2012 (11) TMI 988 - AT - Income Tax

Determination of Arm s Length Price - Transaction with Associate Enterprises - In the present case Assessee has adopted Transactional Net Margin Method as most appropriate method for determining its ALP of international transaction. It had used six comparable companies for bench marking its ALP on international transactions. However, out of six, the TPO rejected three comparables on the ground that their related party transactions were either more than 15% or turnover was more than Rs. 1,500 crore - TPO introduced his set of fresh nine comparables to bench mark the ALP of international transaction of the assessee. The arithmetic mean of the PLI of the 12 comparable companies (three of assessee and nine of TPO) worked out to 5.34%. Held that - Value of international transaction of the assessee falls within safe harbour of /- 5% of the ALP determined by the TPO. Accordingly, on this preliminary ground alone, the adjustment of Rs. 3,70,87,177 made towards ALP by the Assessing Officer is uncalled for and the same is hereby deleted - grounds raised by assessee are allowed. The contention of the revenue that adjustment arising our of ALP has to be made on the entire turnover instead of restricting the same to the international transaction with the A.E - Decided in favor of assessee. Disallowance of Expenditure on Computer Software - held that - insofar as the directions on account of AMC for maintenance of software given by the DRP is concerned, the same appears to be very reasonable and no interference is called for - However, with regard to the other expenditure, the Assessing Officer is directed to verify this contention of the assessee in the light of the decision of the Special Bench of the Tribunal, Delhi, rendered in Amway India Enterprises v. DCIT, 2008 (2) TMI 454 - ITAT DELHI - Thus, this ground is partly allowed for statistical purposes. Disallowance of Depreciation on laptop purchased - held that - Assessee could not produce evidence for purchase of laptop - no merit in the contention of the assessee and the same is dismissed - Thus, this ground is dismissed.

Summary

Issues Involved:
1. Adjustment of Arm's Length Price (ALP) for international transactions.
2. Disallowance of expenditure on computer software.
3. Disallowance of depreciation on laptop purchased.

Issue-wise Detailed Analysis:

1. Adjustment of Arm's Length Price (ALP) for International Transactions:
The assessee challenged the addition of Rs. 3,70,87,177 towards ALP for transactions with Associate Enterprises (A.E.) amounting to Rs. 49,81,00,499. The assessee, a partnership firm engaged in the manufacturing and sale of cut and polished diamonds, referred the matter to the Transfer Pricing Officer (TPO) under section 92CA(1) due to international transactions exceeding Rs. 15 crores. The TPO rejected three of the six comparable companies used by the assessee and introduced nine new comparables, resulting in an arithmetic mean PLI of 5.34%.

The assessee argued that this adjustment should fall within the safe harbour of +/- 5% as per the proviso to section 92C(2). The Tribunal examined whether the adjustment in ALP falls within this safe harbour. The Tribunal found that the assessee's ALP indeed falls within the +/- 5% range of the ALP determined by the TPO. The Tribunal rejected the Departmental Representative's contention that the adjustment should be made on the entire turnover, emphasizing that ALP adjustments should be restricted to international transactions with A.E.s only. Consequently, the Tribunal deleted the adjustment of Rs. 3,70,87,177, allowing grounds no.1 to 6 raised by the assessee.

2. Disallowance of Expenditure on Computer Software:
The assessee challenged the disallowance of expenditure on computer software. The Dispute Resolution Panel (DRP) directed the Assessing Officer (AO) to verify whether the payments were for maintenance (revenue expenditure) or development/upgradation (capital expenditure) of software. The Tribunal upheld the DRP's direction to verify the nature of the expenses. The Tribunal found the directions regarding AMC for maintenance reasonable but directed the AO to verify other expenditures in line with the decision in Amway India Enterprises v. DCIT. This ground was partly allowed for statistical purposes.

3. Disallowance of Depreciation on Laptop Purchased:
The assessee challenged the disallowance of depreciation on a laptop worth Rs. 98,696 purchased through a credit card. The DRP rejected the objection due to the lack of supporting evidence like purchase invoices and warranty details. The Tribunal found no merit in the assessee's contention as no new evidence was provided. Therefore, the Tribunal dismissed this ground.

Conclusion:
The Tribunal partly allowed the assessee's appeal for statistical purposes. The adjustment of Rs. 3,70,87,177 towards ALP was deleted, the software expenditure issue was sent back for verification, and the disallowance of depreciation on the laptop was upheld.