2016 (7) TMI 1495 - AT - Income Tax

TPA - Comparability selection - clubbing of the investment advisory service and investment banking services for the purpose of comparative analysis assessee s functions are basically in the nature of merchant banking service for the Associate Enterprise (A.E) - Held that - Investment advisory service segment cannot be clubbed with investment banking service for the purpose of bench marking the margin. Bench marking of the price charged for investment advisory service segment should have to be independently undertaken. As the Transfer Pricing Officer has not undertaken such exercise, we are inclined to restore the issue back to the file of the Transfer Pricing Officer to undertake such exercise by treating investment advisory service as a separate segment. The Transfer Pricing Officer must carefully examine the comparables selected by the assessee in its transfer pricing study and decide whether they are functionally similar, hence, suitable to be selected as comparable in respect of investment advisory segment. In case, the Transfer Pricing Officer finds them not to be comparable to the assessee, he may conduct a search process himself to find out comparables in the aforesaid category. Selection / rejection of comparable in the investment banking service segment and certain adjustments for computing the margin as proposed by assessee - we must observe, in the earlier part of the order, we have disapproved the approach of the Transfer Pricing Officer in rejecting the transfer pricing analysis of the assessee without proper application of mind and clubbing the investment advisory and investment banking services and treating it as investment banking segment for bench marking the price charged to A.E. For this reason alone, the transfer pricing adjustment by the Transfer Pricing Officer and confirmed by the DRP even in respect of investment banking services needed to be set aside. However, as learned Counsels appearing for the respective parties were heard at length on investment banking issues, it is necessary to deal with the submissions made on behalf of the parties with regard to certain adjustments claimed by the assessee in the investment banking segment while computing the margin of the assessee / comparables as well as also issues relating to selection / rejection of comparables. As not disputed that the assessee is in the start up mode as the impugned assessment year is the first full year of operation as far as investment banking segment is concerned. Whereas, the comparable companies no doubt have established themselves in the investment banking segment as they are in operation for substantial period. It is the submission of the assessee that the employee cost of the assessee was 71.5% of the total operating cost, whereas, the average employee cost of the comparable companies selected by the Transfer Pricing Officer is 29.43%. In this context, a reference can be made to a working of the average employee cost of comparables at Page 47 of the paper book. The assessee has also submitted a working as per which if employee cost is taken at 29% then assessee s margin would be 110% which is more than the margin of 105% computed by the Transfer Pricing Officer. In our view, the aforesaid contention of the assessee needs to be examined in detail after verifying the employee cost of both the assessee and comparable companies. It is evident from the order of the Transfer Pricing Officer and DRP, they have not examined the issue of adjustment towards employee cost in a proper perspective As far as use of multiple year data is concerned, in our view, one has to adhere to provisions of rule 10B(4) and proviso thereunder. As per the aforesaid provision use of multiple year data is not entirely prohibited. However, it is for the assessee to establish on record by bringing sufficient fact and material to show that data related to earlier years reveal certain factors which can have influence on the determination of margin in relation to the transactions being compared. If the assessee is able to establish this with relevant facts, then the Transfer Pricing Officer certainly has to consider them. As far as Chartered Capital and Investment Ltd. is concerned, assessee s contention with regard to the comparability of this company needs to be examined afresh by examining / analysing the impact of non provision of liability for gratuity on the margin of the company. It is the further contention of the assessee that the employee cost of this company is only 19.54% compared to employee cost of 71% of the assessee. This aspect has also not been examined by the Departmental Authorities. Necessary facts have to be examined to find out whether the low employee cost is due to out sourcing of activities or any other factor and necessary adjustment accordingly is to be made to the margin of the comparable / assessee.The assessee has also raised issue of super normal profit earned by the company. This factor, in our view, also requires examination as to whether there is any special reason for earning such profit may be as a result of merger or acquisition or due to any other factor. EDELWEISS CAPITAL LIMITED - RPT filter of 25% applied by DRP is reasonable and hence, needs no interference. If Edelweiss Capital Ltd. is functionally similar to the assessee, only because it has started its operation earlier compared to the assessee, it cannot be excluded for that reason alone. Of course, necessary adjustment can be made to the margin of the comparable / assessee keeping in view relevant factors which might have influenced the margin of the comparable. However, it is for the assessee to establish such facts with cogent evidence. With the aforesaid observations, we restore the issue to the file of the A.O. / Transfer Pricing Officer for fresh consideration. L&T CAPITAL LIMITED - DRP has directed the Assessing Officer to verify the RPT of the company whether exceeds the threshold limit of 25%. In addition to the aforesaid direction of the DRP, we further direct the Assessing Officer / Transfer Pricing Officer to also examine the factors which have resulted in lower employee cost of this comparable and make necessary adjustment if need be. Similarly, the Assessing Officer / Transfer Pricing Officer should also ascertain any extra ordinary reasons for earning of high margin of 91%. If there is any extraneous circumstances which impacted the margin earned by the comparable, compared to the assessee then this company should not be included as a comparable. CENTRUM CAPITAL LIMITED and KEYNOTE CORPORATE SERVICE LIMITED - we have noted that the DRP has not dealt with assessee s objection in respect of these two companies merely for the reason that they were selected by the assessee itself. The aforesaid approach of the DRP is not correct. Though, it may be a fact that the assessee had selected these two companies as comparable on the basis of multiple year data, however, that cannot prevent the assessee from objecting to the comparable selected even by him on some valid reasons. As the Departmental Authorities have not dealt with assessee s objection with regard to selection of these two companies, we are inclined to restore the issue to the file of Assessing Officer / Transfer Pricing Officer for examining afresh after providing due opportunity of being heard. Insofar as five other companies selected by the assessee viz. Aryaman Financial Services Ltd., Excess India Advisors India Ltd., ICRA Management Consulting Services Ltd., ICRA On line Limited, Kinetic Trust Ltd., on a perusal of the order of the Transfer Pricing Officer, we find, he has neither made any discussion on these companies nor has assigned any reason why they are not comparable to the assessee. DRP s order is also totally silent on this issue. In the aforesaid view of the matter, we direct the Assessing Officer / Transfer Pricing Officer to examine the comparability of these five companies while considering the issue of comparability of other comparables objected by the assessee. Transfer pricing adjustment with regard to ITES segment - Comparable selection - Held that - As assessee is into performing ITES / BPO functions thus companies functionally dissimilar with that of assessee need to be deselected from final list. Disallowance of cost relating to ESOP - Held that - As decided in assessee s own case 2015 (12) TMI 966 - ITAT MUMBAI we hold that discount on issue of employees stock options is allowable as deduction in computing the income under the head profits and gains of business of profession Deduction claimed of an amount paid to Bombay Stock Exchange and National Stock Exchange - Deduction u/s 37 - Held that - As decided in assessee s own case 2015 (12) TMI 966 - ITAT MUMBAI payment made by the assessee to stock exchanges were not for infraction of any law in view of the judgment of in the case of Angel Capital & Debitt Market Ltd. 2014 (5) TMI 584 - BOMBAY HIGH COURT deleted the addition. Computing deduction under section 10A - treatment to telecommunication charges - Held that - This issue is no more res integra, as different High Courts including the Hon ble Jurisdictional High Court in CIT v/s Gem Plus Jewellery India Ltd., 2010 (6) TMI 65 - BOMBAY HIGH COURT as well as different benches of the Tribunal including Mumbai Benches have held that telecommunication charges have to be excluded both from export turnover as well as total turnover for computing deduction under section 10A.

Summary

Issues Involved:
1. Transfer Pricing Adjustment for Investment Advisory and Investment Banking Services.
2. Transfer Pricing Adjustment for Information Technology Enabled Services (ITES).
3. Applicability of +/- 5% Variation under Section 92C(2).
4. Reference to Transfer Pricing Officer (TPO) without Satisfying Preconditions.
5. Disallowance of Employee Stock Option Plan (ESOP) Costs.
6. Disallowance of Charges Paid to Stock Exchanges.
7. Reduction of Telecommunication Charges from Export Turnover for Section 10A Deduction.
8. Reduction of Telecommunication Charges from Total Turnover for Section 10A Deduction.

Issue-wise Analysis:

1. Transfer Pricing Adjustment for Investment Advisory and Investment Banking Services:
The assessee, an Indian company engaged in securities broking, investment banking, underwriting, and other financial services, challenged the upward transfer pricing adjustment made by the TPO, which clubbed investment advisory services and investment banking services for benchmarking. The Tribunal found the TPO's approach flawed, noting that investment advisory services are functionally different from investment banking services. The Tribunal directed the TPO to treat investment advisory services as a separate segment and to re-examine the comparables selected by the assessee, ensuring they are functionally similar. The Tribunal also addressed the selection/rejection of specific comparables and adjustments for computing margins, emphasizing the need for a detailed examination of employee costs and other factors influencing margins.

2. Transfer Pricing Adjustment for Information Technology Enabled Services (ITES):
The assessee contested the transfer pricing adjustment for ITES, primarily objecting to the selection of certain comparables by the TPO. The Tribunal addressed objections regarding specific comparables such as Mold-Tek Technologies Limited, eClerx Services Limited, Vishal Information Technologies Limited, Accentia Technologies Limited, and Acropetal Technologies Limited. The Tribunal excluded these companies from the list of comparables, citing reasons such as functional differences, high-end services, mergers and acquisitions, and low employee costs. The Tribunal directed the TPO to re-examine the comparables and ensure they are functionally similar to the assessee.

3. Applicability of +/- 5% Variation under Section 92C(2):
The Tribunal did not specifically address this issue in detail, as the primary focus was on the selection of comparables and adjustments for computing margins in the transfer pricing analysis.

4. Reference to Transfer Pricing Officer (TPO) without Satisfying Preconditions:
The Tribunal did not specifically address this issue in detail, as the primary focus was on the selection of comparables and adjustments for computing margins in the transfer pricing analysis.

5. Disallowance of Employee Stock Option Plan (ESOP) Costs:
The assessee claimed a deduction for ESOP costs, which was disallowed by the AO on the grounds that it was a contingent liability. The Tribunal, referring to its decision in the assessee's own case for the assessment year 2009-10, allowed the deduction, following the decision of the Special Bench of the Bangalore Tribunal in Biocon Ltd., which held that the discount on ESOP is allowable as a deduction.

6. Disallowance of Charges Paid to Stock Exchanges:
The assessee claimed a deduction for charges paid to stock exchanges, which was disallowed by the AO as penalties. The Tribunal, referring to its decision in the assessee's own case for the assessment year 2009-10 and the decision of the Hon'ble Bombay High Court in Angel Capital & Debit Market Ltd., allowed the deduction, holding that the payments were not for infraction of any law.

7. Reduction of Telecommunication Charges from Export Turnover for Section 10A Deduction:
The Tribunal directed the AO to exclude telecommunication charges from both export turnover and total turnover for computing the deduction under section 10A, following the decisions of various High Courts and the Tribunal's decision in the assessee's own case for the assessment year 2009-10.

8. Reduction of Telecommunication Charges from Total Turnover for Section 10A Deduction:
The Tribunal directed the AO to exclude telecommunication charges from both export turnover and total turnover for computing the deduction under section 10A, following the decisions of various High Courts and the Tribunal's decision in the assessee's own case for the assessment year 2009-10.

Conclusion:
The Tribunal allowed the appeal partly, directing the TPO to re-examine the comparables and adjustments for computing margins in the transfer pricing analysis and allowing the deductions for ESOP costs and charges paid to stock exchanges. The Tribunal also directed the AO to exclude telecommunication charges from both export turnover and total turnover for computing the deduction under section 10A.