Income Tax Appellate Tribunal - Mumbai
Lehman Brothers Securities Pvt. Ltd., ... vs D.C.I.T. 4(3), Mumbai on 12 December, 2017
आयकर अपीऱीय अधिकरण "K" न्यायपीठ मब
ुं ई में ।
IN THE INCOME TAX APPELLATE TRIBUNAL "K" BENCH, MUMBAI
BEFORE SHRI MAHAVIR SINGH JUDICIAL MEMBER
AND SHRI RAMIT KOCHAR, ACCOUNTANT MEMBER
आयकर अपीऱ सं./I.T.A. No.4574/Mum/2012
(नििाारण वर्ा / Assessment Year: 2007-08)
Lehman Brothers Securities बिाम/ DCIT 4(3)
Pvt. Ltd. C/o KPM G India R.No. 649, 6 t h Floor,
Private Li mited Lo dha Aayakar Bhavan, M K
v.
Excelus, 1 s t Floor, Apollo
Road, Mumbai 400020
Mills Compound, M ahalaxmi ,
Mumbai 400011
स्थायी ऱेखा सं ./ PAN : AABCL1353R
(अपीऱाथी /Appellant) .. (प्रत्यथी / Respondent)
Assessee by: Shri. Rahul K. Mitra
Revenue by : Shri. Jayant Kumar,CIT-DR
सन
ु वाई की तारीख /Date of Hearin g : 13-9-2017
घोषणा की तारीख /Date of Pronouncement : 12.12.2017
आदे श / ORDER
PER RAMIT KOCHAR, Accountant Member
This appeal, filed by the assessee, being ITA No. 4574/Mum/2012 for assessment year 2007-08, is directed against the appellate order dated 12- 04-2012 passed by learned Commissioner of Income-tax (Appeals)-15, Mumbai (hereinafter called "the CIT(A)") for assessment year 2007-08, appellate proceedings had arisen before learned CIT(A) from the assessment order dated 18.02.2011 passed by learned Assessing Officer (hereinafter called "the AO") u/s 143 of the Income-tax Act, 1961 (hereinafter called "the Act").
2. The brief facts of the case are that assessment has been framed by the A.O u/s. 143(3) of the 1961 Act vide assessment order dated 18.02.2011 wherein , inter-alia , transfer pricing additions to the tune of Rs. 33.10 crores have been made by adjustment to arm lengths price with respect to 1 I.T.A. No. 4574/ Mum/2012 the international transaction entered into by the assessee with its Associate Enterprise (A.E) , the TP additions made by the AO in the assessment order were in turn based upon orders dated 28.10.2010 passed by Transfer Pricing Officer(TPO) u/s. 92CA(3) , wherein an adjustment of Rs. 33.10 crores was proposed by TPO to the Arms Length Price of International Transaction entered into by the assessee with its AE's with respect to the investment banking services rendered by the assessee. It is claimed by the assessee that it is part of Lehman Brothers group, headquartered in New York, 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 serves 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 investment banking division transaction with its AE, the assessee claimed to have 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 transactions with A.E. by applying Global Group policy of Lehman Brother Group applicable to all its entities, based on Profit/Revenue split method. It was claimed by the assessee that this is a first year of operations and the Global Revenues for the Investment Banking division in the financial year 2006-07 were 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 are 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. based on Global Transfer Pricing policy of the Lehman Group uniformly and consistently applied to all Lehman Brother entities worldwide. The TPO rejected this method as the assessee could not explain the same properly and TPO applied TNMM method at entity level and comparables were drawn by TPO accordingly. The assessee on its part had submitted that the Profit/Revenue split method is the most appropriate method to bench mark international transactions based upon the global transfer pricing policy of the Lehman Group which is 2 I.T.A. No. 4574/ Mum/2012 consistently and uniformly applied to all Lehman Group entities across various countries since financial year 1999-2000 as basis of allocation of Revenue/Income to various Lehman group entities. The assessee claimed that the assessee business model is unique one and there is no comparable company in the segment in which the assessee dealt with. 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's 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 could not find comparable w.r.t. IBD division , wherein comparables were chosen by TPO from ITES/BPO segment , as under:
.c:
., ,c SI. No. Name of the company 2006-07
. ..,...,..
1 B 2 K Corp. Pvt. Ltd. NA
2 B N R Udyog Ltd. 30.73
3 CMC Limited t 32.91
4 Cosmic Global Ltd. 11.31
5 Datamatics Technologies Ltd. 4.03
6 Fortune Infotech Ltd. 12.82
7 Galaxy CommerciaIs Ltd 14.22
8 HCL Technologies Ltd. 20.06
9 KPIT Cummins Global Business 19.93
Solutions Ltd
10 T S R Darashaw Ltd. 44.64 -
--.
Arithmetical mean 21.18
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 while computing ALP. It was also claimed that the assessee has not operated at full capacity during the previous year relevant to the impugned assessment year as the assessee was in the process of employing 3 I.T.A. No. 4574/ Mum/2012 new employees being the first year of operation and the costs were incurred for recruitment charges as also there are premises lying vacant which could not be used due to non employment of employees being first year of operations . It was also submitted that Lehman Group had collapsed worldwide and the assesses is trying to collate information with great difficulty as employees have 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 international transactions entered into by the assessee with its AE. The TPO identified comparables in the field of IT Enabled Services/Business Processing Outsourcing(BPO) as TPO could not locate comparables in the field of Investment Banking Division in which assessee was engaged in and TNMM method was applied by the TPO, which led to net additions to the tune of Rs. 33.10 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 for which details were brought on record by the assessee) being proposed adjustment to ALP by the TPO 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 .
3. Aggrieved by the appellate order dated 12.04.2012 passed by learned CIT(A), the assessee has come in an appeal before the tribunal .
4. At the outset , Ld. Counsel for the assessee pleaded that there was an extra ordinary situation prevailing during assessment proceedings arising out of the collapse of Lehman Brothers worldwide which was liquidated in 2009 and because of that proper representation and explanation co uld not be made before the authorities below leading to huge additions to the tune of Rs. 33.10 cro res to ALP by way of TP additi ons . It is prayed and stated before us by the Ld. Counsel fo r the assessee that i f an fresh opportunities is granted to the assessee by setting aside the matter to the file of A.O./TPO , the assessee is now in a position to offer proper explanations and make proper representation before the authorities below to justify its methodology of benchmarking o f international tran sactions with its A.E .as well computation o f ALP as was made by it in its TP study. It is cl aimed by the 4 I.T.A. No. 4574/ Mum/2012 learned counsel for the assessee that the method adopted by the assessee for bench marking of international transactions with AE being Revenue spl it method was the most appropri ate method because the services offered by the assessee in IBD segment are integrated, inter-connected and seamless wherein several entities across gl obe of Lehman Brother s Group co llaborate along with cl ients and banks to co mplete transaction in IBD segment wherein Revenue split method is the most appropriate method for benchmarking and co mputation of A LP of its international tran sactions with AE . It was submitted that this was a first year operation and the assessee was engaged in investment banking business ,and the transfer pricing was done worldwide by Lehman Brothers Gro up by following global policy uniformly an d co nsistently wherein Revenue split method is adopted to compute ALP of internatio nal tran sactions with AE. It was submitted th at the transfer prici ng methodology of Revenue split adopted by Lehman Brothers gl obally since several years consistently and uniformly was also applied the case of assessee which was rejected by TPO as well by learned CIT(A) and instead TNMM was applied . It was submitted that the business model of the assessee is unique being investment banking , there are no comparable available. It was submitted that there was an amendment in 2012 wherein legislature has introduced Ru le 10AB by the IT (S ixth Amendment ) Rules , 2012 w.e.f. 01 -04- 2012 under the sub head "Other method of determination of ALP"
which was held to be retrospective by Delhi ITAT in the case of Global One India P. Ltd. v. ACIT in ITA No. 5571/Del/2011 and ITA 5896/Del/2012 vide orders dated 15 -04-2014 and it is claimed that Revenue S plit method could fall under any other suitable method for computing ALP . The assessee also relied upon the decision of Mumbai-tribu nal in the case of ACIT v. Agility Logistics P. Ltd. in ITA No. 2000 ,6004 & 8146 /Mum/2010 vide orders dated 25 -01-2012 and the decision in the case of DCIT v. DHL Danzas Lemuir Private Ltd. in ITA no.
9112/Mum/2010 , 8119/Mum/2011 vide orders dated 10 -02- 2014 and also decision of Delhi B enches of the t ribunal in the 5 I.T.A. No. 4574/ Mum/2012 case of Toll Global Forwarding India P rivate Ltd. in ITA no. 5025/Del/2010 vi de orders dated 18 -11-2014. It is submi tted that assessee has adopted Revenue S plit method and share of the assessee is considered to be 0.56% in global revenues of IBD business of Lehman Brothers Group. I t is submitted that even if the Revenue S plit method is not acceptable to TPO , he could have modified it to Profit S plit method to compute ALP but outright rejection of the method was not warranted and TNM M as adopted by Revenue which was later confi rmed by learned CIT(A) is not suitable method keeping in view business matrix o f the assesse . The assessee again reiterated that the assessee business of IBD involves integrated, inter-connected and seamless business operations wherein several Lehman Brother entities worldwide as well clients and banks are involved to successfully compete transactions and hence Revenue/profit split is the most suitable method. It is also s tated before us that due to collapse of Lehman Brothers worldwide and its l iquidation in 2009 , the assessee employees left the organisation wherein the assessee could not effectively make representatio ns before the authorities below and due to this extra o rdinary situat ion prevailing when assessment was progressing , the additions were made due to lack of proper representations by the assessee . It was stated by learned counsel for the assessee that if an fresh opportunities is now given to the assessee , it wi ll submit explanations along with all necessary evidences to support its contentions . I t was stated by Ld. Counsel for ass essee that keeping in view factual matrix of the case as there was no proper representation before the authorities below during assessment proceedings as well before learned CIT(A) as info rmation could not be collated due to collapse of Lehman Brothers , there could be an open ended set aside to the file of the A.O/TPO wherein all the contention s/issues can be left open including any fresh issue which may arise for consideration by TPO/AO du ring de - novo proceedings , and TPO/AO can decide the issue 's afresh denovo on merits in accordance with law including considering 6 I.T.A. No. 4574/ Mum/2012 the most suitabl e method fo r computing ALP w.r.t. its international transaction s with AE .
The learned CIT-D R on the ot her hand submitted that as per Rule 10B(1)(d) of Income -tax Rules, 1962, only profit split method is acceptable to compute the ALP . It was submitted that there is no such Revenue Split method as adopted by the assessee which is accepted in Indi an TP jurisprudence and combined net profit of the group globally is to be split for which no details were furnished by the assessee .It was submi tted that the assessee did not submitted due i nformation and evidences during assessment proceedings as well before learned CIT(A) and hence the TPO applied TNMM method to compute ALP of its international transactions with AE. It was fai rly agreed that i f the learned counsel for the assessee have agre ed to the open ended set aside to TPO/AO for de -novo assessment wherein TPO/AO may consider all issues which arises or may arise to frame denovo assessment , the Revenue will not have objection and all the issues which may arise to frame assessment are to b e left open to be decided by the AO/TPO in de -novo proceedings on merits in accordan ce with law.
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 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 7 I.T.A. No. 4574/ Mum/2012 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 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 entity level and comparables were drawn by TPO accordingly. The TPO could not find 8 I.T.A. No. 4574/ Mum/2012 comparable from investment banking segment while the same were drawn from ITES/BPO segment, as under:
.c:
., ,c SI. No. Name of the company 2006-07
. ..,...,..
1 B 2 K Corp. Pvt. Ltd. NA
2 B N R Udyog Ltd. 30.73
3 CMC Limited t 32.91
4 Cosmic Global Ltd. 11.31
5 Datamatics Technologies Ltd. 4.03
6 Fortune Infotech Ltd. 12.82
7 Galaxy CommerciaIs Ltd 14.22
8 HCL Technologies Ltd. 20.06
9 KPIT Cummins Global Business 19.93
Solutions Ltd
10 T S R Darashaw Ltd. 44.64 -
--.
Arithmetical mean 21.18
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 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 9 I.T.A. No. 4574/ Mum/2012 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 globa lly participate along with banks and clients to successfully complete the transactions and the Revenue split met hod 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 methodology adopted by the assessee for benchmarking international tran sactions 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 t he assessee could not make effective representations before the authorities below due to extraordinarily situation faced by the assessee owing to collapse of Lehman Brothers g roup worldwide leading to liquidation in 2009 . This ye ar was also the fi rst year operations and it is claimed that there certain extrao rdi nary expenses such as fees paid for increase in share capital , rental paid fo r 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 acco rdance with l aw before arriving ALP o f 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 isuses 10 I.T.A. No. 4574/ Mum/2012 which arises or may arise du ring de -novo assessment proceedings on merits in acco rdance with l aw after hearing the assessee. Ld. DR h as also afte r consi dering the factual matrix of the case and concession granted by the learned counsel for the assessee fairly ag reed 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 acco rdance with law after hearing the assessee and considering the material placed on record . We have duly considered the factual matrix o f 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 fi rst appellant proceedings , due to collapse of Lehman Brother g roup worldwide, the assessee could not make effective representations before the authorities below an d interest of justice demand that the assessee be given one more opportunity to present all evidences and explanations in its support before th e 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. i ssues 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 fo r afresh determination of all issues which had arisen or may arise du ring assessment on merits in accordance 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 sh al l make the assessment de -novo on merits in accordance with law. Needless to say that the authoriti es 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 11 I.T.A. No. 4574/ Mum/2012 support of its co ntentions which shal l be admitted in the interest of justice . We order acco rdingly.
5. In the result appeal of the assessee in ITA 4574/Mum/2012 for assessment year 2007-08 is allowed for statistical purpo ses.
Order pronounced in the open court on 12.12.2017 आदे श की घोषणा खुऱे न्यायाऱय में ददनांकः 12.12.2017 को की गई ।
Sd/- Sd/-
(MAHAVIR SINGH ) (RAMIT KOCHAR)
JUDICIAL MEMBER ACCOUNTANT MEMBER
Mumbai, dated: 12 .12.2017
Nishant Verma
Sr. Private Secretary
copy to...
1. The appellant
2. The Respondent
3. The CIT(A) - Concerned, Mumbai
4. The CIT- Concerned, Mumbai
5. The DR Bench, E
6. Master File
// Tue copy//
BY ORDER
DY/ASSTT. REGISTRAR
ITAT, MUMBAI
12