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2017 (9) TMI 1890 - AT - Income TaxTP Adjustment - comparable selection - CIT- A accepting Brescon Corporate Advisors Ltd. ( Brescon ) as a comparable to the appellant by holding that the activities performed by Brescon are similar to the activities performed by the appellant - TPO has accepted TNMM as the most appropriate method for benchmarking the international transactions - HELD THAT - As decided in own case 2017 (2) TMI 1389 - ITAT DELHI we are of the considered view that Brescon Corporate Advisors Ltd. introduced by the TPO and retained by ld. CIT (A) in the final list of comparables is not a suitable comparable, hence ordered to be excluded from the list of comparables. Integrated Enterprises India Limited - We are of the considered view that when a specific prayer has been made by the assessee to admit additional evidences in the form of financial data which was not available in the public domain during the TP proceedings before TPO, it was imperative on the part of ld. CIT (A) to pass an order on the application for additional evidence and to examine the suitability of comparable sought to be included by the assessee for benchmarking its international transaction. We set aside this issue to the ld. CIT (A) to decide afresh the suitability of the comparability of the Integrated Enterprises India Limited after allowing the application for additional evidence - additional ground is determined in favour of the assessee. Bonus paid to the employees by invoking provisions contained u/s 36(1)(ii) - HELD THAT - As decided in own case 2017 (2) TMI 1389 - ITAT DELHI deduction u/s 36(1)(ii) in respect of payment of bonus to the aforesaid shareholder/Director who are also major shareholder in the company with 50% shareholding of each is allowable deduction as there is no change in the shareholding pattern during the year under assessment - Decided in favour of the assessee. M/s. Keynote Corporate Services Ltd. - Only the shareholding pattern of M/s. Keynote Corporate Services Ltd. is changed with amalgamation which has not affected the profit. However, this contention is not tenable in the face of uncontroverted fact that the profit margin of assessee company has raised up to 145% during the year under assessment which is extremely volatile and abnormal and is due to the amalgamation and merger. Moreover, launch of ESOP Division which focused on designing and implementing stock option scheme for corporate, the business model of comparable company has undergone a change. So, we are of the considered view that the ld. CIT (A) has rightly excluded M/s. Keynote Corporate Services Ltd. as unsuitable comparable.
Issues Involved:
1. Determination of Arm's Length Price (ALP) and selection of comparables. 2. Inclusion/exclusion of specific companies as comparables. 3. Treatment of reimbursement of expenses. 4. Disallowance of bonus paid to employees under Section 36(1)(ii) of the Income Tax Act, 1961. 5. Admittance of additional evidence and grounds. Detailed Analysis: 1. Determination of Arm's Length Price (ALP) and Selection of Comparables: The assessee company, engaged in providing advisory services, adopted the Transactional Net Margin Method (TNMM) as the Most Appropriate Method (MAM) with Operating Profit/Operating Cost (OP/OC) as the Profit Level Indicator (PLI). The company benchmarked its international transactions using data from three financial years (2004-05, 2005-06, and 2006-07) and found its transactions to be at arm's length. However, the Transfer Pricing Officer (TPO) introduced two new comparables and used only the financial data for FY 2006-07, resulting in an adjustment of ?14,38,63,970 to the total income of the assessee. 2. Inclusion/Exclusion of Specific Companies as Comparables: Brescon Corporate Advisors Limited: The TPO included Brescon Corporate Advisors Limited as a comparable, which the assessee contested. The Tribunal noted that the TPO had accepted TNMM as the most appropriate method and found no change in the assessee's business activities. The Tribunal cited a previous decision in the assessee's own case (AY 2006-07), where Brescon was excluded due to its different functional profile and lack of segmental data. Consequently, the Tribunal ordered the exclusion of Brescon from the list of comparables. Integrated Enterprises India Limited: The assessee sought to include Integrated Enterprises India Limited as a comparable, providing financial data not available during the TPO proceedings. The Tribunal found that the CIT(A) had overlooked this comparable and remanded the issue back to the CIT(A) to decide afresh on its suitability after considering the additional evidence. 3. Treatment of Reimbursement of Expenses: The assessee contended that amounts reimbursed by its associated enterprises should not be considered part of operating expenses or revenue while determining ALP. However, the Tribunal did not provide specific findings on this issue in the summarized judgment. 4. Disallowance of Bonus Paid to Employees under Section 36(1)(ii): The Assessing Officer (AO) disallowed ?2,33,40,000 paid as a bonus to two directors, also major shareholders, under Section 36(1)(ii), arguing it could have been paid as dividends. The CIT(A) upheld this disallowance. However, the Tribunal referred to a previous decision in the assessee's own case and a Delhi High Court ruling, which allowed the deduction under Section 36(1)(ii), noting that the bonus was not paid in the ratio of shareholding and that dividends had been declared. Consequently, the Tribunal allowed the deduction for the bonus paid. 5. Admittance of Additional Evidence and Grounds: The Tribunal allowed the assessee's application to admit additional grounds and evidence regarding the inclusion of Integrated Enterprises India Limited as a comparable. The Tribunal remanded this issue back to the CIT(A) for fresh consideration. Revenue's Appeal: The Revenue sought the inclusion of Keynote Corporate Services Ltd. as a comparable, which the CIT(A) had excluded due to its volatile profit margins resulting from business restructuring and amalgamation. The Tribunal upheld the CIT(A)'s decision, noting the significant changes in the company's business model and profit volatility. Conclusion: The Tribunal partly allowed the assessee's appeal for statistical purposes and dismissed the Revenue's appeal. The Tribunal emphasized the importance of functional comparability and consistency in benchmarking international transactions, and it remanded specific issues for further consideration by the CIT(A).
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