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Thursday, 12 March 2020 14:56

PCIT vs. Eight Roads Investment Advisors Pvt. Ltd.

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PCIT vs. Eight Roads Investment Advisors Pvt. Ltd. Taxpundit.org

 

 

 

1. This appeal has been preferred under Section 260A of the Income Tax Act 1961 (for short ‘the said Act’) for the assessment year 2010 – 2011, against the order dated 25th October 2016 passed by the Income Tax Appellate Tribunal “K” Bench, Mumbai (hereinafter referred to as “Tribunal”).

2. The respondent / assessee entered into an international transaction of non-binding investment advisory services with its Associate Enterprises (for short ‘A.E.’) and earned revenue of Rs.25.83 crores during the assessment year 2010 - 2011. The assessee for the purpose of bench marking the transaction adopted Transnational Net Margin Method (for short “TNMM”) as an appropriate method under the provisions of Section 92C of the Act and identified seven comparable companies as comparables with their three years average weighted margin of 18.23% and operating margin being at 19.67% for the purpose of claiming the international transaction to be at arm’s length.

2.1 The Assessing Officer (for short “AO”) framed a draft assessment order dated 26th February 2014 making an upward revision of transfer pricing adjustment of Rs.4,96,42,540.00. The assessee approached the Dispute Resolution Panel (for short “DRP”) against the draft assessment order with its objections. The DRP vide order dated 7th October 2014 rejected the contentions and objections raised by the assessee in relation to upward revision of transfer pricing adjustment and directed the AO to finalize the draft assessment, resulting in passing of the impugned assessment order. The AO / Transfer Pricing Officer (for short “TPO”) by his final order dated 31st October 2014 rejected the transfer pricing study of the assessee on the basis of various defects and deficiencies and rejected six out of seven comparables selected by the assessee while retaining one comparable on the basis of single year data. However in the said order the TPO proceeded and selected six new comparable companies as comparables with an arithmetic mean of 42.66% of operating margin. The TPO applied the aforesaid arithmetic mean to be operating cost of the assessee and determined the arm’s length price of Rs.30,79,92,412.00 as against the international transaction price of Rs.25,83,49,872.00 resulting in a short fall of Rs.4,96,42,540.00. This short fall was treated as transfer pricing by the TPO. 

3. The above order was assailed by the assessee before the Tribunal. Tribunal by the impugned order dated 25th October 2016 allowed the appeal filed by the assessee in elaborate detail with respect to selection of each comparable company by the TPO and DRP and directed the AO / TPO to determine the arm’s length price afresh in terms of fresh directions given by the Tribunal in respect of each comparable company. Being aggrieved by the order passed by the Tribunal the revenue is in appeal before us.

4. The revenue has projected the following substantial questions of law :

“6.1 “Whether on the facts and circumstances of the case and in Law, the Hon’ble ITAT was justified in directing to exclude for functionally comparable companies from the list of comparables selected by the TPO viz. M/s IDFC Investment Advisors Pvt. Ltd, M/s ICRA Online Ltd., M/s Motilal Oswal Investment Advisors Pvt. Ltd. and M/s Kshitij Investment Advisory Co.Ltd., on the ground of functional dissimilarity ?”

6.2 “Whether on the facts and circumstances of the case and in Law, the Hon’ble ITAT was justified in directing to consider four companies viz. M/s ICRA Management Consulting Services Pvt. Ltd., M/s IDC India Limited, M/s Informed Technology Ltd. and M/s Kinetic Trust Ltd. as comparable even though these companies are not functionally comparable to that of the assessee ?”

6.3 “Whether on the facts and circumstances of the case and in Law, the Hon’ble ITAT was justified in directing not to consider M/s IDFC Investment Advisors Ltd as a comparable, without appreciating the fact that the said company has earned Rs.13.42 crores from Investment Advisory Services out of total revenue of Rs.26.29 crores ?”

6.4 “Whether on the facts and circumstances of the case and in Law, the Hon’ble ITAT was justified in directing not to consider M/s ICRA Online Ltd. as a comparable without appreciating the fact that TPO has used segmental results of “outsourced services” of the said company for comparatively purpose and that segment is functionally similar to that of assessee ?

6.5 “Whether on the facts and circumstances of the case and in Law, the Hon’ble ITAT was justified in directing not to consider M/s Motilal Oswal Investment Advisors Pvt. Ltd. as a comparable without appreciating the fresh facts brought on record by the TPO in respect of functions performed and assets employed by the said company u/s 133 (6) such as employee profile and income received from top clients of the said company ?”

6.6 “Whether on the facts and in the circumstances of the case and in Law, the Hon’ble ITAT was justified in directing not to consider M/s Kshitij Investment Advisory Co. Ltd. as a comparable on account of peculiar economic circumstances arising as a result of realignment with another company, simply relying on the decision of Hon’ble ITAT in the case of Carlyle India Advisors Pvt. Ltd., ITA No.1040/Mum/2015 and AGM Advisors India Pvt. Ltd., ITA No.4757/Mum/2015, without appreciating the fact that the realignment has not resulted in any change of activity of the business of the said company ?”

6.7 “Whether on the facts and in the circumstances of the case and in Law, the Hon’ble ITAT was justified in directing not to consider M/s Kshitij Investment Advisory Co. Ltd. as a comparable without appreciating the fresh facts brought on record by the TPO in respect of functions performed and assets employed by the said company u/s 133 (6) such as employee profile and income received from top clients of the said company ?”

6.8 “Whether on the facts and circumstances of the case and in Law, the Hon’ble ITAT was justified in directing to consider M/s ICRA Management Consulting Services Pvt. Ltd. as a comparable without appreciating the fact that the said company is not into Investment Advisory services and the assessee company has also itself submitted in the course of TP proceedings that the functions performed by this company are not exactly similar to the assessee company ?”

6.9 “Whether on the facts and circumstances of the case and in Law, the Hon’ble ITAT was justified in directing to consider M/s ICRA Management Consulting Services Pvt. Ltd. as a comparable without appreciating the fresh facts brought on record by the TPO in respect of functions performed and assets employed by the said company u/s 133 (6) to substantiate that the services provided to top ten clients of the said companies and its employee profile are different from that of assessee during the year under consideration ?”

6.10 “Whether on the facts and circumstances of the case and in Law, the Hon’ble ITAT was justified in directing to consider M/s IDC India Ltd. as a comparable without appreciating the fact that the said company is not into Investment Advisory Services and the assessee company has also itself submitted in the course of TP proceedings that the functions performed by this company are not exactly similar to the Assessee company ?”

6.11 “Whether on the facts and circumstances of the case and in Law, the Hon’ble ITAT was justified in directing to consider M/s Informed Technology Ltd. as a comparable without appreciating the fact that the said company is not into Investment Advisory Services and the assessee company has also itself submitted in the course of TP proceedings that the functions performed by this company are not exactly similar to the Assessee company ?”

6.12 “Whether on the facts and circumstances of the case and in Law, the Hon’ble ITAT was justified in directing to consider M/s Kinetic Trust Ltd. as a comparable without appreciating the fact that the said company is not into Investment Advisory Services and its turnover is less than Rs.1 crore ?”

5. We may now advert to the relevant facts necessary for appreciating the controversy in question :-

5.1. The assessee company filed return of income on 11.10.2010 declaring a total income of Rs.7,00,51,101/- for the assessment year 2010 – 2011. The case of the assessee was selected for scrutiny and statutory notice under Section 143 (2) of the Act was issued, also notice under Section 142 (1), inter alia, calling for various details in connection with scrutiny assessment proceedings. The assessee company through its authorized representative furnished the details called for. Thereafter the AO discussed the case. Reference was made to the TPO for computation of arm’s length price in relation to the international transaction. The TPO by his draft order dated 26th February 2014 reported an upward adjustment of Rs.4,96,42,540.00 in respect of the value of the international transaction made by the assessee with its Associate Enterprises (A.E.) with regard to arm’s length price. The assessee was given a fair chance to explain as to why the addition should not be made on the transfer pricing adjustment of Rs.4,96,42,540.00. The TPO after hearing the assessee passed order under Section 92CA (iii) of the said Act making an upward adjustment to the tune of Rs.4,96,42,540.00.'

5.2. The assessee chose the following seven comparable companies for the purposes of bench marking :-

The TPO after considering various aspects of the comparable companies rejected six out of the aforesaid seven comparables chosen by the assessee. The TPO accepted only one company which was Future Capital Investment Advisors Limited and after undertaking a further detailed analysis of the entire matrix of acceptance and rejection based on profit and operating margin proposed to include five fresh / new comparables as under :-

The TPO included the above five comparable companies in the set of comparables and thus finalised a set of six comparables for the purpose of bench marking the international transaction of the assessee. The TPO considered the financial data and annual reports of the six comparables for the financial year 2009 - 2010 as per Rule 10B(4) and with the arithmetic mean of their operating margin being at 42.66% arrived at an upward adjustment of Rs.4,96,42,540.00 in his order. 

5.3. The assessee filed its objection against the order of TPO before the DRP, III, Mumbai. Before the DRP assessee summarized that it had entered into an international transaction with its A.E. to provide investment advisory services of Rs.25.83 crores. The assessee for the purpose of bench marking the international transaction had chosen TNMM as the most appropriate method and identified seven comparable companies with their three years average weighted margin of 18.23% and operating profit margin being 19.67%, for providing investment advisory services to be at arm’s length.

5.4. The DRP considered the submissions of the assessee citing functional details as also related party transactions in the case of comparables which were rejected by the TPO and returned a finding that for the reasons given by the TPO in his draft order which were in substantial detail regarding non submission of financials and other details of the A.E., rejected the comparables adopted by the assessee and included the new comparables suggested by the TPO. DRP held that draft order passed by the TPO was sustainable and did not require any interference in the bench marking done by the TPO. Accordingly, AO vide his final order dated 31st October 2014 completed the assessment in terms of order dated 07th October 2014 passed by the Dispute Resolution Panel (DRP) – III, Mumbai.

5.5. The assessee approached the Tribunal against the order of the DRP. The Tribunal after a thorough analysis of each comparable offered the following reasons for inclusion of the six rejected comparables which were excluded by the TPO and DRP. For the sake of completeness, we would like to dwelve into the scrutiny and reasons given by the Tribunal in respect of each of the comparables which came to be included by the Tribunal as comparables.

NEW COMPARABLES SELECTED BY TPO / DRP WHICH WERE REJECTED BY TRIBUNAL

5.6 IDFC INVESTMENT ADVISORS PVT. LTD.

Before the Tribunal the assessee objected to the selection of this company as a comparable by the TPO on the ground that the said company was primarily engaged in providing Portfolio Management Services (PMS). The assessee submitted that PMS and investment banking services were functionally different from investment advisory services undertaken by the assessee. The assessee company was an investment advisory service company as stated in its annual report in relation to IDFC which was actually a PMS. The assessee submitted that, functions performed by this company such as investment and brokerage were performed by an Investment Advisor (IA). After a detailed scrutiny of the profit and loss account of this company, it was revealed that this company was engaged in a number of activities as reported by the revenue under one segment. Unlike the assessee, the functions performed, assets employed and risks undertaken by this company were totally different than the functions performed by the assessee company. Therefore it could not be treated as a comparable. In support of the above propositions to challenge the inclusion of IDFC Investment Advisors Pvt. Ltd as comparable by the TPO / DRP, assessee relied upon the following judgments.

21. The existence of a substantial question of law is sine qua non for maintaining an appeal before the High Court. While the appeal to High Court under Section 260-A of the Act may be a First appeal in the sense from the order of final fact finding by the Tribunal under the Income Tax Act, whereas the Second Appeal on substantial question of law before High Court under Section 100 would lie against the Judgment and Decree of the first Appellate Court disposing of an appeal against the Judgment and Decree of a Trial Court, but nonetheless it is the third round of consideration at the level of the High Court, where the facts and law both have been screened, discussed and analyzed by the Authorities or the Courts below and therefore the tenor and color of the words "substantial question of law" in both these enactments remains the same.

22. The High Court has power to not only formulate the substantial questions of law and rather it has the duty to do so and can also frame additional substantial questions of law at a later stage, if such a substantial question of law is involved in the appeal before it under these provisions and the appeal should be heard and decided only on such substantial questions of law after allowing the parties to address their arguments on the same. The extended power given to the High Courts to decide even an issue under Sub- section (6) of Section 260-A of the Income Tax Act, which is in pari materia with Section 103 of the Civil Procedure Code and which says that the High Courts may determine any issue which (a)has not been determined by the Tribunal or (b) has been wrongly determined by the Tribunal, can be so determined by the High Court, only if the High Court comes to the conclusion that 'by reason of the decision on substantial question of law rendered by it', such a determination of issue of fact also would be necessary and incidental to the answer given by it to the substantial question of law arising and formulated by it.”

14. Section 92-A defines an Associated Enterprise (A.E.) in relation to another enterprise to mean an enterprise which participates directly or indirectly, or through one or more intermediaries, in the management or control or capital of the other enterprise by holding not less than 26% of the voting power in the other enterprise and satisfies the other criteria as stated in Section 92-A of the Act.

14.1. Relevant portion of Section 92-B of the Act reads thus : ““international transaction” means a transaction between two or more associated enterprises, either or both of whom are non-residents, in the nature of purchase, sale or lease of tangible or intangible property, or provision of services, or lending or borrowing money, or any other transaction having a bearing on the profits, income, losses or assets of such enterprises, and shall include a mutual agreement or arrangement between two or more associated enterprises for the allocation or apportionment of, or any contribution to, any cost or expense incurred or to be incurred in connection with a benefit, service or facility provided or to be provided to any one or more of such enterprises.”

14.2. Section 92-C (1) of the Act reads thus :

“(1) The arm's length price in relation to an international transaction (or specified domestic transaction) shall be determined by any of the following methods, being the most appropriate method, having regard to the nature of transaction or class of transaction or class of associated persons or functions performed by such persons or such other relevant factors as the Board may prescribe, namely:-

14.3. Section 92-CA deals with reference to Transfer Pricing Officer where an assessee has entered into an international transaction a specified domestic transaction and the Assessing Officer considers it necessary or expedient, he may with the previous approval of the Principal Commissioner or Commissioner refer the computation of the arm’s length price in relation to the said international transaction or specified domestic transaction to the Transfer Pricing Officer.

14.4. Section 92-F (ii) of the Act defines “arm’s length price” and reads thus :-

“(ii) “arm’s length price” means a price which is applied or proposed to be applied in a transaction between persons other than associated enterprises, in uncontrolled conditions;”

15. In the case before us the TNMM method appears to have been the most popular and widely adopted method for determining the Arm’s Length Price in which the operating profit margin of comparable companies are considered by the authorities and applied to the case of the assessee to determine the Arm’s Length Price to make transfer pricing adjustments. Rules 10-A, 10-AB, 10-B, 10-C and 10-CA of the Income Tax Rules, 1962 prescribe the manner for working out Arm’s Length Price under the prescribed methods. From the aforesaid scheme of assessment, it is clear that the process of determination of Arm’s Length Price has to be undertaken by the Expert Wing of the Income Tax Department which is manned by TPO and at the higher level by a collegium of three Commissioners in the form of DRP whose orders are appealable before the Appellate Tribunal. In the above backdrop, in so far as the present case is concerned the TPO had rejected six comparable companies chosen by the assessee for bench marking namely i) Access India Advisors Limited; ii) ICRA Management Consulting Services Limited; iii) IDC (India) Limited; iv) Informed Technologies Limited; v) Integrated Capital Services Limited and vi) Kinetic Trust Limited. The Transfer Pricing Officer (TPO) only accepted one company as a comparable company being Future Capital Investment Advisors Limited but undertook a further detailed analyses and proposed to include the following five more companies as comparables namely i) Future Capital Holdings Limited (Segmental); ii) ICRA Online Limited (Segmental); iii) IDFC Investment Advisors Private Limited; iv) Kshitij Investment Advisors Limited and v) Motilal Oswal Investment Advisors Private Limited.

16. The submissions advanced on behalf of the respective parties are mostly based upon the filters which have been applied which are essentially related to turnover filter, the comparable entities being functional entities, higher transfer pricing adjustments, transfer pricing analyses and profits declared by the companies. We have quoted the specific findings given by the Tribunal and would therefore, not like to dwelve deeper or reiterate the same. We would however like to say that the Tribunal has considered the case of each comparable company and discussed the parameters of comparables for the purposes of including the same as a comparable and / or excluding the same as comparable on the basis of the functionality of the said companies in the public domain. We find that such a detailed exercise having been undertaken by the Tribunal qua each and every comparable company, the reasons given by the Tribunal cannot be faulted with in respect of the comparable companies. The Tribunal has referred to and relied upon the order passed by this Court in the case of Principal Commissioner of Income Tax - 14 Vs. Temasek Holdings Advisors India Pvt. Ltd. in Income Tax Appeal No.304 of 2017 delivered on 16th April 2019, wherein the following substantial questions of law were framed.

“(a) Whether on the facts and in the circumstances of the case, the Tribunal is correct in law in directing the Assessing Officer to include ICRA Management Consultancy Services Ltd., Kinetic Trust Limited in the set of comparable companies while determining the TP adjustment of international transaction ?

(b) Whether on the facts and in the circumstances of the case, the Tribunal is correct in law in striking down the additional markup margin of 3% to the average PLI of the comparable companies selected by the TPO ?”

17. In the said order, this Court after referring to another order dated 17th November 2016 passed in Income Tax Appeal No.1051 of 2014 dismissed the revenue’s appeal raising objection to the Tribunal’s decision to include ICRA Management Consultancy Services Ltd. and Kinetic Trust Limited which were both rejected by the TPO. So also in the present case, the comparables suggested by the assessee which were excluded by the TPO / DRP were in fact adopted as comparables by the TPO for the financial year 2009 - 2010 in the case of the assessee itself. This aspect was also considered in the aforesaid order.

18. The assessee has placed before us a copy of the judgment delivered by this Court in the case of Principal Commissioner of Income Tax - 3 V/s. M/s. Bain Capital and Advisors (I) P. Ltd. in Income Tax Appeal No.541 of 2016, dated 24th November 2018, wherein the revenue had urged the following question for consideration.

“Whether on the facts and in the circumstances of the case and in law, the Tribunal was justified in holding that Motilal Oswal Investment Advisors Pvt. Ltd. and M/s. IDFC Ltd. were not comparables for the purpose of Rule 10B of the Income Tax Rules ?”

19. This Court after due consideration dismissed the appeal of the revenue holding that no substantial question of law arose from the order of the Tribunal.

20. On a thorough consideration we find that the rational for inclusion of the six comparables excluded by the TPO have been dealt with in extensive detail by the Tribunal and we are in agreement with the reasons recorded by the Tribunal. Further the reasons given for inclusion of the five new comparables by the TPO have been decidedly set aside by the Tribunal on the basis of decisions rendered by this Court either in the case of the assessee itself and / or in other cases after proper consideration.

21. At this stage we would like to refer to paragraph No.54 in the judgment of Principal Commissioner of Income Tax Vs. M/s. Softbrands India Pvt. Ltd. (supra), which reads thus :

“54. The procedure of assessment under Chapter X relating to international transactions as indicated above is already a lengthy one and involves multiple Authorities of the Department. A huge, cumbersome and tenacious exercise of Transfer Pricing Analysis has to be undertaken by the Corporate Entities who have to comply with the various provisions of the Act and Rules with a huge Data Bank and in the first instance they have to satisfy that the profits or the income from transactions declared by them is at 'Arm's length' which analysis is invariably put to test and inquiry by the Authorities of the Department and through the process of Transfer Pricing Officer (TPO) and Dispute Resolution Panel (DRP) and the Tribunal at various stages, the assessee has a cumbersome task of compliance and it has to satisfy the Authorities that what has been declared by them is true and fair disclosure and much of the Transfer Pricing Adjustments is not required but the Tax Authorities have their own view on the other side and the effort on the part of the Tax Revenue Authorities is always to extract more and more revenue. This process of making huge Transfer Pricing Adjustments results in multi- layer litigation at multiple Fora. After the lengthy process of the same, the matter reaches the Tribunal which also takes its own time to decide such appeals. In the course of this dispute resolution, much has already been lost in the form of time, man-hours and money, besides giving an adverse picture of the sluggish Dispute Resolution process through these channels. If appeals under Section 260-A of the Act were to be lightly entertained by High Court against the findings of the Tribunal, without putting it to a strict scrutiny of the existence of the substantial questions of law, it is likely to open the flood-gates for this litigation to spill over on the dockets of the High Courts and up to the Supreme Court, where such further delay may further cause serious damage to the demand of expeditious judicial dispensation in such cases.”

22. From the above, it is clear that the appeal filed under Section 260A of said Act is required to be entertained only on “substantial question of law” arising out of the order of the Tribunal, keeping in mind that we can not disturb findings of fact under Section 260A of the said Act unless such findings are shown to be ex-facie perverse and unsustainable and exhibit a total non-application of mind. We are therefore of considered opinion that the present appeal filed by the Revenue does not give rise to any substantial question of law. The appeal filed by the Revenue is found to be devoid of merit and the same is liable to be dismissed.

23. In view of the above findings, the appeal filed by the Revenue is therefore dismissed with no order as to costs.

Cases Referred to  

1. Temasek Holdings Advisors India Pvt. Ltd. v/s DCIT, ITA no.776/Mum./2015

2. AGM India Advisors Pvt. Ltd. v/s DCIT, ITA no.4757/Mum./2015

3. Goldman Sachs India Securities Pvt. Ltd. v/s CIT, 69 taxmann.com 19

4. General Atlantic Pvt. Ltd. v/s ACIT, ITA no.7638/Mum./2011

5. CIT v/s Carlyle India Advisors Pvt. Ltd., 32 taxmann. Com 23

6. Sparkles Dhandho Advisors P. Ltd. v/s ITO, ITA no.1047/ Mum./2015

7. Bain Capital Advisors (India) Pvt. Ltd. v/s DCIT, ITA no.413/Mum./2015

8. Carlyle India Advisors Pvt. Ltd. ITA no.1040/Mum./2015

9. AGM India Advisors Pvt. Ltd. v/s DCIT, ITA no.4757/Mum./2015

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Read 191 times Last modified on Thursday, 12 March 2020 15:29
Deepak Kumar

A Post Graduate and Chartered Accountant Deepak Sinha is a member of Taxpundit's core team. An analytical, result oriented professional with more than 10 years of combined experience in industry and consultancy.

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