Loading judgment…
No AI summary yet for this case.
Income Tax Appellate Tribunal, MUMBAI BENCH “K”, MUMBAI
Before: SHRI AMIT SHUKLA & SHRI MANOJ KUMAR AGGARWAL
Per Amit Shukla, Judicial Member:
The aforesaid appeal has been filed by the assessee against final assessment order dated 06.09.2010, passed u/s. 143(3) r.w.s 144C(13) of the Income Tax Act, 1961, by the Assessing Officer in pursuance of direction given by the Dispute Resolution Panel (DRP), vide order dated 12.08.2010, for the A.Y. 2006-07.
In the grounds of appeals, the assessee has raised as much as nine grounds and one additional ground. At the outset, the learned counsel for the assessee, Shri Nishant Thakkar, submitted that ground nos. 2, 3, 6 and 7 are not pressed and, therefore, same are being dismissed as not pressed.
3. Effectively, now the following grounds have been pressed:-
J P Morgan Advisors India Private Limited
“1. In computing the Arm’s Length Price(ALP) for the transactions pertaining to investment advisory services at Rs.27,147,213 after adopting profit level indicator of 27.18% as against 18.91% as adopted by the Appellant and consequently making an upward adjustment of Rs.2,5999,882 4. In adopting a different comparable set of comparable companies to benchmark the investment advisory service rendered by the Appellant and not making available the search process adopted in determining the same; 5. In using inappropriate filters/criteria and keywords in evaluating comparable companies; 8. In not granting credit of tax deducted at source amounting to Rs.1,222,588; and 9. Levyng consequential additional interest amounting to Rs.673,557 under section 234B of the Act and Rs.17,697 under section 234C of the Act.” The additional ground raised vides separate petition reads as under: “Companies engaged in rendering merchant banking/investment banking services, being functionally different from the Appellant which is engaged in rendering investment advisory services, ought not be taken into consideration for the purpose of determining the arm’s length price despite the fact that the Appellant included such companies in its transfer pricing study report.” Thus, the issues raised vide ground nos. 1, 4, 5 and additional ground relates to transfer pricing adjustment of Rs.2,25,99,882/-.
Brief facts qua the issue of transfer pricing adjustment are that the assessee company is engaged in providing ‘non-binding investment advisory services’ to its Associate Enterprise (AE), viz., J P Morgan Securities (Asia Pacific) Limited, Hong Kong and J P Morgan Chase Bank N.A. Mumbai Branch. The international transactions, advisory services with the AE was reported at Rs.2,45,47,331/- on J P Morgan Advisors India Private Limited which it was stated that the assessee has earned cost plus margin of 15% as per the agreement. To benchmark the said margin, the assessee has adopted Transactional Net Margin Method (TNMM) as the most appropriate method and in its transfer pricing study report; it computed the PLI by using the data of financial years 2003-04, 2004-05 and 2005-06. The assessee had selected eight comparable companies with arithmetic mean of 18.91%. Accordingly, it was stated that the assessee’s margin was at arm’s length, since it falls within the range of plus/minus 5%. The list of comparables selected by the assessee for the purpose of benchmarking the PLI is as under:-
Sr. Name of the companies Weighted No. average margin as per TP report 1 Brescon Corporate Advisors Limited 65.60% 2 Centrum Capital Limited 19.03% 3 Keynote Corporate Services Limited 33.64% 4 Khandwala Securities Limited 19.95% 5 KJMC Global Markets (India) Limited 1.70% 6 Securities Capital Investments (India) -42.09% Limited 7 Sumedha Fiscal Services Limited 45.00% 8 SREI Capital Markets Limited 8.44% Arithmetic mean 18.91%
The learned TPO rejected the assessee’s entire search process and conducted a fresh search of comparables and identified eight comparable companies on the basis of the data of F Y 2005-06. The said comparable companies with their operating margin were as under:
J P Morgan Advisors India Private Limited
Sr. Name of the companies Operating No. margin considering on FY 2005 -06 1 Centrum Capital Limited 37.92% 2 Keynote Corporate Services Limited 68.87% 3 Sumedha Fiscal Services Limited 23.50% 4 SREI Capital Markets Limited 14.53% 5 M/s. Chartered Capital & Investment 34.34% Limited 6 M/s. Edelweiss Capital Limited 79.47% 7 IDC (India) Limited 14.58% 8 M/s. L & T Capital Co. Ltd. 45.59% Arithmetic mean 39.85% Accordingly, TP adjustment of Rs.53,04,358/- was made.
The DRP, after considering the objections raised by the assessee on the basis of the material placed on record, rejected three comparables selected by the TPO and accepted M/s. Keynote Corporate Services Limited by considering the arithmetic mean of three years data for the F.Ys 2003-04, 2004-05 and 2005-06. The final list of comparables after the stage of DRP is as under:
Sr. Name of the companies Operating margin No. considering on FY 2005 -06 1 Centrum Capital Limited 37.92% 2 Keynote Corporate Services Limited 45.37% 3 SREI Capital Markets Limited 14.53% 4 Sumedha Fiscal Services Limited 23.50% 5 IDC India Limited 14.58% Arithmetic mean 27.18%
J P Morgan Advisors India Private Limited
Before us, out of the aforesaid five comparables, the assessee has challenged four comparables. Viz,:-
a) Centrum Capital Limited; b) Keynote Corporate Services Limited; c) SREI Capital Markets Limited; and d) Sumedha Fiscal Services Limited.
At the outset, the learned counsel, Shri Nishant Thakkar submitted that all these four comparables now stands covered by series of Tribunal decisions, wherein it has been held that these comparable companies cannot be held to be good comparable for benchmarking the margin of the company engaged in investment advisory services, because they are into merchant banking. The list of such decisions wherein these comparable companies have been discussed and analyzed were submitted before us, are as under:- i. General Atlantic Pvt. Ltd. v. DCIT [ITA No. 8914/Mum/2010 for AY 2006-07] ii. Carlyle India Advisors Private Limited v. ACIT [146 TTJ 521] iii. J P Morgan India Private Limited [ITA No.8193/Mum/2010 for A.Y. 2006-07] iv. TPG Capital India Pvt. Limited v. ACIT [ITA No.880/Mum/2013 for A.Y. 2008-09].
On the other hand learned CIT- DR, Mrs. Malathi Shridharan, first of all submitted that, if all the four comparables are rejected then only one comparable would be left which would not give appropriate comparative analysis and eschewed arm’s length result. She further submitted that these four comparables were assessee’s own comparables, which are now being challenged by the assessee and hence, the assessee’s submissions at the outset cannot be J P Morgan Advisors India Private Limited accepted, because it amounts to cherry picking. Even otherwise also, if one goes by only one comparable only, i.e., IDC (India) Ltd., then also it can be seen that it is also not a very good comparable. Thus, the entire matter should go back to the TPO for fresh benchmarking and search of comparables.
In rejoinder, the learned counsel, objecting to the submissions made by the ld. CIT-DR, submitted that, firstly, there is no provision in law that if one comparable is selected by the assessee during the course of search process, then comparative analysis cannot be done or that more than one comparables are to be necessarily taken as comparables; and secondly, once the TPO has rejected the entire search process of the assessee, then comparables selected by the TPO needs to be properly analyzed and assessee has all the right to challenge the inclusion or exclusion of such comparables. In support, he relied upon the order dated 18.01.2013 of the Mumbai Benches of this Tribunal in the case of Petro Araldite Private Limited vs. DCIT in for A.Y 2008-09.
We have heard the rival submissions, perused the relevant findings given in the impugned orders as well as the material placed on record. The assessee is engaged in providing non-binding investment advisory services to its AE. It makes investment recommendations to its AE and AE has the right to make the final investment decision. In other words, the advisory given by the assessee is non-binding. The nature of activities performed by the assessee for its AE as stated in the TP study report are illustrated as under:- a) Identification and recommendation of Investment opportunities in Indian equity and debt securities.
J P Morgan Advisors India Private Limited b) Credit analysis of identified investment opportunities including analysis of financial statements, loan documents, bond prospectus and other data sources. c) Valuation of the debt and equity of the investee company based on the aforementioned analysis. d) Assistance and support in relation to any due diligence exercise undertaken by the investors in relation to potential investment opportunities and making recommendations to the AEs on any due diligence findings as may be provided by the AEs to JPMAIPL from time to time. e) Assistance with monitoring and assessing the performance of investments made by its clients and recommend new/additional courses of action with regard to investment/return from investment. f) Provision of such other support services incidental or related to the foregoing services, as requested by the AEs from time to time.
The only issue before us is, with regard to exclusion of four comparables out of five comparables upheld by the DRP. But before dealing with the various comparables, it would be pertinent to address one of the main contentions raised by the learned CIT-DR that, once the assessee has selected certain comparables in its own TP study report then the assessee is precluded from raising objections on such comparables. We notice that this precise issue had come for consideration before this Tribunal in the case of Tata Power Solar Systems Ltd., in wherein it following observations in this regard has been made:- “15. We have heard the rival contentions, perused the relevant findings of the DRP and the TPO authorities below and the material available on record. The only dispute for our adjudication is with regard to the exclusion of two companies, namely, Indo Wind Energy Ltd. and B.F. Utilities Ltd. and inclusion of two comparables viz. Photon Energy Systems Ltd. and Rajasthan Electronics and Instruments Ltd. (segmental). The TPO has included these two comparables (Indo Wind
J P Morgan Advisors India Private Limited
Energy Ltd. and B.F. Utilities Ltd.), mainly, on the ground that these comparables have been chosen by the assessee itself in the transfer pricing study report. Under the transfer pricing mechanism, a comparability analysis has to be undertaken for comparing the control transactions with an uncontrolled transaction. This is achieved by identifying potential comparables having similar functions that can stand the test of FAR analysis (i.e., functions performed, assets employed and risks assumed). The assessee is required to identify the comparables after carrying out proper search and undertaking FAR analysis. However, if the same has not been done properly then it has to stand the scrutiny of the taxing authorities. If, on a deep examination, it is found that the comparables chosen by the assessee do not stand the test of FAR analysis, requirement of the statutory provisions and correct selection of most appropriate methods, the same can be rejected. At the same time, if during the course of transfer pricing proceedings, if the assessee points out the cogent reasons and gives proper analysis as to why the comparables chosen by it were not correct, it cannot be said that the assessee is out rightly precluded from raising such objections. The ultimate aim of the transfer pricing provisions is to determine the appropriate ALP, which can be done only by bench marking with the proper comparables based on FAR analysis and under the prescribed methods. If in the course of the proceedings, it is found that certain comparables do not stand the test of functional analysis or for some other reasons, then the same should be excluded and we do not find any reason that they should to be included simply because the assessee had included the same initially. If the cogent reasons have been given by the assessee for excluding the same, the same should be considered. The initial onus or duty is cast upon the assessee to carry out the selection of proper comparables based on FAR analysis and by adopting suitable transfer pricing method and then analyse its transaction to show the correct arm’s length result. Thereafter, it is axiomatic that the taxing authorities / TPO, should scrutinize the assessee’s report on arm’s length result and the entire process of arriving at the ALP, whether they are based on transfer pricing principles and statutory provisions or not.
J P Morgan Advisors India Private Limited
If he himself founds some irregularity or mistake in any of the process or the steps undertaken, then he is bound to correct in accordance with the settled principles and law. If the assessee points out some mistake or any irregularity in the arm’s length result, then it is incumbent upon the TPO to examine and consider the same and if the assessee’s contentions are found to be correct or tenable, then he has to accept the same. There cannot be estoppel against correct procedure of law and principles solely on account of acquiescence or mistake of the assessee. The TPO is required under law to analyze every comparables and then only determine the correct ALP based on proper comparability analysis. Thus, we do not find any merit in the contention of the Revenue that simply because the assessee has included these two companies then the assessee is debarred from objecting to the same, if there are strong and cogent reasons.”
This proposition was also upheld earlier by the Special Bench in the case of Quark Systems P. Ltd. [2010] 38 SOT 307. In view of the aforesaid proposition, we are unable to accept the contention of the learned CIT-DR that assessee is precluded from contesting a comparable which initially figured in its own set of comparables, provided the assessee gives a cogent reason for exclusion of certain comparables based on FAR analysis and also on the basis of judicial pronouncements. In such cases there cannot be estoppels on objecting the inclusion/exclusion of such comparables.
Now we will come to the exclusion of various comparables as objected by the assessee before us:- (i) Centrum Capital Limited:- The learned counsel before us had stated that this company is mainly engaged in providing ‘merchant banking’ activities and the main income stream of the said company is syndication fees, brokerage, commission and income from trading in bonds hence this company cannot be comparable to the assessee company which is engaged in providing non-binding investment
J P Morgan Advisors India Private Limited advisory services. Moreover, in the case of Carlyle India Advisors Private Limited vs. ACIT (supra), this Tribunal has rejected the said comparable on the ground that it is engaged in the business of merchant banking and cannot be considered as comparable with companies rendering investment advisory services. Further this company was also found to be incomparable with investment advisory services by this Tribunal in the case of General Atlantic Private Limited.
After considering the rival submissions and on perusal of the material available before us, we find that it is an undisputed fact that M/s. Centrum Capital Limited is mainly into ‘merchant banking’ activities and its main income is from syndication fees, brokerage and commission and income from trading in bonds. The function of merchant banker is entirely different, because they are mainly into portfolio management, credit syndication, negotiating draft equity investment, counseling Merger and Acquisition (M&A), etc. These functions are entirely different from ‘investment advisory services’ where core function is to advice on investments to be made in diversified fields. This Tribunal in the case of Carlyle India Advisors Private Limited vs. ACIT (supra) has held that the functions of merchant banking are entirely different from that of investment advisory services and it has been informed by the learned counsel that this decision of the Tribunal has been upheld by the Hon’ble Bombay High Court also. Apart from that, this decision has been followed in catena of other cases by this Tribunal. Thus, we hold that Centrum Capital Limited cannot be held to be a good comparable for benchmarking the assessee’s margin.
(ii)Keynote Corporate Services Limited:This Company too is engaged in providing merchant banking activities. The operations of the J P Morgan Advisors India Private Limited company involve lead managing IPOs, right offer, buyback of shares and takeover, corporate finance and M & A advisory. In comparison, the assessee’s functioning profile is entirely different, which is providing non-binding advisory services. The reasons given by us while dealing with the Centrum Capital Limited and the decision of the Tribunal in the case of Carlyle India Advisors Private Limited vs. ACIT (supra), will also apply here and, therefore, this comparable being involved in merchant banking activities is rejected for being included in the comparable list.
(iii) SREI Capital Markets Limited: - This Company is carrying out full scale investment banking, corporate advisory and project management consulting firm. The primary income earned by this company is from merchant banking activities. The company operates under a single segment, i.e., Project consultancy, merchant banking and underwriter services. Thus, this company being a merchant banker cannot be held to be a comparable with the assessee company, which is providing non-binding advisory services. Moreover, this company has been rejected to be a good comparable with the companies providing investment advisory services not only in the case of Carlyle India Advisors Private Limited vs. ACIT, but also in the case of General Atlantic Private Limited (supra).
(iv) Sumedha Fiscal Services Limited: This Company is too engaged in providing merchant banking activities. The operations of the company involve loan syndication and project consultancy services. Again, this Company has been found to be incomparable by this Tribunal in the case of Carlyle India Advisors Private Limited vs. ACIT and General Atlantic Private Limited (supra). Our decision with regard to the aforesaid comparables will also apply here and J P Morgan Advisors India Private Limited accordingly, we reject the comparable company for the purpose of comparative analysis.
Accordingly, all the four comparables as finally selected by the DRP are hereby rejected and they cannot be taken in the list of comparables.
Lastly, coming to the learned CIT-DR’s argument that, if there is only one comparable left, then it would not be proper to benchmark the margin as the factors of comparative analysis will not throw fruitful result. However, we are unable to appreciate the learned CIT DR’s contentions. First of all, Rule 10B(1)(e)(ii) envisages that net profit margin realized by the enterprise or by an unrelated enterprise from a comparable uncontrolled transaction or a number of such transactions is computed having regard to the same base. Here comparison of net margin is done between enterprise or unrelated enterprise from a comparable transaction or number of comparable transactions, that is, one or more. The comparability analysis between the controlled transaction and the comparable uncontrolled transaction has to be on the same base, i.e., either cost incurred; or sales effected; or assets employed; for determining the PLI. Thus, this rule envisages that the net profit margin realised can be bench marked either from one comparable uncontrolled transaction or from more than one. Further first proviso to section 92C provides that where more than one price is determined by the most appropriate method, the arm’s length price shall be taken to be arithmetic mean of said prices. Thus, the main emphasis under the law is to identify comparable case to benchmark the arm’s length price of the controlled transaction. If there are more than one comparables then various comparability factors can be examined and it may lead to a proper determination of ALP, because many factors and differences
J P Morgan Advisors India Private Limited gets weed out by benchmarking the margin of various comparables. More than one comparable is though desirable to get appropriate arms length results, but there is no mandate in the law that one may choose more than one comparable only. The only limitation in choosing one comparable would be that the tolerance range of plus/minus 5% (or 3%) as envisaged in second proviso to section 92C will not be applicable. Thus, we do not subscribe to the contention raised by the learned CIT (DR) that one comparable company cannot be taken for benchmarking the arm’s length price of a party. Accordingly, we direct the TPO to benchmark the assessee’s margin with only one comparable.
As regards the issue raised in ground no.8, the learned counsel has submitted that the assessee has filed a petition for rectification u/s. 154 before the AO, which is still pending. Accordingly, we direct the AO to dispose of the assessee’s petition regarding non-granting of tax at source.
Regarding ground no.9, it has been admitted by both the parties that it is consequential and accordingly, the same is dismissed.
In the result, the appeal of the assessee is partly allowed.
Order pronounced in the open court on 16th March, 2017.