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Income Tax Appellate Tribunal, MUMBAI BENCH “K”, MUMBAI
Before: SHRI G.S. PANNU & SHRI PAWAN SINGH
The captioned appeal by the assessee is directed against the order dated 31.01.2017 passed by the Assessing Officer u/s 143(3) r.w.s 144C(13) of the Income Tax Act, 1961 (in short ‘the Act’) giving effect to the directions of Dispute Resolution Panel-I, Mumbai (DRP) dated 29.11.2016.
In this appeal, assessee has raised the following Grounds of appeal :-
“Aggrieved by the order passed by the Assistant Commissioner of Income-tax Range -7(1)(1), Mumbai ('AO') in pursuance of the directions issued by Dispute Resolution Panel -1 ('DRP'), Mumbai dated 31 January 2017 under section 143(3) read with section 144C(13) of the Act, the Appellant respectfully submits that the learned AO erred in passing the order on the following grounds:
In making an upward transfer pricing adjustment of Rs 2,94,32,651 by re- computing the arm's length price (ALP) of the international transaction pertaining to provision of non-binding investment advisory services by the Appellant to its overseas associated enterprise (AE) using Transactional Net Margin Method (TNMM) as the most appropriate method, inter alia, on the following grounds:
a) Rejecting the documentation maintained by the Appellant for the international transaction entered into by the Appellant with its AE without giving any cogent reasons; b) Not sharing the search process conducted by the learned transfer pricing officer (TPO) to arrive at the final set of comparable company; c) Identifying a new comparable company without following a scientific search process, namely, Ladderup Corporate Advisory Private limited, which is functionally not comparable to the non-binding investment advisory services provided by the Appellant; d) In arbitrarily selecting a company as a comparable, namely, Ladderup Corporate Advisory Private Limited which earned super- normal profits (38.38%) during the FY 2011 -12 relevant to AY 2012- 13. e) Rejecting the following companies selected as comparables by the Appellant in the transfer pricing documentation: • ICRA Management Consulting Services Limited; • Cyber Media Research Limited (Formerly known as IDC (India) Limited); • Informed Technologies Limited; • Integrated Capital Services Limited. f) Rejecting the use of contemporaneous and multiple year data available for computing the ALP as on the date of filing of return of income and relying only on the single year data (i.e. for the FY ended 31 March 2012) for the purpose of determining the ALP;
2. In making a disallowance of Rs 30,09,500 under section 14A of the Act read with rule 8D(iii) of the Income-tax Rules, 1962 (Rules) on strategic investments made by the Appellant in Benchmark Asset Management Company Private Limited (BAMC) by ignoring the fact:
a) that the primary objective of investment made in BAMC is to have a controlling stake and to further the business interest of the Appellant in BAMC and not with an intention to earn any exempt income in the form of dividend; b) that the entire investment is a strategic investment and no administrative expenditure has been incurred by the Appellant for holding or monitoring the said investment.
In initiating penalty proceedings under section 271(1)(c) of the Act.”
3. The appellant before us is a company incorporated under the provisions of the Companies Act, 1956 and is, inter-alia, engaged in the business of providing asset management and investment advisory services. For the assessment year under consideration, it filed a return of income on 24.11.2012 declaring a total income of Rs.5,87,38,850/-, which was subject to a scrutiny assessment whereby the total income has been assessed at Rs.8,11,95,550/-. Two of the principal additions made to the returned income were, namely, transfer pricing adjustment of Rs.2,94,32,651/- and disallowance u/s 14A of the Act of Rs.30,09,500/-, which are the subject matter of dispute in the present appeal.
Insofar as the Ground of appeal no. 1 is concerned, the same relates to transfer pricing adjustment of Rs.2,94,32,651/- made by the Assessing Officer, in relation to which relevant facts are as follows. The appellant before us is a wholly owned subsidiary of GSM Holding (I) Ltd., a company incorporated in Mauritius. It is a part of Goldman Sachs group of USA and the core business of the group is in the field of providing investment banking, financial advisory, underwriting, trading and principal investment, asset management, securities, banking and financial services. The assessee before us had entered into certain international transactions within the meaning of Sec. 92B of the Act with its associated enterprise as detailed in para 5 of the order of the Transfer Pricing Officer (TPO) passed u/s 92CA(3) of the act dated 29.01.2016. One of the transactions was of providing non- binding investment advisory services to its associated enterprise for which assessee had received a consideration of Rs.21.92 crores. Since Sec. 92(1) of the Act requires computation of income from international transactions having regard to the arm’s length price, the Assessing Officer referred the matter of determination of arm’s length price of such international transactions to the TPO. Before the TPO, assessee pointed out that its margin on providing investment advisory services was 22% on Operating Costs. Assessee benchmarked the transactions by choosing the Transactional Net Margin Method (TNMM) as the most appropriate method. It identified four comparable concerns as detailed in para 6.2 of the TPO’s order and the average margin of such concerns is stated to be -4.32%. Since assessee’s margin of 22% was higher than the average margin of the comparables, assessee asserted that the stated value of the international transactions on account of providing of investment advisory services to its associated enterprise was at an arm’s length price. However, the TPO differed with the assessee on the selection of comparables. The TPO rejected all the four concerns chosen by the assessee as comparable and instead, adopted one concern as a comparable, namely, Ladderup Corporate Advisory Pvt. Ltd., whose margin was 38.38%. The TPO compared this margin with that of the assessee and accordingly, worked out the adjustment of Rs.2,94,32,651/- which, according to him, was required to be made to the stated value of the international transaction of providing of investment advisory services in order to bring it to its arm’s length price. This aspect of the matter has also been affirmed by the DRP and accordingly, the Assessing Officer finalised the assessment by making an addition of Rs.2,94,32,651/- to the returned income.
5. In this background, the learned representative for the assessee pointed out that there was no dispute so far as the nature of services being rendered by the assessee is concerned, being non-binding investment advisory services. It is pointed out that the action of the TPO in considering Ladderup Corporate Advisory Pvt. Ltd. as a comparable is incorrect inasmuch as the said concern is functionally dissimilar. It has been pointed out that the said concern is registered with the SEBI as a Category-I merchant banker and is, inter-alia, engaged in rendering services in investment banking, capital markets, wealth management, project finance and growth stage investing, etc. Reference has also been made to para 9.1 of the order of TPO to point out that assessee had brought out, on the basis of the website extract of the said concern, that it was engaged in rendering investment banking and debt capital services and not investment advisory services. Before the TPO, assessee has also pointed out that even if there was any element of investment advisory services being rendered by the said concern, the Annual Report of the said concern showed that there was no separate reportable segment and, therefore, the said concern could not be compared with the tested transactions. At the time of hearing, the learned representative for the assessee pointed out that for the instant assessment year, under identical circumstances, in the case of Temasek Holdings Advisors (India) Pvt. Ltd. (ITA No. 1429/Mum/2017 dated 03.01.2018), the said concern stood held to be functionally dissimilar to the activities similar to that of the assessee. Reliance has also been placed on the case of Temasek Holdings Advisors (India) Pvt. Ltd. (ITA No. 477/Mum/2016 dated 11.08.2017) and Wells Fargo Real Estate Advisors Pvt. Ltd. (ITA No. 1520/Mum/2016 dated 17.01.2018).
Apart therefrom, it is pointed out that in the following decisions, it has been held that a concern engaged in merchant banking activities could not be compared with a concern which was rendering investment advisory services:- i) CIT vs Temasek Holdings Advisors (India) Pvt. Ltd., of 2014 (Bombay High Court); ii) Goldman Sachs (India) Securities Pvt. Ltd. vs DCIT, ITA Nos. 927/Mum/2016 and 902/Mum/2016; iii) Goldman Sachs (India) Securities Pvt. Ltd. vs ACIT, ITA No. 7724/Mum/2011; and, iv) Goldman Sachs (India) Securities Pvt. Ltd. vs DCIT, ITA No. 222/Mum/2014
On the other hand, the ld. CIT-DR appearing for the Revenue referred to the discussion made by the TPO whereby it is canvassed that the said concern offers various types of services including financial advisory services. It has also been pointed out that the TPO perused the relevant Notes to the Accounts accompanying the Annual financial statements, which showed that the said concern was receiving income by way of corporate advisory services and that the said concern is to be understood as a finance, consultancy and advisory service. It was, therefore, contended that the income-tax authorities made no mistake in treating the said concern as a comparable in order to benchmark the tested transaction.
We have carefully considered the rival submissions. Insofar as the nature of activities undertaken by the assessee is concerned, there is no dispute inasmuch as the assessee is rendering investment advisory services to its associated enterprise, which is sought to be benchmarked. By its very nature, providing of investment advisory services stands on an altogether different footing than merchant banking activities. This distinction has been kept in mind by our co-ordinate Bench in the case of Temasek Holdings Advisors (India) Pvt. Ltd. (supra) wherein also the tested transaction was of providing of investment advisory services. In the said case too, the TPO had considered Ladderup Corporate Advisory Pvt. Ltd. as a good comparable, which was not found acceptable by the Tribunal. A perusal of the said decision dated 03.01.2018 (supra) shows that for an earlier Assessment Year of 2011-12, the said concern was found incomparable primarily on the ground that it was engaged in merchant banking activities, which was quite distinct from its activity of rendering investment advisory services.
In view of the said precedent, which has been rendered based on the fact-situation of the financial year relevant to the assessment year before us, we find no justification to uphold the action of the TPO in considering that Ladderup Corporate Advisory Pvt. Ltd. is a good comparable. Thus, on this aspect, the plea of the assessee is upheld and Ladderup Corporate Advisory Pvt. Ltd. is directed to be excluded from the final list of comparables.
The other grievance which is raised by the assessee is seeking inclusion of the following three concerns in the list of comparables in order to benchmark the transaction :- i) ICRA Management Consulting Services Ltd. ii) IDC (India) Ltd. iii) Informed Technologies India Ltd.
Insofar as Informed Technologies India Ltd. is concerned, the assessee contended before the TPO that the said concern is a good comparable because the said concern collects and analyses data on financial fundamentals, corporate governance and capital market and offers a range of data management services in the financial services sector. It was, therefore, canvassed by the assessee that functionally it is comparable to the activities undertaken by the assessee in its activity of providing investment advisory services.
However, the TPO did not accept the pleas of the assessee as, according to him, the said concern was engaged in IT-enabled knowledge based back office operations, which are distinct from investment advisory and support services undertaken by the assessee. According to the TPO, every kind of advisory service would not be comparable to assessee’s investment advisory services and, therefore, he excluded the said concern from the list of comparables.
In this context, the learned representative had pointed out that for the assessment year under consideration, in a similarly placed situation in the case of Temasek Holdings Advisors (India) Pvt. Ltd. dated 03.01.2018 (supra), the said concern has been held to be a good comparable. At the time of hearing, the learned representative relied on the following decisions to point out that in the context of investment advisory services, the said concern has been held to be a good comparable :- i) Goldman Sachs (India) Securities Pvt. Ltd. vs DCIT, & 902/Mum/2016 dated 11.01.2017; ii) Wells Fargo Real Estate Advisors Pvt. Ltd. vs DCIT, ITA No. 1520/Mum/2016 dated 17.01.2018; iii) DCIT vs Temasek Holdings Advisors (India) Pvt. Ltd., ITA Nos. 477 & 816/Mum/2016 dated 11.08.2017; iv) FIL Capital Advisors India Pvt. Ltd. vs DCIT, ITA No. 7403/Mum/2014 dated 25.10.2016; v) CIT vs Temasek Holdings Advisors (India) Pvt. Ltd., ITA No. 359 of 2015 dated 11.07.2017 (Bombay High Court); vi) DCIT vs Temasek Holding Advisors (P.) Ltd., 47 taxmann.com 311 (Mumbai-Trib.); vii) CIT vs Temasek Holdings Advisors (India) Pvt. Ltd., ITA No. 1051 of 2014 dated 17.11.2016 (Bombay High Court); and, viii) Temasek Holdings Advisors (India) Pvt. Ltd. vs DCIT, ITA Nos. 4203 & 6504/Mum/2012 dated 30.08.2013
On the other hand, the ld. CIT-DR reiterated the stand of the TPO, which we have already noted in the earlier paras and is not being repeated for the sake of brevity.
We have carefully considered the rival submissions. In the context of inclusion of Informed Technologies India Ltd., we find that in the case of Temasek Holdings Advisors (India) Pvt. Ltd. for Assessment Year 2012-13, our co-ordinate Bench was considering its inclusion in the list of comparables in the context of investment advisory services, which is also the transaction under test before us. The Tribunal followed its earlier decision in the case of Temasek Holdings Advisors (India) Pvt. Ltd. for Assessment Year 2011-12 bearing dated 11.08.2017 and held that the said concern was a good comparable. Considering that the functional profile of the assessee before us is similar to that of Temasek Holdings Advisors (India) Pvt. Ltd., in our view, the aforesaid decision of the Tribunal fully covers the controversy before us. In its order dated 03.01.2018 (supra), the Tribunal in the case of Temasek Holdings Advisors (India) Pvt. Ltd. has considered the functional profile of Informed Technologies India Ltd. corresponding to the period under consideration before us also and, therefore, following its decision, it is directed that the said concern be considered as a good comparable in order to arrive at the arm’s length price of the international transaction of providing investment advisory services.
Another aspect in relation to inclusion of Informed Technologies India Ltd. is that for Assessment Years 2013-14 and 2014-15, the TPO has himself accepted the said concern as a good comparable. This aspect was asserted by the learned representative at the time of hearing and it is also canvassed that the functional profile of the assessee as well as of the said concern, namely, Informed Technologies India Ltd. continues to remain the same in the subsequent assessment year. These aspects have not been controverted by the ld. CIT-DR before us and, therefore, on this point too, it is appropriate that the said concern is included as a good comparable.
At the time of hearing, the learned representative for the assessee had pointed out even if one of the three concerns, namely, ICRA Management Consulting Services Ltd., IDC (India) Ltd. and Informed Technologies India Ltd. is accepted as a comparable, the margin of the assessee would be within the permissible variation of 5% as per the second proviso to Sec. 92C(1) of the Act and the impugned disallowance would not remain. Since we have accepted the plea of the assessee for exclusion of Ladderup Corporate Advisory Pvt. Ltd. and inclusion of Informed Technologies India Ltd. as a comparable, considering the aforesaid submissions, there does not remain a need to adjudicate on the other pleas for inclusion of the other two concerns, namely, ICRA Management Consulting Services Ltd. and IDC (India) Ltd. In view of the aforesaid, we direct the Assessing Officer to recompute the arm’s length price of the international transactions of providing investment advisory services, as per our aforesaid directions.
The only other issue in this appeal is with regard to disallowance of Rs.30,09,500/- made u/s 14A of the Act.
On this aspect, the short point pleaded by the assessee was based on the judgment of the Hon'ble Delhi High Court in the case of Cheminvest Ltd. vs CIT, 378 ITR 33 (Del). As per the learned representative, in the absence of any receipt of exempt dividend income during the year under consideration, the disallowance u/s 14A of the Act is not merited. The aforesaid proposition of the assessee is fully supported by the judgment of the Hon'ble Delhi High Court in the case of Cheminvest Ltd. (supra). Insofar as the fact- position of absence of any exempt income is concerned, the ld. CIT-DR has also not controverted the same and, therefore, following the ratio of the Hon'ble Delhi High Court in the case of Cheminvest Ltd. (supra), disallowance u/s 14A of the Act is directed to be deleted.
In the result, appeal of the assessee is allowed.
Order pronounced in the open court on 31st August, 2018.