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Order u/s.254(1)of the Income-tax Act,1961(Act) लेखा लेखा सद�य लेखा लेखा सद�य सद�य,राजे�� सद�य राजे�� राजे�� केकेकेके अनुसार राजे�� अनुसार अनुसार -Per Rajendra,AM: अनुसार Challenging the order dated,11.10.2013 of the Dispute Resolution Panel (DRP)-1,Mumbai, the assessee and the Assessing Officer(AO) have filed cross appeals for the year under consid -eration.Assessee-company was incorporated on 07/09/2006 as part of the Lehman Group.It was engaged in the business of providing of non-binding advisory and support services to its overseas group companies and had filed its return of income on 31/03/2011,declaring Loss of Rs.5.73 crores. 2.During the assessment proceedings,the AO found that the assessee had entered into Inter - national Transactions(IT.s)with its associated Enterprise(AE.s).He made a reference to the Transfer Pricing Officer (TPO).After receiving the order of the TPO,he issued a draft order to the assessee proposing adjustments of Rs.7.89 crores.The assessee filed objections before the DRP.After receiving the directions of the DRP,the AO finalised the assessment,on 27.11. 2013,the AO passed u/s.143(3)r.w.s.144C(5)of the Act,determining its income at Rs.2.15 crores. ITA/342/Mum/2014: 3.Solitary ground of appeal,raised by the AO,is about direction of the DRP to consider IDC
595/14 &342/14-lehman brothers., Ltd.(ICDL)as a valid comparable.During the TP proceedings,the TPO found that for comput - ing the ALP,the assessee had adopted Transactional Net Margin method (‘TNMM’), that the operating profit to operating cost(OP/OC)was taken as PLI,that the Assessee itself was the tested party,that seven companies were taken as comparables,that last three years’ data was used,that the assessee justified the arm’s length nature of the controlled transaction of ‘advisory and support services’ with reference to the OP/OC ratio,realised by seven compara- bles namely-Future Capital Holding Ltd.(FCHL),ICRA Management Consulting Services Ltd.(ICRA),ICRA Online Ltd.(ICRA Online),ICRA Techno Analytics Ltd.(ICRA Techno), IDC(India)Ltd.(IDCL)and KPIT Cummins Global Business Solution (KPIT). Arithmetic Mean of the comparables was 5.81% and it was claimed that IT.s were at arm’s length. The TPO called for further details from the assessee and rejected all the comparables selected by the assessee holding that that it had omitted a crucial phrase "Investment advisory services", in its search process,that the comparable companies selected by it were not functionally comparable with its profile.He selected three new comparables- Motilal Oswal Investment Advisory Pvt.Ltd.(MOIAPL),KLG Capital Services Ltd.(KCSL)and KJMC Corporate Advisors(India)Limited(KCAL).He held that arithmetic mean of the new compara -bles was 69.56%,that the IT.s were not at arm’s length. He further observed that annual report of FCHL was available for the AY.2009-10,that Investment Advisory Segment was shown as part of Advisory Services,that as per the information it failed the 25% related party test(RPT)filter,that it could not be considered a valid comparable.With regard to IDCL,he held that it had a strategic tie-up with IDC-Inc.,that IDC-Inc. was engaged in the business of research and survey services/products,that it would provide the users the research/vertical research/go-to market services/consulting services,that it would not offer investment advisory services. He held that IDCL had to be rejected as a valid comparable. 4.Aggrieved by the draft order,the assessee filed objection before the DRP.After considering the available material,with regard to FCHL,the DRP held claim made by the assessee about functional comparability was factually correct,that it was engaged in investment advisory services,that contention made by it about PRT was not supported by documentary evidences,that while working out RPT at 22.08% it had omitted to take into consideration operating expenses incurred by it on behalf of the party,that correct RPT worked out to 27.32%,that the TPO had rightly held that RPT was above 25%.Finally,it held that claim of the assessee had to be rejected.With regard to IDCL,the DRP,held that it was a relevant
595/14 &342/14-lehman brothers., comparable,as it was into research and advisory services.Referring to the annual report of IDCL for the year under consideration and following the earlier order of the panel,the DRP directed the TPO/AO to include IDCL in the set of comparables for the purpose of bench marking. 5.Before us,the Departmental Representative(DR)supported the order of the TPO with regard to IDCL.For other comparables he relied upon the order of the DRP. The Authorised Representative(AR),with regard to FHCL,stated that it did not fail the RPT, that the RPT of the comparable was only 11.46%,that while calculating the RPT the Depart - mental authorities had taken RPT% as RPT expenses +RPT Income/Total Income.He referr- ed to Pg.22 of the PB wherein working of RPT was given and stated that it was 11.46 %.He argued that RPT percentage was much below the 25% filter.He referred to the case of PTC Software(India) Pvt.Ltd. (ITA/1605/PN/2011 dtd.)and stated that the Hon’ble Bombay High Court had upheld the order of the Tribunal.(ITAX No.732 of 2014). With regard to MOIAPL,he stated that it was excluded from the list of valid comparables by the Tribunal,while deciding appeal for earlier year(ITA/7722/Mum/2012 dtd.30/09/2015.).He relied upon the cases of Carlyle India Advisors(P.)Ltd.(49 taxmann.com.476). Referring to the annual report of IDCL,he stated that the TPO had computed the margin of the comparable at 13.70% as against correct margin of 10.46%,that a rectification application in that regard was filed before the AO by the assessee.He contended that DRP had approved two comparables IDCL and MOIAPL,that if MOIAPL was to be excluded only one comparable would be left to determine the ALP,that even one comparable can be used to benchmark the ALP of the IT.s.He relied upon the cases of J P Morgan Advisors India (P.) Ltd.(80taxmann.12),General Atlantics P.Ltd.(60taxmann.com 88),Pino Bisazza Glass (P.)Ltd. (36taxmann.43). In his rejoinder,the DR stated that for benchmarking IT.s only comparable was not sufficient, that matter could be restored back to the file of the TPO/AO for fresh adjudication. 6.We have heard the rival submissions and perused the material.We find that the assessee was incorporated in India during FY.2006 and was a wholly owned subsidiary of Lehman Brothers Investments Pte.Limited and LB India Holdings Cayman II Ltd.It was providing non-binding advisory services and assistance in credit assessment,initial risk evaluation, evaluation with India borrower,due diligence of issuers and clients to overseas LB group entities.It is further observed that the value of the IT.s was 35.45 crores,that the mean of the PLI was 21.58%,that the weighted average mean was 14.47%,that single year mean was 5. 3
595/14 &342/14-lehman brothers., 8%, that it had selected TNMM as most appropriate method and has selected 7 comparables, that TPO had not objected to the study conducted by the assessee or filters applied by it,that he rejected all comparables on broad functionality,that the DRP rejected the FCHL holding that it failed the RPT test,that it accepted IDCL as a valid comparable, that out of the three comparables selected by TPO the DRP rejected two comparable-KLGCPL and KCAL. 6.1.In the case of IDCL,it is found that as per the annual report available in public domain the margin of PLI for the year under appeal is 10.45% and not 13.70% as taken by the TPO/AO. Either of the parties could not throw any light about the outcome of the rectification applica - tion filed.So,it could be safely presumed that AO had not passed any order u/s.154 of the Act and has not revised the mean of the comparables.As the figures adopted by the AO are not as per the annual report filed by the assessee,so,same have to be discarded.We hold that correct mean of profit for the year was 10.45%. We also find that IDCL was accepted as a valid comparable in the earlier year.No fresh facts have been brought on record proving that there were distinguishing facts of the year under appeal vis-a-vis facts of earlier year.Principles of tax jurisprudence stipulate that rule of consistency should be adhered to as far as possible.In the case of Carlyle India Advisory Pvt. Ltd.(ITA(L)No.1286 of 2012)the Hon’ble Bombay High Court has held that IDCL was a valid comparable for benchmarking investment advisory,as it was carrying out research/ consultancy activities.In the matters of General Atlantic Private Limited(ITA/8914/ Mum/ 2010)and Sandstone Capital Advisors Pvt.Ltd.(ITA/6315/ Mum/2012),the Tribunal has held that,for comparing investment advisory services,IDCL was to be considered a good comparables. Considering the above,we are of the opinion that the DRP had rightly held that IDCL was a valid comparable for benchmarking investment advisory services.So,confirming its order,we decide the effective ground of appeal against the AO. 7.First effective ground of appeal,raised by the assessee,is about exclusion of FCHL from the final list of the comparables.The fact and the arguments advanced by the representatives of both the sides have been discussed in the earlier part of our order. 7.1.We find that the calculation of RPT by the TPO/DRP is not supported by the established norms of TP adjustments. In the case of PTC Software (India)Pvt.Ltd.(supra)the Tribunal has deliberated upon the issue of denominator of RPT % as follow:
595/14 &342/14-lehman brothers., “11. In this regard the first plea of the assessee is that the items at (1) and (8) namely, FCS Software Solutions Ltd. and Compucom Software Ltd. (seg) have been wrongly included by the TPO in the set of comparables. The argument set up by the assessee is that though the said concerns may be functionally comparable, so however, the same stand to be excluded on the basis of the RPT filter of 25% which has been adopted by the TPO himself but has been wrongly applied to include the two companies. In this regard we find that in the Transfer Pricing study undertaken by the assessee it had not applied the filter of RPT for the purposes of eliminating cases having related party transactions. In the course of transfer pricing proceedings, the assessee on being asked, stated that the RPT filter be applied to exclude cases from the list of comparables where the RPT transactions exceed 10% of the total transactions. The TPO however, decided to identify the companies where the quantum of RPT is more than 25% calculated with reference to the appropriate base, and excluded the same for the purposes of comparability analysis. Notwithstanding the assessee’s primary plea that the threshold limit of 25% adopted by the TPO was inappropriate, it has been submitted before us that even after applying the filter adopted by the TPO, the aforestated two concerns are liable to be excluded as they have related party transactions in excess of 25% of the total transactions. It has been pointed out that the RPT percentage has been wrongly calculated by the TPO and for that matter it referred to the detailed submissions made in this regard to the DRP which are placed at pages 815-816 of the ….made in this regard to the DRP which are placed at pages 815 – 816 of the Paper Book.
In this connection, we find that the TPO defined the RPT filter to mean that in cases where the RPT transactions exceed 25% of the total transactions, the same are liable to be excluded for the purposes of comparability analysis. The TPO further decided to compute the limit of 25% of RPT transactions with reference to the appropriate base, which was either sales or total operating expenses, as the case may be. In para 6.3.2. of his order, the TPO has noticed in relation to FCS Software ltd that the said company had sales revenues from related parties of Rs.36.89 crores against total sales of Rs.131.27 crores and it had incurred RPT expenses of nil against total expenses of Rs.107.58 crores. He computed the percentage of RPT to the total transactions at 15.40% by the following method: RPT sales divided by (total sales + total expenses) multiplied by 100 i.e., Rs.36.89 crores divided by (Rs.131.27 + Rs.107.58) multiplied by 100.
Ostensibly, the aforesaid calculation results in RPTs of 15.40% which is below the filter of 25% adopted by the TPO and accordingly, it was not excluded. However, it is quite evident that the denominator of Rs.238.85 crores adopted by the TPO is wrong in as much as it includes total expenses also whereas as per TPO’s own observations, there are no RPT expenses. The numerator comprises of only the sales to related parties and no RPT expenses. Therefore, the adoption of the denominator, i.e., the base, by considering total sales plus total expenses in the present case 7 where there is no RPT expenses would lead to a misleading result. If the denominator is restricted to the total sales in the present case, as there are only RPT sales, the result would be percentage of RPTs of 28.10%, i.e, Rs.36.89 crores divided by Rs.131.27 crores. The case of the assessee is that even by applying the RPT filter of 25% envisaged by the TPO, the said concern is excludible as it has RPTs vis-à-vis its total transactions in excess of 25%. In view of the aforesaid factual matrix, we hold that FCS software ltd is excludible from the list of comparables for the purpose of comparability analysis.” The Hon’ble Bombay High court framed the following question when the Department filed an appeal before it. Ques(i) Whether on the facts and circumstances of the case, the Tribunal erred in excluding FCS software Solutions from the list of comparables RPT % with respect to sales income only with RPT constitutes both sales as well as expenses?
595/14 &342/14-lehman brothers., Vide paragraph 9 of the order,the Hon’ble Court held as under: “The assessment order dated 5th -October, 2011 had included amongst the comparables M/s. FCS Software Solutions Ltd. (M/s. FCS Software Ltd.) as well as M/s. Compucom Software Ltd. (M/s. Compucom Ltd.) to determine the ALP of the respondent assessee's transactions with its holding company. The submission of the respondent-assessee before the Tribunal was that the TPO had in his Transfer Pricing Study applied the filter of 25% in respect of related party transaction (RPT) as against the 10% adopted by the respondent assessee in its transfer pricing study. The respondent assessee had no grievance in respect of the adoption of 25% filter in respect of RPT. However, the grievance was with the method applied in case of M/s. FCS Software Ltd. and M/s. Compucom Ltd. to compute 25% filter as under :- "RPT sales divided by (total sales + total expenses) multiplied by 100 i.e. Rs.36.89 crores divided by (Rs.131.27 + Rs.107.58) multiplied by 100.” It was submitted that this resulted in skewed result of 'the percentage of RPT resulting in its RPTs being 15.40% percentage of RPT resulting in its RPTs being 15.40% i.e. less than 25% RPTs being 15.40% i.e. less than 25% filter. (b) The impugned order of the Tribunal accepts the grievance of the respondent assessee. It records the fact that the denominator in the formula adopted by the TPO is incorrect as it also includes the total expenses when the TPO on facts has held that there are no expenses in respect of the RPT. Therefore, the option of the denominator by considering total sales + total expenses when there are no RPT expenses would lead to misleading results. The denominator was restricted to only total sales and the result would be the RPT are at 28.10%.-i.e. in excess of 25% filter and, therefore, is excludable from the list of comparables. (c) Mr. Suresh Kumar, learned Counsel for the Revenue reiterates the findings in the order of the TPO. No reasons are forthcoming from the Revenue as to what exactly is its grievance with regard to the findings of the Tribunal in case of M/s. FCS Software Ltd. (d) We find that this is a purely factual determination and the RPTs have to be considered in the context of total transactions and not by a conversion formula as adopted by the Assessing Officer.In fact, as recorded in the impugned order of the Tribunal, the determination of percentage of RPT as adopted by it is similar to the method adopted by the TPO in the earlier assessment years. It may be noted that an identical method as directed in the case of M/s. FCS Software Ltd. was also done in case of M/s. Compucom Ltd. by the Tribunal. However, the Revenue has made no grievance in case of the impugned order to the extent of M/s. Compucom Ltd. No-reason for the same is also forthcoming. (e) In the above view, question (i) as proposed being factual, it does not give rise to any substantial question of law.Thus, not entertained. If the above principle is adopted for working out the RPT,it would be less than 25% and thus can be considered a valid comparable.So,Reversing the order of the TPO/AO,we decide the first effective ground of appeal in favour of the assessee. 8.Next effective ground is about inclusion of MOIAPL as a comparable company for benchmarking the IT.s. We find that in the earlier year the Tribunal had held that MOIAPL was not a valid comparable(supra).We are reproducing the relevant portion of the order and it reads as under: “5.From the above it is evident that the said company MOIAPL has undertaken 23 assignments successfully in the year under consideration. Major portion of the income is earned by MOIAPL out of cross border activity services and related financial services. The 595/14 &342/14-lehman brothers., capital market business is one of the source3s of the advisory fees earned by the assessee. Assessee has also earned fees out of assessee‟s capability of the structured finance teams, financial markets, ie both equity and credit market, is another source of income for the assessee. These functions of the assessee were analyzed by the Tribunal during the proceedings in the case of Carlyle India Advisors (P) Ltd (supra). The details of the findings of the Tribunal in this regard are mentioned in para 12 of the said Tribunal‟s order (supra) and the same is reproduced as under: “12. ..........The only dispute is whether Motilal Oswal Investment Advisors Pvt Ltd can be considered as a comparable for the determination of ALP. A perusal of three comparables considered by the TPO shows that M/s. Future Capital Investment Advisors Ltd has operative profit at 21.79% whereas OPM of Motilal Lswal Investment Advisors Pvt Ltd is 72.33%. The comparables used by the TPO themselves are showing extreme OPM. A perusal of the Director‟s report of Motilal Oswal Investment Advisors Pvt Ltd shows that during the year under consideration, the said company has completed 23 assignments successfully as against 14 completed in the immediately preceding year. A close look at the financial statements of the said company show that the income from operations have been shown only as advisory fees whereas it is admittedly an undisputed facts that the said company is engaged in diversified activities. Segmental reporting is not available. Profit and loss account appears to be only of consolidated accounts. The said company is registered with SEBI as a merchant banker and the Director‟s report show that it is into takeover acquisitions, disinvestments etc. In the absence of specific data it is not possible to make comparison. It can therefore be safely said that the said company being into merchant banking and cannot be considered as a comparable. We, accordingly, direct the AO not to consider Motilal Oswal Investment Advisors Pvt Ltd as a comparable for the determination of ALP and redetermine the Arm‟s Length Price excluding Motilal Oswal Investment Advisors Pvt Ltd [ as per the findings] and including M/s. IDC [as per the directions of the DRP] i the light of the provisions of section 92C(2) r.w.s 92C(2A) of the Act. Ground no.4.1 and ground no.9 are accordingly allowed.”
6. The contents of above extracted para highlights the fact that the MOIAPL is into merchant banking, and therefore, is functionally different to that of the assessee which is engaged in the business of non-binding advisory services. Therefore, in our opinion, the assessee is engaged in the function of non-binding advisory services whereas MOIAPL is into the merchant banking, capital markets, finance markets etc. Therefore, we find the MOIAPL is functionally dissimilar and therefore, the same should be excluded for benchmarking the international transactions. Accordingly, AO / TPO is directed to exclude the same. Thus, Ground no. 1 raised by the assessee is allowed in favour of the assessee.” Following the above,second effective ground is decided in favour of the assessee. 9.Now,we would like to discuss the issue as to whether single comparable can be adopted to test the validity of ALP of the IT.s.We find that in the cases of J P Morgan Advisors India (P.)Ltd.(supra),General Atlantics P.Ltd.(supra) and Pino Bisazza Glass (P.)Ltd. (supra),the Tribunal has held that even a single comparable can be considered a valid comparable for determining the ALP of IT.s. 10.Considering the fact that we have held that FCHL and IDCL are valid comparables,we hold that the AO was not justified in making the TP adjustment.Here,we would also like to mention that if only IDCL is taken as a comparable the mean of PLI would be (7.29%),as