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PER PAWAN SINGH, JUDICIAL MEMBER; 1. This appeal by assessee is directed against the order of ld. Commissioner of Income-Tax (Appeals)-17, Mumbai [the ld. CIT(A)] dated 13.02.2015, which in turn arises from the assessment order passed under section 143(3) dated 25.03.2013 for Assessment Year 2010-11.
Brief facts of the case are that the assessee-company is engaged in the business of support services and sale of spares. The assessee, while filing return of income has reported international transactions with its Associate Enterprises (AE) of Rs. 5,68,26,271/- with regard to providing business support services to its AE. Mum 2015-M/s Nov India Pvt. Ltd.
The value of the international transaction was less than Rs. 15 crores, thus, no reference was made to TPO for computation of ALP. The assessee, for benchmarking its transactions with its AE adopted Transactional Net Margin Method (TNMM) as most appropriate method. On the basis of 9 comparable companies selected by the assessee, the assessee has shown mean margin of comparables at 8.04% against the assessee’s PLI at 12.37% and claimed that international transaction under this segment is at ALP. The Assessing Officer after carrying out its research, rejected 2 comparables and included 5 new comparables and on the basis of 11 final set of comparables, made the benchmarking of the international transaction and suggested the upward adjustment of Rs. 19,967,880/- in the following manner:
Operating Cost (a) Rs. 54463937/- Arm’s Length Mean Margin 41% on Cost Arm’s Length Price (b) = 141% of (a) Rs. 7,67,94,151/- Revenues shown in international transactions (c) Rs. 5,68,26,271/- Shortfall being adjustment u/s 92CA (d) = (b) – (c) 1,99,67,880/-
Aggrieved by the additions in the assessment order, the assessee filed appeal before the ld. CIT(A). Besides challenging the inclusion/exclusion of comparables, the assessee challenged the PLI calculated by Assessing Officer at 5.16% against the PLI shown by assessee at 12.37%, by excluding various operating income and expenses. The ld. CIT(A) after considering the contention of the assessee directed the Assessing Officer to verify the mistake in computing PLI and after verifying the same to recompute PLI in Mum 2015-M/s Nov India Pvt. Ltd. para-1.3.9 of his order. However, the exclusion and inclusion of various comparable was upheld. Thus, further aggrieved, the assessee has filed this appeal before us.
We have considered the submission of ld. Authorized Representative (AR) of the assessee and ld. Departmental Representative (DR) for the revenue and perused the material available on record. 6. At the outset of hearing, the ld. AR of the assessee submits that ground no.1 is general in nature, and he is not pressing ground no.2, 7, 8 & 11.
Considering the submission of ld. AR of the assessee, ground no. 1, 2, 7, 8 & 11 are dismissed as not pressed.
Ground No.3 & 4 relates to rejection/exclusion of comparable company namely Foi Global Services on the ground of abnormal losses and Overseas Manpower Corporation on the ground of consistence loss making company. The ld. AR of the assessee submits that losses suffered by comparable company cannot be a ground for rejection; the losses have occurred due to global slowdown thereby a general market trend in the concerned Assessment Year, which cannot be termed as abnormal. The ld. AR submits that the relevant data is available at page no. 460 of Paper Book. In support of his submission, the ld. AR of the assessee relied upon the decision of Hon’ble Delhi High Court in Rampgreen Solutions P. Ltd. ITA No. 102/2015. For Overseas Manpower Corporation, the ld. AR of the assessee submits that this company is not persistently loss making company. This 3 Mum 2015-M/s Nov India Pvt. Ltd. company has shown a profit in A.Y. 2008-09 and cannot be said to be a persistently loss making company. The ld. AR further submits that three year losses to be considered for persistent loss making factor. In support of his submission, the ld. AR relied upon the decision Sandvik Asia P. Ltd. In ITA No. 1088/2015 (Bom. High Court).
On the other hand, the ld. DR for the revenue supported the order of lower authorities. The ld. DR submits that the Assessing Officer has clearly brought on record that Foi Global suffered abnormal losses and Overseas Manpower Corporation was consistently loss making company.
We have considered the submission of both the parties and have gone through the orders of lower authorities. It is undisputed fact that assessee engaged in providing business support services and sales of spares. The assessee provided business support services to its AE for importing finished goods and resale. The assessee in its TP Study report benchmarked its international transaction by adopting Transaction Net Margin Method (TNMM). The method adopted by assessee is not disputed by Assessing Officer. The assessee has shown its PLI at 12.37%. The assessee selected following 11 comparable which are broadly in similar nature of business.
Sr. Comparable companies Operating No. Profit % 1 Access India Advisors Ltd. NC 2 Asian Business Exhibition and Conferences Ltd. 58.11 3 EDCIL Ltd. 7.41 Mum 2015-M/s Nov India Pvt. Ltd.
4 ICRA Management Consulting Services Ltd. 0.41 5 IDC Ltd. 13.00 6 In-house Productions Ltd. 5.81 7 India Tourism Development Corporation Ltd. 1.41 8 Ma Foi Global Services (-43.35) 9 Ma Foi Managements Consultants Ltd. (-1.70) 10 Overseas Manpower Corp. Ltd. (-21.03) 11 Technicon Chemie Ltd. NA Arithmetic Mean 2.23% 10. The assessee selected Foi Global as one of the comparable while carrying out T.P. Study. However, Foi Global was excluded by Assessing Officer on the ground that this comparable company has shown abnormal losses leading to skewed results. The ld. CIT(A) confirmed the action of Assessing Officer that loss of 0.54% is abnormal and affirmed the exclusion. The ld. AR of the assessee vehemently submitted that due to global slowdown and general market trend in the relevant Assessment Year, the losses incurred by that comparable cannot termed as abnormal and relied upon the decision of Rampgreen Solutions P. Ltd. (supra), wherein it was held that losses solely cannot be a ground for rejection of comparable. Further, in Sandvik Asia P.
Ltd. (supra), the Hon’ble Bombay High Court held that to consider a persistent loss making company three years losses to be considered as a persistent loss making factor.
Therefore, considering the decision of Hon’ble Delhi High Court in Rampgreen Solutions Pvt. Ltd. (supra) and Hon’ble Bombay High Court in Mum 2015-M/s Nov India Pvt. Ltd. Sandvik Asia P. Ltd. (supra), we direct the Assessing Officer to include Foi Global and Overseas Manpower Corporation in final set of comparable. No contrary fact or low is brought to our notice for non-inclusion of these two comparables. In the result, ground no.3 & 4 are allowed.
Ground No.5 & 6 relates to exclusion of five comparable included by Assessing Officer while making T.P. Adjustment. Against the inclusion of Crisil Ltd., the ld. AR of the assessee submits that the comparable company is functionally different and is a globally diversified analytical company providing ratings and research services. It is India’s largest rating agency.
The company has unallocable expenses of Rs. 3,82,87,229/-, thus this company cannot be treated as a valid comparable. The assets employed are huge-cannot be compared with the assessee. The company has Net Fixed Assets (NFA) of Rs. 99,84,69,854/- whereas the assessee has NFA of Rs. 12,11,800/-only. Thus, the comparable net fixed assets are 823 times than that of the assessee thereby the same cannot be treated as a valid comparable. Further, the personnel expenses are huge-cannot be compared with the assessee. This company has personnel expenses of Rs. 1,98,90,45,470/- as compared to the assessee of Rs. 2,85,01,936/- only, which is 69.8 times more than the assessee thereby, the same cannot be treated as a valid comparable. In support of his submission, the ld. AR relied upon the decisions of TPG Capital India P. Ltd. [2017] 79 taxmann.com 101 (Mum Trib.), General Atlantic (P.) Ltd. [2015] 64 taxmann.com 423 (Mum 6 Mum 2015-M/s Nov India Pvt. Ltd. Trib.), Cisco Systems (India) P. Ltd. [2014] 50 taxmann.com 280 (Bang Trib.), TPG Capital India P. Ltd. in ITA No. 880/Mum/2013 (Mum Trib), UBS Securities India P. Ltd. in ITA No. 6451/Mum/2011 (Mum Trib.) and Ceve Freight India P. Ltd. in ITA No. 4956/Del/2013 (Del Trib).
For exclusion of Sumedha Fiscal Services Ltd. The ld. AR of the assessee submits that the comparable is functionally different and the company provides corporate services, investment services and wealth management services. The company has income from investments banking and capital market operations. The assets employed by this comparable are huge and cannot be compared with the assessee. The company has Net Fixed Assets of Rs. 4,81,86,676/- whereas the assessee has NFA of Rs. 12,11,800/-. The company’s net fixed assets are 39 times than that of the assessee thereby, the same cannot be treated as a valid comparable. In support of his submission, the ld. AR relied upon the decisions of M/s General Atlantic P.
Ltd. (Mum Trib.), Goldman Sachs (I) Securities P. Ltd. in ITA No. 6912/Mum/2012 (Mum Trib.), JP Morgan India P. Ltd. in ITA No. 880/Mum/2013 (Mum Trib.), Avenue Asia Advisors P. Ltd. in ITA No. 350/2016 (Del. HC) and Xander Advisors India P. Ltd. in ITA No. 5840/Del/2012 (Del. Trib.).
For exclusion of Brescon Corporate Advisors P. Ltd., the ld. AR of the assessee submits that this comparable is functionally different. The ld. AR of the assessee further submits that the company has maintained a high 7 ITA No. 2832 Mum 2015-M/s Nov India Pvt. Ltd. recall value in the field of financial restructuring. The Income of the company is from “fee based financial services” i.e., debit resolution and debt syndication. The ld. AR of the assessee submits that the company does not have segmental information. In support of his submission, the ld. AR relied upon the decisions of TPG Global India P. Ltd. in ITA No. 880/Mum/2013 (Mum Trib.), Goldman Sachs (I) Securities P. Ltd. in ITA No. 6912/Mum/2012 (Mum Trib.), Avenue Asia Advisors P. Ltd. in ITA No. 350/2016 (Del. HC), De Shaw India Advisory Services P. Ltd. in ITA No. 1681/Mum/2014 (Mum Trib.), M/s Blackstone Advisors India Pvt. In ITA No. 1582/Mum/2014 (Mum Trib.), Saxo India P. Ltd. in ITA No. 682/Mum/2016 (Del HC) and Cashedge India P. Ltd. in ITA No. 279/2016 (Del HC).
For exclusion of ICRA Online Limited., the ld. AR of the assessee submits that this comparable/company is functionally different and into three lines of business i.e. outsourced services, information services and software products & services. The ld. AR submits that no segmental information is available. The assets employed are huge-cannot be compared.
The ld. AR further submits that the company has NFA of Rs. 99,84,69,854/- whereas the assessee has NFA of Rs. 12,11,800/- only. The company’s net fixed assets are 823 times than that of the assessee thereby, the same cannot be treated as a valid comparable. In support of his submission, the ld. AR relied upon the decisions of AGM India Advisors P. Ltd. [2016] 70 8 Mum 2015-M/s Nov India Pvt. Ltd. taxmann.com 219 (Mum Trib.), Arisaig Partners (India) P. Ltd. in ITA No. 840/Mum/2015 (Mum Trib.), Mount Kellect Capital Management India P.
Ltd. in (Mum Trib.), M/s Sparkles Dhandho Advisors P. Ltd. in ITA No. 1047/Mum/2015, Saxo India P. Ltd. in ITA No. 682/2016 (Del. HC) and Cashedge India P. Ltd. in ITA No. 279/2016 (Del HC). The ld. AR submits that no segmental information-comparable to be excluded.
For exclusion of Futura Capital Investment Advisors Ltd., the ld. AR of the assessee submits that the company is in the business of investment advisory. The income from operations of the company is from investment advisory fees. In support of his submission, the ld. AR relied upon the decision of New Silk Route Advisors Pvt. Ltd. in ITA No. 1327/Mum/2014 (Mum Trib.).
In alternative submission, the ld. AR of the assessee submits that the Assessing Officer issued show-cause notice for the first time vide notice dated 20.03.2013 for determination of ALP and proposed adjustment of Rs. 1.99 crore to the ALP of international transaction. The assessee filed its reply dated 22.03.2013. The Assessing Officer has extracted the contents of reply in para-5.5 of the assessment order. No proper and fair opportunity was given on exclusion and inclusion of various comparable and no material with regard to inclusion of various comparable was provided to the assessee.
The assessment order was passed on 25.03.2013. The assessment order was 9 Mum 2015-M/s Nov India Pvt. Ltd. passed hurriedly. The Assessing Officer also recomputed/calculated PLI of assessee without giving any show-cause notice and excluded various operating income and operating expenses.
On the other hand, the ld. DR for the revenue supported the order of lower authorities. The ld. DR further submits that the Assessing Officer has given detailed reasoning while including five comparable which are comparable with the assessee. The two comparable excluded by Assessing Officer was not a valid comparable as there was abnormal losses in both the companies.
On recomputation of PLI by Assessing Officer in excluding various operating income and expenses, the ld. DR submits that the ld. CIT(A) has already directed the Assessing Officer to recompute the PLI.
In the rejoinder submission, the ld. AR of the assessee submits that the direction given by ld. CIT(A) in para-1.3.9 is not specific and prayed to pass appropriate direction to the Assessing Officer for recomputation of PLI.
We have considered the rival submission of the parties and have gone through the orders of authorities below. We have also deliberated on various case law relied by ld. representative of the parties. So far as exclusion of Crisil Ltd. is concerned. The ld. AR of the assessee submitted that this comparable is functionally different being a globally diversified analytical company providing rating and research services being India’s largest rating agency. This comparable was included by Assessing Officer on the ground that assessee omitted to consider other comparable dealing in similar nature 10 Mum 2015-M/s Nov India Pvt. Ltd. of business support services and included by treating it as a valid comparable. Before ld. CIT(A), the assessee objected about the inclusion of this comparable on the ground of functional dissimilarity. The ld. CIT(A) has not given any finding while sustaining the inclusion of this comparable.
We have noted that Mumbai Tribunal in TPG Capital India (P.) Ltd. while considering the comparability of CRISIL Ltd. with the assessee engaged in providing sub-investment advisory services and market research and statistical data to its holding company, held that this comparable is functionally different having RPT of more than 25% and directed to exclude this comparable. We have noted that the Mumbai Bench of Tribunal in TPG Capital India Pvt Ltd Vs DCIT (ITA No. 7594/Mum/2014) excluded this comparable on the ground that RPT of this comparable is more than 25%.
Further, by making reliance on various decisions of Tribunal including in IIM Asset Advisors Ltd (ITA No. 5173/Mum/2012) it was held this comparable the advisory segment of this comparable comprise international advisory and risk management practice. Considering the decision of co- ordinate bench as referred above, this comparable has to be excluded from the list of comparable selected by TPO. 21. Now turning to the exclusion/considering of Brescon Corporate Advisor.
This comparable was included by Assessing Officer on the ground that assessee omitted to include/consider other company dealing in similar support services. The assessee objected for inclusion of this comparable 11 Mum 2015-M/s Nov India Pvt. Ltd. before the ld. CIT(A). However, no specific finding for affirming the inclusion of this comparable was given by ld. CIT(A). Before us, the ld. AR vehemently submitted that no segmental information is available. This comparable maintained a high recall value in the field of financial restructuring as per the data available on page no. 394 of the Paper Book and relied on various case laws. The co-ordinate bench of Tribunal in TPG Capital India P. Ltd. while considering the comparability of this comparable with non-binding investment advisory services and providing statistical data to its holding company excluded this comparable on the ground that this comparable company is a leading player in special situation advisory and investment services. It assist in recapitalization, merger, merger and acquisition, infusion of private equity and direct investment and thus, functionally not comparable with investment advisory. Therefore, considering the decision of Tribunal, we direct the Assessing Officer to exclude this comparable from final set of comparable.
So far as Sumedha Fiscal Services Ltd. is concerned this comparable was included by Assessing Officer on the ground that assessee omitted to include/consider other company dealing in similar support services. The assessee objected for inclusion of this comparable before the ld. CIT(A).
However, no specific finding for affirming the inclusion of this comparable was given by ld. CIT(A). As noted above, the ld. AR of the assessee vehemently argued that this comparable company is functional different and 12 Mum 2015-M/s Nov India Pvt. Ltd. is a front ranking financial company. This company provides corporate services, investment services, wealth management services and has shown income from investment banking and capital market operation. The asset employed by this comparable are huge i.e. Rs. 4.81 crore, however in assessee’s net fixed assets are only Rs. 12.11 lakhs. We have noted that co- ordinate bench of Mumbai Tribunal in JP Morgan Advisors India Pvt. Ltd. vs. DCIT (supra) while comparing with non-binding investment advisory services provided by that assessee held that Sumedha Fiscal Services Ltd. is engaged in providing merchant banking acidities. The operation of this comparable involved loan syndication and project consultancy services and directed for rejection from comparable. Further, in General Atlantic Pvt. Ltd. vs. DCIT (supra) this comparable was rejected on the ground that this company has expertise in analyzing and advising on various business and financial models. The investment services provided by this company are in the field of stock broking, depository services, commodity broking, currency derivative, broking and corporate services, financial restructuring, merchant banking and merger and take over. Considering the decision of Tribunal, we find that his comparable company is not comparable with the assessee and direct the Assessing Officer to exclude this comparable from final set of comparable.
ICRA Online. This comparable was included by Assessing Officer on the ground that assessee omitted to include/consider other company dealing in 13 ITA No. 2832 Mum 2015-M/s Nov India Pvt. Ltd. similar support services. The assessee objected for inclusion of this comparable before the ld. CIT(A). However, no specific finding for affirming the inclusion of this comparable was given by ld. CIT(A). The ld. AR of the assessee vehemently argued that this comparable company is into three line of business; outsource services, information services and software product. No segmental information is available. Asset employed by this company are huge comparative to the assessee. We have noted that co- ordinate bench of Tribunal in AGM India Advisor P. Ltd. vs. DCIT (supra) held that this comparable is engaged in merchant banking activities and cannot be accepted as a valid comparable to a company providing non- binding investment advisory services. Considering the decision of Tribunal wherein this comparable company was held to be not comparable with a company providing non-binding investment advisory services. Therefore, we direct the Assessing Officer to exclude this comparable from final set of comparable.
Future Capital Investment Advisors Ltd. This comparable was included by Assessing Officer on the ground that assessee omitted to include/consider other company dealing in similar support services. The assessee objected for inclusion of this comparable before the ld. CIT(A).
However, no specific finding for affirming the inclusion of this comparable was given by ld. CIT(A). The ld. AR of the assessee vehemently argued that this comparable company is functionally different and is in the business of 14 Mum 2015-M/s Nov India Pvt. Ltd. investment advisory. We have noted that co-ordinate bench of Mumbai Tribunal in New Silk Advisor Ltd. vs. DCIT (supra) while considering the comparability of assessee engaged in research advisory, investment opportunities, investigating potential investment, disinvestment and reinvestment and was accepted as a comparable. Further, in India Division Investment Advisors Ltd. (predecessor of Future Capital Investment), this comparable was held to be engaged in the business of asset management company and the main object of assessee was to provide finance investment advisory, facilitating services including identification of investment opportunities, conducting analysis and assessment for providing investment recommendations and consultancy services. Considering the aforesaid decision of co-ordinate bench, we are of the view that this comparable company is not functionally similar with the assessee and is not a good comparable. Hence, we direct the Assessing Officer to exclude this comparable from final set of comparable. In the result, ground no.5 & 6 of the appeal are allowed.
Ground No. 9 & 10 relates to computation of operating margin of comparable and assessee. The ld. AR of the assessee submits that assessee determined its PLI on the basis of OP/OC and shown its PLI at 12.37%. The PLI of comparable was at 8.04%. The Assessing Officer recomputed the PLI by taking view that the assessee has not excluded non-operating income and arrived at PLI at 5.16%. Similarly, PLI of comparable was also 15 ITA No. 2832 Mum 2015-M/s Nov India Pvt. Ltd. recomputed. The Assessing Officer has not given any show-cause or opportunity before disturbing/recomputation of PLI of assessee and the comparable. The assessee during the first appellate stage raised specific ground of appeal
. Though, the ld. CIT(A) directed the Assessing Officer to recompute PLI. No specific direction was given by ld. CIT(A) for exclusion or inclusion of various operating income or operating expenses. The ld. AR of the assessee submits that bad-debt, sundry balances written back, foreign exchanges gave, provision for bad-debts are operating in nature and the expenses disallowed is non-operating. The ld. AR of the assessee also furnished a chart for his reliance on various decisions and would submit that a clear cut direction for computation of PLI may be given to the Assessing Officer.
26. On the other hand, the ld. DR for the revenue submits that the ld. CIT(A) has already considered the issue and has directed the Assessing Officer for calculation of alleged error in computing PLI.
27. We have considered the submission of both the parties and perused the orders of lower authorities. We have noted that before re-computing the PLI of assessee as well as of comparable, no show-cause notice was given by Assessing Officer. The ld. CIT(A) despite accepting the errors has not given specific direction to the Assessing Officer for exclusion/inclusion of various operating income or expenses for calculation of PLI. Therefore, considering the submission of assessee and the fact that we have directed the Assessing 16 Mum 2015-M/s Nov India Pvt. Ltd. Officer to include two comparable and exclude five comparable from final set of comparable. Therefore, we direct the Assessing Officer that before computing ALP on the basis of final set of comparable to re-examine the PLI of assessee and comparable and recompute the same in accordance with law. Needless to direct that before computing the PLI of assessee and the comparables company, the Assessing Officer shall grant opportunity of hearing to the assessee. The assessee is also directed to provide complete details and substantiate its contention with regard to operating profit and expenses. The Assessing Officer is further directed that in case there is variance in opinion on account of various component of income and expenditure, the Assessing Officer shall pass a reasoned order. In the result, these grounds of appeal are allowed for statistical purpose.
28. In the result, appeal of the assessee is partly allowed.
Order pronounced in the open court on 10/01/2020.