ChrysCapital Investment Advisors India Pvt. Ltd., New Delhi V. DCIT, New Delhi

ITA 6183/DEL/2012

• Counselvise Citation: [2013] 140 COUNSELVISE.COM (IT) 69664 (ITAT-DELHI)
• Duration Of Justice: 1 year(s) 7 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 20-12-2013
• Appeal Filed By: Assessee
• Order Result: Dismissed
• Bench Allotted: I
• Next Hearing Date: 26-09-2013
• Assessment Year: 2008-2009
• Appeal Filed On: 13-12-2012
• Result in Favour of: Revenue
• Court: TRIBUNAL
• Department Lawyers: PEEYUSH JAIN; YOGESH KUMAR VERMA
• Assessee Lawyers: S R PATHAK; ATUL NINAWAT CAS
• Keywords: Transfer pricing; International transaction
• Section: 143(3); 10B

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL (DELHI BENCH I : NEW DELHI) BEFORE SHRI R.P. TOLANI, JUDICIAL MEMBER AND SHRI B.C. MEENA, ACCOUNTANT MEMBER ITA NO.6183/DEL./2012 (ASSESSMENT YEAR : 2008-09) CHRYSCAPITAL INVESTMENT ADVISORS VS. DCIT, INDIA PRIVATE LIMITED, CIRCLE 3 (1), SUITE 101, THE OBEROI, NEW DELHI. DR. ZAKIR HUSSAIN MARG, NEW DELHI 110 003. (PAN : AABCC4609H) (APPELLANT) (RESPONDENT) ASSESSEE BY : SHRI S.R. PATHAK, ADVOCATE AND SHRI MAYANK AGGARWAL & ATUL NINAWAT, CAS REVENUE BY : SHRI PEEYUSH JAIN, CIT DR AND SHRI YOGESH KUMAR VERMA, CIT DR ORDER PER B.C. MEENA, ACCOUNTANT MEMBER : THIS APPEAL FILED BY THE ASSESSEE EMANATES FROM TH E ORDER OF THE ASSESSING OFFICER U/S 143(3) READ WITH SECTION 144C OF THE INCOME-TAX ACT, 1961 DATED 19.10.2012 FOR THE ASSESSMENT YEAR 2008-09. 2. THE ASSESSEE COMPANY IS ENGAGED IN PROVIDING INV ESTMENT ADVISORY SERVICES TO THE ASSOCIATED ENTERPRISES (AES). THE A SSESSEE HAS ENTERED INTO TWO INTERNATIONAL TRANSACTION WITH THE AES, ON E AS AN ADVISORY SERVICES FOR WHICH THE AMOUNT OF RS.56,61,99,829/- WAS RECEIVED AND ITA NO.6183/DEL/2012 2 ANOTHER IS REIMBURSEMENT OF EXPENSES INCURRED ON BE HALF OF THE AES OF RS.4,49,72,912/-. IN ORDER TO ESTABLISH THAT THE TR ANSACTIONS BETWEEN THE ASSESSEE AND ITS AES WERE AT ARMS LENGTH PRICE (ALP ), THE ASSESSEE PERFORMED AN ARMS LENGTH ANALYSIS. IN ITS ANALYSIS, THE ASSESSEE IDENTIFIED FOUR ENTITIES AS COMPARABLE AND REACHED AT A CONCLU SION THAT AVERAGE MARGINS OF THESE FOUR ENTITIES COMES TO 4.04% WHILE THE ASSESSEE HAS EARNED OPERATING PROFIT (OP) MARGIN OF 27.05% AND C LAIMED THAT THE TRANSACTIONS WITH AES WERE AT ALP. THE ASSESSING OF FICER/TPO REJECTED THE ALP COMPUTED BY THE ASSESSEE. THE TPO/ASSESSING OFFICER USED THE SINGLE YEAR DATA FOR THE FINANCIAL YEAR 2007-08 AND ALSO INTRODUCED TO INCLUDE TWO COMPANIES AS COMPARABLES, ONE BRESCON C ORPORATE ADVISORS LTD. AND ANOTHER KEYNOTE CORPORATE SERVICES LTD., F OR THE PURPOSES OF DETERMINING THE ALP. THE ASSESSEE FILED THE OBJECTI ONS BEFORE THE DRP ON THE ISSUES OF USING SINGLE YEAR DATA FOR MAKING THE TP ADJUSTMENTS, INTRODUCTION OF TWO NEW COMPANIES AS COMPARABLES, S USTAINING THE SELECTION OF KHANDWALA SECURITIES LTD. AS COMPARABL E BY IGNORING THE EXCEPTIONAL PROFITS EARNED BY IT, CONSIDERING THE R EIMBURSEMENT OF EXPENSES AS A PART OF THE OPERATING EXPENSES AND CO RRESPONDING REIMBURSEMENT AS A PART OF OPERATING REVENUE FOR DE TERMINING ALP AND NOT PROVIDING ADJUSTMENT OF +/- 5% BY PROVISO TO SE CTION 92C(2) OF THE INCOME-TAX ACT, 1961. THESE OBJECTIONS WERE CONSIDE RED BY THE DRP. LD. DRP SUSTAINED THE ORDER OF THE TPO FOR APPLYING THE FILTERS BY THE TPO IN ITA NO.6183/DEL/2012 3 CONSIDERATION OF THE PROFILE OF THE ASSESSEE COMPAN Y. FURTHER, THE DRP HAS ALSO UPHELD THE APPLICATION OF ADDITIONAL FILTE RS BASED ON THE FINANCIALS OF THE COMPANIES TO ARRIVE AT THE SET OF COMPARABLE S. THE DRP ALSO REJECTED THE ASSESSEES CLAIM FOR USING PRIOR YEARS DATA FOR WORKING OUT THE COMPARATIVE ANALYSIS IN THE ABSENCE OF CONDITIO NS MENTIONED IN THE PROVISO TO SECTION 92C(2) OF THE INCOME-TAX ACT, 19 61 AS ASSESSEE HAS NOT DEMONSTRATED THAT THE DATA IN THOSE YEARS WOULD MAT ERIALLY AFFECT THE TRANSACTIONS CARRIED OUT IN THE CURRENT YEAR. AFTER CONSIDERING ALL THE OBJECTIONS OF THE ASSESSEE, LD. DRP HELD THAT KEEPI NG THE TOTALITY OF THE ISSUE IN MIND, THERE WERE FLAWS IN THE SEARCH PROCE SS CARRIED OUT BY THE ASSESSEE AND THE TPO HAS CORRECTLY CARRIED OUT RE-R UN OF THE SEARCH PROCESS AND THE ORDER OF THE TPO WAS UPHELD. WITH R ESPECT TO THE OBJECTION FOR TWO COMPANIES TAKEN AS COMPARABLES, I .E. BRESCON CORPORATE ADVISORS LIMITED AND KEYNOTE CORPORATE SE RVICES LIMITED, THE DRP REACHED AT A CONCLUSION THAT THE SELECTION OF T HESE TWO COMPANIES WAS NOT FLAWED AND UPHELD THE ORDER OF THE TPO. THE OTHER OBJECTION REGARDING HIGH MARGINS AND LOSS MAKING COMPARABLES, THE DRP REACHED AT A CONCLUSION THAT AVERAGE METHOD TO EVEN OUT THE OU TLIER IN THE LONG RUN AND THE OBJECTION WAS DISMISSED. WITH REGARD TO THE REIMBURSEMENT OF THE EXPENSES ALSO, THE ORDER OF THE TPO WAS UPHELD BY T HE DRP. 3. NOW, THE ASSESSEE IS IN APPEAL BEFORE US ON THE ISSUE OF TRANSFER PRICING BY TAKING THE FOLLOWING GROUNDS :- ITA NO.6183/DEL/2012 4 2. THE LD. AO, THE LEARNED TRANSFER PRICING OFFICE R (HEREINAFTER REFERRED AS 'TPO') AND THE LEARNED DIS PUTE RESOLUTION PANEL (HEREINAFTER REFERRED AS 'DRP') HA VE ERRED IN LAW AS WELL AS FACTS OF THE CASE IN NOT ACCEPTIN G THE ARM'S LENGTH PRICE (HEREINAFTER REFERRED AS ALP') DETERM INED BY THE APPELLANT. 3. THE LD. AO / TPO / DRP HAVE ACTED MECHANICALLY AND PASSED THE ORDER IN A MECHANICAL MANNER WITHOUT APPLICATION OF MIND AND WITHOUT UNDERSTANDING THE INTRICACIES OF THE INTERNATIONAL TRANSACTIONS UNDER TAKEN BY THE APPELLANT. 4. THE LD. AO / TPO / DRP HAVE ERRED IN DETERMINING THE ALP ON THE BASIS OF DATA FOR FINANCIAL YEAR 200 7-08 ONLY AND IGNORING THE DATA FOR TWO PRIOR FINANCIAL YEARS I.E. FY 2005-06 AND FY 2006-07. 5. THE LD. AO / TPO HAVE ERRED IN INTRODUCING AND D RP IN UPHOLDING 2 NEW COMPANIES AS COMPARABLES WHILE DETERMINING THE ALP. 6. THE LD. AO / TPO / DRP HAVE ERRED IN SUSTAINING THE SELECTION OF KHANDWALA SECURITIES LIMITED AS COMPAR ABLE AND IGNORING THE EXCEPTIONAL PROFITS EARNED BY IT D URING THE FINANCIAL YEAR 2007-08. 7. THE LD. AO / TPO / DRP HAS ERRED IN CONSIDERING THE REIMBURSABLE EXPENSES AND THE CORRESPONDING REIMBURSEMENTS AS PART OF OPERATING EXPENSES AND OP ERATING INCOME, RESPECTIVELY, OF THE APPELLANT WHILE DETERM INING THE ALP. 8. THE LD. AO / TPO / DRP HAVE ERRED IN NOT ALLOWIN G THE BENEFIT OF 5% AS PROVIDED BY PROVISO TO SECTI ON 92C(2) OF THE ACT. 4. WHILE PLEADING ON BEHALF OF THE ASSESSEE THE LD. AR SUBMITTED THAT THE ASSESSEE HAS DETERMINED THE ALP AFTER CAREFUL C ONSIDERATION OF RELEVANT FACTORS AS THE ASSESSEE WAS FULLY CONVERSA NT WITH VARIOUS ITA NO.6183/DEL/2012 5 COMMERCIAL REALITIES SURROUNDING ASSESSEES BUSINES S AND A COMPREHENSIVE INTERNAL ANALYSIS OF THE FUNCTION PER FORMED, ASSETS DEPLOYED AND RISK UNDERTAKEN WAS CARRIED OUT. THE R EVENUE AUTHORITIES HAVE REJECTED THIS ANALYSIS WITHOUT ANY REASON. HE FURTHER SUBMITTED THAT THE REVENUE AUTHORITIES WERE NOT JUSTIFIED IN USING THE SINGLE YEAR DATA AND IGNORING THE DATAS FOR THE TWO PRECEDING YEARS WHIL E DETERMINING THE ALP. LD. AR ALSO SUBMITTED THAT THE TPO/ASSESSING O FFICER WAS NOT JUSTIFIED BY ADOPTING TWO NEW COMPANIES, BRESCON CO RPORATE ADVISORS LIMITED AND KEYNOTE CORPORATE SERVICES LIMITED, AS COMPARABLES FOR THE PURPOSES OF DETERMINING ALP. LD. AR ALSO SUBMITTED THAT THE REVENUE AUTHORITIES WERE NOT JUSTIFIED IN SUSTAINING THE KH ANDWALA SECURITIES LTD. AS COMPARABLE IGNORING EXCEPTIONAL PROFIT EARNED BY THAT COMPANY. FURTHER THE EXPENSES INCURRED BY ASSESSEE ON BEHALF OF AES WAS WRONGLY TAKEN AS PART OF OPERATING EXPENSES OF THE ASSESSEE AND WRONGLY TAKEN CORRESPONDING REIMBURSEMENT AS PART OF OPERATING RE VENUE AS DETERMINED. THE REVENUE AUTHORITIES ARE NOT JUSTIFIED IN TREATI NG THESE REIMBURSABLE EXPENSES AS PART OF THE OPERATING EXPENSES AND WORK ING OUT OPERATING INCOME. THESE REIMBURSED EXPENSES WERE NOT HAVING A NY RELATION WITH THE OPERATING ACTIVITY OF THE ASSESSEE, HENCE SHOULD NO T BE CONSIDERED AS A PART OF OPERATING ITEMS. LD. AR ALSO SUBMITTED THAT THE REVENUE AUTHORITIES WERE NOT JUSTIFIED IN NOT MAKING ADJUST MENT OF +/- 5% WHILE ITA NO.6183/DEL/2012 6 DETERMINING ALP AS PROVIDED IN PROVISO TO SECTION 9 2C(2) OF INCOME-TAX ACT, 1961. 5. ON THE OTHER HAND, THE LD. DR RELIED ON THE ORDE R OF THE AUTHORITIES BELOW AND ALSO SUBMITTED THAT ASSESSEE HAS CHOSEN T RANSACTIONAL NET MARGIN METHOD (TNMM) AS THE MOST APPROPRIATE METHOD WITH OPERATING PROFIT/OPERATING COST (OP/OC) AS THE PROFIT LEVEL I NDICATOR TO BENCHMARK ALP OF THE INTERNATIONAL TRANSACTION RELATING TO TH E ADVISORY SERVICES. THE ASSESSEE USED MULTIPLE YEAR DATA TO BENCHMARK THE I NTERNATIONAL TRANSACTION TO DETERMINE THE MARGIN OF COMPARABLES IN THE TP STUDY. LD. DR SUBMITTED THAT AS PER RULE 10B(4) OF THE INCOME- TAX RULE, 1962, THE DATA TO BE USED IN ANALYZING THE COMPARABILITY OF I NTERNATIONAL TRANSACTION WITH AN INTERNATIONAL TRANSACTION SHALL BE THE DATA RELATING TO THE FINANCIAL YEAR IN WHICH THE INTERNATIONAL TRANSACTION ENTERED INTO. THE PRIOR PERIOD DATA FOR TWO YEARS MAY BE CONSIDERED IF SUCH DATA R EVEALS FACTS WHICH COULD HAVE AN INFLUENCE ON THE DETERMINATION OF TRA NSFER PRICING IN RELATION TO TRANSACTIONS BEING COMPARED. IN ASSESSE ES CASE, THERE IS NOTHING ESTABLISHED BY THE ASSESSEE WHICH CAN INVOK E THE PROVISO TO RULE 10B(4) OF INCOME-TAX RULES, 1962. THEREFORE, THE AS SESSING OFFICER, AS APPROVED BY THE DRP, HAS RIGHTLY USED THE CURRENT Y EAR DATA. HE FURTHER SUBMITTED THAT THIS PROPOSITION HAS BEEN UPHELD BY VARIOUS DECISIONS OF ITAT INCLUDING THE CASES OF AZTECH SOFTEARE TECHNOL OGY 294 ITR (AT)(32)(BANG.)(SB) AND HONEYWELL LTD. 2009-TIOL- 104-ITAT-PUNE. ITA NO.6183/DEL/2012 7 SIMILAR VIEW HAS ALSO BEEN HELD IN THE CASE OF THE MENTOR GRAPHICS (NOIDA) PVT. LTD. VS. DCIT [2007] 109 ITD 101 (DE LHI) AND MANY OTHER CASES. ON THE ISSUE OF EXTREME RESULTS COMPARABLES IN THE CASES OF BRESCON CORPORATE ADVISORS LTD., KEYNOTE CORPORATE SERVICES LTD. AND KHANDWALA SECURITIES LTD., THE LD. DR SUBMITTED THA T THERE IS NO SUCH LAW WHICH PROVIDES THAT HIGH MARGINS COMPARABLES SHOULD BE REJECTED. LD. DR SUBMITTED THAT THE LAW PROVIDES FOR AN AVERAGE T HAT IS MEAN OF THE COMPARABLES. IF THE HIGH PROFIT AND LESS PROFIT COM PARABLES ARE REMOVED THEN IT WILL GIVE THE RESULT OF MEDIUM RATHER THAN MEAN AND IT WILL GO AGAINST THE LAW. THEREFORE, HIGH LOSS MAKING COMPAN Y AS WELL AS HIGH PROFIT MAKING COMPANY CANNOT BE REJECTED OR TAKEN O UT OF THE COMPARABLES. HE FURTHER SUBMITTED THAT THE LAW PROV IDES FOR WORKING OUT THE AVERAGE AND BY THIS VARIATIONS ARE IRON OUT. LD . DR SUBMITS THAT LAW ALSO PROVIDES +/- 5% MARGIN TO TAKE CARE OF SUCH EV ENTUALITIES. THEREFORE, THE ASSESSEES GROUND IN THIS REGARD DESERVES TO BE DISMISSED. LD. DR SUBMITTED THAT TWO COMPARABLES, I.E. BRESCON CORPOR ATE ADVISORS LTD. AND KEYNOTE CORPORATE SERVICES LTD. ADDED BY TPO AS COMPARABLES WERE ALSO JUSTIFIED AS BOTH THE COMPANIES WERE ALSO PERF ORMING THE SAME FUNCTIONS WHICH THE ASSESSEE IS DOING. BRESCON CORP ORATE ADVISORS LTD. APPEARS IN THE INITIAL LIST OF THE COMPANIES GENERA TED BY THE SEARCH PROCESS AND THE ASSESSEE HAS ELIMINATED ONLY ON THE BASIS O F HIGH PROFITS AND, THEREFORE, THIS COMPANY MEETS ALL THE CRITERIA WITH REGARD TO THE SELECTION ITA NO.6183/DEL/2012 8 OF COMPANIES AND HIGH PROFIT MARGINS CANNOT BE A RE ASON FOR DIFFERENCE FOR REJECTION OF THE SAME, THEREFORE, BRESCON CORPO RATE ADVISORS LTD. SHOULD NOT BE ELIMINATED FROM THE COMPARABLES. WITH RESPECT TO KEYNOTE CORPORATE SERVICES LTD., THE LD. DR SUBMITTED THAT THE ASSESSEE HIMSELF HAS TAKEN IT AS A COMPARABLE IN THE PREVIOUS YEAR A ND IN THIS YEAR ALSO, IT QUALIFIES AS A COMPARABLE BASED ON THE ASSESSEES R ESEARCH PROCESS AND ASSESSEES CLAIM THAT IT WAS ENGAGED IN DIFFERENT K IND OF SERVICES WAS NOT JUSTIFIED. FURTHER, WITH RESPECT TO KHANDWALA SECUR ITIES LTD., THE LD. DR SUBMITTED THAT IT WAS SUBMITTED BY THE ASSESSEE ITS ELF HAS SELECTED AND ASSESSEE HAS TRIED TO TAKE IT OUT OF COMPARABLES FO R THE REASON THAT IT WAS HAVING HIGH MARGINS. THEREFORE, ALL THESE THREE COM PANIES DESERVE TO BE COMPARABLES AND THE REVENUE AUTHORITIES HAS RIGHTLY DONE SO. 6. WITH REGARD TO THE REIMBURSEMENT, LD. DR SUBMITT ED THAT THE TPO HAS EXAMINED REIMBURSEMENT WITH RESPECT TO THE SCOP E OF THE AGREEMENT BETWEEN THE ASSESSEE AND AES AND WHEREIN IT WAS CAT EGORICALLY AND CLEARLY STIPULATED THAT ASSESSEE SHALL, WHERE APPRO PRIATE, ARRANGED FOR AND COORDINATE THE SERVICES OF OTHER INVESTMENT PROFESS IONAL AND CONSULTANTS. THIS IS VERY CLEAR FROM THE RELEVANT CLAUSE WITH RE GARD TO THE INVESTMENT ADVISOR DUTIES WHICH ASSESSEE HAS TO PERFORM FOR TH E AES. THEREFORE, ALL THE EXPENSES INCURRED ON BEHALF OF THE AE S ARE INV ARIABLY ROUTED THROUGH THE PROFIT AND LOSS AND RESULTING MARGINS SHALL BE RELIED UPON IN ANALYZING THE PROFITABILITY OF THE TESTED PARTY. THE REIMBURS EMENT EXPENSES WERE ITA NO.6183/DEL/2012 9 TOWARDS CARRYING OUT THE CORE OPERATION OF THE ASSE SSEE, THEREFORE, THESE HAVE TO BE TAKEN AS OPERATIONAL EXPENSES AND THE DR P HAS RIGHTLY APPROVED THE INCLUSION OF THE REIMBURSEMENT EXPENSE S IN THE OPERATING INCOME AND THE REIMBURSEMENT SHOULD BE ROUTED THROU GH THE PROFIT & LOSS ACCOUNT. 7. WE HAVE HEARD BOTH THE SIDES ON ALL THE ISSUES W ITH REGARD TO THE TRANSFER PRICING. THE ISSUE RAISED REGARDING THE DE TERMINING THE ALP ON THE BASIS OF CURRENT YEAR DATAS AND NOT CONSIDERING TO PRIOR TWO FINANCIAL YEARS 2005-06 AND 200607, WE HOLD THAT IN ORDER TO DETERMINE THE ARMS LENGTH PRICE IN RELATION TO INTERNATIONAL TRANSACTI ON, IT HAS TO BE COMPARED WITH UNCONTROLLED AND UNRELATED TRANSACTIONS BY USI NG THE DATA RELATING THE FINANCIAL YEAR IN WHICH YEAR THE INTERNATIONAL TRAN SACTION HAS BEEN ENTERED INTO. IT HAS BEEN STIPULATED UNDER RULE 10B(4) READ WITH RULE 10D(4) OF INCOME-TAX RULES, THAT CONTEMPORANEOUS INFORMATION AND DOCUMENT SHOULD BE CONSIDERED AS FAR AS POSSIBLE FOR THE PUR POSE OF COMPARING UNCONTROLLED TRANSACTION WITH THE INTERNATIONAL TRA NSACTION. THEREFORE, THE COMPARABILITY OF AN UNCONTROLLED AND UNRELATED TRAN SACTION WITH THE INTERNATIONAL TRANSACTION HAS TO BE DECIDED BY USIN G CURRENT YEAR DATA. ONLY WHEN THE CURRENT YEAR DATA DOES NOT GIVE A TRU E PICTURE OF THE AFFAIRS AND RESULTS OF THE COMPARABLES DUE TO EXISTENCE OF ABNORMAL CIRCUMSTANCES, THE MULTI YEAR DATA CAN BE CONSIDERE D. WHEN THERE IS NO SUCH ABNORMAL OR EXCEPTIONAL CIRCUMSTANCES/ FACTS I N EXISTENCE FOR THE ITA NO.6183/DEL/2012 10 YEAR UNDER CONSIDERATION WHICH COULD HAVE AN INFLUE NCE ON THE RESULTS AS WELL AS ON THE DETERMINATION OF THE TRANSFER PRICES , THEN THE DATA RELATING TO FINANCIAL YEAR IN WHICH THE INTERNATIONAL TRANSA CTION HAS BEEN ENTERED INTO SHALL BE USED. ACCORDINGLY, WE FIND NO FORCE/S UBSTANCE IN THIS GROUND OF ASSESSEES APPEAL, HENCE THE SAME STANDS DISMISS ED. 8. THE OTHER GROUND IN THE ASSESSEES APPEAL IS INT RODUCING AND UPHOLDING TO NEW COMPANIES AS COMPARABLES WHILE DET ERMINING THE ALP. WE HAVE HEARD BOTH THE SIDES ON THE ISSUE OF BRINGI NG IN TWO NEW COMPANIES, I.E. BRESCON CORPORATE ADVISORS LTD. AND ANOTHER KEYNOTE CORPORATE SERVICES LTD. AS COMPARABLE FOR THE PURPO SE OF DETERMINING THE ALP. THE LD. AR HAS OBJECTED THE INCLUSION OF THESE TWO PARTIES FIRSTLY ON ACCOUNT OF EXCEPTIONALLY HIGH PROFITS AND NOT ACCEP TING THE SAME AS COMPARABLE COMPANIES. THE FACTORS FOR DETERMINING I NCLUSION AND EXCLUSION OF ANY CASE IN THE CASE OF COMPARABLES A RE SPECIFICALLY PROVIDED UNDER RULE. THEREFORE, UNLESS AND UNTIL TH ERE ARE SPECIFIC REASONS AND FACTORS AS PROVIDED UNDER RULE 10B, AN ENTITY CANNOT BE EXCLUDED OR ELIMINATED FROM THE LIST OF COMPARABLES SOLELY ON THE BASIS OF HIGH PROFIT MAKING UNIT OR LOSS MAKING UNIT BECAUSE NO SUCH FACTOR FINDS PLACE EITHER IN RULE 10B(2) OR 10B(3). THEREFORE, THIS GROUND OF ASSESSEES APPEAL HAS NO MERITS AND THE SAME IS DIS MISSED. 9. THE OTHER GROUND IS AGAINST SUSTAINING THE SELEC TION OF KHANDWALA SECURITIES LTD. AS COMPARABLE EVEN WHEN EXCEPTIONAL PROFIT EARNED BY THIS ITA NO.6183/DEL/2012 11 COMPANY DURING THE FINANCIAL YEAR 2007-08. AS WE HA VE ALREADY MENTIONED EARLIER THAT RULE 10B DOES NOT PROVIDE TH E BASIS TO EXCLUDE AN ENTITY OR ELIMINATE IT FROM THE LIST FROM COMPARABL ES SOLELY ON THE BASIS OF HIGH PROFIT MAKING, FOR SAME REASONS, WE FIND NO ME RITS IN THIS GROUND OF ASSESSEES APPEAL ALSO. IT IS EVIDENT THAT DECISIVE FACTORS FOR DETERMINING INCLUSION OR EXCLUSION OF ANY CASE IN/FROM THE LIST OF COMPARABLES ARE THE SPECIFIC CHARACTERISTICS OF SERVICES PROVIDED, ASSE TS EMPLOYED, RISK ASSUMED, THE CONTRACTUAL TERMS AND CONDITIONS PREVA ILING INCLUDING THE GEOGRAPHICAL LOCATION AND SIZE OF THE MARKET, COST OF LABOUR AND CAPITAL IN THE MARKETS, ETC. NOWHERE THE HIGHER OR LOWER PROFI T RATE HAS BEEN PRESCRIBED AS THE DETERMINATIVE FACTOR TO MAKE A CA SE IN COMPARABLE. IT HAS BEEN DONE RIGHTLY SO BECAUSE PROFIT IS NOT A FA CTOR ITSELF, BUT CONSEQUENCE OF EFFECTS OF VARIOUS FACTORS. ONLY IF THE HIGHER OR LOWER PROFIT RATE RESULTS ON ACCOUNT OF EFFECT OF FACTORS GIVEN IN RULE 10B(2) READ WITH SUB-RULE (3), THAT SUCH CASE SHALL MERIT OMISSION THEN ONLY IT CAN BE CONSIDERED. HIGHER PROFITS ACHIEVED DUE TO FACTO RS NOT MENTIONED IN THE RULE THEN SUCH CASE SHALL BE CONTINUED TO FIND PLAC E IN THE LIST OF COMPARABLES. SIMILAR VIEW HAS BEEN APPROVED BY VARI OUS COORDINATE BENCHES OF THE TRIBUNAL INCLUDING EXXON MOBIL COMPA NY INDIA (P.) LTD. - (2011-TTJ-68-ITAT-MUMTP) AND DCIT VS. M/S. B.P. I NDIA SERVICES (P.) LTD. ITA NO.4425/MUM/2010 ASSESSMENT YEAR 20 04-05. ITA NO.6183/DEL/2012 12 10. THE OTHER GROUND IN THE ASSESSEES APPEAL IS RE GARDING CONSIDERING THE REIMBURSABLE EXPENSES AND CORRESPONDING REIMBUR SEMENTS AS PART OF OPERATING EXPENSES AND OPERATING INCOME RESPECTIVEL Y OF THE ASSESSEE WHILE DETERMINING THE ALP. 11. AFTER HEARING BOTH THE SIDES, WE FIND THAT THE FUNCTIONAL ANALYSIS REVEALS THAT CERTAIN EXPENSES AMOUNTING TO RS.4.9 C RORES HAS BEEN INCURRED IN THE COURSE OF SERVICES. MOREOVER, THE A GREEMENTS OF THE ASSESSEE WITH AES STIPULATE THAT ALL ANCILLARY EXPE NSES IN CONNECTION WITH THE SERVICES RELATED TO THE FUNCTION SHALL BE PAID OUT OF THE FIXED FEES PAID BY THE MANAGEMENT COMPANIES. THE EXPENSES INCURRED TO WITH RELATION TO SERVICES PERFORMED BY THE ASSESSEE, EVEN IF NOT PAR T OF THE MANAGEMENT FEE, SHOULD BE INVARIABLY ROUTED THROUGH THE PROFIT AND LOSS ACCOUNT AND INVITED AN APPROPRIATE MARK UP. IN VIEW OF THESE FA CTS, WE FIND NO INFIRMITY IN INCLUDING THE REIMBURSEMENT AMOUNTING TO RS.4.9 CRORES IN THE COST BASE AND WE DISMISS THIS GROUND OF ASSESSE ES APPEAL. 12. THE OTHER GROUND IS RELATING TO NOT ALLOWING BE NEFIT OF +/- 5% AS PROVIDED BY PROVISO TO SECTION 92C(2) OF THE ACT. 13. WE HAVE HEARD BOTH THE SIDES ON THIS ISSUE. THI S ISSUE HAS BEEN SETTLED BY THE AMENDMENT MADE BY THE FINANCE ACT, 2 012 RETROSPECTIVELY THEREBY IT HAS BEEN MADE CLEAR THAT BENEFIT OF +/- 5% UNDER THE PROVISO TO SECTION 92C(2) OF THE ACT SHALL NOT BE ALLOWED AS S TANDARD DEDUCTION FOR THE PURPOSE OF COMPUTATION OF ARMS LENGTH PRICE. T HE BENEFIT OF PROVISO ITA NO.6183/DEL/2012 13 TO SECTION 92C(2) IS AVAILABLE ONLY WHEN THE PRICE OF INTERNATIONAL TRANSACTION IS WITHIN THE TOLERANCE RANGE OF +/- 5% OF THE ALP COMPUTED BY TAKING ARITHMETIC MEAN OF MORE THAN ONE PRICE. T HUS, IT IS CLEAR THAT BENEFIT UNDER THIS PROVISO IS NOT AVAILABLE TO THE ASSESSEE. THEREFORE, WE FIND NO MERITS IN THIS GROUND OF ASSESSEES APPEAL AND DISMISS THE SAME. 14. THEREFORE, ALL THE GROUNDS RAISED IN THE APPEAL WITH REGARD TO THE TRANSFER PRICING STAND DISMISSED. 15. IN THE GROUND NO.9, THE ISSUE RAISED IS A CORPO RATE ISSUE. THE ASSESSEE HAD CHALLENGED THE DISALLOWANCE OF BONUS A MOUNTING TO RS.98,11,380/- PAID BY THE ASSESSEE TO ITS SHAREHOL DERS-CUM-DIRECTORS, SHRI ASHISH DHAWAN, M.D. AND SHRI KUNAL SHROFF, DIR ECTOR U/S 36(1)(II) OF THE INCOME-TAX ACT, 1961. 16. WHILE PLEADING ON BEHALF OF THE ASSESSEE THE LD . AR SUBMITTED THAT THE ASSESSEE HAS PAID BONUS TO IS MANAGING DIRECTOR , ASHISH DHAWAN AND KUNAL SHROFF OF RS.67,91,947/- AND RS.30,19,433/- R ESPECTIVELY WHO ARE ALSO THE SHAREHOLDERS OF THE ASSESSEE COMPANY AND H OLDING THE SHARE CAPITAL IN THE RATIO OF 2 : 1. THE ASSESSEE COMPANY HAS DECLARED PROFIT OF RS.11,83,39,429/-. THE LD. AR SUBMITTED THAT THESE SHAREHOLDERS AND DIRECTORS ARE ALSO FULL TIME EXECUTIVE EMPLOYEES IN THE ASSESSEES COMPANY AND THE BONUS RECEIVED BY THEM WAS WITH REF ERENCE TO THE SHAREHOLDING OF THE COMPANY IN RELATION TO THE PERF ORMANCE DURING THE RELEVANT PERIOD. THEREFORE, THE PAYMENT OF SUCH BON US TO THEM IS ITA NO.6183/DEL/2012 14 DEDUCTIBLE. LD. AR SUBMITTED THAT THE DECLARATION O F THE BONUS HAS NO RELATION AND NO CONNECTION WITH THE SHAREHOLDER DIR ECTORS. LD. AR ALSO RELIED ON THE DECISION OF HON'BLE BOMBAY HIGH COURT IN THE CASE OF LOYAL MOTOR SERVICE CO. LTD. VS. CIT 14 ITR 647 AND ALS O RELIED ON THE DECISION OF ACIT VS. BONY POLYMERS PVT. LTD. [201 0] 36 SOT 456 (DELHI) AND HON'BLE DELHI HIGH COURT DECISION IN TH E CASE OF CIT VS. CAREER LAUNCHER INDIA LTD. IN ITA NO.939/2010 & ORS . DATED 19.04.2012. 17. ON THE OTHER HAND, LD. DR SUBMITTED THAT THE BO NUS/COMMISSION PAID TO AN EMPLOYEE IS NOT ALLOWABLE AS DEDUCTION I F IT COULD HAVE BEEN PAID AS PROFIT OR DIVIDEND. THERE IS NO DISPUTE THA T THESE TWO DIRECTORS WERE ALSO HAVING ALL THE SHARE CAPITAL IN THE RATIO 2 : 1. THE BONUS IS ALSO PAID IN THE SAME RATIO. HAD THE BONUS NOT BEEN PAI D TO THESE PERSONS IT COULD HAVE ENHANCED RESERVE OF THE ASSESSEE COMPANY WHICH ULTIMATELY TO BE PAID AS DIVIDEND TO THESE SHAREHOLDERS CUM DIREC TORS. THE PROVISIONS OF LAW ARE VERY CLEAR. THERE IS NO AMBIGUITY IN THIS R EGARD. HE FURTHER SUBMITTED THAT THE CASE LAW OF LOYAL MOTOR SERVICE CO. LTD. VS. CIT (CITED SUPRA) RELIED UPON BY THE ASSESSEE WAS OLD A ND PRIOR TO THE AMENDMENT OF THE ACT. FURTHER THE FACTS WERE AT VAR IANCE IN THE CASES OF BONY POLYMERS LTD. (SUPRA) AND ACIT VS. COROMANDAL AGRICO PVT. LTD. THEREFORE, THEY ARE NOT APPLICABLE IN THE FACTS OF ASSESSEES CASE. LD. DR FURTHER SUBMITTED THAT FACTS IN THE CASE OF CIT VS. CAREER LAUNCHER INDIA ITA NO.6183/DEL/2012 15 LTD. WERE AT COMPLETE VARIANCE OF THE FACTS OF ASSE SSEES CASE. IN THAT CASE, THE BONUS WAS PAID FOR THE WORK OF DIRECTORS AND IT WAS NO WAY RELATED TO THE SHAREHOLDINGS. IN ASSESSEES CASE, T HE BONUS IS PAID IN THE SHARE HOLDING PATTERN. HAD THERE BEEN ANY LINK IN WORK AND REWARD THEN IT COULD NOT HAVE BEEN IN THE RATIO OF 2 : 1? THE DIVI DEND IN CASE OF CAREER LAUNCHER COULD HAVE BEEN MUCH HIGHER BUT IT IS NOT SO IN THE ASSESSEES CASE. HE PLEADED TO SUSTAIN THE ORDER OF AUTHORITI ES BELOW. 18. WE HAVE HEARD BOTH THE SIDES ON THIS ISSUE. THE RATIO OF CASE LAWS CAN BE MADE APPLICABLE ONLY WHEN FACTS ARE SAME. IN ASSESSEES CASE, THE MANAGING DIRECTOR, ASHISH DHAWAN AND DIRECTOR, SHRI KUNAL SHROFF WERE HOLDING SHARE OF ASSESSEE COMPANY IN THE RATIO OF 2 : 1. THEY WERE ONLY SHAREHOLDERS OF THE COMPANY. BONUS WAS PAID IN THE RATIO OF SHAREHOLDINGS. THE CASE LAWS RELIED UPON BY THE LD . AR OF HON'BLE BOMBAY HIGH COURT IN THE CASE OF LOYAL MOTOR SERVIC E CO. LTD. VS. CIT WAS DATED 05.03.1946 AND FACTS WERE IN VARIANCE, TH EREFORE, THE RATIO OF THE SAME IS NOT APPLICABLE TO THE AMENDED PROVISION S OF LAW. THE ITAT DECISIONS IN THE CASE OF BONY POLYMERS PVT. LTD. AN D COROMANDEL AGRICO PVT. LTD. ARE ALSO NOT APPLICABLE TO THE ASSESSEES CASE AS IN THOSE CASES THE ITAT HAS REACHED AT A CONCLUSION THAT IN THE AB SENCE OF ANY MATERIAL OR EVIDENCE TO SHOW THAT COMMISSION IS BEING PAID A S DIVIDEND TO THE SHAREHOLDERS THE DISALLOWANCE U/S 36(1)(II) WAS NOT PERMISSIBLE. IN THOSE CASE, THE ITAT HAS ALSO RELIED ON THE PROVISIONS OF COMPANIES ACT, 1956 ITA NO.6183/DEL/2012 16 FOR THE LIMITATION AND RESTRICTIONS IN THE MATTER O F PAYMENT OF DIVIDEND AND ALSO RECORDED THAT ASSESSING OFFICER CANNOT PRE SUME THAT HAD THIS COMMISSION NOT PAID WOULD HAVE NECESSARILY BEING PA ID AS DIVIDEND TO THE SHAREHOLDERS. SIMILARLY, IN THE CASE OF CAREER LAUNCHER, THE FACTS WERE AT VARIANCE TO THE CASE OF THE ASSESSEE. THE RELEV ANT PARA OF THE DECISION OF CIT VS. CAREER LAUNCHER IS REPRODUCED AS UNDER : - 19. THE REVENUES CONTENTION THAT THE TRIBUNAL ERR ED IN ALLOWING THE BONUS PAYMENT TO THE DIRECTORS CANNOT BE ACCEPTED. IT HAS NOT DISPUTED THE FACTS VIZ., (A) T HAT THE PAYMENT WAS SUPPORTED BY BOARD RESOLUTIONS AND (B) THAT NONE OF THE DIRECTORS WOULD HAVE RECEIVED A LESSER AMOUNT OF DIVIDEND THAN THE BONUS PAID TO THEM, HAVING REG ARD TO THEIR SHAREHOLDING. FURTHER, THE DIRECTORS ARE FULL TIME EMPLOYEES OF THE COMPANY RECEIVING SALARY. THEY ARE ALL GRADUATES FROM IIM, BANGALORE. TAKING ALL THESE FAC TS INTO CONSIDERATION, IT WOULD APPEAR THAT THE BONUS WAS A REWARD FOR THEIR WORK, IN ADDITION TO THE SALARY PAID TO T HEM AND WAS IN NO WAY RELATED TO THEIR SHAREHOLDING. THE BO NUS PAYMENT CANNOT BE CHARACTERISED AS A DIVIDEND PAYME NT IN DISGUISE. THE TRIBUNAL HAS FOUND THAT HAVING REGARD TO THE SHAREHOLDING OF EACH OF THE DIRECTORS, THEY WOULD H AVE GOT MUCH HIGHER AMOUNTS AS DIVIDENDS THAN AS BONUS AND THERE WAS NO TAX AVOIDANCE MOTIVE. THE QUANTUM OF THE BON US PAYMENT WAS LINKED TO THE SERVICES RENDERED BY THE DIRECTORS. IT CANNOT THEREFORE BE SAID THAT THE BON US WOULD NOT HAVE BEEN PAYABLE TO THE DIRECTORS AS PROFITS O R DIVIDEND HAD IT NOT BEEN PAID AS BONUS/COMMISSION. ITA NO.6183/DEL/2012 17 IN ASSESSEES CASE, THE PAYMENT OF THE BONUS WAS DI RECTLY RELATED TO THE SHAREHOLDING PATTERNS OF THE DIRECTORS. SHARES WERE HELD IN THE RATIO OF 2:1. THE BONUS HAS BEEN PAID IN THE SAME RATIO OF 2 : 1. IT IS ACCORDING TO THE SHAREHOLDING OF THESE TWO DIRECTORS. ASSESSEE H AD ALSO FAILED TO JUSTIFY THE PAYMENT AS REWARD FOR THE WORK. HAD THE SAME B E A REWARD IT COULD NOT HAVE BEEN PAID IN THE RATIO OF SHAREHOLDING. T HE MANAGING DIRECTOR AND THE DIRECTORS REWARD COULD NOT HAVE BEEN IN TH E RATIO OF 2:1. FURTHER FACTS OF THE CASE CLEARLY ESTABLISH THAT HAD THE BO NUS NOT BEEN PAID TO THESE MANAGING DIRECTOR AND DIRECTOR, THEN IT COULD HAVE BEEN PAID AS DIVIDEND TO THESE TWO SHAREHOLDERS IN THE SAME RATIO IN WHIC H THE BONUS HAD BEEN PAID. THEREFORE, THE CASE LAWS RELIED UPON BY LD. A R ARE NOT OF ANY HELP TO THE ASSESSEE. THESE TWO SHAREHOLDERS WERE MANAGING DIRECTOR AND DIRECTOR OF THE COMPANY HOLDING THE SHARES IN THE R ATIO OF 2 : 1 AND HAD THIS BONUS NOT BEEN PAID IN THE SAME RATIO THEN THE DIVIDEND COULD HAVE BEEN PAID IN THE SAME RATIO. KEEPING THESE FACTS I N VIEW, WE FIND NO MERITS IN THIS GROUND AND THE SAME STANDS DISMISSED . 19. IN THE RESULT, THE APPEAL OF THE ASSESSEE IS DI SMISSED. ORDER PRONOUNCED IN OPEN COURT ON THIS 20 TH DAY OF DECEMBER, 2013. SD/- SD/- (R.P. TOLANI) (B.C. MEENA) JUDICIAL MEMBER ACCOUNTANT MEMBER DATED THE 20 TH DAY OF DECEMBER, 2013/TS ITA NO.6183/DEL/2012 18 COPY FORWARDED TO: 1.APPELLANT 2.RESPONDENT 3.CIT 4.CIT(A) 5.CIT(ITAT), NEW DELHI. AR/ITAT NEW DELHI