TMI Blog2017 (5) TMI 1619X X X X Extracts X X X X X X X X Extracts X X X X ..... sh examination and consideration at the level of TPO/A.O - set aside the TP issue including selection of comparables and functional comparability to the record of the TPO for consideration and adjudication. Computing deduction under Section 10A - AO took the total turnover of the assessee at entity level instead of the turnover of Export Oriented Undertaking (EOU) - Held that:- Assessing Officer took the total turnover of the assessee at ₹ 29.04 Crores whereas the turnover of the EOU undertaking is ₹ 22.88 Crores. Therefore we find that the Assessing Officer has not taken the total turnover of the EOU undertaking. In view of the above facts and circumstances of the case, we direct the Assessing Officer to consider the total turnover of the EOU for the purpose of computing the deduction under Section 10A of the Act. Deduction under Section 10A computation - AO has considered the entire cost of Employees Stock Option and RSU granted to the employees of the company by the holding company of the assessee - Additional ground - Held that:- There is no dispute that the claim made by the assessee in the additional ground was not raised either before the Assessing Officer ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y the TPO is not valid and has vitiated the entire TP analysis carried out by him. He ought to have appreciated the contentions of the Company that in like manner of eliminating very small companies as comparable, medium, large and very large companies ought to be eliminated. He ought to have restricted the comparability analysis only to companies whose level of operations/number of employees/turnover is similar to that of the assessee company. 3. To adopt a flawed one sided stand of eliminating companies having diminishing revenues/persistent losses over a period while carrying out the comparability analysis, but at the same time not hesitating to include companies with continuously increasing revenues/growth/abnormally high margins, while carrying out the comparability analysis. This one sided stand by the TPO has vitiated the entire TP analysis. If companies going through a trough or faring badly are excluded, on the very same coin/argument, companies who are riding a wave with increasing revenues and profits ought to be excluded. The TPO ought to have appreciated that the assessee company is a low risk contract service provider. As a low risk contract service provider, its p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... facts in not allowing appropriate adjustments under Rule 10B to account for, inter alia, differences in (a) accounting practices, (b) Depreciation adjustments, (c) marketing expenditure adjustments, (d) research and development expenditure adjustment, (e) risk profile between the Assessee and the comparable companies (f) under utilization of capacity by the Company. 7. Differences in accounting practices and rate of depreciation on fixed asses not adjusted by the TPO. A The TPO erred in not appreciating our contentions that the charge for depreciation provided by some of the companies considered as comparable by him was lower than that adopted by the Company (rate of depreciation on computers adopted by certain companies considered as comparable by the TPO is 16.21% whereas the Company adopts a higher depreciation rate of 33.33% on the said assets). He accordingly erred in not increasing the cost base and reducing the operating profit margin of these companies, by bringing the depreciation rate for these companies on par with the Company. B The TPO erred in not appreciating our contentions that some of the companies considered as comparable by him were not providing for a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y any of the companies considered as comparable should be added back and thereafter OP/TC be computed. It will be a travesty of fairness if employee stock compensation costs are disallowed but at the same time considered as cost to determine the arms length price. The learned TPO may please appreciate that chapter X has been founded on the premise of tax evasion and labeled as anti avoidance provisions. This cannot be interpreted in a manner where arms length profit margins are applied on expenses which are disallowed while computing total income and that too based on margins of companies who do not accrue cost of such compensations. On eliminating the impact of employee stock compensation costs debited by us, our OP/TC works out as under:- Particulars Amount (Rs.) Total operating expenses debited to Profit and Loss Account 20,49,64,275 Less Exchange fluctuation loss 4,67,491 Employee stock compensation cost 1,14,63,811 Revised TC 19,30,12,973 Re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... B. DEDUCTION UNDER SECTION 10A 1. On the facts and circumstances of the case, there is no justification for the Assessing Officer to compute the deduction under section 10A in the manner laid down in annexure to the assessment order. The total turnover adopted by the Assessing Officer is the total turnover of the Company and not the turnover of the software service undertaking, there4by including turnover of a non-exempt undertaking of ₹ 6,15,55,794/-. He is also erred in adopting the entire communication link costs of ₹ 47,20,847/- incurred in foreign currency and foreign travel expenses of ₹ 1,28,32,732/- as expenses incurred attributable to delivery of computer software outside India. A major part of the foreign travel expenses are not related to delivery to computer software outside India. He also erred in eliminating communication and travel expenses from the export turnover without making similar adjustments to the total turnover of the undertaking. The computation of deduction under section 10A is not in accordance with law. 2. On the facts and circumstances of the case and without prejudice to the above contentions, the learned Assessing Office ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of comparables. Therefore this is a normal case of availability of comparables. Accordingly, in view of the consistent view taken by this Tribunal that in the normal circumstances, the RPT tolerance range shall not exceed 15%. 7. Thus the comparability of the entire set of comparables has to be decided by applying the appropriate filter of turnover at 10 times of assessee's turnover on both sides and further RPT filter of 15%. We are of the considered opinion that the entire TP issue requires fresh examination and consideration at the level of TPO/A.O. Accordingly, in the facts and circumstances of the case, we set aside the TP issue including selection of comparables and functional comparability to the record of the TPO for consideration and adjudication. Needless to say the assessee be given a proper opportunity of hearing raising the objections on the functional comparability of the company. 8. The next issue is regarding restriction of deduction under Section 10A of the Act. 9. We have heard the learned Authorised Representative as well as learned Departmental Representative and considered the relevant material on record. The Assessing Officer while computing de ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... company by the holding company of the assessee. He has further submitted that the deduction in respect of ₹ 1,14,63,811 is eligible for EOU unit out of the total sum of ₹ 1,55,22,724 as the share of non-eligible unit in the said deduction is only ofRs.14,58,953. He has relied upon the decision of Special Bench of this Tribunal in the case of Biocon Ltd. Vs. DCIT 115 TTJ 649. 12. On the other hand, the learned Departmental Representative has submitted that the assessee has not raised this issue either before the Assessing Officer or before the DRP. Further the deduction under Section 10A cannot be allowed without claiming the same in the return of income. Thus he has strongly objected to the additional ground raised by the assessee. 13. We have considered the rival submissions as well as the relevant material on record. There is no dispute that the claim made by the assessee in the additional ground was not raised either before the Assessing Officer or before the DRP. Therefore this is fresh plea raised by the assessee at this stage. So far as the legality of the issue is concerned, there is no bar for raising this legal issue at this level which is also covered b ..... X X X X Extracts X X X X X X X X Extracts X X X X
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