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TMI Blog2015 (11) TMI 1793X X X X Extracts X X X X X X X X Extracts X X X X ..... es on the basis of abnormal profit without defining what constitutes abnormal profit filter and how the same is determined and erred in excluding the comparable company M/s Vishal Information Technologies Ltd. 4. The ld.CIT(A) erred in rejecting the diminishing revenue filter used by the TPO to exclude companies that do not reflect the normal indust6ry trend. 5. The ld.CT(A) has erred in eliminating M/s Nucleus Netsoft & GIS Ltd. as comparable without recording any finding as to how he company does not pass through the filters applied by the TPO. 6. The ld. CIT(A) has erred in eliminating M/s Microland Ltd. as a comparable without recording any finding as to how the company does not pass through the filters applied y the TPO and upheld by the CIT(A). 7. The ld. CIT(A) has erred in directing for under utilization of capacity adjustment ignoring the facts that the adjustment is abstract in nature and exact under utilization of the fixed costs cannot be quantified objectivity as it is not possible to ascertain the same. 8. The ld. CIT(A) was not justified in directing the AO to compute the deduction u/s 10A without setting of losses of one unit against the profits of an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... b. Companies not having data for FY: 2003-04 or 2004-05 were ignored. c. Companies which had not incurred expenditure on marketing and sales were calculated. d. Financial data relating to only companies engaged in call centre, customer care or ITES/BPO were considered. Other service companies were excluded. The average gross profit margin of the comparables worked out at16.92% on the cost. The learned TPO vide his order dated 26-09-2014 passed u/s 92CA of the IT Act rejected the TP study of the assessee company and proceeded to select the following comparables whose average margin in cost worked out to 24.68% by adopting TNM method as the most appropriate method. Image No. 1 5. After allowing the working capital adjustment of 3.10% the arithmetic mean was of PLI worked out to 23.08% and finally the ALP was determined as follows; 5.1 The transactions relating to rendering of software development services, [payment of salary to directors and borrowing of interest free loans were considered to be at arm's length by the TPO (a,c and d above) only addition made is for ITES segment. 12.6. Computation of Arms Length Price The arithmetic mean of the profit level indicators is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Saffron Global Ltd 24.88 3 Cosmic Global Ltd 17.02 4 Transworks Information Services Ltd 02.81 5 Ace Soft Exports Ltd. 14.50 6 Maple E-Solutions Ltd 28.75 7 Microland Ltd 01.72 Arithmetic mean 16.55 The CIT(A) has further allowed the adjustment on account of under utilization capacity. The CIT(A) further directed that the benefit u/s 10A should be worked out before setting of the brought forward losses following the decision of the jurisdictional High Court in the case of ACIT Vs M/s Yokogawa India Ltd. (2012) 21 Taxmann.com 154(Kar.) 13. Being aggrieved by this order, the revenue is in appeal before us in the present appeal. 14. The learned Senior DR vehemently argued before us that the CIT(A) ought not to have deleted the comparable of M/s Vishal Information Tech.Ltd (Supra) applying the filter of abnormal profit and M/s Wipro BPO Solutions Ltd. applying the turnover filter. He further argued that the comparable company M/s Nucleus Netsoft & GIS Ltd. selected by the assessee and passed through all the filter passé by the TPO and therefore, the company should be included in the list of comparables. 15. The learned SR DR fur ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ch.Ltd. formerly known as cosmic Global Company Ltd. that it has to be rejected as comparable on the ground of functional dissimilarity. He relied on the decision of ACIT Vs Maersk Global Service Centre (Ind.) Pvt.Ltd (2011) 16 Taxmann..com 47 (Mum.) for AY: 2005-06. He further submitted that M/s Wipro BPO Solutions Ltd. should be rejected as a comparable on the basis of high turnover filter. In this regard he relied on the following decisions; M/s Wipro BPO Solutions Ltd. has to be rejected as a comparable on the basis of high turnover in view of Hon'ble ITAT in the following decisions; i. ACIT Vs Maersk Global Service Centre (Ind.)Pvt.Ltd(2011) 16 Taxmann.com 47 (Mum) for AY: 2005-06 ii. Market Tools Research Pvt.Ltd. TS-30-ITAT-2014(HYd.)-TP-AY: 2005-06. iii.Deloite Consulting India Pvt.Ltd TS-401-iTAT-2011(Hyd.)-TP-AY: 2004-05 iv. 24/7 Customer.com Pvt.Ltd. vs DCIT TS-708-ITAT-2012(Bang)-TP-AY: 2004-05. He further submitted that M/s Nucleus Netsoft Ltd. has to be rejected as a comparable in view of the following decisions; Nucleus Netsoft & GIS Ltd. as to be rejected as a comparable in view of Hon'ble ITAT in the following decisions; i. ITO vs CRM Services Indi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the expression BPO and KPO are plainly, understood in the sense that whereas, BPO does not necessarily involve advanced skills and knowledge, KPO, on the other hand, would involve employment of advanced skills and knowledge for providing services. Thus, the expression KPO in common parlance is used to indicate an ITEs provider providing a completely different nature of service than any other BPO service provider. A KPO service provider would also be functionally different from other BPO service providers, in asmuchas the responsibilities undertaken, the activities performed, the quality of resources employed would be materially different. In the circumstances, we are unable to agree that broadly ITEs sector can be used for selecting comparables without making a conscious selection as to the quality and nature of the content of services. Rule 10B(2)(a) of the IT Rules, 1962 mandates that the comparability of controlled and uncontrolled transactions be judged with reference to service product characteristics. This factor cannot be undermined by using a broad classification of ITEs which takes within its fold various types of services with completely different content and value. Thus, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... CIT TS-221-ITAT-2013 (Pune)-TP 9. Honeywell Technology Solutions Pvt.Ltd Vs DCITIT(TP)A No.1344/Bang/2011 10. M/s Toyota Kirloskar Motors Pvt. Ltd Vs ACIT (2012) 28 Taxmann.com 293 (bang.). Therefore, we do not find any reason to interfere with the reasoning of the learned CIT(A). Hence, these grounds of appeal filed by the revenue are dismissed. 21. Ground no.5 challenges the directions of the learned CIT(A) to exclude Ms/s Nucleus Netsoft & GIS Ind. Ltd from the list of comparables selected by the TPO. The CIT(A) deleted this company on the ground that the TPO had not clarified whether this company satisfies the filter of related party transactions. We find that from its annual account it had outsourced a considerable portion of its business, where as assessee company, it carried out the entire operation by itself. It cannot be considered as a comparable on the same reasoning the Co-ordinate Bench of Hyderabad in the case of M/s IVY Comptech Pvt. Ltd, Hyderabad in ITA No.1558/Hyd/2010TS-17 ITAT-014(Hyd.)-TP for AY: 2005-06 deleted this company from the list of comparables by holding as under; " We have heard the parties. The sole contention of the assessee for excludin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lled transaction shall be compara.ble to an international transaction if-- (i) none of the differences, if any, between the transactions being compared, or between the enterprises entering into such transactions are likely to materially affect the price or cost charged or paid in, or the profit arising from, such transactions in the open market; or (ii) Reasonably accurate adjustments can be made to eliminate the material effects of such differences." Reliance in this regard is also placed on the recent decision of Chennai Bench of the Tribunal in the case of Mando India Steering Systems Pvt. Ltd. vs. ACIT (ITA No. 2092/Mds/2012), wherein, the Hon'ble Bench has remitted the issue back to the file of the assessing officer with a direction to consider the claim of the assessee with respect to idle capacity adjustment during the relevant period while determining the ALP cost. The relevant extract of the decision reads as under: "We are of the considered view that under-utilization of production capacity in the initial years is a vital factor which has been ignored by the authorities below while determining the ALP cost. The TPO should have made allowance for the higher overhead ex ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... utilization considering the fact that the year under consideration was the first full year of operation of the appellant. Relevant extract of the decision reads as under: "10. -We have heard the rival contentions and perused the material available on record. The suitable adjustment for non-utilisation of capacity is to be taken in to account after considering the ALP while working out TP adjustment, this proposition has been held by coordinate Bench in the case of the Amdocs Business Services (P.) Ltd. (supra) and various other cases as cited here in above . 11. In the given facts and circumstances it was required on the part of the lower authorities to have given due effect to under capacity utilization of the assessee which has not been done TPO for adjustment for ALP determination. In view of the facts and circumstances we are inclined to set aside the matter and restore the issue of under capacity utilization back to the file of the Assessing Officer ITPO to decide the same afresh after giving assessee adequate opportunity of being heard and to file the necessary evidence on this behalf. Needless to say that a proper and speaking order will be passed deciding the issue in accor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... consideration were at arm's length requiring no adjustment/addition on this issue." 16. From the above, it is evident that the appellant is entitled to economic adjustments in the circumstances of under capacity utilization of the company. Of course, such adjustments must be restricted to fixed cost/overheads only. In the 14 instant case, the AO/TPO did not have the occasion to go into the period or the extent of the labour unrest, break-up of the claimed adjustments amounting Rs. 7.32 crores '(rounded off), fixed cost versus the variable cost etc as they' summarily rejected the external comparables in view of their preference to the operating profits of the domestic segment of the carpets. NTherefore and consequently, this key issue also has to be set aside to the files of the' TPO/AO for fresh examination of the issue." Prima facie we see the need for such economic adjustments to the total cost of the carpet of the export segment. We refuse to comment on the facts relating to the figures as none of the authorities has gone into the details of such economic adjustments and they summarily rejected the claims. As such, the requisite adjustments are borne out of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uarter January to March, 2006 fell to i2% as' against the normal capacity utilization of 87% to 94% during the financial year ending December, 31, 2005. Further, the fact that the appellant had to shift its office premises at a very short notice, sufficiently substantiates the low capacity utilization of the appellant during the last quarter of financial year 2005-06. We find out ourselves in agreement with the appellant's submission in this regard." Hon'ble Delhi High Court, in the appeal preferred by the revenue in the case of Transwitch India (supra), vide order dated 17.07.2013, upheld the adjustment claimed by the assessee on account of capacity utilization. Reliance in this regard is also placed on the recent decision Delhi Bench of the Tribunal in the case of DCIT vs. Panasonic AVC Networks India Co. Ltd. (ITA No. 4620/0eI/2011), wherein the Hon'ble Bench has held that capacity underutilization is an important factor affecting net profit margin as lower capacity utilization results in higher per unit costs which in turn results in lower profits. The relevant finding of the decision reads as under: "5. Having heard the rival contentions and having perused the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... all, the question of setting off of loss of the assessee of any profits and gains of business against such profits and gains of the undertaking would not arise. Similarly, as per section 72(2) unabsorbed business loss is to be fist set of and thereafter unabsorbed depreciation treated as current year's depreciation under section 32(2) is to be set off. As deduction under section 10A has to be excluded from the total income of the assessee the question of unabsorbed business loss being set off against such profit 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 Appellate granting the benefit of section 10A to the assessee. Hence, the main substantial question of law is answered in favour of the assesses and against the revenue". The CIT(A) only followed the decision of the Hon'ble Karnataka High Court. We do not find any reason to interfere with the order of the CIT(A) on this ground. Hence, this ground of appeal of the revenue is dismissed. 25. Ground no.11 & 12 are general in nature does not require any adjudication. C.O.No.168(BNG)/2015 (in ITA No. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hallenges inclusion of M/s Maple-E-Solutions Ltd. The learned counsel for the assessee contended that the said company cannot be included as a comparable from the list of comparables on the ground of tainted management. In this regard, he relied on the following decisions; a. ITO Vs CRM Services India Pvt. Ltd TS-307-ITAT-2011(Del.) AY: 2006-07 b. Stream International Services Pvt.Ltd. Vs ADIT (ITA No.8997/Mum/2010) c. Capital IQ Information Systems (Ind.) Pvt.Ltd. Hyderabad (ITA No.1961/Hyd/2011) d. Market Tools Research Pvt.Ltd. Vs DCIT TS-30-ITAT-2014(Hyd.) -TP for AY: 2005-06 e. IVY Comptech Pvt.Ltd. Vs ACIT TS-17-ITAT-2014(Hyd.)-TP for AY: 2005-06. 31. We find merit in the submission of the learned AR and direct the AO/TPO to delete the above from the list of comparables. 32. Ground no.5 challenges the direction of the ld.CIT(A) in not considering M/s Hero Management Service Ltd. as a comparable. The ld. CIT(A) excluded this company from the list of comparable on the ground of negative operating margin of 10.03%. We find that the reasoning of the ld. CIT(A) is not sound. Now it is settled proposition of law that a company incurring normal losses may be include ..... X X X X Extracts X X X X X X X X Extracts X X X X
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