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2016 (2) TMI 571 - ITAT DELHITransfer pricing adjustment - calculation of the assessee’s PLI - Whether projected profit rate of subsequent years can also be considered ? - Held that:- Essence of the entire transfer pricing provisions is to compare the actual price/profit realized/earned by the assessee from an international transaction with the price/profit realized/earned from comparable uncontrolled transactions. It is totally impermissible to substitute actual profit earned by the assessee from an international transaction with any other profit base, either by considering the actual profits for the earlier years as well or by taking into account the projected profits of the subsequent years, for the purposes of determining the ALP of an international transaction. Moreover, the figures taken for subsequent three years are mere projections. The correctness of these projections is mystery for us. We, therefore, jettison the view point of the assessee in calculating its PLI by considering figures for the current year and also projected figures for subsequent three years. The impugned order is, therefore, upheld on this score. Foreign Exchange Fluctuation - Held that:- . On going through all the Agreements entered into by the assessee with its AEs, to which our attention was drawn by the ld. AR, it is manifest that these have been made effective from 1.4.2007, being the current year alone. Under such circumstances, there can be no ground for arguing that the Agreements were entered in the preceding year and the remuneration as realized in the current year on the basis of the foreign exchange rates as applicable, adversely affected its profit margin for the current year, thereby requiring an upward revision in PLI of the assessee. Once the Agreements have been entered into with effect from the first day of the previous year, there can be no scope for comparing the rate of foreign exchange during the year with that of the preceding year or any other earlier year, so as to claim any adjustment. It is, therefore, held that neither the assessee can claim any adjustment on account of foreign exchange fluctuation rate in its profit nor such an adjustment, on the facts and circumstances of the instant case, is warranted in the profit margin of comparables. Revenue sharing formula - Held that:- The assessee was not right in working out its PLI by also considering projected profits for the three subsequent years; no deduction on account of foreign exchange fluctuations can be allowed in the facts and circumstances of the instant case; and the revenue sharing formula as put forth by the assessee as relevant under the CUP method for determining the ALP, is not correct. Consequently, it is held that the calculation of PLI of the assessee done by the TPO under TNMM is correct, which does not warrant any interference. We, therefore, countenance the same. The assessee fails on this issue. Selection of comprables - Held that:- As assessee company, which is engaged in providing software development services to its group concerns companies with different scope of work to be rejected as comparable. Deduction u/s 10A- whether any TP adjustment is permissible? - Held that:- Eligibility of the assessee to deduction u/s 10A of the Act does not operate as a bar for determining the ALP of international transaction undertaken by it and further the enhancement of income due to such transfer pricing addition cannot be considered for allowing the benefit of deduction under this section. Thus we set aside the impugned order and remit the matter to the file of AO/TPO for a fresh determination of the ALP of the international transaction of `Software development services’ in consonance with our decision on various aspects given above. Needless to say, the assessee will be allowed a reasonable opportunity of hearing in such fresh proceedings. Short deduction u/s 10A in respect of Noida unit, which is eligible for tax holiday u/s 10A - Held that:- A sum of ₹ 1,22,342/- has been apportioned by the AO himself as relatable to the eligible unit D-4, Noida. This apportionment has been done of sum of two items, namely, ₹ 1,48,180/- which was claimed as deduction by the assessee in earlier years and a sum of ₹ 1,93,018/- which is the amount of bank charges refunded during the year. These two items were claimed as deduction in the earlier years from the eligible income and these have turned out to be excessive to this extent, either because of the excess provision created in the earlier year which has been now reversed or the excess bank charges claimed which have been refunded in the instant year. Since these expenses at the time of their incurring in the earlier years went on to reduce the eligible income of the Noida unit, in our considered opinion, when the excess amount is reversed in the current year, the same should also be made eligible for the benefit of deduction u/s 10A of the Act. We, therefore, overturn the assessment order on this point, and direct the inclusion of a sum of ₹ 1,22,342/- in the eligible profit for the purposes of deduction. Disallowance of deduction u/s 10A being the amount of depreciation disallowed - Held that:- The opening written down value to the extent of ₹ 2,55,500/- was excessive and ought to have been reduced. Once this amount is reduced, the assessee’s claim for depreciation on such amount to the tune of ₹ 1,53,300/- also becomes disallowable. We, therefore, approve the action of the AO in making addition for a sum of ₹ 1,53,300/-. However, the disallowance of depreciation to this extent will correspondingly enhance the eligible profits of Noida unit and the resultant amount of deduction u/s 10A to this extent. Thus, the disallowance so made would be set off with the increased claim of deduction u/s 10A resulting into no ultimate addition on this score. As the AO has simply made disallowance on account of depreciation without allowing benefit of section 10A on this disallowance, we hold that the assessee should also be allowed benefit u/s 10A of the Act to this extent. This ground is allowed.
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