2013 (1) TMI 672 - AT - Income Tax

Transfer Pricing – Computation of Arm's Length Price - International transaction – Arm’s Length Price - Assessee provided software research & development support services to its Associated Enterprise - Remunerated on a 'cost plus' basis - assessee adopted the Transactional Net Margin Method TNMM - Comparable - Comparability of the comparable relied upon by the TPO – Turnover filter is an important criterion in choosing the comparables - Inappropriate computation of operating margins of comparables and that of the Assessee - Treating foreign exchange gain or loss and provision for bad debts as non-operating in nature and fringe benefit tax as part of operating cost

Abnormal margins - Held that:- Factors for abnormal profits have not been highlighted by the Assessee. In such circumstances it is not possible to accept the submission of the Assessee to exclude this company for the purpose of comparison. In favour of revenue

Segmental Margin – Unusually high profit of comparables - Held that:- The growth rate of this company was double the industry average. Comparable company has made unusually high profit during the financial year 06-07. The operating revenues increased 63.03% which indicates that it was an extraordinary year for this company. The reasons given by the Assessee for excluding this company as comparable are found to be acceptable. In favour of assessee

TPO has observed that "market conditions" are different for on-site and offshore work – Held that:- TPO fails to substantiated how market conditions differ. The fact is that in onsite development of computer software, the Assessee does not employ assets nor does the Assessee assume many risks which the offshore software developer assumes. Even the Assessee accepts that the per hour rate will be different in the case of offshore software development and onsite software development.

R & D expense – Revenue or capital expenditure – Expenditure on website development – Assessee contended that these expenses were for exploring the possibility of domestic market through pilot projects – Held that:- Unless the nature of the expenses is examined it is not possible to decide as to whether the same were revenue in nature and that it relates to existing business of an Assessee. The contention of the assessee that the claim should be examined u/s 35 also cannot be decided unless the correct description of the expense is considered. We therefore set aside the order of the AO – Remand back to AO

Disallowance of provision – Provision for building registration charges - AO has disallowed the same on the ground that it is a provision – Held that:- The assessee submitted that the provision has been reversed and offered to tax during the AY 2009-10 and therefore same should not be taxed in the year under consideration. The limited plea of the Assessee before us is that if the sum is disallowed in this year the same should not be taxed in AY 09-10. We are of the view that it would be appropriate to direct the AO not to tax the same sum in AY 09-10 as the sum has already suffered tax by disallowance in the present AY – In favour of assessee

Disallowance of Travel expense - Expenditure cannot be claimed on the basis of provision and that the liability in respect of the expenditure has not accrued to the Assessee during the previous year – Held that:- Expenses which were claimed as a provision, the Assessee has the system of reversing expenses wherever the same was not incurred by the Assessee, in the succeeding Assessment years. AO examine as to whether the Assessee reverses excess provision when the actual expenses details are available and also see if the Assessee follows the method of accounting consistently – Remand back to AO