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TMI Blog2015 (9) TMI 958X X X X Extracts X X X X X X X X Extracts X X X X ..... sessee. In this case, the Assessing Officer has not made any variation in the income returned by the assessee while drafting the draft assessment order with regard to brought forward losses. Even in the order of DRP, there was no direction for making adjustment of brought forward losses before allowing deduction u/s 10A of the Act. Referring to section 144C(13) of the Act, the ld. Counsel submitted that the power of the Assessing Officer is to pass an order in conformity with the direction of the DRP. Since no variation was made in the draft assessment order with regard to adjustment of brought forward losses before allowing deduction u/s 10A and there was no direction from the DRP, according to the ld. Counsel, the adjustment made by the Assessing Officer in the final assessment order is beyond his jurisdiction. 3. The ld. Counsel further pointed out that since no variation was made in the draft assessment order, the assessee has no occasion to file any objection to the proposed draft assessment order passed by the Assessing Officer. Therefore, there was a violation of principles of natural justice in making adjustment with regard to deduction u/s 10A of the Act. The ld. Counsel ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rejected the claim of the assessee on the ground that M/s Allsec Technologies Ltd. suffered loss for two consecutive years. The TPO has also found that M/s Allsec Technologies Ltd. is selling its products to its subsidiary company. The claim of the assessee that M/s Allsec Technologies Ltd. earned profit in one year out of the three consecutive years, therefore, it cannot be construed to be a persistent loss making company was rejected by the TPO. Referring to the order of the DRP, the ld. Counsel submitted that the DRP directed the TPO to include M/s Allsec Technologies Ltd. as comparable if the same was rejected for the reason for incurring losses consecutively for two years. While giving effect to the order of the DRP, the TPO again rejected the claim of the assessee on the ground of extraordinary dissolution of the subsidiary company namely, M/s BZK Corporation Inc. 6. The ld. Counsel submitted that the dissolution of the subsidiary company namely, M/s BZK Corporation Inc. cannot be considered to be an exceptional event affecting profits of M/s Allsec Technologies Ltd. According to the ld. Counsel, M/s BZK Corporation Inc. was a separate legal entity, therefore, its dissoluti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by the TPO that the companies with low turnover was subjected to market adversaries, the ld. Counsel submitted that when the functional comparability of BPO segment was not in dispute, the conclusion of the TPO that the companies with turnover of less than Rs. 1 crore are subject to market adversaries, is without any basis. 8. According to the ld. Counsel, various decisions of this Tribunal held that turnover filter of Rs. 1 crore to Rs. 200 crores has to be taken into consideration as comparables. However, both TPO as well as the DRP have not considered the decisions of this Tribunal. The ld. Counsel further submitted that the turnover of BPO segment of M/s CG-VAK Software & Exports Ltd. is Rs. 86 lakhs which is less than the filter of Rs. 1 crore applied by the TPO. According to the ld. Counsel M/s CG-VAK Software & Exports Ltd. shall be considered as comparable with that of the assessee since functionally both are same. 9. Referring to M/s Accentia Technologies Ltd., the ld. Counsel submitted that this company provides business and technology solutions and services like Software as a Service (SaaS) which manages all clinical documentation needs, receivables management needs, p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... revenue is from translation services. The ld. Counsel placed his reliance on the decision of Hyderabad bench of this Tribunal in M/s Brigade Global Services Pvt. Ltd vs ITO - TS-730-ITAT-2012(Hyd)-TP. 11. The ld. Counsel further submitted that the Revenue made an attempt to remove low margin comparables without any basis. According to the ld. Counsel, if the low margin comparables are not considered, for the very same reasons, high margin comparables like M/s Accentia Technologies Ltd., Cosmic Global Ltd. and Genesys International Corporation Ltd. are also required to be eliminated from the comparable cases. According to the ld. Counsel, the exceptional profit in the comparable cases would affect the very basis of comparison and therefore, the said exceptional profit companies should not be considered. 12. Referring to Rule 10B(4) of the Income-tax Rules, the ld. Counsel submitted that the assessee cannot be asked to produce the data which is not available at the time of transfer pricing study. The multiple year data was used since the comparables are in continuous projects, therefore, the margins/profits have definitely a bearing on other years as well. According to the ld. Cou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in fact the assessee insisted for service similarity to the extent it is required under CUP method and not under TNMM. According to the ld. DR, the differences in the functions performed between enterprises are often reflected in variations in operating expenses, therefore, there may be a wide range of gross profit margins. However, similar level of net operating profit indicators needs to be taken into consideration. Due to lack of clarity in the public domain with respect to the classification of expenses in the gross or operating profits may make it difficult to evaluate the comparability of gross margins while the use of net profit indicators may avoid problems. According to the ld. DR, M/s Accentia Technologies Ltd. was not engaged in development of software product during the financial year 2008-09 as claimed by the assessee. The statement made by the assessee on the basis of the annual report for the financial year 2010-11 and not based on financial year 2008-09. 14. The ld. DR further pointed out that the assessee claimed that the profit of M/s Accentia Technologies Ltd. is increased by 65.86% on comparison with financial year 2007-08. However, the assessee could not demo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ground that it earned high profit margin then the transfer pricing study would be frustrated. 16. According to the ld. DR, while computing the ALP by taking arithmetic mean, the differences on account of low margins as well as high margin ultimately average out. According to the ld. DR, it is for the assessee to demonstrate that there are peculiar economic circumstances which warrant exclusion of functionally comparable cases on account of earning of high profit margin. 17. The ld. DR further submitted that the assessee claimed before the DRP that the turnover filter of less than Rs. 1 crore and persistent loss making companies should not be considered for filter to find out the most appropriate comparables. The application of turnover filter of less than Rs. 1 crore has been upheld by this Tribunal. Therefore, according to the ld. DR, the objection of the assessee for applying turnover filter and persistent loss filter cannot be sustained. According to the ld. DR, for computing the ALP the data relevant to respective financial year alone has to be considered. The multiple year data cannot be considered for comparison. 18. Referring to the risk profile, the ld. DR pointed out t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gone through the provisions of section 144C of the Act. Sec. 144C(1) enables the Assessing Officer to forward a draft of the proposed assessment order to the eligible assessee if he proposes to make any variation on the income or loss returned which is prejudicial to the interest of the assessee. Clause (13) of sec. 144C enables the Assessing Officer to pass the assessment order in conformity with the direction of the DRP and complete the assessment without any further opportunity to the assessee. The contention of the assessee is that by making adjustment of brought forward losses before allowing deduction u/s 10A, the Assessing Officer made variation in the total income returned by the assessee. Such variation could be made by the Assessing Officer provided there was a direction from the DRP. In this case, apparently, the draft of the proposed assessment order forwarded to the assessee is silent about the adjustment of brought forward losses. In other words, the Assessing Officer has not made any adjustment of brought forward losses with regard to deduction u/s 10A of the Act. The direction of the DRP also does not contain any such adjustment with regard to brought forward losses ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing Officer with regard to brought forward losses before allowing deduction u/s 10A of the Act, is set aside and the Assessing Officer is directed to grant deduction u/s 10A before making any adjustment of brought forward losses. 21. Now coming to determination of ALP in respect of M/s Allsec Technologies Ltd., the DRP directed the TPO to include M/s Allsec Technologies Ltd. as comparable if the same was rejected for the reason of incurring losses consecutively for two years. Section 144C(8) of the Act empowers the DRP to confirm, reduce or enhance the variation proposed in the draft assessment order. However, the DRP shall not set aside any proposed variation or issue any direction for further enquiry and pass the assessment order. In the case before us, the contention of the assessee is that the DRP directed the TPO to include M/s Allsec Technologies Ltd. if the same was rejected for the reason of incurring losses in financial years 2007-08 and 2008-09. We have carefully gone through the direction of the DRP, more particularly, page 14. In fact, the DRP has observed as follows: "This Panel therefore, direct the TPO to include this comparable in the set of comparables if it was ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e assessee and other companies, it is necessary to take into account the assets employed or to be employed by the assessee and other comparable companies. At the very same time, the risk assumed by the assessee and other comparable companies also needs to be taken into consideration. Apart from that, the contractual terms of transaction needs to be examined and find out how the responsibilities, risk and benefits are divided between the respective parties to the transaction. Apart from that, the conditions prevailing in the market in respect of the respective parties including the geographical location and size of the markets, laws prevailing in the respective territorial jurisdiction, cost of labour and capital in the markets, overall economic development and level of competition in the market need to be examined. Apart from that whether the market is wholesale or retail has also needs to be examined. 24. In the case before us, the DRP examined the comparables by using turnover filer, working capital adjustment, risk adjustment etc. While considering the turnover filter, the DRP included M/s Accentia Technologies Ltd. The assessee claims that M/s Accentia Technologies Ltd. earned ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... c Information System Services; (vii) Human Resources Services; (viii) Insurance Claim Processing; (ix) Legal Databases ; (x) Medical Transcription; (xi) Payroll ; (xii) Remote Maintenance; (xiii) Revenue Accounting (xiv) Support Centres, and; (vx) Web-site Services" 26. In fact, this Tribunal in M/s William Lea India Pvt. Ltd in I.T.A. No. 1038/Mds/2014 has considered this notification and found that medical transcription is also one of the IT enabled services or product for the purpose of computing section 10A/10B deduction. Therefore, this Tribunal is of the considered opinion that the DRP has rightly rejected the claim of the assessee. The claim of the assessee is primarily on the ground that 43% of its revenue is from translation service. In fact, translation service is also one of the IT enabled service as provided in the Income-tax Rules. Therefore, the decision of the Hyderabad Bench of this Tribunal in M/s Brigade Global Services Pvt Ltd(supra) may not be applicable to the facts of the case. 27. Coming to working capital adjustment, the DRP found that the assessee has not provided any working capital computation but simply claimed that the margins were reduced to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ies having turnover of Rs. 1 crore to Rs. 200 crore have to be taken as a particular range and the assessee being in that range having turnover of 8.15 crores, the companies which also have the turnover of Rs. 1 crore to Rs. 200 crores only should be taken into consideration for the purpose of making TP study. In view of the above observation of the Hyderabad Bench of this Tribunal, it is also necessary to examine the comparability of turnover between the assessee and the comparable companies. In the case before us, no material is available on record to indicate the actual turnover of the assessee-company and other comparable companies. 31. The DRP has not examined the contractual terms of transaction as provided in Rule 10B(2)(c) of the Income-tax Rules. Unless and until the contractual terms of transaction was examined, we may not be able to say how the responsibility risk and benefits are divided between the respective parties to the transaction. No material is available on record with regard to contractual terms of transaction between the parties. Apart from that, the DRP has not examined the transaction between the parties with regard to geographical location, cost of the lab ..... X X X X Extracts X X X X X X X X Extracts X X X X
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