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2011 (6) TMI 682 - ITAT DELHIMost Appropriate Method for determining ALP for International Transaction u/s 92C - Data Required to be used for selecting Comparables u/s 10(4) - Selection of Comparable Assessees - Selection of Comparable Companies - Assessee used multiple years' data whereas the TPO is of the opinion that current year data is to be used for selecting comparables HELD THAT:- Most Appropriate Method - In the present years, on an analysis of international transactions with the associate parties and data of comparables, the assessee has selected transactional net margin method (TNMM), using net profit margin based on cost as profit level indicator. In these three years this method was not disputed by the learned Transfer Pricing Officer. We can say that both sides are in agreement on the method. For Selecting comparables - Section 10(4) is referred, the used the expression "shall" make it mandatory to first use the current year data. If certain other circumstances reveal an influence on the determination of transfer pricing in relation to the transaction being compared than other datas for period not more than two years prior to such financial year may be used. Thus, the view point of the Transfer Pricing Officer for using the current year data is upheld. For finding out comparable Assessees who have uncontrolled international transactions of similar nature - We are in view that product produced by the assessee in itself is of a complex nature, which required skilled work force. We find certain comparables which were found acceptable by the assessee in the financial year 2004-05 all of a sudden become incomparable in the financial year 2005 06. It suggests that efforts of the financial analyst was to prepare the documentation in such a fashion which would give the result near to the result disclosed by the assessee. The TPO has considered this aspect elaborately - Thus Assessee is high end service provider. Search Methodology for selecting Comparables - The approach of the TPO ought to be judicious. The comparability between a controlled transaction and uncontrolled transaction is a comparison of condition which is broader than a mere comparison of price or margin. Where it is found that the conditions imposed were differed from those which would be made between independent enterprises, transfer pricing adjustment are to be made. Thus, the TPO while evaluating the transfer pricing study made by the assessee arrived at a conclusion that the assessee has left over various angles in identifying the comparables - Decision Against Assessee. Comparability Adjustment under Rule 10B - Selection of Comparable Companies - Assessee has eliminated certain comparables on the ground that some companies have related party transaction because more than 26 percent shareholding of subsidiary was held by the company abroad - TPO said that there may be transactions with associate enterprises but the transactions should not be more than 30 percent HELD THAT:- TPO has applied the filter, quantitatively as well as qualitatively in eliminating the factors which effect the result of the alleged comparables so that the difference between the operations of the assessee as well as such comparables who worked in uncontrolled transactions can be neutralised - Thus, method adopted by TPO upheld. Benefit of Proviso u/s 92C - Tolerance Band - Assessee contended that arithmetic mean of the comparable price should be reduced by 5 percent for determining the arm's length price HELD THAT:- We are of the view that tolerance band provided in the proviso is not to be construed as a standard deduction. In the present case, TPO has adopted the arithmetic mean of several comparables for taking out a profit level indicator which would be tested with the profit level indicator of the assessee. If that arithmetic mean falls within the range of alleged tolerance band then there may not be any adjustment but if it exceeds then ultimate adjustment is not required to be computed after reducing the arithmetic mean by 5 percent The actual working is to be taken. The learned first appellate authority has considered this aspect elaborately, thus, we do not see any merit in the ground of appeal. Software Expenses - Capital or Revenue in Nature? - Expenditure was incurred for acquiring the time based licence to use of software for a period of one year or less than two years - HELD THAT:- There is no such dispute regarding this matter in two years. It suggests that the learned Dispute Resolution Panel has considered this issue without making a proper analysis. On perusal of the assessment order, we find that the AO while considering the ratios laid down by the Special Bench of the Income-tax Appellate Tribunal has observed that the Special Bench was not correct in interpreting the law. In our opinion, it is not for the AO to comment upon the orders of the higher authorities rather she is bound to follow them. Following the decision in the case of AMWAY INDIA ENTERPRISES. VERSUS DEPUTY COMMISSIONER OF INCOME-TAX, CIRCLE - 1(1), NEW DELHI. [2008 (2) TMI 454 - ITAT DELHI-C]we held that, the assessee has not acquired any ownership in the alleged licence and the licences shelf life is less than two years. The nature of the assessee's business is such that it required computer software. Therefore, the expenses incurred by the assessee for obtaining the licence to use the software is to be treated as revenue expenditure - Decision in favour of Assessee. Amount paid to Noida Development Authority - Capital or Revenue in Nature? - The name of the allottee has been got changed by the assessee - For which Assessee was directed to pay charges for change in ownership - HELD THAT:- The learned representative failed to bring the revenue laws of the UP State authorising the Noida Authority for charging such an amount, therefore, we restore the matter back to AO for fresh examination.
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