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TMI Blog2017 (1) TMI 1452X X X X Extracts X X X X X X X X Extracts X X X X ..... During the assessment proceedings, the Assessing Officer(AO)made a reference to the Transfer Pricing Officer(TPO)to determine Arm s Length Price(ALP)of the International Transactions(IT. s)entered into by it with it AE. s. After receiving the order of the TPO, the AO proposed TP-addition in his 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 ₹ 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 ₹ 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 L ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . Similarly, it referred to the annual report of the ICSL and held that it was advising corporate entities into business restructuring and inbound domestic and Mergers and acquisitions, that though services were very distinct from investment advisory services, that the TPO had rightfully rejected it as a valid comparable. 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 ₹ 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 registere ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ppened during the year under consideration, that ICRA had claimed that it was in the field of management consultancy. About IDCL, he contended that the DRP had not brought on record that the matter referred to it was relevant for the year under consideration, that the cost of manufacturing for the year under consideration was similar, that 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. , t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ction. He further argued that MOIAPL had been rejected on the ground that it was engaged in merchant banking investment banking services which were functionally not comparable to the investment advisory services rendered by the assessee, that despite such dissimilarity the Accounts it did not give break-up of results from the said two activities 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 r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... so be included in the list as it had also shown the income from consultancy and so also in other cases also. Thus, this comparable cannot be included on account of single segment of revenue alone, that is, from consultancy fee but had to be analyse on FAR analysis which the TPO had done in a very elaborate manner at pages 9 to 11 of the order. Thus, this 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 ₹ 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l differences between controlled and uncontrolled transactions. However, if any unique function or property significantly affects the operating costs or net margin or had a bearing in the generation of revenue itself, then it cannot be considered to be a fit comparable for benchmarking the net margins. Here it is not the case where there is any unique functions materially 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 fin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f Temasek for AY. 2010-11. We find that the ITAT records the DR's submission as under: If a criterion of the revenue from consultancy fee is to be taken into consideration, then on same logic, Motilal Oswal should also be included in the list as it had also shown the income from consultancy and so also in other cases also. The reference made by the DR to the Kerala 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. Respectfull ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing AS would show that IDCL was a trader or manufacturer of products, that expenses incurred towards the copyright were considered to be operating in nature and formed only 6. 17% of the total expenditure incurred during the year, that payment for copyright would only show that IDCL uses certain copyrighted material while rendering services, that Pg. 486 of the PB made it clear that the 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 n ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ; the general business profile of [DC India Ltd is given as (conversion income and management consultancy) conduct of research and survey, business functions and management consultancy; therefore, this company is functionally different from the business profile of the appellant. We further find that the Tribunal has decided the matter as follow: 8. Having considered the rival submissions as well 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 t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ts inclusion submitted that, if the ICRA Management services can be included for having revenue from advisory services then on same analogy this company should also be given the same treatment. From the perusal of the directors report, it is seen that this company derives its business income from four different business verticals, i. e. Equity capital markets, merger and acquisitions, profit equity syndications and structured debt. 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... usiness of mergers and acquisitions and other related activities. The assessee is not a merchant banker like MOIAPL. In the case of Carlyle India Advisors Private Limited (supra), the Tribunal has held that MOIAPL cannot be taken as a valid comparable in cases, where the assessee is rendering advisory servcies. In that matter the Tribunal held as under : 8. We have heard both the parties and perused the orders of the Revenue Authorities 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... visors Private Limited (IT Appeal 1286 of 2012, dated 22. 02. 2013). Here, we would also like to refer to the order of NVP Venture Capital India Private Ltd. (supra), where in a case of investment advisory the comparable of MOIAPL was rejected by the Tribunal. In that matter the Tribunal had held as under :- 7. We have carefully considered the rival submissions. We find that the assessee has been consistently canvassing before the lower authorities 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 p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to an entity which is rendering non-binding advisory investment services alone. Thus, in our considered opinion, the assessee is justified in seeking the exclusion of the said concern from the final set of comparables on account of functional dissimilarities. In fact, in other precedents cited by the ld. Representative for the assessee, the said concern has also been excluded from the set of comparables under similar circumstances. 9. In conclusion, 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 differ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of ₹ 5. 75 crores by considering the arm s length markup of such services at 26. 93%. He considered the following comparables: SN. Company Comparable selected by OP/TC 1. ATL Assessee 29.18% 2 ITIL Assessee 9.65% 3 JIPL Assessee 13.70% 4 MGSL Assessee -0.02% 5 AT TPO 23.95% 6 EHBSPL TPO 9.69% 7 ESL TPO 56.86% 8 Infosys TPO 17.86% 9. TCS TPO 69.31% Average 26.93% Before proceeding further, it would be useful to discuss t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ovided by the assessee. After going through the annual report of the comparable, the DRP held that segmental result showed that company was persistently making losses in the comparable segment, that the other income included foreign currency income of ₹ 46lakhs, that even the comparable segment failed the turnover filter of ₹ 1 crore, applied by the TPO. v) Cosmic Global Ltd. (CVGL):The TPO rejected the company for the reason that it did not satisfy the export sales filter applied by him. The assessee argued, before the DRP, that CVGL was functionally comparable to IT-e services rendered by the assessee, that no reason were provided by TPO for considering threshold of 75% of total export as an appropriate filter to reject the company. The DRP held that 75% export sales was a valid filter, that the assessee had 100% export in that segment, that the TPO had rightly rejected it as a valid comparable. vi) Aditya Birla Minacs Worldwide Ltd. (ABMWL):The TPO rejected the company for the reason that it failed the RPT filter. The DRP, rejecting the submissions of the assessee, held that 25% RPT filter was a valid filter, that the comparable had failed that filter, th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uring AY. 2009-10, that it had a high brand value, that the accelerated margin of the company for the current year was due to takeover, that company was earning very high profit i. e. 69. 31%, that it had a huge turnover of 1593 crores as compared to the turnover of the assessee of 61. 10crores. However, the DRP upheld the order of the TPO and referred to the case of Tech books Intl Pvt. Ltd. (ITA/240/Del/2015-AY. 2010-11, dated 06. 11. 15)and held that high profit or high turnover was not a criteria to exclude an otherwise comparable co. x) Infosy BPO Ltd. (Infosys):The assessee requested the DRP to exclude the said comparable stating that it had very high turnover viz-a-viz the turnover of the assessee . It relied upon the various cases decide by the Tribunal in that regard. The DRP, while rejecting its objections, held that it was functionally comparable on the basis of activities of the assessee, that high profitability was not good ground for rejection of a comparable, that the TPO had proved that turnover did not have much impact on profitability. xi) E-4-e Healthcare Business Service Pvt. Ltd. (EHBSPL)-Before the DRP, the assessee contended that the company was e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n, matrics management and reporting services. The functionality of the company was not only considered by the Tribunal, Mumbai Special Bench, in the case of Maersk Global Centres India Pvt. Ltd. (supra), but a host of other decisions referred to earlier, wherein, it has been held that the company is involved in providing high end services which is in the nature of KPO, hence, cannot be compared to a general ITES provider. In fact, the Hon'ble Delhi High Court in Rampgreen Solutions Pvt. Ltd. , ITA no. 102 o 2015, has held that this company being a KPO service provider cannot be considered as a comparable to ITES companies. We may further mention, many of the orders passed by the co ordinate benches of the Tribunal rejecting Eclerx Services Ltd. as a comparable to ITES service provider is for the very same assessment year 2008 09. Therefore, respectfully following the view expressed by various judicial authorities, we hold that Eclerx Services Ltd. being functionally different cannot be treated as comparable to the assessee. XXXXXXX 67. We have considered the submissions of the parties and perused the material available on record. We have noted that the Tribunal, Ba ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fit and loss account, the revenue shown from transaction processing and other services is approximately ₹ 1442. 42 crores. There are no segmental details and any other bifurcation as to what comprised of transaction processing charges and other services. That apart, it is seen that, this company is a part of Tata Group and has a huge brand value across the world and also owns huge intangibles. Thus, there is a huge difference in the assets employed by this Company as compared to the assessee which also reflects in its revenue and profit margin. Its intangible assets itself is more than ₹ 3337. 4 crores as on 1st April, 2010 and additions during the year were more than ₹ 756. 24 crores. Thus, this company having huge intangibles assets cannot be compared with the assessee who has no significant intangibles. That apart, it has been pointed out by the Ld. Counsel that, this company has been emerged with TCS in the year 2009 which has led to shooting up of its profit margin to 13% to 68%-70%. This factor itself points out that its high profit margin were due to its huge brand value, which cannot be held to be comparable with captive service provider like Assessee Comp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... able, it is directed to be excluded . This, in view of our discussion and also following the precedence in the aforesaid cases, we hold that TCS e-Serve cannot be held to be comparable company, accordingly, we direct the AO/TPO to exclude the same from comparability list. Respectfully following the same, we hold that TCE e-Service cannot be considered a valid comparable in the case of the assessee. 4. 2. c. It is found that in the case of Actis Global Services Private Limited(supra), the Tribunal had held that Infosys was not a valid comparable for the IT-e services company. We are reproducing the relevant portion of the order and it reads as follow: (ii). Infosys BPO Limited: 17. This comparable is selected by the learned TPO after rejecting the contentions of the assessee regarding functional non-comparability, incomparable scale, brand profits, presence of intangibles, extra ordinary events etc. The learned TPO held that this company operates primarily into business process Management Services and taxpayer has not shown how brand and ownership of intangibles is leading to high profit margin. The ld. DRP also rejected the objection of the assessee. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ss profile is quite limited and not at all comparable to the optimistic business model of Infosys. The turnover of Infosys was ₹ 1127 crores during the FY 2009-10 as compared to the assessee's turn over of ₹ 18. 04 crores. This huge difference in the turnover itself makes it clear that the margins achieved by Infosys BPO being a service sector company, are much higher than that of assessee. In service sector higher turnover reflects higher margin because it is primarily the customer's satisfaction which is relevant in selecting the service provider even at the payment of higher margins. 40. In Merker equitable service centre India Pvt. Ltd. 133 ITD 543, it was held that Infosys BPO cannot be considered as a comparable to a captive service provider, like assessee. 41. Ld. DR has submitted that Actis is also a brand and, therefore, adjustment should be made for the difference. We are unable to accept this contention particularly because the department has not brought on record any brand value of Actis on record. Moreover, the wide difference in turnover makes it clear that there is wide difference in the brand value of the two companies and, therefore, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lter could be deployed if the tested party is a risk bearing entrepreneur. However, to the facts of the present case, the assessee does not assume any risk and is remunerated at cost plus basis. Ld. A. R. has placed reliance in the case of Willis Processing Services Pvt. Ltd. in I. T. A. No. 4547/Mum/2012 wherein the Co-ordinate bench of this Tribunal has held as under: The turnover is not a criteria as prescribed under the Rule 10B(2) for selecting the comparables. It is settled proposition that the decisive factor for determining inclusion or exclusion of any case as a comparable are prescribed under Rule 10B(2) which does not specify any such factor of turnover on the basis of which a particular case can be included or excluded in the list of comparables. In service industry, turnover does not play any significant role as far as the margins are concerned . This reinforces the view that turnover does not play a significant role in service industry and there is no link between turnover and margins . The turnover is not a relevant factor for choice of comparables has been confirmed in many decision, as listed below. 7. 4. Applying the ratio laid down by the coo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... an of time. Assuming a situation where the tested party is following a different financial year ending (say 01/01/2010 to 31/12/2010), following the filter adopted by the ld. TPO, one would reject all the company with the financial year ending 31st of March 2010 and only consider companies with financial year ending 31/12/2010. The number of comparable companies available after using such a filter would be very limited and therefore, in such a case the net margin earned by the comparable companies would be different from the one that would be computed without using this filter. This view is supported by the coordinate bench of this Tribunal in the case of DCIT vs. McKinsey knowledge Centre India private limited in ITA No. 2195/del/2011 wherein it has been held that if a company is functionally comparable, it cannot be rejected merely on the ground that data for the entire financial year was unavailable, if the data can be reasonably extrapolated. Hon ble tribunal further observed that rule 10 B (4) cannot be interpreted in such a rigid manner so as to defeat the basic objective of the rule. The relevant extract of the ruling are reproduced below: 23. . . However, in our con ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... #8377; 11, 86, 105, paid to Bombay Stock Exchange and National Stock Exchange. 74. Brief facts are, during the assessment proceedings, the Assessing Officer noticing that the assessee has claimed deduction towards payment made to stock exchanges called for necessary details. After verifying the details submitted by the assessee he observed that such payment was towards fine for non confirmation of clearing house trades, client code modification, etc. He, therefore, called upon the assessee to explain the payment made being in the nature of penalty why should not be disallowed. Though, the assessee objected to the disallowance by stating that the payment made are not for breach of any statutory provisions, however, the Assessing Officer rejected the claim of the assessee and disallowed the amount. Being aggrieved, assessee challenged the disallowance before the DRP. 75. The DRP also sustained the disallowance accepting the reasoning of the Assessing Officer. 76. We have considered the submissions of the parties and perused the material available on record. Identical issue came up for consideration before the co ordinate bench in assessee s own case for assessment y ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... isory services. In the earlier part of our order, we have held that MOIALP is not a valid comparable. Following the same, ground no. 1 is decided against the Assessing Officer. 7. Next effective ground of appeal is about deleting the addition by the DRP under the head expenditure incurred on account of ESOP. We find that identical issue was decided by the Tribunal while deciding the appeal for the 2008-09 as under: 71. We have considered the submissions of the parties and perused the material available on record. We have noted that identical issue of deduction claimed on account of ESOP arose for consideration in assessee s own case for assessment year 2009 10 before the Tribunal in ITA no. 222/Mum. /2014. The Tribunal vide order dated 30th November 2015, held as under: 12. 3. Before us, the Ld. Senior Counsel drew our attention to the decision of the Special Bench of the Bangalore Tribunal in the case of Biocon Ltd 144 ITD 21 (Bang) wherein on similar facts the discount on issue of ESOP was allowed as deduction. 12. 4. The Ld. DR could not bring any distinguishing decision in favour of the Revenue. Respectfully following the decision of the Special Bench (supr ..... X X X X Extracts X X X X X X X X Extracts X X X X
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