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2015 (9) TMI 555 - ITAT BANGALORE

2015 (9) TMI 555 - ITAT BANGALORE - TMI - Transfer pricing adjustment - selection of comparable - Held that:- Maple eSolutions Ltd. be excluded from the set of comparable companies as objection of the assessee with reference to this company is with regard to the financials of the company, on the ground of unreliability of data being acceptable.

Vishal Information Technological Services Ltd., Asit C Mehta Financial Services Ltd. (earlier known as Nucleus Netsoft & GIS (India) Ltd.) - A .....

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vance arises to the assessee from the impugned order, on the inclusion of these companies as comparables, this claim of the assessee is not maintainable as there is no adverse finding in the impugned orders calling for or requiring us to adjudicate thereon. We, therefore, finding that the contentions raised by the learned Authorised Representative of the assessee in respect of these companies are not maintainable, reject the same. Consequently, the inclusion of these two companies i.e. Vishal In .....

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issue ought to be re-examined afresh by the TPO to ascertain whether and how the assessee's claim has been applied to the comparable companies also so that there will be parity when the said expenditure is proportionately applied to the operating cost of the assessee and comparable companies. In this view of the matter, we set aside the issue of the assessee's claim of additional depreciation being an item of extra-ordinary expenditure to the file of the TPO for fresh examination and adjudicati .....

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3 (8) TMI 421 - ITAT DELHI), wherein it has been held that expenses disallowed should be excluded from operating cost, is well placed and therefore agree with the assessee's contention that expenses disallowed in computation of taxable income should be excluded from operating cost.- Decided in favour of assessee.

Foreign exchange income/loss to be non-operating income/loss and excluded the same while computing the margins in the case of comparables - it is submitted that on grounds of .....

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uphold the TPO's action in including the same while computing the assessee's margins - we direct the TPO to recompute the margins of both the assessee and the comparable companies by treating the foreign exchange gain/loss as operating income and to compute the margins of both the assessee and the comparable companies accordingly - Decided against assessee.

Deduction under Section 10A - assessee contended that the Assessing Officer erred in not appreciating that income which is eligi .....

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sses. In the case on hand, the Assessing Officer has computed the eligible deduction under Section 10A of the Act after setting off brought forward unabsorbed business losses. Respectfully following the decision of the Hon'ble High Court of Karnataka in the case of Yokogawa India Ltd. (supra), we direct the Assessing Officer to allow the deduction under Section 10A of the Act without setting off the brought forward unabsorbed business loses.- Decided in favour of assessee. - IT (T.P.) APPEAL NO. .....

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l ('DRP'), Bangalore under Section 144C(5) rws 144C(8) of the Act vide order dt.20.9.2010. The relevant Assessment Year is 2006-07. 2. The facts of the case, briefly, are as under :- 2.1 The assessee company is engaged in the business of providing system integration, network support and technical services support to its group companies. The assessee is a wholly owned subsidiary of Vinciti Network Inc., a company incorporated in USA. The assessee exports/provides IT Enabled Services (ITES .....

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ting the deduction claimed under Section 10A of the Act. The return was processed under Section 143(1) of the Act and the case was subsequently selected for scrutiny. 2.2 In the period under consideration, the assessee had reported the following international transactions :- (i) Network administration support and other technical services : ₹ 12,84,43,827. (ii) Technical Support Services : ₹ 1,12,56,584. In view of the above international transactions of the assessee, the Assessing Of .....

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assessment order under Section 143(3) rws 144C of the Act dt.23.12.2009 determining the assessee's income at Nil. In this order, the Assessing Officer has held that deduction under Section 10A of the Act is to be granted from the total income after setting off of brought forward business losses and unabsorbed depreciation. 2.3 Aggrieved by the draft order of assessment for Assessment Year 2006-07 dt.23.12.2009, the assessee filed its objections thereto before the DRP, Bangalore. The DRP iss .....

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Adjustment of ₹ 2,50,30,925. 3.1 Aggrieved by the final order of assessment for Assessment Year 2006-07 dt.7.10.2010, the assessee has preferred this appeal raising the following grounds :- "1. The lower authorities have erred in passing the order: a. without considering all the submissions and/or without appreciating properly the facts and circumstances of the case and law applicable; b. at the fag end of the limitation period; c. without affording a proper opportunity of being hear .....

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embers of Dispute Resolution Panel also being jurisdictional Commissioner/Directors of Income Tax of the appellant, the constitution of the Dispute Resolution Panel itself was bad in law and hence the Order passed by the panel also is bad in law. GROUNDS RELATING TO CHARGE OF INCOME TAX 5. The lower income tax authorities have erred in not appreciating that: a. there is no amendment to the definition of the term "income" to include amounts computed under Chapter X; b. the charging or c .....

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d relying upon such replies to compute ALP; and b. not giving an opportunity to the appellant to cross examine the parties involved. GROUNDS ON REJECTION OF TP ANALYSIS OF THE APPELLANT 7. The lower income tax authorities have erred in a. rejecting the comparables selected by the appellant on unjustifiable grounds; and b. rejecting the transfer pricing analysis undertaken by the appellant on unjustifiable grounds. GROUNDS RELATING TO TP ANALYSIS OF THE TPO: 8. The lower authorities have erred in .....

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argins of comparables. 9. The lower authorities have erred in: a. Inappropriately computing the operating margins of the appellant; and b. Not excluding additional depreciation resulting from re-estimate of useful life of assets and provision for contingent telecom expenses from operating cost of the appellant. GROUND RELATING TO ALTERNATE PLI 10. The learned TPO has erred in not appreciating that when benchmarked against other appropriate base (assets employed), the performance of the appellant .....

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tative and quantitative difference between the business of the appellant and those of the comparable companies; (iii) not recognizing that the company was insulated from risks, as against comparables, which assume these risks and therefore have to be credited with a risk premium on this account; and (iv) not appropriately computing the working capital adjustment while computing the margins of the comparables. GROUND ON BENEFIT OF 5% RANGE 13. Assuming without admitting that the adjustment is to .....

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t all and hence it does not enter the normal computation mechanism. c. Not appreciating that deduction under section 10A is available to business profits of a particular year and is therefore not to be influenced by unabsorbed depreciation allowance and brought forward business losses. d. not appreciating that the incomes falling under Chapter III - "incomes which do not form part of total income", need not be computed in the manner laid down in Chapter IV D of the Income Tax Act, and .....

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OTHER GROUNDS 15. In view of the above and other grounds to be adduced at the time of hearing, the appellant prays: (a) that the order passed by the Assessing Officer be quashed; or in the alternative; (b) the adjustments made by the TPO/AO and confirmed by the Dispute Resolution Panel varying the reported value of the international transaction be deleted; (c) deduction under section 10A be computed before set off of brought forward losses and unabsorbed depreciation. The appellant submits that .....

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Maple eSolutions Ltd., as a comparable. 4. The Grounds raised at S.Nos.1 to 4 are general in nature and as the learned Authorised Representative has stated that these grounds are not being pressed, they are dismissed as infructuous. TRANSFER PRICING ISSUES (GROUNDS NO.5 TO 13) 5.1 In the course of proceedings before us, the learned Authorised Representative submitted a chart explaining the assessee's position regarding the acceptability or otherwise of each of the companies selected by the T .....

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essment Year 2006-07; (b) Google India (P.) Ltd. v. Dy. CIT (IT APPEAL NO. 1368 (BANG.) OF 2010, Dated:- 19-10-2012) (c) HSBC Electronic Data Processing (P.) Ltd. v. Addl. CIT (ITA No.1624/Hyd/2010, Dated:- 28-06-2013) for Assessment Year 2006-07. (d) Stream International Services (P.) Ltd. v. ADIT (I.T.) (IT Appeal No. 8997 (Mum.) of 2010, Dated:- 11-01-2013). 5.2 In the light of the above observations, we now briefly examine the grounds of appeal raised at S.Nos.5 to 13 on TP Issues. 5.3.1 Gro .....

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ing and considering the comparability or otherwise of individual companies as raised by the assessee before us, there is no requirement for specific adjudication on specific issues raised. Since the learned Authorised Representative has submitted that only Ground at S.No.8(c) is being pressed, and the Grounds at S. No. 8 (a), (b) and (d) are not being pressed before us, the same are rendered infructous and are accordingly dismissed. 5.3.3 Ground No.9 is raised in respect of the inappropriate com .....

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omparable companies. Since these grounds were not urged before us by the learned Authorised Representative, they are rendered infructuous and are accordingly dismissed. 5.3.6 Ground No.13 raised in respect of the benefit of +/- 5% was not pressed before us and is accordingly dismissed as infructuous. 6.1 As per the TP Study carried out by the assessee, for ITES, the assessee adopted Transactional Net Margin Method ('TNMM') as the Most Appropriate Method ('MAM'). Taking itself as .....

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ssee's objections, the TPO selected the final list of 13 comparables, which are as under :- Sl. No. Company Name OP to Total Cost % 1. Maple eSolutions Ltd. 32.66 2. Allsec Technologies Ltd. 28.51 3. Datamatics Financial Services Ltd. (Seg) 24.99 4. Transworks Information Services Ltd. 19.56 5. Cosmic Global Ltd. (Seg) 16.03 6. Vishal Information Technologies Ltd. 48.03 7. Asit C Mehta Financial Services Ltd. (Earlier known as Nucleus Netsoft & GIS (India) Ltd.) 34.52 8. Goldstone Infrat .....

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TPO was 3.74% on total cost. After granting working capital adjustment of 1.67%, the TPO computed the TP Adjustment at ₹ 2,50,30,925 to the ALP of international transactions entered into by the assessee in the period relevant to Assessment Year 2006-07. The ALP of the ITES rendered by the assessee was computed by the TPO as under :- Arithmetic Mean PLI 24% Less : Working Capital Adjustment as per TPO 1.67% Adj. Arithmetic Mean PLI 22.33 Operating Cost ₹ 13,46,61,429 Arm's Length .....

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make and put forth arguments/contentions only on the issue of comparability or otherwise of individual companies, which in the assessee's opinion are incorrectly included or excluded by the TPO in the final set of comparable companies. In this context, the learned Authorised Representative also submitted a chart explaining the assessee's position regarding the acceptability or otherwise of each of the companies selected or rejected by the TPO as comparable companies to the assessee. 7.1 .....

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companies are liable to be rejected/excluded as comparables :- 1. Maple eSolutions Ltd. 2. Datamatics Financial Services Ltd. 3. Vishal Information Technological Services Ltd. 4. Asit C Mehta Financial Services Ltd. (earlier known as Nucleus Netsoft & GIS (India) Ltd.) 5. Gold Stone Infratech Ltd. and 6. Apex Knowledge Solutions Pvt. Ltd. The learned Authorised Representative submitted that the comparability of the above six companies were considered by the co-ordinate bench of this Tribunal .....

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below. 7.4 We have heard the rival contentions and perused and carefully considered the material on record including the judicial decisions cited. We now proceed to deal with each of six comparables listed out in para 6.2 of this order (supra). 7.5 Maple e-Solutions Ltd. 7.5.1 This was a company chosen as a comparable by the assessee and accepted by the TPO. Before us, the assessee has filed additional grounds of appeal seeking to exclude this company from the final set of comparables on the gro .....

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e case of Ariba Technologies India (P.) Ltd. (supra) for Assessment Year 2006-07. In view of this, the learned Authorised Representative prayed that this company be excluded from the final list of comparables. 7.5.2 Per contra, the learned Departmental Representative supported the orders of the authorities below in including this company in the list of comparables. 7.5.3 We have heard the rival submissions and perused and carefully considered the material on record; including the judicial pronou .....

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Data Processing India Ltd. (supra) and the Delhi Bench of the ITAT in the case of CRM Services India Pvt. Ltd. (supra) where it was excluded for the purpose of comparability on account of the unreliability of data in its financials. The operative portion of the order of the co-ordinate bench in Ariba Technologies India (P.) Ltd. (supra) at para 24 are extracted hereunder :- "12. The objection of the assessee with reference to this company is with regard to the financials of the company, on .....

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it is held with reference to this company as under : 18. We are unable to uphold the contention raised by the learned Departmental Representative. It is apparent from two orders passed - one by the Delhi Bench and the other by the Hyderabad Bench of the Tribunal - that the case of Maple eSolutions Limited has been directed to be excluded from the list of comparables. As the assessment year under consideration is 2006-2007 and the Delhi Bench of the Tribunal has also considered the same assessmen .....

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a), for the same assessment year 2006-07, we direct the Assessing Officer/TPO to exclude this company viz. Maple e-Solutions Ltd. from the set of comparable companies. 7.6 (i) Vishal Information Technological Services Ltd. (ii) Asit C Mehta Financial Services Ltd. (earlier Nucleus Netsoft GIS (India) Ltd.) and (iii) Goldstone Infratech Ltd. 7.6.1 These three companies were chosen by the TPO rejecting the objections of the assessee to their inclusion in the list of comparables. Before us it was s .....

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orted the orders of the authorities below. 7.6.3 We have heard the rival submissions and perused and carefully considered the material on record; including the judicial pronouncements cited and placed reliance upon. We find that a co-ordinate bench of this Tribunal in the case of Ariba Technologies India Pvt. Ltd. (supra) for Assessment Year 2006-07 has excluded these three companies from the list of comparables following the decision of the ITAT, Hyderabad Bench in the case of HSBC Electronic D .....

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chnologies Ltd. 9. The assessee's objection with reference to inclusion of this comparable is on the reason that the company is functionally different, also does not satisfy the filters such as employee cost and on-site revenue filter. It was submitted that employee cost forms a major portion of the total cost of BPO services and in the assessee's case employee cost is 62% of the total cost, whereas in the selected company the employee cost is less than 2%, which indicates that most of t .....

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has outsourced a considerable portion of it's business and is functionally different. Moreover, it was also submitted that the DRP in the later year of 2008-09 vide its order dated 3.8.2012 has rejected this company as a comparable (name changed to Coral Hub Ltd.), vide para 18 of the order, wherein ultimately, it was decided that there is major difference in functionality and the business model and the DRP Bench was of the view that Coral Hub (formerly known as Vishal Information Technolog .....

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curred by the company taken as comparable is outsourcing cost, as can be seen from the Annual report placed in the paper-book and ITAT, Mumbai in the case of Maersk Global Service Centre (supra) has analysed and rejected this company as comparable, due to the reason that it has outsourced a considerable portion of its business and it is functionally different. This factor was also approved by the DRP in assessee's own case in the later year, as can be seen from the copy of the order placed o .....

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y the Mumbai Bench of the Tribunal, vide its order dated 11.1.2013 in ITA No. 8997/Mum/2010 for assessment year 2006-07. 10.1 After considering the rival contentions, we are of the opinion that the business model of the above company is different from that of the assessee. In this case, the foreign exchange revenue is less than 1% of the total turnover. Therefore, it fails the filter provided by the Assessing Officer, on the basis of the foreign exchange earnings. Further, the Revenue from BPO i .....

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the revenues'. Annual accounts of Goldstone Teleservices Limited indicate total revenue of the company at ₹ 30.89 crore from three segments, viz., Telecommunication at ₹ 13.63 crore, BPO at ₹ 5.02 crore and Insulator at ₹ 12.23 crore. The break up of such revenue of Goldstone Teleservices Limited has been provided at page 236 of the paper book. Schedule forming part of the annual accounts of Goldstone Teleservices Limited divulges earnings in foreign currency at S .....

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comparable for the purpose of determining the ALP in this case. We direct the same to be excluded." "Nucleus Netsoft & GIS(India) Ltd. 13. The last objection was with reference to the above company, which is on similar facts as that of Vishal Information Technologies, discussed above. It was submitted that this company is functionally different and fails under the employee cost filter. It was further submitted that there is a scheme of amalgamation of earlier company by the orders .....

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sourcing the work. Accordingly, it cannot be selected as a comparable. Due to amalgamation during the year, the assessee's business model has changed and because of employee cost filter also, this comparable has to be excluded. 13.1 After considering the rival submissions, we are of the opinion that this company cannot be selected as a comparable not only on the reason of failing employee cost filter, but also due to amalgamation during the year, which has changed the business model of the c .....

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es Ltd. (earlier Nucleus Netsoft & GIS (India) Ltd.) 7.7.1 These two companies have been selected as comparable companies to the assessee by the TPO; the inclusion of which was never objected to by the assessee both before the TPO and the DRP. The assessee has also not objected to the inclusion of these companies in the list of comparables, as can be seen from the grounds of appeal raised in Form 36B before this Tribunal nor has any additional ground been raised before us in this regard. How .....

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of comparables nor objected to their inclusion even before the CIT(A) or raised any additional ground of appeal in the present appeal in respect of the inclusion of Datamatics Financial Services Ltd. ;and Asit C Mehta Financial Services Ltd. as comparables, the objections raised by the assessee in this regard, at this stage, ought to be rejected as they are not maintainable. 7.7.3 We have heard both parties and perused and carefully considered the material on record. Admittedly, as pointed out .....

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ee from the impugned order, on the inclusion of these companies as comparables, this claim of the assessee is not maintainable as there is no adverse finding in the impugned orders calling for or requiring us to adjudicate thereon. We, therefore, finding that the contentions raised by the learned Authorised Representative of the assessee in respect of these companies are not maintainable, reject the same. Consequently, the inclusion of these two companies i.e. Vishal Information Technological Se .....

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056 Less : Operating Expenses Direct Cost 10,95,56,657 3,03,87,371 13,99,44,028 Indirect Cost 1,37,33,258 91,41,555 2,28,74,813 Operating Expenses 12,32,89,915 3,95,28,926 16,28,18,841 Less : Extraordinary expenses Depreciation 1,15,02,720 1,15,02,720 Telecom expenses 30,00,000 30,00,000 Loss on sale of assets 12,75,989 12,75,989 Net Operating Profit 1,64,10,496 -1,52,73,990 11,36,506 The assessee contends that the total cost relating to the AE segment is ₹ 12,32,89,915 and that of the non .....

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utation of the ALP as per page 80 of the TPO's order is extracted hereunder :- Particulars Amount Rs. Operating Cost* ₹ 13,46,61,429. Arm's Length Margin 22.33% of the Operating Cost. Arm's Length Price @ 122.33% of operating cost. ₹ 16,47,31,326. *Cost as per statement showing bifurcation of costs vide letter dt.3.8.2009 of the tax payer plus proportionate unallocated cost of depreciation and telecom expenses to the AE segment. In doing so, the TPO has considered the ope .....

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iving at the operating cost with AEs, it has considered depreciation amounting to ₹ 33,87,281 as part of the operating cost. It is submitted that in the period under consideration, the assessee had debited an amount of ₹ 1,15,02,720 to its profit and loss account on account of additional depreciation on assets due to a change in its depreciation policy, whereby there was a change in the estimated useful life of the assets. In this manner, the assessee re-computed the additional depre .....

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the case of Capgemini India (P) Ltd. v. Asstt. CIT (ITA No.7861/Mum/2011, Dated:- 28-02-2013) wherein the assessee had excluded a one time expenditure on Employee Stock Option (ESOP) on account of acquisition of Kanbay by Capgemini Group. It is submitted that the ITAT, Mumbai held that the tax payer was entitled to an adjustment on account of extra-ordinary ESOP cost and observed that adjustment to the margins of the assessee should be made to remove the impact of extra-ordinary expenses. 8.3.3 .....

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special one time provision made to overcome defects in the exhaust system of the automobile manufactured by the assessee and clearly being an extra-ordinary expense, should be excluded from the computation of operating costs. Based on the above, the assessee contended that the proportionate portion of additional depreciation as erroneously included by the TPO in the AE operating cost, be excluded from the computation of AEs operating costs. 8.4 The assessee also claimed that the TPO had erred in .....

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aworth India (P.) Ltd. v. Dy. CIT (ITA No.5341/Del/2010, Dated:- 29-04-2011) wherein it is submitted that it has been held that the expenses disallowed should be excluded from operating cost. 8.5 Further, the assessee submitted that while the TPO in the case of comparables, had considered foreign exchange loss to be non-operational in nature, he has considered and included the same while computing the operating cost of the assessee. It is submitted that by the same parity of reasoning, the same .....

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n-AE segments. It is submitted that if the same pertained to both earlier and subsequent years also, as submitted by the assessee, then it is to be seen whether the same has been applied in the case of the comparables also. The learned Departmental Representative further contended that the assessee's reliance for its claim on the decisions of the Mumbai Tribunal in the case of Capgemini India (P.) Ltd. (supra) and of the co-ordinate bench of this Tribunal in the case of Toyota Kirloskar Moto .....

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n necessitated by defects in the exhaust system of the automobile manufactured by the assessee in that period. It was submitted that this issue, of additional depreciation being included or excluded as part of operating cost of AEs, ought to be set aside to the file of the A.O./TPO for fresh examination. 8.6.2 In respect of the inclusion of the proportionate portion of the provision for telecom expenses in the operating cost, and the treatment for Ex Loss, the learned Departmental Representative .....

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ons of the ITAT, Mumbai Bench in the case of Capgemini India (P.) Ltd. (supra) and of the co-ordinate bench of this Tribunal in the case of Toyota Kirloskar Motors (P.) Ltd. (supra). According to the assessee, the additional depreciation claimed in the profit and loss account was due to the revision in the estimated life of certain assets and relates to earlier years also and therefore it is to be considered as extra-ordinary in nature and accordingly be excluded from the operating cost. 8.8.2 I .....

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inary in nature requiring it to be excluded from the computing of AEs operating cost. If, as contended by the assessee, this expenditure pertains to earlier assessment year's also, then in the fitness of things this issue ought to be re-examined afresh by the TPO to ascertain whether and how the assessee's claim has been applied to the comparable companies also so that there will be parity when the said expenditure is proportionately applied to the operating cost of the assessee and comp .....

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sessee has itself disallowed these expenses in the computation of taxable income on the ground that it is contingent liability. We find that the assessee's reliance on the decision in the case of Haworth India Pvt. Ltd. (supra), wherein it has been held that expenses disallowed should be excluded from operating cost, is well placed and therefore agree with the assessee's contention that expenses disallowed in computation of taxable income should be excluded from operating cost. The asses .....

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his and other Tribunals which hold that foreign exchange gain/losses related to the assessee's business activities are to be treated as operating income/expense for computing the operating margins of both the assessee and the comparable companies and therefore, we uphold the TPO's action in including the same while computing the assessee's margins. This proposition has been upheld in a catera of Tribunal decisions, some of which are :- (i) Sap Labs India (P.) Ltd. v. Asstt. CIT (IT A .....

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le companies. In the light of the aforesaid decisions of the Tribunal cited at para 8.10.1 of this order (supra) and following the same, we direct the TPO to recompute the margins of both the assessee and the comparable companies by treating the foreign exchange gain/loss as operating income and to compute the margins of both the assessee and the comparable companies accordingly. Consequently, the assessee's claim is rejected. 9. Ground No. 14 : Deduction under Section 10A of the Act. 9.1 Gr .....

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regation of the profits/losses of various units after setting off the brought forward business losses and unabsorbed depreciation, which was then accordingly computed at NIL. 9.2 The assessee contended that the Assessing Officer erred in not appreciating that income which is eligible for exemption under Section 10A of the Act does not form part of total income at all and therefore does not enter the normal computation mechanism so as to enable a reduction of business losses and unabsorbed deprec .....

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of the Act, should be given a beneficial interpretation in a manner that does not curtail the benefit. In support of its claim, the assessee placed reliance on the decision of the Hon'ble Karnataka High Court in the case of CIT v. Yokogawa India Ltd. 341 ITR 385 and the decision of the co-ordinate bench of this Tribunal in the case of Mindteck (India) Ltd. v. Dy. CIT (ITA No.1054/Bang/2013, Dated:- 04-07-2014). 9.3 Per contra, the learned Departmental Representative supported the orders of .....

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ed by the assessee under the head profits and gains of business or profession has to be 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 10-A is not be included in the income of the assessee at all, the question of setting off the 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), unabso .....

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