B.C. Meena, Accountant Member - This appeal filed by the assessee emanates from the 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 investment advisory services to the Associated Enterprises (AEs). The assessee has entered into two international transaction with the AEs, one as an advisory services for which the amount of Rs.56,61,99,829/- was received and another is reimbursement of expenses incurred on behalf of the AEs of Rs.4,49,72,912/-. In order to establish that the transactions 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 conclusion that average margins of these four entities comes to 4.04% while the assessee has earned Operating Profit (OP) margin of 27.05% and claimed that the transactions with AEs were at ALP. The Assessing Officer/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 Corporate Advisors Ltd. and another Keynote Corporate Services Ltd., for the purposes of determining the ALP. The assessee filed the objections before the DRP on the issues of using single year data for making the TP adjustments, introduction of two new companies as comparables, sustaining the selection of Khandwala Securities Ltd. as comparable by ignoring the exceptional profits earned by it, considering the reimbursement of expenses as a part of the operating expenses and corresponding reimbursement as a part of operating revenue for determining ALP and not providing adjustment of +/- 5% by Proviso to section 92C(2) of the Income-tax Act, 1961. These objections were considered by the DRP. Ld. DRP sustained the order of the TPO for applying the filters by the TPO in consideration of the profile of the assessee company. Further, the DRP has also upheld the application of additional filters based on the financials of the companies to arrive at the set of comparables. The DRP also rejected the assessee's claim for using prior years data for working out the comparative analysis in the absence of conditions mentioned in the Proviso to section 92C(2) of the Income-tax Act, 1961 as assessee has not demonstrated that the data in those years would materially affect the transactions carried out in the current year. After considering all the objections of the assessee, ld. DRP held that keeping the totality of the issue in mind, there were flaws in the search process carried out by the assessee and the TPO has correctly carried out re-run of the search process and the order of the TPO was upheld. With respect to the objection for two companies taken as comparables, i.e. Brescon Corporate Advisors Limited and Keynote Corporate Services Limited, the DRP reached at a conclusion that the selection of these 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 outlier 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 the DRP.
3. Now, the assessee is in appeal before us on the issue of transfer pricing by taking the following grounds :—
"2. The Ld. AO, the Learned Transfer Pricing Officer (hereinafter referred as 'TPO') and the Learned Dispute Resolution Panel (hereinafter referred as 'DRP') have erred in law as well as facts of the case in not accepting the Arm's Length Price (hereinafter referred as 'ALP') determined 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 undertaken by the appellant.
4. The Ld. AO / TPO / DRP have erred in determining the ALP on the basis of data for financial year 2007-08 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 DRP 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 comparable and ignoring the exceptional profits earned by it during 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 operating income, respectively, of the appellant while determining the ALP.
8. The Ld. AO / TPO / DRP have erred in not allowing the benefit of ± 5% as provided by proviso to section 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 consideration of relevant factors as the assessee was fully conversant with various commercial realities surrounding assessee's business and a comprehensive internal analysis of the function performed, assets deployed and risk undertaken was carried out. The revenue 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 while determining the ALP. Ld. AR also submitted that the TPO/Assessing Officer was not justified by adopting two new companies, Brescon Corporate 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 Khandwala 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 revenue as determined. The revenue authorities are not justified in treating these reimbursable expenses as part of the operating expenses and working out operating income. These reimbursed expenses were not having any relation with the operating activity of the assessee, hence should not be considered as a part of operating items. Ld. AR also submitted that the revenue authorities were not justified in not making adjustment of +/- 5% while determining ALP as provided in Proviso to section 92C(2) of Income-tax Act, 1961.
5. On the other hand, the ld. DR relied on the order of the authorities below and also submitted that assessee has chosen Transactional Net Margin Method (TNMM) as the most appropriate method with Operating Profit/Operating Cost (OP/OC) as the profit level indicator to benchmark ALP of the international transaction relating to the advisory services. The assessee used multiple year data to benchmark the international 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 international 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 reveals facts which could have an influence on the determination of transfer pricing in relation to transactions being compared. In assessee's case, there is nothing established by the assessee which can invoke the Proviso to Rule 10B(4) of Income-tax Rules, 1962. Therefore, the Assessing Officer, as approved by the DRP, has rightly used the current year data. He further submitted that this proposition has been upheld by various decisions of ITAT including the cases of Aztec Software & Technology Services Ltd. v. Asstt. CIT [2007] 107 ITD 141/162 Taxamn 119 (Bang.) (S.B) and Honeywell Automation India Ltd. v. Dy. CIT [IT Appeal No. 4 (PN) of 2008, dated 10-2-2009]. Similar view has also been held in the case of the Mentor Graphics (Noida) (P.) Ltd. v. Dy. CIT [2007] 109 ITD 101 (Delhi) 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 that there is no such law which provides that high margins comparables should be rejected. Ld. DR submitted that the law provides for an average that is mean of the comparables. If the high profit and less profit comparables are removed then it will give the result of medium rather than mean and it will go against the law. Therefore, high loss making company as well as high profit making company cannot be rejected or taken out of the comparables. He further submitted that the law provides 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 eventualities. Therefore, the assessee's ground in this regard deserves to be dismissed. Ld. DR submitted that two comparables, i.e. Brescon Corporate Advisors Ltd. and Keynote Corporate Services Ltd. added by TPO as comparables were also justified as both the companies were also performing the same functions which the assessee is doing. Brescon Corporate Advisors Ltd. appears in the initial list of the companies generated by the search process and the assessee has eliminated only on the basis of high profits and, therefore, this company meets all the criteria with regard to the selection of companies and high profit margins cannot be a reason for difference for rejection of the same, therefore, Brescon Corporate 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 and in this year also, it qualifies as a comparable based on the assessee's research process and assessee's claim that it was engaged in different kind of services was not justified. Further, with respect to Khandwala Securities Ltd., the ld. DR submitted that it was submitted by the assessee itself has selected and assessee has tried to take it out of comparables for the reason that it was having high margins. Therefore, all these three companies deserve to be comparables and the revenue authorities has rightly done so.
6. With regard to the reimbursement, ld. DR submitted that the TPO has examined reimbursement with respect to the scope of the agreement between the assessee and AEs and wherein it was categorically and clearly stipulated that assessee shall, where appropriate, arranged for and coordinate the services of other investment professional and consultants. This is very clear from the relevant clause with regard to the Investment Advisor Duties which assessee has to perform for the AEs. Therefore, all the expenses incurred on behalf of the AE s are invariably routed through the profit and loss and resulting margins shall be relied upon in analyzing the profitability of the tested party. The reimbursement expenses were towards carrying out the core operation of the assessee, therefore, these have to be taken as operational expenses and the DRP has rightly approved the inclusion of the reimbursement expenses in the operating income and the reimbursement should be routed through the profit & loss account.
7. We have heard both the sides on all the issues with regard to the transfer pricing. The issue raised regarding the determining 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 transaction, it has to be compared with uncontrolled and unrelated transactions by using the data relating the financial year in which year the international transaction 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 purpose of comparing uncontrolled transaction with the international transaction. Therefore, the comparability of an uncontrolled and unrelated transaction with the international transaction has to be decided by using current year data. Only when the current year data does not give a true picture of the affairs and results of the comparables due to existence of abnormal circumstances, the multi year data can be considered. When there is no such abnormal or exceptional circumstances/ facts in existence for the year under consideration which could have an influence on the results as well as on the determination of the transfer prices, then the data relating to financial year in which the international transaction has been entered into shall be used. Accordingly, we find no force/substance in this ground of assessee's appeal, hence the same stands dismissed.
8. The other ground in the assessee's appeal is introducing and upholding to new companies as comparables while determining the ALP. We have heard both the sides on the issue of bringing in two new companies, i.e. Brescon Corporate Advisors Ltd. and another Keynote Corporate Services Ltd. as comparable for the purpose of determining the ALP. The ld. AR has objected the inclusion of these two parties firstly on account of exceptionally high profits and not accepting the same as comparable companies. The factors for determining inclusion and exclusion of any case in the case of comparables are specifically provided under Rule. Therefore, unless and until there 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 assessee's appeal has no merits and the same is dismissed.
9. The other ground is against sustaining the selection of Khandwala Securities Ltd. as comparable even when exceptional profit earned by this company during the financial year 2007-08. As we have already mentioned earlier that Rule 10B does not provide the basis to exclude an entity or eliminate it from the list from comparables solely on the basis of high profit making, for same reasons, we find no merits in this ground of assessee's 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, assets employed, risk assumed, the contractual terms and conditions prevailing including the geographical location and size of the market, cost of labour and capital in the markets, etc. Nowhere the higher or lower profit rate has been prescribed as the determinative factor to make a case in comparable. It has been done rightly so because profit is not a factor 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 factors not mentioned in the Rule then such case shall be continued to find place in the list of comparables. Similar view has been approved by various coordinate Benches of the Tribunal including Exxon Mobil Co. India (P.) Ltd. v. Dy. CIT [2011] 46 SOT 294 (URO)/12 taxmann.com 84 (Mum.) and Dy. CIT v.B.P. India Services (P.) Ltd. [2011] 133 ITD 255/15 taxmann.com 125 (Mum.).
10. The other ground in the assessee's appeal is regarding considering the reimbursable expenses and corresponding reimbursements as part of operating expenses and operating income respectively 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 crores has been incurred in the course of services. Moreover, the agreements of the assessee with AEs stipulate that all ancillary expenses 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 part of the management fee, should be invariably routed through the profit and loss account and invited an appropriate mark up. In view of these facts, we find no infirmity in including the reimbursement amounting to Rs.4.9 crores in the cost base and we dismiss this ground of assessee's appeal.
12. The other ground is relating to not allowing benefit of +/- 5% as provided by proviso to section 92C(2) of the Act.
13. We have heard both the sides on this issue. This issue has been settled by the amendment made by the Finance Act, 2012 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 standard deduction for the purpose of computation of arm's length price. The benefit of proviso 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. Thus, it is clear that benefit under this proviso is not available to the assessee. Therefore, we find no merits in this ground of assessee's 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 corporate issue. The assessee had challenged the disallowance of bonus amounting to Rs.98,11,380/- paid by the assessee to its shareholders-cum-directors, Shri Ashish Dhawan, M.D. and Shri Kunal Shroff, Director 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/- respectively who are also the shareholders of the assessee company and holding 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 assessee's company and the bonus received by them was with reference to the shareholding of the company in relation to the performance during the relevant period. Therefore, the payment of such bonus to them is deductible. Ld. AR submitted that the declaration of the bonus has no relation and no connection with the shareholder directors. Ld. AR also relied on the decision of Hon'ble Bombay High Court in the case of Loyal Motor Service Co. Ltd. v. CIT [1946] 14 ITR 647 and also relied on the decision of Asstt. CIT v.Bony Polymers (P.) Ltd. [2010] 36 SOT 456 (Delhi) and Hon'ble Delhi High Court decision in the case of CIT v. Career Launcher India Ltd. [2012] 207 Taxman 28/20 taxmann.com 637.
17. On the other hand, ld. DR submitted that the bonus/commission paid to an employee is not allowable as deduction if it could have been paid as profit or dividend. There is no dispute that 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 paid to these persons it could have enhanced reserve of the assessee company which ultimately to be paid as dividend to these shareholders cum directors. The provisions of law are very clear. There is no ambiguity in this regard. He further submitted that the case law of Loyal Motor Service Co. Ltd. (supra) relied upon by the assessee was old and prior to the amendment of the Act. Further the facts were at variance in the cases of Bony Polymers (P.) Ltd. (supra) and Asstt. CIT v. Coromandel Agrico (P.) Ltd. [IT Appeal No. 710 (Delhi) of 2012, dated 17-4-2012] therefore, they are not applicable in the facts of assessee's case. Ld. Dr further submitted that facts in the case of Career Launcher India Ltd. (supra) were at complete variance of the facts of assessee's case. In that case, the bonus was paid for the work of directors and it was no way related to the shareholdings. In assessee's case, the 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 dividend in case of Career Launcher India Ltd. (supra)could have been much higher but it is not so in the assessee's case. He pleaded to sustain the order of authorities 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 assessee's 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 Service Co. Ltd. (supra) and facts were in variance, therefore, the ratio of the same is not applicable to the amended provisions of law. The ITAT decisions in the case of Bony Polymers (P.) Ltd. (supra) and Coromandel Agrico (P.) Ltd. (supra) are also not applicable to the assessee's case as in those cases the ITAT has reached at a conclusion that in the absence of any material or evidence to show that commission is being paid as 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 for the limitation and restrictions in the matter of payment of dividend and also recorded that Assessing Officer cannot presume that had this commission not paid would have necessarily being paid as dividend to the shareholders. Similarly, in the case of Career Launcher India Ltd. (supra), the facts were at variance to the case of the assessee. The relevant para of the decision of Career Launcher India Ltd. (supra) is reproduced as under :—
"19. The revenue's contention that the Tribunal erred in allowing the bonus payment to the directors cannot be accepted. It has not disputed the facts viz., (a) that 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 regard 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 facts into consideration, it would appear that the bonus was a reward for their work, in addition to the salary paid to them and was in no way related to their shareholding. The bonus payment cannot be characterised as a dividend payment in disguise. The Tribunal has found that having regard to the shareholding of each of the directors, they would have got much higher amounts as dividends than as bonus and there was no tax avoidance motive. The quantum of the bonus payment was linked to the services rendered by the directors. It cannot therefore be said that the bonus would not have been payable to the directors as profits or dividend had it not been paid as bonus/commission."
In assessee's case, the payment of the bonus was directly 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 had also failed to justify the payment as reward for the work. Had the same be a reward it could not have been paid in the ratio of shareholding. The Managing Director and the Director's reward could not have been in the ratio of 2:1. Further facts of the case clearly establish that had the bonus 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 which the bonus had been paid. Therefore, the case laws relied upon by ld. AR are not of any help to the assessee. These two shareholders were Managing Director and Director of the company holding the shares in the ratio 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 in view, we find no merits in this ground and the same stands dismissed.
19. In the result, the appeal of the assessee is dismissed.