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TMI Blog2017 (5) TMI 1366X X X X Extracts X X X X X X X X Extracts X X X X ..... rse of scrutiny assessment the Assessing Officer observed that the assessee is charging its AE cost plus mark up of 10% for providing IT support services. During the period relevant to the assessment year under appeal, the assessee had entered into international transactions with its AE to the tune of Rs. 10,05,89,248/-. The assessee applied Transactional Net Margin Method (TNMM) to benchmark its international transactions, with Profit Level Indicator (PLI) of Operating Profit (OP)/Operating Cost (OC). The assessee had originally selected 12 companies as comparables. The Assessing Officer rejected 6 companies out of total list of 12 by applying various filters viz. loss making companies, low export turnover, data not available. The Assessing Officer, thereafter, included 3 companies in the list of comparables viz. Coral Hub Ltd. (formerly known as Vishal Information Tech Ltd.), eClerx Services and Cepha Imaging Private Ltd. Thus, the final list of comparable companies adopted by the Assessing Officer is as under : Sr. No. Name of the comparable OP/OC (%) 1 Aditya Birla Minacs Worldwide Ltd. 6.42% 2 Cosmic Global Limited 17.91% 3 Delta Services (I) Pvt. Ltd. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ) On the facts and in the circumstances of the case and in law, the honourable CIT (Appeal) - II, Pune erred in confirming the exclusion of R Systems International Ltd. (BPO Segment) from the list of comparable companies on the ground that the company has incurred loss in the relevant previous year. The appellant hereby prays that the companies that have incurred losses be included in the list of comparable companies. 4) On the facts and in the circumstances of the case and in law, the honourable CIT (Appeal) - II, Pune erred in confirming the inclusion of Coral Hubs Ltd. as a comparable company. The appellant hereby prays that the said company may please be excluded from the list of comparable companies. 5) On the facts and in the circumstances of the case and in law, the honourable CIT (Appeal) - II, Pune erred in not allowing for adjustment to the arm's length price on account of differences in risks borne by the appellant and the comparable companies. The appellant hereby prays that risk adjustment to the operating margins of comparable companies be allowed to arrive at the arm's length price. 6) On the facts and in the circumstances of the case and in law, the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... udgment in the case of Rampgreen Solutions Pvt. Ltd. Vs. Commissioner of Income Tax (supra), Coral Hubs Ltd. should be excluded from the list of comparables. 4.1 The ld. AR further submitted that in ground No. 6 of the appeal, the assessee has assailed disallowance of deduction claimed u/s. 10B of the Act. The assessee is a 100% EOU and has been approved by STPI. Admittedly, the assessee is not approved 100% EOU by the Board as specified u/s. 10B of the Act. However, the assessee has been approved by STPI, an autonomous body under the aegis of Ministry of Information Technology, Government of India, therefore, the said approval granted should suffice the condition for grant of deduction u/s. 10B of the Act. 4.2 The assessee has made an alternate submission in ground No. 7 of the appeal claiming deduction u/s. 10A if the assessee is found to be ineligible for claiming deduction u/s. 10B of the Act. The ld. AR submitted that the Tribunal in various cases under similar circumstances where the assessees have failed to obtain approval from the Board as envisaged u/s. 10B of the Act have made alternate claim of deduction u/s. 10A, the Tribunal has accepted alternate submissions subject ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . Admittedly, Vishal's expenditure on employment cost during the relevant period was a small fraction of the proportionate cost incurred by the Assessee, apparently, for the reason that most of its work was outsourced to other vendors/service providers. The DRP and the Tribunal erred in brushing aside this vital difference by observing that outsourcing was common in ITeS industry and the same would not have a bearing on profitability. Plainly, a business model where services are rendered by employing own employees and using one's own infrastructure would have a different cost structure as compared to a business model where services are outsourced. There was no material for the Tribunal to conclude that the outsourcing of services by Vishal would have no bearing on the profitability of the said entity. 39. It is also relevant to note that in the case of Maersk Global Centers (India) Pvt. Ltd. (supra), the DRP itself had accepted the objection of the Assessee and had excluded Vishal as a comparable for the reason as quoted below:- "... that it had a very low employment cost and very high cost on account of venture payment, which suggested that its business model was tha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Industries Development Regulation Act, 1941. Admittedly, the assessee has not been approved by the Board as specified under the provisions of section 10B of the Act. The language of the section is unambiguous and hence requires no further interpretation. Therefore, the assessee is not eligible for claiming deduction u/s. 10B of the Act. Accordingly, ground No. 6 raised in the appeal by the assessee is dismissed. 10. In ground No. 7 the assessee has made an alternate prayer that if the assessee cannot be granted benefit of deduction u/s. 10B the same may be granted under the provisions of section 10A. The benefit of deduction u/s. 10A of the Act is granted to an undertaking established in Free Trade Zone. The contention of the assessee is that the assessee has set up EOU in the Free Trade Zones/Software Technology Park and fulfills all the conditions for availing deduction u/s. 10A of the Act. The ld. AR pointed that CBDT instructions dated 31-03-2006 has clarified that where the units have been approved by STPI they are eligible to claim deduction u/s. 10A of the Act. The ld. AR referred to CBDT instructions dated 31-03-2006 at page 368 of the paper book. 11. A perusal of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ement of the Hon'ble Delhi High Court in the case of Regency Creations Ltd. (supra). In the aforesaid situation, at the time of filing of return of income for the instant assessment year, assessee could not have envisaged the denial of its claim of deduction u/s 10B of the Act, which was being allowed in the past. The aforesaid circumstance clearly establishes the bonafides of the reasons prevailing with the assessee for not having made a claim for deduction u/s 10A of the Act in the return of income. Having regard to the peculiar facts and circumstances of the instant case, in our view, the stand of the Revenue that assessee cannot be allowed the benefits of section 10A of the Act merely because the prescribed Audit Report in Form No.56F was not filed in the return of income, is quite erroneous. Pertinently, after denial of deduction u/s 10B of the Act in the assessment order, the earliest opportunity for the assessee to stake claim for deduction u/s 10A of the Act was before the CIT(A); and, the assessee made the claim before the CIT(A) along with the prescribed Audit Report in Form No.56F. The Hon'ble Delhi High Court in the case of Valiant Communications (supra) in similar circ ..... X X X X Extracts X X X X X X X X Extracts X X X X
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