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Headstrong Services India Pvt. Ltd.,103, Ashoka Estate, Barakhamba Road, New Delhi 110 001 AABCT7650D Vs. ACIT, Circle-12(1) New Delhi.
July, 19th 2012
                       DELHI BENCH : `E' NEW DELHI


                     SHRI C.M. GARG, JUDICIAL MEMBER

                          I.T.A No. 5466/Del/11

                           Asstt. Year ­ 2007-08

Headstrong Services India Pvt.     Vs.   ACIT,
103, Ashoka Estate,
                                         New Delhi.
Barakhamba Road,
New Delhi 110 001

(Appellant)                              (Respondent)

      Appellant by: Shri G.C. Srivastava & Shri Manoneet Dalal, Advocate

      Respondent by: Mrs. Renu Jouhri, CIT (DR)

              Date of hearing        :     20-6-2012
              Date of pronouncement :      17-07-2012



      In this appeal, the assessee has taken up 14 grounds. Ground Nos. 1

& 2 are general in nature. Ground Nos. 3 to 7 deal with adjustment made

by the AO in the total income on account of "transfer pricing". Ground

Nos. 8 to 10 deal with other additions made to the total income returned

by the assessee. Ground Nos. 11 to 14 are in respect of charging of

interest and initiating penalty u/s 271 (1).
                                                      ITA No. 5466/Del/11
                                                      Asstt. year 2007-08

2.    Briefly the facts are that the return was filed on 23.6.2008 declaring

total income of ` 30,64,480/-. Assessment proceedings were initiated by

issuing statutory notice u/s 143(2) of the Act on 1.5.2009, which was

served on the assessee. Thereafter, questionnaire was issued along with

statutory notice u/s 142(1). The draft order was made on 31.12.2010 at

total income of ` 17,66,84,460. The assessee objected the draft order.

The objections were heard by the DRP-I, New Delhi. Finally        order u/s

143(3) read with section 144(c) of the Act was passed on 24.10.2011.

Determining the total income at ` 14,56,46,530/-. Aggrieved by this order,

the assessee is in appeal before us.

3.    As mentioned earlier, ground Nos. 1 & 2 are general in nature. In

ground No. 1 it is mentioned that the order passed by the TPO, the draft

order passed by the AO and the final order passed by the              AO in

pursuance of the directions of Ld. DRP are bad in law. In ground No. 2 it is

mentioned that the AO erred in determining the total income at `

14,56,46,530/- against the returned income of ` 30,64,480/-. These

ground are general in nature and they were not argued by the Ld. Counsel

for the assessee. Therefore, these grounds are dismissed as not pressed.

4.    In ground Nos. 3 to 7, various averments have been made against

enhancement of the income by an amount of ` 13,54,69,266/- on account

of "transfer pricing adjustment" made in respect of international
                                                       ITA No. 5466/Del/11
                                                       Asstt. year 2007-08

transactions with associated enterprises (AEs). Some grounds are

narrative and argumentative also and thus they are not in accordance

with ITAT Rules. These grounds are decided on the basis of submissions

made before us.

4.1.   In this connection, the Ld. Counsel filed a chart regarding 25

comparable companies on the basis of which transfer pricing adjustment

was made. In respect of 10 such comparables, information was obtained

by the AO by issuing notices u/s 133 (6) of the Act. The general

observation made in the chart in respect of these comparables is that the

use of instrument of notice u/s 133(6) for gathering information is

inappropriate. However, the Ld. Counsel could not substantiate the

aforesaid observation. The case of the Ld. CIT(DR) is that the AO can use

all instruments available in the Act for bringing relevant information on

record for determining the total income. Having considered submissions

from both the sides, we are of the view that there is no substance in the

argument that the AO cannot collect information about comparables by

issuing notices u/s 133(6). Therefore, this submission is rejected.

4.2    The second argument is that in respect of 20 companies, of which

information was obtained u/s 133 (6), the same was not put across to the

assessee so that it could file its objections as to whether the cases are

comparable or not and whether any adjustment is required to the book

result of these companies for bringing them as near as possible to the
                                                     ITA No. 5466/Del/11
                                                     Asstt. year 2007-08

case of the assessee. It is argued that non-sharing of the information with

the assessee has led to violation of the principle of natural justice. The

assessee was prevented from stating its case on the comparables for

want of information obtained by the AO directly from the companies. The

Ld. CIT(DR) could not rebut this argument. However, it has been argued

by her that any lacuna in the assessment order on account of this failure

can be cured if the matter is restored to the file of the AO. We have

considered this matter. Such issue arose earlier before the `A' bench of

Delhi Tribunal in the case of Adobe Systems India Pvt. Ltd. in ITA No.

5693(Del)/2011 for assessment year 2007-08. The issue has been decided

in paragraph No. 4 of this order, which is reproduced below :-

     "4. We have considered the facts of the case and submissions made
     before us. In the light of the decision in the case of Genisys
     Integrating Systems (India) Pvt. Ltd. (supra) and also otherwise we
     are of the view that any information obtained in the course of
     assessment proceedings has to be supplied to the assessee for its
     objections, if any. The absence of doing so leads to violation of
     fundamental principle of natural justice. In view thereof, the matter
     is restored to the file of the AO with a direction to supply
     whatsoever information he wants to use against the assessee to it,
     grant it reasonable opportunity of being heard and thereafter pass a
     fresh assessment order as per law."

4.2.1 As a view has already been taken by the Tribunal in the aforesaid

case and in the case of Ameriprise India Pvt. Ltd. in ITA No. 5694/Del/2011

for assessment year 2007-08 dated 26.3.2012, we are bound the follow

the view. Therefore, it is held that it was incumbent on the AO to supply

the information to the assessee, obtain its objections, if any, and pass

order after taking into account the information and the objections of the

assessee. This has not been done in respect of 20 comparables.
                                                        ITA No. 5466/Del/11
                                                        Asstt. year 2007-08

Therefore, the matter of transfer pricing adjustment is restored to the file

of the AO for following proper procedure as mentioned above and decide

the matter denovo.

4.3    The assessee has also taken other objections, i.e. super-normal

profits in some cases, difference in skills of the employees, R & D

expenditure, difference in business models etc. These are matter of

details on which the objections can be raised by the assessee, if any, to

decide whether the cases are really comparables or not or whether some

adjustment is necessary to be made. Thus it is not necessary for us at this

stage to go into these submissions.

4.4.   In the result, the matter of transfer pricing adjustment is restored to

the file of the AO for fresh decision after hearing the assessee. Therefore,

these grounds are treated as allowed for statistical purpose.

5.     Ground No. 8 is to the effect that the AO erred in disallowing

deduction u/s 10A on foreign exchange fluctuation gain and other income

of ` 71,68,081/-, consisting of excess provision written back and

miscellaneous income.

5.1    The Ld. Counsel referred to page No. 6 of PB II, which shows that the

assessee earned income of ` 68,94,022/- on account of fluctuation in rate

of foreign exchange, ` 38,532/- on account of excess provision made in

earlier years and written off in this year and miscellaneous income of `
                                                        ITA No. 5466/Del/11
                                                        Asstt. year 2007-08

4,30,527/-. It is submitted that the finding of the AO is that these incomes

are not related to export business and therefore they cannot be termed as

income derived from the eligible undertaking. It is argued that the finding

of the AO is not in consonance with the relevant provisions. Section 10A

grants deduction of such profits as are derived by the eligible undertaking

from the export of articles, things or computer software for a period of 10

years. It is admitted that sub section (I) does use the word "derived".

However, sub section (4) defines the term "profit derived from export of

articles, things or computer software" to mean the amount which bears

to the profit of the business of the undertaking the same proportion as the

export turnover bears to the total turn over of the business carried on by

the undertaking. It is argued that in the light of this definition, what is to

be computed at the first instance is the "profit of the business" of the

undertaking. While doing so the provisions contained in sections 28 to

44DA come into play. Therefore, such profit has to be computed as

normally understood without insisting on proximate connection between

the business of undertaking and the profit. In the alternative, it is argued

that the claim on account of fluctuation in rate of foreign exchange is in

the revenue field as it is relates to export proceeds. Further, in earlier

years provisions were made which were found to be in excess of the

actual liability by an amount of ` 38,532/-. The miscellaneous income is

also the income derived from the business of the undertaking.
                                                        ITA No. 5466/Del/11
                                                        Asstt. year 2007-08

5.2   In reply, the Ld. CIT(DR) submitted that since the major issue

regarding transfer pricing adjustment is to be decided denovo by the AO,

this matter may also be restored to his file. In particular, it was mentioned

by her that exact details are not available.

5.3   In the rejoinder reply, the Ld. Counsel submitted that the issue is

clear and the basis of deduction is same as u/s 80HHC. There is ample

authority under that section that proximate connection is not required to

be established between the business and the income and the same has to

be computed as the profit is computed under the business head.

5.4   We have considered the facts of the case and submissions made

before us. There is no dispute that foreign exchange fluctuation gain is in

respect of export proceeds, therefore, the amount represents income as it

is in the revenue field. It is also clear that the amount, being in the nature

of export proceeds, leads to increase in turn - over and total turn ­ over.

Further, the provisions made in earlier years would have reduced the

income of the assessee for those years, leading to lower deduction u/s

10A. In this year the sum of ` 38,532/- is found to be excess provision

which has been credited to profit and loss account. This amount is clearly

in the nature of income. The miscellaneous income also represents the

income of the business. The only point which we find is that the income is

shown at ` 4,30,527/- on page No. 6 of the PB, while the Ld. Counsel is

mentioned that the income is of the order of ` 2.30 lacs. This fact may be
                                                       ITA No. 5466/Del/11
                                                       Asstt. year 2007-08

verified by the AO. However, the point of law is clear that the profit of the

business has to be found out under the business head and there is no

necessity to establish proximate or immediate connection between the

business and the profit. Thus, these accounts are includible in the profits

of the business. The AO is directed to recompute the deduction

accordingly after verifying the figure of miscellaneous income.

6.    Ground No.9 is to the effect that the AO erred in disallowing office

maintenance expenditure of ` 24,08,018/- by holding it to be capital

expenditure. The AO has furnished the details of the expenditure under 6

heads and held that all of them are of capital nature. Before the Ld. DRP,

the assessee submitted the details of expenditure and the vouchers in

letter dated 5.9.2011. The expenditure has been incurred on office

maintenance, electricity connection charges, metal detector and scanner

trolley, assorted civil work and other expenses. The bills in respect of the

expenses were also filed. The Ld. DRP mentioned that looking to the

nature of expenses, the action of the AO is upheld but depreciation is to

be allowed at appropriate rate.

6.1   Before us, the Ld. Counsel for the assessee submitted that payment

in respect of electrical connection does not lead to acquisition of a capital

asset. In respect of other items, it was suggested that the matter may be

decided on merits by the bench. As in respect of earlier grounds, the

submissions of the Ld. CIT(DR) has been that this matter may also be
                                                     ITA No. 5466/Del/11
                                                     Asstt. year 2007-08

restored to the file of the AO because the main issue of pricing adjustment

is being restored to his file.

6.2   We have considered the facts of the case and submissions made

before us. We find that the first expenditure of ` 37,584/- is on purchase

of door access controller, proximity readers units for central access

control panel and power supply units. These are new items and therefore

represent capital expenditure. The second expenditure of ` 14,09,610/- is

for obtaining electrical connection. It is seen from the corresponding

order that 600 KVA load was served on 24.8.2006. In this connection

security deposit of ` 13.16 lacs was paid alongwith supervision charges

and system loading charges. The assessee has claimed expenditure only

in respect of supervision charges and system loading charges. The

expenditure is in the nature of initial expenditure granting benefit of

enduring nature to the assessee. Without initialization of electricity

connection, no work can be done in office. Therefore, we are of the view

that the expenditure is capital in nature. The third expenditure of `

47,942/- is on purchase of carpets which is obviously a capital expenditure

as a new asset has been created. Similarly 4th expenditure of ` 22,275/- is

for purchase of 4 handled metal detector, scanner trolley. This has led to

acquisition of a new asset and therefore it is a capital expenditure. In

respect of other      miscellaneous expenditure for Civil Work etc. no

particular reason has been assigned to hold them to be capital

expenditure. These expenses amount to ` 5,47,895/- and ` 3,42,713/- it is
                                                       ITA No. 5466/Del/11
                                                       Asstt. year 2007-08

held that these expenses are allowable as business expenditure u/s 37(1).

The result is that while expenditure of ` 8,90,608/- is held to be revenue in

nature, the balance expenditure is held to be capital in nature. Thus this

ground is partly allowed.

7.    Ground No. 10 is that the AO erred in disallowing debonding charges

of ` 13,59,057/-. In this connection, it has been submitted before the lower

authorities that the amount represents three items ­ 1) duty paid on loss

of laptop of ` 70,731/- ; 2) duty paid of ` 7,71,021/- on capital asset on

debonding the goods and 3) duty paid of ` 5,17,305/- on capital goods

located at Bangalore for debonding. The submission of the assessee is

that it was already in possession of these assets and depreciation was

being claimed and allowed. Payment of debonding charges does not lead

to creation of any new capital asset, hence the charges should be treated

as revenue expenditure. In particular reliance has been placed on the

decision of Hon'ble Supreme Court in the case of Empire Jute company of

India Ltd. vs. CIT, 124 ITR,1 in which it has been held that apart from the

tests of creation of an asset or obtaining benefit of enduring nature, it

should also be examined whether the expenditure is in capital field or

revenue field.

7.1   Before us, the Ld. Counsel referred to the submissions made before

the lower authorities and reiterated that shifting of capital goods from

bonded ware house on payment of duty does not create any asset and
                                                     ITA No. 5466/Del/11
                                                     Asstt. year 2007-08

does not lead to benefit of enduring nature as the asset remains the

same. Therefore, the expenditure is revenue in nature. The argument of

Ld. CIT(DR) has been that the matter may be restored to the file of AO.

7.2    We have considered the facts of the case and submissions made

before us. The capital goods placed in the bonded area are subject to

restrictions that they cannot be sold and they cannot be removed outside

the area for use of self. This encumbrance is removed once the goods are

cleared from the bonded area on payment of duty. The result is that the

assessee can deal with the goods in any manner it desires including sale

thereof. Therefore, payment of custom duty for de bonding increases

value of the asset and it is required to be added to the costs or written

down value, as the case may be. Therefore, this ground is dismissed.

7.3.   Ground No. 11 is general in nature against confirming of the

additions proposed by the AO by the Ld. DR(P). In absence of any specific

argument, this ground is taken as dismissed.

7.4    Ground No. 12 and 13 are against charging of interest under

sections 234B, 234D and 244A. The assessment has been set aside on

one ground and relief has been granted to the assessee on some other

grounds. Therefore, the chargeability of these interests requires a fresh

look on making denovo assessment and giving effect to this order.
                                                            ITA No. 5466/Del/11
                                                            Asstt. year 2007-08

Therefore, these matters are restored to the file of the AO. The result is

that these grounds are treated as allowed.

8.     There is no appeal provided for initiating penalty u/s 271(1)(c),

therefore ground No. 14 is dismissed.

9.     In the result, the appeal is treated as partly allowed as discussed


                    sd/-                sd/-

     [C.M. GARG]                                       [K.G. BANSAL]
     JUDICIAL MEMBER                            ACCOUNTANT MEMBER


                                Copy forwarded to: -
1.     Appellant

2.     Respondent

3.     CIT

4.     CIT (A)

5.     DR, ITAT     TRUE COPY                               By Order,

                                                         Deputy Registrar, ITAT
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