2015 (9) TMI 958 - AT - Income Tax

Adjustment of brought forward losses before allowing deduction u/s 10A - Held that - This Tribunal is of the considered opinion that in the absence of adjustment of brought forward losses while computing deduction u/s 10A in the draft assessment order forwarded to the assessee and in the direction of the DRP, the Assessing Officer cannot make such adjustment in the final assessment order which was passed consequent to the direction of the DRP. Under sec. 144C(13) of the Act, the Assessing Officer has to pass an order in conformity with the direction of the DRP without giving any further opportunity to the assessee. In case there was no direction with regard to brought forward losses before deduction u/s 10A, the Assessing Officer cannot go beyond the direction of the DRP and make adjustment of brought forward losses before allowing deduction u/s 10A of the Act. This Tribunal is of the considered opinion that the Assessing Officer has exceeded his jurisdiction in passing the final assessment order in conformity with the direction of the DRP by making adjustment of brought forward losses before allowing deduction u/s 10A of the Act. Therefore, the adjustment made by the Assessing Officer with regard to brought forward losses before allowing deduction u/s 10A of the Act, is set aside and the Assessing Officer is directed to grant deduction u/s 10A before making any adjustment of brought forward losses. Determination of ALP in respect of M/s Allsec Technologies Ltd. - DRP directed the TPO to include M/s Allsec Technologies Ltd. as comparable if the same was rejected for the reason of incurring losses consecutively for two years - Held that - It is mandatory for the DRP to consider the specific characteristics of service provided by the assessee and the comparable companies. It is also necessary to examine the functions performed by the assessee and the comparable companies. While comparing the functions performed by the assessee and other companies, it is necessary to take into account the assets employed or to be employed by the assessee and other comparable companies. At the very same time, the risk assumed by the assessee and other comparable companies also needs to be taken into consideration. Admittedly, M/s Accentia Technologies Ltd. had engaged itself in medical transcription, billing, collection and coding etc. The Revenue authorities found that M/s Accentia Technologies Ltd. also provides BPO service into Medical transcription. Since M/s Accentia Technologies Ltd. earned 90% of the total revenue from call centre and back office support service the DRP rejected the contention of the assessee. In the absence of any material to demonstrate that the profit of the comparable was abnormally high, the claim of the assessee was rejected. The DRP has also taken note of the fact that during financial year 2008-09 M/s Accentia Technologies Ltd. had earned more than 90% of its total revenue from call centre and back office support service. M/s Cosmic Global Ltd. - Held that - The DRP has not examined the contractual terms of transaction as provided in Rule 10B(2) of the Income-tax Rules. Unless and until the contractual terms of transaction was examined, we may not be able to say how the responsibility risk and benefits are divided between the respective parties to the transaction. No material is available on record with regard to contractual terms of transaction between the parties. Apart from that, the DRP has not examined the transaction between the parties with regard to geographical location, cost of the labour involved, the level of competition in the market etc. The DRP has not examined the asset employed by the assessee and other comparable cases. What was examined is only a working capital adjustment. The assets employed by the assessee need to be considered by the DRP in the light of the procedure provided in Rule 10B(2). Exclusion of two comparable companies namely, M/s Genesis International Co. Ltd and M/s Vishal Information Technologies Ltd (Coral Hub Ltd.) - Revenue appeal - Held that - DRP directed the Assessing Officer to exclude M/s Vishal Information Technologies Ltd and M/s Genesis International Co. Ltd. Since the DRP has not examined the responsibilities, risk assumed, benefits shared by the respective parties in terms of contractual agreement, this Tribunal is of the considered opinion that the matter needs to be reexamined in respect of these two companies which are directed to be excluded by the DRP. Accordingly, the orders of the lower authorities are set aside and the entire issue is remitted back to the file of the Assessing Officer. The Assessing Officer shall refer the matter once again to the DRP and the DRP shall examine the comparables in the light to Rule 10B(2) of the Income-tax Rules after giving a reasonable opportunity to the assessee. Both, the appeal of the assessee and the Revenue are allowed for statistical purposes.

Summary

Issues Involved:
1. Adjustment of brought forward losses before allowing deduction under Section 10A of the Income Tax Act.
2. Determination of Arm's Length Price (ALP) in respect of comparable companies for transfer pricing.

Detailed Analysis:

1. Adjustment of Brought Forward Losses Before Allowing Deduction Under Section 10A:

The primary contention was whether the Assessing Officer (AO) could adjust brought forward losses before allowing the deduction under Section 10A of the Income Tax Act. The assessee argued that such an adjustment was not made in the draft assessment order and was not directed by the Dispute Resolution Panel (DRP). According to Section 144C of the Act, the AO must forward a draft assessment order to the assessee if any variation in income or loss is proposed that is prejudicial to the assessee's interest. Since no such variation was made in the draft order or directed by the DRP, the AO exceeded his jurisdiction by making this adjustment in the final assessment order. Consequently, the Tribunal set aside the adjustment made by the AO and directed that the deduction under Section 10A be granted before making any adjustment of brought forward losses.

2. Determination of Arm's Length Price (ALP) in Respect of Comparable Companies for Transfer Pricing:

a. Inclusion of M/s Allsec Technologies Ltd.:

The DRP directed the Transfer Pricing Officer (TPO) to include M/s Allsec Technologies Ltd. as a comparable if it was excluded solely due to persistent losses in the financial years 2007-08 and 2008-09. However, this direction was contrary to Section 144C(8), which prohibits the DRP from issuing directions for further enquiry. The Tribunal noted that the DRP should have considered the specific characteristics of the services provided, functions performed, and risks assumed by the respective parties, as mandated by Rule 10B(2) of the Income-tax Rules.

b. Inclusion of M/s Accentia Technologies Ltd.:

The assessee contended that M/s Accentia Technologies Ltd. earned high profits and was engaged in medical transcription, billing, collection, and coding, which are IT-enabled services. The Tribunal noted that the DRP had rightly included M/s Accentia Technologies Ltd. as a comparable, as it earned more than 90% of its revenue from call centre and back-office support services, which are IT-enabled services as per the CBDT notification dated 26.9.2000.

c. Inclusion of M/s Cosmic Global Ltd.:

The assessee argued that M/s Cosmic Global Ltd. was primarily engaged in medical transcription, translation services, and accounts BPO, and should not be considered a comparable. However, the Tribunal found that translation services are also IT-enabled services as per the CBDT notification and upheld the DRP's decision to include M/s Cosmic Global Ltd. as a comparable.

d. Working Capital and Risk Adjustment:

The Tribunal noted that the DRP had examined the working capital adjustment but found that the assessee had not provided adequate computation. Regarding risk adjustment, the DRP rejected the assessee's claim of being a risk-free entity, noting that the assessee assumed more critical risks compared to its associated enterprises (AEs). The Tribunal emphasized the need to examine the risk assumed by the assessee and other comparable companies, as mandated by Rule 10B(2)(b).

e. Turnover Filter:

The Tribunal highlighted the importance of the turnover filter in determining comparability, noting that companies with a turnover of less than Rs. 1 crore are prone to market adversaries. It referred to the decision of the Hyderabad Bench in Hyundai Motors India vs. ITO, which emphasized the need to consider companies with a turnover within a specific range for transfer pricing studies.

f. Exclusion of M/s Genesis International Co. Ltd. and M/s Vishal Information Technologies Ltd.:

The Tribunal found that the DRP had not examined the responsibilities, risks assumed, and benefits shared by the respective parties in terms of contractual agreements. Therefore, it remitted the matter back to the AO for re-examination in light of Rule 10B(2) of the Income-tax Rules.

Conclusion:

The Tribunal set aside the adjustments made by the AO regarding brought forward losses before allowing deduction under Section 10A and directed the AO to grant the deduction before making any such adjustments. It also remitted the matter of determining the ALP concerning comparable companies back to the AO for re-examination in light of the principles laid down in Rule 10B(2) of the Income-tax Rules, ensuring that the comparability analysis considers all relevant factors, including turnover, risk, and functional similarities.