TMI Blog2013 (4) TMI 700X X X X Extracts X X X X X X X X Extracts X X X X ..... f software. It is an admitted fact that the assessee is in the business of export of design, development and testing of hardware and software and it was also maintaining the smart card and bio-metric products developed by the third parties. Therefore, it must have incurred a substantial amount of expenditure towards telecommunication and internet charges. The Commissioner of Income-tax (Appeals) has made fair estimation of the same. Since the Revenue has not been able to produce any cogent evidence to controvert the findings of the Commissioner of Income-tax (Appeals), we do not deem it appropriate to interfere with the same. The Revenue has also assailed the order of the Commissioner of Income-tax (Appeals) with regard to exclusion of the telecommunication charges from the export turnover as well as total turnover. We find that the Special Bench of the Tribunal in the case of Sak Soft Ltd. [2009 (3) TMI 243 - ITAT MADRAS-D] has held that while applying the formula prescribed under section 10B(4) of the Act, where the freight, telecommunication charges or insurance attributable to the delivery of articles or things or computer software outside India, the expenses that are to be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... been filed by the Revenue impugning the order of the Commissioner of Income-tax (Appeals)-V, Chennai, dated January 24, 2011, passed under section 143(3) read with section 92C(4) of the Income-tax Act, 1961. The assessee has filed cross-objection in support of the order of the Commissioner of Income-tax (Appeals). However, the cross-objection has been filed with the delay of 550 days. An affidavit in support of application for condonation of delay in filing of cross-objection citing reasons for the delay has also been filed. We have perused the grounds for delay in filing the cross-objection and are satisfied that there is a reasonable cause for delay in filing of the cross objection. In the interest of justice, we condone the delay of 550 days in filing of the cross-objection. The application for condonation of delay is thus, allowed and the cross-objection is admitted to be heard on the merits. 2. The brief facts of the case are that the assessee is a wholly owned subsidiary of M/s. SCM Microsystem Group UK Ltd. The assessee is engaged in prototype design development and related supported activities based on technical specifications and product ideas obtained from the affiliat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Transfer Pricing Officer rejected the submissions of the assessee and made addition to the tune of ₹ 55,88,944. The Assessing Officer, vide assessment order dated December 22, 2008 made addition of the aforesaid amount in accordance with the Transfer Pricing Officer's order apart from the additions made by him. 3. Aggrieved against the assessment order, the assessee preferred an appeal before the Commissioner of Income-tax (Appeals). The Commissioner of Income-tax (Appeals), vide impugned order partly allowed the appeal of the assessee. The Commissioner of Income-tax (Appeals) while deciding the appeal of the assessee partly allowed the ground of exclusion of telecommunication charges from the export turnover while computing the deduction under section 10B of the Act. The Commissioner of Income- tax (Appeals) relying on the decision of the Special Bench of the Tribunal in the case of ITO v. Sak Soft Ltd. reported as [2009] 313 ITR (AT) 353 (Chen- nai) [SB] directed that ₹ 5 lakhs being estimated telecommunication charges should be excluded from the export turnover as well as the total turnover while computing deduction under section 10B of the Act. The second gro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... per Accounting Standard-9 is not tenable. The Departmental representative pointed out that the Transfer Pricing Officer in his order has categorically stated that in the transfer pricing documents, it has been mentioned that SCM group companies generally pay in advance before the commencement of the project and since the SCM is based on a cost plus method as per the service agreement, it has an assured compensation so it is not exposed to any price risks. The Departmental representative further stated that the Commissioner of Income-tax (Appeals) has erred in stating that the Transfer Pricing Officer had not given reason as to why the cost plus method Is better than transactional net margin method. The Departmental representative strongly relied on the order of the Transfer Pricing Officer as far as calculation of the arm's length price is concerned. 5. On the other hand, Shri R. Vijayaraghavan appearing on behalf of the assessee submitted that the Transfer Pricing Officer has erred in making addition on account of the arm's length price. Although in the service agreement cost plus method has been mentioned, there is no bar in adopting transactional net margin method, a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e followed the transactional net margin method over cost plus method as most appropriate method for the reason cost plus method requires comparison of gross margins earned by the company with that of the comparable companies and to determine the gross margins of comparable companies on a reliable manner is a difficulty as the accounting policies adopted by the comparable companies are inconsistent and entire details are not available in the public domain. 7. We have heard the submissions made by both the parties and have also perused the orders of the authorities below. The Revenue has assailed the order of the Commissioner of Income-tax (Appeals) primarily on three grounds. 8. The first ground is with respect to exclusion of telecommunication charges from export turnover while computing deduction under section 10B of the Act. The assessee has claimed an amount of ₹ 6,46,123 towards telecommunication charges. The assessee had excluded the said amount from export turnover in computation of deduction under section 10B of the Act. The assessee has conceded before the Commissioner of Income-tax (Appeals) that it is not in a position to furnish break-up of expenses incurred ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... relates to transfer pricing adjustment. The objection of the Departmental representative is with regard to the method adopted by the assessee in determining the arm's length price. As per the service agreement it was agreed to determine the arm's length price on the basis of cost plus mark-up of 17 per cent., whereas the assessee had followed transactional net margin method for determining the arm's length price. A perusal of section 92C shows that arm's length price to any international transaction shall be determined by any of the methods specified therein being most appropriate method having regard to : (i)nature of transaction ; or (ii)class of transaction ; or (iii)class of associated persons ; or (iv)functions performed by such persons ; or (v)such other relevant factors as may be prescribed by the Board. The methods prescribed under section 92C(1) for determining arm's length price are : 1.comparable uncontrolled price method (CUP) ; 2.resale price method ; 3.cost plus method ; 4.profit split method ; and 5.transactional net margin method (TNMM) or any other method prescribed by the Board. 11. The most appropriate met ..... X X X X Extracts X X X X X X X X Extracts X X X X
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