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Income Tax Appellate Tribunal, “K” BENCH, MUMBAI
Before: SHRI SAKTIJIT DEYAND SHRI MANOJ KUMAR AGGARWAL
Date of Hearing – 04.04.2019 Date of Order – 21.06.2019 2 IIML Assets Advisors Ltd. O R D E R PER SAKTIJIT DEY. J.M.
Aforesaid cross appealsarise out of the order dated 20th April 2017, passed by the learned Commissioner of Income Tax (Appeals)– 56, Mumbai, for the assessment year 2011–12.
./2017 Assessee’s Appeal
Grounds no.1 and 3, being general in nature do not require specific adjudication.
In ground no.2, the assessee has challenged rejection / selection of certain comparables.
Brief facts are, the assessee, an Indian Company, is engaged in the business of rendering periodic advice on investment, finance, management, consultancy and other related activities. Assessee’s Associated Enterprises (AEs) based in Mauritius are Saffron Capital Advisors Ltd. and IL & FS Investment Advisors LLC. The AEs are leading real estate advisory fund managers and provide service to real estate funds. For providing services to the funds sufficiently, the AEs require assessee’s assistance. Accordingly, during the year under consideration, the assessee provided investment advisory services to its AEs and earned revenue of ` 30,53,59,134. In the transfer pricing
3 IIML Assets Advisors Ltd. analysis the assessee benchmarked the arm's length price of the services rendered by applying Transactional Net Margin Method (TNMM) as the most appropriate method with operating profit to operating cost as the profit level indicator. The assessee selected a single comparable viz. Crisil Risk and Infrastructure Solutions Ltd., as comparable with margin of 15.85%. Since the margin shown by the assessee at 19.84% was higher than the margin of the comparable, the price charged to the AE for services rendered was claimed to be at arm's length. Though, the Assessing Officer accepted TNMM as the most appropriate method, however, neither he was convinced with the transfer pricing analysis of the assessee nor the comparable selected. Ultimately, the Transfer Pricing Officer rejected the transfer pricing analysis of the assessee as well as the comparable selected. Having done so, the Transfer Pricing Officer called upon the assessee to show cause as to why the companies selected by him in assessment year 2010–11 should not be taken as comparable in the impugned assessment year as well. Though, the assessee objected to the proposed action of the Transfer Pricing Officer, however, rejecting the objections of the assessee, the Transfer Pricing Officer ultimately selected three companies as comparable with arithmetic mean of 59.98% as detailed below:–
4 IIML Assets Advisors Ltd.
Sl. Profit Level Name of Company no. Indicator 1. Motilal Oswal Investment Advisors Pvt. Ltd. 88.80% 2. Ladderup Corporate Advisory Pvt. Ltd. 55.52% 3. New Berry Advisors Pvt. Ltd. 35.63% Arithmetic mean 59.98%
Applying the arithmetic mean of the comparables to the operating cost of the assessee, the Transfer Pricing Officer determined the arm's length price of the international transaction with AEs at ` 40,76,48,054, as against the price charged by the assessee at ` 30,53,59,134. The resultant short fall of ` 10,22,88,920, was treated as adjustment to the arm's length price. While completing the assessment, the Assessing Officer added back the adjustment suggested by the Transfer Pricing Officer. Against the assessment order so passed, the assessee preferred appeal before the first appellate authority.
After considering the submissions of the assessee, learned Commissioner (Appeals) directed exclusion of Motilal Oswal Investment Advisors Pvt. Ltd. and New Berry Advisors Pvt. Ltd. from the list of comparables. However, he rejected assessee’s contention to exclude Ladderup Corporate Advisory Pvt. Ltd. as a comparable. Further, he also rejected assessee’s submissions to include Crisil Risk
5 IIML Assets Advisors Ltd. and Infrastructure Solutions Ltd. as a comparable. Being aggrieved with the aforesaid decision of learned Commissioner (Appeals), both, the assessee and the Revenue are in appeal before Tribunal. Hereinafter we will deal with selection / rejection of the comparables objected before us by the assessee.
CRISIL RISK AND INFRASTRUCTURE SOLUTIONS LTD. i)
The aforesaid company, though, was selected by the assessee in its transfer pricing analysis, however, the company was rejected by the Transfer Pricing Officer since the Financial Year of the company ends on 31stDecember 2010, as against the Financial Year of the assessee ending on 31st March 2011. Thus, it was observed by the Transfer Pricing Officer that since the financial year of the assessee and Crisil Risk and Infrastructure Solutions Ltd., does not match, it cannot be selected as comparable. Learned Commissioner (Appeals) also agreed with the view expressed by the Transfer Pricing Officer.
The learned Authorised Representative submitted, merely because the financial year of the assessee and the comparable are different, it cannot be rejected. He submitted, if the comparables financial results for March ending can be worked out reliably and is available, it can be accepted as comparable. He submitted, the financial data of the company for the financial year ending on March
6 IIML Assets Advisors Ltd.
2011 is available in the public domain and the assessee has furnished the working of the financial data of the company up to March 2011 before learned Commissioner (Appeals). However, learned Commissioner (Appeals) has failed to consider the submissions of the assessee as well as the working furnished while rejecting the comparable. Thus, he submitted, the company being otherwise functionally similar to the assessee should be included as comparable. In support, learned Authorised Representative relied upon the following decisions:– i) CIT v/s Mercer Consulting India Pvt. Ltd., [2017] 390 ITR 615 (P&H); ii) CIT v/s Mc Kinsey Knowledge Centre India Pvt. Ltd., dated 27.03.2015 (Del. HC); iii) Aegis Ltd. v/s DCIT, [2017] 78 taxmann.com 275 (Mum.); and iv) Advise Market Software Development Centre Pvt. Ltd. v/s ITO, [2018] 94 taxmann.com 179 (Bang.).
The learned Departmental Representative strongly relying upon the observations of the Transfer Pricing Officer and learned Commissioner (Appeals) submitted, since the financial year of the assessee and this company are different, it cannot be treated as comparable to the assessee as the financial data of the comparable corresponding to the financial year followed by the assessee is not available. The learned Departmental Representative submitted, as per
7 IIML Assets Advisors Ltd. rule 10B(4), the comparability analysis has to be done on the basis of the data relating to the financial year in which the international transaction has taken place. Thus, he submitted, this company cannot be treated as comparable. In support, he relied upon the following decisions:– i) CIT v/s PTC Software India Pvt. Ltd., [2017] 395 ITR 176 (Bom.); ii) DCIT v/s Ocwen Financial Solutions Pvt. Ltd., [2018] 96 taxmann.com 505 (Pune); and iii) Dover India Pvt. Ltd. v/s DCIT, [2017] 81 taxmann.com 245 (Pune); and iv) CIT v/s Principal Global Services Pvt. Ltd., [2018] 95 taxmann.com 315 (Bom.).
Further, the learned Departmental Representative submitted, in assessment year 2008–09 though this company was selected by the assessee but was rejected by the Tribunal. He submitted, the company has two segments and 50% of its revenue comes from risk management services. Therefore, the company is also not functionally similar to the assessee. Therefore, the company is also not functionally similar to the assessee.
In rejoinder, the learned Authorised Representative submitted, in the decisions of the Hon'ble Jurisdictional High Court cited by the learned Departmental Representative, the facts are different as in 8 IIML Assets Advisors Ltd.
those cases the data corresponding to the financial year of the assessee were not available which is not the fact in assessee’s case. As regards the functionality of the company, the learned Authorised Representative submitted, though the company is having two segments, however, the segmental details relating to the advisory services are available in the financial statements. The learned Authorised Representative submitted, in the transfer pricing analysis the assessee has only considered the advisory segments of the company. The learned Authorised Representative further submitted, the company was rejected in the assessment year 2008–09 since the Transfer Pricing Officer wanted to compare the research service segment. Thus, he submitted, the company can be treated as comparable subject to verification of the working of financial results for the financial year 2010–11 as furnished by the assessee before learned Commissioner (Appeals).
We have considered rival submissions and perused the material on record. The comparability of the company has two aspects. The first aspect is, the assessee and the comparable have different financial years. Undisputedly, while the financial year of the assessee ends on 31st March that of the comparable ends on 31st December. It is the stand of the Department that the company is not comparable because the financial data of the comparable expenditure to the financial year
9 IIML Assets Advisors Ltd. of the assessee is not available. Per contra, it is the submission of the assessee that financial data of the comparable for the financial year ending on 31st March 2011 is available in public domain which can be extrapolated to get the financial results of the company for the financial year 2010–11. In this context, the assessee has also furnished a working of the financial results of the company for the 31st financial year ending March 2011 before the learned Commissioner (Appeals). As per rule 10B(4), the data to be used in analyzing the comparability of uncontrolled transaction with the international transaction shall be the data relating to the financial year in which the international transaction has been entered into. Thus, as per the plain reading of the aforesaid rule, if the data of the comparable relating to the financial year corresponding to the financial year followed by the assessee is available, it can be compared. Therefore, merely because the assessee and the comparable followed different financial years that by itself does not make the company incomparable if otherwise it is functionally similar to the assessee. This view has been expressed by the Hon'ble Gujarat High Court in Mercer Consulting India Pvt. Ltd. (supra). The same view has been expressed by the Hon'ble Delhi High Court in McKinsey Knowledge Centre India Pvt. Ltd. (supra). In these decisions, the Hon'ble High Courts have held that if from the data available on record the result for the 10 IIML Assets Advisors Ltd. financial year which is followed by the assessee can reasonably be extrapolated, then the comparable cannot be excluded solely on the ground that it has different financial year ending. As regards the decisions of the Hon'ble Jurisdictional High Court in PTC Software India Pvt. Ltd. (supra) and Principal Global Services Pvt. Ltd. (supra) cited by the learned Departmental Representative, it needs to be mentioned, it was not a case before the Hon’ble High Court that though the comparable was following a different financial year, however, the data relating to the financial year followed by the assessee is available. Therefore, to that extent, the aforesaid decisions cited by the learned Departmental Representative are factually distinguishable. The aforesaid factual position has been clearly brought out in the decision of the Co–ordinate Bench in Aeigis Ltd. (supra) and Advise Market Software Development Centre Pvt. Ltd. (supra). Therefore, following the decisions of the Hon’ble Gujarat High Court and Hon’ble Delhi High Court cited supra and the decisions of the Tribunal referred to above, we in principle, agree that even though the comparable may be following a different financial year, however, if financial data of the comparable relating to the financial year followed by the assessee is available and which is authentic and can be relied upon, then, the company should not be rejected as a comparable. Of course, the company should be otherwise functionally similar to the 11 IIML Assets Advisors Ltd. assessee. In view of the aforesaid, we direct the Assessing Officer to examine the working of the financial result of this company for the financial year ending on 31st March 2011 and thereafter decide the issue.
The other aspect is with regard to the functional comparability of the company with the assessee. It is the contention of the learned Departmental Representative that the company has more than one segment and the income derived from segments other than investment advisory segment are more. From the audited financials of the company submitted by the learned Departmental Representative, it is seen that during the year under consideration the company has earned substantial income from research services and rating services which are different from advisory services. In this regard, it is the contention of the assessee that the company has maintained segmental details relating to all the segments and the assessee has carried out the comparability analysis after considering advisory service segment only. It is relevant to observe, while deciding the issue relating to the comparability of the aforesaid company in assessee’s own case for assessment year 2008–09 in Mum./2012, dated 22nd February 2013, the Co–ordinate Bench after taking note of the fact that the company has substantial revenue from research and rating services and further taking note of the fact that in 12 IIML Assets Advisors Ltd.
the absence of adequate information it is not possible to estimate how much of the research revenue is related to advisory segment, concluded that this company has to be excluded as a comparable. Keeping in view the aforesaid decision of the Co–ordinate Bench, the Assessing Officer is directed to verify whether segmental details of the advisory service segment of the company can be reliable ascertained to make comparability analysis with the assessee and decide the issue accordingly. Of–course, the Assessing Officer has to provide adequate opportunity of being heard to the assessee in the matter. With the aforesaid observations, the comparability issue relating to this company is restored back to the Assessing Officer for fresh adjudication.
LADDERUP CORPORATE ADVISORY PVT. LTD. ii)
This comparable was selected by the Transfer Pricing Officer and retained by the learned Commissioner (Appeals). Objecting to the selection of this comparable, the learned Authorised Representative submitted, the company being an investment banker is functionally different from the assessee, hence, cannot be treated as a comparable. In support of such contention, the learned Authorised Representative relied upon the following decisions:–
i) Avenue Asia Advisors Pvt. Ltd. v/s DCIT, [2017] 398 ITR 120 (Mum.);
13 IIML Assets Advisors Ltd. ii) ACIT v/s Black Stones Advisors India Pvt. Ltd.. [2019] 101 taxmann.com 116 (Mum.); iii) Wells Fargo Real Estate Advisors Pvt. Ltd. v/s DCIT, [2018] 90 taxmann.com 18 (Mum.); iv) Guggen Hein Capital Management Asia Pvt. Ltd. v/s ACIT, ITA no.423/Mum./2016, dated 20.02.2019.
The learned Departmental Representative relying upon the observations of the Transfer Pricing Officer and learned Commissioner (Appeals) submitted, investment banking business of the assessee started in July 2010. He submitted that since in the current year, there is no income from investment banking business, the company was rightly selected as a comparable.
We have considered rival submissions and perused the material on record. As could be seen from the facts on record, from the initial stage of transfer pricing proceedings, the assessee has objected for inclusion of this company as a comparable primarily on the ground that the company has been registered with SEBI as a Category–I merchant banker and provides high quality service relating to the investment banking and debt capital. Further, it is the contention of the assessee that the annual report of the company for the year ended 31st March 2011, was not available in public domain. However, rejecting the aforesaid submissions of the assessee, the company was included by the Transfer Pricing Officer as a comparable and the 14 IIML Assets Advisors Ltd.
learned Commissioner (Appeals) also upheld the decision of the Transfer Pricing Officer. From the facts on record, it is evident that this company has been registered with SEBI as a Category–I merchant banking company and is engaged in merchant banking services w.e.f. July 2010. That being the case, the company is functionally different from the assessee. Considering the aforesaid aspect, the Co–ordinate Bench in Wells Fargo Real Estate Advisors Pvt. Ltd. (supra) held that the company cannot be a comparable to an investment advisory service provider. The other decisions of the Co–ordinate Bench cited by the learned Authorised Representative also express similar view. Pertinently, the aforesaid decisions of the Co–ordinate Bench relate to the very same assessment year i.e., assessment year 2011–12. Moreover, in Avenue Asia Advisors Pvt. Ltd. (supra), the Hon'ble Delhi High Court having found that this company is in the business of merchant banking has excluded the company as a comparable. Though the aforesaid decision of the Hon'ble Delhi High Court is for the assessment year 2009–10, however, the relevant facts on the basis of which the Hon'ble Delhi High Court reached their conclusion, are identical to the facts of the present appeal. In the aforesaid view of the matter, respectfully following the decisions referred to above, we hold that this company being a merchant banker is functionally different
15 IIML Assets Advisors Ltd. from the assessee, hence, cannot be treated as comparable. Accordingly, the Assessing Officer is directed to exclude the same.
In the result, assessee’s appeal is partly allowed. ./2017 Revenue’s Appeal
In this appeal, the Revenue has disputed rejection of Motilal Oswal Advisors Pvt. Ltd. as a comparable.
Brief facts are, this company was selected as a comparable by the Transfer Pricing Officer in spite of assessee’s objection. However, learned Commissioner (Appeals) accepting the contention of the assessee that the company is in the business of merchant banking and investment banking excluded it as a comparable.
We have considered rival submissions and perused the material on record. From the facts on record, it is evident that this company is engaged in the business of investment banking and merchant banking, therefore, is functionally dissimilar to the assessee. Considering the aforesaid factual position, the Tribunal in assessee’s own case for the assessment year 2008–09 cited supra, excluded this company as a comparable. The same view was reiterated by the Tribunal in assessment year 2009–10 as well. Respectfully following the 16 IIML Assets Advisors Ltd.
consistent view of the tribunal as noted above, we uphold the decision of learned Commissioner (Appeals) on this issue.
Before parting, it is necessary to observe, out of the three comparables selected by the Transfer Pricing Officer, learned Commissioner (Appeals) had excluded Motilal Oswal Investment Advisors Pvt. Ltd. and New Berry Advisors Pvt. Ltd., while retaining Ladderup Corporate Advisors Pvt. Ltd. Undisputedly, the Department has not challenged the exclusion of New Berry Advisors Pvt. Ltd. While deciding the present cross appeals, we have upheld the decision of learned Commissioner (Appeals) in excluding Motilal Oswal Investment Advisors Pvt. Ltd. Further, we have also directed exclusion of Ladderup Corporate Advisory Pvt. Ltd. In the process, all the comparables selected by the Transfer Pricing Officer have been excluded. Whereas, while considering assessee’s appeal, we have directed the Assessing Officer to reconsider assessee’s claim for including Crisil Risk and Infrastructure Solutions Ltd. (supra) as comparable with certain directions. If ultimately, the Assessing Officer after complying to our direction comes to a conclusion that Crisil Risk and Infrastructure Solutions Ltd. (supra) cannot be treated as a comparable, in that eventuality, he will be left with no comparable to benchmark the international transaction. In that case, the Assessing Officer can call upon the assessee to furnish a fresh set of comparables to benchmark
17 IIML Assets Advisors Ltd. the international transaction and after considering the submissions of the assessee may decide the issue in accordance with law.
In the result, Revenue’s appeal is dismissed.
To sum up, assessee’s appeal is partly allowed and Revenue’s appeal is dismissed. Order pronounced in the open Court on 21.06.2019