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2016 (3) TMI 111 - AT - Income TaxTransfer pricing adjustment - adjustment made on account of sharing of software expenses with the AE - Held that - Provided that data relating to a period not being more than two years prior to the current year may also be considered if such data reveals facts which could have an influence on the determination of transfer prices in relation to the transactions being compared Provided further that the first proviso shall not apply while analysing the comparability of an uncontrolled transaction with an international transaction or a specified domestic transaction, entered into on or after the 1st day of April, 2014 . The assessee is a research organization engaged in undertaking research and development in the area of wireless broadband technology. This component was provided to the assessee on a sporadic basis for undertaking research work. The component purchased was purely provided to the assessee for non-commercial use and thus the market price of the same cannot be as ascertained. The cost certificates provided by the AEs certify that the said equipment was sold on a cost to cost basis. As regards the purchase of software and subscription fee the software was purchased by the AE for the entire group i.e., Alcatel Lucent group. These softwares were purchased from third parties based on combined global requirement of the group. It is a common practice that when there is a bulk purchase or for multiple number of users the negotiated rates will be cheaper than the isolated purchases. The cost of this software was shared by the Indian entity. The assessee had given the details of comparison of the software purchased. The TPO in her remand report has also not raised any objection to the submission of the assessee except stating that the claim of the assessee appears to be verifiable. In view of this, we see no reason why adjustment should be made on account of sharing of software expenses with the AE. The TPO has also not given any reason to treat the subscription value as nil. Therefore, in the absence of any reason to hold otherwise, the subscription paid should not be disallowed. We accordingly, do not find any infirmity in the findings of the ld. CIT(A) while directing the AO to delete the addition made under these heads - Decided against revenue
Issues Involved:
1. Disallowance of subscription fees of Rs. 52,718/- 2. Acceptance of Comparable Uncontrolled Price (CUP) evidence for the purchase of equipment 3. Characteristics of similarity in goods/services under the CUP method Issue-wise Detailed Analysis: 1. Disallowance of Subscription Fees of Rs. 52,718/- The first issue pertains to whether the CIT(A) erred in deleting the disallowance of Rs. 52,718/- for subscription fees. The assessee argued that the payment for subscription charges to Alcatel-Lucent, France, was a cost-to-cost recharge without any markup, thus justifying the use of the CUP method to confirm the arm's length nature of the transaction. The CIT(A) found no reason for adjustment as the TPO did not raise any objections to the assessee's claim, except to state that it appeared verifiable. Consequently, the subscription fee should not be disallowed. 2. Acceptance of CUP Evidence for the Purchase of Equipment The second issue involves the acceptance of CUP evidence by the CIT(A) for the purchase of equipment. The assessee purchased base station equipment, modems, CPE cards, and cables from its AEs, which were manufactured in-house by the AEs and not purchased from third parties. The assessee provided cost certificates from its AEs, certifying that the equipment was supplied at cost without any markup. The CIT(A) accepted these certificates and the customs valuation certificates, which stated that the value of the imported equipment was declared truthfully. The TPO's approach of using internet search data from a different financial year (FY 2010-11) to determine the arm's length price for transactions in FY 2006-07 was found to be flawed. The CIT(A) noted that the provisions of Rule 10B(4) of the IT Rules require data from the same financial year or up to two years prior. Therefore, the TPO's method was incorrect, and the CUP analysis should be rejected. 3. Characteristics of Similarity in Goods/Services Under the CUP Method The third issue addresses whether the CIT(A) ignored the strict characteristics of similarity required under the CUP method. The CIT(A) found that the assessee had provided sufficient evidence to demonstrate that the equipment was purchased at cost. The CIT(A) also noted that the TPO did not share the source of the prices identified through the internet search, depriving the assessee of the opportunity to verify the information. The CIT(A) further highlighted that the assessee is a research organization engaged in developing wireless broadband technology, and the equipment was provided for non-commercial use. The cost certificates confirmed that the equipment was sold on a cost-to-cost basis, satisfying the arm's length criterion. Conclusion: The CIT(A) directed the AO/TPO to delete the disallowance of Rs. 52,718/- for subscription fees and accepted the CUP evidence for the purchase of equipment. The CIT(A) found no reason to treat the subscription value as nil and concluded that the transactions were at arm's length. The appeal of the Revenue was dismissed. Order Pronounced: The order was pronounced in the open court on 19.01.2016.
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