Avenue Asia Advisors Pvt. Limited vs Deputy Commissioner Of Income Tax

S.

No",Comparable,"Weighted

Average Margin

(%)","Updated Margins

for FY 2008-09 (%)",

1.,Ambit Capital Private Limited,27.33,Not Available,

2.,CRISIL Limited,32.03,41.79,

3.,Future Capital Holdings Limited,17.20,21.00,

4.,"ICRA Management Consulting Services

Limited",9.75,(0.56),

5.,IDFC Investment Advisors Limited,(11.65),(54.02),

6.,"Mecklai Financial & Commercial Services

Limited",14.74,13.29,

7.,SREI Capital Markets Limited,6.68,(17.44),

8.,Sumedha Fiscal Services Limited,43.78,Not Comparable,

Arithmetic Mean,,17.48,0.68,

Sr.

No.",Final set chosen by the TPO,"Margin

(%)","Direction by

DRP","Decision of

Delhi Tribunal

1.,Future Capital Holdings Limited,23.39,"Not

challenged

before DRP","Not

challenged

before ITAT

2.,"ICRA Management Consulting

Services Limited",(1.02),"Not

challenged

before DRP","Not

challenged

before ITAT

3.,"Mecklai Financial & Commercial

Services Limited",13.29,"Not

challenged

before DRP","Not

challenged

before ITAT

4.,Sumedha Fiscal Services Limited,56.85,Retained,Retained

5.,Khandwala Securities Limited,39.80,Retained,Rejected

6.,"Brescon Corporate Advisors

Limited",116.70,Retained,Retained

7.,Ladderup Corporation Limited,66.05,Retained,Retained

8.,"Birla Sunlife Asset Management

Company Limited",11.31,Retained,Rejected

9.,"Almondz Global Securities

Limited",34.57,Retained,Rejected

10.,Axis Private Equity Limited,30.42,Retained,Rejected

Mean,39.13,,,

· The principle governing the identification of comparable transactions would be the same, irrespective of whichever transfer pricing method is",,,,

adopted.,,,,

· Comparable transactions must be selected on the basis of a similarity with the controlled transaction/entity.,,,,

· Rule 10B (2) of the Income Tax Rules, 1962 ought to be borne in mind while choosing the factors of comparability in respect of uncontrolled",,,,

transactions.,,,,

· Even while adopting the TNMM method, the standard for selection of the comparable transactions/entitles cannot be diluted.",,,,

· Wide deviation in the Profit Level Indicator (‘PLI’) would require further investigation/analysis.,,,,

· For comparison of transactions, factors such as the nature of capital, resources used, the risks assumed, etc. ought to be considered.",,,,

· Broadly, therefore, the dictum by this Court was that though in the TNMM method there is sufficient tolerance, mere broad functionality is by",,,,

itself insufficient.,,,,

Question (i),,,,

In the backdrop of the principles laid down in Rampgreen Solutions (supra) and the analysis of the ITAT’s order with respect to each of the,,,,

comparables disputed by the Assessee, is as follows:",,,,

(i) Sumedha Fiscal Services Limited - In the case of Sumedha, the ITAT clearly acknowledged that if it had handled management of rights issues",,,,

and the revenue from such service was substantial, then the services provided by Sumedha would be dissimilar to that of the Assessee. However,",,,,

having held so, the ITAT restored the matter to the TPO to again examine whether the revenue of Sumedha was substantial from handling the said",,,,

services of rights issues and with a direction to exclude it if the TPO found it in the affirmative. Such an approach of the ITAT is not in accordance,,,,

with the principles laid down in Rampgreen Solutions (supra). The ITAT's findings acknowledge that Sumedha may not be functionally similar to the,,,,

Assessee, as admittedly, the Assessee does not render services relating to rights issues. Starting the entire exercise of comparability analysis from the",,,,

stage of the TPO would result in an unending cycle of proceedings especially when the relevant material in the form of annual reports etc. was,,,,

available on the record. The ITAT ought to itself have determined whether Sumedha is to be retained at all in view of its own findings. Remanding the,,,,

issue to the TPO was an incorrect approach.,,,,

(ii) Brescon Advisors Limited â€" In the case of Brescon, the ITAT analysed the annual reports and noticed that the income of Brescon is from",,,,

fee based financial services, from debt resolution and debt syndication. Brescon also earned revenue from sale of investments. The ITAT has equated",,,,

`Advisory services related to debt financing' with `financial services from debt resolution and debt syndication'. These two are not identical services.,,,,

Whereas the former is advisory in nature, the latter is executory in nature. While there could be some overlap between the former and latter, the",,,,

matter requires deeper analysis and examination.,,,,

(iii) Ladderup Corporation Limited â€" The ITAT noticed that Ladderup had shown operational income from financial and management consultancy,,,,

services as also fee based activities such as ‘Debt Syndication, IPO Advisory, Private Equity Placement, Merger and Acquisitions, Corporate",,,,

Restructuring and a host of other corporate advisory services.’ The ITAT, thereafter, simply held that Ladderup had similar functions as that of",,,,

the Assessee and was a comparable that deserved to be retained.,,,,

Broadly, it appears that the ITAT has gone on the usage of several terms such as debt syndication, debt financing, IPO advisory, corporate",,,,

restructuring, mergers, acquisitions etc, appearing in the annual reports of the comparable to hold that the Assessee and the said comparables perform",,,,

similar functions. The analysis at such a broad level, based upon the appearance of such similar terminologies, does not by itself make the functions",,,,

similar in nature.,,,,

The argument of the Assessee appears to be that while the Assessee was merely advising on these issues and providing advisory services to its,,,,

AE, these three comparables appear to be actually involved in the providing of services relating to debt restructuring, debt financing, issuance of IPOs,",,,,

mergers and de-mergers, etc. There is a difference between giving advice on these matters and actually undertaking the said services. A similar",,,,

illustration, in the context of litigation, would be the difference between giving advice on what to argue in Court and actually arguing the matter in the",,,,

Court. This difference needs to be borne in mind and the mere appearance of similar sounding words does not by itself constitute similar functions.,,,,

Further, as laid down in Rampgreen Solutions (supra), all these three companies demonstrated a wide deviation in the percentage of margins. Thus, it",,,,

requires a deeper analysis to determine as to whether they were in fact comparables to be retained for the purpose of fixing the ALP.,,,,

Insofar as the argument of Mr. Chaudhary regarding the trend of Assessees to challenge the inclusion of comparables which show a higher,,,,

percentage margin, is concerned, the same cannot be faulted with in as much as every Assessee is entitled to make submissions as to the selection of",,,,

comparables and choose what is advantageous to it. So long as the same can stand the test of legal scrutiny, it cannot be held that such challenges are",,,,

not maintainable.,,,,

In this backdrop, when sub-advisory agreement dated 1st July, 2006 along with the addendum thereto, is examined, the services of the Assessee",,,,

cannot be termed as that of merchant banking though there may be some overlap in the advisory segment of the services provided by merchant,,,,

bankers. In view of the services rendered by the Assessee, Question (i) is answered in the negative i.e. in favour of the Assessee and against the",,,,

Revenue.,,,,

Question (ii),,,,

In view of the above discussion on the various comparables, the findings of the ITAT in respect of Sumedha, Brescon and Ladderup are set aside.",,,,

We have been informed by the learned counsel for the parties that subsequent to the order of the ITAT, the TPO passed an order which resulted in a",,,,

final assessment order being passed by the AO. The matter is currently pending in appeal, by the Assessee, before the CIT (A). All those",,,,

consequential orders would not survive in view of the present order.,,,,

In order to not brook any further delay, this matter may be placed before the CIT (A) to consider as to whether these three companies can be held",,,,

to be comparables in the light of observations made in Rampgreen Solutions (supra) and in this order. The CIT (A) would, thereafter, pass a",,,,

comprehensive order and determine the ALP for the international transactions. Question (ii) is answered in the affirmative i.e. in favour of the,,,,

Assessee and against the Revenue.,,,,

Question (iii),,,,

On the question of notional interest, it was incorrect on the part of the ITAT to hold that the entire outstanding receivables constitute an",,,,

international transaction. The reliance by the Assessee on the decision of this Court dated 25th April, 2017 in ITA 765/2016 [Pr. Commissioner of",,,,

Income Tax v. Kusum Health Care Pvt. Ltd.] (hereafter ‘Kusum Health Care’) is apt. There are several factors which need to be considered,,,,

before holding that every receivable is an international transaction and it requires an assessment on the working capital of the Assessee. Applying the,,,,

decision in Kusum Health Care (supra), Question (iii) is answered in the affirmative i.e. favour of the Assessee and the CIT (A) is directed to study",,,,

the impact of the receivables appearing in the accounts of the Assessee; looking into the various factors as to the reasons why the same are shown as,,,,

receivables and also as to whether the said transactions can be characterized as international transactions.,,,,

The appeal is allowed in the above terms. There will be no order as to the costs.,,,,