ACIT, New Delhi V. M/s. Chrys Capital Investment Advisors (I) Pvt. Ltd, New Delhi

ITA 3928/DEL/2009

• Counselvise Citation: [2010] 119 COUNSELVISE.COM (IT) 5478 (ITAT-DELHI)
• Duration Of Justice: 5 month(s) 23 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 11-03-2010
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: B
• Next Hearing Date: 10-12-2009
• Assessment Year: 2005-2006
• Appeal Filed On: 18-09-2009
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: STEPHEN GEORGE
• Assessee Lawyers: VIKAS SRIVASTAVA
• Keywords: Depreciation; Transfer pricing; International transaction

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL [ DELHI BENCH B DELHI ] BEFORE SHRI D. R. SINGH, JM SHRI K. D. RAN JAN, AM I. T. APPEAL NO. 3928 (DEL) OF 2009. ASSESSMENT YEAR : 2005-06 ASSTT. COMMISSIONER OF INCOME-TAX, M/S. CHRYS CAPITAL INVESTMENT CIRCLE : 3 (1), VS. ADVISORS (I) PVT. LTD., N E W D E L H I. S UITE 101, THE OBEROI, DR. ZAKIR HUSSAIN MARG, N E W D E L H I - 110 045. P A N / G I R NO. AAB CC 4609 H. ( APPELLANT ) ( RESP ONDENT ) ASSESSEE BY : SHRI VIKAS SRIVASTAVA, C. A.; DEPARTMENT BY : SHRI STEPHEN GEORGE [CIT] - D. R.; O R D E R. PER K. D. RANJAN, AM : THIS APPEAL BY THE REVENUE FOR ASSESSMENT YEAR 200 5-06 ARISES OUT OF THE ORDER OF THE LD. COMMISSIONER OF INCOME TAX (APPEALS)-XX, NEW DE LHI. 2. THE GROUNDS OF APPEAL RAISED BY THE REVENUE ARE AS FOLLOWS :- ' 1. WHETHER IN THE FACTS AND CIRCUMSTANCE OF T HE CASE, THE LD. CIT (APPEALS) HAS ERRED IN DISREGARDING ITEMS OF INCOME IN CASE O F COMPARABLES WHICH ARE 2 I. T. APPEAL NO. 3928 (DEL) OF 2009. OPERATING IN NATURE RESULTING IN AN OVERALL REDUCTI ON OF THE AVERAGE PROFIT LEVEL INDICATORS OF THE COMPARABLES FROM 48.91 PER CENT T O 16.26 PER CENT; 2. WHETHER IN THE FACTS AND CIRCUMSTANCE OF TH E CASE, THE LD. CIT (APPEALS) HAS ERRED IN HOLDING THAT REIMBURSEMENT OF ANY ITEM OF OPERATING COST IS OPERATING INCOME. ' 3. THE FIRST ISSUE FOR CONSIDERATION RELATES TO RED UCTION IN AVERAGE PROFIT LEVEL INDICATORS OF THE COMPARABLES FROM 48.91 PER CENT TO 16.26 PER CENT. THE SECOND ISSUE WHICH IS INTERLINKED RELATES TO TREATMENT OF REIMBURSEMENT O F OPERATING COST IS OPERATING INCOME. THE FACTS OF THE CASE STATED IN BRIEF ARE THAT THE ASSE SSEE IS ENGAGED IN THE BUSINESS OF CARRYING OUT RESEARCH AND SCOUTING ACTIVITIES FOR MANAGEMENT COM PANIES TO IDENTIFY ENTREPRENEURS AND PORT-FOLIO COMPANIES REQUIRING ASSISTANCE IN TERMS OF CAPITAL INFUSION, STRATEGIC DIRECTION AND FINANCIAL ADVICE. THE ASSESSING OFFICER FROM FORM NO. 3-CEB FILED ALONG WITH THE RETURN OF INCOME NOTICED THAT THE ASSESSEE DURING THE YEAR UN DER CONSIDERATION HAD INTERNATIONAL TRANSACTIONS WITH THE ASSOCIATED ENTERPRISES / CONC ERNS TO THE TUNE OF RS.11,42,57,278/-. THE ASSESSING OFFICER IN ORDER TO DETERMINE ARM'S LENGT H PRICE IN RELATION TO INTERNATIONAL TRANSACTIONS REFERRED THE MATTER TO TRANSFER PRICIN G OFFICER [TPO]. THE TRANSFER PRICING OFFICER PASSED ORDER UNDER SECTION 92-CA(3) DATED 2 5 TH APRIL, 2008 DETERMINING ARMS LENGTH PRICE OF INTERNATIONAL TRANSACTION RELATING TO ADVI SORY SERVICES AND REIMBURSEMENT OF EXPENSES FROM ASSOCIATED ENTERPRISES AT RS.18,29,92,017/- A S AGAINST TRANSACTION VALUE OF RS.11,42,57,278/- DECLARED BY THE ASSESSEE. THE AS SESSING OFFICER DURING THE COURSE OF ASSESSMENT PROCEEDINGS ASKED THE ASSESSEE TO SHOW C AUSE AS TO WHY ADDITION SHOULD NOT BE MADE ON ACCOUNT OF DIFFERENCE IN ARM'S LENGTH PRICE AS DETERMINED BY TPO VIDE HIS ORDER DATED 25 TH APRIL, 2008. THE ASSESSEE OBJECTED TO THE ADDITIO N ON ACCOUNT OF ALP. HOWEVER, THE ASSESSING OFFICER ADDED THE AMOUNT OF RS.6,87,3 4,739/- ON ACCOUNT OF ADJUSTMENT TO ALP OF INTERNATIONAL TRANSACTIONS WITH THE ASSOCIATED E NTERPRISES. 4. BEFORE THE LD. CIT (APPEALS) THE ASSESSEE CHALLE NGED TPO'S ORDER ON VARIOUS GROUNDS. IT WAS SUBMITTED BY THE ASSESSEE THAT THE ASSESSEE BASED ON SEARCH CONDUCTED FOR COMPARABLES WORKED OUT OPERATING MARGINS AT 14.71 PER CENT. SI NCE THE AVERAGE MARGIN OF PROFIT EARNED BY 3 I. T. APPEAL NO. 3928 (DEL) OF 2009. COMPARABLE ENTITIES WAS 14.71 PER CENT AS AGAINST T HE OPERATING MARGIN OF 15.11 PER CENT EARNED BY THE ASSESSEE AS PER THE BENCH MARKING ANA LYSIS, THE TRANSACTIONS OF ASSESSEE WITH ITS ASSOCIATED ENTERPRISES WERE AT ARM'S LENGTH PRICE. 5.1 IT WAS FURTHER SUBMITTED THAT THE TPO REJECTED THREE COMPANIES, NAMELY, EPIC ENERGY LTD.; MAHANIVESH [INDIA] LTD. AND MARG HOLDINGS & F INANCIAL SERVICES LTD. OUT OF 8 COMPARABLE ENTITIES SELECTED BY THE ASSESSEE. HE I NTRODUCED TWO NEW COMPARABLES, NAMELY, CENTRUM FINANCE LTD. AND SUMEDHA FISCAL SERVICES LT D. IN THE FINAL SET OF COMPARABLES USED FOR THE PURPOSE OF BENCH MARKING ANALYSIS. THE TPO SUBSTITUTED THE PLI USED BY THE ASSESSEE I.E. OPERATING PROFIT ON OPERATING REVENUE WITH HIS OWN PLI I.E. OPERATING PROFIT AS A PERCENTAGE OF OPERATING COST. THE TPO ALSO REJECTE D MULTIPLE YEAR DATA USED BY THE ASSESSEE. THE TPO AFTER MAKING THE ABOVE ADJUSTMENTS ON THE B ASIS OF SEVEN COMPANIES SELECTED BY HIM AS FINAL COMPARABLES COMPUTED THEIR AVERAGE OPE RATING MARGINS AT 48.91 PER CENT. THE TPO WHILE COMPUTING THE PROFITABILITY OF THE ASSESS EE FOR THE PURPOSE OF CARRYING OUT ARMS LENGTH ANALYSIS INCLUDED THE EXPENSES REIMBURSED BY THE ASSOCIATED ENTERPRISES AS A PART OF OPERATING COST OF THE ASSESSEE. AS PER THE TPO, TH E NATURE OF REIMBURSABLE EXPENSES INCURRED BY THE ASSESSEE FORMED PART AND PARCEL OF THE CORE ACTIVITY OF THE ASSESSEE AND HENCE SUCH EXPENSES WERE TO BE INCLUDED IN THE DETERMINATION O F OPERATING EXPENSES WHILE COMPUTING PROFIT LEVEL INDICATOR [PLI] OF THE ASSESSEE. THE TPO ALSO HELD THAT SINCE THE ASSESSEE WAS REIMBURSED ON FIXED FEE BASIS BY ITS ASSOCIATED ENT ERPRISES AND THE REIMBURSEMENT OF THE EXPENSES WAS NOT COVERED BY THE AGREEMENT BETWEEN T HE ASSESSEE AND ITS ASSOCIATED ENTERPRISES, THE REIMBURSEMENT RECEIVED BY THE ASSE SSEE FROM ASSOCIATED ENTERPRISES DID NOT FORM PART OF THE OPERATING REVENUE OF THE ASSESSEE. THUS, THE TPO COMPUTED PROFITABILITY OF THE ASSESSEE AS BELOW:- ' PARTICULARS AMOUNT. INCOME : 1. FEES RS.11,38,92,075/- 2. OTHER INCOME RS. 3,65,203/- TOTAL OPERATING INCOME RS.11,42,57,278/- 4 I. T. APPEAL NO. 3928 (DEL) OF 2009. EXPENDITURE 1. EMPLOYEE COST RS.5,51,25,840/- 2. ADMINISTRATION & GENERAL EXPENSES [4,01,18,983 MINUS 1,17,813] RS.4,00,01,170/- 3. DEPRECIATION RS.17,50,847/- 4. EXPENSES NOT ROUTED THROUGH PROFIT AND LOSS RS.2,6 0,09,805/- ACCOUNT. TOTAL OPERATING EXPENDITURE (B) RS.12,28,87,662/ - OPERATING LOSS RS.86,30,384/- ' 5.2 THE TPO BASED ON ABOVE ANALYSIS, DETERMINED THE ALP AS BELOW :- DETERMINATION OF ALP 1. TOTAL OPERATING EXPENDITURE (A) RS.12,28,87,662 /- 2. ARM'S LENGTH OPERATING REVENUE(B) RS.18,29,92,0 17/- (B) = (A) * 148.91 PER CENT. 3. ACTUAL OPERATING REVENUE OF THE ASSESSEE ( C) RS.11,42,57,278/- REQUIRED ADJUSTMENT (B) MINUS (C) RS .6,87,34,739/-. 5.3 ON THE BASIS OF ABOVE WORKING THE TPO RECOMMEND ED AN ADJUSTMENT OF RS.6,87,34,739/-. 5 I. T. APPEAL NO. 3928 (DEL) OF 2009. 6. THE ASSESSEE AGGRIEVED BY THE ORDER OF THE ASSES SING OFFICER CHALLENGED THE ASSESSMENT ORDER AND WORKING OF ARMS LENGTH PRICE RESULTING IN AN ADDITION OF RS.6,87,34,739/- ON VARIOUS GROUNDS. THE LD. CIT (APPEALS) AFTER EXAMINING THE CONTENTION OF THE ASSESSEE UPHELD THE ORDER OF THE TPO TO CHANGE THE BASE OF PLI. HE ALS O UPHELD THE ACTION OF THE TPO WHEREIN TPO HAD USED CURRENT YEARS' DATA AS AGAINST MULTIPL E DATA USED BY THE ASSESSEE. THE LD. CIT (APPEALS) ALSO UPHELD THE EXCLUSION OF THREE COMPAR ABLES AND INCLUSION OF TWO COMPARABLES FOR THE PURPOSE OF DETERMINATION OF OPERATING MARGI NS. HOWEVER, THE LD. CIT (APPEALS) AGREED WITH THE ASSESSEE THAT TPO HAS INCLUDED NON- OPERATING INCOMES BY WAY OF INTEREST, PROFIT ON SALE OF INVESTMENT AND INCOME FROM MONEY MARKET OPERATIONS, DIVIDEND, PROFIT FROM SHARE TRADING ETC. AS A PART OF OPERATING INCOME. THE LD. CIT (APPEALS) AFTER DETAILED EXAMINATION OF THE OPERATING MARGINS OF THE COMPARA BLES EXCLUDED THE INCOME WHICH WAS NOT PART OF OPERATING INCOME. THE LD. CIT (APPEALS) AF TER REDUCING THE INCOME BY WAY OF INTEREST, DIVIDEND, INCOME FROM INVESTMENT OPERATIO NS, TRADING IN BONDS, CAPITAL MARKET OPERATIONS ETC. DETERMINED THE OPERATING PROFIT AT 16.26 PER CENT AS AGAINST 48.91 PER CENT AND DIRECTED THE ASSESSING OFFICER TO ADOPT THE OPERATI NG MARGIN OF COMPARABLES AT 16.26 PER CENT. 7. AS REGARDS THE SECOND GROUND OF APPEAL, THE ASSE SSEE CHALLENGED THE ACTION OF THE TPO, WHO TREATED THE REIMBURSEMENT OF EXPENSES AS P ART OF OPERATING EXPENSES AND IGNORED THE REIMBURSEMENT OF EXPENSES AS INCOME OF THE ASSE SSEE. IT WAS SUBMITTED BY THE ASSESSEE THAT THE TRANSFER PRICING OFFICER HAD ERRED IN INCL UDING THE EXPENSES INCURRED BY THE ASSESSEE ON BEHALF OF AND AT THE BEHEST OF ITS ASSOCIATED EN TERPRISES AS A PART OF OPERATING EXPENSES WHILE NOT TREATING CORRESPONDING REIMBURSEMENT AS O PERATING INCOME OF THE ASSESSEE. THEREFORE, THE ACTION OF THE LD. TPO WAS ERRONEOUS. 8.1 ON CONSIDERATION OF ARGUMENTS ADVANCED BY THE A SSESSEE, THE LD. CIT (APPEALS) OBSERVED THAT THE TPO IN HIS ORDER HAD INCLUDED THE EXPENSES INCURRED BY THE ASSESSEE AS A PART OF OPERATING COST, AT THE SAME TIME HE HAD NOT CONSIDERED THE CORRESPONDING REIMBURSEMENT OF SUCH EXPENSES AS PART OF OPERATING INCOME. HE WAS OF THE OPINION THAT SUCH DISCRIMINATORY TREATMENT ON THE PART OF THE TP O WAS DEVOID OF ANY LOGIC AND WAS AGAINST THE PRINCIPLE OF FINANCIAL ANALYSIS. HE, THEREFORE , AGREED WITH THE ASSESSEE THAT IT WOULD LEAD TO A MISLEADING PICTURE OF FINANCIAL PERFORMANCE. THE TPO HAD BLOWN HOT AND COLD AS HE HAD INCLUDED THE EXPENSES INCURRED BY THE ASSESSEE AS A PART OF THE OPERATING COST, AT THE SAME 6 I. T. APPEAL NO. 3928 (DEL) OF 2009. TIME, HE HAD NOT INCLUDED THE REIMBURSEMENT AS PART OF OPERATING REVENUE. THIS TREATMENT BY THE TPO WAS NOT PERMISSIBLE IN LAW. THE LD. CIT (A PPEALS), THEREFORE, TREATED THE REIMBURSEMENT OF EXPENSES AS A PART OF OPERATING IN COME. 8.2 THE LD. CIT (APPEALS) ON THE BASIS OF ABOVE FIN DINGS COMPUTED OPERATING MARGIN [PLI] AT THE RATE OF 14.14 PER CENT AS BELOW :- PARTICULARS AMOUNT. INCOME : FEES RS.11,38,92,075/- OTHER INCOME RS.3,65,203/- EXPENSES REIMBURSED RS.2,60,09,805/- OPERATING INCOME (A) RS.14.02,67,083/- EXPENDITURE EMPLOYEE COST RS.5,51,25,840/- ADMINISTRATION & GENERAL EXPENSES RS.4,00,01,1 70/- DEPRECIATION RS.17,50,847/- REIMBURSEMENTS RS.2,60,09,805/- OPERATING EXPENDITURE (B) RS.12,28,87,662/- OPERATING PROFIT (C) [A MINUS B] : RS.1,73,79,421 /- OPERATING MARGIN [PLI] [(C) (B)] 100 : 14.1 4 PER CENT. 8.3 THUS THE LD. LD. CIT (APPEALS) DETERMINED THE OPERATING MARGIN OF COMPARABLE AT 16.26 PER CENT AND THE OPERATING MARGIN OF THE ASSE SSEE AT 14.14 PER CENT WHICH WAS LESS THAN 7 I. T. APPEAL NO. 3928 (DEL) OF 2009. THE MARGIN EARNED BY THE COMPARABLES. THE LD. CIT (APPEALS) FROM THE FIGURES GIVEN ABOVE CALCULATED THE ARMS LENGTH PRICE AS UNDER:- PARTICULARS AMOUNT 1. OPERATING COST OF THE ASSESSEE [INCLUDING ENTIRE AMOUNT OF EXPENSES INCURRED] RS.12,28,87, 662/- 2. ARM'S LENGTH OPERATING MARGIN 16.26 PER CENT. 3. ARM'S LENGTH OPERATING PROFIT (16.26 PER CENT OF RS.12,28,87,662/-} RS.1,99,81,533/- 4. ALP OF TRANSACTION (USING ARMS LENGTH PROFIT) [RS.12,28,87,662/-] + [RS.1,99,81,533/-] RS.14,2 8,69,195/- 5. ALP MINUS 5 PER CENT OF ALP [AS PER PROVISO TO SECT ION 92-C(2)] : RS.13,57,25,735/-. 6. TOTAL OPERATING INCOME : RS.14,02,67,083/-. 8.4 SINCE THE ASSESSEE'S MARGIN AT SERIAL NO. 6 WAS MORE THAN ARMS LENGTH PRICE AT SERIAL NO. 5 (WITHIN THE RANGE OF PROVISO TO SECTION 92C(2 ) THE ASSESSEE'S INTERNATIONAL TRANSACTION WAS CONSIDERED BY THE LD. CIT (APPEALS) TO BE AT AR MS LENGTH PRICE. HE ACCORDINGLY DELETED THE ADDITION OF RS.6,87,34,739/-. 9. BEFORE US THE LD. CIT DR SUPPORTED THE ORDER O F THE ASSESSING OFFICER. ON THE OTHER HAND, THE LD. AR OF THE ASSESSEE SUPPORTING THE ORD ER OF THE LD. CIT (APPEALS) SUBMITTED THAT THE LD. TPO WHILE WORKING OUT PROFIT MARGIN IN CASE OF COMPARABLES HAD INCLUDED THE NON- OPERATING INCOME, SUCH AS INTEREST, DIVIDEND, SHARE TRADING ETC. HE HAD ALSO NOT INCLUDED THE REIMBURSEMENT OF EXPENSES AS INCOME. THE LD. CIT ( APPEALS) WHILE COMPUTING THE PROFIT MARGIN OF COMPARABLES HAD EXCLUDED NON-OPERATING IN COME. THEREFORE, THE LD. CIT (APPEALS) IS JUSTIFIED IN ACCEPTING THE CLAIM OF THE ASSESSEE . 8 I. T. APPEAL NO. 3928 (DEL) OF 2009. 10. WE HAVE HEARD BOTH THE PARTIES AND GONE THROUGH THE MATERIAL AVAILABLE FROM THE RECORDS. FROM THE ORDER OF THE LD. CIT (APPEALS) I T IS CLEAR THAT NON-OPERATING INCOME, WHICH WAS NOT EXCLUDED BY THE TPO HAS BEEN EXCLUDED BY TH E LD. CIT (APPEALS) AND HE HAS THUS WORKED OUT THE PROFIT MARGIN RATE OF 16.26 PER CENT . THIS IN OUR CONSIDERED OPINION IS CORRECT APPROACH TO THE ISSUE. NON OPERATING INCOME CANNOT BE INCLUDED FOR THE PURPOSE OF COMPARISON OF OPERATING INCOME. SECONDLY THE LD. CI T (APPEALS) HAS ALSO INCLUDED THE REIMBURSEMENT OF EXPENSES IN THE OPERATING INCOME. IN OUR CONSIDERED VIEW, THE LD. CIT (APPEALS) HAS RIGHTLY INCLUDED THE REIMBURSEMENT OF EXPENSES IN OPERATING INCOME, OTHERWISE IT WOULD LEAD TO DISTORTED FIGURES. THE LD. CIT (A PPEALS) HAD COMPUTED THE ALP OF TRANSACTION USING ARMS LENGTH PROFIT AT RS.14,28,69 ,195/-. PROVISO TO SECTION 92-C(2) PROVIDES THAT WHERE MORE THAN ONE PRICE IS DETERMIN ED BY MOST APPROPRIATE METHOD, THE ARMS LENGTH PRICE SHALL BE TAKEN TO BE THE ARITHMETICAL MEAN OF SUCH PRICES, OR AT THE OPTION OF THE ASSESSEE, A PRICE WHICH MAY VARY FROM THE ARITHMETI CAL MEAN BY NOT EXCEEDING 5 PER CENT OF SUCH ARITHMETICAL MEAN. THE LD. CIT (APPEALS) HAS DETERMINED THE OPERATING INCOME BY APPLYING THE PROVISIONS OF PROVISO TO SECTION 92C(2 ) AT RS.13,57,25,735/- AS AGAINST OPERATING INCOME OF RS.14,02,67,083/-. THUS IN OUR CONSIDERED OPINION THE LD. CIT (APPEALS) IS JUSTIFIED IN HOLDING THAT THE ASSESSEE'S INTERNATIO NAL TRANSACTION WAS AT ARM'S LENGTH PRICE. DURING THE COURSE OF HEARING, THE LD. CIT DR COUL D NOT ADVANCE ANY ARGUMENTS CONTRARY TO THE FINDINGS OF THE LD. CIT (APPEALS). ACCORDINGLY IN OUR CONSIDERED OPINION, THE LD. CIT (A) IS JUSTIFIED IN COMPUTING THE AVERAGE PLI AT 16.26 PER CENT. HE IS ALSO JUSTIFIED IN HOLDING THE REIMBURSEMENT OF EXPENDITURE AS PART OF OPERATING I NCOME. ACCORDINGLY, WE DO NOT FIND ANY INFIRMITY IN THE ORDER PASSED BY THE LD. CIT (APPEA LS) ON BOTH THE ISSUES. 11. IN THE RESULT, THE APPEAL FILED BY THE REVENUE IS DISMISSED. THE ORDER PRONOUNCED IN THE OPEN COURT ON : 11 TH MARCH, 2010. SD/- SD/- [ D. R. SINGH ] [ K. D. RANJAN ] JUDICIAL MEMBER ACCOUNTANT MEMBER DATED : 11 TH MARCH, 2010. *MEHTA * 9 I. T. APPEAL NO. 3928 (DEL) OF 2009. COPY OF THE ORDER FORWARDED TO : - 1. APPELLANT. 2. RESPONDENT. 3. CIT, 4. CIT (APPEALS), 5. DR, ITAT, NEW DELHI. TRUE COPY. BY ORDER. ASSISTANT REGISTRAR, ITAT. 10 I. T. APPEAL NO. 3928 (DEL) OF 2009.