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2011 (3) TMI 483 - AT - Income TaxInclusion of Interest income for the purpose of calculation of Arm s length price (ALP) Held that - Interest income is not a relevant receipt which has any influence on the operating income of the assessee for working out the ALP. Therefore, this receipt has rightly been excluded in both the assessment years. Credit of expenditure incurred - The Telephone Department has raised a demand upon the assessee which was disputed by it in a telephone adalat but ultimately it has to pay the amount Held that - In computing the ALP, the expenses in the nature of abnormal items are not to be looked into. This expenditure is not of a routine nature. It is not ascertainable from the record, whether it is for actual user of the telephone or for some other reasons - once it is considered that this amount represents expenses of personal nature then it may not have any bearing on the international transaction. CIT(A) has rightly excluded this amount from the operating cost. Expenses in relation to branches closed - cost of closure Held that - Assessee has been receiving the certain charges at cost plus 10%. In such circumstances, this type of receipts would always be considered in the operating expenses. - cost of closure is not to be excluded from computing the operating expenses. Adjustment on account of risk Held that - assessee failed to file the details exhibiting risk born by comparables. - In the absence of that comparability, it is difficult to make adjustment. - The assessee ought to have demonstrated this factor before the learned TPO as well as before the Learned CIT(Appeals). - it is difficult to give any benefit on that account. Adjustment on account of global recession Held that - It may be a corroborative factor for determination of ALP in the case of assessee, but it is difficult to work out the exact influence of the market condition in the profit making of the assessee. TPO has considered the results of the comparable cases and thereafter recommended adjustment, therefore, we do not deem it appropriate to make any ad hoc adjustment on the basis of this argument at this stage. Variation within the limit of /- 5% - held that - the transfer price shown by the assessee was not to be disturbed if it was within /- 5% mean ALP range than the arm s length price determined by the Assessing Officer based on the arithmetical mean of the prices. - this option is available to the assessee but it is available only when assessee is computing the ALP and not when the A.O./PTO is computing the ALP.
Issues Involved:
1. Determination of arm's length price (ALP) in respect of international transactions. 2. Inclusion of interest income in operating income for ALP computation. 3. Exclusion of specific expenses from operating costs. 4. Risk adjustment in ALP computation. 5. Use of current year data versus multiple years data for comparable purposes. 6. Benefit of +/- 5% range under Proviso 92C(2) in ALP computation. 7. Set off of brought forward losses and unabsorbed depreciation. 8. Charging of interest under sections 234B and 234D. 9. Withdrawal of interest granted under section 244A. 10. Assessment of interest income as business income or income from other sources. Detailed Analysis: 1. Determination of Arm's Length Price (ALP): The primary issue in both assessment years 2002-03 and 2003-04 was the determination of ALP for international transactions with associate enterprises. The assessee used the Transactional Net Margin Method (TNMM) and included operating profit margin on operating cost as the Profit Level Indicator (PLI). The TPO accepted most transactions except for agency and market research services, leading to adjustments in ALP. The CIT(A) propounded multiple issues for adjudication, such as the inclusion of interest income and specific expenses in operating costs, and adjustments for working capital and risk differences. 2. Inclusion of Interest Income in Operating Income: The CIT(A) and TPO excluded interest income from operating income, arguing that it was not part of the primary operating activities. The assessee contended that interest income should be included as it had been treated as business income in previous years. However, the CIT(A) held that interest income was a result of finance activity and not of operating activity, thus rightly excluded from ALP computation. 3. Exclusion of Specific Expenses from Operating Costs: Several expenses were debated for inclusion/exclusion from operating costs. The CIT(A) excluded abnormal items like payments to the telephone department and business promotion expenses, deeming them non-recurring and unrelated to regular operating activities. The CIT(A) also excluded costs related to the closure of business units, considering them as relevant to the international transactions. 4. Risk Adjustment in ALP Computation: The assessee sought adjustments for differences in risk profiles between itself and comparable companies. The CIT(A) rejected this claim due to a lack of evidence showing risk differences. The CIT(A) emphasized the need for contemporaneous documentation under Rule 10D to substantiate such adjustments. 5. Use of Current Year Data vs. Multiple Years Data: The assessee's appeal for using data from preceding two years was not pressed, as the Special Bench's decision in Aztectech Software & Technology and Mentorgraphic cases favored using current year data. 6. Benefit of +/- 5% Range under Proviso 92C(2): The CIT(A) denied the benefit of the +/- 5% range, stating it was not a standard deduction but a relief available when determining ALP. The ITAT upheld this view, referencing the decisions in Global Ventage (P) Ltd. and Basf India Ltd. 7. Set Off of Brought Forward Losses and Unabsorbed Depreciation: The CIT(A) left the issue of setting off brought forward losses and unabsorbed depreciation open for the Assessing Officer to decide when giving effect to the order. The ITAT found this approach appropriate. 8. Charging of Interest under Sections 234B and 234D: The CIT(A) upheld the charging of interest under section 234B as consequential but ruled out interest under section 234D, referencing the Special Bench's decision in ITO Vs. Ekta Promoters that section 234D applies from assessment year 2004-05. 9. Withdrawal of Interest Granted under Section 244A: The assessee did not press this ground, leading to its rejection. 10. Assessment of Interest Income as Business Income or Income from Other Sources: The assessee sought to reclassify interest income as business income based on a Supreme Court decision. The ITAT allowed the additional ground and remitted the issue back to the Assessing Officer for verification and re-adjudication. Conclusion: The appeals of the assessee were partly allowed for statistical purposes, while the appeals of the revenue were dismissed. The ITAT upheld the CIT(A)'s detailed examination and findings on most issues, affirming the exclusion of interest income and specific expenses from operating costs, and denying the benefit of the +/- 5% range in ALP computation.
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