2019 (7) TMI 76 - AT - Income Tax

Tribunal ruling on transfer pricing: Equity shares re-characterized as loan, comparability issues addressed

J.P. Morgan Advisors India Pvt. Ltd. Versus Dy. Commissioner of Income Tax Range–3 (2), Mumbai

The Tribunal allowed the assessee's appeal in a transfer pricing case involving re-characterization of equity shares as a loan to an associated ... TP Adjustment - interest on deemed loan - AO/TPO treated difference between the market price of equity shares and the face value as deemed loan to the AE - HELD THAT:- TPO determined the market value of shares of face value of ₹ 10 issued to the holding company at ₹ 28.02 per share. The difference between the market value and the face value of shares was treated as deemed loan advanced to the AE. On the deemed loan, TPO computed arm's length interest @ 14.39% per annum and treated it as adjustment to the arm's length price. Identical adjustment was made by the TPO in the impugned assessment year as well. As could be seen from the material on record, while deciding the disputed addition in the appeal preferred by the assessee in the assessment year 2008–09 [2015 (3) TMI 1359 - ITAT MUMBAI] the Tribunal following the decision of the Hon'ble Jurisdictional High Court in Vodafone India Service Pvt. Ltd. [2014 (10) TMI 278 - BOMBAY HIGH COURT] held that the difference between the market price of equity shares and the face value cannot be treated as deemed loan to the AE. Accordingly, the Tribunal deleted the addition made on account of notional interest on such deemed loan Addition on account of adjustment to the arm's length price of investment advisory services - TNMM - selection/rejection of comparables - HELD THAT:- Companies functionally dissimilar with that of assessee need to be deselected from final list. Issues Involved:1. Transfer Pricing Adjustment on Interest for Deemed Loan to Associated Enterprise (AE)2. Transfer Pricing Adjustment for Investment Advisory Services3. Adjustment for Information Technology Enabled Services (ITES)4. Adjustment of Refund Amount5. Levy of Interest under Sections 234B and 234DIssue-wise Detailed Analysis:1. Transfer Pricing Adjustment on Interest for Deemed Loan to Associated Enterprise (AE):The assessee challenged the addition of Rs. 42,14,72,098 on account of transfer pricing adjustment relating to the interest on an alleged loan advanced to the AE. The Transfer Pricing Officer (TPO) re-characterized the sale of equity shares as a long-term loan without interest and computed notional interest. The Dispute Resolution Panel (DRP) upheld the fair market value determination but directed to charge interest at the domestic cost of borrowing plus a 3% markup. The Tribunal, following the decision in Vodafone India Services Pvt. Ltd. v/s Union of India & Ors., deleted the addition, holding that the shortfall in premium for issuance of equity shares cannot be treated as a deemed loan. This ground was allowed in favor of the assessee.2. Transfer Pricing Adjustment for Investment Advisory Services:The assessee challenged the addition of Rs. 1,57,46,155 on account of adjustment to the arm's length price of investment advisory services. The TPO rejected the assessee's analysis and selected fresh comparables, leading to the adjustment. The Tribunal addressed the comparability of several companies:- Motilal Oswal Investment Advisors Pvt. Ltd.: Excluded as it is engaged in investment banking activities, which are not comparable to investment advisory services.- Khandwala Securities Ltd.: Excluded due to its involvement in merchant banking and broking services.- KJMC Corporate Advisors India Ltd.: Excluded as it operates under a single segment of merchant banking.- L&T Capital Company Ltd.: Excluded due to its primary income from syndication fees.- Sumedha Fiscal Services Ltd.: Excluded as it provides merchant banking services.- ICRA Management Consulting Services Ltd.: Included as it provides consultancy services similar to the assessee.- Informed Technologies Ltd.: Included as it provides data management services to the financial sector.- IDC India Ltd.: Included as it provides market research and advisory services.3. Adjustment for Information Technology Enabled Services (ITES):The assessee challenged the addition of Rs. 5,85,288 on account of adjustment made to the price charged for ITES. The TPO selected comparables leading to the adjustment. The Tribunal addressed the comparability of several companies:- Allsec Technologies Ltd.: Included despite failing the export revenue filter of 75% as it was functionally similar to the assessee.- R Systems International Ltd. (Segmental): Included as it maintains quarterly audited accounts, allowing the financial results for the relevant financial year to be ascertained.- Cosmic Global Ltd.: Excluded as it sub-contracts major portions of its work to third parties.- Genesys International Corporation Ltd.: Excluded as it is engaged in Geospatial Services, which are not comparable to ITES.- Vishal Information Technologies Ltd.: Excluded as it outsources major parts of its work to third parties.4. Adjustment of Refund Amount:The assessee raised the issue of adjustment of Rs. 16,06,319 as 'amount already refunded,' which was not granted. The Tribunal directed the Assessing Officer to verify the issue factually and decide in accordance with the law.5. Levy of Interest under Sections 234B and 234D:The issue of levy of interest under sections 234B and 234D was deemed consequential and did not require adjudication at this stage.Separate Judgments:The Tribunal's decisions were consistent across the appeals for different assessment years, with similar issues being addressed similarly. The appeals were partly allowed for the assessee and dismissed for the Revenue.