TEMASEK HOLDINGS ADVISORS INDIA P.LTD,MUMBAI vs. ITO CIR 14(3)(1), MUMBAI

आदेश / O R D E R

PER RAVISH SOOD, JUDICIAL MEMBER:

P a g e | Temasek Holdings Advisors India Pvt. Ltd. Vs. ITO Circle 14(3)(1) 30.01.2017. The assessee had assailed before us the order of the A.O by raising the following grounds of appeal:-

“Based on the facts and circumstances of the case, Temasek Holdings Advisors India Private limited (hereinafter referred to as the 'Appellant') respectfully craves leave to prefer an appeal under section 253 of the Income- tax Act, 1961 (Act) against the order dated 30 January 2017 passed by the Income-tax Officer, Circle - 14(3)(1), Mumbai (hereinafter referred to as the 'learned AO') under section 143(3) read with section 144C(13) of the Act in pursuance of the directions issued by the Dispute Resolution Panel - 2, Mumbai (Hon'ble DRP). Ground 1 On the facts and in the circumstances of the case and in law, the learned AO based on the directions of the Hon'ble DRP, erred in making an upward adjustment of INR 62,254,019 in determining the arm's length price (ALP) of the international transaction pertaining to the provision of non-binding investment advisory services by the Appellant to its Associated Enterprise. Ground 2 On the facts and in the circumstances of the case and in law, the learned A.O based on the directions of the Hon'ble DRP, failed to appreciate that the ALP as determined by the Appellant by applying the prescribed method in accordance with subsection (1) and (2) of section 92C of the Act, should have been accepted since the pre-condition in section 92C(3) of the Act, before the Deputy Commissioner of Income-tax, Transfer Pricing - 4(2)(1) (hereinafter referred to as 'learned TPO') could proceed to determine the ALP, was not fulfilled in this case. Further, the data used by the Appellant in computation of ALP is taken from two widely recognised commercial information databases for obtaining publicly available financial information in India. The Appellant has used the contemporaneous data for computation of the ALP as on the date of filing of return of income in accordance with Rule 10D(4) of the Income-tax Rules, 1962 (Rules). The transfer pricing documentation, detailed workings and all the other information requested by the learned Transfer Pricing Officer were provided during the course of assessment proceedings. Given that the comparability analysis undertaken by the Assessee was based on well accepted TP principles, the learned A.O has erred in rejecting the search process that is adopted by the Appellant in its transfer pricing documentation and has also not highlighted the specific sub-clause of Section 92C(3) of the Act, on the basis of which the same has been rejected. Ground 3 On the facts and in the circumstances of the case and in law, the learned A.O based on the directions of the Hon'ble DRP, erred in not following a search process in determining the comparable companies and arbitrarily

P a g e | Temasek Holdings Advisors India Pvt. Ltd. Vs. ITO Circle 14(3)(1) selecting the comparable companies to benchmark the transaction of non- binding investment advisory services rendered by the Appellant. Grounds 4 On the facts and in the circumstances of the case and in law, the teamed A.O based on the directions of the Hon'ble DRP has, in arriving at the arithmetic mean of the comparable companies to benchmark the transaction of non- binding investment advisory services rendered by the Appellant, erred on the following grounds: a. In rejecting ICRA Management Consulting Services Limited, ICRA Online Limited, Informed Technologies Limited, Integrated Capital Services Limited and Cyber Media Research Limited [formerly known as IDC (India) Limited] selected by the Appellant as comparable companies in the transfer pricing documentation maintained by the Appellant; b. In selecting Ladderup Corporate Advisory Private Limited, ICRA Techno Analytics Limited and CRISIL Limited as comparable companies with regard to the non-binding investment advisory services provided by the Appellant when in fact the said companies are functionally not comparable to the Appellant. Further the learned A.O has not provided an opportunity of being heard to the Appellant regarding the comparability of these companies additionally included by the learned AO; and c. In computing the incorrect operating margin of Ladderup Corporate Advisory Private Limited, ICRA Techno Analytics Limited and CRISIL Limited, and in not sharing the basis of computation of arriving at the operating margins of the said comparable companies. Ground 5. On the facts and in the circumstances of the case and in law, the Hon'ble DRP erred in concluding that the Appellant is engaged in rendering, non- discretionary portfolio management/ investment management services. Ground 6. The learned AO, based on the directions of the Hon'ble DRP erred, on facts and in law, in rejecting the use of contemporaneous and multiple year data available for computing the ALP as on the date of filing the return of income and relying only on single year data (i.e. for the year ended

31. March 2012) for the purpose of determining the ALP. In this regard, since the comparable data in respect of all the companies for the financial year (FY) 2011-12 was not available at the time of complying with the documentation requirements under the Act, the Appellant has computed the arm's length nature of the international transaction of provision of non-binding investment advisory services using the financial information of the comparable companies pertaining to the FY 2009-10, FY 2O1O-11 and FY 2011-12 that were available at the time of complying with the TP documentation requirements. During the P a g e | Temasek Holdings Advisors India Pvt. Ltd. Vs. ITO Circle 14(3)(1) assessment proceedings, the Appellant has submitted detailed reasoning on the use of contemporaneous and multiple year data with the learned TPO vide submission dated 2 March 2015. Each of the grounds of appeal referred above is separate, and may kindly be considered independent of each other. The Appellant craves leave to add, alter, vary, omit, substitute or amend any or all of the above grounds of appeal, at any time before or at, the time of the appeal, so as to enable the Hon'ble Income-tax Appellate Tribunal to decide this appeal according to law.”

2. Briefly stated, the facts of the case are that the assessee company which is engaged in the business of rendering non-binding Investment Advisory Services to its holding company, viz. Temasek Holdings Pvt. Ltd., had e-filed its return of income for AY 2012-13 on 26.11.2012, declaring total income of Rs.8,57,28,430/-. The return of income filed by the assessee was processed as such under Sec. 143(1) of the Act. The case of the assessee was thereafter selected for scrutiny assessment under Sec. 143(2) of the Act.

P a g e | Temasek Holdings Advisors India Pvt. Ltd. Vs. ITO Circle 14(3)(1) ICRA Management Consulting 7.60% 6.94% Services Limited. ICRA Online Limited. 30.65% 16.64% Informed Technologies Limited. 15.10% 8.26% Integrated Capital Services Limited. -2.92% -1.98% Arithmetic Mean 13.21% -0.13% 4. The A.O during the course of the assessment proceedings made a reference under Section 92CA(1) to the Transfer Pricing Officer (for short ‘TPO’) for computation of Arm’s Length Price (‘ALP’) in respect of the Investment Advisory Services rendered by the assessee company, viz. Temasek Holdings Advisory India Pvt. Ltd. (‘THAIPL’) to its holding company, viz. Temasek Holdings Pvt. Ltd., Singapore (‘THPL’). The TPO not being persuaded to subscribe to the contention of the assessee that multiple year averages were to be used for the purpose of benchmarking the ALP, thus being guided by Rule 10D, which as per him required that only contemporaneous data to be used, therefore, considered the current year data for the purpose of comparability while examining the international transactions of the assessee with its AE. That still further, the TPO in his order observed that the assessee was also performing non- discretionary portfolio management services for its AE. The TPO rejected all the comparables selected by the assessee and substituted the same by a set of three new comparables, which were identified by him as comparable to the assessee, as under:- Name of the Company Operating Margin for F.Y. 2011-12 ICRA Techno Analytics Limited (Segment – 24.96% Professional Services). CRISIL Limited (Segment-Research Services) 50.09% Ladderup Corporate Advisory Private Limited. 38.41% Arithmetic Mean 37.82%

P a g e | Temasek Holdings Advisors India Pvt. Ltd. Vs. ITO Circle 14(3)(1)

The TPO adopted the average margin of 37.82% on operating costs as the ALP margin as against 19.42% shown by the assessee, and vide his order passed under Section 92CA(3), dated 13/01/2016, calculated the ALP in respect of the Investment Advisory Services rendered by the assessee company, viz. Temasek Holdings Advisory India Pvt. Ltd. to its AE, as under: Calculation of arms length price OP/OC of comparables A 37.82% OP/OC of assessee B 19.42% Total operating income C 40,40,42,118 Operating cost as per assessee D 33,83,37,061 Arms length operating cost E=D*A 12,79,59,076 Arms length value of transaction F=D+E 46,62,96,137 Difference in actual and arms length G=F-C 6,22,54,019 5% of international transaction H=5% of I 2,02,02,016 Adjustment proposed 6,22,54,019 The TPO thus proposed an upward Transfer pricing adjustment of Rs.6,22,54,019/-.

No.

4. It was submitted by the ld. A.R that the TPO in the present case had failed to pass a speaking order and had merely reproduced the observations of his predecessor for the immediately preceding year, viz. AY 2011-12. The ld. A.R in order to fortify his aforesaid contention took us through the order of the TPO, which revealed that the latter had from Para 9 to Para 18.2.2 merely reproduced the observations recorded by his predecessor in the immediately preceding year, viz. A.Y 2011-12. It was submitted by the ld. A.R that the TPO instead of deliberating on the facts of the case in the backdrop of the submissions of the assessee, had rather adopted a convenient approach by transposing the order passed by his predecessor for the immediately preceding year in the order for the year under consideration. The ld. A.R adverting to the rejection of the comparables selected by the assessee in its TP study report for benchmarking its international transactions pertaining to provision of Investment advisory services rendered to its AE, submitted that the exclusion of the comparables selected by the assessee was upheld by the DRP by merely the observations of his predecessor in P a g e | Temasek Holdings Advisors India Pvt. Ltd. Vs. ITO Circle 14(3)(1) the case of the assessee for A.Y 2011-12. The ld. A.R submitted that the exclusion of two comparables, viz (i) ICRA management Consultancy Services Ltd.; and (ii) Informed Technologies Ltd. had been set aside by the Tribunal while disposing of the appeal of the assessee for. A.Y 2011-12, viz. Temasek Holdings Advisors India Pvt. Ltd Vs. DCIT (ITA No. 477/Mum/2016 and AY 2011-12), dated 11.08.2017. It was submitted by the ld. A.R that the Tribunal after deliberating at length on the aforesaid two comparables, observing that as the same were good comparables had directed the AO/TPO to include the same in the final list of comparables. That as regards the comparables which had been included by the TPO and thereafter approved by the DRP, it was submitted by the ld. A.R that one of the comparable, viz. Ladderup Corporate Advisory Pvt. Ltd. was also included by the TPO in the case of the assessee for the immediately preceding year, viz. A.Y 2011-12 and approved by the DRP, but however, the same on appeal by the assessee was directed by the Tribunal to be excluded from the final list of comparables, for the reason that the same was functionally incomparable to the assessee company. That as regards the remaining two comparables, viz. (i) ICRA Techno Analytics Ltd., (Segment-Professional services); and (ii) CRISIL Ltd. (Segment Research Services), it was submitted by the ld. A.R that as in the case of the CRISIL Ltd, the related party transactions (for short ‘RPT’) were to the extent of 47.1%, therefore, the same could not have been taken as a comparable. The ld. A.R to fortify his aforesaid contention took us through Page 41 - Para 10.151 of his objection filed before the DRP, which revealed that inclusion of the said comparable was assailed by the assessee before the DRP, in the backdrop of the fact that it had significant RPT of 47.71%. That as regards ICRA Techno Analytics Ltd., it was submitted by the ld. A.R that as the said comparable was a Software development company, P a g e | Temasek Holdings Advisors India Pvt. Ltd. Vs. ITO Circle 14(3)(1) therefore, the same being functionally different was wrongly included by the TPO as a comparable in the case of the assessee. It was further submitted by the ld. A.R that the TPO while including the aforesaid comparables had neither confronted the same nor afforded an opportunity of being heard to the assessee. The ld. A.R in order to drive home his contention that no opportunity of being heard was afforded by the TPO while including the fresh set of comparables, drew our attention to Page 39-Para10.135 of the objections filed before the DRP, which revealed that a specific objection as regards non affording of an opportunity by the TPO as regards inclusion of CRISIL as a comparable was raised by the assessee before the DRP. The ld. A.R further to support his claim that specific objection as regards non affording of an opportunity of being heard by the TPO, while selecting ICRA Techno Analytics as a comparable was raised before the DRP, took us through Page 42- Para 10.156 of the objections, which duly substantiated his aforesaid contention. It was submitted by the ld. A.R that despite the fact that the failure on the part of the TPO to allow an opportunity of being heard to the assessee while including the aforesaid comparables, viz. (i). CRISIL; and (ii). ICRA Techno Analytics was specifically raised before the DRP, however, the said objection of the assessee was not disposed. The ld. A.R drew our attention to Page 18 - Para 10.25 of the objections filed before the DRP, and submitted that the assessee had further averred before the DRP that the TPO had merely relied on the order passed by his predecessor for A.Y 2011-12 and had failed to conduct any fresh analysis for the year under consideration. The ld. A.R further took us through the relevant pages of the order passed by the DRP. Per contra, the ld. Departmental Representative (for short ‘D.R’) relied on the order passed by the ITAT, Delhi in the case of the Motorola Solution India (P) Ltd., Vs. ACIT- Circle-2(2014) 48 taxman.com 248 (Delhi-Trib), to support his P a g e | Temasek Holdings Advisors India Pvt. Ltd. Vs. ITO Circle 14(3)(1) contention that as the assessee was providing services to its AE as a captive service provider, therefore, the TPO had rightly selected the comparables in the final list of comparables. The ld. D.R submitted that the appeal of the assessee was devoid of any merit and deserved to be dismissed.

P a g e | Temasek Holdings Advisors India Pvt. Ltd. Vs. ITO Circle 14(3)(1) “9. We have heard the Ld. Authorized Representatives for both the parties, perused the orders of the lower authorities and the material placed on record. We have given a thoughtful consideration to the facts of the case and find that the DRP as a matter of fact relying on the order passed by his predecessor in the case of the assessee for A.Y. 2010-11, wherein the rejection of the aforesaid comparable, viz. ICRA Management Consultancy Services Limited by the TPO was upheld by his predecessor, had merely gone by the said very reason and upheld the rejection of the said comparable during the year under consideration. We find that the rejection of the aforesaid comparable by the AO/TPO in A.Y. 2010-11 had been set aside by the Tribunal in the case of the assessee, reported as Temasek Holding Advisors India Private Limited Vs. DCIT, Circle 14(3)(1), Mumbai, vide order dated 25.02.2016, wherein the Tribunal had categorically held that the aforesaid company, viz. ICRA Management Consultancy Services Limited was a good comparable and had directed the inclusion of the same in the list of the final comparables. We are of the considered view that now when the order of the AO/TPO in the case of the assessee for the immediately preceding year, viz. A.Y. 2010-11, therein excluding the aforesaid comparable, viz. ICRA Management Consultancy Services Limited had been set aside by the Tribunal, therefore the rejection of the said comparable, viz. ICRA Management Consultancy Services Limited by the A.O during the year under consideration pursuant to the direction of the DRP, wherein the latter had merely followed the order of his predecessor so passed in the case of the assessee for. A.Y. 2010-11, which as observed by us hereinabove had been set aside by the Tribunal, thus cannot be upheld and is liable to be vacated on the said count itself. We are further persuaded to subscribe to the contention of the ld. A.R that cherry picking of the comparables every year by the TPO, without pointing out that the facts in context of the comparables accepted in the preceding years had changed during the year under consideration, cannot be permitted. We further find that the aforesaid comparable, viz. ICRA Management Consultancy Services Limited had also been held to be a good comparable by the Tribunal in the case of the assessee for A.Y(s). 2007-08, 2008-09 and 2009-10, while for in the earlier years the TPO himself had accepted the said company as a comparable. Thus in the totality of the aforesaid facts, we find no reason to take a divergent view, and thus set aside the order of the AO/TPO rejecting the aforesaid comparable, and therein direct that the same be included in the final list of the comparables.” We further find that the Tribunal in its aforesaid order had also concluded that Informed Technologies Ltd was rightly selected by the assessee as a comparable, and had directed the AO/TPO to include the same in the final list of the comparables, by observing as under:

P a g e | Temasek Holdings Advisors India Pvt. Ltd. Vs. ITO Circle 14(3)(1)

11. We have heard the ld. Authorized Representatives for both the parties, perused the orders of the lower authorities and the material produced before us. We have given a thoughtful consideration to the facts of the case and find that in the case of the assessee for the immediately preceding year, i.e A.Y. 2010-11, the aforesaid comparable had been accepted by the TPO as a good comparable, and was consequently included in the final list of comparables. We find ourselves to be in agreement with the contention of the ld. A.R that now when the aforesaid comparable had been accepted by the TPO in the immediately preceding year, i.e A.Y. 2010-11, therefore without pointing out any substantial variance, either functionally or otherwise, it would be absolutely impermissible on the part of the TPO to whimsically reject the said comparable during the year under consideration. We are further persuaded to subscribe to the contention of the ld. A.R that though „declining turnover‟ filter may be appropriate in scale based operations, but the same cannot be applied to the exclusion of the other relevant factors for drawing of adverse inferences in the case of a service entity, as margins in the latter case are not dependent on the scale or size of operations. Thus in the backdrop of our aforesaid observations, we are of the considered view that now when the comparable, viz. Informed Technologies Limited had been considered as a good comparable qua the functions performed by the assessee in A.Y. 2009-10 and A.Y. 2010-11, therefore in the absence of any material change, there is no reason as to why the same is to be rejected as a comparable during the year under consideration. We thus in the backdrop of our aforesaid observations are of the considered view that the aforesaid comparable, viz. Informed Technologies Limited had rightly been selected by the assessee as a comparable, and thus set aside the order of the AO/TPO, and direct that the same be included in the final list of the comparables.

We thus being of the considered view that as both of the aforesaid comparables, viz (i) ICRA management Consultancy Services Ltd.; and (ii) Informed Technologies Ltd. had been held by the Tribunal to be good comparables while disposing of the appeal of the assessee for the immediately preceding year, viz. A.Y. 2011-12, therefore, now when there is no change in the functional profile of the said respective comparables as in comparison to that of the assessee company, and the facts and circumstances involved therein remain the same, thus it can safely be concluded that the assessee had rightly included the said comparables in its TP study report for benchmarking its P a g e | Temasek Holdings Advisors India Pvt. Ltd. Vs. ITO Circle 14(3)(1) international transactions pertaining to provision of Investment advisory services rendered to its AE. We thus direct the AO/TPO to include the aforesaid comparables, viz. (i) ICRA management Consultancy Services Ltd.; and (ii) Informed Technologies Ltd. in the final list of comparables. We find that though the assessee had in its Ground of appeal No. 4 assailed the exclusion of the remaining three comparables which were selected by it for benchmarking its international transactions, viz. (i) Integrated Capital Services ltd; (ii) ICRA Online Ltd; and (iii) Cyber Media Research Ltd, from the final list of comparables by the TPO while determining the ALP of the international transactions of the assessee, however, as no submissions had been advanced before us as regards the same, therefore, we refrain from adjudicating the same.

11. We shall now advert to the comparables which had been included by the TPO in the final list of the comparables and thereafter approved by the DRP. We find that the TPO had included three fresh comparables in the final list of comparables, viz. (i) Ladderup Corporate Advisory Pvt. Ltd.; (ii). CRISIL Ltd.; and (iii). ICRA Techno Analytics Ltd. We first advert to Ladderup Corporate Advisory Pvt. Ltd. which was included by the TPO in the final list of comparables for benchmarking the international transactions of the assessee pertaining to provision of Investment advisory services rendered to its AE. We find that the said comparable was also included by the TPO for determining the ALP of the international transactions of the assessee in the immediate preceding year, viz. A.Y. 2011-12 and approved by the DRP, was however on appeal by the assessee excluded by the Tribunal. We find that the Tribunal observing that the said comparable was functionally incomparable had directed P a g e | Temasek Holdings Advisors India Pvt. Ltd. Vs. ITO Circle 14(3)(1) the AO/TPO to exclude the same from the final list of comparables, by observing as under:

We have perused the aforesaid observations of the Tribunal and are of the considered view that now when there is no shift in the functional profile of the aforesaid comparable, viz. Ladderup Corporate Advisory Pvt. Ltd. as in comparison to that of the assessee, therefore, there is no reason for us to take a different view. We thus being of the considered view that the aforesaid comparable, viz. Ladder up Corporate Advisory Pvt. Ltd. is functionally incomparable to the assessee company and had wrongly been included by the AO/TPO in the final list of the comparables, therefore, direct the AO/TPO to exclude the same from the final list of comparables.

P a g e | Temasek Holdings Advisors India Pvt. Ltd. Vs. ITO Circle 14(3)(1) 13. We shall now advert to the inclusion of ICRA Techno Analytics Ltd as a comparable by the TPO. We find that the ld. A.R had submitted before us that as the said comparable was a Software development company, therefore, it could not have been selected as a comparable in the case of the assessee which was providing investment advisory services to its AE. The ld. A.R had further averred that the assessee was not afforded any opportunity of being heard by the TPO at the time of including the said comparable, viz. ICRA Techno Analytics Ltd. in the final list of comparables. It was further submitted by the ld. A.R that though the assessee had specifically objected to non affording of an opportunity of being heard at the time of inclusion of the aforesaid comparable, viz. ICRA Techno Analytics Ltd in the final list of comparables before the DRP, however, the latter failing to take cognizance of the said objection of the assessee had allowed such serious infirmity on the part of the TPO to perpetuate. We have perused the objections raised by the assessee before the DRP and find that though a specific objection of having been divested of an opportunity of being heard at the time of inclusion of ICRA Techno Analytics Ltd as a comparable was raised by the assessee before him (Page 42- Para 10.156 of the objections), but however, the same had not been considered by the DRP while passing the order. We are of the considered view that in all fairness, now when the assessee was never afforded an opportunity of being heard at the time of inclusion of the aforesaid comparable by the TPO and the objection of the assessee as regards such failure on the part of the TPO to confront the said comparable had also not been disposed of by the DRP, therefore, restore the matter to the file of the AO/TPO with a direction to reconsider the inclusion of the said comparable, viz. ICRA Techno Analytics ltd in the final list of comparables after affording reasonable opportunity of being heard to the assessee.

P a g e | Temasek Holdings Advisors India Pvt. Ltd. Vs. ITO Circle 14(3)(1) 14. The appeal of the assessee is partly allowed in terms of our aforesaid observations.

Order pronounced in the open court on 03/01/2018.