Mastek Limited, Ahmedabad V. The Addl.CIT.,Range-4, Ahmedabad

ITA 3120/AHD/2010

• Counselvise Citation: 312020514 RSA 2010
• Duration Of Justice: 1 year(s) 3 month(s) 5 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 29-02-2012
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: A
• Assessment Year: 2006-2007
• Appeal Filed On: 24-11-2010
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Assessee Lawyers: S N SOPARKAR
• Keywords: Business income; Transfer pricing; Residential status; Double taxation relief; International transaction; Earning of tax free income; Deemed to accrue or arise in india; Proportionate interest; Retrospective amendment; Permanent establishment; Wholly owned subsidiary; Fair market value; Bad and doubtful debts; Commercial expediency
• Section: 92C; 143(3); 72(1); 92F; 92A; 14A; 10B; 148; 92

Judgement Text

, , , , IN THE INCOME TAX APPELLATE TRIBUNAL A BENCH, AHMEDABAD , . ! !,'# ' $ BEFORE SHRI MUKUL KR.SHRAWAT, JUDICIAL MEMBER AND SHRI A. MOHAN ALANKAMONY, ACCOUNTANT MEMBER ./ I.T.A. NO.3120/AHD/2010 ( ! & ! & ! & ! & / / / / ASSESSMENT YEAR : 2006-07) MASTEK LIMITED 804/805, PRESIDENT HOUSE OPP.C.N. VIDYALAYA NEAR AMBAWADI CIRCLE AMBAWADI, AHMEDABAD-380 006 ! ! ! ! / VS. THE ADDL.CIT RANGE-4 AHMEDABAD ' '# ./() ./ PAN/GIR NO. : AAACM 9908 Q ( '* / // / APPELLANT ) .. ( +,'*/ RESPONDENT ) '* - '/ APPELLANT BY : SHRI S.N. SOPARKAR, A.R. +,'* . - ' / RESPONDENT BY : SHRI V.K. GUPTA WITH SHRI KARTAR SINGH !/ . 0#/ // / DATE OF HEARING : 21/12/2011 1 & . 0# / DATE OF PRONOUNCEMENT : 29/02/2012 '2/ O R D E R PER SHRI MUKUL KR. SHRAWAT, JUDICIAL MEMBER : THIS APPEAL HAS BEEN FILED ON 24/11/2010 BY THE A SSESSEE 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 IS SUES RAISED BEFORE US; CERTAIN ORDERS OF THE REVENUE AUTHORITIES WERE INV OLVED, PASSED FOR THE YEAR UNDER CONSIDERATION, CHRONOLOGICALLY AS FOLLO WS:- ITA NO. 3120/AHD/2010 MASTEK LIMITED VS. ADDL.CIT ASST.YEAR - 2006-07 - 2 - (1) AN ORDER OF 92CA(3) OF IT ACT DATED 12/10/200 9 BY ACIT (TPO)-I, AHMEDABAD. (2) AN ORDER U/S.143(3) (A DRAFT ORDER U/S.144-C) D ATED 11.12.2009 / 24.12.2009 BY THE ACIT RANGE-4, AHMEDA BAD. (3) AN ORDER U/S.144C(5) DATED 28/09/2010 PASSED BY DISPUTE RESOLUTION PANEL, AHMEDABAD. (4) AN ORDER U/S.144C R.W.S. 143(3) DATED 26.10.201 0 BY ACIT, RANGE-4, AHMEDABAD. A) FACTS : - 2. THE APPELLANT IS A DOMESTIC LIMITED COMPANY INCO RPORATED IN INDIA ON 14 TH MAY-1982. AS INFORMED THE APPELLANT IS A SOFTWARE DEVELOPMENT COMPANY AND WORKED AS A GLOBAL INFORMAT ION TECHNOLOGY SERVICES PROVIDER. THE SERVICES WERE OFF-SHORE A S WELL AS ON SITE SERVICES; HENCE OPERATED THROUGH ITS SUBSIDIARIES A T OTHER COUNTRIES, VIZ. USA, UK, GERMANY, SINGAPORE, MALAYSIA. IT IS INFO RMED THAT THE ASSESSEE-COMPANY PROVIDES COMPOSITE DELIVERABLES TO THE CLIENTS ONE OF ITS ASSOCIATE ENTERPRISE (IN SHORT A.E.) IS MASTEK U.K.LTD. (IN SHORT MUK) IS A 100% SUBSIDIARY; ESTABLISHED IN THE YEAR 1992. THIS SAID A.E. IS CONTRIBUTING SUBSTANTIAL REVENUE AND FOR THE YEA R UNDER CONSIDERATION STATED TO BE 60% OF THE TOTAL REVENUE OF THE MASTEK GROUP. 2.1. THE ASSESSEE-COMPANY HAS FILED T HE RETURN FOR A.Y. 2006-07 ON 31.10.2006 DECLARING TOTAL INCOME AT RS.61,28,14 0/-, HOWEVER THE ASSESSMENT WAS MADE U/S.144C R.W.S. 143(3) VIDE AN ORDER DATED 26.10.2010 ON ASSESSED INCOME OF RS.22,46,55,290/-; HENCE CHALLENGED IN THIS APPEAL. IT WAS FOUND BY THE REVENUE DEPART MENT THAT ITA NO. 3120/AHD/2010 MASTEK LIMITED VS. ADDL.CIT ASST.YEAR - 2006-07 - 3 - INTERNATIONAL TRANSACTION WAS INVOLVED WITH AN ASSO CIATE ENTERPRISE (A.E.) , THEREFORE REFERRED TO TRANSFER PRICING OFF ICER U/S.92CA ON 30/09/2008. THE ORDER U/S.92CA(3) OF DIT (TRANSFER PRICING) IS DATED 12.10.2009. A DRAFT ASSESSMENT U/S.144C DATED 11/1 2/009 WAS ALSO FORWARDED TO THE ASSESSEE. AND FINALLY THE DIRECTI ONS OF THE DISPUTE RESOLUTION PANEL U/S.144C(5) DATED 28/09/2010 HAS A LSO BEEN RECEIVED BY THE ASSESSING OFFICER TO MAKE AN ASSESSMENT ACCORDI NGLY, I.E. THE IMPUGNED ASSESSMENT NOW BEFORE US UNDER APPEAL. 2.2. REASON GIVEN IN THE IMPUGNED ORDERS F OR MAKING REFERENCE U/S.92CA TO TPO WAS THAT AS PER 3 CEB AUDIT REPORT, THE ASSESSEE HAD INTERNATIONAL TRANSACTION WITH ITS ASSOCIATE ENTE RPRISES AND THE DETAILS OF THOSE ENTERPRISES AND THE AMOUNT OF THE TRANSACT ION INVOLVED WERE STATED TO BE AS UNDER:- SR.NO. NAME & ADDRESS OF AES DESCRIPTION OF TRANSACTION WITH AES AMOUNT PAID/RECD AS PER BOOKS (RS.) 1 MASTEK UK LTD. I) SOFTWARE SERVICES, II) COMMON INFRASTRUCTURE COSTS III) REIMBURSEMENT OF TRAVEL & OTHER COSTS 299,33,35,552 1,15,79,429 1,45,24,952 2 MAJESCO MASTEK NEW JERSEY I) SOFTWARE SERVICES II) REIMBURSEMENT OF TRAVEL & OTHER COSTS 35,17,44,575 2,16,23,772 3 MASTEK GMBH GERMANY I) SOFTWARE SERVICES II) REIMBURSEMENT OF TRAVEL & OTHER COSTS 4,01,61,499 6,24,149 4. MASTEK ASIA PACIFIC PTE LTD. SINGAPORE I) SOFTWARE SERVICES II) REIMBURSEMENT OF PERSONAL AND OTHER COSTS 2,52,66,475 9,49,748 5. MASTEK MSC SDN BHD, MALAYSIA I) SOFTWARE SERVICES II) REIMBURSEMENT OF TRAVEL & OTHER COSTS 2,25,45,120 17,04,627 ITA NO. 3120/AHD/2010 MASTEK LIMITED VS. ADDL.CIT ASST.YEAR - 2006-07 - 4 - 6. CARRETEK LLC, USA I) PROVISION OF INFORMATION TECHNOLOGY ENABLED SERVICES II) REIMBURSEMENT OF ACTUAL COSTS FOR DATA LINES TRAVEL & OTHERS COSTS 5,04,84,337 2,33,04,757 TOTAL : 355,78,48,992/- 2.3. THE TPO HAD PICKED UP FUNCTION ASSET RISK ANALYSIS (FAR) OF M/S.MASTEK UK (MUK) AND THEREAFTER SUGGESTED FOLLOW ING THREE ADJUSTMENTS:- (A)INTERNATIONAL TRANSACTION WITH MASTEK UK (MUK) FOR SOFTWARE SERVICES UPWARD ADJUSTMENT RE QUIRED OF RS.18,62,45,100/- (B) HUMAN RESOURCES MANAGEMENT SERVICES WITH MASTEK UK ADJUSTMENT REQUIRED RS. 2,92,22,683/- (C) EXCESS CREDIT PERIOD GRANTED TO THE A.E. 11,22,281/- -------------------- TOTAL ADJUSTMENT SUGGESTED BY T.P.O. RS.21,65,90,064 ALL THE THREE ADJUSTMENTS AND OTHER ADDITIONS MADE IN THE IMPUGNED ASSESSMENT ORDER ARE NOW UNDER APPEAL, THE REFORE, THE GROUND- WISE ADJUDICATION IS AS UNDER:- ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN L AW, THE ADDITIONAL COMMISSIONER OF INCOME-TAX RANGE-4, AHMEDABAD ('LD. AO') ERRED IN CONCLUDING THE ASSESSMENT UNDER SECTION 143(3) OF T HE INCOME TAX ACT, 1961 ('THE ACT') READ WITH SECTION 144C OF THE ACT ON THE BASIS OF DIRECTIONS ISSUED UNDER SECTION 144C(5) OF THE ACT BY THE HON'BLE DISPUTE RESOLUTION PANEL, AS FOLLOWS: 1. GROUND NO. 1 - RE-COMPUTATION OF THE ARM'S LENG TH PRICE ('ALP') OF THE INTERNATIONAL TRANSACTIONS OF SOFTWA RE SERVICES DISTRIBUTED BY MASTEK (UK) LIMITED ('MUK') I. THE LD. AO HAS ERRED IN LAW AND ON FACTS IN RELATIO N TO THE RE- COMPUTATION OF THE ALP OF THE INTERNATIONAL TRANSAC TIONS OF SOFTWARE SERVICES DISTRIBUTED BY MUK (ASSOCIATED EN TERPRISE) BY MAKING AN ADJUSTMENT OF RS.18,62,45,100. ITA NO. 3120/AHD/2010 MASTEK LIMITED VS. ADDL.CIT ASST.YEAR - 2006-07 - 5 - II. THE LD. AO HAS ERRED IN LAW AND ON FACTS IN D ISREGARDING THE DISTRIBUTION OPERATIONS OF MUK AND CONSIDERING THE OPERATIONS OF MUK AS THAT OF A MARKETING SERVICE PROVIDER, WIT HOUT GIVING WEIGHT-AGE TO INTER ALIA THE KEY SELLING FUNCTIONS INVOLVING NEGOTIATING AND CONCLUDING CUSTOMER CONTRACTS AND T HE KEY RISKS VIZ. MARKET AND CREDIT, ASSUMED BY MUK. III. THE LD. AO HAS ERRED IN LAW AND ON FACTS IN R EJECTING THE DISTRIBUTION COMPARABLES, PROVIDED IN THE TP STUDY AND IN ADOPTING THE COMPARABLE SET WHICH COMPRISES OF COMP ANIES CARRYING OUT MARKETING SUPPORT ACTIVITIES IN US REG ION. FURTHER, THE LD. AO OUGHT TO HAVE CONSIDERED THE DIFFERENCES IN FUNCTIONS, ASSETS AND RISKS PERFORMED AND ALSO THE GEOGRAPHICA L DIFFERENCES WHILE SELECTING THE COMPARABLES AND THEREAFTER PROV IDED 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 ERRE D IN LAW AND ON FACTS IN MAKING AN ADJUSTMENT TO THE ARM'S LENGTH P RICE OF THE SAID INTERNATIONAL TRANSACTIONS WITHOUT GIVING BENE FIT 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 HEREINA FTER REFERRED TO AS MIL) WAS INCORPORATED ON 14/05/1982. THE APPELLAN T IS A GLOBAL INFORMATION TECHNOLOGY SERVICES PROVIDER. THE APPEL LANT IS OFFERING SOFTWARE DEVELOPMENT AND ITS RELATED SERVICES. THE APPELLANT HAS OVERSEAS SUBSIDIARIES OR ASSOCIATED ENTERPRISES (AE). FOR O VERSEAS CLIENTS, THE APPELLANT PROVIDES SERVICES THROUGH ITS AES SITUATE D OUTSIDE INDIA. THE SERVICES INCLUDES OFFSHORE SERVICES AND ONSITE SERV ICES. ONE OF THE SUBSIDIARY IS MASTEK UK LTD. (IN SHORT MUK). AT TH IS JUNCTURE, OUR ATTENTION WAS DRAWN THAT MUK HAS WORKED AS A DISTR IBUTOR OF THE SOFTWARE SERVICES TO THE CUSTOMERS IN THE COUNTRY U K, AND THIS IS ONE OF ITA NO. 3120/AHD/2010 MASTEK LIMITED VS. ADDL.CIT ASST.YEAR - 2006-07 - 6 - THE CONTROVERSY RAISED BY THE TPO. OUR ATTENTION H AS ALSO BEEN DRAWN THAT FOR THE YEAR UNDER CONSIDERATION THE REVENUE G ENERATED BY MUK WAS MORE THAN 60% OF THE TOTAL REVENUE OF THE ASSESSEE. 3.1. THE START POINT FOR THE CONTROVERSY I N HAND IS BECAUSE OF AN OBSERVATION OF THE TPO THAT ON THE OPERATIVE TURNOV ER OF RS.355.82 CRORES THE ASSESSEE HAD SHOWN OPERATING PROFIT ON COST AT 12.62% AS AGAINST THE OPERATING PROFIT ON COST AT 26.02% IN THE IMMEDIATE PRECEDING ASSESSMENT YEAR. AN ENQUIRY WAS RAISED TO EXPLAIN THE REASON OF FALL IN OPERATING PROFIT. IN THIS REGARD, THE PRELIMINARY EXPLANATION OF THE ASSESSEE WAS THAT THERE WAS A NEW PROFIT SHARING AG REEMENT WITH MUK. THAT AGREEMENT HAS BEEN REFERRED TO AS MASTER AGREEMENT DATED 30/03/2005. FROM THE SIDE OF THE ASSESSEE, FAR ANALYSIS WAS FURNISHED. THAT ANALYSIS SHALL BE DISCUSSED IN THE LATER PART OF THIS ORDER. MEANWHILE IT IS WORTH TO MENTION THAT ON THE BASIS OF THE SAI D FAR ANALYSIS THE CONTENTION OF THE ASSESSEE BEFORE THE TPO WAS THAT THE MUK HAS FUNCTIONED AS A DISTRIBUTOR. THE DISTRIBUTION AC TIVITIES OF MUK WERE, SUCH AS, IDENTIFYING THE CUSTOMERS, ESTABLISHING CO NTACTS, SOLICITING ENQUIRIES, MANAGING OF RELATIONSHIP. ALL THESE A CTIVITIES WERE PERFORMED IN UK AND MUK WAS APPOINTING ADVERTISING AGENCIES F OR ADVERTISEMENT OF SOFTWARE SERVICES IN NEWSPAPER JOURNALS, ETC. IT WAS INFORMED THAT THE MUK HAS ENTERED INTO CONTRACTS AND NEGOTIATED WITH THE CUSTOMERS IN UK. ON SIGNING OF THE CONTRACT, MUK HAS PROVIDED A LL REQUISITE DETAILS, TIME LIMIT OF COMPLETION, WARRANTY PERIOD AND OTHER SPECIFIC COMMITMENTS. THE ASSESSEE HAS ALSO FURNISHED THE DETAILS OF ALL OTHER FUNCTIONS PERFORMED BY MUK ON ONE HAND ,AND ON THE OTHER HAND, THE FUNCTIONS PERFORMED BY MIL. ON THE BASIS OF THE F AR ANALYSIS THE TPO HAD SUMMARIZED THE FUNCTIONS PERFORMED BY MUK AS B ELOW:- ITA NO. 3120/AHD/2010 MASTEK LIMITED VS. ADDL.CIT ASST.YEAR - 2006-07 - 7 - 1) IDENTIFYING CUSTOMERS 2) ESTABLISHING CONTACTS 3) SOLICITING ENQUIRIES 4) MANAGING CUSTOMER RELATIONSHIPS 5) APPOINTMENT OF AGENCIES OR ENGAGING INTO ADVERTISEM ENT AND SALES PROMOTION. 6) NEGOTIATION OF CONTRACTS AND SIGNING OF CONTRACTS O N CONCLUDING. 7) AGREEING THE SCOPE DELIVERABLES AND TIME SCHEDULES WITH THE CUSTOMERS. 3.2. ACCORDING TO TPO, FIRST FIVE FUNCTIONS, I.E. I DENTIFYING THE CUSTOMERS, ESTABLISHING THE CONTRACTS, SOLICITATION OF THE ENQUIRIES, MANAGEMENT OF RELATIONSHIP AND APPOINTMENT OF AGENC IES WERE PURELY MARKETING ACTIVITIES. FURTHER, AS PER TPO, CERTAIN FUNCTIONS, SUCH AS, NEGOTIATION OF CONTRACTS, SIGNING OF CONTRACTS, FIX ATION 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 LIABILI TY RISK, TECHNOLOGY RISK, CREDIT RISK, MAN-POWER RISK AND FOREIGN EXCHANGE RI SK, WERE REMAINED WITH MIL. TPO HAD EVEN STATED THAT NORMAL DISTRIBU TORS RISK LIKE INVENTORY RISK, FOREIGN EXCHANGE RISK AND PROFIT RI SK WERE NOT EXISTED WITH MUK. ACCORDING TO TPO, MUK DID NOT RECEIVE THE DE LIVERY 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 RESP ECT OF FIXATION OF ARMS 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 ITA NO. 3120/AHD/2010 MASTEK LIMITED VS. ADDL.CIT ASST.YEAR - 2006-07 - 8 - 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, IT WAS ALLEGED THAT MUK HAD NO NON-RECURRING EXPENSES. THE MUK HAS RECEIVED ADMITTEDLY 5.5% NET PROFIT. BECAUSE OF TH E SAID FIXED PERCENTAGE OF PROFIT, THE TPO HAS STATED THAT THE M UK HAS NOT FUNCTIONED LIKE AN INDEPENDENT DISTRIBUTION COMPANY. AS PER T PO, AN INDEPENDENT DISTRIBUTION COMPANY EARNS FLUCTUATING PROFIT. THE TPO HAS DISCUSSED THE METHOD OF PREPARATION OF BILL AND NOTED THAT THE BI LLS RAISED BY THE ASSESSEE-COMPANY TO MUK WERE BASED UPON THE REVENUE COLLECTED FROM THE CLIENTS AND AFTER REDUCING THE FRONT OFFICE CO ST OF MUK, A NET PROFIT OF 5.5% WAS GIVEN. AS PER TPO THE ASSESSEE( MIL) W AS RAISING BILLS ON THE BASIS OF THE THIRD PARTY RECEIPTS AFTER CONSIDE RING MUK AS A FRONT OFFICE. LASTLY, ACCORDING TO HIM, EXPENSES WOULD HA VE BEEN BORNE BY THE MUK, HAD IT FUNCTIONED AS AN INDEPENDENT DISTRIBUTO R. 3.5. THEREAFTER, THE TPO HAS DISCUSSED ONE O F THE CLAUSE OF THE AGREEMENT WITH MUK THROUGH WHICH IT WAS AGREED UPON THAT MUK SHALL BE ENTITLED TO RETAIN AN ARMS LENGTH RETURN ON TH E REVENUES RECEIVED FROM CUSTOMERS IN UK. AT THE END OF EACH MONTH, MASTEK INDIA USED TO DETERMINE THE TOTAL TRANSFER PRICE DUE FROM MUK FOR SERVICES RENDERED DURING THAT MONTH AND THEN ISSUE AN INVOICE IN GREA T BRITAIN POUNDS. ON THE BASIS OF INFORMATION, THE TPO HAS CITED AN EXAM PLE OF THE COMPENSATION FOR MUK AND THE RELATED TRANSFER PRICE OF MASTEK INDIA IN THE FOLLOWING MANNER:- REVENUE FROM UK CLIENT 1000 LESS: ITA NO. 3120/AHD/2010 MASTEK LIMITED VS. ADDL.CIT ASST.YEAR - 2006-07 - 9 - FRONT OFFICE COST OF MUK 200 ARMS LENGTH PERCENTAGE OF REVENUES AS DETERMINED FROM TIME TO TIME 55 TRANSFER PRICE FOR MASTEK 745 NOTE : FRONT OFFICE COSTS SHALL INCLUDE PERSONAL C OST TRAVEL, LODGING, LOCAL CONVEYANCE SALES PROMOTION PR & MKTG CONSULTING SEMINAR & CONVEYANCE INSURANCE RENT, RAT ES, TAXES LEGAL & PROF FEES AUDIT FEES DOUBTFUL DEBTS OTHERS. 3.6. AN ANOTHER POINT HAS ALSO BEEN RAISED THAT THE TANGIBLE AND INTANGIBLE ASSETS HAVE BELONGED TO THE ASSESSEE-COM PANY. THE TPO HAS DRAWN A CONCLUSION THAT ON THE BASIS OF THE FAR ANA LYSIS AND THE ACTIVITIES PERFORMED BY MUK THE SAID AE HAS ACTED A S A FRONT OFFICE OF THE PARENT COMPANY AS ALSO MERELY A MARKETING ENTIT Y. THEREAFTER, A CONCLUSION WAS DRAWN THAT THE PROFIT HAS BEEN ATTRI BUTED TO MUK ON THE BASIS OF VALUE ADDED EXPENSES INCURRED BY IT. SINCE 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 COMPARA BLES CHOSEN BY THE ASSESSEE. HE HAS MENTIONED THE DEFECTS IN THOSE CO MPARABLES. THE TPO, THEREUPON, HAS DRAWN A CONCLUSION THAT THE REFERRED COMPARABLE COMPANIES WERE IN PRODUCT-DISTRIBUTION AND NOT IN S ERVICE-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 A S FOLLOWS:- (A) AS A DISTRIBUTOR, ASSESSEE TAKES NORMAL RISK RELATED TO BUSINESS RISK EXCEPT RISK RELATED TO INVENTORY. ITA NO. 3120/AHD/2010 MASTEK LIMITED VS. ADDL.CIT ASST.YEAR - 2006-07 - 10 - (B) THE ASSESSEE ENTERS INTO NEGOTIATION WITH THE B UYER AND STRIKES A DEAL AND SIGNS THE CONTRACT, IT IS CARRYI NG OUT SELLING FUNCTIONS. (C) THE COMPENSATION TO A DISTRIBUTOR SHOULD BE R EIMBURSEMENT OF OPERATING COST PLUS VOLUME RELATED COMMISSION. (D) EMPLOYEES QUALIFICATION AND STRENGTH AND IN TH IS REGARD THE ASSESSEE SUBMITS CASE STUDIES SAYING INVOLVEMENT OF MUK EMPLOYEES RELATED TO THIRD PARTY ACCOUNT. (E) PROVISION REGARDING REWARD RELATING TO SELLING FUNCTION IN UK TAX LAWS. (F) RELYING ON THE RULING OF HON'BLE ITAT KOLKATA IN TH E CASE OF DEVELOPMENT CONSULTANT PVT.LTD. VS. DCIT, CIRCLE-11 (ITA NOS.79 & 80/KOL/2008), STATING THAT MODEL SIMILAR T O IT WAS ACCEPTED AS DISTRIBUTION OF SERVICES. 3.8. THE TPO HAS GIVEN HIS REASONING AS UNDER:- (A) THE ASSESSEE HAS STATED THAT MUK IS ASSUMING MARKET RISK AND CREDIT RISK WITH REGARD TO KEY FUNCTIONS OF SEL LING. IN FACT EXPOSURE TO THESE RISKS IS MORE TO THE ASSESSEE COM PANY AS COMPARED TO MUK AS ANY REDUCTION IN REVENUE WILL HU RT HUGE SET UP AND INFRASTRUCTURE CREATED BY THE ASSESSEE COMPA NY AS COMPARED TO MUK WHICH IS MERELY CUSTOMER FACING ENT ITY AND MARKETING ASSESSEES BUSINESS USING GOODWILL AND NA ME OF THE ASSESSEE COMPANY. IT IS THE ASSESSEE COMPANY WHICH IS MORE INVOLVED IN GETTING A CONTRACT IN FIXING COMPETITIV E PRICING AND TAKING PROFIT RISK. IT CAN BE SEEN FROM THE FINANC IAL STATEMENT OF THE ASSESSEE COMPANY THAT IT IS RECEIVING FLUCTUATI NG MARGINS ON EACH CONTRACT WHEREAS MUK HAS BEEN ASSURED OF A FIX ED RETURN IRRESPECTIVE OF THE FACT WHETHER THE ASSESSEE IS EA RNING PROFIT OR INCURRING LOSSES ON A PARTICULAR CONTRACT. IN ADDI TION TO THE ABOVE, IT IS THE ASSESSEE COMPANY WHICH BEARS PRODUCT/SERV ICE LIABILITY RISK, TECHNOLOGY RISK, MANPOWER RISK AND FOREIGN EX CHANGE RISK. FURTHER ASSESSEE COMPANY ASSUMES ALL CREDIT RISK OF THE MUK EVEN CREDIT RISK LIES WITH ASSESSEE COMPANY. UNDER THE ITA NO. 3120/AHD/2010 MASTEK LIMITED VS. ADDL.CIT ASST.YEAR - 2006-07 - 11 - CIRCUMSTANCES, MUK CANNOT BE SAID TO BE AN ENTITY H AVING NORMAL BUSINESS RISK AS OF INDEPENDENT DISTRIBUTOR AND CAN BE SAID AS CAPTIVE OFFICE CUSTOMER FACING ENTITY OF THE ASSESS EE. AS DISCUSSED EARLIER, THE ASSESSEE COMPANY HAS ENTE RED INTO AN AGREEMENT WITH MUK BY AGREEMENT DATED 30/3/2005 CAL LED AS MASTER AGREEMENT WHERE IT CAN BE SEEN THAT ALL TH E RISK AND CONSEQUENTLY ALL THE EXPENSES HAVE BEEN TAKEN UP BY THE ASSESSEE COMPANY. IN FACT BY DOING SO ALL THE MARKETING INT ANGIBLES AND OTHER INTANGIBLE DEVELOPED DURING THE COURSE OF BUS INESS HAVE TO BE TREATED AS ASSETS OF THE ASSESSEE COMPANY ONLY. FURTHER, BY PROVIDING COMFORT LETTERS TO THIRD PARTIES AND GUAR ANTEES TO BANK, ASSESSEE HAS ASSUMED ALL THE RISK OF THE MUK. THE ASSESSEE COMPANY IS REIMBURSING BESIDES ALL OTHER EXPENSES, EXPENSE RELATED TO INSURANCE TAKEN FOR VARIOUS PURPOSES/RIS K, DOUBTFUL DEBTS AND OTHERS ARE ALSO BEING PAID BY THE ASSESSE E COMPANY. (B) THE ASSESSEE HAS STATED THAT MUK ENTERS INTO NEGOTIATIO NS WITH THE BUYER AND STRIKES A SALE I.E. CONCLUDES TH E CONTRACT AND FURTHER SIGNS CONTRACT AS ITS FUNCTIONS. MERELY DOING THIS FUNCTION WITHOUT ASSUMING RELATED RISK DOES NOT MEAN CARRYIN G OUT THOSE FUNCTIONS INDEPENDENTLY WHICH ARE REQUIRED TO BE RE MUNERATD AS SUCH. IT IS CLEAR FROM ANNEXURE A & B THAT FINAL P RICE FOR ANY CONTRACT TO THE THIRD PARTY IS DECIDED BY ASSESSEE COMPANY IN CONSULTATION WITH MUK AND MUK MERELY SIGNS THOSE CO NTRACT ON ASSESSEES BEHALF. MERELY STATING THAT THESE CONTR ACT6S HAVE BEEN ENTERED INTO BY MUK IS NOT THE SUBSTANCE OF ALL THO SE 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 INCOR PORATED IN THE AGREEMENT AS PER THE DIRECTION OF THE ASSESSEE COMP ANY. (C) THE ASSESSEE HAS STATED THAT A DISTRIBUTOR SHOULD B E COMPENSATED FOR REIMBURSEMENT OF ITS OPERATING COST PLUS VOLUME RELATED COMMISSION IS NOT NORMAL SYSTEM OF COMPENSA TION. THERE MAY BE REIMBURSEMENT OF CERTAIN EXPENSES WHICH A PR INCIPAL MAY REIMBURSE TO THE DISTRIBUTOR FOR CERTAIN SPECIFIC W ORK WHICH IT WANTS TO BE CARRIED OUT. HOWEVER, REIMBURSEMENT OF ALL EXPENSES AND RISK AND FURTHER PAYMENT OF COMMISSION THAT TOO @ 5.5% ON ITA NO. 3120/AHD/2010 MASTEK LIMITED VS. ADDL.CIT ASST.YEAR - 2006-07 - 12 - BASIS OF SALES IS NOT A PREVALENT SYSTEM. THE MORE PREVALENT SYSTEM IS PAYING COMMISSION ON SALES AND NOT REIMBU RSEMENT OF DAY TO DAY EXPENSES OF THE COMMISSION AGENT. THERE CANNOT BE ANY DISTRIBUTOR WHICH IS TO BE PAID FOR ALL ITS EXPENSE S AND RISK AND IN ADDITION ABOVE, VOLUME RELATED COMMISSION AS SAME W OULD PROMOTE INEFFICIENCIES IN EXPENSES AND FURTHER REMU NERATION TO THE DISTRIBUTOR ON INTANGIBLES OF THE PRINCIPAL. (D) THE ASSESSEE HAS FURTHER STATED THAT IT HAS EMPLOYE D HIGHLY QUALIFIED FULL FLEDGED STRATEGY BUSINESS TEAM WHICH WAS NOT ONLY SELLING AND PROMOTING ITEMS BUT ALSO TAKING STRATEG IC DECISION IN RESPECT OF THE SALES. THE ASSESSEE HAS NOT SUBMITT ED WHAT STRATEGIC DECISIONS OR WHETHER ALL STRATEGIC DECISIONS REQUIR ED IN RESPECT OF SALE WAS BEING TAKEN BY THAT TEAM ONLY. PROVIDING A VERY HIGHLY QUALIFIED TEAM IS MERELY A MARKETING EXERCISE WHICH PROVIDES COMFORT TO THIRD PARTY CLIENTS AND PRESENCE OF THE ASSESSEE COMPANY IN THE UK. ANY MARKETING STRATEGY REQUIRES PROVIDING COMFORT TO THE CLIENTS AND SHOWING TO OTHERS INCLUD ING CLIENTS THAT THE ASSESSEE COMPANY IS COMPETENT IN CARRYING OUT A LL TECHNICAL PROJECTS AND HAS SUPPORT SERVICES NEAR TO IT. SIGN ING OF CONTRACT IN UK AND PRESENCE OF COMPETENT TEAM IS CLEARLY MARKET ING EXERCISE FOR SOFTWARE SERVICE BUSINESS. (E) THE ASSESSEE HAS FURTHER RELIED ON TRANSFER PRICIN G GUIDELINES OF UK REVENUE AUTHORITIES WHICH ALSO SUPPORTS UNDER SIGNS CONTENTION THAT REMUNERATION SHOULD BE BASED ON RISK TAKEN BY THE ENTITY. (F) THE ASSESSEE HAS RELIED UPON DECISION OF HONOR ABLE KOLKATA ITAT IN THE CASE OF DEVELOPMENT CONSULTANT PVT LTD THAT MODEL, SIMILAR TO THE DISTRIBUTION OF SERVICES WAS ACCEPTE D BY THE TRIBUNAL AND IT WAS AGREED THAT DISTRIBUTOR NEED TO BE COMPE NSATED ON GROSS MARGIN BASIS. 3.9. FINALLY, THE TPO HAS COMPUTED THE ARMS LENG TH PRICE AS UNDER:- 8. COMPUTATION OF ARMS LENGTH PRICE : ITA NO. 3120/AHD/2010 MASTEK LIMITED VS. ADDL.CIT ASST.YEAR - 2006-07 - 13 - 8.1. THE ASSESSEE COMPANY HAS SUBMITTED ARMS LEN GTH MARK UP FOR US MARKET ON SIMILAR ACTIVITIES USING PLI OF VA LUE ADDED EXPENSES/TOTAL COST (VAE/TC). THE ARITHMETIC MEAN OF THE COMPANY FOUND OUT BY THE ASSESSEE IS 6.02%. A SIMI LAR COMPARABLE SET BASED ON SIMILAR PLI WAS FOUND OUT I N ANOTHER CASE USING FOLLOWING DATA: I) STANDARD & POORS COMPUSTAT II) MERGENTS VS PUBLIC COMPANIES AND III) DISCLOSURE THE FOLLOWING INDUSTRIAL CLASSIFICATION CODES WERE USED FOR ECONOMIC CRITERIA, ADVERTISING AGENCIES; ADVERTISIN G NOT CLASSIFIED ELSEWHERE, BUSINESS CONSULTING SERVICES AND BUSINES S CONSULTING SERVICES NOT CLASSIFIED ELSEWHERE. THE COMPANIES W HICH WERE CLASSIFIED INACTIVE AND CLOSED AND SIMILAR COMPANIE S HAVING LESS THAT US $ 1.5 MN WERE EXCLUDED AND MANUAL QUALITATI VE 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 RESU LTED IN ARITHMETIC MEAN OF COMPARABLES AT 5.6% ON COST. HO WEVER, ARITHMETIC MEAN OF THE COMPARABLE COMPANIES FOUND O UT BY THE ASSESSEE COMPANY AT 6.02% HAS BEEN USED FOR COMPUTA TION OF ARMS LENGTH PRICE FOR MARKETING/FRONT END OFFICE A CTIVITIES 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 23,66,643 (2860974 4984 331) CONVERTED INTO INR @ RS.78,6959/- PER POUND = RS.18,62,45,100/- (UPWARD ADJUSTMENT OF RS.18,62,45,100/-) 3.10. WE HAVE ALSO GONE THROUGH THE ORDER OF THE LD.DRP, AHMEDABAD DATED 28/09/2010. A MAJOR PORTION OF T HIS ORDER SIMPLY CONTAINS THE ORDER OF THE TPO AND THE SUBMISSIONS OF THE ASSESSEE. THE PROPOSED ADDITION/ADJUSTMENT WAS AFFIRMED AND THE R EASONS ASSIGNED IN SHORT ARE AS FOLLOWS. DRP WAS OF THE VIEW THAT THE SAID AE, I.E.MUK ITA NO. 3120/AHD/2010 MASTEK LIMITED VS. ADDL.CIT ASST.YEAR - 2006-07 - 14 - SITUATED IN UK HAS PERFORMED THE FUNCTIONS, SUCH AS , IDENTIFICATION OF CUSTOMERS, ESTABLISHMENT OF CONTACTS, SOLICITATION OF ENQUIRIES, MAINTENANCE OF CUSTOMER RELATIONSHIP, APPOINTMENT O F ADVERTISEMENT AGENCIES, ETC. WERE THE FUNCTIONS IN THE NATURE OF MARKETING ACTIVITIES. EVEN THE SIGNING OF CONTRACTS, AGREEMENT ON PRICE, SCOPE OF DELIVERABLES OR THE TIME SCHEDULE WERE THE FUNCTIONS THOUGH UNDE RTAKEN BY THE MUK BUT ONLY WITH REFERENCE TO THE FEEDBACK RECEIVED BY THE MASTEK INDIA LTD. THEY HAVE ENDORSED THE VIEW OF THE TPO THAT THE MUK HAD FUNCTIONED AS A FRONT OFFICE OF THE ASSESSEE. ACCORDING TO DRP, ONLY A FIXED PROFIT WAS SETTLED AS PER THE TERMS OF THE AGREEMENT BETWEEN T HE ASSESSEE-COMPANY AND MUK. THE MUK WAS ADMITTEDLY REMUNERATED AT 5.5% OF THE REVENUE RECEIVED AS A THIRD PARTY SALE PRICE. ACCORDING TO DRP IF MUK WAS WORKING AS A DISTRIBUTOR, THEN THERE SHOULD NOT BE A FIXED PROFIT BUT THE PROFIT SHOULD KEPT ON CHANGING. THEY HAVE STATED T HAT THE SELLING PRICE COULD NOT BE FIXED BY MUK AND, THEREFORE, MUK COULD NOT BE CONSIDERED AS AN INDEPENDENT ENTREPRENEUR. THE ASSESSEE HAD MADE CONTENTIONS IN RESPECT OF THE ADJUSTMENT MADE BY THE TPO WITH REFE RENCE TO RULE 10B(1)(E), 10B(2) AND 10B(3) OF THE INCOME-TAX RULE S. HOWEVER, THE CONTENTION OF THE ASSESSEE CONNECTED IN THIS REGARD WERE NEGATED IN THE FOLLOWING MANNER:- A) FROM THE PLAIN READING OF THE AFORESAID RULE, IT IS CRYSTAL CLEAR THAT PROFIT LEVEL INDICATOR (PLI) PRESCRIBED UNDER TNMM IS THE NET OPERATING MARGINS COMPUTED IN RELAT ION TO THE PRESCRIBED BASE AS MENTIONED IN SUB-SECTION (I) ABOVE. THE CHOICE WITH THE TAX PAYER IS REGARDING SELECTIO N OF BASE I.E. COST INCURRED OR SALE EFFECTED OR ASSETS EMPLO YED OR ANY OTHER RELEVANT BASE, BUT NOT IN THE SELECTION OF MA RGINS. B) NET PROFIT MARGINS HAVE NOT BEEN DEFINED IN THE I.T . ACT OR RULES MADE THEREIN. WHEN THE STATUES HAVE NOT PROV IDED THE ITA NO. 3120/AHD/2010 MASTEK LIMITED VS. ADDL.CIT ASST.YEAR - 2006-07 - 15 - DEFINITION OF A TERM USED IN IT THEN GENERAL MEANIN G OF THE TERM HAS TO BE TAKEN INTO CONSIDERATION. IT HAS BE EN HELD BY THE KERALA HIGH COURT IN THE CASE REPORTED IN 190 I TR 32 (KER) WHILE INTERPRETING THE MEANING OF A WORD, TH E COURT IN THE ABSENCE OF THE STATUTORY DEFINITION WILL HAVE T O CONSIDER ITS MEANING IN THE MANNER IN WHICH IT IS UNDERSTOOD GEN ERALLY BY THOSE WHO DEAL WITH THE SUBJECT IN QUESTION THUS, THE NET PROFIT NORMALLY MEANS PROFIT BEFORE T AX, COMPUTED IN ACCORDANCE WITH THE ACCOUNTING PRINCIPL ES. HOWEVER, ANY ITEM OF INCOME OR EXPENDITURE WHICH HA S 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 INC OME AND INTEREST INCOME, WHICH ARE NOT DIRECTLY RELATED TO THE TRANSACTIONS. C) THUS, UNDER TNMM, IN THE FIRST STEP, NET OPERA TING MARGIN FROM INTERNATIONAL TRANSACTION IS COMPUTED IN RELAT ION TO THE APPROPRIATE BASE. IN THE SECOND STEP, NET OPERATIN G MARGIN OF THE UNCONTROLLED TRANSACTIONS ARE IDENTIFIED. IN T HE THIRD STEP THE NET OPERATING MARGIN OF UNCONTROLLED TRANSACTIO N ARE ADJUSTED TO TAKE INTO ACCOUNT THE DIFFERENCES, IF A NY, BETWEEN THE INTERNATIONAL TRANSACTION AND THE COMPARABLE UN CONTROLLED TRANSACTION OR BETWEEN THE ENTERPRISES ENTERED INTO SUCH TRANSACTIONS WHICH COULD MATERIALLY AFFECT THE AMOU NT OF NET PROFIT MARGIN COMPUTED IN STEP 3 ABOVE IS THEN TAKE N TO BE NET OPERATING MARGIN AND THE ARMS LENGTH PRICE OF THE TRANSACTIONS COMPUTED BY THAT OPERATING MARGIN. 3.11. DRP HAS DISCUSSED SKODA AUTO (INDIA) PVT.LTD. VS. ASST.CIT REPORTED AS (2009) 122 TTJ (PUNE) 699, WHEREIN ON E OF US, I.E. JM IS THE CO-AUTHOR. THE DIFFERENCE IN QUANTUM OF IMPORTS W AS HELD AS DIFFERENCE IN BUSINESS MODEL AND, THEREFORE, IT WAS SUGGESTED THAT THE REQUISITE ADJUSTMENT IS REQUIRED TO BE CARRIED OUT FOR SUCH F UNCTIONAL DIFFERENCE. BUT THE DRP WAS OF THE VIEW WHERE THERE IS NO DIFFE RENCE IN THE ITA NO. 3120/AHD/2010 MASTEK LIMITED VS. ADDL.CIT ASST.YEAR - 2006-07 - 16 - FUNCTIONS PERFORMED, THEN THERE COULD NOT BE ANY NE ED FOR ANY CHANGE IN PLI IN THOSE CIRCUMSTANCES. 3.12. DRP HAS FURTHER REFERRED THAT THE ASSESSEE HA S FOLLOWED TNMM METHOD FOR BENCH-MARKING ITS TRANSACTIONS. IT WAS OBSERVED THAT TNMM METHOD EMPHASIZES THE ADOPTION OF NET MARGIN FROM V ARIOUS TRANSACTIONS. THE PROFIT LEVEL INDICATOR ADOPTED SHOULD INDICATE THE REAL AND NOT NOTIONAL PROFIT. ANY INDICATOR WHICH MAY EITHER IN DICATE INCREASE PROFIT OR REDUCE LOSS DUE TO NON-CONSIDERATION OF CERTAIN FACTORS, ACCORDING TO DRP, DO NOT REPRESENT THE ACTUAL STATE OF AFFAIRS. ACCORDING TO THEM, BENCH-MARKING DONE, THEREFORE HAVE NO MEANING. THE Y ALSO RULED OUT THAT AS PER RULE 10B(10)(E)(III) THE ITEMS OF EXPEN SES WHICH WERE PROPORTIONATELY HIGHER SHOULD ALSO NOT BE ALLOWED. LD.DRP HAS RATHER COMMENTED THAT THE ASSESSEE HAD NOT GIVEN ANY KIND OF WORKING AS TO HOW AND AS TO WHAT KIND OF ADJUSTMENT WOULD BE WARR ANTED. THEY HAVE HELD THAT THE BENCH-MARKING ANALYSIS CONDUCTED BY T HE TPO DID NOT REQUIRE ANY INTERVENTION. 3.13. THE ASSESSEE HAS PLEADED TO GRANT BE NEFIT OF PROVISO TO SECTION 92C(2) OF THE ACT. THIS PROVISO PRESCRIBES THAT WHERE MORE THAN ONE PRICE IS DETERMINED BY THE MOST APPROPRIATE MET HOD, THE ARMS LENGTH PRICE SHALL BE TAKEN TO BE ARITHMETICAL MEAN OF SUC H PRICES. AN OPTION IS PRESCRIBED THAT A PRICE WHICH MAY VARY FROM THE ARI THMETICAL MEAN BY AN AMOUNT NOT EXCEEDING 5% OF SUCH ARITHMETICAL MEAN C AN BE SUBSTITUTED. HOWEVER, A PRESS NOTE ISSUED BY THE MINISTRY OF FIN ANCE DATED 22/08/2001 WAS REFERRED, WHEREIN IT WAS EXPRESSED T HAT IN VIEW TO AVOID HARDSHIP TO THE TAXPAYER, NO ADJUSTMENT IS TO BE MA DE IF THE PRICE ADOPTED BY THE ASSESSEE IS UP BY 5% OR LESS BY 5% MORE THAN THE ALP. THE DRP ITA NO. 3120/AHD/2010 MASTEK LIMITED VS. ADDL.CIT ASST.YEAR - 2006-07 - 17 - HAS REFERRED CBDT CIRCULAR NO.12 DATED 23/08/2001(2 51 ITR 15 (ST.) SPECIFYING THAT THE AO SHOULD NOT MAKE ANY ADJUSTME NT TO THE PRICE SHOWN BY THE ASSESSEE IF SUCH PRICE IS WITHIN THAT RANGE. DRP HAS THEREAFTER MENTIONED THAT THE ALP OF THE INTERNATIO NAL TRANSACTION AS UNDERTAKEN BY THE ASSESSEE HAD FALLEN BEYOND THE SA ID MARGIN OF 5%, THEREFORE, THE AO WAS CORRECT IN INVOKING THE RELEV ANT PROVISIONS FOR THE ADJUSTMENT. FOR THIS LEGAL PROPOSITION, CASE LAW CITED WAS - GLOBAL VANTAGE PVT.LTD. 1 ITR 326 (TRIB.)[DELHI]. C) APPELLANTS ARGUMENT: 4. DURING THE PROCEEDINGS BEFORE US, SHRI S N SOP ARKAR, 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 PROC EEDED TO MAKE VARIOUS ARGUMENTS SUMMARIZED AS FOLLOWS: A) THE LD. COUNSEL STATED THAT THE ASSESSEE DERIV ED MAXIMUM REVENUES FROM THE UK MARKET. FROM 1.1.2005, THE BUSINESS MOD EL OF THE ASSESSEE HAD UNDERGONE A CHANGE. THIS WAS KEEPING IN PERSPEC TIVE INTER ALIA THE HMRC (HER MAJESTY OF REVENUE & CUSTOMS) GUIDELINES OF UK TO ENSURE THAT THE ASSESSEE AND MUK COMPLY WITH THE TR ANSFER PRICING REGULATIONS IN BOTH INDIA AND UK RESPECTIVELY AS RE GARDS THE EXPORT OF SOFTWARE SERVICES TO MUK WERE CONCERNED. THE EXTRA CTS OF THE HMRC GUIDELINES RELIED UPON BY THE LD. COUNSEL IS RE PRODUCED BELOW: 'THE SELLING FUNCTION TREATED AS A PROVISION OF SER VICES A SELLING ENTITY IS REWARDED ON A COST PLUS BASIS B Y A CONNECTED PARTY. YOU SHOULD SCRUTINIZE CAREFULLY ANY CLAIMS T HAT THE COMPANY HAS NO RISK AND IS MERELY INTRODUCING THE CUSTOMER, OR HELPING TO ITA NO. 3120/AHD/2010 MASTEK LIMITED VS. ADDL.CIT ASST.YEAR - 2006-07 - 18 - MAINTAIN EXISTING CUSTOMER RELATIONS - THAT THE COM PANY IS PROVIDING A SERVICE TO THE PRINCIPAL WHO IS ACTUALL Y SELLING THE GOODS. BETWEEN INDEPENDENTS SELLING IS USUALLY A CRITICAL, ENTREPRENEURIAL PART OF ANY TRADE RATHER THAN A LOW LEVEL SERVICE T YPE ACTIVITY. SUCH CASES MAY RANGE FROM A SMALL REPRESENTATIONAL OFFICE WITH A FEW EMPLOYEES, TO A LARGE PRESENCE INVOLVING HUNDRE DS OF STAFF. IN THE SELLING WORLD, EVEN A RELATIVELY SMALL CONCERN WOULD EXPECT SOME FORM OF REWARD RELATED TO THE SALES MADE. THE LARGER THE PRESENCE, THE MORE UNLIKELY IT IS THAT THE COMPANY IS JUST PROVIDING A SERVICE. IT IS OF COURSE POSSIBLE TO THINK OF SERVICES THAT MIGHT BE PROVIDED TO SOMEONE CARRYING ON THE BUSINESS OF SELLING, FOR EXAMPLE THE SELLING COMPANY WILL VERY LIKELY PAY SOMEONE TO ADV ERTISE THEIR GOODS. HOWEVER, THE ACT OF SOLICITING AND SECURING A SALE GOES BEYOND THE PROVISION OF SERVICES TO THE SELLING ACT IVITY; INSTEAD IT IS A FUNDAMENTAL ASPECT OF THE SELLING ACTIVITY ITSELF . A COST PLUS METHOD OF REWARD IS UNLIKELY TO BE APPROPRIATE A BE TTER WAY OF ESTABLISHING AN ARM'S LENGTH REWARD WILL BE TO USE A PRICE LINKED TO THE SALE OF THE GOODS. AS WITH OTHER CASES INVOLVING SELLING ACTIVITY, YOU SHOULD CONSIDER WHETHER THERE IS ANOTHER PARTY TRADING (EG A UK PER MANENT ESTABLISHMENT OF A FOREIGN PRINCIPAL). THE LD. COUNSEL THUS HIGHLIGHTED THAT THE UK REVENU E AUTHORITIES WOULD EXPECT ENTITIES PERFORMING THE ROLE OF A DISTRIBUTO R (I.E. PERFORMING A SELLING FUNCTION) WOULD NEED TO BE COMPENSATED ON A RETURN ON SALES BASIS AND NOT COST PLUS BASIS. HE STATED THAT THE RISKS IN THE NATURE OF MARKET AND CUSTOMER CREDIT RISKS WERE BORNE BY MUK AND ACCORDINGLY THE COMPENS ATION SHOULD BE THAT OF PRICE LINKED TO SALES. B) THE LD. COUNSEL FURTHER EXPLAINED THE NEED TO CHANGE THE BUSINESS MODEL BY STATING THAT MUK STARTED PERFORMING SELLIN G ACTIVITIES ON A LARGE SCALE AS AGAINST MARKETING ACTIVITIES IT PERF ORMED IN THE PAST. PRIOR TO 1.1.2005, MUK ACTED AS A MARKETING SERVICES PROV IDER FOR OFFSHORE ITA NO. 3120/AHD/2010 MASTEK LIMITED VS. ADDL.CIT ASST.YEAR - 2006-07 - 19 - SERVICES PERFORMED BY THE ASSESSEE. AS REGARDS TH E ONSITE ACTIVITIES, MUK PERFORMED THE SAME ON ITS OWN ACCOUNT BUT OBTAI NED 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' WHI CH WAS MADE EFFECTIVE 1 JANUARY 2005 AND THE OLD SERVICES AGREE MENT TITLED AS 'SERVICES AGREEMENT' WAS TERMINATED. C) THE LD. COUNSEL EXPLAINED THAT THE COM PENSATION TO MUK WHICH WAS A DERIVATIVE FIGURE, WAS BASED ON THE MA RKET BACK-UP APPROACH. THEREFORE THE COMPUTATION TO MUK WAS WOR KED 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 I S 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 BASE. HE EMPHASIZED THE POINT THAT AS TH E ENTIRE PROFITS WERE EXEMPT U/S 10A IN INDIA, THERE WAS NO INCENTIVE ON THE PART OF THE ASSESSEE TO PARK PROFITS IN UK. NO LOGICAL BUSINESS MAN WOULD WANT TO ABUSE THE TRANSFER PRICING PROVISIONS BY NOT BRINGI NG THE PROFITS BACK TO INDIA, WHICH OTHERWISE WAS EXEMPT, AND PARK THE SAM E IN UK AND CONTINUE TO PAY TAXES AT A RATE AS HIGH AS 30% IN U K. IN THIS REGARD, THE LD. COUNSEL RELIED UPON THE DECISION OF THE HIGH CO URT OF DELHI IN CASE OF MOSER BAER INDIA LTD. V. ADDITIONAL COMMISSIONER OF INCOME-TAX [2009] 176 TAXMAN 473 (DELHI) / 316 ITR 1, WHICH BRINGS OUT THE REASONS FOR INTRODUCING CHAPTER X IN THE ACT, WHICH IS TO PREVENT AN ASSESSEE FROM AVOIDING PAYMENT OF TAX BY TRANSFERRI NG INCOME YIELDING ASSETS TO NON-RESIDENTS EVEN WHILE RETAINING THE PO WER TO ENJOY THE FRUITS OF SUCH TRANSACTIONS I.E. THE INCOME SO GENERATED. IN THE INSTANT CASE, THE ENTIRE INCOME EVEN IF BROUGHT BACK TO INDIA IN THE FIRST PLACE WOULD HAVE NEVER SUFFERED A SINGLE RUPEE OF TAX. E) IN ADDITION TO ABOVE, THE LD. COUNSEL RELIED UPON THE FOLLOWING TO SUPPORT THE FACT THAT THERE WAS NO REASON FOR SHIFT ING OF TAX BASE BY MIL, WHICH IS ENJOYING SECTION 10A BENEFITS: CIRCULAR NO. 12 DATED AUGUST 12, 2001 [251 I TR(ST.) 15]; CIRCULAR NO. 14 DATED NOVEMBER 09, 2001 [252 ITR( ST) 65] - PARA 55, WHICH BRINGS THE OBJECTIVE OF IN TRODUCING TP ITA NO. 3120/AHD/2010 MASTEK LIMITED VS. ADDL.CIT ASST.YEAR - 2006-07 - 20 - REGULATIONS. THE SAME HAS ALSO BEEN DISCUSSED IN TH E CASE OF MOSER BAER AS DISCUSSED ABOVE; DUFON LABORATORIES (2010-39-SOT-59-MUMBAI) - PAR A 13 AND PARA 29; INDO AMERICAN JEWELLERY (2010-131-TTJ-MUMBAI-63 ) - PARA 11 AND 12 PHILLIPS SOFTWARE CENTRE (PRIVATE) LIMITED (200 8-119-TTJ- BANGALORE-721) - PARA 5.1 F). THE LD. COUNSEL FOR THE ASSESSEE DURING THE COU RSE OF THE PROCEEDINGS FILED A WRITTEN SYNOPSIS OF THE ARGUMENTS. REFERRIN G TO THIS SYNOPSIS, THE LD. COUNSEL FOR THE ASSESSEE REFERRED TO VARIOUS DO CUMENTS AND SUBMISSION FILED BEFORE US. THE SAME HAVE BEEN BRIE FLY NARRATED BELOW: I. HE HIGHLIGHTED PARA (C) AND (F) OF PARA 2.1 OF THE DISTRIBUTION AGREEMENT , WHICH DISCUSSES ROLES AND RESPONSIBILITIES OF THE TRANSACTING ENTITIES VIZ: M UK AND MIL; II. HE POINTED OUT ARTICLE 3 OF THE DISTRIBUTION A GREEMENT STATING THAT MIL WILL NOT COMPENSATE MUK FOR ANY NEGLIGENT ACT OF MUK. THIS ASPECT IS TYPICAL OF ANY DISTRIBUTION ACTIVITY VIS-A-VIS MARKETING ACTIVITY; III. THERE 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 INVOICI NG CLAUSE OF THE DISTRIBUTION AGREEMENT ALONG WITH EXHIBIT 1 TO DEMONSTRATE 5.52% COMPENSATION MECHANISM FOR MUK; VI. HE POINTED OUT THAT SELLING ACTIVITIES (NEGOTI ATING AND CONCLUDING CONTRACTS) PERFORMED BY MUK WERE VALUE A DDED FUNCTIONS SEPARATE FROM MARKETING AND FRONT OFFICE. MUK ITA NO. 3120/AHD/2010 MASTEK LIMITED VS. ADDL.CIT ASST.YEAR - 2006-07 - 21 - TAKES INDEPENDENT DECISIONS AS REGARDS PRICING TO C USTOMERS AND IS NOT ACTING LIKE AN AGENT OF MIL. VII. HE FURTHER STATED THAT SELLING ACTIVITY IS VER Y 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 QUAL IFICATION, DESIGNATION AND ROLES IN MUK. HE POINTED OUT THAT M UK WITH THE SET OF HIGHLY QUALIFIED AND EXPERIENCED EM PLOYEES, WAS QUITE CAPABLE TO TAKE BUSINESS DECISIONS AND EN TER INTO NEGOTIATION AND CONCLUSION OF CONTRACTS ON ITS OWN BEHALF. VIII. MUK EMPLOYED WELL QUALIFIED MANAGERIAL AND T ECHNICAL PERSONNEL WITH SKILLS AS WELL AS THE EXPERIENCE TO UNDERSTAND THE SOFTWARE OFFERINGS, CREATE PROPOSALS, NEGOTIATE AND CONCLUDE CONTRACTS INDEPENDENTLY. THE BREAK-UP OF T HE EMPLOYEES WERE DISCUSSED BY THE LD. COUNSEL. HE IDE NTIFIED APART FROM 1 COUNTRY HEAD, THERE WERE 28 EMPLOYEES OF MUK WHO WERE INVOLVED IN SALES SOLUTIONS & STRATEGY , 13 EMPLOYEES WERE INVOLVED IN SALES OPERATIONS AND SUP PORT AND 8 EMPLOYEES WERE PART OF LEGAL AND FINANCE. IX. AFTER A SALE CONTRACT IS CONCLUDED, MUK INFORM S MIL OF THE SPECIFICATIONS AND THE TERMS OF THE CONTRACT. ACCOR DINGLY, MIL'S ROLE WOULD START ONLY AFTER MUK HAS CONCLUDED THE CUSTOMER CONTRACT. THE CUSTOMER CONTRACTS MAY BE DI SCUSSED AT TIMES WITH MIL BEFORE CONCLUDING. HOWEVER THIS I S FROM THE PERSPECTIVE OF ONLY ALIGNING WITH THE GROUP'S B USINESS POLICIES AND GOALS. THIS IS IN ACCORDANCE WITH ANY THIRD PARTY DISTRIBUTORS WHO WOULD NEED TO CONSULT WITH THE MANUFACTURERS TO FIND OUT AS TO WHEN THE REQUIRED G OODS WOULD BE MADE AVAILABLE. THE CONTRACTS BETWEEN MUK AND THE UK CUSTOMER WERE INDEPENDENT AND NOT ENTERED IN TO ON BEHALF OF MIL. MIL WAS PROVIDING THE SOFTWARE SERVI CES AS PER THE CONTRACT TERMS ENTERED INTO BETWEEN MUK AND THE CUSTOMERS. X. HE DREW OUR ATTENTION TO THE CASE STUDIES PREPAR ED FOR AY 2006-07, WHICH CLEARLY DEPICTED THE WORK PERFORMED BY MUK THROUGH ITS EMPLOYEES ON MAJOR CLIENTS IN UK. T HE CASE STUDIES EXPLAINED THE COMPLEXITIES OF THE NATU RE OF WORK INVOLVED AND THE INVOLVEMENT OF THE EMPLOYEES OF MUK IN CARRYING OUT SELLING ACTIVITIES IN ADDITION TO MARKETING. ITA NO. 3120/AHD/2010 MASTEK LIMITED VS. ADDL.CIT ASST.YEAR - 2006-07 - 22 - XI) THE LD. COUNSEL THEN BROUGHT OUT AN ANOTHER POINT FOR OUR CONSIDERATION THAT THE TPO WAS GIVEN AN OPPORTUNITY DURING THE COURSE OF THE HEARING TO INTERVIEW KEY SALES PE RSONNEL OF MUK (EITHER TELEPHONICALLY / IN PERSON). HOWEVER, ACCORDING TO THE LD. COUNSEL THE TPO NEVER EXERCISE D THIS OPTION. IN THIS REGARD, THE LD. COUNSEL RELIED UPON NESTLE INDIA LIMITED (2005-094-TTJ-DELHI-53) - PARA 91. IN THE SAID CASE, THE ASSESSEE HAD GIVEN AN OPPORTUNITY TO THE TAX OFFICE TO VISIT THE OFFICE PREMISES AND FACTORY IN RELATION TO CONFIRMING THE TECHNOLOGY AVAILED BY THE ASSESSEE F ROM ITS GROUP ENTITY(IES). HOWEVER, THE OFFICER DID NOT AVA IL OF THIS OPPORTUNITY. FURTHER, THE ASSESSEE PLACED VARIOUS S UBMISSION 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 DISALLOWAN CE; THE FUNCTIONS PERFORMED BY MUK, IN NUTSHELL WERE REITER ATED AS FOLLOWS: IDENTIFYING CUSTOMERS; ESTABLISHING CONTACTS; SOLICITING ENQUIRIES; MANAGING CUSTOMER RELATIONSHIPS; APPOINTMENT OF AGENCIES OR ENGAGING INTO ADVERTIS EMENT AND SALES PROMOTION; NEGOTIATION OF CONTRACTS AND SIGNING OF CONTRACTS ON CONCLUDING; AGREEING THE SCOPE DELIVERABLES AND TIME SCHEDULE S WITH THE CUSTOMERS THE LD. COUNSEL HAS EMPHASIZED ON THE LAST TWO FUNC TIONS, WHICH ARE IN THE NATURE OF SELLING FUNCTIONS. MARKE TING ACTIVITY IS JUST A SUBSET OF THE ENTIRE SELLING FUNCTIONS. N EGOTIATION OF CONTRACTS, TAKING A DECISION ON THE SAME AND CONCLU DING THE CONTRACTS IS AN IMPORTANT PART OF THE SELLING FUNCT ION AND COMMANDS A REWARD MUCH MORE THAN FOR A MARKETING ACTIVITY. IT THEREFORE WARRANTS REMUNERATION ABOVE MERE COST PLU S. THE LD. COUNSEL FURTHER EMPHASIZED THAT UK HMRC'S WEBSITE P ROVIDES ITA NO. 3120/AHD/2010 MASTEK LIMITED VS. ADDL.CIT ASST.YEAR - 2006-07 - 23 - THAT COST PLUS METHOD IS UNLIKELY TO BE APPROPRIATE ONLY FOR SELLING ACTIVITY. H). IN RELATION TO THE TANGIBLE / INTANGIBLE ASSETS OWNED BY MUK, THE LD. COUNSEL POINTED OUT THAT MUK OWNS TANGIBLE ASSETS. MUK OWNS MARKETING INTANGIBLES ALSO IN THE FORM OF CUSTOMER RELATIONSHIP AND CONTRACTS. IN THIS REGARD, THE LD. COUNSEL POINTED OUT THAT IF MUK WERE TO SELL ITS BU SINESS TO A THIRD PARTY, WOULD IT NOT CLAIM ADEQUATE COMPENSATI ON TOWARDS MARKETING INTANGIBLES OWNED BY IT. I). THE LD. COUNSEL THEN POINTED OUT THAT AFTER CON SIDERING THE SELLING FUNCTIONS PERFORMED, MUK SHOULD BE CHARACTERISED_AS A DISTRIBUTOR AND NOT A MERE MARKE TING SERVICES PROVIDER. THE SAID CHARACTERIZATION WAS ADOPTED BY THE ASSESSEE AND DOCUMENTED IN THE TP STUDY REPORT. IN THIS REGARD, THE LD. COUNSEL RELIED UPON THE FOLLOWING C ASE LAWS: BECHTEL INDIA PRIVATE LIMITED (2011-TII-07-ITAT-DEL -TP ) PARA 12, WHEREIN IT WAS HELD THAT ENTITY CHARACTERI SATION SHOULD BE DONE AFTER PROPER FAR ANALYSIS OF THE ASSESSEE A ND ONLY THEREAFTER, THE COMPARABLES SHOULD BE SELECTED; DEVELOPMENT CONSULTANTS PRIVATE LIMITED V/S DCIT (2 008- 115-TTJ-KOLKATTA-577) - PARA 10, WHEREIN THE CHARACTERISATION OF THE 'DISTRIBUTION OF SERVICES' HAS BEEN TAKEN IN TO COGNIZANCE BY THE AUTHORITIES. FURTHER A PASSING REFERENCE WAS MADE BY THE KOLKATTA ITAT IN THE SAID CASE THAT THE MARGINS OF A DISTRIBUTOR OF SERVICES SHOULD BE BASED ON SALES. J). IN ADDITION TO ABOVE, THE LD. COUNSEL MADE SE VERAL OTHER POINTS TO SUPPORT THE ASSESSEE'S POSITION, WHICH ARE BRIEF LY DISCUSSED BELOW: CONTRACTS ARE NEGOTIATED AND SIGNED BY MUK WITH CUSTOMERS: THE TPO HAS ON A PRESUMPTIVE BASIS STATED THAT MUK IS NOT CAPABLE OF ENTERING INTO CONTRACTS. THE TPO HAS WITHOUT ANY EVIDENCES CONCLUDED THAT THE MUK IS MER ELY A CUSTOMER FACING ENTITY AND MARKETING ASSESSEE'S BUS INESS USING GOODWILL AND NAME OF THE ASSESSEE COMPANY. TH E TPO HAS FURTHER ERRONEOUSLY PRESUMED THAT IT IS THE ASS ESSEE ITA NO. 3120/AHD/2010 MASTEK LIMITED VS. ADDL.CIT ASST.YEAR - 2006-07 - 24 - COMPANY WHICH IS MORE INVOLVED IN GETTING A CONTRAC T IN FIXING COMPETITIVE PRICING AND TAKING PROFIT RISK. THE LD. COUNSEL CATEGORICALLY STATED THAT THE TPO HAS NOT S HARED ANY DOCUMENTS / EVIDENCES WHICH SUPPORTS HIS VIEWS THAT MIL WAS INVOLVED IN FIXING THE PRICE. MIL'S INVOLVEMENT IS NOWHERE BROUGHT OUT EVEN IN THE THIRD PARTY AGREEME NT THAT MIL HAS ENTERED INTO WITH ITS CUSTOMERS IN UK. IT I S 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 CONSUL T 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 DIST RIBUTOR. . AS REGARDS THE EMPLOYEE PROFILE SUBMITTED BE FORE THE TPO, THE TPO HAS AGAIN ERRONEOUSLY STATED THAT PROVIDING A HIGHLY QUALIFIED TEAM IS MERELY A MARKETING EXERCIS E, 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 COMPENS ATED AT 5.52%, IT CANNOT BE TREATED AS A MARKETING / FRO NT OFFICE ENTITY. CONTRACTS HAVE TO BE RECOGNISED. LEGALLY BI NDING AGREEMENTS CANNOT BE DISREGARDED WITHOUT ASSIGNING WELL ARGUED REASONS. HE RELIED UPON ABHISHEK AUTO INDUSTRIES LTD. (2010 TIL 54 ITAT DELHI TP). THE SAID RULING IN TURN RELIED UPON THE FOLLOWING JUDICIAL PRECEDENTS: AZADI BACHAO ANDOLAN (263-ITR-706-SC); GILLETTE DIVERSIFIED OPERATIONS (PVT) LIMITED (2010 - 324-ITR-226-DELHI); WALFORT SHARE & STOCK BROKERS PRIVATE LIMITED (2010-233-CTR-42-SC); SONY INDIA (P) LIMITED - (2008-114-ITD-448-DEL). ITA NO. 3120/AHD/2010 MASTEK LIMITED VS. ADDL.CIT ASST.YEAR - 2006-07 - 25 - IN THIS REGARD, LD. COUNSEL QUESTIONED THAT WOULD T HE REVENUE DEPARTMENT AGREE TO GIVE FLUCTUATING RETURNS TO MUK AND WOULD THAT BE TREATED ARMS LENGTH ? COMFORT LETTER TO THIRD PARTIES: THE LD. COUNSEL ARGUED THAT EVEN IN A THIRD PARTY SCENARIO THE MANUFACTURER OF GOODS WOULD ALWAYS GIVE GUARANTEE ABOUT THE PRODUCTS MANUFACTURED. IN THE INSTANT CAS E, IF MIL HAS GIVEN COMFORT LETTER TO THIRD PARTIES, I T IS FOR ITS OWN PERFORMANCE AND THIS BY NO WAY DILUTES THE ROLE OF MUK AS A DISTRIBUTOR OF SERVICES. CASE STUDIES DEPICTING COMPLEXITIES IN SELLING ACTIVITIES: THE LD. COUNSEL HAS EXPLAINED THE ROLE OF EMPLOYEES OF MUK IN NEGOTIATING AND CONCLUDING COMPLEX PROJECTS IN UK AND ENSURING THE TIMELY DELIVERY FOR THE SAME. ACCORDING TO THE LD. COUNSEL THE TPO'S ORDER IS ABSOLUTELY SILENT IN THIS REGARD . EVEN AS REGARDS THE HMRC GUIDANCE PRODUCED BEFORE US, ACCORDING TO THE LD. COUNSEL, THE TPO HAS NOT DEALT WITH THE SAME IN HIS ORDER. MARKETING / FRONT OFFICE: THE LD. COUNSEL STATED THAT THE TPO WAS NOT SURE AS REGARDS THE ROLE OF MUK. THIS WAS EVIDENT FROM THE VARYING CONCLUSIONS DRAWN BY THE TPO IN HIS ORDER VIZ: PARA 6.1, THE TP O REGARDED FIRST FIVE ACTIVITIES AS MARKETING ACTIVIT IES AND THE BALANCE TWO AS FRONT OFFICE ACTIVITIES. AS AGAINST THESE, IN PARA 7.3, THE TPO TREATED MUK AS A MARKETING ENTITY / FRONT END OFFICE OF THE ASSESSEE . K). COMMISSION TO EMPLOYEES OF MUK: THE LD. COUNSEL EMPHASIZED THAT MUK PROVIDES INCENTIVES TO ITS EMPL OYEES (I.E. SALES PERSONNEL) IN THE FORM OF COMMISSION AS A PERCENTAG E OF SALES GENERATED BY THEM. IN THIS REGARD, THE LD. COUNSEL DURING THE COURSE OF THE HEARING PRODUCED A CHART OF COMMISSION PAID TO THE EMPLOYEE S FOR THE PERIOD FY 2005-06 TO FY 2009-10. HE DREW OUR ATTENTION TO THE FACT THAT DURING THIS PERIOD, THE AVERAGE COMMISSION AS A TOTAL PERCENTAG E TO THE SALARY WAS ITA NO. 3120/AHD/2010 MASTEK LIMITED VS. ADDL.CIT ASST.YEAR - 2006-07 - 26 - AROUND 40%. IN THIS REGARD, THE TPO INCORRECTLY LIN KED 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 R EPATRIATED AS DIVIDEND TO THE ASSESSEE COMPANY. THE LD. COUNSEL STATED THA T THIS ASPECT HAD NO CONNECTION TO THE POINT BEING DISCUSSED THAT IF THE EMPLOYEES WHO ARE EARNING COMMISSION LINKED TO SALES GENERATED BY THE M TO INCREASE THE OVERALL REVENUES OF MUK, WHY WOULD MUK BE NOT COMPE NSATED 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 HA D SUBMITTED THE DETAILS ABOUT UK COMPARABILITY . THE LD. COUNSEL ST ATED THAT EVEN IF MUK IS TO BE TREATED AS A MARKETING SERVICES PROVID ER, THOUGH OBVIOUSLY WITHOUT ACCEPTING, THE COMPARABLES PERFORMING SIMI LAR FUNCTIONS IN UK MARKET NEED TO BE TREATED AS COMPARABLES AND NOT US MARKET. THE UK COMPARABLES, IF ADOPTED, REFLECTED AN ARITHMETIC ME AN OF 11.96%. FURTHER, THE BENEFIT OF (+/-)5% AS PROVIDED IN PROV ISO TO SECTION 92C(2) SHOULD ALSO BE PROVIDED TO THE ASSESSEE. AFTER GRAN TING THE BENEFIT OF (+/-)5%, THE ASSESSEE WOULD HAVE WELL COMPLIED WITH THE TRANSFER PRICING REGULATIONS OF INDIA AND THE QUESTION OF ADJUSTMENT WOULD NOT ARISE. FURTHER, THE LD. COUNSEL ALSO HIGHLIGHTED THE ERROR ON PART OF THE TPO BY ADOPTING THE FINANCIALS OF MUK FOR THE PERIOD JULY 2005-JUNE 2006 INSTEAD OF APRIL 2005-MARCH 2006. AT THIS JUNCTURE IT IS WORTH TO MENTION THAT LD. CIT DR HAS NOT OBJECTED AND ACCEPTED THE S AID FALLACY. ABOUT DRPS OBSERVATION LD. COUNSEL HAS BRIEFLY MENTIONED THAT THE SAID ORDER IS NOTHING BUT A COPY-PASTE OF THE TPOS ORDER AS A LSO THE SUBMISSIONS OF ITA NO. 3120/AHD/2010 MASTEK LIMITED VS. ADDL.CIT ASST.YEAR - 2006-07 - 27 - THE ASSESSEE, HENCE THE POINTS DISCUSSED THEREIN HA S ALREADY BEEN ATTENDED BY HIM. M) BASIS OF STUDY : ABOUT SEARCH STRATEGY FOR UNCONTROLLED COMPARABLES IT IS INFORMED THAT RENOWNED EXTERNAL DATA- BASES W ERE CONSULTED NAMELY FAME ( BY BUREAU VAN DIJK), STANDARD & POORS RESEA RCH INSIGHT, COMPUSTAT GLOBAL DATA, PRIMARKS DISCLOSURE WORLDSC OPE AND ON THE BASIS OF THE STUDY FILTERED OUT THE NON-COMPARABLES . HE HAS THUS PLEADED THAT THE PRIMARY ONUS AS CASTED UPON BY CBDT CIRCUL AR NO.14 OF 2001 DATED 9.11.2001 (252 ITR 65)(ST.) TO SUBSTANTIATE T HE ARMS LENGTH PRICE WAS DULY DISCHARGED. N ) MAIN CUSTOMER : LD. AR HAS EMPHASIZED THAT THE MAIN CUSTOMER IN UK IS BRITISH TELECOME ( BT) AND THE SALES ACCOUNTE D WERE 40 MILLION POUNDS I.E. 311 CRORES APX. SUCH AN ORGANIZATION U. K. GOVERNMENT MIGHT NOT NEGOTIATE AND ASSIGN THE JOB TO A FRONT O FFICE ENTITY OR A MARKETING ENTITY, ARGUED BEFORE US. D) REVENUES ARGUMENT 5. THE LD. COMMISSIONERS SHRI V.K. GUPTA AND SHRI KARTAR SINGH HAVE APPEARED. THE LD. DRS NOW PRESENTED THE REVEN UE'S CASE AND RELIED ON THE TPO'S AS WELL AS LD. DRP'S ORDER. THE ARGUMENTS PUT FORWARD ARE DISCUSSED BELOW: I. THE LD. DR POINTED OUT THAT THE CUSTOMERS IN THE UK WERE GIVEN COMFORT BY MIL THROUGH THE PRESENCE OF MUK. I T IS MIL WHICH HELPS THE CUSTOMERS. SAME MODEL WAS FOLLO WED BY MIL IN THE SAID AY 2006-07 AS REGARDS ITS ANOTHE R SUBSIDIARY IN USA, WHERE THE COMPENSATION CONTINUED TO BE COST PLUS MARK-UP. ITA NO. 3120/AHD/2010 MASTEK LIMITED VS. ADDL.CIT ASST.YEAR - 2006-07 - 28 - II. ACCORDING TO THE LD. DR, THERE HAS NOT BEEN AN Y SIGNIFICANT CHANGE IN THE FUNCTIONS PERFORMED BY MUK. IT IS ONL Y THAT THE ONSITE ACTIVITIES EARLIER PERFORMED BY MUK WERE NOW SHIFTED TO THE UK BRANCH OF MIL. THE LD. DR POINTED OUT THAT WHEN HE ENQUIRED ABOUT WHY WAS THE US SUBSIDIA RY'S MODEL CHANGED LATER, THE ASSESSES REPLIED STATING T HAT FUNCTIONS WERE WRONGLY IDENTIFIED AND LATER CORRECT ED. III. THE LD. DR STATED THAT THE FINANCIALS OF THE UK UNITS, WHICH IS NOW PRESENTED BY THE LD. COUNSEL WAS NEVER PRODU CED BEFORE THE TPO AND SO IT IS DIFFICULT TO COMMENT ON ITS AUTHENTICITY. EVEN IF THE SAME NEEDS TO BE RELIED U PON, THE WORKINGS SHOULD BE MADE AFTER ALLOCATION OF COMMON COSTS INCURRED BY MIL. IV. THE MAIN ARGUMENT AS PER THE LD. DR WAS TO EST ABLISH THAT WHETHER MUK WOULD CONCLUDE THE CONTRACTS ON THEIR O WN OR WOULD THEY TAKE HELP FROM INDIA? ALSO GIVEN THE AN SWER THAT WITHOUT THE HELP AND SUPPORT FROM MIL NOT A SI NGLE 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 PERSO NS WERE CALLED BUT THE ASSESSEE NEVER PRODUCED THE SAM E. 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 DELIV ERY ; AND FOR THAT HAS TO NECESSARILY CONSULT MIL. DELIVERY OF THE SOFTWARE HAS ALWAYS TAKEN PLACE FROM MIL TO THE CUSTOMER. VII. MUK HAS NO BRAND / TECHNICAL EXPERTISE TO DIS TRIBUTE. THEY USE MIL'S INDIA BRAND. AS PER LD. DR HOW WOULD A CUSTOMER IN UK GIVE A CONTRACT TO MUK WITHOUT MIL'S BACK-UP. THE REQUISITE TECHNICAL CAPABILITIES ARE WITH MIL AND THEREFORE MUK CANNOT ENTER INTO CONTRACT ON ITS OWN. ITA NO. 3120/AHD/2010 MASTEK LIMITED VS. ADDL.CIT ASST.YEAR - 2006-07 - 29 - VIII. THE LD. DR TOOK US THROUGH THE RELEVANT PORT ION OF THE TP STUDY REPORT, WHERE THE ASSET ANALYSIS WAS CARRIED OUT BY THE ASSESSEE AND RE-EMPHASIZED THAT WITHOUT MIL'S N AME, MUK WILL NOT BE ABLE TO SELL THE CONTRACTS TO THIRD PARTIES IN UK. IX. FURTHER, MIL HAS ALSO GIVEN PERFORMANCE GUARANTEE TO THE CUSTOMERS IN UK, WHICH FURTHER STRENGTHENS THE POINT THAT MUK ACTS LIKE A MARKETING SUPPORT SERVICE PROV IDER. X. AS PER THE CONCLUSION OF THE FUNCTIONS, ASSETS AND RISKS ANALYSIS, IT IS MIL WHICH IS PRIMARILY RESPONSIBLE TO THE CUSTOMER AND ACTS LIKE AN ENTREPRENEUR. XI. FURTHER, THE RATE OF THE COMPENSATION FOR MUK IS ALSO FIXED AT 5.52% EVERY MONTH. XII. THEN, THE LD. DR PUT UP HIS CONTENTIONS AGAIN ST THE ARGUMENTS PUT FORWARD BY THE LD COUNSEL FOR THE ASS ESSEE, CAN BE SUMMARIZED AS FOLLOWS: A. NO SHIFTING OF PROFITS:- THE LD. DR STATED THAT THE TRANSFER PRICING PROVISIONS ARE ATTRACTED AS SOON A S THERE ARE INTERNATIONAL TRANSACTIONS. THE LD. AO/TP O IS NOT REQUIRED TO SEE THE MOTIVE FOR ENTERING INTO AN INTERNATIONAL TRANSACTION. THERE IS NOTHING SPECIFI ED IN THE LAW AS TO WHETHER THE ONUS LIES ON REVENUE TO DEMONSTRATE THAT THE PROFIT SHIFTING MOTIVE WAS PREVALENT IN RELATION TO A PARTICULAR INTERNATIONAL TRANSACTION. THE LD. DR READ OUT THE PROVISIONS OF SECTION 92 OF THE ACT AND BASED ON THE PLAIN READI NG, ARGUED THAT NO WHERE ANY SATISFACTION AS TO THE MOT IVE TO SHIFT PROFITS NEED TO BE SHOWN OR RECORDED. THE TPO RELIED UPON AZTEC SOFTWARE & TECHNOLOGY SERVICES LTD. [107 ITD 141 (SB)]. AS REGARDS THE MOSER BAER CASE ( 316 ITR PG.1)REFERRED TO BY THE LD. COUNSEL FOR THE ASSESSEE, THE LD. DR POINTED OU T THAT THE SAME WAS ONLY AN OBSERVATION BY DELHI HIGH COURT AND NO DECISION WAS TAKEN THAT ONLY IF MOTIVE WAS PROVED, ONE CAN GO AHEAD. THE LD. DR ALSO STATE D ITA NO. 3120/AHD/2010 MASTEK LIMITED VS. ADDL.CIT ASST.YEAR - 2006-07 - 30 - THAT THE INSTRUCTION OF THE CBDT IS AUTOMATIC VIZ: IF THE TRANSACTION VALUE IS MORE THAN RS. 15 CRORES, I T SHOULD BE REFERRED AUTOMATICALLY TO TPO. THE LD. DR CONTINUED AND CLA RIFIED THAT THERE WAS NO DISPUTE AS REGARDS MOST APPROPRIATE 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 TH E 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 NEVER PRODUCED ANY EVIDENCE AS REGARDS THE STAFF OF MUK BEING PAID SALARY AND COMMISSION. THESE DETAILS NOW GIVEN SHOULD NOT INFLUENCE THE TRIBUNAL AND SHOULD BE DISREGARDED. ITA NO. 3120/AHD/2010 MASTEK LIMITED VS. ADDL.CIT ASST.YEAR - 2006-07 - 31 - G. USE OF US COMPARABLES: - IN THIS REGARD, THE LD. DR STATED THAT IN THE SHOW CAUSE NOTICE HE REQUESTED T HE ASSESSEE TO STATE WHY UK/US COMPARABLES SHOULD NOT BE USED. ACCORDING TO THE LD. DR, THE ASSESSEE NEVE R SUBMITTED THE DETAILS OF UK COMPARABLE UNTIL THE TP O PLACED HIS ORDER FOR DIT'S APPROVAL. HE POINTED OUT THAT THE ASSESSEE GAVE HIS REPLIES BUT NEVER GAVE ANY REPLIES IN RELATION TO THE UK COMPARABLES. THE DETA ILS GIVEN BY THE ASSESSEE WERE SUBMITTED LATE AND NOT WITHIN THE TIME GIVEN IN THE SHOW CAUSE. AS PER THE LD. DR, THE PROCEDURE IS TO SEND THE DRAFT ORDER FO R DIT'S APPROVAL, WHICH WOULD TAKE A GAP OF AROUND 5 TO 6 WORKING DAYS. THE LD. DR FURTHER STATED THAT T HE TPO USED THE SAME REPORT OF THE ASSESSEE, WHICH WAS PREPARED IN RELATION TO ANOTHER SUBSIDIARY IN USA HAVING SIMILAR BUSINESS MODEL AND WHERE SAME FUNCTIONS WERE CARRIED OUT. THE LD. DR AGREED THAT UK COMPARABLES CAN BE USED AND OFFERED THAT THE TPO WOULD BE HAPPY TO RE-LOOK INTO THE SAME AND REVERT BACK WITHIN A WEEK'S TIME. ACCORDING TO THE LD. DR, WHETHER ONE USES UK / US COMPARABLES, IN AN ARMS' LENGTH SITUATION THE MARGINS WOULD BE VERY CL OSE AND NOT VITIATE ON A LARGER BASIS. AS REGARDS THE COMPARABILITY ANALYSIS CARRIED OUT BY THE ASSESSEE, THE LD. DR STATED THAT THE ASSESSEE IDENTIFIED THE COMPANIES ENGAGED IN DISTRIBUTION OF SOFTWARE PRODUCTS AND NOT SOFTWARE SERVICES. HE HAS PLEADED THAT UNCOMPARABLES CANNOT BE COMPARED. H. PERIOD OF FINANCIALS: - AS REGARDS THE USAGE OF THE PERIOD JULY-JUNE AGAINST APRIL-MARCH, THE LD. DR ACCEPTED THE ERROR ON PART OF THE REVENUE AND STATE D THAT THE SAME NEED TO BE RECTIFIED. I. +/-5% BENEFIT TO THE ASSESSEE: - IN THIS REGARD, THE LD. DR RELIED UPON THE CASE LAW OF GLOBAL VANTEDGE PRIVATE LIMITED V DCIT [2010-TIOL-24-ITAT- ITA NO. 3120/AHD/2010 MASTEK LIMITED VS. ADDL.CIT ASST.YEAR - 2006-07 - 32 - DEL] AND MARUBENI INDIA PRIVATE LIMITED AND STATED THAT THE BENEFIT OF +/-5% IS AVAILABLE ONLY WHEN TH E ASSESSEE COMPUTES THE ARM'S LENGTH PRICE AND NOT WHEN THE TPO DETERMINES THE SAME. FURTHER, THE LD. DR STATED THAT IF THE LAW OF +/-5% IS CORRECTLY APP LIED THE ASSESSEE'S CASE DOES NOT FIT WITHIN THIS RANGE AS THE ASSESSEE HAS SELECTED MUK AS THE TESTED PARTY. THE LD. DR ALSO DID NOT ACCEPT THE WORKING OF THE ARITHMETIC MEAN OF 11.96% OF UK COMPARABLES AS ACCORDING TO HIM THE SAME WAS NEVER SUBMITTED BEFORE THE TPO. XIII. THE LD.CIT DR MR. GUPTA HAS PROCEEDED ON TH E CHARACTERIZATION OF MUK. HE DISCUSSED THE REAL CHARACTERISTICS OF A DISTRIBUTOR AND STATED THAT MU K 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 ACCO RDINGLY, MIL SHALL RAISE THE INVOICE ON MUK. THE LD. DR STAT ED THAT THE PRICE FOR CUSTOMER IS ALWAYS FIXED BY MIL AND M UK WILL ACCORDINGLY NEVER INCUR ANY LOSS. MUK SHALL AL WAYS GET A FIXED RATE OF RETURN VIZ: 5.52% AND SHALL ACCORDI NGLY NOT ASSUME ANY RISK. XIV. AS REGARDS THE TECHNICAL SERVICES ARE CONCER NED, 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 TECH NICAL PEOPLE IN MUK TO CARRY OUT ANY TECHNICAL SUPPORT SE RVICES 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 SER VICES HAVE NOT BEEN DISCUSSED. THE TEAM OF MUK THOUGH TECHNICA L ARE NOT FROM THE SOFTWARE SERVICES PERSPECTIVE BUT MERE LY COMMERCIAL PERSPECTIVE. XV. BASED ON THE ABOVE, THE LD. DR CONCLUDED THAT THE TPO HAS RIGHTLY TREATED MUK AS A MARKETING SUPPORT SERVICE ITA NO. 3120/AHD/2010 MASTEK LIMITED VS. ADDL.CIT ASST.YEAR - 2006-07 - 33 - PROVIDER/PERFORMING FRONT OFFICE ACTIVITIES AND SHO ULD BE THEREFORE COMPENSATED ONLY ON A COST PLUS BASIS. E) REJOINDER: 6. IN THE REJOINDER, THE LD. COUNSEL FOR THE ASSESSEE RESPONDED TO THE AFORESAID ARGUMENTS AND THE SAME ARE SUMMARI ZED BELOW: A. SHIFTING OF TAX BASE: - THE LD. COUNSEL CLARIFIED THAT THE POINT RAISED BY HIM WAS NOT TO CHALLENGE THE JURISDICTION OF THE TP REGULATIONS BUT WAS MORE FRO M A COMMERCIAL PERSPECTIVE AND IN HIS VIEW IT IS AN IMPORTANT POINT TO BE CONSIDERED AS TO WHY WOULD A BUSINESSMAN NOT BRING ALL THE PROFITS IN INDIA, WHE N THE SAME WERE EXEMPT AND CONTINUE TO PAY TAXES AT A RATE OF 30% IN UK BY PARKING THESE PROFITS THERE. H E FURTHER EMPHASIZED THAT THE DELHI HIGH COURT'S RULI NG NEED TO BE RESPECTED. . THE JUDGEMENT OF ITAT VI Z: AZTEC SOFTWARE ( SUPRA) RELIED UPON BY THE TP O HAS NO APPLICATION. THE LD. COUNSEL EMPHASIZED THA T THIS ISSUE SHOULD BE DEALT FROM THE COMMERCIAL ASPE CT. B. HMRC'S GUIDANCE: - IN THIS REGARD, THE LD. COUNSEL EMPHATICALLY STATED THAT AS MUK IS A TAXABLE ENTITY IN UK, THE GUIDELINES OF HMRC ARE APPLICABLE TO UK. IT WOULD BE INCORRECT ON THE PART OF THE TPO, WHO REPRESENTS GOVERNMENT OF INDIA, TO STATE THAT GUIDA NCE OF HMRC IS A MERE GUIDANCE AND ANY GUIDANCE GIVEN BY THE CBDT IN INDIA IS IN FACT A LAW. GIVEN THE CIRCUMSTANCES, IT WOULD BE INCORRECT TO ASSUME THAT GOVERNMENT OF INDIA WOULD BE HAPPY SIMPLY IF THE ASSESSEE WOULD HAVE CHARGED IN THE FIRST INSTANCE. HOWEVER, IT IS PERTINENT TO NOTE THAT EVEN IF ASSES SEE WOULD HAVE CHARGED IN THE FIRST INSTANCE, THE INDIA N GOVERNMENT WOULD NOT HAVE BEEN ABLE TO COLLECT ANY TAX, DUE TO THE SPECIFIC PROVISIONS OF SECTION 10A IN THE ACT. AS AGAINST THIS, THE REVENUE IS NOW EXPECT ING THE ASSESSEE TO PAY TAX SIMPLY BECAUSE IT APPEARS T O THEM THAT THE ASSESSEE HAD UNDERCHARGED ITS AE IN T HE FIRST INSTANCE, WHICH IN LD. COUNSEL'S BELIEF IS AN UNFAIR APPROACH. ITA NO. 3120/AHD/2010 MASTEK LIMITED VS. ADDL.CIT ASST.YEAR - 2006-07 - 34 - C. 5.52% REMUNERATION TO MUK: - IN THIS REGARD, THE LD. COUNSEL POINTED OUT THAT YARDSTICKS FOR APPLYING TA X TO AN INDIAN ENTITY CANNOT BE DIFFERENT THAN THE YARDSTICKS FOR DECIDING HOW UK SHOULD BE COMPENSATED. WITH THE ARGUMENTS OF LD. DR, THE EXPECTATION IS TO LEAVE LESS 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 ACTIVITIE S WHILST OPERATING THROUGH THEIR SUBSIDIARIES IN INDI A, WOULD THE GOVERNMENT OF INDIA EVER ALLOW THEM TO EARN LESS THAN 1% OF THE TOTAL REVENUES GENERATED O UT 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 A NY 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 THE SOFTWARE CAPABILITIES OF MIL. IT DOES NOT HAVE ITA NO. 3120/AHD/2010 MASTEK LIMITED VS. ADDL.CIT ASST.YEAR - 2006-07 - 35 - TECHNICAL PEOPLE TO PERFORM THE SOFTWARE SERVICES. HOWEVER, IT DOES ALL THAT IS REQUIRED TO DISTRIBUTE A COMPLEX SOFTWARE SOLUTION TO A CUSTOMER AND THE SAM E HAVE BEEN WELL DEMONSTRATED THROUGH THE BUSINESS CASE STUDIES. F. DELIVERIES TO THE CUSTOMER BY MIL: - THE SOFTWARE SOLUTIONS DEVELOPED BY MASTEK ARE CUSTOMISED SOFTWARE SOLUTIONS AND WILL ALWAYS HAVE TO BE PUT U P AT THE CUSTOMER'S SITE BY MIL. THIS DOES NOT GIVE A NY RIGHT TO MIL TO RAISE ANY INVOICES ON CUSTOMERS DIRECTLY. DELIVERIES DIRECTLY TO THE CUSTOMERS WILL HAVE NO BEARING ON THE CASE AS TO WHETHER MUK ACTS AS A DISTRIBUTOR OR A MERE MARKETING SERVICES PROVIDER. G. COMMISSION TO THE EMPLOYEES: - IT WAS INCORRECT ON THE PART OF THE LD. DR TO STATE THAT THIS WAS NEVER DISCUSSED BEFORE THE TPO. THIS ASPECT HAS BEEN VERY MUCH DISCUSSED WITH THE TPO AND PLACED ON RECORD. PAGE 1242 OF THE PAPER BOOK NO. IV REFLECTS THE SAME. H. SHOW CAUSE NOTICE: - THE LD. COUNSEL STATED THAT IT WAS NO WHERE BROUGHT OUT IN THE SHOW CAUSE NOTICE O F THE TPO THAT HE SHALL USE US COMPARABLES. THE UK COMPARABLES WERE GIVEN ON 6 TH OCTOBER 2009. FURTHER, THE SAME WERE ALSO GIVEN TO THE LD. DRP AND A COPY OF THE SAME WAS AGAIN MARKED TO THE TPO. THE LD. COUNSEL ALSO HIGHLIGHTED THAT THE TPO RAISED QUERIE S REGARDING THE DATABASE AND SEARCH STRATEGY USED AND ALSO REQUESTED FOR FINANCIALS OF THE UK MARKETING SERVICE PROVIDERS. ALL OF THIS INFORMATION WAS DULY SUBMITTED TO THE TPO WITH A COPY TO THE DRP. HOWEVER THE DRP DIRECTIONS HAVE REMAINED SILENT ON THIS MATTER. ACCORDINGLY, THERE ARISES NO FURTHER N EED TO GIVE ONE MORE OPPORTUNITY NOW TO THE LD. TPO / DRP. AS THE LD. DRP / TPO DID NOT ACT UPON THE SAME, AN ADVERSE INFERENCE BE DRAWN IN THIS REGARD. THE LD. COUNSEL ALSO FURTHER STATED THAT IN THE SUBSEQUENT ASSESSMENT YEAR VIZ: AY 2007-08, THE TPO HAS USED THE UK COMPARABLES. ITA NO. 3120/AHD/2010 MASTEK LIMITED VS. ADDL.CIT ASST.YEAR - 2006-07 - 36 - I. MODEL OF US SUBSIDIARY SAME AS THAT OF MUK : - IN THIS REGARD, THE LD. COUNSEL POINTED OUT THAT FOR T HE TRIBUNAL IN ORDER TO CONCLUDE WHETHER THE US MODEL IS SIMILAR TO THAT OF UK WOULD NEED TO PERUSE THE RECORDS OF THE US SUBSIDIARY. ALSO EACH GEOGRAPHY HAS TO BE SEEN SEPARATELY. THE LD. COUNSEL FURTHER CLARIFIED THAT THE MODEL ADOPTED BY THE US SUBSIDIA RY WAS DIFFERENT THAN THE MODEL ADOPTED BY THE UK SUBSIDIARY. J. +/-5% BENEFIT: - THE LD. COUNSEL POINTED OUT PARA 30 IN RELATION TO MARUBENI INDIA PVT. LTD. AND STATED THAT THE ASSESSEE'S CASE IS NOT TO CLAIM STANDARD DEDUCT ION OF +/-5%. IN THE ASSESSEE'S CASE, THE ASSESSEE IS W ITHIN THE +/-5% RANGE. F) CONCLUSION :- 7. WE HAVE HEARD THE SUBMISSIONS OF BOTH T HE SIDES AT A CONSIDERABLE LENGTH. IT IS TO BE STATED AT THE OUT SET ITSELF THAT THE PRELIMINARY ISSUE IS WHETHER THE MUK IS TO BE CONSIDERED AS CARRYING ON DISTRIBUTION OPERATIONS AS CONTESTED BY THE AP PELLANT, OR WHETHER THE MUK IS TO BE CONSIDERED AS CARRYING ON MARKETING SERVICES AS HELD BY THE REVENUE DEPARTMENT. BASED UPON THE TPOS FINDINGS AND DRPS DIRECTIONS, THE AO HAD TREATED M UK 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 CORPOR ATION (REFERRED AS MASTEK IN SHORT MIL ), AHMEDABAD AND MASTEK UK LT D. (MUK), A UNITED KINGDOM CORPORATION, UK. THE SAID AGREEMEN T WAS EFFECTIVE ITA NO. 3120/AHD/2010 MASTEK LIMITED VS. ADDL.CIT ASST.YEAR - 2006-07 - 37 - FROM 01/01/2005. IN THE PREAMBLE, IT IS STATED TH AT FROM 01/01/2005, MASTEK HAS CHANGED ITS BUSINESS MODEL FOR UK OPER ATIONS. CONSEQUENTLY, MASTEK HAS STARTED PROVIDING ON-SIT E SOFTWARE SERVICES TO CUSTOMERS IN UK THROUGH MASTEK UK- BRANCH . TH E AGREEMENT SAYS THAT EARLIER THOSE SERVICES WERE PROVIDED BY MUK. AN ANOTHER OPENING REMARK IN THE PREAMBLE WAS THAT THE MASTEK HAS ENGA GED AS ALSO RETAINED MUK TO PERFORM THE DISTRIBUTION ACTIVITIES FOR THE SOFTWARE DEVELOPMENT AND INFORMATION TECHNOLOGY SERVICES. ON-SITE AND O FF-SHORE SERVICES TO BE PERFORMED BY MASTEK. MUK HAS ACCEPTED TO PERFO RM SUCH DISTRIBUTION ACTIVITIES BUT FOR CONSIDERATION AS RE CORDED THEREIN BELOW IN THE SAID AGREEMENT. RELEVANT PORTION IS REPRODUCE D BELOW. WHEREAS WITH EFFECT FROM JANUARY 1, 2005, MASTEK H AS CHANGED ITS BUSINESS MODEL FOR THE UK OPERATIONS. C ONSEQUENTLY, MASTEK HAS STARTED PROVIDING ONSITE SOFTWARE SERVIC ES TO MUKS CUSTOMERS IN THE UK, THROUGH MASTEK LTD., -UK BRANC H, WHICH WERE EARLIER PROVIDED BY MUK. WHEREAS HENCEFORTH MASTEK ENGAGES AND RETAINS MUK T O PERFORM THE DISTRIBUTION ACTIVITIES FOR THE SOFTWAR E DEVELOPMENT AND INFORMATION TECHNOLOGY SERVICES (ONSITE AND / O R OFFSHORE) TO BE PERFORMED BY MASTEK. WHEREAS, MUK IS WILLING AND COMMITTED TO PERFORM SU CH DISTRIBUTION ACTIVITIES FOR CONSIDERATION AS RECORD ED IN THIS AGREEMENT. NOW, THEREFORE, IN CONSIDERATION OF THE PREMISES AN D OF THE TERMS HEREINAFTER SET FORT, THE PARTIES HERETO AGRE E AS FOLLOWS: ARTICLE 1 APPOINTMENT SUBJECT TO THE PROVISIONS OF THIS AGREEMENT, MASTEK HEREBY APPOINTS MUK AS ITS DISTRIBUTOR AND MUK HEREBY ACCE PTS SUCH APPOINTMENT AS DISTRIBUTOR OF THE SOFTWARE DEVELOPM ENT AND OTHER ITA NO. 3120/AHD/2010 MASTEK LIMITED VS. ADDL.CIT ASST.YEAR - 2006-07 - 38 - INFORMATION TECHNOLOGY RELATED SERVICES (HEREINAFTE R REFERRED TO AS SERVICES). 7.1. WE HAVE PERUSED ARTICLE 2, WHICH HAS PRESCRIBED ROLE AND RESPONSIBILITIES OF MUK AND MASTEK(MIL). MUK WAS M ADE RESPONSIBLE FOR CARRYING OUT DISTRIBUTION ACTIVITIES FOR SOFTWA RE DEVELOPMENT TO BE PROVIDED BY MASTEK, INTER-ALIA, IDENTIFYING CUSTOME RS, ESTABLISHING CONTACTS, SOLICITING ENQUIRIES, CUSTOMER RELATIONSH IP IN UK, ETC. ON THE OTHER HAND, MASTEK( (MIL) AGREED TO TAKE RESPONSIBI LITY TO PROVIDE MATERIAL IN SUPPORT OF DISTRIBUTION ACTIVITIES, TO ENSURE ADEQUATE NUMBERS OF ENGINEERS OF THE REQUIRED SKILLS, TO MAKE AVAILA BLE THEM AT ALL TIMES FOR EXECUTION OF ON-SITE AND OFF-SHORE SERVICES. 7.2. VIDE ARTICLE 4 OF THE SAID AGREEMENT, IT HAS FIXED THE PRICE AND THE METHOD OF INVOICING. IT SAYS THAT MUK SHALL BE ENTITLED TO RETAIN AN ARTMS LENGTH RETURN ON THE REVENUES RECEIVED FROM ITS CUSTOMERS IN UK FOR ITS DISTRIBUTION ACTIVITIES PERFORMED. MUK IS TO EARN ARMS LENGTH RETURN COMMENSURATE WITH ITS FUNCTIONS AND R ISK. 7.3. ARTICLE 4.3 PRESCRIBES THAT AT THE END OF EACH MONTH MASTEK SH ALL 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 SHAL L BE PAYABLE BY MUK WITHIN 60 DAYS OF RECEIPT OF INVOICE ISSUED BY MAST EK INDIA LTD. (MIL). 7.4. BEFORE US, ABHISHEK AUTO INDUSTRIES (2010-TII-54-ITAT-DEL- TP) CITED WHEREIN THE TRIBUNAL HAS MADE A CLEAR VERDIC T THAT WRITTEN ITA NO. 3120/AHD/2010 MASTEK LIMITED VS. ADDL.CIT ASST.YEAR - 2006-07 - 39 - AGREEMENTS WHICH ARE DULY EXECUTED BY THE RESPECTIVE PARTIES B ASED ON COMMERCIAL EXPEDIENCY CANNOT BE DISREGARDED WITHOUT GIVING ANY COGENT REASON. IN THE PRESENT APPEAL, IT HAS NOT BEEN DISP UTED 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 INTE RVENE IN THE REALM OF INTRICACIES OF COMMERCIAL EXPEDIENCIES INVOLVED, HENCE IT IS IMPROPER TO IGNORE THE TERMS & CONDITIONS INCORPORATED THERE IN WITHOUT ASSIGNING SOME STRONG REASON. 7.5. ON THE BASIS OF THE ABOVE MASTER AGREEMENT A V EHEMENT ARGUMENT FROM THE SIDE OF THE ASSESSEE WAS THAT THE ACTIVITIES PERFORMED BY THE MUK WAS DISTRIBUTION OF SOFTWARE SERVICES. A QUESTION WAS RAISED THAT WHY AT ALL BUSINESS MODEL WAS REQUIRED TO BE C HANGED AND WHY THE IMPUGNED MASTER AGREEMENT DATE 30.3.2005 WAS EXECU TED AND THAT WHAT WAS THE NECESSITY TO SUBSTITUTE THE EXISTING BUSIN ESS PATTERN. IN THIS REGARD, LD.AR HAS REFERRED HER MAJESTY OF REVENUE AND CUSTOMS (HMRC). 8. RELEVANT PORTION OF HMRC IS REPRODUCED BELOW:- IT IS OF COURSE POSSIBLE TO THINK OF SERVICES THAT MIGHT BE PROVIDED TO SOMEONE CARRYING ON THE BUSINESS OF SELLING FOR EXAMPLE THE SELLING COMPANY WILL VERY LIKELY PAY SOMEONE TO ADV ERTISE THEIR GOODS. HOWEVER, THE ACT OF SOLICITING AND SECURING A SALE GOES BEYOND THE PROVISION OF SERVICES TO THE SELLING ACT IVITY; INSTEAD IT IS A FUNDAMENTAL ASPECT OF THE SELLING ACTIVITY ITSELF . A COST PLUS METHOD OF REWARD IS UNLIKELY TO BE APPROPRIATE. A BETTER WAY OF ESTABLISHING AN ARMS LENGTH REWARD WILL BE TO USE A PRICE LINKED TO THE SALE OF THE GOODS . ITA NO. 3120/AHD/2010 MASTEK LIMITED VS. ADDL.CIT ASST.YEAR - 2006-07 - 40 - 8.1. IN THE LIGHT OF THE ABOVE, THE STAND OF THE OF THE ASSESSEE IS THAT UK REVENUE AUTHORITIES HAVE EXPECTED THAT ENTITIES PER FORMING THE ROLE OF THE DISTRIBUTOR WOULD NEED TO BE COMPENSATED ON THE RETURN ON SALE BASIS AND NOT COST PLUS BASIS. IN THE SAID GUIDELINES IT WAS MADE CLEAR THAT A SELLING ENTITY COULD BE REWARDED ON SALE BASIS. SINCE THE ASSESSEE HAS CHANGED ITS BUSINESS PATTERN, THEREFOR E, THE SAID GUIDELINES HAVE A DIRECT IMPACT ON THE TRANSACTIONS INVOLVED A ND THEREFORE IT WAS A JUSTIFIED MOVE TO ADOPT A PRICE LINKED REWARD. THER EFORE THE METHODOLOGY ADOPTED BY THE MIL AND MUK FOR INTERNATIONAL TRANSA CTION CAN BE SAID TO BE A BUSINESS DEMAND AS ALSO BUSINESS NECESSITY. 9. REVERTING BACK TO THE FUNCTIONS OF A DISTRIBUTOR WE HAVE BEEN INFORMED THAT A DISTRIBUTOR PERFORMS SELLING O F A PRODUCT, PRICE NEGOTIATION, ENTER INTO A CONTRACT, SETTLE THE SCOP E OF DELIVERABLES, FIXED THE TIME SCHEDULE WITH THE CUSTOMERS, IDENTIFY THE CUSTOMERS, ESTABLISH THE CONTACT WITH THE CUSTOMERS, SOLICIT THE ENQUIRI ES AND APPOINTMENT OF OTHER AGENCIES AND ALSO PROMOTE THE SALES BY ADVERT ISEMENT. AS AGAINST THAT, IN AGENCY RELATIONSHIP ALL SUCH ACTIVITIES AR E NOT EXPECTED FROM AN AGENT. SINCE THE MUK HAS ITS OWN TEAM OF QUALIFIED PERSONS AND THAT DUE TO DEPLOYMENT OF THE SAID TEAM THE REVENUE HAS INCR EASED SUBSTANTIALLY, THEREFORE, IT IS MEANINGFUL TO HOLD THAT THE MUK IN FACT IS IN A POSITION TO INDEPENDENTLY NEGOTIATE THE TERMS WITH THE CUSTO MERS AND HANDLE THE CUSTOMERS IN RESPECT OF FIXING OF TIME SCHEDULE AND THE SCOPE OF DELIVERABLES. 10. ONCE WE HAVE EXAMINED THAT ASPECT, THER EFORE WE ARE NOT IN AGREEMENT WITH THE TPO THAT MUK IS MERELY A CUSTOME R FACING ENTITY AND SIMPLY MEANT FOR THE MARKETING OF ASSESSEES BU SINESS. WE ARE OF THE VIEW THAT THERE WAS NO DIRECT EVIDENCE IN THE HANDS OF THE TPO TO SAY THAT ITA NO. 3120/AHD/2010 MASTEK LIMITED VS. ADDL.CIT ASST.YEAR - 2006-07 - 41 - THE ASSESSEE WAS SIMPLY A SELLING AGENT AND THAT IT APPEARS THAT THE TPO HAD PROCEEDED ON A PRESUMPTION THAT THE MUK HAS AC TED AS A SELLING AGENT FOR THE YEAR UNDER CONSIDERATION. HIS PRESUMP TION IS PRIMARILY BASED UPON ONE FACT THAT THERE WAS A FIXED PERCENTA GE OF AWARD GIVEN BY MIL TO MUK; WHICH IN HIS OPINION IS PREVALENT IN SE LLING AGENTS 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 REQUIREMENT OF THE MAIN MANUFACTURER. THOUGH THE PARTIES I.E. MIL AND MUK A RE ASSOCIATED TO EACH OTHER BUT SIMULTANEOUSLY TWO SEPARATE LEGAL EN TITIES HAVING SEPARATE TAX STRUCTURE HENCE SETTLED THE TERMS OF PAYMENT ON SALES BASIS, CONSIDERING THEIR RESPECTIVE ADVANTAGES, THOUGH CAN BE A FIXED AMOUNT, SO THAT THERE SHOULD BE ENVIABLE INCENTIVE TO GENERATE MORE REVENUE. 11. ONE MUST NOT OVERLOOK A BASIC FACT THAT T HE MIL HAD CHANGED ITS BUSINESS MODEL IN RESPECT OF UK OPERATIONS. BE FORE US, THE PERCENTAGE OF AWARD/ COMPENSATION PAID TO OTHER ASS OCIATE ENTERPRISES IS INFORMED. THE GEOGRAPHICAL REVENUE WAS COMPARED AND IT WAS FO UND THAT OUT OF THE OTHER ASSOCIATE ENTERPRISES THE REV ENUE GENERATED BY MUK FROM UK WAS HIGHEST AT 60%. BECAUSE OF THE SUBSTANTIAL GROWTH IN BUSINESS IN UK AND SUBSTANTIAL INCREASE IN REVEN UE, IT WAS A BUSINESS DECISION TO CHANGE THE BUSINESS PATTERN. THEREFORE WITH EFFECT FROM 01/01/2005 MASTEK HAS CHANGED ITS BUSINESS MODEL FO R UK OPERATIONS. CONSEQUENTLY, THE MASTEK HAS STARTED PERFORMING ON -SITE SOFTWARE SERVICES IN THE UK THROUGH A UK BRANCH WHICH WAS EA RLIER PROVIDED BY MUK. AS A RESULT, MASTEK HAS ENGAGED AND ALSO RETA INED MUK TO PERFORM THE DISTRIBUTION ACTIVITIES FOR SOFTWARE SE RVICES TO BE PERFORMED ITA NO. 3120/AHD/2010 MASTEK LIMITED VS. ADDL.CIT ASST.YEAR - 2006-07 - 42 - BY MASTEK ON-SITE AND OFF-SHORE VIDE SAID AGREE MENT MUK WAS THEREFORE APPOINTED AS A DISTRIBUTOR. THE INTERNAT IONAL TRANSACTION ENTERED INTO BETWEEN MASTEK AND MUK WERE SUMMARIZED BEFORE US AS FOLLOWS:- SR.NO. NATURE VALUE (INR) 1. SOFTWARE SERVICES (DISTRIBUTED BY MUK) 2,993,335 ,552 2. COMMON INFRASTRUCTURE COSTS COST ALLOCATION PAID/PAYABLE TO MUK 11,579,249 3. REIMBURSEMENT OF EXPENSES RECEIVED/RECEIVABLE FROM MUK 14,524,952 12. SINCE IT WAS A HIGH VOLUME OF TURNOVER, THEREFO RE THE AO HAS ALSO ENQUIRED ABOUT THE RISK PROFILE OF MUK. A DISCUSSION WAS THAT ON ACCOUNT OF INCREASED BUSINESS THERE SHOULD BE INCR EASED COMPETITION. IT WAS EXPLAINED TO THE REVENUE AUTHORITIES THAT MUK I S THE CUSTOMER FACING ENTITY. BECAUSE OF THAT POSITION IN THE MAR KET IN UK, THE MUK HAD ALSO ASSUMED MARKET RISK. LIKEWISE, THE CREDIT RISK, VIS--VIS CUSTOMER, WAS ASSUMED BY MUK, WHEREAS MASTEK HAS AS SUMED THE CREDIT RISK VIS--VIS MUK. AN ANOTHER FEATURE IN THIS REG ARD HAS ALSO BEEN BROUGHT ON RECORD THAT MUK HAD OBTAINED BORROWING L IMITS FROM BANK IN INDIA. THAT BORROWINGS WERE AFTER THE ISSUANC E OF GUARANTEE TO THE BANK BY MASTEK. BUT IN RETURN MUK HAS GIVEN PERFOR MANCE GUARANTEE. ALL THESE INFORMATION, THUS INDICATED THAT MUK HAS ACTED AS A DISTRIBUTOR AND NOT MERELY A FRONT OFFICE CONCERN OF MIL. WE CA N THEREFORE HOLD THAT ONLY ONE CRITERIA OF FIXED PERCENTAGE OF COMPENSATI ON/ AWARD AGREED TO BE GIVEN TO MUK MUST NOT BE MEASURED AS A SOLE CRITERI A TO INTERRUPT THE STATUS OF MUK FROM DISTRIBUTOR TO SELLING AGENT . ITA NO. 3120/AHD/2010 MASTEK LIMITED VS. ADDL.CIT ASST.YEAR - 2006-07 - 43 - 13. THERE WAS AN OBJECTION THAT DUE TO THE CHAN GE 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 H AS ALLEGED THAT THERE WAS A FALL IN THE PROFIT DUE TO CHANGE IN THE BUSIN ESS MODEL. IT WAS EXPLAINED THAT DUE TO CHANGE IN THE BUSINESS MODEL, THERE WAS ALSO A CHANGE IN THE PROFITABILITY. ACCORDING TO LD.AR, TH ERE 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, THE ENTIRE ON-SITE REVENUE, APPRO XIMATELY IT WAS STATED TO BE RS.150 CRORES, WAS ACCOUNTED IN THE BOOKS OF MIL. AND THAT ON ACCOUNT OF THE UK OPERATIONS, THE PROFITS HAVE BEEN INCREASED IN INDIAN RUPEES FROM 45 CRORES TO RS.51 CRORES. THE PERCENT AGE OF PROFITABILITY WAS LOW SIMPLY BECAUSE OF INCREASE IN DENOMINATOR, BUT THERE WAS NO SHIFTING OF PROFIT FROM MIL TO MUK. OTHERWISE ALSO IT IS A GENERAL MARKET PHENOMENON THAT WHENEVER THERE IS HIGH TURN OVER THERE IS DECLINE IN PROFIT RATIO SO AS TO SUSTAIN THE MARKET COMPETI TION AS ALSO TO GARNER MORE BUSINESS. THIS UNIVERSAL REALTY THUS SUPPORTS THE STAND OF THE APPELLANT. 14. AN ANOTHER ARGUMENT HAS ALSO BEEN RA ISED THAT THERE WAS NO ADVANTAGE IN SHIFTING OF PROFIT FROM INDIA TO UK. A VEHEMENT CONTENTION WAS RAISED THAT ONCE THE ENTIRE INCOME OF MIL IS SU BJECT TO SPECIAL BENEFIT AS PRESCRIBED U/S.10A AND THERE WAS NIL INCIDENCE O F TAX, THEN THERE WAS NO JUSTIFIABLE REASON TO PARK THE PROFITS IN UK. IT WAS INFORMED BY THE LD.AR THAT IN UK THE ASSESSEE WOULD SUFFER TAX @ 30 %, HENCE THERE WAS NO LOGIC TO SHIFT THE PROFIT. AT THAT JUNCTURE, L D. CIT DR MR.V.K.GUPTA ITA NO. 3120/AHD/2010 MASTEK LIMITED VS. ADDL.CIT ASST.YEAR - 2006-07 - 44 - HAS REFERRED AZTECH SOFTWARE & TECHNOLOGY SERVICES LTD. REPORTED AS (109 TTJ 892) ( 107 ITD 141)(BANG)(SB) FOR A LEGAL PROPOSITION THAT ANY ADJUSTMENT ON ACCOUNT OF TRANSFER PRICING WOULD NOT QUALIFY FOR THE SPECIAL BENEFIT PRESCRIBED U/S.10A OF I.T. ACT. L D.AR HAS OPPOSED AND PLEADED THAT ONCE THE TRANSACTION WAS ALP TRANSACTI ON, THEN THERE WAS NO REQUIREMENT OF ANY ADJUSTMENT AND HENCE THERE WAS N O REQUIREMENT OF REJECTION OF BENEFIT OF SECTION 10A OF I.T. ACT. THIS ARGUMENT HAS FORCE BECAUSE BY APPLYING A VERY COMMON LOGIC NO BUSINESS MAN WILL SHIFT THE PROFITS FROM A COUNTRY WHERE SUCH PROFITS ARE EXEMP T OR HAVING LOWER INCIDENCE OF TAX. RATHER REVENUE WAS UNABLE TO AN SWER THE QUESTION THAT WHY AT ALL THIS ASSESSEE HAS SHIFTED ITS BUSINESS P ROFIT TO UK WHERE RATE OF TAX IS SAID TO BE 30% AS AGAINST NIL RATE OF TAX I N INDIA. NATURALLY, THE DECISION OF MOSER BEAR INDIA LTD. VS. ADDL.CIT 316 ITR 01(DELHI), GLOBAL VANTEDGE PVT.LTD. (2010) TIOL-24 (ITAT-DEL)( 1 ITR 326(AT) AND MSS INDIA PVT.LTD. (2009) TIOL 416 (ITAT-PUNE) ARE WORTH FOR REFERENCE. 14.1. THIS VERY QUESTION HAD RAKED UP IN THE CA SE OF ITO VS. M/S.ZYDUS ALTANA HEALTHCARE PVT.LTD. (2010-TII-29-I TAT-MUM- TP) THAT WHERE ASSESSEES INCOME IS EXEMPT U/S.10B, WH ETHER THE TPO WAS JUSTIFIED IN TAKING HIGHER 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 A SPECTS, CONCLUDED THAT THE MARK UP TO 5% OVER COST WAS NOT AS PER ARMS L ENGTH PRICE AND AS PER TPO THE SAME SHOULD HAVE BEEN 17.14% ON THE BASIS O F COMPARABLES. THE ASSESSEE HAD ADOPTED TRANSACTIONAL NET MARGIN M ETHOD (TNMM) AND IN ORDER TO EXAMINE THE APPROPRIATENESS OF THIS METHOD THE TPO RESORTED TO COMPARABLE UNCONTROLLED PRICE METHOD (C UP) ALONG WITH ITA NO. 3120/AHD/2010 MASTEK LIMITED VS. ADDL.CIT ASST.YEAR - 2006-07 - 45 - 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 F OR DETERMINING THE ARMS LENGTH PRICE IN REGARD TO INTERNATIONAL TRANS ACTIONS 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 COU NTRYS JURISDICTION, THEREFORE THERE WAS NO NECESSITY FOR THE ASSESSEE T O TRANSFER THE PROFITS IN ANY OVERSEAS JURISDICTION. WE HAVE ALSO NOTICED THA T IN AN UNEQUIVOCAL TERMS IT IS PRONOUNCED, QUOTE THAT SINCE THE PROF ITS BY THE AES HAVE BEEN SUBJECTED TO TAX IN THE RESPECTIVE OVERSEAS JU RISDICTION, THERE WAS NO NECESSITY FOR THE ASSESSEE TO TRANSFER THE P ROFITS IN ANY OVERSEAS JURISDICTION UNQUOTE. 15. AN ANOTHER QUESTION IS THAT MERELY BECAUSE IN TERMS OF THE MASTER AGREEMENT THE MUK HAS RECEIVED A FIXED COMPE NSATION AT 5.5%, WHETHER IT COULD LEAD TO A CONCLUSION THAT THE SAID ENTITY WAS A MARKETING OR FRONT OFFICE ENTITY. THOUGH UNDISPUTEDLY A LE GALLY BINDING AGREEMENT MUST NOT BE DISREGARDED BUT THAT AGREEMENT HAS TO B E UNDERSTOOD AND TAKEN INTO ACCOUNT AS A WHOLE AND NOT IN PIECE-MEAL . A DECISION OF ABHISHEK AUTO INDUSTRIES LTD. (2010 TII 54 ITAT DE LHI TP) HAS BEEN REFERRED. IT IS ALSO WORTH TO REFER AZADI BACHAVO ANDOLAN & ANR. 263 ITR 706 (SC) . AN ANOTHER FACT HAS ALSO BEEN BROUGHT THAT THE MUK HAD PRESCRIBED COMMISSION TO ITS EMPLOYEES ON S ALES. THE EMPLOYEES WHO HAVE EARNED COMMISSION ON SALES HAVE GENERATED MORE REVENUE TO MUK. THE PROGRESSIVE FIGURES OF REVENU E GENERATION DURING THE YEAR UNDER CONSIDERATION HAS BEEN BROUGHT ON RE CORD AND INFORMED ITA NO. 3120/AHD/2010 MASTEK LIMITED VS. ADDL.CIT ASST.YEAR - 2006-07 - 46 - ABOUT THE TREND FOLLOWED IN THE YEARS TO COME IN CO MPARISON TO THE REVENUE GENERATION IN THE PAST. SINCE THE MUK HAD MADE ALL ENDEAVOURS AND EFFORTS TO IMPROVE THE REVENUE GENERATION, THER EFORE, IN OUR CONSIDERED OPINION, IT WAS NOT APPROPRIATE TO CHARA CTERIZE MUK AS A MARKETING SERVICES PROVIDER INSTEAD OF A DISTRIB UTOR. IN OUR HUMBLE OPINION, MUK WAS RIGHTLY CHARACTERIZED AS A DISTRI BUTOR OF SERVICES. 16. THE TPO HAS DISCUSSED A COMPARABILITY ANAL YSIS TO DETERMINE WHETHER 5.52% RETURN ON SALES ACHIEVED BY MUK WAS A T ARMS LENGTH OR NOT. THE ASSESSEE HAS CARRIED OUT A SEARCH ANALYSI S AND IDENTIFIED CERTAIN DISTRIBUTORS OF SOFTWARE PRODUCTS , BUT CONSIDERING ASSESSEES BUSINESS, IT WAS EXPECTED TO IDENTIFY DISTRIBUTORS OF SOFTWARE SERVICES. THERE WAS A REFERENCE OF T P STUDY REPORT. ACCORDING TO ASSES SEE, THE SAID BENCH- MARKING WAS CLOSEST AVAILABLE INSTANCES, HOWEVER, P LEADED TO APPLY THE SAME, NEVERTHELESS, CONSIDERING THE CONSTRAINTS OF THE DATABASE USED. IT HAS BEEN SUBMITTED THAT ARITHMETIC MEAN OF THE PRO FIT MARGINS OF THOSE COMPARABLES WAS 4.62% AND CONSIDERING THE PROVISO T O SECTION 92C(2) OF I.T. ACT, THE BENEFIT OF (+/-)5% RANGE WAS AVAILABL E TO THE ASSESSEE. THERE WAS A REFERENCE OF OECD TP GUIDELINES WHICH STATES THAT EMPHASIS IS TO BE PROVIDED ON FUNCTIONAL SIMILARITIES RATHER TH AN ON PRODUCTS SIMILARITIES. THIS OBSERVATION OF OECD IS HELPFUL TO THIS ASSE SSEE. THE ASSESSEE HAS SELECTED FEW COMPARABLES PERTAINING TO THE SOFTWARE INDUSTRY. THOSE COMPARABLES WERE INVOLVED IN DIS TRIBUTION ACTIVITIES AND CAN BE SAID TO BE FUNCTIONALLY SIMILAR, THEREF ORE THERE OUGHT NOT TO BE ANY REASON ON THE PART OF THE TPO TO REJECT SUCH BE NCH-MARK. WE ARE AWARE THAT THE TPO HAD SELECTED MARKETING SERVICES FOR BENCH-MARK. HE HAS IDENTIFIED CERTAIN COMPARABLES, BUT ALL WERE PE RFORMING THE OPERATIONS IN US. THE ARITHMETIC MEAN OF THOSE US MARKETING ITA NO. 3120/AHD/2010 MASTEK LIMITED VS. ADDL.CIT ASST.YEAR - 2006-07 - 47 - COMPARABLES WAS 6.02% AND THEREUPON THE IMPUGNED A DJUSTMENT WERE WORKED OUT BY THE TPO. HOWEVER, AS FAR AS THE QUES TION 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 C ASE 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 APPROPRIA TE AND MOST SUITABLE COMPARABLE. WE, THEREFORE, DO NOT ENDORSE THE BENCH- MARKING OF TPO BEING BASED UPON US COMPARABLES . 16.1. IT IS CLEAR THAT ARMS LENGTH PRIC E IS TO BE DETERMINED BY TAKING RESULT OF COMPARABLE TRANSACTIONS AND THOSE TRANSACTIONS MUST BE IN COMPARABLE CIRCUMSTANCES . IT IS THEREFORE REQUIRED TO HAVE A PROPER STUDY OF SPECIFIC CHARACTERISTICS OF CONTROLLED TRA NSACTION. IT IS ALSO REQUIRED THAT THERE SHOULD BE PROPER STUDY OF FUNCT IONS PERFORMED SO AS TO MATCH THE IDENTICAL SITUATIONS UNDER WHICH FUNCTION S HAVE BEEN PERFORMED. THEN RISK PROFILE IS ALSO REQUIRED TO B E COMPARED. WE MAY LIKE TO ADD THAT THERE ARE SO MANY PERSPECTIVES WH ICH ARE REQUIRED TO BE COMPARED AND IN THIS CONNECTION THE HONBLE COURTS HAVE ALSO SUGGESTED SO, SUCH AS, COMPARISON OF FUNCTIONAL PROFILE, SIMI LARITY IN RESPECT OF ASSETS EMPLOYED AND A THOROUGH SCREENING OF THE COM PARABLES ETC. HENCE, IN THE PRESENT CASE, IT IS NECESSARY TO CONS IDER AN ANALYSIS THAT WHETHER THE COMPARABLES SELECTED BY THE TPO HAD ANALOGOUS FUNCTIONAL PROFILE TO THAT OF FUNCTIONAL PROFILE OF THE ASSESSEE. IT IS TRUE THAT FUNCTIONAL PROFILE AND ASSETS & RISK ANALYSIS WAS MADE AVAILABLE BUT THAT IS TO BE CORRECTLY UNDERSTOOD IN THE LIGHT OF THE N ATURE OF INTERNATIONAL TRANSACTION CARRIED OUT BY THE ASSESSEE WITH THE SA ID AE. A SIMILAR PROBLEM WAS CONSIDERED BY ITAT DELHI BENCH IN THE C ASE OF BECHTEL ITA NO. 3120/AHD/2010 MASTEK LIMITED VS. ADDL.CIT ASST.YEAR - 2006-07 - 48 - INDIA PVT.LTD. VS. DY.CIT (2011-TII-07-ITAT-DEL-TP ) WHERE THE ASSESSEE STATED TO BE ENGAGED IN THE BUSINESS OF PR OVIDING ELECTRONIC DATA SUPPORT SERVICE TO AE AND THE DIFFICULTY AROSE THAT THE SAID FUNCTION WAS COMPARED WITH THE COMPANIES ENGAGED IN THE BUSINESS OF DEVELOPMENT OF SOFTWARE. SO THE QUESTION WAS THAT WHETHER A MINUT E EXAMINATION OF FUNCTIONAL PROFILE IS NECESSARY FOR THE PURPOSE OF SELECTION OF COMPARABLES AND THE ANSWER GIVEN WAS THAT FUNCTIONA L PROFILE MUST BE FIRST EXAMINE AND AFTER THAT PROCEED TO SELECT THE COMPARABLES. INTERESTINGLY, IN THE PRESENT CASE NOW BEFORE US, C OMPARABLES CHOSEN BY THE ASSESSEE WERE DISCUSSED BY THE TPO AND THOSE WE RE DISCARDED. THE BASIC REASON FOR REJECTION OF THOSE COMPARABLES WAS THAT THE COMPANIES THOSE WERE QUOTED BY THE ASSESSEE WERE DEALING IN P RODUCT DISTRIBUTION, WHEREAS THE TPO WAS OF THE VIEW THAT THE AE WAS NOT HING BUT FRONT OFFICE OF THE ASSESSEE AND SIMPLY ENGAGED IN MARKE TING ACTIVITY. IN THIS CONTEXT, WE ARE OF THE VIEW THAT IN ORDER TO DETERM INE THE MOST APPROPRIATE METHOD FOR DETERMINING THE ARMS LENGTH PRICE, FIRST IT IS NECESSARY TO SELECT THE TESTED PARTY AND SUCH A SELECTED PARTY SHOULD BE LEAST COMPLEX AND SHOULD NOT BE UNIQUE, SO THAT PRI MA FACIE CANNOT BE DISTINGUISHED FROM POTENTIAL UNCONTROLLED COMPARABL ES. 17. WE HAVE ALSO EXAMINED THE EXACT NATURE OF THE A DJUSTMENT AS PROPOSED BY TPO ON THE BASIS OF THE FIGURES INVOLVE D. 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 P ROFIT OUGHT TO HAVE BEEN EARNED BY THE ASSESSEE. AS AGAINST THAT, THE O PERATIVE PROFIT OF MUK WAS 28,60,974. THEREFORE, AS PER TPO THE EXCESS O PERATING PROFIT TRANSFERRED WAS (28,60,974 4,94,331) 23,66,643. HENCE, AS PER TPO, ITA NO. 3120/AHD/2010 MASTEK LIMITED VS. ADDL.CIT ASST.YEAR - 2006-07 - 49 - THE MUK HAS EARNED EXCESS PROFIT OF 23,66,643 AND A FTER CONVERTING THE SAME INTO RUPEES AN UPWARD ADJUSTMENT WAS MADE. TH E FIGURES AS MENTIONED HAVE BEEN TAKEN FROM THE AUDITED FINANCIA L STATEMENT OF MUK FOR THE YEAR ENDED 30 TH JUNE, 2006. WE HAVE BEEN INFORMED THAT AS PER THE P&L A/C. OF MUK ENDED ON 31/03/2006, THE REVENU E WAS 4,98,26,033 AND THE MASTEK BILLING WAS 3,82,63,673. THE EXPENSES, SUCH AS, ADMINISTRATIVE COST, SELLING, TRAVELLING, COMMU NICATION, ETC. WERE 88,13,223. THE TOTAL OF THE BILLING AND THE EXPENS ES WAS THUS 4,70,76,896. THIS AMOUNT WAS DEDUCTED FROM THE RE VENUE OF 4,98,26,033 AND THE BALANCE WAS THE OPERATING PROFI T (OP) CAME TO 27,49,137. THIS FIGURE OF OP IS IN FACT 5.52% OF THE TOTAL REVENUE. THE CALCULATION OF TRANSACTION HAS BEEN FURTHER EXPLAIN ED AND IN THIS CONNECTION PAPER BOOK-II IS REFERRED WHEREIN ON PA GE 306 THERE WAS A LIST OF INVOICES RAISED ON MUK. FOR EXAMPLE, FOR THE MO NTH OF JULY 2005 AS PER MASTEK INVOICE NO.(MH-1030001) THE INVOICE AMOU NT WAS 2450.82. HOWEVER, THE TOTAL REVENUE OF MUK WAS 3333.78. THE FRONT OFFICE COST OF MUK WAS 699.60. THEREAFTER, THE OPERATIVE PROFI T OF MUK WAS CALCULATED AS 183.36. THIS AMOUNT OF OP IS 5.5%. FOR THE ENTIRE PERIOD, THE MUKS OPERATING MARGIN WAS UNIFORM AT 5.5%. IN THIS REGARD, INVOICES HAVE BEEN PLACED BEFORE US. ON THE BASIS OF THE SAID FIGURES IT WAS CERTIFIED; AFTER ECONOMIC ANALYSIS; THAT THE M OST APPROPRIATE METHOD FOR THE ASSESSEE WAS TNMM METHOD. IT HAS ALSO BEEN CERTIFIED THAT THE APPLICATION OF TNMM REQUIRES THE SELECTION OF AN APPROPRIATE PROFIT LEVEL INDICATOR (PLI). THE PLI MEASURES TH E RELATIONSHIP BETWEEN PROFIT AND COST INCURRED OR REVENUE EARNED OR ASSET S EMPLOYED. IN THE INSTANT CASE, THE RETURN ON SALES (ROS) TO BENCH MA RK THE PROFIT OR RETURN ON THE OPERATIONS BY MUK WAS SELECTED TO REL IABLY MEASURE THE ITA NO. 3120/AHD/2010 MASTEK LIMITED VS. ADDL.CIT ASST.YEAR - 2006-07 - 50 - INCOME OF THE TESTED PARTY. IT WAS DECIDED THAT T HE SAID REVENUE WAS EARNED HAD IT DEALT WITH UNCONTROLLED PARTIES AT AR MS LENGTH. AS FAR AS THE OPERATING PROFIT MARGIN (OM) IS CONCERNED, THE RATIO OF OPERATING PROFIT TO SALES IS NORMALLY A GOOD INDICATOR OF TOT AL RETURN TO THE BUSINESS ACTIVITY. THIS MEASURE ACCOUNTS FOR OPERATING EXPE NSES AS WELL AS COST OF GOODS SOLD AND THUS IS LESS LIKELY, THAN THE GROSS MARGIN, TO BE DISTORTED BY DIFFERENCES IN FUNCTIONS OR ACCOUNTING CONVENTIO NS. IN THE INSTANT CASE, THE SAID RATIO WOULD BE A GOOD INDICATOR OF T OTAL RETURN TO THE ONSITE BUSINESS ACTIVITY CARRIED OUT BY MUK. IT WOULD ACC OUNT FOR OPERATING EXPENSES AS WELL AS DIRECT COST OF CONDUCTING THE S AID OPERATIONS BY MUK. IN THE INSTANT CASE, MUK HAS BEEN LEFT WITH A N OM OF 5.52%. FOR JUSTIFICATION OF ALP THE ASSESSEE HAS FURTHER A RGUED IN SUPPORT OF TNMM METHOD, BRIEFLY DESCRIBED IN THE FOLLOWING PAR A. 17.1. THERE IS ONE MORE POINT THAT IN DETERMINA TION OF ARMS LENGTH PRICE IN THE PRESENT CASE, THE DISPUTE IS, WHETHER TO BE DETERMINED BY CUP(COMPARABLE UNCONTROLLED PRICE) METHOD OR BY TNMM (TRANSACTIONAL 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 EN ABLE THE DETERMINATION OF ALP ON THE BASIS OF RESPECTIVE MAR GINS EARNED BY COMPARABLE UNCONTROLLED COMPANIES. THE REGULATIONS HAVE BEEN PROVIDED THAT WHERE MORE THAN ONE PRICE IS DETERMIN ED BY THE MOST APPROPRIATE METHOD, THE ALP SHALL BE TAKEN TO BE TH E ARITHMETIC MEAN OF SUCH PRICES. THEREFORE, LD.AR HAS SUGGESTED SUCH A N ALTERNATE PRACTICAL ITA NO. 3120/AHD/2010 MASTEK LIMITED VS. ADDL.CIT ASST.YEAR - 2006-07 - 51 - 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:- ARMS 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 SOFT WARE SERVICES DISTRIBUTED BY MUK, AFTER THE AMOUNTS RECEIVED BY MASTEK, THE MUK WAS LEFT WITH AN OM OPERATIVE MARGIN OF 4.62% OR LE SS FOR SUCH TRANSACTION. BUT IN THE INSTANT CASE, MUK WAS LEFT WITH AN OM OF 5.52%. SINCE IT WAS BETTER, THEREFORE THE IMPUGNED INTERNA TIONAL TRANSACTION BETWEEN MASTEK AND MUK CAN BE HELD AN ARMS LENGTH TRANSACTION. IF ON EXAMINATION OF FACTS AND FIGURES THE SITUATION I S THAT THE COMPARISONS DO NOT GIVE A CLEAR PICTURE RATHER THEY SKEW THE RE SULT, THEN SUCH RESULTS CANNOT BE CONSIDERED AS THE REPRESENTATIVE OF THE I NDUSTRY. RATHER, WE MAY LIKE TO COMMENT THAT THE DRP BEING A HIGH-POWER AND HIGHLY QUALIFIED CONSORTIUM OF HIGH-RANKING REVENUE OFFICE RS, THEREFORE THEIR ORDER SHOULD BE PRECISE ON THE ISSUES RAISED AND MU ST NOT BE LACKING IN REASONING. THOUGH THE PRESENT ORDER OF THE DRP C ANNOT BE SAID TO BE A LACONIC ORDER OR A CURSORY ORDER BUT DEVOID OF PREC ISELY HANDLING THE ISSUES RAISED BY THE TPO AND CONFRONTED BY THE ASSE SSEE. ITA NO. 3120/AHD/2010 MASTEK LIMITED VS. ADDL.CIT ASST.YEAR - 2006-07 - 52 - 17.2. WE ARE AWARE THAT THE SELECTION OF COMPARABLE S AND SELECTION OF SIMILAR TRANSACTIONS IS NOT EASY TO FIND OUT AND A DIFFICULT TASK TO PICK UP EXACTLY IDENTICAL BUSINESS MODEL. ONLY AN ENDEAVO UR SHOULD BE MADE SO THAT THE COMPARABLES SHOULD MATCH WITH THE ASSESSEE AS CLOSE/NEAR AS POSSIBLE. IN THE CASE OF SCHEFENACKER MOTHERSON LTD. VS. ITO (2009- TIOL-376-ITAT-DEL) :: [123 TTJ 509] AN OBSERVATION HAS BEEN MADE THAT A SIMILAR TRANSACTION IS NOT EASY TO FIND. A N ATTEMPT IS TO BE MADE TO FIND ENTITIES CARRYING SIMILAR FUNCTIONS. THEIR PR OFIT MARGINS OR THE MEAN OF THE SUCH PROFIT MARGINS IS REQUIRED TO BE TAKEN INTO ACCOUNT AND, THEREFORE, REQUIRED TO BE COMPARED WITH THE PROFIT MARGIN WITH THE TESTED PARTY. FAR HAS BEEN SUGGESTED AS A STEP TO ACHIE VE SUCH TARGET. IT HAS BEEN SUGGESTED THAT IF THERE ARE DIFFERENCES BETWEE N THE SELECTED COMPARABLES AND THE TESTED PARTY, THEN SUCH DIFFERE NCES CAN ALSO REQUIRED TO BE ADJUSTED. THE OBJECT OF T.P. PROCEEDINGS IS TO COMPARE LIKE WITH LIKE AND TO ELIMINATE SUITABLE DIFFERENCES. FOR T HE PURPOSE OF ARRIVING AT A FAIR AMOUNT OF ADJUSTMENT; IN THE CASE OF SKODA AUTO (INDIA) PVT.LTD. 122 TTJ 699(PUNE), IT WAS OPINED THAT IF EXTERNAL CUP METHOD IS FOUND TO BE IRRELEVANT, THEN INTERNAL CUP CAN BE MADE THE BASIS FOR ADJUSTMENT, IF ANY. IT HAS BEEN SUGGESTED THAT THE ALP SHOULD BE ARRIVED AT WITH SUCH ADJUSTMENT WHICH COMPARE ITSELF WITH THE FUNCTIONAL LY SIMILAR COMPANIES. A REFERENCE WAS MADE BY THE BENCH OF RULE 10B(3) WH ICH 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 PR ICE OR COST CHARGED OR PAID IN, OR THE PROFIT ARISING FROM, SUCH TRANSACTI ONS IN THE OPEN MAKER; OR (II) REASONABLY ACCURATE ADJUSTMENTS CAN BE MADE TO ELIMINATE THE ITA NO. 3120/AHD/2010 MASTEK LIMITED VS. ADDL.CIT ASST.YEAR - 2006-07 - 53 - MATERIAL EFFECTS OF SUCH DIFFERENCES. WE THEREFOR E ADD THAT THE BUSINESS STRATEGIES MUST ALSO BE EXAMINED IN DETERMINING COM PARABILITY FOR TRANSFER PRICING PURPOSES. IF THE BUSINESS MODEL A RE FUNDAMENTALLY DIFFERENT, THEN NATURALLY NO COMPARISON IS POSSIBLE . THE RIGHT RECOURSE THEREAFTER IS THAT THE IMPACT OF DIFFERENCES BE ELI MINATED SO AS TO ARRIVE AT A MOST NEAR COMPARISON. IN RESPECT OF THE ADJUSTM ENTS IN THE CASE OF SONY INDIA PVT.LTD. [(2008)118-TTJ-DELHI-865] THE OBSERVATION IS THAT, QUOTE WHILE COMPARING CONTROLLED AND UNCONTR OLLED TRANSACTIONS OR ENTERPRISES, ONE HAS TO LOOK FOR THE DIFFERENCES AN D WHETHER SUCH DIFFERENCES ARE LIKELY TO AFFECT THE PRICE, COST CH ARGED OR PAID OR PROFIT ARISING FROM THE TRANSACTION IN THE OPEN MARKET. I T HAS FURTHER TO BE EXAMINED WHETHER A REASONABLY ACCURATE ADJUSTMENT C AN BE MADE TO ELIMINATE THE MATERIAL EFFECT OF THE DIFFERENCES BE TWEEN THE TRANSACTIONS OR ENTITIES. IF A REASONABLY ACCURATE ADJUSTMENT F OR THE DIFFERENCE TO ELIMINATE MATERIAL EFFECT OF THE DIFFERENCES CANNOT POSSIBLY BE MADE, THEN SUCH COMPARABLES (UNCONTROLLED) ARE TO BE REJECTED UNQUOTE. WHILE DECIDING THE CASE OF MENTOR GRAPHICS (NOIDA) PVT.LTD. 122 TTJ 408 [DEL.], THE GUIDELINES GIVEN WERE AS UNDER:- THE FIRST STEP IN THE DETERMINATION OF ARMS LENGT H PRICE IS TO ANALYSE THE SPECIFIC CHARACTERISTICS OF THE CONTROL LED TRANSACTION WHETHER IT RELATES TO TRANSFER OF GOODS, SERVICES O R INTANGIBLES. WITHOUT PROPER STUDY OF SPECIFIC CHARACTERISTICS OF CONTROLLED TRANSACTION, NO MEANINGFUL COMPARISON OR LOCATION O F COMPARABLE IS POSSIBLE. FOR EXAMPLE, A MERE CONSIDERATION THAT CONTROLLED TRANSACTION RELATES TO SOFTWARE SUPPLY IS NOT SUF FICIENT AS THERE ARE HUNDREDS OF SOFTWARES WITH DIFFERENT CHARACTERI STICS WHICH MATERIALLY AFFECT THEIR OPEN MARKET VALUE. THE CHARACTERISTICS THAT ARE THE PROPERTY, ITS QUALITY, RELIABILITY AND AVAILABILITY (SUPPLY). IN CASE OF PROVISIONS OF SERVICES, THE N ATURE AND EXTENT OF ITA NO. 3120/AHD/2010 MASTEK LIMITED VS. ADDL.CIT ASST.YEAR - 2006-07 - 54 - SERVICES AND WHERE TANGIBLE PROPERTY IS INVOLVED FO R COMPARISON, THE FORM OF TRANSACTION. TO PUT IT IN OTHER WORDS, ALL THE CHARACTERISTICS OF THE CONTROLLED TRANSACTION WHICH ARE LIKELY TO AFFECT ITS OPEN MARKET VALUE MUST BE TAKEN INTO ACC OUNT. THE STUDY SHOULD INCLUDE ANALYSIS OF FUNCTIONS, RISKS AND ASS ETS OF THE CONTROLLED TRANSACTION FOR CORRECT LOCATION OF SIMI LAR OR NEARLY SIMILAR CHARACTERISTICS IN UNCONTROLLED TRANSACTION S. SPECIFIC CHARACTERISTICS ARE NECESSARY TO CARRY SEARCH OF SI MILAR COMPARABLES WITH SIMILAR CHARACTERISTICS. AFTER TH E SELECTION OF THE COMPARABLES, BEST METHOD OF DETERMINING ARMS LENGT H PRICE IS SELECTED. THEREAFTER, FUNCTIONAL ANALYSIS IS CARRIED TO IDEN TIFY FUNCTIONS, RISKS AND ASSETS OF UNCONTROLLED TRANSAC TIONS AND COMPARISON IS CARRIED WITH CHARACTERISTICS OF THE C ONTROLLED TRANSACTION. THIS IS NECESSARY TO FIND WHETHER COMPARABLES SELECTED ARE REALLY COMPARABLE AND RELIABLE. COMPA RISON BASED ON FUNCTIONAL ANALYSIS INCLUDES ECONOMICALLY SIGNIF ICANT ACTIVITIES AND RESPONSIBILITIES UNDERTAKEN OR TO BE UNDERTAKEN BY THE INDEPENDENT AND ASSOCIATED ENTERPRISES. THE STRUCT URE AND ORGANIZATION OF THE GROUP AND MORE PARTICULARLY THE JUDICIAL RELATIONSHIP BETWEEN DIFFERENT ENTITIES OF SAME GRO UP ARE TO BE SEEN. THE FUNCTION THAT NEEDS TO BE IDENTIFIED WHI LE CARRYING COMPARISON AS PER OECD GUIDELINES INCLUDES DESIGN, MANUFACTURING, ASSEMBLING, RESEARCH AND DEVELOPMENT , SERVICING, PURCHASING, DISTRIBUTION, MARKETING, ADVERTISING, T RANSPORTATION, FINANCIAL AND MANAGEMENT ACTIVITIES. IT IS ALSO NE CESSARY TO EXAMINE AS TO WHAT IS THE PRINCIPAL FUNCTION OF THE ENTITIES. THE ANALYSIS OF COMPARISON SHOULD CONSIDER TOTAL ASPECT S 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 S IGNIFICANT DIFFERENCES IN THE RISK INVOLVED, THEN THE COMPARAB LES IDENTIFIED ARE NOT CORRECT AS APPROPRIATE ADJUSTMENTS FOR DIFF ERENCES IN SUCH CASES ARE NOT POSSIBLE. THEREFORE, WHILE PERFORMIN G SEARCHES FOR POTENTIAL COMPARABLE COMPANIES, NOT ONLY TURNOVER A ND 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 COMPARABLES FOUND ARE SIMILAR OR ALMO ST SIMILAR TO THE CONTROLLED TRANSACTION AND NO ADJUSTMENTS ARE N EEDED. IT IS USEFUL TO SEE THE LEVEL OF INTANGIBLE ASSETS IN COM PARISON TO AN ITA NO. 3120/AHD/2010 MASTEK LIMITED VS. ADDL.CIT ASST.YEAR - 2006-07 - 55 - APPROPRIATE BASE. DEPENDING ON FACTS OF THE CASE, FINAL SET OF COMPARABLES MAY NEED TO ELIMINATE DIFFERENCES BY MA KING ADJUSTMENTS FOR THE FOLLOWING : (A) WORKING CAPITAL ; (B) ADJUSTMENT FOR RISK AND GROWTH; (C) ADJUSTMENT OF R&D EXPENSES . THE RISK NOT ONLY DUE TO HUMAN RESOURCES, INFRASTRUCTURE AND QUA LITY WHICH ARE NORMALLY TAKEN INTO ACCOUNT YET MORE SIGNIFICANT RI SKS LIKE MARKET RISK, CONTRACT RISK, CREDIT AND COLLECTION RISK AND RISK OF INFRINGEMENT OF INTELLECTUAL PROPERTY ARE BEING IGN ORED HERE. IF THERE ARE DIFFERENCES WHICH CAN BE ADJUSTED, THEN A DJUSTMENTS ARE REQUIRED TO BE MADE. IF THE DIFFERENCES BETWEEN TH E COMPANIES ARE SO MATERIAL THAT ADJUSTMENT IS NOT POSSIBLE, THEN C OMPARABLES ARE REQUIRED TO BE REJECTED. FURTHER IN THE ANALYSIS N UMEROUS RATIO ARE APPLIED, DEPENDING ON THE SPECIFIC OF THE COMPA RABLES. THE SEARCH MAY INCLUDE THE FOLLOWING: INVENTORY/SALES; OPERATING ASSETS TO TOTAL ASSETS, FIXED ASSETS TO TOTAL SALES , FIXED ASSETS TO NUMBER OF EMPLOYEES, OPERATING EXPENSES TO SALE, CO ST OF SALES.- AZTECH SOFTWARE & TECHNOLOGY SERVICES LTD. VS. ASST T.CIT (2007) 109 TTJ (BANG) (SB) 892 RELIED ON. (EMPHASIS GIVEN) (PARAS 26 TO 27.3) IT IS IMPORTANT TO NOTE THAT IN THE SAID REPORTED JUDGEMENT, THE TESTED PARTY WAS DEVELOPING SPECIFIC SOFTWARE FO R ITS PARENT-COMPANY. THE SOFTWARE DEVELOPED BY THE TAX-PAYER WAS USED IN -HOUSE FOR INTEGRATING THE SALE WITH OTHER SOFTWARE COMPONENTS DEVELOPED BY ITSELF. THE WHOLE SOFTWARE SUPPORTED THE HARDWARE MANUFACTU RED BY THE PARENT AND SOLD AS A PACKAGE IN THE OPEN MARKET. THE ROLL OF THE TESTED PARTY HAS BEEN THAT IT HAS CONTRACT FOR SOFTWARE DEVELOPMENT AND SUPPORTS SERVICE PROVIDER. IT WAS FOUND THAT IT WAS A CAPTIVE COMP ANY. MOST OF THE BUSINESS RISK, SUCH AS, CONTRACT RISK, MARKET RISK, CREDIT RISK, WARRANTEE RISK, PRICE RISK, ETC. SPECIALLY BORNE BY THE AE. ALL INTANGIBLES INCLUDING DISCOVERIES, IMPROVEMENT, INVENTIONS AND TRADE-SECR ETS CONCEIVED OR REDUCED TO PRACTICE, WERE THE SOLE AND EXCLUSIVE PR OPERTY OF THE PARENT- AE. THE TAXPAYER ONLY MAINTAINED AND DEVELOPED NE CESSARY HUMAN ITA NO. 3120/AHD/2010 MASTEK LIMITED VS. ADDL.CIT ASST.YEAR - 2006-07 - 56 - RESOURCES AND INFRASTRUCTURE FOR DEVELOPMENT OF SOF TWARE. THE BENCH HAS HELD THAT THE ABOVE CHARACTERISTICS OF THE CONT ROLLED TRANSACTIONS WERE NOT KEPT IN MIND BY THE TPO. THE BENCH HAS EVEN MENTIONED THAT WHEN TNMM IS APPLIED TO DETERMINE ARMS LENGTH PRIC E AS PER OECD GUIDELINES, FUNCTIONAL PROFILE, ASSETS, ASSUME D RISK OF CONTROLLED AND UNCONTROLLED TRANSACTIONS AS PER RUL ES 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 DISSIMILAR ITIES OF THE TRANSACTIONS UNDER COMPARISON ARE TO BE SCRUTINIZED TO SEE DIFFERENCES OF SITUATIONS, CIRCUMSTANCES AND ENVIRONMENT. EVEN I T IS EVIDENT FROM RULE 10B THAT WHILE COMPARING TRANSACTIONS OR EVEN COMPA RING ENTERPRISES IF APPLYING TNMM, THE DIFFERENCES WHICH ARE LIKELY TO MATERIALLY AFFECT THE PRICE, COST CHARGED OR PAID, OR THE PROFIT IN THE O PEN MARKET, ALL THESE POINTS ARE TO BE TAKEN INTO CONSIDERATION WITH THE SOLE IDEA TO MAKE A REASONABLE AND AS MUCH AS POSSIBLE ACCURATE ADJUSTM ENTS. 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 TH E CASE LAWS CITED, WE ARE TEMPTED TO MAKE CERTAIN OBSERVATIONS IN RESPECT OF THE SCHEME OF TRANSFER PRICING AS IT WAS ENUMERATED IN CIRCULAR NO.12/2001 DATED 23/08/2001(251 ITR 15 (ST.). THE PROVISIONS OF SECTION 92 & 92A UPTO SECTION 92F HAVE BEEN ENACTED WITH A VIEW TO PROVID E A STATUTORY FRAME- WORK WHICH CAN LEAD TO COMPUTATION OF A REASONABLE, FAIR AND EQUITABLE PROFIT AND TAX IN INDIA, SO THAT THE PROFITS WHICH ARE CHARGEABLE TO TAX IN INDIA DO NOT GET DIVERTED ELSEWHERE. THESE PROVISI ONS HAVE THEREFORE LAID ITA NO. 3120/AHD/2010 MASTEK LIMITED VS. ADDL.CIT ASST.YEAR - 2006-07 - 57 - DOWN CERTAIN RULES TO ARRIVE AT A ALP THROUGH THE MOST JUSTIFIABLE METHOD. GENERALLY THE ALLEGATION IS THAT BY ORDER ING THE PRICES CHARGED AND PAID IN INTRA-GROUP TRANSACTION THE MODES OPERANDI LEADS TO EROSION OF TAX REVENUE IN INDIA. NATURALLY, FOR THE PURPOS E OF DETERMINATION OF ARMS LENGTH PRICE OF AN INTERNATIONAL TRANSACTION A VERY FAIR METHOD HAS TO BE ADOPTED AND THAT OUR TAX-PAYERS MUST NOT BE P UT TO AVOIDABLE HARDSHIP IN THE IMPLEMENTATION OF THESE REGULATIONS . WE HAVE TO KEEP IN MIND THE PRELIMINARY OBJECTIVE AS IT WAS PROPOUNDED VIDE A CIRCULAR NO.14 DATED NOVEMBER 09,2001(252 ITR 65 ST) THAT SECTION 92 PROVIDES THAT IF AN INCOME IS ARISING FROM AN INTER NATIONAL TRANSACTION BETWEEN AE; SHALL BE COMPUTED HAVING REGARD TO THE ARMS LENGTH PRICE. SECTION 92 THEREFORE ONLY DEALS SPECIFICALLY WITH T HE CROSS BOARDER TRANSACTION AND ALSO PRESCRIBES AN ADJUSTMENT TO BE MADE TO THE PROFITS OF A RESIDENT. A DISTINCTION AT THIS JUNCTURE HAS TO BE READ THAT THE RELEVANT PROVISIONS PROVIDE FOR ADJUSTMENT OF PROFITS RATHER THAN ADJUSTMENT OF PRICES. A GENERAL AWARENESS IS ABOUT THE PROCEDURE THAT PRIMARY ONUS IS ON TAX-PAYER TO DETERMINE AN ARMS LENGTH PRICE IN ACCORDANCE WITH THE RULES. SECTION 92C PROVIDES THE ARMS LENGTH PRIC E IN RELATION TO AN INTERNATIONAL TRANSACTION, WHICH IS TO BE DETERMINE D BY (A) COMPARABLE UNCONTROLLED PRICE METHOD(CUP); OR (B) RESALE PRICE METHOD OR (C) COST PLUS METHOD; OR (D) PROFIT SPLIT METHOD; OR (E) TRA NSACTIONAL NET MARGIN METHOD(TNMM); OR (F) ANY OTHER METHOD WHICH MAY BE PRESCRIBED BY THE BOARD. THE PROVISIONS OF SELECTION OF COMPARABLE INSTANCE S IS A VERY DIFFICULT PROCEDURE TO APPLY IN PRACTICE. EVEN IN THE CUP METHOD, THE PRICE OF THE SERVICES OR THE PRICE OF T HE GOODS IS TO BE DIRECTLY COMPARED WITH THE PRICE OF AN UNCONTROLLED TRANSACT ION UNDER SIMILAR CONDITIONS. BUT THE SIMILAR CONDITIONS OR THE SIMI LAR FACTORS ARE GENERALLY ITA NO. 3120/AHD/2010 MASTEK LIMITED VS. ADDL.CIT ASST.YEAR - 2006-07 - 58 - SUBJECT OF CONTROVERSY BECAUSE OF THE DYNAMICS, SUC H AS, TURNOVER DIFFERENCE OR THE QUANTITY DIFFERENCE OR THE GEOGRA PHICAL 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 VS. D UFON LABORATORIES (2010-TII-26-ITAT-MUM-TP), THE RESPECTED COORDINATE BENCH HAS CONCLUDED THAT DUE TO LACK OF SIMILARITY WITH THE C OMPARABLE TRANSACTIONS, THE TRANSACTION WITH THE AE WAS AT ARMS LENGTH AND THAT THERE WAS NO CASE OF MAKING ADJUSTMENT. THEREFORE THE TRANSFER P RICING SCHEDULE OF THE ASSESSEE IN THE LIGHT OF FAR ANALYSIS SHOULD BE VER Y ACCURATE AND ALP HAS TO BE DETERMINED OF AN INTERNATIONAL TRANSACTIO N 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 TRANSFER PRICING AS VOID OR NOT AT AN ARMS LENGTH. RATHER CBDT CIRCULAR NO. 12 DATED 23 AUG. 2001 (252 ITR 15 ST.) MADE CLEAR TO THE A.O. VIDE ITS CLAUSE (VI) THAT WHEN AN INTERNATION AL TRANSACTION HAS BEEN PUT TO A SCRUTINY, THE RECOURSE IS TO FOLLOW THE FO UR CONDITIONS AS PRESCRIBED IN SEC.92C(3) BASED UPON THE MATERIAL IN FORMATION OR DOCUMENT IN POSSESSION, OTHERWISE THE VALUE OF THE INTERNATIONAL TRANSACTION BE ACCEPTED. THEREFORE IN THE CASE OF PHILIPS SOFTWARE ( 119 TTJ 721 ) THE OBSERVATION IS AS FOLLOWS:- ITA NO. 3120/AHD/2010 MASTEK LIMITED VS. ADDL.CIT ASST.YEAR - 2006-07 - 59 - 5.1 WE HAVE HEARD THE RIVAL CONTENTIONS AND WE PRO CEED TO ADJUDICATE ON THE ISSUES IN THE SEQUENCE WHICH HAS BEEN ARGUED BY THE RIVAL PARTIES BEFORE US. THE LEARNED COUNSEL F OR THE ASSESSEE HAS ARGUED THAT THE TAX PAYABLE BY IT IN INDIA IS L OWER THAN THE TAX RATE APPLICABLE TO ITS AE IN THE NETHERLANDS. SINC E THE ASSESSEE IS AVAILING THE BENEFIT UNDER S. 10A OF THE ACT, ONE C ANNOT TAKE A SIMPLISTIC VIEW ON THE MATTER OF TAX AVOIDANCE. IN THIS CONNECTION THE LEARNED DEPARTMENTAL REPRESENTATIVE HAS DRAWN R EFERENCE TO THE PROVISO TO S.92C(4). RELYING ON OECD GUIDELINE S, THE DEPARTMENTAL REPRESENTATIVE HAS MENTIONED THAT THE CONSIDERATION OF TRANSFER PRICING SHOULD NOT BE CONFUSED WITH THE CONSIDERATION OF PROBLEMS OF TAX AVOIDANCE, EVEN THOUGH TRANSFER PRICING POLICIES MAY BE USED FOR SUCH PURPOSES. IN THIS CONNECTION, IT WAS POINTED OUT THAT BY NOT DECLARING PROPER PROFITS IN INDIA, THE ASSESSEE IS INDIRECTLY REDUCING ITS LIABILITY TO DDT. THE SPEC IAL BENCH OF THE TRIBUNAL, IN THE CASE OF AZTEC SOFTWARE (SUPRA), HA S CONCLUDED THAT THE AO/TPO NEED NOT PROVE THE MOTIVE OF SHIFTING OF PROFITS OUTSIDE INDIA FOR MAKING A TRANSFER PRICING ADJUSTMENT. TH E ASSESSEE HAD GENERALLY ARGUED THAT ONE OF THE FACTORS DRIVING AN Y MOTIVE FOR SHIFTING PROFITS WOULD BE THE DIFFERENCE IN THE TAX RATE IN INDIA AND THE TAX RATE APPLICABLE TO THE AE IN THE OVERSEAS J URISDICTION. IN THE INSTANT CASE, SINCE THE ASSESSEE WAS AVAILING T HE BENEFIT UNDER S.10A OF THE ACT, IT WOULD BE DEVOID OF LOGIC TO AR GUE THAT THE ASSESSEE HAD MANIPULATED PRICES (AND SHIFTED PROFIT S) TO AN OVERSEAS JURISDICTION FOR THE PURPOSE OF AVOIDING T AX IN INDIA. 18.1 BEFORE WE PART WITH; A THOUGHT HAS BOTHERED US THAT WHILE DEALING WITH THE TP PROCEEDING AS PRESCRIBED UNDER CHAPTER X OF I.T. ACT, WHY THE HELP OF SECTION 40A(2)(A) BE NOT TAKEN. THIS S ECTION ALSO HAS A LIST OF PERSONS WHICH ARE SAID TO BE RELATED TO THE ASSESSE E OR CONNECTED WITH THE ENTITY. SO THIS SECTION SAYS THAT WHERE AN ASSESSE E INCURS ANY EXPENDITURE IN RESPECT OF WHICH PAYMENT HAS BEEN MADE TO ANY PE RSON, AS LISTED THEREIN AND THE AO IS OF THE OPINION THAT SUCH EXPE NDITURE 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 ITA NO. 3120/AHD/2010 MASTEK LIMITED VS. ADDL.CIT ASST.YEAR - 2006-07 - 60 - 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 H AVE LAID DOWN THE GUIDELINES IN RESPECT OF DETERMINATION OF AN AMOUNT WHETHER TO BE TREATED AS EXCESSIVE OR UNREASONABLE HAVING REGARD TO THE F AIR MARKET VALUE OF THE GOODS. EVEN IN THE TRANSFER PRICING CASES, RULE 10 B AND RULE 10C ALSO INDICATE THE SAME METHOD AS WELL AS THE ANALOGY WHI LE RELYING UPON OR COMPARING THE UNCONTROLLED TRANSACTION. THESE RULE S ALSO PRESCRIBE THAT WHILE COMPARING THE INTERNATIONAL TRANSACTION, THEN CONDITIONS PREVAILING IN THE MARKETS, FUNCTIONS PERFORMED, CONTRACTUAL TE RMS, ETC. ETC. ARE THE FACTORS TO ANALYSIS THE COMPARABILITY. THEREFORE, WE EXPRESS AN OPINION, THOUGH PRESENTLY NOT THE SUBJECT MATTER OF DISPUTE , THAT THE CASE LAWS WHICH ARE ALREADY IN PUBLIC DOMAIN IN RESPECT OF DE CIDING THE DISALLOWANCES MADE U/S.40A(2)(A) OF THE ACT CAN BE HELPFUL. WE HAVE EXPRESSED THIS OPINION BECAUSE IN A DIFFICULT TRANS FER PRICING CASE, PRIMARILY BECAUSE OF THE COMPLEXITY OF THE FACTS, EVEN THE BEST INTENTIONED TAX-PAYER CAN MAKE AN HONEST MISTAKE AN D LIKE-WISE THE BEST INTENTIONED TAX-EXAMINER, MAY GENUINELY DRAW WRONG CONCLUSION . OECD TP GUIDELINES THUS SUGGEST, FIRST, TAX EXAMINE RS 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 ARMS LENGTH PRINCIPLE. 18.2. UNDER THE TOTALITY OF THE FACTS AND CIRCUMSTA NCES OF THE CASE, FIRST WE HEREBY HOLD THAT CONSIDERING THE FAR ANALYSIS, R ISK FACTOR AND THE ITA NO. 3120/AHD/2010 MASTEK LIMITED VS. ADDL.CIT ASST.YEAR - 2006-07 - 61 - BUSINESS MODEL AS WELL AS THE TERMS AND CONDITIONS OF THE MASTER AGREEMENT INCORPORATED IN THE LIGHT OF THE CHANGED CIRCUMSTANCES OF UK, THE AE, I.E. MUK HAS FUNCTIONED AS A DISTRIBUTOR IN UK. ONCE WE HAVE HELD SO, THEN THE QUESTION ARISES THAT THE ASSESSEE HAS RIGHTLY REIMBURSED FRONT OFFICE COST TO MUK. WE ARE OF THE CONSCIEN TIOUS VIEW THAT THE TPO HAS NOT RAISED ANY QUESTION OR DOUBTED THE PAYM ENT OF FRONT OFFICE COST. NEXT WE HEREBY HOLD THAT IF AN AGREEMENT IN ITS TOTALITY HAS NOT BEEN HELD A SHAM AGREEMENT, THEN THERE WAS NO JUSTI FICATION TO DISBELIEVE ONE OF THE CLAUSE, IN THE PRESENT CASE, THE CLAUSE OF PROFIT REIMBURSEMENT OF 5.5% TO MUK. IT WAS A MUTUAL DECISION OF THE PA RTIES TO THE AGREEMENT TO FIX THE PERCENTAGE OF PROFIT FOR MUK. THERE IS NO HARD AND FAST RULE THAT A DISTRIBUTOR ALWAYS HAVE A FLUCTUAT ING PERCENTAGE OF PROFIT. THE TPO WAS NOT JUSTIFIED IN COLLECTING THE DATA OF ALLEGED COMPARABLE INSTANCES WHICH IN FACT WERE EITHER ADVERTISING AGE NCIES OR IN BUSINESS CONSULTING SERVICES BUT NOT A DISTRIBUTOR AND THEN ADOPTED ARITHMETIC MEAN OF 6.02% OF PROFIT WHICH WAS USED FOR COMPUTAT ION OF ARMS LENGTH PRICE. SUCH AN ADJUSTMENT WAS UNCALLED FOR SO CANN OT BE APPROVED IN THE LIGHT OF FOREGOING DISCUSSION. WE ALSO HOLD THAT P RIMA-FACIE THERE WAS NO REASON TO SHIFT THE TAX BURDEN TO UK WHEN ADMITTEDL Y THERE WAS NO INCENTIVE OR TAX BENEFIT TO THIS ASSESSEE. THE ADJ USTMENT 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 ITA NO. 3120/AHD/2010 MASTEK LIMITED VS. ADDL.CIT ASST.YEAR - 2006-07 - 62 - I. THE LD. AO HAS ERRED IN LAW AND ON FACTS IN ALLEGIN G THE HRM FUNCTION TO BE AN INTERNATIONAL TRANSACTION AND THE REBY MAKING AN ADJUSTMENT OF RS.2,92,22,683. II. THE LD. AO HAS ERRED IN LAW AND ON FACTS BY NOT TAK ING COGNIZANCE OF THE FACT THAT THE SAID ISSUE HAS BEEN DECIDED IN FAVOUR OF THE APPELLANT BY THE ORDERS OF THE HON'BL E COMMISSIONER OF INCOME TAX (APPEALS), AHMEDABAD ['C IT(A)'] FOR ASSESSMENT YEAR 2005-06, 2004-05, 2003-04 AND 2 002-03. III. WITHOUT PREJUDICE TO THE ABOVE, THE LD. AO HA S ERRED IN LAW AND ON FACTS BY DISREGARDING THE COUNTER CLAIMS SUBMITT ED 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 SERVIC ES RENDERED BY THE ASSESSEE WERE FOR THE BENEFIT OF ITS ASSOCIATE ENT ERPRISES BY SECONDING EMPLOYEES. THE SECONDING OF EMPLOYEES HAS INVOLVED RECRUITMENT, TRAINING, RE-ALLOCATION OF PERSONNEL, RE-ABSORPTION ON RETURN. ACCORDING TO TPO, HUMAN RESOURCE SERVICES WERE DIFFERENT FROM SOFTWARE DEVELOPMENT SERVICES. THEREFORE, THE TPO HAS DECIDED TO EXAMINE THE QUANTUM OF SERVICES RENDERED AND TO DETERMINE THE A RMS LENGTH PRICE OF SUCH SERVICES. AS PER THE FUNCTION ASSET RISK (FAR) ANALYSIS, THE PERFORMANCE INCLUDED RECRUITMENT AND SELECTION. TH E HRD CARRIED OUT AN ANALYSIS TO DETERMINE THE VACANCIES AT VARIOUS LEVE LS. THEREAFTER, RESUME OF SUITABLE CANDIDATES WAS OBTAINED. AFTER EVALU ATING THOSE CANDIDATES, THEY HAVE BEEN GIVEN GENERAL AS WELL AS TECHNICAL T RAINING. ACCORDING TO TPO, THE ASSESSEE WAS RESPONSIBLE FOR MAINTAINING A POOL OF SKILLED MAN- POWER. THE TPO HAS TAKEN A VIEW THAT IT WAS CLEAR FROM THE FUNCTIONS PERFORMED THAT THE ASSESSEE HAS PERFORMED HUMAN RESOURCE FUNCTION . THEREFORE, ACCORDING TO TPO, IT WAS ESSENTIAL TO BENCH-MARK THE ITA NO. 3120/AHD/2010 MASTEK LIMITED VS. ADDL.CIT ASST.YEAR - 2006-07 - 63 - HUMAN RESOURCE SERVICES SEPARATELY. HE HAS OBSERVED THAT THE DIRECT QUANTITATIVE INDICATOR OF THE HUMAN RESOURCE MANAGE MENT SERVICES RENDERED BY THE ASSESSEE TO ITS AES IS THE NUMBER O F PERSONS DEPUTED BY THE ASSESSEE FROM YEAR TO YEAR, ON SECONDMENT BASIS . NO DOUBT THE SERVICES RENDERED BY THE ASSESSEE UNDER THE HEAD H UMAN RESOURCE MANAGEMENT IS MUCH MORE THAN MERELY PROVIDING MANP OWER, AS IT IS ALSO RESPONSIBLE FOR TRAINING, PERFORMANCE EVALUATI ON, ADMINISTRATIVE FUNCTIONS ETC. THE ASSESSEE ACTUALLY MAINTAINS A RE ADY POOL OF SKILLED MANPOWER FROM WHICH PERSONS ARE MADE AVAILABLE TO T HE AE WHENEVER REQUIRED BY THEM. THE ASSESSEE IN EFFECT BEARS THE BENCH COST FOR THE WHOLE GROUP. HOWEVER, THE ASSESSEE SHOULD AT LEAST BE REMUNERATED FOR THE SERVICE OF PROVIDING SUITABLE MANPOWER AS AND W HEN REQUIRED BY THE AES. 20. IT WAS NOT IN DISPUTE THAT THE ASSESSEE-CO MPANY HAD REGULARLY PROVIDED MAN-POWER TO ITS AES AND IN THIS REGARD TP O HAD NOTED THE FIGURES OF SECONDEES RANGING FROM 279 PERSONS IN TH E MONTH OF MARCH- 2001 UPTO 444 PERSONS IN MARCH-2005. THE TPO HAD D RAWN A CONCLUSION THAT THE ASSESSEE HAD PROVIDED MAN-POWER ON A REGUL AR BASIS TO ITS SUBSIDIARIES LOCATED OVERSEAS. THE MANNER IN WHICH THE SECONDMENTS WERE DONE WAS MENTIONED BY THE AO AS FOLLOWS:- (A) THE AES HAVE ITS OWN POOL OF MANPOWER. OVER A ND ABOVE WHICH IT MAY SOMETIMES REQUIRE ADDITIONAL MANPOWER OF SPECIFIED SKILLS TO UNDERTAKE CERTAIN JOBS. ON SUCH OCCASION S, IT MAY MAKE A REQUEST TO THE ASSESSEE TO PROVIDE REQUIRED MANPOWE R. (B) THE ASSESSEE THEN IDENTIFIES SUITABLE PERSONS AND SECOND THEM TO THE AE LOCATION AS PER THE REQUIREMENTS PLACED. ITA NO. 3120/AHD/2010 MASTEK LIMITED VS. ADDL.CIT ASST.YEAR - 2006-07 - 64 - (C) ONCE THE PERSONS ARE SECONDED, THEY CEASE TO B E ON THE ASSESSEES PAYROLLS. THEY ARE IMMEDIATELY SHIFTED TO THE RESPECTIVE AES PAYROLLS, AND HENCE THEIR SALARY COS TS ARE BORNE BY THE AES. (D) AFTER THE SECONDMENT, THE ASSESSEE HAS NOTHING TO DO WITH THE WORK PERFORMED BY THE SECONDED EMPLOYEES. THE ENTI RE ON-SITE BILLINGS RELATABLE TO THE WORK DONE BY THEM, BELONG S TO THE RESPECTIVE AES. (E) THE PERSONS SECONDED MAY EITHER BE NEWLY RECRU ITED EMPLOYEE OR EXISTING EMPLOYEES, OF THE ASSESSEE COMPANY. (F) FROM TIME TO TIME, THE PERSONS SECONDED MAY RET URN TO THE PAYROLLS OF THE ASSESSEE UPON COMPLETION OF THE PRO JECT FOR WHICH THEY WERE SENT ABROAD. HOWEVER, THERE IS NO HARD A ND FAST RULE IN THIS REGARD. IT IS THE DISCRETION OF THE AES TO SE ND BACK THE EMPLOYEES DEPENDING UPON THEIR ABILITY TO ABSORB TH EM WITH ADEQUATE WORK. 20.1. THE ASSESSEES CONTENTION WAS THAT THE SAI D HRM FUNCTION WAS NOT A SEPARATE FUNCTION AND IT WAS A PART OF THE SO FTWARE SERVICES. THE ASSESSEE HAS EXPLAINED THAT THERE WERE TWO DIFFEREN T TYPES OF TRANSACTIONS, FIRST ONE, PROVIDING SOFTWARE SERVICES TO THE CLIENTS THROUGH AES. FOR THIS SERVICES, CHARGES ARE TO BE MADE BY THE CLIENT S THROUGH AES FOR THE SOFTWARE SERVICES. THE SECOND ONE IS, PROVIDING MAN-POWER INCLUDING TECHNICAL MAN-POWER TO AES FOR CARRYING OUT THEIR W ORK AS AN INDEPENDENT ENTITY. FOR THIS PURPOSE, ASSESSEE-COM PANY PROVIDES THE MAN-POWER OUT OF ITS OWN POOL OF MAN-POWER. SECOND ING OF THESE EMPLOYEES FROM EXISTING ASSESSEES BUSINESS THUS E FFECTS ITS BENCH- STRENGTH AND THE ASSESSEE IS IN TURN IS REQUIRED TO RECRUIT FURTHER MAN- POWER TO FILL UP THE GAP. IT IS ALSO COMMON THAT THOSE SECONDED- PERSONNEL MAY RETURN, AFTER THE AGREED TIME, BACK T O ASSESSEE-COMPANY, ITA NO. 3120/AHD/2010 MASTEK LIMITED VS. ADDL.CIT ASST.YEAR - 2006-07 - 65 - HOWEVER AT THE TIME OF RETURN THOSE EMPLOYEES BECOM E THE EMPLOYEES OF THE ASSESSEE-COMPANY. IT HAS ALSO BEEN EXPLAINED T HAT DURING THE PERIOD OF SECONDMENT THE ASSESSEE HAD TO PERFORM CERTAIN A DMINISTRATIVE FUNCTIONS REGARDING THOSE EMPLOYEES. ON THE OTHER HAND, THOSE AES ARE RESPONSIBLE ONLY FOR PAYMENT OF THE EMPLOYMENT COST OF THE SECONDED EMPLOYEES AND AES ARE NOT RESPONSIBLE TO PAY FOR RE LATED EXPENSES. AS PER TPO, DUE TO THE SAID REASON THAT THE ASSESSEE- COMPANY HAD TO INCUR CERTAIN ADMINISTRATIVE EXPENSES, THEREFORE REQUIRED A MARK UP FOR THE SECONDMENT OF EMPLOYEES. THEREFORE, TPO HAS EXPR ESSED THAT ARMS LENGTH TEST IS TO BE APPLIED FOR SUCH INTEGRAL SERV ICES. ACCORDING TO HIM, IN SIMILAR TYPE OF CASES WHERE IN-BOUND SECONDED EM PLOYEES HAS BEEN RECEIVED BY THE RELATED PARTY, THEN BESIDES PAYING EMPLOYMENT COST A 20% MARK UP HAS BEEN CONSIDERED FOR THE PURPOSE OF COVERING SUCH ADMINISTRATIVE WORK. HE HAS, THEREFORE, EXPRESSE D THAT IN RESPECT OF THE SECONDMENT FUNCTION CARRIED OUT BY THE ASSESSEE A MARK UP ELEMENT FOR COMPUTING ARMS LENGTH PRICE IS REQUIRED. DUE TO NON-CHARGING OF ANY MARK UP IN RESPECT OF THE SERVICES RENDERED FOR SEC ONDMENT OF MAN-POWER A MARK UP AT 9% OF THE TOTAL ANNUAL SALARY WAS APPL IED IN RESPECT OF THE PERSONS SECONDED. HE HAS NOTED THAT THE ASSESSEE HAD PAID 8.33% TO OTHER RECRUITMENT AGENCIES. THE ANNUAL SALARY WAS TAKEN AS THE COMPARABLE UNCONTROLLED PRICE AND THE ARMS LENGTH PRICE WAS DETERMINED AS FOLLOWS:- TOTAL NO.OF PERSONS SECONDED 148 (IN NOS) TOTAL ANNUAL SALARY RS.32,46,96,487 8.33% OF ANNUAL SALARY IF THE PERSON SECONDED RS.2,70,47,217 ARMS LENGTH PRICE FOR THE HUMAN RS.2,92,22,683 ITA NO. 3120/AHD/2010 MASTEK LIMITED VS. ADDL.CIT ASST.YEAR - 2006-07 - 66 - RESOURCE MANAGEMENT SERVICES 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 AN NUAL SALARY TO OTHER RECRUITMENT AGENCIES, THEREFORE THE CUP METHOD APPLIED BY THE TPO WAS CORRECT. AN ARGUMENT WAS RAISED BEFORE THE DRP THAT AS AGA INST 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-STR ENGTH 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 POO L OF SKILLED AND TRADE EMPLOYEES KEEPING IN VIEW THE SECONDMENT REQUIREMEN T OF THE AES. THEREFORE, SUCH FUNCTION OF THE ASSESSEE IS A SEPAR ATE FROM ITS CORE BUSINESS ACTIVITY OF PROVIDING SOFTWARE SERVICES. ACCORDING TO DRP SECONDMENT SERVICES ARE USED BY THE AES AND THEREFO RE THOSE SERVICES SHOULD BE COMPENSATED TO THE ASSESSEE AS PER ARMS LENGTH PRINCIPLE. IT WAS THEREFORE HELD THAT THE TPO WAS JUSTIFIED FOR T HE SAID ADJUSTMENT. NOW THE ASSESSEE HAS CHALLENGED THE OBSERVATION OF THE REVENUE AUTHORITIES. B) ARGUMENTS : 22. AT THE OUTSET, LD.AR MR.S.N.SOPARKAR HAS DRAW N OUR ATTENTION ON AN ADDITIONAL GROUND ; REPRODUCED BELOW:- ITA NO. 3120/AHD/2010 MASTEK LIMITED VS. ADDL.CIT ASST.YEAR - 2006-07 - 67 - 1. THE LEARNED TRANSFER PRICING OFFICER, AND CONSEQUE NTLY THE D.R.P. AND THE ASSESSING OFFICER, HAVE NO JURISDICT ION TO MAKE ANY ADJUSTMENT IN RELATION TO ANY ITEM OTHER THAN C OVERED UNDER GROUND 1 OF THE APPEAL MEMO IN AS MUCH AS THE SAME WERE NOT SUBJECT MATTER OF REFERENCE MADE TO THE TRANSFER PR ICING OFFICER UNDER SECTION 92CA(1) OF THE INCOME TAX ACT , 1961. 23. FROM THE SIDE OF THE REVENUE, LD.DRS MR. V.K. G UPTA AND MR. KARTAR SINGH HAVE VEHEMENTLY OBJECTED THAT, WH ILE SEEKING APPROVAL, THE SAID TRANSACTION HAS DULY BEEN COMMUN ICATED AND IT IS INCORRECT ON THE PART OF THE ASSESSEE TO RAISE AN O BJECTION IN THIS REGARD. LD.DRS HAVE REFERRED A LETTER DATED 31/08/2009 IN T HIS REGARD WHICH WAS AN INTERNAL CORRESPONDENCE, RELEVANT PORTION IS EXT RACTED BELOW:- 2. IN ADDITION THE TRANSACTIONS MENTIONED IN THE ABOVE LETTER, PERUSAL OF RECORDS REVEALS THAT THE ASSESSEE HAS MA DE FURTHER PAYMENTS TO ASSOCIATE ENTERPRISE IN RESPECT OF HRM FUNCTIONS AND HAS ALSO ALLOWED CREDIT PERIOD FOR AMOUNTS OUTSTAND ING WITH ITS ASSOCIATE ENTERPRISE WHICH TANTAMOUNT TO MAKING FIN ANCE AVAILABLE TO SUCH ENTERPRISES FOR THE DURATION OF THE CREDIT PERIOD. THESE TRANSACTIONS ARE NOT MENTIONED IN FORM 3CEB F URNISHED BY THE ASSESSEE. IT IS REQUESTED THAT THE ABOVE ISSUE S MAY ALSO BE TAKEN UP WHILE DETERMINING ARMS LENGTH PRICE IN RE LATION TO THE INTERNATIONAL TRANSACTIONS. 24. HAVING HEARD THE SUBMISSIONS OF BOTH THE SID ES AND AFTER EXAMINING THE RECORD, WE ARE OF THE VIEW THAT THE SUBJECT MAT TER AS DISPUTED IN GROUND NO.2 WAS WELL WITHIN THE JURISDICTION OF THE TPO. ACCORDING TO US, THE TPO HAD ACTED AS PER THE PROVISIONS OF SECT ION OF SECTION 92 OF THE ACT AND HE HAS NOT ACTED BEYOND JURISDICTION. WE, THEREFORE, DISMISS THIS ITA NO. 3120/AHD/2010 MASTEK LIMITED VS. ADDL.CIT ASST.YEAR - 2006-07 - 68 - ADDITIONAL GROUND AND ADJUDICATE THE MAIN GROUND, I .E. GROUND NO.2 HEREUNDER. 24.1. ON MERITS, LD.AR MR.S.N.SOPARKAR HAS STATED THAT THE ASSESSEE IS PROVIDING OFFSHORE SOFTWARE DEVELOPMENT AND RELAT ED SERVICES. SIMULTANEOUSLY, THE AES ARE PROVIDING ONSITE SOFT WARE DEVELOPMENT AND RELATED SERVICES. TO ENABLE AES TO PROVIDE O NSITE SERVICES TO THEIR CUSTOMERS, THE ASSESSEE IS SENDING THE EMPLOYEES O FFSHORE. SUCH SECONDMENT OF EMPLOYEES BRINGS BACK MORE OFFSHORE WORK TO THE ASSESSEE. THE RESULT OF SUCH SECONDMENT OF EMPLOYE ES COULD BE SEEN FROM THE FACT THAT THERE WAS REMARKABLE INCREASE IN OFFSHORE REVENUE GENERATED FROM UK. LD. AR HAS ALSO ARGUED THAT MI L CANNOT BE TERMED AS A RECRUITMENT AGENCY. THE MIL HAS MORE THAN 30 00 EMPLOYEES ON ITS PAY ROLL, HOWEVER, ONLY 148 PERSONS WERE SENT ABROA D 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 MON THS. HE HAS THEREFORE VEHEMENTLY ARGUED THAT SUCH HRM FUNCTION WAS NOTHING BUT AN INTEGRAL PART OF SOFTWARE BUSINESS. HE HAS VEHEM ENTLY OPPOSED THE VIEW OF THE TPO THAT SUCH HRM FUNCTION WAS A SEPARATE SE RVICE 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 20 05-06, AY 2004- 05, AY 2003-04 AND AY 2002-03. FOR ALL THESE ASSESSMENT YEARS, THE HONBLE CIT(A) HAVE DELETED THE DISALLOWANCE AS REG ARDS HUMAN RESOURCE MANAGEMENT FUNCTION. LD.AR HAS CONCLUDED THAT IT WAS NOT APPROPRIATE ON THE PART OF THE TPO TO REGARD HRM FU NCTION AS ITA NO. 3120/AHD/2010 MASTEK LIMITED VS. ADDL.CIT ASST.YEAR - 2006-07 - 69 - RECRUITMENT SERVICES. THE ASSESSEE HAS NOT ACTED AS AN EXTERNAL RECRUITMENT AGENCY. HE HAS ARGUED THAT THE TPO HAS CONSIDERED THE THIRD PARTY RATE PAID BY MIL DURING THE FINANCIAL YEAR 20 04-05 (VIZ.8.33% OF THE ANNUAL SALARY PAID BY THE ASSOCIATED ENTERPRISE S TO ITS EMPLOYEES) TO OTHER RECRUITMENT AGENCIES AS THE BENCHMARK AND ON A PRESUMPTIVE BASIS USED 9% DETERMINING THE ARMS LENGTH COMPENSATION O N THE GROUND THAT ASSESSEE INCURS CERTAIN ADMINISTRATIVE COSTS IN REL ATION TO PROVIDING HRM SERVICES. THIS WOULD MEAN THAT THE TPO HAS REGARDE D COMPARABLE UNCONTROLLED PRICE METHOD (CUP) AS THE MOST APPRO PRIATE METHOD. APPLICATION OF CUP METHOD REQUIRES STRICTER COMPARA BILITY BETWEEN THE CONTROLLED AND UNCONTROLLED TRANSACTIONS. IN ORDER TO DRAW THE COMPARABILITY, THE PROVISIONS OF THE RULES 10B(2) A ND 10B(3) NEED TO BE CONSIDERED. HE HAS REFERRED TRANSFER PRICING GUIDEL INES ISSUED BY ORGANISATION FOR ECONOMIC COOPERATION AND DEVELOPME NT (IN SHORT OECD) AND MENTIONED THAT THE BUSINESS STRATEGIES AR E REQUIRED TO BE EXAMINED IN DETERMINING COMPARABILITY FOR TRANSFER PRICING PURPOSES, SUCH AS, PRODUCT DEVELOPMENT, INNOVATION, INPUT OF EXISTING AND PLANT LABOUR LOSS, ETC. AND SUCH BUSINESS STRATEGIES MAY NEED TO BE TAKEN INTO ACCOUNT WHEN DETERMINING THE COMPARABILITY OF CONTR OLLED AND UNCONTROLLED TRANSACTIONS. HE HAS ALSO STATED THAT HRM FUNCTION ARE ALTOGETHER DIFFERENT FUNCTION OF RECRUITMENT SERVI CE PROVIDER. HE HAS STATED THAT A CRITICAL DIFFERENCE IS THAT THE ASSES SEE IN HRM FUNCTION GIVES TRAINING TO THE EMPLOYEES. AS AGAINST THAT, A RECRUITMENT PROVIDER DO NOT GIVE ANY TRAINING. THE ASSESSEE ALSO PROVIDES CONSTANT UPDATE POST RECRUITMENT. HE HAS THEREFORE PLEADED THAT ONE MUS T APPRECIATE THAT SUCH FACTORS OUGHT TO HAVE BEEN CONSIDERED FOR JUDGING T HE COMPARABILITY. THE COMPARABILITY AS ATTEMPTED BY TPO WAS THEREFORE NO T RELEVANT. HE HAS ITA NO. 3120/AHD/2010 MASTEK LIMITED VS. ADDL.CIT ASST.YEAR - 2006-07 - 70 - ALSO ALTERNATIVELY PLEADED THAT AT ANY RATE THE 9% COST PLUS WAS TOWARDS HIGHER SIDE. RATHER, HE HAS ALTERNATIVELY PLEADED THAT SINCE 92 EMPLOYEES HAVE RETURNED BACK, THEREFORE ASSESSEE SHOULD BE GI VEN THE CREDIT FOR THE COUNTER CLAIM. FOR THE PURPOSE OF REFERENCE TO OEC D CASE LAW RELIED UPON WAS CHEMINOVA INDIA LIMITED (2007-17-SOT-453-MUMBAI). IN RESPECT OF THE ALTERNATE SUGGESTION OF ADJUSTMENT, HE HAS PLACED RELIANCE ON BOSTON SCIENTIFIC INTERNATIONAL BV INDIA BRANCH ( 2010-TII-16- ITAT-MUM-TP). FINALLY, LD.COUNSEL MADE A POINT THAT EVEN IF MIL WAS TO CHARGE FOR SECONDMENTS, THEN THE INCOME WOUL D 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 SUPPORT ED 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 RECR UITMENT, SELECTION, TRAINING, ETC. SHOULD BE PROPERLY COMPENSATED. LD .DR HAS HARPED UPON THE POINT THAT MIL HAS IN FACT MAINTAINED A BUNCH O F 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 T O ARRIVE AT THE ARMS LENGTH PRICE OF THIS TRANSACTION. IN RESPECT OF TH E COMPENSATION COMPUTED; LD.DR HAS MENTIONED THAT THE DIRECT QUANT ITATIVE INDICATOR OF THE HRM SERVICES RENDERED BY MIL IS THE NUMBER OF P ERSONS DEPUTED BY MIL ON YEARLY BASIS. HE HAS ALSO VEHEMENTLY PLEAD ED THAT THE OFFSHORE ACTIVITY AND ONSITE ACTIVITY CANNOT BE SEGREGATED AND BOTH THE ACTIVITIES GO HAND IN HAND. ACCORDING TO HIM, THE AES HAVE DE RIVED VALUABLE BENEFIT OF AVAILABILITY OF TECHNICAL PERSONS AS AND WHEN REQUIRED, HENCE ITA NO. 3120/AHD/2010 MASTEK LIMITED VS. ADDL.CIT ASST.YEAR - 2006-07 - 71 - FOR PROVIDING THIS FACILITY THE ASSESSEE-COMPANY SH OULD RECOVER THE COMPENSATION AT ARMS LENGTH PRICE. C) FINDINGS : 26. WE HAVE HEARD BOTH THE SIDES AT LENGTH. WE HAVE PERUSED THE ORDERS OF THE REVENUE AUTHORITIES IN THE LIGHT OF T HE VOLUMINOUS COMPILATION FILED. IT IS TRUE THAT THE ASSESSEE IS ENGAGED IN PROVIDING OFFSHORE SOFTWARE DEVELOPMENT. THE ASSOCIATE ENT ERPRISES ARE ALSO IN THE BUSINESS OF PROVIDING RELATED SERVICES FOR SOFT WARE DEVELOPMENT ONSITE. FACTS HAVE REVEALED THAT FOR ENABLING TH E AES TO PROVIDE ONSITE SERVICE, THE ASSESSEE HAS SECONDED ITS EMP LOYEES TO THOSE AES. 26.1) TO DEAL WITH THIS PROBLEM IT IS BETTER TO FIRST EXAMINE THE CORRECT MEANING OF THIS NOTION I.E. SECONDMENT AND HAVE FOUND THAT A SECONDMENT TAKES PLACE WHEN AN EMPLOYEE OR A GROU P OF EMPLOYEES ARE TEMPORARILY ASSIGNED TO WORK FOR AN ANOTHER ORGANIZ ATION. THE SECONDMENT IS A PRACTICE THROUGH WHICH ONE ENTITY MAKES THE SERVICES OF ITS EMPLOYEE/ EMPLOYEES AVAILABLE TO ANOTHER EN TITY FOR A SHORT PERIOD OF TIME , WHILE CONTINUING TO TREAT THAT PERSON AS ITS EMPLOYEE EITHER BY REMUNERATING HIM OR BY NOT REMOVING FROM THE ROLL O F EMPLOYMENT. POSSIBLE REASONS FOR THE SECONDMENT ARE VIZ. CARE ER DEVELOPMENT, TO GAIN NEW SKILL/ EXPERIENCE, ENABLING SUCH EMPLOYEE TO REMAIN WITH THE PARENT-EMPLOYER SO AS TO PRESERVE BENEFITS SUCH AS PENSION BENEFIT ETC., INCOME GENERATION FOR THE PARENT-EMPLOYER, TO PROVI DE COVER FOR OFF- SHORE SHORT TERM PROJECTS, TO PROVIDE COVER FOR SHO RT TERM ABSENCE ETC. THE IDEA BEHIND A SECONDMENT ARRANGEMENT IS THAT THE SECONDEE ( THE EMPLOYEE) WILL REMAIN EMPLOYED WITH THE SECONDER ( THE PARENT OR SECONDING-EMPLOYER) DURING THE PERIOD OF SECONDMENT AND FOLLOWING THE TERMINATION OF REQUIREMENT OF THE HOST ( THE OTHE R ABSORBING UNIT ) SUCH ITA NO. 3120/AHD/2010 MASTEK LIMITED VS. ADDL.CIT ASST.YEAR - 2006-07 - 72 - PERSONS RETURN TO THE SECONDER. THE BENEFIT OF SUCH ARRANGEMENT IS THE CONTINUITY OF THE EMPLOYMENT. THE SECONDEE REMAIN S EMPLOYED BY THE SECONDER SO THAT THE STATUTORY PERIOD OF CONTINUO US EMPLOYMENT REMAIN UNBROKEN, TO QUALIFYING FOR PENSION OR OTHER EMPLOY MENT RIGHTS. THE PAYMENT OF FEES OR REMUNERATION DEPENDS UPON THE S ECONDMENT AGREEMENT FROM PARTY TO PARTY, BUT THE PRIMARY LIA BILITY IS OF THE SECONDER. NOW THE ARGUMENT IS THAT BY SUCH SEC ONDMENT OF TRAINED EMPLOYEES, IN RETURN, THE ASSESSEE HAS SUBSTANTIALL Y BEEN BENEFITTED AND BECAUSE OF THE ONSITE SERVICES PROVIDED BY AES, I N THE RESULT, THERE WAS MORE OFFSHORE WORK WAS GENERATED FOR THE ASSESSEE . AS FAR AS THE ASSESSEE IS CONCERNED, ITS OFFSHORE REVENUE HAS A DMITTEDLY INCREASED. A FUNDAMENTAL QUESTION HAS CROPPED UP BECAUSE OF TPO S DECISION THAT WHETHER THE HRM FUNCTION CAN BE SAID TO BE AN INTEG RAL PART OF THE OVERALL SOFTWARE DEVELOPMENT SERVICES OF THE ASSESS EE? IF WE CONSIDER THE OVERALL SCENARIO AND THE GLOBALIZATION OF SUCH SERVICES, THEN WHAT IS APPARENT IS THAT THE ENTITIES WHICH ARE IN THE BUSI NESS OF SOFTWARE DEVELOPMENT HAVE TO ENGAGE TECHNICALLY EXPERT EMPLO YEES. THOSE EMPLOYEES PERFORM THEIR DUTIES ONSITE AS WELL AS SOMETIME OFFSHORE. SUCH ENTREPRENEURS PROVIDE CUSHION TO THOSE EMPLOYE ES 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 COMMON UNDERSTANDING OF THE BUSINESS MODEL OF THIS ASSESSE E IS CONCERNED, AS ALSO THE PREVAILING BUSINESS PATTERN ALL OVER THE WORLD IS CONCERNED, THE DEPLOYMENT OF HUMAN RESOURCES IS INTER-LINKED WITH THE BUSINESS ACTIVITY OF THE ASSESSEE, THEN SUCH HRM ACTIVITY CA N BE SAID TO BE THE INTRICATELY LINKED ACTIVITY WITH THE MAIN BUSINESS ACTIVITY OF AN ENTREPRENEUR. REASON BEING, IN THE PRESENT CASE, SOFTWARE DEVELOPMENT ITA NO. 3120/AHD/2010 MASTEK LIMITED VS. ADDL.CIT ASST.YEAR - 2006-07 - 73 - SERVICES CANNOT BE PERFORMED INDEPENDENTLY OR IN IS OLATION WITH THE DEPLOYMENT OF TECHNICAL PERSONS. IN SUCH BUSINESS MODEL, THERE IS AN ESTABLISHED EXISTENCE OF AES ABROAD. THOSE AES GEN ERALLY DEMAND FOR SUPPLY OF TECHNICAL EMPLOYEES/ENGINEERS SO AS TO AC COMPLISH THE SOFTWARE DEVELOPMENT PROJECT ONSITE. SUCH FACILITY IS PRO VIDED BY THE HEAD OFFICE, I.E. MIL. IN RETURN, MIL HAS ALSO HEAPED T HE PRIZE I.E. HIGH REVENUE GENERATION . BY DISPLAYING DIFFERENT FAR, THE TPO HAD MADE AN ATTEMPT TO DISTINGUISH THE TWO ACTIVITIES. NEVERTH ELESS, THE LAW PRESCRIBES THAT FAR SHOULD BE APPROPRIATELY DOCUMENTED, SO THA T THE CORRECT FIGURES IS IN THE KNOWLEDGE OF THE REVENUE DEPARTMENT. 26.2. AS FAR AS THE COMMERCIAL AND BUSINE SS EXPEDIENCY IS CONCERNED, WE HAVE BEEN INFORMED THAT THE LD.CIT(A) IN PAST FOUR YEARS HAS DECIDED THIS ISSUE IN FAVOUR OF THE ASSESSEE. IT WAS HELD THAT IN THE BUSINESS INTEREST OF THE ASSESSEE TO SECOND ITS EMP LOYEES TO ITS AES, THE MIL HAS SECONDED THE EMPLOYEES. HOWEVER, THE ALLEG ATION OF THE TPO IS THAT THE AES HAVE BEEN BENEFITTED FROM SUCH SECONDM ENTS. BE THAT THE POSITION, EVEN IF IT WAS SO, THAT AN ASSOCIATE ENTE RPRISE IS BENEFITTED, THEN THERE SHOULD NOT BE ANY SCOPE TO DRAW AN ADVERSE IN FERENCE THAT MIL SHOULD ALSO SNATCH THE PROFIT OUT OF THE POCKETS OF AES. AS LONG AS THE MIL HAS GOT HIS POUND OF FLASH AND DISCLOSED BETTER REVENUE GENERATION, THERE SHOULD NOT BE ANY OBJECTION TO THE REVENUE. 26.2. AS FAR AS THE NON-MENTIONING OF HR M FUNCTION IN FORM NO.2CEB IS CONCERNED, A CLARIFICATION HAS BEEN GIVE N THAT NO INTERNATIONAL TRANSACTION OF HRM SERVICES HAD ACTUA LLY BEEN CARRIED OUT WITH ANY OF THE AES IN RESPECT OF SECONDMENT OF EMP LOYEES, HENCE THERE WAS NO QUESTION ABOUT REPORTING THE SAME IN THE SAI D PRESCRIBED FORM. THE EXPENSES IN RELATION TO PERFORMING THE HRM FUNC TION ARE STATED TO BE ITA NO. 3120/AHD/2010 MASTEK LIMITED VS. ADDL.CIT ASST.YEAR - 2006-07 - 74 - ENTIRELY INCURRED AND BORNE BY MIL. EXPENDITURE ON TRAINING IS ALSO BORNE BY MIL. THOSE WERE NOT RECRUITED ON THE BASIS OF AN Y REQUEST OF AES. AT THE TIME OF RECRUITMENT THERE WAS NO SURETY GIVEN O F 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 RECRU ITMENT 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 C OULD BE ALLEGED AS INTERNATIONAL TRANSACTION. WE FIND THIS EXPLANATI ON A REASONABLE EXPLANATION BECAUSE ADMITTEDLY THERE WAS NO INTERNA TIONAL 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 CAS E 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 THA T BY SUCH AN ARRANGEMENT OF SENDING THE EMPLOYEES TO AES, IN RET URN ASSESSEE HAS ALSO BEEN BENEFITED. EMPLOYEES, AFTER RETURNING, ARE WI TH UPGRADED SKILLS, BETTER EXPERIENCE, UPDATE KNOWLEDGE AND WITH A BET TER DELIVERY SKILLS. THIS IS ONE PART OF THE ADVANTAGE AND THE OTHER PAR T OF THE ADVANTAGE HAPPENED TO BE PROCUREMENT OF OFFSHORE BUSINESS I N HIGH VOLUME. WE ARE THEREFORE OF THE VIEW THAT THE COMPARABILITY AN ALYSIS AS CARRIED OUT BY THE TPO DO NOT MATCH WITH THE FACTS OF THE CASE. IT IS NOT APPROPRIATE TO HOLD THAT HRM FUNCTION AS CARRIED OUT BY THIS AS SESSEE IS TO BE TAKEN AS RECRUITMENT SERVICES. WE THEREFORE HOLD THAT THE ASSESSEE WAS NOT FUNCTIONING AS AN EXTERNAL RECRUITMENT AGENCY. AT THE COST OF REPETITION, WHILE ARGUING BEFORE US, THE LD.DR HAS SUPPORTED THE ACTION OF ITA NO. 3120/AHD/2010 MASTEK LIMITED VS. ADDL.CIT ASST.YEAR - 2006-07 - 75 - THE TPO PRIMARILY ON THE GROUND THAT BY THE DEPLOYM ENT OF SKILLED ENGINEERS AT THE SERVICES OF AES, THOSE AES HAVE BE EN BENEFITTED, HENCE, IN RETURN, THE ASSESSEE SHOULD HAVE RECOVERED SOME COMPENSATION ON SECONDMENTS. IT IS NOT A CORRECT APPROACH BECAUSE O NE HAS TO EXAMINE THE BUSINESS STRATEGIES AND THE BUSINESS MODEL OF AN EN TERPRISE AND IF IT IS FOUND THAT OTHER BENEFITS ARE MUCH HIGHER THAN THE SMALL AMOUNT OF COMPENSATION, THEN NATURALLY APPLYING A COMMON BUSI NESS ACUMENSHIP, NO COMPENSATION OR MARK-UPS SHOULD BE ASKED FOR. I N THE PRESENT CASE AS WELL, FACTS AND FIGURES HAVE REVEALED THAT FOLLOWIN G THE SAID BUSINESS STRATEGY THE BUSINESS GROWTH AS A WHOLE WAS MUCH HI GHER THAN THE IMPUGNED COMPENSATION AMOUNT. THIS ALLEGATION IS AL SO TO BE RULED OUT THAT THOSE VERY EMPLOYEES WERE OTHERWISE REGULAR EM PLOYEES OF THE ASSESSEE-COMPANY AND THEY HAVE BEEN ABSORBED AFTER THEIR RETURN FOR THE PERIOD FOR WHICH THEY WERE SENT ABROAD AND WORKED OFFSHORE WITH AES. IT IS TRUE THAT SUCH EMPLOYEES ARE THE REGULAR GROU P OF EXPERTS BUT THEY HAVE BEEN PAID BY AES WHEN WORKED ON-SITE ABROAD, W HICH MEANS THE BURDEN OF SALARY FOR THE OFFSHORE PERIOD WAS IN F ACT BORNE BY AES, OTHERWISE TO MAINTAIN BUNCH OF TRAINED EMPLOYEES TH E MIL HAD TO INCUR THE EXPENDITURE ON SALARY. THEREFORE, THERE WAS AN ARGUMENT OF COUNTER CLAIMS AND IN SUPPORT RELIANCE WAS PLACED ON BOSTON SCIENTIFIC INTERNATIONAL VV (210-TII-16-ITAT-MUM-TP). FOR THESE REASONS WE ALSO HOLD THAT THE SECONDEE-PROVIDER IS NOT AKIN TO RECRUITMENT- SERVICE-PROVIDER OR THAT SECONDMENT IS DIFFERENT FROM RECRUITMENT. FINALLY, WE HOLD THAT THERE WAS NO LEGAL BASIS FOR THE IMPUGNED UPWARD ADJUSTMENT AND THE SAME IS HEREBY D IRECTED TO BE DELETED. THIS GROUND IS ALLOWED. ITA NO. 3120/AHD/2010 MASTEK LIMITED VS. ADDL.CIT ASST.YEAR - 2006-07 - 76 - 28. GROUND NO.3 READS AS UNDER:- 3. GROUND NO. 3 - INTEREST ON ACCOUNT OF EXCESS CR EDIT PERIOD TO AE'S: I. THE LD AO HAS ERRED IN LAW AND ON FACTS IN ALLE GING THE CREDIT PERIOD GRANTED TO THE AE'S AS AN INTERNATIONAL TRAN SACTION AND MADE AN ADJUSTMENT OF RS.1,122,281 BY CHARGING NOTI ONAL INTEREST ON EXCESS CREDIT GRANTED TO THE ASSOCIATED ENTERPRISES. II. THE LD. AO HAS ERRED IN LAW AND ON FACTS BY N OT 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 T HIRD PARTIES EVEN THOUGH THE PAYMENTS HAVE BEEN RECEIVED BEYOND THE NORMAL CREDIT PERIOD; THE APPELLANT HAS NOT PAID ANY INTEREST TO THE THI RD PARTIES FOR SERVICES, IF ANY, AVAILED AND THE PAYME NTS WOULD HAVE BEEN MADE BEYOND THE NORMAL CREDIT PERIO D; 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 / TH E ADDITIONAL COMMISSIONER OF INCOME-TAX, TRANSFER PRICING-L, AHMEDABAD.('LD. TPO') HAS ERRED IN LAW AND ON FACTS BY DISREGARDING THE APPELLANT'S COUNTER CLAIM FOR RECO VERIES MADE BEFORE THE CREDIT PERIOD OF 60 DAYS. 28.1. THE TPO HAD OBSERVED THAT THE ASSESSEE HAD GR ANTED EXCESSIVE CREDIT PERIOD TO ITS AES. ACCORDING TO HIM, NORMA L CREDIT PERIOD IS 60 DAYS, HOWEVER, IT WAS NOTICED THAT THE ASSESSEE HAD GRANTED CREDIT PERIOD ABOVE 60 DAYS. THE TPO WAS OF THE VIEW THAT THE ASSESSEE SHOULD HAVE CHARGED INTEREST @ 6.65% ON ACCOUNT OF EXCESS CREDIT PERIOD GRANTED TO AES. A WORKING WAS CALLED FOR FROM THE ASSESSEE AND O N ITA NO. 3120/AHD/2010 MASTEK LIMITED VS. ADDL.CIT ASST.YEAR - 2006-07 - 77 - THAT BASIS THE TPO HAS ASKED THE AO TO MAKE AN ADJU STMENT OF RS.11,22,281/-. 28.2. WHEN THE MATTER WAS DISCUSSED BEFOR E DRP, THE ACTION OF THE TPO WAS AFFIRMED WITH THE FINDING THAT THE AE HAD R ETAINED THE SALE CONSIDERATION BEYOND A STIPULATED TIME, HENCE, THE ASSESSEE WAS ENTITLED FOR COMPENSATION IN THE FORM OF INTEREST. 28.3. LD. AR MR.S.N.SOPARKAR STATED THAT THOUGH A WORKING WAS PROVIDED TO TPO BUT THAT WAS MADE ONLY TO COMPLY WI TH THE DIRECTIONS BUT THERE WAS NO CONCESSION OR ACCEPTANCE WAS OFFER ED. AS FAR AS CHALLENGING THE JURISDICTION OF THE TPO IS CONCERNE D, THE SAME HAS ALREADY BEEN DISMISSED BY US IN ABOVE PARAS. LD.AR HAS INFORMED THAT MIL IS A DEBT FREE COMPANY. THE COMPANY HAD ISSUED PAID UP AND SUBSCRIBED CAPITAL OF ABOUT RS.7 CRORES. THE COMPA NY HAS RESERVES OF RS.198 CRORES. THE COMPANY HAS NO UNSECURED LOANS. THE BANK CHARGES OR LEASE RENTALS AND FINANCIAL COST WAS ONLY RS.25 LACS. IT IS NOT THE CASE THAT THE ASSESSEE HAS CHARGED INTEREST FOR LATE PAY MENTS FROM ANY OTHER PARTY. LIKEWISE, THE ASSESSEE HAS ALSO NOT PAID IN TEREST TO ITS SUPPLIERS FOR ANY SUCH DELAY IN PAYMENT. NON-CHARGING OF COMPEN SATION OF INTEREST IS STATED TO BE THE MARKET PRACTICE OF THIS INDUSTRY. REFERRING ONE OF THE GUIDELINES OF OECD (PARA 1.29), IT IS PRESCRIBED TH AT NO INTEREST COULD BE CHARGED ON DELAYED PAYMENT ON COMMERCIAL CONSIDERAT ION FOR ENSURING A LONG AND HEALTHY RELATIONSHIP. IT IS OBSERVED THAT ONLY IN THE EVENT OF SEVERANCE OF RELATIONSHIP, PARTIES DO RESORT TO CHA RGING OF INTEREST. RATHER, IN THE CASE OF NIMBUS COMMUNICATIONS (211 TII 03-ITAT- MUM-TP) IT WAS HELD THAT AN OUTSTANDING DEBIT BALANCE FROM AE IS NOT AN INTERNATIONAL TRANSACTION PER SE . AN ANOTHER ARGUMENT HAS ALSO BEEN RAISED THAT MIL SOMETIMES USED TO RECEIVE PAYMENT F ROM AE PRIOR TO THE ITA NO. 3120/AHD/2010 MASTEK LIMITED VS. ADDL.CIT ASST.YEAR - 2006-07 - 78 - STIPULATED PERIOD OF 60 DAYS AND IN THAT CASE, NO I NTEREST HAS BEEN PAID ON SUCH PROPONED PAYMENTS RECEIVED. FOR THIS COUNTER CLAIM, RELIANCE WAS PLACED ON BOSTON SCIENTIFIC INTERNATIONAL TRANSACTION BB (210 TII 16- ITAT-MUM-TP). 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 SU PPORTED THE ACTION OF THE TPO. RATHER, WE HAVE ENQUIRED THE POSITION O F 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 D EBT 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 BRO UGHT ON RECORD THAT THE ASSESSEE HAS FOUND PAYING INTEREST TO ITS CREDITORS OR ITS SUPPLIERS ON DELAYED PAYMENTS. THE MOOT QUESTION IS THAT IN DECI DING THIS ISSUE; A COMMERCIAL CONSIDERATION AND MARKET PRACTICE HAS TO BE TAKEN INTO ACCOUNT. NATURALLY, EVEN AS PER THE OECD(TP) GUIDE LINES, NOW WORTH MENTIONING, IT HAS BEEN SUBSCRIBED THAT TO ENSURE A HEALTHY RELATIONSHIP AND TO MAINTAIN A LONG BUSINESS TRANSACTION, SUCH C OMPENSATION OR CHARGING OF INTEREST ARE BEING IGNORED COMMONLY BY BUSINESS MAN. WE CANNOT IGNORE THIS FACT AS WELL THAT IN PAST FEW AS ST.YEARS, SUCH AN ADJUSTMENT WAS OVERRULED BY LD.CIT(A). IT WAS A CO RRECT DECISION THAT A BUSINESS AND COMMERCIAL CONSIDERATION HAVE TO BE LO OKED INTO AND ONE CANNOT APPLY ARMS LENGTH METHOD TO SAY THAT THE AS SESSEE OUGHT TO HAVE EARNED THE COMPENSATION FROM THE AE. RATHER, DURIN G THE COURSE OF PROCEEDING, IT WAS ENQUIRED BY US WHETHER IT WOULD BE RELEVANT TO SEE IF ITA NO. 3120/AHD/2010 MASTEK LIMITED VS. ADDL.CIT ASST.YEAR - 2006-07 - 79 - THE AES HAVE RECEIVED THE FUNDS FROM THE THIRD PART IES WITHIN REASONABLE CREDIT PERIOD AND WHETHER THE TRANSACTION AS A WHOL E NEED RE- CONSIDERATION. IF THE AES HAVE NOT CHARGED INTERES T TO THIRD PARTIES FOR LATE RECOVERIES, WOULD IT BE REASONABLE TO EXPECT M IL TO RECOVER THE INTEREST FROM THE AES. LIKEWISE IF MIL IS NOT PAYIN G INTEREST ON ADVANCE/ PREPONMENT OF PAYMENT TO AE THEN WAS IT JUSTIFIABLE TO LEVY INTEREST ON FEW DAYS DELAY? IN RESPONSE TO THIS, THE LD. DR HA S STATED THAT SINCE MIL AND ITS AES WERE UNDISPUTEDLY DEALING ON A PRIN CIPAL TO PRINCIPAL BASIS, SO IT WOULD NOT MATTER WHETHER THE AES HAVE RECOVERED THE SAME FROM THEIR CUSTOMERS. THIS ARGUMENT IS NOT APPROPR IATE IN OUR HUMBLE BELIEF. IF THE AES ARE NOT RECOVERING INTERESTS FR OM THIRD PARTIES FOR LATE RECOVERIES, THEN IN THE INSTANT CASE IT WOULD BE T OO MUCH TO EXPECT THE ASSESSEE TO CHARGE THE INTEREST FROM THE AES. THERE IS NO RATIONALE TO INFLICT UPON THE ASSESSEE, MERELY ON PRESUMPTION, T HAT HE OUGHT TO HAVE CHARGED THE INTEREST FROM ITS AES. WE THEREFORE HO LD THAT THERE WAS NO JUSTIFICATION TO PRESUME THAT THERE WAS A SHIFT OF PROFIT TO AVOID TAX IN INDIA. THIS GROUND IS ALLOWED. 31. GROUND NO.4 READS AS UNDER:- 4. GROUND NO. 4 - EXCLUDING EXCHANGE FLUCTUATION GAIN WHILE COMPUTING DEDUCTION UNDER SECTION 10A OF THE ACT THE LD. AO HAS ERRED IN LAW AND ON FACTS IN EXCLUDING RS.1,03,82,636 BEING GAIN ON ACCOUNT OF EXCHANGE FLUCTUATION FROM PROFITS OF THE ELIGIBLE UNIT, WHILE CALCULATING DEDUCTION UNDER SE CTION 10A OF THE ACT . THE LD. AO OUGHT TO HAVE APPRECIATED THE FOLLOWIN G FACTS: I. THE EXCHANGE FLUCTUATION GAIN ACCRUING ON ACCOU NT OF CHANGE IN THE RATE OF FOREIGN CURRENCIES IS HAVING INTIMATE C ONNECTION WITH THE EXPORT BUSINESS AND THUS, ELIGIBLE FOR DEDUCTIO N UNDER SECTION 10A OF THE ACT. ITA NO. 3120/AHD/2010 MASTEK LIMITED VS. ADDL.CIT ASST.YEAR - 2006-07 - 80 - II. THE AFORESAID ISSUE HAS BEEN DECIDED IN FAVOUR BY THE HON'BLE CIT (A) IN APPELLANT'S OWN CASE FOR EARLIER ASSESSM ENT YEARS ('AY'S) VIZ. AY 1999-2000 TO 2005-06 AND THE SAME HAS BEEN CONFIRMED BY THE HON'BLE INCOME-TAX APPELLATE TRIBU NAL - C BENCH, AHMEDABAD ('ITAT') FOR EARLIER AYS 1999-00 A ND 2000- 01. 31.1 THE OPENING REMARK OF THE AO WAS THAT WHIL E CALCULATING THE DEDUCTION U/S.10A OF IT ACT, THE ASSESSEE HAS REDUC ED THE AMOUNT OF OTHER INCOME, HOWEVER, NOT REDUCED FOREIGN EXCHA NGE 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 ASSESSE E IS IN EXPORT OF SOFTWARE DEVELOPMENT AND THE CHANGE IN THE RATE OF FOREIGN CURRENCY HAS INTIMATE CONNECTION WITH THE EXPORT BUSINESS ACTIVI TY. 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 PREVAI LING EXCHANGE RATE, ENTRY IS RECORDED IN THE ACCOUNT. HOWEVER, THE EXPO RT 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 EXC HANGE RATE DIFFERENCE. FEW CASE LAWS HAVE ALSO BEEN CITED AS FOLLOWS:- 1.DECISION OF THE HONBLE CHENNAI ITAT IN THE CAS E OF CHANGEPOND TECHNOLOGIES P LTD V. ASSISTANT COMMISSI ONER OF INCOME TAX CIRCLE 1(3) (2007) (22 SOT 220) 2. DECISION OF HONBLE AHMEDABAD ITAT IN THE CASE OF G AMI EXPORTS VS. ASSISTANT COMMISSIONER OF INCOME TAX (2 005) (94 TTJ 557) 3. DECISION OF THE HONBLE GUJARAT HIGH COURT IN CASE OF HINDUSTAN TRADING CORP. 160 ITR 15 ITA NO. 3120/AHD/2010 MASTEK LIMITED VS. ADDL.CIT ASST.YEAR - 2006-07 - 81 - 4. DECISION OF THE HONBLE MUMBAI ITAT IN THE CASE OF K. UTTAMLAL EXPORTS V. DCIT [2004] (133 TAXMANN 196) 5. DECISION OF THE HONBLE DELHI ITAT IN THE CASE OF S MT. SUJATA GROVER V. DEPUTY COMMISSIONER OF INCOME TAX (2001)( 74 TTJ 347) 6. DECISION OF THE HONBLE MUMBAI ITAT IN THE CASE OF CMC LIMITED, MUMBAI V. THE DCIT, SPL.RANGE 36, MUMBAI (ITA NO.4811/MUM/1998). 31.2. THE AO WAS NOT CONVINCED AND HELD THAT ON PER USAL OF COMPUTATION OF DEDUCTION U/S.10A, IT WAS NOTICED TH AT THE ASSESSEE HAS HIMSELF REDUCED INTEREST ON DEPOSIT, DIVIDEND I NCOME, ETC. FROM THE ELIGIBLE PROFIT OF THE BUSINESS FOR SECTION 10A DED UCTION. HOWEVER, THE ASSESSEE HAS NOT EXCLUDED FOREIGN EXCHANGE GAIN. ACCORDING TO HIM, FOR THE PURPOSE OF SECTION 10A, PROFIT DERIVED FROM EXPORT BUSINESS ARE ELIGIBLE. ACCORDING TO HIM, FOREIGN EXCHANGE GAIN WAS NOT THE PROFIT DERIVED FROM EXPORT BUSINESS. THE AO HAS ALSO REFER RED A DECISION OF ITAT AHMEDABAD PRONOUNCED IN ASSESSEES OWN CASE FO R A.Y. 2002-03 FOR THE PROPOSITION THAT IN RESPECT OF OTHER INCOM E, THE STAND OF THE DEPARTMENT FOR THE PURPOSE OF COMPUTATION U/S.10A W AS UPHELD AND HELD AS NOT ALLOWABLE. HOWEVER, IN RESPECT OF THE ISSUE OF EXCHANGE GAIN THE TRIBUNAL HAS HELD THAT THE EXCHANGE GAIN IS A PAR T OF THE EXPORT BUSINESS OF THE ASSESSEE. AGAINST THE SAID DECISION, THE REVENUE HAD PREFERRED AN APPEAL BEFORE THE HIGH COURT, CONSEQUE NTLY, THE AO HAS HELD THAT THE FOREIGN EXCHANGE GAIN IS NOT TO BE ALLOW ED AS A DEDUCTION WHILE COMPUTING THE AMOUNT U/S.10A OF IT ACT. THE AO HAS RECOMPUTED THE DEDUCTION U/S.10A OF RS.72,98,75,878/-. 31.3. BEFORE THE DRP, IT WAS EXPLAI NED THAT IN RESPECT OF FOREIGN EXCHANGE FLUCTUATION GAIN OF MAHAPE UNIT OF RS.1,03,82,636/- ITA NO. 3120/AHD/2010 MASTEK LIMITED VS. ADDL.CIT ASST.YEAR - 2006-07 - 82 - THE SAME WAS ELIGIBLE PROFIT BEING DERIVED FROM THE EXPORT BUSINESS. THE DRP WAS NOT CONVINCED AND AFTER DISCUSSION IN THE L IGHT OF WOODWARD GOVERNOR INDIA ( P.)LTD. 312 ITR 254(SC), PANDIA N CHEMICALS 262 ITR 278 (SC) AND STERLING FOODS 237 ITR 579, IT WAS OBSERVED THAT FOR THE PURPOSE OF CLAIMING DEDUCTION U/S.10A, IT IS NO T ONLY REQUIRED TO ESTABLISH THAT IT WAS BUSINESS PROFIT OF AN INDUSTR IAL 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. 113 ITR 84 HAS ALSO BEEN CITED AND FINALLY HELD THAT THE GAIN ON FOREIGN EXCHANGE WAS NOT EL IGIBLE FOR DEDUCTION U/S.10A OF I.T. ACT. CONCLUSION: 31.4. AFTER HEARING BOTH THE SIDES, IN BRIEF, IN RE SPECT 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 M /S.MASTEK LTD. VS. ASST.CIT FOR AYS 2000-01 & 1999-2000, DATED 1 7/06/2008 AND FINALLY HELD AS UNDER:- 16.4 AS REGARDS INCOME ON ACCOUNT OF EXCHANGE RA TE FLUCTUATION, HONBLE GUJARAT HIGH COURT IN THE CASE OF CIT VS. A MBA IMPEX 282 ITR 1445(GUJ) H ELD THAT MERELY BECAUSE AN AMOUNT IS RECEIVED IN A YEAR SUBSEQUENT TO THE YEAR OF EXPORT BY WAY OF EXCHANGE RATE DIFFERENCE, IT DOES NOT NECESSARILY A LWAYS FOLLOW THAT THE SAME IS NOT RELATABLE TO THE EXPORTS MADE. THE ITAT IN THE CASE OF RENAISSANCE JEWELLERY (P.) LIMITED VS. INCO ME-TAX OFFICER, WARD 8(3)(3), MUMBAI 289 ITR SP 65 (MUM.) HELD THAT THE PROFIT ON ACCOUNT OF FOREIGN EXCHANGE GAIN IS D IRECTLY REFERABLE TO THE ARTICLES AND THINGS EXPORTED BY THE ASSESSEE . SUCH PROFITS ARE, THEREFORE, OF THE SAME NATURE AS THE SALE PROC EEDS AND THERE IS ITA NO. 3120/AHD/2010 MASTEK LIMITED VS. ADDL.CIT ASST.YEAR - 2006-07 - 83 - NO REASON AS TO WHY DEDUCTION UNDER SECTION 10A SHO ULD NOT BE ALLOWED IN RESPECT OF SUCH EXCHANGE GAIN. NO CONTR ARY DECISION HAS BEEN BROUGHT TO OUR NOTICE. HOWEVER, IN THE CA SE UNDER CONSIDERATION, IT IS NOT EVIDENT FROM THE ORDER OF LOWER AUTHORITIES AS TO WHETHER OR NOT GAIN DUE TO DIFFERENCE IN EXCH ANGE RATE IS ON ACCOUNT OF EXPORTS OR OTHERWISE. IN THESE CIRCUMST ANCES, WE VACATE THE FINDINGS OF LD. CIT(A) AND RESTORE THE MATTER T O THE FILE OF THE AO WITH THE DIRECTIONS TO ASCERTAIN THE NATURE OF G AIN. IN THE EVEN SUCH GAIN IS DERIVED FROM THE EXPORT OF GOODS OR AR TICLES MANUFACTURED OR PRODUCED BY THE TAXPAYER, EXEMPTION /DEDUCTION U/S.10A OR 80HHE AS THE CASE MAY BE, SHOULD BE ALLO WED IN ACCORDANCE WITH LAW AFTER ALLOWING SUFFICIENT OPPOR TUNITY TO THE TAXPAYER. THUS, GROUNDS OF THE REVENUE RELATING TO EXEMPTION/DEDUCTION U/S.10A AND 80HHE OF THE ACT IN RESPECT OF PROFITS ON EXCHANGE FLUCTUATION ARE DISPOSED OF AS INDICATED HEREINBEFORE FOR THESE TWO ASSESSMENT YEARS. 32. ONCE THE RESPECTED COORDINATE BENCH OF THE TRIBUNAL HAS ALREADY RESTORED THIS GROUND BACK TO THE FILE OF THE AO WIT H CERTAIN DIRECTIONS, THEREFORE IT IS NOT PROPER FOR US TO DEAL THIS VERY ISSUE INDEPENDENTLY FOR THE YEAR UNDER CONSIDERATION, BUT TO REFER BACK TO THE FILE OF THE AO TO BE DECIDED DE NOVO AS PER THE SAID DIRECTIONS. THEREFORE, THIS GROUN D MAY BE TREATED AS ALLOWED BUT FOR STATISTICAL PURPOSES ONLY. 33. GROUND NO.5 READS AS UNDER:- 5. GROUND NO. 5 - DISALLOWANCE UNDER SECTION 1 4A OF THE ACT ON ACCOUNT OF EXPENSES INCURRED IN RELATION TO EARN ING EXEMPT INCOME THE LD. AO HAS ERRED IN LAW AND ON FACTS IN DISALLO WING EXPENSES OF RS.20,39,041 UNDER SECTION 14A OF THE ACT READ WITH RULE 8D OF THE INCOME TAX RULES ('THE RULES') INCURRED IN RELATION TO EARNING EXEMPT INCOME THE LD. AO OUGHT TO HAVE APPRECIATED THE FOL LOWING: ITA NO. 3120/AHD/2010 MASTEK LIMITED VS. ADDL.CIT ASST.YEAR - 2006-07 - 84 - I. RULE 8D OF THE RULES CREATES A DEPARTURE FROM S ETTLED 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 O F RS.7,65,60,202/-. IT WAS OBSERVED BY THE AO THAT AS PER THE PROVISIONS O F SECTION 14A AN EXPENDITURE RELATED TO THE INCOME WHICH DOES NOT FO RM 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 ADMINIST RATIVE EXPENSES INCURRED FOR EARNING THE SAID EXEMPT INCOME SHOULD NOT BE DISALLOWED BY APPLYING RULE 8D OF IT RULES. THE ASSESSEE HAS SUB MITTED THAT NO PART OF THE INVESTMENT WAS MADE OUT OF BORROWED FUNDS. IT WAS EXPLAINED THAT THE COMPANY HAD SUFFICIENT FUNDS IN HAND. THE ENTIR E INVESTMENT WAS MADE OUT OF ITS OWN FUNDS. THE POSITION OF THE RES ERVES AND SURPLUS WAS NARRATED TO THE AO TO EXPLAIN THAT THERE WERE SUFFI CIENT SHARE CAPITAL AND RESERVE AND SURPLUS FUNDS IN COMPARISON TO THE INVE STMENT AMOUNT. HOWEVER, THE AO WAS NOT CONVINCED AND ACCORDING TO HIM, THE ASSESSEE HAS NOT FURNISHED DETAILS OF EXACT SOURCE OF INVEST MENT IN SHARES. ACCORDING TO AO, THE ASSESSEE HAS NOT EXPLAINED WHE THER SEPARATE ACCOUNTS WERE MAINTAINED TO DEMONSTRATE THAT NON-IN TEREST BEARING FUNDS WERE UTILIZED FOR THE SAID INVESTMENT. ACCORDING T O AO, APART FROM THE ABOVE, CERTAIN ADMINISTRATIVE EXPENSES WOULD HAVE A LSO BEEN INCURRED FOR MANAGING THE SAID INVESTMENT. APPLYING THE RULE 8D , WHICH ACCORDING ITA NO. 3120/AHD/2010 MASTEK LIMITED VS. ADDL.CIT ASST.YEAR - 2006-07 - 85 - TO HIM WAS APPLICABLE FOR THE YEAR UNDER CONSIDERAT ION, HE HAS COMPUTED EXPENDITURE IN RELATION TO THE INCOME WHICH DID NOT FORM PART OF THE TOTAL INCOME AND A PROPORTIONATE COMPUTATION WAS MADE. FI NALLY A DISALLOWANCE U/S.14A OF RS.20,39,041/- WAS TAXED. THE DRP HAS REFERRED DAGA CAPITAL MANAGEMENT 117 ITD 169 (MUM .) AND HELD THAT THE DISALLOWANCE WAS RIGHTLY MADE. 34. HAVING HEARD THE SUBMISSIONS OF BOTH THE SID ES, AS FAR AS THE DECISION OF DAGA CAPITAL MANAGEMENT (SUPRA) IS CONC ERNED, THE LEGAL VIEW TAKEN THEREIN HAS NOW BEEN REVERSED BY HON'BLE BOMBAY HIGH COURT PRONOUNCED IN THE CASE OF GODREJ & BOYCE MFG. CO.LTD. MUMBAI VS. DY.CIT IN INCOME TAX APPEAL NO.626 OF 2010 AND WRIT PETITION NO.758 OF 2010 ORDER DATED 12/08/2010 [ NOW REPORTED AS 328 ITR 81(BOM)]. IN THIS JUDGEMENT AT THE END, THE HON'BLE COURT HAS RECAPITULATED THE CONCLUSION AND PRONOUNCED THAT A FINDING IS REQUIRED WHETHER THE INVESTMENT IN SHARES IS MADE OUT OF OWN FUNDS OR OUT OF BORROWED FUNDS. A NEXUS IS REQUIRED TO BE ESTABLISHED BETWEEN THE INVESTMENTS AND THE BORROWINGS. IN SECTION 14A OF THE ACT EXPENDITURE INCURRED IN RELATION TO EXEMPTED INCOME IS TO BE DISALLOWED ONLY IF THE ASSESSING OFFICER IS SATISFIED WITH THE EXPENDITURE CLAIMED BY THE ASSESSEE PERTAINING TO THE SAID EXEMPT INCOME. RATHER, THE HONBLE COURT WAS VERY SPECIFIC THAT IN CASE, NO SUCH EXERCISE WAS CARRIED OUT BY THE ASSESSING OFFICER THEN THE MATTER IS TO BE R EMANDED BACK FOR AFRESH INVESTIGATION. IT HAS ALSO BEEN MADE CLEAR THAT THE PROVISO TO SECTION 14A OF THE ACT WAS EFFECTIVE FROM 2001-02. THE HON'BLE COURT HAS ALSO POINTED OUT THE IMPORTANCE OF RULE 8D OF T HE I.T.RULES, 1962. IT WAS MADE CLEAR THAT SUB-SECTION (1) TO SECTION 14A WAS INSERTED WITH RETROSPECTIVE EFFECT FROM 01/04/1962, HOWEVER, SUB- SECTIONS (2) & (3) ITA NO. 3120/AHD/2010 MASTEK LIMITED VS. ADDL.CIT ASST.YEAR - 2006-07 - 86 - 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, RELEVA NT FINDINGS ARE REPRODUCED BELOW:- A) THE ITAT HAD RECORDED A FINDING IN THE EARLIE R ASSESSMENTS THAT THE INVESTMENTS IN SHARES AND MUTUAL FUNDS HAVE BEE N MADE OUT OF OWN FUNDS AND NOT OUT OF BORROWED FUNDS AND THAT TH ERE 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 C AN BE DISALLOWED ONLY IF THE ASSESSING OFFICER IS NOT SAT ISFIED WITH THE CORRECTNESS OF THE EXPENDITURE CLAIMED BY THE ASSES SEE. 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 20 01 WITH RETROSPECTIVE EFFECT FROM 1 APRIL 1962. HOWEVER, I N VIEW OF THE PROVISO TO THAT SECTION, THE DISALLOWANCE THEREUNDE R COULD BE EFFECTIVELY MADE FROM ASSESSMENT YEAR 2001-2002 ONW ARDS. THE FACT THAT THE TRIBUNAL FAILED TO CONSIDER THE APPLI CABILITY OF SECTION 14A IN ITS PROPER PERSPECTIVE, FOR ASSESSMENT YEAR 2001-2002 WOULD NOT BAR THE TRIBUNAL FROM CONSIDERING DISALLO WANCE UNDER SECTION 14A IN ASSESSMENT YEAR 2002-2003. C) THE DECISIONS REPORTED IN SRIDEV ENTERPRISES (SUPRA), MUNJAL SALES CORPORATION (SUPRA) AND RADHASOAMI SATSANG (SUPRA) HOLDING THAT THERE MUST BE CONSISTENCY AND DEFINITE NESS IN THE APPROACH OF THE REVENUE WOULD NOT APPLY TO THE FACT S OF THE PRESENT CASE, BECAUSE OF THE MATERIAL CHANGE INTRODUCED BY SECTION 14A BY WAY OF STATUTORY DISALLOWANCE IN CERTAIN CASES. TH ERE, THE DECISIONS OF THE TRIBUNAL IN THE EARLIER YEARS WOUL D HAVE NO RELEVANCE IN CONSIDERING DISALLOWANCE IN ASSESSMENT YEAR 2002- 2003 IN THE LIGHT OF SECTION 14A OF THE ACT. ITA NO. 3120/AHD/2010 MASTEK LIMITED VS. ADDL.CIT ASST.YEAR - 2006-07 - 87 - 73. FOR THE REASONS WHICH WE HAVE INDICATED, WE HA VE COME TO THE CONCLUSION THAT UNDER SECTION 14A(1) IT IS FOR THE ASSESSING OFFICER TO DETERMINE AS TO WHETHER THE ASSESSEE HAD INCURRED A NY EXPENDITURE IN RELATION TO THE EARNING OF INCOME WHICH DOES NOT FO RM PART OF THE TOTAL INCOME UNDER THE ACT AND IF SO TO QUANTIFY THE EXTE NT OF THE DISALLOWANCE. THE ASSESSING OFFICER WOULD HAVE TO ARRIVE AT HIS DETERMINATION AFTER FURNISHING AN OPPORTUNITY TO TH E ASSESSEE TO PRODUCE ITS ACCOUNTS AND TO PLACE ON THE RECORD ALL RELEVANT MATERIAL IN SUPPORT OF THE CIRCUMSTANCES WHICH ARE CONSIDERE D TO BE RELEVANT AND GERMANE. FOR THIS PURPOSE AND IN LIGHT OF OUR OBSERVATIONS MADE EARLIER IN THIS SECTION OF THE JUDGMENT, WE DEEM IT APPROPRIATE AND PROPER TO REMAND THE PROCEEDINGS BACK TO THE ASSESS ING OFFICER FOR A FRESH DETERMINATION. CONCLUSION : 74. OUR CONCLUSIONS IN THIS JUDGMENT ARE AS FOLLOWS ; I) DIVIDEND INCOME AND INCOME FROM MUTUAL FUNDS FALLIN G WITHIN THE AMBIT OF SECTION 10(33) OF THE INCOME TA X ACT 1961, AS WAS APPLICABLE FOR ASSESSMENT YEAR 2002-03 IS NOT INCLUDIBLE IN COMPUTING THE TOTAL INCOME OF THE ASS ESSEE. CONSEQUENTLY, NO DEDUCTION SHALL BE ALLOWED IN RESP ECT OF EXPENDITURE INCURRED BY THE ASSESSEE IN RELATION TO SUCH INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME UNDER THE ACT, BY VIRTUE OF THE PROVISIONS OF SECTION 14A (1); II) THE PAYMENT BY A DOMESTIC COMPANY UNDER SECTION 115 O(1) OF ADDITIONAL INCOME TAX ON PROFITS DECLARED, DISTR IBUTED OR PAID IS A CHARGE ON A COMPONENT OF THE PROFITS OF T HE COMPANY. THE COMPANY IS CHARGEABLE TO TAX ON ITS PROFITS AS A DISTINCT TAXABLE ENTITY AND IT PAYS TAX IN DIS CHARGE OF ITS OWN LIABILITY AND NOT ON BEHALF OF OR AS AN AGENT F OR ITS SHAREHOLDERS. IN THE HANDS OF THE SHAREHOLDER AS T HE RECIPIENT OF DIVIDEND, INCOME BY WAY OF DIVIDEND DO ES NOT FORM PART OF THE TOTAL INCOME BY VIRTUE OF THE PROV ISIONS OF SECTION 10(33). INCOME FROM MUTUAL FUNDS STANDS ON THE SAME BASIS; ITA NO. 3120/AHD/2010 MASTEK LIMITED VS. ADDL.CIT ASST.YEAR - 2006-07 - 88 - III) THE PROVISIONS OF SUB SECTIONS (2) AND (3) OF SECTI ON 14A OF THE INCOME TAX ACT 1961 ARE CONSTITUTIONALLY VALID; IV) THE PROVISIONS OF RULE 8D OF THE INCOME TAX RULES A S 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 ARTI CLE 14 OF THE CONSTITUTION; V) THE PROVISIONS OF RULE 8D OF THE INCOME TAX RULES W HICH HAVE BEEN NOTIFIED WITH EFFECT FROM 24 MARCH 2008 S HALL 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 ENFORC E THE PROVISIONS OF SUB SECTION (1) OF SECTION 14A. FOR THT PURPOSE, THE ASSESSING OFFICER IS DUTY BOUND TO DET ERMINE THE EXPENDITURE WHICH HAS BEEN INCURRED IN RELATION TO INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME UNDER THE ACT. THE ASSESSING OFFICER MUST ADOPT A REASON ABLE BASIS OR METHOD CONSISTENT WITH ALL THE RELEVANT FA CTS AND CIRCUMSTANCES AFTER FURNISHING A REASONABLE OPPORTU NITY TO THE ASSESSEE TO PLACE ALL GERMANE MATERIAL ON THE R ECORD; VII) THE PROCEEDINGS FOR ASSESSMENT YEAR 2002-03 SHALL S TAND REMANDED BACK TO THE ASSESSING OFFICER. THE ASSESS ING OFFICER SHALL DETERMINE AS TO WHETHER THE ASSESSEE HAS INCURRED ANY EXPENDITURE (DIRECT OR INDIRECT) IN RE LATION TO DIVIDEND INCOME / INCOME FROM MUTUAL FUNDS WHICH DO ES NOT FORM PART OF THE TOTAL INCOME AS CONTEMPLATED UNDER SECTION 14A. THE ASSESSING OFFICER CAN ADOPT A REASONABLE BASIS FOR EFFECTING THE APPORTIONMENT. WHILE MAKING THAT DETERMINATION, THE ASSESSING OFFICER SHALL PROVIDE A REASONABLE OPPORTUNITY TO THE ASSESSEE OF PRODUCING ITS ACCOUNTS AND RELEVANT OR GERMANE MATERIAL HAVING A BEARING ON THE FACTS AND CIRCUMSTANCES OF THE CASE. ( EMPHASIS GIVEN) ITA NO. 3120/AHD/2010 MASTEK LIMITED VS. ADDL.CIT ASST.YEAR - 2006-07 - 89 - ON THE BASIS OF ABOVE DECISION, WE ARE ALSO OF TH E VIEW THAT IT DEPENDS ON THE FACTS OF EACH CASE. ADMITTEDLY , THE FACT OF THE PRESENT CASE WAS THAT THE ASSESSING OFFICER HAD NOT ENQUIRE D THE ISSUE IN THE LIGHT OF THE ABOVE LEGAL PRONOUNCEMENT. SPECIALLY THE PRO NOUNCEMENT OF THE HON'BLE BOMBAY HIGH COURT WAS NOT AVAILABLE AT THAT TIME, HENCE, THE ASSESSING OFFICERS ASSESSMENT ORDER WAS DEVOID OF MERITS AS ALSO THE LAW APPLICABLE . NOW WE HAVE GOT CERTAIN GUIDELINE S, THOUGH CAN NOT BE SAID TO BE EXHAUSTIVE OR COMPLETE, BUT ON THESE LIN ES, THE ASSESSING OFFICER IS EXPECTED HENCEFORTH TO COMPUTE THE CORRE CT DISALLOWANCE, NEEDLESS TO SAY AFTER PROVIDING AN ADEQUATE OPPORTU NITY OF HEARING TO THE ASSESSEE. THEREFORE, THE MATTER IS RESTORED TO BE DECIDED AFRESH, HENCE, THIS GROUND OF THE ASSESSEE MAY BE TREATED AS ALLOW ED FOR STATISTICAL PURPOSES. 35. GROUND NO.6 READS AS UNDER: - 6. GROUND NO. 6 - DISALLOWANCE OF EXPENSES INCURR ED BY APPELLANT'S UK BRANCH UNDER SECTION 40(A)(I) OF THE ACT ON THE GROUND OF NON DEDUCTION OF TAX WHILE MAKING PAYMENTS TO NO N-RESIDENTS THE LD. AO HAS ERRED IN LAW AND ON FACTS IN DISALLO WING EXPENSES AMOUNTING TO RS.12,26,18,416 UNDER SECTION 40(A)(I) OF THE ACT INCURRED AND PAID OUTSIDE INDIA BY APPELLANT'S BRANCH IN UK. THE LD. AO OUGHT TO HAVE APPRECIATED THE FOLLOWING: I. THE SERVICES AVAILED BY UK BRANCH FROM NON-RESIDENTS HA VE BEEN RENDERED AND UTILIZED OUTSIDE INDIA AND AS SUC H, 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 . ITA NO. 3120/AHD/2010 MASTEK LIMITED VS. ADDL.CIT ASST.YEAR - 2006-07 - 90 - II. WITHOUT PREJUDICE TO THE FACT THAT SUCH INCOME OF NON-RESIDENT DOES NOT ACCRUE OR ARISE IN INDIA UNDER THE PROVISI ONS OF THE ACT, EVEN AS PER DOUBLE TAXATION AVOIDANCE AGREEMENT ('D TAA') BETWEEN INDIA AND UK, THE PAYMENTS MADE BY UK BRANC H TO NON- RESIDENTS ARE NOT LIABLE TO TAX IN INDIA. III. WITHOUT PREJUDICE TO THE ABOVE, EVEN OTHERWI SE, IF THE EXPENSES WOULD HAVE BEEN PAID BY THE APPELLANT, THE SAME WOU LD 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 TECHNI CAL PLAN OR TECHNICAL DESIGN. THE SERVICES PROVIDED BY THE NON- RESIDENTS TO THE UK BRANCH NEITHER MAKE AVAILABLE ANY TECHNICAL KNOWLEDGE, SKILL, KNOW-HOW NOR IS IN THE NATURE OF TRANSFER OF TECHNICAL PLAN OR TECHNICAL DESIGN AND AS SUCH, NOT LIABLE TO TAX IN INDIA. IV. WHEN THE INCOME OF NON-RESIDENT IS NOT LIABLE TO TAX IN INDIA, THEN THE PROVISIONS OF SECTION 195 IS NOT APPLICABL E AND AS SUCH, THE APPELLANT HAS NO LIABILITY TO DEDUCT TAX ON SUC H PAYMENTS AND ACCORDINGLY, NO DISALLOWANCE CAN BE MADE UNDER SECT ION 40(A)(I) OF THE ACT. V. THE AFORESAID ISSUE HAS BEEN DECIDED IN FAVOUR BY THE HON'BLE CIT (A) IN APPELLANT'S OWN CASE FOR EARLIER AY 2005 -06. A) FACTS: 35.1. IT WAS NOTED BY THE AO THAT THE A SSESSEE HAS MADE PAYMENT TO 19 PARTIES, LISTED IN THE ASSESSMENT ORD ER, FOR SOFTWARE CONSULTATION AND RECRUITMENT SERVICES. THE PAYMENT TO THE EXTENT OF RS.12,26,18,416/- WAS MADE WITHOUT DEDUCTION OF TAX. A SHOW CAUSE WAS ISSUED AS TO WHY THE DISALLOWANCE UN DER THE PROVISIONS OF SECTION 40(A)(I) SHOULD NOT BE MADE I N RESPECT OF THE SAID PAYMENT. THE EXPLANATION OF THE ASSESSEE WAS T HAT THE MIL IS EXECUTING SOFTWARE DEVELOPMENT PROJECT IN UK THROUG H ITS BRANCH SET UP IN UK. DURING THE COURSE OF EXECUTION OF SOF TWARE ITA NO. 3120/AHD/2010 MASTEK LIMITED VS. ADDL.CIT ASST.YEAR - 2006-07 - 91 - DEVELOPMENT PROJECT, THE UK BRANCH HAS INCURRED VAR IOUS EXPENSES. THE PAYMENTS TO THOSE PARTIES FOR THE SA ID EXPENDITURE HAVE BEEN DIRECTLY MADE BY THE UK BRANCH FROM ITS B ANK ACCOUNT IN UK. THE SUBMISSION OF THE ASSESSEE WAS AS FOLLOW S:- 2.1. ASSESSEES BRANCH IN UK IS A SEPARATE AND D ISTINCT ENTITY: A. IT IS SUBMITTED THAT THE UK BRANCH IS CONSIDERED AS A PERMANENT ESTABLISHMENT (PE) OF MASTEK IN THE UK AND ACCORDINGLY CHARGED TO TAX IN TERMS OF ARTICLE 7 OF INDIA UK DOUBLE TAXATION AVOIDANCE AGREEMENT (DTAA) ON PR OFITS ATTRIBUTABLE TO BRANCH OPERATIONS IN THE UK. AS PE R ARTICLE 7(5) OF INDIA UK DTAA, IN THE DETERMINATION OF THE PROFIT S OF A PE, THERE SHALL BE ALLOWED AS DEDUCTION, EXPENSES WHICH ARE INCURRED FOR THE PURPOSES OF THE BUSINESS OF THE PE, INCLUDI NG EXECUTIVE AND GENERAL ADMINISTRATIVE EXPENSES SO INCURRED WHETHER IN THE UK OR ELSEWHERE, WHICH ARE ALLOWED UNDER THE PROVISIONS O F AND SUBJECT TO THE LIMITATIONS OF THE UK LAW. THUS THE ALLOWAB ILITY OF EXPENSES OF THE UK BRANCH IS GOVERNED BY THE UK LAW AS PER I NDIA UK DTAA. B. FURTHER, WE SUBMIT THAT EXPENSES INCURRED BY TH E ASSESSEE AND EXPENSES INCURRED BY ITS UK BRANCH NEED TO BE TREAT ED SEPARATELY. UK BRANCH IS A SEPARATE LEGAL ENTITY FORMED UNDER T HE UK REGULATIONS. THE SAME IS EVIDENT FROM ARTICLE 7(2) OF INDIA UK DTAA, WHICH STATES THAT WHERE AN INDIAN ENTITY CARRIES O N BUSINESS IN THE UK THROUGH A PE SITUATED THEREIN, T HE PROFITS WHICH THAT PE MIGHT BE EXPECTED TO MAKE IF IT WERE A DIST INCT AND SEPARATE ENTERPRISE. FURTHER, CIRCULAR NO.740 DATED 17 APRIL 1996 S TATES THAT BRANCH OF A FOREIGN COMPANY/CONCERN IN I NDIA IS A SEPARATE ENTITY FOR THE PURPOSES OF TAXATION. APPLY ING 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 SERVIC ES WERE AVAILED BY UK BRANCH FROM NON-RESIDENCE. THOSE SERVICES WERE R ENDERED AS WELL AS UTILIZED OUTSIDE INDIA. ACCORDING TO ASSESSEE, THE RE WAS NO APPLICATION OF SECTION 195 ON THE SAID PAYMENT. IT WAS ALSO CONTE STED THAT AS PER DTAA ITA NO. 3120/AHD/2010 MASTEK LIMITED VS. ADDL.CIT ASST.YEAR - 2006-07 - 92 - WITH UK THE ASSESSEE WAS NOT UNDER OBLIGATION TO DE DUCT TDS. THE AO WAS NOT CONVINCED AND AFTER ANALYZING SECTION 195 O F 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 I S THE SERVICES UTILIZED IN INDIA AS AGAINST SERVICES RENDERED IN INDIA. HE HAS EXPLAINED THAT THE EFFECT OF THE WORD UTILIZED IN PLACE OF REND ERED IS THAT THE NON- RESIDENT NEED NOT TO COME PHYSICALLY TO INDIA OR TH E TRANSACTION NEED NOT TO TAKE PLACE IN INDIA. ACCORDING TO AO, IT IS ENO UGH IF THE SERVICES OR THE END RESULT OF THE SERVICES ARE UTILIZED IN INDI A. HE WAS OF THE VIEW THAT IRRESPECTIVE OF THE SOURCE AND PLACE OF DELIVE RY, THE FTS DEEMED TO ACCRUE OR ARISE IN INDIA, IF THE SERVICES ARE UTILI ZED IN INDIA FOR WHICH FTS IS PAID. THE AO HAS ALSO REFERRED EXPLANATION TO SECTION- 9(1) OF IT ACT. THE INTENTION OF THIS EXPLANATION IS TO BRING CER TAIN INCOME OF NON- RESIDENTS TO TAX IN INDIA IF THE SOURCE IS IN INDIA . ACCORDING TO AO, THE SOURCE IS MIL, AN INDIAN COMPANY. FROM THE SIDE OF THE ASSESSEE, CBDT CIRCULAR 740 WAS CITED FOR THE ARGUMENT THAT THE BRANCH OF A FOREIGN COMPANY IN INDIA BEING TREATED AS A SEPARAT E ENTITY, LIKEWISE BRANCH OF THE ASSESSEE IN UK SHOULD BE CONSIDERED A S A SEPARATE NON- RESIDENT ENTITY. HOWEVER, THE AO WAS NOT CONVINCED AND STATED THAT THE BRANCH IN UK IS ONLY A BRANCH AS WELL AS PART AND P ARCEL OF INDIAN COMPANY. THE AO HAS ALSO MENTIONED THAT THE ALLEGE D PAYMENT WHICH WAS MADE THROUGH THE BRANCH WAS NOT ACCOUNTED AS TR ANSFERRED TO BRANCH BUT ACCOUNTED AS SUCH IN THE NAME OF THE PAYEES. AC CORDING TO HIM, THE EXPENDITURE WAS INCURRED BY THE ASSESSEE-COMPANY. T HE AO HAS FINALLY CONCLUDED AS UNDER:- ITA NO. 3120/AHD/2010 MASTEK LIMITED VS. ADDL.CIT ASST.YEAR - 2006-07 - 93 - 7.20. IN VIEW OF THE ABOVE FACTS AND LEGAL POSI TION IT IS HELD THAT THE ASSESSEE WAS UNDER OBLIGATION TO DEDUCT TAX FRO M THE PAYMENTS MADE TO NON RESIDENT FOR CONSULTANCY AND TRAINING AND RE CRUITMENT WHICH IT HAD FAILED TO DISCHARGE. THEREFORE THE EXPENDITURE CLAI MED UNDER RECRUITMENT AND TRAINING AND CONSULTANCY PAID TO NON RESIDENT I S DISALLOWED AND ADDED BACK TO INCOME U/S.40(A)(I) OF INCOME TAX ACT . THUS AN AMOUNT OF RS.12,26,18,416/- BEING EXPENSES IN THE NATURE OF C ONSULTANCY INCOME ON WHICH TDS HAS NOT BEEN DEDUCTED, IS DISALLOWED AS E XPENDITURE IN THE HANDS OF THE ASSESSEE. HOWEVER, SINCE ALL THESE EX PENSES RELATE TO THE EXPORT INCOME OF THE ASSESSEE FOR WHICH DEDUCTION U NDER SECTION 10A HAS BEEN CLAIMED, THE ASSESSEES INCOME FOR THE PURPOSE OF DEDUCTION SHALL BE MODIFIED ACCORDINGLY. B) ARGUMENTS : 35.3. THE FIRST AND THE FOREMOST SUB MISSION OF LD.AR IS THAT IN A.Y. 2005-06, LD.CIT(A) HAD ALREADY ALLOWED THIS IS SUE IN FAVOUR OF THE ASSESSEE. OUR ATTENTION WAS DRAWN BY LD.AR ON SOM E OF THE OBSERVATION OF LD.CIT(A) WHILE DECIDING THIS ISSUE FOR A.Y. 200 5-06. THE MAIN THRUST WAS THAT THE SERVICES WAS(I) AVAILED BY THE UK BRANCH A ND 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 TECHNICA L 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 UTILI ZED 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. H E HAS REFERRED ARTICLE 7 OF UK DTAA T O HOLD THAT THE PROFIT IS CHARGED TO TAX ATTRIBUTABLE TO BRANCH OPERATIONS IN UK. IN HIS V IEW, THE UK BRANCH IS A SEPARATE LEGAL ENTITY FORMED UNDER UK REGULATIONS. IN HIS OPINION, AFTER ITA NO. 3120/AHD/2010 MASTEK LIMITED VS. ADDL.CIT ASST.YEAR - 2006-07 - 94 - THE COMBINED READING OF EXCEPTION LAID DOWN IN SECT ION 9(1)(VII)(B) ALONG WITH INDIA-UK DTAA THE CONSULTANCY CHARGES PAID B Y THE UK BRANCH NOT TO BE HELD AS INCOME ACCRUE OR ARISING IN INDIA . A DECISION OF HONBLE SUPREME COURT IN THE CASE OF ISHIKAWAJMA-HARIMA HEAVY INDUSTRIES LTD. V. DIRECTOR OF INCOME TAX, MUMBAI 288 ITR 408 WA S CITED. FURTHER, A DECISION OF HONBLE MADRAS HIGH COURT IN THE CASE OF SKYCELL COMMUNICATIONS LTD. V. DCIT [2001] 251 ITR 53 WAS ALSO CITED. 35.4. FROM THE SIDE OF THE REVENUE, LD.DR HAS PLA CED RELIANCE ON THE ORDER OF THE AO AND THE ORDER OF THE DRP. C) CONCLUSION ; 36. WE HAVE HEARD BOTH THE SIDES AND NOTICE D THE BASIC FACTS THAT THE IMPUGNED PAYMENT WAS MADE WITHOUT DEDUCTION OF TAX. IT IS ALSO NOT IN DISPUTE THAT THE PAYMENT WAS MADE TO 19 (NINETEE N) PARTIES AND ALL OF THEM ARE NOT INDIAN RESIDENTS. IT IS ALSO NOT IN D ISPUTE THAT THE NATURE OF EXPENSES WERE, NAMELY, RECRUITMENT SERVICES, TRA INING SERVICES AND SOFTWARE CONSULTING. BEFORE DRP, THE ASSESSEE HAS DESCRIBED THE PARTY-WISE NATURE OF SERVICES. RELEVANT PAGES OF DRP ARE PAGE NOS. 141 TO 147, REFERRED SO AS TO UNDERSTAND THE DESCRIPTIO N OF SAID SERVICES RENDERED. SECTION 40(A)(I) OF THE ACT WAS INVOKED. THIS SECTION STARTS WITH AN OBSTANTE CLAUSE THAT NOTWITHSTANDING OF ANYTHING TO THE CONTRARY IN SECTIONS 30 TO 38, CERTAIN AMOUNTS SHALL NOT BE DEDUCTED IN COMPUTING THE INCOME CHARGEABLE UNDER THE HEAD PROFITS & GAI NS OF BUSINESS IN THE CASE OF AN ASSESSEE ANY INTEREST, ROYALTY, FEES FOR TECHNICAL SERVICES OR OTHER SOME CHARGEABLE UNDER THIS ACT WHICH IS PAYABLE OUTSIDE INDIA OR IN INDIA TO A NON-RESIDENT ON WHICH TAX IS DEDUCTIB LE AT SOURCE UNDER CHAPTER XVII-B OF ACT, BUT SUCH TAX AT SOURCE HAS N OT BEEN DEDUCTED OR ITA NO. 3120/AHD/2010 MASTEK LIMITED VS. ADDL.CIT ASST.YEAR - 2006-07 - 95 - AFTER DEDUCTION HAS NOT BEEN PAID. THE EMPHASIS O F ARGUMENT IS THAT THE SAID SUM SHOULD BE CHARGEABLE UNDER THE ACT. THIS ASPECT HAS TO BE SEEN THOROUGHLY BECAUSE THIS PHRASE IS USED IN THE CHARGING SECTION I.E. 40(A)(I). THE NEXT STEP IS THEREFORE TO PERUSE THE PROVISIONS OF SECTION 195 OF IT ACT WHICH SAYS THAT ANY PERSON RESPONSIBLE FOR PAYING TO A NON-RESIDENT ANY OTHER SUM CHARGEABLE UNDER THE PROVISIONS OF THIS ACT SHALL AT THE TIME OF CREDIT OF SUCH INCOME TO THE A CCOUNT OF THE PAYEE OR AT THE TIME OF PAYMENT THEREOF, DEDUCT INCOME TAX THER EON AT THE RATE IN FORCE. UNDISPUTEDLY, EVEN IN SECTION 195 THE STATUT E HAS INCORPORATED THAT FOR THE PURPOSE OF DEDUCTION OF TDS INCOME IS TO BE CHARGEABLE UNDER THE ACT. AS FAR AS THE FACTS OF THE CASE ARE CONCE RNED, 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 TOWHICH 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 A N INCOME IN INDIA. BECAUSE OF THE DEEMING PROVISION SECTION 9(1) OF I T 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 THA T IN THE CASE OF A NON- RESIDENT, NO INCOME SHALL BE DEEMED TO ACCRUE OR AR ISE 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 A SSESSEE TO VARIOUS ENTITIES WHICH ARE NON-RESIDENT, THEN WHETHER IT CA N BE HELD THAT AN INCOME HAS DEEMINGLY ACCRUED IN INDIA. AS FAR AS T HE ASSESSEES ITA NO. 3120/AHD/2010 MASTEK LIMITED VS. ADDL.CIT ASST.YEAR - 2006-07 - 96 - VEHEMENT CONTENTION IS THAT THE AO SHOULD NOT HAVE DECIDED AGAINST THE ORDER OF CIT(A) PRONOUNCED IN A.Y. 2005-06, WHEREIN VIDE AN ORDER DATED 30/09/2009, THE CIT(A)-VIII AHMEDABAD HAS CO NSIDERED THIS ASPECT AT LENGTH AND THEREUPON HELD AS UNDER:- 8.12. IT MAY BE FURTHER POINTED OUT THAT ARTICLE 7 OF THE DTAA BETWEEN INDIA AND UK STATES THAT BUSINESS INCOME OF THE UK ENTERPRISE SHALL NOT BE TAXABLE IN INDIA UNLESS THE UK ENTERPRISE HAS A PERMANENT ESTABLISHMENT (PE) IN INDIA. THE LD. A.R. POINTED OUT THAT THE ENTITIES FROM WHOM UK BRANCH A VAILED SERVICES DOES NOT HAVE PE IN INDIA. FROM THE INVOI CES SUBMITTED BEFORE ME, IT WAS OBSERVED THAT THESE ENTITIES ARE BASED IN THE UNITED KINGDOM WITH NO BUSINESS PRESENCE IN INDIA. THE A.O. WHILE DRAWING ADVERSE CONCLUSION HAS NOT BROUGHT AN Y FACT ON RECORD TO CONTROVERT THE CLAIM OF THE APP IN THIS R EGARD. I AM OF THE VIEW THAT THE PROFESSIONAL FEES PAYABLE TO SHOU LD BE CONSIDERED AS BUSINESS INCOME OF THE SAID ENTITIES AND IN THE ABSENCE OF PE IN INDIA, THE SAME WOULD N9OT BE LIABLE TO TAX IN INDI A. SINCE SUCH INCOME OF NON-RESIDENTS IS NOT LIABLE TO TAX IN IND IA, THE PROVISION OF SECTION 195 OF THE IT ACT ARE NOT ATTRACTED ON S UCH PAYMENTS AND CONSEQUENTLY NO DISALLOWANCE CAN BE MADE UNDER SECT ION 40(A)(I) OF THE I.T. ACT. 36.2. THIS IS THE ONE ASPECT WHICH HAS BEEN ARGUED AND THE OTHER ASPECT WAS THAT ON SUCH INCOME THE DEEMING PROVISIONS OF S ECTION 9 DO NOT APPLY BECAUSE THE IMPUGNED INCOME DO NOT ACCRUE OR ARISE IN INDIA. IN THIS REGARD, SECTION 9(1)(VII)(B) HAS BEEN CITED AN D REPRODUCED BELOW:- INCOME DEEMED TO ACCRUE OR ARISE IN INDIA 9.(1) THE FOLLOWING INCOMES SHALL BE DEEMED TO ACC RUE OR ARISE IN INDIA:- .. ITA NO. 3120/AHD/2010 MASTEK LIMITED VS. ADDL.CIT ASST.YEAR - 2006-07 - 97 - .. (VII) INCOME BY WAY OF FEES FOR TECHNICAL SERVICES PAYABLE BY- (A) .. (B) A PERSON WHO IS A RESIDENT, EXCEPT WHERE THE FEES ARE PAYABLE IN RESPECT OF SERVICES UTILIZED IN A BUSINESS OR PR OFESSION CARRIED ON BY SUCH PERSON OUTSIDE INDIA OR FOR THE PURPOSES OF MAKING OR EARNING ANY INCOME FROM ANY SOURCE OUTSID E INDIA; OR THEREFORE INCOME BY WAY OF FEES FOR TECHNICAL SERV ICES SHALL NOT BE DEEMED TO ACCRUE OR ARISE IN INDIA IF PAYABLE IN RESPECT OF SERVICES UTILIZED IN A BUSINESS CARRIED ON BY SUCH PERSON OU TSIDE INDIA OR FOR THE PURPOSE OF EARNING ANY INCOME FROM ANY SOURCE OUTSI DE INDIA. THE UK BRANCH OF THE ASSESSEE HAS AVAILED SERVICES OF NON- RESIDENT CONSULTANTS. THESE SERVICES WERE PROVIDED FROM OUTSIDE INDIA. A ND THESE SERVICES HAVE ALSO BEEN UTILIZED OUTSIDE INDIA. THESE SERVI CES WERE IN FACT RENDERED IN UK FOR CARRYING OUT ONSITE WORK AT UK . THE HONBLE SUPREME COURT IN THE CASE OF ISHIKAWAJMA-HARIMA HE AVY INDUSTRIES LTD. V. DIRECTOR OF INCOME TAX, MUMBAI 288 ITR 408 (SUPR A) HAS OPINED THAT WHATEVER WAS PAYABLE BY A RESIDENT TO A NON-RESIDEN T BY WAY OF TECHNICAL FEES WOULD NOT ALWAYS COME WITHIN THE PURVIEW OF SE CTION 9(1)(VII). ACCORDING TO THE HONBLE COURT, IT MUST HAVE SUFFIC IENT 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 CON DITION FOR TAXABILITY IS THAT IT MUST BE UTILIZE IN INDIA. THE HONBLE APEX COURT HAS THEREFORE SAID THAT TWO CONDITIONS FOR TAXABILITY ARE THAT FI RSTLY, RENDERED IN INDIA AND SECONDLY, UTILIZED IN INDIA. AS FAR AS THE INS TANT CASE IS CONCERNED, IT IS NOT IN DISPUTE THAT SERVICES FROM THE FOREIGN CO NSULTANTS WERE NEITHER RENDERED IN INDIA NOR UTILIZED IN INDIA. OUR ATTEN TION HAS BEEN DRAWN ON ITA NO. 3120/AHD/2010 MASTEK LIMITED VS. ADDL.CIT ASST.YEAR - 2006-07 - 98 - AN INSERTION OF AN EXPLANATION BELOW SECTION 9(2) O F IT ACT AND FOR READY REFERENCE, REPRODUCE BELOW:- EXPLANATION FOR THE REMOVAL OF DOUBTS, IT IS HER EBY DECLARED THAT FOR THE PURPOSES OF THIS SECTION, INCOME OF A NON-RESID ENT SHALL BE DEEMED TO ACCRUE OR ARISE IN INDIA UNDER CLAUSE (V) OR CLA USE (VI) OR CLAUSE (VII) OF SUB-SECTION (1) AND SHALL BE INCLUDED IN THE TOT AL INCOME OF THE NON- RESIDENT, WHETHER OR NOT- (I) THE NON-RESIDENT HAS A RESIDENCE OR PLACE OF BUSIN ESS OR BUSINESS CONNECTION IN INDIA; OR (II) THE NON-RESIDENT HAS RENDERED SERVICES IN INDIA. THIS EXPLANATION HAS BEEN INSERTED BY FINANCE ACT, 2007 AND LATER ON SUBSTITUTED BY FINANCE ACT, 2010. DUE TO THIS R EASON, AT THE RELEVANT POINT OF TIME, I.E. DURING THE RELEVANT FINANCIAL Y EAR, IT WAS NOT POSSIBLE ON THE PART OF THE ASSESSEE TO COMPLY WITH THE SAID STATUTE. WE THEREFORE HOLD SINCE THE SERVICES IN QUESTION WERE NEITHER A VAILED NOR RENDERED AND EVEN NOT UTILIZED IN INDIA, THEREFORE NO TAX WAS REQUIRED TO BE DEDUCTED AT SOURCE. REST OF THE ISSUES ABOUT THE NATURE OF THE FTS AND WHETHER IT WAS MADE AVAILABLE TO THE ASSESSEE ARE A LTERNATE PLEA OF THE ASSESSEE AND NEED NOT TO BE ADDRESSED BECAUSE ON TH E PRELIMINARY QUESTION OF CHARGEABILITY, THE ISSUE STANDS DECID ED IN FAVOUR OF THE ASSESSEE. THIS GROUND OF THE ASSESSEE IS THEREFORE ALLOWED. 37. GROUND NO.7 READS AS UNDER: 7. GROUND NO. 7 - DISALLOWANCE OF 20% OF RECR UITMENT AND TRAINING EXPENSES ITA NO. 3120/AHD/2010 MASTEK LIMITED VS. ADDL.CIT ASST.YEAR - 2006-07 - 99 - THE LD. AO HAS ERRED IN LAW AND ON FACTS IN DISALLO WING 20% OF RECRUITMENT AND TRAINING EXPENSES AMOUNTING TO RS.4 7,20,099 ON THE GROUND THAT SUCH EXPENSES HAVE BEEN INCURRED ON EMP LOYEES DEPUTED TO OVERSEAS SUBSIDIARIES. THE LD. AO OUGHT TO HAVE APP RECIATED THE FOLLOWING: I. NONE OF THE RECRUITMENT AND TRAINING EXPENSES HAVE BEEN SPECIFICALLY INCURRED TO RECRUIT OR TRAIN EMPLOYEES FOR THE PURPOSE OF DEPUTATION TO ITS SUBSIDIARIES. THE EXPE NSES INCURRED ARE GENERAL IN NATURE AND HAVE BEEN INCURRED AT AN ORGANIZATIONAL LEVEL FOR ITS ENTIRE STAFF. II. ALL CONDITIONS LAID DOWN IN SECTION 37 OF THE A CT ARE SATISFIED WITH RESPECT TO THE RECRUITMENT AND TRAINING EXPENS ES. III. WITHOUT PREJUDICE TO THE ABOVE, THE LD. TPO H AS ALREADY MADE AN UPWARD ADJUSTMENT IN RESPECT OF HRM FUNCTION FOR THE CAPTIONED ASSESSMENT ON THE GROUND THAT THE ASSESSE E IS NOT JUSTIFIED IN NOT CHARGING ANY MARK-UP ON ACCOUNT OF SERVICES FOR PROVISION OF SKILLED MANPOWER TO GROUP COMPANIES. T HE LD, TPO HAS ACCORDINGLY MADE AN UPWARD ADJUSTMENT OF RS. 2. 92 CRORES CALCULATED AT 9% OF THE TOTAL ANNUAL SALARY OF THE PERSONS SECONDED. AS SUCH, RECRUITMENT AND TRAINING EXPENSE S 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 INCURR ED AN AMOUNT OF RS.2,36,00,496/- FOR RECRUITMENT AND TRAINING EXPEN SES. IN COMPLIANCE OF SHOW-CAUSE, IT WAS INFORMED THAT THE NATURE OF B USINESS OF THE ASSESSEE IS TO PROVIDE SERVICES TO CUSTOMERS WHICH CONSTITUT E COMPOSITE DELIVERABLES AS WELL AS ONSITE - OFFSHORE SERV ICES. THEREFORE, TO PROVIDE ONSITE SOFTWARE DEVELOPMENT SERVICES TO C USTOMERS, THE TECHNICAL SUPPORT AND THE TECHNICAL SERVICES OF TEC HNICAL STAFF IS REQUIRED. IT WAS CATEGORICALLY STATED BEFORE THE AO THAT NONE OF THE RECRUITMENT AND ITA NO. 3120/AHD/2010 MASTEK LIMITED VS. ADDL.CIT ASST.YEAR - 2006-07 - 100 - TRAINING EXPENSES HAVE BEEN SPECIFICALLY INCURRED T O TRAIN THE EMPLOYEES ONLY FOR THE PURPOSE OF DEPUTATION TO ITS SUBSIDIAR IES. THE EXPENDITURE HAS BEEN INCURRED AT ORGANIZATIONAL LEVEL. THE HR DEPARTMENT OF THE COMPANY ON A CONTINUOUS BASIS IS INDULGED IN RECRUI TMENT PROGRAMMES, TRAINING PROGRAMMES, SO AS TO RETAIN THE TALENT OF TECHNICAL PERSONS. THE ASSESSEE HAS EXPLAINED THE BUSINESS RATIONALE BEHIN D SUCH EXPENDITURE THAT THE COMPANY DERIVES DOUBLE BENEFITS, ONE , INCREASE IN OFFSHORE REVENUE, SECOND , EMPLOYEES WITH UPGRADED SKILL HAS ENHANCED SOLUTI ON DELIVERY SKILLS. IT HAS ALSO BEEN INFORMED THAT T HERE IS CONTINUITY OF EMPLOYMENT EVEN IF SENT ABROAD TO AES. SUCH EMPL OYEES REMAIN ON THE PAY-ROLL OF THE ASSESSEE-COMPANY. A DETAILED E XPLANATION WAS FURNISHED, HOWEVER THE AO WAS NOT CONVINCED AND EXP RESSED THAT THE COMPANY HAD SECONDED AS MANY AS 148 PERSONS TO ITS AES. THE ASSESSEE IS, THEREFORE, IN THE OPINION OF THE AO, IS A SUPPL IER OF MAN-POWER TO ITS OFFSHORE SUBSIDIARIES. BUT THOSE PERSONS WERE RECR UITED AND TRAINED AT THE EXPENSE OF THE COMPANY. IN HIS OPINION, SUCH PERSO NS DEPLOYED OUTSIDE INDIA MAY OR MAY NOT COME BACK AND MAY BE ABSORBED BY AE. IN SUCH A SITUATION, THE BENEFITS OF RECRUITMENT AND TRAINING HAVE BEEN ENJOYED BY AES OF THE COMPANY OUTSIDE INDIA. THE AO HAS THER EFORE HELD THAT 20% OF THE RECRUITMENT AND TRAINING EXPENSES HAS TO BE DISALLOWED BEING NOT INCURRED WHOLLY AND EXCLUSIVELY FOR THE PURPOSE OF THE ASSESSEES BUSINESS. HE HAS THEREFORE DISALLOWED A SUM OF RS. 47,20,099/-, HOWEVER, AND ALSO HELD THAT THE SAID DISALLOWANCE CANNOT BE ADDED WHILE COMPUTING THE DEDUCTION U/S.10A OF THE IT ACT. ITA NO. 3120/AHD/2010 MASTEK LIMITED VS. ADDL.CIT ASST.YEAR - 2006-07 - 101 - 37.2. IN THIS REGARD, LD.COUNSEL HAS SUBMITTED T HAT NONE OF THE RECRUITMENT AND TRAINING EXPENSES HAVE BEEN SPECIFI CALLY INCURRED TO RECRUIT OR TRAIN EMPLOYEES FOR THE PURPOSE OF DEPUT ATION TO ITS SUBSIDIARIES. THE EXPENSES INCURRED ARE GENERAL IN NATURE AND HAVE BEEN INCURRED AT AN ORGANIZATIONAL LEVEL FOR ALL STAFF. THEREFORE THERE IS NO DIRECT LINKAGE OF RECRUITMENT AND TRAINING EXPENSES WITH EMPLOYEES DEPUTED TO ITS SUBSIDIARIES. THE LD.COUNSEL FURT HER POINTED OUT THAT ON AN ONGOING BASIS, THE SIGNIFICANT RISK IN THE SOFTW ARE INDUSTRY WHERE THE ASSESSEE OPERATES IS TO MANAGE ATTRITION AND HENCE RETENTION OF EMPLOYEES IS OF UTMOST IMPORTANCE. THE HR DEPARTMENT OF THE COMPANY, THEREFORE, ON A CONTINUOUS BASIS IS REQUIRED TO INDULGE IN ACT IVITIES SUCH AS RECRUITMENT PROGRAMS, TRAININGS REQUIRED TO OBTAIN AND RETAIN THE SAID WORLD-CLASS TALENT, ETC., WHICH ENABLES THE COMPANY TO RENDER WORLD CLASS SOLUTIONS. IT NEEDS TO BE NOTED THAT THE COMPANYS EXPERTISE IN DOMAIN KNOWLEDGE HELPS IN ATTRACTING GOOD TALENT FROM OTHE R COMPETITORS, WHICH HELPS IN DELIVERING SOFTWARE SOLUTIONS. IN THIS RE GARD, IT IS PERTINENT TO NOTE THAT THE INFLOW OF THE EMPLOYEES FOR THE COMPA NY NEED NOT BE ONLY FROM THE FRESH RECRUITS BUT ALSO FROM THE ONSITE EM PLOYEES RETURNING DURING THE CONCERNED YEAR. 37.3. ON THE OTHER HAND, FROM THE SIDE OF THE REVEN UE, THE LD.DR SUPPORTED THE ORDER OF THE AO. 38. ON HEARING THE SUBMISSIONS OF BOTH THE SIDES, W E ARE OF THE CONSCIENTIOUS VIEW THAT IN A SITUATION WHERE THE RE QUISITE DETAIL IN RESPECT OF TRAINING OF EMPLOYEES AND THE GENUINENESS OF TH E EXPENDITURE WAS VERY MUCH BEFORE THE AO AND IN RESPECT OF THESE TWO REASONS, NO ITA NO. 3120/AHD/2010 MASTEK LIMITED VS. ADDL.CIT ASST.YEAR - 2006-07 - 102 - DISALLOWANCE WAS SUGGESTED, THEN IT WAS UNJUSTIFIAB LE ON THE PART OF THE AO TO SAY THAT A 20% RECRUITMENT AND TRAINING EXPEN SES WOULD BE DISALLOWED ON MERE PRESUMPTION THAT IT WAS NOT WHOL LY BENEFICIAL TO THE ASSESSEE. THERE IS NO EVIDENCE IN THE POSSESSION O F 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 TECHNICA L STAFF IS ALWAYS A BUSINESS NECESSITY AND BECAUSE OF THE TRAINED STAFF THE ASSESSEES REVENUE HAS SUBSTANTIALLY GONE UP. IN THE ABSENCE OF ANY ADVERSE MATERIAL, WE ARE NOT INCLINED TO APPROVE SUCH AN ADHOCISM. THIS DISALLOWANCE IS HEREBY DELETED AND GROUND IS ALLOWED . 39. GROUND NO.8 READS AS UNDER:- 8. GROUND NO. 8 - SETTING OFF LOSSES OF OTHER UN ITS WHILE COMPUTING DEDUCTION UNDER SECTION 10A OF THE ACT FR OM THE PROFITS OF ELIGIBLE UNITS THE LD. AO HAS ERRED IN LAW AND ON FACTS IN COMPUTI NG DEDUCTION UNDER SECTION 10A OF THE | ACT CONSIDERING THE NET PROFIT S OF BUSINESS OF ALL UNITS TAKEN TOGETHER I.E. AFTER SETTING OFF LOSSES OF ELIGIBLE AND NON- ELIGIBLE UNITS WITH PROFITS OF ELIGIBLE UNITS THERE BY RESTRICTING DEDUCTION UNDER SECTION 10A OF THE ACT. THE LD. AO OUGHT TO H AVE APPRECIATED THE FOLLOWING: I. EACH ELIGIBLE UNDERTAKING IS AN INDEPENDENT AN D DISTINCTIVE BUSINESS UNIT AND DEDUCTION UNDER SECTION 10A SHOUL D BE COMPUTED SPECIFIC TO ELIGIBLE UNDERTAKING INSTEAD O F COMPUTING SUCH DEDUCTION AFTER CONSIDERING NET BUSINESS PROFI TS OF THE ASSESSEE (INCLUDING LOSSES OF ELIGIBLE AND NON-ELIG IBLE UNITS) AS A WHOLE. ITA NO. 3120/AHD/2010 MASTEK LIMITED VS. ADDL.CIT ASST.YEAR - 2006-07 - 103 - II. LOSSES OF ELIGIBLE AND NON-ELIGIBLE UNDERTAKI NGS CANNOT BE SET OFF AGAINST PROFITS OF ELIGIBLE UNDERTAKING WHILE COMPU TING DEDUCTION UNDER SECTION 10A OF THE ACT. EACH OF THE ABOVE GROUNDS OF APPEAL IS DISTINCT, IN DEPENDENT AND SEPARATE AND WITHOUT PREJUDICE TO THE OTHER GROUNDS OF APPE AL. YOUR APPELLANT CRAVES LEAVE TO ADD TO AND/OR TO AME ND AND/OR TO MODIFY AND/OR TO CANCEL ANY ONE OR MORE GROUNDS OF APPEAL AT ANY TIME BEFORE OR AT THE TIME OF HEARING. ADDITIONAL GROUND OF APPEAL APPELLANT CRAVES LEAVE TO RAISE THIS ADDITIONAL GRO UND OF APPEAL BEFORE THE HON'BLE ITAT. THIS IS A LEGAL GROUND AND THEREF ORE AS PER THE DECISION OF HON'BLE SUPREME COURT IN THE CASE OF NA TIONAL THERMAL POWER (229 ITR 383), IT CAN BE RAISED BEFORE THE HO N'BLE ITAT. LD. AO ERRED IN LAW AND ON FACTS IN COMPUTING DEDUC TION U/S 10A OF THE ACT CONSIDERING THE NET PROFIT OF ALL UNITS TAKEN T OGETHER I.E. AFTER SETTING OFF LOSSES OF ELIGIBLE AND NON - ELIGIBLE UNITS WIT H PROFITS OF ELIGIBLE UNITS THEREBY RESTRICTING DEDUCTION U/S IDA OF THE ACT. L D. AO ERRED IN NOT APPRECIATING THE FACT THAT EACH ELIGIBLE UNDERTAKIN G 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 T HE ACT WITHOUT SETTING OFF LOSSES OF ELIGIBLE AND NON - ELIGIBLE UNDERTAKINGS AGAINST PROFITS OF ELIGIBLE UNDERTAKING WHILE COMPUTING DED UCTION 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 UND ER. ITA NO. 3120/AHD/2010 MASTEK LIMITED VS. ADDL.CIT ASST.YEAR - 2006-07 - 104 - 39.2. THOUGH THE ASSESSEE HAS RAISED THIS ISSUE BE FORE US, BUT EVEN ON QUERY FROM THE BENCH, EXACT FACTS AND FIGURES HAVE NOT BEEN PRODUCED. THE AO HAS SIMPLY MENTIONED THAT THE ASSESSEES ELI GIBLE U/S.10A OF RS.72,98,75,578/-. THE CONNECTED CALCULATION OR T HE COMPUTATION AS MADE BY THE AO IS NOT BEFORE US. EVEN THE CALCULAT ION 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 TH E ELIGIBLE AMOUNT WAS HIGHER. IF IT WAS SO, THEN THERE SHOULD NOT B E ANY GRIEVANCE OF THE ASSESSEE. THE ONLY INFORMATION BEFORE US IN RESPEC T 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 TOTAL 61,39,09,113 THE AO HAS MADE THE COMPUTATION OF THE TOTAL TAXA BLE INCOME WHEREIN THE DEDUCTION U/S.10A WAS MENTIONED AS ELIG IBLE FOR RS.72,98,75,578/-, HOWEVER, THE SAME WAS ALLOWED TO THE EXTENT OF THE INCOME COMPUTED AT RS.63,14,08,049/-. AS FAR AS THE LAW IS CONCERNED, SECTION 10A PRESCRIBES A DEDUCTION OF PROFITS AND G AINS DERIVED BY AN UNDERTAKING FROM THE EXPORT OF ARTICLES OR THINGS O R COMPUTER SOFTWARE. AFTER THE SUBSTITUTION OF WORD DEDUCTION THE INTE NTION OF THE LEGISLATURE WAS TO GIVE ONLY DEDUCTION AND NOT THE EXCLUSION FROM TOTAL INCOME. SECTION 10A HAS FURTHER BEEN AMENDED AND SUB-SECTION(6) WAS INTRODUCED WHICH PRESCRIBES THAT IN COMPUTING THE T OTAL INCOME OF THE ITA NO. 3120/AHD/2010 MASTEK LIMITED VS. ADDL.CIT ASST.YEAR - 2006-07 - 105 - ASSESSEE, NO LOSS REFERRED TO IN SECTION 72(1) OR S ECTION 74(1) OR SECTION 4(3) SHALL BE CARRIED FORWARD OR SET OFF SO FAR AS SUCH LOSS RELATES TO THE BUSINESS UNDERTAKING AND SUCH LOSS RELATES TO ANY O F THE ASSESSMENT YEARS ENDING BEFORE 1 ST DAY OF APRIL-2001. IN RESPECT OF THIS LEGAL CONT ROVERSY, FEW CASE LAWS HAVE BEEN CITED AS FOLLOWS:- (I) SCIENTIFIC ATLANTA INDIA TECHNOLOGY PVT.LTD. VS. AC IT [2010] (129 TTJ 273) [CHENNAI ITAT SPECIAL BENCH] (II) TECHSPAN INDIA (P) LTD. A ANR V. ITO (283 ITR 212)[DEL] THERE IS ONE MORE DECISION OF CAP GEMINI IND IA PVT.LTD. 141 TTJ 33(MUM.). ACCORDING TO THE AMENDED SCHEME THE PROFITS OF THE UNIT ELIGIBLE FOR DEDUCTION WOULD FORM PART OF THE INCOM E COMPUTED UNDER THE HEAD PROFITS AND GAINS OF BUSINESS. THE DEDUCTIO N IS THEREFORE REQUIRED TO BE MADE AT THE STAGE OF COMPUTING THE INCOME AND , HENCE, FIRST IT IS REQUIRED TO ARRIVE AT THE FIGURE OF GROSS TOTAL I NCOME AS DEFINED U/S.80B(5) OF I.T. ACT. THE SAID GROSS TOTAL INCOM E IS TO BE COMPUTED IN ACCORDANCE WITH ALL THE PROVISIONS OF THE ACT, INCL UDING SECTION 10B AS WELL, EXCEPT CHAPTER VIA OF THE ACT. IN THE CONTEX T OF SET OFF OF LOSS FOR AN ELIGIBLE UNDERTAKING AN ANOTHER DECISION OF HONE YWELL INTERNATIONAL INDIA 108 TTJ 94 (PUNE) IS ALSO REQUIRED TO BE TAKE N INTO ACCOUNT. THE AO IS EXPECTED TO PROVIDE SUCH DETAILS TO THE ASSES SEE, SO THAT THE LEGALLY SUSTAINABLE ADJUSTMENT CAN BE MADE. THE ASSESSEE I S ALSO REQUIRED TO FURNISH THE DETAILS OF PROFIT EARNING ELIGIBLE UNIT S AND LOSS SUFFERING ELIGIBLE UNITS. DUE TO LACK OF COMPLETE INFORMAT ION, WE ARE CONSTRAINED TO ADJUDICATE AND FINALIZE THIS ISSUE AS PER LAW. WE THEREFORE REMIT THIS GROUND BACK TO THE STAGE OF AO TO DECIDE DE NOVO . THIS GROUND ALONG ITA NO. 3120/AHD/2010 MASTEK LIMITED VS. ADDL.CIT ASST.YEAR - 2006-07 - 106 - WITH ADDITIONAL GROUND MAY BE TREATED AS ALLOWED FO R STATISTICAL PURPOSES ONLY. BEFORE WE PART-WITH; WE WANT TO PLACE A WORD OF APPRECIATION FOR BOTH THE DISTINGUISHED REPRESENTATIVES; MR.V.K.GUPT A, LD.CIT(TPO) AND MR.S.N.SOPARKAR, SENIOR ADVOCATE FOR THEIR VALUABLE CONTRIBUTIONS TO RESOLVE THE ISSUE. 40. IN THE RESULT, THE APPEAL OF THE ASSESSEE I S PARTLY ALLOWED AS PER THE TERMS INDICATED HEREINABOVE. SD/- SD/- ( . ! ! ) ( ) '# ( A. MOHAN ALANKAMONY ) ( MUKUL KR. SHRAWAT ) ACCOUNTANT MEMBER JUDICIA L MEMBER AHMEDABAD; DATED 29/ 02 /2012 30..!, .!../ T.C. NAIR, SR. PS '2 . +4 5'4& '2 . +4 5'4& '2 . +4 5'4& '2 . +4 5'4&/ COPY OF THE ORDER FORWARDED TO : 1. '* / THE APPELLANT 2. +,'* / THE RESPONDENT. 3. 6 / CONCERNED CIT 4. 6() / THE CIT(A)- 5. 49: +! , , / DR, ITAT, AHMEDABAD 6. :;