TMI Blog2017 (9) TMI 1295X X X X Extracts X X X X X X X X Extracts X X X X ..... questions of law for determination: (i) Was the Income Tax Appellate Tribunal (ITAT') justified in re-characterizing the function of the Assessee as a merchant banker and was this in conformity with the sub-advisory agreement dated 1st February 2006? (ii) Whether the ITAT was in error in upholding theinclusion of the comparable companies by the TPO considering the business profile of the Assessee as outlined in the transfer pricing documentation? (iii) Whether the ITAT erred in upholding the addition of notional interest on the ground of it being an international transaction? Case of the Assessee 3. The Appellant-Assessee (hereafter Assessee ) is a company incorporated in India, inter alia providing non-binding investment advisory services to its Associated Enterprise ( AE ) viz., Avenue Asia Capital Management LP, (Avenue US ), an investment management firm based in New York, US under the agreement dated 1st July, 2016 along with the addendum dated 5th December, 2008. According to the said agreement, the consideration /remuneration to the Assessee is cost plus 20% mark up of the services rendered by the Assessee which included providing research re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... commending an upward adjustment of ₹ 3,20,29,913/-. The TPO also recommended an adjustment of ₹ 51,34,309/- being the notional interest at 15.77% on the outstanding receivables from its AE on the basis that the same constituted an international transaction. Pursuant to the TPO s order, the AO passed a draft assessment order on 28th February, 2013 and assessed the income of the Assessee at ₹ 9,59,45,630 as against the return income of INR 5,87,81,405/-. Objections were filed by the Assessee against the said draft order with the Dispute Resolution Panel ( DRP ). 7. On 16th August, 2013, the DRP upheld the transfer pricing adjustments made by the AO/TPO. Subsequently, on 10th October, 2013, the AO passed the final assessment order under Section 143 (3) read with Section 144C of the Act, computing the total income as ₹ 9,59,45,630/- as per the directions issued by the DRP. This assessment order was challenged by the Assessee before the ITAT. 8. The ITAT has, by a detailed order, analysed the various comparables and remanded the matter to the TPO in respect of a few comparables for further analysis. The ITAT has also rejected some of the comparables suggest ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (iv) Recommendation for exchange of investment; (v) Recommendation of exit strategies; (vi) Identifying the opportunities for investment; (vii) Recommendation for the provision of equity or date or similar financing for investment companies; (viii) Recommendation in relation to date or similar financing; (ix) Purchase of preferred securities; (x) Investment in asset-back securitisation of vehicles and issuance of guarantees; (xi) Giving advice and opinions in connection with reorganisation, recapitalization, splitting of shares, change of par value, conversion otherwise; (xii) Engage and remunerate third party service providers. 12. Thus, the Assessee company s activities are that of a fee based investment/financial advisory service provider. Unlike merchant bankers who are involved in active financing transactions, the Assessee is only advising on financial issues. Thus, according to Mr. Syali, the activities of the Assessee cannot be compared to that of the merchant bankers. Mr. Syali submits that since an exact comparable was not available, the cut based method ( CUP ) cannot be used for determining the ALP and the TNMM method is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 13. Thus, he submits that the selection of comparables must be done keeping in view the comparability factors as specified. Mr. Syali submits that the ITAT has erred in retaining Sumedha, Brescon and Ladderup as according to him that has led to an incorrect conclusion and marking up of the ALP to a higher percentage of margin. According to Mr. Syali, the said entities were not functionally similar to the Assessee. 14. Mr. Syali submits that the ITAT has rightly held in para 6.2 of theimpugned order that the activity of the Assessee had to be characterised as a fee based financial advisory service provider. However, according to him, having done so, the retention of these three comparables does not match the criteria set down by the ITAT itself. He submits that though the TNMM method is sufficiently tolerant to a wide variety of functions, there should not be broad comparability between the comparables and the functional differences ought to be taken note of. Mr. Syali relies upon details of the accounts of the comparable entities of Sumedha, Brescon and Ladderup filed before the ITAT to argue that these three had completely dif ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... not that of a merchant banker, the term consultancy, encompasses the larger gamut of services, which would be included. The ITAT, has, in fact undertaken an in-depth analysis of each of the comparables chosen by the TPO and while retaining three of them has also rejected four of the comparables. This shows that the ITAT has exercised its powers in a judicious manner. Mr. Chaudhary draws the attention of this Court to what he considers an increasing trend of Assessees to themselves suggest several comparables and when the TPO chooses to include the comparables which perform similar functions as those suggested by the Assessees, the same are objected to if the percentage margin is high. Further, according to Mr. Chaudhary, Assessees tend to only challenge the comparables which have high margins on the ground of dissimilarity of functions, though they may in fact possess the same functions as those comparables chosen by the Assessee itself. In fact, this kind of trend ought not to be encouraged by this Court according to him. 18. The Revenue further relies upon specific findings of the ITAT in respectof Sumedha to submit that the ITAT has merely restored the matter to the TPO to e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... le arm s length price. Therefore, as far as possible, the comparables must be selected keeping in view the comparability factors as specified. Wide deviations in profit level indicator must trigger further investigations/analysis. 44. Consideration for a transaction would reflect the functions performed, the significant activities undertaken, the assets or resources used/consumed, the risks assumed. Thus, comparison of activities undertaken /functions performed is important for determining the comparability between controlled and uncontrolled transactions/entity. It would not be apposite to ignore functional dissimilarity only for the reasons that its impact may be reduced on account of using arithmetical mean of the profit level indicator. 20. A perusal of the above decision reveals that the following steps ought tobe undertaken in identification of comparable transactions/entities. The principle governing the identification of comparable transactions would be the same, irrespective of whichever transfer pricing method is adopted. Comparable transactions must be selected on the basis of a similarity with the controlled transaction/entity. Rule 10B (2) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... estments. The ITAT has equated `Advisory services related to debt financing' with `financial services from debt resolution and debt syndication'. These two are not identical services. Whereas the former is advisory in nature, the latter is executory in nature. While there could be some overlap between the former and latter, the matter requires deeper analysis and examination. (iii) Ladderup Corporation Limited The ITAT noticed that Ladderup had shown operational income from financial and management consultancy services as also fee based activities such as Debt Syndication, IPO Advisory, Private Equity Placement, Merger and Acquisitions, Corporate Restructuring and a host of other corporate advisory services. The ITAT, thereafter, simply held that Ladderup had similar functions as that of the Assessee and was a comparable that deserved to be retained. 22. Broadly, it appears that the ITAT has gone on the usage of several termssuch as debt syndication, debt financing, IPO advisory, corporate restructuring, mergers, acquisitions etc, appearing in the annual reports of the comparable to hold that the Assessee and the said comparables perform similar functions. The ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a final assessment order being passed by the AO. The matter is currently pending in appeal, by the Assessee, before the CIT (A). All those consequential orders would not survive in view of the present order. 27. In order to not brook any further delay, this matter may be placed before the CIT (A) to consider as to whether these three companies can be held to be comparables in the light of observations made in Rampgreen Solutions (supra) and in this order. The CIT (A) would, thereafter, pass a comprehensive order and determine the ALP for the international transactions. Question (ii) is answered in the affirmative i.e. in favour of the Assessee and against the Revenue. Question (iii) 28. On the question of notional interest, it was incorrect on the part of the ITAT to hold that the entire outstanding receivables constitute an international transaction. The reliance by the Assessee on the decision of this Court dated 25th April, 2017 in ITA 765/2016 [ Pr. Commissioner of Income Tax v. Kusum Health Care Pvt. Ltd. ] (hereafter Kusum Health Care ) is apt. There are several factors which need to be considered before holding that every receivable is an internation ..... X X X X Extracts X X X X X X X X Extracts X X X X
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