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TMI Blog2012 (11) TMI 988X X X X Extracts X X X X X X X X Extracts X X X X ..... ee 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. - IT APPEAL NO. 7876 (MUM.) OF 2011 - - - Dated:- 7-11-2012 - B. RAMAKOTAIAH AND AMIT SHUKLA, JJ. ORDER Per Bench - The present appeal pr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... PO rejected three comparables on the ground that their related party transactions were either more than 15% or turnover was more than Rs. 1,500 crores. Thereafter, the 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%. 5. Before the DRP, the assessee had made detail objections which were rejected and the order of the TPO for adopting the comparable companies and the margin of 5.34% so arrived at were upheld. 6. Before us, the learned Counsel for the assessee, by way of preliminary ground, submitted that even if arithmetic means of operating profit margin of 12 comparable companies arrived at 5.34% is applied on assessee's international transaction, then the same falls within the safe harbour of +/- 5% in view of the proviso to section 92C(2). His furtehr objection was that the adjustment arising out of ALP should not have been made on the entire turnover of the assessee, instead it should have been restricted to international transactions with the A.E., because sales to non-A.E. comprised of 89% ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h A.E. has to be computed as per the provisions of the Act and the law does not required computing of ALP of the transaction with independent parties because there is an inherent presumption that the transaction with independent parties should always be at ALP. So, the transactions with the independent parties are at arm's length and the margin of the assessee's company is down because of the transaction with the A.E. Therefore, margin from the independent transaction and international transaction cannot be computed separately unless the margin is applied on the entity level. He submitted that the adjustment made by the TPO is justified. On the basis of his argument, he also gave his computation of ALP in the following manner:- Figures in Rs. Total A.E Transaction Non-A.E. Transaction Sales of the assessee since non-A.E. transactions are at arm's length hence apply the arm's length margin i.e., 5.34% to arrive at the cost 4,64,90,63,687 A 49,81,00,499 4,15,09,63,188 Cost 4,44,85,95,846 B 50,80,57,410 3,94,05,38,436 Apply the arm's length margin on the cost used ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... there is a need to ensure that the taxpayers are not put to avoidable hardship in the implementation of these regulations." In the background, the Board has decided the following: "(i) The Assessing Officer shall not make any adjustment to the arm's length price determined by the taxpayer, if such price is up to 5% less or up to 5% more than the price determined by the Assessing Officer. In such cases the price declared by the taxpayer may be accepted." This concept was given statutory form in the Finance Act, 2002, by providing the proviso to section 92C(2). Thus, the statute itself recognises that if the variation between ALP so determined and the price at which international transaction has been undertaken variation of arithmetic mean should be within tolerable range of +/- 5%. 11. The application of +/- 5% to the ALP can be demonstrated by way of following illustration:- Non A.Es Total Operating expenditure attributable to A.E. - sales Rs. 100 Net profit of assessee from A.E. - sales Rs. 4.51 Operating profit % of the assessee 4.51% A.E. sales Rs. 104.51 If AE PLI as determined by th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ties are always at arm's length price, however, it is with regard to related parties i.e., A.Es, only one has to see whether such a transaction is at arm's length. The profit margin from the international transaction with the A.E. has to be seen in relation to the uncontrolled transaction with the independent parties. What is to be compared is the international transactions of the assessee with its related parties and not for its entire transaction with non-related parties also. Therefore, ALP has to be seen only with regard to international transaction with A.Es and not on the entire turnover/sales. 14. Thus, in our conclusion, we hold that in the present case, the 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. Thus, grounds no.1 to 6, raised by the assessee are allowed. 15. In ground no.7, the assessee has challenged disallowance of expenditure on computer software. 16. The DRP, on assessee's objection, has observed and held as under ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er software and the payments made for that purpose were shown as advances given. The payments to Nirav and Gunvantrai Kaku were also monthly charges paid for maintenance of software. The other charges were also in the nature of software maintenance and were not for the development of any new software. The expenses have to be looked at in line with the general distinction between capital and revenue to decide whether the expenses were towards creation of new software or towards regular maintenance of existing software. The Assessing Officer has merely treated the entire sum as being in the nature of expense incurred on creating software. 19. On the other hand, the learned Departmental Representative relied upon the DRP's directions. 20. After having carefully considered the rival contentions of the parties, and the findings of the DRP, we find 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X
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