TMI Blog2016 (7) TMI 1373X X X X Extracts X X X X X X X X Extracts X X X X ..... nancial data of comparable companies are required to be adjusted. The efforts stated decisions of this tribunal has held that in practice such adjustments usually include adjustments for accounts payable, accounts receivable and inventory. We accordingly allow this ground of appeal raised by the assessee Unabsorbed depreciation adjustment - Held that:- When the assessee has brought forward business losses as well as unabsorbed depreciation, the Act specifies a sequence in which these allowances shall be set off. While computing total income of an assessee, carry forward unabsorbed depreciation can be set off in future years only after setting off the brought forward business losses. Further the provision is clear that carry forward unabsorbed depreciation can be set off not only against income from profits and gains from business and profession, but also against income from any other head including income from other sources. In the present case the assessee has brought forward business losses as well as unobserved depreciation. The act specifies the sequence in which these allowances can be set off. Section 72 (3) implies that, the set off of unobserved depreciation as per se ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rmation Technology Enabled Services TNMM 202,507,139 12 12.68 % 17.00% 2.2 The assessee had used the transactional net margin method (TNMM) as the most appropriate method (MAM) to benchmark the international transaction. The assessee used operating profits to operating cost (OP/OC) as the profit level indicator (PLI) to determine the margin of the comparables. 2.3 The Ld.TPO has not objected the MAM and the PLI calculated by the assessee. The only issue that has been disputed by the ld.TPO is in respect of the selection of comparables. Following are the set of comparables selected by the assessee for ITES segment. S.No. Name of the company remarks 1 Caliber Point Business Solutions Ltd. This company is having different financial year ending i.e. December. Hence, can t be considered as suitable comparable. 2 CG-VAK Software Exports Ltd. Income from BPO Business is less than ₹ 1 crore. Hence, not a suitable comparable. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Average 31.74 2.5 This led to the proposal for a transfer pricing adjustment in respect of ITES segment service amounting to ₹ 2,55,12,456/-. 2.6 Thereafter the assessee carried the matter before the dispute resolution panel (DRP)-I, New Delhi. The DRP under section 144C (5) of the IT Act, 1961, gave directions on 7/12/2015, determining the total income at ₹ 2,55,12,456. The DRP however upheld objections of the assessee in respect of Eclerx services Ltd, ICRA Techno Analytics Ltd., and excluded these companies from the list of comparables. The DRP confirmed the addition made by the Ld.TPO in respect of foreign exchange fluctuation while computing the operating margins of the comparable companies as well as the assessee. On receipt of the directions passed by the DRP, the Ld. AO passed the assessment order on 21/01/2016, making the impugned additions. 3. Aggrieved by the order of the Ld.AO the assessee is in appeal before us on the following grounds: 1. That on facts and in law, the impugned order/directions passed by the Income Tax Officer, Ward - 8(4), New Delhi ( Learned AO )/ Deputy Commissioner of Income Tax - Trans ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... stances of the case, by wrongfully rejecting certain comparable companies and adding certain non-comparable companies to the final set of comparables for the purpose of determining the ALP of the impugned transaction on an ad-hoc basis, thereby resorting to cherry picking of com parables. 9 That on facts of the case and in law, the Ld. DRP/TPO/AO have erred, by selecting certain companies which are earning super normal profits as comparable to the Appellant. 10. That on the facts and in the circumstances of the case, the Ld. DRP/TPO/AO have erred, by not making suitable adjustments to account for differences in the risk profile of the Appellant vis-a-vis the comparable companies. 11. That on the facts and in the circumstances of the case, the Ld. DRP/AO have erred, by setting off unabsorbed depreciation from current year business profits prior to Setting off brought forward business losses. 12 That on the facts and in the circumstances of the case, the Ld. DRP/AO have erred, by initiating penalty proceedings under section 271(1)(c) of Act without recording any adequate reasons for such initiation. 13 That on the facts and in the circumstances of the case, the Ld. AO ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... workforce as graduates for undertaking data collection activities. Further, it also employs MCA s, BCA s and diploma holders for undertaking data processing and survey programs. It s data processing staff comprises only 15% of the personnel of Exevo India. 5.2 During the financial year 2010-11 assessee has rendered IT enabled services to Copal Market Research Ltd. The assessee is reimbursed on all its costs incurred along with a markup of 17% as per the agreement between assessee and the AE. Costs year and refers to all the operating direct and indirect expenses incurred by the assessee in rendering the specified IT enabled service to the E as per the agreement entered into between them. 5.3 Assessee is not exposed to market risk as it renders IT enabled services to its AE and is assured of a specified return on its cost. It does not bear any credit and collection risk. As the assessee receives its remuneration in foreign currency and any foreign exchange fluctuation loss is recovered along with the markup. Thus the assessee does not impair even the foreign exchange risk. Assessee does not employ any intangible assets with reference to the services rendered to the associated ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt of software products for healthcare. It is submitted by the ld.AR that Accentia Technologies Ltd is engaged into diversified activities such as Knowledge Process outsourcing(KPO), Legal process outsourcing(LPO), Data process Outsourcing(DPO), high end software services. It is submitted by the ld.AR that segmental information in respect of this company is not available. We find that the Ld. TPO had adopted this company as a comparable as the Ld. TPO is of the view that the services rendered by this comparable are in the nature of BPO or back office services and that nothing he is earned from sale of products. We have perused the annual reports of this company and have observed that Accentia owned a brand and goodwill on account of acquisition/amalgamation of a defendant in force. Further it is observed that this company is providing services in the field of medical transcription billing and collections income from coding etc for which complete segmental information are not available. In our considered opinion this company is functionally dissimilar to that of the assessee. Accordingly we direct the Ld. TPO to exclude this company from the list of comparables. Infosys BPO L ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... xcluded. 6.7. Since there is no similarity in the functional profile of this company and assessee respectfully following the ratio laid down in Agnity India Technologies (supra), we direct the TPO/AO for removal of this company from the list of comparables. TCS E-Serve Ltd 6.8. The ld.TPO had included this company as a comparable despite objections by the assessee. The assessee objected the inclusion of this company as it provided financial information processing and customer contact services with high-level of foreign expenditure and abnormal profits. 6.9. Ld.DR, however, refer to the extracts made by the ld.TPO in the order to submit that TCS E serve Ltd. is a comparable company with that of assessee. The ld.DR relied upon the extract of the decision of Hon ble Delhi High Court in the case of Chris Capital Investment vs DCIT (supra), which has been reproduced hereinabove. 6.10. After considering the rival submissions and pursuing the relevant material on record, we find that the financial results of this company shows that this company is into financial services to help its customers achieve their business objectives by providing innovative best in class servic ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ought on record any material / documents contrary to the above submissions of the assessee. The Ld. TPO has also not been able to bring out any instance of functional dissimilarity of this comparable with that of assessee. The Ld. D.R. placed his reliance on the findings of the authorities below. 7.3. We have perused the orders passed by authorities below, and arguments advanced by both the parties. It has been observed that the assessee in its TP study has objected to the adoption of the turnover filter applied by the TPO. It has been submitted that turnover filter could be deployed if the tested party is a risk bearing entrepreneur. However, to the facts of the present case, the assessee does not assume any risk and is remunerated at cost plus basis. Ld. A.R. has placed reliance in the case of Willis Processing Services Pvt. Ltd. in I.T.A.No. 4547/Mum/2012 wherein the Co-ordinate bench of this Tribunal has held as under: The turnover is not a criteria as prescribed under the Rule 10B(2) for selecting the comparables. It is settled proposition that the decisive factor for determining inclusion or exclusion of any case as a comparable are prescribed under Rule 10B(2) which d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... al years, functionally similar or even identical companies, cannot be held to be incomparable, only owing to differences in the date of ending of the financial year. As most of the business enterprises operate on the going concern concept, which is so fundamental to present the accounts. The concept used in accounting is just an artificial means to reckon the operating results of business operation at a given point in time and nothing would turn up on changing the end of accounting period from 31st March to any other date within a short span of time. Assuming a situation where the tested party is following a different financial year ending (say 01/01/2010 to 31/12/2010), following the filter adopted by the ld.TPO, one would reject all the company with the financial year ending 31st of March 2010 and only consider companies with financial year ending 31/12/2010. The number of comparable companies available after using such a filter would be very limited and therefore, in such a case the net margin earned by the comparable companies would be different from the one that would be computed without using this filter. This view is supported by the coordinate bench of this Tribunal in the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Respectfully following the ratio is laid down in the above judgments we are in agreement with the Ld.AR, that while comparing the margins earned by the comparable companies there is always the assessee, the difference on account of working capital employed should also be factored into. In order to improve the reliability of results, the financial data of comparable companies are required to be adjusted. The efforts stated decisions of this tribunal has held that in practice such adjustments usually include adjustments for accounts payable, accounts receivable and inventory. 6.2. We accordingly allow this ground of appeal raised by the assessee Ground No. 11 7. During the course of the assessment proceedings the Ld.AO had adjusted the amount of unabsorbed depreciation with the profits and gains from business pertaining to the year under consideration and has used the residual profit, post adjustment of the unobserved depreciation, to adjust the amount of brought forward losses. The Ld.AO computed the adjustment as under: Particulars Amount (in Rs.) Business profits before adjustment of brought fo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hat previous year, and so on for the succeeding previous years. Section 72 (2): Where any allowance or part thereof, under subsection of subsection (2) of section 32 or subsection (4) of section 35, to be carried forward, effect shall first be given to the provisions of this section. 7.4. A combined reading of the above sections it is clear that while computing total income of an assessee, carry forward unabsorbed depreciation can be set off in future years only after setting off the brought forward business losses. Further the provision is clear that carry forward unabsorbed depreciation can be set off not only against income from profits and gains from business and profession, but also against income from any other head including income from other sources. 7.5. In the present case before us the assessee has brought forward business losses as well as unobserved depreciation. The act specifies the sequence in which these allowances can be set off. Section 72 (3) implies that, the set off of unobserved depreciation as per section 32 (2) against business income shall be given effect to only after setting off the brought forward business losses. From the calculation made by ..... X X X X Extracts X X X X X X X X Extracts X X X X
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