TaxTMI 
TaxTMI 
2015 (9) TMI 555
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....rated in USA. The assessee exports/provides IT Enabled Services (ITES) to its parent company and is compensated on cost plus basis for its services and also has domestic business to the extent of 21% of its total revenues. For Assessment Year 2006-07, the assessee filed its return on 30.11.2006 declaring NIL income, after claiming deduction of Rs. 2,80,16,793 under Section 10A of the Act. The assessee did not consider the brought forward business losses of Assessment Year 2001-02 and unabsorbed depreciation for Assessment Years 2001-02 and 2002-03 while computing the deduction claimed under Section 10A of the Act. The return was processed under Section 143(1) of the Act and the case was subsequently selected for scrutiny. 2.2 In the period under consideration, the assessee had reported the following international transactions :- (i) Network administration support and other technical services : Rs. 12,84,43,827. (ii) Technical Support Services : Rs. 1,12,56,584. In view of the above international transactions of the assessee, the Assessing Officer made a reference under Section 92CA of the Act to the Transfer Pricing Officer ('TPO') for dete....
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....m. 4. The members of Dispute Resolution Panel also being jurisdictional Commissioner/Directors of Income Tax of the appellant, the constitution of the Dispute Resolution Panel itself was bad in law and hence the Order passed by the panel also is bad in law. GROUNDS RELATING TO CHARGE OF INCOME TAX 5. The lower income tax authorities have erred in not appreciating that: a. there is no amendment to the definition of the term "income" to include amounts computed under Chapter X; b. the charging or computation provision relating to income under the head "Profits & Gains of Business or Profession" do not refer to or include the amounts computed under Chapter X' c. there is no provision in Chapter X indicating that it would override the computation provisions of business income or the normal understanding of the term "income". GROUNDS RELATING TO NOTICE UNDER 133(6) 6. The lower authorities have erred in: a. adopting a flawed process in issuing notices u/s133(6) and relying upon such replies to compute ALP; and b. not giving an opportunity to the appellant to cross examine the parties involved. GROUNDS ON REJECTION OF TP ANALYSIS OF THE APPELLAN....
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....wer income tax authorities have erred in not allowing the benefit of the +/-5% range mentioned in the proviso to section 92C(2). GROUNDS RELATING TO ADDITIONS U/S 10A 14. The lower authorities have erred in a. concluding that the deduction under section 10A is allowable from total income after giving effect to the provisions of set-off and carry forward of losses. b. not appreciating that income which is eligible for exemption under section 10A does not form part of total income at all and hence it does not enter the normal computation mechanism. c. Not appreciating that deduction under section 10A is available to business profits of a particular year and is therefore not to be influenced by unabsorbed depreciation allowance and brought forward business losses. d. not appreciating that the incomes falling under Chapter III - "incomes which do not form part of total income", need not be computed in the manner laid down in Chapter IV D of the Income Tax Act, and the same has to be understood as commercial profits or book profits. e. Not appreciating that instructions to Form No. 1 require deduction under section 10A to be considered at source while computing prof....
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....EAL NO. 1368 (BANG.) OF 2010, Dated:- 19-10-2012) (c) HSBC Electronic Data Processing (P.) Ltd. v. Addl. CIT (ITA No.1624/Hyd/2010, Dated:- 28-06-2013) for Assessment Year 2006-07. (d) Stream International Services (P.) Ltd. v. ADIT (I.T.) (IT Appeal No. 8997 (Mum.) of 2010, Dated:- 11-01-2013). 5.2 In the light of the above observations, we now briefly examine the grounds of appeal raised at S.Nos.5 to 13 on TP Issues. 5.3.1 Grounds No.5 to 7 are general in nature and since the learned Authorised Representative submitted that these grounds are not being pressed before us, the same are rendered infructuous and are accordingly dismissed. 5.3.2 In Ground No.8 (a to d), the learned Authorised Representative submitted that only the ground raised at S.No.9 (C) is being urged as it is in respect of the inclusion of certain companies as comparables by the TPO and the exclusion of certain other comparables. As we will be examining and considering the comparability or otherwise of individual companies as raised by the assessee before us, there is no requirement for specific adjudication on specific issues raised. Since the learned Authorised Representative has submitted that ....
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.... 29.01 9. Spanco Ltd. (Seg) (Earlier known as Spanco Telesystems & Solutions Ltd.) 20.86 10. Ace Software Exports Ltd. 7.72 11. Apex Knowledge Solutions Pvt. Ltd. 20.48 12. R Systems International Ltd. (Seg) 15.11 13. Flextronics Software Systems Ltd. (Seg) 14.54 Average 24.00 6.3 The average mean margin of the 13 comparable companies selected by the TPO was 24.00% whereas the average mean margin of the assessee as computed by the TPO was 3.74% on total cost. After granting working capital adjustment of 1.67%, the TPO computed the TP Adjustment at Rs. 2,50,30,925 to the ALP of international transactions entered into by the assessee in the period relevant to Assessment Year 2006-07. The ALP of the ITES rendered by the assessee was computed by the TPO as under :- Arithmetic Mean PLI 24% Less : Working Capital Adjustment as per TPO 1.67% Adj. Arithmetic Mean PLI 22.33 Operating Cost Rs. 13,46,61,429 Arm's Length Price (ALP) @ 122.33% of Operating Cost Rs. 16,47,31,326 6.4 The price charged by the assessee to its AEs is compared to the ALP as under :- Arm's....
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....4 We have heard the rival contentions and perused and carefully considered the material on record including the judicial decisions cited. We now proceed to deal with each of six comparables listed out in para 6.2 of this order (supra). 7.5 Maple e-Solutions Ltd. 7.5.1 This was a company chosen as a comparable by the assessee and accepted by the TPO. Before us, the assessee has filed additional grounds of appeal seeking to exclude this company from the final set of comparables on the grounds that this company's management is tainted and therefore the financials of this company and its data are unreliable for being applied for comparability purposes. It is submitted that it is on these grounds that this company was rejected as a comparable by the ITAT, Delhi Bench in the case of ITO v. CRM Services India (P.) Ltd (IT APPEAL NOS. 4068 (DELHI) OF 2009 AND 4796 (DELHI) OF 2010, Dated:- 30-06-2011) and that this decision was followed by a co-ordinate bench of this Tribunal in the case of Ariba Technologies India (P.) Ltd. (supra) for Assessment Year 2006-07. In view of this, the learned Authorised Representative prayed that this company be excluded from the final list of compar....
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....f comparables, we are unable to accept the contention of the Id. DR in this regard. It is more so because no contrary view has been brought by the Ld. DR to our notice. Respectfully following the precedents, we direct the exclusion of this case from the final list of comparables." Following the decision of the co-ordinate bench of this Tribunal in the case of Ariba Technologies India Pvt. Ltd. (supra), for the same assessment year 2006-07, we direct the Assessing Officer/TPO to exclude this company viz. Maple e-Solutions Ltd. from the set of comparable companies. 7.6 (i) Vishal Information Technological Services Ltd. (ii) Asit C Mehta Financial Services Ltd. (earlier Nucleus Netsoft GIS (India) Ltd.) and (iii) Goldstone Infratech Ltd. 7.6.1 These three companies were chosen by the TPO rejecting the objections of the assessee to their inclusion in the list of comparables. Before us it was submitted that the comparability of these three companies were considered and rejected as comparables by a co-ordinate bench of the Tribunal in the case of Ariba Technologies India Pvt. Ltd. (supra) which followed the decision of the ITAT, Hyderabad Bench in the case of HSBC Electron....
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....ts order dated 3.8.2012 has rejected this company as a comparable (name changed to Coral Hub Ltd.), vide para 18 of the order, wherein ultimately, it was decided that there is major difference in functionality and the business model and the DRP Bench was of the view that Coral Hub (formerly known as Vishal Information Technology Ltd.) was not a suitable comparable and needs to be dropped from the final set of comparables. Based on the above submissions, it was submitted that this company cannot be used as a comparable and has to be excluded. 9.1 The learned Departmental Representative, however relied on the orders of the TPO. 9.2 After considering the rival contentions, we find considerable force in the contentions advanced by the learned counsel. There is no dispute with reference to the fact that most of the cost incurred by the company taken as comparable is outsourcing cost, as can be seen from the Annual report placed in the paper-book and ITAT, Mumbai in the case of Maersk Global Service Centre (supra) has analysed and rejected this company as comparable, due to the reason that it has outsourced a considerable portion of its business and it is functionally different. Th....
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....s not pass through the filter adopted by the TPO, being the companies whose export revenues are more than 25% of the revenues'. Therefore, we are of the opinion, that this company cannot be considered as a comparable for the purpose of determining the ALP in this case. We direct the same to be excluded." "Nucleus Netsoft & GIS(India) Ltd. 13. The last objection was with reference to the above company, which is on similar facts as that of Vishal Information Technologies, discussed above. It was submitted that this company is functionally different and fails under the employee cost filter. It was further submitted that there is a scheme of amalgamation of earlier company by the orders of the Hon'ble High Court of Judicature of Bombay, on 22.2.2006 and in view of amalgamation, the financials have changed and the business model also changed. Referring to the annual report placed on record, it was submitted that as against Rs. 24.02 lakhs of employee costs for the year ending 31st March, 2005, the employee cost has increased to Rs. 132.59 lakhs. Further, the data processing charges is also to the extent of Rs. 1.04 crores, which indicates that the assessee is outsourcin....
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....heard both parties and perused and carefully considered the material on record. Admittedly, as pointed out by the ld. D.R., there is no disputing the fact that the assessee had never objected to the inclusion of these companies in the set of comparables in earlier proceedings both before the TPO and the CIT(A). It is also seen that even in the grounds of appeal raised before us, the assessee has not raised any grounds or any additional grounds of appeal challenging the inclusion of these two companies in the list of comparables. In this factual matrix, since no cause of grievance arises to the assessee from the impugned order, on the inclusion of these companies as comparables, this claim of the assessee is not maintainable as there is no adverse finding in the impugned orders calling for or requiring us to adjudicate thereon. We, therefore, finding that the contentions raised by the learned Authorised Representative of the assessee in respect of these companies are not maintainable, reject the same. Consequently, the inclusion of these two companies i.e. Vishal Information Technological Services Ltd. and Asit C Mehta Financial Services Ltd. in the final list of comparables is uphe....
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.... 8.3.1 The contention of the assessee is that the TPO erred in including the proportionate cost of additional depreciation and telecom expenditure, which were extraordinary expenses, as part of operating cost. The assessee contends that while arriving at the operating cost with AEs, it has considered depreciation amounting to Rs. 33,87,281 as part of the operating cost. It is submitted that in the period under consideration, the assessee had debited an amount of Rs. 1,15,02,720 to its profit and loss account on account of additional depreciation on assets due to a change in its depreciation policy, whereby there was a change in the estimated useful life of the assets. In this manner, the assessee re-computed the additional depreciation from inception or date of acquisition of the assets and charged the same, which also related to the earlier assessment years, to the profit and loss account. The assessee contends that the same should be considered as an extra-ordinary item and therefore should not form part of the computation of AEs operating cost for the year under consideration. 8.3.2 In support of the above proposition, the learned Authorised Representative placed reliance o....
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....onsidered and included the same while computing the operating cost of the assessee. It is submitted that by the same parity of reasoning, the same ought to be excluded while computing the operating cost of the assessee. 8.6.1 The learned Departmental Representative submitted that the assessee's claim that additional depreciation on assets ought not to consider as part of operating cost on the ground that it was an item of extra-ordinary expenditure, is not tenable. It was contended that the said expenditure is clearly not extra-ordinary in nature and the TPO had correctly allocated the said expenditure proportionately between AE and non-AE segments. It is submitted that if the same pertained to both earlier and subsequent years also, as submitted by the assessee, then it is to be seen whether the same has been applied in the case of the comparables also. The learned Departmental Representative further contended that the assessee's reliance for its claim on the decisions of the Mumbai Tribunal in the case of Capgemini India (P.) Ltd. (supra) and of the co-ordinate bench of this Tribunal in the case of Toyota Kirloskar Motors (P.) Ltd. (supra) would not come to the assesse....
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....nd in its profit and loss account, is an expenditure extra-ordinary in nature requiring it to be excluded from the computing of AEs operating cost. If, as contended by the assessee, this expenditure pertains to earlier assessment year's also, then in the fitness of things this issue ought to be re-examined afresh by the TPO to ascertain whether and how the assessee's claim has been applied to the comparable companies also so that there will be parity when the said expenditure is proportionately applied to the operating cost of the assessee and comparable companies. In this view of the matter, we set aside the issue of the assessee's claim of additional depreciation being an item of extra-ordinary expenditure to the file of the TPO for fresh examination and adjudication thereon in the light of our observations above, after affording the assessee adequate opportunity of being heard and to file details/submissions required. 8.9 With respect to the contingent expenses in the nature of provision for telecom expenses, it is seen that the assessee has itself disallowed these expenses in the computation of taxable income on the ground that it is contingent liability. We find....
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.... relates to the computation of the deduction under Section 10A of the Act. In the year under consideration, the assessee claimed deduction under Section 10A of the Act to the extent of Rs. 2,80,16,793. In doing so, the assessee did not consider the brought forward business losses and unabsorbed depreciation. The Assessing Officer, however, was of the view that the deduction under Section 10A of the Act is available from total income and held that total income is computed after aggregation of the profits/losses of various units after setting off the brought forward business losses and unabsorbed depreciation, which was then accordingly computed at NIL. 9.2 The assessee contended that the Assessing Officer erred in not appreciating that income which is eligible for exemption under Section 10A of the Act does not form part of total income at all and therefore does not enter the normal computation mechanism so as to enable a reduction of business losses and unabsorbed depreciation of other STP units. The assessee submits that the eligible business should be of a particular year and not influenced by business losses and unabsorbed depreciation of current as well as earlier years. It ....