New Silk Route Advisors P.Ltd, Mumbai vs Assessee

आयकर अपीलीय अिधकरण, अिधकरण "के" खंडपीठ मुंबई INCOME TAX APPELLATE TRIBUNAL,MUMBAI - K BENCH सव ौी आई पी बंसल , याियक सदःय एवं राजे ि, लेखा सदःय Before S/Sh. I P Bansal,Judicial Member & Rajendra,Accountant Member आयकर अपील सं/.ITA No.1327/Mum/2014,िनधा िनधा रण वष /Assessment Year-2009-10 New Silk Route Advisors Private ltd. DCIT-7(1) 205,Ceejay House,Shivsagar Estate, Aaykar Bhavan,M K Road Dr.A.B.Road,Worli,Mumbai-18 Mumbai-20 PAN:AACCN4541N (अपीलाथ$ /Assessee) (ू&यथ$ / Respondent) िनधा 'रती ओर से/Assessee by :Shri Kanchun Kaushal, Aliagger Rampurawala & Dhanesh Bafna राजःव क* ओर से/ Revenue by :Shri N.K.Chand सुनवाई क* तार+ख/ Date of Hearing :15-01-2015 घोषणा क* तार+ख / Date of Pronouncement : 20-02-2015 आ यकर अ िधिनयम, िधिनयम 1961 क* धारा ( 1 ) 254 के अ तग त आदे श Order u/s.254(1)of the Income-tax Act,1961(Act) Per Rajendra, A.M.लेखा सदःय राजे ि के अनुसार:

Challenging the order dated 24.01.2014 of the Assessing officer (AO) passed u/s. 143(3) r.w.s. 144 C(13)of the Act,the assessee has raised following Grounds of Appeal:

1. On the facts and in the circumstances of the case and in law, the Dispute Resolution Panel erred in directing the Deputy Commissioner of Income Tax, 7(1) ('AO') / the Additional Commissioner of Income Tax, Transfer Pricing - 11(1) ('TPO'), to make an adjustment of Rs.4,06,64,554 to the international transaction of provision of non binding investment advisory and related services to its associated enterprises.

The Appellant prays that the aforesaid adjustment be deleted.

2. On the facts and in the circumstances of the case and in law, the Dispute Resolution Panel erred in directing the AO to disallow part of the expense incurred on bonus paid to shareholder employees amounting to Rs. 1,93,03,138 under section 36(1)(ii) of the Act.

The Appellant prays that the aforesaid addition be deleted.

The Appellant prays that the Ld. AO be directed to levy in accordance with law. The Appellant craves leave to add to, alter, amend or withdraw all or any of the above grounds of appeal.

Assessee-company is engaged in the business of providing research advisory and other ancillary support services to two of its associate enterprises(AE) namely New Silk Route Advisors L.P., Cayman Islands (NSRI) and M/s NSR New Silk Route Mauritius Advisors LLC,(NSRM). It had filed its return of income on 30.09.2009,declaring a total income of Rs.5,74,52,88/-.The AO completed the assessment on 24.01.2014,determining the income of the assessee at Rs.11,74,20, 580/-.

2.First effective ground of appeal is about disallowance made u/s. 36(1)(ii) of the Act.During the course of assessment proceedings, from the details of expenses in respect of salary & allowances, filed by the assessee,the AO found that an amount of Rs.5,94,07,087/-had been paid to following employees who were also beneficial owner of the shares in the company:

SN Name of the Director Bonus paid(Rs.) %of shareholding 1. Shri Vivek Sett 1,26,79,115 12.20 % ITA/1327/Mum/2014/NSRAPL-2009-10

2 Shri Anand Dorairaj 20,57,241 12.20 % 3 Shri Darius Pandole 2,16,91,616 12.20 % 4 Jacob Kurain 2,29,79,115 12.20 % 5,94,07,087 /-

The AO found that the Directors were substantial shareholders in the assessee company.Vide order sheet entry dated 19.02.2013, the AO asked the assessee to justify the payment of bonus to Directors and explain how the payment allowable in view of provisions of Section 36(1)(ii) of the Act.In response, vide letters dated 15.02.2013 & 26.02.2013 the assessee submitted that the bonus payment made to the Directors was based on Performance evaluation.On perusal of details of total payment the AO observed that the assessee had paid total bonus of Rs.1,65,69,776/- to other employees who were 13 in number and were drawing the salary of approximately Rs. 301 lacs,whereas the total payment of Rs. 5,94,07,087/-was made to the shareholders who were four in number and drawing the salary of Rs. 345 lacs.As a proportion all the employees' bonus was around 55% of salary,whereas in the case of four director-shareholders the same was 172% of salary.Considering those facts,he held that the bonus paid to regular employees was less than the total salary component,that the bonus paid to employees who were beneficial-owner was substan - tially higher than the total salary component,that the assessee had not furnished any supporting documents to justify such high amount of bonus payment to above four employees as against the other employees who did not own any shares in the company,that the company had disclosed payment of bonus to above four shareholder-employees on consolidated basis, that there was no justification for payment of such disproportionate amount as bonus,that from the manner in which the quantum of bonus had been decided and paid to the shareholders employee vis-a-vis the profits of the business distributed to the shareholders it could be seen that even after payment of interim dividend the assessee company had accumulated profit of Rs. 1,93,03,138/- which could have been utilised for payment of dividend to the above four shareholders,that the assessee- company made payment to above shareholders in the guise of bonus so as to avoid overall tax liability and also to evade payment of dividend distribution tax.Relying upon the case of McDowell and Co.Ltd.(154 ITR 148), the AO held that payment of dividend was a colourable device.

3.Aggrieved by the order of the order of the AO,the assessee made representation before the Dispute Resolution Panel(DRP).After considering the submissions of the assessee with regard to the payment of bonus,the DRP held that the four Director employees were holding 48.8% of the share holdings which constituted almost 50% of the share capital, that AO had held that other employees had been paid bonus at the rate of 55% of their salary, that in the case of the four shareholder-employees the bonus paid was 172% of their salary,that the bonus paid to the shareholder employees was disproportionate as to ratio of their salary,that the AO had asked the assessee to prove the nature of services rendered which entitled the employees for such extra bonus,that no evidence was placed on record by the assessee to show that the shareholder employees rendered adequate services warranting the payment of such heavy bonus,that the Company had significant accumulated profits amounting to Rs.1.93 Crores even after distribu - tion of dividend during the year, that the assessee was in a position to distribute dividend to the shareholders, which had been camouflaged as bonus.Finally,the DRP upheld the proposed order of the AO.

4.Before us,the Authorised Representative(AR)stated that the bonus payments were made based on the performance of the employees,that quantum of bonus payable was a commercial decision, that it was dependent on various criterias,that each employee shareholder's contribution to the company was different,that bonus payout to them was different,that employment agreement

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entered in between the assessee and the shareholders had provision of payment of bonus payment in addition to salary payment,that during the year under appeal the assessee had distributed dividends to its shareholders,that out of available profit of Rs.6.95 Crores it had paid 4.01 Crores as dividends, that shareholder were paid dividend of Rs.1.96 Crores out of the dividend of Rs.4.01 Crores,that expenditure incurred by an assessee in granting bonus to shareholder employees by virtue of their employment and not because of shareholding was an allowable expenditure,that bonus paid by the assessee to the shareholder employees was arising out of their employment.He relied upon the cases of Mandovi Motors(8taxmann.com 225),Loyal Motors Services Company Ltd.(14ITR647),Amd Metplast P Ltd.(341ITR563),Career Launchers India Ltd.(207 Taxman

28),that the assessee was following cost plus basis of accounting the bonus payment did not result in tax evasion,that the tax paid by the shareholders for bonus was more than the tax the assessee had to pay if it had paid dividend,that the assessee had not evaded any tax by making payment of bonus to shareholder employees,that decision to distribute dividend was a commercial decision,that bonus cannot be paid on the pattern of dividend is paid i.e.at uniform rate.He further argued that bonus payment was part of employment agreement and stated that bonus was paid because of the professional qualification. DR supported the order of the FAA. He relied upon the decision of Dalal Broacha Stock Broking (P.)Ltd.(131ITD36).

5.We have heard the rival submissions and perused the material before us.We find that DRP had held that the assessee had not produced enough evidence to justify the payment of bonus to shareholder employees,that no evidence was placed on record as to what adequate services were rendered by the shareholders warranting the payment of heavy bonus.AO and the FAA were of the opinion that it was a device to evade tax. After deliberation upon the facts of the case we find that payment of bonus to shareholder-employees had resulted in payment of more taxes in comparison to tax payable had the same amount been paid as dividend to shareholders.We have gone through the chart giving details of tax paid the assessee-company and the shareholders with respect to the bonus payment.So,it cannot be held that it was a device to evade taxes.Not only this,it is found that the shareholders were professionally highly qualified.Payment of bonus is a business decision and till it is not proved that same was not paid actually,it cannot be disallowed.The assessee had claimed that it was based on performance evaluation and the AO had not contravened the fact.The assessee had deducted tax at source on the bonus paid to the shareholder directors and they have shown the receipt of bonus in their respective retruns.They are in the highest slabs of taxpayment.

Here,we would also like to refer the decision of Shahzada Nand and Sons (108 ITR 358)wherein the Hon'ble Apex Court has laid down some principles with regard to payment of commission.In our opinion same principles are applicable to payment of bonus also.Hon'ble Court has held as under:

Section 36(1)(ii) of the Income-tax Act, 1961, does not postulate that there should be any extra services rendered by an employee before payment of commission to him can be justified as an allowable expenditure. If services were in fact rendered by the employee it is immaterial that the services rendered by the employee was in no way greater or more onerous than the services rendered by him in the earlier years. Of course, the circumstances that no additional services were rendered by the employee would undoubtedly be of some relevance in determining the reasonableness of the amount of commission but it would have to be considered along with other circumstances.

The three factors laid down by the proviso to section 36(1)(ii) are not really conditions on the fulfilment of which alone the amount of commission paid to an employee can be regarded as reasonable. They are merely factors to be taken into account by the revenue authorities in determining the reasonableness of the amount of commission. It may be that one of these factors yields a negative response. To take an example, there may be no general practice in similar

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business or profession to give commission to an employee, but, yet, having regard to the other circumstances, the amount of commission paid to the employee may be regarded as reasonable. What the proviso requires is merely that the reasonableness of the amount of commission shall be determined with reference to the three factors. But, it is well-settled that these factors are to be considered from the point of view of a normal, prudent businessman. The reasonableness of the payment with reference to these factors has to be judged not on any subjective standard of the assessing authority but from the point of view of commercial expediency. What is the requirement of commercial expediency must be judged, not in the light of the 19th century laissez faire doctrine which regarded man as an economic being concerned only to protect and advance his self-interest, but in the context of current socio-economic thinking which places the general interest of the community above the personal interest of the individual and believes that a business or undertaking is the product of the combined efforts of the employer and the employees and where there is sufficiently large profit, after providing for the salary or remuneration of the employer and the employees and other prior charges such as interest on capital, depreciation, reserves, etc., a part of it should in all fairness go to the employees.

It is not necessary, for commission paid to an employee to be allowable under section 36(1)(ii), that it should be paid under a contractual obligation.

It is now well-settled that the mere fact that the commission is paid ex gratia would not necessarily mean that it is unreasonable.

We find that the facts of the case relied upon by the AO are different from the facts of the present case.As against that matter in the case under consideration condition of payment of bonus was part of the employment agreement and it was a performance based payment.Considering the above discussion and the peculiar facts and circumstances of the case,we are deciding first effective ground of appeal in favour of the assessee.

6.Next Ground of appeal is about Transfer Pricing Adjustments (TPA).To determine the Arm's Length Price(ALP)with respect to transactions reported by the assessee in Form-3(CEB), the AO made a reference to the Transfer Pricing Officer(TPO) u/s.92CA(1) of the Act on 13. 10. 2010. As per the TPO's order adjustment of Rs.8.71 Crores was to be made.In pursuance of the order of the TPO,the AO forwarded the draft assessment order dated 08.03.2013 passed u/s 143(3) r.w.s. 144C of the Act.The assessee contested the addition before the Dispute Resolution Penal (DRP). The DRP in its direction u/s 144C(5) of the Act,dated 16.12.2013,directed the TPO to modify the comparable set and accordingly decide the TPA.Following the directions of the DRP ,the AO sent a letter dated 26.12.2013 to TPO to carry out necessary modification in the ALP. The TPO, vide his order dated 20.01.2014,gave effect to the direction of DRP and revised the TP Adjustments at Rs.4.06 Crores instead of 8.71 Crores,proposed initially.

7.Before us,the Authorised Representative(AR)stated that the TPO had made an upward TPA of Rs.8,71,48,942/-by arriving at Arm's Length Margin of 55.19% viz a viz a margin of 20.37% for the assessee using a set of six companies,that out of the six four companies were not functionally comparable with the assessee,that DRP rejected three comparables selected by the TPO,that the DRP retained on comparable namely Integrated Capital Services Limited(ICSL).It was further argued that there was functional difference in the business profile of the comparables approved by the DRP i.e.ICSL and the assessee,that the ICSL was engaged in Mergers and Acquisitions(MA) and Turnaround Restructuring Advisory Services(TRAS),it had reported business advisory and that consulting services segment as a reportable segment,that the study of balance sheet of ICSL revealed that it had business profile of investment banking,M&A and TRAS instead of an investment advisory business profile,that the main area of operation of the assessee was investment advice.He relied upon the case of Carlyle India Advisors Investment Private Ltd. (CIAIPL-ITA/ 7901/Mum/2011) and stated that the Hon'ble jurisdictional high court had confirmed the order of the CIAIPL(ITA No.1286 of 2012).He also referred to the another appeal 4 ITA/1327/Mum/2014/NSRAPL-2009-10

of ICSL(ITA/7367/ Mum/2012)along with the matter of General Altantic Pvt.Ltd.(GAPL- ITA/8914/Mum/2010),that operating margins of ICSL were very volatile,that ICSL was earning high margins in AY.2008-09,that comparable should be rejected on that count.He relied upon the cases of Adobe System India Private Limited(148TTJ122).Sonata Software Ltd.(ITA/3514/ Mum/2010)E Gain communication Pvt.Ltd.(118TTJ354).He finally argued that if the ICSL comparable was not considered then arithmetic mean of remaining two of the three comparables would be 24.24%(KIACL-27.82 +FCIAL-20.67),that the arithmetic mean OP/TC of comparable companies,after considering the above set,worked out @24.24 and it was within 5% range and allowable as per the proviso to section 92C(2)of the Act.

8.We have heard the rival submissions and perused the material before us.We find that the main functions carried out by the assessee consisted of providing general and specific information NSRCI and NSRM by carrying out research relating to particular economic/ industry sectors, investment opportunities, investigating potential investments, disinvestments and reinvestments. During the year under consideration,the assessee had provided non-binding research,advisory and other ancillary support services to these two entities, amounting to Rs.29.72 crores.It used the Transactional Net Margin Method to benchmark(TNMM)the international transactions.It compared itself with other entities providing similar advisory services.The assessee's Operating Profit Margin(OPM) during the previous year was worked out at 20.37%. It identified four companies as comparable to it,whose average OPM was worked out at 8.59%. Based on the same,it was submitted before the AO that its international transactions were at arm's length.The AO,after receiving directions from the DRP,made TPA of Rs.4.06 Crores.It is found that final set of companies selected by the AO in his order was as under:

Sn. Name of the compared entity OP Accepted/Disputed 1. Kshitij Investment Advisory Co.Ltd. (KIACL) 27.82% Accepted 2. Future Capital Investment Advisory Ltd.(FCIAC) 20.67% Accepted 3. ICSL 67.28% Disputed.

From the above it is clear that the assessee had objected to inclusion of ICSL,additional company selected by the TPO and confirmed by the DRP,that in the final order the AO had included ICSL for making TPA.Thus,the dispute between the assessee and the AO is adoption of one comparable and that is inclusion of ICSL.

Before proceeding further,we would like to mention that basically and broadly issue related with TPA has to be decided by comparing two entities engaged in similar or almost similar business activities.There are many more and finer parameters to solve the TP issues,But fundamental principle or the thumb rule remains same and that is not to compare the entities that are not in similar business or not in almost similar position.The other well recognised principles of TPA is that comparable companies,earning super normal profits,should not treated as includible compar- ables. Abnormality is not norm of the day to day life-it is an exception.Therefore,it is advisable not to rely on abnormal or super normal profits while deciding the issues of TPA.We find that in the cases relied upon by the AR-Adobe System India Private Limited(supra)Sonata Software Ltd.(supra)E Gain communication Pvt.Ltd.(supra)-various benches of the Tribunal has upheld the said principle.

Now coming to the facts of the case it is found that the assessee is engaged in providing non- binding research,advisory and other ancillary support services whereas ICSL is providing 5 ITA/1327/Mum/2014/NSRAPL-2009-10

advisory and consulting services in the specialised area of M&A,TRAS,that activities of ICSL are in the nature of Investment banking,that the assessee is not representing any company in India,but ICSL represents the Indian Companies.We have noticed that the assessee-company is not involved in business plan with lenders,restructure,implementation,M&A.Thus the activities carried out by the assessee and the comparable i.e. ICSL are not similar-there is functionally substantive difference in their job profile.In our opinion activities of ICSL are akin to the job of a merchant banker.We find that the Ho'ble Court has,in the case of CIAIPL(supra),held that merchant banking and investment banking services were functionally different from investment advisory services.Therefore,we are of the opinion that ICSL has to be excluded for TPA for the year under consideration.Once ICSL is excluded from the TP comparision,the arithmetic mean OP/TC of comparables would be 24.24% as against the mean of 20.73 shown by the assessee.As it is within the 5% range available to the assessee and it meets the arm's length standard,so,we decide second ground of appeal in favour of the assessee.

As a result, appeal filed by the assessee stands allowed.

फलतः िनधा 'रती 2ारा दा3खल क* गई अपील मंजूर क* जाती है .

Order pronounced in the open court on 20th,February,2015.

आदे श क* घोषणा खुले यायालय म7 8दनांक 20 ,फरवर+,2015 को क* गई ।

Sd/- Sd/- आई पी बंसल/I (आई ल P Bansal) (राजे ि / RAJENDRA) याियक सदःय / JUDICIAL MEMBER लेखा सदःय / ACCOUNTANT MEMBER मुंबई/Mumbai,8दनांक/Date: 20.02.2015 SK आदे श क* ूितिल>प अमे>षत/Copy षत of the Order forwarded to : 1. /अपीलाथ$ 2. Respondent /ू&यथ$

3.The concerned CIT(A)/संब@ अपीलीय आयकर आयुA, 4.The concerned CIT /संब@ आयकर आयुA

5. DR "E" Bench, ITAT, Mumbai />वभागीय ूितिनिध ई खंडपीठ,आ.अ. याया.मुब ं ई

6. Guard File/गाड फाईल स&या>पत ूित //True Copy//

आदे शानुसार/ BY ORDER, उप/सहायक पंजीकार Dy./Asst. Registrar आयकर अपीलीय अिधकरण, मुंबई /ITAT, Mumbai

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