2013 (2) TMI 65 - AT - Income Tax

Tribunal affirms CIT(A) decisions on transfer pricing and deduction under Income Tax Act

The Tribunal upheld the CIT(A)'s decisions on both issues. The Comparable Uncontrolled Price (CUP) method adopted by the assessee for determining the ... Transfer Price – Arm Length Price - Appropriate method for computing the ALP - Assessee has adopted the CUP method – Assessee is engaged in providing medical transcription services - Assessee has considered two external comparables and three internal comparables – The price charged to its AE, in comparison with the price charged to its other overseas customers, so also by the price charged by the other two Indian companies Held that:- The comparables adopted by the assessee are uncontrolled parties and can be considered for the purpose of determining the Arms' Length Price as per CUP method. The observation of the TPO that the comparables cannot be considered to be uncontrolled is without any basis, and it is based on mere presumptions and surmises. When the comparables considered by the assessee are in no way connected either with the assessee or with its holding company, and all the information/data relating to their transactions are available, the TPO was not justified in rejecting the computation of ALP made by the assessee by applying the CUP method – In favour of assessee Exemption u/s 10A – Computation of Turnover – Adjustment of communication charges from export turnover & total turnover - Held that:- Following the decision in case of Tata Elexi Ltd. (2011 (8) TMI 782 - KARNATAKA HIGH COURT) that the expenditure incurred towards communication charges, if excluded from the export turnover, has also to be excluded from the total turnover. The communication charges have to be excluded both from the export turnover as well as the total turnover, while computing exemption u/s 10A – In favour of assessee Issues Involved:1. Arm's Length Price (ALP) determination by the Transfer Pricing Officer (TPO).2. Exclusion of telecommunication charges from total turnover for the purpose of computation of deduction under Section 10A of the Income Tax Act.Issue-wise Detailed Analysis:1. Arm's Length Price (ALP) Determination by the Transfer Pricing Officer (TPO):The primary issue in this appeal concerns the determination of the ALP for international transactions between the assessee and its associated enterprise (AE), CBay Systems Ltd., USA. The assessee adopted the Comparable Uncontrolled Price (CUP) method for computing the ALP, citing internal and external comparables. The TPO rejected the CUP method, citing insufficient data and lack of publicly available information, and instead applied the Transactional Net Margin Method (TNMM). The CIT(A) overturned the TPO's decision, validating the CUP method based on the comparables provided by the assessee.- Factual Matrix: The assessee, a private limited company, set up a 100% export-oriented unit under the Software Technology Park of India (STPI) at Hyderabad, providing IT-enabled health care services. The assessee entered into international transactions with its parent company, CBay Systems Ltd., USA, and adopted the CUP method for determining the ALP, comparing rates with both internal and external parties.- TPO's Rejection: The TPO rejected the CUP method due to lack of sufficient data and adopted the TNMM method, determining an ALP that resulted in an addition of Rs. 1,70,51,255 to the assessee's income.- CIT(A)'s Decision: The CIT(A) found the CUP method appropriate, considering the agreements and prices charged by the assessee to its AE and other comparables. The CIT(A) concluded that the price charged by the assessee to its AE was within the arm's length range and deleted the addition made by the TPO.- Tribunal's Conclusion: The Tribunal upheld the CIT(A)'s decision, agreeing that the CUP method was the most appropriate for determining the ALP. The Tribunal found that the TPO's rejection of the CUP method was based on incorrect assumptions and that the comparables used by the assessee were valid and uncontrolled.2. Exclusion of Telecommunication Charges from Total Turnover for Deduction under Section 10A:The second issue pertains to the exclusion of telecommunication charges from the total turnover while computing the deduction under Section 10A of the Income Tax Act.- Assessing Officer's Decision: The assessing officer excluded the communication charges from the export turnover but included them in the total turnover, which affected the computation of the deduction under Section 10A.- CIT(A)'s Decision: The CIT(A), following judicial precedents, held that if communication charges are excluded from the export turnover, they must also be excluded from the total turnover for computing the deduction under Section 10A.- Tribunal's Conclusion: The Tribunal upheld the CIT(A)'s decision, citing consistent judicial pronouncements, including the Hon'ble Karnataka High Court's decision in Tata Elexi Ltd. v. Asstt. CIT, which mandated the exclusion of communication charges from both export turnover and total turnover for Section 10A deduction computation.Final Judgment:The Tribunal dismissed the Revenue's appeal, upholding the CIT(A)'s decisions on both issues. The ALP determined by the assessee using the CUP method was deemed appropriate, and the exclusion of telecommunication charges from both export turnover and total turnover for Section 10A deduction was affirmed.