Itxa/1916/2017 Of Pr Commissioner Of Income-Tax-8 v. 3I India Pvt Ltd

IN THE HIGH COURT OF JUDICATURE AT BOMBAYORDINARY ORIGINAL CIVIL JURISDICTIONINCOME TAX APPEAL NO.1916 OF 2017 Pr. Commissioner of Income Tax -8 ….Appellant V/s. 3I India Ltd …Respondent---- Mr. Suresh Kumar for Appellant Mr. Nitesh Joshi a/w Mr. Rajesh Poojary i/b Mint & Confreres forRespondent ---- CORAM : K.R. SHRIRAM &AMIT B. BORKAR, JJ DATED : 15[th] NOVEMBER 2021 P.C. : 1Appellant is impugning an order dated 16[th] September 2016 passed bythe Income Tax Appellate Tribunal (ITAT), Mumbai. 2Respondent filed its return of income on 7[th] October 2010 for A.Y.-2010-2011 declaring income of Rs.12,52,11,166/-. The return wasprocessed under Section 143(3)(1) of the Income Tax Act 1961 (the Act) on14[th] April 2011 accepting the declared income. After scrunity assessmentnotice under Section 143(2) was issued on 19[th] September 2011, noticeunder Section 142(1) alongwith questionnaire was also issued torespondent on 20[th] December 2013 seeking further details. As theinternational transaction with Associate Enterprises (AE) entered into byrespondent exceeded the threshold limit of Rs.15 crores, a reference to theTransfer Pricing Officer (TPO) was made after the approval of CIT-8,Mumbai for computing the arms’ length price of international transaction.In this case, the TPO made an upward adjustment of Rs.19,55,13,736.73 on account of performance fees and investment advisory fees, vide order dated30[th] January 2014 passed under Section 92CA(3). The Assessing Officerbased on the order of TPO passed a draft assessment order dated 28[th]February 2014 under Section 144C(1) of the Act. Respondent filed itsobjections before the Dispute Resolution Panel (DRP) against the draftassessment order. The DRP after considering objections filed by respondent,by an order dated 13[th] November 2014 partly allowed the objections. TheAssessing Officer, as per directions of DRP passed the assessment orderdated 29[th] December 2014 under Section 143(3) read with Section144C(13) of the Act. 3Aggrieved by this order, respondent filed an appeal before ITAT andITAT was pleased to allow the appeal by an order dated 16[th] September2016. It is this order, which is impugned in the appeal and the following 7 substantial questions of law have been proposed: (a) Whether the Ld. ITAT is right holding the activity of the assessee tobe mere investment Advisory activity ignoring the PAR analysis doneby the TPO ? (b) Whether the Ld ITAT is right in accepting the internalnomenclature of the assessee and thereby ignoring the definitions of“investment advisory” as provided in the SHIM Regulations and alsoignoring the functions and risks/liabilities associated with directorshipof a company which has been relied upon by the IPO in the FARanalytic ? (c) Whether the Ld. ITAT is right in holding that no comparable hasbeen provided for the CUP analysis ignoring the fact that theuncontrolled rates for such activity has been mentioned by the TPO inthe order ? (d) Whether the Ld. ITAT is right in not considering the uncontrolledrates for the PMS activity of the assessee which have been submittedby the assessee before it and stated to be having sanction of theHon’ble High Court of Bombay ? (e) Whether the Ld. ITAT is right in relying on the APA signed by theassessee with CBDT for subsequent years when the same are clearlynot applicable for the relevant year, ignoring the fact that the assesseehad the option of including the relevant year for APA as Ivell and hasnot opted for the same ? (f) Whether the Ld ITAT is right in directing the inclusion of 3comparables in the TNMM analysis relying solely on a decision of theLd. ITAT in a completely different ease without examining theapplicability of the same to the facts of the assessee’s case. Whether the Ld. ITAT is right in directing inclusion of the comparableM/s Kinetic Trust Ltd. ignoring the huge turnover difference betweenthe assessee and the comparable ? (e) Whether the Ld. ITAT is right in relying on the APA signed by theassessee with CBDT for subsequent years when the same are clearlynot applicable for the relevant year, ignoring the fact that the assesseehad the option of including the relevant year for APA as Ivell and hasnot opted for the same ? (f) Whether the Ld ITAT is right in directing the inclusion of 3comparables in the TNMM analysis relying solely on a decision of theLd. ITAT in a completely different ease without examining theapplicability of the same to the facts of the assessee’s case. Whether the Ld. ITAT is right in directing inclusion of the comparableM/s Kinetic Trust Ltd. ignoring the huge turnover difference betweenthe assessee and the comparable ? (g) Whether the Ld. ITAT is right in directing inclusion of thecomparable M/s. IDC India Ltd. and M/s Future Capital InvestmentAdvisors Ltd even though the assessee has considered the same to benon comparable for the year (AY.2010-2011) in its Transfer PricingStudy Report for subsequent years, which include analysis for theAY.2010-2011 as well ? These 7 questions of law can be split into two parts, namely (a) to (e)in Part-1 and (f) and (g) in Part-2. 4We have heard Mr. Suresh Kumar and Mr. Joshi and with theirassistance considered the order of ITAT. 5As regards first part, i.e., (a) to (e) are on the basis that respondent,in addition to investment advisory services, had also rendered portfoliomanagement services (PMS). The ITAT in the impugned judgment, hascome to a finding of fact that there was no evidence of respondent renderingany such additional services. The ITAT has further held that no separate PMSservices needs to be benchmarked as the same is part and parcel ofrendering of investment advisory services which is evident from thefunctions performed in terms of the “Investment Advisory Agreement”entered between respondent and its AE. Therefore, the said 5 questions (a)to (e) cannot be entertained. 6As regards second part, i.e., (f) and (g) are concerned, the finding ofthe ITAT is entirely one of fact and the revenue has failed to show as to howthe finding arrived at by the ITAT is perverse in any manner. The revenuehas also not been able to demonstrate that the analysis done by the ITATwhile excluding the companies suggested by the revenue from the list ofcomparables, was in any manner contrary to the settled position in law. 7The entire exercise of making transfer price adjustment on the basis ofcomparables is nothing but a matter of estimate of a broad and fair guess-work of the authorities based on factual relevant material brought beforethe authorities, i.e., TPO, DRP and the Tribunal which are the fact findingauthorities. It will be useful to reproduce paragraph 12 of judgment of thiscourt in Pr. Commissioner of Income Tax-6 Vs. M/s Eight Roads Investment 1 Advisors Pvt Ltd.1 7The entire exercise of making transfer price adjustment on the basis ofcomparables is nothing but a matter of estimate of a broad and fair guess-work of the authorities based on factual relevant material brought beforethe authorities, i.e., TPO, DRP and the Tribunal which are the fact findingauthorities. It will be useful to reproduce paragraph 12 of judgment of thiscourt in Pr. Commissioner of Income Tax-6 Vs. M/s Eight Roads Investment 1 Advisors Pvt Ltd.1 “12. In view of the above detailed reproduction of the reasoningsgiven by the Tribunal we find that, while undertaking the exercise toarrive at the arm’s length price which is essentially a matter ofestimate of the fair value which the Indian Company had paid or hadreceived from its Associate Enterprise (A.E.), such exercise is requiredto be undertaken by the TPO on the basis of the facts and figuresrelating to comparable cases of other similarly placed entities, whoserelevant data is available in the public domain. As per the provisionsof the Act and the Rules, the assessee company is required to furnishits own Transfer Pricing Analysis and the list of chosen comparableswhich may or may not be agreed to by the Revenue Authorities andthey would introduce some more comparables rejecting thecomparables given by the assessee company by applying certain filterslike Related Party Transactions (RPT) filter, turnover filter, exportearnings filter, employee cost filter, etc to bring them within thecomparable range of the cases of such comparables and generallythere would be a tug of war between the assessee and the revenue insuch a situation. We would state that the assessee company wouldnormally choose comparables, whose operating profit margins are lessor only little more than the assessee, but the revenue would bring incomparables with higher profit margins. The TPO, may in the case of 1 Dated 27[th] February 2020-ITXA No.1125 of 2017 an assessee introduce and suggest comparables whose operatingmargins are higher than the assessee company so as to make transferpricing adjustments in the declared income of the assessee, resultingin fetching of more revenue. From the aforesaid quoted paragraphsfrom the Tribunal’s order, it is evident that, individual cases of suchcomparables have been juxtaposed with the functionality of theassessee considered, analyzed and discussed by the Tribunal in respectof comparables which were excluded by the TPO as also in the case ofthose comparables which were included by the TPO. It is quitecommon to note that, while some comparables are found to beappropriate and really comparable to the facts of the assesseecompany, some are not and it would ultimately result in whether thecorrect filters have been properly applied or not or whether the mostappropriate method of determination of arm’s length price has beenadopted or not to make fair and reasonable transfer pricingadjustments in the hands of the assessee. However, the entire exerciseof making transfer pricing adjustments on the basis of comparables isnothing but a matter of estimate of a broad and fair guess-work of theauthorities based on factual relevant materials brought before theauthorities i.e. the TPO, the DRP and the Tribunal, which are the factfinding authorities.” (emphasis supplied) 8It would be apposite to reproduce paragraphs 5, 6 and 7 of an unreported judgment of this court in The Pr. Commissioner of Income Tax-12Vs. Barclays Technology Centre India Pvt Ltd. which read as under: “5 In the above view, the finding of the Tribunal is entirely one of thefact and the Revenue has failed to show as to how the finding arrivedat by the Tribunal is perverse in any manner. Nor has the Revenueeven attempted to demonstrate that analysis done by the Tribunalwhile excluding the aforesaid four companies from the list ofcomparables, was in any manner contrary to the settled position inlaw. Thus, we see no reason to entertain this appeal. (emphasis supplied) 8It would be apposite to reproduce paragraphs 5, 6 and 7 of an unreported judgment of this court in The Pr. Commissioner of Income Tax-12Vs. Barclays Technology Centre India Pvt Ltd. which read as under: “5 In the above view, the finding of the Tribunal is entirely one of thefact and the Revenue has failed to show as to how the finding arrivedat by the Tribunal is perverse in any manner. Nor has the Revenueeven attempted to demonstrate that analysis done by the Tribunalwhile excluding the aforesaid four companies from the list ofcomparables, was in any manner contrary to the settled position inlaw. Thus, we see no reason to entertain this appeal. 6 However, before closing, we would like to record the fact that wefind that the Revenue is regularly filing appeals from the orders ofthe Tribunal in respect of Transfer Pricing particularly with regard toexclusion and inclusion of certain companies as comparables todetermine ALP of tested parties. These appeals are being filed in aritualistic manner. This results in the orders of the Tribunal which areessentially findings of fact in respect of exclusion/inclusion of acomparable being challenged without pointing out in any mannerperversity of finding or failure to adhere to the settled principles oflaw while determining comparables such as Rule 10B of the IncomeTax Rules, 1961. This unnecessarily takes up the scarce time of theCourt. The Revenue and the Assessee would do well to bear in mindobservations of the Delhi High Court in Principal Commissioner of 2 Dated 26[th] June 2018 – ITXA No.1384 of 2015 IncomeTax9 v. WSP Consultants India (P) Ltd.253 Taxman 58 (Delhi)wherein it has been observed: “10. Any inclusion or exclusion of comparablesper se cannot be treated as a question of lawunless it is demonstrated to the Court that theTribunal or any other lower authority took intoaccount irrelevant consideration or excludedrelevant factors in the ALP determination thatimpact significantly.” 7 We hope the above observations would be kept in mind both by theRevenue and the Assessee who seek to prefer appeals from the ordersof the Tribunal on Transfer Pricing particularly inclusion/exclusion ofcomparables. The Commissioner of Income Tax and the Assessee ingeneral would do well to also review the appeals filed and withdrawthe same, in case the only challenge therein is to finding of facts, ifthe same is without evidence of any perversity or is in the face ofsettled legal position. The counsel of the Revenue is directed to servea copy of this order on the Principal Chief Commissioner of IncomeTax within the State of Maharashtra for necessary action.” (emphasis supplied) 9In our view, the ITAT has not committed any perversity or appliedincorrect principles to the given facts and when the facts and circumstancesare properly analysed and correct test is applied to decide the issue at hand,then, we do not think that questions as pressed raises any substantialquestions of law. 10The appeal is devoid of merit and is dismissed with no order as tocosts. 11We have to note that this is one more appeal filed in a ritualisticmanner which has unnecessarily taken up the scarce time of this court. TheCommissioner of Income Tax and CIT(Judicial) would do well to review allappeals filed and withdraw the same, in case the only challenge therein is tofinding of facts and there is no evidence of perversity or in the fact of settledlegal position. The Counsel of Revenue is directed to serve a copy of this order on the Law Secretary (Government of India), Central Board of DirectTaxes, Principal Chief Commissioner of Income Tax (Maharashtra) and CIT (Judicial) for necessary action. (AMIT B. BORKAR, J) (K.R. SHRIRAM, J.)