2010 (8) TMI 676 - AT - Income Tax

Arms Length Price (ALP) - Reference to TPO - TNMM method - 100% EOU - Deduction u/s 10A - The law provided that whenever a business is carried on between a resident and a non-resident and it appears to the Income-tax Officer that, owing close connection between them, the course of business is so arranged that the business transaction between them produce to the resident either no profits or less than the ordinary profits, the Income-tax Officer shall determine the amount of profits, which reasonably be deemed to have been derived therefrom and adopt such amount in the total income of the resident - it is necessary to understand that even without a specific provision like section 92, it is always possible for the assessing authority to examine every vital and relevant aspect of international transactions between related parties in the course of assessment proceedings - the operating margin of the assessee-company at 8.80 per cent - The arithmetic mean will be worked out on the basis of the combined list of both TPO/Assessing Officer and the assessee-company, comprising 12 comparables - The assessing authority will further find out the operating profits at assessee’s rate of 13.80 per cent and the operating profits at the arithmetic mean rate of 20.57 per cent on the basis of the revised revenue and cost computed in paragraph above - This amount will be corresponding to the differential operating margin of 6.77 per cent

Regarding disallowance of Rs. 1.05 crores - whether the liability was created for the purpose of carrying on the business in the normal course or for the purpose of establishing the business itself - While dealing with the transfer pricing issue, particularly while re-computing the profit margin attributable to assessee’s business, we have held that the payment is an extraordinary item and has to be excluded from the expenditure side to work out the operating profit of the assessee - It is a different matter that the assessee has not acquired any tangible asset or any enduring benefit - Decided against the assessee

Regarding lease line/high speed link charges - Since the total turnover is only the aggregate of the domestic and export turnover, it naturally follows that items of expense incurred in foreign exchange and to the extent attributable to the delivery of computer software out of India which have been excluded from ‘export turnover’ cannot be included in the total turnover - in the case of ITO v. SAK Soft Ltd. [2009] 313 (AT) 3536 - Held that: the scheme of sections 80HHC and 80HHE has to be considered analogous to the scheme of section 10B and, therefore, the adjustment made in the export turnover should be reflected in the total turnover as well - Decided in the favour of assessee