TMI Blog2015 (11) TMI 1793X X X X Extracts X X X X X X X X Extracts X X X X ..... undertaking would not arise. In that view of the matter, the approach of the assessing authority was quite contrary to the aforesaid statutory provisions and the Appellate granting the benefit of section 10A to the assessee. Hence, the main substantial question of law is answered in favour of the assesses - IT(IT)A No.869(B)/2013, C.O. No.168(B)/2015 - - - Dated:- 30-11-2015 - SMT. ASHA VIJAYARAGHAVAN, JUDICIAL MEMBER AND SHRI INTURI RAMARAO, ACCOUNTANT MEMBER For The Revenue : Dr. P.K.Srihari, Addl.CIT For The Assessee : Shri Padamchand Khincha, CA ORDER PER SHRI INTURI RAMARAO, AM: The appeal in IT(TP)A No.869(B)/13 is by the revenue and the cross objection in C.O.No.168(B)/15 is by the assessee-company are directed against the order dated 08-03-2013 of CIT(A)-IV, Bangalore for the assessment year 2005-06. 2. The revenue has raised the following grounds of appeal; 1.The order of the ld.CIT(A) in so far as it is prejudicial to the interest of revenue is opposed to law and the facts and circumstances of the case. 2. The ld.CIT(A) erred in holding that the size, turnover of the company are deciding factors for treating a company as a compar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s a company incorporated under the provisions of the Companies Act, 1956 engaged in the business of software development, consultancy services and IT enabled services. It filed its return of income for the AY: 2005-06 on 31-10-2005 declaring loss of ₹ 7,05,400/-. The case was selected for scrutiny assessment. During the course of assessment proceedings the AO noticed that the assessee had entered into international transactions and therefore, made a reference to the TPO for the purpose of determining the Arm s Length Price (ALP) of the international transactions with its Associated Enterprises (AE). During the course of assessment proceedings, the AO noticed the following international transactions reported by the assessee in this TP study; Provision for software development service ₹ 4,74,92,116/- Salary paid to directors ₹ 1,64,39,283/- Provision call centre services ₹ 3,16,62,195/- Interest free loan availed UK Pounds 3,20,000/- 4. The AO after obtaining necessary approval from the Commi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... charged by the taxpayer to its associated Enterprises is compared to the arms length price as under; Arms length price @ 123.08% of operating cost 4.26,74,654 Price received 3,19,85,157 Shortfall being adjustment u/s 92CA 1,06,89,497 The AO passed the assessment order after making the adjustment for ALP of ₹ 1,06,89,497/- vide order dated 26-12-2008. 6. Being aggrieved by this assessment order an appeal was filed before the CIT(A), who vide order dated 08-03-2013 partly allowed the appeal. The learned CIT(A) had dealt with the comparables selected by the TPO as under; 7. M/s Allsec Technologies Ltd, though included in the list of comparables the learned CIT(A) had directed to adopt the operating margin at 26.19%. 8. In the case of M/s Vishal Information Technologies Ltd., this comparable was directed to be excluded on the ground of abnormal profit margin. 9. In the case of M/s Cosmic Global Ltd inclusion of this company in the list of comparables was upheld by the CIT(A) rejecting the contention of the assessee that outsourced work a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... should not have been directed to be included in the list of comparables., as it does not pass through filters applied by the TPO. He further contended that the CIT(A) ought not to have directed the adjustment on account of under utilization of capacity. The learned SR Dr finally contended that the CIT(A) ought not to have directed the AO to allow the deduction u/s 10A of the IT Act before setting off of brought forward losses, as the decision of the Hon ble Karnataka High Court in the case of M/s Yokogawa India Ltd. (Supra) is under challenge before the Hon ble Supreme Court and an SLP has been granted. 16. On the other hand, learned AR of the assessee vehemently opposed the argument of the learned SR DR. At the outset he submitted that the average margin of the comparables selected b y the TPO actually worked out to 24.68% and whereas the TPO while computing the ALP adopted the average profit margin at 26.18% and the TPO had not even allowed credit of working capital adjustment at 1.3% while working out the ALP and finally submitted that M/s Vishal Information Tech. Ltd. has to be rejected on the ground of functionally dissimilarity and employed cost filter and abnormal profit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ervices India Pvt.Ltd. TS-307-ITAT-2011(Del.)AY: 2006-07 ii. HSBC Electronic Data Vs ACIT (TS-174-ITAT-2013(HYD.)-TP (AY: 2006-07) iii. BA Continuum India Pvt.Ltd. Vs ACIT (TS-295-ITAT-2013 (Hyd.)-TP(AY: 2005-06) iv. Market Tools Research Pvt.Ltd. vs DCIT TS-30-ITAT-2014(Hyd.)-TP for AY: 2005-06 v. IVY Computech Pvt.Ltd. vs ACIT TS-17-ITAT-2014(Hyd.)-TP for AY: 2005-06. He finally submitted that M/s Maple E Solutions Ltd. has to be rejected as a comparable on the ground of tainted management in view of decisions Hon ble ITAT in the following cases; Maple E Solutions Ltd. has to be rejected as a comparable on the ground of tainted management in view of Hon ble ITAT in the following decisions; i. ITO Vs CRM Services India Pvt.Ltd. TS-307-ITAT-2011(Del.) AY: 2006-07 ii. Stream International Services Pvt.Ltd. vs ADIT (ITA No.8997/Mum/2010) iii. Capital IQ information Systems (Ind.) Pvt.Ltd. Hyderabad (ITA No.1961/Hyd/2011) iv. Market Tools Research Pvt.Ltd. vs DCIT TS-30-ITAT-2014(Hyd.)-TP-for AY: 2005-06 v. IVY Comptech Pvt.Ltd. vs ACIT TS-ITAT-2014(Hyd.)/-TP for AY: 2005-06 17. We have heard the rival submissions and pe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ervices with completely different content and value. Thus, where the tested party is not a KPO service provider, an entry rendering KPO services cannot be considered as a comparable for the purpose of Transfer Pricing analysis This perception that a BPO service provider may have the ability to move up the value chain by offering KPO services cannot be a ground for assessing the transactions relating to services rendered by the BPO service provider by benchmarking it with the transactions of KPO service providers. The object is to ascertain the ALP of the service rendered and not of a service (higher in value chain) that may possibly be rendered subsequently. 35. As pointed out by the Special Bench of the Tribunal in Maersk Global Centres (Ind.) Pvt. Ltd (supra), there may be cases where an entity may be rendering a mix of services some of which may be functionally comparable to a KPO while other services may not. In such cases, a classification of BPO and KPO may not be feasible. Clearly, no straitjacket formula can be applied. In cases where the categorization of services rendered cannot be defined with certainty, it would be apposite to employ the broad functionality test an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... holding as under; We have heard the parties. The sole contention of the assessee for excluding the aforesaid company is the employee cost as a percentage of the operating revenue is much lower compared to the assessee. On a perusal of the order passed by the co-ordinate bench in the case of HSBC Electronic Data Processing India Pvt. Ltd.(supra), it is to be noted that the co-ordinate bench while considering the objection of the assessee with regard to the aforesaid company in para-13 accepted assessee s contention that the company outsourced its work and has held that the company cannot be selected as a comparable on account of its low employee cost. In view of such order of the coordinate bench, we direct the AO/TPO to examine this aspect and if there is substantial difference between the assessee and the aforesaid company, then this company cannot be treated as a comparable . Respectfully following the co-ordinate bench decision, we hold that the learned CIT(A) is justified in giving direction to delete M/s Nucleus Netsoft GIS Ind. Ltd. as a comparable. Hence, this ground of appeal filed by the revenue is dismissed. 22. Ground no.6 challenges the direction of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uthorities below while determining the ALP cost. The TPO should have made allowance for the higher overhead expenditure during the initial period of production. In view of the above, we deem it appropriate to remit this issue back to the Assessing Officer with a direction to consider the claim of the assessee with respect to idle capacity adjustment during the relevant period while determining the ALP cost. The assessee is also directed to produce relevant documents in comparable units for the necessary analysis. The appeal of the assessee is allowed for statistical purposes in the aforesaid terms. Reliance in this regard is placed on the decision of Pune Bench of the Tribunal in the case of Amdocs Business Services Pvt. Ltd. vs. DCIT (ITA No. 14212/PN/11), wherein, the Tribunal allowed economic adjustment on account of under capacity utilization holding that the appellant was in start up phase during the assessment year consideration. The relevant extract of the decision is reproduced as under: 9. The next major point made out by the appellant is that this being the first full year of operation, the assessee had incurred certain expenditure which are start-up costs and cannot ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... idence on this behalf. Needless to say that a proper and speaking order will be passed deciding the issue in accordance with law. Reliance in this regard is placed on the following observation of the Hon'ble Mumbai Bench of the Tribunal in the case of ACIT vs. Fiat India Pvt. Ltd (ITA no 1848/Mum/2009): As rightly held by the Id. CIT(A), the said submission made by the appellant is sufficient to demonstrate that there was a material difference in the facts of the appellant's case and that of the comparable cases in terms of capacity utilization as well as in other terms. Appropriate adjustments thus were required to be made to eliminate such differences Further, the Hon'ble Pune Bench of the of Tribunal in the case of Brintons Carpers Asia Pvt. Ltd. vs. ACIT ITA. No. 1296/PN/10) while allowingN adjustment for idle capacity caused due to labour unrest/strike and relying upon the above observation of the Mumbai Tribunal held as follows: 15. From the above, it is clear the AO has authority vide clause (iii) above to make the adjustments. Such adjustments are necessary only to remove or minimize the differences in the comparable or anomaly in' the said compara ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... economic adjustments and they summarily rejected the claims. As such, the requisite adjustments are borne out of the relevant rules/provisions and therefore, the claim is bona fide and has support of the law. For this,' the appellant prefers to go to the files of the AO for want of a speaking order on this issue. In our opinion, the request of the appellant deserves to' be considered favourable. Also, in the case of E.I. Dupont India Pvt. Ltd. vs. DCIT (ITA No 5336/0/2010), the Hon'ble Delhi Bench of the Tribunal, while allowing the adjustment for capacity utilization held that ; It is a matter of fact that fixed costs remain the same even when there is under utilization of capacity. Therefore, the case of the appellant and the comparable cases have to be examined in respect of capacity utilization so as to make the controlled and uncontrolled transactions comparable. Also, the Hon'ble Delhi Bench of the Tribunal in the case of ITO vs. CRM Services India Pvt. Ltd upheld the claim of the appellant towards adjustment of idle capacity: 8.1 This bring us to the alternative argument that the appellant is entitled to get adjustment in respect of capacity under-uti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er profits. The relevant finding of the decision reads as under: 5. Having heard the rival contentions and having perused the material on record, we see no reasons to interfere in very well reasoned findings and directions of the learned CIT (A). Rule 10B (1 )(e)(ii) of the Income Tax Rules 1962 does indeed provide that the net profit margin realized in a comparable uncontrolled transaction is adjusted, inter alia, for differences in enterprise entering into such transactions, which could materially affect the net profit margin in open market. Capacity underutilization by enterprises is certainly an important factor affecting net profit margin in the open market because lower capacity utilization results in higher per unit costs, which, in turn, results in lower profits. Of course, the fundamental issue, so far as acceptability of such adjustments is concerted, is reasonable accuracy embedded in the mechanism for such adjustments, 'end as long as such an adjustment mechanism can be found, no objection can be taken to the adjustment. In our considered view, the learned CIT(A)'s approach is reasonable in this regard and the adjustments are on a conceptually sound basis. In a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... revenue is dismissed. 25. Ground no.11 12 are general in nature does not require any adjudication. C.O.No.168(BNG)/2015 (in ITA No.869(B)/13) (AY: 2005-06) 26. The cross objection has been filed by the assessee-company raising the following grounds of appeal; 1. The order of the ld.CIT(A)-IV, Bangalore to the extent prejudicial to the respondent is bad in law. 2. The learned CIT(A) has erred in confirming the action of the AO and TPO in; a. Passing the order in violation of the principles of natural justice by not affording the respondent an opportunity to substantiate its claim and rebut the method and basis finally adopted for TP analysis; and b. Not appreciating that the charging or computation provision relating to income under the head Profits gains of business or profession do not refer to or include the amounts computed under Chapter X and therefore, the addition made under Chapter X is bad in law. 3. The ld.CIT(A) has erred in confirming the action of the AO in making a reference o TPO for determining the arm s length price without demonstrating as to how or why it was necessary and expedient to do so. Grounds relatin ..... X X X X Extracts X X X X X X X X Extracts X X X X
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