ASSISTANT COMMISSIONER OF INCOME TAX-CIRCLE-4(1)(1), BANGALORE, BANGALORE vs. MPHASIS LIMITED, BANGALORE

Facts

This appeal by the Revenue concerns Assessment Year 2009-10, challenging an order by the CIT(A) that deleted transfer pricing adjustments made by the TPO/AO. The dispute involves selling commission expenses of Rs. 88,86,56,711 and network charges of Rs. 10.36 crores. In the first round of litigation, the ITAT had remanded the issue to the AO to verify if these expenses were part of operating costs benchmarked at the entity level. If so, no separate adjustment was to be made. The TPO, in the second round, reiterated his findings that these were not part of operating costs, leading to the AO's assessment. The CIT(A) subsequently deleted the additions, finding these expenses to be part of operating costs.

Held

The Tribunal held that the adjustment made by the TPO and confirmed by the DRP could not be sustained. It noted that in the first round, the Tribunal had clearly directed that if these expenses were part of operating costs, then no separate adjustment was required. This direction was binding on the TPO/AO. The CIT(A) had examined the records and made a factual finding that selling commission and networking charges were debited in the P&L account. Once this was established, and TNMM was applied as the Most Appropriate Method (MAM), the operating margin already covered such costs. The Tribunal agreed with the assessee that the TPO was not justified in isolating one component and determining ALP separately. The principle laid down in decisions like Tata Power Solar and Epson India supported the assessee's case. Therefore, the additions of Rs. 88.86 crores and Rs. 10.36 crores on account of selling commission and network charges were deleted. The ground of appeal of the Revenue was dismissed.

Key Issues

1. Whether the Tribunal had erred in directing the TPO/AO to treat selling commission expenses and network charges as part of operating expenses while determining the Arm's Length Price (ALP) for offshore work, instead of determining their ALP on a standalone basis, as per Section 92C of the Income Tax Act, 1961. Assessee's Contentions: - The Tribunal's prior direction in the first round of litigation was clear: if these expenses form part of operating costs and the Transactional Net Margin Method (TNMM) is applied at the entity level, no separate adjustment is required. - The CIT(A) verified the financials and found these expenses to be part of operating expenses. - Once TNMM is accepted and operating margins are at arm's length, no further adjustment should be made. - Relied on Tata Power Solar Systems Ltd. and Epson India Pvt Ltd. for the principle that separate benchmarking of individual items is not permissible when TNMM is accepted at the entity level. Revenue's Contentions: - Selling commission expenses: The assessee had not demonstrated cost allocation or the basis of commission payment, justifying the TPO's ALP of NIL. - Network charges: The assessee had not proven the benefit from these services, and the AE was merely passing on vendor charges.