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TMI Blog2018 (11) TMI 1743X X X X Extracts X X X X X X X X Extracts X X X X ..... ding services to its associated enterprises in all the divisions, then the expenditure incurred on foreign travel expenses on the employees of assessee concerned, are to be allowed as business expenditure. Computation of deduction under section 10B - Assessing Officer had set off all the losses of other units with profits of manufacturing unit prior to computing the deduction under section 10B of the Act - HELD THAT:- In M/S YOKOGAWA INDIA LTD. [ 2016 (12) TMI 881 - SUPREME COURT] has laid down that losses or unabsorbed depreciation is to be set off against profits of eligible unit after the deduction under section 10A of the Act has been allowed. Similar proposition has been laid down in M/S. VISHAY COMPONENTS INDIA PVT. LTD. VERSUS THE ADDL. COMMISSIONER OF INCOME TAX, RANGE 7, PUNE AND VICA-VERSA [ 2015 (11) TMI 118 - ITAT PUNE] Since the issue is settled by the Hon'ble Supreme Court, then the deduction claimed under section 10B of the Act is to be allowed against profits of manufacturing unit before adjusting losses of other units or brought forward losses. We hold so. However, the Assessing Officer shall compute working and for this limited purpose, we remi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... companies during the course of assessment proceedings in violation of the principles of natural justice; 5. rejecting comparable companies by erroneously applying a comparability criteria based on strict comparison of products / services and in doing so ignoring the basic tenets of applicability of Transactional Net Margin Method as the most appropriate method which is not based on the concept of strict comparability of products and services and relies on only broad comparability of functions assets and risks; 6. applying arbitrary filters inconsistently to arrive at a fresh set of companies as comparables to the Appellant: 7. accepting companies as comparables to the Appellant without considering the turnover and size of the Appellant and comparables and also disregarding the turnover filter applied by the Appellant 8. applying the filter of rejecting companies with export turnover less than 75% of sales in the search process without providing cogent reasons for using the same and even though the data in respect of export turnover was not available of all comparable companies; 9. including the reimbursement of expenses to calculate the threshold of 25% of rela ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 's business; accordingly, has erred in not allowing the same under section 37(1) of the Act. 20. Set-off of losses of other units prior to deduction under section 10B of the Act The Ld. AO erred in setting-off the losses of other units with the profits of the manufacturing unit prior to computing deduction under section 10B of the Act. 21. Set-off of losses prior to deduction under section 10B of the Act The Ld. AO erred in not appreciating that deduction under section 10B of the Act should be computed before setting-off brought forward losses. 22. Others a) Consequent to the above, the Ld. AO has erred in computing the amount of carry forward of losses for future set-off b) On the facts and in the circumstances of the case, the Ld. AO erred in initiating penalty proceedings under Section 271(1)(c) of the Act on the premise that the Appellant has concealed / furnished inaccurate particulars of income, without appreciating the fact that adjustment made is not in accordance with the law. c) The order passed by the Ld. DRP is incomplete with respect to the grounds of objection raised by the Appellant before it and the additional evidence submitted befo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of rendering of software development services. The assessee had adopted TNNM method as the most appropriate method and had taken the Profit Level Indicator (PLI) in TNNM analysis at net profit / total cost. The assessee was remunerated at cost plus markup of 12% for rendering software development services. The PLI of assessee was 13.49%. The assessee has selected certain concerns as functionally comparable whose mean margin was 11.13% and as per the TP documentation, the international transaction was treated to be at arm's length price. The TPO however, noted that PLI of comparables was arrived at by considering weighted average margins of three years data. The assessee was asked to furnish data for the contemporaneous period i.e. year ending 31.03.2008. The assessee furnished the data with rider that in case the data of the year ending 31.03.2008 was to be considered, then certain companies had ceased to be comparables. The assessee furnished list of 15 comparables, which were selected to be engaged in software development services. The TPO however, after analyzing available data, prepared a list of 11 companies as comparable, which were objected to by the assessee on various ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... capital adjusted margin 1 Bodhtree Consulting Ltd. 19.14 21.96 2 E Infochips Ltd. 30.32 31.53 3 eZest Solutions Ltd. 28.58 30.84 4 Goldstone Technologies 27.06 22.53 5 Helios and Matheson Information Technology 36.05 35.15 6 KALS Information System 30.92 33.27 7 LGS Global Ltd. 26.33 26.87 8 FCS Software Solutions Ltd. 57.02 54.76 31.93 30.74 11. The mean margins of said comparables worked out to 30.74% after working capital adjustment and the Assessing Officer finally made an upward adjustment of ₹ 27,80,728/-. The assessee is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pra) relates to the assessment year 2006-07 whereas the present case of the assessee is for assessment year 2008-09 yet there is no material on record to suggest that the activities carried out by Kals Information Systems Limited in the current assessment year are different from those noted by the Tribunal in the case of Bindview India Pvt. Ltd. (supra) for assessment year 2006-07. 18. Considering the aforesaid discussion, in our view, the concern i.e. Kals Information Systems Limited is liable to be excluded from the list of comparables for the purposes of benchmarking international transactions of provision of software development services. We hold so. Thus, on this aspect assessee succeeds. 12. The said principle has been applied by Pune Bench of Tribunal in Approva Systems Pvt. Ltd. Vs. DCIT in ITA No.1921/PUN/2014, relating to assessment year 2010-11, order dated 25.01.2017. 13. We find that the issue raised is squarely covered by earlier decisions of Pune Bench of Tribunal in Symphony Services Pune Pvt. Ltd. Vs. ITO (supra), which relates to assessment year 2008-09 itself and it has been held that the concern KALS Information Systems Ltd. is to be excluded from th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ernational transactions undertaken by assessee. 16. The next concern under dispute is E-Zest Solutions Ltd., which is engaged in e-business consultancy services including portal development services. The Tribunal in Symphony Services Pune Pvt. Ltd. Vs. ITO (supra) while deciding the issue for assessment year 2008-09 had held that since the said concern was engaged in e-business consultancy services consisting of web strategy services, ITES services and technology consultancy services including portal development services, which were the kind of services understood to be KPO services and hence, was excluded while benchmarking a concern providing software development services. The said principle has been applied by Pune Bench of Tribunal in Barclays Technology Centre India Pvt. Ltd. Vs. ACIT (supra) and following the same parity of reasoning, we hold that the concern which is engaged in providing KPO services is not to be included as functionally comparable to a concern providing software development services. Accordingly, we direct that the same to be excluded from final set of comparables. 17. The last concern which the assessee wants to be excluded is E-Infochips Ltd., whic ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ity, functionally comparable, is to be included in the final list of comparables. The assessee before us has also filed the margins of comparable companies after exclusion / inclusion of the companies i.e. out of eight concerned picked up by the TPO, five concerns have been directed by us to be excluded and one concern has been directed to be included and the arithmetic mean margins of balance entities works out to 12.96% as against assessee s margin of 13.49%. Accordingly, we hold that no adjustment on account of arm's length price needs to be made in the hands of assessee. The upward adjustment made by Assessing Officer / TPO is thus, deleted. The ground of appeal No.I is thus, allowed in favour of assessee. 22. Now, coming to corporate issues raised by assessee, wherein the ground of appeal No.19 is against disallowance of foreign travel expenses. The learned Authorized Representative for the assessee pointed out that this issue is covered by the order of Tribunal in assessee s own case relating to assessment year 2007-08. 23. Brief facts relating to the issue are that the assessee had three units i.e. Manufacturing Unit, Trading Unit and STP Unit. The assessee had de ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... en the expenditure incurred on foreign travel expenses on the employees of assessee concerned, are to be allowed as business expenditure. Hence, we hold so. The ground of appeal No.19 raised by the assessee is thus, allowed. 25. Now, coming to the issue raised vide grounds of appeal No.20 and 21, wherein the assessee has raised the issue of computation of deduction under section 10B of the Act, wherein the Assessing Officer had set off all the losses of other units with profits of manufacturing unit prior to computing the deduction under section 10B of the Act. 26. The learned Authorized Representative for the assessee pointed out that the assessee had earned profit in manufacturing unit of ₹ 2.59 crores, against which it had claimed deduction under section 10B of the Act. However, in the trading unit and in software services division, there were losses and also the assessee had brought forward losses of previous year, which had to be set off during the year. The assessee had computed deduction under section 10B of the Act against profits of manufacturing division before setting off of any losses. The Assessing Officer however, was of the view that deduction under sect ..... 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