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TMI Blog2014 (9) TMI 1010X X X X Extracts X X X X X X X X Extracts X X X X ..... of manufacture and sale of turbochargers. During the previous year relevant to the assessment year 2007-08 it has earned taxable income in the form of royalty from Cummins Turbo Technologies Ltd., India as well as from the IT enabled services operations of its India Branch. The assessment of the income relating to the said India Branch is the subject-matter of dispute before us. The India Branch of the assessee is registered under Software Technology Parks of India (STPI) as a 100% export oriented unit. The India Branch provides support services in the areas of Finance, Human Resources, Marketing, Database Support, Product Management Support, Procurement/Supply Chain Management Support, information technology services and engineering services for its parent office. 4. In this background, for the assessment year 2007-08 appellant filed a return of income declaring taxable income of Rs. 5,73,60,741/-. Since assessee had undertaken certain international transactions with its associated enterprises, the Assessing Officer made a reference to the Transfer Pricing Officer (in short 'TPO') u/s 92CA(1) of the Act in order to determine the arm's length price of the international transa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (ITes) and marketing support services whereas the other transactions have been accepted at being at an arm's length price. In the Transfer Pricing study undertaken by the assessee for its international transaction of provision for IT enabled services, assessee selected the Transactional Net Margin Method (TNMM) as the most appropriate method to determine the arm's length price. The assessee used Operating profit/Operating cost as the Profit Level Indicator (PLI). By selecting comparable companies using certain filters the arithmetic mean PLI of the comparable companies was worked out at 15.54% after considering the financial data of the comparables for three financial years. The assessee's PLI was computed at 11.76% and after taking the benefit of +/-5% provided u/s 92C(2) of the Act, the international transaction was claimed to be at an arm's length price. The TPO accepted the selection of TNNM as the most appropriate method for the purposes of determining the arm's length price of the international transaction. The TPO has rejected certain companies selected by the assessee as comparables and has included certain other companies in the final set of comparables. Fu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mpensated by its associated enterprises on cost plus agreed markup in respect of provision of IT enabled services. It does not bear significant risks vis-à-vis comparable concerns which are full risk bearing entities. Therefore, the concerns which have abnormal profits or there is a wide fluctuation in their profits considered over a period of time, such companies are liable to be excluded from the list of comparables. 8. We have carefully considered the rival stands on this aspect. In the context of the controversy relating to the exclusion of abnormal profit making concerns, a reference has been made to the decision of the Special Bench of the Tribunal in the case of Maersk Global Centres (India) Private Ltd. vs. ACIT vide ITA No.7466/Mum/2012 dated 07.03.2014. The relevant observations of the Bench are as under :- "In generality, we are of the view that the answer to this question will depend on the facts and circumstances of each case inasmuch as potential comparable earning abnormally high profit margin should trigger further investigation in order to establish whether it can be taken as comparable or not. Such investigation should be to ascertain as to whether earnin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... In-fact, a further analysis of the financial data for the aforesaid years suggest that there is a wide fluctuation in the revenue generation of the said concern during the financial year under consideration as compared to the past three financial years. For the subsequent financial year, the revenue generation has taken a downward trend which again reflects a wide fluctuation. At the time of hearing, the learned counsel for the assessee has referred to the Annual Report of the said concern for the financial year under consideration to point out that the company has acknowledged a growth of 132.86% in its revenue generation as compared to the immediately preceding financial year. In our considered opinion, there is no material to say that the high profit margin of 34.71% declared by the said concern in the instant financial year is a normal business trend. Ostensibly, the financial results of either the three preceding financial years or of the succeeding financial year do not justify that the margin of 34.71% for the year under consideration is a normal business trend. Thus, in our considered opinion, the inclusion of the said concern in the final set of comparables would not lend ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in the final list of comparables. 10. In conclusion, we set-aside the order of the CIT(A) on this aspect and direct the Assessing Officer to exclude Informed Technologies India Ltd. from the final list of comparables. 11. Another plea raised before us is against the inclusion of Maple eSolutions Ltd. as a comparable concern by the TPO, which has since been affirmed by the CIT(A). Before the lower authorities, assessee objected to the inclusion of the said concern as comparable on the ground that it was functionally different from the activities of the assessee. As per the appellant, Maple eSolutions Ltd. is a BPO and is carrying out call centre services which is quite distinct from the provision of IT enabled services (ITes) rendered by assessee to its associated enterprises. The lower authorities have rejected the plea of the assessee on the ground that a call centre business is also understood as an ITes which also covers assessee's category of business. The CIT(A) has also found it expedient to retain Maple eSolutions Ltd. as a comparable concern based on the above reasoning. 12. Before us, the learned counsel for the assessee has reiterated the stand of the assessee raised ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... kely to materially effect the price or the cost charged or the profit arising from such transaction in the open market. It would be of relevance to emphasise that the activities/business being carried out by the comparables ought to be functionally comparable to that of the tested party. In the present case, the plea of the assessee is that Maple eSolutions Ltd. is carrying out a pure call centre activity whereas the support services being provided by the assessee to the associated enterprises are in the areas of (i) Finance; (ii) Marketing; (iii) Database Support; (iv) Product Management Support; (v) Procurement/Supply Chain Management Support; and, (vi) Information Technology and Engineering Services. It has been specifically convassed before us that the assessee is not involved in any voice based Call Centre functions, whereas Maple eSolutions Ltd. is providing Call Centre Services. Thus, it is sought to be demonstrated that the activities of the assessee cannot be compared with a concern which is merely running a call centre/BPO. 15. In our considered opinion, the difference in functions sought to be canvassed by the assessee is emerging from record. Merely because the two kin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... diture in terms of the Explanation below section 37(1) of the Act. 18. Before us, the plea of the appellant is that the fee of Rs. 90,000/- paid to ROC, Pune is compensatory in nature as the same was paid for late filing of certain forms to the ROC. It has been explained that the aforesaid expenditure is not incurred for infraction of any law so as to attract the Explanation to section 37(1) of the Act. Reliance has been placed on the following decisions :- (i) Kaira Can Company Limited vs. DCIT, (2010) 2 ITR 20; (ii) CIT vs. Ahmedabad Cotton Mfg. Co. (1994) 205 ITR 163 (SC); and, (iii) CIT vs. Loke Nath & (Construction) Co. (1984) 147 ITR 624 (Del). 19. On the other hand, the learned DR has relied upon the orders of the authorities below in support of the case of the Revenue. 20. We have carefully considered the rival submissions. Explanation below section 37(1) of the Act provides that no deduction shall be allowed in respect of an expenditure incurred by the assessee for any purpose which is an offence or which is prohibited by law. The aforesaid provision has been invoked by the Assessing Officer to disallow a sum of Rs. 90,000/- paid by the assessee to ROC, Pune as addit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ted all other international transactions carried out by the assessee with its associated enterprises at being at an arm's length price. In this year also, the TNNM was selected by the assessee as the most appropriate method to determine the arm's length price and the same has also been accepted by the TPO. In this year also assessee used the Operating profit/Operating cost as the PLI which has been accepted by the TPO. The arithmetic mean PLI, of the comparable companies selected by the assessee came to 10.28% after considering weighted average data of three years and assessee's PLI for the year was 10.03% and therefore assessee claimed that international transaction was concluded at an arm's length price after considering the benefit of +/-5% provided u/s 92C(2) of the Act. 25. In this year too, the TPO rejected certain comparables selected by the assessee and included certain additional companies as comparables in the final set of comparables. The TPO has considered single financial data pertaining to the financial year under consideration for the purposes of comparability analysis, as was the case in assessment year 2007-08. Though the TPO agreed that a working capi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ness undertaken by the assessee. Second reason advanced by the assessee for exclusion of the said comparable is a significant outsourcing of business operations by the said concern. In this context, a reference has been made to the Annual Financial Report of Coral Hubs Ltd., whose relevant extract is placed at page 395-396 of the Paper Book to show that the substantial portion of expenses are by way of outsourced expenses whereas the Personnel expenses are merely 4.4% of the Total expenses. The outsourced expenses include, viz., data entry charges, vendor payments and expenses on conversion of books into POD titles etc. In this context, it has also been pointed out that Mumbai Bench of the Tribunal in the case of ACIT vs. Maersk Global Service Center (India) (P) Ltd., (2012) 66 DTR 90 has noticed that on account of the said concern having outsourced considerable portion of his business, it would not be appropriate to include it as a comparable. Accordingly, it is sought to be contended that the said concern be excluded from the final set comparables. 27. On the other hand, the learned DR submitted that the DRP has considered assessee's objection of Coral Hubs Ltd. being functional ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 46.82%. The plea raised by the assessee is on similar footing as was made in the appeal for assessment year 2007-08 in the context of the exclusion of Informed Technologies India Ltd.. Similar proposition has been examined by us in the appeal of the assessee for assessment year 2007-08 in the earlier paragraphs following the decision of the Special Bench of the Tribunal in the case of Maersk Global Centres (India) Private Ltd. (supra) and it has been held to be applicable having regard to the facts and circumstances of the case. In the context of exclusion of Genesys International Corporation Ltd. also, assessee has furnished the operating margins of the said concern for three financial years including the preceding two years. In the past two years margins of the said concern are 2.64% and 12.52% whereas for the year under consideration it is 46.82%. In our considered opinion the facts in the case of Genesys International Corporation Ltd. are pari-materia to those considered by us in the case of Informed Technologies India Ltd. for assessment year 2007-08 while evaluating its exclusion in the context of the reasoning laid down by the Special Bench of the Tribunal in the case of Mae ..... X X X X Extracts X X X X X X X X Extracts X X X X
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