PIPAL RESEARCH ANALYTICS AND INFORMATION SERVICES INDIA PVT. LTD.,GURGAON vs. ITO, NEW DELHI

Facts in brief qua the transfer pricing adjustment as raised vide ground nos. 1 to 5 are that, assessee company is a custom research company delivering the financial and business research and quantitative analytics to organisation worldwide. It is a captive service provider rendering Information Technology Enabled Services (ITeS) in the nature of business and investment research services. It mainly provides services to Pipal Research Corporation, USA for provision of business and investment research services with clients of Pipal USA and other parts of the world. Pipal USA out sources the services required by its clients to assessee for execution. The functions performed by the assessee in the TP study report has been highlighted as under:-

Being a captive service provider the assessee is exposed to very limited risk and in so far as tangible assets are concerned they are mostly relating to networking equipments, computers, furniture and fixtures, office equipments, software etc. It does not deploy any intangible assets for carrying out business and investment research services. During the year under consideration the provision of ITe services was shown at Rs. 23,19,16,428/-. For benchmarking the margin from such transaction with its AE, the assessee adopted TNMM as most appropriate method by taking PLI as OP/direct cost.

Thus it was reported that the assessee’s transaction with its AE was at arm’s length. The Ld. Transfer Pricing Officer however rejected the economic analysis carried out by the assessee and after detailed discussion, he carried out its own search of comparables and finally shortlisted following seven comparables within average mean of 31.32%. The comparables selected by the TPO were as under:-

Regarding Crisil Limited (Research Segment), he submitted that, firstly, the said company provides services in the areas of credit rating and risk assessments; gas and infrastructure advisory; research on India’s economy, industries and companies; investment research; outsourcing; fund services and risk management; secondly, there were high related party transactions which was to the tune of 60.50% for which a detailed calculation of percentage of RPT has been filed before us. Thus, he submitted that if there are more than 25% of RPT then the said company cannot be taken for the purpose of comparability analysis. In support he relied upon various decisions:-

On the other hand Ld. DR submitted that this company was selected by the assessee which has been accepted by the TPO and this point was not raised before the DRP. In any case without prejudice, he submitted that in case if it is to be included or excluded on the basis of RPT filter, then the matter should be restored back to the file of the AO / TPO to verify the contention of the assessee.

After considering the aforesaid submissions and on perusal of the matter placed on record, we find that one of the main objections raised by the Ld. Counsel for this comparable is that there are high percentage of related party transactions entered by the said company which is almost 60.50%. Once the comparable company is having such a high related party transactions, then it can be held that comparability of controlled transaction with uncontrolled transactions gets vitiated. It is now almost settled by various judicial precedents that for carrying out comparability analysis RPT filter should be around 25%. Since this issue has not been examined from this perspective, therefore, we are of the opinion that for examining the percentage of related party transactions matter should be remanded back to the file of TPO, who shall examine this point and in case the RPT is more than 25%, then this comparable cannot be included in the comparability list and hence should be excluded. With this direction issue of Crisil Limited (Research Segment) is remanded back to the file of the TPO.

Brescon Corporate Advisors Limited: Before us, Ld. Counsel submitted that this company is engaged in Financial Restructuring, syndication of debt and equity related services/ advisory which is entirely different from the business of the appellant which is engaged in entirely consultancy and advisory services to its AE. From the annual reports which have been placed in the paper book he pointed out that Brescon is providing following services:-

On the other hand, Ld. DR strongly relied upon the order of the TPO and DRP and submitted that overall comparability has to be seen and this company is also into financial sector and investments.

After considering the relevant finding given in the impugned order as well as the submission made by the party, we find that Brescon Corporate Advisors Ltd. are not only into advisory services but also into merchant banking, financial restructuring and syndication of debt. Whereas the assessee company as discussed above is purely providing investment advisory services and none of its activities are into merchant banking. Brescon Corporate Advisory is also assisting company in special situations through recapitalisation, mergers and acquisition, infusion of private equity or direct investment etc. The company which is mainly carrying out merchant banking, restructuring and syndication of debt cannot be held to be functionally comparable with a company which is purely into investment advisory services. Apart from that, we find that there is no segmental information with regard to various streams of fees, i.e., financial restructuring and re-capitalisation, syndication of debt equity related advisory, M & A Advisory, etc. In the absence of such segment information, it would be very difficult to carry out in benchmarking analysis with the assessee, because none of such activities are carried out by the assessee. Accordingly, we direct exclusion of said comparable from the list of the comparables.

Khandwala Securities Ltd.: Before us, Ld. Counsel submitted that the overall operations of Khandwala include Investment Banking, Corporate Advisory services, Institutional broking, private client broking and investment advisory services. He also relied upon the following judgments for exclusion of Khandwala Securities Ltd. as a comparable to a company providing investment advisory related support services :-

On the other hand Ld. DR strongly relied upon the order of the TPO and DRP.

After considering the relevant finding given in the impugned order as well as material preferred to before us, we find this company apart from providing corporate advisory services is also providing institutional equity sales, sales trading and research, private client broking and portfolio management services. It also provides corporate advisory services. It also provides a broad range of services including equity capital market transaction, mergers and execution advisory and other such similar services. From the perusal of the annual report and profit and loss account, we find following streams of income:-

From the above it is seen that out of Rs. 16.91 crores from the business operation, brokerage income itself is almost 45% and corporate advisory services is around 46%. The profit and loss account does not give details of segmental revenue except for gross revenue. Moreover advisory services, includes equity capital market transaction, execution of mergers and acquisition advisory services, capital raising advisory services and transaction execution relating to structured finance, real estate and infrastructure. Only few activities undertaken by it under the corporate advisory services which can said to have some similarity with those carried out by the assessee. 13 However in totality if we take the overall streams of revenue and function carried out by this company then it would be very difficult to include such a company into a basket of comparability list and therefore, at entity level and in absence of any overall segment of corporate advisory services, we do not find that it should be included in the comparables. Accordingly, we direct the exclusion of such comparable.

India Venture Capital :- Before us, Ld. Counsel submitted that this company is functionally different. The principal products made by the company are software services as reported in the Balance Sheet Abstract and General Business Profile. The assessee, on the other hand is engaged in rendering ITe Services in the nature of business and investment research services. Therefore, it can be concluded that software development services which are high end in nature are entirely different from ITeS services provided by the assessee. Apart from that, he also submitted that turnover of this company is only 20.25 lacs as compared to that of assessee which is Rs. 23.19 crores. Ld. DR on the other hand strongly relied upon the order of the TPO and DRP.

From the perusal of the annual report, we find that the principal products of this company are software product and services, whereas the assessee company is purely into ITeS which is in the nature of business and investment research services. When a company is into Software development companies then ostensibly it cannot be held to be comparable with ITeS Company and on this ground alone we direct the exclusion of the said company.

In so far as working capital and risk adjustment, no arguments have been placed before us and therefore, same are not adjudicated upon.

As regard the disallowance of Rs. 29,31,485/-, the AO has disallowed the amount on account of provision made during the year for leave encashment by the assessee u/s 43B (f). The DRP has directed the AO to verify whether the said sum of Rs. 29,21,485/- was claimed by the assessee as a deduction and if so the same should be disallowed otherwise no disallowance should be made. The AO in pursuance of such DRP direction noted that the said amount was debited to the profit and loss account and deduction was thus claimed. During the assessment proceedings, the assessee has claimed that the unit is located in a software technology Park of India (STPI) and therefore, eligible for a deduction u/s 10A and since the profits of the unit are exempted u/s 10A, then any expenses pertaining to generation of such profits not allowed as a deduction will get exempted and therefore, section 43B does not apply. However, AO rejected the assessee’s contention and disallowed the same on the ground that such provision of leave encashment which has not been paid will not be allowed.

After hearing both the parties and on perusal of the relevant finding given in the impugned order, we do not find any merits in the contentions raised by the assessee that since the entire income of the assesses is exempt and, therefore, corresponding expenses are also exempt, because from the perusal of the assessment order it is seen that no deduction u/s 10A has been claimed by the assessee and if the provision of leave encashment has not been paid, then in terms of section 43B(f) such amount cannot be allowed as deduction.

In the result the appeal of the assessee is partly allowed.