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2015 (9) TMI 958 - ITAT CHENNAI

2015 (9) TMI 958 - ITAT CHENNAI - TMI - Adjustment of brought forward losses before allowing deduction u/s 10A - Held that:- 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. 1 .....

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jurisdiction in passing the final assessment order in conformity with the direction 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 re .....

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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. Admittedly, M/s Accentia Technologies Ltd. had engaged itself in medical transcription, billing, collection and coding etc. The Revenue authorities found that M/s Accentia Technologies Ltd. also provides BPO service .....

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ntre and back office support service.

M/s Cosmic Global Ltd. - Held that:- The DRP has not examined the contractual terms of transaction as provided in Rule 10B(2) 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 partie .....

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ompanies namely, M/s Genesis International Co. Ltd and M/s Vishal Information Technologies Ltd (Coral Hub Ltd.) - Revenue appeal - Held that:- DRP directed the Assessing Officer to exclude M/s Vishal Information Technologies Ltd and M/s Genesis International Co. Ltd. Since the DRP has not examined the responsibilities, risk assumed, benefits shared by the respective parties in terms of contractual agreement, this Tribunal is of the considered opinion that the matter needs to be reexamined in res .....

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tical 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 Ass .....

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. 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. .....

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sment 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 further submitted that deduction u/s 10A of the Act shall be allowed with respect to profits and gains derived by an undertaking from export of articles or things. The deduction is available at the stage of computing the profits and gains of the business. The ld. Counsel further pointed out that sections 7 .....

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The ld. Counsel has also placed his reliance on the judgment of Bombay High Court in Black & Veatch Consulting Pvt. Ltd 348 ITR 72. The ld. Counsel has also placed his reliance on the decision of Special Bench of this Tribunal in Scientific Atlanta 129 TTJ 273. 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, me .....

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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 comparable with the assessee. Therefore, the a .....

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nt 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 su .....

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on of a Division of i2i Telesources Pvt. Ltd., which is engaged in similar activity as that of the assessee, the ld. Counsel submitted that the same cannot be considered to be an extraordinary item for rejecting M/s Allsec Technologies Ltd as comparable one. The net asset of i2i Telesources was ₹ 2,33,77,000/- as against the net asset of M/s Allsec Technologies Ltd. of ₹ 143,55,77,000. This net asset shows that the merger was a significant event to alter operating result of the entit .....

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hieved 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 com .....

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p; Exports Ltd. was less than ₹ 1 crore. The ld. Counsel further submitted that the TPO has not explained for adopting the filter of ₹ 1 crore for selecting the comparable cases. Referring to the observation made 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 ₹ 1 crore ar .....

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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, performance tracking and reporting, electronic med .....

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report for the assessment year 2010-11. Placing reliance on the decision of Pune Bench of this Tribunal in PTC Software (India) Pvt Ltd in I.T.A. No. 336/Pn/2014, the ld. Counsel submitted that this Tribunal found that M/s Accentia Technologies Ltd. is engaged in in-house development for the same assessment year. The ld. Counsel further submitted that M/s Accentia Technologies Ltd. has substantial goodwill being a parent company, therefore, the same cannot be treated as a comparable one with th .....

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d 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 furthe .....

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ervices 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 .....

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on other years as well. According to the ld. Counsel, the DRP failed to appreciate that the comparables are covered under the proviso to Rule 10B(4) of the Income-tax Rules. Therefore, according to the ld. Counsel, the direction of the DRP was frustrated by comparing the companies which are not functionally similar to that of the assessee. 13. On the contrary, Shri Pathalavath Peerya, ld. Departmental Representative submitted that on the reference made by the Assessing Officer to determine the A .....

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oject management services to M/s Sanmina-SCI Group entities. During 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 servic .....

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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, the ld. DR submitted that this Tribunal accepted that medical transcription is also an IT enabled service. Referring to the OECD guideline, more particularly, para 2.62, the ld. DR submitted that in fact the assessee insisted for service si .....

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ts 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 claime .....

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Accentia Technologies Ltd.. Referring to acquisition of Oak Technologies Inc, USA by M/s Accentia Technologies Ltd., the ld. DR submitted that this acquisition does not have any impact on the margins of M/s Accentia Technologies Ltd. According to the ld. DR, M/s Accentia Technologies Ltd. is a standalone financiers. 15. The ld. DR further submitted that M/s E4e Healthcare Business Services Pvt. Ltd is engaged in providing services to health care industry and also engaged in software development .....

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per 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 .....

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les carrying on similar functions are excluded on the 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 ea .....

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ot 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 that economic adjustment towards risk cannot be given to the assessee since the assessee-company is not totally risk free entity as claimed by it. The assessee-company has a single customer. It also has sovereign risk, foreign country policy r .....

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risk, environment risk, entrepreneurial risk and functional risk etc would affect the result of the company and therefore, it cannot be said that the assessee was not operating in a risk free environment. The ld. DR further pointed out that the PLI 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 .....

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. 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 the Act. However, while computing the income conseq .....

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essing 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 dr .....

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any adjustment towards the ALP determined by the assessee, a draft assessment order has to be first forwarded to the assessee by making variation in the income or loss returned which is prejudicial to the interest of the assessee. On receipt of such draft assessment order, the eligible assessee is entitled to file its objections to the variation made by the Assessing Officer in the draft assessment order. After receiving the objection, the DRP, after giving an opportunity to the assessee and the .....

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see 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 direct .....

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ing Officer has exceeded his jurisdiction in passing the final assessment order in conformity with the direction 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. 21. Now c .....

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er. 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 excluded only on the basis that it had per .....

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e DRP rejected the request of the assessee to consider three year data for determining losses. This is apparent from page 7 & 8 of the DRP s order. 22. We have also gone through the provisions of Rule 10B of the Income-tax Rules which provides method for determination of ALP u/s 92C of the Act. Rule 10B(2) prescribes the method for comparability of international transaction with that of uncontrolled transaction. For the purpose of convenience, Rule 10B(2) is reproduced hereunder: 10B(2) For .....

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riting) 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 .....

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. 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 .....

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ims that M/s Accentia Technologies Ltd. earned high profit. For the financial year 2007-08 the profit of M/s Accentia Technologies Ltd. was increased to 65.86%. Therefore, the assessee contended that M/s Accentia Technologies Ltd. cannot be taken as comparable. Admittedly, M/s Accentia Technologies Ltd. had engaged itself in medical transcription, billing, collection and coding etc. The Revenue authorities found that M/s Accentia Technologies Ltd. also provides BPO service into Medical transcrip .....

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in India specifically 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 content .....

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on 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 products or services, as the case may be, for the purpose of said clauses, namely :- (i) Back-office Operations; (ii) Call Centres ; (iii) Content Development or Animation; (iv) Data Processing; (v) Engineering and Design (vi) Geographic Information System Services; (vii) Human Resources Services; .....

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he 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 .....

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e PLR and average bank rate during financial year 2008-09 and claimed the difference as risk adjustment. This claim of the assessee was rejected by the DRP. The assessee has also claimed before the DRP that it does not estimate any critical risk and it was a risk free entity. However, the DRP found that the assessee assumed more critical risk as compared to AE and entitled for higher remuneration. However, the DRP has not made any adjustment towards risk analysis since the TPO has not made any a .....

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ination 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 compar .....

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y important and the companies having turnover of ₹ 1 crore to ₹ 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 ₹ 1 crore to ₹ 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 th .....

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