DCIT vs. M/S GENISYS INTEGRATING SYSTEMS (INDIA) PVT. LTD.,, BANGALORE

against the order dated 08-03-2013 of CIT(A)-IV, Bangalore for the assessment year 2005-06.

2. The revenue has raised the following grounds of appeal;

“1.The order of the ld.CIT(A) in so far as it is prejudicial to the interest of revenue is opposed to law and the facts and circumstances of the case.

2. The ld.CIT(A) erred in holding that the size, turnover of the company are deciding factors for treating a company as a comparable and accordingly, erred in M/s Wipro Ltd. as a comparable in the segment.

3. The ld.CIT(A) has rejected companies on the basis of abnormal profit without defining what constitutes abnormal profit filter and how the same is determined and erred in excluding the comparable company M/s Vishal Information Technologies Ltd.

4. The ld.CIT(A) erred in rejecting the diminishing revenue filter used by the TPO to exclude companies that do not reflect the normal indust6ry trend.

5. The ld.CT(A) has erred in eliminating M/s Nucleus Netsoft & GIS Ltd. as comparable without recording any finding as to how he company does not pass through the filters applied by the TPO.

6. The ld. CIT(A) has erred in eliminating M/s Microland Ltd. as a comparable without recording any finding as to how the company does not pass through the filters applied y the TPO and upheld by the CIT(A).

7. The ld. CIT(A) has erred in directing for under utilization of capacity adjustment ignoring the facts that the adjustment is abstract in nature and exact under utilization of the fixed costs cannot be quantified objectivity as it is not possible to ascertain the same.

8. The ld. CIT(A) was not justified in directing the AO to compute the deduction u/s 10A without setting of losses of one unit against the profits of another.

10. The ld. CIT(A) ought to have considered the fact that the jurisdictional High Court decision relied upon by him in the case of M/s Yokogawa India has not been accepted by the department and a SLP has been filed before the Hon’ble Supreme Court which is still pending.

11. For these and such other grounds that may be urged at the time of hearing it is humbly prayed that the order of the CIT(A) be reversed and that of the AO be restored.

12. The assessee craves leave to add, to alter, to amend or delete any of the grounds that may be urged at the time of hearing of the appeal”.

a. Companies listed in the data bases as engaged in business services were identified. b. Companies not having data for FY: 2003-04 or 2004-05 were ignored. c. Companies which had not incurred expenditure on marketing and sales were calculated. d. Financial data relating to only companies engaged in call centre, customer care or ITES/BPO were considered. Other service companies were excluded.

The average gross profit margin of the comparables worked out at16.92% on the cost. The learned TPO vide his order dated 26-09-2014 passed u/s 92CA of the IT Act rejected the TP study of the assessee company and proceeded to select the following comparables whose average margin in cost worked out to 24.68% by adopting TNM method as the most appropriate method.

Sl. Company Name Sales OP to Export % of RPT as % Sales & Total (Rs.Cr) exports of Marketing cost% over revenue exp.(Cr.) sales 1 Allsec Tech.Ltd** 57.76 29.85 56.15 97.2% - 7.60 2 Saffron Global 27.78 24.88 27.78 100% - 0.12 Ltd. 3 Vishal 20.82 45.62 20.82 100% - - Information 4 Cosmic Global 1.90 17.02 1.70 89.5% - - Ltd (Tulsyan Tech.Ltd)

5 Transworks 108.23 2.81 107.78 99.6% 3.57 2.59 Information Services Ltd. 6 Wipro BPO 617.71 18.59 617.71 100% 6.34 3.63 Solutions Ltd

Ace Software 5.90 14.50 5.90 100% 0.3 0.02 7 Exports Ltd.

8 Nucleus Netsoft 2.79 40.06 1.24 44.4% - - & GIS Ltd. 9 Maple E 1.47 28.75 1.47 100% - 0.20 Solutions Ltd

Average 24.68

5. After allowing the working capital adjustment of 3.10% the arithmetic mean was of PLI worked out to 23.08% and finally the ALP was determined as follows;

5.1 The transactions relating to rendering of software development services, [payment of salary to directors and borrowing of interest free loans were considered to be at arm’s length by the TPO (a,c and d above) only addition made is for ITES segment.

12.6. Computation of Arms Length Price The arithmetic mean of the profit level indicators is taken as the arms length margin (Please see Annexure-B for details of computation of PLI of the comparables). Based on this, the arms length price of the software services rendered is computed as under; Arithmetic mean PLI 26.18% Less working capital adjustment as per Ann.C 3.10% Adj. Arithmetic mean PLI 23.08% Arms length price: Operating cost (as per segmental account in the 3,46,72,290*(excluding annual report) interest) Arms length price 23.08% Arms length price (ALP) 123.08% 4,26,74,654 Of operating cost 12.7 Price received vis-avis the arms length price:

The price charged by the taxpayer to its associated Enterprises is compared to the arms length price as under; Arms length price @ 123.08% of 4.26,74,654 operating cost Price received 3,19,85,157 Shortfall being adjustment u/s 92CA 1,06,89,497 The AO passed the assessment order after making the adjustment for ALP of Rs.1,06,89,497/- vide order dated 26-12-2008.

6. Being aggrieved by this assessment order an appeal was filed before the CIT(A), who vide order dated 08-03-2013 partly allowed the appeal. The learned CIT(A) had dealt with the comparables selected by the TPO as under;

9. In the case of M/s Cosmic Global Ltd inclusion of this company in the list of comparables was upheld by the CIT(A) rejecting the contention of the assessee that outsourced work and functionally dissimilar.

11. M/s Wipro BPO Solutions Ltd., The inclusion of this company in the list of comparables was upheld by the CIT(A) rejecting the contention of the assesee company that it cannot be taken as a comparables on the ground that it had tainted management.

1 Allsec Tdechnologies Ltd 26.19 2 Saffron Global Ltd 24.88 3 Cosmic Global Ltd 17.02 4 Transworks Information Services Ltd 02.81 5 Ace Soft Exports Ltd. 14.50 6 Maple E-Solutions Ltd 28.75 7 Microland Ltd 01.72

Arithmetic mean 16.55 The CIT(A) has further allowed the adjustment on account of under utilization capacity. The CIT(A) further directed that the benefit u/s 10A should be worked out before setting of the brought forward losses following the decision of the jurisdictional High Court in the case of ACIT Vs M/s Yokogawa India Ltd. (2012) 21 Taxmann.com 154(Kar.)

vi. Market Tools Research Pvt.Ltd. vs DCIT TS-30-ITAT-2014(Hyd.)-TP for AY: 2005-06 vii. 24/7 Customer.com Pvt.Ltd IT Appeal No.227/Bang/2010 (2012) 28 Taxmann.com 258(Bang). viii Brigade Global Services Pvt.Ltd. vs ITO (2013) 33 Taxmann.com 618 (Hyd.) ix. M/s Capital IQ Information Systems (Ind.) Pvt.Ltd ITA No.1961/Hyd/2011 x. Stream International Services Pvt. Ltd Vs ADIT ITA No.8997/Mum/2010 xi. M/s First Advantage Offshore Services Pvt.Ltd. No.1086(Bang.)/2011 In the case of M/s Tulsyan Tech.Ltd. formerly known as cosmic Global Company Ltd. that it has to be rejected as comparable on the ground of functional dissimilarity. He relied on the decision of ACIT Vs Maersk Global Service Centre (Ind.) Pvt.Ltd (2011) 16 Taxmann..com 47 (Mum.) for AY: 2005-06. He further submitted that M/s Wipro BPO Solutions Ltd. should be rejected as a comparable on the basis of high turnover filter. In this regard he relied on the following decisions;

M/s Wipro BPO Solutions Ltd. has to be rejected as a comparable on the basis of high turnover in view of Hon’ble ITAT in the following decisions; i. ACIT Vs Maersk Global Service Centre (Ind.)Pvt.Ltd(2011) 16 Taxmann.com 47 (Mum) for AY: 2005-06 ii. Market Tools Research Pvt.Ltd. TS-30-ITAT-2014(HYd.)-TP-AY: 2005-06. iii.Deloite Consulting India Pvt.Ltd TS-401-iTAT-2011(Hyd.)-TP-AY: 2004-05 iv. 24/7 Customer.com Pvt.Ltd. vs DCIT TS-708-ITAT-2012(Bang)-TP-AY: 2004-05.

He further submitted that M/s Nucleus Netsoft Ltd. has to be rejected as a comparable in view of the following decisions; Nucleus Netsoft & GIS Ltd. as to be rejected as a comparable in view of Hon’ble ITAT in the following decisions; i. ITO vs CRM Services India Pvt.Ltd. TS-307-ITAT-2011(Del.)AY: 2006-07 ii. HSBC Electronic Data Vs ACIT (TS-174-ITAT-2013(HYD.)-TP (AY: 2006-07) iii. BA Continuum India Pvt.Ltd. Vs ACIT (TS-295-ITAT-2013 (Hyd.)-TP(AY: 2005-06) iv. Market Tools Research Pvt.Ltd. vs DCIT TS-30-ITAT-2014(Hyd.)-TP for AY: 2005-06 v. IVY Computech Pvt.Ltd. vs ACIT TS-17-ITAT-2014(Hyd.)-TP for AY: 2005-06.

He finally submitted that M/s Maple E Solutions Ltd. has to be rejected as a comparable on the ground of tainted management in view of decisions Hon’ble ITAT in the following cases; Maple E Solutions Ltd. has to be rejected as a comparable on the ground of tainted management in view of Hon’ble ITAT in the following decisions; i. ITO Vs CRM Services India Pvt.Ltd. TS-307-ITAT-2011(Del.) AY: 2006-07 ii. Stream International Services Pvt.Ltd. vs ADIT (ITA No.8997/Mum/2010) iii. Capital IQ information Systems (Ind.) Pvt.Ltd. Hyderabad (ITA No.1961/Hyd/2011) iv. Market Tools Research Pvt.Ltd. vs DCIT TS-30-ITAT-2014(Hyd.)-TP-for AY: 2005-06 v. IVY Comptech Pvt.Ltd. vs ACIT TS-ITAT-2014(Hyd.)/-TP for AY: 2005-06

20. Ground no.3 & 4 challenges the directions of the learned CIT(A)

deleting the comparable of M/s Vishal Information Tech. Ltd. selected by the TPO from the list of comparables. We find merit in the submission of the learned counsel that the company is functionally different as this company is engaged in the business of providing call centre services. The Hon’ble Delhi High Court in the case of M/s Rampgreen Solutions Pvt. Ltd Vs CIT in dated 10-08-2015 had distinguished the nature of business between the KPO and ITES as follows;

“34. We have reservations as to the Tribunal’s aforesaid view in Maersk Global Centres (India) Pvt. Ltd. (Supra). As indicated above, the expression BPO and KPO are plainly, understood in the sense that whereas, BPO does not necessarily involve advanced skills and knowledge, KPO, on the other hand, would involve employment of advanced skills and knowledge for providing services. Thus, the expression KPO in common parlance is used to indicate an ITEs provider providing a completely different nature of service than any other BPO service provider. A KPO service provider would also be functionally different from other BPO service providers, in asmuchas the responsibilities undertaken, the activities performed, the quality of resources employed would be materially different. In the circumstances, we are unable to agree that broadly ITEs sector can be used for selecting comparables without making a conscious selection as to the quality and nature of the content of services. Rule 10B(2)(a) of the IT Rules, 1962 mandates that the comparability of controlled and uncontrolled transactions be judged with reference to service product characteristics. This factor cannot be undermined by using a broad classification of ITEs which takes within its fold various types of services with completely different content and value. Thus, where the tested party is not a KPO service provider, an entry rendering KPO services cannot be considered as a comparable for the purpose of Transfer Pricing analysis This perception that a BPO service provider may have the ability to move up the value chain by offering KPO services cannot be a ground for assessing the transactions relating to services rendered by the BPO service provider by benchmarking it with the transactions of KPO service providers. The object is to ascertain the ALP of the service rendered and not of a service (higher in value chain) that may possibly be rendered subsequently.

Furthermore, the company operating margin is 50.68% which is considered to be abnormal, in the line of business it is engaged.

Therefore, it cannot be considered as a comparable in the light of the following decisions of the Co-ordinate Benches;

1. Gernisys Integrating Systems (Ind.) Pvt.Ltd Vs DCIT in

Therefore, we do not find any reason to interfere with the reasoning of the learned CIT(A). Hence, these grounds of appeal filed by the revenue are dismissed.

21. Ground no.5 challenges the directions of the learned CIT(A) to exclude Ms/s Nucleus Netsoft & GIS Ind. Ltd from the list of comparables selected by the TPO. The CIT(A) deleted this company on the ground that the TPO had not clarified whether this company satisfies the filter of related party transactions. We find that from its annual account it had outsourced a considerable portion of its business, where as assessee company, it carried out the entire operation by itself. It cannot be considered as a comparable on the same reasoning the Co-ordinate Bench of Hyderabad in the case of M/s IVY Comptech Pvt. Ltd, Hyderabad in ITAT-014(Hyd.)-TP for AY: 2005-06 deleted this company from the list of comparables by holding as under;

“ We have heard the parties. The sole contention of the assessee for excluding the aforesaid company is the employee cost as a percentage of the operating revenue is much lower compared to the assessee. On a perusal of the order passed by the co-ordinate bench in the case of HSBC Electronic Data Processing India Pvt. Ltd.(supra), it is to be noted that the co-ordinate bench while considering the objection of the assessee with regard to the aforesaid company in para-13 accepted assessee’s contention that the company outsourced its work and has held that the company cannot be selected as a comparable on account of its low employee cost. In view of such order of the co- ordinate bench, we direct the AO/TPO to examine this aspect and if there is substantial difference between the assessee and the aforesaid company, then this company cannot be treated as a comparable”.

Respectfully following the co-ordinate bench decision, we hold that the learned CIT(A) is justified in giving direction to delete M/s Nucleus Netsoft & GIS Ind. Ltd. as a comparable. Hence, this ground of appeal filed by the revenue is dismissed.

23. Ground no.7 challenges the directions of the learned CIT(A) to allow the adjustment towards capacity utilization. The CIT(A) had given a categorical finding that the assessee company IPLC link cost of 54.66% were only to the extent of 44.34% thereby the capacity was under utilization to the extent of 54.66%. He accordingly, directed the TPO to allow this adjustment towards under utilization and while doing so, the learned CIT(A) relied on the decision of the Hon’ble Delhi Bench in the case of M/s Global Vanttedge Pvt.Ltd (2010-TIOL-24-ITAT-Del.)

For the purpose of benchmarking the international transactions, it is imperative that the effect of such underutilization of capacity/excess fixed costs is eliminated, while computing the operating margins of the appellant.

Rule 10B(3) of the Rules provides that an appropriate adjustment is required to be made to account for the differences between the controlled and uncontrolled transactions: "An uncontrolled transaction shall be compara.ble to an international transaction if-- (i) none of the differences, if any, between the transactions being compared, or between the enterprises entering into such transactions are likely to materially affect the price or cost charged or paid in, or the profit arising from, such transactions in the open market; or (ii) Reasonably accurate adjustments can be made to eliminate the material effects of such differences.”

Reliance in this regard is also placed on the recent decision of Chennai Bench of the Tribunal in the case of Mando India Steering Systems Pvt. Ltd. vs. ACIT (ITA No. 2092/Mds/2012), wherein, the Hon'ble Bench has remitted the issue back to the file of the assessing officer with a direction to consider the claim of the assessee with respect to idle capacity adjustment during the relevant period while determining the ALP cost. The relevant extract of the decision reads as under: "We are of the considered view that under-utilization of production capacity in the initial years is a vital factor which has been ignored by the authorities below while determining the ALP cost. The TPO should have made allowance for the higher overhead expenditure during the initial period of production. In view of the above, we deem it appropriate to remit this issue back to the Assessing Officer with a direction to consider the claim of the assessee with respect to idle capacity adjustment during the relevant period while determining the ALP cost. The assessee is also directed to produce relevant documents in comparable units for the necessary analysis. The appeal of the assessee is allowed for statistical purposes in the aforesaid terms."

Reliance in this regard is placed on the decision of Pune Bench of the Tribunal in the case of Amdocs Business Services Pvt. Ltd. vs. DCIT (ITA No. 14212/PN/11), wherein, the Tribunal allowed economic adjustment on account of under capacity utilization holding that the appellant was in start up phase during the assessment year consideration. The relevant extract of the decision is reproduced as under: "9. The next major point made out by the appellant is that this being the first full year of operation, the assessee had incurred certain expenditure which are start-up costs and cannot be fully recovered in the instant year itself, and such an expenditure has abnormally affected the profit margin. It is also canvassed that due to the start-up year the capacity utilization was not satisfactory, whereas its profitability has been bench marked against comparables which are established entities -and have been set up over the years. The plea setup by the assessee for economic adjustments on account of under capacity utilization and being in start up phase, is not something which is unreasonable and neither it is otiose to the mechanism of transfer pricing assessments. In fact, in principle, the plea of the assessee is in line with the decisions of the Tribunal in the, case of Global venttedge P. Ltd v. DCIT in 2764IDel/09 (Del); Brintons Carpers' Asia (P) Ltd v. DCIT 139 TT J -177; and, Skoda, Auto India P. Ltd. v. A CIT 122 TT J 699. In our view, the matter requiring factual appreciation, the same is remanded back to the file of the Assessing Officer, who shall consider the propositions put forth by the assessee and allow appropriate economic adjustments on a reasonable basis."

On the same lines, Delhi Bench of the Tribunal in the case of Global Turbine Services Inc. vs. ADIT (ITA No. 3484/0e1/2011) allowed economic adjustment on-account of under capacity utilization considering the fact that the year under consideration was the first full year of operation of the appellant. Relevant extract of the decision reads as under: "10. -We have heard the rival contentions and perused the material available on record. The suitable adjustment for non-utilisation of capacity is to be taken in to account after considering the ALP while working out TP adjustment, this proposition has been held by coordinate Bench in the case of the Amdocs Business Services (P.) Ltd. (supra) and various other cases as cited here in above .

Reliance in this regard is placed on the following observation of the Hon'ble Mumbai Bench of the Tribunal in the case of ACIT vs. Fiat India Pvt. Ltd (ITA no 1848/Mum/2009): "As rightly held by the Id. CIT(A), the said submission made by the appellant is sufficient to demonstrate that there was a material difference in the facts of the appellant's case and that of the comparable cases in terms of capacity utilization as well as in other terms. Appropriate adjustments thus were required to be made to eliminate such differences"

Further, the Hon'ble Pune Bench of the of Tribunal in the case of Brintons Carpers Asia Pvt. Ltd. vs. ACIT while allowing· adjustment for idle capacity caused due to labour unrest/strike and relying upon the above observation of the Mumbai Tribunal held as follows: "15. From the above, it is clear the AO has authority vide clause (iii) above to make the adjustments. Such adjustments are necessary only to remove or minimize the differences in the comparable or anomaly in' the said comparable. -Such adjustments are authenticated by the OECD guidelines too. In this regard, we have perused the important findings of the Tribunal in the case of the Fiat India P Ltd (supra) placed at page 191 of the paper book. For the sake completeness, the same is reproduced as under. …….as regards the adjustments made by the appellant to work out its operating margin for comparing the same with the profit margin of comparable cases, it was held that there was a material difference in the facts of the appellant's case and that of the comparable cases in terms of capacity utilization as well as in other terms. Appropriate adjustments thus were required to be made to eliminate such differences. Further, the TPO himself has allowed similar adjustments made by the appellant in the immediate preceding years i.e. AY 2002- 03, 2003-04 as well as in the immediate succeeding years i.e. 2005-06 and 2006-07 wherein the facts involved were similar to that of the year under consideration i.e. AY 2004- 05; + accordingly, no infirmity is found in the impugned order of the CIT(A) as the adjustments made by the appellant in TNMM analysis were reasonable and accurate and as reflected in the said analysis, international transactions made by the appellant company with its associated concerns during the year under consideration were at arm's length requiring no adjustment/addition on this issue."

16. From the above, it is evident that the appellant is entitled to economic adjustments in the circumstances of under capacity utilization of the company. Of course, such adjustments must be restricted to fixed cost/overheads only. In the 14 instant case, the AO/TPO did not have the occasion to go into the period or the extent of the labour unrest, break-up of the claimed adjustments amounting Rs.7.32 crores '(rounded off), fixed cost versus the variable cost etc as they' summarily rejected the external comparables in view of their preference to the operating profits of the domestic segment of the carpets. ·Therefore and consequently, this key issue also has to be set aside to the files of the' TPO/AO for fresh examination of the issue.”

Prima facie we see the need for such economic adjustments to the total cost of the carpet of the export segment. We refuse to comment on the facts relating to the figures as none of the authorities has gone into the details of such economic adjustments and they summarily rejected the claims. As such, the requisite adjustments are borne out of the relevant rules/provisions and therefore, the claim is bona fide and has support of the law. For this,' the appellant prefers to go to the files of the AO for want of a speaking order on this issue. In our opinion, the request of the appellant deserves to' be considered favourable.”

Also, in the case of E.I. Dupont India Pvt. Ltd. vs. DCIT (ITA No 5336/0/2010), the Hon'ble Delhi Bench of the Tribunal, while allowing the adjustment for capacity utilization held that ; "It is a matter of fact that fixed costs remain the same even when there is under utilization of capacity. Therefore, the case of the appellant and the comparable cases have to be examined in respect of capacity utilization so as to make the controlled and uncontrolled transactions comparable." Also, the Hon'ble Delhi Bench of the Tribunal in the case of ITO vs. CRM Services India Pvt. Ltd upheld the claim of the appellant towards adjustment of idle capacity:

8.1 This bring us to the alternative argument that the appellant is entitled to get adjustment in respect of capacity under-utilization. No objection has been raised by the Id. GIT, DR in this matter. As a matter of fact, he has fairly accepted the proposition that adjustment in this regard is-required to be made. At the same time, it is a/so held that suitable adjustment has to be made to such PLI in respect of idle capacity.

Further, the Hon'ble Bangalore bench of the Tribunal in the case of Genisys Integrating Systems (India) Pvt. Ltd vs. DCIT (ITA No 1231/Bang/2010) the Hon'ble Tribunal held as under: "The appellant should also be given adjustment for under utilization of its infrastructure.

The AO shall consider this fact also while determining the ALP find make the TP, adjustments. With these directions, the appeal of the appellant is disposed of. "

Further, the Hon'ble Delhi' Bench of the Tribunal in the case of Transwitch India Pvt. Ltd VS. ACIT (I.T.A. No. 6083/De1/2010) held as under: "4.11 Another' TPO's contention is that claim of the appellant that the sealing drive reduced its revenue is unsubstantiated. In this regard, appellant has submitted that the appellant had placed on record its quarterly 'capacity' utilization statement demonstrating the fall in its capacity utilization during the quarter January to March, 2006. The capacity utilization, of the appellant during the quarter January to March, 2006 fell to i2% as' against the normal capacity utilization of 87% to 94% during the financial year ending December, 31, 2005. Further, the fact that the appellant had to shift its office premises at a very short notice, sufficiently substantiates the low capacity utilization of the appellant during the last quarter of financial year 2005-06. We find out ourselves in agreement with the appellant's submission in this regard."

Hon'ble Delhi High Court, in the appeal preferred by the revenue in the case of Transwitch India (supra), vide order dated 17.07.2013, upheld the adjustment claimed by the assessee on account of capacity utilization.

Reliance in this regard is also placed on the recent decision Delhi Bench of the Tribunal in the case of DCIT vs. Panasonic AVC Networks India Co.

Ltd. (ITA No. 4620/0eI/2011), wherein the Hon'ble Bench has held that capacity underutilization is an important factor affecting net profit margin as lower capacity utilization results in higher per unit costs which in turn results in lower profits. The relevant finding of the decision reads as under: "5. Having heard the rival contentions and having perused the material on record, we see no reasons to interfere in very well reasoned findings and directions of the learned CIT (A). Rule 10B (1 )(e)(ii) of the Income Tax Rules 1962 does indeed provide that the net profit margin realized in a comparable uncontrolled transaction is adjusted, inter alia, for differences in enterprise entering into such transactions, which could materially affect the net profit margin in open market. Capacity underutilization by enterprises is certainly an important factor affecting net profit margin in the open market because lower capacity utilization results in higher per unit costs, which, in turn, results in lower profits. Of course, the fundamental issue, so far as acceptability of such adjustments is concerted, is reasonable accuracy embedded in the mechanism for such adjustments, 'end as long as such an adjustment mechanism can be found, no objection can be taken to the adjustment. In our considered view, the learned CIT(A)'s approach is reasonable in this regard and the adjustments are on a conceptually sound basis. In any case, as pointed out by the learned counsel, the adjustments so directed by the learned GIT(A) have duly been made by the Assessing Officer, and there have been no issues regarding implementing these adjustments. We approve the conclusions arrived by the CIT(A) on this issue and decline to interfere in the matter.”

Respectfully following the ratio laid down by the Hon’ble Delhi High Court we dismiss the ground of appeal filed by the revenue.

24. Ground no.8 to 10 challenges the directions of the learned CIT(A) to compute profit u/s 10A of the Act, before setting off of the losses of another unit. The CITA), following the jurisdictional High Court decision in the case of CIT Vs M/s Yokogawa India Ltd. (2012) 21 Taxmann.com 154(Kar.) wherein the Hon’ble High Court held as under;

“ As the income of the section 10A unit has to be excluded at source itself before arriving at the gross total income, the loss of the non-section 10A unit cannot be set off against the income of sec.10A unit u/s 72. The loss incurred by the assessee under the head ‘Profits and gains of business or profession’ has to set off against the profits and gains, if any, of any business or profession carried on by such assessee. Therefore, as the profits and gains under section 10A is not be included in the income of the assessee at all, the question of setting off of loss of the assessee of any profits and gains of business against such profits and gains of the undertaking would not arise. Similarly, as per section 72(2) unabsorbed business loss is to be fist set of and thereafter unabsorbed depreciation treated as current year’s depreciation under section 32(2) is to be set off. As deduction under section 10A has to be excluded from the total income of the assessee the question of unabsorbed business loss being set off against such profit and gains of the undertaking would not arise. In that view of the matter, the approach of the assessing authority was quite contrary to the aforesaid statutory provisions and the Appellate granting the benefit of section 10A to the assessee. Hence, the main substantial question of law is answered in favour of the assesses and against the revenue”.

The CIT(A) only followed the decision of the Hon’ble Karnataka High Court. We do not find any reason to interfere with the order of the CIT(A) on this ground. Hence, this ground of appeal of the revenue is dismissed.

25. Ground no.11 & 12 are general in nature does not require any adjudication.

C.O.No.168(BNG)/2015 (in (AY: 2005-06)

“1. The order of the ld.CIT(A)-IV, Bangalore to the extent prejudicial to the respondent is bad in law.

2. The learned CIT(A) has erred in confirming the action of the AO and TPO in;

a. Passing the order in violation of the principles of natural justice by not affording the respondent an opportunity to substantiate its claim and rebut the method and basis finally adopted for TP analysis; and b. Not appreciating that the charging or computation provision relating to income under the head “Profits & gains of business or profession” do not refer to or include the amounts computed under Chapter X and therefore, the addition made under Chapter X is bad in law.

3. The ld.CIT(A) has erred in confirming the action of the AO in making a reference o TPO for determining the arm’s length price without demonstrating as to how or why it was necessary and expedient to do so.

Grounds relating to Transfer Pricing:

4. The ld.CIT(A) has erred in confirming the action of the AO and TPO in;

a. Rejecting the TP analysis undertaken by the Respondent; and b. Holding that the Cost Plus Method (CPM) adopted by the respondent is not the most appropriate method and

5. The ld.CIT(A) has erred in confirming the action of the TPO in;

a. Adopting Transactional Net Margin Method (TNMM) for determination of arm’s length price without demonstrating how TNMM was the most appropriate method under the facts and circumstances of the case. b. Not giving the complete process under TNMM through which the final comparables were selected. c. Adopting cosmic Global Ltd. as a comparable even though it deserves to be rejected on the ground of tainted management. d. Adopting Maple E-Solutions Ltd. as a comparable even though it deserves to be rejected on the ground of tainted management.

Pronounced in the open Court on the 30th November, 2015