EXEVO INDIA PVT. LTD.,NEW DELHI vs. ITO, NEW DELHI

IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCH ‘I’, NEW DELHI

BEFORE SHRI PRAMOD KUMAR, ACCOUNTANT MEMBER AND SMT. BEENA A. PILLAI, JUDICIAL MEMBER I.T.A. No.907/Del/2016 (Assessment Year: 2011-12) Exevo India Pvt. Ltd., Vs. ITO, Ward 8(4), Unit NO.216, Second Floor, New Delhi Square One, C-2, District Centre, Saket, New Delhi. GIR / PAN :AABCE0738K (Appellant) (Respondent)

Appellant by :Shri Deepak Chopra, Adv. Shri Harpreet Singh, Adv. Shri Rohan Khare, Adv. Respondent by :Shri Amrendra Kumar, CIT DR

Date of hearing: 27.04.2016 Date of Pronouncement: 25.07.2016 ORDER PER BEENA A. PILLAI, JM: The present appeal has been filed by the assessee against the final assessment order dated 21/01/2016, passed by ITO, Ward 8(4), u/s.143(3), read with section 144C of the Act.

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scrutiny and notices under section 143(2) of the Act was issued. The ld.AO observed that assessee has entered into international transaction during the financial year 2010- 11. A reference was thus made under section 90 2C (1) by the ld. AO to the Transfer Pricing Officer-1 (3) (TPO) to determine the arm’s length price (ALP) of the international transactions undertaken by the assessee.

2.1 The Ld. TPO issued notice calling for various details from the assessee. The assessee accordingly filed documentation prescribed under Rule 10 D of the Income Tax Rules and other details sought by the ld.TPO. The ld.TPO observed that assessee had provided information technology enabled services to its AE, which is as under:

S. Nature of Metho Amount No.of Arm’s Result N Transaction d (INR) comp Length of . arabl Result assesse es e 1 Provision of TNMM 202,507,139 12 12.68 17.00% information % Technology Enabled Services

2.2 The assessee had used the transactional net margin method (TNMM) as the most appropriate method (MAM) to benchmark the international transaction. The assessee used operating profits to operating cost (OP/OC) as the profit level indicator (PLI) to determine the margin of the comparables.

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2.3 The Ld.TPO has not objected the MAM and the PLI calculated by the assessee. The only issue that has been disputed by the ld.TPO is in respect of the selection of comparables. Following are the set of comparables selected by the assessee for ITES segment.

S.No. Name of the remarks company 1 Caliber Point This company is having different financial Business year ending i.e. December. Hence, can’t be Solutions Ltd. considered as suitable comparable. 2 CG-VAK Income from BPO Business is less than Software & Rs.1 crore. Hence, not a suitable Exports Ltd. comparable. 3 Cosmic Global This company fails export filter (52.96%). Ltd. Hence, not a suitable comparable. 4 Informed This company is having sale below s.5 Technologies crores. Hence, not a suitable comparable. Ltd. 5 Infosys BPO This is a suitable comparable Ltd. 6 Jindal This is a suitable comparable. Intellicom Pvt. Ltd. 7 Microgenetics This company is having sales below Rs.5 Systems Ltd. crores. Hence, not a suitable comparable. 8 R Systems This company is having different financial International year ending i.e. December. Hence, can’t be Ltd considered as suitable comparable.

2.4 The ld.TPO rejected the comparables selected by the assessee by applying certain comparables a criteria such as turnover filter, there companies less than 5 crores were rejected, the companies where multiple year data has

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been used, comparables where employee costs was less than 25% of the total cost, comparables where the related party transactions exceeded 25% of sales and comparables with different financial year data. The ld.TPO in turn selected additional comparables where the ratio of service income to total income was 75%, where the income from export was 75%. The ld.TPO thus arrived at a new set of comparables which included some of the comparables selected by the assessee. The comparables shortlisted by the TPO are as under:

S.No. Name of the company OP/OC % 1 Accentia Technologies Ltd. 29.18 2 e4e Healthcare Business Services Pvt. Ltd. 9.77 3 Eclerx Services Ltd. 56.82 4 ICRA Techno Analytics Ltd. (Segment) 25.54 5 Infosys BPO Ltd. 17.86 6 Jinal Intellicom Ltd., 13.70 7 TCS E-serve Limited 69.31 Average 31.74

2.5 This led to the proposal for a transfer pricing adjustment in respect of ITES segment service amounting to Rs.2,55,12,456/-.

2.6 Thereafter the assessee carried the matter before the dispute resolution panel (DRP)-I, New Delhi. The DRP under section 144C (5) of the IT Act, 1961, gave directions

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on 7/12/2015, determining the total income at Rs.2,55,12,456. The DRP however upheld objections of the assessee in respect of Eclerx services Ltd, ICRA Techno Analytics Ltd., and excluded these companies from the list of comparables. The DRP confirmed the addition made by the Ld.TPO in respect of foreign exchange fluctuation while computing the operating margins of the comparable companies as well as the assessee. On receipt of the directions passed by the DRP, the Ld. AO passed the assessment order on 21/01/2016, making the impugned additions. 3. Aggrieved by the order of the Ld.AO the assessee is in appeal before us on the following grounds:

“1. That on facts and in law, the impugned order/directions passed by the Income Tax Officer, Ward - 8(4), New Delhi ("Learned AO")/ Deputy Commissioner of Income Tax - Transfer Pricing Officer - 1 (2)(1) {erstwhile TPO 1 (3)}, New Delhi ("Learned TPO")/ Hon'ble Dispute Resolution Panel ("Hon'ble DRP"), making an addition of INR 21,057,956 to the total income of the Appellant on account of adjustment in the arm's length price is bad in law. 2 That on facts and in law, the Ld. DRP/TPO/AO have erred in computing the total income of the Appellant at INR 26,456,900/- as against the returned income of INR 1,997,189 by making an upward adjustment of INR 24,459,711/- with respect to Arm's Length Price of the international transaction. 3 That on facts of the case and in law, the Ld. DRP/ TPO /AO have erred in law and in facts, by not accepting the economic analysis undertaken by the Appellant in accordance with the provisions of the Act read with the Rules and conducting a fresh economic

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analysis for the determination of the ALP of the international transactions pertaining to IT enabled services provided to associated enterprises and holding that the Appellant's international transactions are not at arm's length. 4 That on facts of the case and in law, the Ld. DRPITPO/AO have erred, by: a) Not accepting the use of multiple year data, as adopted by the Appellant in Transfer Pricing documentation; and

b) Determining the arm's length price using data pertaining only to FY 2010-11 which was not available to the Appellant at the time of complying with the TP documentation requirements 5. That on facts of the case and in law, the Ld. DRP/TPO/AO have erred, by rejecting certain comparable companies identified by the Appellant only on the basis of turnover less than INR 5 crore as a comparability criterion and not rejecting companies with high turnover. 6 That on facts of the case and in law, the Ld. DRP/TPO/AO have erred, by rejecting certain comparable companies identified by the Appellant for having different accounting year (i.e. companies having accounting year other than 1 April to March 31). 7 That on facts of the case and in law, the Ld. DRPI TPO/AO have erred, in law and on facts and circumstances of the case, by rejecting certain comparable companies identified by the Appellant using 'Export earnings less than 75 percent of operating revenues' as a comparability criterion. 8 That on facts of the case and in law, the Ld. DRPITPO/AO have erred, in law and on facts and

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circumstances of the case, by wrongfully rejecting certain comparable companies and adding certain non-comparable companies to the final set of comparables for the purpose of determining the ALP of the impugned transaction on an ad-hoc basis, thereby resorting to cherry picking of com parables. 9 That on facts of the case and in law, the Ld. DRP/TPO/AO have erred, by selecting certain companies which are earning super normal profits as comparable to the Appellant. 10. That on the facts and in the circumstances of the case, the Ld. DRP/TPO/AO have erred, by not making suitable adjustments to account for differences in the risk profile of the Appellant vis-a-vis the comparable companies. 11. That on the facts and in the circumstances of the case, the Ld. DRP/AO have erred, by setting off unabsorbed depreciation from current year business profits prior to Setting off brought forward business losses. 12 That on the facts and in the circumstances of the case, the Ld. DRP/AO have erred, by initiating penalty proceedings under section 271(1)(c) of Act without recording any adequate reasons for such initiation. 13 That on the facts and in the circumstances of the case, the Ld. AO have erred, in charging interest under section 234 B of the Act. The above grounds of appeal are mutually exclusive & without prejudice to each other. The Appellant craves leave to add, amend, vary, omit or substitute any of the aforesaid grounds of appeal at any time before or at the time of hearing of the appeal.

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The Appellant prays for appropriate relief based on the said grounds of appeal and the facts and circumstances of the case.” 4. We have heard the rival contentions of both the sides, perused the orders passed by the authorities below, the paper books filed by the assessee and the case laws relied upon by both the sides. The only dispute that arises is with respect to selection of the comparables. To be precise the controversy rotates around the exclusion of the following comparable in the list of comparables in respect of:- 1. Accentia Technologies Ltd 2. Infosys BPO Ltd 3. TCS E-Serve Ltd 4.1 Apart from that the assessee is insisting on inclusion of the following comparables which were not included by the DRP as well as the TPO in their list of comparables:- 1. CG-VA K software and exports Ltd 2. R Systems International Ltd 4.2 We shall take up these companies one by one to ascertain their compatibility or otherwise with the assessee. Before embarking upon this exercise it is sine qua non to precisely consider the functional profile of the assessee. A. Functional analysis of the assessee from the TP study: 5. Assessee is a wholly owned subsidiary of Exevo US and has been incorporated on 22/03/2002. The assessee

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is engaged in rendering the following services to its associated enterprises:

1) data collection service for primary research, using one of the combination of the following services being: a) telephonic interviews (CATI); b) Web interviews (CAWI); and c) print or physical interviews. 2) Survey programming; 3) data processing and data analysis services which includes: a) coding services; b) provides quality audits; and c) data quality services. 5.1 The assessee is thus engaged in provision of information technology (IT) enabled services in the nature of survey programming, data collection, data analysis and business research. It is a captive contract service provider rendering IT enabled services to its associated enterprise. The assessee has an approximately 80% of its workforce as graduates for undertaking data collection activities. Further, it also employs MCA’s, BCA’s and diploma holders for undertaking data processing and survey programs. It’s data processing staff comprises only 15% of the personnel of Exevo India.

5.2 During the financial year 2010-11 assessee has rendered IT enabled services to Copal Market Research Ltd. The assessee is reimbursed on all its costs incurred

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along with a markup of 17% as per the agreement between assessee and the AE. Costs year and refers to all the operating direct and indirect expenses incurred by the assessee in rendering the specified IT enabled service to the E as per the agreement entered into between them.

5.3 Assessee is not exposed to market risk as it renders IT enabled services to its AE and is assured of a specified return on its cost. It does not bear any credit and collection risk. As the assessee receives its remuneration in foreign currency and any foreign exchange fluctuation loss is recovered along with the markup. Thus the assessee does not impair even the foreign exchange risk. Assessee does not employ any intangible assets with reference to the services rendered to the associated enterprise. Thus on the basis of the above functional analysis the assessee can be characterised as a routine service provider operating in a low risk or almost risk mitigated environment.

5.4 With the above understanding of the nature of services provided by the assessee to its AE’s, we will now proceed to examine the compatibility or otherwise of the companies disputed by the assessee to the extent.

Grounds 1 and 2 are general in nature.

Ground No. 3 to 9

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Accentia Technologies Ltd.

4.1. Ld.TPO considered this as a comparable. Assessee objects to the compatibility of this company is due to functional incompatibility. Ld.AR submitted that this company was having supernormal profit and is engaged in providing KPO services which is distinct from the nature of services provided by the assessee before us. He has placed reliance upon the decision of coordinate benches of this tribunal in the case of M/s.Capital IQ Information Systems (India) Pvt. Ltd. Vs. DCIT in ITA No. 1961/H/2011 and Symphony Marketing Solutions India Pvt. Ltd., in ITA No. 1316/BANG/2012, wherein the dissimilarities between KPO services and BPO service has been drawn up. He further contended similar view has been upheld by the Hon’ble jurisdictional High Court in the case of Rampgreen Solutions Pvt. Ltd., vs. CIT in ITA 102/2015.

6.2. Ld.DR, however, referred to extracts from the ld.TPO’s order to submit that Accentia Technologies Ltd. is comparable with assessee. The ld. DR relied upon order dated 27.04.2015 passed by Hon’ble Delhi High Court in the case of Chris Capital Investment versus DCIT reported in I.T.A.No. No.417/2014, wherein Hon’ble Delhi High Court has held that:

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“…. the mere fact that an entity makes high / extremely high profits / losses does not ipso facto, lead to its exclusion from the list of comparables for the purpose of determination of ALP. In such circumstances enquiry under Rule 10B(3) ought to be carried out, to determine as to whether the material differences between the assessee and the said entity can be eliminated. Unless such differences cannot be eliminated, the entity should be included as a comparable.”

6.3. After considering the rival submissions and pursuing the relevant material on record, we find that functionally, this company is into development of software products for healthcare. It is submitted by the ld.AR that Accentia Technologies Ltd is engaged into diversified activities such as Knowledge Process outsourcing(KPO), Legal process outsourcing(LPO), Data process Outsourcing(DPO), high end software services. It is submitted by the ld.AR that segmental information in respect of this company is not available. We find that the Ld. TPO had adopted this company as a comparable as the Ld. TPO is of the view that the services rendered by this comparable are in the nature of BPO or back office services and that nothing he is earned from sale of products.

We have perused the annual reports of this company and have observed that Accentia owned a brand and goodwill on account of acquisition/amalgamation of a defendant in force. Further it is observed that this company is

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providing services in the field of medical transcription billing and collections income from coding etc for which complete segmental information are not available.

In our considered opinion this company is functionally dissimilar to that of the assessee. Accordingly we direct the Ld. TPO to exclude this company from the list of comparables.

Infosys BPO Ltd

6.4. The TPO included this company despite assessee’s objections. Assessee had objected for inclusion of this company as it provides high-end integrated services in the nature of business platforms, customer service outsourcing, finance and accounting LPO, HR outsourcing, sourcing and procurement outsourcing etc. The company also has a high brand value of goodwill and has acquired a company or by the name McCsmish Systems LLC to provide end-to-end solutions.

6.5. Ld.DR, however, refer to the extracts made by the ld.TPO in the order to submit that Infosys BPO Ltd. is a comparable company with that of assessee. The ld.DR relied upon the extract of the decision of Hon’ble Delhi High Court in the case of Chris Capital Investment vs. DCIT (supra), which has been reproduced hereinabove. 6.6. After considering the rival submissions and pursuing the relevant material on record, we find that for the year under consideration, this company has had extraordinary

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financial events. It is noted that the company is providing high end integrated service by assisting its clients in improving their competitive positioning by managing their business process in addition to providing increased value. On the other hand, assessee is engaged in providing routine support services in the nature of data collection and analysis which is low end in nature bearing minimal risks.

6.6. Ld. A.R. has rightly placed his reliance upon the decision of Agnity India Technologies Pvt. Ltd. passed by Hon'ble Delhi High Court in I.T.A.No. 3856/2010 wherein, it has been held that this comparable must be rejected on account of difference in risk levels assumed, huge revenues derived and the fact that they are market leaders. Hon’ble court held as under:

“it is argued that the case of assessee is not comparable with Infosys Technologies Ltd., the reason being that the latter is giants in the area of development of software and it assumes all risks, leading to higher profit. On the other hand, the assessee is a captive unit of its parent company in the USA and it assumes only limited currency risk. Having considered these points, we are of the view that the case of aforesaid Infosys and the assessee are not comparable at all as seen from the financial data etc. of the two companies mentioned earlier in this order. Therefore, we are of the view that this case is required to be excluded.” 6.7. Since there is no similarity in the functional profile of this company and assessee respectfully following the ratio laid down in Agnity India Technologies (supra), we direct

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the TPO/AO for removal of this company from the list of comparables.

TCS E-Serve Ltd

6.8. The ld.TPO had included this company as a comparable despite objections by the assessee. The assessee objected the inclusion of this company as it provided financial information processing and customer contact services with high-level of foreign expenditure and abnormal profits.

6.9. Ld.DR, however, refer to the extracts made by the ld.TPO in the order to submit that TCS E serve Ltd. is a comparable company with that of assessee. The ld.DR relied upon the extract of the decision of Hon’ble Delhi High Court in the case of Chris Capital Investment vs DCIT (supra), which has been reproduced hereinabove.

6.10. After considering the rival submissions and pursuing the relevant material on record, we find that the financial results of this company shows that this company is into financial services to help its customers achieve their business objectives by providing innovative best in class services. During the year under consideration, this company has made payments towards use of Tata brand. Consequentially use of the TCS brand has substantially increased the operating profits post acquisition. The Ld. AR submitted that the DRP had excluded this company in the immediately preceding previous year. Without any

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proper reason or change in the functionality and financial data for the year under consideration, it cannot be held that this company can be considered as a comparable. The Ld. TPO has to bring some material on record to show that why this comparable was excluded, in the previous year and in the year under consideration it should be included. Admittedly neither the TPO nor the Ld. DR has been able to demonstrate the difference in the functionality and/or financial data of the assessee for the year under consideration viz-a-viz previous assessment year. Hence following the rule of consistency, we are of the opinion that this company cannot be considered as comparable for the year under consideration. We therefore direct to exclude this comparable.

6.11. Further it was submitted by the Ld. A.R. that in respect of the comparables selected by the Ld. TPO being e 4 e Health care Business Services Pvt. Ltd. and Jindal Intellicom Ltd., suffered from computational errors and inconsistencies. The Ld. DRP had directed the assessee to furnish margin in respect of all the comparables upheld by the panel, for it to be applied by the Ld. TPO. It has been submitted that the Ld. TPO has not given effect to the directions of the DRP pursuant to the margins being provided by the assessee in respect of the comparables finally selected by the panel.

From the final order of the Ld. AO it is observed that the DRP’s directions have not been followed. We accordingly

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direct the Ld. AO to give effect to the directions of the DRP in respect of e 4 e Health care Business Services Pvt. Ltd. and Jindal Intellicom Ltd., by considering the corrected margins, submitted by the assessee.

7.1. The ld.TPO excluded this company from the list of comparables as the revenue generated under ITES segment of this comparable is just Rs. 82.78 Lacs was start hence the Ld. TPO held that this company fails the turnover filter

7.2. The Ld. A.O. has not brought on record any material / documents contrary to the above submissions of the assessee. The Ld. TPO has also not been able to bring out any instance of functional dissimilarity of this comparable with that of assessee. The Ld. D.R. placed his reliance on the findings of the authorities below. 7.3. We have perused the orders passed by authorities below, and arguments advanced by both the parties. It has been observed that the assessee in its TP study has objected to the adoption of the turnover filter applied by the TPO. It has been submitted that turnover filter could be deployed if the tested party is a risk bearing entrepreneur. However, to the facts of the present case, the assessee does not assume any risk and is

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remunerated at cost plus basis. Ld. A.R. has placed reliance in the case of Willis Processing Services Pvt. Ltd. in I.T.A.No. 4547/Mum/2012 wherein the Co-ordinate bench of this Tribunal has held as under: “The turnover is not a criteria as prescribed under the Rule 10B(2) for selecting the comparables. It is settled proposition that the decisive factor for determining inclusion or exclusion of any case as a comparable are prescribed under Rule 10B(2) which does not specify any such factor of turnover on the basis of which a particular case can be included or excluded in the list of comparables.”

“In service industry, turnover does not play any significant role as far as the margins are concerned…. This reinforces the view that turnover does not play a significant role in service industry and there is no link between turnover and margins…. The turnover is not a relevant factor for choice of comparables has been confirmed in many decision, as listed below.”

7.4. Applying the ratio laid down by the coordinate bench of this tribunal in the case of Willis processing services private limited (supra) we direct the ld. TPO/AO to include this company to the list of comparables. R Systems International Ltd 7.5. The ld.TPO has rejected the company on account of different financial year ending vis-a-vis the assessee. The ld.AR submitted that companies whose financial data was available for the relevant period, were considered in view of rule 10 D (4), which provides that information to be used must be contemporaneous. The ld. AR submitted that, though the Company has different financial year

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ending, were operating during the same period of time as the assessee, and were also facing similar business cycles, market and economic conditions as faced by assessee having financial year from April to March. He thus submitted that in absence of evidence available to the contrary that there has been a significant impact on the margins due to change in different reporting/accounting period, it is incorrect to disregard the comparable using this filter. Ld.DR, however, referred to the extracts made by the ld.TPO in his order to submit that R Systems International Ltd., should not be considered comparable with assessee. 7.6. After considering the rival submissions and pursuing the relevant material on record we find that the ld. TPO has not pointed out exact difference, the change of accounting year has made to the financial results of the comparable. The ld.TPO has further not pointed out whether it would not be possible to restate those financial results for a different accounting period without significant change in net profit margins or any other parameters considered relevant. Multinational companies generally operate in different geographical regions and different countries follow different accounting or financial years, functionally similar or even identical companies, cannot be held to be incomparable, only owing to differences in the date of ending of the financial year. As most of the business enterprises operate on the going

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concern concept, which is so fundamental to present the accounts. The concept used in accounting is just an artificial means to reckon the operating results of business operation at a given point in time and nothing would turn up on changing the end of accounting period from 31st March to any other date within a short span of time. Assuming a situation where the tested party is following a different financial year ending (say 01/01/2010 to 31/12/2010), following the filter adopted by the ld.TPO, one would reject all the company with the financial year ending 31st of March 2010 and only consider companies with financial year ending 31/12/2010. The number of comparable companies available after using such a filter would be very limited and therefore, in such a case the net margin earned by the comparable companies would be different from the one that would be computed without using this filter. This view is supported by the coordinate bench of this Tribunal in the case of DCIT vs. McKinsey knowledge Centre India private limited in ITA No. 2195/del/2011 wherein it has been held that if a company is functionally comparable, it cannot be rejected merely on the ground that data for the entire financial year was unavailable, if the data can be reasonably extrapolated. Hon’ble tribunal further observed that rule 10 B (4) cannot be interpreted in such a rigid manner so as to defeat the basic objective of the rule. The relevant extract of the ruling are reproduced below:

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“ 23. ….. However, in our considered opinion, if a comparable is functionally same as that of the tested party then the same cannot be rejected merely on the ground that data for entire financial year is not available. If from the available data on record the results were financial year can be reasonably extrapolated, then the comparable cannot be excluded solely on this ground. The learn ADR as referred to rule 10 B (4) which only mandates that the data which is to be utilised for analysing the comparability of uncontrolled transactions with an international transaction, has to be financial year only in which the international transaction has been entered into. This rule is based on matching principle but this role cannot be interpreted in such a rigid manner so as to defeat the basic object of rule viz., selection of the comparable for determination of arms length price of an international transaction” (emphasis supplied) 7.7. In any case the ld.TPO has not cited any instances of functional dissimilarity of this comparable company with that of assessee. We therefore direct the ld. AO/TPO to consider this company in the final list of comparable. Accordingly ground No. 3 to 9 stands disposed accordingly. Ground No. 10 6. The ld.AR submitted that Ld. AO has not followed the directions of the DRP in granting the working capital adjustment. It is submitted by the Ld. AR that the assessee before us is not subjected to much risk and allowability of working capital adjustment has to be made in the case of the comparables, which has been upheld in

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various judicial rulings by coordinate benches of this Tribunal, which are as under: • Mentor Graphics Noida Pvt. Ltd., reported in 109 ITD 101, • Sony India reported in 288 ITR 52, • Philips software reported in 25 SOT 226 and • Mercer Consulting India Pvt. Ltd. reported in 150 ITD 1. 6.1. Respectfully following the ratio is laid down in the above judgments we are in agreement with the Ld.AR, that while comparing the margins earned by the comparable companies there is always the assessee, the difference on account of working capital employed should also be factored into. In order to improve the reliability of results, the financial data of comparable companies are required to be adjusted. The efforts stated decisions of this tribunal has held that in practice such adjustments usually include adjustments for accounts payable, accounts receivable and inventory. 6.2. We accordingly allow this ground of appeal raised by the assessee Ground No. 11 7. During the course of the assessment proceedings the Ld.AO had adjusted the amount of unabsorbed depreciation with the profits and gains from business pertaining to the year under consideration and has used the residual profit, post adjustment of the unobserved

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depreciation, to adjust the amount of brought forward losses. The Ld.AO computed the adjustment as under:

Particulars Amount (in Rs.) Business profits before adjustment of 3,401,754 brought forward loss and unabsorbed depreciation Step-1- Less: brought forward 2,131,805 depreciation Business profits after adjustment of (A) 1,269,949 unabsorbed depreciation but before adjustment of brought forward loss

Step 1- Less: Brought forward loss 1,269,949 Income taxable under the head “Profits (B) NIL and gains from business and profession” Income from other sources © 4,128,994 Total Taxable income (A+C) 5,398,994

The DRP upheld adjustment made by the Ld. AO.

7.1. The Ld. AR submits that the proposed adjustment is based on incorrect interpretations of provisions of section 32 (2) of the act. Section 32 (2) lays down the provisions for carry forward of unabsorbed depreciation and set off of the same subject to applicability of section 72 (2) which lays down the manners of setting off of unabsorbed depreciation, when the assessee has brought forward losses as well.

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7.2. On the contrary the Ld.DR relied upon the orders of the authorities below and CBDT Circular No. 7/2013 dated 18/07/2013.

7.3. We have perused their rival submissions of both the parties. When the assessee has brought forward business losses as well as unabsorbed depreciation, the Act specifies a sequence in which these allowances shall be set off. The relevant provisions of the Act are as under:

“section 32 (2):

Where in the assessment of the assessee, full effect cannot be given to any elements under subsection (1) in any previous year, owing to there being no profits or gains chargeable for the previous year, or owing to the profits or gains chargeable being less than the elements, then, subject to the provisions of subsection (2) of section 72 and section (3) of section 73, the allowance or the part of the elements to which effect has not been given, as the case may be, shall be added to the amount of the allowance of depreciation for the following previous year and deemed to be part of that elements, or if there is no such relevance for that previous year, or deemed to be the allowance for that previous year, and so on for the succeeding previous years.

Section 72 (2):

Where any allowance or part thereof, under subsection of subsection (2) of section 32 or subsection (4) of section 35,

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to be carried forward, effect shall first be given to the provisions of this section.”

7.4. A combined reading of the above sections it is clear that while computing total income of an assessee, carry forward unabsorbed depreciation can be set off in future years only after setting off the brought forward business losses. Further the provision is clear that carry forward unabsorbed depreciation can be set off not only against income from profits and gains from business and profession, but also against income from any other head including income from other sources.

7.5. In the present case before us the assessee has brought forward business losses as well as unobserved depreciation. The act specifies the sequence in which these allowances can be set off. Section 72 (3) implies that, the set off of unobserved depreciation as per section 32 (2) against business income shall be given effect to only after setting off the brought forward business losses. From the calculation made by the Ld.AO, it is observed that the Ld.AO has adjusted the amount of unobserved depreciation from the business income before making adjustment for brought forward business losses. The circular relied upon by the Ld.AR is not applicable to the present case under consideration as it is applicable where the set off each to be made against the profits of a STP/EOU/SEZ unit, before the deduction under section 10 A/10 B of the Income tax Act is allowed.

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7.6. We accordingly direct the Ld.AO to allow the set off as per law. Accordingly this ground raised by the assessee stands allowed.

Sd./- Sd./- (PRAMOD KUMAR) (BEENA A. PILLAI) ACCOUNTANT MEMBER JUDICIAL MEMBER Date: 25.07.2016 Sp. Copy forwarded to:- 1. The appellant 2. The respondent 3. The CIT 4. The CIT (A)-, New Delhi. 5. The DR, ITAT, Loknayak Bhawan, Khan Market, New Delhi. True copy. By Order (ITAT, New Delhi)

27 I.T.A.No. 907/Del/2016.

S.No. Details Date Initials Designation 1 Draft dictated on Sr. PS/PS 2 Draft placed before author Sr. PS/PS Draft proposed & placed before 3 JM/AM the Second Member Draft discussed/approved by 4 AM/AM Second Member Approved Draft comes to the 25/7/16 5 Sr. PS/PS Sr. PS/PS 6 Kept for pronouncement 25/7 Sr. PS/PS 7 File sent to Bench Clerk 26/7 Sr. PS/PS Date on which the file goes to 8 Head Clerk 9 Date on which file goes to A.R. 10 Date of Dispatch of order