2014 (9) TMI 1010 - AT - Income Tax

Transfer pricing adjustment - Held that - Informed Technologies India Ltd. is required to be excluded from the final set of comparables because the said concern is abnormal profit making company. Maple e-Solutions Ltd the difference in functions sought to be canvassed by the assessee is emerging from record. Merely because the two kind of activities are referred to as ITES in a Notification by the CBDT does not imply that the same have to be understood as functionally identical/similar. Infact the dissimilarity in the functions performed by assessee and Maple eSolutions Ltd. is quite evident and the same has also not been disputed by the lower authorities. On this aspect we are of the opinion that the said concern is liable to be excluded from the list of comparables. Disallowance of fee paid to ROC Pune - CIT(A) disallowed the said expenditure on the ground that the payment was in the nature of penalty and thus the same was not an allowable expenditure in terms of the Explanation below section 37(1) - Held that - he additional fee/cost to regularize the default in compliance with the filing requirements are specified by the Department of Company Affairs Government of India and it does not envisage that the payments are penal in nature. In our considered opinion whether or not a particular payment is in nature of penalty is required to be examined having regard to the particular statutory scheme in terms of which it has been incurred. In the present case apart from making a bald assertion the income-tax authorities have not established as to how the impugned payment is in the shape of penalty or an amount akin to penalty for any breach or infraction of law or any public policy. In the absence of such a finding based on relevant material we are unable to accept the stand of the Revenue that Explanation to section 37(1) of the Act is attracted qua the impugned payment. Therefore we set-aside the order of the CIT(A) and direct the Assessing Officer to delete the impugned addition. - Decided in favour of assessee Addition to the stated value of international transaction of IT enabled services rendered by the assessee to its associated enterprise in order to determine its arm s length price - selection of comparables - Held that - We are inclined to uphold assessee s plea of excluding Coral Hubs Ltd. from the final set of comparables on account of the distinction in the business model. Genesys International Corporation Ltd. be excluded from the final set of comparables on the ground that for the financial year ended 31.03.2008 corresponding to the year under consideration before us the said concern has made abnormally high profit of 46.82% for the purposes of determination of arm s length price of international transaction of Provision of IT enabled services to the associated enterprises.

Summary

Issues Involved:
1. Transfer Pricing adjustments for IT enabled services.
2. Exclusion of certain companies from the list of comparables.
3. Disallowance of fees paid to the Registrar of Companies (ROC).

Issue-wise Detailed Analysis:

1. Transfer Pricing Adjustments for IT Enabled Services:
The appellant, a UK-based company, engaged in manufacturing and selling turbochargers, filed returns declaring taxable income for the assessment year 2007-08. The Assessing Officer referred the appellant's international transactions to the Transfer Pricing Officer (TPO) to determine the arm's length price. The TPO made an adjustment of Rs. 27,67,040/- to the stated value of IT enabled services rendered by the appellant to its associated enterprises. The CIT(A) provided partial relief by modifying the addition to Rs. 17,14,116/- after including Genesys International Corporation Ltd. as a comparable, rectifying errors in operating margin calculations of Informed Technology India Ltd., and allowing working capital adjustment. The appellant contested the sustained addition before the Tribunal.

2. Exclusion of Certain Companies from the List of Comparables:
- Informed Technologies India Ltd.: The appellant argued for its exclusion due to abnormal profit margins. The Tribunal referred to the Special Bench decision in Maersk Global Centres (India) Pvt. Ltd., stating that high-profit margins must be investigated to determine if they reflect normal business conditions. The Tribunal found that Informed Technologies India Ltd. had fluctuating margins over several years, indicating abnormal business trends. Thus, it directed the exclusion of this company from the comparables list.

- Maple eSolutions Ltd.: The appellant contended that Maple eSolutions Ltd. should be excluded as it was functionally different, being a call center service provider, unlike the appellant's IT enabled services. The Tribunal agreed, noting the dissimilarity in functions and supported by previous Tribunal decisions, directed the exclusion of Maple eSolutions Ltd. from the comparables list.

- Coral Hubs Ltd.: For the assessment year 2008-09, the appellant argued against including Coral Hubs Ltd. due to its distinct business model involving significant outsourcing. The Tribunal agreed, citing the Mumbai Bench's decision in Maersk Global Service Center (India) Pvt. Ltd., and excluded Coral Hubs Ltd. from the comparables list.

- Genesys International Corporation Ltd.: The appellant sought its exclusion due to abnormally high profits. The Tribunal, applying similar reasoning as in the case of Informed Technologies India Ltd., directed the exclusion of Genesys International Corporation Ltd. from the comparables list.

3. Disallowance of Fees Paid to the Registrar of Companies (ROC):
The appellant contested the disallowance of Rs. 90,000/- (for AY 2007-08) and Rs. 10,000/- (for AY 2008-09) paid to the ROC for late filing of forms, which was treated as a penalty by the Assessing Officer. The Tribunal held that the payment was compensatory and not penal in nature, referencing decisions in Kaira Can Company Limited vs. DCIT, CIT vs. Ahmedabad Cotton Mfg. Co., and CIT vs. Loke Nath & Co. Consequently, the Tribunal directed the deletion of the disallowance.

Conclusion:
The Tribunal partly allowed the appeals for both assessment years, directing the exclusion of certain companies from the comparables list and deleting the disallowance of ROC fees. The detailed analysis ensured that the arm's length price determination and the nature of ROC fees were appropriately addressed.