TaxTMI 
TaxTMI 
2017 (5) TMI 1619
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....ect, thereby satisfying the pre-conditions for invoking the provisions of section 92C(3) of the Income Tax Act, 1961(Act). Accordingly, he erred in ignoring the arm's length price computed by the assessee and proceeding to determine arms length price in terms of section 92C(1) and (2) of the Act. The pre-conditions for the Assessing Officer to proceed to determine the arm's length price in relation to the international transactions of the assessee company with its associated enterprise have not been satisfied. 2. To adopt a flawed one sided turnover filter of eliminating companies with a turnover of Rs. 1 crore and below but at the same time including medium, large and very large companies with huge scale and size of operations, while carrying out the comparability analysis. This one sided stand taken by the TPO is not valid and has vitiated the entire TP analysis carried out by him. He ought to have appreciated the contentions of the Company that in like manner of eliminating very small companies as comparable, medium, large and very large companies ought to be eliminated. He ought to have restricted the comparability analysis only to companies whose level of operations/n....
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....ime of conducting the transfer pricing study by the assessee. 5. The final list of comparables adopted by the TPO is vitiated as a result of flawed processes and application of improper filters. As a result of such flawed processes, wrong application of filters and adoption of one sided filters, many incomparable companies like Infosys Technologies Limited, Tata Elexi Limited, Wipro etc have been considered as comparable with the company. These companies are completely different from the assessee company in terms of functions performed, risks assumed, assets employed, size and scale of operation, turnover, number of employees, market reach and other relevant factors. He ought to have accepted the comparables furnished by the Company and accepted the prices by it as the arms length price. 6. The TPO erred in law and on facts in not allowing appropriate adjustments under Rule 10B to account for, inter alia, differences in (a) accounting practices, (b) Depreciation adjustments, (c) marketing expenditure adjustments, (d) research and development expenditure adjustment, (e) risk profile between the Assessee and the comparable companies (f) under utilization of capacity....
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....which will not vest due to attrition etc. These assumptions may be made differently by various companies. In the case of our parent company, the cost of employee stock compensations have been computed based on GAAP/ conditions prevalent in the USA, which would necessarily be different from other Indian companies following the Black Scholes method who would compute them based on Indian GAAP/ conditions prevalent in India. In fact the Indian accounting standards prescribed by the Central Government under section 211 (3C) of the Act do not mandate that companies recognize employee stock compensation cost in their financial statements. To eliminate the impact of companies not accruing the cost of the same or adopting differing methods/assumptions by few companies which accrue the same and to make comparison meaningful, the charge for ESOP made by us as well as by any of the companies considered as comparable should be added back and thereafter OP/TC be computed. It will be a travesty of fairness if employee stock compensation costs are disallowed but at the same time considered as cost to determine the arms length price. The learned TPO may please appreciate that chapter X has....
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.... operating cost under the transaction net margin method while computing the arms length price. 10. Without prejudice to the foregoing contentions, the TPO erred in not talking cognizance of the fact that the average hourly offshore billing rate of the company compared favourably with other software companies after adjusting for differences in functions performed, risks assumed and assets employed and that the arms length test was satisfied by the 'Comparable uncontrolled price method'. 11. The TPO erred in not allowing necessary deduction of 5% in terms of proviso to section 92C(2) of the Act. B. DEDUCTION UNDER SECTION 10A 1. On the facts and circumstances of the case, there is no justification for the Assessing Officer to compute the deduction under section 10A in the manner laid down in annexure to the assessment order. The total turnover adopted by the Assessing Officer is the total turnover of the Company and not the turnover of the software service undertaking, there4by including turnover of a non-exempt undertaking of Rs. 6,15,55,794/-. He is also erred in adopting the entire communication link costs of Rs. 47,20,847/- incurred in foreign ....
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....ee's turnover of international transactions is Rs. 22.88 Crores. Therefore the first issue raised is regarding the applying of proper filter of turnover. Both the parties have agreed in principle that 10 times of the assessee's turnover on both sides shall be applied as a filter for selecting the comparable companies. The second aspect which is to be considered in this appeal is regarding Related Party Transaction (RPT) filter. The TPO applied 25% RPT. We find that neither the TPO nor the assessee has found any difficulty in selection of comparable companies. The TPO has selected as many as 20 companies in the final set of comparables. Therefore this is a normal case of availability of comparables. Accordingly, in view of the consistent view taken by this Tribunal that in the normal circumstances, the RPT tolerance range shall not exceed 15%. 7. Thus the comparability of the entire set of comparables has to be decided by applying the appropriate filter of turnover at 10 times of assessee's turnover on both sides and further RPT filter of 15%. We are of the considered opinion that the entire TP issue requires fresh examination and consideration at the level of TPO/A.O. Ac....
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....the company. In view of the above and other grounds to be adduced at the time of hearing, the appellant prays that the additional grounds may be admitted in the interest of fairness and justice and disposed of on merits." 11. We have heard the learned Authorised Representative as well as learned Departmental Representative and considered the relevant material on record. The learned Authorised Representative of the assessee has submitted that the Assessing Officer while computing the deduction under Section 10A has considered the entire cost of Employees Stock Option and RSU granted to the employees of the company by the holding company of the assessee. He has further submitted that the deduction in respect of Rs. 1,14,63,811 is eligible for EOU unit out of the total sum of Rs. 1,55,22,724 as the share of non-eligible unit in the said deduction is only ofRs.14,58,953. He has relied upon the decision of Special Bench of this Tribunal in the case of Biocon Ltd. Vs. DCIT 115 TTJ 649. 12. On the other hand, the learned Departmental Representative has submitted that the assessee has not raised this issue either before the Assessing Officer or before the DRP. Further the deductio....