2016 (6) TMI 1286 - AT - Income Tax

Addition on account of BPO activities - adjustment made in the TP order u/s.92CA(3) - rejection of some of the comparables selected by the assessee - Held that - Assessee is into international transactions pertaining to BPO services. TPO noted that out of the 11 comparables 7 do not qualify to be treated as comparables since either they were into different functions or had substantial transactions with related parties. The TPO therefore made fresh searches and after considering the various objections of the assessee had retained 7 comparables out of 30 selected by him. Thus, in effect, the TPO took final set of 11 companies as comparables and determined the arithmetic mean at 21.67% and accordingly made adjustment of ₹ 11,92,55,177/- in respect of BPO activity which has come down to ₹ 5,96,21,856/- after the directions of the DRP. They have further held that in absence of any justifiable reasons the final set of 11 comparables as selected by the TPO is upheld. Exclusion of depreciation for working of PLI - Hed that - We find the Delhi Bench of the Tribunal in the case of Schefenacker Motherson Ltd. (2009 (6) TMI 125 - ITAT DELHI) while deciding an identical issue has held that for determination of ALP under TNMM assessee was justified in taking profit level indicator of comparable companies as operating cash profits without taking into consideration depreciation. Exclusion of depreciation was justified to eliminate the difference in technology used, age of assets used in production, difference in capacity utilization and different depreciation policies adopted by various companies. TP adjustment has to be made only with respect to transactions with associated enterprises based on ALP and not with respect to total purchases/sales. We, therefore, restore this issue to the file of the AO/TPO for re-computation of the TP adjustment in respect of BPO activity. Ground raised by the assessee is accordingly allowed for statistical purposes. Addition to the total income on account of interest chargeable on delayed receipts from the associated enterprises following adjustment made in the transfer pricing order u/s.92CA(3) - Held that - Respectfully following the decision of the Tribunal in assessee s own case in the immediately preceding assessment year we restore the issue to the file of the AO with a direction to recompute the addition in the light of the direction of the Tribunal. The above ground is accordingly allowed for statistical purposes. deduction u/s 10A in respect of various eligible undertakings of the Company - Held that - Since it is the submission of the Ld. Counsel for the assessee that no new undertakings were set up by the assessee in the current year and deduction was allowed in respect of undertakings established upto A.Y. 2005-06, therefore, we restore this issue to the file of the AO who shall verify the records and in case no new undertakings are set up during the impugned assessment year, then following the order of the Tribunal allow deduction u/s.10A in respect of various eligible undertakings of the company. Needless to say, the AO shall give due opportunity of being heard to the assessee. Ground of appeal No.3 by the assessee is accordingly allowed. Invoking provisions of section 10A(7) read with section 80IA(10) on protective basis - Held that - We restore the issue to the file of the AO with a direction to verify the records and if under identical circumstances the DRP has decided the issue in favour of the assessee in its own case for A.Yrs. 2010-11 and 2011-12 then to decide the issue in the light of the direction of the DRP. Grounds raised by the assessee are accordingly allowed for statistical purposes. Claim of the assessee relating to the set off of the losses against the other business profits allowed Denial of 10A deduction in respect of various undertakings is not justified. Accordingly, the grounds raised by the assessee on this issue are allowed. Setting off of brought forward loss of NDA (BPO) unit before allowing deduction u/s.10A in respect of profits of the said unit for the current year and thereby restricting the deduction u/s.10A to Rs. Nil - Held that - Since in the preceding years the matter has been decided against the assessee and assessee is in appeal before the Hon ble High Court, therefore, in view of judicial precedents the order of the AO on this issue is upheld and the ground raised by the assessee is dismissed. Denial of 10A deduction - Held that - The number of technical manpower personnel transferred to the new unit at the end of the financial year does not exceed 50% of the total technical manpower actually engaged in development of Software of IT enabled products in new unit. Since the assessee satisfies the condition as per CBDT Circular No.14/2004 dated 08-10-2014 which has already been reproduced in the preceding paragraphs at Para 59 of this order, therefore, we are of the considered opinion that denial of 10A deduction in respect of various undertakings is not justified. This ground by the assessee is accordingly allowed. Allowing deduction for ESOP cost charged to the profit and loss account by observing that it is nothing but a notional entry and no cost is actually incurred by the company - Held that - We find from the documents filed by the Ld. Counsel for the assessee that the DRP in subsequent years, following the decision in the case of Biocon Ltd. (2013 (8) TMI 629 - ITAT BANGALORE), has allowed the claim of ESOP cost. Under these circumstances, we deem it proper to restore the issue to the file of the AO with a direction to verify the records of the subsequent years. In case the same has been allowed either by the DRP or by the AO, then the claim of ESOP cost has to be allowed by him. Needless to say the AO shall give due opportunity of being heard to the assessee while deciding the issue

Summary

Issues Involved:
1. Addition on account of BPO activities.
2. Interest chargeable on delayed receipts from associated enterprises.
3. Deduction under section 10A for various eligible undertakings.
4. Invoking provisions of section 10A(7) read with section 80IA(10) on protective basis.
5. Not setting off losses of 10A undertakings against other income.
6. Set off of brought forward loss before allowing deduction under section 10A.
7. Deduction for ESOP cost.

Issue-Wise Detailed Analysis:

1. Addition on account of BPO activities:
The assessee challenged the addition of ?5,96,21,856/- made by the AO for BPO activities. The AO, following the TPO’s adjustment, benchmarked BPO services separately from software development services. The TPO rejected the assessee's comparables and selected new ones, leading to the adjustment. The Tribunal found merit in excluding depreciation for working out PLI, following the Delhi Bench's decision in Schefenacker Motherson Ltd., and restored the issue to the AO for verification.

2. Interest chargeable on delayed receipts from associated enterprises:
The TPO made adjustments for interest on delayed receipts, which the DRP upheld. The Tribunal, referencing its decision in the assessee's own case for A.Y. 2005-06, restored the issue to the AO to recompute the addition, applying LIBOR plus rates and excluding guarantee commission.

3. Deduction under section 10A for various eligible undertakings:
The AO denied deduction under section 10A for various units, considering them formed by splitting up existing businesses. The Tribunal, referencing its earlier decisions and the Hon’ble Bombay High Court’s rulings, restored the issue to the AO to verify if no new undertakings were set up in the current year and to allow the deduction accordingly.

4. Invoking provisions of section 10A(7) read with section 80IA(10) on protective basis:
The AO restricted the deduction under section 10A, assuming more than ordinary profits due to close business connections. The Tribunal, following its decision in the case of M/s. Honeywell Automation India Ltd., directed the AO to verify if the DRP had decided the issue in favor of the assessee in subsequent years and to decide accordingly.

5. Not setting off losses of 10A undertakings against other income:
The AO disallowed the set-off of losses from 10A units against other income, which the DRP upheld. The Tribunal, following its own and the Hon’ble Bombay High Court’s decisions in the assessee’s own case, allowed the set-off of such losses against other income.

6. Set off of brought forward loss before allowing deduction under section 10A:
The AO set off brought forward losses before allowing deduction under section 10A, which the DRP upheld. The Tribunal, following its earlier decision, upheld the AO’s order, noting that the issue was pending before the Hon’ble Bombay High Court.

7. Deduction for ESOP cost:
The AO disallowed the ESOP cost, considering it a notional entry. The Tribunal, noting that the DRP had allowed the claim in subsequent years following the Bangalore Special Bench’s decision in Biocon Ltd., restored the issue to the AO to verify and allow the claim if it had been allowed in subsequent years.

Conclusion:
The Tribunal provided detailed directions for each issue, often restoring matters to the AO for verification and recomputation based on established precedents and specific factual verifications. The decisions largely favored the assessee, especially in the context of deductions under section 10A and the treatment of ESOP costs.