result Allowed
Bench Allotted A
Tribunal Order Date 21-01-2011
Date Of Final Hearing 10-01-2011
Next Hearing Date 10-01-2011
Assessment Year 2006-2007
Appeal Filed On 28-10-2010
Judgment Text
IN THE INCOME TAX APPELLATE TRIBUNAL (DELHI BENCH A : NEW DELHI) SHRI R.P. TOLANI JUDICIAL MEMBER AND SHRI SHAMIM YAHYA ACCOUNTANT MEMBER ITA NO.4699/DEL./2010 (ASSESSMENT YEAR : 2006-07) M/S. ARICENT TECHNOLOGIES (HOLDING) LIMITED VS. DCIT CIRCLE 11(1) (ERSTWHILE FLEXTRONICS SOFTWARE SYSTEMS LTD.) NEW DELHI. 5 JAIN MANDIR MARG (ANNEXE) CONNAUGHT PLACE NEW DELHI. (PAN : AAACH0152P) (APPELLANT) (RESPONDENT) ASSESSEE BY : S/SHRI AJAY VOHRA NEERAJ JAIN AND RAGHUVANSHI ADVOCATES REVENUE BY : SHRI ASHOK PANDEY CIT DR ORDER PER SHAMIM YAHYA ACCOUNTANT MEMBER : THIS APPEAL BY THE ASSESSEE IS DIRECTED AGAINST TH E ORDER OF THE ASSESSING OFFICER FOR THE ASSESSMENT YEAR 2006-07 D ATED 30.9.2010. 2. THE FIRST ISSUE RAISED IS THAT THE ASSESSING OFF ICER ERRED IN LAW IN PROPOSING AN ADJUSTMENT OF ` 2 97 96 990 TO THE ARMS LENGTH PRICE OF THE INTERNATIONAL TRANSACTION OF PAYMENT OF INCENTIVE T O EMPLOYEES ON THE BASIS OF THE ORDER PASSED U/S 92CA(3) OF THE INCOME-TAX A CT BY THE TRANSFER PRICING OFFICER (TPO). ITA NO.4699/DEL./2010 2 3. THE ASSESSEE IN THIS CASE IS ENGAGED IN THE BUSI NESS OF DESIGNING PACKAGED SOFTWARE AND ALSO PROVIDES SOFTWARE CONSUL TANCY SERVICES. IN THIS CASE A REFERENCE WAS MADE TO THE TPO NEW DELHI FO R DETERMINING ARMS LENGTH PRICING U/S 92CA(3) IN RESPECT OF INTERNATIO NAL TRANSACTION ENTERED INTO BY THE ASSESSEE DURING THE FINANCIAL YEAR 2005 -06. THE TPO IN HIS ORDER DATED 17.9.2009 PROPOSED AN ADDITION OF ` 2 97 96 990 BEING THE DIFFERENCE BETWEEN BOOK VALUE OF INTERNATIONAL TRANSACTION AND ARMS LENGTH PRICING. THE ASSESSING OFFICER ASKED THE ASSESSEE TO EXPLAIN WHY THE DIFFERENCE BETWEEN THESE BOOK VALUES SHOULD NOT BE BROUGHT TO TAX. CONSIDERING ASSESSEES REPLY THE ASSESSING OFFICER WAS NOT SAT ISFIED AND HE FOUND THAT THE ADDITION MADE BY THE TPO IN THIS REGARD WAS APP ROPRIATE. THE ASSESSEE HAS AGITATED THIS MATTER BEFORE THE DRP WHICH HAS A DJUDICATED THE MATTER AS UNDER :- 2. ARM'S LENGTH PRICE U/S. 92 CA(3): 2.1 IN THIS CASE THE TPO PASSED TRANSFER PRICING ORDER U/S 92CA(3) OF I.T. ACT ON 17.09.2009 BY MAKING UPWARD ADJUSTMENT OF RS.L 97 96 990/- ON THE ARM'S LENGTH PRICE OF INTERNATIONAL TRANSACTIONS. WHILE MAKING THIS ADJUS TMENT THE TPO HAS OBSERVED THAT THE ASSESSEE HAS RECEIVED PAY MENT TOWARDS TECHNICAL SERVICES RENDERED TO ITS AE. THE PLEA BY THE ASSESSEE THAT IT IS AN INCENTIVE PAID TO EMPLOYEES IS A COLOURABLE DEVICE TO AVOID PAYING A MARK-UP ON THESE PAYMENTS. THE OP/TC MARGIN OF THE ASSESSEE IS 27.95% EXCLUDING T HE INTERNATIONAL TRANSACTION OF RS.106 608 194 AS THE ASSESSEE HAS NOT DISCLOSED THE RECEIPT AS AN INTERNATIONAL TRANS ACTION. SINCE THE PAYMENT HAS BEEN MADE WITHOUT ANY MARK-UP SUCH ITA NO.4699/DEL./2010 3 PAYMENT IS NOT AT ARM'S LENGTH. THE ASSESSEE HAS SH OWN A PROFIT MARGIN OF 27.95% (OP/TC). THIS IS THE MORE APPROPRI ATE PLI IN THE CASE OF THE ASSESSEE AS SALES ARE MADE TO AE AN D THAT MAKES IT A CONTROLLED TRANSACTION. THEREFORE A MARK UP OF 27.95% HAS BEEN APPLIED TO THE PAYMENT OF RS.106 608 194 RECEI VED BY THE ASSESSEE HOLDING IT TO BE PAYMENT RECEIVED FOR REND ER SERVICE. ACCORDINGLY THE UPWARD ADJUSTMENT OF RS.2 97 96 990 / - HAS BEEN MADE. WHILE REACHING TO THIS CONCLUSION THE T PO HAS MADE FOLLOWING OBSERVATIONS:- (I) THE METHOD USED IS CUP OR TNMM DEPENDING ON THE TRANSACTION. THE ASSESSEE HAD USED OP / SALES AS THE PLI. HOWEVER FOR THE APPLYING THE MARK-UP OP /TC HAS BEEN USED. (II) THE AMOUNT RECEIVED FROM THE AE WHICH THE ASSESSEE CLAIMS TO BE INCENTIVE TO BE PAID TO EMPLOYEES HAS BEEN TREATED AS PAYMENT OF SERVICES RENDERED. 2.2 THE ASSESSEE HAS NOT ACCEPTED THE ABOVE ADJUSTM ENTS IN THE ARM'S LENGTH PRICE OF INTERNATIONAL TRANSACTION S AND HAS OBJECTED TO THE SAME. IT HAS BEEN SUBMITTED THAT PU RSUANT TO TAKING OVER OF THE ASSESSEE COMPANY BY FLEXTRONICS INTERNATIONAL SINGAPORE PTE LTD. THE LATTER HAS DE CIDED TO PAY AN INCENTIVE TO THE EMPLOYEES OF THE ASSESSEE COMPANY IN ORDER TO RETAIN THEM IN THE ORGANIZATION. SINCE IT WAS ANTIC IPATED THAT THE SOME OF THE EMPLOYEES MAY LEAVE THE ORGANIZATION P URSUANT TO THE TAKEOVER 10% OF INCENTIVE WAS TO BE PAID DURIN G ASSESSMENT YEAR 2005-06; 40% DURING A.Y. 2006-07 AN D 50% DURING A.Y. 2007-08. SINCE THE PAYMENT FROM A FOREI GN COMPANY CANNOT BE MADE DIRECTLY TO THE EMPLOYEES OF ANOTHER COMPANY IN INDIA THE SAME WAS MADE TO THE ASSESSEE COMPANY. ASSESSEE ALSO HAS AN OFFICE IN GERMANY CERTAIN EMP LOYEES WERE BASED IN GERMANY THEREFORE PAYMENT WAS FIRST MADE TO AE AND THEN IT WAS ACCORDINGLY DISBURSED TO THEM. T HEREFORE IT HAS BEEN SUBMITTED THAT AMOUNT RECEIVED FROM THE AE BY WAY OF REIMBURSEMENT OF SUCH PAYMENT OF INCENTIVE WAS INEXTRICABLY LINKED WITH THE CORRESPONDING EXPENSES . THEREFORE SUCH UPWARD ADJUSTMENT WAS NOT CORRECT. ITA NO.4699/DEL./2010 4 2.3 THE FINDINGS OF THE TPO AND THE SUBMISSIONS MAD E BY THE ASSESSEE HAVE BEEN TAKEN INTO CONSIDERATION. IN THE BODY OF TRANSFER PRICING ORDER THE TPO HAS DISCUSSED IN DET AIL THE ISSUE OF MARKUP ON THE PAYMENT RECEIVED BY THE ASSESSEE C OMPANY. IT HAS BEEN CONCLUDED THAT THESE RECEIPTS ARE REGULAR FEATURE STARTING FROM F.Y. 2004-05 TO 2006-07 IF IT HAD BEE N AN INCENTIVE THE SAME WOULD HAVE BEEN MADE AT ONE GO. SUCH PAYMENT IN THE GARB OF INCENTIVE HAS BEEN MADE ONLY TO THE INDIAN SUBSIDIARY. THE REASON OF NOT DIRECTLY PAYIN G THE INCENTIVE TO THE EMPLOYEES COULD NOT BE SATISFACTOR ILY EXPLAINED BY THE ASSESSEE. IT COULD ALSO NOT BE EXPLAINED AS TO WHY SOME EMPLOYEES HAVE BEEN PAID IN EXCESS OF THE SUPPOSED TARGET INCENTIVE. THERE IS ENOUGH FORCE IN THE OBSERVATION OF THE TPO THAT NO AE SHALL MAKE A PAYMENT WITHOUT ANY SERVICE /REASON OF PROFIT. THERE WAS ENOUGH REASON OF STAYING BACK OF THE EMPLOYEES OF THE ASSESSEE COMPANY BECAUSE BEING TAK EN OVER BY AN INTERNATIONAL CORPORATION WAS MORE ADVANTAGEO US TO THEM. THE ASSESSEE HAS RELIED ON A LETTER WRITTEN ' BY PRESIDENT AND M.D. TO ONE OF THE EMPLOYEES AND RESPONSES ON F REQUENTLY ASKED QUESTIONS (FAQS) FOR SUCH A HUGE PAYMENT WHI CH DOESN'T APPEAR TO BE LOGICAL. THEREFORE OBSERVATION OF THE TPO THAT THERE WAS NO POLICY DOCUMENT BASED ON WHICH T HIS PAYMENT WAS MADE IS VERY CORRECT. THUS WE FIND NO COMPELLING REASONS TO INTERFERE WITH THE ORDER OF TPO AND THE ASSESSING OFFICER AND HENCE THE SAME ARE CONFIRMED. 4. WE HAVE HEARD BOTH THE COUNSELS AND PERUSED THE RECORD. LEARNED COUNSEL FOR THE ASSESSEE FURTHER SUBMITTED THAT IN THE FIRC SUBMITTED TO THE RBI IT HAS BEEN CLEARLY MENTIONED THAT THESE ARE I NCENTIVE PAYMENTS. IT IS FOR THE DEPARTMENT TO PROVE THAT THE PAYMENTS ARE R ECEIVED AGAINST THE SERVICES RENDERED BY THE ASSESSEE. MOREOVER IN EA RLIER ASSESSMENT YEAR 2005-06 AND SUBSEQUENT ASSESSMENT YEAR 2007-08 ASS ESSMENT WAS DONE U/S 143(3) AND NO ADJUSTMENT IN THIS REGARD WAS DONE. EVEN IF WE REWORK THE ITA NO.4699/DEL./2010 5 COMPUTATION THE SAME WOULD BE AT THE HIGHER SIDE. WE FIND THAT IN THE TRANSFER PRICING DOCUMENTATION VARIOUS INTERNATION AL TRANSACTIONS WERE BENCHMARKED APPLYING TRANSACTIONAL NET MARGIN METHO D (TNMM) AS THE MOST APPROPRIATE METHOD. IN THE TRANSFER PRICING D OCUMENTATION FOR THE PURPOSE OF APPLYING TNMM THE OPERATING PROFIT MARG IN OF THE ASSESSEE WAS COMPARE WITH THE OPERATING PROFIT MARGIN OF COMPARA BLE COMPANIES. THE RESULT OF THE BENCHMARKING ANALYSIS IS SUMMARISED A S UNDER :- OP/TC% OP/SALES% AVERAGE OF PLI OF 63 COMPARABLE COMPANIES 15.78% 11.29% PLI OF FSS 27.95% 21.85% THE TPO IN HIS ORDER HELD THAT THE PAYMENT OF INCEN TIVE TO EMPLOYEES IS TOWARDS TECHNICAL SERVICES RENDERED BY THE ASSESSEE TO THE AE AND THAT THE AE HAS ENTERED INTO SUCH TRANSACTION TO AVOID PAYIN G A MARK-UP ON THE PAYMENTS. IN THE TRANSFER PRICING DOCUMENTATION S INCE THE ASSESSEE HAD SHOWN ITS OPERATING PROFIT MARGIN AT 27.95% (OP/TC) THE TPO CONSIDERING SUCH MARGIN NOTIONALLY IMPUTED A MARKUP ON THE SAI D SUM OF ` 10 66 08 194 BEING THE PAYMENT OF INCENTIVE TO EMPLOYEES BY THE ASSOCIATED ENTERPRISE AND ACCORDINGLY PROPOSED AN ADJUSTMENT OF ` 2 97 96 990. THE TPOS OBSERVATION IN THIS REGARD AND THE ASSESSEES CONTE NTIONS ARE SUMMARISED AS UNDER :- ITA NO.4699/DEL./2010 6 RE: CONTENTIONS OF THE ASSESSEE: IT IS SUBMITTED THAT PURSUANT TO TAKE OVER OF ASSES SEE COMPANY BY THE ASSOCIATED ENTERPRISE VIZ. FLEXTRONICS INT ERNATIONAL SINGAPORE PTE. LTD. THE LATTER HAD DECIDED TO PAY AN INCENTIVE TO THE EMPLOYEES IN ORDER TO RETAIN THEM WITH THE O RGANIZATION. FLEXTRONICS INTERNATIONAL SINGAPORE PTE. LTD. WAS AN ORIGINAL EQUIPMENT MANUFACTURERS AND DID NOT HAVE ANY PREVIO US EXPERIENCE OF THE SOFTWARE BUSINESS. IT WAS ANTICIP ATED THAT SOME OF THE EMPLOYEES MAY LEAVE THE ORGANIZATION IN THAT VIEW OF THE MATTER. THEREFORE THE OBJECTIVE OF INCENTIV E PAID BY THE ASSOCIATED ENTERPRISE WAS TO RETAIN THE EMPLOYEES O F THE APPELLANT WHICH CONSTITUTED THE CORE ASSET IN A SOF TWARE BUSINESS. THE LETTER DATED 18TH OCTOBER 2004 ISSUED TO THE EMPLOYEES AT THE TIME OF THE GRANT OF THE ABOVE INCENTIVE IS ENC LOSED AT PAGES 318 TO 320 OF OUR SUBMISSIONS. THE INCENTIVE PLAN W AS ISSUED WHICH STATES THE FOLLOWING SCHEME: A) 10% TO BE PAID ON OCTOBER 1 2004 B) 15% TO BE PAID ON APRIL 1 2005 C) 25% TO BE PAID ON OCTOBER 1 2005 D) 25% TO BE PAID ON APRIL 1 2006 E) 25% TO BE PAID ON OCTOBER 1 2006 AS PER THE LETTER ISSUED TO THE EMPLOYEES 10% OF T HE INCENTIVE WAS TO BE PAID DURING ASSESSMENT YEAR 2005-06 40% DURING ASSESSMENT YEAR 2006-07 AND 50% DURING ASSESSMENT Y EAR 2007-08. THE PAYMENTS OF THE AFORESAID INCENTIVE WERE ALSO E VIDENCED BY (I) FIRC (II) DETAILS OF DISBURSEMENT TO THE EMPLO YEES AND (III) RECONCILIATION OF THE AMOUNT RECEIVED FROM THE AE A ND DISBURSEMENT TO THE EMPLOYEES. ALSO NOTE NO.7 IN TH E AUDITED ACCOUNTS CLEARLY PROVIDES THE FACTUM OF RECEIPT OF THE AMOUNT FROM FLEXTRONICS INTERNATIONAL LIMITED SINGAPORE T OWARDS PAYMENT OF INCENTIVES TO THE EMPLOYEES. ITA NO.4699/DEL./2010 7 THE GROUNDS ON WHICH THE TPO PROPOSED AN ADJUSTMENT IS CONTENDED IN SERIATIM AS UNDER: 1) COMMENTS OF TPO (I) IT WILL BE NOTED THAT SUCH PAYMENTS ARE A REGU LAR FEATURE EVERY YEAR STARTING FROM FY 2004-05 TO FY 2006-07. (II) IF IT ACTUALLY WAS AN INCENTIVE PAYMENT IT C OULD HAVE BEEN MADE AT ONE GO. BUT THIS IS NOT THE CASE. REPLY: IT IS SUBMITTED THAT THE OBJECTIVE OF INCENTIVE PAI D BY THE ASSOCIATED ENTERPRISE WAS TO RETAIN THE EMPLOYEES O F THE APPELLANT WHICH CONSTITUTED CORE ASSET IN A SOFTWAR E BUSINESS. SINCE IT WAS ANTICIPATED THAT SOME OF THE EMPLOYEE S MAY LEAVE THE ORGANIZATION PURSUANT TO THE TAKEOVER AS PER T HE LETTER ISSUED TO THE EMPLOYEES 10% WAS TO BE PAID DURING ASSESSMENT YEAR 2005-06 40% DURING ASSESSMENT YEAR 2006-07 AN D 50% DURING ASSESSMENT YEAR 2007-08. 2) COMMENTS OF TPO (III) THE APPELLANT HAD BEEN ASKED TO PROVIDE DETA ILS WHETHER THERE WAS ANY STATED POLICY DOCUMENT IN THIS REGARD. THE APPELLANT HAS NOT SUBMITTED (TPO ORDER) ANY SUCH DOCUMENT. REPLY: THE APPELLANT HAD PLACED ON RECORD COPY OF LETTER I SSUED TO THE EMPLOYEES (REFER PAGES 318 TO 321) WHICH CLEARLY S TATES THAT THE FLEXTRONICS INTERNATIONAL SINGAPORE PTE. LTD. AND THE APPELLANT HAVE DECIDED TO GRANT INCENTIVE TO THE EM PLOYEES COMPRISING OF STOCK OPTION GRANT AND PERFORMANCE-BA SED CASH BONUS. THE SAID LETTER CLEARLY ESTABLISHES THAT THE PAYMENT OF INCENTIVE WAS MADE TO THE EMPLOYEES PURSUANT TO ACQ UISITION OF ITA NO.4699/DEL./2010 8 THE APPELLANT'S COMPANY BY FLEXTRONICS INTERNATIONA L SINGAPORE PTE. LTD. TO RETAIN THE KEY EMPLOYEES. FURTHER SAMPLE COPIES OF SALARY SLIPS AND FORM 16 HAVE ALSO BEEN ENCLOSED IN OUR SUBMISSION FROM PAGES 284 TO 3 17 OF OUR SUBMISSIONS TO SUBSTANTIATE THE DISBURSEMENT 284 & 313 OF THE INCENTIVE. 3) COMMENTS OF TPO (IV) ADMITTEDLY THIS PAY-OUT HAS BEEN MADE ONLY T O THE INDIAN SUBSIDIARY. REPLY: IT IS SUBMITTED THAT SINCE ONLY THE APPELLANT WAS A CQUIRED BY FLEXTRONICS INTERNATIONAL SINGAPORE PTE. LTD. THE SAID PAY-OUT WAS ACCORDINGLY MADE ONLY TO THE EMPLOYEES OF THE A PPELLANT. HENCE THE CONTENTION OF THE TPO IS WITHOUT ANY BAS IS. 4) COMMENTS OF TPO (V) IF INDEED THE PAYMENT WAS AN INCENTIVE TO BE PAID IDENTIFIABLE EMPLOYEES IT COULD HAVE BEEN MADE DIRECTLY BY THE PARENT COMPANY TO THE EMPLOYEES. THERE WAS NO NEED TO USE THE APPELLANT AS A CONDUIT. IT WOULD BE APPRECIATED THAT ANY PAYMENT FROM A FOR EIGN COMPANY CANNOT BE MADE DIRECTLY TO THE EMPLOYEES OF ANOTHER COMPANY IN INDIA EVEN IF IT IS AN ASSOCIATED COMPAN Y. IT WAS IMPERATIVE FOR THE ASSOCIATED COMPANY TO UTILIZE SE RVICES OF THE APPELLANT FOR DISTRIBUTION OF SUCH INCENTIVE PAYMEN T. IT WOULD BE APPRECIATED THAT IT WAS NOT PRACTICAL FOR THE FO REIGN COMPANY TO REMIT FUNDS INDIVIDUALLY TO NUMEROUS EMPLOYEES I N INDIA DIRECTLY BY TAKING THEIR INDIVIDUAL BANK DETAILS. F URTHER IT IS SUBMITTED THAT THE ASSESSEE DID NOT BOOK ANY INCOME OR EXPENSE FOR THE INCENTIVE PAID BY THE PARENT COMPANY AND TH E SAME ALSO DID NOT IMPACT THE PROFITS OF THE APPELLANT. ITA NO.4699/DEL./2010 9 5) COMMENTS OF TPO (VI) IT WILL BE NOTICED IN THE TABLE AT ANNEXURE-I SOME EMPLOYEES HAVE BEEN PAID IN EXCESS OF THE SUPPOSED 'TARGET INCENTIVE'. REPLY: THE INCENTIVES GIVEN TO THE EMPLOYEES WERE COMPUTED BASED ON THE BASIS OF THE PREDETERMINED TARGETS WHICH ARE DE TAILED ON PAGES 367 TO 370. IT IS PERTINENT TO NOTE THAT FEW EMPLOYEES HAVE ALSO BEEN PAID LESSER AMOUNT THAN THE TARGET I NCENTIVE. THE REASON FOR SUCH DIFFERENCE IN THE TARGET INCENTIVE AND THE ACTUAL PAYMENT IS THE FACT THAT THE INCENTIVES ARE COMPUTE D ON SOME BENCHMARKS INSTITUTED FOR THE EMPLOYEES. 6) COMMENTS OF TPO (VII) TOWARDS THE END OF THE LIST THE NAMES OF SO ME EMPLOYEES ARE MISSING. ADMITTEDLY ALL MONEY HAS NOT BEEN PAID OUT. USD 9 247 REMAINS WITH TPO ORDER THE APPELLANT. THE NAMES OF CERTAIN EMPLOYEES WERE INADVERTENTLY O MITTED FROM THE LIST OF EMPLOYEES SUBMITTED TO THE TPO. TH E COMPLETE LIST OF EMPLOYEES HAS BEEN ATTACHED AT PAGES 271 TO 283. IT IS SUBMITTED THAT THE BALANCE AMOUNT OF USD 9 24 7 LEFT WITH THE APPELLANT IS ON ACCOUNT OF EXCHANGE RATE FLUCTU ATION. THE BALANCE AMOUNT HAS BEEN TRANSFERRED TO THE INCOME O F THE COMPANY IN ASSESSMENT YEAR 2008-09 AND HAS ACCORDIN GLY BEEN TAXED. 7) COMMENTS OF TPO (VIII) SOME OF THE EMPLOYEES WHO ARE SUPPOSED TO HA VE RECEIVED THE PAYMENT ARE SAID TO BE BASED IN GERMANY. IT DOES NOT SEEM LOGICAL THAT THE MONEY WILL FIRST BE REMITTED TO INDIA AND WILL THEN FLOW TO ITA NO.4699/DEL./2010 10 GERMANY. AS STATED AT (V) ABOVE THE PAYMENT COULD HAVE DIRECTLY BEEN REMITTED TO GERMANY. REPLY: IT IS SUBMITTED THAT THE APPELLANT ALSO HAS AN OFFI CE IN GERMANY AND THEREFORE CERTAIN EMPLOYEES ARE BASED IN GERMA NY TO CARRY OUT ONSITE ASSIGNMENTS AT THE CUSTOMER LOCATIONS. S UCH EMPLOYEES BEING RELATED TO INDIAN ENTITY IT IS THE REFORE IMPERATIVE THAT PAYMENT IS SUPPOSED TO BE MADE BY T HE ASSOCIATED ENTERPRISE TO THE APPELLANT ONLY AND THE N ACCORDINGLY IT WAS SUPPOSED TO BE DISPERSED TO SUCH EMPLOYEES. IN THE BACKGROUND OF AFORESAID THE ASSESSEE HAD SU BMITTED THAT IT WOULD BE APPRECIATED THAT THE SAID SUM OF ` 10 66 08 194 RECEIVED FROM THE ASSOCIATED ENTERPRISE WAS MERELY IN THE NATURE OF REIMBURSEMEN T TOWARDS INCENTIVE PAID TO THE EMPLOYEES AND DOES NOT HAVE ANY ELEMENT OF I NCOME. FURTHER ITEM NO.7 TO THE NOTES TO ACCOUNTS IN THE AUDITED ACCOUN TS CONCLUSIVELY STATES THE FACT THAT THE SAID AMOUNT OF ` 10 66 08 194 RECEIVED FROM THE ASSOCIATED ENTERPRISE WAS OF THE CHARACTER OF REIMBURSEMENT A ND DID NOT HAVE ANY ELEMENT OF INCOME THEREIN. IT IS FURTHER SUBMITTED THAT THE AMOUNT RECEIVED FROM THE AE BY WAY OF REIMBURSEMENT OF SUCH PAYMENT OF INCENTIVE WAS INEXTRICABLY LINKED WITH THE CORRESPONDING EXPENSES . THUS IT HAS BEEN CLAIMED THAT ASSESSEE HAS MERELY FACILITATED PAYMEN T OF INCENTIVE TO THE EMPLOYEES AND ACTED AS A CONDUIT WHILE MAKING DISBU RSEMENT OF INCENTIVE TO THE EMPLOYEES ON BEHALF OF THE AE. THEREFORE IT W OULD BE APPRECIATED THAT ITA NO.4699/DEL./2010 11 THE AMOUNT OF REIMBURSEMENT RECEIVED FROM AE IS DIR ECTLY CONNECTED WITH THE CORRESPONDING PAYMENT OF INCENTIVES TO THE EMPL OYEES. 5. WE HAVE CAREFULLY CONSIDERED THE SUBMISSIONS. W E FIND THAT THE TPO HAS NOT OBJECTED TO THE METHOD OF TRANSFER PRICING DOCUMENTATION. THE PLI OF THE ASSESSEE IS CONSIDERABLY HIGHER THAN THE AVE RAGE OF THE COMPARABLES. ONLY PAYMENT OF INCENTIVES TO THE ASSESSEES EMPLOY EES BY THE PARENT COMPANY SUBSEQUENT TO TAKE OVER HAS BEEN SUBJECTED TO ENHANCEMENT/MARKUP. WE FIND CONSIDERABLE COGENCY I N THE SUBMISSION OF THE ASSESSEE. THE AMOUNT INVOLVED HAS BEEN PAID AS INCENTIVE TO EMPLOYEES OF THE ASSESSEE COMPANY BY THE PARENT COMPANY. THI S HAS BEEN DONE PURSUANT TO THE TAKE OVER TO PROVIDE INCENTIVE TO T HE EMPLOYEES OF THE ASSESSEE COMPANY TO REMAIN IN THE EMPLOYMENT. IT I S NOT UNDERSTANDABLE HOW PAYMENT IN ONE-GO WOULD BE BETTER THAN SPREADIN G OVER SEVERAL YEARS WHICH HAS BEEN CITED AS ONE OF THE OBJECTIONS OF TH E TPO. IN OUR OPINION SPREADING IT OVER SEVERAL YEARS IS A MORE BETTER WA Y TO PROVIDE INCENTIVE. THE REVENUES CONTENTION THAT THE PAYMENT HAS BEEN MADE FOR SERVICES RENDERED IS BASED ON SURMISES AS NOTHING HAS BEEN P RODUCED TO SHOW THAT IT IS A PAYMENT FOR SERVICES RENDERED TO THE PARENT CO MPANY. ALL THE DOCUMENTARY EVIDENCE IN THIS REGARD SUPPORTS THE CA SE OF THE ASSESSEE. WE FURTHER FIND THAT NO ADJUSTMENT IN THIS REGARD HAS BEEN MADE IN EARLIER ITA NO.4699/DEL./2010 12 ASSESSMENT YEAR 2005-06 AND SUBSEQUENT ASSESSMENT Y EAR 2007-08 WHEREIN ALSO SIMILAR INCENTIVES WERE PAID AND THE FACTS WER E IDENTICAL. THE PAYMENT HAS BEEN DONE IN ORDER TO PROVIDE INCENTIVE IN ORDE R TO RETAIN THE EMPLOYEES WHICH WOULD ENSURE THE CONTINUED PROFITABILITY OF T HE ASSESSEE COMPANY. THERE IS NO MERIT IN TPOS COMMENT THAT THE PAYMENT S OF INCENTIVES COULD HAVE BEEN MADE DIRECTLY TO THE EMPLOYEES AND THERE WAS NO NEED TO USE THE ASSESSEE AS A CONDUIT. ASSESSEE HAS RIGHTLY POINTE D OUT THAT PAYMENT FROM A FOREIGN COMPANY CANNOT BE MADE DIRECTLY TO EMPLOYEE S OF OTHER COMPANY IN INDIA EVEN IF IT IS AN ASSOCIATED COMPANY. THE TPO S COMMENT THAT SOME EMPLOYEES HAVE BEEN PAID IN EXCESS OF THE SUPPOSED TARGET INCENTIVE. THIS IS NOT A VERY COGENT BASIS. ASSESSEE HAS POIN TED OUT THAT THERE ARE ALSO INSTANCES WHERE FEW EMPLOYEES ARE PAID LESSER AMOUN T THAN THE TARGET INCENTIVE. REASONS FOR SUCH DIFFERENCES HAS BEEN S AID TO BE THE FACT THAT INCENTIVES ARE COMPUTED ON SOME BENCHMARK INSTITUTE D FOR THE EMPLOYEES. THE TPOS COMMENT THAT ALL AMOUNT HAS NOT BEEN SPEN T AS US $ 9 247 REMAINED HAS BEEN CONTROVERTED BY THE ASSESSEE BY S UBMITTING THAT THIS AMOUNT HAS REMAINED ON ACCOUNT OF EXCHANGE FLUCTUAT ION. THE ADVERSE INFERENCE THAT TOWARDS THE END OF LIST THE NAMES O F SOME OF THE EMPLOYEES ARE MISSING HAS BEEN EXPLAINED TO BE INADVERTENTLY MISSING FROM THE LIST SUBMITTED TO THE TPO. THE COMPLETE LIST OF THE EMP LOYEES HAS BEEN ATTACHED ITA NO.4699/DEL./2010 13 AT PAGES 271 TO 283. TPOS ADVERSE INFERENCE THAT PAYMENTS MADE TO EMPLOYEES BASED IN GERMANY HAS BEEN CONTROVERTED BY THE ASSESSEE BY SUBMITTED THAT ASSESSEE HAS ALSO AN OFFICE IN GERMA NY AND THEREFORE CERTAIN EMPLOYEES ARE BASED IN GERMANY TO CARRY OUT ONSITE ASSIGNMENTS. SUCH EMPLOYEES BEING RELATED TO INDIAN ENTITY IT IS NEC ESSARY THAT THE PAYMENT WAS TO BE PAID BY THE ASSOCIATED COMPANY THROUGH TH E ASSESSEE ONLY. IN THE BACKGROUND OF AFORESAID DISCUSSION WE AGREE WIT H THE CONTENTION THAT THE SUM OF ` 10 66 08 194 RECEIVED FROM THE ASSOCIATED ENTERPRIS E/PARENT COMPANY WAS MERELY IN THE NATURE OF REIMBURSEMENT T OWARDS INCENTIVE PAID TO THE EMPLOYEES AND DOES NOT HAVE ANY ELEMENT OF I NCOME. THE MATTER HAS BEEN DULY DISCLOSED IN THE FINANCIAL STATEMENT OF A CCOUNTS. MOREOVER THE AMOUNT RECEIVED FROM THE ASSOCIATED ENTERPRISES WA S IN FACT REIMBURSEMENT OF SUCH PAYMENT OF INCENTIVE AND WAS INEXTRICABLY L INKED WITH CORRESPONDING EXPENSES. IF THE WORKING IS RE-WORKE D TAKING THE AMOUNT RECEIVED AS ASSESSEES RECEIPT AND PAYMENT AS ASSES SEES EXPENSES STILL THE PLI WOULD BE FAVOURABLE AS COMPARABLE TO THE AVERAG E COMPARABLES. HENCE WE SET ASIDE THE ORDER OF ASSESSING OFFICER AND DEC IDE THE ISSUE IN FAVOUR OF ASSESSEE. 5. THE NEXT ISSUE RAISED IS THAT THE ASSESSING OFFI CER ERRED IN DISALLOWING DEDUCTION U/S 10B AMOUNTING TO ` 1 35 11 53 643 FOLLOWING ORDER PASSED U/S ITA NO.4699/DEL./2010 14 143(3) READ WITH SECTION 263 OF THE ACT DATED 28.12 .2008 FOR ASSESSMENT YEAR 2003-04 HOLDING THAT DEDUCTION WAS NOT ADMISSI BLE. 6. ON THIS ISSUE THE ASSESSING OFFICER NOTED THAT ASSESSEE COMPANY HAS CLAIMED AN EXEMPTION OF ` 1 35 11 53 643 U/S 10B OF THE ACT. HE FURTHER NOTED THAT IN VIEW OF THE DISALLOWANCE OF THE EXEMP TION CLAIMED FOR THE ASSESSMENT YEAR 2003-04 VIDE ORDER DATED 28.12.2008 U/S 143(3) READ WITH SECTION 263 ASSESSEE WAS REQUIRED TO JUSTIFY THE E XEMPTION SO CLAIMED IN THE YEAR UNDER CONSIDERATION. THE ASSESSING OFFICER EN QUIRED AS UNDER :- YOU HAVE CLAIMED DEDUCTION U/S 10B OF THE IT ACT T O THE EXTENT OF ` 38 83 45 866/-. PLEASE FURNISH EVIDENCE TO JUSTIFY THE CLAIM OF DEDUCTION U/S 10B IN RESPECT OF ALL THE UNITS AS DEDUCTION U/S 80HHE HAS BEEN CLAIMED IN EARLIER YEAR. THE DEDUCT ION U/S 10B IS NOT ALLOWABLE ONCE THE DEDUCTION IS CLAIMED U/S 80HHE OF THE IT ACT IN VIEW OF PROVISIONS OF SUBSECTION 5 OF SE CTION 80HHE. ALSO FURNISH THE DETAILS OF DEDUCTION CLAIMED UNIT WISE IN EARLIER YEARS EITHER U/S 80HHE AND 10B. THE ASSESSEE RESPONDED AND SUBMITTED COPIES OF FORM NO.56G IN RESPECT OF ALL THE UNITS ON THE INCOME OF WHICH THE EXEMPTION WAS CLAIMED. THE ASSESSING OFFICER HELD THAT IN VIEW OF THE DETAILED DISCUSSION MADE BY DCIT CIRCLE 11(1) NEW DELHI VIDE HIS ORDER ASSES SEES CLAIM OF EXEMPTION OF ` 38 83 45 866/- STANDS DISALLOWED. 7. AGAINST THIS ORDER THE ASSESSEE IS IN APPEAL BE FORE US. 8. IT WAS SUBMITTED BY THE LEARNED COUNSEL FOR THE ASSESSEE THAT THE ISSUE IS SQUARELY COVERED IN FAVOUR OF THE ASSESSEE BY TH E DECISION OF HON'BLE ITA NO.4699/DEL./2010 15 JURISDICTIONAL HIGH COURT IN THE CASE OF CIT VS. LE GATO 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 OF FACT THAT T HE RESPONDENT- ASSESSEE WAS NOT AN OLD UNIT ALREADY IN EXISTENCE S O AS TO BE DISENTITLED TO THE BENEFIT OF EXEMPTION UNDER S.10A OF THE IT ACT. IT HAS ON THAT FINDING REMITTED THE MATTER BACK T O THE AO WITH THE FOLLOWING DIRECTIONS : WE THEREFORE SET ASIDE THE ORDERS OF THE AUTHORI TIES BELOW ON THIS POINT AND RESTORE THE MATTER BACK TO THE FILE OF THE AO WITH A DIRECTION TO ALLOW EXEMPTION UNDER S. 10A IN BOTH THE YEARS IN CASE THE ASSESSEE IS FOUND TO HAVE SATISFIED ALL OTHER REQUISITES ENVISAGED IN THE SCH EME OF S. 10A OF THE ACT. IN CASE THE EXEMPTION UNDER S. 10 A CANNOT BE ALLOWED FOR THE REASONS OF NOT SATISFYING THE REQUISITES THE CLAIM OF DEDUCTION UNDER S. 80HHE S HALL BE ALLOWED AFTER PROVIDING OPPORTUNITY TO MEET THE REQ UISITES. 2. THE ABOVE DIRECTION IS IN OUR VIEW JUST AND PR OPER HENCE DOES NOT CALL FOR ANY INTERFERENCE ESPECIALLY WHEN THE QUESTION (WHETHER THE ASSESSEE) SATISFIES THE PRE-REQUISITES STIPULATED FOR THE PURPOSE OF GETTING BENEFIT UNDER S. 10A IS A MA TTER LEFT TO BE DETERMINED BY THE AO. SO ALSO THE ENTITLEMENT OF T HE ASSESSEE TO SEEK DEDUCTION UNDER S. 80HHE HAVING BEEN LEFT TO B E DETERMINED BY THE AO SUBJECT TO ASSESSEES SATISFYING THE PRE -REQUISITES STIPULATED FOR THE GRANT OF SUCH A BENEFIT UNDER TH E SAID PROVISION. NO QUESTION OF LAW MUCH LESS A SUBSTANTIAL QUESTION OF LAW ARISES FOR OUR CONSIDERATION IN THIS APPEAL TO WARRANT ITS ADMISSION. THE APPEAL IS ACCORDINGLY DISMISSED IN LIMINE. 9. RESPECTFULLY FOLLOWING THE PRECEDENT AS ABOVE W E SET ASIDE THE ORDER OF ASSESSING OFFICER AND REMIT THE ISSUE BACK TO HI S FILE TO CONSIDER THE ISSUE AFRESH IN LIGHT OF THE ABOVE DISCUSSION. NEEDLESS TO ADD ASSESSEE SHOULD BE GRANTED ADEQUATE OPPORTUNITY OF BEING HEARING. ITA NO.4699/DEL./2010 16 10. THE LAST ISSUE IS THAT THE AO ERRED IN MAKING D ISALLOWANCE OF PROJECT EXPENSES 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 APPRECIAT E THAT THE SAID PROJECT EXPENSES WERE ROUTINE EXPENDITURE INCURRED ON TRAIN ING IN THE COURSE OF CARRYING ON OF BUSINESS AND ARE ALLOWABLE AS DEDUCT ION. 11. ON THIS ISSUE THE ASSESSING OFFICER NOTED THAT ASSESSEE HAS CLAIMED EXPENDITURE OF ` 1 93 12 834 ON ACCOUNT OF PROJECT EXPENSES. ASSESS ING 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 C APITAL ASSET NOR RESULTED IN ENDURING BENEFIT OF CAPITAL FIELD TO BE RECORDED AS CAPITAL EXPENDITURE. THE ASSESSING OFFICER DID NOT ACCEPT THE ABOVE SUBM ISSION. HE PROCEEDED TO HOLD THE SAME TO BE CAPITAL EXPENDITURE AND DISA LLOWED THE SAME. 12. AGAINST THIS ORDER ASSESSEE IS IN APPEAL BEFOR E US. 13. WE HAVE HEARD BOTH THE COUNSELS AND PERUSED THE RECORD. WE FIND THAT ASSESSEE VIDE ITS LETTER DATED NOVEMBER 6 2009 SUB MITTED IN THE PAPER BOOK PAGE NO.229 AND DULY EXPLAINED THAT ` 1 93 12 834 WAS IN RESPECT OF TRAINING ITA NO.4699/DEL./2010 17 OF VARIOUS PERSONNEL AND SUCH EXPENSES WERE ROUTINE EXPENSES INCURRED IN THE COURSE OF CARRYING ON SOFTWARE BUSINESS. IN T HIS CONNECTION ASSESSEE ALSO REFERRED TO HON'BLE APEX COURT DECISION IN THE CASE OF EMPIRE JUTE MILLS 224 ITR 1 AND SEVERAL OTHER CASE LAWS. WE HAVE CAREFULLY CONSIDERED THE SUBMISSIONS. IT IS UNDISPUTED THAT THE AFORESA ID AMOUNT WAS SPENT FOR TRAINING OF THE PERSONNEL. BY ANY STRETCH OF IMAGI NATION THESE EXPENSES CANNOT BE SAID TO HAVE RESULTED IN ENDURING BENEFIT TO BE CLASSIFIED AS CAPITAL EXPENDITURE. HENCE WE SET ASIDE THE ORDER OF THE ASSESSING OFFICER ON THE ISSUE AND DECIDE THE ISSUE IN FAVOUR OF THE ASSESSE E. 14. IN THE RESULT THIS APPEAL FILED BY THE ASSESSE E STANDS ALLOWED. ORDER PRONOUNCED IN THE OPEN COURT ON THIS 21 ST DAY OF JANUARY 2011. SD/- SD/- (R.P. TOLANI) (SHAMIM YAHYA) JUDICIAL MEMBER ACCOUNTANT MEMBER DATED THE 21 ST DAY OF JANUARY 2011 TS COPY FORWARDED TO: 1.APPELLANT 2.RESPONDENT 3.CIT 4.DRP-I NEW DELHI. 5.CIT(ITAT) NEW DELHI. AR ITAT NEW DELHI.