TaxTMI 
TaxTMI 
2020 (2) TMI 1735
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....ansaction adopted Transnational Net Margin Method (for short "TNMM") as an appropriate method under the provisions of Section 92C of the Act and identified seven comparable companies as comparables with their three years average weighted margin of 18.23% and operating margin being at 19.67% for the purpose of claiming the international transaction to be at arm's length. 2.1 The Assessing Officer (for short "AO") framed a draft assessment order dated 26th February 2014 making an upward revision of transfer pricing adjustment of Rs. 4,96,42,540.00. The assessee approached the Dispute Resolution Panel (for short "DRP") against the draft assessment order with its objections. The DRP vide order dated 7th October 2014 rejected the contentions and objections raised by the assessee in relation to upward revision of transfer pricing adjustment and directed the AO to finalize the draft assessment, resulting in passing of the impugned assessment order. The AO / Transfer Pricing Officer (for short "TPO") by his final order dated 31st October 2014 rejected the transfer pricing study of the assessee on the basis of various defects and deficiencies and rejected six out of seven comparables sel....
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....s justified in directing not to consider M/s ICRA Online Ltd. as a comparable without appreciating the fact that TPO has used segmental results of "outsourced services" of the said company for comparatively purpose and that segment is functionally similar to that of assessee ?" 6.5 "Whether on the facts and circumstances of the case and in Law, the Hon'ble ITAT was justified in directing not to consider M/s Motilal Oswal Investment Advisors Pvt. Ltd. as a comparable without appreciating the fresh facts brought on record by the TPO in respect of functions performed and assets employed by the said company u/s 133 (6) such as employee profile and income received from top clients of the said company ?" 6.6 "Whether on the facts and in the circumstances of the case and in Law, the Hon'ble ITAT was justified in directing not to consider M/s Kshitij Investment Advisory Co. Ltd. as a comparable on account of peculiar economic circumstances arising as a result of realignment with another company, simply relying on the decision of Hon'ble ITAT in the case of Carlyle India Advisors Pvt. Ltd., ITA No.1040/Mum/2015 and AGM Advisors India Pvt. Ltd., ITA No.4757/Mum/2015, withou....
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....his company are not exactly similar to the Assessee company ?" 6.12 "Whether on the facts and circumstances of the case and in Law, the Hon'ble ITAT was justified in directing to consider M/s Kinetic Trust Ltd. as a comparable without appreciating the fact that the said company is not into Investment Advisory Services and its turnover is less than Rs. 1 crore ?" 5. We may now advert to the relevant facts necessary for appreciating the controversy in question :- 5.1. The assessee company filed return of income on 11.10.2010 declaring a total income of Rs. 7,00,51,101/- for the assessment year 2010 - 2011. The case of the assessee was selected for scrutiny and statutory notice under Section 143 (2) of the Act was issued, also notice under Section 142 (1), inter alia, calling for various details in connection with scrutiny assessment proceedings. The assessee company through its authorized representative furnished the details called for. Thereafter the AO discussed the case. Reference was made to the TPO for computation of arm's length price in relation to the international transaction. The TPO by his draft order dated 26th February 2014 reported an upward adjustment of....
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.... transaction had chosen TNMM as the most appropriate method and identified seven comparable companies with their three years average weighted margin of 18.23% and operating profit margin being 19.67%, for providing investment advisory services to be at arm's length. 5.4. The DRP considered the submissions of the assessee citing functional details as also related party transactions in the case of comparables which were rejected by the TPO and returned a finding that for the reasons given by the TPO in his draft order which were in substantial detail regarding non submission of financials and other details of the A.E., rejected the comparables adopted by the assessee and included the new comparables suggested by the TPO. DRP held that draft order passed by the TPO was sustainable and did not require any interference in the bench marking done by the TPO. Accordingly, AO vide his final order dated 31st October 2014 completed the assessment in terms of order dated 07th October 2014 passed by the Dispute Resolution Panel (DRP) - III, Mumbai. 5.5. The assessee approached the Tribunal against the order of the DRP. The Tribunal after a thorough analysis of each comparable offered the ....
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....nal after considering the submissions and more specifically findings expressed by the Tribunal, Mumbai Bench in the case of AGM India Advisors Pvt. Ltd. (supra) concluded that as seen in the case of Carlyle India Advisors Pvt. Ltd. (supra) after perusing the annual report of this company, the Tribunal had arrived at a finding that the said company was engaged in providing PMC and such services were fee based and the said company had earned revenue from different segments such as portfolio management fee, performance fee, advisory fee etc. On this basis, the Tribunal arrived at a finding that in the above scenario, where a company was remunerated on cost plus basis, it was risk insulated and therefore, on application of FAR analysis, it could be compared with other companies if there is any difference in its functions. The Tribunal refered to the observation of the Hon'ble High Court in the case of General Atlantic Pvt Ltd. (supra) while approving the view expressed in Carlyle India Advisors Pvt. Ltd. (supra), rejected this company i.e. IDFC Investment Advorse Pvt. Ltd as a comparable. 5.7 ICRA Online Limited (Segmental) The assessee objected to the selection of this company a....
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....ent Advisory Company Limited The assessee objected to this company as a comparable selected by the TPO as this company had entered into an agreement with another company namely Everstone Investment Advisors Pvt. Ltd. to realign its investment advisory activities with effect from 01st January 2010 and as a result of such joint venture, its entire business was restructured. The assessee submitted that, the profit and loss account of this company for the financial year 2010 - 2011 revealed that no revenue was earned from investment advisory business. The assessee submitted that this company had operated only for nine months during the financial year 2009 - 2010 and hence could not be compared to the assessee. The Tribunal after considering the material available on record and the decisions in Carlyle India Advisors Pvt. Ltd (supra) followed by AGM India Advisors Pvt. Ltd. (supra) returned a finding that this company could not be treated as a comparable. The Tribunal based its finding on the decisions given in the aforesaid two cases, in respect of this company pertaining to the very same assessment year and followed the decisions of the co-ordinate bench in excluding this company f....
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....he TPO / DRP as comparable. This company was engaged in the business and research and certificate globally, it was provider of market intelligence advisory services and events for information technology, telecom and consumer technology markets. The assessee submitted that, this company was engaged in research and survey functions which were functionally comparable to advisory support services rendered by the assessee. The assessee submitted that, in the assessee's own case for the assessment year 2009 - 2010, this company had been accepted as a comparable by the TPO / DRP and therefore there was no reason to exclude the same in the related assessment year. The Tribunal after considering the materials available on record with reference to this company rejected the submission of the DR for exclusion, by referring to a similar submission made by the department in the case of Temasec Holdings Advisors India Pvt. Ltd. (supra) and relying upon the co-ordinate bench decision in the case of AGM India Advisors Pvt. Ltd. (supra) included this company as comparable. 6.3 Informed Technologies Limited This company was rejected by the TPO / DRP as comparable. This company collected and ana....
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.... inclusion or exclusion of comparables per se cannot be treated as a question of law unless it is demonstrated to the Court that the Tribunal or any other lower authority took into account irrelevant consideration or excluded relevant factors in the ALP determination that impact significantly." Though the revenue says that the questions projected in paragraph Nos.6.1 to 6.12 are not just questions of law but substantial questions of law, the assessee disagrees with the same and submits that the Tribunal's order has been rendered on purely factual questions which are consistent with the materials placed on record and hence, in the submission of the assessee, the appeal deserves to be dismissed. 9. We would state that before the Tribunal one of the principal submissions was that in the assessee's own case similar questions had been dealt with for the previous assessment year in respect of the same comparable and therefore, heavy reliance was placed on the earlier order of the Tribunal in the assessee's own case for accepting the comparables (which were excluded in the present year). 10. At this stage, we would like to refer to the judgment passed by the Karnataka High Court ....
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....lls and designated Authorities have been created under the Income Tax Act, 1961, but still retaining the normal provisions for assessments of appeals in the Indian Income Tax Act about the remedial Forums or the appeal mechanisms and the Income Tax Appellate Tribunal constituted under Section 253 of the Act continues to be the final fact finding body under the Act even with regard to the assessments of the international transactions under the Special Chapter X as aforesaid and the appeal to the Constitutional Courts as provided in Section 260-A to High Court and Section 261 to the Hon'ble Supreme Court are applicable to these special assessments under Chapter X as well." 11. Now we would like to refer to the findings, reasons, analysis and scrutiny under taken / given by the Tribunal in its order for excluding the comparables suggested by the TPO on the touchstone of comparability to match with the functions performed by the assessee. 11.1 Paragraph Nos. 4 and 5 of the Tribunal's order pertaining to exclusion of IDFC Investment Advisors Pvt. Ltd. reads thus : "4. We have considered the submissions of the parties and perused the material available on record in the lig....
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....to exclude ICRA-O from the final set of comparable companies, that he had held that it was functionally not comparable to the assessee. Charging of fees by ICRA-O did not mean that it was a valid comparable to the assessee. As per the settled principles of TP for a company to be treated as a valid comparable the functions performed, assets employed and risks assumed have to be comparable and not nomenclatures in the annual accounts. We would like to refer to Pg.507 of the PB in case of ICRA-O and it reads as under:- "ICRA Online Limited is a leading information services, outsourcing and technology solutions provider and caters for some of the biggest names in the financial services sector in (India) and abroad, which is a testimony to its product quality, commitment and credibility." From the above description it is clear that ICRA-O operated in two strategic lines of business, i.e., knowledge process outsourcing and information services and technology solutions, with a list of reputed global and domestic clients. Note c (iii) on Pg.507 of the PB also proves that the activities performed by the company under the business line "Outsourced Services" were in the natu....
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.... 11.3 Paragraph Nos.12 and 13 of the Tribunal's order pertaining to exclusion of Motilal Oswal Investment Advisors Pvt. Ltd. (MOIAPL) reads thus : "12. We have considered the submissions of the parties and perused the material available on record in the light of the decisions relied upon. Having gone through the annual report of MOIAPL, we have noted that the company is engaged in a number of activities including investment banking activities. Thus, the company is functionally different from the assessee because of functions performed, assets employed and risk undertaken. Therefore, it fails in the FAR analysis itself. It is pertinent to observe, in case of Temasec Holding Advisors India Pvt. Ltd. (supra), Mumbai Bench of the Tribunal, after considering almost similar argument put forward by the parties excluded this company as a comparable to a non- binding investment advisory service provider holding as under :- "25. This comparable has been included by the TPO and while including the said comparable he has observed that its income is only from Advisory fees during the year and it is performing advisory services in that field of investment like assessee. Befor....
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....Motilal Oswal cannot be put into the comparability list and is directed to be excluded." 13. Following the aforesaid decision, the Tribunal, Mumbai Bench, expressed similar view in case of AGM India Advisors Pv.t Ltd. (supra). In fact, in host of other decisions cited by the learned Sr. Counsel, the Tribunal has held MOIAPL not to be a comparable to a company involved in investment advisory service as it is an Investment Banker. The Hon'ble Jurisdictional High Court also in the decisions relied upon by the learned Sr. Counsel, held that a company engaged in investment banking activity cannot be compared to a company providing investment advisory services. Respectfully following the view taken by the Hon'ble Jurisdictional High Court as well as different Benches of the Tribunal, we exclude this company from the list of comparables." 11.4 Paragraph Nos.16 and 17 of the Tribunal's order pertaining to exclusion of Kshitij Investment Advisory Company Limited reads thus : "16. We have considered the submissions of the parties and perused the material available on record in the light of the decisions relied upon. The fact that there is restructuring of the bus....
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....e in stand is marited. In the present case, what the assessee is claiming is that there has been a restructuring / realingment of investment advisory business being carried out by Kshitij Investment Advisory Co. Ltd. which has impacted the financial results thereby rendering the said concern as an unfit comparable. The proposition being canvassed by the assessee is supported by the decision of Hyderabad Bench of the Tribunal in the case of Capital IQ Information System (India) Pv.t Ltd. (supra). In fact, it is quite well understood that in a year where realignment / restructuring of business takes place, such year is often a peculiar economic year in the history of a concern and in such a situation, it would be in the interest of justice and fair play that such a concern is not treated as a comparable. In fact, in principle, we do not find any disagreement on the part of the TPO also on this aspect. However, what the TPO has stated is that in the present case, the realignment / restructuring is in the same line of business and, therefore, such restructuring / realignment does not result in any change in the activity of business. Therefore, according to the Revenue, there would be n....
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....aken place w.e.f. 1.1.2010, did impact the financial results inasmuch as the income from operations of the said concern for the year under consideration reduced to Rs. 17,23,10,815 from Rs. 26,47,96,102 in the immediately preceding year. Considering the entire conspectus of facts and circumstances, in our view, the assessee company is justified in asserting that Kshitij Investment Advisory Co. Ltd. deserves to be excluded from the final set of comparables on account peculiar economic circumstances during the year under consideration. Thus, on this aspect also, assessee succeeds." 17. Following the aforesaid decision, the Tribunal again in case of AGM India Advisors Pvt. Ltd. (supra) held that this company cannot be treated. As a comparable as these decisions pertain to the very same assessment year and the facts on the basis of which the decisions were rendered by the Tribunal remains same in the case of the present assessee further, as no contrary decision was brought to our notice by the learned Departmental Representative, respectfully following the aforesaid decisions of the co-ordinate bench, we exclude this company from the list of comparables." 11.5 Paragraph Nos....
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.... on 31st March 2010 (appearing at page 176 of the paper book). The TPO in his order has noted that its consultation or advisory operations ranges in various fields which have been tabulated by him at pages 9 to 11 of the order, which according to him assessee is not performing. On the perusal of the directors' report and also the remarks of the TPO, we find that the ICRA Management is providing consultancy services in a myriad areas ranging from development, transportation, urban infrastructure, energy sector, banking and financial services and advising cross border M&A transaction etc. Some other observation made by the TPO is that ICRA has participated in various international forums, partnered with foreign company in multiple projects and has a very big client base unlike assessee. However all these facts do not affect the core competency and functions of the said company, which is advisory, because in all the fields it is rendering only advisory and consultancy services. The whole revenue is again from consultancy/advisory fees. In the instant case also, the assessee is providing Investment Advisory Services to its AE in diverse industries like, infrastructure, telecom, media, ....
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....comparable." 11.6 Paragraph Nos.30 and 31 of the Tribunal's order pertaining to exclusion of IDC India Limited reads thus : "30. We have considered the submissions of the parties and perused the material available on record in the light of the decisions relied upon. On a perusal of the information available in the website and annual report of the company, we have noted that it is primarily engaged in the business of market research and management consultancy. Therefore, the contention of the learned Departmental Representative that it is a product company may not be correct. Further, we have noted that in case of Temasec Holdings Advisors India Pvt. Ltd. (supra), the very same argument of IDC India Ltd. being a product company and provides go to market service was advanced by the learned Departmental Representative. However, rejecting such contentions of the learned Departmental Representative, Tribunal included this company as a comparable holding as under:- "22. This comparable though accepted by the TPO as a good comparable, however, the DRP has additionally rejected this comparable. In assessment year 2008-09, the Tribunal has held to be a good comparable, ....
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....espectfully following the decisions of the Co-ordinate Bench of the Tribunal referred to above, we hold that IDC India Ltd. is a comparable to the assessee." 11.7 Paragraph Nos.35 and 36 of the Tribunal's order pertaining to exclusion of Informed Technologies Limited reads thus : "35. We have considered the submissions of the parties and perused the material available on record in the light of the decisions relied upon. On a perusal of the material on record, we have noted that this company is basically engaged in providing data management service to the financial sector. Considering the aforesaid fact, the Tribunal in Temasek Holdings Advisors (I) Pvt. Ltd. (supra), while including the company as a comparable has observed as under:- "(v) Informed Technologies Ltd. This company mostly offers range of data management services to the financial sector in USA. It collects and analyses data of financial fundamentals, corporate governance and capital market. It outsource services i.e., BPO services consisting of financial data base and back office activities for research and advisory reports. Thus, the data outsourcing charges are mostly related to analysing of data ....
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....ument advanced by the Department accepted this company as comparable. The relevant observations of the Bench is reproduced hereunder for the sake of convenience:- "(ii) Kinetic Trust Ltd. (Rejected by the TPO):-Mr. Porus Kaka, submitted that the TPO has observed that in the annual report of the Kinetic Trust, does not specify that the said company is engaged in the investment advisory; further the said company is NBFC registered with RBI; and lastly, its turnover is only Rs. 20 lakhs. To counter this TPO's observation, Mr. Kaka pointed out that firstly, Directors' report for financial year 2009-10 specifically mentions that the company has concentrated on its main activity of a corporate consultancy services and financial services. This is evident from Directors' report given at page 193 of the paper book. Merely because the said company is NBFC, the same does not change the nature of activities undertaken by the company i.e., Consultancy Services. Secondly, while selecting the list of comparables in search criteria, the assessee has not considered the turnover criteria as one of the factor in determining or streamlining the selection of the companies. It has not cherry pi....
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....e Assessing Officer / Transfer Pricing Officer to include this company as a comparable. In view of the aforesaid, we direct the Assessing Officer / Transfer Pricing Officer to determine the arm's length price afresh in terms of observations made by us herein above." 12. In view of the above detailed reproduction of the reasonings given by the Tribunal we find that, while undertaking the exercise to arrive at the arm's length price which is essentially a matter of estimate of the fair value which the Indian Company had paid or had received from its Associate Enterprise (A.E.), such exercise is required to be undertaken by the TPO on the basis of the facts and figures relating to comparable cases of other similarly placed entities, whose relevant data is available in the public domain. As per the provisions of the Act and the Rules, the assessee company is required to furnish its own Transfer Pricing Analysis and the list of chosen comparables which may or may not be agreed to by the Revenue Authorities and they would introduce some more comparables rejecting the comparables given by the assessee company by applying certain filters like Related Party Transactions (RPT) filter,....
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....he High Court under Section 260-A of the Act is locked with the words "Substantial questions of law" and the key to open that lock to maintain such appeal can only be the perversity of the findings of the Tribunal in these type of cases and the perversity in the findings not only averred by the appellant before this Court but, established on the basis of cogent material which was available before the Authorities below including the Tribunal and the findings arrived at by the Tribunal can be so held to be perverse within the well settled parameters for determining the same as perverse. It is not allowed to either of the parties, i.e. the Assessee or the Revenue to invoke the jurisdiction of this Court under Section 260-A of the Act merely because the Tribunal comes to reverse or modify the findings given by the lower Authority, viz. Transfer Pricing Officer (TPO) or Dispute Resolution Panel (DRP) which comprises of three Commissioners and the Revenue or the assessee may feel dissatisfied, because of the reversal or modification of such findings by the Tribunal resulting in leaving out of certain comparables or adding on of certain comparables for determining the 'Arm's Lengt....
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....hearing of the appeal, be allowed to argue that the case does not involve such question: Provided that nothing in this sub- section shall be deemed to take away or abridge the power of the Court to hear, for reasons to be recorded, the appeal on any other substantial question of law not formulated by it, if it is satisfied that the case involves such question. (5) The High Court shall decide the question of law so formulated and deliver such judgment thereon containing the grounds on which such decision is founded and may award such cost as it deems fit. (6) The High Court may determine any issue which (a) has not been determined by the Appellate Tribunal; or (b) has been wrongly determined by the Appellate Tribunal, by reason of a decision on such question of law as is referred to in sub-section (1). [(7) Save as otherwise provided in this Act, the provisions of the Code of Civil Procedure, 1908 (5 of 1908), relating to appeals to the High Court shall, as far as may be, apply in the case of appeals under this Section.] Sections 100 and 103 of the Code of Civil Procedure, 1908 read thus: "Section 100 - Second Appeal. (1....
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....ax Act, whereas the Second Appeal on substantial question of law before High Court under Section 100 would lie against the Judgment and Decree of the first Appellate Court disposing of an appeal against the Judgment and Decree of a Trial Court, but nonetheless it is the third round of consideration at the level of the High Court, where the facts and law both have been screened, discussed and analyzed by the Authorities or the Courts below and therefore the tenor and color of the words "substantial question of law" in both these enactments remains the same. 22. The High Court has power to not only formulate the substantial questions of law and rather it has the duty to do so and can also frame additional substantial questions of law at a later stage, if such a substantial question of law is involved in the appeal before it under these provisions and the appeal should be heard and decided only on such substantial questions of law after allowing the parties to address their arguments on the same. The extended power given to the High Courts to decide even an issue under Sub- section (6) of Section 260-A of the Income Tax Act, which is in pari materia with Section 103 of the Ci....
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....y be prescribed by the Board." 14.3. Section 92-CA deals with reference to Transfer Pricing Officer where an assessee has entered into an international transaction a specified domestic transaction and the Assessing Officer considers it necessary or expedient, he may with the previous approval of the Principal Commissioner or Commissioner refer the computation of the arm's length price in relation to the said international transaction or specified domestic transaction to the Transfer Pricing Officer. 14.4. Section 92-F (ii) of the Act defines "arm's length price" and reads thus :- "(ii) "arm's length price" means a price which is applied or proposed to be applied in a transaction between persons other than associated enterprises, in uncontrolled conditions;" 15. In the case before us the TNMM method appears to have been the most popular and widely adopted method for determining the Arm's Length Price in which the operating profit margin of comparable companies are considered by the authorities and applied to the case of the assessee to determine the Arm's Length Price to make transfer pricing adjustments. Rules 10-A, 10-AB, 10-B, 10-C and 10-CA of the Income Tax Ru....
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....al has referred to and relied upon the order passed by this Court in the case of Principal Commissioner of Income Tax - 14 Vs. Temasek Holdings Advisors India Pvt. Ltd. in Income Tax Appeal No.304 of 2017 delivered on 16th April 2019, wherein the following substantial questions of law were framed. "(a) Whether on the facts and in the circumstances of the case, the Tribunal is correct in law in directing the Assessing Officer to include ICRA Management Consultancy Services Ltd., Kinetic Trust Limited in the set of comparable companies while determining the TP adjustment of international transaction ? (b) Whether on the facts and in the circumstances of the case, the Tribunal is correct in law in striking down the additional markup margin of 3% to the average PLI of the comparable companies selected by the TPO ?" 17. In the said order, this Court after referring to another order dated 17th November 2016 passed in Income Tax Appeal No.1051 of 2014 dismissed the revenue's appeal raising objection to the Tribunal's decision to include ICRA Management Consultancy Services Ltd. and Kinetic Trust Limited which were both rejected by the TPO. So also in the present case,....