NEW SILK ROUTE ADVISORS P.LTD, MUMBAI V. DCIT 7(1), MUMBAI

ITA 1327/MUM/2014

• Counselvise Citation: [2015] 140 COUNSELVISE.COM (IT) 88296 (ITAT-MUMBAI)
• Duration Of Justice: 11 month(s) 23 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 20-02-2015
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: K
• Next Hearing Date: 01-09-2014
• Assessment Year: 2009-2010
• Appeal Filed On: 27-02-2014
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: N K CHAND
• Keywords: Depreciation; Transfer pricing; International transaction; Commercial expediency
• Section: 143(3)

Judgement Text

, INCOME TAX APPELLATE TRIBUNAL,MUMBAI - K BENCH , , BEFORE S/SH. I P BANSAL,JUDICIAL MEMBER & RAJENDRA,ACCOUNTANT MEMBER /. ITA NO.1327/MUM/2014, ! ! ! ! ' ' ' ' / ASSESSMENT YEAR-2009-10 NEW SILK ROUTE ADVISORS PRIVATE LTD. 205,CEEJAY HOUSE,SHIVSAGAR ESTATE, DR.A.B.ROAD,WORLI,MUMBAI-18 PAN:AACCN4541N DCIT-7(1) AAYKAR BHAVAN,M K ROAD MUMBAI-20 ( #$ / ASSESSEE) ( %&#$ / RESPONDENT) ! '( ! '( ! '( ! '( ) ) ) ) /ASSESSEE BY :SHRI KANCHUN KAUSHAL, ALIAGGER RAMPURAWALA & DHANESH BAFNA * ) / REVENUE BY :SHRI N.K.CHAND ! ! ! ! * ** * (+ (+ (+ (+ / DATE OF HEARING :15 -01-2015 ,-' * (+ / DATE OF PRONOUNCEMENT : 20 -02-2015 ! ! ! ! , 1961 * ** * 254 )1 ( (.( (.( (.( (.( / / / / ORDER U/S.254(1)OF THE INCOME-TAX ACT,1961(ACT) PER RAJENDRA, A.M. ! : CHALLENGING THE ORDER DATED 24.01.2014 OF THE ASSE SSING OFFICER (AO) PASSED U/S. 143(3) R.W.S. 144 C(13)OF THE ACT,THE ASSESSEE HAS RAISED FOLLOWI NG GROUNDS OF APPEAL: 1. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CAS E AND IN LAW, THE DISPUTE RESOLUTION PANEL ERRED IN DIRECTING THE DEPUTY COMMISSIONER OF INCOME TAX, 7(1) ('AO') / THE ADDITIONAL COMMISSIONER OF INCOME TAX, TRANSFER PRICING - 11(1) ('TPO'), TO MA KE AN ADJUSTMENT OF RS.4,06,64,554 TO THE INTERNATIONAL TRANSACTION OF PROVISION OF NON BINDI NG INVESTMENT ADVISORY AND RELATED SERVICES TO ITS ASSOCIATED ENTERPRISES. THE APPELLANT PRAYS THAT THE AFORESAID ADJUSTMENT B E DELETED. 2. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CAS E AND IN LAW, THE DISPUTE RESOLUTION PANEL ERRED IN DIRECTING THE AO TO DISALLOW PART OF THE EXPENSE INCURRED ON BONUS PAID TO SHAREHOLDER EMPLOYEES AMOUNTING TO RS. 1,93,03,138 UNDER SECTIO N 36(1)(II) OF THE ACT. THE APPELLANT PRAYS THAT THE AFORESAID ADDITION BE DELETED. THE APPELLANT PRAYS THAT THE LD. AO BE DIRECTED TO LEVY IN ACCORDANCE WITH LAW. THE APPELLANT CRAVES LEAVE TO ADD TO, ALTER, AMEND OR WITHDRAW ALL OR ANY OF THE ABOVE GROUNDS OF APPEAL. ASSESSEE-COMPANY IS ENGAGED IN THE BUSINESS OF PROV IDING RESEARCH ADVISORY AND OTHER ANCILLARY SUPPORT SERVICES TO TWO OF ITS ASSOCIATE ENTERPRISE S(AE) NAMELY NEW SILK ROUTE ADVISORS L.P., CAYMAN ISLANDS (NSRI) AND M/S NSR NEW SILK ROUTE MA URITIUS ADVISORS LLC,(NSRM). IT HAD FILED ITS RETURN OF INCOME ON 30.09.2009,DECLARING A TOTAL INCOME OF RS.5,74,52,88/-.THE AO COMPLETED THE ASSESSMENT ON 24.01.2014,DETERMINING THE INCOME OF THE ASSESSEE AT RS.11,74,20, 580/-. 2. FIRST EFFECTIVE GROUND OF APPEAL IS ABOUT DISALLOWA NCE MADE U/S. 36(1)(II) OF THE ACT.DURING THE COURSE OF ASSESSMENT PROCEEDINGS, FROM THE DETAILS OF EXPENSES IN RESPECT OF SALARY & ALLOWANCES, FILED BY THE ASSESSEE,THE AO FOUND THAT AN AMOUNT O F RS.5,94,07,087/-HAD BEEN PAID TO FOLLOWING EMPLOYEES WHO WERE ALSO BENEFICIAL OWNER OF THE SHA RES IN THE COMPANY: SN NAME OF THE DIRECTOR BONUS PAID(RS.) %OF SHAREHO LDING 1. SHRI VIVEK SETT 1,26,79,115 12.20 % ITA/1327/MUM/2014/NSRAPL-2009-10 2 2 SHRI ANAND DORAIRAJ 20,57,241 12.20 % 3 SHRI DARIUS PANDOLE 2,16,91,616 12.20 % 4 JACOB KURAIN 2,29,79,115 12.20 % 5,94,07,087 /- THE AO FOUND THAT THE DIRECTORS WERE SUBSTANTIAL SH AREHOLDERS IN THE ASSESSEE COMPANY.VIDE ORDER SHEET ENTRY DATED 19.02.2013, THE AO ASKED TH E ASSESSEE TO JUSTIFY THE PAYMENT OF BONUS TO DIRECTORS AND EXPLAIN HOW THE PAYMENT ALLOWABLE IN VIEW OF PROVISIONS OF SECTION 36(1)(II) OF THE ACT.IN RESPONSE, VIDE LETTERS DATED 15.02.2013 & 26 .02.2013 THE ASSESSEE SUBMITTED THAT THE BONUS PAYMENT MADE TO THE DIRECTORS WAS BASED ON PERFORMA NCE EVALUATION.ON PERUSAL OF DETAILS OF TOTAL PAYMENT THE AO OBSERVED THAT THE ASSESSEE HAD PAID TOTAL BONUS OF RS.1,65,69,776/- TO OTHER EMPLOYEES WHO WERE 13 IN NUMBER AND WERE DRAWING TH E SALARY OF APPROXIMATELY RS. 301 LACS,WHEREAS THE TOTAL PAYMENT OF RS. 5,94,07,087/- WAS MADE TO THE SHAREHOLDERS WHO WERE FOUR IN NUMBER AND DRAWING THE SALARY OF RS. 345 LACS.AS A PROPORTION ALL THE EMPLOYEES BONUS WAS AROUND 55% OF SALARY,WHEREAS IN THE CASE OF FOUR DI RECTOR-SHAREHOLDERS THE SAME WAS 172% OF SALARY.CONSIDERING THOSE FACTS,HE HELD THAT THE BON US PAID TO REGULAR EMPLOYEES WAS LESS THAN THE TOTAL SALARY COMPONENT,THAT THE BONUS PAID TO EMPLO YEES WHO WERE BENEFICIAL-OWNER WAS SUBSTAN - TIALLY HIGHER THAN THE TOTAL SALARY COMPONENT,THAT THE ASSESSEE HAD NOT FURNISHED ANY SUPPORTING DOCUMENTS TO JUSTIFY SUCH HIGH AMOUNT OF BONUS PAYM ENT TO ABOVE FOUR EMPLOYEES AS AGAINST THE OTHER EMPLOYEES WHO DID NOT OWN ANY SHARES IN THE C OMPANY,THAT THE COMPANY HAD DISCLOSED PAYMENT OF BONUS TO ABOVE FOUR SHAREHOLDER-EMPLOYEE S ON CONSOLIDATED BASIS, THAT THERE WAS NO JUSTIFICATION FOR PAYMENT OF SUCH DISPROPORTIONATE AMOUNT AS BONUS,THAT FROM THE MANNER IN WHICH THE QUANTUM OF BONUS HAD BEEN DECIDED AND PAID TO T HE SHAREHOLDERS EMPLOYEE VIS-A-VIS THE PROFITS OF THE BUSINESS DISTRIBUTED TO THE SHAREHOL DERS IT COULD BE SEEN THAT EVEN AFTER PAYMENT OF INTERIM DIVIDEND THE ASSESSEE COMPANY HAD ACCUMULAT ED PROFIT OF RS. 1,93,03,138/- WHICH COULD HAVE BEEN UTILISED FOR PAYMENT OF DIVIDEND TO THE A BOVE FOUR SHAREHOLDERS,THAT THE ASSESSEE- COMPANY MADE PAYMENT TO ABOVE SHAREHOLDERS IN THE G UISE OF BONUS SO AS TO AVOID OVERALL TAX LIABILITY AND ALSO TO EVADE PAYMENT OF DIVIDEND DIS TRIBUTION TAX.RELYING UPON THE CASE OF MCDOWELL AND CO.LTD.(154 ITR 148), THE AO HELD THAT PAYMENT OF DIVIDEND WAS A COLOURABLE DEVICE. 3. AGGRIEVED BY THE ORDER OF THE ORDER OF THE AO,THE A SSESSEE MADE REPRESENTATION BEFORE THE DISPUTE RESOLUTION PANEL(DRP).AFTER CONSIDERING THE SUBMISSIONS OF THE ASSESSEE WITH REGARD TO THE PAYMENT OF BONUS,THE DRP HELD THAT THE FOUR DIR ECTOR EMPLOYEES WERE HOLDING 48.8% OF THE SHARE HOLDINGS WHICH CONSTITUTED ALMOST 50% OF THE SHARE CAPITAL, THAT AO HAD HELD THAT OTHER EMPLOYEES HAD BEEN PAID BONUS AT THE RATE OF 55% OF THEIR SALARY, THAT IN THE CASE OF THE FOUR SHAREHOLDER-EMPLOYEES THE BONUS PAID WAS 172% OF TH EIR SALARY,THAT THE BONUS PAID TO THE SHAREHOLDER EMPLOYEES WAS DISPROPORTIONATE AS TO RA TIO OF THEIR SALARY,THAT THE AO HAD ASKED THE ASSESSEE TO PROVE THE NATURE OF SERVICES RENDERED W HICH ENTITLED THE EMPLOYEES FOR SUCH EXTRA BONUS,THAT NO EVIDENCE WAS PLACED ON RECORD BY THE ASSESSEE TO SHOW THAT THE SHAREHOLDER EMPLOYEES RENDERED ADEQUATE SERVICES WARRANTING THE PAYMENT OF SUCH HEAVY BONUS,THAT THE COMPANY HAD SIGNIFICANT ACCUMULATED PROFITS AMOUNTI NG TO RS.1.93 CRORES EVEN AFTER DISTRIBU - TION OF DIVIDEND DURING THE YEAR, THAT THE ASSESSEE WAS IN A POSITION TO DISTRIBUTE DIVIDEND TO THE SHAREHOLDERS, WHICH HAD BEEN CAMOUFLAGED AS BONUS.F INALLY,THE DRP UPHELD THE PROPOSED ORDER OF THE AO. 4. BEFORE US,THE AUTHORISED REPRESENTATIVE(AR)STATED T HAT THE BONUS PAYMENTS WERE MADE BASED ON THE PERFORMANCE OF THE EMPLOYEES,THAT QUANTUM OF BONUS PAYABLE WAS A COMMERCIAL DECISION, THAT IT WAS DEPENDENT ON VARIOUS CRITERIAS,THAT EAC H EMPLOYEE SHAREHOLDERS CONTRIBUTION TO THE COMPANY WAS DIFFERENT,THAT BONUS PAYOUT TO THEM WAS DIFFERENT,THAT EMPLOYMENT AGREEMENT ITA/1327/MUM/2014/NSRAPL-2009-10 3 ENTERED IN BETWEEN THE ASSESSEE AND THE SHAREHOLDER S HAD PROVISION OF PAYMENT OF BONUS PAYMENT IN ADDITION TO SALARY PAYMENT,THAT DURING THE YEAR UNDER APPEAL THE ASSESSEE HAD DISTRIBUTED DIVIDENDS TO ITS SHAREHOLDERS,THAT OUT OF AVAILABLE PROFIT OF RS.6.95 CRORES IT HAD PAID 4.01 CRORES AS DIVIDENDS, THAT SHAREHOLDER WERE PAID DIVIDEND O F RS.1.96 CRORES OUT OF THE DIVIDEND OF RS.4.01 CRORES,THAT EXPENDITURE INCURRED BY AN ASSESSEE IN GRANTING BONUS TO SHAREHOLDER EMPLOYEES BY VIRTUE OF THEIR EMPLOYMENT AND NOT BECAUSE OF SHARE HOLDING WAS AN ALLOWABLE EXPENDITURE,THAT BONUS PAID BY THE ASSESSEE TO THE SHAREHOLDER EMPLO YEES WAS ARISING OUT OF THEIR EMPLOYMENT.HE RELIED UPON THE CASES OF MANDOVI MOTORS(8TAXMANN.CO M 225),LOYAL MOTORS SERVICES COMPANY LTD.(14ITR647),AMD METPLAST P LTD.(341ITR563),CAREE R LAUNCHERS INDIA LTD.(207 TAXMAN 28),THAT THE ASSESSEE WAS FOLLOWING COST PLUS BASIS OF ACCOUNTING THE BONUS PAYMENT DID NOT RESULT IN TAX EVASION,THAT THE TAX PAID BY THE SHAREHOLDER S FOR BONUS WAS MORE THAN THE TAX THE ASSESSEE HAD TO PAY IF IT HAD PAID DIVIDEND,THAT THE ASSESSE E HAD NOT EVADED ANY TAX BY MAKING PAYMENT OF BONUS TO SHAREHOLDER EMPLOYEES,THAT DECISION TO DIS TRIBUTE DIVIDEND WAS A COMMERCIAL DECISION,THAT BONUS CANNOT BE PAID ON THE PATTERN O F DIVIDEND IS PAID I.E.AT UNIFORM RATE.HE FURTHER ARGUED THAT BONUS PAYMENT WAS PART OF EMPLOYMENT AG REEMENT AND STATED THAT BONUS WAS PAID BECAUSE OF THE PROFESSIONAL QUALIFICATION. DR SUPPO RTED THE ORDER OF THE FAA. HE RELIED UPON THE DECISION OF DALAL BROACHA STOCK BROKING (P.)LTD.(13 1ITD36). 5. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE MATERIAL BEFORE US.WE FIND THAT DRP HAD HELD THAT THE ASSESSEE HAD NOT PRODUCED ENOUGH EVID ENCE TO JUSTIFY THE PAYMENT OF BONUS TO SHAREHOLDER EMPLOYEES,THAT NO EVIDENCE WAS PLACED O N RECORD AS TO WHAT ADEQUATE SERVICES WERE RENDERED BY THE SHAREHOLDERS WARRANTING THE PAYMENT OF HEAVY BONUS.AO AND THE FAA WERE OF THE OPINION THAT IT WAS A DEVICE TO EVADE TAX. AFT ER DELIBERATION UPON THE FACTS OF THE CASE WE FIND THAT PAYMENT OF BONUS TO SHAREHOLDER-EMPLOYEES HAD RESULTED IN PAYMENT OF MORE TAXES IN COMPARISON TO TAX PAYABLE HAD THE SAME AMOUNT BEEN PAID AS DIVIDEND TO SHAREHOLDERS.WE HAVE GONE THROUGH THE CHART GIVING DETAILS OF TAX PAID T HE ASSESSEE-COMPANY AND THE SHAREHOLDERS WITH RESPECT TO THE BONUS PAYMENT.SO,IT CANNOT BE HELD T HAT IT WAS A DEVICE TO EVADE TAXES.NOT ONLY THIS,IT IS FOUND THAT THE SHAREHOLDERS WERE PROFESS IONALLY HIGHLY QUALIFIED.PAYMENT OF BONUS IS A BUSINESS DECISION AND TILL IT IS NOT PROVED THAT SA ME WAS NOT PAID ACTUALLY,IT CANNOT BE DISALLOWED.THE ASSESSEE HAD CLAIMED THAT IT WAS BAS ED ON PERFORMANCE EVALUATION AND THE AO HAD NOT CONTRAVENED THE FACT.THE ASSESSEE HAD DEDUCTED TAX AT SOURCE ON THE BONUS PAID TO THE SHAREHOLDER DIRECTORS AND THEY HAVE SHOWN THE RECEI PT OF BONUS IN THEIR RESPECTIVE RETRUNS.THEY ARE IN THE HIGHEST SLABS OF TAXPAYMENT. HERE,WE WOULD ALSO LIKE TO REFER THE DECISION OF SH AHZADA NAND AND SONS (108 ITR 358)WHEREIN THE HONBLE APEX COURT HAS LAID DOWN SOME PRINCIPLE S WITH REGARD TO PAYMENT OF COMMISSION.IN OUR OPINION SAME PRINCIPLES ARE APPLICABLE TO PAYME NT OF BONUS ALSO.HONBLE COURT HAS HELD AS UNDER: SECTION 36(1)(II) OF THE INCOME-TAX ACT, 1961, DOES NOT POSTULATE THAT THERE SHOULD BE ANY EXTRA SERVICES RENDERED BY AN EMPLOYEE BEFORE PAYMENT OF COMMISSION TO HIM CAN BE JUSTIFIED AS AN ALLOWABLE EXPENDITURE. IF SERVICES WERE IN FACT REN DERED BY THE EMPLOYEE IT IS IMMATERIAL THAT THE SERVICES RENDERED BY THE EMPLOYEE WAS IN NO WAY GRE ATER OR MORE ONEROUS THAN THE SERVICES RENDERED BY HIM IN THE EARLIER YEARS. OF COURSE, TH E CIRCUMSTANCES THAT NO ADDITIONAL SERVICES WERE RENDERED BY THE EMPLOYEE WOULD UNDOUBTEDLY BE OF SO ME RELEVANCE IN DETERMINING THE REASONABLENESS OF THE AMOUNT OF COMMISSION BUT IT W OULD HAVE TO BE CONSIDERED ALONG WITH OTHER CIRCUMSTANCES. THE THREE FACTORS LAID DOWN BY THE PROVISO TO SECTI ON 36(1)(II) ARE NOT REALLY CONDITIONS ON THE FULFILMENT OF WHICH ALONE THE AMOUNT OF COMMISSION PAID TO AN EMPLOYEE CAN BE REGARDED AS REASONABLE. THEY ARE MERELY FACTORS TO BE TAKEN INT O ACCOUNT BY THE REVENUE AUTHORITIES IN DETERMINING THE REASONABLENESS OF THE AMOUNT OF COM MISSION. IT MAY BE THAT ONE OF THESE FACTORS YIELDS A NEGATIVE RESPONSE. TO TAKE AN EXAMPLE, THE RE MAY BE NO GENERAL PRACTICE IN SIMILAR ITA/1327/MUM/2014/NSRAPL-2009-10 4 BUSINESS OR PROFESSION TO GIVE COMMISSION TO AN EMP LOYEE, BUT, YET, HAVING REGARD TO THE OTHER CIRCUMSTANCES, THE AMOUNT OF COMMISSION PAID TO THE EMPLOYEE MAY BE REGARDED AS REASONABLE. WHAT THE PROVISO REQUIRES IS MERELY THAT THE REASON ABLENESS OF THE AMOUNT OF COMMISSION SHALL BE DETERMINED WITH REFERENCE TO THE THREE FACTORS. BUT , IT IS WELL-SETTLED THAT THESE FACTORS ARE TO BE CONSIDERED FROM THE POINT OF VIEW OF A NORMAL, PRUD ENT BUSINESSMAN. THE REASONABLENESS OF THE PAYMENT WITH REFERENCE TO THESE FACTORS HAS TO BE J UDGED NOT ON ANY SUBJECTIVE STANDARD OF THE ASSESSING AUTHORITY BUT FROM THE POINT OF VIEW OF C OMMERCIAL EXPEDIENCY. WHAT IS THE REQUIREMENT OF COMMERCIAL EXPEDIENCY MUST BE JUDGED, NOT IN THE LIGHT OF THE 19TH CENTURY LAISSEZ FAIRE DOCTRINE WHICH REGARDED MAN AS AN ECONOMIC BEING CONCERNED O NLY TO PROTECT AND ADVANCE HIS SELF-INTEREST, BUT IN THE CONTEXT OF CURRENT SOCIO-ECONOMIC THINKI NG WHICH PLACES THE GENERAL INTEREST OF THE COMMUNITY ABOVE THE PERSONAL INTEREST OF THE INDIVI DUAL AND BELIEVES THAT A BUSINESS OR UNDERTAKING IS THE PRODUCT OF THE COMBINED EFFORTS OF THE EMPLOYER AND THE EMPLOYEES AND WHERE THERE IS SUFFICIENTLY LARGE PROFIT, AFTER PROVIDING FOR THE SALARY OR REMUNERATION OF THE EMPLOYER AND THE EMPLOYEES AND OTHER PRIOR CHARGES SUCH AS INTER EST ON CAPITAL, DEPRECIATION, RESERVES, ETC., A PART OF IT SHOULD IN ALL FAIRNESS GO TO THE EMPLOYE ES. IT IS NOT NECESSARY, FOR COMMISSION PAID TO AN EMPL OYEE TO BE ALLOWABLE UNDER SECTION 36(1)(II), THAT IT SHOULD BE PAID UNDER A CONTRACTUAL OBLIGATI ON. IT IS NOW WELL-SETTLED THAT THE MERE FACT THAT THE COMMISSION IS PAID EX GRATIA WOULD NOT NECESSARILY MEAN THAT IT IS UNREASONABLE. WE FIND THAT THE FACTS OF THE CASE RELIED UPON BY T HE AO ARE DIFFERENT FROM THE FACTS OF THE PRESENT CASE.AS AGAINST THAT MATTER IN THE CASE UNDER CONSI DERATION CONDITION OF PAYMENT OF BONUS WAS PART OF THE EMPLOYMENT AGREEMENT AND IT WAS A PERFO RMANCE BASED PAYMENT.CONSIDERING THE ABOVE DISCUSSION AND THE PECULIAR FACTS AND CIRCUMS TANCES OF THE CASE,WE ARE DECIDING FIRST EFFECTIVE GROUND OF APPEAL IN FAVOUR OF THE ASSESSE E. 6. NEXT GROUND OF APPEAL IS ABOUT TRANSFER PRICING ADJ USTMENTS (TPA).TO DETERMINE THE ARMS LENGTH PRICE(ALP)WITH RESPECT TO TRANSACTIONS REPOR TED BY THE ASSESSEE IN FORM-3(CEB), THE AO MADE A REFERENCE TO THE TRANSFER PRICING OFFICER(TP O) U/S.92CA(1) OF THE ACT ON 13. 10. 2010. AS PER THE TPO'S ORDER ADJUSTMENT OF RS.8.71 CRORES WA S TO BE MADE.IN PURSUANCE OF THE ORDER OF THE TPO,THE AO FORWARDED THE DRAFT ASSESSMENT ORDER DAT ED 08.03.2013 PASSED U/S 143(3) R.W.S. 144C OF THE ACT.THE ASSESSEE CONTESTED THE ADDITION BEFO RE THE DISPUTE RESOLUTION PENAL (DRP). THE DRP IN ITS DIRECTION U/S 144C(5) OF THE ACT,DATED 1 6.12.2013,DIRECTED THE TPO TO MODIFY THE COMPARABLE SET AND ACCORDINGLY DECIDE THE TPA.FOLLO WING THE DIRECTIONS OF THE DRP ,THE AO SENT A LETTER DATED 26.12.2013 TO TPO TO CARRY OUT NECES SARY MODIFICATION IN THE ALP. THE TPO, VIDE HIS ORDER DATED 20.01.2014,GAVE EFFECT TO THE DIREC TION OF DRP AND REVISED THE TP ADJUSTMENTS AT RS.4.06 CRORES INSTEAD OF 8.71 CRORES,PROPOSED INI TIALLY. 7. BEFORE US,THE AUTHORISED REPRESENTATIVE(AR)STATED T HAT THE TPO HAD MADE AN UPWARD TPA OF RS.8,71,48,942/-BY ARRIVING AT ARMS LENGTH MARGIN OF 55.19% VIZ A VIZ A MARGIN OF 20.37% FOR THE ASSESSEE USING A SET OF SIX COMPANIES,THAT OUT OF THE SIX FOUR COMPANIES WERE NOT FUNCTIONALLY COMPARABLE WITH THE ASSESSEE,THAT DRP REJECTED THRE E COMPARABLES SELECTED BY THE TPO,THAT THE DRP RETAINED ON COMPARABLE NAMELY INTEGRATED CAPITA L SERVICES LIMITED(ICSL).IT WAS FURTHER ARGUED THAT THERE WAS FUNCTIONAL DIFFERENCE IN THE BUSINESS PROFILE OF THE COMPARABLES APPROVED BY THE DRP I.E.ICSL AND THE ASSESSEE,THAT THE ICSL WAS ENGAGED IN MERGERS AND ACQUISITIONS(MA) AND TURNAROUND RESTRUCTURING ADVISORY SERVICES(TRAS ),IT HAD REPORTED BUSINESS ADVISORY AND THAT CONSULTING SERVICES SEGMENT AS A REPORTABLE SE GMENT,THAT THE STUDY OF BALANCE SHEET OF ICSL REVEALED THAT IT HAD BUSINESS PROFILE OF INVESTMENT BANKING,M&A AND TRAS INSTEAD OF AN INVESTMENT ADVISORY BUSINESS PROFILE,THAT THE MAIN AREA OF OPERATION OF THE ASSESSEE WAS INVESTMENT ADVICE.HE RELIED UPON THE CASE OF CARLYL E INDIA ADVISORS INVESTMENT PRIVATE LTD. (CIAIPL-ITA/ 7901/MUM/2011) AND STATED THAT THE HON BLE JURISDICTIONAL HIGH COURT HAD CONFIRMED THE ORDER OF THE CIAIPL(ITA NO.1286 OF 20 12).HE ALSO REFERRED TO THE ANOTHER APPEAL ITA/1327/MUM/2014/NSRAPL-2009-10 5 OF ICSL(ITA/7367/ MUM/2012)ALONG WITH THE MATTER OF GENERAL ALTANTIC PVT.LTD.(GAPL- ITA/8914/MUM/2010),THAT OPERATING MARGINS OF ICSL W ERE VERY VOLATILE,THAT ICSL WAS EARNING HIGH MARGINS IN AY.2008-09,THAT COMPARABLE SHOULD B E REJECTED ON THAT COUNT.HE RELIED UPON THE CASES OF ADOBE SYSTEM INDIA PRIVATE LIMITED(148TTJ1 22).SONATA SOFTWARE LTD.(ITA/3514/ MUM/2010)E GAIN COMMUNICATION PVT.LTD.(118TTJ354).H E FINALLY ARGUED THAT IF THE ICSL COMPARABLE WAS NOT CONSIDERED THEN ARITHMETIC MEAN OF REMAINING TWO OF THE THREE COMPARABLES WOULD BE 24.24%(KIACL-27.82 +FCIAL-20.67),THAT THE ARITHMETIC MEAN OP/TC OF COMPARABLE COMPANIES,AFTER CONSIDERING THE ABOVE SET,WORKED OU T @24.24 AND IT WAS WITHIN 5% RANGE AND ALLOWABLE AS PER THE PROVISO TO SECTION 92C(2)OF TH E ACT. 8. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE MATERIAL BEFORE US.WE FIND THAT THE MAIN FUNCTIONS CARRIED OUT BY THE ASSESSEE CONSISTED OF PROVIDING GENERAL AND SPECIFIC INFORMATION NSRCI AND NSRM BY CARRYING OUT RESEARCH RELATING TO PARTICULAR ECONOMIC/ INDUSTRY SECTORS, INVESTMENT OPPORTUNITIES, INVESTIGATING POTENTIAL I NVESTMENTS, DISINVESTMENTS AND REINVESTMENTS. DURING THE YEAR UNDER CONSIDERATION,THE ASSESSEE HA D PROVIDED NON-BINDING RESEARCH,ADVISORY AND OTHER ANCILLARY SUPPORT SERVICES TO THESE TWO ENTIT IES, AMOUNTING TO RS.29.72 CRORES.IT USED THE TRANSACTIONAL NET MARGIN METHOD TO BENCHMARK(TNMM)T HE INTERNATIONAL TRANSACTIONS.IT COMPARED ITSELF WITH OTHER ENTITIES PROVIDING SIMIL AR ADVISORY SERVICES.THE ASSESSEE'S OPERATING PROFIT MARGIN(OPM) DURING THE PREVIOUS YEAR WAS WOR KED OUT AT 20.37%. IT IDENTIFIED FOUR COMPANIES AS COMPARABLE TO IT,WHOSE AVERAGE OPM WAS WORKED OUT AT 8.59%. BASED ON THE SAME,IT WAS SUBMITTED BEFORE THE AO THAT ITS INTERN ATIONAL TRANSACTIONS WERE AT ARM'S LENGTH.THE AO,AFTER RECEIVING DIRECTIONS FROM THE DRP,MADE TPA OF RS.4.06 CRORES.IT IS FOUND THAT FINAL SET OF COMPANIES SELECTED BY THE AO IN HIS ORDER WAS AS UNDER: SN. NAME OF THE COMPARED ENTITY OP ACCEPTED/DISPUTED 1. KSHITIJ INVESTMENT ADVISORY CO.LTD. (KIACL) 27.82% ACCEPTED 2. FUTURE CAPITAL INVESTMENT ADVISORY L TD.(FCIAC) 20.67% ACCEPTED 3. ICSL 67.28% DISPUTED. FROM THE ABOVE IT IS CLEAR THAT THE ASSESSEE HAD OB JECTED TO INCLUSION OF ICSL,ADDITIONAL COMPANY SELECTED BY THE TPO AND CONFIRMED BY THE DRP,THAT I N THE FINAL ORDER THE AO HAD INCLUDED ICSL FOR MAKING TPA.THUS,THE DISPUTE BETWEEN THE ASSESSE E AND THE AO IS ADOPTION OF ONE COMPARABLE AND THAT IS INCLUSION OF ICSL. BEFORE PROCEEDING FURTHER,WE WOULD LIKE TO MENTION THAT BASICALLY AND BROADLY ISSUE RELATED WITH TPA HAS TO BE DECIDED BY COMPARING TWO ENTITIES ENG AGED IN SIMILAR OR ALMOST SIMILAR BUSINESS ACTIVITIES.THERE ARE MANY MORE AND FINER PARAMETERS TO SOLVE THE TP ISSUES,BUT FUNDAMENTAL PRINCIPLE OR THE THUMB RULE REMAINS SAME AND THAT I S NOT TO COMPARE THE ENTITIES THAT ARE NOT IN SIMILAR BUSINESS OR NOT IN ALMOST SIMILAR POSITION. THE OTHER WELL RECOGNISED PRINCIPLES OF TPA IS THAT COMPARABLE COMPANIES,EARNING SUPER NORMAL PROF ITS,SHOULD NOT TREATED AS INCLUDIBLE COMPAR- ABLES. ABNORMALITY IS NOT NORM OF THE DAY TO DAY L IFE-IT IS AN EXCEPTION.THEREFORE,IT IS ADVISABLE NOT TO RELY ON ABNORMAL OR SUPER NORMAL PROFITS WHI LE DECIDING THE ISSUES OF TPA.WE FIND THAT IN THE CASES RELIED UPON BY THE AR-ADOBE SYSTEM INDIA PRIVATE LIMITED(SUPRA)SONATA SOFTWARE LTD.(SUPRA)E GAIN COMMUNICATION PVT.LTD.(SUPRA)-VAR IOUS BENCHES OF THE TRIBUNAL HAS UPHELD THE SAID PRINCIPLE. NOW COMING TO THE FACTS OF THE CASE IT IS FOUND THA T THE ASSESSEE IS ENGAGED IN PROVIDING NON- BINDING RESEARCH,ADVISORY AND OTHER ANCILLARY SUPPO RT SERVICES WHEREAS ICSL IS PROVIDING ITA/1327/MUM/2014/NSRAPL-2009-10 6 ADVISORY AND CONSULTING SERVICES IN THE SPECIALISED AREA OF M&A,TRAS,THAT ACTIVITIES OF ICSL ARE IN THE NATURE OF INVESTMENT BANKING,THAT THE ASSESS EE IS NOT REPRESENTING ANY COMPANY IN INDIA,BUT ICSL REPRESENTS THE INDIAN COMPANIES.WE HAVE NOTICE D THAT THE ASSESSEE-COMPANY IS NOT INVOLVED IN BUSINESS PLAN WITH LENDERS,RESTRUCTURE, IMPLEMENTATION,M&A.THUS THE ACTIVITIES CARRIED OUT BY THE ASSESSEE AND THE COMPARABLE I.E. ICSL ARE NOT SIMILAR-THERE IS FUNCTIONALLY SUBSTANTIVE DIFFERENCE IN THEIR JOB PROFILE.IN OUR OPINION ACTIVITIES OF ICSL ARE AKIN TO THE JOB OF A MERCHANT BANKER.WE FIND THAT THE HOBLE COURT HAS,I N THE CASE OF CIAIPL(SUPRA),HELD THAT MERCHANT BANKING AND INVESTMENT BANKING SERVICES WE RE FUNCTIONALLY DIFFERENT FROM INVESTMENT ADVISORY SERVICES.THEREFORE,WE ARE OF THE OPINION T HAT ICSL HAS TO BE EXCLUDED FOR TPA FOR THE YEAR UNDER CONSIDERATION.ONCE ICSL IS EXCLUDED FROM THE TP COMPARISION,THE ARITHMETIC MEAN OP/TC OF COMPARABLES WOULD BE 24.24% AS AGAINST THE MEAN OF 20.73 SHOWN BY THE ASSESSEE.AS IT IS WITHIN THE 5% RANGE AVAILABLE TO THE ASSESSEE AND IT MEETS THE ARMS LENGTH STANDARD,SO,WE DECIDE SECOND GROUND OF APPEAL IN FAVOUR OF THE ASS ESSEE. AS A RESULT, APPEAL FIL ED BY THE ASSESSEE STANDS ALLOWED. 0(1 ! '( 2 3 * . 4 * ( 5 6 . ORDER PRONOUNCED IN THE OPEN COURT ON 20TH, FEBRUARY,2015. / * ,-' 7 8! 20 ,0+ , ,, , 201 5 - * . = SD/- SD/- ( /I P BANSAL) ( / RAJENDRA) / JUDICIAL MEMBER / ACCOUNTANT MEMBER / MUMBAI, 8! /DATE: 20.02.2015 SK / / / / * ** * %(> %(> %(> %(> ? >'( ? >'( ? >'( ? >'( / COPY OF THE ORDER FORWARDED TO : 1. / #$ 2. RESPONDENT / %&#$ 3. THE CONCERNED CIT(A)/ @ A , 4. THE CONCERNED CIT / @ A 5. DR E BENCH, ITAT, MUMBAI / >B. %(! , . . . 6. GUARD FILE/ . 0 &>( %( //TRUE COPY// /! / BY ORDER, C / 5 DY./ASST. REGISTRAR , /ITAT, MUMBAI