AI Drafter 
TaxTMI 
TaxTMI 
2016 (7) TMI 1495
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....ed in passing the order on the following grounds: 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 c....
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....ce to TPO without satisfying the preconditions necessary for making such 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. Witho....
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....clearing services in res-pect of contracts entered in the derivatives seg-ment on NSE and BSE 409,746,296 CUP 7. Provision of information 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 merchan....
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....ransfer Pricing Officer except IDC India Ltd. and Sumedha Fiscal Services Ltd., for which the assessee submitted revised margin and also inclusion of one company i.e., ICRA Management Consulting Service, but, the Transfer Pricing Officer did not accept the contention 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 Office....
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....nt advisory (listed and unlisted) segment for bench marking purpose, hence, the same approach should be followed in the impugned assessment year. The learned Sr. Counsel further submitted in assessee's own case for the assessment year 2007-08 and 2009-10, the Tribunal had also upheld bench marking of investment advisory as a separate 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, 200....
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....vestment advisory service as a separate segment. The Transfer Pricing Officer must carefully examine the comparables selected by the assessee in its transfer pricing study and decide whether they are functionally similar, hence, suitable to be selected as comparable in respect of investment advisory segment. In case, the Transfer Pricing 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....
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....e made an attempt to demonstrate the volatile nature of business in this segment. It was submitted, the effect of sub-prime crisis in the developed economy had started affecting the investment banking industry worldwide including India by the last quarter of the financial year 2007-08. Therefore, a multiple year analysis of the margin of the comparables 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 f....
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....he margin shown by that company lacks credibility and does not show a normal business trend if financial results of either three preceding financial year or succeeding financial year is taken. He, therefore, submitted rejection of the comparables selected using multiple year data is not proper. 17. Learned Departmental Representative referring 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 ....
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....seek mandate for investment banking. He submitted, the skill set required for investment advisory and investment banking are same and many professional would render both types of services. Learned Departmental Representative submitted, in any case of the matter, filter of 25% to 50% of the employee cost can be considered. 20. In the rejoinder, it was 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 th....
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....vices Pvt. Ltd., ITA no.8997/Mum./ 2010, ITAT, Mumbai; iii) Stream International Services Pvt. Ltd. ITA no.8290/Mum./ 2011; iv) Maersk Global Services Centre v/s DCIT, ITA no.2492/Mum./ 2014, ITA no.2594/Mum./2014. EDELWEISS CAPITAL LIMITED 24. Objecting to the selection of this company, learned Sr. Counsel submitted, this company has number one ranking 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 Depa....
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....rable. He submitted, assessee while computing RPT had included the interest cost on interest free unsecured loan obtained by L&T Capital Ltd. from its holding company. He submitted, interest cost is outside the computation of PLI being non-operating in the nature, accordingly should be excluded from RPT computation. He also referred to the observations of the DRP wherein Assessing 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 ....
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....lenging the rejection of comparable selected by the assessee in the transfer pricing study submitted that neither the Transfer Pricing Officer nor the DRP have assigned any reason while rejecting those comparables without considering their functional similarity to the assessee. He, therefore, submitted that the companies selected by the assessee must also be considered as comparable as there is 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. Howev....
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....rage employee cost of comparables at Page-47 of the paper book. The assessee has also submitted a working as per which if employee cost is taken at 29% then assessee's margin would be 110% which is more than the margin of 105% computed by the Transfer Pricing Officer. In our view, the aforesaid contention of the assessee needs to be examined in detail after verifying the employee cost of both the 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 ha....
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....sessing Officer / Transfer Pricing Officer for examination afresh. EDELWEISS CAPITAL LIMITED 40. As could be seen from the order of the DRP, a direction has been issued to the Assessing Officer to examine the RPT and exclude if it is found to be above 25%. It is the contention of the assessee before us that a company having RPT above 15% cannot be considered as comparable. It has been further submitted 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 ....
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.... Kinetic Trust Ltd., on a perusal of the order of the Transfer Pricing Officer, we find, he has neither made any discussion on these companies nor has assigned any reason why they are not comparable to the assessee. DRP's order is also totally silent on this issue. In the aforesaid view of the matter, we direct the Assessing Officer / Transfer Pricing Officer to examine the comparability of these five companies 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 ....
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....* Companies who have less than 75% of the revenues as export sales were excluded * Companies who have diminishing revenues/persistent losses for the period under consideration were excluded * Companies having different financial year ending (i.e. not March 31, 2008) or data of the company does not fall within 12 month period i.e. 01-04-2007 to 31-03-2008, were rejected. * Companies that are functionally different front 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.) 40729....
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....arned Sr. Counsel relied upon the following decisions:- i) Maersk Global Centres (I) Pvt. Ltd., ITA no.7466/Mum./2012; ii) Lionbridge Technologies P. Ltd., ITA no.7498/Mum./2012; iii) Stream International Services P. Ltd., ITA no.8290/M./2011; iv) Symphony Mktg Solutions (I) P. Ltd., ITA no.1316/ B./2012. 51. Learned Departmental Representative submitted, engineering design service also comes within ITES that being the case, no further distinction / differentiation can be made between ITES provider by terming it as high end or low end. Learned D.R. submitted, as far as merger and acquisition 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 th....
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....90/Mum./ 2011; iv) Symphony Marketing Solutions India P. Ltd., ITA no.1316/ Bang./2012; v) Capital IQ Information Systems India P. Ltd. ITA no.124 & 170/Hyd./2014; vi) Excellence Data Research P. Ltd. ITA no.159/Hyd./2014; vii) Hyundai Motors India Engineering P. Ltd., ITA no.255/ Hyd./2014. 55. Learned Departmental Representative submitted, service provided by this company comes within the ambit of ITES, hence, it cannot be rejected as a comparable. He submitted, information obtained by the Transfer Pricing Officer under section 133(6) was furnished to the assessee, however, assessee did not raise any 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 compan....
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....ndia Ltd., ITA no.1624/ Hyd./2010. 58. He also relied upon the decision of the Hon'ble Delhi High Court in Rampgreen Solutions Pvt. Ltd., wherein rejection of this company was upheld on account of low employee cost. 59. Learned Departmental Representative vehemently objecting to the rejection of this company submitted, this company was selected by the assessee itself in its transfer pricing study. He submitted, before the Transfer Pricing Officer / DRP, the assessee has also not objected to selection of this company. Therefore, at this stage, assessee's objection could not be entertained. 60. In the rejoinder, learned Sr. Counsel 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.....
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....ion Systems India P. Ltd. ITA no.124 and 170/Hyd./2014; iii) Stream International Services P. Ltd., ITA no.8290/Mum./ 2011; and iv) Symphony Marketing Solutions India P. Ltd., ITA no.1316/ Bang./2012; v) Hyundai Motors India Engineering P. Ltd., ITA no.255/ Hyd./2014; vi) Excellence Data Research, ITA no.159/Hyd./2014; vii) Mindteck (I) Ltd., ITA no.70/Bang./2014 viii) Parexel International (I) Pvt. Ltd., ITA no.144/Hyd./2014; ix) Avineon India P. Ltd., ITA no.1989/Hyd./2011; 63. Learned Departmental Representative submitted, the company is engaged in providing, hence, ITES has been rightly selected as a comparable. He submitted, even 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 ex....
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...., 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 India Pvt. Ltd. (supra) has also held that the company cannot be treated as comparable to a company performing ITES / BPO functions. As these decisions rendered by the Tribunal are for the very same assessment year, respectfully following the same, we direct exclusion of this company from the list of comparables. It has been submitted before us by the learned Sr. Counsel that on exclusion of these companies, 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 asses....
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.... our notice by the learned Departmental Representative, respectfully following the decision of the co-ordinate bench as referred to above, we allow assessee's claim of deduction and delete the addition made by the Assessing Officer. 73. The issue raised in ground no.6, relates to deduction claimED of an amount of Rs. 11,86,105, paid to Bombay Stock Exchange and National Stock Exchange. 74. Brief facts are, during the assessment proceedings, the Assessing Officer noticing that the assessee has claimed deduction towards payment made to stock exchanges called for necessary details. After verifying the details submitted by the assessee he observed that such payment was towards fine 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. ....