TMI Blog2015 (9) TMI 958X X X X Extracts X X X X X X X X Extracts X X X X ..... rection of the DRP by making adjustment of brought forward losses before allowing deduction u/s 10A of the Act. Therefore, the adjustment made by the Assessing 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. Determination of ALP in respect of M/s Allsec Technologies Ltd. - 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 - Held that:- It is mandatory for the DRP to consider the specific characteristics of service provided by the assessee and the comparable companies. It is also necessary to examine the functions performed by the assessee and the comparable companies. While comparing the functions performed by the 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. A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng Officer. The Assessing Officer shall refer the matter once again to the DRP and the DRP shall examine the comparables in the light to Rule 10B(2) of the Income-tax Rules after giving a reasonable opportunity to the assessee. Both, the appeal of the assessee and the Revenue are allowed for statistical purposes. - I.T.A. No.1194/Mds/2014, I.T.A. No.1379/Mds/2014 - - - Dated:- 24-7-2015 - SHRI N.R.S. GANESAN AND SHRI A. MOHAN ALANKAMONY, JJ. For The Assessee : Shri N.V. Balaji, Advocate For The Department : Shri Pathalavath Peerya, CIT ORDER PER N.R.S.GANESAN, JUDICIAL MEMBER Both the assessee and Revenue filed appeals against the order of the Assessing Officer consequent to the direction of the Dispute Resolution Panel. 2. Shri N.V. Balaji, ld. Counsel for the assessee submitted that the Assessing Officer made adjustment of brought forward losses before allowing deduction u/s 10A of the Act. Referring to the draft assessment order, the ld. Counsel pointed out that such adjustment was not made in the draft assessment order. According to the ld. Counsel, as per sec. 144C of the Act, the Assessing Officer shall forward proposed draft assessment order to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 4. Referring to the adjustment made in Arm s Length Price with regard to international transaction, the ld. Counsel submitted that the assessee is engaged in the business of manufacturing electrical products for telecommunication, medical, defence etc. For the purpose of transfer pricing documentation, the assessee followed Transactional Net Margin Method(TNMM) as the most appropriate method. According to the ld. Counsel, the assessee has identified uncontrolled comparables and computed the Profit Level Indicator(PLI) at 18.56%. The ld. Counsel further submitted that the assessee s gross margin was 16.96%. Since the gross profit margin was within 5% of the arithmetic mean of the comparable companies, the assessee considered the international transaction of purchase from AEs to be at arm s length. 5. Referring to the order of the TPO, the ld. Counsel submitted that the assessee has selected eight companies as comparables. However, the TPO rejected all the companies as not comparable one. Referring to M/s Allsec Technologies Ltd., the ld. Counsel submitted that M/s Allsec Technologies Ltd is primarily engaged in the business operating a call centre which is functionally comparab ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ompany engaged in similar activity cannot result exceptional profit in the year of merger. According to the ld. Counsel, result can be achieved by organic expansion which is comparable with the inorganic expansion by merger. The ld. Counsel further submitted that it may not be correct to conclude that organic mode would not be exceptional and inorganic mode is exceptional. The ld. Counsel further submitted that M/s Allsec Technologies Ltd. was able to increase its operations which resulted in reduction of losses as compared to previous year. Therefore, according to the ld. Counsel, rejection of M/s Allsec Technologies Ltd. as comparable case is not justified. 7. Referring to M/s CG-VAK Software Exports Ltd., the ld. Counsel submitted that M/s CG-VAK Software Exports Ltd. has three segments. The first one is software services, the second is BPO services and third is Training. The assessee in its transfer pricing documentation considered the BPO services as comparable to its operations. However, the TPO rejected the claim of the assessee on the ground that the turnover of BPO segment of M/s CG-VAK Software Exports Ltd. was less than ₹ 1 crore. The ld. Counsel further s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s a comparable one with that of the assessee-company which is only a captive service provider. The ld. Counsel placed his reliance on the decision of the Mumbai Bench of this Tribunal in I.T.A. No. 2492/Mum/2014. 10. Referring to M/s Cosmic Global Ltd., the ld. Counsel submitted that this company is engaged in IT enabled translation services. According to the ld. Counsel, the main source of revenue of this company is from medical transcription services, translation charges and Accounts BPO. The ld. Counsel further pointed out that 53% of the revenue of this company is from medical transcription and 4% of the revenue is from Account BPO. The remaining 43% is from translation services. Inspite of objection of the assessee, the TPO included M/s Cosmic Global Ltd, as a comparable one. According to the ld. Counsel, the assessee is not in translation services and the translation services provided by M/s Cosmic Global Ltd. is not functionally comparable with the services of the assessee-company. The ld. Counsel further pointed out that M/s Cosmic Global Ltd. does not have segmental information regarding its income from translation services and medical transcription services. In the abs ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uring the year under consideration, the assessee-company entered into five international transactions with AEs. On the basis of the ALP adjustment made by the TPO, the Assessing Officer made upward adjustment of ₹ 2.29 crores to the ALP determined by the assessee. Referring to the comparable cases, more particularly, M/s Accentia Technologies Ltd., the ld. DR submitted that this company is engaged in medical transcription services. Referring to the notification issued by the CBDT dated 26.9.2000, the ld. DR pointed out that medical transcription is also one of the information technology enabled services, therefore, the contention of the assessee that M/s Accentia Technologies Ltd. is not a comparable one cannot be accepted. Referring to the copy of the notification issued by the CBDT dated 26.9.2000, the ld. DR pointed out that creation and maintenance of medical transcription excluding medical advice was considered to be an IT enabled services under the Income-tax Rules. The ld. DR further pointed out that translation service is also an IT enabled service. Referring to the decision of this Tribunal in the caaes of M/s William Lea India Pvt Ltd in I.T.A. No. 1038/Mds/2014, th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is engaged in translation services. Referring to super normal profit, the ld. DR submitted that the super normal profit of a company cannot be a deciding factor to consider a company as a comparable one. According to the ld. DR, comparable companies which are functionally similar cannot be excluded only for the reason that they are having super profit margin. According to the ld. DR, functional comparability has to be established before considering a company as a comparable one. According to the ld. DR, there is no need for going into the margins of any particular company. According to the ld. DR, any comparability analysis loss or higher margin is not a determining factor unless there are any peculiar circumstances in a case making it functionally not comparable. The ld. DR further submitted that if the functional transaction has been undertaken and the functional profit of the comparable is same as that of the assessee then such a company cannot be rejected merely because it has a high profit margin. In the absence of any material to indicate that the high profit margin was on account of extraordinary economic factor for which necessary adjustment has to be made to bring the pro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... I of the assessee is not within 5% of the PLI of the comparable cases, therefore, the necessary and suitable adjustment has to be made. The ld. DR further pointed out that functionally similar companies alone need to be compared. Therefore, the TPO and the DRP has rightly rejected the comparables selected by the assessee for making adjustment of ALP in respect of the transaction with AE. 19. We have considered the rival submissions on either side and also perused the material available on record. The objection of the assessee is that with regard to brought forward losses before allowing deduction u/s 10A, the Assessing Officer has not made any such adjustment in the draft assessment order. Moreover, there was no direction from the DRP. We have carefully gone through the draft assessment order a copy of which is available on record. As rightly submitted by the ld. Counsel for the assessee, the Assessing Officer has not made any adjustment of brought forward losses before allowing deduction u/s 10A in the draft assessment order. We have also gone through the order of the DRP. In fact, the DRP has also not considered the brought forward losses for allowing deduction u/s 10A of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to give effect to the direction of the DRP without providing any further opportunity of being heard to the assessee. Therefore, in this case, the assessee has no occasion to explain before the authorities why the adjustment of brought forward losses before allowing deduction u/s 10A should not be made. This Tribunal is of the considered opinion that in the absence of adjustment of brought forward losses while computing deduction u/s 10A in the draft assessment order forwarded to the assessee and in the direction of the DRP, the Assessing Officer cannot make such adjustment in the final assessment order which was passed consequent to the direction of the DRP. Under sec. 144C(13) of the Act, the Assessing Officer has to pass an order in conformity with the direction of the DRP without giving any further opportunity to the assessee. In case there was no direction with regard to brought forward losses before deduction u/s 10A, the Assessing Officer cannot go beyond the direction of the DRP and make adjustment of brought forward losses before allowing deduction u/s 10A of the Act. This Tribunal is of the considered opinion that the Assessing Officer has exceeded his jurisdiction in pas ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... convenience, Rule 10B(2) is reproduced hereunder: 10B(2) For the purposes of sub-rule (1), the comparability of an international transaction with an uncontrolled transaction shall be judged with reference to the following, namely:- (a) the specific characteristics of the property transferred or services provided in either transaction; (b) the functions performed, taking into account assets employed or to be employed and the risks assumed, by the respective parties to the transactions; (c) the contractual terms (whether or not such terms are formal or in writing) of the transactions which lay down explicitly or implicitly how the responsibilities, risks and benefits are to be divided between the respective parties to the transactions; (d) conditions prevailing in the markets in which the respective parties to the transactions operate, including the geographical location and size of the markets, the laws and Government orders in force, costs of labour and capital in the markets, overall economic development and level of competition and whether the markets are wholesale or retail. 23. In view of the above rule, it is mandatory for the DRP to consider the specific ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ically deviate from OECD guidelines and specify the arithmetic mean for determining ALP. In the absence of any material to demonstrate that the profit of the comparable was abnormally high, the claim of the assessee was rejected. The DRP has also taken note of the fact that during financial year 2008-09 M/s Accentia Technologies Ltd. had earned more than 90% of its total revenue from call centre and back office support service. 25. Now coming to M/s Cosmic Global Ltd., the contention of the assessee is that the main source of revenue is from medical transcription, translation services and accounts BPO. The CBDT in its notification dated 26.9.2000 specifies the following services as Information Technology enabled services or products. For the purpose of convenience, Notification No.11521 dated 26.9.2000 issued by the CBDT is reproduced hereunder: In exercise of the powers conferred by clause (b) of item (i) of Explanation 2 of section 10A, clause (b) item (i) of Explanation 2 of section 10B and clause (b) of Explanation to section 80HHE of the Income-Act, 1961 (43 of 1961), the Central Board of Direct Taxes hereby specifies the following information technology enabled product ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a comparable company, the risk assumed by the assessee-company while having transaction with AE and the uncontrolled company while having transaction with other companies has to be examined for the purpose of determining ALP. In the case before us, such analysis was not done since the DRP was of the considered opinion that making such adjustment would violate the principles of natural justice. This Tribunal is of the considered opinion that examination of the risk assumed by the assessee and other comparable companies is one of the relevant factor under Rule 10B(2)(b). Therefore, the matter needs to be examined by the DRP after giving an opportunity to the assessee. Merely because the TPO has not considered the risk assumed by the respective parties which does not mean that the DRP should not consider the same. The mandatory requirement provided under Rule 10B(2) of the Income-tax Rules needs to be followed while determining the comparable companies for determination of ALP. What is required is an opportunity shall be given to the assessee. 30. While considering the turnover filter, the DRP found that the companies whose turnover is less than ₹ 1 crore are prone to market ..... X X X X Extracts X X X X X X X X Extracts X X X X
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