TPG CAPITAL INDIA P.LTD, MUMBAI V. DCIT (OSD) 3(1), MUMBAI

ITA 5411/MUM/2016

• Counselvise Citation: [2018] 118 COUNSELVISE.COM (IT) 9038 (ITAT-MUMBAI)
• Duration Of Justice: 2 year(s) 3 month(s) 4 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 07-12-2018
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: G
• Assessment Year: 2010-2011
• Appeal Filed On: 02-09-2016
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: MANISH KUMAR SINGH
• Keywords: Related party transaction; Business income; Transfer pricing; International transaction; Scheme of amalgamation
• Section: 234B; 12

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL J BENCH, MUMBAI BEFORE SHRI SHAMIM YAHYA, AM AND SHRI PAWAN SINGH, JM ITA NO. 5411 /MUM/ 2016 (ASSESSMENT YEAR: 2010 - 11 ) TPG CAPITAL INDIA PRIVATE LIMITED (AS A SUCCESSOR TO TPG GROWTH ADVISORS (INDIA) PRIVATE LIMITED) 1004, THE CAPITAL, PLOT NO. C - 70, G - BLOCK, BANDRAKURLA COMPLEX, BANDRA (E), MUMBAI - 400 051 VS. DY. CIT(OSD) - 3(1), MUMBAI PAN/GIR NO. AABCN 6660 K ( APPELLANT ) : ( RESPONDENT ) APPELLANT BY : SHRI PORUS KAKA RESPONDENT BY : SHRI MANISH KUMAR SINGH DATE OF HEARING : 03.10.2018 DATE OF PRONOUNCEMENT : 07.12 .2018 O R D E R PER SHAMIM YAHYA, A. M.: THIS APPEAL BY THE ASSESSEE IS DIRECTED AGAINST THE ORDER OF THE LEARNED COMMISSIONER OF INCOME TAX (APPEALS) - 58, MUMBAI (LD.CIT(A) FOR SHORT) DATED 23.05.2016 AND PERTAINS TO THE ASSESSMENT YEAR (A.Y.) 2010 - 11. 2. THE GROUNDS OF APPEAL READ AS UNDER: 1. THE CIT(A) / AO ERRED ON FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW IN DISREGARDING THE METHODICALLY PREPARED TRA NSFER PRICING DOCUMENTATION SUBMITTED BY THE APPELLANT AND IN NOT APPRECIATING THAT THE ARM'S LENGTH PRICE OF THE INTERNATIONAL TRANSACTIONS IN RELATION TO NON - BINDING INVESTMENT ADVISORY SUPPORT SERVICES WAS APPROPRIATELY DETERMINED IN THE TRANSFER PRICIN G DOCUMENTATION APPLYING TRANSACTIONAL NET MARGIN METHOD ('TNMM'), THEREBY RESULTING INTO TRANSFER PRICING ADDITION / ADJUSTMENT. 2. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW, THE LEARNED AO ERRED AND THE HON'BLE CIT(A) FURTHER ERRED IN UPHOLDING / CONFIRMING THE ACTION OF THE LEARNED AO IN REJECTING THE CONTENTION OF THE APPELLANT TO COMPUTE 2 ITA NO. 5411/MUM/2016 THE MARGIN OF THE ALLEGED COMPARABLE COMPANIES BASED ON MULTIPLE YEAR FINANCIAL DATA. 3. THE CIT(A) / AO ERRED ON FACTS AND CIRCUMSTANCES OF T HE CASE AND IN LAW BY NOT TAKING COGNIZANCE OF THE FUNCTIONS AND RISK OF THE APPELLANT AS OUTLINED IN THE TRANSFER PRICING DOCUMENTATION AND AS SUBMITTED DURING THE COURSE OF THE PROCEEDINGS AND THE LEARNED CIT(A) FURTHER GRIEVOUSLY ERRED IN DISREGARDING T HE FUNCTIONAL AND RISK PROFILE O F THE APPELLANT BY MAKING CERTAIN INCORRECT, IRRELEVANT AND UNSUBSTANTIATED OBSERVATIONS. 4. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW, THE LEARNED C1T(A) ERRED IN NOT APPRECIATING THAT THE APPELLANT IS ESSENTIALLY A NON - BINDING INVESTMENT ADVISORY SERVICES PROVIDER. 5. THE CIT(A) / AO ERRED ON FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW IN REJECTING 2 COMPARABLES OUT OF TOTAL 5 COMPARABLES, IDENTIFIED BY THE APPELLANT BY WAY OF DETAILED AND METHOD ICAL SEARCH PROCESS AS FORMING PART OF THE TRANSFER PRICING DOCUMENTATION PREPARED BY THE APPELLANT REQUIRED UNDER THE ACT AND THE RULES, DESPITE ALL OF THEM BEING FUNCTIONALLY COMPARABLE TO THE FUNCTIONS OF THE APPELLANT HEREIN. 6. WITHOUT PREJUDICE TO THE ABOVE, THE CIT(A) / AO ERRED ON FACTS AND CIRCUMSTANCES OF THE CASE IN NOT ALLOWING PROPER ADJUSTMENTS UNDER THE PROVISIONS OF RULE 10 B(1)(E)(III) OF THE RULES, TO ACCOUNT FOR DIFFERENCES BETWEEN THE RISK PROFILE OF THE APPELLANT AND THE FINAL LIST O F COMPARABLES SELECTED BY THE CIT(A). 7. THE CIT(A)/ AO ERRED ON FACTS AND CIRCUMSTANCES OF THE CASE IN LEVYING INTEREST UNDER SECTION 234B AND SECTION 234C OF THE ACT. THE APPELLANT PRAYS THAT SUITABLE DIRECTION TO BE GIVEN TO DELETE/REDUCE THESE INTER EST. 8. THE CIT(A)/ AO ERRED ON FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW IN INITIATING PENALTY PROCEEDINGS UNDER SECTION 271(L)(C) OF THE ACT. 3. B RIEF FACTS OF THE CASE ARE AS UNDER: THE ASSESSEE, TPG GROWTH ADVISORS (INDIA) PRIVATE LIMITED OR TPG INDIA IN SHORT, WAS INCORPORATED ON 12.12.2007 AS PRIVATE LIMITED COMPANY UNDER THE COMPANIES INCOME TAX ACT, 1961, 1956. THE ASSESSEES HOLDING COMPANY, TPG GROWTH LLC. USA (TPG USA HENCEFOR TH) HOLDS 99 . 99 PERCENT OF THE EQUITY SHARE CAPITAL IN THE APPELLANT. THE APPELLANT IS ENGAGED IN PROVIDING NON - BINDING INVESTMENT ADVISORY SERVICES TO ITS ASSOCIATED ENTERPRISE (A E ). PURSUANT TO THE SCHEME OF AMALGAMATION UNDER SECTIONS 391 TO 394 OF THE COMPANIES ACT, 1956 SANCTIONED BY THE HON'BLE BOMBAY HIGH COURT VIDE O RDER DATED 19 TH OCTOBER 2012 AND FILED WITH THE REGISTRAR OF COMPANIES (ROC) ON 21 3 ITA NO. 5411/MUM/2016 NOVEMBER 2012. TPG GROWTH ADVISORS (INDIA) PRIVATE LIMITED HAS BEEN AMALGAMATED INTO TPG CAPITAL INDIA PRIVATE LIMITED WITH EFFECT FROM THE APPOINTED DALE AS ON 1 APRIL 2011. 4. THE ASSESSEE PROVIDES NON - BINDING INVESTMENT ADVISORY SERVICE S TO IT'S AE. DURING AY 2010 - 11 THE ASSESSEE HAS RECEIVED A SUM OF RS. 8 , 75,78,624 FROM ITS AE BASED ON THE SERVICE AGR EEMENT ENTERED INTO BETWEEN THE ASSESSEE AND ITS AE. THE ASSESSEE HAS CONDUCTED A TP STUDY WHICH HAS BEEN SUBMITTED TO THE ASSESSING OFFICER DURING THE COURSE OF ASSESSMENT PROCEEDINGS. BASED ON THE FUNCTIONAL CHARACTERIZATION OF THE ASSESSEE AND T HE FAR A NALYSIS CONDUCTED BY IT THE ASSESSEE HAS SELECTED ITSELF AS TESTED PARTY, TNMM AS THE MOST APPROPRIATE METHOD, OPERATING PROFIT TO TOTAL OPERATING EXPENSES AS PROFIT LEVEL INDICATOR AND HAS CONDUCTED ITS SEARCH FOR COMPARABLES IN PROWESS AND CAPITALINE DAT A BASE APPLYING FOLLOWING FILTERS: REJECT COMPANIES HAVING MFG SALES TO TOTAL SALES RATIO OF MORE THAN 25% OF SALES REJECT COMPANIES HAVING TRADING SALES TO TOTAL SALES RATIO OF MORE THAN 25% OF SALES REJECT COMPANIES HAVING FUND BASED INCOME TO TOTAL INCOME RATIO OF MORE THAN 25% REJECT COMPANIES HAVING R&D EXPENSES TO SALES RATIO OF MORE THAN 5% OF SALES REJECT COMPANIES WITH IMENTORY TO TOTAL ASSETS RATIO OF MORE THAN 5% THE ASSESSEE ARRIVED AT FIVE COMPARABLES AND USED THREE YEAR DATA TO ARRIVE AT THE ARITHMETIC MEAN OF SUCH MARGIN AT 10.25%, SINCE ITS OWN MAR GIN HAS BEEN COMPUTED AT 10.64%, THE ASSESSEE HAS TREATED THE TRANSACTIONS TO BE AT ARM'S LENGTH. 5. THE AO HAS REJECTED THE STUDY CONDUCTED BY THE ASSESSEE ON THE GROUND THAT THE ASSESSEE HAS NOT USED THE RPT FILLER AND THAT FUNCTIONALLY DIFFERENT COMPANIES WERE SELECTED AS COMPARABLES. HE REJECTED FOUR OF THE FIVE COMPARABLES SELECTED BY THE 4 ITA NO. 5411/MUM/2016 APPELLANT, ADDED TW O OF HIS OWN COMPARABLES AND ARRIVED AT A ARITHMETIC MEAN OF MARGINS AT 60.97% AS A GAINST THE APPELLANT'S MARGIN OF 10.64%. IN LIGHT OF THE FACT THAT THE ADJUSTMENT WAS MORE THAN 5% OF THE TRANSAC TION VALUE, AN ADJUSTMENT OF RS. 4,00 , 73,590/ - HAS BEEN MADE TO THE INCOME OF THE APPELLANT. 6. A GAINST THE ABOVE ORDER, THE ASSESSEE APPEALED BEFORE THE L D. CIT ( A ) . 7. THE ASSESSEE OBJECTED AGAINST THE EXCLUSION OF THE FOLLOWING COMPARABLES BY THE TRANSFER PRICING OFFICER (TPO FOR SHORT): SR. NO. NAME OF THE COMPANY 1 FUTURE CAPITAL HOLDINGS LIMITED (SEGMENT - INVESTMENT ADVISORY) 2 FUTURE CAPITAL INVESTMENT ADVISORS LIMITED 3 ICRA MANAGEMENT CONSULTING SERVICES LTD. 4 IDC (INDIA) LTD. 5 INFORMED TECHNOLOGIES INDIA LTD. 8. T HE L D. CIT(A) UP HELD THE ACTION OF THE TPO EXCEPT FOR FUTURE HOLDING INDIA LTD . T HE ASSESSEE ALSO OBJECTED AGAINST THE INCLUSION OF THE FOLLOWING COMPARABLES BY THE TPO: MOTILAL OSWAL INVESTMENT ADVISORY PRIVATE LIMITED INTEGRATED CAPITAL SERVICES LIMITED. THE LD. CIT(A) UPHELD THE ACTION OF THE TPO QUA INTEGRATED CAPITAL SERVICES LIMITED. 9. A GAINST THE ABOVE ORDER , THE ASSESSEE IS IN APPEAL BEFORE US. 10. THE A SSES SEE HAS RAISED VARIOUS GROUNDS. T HE LEARNED COUNSEL OF THE ASSESSEE SUBMITTED THAT IN THE PRESENT CASE , THE ASSESSEE IS ONLY PRESSING FOR INCLUSION OF ICRA MANAGEMENT C ONSULTANCY SERVICES LTD., IN THE LIST OF COMPARABLES. 5 ITA NO. 5411/MUM/2016 11. I N SUPPORT OF FOR THE ABOVE PROPOSITION , THE LEARNED COUNSEL OF THE ASSESSEE SUBMITTED THAT IN SEVERAL CASE LAWS INCLUDING THAT OF THE ASSESSEE IT SELF THIS COMPARABLE HAS BEEN ACCEPTED AS FUNCTIONA LLY COMPARABLE TO THE ASSESSEE. HENCE , HE SUBMITTED THAT THIS COMPARABLE SHOULD NOT BE E XCLUDED FROM THE LIST OF COMPARABLES . 12. P ER CONTRA , THE LD. DEPARTMENTAL REPRESENTATIVE (LD. DR FOR SHORT) C OULD NOT DISPUTE THE SUBMISSION OF THE LEARNED COUNSEL OF THE ASSESSEE. 13. UPON CAREFUL CONSIDERATION WE NOTE THAT AS SUBMITTED BY THE LEARNED COUNSEL OF THE ASSESSEE IN FOLLOWING CASE LAWS THIS COMPARABLE HAS BEEN HELD TO BE FUNCTIONALLY COMP ARABLE TO THAT OF THE ASSESSEE AND O T H E R FUNCTIONALLY COMPARABLE ENTITIES: 6 ITA NO. 5411/MUM/2016 BOMBAY HIGH COURT DECISION IN THE CASE OF GENEA ATLANTIC 2006 - 07 PRIVATE LIMITED (ITA NO. 1993 OF 2013 AND 8914/MUM/2010) 14. WE MAY GAINFULLY REFER TO THE DECISION OF THE ITAT IN THE CASE OF TPG CAPITAL INDIA PRIVATE LIMITED VS. DCIT (IN ITA NO. 7594/MUM/2010 VIDE ORDER DATED 08.02.2017) QUA THIS ISSUE FOR A.Y. 2009 - 10 WHICH IS AS UNDER: (2). ICRA MANAGEMENT CONSULTING SERVICES LTD. : - THE LD. A.R SUBMITTED THAT THE AFORESAID COMPARABLE HAD BEEN EXCLUDED BY THE TPO FROM THE LIST OF COMPAR ABLES PROVIDED BY THE ASSESSEE FOR THE REASON THAT AS PER THE TPO THE SAID COMPARABLE HAD SIGNIFICANT RELATED PARTY TRANSACTIONS DURING THE YEAR AND WAS ALSO A LOSS MAKING ENTITY. THE LD. A.R ADVERTING TO THE AFORESAID OBSERVATIONS OF THE TPO WHICH THEREIN HAD BEEN UPHELD BY THE CIT(A), THEREIN AVERRED THAT AS THE RPT OF THE AFORESAID COMPARABLE WAS 14%, AND AS SUCH LESS THAN THE MINIMUM 25% WHICH COULD GO TO JUSTIFY EXCLUSION OF THE SAID COMPARABLE, THE AFORESAID OBSERVATIONS OF THE LOWER AUTHORITIES ON TH E SAID COUNT THUS COULD NOT BE SUSTAINED AS SUCH. IT WAS FURTHER SUBMITTED BY THE LD. A.R THAT AS THE AFORESAID COMPARABLE HAD SUFFERED A LOSS ONLY DURING THE YEAR UNDER CONSIDERATION AND ITS OP/OC STOOD REFLECTED AT - 1.84%, THEREFORE MERELY ON THE SAID CO UNT AND BYPASSING THE VERY FACT THAT IT WAS NOT A PERSISTENT LOSS MAKING COMPANY IN THE PRECEDING YEARS, NO ADVERSE INFERENCE AS REGARDS THE FEASIBILITY OF ADOPTING THE AFORESAID COMPARABLE BY THE ASSESSEE WAS THUS LIABLE TO BE DRAWN. THE LD. A.R FURTHER S UBMITTED THAT THE AFORESAID COMPARABLE HAD DULY BEEN HELD BY THE TRIBUNAL AS BEING FUNCTIONALLY COMPARABLE IN THE CASE OF SIMILARLY PLACED ASSESSEES WHO WERE ENGAGED IN INVESTMENT ADVISORY SERVICES, AND IN SUPPORT THEREOF RELIED ON THE FOLLOWING ORDERS OF THE COORDINATE BENCHES OF THE TRIBUNAL: - (I) DCIT VS. TEMASEK HOLDINGS ADVISORS PVT. LTD., (ITA NO.968/MUM/2014, DATED 27.06.2014 - A.Y 2009 - 10). (II) TEMASEK HOLDINGS ADVISORS INDIA PVT. LTD., VS. DCIT (ITA NO. 776/MUM/2015, DATED 25.02.2016 - A.Y. 2010 - 1 1). (III) M/S GENERAL ATLANTIC PVT. LTD., VS. DCIT (ITA NO. 199/MUM/2014, DATED 06.11.2015 - A.Y 2009 - 10). 7 ITA NO. 5411/MUM/2016 (IV) AVENUE ASIA ADVISORS PVT. LTD. VS. DCIT (ITA NO. 6638/DEN/2013, DATED 22.01.2016 - A.Y 2009 - 10). (V) AGM INDIA ADVISORS PVT. LTD. VS. DCIT (ITA NO. 4456/MUM/2015, DATED 18.05.2016 AY 2010 - 11). THE LD. AR FURTHER DRAWING SUPPORT FROM THE FACT THAT THE AFORESAID ORDER OF THE TRIBUNAL SO PASSED IN THE CASE OF GENERAL ATLANTIC PVT. LTD. (SUPRA) HAD THEREAFTER BEEN UPHELD BY THE HON'BLE HIGH COURT OF B OMBAY IN THE CASE OF : CIT VS. GENERAL ATLANTIC PVT. LTD. (ITA NO. 8914 OF 2010, DATED 08.03.2016 - A.Y 2006 - 07), THEREIN SUBMITTED THAT NOW WHEN PURSUANT TO THE AFORESAID JUDGMENT OF THE HON'BLE HIGH COURT THE FUNCTIONAL COMPARABILITY OF THE AFORESAID COM PARABLE WAS NO MORE RES - INTEGRA THEREFORE THE ADVERSE INFERENCES SO DRAWN BY THE LOWER AUTHORITIES WERE LIABLE TO BE SET ASIDE. THAT ON THE OTHER HAND THE LD. D.R THOUGH CONCEDED TO THE FACT THAT THE RPT IN THE CASE OF THE AFORESAID COMPARABLE WAS 14%, BU T HOWEVER DRAWING SUPPORT FROM THE DIRECTOR'S REPORT FOR THE YEAR UNDER CONSIDERATION, THEREIN SUBMITTED THAT THE FOCUS AREA OF THE SAID COMPARABLE, VIZ ICRA MANAGEMENT CONSULTING SERVICES LTD. (SUPRA) WAS NOT MERELY INVESTMENT ADVISORY FUNCTIONS, BUT RATH ER THE SAME WAS SUBSTANTIALLY FUNCTIONALLY DIFFERENT. IT WAS FURTHER AVERRED BY THE LD. D.R THAT A PERUSAL OF THE 'PROFIT AND LOSS ACCOUNT' OF THE AFORESAID COMPARABLE, WHICH FORMED PART OF THE APB REVEALED THAT THE SAID COMPARABLE UNLIKE THE ASSESSEE WAS NOT MERELY INTO PROVIDING SERVICES, BUT WAS ALSO INTO SALES, AND AS SUCH NO FEASIBLE COMPARISON COULD BE CARRIED OUT AS AGAINST THE BUSINESS OF THE ASSESSEE COMPANY. THUS, IN THE BACKDROP OF THE AFORESAID SUBMISSIONS IT WAS SUBMITTED BY THE LD. D.R THAT TH E AFORESAID COMPARABLE, VIZ ICRA MANAGEMENT CONSULTING SERVICES LTD. (SUPRA) HAD RIGHTLY BEEN EXCLUDED BY THE TPO, WHICH THEREAFTER HAD BEEN SUSTAINED BY THE CIT(A). WE HAVE HEARD THE LD. REPRESENTATIVES, PERUSED THE RECORD AND ARE UNABLE TO PERSUADE OURSE LVES TO BE IN AGREEMENT WITH THE OBSERVATIONS OF THE LOWER AUTHORITIES WHICH HAD EXCLUDED THE AFORESAID COMPARABLE SELECTED BY THE ASSESSEE COMPANY. WE ARE UNABLE TO SUBSCRIBE TO THE AVERMENTS MADE BEFORE US BY THE LD. D.R THAT AS THE AFORESAID COMPARABLE WAS FUNCTIONALLY INCOMPARABLE, THEREFORE THE SAME HAD RIGHTLY BEEN EXCLUDED BY THE TPO. WE FIND THAT THE TPO HAD NEVER DRAWN ADVERSE INFERENCES AS REGARDS SELECTION OF THE SAID COMPARABLE BY THE ASSESSEE ON THE GROUND OF FUNCTIONAL INCOMPARABILITY, BUT AS OBSERVED BY US HEREINABOVE, HAD EXCLUDED THE SAME FOR THE REASON THAT THERE WERE SIGNIFICANT RPT AND ALSO BECAUSE THE SAID COMPARABLE WAS A LOSS MAKING ENTITY. WE ARE OF THE CONSIDERED VIEW THAT NOW WHEN AS OBSERVED BY US HEREINABOVE, THE AFORESAID COMPARA BLE CANNOT BE HELD TO BE A PERSISTENT LOSS MAKING COMPANY, COUPLED WITH THE CONCEDED FACT THAT THE RPT OF THE SAID COMPANY WAS 14%, THAT IS MUCH LESS THAN 25% WHICH HAD CONSISTENTLY BEEN ADOPTED AS A YARDSTICK FOR JUSTIFYING THE INCLUSION OR NOT OF A COMPA RABLE, THEREFORE NOW WHEN NEITHER OF THE AFORESAID OBSERVATIONS/FINDINGS OF THE TPO CAN BE SUSTAINED, WE THUS FIND NO JUSTIFICATION IN UPHOLDING THE ORDER OF THE TPO, WHICH THEREAFTER HAD BEEN SUSTAINED BY THE CIT(A). THUS IN LIGHT OF AFORESAID OBSERVATION S, WE HEREIN SET ASIDE THE ORDER OF THE LOWER AUTHORITIES WHICH HAD EXCLUDED THE AFORESAID COMPARABLE, VIZ ICRA 8 ITA NO. 5411/MUM/2016 MANAGEMENT CONSULTING SERVICES LTD., (SUPRA) FROM THE LIST OF THE COMPARABLES SELECTED BY THE ASSESSEE, AND DIRECT ACCORDINGLY. 15. IN THE BACKGROUND OF THE AFORESAID PRECEDENT'S , WE DIRECT THAT THE ABOVE COMPARABLE SHOULD BE INCLUDED IN THE LIST OF COMPARABLES. THE ORDER OF LEARNED CIT - A ACCORDINGLY STANDS MODIFIED . 16. I N THE RESULT , THE ASSESSEE'S APPEAL IS PARTLY ALLOWED AS ABOVE . ORDER PRONOUNCED IN THE OPEN COURT ON 0 7 . 1 2 . 2 0 1 8 S D / - S D / - ( PAWAN SINGH ) (SHAMIM YAHYA) JUDICIAL MEMBER ACCOUNTANT MEMBER MUMBAI ; DATED : 0 7 . 1 2 . 2 0 1 8 ROSHANI , SR. PS COPY OF THE ORDER FORWARDED TO : 1. THE APPELLANT 2. THE RESPONDENT 3. THE CIT(A) 4. CIT - CONCERNED 5. DR, ITAT, MUMBAI 6. GUARD FILE BY ORDER, (DY./ASSTT. REGISTRAR) ITAT, MUMBAI