M/S. I 2 TECHNOLOGIES INDIA P. LTD.,MUMBAI vs. ACIT, CIR-8(2), MUMBAI

The captioned cross-appeals filed by the assessee and Revenue pertaining to A.Y. 2002-03 are directed against an order passed by Ld. CIT(A)-VIII, Mumbai dated 12/12/2005, which in turn arises out of an order passed by AO under section 143(3) of the Income Tax Act, 1961 (the Act) dated 29/03/2005.

Grounds of Assessee’s Appeal:-

“A] The order of the CIT (Appeals) is bad in law and on facts as he has failed to interfere with a patently illegal order passed by the TPO and incorporated by the AO in the assessment order. The learned CIT (Appeals) ought to have realized that the interest cost included by the TPO is only a notional expense and not a real one. The learned CIT (Appeals) erred in ignoring the fact that the adjustment made with regard to travel expenses had to be ignored. The learned CIT (Appeals) further erred in not adopting the CUP method and applying the available data with respect to the financial year 2001-02. The CIT (Appeals) also erred in accepting the action taken by the TPO in eliminating the data pertaining to companies having turnover less than Rs.5 crores. In general, the CIT (Appeals) erred in upholding the order of the TPO as incorporated in the AO.

B] The Appellant submits that the provisions of Section 92C(4) would apply only when the AO independently makes an assessment and not when the TPO passes an order which according to the AO is binding on him. Hence, the denial of exemption under Section 1OA with respect to the adjustment made by the TPO is opposed to law and to facts. C] The CIT (Appeals) failed to realize that software expenses are revenue in nature and fully allowable.

D] The CIT (Appeals) erred in upholding the denial of relief under Section 1OA with respect to interest received on temporary investment of surplus funds. E] For these and other grounds that may be adduced at the time of hearing may be allowed.” Ground of Revenue’s Appeal:-

“On the facts and in the circumstances of the case and in law, the Commissioner of Income Tax (Appeals) erred in directing the Assessing Officer to allow depreciation @ 60% as against 25% allowed by him, considering that the amendment was effective from A.Y.2003-04, without appreciating the facts of the case.”

2. The substantive dispute in the appeal of the assessee relates to the addition on account of transfer pricing adjustment with respect to the international transaction undertaken by the assessee with its associated enterprise. At the time of hearing, it was a common point between the parties that the issue may be set-aside to the file of the Assessing Officer /Transfer Pricing Officer to carry out the proceedings afresh on account of a fundamental error that has crept in. Elaborating the issue, the Ld. Representative for the assessee pointed out that the assessee is a wholly owned subsidiary of M/s. i2 Technologies Inc., Netherlands and it is providing software development and consultancy services to its associated enterprise. It is being remunerated at cost plus 10% mark-up for rendering such services. It was pointed out that the Transfer Pricing Officer has used the TNM method for the purposes of determining the arm's length price of software development services rendered by the assessee to its associated enterprise. In carrying out such comparability analysis, data of the comparables which has been used is corresponding to financial year 2000-01, whereas the financial year relevant for the assessment year under consideration is 2001-02. Another area of dispute pointed out by the Ld. Representative for the assessee is that the action of the Transfer Pricing Officer in imputing a mark-up on account of interest payable on the interest free loans taken by the assessee from the associated enterprise. Thirdly, it was pointed out that the lower authorities have further erred in including travel expenses reimbursed to the assessee by its associated enterprise and in imputing the mark-up on the same without appreciating that in the case of reimbursement of expenditure, no mark-up is chargeable.

6. In so far as Ground No. “D” of assessee’s appeal is concerned, the same relates the allowability of relief under section 10A of the Act with respect to interest income, which issue was also agreed by the parties to be restored back to the file of Assessing Officer / Transfer Pricing Officer to be adjudicated afresh in accordance with law. We direct accordingly.