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2012 (10) TMI 1029 - AT - Income TaxDisallowance of communication, travel and onsite expenses - Determination of Arms Length Price for international transactions - Held that - decision of the Hon ble Karnataka High Court in the case of Tata Elxsi and the CIT(A) has followed the same in granting relief from disallowance u/s 10A to the assessee - Decided in favor of assessee Held that - No bench marking for super profit making companies is prescribed by the law - as long as two companies are functionally similar, they are to be considered as comparables - The factor of loss in the parent company would not be a guiding factor for making any adjustment to the ALP of the international transaction - If the parent company is making any losses, then the said company to claim the losses in accordance with the laws of the country in which it is taxable - the working capital adjustment is accordingly allowed for statistical purpose - Partly in favor of revenue
Issues:
1. Exclusion of certain expenses for computation of deduction u/s 10A of the IT Act. 2. Rejection of certain companies as comparables. 3. Adhoc deduction from ALP determined. 4. Standard deduction allowed from ALP. 5. Working capital adjustment made by the TPO. Issue 1: Exclusion of certain expenses for computation of deduction u/s 10A of the IT Act The Revenue appealed against the order of the Commissioner of Income-tax - (Appeals) IV at Bangalore, challenging the exclusion of communication expenses, travel and onsite expenses, and subscription fees from the total turnover for the computation of deduction u/s 10A of the IT Act, 1961. The Hon'ble Karnataka High Court's decision in the case of Tata Elxsi was cited, and the CIT(A) was found to have correctly followed the same, leading to the rejection of the Revenue's appeal on this issue. Issue 2: Rejection of certain companies as comparables The assessee, a 100% export-oriented unit engaged in software development, sought relief against the TPO's adjustment of the arms-length price for international transactions. The CIT(A) excluded certain companies like Vishal Information Technology and Nuclear Netsoft & GIS Ltd. as comparables, citing super profits and low margins. The Revenue contested this exclusion, arguing against the absence of specific economic circumstances leading to super profits. The Tribunal upheld the exclusion of Vishal Information Technology but disagreed with the exclusion of Nuclear Netsoft, emphasizing that high profits alone do not classify a company as super-profit making. The Tribunal partially allowed this ground of appeal. Issue 3: Adhoc deduction from ALP determined The Revenue challenged the adhoc deduction of 2% from the ALP determined after excluding three comparable cases, contending that such deduction was not guided by commercial considerations. The Tribunal held that adjustments to ALP should be based on the profit-making capacity in India compared to comparable companies, and losses in the parent company should not influence such deductions. Consequently, the Tribunal allowed this ground of appeal. Issue 4: Standard deduction allowed from ALP The appeal addressed the allowance of a standard deduction of 5% from the ALP, following the ITAT's decision in a specific case. The Tribunal noted that this issue was resolved by a retrospective amendment in the Finance Act of 2012, directing the AO to make adjustments in accordance with the law. Therefore, the Tribunal allowed this ground of appeal. Issue 5: Working capital adjustment made by the TPO The working capital adjustment made by the TPO for nine comparables was contested by the Revenue, especially after excluding three comparable companies. The Tribunal directed the AO to reconsider the working capital adjustment after excluding Vishal Information Technology from the list of comparables, allowing this ground of appeal for statistical purposes. In conclusion, the Tribunal partly allowed the Revenue's appeal, addressing various issues related to the computation of deduction, exclusion of comparables, adhoc deductions, standard deductions, and working capital adjustments. The Tribunal's detailed analysis and decisions on each issue reflect a thorough consideration of the legal and factual aspects involved in the case.
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