Altico Capital India Pvt. Ltd Vs ACIT (ITAT Mumbai)
Conclusion: The ITAT deleted the adjustment in respect of international transaction of Payment of Interest on ‘Fully Convertible Debentures’ by upholding the contentions that LIBOR was not applicable as there was no lending/borrowing in foreign currency and assessee had issued rupee dominated debentures. Also in earlier year, TPO has taken Indian rates for charging interest on FCDs and not LIBOR rate, and therefore the same transaction following/percolating from previous years should not be taxed on different basis.
Facts: In present facts, the cross appeals have been filed by either parties challenging the impugned order dated 25/10/2017, passed under section 250 of the Income Tax Act, 1961 (“the Act”) by learned Commissioner of Income Tax (Appeals)–55, Mumbai, (“learned CIT(A)”), for the assessment year 2011–12. The assessee has raised the following grounds:
1. On the facts and circumstances of the case and in law, the learned CIT(A) has erred in upholding the upward adjustment made by the Assistant Commissioner of Income-tax 14(1)(2), Mumbai (hereinafter referred to as ‘learned AO’)/ Deputy Commissioner of Income-tax (Transfer Pricing)-1(2)(1), Mumbai (hereinafter referred to as ‘learned TPO‟ with respect to the international transaction pertaining to payment of interest on Fully Convertible Debentures (FCDs):
2. On the facts and circumstances of the case, the learned CIT(A) has erred in not correctly appreciating the relevant facts of the case and submissions filed by the Appellant for the year under consideration with respect to the international transaction of nonbinding investment advisory services rendered by the Appellant to its associated enterprises (AEs);
The brief facts of the case, are that the assessee is engaged in business of acquiring non-performing loans, other assets and providing medium to long term finance to corporate borrowers. For the year under consideration, the assessee e-filed its return of income on 29/09/2012 declaring total income of Rs. 16,02,09,260. The assessee is a subsidiary of Clearwater Capital Partners (CCP) Cyprus, and was incorporated as Private Limited Company under the provisions of the Companies Act, 1956.
In respect of international transaction pertaining to “Provision of Investment Advisory Services”, assessee acts as a sub- advisor and provides various investments advisory and appraisal services, which include sourcing of deals, analysis of industry, sponsor checks, transaction structuring, financial modelling, preparation of draft term sheet, etc., to its associated enterprise CCP, Singapore. For benchmarking this transaction, the assessee used Transactional Net Margin Method (“TNMM”) as the most appropriate method with Profit Level Indicator (“PLI”) of Operating Profit to Operating Cost (“OP/OC”).
In its appeal, assessee is aggrieved against transfer pricing adjustment of Rs. 4,57,86,527 in respect of international transaction of “Payment of Interest on Fully Convertible Debentures (FCDs)”. As the assessee would require finance from time to time to engage in the activities described above, assessee requested its associated enterprises (CCP Cyprus) to provide such finance by subscribing to FCDs issued by the assessee on a private placement basis. All the FCDs issued by assessee to the associated enterprise carried interest at the rate of 12%, during the year under consideration. The assessee benchmarked this international transaction by applying Comparable Uncontrolled Price (“CUP‟) method as the most appropriate method. Further, the assessee considered the lending rates offered by other banks, as published by RBI on a quarterly basis, in respect of advances other than export credits to be an appropriate benchmark for the rate of interest paid by the assessee to its associated enterprise. Thus, accordingly arm’s length rate of interest was worked out to 11.48%. As the assessee was paying interest at the rate of 12% on FCDs issued to the associated enterprise, the assessee claimed the international transaction to be at arm’s length. The TPO noted that the assessee has paid interest at the rate of 12% amounting to Rs 15,69,82,378 on FCDs issued to its associated enterprise and same has been debited in the books of accounts. The TPO vide order passed under section 92CA(3) of the Act held that similar uncontrolled transaction would have provided FCD for lower interest and thus the international transaction representing issue of FCDs at higher interest rate is not at ALP. Accordingly, TPO computed the ALP by applying the interest calculated on the basis of 6 month average USD LIBOR + 800 basis point (i.e. 8.5% p.a.). As a result, TPO made an upward adjustment of Rs. 4,57,86,527 to the international transaction of „Payment of Interest on FCDs’. In conformity, the Assessing Officer, inter-alia, passed the order under section 143(3) r.w.s. 144C(3) of the Act. In appeal, learned CIT(A) vide impugned order upheld the upward adjustment made by the TPO. Being aggrieved, assessee was in appeal.
During the course of hearing, learned counsel submitted that assessee is NBFC and therefore it doesn’t qualify as an eligible borrower to raise External Commercial Borrowing. It was further submitted that LIBOR is not applicable as there is no lending/borrowing in foreign currency and assessee had issued rupee dominated debentures. Learned counsel further submitted that in earlier year, TPO has taken Indian rates for charging interest on FCDs and not LIBOR rate, and therefore the same transaction following/percolating from previous years should not be taxed on different basis. On the other hand, learned DR by vehemently relying upon the orders passed by the lower authorities submitted that in the present case, risk factor is not high to justify higher interest charged by the associated enterprise.
The ITAT observed that as there is no change in facts and the methodology adopted by the assessee for benchmarking the international transaction of “Payment of Interest on FCDs” which has been accepted in the prior years, therefore there is no reason to deviate from the view so taken by the coordinate bench of Tribunal in assessee’s own case. Further, the learned DR could not show us any reason to deviate from the aforesaid order. Thus, respectfully following the order passed by the coordinate bench of Tribunal in assessee’s own case, the plea of the assessee was upheld and delete the impugned adjustment in respect of international transaction of Payment of Interest on FCDs’.
Accordingly, Grounds raised in assessee’s appeal were allowed.
FULL TEXT OF THE ORDER OF ITAT MUMBAI
The present cross appeals have been filed by either parties challenging the impugned order dated 25/10/2017, passed under section 250 of the Income Tax Act, 1961 (“the Act”) by learned Commissioner of Income Tax (Appeals)–55, Mumbai, (“learned CIT(A)”), for the assessment year 2011–12.
2. In its appeal, the Revenue has raised following grounds:
“Whether on the facts of the case and in law the cita erred in holding that M/s.ICRA Management Consulting Services Ltd, a become bench the of the ass and has in directing to include this comparable company to benchmark the transaction of the ass and has erred in directing to include this comparable in the set of the comparables, without appreciating the fact that ICRA Management Consulting Services Ltd., is performing diversified functions including the M&A which is classified as merchant bankers which is different from investment advisors and no segmental for investment advisory are available.
Whether on the Sacs of the care and in tow the learned CITA) erred in holding that M/s. Future Capital Investment Advisory Services as a comparable company benchmark the transaction of assessee and has directing to include this comparable in the set of the comparables without appreciating the fact that M/s. Future Capital Investment Advisory Services has realigned the business and has made agreements with Everstone Investment Advisors Limited to do so and has not reported any operating income in the year 2010-11 relevant to A.Y. 2011-12.
3. Whether on the facts of the case and in law the learned CIT(A) erred in Toting that M/s. Goldman Sachs India Securities Pvt. Ltd. und M/s. AGM India) Advisors Ltd. as comparable companies to benchmark the transaction of the assessee and has erred in directing to include this comparable in the set of the comparables, without appreciating the fact that these two companies are captive providers of advisory services and fails RPT filter. The CITIA) also erred in appreciating that the Mumbai ITAT, in the c of Technimont 138 TTD 23 (Mum.), has held that comparison has to be male with uncontrolled transaction and these two comparables are having 100% controlled transactions.
4. Whether on the facts of the case and in law the learned CITA) erred in holding that M/s. Motilal Oswal Investment Advisors Ltd is not a comparable company to benchmark the transaction of the assessee and has erred directing to exclude this comparable from the set of the comparables, without appreciating the fact that the assessee is also engaged in business of acquiring non-performing loans and other assets and providing long term finance to corporate borrowers thus performing functions which are akin to the functions performed by Motilal Oswal Investment Advisors Ltd.
5. Whether on the facts of the case and in law the learned CITIA) erred in holding that M/s. Ladderup Corporate Advisors Pvt. Ltd is not a comparable company to benchmark the transaction of the assessee and has erred in directing to exclude this comparable from the set of the comparables, without appreciating the fact that the assessee is also engaged in business of acquiring non-performing loans and other assets and providing long term finance to corporate borrowers thus performing functions which are akin to the functions performed by Ladderup Corporate Services Private Limited.
6. The appellant prays that the order of CIT (A) on the above ground be set-aside and that of the assessing officer be restored.
7. The appellant craves leave to amend or alter any ground or add a new ground which may be necessary.”
3. While, assessee, in its appeal, has raised following grounds:
“Ground 1:
1. On the facts and circumstances of the case and in law, the learned CIT(A) has erred in upholding the upward adjustment made by the Assistant Commissioner of Income-tax 14(1)(2), Mumbai (hereinafter referred to as ‘learned AO’)/ Deputy Commissioner of Income-tax (Transfer Pricing)-1(2)(1), Mumbai (hereinafter referred to as ‘learned TPO‟ with respect to the international transaction pertaining to payment of interest on Fully Convertible Debentures (FCDs):
2. In upholding the transfer pricing adjustment with respect to the international transaction pertaining to payment of interest on FCDs, the learned CIT(A) has erred on the following grounds.
2.1 In rejecting the transfer pricing documentation maintained by the Appellant without considering the provisions of section 92C(3) of the Act;
2.2 In not accepting the benchmarking analysis and arm’s length price (ALP) of the aforementioned international transaction as conducted/determined by the Appellant in accordance with the provisions of the Act read with the Income-tax Rules, 1962.
2.3 In rejecting the average lending rates for advances (other than export credit) offered by commercial bank in India at which at least 60 percent of the business is conducted (as published on the website of the Reserve bank of India) adopted by the Appellant and re computing the arm’s length rate by applying the average of 6 month USD LIBOR + 800 basis points, thereby upholding an upward adjustment of INR 4,57,86,528
2.4 In ignoring the principle of consistency since during the previous assessment years the learned AO/ TPO had considered the average lending rates offered by Indian commercial banks as an appropriate benchmark and there has been no change in facie of the Appellant in the Financial Year 2010-11 as compared to the previous assess years;
2.5 Without prejudice to the grounds above, in not providing the basis for arriving at 800 basis points while choosing the average 6 month USD LIBOR to determine the ALP of the payment of interest on FCDs.
Ground 2
3. On the facts and circumstances of the case, the learned CIT(A) has erred in not correctly appreciating the relevant facts of the case and submissions filed by the Appellant for the year under consideration with respect to the international transaction of nonbinding investment advisory services rendered by the Appellant to its associated enterprises (AEs);
4. Without prejudice of the above ground, the learned CIT(A) based on the facts and circumstances of the case, has erred:
4.1 In not adjudicating and not considering Appellant’s submissions and contentions on inclusion of certain companies considered as comparable in its transfer pricing study Le IDC (India) Limited, Informed Technologies (India) Limited and Integrated Capital Services Limited which are functionally comparable to the nonbinding investment advisory services rendered by the Appellant;
4.2 In adjudicating on a comparable Future Capital Investment Advisors Limited, which was neither a comparable in Appellant’s set nor in learned TPO’s set;
4.3 In rejecting the use of contemporaneous and multiple year data available for computing the ALP as on the date of filing of return of income and relying on the single year data (.e. the year ended 31 March 2011) for the purpose of determining the ALP;
Each of the grounds of appeal referred above is separate, and may kindly be considered independent of each other.
The Appellant craves leave to add, alter, vary, omit, substitute or amend the grounds of appeal, at any time before or at, the time of hearing of the appeal, so as to enable the Hon’ble Income Tax Appellate Tribunal to decide this appeal according to law.”
4. Both assessee and Revenue are, inter-alia, aggrieved against the findings of the learned CIT(A) in respect of selection of comparables for benchmarking the international transaction pertaining to „Provision of Investment Advisory Services‟. Therefore, grounds pertaining to selection of comparables in appeals by both the parties are considered together.
5. In its appeal, Revenue has raised grounds challenging inclusion of M/s ICRA Management Consulting Services Ltd., M/s Future Capital Investment Advisory Services and M/s Goldman Sachs India Securities Private Limited, and exclusion of M/s Motilal Oswal Investment Advisers Ltd and M/s Ladderup Corporate Advisers Private Limited. While, assessee in its appeal, inter-alia, has raised grounds challenging exclusion of IDC (India) Ltd, Informed Technologies (India) Ltd and Integrated Capital Services Ltd.
6. The brief facts of the case, as emanating from record, are: the assessee is engaged in business of acquiring non-performing loans, other assets and providing medium to long term finance to corporate borrowers. For the year under consideration, the assessee e-filed its return of income on 29/09/2012 declaring total income of Rs. 16,02,09,260. The assessee is a subsidiary of Clearwater Capital Partners (CCP) Cyprus, and was incorporated as Private Limited Company under the provisions of the Companies Act, 1956. During the year under consideration, the assessee entered into following international transactions with its associated enterprises:
