2014 (11) TMI 346 - AT - Income Tax

Transfer pricing adjustment Selection of comparables Brescon Corporate Advisors Ltd Segmental data not provided - Held that - The company is engaged in carrying on merchant banking and investment activities along with providing project advisory services - A look at the Annual accounts of Brescon Corporate Advisors Ltd. indicates that it has two streams of income, namely, Fee based financial services and Other income - The assessee s activity is to tender advice to the Manager about the avenues for making investment in real estate, and, if the Manger agrees to go ahead with such investment opportunity, then, to get involved in the process of finalization of the deal and then provide support services, including maintenance of books of account etc., on the clicking of the deal there is no rationality in including this company in the list of comparables since no segmental data of the advisory services by this company is available, which component is very small vis-a-vis the entity level operations - Availability of separate data could have possibly made it comparable with the assessee thus, the company is directed to be excluded from the list of comparables. Khandawala Securities Ltd. Held that - There is no data of net income of this component on segment level, except for its gross revenue - it includes equity capital markets transaction execution, mergers and acquisitions advisory, capital raising advisory and transaction execution relating to structured finance, real estate and infrastructure - Thus, out of total of 46% of the gross revenues of this company lying under the overall Corporate advisory services division , it is manifest that only some of the activities undertaken by it bear some similarity to those carried on by the assessee - The fact that apart from entity level, no details of this overall segment of Corporate Advisory Services are available, further cements the viewpoint the company is directed to be excluded from the list of comparables. Sumedha Fiscal Services Ltd. Held that - The segmental data is available but such segment with the caption Consultancy services also encompasses loan syndication, merchant banking, restructuring and other related advisory services apart from consultancy services - The composition of consultancy services simpliciter in this overall segment, which is akin to that of the assessee is not ascertainable - Since the advisory services are not separately identifiable from this broader segment of consultancy services, the overall consultancy segment of the company cannot be considered as comparable thus, the matter is to be remitted back to the TPO for determination of ALP of the international transaction by considering the remaining four companies as comparable - Decided in favour of assessee. Disallowance u/s 14A r.w. Rule 8D Held that - The assessee earned exempt income and did not offer any disallowance u/s 14A - The AO recorded proper satisfaction that the provisions of section 14A were attracted as the assessee had incurred some expenditure for making investment, which was not offered for disallowance in Maxopp Investment Ltd. Vs. CIT 2011 (11) TMI 267 - Delhi High Court it has been held that the provisions of section 14A are attracted in such situations - As the assessment year under consideration is 2008-09, the prescription of rule 8D would apply - the AO was fully justified in making disallowance under clause (iii) of rule 8D at 0.5% of the average value of investments Decided against assessee.

Summary

Issues Involved:
1. Selection of comparable companies for transfer pricing adjustment.
2. Disallowance under section 14A of the Income-tax Act, 1961.

Issue-wise Detailed Analysis:

1. Selection of Comparable Companies for Transfer Pricing Adjustment:

The primary issue in this appeal concerns the selection of three companies as comparables for transfer pricing adjustment. The assessee, engaged in providing investment advisory services to its associated enterprise (AE) in Mauritius, used the Transactional Net Margin Method (TNMM) to establish that its international transactions were at arm's length price (ALP). The Transfer Pricing Officer (TPO) reduced the number of comparables from 17 to 7, resulting in an average OP/TC of 35.15% and a proposed transfer pricing adjustment of Rs. 1,28,37,664/-. The assessee contested the selection of three companies: Brescon Corporate Advisors Ltd., Khandawala Securities Ltd., and Sumedha Fiscal Services Ltd.

Brescon Corporate Advisors Ltd.:

The assessee argued for the exclusion of Brescon Corporate Advisors Ltd. on the grounds that it was primarily a merchant banking company with significant income from recapitalization advisory and debt syndication. The TPO rejected this argument, maintaining that the company provided investment advisory services. However, the tribunal found that Brescon Corporate Advisors Ltd. had multiple income streams, including 'Fee based financial services' and 'Other income', with no segmental data available to isolate the income from advisory services. Given the lack of segmental data and the distinct nature of its income streams, the tribunal directed the exclusion of Brescon Corporate Advisors Ltd. from the list of comparables.

Khandawala Securities Ltd.:

The assessee contended that Khandawala Securities Ltd. engaged in merchant banking activities and should be excluded. The TPO included it, noting its corporate advisory services related to real estate and infrastructure. The tribunal observed that Khandawala Securities Ltd.'s income comprised brokerage, corporate advisory services, income from capital market operations, and profit on sale of long-term investments. With no segmental data available to isolate the income from advisory services, the tribunal concluded that Khandawala Securities Ltd. could not be considered comparable and ordered its exclusion.

Sumedha Fiscal Services Ltd.:

The assessee argued that Sumedha Fiscal Services Ltd. should be excluded due to its involvement in merchant banking activities. The TPO included it, citing its advisory services. The tribunal noted that Sumedha Fiscal Services Ltd. had segmental data, but its consultancy services segment included loan syndication, merchant banking, restructuring, and other advisory services. Without separate data for consultancy services akin to those provided by the assessee, the tribunal held that Sumedha Fiscal Services Ltd. could not be considered comparable and ordered its exclusion.

The tribunal rejected the Revenue's contention that the assessee should not be allowed to exclude companies it initially considered comparable, emphasizing that the TPO must evaluate the comparability on merits. Consequently, the tribunal directed the exclusion of the three companies and remanded the matter to the TPO/AO to determine the ALP based on the remaining four comparables.

2. Disallowance under Section 14A of the Income-tax Act, 1961:

The assessee contested the disallowance of Rs. 2,48,589/- made by the AO under section 14A read with rule 8D of the I.T. Rules, 1962. The AO observed that the assessee earned dividend income from mutual funds, claimed as exempt, and made investments during the year. The AO applied rule 8D(2)(iii) to disallow 0.5% of the average value of investments, resulting in the addition.

The tribunal upheld the AO's decision, noting that the assessee earned exempt income and did not offer any disallowance under section 14A. The AO recorded proper satisfaction that the provisions of section 14A were attracted, and the Hon'ble jurisdictional High Court in Maxopp Investment Ltd. Vs. CIT supported the AO's stance. Therefore, the tribunal concluded that the AO was justified in making the disallowance under rule 8D(2)(iii).

Conclusion:

The appeal was partly allowed. The tribunal directed the exclusion of the three contested companies from the list of comparables and remanded the matter to the TPO/AO for determining the ALP with the remaining comparables. The disallowance under section 14A was upheld.