9911796707
|
Home
Forgot password New User/ Regiser ⇒ Register to get Live Demo
2013 (1) TMI 672 - AT - Income TaxTransfer Pricing Computation of Arm s Length Price - International transaction Arm s Length Price - Assessee provided software research & development support services to its Associated Enterprise - Remunerated on a cost plus basis - assessee adopted the Transactional Net Margin Method TNMM - Comparable - Comparability of the comparable relied upon by the TPO Turnover filter is an important criterion in choosing the comparables - Inappropriate computation of operating margins of comparables and that of the Assessee - Treating foreign exchange gain or loss and provision for bad debts as non-operating in nature and fringe benefit tax as part of operating cost Abnormal margins - Held that - Factors for abnormal profits have not been highlighted by the Assessee. In such circumstances it is not possible to accept the submission of the Assessee to exclude this company for the purpose of comparison. In favour of revenue Segmental Margin Unusually high profit of comparables - Held that - The growth rate of this company was double the industry average. Comparable company has made unusually high profit during the financial year 06-07. The operating revenues increased 63.03% which indicates that it was an extraordinary year for this company. The reasons given by the Assessee for excluding this company as comparable are found to be acceptable. In favour of assessee TPO has observed that market conditions are different for on-site and offshore work Held that - TPO fails to substantiated how market conditions differ. The fact is that in onsite development of computer software, the Assessee does not employ assets nor does the Assessee assume many risks which the offshore software developer assumes. Even the Assessee accepts that the per hour rate will be different in the case of offshore software development and onsite software development. R & D expense Revenue or capital expenditure Expenditure on website development Assessee contended that these expenses were for exploring the possibility of domestic market through pilot projects Held that - Unless the nature of the expenses is examined it is not possible to decide as to whether the same were revenue in nature and that it relates to existing business of an Assessee. The contention of the assessee that the claim should be examined u/s 35 also cannot be decided unless the correct description of the expense is considered. We therefore set aside the order of the AO Remand back to AO Disallowance of provision Provision for building registration charges - AO has disallowed the same on the ground that it is a provision Held that - The assessee submitted that the provision has been reversed and offered to tax during the AY 2009-10 and therefore same should not be taxed in the year under consideration. The limited plea of the Assessee before us is that if the sum is disallowed in this year the same should not be taxed in AY 09-10. We are of the view that it would be appropriate to direct the AO not to tax the same sum in AY 09-10 as the sum has already suffered tax by disallowance in the present AY In favour of assessee Disallowance of Travel expense - Expenditure cannot be claimed on the basis of provision and that the liability in respect of the expenditure has not accrued to the Assessee during the previous year Held that - Expenses which were claimed as a provision, the Assessee has the system of reversing expenses wherever the same was not incurred by the Assessee, in the succeeding Assessment years. AO examine as to whether the Assessee reverses excess provision when the actual expenses details are available and also see if the Assessee follows the method of accounting consistently Remand back to AO
Issues Involved:
1. Addition to total income by way of adjustment to the Arms' Length Price (ALP) for international transactions. 2. Exclusion of expenses incurred in foreign currency from export turnover for computing deduction under section 10A. 3. Disallowance of research and development expenses under section 37. 4. Disallowance of provision for building registration charges and provision towards foreign travel expenses. 5. Levy of interest under section 234B of the Act. Issue-wise Detailed Analysis: 1. Adjustment to ALP: The assessee, engaged in providing software research & development services to its AE, Versata International Inc., USA, contested the adjustment to ALP made by the TPO. The TPO had rejected 20 out of 28 comparables proposed by the assessee and added 18 new comparables, resulting in an adjusted arithmetic mean of 24.35%. This led to an addition of Rs. 6,20,48,644 to the assessee's income. The Tribunal addressed several specific objections: - Turnover Filter: The Tribunal agreed with the assessee that companies with a turnover exceeding Rs. 200 crores should be excluded from the list of comparables, citing the principle that size impacts comparability. Consequently, companies like Infosys Technologies Ltd., Wipro Ltd., and others were excluded. - Use of Information u/s 133(6): The Tribunal noted that the TPO relied on information obtained through notices u/s 133(6) without providing the assessee an opportunity to cross-examine the parties. The Tribunal emphasized that such information should be shared with the assessee, and cross-examination should be allowed if requested. - Improper Selection of Comparables: The Tribunal found that certain companies like Megasoft Ltd., Avani Cimcon Technologies Ltd., Celestial Labs Ltd., KALS Information Systems Ltd., and Accel Transmatic Ltd. were improperly included as comparables. For instance, Megasoft Ltd.'s segmental margin of 23.11% (software services segment) was deemed appropriate for comparison rather than the entity-level margin of 60.23%. - Rejection of Assessee's Comparables: The Tribunal upheld the TPO's rejection of certain comparables proposed by the assessee, such as Indium Software (India) Ltd. and E2E Infotech Ltd., based on valid grounds like functional dissimilarity and insufficient details. The Tribunal directed the AO to re-compute the ALP adjustment based on the revised set of comparables, resulting in an arithmetic mean of 17.508%. 2. Exclusion of Expenses from Export Turnover: The Tribunal addressed the exclusion of Rs. 1,78,58,079 incurred in foreign currency from export turnover, emphasizing that the assessee was engaged in software development, not rendering technical services. Additionally, Rs. 24,29,913 for telecommunication and insurance expenses were excluded from export turnover. The Tribunal reiterated that expenses reduced from export turnover should also be reduced from total turnover. 3. Disallowance of R&D Expenses: The assessee's claim of Rs. 1,76,98,160 as research and development expenses was disallowed by the AO, considering it as capital expenditure. The Tribunal noted that these expenses were for developing websites and should be considered as revenue expenditure. The Tribunal remanded the issue back to the AO for fresh consideration, emphasizing the need to examine the nature of expenses. 4. Provision for Building Registration Charges and Foreign Travel Expenses: - Building Registration Charges: The Tribunal directed the AO not to tax the provision for building registration charges in AY 09-10, as it was already disallowed in the current year. - Foreign Travel Expenses: The Tribunal directed the AO to re-examine the provision for foreign travel expenses in light of the Supreme Court's decision in Bharat Earth Movers v. CIT, ensuring the reasonableness and consistency of the provision. 5. Levy of Interest u/s 234B: The Tribunal noted that the levy of interest under section 234B is consequential and directed the AO to provide appropriate relief. Conclusion: The Tribunal partly allowed the assessee's appeal, directing the AO to re-compute the ALP adjustment and reconsider the disallowances based on the Tribunal's guidelines. The Tribunal emphasized the importance of providing the assessee with opportunities for cross-examination and ensuring accurate computation of expenses and adjustments.
|
