Loading judgment…
No AI summary yet for this case.
Income Tax Appellate Tribunal, MUMBAI BENCH “K”, MUMBAI
IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI BENCH “K”, MUMBAI BEFORE SHRI AMIT SHUKLA, JUDICIAL MEMBER AND SHRI GAGAN GOYAL, ACCOUNTANT MEMBER (A.Y. 2010-11) ACIT-5(1)(1), Room No. 568, 5th Floor, Aayakar Bhavan, M.K. Road, Mumbai- 400020. ...... Appellant Vs. M/s General Atlantic Pvt. Ltd., Level 19, Birla Auror, Dr. Annie Besant Road, Worli, Mumbai- 400030. PAN: AABCG7917Q ..... Respondent Appellant by : Dr. Yogesh Kamat, CIT-DR Respondent by : Sh. Porus Kaka/Divesh Chawla Date of hearing : 30/05/2022 Date of pronouncement : 25/08/2022 ORDER PER GAGAN GOYAL, A.M:
This appeal by the Revenue is directed against the order of Ld. Commissioner of Income Tax (Appeals)-56, Mumbai [hereinafter referred to as (‘Ld. CIT (A)’) dated 11.02.2021 for the Assessment Year (AY) 2010-11. The Revenue has raised the following grounds of appeal:
M/s General Atlantic Pvt. Ltd.
A. Ground No.1 1. on inclusion of ICRA Management Consulting Services Ltd as a comparable 1.1 Whether on the facts and circumstances of the case and in law, the Ld.CIT(A) is correct in including ICRA Management Consulting Services Ltd.(ICRA) as a comparable, when ICRA involves management consultancy services whereas the assessee is involved in providing investment advisory services to the Associated Enterprises and so holding ICRA as comparable is against the provisions of clause (a) and (of Rule 108(2) of the Income-tax Rules as specific characteristics of services rendered and Functions, Assets and Risks(FAR) totally differ between them? 1.2 Whether on the facts and circumstances of the case and in law, the Ld. CIT(A) is right in including ICRA as a comparable ignoring the fact that the TPO obtained detailed information from ICRA itself u/s 133(6) that it was involved in management consultancy services and while ignoring the fact that the clients of this company are predominantly Government and government related organizations which clearly indicate that it failed the comparability tests laid down in Rule 103(2)(a)/(b) and this issue was not adjudicated in the order of the Hon'ble Tribunal for AY 2011-12 which was relied on by the Ld.CIT(A)? 1.3 Whether on the facts and circumstances of the case and in law, the Ld.CIT(A) is right in including ICRA as a comparable ignoring the fact that the TPO obtained detailed information from ICRA itself u/s 133(6) and described in detail in Para 7.2.2 of his order, where the services provided by ICRA were found to involve various activities like consultancy services to Traffic and transportation plans for large cities, sanitation projects, improvement of public health facilities, pulse polio program and Avian influenza programs for UNICEF, consultancy services for reconciliation and certification to State Power generation and Electricity Distribution companies among others but not to involve any service in the financial field or investment advisory segment, which clearly indicates that it failed the comparability tests laid down in Rule 10B/2)(a)/(b) and this issue was not adjudicated in the order of the Hon'ble Tribunal for AY 2011-12 which was relied on by the Ld.CIT(A)? 1.4 Whether on the facts and circumstances of the case and in law, the Ld.CIT(A) is right in including ICRA as a comparable on the ground that the it was accepted by the Hon'ble ITAT as a comparable for a previous year or a subsequent AY, ignoring the basic tenet that the transfer pricing audit is highly
M/s General Atlantic Pvt. Ltd. facts-intensive and facts-driven and the contemporaneous facts have to considered and evaluated for every AY independently as dictated by Rule 10B(4) and by taking into account the comparability rules as enshrined in Rule 10B(2)? 1.5 Whether on the facts and circumstances of the case and in law, the Ld.CIT(A) is right in relying on the order of the Hon'ble ITAT for AY 2011-12 in which the relevant facts as mentioned in Grounds 1.1 to 1.4 have not been clearly brought to the notice of the Hon'ble Tribunal? 2. on inclusion of IDC (India) Ltd as a comparable: 2.1 Whether on the facts and circumstances of the case and in law, the Ld. CIT(A) is correct in including IDC India Ltd (IDC) as a comparable, when IDC is involved in the business of market research and survey advisory services as confirmed by the Hon'ble Tribunal in the case of Tevapharma India (P) Ltd 18 taxmann.com 148 whereas the assessee is involved in providing investment advisory services to the Associated Enterprises and so holding IDC as comparable is against the provisions of clause (a) and (b)of Rule 108(2) of the Income-tax Rules as specific characteristics of services rendered and Functions, Assets and Risks(FAR) totally differ between them? 2.2 Whether on the facts and circumstances of the case and in law, the Ld.CIT(A) is right in including IDC as a comparable on the ground that the it was accepted by the Hon'ble ITAT as a comparable for a subsequent year AY, ignoring the basic tenet that the transfer pricing audit is highly facts-intensive and facts-driven and the contemporaneous facts have to considered and evaluated for every AY independently as dictated by Rule 10B(4) and by taking into account the comparability rules as enshrined in Rule 10B(2)? 3. on rejecting M/s Motilal Oswal Advisors Pvt. Ltd as comparable: 3.1 Whether on the facts and circumstances of the case and in law, the Ld. CIT(A) is right in excluding M/s Motilal Oswal Advisors Put Ltd (MOA) as a comparable holding that MOA involves in merchant banking/ investment banking services, without appreciating the fact that the comparable (MOA) is engaged in providing high quality strategic and financial advisory services which is similar to that of the assessee and so it qualifies the comparability tests laid down in Rule 10B(2) and that the financials of MOA show it has income in the nature of advisory fees and there is no evidence that it involved in merchant banking/ investment banking services during the FY 2009-10?
M/s General Atlantic Pvt. Ltd.
3.2 Whether on the facts and circumstances of the case and in law, the Ld. CIT(A) is right in excluding MOA as a comparable ignoring the fact that the TPO obtained detailed information described in Para 7.1.2 of his order where the services provided by MOA to its top 10 clients were found to include strategic and financial advisory services to a foreign entity for acquisition of majority equity stake and also for 100% acquisition in another foreign entity, acting as a lead manager for placement of equity shares and convertible instruments with investors, advisory services for public offering of equity shares, strategic financial advisory services to foreign entities for proposed investments in Indian companies among others and constitute 82.64% of its total advisory fees which clearly shows that MOA was involved in the investment advisory segment, similar to the high quality, investment advisory services rendered by the assessee company and this issue was not adjudicated in the order of the Hon'ble Tribunal for AY 2011-12 which was relied on by the Ld.CIT(A)? 3.3 Whether on the facts and circumstances of the case and in law, the Ld.CIT(A) is right in excluding M/s MOA as a comparable without looking into the basic tenet of transfer pricing that in TNMM under Rule 10B(1)(e), the comparable need not be identical but suffice to be similar? 3.4 Whether on the facts and circumstances of the case and in law, the order of Ld. CITIA) is not perverse in adopting two different stands, in so far as inclusion of comparables is concerned he laid down much broader comparability test, and for exclusion of comparables he laid down stricter comparability test? 3.5 Whether on the facts and circumstances of the case and in law, the Ld.CIT(A) is right in relying on the order of the Hon'ble ITAT for AY 2011-12 in which the relevant facts as mentioned in Grounds 3.1 to 3.4 have not been clearly brought to the notice of the Hon'ble Tribunal? 4. on rejecting M/s Kshitij Investment Advisory Company Ltd as comparable: 4.1 Whether on the facts and circumstances of the case and in law, the Ld. CIT (A) is right in excluding M/s Kshitij Investment Advisory Company Ltd (KIACL) as a comparable on the ground that there was restructuring/realignment of business without appreciating that there was no change in the nature of business for the impugned FY 2009-10 and so, KIACL qualifies to be a comparable as per comparability test laid down in Rule 10B (2)? 4.2 Whether on the facts and circumstances of the case and in law, the Ld CIT(A) is right in excluding KIACL as a comparable ignoring the fact that the TPO
M/s General Atlantic Pvt. Ltd. obtained detailed information from KIACL itself u/s 133(6) of the clients and advisory fees received where it was seen that the most of the revenue of Rs 17.23 Cr was from advisory fees and the "Mall management fees" of Rs 6.65 lakhs amounts to only 0.3% of the total income for the impugned FY 2009-10 and so, KIACL qualifies to be a comparable as per comparability test laid down in Rule 10B(2)P 4.3 Whether on the facts and circumstances of the case and in law, the Ld.CIT(A) is right in excluding M/s KIACL as a comparable without looking into the basic tenet of transfer pricing that in TNMM under Rule 10B(1)(e), the comparable need not be identical but suffice to be similar? 4.4 Whether on the facts and circumstances of the case and in law, the order of Ld. CIT(A) is not perverse in adopting two different stands, in so far as inclusion of comparables is concerned he laid down much broader comparability test, and for exclusion of comparables he laid down stricter comparability test? B. On Ground No.2 1. "On the facts and in the circumstances of the case and in law, the learned CIT (A) has erred in deleting the disallowance of Rs.51, 03,678/- of the Income Tax Act on account of foreign travel expenditure". 2. "On the facts and circumstances of the case and in law, the Ld. CIT (A) failed to appreciate the fact that the assessee failed to produce any material evidence for examination by the AO on account of claim of foreign travel expenditure as wholly and exclusively for business purpose." C. The appellant prays that the order of Ld. CIT (A) be set aside and the order of the AO be restored. D. The appellant craves leave to amend or alter any ground or add any other grounds which may be necessary.”
Brief facts of the case are that the assessee-company filed its original return of income on 15.10.2010 declaring taxable income of Rs. 9,87,93,429/-. The case was selected for scrutiny and statutory notice under section 143(2) of the I.T. Act was issued. Subsequently notices under section 142(1) on various dates were also issued calling for various details in support of return filed.
M/s General Atlantic Pvt. Ltd.
3. Assessee (GAPL) is a Private Limited company engaged in the business of rendering non-binding investment advisory services to its Associated Enterprises (AE). Assessee is one of the group companies of GASC LLC (AE), operating in India and is responsible for providing non-binding investment advisory services to support the investment management’s activities performed by AE. GASC LLC is one of the world’s leading private equity investment firms focused on growth equity investments on a global basis.
GASE LLC is engaged by GA (main holding company) to provide investment management services to the PE funds. As an investment manager GASC LLC is responsible for identifying, analyzing and managing all private equity transactions and operations. GASC LLC is not engaged in funding for investment but assist GA with investment decisions. 5. As in non-binding investment advisor GAPL operates under the supervision of AE and its functions are limited to research and collation of information and sharing the same with AE on non-risk basis. While rendering these services, the assessee is remunerated on full cost + mark-up basis of 18%. The value of the international transactions entered into by the assessee with its AE for the year under consideration amounts to Rs. 59,03,07,520/-. During the year under consideration, the assessee earned a return on total cost of 18.10%. 6. Assessing Officer (AO), based on the order of Transfer Pricing Officer (TPO), Addl. CIT, Transfer Pricing-I(1) adjusted assessee’s income upward by Rs. 11,70,94,894/- and also disallowed Foreign Travel Expenditure incurred and claimed by the assessee amounting to Rs. 51,03,678/-
M/s General Atlantic Pvt. Ltd.
Against this upward adjustment based on TPO’s report and disallowance of Foreign Travel Expenditure, assessee preferred an appeal before the Ld. CIT (A)- 56, Mumbai. Ld. CIT (A) accepted the plea of the assessee with reference to inclusion/exclusion of following companies as acceptable being comparable and deleted the disallowance of Foreign Travel Expenditure as under: (i) ICRA Management Consulting Services Ltd. (inclusion) (ii) IDC India Ltd. (inclusion) (iii) Kshitij Investment Advisory Company Ltd. (exclusion) (iv) Motilal Oswal Investment Advisors Pvt. Ltd. (exclusion) (v) ICRA Online Limited (inclusion) (vi) IDFC Investment Advisors Ltd. (inclusion) (vii) Agrima Consultant International Ltd. (exclusion) (viii) CRISIL Risk & Infrastructure Ltd. (exclusion) (ix) Credible Management & Consultant Pvt. Ltd. (exclusion) 8. Against this order of Ld. CIT (A), the Revenue preferred this appeal before us with ground of appeal
mentioned (supra). We have gone through the order of AO along with the order passed by TPO under section 92CA (3), order of Ld. CIT (A) and submissions of the assessee along with Paper Book (PB).
9. Ground A (1), (2), (3) & (4) with its sub-grounds. All these grounds pertain to the order of Ld. CIT (A) in which either he included the name of the company for the purposes of comparable or excluded for the same purpose on the appeal of the assessee or Revenue felt aggrieved against the decision of Ld. CIT (A). We are discussing name wise details of the companies either included or excluded for the purposes of comparable as under:
M/s General Atlantic Pvt. Ltd.
(i) ICRA Management Consulting Services Ltd. (inclusion) Here-in-below, we are reproducing the findings of Ld. CIT (A) for better understanding the grievance of Revenue as under: “Assessee has objection to rejection of this comparable by TPO, it is stated that the company is providing consultancy services in the areas of strategy, risk management, process consulting transaction advisory, policy and regulation and development consulting, which it claims to be broadly comparable to Appellant's activities. Audited financials are enclosed in the paper book. It is also submitted that this company was accepted by ITAT as comparable in assessee's own case for AY 2011-12 (DCIT VIS General Atlantic Pvt. Ltd 91 Taxman.com 406 (Mumbai - Trib) and that there is no change in activities of the company in A.Y 2010-11 The Appellant has also relied on decision of Mumbai ITAT in the case of Temasek Holdings Advisors (India) Pvt Ltd for AY 2010-11 and a number of other decisions holding that the said company is comparable with an Appellant engaged in the business of non-binding investment advisory services. The TPO rejected this company as a comparable observing that services rendered by the company are not in the financial field and that they are predominantly given to government and government related organization. It is also observed that there is vast difference in average employee compensation between the two companies, indicating that they can't perform similar functions. The TPO has accordingly, rejected assessee's reliance on ITAT decision in the case of Temasek Holdings. 5.1.1 I have considered the TPOs and Appellant's contentions. The activities of comparable companies are broadly comparable to appellant activity. Hon'ble ITAT while accepting this company as a comparable to Appellant Company for A.Y 2011 12 has observed the following: “14. We have heard rival submissions and perused material available on record. Insofar as ICRA Management Consulting Services Ltd. is concerned, the Transfer Pricing Officer has rejected it as a comparable basically on the reasoning that unlike the assessee this company is providing management consulting service. One more reason by the Transfer Pricing Officer to exclude this company is difference in skill set of employees. However, we find nothing new in the argument of the Department as upon consideration of the very same argument, this company has been found to be a comparable to a non-binding investment advisory service provider. It is relevant to observe, in case 11 General Atlantic Pvt. Ltd. of AGM India Advisors Pvt. Ltd. v/s DCIT, (2017) 79 taxmann.com 86 which is for the very same assessment year, the M/s General Atlantic Pvt. Ltd.
Tribunal after considering argument advanced by the Department regarding difference in skill set held that ICRA Management Consultancy Services is a valid comparable to a company providing non-binding investment advisory services. It is also relevant to note, in assessee's own case for assessment year 2009-10, this company has been accepted as a comparable by the DRP. Even otherwise also, the observations of the Transfer Pricing Officer on difference in skill set between the assessee and the comparable company appears to be not on the basis of proper analysis of fact and more on assumption and presumption As regards other functional differences of the comparable pointed by the loomed Departmental Representative, it needs to be mentioned, neither Transfer Pricing Officer nor DRP have deliberated on those aspects Since these issues raised by the learned Departmental Representative are completely new issues and never raised at any stage earlier, we do not consider if appropriate to deal with them as It requires verification of fresh facts Therefore, respectfully following the decisions of the Tribunal cited before us by the learned Authorised Representative, we direct the Assessing Officer to accept this company as a comparable.” Thus the Hon'ble ITAT has considered the various observations made by the TPO in rejecting the comparable. It is also noted that the company is accepted as a comparable by DRP for AY 2009-10, Since there is no change activity in AY 2010-11, the company is accepted as a comparable. The sub ground accordingly succeeds.” We have gone through the legal paper book submitted by the assessee, on page no. 1 to 6, the Hon’ble Bombay High Court on the appeal of Revenue against the assessee, held that an investment advisor could not be compared to a merchant banker and the findings on the matter of inclusion/exclusion of comparables is a question of fact and does not give rise to any substantial question of law, hence, appeal of Revenue is dismissed. In view of Hon’ble High Court’s finding, it will be rather relevant to refer orders of ITAT in the case of assessee or any other assessee with the similar facts. Based on above, we are respectfully relying on the findings of ITAT in assessee’s own case vide A.Y. 2006- 07, ITA No. 7368/Mum/2011 A.Y. 2007-08, ITA No. 1019/Mum/2014 A.Y. 2009-10, ITA No. 2207/Mum/2016 A.Y. 2011-12, ITA No. 900/Mum/2017 A.Y. 2012-13. We further relied on the decision of ITAT vide ITA No. 776/Mum/2015 A.Y. 2010-11 in M/s General Atlantic Pvt. Ltd. the case of Tamasek Holdings Advisors India Pvt. Ltd. Vs. Dy.CIT, Circle-14(3)(1), Mumbai (ii) IDC India Ltd. (inclusion) Here-in-below, we are reproducing the findings of Ld. CIT (A) for better understanding the grievance of Revenue as under:
“Assessee has objected to rejection of this comparable by TPO. Following is submitted in support of assessee's contention that it is a good comparable. “15. In this regard, vide the submission dated 12 July 2013, the appellant had submitted that IDC, which had been selected by the appellant as a comparable company in its TP study for the earlier years, has been rejected in FY 2009-10 on account of having related party transaction greater than 10% of its sales in FY 2008- 09 (copy of the submissions enclosed from Page 605 to Page 643 of the Paper Book Volume 1). Also, the appellant had submitted that the audited financials of IDC for FY 2009-10 which was not available at the time of preparing the TP study and hence the calculation of related party transaction was performed using the financials for the earlier year i.e. F.Y. 2008-09 This calculation resulted in related party transaction/sales of 12.30% which is higher than the threshold of related party transactions/sales of more than 10% as adopted by the appellant in its transfer pricing report, amounting to its rejection.
Regarding the questions of determining the quantum of related party transactions, the related party transaction for FY 2009-10, comfortably falls below the limit of 25% as proposed to apply by the Ld. TPO. (Refer paragraph 5.2 of the show cause notice) 17. It was further submitted that the financials of IDC for the F.Y. 2009-10 are now available. Based on the perusal of the latest financials, IDC does not have any related party transactions and hence should now be selected as a comparable company.
The Ld. TPO had rejected this company by contending that the functional comparability and the exact quantum of related party transaction cannot be determined. The appellant wishes to submit that the functional comparability of IDC with investment advisory companies has been well settled by various judicial precedents including the appellant's own case in ITAT for A.Y. 2006-07 and A. Y 2007-08 Further, IDC has also been selected by the learned TPO in the appellant own case for AY 2009-10.
M/s General Atlantic Pvt. Ltd.
Further, the appellant submits that IDC has been accepted as a comparable for the same assessment year i.e. AY 2010-11 by the Mumbai Tribunal in the case of Tamasek Holdings Advisors India (P) Ltd v. DCIT (177 TTJ 678).
The appellant had further submitted that, selection of IDC assumes high Importance as this company has been pronounced as comparable to the activity of investment advisory in various ITAT rulings. Further, IDC has been accepted by the ITAT as comparable to the investment advisory services in case of Carlyle India Advisors Pvt. Ltd. vs ACIT [ITA No. 7901/Mum/2011] In addition, the Appellant has also relied on number of other decisions, The TPO has rejected this comparable holding that results available in the public domain are not reliable and it is not correct to say that the company passes the RPT filter. It is also observed that decision in the case of Carlyle India does not go into comparability analysis and as such does not lay down a ratio as regards comparability of IDC India. It is therefore, concluded by the TPO that it is not possible to examine functional comparability as well as true quantum of related party transactions and therefore, TPO rejected the company as a comparable. 5.2.1 I have considered the above and find that the company is comparable functionally with investment advisory companies are held in number of decisions. In assessee's own case it was accepted by ITAT for AY 2006-07. The said decision has been confirmed by the jurisdictional High Court. The Hon'ble ITAT has upheld this as a comparable for AY 2011-12 in assessee's own case. The TPO has also accepted it has a comparable for AY 2009-10. The reason for rejection the TPO was related party transactions. The appellant has stated that details now available show that there are no related party transactions and it passes RPT filter easily. Therefore, the company is accepted as a comparable. The sub ground accordingly succeeds.” We have gone through the legal paper book submitted by the assessee, on page no. 1 to 6, the Hon’ble Bombay High Court on the appeal of Revenue against the assessee, held that an investment advisor could not be compared to a merchant banker and the findings on the matter of inclusion/exclusion of comparables is a question of fact and does not give rise to any substantial question of law, hence, appeal of Revenue is dismissed. In view of Hon’ble High Court’s finding, it will be rather relevant to refer orders of ITAT in the case of assessee or any other M/s General Atlantic Pvt. Ltd. assessee with the similar facts. Based on above, we are respectfully relying on the findings of ITAT in assessee’s own case vide A.Y. 2006- 07, ITA No. 7368/Mum/2011 A.Y. 2007-08, ITA No. 1019/Mum/2014 A.Y. 2009-10, ITA No. 2207/Mum/2016 A.Y. 2011-12, ITA No. 900/Mum/2017 A.Y. 2012-13. We further relied on the decision of ITAT vide ITA No. 776/Mum/2015 A.Y. 2010-11 in the case of Tamasek Holdings Advisors India Pvt. Ltd. Vs. Dy.CIT, Circle-14(3)(1), Mumbai (iii) Motilal Oswal Investment Advisors Pvt. Ltd. (exclusion) Here-in-below, we are reproducing the findings of Ld. CIT (A) for better understanding the grievance of Revenue as under: “Selection of Motilal Oswal investment Advisors Private Limited (MOIAPL) as comparable The appellant has objected to selection of Motilal Oswal investment Advisors Private Limited as a comparable by the TPO. A detailed submission has been made which is summarised below.
1. Appellant rejected MOIAPL as it is primarily engaged in the business of investment banking, which is also reinforced from MOIAPL's reply to notice u/s. 133(6) the appellant has also enclosed annual report and relevant screenshots from website 2. Around 40% of revenue of MOIAPL is generated from investment banking activities. In the absence of specific segment pertaining to advisory, the company should not be considered as comparable.
3. The appellant wishes to submit that the functional dissimilarity of MOIAPL with investment advisory companies has been well settled by various judicial precedents including the appellants own case in ITAT for AY 2009-10 and Bombay HC in AY 2011-12 (refer pages 54-68 and 7-11 of the legal paper-book) 5.3.1 On the other hand, the TPO has added this company as a comparable for the following reasons:
M/s General Atlantic Pvt. Ltd.
Strategic and financial advisory services rendered by MOIAPL are comparable with the high quality investment advisory services rendered by the assessee company 2. Advisory fees is the single reportable operational income segment in the balance sheet of the company. It clearly shows that it not in the business of managing funds 3. The company is employing highly skilled set of employees, similar to the assessee company. 4. OIAPL is neither into investment banking activity nor in merchant banking activity. Merger and acquisition related advisory services in fact are advisory services which involve skilled set which are comparable to investment advisory services. 5.3.2 This company is added by the TPO as a comparable. The Hon'ble ITAT has rejected this as a comparable for AY2009-10 & 2011-12. It is observed in order for AY 2011-12 that it has been rejected in many cases by different benches of ITAT Hon'ble Bombay High Court has confirmed the decision of the ITAT for AY 2009-10. I find that the company is engaged in different activities which are not comparable to the appellant activities. Therefore, the company is rejected as a comparable. The sub ground accordingly succeeds.” We have gone through the legal paper book submitted by the assessee, on page no. 1 to 6, the Hon’ble Bombay High Court on the appeal of Revenue against the assessee, held that an investment advisor could not be compared to a merchant banker and the findings on the matter of inclusion/exclusion of comparables is a question of fact and does not give rise to any substantial question of law, hence, appeal of Revenue is dismissed. In view of Hon’ble High Court’s finding, it will be rather relevant to refer orders of ITAT in the case of assessee or any other assessee with the similar facts. Based on above, we are respectfully relying on the findings of ITAT in assessee’s own case vide A.Y. 2006- 07, ITA No. 7368/Mum/2011 A.Y. 2007-08, ITA No. 1019/Mum/2014 A.Y. 2009-10, ITA No. 2207/Mum/2016 A.Y. 2011-12, ITA No. 900/Mum/2017 A.Y. 2012-13. We further relied on the decision of ITAT vide ITA No. 776/Mum/2015 A.Y. 2010-11 in M/s General Atlantic Pvt. Ltd. the case of Tamasek Holdings Advisors India Pvt. Ltd. Vs. Dy.CIT, Circle-14(3)(1), Mumbai.
(iv) Kshitij Investment Advisory Company Ltd. (exclusion) Here-in-below, we are reproducing the findings of Ld. CIT (A) for better understanding the grievance of Revenue as under:
“Kshitij Investment Advisory Company Ltd: The appellant has submitted as under: “34. Kshitij Investment Advisory Co. Limited is selected as a comparable company by the Appellant in its transfer pricing study report. However, based on further evidences available, it is proposed to exclude Kshitij investment Advisory Co Limited from the final set of comparable companies based on the following facts.
Kshitij investment Advisory Co Limited ("Kshitij") is a subsidiary of Future group and is engaged in provision of investment advisory services However. based on the perusal of the financial statements of the company, it can be observed that during the FY 2009-10, the company and its holding company viz Future Capital Holdings Limited (FCH) entered into agreements with Ever stone Investment Advisors Private Limited, to realign its investment advisory activities Accordingly, it can be seen that the FY 2009-10 marks existence of an extraordinary event 36. Accordingly, is submitted that the above comparable company is not comparable to the business operations of the Appellant for the FY 2009-10 and A proposed to be rejected form the final set of comparable companies for comparability. The appellant has provided the Page 29 of 42 reasons in connection with exclusion of the above company vide its submission dated 12 July 2013 and submission dated 17 December 2013 37. The Ld. DCIT/TPO erred in holding Kshitij Investment Advisory Co. Limited as comparable to the assessee, thereby ignoring that in FY 2009-10, Kshitij Investment Advisory Co. Limited has undergone restructuring of business of Investment advisory.”
Further, the appellant has placed reliance on the following rulings: Name of the Judicial Rulings relied upon 1. Pr. Commissioner of Income Tax-6 Vs. Ms. Eight Roads Investment Advisors Put Ltd. (Formerly known as FIL Capital Advisors India Pvt. Ltd.) (Bombay High Court) (AY 2010-11) (1125 of 2017) 2. Carlyle India Advisors (P) Ltd vs Assistant Commissioner of Income Tax. 14(1)(2), Mumbai, (2016) 66 taxmann.com 14 (Mumbai - Trib) (AY 2010-11)
M/s General Atlantic Pvt. Ltd.
AGM India Advisors (P) Ltd vs. DCIT [2016] 70 taxmann.com 219 (Mum-Trib) (A.Y 2010-11) 4. AGM India Advisors Pvt .Ltd. vs DCIT [2017] 79 taxmann.com 86 (Mum-Trib) (AY 2011-12)” 5.4.1 The TPO has observed that this company was rejected by appellant on the ground of sales less than Rs.1 Crore. It was claimed by appellant before TPO that company manages real estate activities of Future Group. As per TPO company has undergone realignment of business with a view to have a focused and dedicated approach to investment advisory business: As per balance sheet, investment advisory fees is only reportable segment TPO also called for information u/s. 133(6) regarding salaries and found them to be high and comparable to assessee. The TPO notice that out of total income of Rs. 17.23 Cr, only Rs.6.65 Lakhs is from advisory fees received from mall Management Company. 5.4.2 The appellant has opposed inclusion of this company as a comparable by the TPO.The TPO has stated that it was rejected by the appellant in transfer pricing study because of low sales. As regards functional comparability the TPO observed that after realignment of business, the only reportable segment in balance sheet of the company was investment advisory fees. It is however noted that the issue has been discussed by Hon'ble ITAT in Carlyle India Advisors (P) Ltd vis. Assistant Commissioner of Income Tax for AY 2010-11 in its decision dated 18.05.2015. The Hon'ble ITAT has examined claim that restructuring/realignment of investment advisory business carried by the company has impacted financial results thereby rendering it as an unfit comparable and it is held that realignment /restructuring has impacted financial results and there is considerable decrease in revenue. Therefore it was held that it deserved to be excluded from final set of comparable on account of peculiar economic circumstances. I therefore accept assessee's submission and direct AO/TPO not to consider this company as a comparable while computing the ALP.” We have gone through the legal paper book submitted by the assessee, on page no. 1 to 6, the Hon’ble Bombay High Court on the appeal of Revenue against the assessee, held that an investment advisor could not be compared to a merchant banker and the findings on the matter of inclusion/exclusion of comparables is a question of fact and does not give rise to any substantial question of law, hence, M/s General Atlantic Pvt. Ltd. appeal of Revenue is dismissed. In view of Hon’ble High Court’s finding, it will be rather relevant to refer orders of ITAT in the case of assessee or any other assessee with the similar facts. Based on above, we are respectfully relying on the findings of ITAT in assessee’s own case vide A.Y. 2006- 07, ITA No. 7368/Mum/2011 A.Y. 2007-08, ITA No. 1019/Mum/2014 A.Y. 2009-10, ITA No. 2207/Mum/2016 A.Y. 2011-12, ITA No. 900/Mum/2017 A.Y. 2012-13. We further relied on the decision of ITAT vide ITA No. 776/Mum/2015 A.Y. 2010-11 in the case of Tamasek Holdings Advisors India Pvt. Ltd. Vs. Dy.CIT, Circle-14(3)(1), Mumbai.
10. ICRA Management Consulting Services Limited On the perusal of the directors' report and also the remarks of the TPO, it is found 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, banking etc, to enable the AE to take decision for making investments. The functions of consultancy/advisory have to be seen as its core competence area and not in the field in which such M/s General Atlantic Pvt. Ltd.
consultancy is given. Under the TNMM, one has to see the transaction undertaken are comparable or not and whether any adjustment is required to obtain a reliable result, because under TNMM the net margin are less affected by transactional differences and is more tolerant to some minor functional differences between controlled and uncontrolled transactions. However, if any unique function or property significantly affects the operating costs: or net margin or has a bearing in the generation of revenue itself, then it cannot be considered to be a fit comparable for bench marking 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 has accepted ICRA to be a comparable and in later years the Tribunal in assessment years 2008- 09 and 2009-10 has held ICRA Management to be good comparable qua the functions of the assessee and there being no material change on facts, functional profile or any other factor in this year, then as matter of consistency, findings given in the earlier years cannot be deviated from. 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, ICRA Management is a good comparable and should be included in the list of final comparables.
IDC India Ltd. 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, firstly, on the ground that this M/s General Atlantic Pvt. Ltd.
company is also engaged in the advisory and consultancy services for the purpose of investment made in various sectors and secondly, it has been found to be good comparable by the TPO in the assessment years 2007-08 and 2009-10. Once company has been held to be good comparable consistently for three years then without any change in the material facts, it cannot be held that this comparable could be rejected in this year. Accordingly, same is directed to be included in the comparability Test.
Motilal Oswal Investment and Advisor Ltd. 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 includes portfolio management, credit syndication, counselling on M&A, etc. This whole range of functions and activities carried out by Motilal Oswal is definitely are far wider and much different from investment advisory services where core functions is to give M/s General Atlantic Pvt. Ltd.
advices for making the investments in diversified fields. A company which is engaged in merger and acquisitions, private equity syndication, loan/credit syndication and performing most of the function of a Merchant Banker, then the entire functions and transactions affects the generation of revenue and margins. Such functions are entirely different from investment advisory services. Mere classification of revenue as advisory fees will not put the company in a comparable basket sans functional similarity and transactional analysis. Thus, Motilal Oswal cannot be put into the comparability list and is directed to be excluded.
Kshitij Investment Advisory Company Ltd. 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 business of the comparable as a result of realignment with another company is evident from the annual report of the company. Considering the aforesaid aspect, the Tribunal, Mumbai Bench, in Carlyle India Advisors (P) Ltd. ITA No. 1040/Mum./2015, order dated 18th November 2015 (supra) for the very same assessment year held that this company cannot be treated as a comparable on account of peculiar economic circumstances arising out of its realignment. Relevant observation of the Tribunal is extracted hereunder for the sake of convenience: "We have carefully considered the rival stands on the issue of exclusion of Kshitij Investment Advisory Co. Ltd. from the final set of comparables. The first and the foremost resistance articulated by the Revenue to oppose the exclusion of the said concern from the final set of comparables is the fact that such concern was included by the assessee itself as a comparable in its transfer pricing study. As per the Revenue, since the said concern has been adopted by the assessee as a comparable, M/s General Atlantic Pvt. Ltd.
it is impermissible for the assessee to raise a plea asking for its exclusion in the process of determination of average margins under the TNM method. In our considered opinion, the proposition being canvassed by the Revenue is not absolute, but it has to be considered in the facts and circumstances of each case. No doubt in a situation of the type before us, the burden lies on the assessee to justify exclusion of Kshitij Investment Advisory Co. Ltd., considering the fact that initially assessee had taken it as a good comparable. Our aforesaid approach is founded on a well accepted proposition that in the course of determination of correct tax liability, it is impermissible for the Revenue to take advantage of an ignorance or mistake of the assessee in offering certain amount as income, which is more than the legally due amount. Notably, there cannot be a estoppel against the statute and it is a trite law that no tax can be levied or collected from a subject except by an authority of law. We may hasten to add here that we are not staying that on each and every aspect of the assessment declared in the return of income, an assessee is entitled to turn around and argue differently before the income tax authorities; rather, there has to be justifiable reasons shown by the assessee, duly supported by law or facts, whereby the change in stand is marited. In the present case, what the assessee is claiming is that there has been a restructuring/realignment 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) (P) 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 no impact on the financial results so as to make it incomparable with the tested transactions. We have carefully considered the aforesaid plea set up by the Revenue and in this context, we may briefly refer to the "Business Review" outlined in the Directors Report of the said concern, placed at page 536 of the paper book. It is stated therein that the investment advisory business has been realigned and all the employees have been transferred to Ever stone Investment Advisors (P.) Ltd. during the year under consideration to Ever stone Investment Advisors (P) Ltd. during the year under M/s General Atlantic Pvt. Ltd. consideration w.e.f. 1 1-2010. The note also suggests that the said concern did not enter into any non-compete agreement with Ever stone Investment Advisors (P) Ltd. but was free to pursue any activity, including the activity in relation to investment advisory services. The aforesaid aspect has been highlighted by the Revenue to say that the said concern continues to be in the business of rendering investment advisory services and, therefore, the restructuring does not impact the comparability of the concern. In our considered opinion, the approach of the Revenue in this context is quite flawed. Firstly, it is not disputed that the activity of investment advisory services has been realigned which included the transfer of all employees to Ever stone Investment Advisory (P) Ltd. The averments in the Director's Report suggest that post realignment; the concern is only evaluating its options to commence business operations either in some other line or in the similar line of investment advisory services. What we are trying to emphasize is that there is no averment in the Directors Report to suggest that the said concern has actually carried out any investment advisory services post realignment w.e.f. 1-1-2010. In fact, in the course of hearing before us, the ld. Representative for the assessee pointed out that a perusal of the annual report for subsequent financial year of 2010-11 showed no such operations by the said concern. Therefore, considering the aforesaid fact situation, the instant financial year of the said concern is containing peculiar economic circumstances and the same has to be taken into consideration while evaluating the rationale for its inclusion as a comparable. Before us, the Ld. Representative also pointed out that the said restructuring/realignment which has taken 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."
Following the aforesaid decision, the Tribunal again in case of AGM India Advisors (P) 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 M/s General Atlantic Pvt. Ltd. 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.
15. We have carefully considered the order of Ld. CIT (A) along with the order of TPO passed under section 92CA (3) and various submissions along with PB filed by the assessee. Inclusion/exclusion of comparables has already been confirmed by co-ordinating bench of ITAT and Hon’ble Jurisdictional High Court in assessee’s own case, Revenue is failed to come forward with any additional fact differentiating the earlier findings of ITAT/Hon’ble High Court. We do not found any perversity in the order of Ld. CIT (A).
16. The submissions advanced on behalf of the respective parties are mostly based upon the filtered which have been applied are essentially related to turnover, the comparable entities being functional entities, higher transfer pricing adjustments, transfer pricing analysis and profits declared by the companies. We would like to say that the Ld. CIT (A) has considered the case of each comparable company and discussed the parameters of comparables for the purposes of including/excluding the same as comparables on the basis of the functionality of the said companies in the public domain.
On a through consideration, we find that the rational for inclusion/exclusion of each company have been dealt with in extensive detail by the Ld. CIT (A) and we are in agreement with the reasons recorded by the Ld. CIT (A). Further, the reasons given for inclusion/exclusion of the comparables by the Ld. CIT(A) have been decided on the basis of decisions rendered by ITAT/Hon’ble M/s General Atlantic Pvt. Ltd.
High Court either in the case of the assessee itself and/or in other cases after proper consideration of the facts.
18. In view of the above facts, the appeal filed by the Revenue is therefore, dismissed and the order passed by the Ld. CIT (A) is sustained on merits.
19. Ground No.2 pertains to deleting the disallowance of Rs. 51, 03,678/- on account of Foreign Travel Expenditure. Findings of Ld. CIT (A), we are reproducing here-in-below for the sake clarity and reference: “Disallowance of foreign travel expenditure of Rs. 51, 03,678/- In ground no. 2, the appellant has stated that the Ld. DCIT has erred in (i) disallowing the foreign travel expenditure (ii) stating that the appellant has not substantiated its contention (ii) in stating that it is capital in nature and not incurred wholly and exclusively for the purpose of business (v) in not appreciating that it is Incurred in connection with the business (v) not considering assessee submission in correct perspective. In ground no. 3, it is stated without prejudice that if the foreign travel expenditure were to be disallowed, the income of the appellant should be recomputed by calculating the mark-up on the cost excluding the foreign travel expenditure so disallowed. The AD has discussed this issue in Para no. 5 of the assessment order. The expenditure disallowed is part of travel expenditure and includes air fare and hotel stay expenses. The appellant provided breakup along with purpose, which is reproduced in the order with the observation that it includes expenditure incurred on meeting potential investee. The AO has disallowed the expenditure holding as under: "Although the assessee has vehemently contended that purpose behind the aforesaid expenses is an integral part of and has a direct nexus with its business and is therefore entirely for the purposes of its business, it has not substantiated its contention with any solid material evidence so as to prove the nexus of such expenses with the business activity. Since the meeting of potential invested may be a meeting related to business but it cannot be said to be wholly and exclusively for the purpose of business Therefore, the expenditure incurred on such meetings cannot be allowed Further, such M/s General Atlantic Pvt. Ltd.
meetings with potential investee is not a Revenue Expenditure but an expenditure incurred for obtaining further capital or deployment of capital which in either of the case takes the nature of capital expenses and not revenue in nature. Accordingly, the above expenditure of Rs.51,03.678/ is disallowed as the same is on capital account and for not incurred for the purpose of business" During the appellate proceedings, the appellant has filed a detailed submission. Details (including contentions, case laws relied upon) submitted before the AO are included in the paper book and discussed in the submission. Further, the following is submitted: “9. In this regard, the appellant would like to draw your Honour’s kind attention to the provisions of section 37(1) of the Act which provide that expenditure should be allowed as a deduction in computing the income chargeable under the head "Profits and gains of business or profession" provided the following conditions are satisfied. i. The expenditure should not be an expenditure covered under sections 30 to 36 of the Act: ii. In The expenditure is neither in the nature of capital expenditure nor personal expenditure, and iii. The expenditure is laid out or expended wholly and exclusively for the purposes of business or profession. The learned DCIT has disallowed the foreign travel expenditure under the second and the third limb i.e. by treating the expenditure incurred as not for the purposes of business and treating the same as a capital expenditure.
As mentioned above, the appellant assists GASC LLC to take an informed decision on whether or not to invest in potential target companies. In order to perform the advisory services, it is imperative for the appellant to understand the business of the potential investees and to gather relevant information. Any expenditure incurred for the above purpose is an integral part of and has direct nexus with the business of the appellant and is therefore entirely for the purposes of its business. Further, the meetings are in no way for obtaining further capital or deployment of capital and therefore expenses incurred on such foreign travel cannot be considered to be capital in nature.
11. The appellant, therefore, submits that disallowance of foreign travel expenditure incurred by the appellant on meeting with potential investees on the ground that it is not for the purpose of business/ is on capital account is not only factually incorrect but is also devoid of any merits and therefore should be deleted.
M/s General Atlantic Pvt. Ltd.
12. In this regard, the appellant places reliance on the decision of the Hon'ble Mumbai Tribunal in the appellant's own case for the assessment year 2009-10 wherein the disallowance made on account of foreign travel expenditure incurred for meeting potential investees was deleted by the Hon'ble Tribunal. A copy of the above order is enclosed herewith at page 705 to 720 of the paper book volume II. Further, the appellant places reliance on the directions issued by the DRP for the assessment year 2011-12 (copy enclosed at page 721 to 750 of the paper book volume II) wherein the DRP held that foreign travel expenses incurred in meeting investees/potential investees was revenue expenditure. Accordingly, the DRP issued directions (relevant directions at page 750 of the paper book volume II) for deletion of the disallowance made on foreign travel expenditure. The Appellant submits that the department has not preferred an appeal before the High Court for the assessment year 2009-10 and before the Tribunal for the assessment year 2011-12 on this issue.
13. The appellant also submits that in all the subsequent assessment years, the department has not made any disallowance in respect of expenditure incurred by the appellant on foreign travel. The appellant also submits that its total receipts credited to the Profit & Loss account is Rs. 52,94,21,760 and the expenditure disallowed by the DCIT on foreign travel is Rs. 51,03,678 which constitutes a mere 0.96% of its total receipts: In view thereof, the appellant submits that the DCIT be directed to the delete the disallowance. 14. The appellant also places reliance on the following judicial precedents: a. Decision of the Delhi High Court in the case of Delhi Cloth and General Mills Co. Ltd v. Commissioner of Income tax (158 ITR 64) (copy enclosed at page 784 to 787 of the paper book volume II) In the above case, it was held that expenditure incurred by assessee-company on foreign trips of its directors for attending conference meetings for purpose of advancement of its business was an allowable expenditure b. Decision of the Mumbai Tribunal in the case of Agfa India (P) Ltd v. Assistant Commissioner of Income tax (81 faxmann.com 453) (copy enclosed at page 788 to 793 of the paper book volume II) In the above case, the assessee during the course of the assessment proceedings had furnished all the details including name of the employee, place visited, purpose of visit etc in respect of foreign travel. The purpose of the visit of the employees was to attend business meetings, fairs and exhibitions, training etc. It was held that as the expenses were genuine expenses incurred wholly and exclusively for the purpose of the business and were revenue in nature, the same should be allowed as deductible expenses under section 37(1) of the Act M/s General Atlantic Pvt. Ltd.
Without prejudice to the above submissions, the appellant submits that its income consists of service fees charged to GASC LLC. Such service fees are computed on a cost plus basis i.e. the fee is determined by charging a mark-up on actual cost incurred in connection with rendition of services The above mentioned foreign travel expenditure has been considered as a component of the cost incurred and accordingly the same has been charged to GASC LLC along with mark-up.
16. Accordingly, the appellant submits that if the foreign travel expenditure is disallowed, the income of the appellant should be re-computed by calculating the mark-up on the cost excluding the disallowed foreign travel expenditure. 17. In view of the above, the appellant requests your Honour to direct the learned DCIT to delete the disallowance made of Rs.51, 03, 6784 towards foreign travel expenditure incurred during the year under consideration. Alternatively and without prejudice to the above, the appellant requests your Honour to direct the learned DCIT to re-compute the income of the appellant by calculating the mark up on the cost excluding the disallowed foreign travel expenditure." I have perused the assessment order and assessee submissions. The air fare and hotel expenses are incurred for attending various meetings in foreign countries. It is submitted that the appellant assists GASC LLC to take an informed decision on whether or not invest in potential target company. Accordingly the expenditure is incurred on meetings with potential investees and to gather relevant information. It is therefore stated that expenditure has direct nexus with the business of the appellant and also it is not connected with obtaining further capital or deploying it. I find that the expenditure is incurred for business purposes and it is revenue expenditure. Similar additions made in AY 2009-10 and AY 2011-12 have been respectively deleted/not approved by ITAT and DRP. Therefore ground no.2 is above allowed.” 20. We have gone through the details furnished before the AO, Ld. CIT (A) and the order of ITAT in assessee’s own case for A.Y. 2009-10, (copy attached vide page 36 to 42, Para 15 PB 1).
M/s General Atlantic Pvt. Ltd.