TaxTMI 
TaxTMI 
2017 (9) TMI 1295
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....parable companies by the TPO considering the business profile of the Assessee as outlined in the transfer pricing documentation? (iii) Whether the ITAT erred in upholding the addition of notional interest on the ground of it being an international transaction?" Case of the Assessee 3. The Appellant-Assessee (hereafter 'Assessee') is a company incorporated in India, inter alia providing non-binding investment advisory services to its Associated Enterprise ('AE') viz., Avenue Asia Capital Management LP, (Avenue US'), an investment management firm based in New York, US under the agreement dated 1st July, 2016 along with the addendum dated 5th December, 2008. According to the said agreement, the consideration /remuneration to the Assessee is cost plus 20% mark up of the services rendered by the Assessee which included providing research reports and other material to assist the AE in carrying out assessment of potential investment opportunities in India. 4. The Assessee filed its return of income for AY 2009-10 on 30th September, 2009 declaring a total income of Rs. 5,87,81,405/-. Pursuant to a notice dated 8th September, 2010, issued under Section 143 (2) of the Act, a refe....
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....allenged by the Assessee before the ITAT. 8. The ITAT has, by a detailed order, analysed the various comparables and remanded the matter to the TPO in respect of a few comparables for further analysis. The ITAT has also rejected some of the comparables suggested by TPO/AO but retained some of them. The ITAT, thus, partly allowed the appeal of the Assessee on the issue of comparables. Insofar as the adjustments for receivables were concerned, the ITAT upheld that the outstanding receivables constitute an international transaction by relying on the decision in Logics Micro System v. ACIT (2011) 8 ITR 159 (hereafter 'Logics Micro System'). The ITAT, thus, restored the matter of computation of the adjustment to outstanding receivables, to the TPO with a direction to compute the interest for receivables on a day to day basis beyond the period available as per the industry standard and apply LIBOR rate of interest. 9. The Assessee is aggrieved by the impugned order to the extent it has retained three of the comparables namely Sumedha Fiscal Services Limited (hereafter 'Sumedha'), Brescon Advisors Limited (hereafter 'Brescon') and Ladderup Corporation Limited (hereafter 'Ladderup') ....
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....ies of the Assessee cannot be compared to that of the merchant bankers. Mr. Syali submits that since an exact comparable was not available, the cut based method ('CUP') cannot be used for determining the ALP and the TNMM method is rightly used. However, while agreeing that the TNMM method is the correct method, Mr. Syali relies upon the judgment of this court in Rampgreen Solutions Private Limited v. Commissioner of Income Tax (2015) 377 ITR 533 (Del) (hereafter 'Rampgreen Solutions') to submit that while selecting the comparable transactions or entities, the basis should be one of similarity with the controlled transaction/ entity and a mere broad similarity is not sufficient. Mr. Syali has broadly summarised the findings of the DRP and the ITAT qua the 10 comparable companies chosen by the TPO, in the following table: Sr. No. Final set chosen by the TPO Margin (%) Direction by DRP Decision of Delhi Tribunal 1. Future Capital Holdings Limited 23.39 Not challenged before DRP Not challenged before ITAT 2. ICRA Management Consulting Services Limited (1.02) Not challenged before DRP Not challenged before ITAT 3. Mecklai Financial & Co....
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.... him, established that the Assessee merely conducted research and made recommendations and did not have any role in the decision making or any right to take decisions. 15. Insofar as the issue of notional interest on receivables is concerned, Mr. Syali relies upon the submission made by the Assessee before the DRP to argue that if the working capital adjustment is given as per the margin of the final set of comparables proposed by the TPO, the outstanding receivables would be automatically factored in and separate adjustment on account of interest on receivables would not be required. Mr. Syali, thus, submits that the approach of the ITAT on this issue is also erroneous. Submissions of the Revenue 16. Mr. Rahul Chaudhary, learned Senior Standing Counsel for the Revenue, submitted that the adoption of the TNMM method is not faulted by the Revenue. He submits that there is no flaw in the approach of the ITAT or the DRP, inasmuch as, the ITAT was quite conscious of the difference between the merchant banking services and the financial advisory services rendered by the Assessee. In any case, he submits that the ITAT has noticed that a merchant banker performed two types of ser....
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....ables cannot be faulted with as the ITAT noted specifically that the Assessee is not engaged in merchant banking services. Analysis of the decision in Rampgreen Solutions 19. The first and the foremost issue that arises in this case is with respect tothe applicability of tests laid down in Rampgreen Solutions (supra), which was rendered on 10th August, 2015. This decision has clearly laid down the various principles on the basis of which determination of comparables needs to be undertaken while fixing the ALP and the margin that needs to be assigned. This Court had specifically rejected the proposition that broad functionality is sufficient to find the comparable entity though the TNMM method allows broad flexibility tolerance in the selection of comparables. This proposition having been rejected, the Court in Rampgreen Solutions (supra) held as under: "43. In our view, the aforesaid approach would not be apposite. In so far as identifying comparable transactions/entities is concerned, the same would not differ irrespective of the transfer pricing method adopted. In other words, the comparable transactions/entities must be selected on the basis of similarity with the contr....
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....fficient tolerance, mere broad functionality is by itself insufficient. Question (i) 21. In the backdrop of the principles laid down in Rampgreen Solutions (supra) and the analysis of the ITAT's order with respect to each of the comparables disputed by the Assessee, is as follows: (i) Sumedha Fiscal Services Limited - In the case of Sumedha, the ITAT clearly acknowledged that if it had handled management of rights issues and the revenue from such service was substantial, then the services provided by Sumedha would be dissimilar to that of the Assessee. However, having held so, the ITAT restored the matter to the TPO to again examine whether the revenue of Sumedha was substantial from handling the said services of rights issues and with a direction to exclude it if the TPO found it in the affirmative. Such an approach of the ITAT is not in accordance with the principles laid down in Rampgreen Solutions (supra). The ITAT's findings acknowledge that Sumedha may not be functionally similar to the Assessee, as admittedly, the Assessee does not render services relating to rights issues. Starting the entire exercise of comparability analysis from the stage of the TPO would re....
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....tion, would be the difference between giving advice on what to argue in Court and actually arguing the matter in the Court. This difference needs to be borne in mind and the mere appearance of similar sounding words does not by itself constitute similar functions. Further, as laid down in Rampgreen Solutions (supra), all these three companies demonstrated a wide deviation in the percentage of margins. Thus, it requires a deeper analysis to determine as to whether they were in fact comparables to be retained for the purpose of fixing the ALP. 24. Insofar as the argument of Mr. Chaudhary regarding the trend of Assessees to challenge the inclusion of comparables which show a higher percentage margin, is concerned, the same cannot be faulted with in as much as every Assessee is entitled to make submissions as to the selection of comparables and choose what is advantageous to it. So long as the same can stand the test of legal scrutiny, it cannot be held that such challenges are not maintainable. 25. In this backdrop, when sub-advisory agreement dated 1st July, 2006 along with the addendum thereto, is examined, the services of the Assessee cannot be termed as that of merchant bank....