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2022 (12) TMI 200 - AT - Income TaxTP Adjustment - reimbursement of pocket expenses incurred by the Appellant on behalf of its AEs - TPO has included in cost base of the assessee and made an adjustment of 12 % thereof - As submitted by the assessee that it is operating margin from software development services 19.45%, even if the out-of-pocket expenses incurred by the appellant on behalf of its associated enterprise are also treated as part of the cost base of the appellant - margins so computed are also higher than the arithmetic mean of the margins of the comparable companies computed at 8.69% selected by the assessee - HELD THAT - To examine this alternative argument it is necessary to examine the order passed by the learned transfer pricing Officer u/s 92CA (3) of the act that whether the learned transfer pricing officer has objected to the any of the comparable companies selected by the assessee. On going through the transfer pricing officer s order, we do not find that learned transfer-pricing officer has disputed any of the comparable selected by the assessee. Therefore, the set of comparable selected by the assessee for computation of the arm s-length price deserves to be accepted as it has become final for the AY. On going through the same, we find that the computation of the margin considering the reimbursement as cost base is 19.45%, which is also accepted by the learned transfer-pricing officer. Therefore, there cannot be any dispute on the same. It is also fact that margin of the comparable companies selected by the assessee, which has become final, now is 8.69%. This argument was raised by assessee before the learned CIT-A however it was not at all considered. Therefore, we do not find any reason to sustain addition on account of adjustment of markup on pass through cost claimed by the assessee. Accordingly ground number 3 of the appeal of the assessee is allowed which deletes the transfer pricing adjustment - In view of this, ground treated as allowed. Loss incurred by eligible unit u/s 10 A set-off against the profits of other eligible units - HELD THAT - We find that identical issue has been decided by the honourable Bombay High Court in the case of the assessee 2011 (5) TMI 509 - ITAT, MUMBAI wherein the order of the coordinate bench dated 25th of may 2011 for assessment year 2006 2007 is upheld. While deciding the above issue the honourable High Court also considered its own decision in case of Hindustan Unilever Ltd 2010 (4) TMI 206 - BOMBAY HIGH COURT The issue also reached before the honourable Supreme Court in assessee s own case for assessment year 2005 06 known as CIT V Yokogawa India Limited 2016 (12) TMI 881 - SUPREME COURT wherein it was decided in favour of the assessee. The learned departmental representative could not controvert the above fact. AO is directed to allow the loss of Chennai unit accordingly. Computation of deduction u/s 10A - telecommunication expenses of eligible units should be reduced from the export turnover of the eligible unit - HELD THAT - As decided in 2014 (4) TMI 1224 - BOMBAY HIGH COURT assessee is in business of software development and the charges, which are claimed to have been incurred, are in relation to the business of software development within India. Therefore, there could not be said to be cost deductible from the export turnover for the purposes of Section 10 A of the act. Therefore, ground number 8 and 9 of the appeal of the assessee is allowed directing the learned assessing officer to not to reduce the above sum from the export turnover of the eligible units. Equal treatment is required to be given to the above expenditure in view of the decision of the honourable Supreme Court in case of CIT versus HCL technologies Ltd 2018 (5) TMI 357 - SUPREME COURT Accordingly, the learned assessing officer is directed to give the treatment of dental and cost i.e. telecommunication expenditure for the purpose of computation of export turnover as well as total turnover. Accordingly, ground number 8, 9, and 13 of the appeal are allowed. Consideration of the foreign exchange expenditure while computing deduction u/s 10 A - In view of the above decision of CIT versus HCL technologies Ltd. 2018 (5) TMI 357 - SUPREME COURT we direct the learned assessing officer to give the treatment to the expenditure while computing export turnover and the total turnover of the eligible unit. Unexplained expenditure on the basis of unreconciled AIR statement - HELD THAT - Assessee has denied any such transactions entered into with the bank. Assessee has also written to the bank and subsequent reminders also. In view of this we find that there is no infirmity in the direction of the learned CIT A to give opportunity to the assessee as well as direction to the learned assessing officer to verify the claim of the assessee from external sources. Naturally, if the assessee has not entered into such transaction, the learned AO should have examined the above claim of the assessee of consistent denial through external sources. The assessee has also given the name of employee whose credit card transactions are found with the bank. Further, with respect to another party also assessee denied having entered into any such transactions. In view of this, we direct the learned assessing officer to carry out detailed examination of the above transactions whether they have been entered into by the assessee or not. If it is found that assessee has not entered into such transactions, the additions deserve to be deleted. In the result ground of the appeal of the assessee is allowed.
Issues Involved:
1. Transfer pricing adjustment for reimbursement of expenses. 2. Computation of deduction under section 10A. 3. Reduction of telecommunication expenses from export turnover. 4. Reduction of foreign exchange expenses from export turnover. 5. Addition based on unreconciled AIR statement. Detailed Analysis: 1. Transfer Pricing Adjustment for Reimbursement of Expenses: The primary issue was whether the reimbursement of expenses amounting to ?170,82,85,067/- incurred by the assessee on behalf of its Associated Enterprises (AEs) should be included in the cost base for markup calculation. The assessee argued that these were out-of-pocket expenses and should not attract a markup. The Transfer Pricing Officer (TPO) included these expenses in the cost base and applied a 12% markup, resulting in an adjustment of ?20,49,93,848/-. The Tribunal noted that the assessee had consistently treated these expenses as pass-through costs without markup in previous years, which was accepted by the Revenue. Furthermore, even if these expenses were included in the cost base, the assessee's operating margin of 19.45% exceeded the comparable companies' margin of 8.69%. Therefore, the Tribunal deleted the transfer pricing adjustment, allowing grounds 1 to 5 in favor of the assessee. 2. Computation of Deduction Under Section 10A: The issue involved whether the loss of ?6,45,94,565/- from the Chennai unit, which was eligible for deduction under section 10A, should be set off against the profits of other eligible units. The Tribunal referred to the Supreme Court's decision in the assessee's own case, which held that such losses should not be set off against the profits of other eligible units. Consequently, grounds 6 and 7 were allowed, directing the Assessing Officer to allow the loss of the Chennai unit accordingly. 3. Reduction of Telecommunication Expenses from Export Turnover: The assessee contested the reduction of telecommunication expenses amounting to ?1,46,12,448/- from the export turnover of eligible units. The Tribunal referred to the Bombay High Court's decision in the assessee's own case, which held that such expenses should not be deducted from the export turnover. Additionally, in line with the Supreme Court's decision in the case of CIT vs. HCL Technologies Ltd., the Tribunal directed that these expenses should also be excluded from the total turnover. Thus, grounds 8, 9, and 13 were allowed. 4. Reduction of Foreign Exchange Expenses from Export Turnover: The assessee argued against the reduction of foreign exchange expenses amounting to ?97,70,36,684/- from the export turnover. The Tribunal, following the Supreme Court's decision in CIT vs. HCL Technologies Ltd., directed that these expenses should also be excluded from the total turnover. Consequently, grounds 10, 11, and 14 were allowed. 5. Addition Based on Unreconciled AIR Statement: The Assessing Officer made an addition of ?24,46,601/- based on unreconciled transactions in the AIR statement. The assessee denied entering these transactions and provided evidence, including correspondence with the bank. The Tribunal upheld the CIT(A)'s direction to the Assessing Officer to verify these transactions from external sources and provide the assessee an opportunity to clarify. The Tribunal directed a detailed examination of these transactions, allowing ground 12 with specific directions. Conclusion: The Tribunal allowed the appeal in favor of the assessee on all grounds, directing appropriate adjustments and verifications as detailed above. The order was pronounced in the open court on 12.05.2022.
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