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2015 (11) TMI 1662 - AT - Income TaxDeduction u/s. 10A in respect of disallowance made u/s.40(a)(ia) and 43B - Held that - The authorities below have erred in not appreciating the fact that the amount disallowed u/s. 40(a)(i) and 43B results in higher business income of the assessee. Therefore the deduction u/s. 10A ought to have been granted. The Ld. Counsel contended that the DRP has erred in holding that the allocation of various expenses by the assessee between eligible and non-eligible units are without any proper basis. The DRP further erred in appropriating the actual expenses incurred by individual unit on turnover basis. The authorities below have failed to take into consideration the fact that these expenses relate to the individual units and hence there was no reason to appropriate the same on the basis of turnover of each unit. The Ld. Counsel contended that similar issue had come up before the Tribunal in assessee s own case in the assessment year 2007-08. The Tribunal decided the issue in favour of the assessee correctly. Addition u/s. 92CA by substituting some new comparables and rejecting the entities selected by the assessee as comparables for determining ALP - Held that - The assessee is engaged in providing software development services ITES and sales support services thus companies dissimilar with that of assessee need to be deselected from final list of comparable.
Issues Involved:
1. Disallowance of deduction u/s. 35D. 2. Restricting the claim of deduction u/s. 10A. 3. Addition u/s. 92CA by substituting comparables and rejecting entities selected by the assessee for determining ALP. Detailed Analysis: 1. Disallowance of Deduction u/s. 35D: The first ground raised by the assessee in appeal is with regard to the disallowance of deduction u/s. 35D of the Act. The assessee's counsel stated that this ground is not pressed. Accordingly, the first ground of appeal relating to disallowance of deduction u/s. 35D is dismissed as not pressed. 2. Restricting the Claim of Deduction u/s. 10A: The second ground in the appeal relates to the deduction u/s. 10A in respect of disallowance made u/s. 40(a)(ia) and 43B of the Act. The assessee argued that similar issues were adjudicated in their favor in the assessment year 2007-08 by the Tribunal, which followed the judgment of the Hon'ble Bombay High Court in the case of CIT Vs. Gem Plus Jewellery India Pvt. Ltd. The Tribunal found that the issue raised in the present appeal is identical to the one raised in the assessment year 2007-08 and decided in favor of the assessee. Accordingly, the Tribunal directed the Assessing Officer to allow the deduction u/s. 10A to the assessee. 3. Addition u/s. 92CA by Substituting Comparables and Rejecting Entities Selected by the Assessee for Determining ALP: Software Development Services: The assessee provided software development services and selected 23 companies as comparables for determining ALP. The TPO rejected most of these companies and included new ones, resulting in an average operating margin of 24.63%. The Tribunal analyzed the objections raised by the assessee on the comparables selected by the TPO: - Bodhtree Consulting Ltd.: Rejected as comparable because it is not exclusively engaged in software development services, supported by decisions in Barclays Technology Centre India (P) Ltd. and NetHawk Networks India Pvt. Ltd. - E-Zest Solutions Ltd.: Rejected due to functional differences, as it is engaged in ITES/KPO services, supported by decisions in Symphony Services Pune (P) Ltd. and 3DPLM Software Solutions Ltd. - Helios & Matheson Information Tech.: Rejected as it was functionally different, supported by the Tribunal's decision in the assessee's own case for assessment year 2007-08. - Infosys Technologies Ltd.: Rejected due to disparity in scale of operations, supported by the Tribunal's decision in the assessee's own case for assessment year 2007-08. - Kals Information System: Rejected due to functional differences, supported by decisions in Bindview India Pvt. Ltd. and PTC Software Ltd. - FCS Software Solutions Ltd.: Rejected due to functional differences and abnormally high profits, supported by the decision in Barclays Technology Centre India (P) Ltd. The Tribunal also directed the inclusion of: - Aztec Soft Ltd.: Included as the RPT was only 16.08% and not in a restructuring phase. - SIP Technologies and Exports Ltd.: Included as it was not a persistent loss-making company. Design, Engineering, Testing, and Authoring Services: The TPO selected new comparables resulting in an average operating margin of 31.62%. The Tribunal analyzed the objections raised by the assessee: - Coral Hubs Ltd.: Rejected due to functional differences and abnormally high profits, supported by decisions in Symphony Marketing Solutions India Pvt. Ltd. and Capital IQ Information Systems India Pvt. Ltd. - Genesys International Corporation Ltd.: Rejected due to functional differences, supported by decisions in Hyundai Motors India Engineering Pvt. Ltd. and Symphony Marketing Solutions India Pvt. Ltd. - Cosmic Global Ltd.: Rejected due to functional differences, supported by decisions in Parexel International India Pvt. Ltd. and Mercer Consulting (India) Ltd. Business Support Services: The TPO selected new comparables resulting in an average operating margin of 20.32%. The Tribunal analyzed the objections raised by the assessee: - TSR Darashaw Ltd.: The only objection was abnormally high operating margin, which was not sufficient to exclude it. - Apitco Ltd.: Rejected due to functional differences, supported by the decision in Ciena India (P.) Ltd. Conclusion: The appeal of the assessee is partly accepted for statistical purposes. The Tribunal directed the exclusion of certain comparables and the inclusion of others based on functional differences, abnormally high profits, and previous judicial decisions. The Tribunal upheld the method adopted by the assessee for determining ALP but adjusted the list of comparables accordingly.
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