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TMI Blog2018 (5) TMI 1533X X X X Extracts X X X X X X X X Extracts X X X X ..... e relating to sponsorship and brokerage expenses after taking into account the settled judicial precedents as well as the evidences in this regard. Incorrect computation of operating margins of certain comparable companies - Held that:- As held by the ITAT Mumbai Bench in the case of DHL Express (India) Private Limited [2011 (4) TMI 856 - ITAT MUMBAI] wherein miscellaneous income like interest income, rent received, dividend received, penalty collected, rent deposits written back, foreign exchange fluctuation and profit on sale of assets were held to be not forming part of operational income. Therefore, keeping in mind, the judicial precedents as well as the submissions of the assessee in this regard, we restore ground to the file of the AO/TPO for re-computing the operating profit margin of the remaining comparable companies after giving due opportunity to the assessee to present its case. - ITA No.1029/Del/2014 - - - Dated:- 21-5-2018 - SHRI N.K.SAINI, ACCOUNTANT MEMBER AND SHRI SUDHANSHU SRIVASTAVA, JUDICIAL MEMBER For The Assessee : Shri Arun Chhabra, CA Shri Gaurav Jain, CA Ms Sana Siddiqui, Shri Karan Jain For The Revenue : Sh. Sanjay I. Bara, CIT DR ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e and in law, the Transfer Pricing Officer (TPO)/ the Assessing Officer (AO) and the Hon ble Dispute Resolution Panel (DRP) have erred : Transfer Pricing Adjustment : 1. In determining the adjustment of INR 4,88,23,670 to the value of the international transaction of provision of investment advisory services and consequently enhancing the taxable income of the appellant : In determining the above adjustment, have, in particular erred in : 1.1 Rejecting the transfer pricing documentation as maintained by the appellant; 1.2 Using financial information of the comparable companies relating to the financial year 2008-09 although such information was not available when the appellant maintained documentation as per the requirement of the act; 1.3 Applying inappropriate filters in order to select comparable companies; 1.4 Rejecting the filters applied by the appellant for selection of comparable companies while preparing TP documentation; 1.5 Rejecting certain functionally comparable companies selected by the appellant 1.6 Retaining certain companies as comparable companies although not functionally comparable to the appellant; 1.7 Reta ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... business of investment banking has not been disputed by the TPO. It was also submitted that the only argument of the TPO is that the corporate finance advisory forms the core of all the services offered by Motilal Oswal Investment Advisors Private Ltd. It was submitted that investment banking services significantly differ from investment advisory services and this contention is also supported by the Mumbai Bench of the Tribunal in the case of General Atlantic Pvt. Ltd vs. DCIT in ITA No./1019/Mum/2014 wherein the Mumbai Tribunal has highlighted that the functional and risk profile of an investment banker is not comparable to an investment advisor. It was further submitted that this contention has also been upheld by the Mumbai Tribunal in the case of Carlyle India Advisers Private Limited in ITA No. 7901/Mum/2011 and ratified by the Hon ble Mumbai High Court in ITA No. 1286/ 2012. The Ld. AR further submitted that the TPO has observed that there is no mention of the word underwriting in the annual report but then underwriting income is not the only source of income from where an investment banking company earns its revenue. An investment bank may also assist and advise companies ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rsified business operations with major share of revenue arising from Capital market operations. It was also submitted that since the Assessee is engaged in the business of provision of investment advisory services, the business of the Assessee cannot be considered as comparable to the business of Khandwala Securities Limited. The Ld. AR submitted that furthermore, the TPO has used the entity level margins of Khandwala Securities Limited for the purpose of computing the arm s length price but while analyzing the annual report its is observed that the income earned by Khandwala Securities Limited is fee based from functionally diversified services ranging from brokerage, corporate advisory services and income from capital market operations which is significantly different from the operations of the Assessee. The Ld. AR also placed reliance on a plethora of case laws in support of his contentions which were placed in the Paper Book. 3.03 Axis Private Equity Limited : The Ld. AR submitted that the business of Axis Private Equity Limited significantly differed from the business of the Assessee as Axis Private Equity Limited is an asset management/fund management company whereas the A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... its advice and cannot invest funds on behalf of its AE. The Ld. AR submitted that the remuneration of Axis Private Equity Limited is dependent on the fund size of Axis Infrastructure Fund-1 as is evident from its annual report for FY 2009-10 which has been relied upon by the TPO himself. It was submitted that, thus, Axis Private Equity Limited follows a different revenue model wherein the revenue earned by Axis Private Equity Limited is not dependent on the cost or functions performed by Axis Private Equity Limited but is dependent on the fund size invested by it. The Ld. AR also submitted that the TPO in his show cause notice, has himself, proposed to reject companies which are charging fixed fee instead of a rate based on the evaluation of services and Axis Private Equity Limited should be rejected from the set of comparable companies on account of said criteria as well. It was further argued that apart from the above, Axis Private Equity Limited is earning its entire revenue from Axis Infrastructure Fund which has been promoted by the Axis Bank which is the promoter of Axis Private Equity Limited as well. Thus, it was submitted, 98% of the revenue of Axis Private Equity Limited ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sake of brevity. 3.05 Milestone Capital Advisors Private Ltd : The Ld. AR submitted that the business of Milestone Capital Advisors Private Ltd significantly differed from the business of the Assessee. It was submitted that this company is offering a wide profile of services such investment advisory, portfolio management, project and property management, as mentioned in its draft red herring prospectus and, therefore, it should ideally not be selected in the final set of comparable companies in the absence of segmental details of the services offered. The Ld. AR also placed reliance on a plethora of case laws in support of his contentions which were placed in the Paper Book. It was further submitted that Milestone Capital Advisors Private Ltd is an asset management company and has several funds under management a profile which is significantly different from an investment advisory company. The Ld. AR reiterated his submissions and arguments regarding the difference between an asset management/investment management company and an investment advisory company. 3.1 In relation to ground number 1.10, the Ld. AR submitted that the TPO has erred in treating certain expenses like d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ic cost incurred to render services to AE and thereby warrants exclusion while computing the operating cost in relation to international transaction undertaken by Assessee with the AE. It was further submitted that said expense had long term benefit associated with it and AE did not reimburse this expense. Reliance was placed on order of the Bench of Mumbai Tribunal in the case of Chemtex Global Engineers P. Ltd in ITA 3590/Mum/2010 wherein it was held that, one time extra-ordinary expenses, which are not standard expenses for earning income, ought not to be taken into consideration while computing total operating cost. 3.3 With respect to ground no. 1.12 regarding incorrect computation of operating profit margins of comparable companies, the Ld. AR submitted that the TPO has considered 'other income or 'miscellaneous income as part of operating income while computing the operating profit margins of the comparable companies. It was submitted that other income or miscellaneous income should not be considered as part of operating income of the comparable companies because as per Schedule VI of the Companies Act, 1956 (applicable for the relevant financial year), the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ious year amounts to INR 86,631/- only and, thus, should be corrected accordingly. 3.5 Ld. AR also submitted that ground no. 1.13, 1.14 and ground no. 3 were not being pressed. 4. In response, the Ld. CIT DR placed extensive reliance on the observations of the Assessing Officer/TPO as well as the directions of the Ld. DRP in respect of the five comparables being contested by the assessee as well as the grounds relating to treatment of non-includible cost like sponsorship expenses and brokerage in computing the operating cost which were being contested by the assessee before the Tribunal. The Ld. CIT DR also vehemently argued that operating profit margins of the comparable companies had been correctly computed by the lower authorities. 5. We have heard the rival submissions and have perused the material available on record. We now take up the comparables being contested by the assessee one by one: 5.01 Motilal Oswal Investment Advisors Private Limited: It has been submitted by the Ld. AR that this company is functionally different from the assessee company as the assessee is engaged in the business of providing investment advisory services whereas Motilal Oswal Inve ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... institutional banking, investment advisory services etc. whereas the assessee is engaged only in providing investment advisory services. Our attention has been drawn to annual report of Khandwala Securities Limited where indeed the business operations have been stated to include investment banking, corporate advisory services, institutional broking, private client broking along with the investment advisory services. It is also seen that the business of the Khandwala Securities Limited includes equity and debt broking, structuring and executing diverse equity capital risk transaction, institutional equity sales, sales training and research, portfolio management services, mergers and acquisitions advisory etc. We also note that the TPO has used entity level margins of Khandwala Securities Limited for the purpose of computing the Arm s Length Price wherein the income earned by Khandwala Securities Limited is very functionally diversified service as mentioned above. We further note that the ITAT Delhi Bench in the case of Avenue Asia Advisors Pvt. Ltd. vs. DCIT in ITA 6638/Del/2013 for assessment year 2009-10 had directed exclusion of this company on the ground that this company had su ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 10 also directed exclusion of Axis Private Equity Ltd. on the ground that this company had carried the activity of managing directly or indirectly investments, managing mutual funds, venture capital fund, off shore fund, pension fund, provident fund, insurance fund etc. A similar view was taken by the ITAT Delhi Bench in the case of Mckinsey Knowledge Centre India Pvt. Ltd. vs. DCIT in ITA No. 6648/Del/2016 for assessment year 2012-13 wherein this company was directed to be excluded as a comparable. Therefore, based on the work profile of the assessee and respectfully following the above mentioned judicial precedents, we direct the TPO/Assessing Officer to exclude Axis Private Equity Ltd. for the purpose of comparability analysis. 5.04 Almondz Global Securities Limited: In case of this company, it has been submitted that this company is also functionally different from the assessee as this company is into corporate finance and advisory services. A perusal of the annual report of this company shows that the corporate advisory and fee segment includes revenue from merchant banking, investment advisory and loan syndication fee which cannot be considered to be comparable to the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e ITAT in Sumtotal Systems India Pvt. Ltd. vs. ACIT in ITA No. 1710/Hyd/2011 for assessment year 2007-08 wherein it directed exclusion of Avani Cimcon Technologies Limited on the ground that segmental details of the operating income was not available. A similar view was taken by the ITAT Hyderabad Bench in the case of Capital IQ Information System (India) Pvt. Ltd. in ITA No. 124/Hyd/2014 and ITA 170/Hyd/2014 for assessment year 2009-10 wherein the Bench directed exclusion of Eclerx Services Ltd. from the list of comparables as there was no segmental data for diversified service portfolio. Therefore, in such a situation since the segmental data of the services being offered by Milestone Capital Advisors Private Limited is not available, we have no other option but to direct the Assessing Officer/TPO to exclude this company form the final list of comparables. 5.1 Coming to ground nos. 1.10 and 1.11 which challenge the treatment of certain expenses not related to the transaction with AE as part of the operating cost, the assessee has challenged the action of the TPO in treating depreciation, sponsorship, advertisement, audit fee etc. as part of the operating cost. However, at the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... puting the operating profit margins of the comparable companies whereas this should not have been considered as part of the operating income. It is seen that ITAT Bangalore Bench in the case of Hewlett-Packard (India) Software Operation P. Ltd. in ITA 1682/Bang/2012 for assessment year 2008-09 had restored the matter for re-computing the operating margin of the comparable companies after accepting the assessee s claim that miscellaneous income was not operational in nature. A similar view has been held by the ITAT Mumbai Bench in the case of DHL Express (India) Private Limited in ITA No. 7360/Mum/2010 wherein miscellaneous income like interest income, rent received, dividend received, penalty collected, rent deposits written back, foreign exchange fluctuation and profit on sale of assets were held to be not forming part of operational income. Therefore, keeping in mind, the judicial precedents as well as the submissions of the assessee in this regard, we restore ground no. 1.12 to the file of the Assessing Officer/TPO for re-computing the operating profit margin of the remaining comparable companies after giving due opportunity to the assessee to present its case. 5.3 Accordin ..... 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