Mumbai ITAT Rejects Excess PE Attribution: Revenue Sharing with UK Office Upheld in Cross-Border M&A Deals

BDA Partners Limited Vs DCIT (ITAT Mumbai)

Mumbai ITAT Rejects Excess PE Attribution: Revenue Sharing with UK Office Upheld in Cross-Border M&A Deals

The Mumbai ITAT deleted an addition of ₹6.49 crore made on account of profit attributed to the Indian Permanent Establishment (PE) of a Hong Kong-based M&A advisory firm, holding that the Revenue had wrongly ignored the significant role played by the UK office in executing two cross-border merger and acquisition transactions.

The assessee, engaged in global M&A advisory services, followed a revenue allocation model under which deal revenues were divided equally between origination (50%) and execution (50%) functions. In two specific transactions—Smartcube and Acuity—the assessee allocated only 25% of the execution revenue to the Indian branch and the remaining 25% to the UK branch, contending that the UK team had played a substantial role in executing the deals.

The Assessing Officer rejected the allocation and attributed the entire execution revenue to the Indian PE, resulting in an addition of ₹6.49 crore. The DRP also upheld the adjustment, observing that in most other transactions the execution revenue had been fully attributed to India.

Before the Tribunal, the assessee produced detailed evidence, including email communications, demonstrating active involvement of the UK team headed by Jonathan Aiken in the execution process. The Tribunal noted that the communications clearly showed participation by the UK office and further observed that the buyers involved in the transactions were located outside India, particularly in the UK and USA, making the UK office’s involvement commercially significant.

The ITAT found merit in the assessee’s contention that while full execution revenue had been attributed to India in other deals, the two disputed transactions were materially different because another branch had substantially contributed to the execution function. The Tribunal also noted that the Revenue had already accepted allocation of a major portion of the origination revenue to overseas branches in the same transactions.

Holding that the documentary evidence adequately established the UK office’s role in the successful consummation of the deals, the Tribunal ruled that the departmental authorities were not justified in attributing the entire execution revenue to the Indian PE. Accordingly, the addition of ₹6.49 crore was deleted. The Tribunal also directed the Assessing Officer to verify and grant MAT credit under Section 115JAA in accordance with law.

FULL TEXT OF THE ORDER OF ITAT MUMBAI

Captioned appeal by the assessee, arises out of final assessment order dated 16.07.2025, passed u/s.143(3) read with section 144C(13) of the Income Tax Act, 1961 (‘the Act’ for short), pertaining to the assessment year (A.Y. for short) 2023-24, in pursuance to the directions of learned Dispute Resolution Panel (‘ld. DRP’ for short).

2. In ground nos. 1 to 3, the assessee has challenged the addition of an amount of Rs.6,49,53,719/-, being profit attributable to the Permanent Establishment (‘PE’ for short) in India.

3. Briefly the facts are, the assessee is a non-resident corporate entity, incorporated in Hong-Kong and having a branch at Mumbai in India. As stated, the assessee is part of BDA Group and is engaged in the business of providing Mergers & Acquisitions (‘M & A’ for short) advisory service to clients globally on cross-border M&A, capital raising and financial restructuring. It is further stated, the assessee offers independent merger and acquisition advisory business to sell-side clients. The aforesaid business model basically comprises of origination and execution in terms of functionality. It is stated, the origination and execution functions are integrated and depended upon one other for successful outcome and without the involvement of either of the functions, the deal cannot be consummated successfully, hence, would not generate revenue for the assessee. It was submitted, once the deal fructifies, the receipts are shared in the following manner:

4. During the financial year relevant to the assessment year in dispute, the assessee had reported total revenue of Rs.5397.71 lacs and expenditure of Rs.4123.21 lacs, thereby declaring profit of Rs.1274.49 lacs.

5. For the assessment year under dispute, the assessee filed its return of income on 27.11.2023, declaring income at Rs.Nil under the normal provisions of the Act and book profit at Rs.12,74,49,327/- u/s. 115JAA of the Act. Assessee’s case was selected for scrutiny. In course of assessment proceeding, after verifying the return of income and financial statements, the A.O. noticed that the assessee has declared 50% of the revenue towards origination and 50% towards execution of the deals. He also found that the appropriation of income between the functions was following the same logic as was followed in the past assessment years. However, he found that in case of two deals, i.e., Smedvig Capital Ltd. (‘Smartcube’) and Trident Holdco Limited (‘Acquity’), the revenue admitted on account of execution function was shown at 25% of the receipts and the balance 25% was shared with the United Kingdom (UK) branch. Noticing the above, the A.O. issued a show cause notice to the assessee to explain why the entire 50% allocated for execution function should not be attributed to PE in India.

6. In response to the show cause notice, the assessee furnished a detailed reply explaining the modality of both origination and execution functions. It was submitted by the assessee that the origination function is critical to the mergers and acquisition process since, significant origination efforts had to be undertaken in order to win mandates. It was submitted, the origination function is responsibles for building and maintaining key relationships and the reputation of the firm so that the origination will be able to win the merger of the acquisition work when the opportunity arises. It was further submitted that the origination is a continuous marketing process and there is no clear relationship between the amount of time spent marketing to a client and the amount of revenue earned. It was submitted, only after the origination effort elicits a positive response and a mandate is secured, an execution team is assembled to deliver on the mandate. The execution process involves primarily identifying potential buyers and technical transaction support on periphery which involves primarily to liaise amongst multiple parties to the transaction to ensure that the deal is closed successfully. With specific reference to the deals forming part of the show cause notice, the assessee submitted that both the projects were largely driven by UK Office and primarily by the Partner, Shri Jonathan Aiken. It was submitted, the role of India Office on the execution front, has been on the peripheral, largely to support on the due-diligence activities, given India Office’s involvement. Hence, the revenue attributable to the execution component have been equally divided between India and UK Office. To demonstrate involvement of UK Office in the execution function, the assessee furnished email communications between the UK and Indian team.

7. The A.O., however, was not convinced with the submissions of the assessee. Though, the A.O. acknowledged that some email correspondences are in the name of Shri Jonathan Aiken, however, he observed, they do not conclusively prove the involvement of the UK branch for execution functions. Hence, according to him, the allocation of 25% of the revenue is not commensurate with the efforts made by the branches. He further observed that the documentary evidence furnished by the assessee did not conclusively prove the involvement of the UK Office. Hence, he held that the sharing of revenue of execution functions between India and UK Office is not permissible. Accordingly, the Revenue attributed to UK Office for both the projects, aggregating to Rs.6,49,53,788/- was added to the income of the assessee, while framing the draft assessment order.

8. Against the draft assessment order, the assessee raised objections before ld. DRP. While disposing of the objections of the assessee, ld. DRP noted that out of 11 deals successfully executed during the year, in 9 deals, the entire “Execution” component of the revenue was attributed to the India Office by the assessee itself. According to ld. DRP, the aforesaid fact indicates that the ground work of such deals including due diligence of the companies to be acquired /stakes to be bought were carried out in India. Ld. DRP observed, in case of each of these deals more spadework for execution of the deal is required to be done in India vis-à-vis the country from where the funds have to flow. Therefore, there is no justifiable reason why out of 50% revenue attributable to India Office for execution function, a part has to be shared with the UK Office. Referring to their directions in assessee’s case in A.Y. 2021-22, ld. DRP observed that the bonus and other incentives paid to the employees of the Indian Office indicate that all the ground work for execution function was carried out in India. Thus, ultimately, ld. DRP upheld the decisions of A.O. In terms with the direction of ld. DRP, final assessment order was passed.

9. Before us, ld. Counsel appearing for the assessee reiterated the stand taken before the departmental representatives. He submitted that the revenue offered by the assessee in respect of all the deals have been accepted by the A.O., except in case of two deals, that too, relating to execution function. He submitted, in case of Smedvig Capital Ltd. for acquisition of Smartcube, the buyer WNS Global Service (UK Ltd.) is a company located in USA and listed on the New York stock exchange. Whereas, the seller is Smedvig Capital Ltd. and others located in UK. Thus, both the seller and the buyer are outside India. He submitted, the Co-founder and Chief Executive Officer (CEO) of The Smart Cube, Mr. Gautam Singh is based out of the UK. The deal was closed on 16.12.2022. So far as, Trident Holdco Limited project is concerned, it was submitted that the seller is Cians and was founded by Anmol Bhandri (USA) and Aman Chowdhury (India). Whereas, the buyer is Acuity Knowledge Partners, having headquarters in London, UK. Thus, he submitted, substantial part of the execution function was undertaken by the team headed by Shri Jonathan Aiken of UK Office. In this context, ld. Counsel drew our attention to various email communications between various branches of the assessee located in India, UK and USA. He submitted, though cogent documentary evidences were furnished to demonstrate the execution functions executed by UK office, they have been ignored without valid reasons. He submitted, since the UK Office had equally contributed to the execution functions, 25% of the revenue has been shared with them in respect of two projects.

10. Proceeding further, ld. Counsel submitted that the DRP has erroneously relied upon the directions in A.Y. 2021-22 as it was factually different. He submitted, in A.Y. 2021-22, the major dispute was with regard to existence of PE. Whereas, in the current year, the assessee has admitted existence of PE. He submitted, in A.Y. 2021-22, the departmental authorities have held that the assessee not only had a PE in India, but had also attributed profit to the PE, keeping in view the bonus and other incentives paid to employees of the India Office, over and above their salary. Drawing our attention to a chart furnished at the time of hearing, ld. Counsel submitted, in A.Y. 2021-22, though the assessee had attributed income of Rs.4,80,000/- to the Indian branch, however, the A.O. had attributed income of Rs.13,28,99,895/- to the PE in India. He submitted, even with reference to the income attribution to PE, the total salary paid by the assessee to the employees constitute 74% of the income attributed. Whereas, in the current assessment year, only 64% of the profit of the Indian branch was towards salary. He submitted, as compared to net profit rate of 16% in A.Y. 2021-22, the net profit ratio of the year under consideration is 29%. Thus, he submitted, the departmental authorities were not justified in attributing more income to PE.

11. Learned Departmental Representative (‘ld. DR’ for short) strongly relied upon the observations of A.O. and ld. DRP. He submitted that the attribution of revenue by the assessee between the UK and Indian Office is unscientific, hence, cannot be accepted.

12. We have considered rival submissions and perused the materials on record. As per the business model followed by the assessee, the revenue earned from successful execution mergers and acquisitions are allocated between the origination and execution functions at the ratio of 50 : 50. Thereafter, depending upon the role placed by a particular branch, the revenue earned in both the functions are shared. If a particular branch is entirely responsible for either the origination or execution function, the entire 50% is attributed to the concerned branch. Otherwise, depending upon the role played, the revenue is shared between the branches. For better appreciation, the following tabular chart furnished by the assessee demonstrating the sharing of revenue is reproduced hereunder:

13. A perusal of the said chart indicates that insofar as the origination function is concerned, in respect of 9 deals, revenue has been shared between India and overseas branches. Whereas, in respect of execution function, out of 9 deals, in 7 cases the entire 50% has been allocated to the Indian branch. Whereas, in respect of two deals, as referred to by the departmental authorities, the revenue has been allocated between India and UK branch equally at 25%. The sharing of revenue of these two deals is the bone of contention between the assessee and the department. As could be seen from the chart, insofar as origination function relating to these two deals, out of 50% of the weightage, the India Office has received 5%. Whereas, 45% has been shared between UK and USA branches, which in other words, means that India, UK and USA branches have placed their role in origination function. Insofar as, execution function relating to the two deals, 50% of the revenue allocable to the execution function has been shared between India and UK branches. Throughout, it is the case of the assessee that a team headed by Shri Jonathan Aiken in UK Office had played a significant role in execution function, which ultimately resulted in consummation of the deals. In this context, the assessee had referred to various email communications between the UK and India Office placed in the paper book. Perusal of the said communications do demonstrate that a team in UK Office was actively involved in execution function relating to the merger and acquisition process. It is also a fact on record the ultimate buyers are located in UK and the sellers are in USA and India. Thus, looking at the location of the buyers, which is in UK, it cannot be denied that the UK Office played significant role in successful execution of the merger and acquisition process. Further the fact that except the above noted two deals, the assessee has attributed the entire 50% revenue out of execution functions to the Indian branch vindicates assessee’s claim that in respect of the two projects, significant role was played by another branch necessitating sharing of revenue. Thus, in our view, the departmental authorities were not justified in rejecting the assessee’s claim. More so, keeping in view the fact that major part of the revenue earned from origination functions have been attributed to the UK and USA branches and only 5% has been attributed to the Indian branch, which has been accepted by the department. Thus, on over all consideration of facts and circumstances on record, we are of the view that the addition made at the hands of the assessee cannot be sustained. Accordingly, the A.O. is directed to delete the addition.

14. In ground no. 1.4, the assessee has raised the issue of computational error arising out of non-grant of MAT credit u/s. 115JAA of the Act.

15. Having considered rival submissions and perused the materials on record, we direct the A.O. to factually verify assessee’s claim and grant MAT credit as per law.

16. In the result, the appeal is partly allowed.

Order pronounced in the open court on 10.06.2026