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TMI Blog2017 (3) TMI 1028X X X X Extracts X X X X X X X X Extracts X X X X ..... nother. 1. That the order of the learned Income Tax Officer, Ward- (1), Bangalore ( Assessing Officer or AO ) to the extent prejudicial to the Appellant, is bad in law and liable to be quashed. Transfer Pricing 2. That the learned AO and the learned Dispute Resolution Panel ('Panel') erred in not following the ruling of the Hon'ble Income Tax Appellate Tribunal ( ITAT ) in the Appellant's own case (ITA No.918/Bang/2011) for Assessment Year ( AY ) 2007- 08. 3. That the learned AO and the learned Panel erred in upholding the learned Transfer Pricing Officer's ( TPO ) approach of rejecting the Transfer Pricing ( TP ) documentation maintained by the Appellant; 4. That the learned AO and the learned Panel erred both in facts and law in confirming the action of the learned TPO of making an adjustment to the transfer price of the Appellant in respect of contract research and development services provided to its associated enterprises by ₹ 37,922,569, holding that the international transactions do not satisfy the arm's length principle envisaged under the Income Tax Act, 1961 (the 'Act') and in doing so grossly erred in: 4.1 Upholdi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... isions of section 10B the Act vide the Finance Act, 2000. 8.2 The learned Panel has erred in relying on Circular 7 of 2013 (dated July 16, 2013) without taking into account the fact that circulars are not binding upon the assessee. 9. The learned AO erred in charging interest under section 234C of the Act of ₹ 45,384 as against ₹ 41,321 in the return of income filed by the Appellant. That the Appellant craves leave to add to and/or to alter, amend, rescind, modify the grounds herein above or produce further documents before or at the time of hearing of this Appeal, 2. With regard to Transfer Pricing issues, the Id. counsel for the assessee has filed a chart with the submission that the TPO has chosen 10 comparables out of which assessee has objection for the inclusion of 4 comparables. The total comparables taken by the TPO for the purpose of computing the ALP are as under:- 1. Aurigene Discovery Technologies Ltd. 2. Celestial Biolabs Ltd. 3. Clinigene International Ltd. 4. IDC India Ltd. 5. Jubilant Chemys 6. Oil field Instrumentations (India) Ltd. 7. Tata Elxsi Ltd. 8. TCG Lifesciences Ltd. 9. Technicom Chemie (India) Ltd. 10 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or the assessee has contended that this company is single segment company engaged in market research, consulting and advisory services since 1986. The company offers consultancy services in market intelligence, market sizing, go-to-market service covering Information Technology, telecommunication, energy and utilities etc. Thus not comparable to the functional profile of the assessee. In support of his contention, the Id, counsel has contended that profile of this comparable was examined by the Tribunal in assessee's own case for the AY 2007-08 and has categorically held that this company has to be excluded from the list of comparables for computing the ALP. Copy of the order is placed on record. Similarly, profile of this company was also examined in the case of Tevapharm (P.) Ltd. (supra) of which copy is placed on record. 8. With respect to Oil field Instrumentations Ltd., the Id, counsel for the assessee has contended that this company belongs to oil field and is engaged in providing mud logging services. The company receives various mud logging service orders from domestic and international markets, public/private and multinational companies etc. Thus not functionally c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... m Pvt. Ltd. are identical, i.e., both the companies carried out analytical research and stability testing services to its AEs. In the case of Tevapharm Pvt. Ltd., the TPO had selected Engineering India Ltd., IDC India Ltd., Oil Field Instrumentation, Celestial Labs and Mindtree Ltd., as comparable. The Tribunal examined the comparability of these companies to a company engaged in contract research development and came to the following conclusion :- 1 ........... 3. IDC (India) Limited (IDC): IDC primarily undertakes search and survey services for products. IDC research documents cover areas like Enterprise Management Applications, Broadband, Internet and eBusiness, Mobile Usage, IT Service Exports and Continuous Market Review of Computing and Peripheral Products. Such research reports provide market forecasts, competitive analyses, vendor profiles, and information on customer requirements and buying patterns. Further, the areas of research include Communication Services Broadband Business, Network Services, IP based services, residential small business and wireless communications. The products and services of IDC consist of the following: - Customised Services: IDC deli ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ite drilling decisions. It is rugged and field proven equipment, used in Exploration, Production and Refinery Sectors. Oil field provides Gas Detection like Hydrocarbon Detector, Carbon Dioxide Detector, Hydrogen Sulphide Detector, Higher Hydrocarbons Detector, Nitrogen Detector, Sulphur Dioxide Detector, Oxygen Detector, Carbon Monoxide Detector, Hydrogen Detector, etc. The extracts of the functional profile of Oil Field from its website as given above and the information in the annual report of Oil Field on the nature of assets employed such as outer shell of mud logging units, sensors and other instruments clearly demonstrate the disparity between Oil Field's and Assessee's operations, As discussed earlier the functional profile of Assessee is in the nature of providing - Contract Research and testing services. Oil field does not carry out any of these stipulated activities and accordingly Oil field ought not to be considered a comparable. (Emphasis Supplied) 5. Celestial Labs Limited (Celestial Labs): According to assessee Celestial Labs as a comparable has been cheery picked by the TPO. Celestial Labs is a diversified company operating in varied fields such as re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... filing the patent. The patent details have been discussed with Patent officials and the response is very favorable. The cloning and purification under wet lab procedures are under progress with our collaborative Institute, Department of Microbiology, Osmania University, Hyderabad, In the industrial biotechnology area, the company has signed the Technology transfer agreement with IMTECH CHANDIGARH (a very reputed CSIR organization) to manufacture and market initially two Enzymes, Alpha Amylase and Alkaline Protease in India and overseas. The company is planning to set up a biotechnology facility to manufacture industrial enzymes. This facility would also include the research laboratories for carrying out further R D activities to develop new candidates' drug molecules and license them to Interested Pharma and Bio Companies across the GLOBE. The proposed Facility will be set up in Genome Valley at Hyderabad in Andhra Pradesh. According to the learned D.R. celestial labs is also in the field of research in pharmaceutical products and should be considered as comparable. As rightly submitted by the learned counsel for the Assessee, the discovery is in relation to a so ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ding the comparables cannot be termed to be water-tight compartment that if the criterion increases/goes down by 0.1%, the comparable has to be excluded. The TPO has to adopt some criteria to exclude the comparable from the list of comparables, but it does not mean that it is water-tight compartment and if the criteria is slightly increased or decreased by 0.1 to 0.9%, the comparables are to be excluded. Undisputedly the TPO has adopted the benchmark of 75% of the total revenue as income from R D services and in the case of TCG Lifesciences Ltd., the income from R D services was 74.5% and if the round figure has to be taken, it may also come to 75%. Therefore, we are of the view that on technical ground, the comparables cannot be excluded. Had it been a difference of 1% or 2%, one can understand that comparable has to be excluded on the basis of benchmark adopted by the TPO, but where the difference is 0.1% to 0.9%, the same should not be considered to be substantial difference for the application of benchmark. We therefore find no force in the contention of the assessee that this comparable has to be excluded on the basis of benchmark adopted by the revenue for operating revenue f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... om the total income. In the scheme of the Act, while various deductions are allowed in computing the total income, once the total income is computed no further adjustment to the total income is envisaged. The scheme of the Act provides for deduction in computing the total income but no mechanism for any deduction from the total income already computed is provided under the Act. Once the total income is computed, the next step is determination of tax by applying the applicable rates on the total income. The computation of total income begins only with Chapter-IV and as Section 10A is covered in Chapter-III, the phrase total income used in Section 10A cannot be understood in the same sense as in Section 2(45). The phrase total income used in Section 10A(1) is to be understood as the total income of the STP unit. This is clear from the first proviso to Section 10A(l) which makes a reference to the total income of the undertaking and not to the total income of the assessee. The definition of any term given in Section 2 will apply only when the contest does not otherwise require. The placement, language and setting of Section 10A cannot mean the total income computed in accordance w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... itself and not after computing the gross total income. The total income used in the provisions of s. 10A in this context means the global income of the assessee and not the total income as defined in s. 2(45). Hence, the income eligible for exemption under s. 10A would not enter into computation as the same has to be deducted at source level. The amendment by the Finance Act, 2003 by inserting the words the year ending upto the first day of April, 2001 , for that in cls. (1) and (2) of sub-s. (6) restricting the disallowance only upto the first day of April, 2001 and granting the benefit, of those provisions even in respect of units to which ss. 10A and 10B indicates the legislative intention of providing the benefit of carry forward of depreciation and business loss relating to any year of the tax holiday period to be set off against income of any year post tax holiday. This is supported by Circular No. 7 of 2003. The expression deduction of such profits and gains as derived by an undertaking shall be allowed from the total income of the assessee has to be understood in the context with which the said provision is inserted in Chapter III. Sub-s. (4) of S. 10A clarifies t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of any profits and gains of business against such profits and gains of the undertaking would not arise. Similarly, as per s. 72(2), unabsorbed business loss is to be first set off and thereafter unabsorbed depreciation treated as current year's depreciation under s. 32(2) is to be set off. As deduction under s. 10A has to be excluded from the total income of the assessee, the question of unabsorbed business loss being set off against such profits and gains of the 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 CIT(A) as well as the Tribunal were fully justified in setting aside the said assessment order and granting the benefit of s. 10A to the assessee. - Asstt. CIT v. Yokogawa India Ltd. 2006 (8) TMI 448 - ITAT BANGALORE and Intellinet Technologies India (P) Ltd. v. ITO 2010 (3) TMI 944 - ITAT BANGALORE : (2010) 48 DTR (Bang) (Trib) 129 affirmed. 18. Since the Hon'ble jurisdictional High Court has taken a view with respect to section 10A of the Act, similar view has to be followed for deduction u/s 10B also. Therefore, following the same, we hold that the ..... X X X X Extracts X X X X X X X X Extracts X X X X
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