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2011 (9) TMI 634 - AT - Income TaxTransfer pricing - computation of the net margin of the assessee for the purposes of transfer pricing - total cost of the assessee (including the cost of transactions with non-AEs) taken-bad debts/reimbursements, foreign exchange fluctuation taken into account - Held that - Arms Length Price for the international transactions with associated enterprises should be determined considering only the operating cost (i.e. excluding bad debts/ reimbursements) allocatable to the Associated Enterprises segment and not the total cost of the assessee. Further, though exchange rate fluctuation should be considered while such computation but in present case there is no justification for any adjustment on account of foreign exchange fluctuation to the Price declared by the assessee since the assessee s margin would fall within the Arms Length range. All other grounds raised related to software development services are disposed off. Decided in favor of assessee. Interest on loans provided to its AEs - Held that - The comparable, in respect of foreign currency loan in the international market, is to be LIBOR based which is internationally recognized and adopted. In view of this matter, matter is remitted back to the file of the assessing officer to verify the actual average LIBOR prevailed in the financial year relevant to the assessment year under consideration. Partly allowed in favor of assessee for statistical purpose. Corporate guarantee provided to banks on loans taken by its subsidiary - Held that - The corporate guarantee provided by the assessee company does not fall within the definition of international transaction. In the absence of any charging provision, the lower authorities are not correct in bringing aforesaid transaction in the TP study. Thereby no TP adjustment is required. Decided in favor of assessee. Exclusion of communication charges and implementation expenses from the export turnover and further not reducing the same from the total turnover for the purpose of computation of benefit under section 10A of the Act - Held that - The telecommunication charges and implementation expenses incurred by the assessee company, which has been excluded by the assessing officer from export turnover, has to be excluded from the total turnover also, while computing the admissible deduction 10A of the Act. Decided in favor of assessee. Dis-allowance of expenditure under section 14A of the Act - Held that - The issue is restored to the file of the assessing officer to rework the dis-allowance on reasonable basis in accordance with the ratio laid down by the aforesaid judgment. Allowed in favor of assessee for statistical purpose.
Issues Involved:
1. Rejection of Transfer Pricing documentation and adjustment of Rs. 4,19,41,501. 2. Computation of correct net margin under Transactional Net Margin Method (TNMM). 3. Application of TNMM to internal uncontrolled transactions. 4. Exclusion of foreign exchange fluctuation in computation of operating margin under TNMM. 5. Rejection of contemporaneous data and use of fresh comparable search. 6. Use of data for FY 2005-06 only in determination of Arm's Length Price (ALP). 7. Use of selective information/documents not available in public domain. 8. Eligibility for tax holiday benefit under section 10A. 9. Use of additional filters in comparative analysis. 10. Rejection of certain comparable companies for determination of ALP. 11. Selection of certain companies as comparable for determination of ALP. 12. Addition of reimbursements received to operating cost. 13. Determination of arms length interest rate for loans provided to Foursoft BV Netherlands. 14. Determination of ALP on corporate guarantee provided. 15. Discrimination in determining ALP for corporate guarantee vis-a-vis similar guarantees by other companies. 16. Non-adjustment of net margins for functional and risk differences. 17. Adjustment to transfer price limited to lower end of 5% range of ALP. 18. Deduction of expenses from export turnover in computation of deduction u/s. 10A. 19. Determination of expenditure relating to exempt income and disallowance under section 14A. 20. Disallowance of expenses incurred towards professional and legal fees. 21. Imposition of interest under section 234B. 22. Initiation of penalty proceedings u/s. 271(1)(c). Detailed Analysis: 1. Rejection of Transfer Pricing Documentation and Adjustment of Rs. 4,19,41,501: The assessee argued that the Transfer Pricing (TP) documentation was maintained in accordance with the provisions of the Act and Rules. The TPO made adjustments totaling Rs. 4,19,41,501 for software services, interest on loans, and corporate guarantees. The ITAT found that the TPO should have considered only the operating cost allocable to the AE segment and excluded bad debts and reimbursements. The ITAT directed the AO to verify the segmental financials prepared by the assessee and adopt the same for arriving at the net margin on the international transaction with AEs. 2. Computation of Correct Net Margin under TNMM: The ITAT agreed with the assessee that the TPO should have determined the ALP considering only the operating cost allocable to the AE segment. The ITAT directed the AO to verify the segmental financials and exclude bad debts and reimbursements for computing the net margin. 3. Application of TNMM to Internal Uncontrolled Transactions: Since the ITAT resolved the primary issues in favor of the assessee, the grounds related to the application of TNMM to internal uncontrolled transactions became redundant and were not addressed. 4. Exclusion of Foreign Exchange Fluctuation in Computation of Operating Margin under TNMM: The ITAT held that exchange fluctuation gains arise in the normal course of business and should be considered while computing the net margin. The ITAT directed that no adjustment is required as the assessee's margin falls within the Arms Length range. 5. Rejection of Contemporaneous Data and Use of Fresh Comparable Search: The ITAT did not address this issue separately as it became redundant due to the resolution of primary issues. 6. Use of Data for FY 2005-06 Only in Determination of ALP: The ITAT did not address this issue separately as it became redundant due to the resolution of primary issues. 7. Use of Selective Information/Documents Not Available in Public Domain: The ITAT did not address this issue separately as it became redundant due to the resolution of primary issues. 8. Eligibility for Tax Holiday Benefit under Section 10A: The ITAT did not address this issue separately as it became redundant due to the resolution of primary issues. 9. Use of Additional Filters in Comparative Analysis: The ITAT did not address this issue separately as it became redundant due to the resolution of primary issues. 10. Rejection of Certain Comparable Companies for Determination of ALP: The ITAT did not address this issue separately as it became redundant due to the resolution of primary issues. 11. Selection of Certain Companies as Comparable for Determination of ALP: The ITAT did not address this issue separately as it became redundant due to the resolution of primary issues. 12. Addition of Reimbursements Received to Operating Cost: The ITAT directed that reimbursements should not be included in the operating cost for the AE segment. 13. Determination of Arms Length Interest Rate for Loans Provided to Foursoft BV Netherlands: The ITAT held that the ALP for international loans should be LIBOR-based. The ITAT directed the AO to verify the actual average LIBOR rate and adopt it if the assessee's claim of 4.42% is correct. 14. Determination of ALP on Corporate Guarantee Provided: The ITAT held that the corporate guarantee does not fall within the definition of international transaction under TP legislation. The ITAT ruled that no TP adjustment is required for the corporate guarantee transaction. 15. Discrimination in Determining ALP for Corporate Guarantee vis-a-vis Similar Guarantees by Other Companies: The ITAT ruled that no TP adjustment is required for the corporate guarantee transaction, making this issue redundant. 16. Non-Adjustment of Net Margins for Functional and Risk Differences: The ITAT did not address this issue separately as it became redundant due to the resolution of primary issues. 17. Adjustment to Transfer Price Limited to Lower End of 5% Range of ALP: The ITAT did not address this issue separately as it became redundant due to the resolution of primary issues. 18. Deduction of Expenses from Export Turnover in Computation of Deduction u/s. 10A: The ITAT held that telecommunication charges and implementation expenses excluded from export turnover should also be excluded from total turnover while computing the deduction under section 10A. 19. Determination of Expenditure Relating to Exempt Income and Disallowance under Section 14A: The ITAT restored the issue to the AO to rework the disallowance on a reasonable basis in accordance with the Bombay High Court's judgment in Godrej & Boyce vs. DCIT. 20. Disallowance of Expenses Incurred Towards Professional and Legal Fees: The assessee did not press this issue, and it was dismissed as not pressed. 21. Imposition of Interest under Section 234B: The ITAT held that charging of interest under section 234B is mandatory and consequential to the assessed income. 22. Initiation of Penalty Proceedings u/s. 271(1)(c): The ITAT held that there is no provision in the Act for allowing an appeal against the initiation of penalty proceedings under section 271(1)(c), and the ground was rejected. Conclusion: The appeal was partly allowed for statistical purposes, with directions for the AO to verify certain claims and recompute the net margin and interest rates as per the ITAT's guidance. The ITAT also ruled in favor of the assessee on several key issues, including the exclusion of bad debts and reimbursements from operating costs and the non-requirement of TP adjustments for corporate guarantees.
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