2013 (9) TMI 334 - AT - Income Tax

Tax Tribunal upholds CIT(A) decisions for 2003-04 & 2004-05, dismissing Revenue appeals on various grounds.

The Tribunal upheld the CIT(A)'s decisions for both assessment years 2003-04 and 2004-05, dismissing the Revenue's appeals on various grounds including ... Transfer pricing adjustments - Arm’s Length Price - selection of comparables - Rule 10B(4) - Held that:- the deviation took place in the final list of comparables relied on by the Assessing Officer as against the companies selected by the assesseecompany. The list of comparable companies relied upon by the assesseecompany has been rejected by the Transfer Pricing Officer without stating any reason, even though the Transfer Pricing Officer has, by and large, agreed with the general premises on which the assessee has computed its arm's length price. Even though the Transfer Pricing Officer has adopted the transactional net margin method to compute the arm's length price, he has overruled the objections of the assessee without stating any reason. The arbitrary selection of comparables has in fact inflated the operating profit in the computation made by the Transfer Pricing Officer. - Deletion of transfer pricing adjustments by CIT(A) sustained - Decided against the revenue. Disallowance of Dividend Tax delay charges, interest for delay in remitting TDS, expenses incurred for delay in UTI dividend payments, etc. It is to be seen that the delay charges attributable to dividend tax partakes the character of dividend tax itself. Dividend tax as such is not deductible - the delay charges also are not deductible - This is the same case in respect of interest for delay in remitting TDS - There cannot be a different view on expenses incurred for delay in UTI dividend payments - Therefore, these expenses claimed by the assessee are not deductible in computing its income. - Decided against the assessee. Issues Involved:1. Arm's Length Price (ALP) determination for software services.2. Eligibility for exemption under section 10A of the Income-tax Act.3. Jurisdiction and validity of income-escaping assessment order.4. Deductibility of certain expenses (dividend tax delay charges, interest for delay in remitting TDS, expenses for delay in UTI dividend payments).5. Allowability of software development expenses as business expenditure.Issue-wise Detailed Analysis:1. Arm's Length Price (ALP) Determination for Software Services:The primary issue involves the determination of the arm's length price for software services provided by the assessee to its associated enterprise (AE). The assessee adopted the Transactional Net Margin Method (TNMM) and filed a detailed transfer pricing study. The Transfer Pricing Officer (TPO) agreed with the method and the profit level indicator (PLI) used by the assessee but disagreed on the selection of comparables. The TPO's revised list of comparables resulted in a higher operating profit ratio of 27.52%, leading to an addition of Rs. 4.58 crores to the assessee's income. The Commissioner of Income-tax (Appeals) (CIT(A)) deleted this addition, noting that the TPO rejected the assessee's comparables without stating reasons and that the TPO had no issues with the method or data used. The Tribunal upheld the CIT(A)'s decision, emphasizing the arbitrary rejection of comparables by the TPO and the consistency in the assessee's method across multiple years.2. Eligibility for Exemption Under Section 10A of the Income-tax Act:The Revenue contested the CIT(A)'s direction to allow the assessee exemption under section 10A. The Tribunal referred to its previous decisions in the assessee's own case for earlier and subsequent years, where it was held that the assessee was entitled to the section 10A deduction. The Tribunal found the CIT(A)'s reliance on these earlier decisions justified and upheld the direction to allow the exemption.3. Jurisdiction and Validity of Income-Escaping Assessment Order:The assessee's cross-objection challenged the jurisdiction and validity of the income-escaping assessment order. However, the Tribunal found no substantial force in this argument and dismissed the objection, indicating that the assessment order was within jurisdiction and in accordance with the law.4. Deductibility of Certain Expenses:The assessee objected to the disallowance of expenses related to dividend tax delay charges, interest for delay in remitting TDS, and expenses for delay in UTI dividend payments. The Tribunal held that these expenses were not deductible as they partook the character of non-deductible taxes and penalties. Consequently, the Tribunal upheld the disallowance of these expenses.5. Allowability of Software Development Expenses as Business Expenditure:For the assessment year 2004-05, the Revenue challenged the CIT(A)'s decision to allow software development expenses as business expenditure. The CIT(A) relied on a Tribunal decision in a similar case, which held that software expenses are revenue in nature due to their short lifespan and frequent updates. The Tribunal agreed with the CIT(A) and dismissed the Revenue's ground, affirming that such expenses should be allowed in full.Conclusion:The Tribunal dismissed the Revenue's appeals for both assessment years 2003-04 and 2004-05, upholding the CIT(A)'s decisions on all contested grounds. The assessee's cross-objection for the assessment year 2003-04 was also dismissed. The orders were pronounced in the open court on January 8, 2013, at Chennai.