2014 (11) TMI 483 - AT - Income Tax

Reimbursement of cost of salary and other expenses to holding company Non-deduction of TDS u/s 40(a)(ia) secondment of employees - Held that - Following the decision in Temasek Holdings Advisors (I) P. Ltd. Versus Dy. Commissioner of Income Tax 2013 (9) TMI 48 - ITAT MUMBAI - The salary can be paid either by the first company to whom the seconded employees belong or the other company which are availing the services of seconded employee. In the present case, the secondment agreement clearly provides that these two employees will work for the assessee company under their supervision and under the control of the Board of Directors of the Indian company - disallowance made with respect to reimbursement of salaries and the expenses of seconded employees were deleted on the plea that tax has been deducted at source u/s 192 of the Act - with regard to reimbursement of expenditure towards payment of professional fees was restored back to the file of the AO to examine and decide afresh thus, the disallowance made with respect to reimbursement of salaries and expenses of seconded employees is set aside and the for reimbursement of expenditure on account of professional fee is remitted back to the AO for fresh adjudication Decided partly in favour of revenue. Transfer pricing adjustment u/s 92CA Receipts of investment advisory services Selection of comparables - Held that - Following the decision in Temasek Holdings Advisors (I) P. Ltd. Versus Dy. Commissioner of Income Tax 2013 (9) TMI 48 - ITAT MUMBAI - The assessee which is mainly engaged in rendering of investment advisory services to its parent company at Singapore has received mark-up of 21% - This margin of 21% has been benched marked by using TNMM as the most appropriate method with PLI as operating profit to operating cost - its margin on the transaction carried out with its parent company was at ALP - The TPO out rightly rejected the assessee s comparables, firstly, on the ground that they are not in investment advisory services and secondly the assessee has not carried out search by using the key phrase investment advisory services . No proper reasoning has been given by the TPO as to why data from Prowess is not reliable and the capital line data should have been taken - He has also not established that by entering the key phrase investment advisory service , the selection of the functionally similar companies are available from the data - The companies selected as comparable by TPO are engaged in the asset management are basically responsible for mobilizing the funds from the investors by marketing the scheme - Their main functions are sales and marketing, investment and management of the funds mobilized under various schemes - They are responsible for providing management and administrative services mostly to the mutual funds and to deploy such funds - The risk is also assumed by such companies in the form of service liabilities, regulatory and reputational risk - Moreover, the asset management companies are also regulated entities which are required to be licensed by SEBI - Thus, these companies also fail the test of FAR analysis with the investment advisory companies - all the six companies shortlisted by the assessee are quite good comparables looking to the overall functions and also that the same have been found to be so by the Department in the preceding and succeeding years - the entire adjustment made by the TPO cannot be sustained as the margin of the assessee at arm s length looking to the average margin of the comparables - the order of the DRP is upheld Decided against revenue.

Summary

Issues Involved:
1. Deletion of disallowance of expenditure claimed as reimbursement of cost of salary and other expenses due to non-deduction of TDS under Section 40(a)(ia) of the Income Tax Act, 1961.
2. Deletion of transfer pricing adjustment made under Section 92CA on international transactions relating to investment advisory services.

Issue-Wise Detailed Analysis:

1. Deletion of Disallowance of Expenditure Claimed as Reimbursement of Cost of Salary and Other Expenses Due to Non-Deduction of TDS under Section 40(a)(ia):
The Revenue challenged the deletion of disallowance of Rs. 12,73,34,892/- claimed by the assessee as reimbursement of cost of salary and other expenses to its holding company, arguing that TDS was not deducted as required under Section 40(a)(ia). The assessee, a wholly-owned subsidiary providing investment advisory services to its Singapore-based parent company, reimbursed expenses to its parent company. The Assessing Officer (AO) disallowed these expenses citing non-compliance with TDS provisions.

The Dispute Resolution Panel (DRP) directed the deletion of this disallowance, following precedents set in the assessee's own case for previous assessment years. The Tribunal upheld the DRP's direction, noting that the salaries and expenses of seconded employees were subjected to TDS under Section 192, thus disallowance under Section 40(a)(ia) was not applicable. However, the Tribunal restored the issue of reimbursement of professional fees to the AO for fresh examination, as it was not properly addressed in previous orders.

2. Deletion of Transfer Pricing Adjustment Made under Section 92CA on International Transactions Relating to Investment Advisory Services:
The Revenue also contested the deletion of a transfer pricing adjustment of Rs. 89,56,506/- made by the AO/TPO. The adjustment was based on the rejection of Access India as a comparable company and inclusion of CRISIL, which had significant related party transactions (RPT).

The DRP, following the Tribunal's order for the assessment year 2008-09, held that Access India is functionally comparable and CRISIL should be excluded due to high RPT. The Tribunal confirmed the DRP's decision, emphasizing that the comparables chosen by the assessee were accepted in previous and subsequent assessment years. The Tribunal noted that the AO/TPO's rejection of the assessee's comparables lacked proper reasoning and that the comparables selected by the AO/TPO were not functionally similar to the assessee's investment advisory services.

Conclusion:
The Tribunal partly allowed the Revenue's appeal. It upheld the deletion of disallowance related to reimbursement of salaries and expenses of seconded employees, while remanding the issue of professional fees reimbursement to the AO for fresh examination. The Tribunal also confirmed the DRP's deletion of the transfer pricing adjustment, validating the comparables chosen by the assessee for determining the arm's length price.