Business income and transfer pricing principles: ITAT treats franchise royalty, computer peripherals depreciation, and comparable selection accordingly.

Income from continuous and systematic service activity for a foreign group entity is treated as business income where the activity is business-linked and has been consistently accepted in earlier years. Royalty paid for use of franchise rights is regarded as a business expenditure when incurred under the commercial arrangement for running the franchise. Administrative es allocated to a subsidiary are not disallowed on a broad attribution without a proper basis. Computer peripherals and accessories qualify for 60% depreciation as part of the computer system. In transfer pricing, comparables must be functionally similar with similar assets and risks; dissimilar businesses are excluded, and unresolved operating-expense issues may require fresh adjudication. Current-year data is the norm, and the proviso to section 92C(2) tolerance benefit was not available on the stated facts.

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Issues: (i) Whether service income received from the foreign group entity was assessable as business income or as income from other sources; (ii) whether royalty paid for use of the franchise business rights was allowable as a business expenditure; (iii) whether administrative expenses incurred by the assessee could be disallowed as attributable to the subsidiary company; (iv) whether depreciation was admissible at 60% on computer peripherals and accessories; (v) whether the transfer-pricing adjustment was liable to be recomputed by excluding functionally dissimilar comparables and whether the dispute on operating expenses required fresh adjudication; (vi) whether current-year data and single-year data could be used for transfer-pricing analysis; (vii) whether the benefit of the proviso to section 92C(2) was available.

Issue (i): Whether service income received from the foreign group entity was assessable as business income or as income from other sources.

Analysis: The service activity was continuous and systematic and had been accepted in earlier years. The corresponding expenditure had also been treated as business expenditure. The nature of the activity and the past consistent treatment showed that the receipts arose from the assessee's business operations.

Conclusion: The receipt was held to be business income and the issue was decided in favour of the assessee.

Issue (ii): Whether royalty paid for use of the franchise business rights was allowable as a business expenditure.

Analysis: The payment was made pursuant to the business arrangement for running the franchised business and had been permitted under the governmental approvals and liberalised remittance policy. The earlier years' view had also accepted the payment as incurred wholly for business purposes.

Conclusion: The royalty expenditure was held allowable and the issue was decided in favour of the assessee.

Issue (iii): Whether administrative expenses incurred by the assessee could be disallowed as attributable to the subsidiary company.

Analysis: The subsidiary was created to undertake advertising, marketing and promotion activities for the common business interest. The arrangement showed that the assessee's contribution to the subsidiary's activities was part of the business model, and the disallowance was made on a general allocation without a proper basis.

Conclusion: The disallowance was deleted and the issue was decided in favour of the assessee.

Issue (iv): Whether depreciation was admissible at 60% on computer peripherals and accessories.

Analysis: Computer peripherals and accessories form an integral part of the computer system and cannot function independently of it. They therefore fall within the higher depreciation category applicable to computers.

Conclusion: Depreciation at 60% was allowed and the issue was decided in favour of the assessee.

Issue (v): Whether the transfer-pricing adjustment was liable to be recomputed by excluding functionally dissimilar comparables and whether the dispute on operating expenses required fresh adjudication.

Analysis: Comparability had to be determined on the basis of functions performed, assets employed and risks assumed. The identified comparables engaged in event management, engineering consultancy, chemical testing and other functionally different activities were not proper comparables for marketing and support services. The dispute relating to operating expenses and their treatment for transfer-pricing purposes had not been adjudicated by the DRP and required reconsideration.

Conclusion: The functionally dissimilar comparables were excluded and the operating-expense issue was restored for fresh adjudication.

Issue (vi): Whether current-year data and single-year data could be used for transfer-pricing analysis.

Analysis: The applicable rule required contemporaneous data for the relevant financial year, and use of older years' data was permitted only where it had an established influence on the determination of arm's length price. No such case was shown.

Conclusion: The challenge was rejected and the issue was decided against the assessee.

Issue (vii): Whether the benefit of the proviso to section 92C(2) was available.

Analysis: The retrospective legislative amendment settled the position on the tolerance range for arm's length price computation and removed the claimed benefit in the manner urged by the assessee.

Conclusion: The claim for the +/- 5% benefit was rejected.

Final Conclusion: The appeal succeeded substantially on the core corporate-tax issues and partly on the transfer-pricing comparables, but one transfer-pricing dispute was remitted for fresh consideration, resulting in a mixed outcome overall.

Ratio Decidendi: Income arising from a continuous and business-linked activity, and expenditures incurred wholly and exclusively for that business, are to be characterised on their true commercial nature, while transfer-pricing comparability must be judged by functional similarity, assets employed and risks assumed.

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