Income Tax Appellate Tribunal - Delhi
Control Risks India Pvt. Ltd., New Delhi vs Acit, New Delhi on 30 May, 2018
IN THE INCOME TAX APPELLATE TRIBUNAL
DELHI BENCH: 'I-2', NEW DELHI
BEFORE SH. RAJPAL YADAV, JUDICIAL MEMBER
AND
SH. O.P. KANT, ACCOUNTANT MEMBER
ITA No.1480/Del/2017
Assessment Year: 2012-13
M/s. Control Risks India Pvt. Vs. ACIT,
Ltd., 401, Copia Corporate Circle-6(2), New Delhi
Suits, Jasola Complex, New
Delhi
PAN : AADCC3008J
(Appellant) (Respondent)
Appellant by Sh. Ajay Vohra, Sr. Adv. &
Sh. Aditya Vohra, Adv.
Respondent by Sh. H.K. Choudhary, CIT(DR)
Date of hearing 03.05.2018
Date of pronouncement 30.05.2018
ORDER
PER O.P. KANT, A.M.:
This appeal by the assessee is directed against order dated 31/01/2017 passed by the Assistant Commissioner of Income Tax, Circle 6(2), New Delhi (in short 'the Assessing Officer') for assessment year 2012-13, in pursuance to the direction of the Ld. Dispute Resolution Panel (DRP). The grounds raised in the appeal are reproduced as under:
1. That the Assessing Officer ('AO') erred on facts and in law in completing the assessment under section 144C read with section 143(3) of the Income-tax Act, 1961 ('the Act') at an income of Rs. 8,27,23,461 as against income of Rs.
1,09,68,920 returned by the appellant.
2 ITA No. 1480/Del/20172. That the AO erred on facts and in law in making an addition of Rs. 3,95,61,889 allegedly on account of difference in the arm's length price of the 'international transactions' on the basis of the order passed under section 92CA(3) of the Act by the Transfer Pricing Officer ('TPO') 2.1 The AO/TPO erred on facts and in law in disregarding the benchmarking analysis undertaken by the appellant applying internal TNMM in the Transfer Pricing Documentation allegedly holding that:
(i) The segmental analysis/profitability undertaken by the appellant in the Transfer Pricing Documentation is not appearing in the audited financial statement
(ii) The internal TNMM, applied by the appellant, is a sort of CUP and accordingly, strictly comparability is required for applying CUP method
(iii) The services provided to the associated enterprises and non-associated enterprises are not identical.
(iv) The details of services and billing structure of the associated enterprises and non-associated enterprises is not provided by the appellant 2.2 That the AO/TPO erred on facts and in law in characterizing appellant as a provider of financial advisory services and also erred in comparing the appellant with companies engaged in the business of stock broking and trading of shares.
2.3 That the AO/TPO erred on facts and in law in rejecting the following comparable companies for undertaking benchmarking analysis allegedly holding them to be functionally not comparable to the appellant:
(i) Bombay Intelligence Security (India) Ltd.
(ii) Central Investigation & Security Services Ltd.
(iii) Cyber media Research & Services Ltd.3 ITA No. 1480/Del/2017
2.4 That the AO/TPO erred on facts and in law in considering the following companies as comparable for the purpose of benchmarking analysis, not appreciating that these companies are functionally not comparable to the appellant and do not satisfy the comparability criteria laid down in rule 10B(2) of the Income Tax Rules, 1962 ('the Rules'):
(i) Apitco Ltd.
(ii) Ladderup Corporate Advisory Pvt. Ltd.
2.5 That the AO/TPO erred on facts and in law in considering Apitco Ltd. as comparable not appreciating that the information with respect to related party transactions is not available in the annual report of the company and accordingly, not satisfying the filter of related party transactions applied by the TPO.
2.6 That the AO/TPO erred on facts and in law in considering Ladderup Corporate Advisory Pvt. Ltd. as comparable not appreciating that the company is engaged in the business of providing financial and management counseltancy and accordingly, functionally not comparable to the appellant.
2.7 That the AO/TPO erred on facts and in law in not allowing appropriate risk adjustment to establish comparability on account of the appellant being a low-risk-bearing captive service provider as opposed to the comparable companies who were independent comparable companies.
2.8 Without prejudice that the AO/TPO erred on facts and in law in incorrectly computing the transfer pricing adjustment at Rs. 3,95,61,889 as against the correct adjustment of Rs. 80,83,424.
3. That the AO erred on facts and in law in disallowing under section 40(a)(i) of the Act, inter-company fees payments of Rs.2,17,63,132 made by the appellant to its group companies located outside India on the ground that tax has not been withheld therefrom under section 195 of the Act.
3.1 That the AO erred on facts and in law in disentitling the appellant from claiming benefits available under the Double 4 ITA No. 1480/Del/2017 Taxation Avoidance Agreement on the ground that the appellant did not furnish Tax Residency Certificate(s), not appreciating that there was no such requirement in law in the relevant assessment year.
3.2 That the AO erred on facts and in law in confirming the directions issued by the Dispute Resolution Panel ('DRP') without appreciating that the DRP had failed to consider challans evidencing deduction and deposit of tax at source in financial year 2016-17_by the appellant in respect of inter- company fee payment made to group company located in USA, furnished by the appellant before the DRP by way of additional evidence.
3.3 Without prejudice, that the AO erred on facts and in law in confirming the directions issued by the DRP without appreciating that the DRP had failed to consider Tax Residency Certificates of group companies located in UK and Singapore, duly furnished by the appellant before the DRP by way of additional evidence.
3.4 That the AO erred on facts and in law in disallowing under section 40(a)(i) of the Act, payments in the nature of international commission amounting to Rs.1,04,29,520 made by the appellant to its group companies located outside India for failure to withhold tax therefrom under section 195 of the Act.
4. That the AO erred on facts and in law in levying interest under Section 234A and 234B of the Act.
The appellant craves leave to add, amend, alter or vary, any of the aforesaid grounds of appeal before or at the time of hear
2. Briefly stated facts of the case are that the assessee filed its return of income on 30/11/2012, declaring total income of Rs.1,09,68,920/-. The case was selected for scrutiny and notice under section 143(2) of the Income-tax Act, 1961 (in short 'the Act') was issued and complied with. The Ld. Assessing Officer 5 ITA No. 1480/Del/2017 observed International Transactions carried out by the assessee with Associated Enterprises (AEs). He referred determination of arm's length price to the Ld. Transfer Pricing Officer (TPO). The International Transactions and the method selected by the assessee for determining arm's length value of those transactions has been reproduced by the Ld. TPO in his order, which are extracted below :
No. Type of international Method selected Total value of transaction MAM PLI transaction (Rs.) viii. Inter-company fee paid TNMM OP/OC 22,994,801 ix. Commission paid TNMM OP/OC 11,212,101 x. Sale of services TNMM OP/OC 66,934,125 xi. Cost recharged TNMM OP/OC 29,249,611 xii. Commission Income TNMM OP/OC 4,557,770 xiii. Reimbursement of CUP NA 7,246,646 expenses xiv. Recovery of expenses CUP NA 3,908,073 2.1 The assessee used internal TNMM for benchmarking the International Transactions, which was rejected by the Ld. TPO on the ground that AE and Non-AE segment wise profitability analysis was not appearing in audited financial statement. The Ld. TPO chose external TNMM as most appropriate method for determination of arm's length value of the international transaction. The Ld. TPO computed operating profit/operating cost (OP/OC) of the assessee at 1.79%. The assessee, using external TNMM as secondary analysis, selected 5 comparables and computed their mean margin (OP/OC) at 5.52% using multiple year data. The Ld. TPO, however, using current year data computed mean margin of those five comparables proposed by the assessee at 6.87%. After considering submissions of the 6 ITA No. 1480/Del/2017 assessee, the Ld. TPO finally selected following four comparables and computed mean margin at 25.29%:
No. Name of company OP/OC(%)
i. Cholamandalam MS Risk 36.82%
Services Ltd.
ii. Apitco Limited 20.46%
iii. ICRA Management 6.62%
Consulting Services Ltd.
iv. Ladderup Corporate Advisory 37.25%
Pvt. Ltd.
Average 25.29%
2.2 Accordingly, he computed the adjustment of
Rs.3,95,61,889/- as under:
Operation Cost 168,380,063
Arm's Length Price at a margin of 210,963,381 25.29% Price received 171,401,492 105% of price received 179,971,567 Proposed adjustment u/ 92CA 39,561,889 2.3 The Ld. TPO passed order under section 92CA(3) of the Act on 27/01/2016 and proposed upward adjustment of Rs.3,95,61,889/- to the value of international transaction declared by the assessee. The Assessing Officer issued a draft assessment order to the assessee, against which the assessee filed objection before the Ld. DRP, who issued certain directions to the Ld. TPO for verification. After taking into account the direction of the Ld. DRP and the comments of the Ld. TPO, the Assessing Officer issued final assessment order on 31/01/2017, finding of which, have been challenged by the assessee before us.7 ITA No. 1480/Del/2017
In the impugned order, the Assessing Officer made following two addition/disallowances:
1. Transfer pricing adjustment of Rs.3,95,61,889/-.
2. Disallowance under section 40(a)(i) of the Act amounting to Rs.3,21,92,652/- for non-deduction of tax at source on certain payments.
3. The ground No. 1 of the appeal is general in nature and is covered by other grounds of appeal and, therefore, it is not specifically required to be adjudicated.
4. The ground Nos. 2 to 2.8 relate to Transfer Pricing Addition of Rs.3,95,61,889/-.
4.1 Before us, the Ld. counsel of the assessee did not press ground No. 2.1 challenging rejection of internal TNMM by the Ld. TPO/DRP. Addressing ground No. 2.8, the Ld. Counsel submitted that the Ld. TPO has applied the mean margin of comparables over entire cost of the assessee company including cost towards non-AE transactions. According to him for computing the arm's length value of international transaction, the Ld. TPO should have applied, the mean margin of the comparables over the cost in respect of international transaction with AE only. 4.2 Addressing ground No. 2.2, the Ld. Counsel submitted that the Ld. TPO has wrongly characterized the assessee company as provider of financial advisory services and comparing the assessee with companies engaged in the business of stock broking and trading of shares. The Ld. Counsel submitted that identical issue of wrong characterization of the assessee was raised before the Tribunal in the case of the assessee for assessment year 2010-11 and 2011-12 and the Tribunal after 8 ITA No. 1480/Del/2017 verifying the facts, restored the matter to the file of the TPO for carrying out FAR analysis of the assessee on the basis of the evidence on record and then proceed for selecting comparables.
The Ld. counsel also filed copy of the order of the Ld. TPO for assessment year 2010-11 , passed in consequence to the order of the Tribunal.
4.3 The Ld. DR also agreed that the assessee has been wrongly characterized by the Ld. TPO as engaged in providing financial advisory and in earlier years, matter was restored to the Ld. TPO for re-characterization and fresh comparability. Accordingly, he also concurred with the Ld. counsel of the assessee that matter need to be restored to the Ld. TPO for carrying out fresh search of comparables in the light of correct characterisation of the assessee.
4.4 We have heard the rival submissions and perused the relevant material on record. We find that the Tribunal in ITA No. 979/Del/2015 for assessment year 2010-11 has restored the issue to the Ld. TPO for re-characterization and selection of the comparables observing as under:
"8.3. Accordingly, considering the ratio of the decision of the Jurisdictional High Court in Text Hundred India Private Limited (cited supra), we find that the assessee has successfully demonstrated that since the very nature of assessee's business activity has not been correctly understood the conclusion drawn for characterisation of the assessee suffer from a fundamental error wherein the TPO has understood the assessee on considering the TP report filed as being engaged in providing investment and other financial advisory services to its AE. Whereas the peculiar facts of the case as evident from the evidence placed before the TPO and the tax authorities read along with the fresh evidence sought to be placed in the 9 ITA No. 1480/Del/2017 proceedings before us whose filing has not been objected to by the I.T.A .No.-979/Del/2015 Page 16 of 21 Revenue demonstrates to the contrary. We find that the taxpayer no doubt undertakes financial services but these are not activities engaged in stock broking; trading; depositaries etc. these are in the context of forensic, investigative, risk assessments etc. requiring appreciation of socio-political and geopolitical studies which necessarily impact the financials and may be incorporated in the financial comparative information provided by various other taxpayers however when coupled with the forensic services which the taxpayer definitely renders which is evident from the extract of the redacted agreements entered into by the assessee company with its customers the nature of the activity impacting its FAR needs to be addressed. It is seen that even if the nature of activities impact the ultimate decision-making qua the financial information provided however, by no stretch of imagination the assessee can be compared with companies who are trading in shares and investments. Accordingly holding the fresh evidences as relevant and crucial to determine the issues, the fresh evidence is admitted. Support is drawn from the decision of the Jurisdictional High Court in the case of CIT vs Text Hundred India Pvt. Ltd. (cited supra). The following extract of the said decision is reproduced hereunder:-
"13. The aforesaid case law clearly lays down a neat principle of law that discretion lies with the Tribunal to admit additional evidence in the interest of justice once the Tribunal affirms the opinion that doing so would be necessary for proper adjudication of the matter. This can be done even when application is filed by one of the parties to the appeal and it need not to be a suo motto of the Tribunal. The aforesaid rule is made enabling the Tribunal to admit the additional evidence in its discretion if the Tribunal holds the view that such additional evidence would be necessary to do substantial justice in the matter. It is well settled that the procedure is handmade of justice and justice should not be allowed to be choked only because of some inadvertent error or omission on the part of one of the parties to lead evidence at the appropriate stage. Once it is found that the party intending to lead evidence bfore the Tribunal for the first time was prevented by sufficient cause to lead such an evidence and that this evidence would have material bearing on the issue which needs to be 10 ITA No. 1480/Del/2017 decided by the Tribunal and ends of justice demand admission of such an evidence, the Tribunal can pass an order to that effect."
(emphasis provided) 8.4. We further find our conclusion supported by a decision of the Co-ordinate Bench in the case of UCB India Pvt. Ltd Vs. ACIT, Circle 7(3), Mumbai, 121 ITD 131, wherein it is held as under:
"In all fairness, the assessee should not be pinned down to his submissions in the first round of Transfer Pricing proceedings. It should be appreciated that Transfer Pricing regulations are relatively new provisions and the case does require special consideration. The assessee is free to support his case in any manner it deems fit by filing any additional evidence or document before the A.O. Further information may be gathered from the parent company, if possible. Fresh methods may be adopted to prove ALP. Our intention is that, the assessee should not be shut out in the second round of proceedings, on the ground that, certain documents were not filed in the first round or certain method was not adopted originally."
(emphasis provided)
9. Accordingly in view of the above detailed reasoning on facts and law, the issue is restored to the file of the TPO to carry out a FAR analysis of the assessee after characterizing its activity on the basis of evidence on record and then proceed to selecting comparables as per Rules and in accordance with law. Needless to say that the assessee shall be afforded a reasonable opportunity of being heard."
4.5 Similarly, following the order for assessment year 2010-11, the Tribunal in ITA No. 1098/Del/2016 for assessment year 2011-12 also restored the matter to the Ld. TPO with following observations:
"5. These facts set out in the TP study Report on the basis of Distribution and Sales Agreement entered into by the assessee and its AE have admittedly not been considered and the characterization based on past 11 ITA No. 1480/Del/2017 precedent by the TPO has been followed in haste. Accordingly, considering the judicial precedent and the material available on record, in the light of submissions of the parties before the Bench, we deem it appropriate to admit the fresh evidences filed. These evidences have been discussed in detail and are identical to what has been filed in ITA No. 979/Del/2015 in order dated 27.09.2016. The evidences have been considered to be relevant and crucial for determining the issues as to elaborate and support the original claims of the tax payer. Accordingly following the judicial precedent the evidence is admitted. Since the evidences have to be considered for the first time again following the precedent these are remitted to the TPO with the direction to pass a speaking order in accordance with law after giving the assessee a reasonable opportunity of being heard."
4.6 Further, on perusal of the order of the TPO passed for assessment years 2010-11 and 2011-12 consequent to the order of the Tribunal, we find that the Ld. TPO admitted that the assessee was incorrectly characterized as provider of investment and financial advisory while selecting the comparable companies. The contention of the assessee before us in the year under consideration is that the comparables selected by the Ld. TPO are engaged in providing financial advisory and stock broking etc. services, which are functionally dissimilar to the assessee. 4.7 Since, the Tribunal in earlier years has sent the issue of characterization of the profile of assessee and selection of comparables to Ld. TPO, respectfully following the finding of the Tribunal, in the year under consideration also, we redirect the Ld. AO/TPO for choosing external TNMM as most appropriate method and after characterization of the assessee in view of the transfer pricing study of the assessee and evidences produced, make fresh 12 ITA No. 1480/Del/2017 selection of comparables functionally similar to the assessee and then decide the arm's length price of the international transaction accordingly in accordance of law. It is needless to mention that the assessee shall be afforded adequate opportunity of being heard.
5. On the issue of taking only cost related to AE transactions for applying mean margin of comparables and computing the arm's length price of the transaction, we agree with the contention of the Ld. counsel as the value of the international transaction only has to be compared with uncontrolled transaction.
5.1 When the transaction of the assessee consist both AE and Non-AE transactions, then the mean margin of comparables has to be applied only over the operating cost of the AE transaction, which are international transactions, for determination of arm length price. By including the cost of non-AE transactions into the operating cost for the purpose of computing arm's length price, would distort the comparison of the international transaction with uncontrolled comparable transactions. Since, we have already restored the matter to the Ld. AO/TPO for re- characterization of profile of the assessee and selection of fresh comparables, we feel it appropriate to direct the Ld. AO/TPO for considering only the operating cost of AE transaction, for applying mean margin of comparables and compute adjustment, if any to the value of the international transaction reported by the assessee.
5.2 Accordingly, the grounds related to transfer pricing addition are allowed partly for statistical purposes.
13 ITA No. 1480/Del/20176. The ground No. 3 to 3.2 of the appeal relate to disallowance under section 40(a)(i) of the Act amounting to Rs. 2,17,63,132/- for non-deduction of tax at source on inter-company fee payments.
6.1 Before us, the Ld. counsel of the assessee submitted that the Ld. DRP did not consider the documentary evidences including challans evidencing deduction and deposit of tax at source by the assessee. According to the Ld. counsel, the action of the Ld. DRP in dismissing the contentions of the assessee on the issue in dispute without reasoning, is not justified and matter need to be restored back to either the Ld. DRP or the Assessing Officer for reconsideration of the evidences filed before the Ld. DRP.
6.2 The Ld. DR, could not controvert the above facts and concurred that, matter might be restored to either the file of the Ld. DRP or the Ld. AO for deciding of afresh in the light of additional evidences furnished by the assessee before the Ld. DRP.
6.3 We have heard the rival submissions and perused the relevant material on record. The relevant part of the order of the Ld. DRP is reproduced as under:
"3. The submissions of the assessee and the facts have been carefully considered. In the assessment order, the AO has discussed this issue in detail and has given valid reasons for his decision. The assessee has failed to controvert the findings of the AO. Considering the facts and reasons given in the draft assessment order, the addition made by the AO is justified and is upheld. The Grounds are dismissed."14 ITA No. 1480/Del/2017
6.4 We find that the Ld. DRP has confirmed the disallowance without any detailed reasoning and taking into account the documentary evidences of deposit of tax deducted at source filed by the assessee. In such circumstances, the action of the Ld. DRP is not justified being in violation of principle of natural justice and matter should be considered afresh by the Ld. DRP. Since the grounds related to transfer pricing adjustment has already been restored to the file of the Ld. AO/TPO, restoring this ground to the Ld. DRP will give rise to multiple proceedings and, therefore, we feel it appropriate to restore this issue also to the file of the Ld. AO for deciding afresh after providing adequate opportunity of being heard to the assessee. The assessee is directed to file all the documentary evidences on the issue in dispute before the Ld. AO. Accordingly, the grounds related to disallowance under section 40(a)(i) of the Act are allowed for statistical purposes.
7. In the result, appeal of the assessee is allowed for statistical purposes.
The decision is pronounced in the open court on 30th May, 2018.
Sd/- Sd/-
(RAJPAL YADAV) (O.P. KANT)
JUDICIAL MEMBER ACCOUNTANT MEMBER
Dated: 30th May, 2018.
RK/-(D.T.D.)
Copy forwarded to:
1. Appellant
2. Respondent
3. CIT
4. CIT(A)
5. DR
Asst. Registrar, ITAT, New Delhi