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TMI Blog2017 (8) TMI 1490X X X X Extracts X X X X X X X X Extracts X X X X ..... ed to as that of an Investment advisor. Thus we are of the considered view that the aforementioned comparable, viz. Motilal Oswal Equity Pvt. Ltd. is functionally incomparable with the assessee company and had wrongly been included in the list of the final comparables. We thus direct the AO/TPO to exclude the aforesaid comparable from the final list of the comparables. That in light of our aforesaid observations we herein direct the AO/TPO to recompute the ALP of the assessee company. The AO/TPO are directed that if the ALP of the assessee is found within the safe harbour of (+)/(-) 5% parameters, then no addition would be called for in the hands of the assessee. The appeal of the assessee is thus allowed in terms of our aforesaid observations. Addition u/s 40(a)(i) - setting aside of disallowance suggested by the AO u/s 40(a)(i) in the draft assessment order and exclusion of the said disallowance by the AO in the assessment framed under Section 143(3) r.w.s. 92CA(3) - Held that:- The assessee company is not a beneficiary of this expenditure because the seconded employees have been paid salary by THPL who are working in India for the assessee company and the assessee is merel ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and in law, the learned. A.O based on the directions of the Honorable DRP failed to appreciate that the ALP as determined, by the Appellant should have been accepted as the pre-condition in section 92C(3) of the Act before the Additional Commissioner of Income-tax, Transfer Pricing - 4(2) (hereinafter referred to as 'learned TPO') could proceed to determine the ALP was not fulfilled in this case. Further, the learned AO has also not highlighted the specific sub-clause of section 92C(3) of the Act, on the basis of which he has rejected the search process that is adopted by the Appellant in its transfer pricing documentation. Ground 3 On the facts and in the circumstances of the case and in law, the learned A.O. based on the directions of the Honorable DRP, erred in hot following a search process in determining the comparable companies and arbitrarily selecting the comparable companies to benchmark transaction of investment advisory services rendered by the Appellant Ground 4 On the facts and in the circumstances of the case and in law, the learned AO based on the directions of the Honorable DRP has, in arriving at the arithmetic mean of the comparable companies t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Operating Cost. The assessee as per its TP study report reflected an operating profit margin of 20.93%, as in comparison to the weighted average margin of 15.69% on operating costs considering the financial data of comparable companies for three years. That still further the updated margin using single year data for F.Y. 2010-11 worked out at 13.53% on operating costs, as under:- Name of the Company Operating Margin as per TP study based on multiple years. Single year margins for F.Y. 2010-11 Access India Advisors Limited. 6.62% NA* Future Capital Investment Advisors Limited. 20.02% NC** ICRA Management Consulting Services Limited. 4.72% 15.51% ICRA Online Limited. 33.39% 22.32% IDC (India) Limited. 11.27% 10.33% Informed Technologies Limited. 19.11% 11.70% Integrated Capital Services Limited. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 55.60% The TPO thus adopted the margin of 55.60% on operating costs as the ALP margin as against 20.93% shown by the assessee and vide his order passed under Section 92CA(3), dated 28/01/2015 made an upward Transfer pricing adjustment of ₹ 16,06,51,776/-. The A.O. after receiving the report of the TPO passed a Draft Assessment Order u/s 143(3) r.w.s 92CA(3), dated 09/03/2015, and proposed to assess the income of the assessee company at ₹ 39,23,26,081/-. The assessee being aggrieved by the draft assessment order approached the Dispute Resolution Panel-2, Mumbai (DRP) and objected to the variations proposed by the A.O. 4. That the DRP vide its directions passed u/s 144C(5) though deleted the addition of ₹ 13,87,07,155/- made by the A.O u/s 40(a)(i), but however dismissed all the objections which were raised by the assessee against the TP adjustments made by the TPO, barring the objection raised as regards the inclusion by the TPO of M/s Motilal Oswal Investment Advisors Pvt. Ltd. in the final list of the comparable companies for benchmarking the ALP of the international transactions entered into by the assessee company with its AE. The A.O. follo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hearing of the appeal the Ld. A.R drawing our attention to Page 6 of the order of the TPO submitted that the TPO while drawing adverse inferences in the hands of the assessee company had borrowed the observations from the assessment order passed in the case of the assessee for the immediately preceding year, viz. A.Y.2010-11, and thus wrongly concluded that the assessee was involved in Portfolio management and management of companies in which the AE had made investments. The Ld. A.R taking us through the findings of the TPO recorded at Para 12-12.1 of his order, therein averred that even the mistakes in the aforesaid order of the preceding year were transposed as such by the TPO while passing the order for the year under consideration. The Ld. A.R referring to the nature of activities of the assessee company submitted that the assessee company, viz. Temasek Holding Advisors (I) Private Limited, (THAIPL) which is a wholly owned subsidiary company of Temasek Holding Private Limited, Singapore (THPL), had begun providing Investment advisory services to its holding company, viz. THPL in the year 2004. 'The Ld. A.R deliberating on the nature of services rendered by the assessee the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... age OP/OC of 15.69% of the aforesaid comparables, that of the assessee-company for the year under consideration stood reflected at 20.93%. It was submitted by the ld. A.R that the TPO. while benchmarking the international transactions of the assessee with its AE had most arbitrarily restricted himself to the current year data for the purpose of comparability. It was further submitted by the Ld. A.R that the arithmetic mean of the operating margin of the aforesaid comparables for the F.Y. 2010-11, which was furnished during the course of proceedings before the TPO was 13.53%. It was submitted by the ld. A.R that the TPO had in a whimsical manner rejected all the companies which were selected by the assessee as comparables, and had modified the comparability analysis of the assessee by invoking the provision of Section 92C(3)(c) by incorporating a final set of comparables, as under:- Name of the company OP/OC Motilal Oswal Investment advisory Pvt. Ltd. 82.23% Ladder Up corporate Advisory Pvt. Ltd. 52.42% Motilal Oswal Pvt. Equity Advisors Pvt. Ltd. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ld. A.R that without pointing out any substantial variance either as regards the functionality or any other factor, the comparables cannot be shifted arbitrarily by the TPO in different years. The ld. A.R. restricting himself to the exclusion of two companies selected by the assessee as comparable, viz-. ICRA Management Consultancy Services limited and Informed Technologies Limited, therein, submitted that if the exclusion of the said companies as a comparable by the A.O/TPO is set aside, then the case of the assessee would be within the safe harbor of (+)/(-) 5% parameters, and in the backdrop of the said factual position no averrments would be required to be placed in context of IDC India Limited and ICRA Online Limited. 8. The ld. A.R assailing the rejection of M/s. ICRA Management Consultancy Services Limited by the TPO, which thereafter had been upheld by the DRP, therein drew our attention to Page No. 30 - Para 4.12 of the order of the DRP. It was submitted by the ld. A.R that the DRP had upheld the rejection of the aforesaid comparable by the TPO for the reason that his predecessor in the case of the assessee for the immediately preceding year, i.e A.Y. 2010-11, had uphe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... our attention to the observations of the coordinate bench of the Tribunal recorded in the case of the assessee for A.Y. 2007-08 and 2008-09, reported as Temasek Holding Advisors (I) (P.) Ltd. v. Dy. CIT [2013] 38 taxmann.com 80/60 SOT 134 (Mum. - Trib.) (URO) (Page 26 of 'APB'), and the order passed by the Tribunal while disposing of the appeal of the revenue, reported as Dy. CIT v. Temasek Holding Advisors (P.) Ltd. [2014] 47 taxmann.com 311/151 ITD 458 (Mumbai - Trib.) (Page No. 32-33 of 'APB'). It was thus in the backdrop of the aforesaid factual position averred by the Ld. A.R that the A.O/TPO without placing on record any material which could go to prove that the aforesaid comparable, viz. ICRA Management Consultancy Services Limited during the year under consideration was found to be either functionally or otherwise at variance, as in comparison to the preceding years, thus were not justified in most arbitrarily excluding it from the final list of the comparables. The ld. A.R further referring to Page 10 of the order of the TPO for the year under consideration therein submitted that the functions performed, assets used and risk taken ('FAR') of the afo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... elevant extracts of the order passed by the Tribunal in its case for A.Y. 2010-11, and therein averred that the Tribunal after deliberating at length, had held ICRA Management Consultancy Services Limited as functionally comparable, It was submitted by the ld. A.R that there cannot be cherry picking of comparables, and unless some material difference had arisen during the year under consideration as in comparison to the earlier year, the same could not be whimsically rejected as a comparable. The ld. A.R averred that a fresh filter cannot be introduced for the first time before the Tribunal, because if that be permitted, then all the comparables put up by the TPO will be liable to be excluded. It was lastly submitted by the ld. A.R that now when the functional comparability of ICRA Management Consultancy Services Limited had duly been appreciated by the Tribunal in the case of the assessee in the earlier years, then in the backdrop of the 'Principle of Consistency', a different view on the same set of functional profile cannot be drawn. Per contra, Ld. Departmental Representative (for short D.R) in order to drive home his contention that ICRA Management Consultancy Services ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ist of the final comparables. We are of the considered view that now when the order of the AO/TPO in the case of the assessee for the immediately preceding year, viz. A.Y. 2010-11, therein excluding the aforesaid comparable, viz. ICRA Management Consultancy Services Limited had been set aside by the Tribunal, therefore, the rejection of the said comparable, viz. ICRA Management Consultancy Services Limited by the A.O during the year under consideration, pursuant to the direction of the DRP, who had merely adopted the observations of his predecessor on A.Y. 2010-11, thus cannot be upheld and is liable to be vacated on the said count itself. We are further persuaded to subscribe to the contention of the ld. A.R that cherry picking of the comparables every year by the TPO, without pointing out that the facts in context of the comparables accepted in the preceding years had changed during the year under consideration, cannot be permitted. We further find that the aforesaid comparable, viz. ICRA Management Consultancy Services Limited had also been held to be a good comparable by the Tribunal in the case of the assessee for A.Y(s). 2007-08, 2008-09 and 2009-10, while for in the earlier ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by the Hon'ble High Court of Bombay while dismissing the appeal of the department for A.Y. 2008-09, therefore, we are not persuaded to accept the aforesaid contentions of the ld. D.R. Thus in the totality of the aforesaid facts, we are of the considered, view that there is no reason for us to take a view divergent from that arrived at by the Tribunal in the case of the assessee for the preceding years, and thus set aside the order of the AO/TPO rejecting the aforesaid comparable and direct that the same be included in the final list of the comparables. 10. The ld. A.R assailing the rejection by the AO/TPO of M/s. Informed Technologies Limited which was selected by the assessee company as a comparable, therein drew our attention to Page 13 of the order of the TPO. It was submitted by the ld. A.R that the TPO being of the view that as the aforesaid comparable had received data outsourcing charges, i.e BPO income of ₹ 1.75 crore and was registered with Software Technology Park India (STPI), thus it was functionally not comparable with the assessee company. It was submitted by the ld. A.R that the TPO holding a conviction that the services of the aforesaid comparable, as g ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e order of the TPO and the 'Annual report' of the aforesaid comparable for the year' under consideration (Page 262), therein averred that as the said comparable unlike the assessee was a BPO and not into the 'Investment advisory business', therefore, the same was functionally incomparable and had rightly been rejected by the TPO. The Ld. D.R in order to fortify his aforesaid contention, therein submitted that, as stood gathered from the 'Financial statements' of the aforesaid comparable (Page 253 of APB), the latter unlike the assessee had paid a hefty salary aggregating to ₹ 63,64,818 during the year under consideration. Thus in the totality of the contentions raised before us and after referring to the material placed, on our record, it was submitted by the ld. D.R that the aforesaid comparable was functionally different, and had rightly been excluded by the TPO from the final list of the comparables. 11. We have heard the ld. Authorized Representatives for both the parties, perused the orders of the lower authorities and the material produced before us. We have given a thoughtful consideration to the facts of the case and find that in the cas ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... DRP, therein submitted that the aforesaid company was functionally not comparable and had wrongly been included by the TPO in the final set of comparables. The ld. A.R drew our attention to the 'Profit and loss account' of the said comparable (Page 322 of APB) and the 'Schedule' forming part of the same (Page 329), which revealed that the main source of the said comparable was by way of 'Financial and Management Consultancy Fees', and thus was entirely different from the activities of the assessee company which was not into the business of managing anybody's finances. The ld. A.R further drew our attention to the 'Cash flow' statement of the aforesaid comparable for the year under consideration (Page 323), 'Schedule 16' which formed part of the accounts for the year (Page 330) and 'Segment information' (Page 334), which therein did go to fortify the claim of the assessee that the aforesaid comparable was into 'Financial and Management Consultancy'. The ld. A.R further referring to the 'Companies general business profile' (Page 338) therein submitted that the aforesaid comparable, viz. M/s. Ladderup Corporate Advis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... porate Advisory Services Limited had received merchant banking registration in the month of July, 2010 from SEBI, but no actual income was received from the said activity. Thus in the backdrop of the aforesaid facts it was submitted by the ld. D.R that the aforesaid comparable was deriving income only from advisory services, and as such if the functioning of the assessee company were pitted as against that of the aforesaid comparable, it stood revealed that the said comparable was providing advisory functions on restructuring like the assessee, as well, as providing advisory services on acquisition, i.e in the manner the assessee company helped its AE in carrying out acquisitions. It was thus submitted by the ld. D.R that the functions of the aforesaid comparable, viz. Ladderup Corporate Advisory Services Limited were similar to that of the assessee company, and as such after thorough vetting and verification of the said functional comparability the same had been included in the final set of comparables by the TPO. The Ld. D.R in support of his aforesaid contention therein placed on record the copy of the order passed by a coordinate bench of the Tribunal, i.e ITAT, Delhi, in the c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rvations of the coordinate bench of the Tribunal were recorded in context of A.Y. 2009-10 involved in the case before them, while for the year before us in the present appeal is A.Y. 2011-12. Thus the case law relied upon by the Ld. D.R is distinguishable on facts, and as such for the foregoing reason would be of no assistance to him to support his aforesaid contention. That in the backdrop of the aforesaid facts as had been brought to our notice, and as such are irrebuttably supported by the records produced before us, we hold a strong conviction that now when the aforesaid comparable, viz. Ladder up Corporate Advisory Pvt. Ltd. is engaged in Merchant banking/Investment banking and other similar activities during the year under consideration, therefore, the same cannot be considered as functionally comparable to the assessee company which is engaged in rendering non-binding investment, advisory services. We thus are persuaded to subscribe to the contention of the ld. AR that the aforesaid comparable, viz. Ladder up Corporate Advisory Pvt. Ltd. is functionally incomparable to the assessee company and had wrongly been included by the AO/TPO in the final list of the comparables. We t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... arables by the TPO, nothing has been brought on record before us, that TPO has adopted any scientific method for selection of his two comparables, i.e. Motilal Oswal Investment Advisory Pvt. Ltd. and Future Capital Holdings Ltd. From the perusal of para 9.2 of the TPO's order it appears that, he has tried to pick-up the two comparables from the accept and reject matrix of companies by the assessee during its search process. Such an approach clearly indicates cherry picking, which approach cannot be accepted. Alternatively, it was submitted by the ld. A.R that not only the TPO had resorted to cherry picking process while selecting the aforesaid comparable, but all the more had afforded only a one day notice to place its objections in context of the selection of the aforesaid comparable, viz, Motilal Oswal Equity Advisors Private Limited. The ld A.R further submitted that the aforesaid company, viz. Motilal Oswal Equity Advisors Private Limited was functionally incomparable to the assessee company, and in support of his aforesaid contention relied on the 'directors report' placed at Page nos. 343-344 of the APB, which revealed that unlike the assessee company which wa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at a variance as against the assessee company which is engaged in the business as that of an investment advisor. We further find that from a perusal of the 'Annual report' of the aforesaid comparable for Financial year 2010-11, it stands revealed that the latter operates 4 different business verticals, viz. financial advisory, investment advisory, management and facilitation services and identifying investment opportunities. We find that despite the aforesaid multiple sectors of operations, no segmental data is available in the 'Annual report', and the income from the advisory operating constitute only 42.10% of its total operating income. We are further of the considered view that as observed by us hereinabove, the aforesaid comparable unlike the assessee is engaged in the business of managing and advising funds in the Growth Capital as well as Real Estate Space. That a perusal, of 'Schedule E' to the balance sheet of the aforesaid comparable therein reveals that the latter had made investments in one of the funds managed, by it, i.e 'India Reality excellence fund'. Thus in the totality of the aforesaid facts we are of the considered view that funct ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... an amount of ₹ 13,87,07,155 to its holding company, viz. M/s. Temasek Holding Limited, Singapore on account of reimbursement of the salary expenses of the employees who were on the pay roll of the aforesaid holding company, via THPL, and were posted on deputation with the assessee company and exclusively working for the latters operations. The salary to the aforesaid seconded employees was paid by the holding company, viz. THPL. The services rendered by the aforesaid employees involved evaluation of investment opportunities in India and keeping THPL posted with economic developments in India which had a bearing on the investments to be made by the holding company, viz. THPL, in India. The AO observing that the assessee company had not deducted TDS before repatriation of the amount to its holding company, therein, called upon it to put-forth an explanation as regards the same. The assessee company submitted before the AO that as the aforesaid employees were on the pay roll of the holding company, viz. THPL, accordingly the salary of such employees was paid by THPL, wherein the latter in turn raised a charge on the assessee company, viz. THAIPL, in terms of the seconded agreem ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ransaction can be explained with a small example being at, Arms Length. Let us say, an engineering company situated in abroad has outsourced and deputed its engineers in India to execute a turnkey contract for a company in India. The salary was paid by the foreign engineering company directly to its employees deputed in India with TDS deduction on salary. The contracted job was successfully completed. While making the payment of the contracted amount (inclusive of salary expenses of the deputed engineers) towards the technical services received from the foreign concern, the concern in India has to deduct/withhold the tax while making the payment of contracted amount to abroad. (vi) The salary expenses in question have been incurred towards technical/professional services rendered by the deputed employees who are working under the guidance of the assessee company, though, for the exclusive benefit of the parent holding company. (vii) It is mandatory for the assessee company to withhold the tax while repatriating the payment being made to the holding company, which has been disguised as a reimbursement of salary expenses in the form a colorable device to fool the tax authorit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ection of the DRP, had carried the matter in appeal before us. That during the course of the hearing of the appeal the Id. D.R strongly relied on the draft assessment order of A.O., and therein averred that the DRP had wrongly directed the deletion of the disallowance of ₹ 13,87,07,155/- made by the A.O under Section 40(a)(i) of the 'Act'. It was further submitted by the Id. D.R that the department had filed an appeal with the Hon'ble High Court of Bombay against the order of the Tribunal passed in the case of the assessee for A.Y. 2008-09, which was pending adjudication as on date. That on the other hand the ld. A.R relied on the order of the Tribunal so passed in its case for A.Y. 2007-08 and A.Y. 2008-09, and submitted that the issue was squarely covered in favor of the assessee company. 20. We have heard the authorized representatives for both the parties, perused the orders of the lower authorities and the material produced before us. We find that the issue involved in the present case is squarely covered by the order of a coordinate bench of the Tribunal in the case of the assessee, viz. Temasek Holding Advisors India (P.) Ltd. (supra), wherein it was hel ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nce under section 40(a)(ia) has to be made. The main reason for disallowing these expenses was that the secondment agreements were unregistered and date and place in the said agreements have not been mentioned and, therefore, these agreements are colourable device with an intention of avoiding tax liability on the expenses which have been claimed to be reimbursed. Such a reasoning of the Assessing Officer is wholly vitiated for the reason that firstly, an agreement between the two parties need not necessarily be registered as there is no provision under the law that such secondment agreement entered into between the two parties needs to be registered under some Indian statutory law or any approval from the Government of India is required. He has also not referred to any such provision through which such approval is needed; Secondly, before the learned. Commissioner (Appeals), the signed agreement was duly filed and in the said agreements, date has already been mentioned in the operating part of the agreement. If the Assessing Officer had any doubt about the authenticity of the agreement, he could have very well required the assessee to substantiate the same. This premise of the A ..... X X X X Extracts X X X X X X X X Extracts X X X X
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