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TMI Blog2013 (10) TMI 1487X X X X Extracts X X X X X X X X Extracts X X X X ..... ng)-11(5) as section 92CA(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-à-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. T ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... required to 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) i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 marking these transactions for the TP studies, assessee used TNMM method, most appropriate method with Operating Profits to Total Costs (OP/TC) as profit level indicator (in short „PLI‟). The following 5 comparables were finally shortlisted by the assessee for TNMM studies and the Arithmetic Mean is computed at n ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... al 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." 10.1. From the above list of 9 comparables chosen by the TPO, 3 comparables offered by the assessee found acceptable by the TPO. They are (1) Allianz Securities Ltd; (2) Keynote Corporate Services Ltd and (3) SREI Capital Markets Ltd. However, the assessee is against the inclusion of other 6 comparables and the addition of ₹ 2,67,01,717/-. Agg ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... en 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: 12.7. The appellant earns a margin of 15% from the rendering of investment advisory services to its AE. Accordingly, the margin earned by the appellant of 15% falls below + 5% range of the ALP as determined above and thus does not satisfy the Arm‟s Length principle. The adjustment to the international transaction shall therefore be worked out as under: ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... us 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 brought our attention to page 214 of the paper book and mentioned that the ICDS Securities Ltd is engaged primarily in "credit card services in association with Standard Chartered Bank". Referring to page 223 of the paper book, Ld Counsel mentioned that assessee‟s „operating income‟ is ₹ 2.67 Crs and it includes Broking and Share Trading income of ₹ 2.08 Crs and Functional & Advisory Services income of only ₹ 5,03,418/-. Referring to page 234 of the paper book showing the „segment accounting‟, out of the sum of ₹ 56,03,418/-, the sum of ₹ 5.76 lacs is earned on account of De ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... td 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 disposing the ground without making a mention to this issue in the impugned order of the CIT(A) is also highlighted by Ld Counsel. Referring to ground no.1.5, Ld Counsel argued that the same is consequential and the ground depends on the final computation of the Arithmetic Mean of AL margin. 18. On the other hand, Ld DR relied on the order of the AO/TPO/CIT(A). However, regarding the risk adjustment, Ld CIT-DR is of firm opinion that the grant of the risk adjustment is not a matter of rule or right. Considering the fact the assessee has not substantiated the claim with the facts and the figures on the existence of the risk in the business of the comparable qua the assessee, there is no need for such granting of the adjustments. Regarding ground no. 1.5, Ld DR has nothing specific to argue. 19. We have heard both the par ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ra 53 in particular, wherein the Tribunal held that the stocking broking companies are not good comparables on FAR analysis with that of the assessee company which is engaged in Investment Advisory services. Assessee is not engaged in loan syndication or capitalization of funds from the investors and he is not engaged in marketing, investment and management of funds mobilizing under various schemes. The comparable of this kind, which is responsible for providing management and administrative services on one side and providing the credit card services on the other, the company is entirely on a different function. These functional on one side and the IAS of the assessee on the other belong to different genera of the functions. Therefore, we find the CIT(A) has not correct in including the company in the list of comparable. Hence we set aside the order of the CIT(A) in this regard and direct the AO / TPO / CIT (A) to exclude M/s ICDS Securities Ltd in the list of the comparable as it is of different function. Accordingly, we order in favour of the assessee. Justification for inclusion of M/s Sumedha Fiscal Services Ltd as good comparable 21. Regarding the inclusion of the M/s Sumedh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d in the Investment Advisory Services (IAS) and the so called comparable case of Sumedha Fiscal Services Ltd is found to be not a good comparable. Thus, it is binding on us that the case of M/s Sumedha Fiscal Services Ltd is not a good comparable functionally even to the present assessee, whose function is IAS. Para 2 of the said judgment of the High Court is relevant. 23. Thus, the assessee‟s function of „investment advisory services (in short „IAS‟) involve monitoring, gathering of investment related data and supply to the parent company at Singapore and in substance, the same is incomparable to the functions of (i) Broking and Share Trading and offer of Credit Card Services to Standard Chartered Bank; and (ii) Loan Syndication and Project Consultancy Services/ Capital Market Operations as discussed in the above. Thus, these two sets of functions belong to different genera. Thus, the basis requirement of the FAR analysis, which is the integral part of the „transfer pricing‟ study, is not met so as to justify the inclusion of the said two comparable. This basic principle is repeatedly affirmed by the Tribunal right from the beginning as evident ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d, the result of each comparable and there are adequate reasons for such adjustment, no adjustment is justified. In absence of any such situation, no adjustment can be allowed. In our considered view, taxpayer has not been able to show how this risk, if any, is translated into charging a higher margin in comparable companies. Similarly, the assessee‟s claim that it has no market risk is also not acceptable. Assessee provides service to its group company only. Single customer risk is also a market risk. The performance of company in such cases is entirely dependent on the Associated Enterprises (AE). As soon as the AE runs out of the business or if AE‟s business gets reduced substantially then the business of the assessee will also get adversely effected accordingly. Being a captive service provider, the assessee cannot look for other customers. In such cases, the assessee runs a greater risk than an average independent entity who can always overcome the risk by looking for other customers or other market. The dependence on the particular client or a particular geography area along is always considered a high risk. It can be seen from the financial crisis in 2008-09 in U ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dered by the TPO. We shall now proceed to analyse the justification of the above conclusion of the CIT(A) in the succeeding paragraphs of this order. A. Justification for inclusion of GeefCee Finance Ltd as good comparable 29. Before us, Ld DR made a legal proposition that loss making company do not constitutes good comparable for the profit making assessee like the present one. In this regard, he relied on various binding coordinate bench decisions of this tribunal. Further, he mentioned that the M/s GeefCee Finance Limited with the operating margin of 0.26% is not operating profit of the comperable business. This case has registered operating losses consistently for three years and filed financial statements for three Fys ending on 31st March, 2003, 2004 and 2005. Sri Ajeeth Jain CIT DR stated that it is a case of persistent operational loss. In this regard, Ld DR tabulated the operational losses over cost. Relevant table as modified as follows: 30. Further, to substantiate the above legal proposition, Ld DR filed a copy of the order of the Tribunal in the case of M/s Advance Power Display Systems Ltd vs. ACIT vide appeal ITA No.6732/M/2011 & ITA No.6542/M/2011 (AY: 2003-2004) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iple, the order of the CIT(A) is incorrect on his conclusion and however, the same is subject to the verification of the loss percentages of OC/TC for the three years. As this data is not available before the CIT(A) too. 34. We have also perused the decisions cited by the DR in connection his argument on the persistent loss making as not good comparables and relevant pick from the contents of para 10.2 from the order of the ITAT of M/s Advance Power Display Systems Ltd reads as under: "10.2. Even otherwise, when the comparability of the case has to be tested independently for each year, then without examination of the comparability, no case can be accepted as a comparable, solely on the basis that it has been accepted as comparable in the subsequent year. From the annual report of the company M/s. BCC Fuba India Ltd., it is clear that this company is showing persisting loss from the year after year and therefore, in view of the series of decisions of this Tribunal on the point that persisting loss making company cannot be considered as good comparable for the purpose of determination of the ALP." 35. The above decision was given on the following factual matrix of the case. "9.1 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... O needs to verify before the exclusion after granting adequate opportunity to the assessee. B. Justification for exclusion of (i) A.K. Capital Services Ltd; (ii) Ajcon Global Services Ltd; (iii) Pioneer Investcorp Ltd and (vi) Brescon Corporate Advisors Ltd, as bad comparable: 37. In connection with these 4 comparables, Ld DR relied on the conclusions given by the TPO in this regard in favour of considering the same as good comparables. 38. On the other hand, Ld Counsel demonstrated that these companies are not functionally comparable (FAR analysis) as they are not engaged in rendering of the advisory services like in the case of the assessee. Referring to A.K. Capital Services Ltd, Ld Counsel mentioned that this company undertakes merchant banking activities which are regulated by the SEBI. Referring to Ajcon Global Services Ltd, Ld Counsel mentioned that this company is engaged in the equity broking and financial advisory services, which is functionally different and not comparable to the activities of the assessee. Referring to Pioneer Investcorp Inc, Ld Counsel mentioned that this company is predominantly engaged in the field of debt syndication and allied services to the co ..... X X X X Extracts X X X X X X X X Extracts X X X X
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