2015 (9) TMI 555 - AT - Income Tax

Transfer pricing adjustment - selection of comparable - Held that - Maple eSolutions Ltd. be excluded from the set of comparable companies as objection of the assessee with reference to this company is with regard to the financials of the company, on the ground of unreliability of data being acceptable. Vishal Information Technological Services Ltd., Asit C Mehta Financial Services Ltd. (earlier known as Nucleus Netsoft & GIS (India) Ltd.) - Admittedly, as pointed out by the ld. D.R., there is no disputing the fact that the assessee had never objected to the inclusion of these companies in the set of comparables in earlier proceedings both before the TPO and the CIT(A). It is also seen that even in the grounds of appeal raised before us, the assessee has not raised any grounds or any additional grounds of appeal challenging the inclusion of these two companies in the list of comparables. In this factual matrix, since no cause of grievance arises to the assessee from the impugned order, on the inclusion of these companies as comparables, this claim of the assessee is not maintainable as there is no adverse finding in the impugned orders calling for or requiring us to adjudicate thereon. We, therefore, finding that the contentions raised by the learned Authorised Representative of the assessee in respect of these companies are not maintainable, reject the same. Consequently, the inclusion of these two companies i.e. Vishal Information Technological Services Ltd. and Asit C Mehta Financial Services Ltd. in the final list of comparables is upheld. Computation of Operating Cost of the assessee - assessee s claim for treating its claim for additional depreciation to be treated as an item of extra-ordinary expenditure and therefore should be reduced from operating cost - Held that - If, as contended by the assessee, this expenditure pertains to earlier assessment year s also, then in the fitness of things this issue ought to be re-examined afresh by the TPO to ascertain whether and how the assessee s claim has been applied to the comparable companies also so that there will be parity when the said expenditure is proportionately applied to the operating cost of the assessee and comparable companies. In this view of the matter, we set aside the issue of the assessee s claim of additional depreciation being an item of extra-ordinary expenditure to the file of the TPO for fresh examination and adjudication thereon in the light of our observations above, after affording the assessee adequate opportunity of being heard and to file details/submissions required. Contingent expenses in the nature of provision for telecom expenses - Held that - As it is seen that the assessee has itself disallowed these expenses in the computation of taxable income on the ground that it is contingent liability. We find that the assessee s reliance on the decision in the case of Haworth India Pvt. Ltd. (2013 (8) TMI 421 - ITAT DELHI), wherein it has been held that expenses disallowed should be excluded from operating cost, is well placed and therefore agree with the assessee s contention that expenses disallowed in computation of taxable income should be excluded from operating cost.- Decided in favour of assessee. Foreign exchange income/loss to be non-operating income/loss and excluded the same while computing the margins in the case of comparables - it is submitted that on grounds of parity the same should be excluded from operational income/loss while computing the margins of the assessee also - Held that - On consideration we are unable to accept the assessee s claim. We find that there are several decisions of this and other Tribunals which hold that foreign exchange gain/losses related to the assessee s business activities are to be treated as operating income/expense for computing the operating margins of both the assessee and the comparable companies and therefore, we uphold the TPO s action in including the same while computing the assessee s margins - we direct the TPO to recompute the margins of both the assessee and the comparable companies by treating the foreign exchange gain/loss as operating income and to compute the margins of both the assessee and the comparable companies accordingly - Decided against assessee. Deduction under Section 10A - assessee contended that the Assessing Officer erred in not appreciating that income which is eligible for exemption under Section 10A of the Act does not form part of total income at all and therefore does not enter the normal computation mechanism so as to enable a reduction of business losses and unabsorbed depreciation of other STP units - Held that - The Hon ble High Court of Karnataka in the case of CIT v. Yokogawa India Ltd. 2011 (8) TMI 845 - Karnataka High Court has held that deduction under Section 10A of the Act is to be given without setting off the unabsorbed brought forward losses. In the case on hand, the Assessing Officer has computed the eligible deduction under Section 10A of the Act after setting off brought forward unabsorbed business losses. Respectfully following the decision of the Hon ble High Court of Karnataka in the case of Yokogawa India Ltd. (supra), we direct the Assessing Officer to allow the deduction under Section 10A of the Act without setting off the brought forward unabsorbed business loses.- Decided in favour of assessee.

Summary

Issues Involved:
1. Procedural Grounds
2. Transfer Pricing Issues
3. Computation of Operating Cost
4. Deduction under Section 10A of the Income Tax Act

Detailed Analysis:

1. Procedural Grounds:
The appellant raised several procedural grounds, including the reference to the Transfer Pricing Officer (TPO) without demonstrating necessity, the constitution of the Dispute Resolution Panel (DRP), and the manner in which the order was passed. These grounds were dismissed as infructuous since they were not pressed by the appellant during the hearing.

2. Transfer Pricing Issues:
- Selection of Comparables: The appellant contested the inclusion of certain companies as comparables by the TPO. The Tribunal examined the comparability of individual companies based on past judicial pronouncements and found that:
- Maple eSolutions Ltd.: Excluded due to unreliable financial data, following precedents set by ITAT Delhi and Hyderabad Benches.
- Vishal Information Technological Services Ltd., Asit C Mehta Financial Services Ltd., and Goldstone Infratech Ltd.: Excluded as they were functionally different and failed certain filters like employee cost and foreign exchange earnings.
- Datamatics Financial Services Ltd. and Asit C Mehta Financial Services Ltd.: Their inclusion was upheld as the appellant had not objected to these companies in earlier proceedings or raised additional grounds before the Tribunal.

3. Computation of Operating Cost:
- Additional Depreciation: The appellant argued that additional depreciation due to a change in the estimated useful life of assets should be considered an extra-ordinary item and excluded from the operating cost. The Tribunal directed the TPO to re-examine this issue to ensure parity with comparable companies.
- Provision for Telecom Expenses: The Tribunal agreed with the appellant that these expenses, being contingent and disallowed in the computation of taxable income, should be excluded from the operating cost.
- Foreign Exchange Gain/Loss: The Tribunal upheld the TPO's inclusion of foreign exchange gain/loss as operating income/expense, following several Tribunal decisions that treated such gains/losses as operational.

4. Deduction under Section 10A of the Income Tax Act:
- Set-Off of Brought Forward Losses: The appellant contended that the deduction under Section 10A should be computed without setting off brought forward business losses and unabsorbed depreciation. The Tribunal, following the decision of the Hon'ble Karnataka High Court in the case of CIT v. Yokogawa India Ltd., directed the Assessing Officer to allow the deduction under Section 10A without setting off the brought forward unabsorbed business losses.

Conclusion:
The appeal was partly allowed. The Tribunal directed the exclusion of certain companies from the list of comparables, re-examination of the inclusion of additional depreciation in operating costs, exclusion of contingent telecom expenses from operating costs, and allowed the deduction under Section 10A without setting off brought forward losses.