Income-tax Appellate Tribunal - K Bench Mumbai Before S/Shri Rajendra,Accountant Member and Saktijit Dey,Judicial Member ITA No.1573/Mum/2011 : Assessment Year-2004-05 Income tax Officer-5(2)(4) M/s. Marsh India Pvt. Ltd. Room No.571, 5th Floor Peninsula Corporate Park Aayakar Bhavan, M.K. Road Vs. 902, Tower 1, Ganpatrao Kadam Marg Mumbai-400 020. Lower Parel, Mumbai-400 013. PAN:AADCM 4220 G (Appellant) (Respondent) Revenue by: Shri N.K. Chand-CIT Assessee by: Shri Nishant Thakkar Date of Hearing: 27.09.2016 Date of Pronouncement: 05.10.2016 ,1961 254(1) Order u/s.254(1)of Income-tax Act,1961(Act) , PER Rajendra A.M.- Challenging orders dated 10.12.2010 of CIT(A)- 15,Mumbai,the Assessing Officer (AO)has filed present appeal.Assessee-company,engaged in business of insurance brok - ing,reinsurance-broking,risk management and insurance programme management services for businesses,public entitites,insurance companies, associations, professional services organisa - tion and private clients,filed its return of income on 31.10.2004,declaring total Loss at Rs.1, 75,28,794/-.The AO completed assessment u/s.143(3) on 22.12.2006, determining its loss at Rs.98.74 lakhs. 2.First Ground of appeal is about deleting disallowance of Income tax on expatriate salary, amounting to Rs.43.24 lakhs. During assessment proceedings,the AO found that assessee had borne Income tax of Rs.49,39,525/- in respect of expatriate s salary, that on its own it had disallowed Rs.6.15 lakhs u/s.40(a)(v) of Act, that disallowance was made by it for non monetary perquisites.The AO directed assessee to file explanation with regard to remaining amount. After considering submission of assessee,the AO held that Income tax paid on behalf of expatriate s salary could not be allowed. Finally.he made disallowance of Rs.43,24,288/-. 2.1.Aggrievd by order of AO assessee preferred appeal before First Appellate Authority (FAA). Before him,it was argued that assessee had borne Income tax in respect of salary paid to William Jones (WJ), that said expenditure was in terms of 1573/M/11-Marsh India P.Ltd. employment agreement entered into with WJ, that tax borne by assessee had been offered for tax as part of perquisite by WJ in his assessment records, that tax on non monetary perquisites could be disallowed.After considering submission of assessee and assessment order, FAA held that assessee had borne Income tax of WJ as per terms of employment agreement that it was in nature of salary/employment cost to company that was otherwise allowable as deduction, that tax borne by company. 2.2.Before us,the Departmental.Represnetative(DR) supported order of AO and referred to provisions of section 10(e)(e) of Act. Authorised Representative(AR)stated that WJ had offered amount in question for taxation, assessee itself had made disallowance of Rs.6.24 lakhs. He also referred to Form No.16 of WJ . 2.3.We have heard rival submissions and perused material before us. We find that assessee had paid income-tax in respect of salary paid to WJ as per employment agreement, that it had suo motu made disallowance for non-monetary perquisites, that WJ had offered disputed amounts in his return of income. Considering fact that WJ had paid tax on amount in question,we are of opinion that order of FAA needs no interference whatsoever, upholding his order Ground No.1 is decided against AO. 3.Second Ground of appeal is with regard to deletion of club membership fee amounting to Rs.3.24 lakhs.During assessment proceedings,it was found that amount was paid towards membership fee of Willingdon Sports Club and Breach Candy Swimming Bath Trust by assesse.The AO held that membership fee paid towards club by assessee company was capital in nature as it was first year of revenue generation,that it was going to bring enduring benefit to assessee for years to come.He made disallowance of Rs. 3. 24 lakhs. 3.1.During appellate proceedings FAA, relying upon judgment of Jurisdictional High Court in case of OTIS Elevators Co. (I) (195ITR682) held that expenditure incurred by assessee was wholly and exclusively for purpose of business. He allowed appeal filed by assessee. 3.2.Before us,the DR supported order of AO. AR relied upon case of United Glass Mfg. Co. Ltd. (Civil Appeal No.6447 of 2012 dt.12.9.12 of Supreme Court). 2 1573/M/11-Marsh India P.Ltd. 3.3.After hearing rival submissions we find that Hon'ble Apex Court,in case of United Glass Mfg. Co. Ltd.(supra),has held that club membership fees incurred by assessee is business expenditure and has to be allowed as per provisions of section 37 of Act. Respectfully following above judgement Ground No.2 is decided against AO. 4.Ground No.3 is about Transfer Pricing (TP).During assessment proceedings AO noted that assessee had entered into International Transactions (IT)with its Associate Enterprise(AE).He directed it to justify TP study and prove that transactions were at Arm s LengthPprice (ALP).Vide its letter,dt.7.12.2006, assessee stated that company s OP/TC ratio was 28.28% as against mean of comparable company (24.02%).The AO held that while calculating ratio assessee had taken advisory fee at Rs.59.99 lakhs, that as per audit report advisory fee was Rs.86.36 lakhs.He asked assessee to show cause basis of taking advisory fee at Rs.59.99 lakhs and to explain as to why two different TP methods had been used for different AE.s in respect of advisory fee. Vide its letter dt.7.12.2006 assessee computed mean as under :- Comparable Companies Adjusted OP/TC Geojit Financial Services Ltd. 57.39% Integrated Enterprises (India) Ltd. 21.16% Keynote Corporate Services Ltd. -2.61% S K P Securities Ltd. 69.57% VCK Capital Market Services Ltd. -25.40% Mean 24.02% 4.1.After considering submission of assessee AO held that out of five comparables two were loss making and had no connection with line of business. He reworked comparable mean of adjusted OP/TC ratio as under :- Company Name Individual Company Mean Geojit Financial Services Ltd. 57.39% Integrated Enterprises (India) Ltd. 21.16% S K P Securities Ltd. 69.57% Mean 49.37% He applied rate of 49.37% as ALP on total cost as against 28.28% percent. As result following adjustment was made. Particulars Amount(Rs.) Total operating cost(as per assessee s letter dated 21.12. 06) 64,42,528 Add: Arm s length return on total cost @ 49.37 31,80,725 Arm s length price of advisory fees 96,23,353 ALP after considering 5% range as per proviso to section 92C(2) of Act. 91,42,185 Less: Actual Advisory fee as per para 4.4(b) 82,64,583 Adjustment 8,77,602 3 1573/M/11-Marsh India P.Ltd. 4.2.During appellate proceedings assessee argued that inclusion of loss making company in distribution curve was just as normal as inclusion of company that were extremely profitable, that AO had wrongly excluded loss making companies holding that those were nowhere near to assessee s line of business, that loss making companies were in same business, that net worth of both loss making company s was positive. After considering submission of assessee and assessment order FAA held that VCK and Keynote Corporate i.e. loss making company s were functionally similar to assessee, that they had incurred loss during year, that their network remained positive, that inclusion of loss making companies in distribution curve was normal. Finally he deleted addition made by AO. 5.Before us, DR stated that companies were constantly making losses, that same could not be selected as comparables.He referred to case of Affinity Express India Pvt. Ltd. (ITA No.106/PN/2012-assessment year-2004-05 dt.09.03.16).The AR supported order of FAA.On specific query by Bench,the AR stated that both companies were suffering losses in earlier years as well as in current year. 6.We have heard rival submission and perused material before us.We find that AO had made adjustment as assessee had included loss making entities in comparables list, that FAA had ignored fact that two of five comparables were showing loss , that he emphasised on net worth of company rather than losses suffered by companies,that both companies were suffering losses for continuously three years . In our opinion AO was justified in excluding constant loss making entitles from list of comparables.Therefore,reversing order of FAA Ground No.3 is decided in favour of AO. As result appeal filed by AO stands partly allowed. Order pronounced in open court on 5th October, 2016. 05 , 2016 (Rajendra) Sd/- Sd/- ( Saktijit Dey) JUDICIAL MEMBER ACCOUNTANT MEMBER Mumbai; Dated : 05. 10.2016. Jv.Sr.PS. 4 1573/M/11-Marsh India P.Ltd. Copy of Order forwarded to : 1.Appellant 2. Respondent / 3.The concerned CIT(A) , 4.The concerned CIT 5.DR K Bench, ITAT, Mumbai 6.Guard File //True Copy// BY ORDER, Dy./Asst. Registrar /ITAT, Mumbai. 5 Income tax Officer-5(2)(4), Mumbai v. M/s. Marsh India Pvt. Ltd