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Before: SHRI R. K. PANDA & MS SUCHITRA KAMBLE
PER SUCHITRA KAMBLE, JM
ITA No. 6310/Del/2012 is filed by the assessee against the Assessment Order dated 17/11/2012 passed by Assessing Officer u/s 143(3) r/w Section 144C of Income tax Act, 1961 for Assessment Year 2008-09 and ITA No. 1466/Del/2015 is filed by the assessee against the Assessment Order dated
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14/11/2014 passed by Assessing Officer u/s 143(3) r/w Section 144C of Income tax Act, 1961 for Assessment Year 2010-11.
We are taking up the facts of A.Y. 2010-11 first. Evalueserve.com India is engaged in the business of providing IT enabled services to its AEs. The company is registered with the software technology parks of India (STPI), Noida, an autonomous body under the Ministry of Information Technology of Government of India. Evaluserve.com India derives business from the following four major segments:-
a) Business Information
EVS India renders research services primarily to its AEs. EVS India analysts cover a range of industries including – banking, insurance, telecommunications, pharmaceuticals and bio-technology, chemicals, energy and consumer goods, EVS India utilizes primary and secondary sources to conduct its research and analysis in this segment. Essentially, the research capabilities include: industry and value chain analysis, in-depth analysis of customer segments, products, channels, technologies, competitive benchmarking, monitoring and customized newsletters, forecasting, modeling, financial analysis, database content creation, management, up-gradation of existing research, commercialization analysis and business plans. The delivery is made on demand as well as on a continuous basis.
b) Intellectual Property
The services under this category include the following areas:
• Patents drafting and prior art search • Intellectual property asset management EVS India is involved in carrying out patent assessment, intellectual property research and analysis, patent consulting and preparing draft of patent applications to be filed overseas. This research is delivered to its AEs, which
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have an arrangement with a team of lawyers for filling of the patent applications in the appropriate jurisdictions. Apart from this, it also offers intellectual property asset management and helps in analyzing the portfolio of patents. It offers assistance on patent overlap, infringement and in finding potential companies which would be interested in licensing a particular invention. c) Investment Research and Financial Analytics This includes financial analysis and research focused on global mutual funds and equities. Essentially, it involves tracking the performance of specific stocks and mutual funds and analyzing it. The background data is compiled and provided to the clients that include mainly investment banks. The work is customized according to the requirements of the clients and specific requests received by them. d) Market Research: This involves voice-based support for conducting telephonic customer surveys in different parts of the world and formulation of preliminary hypothesis bases on the surveys. EVS India has extensive primary research capabilities, including the ability to conduct research in multiple languages. 3. The international transactions entered into are tabulated below:-
Sr. No. Nature of transaction Arm’s Length price as per taxpayer
(i) Provision of Services – Back Office 1,19,40,56,308 Operations (Research Services)
(ii) Cost Reimbursement 4,38,77,908
The assessee filed its return of income on 01.10.2010 declaring income of Rs.77,03,114. Since the Assessee had undertaken international transactions
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with its associated enterprises, a reference was made by the Assessing Officer to Transfer Pricing Officer (TPO) under Section 92CA (1). The assessee furnished the TP study and selected TNMM as the most appropriate method to benchmark its international transaction namely Information Technology Enable (ITeS) services. In respect of said services in the TP study, the assessee selected 10 comparables, whose average margin was 13.60% as against assessee’s margin of 20.17%, therefore, the assessee held that his transaction was at arm’s length. The TPO did not agree with the various filters used by the assessee in its TP study and the TPO used certain more filters and rejected 8 comparables from assessee’s set and selected 10 new comparables. Thus, the TPO selected a set of 12 comparables (2 from assessee’s set and 10 from new companies) whose average margin was 33.14% as against that of assessee’s at 20.17%. Vide order dated 09.01.2014 the TPO proposed an addition of Rs. 18,66,87,657 and the Assessing Officer vide draft assessment order after considering the said addition, proposed to assess the assessee at an income of Rs.19,57,81,350.
Aggrieved by the draft assessment order, the assessee filed objections before the Dispute Resolution Panel (DRP). The DRP passed directions vide order dated 23.09.2014. The Assessing Officer passed an Assessment Order dated 14.11.2014, thereby making addition of Rs. 19,57,81,350 to the income of the assessee.
Being aggrieved by the Assessment Order, the assessee has filed present appeal before us. The grounds of appeal are as follows: 1. That on the facts and in the circumstances of the case and in law, the order passed by the Ld. Assessing Officer ("AO") is bad in law and void ab- initio.
That on facts and circumstances of the case and in law, the Ld. AO/Ld. Transfer Pricing Officer ("TPO")/ Ld. Dispute Resolution Panel ("DRP") erred in
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making an addition of Rs. 186,687,657/-to the returned income of the Appellant by re-computing, the arm's length price of the international transactions under section 92 of the Income Tax Act, 1961 ("Act") and Rs. 1,390,576 on account of disallowance of prior period expenses.
That on the facts and circumstances of the case and in law, the reference made by the Ld. AO suffers from jurisdictional error as the Ld. AO has not recorded any reasons in the assessment order based on which he reached the conclusion that it was "expedient and necessary" to refer the matter to the Ld. TPO for computation of the arm's length price, as is required under section 92CA(1) of the Act. 4. That the Ld. AO/ Ld. TPO/ Ld. DRP erred on facts and in law in the assessment of the arm's length price of the Appellant's international transactions with associated enterprises by-
4.1. Rejecting on the basis of subjective grounds and presumptions, the comparability analysis conducted by the Appellant for determining the arm's length price in terms of section 92D of the Act read with Rule 10D of the Income-tax Rules, 1962 ("Rules") as well as fresh search. Further, the Ld. AO/ Ld. TPO/ Ld. DRP erred in modifying the comparable companies set adopted by the Appellant on the basis of additional/ modified quantitative filters selected by him and arbitrary statements which lacked valid and sufficient reasoning 4.1.1. Rejecting companies whose export revenues are less than 75 percent of the total revenues without taking cognizance of the Appellant's submissions 4.1.2. Rejecting companies whose sales turnover is less than INR 5 crores. 4.1.3. Rejecting companies with diminishing revenue for the period under consideration instead of being guided by functional comparability.
4.1.4. Rejecting companies with different financial year ending without taking cognizance of the Appellant's submissions.
4.1.5 Rejecting companies whose service income is less than 75 percent of the total revenues without taking cognizance of the Appellant's submissions.
4.2. The Ld. AO/ Ld. TPO/ Ld. DRP has erred by selecting certain
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companies which are not comparable in view of their significantly high turnover as compared to the Appellant 4.3 The Ld. AO/ Ld. TPO/ Ld. DRP has erred by selecting certain companies which were not comparable by way of functions and assets in order to determine the arm's length margin applicable to the Appellant and also erred by rejecting certain companies which were comparable by way of functions and assets in order to determine the arm's length margin applicable to the Appellant 4.4. The Ld. AO/ Ld. TPO/ Ld. DRP has erred in incorrectly computing margins of several comparable companies selected in the final comparable set 5. The Ld. AO/Ld. TPO/ Ld. DRP erred in treating provision for doubtful debts and donation expenses as an operating item instead of treating them as non-operating while computing the operating margin of the Appellant 6. The Ld.AO/Ld. TPO/ Ld. DRP erred in reclassifying expenses related to the non- unit of the Appellant which had been taken as non-operating by the Appellant to be operating expenses. Further, the Ld. AO/Ld. TPO/ Ld. DRP also erred in not considering the documentary evidence submitted to substantiate the non-operations in the said unit of the Appellant.
The Ld.AO/ Ld. TPO/ Ld. DRP erred in disregarding the multiple year data selected by the Appellant in the TP Documentation and in selecting the current year (i.e. financial year 2009-10) data for comparability despite the fact that at the time of comparison done by the Appellant, the complete data for financial year 2009-10 was not available within the public domain.
That the Ld. AO/ Ld. TPO erred in making a transfer pricing adjustment especially as the Ld. TPO had accepted the arm's length nature of the international transactions in FY 2008-09 and Commissioner of Income Tax Appeals ("CIT(A)") had accepted the arm's length nature of the international transactions in FY 2004-05 and FY 2006-07 9. The Ld. AO/ Ld. TPO/ Ld. DRP has erred in not appreciating the fact that the Appellant is a company incorporated under the provisions of the Companies Act, 1956 and enjoying the tax holiday benefits conferred under Section 10A of the Act as per the Software Technology Park of India ("STPI") Scheme. Thus, there is no motive on the part of the Appellant to shift the profits to any other jurisdiction. Hence the case of the Appellant falls squarely within the ambit of aforementioned principle.
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10.1. That, on the facts and in law, the order of the Ld. AO is erroneous to the extent of not incorporating the binding directions of the Hon'ble DRP while finalizing the order section 143(3) read with section 144C of the Act on the disallowances made by the Ld. AO of Rs. 13,90,576/- as prior period expense.
10.2. Without prejudice to Ground 10 and 11, the Ld. AO failed to understand that the appellant has computed the taxable income before giving any effect to prior period item in the profit and loss statement. The Ld. AO erred in appreciating the fact that the disallowance of Rs. 13,90,576/- as prior period expense would result in double taxation, which is bad in law.
That the Ld. AO erred in facts and in law in charging interest under section 234B, 234C and 234D of the Act. 12. That on the facts and circumstances of the case and in law, the Ld. AO has erred in initiating penalty proceedings u/s 271(l)(c) of the Act mechanically and without recording any adequate satisfaction for such initiation
Ground No. 1 is general in nature, hence dismissed. Ground No. 2 is correlated with Ground No. 10.1 and 10.2 and are related to disallowance of prior period expenses. Hence Ground No. 2 is discussed alongwith Ground No. 10.1 and 10.2. Ground No. 3 was not pressed by the Ld. AR at the time of hearing. Hence, Ground No. 3 is dismissed. 8. The Ld. AR submitted that during the course of the Transfer Pricing Assessment proceedings, the Assessee had provided all the submissions and relevant back up documents in support of the arm’s length nature of the international transactions. However, the TPO issued a show cause notice dated 25.11.2013 indicating therein to make a transfer pricing adjustment to the international transactions related to provisions of ITES. The TPO modified the comparability analysis conducted by the assessee for determining the arm’s length price for the ITES and concluded that the filters used in TP
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Documentation are inappropriate and suffer from various lacuna and defects and that the economic analysis conducted is inadequate and hence cannot be accepted. The TPO applied certain additional/modified quantitative filters (reject companies with different financial year ending, export revenues as a percentage of sales less than 75%, reject companies with sales turnover INR 5 crores etc.) selected by the TPO which lacked valid and sufficient reasoning and selected companies which in terms of their functions, assets and risks were not comparable to the Assessee. While applying these quantitative filters, the TPO used the updated financial information of the comparable companies pertaining to F.Y. 2009-10 which was not available with the assessee at the time of preparation of TP documentation. Accordingly, a detailed response dated 13.12.2013 was filed by the assessee with the TPO. The assessee therein explained that in undertaking the benchmarking analysis, the assessee undertook the selection of external comparables, using a scientific screening process involving various quantitative and qualitative filters, to arrive at independent companies with a comparable functional profile. Accordingly, the Assessee has rejected companies that do not meet any of the specified quantitative criteria as well as companies that are engaged in a different product line or have related party transactions or have an incomparable asset base. The assessee, in order to arrive at a set of due comparable companies, was solely guided by the parameters of functional comparability and therefore, the assessee in the TP documentation of F.Y. 2009-10 has not rejected companies on the basis of margins earned, whether profits or losses. The assessee also expressed its disagreement with the use of current year data by the TPO. 9. In respect of provision of IT enabled services, the Ld. AR submitted that the additional/ modified quantitative filters used by the TPO for rejecting the comparables were subjective, and the quantitative threshold limits that were considered for these filters do not provide a rational basis for using such limits. Further, the TPO rejected the companies with diminishing revenue/persistent
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losses while retained the comparables which had significant high growth as compared to the assessee company. If companies with diminishing revenue/persistent losses are being eliminated as said by the TPO, the same treatment should be given to companies with high sales/profitability growth. The quantitative filter of export revenue used by the TPO is not true indicator of the functional comparability of the company. Evaluation of comparable companies based on revenues is not an appropriate filter. In fact, comparability of a company is dependent on altogether different set of factors which have already been considered by the assessee in its transfer pricing documentation. Further, it was highlighted that the filtering process adopted by the TPO and the companies finally arrived at by the TPO do not adhere to the comparability criteria set out under Rule 10B(2) of the Indian Regulations. Also, the companies finally selected by the TPO were engaged in a different set of functions as compared to that of the assessee and had related party transactions. Further the TPO wrongly computed the margins of comparable companies. The TPO wrongly computed the PLI of the assessee at 16.17% instead of 20.17% by considering provision for doubtful debts, donations and expenses relating to Noida unit as operating. Working capital adjustment to account for differences in the working capital policies of the assessee and comparables is also required. The TPO used the updated financial information of the comparables to determine their comparability and arrived at an arm’s length margin. Such information was not available with the assessee at the time transfer pricing study was conducted. It was explained that the assessee is a company incorporated under the provisions of the Companies Act, 1956 and enjoyed tax holiday benefits conferred under Section 10A of the Act as per the Software Technology Park of India Scheme. Thus, there is no motive on the part of the assessee to shift the profits to any other jurisdiction.
The Ld. DR submitted regarding Grounds pertaining to the TP Adjustment that the assessee is providing Research and Analysis Services
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consisting of Business Information, Intellectual property research, Investment Research & financial analytics and Market Research services, to its AE as mentioned in the TP Study Report. From the perusal of the above services it is evident that the assessee is providing High End domain specific KPO Services and not low-end BPO Services. The ITAT in case of assessee for the AY 2006-07 (ITA No. 4001 /del/2013) dated 11.05.2017 has restored the identical issue of transfer pricing adjustment back to the file of AO/ TPO for ascertaining the correct functional profile of the assessee. The operating para of the above judgment is given below:- “34. On reading of the above decision it is apparent that coordinate bench in its order for AY 2007-08 while reading the orders for AY 2005-06 of the coordinate bench in case of the assessee, has entered in to an error by not looking at the para no 43 of the order, where findings are contained, where in it has been held that assessee is high end ITES services provider in its T P Study report because the assessee conducts research activity and provides knowledge management services to its AEs. The coordinate bench has looked at the reference and finding in case of Maersk Global Centers (India ) Pvt. Ltd. (ITA 7466/Mum/2012) in para no 38 and 39 of that judgment and has held that assessee is a low end ITES service provider. According to us those paras of order for AY 2005-06 do not contain the finding about the functional profile of the assessee. Assessee has submitted at page no 245 onwards of the paper book order of Ld TPO for Ay 2005-06 where in where in at para no 2 Id. TPO has described the business description of the assessee and at para no 2.3 assessee has mentioned the description of the assessee‘s business as under:- — The assessee is engaged in the business of providing high end IT enables services to its associated enterprises, the company is registered with software technology of the government of India. The assessee conducts research activities and provides knowledge management services to its associated enterprises. II The above functional profile matches with the website information submitted by the Id DR. Looking at the order of the Id TPO for impugned AY 2006-07, we could not find, on the basis of services mentioned, whether assessee is classified as High end ITES or Low End ITES
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service provider. Even assessee has also not submitted its search criteria ( Para No (iv) at page no 15 of TPO order) and it is also mentioned that assessee has conducted fresh search process without assigning any reason for conducting fresh search and also not provided details of search process employed and its distinction with earlier search process for the same year. This has lead to an ambiguity in selection of comparables qua the functional profile of the assessee. On the basis of facts pointed out by the Id DR and examining the submission of the assessee before us coupled with the documents relied upon, we cannot close our eyes to this startling facts staring at us. In view of the above categorical finding of the coordinate bench for AY 2005-06 based on the T P Study report of the assessee itself now it is not possible to assume the functional profile of the assessee as low End ITES provider. Further it is also not possible to ignore the findings of the coordinate bench for AY 2007-08 further the appeal before us is AY 2006-07 which is in between year of both the above years decided by the coordinate bench. The two comparables objected by the assessee also cannot be directed for its exclusion without reaching at the correct functional profile of the assessee. Therefore, in the interest of justice and to dig out the correct functional profile of the assessee amidst host of confusion, we set aside the whole issue of transfer pricing adjustment back to the file of Ld AO/ TPO for ascertaining the correct functional profile of the assessee for this year without being influenced by the order of the coordinate bench for AY 2007-08, then carry out examination of comparability analysis and then determine ALP of the International transactions. Needless to say that assessee shall be duty bound to provide correct functional profile of the assessee and its complete search process and its stepwise results to the Id TPO/ AO along with its justification for claim of working capital adjustments or capacity utilization for examination by the Id AO/ TPO. In the result ground no 3, 4, 5 and additional ground are remitted back to the file of Id AO/ TPO to decide the whole issue afresh and hence these grounds of appeal of the assessee are allowed with above directions.”
The order of the ITAT in case of Evalueserve SEZ (Gurgaon) Pvt. Ltd. for the AY 2010-11 (ITA No. 1467/Del/2017) is not applicable (as argued by the Ld. AR)
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as in the above case the ITAT has held that Evalueserve SEZ (Gurgaon) Pvt. Ltd. is not a KPO and is providing only ITeS Services which fall in the realm of BPO and thus eclerx, which is a KPO, cannot be compared with Evalueserve SEZ (Gurgaon) Pvt. Ltd., which is a BPO. The Department is in the process to file MA in the case of Evalueserve SEZ (Gurgaon) Pvt. Ltd. for 2010-11 (ITA No. 1467/Del/2017). The functional profile of the assessee has not changed even in the AY 2010-11. Hence, following the above order of the ITAT in assessee’s own case for the AY 2006-07, the Ld. DR submitted that the order of the AY 2010-11 may also be restored to the AO/TPO for ascertainment of correct functional profile (whether the assessee is a KPO or BPO). Unless the correct profile (FAR) of the assessee is ascertained (whether the assessee is a KPO or BPO) no argument can be made for the exclusion/inclusion of comparables on ground of functional dissimilarity.
The Ld. AR in his rejoinder submitted that the Ld. DR cannot argue that assesse is a KPO as he cannot go beyond the order of the TPO. The Ld. AR submitted that Ld. DR cannot be permitted to go beyond the TPOs order. Once the TPO expressly accepts the functional profile of the Appellant, then Revenue cannot be allowed to argue beyond it. In our case at para 3 internal page 3, the TPO has given a categorical finding that he has pursued the TP Study and has found everything in order. The Ld. AR submitted that the Revenue cannot improve the assessment order. It is the prerogative of the TPO to accept or reject the functional profile after considering all the relevant aspects. Once the TPO accepts it, then that becomes final qua the Revenue. The Revenue cannot step into the shoes of the TPO to undo what was not done by him. If this is accepted and given a logical conclusion, then invariably all the cases pending before the Tribunal/ High Court will require restoration to the TPO, and fresh opportunity will be given to the TPO. The Ld. AR submitted that the role of the Ld. DR, in an appeal by the assessee is limited to defending the order of the TPO. He cannot do or argue what the TPO could have done but failed to do.
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For the above preposition, the Ld. AR relied upon the following decision: i) CIT vs. Ms. Aishwariya K.Rai [2010] 127 ITD 204- Mumbai ITAT ii) MCorp Global P. Ltd. vs. CIT [2009] 309 ITR 434 (SC) iii) Mckinsey Knowledge Centre (P.) Ltd. vs. DCIT [2017] 77 taxmann.com 164 (Delhi - Trib.) iv) Mahindra & Mahindra Ltd. vs. DCIT - Mumbai IT AT - Special Bench [2010] 122 ITD 216 (Mumbai) (SB) v) Emission AB- Delhi ITAT- 20/56 SOT 177 vi) ITO vs. Anant Y. Chavan [2009] 126 TTJ (Pune) 984 vii) American Express (India) (P.) Ltd. vs. DCIT- [2017] 83 taxmann.com 345 (Delhi - Trib.) viii) Mckinsey Knowledge Centre (P.) Ltd. vs. DCIT [2017] 82 taxmann.com 25 (Delhi – Trib)
The Ld. AR pointed out that in the recent decisions in case of American Express and Mckinsey (supra), the Ld. DR raised this very issue stating that those companies are KPOs and hence matter should be remanded. However, ITAT did not entertain such plea for the reason that this was not the case of the TPO and classification is not mandatory in law. The Ld. AR submitted that classification to BPO/KPO is not mandatory. The Hon’ble Delhi High Court in Rampgreen Solutions 377 ITR 533 held that classification is not mandatory. Furthermore, the concept of BPO and KPO is not mentioned in Rule 10B of the Income Tax Rules, 1962 (‘the Rules’). On examination of the Act and the Rules, it is evident that for comparability analysis, information technology enabled services are not bifurcated in strict compass of BPO/KPO. The basic rule is contained in Rule 10B and that should be applicable. The Ld. AR relied on decision of the ITAT Delhi in case of Chryscapital Investment Advisors vs. DCIT (376 ITR (Trib)183 )(Delhi). This view is reaffirmed again, in Avenue Asia Advisors P. Ltd. vs. DCIT ITA No. 350/2016 order dated 18.09.2017. The Ld. AR further submitted that each year has to be seen on its own facts. It is settled law that each AY is to be seen on its own facts. In our case, there are
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many distinguishing features between the facts of AY 2006-07 and the facts of AY 2010-11. Hence, order of AY 2006-07 should not be followed. The distinguishing factors pointed out by the Ld. AR are as follows:
• Additional grounds were raised for the first time in AY 2006-07, which is not the case in AY 2010-11 as all points have been contested since the TPO level
• The assesse was wanting to exclude 2 comparables taken by it in its own TP Study
• Assessee could not submit and explain why a different stance was being taken now
• Assessee could not explain how these 2 comparables were initially taken as comparable in its own TP Study- the reason for retracting its own comparables, and initial search process of assesse is not known
• There is no common comparable in AY 2006-07 and AY 2010-11, which is subject-matter of dispute.
• AY 2006-07 was remanded back because the Ld. DR was against the admission of additional ground.
• The Ld. DR made a statement that Dept, is in the process of filing an MA in AY 2007-08 order. However, till date no such MA has been filed and the even the time limitation has expired. It was incorrect on behalf of the Dept, to make such a statement, which has not subsequently been honoured.
The Ld. AR submitted that the Ld. DR submitted website print and stated that in that it is written that assesse is KPO. This is factually incorrect.
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The website print is of the Parent Company of the assesse and not of the assesse. In any case assesse has not accepted the order of Tribunal for AY 2006-07 and has filed appeal in High Court and MA in ITAT. The Ld. AR submitted that the case of sister concern is having identical facts. The Ld. AR submitted that the Tribunal has now ruled in case of sister concern on merits(ITA No. 1467/D/2015- Group entity (Evalueserve (SEZ)). The Ld. AR pointed out that functional profile of sister concern and of assesse are identical. In this year TP Study, TPO order and DRP order of both entities are identical. Hence, Revenue is bound to take same stand when looking at both the entities. As TP Study and TPO order of both entities are identical, and Ld. DR did not challenge the functional profile when case of Evalueserve (SEZ) was heard in ITAT and did not take a stand that Evalueserve (SEZ) is a KPO, in view of the fact that TP Study and TPO order of both entities is identical, Ld. DR now cannot take a different stance qua both the entities. Further, even ITAT in its order at para 8 has stated that the FAR analysis shall be the basis to determine comparability. Further, ITAT has also mentioned that TPO has not disputed the functional profile of the assesse. The Ld. AR relied upon the Hon’ble Delhi High Court’s decision in assessee’s own case for AY 2007-08. More importantly, Department appealed against the ITAT order for AY 2007-08 in Delhi High Court and vide order dated 31.10.2017, Department’s appeal in Delhi High Court has been dismissed. For AY 2007-08, ITAT had ruled in favour of the assesse. Delhi High Court order has now settled this issue in assessee’s own case. The Ld. AR submitted that in the order for AY 2007-08, DR did raise this issue disputing functional profile of the Assessee, during the course of his arguments and stated that assesse is a KPO and yet ITAT ruled in our favour. Thereafter, appeal was filed in the Delhi High Court by the Department in which specifically this ground was raised in detail and question of law was also framed. Yet, Delhi High Court has dismissed their appeal. The Ld. AR pointed out that this issue of so-called conflict between ITAT findings in AY 2005-06 and 2007-08, which is also mentioned AY 2006-07 ITAT order,
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was a specific ground taken by the Department in their appeal memo and yet it has been dismissed. Hence, now principle of merger is applicable and since High Court has approved the ITAT order and passed an order and dismissed Department’s contention that Assessee is a KPO, this view is now binding on Department. ITAT order of AY 2007-08, Department’s appeal in High Court and High Court order dated 31.10.2017 is being filed herewith alongwith ITAT order of AY 2007-08.
The Ld. AR submitted the background of all cases as follows:
• AY 2005-06- ITAT ruled in assessee’s favour for this AY on 30.09.2016, on merits. No appeal filed by Department in High Court.
• AY 2006-07- ITAT has remanded it back primarily because assesse wanted to change its own stand after 11.05.2017 and retract its own comparables.
• AY 2007-08- ITAT ruled in assessee’s favour for this AY on 13.12.2016, on merits. Appeal filed by Department in which both issues were raised and challenged- functional profile of assesse and comparables on merits. However, Delhi High Court vide order dated 31.10.2017, dismissed Department’s appeal.
• The Tribunal vide order dated 30.06.2017 has also ruled in case of sister concern, whereby case has not been remanded back (ITA No. 1467/D/2015- Group entity (Evalueserve (SEZ)). It is pertinent to note that functional profile of sister concern and of assesse are identical. In this year TP Study, TPO order and DRP order of both entities is identical.
The Ld. AR submitted that if all facts and evidence are on record before the Hon’ble Tribunal, a mere remand will only prolong the proceedings and lead to multiplicity of proceedings. The Hon’ble Delhi High Court has recently
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in 2017 held that unnecessary remand in TP cases is a practice which should not be followed. For the above preposition, the Ld. AR relied upon the following decisions:
• Bechtel India Private Limited vs. DCIT- Delhi High Court order dated 25.07.2017 • Alcatel -lucent India Ltd. Vs. DCIT - Delhi High Court order dated 08.05.2017 • Voith Hydro Private Ltd. vs. PCIT- Delhi High Court order dated 25.09.2017
The Ld. AR pointed out that Ld. DR for the first time is taking up the issue of functional profile of the assessee during the course of the hearing proceedings before the Tribunal. This was never an issue taken up by the TPO/DRP and also the Department/Revenue was not in appeal before the Tribunal. Furthermore, only the assessee is in appeal before the Tribunal. The Ld. AR relied upon the following decisions: • Assam Co-Operative Apex Bank Ltd. v. Commissioner of Income tax [1978] 112 ITR 257 (Gauhati) • V. Ramaswamy Iyengar v. Commissioner of Income-tax [1960] 40 ITR 377 (Madras) • In New India Life Assurance Co. Ltd. v. Commissioner of Income-tax [1957] 31 ITR 844(Bom.)-
The Ld. AR submitted that the Ld. DR cannot argue that assesse is a KPO and cannot go beyond the TPO’s order. The Ld. DR cannot be permitted to go beyond the TPO’s order. Once TPO expressly accepts the functional profile of the Appellant, then Revenue cannot be allowed to argue beyond it. In our case at para 3 internal page 3, the TPO has given a categorical Finding that he has pursued the TP Study and has found everything in order.
For A.Y. 2010-11, the Ld. AR submitted that the assessee is challenging
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10 comparables to be excluded. These are as under: i. Accentia Technologies Ltd. ii. Eclerx Services Ltd. iii. ICRA Techno Analytics Ltd. iv. Infosys BPO Ltd. v. TCS E-serve International Ltd. vi. TCS E-serve Ltd. vii. igate Global Solutions Ltd. viii. e4e Healthcare Ltd. ix. R Systems x. Omega Healthcare Ltd.
17.1 The Ld. AR submitted that for Accentia Technologies Ltd., Eclerx Services Ltd., ICRA Techno Analytics Ltd., Infosys BPO Ltd., TCS E-Serve International Ltd., TCS E-Serve Ltd., e4e Healthcare Ltd. have been excluded by the ITAT in the sister concern of the assessee i.e. E-Valuesez (Gurgaon) Pvt. Ltd. for A.Y. 2010-11 in ITA No. 1467/D/2015. The Ld. AR submitted that functional profile and FAR analysis of both the companies are identical.
17.2 The Ld. AR submitted that the ITAT erred in inadvertently not excluding igate global Solutions Ltd., from the list of comparables, by stating that igate global Solutions Ltd. is functionally comparable to the Assessee. The Ld. AR submitted that this is factually incorrect and igate global Solutions Ltd should be excluded. The Ld. AR submitted that Tribunal in the case of E- VALUESEZ (GURGAON) PVT. LTD. for AY 2010-11- ITA No. 1467/D/15 in para 15 noted that igate global Solutions Ltd. is engaged in contract centre services and IT enabled services. This is factually incorrect. In the Annual Report, just before the use of words “contract centre services and IT enabled services”, it is
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written that igate global Solutions Ltd. is engaged in “software development services also” and all 3 are taken as one segment and thus there is no segmental reporting. Hence, the ITAT inadvertently overlooked the words “software development services” mentioned at Page 56 of Annual Report of igate global Solutions Ltd. The ITAT in its order at para 18, 24, 27 has excluded 3 comparables, ICRA Techno Analytics Ltd., TCS E-Serve International Ltd. and TCS E-Serve Ltd., on the ground that these 3 companies are engaged in the business of software development/testing etc., and hence is not functionally comparable. Thus, as igate global Solutions Ltd is engaged in software development and Assessee is not, the Ld. AR submitted that igate global Solutions Ltd should be excluded. Page 56 of the Annual Report clearly mentions that the company is engaged in software development. igate global Solutions Ltd. is engaged in software products and services. This is mentioned in page 67, 29 and 73 of the Annual Report. The Assessee is not engaged in sale of any products. Hence it is not comparable with the Assessee. At page 73, it uses the words ‘products’ and then writes 'Software Engineering’. At Page 56, 67, 51 of the Annual Report, stated that the company is engaged in IT services, contract centre services and IT enabled services. It is a known fact that IT services pertain to software industry and is different from IT enabled services. There are plethora of case-laws which state that software development is different from IT enabled services. At Page 56, 67, 51 of the Annual Report, it is stated that the company has only 1 segment. Hence income from software development, contract centre services and IT enabled services is reported as one segment- hence there is lack of segmental information. The Tribunal in para 11 and 18 have excluded Accentia Technologies Ltd. and ICRA Techno Analytics Ltd. on the ground that there is lack of segmental reporting. Hence, the Ld. AR submitted that same reasoning is applicable in the present case. The Ld. AR pointed out that E-VALUESEZ (GURGAON) PVT. LTD has not challenged the ITAT order either in appeal or via MA, for the simple reason that it has got relief on other comparables and hence addition stands deleted
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and thus challenging the ITAT order qua this issue would only be an academic exercise. However, in the present case, the Assessee is very much challenging the finding qua igate global Solutions Ltd, on grounds mentioned above, stating that it should not be followed and igate global Solutions Ltd should be excluded.
17.3 The Ld. AR further submitted that regarding R Systems and Omega Healthcare Ltd., the ITAT remanded back these comparables with the directions to the TPO. The same findings may followed in the present case.
The Ld. DR relied upon the orders of the TPO/AO and directions of the DRP.
We have heard both the parties and perused all the relevant material available on records. It is pertinent to note that the Assessee for A.Y. 2010-11 has not argued the comparables before us but only submitted the chart to that extent and submitted that the same should be considered according to the directions given by the Tribunal for A.Y. 2010-11- ITA No. 1467/D/15 in case of E-Valueserve SEZ (Gurgaon) P. Ltd. vs. ACIT order dated 30.06.2017. From the records or from the arguments, the Ld. AR has not made out clear similarities between the E-Valueserve SEZ (Gurgaon) P. Ltd. and the assessee company i.e. Evaluserve.com Pvt. Ltd. The same was not done by the TPO about the similarities between the sister concern and the assessee company. Therefore, if there is similarity between the two entities then these comparables has to be considered by the TPO/AO as per the written chart submitted before us. Otherwise, the same should be looked into afresh by the TPO and if all comparables are qualifying all the filters set out by the TPO/AO, then same should be included in the final list. Therefore, this issue is remanded back entirely to the file of the TPO for fresh adjudication after taking into consideration the functional profile of the assessee company and the comparables as well as taking into account the decision of the Tribunal in case of sister concern. Needless to say, the assessee be given proper opportunity of
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hearing by following principles of natural justice. Accordingly, Ground No. 4.1 is partly allowed for statistical purpose.
As regards Ground Nos. 4 and more specifically Ground No. 4.4, the Ld. AR submitted that the TPO erred in calculating the PLI of the comparables. TPO has taken 'miscellaneous income’ as operating in nature. The Ld. AR submitted that in the absence of details and nature of ‘miscellaneous income’ received by comparables, it should not be taken to be an operating item. This is mentioned in TPO’s order itself wherein calculations of PLI of comparables is stated. Hence, the Ld. AR submitted that ‘miscellaneous income’ should be non-operating as details are not known. In the case of BNY Mellon International Operations (India) (P.) Ltd. [2014] 52 taxmann.com,,306 (Pune - Trib.), Pune ITAT has held that ‘miscellaneous income’ is non-operating in nature. Further, the Ld. AR submitted that in case of Interglobe Technologies Pvt. Ltd, reimbursement of expenses are taken as operating. It is humbly submitted that in the absence of details and nature of expenses which have been reimbursed, it cannot be taken to be operating in nature. The Annual Report is silent. Hence, it should be taken to be non- operating.
The Ld. DR regarding Ground No. 4 submitted that the export filter (excluding companies having export less than 75% of total income) adopted by the TPO is a reasonable filter as the assessee earns predominantly from exports and thus its business model is different from the companies earning in domestic market. Geographical location costs saving benefits are available to the exporter due to which it has high margin, unlike the company providing services in domestic market, and thus the FAR of export oriented companies are different from the FAR of companies providing services in domestic sector. The ITAT Delhi I-2 Bench in case of Actis Global Services Pvt. Ltd. ITA No. 30/Del/2015 dated 10.12.2015 has upheld the above filter after considering the Provisions of Rule 10B(2)(d)- "conditions prevailing in the markets in which the respective parties to the transactions operate, including the geographical location and size of the markets, the laws and Government orders in force, costs
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of labour and capital in the markets, overall economic development and level of competition and whether the markets are wholesale or retail".
The Ld. DR further submitted that exclusion of Companies having 22. turnover less than Rs. 5 cr is not actually a turnover filter but a filter to exclude the companies with low capital base (vis-a-vis the turnover of Rs. 127 crore of assessee). These extremely low turnover (vis-a-vis the turnover of the assessee) companies lack competitive strength, operational efficiencies and human resources. In most of such companies the distinction between the shareholders and key employees is quite vague as the key employees are mostly the shareholders thereby obliterating the economic distinction between profit and salaries. The Ld. DR submitted that exclusion of diminishing revenue companies is a reasonable filter. The ITAT Delhi in case of Navisite India (P.) Ltd. [2015] 53 taxmann.com 73 (Delhi - Trib.) held that diminishing revenue/persistent losses are not in conformity with normal operational results and, thus, the companies incurring losses or diminishing revenue cannot be taken as comparable. The Ld. DR further submitted that excluding companies having different financial year, the ITAT Delhi held in case of Ameriprise India (P.) Ltd. v. Assistant Commissioner of Income- tax, Circle-1 (1), New Delhi[2015] 62 taxmann.com 237 (Delhi - Trib.) that — “If tested party has March year ending, then comparables must also have data relating to financial year ending 31st March itself and if such a data is not available, then a company albeit functionally comparable, disqualifies. However, if the relevant data for the concerned financial year can be deducted from the information available from its annual report, then, there can be no objection to its inclusion in the list of comparables with the adjusted data for the relevant financial year itself. ”
The Ld. DR submitted that since data for the relevant financial year was not available hence the TPO correctly excluded those comparables. The Ld. DR further submitted that excluding companies having Service Income less than 75% while keeping in view the fact that the assessee is a 100% EOU and predominantly earns service income in forex from providing services to its AE. Thus the above filter was correctly applied at 75% to exclude the companies
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having different business model (predominantly manufacturing company).
We have heard both the parties and perused all the relevant material available on record. From the perusal of the record it can be seen that the TPO has taken 'miscellaneous income’ as operating in nature. As per the Ld. AR’s submission in the absence of details and nature of ‘miscellaneous income’ received by comparables, it should not be taken to be an operating item. This is mentioned in TPO’s order itself wherein calculations of PLI of comparables is stated. Hence, the Ld. AR submitted that ‘miscellaneous income’ should be non-operating as details are not known. Prima facie this appears to be true, but the TPO/AO has not made any effort to look upon this aspect. Therefore, it will be appropriate to remand back this issue to the file of the TPO/Assessing Officer for fresh adjudication. We therefore restore this issue to the file of the A.O/TPO for fresh adjudication of the issue after giving due opportunity of being herd to the assessee. Ground No. 4, more specifically Ground No. 4.4 is partly allowed for statistical purpose.
As regards Ground No. 5, relating to provisions of doubtful debts and donation expenses as an operating expenses item instead of treating them as non-operating while computing the operating margin of the assessee, the Ld. AR submitted that the TPO has taken donation and provision for doubtful debt to be an operating expense when calculating assessee’s PLI. The Ld. AR submitted that donation has nothing to do with day to day operations of the Assessee and hence should be taken to be a non-operating expense. The Ld. AR relied upon the decision of Thyssenkrupp Industries India (P.) Ltd. vs. ACIT - [2013] 33 taxmann.com 107 (Mumbai - Trib.). Furthermore, TPO himself when calculating PLI of comparables has taken donation and provision for doubtful debt to be non operating in nature at page 31 (e4e healthcare), page 32 (Fortune), page 35 (Infosys BPO). Hence, the Ld. AR prayed that when TPO himself accepts that donation and provision for doubtful debt is non-operating, then same should be applied when calculating PLI of assesse and it should be
24 ITA Nos. 6310/DEL/2012 & 1466/DEL/2015
taken as non-operating in nature.
As relates to Ground No. 5 relating to the provision for doubtful debt, the Ld. DR submitted that it is linked with the operations of the assessee and thus it is operating in nature. The ITAT Delhi in case of Techbooks International (P.) Ltd. v. Deputy Commissioner of Income-tax, Circle-3, Noida [2015] 63 taxmann.com 114 (Delhi - Trib.) has held that provision for doubtful debt is operating in nature.
We have heard both the parties and perused all the relevant material available on record. It is pertinent to note that the TPO himself while calculating PLI of comparables has taken donation and provision for doubtful debt to be non operating in nature. The TPO has not made out the interlink between the donations and provisions for doubtful debt while concluding that it is operating in nature. No direct connectivity was made out by the TPO while arriving at the said conclusion. Therefore, the order of the TPO/AO is not sustainable on this account while making additions to that extent. Ground No. 5 of the Assessee’s appeal is allowed.
As relates to Ground No. 6, the Ld. AR submitted that TPO has erred in re-calculating Assessee’s PLI from 20.17% to 16.17%. The same is not acceptable to the assesse as per the Ld. AR. The Ld. AR submitted that assesse in its TP Study at page 499, 485 of PB Vol. 2 has stated that Rs. 3,06,71,861/- was incurred on NOIDA unit where no operation was done but fixed cost had to be incurred. Hence, this is a non-operating expense. However, TPO stated that this is an operating expense because according to him the AE should have reimbursed this expense. The Ld. AR submitted that this is a non-operating expense as these expenses related to Noida unit which is not operational during the year. Further, the Ld. AR pointed out that EVS India had two STPI units in Gurgaon and Noida respectively. However, there were no operations in the Noida unit. The said unit was in the process of
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shutting down due to certain business reasons. EVS India did not undertake any operations in the Noida unit while it continued to incur the fixed costs pertaining to this unit. These costs relate to rent and hire charges, depreciation, insurance, security charges, repair and maintenance, etc. The Ld. AR further submitted that the Assessee did not carry out operations in the Noida unit and the fixed costs incurred were unproductive costs and were not billed to the parent company. Thus, as the expenses incurred for the Noida unit were non- recurring and extraordinary in nature, these expenses have been excluded from the operating profit computation. This was mentioned in TP Study at page 499, 485. Also detailed submissions in this regard have been filed before TPO and DRP. The Ld. AR submitted that the comparables did not incur such extraordinary / non recurring expenses and hence for a like to like comparison, it is necessary to adjust such abnormal expenses from the computation of operating profit. The Ld. AR submitted that the very basis of Transfer Pricing Regulations is to undertake an exercise of comparability to eliminate differences, if any, by a suitable adjustment. The Ld. AR relied upon Rule 10B(3) and Rule 10B(1)(e)(ii) of the Income Tax Rules, 1962 as well as relied upon Safe Harour Rules notified by CBDT, which is now incorporated as Rule 10TA of the Income Tax Rules, 1962. The said Rules state that “operating expense” means the cost incurred in relation to international transaction. This fixed cost of NOIDA unit is not in relation to international transaction as this year business and operations of the Assessee were carried out only in the GURGAON unit and there were no operations in the NOIDA Unit and thus all costs that were incurred in relation to the international transaction, were incurred in the GURGAON unit. These fixed cost of NOIDA unit has no relation to providing of services to the AE. The Ld. AR submitted that it specifically refers to expenses incurred in course of normal operations and excludes extra- ordinary expenses and other expenses not relating to normal operations of the assesse. Thus, a bare reading of Safe Harbour Rules states that the intent is to exclude such extra-ordinary expenses which have no corelation with day-to-
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day operations. Further, the Ld. AR pointed out that TPO at page 29 states that these Safe Harbour Rules are applicable and applies them when determining the PLI of the comparables. Hence, the Ld. AR submitted that TPO must apply these Safe Harbour Rules when determining the PLI of the Assessee also. The Ld. AR relied upon the following judgments-
• Marubeni India (P.) Ltd. v. DIT 120131 354 ITR 638/215 Taxman 122 (Maq.)/33 taxmann.com 100 (Delhi)- Delhi High Court • CIT vs. Transwitch India (P.) Ltd ITA No. 678/2012- Delhi High Court • HOV Services Ltd. vs. JCIT [2016] 73 taxmann.com 311 (Pune - Trib.)
HCL Technologies BPO Services Ltd. v. Asstt. CIT 120151 60 • taxmann.com 186/69 SOT 571 (Delhi-Trib)
• Dy. CIT v. Exxon Mobil Gas (India) (P.) Ltd. [20151 152 ITD 220/120141 51 taxmann.com 256 (Delhi-Trib)
Transwitch India (P.) Ltd. v. Dy. CIT [20121 21 taxmann.com • 257/53 SOT 151 (Delhi-Trib)
The Ld. AR submitted that Marubeni India (P.) Ltd. v. DIT (2013) 354 ITR 638- Delhi High Court is directly on this issue wherein the Hon'ble Delhi High Court held that expenditure for closure of its India units would represent abnormal cost and the same has to be excluded while computing the operating margin of the assesse. In the case of Marubeni India (supra), also the Revenue argued that since the assessee is a captive unit of its associated enterprise, it was actually the latter that undertook the entire risk. Even in assessee’s case, the TPO states that assesse is a captive unit and risk is with the AE and hence AE should bear this expense and compensate. However, this was rejected by the Hon’ble Delhi High Court. The Ld. AR further submitted that the TPO cannot sit in the chair of the businessman and decide how the business is to be conducted. The incurring of expense are not doubted. TPO has not doubted
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that there is a material difference on this account. He has denied only on the ground that Assessee should have been compensated by the AE without realizing that the assesse is not charging on cost plus basis. The expense have been allowed u/s 37 of the Act and the limited reason for denying a higher PLI by the TPO is that the expenses should have been compensated by the AE, which is not correct. The DRP at para 11 has stated that evidence was not made available. This is factually incorrect. All evidences/bills/details/correspondence was made available to them and is also being filed in Court today. This argument of the Revenue that AE should have shared this cost, is again rejected by Hon’ble Delhi High Court in the case of CIT vs. Transwitch India P. Ltd. ITA No. 678/2012.
The Ld. DR relied upon the orders of the TPO/AO and directions of the DRP.
We have heard both the parties and perused all the relevant records. It is pertinent to note that the DRP observed that the evidence was not produced. But according to the Ld. AR, all evidences/bills/details/correspondence were produced. Since the evidences have not been verified by the revenue authorities, therefore, it will be appropriate to remand back this issue to the file of the TPO/AO for adjudicating the issue in the right of all the evidences produced by the assessee and after taking the same into consideration, decide the issue as per fact and law. Needless to the say, the assessee be given the opportunity of hearing by following principles of natural justice. Ground No. 6 is partly allowed for statistical purpose.
As relates to Ground No. 9, the Ld. AR submitted that the assessee has claimed deduction under Section 10A of the Income Tax Act, 1961 as allowable after setting off brought forward losses of the previous years. The Ld. AR submitted that the issue is squarely covered in favour of the
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assessee by the decision of the Hon’ble Supreme Court and therefore the issue needs to be decided in favour of the assessee.
The Ld. DR submitted regarding Ground No. 9 that the ITAT Delhi held in case of Interra Information Technologies (India) (P.) Ltd. [2012] 27 taxmann.com 1 (Delhi - Trib.) that the contention of the assessee that the transfer pricing adjustment should not be made for the reason that its income is exempt under section 10A and hence there is no motive to divert profit has to be rejected applying the judgment of the Special Bench of the Tribunal rendered in the case of Aztec Software Technology Services Ltd. v. Asstt. CIT [2007] 15 SOT 49/162 Taxman 119 (Bang.).
We have heard both the parties and perused the material available on the record. This issue is squarely covered in favour of the assessee by the decision of the Hon’ble Apex Court in case of CIT vs. Yokogawa India Ltd. (2017) 391 ITR 274. The Hon’ble Apex Court held as under:
“12. We have considered the submissions advanced and the provisions of Section 10A as it stood prior to the amendment made by Finance Act, 2000 with effect from 1.4.2001; the amended Section 10Athereafter and also the amendment made by Finance Act, 2003 with retrospective effect from 1.4.2001.
The retention of Section 10A in Chapter III of the Act after the amendment made by the Finance Act, 2000 would be merely suggestive and not determinative of what is provided by the Section as amended, in contrast to what was provided by the un-amended Section. The true and correct purport and effect of the amended Section will have to be construed from the language used and not merely from the fact that it has been retained in Chapter III. The introduction of the word ‘deduction’ inSection 10A by the amendment, in the absence of any contrary material, and in view of the scope of the deductions contemplated by Section 10A as already discussed, it has to be understood that the Section embodies a clear enunciation of the
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legislative decision to alter its nature from one providing for exemption to one providing for deductions.
The difference between the two expressions ‘exemption’ and ‘deduction’, though broadly may appear to be the same i.e. immunity from taxation, the practical effect of it in the light of the specific provisions contained in different parts of the Act would be wholly different. The above implications cannot be more obvious than from the case of Civil Appeal Nos. 8563/2013, 8564/2013 and civil appeal arising out of SLP(C) No. 18157/2015, which have been filed by loss making eligible units and/or by non-eligible assessees seeking the benefit of adjustment of losses against profits made by eligible units.
Sub-section 4 of Section 10A which provides for pro rata exemption, necessarily involving deduction of the profits arising out of domestic sales, is one instance of deduction provided by the amendment. Profits of an eligible unit pertaining to domestic sales would have to enter into the computation under the head “profits and gains from business” in Chapter IV and denied the benefit of deduction. The provisions of Sub-section 6 of Section 10A, as amended by the Finance Act of 2003, granting the benefit of adjustment of losses and unabsorbed depreciation etc. commencing from the year 2001-02 on completion of the period of tax holiday also virtually works as a deduction which has to be worked out at a future point of time, namely, after the expiry of period of tax holiday. The absence of any reference to deduction under Section 10A in Chapter VI of the Act can be understand by acknowledging that any such reference or mention would have been a repetition of what has already been provided in Section 10A. The provisions of Sections 80HHC and 80HHE of the Act providing for somewhat similar deductions would be wholly irrelevant and redundant if deductions under Section 10A were to be made at the stage of operation of Chapter VI of the Act. The retention of the said provisions of the Act i.e. Section 80HHC and 80HHE, despite the amendment of Section 10A, in our view, indicates that some additional benefits to eligible Section 10A units, not contemplated by Sections 80HHC and 80HHE, was intended by the legislature. Such a benefit can only be understood by a legislative mandate to understand that the stages for working out the deductions under Section 10A and 80HHC and 80HHE are substantially different. This is the next aspect of the case which we would now like to turn to.
From a reading of the relevant provisions of Section 10A it is more than clear to us that the deductions contemplated therein is qua the eligible
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undertaking of an assessee standing on its own and without reference to the other eligible or non-eligible units or undertakings of the assessee. The benefit of deduction is given by the Act to the individual undertaking and resultantly flows to the assessee. This is also more than clear from the contemporaneous Circular No. 794 dated 9.8.2000 which states in paragraph 15.6 that, “The export turnover and the total turnover for the purposes of sections 10A and 10B shall be of the undertaking located in specified zones or 100% Export Oriented Undertakings, as the case may be, and this shall not have any material relationship with the other business of the assessee outside these zones or units for the purposes of this provision.”
If the specific provisions of the Act provide [first proviso to Sections 10A(1); 10A (1A) and 10A (4)] that the unit that is contemplated for grant of benefit of deduction is the eligible undertaking and that is also how the contemporaneous Circular of the department (No.794 dated 09.08.2000) understood the situation, it is only logical and natural that the stage of deduction of the profits and gains of the business of an eligible undertaking has to be made independently and, therefore, immediately after the stage of determination of its profits and gains. At that stage the aggregate of the incomes under other heads and the provisions for set off and carry forward contained in Sections 70, 72and 74 of the Act would be premature for application. The deductions under Section 10A therefore would be prior to the commencement of the exercise to be undertaken under Chapter VI of the Act for arriving at the total income of the assessee from the gross total income. The somewhat discordant use of the expression “total income of the assessee” in Section 10A has already been dealt with earlier and in the overall scenario unfolded by the provisions of Section 10A the aforesaid discord can be reconciled by understanding the expression “total income of the assessee” in Section 10A as ‘total income of the undertaking’.
For the aforesaid reasons we answer the appeals and the questions arising therein, as formulated at the outset of this order, by holding that though Section 10A, as amended, is a provision for deduction, the stage of deduction would be while computing the gross total income of the eligible undertaking under Chapter IV of the Act and not at the stage of computation of the total income under Chapter VI. All the appeals shall stand disposed of accordingly.”
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Thus, the Hon’ble Apex Court held that the aggregate of the incomes under other heads and the provisions for set off and carry forward contained in Sections 70, 72 and 74 of the Act would be premature for application. The deductions under Section 10A therefore would be prior to the commencement of the exercise to be undertaken under Chapter VI of the Act for arriving at the total income of the assessee from the gross total income. The expression “total income of the assessee” in Section 10A has to be understood as ‘total income of the undertaking’. Thus, there was no motive of the assessee to divert the profit of the assessee company. Therefore, Ground No. 9 is allowed.
As relates to Ground No. 10.1 and 10.2 regarding addition on account of disallowance of prior period expenses to the extent of Rs. 13,90,576, the Ld. AR submitted that during the course of the assessment proceedings, the Assessing Officer issued a notice under Section 143(2) of the Act vide its questionnaire dated 19.09.2013. The assessee was asked to submit various details related to the return of income for A.Y. 2010-11. In compliance to the said notice, assessee attended and the relevant information and documents as asked for were provided by the assessee before the Assessing Officer from time to time. The Assessing Officer vide its draft order dated 12.03.2014 u/s 144C r/w Section 143(3) of the Act proposed an addition of Rs. 13,90,576 as prior period expense to the returned income. The Ld. AR submitted that the Assessing officer has not given any opportunity to explain/rebut the disallowances. During the year under consideration, the assessee company has ‘Profit before tax and prior period items’ amounting to Rs.9,33,39,128/- as per the audited profit and loss account. The assessee had shown “prior period items” amounting to Rs. 37,40,361/- below the line in the profit and loss account. The Ld. AR further submitted that without prejudice to the above, the prior period income of Rs. 13,90,576 was in fact the reversal of the prior period expense for A.Y. 2009-10. The benefit of the said prior period expenses amounting to Rs.
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32,055,199 was not claimed in the tax computation for A.Y. 2009-10. Since the benefit of expense was not taken in the earlier year tax computation, the same should not be considered as income.
The Ld. DR relied upon the orders of the TPO and Assessing Officer.
We have heard both the parties and perused all the relevant records available. As regards Ground Nos. 10.1 and 10.2, the DRP while giving directions vide order dated 23.09.2014 at page 41 has given relief on disallowance of prior period expense of Rs.13,90,576/-. However, this addition has not been deleted by the Assessing Officer. Therefore, we direct the Assessing Officer to delete this addition as per the directions given by the DRP. Ground No. 10.1 and 10.2 are partly allowed for statistical purpose.
Ground No. 7 and 8 are already taken into account while deciding the issue of comparables. Therefore, Ground Nos. 7 and 8 are partly allowed for statistical purpose. 39. Ground No. 11 is regarding charging and computing interest under section 234B, 234D and 244A of the Income Tax Act, 1961. Since, no specific arguments were raised before us and since charging of interest is consequential to the computation of total income of the assessee, therefore, ground No. 11 is dismissed. 40. Ground No. 12 is regarding initiation of penalty proceedings under the provisions of section 271 (1)(c) of the Income Tax Act, 1961. The same is dismissed being premature at this juncture. 41. In result, ITA No. 1466/DEL/2015 for A.Y. 2010-11 i.e. appeal of the assessee is partly allowed for statistical purpose.
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Now we are taking up the Appeal for A.Y. 2008-09 Grounds are as follows:
That on the facts and in the circumstances of the case and in law, the order passed by the Ld. Assessing Officer ("AO") is bad in law and void ab-initio. 2. That on facts and circumstances of the case and in law, the Ld. AO/Ld. Transfer Pricing Officer ("TPO")/ Ld. Dispute Resolution Panel ("DRP") erred in making an addition of Rs. 186,687,657/-to the returned income of the Appellant by re-computing, the arm's length price of the international transactions under section 92 of the Income Tax Act, 1961 ("Act") and Rs. 1,390,576 on account of disallowance of prior period expenses.
That on the facts and circumstances of the case and in law, the reference made by the Ld. AO suffers from jurisdictional error as the Ld. AO has not recorded any reasons in the assessment order based on which he reached the conclusion that it was "expedient and necessary" to refer the matter to the Ld. TPO for computation of the arm's length price, as is required under section 92CA(1) of the Act. 4. That the Ld. AO/ Ld. TPO/ Ld. DRP erred on facts and in law in the assessment of the arm's length price of the Appellant's international transactions with associated enterprises by-
4.1.Rejecting on the basis of subjective grounds and presumptions, the comparability analysis conducted by the Appellant for determining the arm's length price in terms of section 92D of the Act read with Rule 10D of the Income-tax Rules, 1962 ("Rules") as well as fresh search. Further, the Ld. AO/ Ld. TPO/ Ld. DRP erred in modifying the comparable companies set adopted by the Appellant on the basis of additional/ modified quantitative filters selected by him and arbitrary statements which lacked valid and sufficient reasoning 4.1.1. Rejecting companies whose export revenues are less than 75 percent of the total revenues without taking cognizance of the Appellant's
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submissions 4.1.2. Rejecting companies whose sales turnover is less than INR 5 crores. 4.1.3. Rejecting companies with diminishing revenue for the period under consideration instead of being guided by functional comparability.
4.1.4. Rejecting companies with different financial year ending without taking cognizance of the Appellant's submissions.
4.1.5 Rejecting companies whose service income is less than 75 percent of the total revenues without taking cognizance of the Appellant's submissions.
4.2. The Ld. AO/ Ld. TPO/ Ld. DRP has erred by selecting certain companies which are not comparable in view of their significantly high turnover as compared to the Appellant 4.3 The Ld. AO/ Ld. TPO/ Ld. DRP has erred by selecting certain companies which were not comparable by way of functions and assets in order to determine the arm's length margin applicable to the Appellant and also erred by rejecting certain companies which were comparable by way of functions and assets in order to determine the arm's length margin applicable to the Appellant 4.4. The Ld. AO/ Ld. TPO/ Ld. DRP has erred in incorrectly computing margins of several comparable companies selected in the final comparable set 5. The Ld. AO/Ld. TPO/ Ld. DRP erred in treating provision for doubtful debts and donation expenses as an operating item instead of treating them as non-operating while computing the operating margin of the Appellant 6. The Ld.AO/Ld. TPO/ Ld. DRP erred in reclassifying expenses related to the non- unit of the Appellant which had been taken as non-operating by the Appellant to be operating expenses. Further, the Ld. AO/Ld. TPO/ Ld. DRP also erred in not considering the documentary evidence submitted to
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substantiate the non-operations in the said unit of the Appellant.
The Ld.AO/ Ld. TPO/ Ld. DRP erred in disregarding the multiple year data selected by the Appellant in the TP Documentation and in selecting the current year (i.e. financial year 2009-10) data for comparability despite the fact that at the time of comparison done by the Appellant, the complete data for financial year 2009-10 was not available within the public domain.
That the Ld. AO/ Ld. TPO erred in making a transfer pricing adjustment especially as the Ld. TPO had accepted the arm's length nature of the international transactions in FY 2008-09 and Commissioner of Income Tax Appeals ("CIT(A)") had accepted the arm's length nature of the international transactions in FY 2004-05 and FY 2006-07 9. The Ld. AO/ Ld. TPO/ Ld. DRP has erred in not appreciating the fact that the Appellant is a company incorporated under the provisions of the Companies Act, 1956 and enjoying the tax holiday benefits conferred under Section 10A of the Act as per the Software Technology Park of India ("STPI") Scheme. Thus, there is no motive on the part of the Appellant to shift the profits to any other jurisdiction. Hence the case of the Appellant falls squarely within the ambit of aforementioned principle.
10.1. That, on the facts and in law, the order of the Ld. AO is erroneous to the extent of not incorporating the binding directions of the Hon'ble DRP while finalizing the order section 143(3) read with section 144C of the Act on the disallowances made by the Ld. AO of Rs. 13,90,576/- as prior period expense.
10.2. Without prejudice to Ground 10 and 11, the Ld. AO failed to understand that the appellant has computed the taxable income before giving any effect to prior period item in the profit and loss statement. The Ld. AO erred in appreciating the fact that the disallowance of Rs. 13,90,576/- as prior period expense would result in double taxation, which is bad in law.
That the Ld. AO erred in facts and in law in charging interest under
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section 234B, 234C and 234D of the Act. 12. That on the facts and circumstances of the case and in law, the Ld. AO has erred in initiating penalty proceedings u/s 271(l)(c) of the Act mechanically and without recording any adequate satisfaction for such initiation
Brief facts of the case are as under: The assessee company, during the year under consideration was carrying on the business of IT enabled service provider and was registered with the STPI as a 100% Export Oriented Unit and also claimed deduction u/s 10A of the IT Act amounting to Rs.19,51,11,412/-. The Assessee filed return of income declaring total income of Rs.97,66,189/- on 30-09-2009. However, tax was paid u/s 115JB on book profit of Rs.1,78,14,537/-. The case was selected for scrutiny. Notice u/s 143(2) of the I T Act was issued and served upon the assessee on 06.08.2009. In response to the notice, Chartered Accountant and Authorized Representative of the assessee attended the proceedings and filed required details. In this case, a reference was made to the Addl.CIT,TPO-1(2), New Delhi; for determining arm’s length price u/s 92CA(3) in respect of international transaction entered into by the assessee during financial year 2007-08. The issue was examined by the Addl.CIT,TPO-1(2), New Delhi, who vide his order dated 28.10.2011 determined the difference in arm’s length price of the international transactions of the assessee with its Associated Enterprises at Rs. 1,43,47,80,664/-. The Transfer Pricing Officer passed an order u/s 92CA(3) of the Act on 28.10.2011 wherein the TPO proposed an adjustment of Rs. 18,91,35,772/-. The TPO computed the arm’s length price of the IT enabled services rendered by assessee as under:- Arithmetic mean PLI : 29.16% Less: Working Capital Adjustment : 2.45% Arm’s Length Price : 26.17% Operating Cost Rs.1,278,722,867 Arms Length Margin 26,71% of the Operating Cost
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Arms Length Price (ALP) Rs. 1,620,269,745 Price shown in the Rs.1,431,433,973 international transaction Shortfall being Rs.189,135,772 adjustment u/s 92CA The above shortfall of Rs. 18,91,35,772/- was treated as transfer pricing adjustment u/s 92CA of the Act by the TPO. The Assessing Officer made addition of Rs.189,135,772/- to the income of the assessee. The assessee filed an objection before the DRP-1 against the draft assessment order passed by the Assessing Officer. The DRP-1 passed an order u/s 144C(5) for AY 2008-09 and directed the TPO to recompute the transfer pricing adjustment after re- examining the comparables and accordingly, TPO-1(2) gave the effect to the directions issued by DRP-1 and determined the Arm’s Length Price at Rs.12,77,12,819/- instead of Rs.18,91,35,772/- as per the draft assessment order. The Assessing Officer further observed that the assessee claimed deduction u/s 10A of the Income Tax Act from the profits and gains of business and thereafter, set off the brought forward business loss of A.Y. 2002- 03 against the balance profits under the head. However, the Assessing Officer observed that this treatment adopted by the assessee was contrary to the provisions of the Act. The Assessing Officer observed that the assessment of the assessee for the assessment year 2007-08 was completed u/s 144C / 143(3) wherein all the brought forward losses ’/ depreciation was already adjusted in that year and for the current year, the assessee company was left with no brought forward losses / depreciation.
As regards the comparables, the following 10 comparables are to be excluded as per the Ld. AR for A. Y. 2008-09:
44.1 Coral Hub (Vishal Information Technologies Ltd.): The Ld. AR submitted that this company is having heavy outsourcing activities as well as having different business model and this very position for this very comparable has been accepted by the Hon’ble Delhi High Court in case of Rampgreen
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Solutions (2015) 377 ITR 533 for this very Assessment Year. It has significant outsourcing cost and vendor payment are almost 87% and employee cost is about only 4.39%. The assessee company, on the other hand, has significant employee cost whereby cost of assessee is Rs. 85,34,53,827/-. Recently in case of CIT vs. New River Software Services Ltd. (ITA No. 924/2016 order dated 22.08.2017, the Hon’ble Delhi High Court held that this company cannot be taken as a comparable as it has a different business model. The Ld. AR further submitted that this comparable is functionally dissimilar as it is engaged in Digital Library and Print on demand. It is in the field of data digitization, conversion and publishing.
44.2 The Ld. DR relied upon the order of the TPO/AO and the directions of the DRP.
44.3 We have heard both the parties and perused all the relevant material available on record. The assessee company is engaged in the business of providing IT enabled services to its AEs and mainly having segment relating to Business Information, Intellectual Property, Investment Research and Financial Analytics and Market Research. But Coral Hub is engaged in Digital Library and Print on demand. From the perusal of the Annual Report the segmental details were also not available for this comparable. Therefore, it will be appropriate to exclude this comparable. Therefore, we direct the TPO/AP to exclude this comparable from the final list of the comparables.
44.4 Acropetal Technologies Pvt. Ltd.: The Ld. AR submitted that the TPO fails in its own filters on this comparable. There is contradiction as far as 2 segments are concerned. In Annual Report, it is written as “Engineering” and “ITES” segment wherein in information u/s 133(6), it is written as “software development” and “engineering/ites”. Hence, it shows that the comparable is inter-changeable by using the words ‘software’, ‘engineering’ and ‘ites’ and hence the data is not reliable. The Ld. AR submitted that the assessee cannot be compared with this comparable as it is functionally dissimilar. Acropetal
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Technologies is rendering software development and engineering design services. The Ld. AR submitted that these services are different from the services provided by the assessee. The assessee is not in software development and hence cannot be compared with other segment. The comparable company does not pass the service income filter of 75% as applied by the TPO i.e. ITES revenue is less than 75% of total revenue. The Ld. AR relied upon the decision of the Motorola Solutions India (P) Ltd. vs. ACIT (2015 152 ITD 158 (Del) and Baxter India vs. ACIT (ITA No. 6158/2016).
44.5 The Ld. DR relied upon the order of the TPO/AO and the directions of the DRP.
44.6 We have heard both the parties and perused all the relevant material available on record. The assessee company is engaged in the business of providing IT enabled services to its AEs and mainly having segment relating to Business Information, Intellectual Property, Investment Research and Financial Analytics and Market Research. But Acropetal Technologies Ltd. is rendering software development and engineering design services. Though the TPO has compared “engineering design services” segment with the assessee, however, such services are different from the services provided by the assessee. Assessee is not in software development. Therefore, it will be appropriate to exclude this comparable. Therefore, we direct the TPO/AP to exclude this comparable from the final list of the comparables.
44.7 Wipro Ltd.: The Ld. AR submitted that the turnover of the assessee is Rs. 143 crores whereas turnover of Wipro is Rs. 176,581 million. The Ld. AR relied upon the decision of the ITAT in case of Samsung Heavy Industries India P. Ltd. vs. DCIT (2017) 84 taxmann.com 154 wherein it is held that turnover is a important factor to determine comparability. The Ld. AR submitted that this comparable is having its own significant tangible which is not in the case of the assessee company. The Ld. AR further submitted that there is significant R & D activities in this comparable. Besides this, the Ld. AR
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submitted that this comparable fails TPO’s own 75% revenue income filter. Income from this segment is Rs. 10,58,10,000 and total is Rs. 176,58,10,000. It fails the TPO’s filter because BPO segment income figure is approximately 11,572 whereas IT/software segment income figure is 112,762 which is less than 75% filter. Thus, the Ld. AR submitted that this comparable has to be excluded.
44.8 The Ld. DR relied upon the order of the TPO/AO and the directions of the DRP.
44.9 We have heard both the parties and perused all the relevant material available on record. We find from the business profile of Wipro vis-à- vis the taxpayer that there are lot of dissimilarities as Wipro is a giant company having huge asset base, brand value, goodwill and presence in the global market. There is significant R & D activities and it is a full fledged risk bearing service provider. Therefore, it will be appropriate to exclude this comparable. Therefore, we direct the TPO/AP to exclude this comparable from the final list of the comparables.
44.10 Accentia Technologies Ltd.: The Ld. AR submitted that there was extraordinary events during A.Y. 2008-09 i.e. amalgamation and acquisition. This company has acquired four companies and has had several other collaborations. The Ld. AR submitted that the Hon’ble Delhi High Court in case of PCIT vs. Ameriprise India P. Ltd. ITA No. 461/2016 upheld the exclusion of thecomparable on the ground of extraordinary events that had taken place. This comparable is functionally dissimilar to the assessee company. Accentia Technologies Ltd. is engaged in health care receivables cycle management. Its income is derived from three sources i.e. Medical Transcription, Billing and Coding and Software Development and Implementation. But Annual Report stated that it has only one segment. Thus, there is no segmental details available of this comparable.
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44.11 The Ld. DR relied upon the order of the TPO/AO and the directions of the DRP.
44.12 We have heard both the parties and perused all the relevant material available on record. Accentia Technologies Ltd. is engaged in health care receivables cycle management. There was extraordinary events during A.Y. 2008-09 i.e. amalgamation and acquisition. There is no segmental details available. Therefore, it will be appropriate to exclude this comparable. Therefore, we direct the TPO/AP to exclude this comparable from the final list of the comparables.
44.13 Eclerx Services Ltd.: The Ld. AR submitted that this comparable is functionally dissimilar. It is engaged in data analysis and financial services and this position for this comparable has been accepted by the Hon’ble Delhi High Court in Rampgreen Solutions for A.Y. 2008-09. Eclerx Services Ltd. is engaged in providing data analysis and data process solutions. Pricing analytics, bundling optimization, content operations, sales and marketing support, product data management, revenue management are some of its functions. This company provides tailored process outsourcing and management services in addition to multitude of the data aggregation and mining and maintenance services. There is extraordinary events during A.Y. 2008-09 that of acquisition. Eclerx Services Ltd. has been acquired UK based Igentica Travel Solutions Ltd. which gave it a new customer base. The Ld. AR relied upon the decision of the Hon’ble Delhi High Court in case of PCIT vs. Amerirprise India Pvt. Ltd. (ITA No. 461/2016).
44.14 The Ld. DR relied upon the order of the TPO/AO and the directions of the DRP.
44.15 We have heard both the parties and perused all the relevant material available on record. Eclerx Services Ltd. is engaged in providing data analysis and data process solutions. Pricing analytics, bundling optimization,
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content operations, sales and marketing support, product data management, revenue management are some of its functions. It is engaged in data analytics and financial services and this position for this comparable has been accepted by the Hon’ble Delhi High Court in Rampgreen Solutions for A.Y. 2008-09. There is extraordinary events during A.Y. 2008-09 that of acquisition. Therefore, it will be appropriate to exclude this comparable. Therefore, we direct the TPO/AP to exclude this comparable from the final list of the comparables.
44.16 Infosys BPO: The Ld. AR submitted that it is an industry giant and benefits from the use of the name “Infosys”. It is among top 10 BPOs of India as per NASSCOM ranking having turnover of Rs. 825 crores. While assessee company’s turnover is Rs. 143 crores. There is an extraordinary events that of acquisition of a group during A.Y. 2008-09 as held in case of Ameriprise India Pvt. Ltd. (Supra) by Hon’ble Delhi High Court. There is extensive selling and marketing expenses of Rs. 50,87,97,083/- of this comparable company.
44.17. The Ld. DR relied upon the order of the TPO/AO and the directions of the DRP.
44.18 We have heard both the parties and perused all the relevant material available on record. There is an extraordinary event that of acquisition of a group during A.Y. 2008-09. The Hon’ble Delhi High Court in case of PCIT vs. Actis Global Services held that size and scale of operations of a company does make it unsuitable as comparable. Therefore, it will be appropriate to exclude this comparable. Therefore, we direct the TPO/AP to exclude this comparable from the final list of the comparables.
44.19 Genesys International Ltd.: The Ld. AR submitted that the comparable company is functionally different. It is dealing with geospatial services and content providers. The Company caters to the needs of consumer mapping, navigation, internet portals as well as infrastructure players
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including state and local governments. This comparable also covers more than half a million kilo meters of all major Indian Highways. This company is engaged in providing geographical information services comprising photogrammetric, remote sensing cartonogrpahy, data conversion, related computer based services and other related services. There is an extraordinary event in this year i.e. company has acquired 100% stake in Ladya Systech Ltd. thus profit has increased from Rs.2,18,87,251/- to Rs.15,19,86,605/-.
44.20 The Ld. DR relied upon the order of the TPO/AO and the directions of the DRP.
44.21 We have heard both the parties and perused all the relevant material available on record. This company is engaged in providing geographical information services comprising photogrammetric, remote sensing cartonogrpahy, data conversion, related computer based services and other related services. Thus the function of this comparable company is different from the function of the assessee company. There is an extraordinary event in this year. Therefore, it will be appropriate to exclude this comparable. Therefore, we direct the TPO/AP to exclude this comparable from the final list of the comparables.
44.22 Datamatics Financial Services P. Ltd.: The Ld. AR submitted that this comparable company’s ITES segment does not pass the TPO’s filter of income more than 75% from the ITES segment as total income is Rs. 16,72,43,518 and income from ITES segment is only Rs. 6,05,96,243/-. Thus, the income from ITES is Rs.13,28,776/- out of total income of Rs.6,19,25,019/-. There is discrepancy in the data provided u/s 133(6) quoted in TPO order and what is reported in Annual Report as regards turnover of the company in each segment, hence data is not reliable. The Ld. AR relied upon the Tribunal decision in case of Baxter India vs. ACIT (ITA No. 6158/2016) wherein it is held that in case of discrepancy in the information in Annual Report and in 133(6) reply, the company cannot be taken as a comparable. The
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Ld. AR further submitted that Datamatics Technologies Ltd. was taken by the assessee in its TP study at entity level. But the TPO said it is comparable only with ITES segment.
44.23 The Ld. DR relied upon the order of the TPO/AO and the directions of the DRP.
44.24 We have heard both the parties and perused all the relevant material available on record. The ITES segment is similar to that of the Assessee company. But there is discrepancy in the information in Annual Report and in 133(6) reply, the company cannot be taken as a comparable. Thus, following the decision of the Tribunal in case of Baxter India (supra), it will be appropriate to exclude this comparable. Therefore, we direct the TPO/AP to exclude this comparable from the final list of the comparables.
44.25 Crossdomain Solutions Pvt. Ltd.: The Ld. AR submitted that this comparable company is functionally different. The company has developed product suites for payroll processing services and it develops information systems. It is into data processing and insurance claims processing and payroll processing. In P& L account it is mentioned that revenue is from International services, C&B SS services, Retrials services, Transition services and other services which is not comparable to the assessee company.
44.26 The Ld. DR relied upon the order of the TPO/AO and the directions of the DRP.
44.27 We have heard both the parties and perused all the relevant material available on record. This comparable is functionally different, since this The company has developed product suites for payroll processing services and that it develops information systems. Thus, it is into product development. Further, no segmental data is available. Therefore, we direct the TPO/AO to exclude this comparable from the final list of the comparables.
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44.28 HCL Comnet Systems & Services Ltd.: The Ld. AR submitted that this company is functionally dissimilar. The company has two segments i.e. ITES activities and telecommunication services. The ITES activities in HCL Comnet includes data centre management services, end user computing services, managed security services which is not functionally similar to that of assessee company. This comparable also fails TPO’s RPT filter. Besides there is different financial year ending as this comparable company follows year ending in June.
44.29 The Ld. DR relied upon the order of the TPO/AO and the directions of the DRP.
44.30 We have heard both the parties and perused all the relevant material available on record. The ITES activities, in HCL Comnet includes data centre management services, end user computing services, managed security services which is not functionally similar to that of assessee company. Therefore, it will be appropriate to exclude this comparable. Therefore, we direct the TPO/AP to exclude this comparable from the final list of the comparables.
As regards Ground No. 1 and 2 of the appeal, the same are general in nature. Hence Ground No. 1 and 2 are dismissed. As regards Ground No. 3, the same has not been contested by the Assessee, therefore, Ground No. 3 is dismissed. As regards Ground No. 4, 4.1, 4.2, 4.2.1, 4.2.2, 4.2.3, 4.2.4 and 4.3 as well as Ground No. 5, 6, 7 and 8 are relating to comparables which is dealt in the above paras and the TPO/AO has to follow the directions given by us. Thus, Ground No. 4, 4.1, 4.2, 4.2.1, 4.2.2, 4.2.3, 4.2.4 and 4.3 as well as Ground No. 5, 6, 7 and 8 are partly allowed for statistical purpose.
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As regards Ground No. 9, the same is identical to the Ground No. 9 of the assessee’s appeal for A.Y. 2010-11. Ground No. 9 is allowed.
As relates to Ground No. 10 of the assessee’s appeal, the Ld. AR submitted that brought forward losses and unabsorbed depreciation have already been adjusted in the last year and consequently erred in creating an additional taxable income of Rs.47,28,931 for the current A.Y. 2008-09. The Ld. DR relied upon the order of the Assessing Officer.
We have heard both the parties and perused all the relevant material available on record. It is pertinent to note that from the records it appears that brought forward losses and unabsorbed depreciation have already been adjusted in the last year i.e. 2007-08, but the Assessing Officer has not taken into consideration the same. Therefore, it will be appropriate to remand back this issue to the file of the Assessing Officer to verify the brought forward losses and unabsorbed depreciation which was adjusted in the earlier year and make the additions as per the facts of the case and the law. Needless to say, the assessee be given opportunity of hearing by following principles of natural justice. Ground No. 10 is allowed for statistical purpose.
As regards Ground No. 11 and 12, the same are consequential hence dismissed.
In result, ITA No. 6310/DEL/2012 for A.Y. 2008-09 is partly allowed for statistical purpose.
Order pronounced in the Open Court on 03rd August, 2018.
Sd/- SD/- (R. K. PANDA) (SUCHITRA KAMBLE) ACCOUNTANT MEMBER JUDICIAL MEMBER
Dated: 03/08/2018 R. Naheed *
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