2013 (2) TMI 322 - AT - Income Tax

Tribunal Upholds CIT(A)'s Decision for Assessee on Tax Deduction & Transfer Pricing

The Tribunal upheld the Ld. CIT(A)'s decision in favor of the assessee on all issues: eligibility for deduction under Section 10A, inclusion of service ... Transfer Pricing – Arm length Price - International transaction entered into with Associated Enterprise - TPO has not accepted the ALP of international transaction – Assessee is following CPM (Cost plus method) whereas TPO argued for TNMM (Transactional Net Margin Method) as appropriate Held that:- Where an assessee has followed one of standard methods of determining ALP, such a method cannot be discarded in preference over transactional profit methods, unless revenue authorities are able to demonstrate fallacies in application of standard methods. While there is no particular order or priority of methods which the assessee must follow and no method can invariably be considered to be more reliable than others, TNMM and Profit Split Method (PSM) are treated as methods of last resort which are pressed into service only when the standard methods i.e. CUP Resale Price Method (RPM) and Cost Plus Method (CPM) cannot be reasonably applied. As concluding from the facts of the case if we exclude four super normal profit companies from the list of comparables and recompute the OPM from the list of comparables adopted by the TPO, the average OPM comes to 18.91% whereas the Net Profit Margin of the assessee is 18.11%. Do not any reason for TP adjustment. In favour of assessee Issues Involved:1. Eligibility for deduction under Section 10A of the I.T. Act.2. Inclusion of service charges received while computing deduction under Section 10A.3. Allowance of unbilled software income.4. Transfer pricing adjustment related to international transactions with Associated Enterprise Offshore Digital Service Inc. (ODSI).Issue-wise Detailed Analysis:1. Eligibility for Deduction under Section 10A:The Revenue challenged the Ld. CIT(A)'s decision that the assessee is eligible for deduction under Section 10A of the I.T. Act, arguing that the assessee company was formed by hiving off the Sonata Software Division from an existing company, Indian Organic Chemicals Ltd., and did not satisfy other conditions laid down under Section 10A. The Tribunal noted that this issue had been consistently decided in favor of the assessee in earlier years (1998-99 to 2004-05). The Tribunal's earlier judgments confirmed the assessee's eligibility for deduction under Section 10A. The Ld. Departmental Representative did not present any contrary evidence. Following the precedent, the Tribunal upheld the Ld. CIT(A)'s order and dismissed this ground of appeal.2. Inclusion of Service Charges Received while Computing Deduction under Section 10A:The Revenue contested the Ld. CIT(A)'s decision to include service charges received from M/s. Sonata Information & Technology Ltd. while computing the deduction under Section 10A. The Tribunal observed that this issue had also been consistently decided in favor of the assessee in earlier years (1998-99 to 2004-05). The Tribunal's previous rulings confirmed that service charges received from SITL were eligible for inclusion in the computation of deduction under Section 10A. The Ld. Departmental Representative failed to present any new evidence to counter this. Respecting the Tribunal's earlier decisions, the Tribunal upheld the Ld. CIT(A)'s order and dismissed this ground of appeal.3. Allowance of Unbilled Software Income:The Revenue challenged the Ld. CIT(A)'s decision to allow the claim of unbilled software income amounting to Rs. 2,92,82,531/-. The Tribunal noted that similar issues had been decided in favor of the assessee in earlier years (2002-03 to 2004-05). The Tribunal's previous rulings supported the allowance of unbilled software income. The Ld. Departmental Representative did not provide any contrary material. Following the Tribunal's earlier decisions, the Tribunal upheld the Ld. CIT(A)'s order and dismissed this ground of appeal.4. Transfer Pricing Adjustment Related to International Transactions with ODSI:The Revenue contested the Ld. CIT(A)'s decision to disallow the transfer pricing adjustment of Rs. 8,02,72,632/- related to international transactions with ODSI. The Assessing Officer, based on the Transfer Pricing Officer (TPO)'s report, had made this adjustment, rejecting the assessee's Cost Plus Method (CPM) and adopting the Transactional Net Margin Method (TNMM). The Ld. CIT(A) found that the gross margin earned by the assessee in services to ODSI was higher compared to unrelated parties, thus no adjustment was required.The Tribunal reviewed the facts and submissions. The Ld. Counsel for the assessee argued that the law does not prioritize any method for determining Arm's Length Price (ALP) and that internal comparables are more reliable. The Tribunal noted that the TPO did not provide valid reasons for rejecting the CPM. The Tribunal emphasized that standard methods should not be discarded without demonstrating fallacies in their application. The Tribunal found substance in the argument that CUP/CPM was the most appropriate method for the assessee's case. The Tribunal also noted that excluding certain high-profit companies from the comparables list, the average Operating Profit Margin (OPM) was 18.91%, close to the assessee's 18.11%. Thus, no TP adjustments were required. The Tribunal upheld the Ld. CIT(A)'s order and confirmed that no transfer pricing adjustment was warranted.