TMI Blog2013 (10) TMI 1487X X X X Extracts X X X X X X X X Extracts X X X X ..... 4) of the Act, as applicable for the relevant assessment year, required the AO to compute the total income having regard to the Arm‟s Length Price (ALP) determined by the Ld Transfer Pricing Officer (TPO). 1.2. That the rejection by the Ld TPO of the transfer pricing analysis undertaken by the appellant without expressly mentioning the specific clause which has been invoked under section 92C(3) of the Act, so as to warrant rejection of the appellant‟s comparables and substitute the same with the different set of comparables vitiated his order and consequently the assessment made. 1.3. That the failure by the Ld TPO to share the fresh comparability analysis conducted at the time of assessment vitiated the assessment made. 1.4. That the Ld TPO erred in not making suitable adjustments to the net profit margins of the appellant vis- -vis the comparable companies for difference in risk profile, in terms of Rule-10B of the I T Rules, 1962. 1.5. That the AO erred in calculating the transfer pricing adjustment without considering the permitted + / - 5% variation from the Arms Length Price ads per proviso to section 92C(2) of the Act. 2. The CIT (A) erred in rej ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... be dismissed. On hearing both the parties, ground no.3 stands dismissed too. Further, referring to ground no.1.5, Ld Counsel mentioned that the adjudication of the said ground depends on the outcome of grounds no. 1.4 and 5. Lastly, Ld Counsel mentioned that the ground no.6 is general in nature and the same does not call for any specific adjudication. Resultantly, the grounds left for adjudication in this order are only ground no. 1.4 1.5 and ground no.5. Thus, the issue involved in the ground 1.4 relates to failure of the TPO in not making adjustments to net profit margins of the assessee for difference in risk profile in terms of Rule-10B of the Income Tax Rules, 1962. Ground no.1.5 relates to the applicability of the proviso to section 92C(2) of the Act and it is consequential to the outcome of the adjudication of ground no.1.4 and 5. Further, the issue raised in ground no.5 relates to the accepting the two additional comparables such as Sumetha Fiscal Services Ltd and ICDS Securities Ltd when these comparables are functionally incomparable (ie FAR). 4. Briefly stated, the succinct facts are that the assessee, M/s Temasek Holdings Advisors India Pvt. Ltd (THAIPL) is wholly su ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... used in computation of the arm‟s length price is not reliable or correct. Accordingly, the amount of adjustment to the income of the assessee is being determined as under: 5.1.11. Thus the assessee has received service fees of ₹ 10,01,20.558/- from its AE for advisory services. The arm‟s length value of these services is calculated at ₹ 12,68,22,275/-. Thus an adjustment of ₹ 2,67,01,717/- is being made to the income of the assesses 6. The order of the TPO passed u/s 92CA(3) was forwarded to the assessee calling for explanations, if any. The assessee filed a reply dated 26.9.2008. Considering the provisions of section 92CA(4), AO ignored the objections raised by the assessee and incorporated the decision of the TPO. Accordingly, the addition made works out to ₹ 2,67,01,717/-. We shall now discuss the details of the proceedings before the TPO in the succeeding paragraph. Before the TPO: 7. Before the TPO, assessee submitted that an amount of ₹ 10,01,20,558/- was received by the assessee from THPL for providing the IAS. The bills were raised at Cost plus 15% margin towards services rendered by the assessee. While bench mark ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Under Rule 10B(4) of the Income Tax Rules, 1962, the data to be used in analyzing the comparability of an uncontrolled transactions with an international transaction shall be data relating to the financial year in which the international transaction has been entered into. Throughout our analysis above, we have used data relating to the financial year 2004-2005, as required under the IT Rules. 5.1.11. The assessee has calculated its net profit margin to costs at 15% while the arms length margin comes to 45.67%. I am of the opinion that the price charged by the assessee for advisory services has not been determined in accordance with subsections (1) and (2) of section 92C of the Income-tax Act 1961. Also the information or data used in computation of the arm‟s length price is not reliable or correct. Accordingly, the amount of adjustment to the income of the assessee is being determined as under:- Thus, the asessee has received service fees of 10,01,20,558/- from its AE for advisory services. The arm‟s length value of these services is calculated at ₹ 12,68,22,275/-. Thus, an adjustment of ₹ 2,67,01,717/- is being made to the income of the assessee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Ltd., Pioneer Investcorp Inc. and Btrescon Corporate Advisors Ltd are not comparable to the appellant because their majority activity is in fields other than Financial Advisory Services. However, in respect of Sumedha Fiscal Services Ltd and ICDS Securities Ltd the TPO has stated that their argument data for Financial and Advisory Services only has been used for comparability. The appellant has not stated anything in this regard and has only contended that the said companies are engaged in other activities besides Financial and Advisory Services. Since, the TPO has considered only the segmental data pertaining to Financial Advisory Services of these companies for the purpose of comparability with the appellant, in my view, these tow companies cannot be excluded. The arguments of the appellant do not have much force for exclusion of these companies. In view of the above discussion, therefore 4 comparables selected by the appellant as decided by me in para no.12.4 above and two of the TPO i.e. Sumedha Fiscal Services Ltd and ICDS Securities Ltd are held to be comparable to the appellant. Based on the above discussion, the final set of comparable companies are as follows: 1 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... permitted + / - 5% variation from the Arms Length Price as per proviso to section 92C(2) of the Act. 5. In accepting two additional companies i.e., ICDS Securities Ltd and Sumedha Fiscal Services Ltd selected by the Ld TPO as comparable to the activity of investment advisory services provided by the appellant, on the ground that segmental data has been used for comparison purposes thereby making it similar to the activity of the appellant, whereas the fact remains that the said companies are not comparable to the appellant on account of difference in functions / activity. Accordingly, the finding of the Ld CIT (A) is erroneous and perverse. 14. Shri Porus Kaka, Ld Counsel for the assessee brought our attention to the ground 5 above and mentioned that the decision of inclusion of the said two comparables namely ICDS Securities Ltd and Sumedha Fiscal Services Ltd by the CIT(A) is perverse. Ld Counsel pointed out how these two comparables are functionally distinguishable to that of the assessee and how the decision of CIT (A) is not sustainable. The relevant arguments in each of the comparables are given in the succeeding paragraphs. 15. M/s ICDS Securities Ltd: Ld Counsel b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... CIT vide ITA No.7901/Mum/2011 (AY 2007-08), dated 4.4.2012 and mentioned that the said company is functionally comparable to that of the assessee. Consequently, the company which should not be found to be good comparable with Carlyle India Advisors Private Ltd, is equally not good one for the present assessee too. In this regard, Ld Counsel brought our attention to the order of the Tribunal in the case of Carlyle India Advisors Private Ltd, supra and brought our attention to para 27 where the Tribunal dealt with the case of Sumedha Fiscal Services Ltd and found not a good comparable. Further, he mentioned that the said order of the Tribunal reached jurisdictional High Court, wherein the order of the Tribunal was confirmed in favour of the assessee. Thus, it is binding on us that the case of M/s Sumedha Fiscal Services Ltd is not a good comparable functionally for the present assessee qua Carlyle India Advisors Private Ltd. Para 2 of the said judgment of the High Court is relevant here. 17. Further, referring to ground 1.4 of the appeal, Ld Counsel mentioned that the assessee is entitled to the risk adjustment and is critical of the order of the CIT(A) on this issue. The fact of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 8 A.K. Capital Services Ltd Rejected 9 Ajcon Global Services Ltd Rejected 10 Brescon Corporate Advisors Ltd Rejected 11 ICDS Securities Ltd (Seg.Consultancy) ICDS Securities Ltd (Seg. Consultancy) 12 Pioneer Investcorp Ltd Rejected 13 Sumedha Fiscal Services Ltd(Seg) Rejected 7 Comparables 9 Comparables 5 comparables The limited issue before us for adjudication relates to the justification for inclusion of the two comparables namely, ICDS Securities and Sumedha Fiscal Services Ltd as good ones. Adjudication in this regard are discussed as under: Justification for inclusion of M/s ICDS Securities Ltd as good comparable 20. The brief arguments of the Ld Counsel is whether the ICDS Sec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ors Pvt. Ltd and the said comparable was rejected by the Tribunal in the case of Carlyle India Advisors Pvt. Ltd (supra) for the AY 2007-2008. In this case, Sumedha Fiscal Services Ltd was rejected as comparable and the said decision of the Tribunal was approved by the binding decision of the judgment of the jurisdictional High Court. Relevant discussion is given in para 27 of the said order of the Tribunal which is as under: 27. We will now consider 8 comparable cases selected by the TPO and see whether they can be functionally compared with that of the assessee. (1) .. (2) ... (3) M/s. sumedha Fiscal Services Ltd (iii) M/s. Sumedha Fiscal Services Ltd on the ground that the company on a qualitative review and for the reason that its income is from loan syndication and project consultancy services. In the final list, the TPO has included these companies as comparable companies. The TPO has given no reason whatsoever for changing his stand. Apart from the above, the assessee in its submissions dated 19.10.2010 filed before the TPO had highlighted as to how these companies are not functionally comparable with that of the assessee. The TPO has not even co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Services are treated on par with the IAS offered by the assessee. The provisions of the Rule10B(2) are relevant here. Therefore, considering the above functional differences of the impugned two comparables qua the assessee, we are of the opinion that ground no.5 raised by the assessee has to be allowed in his favour. AO is directed to consider the above direction and amend his order. Accordingly, ground 5 is allowed. 24. Ground 1.4 relates to the claim of Risk adjustment. We find the assessee has not brought out any facts before us to demonstrate that the claim of risk is supported by the facts and figures. It is the decided case that the grant of risk adjustment is not automatic or of general rule. Assessee needs to demonstrate with figures that the impugned risks have material effect on the operating margins qua the total cost. Reliance is placed on the decision of the Tribunal in the case of M/s. Premier Exploration Services Pvt. Ltd vs. ITO vide ITA No.4935/Del/2011 (AY: 2007-2008), order dated 31.5.2013 for the proposition that the risk adjustments cannot be allowed as a general rule and the assessee is under obligation to demonstrate the existence of risk with the help of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd 4429/M/2012 (AY: 2007-2008). Considering the above settled nature of the issue and also respectfully following the decision of the coordinate Bench of ITAT, Delhi, we are of the opinion that the ground raised by the assessee is decided against the assessee. Accordingly, ground 1.4 of the assessee is dismissed. 25. Ground 1.5 relates to application of the proviso to section 92C(2) of the Act (+/-5%) and we find this ground is consequential in nature and therefore, we order the AO to compute the margins and apply the proviso in accordance with the law in force. Accordingly, ground 1.5 is allowed as consequential. 26. In the result, appeal of the assessee is partly allowed. I.T.A. No.5616/M/2009 (AY: 2005-2006) (By Revenue) 27. This cross appeal filed by the Revenue on 15.10.2009 is against the order of the CIT (A)-XXXII, Mumbai dated 20.7.2009 for the assessment year 2005-2006. The only effective ground raised by the Revenue in this appeal reads as under: 1. On the facts and in the circumstances of the case and in law, the CIT (A) erred in giving a relief to the assessee of ₹ 1,17,01,045/- taking the Arm‟s Length margin # 32.25% instead of 45.67% as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , Ld DR distinguished the Special Bench decision (supra) by stating that the case dealt with by the Special Bench is not a company with persistent losses unlike the case of M/s. GeefCee Finance Limited. 32. We have heard both parties on this issue. The issue is if a company with persistent losses can be considered as good comparable for ALM studies and the if the case of M/s. GeefCee Finance Limited is one such company. In this regard, we have perused the cited SB decision and find that the same is relevant for the proposition that If IC has suffered heavy losses and, therefore, it is not treated as comparable by the tax authorities, they also have to consider that the DM has earned extraordinary profit and has a huge turnover, besides differences in assets and other characteristics matter is therefore remitted to the file of the AO for consideration of claim of the taxpayer and make a de novo adjudication of the ALP after providing reasonable opportunity of being heard to the assessee‟. Therefore, the matter is remanded and there is no finality in the matter. There is no data to demonstrate the said facts are comparable to that of the M/s. GeefCee Finance Limited too. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r necessary, which is a profit making one, there is a need for more attention qua the conditions prescribed in clauses (a) to (d) of Rule 10B(2) of the IT Rules, 1962 for an ultimate judgment on the comparability of impugned transactions. It should not be the case, that a comparable should be excluded by the TPO or demanded by the assessee, if a comparable is a loss making one. Similarly, a case should not be included on the same principle. The judgment on the inclusion or exclusion depends on the data and the applicability of the specified conditions in the said clauses. Whoever demands for or against such exclusion or inclusion needs to demonstrate with facts and reasons in support of the claim. Normally, as per the OECD TP guidelines, the losses or unusual profits constitute extreme results and such results demands further examination into the reasons for such results. If such examination results in detection of the responsible reasons causing such losses there is need for adjustments to the margins or exclusions of that case for the purpose of comparability studies. Reliance is placed on the order of the Tribunal in the case of Willis Processing India P. Ltd., 30 Taxmann.com 35 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ped in the table above para 46 of the order of the ITAT dt. 30.08.2013. To support the same and the order/conclusions of the CIT(A), Ld Counsel for the assessee brought out attention to the financials and the segmental details based on the documents furnished before and submitted for not disturbing the finding of CIT(A) given in para 12.5 and 12.6of the impugned order. 39. We have heard the parties and perused the orders of the revenue and the documents placed before us. Initial lines of the said para 12.6 is relevant and the same read as under: 12.6 I have considered the observations of the TPO/AO in respect of the six comparables . I agree with the arguments of the appellant that of (i) A.K. Capital Services Ltd; (ii) Ajcon Global Services Ltd; (iii) Pioneer Investcorp Ltd and (vi) Brescon Corporate Advisors Ltd, are not comparable to the appellant because their major activity is in fields other than Financial advisory services No incriminating document on data in respect of these four companies is brought by Ld DR to our notice to controvert the above finding of the CIT(A). Considering the same, we are of the opinion, the finding of the CIT(A) on this issue do not c ..... X X X X Extracts X X X X X X X X Extracts X X X X
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