TMI Blog2012 (8) TMI 730X X X X Extracts X X X X X X X X Extracts X X X X ..... led to consider various points raised by the assessee - matter is restored to the file of the Assessing Officer/DRP for fresh adjudication Disallowance of bonus paid by the assessee to its employees (who are also shareholders of the assessee-company) under section 36(1)(ii ) of the Act by holding that the same would have been payable by way of dividend – Held that:- There was a specific direction by the learned DRP to allow the assessee’s claim if the same was allowed in the earlier year - matter restored to the file of the Assessing Officer for fresh adjudication after verifying as to whether identical claim was allowed in earlier years and if it is found that the same is allowed in the earlier year, the Assessing Officer shall allow the assessee’s claim as so directed by the learned DRP Disallowance of severance cost paid by the assessee-company to one of its employees – Held that:- Issue was pending in appellate proceedings in the earlier years - matter restored to the file of the Assessing Officer/DRP for fresh adjudication after ascertaining as to whether identical issue based on same set of facts has been decided by any appellate authority in earlier years and if it is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the assessee may be, in brief, stated as under. 4. As per the transfer pricing report submitted by the assessee, Chrysalis Management Companies are asset management companies for Investment Funds (Venture Capital Funds), who generally focus on investments in incubation ventures. The investment funds managed by the Chrysalis Management Companies concentrate on providing funds to entrepreneurs engaged in the business of providing software services, outsourcing services and technology out of India. The assessee-company, namely, Chrys Capital Investment Advisors (India) Pvt. Ltd. is engaged in providing investment advisory services to the Chrysalis Management Companies to assist them in their investment decisions. It is reported that the assessee-company carries out research and scouting activities for Chrysalis Management Companies to identify entrepreneurs and portfolio companies requiring assistance in terms of capital infusion, strategic direction and financial advice. 5. The international transactions entered into by the assessee-company with its associated enterprises during the year under consideration are as under : S. No. Description ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing Profit 49,032,272 Operating Margin (Operating Profit/ Operating Expenses) 24.15% 8. The aforesaid analysis made by the assessee was considered by the TPO. After considering the assessee s submissions and detailed analysis made by the TPO, the TPO passed the order dated 28-5-2009 under section 92CA(3) of the Act recommending an adjustment of Rs. 8,68,19,937 to the total income of the assessee. In determining the arm s length price, the TPO has rejected the following two entities that were selected comparables by the assessee-company : ( i )SREI Capital Markets Limited and ( ii )Integrated Enterprises (India) Limited. 9. On the other hand, the TPO introduced following two fresh comparables to determine arm s length price : ( i )Brescon Corporate Advisors Limited and ( ii )ICDS Securities Limited. 10. After excluding the two comparables that were selected by the assessee and including two fresh comparables, the TPO determined the average margin of 52.86 per cent as under : S. No. Company Name Operating Margin 1. Khandwala Securities Limited 43.35% 2. Keynote Corpo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ining ALP. ( iv )The TPO has erred in determining the ALP on the basis of data for current financial year 2005-06 only and ignoring the data for two financial years i.e., 2003-04 and 2004-05. ( v )The TPO has erred in not making any adjustment to the arm s length price on account of difference in working capital requirement of the assessee and the comparables. ( vi )The TPO has erred in accepting companies or entities with exceptional high margins as comparables. ( vii )The TPO has erred in computing the operating margin of one of the comparables i.e., KJMC Global Market (India) Limited for the FY 2005-06. ( viii )The TPO has erred in considering the amounts reimbursed by assessee s associate enterprises as part of operating expenses and the correspondingly reimbursement as part of operating revenue of the assessee while determining ALP. (ix)The TPO has erred in not allowing the benefit of 5 per cent. 16. Without going to the merit regarding the determination of arm s length price, we shall first decide as to whether learned DRP was justified in rejecting the assessee s objections and accepting the TPO s order in the manner as done by them. 17. In this c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... itself in earlier year. The assessee raised contention about exclusion of super profit companies from the comparables which has not been commented upon by the DRP. Having regard to the provisions contained in section 144C of the Act, we are of the considered view that learned DRP should have passed a speaking and reasoned order on each and every point of objections raised by the assessee and support its conclusion with the reasons. Section 144C has given wide powers to DRP as would be clear from sub-sections 6 to 11 of section 144C which are as under : "(6) The Dispute Resolution Panel shall issue the directions referred to in sub-section (5), after considering the following namely : ( a )draft order; ( b )objections filed by the assessee; ( c )evidence furnished by the assessee; ( d )report, if any, of the Assessing Officer, Valuation Officer or Transfer Pricing Officer or any other authority; ( e )records relating to the draft order; ( f )evidence collected by, or caused to be collected by, it; and ( g )result of any enquiry made by, or caused to be made by, it. (7) The Dispute Resolution Panel may, before issuing any directions referred to in sub-section (5) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sessee as per law. We order accordingly. 21. Since the matter is restored to the file of the Assessing Officer/DRP for fresh adjudication, we need not go into the merits of the issue about determination of ALP after selecting comparables, which shall be considered and decided by learned DRP after considering all objections of the assessee by passing a speaking and reasonable order. 22. The next issue raised by the assessee is directed against the Assessing Officer s order in disallowing the bonus amounting to Rs. 2,95,93,000 paid by the assessee to its employees (who are also shareholders of the assessee-company) under section 36(1)( ii ) of the Act by holding that the same would have been payable by way of dividend. 23. In the draft assessment order, the Assessing Officer disallowed the aforesaid payment of Rs. 2,95,93,000 on account of payment of bonus. The matter was referred to the learned DRP and objection was raised by the assessee against the Assessing Officer s action. The learned DRP has decided this issue by directing the Assessing Officer to verify records of the earlier year and if it is allowed in the earlier years, the same should be allowed in this asses ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ns, experience and expertise in the field of investment advisory services and keeping in view their experience, expertise and services rendered, the assessee had compensated them. He further contended that one of the shareholders was paid much higher sum on account of bonus though both held equal share in the company and therefore, it cannot be said that the said sum would have been payable to them as dividend. In this connection, reliance was placed on the decision of Hon ble Bombay High Court in the case of Loyal Motor Service Co. v. CIT [1946] 14 ITR 647 . He also relied upon the recent case of Dy. CIT v. Cheviot International Ltd. MANU/ID/310/2010 (Trib. - Delhi), a copy of which is placed at page 579 of the paper book of judicial precedents. 25. The learned counsel for the assessee further submitted that in a hypothetical scenario in which bonus is allowed as a result of their shareholding, there would be huge difference between the actual bonus paid and the bonus ought to be paid as shown below : S. No. Name of the Employee Bonus Amount (Actual) (in Rs.) Bonus Amount (in ratio of 1:1) (in Rs.) Difference (in Rs.) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... made by the assessee in the earlier years, the question of deciding this issue on the basis of earlier years does not arise. This position is not clear as to whether the identical claim was made by the assessee in the earlier years and was allowed by the Assessing Officer. The various contentions raised on merits have not been dealt with either by the learned DRP or by the Assessing Officer. We, therefore, restore this matter to the file of the Assessing Officer for fresh adjudication after verifying as to whether identical claim was allowed in earlier years and if it is found that the same is allowed in the earlier year, the Assessing Officer shall allow the assessee s claim as so directed by the learned DRP. If no such claim was made in the earlier year and it is for the first time the claim has been made, the DRP shall decide the matter on merits having regard to the provisions contained in section 36(1)( ii ) in the light of facts of the present case and the contentions/submissions of the assessee as well as the decisions cited by the learned counsel for the assessee. The Assessing Officer/DRP shall provide reasonable opportunity of being heard to the assessee. 29. Next gro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r ascertaining as to whether identical issue based on same set of facts has been decided by any appellate authority in earlier years and if it is not so, then learned DRP is directed to decide the issue on merits having regard to the provisions provided under section 37(1) of the Act in the light of the facts of the present case. The Assessing Officer/DRP shall provide reasonable opportunity of being heard to the assessee. We order accordingly. 33. Next issue is with regard to disallowance of Rs. 1,30,000 out of staff welfare expenses. 34. In the course of assessment proceedings, it was noticed by the Assessing Officer that assessee-company paid an amount of Rs. 1,30,000 to M/s Neemrana Hotels Pvt. Ltd., on 17-11-2005 by debiting staff welfare expenses to profit and loss account. The assessee explained before the Assessing Officer that the assessee has held official get together at The Pataudi Palace for its employees and the amount incurred was booked as staff welfare expenses in the books of account. The copy of bill in relation to the above mentioned expenditure was furnished. The Assessing Officer disallowed the same in the draft assessment order and the matter was then ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Printing Press without deducting tax at source. 39. The said disallowance has been made by the Assessing Officer by invoking provisions of section 40( a )( ia ). The assessee has explained before us that out of Rs. 2,22,748 paid to Bansal Printing Press, it has claimed only Rs. 42,100 as printing and stationery and Rs. 25,269 as courier charges and the rest of the amount paid to Bansal Printing Press was not claimed in the profit and loss account but the same was debited to its associated enterprises and claimed as a reimbursement. The assessee, therefore, submitted that disallowance can only be made only to the extent of expenses claimed as deduction. The learned counsel for the assessee, therefore, submitted that the Assessing Officer has erred in disallowing the expenses to the extent of Rs. 1,55,379 which has not been claimed by the assessee as expenses in its profit loss account. 40. After hearing both the parties, we are in agreement with the contention of the learned counsel for the assessee that if expenses have not been claimed as deduction in the profit and loss account, the question of disallowance thereof would not arise. Insofar as the payment of Rs. 42,100 ..... X X X X Extracts X X X X X X X X Extracts X X X X
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