2017 (11) TMI 644 - HC - Income Tax

Determination under Section 92CA - comparable selection - Held that - TPO has taken the comparables with the financial data for the year 2002-03 instead of for the financial year 2003-04. He has not given any reason for not taking the contemporary data as per Rule 10B(4) of the Income Tax Rules, 1962. There are various judgments in support of taking the current year data. Allocations of expenses - Held that - AO did not rejected the books of accounts of the appellant. He has not given any finding regarding the reliability of the books of accounts maintained by the appellant. There is no reason for the AO to make an addition on an estimation basis when the books of accounts of the appellant were not rejected. The AO has not analyzed the reason for loss suffered by the appellant. Therefore, in view of the submission of the appellant, it is clear that the appellant is incurring losses on account of business reasons and hence the arbitrarily estimated GP addition is not sustainable. Appellant gets relief under this ground of appeal.

Summary

Issues:
1. Allocation key for expenses towards manpower employed.
2. Addition of ?12,04,270 based on expense allocations.

Issue 1: Allocation key for expenses towards manpower employed
The case involved an appeal under Section 260A of the Income Tax Act, 1961, concerning the allocation key for expenses towards manpower employed by a software development firm engaged in international transactions. The Transfer Pricing Officer (TPO) had taken into account comparables of 24 companies and suggested adjustments to the allocation key without rejecting the assessee's accounts. The Commissioner of Income Tax (Appeals) (CIT(A)) found fault with the comparables used by the TPO as many were from a previous year. The CIT(A) reasoned that the allocation key based on manpower employed was acceptable for expenses allocation, while rejecting the alternative key of man-hours invested. The Court noted that the exercise was factual, and no substantial question of law arose, ultimately dismissing the appeal.

Issue 2: Addition of ?12,04,270 based on expense allocations
The second issue revolved around the addition of ?12,04,270 based on findings related to expense allocations. The excess expenses disallowed by the Assessing Officer (AO) led to the profit attributed on that score. The CIT(A) accepted the assessee's appeal, stating that since the AO did not reject the books of accounts and did not provide reasons for making an estimation-based addition, the arbitrarily estimated GP addition was not sustainable. The CIT(A) concluded that the appellant was incurring losses due to business reasons. The Income Tax Appellate Tribunal (ITAT) upheld the CIT(A)'s findings, leading to the dismissal of the appeal by the Court, as no substantial question of law was found to arise.

In conclusion, the judgment delved into the intricacies of expense allocations and the acceptance of the allocation key based on manpower employed for a software development firm. It also highlighted the importance of providing valid reasons for making additions based on estimations and the need for a factual analysis in such cases.