2011 (1) TMI 1245 - AT - Income Tax

Transfer pricing adjustment - Pre-operative expenses - Held that - The assessee has incurred expenditure from 1.1.2004 to 14.3.2004 i.e. after entering into agreement with AE on 1.1.2004 and this amount is liable for mark up at 10% because no customer would pay mark up before entering into agreement - The expenditure incurred after agreement only has to be mark up - The Revenue has not brought any material on record to show that the assessee has incurred any expenditure before entering into service agreement on the impugned issue - Decided against Revenue.

Summary

Issues:
1. Allowability of expenditure based on agreement and evidence of services rendered.
2. Adjustment of expenses incurred during a specific period for mark-up calculation.

Issue 1: Allowability of expenditure based on agreement and evidence of services rendered:

The case involved an appeal by the Revenue against the CIT(A)'s order concerning the assessment year 2004-05. The assessee, a subsidiary of a US company, engaged in software development services. The Transfer Pricing Officer (TPO) determined that expenses incurred prior to a specific agreement with the associated enterprise (AE) were to be reimbursed by the AE with a mark-up. The TPO found that expenses from July 2003 to March 2004 were for R&D work before commercial operations, requiring reimbursement. The CIT(A) directed mark-up adjustment only for expenses incurred after the agreement, i.e., from January 1, 2004, to March 14, 2004. The Revenue contended that the TPO's Arm's Length Price should be considered, while the assessee argued that only post-agreement expenses were eligible for mark-up. The authorized representative highlighted evidence supporting the commencement of services post-agreement. The CIT(A)'s decision was upheld as the Revenue failed to prove any pre-agreement expenditure by the assessee.

Issue 2: Adjustment of expenses incurred during a specific period for mark-up calculation:

The TPO computed expenses incurred by the assessee from July 2003 to March 2004, requiring reimbursement by the AE with a mark-up. However, the CIT(A) directed adjustment only for expenses from January 1, 2004, to March 14, 2004, as eligible for mark-up. The authorized representative argued that the transfer price fell within the 5% range of the Arm's Length Price, negating the need for any adjustment. Citing relevant judgments, it was contended that the actual transfer price complied with the arm's length principle. The CIT(A)'s decision to adjust only post-agreement expenses for mark-up was upheld, and the Revenue's appeal was dismissed.

This detailed analysis of the judgment covers the issues of allowability of expenditure based on agreements and evidence of services rendered, as well as the adjustment of expenses incurred during a specific period for mark-up calculation, providing a comprehensive understanding of the legal nuances involved in the case.