Income Tax Appellate Tribunal - Delhi
Pipal Research Analytics And ... vs Ito, New Delhi on 18 June, 2018
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INCOME TAX APPELLATE TRIBUNAL
DELHI BENCH "I-2": NEW DELHI
BEFORE SHRI AMIT SHUKLA, JUDICIAL MEMBER
AND
SHRI O.P. KANT, ACCOUNTANT MEMBER
ITA No.:-6374/Del/2012
Assessment Year: 2008-09
Pipal Research Analytics and ITO,
Information Services India Pvt. Ward-14(2)
Ltd., Vs. New Delhi.
CRISIL House, Plot No. 46,
Sector 44, Opp. PF Office
Gurgaon 122 003
PAN AAICS2386Q
(Appellant) (Respondent)
Assessee by: Shri Anubhav Rastogi, Adv.
Department by : Shri S.K. Ambastha, CIT,DR
Date of Hearing 20/03/2018
Date of 18/06/2018
pronouncement
ORDER
PER AMIT SHUKLA, J.M.
The aforesaid appeal has been filed by the assessee against final assessment order dated 21.12.2011, passed in pursuance of directions given by the Dispute Resolution Panel, New Delhi (DRP) vide order dated 28.9.2012, for the quantum of assessment passed u/s 143(3) r.w.s 144C (5) for the assessment year 2008-09. In the grounds of appeal the assessee has raised following grounds:-
"On the facts and circumstances of the case and in law, the Income Tax Officer, Ward 14(2}, New Delhi ('AO') erred in concluding the assessment under Section 143(3) of the Income tax Act, 1962 read with Section 144C of the Act, as follows:
1. determining the arm's-length price of the Appellant's international transactions of provision of corporate research services at Rs.30,05,63,588 instead of Rs. 23,19,16,428 determined by the Appellant;
2. disregarding the appellant's Transfer Pricing documentation and conducting his own comparability analysis which is not in accordance with the contemporaneous documentation requirement of the Indian TP regulations;
3. requiring financial data of only the current year (FY 2007-08) of the comparable companies to be used for benchmarking the Appellant's international transactions;
4. not granting working capital adjustment and risk adjustment to the Appellant to account for the differences in the working capital and risk profile-of the comparables vis-a vis the Appellant;
5. the learned AO be directed to grant (+/-) 5% benefit as available under proviso to Section 92C(2) of the Act.
6. The AO erred in law and in facts in disallowing Rs. 29,31,485 u/s 438 (f) completely ignoring the assesses contention of a deduction of an equal amount u/s 10A of the Act.
7. Alternatively, the AO further erred in considering section 10A as a deduction as against exemption from total income and therefore erroneously disallowing Rs. 29,31,485 u/s 43(f).2
2. Facts in brief qua the transfer pricing adjustment as raised vide ground nos. 1 to 5 are that, assessee company is a custom research company delivering the financial and business research and quantitative analytics to organisation worldwide. It is a captive service provider rendering Information Technology Enabled Services (ITeS) in the nature of business and investment research services. It mainly provides services to Pipal Research Corporation, USA for provision of business and investment research services with clients of Pipal USA and other parts of the world. Pipal USA out sources the services required by its clients to assessee for execution. The functions performed by the assessee in the TP study report has been highlighted as under:-
a. Understanding the requirement of Clients of Pipal USA in terms of deliverables:
Pipal India co-ordinates with Pipal USA and clients of Pipal USA over phone/ e-mail to understand the exact content of the deliverables required by the clients. Sometimes, Pipal India directly contacts the client of Pipal USA to understand their requirements in case Pipal USA wants Pipal India to do so.
b. Arrangement of proper infrastructure: Pipal India, on the basis of its experience of dealing with Pipal USA, forecasts the infrastructure required for provision of services and accordingly arranges for the resources in time so that it can provide the timely delivery of services.
c. Marketing / Business Development:3
Pipal India does not carry out any marketing or business development function since it is a captive service provider and secures its entire business by way of outsourcing from its parent, Pipal USA.
d. Finance:
Pipal India receives advance payment from Pipal USA for all the services it renders to Pipal USA. Further, Pipal India have also made arrangements for the funds required for meeting working capital and fixed capital requirements by way of an unsecured loan.
e. Technology:
Pipal India uses the appropriate technologies for executing various projects for Pipal USA. The choice of technologies to be used has been done by Pipal India with the necessary input /direction from Pipal USA as and when required.
f. In-house research:
Employee of Pipal India do in-house research for improving the overall quality of the services to be provided by it and also try to find out new ways of performing the services to improve the overall efficiencies of the employees.
g. Quality Check:
Pipal India adheres to an internal quality standard during the provision of services to Pipal USA. Pipal India through its experienced employees checks the deliverables considering quality required by Pipal USA.
3. Being a captive service provider the assessee is exposed to very limited risk and in so far as tangible assets are concerned they are mostly relating to networking equipments, computers, furniture and 4 fixtures, office equipments, software etc. It does not deploy any intangible assets for carrying out business and investment research services. During the year under consideration the provision of ITe services was shown at Rs. 23,19,16,428/-. For benchmarking the margin from such transaction with its AE, the assessee adopted TNMM as most appropriate method by taking PLI as OP/direct cost. The assessee's PLI was arrived at 21% on the direct cost. In the TP study report the assessee selected four comparables companies namely:-
No. Name Weighted
Average
OP/DC(%)
1. Allsec Technologies Ltd. 6.50
2. Cosmic Global Ltd. 40.28
3. Datamatics Financial 24.12
Services Ltd.
4. iSmart International Ltd. 9.97
Average 20.22%
4. Thus it was reported that the assessee's transaction with its AE was at arm's length. The Ld. Transfer Pricing Officer however rejected the economic analysis carried out by the assessee and after detailed discussion, he carried out its own search of comparables and finally shortlisted following seven comparables within average mean of 31.32%. The comparables selected by the TPO were as under:- 5
S. TPO's Comparables OP/TC
No. margin
1. CRISIL Ltd. (seg.) 31.80%
2. Brescon Corporate Advisors Ltd. 87.4%
3. Arix Consultants Ltd. 5.15%
4. Ambit Capital Pvt. Ltd. 0.33%
5. Khandwala Securities Ltd. 80.70%
6. Quantum Advisors Ltd. 3.26%
7. Indian Venture Capital Ltd. 11.20%
Mean OP/TC 31.32%
Based on the above comparables the Ld. TPO proposed an adjustment of Rs. 7,49,12,375/-. He also denied working capital adjustment as claimed by the assessee and also risk adjustment on the ground that assessee is purely a captive service provider. Ld. DRP by and large confirmed the comparables chosen by the TPO and however the final adjustment amount was worked out Rs. 6,86,47,160/-.
6. Before us Ld. Counsel for the assessee had contested inclusion of following four comparables:-
1. Crisil Limited (Research Segment)
2. Brescon Corporate Advisors Limited
3. Khandwala Securities Limited
4. India Venture Capital Limited 6
6. Regarding Crisil Limited (Research Segment), he submitted that, firstly, the said company provides services in the areas of credit rating and risk assessments; gas and infrastructure advisory; research on India's economy, industries and companies; investment research;
outsourcing; fund services and risk management; secondly, there were high related party transactions which was to the tune of 60.50% for which a detailed calculation of percentage of RPT has been filed before us. Thus, he submitted that if there are more than 25% of RPT then the said company cannot be taken for the purpose of comparability analysis. In support he relied upon various decisions:-
- Assistant Commissioner of Income-tax, Circle 3 (1), New Delhi v. Convergys India Service (P.) Ltd.(55 Taxmann.com 30)
- Nokia India (P.) Ltd. v. Deputy Commissioner of Income-tax, Circle -13(1), New Delhi (52 Taxmann.com 492)
- Deputy Commissioner of Income-tax- 6(3),Mumbai v. Matrix India Asset Advisors (P.) Ltd.(49 Taxmann.com 151)
- Assistant Commissioner of Income-tax, 11 (1), Mumbai v. Zee Entertainment Enterprises Ltd.*(51 Taxmann.com 231)
- Deputy Commissioner of Income-tax, Circle 12 (1), Bangalore v. Misys Software (I) (P.) Ltd.*(56 taxmann.com 332)"
7. On the other hand Ld. DR submitted that this company was selected by the assessee which has been accepted by the TPO and this point was not raised before the DRP. In any case without prejudice, he submitted that in case if it is to be included or excluded on the basis 7 of RPT filter, then the matter should be restored back to the file of the AO / TPO to verify the contention of the assessee.
8. After considering the aforesaid submissions and on perusal of the matter placed on record, we find that one of the main objections raised by the Ld. Counsel for this comparable is that there are high percentage of related party transactions entered by the said company which is almost 60.50%. Once the comparable company is having such a high related party transactions, then it can be held that comparability of controlled transaction with uncontrolled transactions gets vitiated. It is now almost settled by various judicial precedents that for carrying out comparability analysis RPT filter should be around 25%. Since this issue has not been examined from this perspective, therefore, we are of the opinion that for examining the percentage of related party transactions matter should be remanded back to the file of TPO, who shall examine this point and in case the RPT is more than 25%, then this comparable cannot be included in the comparability list and hence should be excluded. With this direction issue of Crisil Limited (Research Segment) is remanded back to the file of the TPO.
9. Brescon Corporate Advisors Limited: Before us, Ld. Counsel submitted that this company is engaged in Financial Restructuring, syndication of debt and equity related services/ advisory which is 8 entirely different from the business of the appellant which is engaged in entirely consultancy and advisory services to its AE. From the annual reports which have been placed in the paper book he pointed out that Brescon is providing following services:-
- Distressed and special situation advisory:
- Brescon is a leading player in distressed and special situation advisory and investment space whereas the appellant is engaged in provision of ITES services in the nature of business and investment research services.
- Resolution Services : which include reorganization of asset liability mismatch, realignment of lender obligation with that of operational cash flows and one time settlement
- Recapitalization Advisory services : cater to raising equity and debt (including convertible and structured debt).
Apart from that, he submitted that source of revenue of Brescon Corporate Advisor is through fees based financial services which comprises of ; Financial Restructuring and Capitalization; Syndication of Debt and Equity related services/advisory, for which there is no segmental information available. He also placed reliance upon the following judgments of the Tribunal, wherein this company has been excluded from the company providing investment advisory services:-
- Avenue Asia Advisors (P.) Ltd. vs. DCIT (2017)(85 Taxmann.com
311)(Delhi High Court)
- Temasek Holding Advisors (I) Pvt. Ltd. vs. DCIT (ITA No. 4203 and 4503/Mum/2012) 9
- Temasek Holding Advisors (I) Pvt. Ltd. vs.DCIT (ITA No. 5395 and 5616/Mum/2009)
- Xander Advisors India Pvt. Limited vs. ACIT
- TPG Capital India Pvt. Limited vs. ACIT (ITA No. 880/Mum/2013)(Mum)
10. On the other hand, Ld. DR strongly relied upon the order of the TPO and DRP and submitted that overall comparability has to be seen and this company is also into financial sector and investments. Therefore, the reasoning given by the AO for inclusion of the said company should be upheld.
11. After considering the relevant finding given in the impugned order as well as the submission made by the party, we find that Brescon Corporate Advisors Ltd. are not only into advisory services but also into merchant banking, financial restructuring and syndication of debt. Whereas the assessee company as discussed above is purely providing investment advisory services and none of its activities are into merchant banking. Brescon Corporate Advisory is also assisting company in special situations through recapitalisation, mergers and acquisition, infusion of private equity or direct investment etc. The company which is mainly carrying out merchant banking, restructuring and syndication of debt cannot be held to be functionally comparable with a company which is purely into investment advisory services. Apart from that, we find that there is no segmental information with regard to various streams of fees, i.e., 10 financial restructuring and re-capitalisation, syndication of debt equity related advisory, M & A Advisory, etc. In the absence of such segment information, it would be very difficult to carry out in benchmarking analysis with the assessee, because none of such activities are carried out by the assessee. Accordingly, we direct exclusion of said comparable from the list of the comparables.
12. Khandwala Securities Ltd.: Before us, Ld. Counsel submitted that the overall operations of Khandwala include Investment Banking, Corporate Advisory services, Institutional broking, private client broking and investment advisory services. He also relied upon the following judgments for exclusion of Khandwala Securities Ltd. as a comparable to a company providing investment advisory related support services :-
- Carlyle India Advisors (P.) Ltd v. Assistant Commissioner of Income-tax 10(1), Mumbai (24 Taxmann.com 176)
- General Atlantic (P.) Ltd. v. Deputy Commissioner of Income-tax, Circle - 3(1), Mumbai (32 Taxmann.com 178).
Further details on the business profile of Khandwala were given which are as follows:-
- Corporate Advisory Business: It provides a broad range of services including equity capital market transaction execution, mergers and execution advisory and capital raising advisory and transaction execution relating to structured finance, real estate and infrastructure.11
- Capital Market Operations: Khandwala provides a broad range of corporate advisory services from transaction structuring to product placement.
- Institutional Equities: business comprises institutional equity sales, sales trading and research. It provides equity and derivatives sales and trading services to a large no. of institutional investors.
- Market Research: It involves fundamental, technical and alternative investment research.
- Private Client Broking: It involves providing advisory based brokerage services with a strong emphasis on research and value added services.
- Portfolio Management Services: It involves providing high net worth individuals with investment advisory, planning and asset deployment advise, asset allocation and distribution of a wide range of products.
13. On the other hand Ld. DR strongly relied upon the order of the TPO and DRP.
14. After considering the relevant finding given in the impugned order as well as material preferred to before us, we find this company apart from providing corporate advisory services is also providing institutional equity sales, sales trading and research, private client broking and portfolio management services. It also provides corporate advisory services. It also provides a broad range of services including 12 equity capital market transaction, mergers and execution advisory and other such similar services. From the perusal of the annual report and profit and loss account, we find following streams of income:-
SCHEDULE For the year ended
March 31, 2008
Rs.
Income
Brokerage 79,647,841
Corporate Advisory Services 83,288,455
Income from Capital Market Operations 5,675,562
Profit on sale of Long-term investments 481,534
______________
169,093,391
11,077,466
15. From the above it is seen that out of Rs. 16.91 crores from the business operation, brokerage income itself is almost 45% and corporate advisory services is around 46%. The profit and loss account does not give details of segmental revenue except for gross revenue. Moreover advisory services, includes equity capital market transaction, execution of mergers and acquisition advisory services, capital raising advisory services and transaction execution relating to structured finance, real estate and infrastructure. Only few activities undertaken by it under the corporate advisory services which can said to have some similarity with those carried out by the assessee. 13 However in totality if we take the overall streams of revenue and function carried out by this company then it would be very difficult to include such a company into a basket of comparability list and therefore, at entity level and in absence of any overall segment of corporate advisory services, we do not find that it should be included in the comparables. Accordingly, we direct the exclusion of such comparable.
16. India Venture Capital :- Before us, Ld. Counsel submitted that this company is functionally different. The principal products made by the company are software services as reported in the Balance Sheet Abstract and General Business Profile. The assessee, on the other hand is engaged in rendering ITe Services in the nature of business and investment research services. Therefore, it can be concluded that software development services which are high end in nature are entirely different from ITeS services provided by the assessee. Apart from that, he also submitted that turnover of this company is only 20.25 lacs as compared to that of assessee which is Rs. 23.19 crores. Ld. DR on the other hand strongly relied upon the order of the TPO and DRP.
17. From the perusal of the annual report, we find that the principal products of this company are software product and services, whereas the assessee company is purely into ITeS which is in the 14 nature of business and investment research services. When a company is into Software development companies then ostensibly it cannot be held to be comparable with ITeS Company and on this ground alone we direct the exclusion of the said company.
18. In so far as working capital and risk adjustment, no arguments have been placed before us and therefore, same are not adjudicated upon.
19. As regard the disallowance of Rs. 29,31,485/-, the AO has disallowed the amount on account of provision made during the year for leave encashment by the assessee u/s 43B (f). The DRP has directed the AO to verify whether the said sum of Rs. 29,21,485/- was claimed by the assessee as a deduction and if so the same should be disallowed otherwise no disallowance should be made. The AO in pursuance of such DRP direction noted that the said amount was debited to the profit and loss account and deduction was thus claimed. During the assessment proceedings, the assessee has claimed that the unit is located in a software technology Park of India (STPI) and therefore, eligible for a deduction u/s 10A and since the profits of the unit are exempted u/s 10A, then any expenses pertaining to generation of such profits not allowed as a deduction will get exempted and therefore, section 43B does not apply. However, AO rejected the assessee's contention and disallowed the same on the 15 ground that such provision of leave encashment which has not been paid will not be allowed.
20. After hearing both the parties and on perusal of the relevant finding given in the impugned order, we do not find any merits in the contentions raised by the assessee that since the entire income of the assesses is exempt and, therefore, corresponding expenses are also exempt, because from the perusal of the assessment order it is seen that no deduction u/s 10A has been claimed by the assessee and if the provision of leave encashment has not been paid, then in terms of section 43B(f) such amount cannot be allowed as deduction. Accordingly, the addition as confirmed by the AO in pursuance of the DRP direction is upheld. Thus, on this issue the assessee's ground is dismissed.
21. In the result the appeal of the assessee is partly allowed.
Order pronounced in the Open Court on 18th June, 2018.
sd/- sd/- (O.P. KANT) (AMIT SHUKLA) ACCOUNTANT MEMBER JUDICIAL MEMBER Dated: 18th June/2018 Veena Copy forwarded to 1. Applicant 2. Respondent 3. CIT 4. CIT (A) 16 5. DR:ITAT ASSISTANT REGISTRAR ITAT, New Delhi 17