TMI Blog2019 (7) TMI 76X X X X Extracts X X X X X X X X Extracts X X X X ..... value cannot be treated as deemed loan to the AE. Accordingly, the Tribunal deleted the addition made on account of notional interest on such deemed loan Addition on account of adjustment to the arm's length price of investment advisory services - TNMM - selection/rejection of comparables - HELD THAT:- Companies functionally dissimilar with that of assessee need to be deselected from final list. - ITA no. 990/Mum./2014, IT(TP)A no.1754/Mum./2014 And IT(TP)A no. 1597/Mum./2015 - - - Dated:- 19-6-2019 - SHRI SAKTIJIT DEY, JUDICIAL MEMBER AND SHRI MANOJ KUMAR AGGARWAL, ACCOUNTANT MEMBER For The Assessee : Shri Madhur Agrawal For The Revenue : Shri Anand Mohan ORDER PER SAKTIJIT DEY. J.M. This bunch consists of a set of cross appeals pertaining to the assessment year 2009 10 and an appeal by the assessee for the assessment year 2010 11. These appeals arise out of final assessment orders passed under section 143(3) r/w section 144C(13) of the Income Tax Act, 1961 (for short the Act ) in pursuance to the directions of the Dispute Resolution Panel III (DRP), Mumbai. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t of borrowing plus 3% mark up. 6. The learned Authorised Representative submitted, while deciding the identical issue in assessee s own case for the assessment year 2008 09, the Tribunal following the decision of the Hon'ble Jurisdictional High Court in Vodafone India Services Pvt. Ltd. v/s Union of India Ors., 368 ITR 001 (Bom.), deleted the addition by holding that the shortfall in premium for issuance of equity shares by the assessee to its holding company cannot be treated as deemed loan. The learned Authorised Representative submitted, the same view has been expressed by the Tribunal in case of assessee s sister concern viz., J.P. Morgan Securities India Pvt. Ltd. He also relied upon the decision of the Hon'ble Jurisdictional High Court in Vodafone India Services Pvt. Ltd. (supra). 7. The learned Departmental Representative, though, submitted that the issue is covered in favour of the assessee by the decision of the Tribunal in assessment year 2008 09, however, he relied upon the observations of learned DRP. 8. We have considered rival submissions and perused the material on record. As could be seen from the fact ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... shown by the assessee at 15%. Thus, the assessee claimed the price charged for the provisions of investment advisory services to be at arm's length. The Transfer Pricing Officer, however, did not accept the transfer pricing analysis of the assessee. Pointing out defects and deficiencies, he observed that the transfer pricing analysis of the assessee is unreliable, hence, rejected it. After rejecting the transfer pricing analysis of the assessee, though, he agreed that TNMM is the most appropriate method to benchmark the arm's length price, however, he undertook the exercise of determining the arm's length price of the international transaction by selecting fresh comparables by applying certain additional filters. In the process, he selected six companies as comparables with average margin of 16.99%. By applying the average margin of the comparables to the cost incurred by the assessee, the Transfer Pricing Officer determined the arm's length price relating to the investment advisory service segment at ₹ 3,35,00,913, as against ₹ 1,77,54,758, shown by the assessee. The resultant shortfall of ₹ 1,57,46,155, was treated as the transfer pricing adjust ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... T, ITA no.143/Mum./2014, 04.07.2014; and ix) Bain Capital Advisors India Pvt. Ltd. v/s DCIT, ITA no.1360/Mum./2014, dated 05.01.2015. 14. The learned Departmental Representative drawing our attention to the annual report of the company submitted, the core activity of the company is advisory services. Therefore, this company was rightly selected as comparable. 15. We have considered rival submissions and perused the material on record. From the annual report of the company it is noticed that it is engaged in the business of merchant banking. Hence, it cannot be functionally comparable to the assessee. In the case of DCIT v/s M/s. Arisaig Partners India Pvt. Ltd., ITA no.1083/Mum./2014, dated 25th March 2015, the Tribunal, Mumbai Bench, has rejected this company as a comparable for the aforesaid reason. While deciding the appeal filed by the Department against the aforesaid decision of the Tribunal, the Hon'ble Jurisdictional High Court, in judgment dated 10th October 2018, in ITA no.609 of 2016, approved the decision of the Tribunal. In various other decisions, as cited before us by the learned Authorised Representative, t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... debt issue management, portfolio management and broking. As could be seen from the functional profile of this company, none of the services provided by the company can be comparable to investment advisory services provided by the assessee. Pertinently, while considering the aforesaid comparable for selection in assessee s own case in assessment year 2010 11, the Transfer Pricing Officer after taking note of the submissions of the assessee in the context of facts and material placed before him has held that neither the merchant banking nor broking service segment of the company can be comparable to the assessee. Accordingly, he rejected this comparable. On a perusal of material on record, we are of the view that there is no change in the functional profile of this company in assessment years 2009 10 and 2010 11. Therefore, this company being functionally different from the assessee cannot be treated as comparable. Similar view has been expressed in the decisions cited by the learned Authorised Representative, couple of which relate to the impugned assessment year. In view of the aforesaid, we direct the Assessing Officer to exclude this company as a comparable. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... OMPANY LTD. 22. Objecting to the selection of this company, the learned Authorised Representative submitted, 95% of the income of the company is from syndication fee. Drawing our attention to the annual report of the company, the learned Authorised Representative submitted, it operates under single segment of portfolio management, mutual fund distribution and merchant banking. Therefore, he submitted, the functional profile of this company does not match with an investment advisory service provider. He submitted, for the aforesaid reason, the Transfer Pricing Officer himself excluded this company as a comparable in assessee s own case for the assessment year 2010 11. Thus, he submitted, the company should be rejected as a comparable. In support, he relied upon the following decisions: i) General Atlantic Pvt. Ltd. v/s DCIT, ITA no.8914/Mum./2010, dated 31.01.2013; ii) CIT v/s Carlyle India Advisors Pvt. Ltd., ITA(L) no.1386 of 2012 dated 22.02.2013; and iii) Carlyle India Advisors Pvt. Ltd. v/s ACIT, ITA no.7901/Mum./2011, dated 04.04.2012; 23. Learned Departmental Representative reli ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n a number of decisions as submitted in the legal paper book. 27. The learned Departmental Representative relied upon the Transfer Pricing Officer and the DRP. 28. We have considered rival submissions and perused the material on record. As could be seen from the annual report of the company placed in the paper book, the company is a SEBI registered investment/merchant banking company and provides merchant banking services. It is further noticed that the company has earned income from loan syndication and consultancy services. Thus, from the facts emanating from record, it is evident that the functional profile of the company as an investment/merchant banker renders it incomparable to an investment advisory service provider. Considering the aforesaid aspect, the Transfer Pricing Officer himself has rejected this company as a comparable in assessee s own case for the assessment year 2010 11. No material has been brought before us to demonstrate that the functional profile of the company in assessment years 2009 10 and 2010 11 are not similar. Moreover, in the decisions relied upon by the learned Authorised Representative, this company has been held ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Moreover, in the decision cited before us by the learned Authorised Representative, some of which pertain to the impugned assessment year, it has been held that this company is a good comparable to an investment advisory service provider. Moreover, it has been brought to our notice by the learned Authorised Representative that in assessee s own case in assessment years 2008 09, 2013 14 and 2015 16, the company has been accepted as a comparable. In view of the aforesaid, we are inclined to accept this company as a good comparable to the assessee. Accordingly, the Assessing Officer is directed to include this company as a comparable. vii) INFORMED TECHNOLOGIES LTD. 33. Objecting to the rejection of this company as a comparable, the learned Authorised Representative submitted, as per functional profile of the assessee company mentioned in the annual report, it collects and analyses data on financial fundamentals, corporate governance, director/executive compensation and capital market. It offers a range of data management services to the financial sector. He submitted, though, the company is functionally similar to the assessee, the Transfer Pri ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y services provided by the company involved analysis of the business and operations of a company/sector, it s profitability, operation, efficiency, future outlook, etc. which are similar to the functions performed by the assessee. Thus, he submitted, the Transfer Pricing Officer wrongly rejected the company as a comparable. The learned Authorised Representative submitted, in a number of decisions, some of which relate to the impugned assessment year as well, the Tribunal has consistently held this company to be a comparable to investment advisory service provider. He submitted, in assessee s own case in assessment years 2008 09 and 2013 14, the Transfer Pricing Officer himself has accepted this company as a comparable. Thus, he submitted, the company should be treated as a comparable to the assessee. In support he relied upon the following decisions: i) Warburg Pincus India Pvt. Ltd. v/s ACIT, ITA no.6981/ Mum./2012, etc., dated 13.01.2017; ii) TPG Capital India Pvt. Ltd. v/s DCIT, ITA no.7594/Mum./ 2014, dated 08.02.2017; and iii) DCIT v/s Temasek Holdings Advisors India Pvt. Ltd., ITA no. 968/Mum./2014, dated 27.06.2014. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d, this company is assessee s own comparable in transfer pricing study report and the assessee has neither objected the selection of this company before the Transfer Pricing Officer nor before the DRP. Thus, he submitted, at this stage the assessee cannot challenge the selection of this company through additional ground. In support of such contention he relied upon certain case laws as submitted in Legal Paper Book II. 41. In rejoinder, the learned Authorised Representative submitted, assessee cannot be prevented from seeking exclusion of a company wrongly selected by it, if, factually the company is not comparable to the assessee. In support of his contention, the learned Authorised Representative relied upon the following decisions: i) Warburg Pincus India Pvt. Ltd. v/s ACIT, ITA no.6981/ Mum./2012, etc., dated 13.01.2017; ii) TPG Capital India Pvt. Ltd. v/s DCIT, ITA no.7594/ Mum./2014, dated 08.02.2017; and iii) DCIT v/s Temasek Holdings Advisors Indian Pvt. Ltd., ITA no.968/Mum./2014, dated 27.06.2014. 42. We have considered rival submissions and perused the material on record. We ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by selecting TNMM as the most appropriate method with operating profit to operating cost as the PLI. By undertaking a search process applying certain filters, the assessee short listed eight companies as comparables with arithmetic mean of 18.56% as against margin shown by the assessee @ 15%. Thus, the price charged for international transaction with the AE was claimed to be at arm's length. The Transfer Pricing Officer, after verifying the transfer pricing analysis of the assessee found it to be unreliable, though, he accepted TNMM as the most appropriate method to benchmark the transaction. Pointing out various defects and deficiency, he rejected the transfer pricing analysis of the assessee and proceeded to determine the arm's length price of the transaction independently. Ultimately, the Transfer Pricing Officer selected six companies as comparable on the basis of current year data with arithmetic mean of 35.71%. Applying the arithmetic mean of the comparables to the cost incurred, the Assessing Officer determined the arm's length price of the transaction at ₹ 38,15,254, as against the price charged by the assessee at ₹ 32,52,031. The resultant short fa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 4.45%. So, there is not much difference between the threshold limit fixed by the Transfer Pricing Officer @ 75% and the export revenue earned by the company. Therefore, it needs examination whether due to such marginal difference the company can be excluded. In case of Mercer Consulting India Pvt. Ltd. v/s DCIT, [2014] 150 ITD 001 (Del.), the Tribunal while dealing with the issue relating to rejection of the company as a comparable on identical reasoning held that the ratio of 75% fixed by the Transfer Pricing Officer is not something which is scientifically proven. The Bench held that the company cannot be excluded for such a minuscule difference, if, it is otherwise comparable. Thus, ultimately, the Tribunal directed for inclusion of the company as a comparable. The Hon ble Punjab Haryana High Court while dealing with identical issue in CIT v/s Mercer Consulting India Pvt. Ltd, [2017] 390 ITR 615 (P H) also approved the aforesaid view of the Tribunal. In Capital IQ Information System India Pvt. Ltd. v/s ACIT, [2014] 49 taxmann.com 313 (Trib. Hyd.) following the decision in Mercer Consulting India Pvt. Ltd. v/s DCIT (supra), the Tribunal included the company as a comparable. Res ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . Principal Global Services (P.) Ltd. [2018] 257 Taxman 244 (Bom.). 54. In rejoinder, learned Authorised Representative submitted, in the case before the Hon'ble Jurisdictional High Court, it was not possible to ascertain the financial result of the comparable for the financial year followed by the assessee. However, in case of R Systems International Ltd. the situation is different as the company is maintaining quarterly audited accounts from which the results for the financial year 2008 09, is easily ascertainable. Therefore, there is no difficulty in computing the margin of the comparable for the financial year 2008 09. Thus, he submitted, the company otherwise being functionally similar to the assessee, has to be included as a comparable. 55. We have considered rival submissions and perused the material on record. We have also applied our mind to the decisions relied upon. The only reason for which the Transfer Pricing Officer has rejected this company as a comparable is, it follows calendar year as its financial year, whereas, the assessee s financial year ends on 31st March. However, from the annual report and other materials placed bef ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n International Operations v/s DCIT, [2015] 55 taxmann.com 386 (Pune Trib.); vi) ADP Pvt. Ltd. v/s SCIT, ITA no.134 191/Hyd./2014; vii) Cummins Turbo Technologies Ltd. v/s DDIT, ITA no.784/ Pune/2014; viii) Macquarie Global Services Pvt. Ltd., ITA no.6803/ Del./2104; ix) Xchanging Technology Services India Pvt. Ltd., ITA no. 6803/Del./2013; x) NCS Pearson India Pvt. Ltd. ITA no.2556/Del./2014; xi) M/s. Parexel International India Pvt. Ltd., ITA no.144/ Hyd./2014; and xii) E4e Business Solutions India Pvt. Ltd., ITA no.1777 1845/Bang./2013. 57. The learned Departmental Representative submitted, the assessee itself has selected this company as comparable. Therefore, he submitted, the company should not be rejected. 58. The learned Authorised Representative submitted, though, the assessee might have selected the company as a comparable on the basis of limited data available in public domain, however, subsequently more information came into the public domain which indicated that the company is functionally d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n of this company as a comparable, the learned Authorised Representative submitted, under no circumstances, the company can be treated as a comparable to the assessee as it is engaged in Geospatial Services and Engineering design services which include Geographical Information Service (GIS), Lidar, 3D Mapping, etc. In this context, the learned Authorised Representative extensively referred to the annual report of the company placed in the paper book. Thus, he submitted, the company being functionally different from the assessee cannot be treated as a comparable. In support of such contention, he relied upon the following decisions: i) CIT v/s Mercer Consulting India Pvt. Ltd. [2016] 76 taxmann.com 153 (P H); ii) Mercer Consulting India Pvt. Ltd. v/s DCIT, [2014] 47 taxmann.com 84 (Del. Trib.); iii) Capital IQ Information Systems India Pvt. Ltd., [2014] 49 taxmann.com 313 (Hyd. Trib.); iv) Hyundai Motors India Engineering Pvt. Ltd. v/s DCIT, [2014] 49 taxmann.com 290 (Hyd. Trib.); v) Excellence Data Research Pvt. Ltd. v/s ITO, [2014] 49 taxmann.com 409 (Hyd. Trib.); ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... view of our reasoning while deciding the comparability of Cosmic Global Ltd. herein before, we do not find the submissions of the learned Departmental Representative acceptable. d) VISHAL INFORMATION TECHNOLOGIES LTD. 63. Objecting to the selection of this company as a comparable the learned Authorised Representative submitted, the business model of the company is completely different from the assessee as it outsources major part of its work to third parties. To demonstrate the aforesaid factual aspect, the learned Authorised Representative drew our attention to the annual report of the company placed in the paper book and submitted that 64.61% of the cost are towards payment to third party vendors. Thus, he submitted, the company cannot be treated as comparable to the assessee. The learned Authorised Representative relied upon the following decisions: i) e4e Business Solutions India Pvt. Ltd., ITA no.1777 1845/Bang./2013; ii) CIT v/s Mercer Consulting India Pvt. Ltd. [2016] 76 taxmann.com 153 (P H); iii) PCIT v/s PTC Software India Pvt. Ltd., ITA no.598/2016, dated 16.04.2018; ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nting to ₹ 16,06,319. 67. The learned Authorised Representative submitted, while computing the tax liability of the assessee, the Assessing Officer has adjusted an amount of ₹ 16,06,319, as amount already refunded , though, no such was ever granted to the assessee. 68. Having considered rival submissions, we direct the Assessing Officer to verify the issue factually and decide it in accordance with law. Ground raised is allowed for statistical purposes. 69. In ground no.6, the assessee has challenged levy of interest under section 234B and 234D of the Act. 70. Levy of interest being consequential is not required to be adjudicated at this stage. 71. In the result, appeal is partly allowed. ITA no.1754/Mum./2014 Revenue s Appeal A.Y. 2009 10 72. The grounds raised by the Revenue are corresponding to grounds no.1 and 2 of ITA no.990/Mum./2014. In view of our decisions given in the earlier part of this order, the grounds raised by the Revenue have become redundant, hence, dismissed. 73. In the result, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 403/ Mum./2014, dated 25.10.2016; ii) Arisaig Partners India Pvt. Ltd. v/s ACIT, ITA no.840/ Mum./2015, dated 11.11.2016; iii) PCIT v/s Bain Capital Advisors India Pvt. Ltd., ITA no. 541 of 2016, dated 24.11.2018; iv) Bain Capital Advisors India Pvt. Ltd. v/s DCIT, ITA no.413/Mum./2015; 15.05.2015; v) Carlyle India Advisors Pvt. Ltd. v/s ACIT, [2016] 66 taxmann.com 14 (Mum. Trib.); vi) AGM India Advisors Pvt. ltd. v/s DCIT, ITA no.4757/ Mum./2015m dated 18.05.2016, dated 18.05.2016; and vii) Sparkles Dhandho Advisors Pvt. Ltd. v/s ITO, ITA no. 1047/Mum./2015. 79. The learned Departmental Representative relied upon the observations of the Transfer Pricing Officer and learned DRP. 80. We have considered rival submissions and perused the material on record. As could be seen from the annual report of the company placed in the paper book, it is not only registered as a portfolio manager with SEBI but it actually provides portfolio management service. By providing such services during the year it has also earned substantial revenue ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessee s knowledge process outsourcing division provided financial and analytical services and support of clients in the areas of Data Extraction, Aggregation, Electronic Conversion of Financial Statements, Validation and Analysis, Accounting and Finance, Research and Analytics, that the company was not engaged in investment advisory or consultancy services, that the A.O. was directed to exclude ICRA O from the final set of comparable companies, that he had held that it was functionally not comparable to the assessee. Charging of fees by ICRA O did not mean that it was a valid comparable to the assessee. As per the settled principles of TP for a company to be treated as a valid comparable the functions performed, assets employed and risks assumed have to be comparable and not nomenclatures in the annual accounts. We would like to refer to Pg.507 of the PB in case of ICRA O and it reads as under: ICRA Online Limited is a leading information services, outsourcing and technology solutions provider and caters for some of the biggest names in the financial services sector in (India) and abroad, which is a testimony to its product quality, commitment and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... itted, the company has re aligned its investment advisory business with Everstone Investment Advisors Pvt. Ltd. w.e.f. 1st January 2010. He submitted, the company has operated only for nine months during the financial year 2009 10 which is evident from sharp drop in operational expenditure as well as revenue due to re structuring. In this context, he drew our attention to the annual report of the company. Thus, he submitted, the company cannot be treated as a comparable. In support, he relied upon the following decisions: i) Carlyle India Advisors Pvt. Ltd. v/s ACIT, [2016] 66 taxmann.com 14 (Mum. Trib.); and ii) AGM India Advisors Pvt. ltd. v/s DCIT, ITA no.4757/Mum./2015m dated 18.05.2016, dated 18.05.2016. 83. The learned Departmental Representative relied upon the observations of the Transfer Pricing Officer and learned DRP. 84. We have considered rival submissions and perused the material on record. On a perusal of the annual report of the company, we find the aforesaid submissions of the learned Authorised Representative acceptable. While deciding the comparability of this company in case of AGM Indi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... impacted the financial results thereby rendering the said concern as an unfit comparable. The proposition being canvassed by the assessee is supported by the decision of Hyderabad Bench of the Tribunal in the case of Capital IQ Information System (India) (P.) Ltd. (supra). In fact, it is quite well understood that in a year where realignment/restructuring of business takes place, such year is often a peculiar economic year in the history of a concern and in such a situation, it would be in the interest of justice and fair play that such a concern is not treated as a comparable. In fact, in principle, we do not find any disagreement on the part of the TPO also on this aspect. However, what the TPO has stated is that in the present case, the realignment/restructuring is in the same line of business and, therefore, such restructuring/realignment does not result in any change in the activity of business. Therefore, according to the Revenue, there would be no impact on the financial results so as to make it incomparable with the tested transactions. We have carefully considered the aforesaid plea set up by the Revenue and in this context we may briefly refer to the Business Review out ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mstances, in our view, the assessee company is justified in asserting that Kshitij Investment Advisory Co. Ltd deserves to be excluded from the final set of comparables on account peculiar economic circumstances during the year under consideration. Thus, on this aspect also, assessee succeeds. 85. There being no difference in facts, respectfully following the aforesaid decisions of the Co ordinate Bench, which are for the very same assessment year, we exclude this company from the list of comparables. 4. ICRA MANAGEMENT CONSULTING SERVICES LTD. INFORMED TECHNOLOGIES LTD. IDC INDIA LTD. 86. Comparability issues relating to the aforesaid comparables also arose in assessee s appeal for the assessment year 2009 10 being ITA no.990/Mum./2014. The argument advanced by learned Counsels appearing for the parties in the appeal for assessment year 2009 10 were also adopted in the impugned assessment year. Therefore, the facts and contentions relating to the comparability of these companies being identical in both the years under consideration, respectfully following our decision in respect of these comparables while deciding assesse ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
