Cross-Border M&A Advisory Revenue Cannot Be Fully Attributed to Indian PE: ITAT

The Income Tax Appellate Tribunal (ITAT) Mumbai deleted an addition of Rs 6.49 crore after observing that documentary evidence establishes substantial involvement of an overseas branch in executing cross-border transactions.

BDA Partners Limited is a Hong Kong-based company having a branch office in Mumbai and is engaged in providing Mergers and Acquisitions (M&A) advisory services globally. The company follows a business model under which revenue generated from successful transactions is divided equally between the origination and execution functions, each carrying a weightage of 50%. For the assessment year 2023-24, the assessee reported a revenue collection of Rs 53.97 crore and profit of Rs 12.74 crore.

During assessment proceedings, the AO noticed that in two transactions of the acquisition of Smartcube and Acuity, the assessee allocated only 25% of the execution revenue to the Indian office and shared the remaining 25% with its UK branch. The AO was of the view that the entire execution-related revenue should be attributed to the Indian PE and consequently made an addition of Rs 6.49 crore. The Dispute Resolution Panel (DRP) affirmed the addition.

The assessee contended before the Tribunal that both transactions were substantially driven by the UK office and that the UK team played a crucial role in execution activities, including transaction coordination and interaction with overseas parties. The assessee furnished email correspondence and documentary evidence that proved active participation of the UK office in the execution process. The Revenue argued that the evidence produced by the assessee did not conclusively establish the extent of the UK office’s contribution.

The Tribunal observed that the assessee’s revenue-sharing model had been consistently followed and accepted in respect of several other transactions. After the examination of documentary evidence, the Tribunal found that the UK office was actively involved in the execution process of the disputed transactions. It was further observed that the buyers and sellers were located outside India and thus, the UK office had played a significant role in bringing the transactions to conclusion.

The Tribunal concluded that the addition of Rs 6.49 crore, which is attributed to the UK office, could not be sustained and directed the AO to delete the addition. The appeal was partly allowed, while the issue relating to MAT credit was restored to the AO for verification and grant as per law.