GOLDMAN SACHS INDIA SECURITIES P. LTD, MUMBAI V. ASST CIT CIR 7(1)(1), MUMBAI

ITA 1428/MUM/2017

• Counselvise Citation: [2019] 118 COUNSELVISE.COM (IT) 3621 (ITAT-MUMBAI)
• Duration Of Justice: 1 year(s) 11 month(s) 23 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 22-02-2019
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: Not Allotted
• Assessment Year: 2012-2013
• Appeal Filed On: 01-03-2017
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Keywords: Transfer pricing; International transaction; Wholly owned subsidiary; Non compliance
• Section: 143(3); 37(1)

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL K BENCH, MUMBAI BEFORE SHRI SAKTIJIT DEY , JUDICIAL MEMBER AND SHRI M. BALAGANESH , ACCOUNTANT MEMBER ITA NO. 1428 /MUM./201 7 ( ASSESSMENT YEAR : 20 12 13 ) GOLDMAN SACHS INDIA SECURITIES P. LTD. 951 A, RATIONAL HOUSE APPASAHEB, MARATHE MARG PRABHADEVI, MUMBAI 400 025 PAN AAFCA6819F . APPELLANT V/S ASSTT . COMMISSIONER OF INCOME TAX (I.T) CIRCLE 7 (1)(1), MUMBAI . RESPONDENT ASSESSEE BY : SHRI MADHUR AGARWAL REVENUE BY : SHRI ANAND MOHAN DATE OF HEARING 1 2 . 02 .201 9 DATE OF ORDER 22.02.2019 O R D E R PER SAKTIJIT DEY, J.M. AFORESAID APPEAL HA S BEEN FILED BY THE ASSESSEE CHALLENGING THE ASSESSMENT ORDER DATED 31 ST JANUARY 2017 , PASSED UNDER SECTION 143(3) R/W SECTION 144C (13) OF THE INCOME TAX ACT, 1961 (FOR SHORT THE ACT ), IN PURSUANCE TO THE DIRECTIONS OF THE DISPUTE RESOLUTION PANEL 1 (DRP), MUMBAI, FOR THE ASSESSMENT YEAR 2012 13 . 2 GOLDMAN SACHS INDIA SECURITIES P. LTD. 2 . IN GROUND NO.1, THE ASSESSEE HAS CHALLENGED THE ADDITION MADE ON ACCOUNT OF TRANSFER PRICING ADJUSTMENT AMOUNTING TO ` 7,09,72,772, TO THE ARMS LENGTH PRICE OF INTERNATIONAL TRANSACTION WI TH THE ASSOCIATED ENTERPRISE (AE) PERTAINING TO THE PROVISION OF NO N BINDING INVESTMENT ADVISORY AND SUPPORT SERVICE. 3 . BRIEF FACTS ARE, THE ASSESSEE , AN INDIAN COMPANY , IS A WHOLLY OWNED SUBSIDIARY OF GOLDMAN SACHS (MAURITIUS) LLC. THE ASSESSEE IS CONDUCTING BUSINESS IN VARIOUS SEGMENTS SUCH AS MERCHANT BANKING, INVESTMEN T ADVISORY SERVICES, PROVISIONS OF INFORMATION TECHNOLOGY ENABLED SERVICES (ITES) AND SECURITIES BUSINESS. FOR THE ASSESSMENT YEAR UNDER DISPUTE, THE ASSESSEE FILED ITS RETURN OF INCOME ON 29 TH NOVEMBER 2012, DECLARING INCOME OF ` 437,63,20,560. DURING THE ASSESSMENT PROCEEDINGS, THE ASSESSING OFFICER NOTICING THAT IN THE PREVIOUS YEAR RELEVANT TO THE ASSESSMENT YEAR UNDER DISPUTE, THE ASSESSEE HAS ENTERED INTO INTERNATIONAL TRANSACTION S WITH ITS OVERSEAS AE, MADE A REFERENCE TO THE TRANSFER PRICING OFFICER FOR DETERMINING THE ARMS LENGTH PRICE OF THE INTERNATIONAL TRANSACTION. IN THE COURSE OF PROCEEDINGS BEFORE HIM, THE TRANSFER PRICING OFFICER NOTED THAT THE ASSESSEE HAS BENCH MARKED THE INTERNATIONAL TRANSACTION PERTAINING TO INVESTMENT ADVISORY SEGMENT ADOPTING TRANSACTIONAL NET MARGIN METHOD ( TNMM ) AS THE MOST APPROPRIA TE METHOD WITH OPERATING PROFIT/ OPERATING COST (OP/OC) AS THE PROFIT LEVEL INDICATOR (PLI) . B Y 3 GOLDMAN SACHS INDIA SECURITIES P. LTD. APPLYING CERTAIN FILTERS, THE ASSESSEE HAS SELECTED FOUR COMPANIES AS COMPARABLE S WITH AVER AGE MEAN MARGIN OF 4.32% . S INCE , THE PROFIT MARGIN SHOWN BY THE ASSESSEE AT 22.00% IS MUCH HIGHER THAN THE AVERAGE MARGIN OF THE COMPARABLE S THE ASSESSEE CLAIMED THE I NTERNATIONAL TRANSACTION WITH AE TO BE AT ARMS LENGTH. THE TRANSFER PRICING OFFICER, HO WEVER, DID NOT ACCEPT THE TRANSFER PRICING ANALYSIS DONE BY THE ASSESSEE. HENCE , HE REJECTED NOT ONLY THE TRANSFER PRICING STUDY REPORT FILED BY THE ASSESSEE BUT ALSO ALL THE COMPARABLES SELECTED BY THE ASSESSEE. HAVING DONE SO, THE TRANSFER PRICING OFFICE R PROCEEDED TO SELECT COMPARABLES INDEPENDENTLY BY APPLYING CERTAIN FILTERS ON HIS OWN. IN THE PROCESS, HE SELECTED A SINGLE COMPARABLE VIZ. LA D DERUP CORPORATE ADVISORY PVT. LTD., AS A COMPARABLE . S INCE , THE PROFIT MARGIN OF THE SAID COMPARABLE AT 38.38% IS MUCH HIGHER TO THE PROFIT MARGIN SHOWN BY THE ASSESSEE AT 22.00%, THE TRANSFER PRICING OFFICER APPLYING THE PROFIT MARGIN OF THE COMPARABLE MADE AN UPWARD ADJUSTMENT OF ` 7,09,72,772, TO THE ARMS LENG TH PRICE OF THE INVESTMENT ADVISORY SEGMENT. THE ASSESSING OFFICER WHILE PASSING THE DRAFT ASSESSMENT ORDER ADDED THE TRANSFER PRICING ADJUSTMENT PROPOSED BY THE TRANSFER PRICING OFFICER. THOUGH, THE ASSESSEE OBJECTED TO THE TRANSFER PRICING ADJUSTMENT MAD E BY THE TRANSFER PRICING OFFICER BY RAISING OBJECTIONS BEFORE THE DRP ON VARIOUS GROUNDS , INCLUDING , SELECTION/ REJECTION OF COMPARABLES, HOWEVER, THE 4 GOLDMAN SACHS INDIA SECURITIES P. LTD. DRP REJECTED THE OBJECTIONS OF THE ASSESSEE. THEREFORE, IN TERMS OF THE DIRECTIONS OF THE DRP, THE ASSESS ING OFFICER PASSED THE IMPUGNED ASSESSMENT ORDER. 4 . THE LEARNED AUTHORISED REPRESENTATIVE APPEARING FOR THE ASSESSEE SUBMITTED , IF THE COMPARABLE SELECTED BY THE TRANSFER PRICING OFFICER VIZ., LADDER UP CORPORATE ADVISORY PVT. LTD. IS EXCLUDED AND ANY ONE OF THE COMPARABLES SELECTED BY THE ASSESSEE IS INCLUDED , ASSESSEES PROFIT MARGIN WILL BE WITHIN THE RANGE OF 5%. HENCE , NO FURTHER ADJUSTMENT TO THE ARMS LENGTH PRICE WOULD BE REQUIRED. HE SUBMITTED , IN THAT EVENT , OTHER GROUNDS RAISED BY THE ASSESSEE CHA LLENGING THE TRANSFER PRICING ADJUSTMENT WOULD BECOME ACADEMIC. PROCEEDING FURTHER, HE SUBMITTED , LADDERUP CORPORATE ADVISORY PVT. LTD. CANNOT BE CONSIDERED AS A COMPARABLE TO A NON BINDING INVESTMENT ADVISORY SERVICE PROVIDER , SINCE; IT IS BASICALLY ENGAG ED IN MERCHANT BANKING ACTIVITIES, HENCE, FUNCTIONALLY DIFFERENT FROM THE ASSESSEE. HE SUBMITTED , IN VARIOUS JUDICIAL PRECEDENTS, IT HAS BEEN HELD THAT THIS COMPANY BEING ENGAGED IN MERCHANT BANKING ACTIVITY CANNOT BE TREATED AS A COMPARABLE TO A NON BINDI NG INVESTMENT ADVISORY SERVICE PROVIDER. HE SUBMITTED , THE AFORESAID PRINCIPLE HAS ALSO BEEN LAID DOWN BY THE HON'BLE JURISDICTIONAL HIGH COURT IN VARIOUS DECISIONS. HE SUBMITTED , IN CASE OF ONE OF THE GROUP COMPANIES OF THE ASSESSEE VIZ. GOLDMAN SACHS ASS ET MANAGEMENT INDIA PVT. LTD. , WHICH 5 GOLDMAN SACHS INDIA SECURITIES P. LTD. IS FOR THE VERY SAME ASSESSMENT YEAR, THE TRIBUNAL HAS HELD THAT THIS COMPANY CANNOT BE A COMPARABLE TO A NON BINDING INVESTMENT ADVISORY SERVICE PROVIDER. IN THIS CONTEXT, HE DREW OUR ATTENTION TO THE ORDER PASSED BY T HE TRIBUNAL IN ITA NO.1427/ MUM./2014, DATED 31 ST AUGUST 2018. HE ALSO RELIED UPON THE FOLLOWING DECISIONS: I ) TEMASEK HOLDINGS ADVISORY SERVICES PVT. LTD. V/S DCIT, ITA NO.477 AND 816/MUM./2016, DATED 11.08.2017; II ) TEMASEK HOLDING ADVISORY SERVICES PVT. LTD. V/S ITO, ITA NO.1429/MUM./2017, DATED 03.01.2018; AND III ) WELLS FARGO REAL ESTATE ADVISORY PVT. LTD. V/S DCIT, ITA NO.1520/MUM./2016, DATED 17 TH JANUARY 2018. 5 . PROCEEDING FURTHER, THE LEARNED AUTHORISED REPRESENTATIVE SUBMITTED , INFORM ED TECHNOLOGIES LT D. WAS WRONGLY REJECTED AS A COMPARABLE , THOUGH , IT IS FUNCTIONALLY SIMILAR TO THE ASSESSEE. HE SUBMITTED , IN CASE OF ASSESSEES SISTER CONCERN, VIZ, GOLDMAN SACHS ASSET MANAGEMENT INDIA LTD., WHICH LIKE THE ASSESSEE IS ALSO ENGAGED IN PROVIDING NON BINDIN G INVESTMENT ADVISORY SERVICE , THE TRIBUNAL WHILE DECIDING THE APPEAL IN ITA NO.1427/MUM./2017, DATED 31 ST AUGUST 2018, HAS FOUND THE AFORESAID COMPANY TO BE FUNCTIONALLY SIMILAR, HENCE, INCLUDED IT AS A COMPARABLE. HE SUBMITTED , IN VARIOUS OTHER DECISIONS ALSO, THIS COMPANY HAS BEEN HELD AS A GOOD COMPARABLE TO NON BINDING INVESTMENT ADVISORY SERVICE PROVIDER. IN THIS CONTEXT, HE RELIED UPON THE FOLLOWING DECISIONS: 6 GOLDMAN SACHS INDIA SECURITIES P. LTD. I ) TEMASEK HOLDINGS ADVISORS INDIA PVT. LTD., ITA NO.1429/ MUM./2017; II ) GOLDMAN SACHS (I) SECURITIES PVT. LTD. V/S DCIT, ITA NO. 927/MUM./2016 AND ITA NO.902/MUM./2016; III ) WELLS FARGO REAL ESTATE ADVISORS PVT. LTD., ITA NO.1520/ MUM./2016; IV ) DCIT V/S TEMASEK HOLDINGS ADVISORS INDIA PVT. LTD., ITA NO.477 & 816 OF 2016 (MUM. TRIB.); V ) FIL CAPITAL AD VOSORS INDIA PVT. LTD. V/S DCIT, ITA NO.7403/ MUM./2014; VI ) CIT V/S TEMASEK HOLDINGS ADVISORS INDIA PVT. LTD., ITA NO. 359 OF 2015 (BOMBAY HIGH COURT); VII ) CIT V/S TEMASEK HOLDINGS ADVISORS INDIA PVT. LTD., ITA NO. 968/MUM./2014; VIII ) CIT V/S TEMASEK HOLDINGS ADVIS ORS INDIA PVT. LTD., ITA NO. 1051 OF 2014; AND IX ) TEMASEK HOLDINGS ADVISORS INDIA PVT. LTD. V/S DCIT, ITA NO.4203/MUM. /2012 AND ITA NO.6504/MUM./2012. 6 . HE SUBMITTED THE TRANSFER PRICING OFFICER HIMSELF HAS ACCEPTED THIS COMPANY AS A COMPARABLE IN ASSESSEES OWN CASE FOR THE ASSESSMENT YEAR 2013 14 AND 2014 15. THUS, HE SUBMITTED , THIS COMPANY BEING FUNCTIONALLY SIMILAR SHOULD BE INCLUDED AS COMPARABLE. 7 . THE LEARNED DEPARTMENTAL REPRESENTATIVE SUBMITTED , INSOFAR AS THE COMPARABILITY OF LADDERUP CORPORATE ADVISORY PVT. LTD. IS CONCERNED, HE WOULD LIKE TO RELY UPON THE OBSERVATIONS OF THE LEARNED DRP AND THE TRANSFER PRICING OFFICER. 7 GOLDMAN SACHS INDIA SECURITIES P. LTD. 8 . INSOFAR AS THE INCLUSION OF THE INFORM ED TECHNOLOGIES LTD. IS CONCERNED, DRAWING OUR ATTENTION TO THE OBSERVATIONS OF THE TRANSFER PRICING OFFICER, HE SUBMITTED , THIS COMPANY BEING IN THE BUSINESS OF ITES IS FUNCTIONALLY DIFFERENT FROM THE ASSESSEE, HENCE, NOT COMPARABLE. HE SUBMITTED , IN CASE OF A NUMBER OF OTHER ASSESSE E S THE TRIBUNAL HAS REJECTED THIS COMPANY AS COMPARABLE FOR VARIOUS REASONS. HE FURTHER SUBMITTED , IN ASSESSEES OWN CASE FOR THE ASSESSMENT YEAR 2011 12 , THE TRIBUNAL HAS NOT INCLUDED IT AS A COMPARABLE. IN SUPPORT OF HIS CONTENTION LEARNED DEPARTMENTAL REPRESENTATIVE RE LIED UPON THE FOLLOWING DECISIONS: I ) MPHASIS LTD. V/S ACIT,, ITA NO.14/BANG./2012, DATED 19.05.2017; II ) H&S SOFTWARE DEVELOPMENT V/S DCIT, ITA NO.6455/ DEL./ 2012, DATED 18.01.2016; III ) SERVICES INDIA PVT. LTD. V/S DCIT, IT(TP)A NO.2315/BANG./ 2016, DATED 13.04 .2017; IV ) VISHAY COMPONENTS PVT. LTD. V/S ACIT, ITA NO.341/PUN./ 2013, DATED 31 ST MAY 2017; V ) XM SOFTWARE SOLUTION PRIVATE LTD. V/S ACIT, DATED 07.02.2018; VI ) CENGAGE LEARNING INDIA PVT. LTD. V/S ITO, ITA NO.5926/ DEL./2010, DATED 11.05.2018; VII ) DIALOGIC NETWORKS INDIA PVT. LTD. V/S DCIT, TS 2 ITAT 2017(MUM.) TP; AND VIII ) MAGMA DESIGN AUTOMATION INDIA PVT. LTD. V/S DCIT, ITA NO.1279/BANG./2014, DATED 28.02.2017. 8 GOLDMAN SACHS INDIA SECURITIES P. LTD. 9 . WE HAVE CONSIDERED RIVAL SUBMISSIONS AND PERUSED THE MATERIAL ON RECORD. WE HAVE ALSO APPLIED OUR MIND TO THE DECISIONS CITED BEFORE US. INSOFAR AS LADDERUP CORPORATE ADVISORY PVT. LTD. IS CONCERNED, NO DOUBT , THE ASSESSEE HAS OBJECTED TO SELECTION OF THIS COMPANY P RIMARILY ON THE GROUND THAT THE COMPANY IS ENGAGED IN MERCHANT BANKING ACTIVITY UNLIKE THE ASSESSEE WHICH IS ENGAGED IN PROVIDING NON BINDING INVESTMENT ADVISORY SERVICES. AS COULD BE SEEN FROM FACTS ON RECORD, LEARNED DRP DOES NOT DISPUTE THE FA CT THAT THIS COMPANY IS REGISTERED AS A MERCHANT BANKING COMPANY WITH SEBI. HOWEVER , IT HAS UPHELD THE SELECTION OF THE COMPANY AS A COMPA RABLE BY SIMPLY STATING THAT IT IS OPERATING IN FINANCIAL SPACE AND IS PRIMARILY PLAYING AN ADVISORY ROLE TO THE CORPO RATE . IN OUR VIEW, IF THIS COMPANY IS A MERCHANT BANKING COMPANY AND SIGNIFICANT REVENUE IS EARNED FROM MERCHANT BANKING SEGMENT, IT CANNOT BE TREATED AS A COMPARABLE TO A NON BINDING INVESTMENT ADVISORY SERVICE PROVIDER. IN CASE OF GOLDMAN SACHS ASSETS MANAGEMENT INDIA PVT. LTD. V/S ACIT, ITA NO.1427/ MUM./2017, DATED 31 ST AUGUST 2018, WHICH IS NOT ONLY A SISTER CONCERN OF THE ASSESSEE BUT ALSO ENGAGED IN THE BUSINESS OF PROVIDING NON BINDING INVESTMENT ADVISORY SERVICES, THE TRIBUNAL WHILE DECIDING THE ISSUE OF COMPARABILITY OF THIS COMPANY HAS HELD THAT THE COMPANY BEING A CATEGORY I MERCHANT BANKING COMPANY, CANNOT BE TREATED AS A COMPARABLE TO A COMPANY RENDERING INVESTMENT ADVISORY SERVICE LIKE 9 GOLDMAN SACHS INDIA SECURITIES P. LTD. THE ASSESSEE. SINCE , TH IS DECISION OF THE CO ORDINATE BENCH IS FOR THE VERY SAME ASSESSMENT YEAR, IT WILL SQUARELY APPLY TO THE FACT S OF THE PRESENT APPEAL ALSO. EVEN , THE OTHER DECISIONS CITED BY THE LEARNED AUTHORISED REPRESENTATIVE ALSO EXPRESS SIMILAR VIEW. IN VIEW OF THE AF ORESAID, WE HOLD THAT LADDERUP CORPORATE ADVISORY PVT. LTD. CANNOT BE TREATED AS A COMPARABLE TO THE ASSESSEE. 10 . INSOFAR AS INFORM ED TECHNOLOGIES INDIA LTD. IS CONCERNED, IT IS ONE OF THE COMPA RABLES SELECTED BY THE ASSESSEE. HOWEVER , THE TRANSFER PRICING O FFICER AND THE DRP REJECTED THE AFORESAID COMPARABLE PRIMARILY ON THE GROUND THAT IT IS FUNCTIONALLY DIFFERENT FROM THE ASSESSEE AS IT IS ENGAGED IN THE PRO VISION OF ITES. ON A PERUSAL OF FACTS ON RECORD IT IS NOTICED THAT THE NATURE OF SERVICE PROVIDED BY THIS COMPANY IS AKIN TO THE INVESTMENT ADVISORY SERVICES PROVIDED BY THE ASSESSEE. WHILE EXAMINING THE COMPARABILITY OF THE AFORESAID COMPANY FOR THE VERY SAME ASSESSMENT YEAR IN CASE OF GOLDMAN SACHS ASSET MANAGEMENT INDIA PVT. LTD. (SUPRA), WHICH LIKE T HE ASSESSEE IS ALSO PROVIDING NON BINDING INVESTMENT ADVISORY SERVICE , THE TRIBUNAL IN ITA NO.1427/ MUM./2014, DATED 31 ST AUGUST 2018, HAS HELD THAT THE COMPANY IS A GOOD COMPARABLE TO AN INVESTMENT ADVISORY SERVICE PROVIDER. NOTABLY, AS BROUGHT TO OUR NOT ICE BY THE LEARNED AUTHORISED REPRESENTATIVE , THE TRANSFER PRICING OFFICER HIMSELF HAS ACCEPTED THIS COMPANY AS A COMPARABLE IN ASSESSMENT YEAR 2013 14 AND 2014 15. 10 GOLDMAN SACHS INDIA SECURITIES P. LTD. EVEN, IN THE OTHER DECISIONS CITED BY THE LEARNED AUTHORISED REPRESENTATIVE IT HAS BEEN HEL D THAT THIS COMPANY IS A COMPARABLE TO A NON BINDING INVESTMENT ADVISORY SERVICE PROVIDER. THE DECISIONS RELIED UPON BY THE LEARNED DEPARTMENTAL REPRESENTATIVE APPEARS TO BE FACTUALLY DISTINGUISHABLE SINCE IN THOSE DECISIONS, THIS COMPANY HAS BEEN REJECTED BY APPLICATION OF CERTAIN FILTERS. HOWEVER, IN CASE OF THE PRESENT ASSESSEE, THE TRANSFER PRICING OFFICER AND THE DRP HA VE NOT REJECTED THIS COMPANY BY APPLYING THOSE FILTERS. IN ANY CASE OF THE MATTER, AS PER THE ACCEPTED LEGAL PRINCIPLE, IN CASE OF DIVE RGENT VIEWS ON A PARTICULAR ISSUE THE VIEW FAVOURABLE TO THE ASSESSEE HAS TO BE TAKEN. IN VIEW OF THE AFORESAID, WE DIRECT THE ASSESSING OFFICER TO COMPUTE THE ARMS LENGTH PRICE OF NON BINDING INVESTMENT ADVISORY SERVICE SEGMENT BY INCLUDING INFORMED TECH NOLOGIES INDIA LTD. AS A COMPARABLE . S INCE , IN COURSE OF HEARING IT WAS SUBMITTED BY THE LEARNED AUTHORISED REPRESENTATIVE THAT INCLUSION OF ANY ONE OF THE COMPARABLES SELECTED BY THE ASSESSEE AND EXCLUSION OF LADDERUP CORPORATE ADVISORY PVT. LTD. WOULD BRING THE PROFIT MARGIN OF THE ASSESSEE WITHIN THE ACCEPTABLE RANGE REQUIRING NO FURTHER ADJUSTMENT, WE DO NOT FEEL IT NECESSARY TO DELIBERATE FURTHER ON THE OTHER COMPARABLES SELECTED BY THE ASSESSEE. FURTHER, WE HASTEN TO ADD , WHILE DECIDING ASSES SEES APPEAL FOR ASSESSMENT YEAR 2011 12, THE TRIBUNAL HAVING ACCEPTED I CRA MANAGEMENT CONSULTING SERVIC ES LTD. 11 GOLDMAN SACHS INDIA SECURITIES P. LTD. AND IDC INDIA LTD. AS VALID COMPARABLES RESULTING IN BRINGING THE MARGIN OF THE ASSESSEE WITHIN TOLERANCE RANGE , DID NOT THOUGHT IT NECESSARY TO DELIBERATE UPON ACCEPTABILITY OF INFORMED TECHNOLOGIES LTD. AS A COMPARABLE. GROUND RAISED IS PARTLY ALLOWED. 11 . IN GROUND NO.2, THE ASSESSEE HAS CHALLENGED THE ADDITION MADE O N ACCOUNT OF TRANSFER PRICING ADJUSTMENT TO THE ARM'S LENGTH PRICE OF INFORMATION TECHNOLOGY ENABLED SERVICE ( ITES ) SEGMENT. 12 . WITH REGARD TO THIS GROUND ALSO, THE LEARNED AUTHORISED REPRESENTATIVE , AT THE OUTSET , SUBMITTED THAT IF ONE OF THE COMPARABLES SELECTED BY THE ASSESSEE VIZ. R. SYSTEMS INTERNATIONAL LTD. IS INCLUDED AND EXCEL I NFOWAYS LTD. SELECTED BY THE TRANSFER PRICING OFFICER IS EXCLUDED , ASSESSEES PROFIT MARGIN WOULD BE WITHIN THE ACCEPTABLE RANGE OF THE AVERAGE PROFIT MARGIN OF THE REST OF THE COMPARABLES. 13 . BRIEF FACT S ARE, THE ASSESSEE WHILE BENCH MARKING THE INTERNATIONAL TRANSACTION RELATING TO ITES SEGMENT ADOPTED TNMM AS THE MOST APPROPRIATE METHOD WITH OPERATING PROFIT/OPERATING COST ( OP/OC ) AS THE PROFIT LEVEL INDICATOR ( PLI ). THE ASSESSEE SELECTED TEN COMPARABLES WIT H AVERAGE MEAN MARGIN OF 16.61%. SINCE THE MARGIN SHOWN BY THE ASSESSEE AT 16.00% IS WITHIN THE ACCEPTABLE RANGE, THE PRICE CHARGED FOR THE INTERNATIONAL TRANSACTION WAS CLAIMED TO BE AT 12 GOLDMAN SACHS INDIA SECURITIES P. LTD. ARMS LENGTH. THE TRANSFER PRICING OFFICER , HOWEVER, DID NOT ACCEPT THE TRANSFER PRICING STUDY REPORT OF TH E ASSESSEE. OUT OF THE 10 COMPARABLES SELECTED , THE TRANSFER PRICING OFFICER REJECTED SIX COMPARABLES WHILE ACCEPTING FOUR. IN ADDITION, THE TRANSFER PRICING OFFICER SELECTED FOUR MORE C OMPARABLES INCLUDING EXCEL INFO WAYS LTD. THE ARITHMETIC MEAN OF THE CO MPARABLES AT 26.31% BEING HIGHER THAN THE PROFIT MARGIN SHOWN BY THE ASSESSEE AT 16.00%, THE TRANSFER PRICING OFFICER MADE AN UPWARD ADJUSTMENT OF ` 6,35,32,502 TO THE ARMS LENGTH PRICE. THOUGH, THE ASSESSEE OBJECTED TO THE TRANSFER PRICING ADJUSTMENT BY RAISING VARIOUS GROUNDS BEFORE THE DRP, HOWEVER, THE DRP GRANTED PARTIAL RELIEF TO THE ASSESSEE WHICH RESULTED IN REDUCTION OF TRANSFER PRICING ADJUSTMENT TO ` 5,20,09,149. 14 . THE LEARNED AUTHORISED REPRESENTATIVE SUBMITTED , R. SYSTEMS LTD. BEING FUNCTIONALL Y SIMILAR TO THE ASSESSEE HAS TO BE INCLUDED AS A COMPARABLE. HE SUBMITTED , ONLY BECAUSE THIS COMPANY HAS A DIFFERENT FINANCIAL YEAR ENDING, THE TRANSFER PRICING OFFICER AND THE DRP HAVE REJECTED THIS COMPANY. THE LEARNED AUTHORISED REPRESENTATIVE SUBMITTE D , BEFORE THE TRANSFER PRICING OFFICER AND THE DRP THE ASSESSEE HAS FURNISHED QUARTERLY FINANCIAL RESULT S FROM THE AUDITED ACCOUNTS OF THIS COMPANY FROM WHICH THE PROFIT MARGIN OF THE COMPANY FOR THE RELEVANT FINANCIAL YEAR CAN EASILY BE ASCERTAINED. TO DE MONSTRATE THAT THE FINANCIAL RESULT OF THE COMPANY IN THE RELEVANT 13 GOLDMAN SACHS INDIA SECURITIES P. LTD. PREVIOUS YEAR CAN BE ASCERTAINED FROM THE QUARTERLY FIGURES, LEARNED AUTHORISED REPRESENTATIVE DREW OUR ATTENTION TO THE OBJECTIONS RAISED BEFORE THE DRP SHOWING THE MARGIN OF THE COMPANY F OR THE RELEVANT PREVIOUS YEAR. THUS, HE SUBMITTED , IT CANNOT BE REJECTED AS A COMPARABLE. IN SUPPORT OF HIS CONTENTION, THE LEARNED AUTHORISED REPRESENTATIVE RELIED UPON THE FOLLOWING DECISIONS: I ) CIT V/S MERCER CONSULTING INDIA PVT. LTD., ITA NO.101/2015 (O&M), DATED 24.08.2016; II ) CIT V/S MCKINSEY KNOWLEDGE CENTRE INDIA PVT. LTD., ITA NO. 217/2014, DATED 27.03.2015; III ) GOLDMAN SACHS INDIA SECURITIES PVT. LTD. V/S ACIT, IT(TP)A NO. 927/MUM./2016, DATED 11.01.2017; IV ) BAXTER INDIA PVT. LTD. V/S ACIT, [2017] 85 TAXMANN.COM 285 (DEL.); V ) ACIT V/S MAERSK GLOBAL SERVICE CENTRE INDIA PVT. LTD. & ORS., ITA NO.944/MUM./2016, ETC., DATED 19.04.2018; VI ) EMERSON CLIMATE TECHNOLOGIES INDIA PVT. LTD. V/S DCIT & ORS., ITA NO.359/PUN./2016, ETC., DATED 25.04.2018; AND VII ) PCIT V/S ALLSCRIPTS INDIA PVT. LTD., [2016] 72 TAXMANN.COM 305 (GUJ.). 15 . AS REGARDS EXCEL INFOWAYS LTD., THE LEARNED AUTHORISED REPRESENTATIVE SUBMITTED , THIS COMPANY COMES WITHIN THE PERSISTENT LOSS MAKING / DIMINISHING REVENUE FILTER APPLIED BY THE TRANSFER PRICI NG OFFICER HIMSELF. THEREFORE, IT CANNOT BE TREATED AS A COMPARABLE. WITHOUT PREJUD ICE TO THE AFORESAID SUBMISSION , HE SUBMITTED , THIS IS 14 GOLDMAN SACHS INDIA SECURITIES P. LTD. THE LAST YEAR OF OPERATION OF THE BPO SEGMENT OF THE COMPANY, HENCE, IT DOES NOT SATISFY THE REQUIREMENT OF A GOING CO NCERN. IN THIS FINANCIAL YEAR, TH E BPO SEGMENT HAS BEEN CLOSED DOWN, HENCE, IT CANNOT BE TREATED AS A COMPARABLE. FURTHER, HE SUBMITTED , THE EMPLOYEE COST OF THIS COMPANY IS SUBSTANTIALLY LOW WHICH INDICATES THAT THE COMPANY MADE TO BE OUTSOURCING SOME OF ITS ACTIVITIES, HENCE, THE BUSINESS MODEL OF THE COMPANY IS DIFFERENT FROM THE ASSESSEE. THUS, HE SUBMITTED , IT CANNOT BE TREATED AS COMPARABLE. IN SUPPORT, HE RELIED UPON THE FOLLOWING DECISIONS: I ) BAXTER INDIA PVT. LTD. V/S ACIT, [2017] 85 TAXMANN.COM 28 5 (DEL.); II ) ACIT V/S MAERSK GLOBAL SERVICE CENTRE INDIA PVT. LTD. & ORS., ITA NO.944/MUM./2016, ETC., DATED 19.04.2018; III ) EMERSON CLIMATE TECHNOLOGIES INDIA PVT. LTD. V/S DCIT & ORS., ITA NO.359/PUN./2016, ETC., DATED 25.04.2018; AND IV ) PCIT V/S ALLSCRIPTS INDIA PVT. LTD., [2016] 72 TAXMANN.COM 305 (GUJ.). 16 . THE LEARNED DEPARTMENTAL REPRESENTATIVE HEAVILY RELYING UPON THE OBSERVATIONS OF THE TRANSFER PRICING OFFICER SUBMITTED , SINCE EXCEL INFOWAYS LTD. HAS CLEARED ALL FILTERS APPLIED BY THE TRANSFER PRICING OFFICER, IT HAS BEEN RIGHTLY SELECTED AS A COMPARABLE. AS REGARDS COMPARABILITY OF R. SYSTEMS LTD. IS CONCERNED, HE HEAVILY RELIED UPON THE REASONING OF THE TRANSFER PRICING OFFICER AND DRP. THE LEAR NED 15 GOLDMAN SACHS INDIA SECURITIES P. LTD. DEPARTMENTAL REPRESENTATIVE SUBMITTED, SINCE THE ASSESSEE HAS NOT CHALLENGED THE APPLICATION OF SPECIFIC FILTERS BY THE TRANSFER PRICING OFFICER, IT CANNOT CHALLENGE THE SELECTION OF THE COMPARABLE. IN SUPPORT, HE RELIED UPON THE FOLLOWING DECISIONS: I ) AEGIS LTD. V/S DCIT, ITA NO.7694/MUM./2014, ITA NO. 1209/MUM./2015, DATED 08.02.2017; II ) VISHAY COMPONENTS PVT. LTD. V/S ACIT, IT(TP)A NO.341/ PUN./2013, DATED 31.05.2017; III ) XL HEALTH CORPORATION INDIA PVT. LTD. V/S ACIT, IT(TP)A NO. 2311/BANG./2016, DATED 09.02.2015; IV ) DCIT V/S OCWEN FINANCIAL SOLUTIONS P. LTD. V/S ITA NO.511/ PN./2016 AND C.O. NO.01 AND 14/PUN./2018, DATED 14.05.2018; V ) HOPAG LLOYD GLOBAL SERVICES PVT. LTD., IT(TP)A NO.8499/ MUM./2010, DATED 28.02.2013; AND VI ) WILLS PROCESSING SERVICES INDIA PVT. LTD. V/S DCIT, IT(TP)A NO.4547/MUM./2012 & ITA NO.4429/MUM./2012 DATED 01.03.2013. 17 . WE HAVE CONSIDERED RIVAL SUBMISSIONS AND PERUSED THE MATERIAL ON RECORD. IT IS EVIDENT FROM THE FACTS ON RECORD THAT THE ASSESSEE OBJECTED T O SELECTION OF EXCEL INFOWAYS LTD., PRIMARILY ON THREE GROUNDS. FIRSTLY, IT FAILS THE PERSISTENT LOSS MAKING / DIMINISHING REVENUE FILTER APPLIED BY THE TRANSFER PRICING OFFICER; SECONDLY, THE BPO SE G MENT OF THE COMPANY DOES NOT SATISFY THE CONDITION OF A GOING CONCERN SINCE IT WAS CLOSED DOWN DURING THE RELEVANT FINANCIAL YEAR AND THIRDLY , THE EMPLOYEE COST OF THE COMPANY IS COMPARATIVELY LOWER 16 GOLDMAN SACHS INDIA SECURITIES P. LTD. COMPARED TO THE REVENUE EARNED. ON A PERUSAL OF THE ORDER PASSED BY THE TRANSFER PRICING OFFICER, IT IS NOTICED T HAT WHILE UNDERTAKING THE SEARCH PROCESS FOR SELECTING COMPARABLES, THE ASSESSING OFFICER HAS APPLIED PERSISTENT LOSS MAKING / DIMINISHING REVENUE FILTER TO EXCLUDE COMPANIES. IN CASE OF BAXTER INDIA PVT. LTD. (SUPRA), THE TRIBUNAL, DELHI BENCH, WHILE EXAM INING THE COMPARABILITY OF THIS COMPANY IN THE VERY SAME ASSESSMENT YEAR, HAS HELD THAT IT DOES NOT PASS THE DIMINISHING REVENUE FILTER APPLIED BY THE TRANSFER PRICING OFFICER. IT IS FURTHER RELEVANT TO OBSERVE , THE TRIBUNAL ALSO HELD THAT DUE TO SUPER NOR MAL PROFIT EARNED BY THE COMPANY AND LOW EMPLOYEE COST IT CANNOT BE TREATED AS COMPARABLE. SIMILARLY, IN CASE OF EMERS ON CLIMATE TECHNOLOGIES INDIA PVT. LTD. (SUPRA), THE TRIBUNAL TAKING NOTE OF THE FA C T THAT THE BPO SEGMENT OF THE COMPANY WAS CLOSED DOWN IN FINANCIAL YEAR 2011 12 HELD THAT IT CANNOT BE TREATED AS COMPARABLE. FURTHER, THE BENCH OBSERVED THAT THE EMPLOYEE COST OF THE COMPANY BEING VERY LOW IT CANNOT BE TREATED AS COMPARABLE. IN OUR VIEW, THE AFORESAID OBSERVATION OF THE TRIBUNAL IN THE DECIS IONS REFERRED TO ABOVE ARE VERY MUCH RELEVANT FOR DECIDING THE COMPARABILITY OF THIS COMPANY AND SQUARELY APPLIES TO THE FACTS OF THE PRESENT APPEAL. IN VIEW OF THE AFORESAID, WE HOLD THAT THIS COMPANY CANNOT BE TREATED AS COMPARABLE TO THE ASSESSEE, HENCE , SHOULD BE EXCLUDED. AS REGARDS R. SYSTEMS LTD., WE HAVE NOTICED THAT BEFORE THE TRANSFER PRICING OFFICER AND THE 17 GOLDMAN SACHS INDIA SECURITIES P. LTD. DRP, THE ASSESSEE HAS FURNISHED AUDITED QUARTERLY FINANCIAL RESULTS OF THE COMPANY FROM WHICH THE FINANCIAL RESULTS OF THE COMPANY FOR THE PR EVIOUS YEAR RELATING TO THE ASSESSMENT YEAR UNDER DISPUTE CAN EASILY BE ASCERTAINED. THEREFORE, THE CONTENTION OF THE LEARNED DEPARTMENTAL REPRESENTATIVE THAT THE REJECTION OF R. SYSTEMS LTD. BY APPLYING DIFFERENT FINANCIAL YEAR FILTER IS VALID , CANNOT BE ACCEPTED. THE DECISIONS RELIED UPON BY THE LEARNED AUTHORISED REPRESENTATIVE CLEARLY EXPRESS SIMILAR VIEW. AS REGARDS THE CONTENTION OF THE LEARNED DEPARTMENTAL REPRESENTATIVE THAT THE ASSESSEE HAS NOT CHALLENGED THE FILTERS APPLIED BY THE TRANSFER PRICING OFFICER, WE DO NOT FIND MERIT IN SAME SINCE THE ASSESSEE HAS RAISED SPECIFIC GROUND S CHALLENGING THE FILTERS APPLIED BY THE TRANSFER PRICING OFFICER. THOUGH, WE HAVE EXAMINED THE PRINCIPLE LAID DOWN IN THE DECISION CITED BY THE LEARNED DEPARTMENTAL REPRES ENTATIVE, HOWEVER, WE PREFER TO FOLLOW THE DECISIONS EXPRESSING VIEW FAVOURABLE TO THE ASSESSEE. IN COURSE OF HEARING, IT WAS SUBMITTED BY THE LEARNED AUTHORISED REPRESENTATIVE THAT IN CASE R. SYSTEM INTERNATIONAL LTD. (SUPRA) IS INCLUDED AND EXCEL INFOWAY S LTD. IS EXCLUDED, ASSESSEES PROFIT MARGIN WOULD BE WITHIN THE ACCEPTABLE RANGE OF AVERAGE MARGIN OF THE REST OF THE COMPARABLES. IN V IEW OF THE AFORESAID SUBMISSION OF THE LEARNED AUTHORISED REPRESENTATIVE WE DESIST OURSELVES FROM DEALING WITH THE ACCEP TABILITY OR OTHERWISE OF ALL OTHER COMPARABLES DISPUTED BEFORE US AND THE ISSUE RELATING TO THE 18 GOLDMAN SACHS INDIA SECURITIES P. LTD. COMPARABILITY ASPECT OF THE REST OF THE COMPARABLES ARE LEFT OPEN. GROUND NO.2, IS PARTLY ALLOWED. 18 . IN GROUND NO.3, THE ASSESSEE HAS CHALLENGED THE DISALLOWANCE OF AMORTIZATION OF COST RELATING TO EMPLOYEES STOCK OPTION PLAN (ESOP). 19 . BRIEF FACTS ARE, DURING THE ASSESSMENT PROCEEDINGS, THE ASSESSING OFFICER NOTICING THAT THE ASSESSEE HAS DEBITED COST PERTAINING TO ESOP TO EMPLOYEES , CALLED UPON THE ASSESSEE TO EX PLAIN WHY IT SHOULD NOT BE DISALLOWED . T HOUGH , THE ASSESSEE OBJECTED TO THE PROPOSED DISALLOWANCE, HOWEVER, THE ASSESSING OFFICER DISALLOWED THE DEDUCTION CLAIMED BY THE ASSESSEE. THE ASSESSEE CHALLENGED THE AFORESAID DISALL OWANCE UNSUCCESSFULLY BEFORE LEARNED DRP. 20 . THE LEARNED AUTHORISED REPRESENTATIVE SUBMITTED , THE ISSUE HAS BEEN DECIDED IN FAVOUR OF THE ASSESSEE IN ASSESSEES OWN CASE FOR THE ASSESSMENT YEAR 2009 10 AND 2011 12. IN SUPPORT OF SUCH CONTENTION, HE PLACED BEFORE THE BENCH THE ORDERS OF THE TRIBUNAL FOR THE RELEVANT ASSESSMENT YEAR S . 21 . THE LEARNED DEPARTMENTAL REPRESENTATIVE AGREED THAT THE ISSUE HAS BEEN DECIDED IN FAVOUR OF THE ASSESSEE BY THE TRIBUNAL IN THE PRECEDING ASSESSMENT YEAR S . 19 GOLDMAN SACHS INDIA SECURITIES P. LTD. 22 . WE HAVE CONSIDERED RIVAL SUBMISSIONS AND PERUSED THE MATERIAL ON RECORD. IT IS OBSERVED , IDENTICAL DISPUTE CAME UP FOR CONSIDERATION BEFORE THE TRIBUNAL IN ASSESSEES OWN CASE IN ASSESSMENT YEAR 2009 10 IN ITA NO.222/MUM./2014, DATED 30 TH NOVEMBER 2015. T HE TRIBUNAL, WHILE DECIDING THE ISSUE HELD THAT AS PER THE DECISION OF THE TRIBUNAL, BANGALORE BENCH, IN BIOCON LTD. V/S DCIT , [2013] 144 ITD 21 (BANG.), ESOP COST IS ALLOWABLE AS DEDUCTION. ACCORDINGLY, THE TRIBUNAL ALLOWED THE DEDUCTION CLAIMED BY THE ASSESSEE. THE SAME VIEW WAS REITERATED BY THE TRIBUN AL WHILE DECIDING ASSESSEES APPEAL ON IDENTICAL ISSUE IN THE ASSESSMENT YEAR 2011 12 IN ITA NO.927 AND 902/ MUM./2016, DATED 11 TH JANUARY 2017 . THE FACTS BEING IDENTICAL, RESPECTFULLY FOLLOWING THE CONSISTENT VIEW OF THE TRIBUNAL IN ASSESSEES OWN CASE, A S REFERRED TO ABOVE, WE ALLOW ASSESSEES CLAIM BY DELETING THE DISALLOWANCE MADE B Y THE ASSESSING OFFICER. GROUND RAISED IS ALLOWED. 23 . IN GROUND NO.4, THE ASSESSEE HAS CHALLENGED THE DISALLOWANCE OF ` 19,99,644, PAID TO THE STOCK EXCHANGES FOR NON CONFIRMATION OF CLEARING HOUSE TRADE, CLIENT CODE MODIFICATION, ETC. IN THE COURSE OF ASSESSMENT PROCEEDINGS, THE ASSESSING OFFICER WHILE EXAMINING THE DEDUCTION CLAIMED OF ` 19,99,644, TOWARDS PAYMENT MADE TO NSE AND BSE WA S OF THE VIEW THAT THE PAYMENT MADE BEING IN THE NATURE OF PENALTY IS NOT ALLOWABLE UNDER SECTION 37(1) OF THE ACT. ACCORDINGLY, HE 20 GOLDMAN SACHS INDIA SECURITIES P. LTD. DISALLOWED IT. WHILE DOING SO, HE RELIED UPON THE DECISION OF THE DRP UPHOLDING SIMILAR DISALLOWANCE IN ASSESSMENT YEAR 2011 12. THOUGH, THE ASSESSEE CHALLENGED THE AFORESAID DISALLOWANCE BEFORE THE DRP, HOWEVER, IT WAS UNSUCCESSFUL. 24 . THE LEARNED AUTHORISED REPRESENTATIVE SUBMITTED , SIMILAR DISALLOWANCE MADE IN ASSESSMENT YEAR S 2009 10 AND 2011 12, WAS DELETED BY THE TRIBUNAL. HENCE, THE AFORESAID DECISION S OF THE TRIBUNAL WILL SQUARELY APPLY TO THE FACTS OF THE PRESENT CASE. 25 . THE LEARNED DEPARTMENTAL REPRESENTATIVE AGREED THAT IN THE PRECEDING ASSESSMENT YEAR S SIMILAR DISALLOWANCE MADE BY THE ASSESSING OFFICER WAS DELETED BY TH E TRIBUNAL. 26 . WE HAVE CONSIDERED RIVAL SUBMISSIONS AND PERUSED MATERIAL ON RECORD. IT IS EVIDENT , THE ASSESSING OFFICER HAS DISALLOWED THE PAYMENT MADE TO BSE AND NSE ON THE REASONING THAT SUCH PAYMENTS ARE IN THE NATURE OF PENALTY. HOWEVER, WHILE DECIDING THE ISSUE RELATING TO SIMILAR DISALLOWANCE MADE IN ASSESSMENT YEAR S 2009 10, THE TRIBUNAL IN ITA NO.222/MUM./2014, DATED 30 TH NOVEMBER 2015, FOLLOWING THE DECISION OF THE HON'BLE JURISDICTIONAL HIGH COURT DELETED THE DISALLOWANCE MADE ON ACCOUNT OF PAYMENT MADE TO STOCK EXCHANGES TOWARDS NON COMPLIANCE OF CLEARING HOUSE TRADE, CLIENT CODE MODIFICATION, ETC. THE SAME VIEW WAS EXPRESSED BY THE TRIBUNAL WHILE DECIDING ASSESSEES 21 GOLDMAN SACHS INDIA SECURITIES P. LTD. APPEAL FOR THE ASSESSMENT YEAR 2011 12, IN ITA NO.927/MUM./2016, DATED 11 TH JANUAR Y 2017. FACTS BEING IDENTICAL, RESPECTFULLY FOLLOWING THE DECISIONS OF THE TRIBUNAL IN ASSESSEES OWN CASE IN THE PRECEDING ASSESSMENT YEAR S , WE ALLOW ASSESSEES CLAIM BY DELETING THE DISALLOWANCE MADE BY THE ASSESSING OFFICER. GROUND RAISED IS ALLOWED. 27 . G ROUND NO.5, BEING CONSEQUENTIAL AND GROUND NO.6 BEING PREMATURE AT THIS STAGE , ARE DISMISSED. 28 . IN THE RESULT, ASSESSEES APPEAL IS PARTLY ALLOWED. ORDER PRONOUNCED IN THE OPEN COURT ON 22.02.2019 SD/ - M. BALAGANESH ACCOUNTANT MEMBER SD/ - SAKTIJIT DEY JUDICIAL MEMBER MUMBAI, DATED: 22.02.2019 COPY OF THE ORDER FORWARDED TO : ( 1 ) THE ASSESSEE; ( 2 ) THE REVENUE; ( 3 ) THE CIT(A); ( 4 ) THE CIT, MUMBAI CITY CONCERNED; ( 5 ) THE DR, ITAT, MUMBAI; ( 6 ) GUARD FILE . TRUE COPY BY ORDER PRADEEP J. CHOWDHURY SR. PRIVATE SECRETARY (SR. PRIVATE SECRETARY) ITAT, MUMBAI