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TMI Blog2017 (2) TMI 1389X X X X Extracts X X X X X X X X Extracts X X X X ..... tion 36(1)(ii) in respect of payment of bonus to the two shareholder-directors - Held that:- This issue is covered in favour of assessee by the decision in assessee's own case for the assessment year 2008-09 [2015 (4) TMI 949 - DELHI HIGH COURT] as held the bonuses paid to the two shareholder-directors in the preceding two financial years were in the ratio of 60-65%:40-35%, even though their shareholding was 1:1. The balance sheet of the assessee placed on record also indicates that the two shareholders also hold directorial positions in the assessee. Therefore, the assessee's contention that the bonus was paid to the shareholders in their managerial capacity, like in the case of other managers, cannot be questioned merely on the basis of a speculation by the revenue that such payment was to avoid tax. In such circumstances, the deduction under Section 36(1)(ii) in respect of payment of bonus to the two shareholder-directors is allowed Allowability of severance cost - Held that:- Admittedly, Sri. Girish Baliga was neither a shareholder nor a director of the assessee company and did not have any other beneficial interest in the assessee. He was a qualified CA and a very experienc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (vi) Disallowance out of Staff Welfare Expenses ₹ 130000/- (vii) Depreciation on Computer Accessories ₹ 58986/- 3. The assessee preferred an appeal before ld. CIT(A) against the aforementioned addition and the Tribunal vide its order dated 18th March, 2011 in ITA No. 3717/DEL/2010 restored the matter to the file of the AO/DRP on issues of Arm's Length Price, disallowance under Section 36(1)(ii) and severance cost. Accordingly, learned DRP vide its order dated 4th March, 2013 decided the matter. After considering the directions of learned DRP, the TPO vide his order dated 8th February, 2013 recalculated the income of assessee to be enhanced by ₹ 4,17,67,171/-. As regards the other two issues of addition of ₹ 35,10,000/- on account of severance cost and disallowance under Section 36(1)(ii) amounting to ₹ 2,95,93,000/-, learned DRP upheld the addition made by AO. Accordingly, Assessing Officer determined the revised income of ₹ 12,77,03,384/- as under:- (i) Income assessed u/s 143(3) r.w.s. 144C vide order dt ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f the Hon'ble DRP). 8. The Ld. AO/TPO/DRP have erred in considering the amounts reimbursed by its associated enterprises (payments made by the appellant on behalf of its associated enterprises which were subsequently reimbursed by the associated enterprises) as part of operating expenses and the corresponding reimbursement as part of operating revenue of the appellant while determining ALP. 9. The Ld. AO/TPO/DRP have erred in not allowing the benefit of + 5% as provided by proviso to section 92C(2) of the Act. 10. The Ld. AO/DRP have erred in disallowing the bonus amounting to ₹ 29,593,000 paid by the appellant to its employees (who are also shareholders of the appellant) u/s 36(l)(ii) of the Act by holding that the same would have been payable by way of dividend. The Ld. AO has ignored the fact that the ratio of bonus paid by the appellant is different from the ratio of the shareholding of the shareholders employee and thus, bonus paid cannot be disallowed u/s 36(l)(ii) of the Act. 11. The Ld. AO/DRP have erred in disallowing the severance cost amounting to ₹ 3,510,000 paid by the appellant to an employee at the time of severance. The Ld. AO erred in ho ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ;ble Tribunal. The comparables with high margins have invariably been assailed by the assessees on the ground of functional dis-similarity, etc. However, it is also seen that the comparables (included by assessee) having low margins also suffer from functional dis-similairty or other characteristics as found in comparables with high margin. In the past in other cases (e.g. M/s Avenue Asia Ltd. ITA No.6638/DEL-2013) Hon'ble Tribunal, during the course of hearing stated that Department cannot challenge the comparables accepted by the TPO when the Revenue is not in appeal. The judgement in this case was passed in January, 2016. Therefore, it was realized that Revenue would have to file a cross objection to seek justice. In view of this, it was decided that on such issues department needs to file objection. In view of this appeal has been filed late. In view of the above facts and circumstances it is, therefore, humbly requested to your honour kindly condone the delay in filing the appeal late. Kindly acknowledge receipt, Yours faithfully, Sd/- Dy. Commissioner of Income Tax Circle-6(l), New Delhi 6. At the outset, learned counsel submitted that the cross o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ied to accentuate on the functional dissimilarities of the remaining four companies. ITA No.1585/Del/2015 16 11. In this regard, the primary question which falls for our consideration is: 'Can the DR argue for the exclusion of some companies, which were treated by the AO/TPO as comparable'? In our considered opinion, the answer to this question can be given in negative alone. It is understandable that when CIT(A) has decided some point in favour of the assessee and against the Revenue, the AO is fully empowered to assail the correctness of such a decision in an appeal before the tribunal. Similarly, when an assessment order is passed u/s 143(3) read with section 144C of the Act, the AO can be aggrieved against the direction given by the DRP. In such cases of grudge, the AO can approach the tribunal for an appropriate relief, wherever and to the extent the law permits. The underlying idea behind these situations is that the AO is dissatisfied with reversal of his view either by the CIT(A) or the DRP, as the case may be, which he wants to be restored. But, the AO in our considered opinion, can under no circumstance be aggrieved with his own view taken in the assessment order ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t is relevant to mention that the institution of the DRP came into being by means of insertion of section 144C by the Finance (No. 2) Act, 2009 w.r.e.f. 1.4.2009. As per this ITA No.1585/Del/2015 19 section, an assessee who is dissatisfied with a draft order can approach the DRP for necessary relief. Such a relief can be allowed by giving direction under sub-section (5) of this section. Sub-section (13) of section 144C provides that the AO is obliged to pass a final assessment order in conformity with the direction given by the DRP. This shows that the direction tendered by the DRP is binding on the AO notwithstanding the AO's reservations on it. The Finance Act, 2012 inserted sub-section (2A) to section 253 w.e.f. 1.7.2012 providing that : 'The Principal Commissioner or Commissioner may, if he objects to any direction issued by the Dispute Resolution Panel under sub-section (5) of section 144C in respect of any objection filed on or after the 1st day of July, 2012, by the assessee under sub-section (2) of section 144C in pursuance of which the Assessing Officer has passed an order completing the assessment or reassessment, direct the Assessing Officer to appeal to the Appe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r cross objection against the assessment order passed in pursuance of the direction of the DRP to the extent it is aggrieved against such direction. It has no right to file appeal or cross objection against the voluntary decision of the AO/TPO ITA No.1585/Del/2015 22 which was not subject matter of any adverse direction by the DRP. The analogy which follows is that if no appellate recourse is open to the Department against the suo motu order of the AO/TPO, then, the DR, who argues before the tribunal for and on behalf of the AO, can equally have no right to argue against that part of the order. We want to clarify that the Department is fully empowered to set such adverse position right by taking recourse to the other remedies, if any, available as per law de hors the appellate option. 16. The ld. DR then argued that there can be no estoppel against the Act and hence no shadow can be cast on his right to argue against the inclusion of four companies which are not comparable. We appreciate the concern of the ld. DR and find force in his contention that there can be no estoppel against the statute. But, the point is that if the statute does not permit the raising of such a contention ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nst the orders specified therein. Sub-section (2) of section 253 empowers the Revenue to file appeal before the Tribunal. This section provides that the C1T may, if he objects to any order passed by the CIT(A) u/s 154 or 250, direct the Assessing Officer to appeal to the Appellate Tribunal against the order. This section does not embrace cases where the first appeal lies to the Tribunal against the order passed by the Assessing Officer u/s I44C( 13) pursuant to the direction given by the Dispute Resolution Pane! (DRP) u/s 144C(5) of the Act. This is in a sharp contrast to the specific entitlement of the assessee under clause (d) of section 253(1) to appeal against the order passed by the Assessing Officer in pursuance of the directions of the DRP. The reason appears to be that \\hen the DRP has scrutinized the draft order of the Assessing Officer and given the appropriate direction to modify it. if necessary, then there is no logic in empowering the C1T to rescrutinize such order of the Assessing Officer and have any grievance against the same. It is more so because the order of the AO has already been checked by a group of three CITs constituting the DRP. I however later it was re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssee before the DRP prior to 01.07.12. the Revenue could have neither filed appeal nor cross-objection against the order of the Assessing Officer. We. therefore, hold that the cross-objection filed by the Revenue is not maintainable as per law. 11. The second reason for which the CO of the Revenue deserves the fate of dismissal is the language of section 253 of the Act which permits the CIT to authorize the Assessing Officer to file appeal u/s sub-section (2A) 'if he objects to any direction issued by the Dispute Resolution Panel under sub-section (5) of section 144C. In the like manner, cross-objection can be filed under sub-section (4) of section 253 of the Act which provides that: 'the Assessing Officer .... on receipt of notice that an appeal against the order of... the Assessing Officer in pursuance of the directions of the Dispute Resolution Panel has been preferred under sub-section (1) .... he may ... file a memorandum of cross-objections... against any part of the order of the Assessing Officer (in pursuance of the directions of the Dispute Resolution Panel) ...'. The crux of the matter is that the appeal or the cross-objection can be filed by the Revenue on ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . 13. Learned CIT(DR) further submitted that appellate authority is required to set right the wrongful actions of lower authorities. In this regard, he relied on the decision in Kapurchand Shrimal v. CIT [1981] 131 ITR 451/7 Taxman 6 (SC) and also on the decision of Hon'ble High Court of Delhi in the case of CIT v. Jansampark Advertising Marketing (P.) Ltd. [2015] 375 ITR 373/231 Taxman 384/56 taxmann.com 286. 14. Learned CIT(DR) referred to page 66 to 68 wherein the TPO's order is contained and referred to page 73 of the paper book to point out that learned TPO accepted certain comparables though they were functionally not comparable. He submitted that same principle is to be applied for all comparables whether earning high profit or low profit. Learned counsel in the rejoinder relied on the decision of Hon'ble Supreme Court in the case of MCorp Global (P.) Ltd. v. CIT [2009] 178 Taxman 347/309 ITR 434 wherein, it has been held that benefit once granted to Assessee cannot be taken back. Learned DR referred to the decision in the case of Trend Micro India (P.) Ltd. (supra), and pointed out that the Tribunal, after discussion, had set aside the matter to learned ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by the Appellate Tribunal may file an appeal to the High Court and such appeal under this sub-section shall be- (a) filed within one hundred and twenty days from the date on which the order appealed against is received by the assessee or the Chief Commissioner or Commissioner; (b) (c) in the form of a memorandum of appeal precisely stating therein the substantial question of law involved, (2A) The High Court may admit an appeal after the expiry of the period of one hundred and twenty days referred to in clause (a) of sub-section (2), if it is satisfied that there was sufficient cause for not filing the same within that period. (3) Where the High Court is satisfied that a substantial question of law is involved in any case, it shall formulate that question. The appeal shall be heard only on the question so formulated, and the respondents shall, at the hearing of the appeal, be allowed to argue that the case does not involve such question: Provided that nothing in this sub-section shall be deemed to take away or abridge the power of the court to hear, for reasons to be recorded, the appeal on any other substantial question of law not formulated by it, if it is satis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... question before the Appellate Authority and also before the Appellate Tribunal. The appellant has not produced the memorandum of the appeal before the Tribunal and the order of the Appellate Tribunal also does: not bear it out that the appellant has raised this question, but we would think that the question which is raised essentially, appears to be a pure question of law and it is substantial in the sense that it has got a direct and substantial impact on the destiny of the appellant's case and we hence proceed to formulate the following substantial question of law:- Whether in the circumstances of the case, the Appellate Authority and the Tribunal should have found that the amount of interest received on the refund by the Income Tax Department should be included in the amount on which the appellant was taxed under Section 44BB of the Act? Whether in the circumstances of the case, the Appellate Authority and the Tribunal should have found that the amount of interest received on the refund by the Income Tax Department should be included in the amount on which the appellant was taxed under Section 44BB of the Act?.' Relying on this decision, ld. CIT(DR) submitted that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ciation in respect of 42,000 bottles out of the total number of bottles (5,46,000), by reason of the impugned judgment. That benefit is sought to be taken away by the Department, which is not permissible in law. This is the infirmity in the impugned judgment of the High Court and the Tribunal. 18. Learned CIT (DR) referred to the decision of Hon'ble Bombay High Court in the case of Ashok Vardhan Birla (supra). In this case, it was, inter alia, held that while deciding a tax appeal, the appellate authorities viz. the Appellate Assistant Commissioner as also the Tribunal have jurisdiction to permit additional grounds to be raised before them even though these grounds may not have been raised before either the Assessing Officer or the Appellate Assistant Commissioner, so long as the points for decision arise from the proceedings which were the subject matter of assessment before the Assessing Authority. It was further held that additional grounds can be entertained so long as they relate to the matter of the proceedings which were before the Assessing Officer or before the Appellate Authority. This decision, in our humble opinion, does not help the department because there was ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s were made with the reference to powers of appellate authorities, which were as follows: '38. The provision of appeal, before the CIT (Appeals) and then before the ITAT, is made more as a check on the abuse of power and authority by the AO. Whilst it is true that it is the obligation of the AO to conduct proper scrutiny of the material, given the fact that the two appellate authorities above are also forums for fact-finding, in the event of AO failing to discharge his functions properly, the obligation to conduct proper inquiry on IT A No. 525/2014 Page 21 of 24 facts would naturally shift to the door of the said appellate authority. For such purposes, we only need to point out one step in the procedure in appeal as prescribed in Section 250 of the Income Tax Act wherein, besides it being obligatory for the right of hearing to be afforded not only to the assessee but also the AO, the first appellate authority is given the liberty to make, or cause to be made, further inquiry , in terms of sub-section (4) which reads as under:- -The Commissioner (Appeals) may, before disposing of any appeal, make such further inquiry as he thinks fit, or may direct the Assessing Officer to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on also is of no assistance to the department because in the present case, the learned TPO has also arrived at certain comparables after duly examining the facts. These comparables, impugned by learned CIT(DR), are not the subject matter of appeal before the Tribunal. The submission of learned CIT(DR) relying on B.J. Services Co. (supra) that the appellate authority should set right all the actions of lower authorities are acceptable to the extent of the subject matter of appeal. Though, the submission of learned CIT (DR) that the subject matter appeal is determination of arm's length price, no doubt is convincing, but at the same it has to be kept in mind that determination of Arm's Length Price of international transactions involves several steps and, on those steps, which are not disputed by the assessee, the department cannot be heard unless specific provision is there for entering into that realm. We are of the considered opinion that the issue is squarely covered by the decisions of various Coordinate Benches noted earlier. 21. In view of the above discussion, the cross objection filed by the department is held to be non maintainable and, thus, rejected. 22. Now ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nce in the form of capital infusion, strategic direction and financial advice. ChrysCapital Management Companies are asset management companies for investment funds (Private Equity Funds) who generally focus on investment in incubation ventures. These investment funds concentrate on providing funds to entrepreneurs engaged in the business of providing software services, outsourcing services and technology out of India. 27. The assessee had undertaken the following international transactions:- S. No Description Amount (Rs.) 1. Advisory Services 25,20,11,250 2. Reimbursement of expenses incurred on behalf of AE's 5,39,53,094 3. Receipt of advance for services to be rendered in future 3,33,41,250 28. There was no adjustment made in regard to the reimbursement of expenses and receipt of advance for services to be rendered in future. As regards, the advisory services, the assessee company adopted Transactional Net Margin Method (TNMM) with Operating Pro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... A.Y. 2006-07 Used by Assessee 1. Ajcon Global Services Limited Yes Yes No 2. Brescon Corporate Advisors Limited Yes Yes No 3. Epic Energy Limited Yes Rejected No 4. ICDS Securities Ltd Yes Yes No 5. KJMC Global Market (India) Ltd Yes Yes Yes 6. Keynote Corporate Services Ltd Yes Yes Yes 7. Mahanivesh India Ltd Yes Rejected No 8. Maarg Holding Financial Service Ltd. Yes Rejected No 9. Sumedha Fiscal Service Limited No Yes Yes ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 34. Now, in the present appeal, the assessee's main grievance vide ground no. 5 is as regards inclusion of Brescon Corporate Advisors Limited mainly relying on the decision in the case of Temasek Holdings Advisors India (P.) Ltd. v. Dy. CIT [2013] 40 taxmann.com 426/[2014] 148 ITD 1 (Mum. - Trib.) and the decision of ITAT Delhi Bench in the case of Xander Advisors India (P.) Ltd. v. Asstt. CIT [2014] 52 taxmann.com 228/[2015] 153 ITD 528 (Delhi - Trib.). Learned counsel pointed out that in both these decisions this company had been considered and it was held that this was a merchant banking company with its main source of income from recapitalization advisory and debt syndications and, thus, it was not a simple investment advisory services as the assessee is. Learned CIT (DR) submitted that the decision in the case of Xander Advisors India (P.) Ltd. (supra) pertains to assessment year 2008-09 and not to assessment year 2006-07 which is before us. In this regard, he relied on Rule on 10B(4), wherein, it has been mandated that the data to be used in analyzing the comparability with an international transaction shall be the data of the financial year in which the inter ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Dividend, Interest received, Profit/loss on sale of investments and Profit/loss arising out of dealing in shares and securities. A close look at the composition of the gross revenue from Tee based financial services' transpires that some component of 'Equity related advisory/M A advisory' prima facie partly resembles with the services rendered by the assessee. The Id. DR himself candidly accepted, and rightly so, that the other components of this stream of the revenue are of no match with that of the assessee. Now, the question arises as to whether Brescon Corporate Advisors Ltd., under these circumstances can be considered as comparable? At this stage, it is pertinent to mention that the gross revenue of this company amounts to ₹ 20.27 crore and there is no segmental data available either in respect of net profit from 'Fee based financial services' or 'Other income'. As 'Other income' also includes income from Investment activity, being profit/loss on sale of investment and dealing in shares and securities, the impact of such profit/loss on the overall net profit of the company on entity level, cannot be determined. Even though some compo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... A advisory fees was also there. Therefore, there is no change in functional profile as regards the advisory services given by assessee as compared to Brescon, therefore, the decision relied upon by learned counsel is applicable to the present set of facts. 38. As far as ld. CIT(DR)'s contention regarding inclusion of this comparable by assessee in earlier year is concerned, it would suffice to observe that there is no estoppel against the assessee from demonstrating that a particular comparable was wrongly included in earlier year and, therefore, it should be excluded in this year. We find that both the decisions referred before us clearly supports the assessee's contention and, therefore, we direct for excluding Brescon Corporate Advisors Limited from the list of comparables. As far as the inclusion of ICDS securities is concerned, the same was not pressed at the item of hearing and, therefore, the same will remain in the list of comparables. In the result, ground no. 5 is partly allowed. 39. Vide ground no. 7, the main grievance raised by assessee is in regard to the inclusion of non operating incomes while computing profits of following comparables :- (i) KGMC ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n Chryscapital Investment Advisors (India) (P.) Ltd. v. Dy. CIT [2015] 376 ITR 183/232 Taxman 20/56 taxmann.com 417 (Delhi), has observed as under:- The final question that arises for this Courts determination in the present appeal is the assessee's claim for deduction under Section 36(1)(ii) of the Act in respect of the bonus paid by it to its two shareholders - Ashish Dhawan and Kunal Shroff The lower authorities denied such claim, holding that the bonus was paid to the shareholders in lieu of dividend with the objective of avoiding tax. Such inference was drawn from two facts: (a) the bonus paid was in proportion of their shareholding in the assessee company, i.e. 2:1; and (b) no dividend had been declared by the assessee. However, a perusal of an excerpt from the DRP s order dated 21.09.2012 quoted by the AO in his order dated 19.10.2012 contradicts both these facts: (a) bonus was not paid in the ratio of 2:1 and (b) the assessee had declared interim dividend ITA 417/2014 Page 52 of ' 5,47,47,000/-. Further, the bonuses paid to the two shareholder-directors in the preceding two financial years were in the ratio of 60-65%:40-35%, even though their shareholding was 1: ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ercial expediency of the expenditure. Commercial expediency is a matter entirely left to the judgment of the assessee. The Assessing Officer, being not satisfied with the assessee's reply, made an addition of ₹ 35,10,000/-, inter alia, observing that assessee failed to justify the payment to Mr. Baliga with reference to services rendered by him. 45. Learned counsel submitted that the severance allowance was paid to the employee on the basis of business exigencies and, thus, the same could not be disallowed. He submitted that unit did not close down and, therefore, it could not be held to be a capital expenditure. Learned DR submitted that it is for assessee to show that an expense was for business purpose. He submitted that no information was given why payment made and no justification has been provided for payment. 46. We have considered the rival submissions of both the parties. Admittedly, Sri. Girish Baliga was neither a shareholder nor a director of the assessee company and did not have any other beneficial interest in the assessee. He was a qualified CA and a very experienced person. Therefore, there could not be any other consideration for severance cost of & ..... X X X X Extracts X X X X X X X X Extracts X X X X
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