2012 (5) TMI 208 - AT - Income Tax

Transfer pricing - arm s length price (ALP) - transactions with Associated Enterprises (AEs) - selection of comparable - held that - The Tribunal in the case of Genisys Integrating Systems (India) (P.) Ltd. had given specific direction to be followed by the Transfer Pricing Officer. - Matter remanded back for denovo consideration. Admission of additional evidence - held that - the additional evidence would be relevant to consider and decide the case already made out by the Revenue and it is, therefore not a case of tendering of fresh evidence by the department to support a new point or to make out a new case. According to us, the additional evidence filed by the revenue is quite relevant for the purpose of deciding the issue before us and the same, therefore, can be admitted as per rule 29 of Appellate Tribunal Rules, 1963. Capital or revenue expenditure - held that - The Special Bench in the case of Amway India Enterprises (2008 -TMI - 64346 - ITAT DELHI-C) had laid down various tests to determine whether the expenditure incurred for purchase of computer software is capital or revenue.

Issues Involved:
1. Validity of CIT(A)'s order prejudicial to the appellant.
2. Invoking provisions of section 92CA(1) and referring computation of Arm's Length Price (ALP) to Transfer Pricing Officer (TPO).
3. Absence of a charging provision for transfer pricing adjustment.
4. Adjustment to transfer price without application of mind.
5. Determination of mark-up on total cost for R&D services.
6. Determination of mark-up on total cost for IT services.
7. Selection of comparables based on data available at the time of transfer pricing documentation.
8. Use of subsequently available data restricted to originally selected comparables.
9. Inclusion of certain comparable companies in the list.
10. Reinstating specific companies as comparables for IT services.
11. Presumptive adjustment for normalization of expenses.
12. Use of data of comparable companies for the same financial year.
13. Consideration of risk-free nature of appellant's business.
14. Benefit of +/-5% under proviso to section 92C(2).
15. Charging of interest under sections 234B and 234D.
16. Addition, alteration, amendment, rescindment, or modification of grounds before or at the hearing.

Issue-wise Detailed Analysis:

1. Validity of CIT(A)'s Order Prejudicial to the Appellant:
The appellant argued that the CIT(A)'s order was prejudicial and should be quashed. However, the Tribunal did not find merit in this argument.

2. Invoking Provisions of Section 92CA(1) and Referring Computation of ALP to TPO:
The CIT(A) upheld the Assessing Officer's (AO) action of invoking section 92CA(1) and referring the computation of ALP to the TPO. The Tribunal found this action appropriate as per the law.

3. Absence of a Charging Provision for Transfer Pricing Adjustment:
The appellant contended that the addition to chargeable income cannot be made merely through a transfer pricing adjustment. The Tribunal noted that the CIT(A) and AO followed the statutory provisions and guidelines.

4. Adjustment to Transfer Price Without Application of Mind:
The appellant argued that the AO made adjustments without applying their mind. The Tribunal found that the CIT(A) had recomputed the adjustments, which indicated a thorough review.

5. Determination of Mark-up on Total Cost for R&D Services:
The CIT(A) determined a mark-up of 31.73% for R&D services, while the appellant had determined 5%. The Tribunal upheld the CIT(A)'s determination, noting the detailed analysis and comparables used.

6. Determination of Mark-up on Total Cost for IT Services:
For IT services, the CIT(A) determined a mark-up of 25.35%, compared to the appellant's 5%. The Tribunal upheld this determination, citing the CIT(A)'s detailed analysis.

7. Selection of Comparables Based on Data Available at the Time of Transfer Pricing Documentation:
The appellant argued that comparables should be selected based on data available at the time of documentation. The Tribunal found that the CIT(A) had appropriately selected comparables based on the available data.

8. Use of Subsequently Available Data Restricted to Originally Selected Comparables:
The appellant contended that subsequently available data should be restricted to originally selected comparables. The Tribunal upheld the CIT(A)'s approach, which included relevant comparables.

9. Inclusion of Certain Comparable Companies in the List:
The appellant argued against the inclusion of certain companies as comparables. The Tribunal found that the CIT(A) had appropriately included these companies based on their relevance and comparability.

10. Reinstating Specific Companies as Comparables for IT Services:
The CIT(A) reinstated Intertec Communications Private Limited and Igate Global Solutions Limited as comparables. The Tribunal upheld this decision, finding it justified based on the analysis.

11. Presumptive Adjustment for Normalization of Expenses:
The appellant contested the presumptive adjustment for normalization of expenses. The Tribunal upheld the CIT(A)'s decision, finding it consistent with the guidelines.

12. Use of Data of Comparable Companies for the Same Financial Year:
The appellant argued that it was mandatory to use data of comparable companies for the same financial year. The Tribunal found that the CIT(A) had appropriately used the relevant data.

13. Consideration of Risk-free Nature of Appellant's Business:
The appellant contended that the risk-free nature of their business was not considered. The Tribunal upheld the CIT(A)'s approach, which took into account the relevant factors.

14. Benefit of +/-5% Under Proviso to Section 92C(2):
The appellant argued for the benefit of +/-5% as provided in the proviso to section 92C(2). The Tribunal found that the CIT(A) had appropriately applied the provisions.

15. Charging of Interest Under Sections 234B and 234D:
The appellant contested the charging of interest under sections 234B and 234D. The Tribunal upheld the CIT(A)'s decision, finding it consistent with the statutory provisions.

16. Addition, Alteration, Amendment, Rescindment, or Modification of Grounds Before or at the Hearing:
The appellant reserved the right to add, alter, amend, rescind, or modify the grounds. The Tribunal noted this but did not find it necessary to address further.

Revenue's Appeal:

1. Exclusion of Expenses Incurred in Foreign Currency from Total Turnover for Section 10A Deduction:
The CIT(A) directed the AO to exclude expenses incurred in foreign currency from the total turnover for computing the deduction under section 10A. The Tribunal upheld this decision, citing the Karnataka High Court's affirmation in Tata Elxsi Ltd.

2. Nature of Expenses for Purchase of Software:
The CIT(A) held that expenses for purchasing software were revenue in nature. The Tribunal remanded the matter to the AO for reconsideration in light of the Karnataka High Court's decision in Toyota Kriloskar Motors Pvt. Ltd. and the Special Bench's order in Amway India Enterprises.

Conclusion:
The Tribunal allowed the assessee's appeal for statistical purposes and partly allowed the revenue's appeal for statistical purposes, remanding specific issues back to the AO for fresh adjudication.

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