TMI Blog2014 (9) TMI 1010X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 ar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... parent office. 4. In this background, for the assessment year 2007-08 appellant filed a return of income declaring taxable income of ₹ 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 transactions entered by the assessee with its associated enterprises. The TPO passed an order u/s 92CA(3) of the Act on 28.10.2010 making an adjustment of ₹ 27,67,040/- to the stated value of international transactions of IT enabled services rendered by the assessee to its associated enterprises so as to bring it to the level of arm's length price. The Assessing Officer has passed an order u/s 143(3) r.w.s. 144C(4) of the Act on 28.02.2011 computing the income from the international transactions at the arm's length price determined by the TPO thereby making an addition of ₹ 27,67,040/- on this count. The assessee carried the matter in appeal before the CIT(A) who has since allowed certain reliefs to the assessee on this issue. The C ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. Further, the TPO has considered the single year financial data of the financial year 2006-07 of the comparable companies as was available at the time of transfer pricing proceedings. The arithmetic mean PLI of the final set of comparable companies selected by the TPO worked out to 22.20%, as against the margin of 11.76% declared by the assessee. While determining the adjustment to the stated value of international transactions, the TPO did not allow the adjustment sought by the assessee on account of working capital, marketing and risk profile differences of the appellant vis- -vis the comparable companies. Accordingly, the Assessing Officer computed the income from the international transactions at the arm s length price determined by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 earning of high profit reflects a normal business condition or whether it is the result of some abnormal conditions prevailing in the relevant year. The profit margin earned by such entity in the immediately preceding year/s may also be taken into consideration to find out whether the high profit margin represents the normal business trend. The FAR analysis in such case may be reviewed to ensure that the potential comparable earning high profit satisfies the comparability conditions. If it is found on such investigation that the high margin profit making company does not satisfy the comparability analysis and or the high profit margin earned by it does not reflect the normal business condition, we are of the view that the high profit margin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 credibility to the comparability analysis and therefore it deserves to be excluded. We hold so. 9. The plea setup by the CIT(A), and which has been reiterated before us is that the point setup by the assessee would involve consideration of multiple year data of the comparable whereas the transfer pricing analysis is required to be done based on the singular financial year data i.e. financial year data of the comparables relevant to the year in which the international transactions have been entered into. In our considered opinion, the aforesaid plea of the Revenue is untenable having regard to the issue in question. No doubt, subrule (4) of rule 10B of the Income Tax Rules, 1962 (in short the Rules ) prescribe that the data to be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 before the lower authorities to the effect that the activities of Maple eSolutions Ltd. are functionally different than those of assessee s India branch in question. By referring to the activity profile of Maple eSolutions Ltd. it is submitted that it is engaged in providing call centre services. The learned counsel referred to the functions being performed by the assessee as enumerated in the Transfer Pricing study, a copy of which has been placed in the Paper Book filed before us. On that basis, it is sought to be pointed out that the activities being undertaken by the assessee are not similar to those of Maple eSolutions Ltd. Apart therefrom, a new plea has been raised to justify exclusion of Maple eSolutions Ltd., based o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ically 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 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. Apart therefrom, the decision of our Co-ordinate Benches of Delhi and Hyderabad in CRM Services India (P) Ltd. (supra) and M/s Capital IQ Information Systems (India) Pvt. Ltd. (supra) respectively also support assessee s plea that the said concern is liable to be excluded from the fi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as 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 ₹ 90,000/- paid by the assessee to ROC, Pune as additional fees for filing of certain forms. The stand of the assessee is that the impugned sum has been paid as fee for breach of a regulatory procedure of filing forms with ROC under the Companies Act, 1956 and is not for any infraction of law. The 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, ap ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as 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 capital adjustment is allowable but he did not allow the adjustment on the ground that assessee did not furnish complete details for the same. With respect to adjustments for difference in risk profile marketing, etc. vis- -vis the comparable companies the TPO did not give any adjustment, as was his stand for assessment year 2007-08. Ultimately, the TPO determined the arithmetic mean PLI of the revised set of comparable companies at 27.61% and made an adjustment of ₹ 1,26,41,010/- in order to bring the stated value of international transaction to an arm's length price. The order of the TPO dated 28.10.2010 was rectified on an application moved by the assessee whereby t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t 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 functionally noncomparable and rejected the same on the ground that the e-publishing business falls under the category of ITES and hence the said concern is comparable. Further, it is contended that the outsourcing of business by Coral Hubs Ltd. would show higher vendor payments and low employee costs and if the two are combined, it would become comparable to the case of a normal concern like the assessee. Therefore on this point also the exclusion of Coral Hubs Ltd. is sought to be assailed. 28. We have carefully considered the rival submissions. The objective of the Transfer pricing analysis is to determine the arm's length price of the tested transaction or in o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rn 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 Maersk Global Centres (India) Private Ltd. (supra). Therefore, on the basis of similar reasoning, we direct the Assessing Officer to exclude Genesys International Corporation Ltd. from the final set of comparables for the purposes of determination of arm's length price of international transaction of Provision of IT enabled services to the associated enterprises. 30. At the time of hearing, it was stated by the learned Representative for the appellant that if assessee were to succeed on its plea of the exclusion of . Coral Hubs Ltd. and Genseys international Corporation Ltd. from the final set of comparables, then the variation between the arm's length pric ..... X X X X Extracts X X X X X X X X Extracts X X X X
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