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TMI Blog2016 (7) TMI 1495X X X X Extracts X X X X X X X X Extracts X X X X ..... nds: 1. In making an upward transfer pricing adjustment of Rs. 946,786,679 in determining the arms length pricing (ALP) of the international transactions pertaining to (a) investment advisory services in respect of listed Indian equities; (b) Investment advisory/support services in respect of strategic (unlisted) investments and (c) Investment banking services, provided by the Appellant to its overseas associated Enterprises (AE) by rejecting comparables selected by the Appellant, inter-alla, on following grounds: i. Rejecting the separate functional analysis, search process adopted and documentation maintained by the Appellant for these transactions and treating these three separate international transactions as a single international transaction for the purpose of determining the ALP. ii. Adopting a set of comparable companies whose functions are not similar to that of the Appellant, in the context of the said international transactions. iii. Rejecting the multiple year data and relying only on the single year data (i.e. for the year ended March 2008); iv. Considering companies with related party transactions as comparable to the Appellant. vi. Considering compa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uch reference. 5. Based on the facts and circumstances of the case, the learned AO has erred in law in disallowing the amortization and mark to market cost (hereinafter collectively referred as ESOP cost) amounting to Rs. 203,156,936 incurred by the Appellant in respect of restricted stock units (RSU5) granted to its employees, on the basis that the ESOP costs are notional/ contingent in nature. 6. Based on the facts and circumstances of the case, the learned A0 has erred in law in disallowing charges paid to the National Securities Clearing Corporation Ltd., Bombay Stock Exchange and National Stock Exchange (stock exchanges) amounting to Rs. 1,186,105 for non-confirmation of clearing house trades, client code modification, bad/ short delivery, etc. on the basis that the payments made are in nature of penalties / fine. 7. Based on the facts and circumstances of the case, the learned AO has erred in law in not accepting Appellants contention that the telecommunication charges are not required to be reduced from export turnover for the purpose of computing deduction under section 10A of the Act. 8. Without prejudice to the above ground, the learned AU erred in reducing the te ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nformation technology enabled ser-vices 411,868,557 TNMM 8. Reimbursement / recovery of expenses 728,272,995 N.A. 9. Transfer of fixed asset from AE to GSISPL 20,587 N.A. 5. The Transfer Pricing Officer after examining the transfer pricing study report submitted by the assessee and other documents on record found that the assessee has classified its services rendered in investment advisory and banking segment under three different categories which are as under:- i) Provisions for investment advisory service in respect of listed Indian securities amounting to Rs. 21,55,87,341; ii) Provisions for investment advisory in connection with making strategic investment in India amounting to Rs. 79,70,71,410; iii) Provisions of investment banking services of Rs. 33,56,74,029. 6. The Transfer Pricing Officer after analysing the activity of the assessee and the nature of business in the aforesaid three categories was of the view that the functions are basically in the nature of merchant banking service for the Associate Enterprise (A.E). Though, the assessee tried to impress upon the Transfer Pricing Officer that the aforesaid categories of transactions ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on of the assessee and finally selected the following comparables:- S.no. Name of Company Margin for the year ended 31.3.2008 1. Centrum Capital Ltd. (Segmental) 102.32% 2. Chartered Capital & Investment Ltd. 209.20% 3. Edelweiss Capital Ltd. 66.00% 4. IDC India Ltd. 13.88% 5. L&T Capital Co. Ltd. 184.91% 6. SERI Capital Markets Ltd. 6.51% 7. Sumedha Fiscal Service Ltd. (segmental) 48.84% 8. Keynote Corporate Services Ltd. (segmental) 209.19% Arithmetic mean 105.10% 8. Applying the arithmetic mean of 105.10%, the Transfer Pricing Officer worked out the arm's length price of the international transaction in respect of each of the categories and the resultant shortfall was treated as adjustment to be made to the price charged. On the basis of the order passed by the Transfer Pricing Officer, the Assessing Officer passed a draft assessment order incorporating the adjustment made to the arm's length price. Being aggrieved of the addition made in the draft assessment order, the assessee filed objections before the DRP. 9. As far as assessee's objection with regard to clubbing of the investment advisory service and investment banking ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... te segment by selecting comparables from that segment. Learned Sr. Counsel submitted, the assessee had bench marked the price charged for investment advisory service segment by selecting comparables from that segment which were rejected by the Transfer Pricing Officer by combining the investment advisory services to investment banking segment and selecting comparables from investment banking segment. Learned Sr. Counsel submitted, the comparable selected by Transfer Pricing Officer were rejected by the Tribunal in assessee's own case as not comparable to investment advisory segment. Learned Sr. Counsel submitted, the companies selected by the assessee as comparable in the investment advisory service segment have been accepted as good comparables by the Tribunal in the case of Temasek Holdings Advisors India Pvt. Ltd., for the assessment years 2008-09, 2009-10 and 2010-11. He, therefore, submitted, the comparable selected by the assessee in the investment advisory service segment should be accepted. 11. Learned Departmental Representative though accepted that investment advisory and investment banking are two completely different segments and, hence, cannot be combined for bench ma ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng Officer finds them not to be comparable to the assessee, he may conduct a search process himself to find out comparables in the aforesaid category. Of-course, while doing so the Transfer Pricing Officer must assign cogent reasons for selecting / rejecting a comparable. While selecting comparables, he must keep in view the decisions of the Tribunal in assessee's own case as well as other cases cited before us by examining whether the facts and reasons on which the comparables were selected or rejected are also applicable to the impugned assessment year. We make it clear the Transfer Pricing Officer must afford reasonable opportunity of hearing to the assessee to put forward his submissions on the issue of selection / rejection of the comparables. 13. The next issue arising for consideration is in relation to selection / rejection of comparable in the investment banking service segment and certain adjustments for computing the margin as proposed by assessee. 14. As stated by the assessee, it received license from Security Exchange Board of India to commence its investment banking business in December 2006. Thus, the first year of its activity in investment banking segment is fin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... omparables has to be considered to get a correct analysis. He submitted, closure of investment banking mandates are dependent on various factors such as economic condition in the country financial stability of the corporate industry, change in regulation relating to M&A deals, global financial environment, changes in taxation laws, political environment, regulatory approvals, etc. It was submitted, investment banking mandates are generally spread over more than one year and the companies are generally entitled to fees only on successful completion of the mandates which is dependent upon various factors. He submitted, considering the cyclical nature of industries, dynamic environment affecting the investment banking service and the uncertainty around the collection / generation of investment banking revenues, utilisation of multiple year data for bench marking purpose would provide more accurate bench mark of companies. It was submitted, there is a long lead time between identification of potential opportunities and winning mandates and subsequent closure of mandates leading to very uneven recognition of revenue across players within the sector. In order to smooth out this volatilit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g to the observations of the Transfer Pricing Officer / DRP submitted assessee is required to demonstrate that earlier year data has an impact on the profits of the current financial year of the assessee as well as the comparable companies which have not been done by the assessee. He further submitted, assessee's contention cannot be accepted as details for later years were not available with the Transfer Pricing Officer and law provides use of only one year data. He submitted, in respect of some of the comparables data relating to assessment years 2008-09 and 2007-08 were not available. Learned Departmental Representative submitted, the year 2007 is a good year for investment banking industry and impact of change in global market has affected all comparables as well as the assessee. Learned Departmental Representative submitted, use of own data of future year is also not permissible in law. He submitted, the assessee has also not furnished data relating to its own cost accounted for and revenue recognized in investment banking transactions. 18. In the rejoinder, it was submitted by the learned Sr. Counsel that assessee had been remunerated by A.Es on the basis of revenue sharing ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as submitted by the learned Authorised Representative that the allegation of the Department that assessee had leveraged on the existing client relationship from investment advisory to seek mandate from investment banking is incorrect. He submitted, skill set required for investment advisory and investment banking are not same as investment advisory services are rendered by the assessee only to A.E., whereas, investment banking service are rendered to third part clients in co-ordination with A.Es, therefore, there cannot be a leverage of clients between both the segments. Learned Sr. Counsel submitted, considering the fact that this is the full year of operation if the employee cost of assessee is considered at 29% as that of comparable companies, the margin of assessee works out to 110% as against the margin of 115.10% determined by the Transfer Pricing Officer. Learned Sr. Counsel thereafter advanced his argument on selection / rejection of comparables in the investment banking segment as under:- CHARTERED CAPITAL INVESTMENT LIMITED 21. Seeking exclusion of this company as a comparable, learned Sr. Counsel submitted, as per audit report, the auditors have mentioned accounts pre ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in both Bloomberg and Prime Database League Tables for Mid Market Private Equity Placements. It is an established player in the market unlike assessee who is in its first year of operation. He submitted, the RPT ratio of this company is 24.9%, hence, it cannot be considered as comparable. 25. Learned Departmental Representative referring to the observations of Transfer Pricing Officer submitted that the Transfer Pricing Officer has applied RPT filter of 25% as a quantitative filter for rejection of companies. He submitted as the RPT of the company is less than 25% there is no justification for excluding this company by applying RPT filter. Learned Departmental Representative submitted, the quantitative RPT filter applied by the Transfer Pricing Officer has been upheld in a number of cases by the Tribunal. Learned Departmental Representative submitted, in any case of the matter, the DRP has directed the Assessing Officer to verify the RPT figures by applying 25% bench mark, hence, the matter should be remanded back to the Assessing Officer / Transfer Pricing Officer with a direction not to consider capital transaction for the RPT computation. As far as the contention of the learne ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing Officer / Transfer Pricing Officer was directed to compute RPT by applying RPT filter of 25%. 29. In the rejoinder, Learned Sr. Counsel submitted, even excluding the interest cost while computing RPT it works out to more than 15%, therefore, company cannot be treated as a comparable. He further submitted, employee cost to operating cost of this company is 13.66% compared to employee cost of assessee at 71%. Therefore, it cannot be treated as a comparable. CENTRUM CAPITAL LIMITED 30. Learned Sr. Counsel submitted, this company is in investment banking business over a decade and is a leading company in the field whereas, assessee is in the first full year of operation. Hence, did not enjoy economies of scale as enjoyed by Centrum Capital Ltd. 31. Learned Departmental Representative relying upon the observations of Transfer Pricing Officer / DRP submitted, this company was selected by the assessee itself, therefore, there should not be any objection for retaining this company. Responding to the submissions made by the learned Sr. Counsel, that this company enjoyed name, goodwill and strong presence, the learned Departmental Representative submitted, the assessee being part of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s no basis provided by the Departmental Authorities for rejecting them. 36. We have heard the rival contentions carefully in the light of the facts and material on record as well as the decisions relied upon by both the parties. At this stage, we must observe, in the earlier part of the order, we have disapproved the approach of the Transfer Pricing Officer in rejecting the transfer pricing analysis of the assessee without proper application of mind and clubbing the investment advisory and investment banking services and treating it as investment banking segment for bench marking the price charged to A.E. For this reason alone, the transfer pricing adjustment by the Transfer Pricing Officer and confirmed by the DRP even in respect of investment banking services needed to be set aside. However, as learned Counsels appearing for the respective parties were heard at length on investment banking issues, it is necessary to deal with the submissions made on behalf of the parties with regard to certain adjustments claimed by the assessee in the investment banking segment while computing the margin of the assessee / comparables as well as also issues relating to selection / rejection of c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e assessee and comparable companies. It is evident from the order of the Transfer Pricing Officer and DRP, they have not examined the issue of adjustment towards employee cost in a proper perspective. 37. As far as use of multiple year data is concerned, in our view, one has to adhere to provisions of rule 10B(4) and proviso thereunder. As per the aforesaid provision use of multiple year data is not entirely prohibited. However, it is for the assessee to establish on record by bringing sufficient fact and material to show that data related to earlier years reveal certain factors which can have influence on the determination of margin in relation to the transactions being compared. If the assessee is able to establish this with relevant facts, then the Transfer Pricing Officer certainly has to consider them. As far as the assessee's objection to selection of certain comparables are concerned from the facts and material on record, we find that out of eight comparables selected by the Transfer Pricing Officer, the DRP has dealt with only three companies, namely; Chartered Capital and Investment Ltd., Edelweiss Capital Ltd. and L&T Capital Company Ltd., whereas, there is no discussion ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tted that Edelweiss Capital Ltd. being an established player in investment banking cannot be treated as comparable. However, we are not convinced with the aforesaid submissions of the assessee. In our view, RPT filter of 25% applied by DRP is reasonable and hence, needs no interference. If Edelweiss Capital Ltd. is functionally similar to the assessee, only because it has started its operation earlier compared to the assessee, it cannot be excluded for that reason alone. Of-course, necessary adjustment can be made to the margin of the comparable / assessee keeping in view relevant factors which might have influenced the margin of the comparable. However, it is for the assessee to establish such facts with cogent evidence. With the aforesaid observations, we restore the issue to the file of the A.O. / Transfer Pricing Officer for fresh consideration. L&T CAPITAL LIMITED 41. The basic contention of the assessee objecting to selection of this company are RPT is more than 25%, employee cost is much lower to the assessee and it has earned super normal profit. We have noted that the DRP has directed the Assessing Officer to verify the RPT of the company whether exceeds the threshold l ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... while considering the issue of comparability of other comparables objected by the assessee. 44. With the aforesaid observations, we restore the issue back to the file of the Assessing Officer. Consequently, ground no.1, is allowed for statistical purposes. 45. In ground no.2, assessee has challenged transfer pricing adjustment made in respect of information technology enabled services (ITES) segment. 46. Though, in ground no.2 with sub grounds the transfer pricing adjustment with regard to ITES segment has been contested on various issues but at the time of hearing, learned Sr. Counsel appearing for the assessee confined his argument to selection of certain comparables by the Transfer Pricing Officer and sustained by the DRP. Therefore, we will deal with this issue only. 47. Brief facts are, as stated earlier, the assessee is also engaged in providing ITES to its A.E. and during the relevant previous year, it earned revenue of Rs. 41,18,68,557 from its overseas A.E. towards provision of ITES. For bench marking the price charged to its A.E. for provision of ITES, the assessee through an external agency conducted transfer pricing analysis by selecting Transaction Net Margin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that of taxpayer or working in * Peculiar economic circumstances, after giving valid reasons, were excluded." 48. The Transfer Pricing Officer pointing out various defects in the transfer pricing analysis done by the assessee ultimately rejected it and applying the filters as noted above, undertook a search process independently to find out comparables. The search carried out by the Transfer Pricing Officer yielded 22 comparables with average weighted margin of 27.53% as against margin shown by the assessee at 15.65%. The final comparables selected by the Transfer Pricing Officer with their margin is as under:- Name of Company Sales (Rs. ) Total Cost (Rs. ) Operating Profit (Rs. ) OP / TC (%) Accentia Technologies Ltd. (Seg.) 407293974 287301205 119992769 41.76 Acropetal Technologies (Seg.) 208000505 153737300 54263205 35.30 Aditya Birla Minacs Worldwide Ltd. 1881373000 1840860000 40513000 2.20 Asit C. Mehta Financial Services Ltd. (Seg.) 42434946 38782844 3652102 9.42 Caliber Point Business Solutions Ltd. 531355282 478836110 52519172 10.97 Coral Hubs Ltd. (Formerly Vishal Information Technologies Ltd.) 380784348 252713811 128070537 50.68 Cos ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sition are concerned, if the post merger and acquisition functions and pre-merger and acquisition functions of the company have not changed it cannot be said to have undergone exceptional year of operation. In this context, he relied upon the decision of Mumbai Bench of the Tribunal in Willis Processing. As far as earning of super normal profit is concerned, the learned Departmental Representative submitted, if the company is otherwise functionally similar, it can be considered as a comparable in spite of the fact that it has earned high profit margin. In this context, he relied upon the decision of the Hon'ble Delhi High Court in Chrys Capital. 52. In the rejoinder, the learned Sr. Counsel referred to the specific finding in the Special Bench decision of the Tribunal in Maersk Global Centres India Pvt. Ltd. 53. We have considered the submissions of the parties and perused the material available on record. We find that the Tribunal, Mumbai Special Bench in Maersk Global Centres India Pvt. Ltd. (supra) while specifically dealing with the comparability of the aforesaid company to a ITES service provider has held that since the company is engaged in providing engineering design ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y objection. Learned Departmental Representative submitted, even if there is some minor / narrow difference in functionality of the company but it has no impact on the bench marking of the transaction under TNMM. 56. We have considered the submissions of the parties and perused the material available on record. As per the annual report of this company, it is noted that the company is engaged in offering solutions in the field of data analytics, operations management, audits and re-conciliation, 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sel submitted, though, the assessee had selected this company in its transfer pricing study but subsequently on the basis of data available in public domain, it was found that the company is not comparable. Therefore, the assessee cannot be prevented from objecting to the selection of the said company. For such proposition, he relied upon the decision of the Tribunal, Delhi Special Bench, in Quark Systems Ltd. 61. We have considered the submissions of the parties and perused the material available on record as well as the decisions relied upon. No doubt, assessee in the transfer pricing study has selected this company as a comparable. It is also a fact either before the Transfer Pricing Officer or the DRP, assessee has not raised any specific objection in respect of the aforesaid company. Even then, assessee's objection cannot be overruled for that reason alone. When the Transfer Pricing Officer has rejected the transfer pricing analysis of the assessee the department cannot use it selectively to their advantage. Moreover, it appears from the facts and materials placed on record that this company is different from the assessee considering the fact that it outsources its ITES servi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ven though it has earned major part of its revenue from medical transcription, it should be taken as a comparable. He submitted, the sector in which services are provided is irrelevant if the segment is comparable. Learned Departmental Representative submitted, merger and acquisition have no impact in the profitability of the company as the margin shown by the company is comparable to the preceding year. 64. We have considered the submissions of the parties and perused the material available on record. The assessee has sought exclusion of this company primarily for the reason that it is functionally different and secondly the acquisitions and mergers effected during the year had impacted the profitability. We find comparability of this company for the very same assessment year came up for consideration before the Tribunal, Bangalore Bench, in Symphony Marketing Solutions India Pvt. Ltd. (supra), the Tribunal following another decision of the Tribunal in case of Capital IQ Information Systems Pvt. Ltd. v/s DCIT, [2013] 32 Taxman.com 21, excluded this company on the reasoning that extra ordinary event which took place might have impacted the profitability. In view of the aforesaid, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ompanies, the margin of the assessee would be within +/- 5% tolerance band of the arithmetic mean of the comparable companies requiring no further adjustment to the price charged. In view of the aforesaid submissions of the learned Sr. Counsel, we do not consider it necessary to deal with the other comparables objected to by the assessee as it is merely of academic interest. Ground no.2, raised by the assessee is partly allowed. 68. Grounds no.3 and 4, have not been pressed by the learned Sr. Counsel for the assessee, hence, these grounds are dismissed as "not pressed". 69. In ground no.5, assessee has raised the issue of disallowance of cost relating to ESOP. 70. Brief facts are, in the course of assessment proceedings, the Assessing Officer noticing that the assessee has claimed deduction of Rs. 20,31,56,936, on account of ESOP cost called upon the assessee to justify the claim. In response, it was submitted by the assessee that it grants Restricted Stock Units (RSU), to its employees that derive their value from the shares of Goldman Sachs Group Inc. as per policy of global stock award plan. The sum payable by the assessee to Goldman Sachs Group Inc. In respect of RSUs ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ine 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 year 2009-10 in ITA no.222/Mum./2014. The Tribunal after considering the submissions of the parties in the context of facts and material on record being convinced that the payment made by the assessee to stock exchanges were not for infraction of any law in view of the judgment of Hon'ble Jurisdictional High Court deleted the addition. For ready reference, the observations of the Tri ..... X X X X Extracts X X X X X X X X Extracts X X X X
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