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Income Tax Appellate Tribunal, “J”BENCH, MUMBAI
Before: SHRI SAKTIJIT DEYAND SHRI MANOJ KUMAR AGGARWAL
Date of Hearing – 10.06.2019 Date of Order – 21.06.2019
2 TPG Capital India Pvt. Ltd. O R D E R PER SAKTIJIT DEY. J.M.
Aforesaid cross appeals arise out of the order dated 23rd December 2016, passed by the learned Commissioner of Income Tax (Appeals)–58, Mumbai, for the assessment year 2010–11.
IT(TP)A no.3068/Mum./2017 Assessee’s Appeal
Though, the assessee has raised nine grounds in the memorandum of appeal, however, at the outset, Shri Porus Kaka, learned Sr. Counsel for the assessee submitted, as per instructions except grounds no.5, 6 and 7, the other grounds are not to be pressed. Further, he submitted, assessee does not want to contest selection of Future Capital Investment Advisors Ltd. as a comparable. In view of the aforesaid submissions of learned Sr. Counsel, all other grounds, except, ground no.5, 6 and 7 are dismissed as not pressed.
In grounds no.5 and 6, the assessee has challenged rejection / selection of the following comparables:–
i) ICRA Management Consulting Services Ltd. ii) Future Capital Holdings Ltd. iii) ICRA Online Ltd. 4. Before we proceed to deal with the issues raised in these grounds, it is necessary to narrate the facts leading to the present dispute.
3 TPG Capital India Pvt. Ltd.
Brief facts are, the assessee, an India company, is a subsidiary of TPG Capital L.P., USA. It provides non–binding investment advisory services to TPG Capital L.P., USA, which is its AE. During the year under consideration, the assessee entered into various international transactions with its AE. However, in the present appeal the only point in dispute is with regard to the adjustment made to the arm's length price of non–binding investment service provided to the AE. It is evident from the facts on record, for provision of investment advisory service to the AE during the year, the assessee has earned revenue of ` 24.56.91.499. To benchmark the arm's length price of the aforesaid transaction, assessee adopted 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 considering itself as a tested party, the assessee selected six companies as comparables with arithmetic mean of 13.97% as against the margin shown by the assessee at 11.04%. Therefore, the price charged for the transaction was claimed to be at arm's length.
The Transfer Pricing Officer, however, did not find the transfer pricing analysis of the assessee reliable. Though, the Transfer Pricing Officer accepted TNMM as the most appropriate method to benchmark the international transaction, however, he excluded one of the comparables selected by the assessee viz. ICRA Management
4 TPG Capital India Pvt. Ltd. Consulting Services Ltd. Further, the Transfer Pricing Officer introduced a fresh comparable viz. Motilal Oswal Investment Advisors Pvt. Ltd. Thus, ultimately, the Transfer Pricing Officer selected six comparables with arithmetic mean of 37.48% on the basis of current year data. By applying the arithmetic mean of the selected comparables to the operating cost, the Transfer Pricing Officer determined the arm's length price of the international transaction at ` 30,63,36,450, as against the price charged by the assessee at ` 24,56,91,499. The resultant short fall of ` 6,06,44,950, was treated as adjustment to the arm's length price shown by the assessee. Pertinently, while determining the arm's length price as aforesaid, the Transfer Pricing Officer did not allow assessee’s claim of risk adjustment. The adjustment proposed by the Transfer Pricing Officer was added back to the income of the assessee while framing the assessment order. Against the assessment order so passed, the assessee preferred appeal before the first appellate authority.
The learned Commissioner (Appeals) after considering the submissions of the assessee granted partial relief to the assessee by excluding Motilal Oswal Investment Advisors Pvt. Ltd. as comparable. Hereinafter, we will deal with each of the comparables disputed before us by the assessee.
5 TPG Capital India Pvt. Ltd. i) ICRA MANAGEMENT CONSULTING SERVICES LTD.
Though, the assessee has selected this company as a comparable in its transfer pricing analysis, however, the Transfer Pricing Officer rejected it alleging functional difference. The learned Commissioner (Appeals) also upheld the aforesaid decision of the Transfer Pricing Officer.
The learned Sr. Counsel for the assessee submitted, the only reason for which the Department has rejected this company is, its advisory services are different from the assessee. The learned Sr. Counsel submitted, in assessee’s own case the Tribunal has accepted this company as comparable in A.Y. 2008–09 and 2009–10. He submitted, even in case of assessee’s sister concern for the very same assessment year the Tribunal has accepted this company as a comparable to an investment advisory service provider. Thus, he submitted, the company being functionally similar to the assessee should be included as a comparable. In support of such contention, he relied upon the following decisions:–
i) TPG Capital India Pvt. Ltd. v/s ACIT, ITA no.880/Mum./ 2013, dated 29.10.2014; ii) TPG Capital India Pvt. Ltd. v/s DCIT, ITA no.7594/Mum./ 2014, dated 08.02.2017; iii) TPG Capital India Pvt. Ltd. v/s DCIT, ITA no.5411/Mum./ 2016, dated 07.12.2018;
6 TPG Capital India Pvt. Ltd. iv) CIT v/s Temasek Holdings Advisors India Pvt. Ltd., ITA no. 1051/Mum./2014, dated 17.11.2016; v) Temasek Holdings Advisors India Pvt. Ltd. v/s DCIT, ITA no. 776/Mum./2015, dated 18.05.2016; vi) AGM India Advisors Pvt. Ltd. v/s DCIT, ITA no.4757/Mum./ 2015 and ITA no.4801/Mum./2015, dated 18.05.2016; and vii) Warburg Pincus India Pvt. Ltd. v/s DCIT, Mum./2015, dated 12.04.2017.
The learned Departmental Representative strongly relying upon the observations of learned Commissioner (Appeals) submitted, though, the assessee claims that the company has investment advisory segment, however, no segmental details are available. Therefore, it cannot be treated as comparable.
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 placed in the paper book, it is to be understood that the nature of service provided by the company is more or less similar to the assessee. As could be seen, this company was selected as a comparable by the Transfer Pricing Officer himself in assessment year 2008–09. Similarly, though, in assessment year 2009–10 the Transfer Pricing Officer rejected this company as a comparable, however, while deciding assessee’s appeal in ITA no. 7594/Mum./2014, dated 8th February 2017, the Tribunal accepted it as a comparable. Pertinently, in case of TPG Growth Advisors India Pvt.
7 TPG Capital India Pvt. Ltd. Ltd., which subsequently became the present assessee, for the very same assessment year the Tribunal in ITA no.5411/Mum./2016, dated 7th December 2018, has accepted this company as a comparable. Even, in the other decisions cited by the learned Sr. Counsel, which are for the very same assessment year, this company has been accepted as a comparable to an investment advisory service provider. Respectfully following the decisions of the Tribunal in assessee’s own case as well as in case of others as cited supra, we direct the Assessing Officer to include this company as a comparable.
This company was selected by the assessee and also retained by the Transfer Pricing Officer and the learned Commissioner (Appeals). The only objection of the assessee in respect of this comparable is, the Transfer Pricing Officer has not computed the margin of the company correctly.
The learned Sr. Counsel for the assessee submitted, while the Transfer Pricing Officer has computed the margin of the company at 29.48%, the actual margin of the company is 16.26%. To demonstrate such fact, learned Sr. Counsel drew our attention to the decision of the Tribunal in Carlyle India Advisors Pvt. Ltd. v/s ACIT, [2016] 66 taxmann.com 14 (Mum.). The learned Sr. Counsel submitted, while
8 TPG Capital India Pvt. Ltd. deciding the aforesaid company’s appeal for the very same assessment year i.e., 2010–11, the Tribunal has noted that the margin of the investment advisory segment of the company is 16.26%. Further explaining, learned Sr. Counsel submitted, the difference in margin between the Transfer Pricing Officer and the figures mentioned in the Tribunal’s decision in case of Carlyle India Advisors Pvt. Ltd. is, because of the fact that the unallocated corporate expenditure of ` 5,25,74,918, has not been allocated to all the segments. The learned Sr. Counsel submitted, if unallocated expenditure is proportionately allocated to all the segments, the margin of this company from investment advisory segment would be 16.26% as has been mentioned in the Tribunal’s order in Carlyle India Advisors Pvt. Ltd. (supra). Thus, he submitted, the margin of this company should be computed @ 16.26% subject to verification by the Transfer Pricing Officer.
The learned Departmental Representative, though, relied upon the observations of the Transfer Pricing Officer and learned Commissioner (Appeals), however, he fairly submitted that assessee’s claim may be verified by the Assessing Officer and the Transfer Pricing Officer.
We have considered rival submissions and perused the material on record. At the outset, we must make it clear that there is no 9 TPG Capital India Pvt. Ltd. dispute between the parties that the company is a comparable to the assessee. The dispute is only with regard to the margin computation of the company. While the Transfer Pricing Officer has computed the margin of the company for the F.Y. 2009–10 at 29.48%,it is the contention of the assessee that the actual margin relating to the investment advisory segment of the company is 16.26%. On a perusal of the order passed by the Tribunal in case of Carlyle India Advisors Pvt. Ltd. (supra), it appears that the margin of this company for F.Y. 2009–10 has been computed at 16.26%. The reason for such computation according to the learned Sr. Counsel is due to proportionate allocation of unallocated expenditure to all the segments including investment advisory segment. In our view, the aforesaid claim of the assessee merits consideration. Therefore, we direct the Assessing Officer to factually verify assessee’s claim with regard to the actual margin of the investment advisory segment of the company and, thereafter consider the same for computing the arm's length price of the assessee. However, before taking any decision on this issue, the assessee must be provided adequate opportunity of being heard.
Though, this company was selected by the assessee itself in its transfer pricing analysis, however, before us, the assessee seeks exclusion of the company as a comparable.
10 TPG Capital India Pvt. Ltd.
The learned Sr. Counsel for the assessee submitted, while selecting the company as comparable complete information about the company was not available in public domain. However, subsequently, on the basis of information available in public domain, it came to the notice of the assessee that the company is functionally different as it is engaged in providing completely different nature of services. Therefore, in no way, it can be comparable to the assessee. The learned Sr. Counsel submitted, due to the aforesaid reason the consistent view of the Tribunal in various cases is in favour of excluding the company as a comparable to an investment advisory service provider. In support of his contention, the learned Sr. Counsel relied upon the following decisions:–
i) AGM India Advisors Pvt. Ltd. v/s DCIT, ITA no.4757/Mum./ 2015 and ITA no.4801/Mum./2015, dated 18.05.2016; ii) Arisaig Partners India Pvt. Ltd. v/s ACIT, ita no.840/Mum./ 2015, dated 11.11.2016; iii) Sparkles Dhandho Advisors Pvt. Ltd. v/s ITO, Mum./2015, dated 03.01.2018; and iv) Mount Kellet Capital Management India Pvt. Ltd. v/s DCIT, ITA no.887/Mum./2015, dated 11.11.2016
The learned Departmental Representative strongly supporting the exclusion of this company submitted, since the assessee itself had selected it as a comparable and had never objected it before the Departmental Authorities, it cannot do so now before the Tribunal.He
11 TPG Capital India Pvt. Ltd. submitted, whether a particular company is a comparable or not is a purely factual issue requiring investigation into facts. Therefore, assessee’s contention for removing the comparable on the basis of fresh facts should not be entertained at this stage.
In rejoinder, the learned Sr. Counsel for the assessee submitted, the entire purpose of introducing the transfer pricing mechanism is to determine arm's length price of an international transaction between the AE with similar comparable uncontrolled transaction. Therefore, if a company in real sense is not a comparable there is no purpose in undertaking a comparability analysis with that comparable. Thus, he submitted, it has to be factually verified whether a particular company is comparable or not before accepting or rejecting it. He submitted, though, the assessee might have selected it as a comparable, however, if the company is not functionally comparable to the assessee, it cannot 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. No doubt, the assessee in its transfer pricing analysis has selected this company as a comparable. It is also a fact that neither before the Transfer Pricing Officer nor before learned Commissioner (Appeals), the assessee has objected to the inclusion of this company as a comparable. Thus, truly speaking, the issue raised by the assessee
12 TPG Capital India Pvt. Ltd. relating to the comparability of this company before us is a completely new issue raised for the first time. However, it is the contention of learned Sr. Counsel that due to insufficiency of data / information available in the public domain at the relevant point of time, the assessee had selected this company as a comparable. From the annual report of the company placed in the paper book, it is noticed that this company operates in two segments of business, i.e. Knowledge Process Outsourcing and Information Services and technology solutions with a list of reputed global and domestic clients. Thus, prima facie, it appears that the company is functionally different from the assessee. In various decisions also, some of which have been filed before us by the learned Sr. Counsel for the assessee, the Tribunal has held that this company is not a comparable to a company engaged in the business of providing investment advisory service. In our view, the primary issue which requires to be considered is, whether the assessee and this company are functionally similar to be considered as comparables. In this regard, a detailed analysis of the functions performed by the assessee and the comparable has to be analyzed. Undisputedly, the Departmental Authorities had no occasion to factually verify the reasons / grounds on which the assessee seeks exclusion of this company as a comparable. Therefore, in the interest of fair play and justice, we are inclined to restore the issue relating to the comparability of this company to the Assessing Officer for fresh
13 TPG Capital India Pvt. Ltd. adjudication after due opportunity of being heard to the assessee. The Assessing Officer while deciding the issue must deal with and keep in view the submissions to be made by the assessee and the ratio laid down in the decisions relied upon. Grounds no.5 and 6, are disposed of accordingly.
In ground no.7, the assessee has challenged disallowance of risk adjustment.
The learned Sr. Counsel for the assessee submitted, in course of proceedings before the Transfer Pricing Officer, the assessee had made detailed submissions and has also furnished a working providing for risk adjustment while computing the margin of the comparables. However, the Departmental Authorities have not properly considered assessee’s claim. He submitted, assessee being a captive service provider to its AE is a completely risk mitigated entity. Whereas, the comparables are not so as they are exposed to various risk factors including market risk. The learned Sr. Counsel submitted, assessee’s income is not connected to the acceptance of advice given by it to the AE. He submitted, the assessee is also remunerated at cost plus mark–up basis. Therefore, it is completely insulated from various kinds of risk which may not be the case with the comparables. Therefore, for such risk difference between the assessee and the comparables, necessary adjustment has to be made to the margin of the 14 TPG Capital India Pvt. Ltd. comparables as per the provisions of rule 10B(1)(e)(iii). He submitted, considering various factors assessee has computed risk adjustment on scientific basis which has not been considered properly by the Transfer Pricing Officer. In this context, he drew our attention to the submissions made before the Transfer Pricing Officer, a copy of which is placed at Page–349 of the paper book. The learned Sr. Counsel submitted, it is now fairly well settled that adjustment on account of risk factor has to be provided. In this context, he relied upon the following decisions:–
i) PCIT v/s Watson Pharma Pvt. Ltd., [2008] 95 taxmann.com 281; ii) CIT v/s General Atlantic Pvt. Ltd., [2016] 384 ITR 271; iii) DBOI Global Service Pvt. Ltd. v/s ACIT, [2016] 74 taxmann.com 83; iv) Walt Disney Co. India Pvt. Ltd. v/s DCIT, [2017] 81 taxmann.com 321 (Mum.); and v) Watson Pharma Pvt. Ltd. v/s DCIT, [2015] 54 taxmann.com 88 (Mum.).
The learned Departmental Representative drawing our attention to the transfer pricing analysis of the assessee submitted, assessee has also borne some risk like quality risk and employment attrition risk. Thus, he submitted, assessee cannot be treated as a completely risk mitigated entity. Relying upon the observations of learned Commissioner (Appeals) he submitted, assessee being a captive
15 TPG Capital India Pvt. Ltd. service provider to its AE bears single customer risk as the assessee is not permitted to enter into transactions with third parties. Therefore, in case of a failure of the AE, assessee’s business would be put at risk. Further, he submitted, the working of risk adjustment furnished by the assessee is not on scientific basis but is general in nature. Therefore, he submitted, no risk adjustment should be allowed.
We have considered rival submissions and perused the material on record. It is a fact that though in the transfer pricing study report, the assessee has not provided for any adjustment to the margin of the comparable on account of risk factor, however, it has made a risk analysis. It is evident, assessee is a captive service provider to its AE and is remunerated at cost plus mark–up basis. Thus, it is a fact that most of the risks are assumed by the AE and the assessee so to say is a risk mitigated entity. It is apparent, in course of proceedings before the Transfer Pricing Officer, the assessee in its submissions dated 30th July 2013, has claimed risk adjustment and has also furnished a working providing for risk adjustment while computing margin of the comparables. It is observed, neither the Transfer Pricing Officer nor learned Commissioner (Appeals) have properly appreciated the claim of the assessee vis–a–vis the facts on record. While the Transfer Pricing Officer has rejected assessee’s claim of risk adjustment by stating that the assessee has not done so in the transfer pricing study
16 TPG Capital India Pvt. Ltd. report, learned Commissioner (Appeals) has rejected assessee’s claim by stating that the assessee also bears single customer risk. In our view, assessee’s claim of risk adjustment requires consideration. Now, it is fairly well settled that in appropriate cases, adjustment towards risk factor can be allowed. In fact, rule 10B(1)(e)(iii) provides for such adjustment. The Hon'ble Jurisdictional High Court in Watson Pharma Pvt. Ltd. (supra) has approved the decision of the Tribunal in allowing risk adjustment. In case of DBOI Global Services Pvt. Ltd. (supra), the Tribunalrejecting the single customer risk argument put forward by the Department has restored the issue to the Assessing Officer / Transfer Pricing Officer for considering assessee’s claim of risk adjustment. The Tribunal in Walt Disney Co. Ltd. (supra) has also restored the issue with a direction to consider assessee’s claim of risk adjustment. In the facts of the present case, it is the plea of the assessee that compared to it, the comparables are risk bearing entities. In fact, it is seen from the order of the Transfer Pricing Officer, he had rejected one of the comparables selected by the assessee i.e., ICRA Management Consultancy Services Ltd. by stating that it is a high-risk entity. Thus, according to the Transfer Pricing Officer also, risk is a relevant factor for comparability analysis. In view of the aforesaid, though, in principle we agree with learned Sr. Counsel for the assessee that risk adjustment in appropriate cases has to be allowed, however, the working of risk adjustment furnished by the assessee requires
17 TPG Capital India Pvt. Ltd. verification at the end of the Assessing Officer / Transfer Pricing Officer. We, therefore, restore the issue to the Assessing Officer / Transfer Pricing Officer for factual verification of assessee’s claim of risk adjustment qua the comparables. Needless to mention, the Assessing Officer must decide the issue in accordance with law and after providing adequate opportunity of being heard to the assessee keeping in view the decisions to be cited by the assessee. This ground is allowed for statistical purposes.
./2017 Revenue’s Appeal
In this appeal, the Revenue has challenged the decision of the learned Commissioner (Appeals) in excluding Motilal Oswal Investment Advisors Pvt. Ltd. as a comparable.
As discussed earlier, this company was introduced by the Transfer Pricing Officer as a fresh comparable by the despite the objection of the assessee. However, learned Commissioner (Appeals) having found that the company is engaged in the business of investment / merchant banking has excluded it 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 by the parties on the issue of comparability of this company. After careful reading of the decisions cited before us, we are of the 18 TPG Capital India Pvt. Ltd. considered opinion that the issue relating to the comparability of this company is no more res integra in view of the judicial pronouncements cited before us. Undisputedly, this company is in the business of investment / merchant banking which is completely different from investment advisory service provided by the assessee. For this reason alone, this company has to be excluded as a comparable. Therefore, consistent with the view expressed in the judicial pronouncements cited before us, we uphold the decision of learned Commissioner (Appeals) in excluding this company as a comparable. Grounds raised are dismissed.
In the result, 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