ITAT Partially Allows Appeal for Foreign Currency Expenses, ALP, and +/- 5% Adjustment

The ITAT allowed the appeal partly for statistical purposes, providing relief to the assessee on the issues of exclusion of foreign currency expenses from both export and total turnover, determination of Arm's Length Price (ALP), and benefit of +/- 5% adjustment. The issues of charging interest and initiation of penalty proceedings were addressed as consequential and premature, respectively.

---

---

Issues Involved:
1. Exclusion of foreign currency expenses from export turnover and total turnover while computing deduction under section 10A.
2. Determination of Arm's Length Price (ALP) for international transactions.
3. Benefit of +/- 5% adjustment under the proviso to section 92C(2).
4. Charging of interest under sections 234B and 234C.
5. Initiation of penalty proceedings under section 271(1)(c).

Detailed Analysis:

1. Exclusion of Foreign Currency Expenses from Export Turnover and Total Turnover:
The assessee's grievance was regarding the exclusion of foreign currency expenses from export turnover but not from total turnover while computing deduction under section 10A. The Assessing Officer (AO) excluded expenses like tele/internet charges, traveling expenses, and other onsite expenses from export turnover but not from total turnover. The ITAT referred to the Special Bench decision in the case of Sak Soft Ltd., the Bombay High Court in Gem Plus Jewellery India Ltd., and the Karnataka High Court in Tata Elxsi Ltd., which held that if an item is excluded from export turnover, it should also be excluded from total turnover to maintain parity. The ITAT directed the AO to exclude the expenses from both export turnover and total turnover.

2. Determination of Arm's Length Price (ALP):
The Transfer Pricing Officer (TPO) made an adjustment to the ALP for software services provided by the assessee to its associated enterprise (AE). The assessee used the Comparable Uncontrolled Price (CUP) and Cost Plus Method (CPM) but the TPO applied the Transactional Net Margin Method (TNMM). The ITAT noted that the TPO had rejected certain comparables and included others without providing the assessee an opportunity to be heard, violating the principle of natural justice. The ITAT remanded the issue back to the AO/TPO for fresh adjudication, directing them to consider the assessee's arguments, provide an opportunity for cross-examination of comparables, and make suitable adjustments for differences in risk profiles.

3. Benefit of +/- 5% Adjustment:
The assessee contended that the benefit of +/- 5% adjustment under the erstwhile proviso to section 92C(2) should be allowed. The ITAT referred to its earlier decision in Tatra Vectra Motors Ltd., where it was held that the benefit of the option of +/- 5% variation was available to the assessee for computing ALP. The ITAT directed the AO to allow this benefit to the assessee.

4. Charging of Interest under Sections 234B and 234C:
The issue of charging interest under sections 234B and 234C was held to be consequential in nature. The ITAT ordered accordingly.

5. Initiation of Penalty Proceedings under Section 271(1)(c):
The issue regarding the initiation of penalty proceedings under section 271(1)(c) was raised prematurely and was dismissed by the ITAT.

Conclusion:
The ITAT allowed the appeal partly for statistical purposes, providing relief to the assessee on the issues of exclusion of foreign currency expenses from both export and total turnover, determination of ALP, and benefit of +/- 5% adjustment. The issues of charging interest and initiation of penalty proceedings were addressed as consequential and premature, respectively.

---