2011 (9) TMI 477 - AT - Income Tax

Deduction from export turnover under 10A - lease line charges relatable to the STP unit of the appellant - Held That - In view of Patni Telecom (2008 (1) TMI 452 - ITAT HYDERABAD-A), internet service provider charges and traveling expenses on development of software outside India cannot be excluded from the export turnover, while computing the deduction u/s 10A. Similar view was in case of Gem Plus Jewellery India Ltd (2010 - TMI - 76903 - BOMBAY HIGH COURT ). Transfer Price Adjustments - Assessee imported goods from its holding Co. performed spares replacement services and exported back - TNMM method was followed as the basis of price fixation and selected logistic companines as comparable - Revenue treated the assessee as dealer and adopted Resale Price Method(RPM) - Held That - We are not able to agree with this finding of the TPO. A trader is a one who purchases the goods by transfer of ownership over the goods and is free to fix the re-sale price and also is free to choose the customers to whom he would sell the goods.In the given case assessee is becoming the owner of the goods imported, but, by virtue of the product replacement services agreement, he has no right to fix the resale price or to choose the customer to whom the products are to be sold. Assessee is only a custodian of the goods imported till they are delivered to the client or customer of its parent company on its directions. When assesee is not a trader RPM cannot be adopted. The assessee has adopted the transactional net margin method, as the most appropriate method as seen above. - The other methods prescribed by Rules are not applicable to the facts of the case before and therefore, the TNMM method is the most appropriate method for computing the ALP relating to the international transactions of the assessee with its associated enterprise. Selection of Comparables - As already brought out by the counsel for the assessee the assets employed and the risk undertaken by the assessee are nil. All these factors are to be considered while selecting the comparables, but the TPO has not considered these aspects before rejecting the comparables selected by the assessee. As regards the comparables selected by the TPO, as rightly pointed out by the counsel for the assessee, three of these comparables except Iris Computers are involved in trading and manufacturing activities and the segmental break up is not given. - While accepting the contention of the assessee, matter remanded back to AO.

Issues Involved:

1. Assessment of total income.
2. Deduction under Section 10A of the IT Act.
3. Treatment of lease line charges.
4. Treatment of foreign currency expenditure.
5. Transfer Pricing (TP) adjustments.
6. Economic analysis for TP.
7. Transfer Pricing method and comparables.
8. Determination of Arm's Length Price (ALP).
9. Application of 5% range benefit under Section 92C.
10. Levy of interest under Section 234B.

Detailed Analysis:

1. Assessment of Total Income:
The assessee's total income was assessed at Rs. 505,440,247/- against the returned income of Rs. 214,223,174/-. The learned AO's assessment was contested by the assessee.

2. Deduction under Section 10A of the IT Act:
The assessee claimed deductions under Section 10A, which were disputed by the AO. The primary contention was whether lease line charges and foreign currency expenditure should be deducted from the export turnover.

3. Treatment of Lease Line Charges:
The AO considered the entire lease line charges attributable to the delivery of computer software outside India. The assessee argued that these charges were also for general communication purposes and only 70% should be considered attributable to software delivery.

4. Treatment of Foreign Currency Expenditure:
The AO reduced foreign currency expenditure from the export turnover. The assessee contended that since it did not provide technical services outside India, such expenses should not be reduced from export turnover. The ITAT Special Bench in the case of M/s Zylog Systems Ltd. and other cases supported the assessee's view that such expenses should not be excluded from export turnover.

5. Transfer Pricing Adjustments:
The AO/TPO made an addition of Rs. 268,657,520 to the total income on account of TP adjustments related to spares replacement services. The assessee challenged the characterization of its role and the method used for determining the ALP.

6. Economic Analysis for TP:
The TPO disregarded the economic analysis undertaken by the assessee and conducted a fresh analysis. The assessee argued that the TPO did not properly analyze its functional, asset, and risk profile and incorrectly treated it as a trader/distributor of spare parts.

7. Transfer Pricing Method and Comparables:
The TPO adopted the Resale Price Method (RPM) and used comparables involved in trading electrical goods. The assessee argued that the Transactional Net Margin Method (TNMM) was more appropriate and that the TPO's comparables did not satisfy the comparability criteria.

8. Determination of Arm's Length Price (ALP):
The ITAT found that the RPM was not suitable since the assessee did not have the freedom to fix resale prices or choose customers. The TNMM was deemed the most appropriate method. The ITAT directed the AO/TPO to recompute the ALP using proper comparables and the TNMM method.

9. Application of 5% Range Benefit under Section 92C:
The assessee argued that the TP adjustments should be limited to the lower end of the 5% range as per the erstwhile proviso to Section 92C(2). The ITAT directed the AO/TPO to consider this benefit in light of judicial precedents.

10. Levy of Interest under Section 234B:
The AO levied consequential interest amounting to Rs. 49,522,328/- under Section 234B. The ITAT did not specifically address this issue in the judgment.

Conclusion:
The ITAT allowed the assessee's appeal for statistical purposes, directing the AO to recompute the ALP and deductions under Section 10A, considering the proper comparables and the TNMM method. The ITAT also instructed the AO to apply the 5% range benefit as per judicial precedents.

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