TaxTMI 
TaxTMI 
2017 (1) TMI 1452
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....he TPO, the AO proposed TP-addition in his draft order. The assessee filed objections before the DRP. In pursuance of the directions of the DRP, the AO completed the assessment u/s. 143 (3) r. w. s. 144C of the Act, on 27. 10. 2016, determining the income of the assessee at Rs. 2, 97, 58, 29, 725/-. Non-binding Investment Advisory Services: 2. First ground of appeal is about inclusion/exclusion of certain comparables. During the transfer pricing proceedings, the TPO found that for the year under consideration the assessee had provided non-binding investment advisory services to its AE's worth Rs. 41. 94 crores, that the services were benchmark using the TNMM, that the PLI used was OP/OC, that the assessee was remunerated with the markup of 22% on the total operating costs, that the arithmetic mean of the comparables selected by the assessee was determined at 12. 59% and therefore it was claimed that same was at Arm's Length Price(ALP). He found that the assessee had selected seven comparables for determining the ALP:He rejected all the comparables selected by the assessee and applied two new comparables namely Motilal Oswal Advisers India Private Ltd. (MOIALP)and Ladderup Cor....
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....hat the TPO had rightfully rejected it as a valid comparable. 3. iv. With regard to MOIAPL, the DRP held that it should be taken out from the list of the valid comparables, as it was engaged in merchant banking and other activities, that the functions performed by it were different from the functions of the assessee. 3. v. About LCAPL, the DRP observed that it was a boutique investment banking firm that offered financial advisory services namely re-capitalisation, joint ventures, that syndicate, Project and acquisition financing, IP offerings, Mergers and acquisitions, strategic manage - ment accounting, that as per the annual report it had earned Rs. 11. 18 crores from financial and management consulting services, that it had acquired merchant banking licence in July, 2010, that there was no evidence that during the year 2010-11 any income had been received from merchant banking, that merely being a SEBI registered merchant banker did not mean that company had earned its income or any part of it from merchant banking, that AO had rightly included it in the list of valid comparables. 3. 1. During the course of hearing before us, the Authorised Representative(AR)argued that....
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....he cost of manufacturing for the year under consideration was similar, that royalty was there in the earlier years also, that subscription would not make the assessee product company. 3. 2. We have heard the rival submissions and perused the material before us. We find that in the case of AGM India Advisors Private Ltd. (supra), the Tribunal has dealt with inclusion/ exclusion of ICRA and IDCL and MOIALP as valid comparables for investment advisory services, that it had considered all the arguments that have been raised by the DR. We would like to reproduce the relevant portions of the order of AGM India Advisors Private Ltd. and same read as under: 6. a. First we would take up the matter of ICRA. In that regard, the DR argued that page 437, 438 and 462 of the PB showed that ICRA was engaged in rendering consultancy services to companies other than in financial sector i. e. urban development, water sector etc. , that it was also engaged in cross border mergers and acquisitions transactions(Pg. 493 of the PB), that the annual report of ICRA(Pg. 432-461 of the PB)did not provide for any segmental information, that if MOIAPL was rejected as a comparable on that ground ICRA....
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.... dissimilarity the Accounts it did not give break-up of results from the said two activities separately, that it could not be treated as a valid comparable, that ICRA did not have separate segmenals, that it rendered only advisory services in varied fields, that hence the argument that because ICRA had no segmentals it must be rejected as MOIAPL is liable to be rejected was devoid of merits, that the DR, during his argument, failed to mention that the Tribunal had upheld the acceptance of ICRA as a comparable in the case of Temasek for AY. 2010-11 as well, which had been argued by the DR himself, that the Tribunal had taken a note of the fact that ICRA was rendering consultancy/advisory services in various sectors and after considering these facts, it adjudged ICRA to be a good comparable, that ICRA should be accepted as a functionally comparable company to the non-binding investment advisory services provided by the assessee. He referred to the cases of Temasek Holdings Advisors Private Limited(ITA/4203/Mum/2012 &6504/SSMum/2012-AY. s. 2007-08&2008-09), M/s Blackstone Advisors Private Ltd. (ITA/1581/Mum/2016-AY. 2008-09). 6. a. i. We have heard the rival submissions and p....
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....yse on FAR analysis which the TPO had done in a very elaborate manner at pages 9 to 11 of the order. Thus, this comparable had rightly been rejected by the TPO. Thereafter, he pointed out various other aspects as given in the Directors report of ICRA from pages 162 to 164 and submitted that the fields in which it is operating is very diverse and had also advised in cross border M&A. Further, if the skill set of the employees of the appellant is taken into consideration, then it would be seen that the average salary is very high which is evident from the fact that 22 to 25 employees salary paid was more than Rs. 20 crores as compared to the average salary cost of ICRA. Thus, going by the qualitative human asset, then there is a huge variation, which fails the comparability tests. Accordingly, this company should not be included. XXXXXXX "20. At the outset, this comparable was subject matter of consideration before the Tribunal in AY 2008-09 & 2009-10, wherein this company was held to be good comparable both on the ground of functional similarity and in view of principles of consistency as it was held to be a good comparable by the TPO in the earlier years. From the....
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....ered to be a fit comparable for benchmarking the net margins. Here it is not the case where there is any unique functions materially affecting the revenue or net margins vis-a-vis the functions performed by ICRA. Hence on functional level it is a good comparable. As stated earlier, in the earlier years, the TPO had accepted ICRA to be a comparable and in later years the Tribunal in AY 2008-09 & 2009-10 had held ICRA Management to be good comparable qua the functions of the appellant and there being no material change on facts, functional profile or any other factor in this year, then as matter of consistency, we do not want do deviate from our findings given in the earlier years. There cannot be a pick and choose of comparables every year unless there are some material difference in facts and circumstances compelling to take a different conclusion. Thus, we hold that ICRA Management is a good comparable and should be included in the list of final comparables. " It is further pertinent to note here that it is not in dispute that the functional profile of Temasek(supra)was comparable with the assessee. We have compared the functional profiles of both the companies for the AY....
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....swal should also be included in the list as it had also shown the income from consultancy and so also in other cases also. " The reference made by the DR to the Kerala High Court decision of Kalpetta Estates Ltd. [211 ITR 635] to say that res judicata does not apply to income-tax proceedings is not relevant in the said proceedings as there are no new material placed on records by the DR with regards to the change in functional profile of ICRA or Temasek Holdings Advisors (India) Private Limited. After considering the same arguments the Tribunal had held, as stated earlier, that ICRA was a valid comparable for investment advisory company and had emphasized on following the rule of consistency. We find that in the subsequent years ICRA has been accepted a valid comparable, that all the arguments raised by the DR in the matter of Tamasek for the AY. 2010-11, have been dealt extensively by the Tribunal, that it had rejected the arguments raised by the DR. Respectfully following the orders of the Tribunal delivered in the cases mentioned in earlier paragraphs, we hold that the order of the FAA does not suffer from any legal or factual infirmity. So, confirming his orde....
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....iture incurred during the year, that payment for copyright would only show that IDCL uses certain copyrighted material while rendering services, that Pg. 486 of the PB made it clear that the word products used by IDCL in its Annual Accounts referred to nothing but the areas in which it provides research/advisory viz. Infrastructure Technology Segment (Global IT), Finance (Investment Research Advisory), Marketing (CMO Advisory), that the sale income referred to by the DR related to the sale of various research reports which are prepared by IDCL on the basis of the research, analysis and survey undertaken by them, that IDCL could not be concluded to be a product company, that the three page hand-out titled "About IDC Go-to-Market Services", submitted by the DR pertained to and provided information in connection with IDC Inc. and not IDCL, that the Web site print outs titled "IDC's Go-to-Market Services include"were prints of a web site taken on 16. 12. 2015, that the information did not relate to the year under consideration and hence could not be relied upon, that there was nothing in the printouts which suggeseds that IDCL was a product company or that it was not a valid compar....
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.... therefore, this company is functionally different from the business profile of the appellant. We further find that the Tribunal has decided the matter as follow: "8. Having considered the rival submissions as well as the relevant material on record, we find that the main business of the assessee from which it had derived its income is conducting research and survey, business conversion and management consultancy. Though the separate results in respect of each activity are not provided; however, prima facie, it appears that the company is in the business of marketing research and management consultancy. Therefore, as far as the functions of IDC India Ltd are concerned, the same are similar to the activity of the appellant. Therefore, in our considered view, IDC India Ltd can be considered as a good comparable for the purpose of determination of ALP. " It is found that the annual report of IDCL(at Note 13 on page 482 of the PB), mentions the following: "The Company is engaged in the business of 'Market research and Management Consultancy which is identified as the only and primary business segment of the company' Further all the operating ....
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.... company should also be given the same treatment. From the perusal of the directors' report, it is seen that this company derives its business income from four different business verticals, i. e. Equity capital markets, merger and acquisitions, profit equity syndications and structured debt. It also give advises on cross border acquisition. Its core competence is in the field of merchant banking. It also provides comprehensive investment banking solutions and transaction expertise covering private placement of equity, debt and convertible instruments in international and domestic capital markets, monitoring mergers and acquisitions and advising M&A as professional and restructuring advisory and implementations. It is also involved in various professional activities of the merchant banking. A Merchant Banker provides capital to companies in the form of share ownership instead of loans. It also provides advisory on corporate matters to the companies in which they invest. The focus is on negotiated private equity investment. The wide range of activities include portfolio management, credit syndication, counseling on M&A, etc. This whole range of functions and activities carried out by....
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....le India Advisors Private Limited (supra), the Tribunal has held that MOIAPL cannot be taken as a valid comparable in cases, where the assessee is rendering advisory servcies. In that matter the Tribunal held as under : "8. We have heard both the parties and perused the orders of the Revenue Authorities as well as the relevant material placed before us. It is an undisputed fact that the assessee is engaged in the business of rendering investment advisory and related services to its principal Carlyle Hong Kong. The dispute raised in ground no. 4 relates to whether (i) KLG Capital Services Ltd (KLG);(ii) KJMC Corporate Advisors (India) Limited (KJMC) and(iii)Motilal Oswal Investment Advisors Pvt Ltd(MOIAPL)are functionally comparable cases or not considering the decision of the Tribunal as well as the judgment of the Bombay High Court relied upon by the assessee. Regarding MOIAPL, assessee relied heavily on the order of the Tribunal in its own case for the AY 2008-2009, a copy of which is placed at page 282 of the paper book. On perusal of the said order of the Tribunal, we find that it is decided in favour of the assessee vide ITA No. 7367/Mum/ 2012(AY 2008-2009), dated 7. ....
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....he order of NVP Venture Capital India Private Ltd. (supra), where in a case of investment advisory the comparable of MOIAPL was rejected by the Tribunal. In that matter the Tribunal had held as under :- "7. We have carefully considered the rival submissions. We find that the assessee has been consistently canvassing before the lower authorities that Motilal Oswal Investment Advisors Private limited be excluded from the final set of comparables on the ground that its activities'are functionally incomparable to the activity of Provision of investment advisory services being rendered by the assessee to its Associated Enterprises. In fact, before the TPO, assessee pointed out that the said concern was engaged in providing comprehensive investment banking solutions and that it was rendering services across various products, viz. Equity Capital Markets, Mergers & Acquisitions, Private Equity Syndications and Structured Debt, etc. The appellant relied upon the decision of the Tribunal in the case of Carlyle India Advisors Private Limited (214 Taxmann 492), to support its plea for exclusion of the said concern from the final set of comparables. The TPO rejected the aforesaid plea ....
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....inion, the assessee is justified in seeking the exclusion of the said concern from the final set of comparables on account of functional dissimilarities. In fact, in other precedents cited by the ld. Representative for the assessee, the said concern has also been excluded from the set of comparables under similar circumstances. 9. In conclusion, on the basis of the afore-said discussion and having regard to the precedents noted above, we hold that M/s. Motilal Oswal Investment Advisors Private Limited (supra) is liable to be excluded from the final set of comparables. " Following the above orders, we hold that job profile of MOIAPL was different as compared to the activities undertaken by the assessee. It was rendering investment advisory services, specifically related with real estate business whereas MOIPAL is a merchant banker. So, we hold that MOIAPL is liable to be excluded from the final set of comparables. " Respectfully, following the above, we hold that KIACL and MOIAPL were wrongly included in the list of valid comparables. Both are functionally different from the assessee. Activities carried out the assessee for the year under appeal are distin....
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....e following comparables: SN. Company Comparable selected by OP/TC 1. ATL Assessee 29.18% 2 ITIL Assessee 9.65% 3 JIPL Assessee 13.70% 4 MGSL Assessee -0.02% 5 AT TPO 23.95% 6 EHBSPL TPO 9.69% 7 ESL TPO 56.86% 8 Infosys TPO 17.86% 9. TCS TPO 69.31% Average 26.93% Before proceeding further, it would be useful to discuss the inclusion and exclusion of comparables by the TPO/DRP: i) In the case of Micro Genetic System Ltd. (MGSL), the TPO held that not only the revenue of the company had declined by 50% for the year under consideration, but it had also incurred losses. Before the DRP, the assessee placed reliance on M/s. Capital IQ Information System Ltd. (India) Pvt. Ld. (ITA/124 and 170/Hyd. /2014) and assessee's own case for the AY. 2007-08 wherein the Tribunal had upheld the inclusion of Capital Trust Ltd. which was rejected by the TPO on the ground that the company was suffering loss. After considering the available material, the DRP directed that ....
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....O for considering threshold of 75% of total export as an appropriate filter to reject the company. The DRP held that 75% export sales was a valid filter, that the assessee had 100% export in that segment, that the TPO had rightly rejected it as a valid comparable. vi) Aditya Birla Minacs Worldwide Ltd. (ABMWL):The TPO rejected the company for the reason that it failed the RPT filter. The DRP, rejecting the submissions of the assessee, held that 25% RPT filter was a valid filter, that the comparable had failed that filter, that the TPO had rightly rejected it as comparable. vii)Eclerx Services Ltd. (ECL):The assessee argued before the DRP that company was earning super normal profit of 56. 86 % , that it operated under an exceptional year of operation, that it provided services in the form of data analytics and data process solution, that it was engaged in activities which the assessee did not undertake, that in the case of MAERSK Global Services (I )Pvt. Ltd. (ITA7466/Mum/2012), ECL was rejected as a valid comparable, that in the case of Capita IQ Information System (India) Pvt. Ltd. (ITA/1961/Hyd/2011) the Tribunal had upheld the rejection of ESL from the list of companie....
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....ry high turnover viz-a-viz the turnover of the assessee . It relied upon the various cases decide by the Tribunal in that regard. The DRP, while rejecting its objections, held that it was functionally comparable on the basis of activities of the assessee, that high profitability was not good ground for rejection of a comparable, that the TPO had proved that turnover did not have much impact on profitability. xi) E-4-e Healthcare Business Service Pvt. Ltd. (EHBSPL)-Before the DRP, the assessee contended that the company was engaged in health care out-sourcing services. The DRP held that EHBSPL was into healthcare BPO and was functionally comparable to the assessee, that the TPO had rightly accepted it as a valid comparable. 4. 1. During the course of hearing before us, the Authorised Representative(AR)stated that in the assessee's own case the Tribunal had excluded ECL and AT from the list of the valid compa -rables(ITA/6921/Mumu/2012. AY. 2008-09, dtd. 22. 07. 2016), that in the case of Capitia India Pvt. Ltd. (ITA. s/356&105/Mum/2016. AY. 2-11-12, dtd. 19. 09. 2016)TCS was held to be an in-valid comparable for IT-e services, that the Tribunal had held that Infosys was not....
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....many of the orders passed by the co-ordinate benches of the Tribunal rejecting Eclerx Services Ltd. as a comparable to ITES service provider is for the very same assessment year 2008-09. Therefore, respectfully following the view expressed by various judicial authorities, we hold that Eclerx Services Ltd. being functionally different cannot be treated as comparable to the assessee. " XXXXXXX "67. We have considered the submissions of the parties and perused the material available on record. We have noted that the Tribunal, Bangalore Bench, in Symphony Marketing Solutions India Pvt. Ltd. (supra), after perusing the annual report of this company found that major source of income is from providing engineering design service which is not comparable to ITES / BPO functions. The Bench observed, provision of engineering design service is a high end service amongst the BPO which requires high skill, hence, it can be regarded as KPO service. The bench, therefore, excluded the company as a comparable to ITES / BPO segment. The Tribunal, Hyderabad Bench, in M/s. Market Tools Research Pvt. Ltd. v/s DCIT, following co-ordinate bench decision in Symphony Marketing Solutions Ind....
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....ns during the year were more than Rs. 756. 24 crores. Thus, this company having huge intangibles assets cannot be compared with the assessee who has no significant intangibles. That apart, it has been pointed out by the Ld. Counsel that, this company has been emerged with TCS in the year 2009 which has led to shooting up of its profit margin to 13% to 68%-70%. This factor itself points out that its high profit margin were due to its huge brand value, which cannot be held to be comparable with captive service provider like Assessee Company. So far as the decision of ITAT Delhi Bench in the case of 'Techbooks International Pvt. Ltd' is concerned as pointed out by the Ld. Counsel, we find that this decision of the Tribunal has been distinguished and explained by the subsequent three decisions of the Delhi Bench of the ITAT, wherein, the Tribunal has categorically held that, in absence of any segmental details and segregation of the total revenue this comparable company cannot held to be comparable. The relevant observation of the Tribunal in the case of Ameriprise India Pvt. Ltd (supra) reads as under:- 12. 5 We have gone through the annual report of Company and have carefull....
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....der and it reads as follow: "(ii). Infosys BPO Limited: 17. This comparable is selected by the learned TPO after rejecting the contentions of the assessee regarding functional non-comparability, incomparable scale, brand profits, presence of intangibles, extra ordinary events etc. The learned TPO held that this company operates primarily into business process Management Services and taxpayer has not shown how brand and ownership of intangibles is leading to high profit margin. The ld. DRP also rejected the objection of the assessee. 18. The learned AR of the assessee submitted before us that this comparable has been considered in appellant's own case for assessment year 2010-11 by the coordinate bench and following the decision of Hon'ble Delhi High Court in the case of Rampgreen Solutions, has held that it is functionally incomparable with the assessee. He further stated that there is no change in the data analysis of the assessee as compared to the previous year and therefore, this issue is covered so far as exclusion of this comparable in favour of the assessee is concerned. In spite of that he submitted in his synopsis, the functions performed....
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.... Merker equitable service centre India Pvt. Ltd. 133 ITD 543, it was held that Infosys BPO cannot be considered as a comparable to a captive service provider, like assessee. 41. Ld. DR has submitted that Actis is also a brand and, therefore, adjustment should be made for the difference. We are unable to accept this contention particularly because the department has not brought on record any brand value of Actis on record. Moreover, the wide difference in turnover makes it clear that there is wide difference in the brand value of the two companies and, therefore, without quantification of the same, effect on turnover cannot be ascertained. We further find that the Infosys BPO has not been taken as comparable in detailed list annexed to synopsis filed by assessee including the following cases: - " - Zavata India Pvt. Ltd. Vs. DCIT (ItA no. 1781/Hyd/2011) -Capital IQW Information Systems (India) Pvt. Ltd. Vs. DCIT (Int. Taxation) (ITA no. 1961/Hyd/2011) 26 ITA 30/Del/2015 -Triniti Advanced Software Labs (P) Ltd. (2011-TII-92-ItAT-Hyd-TP). Agnity India Technologies Vs. ITO ITA 1204/2011 Delhi High Court - In this case it was emphasized that Infosys T....
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....parable are prescribed under Rule 10B(2) which does not specify any such factor of turnover on the basis of which a particular case can be included or excluded in the list of comparables. " "In service industry, turnover does not play any significant role as far as the margins are concerned.... This reinforces the view that turnover does not play a significant role in service industry and there is no link between turnover and margins.... The turnover is not a relevant factor for choice of comparables has been confirmed in many decision, as listed below. " 7. 4. Applying the ratio laid down by the coordinate bench of this tribunal in the case of Willis processing services private limited (supra) we direct the ld. TPO/AO to include this company to the list of comparables. R Systems International Ltd 7. 5. The ld. TPO has rejected the company on account of different financial year ending vis-a-vis the assessee. The ld. AR submitted that companies whose financial data was available for the relevant period, were considered in view of rule 10 D (4), which provides that information to be used must be contemporaneous. The ld. AR submitted that, though th....
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.... using this filter. This view is supported by the coordinate bench of this Tribunal in the case of DCIT vs. McKinsey knowledge Centre India private limited in ITA No. 2195/del/2011 wherein it has been held that if a company is functionally comparable, it cannot be rejected merely on the ground that data for the entire financial year was unavailable, if the data can be reasonably extrapolated. Hon'ble tribunal further observed that rule 10 B (4) cannot be interpreted in such a rigid manner so as to defeat the basic objective of the rule. The relevant extract of the ruling are reproduced below: " 23. .... . However, in our considered opinion, if a comparable is functionally same as that of the tested party then the same cannot be rejected merely on the ground that data for entire financial year is not available. If from the available data on record the results were financial year can be reasonably extrapolated, then the comparable cannot be excluded solely on this ground. The learn ADR as referred to rule 10 B (4) which only mandates that the data which is to be utilised for analysing the comparability of uncontrolled transactions with an international transaction, has to be....
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....lty 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 Tribunal is reproduced below:- "13. 2. Before us, the Ld. Senior Counsel drew our attention to the decision of the Hon'ble High Court of Bombay in th....