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2011 (6) TMI 154 - AT - Income TaxArm s length price - Reference to TPO - Addition - Software Technological Park (STP) - TNMM method - In the present year, on an analysis of the international transaction with the associate parties and data of comparables, assessee has selected TNMM, using net profit margin based on cost as PLI. This method is not disputed by the TPO hence we can say that both sides are in agreement on the method - for taking up the internal benchmarking, an adjustment be made for eliminating the geographic condition effecting the value of such services - the operating profit margin with respect to unrelated transaction is minus 14.10 per cent whereas the assessee is showing operating profit with related parties at 14.33 per cent - if we examine this result within the right of the ITAT s order for assessment year 2006-07, then also no adjustment is required in the result of international transaction shown by the assessee - Decided in favour of the assessee Prior period expenses - CIT(A) deleted the addition following the decision in the case of Saurasthra Cement & Chemical Industries Ltd. v. CIT (1979 -TMI - 36941 - GUJARAT High Court) - Order of CIT(A) upheld - decided in favor of assessee.
Issues Involved:
1. Deletion of additions made by the Assessing Officer based on the TPO's recommendations for adjustment in arm's length price (ALP) on international transactions. 2. Allowance of exemption under section 10A of the Income-tax Act. 3. Deletion of addition of Rs. 19,26,120 related to prior period expenses. Detailed Analysis: 1. Deletion of Additions Based on TPO's Recommendations for ALP Adjustment: The revenue contended that the CIT (Appeals) erred in deleting the additions made by the Assessing Officer based on the TPO's recommendations for ALP adjustment in international transactions. The assessee, a subsidiary of Birla Soft Enterprises, engaged in software development, had declared an income of Rs. 7,82,54,384. The dispute centered on three international transactions with associated enterprises, primarily using the Transactional Net Margin Method (TNMM) for determining ALP. The TPO recommended an adjustment of Rs. 4,95,51,723, which was contested by the CIT (Appeals), who found that the arithmetic mean of the profit level indicator of comparables was 14.01%, while the assessee disclosed a mean of 10.91%, within the tolerable band per section 92C(2). The Tribunal upheld the CIT (Appeals) decision, noting that the method of TNMM was undisputed and that the use of current year data was mandatory under Rule 10B(4). The Tribunal also agreed with the CIT (Appeals) that the TPO's approach of segregating STP units was incorrect, as the services provided were identical across units, governed by a single agreement, and there was unity of business and administrative control. 2. Allowance of Exemption Under Section 10A: The revenue challenged the CIT (Appeals) decision to allow exemption under section 10A for the STP unit on the third floor at STP Complex, Sector 29, Noida, arguing it was an extension of an existing unit. The CIT (Appeals) relied on the ITAT's order for the assessment year 2003-04, which held that the unit was not an extension. The Tribunal upheld the CIT (Appeals) decision, finding no reason to interfere, as the issue had been settled in the previous year. 3. Deletion of Addition of Rs. 19,26,120 Related to Prior Period Expenses: The revenue contested the deletion of Rs. 19,26,120, arguing these were prior period expenses. The assessee explained that the amount related to payroll tax reconciliation for its Australian branch, which was obligated to reconcile annual wages and pay any differential in July 2003. The CIT (Appeals) deleted the addition, following the Gujarat High Court's decision in Sourasthra Cement & Chemical Industries Ltd. v. CIT, which held that such liabilities accrue and crystallize upon reconciliation. The Tribunal agreed, noting that the liability had indeed crystallized during the relevant period. Conclusion: The Tribunal dismissed the revenue's appeal, upholding the CIT (Appeals) decisions on all grounds. The deletion of additions based on TPO's recommendations was justified as the assessee's ALP was within the tolerable band, and the method and data used were appropriate. The allowance of exemption under section 10A was supported by precedent, and the deletion of the addition related to prior period expenses was consistent with established legal principles.
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