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2016 (5) TMI 1180 - ITAT MUMBAI

2016 (5) TMI 1180 - ITAT MUMBAI - TMI - Transfer pricing adjustment - Held that:- We agree with the contention of the Ld. Counsel that adjustment if at all is required to be made then the same should be made in respect of transactions with the AE only accordingly, the TPO is directed to make the adjustment only with respect to transaction with the AE and not for the entire revenue as costs.

Whatever disallowances which has been made by the AO under various heads should be reduced from .....

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programmes essential for business. However, all these details and bills and vouchers along with the nature of expenditures have not been examined properly by the AO as well as by the DRP, therefore, in the interest of justice, we feel that the issue of software expenses should be remitted back to the file of the AO and should be decided afresh after considering these bills and vouchers and also the nature of expenses. It is clarified that if payment is recurring in nature purely for software the .....

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fore, in the interest of justice, we feel that the disallowance made should be restricted to 25% of the total expenditure debited on account of travelling expenses. Thus, the assessee gets part relief on this score. Similarly, on ad-hoc disallowance of telephone and communication, the same was made 50% on total expenditure claimed at ₹ 14,76,748/- on the ground that relevant details have not been furnished. Since similar position is continuing at the stage of the Tribunal also, therefore, .....

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143(3) r.w.s. 144C(13), in pursuance of directions given by the Dispute Resolution Panel (DRP), Mumbai under section 144C(5) vide order dated 28.02.2012. The assessee in its appeal has raised following grounds:- 1. On the facts and in the circumstances of the case, and in law, the learned Assessing Officer has erred, in conformity with the directions of Hon'ble Dispute Resolution Panel ('DRP'), Mumbai under section 144C(13) of the Income-tax Act, 1961, and the order of the Transfer .....

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the Income-tax Act, 1961, and the order of the Transfer Pricing Officer u/s. 92CA(3), in adding the negative margin of the appellant (-20.07%) to the positive margin of comparable companies (10.99%) and thereby adopting Arm's Length Margin of 31.06% (20.07%+10.99%) of operating costs. Instead, it should be only 10.99% of operating cost. 3. Without Prejudice to Ground no.1 and 2 above, on the facts and in the circumstances of the case, and in law, learned Assessing Officer has erred, in conf .....

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as erred, in conformity with the directions of Hon'ble Dispute Resolution Panel ('DRP'), Mumbai under section 1 44C( 13) of the Income-tax Act, 1961, and the order of the Transfer Pricing Officer u/s. 92CA(3), in determining the proportionate Arm's Length Price of international transactions entered into by appellant at Rs,10,12,64,747/- as against the actual revenue received ₹ 5,49,70,581/- and thereby making an addition of ₹ 4,62,94,166/-. 5. On the facts and in the .....

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ure by the Assessing Officer. 7. On the facts and in the circumstances of the case, and in law, the learned Assessing Officer ACIT (OSD) - 10(1), Mumbai, has erred in disallowing lease rent ₹ 1,83,95,052/- in spite of specific direction by the Honourable Dispute Resolution Panel to delete the proposed addition. 8. On the facts and in the circumstances of the case, and in law, the learned Assessing Officer ACIT (OSD) - 10(1), Mumbai, has erred in disallowing 50% of Postage and Courier expen .....

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e case, and in law, the learned Assessing Officer ACIT (OSD) - 10(1), Mumbai, has erred in disallowing 50% of the Travelling expenses of ₹ 23,33,502/- incurred wholly and exclusively for the purpose of its business, merely on surmises and conjectures. 11. On the facts and in the circumstances of the case, and in law, the learned Assessing Officer ACIT (OSD) - 10(1), Mumbai, has erred in disallowing 50% of the Telephone and Communication expenses of ₹ 14,74,748/- incurred wholly and e .....

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orward business loss and unabsorbed depreciation against the business income as assessed by him . 2. At the outset, Ld. Counsel for the assessee submitted that, grounds no. 1, 2, 7, 8, 9 & 13 are not pressed, accordingly, these grounds are treated as dismissed as not pressed. 3. Ground no. 3 & 4, relates to transfer pricing adjustment made by the TPO for sum of ₹ 4,62,94,166/-. 4. The brief facts qua the Transfer Pricing adjustment are that, the assessee company is engaged in provi .....

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nagement Fees 61,99,643 CUP 3 IGate Clinical Research International Inc. Project Management 3,43,46,956 CUP The TPO rejected the CUP method followed by the assessee and applied transactional net margin method (TNMM) for benchmarking the arm s length price (ALP) of the international transaction entered into by the assessee. The assessee s negative margin of (-)20.07% was converted into positive margin of 10.99% after computing the arm s length margin of 31.06% of the total cost incurred by the as .....

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893,349/-, out of which revenue from associated enterprise was only ₹ 5,49,70,581/-, therefore, any benchmarking should have been restricted to this revenue only. Apart from that, the Ld. Counsel before us submitted that, while applying margin of 10.99% of the cost, the expenses which has already been disallowed by the AO should have been reduced from the operating cost by the AO, otherwise, it will amount to double addition. The details of such expenses disallowed by the AO are as under:- .....

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upport of his contention, he has given a list of 19 decisions, wherein, it has been unanimously held that transfer pricing adjustment should be restricted to the value of international transactions only and it could not be made on the entire turnover. The list of such decision are as under:- He submitted that, if adjustment is made only in respect of transaction with the AE then aggregate proportionate working would be in the following manner: Total Operating Costs Rs.9,68,85,789/- Revenue from .....

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n with the AE and secondly, the expenses which has already been disallowed by the AO should be reduced from the operating cost. 6. On the other hand, Ld. CIT DR submitted that, the entire transfer pricing analysis of the assessee was erroneous. In the course of T P proceedings, assessee had pleaded that CUP method should be applied, even though assessee had originally adopted TNMM in its Transfer Pricing Study Report. The TPO has rejected the assessee s contention for application of CUP and had .....

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ire costs or entire sales, otherwise the margin itself will become distorted. Secondly, if TNMM has to be applied on part of the transaction i.e. transactions with the AE then in such cases, there would always be an internal Comparable by way of transactions with other parties and in all such cases, there would be no requirement for benchmarking it with external comparables, therefore, the whole premise where TNMM is applied only for the AE transaction will not give correct picture. However, reg .....

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benchmarking the arm s length price of the international transaction with the AE the same is not in dispute. The assessee had disclosed operating loss of (-) 20.07% of the costs which has been rejected by the TPO and after carrying out the comparability analysis with the external comparables, he has arrived at an Arm s Length Margin of 36.01% and, thereby the resultant adjustment by way of Arm s length margin was computed at 10.99%. This arm s length margin of 10.99% has not been disputed before .....

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89/-. As against this, the revenue from AE is ₹ 5,49,70,581/-. The proportionate operating cost in respect of a revenue from the AE was thus, ₹ 6,60,08,689/-. If Arm s Length Margin of 10.99% is applied to this sum then same would be ₹ 72,54,355/-. If such an ALP of ₹ 72,54,355/- is applied to revenue from AE, then it would be worked out to ₹ 7,32,63,044/-. The adjustment to be made, then would be at ₹ 1,82,92,463/-. If any addition at all on account of Transf .....

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by the Ld. CIT DR, which has been dealt by us in the following manner:- 6. We have heard the rival contentions qua the issue, whether the adjustment on account of margins of the comparables should be made at the entity level or only with regard to the transactions with the AE. Provisions of section 92 provides that any income arising from an international transaction shall be computed having regard to the ALP'. Thus, the ALP has to be on international transaction and not in relation to asses .....

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the adjustment arising out of ALP should be with regard to international transaction and not on the entire turnover of the assessee. The transfer pricing mechanism revolves around international transaction where it has to be seen whether such transactions are at arm's length price or not. The presumption is that transactions with the independent parties 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 transact .....

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raised by the Ld. CIT DR that there is no segmental information with regard to the AE and non-AE transaction, therefore such an adjustment cannot be restricted to AE transaction only, we are unable to appreciate his argument firstly, there has been consistent view that the adjustment if at all, should be made on the international transactions and not at the entity level i.e. with the non-AE transactions also; and Secondly, the international transactions with the AE if have been duly reported, th .....

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d be done only on AE transaction not on the entire turnover. Accordingly, the AO / TPO is directed to benchmark the margin of the comparable companies only with the transaction with the AE and not for the entire turnover at entity level. Thus, we agree with the contention of the Ld. Counsel that adjustment if at all is required to be made then the same should be made in respect of transactions with the AE only accordingly, the TPO is directed to make the adjustment only with respect to transacti .....

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stands confirmed should be directed to be reduced from the operating cost. 10. In ground no. 5 & 6, the assessee has challenged the disallowances of software and license of ₹ 10,91,131/- and alternatively, it has been claimed that if the same is treated as capital expenses, then depreciation under section 32 should be directed to be allowed. 11. The assessee has paid subscription charges, mostly for software and website data amounting to ₹ 10,91,132/- and these expenses have bee .....

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are towards annual maintenance contract and annual subscription fees and license fees, which are capital in nature. 13. The DRP too accepted the AO s action for treating the said expenses as capital in nature. 14. After considering the rival submission and on perusal of the details of software expenses, which for the sake of ready reference are reproduced here in below:- Sr. no. Vendor Name Purpose Amount Remarks 1. Dataformatics Consultancy Pvt Ltd Lisence 17,522 Win server Lisence 2. Antraweb .....

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re for AY 2008-09 Including tally Linking charges etc 33,800 Salary TDS Calculation Software AY 2008-09 7. Prepaid Reversal Reversal of pre- Paid Medra Dictonery Sub- Scription Charges Accounted in FY 2006-07 19,338 1,091,130 It can be seen that, some of the expenditures are periodical and recurring in nature, which cannot be held to be capital in nature. Because these expenditures are part and parcel for running of and maintenance of computer programmes essential for business. However, all thes .....

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of the expenditures are treated as capital then, needless to say that AO will allow deprecation of such expenditure. Thus, with this direction, ground no. 5 and 6 are treated as allowed for statistical purposes. 15. In ground no. 10, the assessee has challenged the disallowance of travelling expenses of ₹ 11,66,755/- being 50% claim of ₹ 23,33,502/-, the AO has disallowed these expenses on the ground that no business is procured from the foreign countries, therefore, considered as b .....

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,502 % of foreign travel To 30% 3% 9% 3% 18. After considering the relevant finding given in the impugned orders, we find that AO has disallowed 50% of various expenditures debited in the profit and loss account on the ground that, assessee could not furnish the break-up and the necessary supporting evidences. Accordingly, he disallowed 50% of the entire expenditure. Even before us, the entire details have not been furnished. However, looking to the fact that foreign travelling expenses has been .....

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