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Income Tax Appellate Tribunal, MUMBAI BENCHES “K”, MUMBAI
Before: Shri Mahavir Singh, & Shri Ashwani Taneja
आदेश / O R D E R Per Ashwani Taneja (Accountant Member): These cross appeals have been filed against the final assessment order passed by the AO dated 07.01.2014 u/s 143(3) r.w.s. 144C (13) of the Income Tax Act, 1961, (herein after called as ‘Act’) in pursuance to the directions of the Dispute Resolution Panel (DRP) given vide its order dated 20.12.2013 for A.Y. 2009-10.
During the course of hearing, arguments were made by Shri Pankaj Toprani & Shri Sandeep Parikh, Authorised Representative (AR) on behalf of the Assessee and by Shri N.K. Chand, Departmental Representative (DR) on behalf of the Revenue.
First we shall take appeal of the assessee in ITA No.1840/Mum/2013
The assessee has raised five grounds contesting the Transfer Pricing Adjustment made by the AO.
3.1. The brief facts are that an adjustment of Rs.3,45,15,177/- was made by the TPO in respect of transactions entered into by the assessee with its two Associate Enterprises viz. Xoriant Corporation, USA and Y. Point (UK) Ltd. The assessee was engaged in the business of software development solely for its two associated enterprises.
3 Xoriant Solutions Pvt. Ltd.
Before the TPO the assessee stated that it has been following Cost Plus Method (CPM) which according to the assessee was Most Appropriate Method (MAM). It was submitted that by following CPM, the assessee was charging to its aforesaid two AEs a mark-up of 10% of the total cost. The total cost included operating expenses, selling and administration expenses, interest & depreciation. During the course of Transfer Pricing Proceedings, the TPO felt that CPM was not MAP and therefore, he changed the method to TNMM (Transactional Net Margin Method) and carried out a fresh search of the comparables and found that assessee’s margin under TNMM was 8.85% whereas comparables’ arithmetic mean margin was 20.8%, and therefore resultantly, an adjustment of Rs.3,45,15,177/- was made.
3.2. Being aggrieved, the assessee filed objections before the DRP wherein the assessee objected to selection of TNMM as MAM and also objected to the selection of comparables and worked out arithmetic mean margin at 20.8%. But DRP dismissed the objections on both the grounds.
3.3. Being aggrieved, the assessee filed this appeal before the Tribunal. It was contended by the Ld. Counsel that the DRP has not considered the submissions of the assessee and without giving any reasoning, objections of the assessee were dismissed. On the other hand, Ld. DR submitted that assessee did not make out proper research of the comparables and therefore, TPO had no option but to change the most
4 Xoriant Solutions Pvt. Ltd. appropriate method to TNMM and carry out a fresh search. It was further submitted that proper verification of facts was also required to select most appropriate method.
3.4. We have gone through submissions of both the sides as well as orders of the lower authorities. It is noted by us that approach adopted by the lower authorities i.e. TPO as well as DRP has not been fair and justified. The TPO changed the method to TNMM without giving proper reasoning and effective opportunity of hearing to the assessee. It has been brought to our notice that during the transfer pricing proceedings for the preceding years i.e. 2007-08 and 2008-09, CPM has been accepted as the most appropriate method by the TPO in the transfer pricing orders passed for these two years. It was submitted that no reason has been given by the lower authorities to justify as to why a deviation in the year was needed in the facts of this case and especially when business was same in all the three years. It is further noted by us that the DRP has not given any reasoning whatsoever in its order while dismissing the objections of the assessee and confirming the order of the TPO. It is also noted by us that the assessee did not make out proper research of comparables following CPM. Thus, taking into account of facts and circumstances of the case, we find it appropriate to send this matter back to the file of AO/TPO. The assessee shall give proper analysis of comparables on the basis of proper search of the comparables to work out arithmetic mean margin following Cost Plus Method. The TPO shall take into account all the details and 5 Xoriant Solutions Pvt. Ltd. documents as may be submitted by it and also take into account the justification given by the assessee for adopting CPM in the case of assessee. The TPO shall also take into account orders passed for preceding two years and shall give proper reasoning on facts and law in case he wants to deviate from the method adopted in these two years. The TPO is free to carry out fresh search of the comparables as may be needed in the given facts of the case. The TPO shall also give adequate opportunity of hearing to the assessee. Thus, grounds no. 1 to 5 are sent back to the file of the TPO for fresh adjudication with the directions as given above.
Grounds with regard to levy of interest are consequential and therefore, dismissed.
As a result assessee’s appeal is partly allowed for statistical purposes.
Now we shall take Revenue’s Appeal in for A.Y. 2009-10:
The solitary issue raised in this appeal by the revenue is with regard to the action of the DRP in directing the AO to not to set off brought forward unabsorbed depreciation and brought forward losses pertaining to the unit eligible for deduction u/s 10A for the purpose of computing deduction u/s 10A of the Act. 6.1. The brief facts are that the AO noted that in the computation of Income, the assessee computed Business
6 Xoriant Solutions Pvt. Ltd.
Income at Rs.1,97,11,791/- and claimed deduction under section 10A to the extent of Rs.1,97,11,791/-. Thereafter, the assessee also claimed set-off of carry forward losses of Rs.9,09,776/- of A.Y. 2003-04 against Income from Other Sources. Further, the assessee also claimed to carry forward Unabsorbed depreciation of Rs.15,79,707/- and brought forward losses of Rs.94,45,230/- of AY 2003-04 to subsequent year. The Assessing Officer held that the assessee cannot claim deduction under Section 10A before set-off of unabsorbed depreciation and brought forward business losses.
6.2. Being aggrieved, the assessee filed its objections before the DRP and argued that as per scheme of the Act, profits of the units eligible for deduction under Section 10A forms part of income computed under the head – ‘Profits & Gains of Business or Profession’ and the deduction in respect of the profits as specified in Section 10A is required to be made at the stage of computing the income under that head. In other words, deduction under Section 10A is required to he granted while computing the Profits and Gains of the business itself. As per the scheme of the Act, Section 10A does not fall under Chapter VI-A and Section 80AB is not applicable. The brought forward depreciation and brought forward business losses will be carried forward as per the provisions of Section 32 and 72 respectively. The following decisions were relied upon:- (i) TEI Technologies (F) Ltd IT Appeal No.2067 of 2010
7 Xoriant Solutions Pvt. Ltd.
& 347 of 2011 (Del) and Hindustan Unilever Ltd vs. DCIT 325 ITR 102 (Born).
6.3. The DRP considered the submissions of the assessee and relying upon the judgment of Hon’ble Jurisdictional High court accepted the claim of the assessee and held as under: “It is seen that the Hon'ble Bombay High Court in the case of Black & Veatch Consulting (F) Ltd 20 Taxman 727 (2012) held that deduction u/s 10A has to be given at stage when profits and gains of business are computed in first instance i.e. anterior to application of provisions of section 72 which deals with carry forward and set off of business losses, following its own earlier decision in Hindustan Unilever Ltd. v DCIT (2010) 325 ITR 102. Respectfully following the same AO is directed to allow deduction u/s 10A before set off of carried forward loss and depreciation of eligible unit.”
6.4. Being aggrieved the revenue filed appeal before the Tribunal.
6.5. During the course of hearing, Ld. Counsel of the assessee relied upon the order of the DRP and submitted that in view of judgment of Hon’ble Jurisdictional High Court this issue was covered in its favour. On the other hand, Ld. DR relied upon the order of the AO.
6.6. We have gone through the orders of the lower authorities and submissions made by both the sides. It is noted that the 8 Xoriant Solutions Pvt. Ltd.
DRP has followed the judgment of the Hon’ble Jurisdictional High Court while accepting the claim of the assessee that deduction u/s 10A was to be given at the stage while profits and gains of the business were computed in first instance i.e. prior to set off of the business losses. No contrary judgment has been brought to our notice and therefore, we do not find anything wrong in the order of the DRP and therefore, same is upheld and grounds raised by the revenue are dismissed.
In the result, appeal filed by the revenue is dismissed and appeal filed by the assessee is partly allowed for statistical purposes.
Order pronounced in the open court on 22nd April, 2016.