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2016 (8) TMI 821 - AT - Income TaxTransfer pricing adjustment - mark up of managerial services post incorporation - mark-up on reimbursement of expenses - Held that - The expenditure incurred by the assessee when the A.E. of the assessee was not in existence cannot in our view be taken as a factor for determining the A.L.P. of an international transaction that took place between the assessee and its A.E. post incorporation. Just because post incorporation NDTV Network Plc UK has reimbursed the employee cost incurred by the assessee prior to incorporation to the assessee it does not lead us to a conclusion that on other managerial services provided by the assessee to the A.E. no mark up should be charged while reimbursing the expenditure. The assessee in this case has itself worked out 12.29% as the ALP margin in its Transfer Pricing Report. It is not controverted by the Ld.Counsel for the assessee that in the subsequent Assessment Years the assessee itself has admitted a mark up on reimbursement of expenditure on these management services. In view of the above discussion we are of the considered opinion that the TPO is right in making a mark up of managerial services post incorporation of the A.E. Thus we hold that (a) There can be no mark-up on reimbursement of expenses incurred by the assessee prior to incorporation of NDTV Network Plc UK. (b) The action of the A.O. in charging a mark-up on reimbursement of expenses incurred by the assessee on management services after incorporation is upheld. Though the Ld.Counsel for the assessee raised arguments on percentage of mark-up in view of the percentage of mark-up adopted by the assessee in the subsequent years we do not see any reason to interfere with the rate of mark-up adopted by the Ld.Transfer Pricing Officer. - Decided partly in favour of assessee Expenses incurred on upgradation of accounting software - Held that - CIT(A) has allowed this expenditure as revenue in nature. While doing so he observed that the assessee itself has characterised certain software purchase on its own as capital assets. He observed that certain software needs regular upgradation or change as per the requirement of fast changing broadcasting industry and that his predecessor has allowed similar expenditure on upgradation of software as revenue in nature. We find no infirmity in this finding of the Ld.CIT(A). - Decided against revenue
Issues Involved:
1. Transfer Pricing Adjustment 2. Disallowance of ESOP Expenditure 3. Allowability of Software Expenditure Detailed Analysis: 1. Transfer Pricing Adjustment: The assessee, a company engaged in the business of Television and News Broadcasting, filed its return declaring a loss, but the Assessing Officer (A.O.) made a transfer pricing adjustment of ?94,16,785/- under Section 92CA(3) of the Income Tax Act. The First Appellate Authority granted part relief, leading to cross-appeals by both the assessee and the Revenue. The assessee argued that the CIT(A)/TPO erred in making an addition under Chapter X of the Act and in upholding that the nature of services rendered to its Associated Enterprise (AE) were 'Management services' and not 'Shareholder services.' The assessee contended that the TPO was unjustified in applying a markup of 18.18% to the costs incurred on the alleged provision of management services, and that the TPO should have used data from multiple years for benchmarking. The Tribunal held that the expenditure incurred prior to the incorporation of the UK subsidiary could be classified as shareholder activity, which does not justify a markup. However, the expenditure incurred after incorporation as management services warranted a markup. The Tribunal upheld the TPO's decision to apply a markup on the management services but found no reason to interfere with the rate of markup adopted by the TPO. 2. Disallowance of ESOP Expenditure: The A.O. disallowed the claim of ESOP expenditure of ?21,28,41,993/-. The assessee argued that this expenditure should be allowed based on the decision in its own case for A.Y. 2008-09, where the A.O. applied the propositions laid down by the Special Bench of the ITAT in the case of Biocon Ltd. The Tribunal noted that the issue of ESOP expenditure was pending before the High Court in the assessee's own case and remanded the issue back to the A.O. for fresh adjudication in line with the Special Bench's decision in Biocon Ltd. 3. Allowability of Software Expenditure: The A.O. disallowed expenses incurred on the upgradation of accounting software, treating it as capital expenditure. The CIT(A) allowed this expenditure as revenue in nature, observing that certain software needs regular upgradation due to the fast-changing broadcasting industry. The Tribunal found no infirmity in the CIT(A)’s finding and upheld the decision to treat the software expenditure as revenue in nature. Conclusion: - The Tribunal partially allowed the assessee's appeal on the transfer pricing adjustment, holding that no markup was required on pre-incorporation expenses but upheld the markup on post-incorporation management services. - The issue of ESOP expenditure was remanded to the A.O. for fresh adjudication in line with the Special Bench's decision in Biocon Ltd. - The Tribunal upheld the CIT(A)’s decision to treat software expenditure as revenue in nature, dismissing the Revenue's appeal on this issue. Order Pronounced: The assessee's appeal was allowed in part, and the Revenue's appeal was dismissed.
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