Income Tax Appellate Tribunal - Mumbai
Lehman Brothers Securities P.Ltd, ... vs Asst Cit Cir 4(3), Mumbai on 3 January, 2019
आयकर अपीलीय अधिकरण "K " न्यायपीठ मब
ुं ई में ।
IN THE INCOME TAX APPELLATE TRIBUNAL " K" BENCH, MUMBAI
श्री महावीर स हिं , न्याययक दस्य एविं श्री राजेश कुमार लेखा दस्य के मक्ष ।
BEFORE SRI MAHAVIR SINGH, JM AND SRI RAJESH KUMAR, AM
Aayakr ApIla saM . / ITA No. 7705/Mum/2012
(inaQa- a rNa baYa- / Assessment Year 2008-09)
Lehman Brothers Securities The Asst. Commissioner of
Pvt. Ltd. Income Tax, Circle 4(3),
C/o KPMG India Private Room No. 649, 6 t h Floor,
Vs.
Limited, Lodha Excelus, 1 s t Aayakar Bahvan, M.K.
Floor, Apollo Mills Compound, Road, Mumbai -400 020
Mahalaxmi, Mumbai-400 011
(ApIlaaqaI- / Appellant) .. (p`%yaqaaI- / Respondent)
स्थायी ले खा िं . / PAN No. AABCL1353R
अपीलाथी की ओर े / Appellant by : Shri Arijit Chakravarty ARs
प्रत्यथी की ओर े / Respondent by : S/shri Jayant Kumar
Rajeev K. Gubgotra, DRs'
ुनवाई की तारीख / Date of hearing: 05-10-2018
घोषणा की तारीख / Date of pronouncement : 03 -01-2019
AadoSa / O R D E R
महावीर स हिं , न्याययक दस्य/
PER MAHAVIR SINGH, JM:
This appeal is arising out of the order of Dispute Resolution Panel- 1, Mumbai [in short 'DRP'], directions dated 05.09.2012. The Assessment was framed by the Asst. Commissioner of Income Tax-Range 4(3), Mumbai (in short 'ACIT/AO') for the assessment year 2008-09 vide order 2 ITA No . 7 7 05 / Mu m /2 0 1 2 dated 25.10.2012 under section 143(3) of the Income Tax Act, 1961(hereinafter 'the Act').
2. The first and second issues are common and interconnected. The first issue in this appeal of assessee is against the order of DRP/TPO/AO in making transfer pricing adjustment relating to international taxation of the Investment Banking Division. For this assessee has raised the following ground No. 1: -
"Ground I - Transfer Pricing Adjustment relating to international transactions of the Investment Banking Division of Rs. 342,133,208 I. On the facts and in the circumstances of the case, the learned Transfer Pricing Officer ('TPO') and the learned Assessing Officer ('AO') under the directions of the Hon'ble Dispute Resolution Panel (DRP') erred on facts and in law in making an addition of Rs. 342,133,208 in relation to Investment Banking Division transactions ('IBD Transactions') of the Appellant based on the provisions of Chapter X of the Income-tax Act, I961TiHe Ad).
2. The learned AO under the directions of the Hon'ble DRP erred in confirming the action of the 1 P0 of disregarding the transfer pricing methodology selected by the Appellant and its group companies globally to determine the arm's length price (ALP') of the IBD Transactions. The transfer pricing methodology selected by the Appellant is in fact the 3 ITA No . 7 7 05 / Mu m /2 0 1 2 most appropriate transfer pricing method to determine the ALP of the IBD Transactions.
3. The learned AO / TPO under the directions of the Hon'ble DRP erred on facts and in law in upholding the action of the learned TPO of requesting the Appellant to conduct a benchmarking analysis using the Transactional Net Margin Method (TNMM) to determine the ALP of the IBD Transactions.
4. The learned AO / TPO under the directions of the Hon'ble DRP erred in the facts of the case and in law in rejecting comparable entities selected by the Appellant, which were in fact comparable to the functions performed by the Appellant in the IBD Transactions.
5. The learned AO I TPO under the directions of the Hon'ble DRP erred on facts and in law in rejecting the use of multiple year data by the Appellant.
6. The learned A0 / TPO under the directions of the Hon'ble DRP erred on facts and in law in not allowing appropriate adjustments for marketing expenses. startup expenses and other adjustments to improve comparability as is required to be done in accordance with the provisions of Rule 10B(1)(3)(iii) of the Income-tax Rules. 1962 to account for difference between the Appellant and the alleged comparables selected by the learned AO/ TPO.4
ITA No . 7 7 05 / Mu m /2 0 1 2
7. The teamed TPO erred and the Hon'ble DRP further erred in upholding / continuing the action the TPO of rejecting the without prejudice contention of the Appellant to provide the benefit reduction of 5 percent from the arithmetic mean as provided in proviso to Section 92C(2) of the Act while determining the ALP for the 180 Transactions."
3. As regards to the second issue i.e. Transfer Pricing adjustment relating to securities broking transaction of ₹ 78,78,825/-. For this assessee has raised the following ground: -
"Ground 2 - Transfer Pricing Adjustment relating to Securities Broking transactions of Rs. 7,878,825/-
1. On the facts and in the circumstances of the case, the learned TPO and the learned AO under the directions of the Hon'ble DRP erred on facts and in law in making an addition of Ks. 7.878.825 in relation to provision of Equity Broking services (The Broking Transactions) of the Appellant based on the provisions of Chapter X of the Act.
2. The learned AO/ TPO under the directions of the Hon'ble DRP erred on in the facts of the case and in law in rejecting the adjustments claimed by the Appellant for differences in volumes transacted and research costs while determining the ALP of the Broking Transactions.
3. The learned AO / TPO under the directions of the Hon'ble DRP erred in the facts of the case and in 5 ITA No . 7 7 05 / Mu m /2 0 1 2 law by arbitrarily considering tile top JO third party clients for the purpose of determining the ALP of the Broking Transactions, instead of comparing the brokerage charged to all clients.
4. The learned TPO erred and the Hon'ble DRP further erred in upholding / continuing the action of the TPO of rejecting the without prejudice contention of the Appellant to provide the benefit I reduction of 5 percent from the arithmetic mean as provided in proviso to Section 92C(2) of the Act, while determining the ALP for the Broking Transactions.
The Appellant prays that the adjustment in relation to transfer pricing matters made by the learned AO / TPO and upheld by the Hon'ble DRP in respect of the Broking Transactions be deleted."
4. Briefly stated facts are that the assessee was incorporated in FY 2005-06 and engaged in the business of providing of investment banking and equity broking services of oversea group companies. Lehman Brothers holding Inc (LBHI), the ultimate holding company of the assessee company was incorporated in the USA and LBHI filed a bankruptcy petition under USA Bankruptcy court in September 2008. The assessee is a subsidiary of Lehman Brothers Investment Pvt. Ltd a company incorporated in Singapore, which was also placed into creditors voluntary litigation with effect from 24.10.2008. The personal of the assessee and its AE have all been disbanded as a result of collapse of Lehman Group. During the relevant year, the assessee entered into various international transactions including the provision of investment 6 ITA No . 7 7 05 / Mu m /2 0 1 2 banking services and the value of this transaction was declared at ₹ 25.34 crores. The assessee has adopted the profit split method to justify the price transaction in accordance with global transfer pricing policy of the Lehman Group. The DRP directed the AO to compute the margin using only three comparables namely AK Capital services limited, Batliwala & Karani Securities India Pvt. Ltd and CIL Securities Ltd. and it was directed vide Para 6 to 6.3 as under: -
"6.1 In view of facts found, we direct that Khandwala Securities Ltd. should be deleted from the list of comparables. Further we confirm the action of the TPO in rejecting the 4 companies mentioned above as submitted by the assessee in its analysis. The AO is therefore, directed to recompute the margin using only 3 comparables namely A.K. Capital Services Ltd., Batliwala & Karani Securities India Pvt. Ltd. and CIL Securities Ltd.
6.2 The assessee has further submitted that the relevant year was only the second year of operations for the assessee, while the comparables chosen by the TPO are much more established. The assessee had made special efforts and incurred significant expenses on marketing so as to establish its presence in India and therefore, an adjustment on account of marketing and startup expenses should be granted from the mean NCP margin computed above.
6.3 The assessee's submissions have been considered and found to be not acceptable. The 7 ITA No . 7 7 05 / Mu m /2 0 1 2 Lehman Brothers Group at the relevant time was an internationally renowned group in the area of merchant banking. The mere trade name would be enough to enter any new market and gain a foot hold in the same. We are therefore, of the view that no adjustments on account of marketing expenses or startup costs are required to be made."
5. The AO accordingly passed an order following DRP's direction and making adjustment of ₹ 34,21,33,208/-. Aggrieved, assessee came in appeal before Tribunal.
6. At the outset, it is noticed that exactly on identical facts, the Tribunal in earlier year has set aside the matter back to the file of the AO/ TPO for fresh determination of the transfer pricing adjustment by observing in Para 4 as under: -
"4. We have considered rival contentions and have perused material on record including orders of the authorities below and case laws cited before us . We have observed that the assessee is an entity which was part of Lehman Brothers group and had offered financing and advisory salutations to its clients in India in the field of Investment Banking Division. It is claimed that the Investment Banking Division (IBD) serve Corporate, Institutional and Government clients. It claimed to serve the clients capital-raising needs through specialized product groups in underwriting, private placements, leveraged finance and other activities associated with debt and equity products. With respect to its 8 ITA No . 7 7 05 / Mu m /2 0 1 2 investment banking Division transaction with its AE, the assessee submitted its transfer pricing study wherein arm length price(ALP) of revenues from IBD was computed and offered for taxation by the assessee with respect to its international transactions with A.E. based on Revenue Split method which was claimed to be based on Global Policy of Lehman Brothers Group worldwide being made applicable to all its entities since 1999-00 which was also claimed to have been applied to the assessee for computing ALP of its international transactions with AE . The Revenue was claimed to be allocated among all entities of Lehman Brothers worldwide with regard to compensation, head count and revenue allocation and an arm length range was then derived for each entity from these combinations of aforesaid allocations, wherein assessee's share in global revenues of IBD was claimed to be computed at 0.56% of the total IBD revenue, which worked out to U.S. Dollar's 41,28,055/- equivalent to Indian Rs. 28,88,26,985/- , computed as ALP of the IBD division with respect to the International transactions with its A.E. . The assessee contended before lower authorities during the course of assessment/first appellate proceedings that the assessee could not make proper representations before the authorities below owing to collapse of Lehman Brother Group which led to its liquidation in 2009 and the employees of the group left the organisation, which made it 9 ITA No . 7 7 05 / Mu m /2 0 1 2 difficult to collate information as desired by the authorities below during assessment/first appellate stage. The assessee had submitted that the Profit/Revenue split method is the most appropriate method to bench mark international transactions with its AE as the transactions were integrated, inter-connected and seamless wherein various Lehman Brother entities across globe participate along with bankers and client to successfully conclude the transactions and hence Revenue Split was claimed to be most appropriate method to bench mark its international transactions with its AE and the said method was claimed to be consistently and uniformly applied since 1999-00 by Lehman Brother Group worldwide across all its entities . The assessee claimed that the assessee business model is unique one and there are no comparable companies available in the segment in which the assessee is engaged into. It was submitted by the assessee before the TPO that the functions performed in the AE segments related to Investment Banking Division and concerns Underwriting, Leverage Finance, Private Placement, Mergers and acquisitions, Restructuring etc. . It was stated by the assessee that by no stretch of imagination, such functions be benchmarked with the non-binding investment advisory services proposed in the show cause issued by TPO. The TPO rejected this method as the assessee could not explain the basis of the same properly and applied TNMM method at 10 ITA No . 7 7 05 / Mu m /2 0 1 2 entity level and comparables were drawn by TPO accordingly. The TPO could not find comparable from investment banking segment while the same were drawn from ITES/BPO segment, as under:
It was also claimed by the assessee that it is the first year of operations in India and there are certain extra ordinary expenses such as start up cost and non-recurring expenses which were incurred by the assessee such as signup bonuses , relocation expenses, recruitment expenses etc. which need to be factored in and excluded while computing ALP. It was also claimed the assessee has not operated at full capacity during the previous year relevant to the impugned assessment year being the first year of operations as the assessee was in the process of employing new employees and costs were incurred for recruitment charges as also there are premises lying vacant for which heavy rents are paid but premises could not be utilised due to non 11 ITA No . 7 7 05 / Mu m /2 0 1 2 employment of employees as being the first year of operations . It was also submitted that Lehman Group had collapsed worldwide and the assesses is trying to collate the information with great difficulty as the employees had left the Group. The TPO in the absence of details furnished by the assessee proceeded to apply TNMM method at the entity level to bench mark the international transactions entered into by the assessee which led to net transfer pricing additions proposed by the TPO to the tune of Rs. 33.1 crore by applying average margin of 21.18% to the total cost of Rs. 55.7 crores(after excluding certain extra-ordinary start up costs) which led to the additions to the tune of Rs. 33.10 crores being made by the AO vide assessment order dated 18.02.2011, which was later confirmed by learned CIT(A) vide its appellate orders dated 12.04.2012 . The assessee has relied upon several cases laws cited above in preceding paras and tried to justify that the assessee business is integrated , inter-connected and seamless business of investment banking wherein several Lehman Brothers entities globally participate along with banks and clients to successfully complete the transactions and the Revenue split method is the most suitable.
Reference is made to an amendment brought in by amendment in 2012 wherein legislature has introduced Rule 10AB by the IT (Sixth Amendment) Rules , 2012 w.e.f. 01-04-2012 under the sub head "Other method of determination of ALP" to justify the 12 ITA No . 7 7 05 / Mu m /2 0 1 2 methodology adopted by the assessee for benchmarking international transactions by adopting Revenue Split Method instead of Profit Split Method or other specified methods as are acceptable in Indian TP jurisprudence . We have observed based on material on record that the assessee could not make effective representations before the authorities below due to extraordinarily situation faced by the assessee owing to collapse of Lehman Brothers group worldwide leading to liquidation in 2009 . This year was also the first year operations and it is claimed that there certain extraordinary expenses such as fees paid for increase in share capital, rental paid for premises lying vacant due to non appointment of employees being first year of operation, signup bonuses being given to employees on joining the assessee and recruitment cost incurred in the initial phase of appointment of the new employees as assessee 's base being setup in India which deserves to be seen by the authorities below on merits in accordance with law before arriving ALP of its international transactions with AE .The assessee has prayed and agreed for open set-aside to enable it to make effective representation before the authorities below in de- novo proceedings wherein necessary evidences and explanations could be furnished and authorities below can take view on issues which arises or may arise during de -novo assessment proceedings on merits in accordance with law after hearing the 13 ITA No . 7 7 05 / Mu m /2 0 1 2 assessee. Ld. DR has also after considering the factual matrix of the case and concession granted by the learned counsel for the assessee fairly agreed for an open set aside wherein all the issues which arises or may arise in assessment are kept open and TPO/AO will be free to adjudicate all such issue's afresh on merits in accordance with law after hearing the assessee and considering the material placed on record . We have duly considered the factual matrix of this case and are of the considered view that keeping in view exceptional circumstances faced by the assessee during the period when the proceedings were under way with the Revenue for framing assessments as well during first appellant proceedings , due to collapse of Lehman Brother group worldwide, the assessee could not make effective representations before the authorities below and interest of justice demand that the assessee be given one more opportunity to present all evidences and explanations in its support before the authorities below in de-novo assessment proceedings . The onus shall be on the assessee to bring on record necessary evidences and explanation in support of its contentions w.r.t. issues that arises or may arise during de -novo proceedings. Hence keeping in view factual matrix of the case , we are inclined to set aside and restore the matter back to the file of the AO/TPO for afresh determination of all issues which had arisen or may arise during assessment on merits in accordance 14 ITA No . 7 7 05 / Mu m /2 0 1 2 with law including the methodology adopted by the assessee for benchmarking its international transactions with AE. We would like to make it clear that it is an open set aside and AO/TPO shall make the assessment de -novo on merits in accordance with law. Needless to say that the authorities below shall provide proper opportunity of being heard to the assessee in accordance with principles of natural justice in accordance with law. The assessee will be allowed by authorities below to furnish all necessary and relevant evidences and explanations in support of its contentions which shall be admitted in the interest of justice. We order accordingly."
7. We find that in the first year of operation of the company, when this issue arose, which has already been set aside to the file of the AO/ TPO for fresh determination of Transfer Pricing adjustment after giving proper opportunity to the assessee. As the issue in first year has already been set aside, we in this year also, setting aside the same on similar directions to the file of the AO/ TPO.
8. As the above issue has already been set aside for the reason that the TPO/ AP/ DRP in the absence of details furnished by assessee proceeded to apply ALP to broking transaction and we have already set aside the first issue exactly on identical reasoning's, we restore this second issue to the file of the AO/ TPO exactly on similar directions. Hence, this issue of the assessee's appeal is also set aside to the file of the AO /TPO.
15ITA No . 7 7 05 / Mu m /2 0 1 2
9. The next issue in this appeal of assessee is against the order of AO in not allowing claim of depreciation of goodwill. For this assessee has raised the following ground No. 3: -
"Ground 3 - Claim for depreciation on goodwill On the facts and in the circumstances of the case and in facts, the learned AO has erred in disregarding the claim of the Appellant for depreciation on goodwill of Rs. 386,373,250.
The appellant prays before the Hon'ble ITAT to direct the AO to allow deduction for depreciation on goodwill of Its. 386.373.250 for AY 2008-09 and consequently, to carry forward the same to subsequent years for set off."
10. We have gone through the orders of the lower authorities and noticed that there is no discussion about this issue and it seems that this issue has not been considered by the lower authorities. Hence, we are of the view that since above two issues are set aside to the file of the AO/ TPO, this issue can also be considered by the AO while adjudicating this assessment year.
11. The assessee has also raised the additional ground which is as follows: -
"1.8 The learned AO/ TPO and the learned DRP erred in attributing the entire shortfall of ₹ 342,133,208/- to all the transactions of Appellant, instead of restricting the same only to the proportion 16 ITA No . 7 7 05 / Mu m /2 0 1 2 of international transaction under investment banking division(IBD) of the Appellant."
12. Since, main issue has been set aside to the file of the AO, the assessee can take up this issue with the AO/ TPO, whether the entire shortfall of ₹ 34,21,33,208/- is to be attributed to all the transactions of the assessee or it should be restricted only to the extent of proportion of international transaction under investment banking division of the assessee. The AO will decide accordingly.
13. In the result, the appeal of assessee is allowed for statistical purposes.
Order pronounced in the open court on 03-01-2019.
Sd/- Sd/-
(राजेश कुमार / RAJESH KUMAR) (महावीर स ह
िं /MAHAVIR SINGH)
(लेखा दस्य / ACCOUNTANT MEMBER) (न्याययक दस्य/ JUDICIAL MEMBER)
मुिंबई, ददनािंक/ Mumbai, Dated: 03-01-2019
सदीप सरकार, व.निजी सधिव / Sudip Sarkar, Sr.PS 17 ITA No . 7 7 05 / Mu m /2 0 1 2 आदे श की प्रनिललपप अग्रेपिि/Copy of the Order forwarded to :
1. अपीलाथी / The Appellant
2. प्रत्यथी / The Respondent.
3. आयकर आयुक्त(अपील) / The CIT(A)
4. आयकर आयुक्त / CIT
5. ववभागीय प्रयतयनधि, आयकर अपीलीय अधिकरण, मुिंबई / DR, ITAT, Mumbai
6. गार्ड फाईल / Guard file.
आदे शािसार/ BY ORDER, त्यावपत प्रयत //True Copy// उप/सहायक पुंजीकार (Asstt. Registrar) आयकर अपीलीय अधिकरण, मुिंबई / ITAT, Mumbai