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2017 (2) TMI 1389 - AT - Income TaxTPA - comparability analysis - functinal similarity - Held that - Assessee is engaged in the business of providing advisory services to its associated enterprises noted above to assist them in providing services to the Investment funds. CCIAPL primarily carries out research and scouting activities for ChrysCapital Management Companies to identify entrepreneurs and portfolio companies requiring assistance in the form of capital infusion, strategic direction and financial advice. ChrysCapital Management Companies are asset management companies for investment funds (Private Equity Funds) who generally focus on investment in incubation ventures. These investment funds concentrate on providing funds to entrepreneurs engaged in the business of providing software services, outsourcing services and technology out of India, thus companies functionality dissimilar with that of assessee need to be delsected from final list. We direct for excluding Brescon Corporate Advisors Limited from the list of comparables. Deduction under Section 36(1)(ii) in respect of payment of bonus to the two shareholder-directors - Held that - This issue is covered in favour of assessee by the decision in assessee s own case for the assessment year 2008-09 2015 (4) TMI 949 - DELHI HIGH COURT as held the bonuses paid to the two shareholder-directors in the preceding two financial years were in the ratio of 60-65% 40-35%, even though their shareholding was 1 1. The balance sheet of the assessee placed on record also indicates that the two shareholders also hold directorial positions in the assessee. Therefore, the assessee s contention that the bonus was paid to the shareholders in their managerial capacity, like in the case of other managers, cannot be questioned merely on the basis of a speculation by the revenue that such payment was to avoid tax. In such circumstances, the deduction under Section 36(1)(ii) in respect of payment of bonus to the two shareholder-directors is allowed Allowability of severance cost - Held that - Admittedly, Sri. Girish Baliga was neither a shareholder nor a director of the assessee company and did not have any other beneficial interest in the assessee. He was a qualified CA and a very experienced person. Therefore, there could not be any other consideration for severance cost of ₹ 35,10,000/- paid to him except the services rendered by him to assessee company. The assessee in its submissions has, inter-alia, pointed out that this payment was based on business exigency keeping in mind the best practices being followed in the industry. Therefore, the payment made to Sri. Girish Baliga by the assessee company as going concern was in line with the practice prevalent in the industry. In order to maintain good reputation as regards employment of Human Resources, it had to meet the common commercial practices. The payment had not been made in contemplation of closing down of unit but in regular course of carrying on assessee s business. Under such circumstances, this payment cannot be held to be in capital field and was an allowable expenditure in the hands of the assessee company. In the result, the appeal of the assessee is partly allowed.
Issues Involved:
1. Addition on account of Arm's Length Price under Section 92CA(3). 2. Disallowance under Section 36(1)(ii). 3. Disallowance of Severance Cost. 4. Disallowance under Section 40(a)(ia). 5. Income Tax Debited to the P/L Account. 6. Disallowance out of Staff Welfare Expenses. 7. Depreciation on Computer Accessories. 8. Maintainability of the Department's Cross Objection. 9. Inclusion of non-operating incomes in the computation of profits of comparables. Issue-wise Detailed Analysis: 1. Addition on account of Arm's Length Price under Section 92CA(3): The assessee's main grievance was the inclusion of Brescon Corporate Advisors Limited as a comparable. It was argued that Brescon's functional profile differed significantly from that of the assessee, primarily relying on decisions from similar cases. The Tribunal agreed, noting that Brescon's income from financial restructuring, recapitalization, and debt syndication was not comparable to the assessee's advisory services. Consequently, Brescon was excluded from the list of comparables. 2. Disallowance under Section 36(1)(ii): The assessee contended that the bonus paid to its shareholder-directors should be allowed as a deduction. The Tribunal referred to a previous decision by the Hon'ble Delhi High Court in the assessee's own case, which allowed such a deduction. The High Court had observed that the bonus was paid in the directors' managerial capacity and not as a substitute for dividends. Therefore, the Tribunal allowed the deduction under Section 36(1)(ii). 3. Disallowance of Severance Cost: The assessee paid a severance cost to an employee, Mr. Girish Baliga, and claimed it as a business expenditure. The Tribunal noted that Mr. Baliga was neither a shareholder nor a director and had no beneficial interest in the company. The payment was based on business exigencies and industry practices. The Tribunal found the expenditure to be justified and allowed the deduction. 4. Disallowance under Section 40(a)(ia): This issue was not pressed by the assessee during the hearing, and thus, the Tribunal did not address it in detail. 5. Income Tax Debited to the P/L Account: This issue was also not pressed by the assessee during the hearing, and thus, the Tribunal did not address it in detail. 6. Disallowance out of Staff Welfare Expenses: This issue was not pressed by the assessee during the hearing, and thus, the Tribunal did not address it in detail. 7. Depreciation on Computer Accessories: This issue was not pressed by the assessee during the hearing, and thus, the Tribunal did not address it in detail. 8. Maintainability of the Department's Cross Objection: The Tribunal held that the department's cross objection was not maintainable. It referred to various judicial precedents, noting that the department had no right to file objections against the DRP's directions for periods prior to July 2012. The Tribunal emphasized that the right to appeal is statutory and cannot be assumed in the absence of specific provisions. 9. Inclusion of non-operating incomes in the computation of profits of comparables: The assessee argued that non-operating incomes should be excluded while computing the profits of comparables. The Tribunal agreed and restored the issue to the TPO for re-examination, directing that non-operating incomes and related expenses should be excluded from the computation. Conclusion: The appeal of the assessee was partly allowed, and the cross objection of the Revenue was dismissed. The Tribunal provided detailed reasoning for each issue, ensuring that the legal principles and precedents were thoroughly considered.
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