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Income Tax Appellate Tribunal, K Bench, Mumbai
O R D E R
PER PAWAN SINGH, JM
This appeal by the assessee is directed against the final assessment order dated 30.10.2018 passed under Section 143(3) r.w.s. 144C(13) of the Income Tax Act, 1961 (hereinafter "the Act") passed in pursuance of the direction of DRP dated 10.09.2018 for A.Y. 2014-15.
The assessee has raised the following grounds of appeal: - “1. On the facts and in the circumstances, and in law the learned AO and the learned Transfer Pricing Officer ('TPO') under the directions of the Hon'ble DRP have erred in making transfer pricing adjustment of INR 5,53,65,0677- to the income of the Appellant, thereby assessing the total income of the Appellant at INR 20,92,01,169, as against returned income of INR 15,38,36,102.
2. On facts and circumstances of the case and in law, the learned AO / TPO under the directions of the Hon'ble DRP have erred in arbitrarily rejecting the economic analysis / transfer pricing study undertaken by the Appellant in M/s. Carlyle India Advisors P. Ltd. accordance with the provisions of the Act read with the Income-tax Rules, 1961('Rules'), for the determination of the arm's length price of the international transactions entered into by the Appellant.
3. On facts and circumstances of the case and in law, the learned AO / TPO under the directions of the Hon'ble DRP have erred in re-characterising the Appellant as a Knowledge Process Outsourcing service provider, and not appreciating that it was providing non-binding investment advisory and related support services to its associated enterprises.
4. On facts and circumstances of the case and in law, the learned AO / TPO under the directions of the Hon'ble DRP have erred in not following decisions of the coordinate bench of the Tribunal in Assessee's own case, which have been affirmed by the Bombay High Court confirming that the Assessee is providing non-binding investment advisory services.
5. On facts and circumstances of the case and in law, the learned AO / TPO under the directions of the Hon'ble DRP have erred in applying inappropriate quantitative filters, while determining the arm's length price of the international transactions entered into by the Appellant.
6. On facts and circumstances of the case and in law, the learned AO / TPO under the directions of the Hon'ble DRP have erred in rejecting companies selected by the Appellant in its benchmarking analysis for determining the arm's length price of the international transactions entered into by it.
7. Without prejudice to the other grounds of appeal
, on facts and circumstances of the case and in law,, the learned AO / TPO under the directions of the Hon'ble DRP have erred in rejecting Knowledge process Outsourcing (KPO) companies selected by the Appellant on a without prejudice basis for determining the arm's length price of the international transactions entered into by it.
8. On facts and circumstances of the case and in law, while determining the arm's length price of the international transaction entered into by the Appellant, the learned AO / TPO under the directions of the Hon'ble DRP have erred in selecting comparable companies which are not comparable to the appellant based on the parameters stated in Rule 10B(2) of the Rules.
9. On facts and circumstances of the case and in law, while determining the arm's length price of the international transaction entered into by the Appellant, the learned AO / M/s. Carlyle India Advisors P. Ltd. TPO under the directions of the Hon'ble DRP have erred in arbitrarily selecting comparable companies and not sharing the methodology for conducting the search process in violation of section 92C.
10. On facts and circumstances of the case and in law, the learned AO/ TPO under the directions of the Hon'ble DRP have erred in not granting the benefit of economic adjustments to the arm's length price of the international transactions entered into by the Appellant as required under Rule 10B(1)(e)(iii).
11. On facts and circumstances of the case and in law, the learned AO/ TPO have erred in initiating penalty proceedings under section 271(1)(c) of the Act.”
Brief facts of the case are that the assessee company, engaged in the business of providing non-binding investment advisory and related support services, filed its return of income for A.Y. 2014-15 on 28.11.2014 declaring total income of `13,34, 90,320/-. Along with the return of income the assessee furnished report in Form 3CEB reporting international transactions with its Associated Enterprises (AE). Consequent of reporting international transactions of more than Rs. 15 crores the AO made reference to the Transfer Pricing Officer (TPO) for computation of arms length price of international transactions reported by the assessee. The TPO noted that besides other international transactions the assessee reported transactions with its AE with regard to provision of investment advisory and other related support services of `88,03,72,349/-. The assessee adopted the transaction net margin method (TNMM) as most appropriate method. The assessee selected 3 comparable companies namely, Almondz Global Securities Ltd., Crisil Risk & Infrastructure Solutions Ltd. and ICRA Management Consulting Services Ltd. The assessee has shown profit level indicator by using operating profit / operating cost (OP/OC). The assessee has shown its margin based on the data for financial year 2013-14 at 15%. The arithmetic mean of comparables was at 9.51%. Accordingly the assessee claimed that its transaction with the AE is at arm‟s length. The TPO rejected all the three comparables selected by the assessee by applying export turnover
M/s. Carlyle India Advisors P. Ltd. filter. The TOP included Excel Infoways Ltd. whose mean margin is 42.62%. On the basis of single comparable included by TPO, the TPO suggested adjustment of Rs. 21,15,99,518/- as under: -
Particulars Amount in Rs. Operating income (A) 880,372,349 Less: Operating expenses (B) 765,543,934 Operating Profit (A-B) = C 114,828,416 OP to TC 15.00% Arm‟s Length Price (OP/TC) 42,64% Hence arm‟s length OP = D=42.64% x B 32,64,27,933 Arm‟s length operating income = E = (D+B) 109,19,71,867 Adjustment = (E-A) 21,15,99,518
On receipt of the report of TPO under Section 92CA(3) the AO passed draft assessment order dated 4th December, 2017 by making adjustment of Rs. 21,15,99,518/-. A copy of the draft assessment order was served upon the assessee. The assessee, on receipt of the draft assessment, exercised his option for filing objection before the DRP. The assessee, besides objecting the characterisation of assessee by TPO in place of non–binding investment advisory and related services also challenged inclusion of comparable and rejecting the comparables selected by the assessee without considering the functions performed assets employed and risk assumed (FAR) analysis of the assessee vis-a-vis the comparable selected. The DRP sustained the re-characterisation of the TPO in place of investment advisory and related support services, however, directed the TPO to examine the computation of operating margins by the assessee and to exclude extra ordinary items, if any. On receipt of the direction of DRP the AO/TPO, while giving effect to the direction of DRP, the TP adjustment was reduced to Rs. 5,53,65,067/- which was added/adjusted with the income of the assessee in the final assessment order passed under section 143(3) read with section 144C(13). Thus aggrieved the assessee has filed the preset appeal before us.
We have heard the submissions of the learned authorised representative (ld. A.R.) of the assessee and the learned departmental
M/s. Carlyle India Advisors P. Ltd. representative (ld. D.R.) for Revenue and perused the material available on record. Though the assessee has raised multiple grounds of appeal, however, in our considered views; all the grounds of appeal can be classified into two broad issues, i.e. (i) re-characterisation of assessee by TPO as knowledge process outsourcesing (KPO) in place of non–binding investment advisory and related services and (ii) exclusion/inclusion of various comparable companies. The learned A.R. of the assessee submitted that on similar set of facts in assessee's own case for A.Y. 2012-13 and A.Y. 2013-14 the assessee was held as non–binding investment advisory and related services and cannot be compared with merchant banking, investment banking or KPO‟s. The learned A.R. for the assessee submits that the Tribunal, while deciding the assessee‟s case for A.Y. 2012-13 and A.Y. 2013-14 followed the decision in assessee's own case for earlier years and the order of the Tribunal for A.Y. 2007-08, which is affirmed by the Hon'ble Jurisdictional High Court. In AY 2007-08 the Tribunal after analysing the „service agreement‟, which is effective from 01.04.2006 held that the assessee is engaged in providing non-binding investment advisory and related support services. The said service agreement is still continuing.
On the other hand, the learned D.R. for the Revenue supported the order of the lower authorities and submitted that there is no clear finding of the Tribunal on re-characterisation of assessee. Therefore in the absence of clear finding of the Tribunal the assessee cannot be treated as non–binding investment advisory and related services.
The TPO while making transfer pricing (TP) adjustment issued show cause notice dated 09.10.2017, as to why the assessee should not be characterised as KPO by taking view that most of the employee of the assessee are drawing high salary. The assessee filed its reply and contended that based on FAR (functions performed asset employed and the risk assumed), the assessee can be characterised as limited risk bearing captive investment advisory and related services
M/s. Carlyle India Advisors P. Ltd. provider. It was also contended that the salary paid to the employee of assessee are commensurate with the role and responsibilities undertaken by them, and is comparable with the industries slandered. The TPO instead of examining the contents of the reply furnished by the assessee followed the order of DRP for AY 2013-14, wherein the objections of the assessee was rejected. In AY 2013-14 the DRP held that investment service provider may function as KPO. The DRP upheld the action of TPO by following its order for preceding assessment year (AY 2013-14).
We have noted that on identical set of facts in assessee's own case for assessment years 2012-13 and 2013-14 in & 6321 dated 27.02.2019, wherein the assessee‟s appeal for A.Y. 2013- 14 has raised specific ground for re-characterisation of assessee as a KPO in place of non–binding investment advisory and related services. The Tribunal while considering the functional similarities/ dissimilarity of the assessee with other comparable held that the assessee is engaged in providing non-binding investment advisory and related support services. Though, no specific finding is mentioned in the order for AY 2012-13 and 2013-14, however, the objection of the revenue that the assessee is KPO, is virtually rejected. We have further seen that in appeal for AY 2007-08 the coordinate bench of the Tribunal after detail analysis of service agreement held that the assessee is providing non-binding investment advisory and related support services. The order of the Tribunal was upheld by Hon‟ble Bombay High Court in ITA No. 1286 of 2012 dated 22.02.2013 reported vide (2013) 357 ITR 584(Bom).
No change in the facts or the functions undertaken by the assessee is brought to our notice. The subsistence of „service agreement‟ which is in existence since 01.04.2006, till the period under consideration, is not disputed by the lower authorities. No contrary law is also brought to our notice. More over the international transaction related with provision of non-binding investment advisory
M/s. Carlyle India Advisors P. Ltd. and related supported services, reported by the assessee in its Form- 3CEB, was identified and examined by TPO for computation of ALP. Thus, in absence of any contrary law or fact and respectfully following the decision of earlier years wherein the assessee was held as engaged in providing non-binding investment advisory and related support services. With the aforesaid observation, we hold that lower authority was not correct in re-characterizing the assessee as KPO in place of providing non-binding investment advisory and related support services of the year under consideration. In the result, this ground of appeal is allowed.
The broad issue No. 2 relates to exclusion and inclusion of comparables. The learned A.R. of the assessee submits that the TPO has wrongly rejected the three comparables selected by the assessee namely, Almond Global Securities (Almond), Crisil Risk and Infrastructure Solutions Ltd. (Crisil) and ICRA Management Consultancy Services Ltd. (ICRA) and included Excel Infoways Ltd. The learned A.R. submitted that Excel Infoways Ltd. was included on the basis of the order for A.Y. 2012-13. This comparable, Excel Infoways Ltd. was excluded by the Tribunal in earlier years.
For inclusion of Almond, Crisil and ICRA, the ld. AR of the assessee submits that these comparable were allowed as comparable in assessee‟s own case for A.Y. 2013-14 and Excel Infoways Ltd. was excluded in A.Y. 2012-13. The ld. AR for assessee submits that in case all three abovesaid comparable i.e. Almond, Crisil and ICRA are included and Excel Infoways Ltd. is excluded the mean margin of assessee would be with a tolerance range.
On the other hand, the ld. DR for the revenue supported the order of lower authorities.
We have considered the submission of both the parties and find that co-ordinate bench of Tribunal in assessee‟s own case for A.Y. 2013-14 in dated 27.02.2019 while
M/s. Carlyle India Advisors P. Ltd. considering the comparability of Almond, Crisil and ICRA passed the following order:
“41. We have heard the authorized representatives for both the parties, perused the orders of the lower authorities and the material available on record. We shall first advert to the maintainability of the exclusion of certain companies which were selected by the assessee as comparables in its TP study report, but the same not finding favour with the TPO/DRP were excluded from the final list of comparables, as under:
(A) CRISIL RISK AND INFRASTRUCTURE SOLUTIONS LTD: We find from a perusal of the „notes‟ to the financial statements of Crisil Risk and Infrastructure Solutions Ltd. that it is a leading advisor to regulators and governments, multilateral agencies, investors and large public and private sector firms and is providing a comprehensive range of risk management tools, analytics and solutions to financial institutions, banks and corporates. In our considered view the provision of advisory services by the aforementioned company can safely be held to be comparable to the investment advisory services that were provided by the assessee during the year under consideration. The aforementioned company was rejected as a comparable by the TPO/DRP for the reason that it had failed the export filter. We have deliberated at length and are unable to persuade ourselves to subscribe to the exclusion of the aforementioned company viz. Crisil Risk and Infrastructure Solutions Ltd. as a comparable for benchmarking the international transactions of the assessee for the year under consideration. We find that the DRP had in the assesses own case for the immediately preceding year viz. A.Y. 2012-13 directed the TPO not to consider export filter as it was not a relevant filter in the case of the assessee, since the services were rendered by the assessee for the A.E in India and also investments were to be made in India. In our considered view as there is no change in the facts during the year under consideration as against that of the immediately preceding year
M/s. Carlyle India Advisors P. Ltd. viz. A.Y. 2012-13, therefore, upholding of the application of the export filter by the DRP by adopting an inconsistent approach cannot be accepted. Our view that in absence of any change in the facts the principle of consistency has to be followed finds support from the judgments of the Hon’ble Supreme Court in the case of (i). Radhsoami Satsang Vs. CIT (1992) 193 ITR 321 (SC) and (ii). CIT Vs. Excel Industries ltd. (2013) 358 ITR 295 (SC) and the judgment of the Hon’ble High Court of Bombay in the case of Pr. CIT Vs. Quest Investments Advisory Pvt. ltd. (ITA No. 280 of 2016) (Bom). Apart therefrom, we find that Crisil Risk and Infrastructure Solutions Ltd. was in itself accepted by the TPO as a comparable in the case of certain assesses which were providing investment advisory services viz. (i) Kitara Capital Pvt. Ltd. Vs. ITO (ITA No. 130/Mum/2014; and (ii) General Atlantic (P) Ltd. Vs. DCIT (2015) 64 taxamann.com 423 (Mumbai). We thus in the backdrop of our aforesaid observations are of the considered view that the TPO/DRP has erred in excluding the aforementioned company viz. Crisil Risk and Infrastructure Solutions Ltd. from the final list of the comparables. In terms of our aforesaid observations, we herein direct the A.O/TPO to include the said company viz. Crisil Risk and Infrastructure Solutions Ltd. in the final list of comparables for benchmarking the international transactions of the assessee during the year under consideration.
(B) ALMONDZ GLOBAL SECURITIES LTD: We have perused the „Annual report‟ of the aforementioned company and find that the business of the assessee during the year comprised of providing consultancy in the financial areas. The assessee has taken the margin earned by the aforementioned company under the segment of Corporate Finance and Advisory Fee segment. As per the „annual report‟ of the company the SEBI had passed two ad interim ex-parte orders on 28.12.2011 (which were confirmed vide interim orders dated 11.09.2012 and 21.09.2012), as per which the company was prohibited from taking new assignment or involvement in any new issue of capital
M/s. Carlyle India Advisors P. Ltd. including IPO, follow-on issue etc. from the securities market in any manner whatsoever, from the date of the order till further directions. In sum and substance, the aforementioned company having been debarred had not undertaken any merchant banking activities during the under consideration viz. A.Y. 2013-14. We find substantial force in the contention advanced by the ld. A.R that in the backdrop of the aforesaid facts as the aforementioned company i.e. Almondz Global Securities ltd. which during the year under consideration viz. A.Y. 2013-14 was purely into research based investment advisory, thus are of the considered view that the same was rightly selected as a comparable by the assessee. Insofar, the rejection of the said company as a comparable by the TPO/DRP is concerned, we find that the same is for the reason that the said company had failed the export filter. We are unable to subscribe to the aforesaid view so taken by the lower authorities and for the reasons discussed at length by us hereinabove, that as observed by the DRP in the case of the assessee for A.Y. 2012-13 the export filter was not relevant in the case of the assessee, thus do not find any favour with the said observations so drawn by the lower authorities and are of the considered view that the TPO/DRP had wrongly rejected the aforementioned company viz. Almondz Global Services Ltd. as a comparable in the case of the assessee. In terms of our aforesaid observations, we direct the AO/TPO to include the abovementioned company viz. Almondz Global Services ltd., in the final list of comparables for the purpose of benchmarking the international transactions of the assessee for the year under consideration.
(C) ICRA MANAGEMENT CONSULTING SERVICES LTD: We find that ICRA Management Consultancy Ld. is into advisory and management consultancy, while for the assessee is into providing non-binding investment advisory services. In our considered view as the functions performed in investment advisory as well as in management consultancy remain the same, thus a company providing management consultancy can safely be M/s. Carlyle India Advisors P. Ltd. taken as a comparable as against that involved in providing investment advisory. We find that the various objections raised and the basis adopted by the ld. D.R to justify the exclusion of the aforementioned company viz. ICRA Management Consulting Services Ltd. as comparable in the case of the assessee, had been rebutted and dislodged by the ld. A.R in his submissions placed in the appeal of the assessee for A.Y 2012-13. We are of the considered view that as the facts of the case before us, as well as the functional profile of the assessee and the aforementioned company viz. ICRA Management Consulting Services Ltd. had not witnessed any change during the year under consideration, therefore, our observations recorded for including the said company as a comparable in the case of the assessee for A.Y 2012-13 shall apply mutatis mutandis in the present appeal of the assessee for A.Y 2013-14. We thus in terms of our aforesaid observations are of the considered view that the assessee had rightly included the aforementioned company viz. ICRA Management Consulting Services Ltd. as a comparable in the case of the assessee and the same had wrongly been excluded by the TPO/DRP. In terms of our observations recorded while disposing off the appeal of the assessee for A.Y 2012-13 i.e in we herein direct the A.O/TPO to include ICRA Management Consulting Services Ltd. in the final list of comparables for benchmarking the ALP of the international transactions of the assessee during the year under consideration viz. A.Y 2013-14.”
Now adverting to comparability of Excel Infoways Ltd. the ld AR for the assessee submits that this comparable is predominantly engaged in outsourcing services. It has abnormal business activities and fluctuating margin during this financial year. This comparable was included by TPO in AY 2012-13; however, the DRP excluded this company from the final set of comparable. The assessee in its reply before TPO objected the inclusion of this comparable company.
M/s. Carlyle India Advisors P. Ltd. Despite bringing this fact to the notice of DRP, the inclusion of this comparable was upheld.
On the other hand the ld. DR for the revenue supported the order of TPO/DRP.
We have considered the rival submissions of the parties and have gone through the orders of the TPO/DRP. During TP adjustment proceedings the TPO after characterising the assessee as KPO, the TPO issued show cause notice date 09.10.2017 as to why this comparable company should not be included. The assessee filed its reply dated 17.10.2017, which is extracted by TPO in para 5.6 of his order. The assessee objected for inclusion on the ground that this company is in the different business, it is in BPO and IT enabled services and development infrastructure facilities, low employee cost, different in asset and unusual business year. The contentions of the assessee were not accepted by TPO. The TPO held that the contention of the assessee is not correct and that the annual report of this company clearly mentioned that it was industry effect and not company specific. The industry scenario affects all the business at the same time so it cannot be considered as unusual to reject the comparable. The DRP affirmed the action of the TPO by taking view that they have not find much difference in the function profile of this comparable and that it is engaged in the business of providing customer care services.
We have noted that the assessee despite bringing the fact on record that Excel Infoways was excluded by DRP itself in AY 2012-13, the DRP upheld the order of TPO, without bringing material difference for the year under consideration to justify its inclusion. We have further noted that the TPO himself identify this company as back office services to its AE‟s. More over unusual business year is also not disputed by the TPO. Even otherwise this comparable was included by TPO by treating the assessee as KPO. The assessee has placed on M/s. Carlyle India Advisors P. Ltd. record the annual report of this company at page no. 119 to 186 of the paper book. We have carefully perused the annual report of this comparable company. Perusal of annual report of this comparable company shows that this company is engaged in providing business support service; IT enabled services and development of infrastructure facilities. Considering the segmental reporting of the comparable company, in our view this is not a valid comparable with the assessee which is engaged in providing non-binding investment advisory services. Therefore, we direct the TPO to exclude this comparable from the final set of comparable.
Considering the decision of Tribunal in assessee‟s own case for earlier year wherein three comparable namely Almond, Crisil and ICRA was considered as valid comparable. Further, we have directed to exclude Excel Infoways Ltd on the basis of order of DRP for AY 2012-13 and our discussion in para 17, therefore, we find that both the substantial ground of appeal are covered in favour of assessee. Considering the facts that we have allowed both the substantial ground of appeal in favour of assessee therefore, adjudication on the issue related with economic analysis has become academic.
In the result, the appeal filed by the assessee is allowed. Order pronounced in the open court on 15th July, 2020.