Pari Washington Company Advisors Private Limited, CHENNAI V. DCIT, CHENNAI

ITA 522/CHNY/2017

• Counselvise Citation: [2017] 127 COUNSELVISE.COM (IT) 6082 (ITAT-CHENNAI)
• Duration Of Justice: 6 month(s) 27 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 27-09-2017
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: D
• Next Hearing Date: 05-07-2017
• Assessment Year: 2012-2013
• Appeal Filed On: 02-03-2017
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Keywords: Transfer pricing

Judgement Text

, , IN THE INCOME TAX APPELLATE TRIBUNAL D BENCH, CHENNAI . . . , . !'# ! , % !& BEFORE SHRI N.R.S. GANESAN, JUDICIAL MEMBER AND SHRI A. MOHAN ALANKAMONY, ACCOUNTANT MEMBER ./ ITA NO.522/MDS/2017 ( )( / ASSESSMENT YEAR : 2012-13 M/S PARI WASHINGTON COMPANY ADVISORS PRIVATE LIMITED, 18, TIGER VARADACHARI ROAD, 1 ST STREET, BESANT NAGAR, CHENNAI - 600 090. PAN : AAECP 0955 E V. THE DEPUTY COMMISSIONER OF INCOME TAX, CORPORATE CIRCLE 5(1), CHENNAI - 600 034. (+,/ APPELLANT) (-.+,/ RESPONDENT) +, / 0 / APPELLANT BY : SH. RAGHUNATHAN SAMPATH, ADVOCATE -.+, / 0 / RESPONDENT BY : SMT. T.H. VIJAYALAKSHMI, CIT 1 / 2% / DATE OF HEARING : 19.09.2017 3') / 2% / DATE OF PRONOUNCEMENT : 27.09.2017 / O R D E R PER N.R.S. GANESAN, JUDICIAL MEMBER: THIS APPEAL OF THE ASSESSEE IS DIRECTED AGAINST THE ASSESSMENT ORDER DATED 27.12.2016, PASSED CONSEQUEN T TO THE DIRECTION OF THE DRP UNDER SECTION 144C(5) OF THE I NCOME-TAX ACT, 1961 (IN SHORT 'THE ACT') FOR THE ASSESSMENT YEAR 2 012-13. 2 I.T.A. NO.522/MDS/17 2. SHRI RAGHUNATHAN SAMPATH, THE LD.COUNSEL FOR THE ASSESSEE, SUBMITTED THAT THE ASSESSEE IS ENGAGED IN THE BUSINESS OF NON-BINDING INVESTMENT ADVISORY SERVICES TO ITS ASSOCIATED ENTERPRISE AT MAURITIUS. ACCORDING TO THE LD. COUN SEL, THE ASSESSEE RECEIVED MORE THAN 90% OF ITS REMUNERATION FROM SUC H ADVISORY SERVICES. THE TRANSFER PRICING OFFICER ADMITTED TH AT IT IS A NON- BINDING ADVISORY SERVICES WITH REGARD TO INDIAN SEC URITIES. ACCORDING TO THE LD. COUNSEL, THE ASSESSEE ANALYSES THE MARKETING CONDITION IN INDIA AND ADVISES THE ASSOCIATED ENTER PRISE AT MAURITIUS FOR MAKING INVESTMENT. THE ADVICE RENDER ED BY THE ASSESSEE IS NOT BINDING ON THE ASSOCIATED ENTERPRIS E. IT IS FOR THE ASSOCIATED ENTERPRISE TO TAKE ITS OWN DECISION AFTE R CONSIDERING THE SUGGESTION/ADVICE GIVEN BY THE ASSESSEE-COMPANY. 3. REFERRING TO THE DIRECTION OF DRP, THE LD. COUNS EL FOR THE ASSESSEE SUBMITTED THAT THE DRP ADMITTED THAT IF TH E ASSESSEE IS PROVIDING ONLY NON-BINDING SERVICES, THE CASE LAWS RELIED ON BY THE ASSESSEE ARE SQUARELY APPLICABLE. HOWEVER, ACCORDI NG TO THE LD. COUNSEL, THE DRP FOUND THAT THE ASSESSEE HAS NOT FU RNISHED THE DETAILS OF NON-BINDING ADVISORY SERVICES PROVIDED T O ITS ASSOCIATED ENTERPRISE, THEREFORE, THE DRP ON AD HOC BASIS ADOP TED THE PROFIT AT 3 I.T.A. NO.522/MDS/17 26.58%. FOR ADOPTING 26.58%, THE DRP TOOK THE PROF IT OF MERCHANT BANKER AT 41.58%. THE LD.COUNSEL FURTHER SUBMITTED THAT MERCHANT BANKING COMPANY CANNOT BE COMPARED WITH THE SERVICE S OF THE ASSESSEE. THE ASSESSEE IS NOT HOLDING ANY INVESTME NT. THE BUSINESS OF THE ASSESSEE IS ONLY TO PROVIDE NON-BIN DING ADVISORY SERVICE TO ITS ASSOCIATED ENTERPRISE. ACCORDING TO THE LD. COUNSEL, IN THE CASE OF MERCHANT BANKING, THEY ARE HOLDING I NVESTMENT, THEREFORE, THE DRP CANNOT TAKE 41.58% FOR DETERMINI NG ARM'S LENGTH PRICE AS IN THE CASE OF MERCHANT BANKER. APART FRO M THAT, ACCORDING TO THE LD. COUNSEL, THE DRP HAS ALSO, ON AD HOC BAS IS, FOUND THAT THE MUTUAL FUNDS NORMALLY GIVE ANNUAL YIELD OF 10-1 2% AND BY GIVING FURTHER MARGIN OF 3% IN INVESTMENT, THE DEDUCTION W AS GIVEN AT 15% AND THE BALANCE 26.58% WAS CONSIDERED TO ADVISORY S ERVICES. ACCORDING TO THE LD. COUNSEL, THIS AD HOC COMPUTATI ON IS NOT PERMISSIBLE UNDER THE SCHEME OF TRANSFER PRICING. THE SERVICE RENDERED BY THE ASSESSEE-COMPANY HAS TO BE COMPARED WITH SIMILAR SERVICES RENDERED BY OTHER COMPANIES IN THE UNCONTROLLED TRANSACTION. MOREOVER, ACCORDING TO THE LD. COUNSE L, EXPORT EARNINGS FILTER WAS NOT TAKEN INTO CONSIDERATION EI THER BY THE TPO OR DRP. IN ALL THE COMPARABLE CASES, THE COMPARABL E COMPANIES 4 I.T.A. NO.522/MDS/17 HAVE NOT DONE ANY EXPORT SERVICE. THEREFORE, ACCOR DING TO THE LD. COUNSEL, EXPORT EARNINGS FILTER HAS TO BE ADOPTED. 4. REFERRING TO THE DIRECTION OF DRP, THE LD.COUNSE L FOR THE ASSESSEE SUBMITTED THAT THE DRP ITSELF FOUND THAT 4 1.58% ALP MARGIN ADOPTED IN MERCHANT BANKING CANNOT BE ADOPTE D TO THE SERVICE RENDERED BY THE ASSESSEE WHICH IS AN ADVISO RY CHARACTER. THE LD.COUNSEL FURTHER SUBMITTED THAT THE ASSESSEE IS ONLY AN ADVISER TO THE ASSOCIATED ENTERPRISE AT MAURITIUS A ND NOT ACTING AS INVESTMENT MANAGER, THEREFORE, THE ESTIMATION OF 15 % OF MARGIN ON AD HOC BASIS IS NOT CORRECT. THE LD.COUNSEL FURTHE R SUBMITTED THAT WITHOUT REFERENCE TO ANY COMPARABLE DATA, THE DRP D ETERMINED THE ALP AT 26.58%. THE LD.COUNSEL FURTHER SUBMITTED TH AT THE MARGIN ATTRIBUTABLE TO INVESTMENT ADVISER HAS TO BE NECESS ARILY LOWER THAN THAT OF INVESTMENT MANAGER. THE INVESTMENT MANAGER TAKES MORE RISK IN MAKING INVESTMENT. HOWEVER, THE ADVISER IS NOT TAKING ANY SUCH RISK. THE MAIN CONTENTION OF THE LD.COUNSEL I S THAT ADOPTION OF 15% FOR THE INVESTMENT ADVISER IS HIGHLY ARBITRARY. IT NEEDS TO BE TAKEN INTO CONSIDERATION THE DATA AVAILABLE ON RECO RD. 5. ON THE CONTRARY, SMT. T.H. VIJAYALAKSHMI, THE LD . DEPARTMENTAL REPRESENTATIVE, SUBMITTED THAT THERE W AS DIFFERENCE 5 I.T.A. NO.522/MDS/17 BETWEEN THE STUDY MADE BY THE TPO AND THE ASSESSEE. ACCORDING TO THE LD. D.R., THE CLAIM OF THE ASSESSEE THAT IT IS PROVIDING ONLY NON-BINDING ADVISORY SERVICE IS NOT SUBSTANTIATED B Y NECESSARY MATERIAL. REFERRING TO THE DIRECTION OF THE DRP, M ORE PARTICULARLY PARA 2.20.7, THE LD. D.R. SUBMITTED THAT THE DRP FO UND THAT THE ASSESSEE IS PROVIDING ADVICE TO ITS ASSOCIATED ENTE RPRISE AT MAURITIUS WHICH IS INVESTING IN THE CAPITAL. THERE FORE, ACCORDING TO THE LD. D.R., COMPARING THE ACTIVITY OF THE ASSESSE E AND WITH THAT OF ITS ASSOCIATED ENTERPRISE WAS IN THE NATURE OF INVE STMENT BANKER, HENCE, THE TPO AS WELL AS THE DRP HAVE SELECTED THE COMPARABLE COMPANIES WHICH ARE ENGAGED IN THE INVESTMENT BANKI NG AND SEGREGATION WAS MADE WITH REGARD TO ADVISORY SERVIC ES. THEREFORE, ACCORDING TO THE LD. D.R., IT IS NOT CORRECT TO SAY THAT THE DRP MADE TRANSFER PRICING ADJUSTMENT ON AD HOC BASIS WITHOUT COMPARING THE AVAILABLE DATA. ACCORDING TO THE LD. D.R., THE DAT A WAS NOT PROVIDED BY THE ASSESSEE, THEREFORE, THE DRP HAS TAKEN THE A VAILABLE DATA ON RECORD. 6. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS ON EITH ER SIDE AND PERUSED THE RELEVANT MATERIAL AVAILABLE ON RECORD. A BARE READING OF THE ORDER OF THE TPO AND THE DIRECTION OF THE DRP S HOWS THAT THE 6 I.T.A. NO.522/MDS/17 ASSESSEE IS PROVIDING ADVISORY SERVICE TO ITS ASSOC IATED ENTERPRISE WHICH IS IN THE BUSINESS OF INVESTMENT. IN OTHER W ORDS, THE ASSOCIATED ENTERPRISE AT MAURITIUS IS MAKING INVEST MENTS IN INDIAN SECURITIES AFTER CONSIDERING THE ADVICE RENDERED BY THE ASSESSEE- COMPANY. THE ASSESSEE-COMPANY IS ONLY RENDERING IT S ADVICE AFTER ANALYZING THE MARKET / ECONOMIC SCENARIO IN INDIA. THE ASSOCIATED ENTERPRISE AT MAURITIUS TAKES DECISION AFTER CONSID ERING THE ADVICE RENDERED BY THE ASSESSEE-COMPANY WHETHER TO INVEST IN SECURITIES OR NOT. THESE FACTS ARE NOT IN DISPUTE. THEREFORE , THIS TRIBUNAL IS OF THE CONSIDERED OPINION THAT THE SERVICE OF THE ASSE SSEE-COMPANY IS NON-BINDING ADVISORY SERVICE. FOR THE PURPOSE OF A NALYZING OR PROVIDING ADVISORY SERVICES, THE ASSESSEE-COMPANY H AS TO NECESSARILY SCRUTINIZE THE FINANCIALS AND OTHER REL EVANT MATERIAL OF THE RESPECTIVE COMPANIES BEFORE OFFERING ITS ADVICE TO ITS ASSOCIATED ENTERPRISE. SIMILARLY, THE INVESTING COMPANY ALSO ANALYZES THE FINANCIALS OF THE RESPECTIVE COMPANIES BEFORE MAKIN G ANY DECISION TO INVEST IN THE SECURITIES OF THOSE PARTICULAR COM PANIES. IN THE CASE OF THE ASSESSEE-COMPANY, AFTER MAKING ANALYSIS, ITS ACTIVITY ENDS IMMEDIATELY AFTER PROVIDING ITS ADVICE TO ITS ASSOC IATED ENTERPRISE. THE ASSOCIATED ENTERPRISE AFTER RECEIVING ADVICE FR OM THE ASSESSEE-COMPANY, RE-EXAMINES / REVIEWS THE ENTIRE MATTER IN THE 7 I.T.A. NO.522/MDS/17 LIGHT OF THE ADVICE GIVEN BY THE ASSESSEE-COMPANY A ND THEREAFTER TAKES A DECISION WHETHER TO INVEST IN THOSE COMPANI ES OR NOT. 7. IF THE ASSOCIATED ENTERPRISE DECIDES TO MAKE INV ESTMENT, THEN THEY ARE MAKING INVESTMENT AFTER TAKING A RISK . THERE IS A DISTINCTION BETWEEN THE ACTIVITY CARRIED ON BY THE INVESTMENT MANAGER AND THE COMPANY WHICH IS OFFERING ADVISORY SERVICES. IN THE CASE OF THE COMPANY, WHICH IS OFFERING ADVISORY SERVICE, IT DOES NOT TAKE ANY RISK. IT SIMPLY RENDERS ITS ADVISORY S ERVICE. HOWEVER, THE INVESTMENT MANAGER IS TAKING ENTIRE RISK IN MAK ING INVESTMENT. THEREFORE, THIS TRIBUNAL IS OF THE CONSIDERED OPINI ON THAT THE DATA WHICH PERTAINS TO THE ADVISORY SERVICE COMPANIES HA S TO BE COMPARED WITH THAT OF PROFIT OF THE ASSESSEE-COMPAN Y. IN THE CASE BEFORE US, THE DRP HAS TAKEN 15% ON AD HOC BASIS WI THOUT COMPARING WITH ANY OF THE DATA OF THE OTHER COMPANI ES WHICH PROVIDE SIMILAR ADVISORY SERVICE. IT IS NOBODYS C ASE THAT NO SUCH SIMILAR COMPANY IS AVAILABLE IN INDIA. THE DRP FOU ND FAULT WITH THE ASSESSEE FOR NOT PROVIDING COMPARABLES. THIS TRIBU NAL IS OF THE CONSIDERED OPINION THAT IT CANNOT BE A REASON FOR M AKING ADJUSTMENT ON AD HOC BASIS. 8 I.T.A. NO.522/MDS/17 8. UNDER THE SCHEME OF TRANSFER PRICING, THE ADJUST MENT HAS TO BE MADE AFTER COMPARING THE TRANSACTION OF SIMILARL Y PLACED COMPANIES IN RESPECT OF SIMILAR BUSINESS. THEREFOR E, WE ARE UNABLE TO UPHOLD THE ADJUSTMENT MADE BY THE DRP ON AD HOC BASIS WITH REGARD TO MUTUAL FUNDS. ACCORDINGLY, THE ORDERS OF THE LOWER AUTHORITIES ARE SET ASIDE AND THE ENTIRE ISSUE IS R EMITTED BACK TO THE FILE OF THE ASSESSING OFFICER. THE ASSESSING OFFIC ER SHALL REFER THE MATTER ONCE AGAIN TO THE TPO. THE TPO SHALL RE-EXA MINE THE MATTER AFRESH IN THE LIGHT OF THE MATERIAL / DATA A VAILABLE ON RECORD. IT IS ALSO OPEN TO THE ASSESSEE TO FILE FRESH DATA TO THE TPO IN RESPECT OF OTHER COMPANIES PROVIDING ADVISORY SERVI CES. IT IS OPEN TO THE TPO TO COMPARE SOME MORE DATA FROM PUBLIC DO MAIN. THEREAFTER THE TPO SHALL DECIDE THE ISSUE IN ACCORD ANCE WITH LAW, AFTER GIVING A REASONABLE OPPORTUNITY TO THE ASSESS EE. 9. IN THE RESULT, THE APPEAL FILED BY THE ASSESSEE IS ALLOWED FOR STATISTICAL PURPOSES. 9 I.T.A. NO.522/MDS/17 ORDER PRONOUNCED ON 27 TH SEPTEMBER, 2017 AT CHENNAI. SD/- SD/- (. !'# ! ) ( . . . ) (A. MOHAN ALANKAMONY) (N.R.S. GANESAN) % / ACCOUNTANT MEMBER /JUDICIAL MEMBER /CHENNAI, 5 /DATED, THE 27 TH SEPTEMBER, 2017. KRI. / -267 87)2 /COPY TO: 1. +, /APPELLANT 2. -.+, /RESPONDENT 3. PRINCIPAL CIT-5, BANGALORE 4. CIT(TP-2), BANGALORE 5. 79 -2 /DR 6. ( : /GF.