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Pune Tribunal rejects high margin companies, after considering if the high
profits reflect a normal business phenomena or they are a result of certain
abnormal conditions
16 October 2014
Background
Recently, the Pune Bench of the Income-Tax Appellate Tribunal (the Tribunal) in the case of the Indian branch of
1
Cummins Turbo Technology Limited, U.K. (the Company or the taxpayer) has rejected high margin companies
after considering if the high profits reflect a normal business phenomena or if they are a result of certain abnormal
conditions. The Tribunal has also rejected companies into call centre activity. Overall, it has resulted in the deletion
of the Transfer Pricing (TP) adjustment.
Facts of the case

The taxpayer is an Indian branch of a U.K. based company engaged in the business of manufacture and sale of
turbochargers. The taxpayer is engaged in the business of providing support services in the areas of finance,
human resource, marketing, database support, product management support/supply chain management
support, information technology services and engineering services for its parent office.

The appeals relate to two different assessment years for the same taxpayer.
For Assessment Year (AY) 2007-08

With respect to the provision of IT enabled services, the taxpayer in its TP study adopted Transactional Net
Margin Method (TNMM) as the most appropriate method for determining the arm’s length price and computed
the arithmetic mean of the comparable companies as 15.54 per cent, while the taxpayer had an operating
margin of 11.76 per cent. Thus the transaction was concluded to be at arm’s length after taking the benefit of
+/-5 per cent provided under the proviso to Section 92C(2) of the Income-tax Act, 1961 (the Act).
___________
1
Cummins Turbo Technology Limited v. DDIT (ITA Nos. 161 & 269/PN/2013) – Taxsutra.com
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Cooperative (“KPMG International”), a Swiss entity. All rights reserved.

During the course of TP assessment proceedings, the Transfer Pricing Officer (TPO) rejected few companies and
selected other comparable companies and on the basis of single year data re-computed the Profit Level Indicator
(PLI) of comparable companies as 22.20 per cent, and thereby proposed a TP adjustment.

The Commissioner of Income-tax (Appeals) [CIT(A)] allowed partial relief to the taxpayer with respect to recomputation of margins of certain comparable companies and also allowed working capital adjustment.
Contentions before the Tribunal and findings of the Tribunal
Before the Tribunal, the taxpayer raised contentions against rejection/selection of certain comparable companies by
the TPO/CIT(A) which are summarised in the table below along with the findings of the Tribunal:
Taxpayer’s objections
Company
Informed
Technologies India
Limited (Informed
Technologies)
 Abnormal profit making company
Maple eSolutions
Limited (Maple
eSolutions)
 Engaged
services
Tribunal’s findings
 Placed reliance on the Special Bench
Ruling in the case of Maersk Global
 Wide fluctuation in profit over a period of Centers (India) Private Limited2 wherein it
time
was held that appropriate investigation is
 Operating margin trend over five year required for including/ excluding a high
period (preceding three years and the profit making company
subsequent year) ranging from (69.07)
 Directed the Assessing Officer (AO) to
per cent to 34.71 per cent.
reject Informed Technologies as a
comparable company since the financial
results over the years did not reflect normal
business trend.
 Merely because the two kinds of activities
are referred to as IT enabled services
under Central Board of Direct Taxes
 Activities performed by the taxpayer (CBDT) notification, the same cannot be
concluded to be similar
different from Maple eSolutions
in
providing
call
centre
 Placed reliance on various rulings 
wherein financial results of Maple
eSolutions were found to be unreliable
on account of its directors being
involved in certain frauds.
3
Directed the AO to reject Maple eSolutions
as a comparable company on account of
difference in the nature of services and
unreliability of financial data.
Considering the above exclusions the TP adjustment stands deleted, and accordingly other grounds were not
adjudicated for AY 2007-08.
AY 2008-09

During the AY 2008-09, the taxpayer had adopted TNMM for benchmarking the transaction of IT enabled
services and thereby determined the arm’s length margin of comparable companies as 10.28 per cent while the
taxpayer had an operating margin of 10.03 per cent. Thus, the transaction was concluded to be at arm’s length
after taking the benefit of +/-5 per cent provided under the proviso to Section 92C(2) of the Act.
____________
2
Maersk Global Centres (India) P. Ltd. v. ACIT (I TA No.7466/Mum/2012) - It was held in the Special Bench Ruling of Maersk Global that the profit margin earned by
such entity in the immediately preceding years may also be taken into consideration to find out whether the high profit margin represents normal business trend
3
CRM Services India (P) Ltd [ITA No. 4068 (Del)/ 2009], Capital IQ Information Systems (India) Pvt Ltd v. DCIT [ITA No. 1961/Hyd/2011]
© 2014 KPMG, an Indian Registered Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International
Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
KPMG FLASH NEWS
KPMG IN INDIA

During the course of TP assessment proceedings, the TPO rejected few companies and selected other
comparable companies, and on the basis of single year data re-computed the PLI of comparable companies
as 27.61 per cent, which was later rectified to 24.91 per cent, thereby leading to a TP adjustment.

Against the aforesaid addition, the taxpayer filed its objections before the Dispute Resolution Panel (DRP)
wherein the DRP granted relief with respect to rectifying the margins of certain companies and allowing the
working capital adjustment. Thus, based on the directions of the DRP, the AO passed its order reducing the
TP adjustment.

Aggrieved by the AO’s order, the taxpayer filed an appeal before the Tribunal.
Contentions before the Tribunal and findings of the Tribunal
Before the Tribunal, the taxpayer raised the contentions against rejection/selection of certain comparable
companies by the TPO/DRP, which are summarised in the table below:
Taxpayer’s objections
Company
Coral Hubs
Limited (Coral
Hubs)
Tribunal’s findings
 Engaged in the business of conversion  The nature as well as business model
of books into POD titles (e-publishing
needs to be examined to establish
business)
comparability
 Significant
operations
business  Directed the AO to reject Coral Hubs on
account of difference in the business
model.
 Placed reliance on Tribunal’s ruling in
the case of Maersk Global Service
4
Centre (India) Private Limited.
outsourcing
of
Genesys
 Abnormally high profit margin
 Placed reliance on the Special Bench
International
Ruling in the case of Maersk Global
5
 Wide fluctuations in the margin earned
Corporation
Centers (India) Private Limited and
over
the
three
year
period
ranging
from
Limited (Genesys)
directed the AO to reject Genesys by
2.64 per cent to 46.82 per cent.
following the same approach as that
adopted for exclusion of Informed
Technologies for AY 2007-08.
Considering the above exclusions the TP adjustment stands deleted and accordingly other grounds were not
adjudicated for AY 2008-09.
Our comments
This decision of the Pune Tribunal relies on the Special Bench ruling in the case of Maersk Global to exclude
companies with wide margin fluctuations over a period of time arising due to abnormal conditions. The Tribunal
also provided an important observation that merely because two kinds of activities are referred as ITES under the
CBDT notification, the same does not imply that they are functionally identical/similar.
____________
4
It was held in the Mumbai Tribunal ruling of ACIT v. Maersk Global Services Centre India Private Limited [66 DTR 90] that incase of concerns having outsourced
considerable portion of the business, it would not be appropriate to include it as a comparable company
5
It was held in the Special Bench Ruling of Maersk Global that the profit margin earned by such entity in the immediately preceding years may also be taken into
consideration to find out whether the high profit margin represents normal business trend
© 2014 KPMG, an Indian Registered Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International
Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
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© 2014 KPMG, an Indian Registered Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International
Cooperative (“KPMG International”), a Swiss entity. All rights reserved.