2017 (8) TMI 1490 - AT - Income Tax

Tribunal directs reassessment on transfer pricing & allows expense reimbursement, citing prior tax deduction.

Temasek Holdings Advisors India (P.) Ltd. Versus Deputy Commissioner of Income tax,

The Tribunal allowed the appellant's appeal, directing the Assessing Officer and Transfer Pricing Officer to recompute the arm's length price by including ... TPA - comparable selection - Held that:- Assessee is into providing Investment advisory services to its holding company, viz. THPL in the year 2004. Despite the 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 functions performed by the aforementioned comparable, viz. Motilal Oswal Equity Pvt. Limited, which is into managing and investment into funds, cannot be compared to the assessee whose functions are strictly limited 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 merely reimbursing the same. By rendering this service to the THPL, the assessee is earning business income and salary paid is certainly a business expenditure on which TDS has already been deducted as the liability to withhold the tax on salary falls within the purview of section 192 only, which has been done in this case. There cannot be a double deduction of TDS once at the time of payment of the salary and again on the reimbursement made by the assessee to the THPL. Thus, there was no requirement for deducting the tax at the time of reimbursement, when already tax has been deducted at the time of payment of salary - Disallowance u/s 40(a)(i) to be deleted. Issues Involved:1. Upward adjustment in determining the arm's length price (ALP) of international transactions.2. Rejection of comparable companies by the Assessing Officer (AO) and Transfer Pricing Officer (TPO).3. Inclusion of new comparable companies by the TPO.4. Use of contemporaneous and multiple year data for computing the ALP.5. Classification of the appellant's services.6. Disallowance of reimbursement of expenses under Section 40(a)(i).Detailed Analysis:Issue 1: Upward Adjustment in Determining the ALPThe appellant challenged the upward adjustment of Rs. 9,91,14,498/- made by the AO based on the directions of the Dispute Resolution Panel (DRP) for determining the ALP of international transactions related to investment advisory services. The AO, following the TPO's report, made an upward transfer pricing adjustment. The TPO had rejected the appellant's use of multiple year averages and instead used current year data, concluding that the appellant was involved in portfolio management and management of companies in which the AE had made investments. The TPO selected new comparable companies, resulting in a higher ALP margin.Issue 2: Rejection of Comparable Companies by AO and TPOThe appellant contested the rejection of certain companies it had selected as comparables, including ICRA Management Consulting Services Limited and Informed Technologies Limited. The DRP upheld the TPO's rejection based on previous years' orders. However, the Tribunal found that the rejection was not justified as the facts and functional profiles of the comparables had not changed. The Tribunal directed the inclusion of ICRA Management Consulting Services Limited and Informed Technologies Limited in the final list of comparables, citing consistency and the lack of substantial variance in functionality.Issue 3: Inclusion of New Comparable Companies by TPOThe appellant objected to the inclusion of Ladderup Corporate Advisory Private Limited and Motilal Oswal Private Equity Advisors Private Limited as comparables. The Tribunal found that Ladderup Corporate Advisory Private Limited was engaged in merchant banking services, which were not comparable to the appellant's investment advisory services. Similarly, Motilal Oswal Private Equity Advisors Private Limited was involved in managing and investing in funds, which differed from the appellant's advisory services. The Tribunal directed the exclusion of these companies from the final list of comparables.Issue 4: Use of Contemporaneous and Multiple Year Data for Computing the ALPThe appellant argued that the AO/TPO erred in rejecting the use of contemporaneous and multiple year data available for computing the ALP and relied only on single year data. The Tribunal supported the appellant's contention, emphasizing the importance of using multiple year data to reflect the true profitability and comparability.Issue 5: Classification of the Appellant's ServicesThe DRP had concluded that the appellant was engaged in rendering portfolio management/investment management services, which the appellant disputed. The Tribunal found that the appellant provided non-binding investment advisory services and not portfolio management services. The Tribunal directed the AO/TPO to reconsider the classification based on the appellant's actual functions.Issue 6: Disallowance of Reimbursement of Expenses under Section 40(a)(i)The department appealed against the DRP's direction to delete the disallowance of Rs. 13,87,07,155/- made by the AO under Section 40(a)(i) for reimbursement of expenses to the appellant's overseas holding company. The Tribunal upheld the DRP's decision, noting that the issue was covered by previous Tribunal orders in the appellant's favor. The Tribunal found that the reimbursement was for salary expenses of employees deputed in India, and the salary had already been subjected to TDS under Section 192 by the holding company. Therefore, no further deduction of tax at source was required.Conclusion:The Tribunal allowed the appellant's appeal, directing the AO/TPO to recompute the ALP considering the inclusion of the previously rejected comparables and exclusion of the newly included comparables. The Tribunal also upheld the DRP's direction to delete the disallowance under Section 40(a)(i), dismissing the department's appeal.