Revenue appeal partly allowed, issues remitted for verification. Disallowance of foreign travel expenses upheld.

The appeal filed by the revenue was partly allowed for statistical purposes. The issues concerning the restriction of comparables and relief on the NET R&D and NIC R&D segments were remitted back to the Transfer Pricing Officer (TPO) for proper verification and application of filters as per law. The deletion of disallowance of foreign traveling expenses was upheld.

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Issues Involved:
1. Deletion of disallowance of foreign traveling expenses.
2. Restriction of comparables to 11 companies for determining the Arm’s Length Price (ALP).
3. Allowance of relief to the assessee on the issue of NET R&D and NIC R&D segments.

Issue-wise Detailed Analysis:

1. Deletion of Disallowance of Foreign Traveling Expenses:
The revenue contested the deletion of Rs. 57,23,201/- out of foreign traveling expenses made by the Assessing Officer (AO). The Tribunal noted that similar issues had been settled in the assessee’s favor in previous years (1998-99, 1999-00, 2000-01, 2001-02, and 2002-03), and these decisions were upheld by the Hon’ble jurisdictional High Court. The Tribunal observed that the AO had disallowed 20% of the total foreign travel expenses, while the CIT(A) had restricted this to 10% in previous years, which was upheld by the Tribunal and High Court. The Tribunal found that the expenses were incurred in accordance with the international travel policy of the Nokia group and were for business purposes. Hence, the Tribunal did not find any reason to interfere with the CIT(A)’s consistent approach and dismissed this ground raised by the revenue.

2. Restriction of Comparables to 11 Companies:
The revenue challenged the CIT(A)’s decision to restrict the comparables to 11 companies for determining the ALP. The Tribunal noted that the assessee rendered contract services to Nokia Internet Communication Research Centre, Hyderabad, and had margins of 5.2% and 5.1% from its NIC Hyderabad and Net R&D divisions, respectively. The TPO had rejected the comparables selected by the assessee and introduced a new set of 52 comparables. The CIT(A) revised the list of comparables and computed the margin at 12.13% by applying OP/TC. The Tribunal observed that the CIT(A) had followed the order of his predecessor for the assessment year 2002-03, which was upheld by the jurisdictional High Court. However, the Tribunal found that the CIT(A) did not give an opportunity to the TPO and did not analyze the financial data of comparables vis-a-vis the assessee for the year under consideration. The Tribunal agreed with the revenue’s contention and remitted the issue back to the TPO for proper verification of the comparables and applying filters as per law.

3. Allowance of Relief on NET R&D and NIC R&D Segments:
The revenue contested the relief allowed to the assessee amounting to Rs. 51,62,628/- for the NET R&D segment and Rs. 38,68,161/- for the NIC R&D segment. The Tribunal noted that the CIT(A) had relied on the order passed by his predecessor for the assessment year 2002-03 and had adopted a threshold of 25% for detecting companies having Related Party Transactions (RPT). The CIT(A) revised the list of comparables and computed the margin at 12.13% by applying OP/TC. The Tribunal observed that the CIT(A) had merely followed the decision of his predecessor without remanding the issue back to the TPO and did not give an opportunity to the TPO while changing the filter. The Tribunal agreed with the revenue’s contention and remitted the issue back to the TPO for proper verification of the comparables and applying filters as per law.

Conclusion:
The appeal filed by the revenue was partly allowed for statistical purposes, with the issues regarding the restriction of comparables and relief on the NET R&D and NIC R&D segments being remitted back to the TPO for proper verification and application of filters as per law. The deletion of disallowance of foreign traveling expenses was upheld. The order was pronounced in the open court on 06.12.2017.

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