2017 (12) TMI 799 - AT - Income Tax

TPA - comparable selection - Held that - The assessee is an entity which was part of Lehman Brothers group and had offered financing and advisory salutations to its clients in India in the field of Investment Banking Division. It is claimed that the Investment Banking Division (IBD) serve Corporate, Institutional and Government clients. It claimed to serve the clients capital-raising needs through specialized product groups in underwriting, private placements, leveraged finance and other activities associated with debt and equity products, thus companies functionally dissimilar with that of assessee need to deselected from final list.

Issues Involved:
1. Transfer Pricing Adjustments
2. Methodology for Benchmarking International Transactions
3. Extraordinary Expenses and First Year of Operations
4. Effective Representation and Collation of Information

Issue-wise Detailed Analysis:

Transfer Pricing Adjustments:
The core issue revolves around the transfer pricing adjustments made by the Assessing Officer (AO) amounting to ?33.10 crores. The AO's adjustments were based on the Transfer Pricing Officer's (TPO) order, which proposed an adjustment to the Arm's Length Price (ALP) of the international transactions between the assessee and its Associate Enterprise (AE). The TPO rejected the Profit/Revenue split method proposed by the assessee and instead applied the Transactional Net Margin Method (TNMM) at the entity level, using comparables from the IT Enabled Services/Business Processing Outsourcing (ITES/BPO) segment.

Methodology for Benchmarking International Transactions:
The assessee, part of the Lehman Brothers group, argued that the Revenue split method was the most appropriate for benchmarking its international transactions. This method, based on the global transfer pricing policy of Lehman Brothers, was consistently applied across all entities since 1999-2000. The assessee contended that its business model was unique, involving integrated and seamless operations across multiple entities globally, making it difficult to find comparables in the investment banking division. The TPO, however, rejected this method due to insufficient explanation and applied TNMM, leading to the adjustments.

Extraordinary Expenses and First Year of Operations:
The assessee claimed that being the first year of operations in India, it incurred extraordinary expenses such as startup costs, signup bonuses, relocation expenses, and recruitment costs. These expenses, along with the fact that the assessee had not operated at full capacity, were argued to be factors that should be considered while computing the ALP. The TPO, however, excluded certain extraordinary startup costs and applied an average margin of 21.18% to the total cost, leading to the proposed adjustments.

Effective Representation and Collation of Information:
The assessee faced difficulties in making effective representations before the authorities due to the collapse of Lehman Brothers worldwide and its subsequent liquidation in 2009. This collapse led to the departure of employees, making it challenging to collate necessary information and provide proper explanations during the assessment and appellate proceedings. The assessee requested an open-ended set aside to allow for fresh opportunities to present explanations and evidence before the AO/TPO.

Tribunal's Decision:
The tribunal considered the rival contentions and the material on record. It acknowledged the extraordinary situation faced by the assessee due to the collapse of Lehman Brothers and the first year of operations. The tribunal noted that the assessee could not make effective representations during the assessment and appellate proceedings. Consequently, the tribunal decided to set aside the matter to the file of the AO/TPO for a fresh determination of all issues on merits. The tribunal emphasized that the authorities should provide proper opportunities to the assessee to furnish necessary evidence and explanations. The appeal was allowed for statistical purposes, and the matter was restored for de-novo assessment.

Conclusion:
The tribunal's judgment highlights the importance of considering extraordinary circumstances and ensuring fair opportunities for representation. It also underscores the need for appropriate methodologies in benchmarking international transactions, especially in unique business models like investment banking. The decision to set aside the matter for fresh assessment reflects a balanced approach to achieving justice while adhering to legal principles.

← Previous Next →