9911796707
TMI Blog2017 (1) TMI 1452X X X X Extracts X X X X X X X X Extracts X X X X ..... draft order. The assessee filed objections before the DRP. In pursuance of the directions of the DRP, the AO completed the assessment u/s. 143 (3) r. w. s. 144C of the Act, on 27. 10. 2016, determining the income of the assessee at Rs. 2, 97, 58, 29, 725/-. Non-binding Investment Advisory Services: 2. First ground of appeal is about inclusion/exclusion of certain comparables. During the transfer pricing proceedings, the TPO found that for the year under consideration the assessee had provided non-binding investment advisory services to its AE's worth Rs. 41. 94 crores, that the services were benchmark using the TNMM, that the PLI used was OP/OC, that the assessee was remunerated with the markup of 22% on the total operating costs, that the arithmetic mean of the comparables selected by the assessee was determined at 12. 59% and therefore it was claimed that same was at Arm's Length Price(ALP). He found that the assessee had selected seven comparables for determining the ALP:He rejected all the comparables selected by the assessee and applied two new comparables namely Motilal Oswal Advisers India Private Ltd. (MOIALP)and Ladderup Corporate Advisory Private Ltd. (LCAPL). He arriv ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... able. 3. iv. With regard to MOIAPL, the DRP held that it should be taken out from the list of the valid comparables, as it was engaged in merchant banking and other activities, that the functions performed by it were different from the functions of the assessee. 3. v. About LCAPL, the DRP observed that it was a boutique investment banking firm that offered financial advisory services namely re-capitalisation, joint ventures, that syndicate, Project and acquisition financing, IP offerings, Mergers and acquisitions, strategic manage - ment accounting, that as per the annual report it had earned Rs. 11. 18 crores from financial and management consulting services, that it had acquired merchant banking licence in July, 2010, that there was no evidence that during the year 2010-11 any income had been received from merchant banking, that merely being a SEBI registered merchant banker did not mean that company had earned its income or any part of it from merchant banking, that AO had rightly included it in the list of valid comparables. 3. 1. During the course of hearing before us, the Authorised Representative(AR)argued that if ICRA and IDCL were included in the final list of the compa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hat royalty was there in the earlier years also, that subscription would not make the assessee product company. 3. 2. We have heard the rival submissions and perused the material before us. We find that in the case of AGM India Advisors Private Ltd. (supra), the Tribunal has dealt with inclusion/ exclusion of ICRA and IDCL and MOIALP as valid comparables for investment advisory services, that it had considered all the arguments that have been raised by the DR. We would like to reproduce the relevant portions of the order of AGM India Advisors Private Ltd. and same read as under: 6. a. First we would take up the matter of ICRA. In that regard, the DR argued that page 437, 438 and 462 of the PB showed that ICRA was engaged in rendering consultancy services to companies other than in financial sector i. e. urban development, water sector etc. , that it was also engaged in cross border mergers and acquisitions transactions(Pg. 493 of the PB), that the annual report of ICRA(Pg. 432-461 of the PB)did not provide for any segmental information, that if MOIAPL was rejected as a comparable on that ground ICRA should also be rejected, that the Tribunal order of Temasek(supra)relied upon by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... separately, that it could not be treated as a valid comparable, that ICRA did not have separate segmenals, that it rendered only advisory services in varied fields, that hence the argument that because ICRA had no segmentals it must be rejected as MOIAPL is liable to be rejected was devoid of merits, that the DR, during his argument, failed to mention that the Tribunal had upheld the acceptance of ICRA as a comparable in the case of Temasek for AY. 2010-11 as well, which had been argued by the DR himself, that the Tribunal had taken a note of the fact that ICRA was rendering consultancy/advisory services in various sectors and after considering these facts, it adjudged ICRA to be a good comparable, that ICRA should be accepted as a functionally comparable company to the non-binding investment advisory services provided by the assessee. He referred to the cases of Temasek Holdings Advisors Private Limited(ITA/4203/Mum/2012 &6504/SSMum/2012-AY. s. 2007-08&2008-09), M/s Blackstone Advisors Private Ltd. (ITA/1581/Mum/2016-AY. 2008-09). 6. a. i. We have heard the rival submissions and perused the material before us. Before proceeding futher, we would like to mention that the assessee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... comparable had rightly been rejected by the TPO. Thereafter, he pointed out various other aspects as given in the Directors report of ICRA from pages 162 to 164 and submitted that the fields in which it is operating is very diverse and had also advised in cross border M&A. Further, if the skill set of the employees of the appellant is taken into consideration, then it would be seen that the average salary is very high which is evident from the fact that 22 to 25 employees salary paid was more than Rs. 20 crores as compared to the average salary cost of ICRA. Thus, going by the qualitative human asset, then there is a huge variation, which fails the comparability tests. Accordingly, this company should not be included. XXXXXXX "20. At the outset, this comparable was subject matter of consideration before the Tribunal in AY 2008-09 & 2009-10, wherein this company was held to be good comparable both on the ground of functional similarity and in view of principles of consistency as it was held to be a good comparable by the TPO in the earlier years. From the perusal of the annual report, which is appearing from pages 156 to 187 of the paper book, we find that it is essentially pro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... erially affecting the revenue or net margins vis-a-vis the functions performed by ICRA. Hence on functional level it is a good comparable. As stated earlier, in the earlier years, the TPO had accepted ICRA to be a comparable and in later years the Tribunal in AY 2008-09 & 2009-10 had held ICRA Management to be good comparable qua the functions of the appellant and there being no material change on facts, functional profile or any other factor in this year, then as matter of consistency, we do not want do deviate from our findings given in the earlier years. There cannot be a pick and choose of comparables every year unless there are some material difference in facts and circumstances compelling to take a different conclusion. Thus, we hold that ICRA Management is a good comparable and should be included in the list of final comparables. " It is further pertinent to note here that it is not in dispute that the functional profile of Temasek(supra)was comparable with the assessee. We have compared the functional profiles of both the companies for the AY. 2010-11 and have found them almost same, that ICRA was accepted as a comparable in the assessee 's own case in subsequent year ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rala High Court decision of Kalpetta Estates Ltd. [211 ITR 635] to say that res judicata does not apply to income-tax proceedings is not relevant in the said proceedings as there are no new material placed on records by the DR with regards to the change in functional profile of ICRA or Temasek Holdings Advisors (India) Private Limited. After considering the same arguments the Tribunal had held, as stated earlier, that ICRA was a valid comparable for investment advisory company and had emphasized on following the rule of consistency. We find that in the subsequent years ICRA has been accepted a valid comparable, that all the arguments raised by the DR in the matter of Tamasek for the AY. 2010-11, have been dealt extensively by the Tribunal, that it had rejected the arguments raised by the DR. Respectfully following the orders of the Tribunal delivered in the cases mentioned in earlier paragraphs, we hold that the order of the FAA does not suffer from any legal or factual infirmity. So, confirming his order we hold that he had rightly included ICRA in the list of valid comparables. 6. b. With regard to IDCL the DR argued that it was a product company, that it would follows AS-9 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... word products used by IDCL in its Annual Accounts referred to nothing but the areas in which it provides research/advisory viz. Infrastructure Technology Segment (Global IT), Finance (Investment Research Advisory), Marketing (CMO Advisory), that the sale income referred to by the DR related to the sale of various research reports which are prepared by IDCL on the basis of the research, analysis and survey undertaken by them, that IDCL could not be concluded to be a product company, that the three page hand-out titled "About IDC Go-to-Market Services", submitted by the DR pertained to and provided information in connection with IDC Inc. and not IDCL, that the Web site print outs titled "IDC's Go-to-Market Services include"were prints of a web site taken on 16. 12. 2015, that the information did not relate to the year under consideration and hence could not be relied upon, that there was nothing in the printouts which suggeseds that IDCL was a product company or that it was not a valid comparable to the assessee. 6. b. i. We have heard the rival submissions and perused the material before us. We find that while adjudicating the appeal of Tamasek for the AY. 2010-11 the Tribun ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ell as the relevant material on record, we find that the main business of the assessee from which it had derived its income is conducting research and survey, business conversion and management consultancy. Though the separate results in respect of each activity are not provided; however, prima facie, it appears that the company is in the business of marketing research and management consultancy. Therefore, as far as the functions of IDC India Ltd are concerned, the same are similar to the activity of the appellant. Therefore, in our considered view, IDC India Ltd can be considered as a good comparable for the purpose of determination of ALP. " It is found that the annual report of IDCL(at Note 13 on page 482 of the PB), mentions the following: "The Company is engaged in the business of 'Market research and Management Consultancy which is identified as the only and primary business segment of the company' Further all the operating facilities located in (India) " 6. b. ii. We are of the opinion that IDCL was not a product company, that had it been a trader of products it would have "stock" appearing in its Balance Sheet, that it was a fact that no such opening or closi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... It also give advises on cross border acquisition. Its core competence is in the field of merchant banking. It also provides comprehensive investment banking solutions and transaction expertise covering private placement of equity, debt and convertible instruments in international and domestic capital markets, monitoring mergers and acquisitions and advising M&A as professional and restructuring advisory and implementations. It is also involved in various professional activities of the merchant banking. A Merchant Banker provides capital to companies in the form of share ownership instead of loans. It also provides advisory on corporate matters to the companies in which they invest. The focus is on negotiated private equity investment. The wide range of activities include portfolio management, credit syndication, counseling on M&A, etc. This whole range of functions and activities carried out by Motilal Oswal is definitely are far wider and much different from investment advisory services where core functions is to give advices for making the investments in diversified fields. A company which is engaged in merger and acquisitions, private equity syndication, loan/credit syndication ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s as well as the relevant material placed before us. It is an undisputed fact that the assessee is engaged in the business of rendering investment advisory and related services to its principal Carlyle Hong Kong. The dispute raised in ground no. 4 relates to whether (i) KLG Capital Services Ltd (KLG);(ii) KJMC Corporate Advisors (India) Limited (KJMC) and(iii)Motilal Oswal Investment Advisors Pvt Ltd(MOIAPL)are functionally comparable cases or not considering the decision of the Tribunal as well as the judgment of the Bombay High Court relied upon by the assessee. Regarding MOIAPL, assessee relied heavily on the order of the Tribunal in its own case for the AY 2008-2009, a copy of which is placed at page 282 of the paper book. On perusal of the said order of the Tribunal, we find that it is decided in favour of the assessee vide ITA No. 7367/Mum/ 2012(AY 2008-2009), dated 7. 2. 2014. On perusal of para 12 of the said order of the Tribunal, which contains the operational part, we find the same is relevant and the Tribunal has given its finding under the facts which are similar to that of the AY under consideration. The MOIAPL, which has engaged in the business of merchant banking is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uthorities that Motilal Oswal Investment Advisors Private limited be excluded from the final set of comparables on the ground that its activities'are functionally incomparable to the activity of Provision of investment advisory services being rendered by the assessee to its Associated Enterprises. In fact, before the TPO, assessee pointed out that the said concern was engaged in providing comprehensive investment banking solutions and that it was rendering services across various products, viz. Equity Capital Markets, Mergers & Acquisitions, Private Equity Syndications and Structured Debt, etc. The appellant relied upon the decision of the Tribunal in the case of Carlyle India Advisors Private Limited (214 Taxmann 492), to support its plea for exclusion of the said concern from the final set of comparables. The TPO rejected the aforesaid plea on the ground that the Profit and Loss account of the said concern for the year under consideration showed that the only stream of income was from advisory services and not from any activity of merchant banking and, therefore, the said concern was carrying out only advisory services and, according to him, the said concern was includible in the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on the basis of the afore-said discussion and having regard to the precedents noted above, we hold that M/s. Motilal Oswal Investment Advisors Private Limited (supra) is liable to be excluded from the final set of comparables. " Following the above orders, we hold that job profile of MOIAPL was different as compared to the activities undertaken by the assessee. It was rendering investment advisory services, specifically related with real estate business whereas MOIPAL is a merchant banker. So, we hold that MOIAPL is liable to be excluded from the final set of comparables. " Respectfully, following the above, we hold that KIACL and MOIAPL were wrongly included in the list of valid comparables. Both are functionally different from the assessee. Activities carried out the assessee for the year under appeal are distinct and quite separate from the activities of those companies. So, reversing the order of the FAA, we decide first effective ground of appeal in favour of the assessee. " Respectfully, following the above, we hold that the DRP was not justified in excluding ICRA and IDCL from the list of the valid comparables. We also hold that the DRP had rightly excluded MOIALP from ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ul to discuss the inclusion and exclusion of comparables by the TPO/DRP: i) In the case of Micro Genetic System Ltd. (MGSL), the TPO held that not only the revenue of the company had declined by 50% for the year under consideration, but it had also incurred losses. Before the DRP, the assessee placed reliance on M/s. Capital IQ Information System Ltd. (India) Pvt. Ld. (ITA/124 and 170/Hyd. /2014) and assessee's own case for the AY. 2007-08 wherein the Tribunal had upheld the inclusion of Capital Trust Ltd. which was rejected by the TPO on the ground that the company was suffering loss. After considering the available material, the DRP directed that there was no reason to reject the comparable because there was loss in a particular year. It directed the TPO to accept it as a valid comparable. ii) Caliber Point Business Solutions Ltd. -Segmental(CPBSL). The TPO rejected the said comparable for the reason that it had a different year ending other that 31st March. The assessee submitted that on review of segment reporting, it was clear that major operations of the company was in the BPO segment, that the BPO services were comparable to the services provided by the assessee. The DRP ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... jected it as comparable. vii)Eclerx Services Ltd. (ECL):The assessee argued before the DRP that company was earning super normal profit of 56. 86 % , that it operated under an exceptional year of operation, that it provided services in the form of data analytics and data process solution, that it was engaged in activities which the assessee did not undertake, that in the case of MAERSK Global Services (I )Pvt. Ltd. (ITA7466/Mum/2012), ECL was rejected as a valid comparable, that in the case of Capita IQ Information System (India) Pvt. Ltd. (ITA/1961/Hyd/2011) the Tribunal had upheld the rejection of ESL from the list of companies comparable to provisions of IT-enabled services. The DRP after considering the available material held that the assessee performed services which were BPO in nature, that it had not demonstrated the specific reason for the high profits, that in absence thereof without any valid reasons differentiating it on FAR analysis the contention of the assessee could not accepted. The DRP referred to the case of Willis Processing and held that, issue of inclusion or exclusion of comparables had to be decided not on the ground of abnormal or high profit margins, tha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . The DRP held that EHBSPL was into healthcare BPO and was functionally comparable to the assessee, that the TPO had rightly accepted it as a valid comparable. 4. 1. During the course of hearing before us, the Authorised Representative(AR)stated that in the assessee's own case the Tribunal had excluded ECL and AT from the list of the valid compa -rables(ITA/6921/Mumu/2012. AY. 2008-09, dtd. 22. 07. 2016), that in the case of Capitia India Pvt. Ltd. (ITA. s/356&105/Mum/2016. AY. 2-11-12, dtd. 19. 09. 2016)TCS was held to be an in-valid comparable for IT-e services, that the Tribunal had held that Infosys was not a valid comparable in the case of Actis Global Services Private Limited(ITA/6175 /Del/ 2015, AY. 2011-12, dtd. 29. 07. 2016), that in the matter of Exevo India Pvt. Ltd. (ITA/907/ Del/ 2016, AY. 2011-12, dtd. 25. 07. 2016)CVSEL and RSL were considered valid comparable for IT-e servi -ces, that EHBSPLwas a functionally different company and that it was not engaged in providing IT-e services. He referred to pages 4, 43 and 51 of the paper book. He argued that the if the above inclusion/ exclusions were considered the margin would fall with the permissible limit of +/(-) 5%, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... td. (supra), after perusing the annual report of this company found that major source of income is from providing engineering design service which is not comparable to ITES / BPO functions. The Bench observed, provision of engineering design service is a high end service amongst the BPO which requires high skill, hence, it can be regarded as KPO service. The bench, therefore, excluded the company as a comparable to ITES / BPO segment. The Tribunal, Hyderabad Bench, in M/s. Market Tools Research Pvt. Ltd. v/s DCIT, following co-ordinate bench decision in Symphony Marketing Solutions India Pvt. Ltd. (supra) has also held that the company cannot be treated as comparable to a company performing ITES / BPO functions. As these decisions rendered by the Tribunal are for the very same assessment year, respectfully following the same, we direct exclusion of this company from the list of comparables. It has been submitted before us by the learned Sr. Counsel that on exclusion of these companies, the margin of the assessee would be within +/- 5% tolerance band of the arithmetic mean of the comparable companies requiring no further adjustment to the price charged. In view of the aforesaid subm ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rnational Pvt. Ltd' is concerned as pointed out by the Ld. Counsel, we find that this decision of the Tribunal has been distinguished and explained by the subsequent three decisions of the Delhi Bench of the ITAT, wherein, the Tribunal has categorically held that, in absence of any segmental details and segregation of the total revenue this comparable company cannot held to be comparable. The relevant observation of the Tribunal in the case of Ameriprise India Pvt. Ltd (supra) reads as under:- 12. 5 We have gone through the annual report of Company and have carefully considered the reasoning given by the coordinate Bench in the case of Techbook International P Ltd (supra). On perusal of Schedule 'O' - Notes to Accounts of the Standalone financials of the Company, it is clear that the Company is engaged in "transaction processing" - and "technical services" activities. No separate segmental details are available. On a careful reading of the decision of coordinate Bench in Techbook International P td (supra) it is clear that Schedule 'O' - Notes to Accounts in respect to carried out by Company and relevant segmental details were never brought to the attention of the Bench. We find ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... llant's own case for assessment year 2010-11 by the coordinate bench and following the decision of Hon'ble Delhi High Court in the case of Rampgreen Solutions, has held that it is functionally incomparable with the assessee. He further stated that there is no change in the data analysis of the assessee as compared to the previous year and therefore, this issue is covered so far as exclusion of this comparable in favour of the assessee is concerned. In spite of that he submitted in his synopsis, the functions performed by this company and demonstrated that it is full fledged entrepreneur carrying greater risk compared to the assessee. He further stated about the outsourcing model, substantial sealing in market expenses and also drawn our attention that there is extra ordinary event during the year. He further relied on the decisions of Hon'ble Delhi High Court in thecae of Rampgreen Solutions Pvt. Limited vs. CIT and also Agnity India Technologies vs. ITO over and above assessee's own case for assessment year 2010-11. He also submitted that Hon'ble Bombay High court in the case of Pantaire Water India Pvt. Ltd. has excluded this company on account of wide differe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... taken as comparable in detailed list annexed to synopsis filed by assessee including the following cases: - " - Zavata India Pvt. Ltd. Vs. DCIT (ItA no. 1781/Hyd/2011) -Capital IQW Information Systems (India) Pvt. Ltd. Vs. DCIT (Int. Taxation) (ITA no. 1961/Hyd/2011) 26 ITA 30/Del/2015 -Triniti Advanced Software Labs (P) Ltd. (2011-TII-92-ItAT-Hyd-TP). Agnity India Technologies Vs. ITO ITA 1204/2011 Delhi High Court - In this case it was emphasized that Infosys Technologies Ltd. could not be considered as a comparable being a giant company. The same principle is applicable to Infosys BPO also. 42. In view of above discussion, we direct ld. TPO to exclude Infosys BPO. 43. In the result, ground no. 6 is allowed. " The ld. DR could not controvert how the facts of assessment year 2010-11 in the case of assessee and in the case of comparable are different and, therefore, following the decision of coordinate Bench we direct exclusion of Infosys BPO Limited from the comparability analysis. Considering the above , we direct the AO to exclude Infosys from the list of comparables. 4. 2. d. Before taking up other comparables, we would like to refer to the matter of Exevo Indi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . R Systems International Ltd 7. 5. The ld. TPO has rejected the company on account of different financial year ending vis-a-vis the assessee. The ld. AR submitted that companies whose financial data was available for the relevant period, were considered in view of rule 10 D (4), which provides that information to be used must be contemporaneous. The ld. AR submitted that, though the Company has different financial year ending, were operating during the same period of time as the assessee, and were also facing similar business cycles, market and economic conditions as faced by assessee having financial year from April to March. He thus submitted that in absence of evidence available to the contrary that there has been a significant impact on the margins due to change in different reporting/accounting period, it is incorrect to disregard the comparable using this filter. Ld. DR, however, referred to the extracts made by the ld. TPO in his order to submit that R Systems International Ltd. , should not be considered comparable with assessee. 7. 6. After considering the rival submissions and pursuing the relevant material on record we find that the ld. TPO has not pointed out e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ilable. If from the available data on record the results were financial year can be reasonably extrapolated, then the comparable cannot be excluded solely on this ground. The learn ADR as referred to rule 10 B (4) which only mandates that the data which is to be utilised for analysing the comparability of uncontrolled transactions with an international transaction, has to be financial year only in which the international transaction has been entered into. This rule is based on matching principle but this role cannot be interpreted in such a rigid manner so as to defeat the basic object of rule viz. , selection of the comparable for determination of arms length price of an international transaction" (emphasis supplied) 7. 7. In any case the ld. TPO has not cited any instances of functional dissimilarity of this comparable company with that of assessee. We therefore direct the ld. AO/TPO to consider this company in the final list of comparable. Accordingly ground No. 3 to 9 stands disposed accordingly. " Respectfully following the above, we direct the AO to include both the comparables in the final list of valid comparables. 4. 3. We find that if the above mentioned four comparab ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... changes were not for infraction of any law in view of the judgment of Hon'ble Jurisdictional High Court deleted the addition. For ready reference, the observations of the Tribunal is reproduced below:- "13. 2. Before us, the Ld. Senior Counsel drew our attention to the decision of the Hon'ble High Court of Bombay in the case of Angel Capital & Debitt Market Ltd. in Income Tax Appeal (L) No. 475 of 2011 wherein the Hon'ble Court had the opinion to consider the following question of law. "Whether on the facts and in the circumstances of the case and in law the Hon'ble Tribunal was justified in deleting the disallowance made by the Assessing Officer of claim of the Assessing Company for a deduction of payment of Rs. 6, 51, 240/- towards penalty paid to Stock Exchange even though such penalty payment was clearly disallowable under Explanation to Section 37(1) of the Income Tax Act?" and the same was answered by the Hon'ble High Court as under: "As regards question (C) is concerned, the finding of fact recorded by the ITAT is that the amount paid as penalty was on account of irregularities committed by the assessee's clients. Such payments were not on ac ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
