Revenue from Cross Border Mergers and Acquisitions Advisory not Attributable to Indian PE: ITAT [Read Order]

The Mumbai Bench of the Income Tax Appellate Tribunal (ITAT) held that revenue earned from cross-bordermergers and acquisitions (M&A) advisory services was not attributable to the assessee’s Permanent Establishment (PE) in India and directed deletion of the addition made by the Revenue authorities.

The assessee, a non-resident company incorporated in Hong Kong, had a branch office in Mumbai and was engaged in providing M&A advisory services, capital raising, and financial restructuring services to clients globally as part of the BDA Group.

During the assessment proceedings, the Assessing Officer observed that the allocation of only 25% of the revenue to the Indian branch for execution functions was not commensurate with the efforts undertaken by the branch.

The Assessing Officer further held that the documentary evidence furnished by the assessee did not conclusively establish the involvement of the United Kingdom office in the execution of the projects. Consequently, the revenue attributed by the assessee to the United Kingdom office in respect of two projects, aggregating to ₹6.49 crore, was treated as attributable to the Indian PE and added to the assessee’s income.

The Dispute ResolutionPanel (DRP) upheld the action of the Assessing Officer, observing that there was no justifiable basis for sharing a portion of the revenue attributable to execution functions with the United Kingdom office. The DRP also noted that the bonus and incentive payments made to employees of the Indian branch indicated that substantial groundwork relating to execution functions had been carried out in India.

Before the Tribunal, the assessee submitted that in the preceding assessment year, although only a nominal amount had been attributed to the Indian PE, the Revenue had attributed a substantially higher income to the PE. It was argued that a significant portion of the income attributed to the Indian branch was already reflected in employee costs and that the branch had reported a higher net profit ratio during the year under consideration. Therefore, there was no justification for attributing additional income to the Indian PE.

It was further submitted that substantial part of the execution function was undertaken by the team headed by Jonathan Aiken of UK Office and that though cogent documentary evidence was furnished to demonstrate the execution functions executed by UK office, they have been ignored without valid reasons.

The counsel also pointed out that 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.

The Revenue, on the other hand, contended that the allocation of revenue between the Indian and United Kingdom offices was arbitrary and lacked a scientific basis, and therefore could not be accepted.

After examining the facts, the Tribunal of Aktijit Dey, Vice President and Prabhash Shankar, Accountant Member held that “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.”

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