TaxTMI 
TaxTMI 
2019 (6) TMI 1117
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.... systems and software that telecom companies use to offer call answering, voice/fax mail, communications surveillance and recording etc. The assessee i.e. Comverse Network Systems India (P) Ltd. is a subsidiary of Comverse Technology Inc. USA which holds 99.90% of the capital. The assessee was incorporated in the year 1999 to provide pre-sales support and post-sales support services primarily to the customers of Comverse Network Systems Ltd., Tel Aviv and also to the Indian customers of Verint Systems Inc (another subsidiary of the holding company) which are the Associated Enterprises (AE). 2.1 During the captioned year, the return of income was was filed declaring income of Rs. 61,18,410/-. Subsequently, the case was selected for scrutiny. During the year under consideration, the assessee had shown total service income of Rs. 9,88,99,921/-. In view of the international transactions entered into by the assessee during the year under consideration, the Assessing Officer (AO) made a reference to the Transfer Pricing Officer (TPO) u/s 92CA(3) of the Income Tax Act, 1961 (hereinafter called 'the Act') to determine the Arm's Length Price (ALP) with respect to the two transacti....
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....ained liabilities for the purpose of book profit calculation u/s 115JB without any basis. Keeping in view the above facts & the tax effect i.e. 62,18,019/- which is more than the prescribed monetary limit of Rs. 3,00,000/- for appeal before the Hon'ble ITAT & as also suggested by the Range Head, further appeal to the ITAT is recommended in this case on the below mentioned issues." 2.5 The assessee is also before the ITAT by means of a Cross Objection (CO) and the grounds raised in the CO are as under:- "1. That the learned Commissioner of Income Tax [Appeals], Rohtak ("CIT-A") erred in not holding the order passed by the learned Assistant Commissioner of Income tax, Circle 1(1), Gurgaon ("AO") and the learned Assistant Commissioner of Income tax, Transfer Pricing Officer - IV, New Delhi ("TPO") as being contrary to the facts, law and the principles of natural justice. 2. That the learned CIT-A erred in law in not holding that the learned AO did not meet the preconditions for making reference to the learned TPO under section 92CA(1) of the Act and erred in not providing an opportunity of 'being heard' to the Respondent before referring the transfer pricing issues to t....
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....bles which was based on the Transfer Pricing study report in assessment year 2002-03. These comparables were Hindustan Housing Co. Ltd., Scal Services Ltd., Wartsila Operations & Maintenance India Ltd., Choksi Laboratories Ltd., Artson Engineering Ltd., Isgec Coverma Ltd., Enviro Technology Ltd. and Vimta Labs Ltd. It was submitted by the Ld. Sr. DR that the final set of comparables selected by the TPO had an average PLI of 17.2%. The Ld. Sr. DR drew our attention to the observations and comments of the TPO with respect to each of the comparables selected by the TPO and submitted that all these comparables were functionally comparable to the assessee company and had been rightly selected. 3.1 The Ld. Sr. DR drew our attention to the impugned order and submitted that the Ld. Commissioner of Income Tax (Appeals) had rejected five out of the six comparables selected by the TPO which was incorrect inasmuch as the five comparables viz. Hindustan Housing Co. Ltd., Scal Services Ltd., Choksi Laboratories Ltd., Isgec Coverma Ltd. and Vimta Labs Ltd. were assessee's own comparables in assessment year 2002-03 and, therefore, they could not be taken as being functionally different in the yea....
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....enance services thereof. The Ld. AR further submitted that there were certain Related Party Transactions undertaken by this company during the year under consideration and which constituted 38.86% of its operating revenue. For this, a reference was made to the annual report of this company (which was placed at pages 263-267 of the paper book filed by the assessee company). The Ld. AR argued that this company could not be compared to the assessee company for the above reasons. (ii) M/s Choksi Laboratories Ltd. With respect to this company, the Ld. AR submitted that this company was also not functionally comparable as this is a commercial testing and analysis laboratory engaged in testing of various products which included food and agricultural products, cement and building materials, chemicals, drugs and paints. It was submitted that the other services rendered by the company are calibration services, consultancy and pollution control. Our attention was drawn to page 9 of the TPO's order wherein the TPO himself has observed that the core activity of this company was providing analytical and testing services. It was further submitted that this company had a significantly high propo....
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....dgment of the Hon'ble Bombay High Court in the case of C.I.T. (Large Tax Payer Unit, Mumbai) vs. Lubrizol India Ltd. reported in (2013) 37 taxmann.com 294 (Bombay) wherein it had been held that entrance fee for membership of a club would be considered as revenue expenditure. It was submitted that the Ld. CIT (A) had rightly deleted the disallowance. 4.2 With respect to ground no. 3 pertaining to the contention of the department that the Ld. Commissioner of Income Tax (Appeals) had erred in admitting additional evidence pertaining to the approval of the assessee's gratuity fund without calling for the remand report from the Assessing Officer, the Ld. AR submitted that no fresh evidence had been admitted by the Ld. Commissioner of Income Tax (Appeals) in this respect and the approval of the gratuity fund w.e.f. 29.03.2004 was a matter of record. 4.3.0 With respect to ground no. 4, wherein the department has challenged the action of the Ld. Commissioner of Income Tax (Appeals) in treating the provisions of gratuity and provision for leave encashment as ascertained liabilities for the purpose of book profit calculation u/s 115JB of the Act, the Ld. AR submitted that as far as provisi....
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.... the customers of Comverse Network Systems Ltd., Tel Aviv and also to the Indian customers of Verint Systems Inc (another subsidiary of the holding company) which are the Associated Enterprises (AE). On the other hand, Hindustan Housing Co. Ltd. undertakes a wider variety of activities like providing air conditioning, lift and intercom services which typically included operating and service maintenance services thereof. Thus, although providing post sales services is a part of the activities of Hindustan Housing Co. Ltd., its spectrum includes providing air conditioning, lifts and intercoms also. Thus, it cannot be considered as a company which is functionally comparable to the assessee company. Also, the company fails the Related Party Transaction filter. Therefore, we find no infirmity in the order of the Ld. CIT (A) directing the exclusion of this company from the final set of comparables. (ii) Choksi Laboratories Ltd. With respect to this company, it has been submitted that this company is not functionally comparable as this is a commercial testing and analysis laboratory engaged in testing of various products which included food and agricultural products, cement and building....
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....ssee had no objection if these two comparables were included in the final set of comparables. Accordingly, we direct the TPO/AO to include these two companies in the final set of comparables. 6.1 As far as the disallowance of club expenses is concerned, the Ld. Commissioner of Income Tax (Appeals) has deleted the disallowance by observing that the Assessing Officer has made the disallowance on ad hoc basis without bringing any fact on record to prove that some kind of personal element was involved. We further note that the Hon'ble Bombay High Court in the case of C.I.T. (Large Tax Payer Unit) vs. Lubrizol India Ltd. (supra) has held that entrance fee for membership of a club is to be considered as revenue expenditure. Although entrance fee does have an enduring benefit, it was not considered to be capital in nature by the Hon'ble Bombay High Court as no asset was created. Applying the same analogy, membership fee would also necessarily have to be regarded as revenue in nature. The nature of expenditure is not in doubt here. The Assessing Officer also has not brought out any fact which would justify the disallowance. Therefore, we are unable to differ with the findings of the Ld. C....