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Income Tax Appellate Tribunal, “K” BENCH, MUMBAI
Before: SHRI SAKTIJIT DEY & SHRI MANOJ KUMAR AGGARWAL
PER SAKTIJIT DEY. J.M.
This bunch consists of a set of cross appeals pertaining to the assessment year 2009–10 and an appeal by the assessee for the assessment year 2010–11. These appeals arise out of final assessment orders passed under section 143(3) r/w section 144C(13) of the Income Tax Act, 1961 (for short "the Act") in pursuance to the directions of the Dispute Resolution Panel–III (DRP), Mumbai.
Since all these appeals pertain to the same assessee involving common issues arising out of identical set of facts and circumstances, therefore, as a matter of convenience, these appeals were heard together and are being disposed of by way of this consolidated order.
ITA no.990/Mum./2014 Assessee’s Appeal – A.Y. 2009–10
In ground no.1, the assessee has challenged the addition of ` 42,14,72,098, on account of transfer pricing adjustment relating to the interest on alleged loan advanced to the Associated Enterprise (AE).
Brief facts are, during the financial year 2008–09, the assessee had issued 17,20,40,000 number of equity shares of face value of ` 10 each to its holding company J.P. Morgan Special Situations (Mauritius)
3 J.P. Morgan Advisors India Pvt. Ltd. Ltd. During the transfer pricing proceedings for the assessment year 2008–09, the Transfer Pricing Officer while examining the aforesaid issue re–characterized sale of equity shares as long term loan to the AE without charging any interest. By treating it as an international transaction, the Transfer Pricing Officer determined the arm's length price of the shares issued at ` 28=02 per share and the difference between the arm's length price and actual issue price was treated as deemed loan advanced by the assessee to its holding company. By deeming it as loan, the Transfer Pricing Officer computed notional interest and made adjustment. Following the same method, the Transfer Pricing Officer charged interest @ 14.35% per annum in the impugned assessment year as well and determined the arm's length interest at ` 44,48,73,075, which was treated as adjustment to the arm's length price of interest on the deemed loan to the AE. While confirming the draft assessment order, the Assessing Officer added back the aforesaid amount to the income of the assessee. Against the addition so made, the assessee raised objection before learned DRP.
After considering the submissions of the assessee, learned DRP following its order for the assessment year 2008–09, though, upheld the decision of the Transfer Pricing Officer in determining the fair market value of shares at ` 28=02, however, insofar as the rate of
4 J.P. Morgan Advisors India Pvt. Ltd. interest is concerned, learned DRP directed to charge interest at the domestic cost of borrowing plus 3% mark–up.
The learned Authorised Representative submitted, while deciding the identical issue in assessee’s own case for the assessment year 2008–09, the Tribunal following the decision of the Hon'ble Jurisdictional High Court in Vodafone India Services Pvt. Ltd. v/s Union of India & Ors., 368 ITR 001 (Bom.), deleted the addition by holding that the shortfall in premium for issuance of equity shares by the assessee to its holding company cannot be treated as deemed loan. The learned Authorised Representative submitted, the same view has been expressed by the Tribunal in case of assessee’s sister concern viz., J.P. Morgan Securities India Pvt. Ltd. He also relied upon the decision of the Hon'ble Jurisdictional High Court in Vodafone India Services Pvt. Ltd. (supra).
The learned Departmental Representative, though, submitted that the issue is covered in favour of the assessee by the decision of the Tribunal in assessment year 2008–09, however, he relied upon the observations of learned DRP.
We have considered rival submissions and perused the material on record. As could be seen from the factual matrix of the issue, in course of transfer pricing proceedings in assessment year 2008–09,
5 J.P. Morgan Advisors India Pvt. Ltd. the Transfer Pricing Officer determined the market value of shares of face value of ` 10 issued to the holding company at ` 28=02 per share. The difference between the market value and the face value of shares was treated as deemed loan advanced to the AE. On the deemed loan, the Transfer Pricing Officer computed arm's length interest @ 14.39% per annum and treated it as adjustment to the arm's length price. Identical adjustment was made by the Transfer Pricing Officer in the impugned assessment year as well. As could be seen from the material on record, while deciding the disputed addition in the appeal preferred by the assessee in the assessment year 2008– 09 vide ITA no.7573/Mum./2012, etc., dated 25th March 2015, the Tribunal following the decision of the Hon'ble Jurisdictional High Court in Vodafone India Service Pvt. Ltd. (supra) held that the difference between the market price of equity shares and the face value cannot be treated as deemed loan to the AE. Accordingly, the Tribunal deleted the addition made on account of notional interest on such deemed loan. Facts being identical, respectfully following the aforesaid decision of the Co–ordinate Bench, we delete the addition made on account of notional interest. This ground is allowed.
Ground no.2 being consequential in nature does not require adjudication.
6 J.P. Morgan Advisors India Pvt. Ltd. 10. In ground no.3, the assessee has challenged the addition made of ` 1,57,46,155, on account of adjustment to the arm's length price of investment advisory services.
Brief facts are, the assessee is a subsidiary of J.P. Morgan Securities India Pvt. Ltd. and is a part of J.P. Morgan Chase Group (JPCM). Amongst various international transactions undertaken during the year by the assessee with its AEs, one related to provision of investment advisory services. In the transfer pricing analysis, the assessee benchmarked the price charged for investment advisory services by selecting Transactional Net Margin Method (TNMM) as the most appropriate method with operating profit to operating cost (OP/OC) as the profit level indicator (PLI). By undertaking a search process, the assessee selected 10 companies as comparables with average margin of 16.19% as against the margin shown by the assessee at 15%. Thus, the assessee claimed the price charged for the provisions of investment advisory services to be at arm's length. The Transfer Pricing Officer, however, did not accept the transfer pricing analysis of the assessee. Pointing out defects and deficiencies, he observed that the transfer pricing analysis of the assessee is unreliable, hence, rejected it. After rejecting the transfer pricing analysis of the assessee, though, he agreed that TNMM is the most appropriate method to benchmark the arm's length price, however, he
7 J.P. Morgan Advisors India Pvt. Ltd. undertook the exercise of determining the arm's length price of the international transaction by selecting fresh comparables by applying certain additional filters. In the process, he selected six companies as comparables with average margin of 16.99%. By applying the average margin of the comparables to the cost incurred by the assessee, the Transfer Pricing Officer determined the arm's length price relating to the investment advisory service segment at ` 3,35,00,913, as against ` 1,77,54,758, shown by the assessee. The resultant shortfall of ` 1,57,46,155, was treated as the transfer pricing adjustment. The aforesaid adjustment proposed by the Transfer Pricing Officer was added back to the income of the assessee in the draft assessment order. Though, the assessee raised objections before learned DRP mainly with regard to selection/rejection of comparables, however, learned DRP did not find merit in the objections of the assessee.
Before us, the dispute is mainly confined to the selection/rejection of comparables. Hereinafter we will deal with each of the comparables disputed before us.
i) MOTILAL OSWAL INVESTMENT ADVISORS PVT. LTD.
Objecting to the selection of this company as a comparable the learned Authorised Representative submitted, the company is engaged in investment banking activities as it provides comprehensive investment banking solution and transaction expertise covering private
8 J.P. Morgan Advisors India Pvt. Ltd. placement of equity, debt and convertible instrument covering international and domestic capital markets, mergers and acquisitions advisory and re–structuring advisory and implementation. In this context, he drew our attention to the annual report of the company placed in the paper book. He submitted, the company being functionally different from the assessee cannot be treated as comparable. He also submitted that in various decisions different Benches of the Tribunal have held that this company cannot be treated as comparable to an investment advisory service provider. In this context, he relied upon a number of decisions of different Benches of the Tribunal as under:–
i) PCIT v/s Arisaig Partners India Pvt. Ltd., ITA no.609 of 2016, dated 10.10.2018; ii) DCIT v/s Arisaig Partners India Pvt. Ltd., ITA no.1083/ Mum./2014, etc., dated 25.03.2015 iii) General Atlantic Pvt. Ltd. v/s DCIT, ITA no.1019/ Mum./2014, dated 06.11.2015; iv) Goldman Sachs (India) Securities Pvt. Ltd. v/s DCIT, ITA no.222/Mum./2014, dated 30.11.2015; v) Sungroup Enterprises Pvt. Ltd. v/s DCIT, ITA no.1029/ Del./2014, dated 21.05.2018; vi) Carlyle India Advisors Pvt. Ltd. v/s DCIT, ITA no.2200/ Mum./2014, dated 22.08.2014 vii) Wells Fargo Real Estate Advisors Pvt. Ltd. v/s DCIT, no.1093/Mum./2014, dated 27.05.2015; viii) Acumen Fund Advisory Services India Pvt. Ltd. v/s DCIT, ITA no.143/Mum./2014, 04.07.2014; and
9 J.P. Morgan Advisors India Pvt. Ltd. ix) Bain Capital Advisors India Pvt. Ltd. v/s DCIT, ITA no.1360/Mum./2014, dated 05.01.2015.
The learned Departmental Representative drawing our attention to the annual report of the company submitted, the core activity of the company is advisory services. Therefore, this company was rightly selected as comparable.
We have considered rival submissions and perused the material on record. From the annual report of the company it is noticed that it is engaged in the business of merchant banking. Hence, it cannot be functionally comparable to the assessee. In the case of DCIT v/s M/s. Arisaig Partners India Pvt. Ltd., ITA no.1083/Mum./2014, dated 25th March 2015, the Tribunal, Mumbai Bench, has rejected this company as a comparable for the aforesaid reason. While deciding the appeal filed by the Department against the aforesaid decision of the Tribunal, the Hon'ble Jurisdictional High Court, in judgment dated 10th October 2018, in ITA no.609 of 2016, approved the decision of the Tribunal. In various other decisions, as cited before us by the learned Authorised Representative, this company has been rejected as comparable since it is in the business of merchant banking. Notably, a number of these decisions cited by the learned Authorised Representative pertain to the impugned assessment year. Therefore, respectfully following the consistent view of the tribunal and the Hon'ble Jurisdictional High
10 J.P. Morgan Advisors India Pvt. Ltd. Court on the issue, we direct the Assessing Officer to exclude this company from the list of comparables.
ii) KHANDWALA SECURITIES LTD.
Objecting to the selection of this company, the learned Authorised Representative submitted, it is engaged in the business of merchant banking, hence, cannot be treated as comparable to the assessee. He submitted, for the aforesaid reason, the Transfer Pricing Officer himself has not selected this company as a comparable in assessee’s own case for the assessment year 2010–11. He submitted, since there is no change in the activity of the company in the impugned assessment year, it should not be treated as comparable. In support of such contention, the learned Authorised Representative relied upon the following decisions:–
i) Goldman Sachs (India) Securities Pvt. Ltd. v/s DCIT, ITA no.222/Mum./2014, dated 30.11.2015; and ii) Sungroup Enterprises Pvt. Ltd. v/s DCIT, ITA no.1029/ Del./2014, dated 21.05.2018;
The learned Departmental Representative relied upon the observations of the Transfer Pricing Officer and learned DRP.
We have considered rival submissions and perused the material on record. As could be seen, while rejecting the objections raised by
11 J.P. Morgan Advisors India Pvt. Ltd. the assessee against the selection of the aforesaid comparable, the Transfer Pricing Officer has held that the fee based segment providing financial advisory services relating to merger and acquisitions, equity and debt issue management, portfolio management and broking is comparable to the assessee. Learned DRP has also endorsed the Transfer Pricing Officers’ view. However, on a perusal of the annual report of the company placed in the paper book it is noticed that the company has two segments, viz; merchant banking segment and fee based segments. The merchant banking segment in any way cannot be comparable to the assessee. The fee based segment provides financial advisory services related to the merger and acquisitions, equity and debt issue management, portfolio management and broking. As could be seen from the functional profile of this company, none of the services provided by the company can be comparable to investment advisory services provided by the assessee. Pertinently, while considering the aforesaid comparable for selection in assessee’s own case in assessment year 2010–11, the Transfer Pricing Officer after taking note of the submissions of the assessee in the context of facts and material placed before him has held that neither the merchant banking nor broking service segment of the company can be comparable to the assessee. Accordingly, he rejected this comparable. On a perusal of material on record, we are of the view that there is no change in the functional profile of this company in assessment years
12 J.P. Morgan Advisors India Pvt. Ltd. 2009–10 and 2010–11. Therefore, this company being functionally different from the assessee cannot be treated as comparable. Similar view has been expressed in the decisions cited by the learned Authorised Representative, couple of which relate to the impugned assessment year. In view of the aforesaid, we direct the Assessing Officer to exclude this company as a comparable.
iii) KJMC CORPORATE ADVISORS INDIA LTD. (FORMERLY KNOWN AS KJMC GLOBAL MARKET INDIA LTD.)
Objecting to the selection of this company, the learned Authorised Representative submitted, the company is registered with SEBI as a merchant banker and is providing merchant banking services. Drawing our attention to the annual report of the company, the learned Authorised Representative submitted, the company operates under the single segment of merchant banking. Therefore, it cannot be treated as a comparable. He submitted, considering the aforesaid factual position, the Transfer Pricing Officer himself has rejected this company as a comparable in assessee’s own case for the assessment year 2010–11. Thus, he submitted, this company should be removed from the list of comparables. In support, he relied upon the following decisions:–
i) Carlyle India Advisors Pvt. Ltd. v/s DCIT, ITA no.2200/ Mum./2014, dated 22.08.2014; and
13 J.P. Morgan Advisors India Pvt. Ltd. ii) DCIT v/s Arisaig Partners India Pvt. Ltd., ITA no.1083/ Mum./2014, etc., dated 25.03.2015.
The learned Departmental Representative relied upon the observations of the Transfer Pricing Officer and learned DRP.
We have considered rival submissions and perused the material on record. On going through the annual report of the company placed in the paper book, it is noticed that the company is a SEBI registered merchant banker and operates under a single segment i.e., merchant banking. It is also noticed that in assessee’s own transfer pricing proceedings for the assessment year 2010–11, the Transfer Pricing Officer having found that it is not comparable to the assessee for the reasons stated herein before rejected it as a comparable. There is no material difference in the functional profile of this company in the assessment years 2009–10 and 2010–11. That being the case, the reasoning on the basis of which this company was rejected in assessment year 2010–11 equally applies to the impugned assessment year as well. Moreover, in the decisions cited before us by the learned Authorised Representative, this company has been rejected because of the fact that it is involved in merchant banking activity. In view of the aforesaid, we direct the Assessing Officer to exclude this company from the list of comparables.
14 J.P. Morgan Advisors India Pvt. Ltd. iv) L&T CAPITAL COMPANY LTD.
Objecting to the selection of this company, the learned Authorised Representative submitted, 95% of the income of the company is from syndication fee. Drawing our attention to the annual report of the company, the learned Authorised Representative submitted, it operates under single segment of portfolio management, mutual fund distribution and merchant banking. Therefore, he submitted, the functional profile of this company does not match with an investment advisory service provider. He submitted, for the aforesaid reason, the Transfer Pricing Officer himself excluded this company as a comparable in assessee’s own case for the assessment year 2010–11. Thus, he submitted, the company should be rejected as a comparable. In support, he relied upon the following decisions:–
i) General Atlantic Pvt. Ltd. v/s DCIT, ITA no.8914/Mum./2010, dated 31.01.2013; ii) CIT v/s Carlyle India Advisors Pvt. Ltd., ITA(L) no.1386 of 2012 dated 22.02.2013; and iii) Carlyle India Advisors Pvt. Ltd. v/s ACIT, ITA no.7901/Mum./2011, dated 04.04.2012;
Learned Departmental Representative relied upon the observations of the Transfer Pricing Officer and learned DRP.
We have considered rival submissions and perused the material on record. On a perusal of annual report of the company placed in the
15 J.P. Morgan Advisors India Pvt. Ltd. paper book, it is noticed that the company is basically engaged in portfolio management, mutual fund distribution and merchant banking service. It is also noticed that 95% of its revenue is derived from syndication fee. Thus, from the aforesaid facts, it is very much clear that the business model of this company is completely different from the assessee. Considering the aforesaid factual aspect, the Transfer Pricing Officer himself has excluded this company as a comparable in assessee’s own case for the assessment year 2010–11. No material difference in the factual position relating to the assessment year 2009–10 and 2010–11 has been brought to our notice by the learned Departmental Representative. Moreover, in the decisions cited before us by the learned Authorised Representative, this company has been held as not comparable to an investment advisory service provider. In view of the aforesaid, we direct the Assessing Officer to exclude this company from the list of comparables.
v) SUMEDHA FISCAL SERVICES LTD.
Objecting to the selection of this company, the learned Authorised Representative submitted, it is registered as a merchant banking company with the SEBI and provides merchant banking service. Drawing our attention to the annual report of this company, he submitted, the company has earned income from loan syndication and consulting services. He submitted, the consultancy segment
16 J.P. Morgan Advisors India Pvt. Ltd. comprise of loan syndication, merchant banking, re–structuring and other related advisory services. He submitted, the Transfer Pricing Officer while selecting the company has observed that the consultancy segment is comparable to the assessee.
The learned Authorised Representative submitted, the aforesaid observation of the Transfer Pricing Officer is wrong considering that merchant banking service cannot be compared with investment advisory service. He submitted, in assessee’s own case in assessment year 2010–11, the Transfer Pricing Officer has rejected this company as a comparable. Thus, he submitted, the company cannot be treated as comparable to the assessee. In support, he relied upon a number of decisions as submitted in the legal paper book.
The learned Departmental Representative relied upon the Transfer Pricing Officer and the DRP.
We have considered rival submissions and perused the material on record. As could be seen from the annual report of the company placed in the paper book, the company is a SEBI registered investment/merchant banking company and provides merchant banking services. It is further noticed that the company has earned income from loan syndication and consultancy services. Thus, from the facts emanating from record, it is evident that the functional profile of
17 J.P. Morgan Advisors India Pvt. Ltd. the company as an investment/merchant banker renders it incomparable to an investment advisory service provider. Considering the aforesaid aspect, the Transfer Pricing Officer himself has rejected this company as a comparable in assessee’s own case for the assessment year 2010–11. No material has been brought before us to demonstrate that the functional profile of the company in assessment years 2009–10 and 2010–11 are not similar. Moreover, in the decisions relied upon by the learned Authorised Representative, this company has been held to be not comparable to an investment advisory service provider. In view of the aforesaid, we direct the Assessing Officer to exclude this company from the list of comparable.
vi) ICRA MANAGEMENT CONSULTING SERVICES LTD.
Objecting to the rejection of this comparable, the learned Authorised Representative submitted, this company is functionally similar to the assessee as it provides consultancy services in strategy, risk management, operation improvement, regulatory economics, etc. In this context, he drew our attention to the functional profile of the company as mentioned in the annual report. Further, drawing our attention to the Profit & Loss Account of the company he submitted, the main source of income is consultancy fees. The learned Authorised Representative submitted, the Transfer Pricing Officer rejected the company without any valid reason. He submitted, this company has
18 J.P. Morgan Advisors India Pvt. Ltd. been accepted as a comparable in the assessment years 2008–09, 2013–14 and 2015–16. Further, he submitted, in a number of decisions, the Tribunal has accepted this company as a good comparable to an investment advisory service provider. In support of this, he relied upon the following decisions:–
i) Warburg Pincus India Pvt. Ltd. v/s ACIT, ITA no.6981/ Mum./2012, etc., dated 13.01.2017; ii) TPG Capital India Pvt. Ltd. v/s DCIT, ITA no.7594/Mum./ 2014, dated 08.02.2017; iii) DCIT v/s Temasek Holdings Advisors Indian Pvt. Ltd., ITA no.968/Mum./2014, dated 27.06.2014.
Thus, he submitted, this company should be included as a comparable.
The learned Departmental Representative relied upon the observations of the Transfer Pricing Officer and learned DRP.
We have considered rival submissions and perused the material on record. On a critical analysis of the functional profile of the company, as mentioned in the annual report placed in the paper book, it is noticed that the services rendered by the company are similar to the services rendered by the assessee. Basically, this company provides various advisory services in strategy, risk management, operations improvement, etc. The main source of income of the company is also from consultancy service. Thus, it appears that this
19 J.P. Morgan Advisors India Pvt. Ltd. company is functionally similar to the assessee. Moreover, in the decision cited before us by the learned Authorised Representative, some of which pertain to the impugned assessment year, it has been held that this company is a good comparable to an investment advisory service provider. Moreover, it has been brought to our notice by the learned Authorised Representative that in assessee’s own case in assessment years 2008–09, 2013–14 and 2015–16, the company has been accepted as a comparable. In view of the aforesaid, we are inclined to accept this company as a good comparable to the assessee. Accordingly, the Assessing Officer is directed to include this company as a comparable.
vii) INFORMED TECHNOLOGIES LTD.
Objecting to the rejection of this company as a comparable, the learned Authorised Representative submitted, as per functional profile of the assessee company mentioned in the annual report, it collects and analyses data on financial fundamentals, corporate governance, director/executive compensation and capital market. It offers a range of data management services to the financial sector. He submitted, though, the company is functionally similar to the assessee, the Transfer Pricing Officer has wrongly rejected it. He submitted, this company has been accepted as a comparable in assessee’s own case in assessment years 2013–14 and 2015–16. He submitted, in various
20 J.P. Morgan Advisors India Pvt. Ltd. decisions, the Tribunal has held this company to be a good comparable to an investment advisory service provider. In this context, he relied upon the following decision:–
i) DCIT v/s Temasek Holdings Advisors Indian Pvt. Ltd., ITA no.968/Mum./2014, dated 27.06.2014.
The learned Departmental Representative strongly relied upon the observations of the Transfer Pricing Officer and learned DRP.
We have considered rival submissions and perused the material on record. On a perusal of the annual report of the company as placed in the paper book, we have noticed that the company is providing various services to the clients in financial market which are in the nature of advisory service. Therefore, from the facts on record, it appears that the company is functionally similar to the assessee. In various decisions of the Tribunal, some of which pertain to the impugned assessment year, it has been held that this company is a good comparable to an investment advisory service provider. Moreover, it has been brought to our notice by the learned Authorised Representative that in assessee’s own case in assessment years 2013– 14 and 2015–16, the Transfer Pricing Officer himself has accepted this company as a comparable. In view of the aforesaid, we direct the Assessing Officer to include this company as a comparable.
21 J.P. Morgan Advisors India Pvt. Ltd.
viii) IDC INDIA LTD. (NOW KNOW AS CYBRE MEDIA RESEARCH LTD.)
Objecting to the rejection of this company as a comparable, the learned Authorised Representative submitted, the company is engaged in market research activities and survey services. He submitted, the company renders user research, vertical research, go–to market service and consulting services which is comparable to the research activities undertaken by the assessee for potential investment particulars. He submitted, the company is a premier provider of market intelligence and advisory services. In this context, he drew our attention to the website extracts furnished in the paper book. The learned Authorised Representative submitted, the underlying functions/activities performed with respect to research and survey services provided by the company involved analysis of the business and operations of a company/sector, it’s profitability, operation, efficiency, future outlook, etc. which are similar to the functions performed by the assessee. Thus, he submitted, the Transfer Pricing Officer wrongly rejected the company as a comparable. The learned Authorised Representative submitted, in a number of decisions, some of which relate to the impugned assessment year as well, the Tribunal has consistently held this company to be a comparable to investment advisory service provider. He submitted, in assessee’s own case in assessment years 2008–09 and 2013–14, the Transfer Pricing Officer
22 J.P. Morgan Advisors India Pvt. Ltd. himself has accepted this company as a comparable. Thus, he submitted, the company should be treated as a comparable to the assessee. In support he relied upon the following decisions:–
i) Warburg Pincus India Pvt. Ltd. v/s ACIT, ITA no.6981/ Mum./2012, etc., dated 13.01.2017; ii) TPG Capital India Pvt. Ltd. v/s DCIT, ITA no.7594/Mum./ 2014, dated 08.02.2017; and iii) DCIT v/s Temasek Holdings Advisors India Pvt. Ltd., ITA no. 968/Mum./2014, dated 27.06.2014. 37. The learned Departmental Representative relied upon the observations of the Transfer Pricing Officer and learned DRP.
We have considered rival submissions and perused the material on record. On analyzing the functional profile of the assessee mentioned in the annual report, a copy of which is placed in the paper book, it is observed that the service provided by this company can be considered to be similar to the services provided by the assessee. In various decisions of the Tribunal, as cited before us by the learned Authorised Representative, this company has been accepted as a comparable even in cases relating to the impugned assessment year also. Moreover, it has been brought to our notice by the learned Authorised Representative that in assessee’s own case in assessment years 2008–09 and 2013–14, this company has been accepted as a comparable. In view of the aforesaid, we direct the Assessing Officer to include this company as a comparable to the assessee.
23 J.P. Morgan Advisors India Pvt. Ltd.
Besides the aforesaid comparables, as disputed before us in ground no.3, the assessee vide letter dated 2nd July 2015 has raised additional ground challenging inclusion of Integrated Capital Service Ltd. as a comparable. As could be seen from the facts on record, this company was selected by the assessee itself as a comparable in its transfer pricing study report and the Transfer Pricing Officer also accepted it as a comparable. It is evident, selection of the aforesaid comparable was not objected to by the assessee even before learned DRP. However, now before us, the assessee is objecting to selection of this company as a comparable by raising an additional ground. It is the contention of the learned Authorised Representative that the company is engaged in rendering advisory and consulting services in the area of M & A and its activities are in the nature of investment banking service. In this context, he drew our attention to the annual report of the company. Further, he submitted that in various decisions of the Tribunal, the company has been held as not comparable to an investment advisory service provider. Thus, he submitted, the company should be excluded from the list of comparables.
Strongly opposing the contention of the learned Authorised Representative, the learned Departmental Representative submitted, this company is assessee’s own comparable in transfer pricing study report and the assessee has neither objected the selection of this
24 J.P. Morgan Advisors India Pvt. Ltd. company before the Transfer Pricing Officer nor before the DRP. Thus, he submitted, at this stage the assessee cannot challenge the selection of this company through additional ground. In support of such contention he relied upon certain case laws as submitted in Legal Paper Book–II.
In rejoinder, the learned Authorised Representative submitted, assessee cannot be prevented from seeking exclusion of a company wrongly selected by it, if, factually the company is not comparable to the assessee. In support of his contention, the learned Authorised Representative relied upon the following decisions:–
i) Warburg Pincus India Pvt. Ltd. v/s ACIT, ITA no.6981/ Mum./2012, etc., dated 13.01.2017; ii) TPG Capital India Pvt. Ltd. v/s DCIT, ITA no.7594/ Mum./2014, dated 08.02.2017; and iii) DCIT v/s Temasek Holdings Advisors Indian Pvt. Ltd., ITA no.968/Mum./2014, dated 27.06.2014.
We have considered rival submissions and perused the material on record. We have also applied our mind to the decisions relied upon. Though, the assessee itself has selected this company as a comparable in its transfer pricing study report which was accepted by the Transfer Pricing Officer and before learned DRP also, the assessee has not raised any objections against selection of this company, however, the object and purpose of determining arm's length price under TNMM is
25 J.P. Morgan Advisors India Pvt. Ltd. by having proper comparables. For this reason only the Transfer Pricing Officer has been empowered under the Act to determine the arm's length price of an international transaction. In course of transfer pricing proceeding the Transfer Pricing Officer is entitled to look into the acceptability or otherwise of the benchmarking done by the assessee. While doing so, the Transfer Pricing Officer in many cases rejects the comparables selected by the assessee finding them to be functionally dissimilar. Therefore, only because the assessee has selected a particular comparable, it cannot be retained irrespective of the fact that it is functionally dissimilar to the assessee. Therefore, functional similarity of a comparable is of paramount consideration. This principle has been laid down in various judicial precedents as cited before us by learned Authorised Representative. In fact, in assessee’s own case the Hon’ble Jurisdictional High Court has expressed this view in PCIT V/s. J.P.Morgan India (P.) Ltd.[2019]102 taxmann.com 335(Bombay). Therefore, we are inclined to admit the additional ground raised by the assessee. However, since the issue has been raised for the first time before us, to afford a fair opportunity to the Department to examine assessee’s claim regarding comparability of this company, we restore the issue to the Assessing Officer for adjudication after due opportunity of being heard to the assessee. The additional ground is allowed for statistical purpose.
26 J.P. Morgan Advisors India Pvt. Ltd. 43. In ground no.4, the assessee has challenged the addition made of ` 5,85,288, on account of adjustment made to the price charged for the provisions of Information Technology Enabled Services (ITES).
Brief facts are, during the year under consideration assessee provided support services to its AEs in respect of building MS Access databases and MS Excel work sheets. In the transfer pricing analysis, the assessee benchmarked the aforesaid transaction by selecting TNMM as the most appropriate method with operating profit to operating cost as the PLI. By undertaking a search process applying certain filters, the assessee short listed eight companies as comparables with arithmetic mean of 18.56% as against margin shown by the assessee @ 15%. Thus, the price charged for international transaction with the AE was claimed to be at arm's length. The Transfer Pricing Officer, after verifying the transfer pricing analysis of the assessee found it to be unreliable, though, he accepted TNMM as the most appropriate method to benchmark the transaction. Pointing out various defects and deficiency, he rejected the transfer pricing analysis of the assessee and proceeded to determine the arm's length price of the transaction independently. Ultimately, the Transfer Pricing Officer selected six companies as comparable on the basis of current year data with arithmetic mean of 35.71%. Applying the arithmetic mean of the comparables to the cost incurred, the Assessing Officer
27 J.P. Morgan Advisors India Pvt. Ltd. determined the arm's length price of the transaction at ` 38,15,254, as against the price charged by the assessee at ` 32,52,031. The resultant short fall of ` 5,85,288, was treated as the adjustment to the arm's length price. The aforesaid adjustment proposed by the Transfer Pricing Officer was added back in the draft assessment order.
Though, the assessee raised objections before learned DRP against the transfer pricing adjustment, however, learned DRP rejected the objections of the assessee.
The dispute raised in this ground is restricted to selection of certain comparables by the Transfer Pricing Officer. Hereinafter we will deal with comparables specifically disputed before us by the assessee.
a) ALLSEC TECHNOLOGIES LTD.
Though, this company was selected by the assessee in the transfer pricing analysis, however, the Transfer Pricing Officer rejected this company on the ground that it fails export revenue filter of 75%.
The learned Authorised Representative submitted, this company is engaged in providing ITeS which is evident from the annual report of the company. Thus, it is functionally similar to the assessee. Only because the export earning of the assessee company is 74.45% which is just below the export earning filter of 75% fixed by the Transfer
28 J.P. Morgan Advisors India Pvt. Ltd. Pricing Officer, it cannot be rejected. Thus, he submitted, the company should be included as a comparable. In support he relied upon the following decisions:– i) CIT v/s Mercer Consulting India Pvt. Ltd., [2016] 76 taxmann.com 153 (P&H); ii) Mercer Consulting India Pvt. Ltd. v/s DCIT, [2014] 47 taxmann.com 84 (Del.); and iii) Capital IQ Information Systems India Pvt. Ltd. v/s ACIT, [2014] 49 taxmann.com 313 (Hyd.).
The learned Departmental Representative relied upon the observations of the Transfer Pricing Officer and the DRP.
We have considered rival submissions and perused the material on record. Undisputedly, the Transfer Pricing Officer rejected this company as a comparable on the reasoning that it fails export earning filter of 75%. Therefore, it is evident, there is no dispute with regard to functionally similarity between the assessee and this company. On a perusal of the annual report of the company placed in the paper book, it is noticed that the export earning of the company as a percentage of the total revenue works out to 74.45%. So, there is not much difference between the threshold limit fixed by the Transfer Pricing Officer @ 75% and the export revenue earned by the company. Therefore, it needs examination whether due to such marginal difference the company can be excluded. In case of Mercer Consulting India Pvt. Ltd. v/s DCIT, [2014] 150 ITD 001 (Del.), the Tribunal while
29 J.P. Morgan Advisors India Pvt. Ltd. dealing with the issue relating to rejection of the company as a comparable on identical reasoning held that the ratio of 75% fixed by the Transfer Pricing Officer is not something which is scientifically proven. The Bench held that the company cannot be excluded for such a minuscule difference, if, it is otherwise comparable. Thus, ultimately, the Tribunal directed for inclusion of the company as a comparable. The Hon’ble Punjab & Haryana High Court while dealing with identical issue in CIT v/s Mercer Consulting India Pvt. Ltd, [2017] 390 ITR 615 (P&H) also approved the aforesaid view of the Tribunal. In Capital IQ Information System India Pvt. Ltd. v/s ACIT, [2014] 49 taxmann.com 313 (Trib. Hyd.) following the decision in Mercer Consulting India Pvt. Ltd. v/s DCIT (supra), the Tribunal included the company as a comparable. Respectfully following the decisions cited supra, we direct the Assessing Officer to include this company as a comparable.
b) R SYSTEMS INTERNATIONAL LTD. (SEGMENTAL)
This company was selected by the assessee as a comparable. However, the Transfer Pricing Officer rejected it on the ground that it has a different financial year ending compared to the assessee.
The learned Authorised Representative submitted, though, the company is functionally similar to the assessee, however, it was rejected by the Transfer Pricing Officer solely for the reason that the
30 J.P. Morgan Advisors India Pvt. Ltd. financial year of the company ends on 31st December, whereas, assessee’s financial year ends on 31st March. The learned Authorised Representative submitted, if the company maintains its accounts in a manner from which the financial result of the financial year followed by the assessee can be ascertained, then, such company cannot be rejected due to different financial year ending. He submitted, this company maintains accounts from which quarterly results are available. Therefore, the financial results of the financial year ending on 31st March can easily be found out. Thus, he submitted, simply for the reason of different financial year ending the company cannot be rejected as comparable. In support of such contention, the learned Authorised Representative relied upon the following decisions:–
i) Mercer Consulting India Pvt. Ltd. v/s DCIT, ITA no.101/ O&M/2015; ii) Mercer Consulting India Pvt. Ltd. v/s DCIT, ITA no.966/ Del./2014; iii) Maersk Global Service Centre India Pvt. Ltd. v/s DCIT, ITA no.2594/Mum./2014 & ITA no.2492/Mum./2014; and iv) Cisco Systems India Pvt. Ltd. v/s DCIT, S.P. no.130/ Bang./2014 & IT(TP)A no.271/Bang./2014.
The learned Departmental Representative submitted, since, the accounting period of the comparable is different from the assessee, it cannot be treated as comparable. He submitted, due to difference in financial year the margin of the comparable for the financial year
31 J.P. Morgan Advisors India Pvt. Ltd. followed by the assessee cannot be computed. Thus, he submitted, in the aforesaid situation the company has to be rejected as a comparable. In support of such contention, he relied upon the decision of the Hon'ble Jurisdictional High Court in CIT V/s. Principal Global Services (P.) Ltd. [2018] 257 Taxman 244 (Bom.).
In rejoinder, learned Authorised Representative submitted, in the case before the Hon'ble Jurisdictional High Court, it was not possible to ascertain the financial result of the comparable for the financial year followed by the assessee. However, in case of R Systems International Ltd. the situation is different as the company is maintaining quarterly audited accounts from which the results for the financial year 2008– 09, is easily ascertainable. Therefore, there is no difficulty in computing the margin of the comparable for the financial year 2008– 09. Thus, he submitted, the company otherwise being functionally similar to the assessee, has to be included as a comparable.
We have considered rival submissions and perused the material on record. We have also applied our mind to the decisions relied upon. The only reason for which the Transfer Pricing Officer has rejected this company as a comparable is, it follows calendar year as its financial year, whereas, the assessee’s financial year ends on 31st March. However, from the annual report and other materials placed before us relating to the aforesaid company, it is evident that the financial
32 J.P. Morgan Advisors India Pvt. Ltd. results of the company is maintained on quarterly basis which are also audited. Thus, from the quarterly financial results, margin of the company can be easily computed for the financial year 2008–09 by removing first quarter of the year 2008 and including the first quarter of the year 2009. The Hon’ble Punjab & Haryana High Court while considering the comparability issue of the company for the very same assessment year in case of CIT v/s Mercer Consulting India Pvt. Ltd. (supra) after noticing the fact that the financial results of the company can be ascertained from the quarterly audited accounts, held that in spite of the fact that the company’s financial year ends in December, however, still it can be treated as a comparable to a company with financial year ending on 31st March. The other decisions cited by the learned Authorised Representative also support this view. Insofar as the decision of the Hon'ble Jurisdictional High Court cited by the learned Departmental Representative, on a careful reading of the said decision, it is very much clear that in the facts of that case, the financial result of the comparable for the financial year followed by the assessee was not available. In view of the aforesaid, we direct the Assessing Officer to include this company as a comparable.
c) COSMIC GLOBAL LTD.
Objecting to the inclusion of this company, the learned Authorised Representative submitted, the company is functionally
33 J.P. Morgan Advisors India Pvt. Ltd. different from the assessee as 95% of its income is from translation service which is largely sub–contracted to third party vendors. Further, he submitted, the company has not undertaken separate segmental accounting for ITeS. Thus, he submitted, the company cannot be treated as a comparable. In support of such contention, he relied upon the following decisions:–
i) CIT v/s Principal Global Services Pvt. Ltd., ITA no.280/ Pune/2014, [2018] 257 Taxman 244; ii) Principal Global Services Pvt. Ltd. v/s DCIT, ITA no.1847/ Mum./2014, dated 27.04.2016; iii) VFS Global Services Pvt. Ltd. v/s DCIT, ITA no.1847/ Mum./2014, dated 27.04.2016; iv) Mazimize Learning Pvt. Ltd. v/s ACIT, [2015] 58 taxmann.com 169 (Pune Trib.); v) BNY Mellon International Operations v/s DCIT, [2015] 55 taxmann.com 386 (Pune–Trib.); vi) ADP Pvt. Ltd. v/s SCIT, ITA no.134 & 191/Hyd./2014; vii) Cummins Turbo Technologies Ltd. v/s DDIT, ITA no.784/ Pune/2014; viii) Macquarie Global Services Pvt. Ltd., ITA no.6803/ Del./2104; ix) Xchanging Technology Services India Pvt. Ltd., ITA no. 6803/Del./2013; x) NCS Pearson India Pvt. Ltd. ITA no.2556/Del./2014; xi) M/s. Parexel International India Pvt. Ltd., ITA no.144/ Hyd./2014; and xii) E4e Business Solutions India Pvt. Ltd., ITA no.1777 & 1845/Bang./2013.
The learned Departmental Representative submitted, the assessee itself has selected this company as comparable. Therefore, he submitted, the company should not be rejected.
34 J.P. Morgan Advisors India Pvt. Ltd. 58. The learned Authorised Representative submitted, though, the assessee might have selected the company as a comparable on the basis of limited data available in public domain, however, subsequently more information came into the public domain which indicated that the company is functionally different from ITeS provider. Thus, he submitted, only because the assessee had selected it in the transfer pricing analysis, it will not be precluded from seeking exclusion of the company if it is found to be functionally different. In this context, the learned Authorised Representative relied upon the decision of the Hon'ble Jurisdictional High Court in PCIT v/s J.P. Morgan India Pvt. Ltd., [2018] 102 taxmann.com 335 (Bom.).
We have considered rival submissions and perused the material on record. We have also applied our mind to the decisions relied upon. From the annual report of the company placed in the paper book, it is very much clear that this company is sub–contracting major portion of its work to third parties. Whereas the assessee is undertaking the work itself. Thus, there is a basic difference between the business model of the assessee and this company. Therefore, merely because the assessee selected it as a comparable in its transfer pricing analysis on the basis of insufficient data available in public domain, it cannot be precluded from objecting to the selection of this company as a comparable subsequently. Moreover, it is evident, in course of
35 J.P. Morgan Advisors India Pvt. Ltd. proceedings before the Transfer Pricing Officer itself and subsequently before learned DRP, the assessee has objected to selection of this company as a comparable. Thus, it is not the case that the assessee for the first time is objecting to the selection of the company before the Tribunal. As could be seen, under identical fact situation this company was held to be not comparable to a ITeS provider by the Tribunal, Pune Bench, in Principal Global Services Pvt. Ltd. v/s DCIT (supra). While deciding the appeal filed by the Department on the issue, the Hon’ble High Court upheld the decision of the Tribunal by holding that due to difference in business model it cannot be treated as a comparable. The other decisions cited by the learned Authorised Representative, many of which relate to the impugned assessment year, also express similar view with regard to the aforesaid company as a comparable to ITeS service provider. In view of the aforesaid, respectfully following the decisions referred to above, we direct the Assessing Officer to exclude this company as a comparable.
d) GENESYS INTERNATIONAL CORPORATION LTD.
Objecting to the selection of this company as a comparable, the learned Authorised Representative submitted, under no circumstances, the company can be treated as a comparable to the assessee as it is engaged in Geospatial Services and Engineering design services which include Geographical Information Service (GIS), Lidar, 3D Mapping,
36 J.P. Morgan Advisors India Pvt. Ltd. etc. In this context, the learned Authorised Representative extensively referred to the annual report of the company placed in the paper book. Thus, he submitted, the company being functionally different from the assessee cannot be treated as a comparable. In support of such contention, he relied upon the following decisions:–
i) CIT v/s Mercer Consulting India Pvt. Ltd. [2016] 76 taxmann.com 153 (P&H); ii) Mercer Consulting India Pvt. Ltd. v/s DCIT, [2014] 47 taxmann.com 84 (Del. Trib.); iii) Capital IQ Information Systems India Pvt. Ltd., [2014] 49 taxmann.com 313 (Hyd. Trib.); iv) Hyundai Motors India Engineering Pvt. Ltd. v/s DCIT, [2014] 49 taxmann.com 290 (Hyd. Trib.); v) Excellence Data Research Pvt. Ltd. v/s ITO, [2014] 49 taxmann.com 409 (Hyd. Trib.); vi) Knoah Solutions Pvt. Ltd. v/s ITO, [2014] 52 taxmann. com 308 (Hyd. Trib.); vii) Macquarie Global Services Pvt. Ltd., ITA No.6803/ Del./2013; viii) ADP Pvt. Ltd., ITA no.134 & 191/Hyd./2014 ix) Cummins Turbo Technologies Ltd. v/s DDIT, ITA no.784/ Pun./2014; x) Parexel International India Pvt. Ltd., ITA no.144/ Hyd./2014; and xi) KPIT Cummins Global Business Solutions Ltd., ITA no.246/Pune/2013 & 459 & 525/Pune/2014.
The learned Departmental Representative submitted, the company having been selected by the assessee itself should not be excluded.
37 J.P. Morgan Advisors India Pvt. Ltd. 62. We have considered rival submissions and perused the material on record. We have also applied our mind to the decisions relied upon. From the annual report of the company placed in paper book, it is evident that it is observed that the service provided by the company is completely different from the assessee. As could be seen, Genesis is providing full range of Geospatial Services to its customers which includes 3D mapping, navigation map, image processing, cadastral mapping, etc. Thus, from the aforesaid facts, it is clear that the business model of the company is completely different from the assessee which provides routine back office support service to its A.Es. After analyzing the aforesaid aspect, the Tribunal, Delhi Bench, in Mercer Consulting India Pvt. Ltd. v/s DCIT (supra), has held that the company cannot be comparable to a routine ITeS provider. While deciding the Revenue’s appeal against the aforesaid decision of the Tribunal, the Hon’ble P&H High Court in CIT v/s Mercer Consulting India Pvt. Ltd. (supra) has upheld the decision of the Tribunal in rejecting this company as a comparable. Thus, the decision cited by the learned Authorised Representative also expresses similar view. Since the aforesaid decision relates to the very same assessment year and no factual difference has been brought to our notice by the learned Departmental Representative, respectfully following the decision cited before us, we are of the view that the company cannot be treated as a comparable to the assessee. It is relevant to observe
38 J.P. Morgan Advisors India Pvt. Ltd. that the learned Departmental Representative has also submitted before us that this company was initially selected by the assessee also. However, in view of our reasoning while deciding the comparability of Cosmic Global Ltd. herein before, we do not find the submissions of the learned Departmental Representative acceptable.
d) VISHAL INFORMATION TECHNOLOGIES LTD.
Objecting to the selection of this company as a comparable the learned Authorised Representative submitted, the business model of the company is completely different from the assessee as it outsources major part of its work to third parties. To demonstrate the aforesaid factual aspect, the learned Authorised Representative drew our attention to the annual report of the company placed in the paper book and submitted that 64.61% of the cost are towards payment to third party vendors. Thus, he submitted, the company cannot be treated as comparable to the assessee. The learned Authorised Representative relied upon the following decisions:–
i) e4e Business Solutions India Pvt. Ltd., ITA no.1777 & 1845/Bang./2013; ii) CIT v/s Mercer Consulting India Pvt. Ltd. [2016] 76 taxmann.com 153 (P&H); iii) PCIT v/s PTC Software India Pvt. Ltd., ITA no.598/2016, dated 16.04.2018; iv) PTC Software India Pvt. Ltd. v/s DCIT, [2014] 52 taxmann.com 351 (Pune–Trib.);
39 J.P. Morgan Advisors India Pvt. Ltd.
v) Maersk Global Service Centres India Pvt. Ltd. v/s DCIT, ITA no.2594/Mum./2014, etc., dated 16.01.2015; vi) Nomura Structured Finance Services Pvt. Ltd. v/s DCIT, etc., dated 31.03.2016; and vii) Rampgreen Solutions Pvt. Ltd. v/s CIT, [2015] 60 taxmann.com 355 (Del.).
The learned Departmental Representative submitted, since the assessee itself had selected it as a comparable in the transfer pricing study report, it should not be excluded.
We have considered rival submissions and perused the material on record. We have also applied our mind to the decisions relied upon. On a perusal of the annual report of the company, we have noted that a major portion of the cost comprises of payment made to third party vendors. The employee cost is also very less as compared to the assessee. Thus, the aforesaid facts clearly demonstrate that the company is not doing the work itself but is getting it done by outsourcing to third parties. Therefore, the business model of this company is completely different from the assessee as the assessee is doing the work itself. In the decisions cited before us by the learned Authorised Representative this company has been rejected as a comparable on the reasoning that it outsources major portion of its work to third party vendors. In many cases, the orders passed by the Tribunal have been upheld by the High Courts. Since, many of these
40 J.P. Morgan Advisors India Pvt. Ltd. decisions pertain to the very same assessment year and no factual difference has been brought to our notice in the instant case, respectfully following the decisions cited by the learned Authorised Representative, we direct the Assessing Officer to exclude this company from the list of comparable. The contention of the learned Departmental Representative that the company was selected by the assessee itself, hence, should not be excluded is not found acceptable because of our reasoning while dealing with similar argument advanced by the learned Departmental Representative in respect of comparability of Cosmic Global Ltd. in the earlier part of this order. Ground no.4 is allowed in terms indicated above.
In ground no.5, the assessee has raised the issue of adjustment of refund amounting to ` 16,06,319.
The learned Authorised Representative submitted, while computing the tax liability of the assessee, the Assessing Officer has adjusted an amount of ` 16,06,319, as “amount already refunded”, though, no such was ever granted to the assessee.
Having considered rival submissions, we direct the Assessing Officer to verify the issue factually and decide it in accordance with law. Ground raised is allowed for statistical purposes.
41 J.P. Morgan Advisors India Pvt. Ltd. 69. In ground no.6, the assessee has challenged levy of interest under section 234B and 234D of the Act.
Levy of interest being consequential is not required to be adjudicated at this stage.
In the result, appeal is partly allowed.
ITA no.1754/Mum./2014 Revenue’s Appeal – A.Y. 2009–10
The grounds raised by the Revenue are corresponding to grounds no.1 and 2 of ITA no.990/Mum./2014. In view of our decisions given in the earlier part of this order, the grounds raised by the Revenue have become redundant, hence, dismissed.
In the result, appeal is dismissed.
IT(TP)A no.1597/Mum./2015 Assessee’s Appeal – A.Y. 2010–11
Grounds no.1, 2 and 3, are identical to grounds no.1 and 2 of ITA no.990/Mum./2014. Following our decision therein in the earlier part of this order, we allow the grounds raised.
In grounds no.4 and 5, the assessee has challenged the addition made of ` 29,54,289, on account of adjustment made to the arm's
42 J.P. Morgan Advisors India Pvt. Ltd. length price of investment advisory service provided to overseas Associated Enterprise.
The dispute in these grounds is confined to selection/rejection of comparables only. Herein after we will deal with the comparables disputed before us by the assessee.
MOTILAL OSWAL INVESTMENTS ADVISORS PVT. LTD.
Facts relating to the selection of this comparable by the Transfer Pricing Officer and learned DRP are identical to the assessment year 2009–10. While deciding the comparability of this company in assessee’s appeal for the assessment year 2008–09, vide ITA no.990/Mum./2014, in the earlier part of the order, we directed the Assessing Officer to exclude this company from the list of comparables. Following our decision therein, we direct the Assessing Officer to exclude this company as a comparable.
IDFC INVESTMENT ADVISORS LTD.
Objecting to the selection of this company, the learned Authorised Representative submitted, it is registered with SEBI as a portfolio manager and carries out portfolio management service. Drawing our attention to the annual report of the company placed in the paper book learned Authorised Representative submitted, during the year the company has started rendering portfolio management
43 J.P. Morgan Advisors India Pvt. Ltd. service to the IDFC Hybrid Infrastructure Portfolio, IDFC Growth Portfolio and IDFC Agriculture Opportunities Portfolio. He submitted, by providing such services, the company has also earned substantial revenue. He submitted, there is no segmental information available in the annual report with regard to the investment advisory services rendered by the company. Thus, he submitted, the company cannot be treated as a comparable. In support of such contention, he relied upon the following decisions:–
i) FIL Capital Advisors India P. Ltd. v/s DCIT, ITA no.7403/ Mum./2014, dated 25.10.2016; ii) Arisaig Partners India Pvt. Ltd. v/s ACIT, ITA no.840/ Mum./2015, dated 11.11.2016; iii) PCIT v/s Bain Capital & Advisors India Pvt. Ltd., ITA no. 541 of 2016, dated 24.11.2018; iv) Bain Capital Advisors India Pvt. Ltd. v/s DCIT, ITA no.413/Mum./2015; 15.05.2015; v) Carlyle India Advisors Pvt. Ltd. v/s ACIT, [2016] 66 taxmann.com 14 (Mum. Trib.); vi) AGM India Advisors Pvt. ltd. v/s DCIT, ITA no.4757/ Mum./2015m dated 18.05.2016, dated 18.05.2016; and vii) Sparkles Dhandho Advisors Pvt. Ltd. v/s ITO, ITA no. 1047/Mum./2015.
The learned Departmental Representative relied upon the observations of the Transfer Pricing Officer and learned DRP.
We have considered rival submissions and perused the material on record. As could be seen from the annual report of the company
44 J.P. Morgan Advisors India Pvt. Ltd. placed in the paper book, it is not only registered as a portfolio manager with SEBI but it actually provides portfolio management service. By providing such services during the year it has also earned substantial revenue. It is relevant to observe, while examining the issue of comparability of this company to an investment advisory service provider in case of FIL Capital Advisors India Pvt. Ltd. v/s DCIT, ITA no.7403/Mum./2014, dated 25th October 2016, the Tribunal has held as under:–
“4. We have considered the submissions of the parties and perused the material available on record in the light of the decisions relied upon. On a perusal of the annual report of this company, it is very much clear that the company is engaged in providing PMS and such service is fee based. That apart, reference to the Profit & Loss account does indicate that the company, though, has earned revenue from different segments such as portfolio management fee, performance fee, advisory fee, etc., but the segmental details are not available Further, we have also noted from the annual report of the company that it has made investment and also incurred brokerage expenses. If we compare the assessee’s activities with the comparable, it could be seen that the assessee is only providing advisory service to its A.E. which is non–binding in nature, therefore, is totally different from the functions performed by IDFC. Considering the aforesaid aspect, the Tribunal, Mumbai Bench, in Carlyle India Advisors Pvt. Ltd. (supra), has held that this company is not comparable to an investment advisor service provider. Same view has also been expressed by the Tribunal, Mumbai Bench, in AGM India Advisors Pvt. Ltd. v/s DCIT, ITA no.4757/Mum./2015, A.Y. 2010–11, order dated 18th May 2016, and other decisions of the Tribunal, Mumbai Bench, relied upon by the learned Sr. Counsel. The Bench in the case of AGM Advisors India Pvt. Ltd. (supra), ultimately concluded as under:– “7. We find that the assessee objected to the inclusion of ICRA– 0 and IDFC on the ground that the TPO had applied no scientific method in arriving at the said two companies that the companies had been cherry – picked by the TPO and he had not furnished the process applied by which he had come to select
45 J.P. Morgan Advisors India Pvt. Ltd. the said two companies, that such an approach to select comparables was impressible in law and on that count alone the said two companies should be rejected, that the first appellate authority had rejected ICRA–O as comparable on investment advisory servies rendered by the assessee and had stated assessee’s knowledge process outsourcing division provided financial and analytical services and support of clients in the areas of Data Extraction, Aggregation, Electronic Conversion of Financial Statements, Validation and Analysis, Accounting and Finance, Research and Analytics, that the company was not engaged in investment advisory or consultancy services, that the A.O. was directed to exclude ICRA–O from the final set of comparable companies, that he had held that it was functionally not comparable to the assessee. Charging of fees by ICRA–O did not mean that it was a valid comparable to the assessee. As per the settled principles of TP for a company to be treated as a valid comparable the functions performed, assets employed and risks assumed have to be comparable and not nomenclatures in the annual accounts. We would like to refer to Pg.507 of the PB in case of ICRA–O and it reads as under:– “ICRA Online Limited is a leading information services, outsourcing and technology solutions provider and caters for some of the biggest names in the financial services sector in (India) and abroad, which is a testimony to its product quality, commitment and credibility.” From the above description it is clear that ICRA–O operated in two strategic lines of business, i.e., knowledge process outsourcing and information services and technology solutions, with a list of reputed global and domestic clients. Note c(iii) on Pg.507 of the PB also proves that the activities performed by the company under the business line “Outsourced Services” were in the nature of “maintenance and management of data” and therefore cannot be compared with the assessee. As far as IDFC is concerned, we would like to mention that a portfolio manager is a body corporate who pursuant to a contract or arrangement with the client would advises or direct or undertake on behalf of the client–whether as a discretionary portfolio manager or otherwise. FAR analysis of a portfolio manager cannot be compared with an assessee engaged in the business of providing investment advisory services. The Tribunal has in the cases discussed at paragraph 6.d.a. held that IDFC was not a valid comparable. Considering the above discussion, we are of the option that the order of the FIRST APPELLATE AUTHORITY and exclude both the comparables does not suffer from any legal or factual infirmity. So, confirming his order, we decide the issue against the AO.”
46 J.P. Morgan Advisors India Pvt. Ltd. 5. It is also relevant to observe, the Hon'ble Jurisdictional High Court in General Atlantic Pvt. Ltd. (supra), while approving the view expressed in Carlyle India Advisors Pvt. Ltd. (supra) has observed that where a company is remunerated on cost plus basis, it is risk insulated, therefore, on application of FAR, it cannot be compared with other companies if there is any difference. Therefore, respectfully following the decision of the co–ordinate bench of the Tribunal referred to above as well as the principle laid down by the Hon'ble Jurisdictional High Court, we reject this company as a comparable.”
The other decisions cited by the learned Authorised Representative also express similar view. Since, the aforesaid decisions pertain to the very same assessment year, respectfully following them we direct the Assessing Officer to exclude this company from the list of comparables.
KSHITIJ INVESTMENT ADVISORY CO. LTD.
Objecting to the selection of this company, the learned Authorised Representative submitted, the company has re–aligned its investment advisory business with Everstone Investment Advisors Pvt. Ltd. w.e.f. 1st January 2010. He submitted, the company has operated only for nine months during the financial year 2009–10 which is evident from sharp drop in operational expenditure as well as revenue due to re–structuring. In this context, he drew our attention to the annual report of the company. Thus, he submitted, the company cannot be treated as a comparable. In support, he relied upon the following decisions:–
47 J.P. Morgan Advisors India Pvt. Ltd. i) Carlyle India Advisors Pvt. Ltd. v/s ACIT, [2016] 66 taxmann.com 14 (Mum. Trib.); and ii) AGM India Advisors Pvt. ltd. v/s DCIT, ITA no.4757/Mum./2015m dated 18.05.2016, dated 18.05.2016.
The learned Departmental Representative relied upon the observations of the Transfer Pricing Officer and learned DRP.
We have considered rival submissions and perused the material on record. On a perusal of the annual report of the company, we find the aforesaid submissions of the learned Authorised Representative acceptable. While deciding the comparability of this company in case of AGM India Advisors Pvt. Ltd. v/s DCIT (supra), the Co–ordinate Bench following its decision in Carlyle India Advisors Pvt. Ltd. v/s ACIT (supra), has excluded it from the list of comparables. The observations of the Co–ordinate Bench in Carlyle India Advisors Pvt. Ltd. (supra) in this regard is as under:–
“22. 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, 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
48 J.P. Morgan Advisors India Pvt. Ltd. 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 saying 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 merited. 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 Everstone Investment Advisors Pvt Ltd during the year under consideration w.e.f 1.1.2010. The note also suggests that the said concern did not enter into any non-compete agreement with Everstone Investment Advisors Pvt. 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 or 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 Everstone Investment Advisory Pvt. Ltd.
49 J.P. Morgan Advisors India Pvt. Ltd. The averments in the Directors 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.”
There being no difference in facts, respectfully following the aforesaid decisions of the Co–ordinate Bench, which are for the very same assessment year, we exclude this company from the list of comparables.
ICRA MANAGEMENT CONSULTING SERVICES LTD. INFORMED TECHNOLOGIES LTD. IDC INDIA LTD.
Comparability issues relating to the aforesaid comparables also arose in assessee’s appeal for the assessment year 2009–10 being ITA no.990/Mum./2014. The argument advanced by learned Counsels appearing for the parties in the appeal for assessment year 2009–10
50 J.P. Morgan Advisors India Pvt. Ltd. were also adopted in the impugned assessment year. Therefore, the facts and contentions relating to the comparability of these companies being identical in both the years under consideration, respectfully following our decision in respect of these comparables while deciding assessee’s appeal in assessment year 2009–10 in earlier part of this order, we direct the Assessing Officer to include these companies as comparable.
Besides the comparables dealt above, in the additional grounds filed on 30th March 2019, the assessee has disputed the selection of Integrated Capital Services Ltd., as a comparable. Pertinently, similar issue was raised by the assessee in its appeal for the assessment year 2009–10, vide ITA no.990/Mum./2014. Respectfully following our detailed reasoning therein in the earlier part of this order, though, we admit the additional grounds raised by the assessee, however, following our decision therein we restore the issue to the Assessing Officer for adjudication after due opportunity of being heard to the assessee. The additional ground is allowed for statistical purpose.
In grounds no.6 and 7, the assessee has raised the issue of non– grant/short grant of credit for TDS and advance tax.
51 J.P. Morgan Advisors India Pvt. Ltd. 89. Having considered rival submissions, we direct the Assessing Officer to verify assessee’s claim factually and allow credit for TDS and advance tax in accordance with law and only after affording reasonable opportunity of being heard to the assessee.
In ground no.8, the assessee has raised the issue of levy of interest under section 234B of the Act.
The issue raised being consequential in nature does not require adjudication at this stage. Ground is dismissed.
In the result, appeal is partly allowed.
To sum up, assessee’s appeals are partly allowed and Revenue’s appeal is dismissed. Order pronounced in the open Court on 19.06.2019
Sd/- Sd/- MANOJ KUMAR AGGARWAL SAKTIJIT DEY ACCOUNTANT MEMBER JUDICIAL MEMBER
MUMBAI, DATED: Copy of the order forwarded to: (1) The Assessee; (2) The Revenue; (3) The CIT(A); (4) The CIT, Mumbai City concerned; (5) The DR, ITAT, Mumbai; (6) Guard file. True Copy By Order Pradeep J. Chowdhury Sr. Private Secretary (Assistant Registrar) ITAT, Mumbai