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M/s Sutherland Healthcare Solutions Ltd Versus Income Tax Officer Circle 1 (1) , Hyderabad and Vice-Versa

2016 (11) TMI 1499 - ITAT HYDERABAD

Allowability of deduction u/s 10A - Held that:- AO is directed to allow 10A deductions in respect of the export business without setting of the loss from the non export business. - TPA - rejecting the foreign company as the tested party - Held that:- Having perused the relevant documents in order to verify as to whether the assessee has provided the necessary relevant information about the tested party and also the comparables to the tax administration to verify the same, we have verified th .....

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- Selection of comparable criteria - Held that:- Assessee is into the software development and providing call centre services exclusively to its AE, thus companies functionally dissimilar with that of assessee need to be deselctded from final list. - ITA No.831/Hyd/2009, ITA No.835/Hyd/2009 - Dated:- 30-11-2016 - Smt. P. Madhavi Devi, Judicial Member AND Shri S.Rifaur Rahman, Accountant Member For The Assessee : Shri Ravi Bharadwaj For The Revenue : Smt. U. Minichandran, DR ORDER Per Smt. P. .....

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the assessee has entered into an international transaction with its AE which is the wholly owned subsidiary company of the assessee in USA. The computation of Arms Length Price (ALP) was referred to the TPO u/s 92CA of the Act. The assessee adopted the CUP method as the most appropriate method and has adopted the foreign company AE as the tested party and the US Companies as comparables. It arrived at the margin of the comparables at 14.64% as against the assessee s margin of 12.90% and therefor .....

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nd treated the assessee as a tested party. He also rejected the CUP method adopted by the assessee on the ground that there is no adequate data to apply CUP method or other methods. He considered the TNMM as the most appropriate method. Thereafter, he proceeded to consider the comparable companies in India and arrived at 22 companies and after conducting the FAR analysis of the comparables, he arrived at the mean margin of the comparables and computed the adjustment u/s 92CA of the Act at ₹ .....

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e Teleservices Ltd iii) M/s. Allsec Technologies Ltd 4) Against the order of the CIT (A), both the assessee as well as the Revenue are in appeal before us. While the Revenue is in appeal against the exclusion of certain comparable companies cited above from the final list of comparables and also against the direction allowing a standard deduction (+_) 5% tax, the assessee is in appeal against the order of the CIT (A) confirming the order of the TPO rejecting the foreign company as a tested party .....

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CIT(Appeals) erred in facts and in law while disposing the appeal against the Order of Ld. Assessing Officer (' AO') passed under section 143(3) of the Income Tax Act, 1961 ('Act'). 2. The Ld. CIT(Appeals) erred in confirming that the deduction under section 10A of the Act is allowable from the total income of the business and not from the profit of the undertaking. 3. The Ld. CIT (Appeals) erred in law and in facts in confirming that Ld. TPO's rejection of the overseas Asso .....

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PO, the transactions with Associated Enterprises are carried out at similar operating margin as that of non Associated Enterprises implying that the transactions with Associated Enterprises were carried at arm s length. 6. The Ld. CIT(Appeals) erred in not appreciating that the Ld. TPO erred in law and in facts in not considering the submissions of the appellant with respect to the selection of comparable data and arbitrarily selecting comparable companies. 7. The Ld. CIT (Appeals) erred in not .....

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onment of cost. Each of the above ground is independent and without prejudice to the other grounds of appeal preferred by the appellant. The Appellant craves, to leave to add, alter, vary, omit, substitute or amend the above grounds of appeal, at any time before or at, the time of hearing of the appeal, so as to enable the Appellate authority to decide this appeal according to the law . Further vide letter dated 31.12.2015 the assessee has raised the following additional grounds of appeal: Addit .....

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nterprises Ltd III) Northgate BPO Services Ltd IV) BNKe Solutions Pvt Ltd V) Saffron Global Ltd VI) Suprawin Technologies Ltd VII) Asian Cerc Information Technology Ltd 11. Not granting TDS Credit of ₹ 4,01,357 . 5. At the time of hearing, the Revenue has raised an objection about the maintainability of the appeal on the ground that the Form No.36 has been signed by the Authorized Signatory and not by the Managing Director/Director as required under the provisions of Income Tax Appellate T .....

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rector (as the assessee was not having a Managing Director at that point of time) was filed. The copy of the Board resolution is also produced before us. It is submitted that the registry had not pointed out any defects. Therefore, according to the learned Counsel for the assessee, the appeal is maintainable as the defect has been rectified by filing revised Form 36 in accordance with the Rules and in support of his contentions that the defect is a curable one and will not affect the maintainabi .....

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ents but signed by the constituted attorney, is a curable irregularity and defect once removed, such removal relates back to the date, the appeal was originally filed. c) Wipro Information Technology Ltd vs. Dy.CIT reported in (2004) 88 TTJ 0778 wherein it was held that the appeal signed by the incompetent person is a curable defect and since the same has been cured, appeal is maintainable. 6. The learned DR, however, opposed the same and relied upon the decision of the Coordinate Bench of this .....

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t there is no dispute that u/s 253 of the I.T. Act and Rule 45(2) of the I.T. Rules, a person who is the Managing Director of the company or a Director, in certain circumstances, as on the date of filing of the returns, only can sign and verify the returned income of the company. In the case before us, the authorized signatory had signed the form of appeal and also the grounds of appeal at the time of filing of the appeal. Thereafter, the Registry did not raise any objection regarding the mainta .....

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g Partner, but the grounds of appeal was not signed by the Managing Partner but was signed by its Counsel. It was in these circumstances that the Tribunal held that the grounds of appeal not signed by the Managing Director is a curable defect. In our opinion, this case is distinguishable from assessee s case and cannot be applied. 8. In the case of Harilelas (Cited Supra), the Mumbai Bench of the Tribunal, while dealing with an appeal wherein the memo of appeal and verification were signed by th .....

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nguishable from facts. As held by the various Benches of the Tribunal, the defect in the assessee s case is only a curable defect and the assessee having rectified the defect, the appeal is maintainable. Therefore, the objection of the Revenue that the appeal is not maintainable is not sustainable. 10. Coming to the assessee s appeal, the grounds of appeal No.1 is general in nature and needs no adjudication. 11. As regards Ground No.2, the learned Counsel for the assessee submitted that this iss .....

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076 from export business u/s 10A of the Act. The AO held that the loss of non export business is to be set off from the profit of the export business and only thereafter deduction u/s 10A is allowable. Against this order of the AO, the assessee had filed an appeal before the CIT (A) and the CIT (A) has confirmed the order of the AO. This issue had arisen in assessee s own case in the earlier A.Ys and the Tribunal followed the decision of the Hon'ble Karnataka High Court in the case of CIT vs .....

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#39;ble Supreme Court in the case of M/s. Himatasingike Seide Ltd was also considered. According to the learned DR, the Hon'ble Supreme Court in the case of Himatasingike Seide Ltd has reversed the judgment of the Hon'ble Karnataka High Court in the case of M/s Yokogawa India Ltd and therefore, has to be followed. 12. Having regard to the rival contentions and the material on record, we find that in the case of M/s Safran Aerospace India Pvt. Ltd vs. DCIT, the Coordinate Bench of this Tr .....

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s. During the assessment proceedings u/s 143(3), the AO had observed that the assessee had claimed exemption u/s 10A for its STPI unit before set off of brought forward losses and depreciation. The AO, therein, had also observed that 10A benefit can be given only after adjusting brought forward loss and depreciation from the total income of the assessee. Aggrieved, the assessee preferred an appeal before the CIT (A) who granted relief to the assessee and on further appeal by the Revenue to the T .....

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ar has to be allowed without setting off brought forward unabsorbed losses and the depreciation from earlier assessment year or current assessment year either in the case of non- STP units or in the case of the very same undertaking?" The Hon'ble High court has considered the issue at length and at Para 31 of its order has held that as deduction u/s 10A has to be excluded from the total income of the assessee, the question of unabsorbed business loss being set off against such profits a .....

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s of the very same High Court by benches of equal strength, then the later judgment of the High Court has to be followed as held by the Hon'ble Apex Court in the case of Bhika Ram & Others vs. UOI reported in 238 ITR 113. The decision of the High Court in the case of Himatsingike Siede (supra) is dated 4th August, whereas the decision of the Hon'ble High Court in the case of Yokogawa India Ltd (supra) is dated 9th August, 2011. As regards the dismissal of the SLP by the Hon'ble S .....

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pra) holds the field. Further, the Hon'ble Apex Court in the case of Vegetable Products Ltd., reported in 881TR 192 (SC) has held that where two reasonable constructions are possible, then the construction in favour of the assessee must be adopted. Respectfully following the said decision, we allow the ground of appeal We find that the above decision is in fact in favour of the assessee and respectfully following the same, the claim of the assessee is allowed and the AO is directed to allow .....

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x activities and therefore, the said company has been considered as the tested party and the US comparables have been adopted by the assessee. According to him, both the TPO as well as the CIT (A), have erred in rejecting the foreign company as the tested party, only on the ground, that the TPO does not have the power to obtain information about the foreign comparables. In support of his contention that a foreign company can be adopted as a tested party, the learned Counsel for the assessee reli .....

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eign comparables cannot be accepted at all is not correct as the Indian transfer pricing does not reject the foreign comparables if the tested party is foreign. 14. The learned DR, on the other hand, supported the orders of the authorities below and submitted that during the TP analysis, the AO/TPO will have to verify the details filed by the assessee and if the tested party is a foreign company, then the comparables also will have to be foreign companies and the AO/TPO has no jurisdiction over .....

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suggests that a foreign company can be taken as a tested party provided the assessee makes sure that the necessary relevant information about the tested party and sufficient data on comparables is furnished to the tax administration and vice-versa in order to verify the selection and application of the transfer pricing method. The learned Counsel for the assessee had stated that the assessee has filed the information relating to both the tested party and also the foreign companies taken as comp .....

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or has it otherwise enquired into the nature of the circumstances, activities or results and also further that the financial data provided in the Global Symposium for all the companies and the data is classified and treated in a manner that is unique to Global Symposium . Thus, according to the learned DR, the relevant financial statements have not been gone into by the assessee itself and therefore, the assessee s T.P. study for arriving at the comparable companies is not reliable. 16. Having r .....

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e the AO or the TPO to verify the same and for arriving at the ALP. Therefore, we are satisfied that the assessee has not done a proper TP study and therefore, the TPO has rightly rejected the foreign company as a tested party and the foreign comparables for arriving at the ALP. Accordingly Grounds 3 & 4 are rejected. 17. As regards Grounds 5 to 7, the TPO has adopted the assessee company as the tested party and has adopted 15 companies as comparable to the assessee and adopted TNMM as the m .....

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Ltd is to be excluded on account of extra ordinary circumstances and abnormal profit and Goldstone Teleservices Ltd has to be excluded on account of insignificant forex revenue. As far as the first two companies are concerned, he submitted that the issue of functional dissimilarities of the above companies has been brought out by the Coordinate Bench of this Tribunal in the case of 24/7 Customer.Com Pvt Ltd to which one of us the J.M. is the signatory for the A.Y 2004-05. The Tribunal, at Paras .....

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ices such as Title Plant maintenance and Electornic Data discovery which gives it an edge over other Indian Company competition thereby enabling it to generate higher revenues and margins. It was also submitted by the learned counsel for the assessee that it has a process of continuous in house R & D process for upgradation of software and training its professionals to develop its own software to cater to the needs of its clients. On appraisal of the submissions and the material on record, i .....

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rom the list of comparables in this case . 15.3.4 M/s. Fortune Infotech Ltd. The learned counsel for the assessee contended that this company was using web based software, unique technology and technical knowhow imported from its business partner for providing BPO services and submitted letter dt.11.9.2012, enclosing web site extracts detailing the intangibles developed by this company. On perusal of the details furnished and submissions made, it is seen that this company has developed its own s .....

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arables, we hold that this company which has unique intangibles cannot be taken as a comparable for the assessee and accordingly direct the Assessing Officer / TPO to exclude it from the list of comparables in this case . 18. We find that the assessee before us is into the software development and providing call centre services exclusively to its AE as in the case of 24/7 Customer.com Pvt. Ltd and therefore, the decision of the Coordinate Bench in the above case is applicable to the facts before .....

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hown abnormal trading results as compared to the assessee therein and therefore, cannot be considered as a comparable. Relevant Paragraphs 39 to 41 are reproduced hereunder: 39. AR submitted in respect of Ultramarine & Pigment Ltd. (item No. 17 in the chart) introduced by the Assessee and accepted by lower authorities but later on rejected by the Assessee on the ground that during the current financial year, the company had made abnormal profits. The AR submitted that the company showing abn .....

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TR (Trib.) 285 Delhi. 40. The DR submitted that M/s. Ultramarine Pigments Limited cannot be excluded from comparables. According to the assessee counsel, the AO was not correct in accepting this company which has 123% increase in revenue in one year, as a comparable in this case. However, the assessee itself has proposed this company as a comparable in their TP documentation. Further, it is seen that the TPO has considered only the segmental results, pertaining to F.Y 2003-04 in the case of the .....

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g regard to such facts, the TPO was justified in considering the segmental results in respect of the above company, for comparability analysis in this case. Accordingly, the AO was also justified in accepting such segmental results in respect of the above company for comparability analysis in this case. 41. We have heard both the parties on this issue. It is an admitted fact that the cases which were showing abnormal trading results, as discussed in earlier paras, by relying on the order of the .....

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ies per se are liable to be excluded from the comparables . Respectfully following the same, we direct that this company cannot be taken as a comparable. 20. As regards Goldstone Teleservices Ltd is concerned, the objection of the assessee is that its forex earning is less than 25% of the total revenue and therefore, cannot be considered as comparable. Our attention has been drawn to Page 577 of the Paper Book wherein the earnings in foreign currency on export of total goods is ₹ 163.31 la .....

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PT filter. The learned Counsel for the assessee has drawn our attention to the decision of the Coordinate Bench in the case of Brigade Global Services Pvt Ltd in ITA No.1494/Hyd/2010 wherein it has been clearly brought out that there were no related party transactions during the relevant A.Y and the TPO therein was directed to consider the same as a comparable company. For the sake of ready reference, Para 31 and 32 of the order are reproduced hereunder: 31. Regarding Ace Software Exports Ltd. t .....

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Apex Inc. during the relevant financial year. It was further submitted that the AO erred in treating the above company as functionally different from that of the assessee company. It was submitted that as seen from the annual report of Ace Software Ltd., for the year ended 31.03.2004, the sale transaction made by Ace Software Exports during the F.Y 2003-04 were controlled transactions and this company, should not be considered as a comparable. Therefore, the TPO was justified in rejecting the a .....

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capital in Ace Software Exports Ltd. Even otherwise provisions of section 92A(2)(i) deems two companies as AEs only, if 100% goods are purchased and sold. Though the transactions with related parties cannot be considered for the purpose of comparison, in the present case considering the facts, rejection is not justified . Since the above decision is for the same A.Y and facts are the same, respectfully following the above decision, we direct that this company may also be considered as comparable .....

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