TAMASEK HOLDINGS ADVISORS INDIA P. LTD. vs.DEPUTY COMMISSIONER OF
INCOME TAX
BOMBAY TRIBUNAL
B R BASKARAN, AM & AMIT SHUKLA, JM.
ITA No. 776/Mum/2015
Feb 25, 2016
(2016) 46 cch 0175 MumTrib
Legislation Referred to
Section 92D
Case pertains to
Asst. Year 2010-11
Issue
Transfer Pricing Adjustments
Decision in favour of:
Assessee (Partly)
Transfer Pricing—Computation of Arm’s Length
Price—Transfer Pricing Adjustment—Selection of Comparables—Exclusion of
companies—Assessee was Private Limited Company incorporated in India and 100%
subsidiary of ’X’—Assessee vide agreement with ‘X’ agreed to provide Investment
Advisory Services— While rendering services, Assessee provided investment
recommendation in India to ’X’, whereas later retained right of use of
investment advice or information—Hence advisory services provided by assessee
were in nature of non binding advisory services for which Assessee was
compensated with cost plus markup—TPO made selection of comparables in
determination of Arm’s Length Price (ALP) for provision of investment advisory
services to its associate enterprises—TPO excluded five companies selected by
Assessee from list of comparables—Assessee challenged action of TPO in
excluding those five companies from final list of comparables—Held, with regard
to Company ‘A’’ it was held that it was essentially providing consultancy
services in diversified areas, like in government sectors, infrastructure,
energy, corporate advisory, banking and financial services, etc.—It focused on
consultancy and advisory which is its core area and competency—Revenue
generation was purely from consultancy fees as evident from profit and loss
account—Here it was not case where there was any unique functions materially
affecting revenue or net margins vis-a-vis functions performed by this company—
Hence on functional level it was good comparable— As stated, in earlier years,
TPO accepted this company to be comparable and in later years Tribunal in AY
2008-09 & 2009-10 held this company to be good comparable qua functions of
Assessee and there being no material change on facts, functional profile or any
other factor in this year—ITAT held that Company ’A’ was good comparable and
should be included in list of final comparables— With regard to Company ’B’ it
was held that If on FAR analysis there were differences on account of either
assets deployed and risk assumed materially affecting costs or margins then
probably such comparability could be rejected—But here in this case, merely on
ground that it had low turnover could not be reason or criteria for
rejection—In case of nortel India Pvt Ltd vs Addl. CIT, Tribunal held that no
company could not be excluded from comparable list merely for reason of low
turnover especially, when no turnover filter was applied by either
parties—Analysis in such cases had to be carried out on functional basis—It had
been brought on record that said decision of Tribunal in appeal filed by
Revenue before High Court had been upheld—In earlier years, this comparable had
been held to be good comparable by TPO himself and Tribunal in two years accepted
to be good comparable—Thus as matter of consistency, ITAT held that company ‘B’
should be included in comparability list—With regard to company ’C’ it was held
that this comparable though accepted by TPO as good comparable, however, DRP
additionally rejected this comparable—In case of Carlyle Advisory India Ltd.,
ITAT Mumbai Bench, Tribunal held that third company was a good comparable with
companies rendering investment advisory services—Functions of advisory services
of third company were quite similar to functions of Assessee and, therefore,
this comparable could not be rejected from list of comparables—Accordingly,
same was directed to be included in comparability list—Company ’D’’ was also
accepted by TPO as good comparable, however, DRP rejected same— From perusal of
annual report, it seen that it was primarily engaged in rendering investment
advisory services only and its operating in single segment—Thus, there could
not be any genuine reason for rejecting said comparable—DRP rejected this comparable
on ground that it was in process of shutting down its business—However, during
year, it continued to render investment advisory services and realignment
agreement was effective from 1st January, 2010, realignment was also for
investment advisory activities— Thus, there was not much impact on net margins
especially in assessment year 2010-11, therefore, this company could not be
rejected and TPO was directed to include same in final comparability list—With
regard to Company ‘’E’’’ in case of Q India Pvt Ltd. and New Consolidate
Advisory Ltd., this comparable company had not been contested by
Assessee—Accordingly, ITAT held that this comparable had rightly been rejected
and should not be included in final comparables—Company ‘F’ was in field of
merchant banking—It was also involved in various professional activities of
merchant banking—Merchant Banker provided capital to companies in form of share
ownership instead of loans— It also provided advisory on corporate matters to
companies in which they invested—Functions and activities carried out by this
company was totally definitely from investment advisory services where core
functions was to give advices for making investments in diversified
fields—Company which was engaged in merger and acquisitions, private equity
syndication, loan/credit syndication and performing most of function of
Merchant Banker, then entire functions and transactions affected generation of
revenue and margins—Such functions were entirely different from investment
advisory services—Mere classification of revenue as ‘advisory fees’ Would not
put company in comparable basket sans functional similarity and transactional
analysis—In case of Carlyle India Advisors Pvt. Ltd , it was held that,
merchant banking functions were entirely different from investment advisory
services—It was held that this company could not be put into comparability list
and was directed to be excluded--Assessee’s Appeal partly allowed.
Held
From the perusal of the
annual report, which is appearing from pages 156 to 187 of the paper book, ITAT
find that it is essentially providing consultancy services in diversified
areas, like in government sectors, infrastructure, energy, corporate advisory,
banking and financial services, etc. It focuses on consultancy and advisory
which is its core area and competency. The revenue generation is purely from
consultancy fees which is evident from profit and loss account. Here it is
not the case where there is any unique functions materially affecting the
revenue or net margins vis-a-vis the functions performed by ICRA. Hence on
functional level it is a good comparable. As stated earlier, in the earlier
years, the TPO has accepted ICRA to be a comparable and in later years the
Tribunal in AY 2008-09 & 2009-10 has held ICRA Management to be good
comparable qua the functions of the assessee and there being no material change
on facts, functional profile or any other factor in this year, then as matter
of consistency, we do not want do deviate from our findings given in the
earlier years. There cannot be a pick and choose of comparables every year
unless there are some material difference in facts and circumstances compelling
to take a different conclusion. Thus, ITAT hold that ICRA Management is a good
comparable and should be included in the list of final comparables.
(Para20)
It is seen that, the
company is concentrating on its main activity of corporate consultancy services
and financial services. Being a NBFC has not changed the nature of activity
undertaken by the company and its core business competency and its revenue is
from consultancy services. If on FAR analysis there are differences on account
of either assets deployed and risk assumed materially affecting costs or
margins then probably such comparability can be rejected. But here in this
case, merely on the ground that it has a low turnover cannot be the reason or
criteria for rejection. Rather in the case of Nortel India Pvt Ltd vs Addl. CIT
(supra), the Tribunal held that a company cannot be excluded from the
comparable list merely for the reason of low turnover especially, when no
turnover filter was applied by either parties. The analysis in such cases has
to be carried out on functional basis. Before us, it has also been brought on
record that the said decision of the Tribunal in the appeal filed by the
Revenue before the High Court has been upheld that is, revenue’s appeal has
been dismissed. Further as stated above, in the earlier years, this comparable
has been held to be a good comparable by the TPO himself and Tribunal in two
years have accepted to be a good comparable. Thus as a matter of consistency,
ITAT hold that Kinetic Trust Ltd. should be included in the comparability list.
(Para21)
This comparable though
accepted by the TPO as a good comparable, however, the DRP has additionally
rejected this comparable. In assessment year 2008-09, the Tribunal has held to
be a good comparable, Moreover, in the case of Carlyle Advisory India Ltd.,
ITAT Mumbai Bench, reported in 43 taxman.com 184, the Tribunal held that this company
is a good comparable with the companies rendering investment advisory services.
This decision of the Carlyle Advisors have also upheld by the Hon’ble Bombay
High Court. Moreover, ITAT have already discussed the functions performed by
the IDC India Ltd while dealing with Ld. Counsel’s argument that functions of
advisory services are quite similar to the functions of the assessee and,
therefore, ITAT accept the assessee’s contention that this comparable cannot be
rejected. Accordingly, same is directed to be included in the comparability
list.
(Para22)
This company is also
accepted by the TPO as good comparable, however, the DRP has rejected the same.
Such a rejection by the DRP is without giving any opportunity to the assessee.
From the perusal of the annual report, which has placed in the paper book from
pages 263 to 272, it is seen that it is primarily engaged in rendering
investment advisory services only and its operating in a single segment. Thus,
there cannot be any genuine reason for rejecting the said comparable. The DRP
has rejected this comparable on the ground that it is in the process of
shutting down its business. However, during the year, it has continued to
render the investment advisory services and the realignment agreement was
effective from 1st January, 2010, the realignment is also for investment
advisory activities. Thus, there is not much impact on the net margins
especially in the assessment year 2010-11, therefore, this company cannot be
rejected and TPO is directed to include the same in the final comparability
list.
(Para23)
Integrated Capital Services
Ltd: This comparable has been admitted by the Ld. Counsel to have been rejected
by the Tribunal Q India Pvt Ltd. (supra) and New Consolidate Advisory Ltd.
(supra) therefore, this comparable company has not been contested by him.
Accordingly, ITAT hold that this comparable has rightly been rejected
and shall not be included in the final comparables.
(Para24)
Motilal Oswal Investment
and Advisor Ltd : This comparable has been included by the
TPO and while including the said comparable he has observed that its income is
only from Advisory fees during the year and it is performing advisory services
in that field of investment like assessee.. From the perusal of the directors’
report, it is seen that this company derives its business income from four
different business verticals, i.e. Equity capital markets, merger and
acquisitions, profit equity syndications and structured debt. It also give
advises on cross border acquisition. Its core competence is in the field of
merchant banking. It also provides comprehensive investment banking solutions
and transaction expertise covering private placement of equity, debt and
convertible instruments in international and domestic capital markets,
monitoring mergers and acquisitions and advising M&A as professional and
restructuring advisory and implementations. It is also involved in various
professional activities of the merchant banking. A Merchant Banker provides capital
to companies in the form of share ownership instead of loans. It also provides
advisory on corporate matters to the companies in which they invest. The focus
is on negotiated private equity investment. The wide range of activities
include portfolio management, credit syndication, counseling on M&A, etc.
This whole range of functions and activities carried out by Motilal Oswal is
definitely are far wider and much different from investment advisory services
where core functions is to give advices for making the investments in
diversified fields. A company which is engaged in merger and acquisitions,
private equity syndication, loan/credit syndication and performing most of the
function of a Merchant Banker, then the entire functions and transactions affects
the generation of revenue and margins. Such functions are entirely different
from investment advisory services. Mere classification of revenue as ‘advisory
fees’ will not put the company in a comparable basket sans functional
similarity and transactional analysis. In case of Carlyle India Advisors Pvt.
Ltd (supra), it has been held that, the merchant banking functions are entirely
different from investment advisory services and this decision of the Tribunal
has been upheld by the Hon’ble Bombay High Court. Thus, in view of plethora of
judicial decisions as referred to by Ld. Counsel and in view of functional
differences as discussed as above, ITAT hold that Motilal Oswal
cannot be put into the comparability list and is directed to be excluded.
(Para25)
Conclusion
No company could not be excluded from comparable list merely for
reason of low turnover especially, when no turnover filter was applied by
either parties
In favour of
Assesse(Partly)
Transfer Pricing—Computation of Arms Length
Price—Transfer Pricing Adjustment—Addition of 3% markup additionally made over
and above comparative margin—AO made addition of 3% markup additionally made
over and above comparative margin arrived at by, TPO—Held, TPO added markup on
ground that Assessee in addition to investment advisory services had rendered
portfolio management services it was monitoring funds for its AE, hence for
such distinct function further upward adjustment should be made—First of all
for making transfer pricing adjustment comparability analysis had to be done
and then only margins could be benchmarked—TPO had not brought on record that,
Assessee was rendering any additional function which was not included in
investment advisory function—TPO had to show that there were additional
functions or services rendered by Assessee in this year qua assets employed,
functions performed and risks assumed— Moreover if activities of Assessee
remained same and FAR Analysis had been done on investment advisory services as
in earlier years, then how such services had become different in this year
without any new material fact had not been elaborated by TPO—Monitoring
functions performed by Assessee were part and parcel of portfolio advisory
services rendered by it because, activities carried out by Assessee while undertaking
portfolio monitoring activities included analysis of latest development in
industry, ongoing performance of industries and providing necessary information
to its AE from time to time—This aspect had been noted by ITAT, Mumbai Bench in
case of Carlyle India Advisors Private Limited and it was held that that no
such addition or adjustment on account of extra markup could be made—ITAT
directed to delete addition
Held
TPO has added this markup
on the ground that assessee in addition to investment advisory services has
rendered portfolio management services, that is, it is monitoring the funds for
its AE, hence for such a distinct function further upward adjustment should be
made. First of all for making such transfer pricing adjustment a comparability
analysis has to be done and then only margins can be benchmarked. He has not
brought on record that, assessee is rendering any additional function which is
not included in the investment advisory function. The TPO has to show that
there are additional functions or services rendered by the assessee in this
year qua the assets employed, functions performed and risks assumed. ITAT agree
that such an additional mark-up applied by the TPO is without any FAR analysis
or without any benchmarking exercise with any comparables and more importantly
without any analysis of assessee’s own facts. The assessee is providing
non-binding investment advisory services to its AE and such services as
highlighted by Ld. Counsel include; identifying and analyzing potential
investment opportunities, evaluating and making recommendations to THPL with
respect to specified investments. The monitoring functions performed by the
assessee are part and parcel of the portfolio advisory services rendered by it
because, the activities carried out by the assessee while undertaking portfolio
monitoring activities include analysis of the latest development in the
industry, ongoing performance of the industries and providing necessary
information to its AE from time to time. This aspect has been noted by the
ITAT, Mumbai Bench in the case of Carlyle India Advisors Private Limited
(supra) and in other decisions cited above by the Ld. Counsel. Thus, ITAT hold
that no such addition or adjustment on account of extra markup can be made.
Accordingly, ITAT direct to delete the addition.
(Para26)
Conclusion
Monitoring functions performed by Assessee were part and parcel of
portfolio advisory services rendered by it hence no addition or adjustment on
account of extra markup could be made.
In favour of
Assessee (Partly)
Cases Referred to
Q-India Investment Advisor P Ltd vs. DCIT
(ITA 923/Mum/2015)
DCIT vs. Arisaig Partners India (ITA NO. 1083/Mum/2014
Bain Capital Advisors vs. DCIT (ITA No. 1083/Mum/2014)
Goldman Sachs (India) Securities Private Limited vs. ACIT (ITA No. 7724/Mum/2011)
TPG Capital India Pvt. Ltd. vs. ACIT (ITA No. 880/Mum/ 2013)
NVP Venture Capital India Pvt. Ltd. vs. DCIT( ITA No.1564/Mum/2015)
New Jahanghir Valal Mills Co. Ltd. vs. CIT, reported in [1963] 49 ITR 137
CIT vs. Kalpetta Estates Ltd, reported in [1995] 211 ITR 635
Sand Stone Capital Advisors Private Ltd. vs. DCIT, reported in 147 ITD 240
DCIT vs. Arisaig Partners India (ITA NO. 1083/Mum/2014
Bain Capital Advisors vs. DCIT (ITA No. 1083/Mum/2014)
Goldman Sachs (India) Securities Private Limited vs. ACIT (ITA No. 7724/Mum/2011)
TPG Capital India Pvt. Ltd. vs. ACIT (ITA No. 880/Mum/ 2013)
NVP Venture Capital India Pvt. Ltd. vs. DCIT( ITA No.1564/Mum/2015)
New Jahanghir Valal Mills Co. Ltd. vs. CIT, reported in [1963] 49 ITR 137
CIT vs. Kalpetta Estates Ltd, reported in [1995] 211 ITR 635
Sand Stone Capital Advisors Private Ltd. vs. DCIT, reported in 147 ITD 240
Counsel appeared:
Porus Kaka, Divesh Chawla for the Appellant.: N K Chand, Sambit
Mishra for the Respondent
AMIT SHUKLA, JM.
1. The aforesaid appeal has
been filed by the assessee against Final Assessment Order dated 31.12.2014,
passed by Assessing officer under section 143(3) r.w.s. 144C(13) in pursuance
of directions given by the Dispute Resolution Panel (DRP) vide order dated
22.12.2014, under section 144C(5) for the assessment year 2010-11. In various
grounds of appeal, the assessee has mainly challenged the Transfer Pricing
Adjustment of Rs. 9,41,19,278/- in determination of Arm’s Length Price (ALP)
for provision of investment advisory services to its associate enterprise (AE).
The assessee is mainly aggrieved by exclusion of five comparable companies,
(three by the Transfer Pricing officer (TPO) and two by the DRP) and inclusion
of one comparable to arrive at the mark-up margin of 37.51% as against the
assessee’s margin of 21.4%. The assessee in its ground no. 4 has mainly
challenged the rejection of the following three comparables selected by the
assessee in its TP Study report for the financial year 2009-10 relevant to
assessment year 2010-11:-
(i) ICRA
Management Consultancy Services Ltd. (ICRA);
(ii)
Integrated Capital Services Ltd;
(iii)
Kinetic Trust Ltd.
The assessee has also
challenged the inclusion of one company by the TPO, M/s Motilal Oswal
Investment Advisors Pvt. Ltd. as a comparable company. In ground no.5, the
assessee has challenged rejection of two comparable companies by the DRP
namely:
(i) Future
Capital Investment Advisors Limited and
(ii) IDC
India Ltd,
which were accepted by the
TPO. That apart, assessee has also challenged the addition of a further markup
of 3% by the TPO over and above the comparative margin arrived at 37.51%. All
other grounds revolve around these major issues only.
2. The brief facts qua the
issue of Transfer Pricing adjustment are that, the assessee is a Private
Limited Company incorporated in India and is 100% subsidiary of Tamasek
Holdings Private Limited, Singapore (THPL). Assessee vide agreement dated 1st
April 2004 with THPL agreed to provide Investment Advisory Services. While
rendering these services, the assessee provides investment recommendation in
India to THPL, whereas the later retains the right of the use of investment
advice or information. Hence the advisory services provided by the assessee
were in the nature of non binding advisory services for which assessee was
compensated with cost plus markup. The services rendered by the assessee under
the "Investment Advisory Agreement" included the following services /
functions:
a)
Providing research reports, macro economic analysis and other advisory
services;
(b)
Identifying, screening and investigating sectors of the Indian economy for
investment opportunity;
(c)
Advising in investigation, structure, monitoring of portfolio
securities/portfolio companies as the case may be;
(d)
Undertaking economic and market intelligence of the eligible portfolio
companies including analysis and investigation of eligible portfolio companies,
including their products, services, markets, management, financial solutions,
competitive position market ranking, prospects for future performance and
relevant industry sector;
(e)
Undertaking due diligence of investment opportunities and submit reports and
recommendation; and
(f)
Assisting in performance review of portfolio companies, recommending the plans
for managerial and business support and furnishing performance and relevant
industry sector reports.
The
details of international transaction, as reported in the Transfer Pricing Study
report and in form 3CEB, entered by the assessee with THPL was as under:-
|
Sr. No.
|
Nature of
transaction
|
AY 2010-11 (Rs.)
|
Method used as per
TPSR
|
|
1
|
Investment Advisory
services
|
34,31,28,197
|
TNMM
|
|
2
|
Reimbursement of
salary & other cost
|
7,87,29,790
|
Not Applicable
|
|
3
|
Purchase of fixed
asset
|
23,09,616
|
Not applicable
|
3. As stated above the
transaction of Investment Advisory Services was disclosed by the assessee at a
mark-up margin of 21.4%. To benchmark the margin, whether earned at arm’s
length price, the assessee carried out the FAR analysis after adopting transactional
net margin method (TNMM) as the most appropriate method (MAM) for comparing its
operating margin with the external comparables engaged in financial and
corporate advisory services. It has been stated before us that, assessee in its
TP Study Report has under taken a very systematic approach for selection of
comparables, firstly, by identifying the companies engaged in the comparable
business after detailed search process using keynotes on the accepted public
data (i.e. Prowess and Capital Line); secondly, by applying quantitative filter
to shortlist the number of companies thrown in list; and lastly, every
comparable shortlisted were analysed at qualitatively level based on the
multiple year data of the financial accounts available in the public domain. The
whole search process has been documented in the Transfer Pricing Study report
including accept and reject matrix. The entire documentation was been stated to
be done in accordance with section 92D read with Rule 10B.
4. Before us, the Ld.
Senior counsel, Mr. Porus Kaka, submitted that the process for selecting the
comparables by the assessee was purely transparent and was undertaken by
reviewing qualitatively the nature of services provided by the companies and
thereafter carried out the comparative analysis with the functions and services
rendered by the assessee. The assessee has mainly selected the comparable
companies which were engaged in the rendering of services similar to Corporate
Advisory Services, strategic Advisory Services, Consultancy services, etc. The
assessee has specifically excluded the comparable companies which were
registered as merchant bankers with SEBI, asset management companies, stock
brokers and like due to the reasons that their functional risk profile are
significantly different from that of the assessee, which merely provides
non-binding advisory services to its AE. He further submitted that, this is not
the first year of transfer pricing process and the adjustments made by the TPO
based on inclusion and exclusion of comparables. In the earlier years also as
well as in the AYs 2008-09 and 2009-10, by and large similar companies were
selected by the assessee and on the same reasoning and ground on which the TPO
has made the transfer pricing adjustment in this year was also made in the
earlier years. In those years, the matter has attained finality at least from
the stage of the ITAT, wherein the most of the disputed issues on comparables
have been decided in favour of the assessee. Thus, on a larger perspective the
issues in this year are by and large are covered by the decisions of the
Tribunal in assessee’s own case.
5. Like in the earlier
years, after detail analysis, the assessee had chosen comparables in its TP
Study report to benchmark its margins, firstly by taking weighted average of
three years for determining the arithmetic mean by analysing 10 final
comparables, the weighted average margin was arrived at 20.52%. Later on, when
the assessee submitted the margin based on the calculation for the financial
year 2009-10, 7 comparables were finally listed, the arithmetic mean of which
were arrived at 14.84%. This it was stated that the assessee’s margin was at
ALP. The list of 7 comparables selected by the assessee and operating margins
based on financial year data of 2009-10 are as under:
|
Name of the company
(Comparables selected By the assessee
|
Operating margin FY
2009-10
|
|
Future Capital
Investment Advisors Ltd.
|
15.71%
|
|
ICRA Management
Consulting Services Ltd
|
0.41%
|
|
ICRA online Ltd
|
41.77%
|
|
IDC India Ltd
|
13.00%
|
|
Informed
Technologies Ltd.
|
25.52%
|
|
Integrated Capital
Services Ltd.
|
-2.92%
|
|
Kinetic Trust Ltd.
|
10.39%
|
|
Arithmetic Mean
|
14.84%
|
Shri Porus Kaka submitted
that, after the computation of Arm’s Length Margin by benchmarking with the
comparables on scientific and qualitative analysis done in accordance with the
provisions of the Act and Rules, the Ld. TPO, rejected the assessee’s some of
the comparables and also included his own comparable without providing any
method and the process as to how he has undertaken search process for
identifying the comparable companies. He has merely cherry picked the
comparable companies without undertaking any fresh search and has rejected the
comparables which stood accepted in the earlier years. If the search process
for selecting of comparables is to be done by the assessee in accordance with
the rules, then same methodology has to be adopted by the TPO also. Law does
not envisage differential procedure for assessee and revenue so far as
selection methodology is concerned.
6. In the transfer pricing
order the Ld. TPO, in the show cause notice required the assessee as to why
ICRA Management Consultancy Services Ltd. and Integrated Capital Services Ltd.
selected by the assessee should not be rejected and why two comparable
companies, namely, Future Capital Holdings Ltd. and Motilal Oswal Investment
Advisors Pvt. Ltd Capital should not be included. In response, the assessee
filed detailed reply with regard to the each and every comparable sought to be
excluded and included by the TPO. Assessee’s reply in this regard has been
noted by the TPO at paras 10.12 to 10.5. However, the TPO rejected the
assessee’s contention with regard to each and every comparable as per the
detailed finding given from para 11.1 to para 11.5. The relevant facts and
counter arguments of both the parties relating to the comparables which are in
dispute before us are discussed hereinafter in brief:-
(i) ICRA
Management Consultancy Services Ltd. (Rejected by the TPO):- Mr. Porus
Kaka, pointed out that ICRA Management is essentially a Professional
Consultancy Services Company which provides consultancy in diverse areas such
as Government, infrastructure, energy, corporate Advisory, banking and
financial sector etc. It was incorporated in 2005 by taking over the entire
business management consulting division of ICRA Ltd. It offers
consultancy/advisory services through different business groups and practice
areas and its entire income is from consultancy fees. After referring to the
annual report of the management, (appearing in the paper book pages 157 to 186)
and from Directors’ report, he pointed out that, this company is purely into advisory
services and functions performed by this company for rendering these services
are similar to that of the assessee. This is evident not only by the assessee’s
submissions made before the TPO, but this company was also subject matter of
dispute in the earlier years by the Department, which is evident from the fact
that, in assessment year 2008-09 and 2009-10 this comparable has been directed
to be included for the comparability analysis by the Tribunal and on same facts
this company cannot be rejected. He thus submitted that, the inclusion of ICRA
Management Consultancy Services Ltd. is covered by the two decisions of the
Tribunal of the immediate earlier years; therefore, no different view can be
taken in this year. He also furnished a chart giving the relevant paragraphs of
the Tribunals’ order, whereby, this comparable has been dealt specifically in
both the years by separate orders. He further submitted that, the analysis done
by the TPO for rejecting the said comparable is not correct as he is trying to
highlight the various fields and industries in which ICRA is rendering
services, whereas assessee is not. Advisory services in financial and corporate
sector are important and key function which needs to be analysed rather than
the areas in which the services are being rendered. In case of the assessee
also if the list of investments made by assessee's AE on the basis of
recommendations provided by the assessee is to be seen, then the assessee has
also provided non- binding advisory services in diverse fields, like
infrastructure, telecom, media, banking, etc. The TPO is also not correct in
holding that the Tribunal order was based on the earlier orders of the TPO
where this company was accepted as comparable. He has taken a divergent view
without brining any substantial material on record to show that how the facts
have changed in this year. Accordingly this comparable company needs to be
accepted not only on functional profile but also as a matter of consistency.
(ii) Kinetic
Trust Ltd. (Rejected by the TPO):-Mr. Porus Kaka, submitted that the TPO
has observed that in the annual report of the Kinetic Trust, does not specify
that the said company is engaged in the investment advisory; further the said
company is NBFC registered with RBI; and lastly, its turnover is only Rs. 20
lakhs. To counter this TPO’s observation, Mr. Kaka pointed out that firstly,
Directors’ report for financial year 2009-10 specifically mentions that the
company has concentrated on its main activity of a corporate consultancy services
and financial services. This is evident from Directors’ report given at page
193 of the paper book. Merely because the said company is NBFC, the same does
not change the nature of activities undertaken by the company i.e., Consultancy
Services. Secondly, while selecting the list of comparables in search criteria,
the assessee has not considered the turnover criteria as one of the factor in
determining or streamlining the selection of the companies. It has not cherry
picked the comparables by inserting any kind of lower or higher turnover
filter. The reliance placed by the TPO on the decision of Tribunal in the case
of Trilogy E Business Software P Ltd vs DCIT (ITA No. 1054/Bang/2011) is not
correct as the Tribunal's decision was based on the facts and in that context
it has highlighted the importance to apply the turnover over filter ranging
between Rs.1 crore to Rs.200 crores. The said decision does not implicate that
the range of Rs.1 crore to Rs.200 crores is to be applied essentially in all
the cases. Thus, the decision of the said Tribunal cannot be applied to the
facts of the present case. On the contrary in the case of Nortel Networks India
P Ltd, reported in [2014] 44 taxman.com 46 the Delhi Tribunal has held that, if
the functional profile of the comparable is the same with that of the assessee
then, it cannot be excluded from the list of the comparables merely for the
reason of low turnover. He submitted that the said decision of the Tribunal has
been now been upheld by the Hon’ble High Court vide order dated 24.02.2015 in
ITA No. 3043/2015, wherein, the Hon’ble High Court observed that, whether the
turnover filter is appropriate one and applicable, cannot be answered in the
abstract and is entirely fact dependent. Lastly, the Tribunal in assessee’s own
case for the assessment year 2008-09 & 2009-10 has accepted the Kinetic
Trust Ltd as a comparable company so far as the functions performed by the
assessee. The Ld. TPO in utter disregard to the Tribunal’s order has stated
that the said decision of the ITAT cannot be accepted, because the finding was
given on the ground that the TPO has accepted this comparable in the earlier
years. This cannot be the ground for rejection, rather the Kinetic Trust Ltd is
to be included as the comparable company following judicial precedence and
consistency in view of the Tribunal orders for two consecutive earlier years.
(iii) IDC
India Ltd : At the outset, the Ld. Counsel, submitted that, the Ld.
TPO has taken IDC India Ltd. as a comparable company in his Transfer Pricing
Order, however, the DRP has rejected the said comparable while issuing his
direction for AY 2010-11 without giving any opportunity to the assessee.
Further, the ITAT Mumbai Bench in the assessee’s own case for the assessment
year 2008-09 & 2009-10 has accepted the IDC India as comparable company to
the functions comparable by the assessee. Further, the Hon’ble Bombay High
Court in the case of Carlyle India Advisors Pvt. Ltd. (32 taxman.com 33) had
upheld IDC India as functionally comparable to the functions performed by an
investment advisor. He further relied upon the decision of General Atlantic
Pvt. Ltd. vs DCIT, reported in 32taxmann.com 178. Explaining the profile and
function of the company, he submitted that IDC India is engaged in the business
of market research Company primarily dealing in research and survey services
and products. It provides user research, vertical research, go-to market
services and consultancy services which enable IT professionals, business
executives and the investment community make fact based decisions on technology
purchase and business strategy. The functions performed by the assessee while
rendering investment advisory services include analysing financial data of
potential clients, analysing market conditions, conducting research on various
sectors, markets, companies, etc.
(iv) Rejection
of Future Capital Investment Advisory Ltd: This comparable was also
accepted by the TPO as a good comparable but has been rejected by the DRP
without providing any opportunity of hearing to the assessee. From the
annual report for the financial year 2009-10, it can be seen that this company
is engaged in rendering Investment Advisory Services and has single reporting
segment, which is advisory services.
(v) Rejection
of Integrated Capital Services Ltd.:- This company was part of assessee’s
comparable set but was rejected by the TPO for the reason that it is not
functionally comparable, as it is providing consultancy services in the field
of reconstruction of business, merger, amalgamation which is functionally
cannot be held to be comparable with the functions performed by the assessee,
that is, Investment Advisory Services. The TPO has noted that a consulting and
advisory income earned by this company was only Rs.84 lakhs, which is much less
as compared to the assessee’s turnover of Rs. 34.31 crores. The TPO has again
referred to the decision of ITAT in the case of Trilogy E Business. Mr. Kaka
submitted that, assessee’s case had been that the services in the field of
merger/finance, which are particularly similar to the functions performed by
the assessee. The Annual report of Integrated Capital indicates that it renders
advisory and consultancy services and further it is operating in a single
revenue segment of consultancy and advisory services. Secondly, when no
turnover filter has been applied by the assessee, then without any reason and
without any proper search criteria by the TPO, he cannot resort to insert low
turnover filter only for the purpose of cherry picking. He referred to the
decision of Norton India P. Ltd. vs. Additional CIT (ITAT Delhi bench) (Supra)
wherein, the Tribunal held that, the company cannot be excluded from the list
of comparable mainly for the reason of having low turnover. Lastly, in the AY
2009-10, the TPO has accepted integrated capital as a comparable company to the
assessee and the functions performed by the said company in AY 2010-11 are
exactly similar to in AY 2009-10, therefore, the same cannot be rejected in
this year.
However,
he submitted that the Tribunal in the case of:
(i)
Q-India Investment Advisor P Ltd vs DCIT (ITA 923/Mum/2015);
(ii) New
Silk Road P Ltd. vs DCIT (ITA 1327/M/214) has rejected Integrated Capital as a
comparable company to an Investment Advisory Services.
(vi) MotilalOswal
Investment Advisors Pvt Ltd.: This company has been included by the TPO and
upheld by the DRP on the following points (as summarized by DRP):-
a) The
company is engaged in providing high quality strategic and financial services
which are used in acquiring majority equity stake, Financial Advisory services
for hundred percent acquisitions, rendering advisory services for placement of
equity with investors, rendering strategic financial advisory services to
enhance banking fund limits of the companies. The analysis of these services
shows that the strategic and financial advisory services rendered by this
company are comparable with the high quality, investment advisory services
rendered by the assessee company.
b) On
going through the Balance Sheet of Motilal Oswal Investment Advisors Pvt Ltd,
it is seen that the company has single reportable operational income segment
and it is advisory fees of Rs. 64.94 crores. The other income is a minor
component of Rs. 58.14 lacs. Further, on going through the Balance sheet, it is
seen that the company has investments of Rs. 52.50 lacs only. Obviously, an
investment banker or Merchant banker will have more investments in its Balance
Sheet. As per the notes to the accounts, the company has given a capital
commitment of Rs. 1.5 crores to Aditya Birla Pvt. Equity and Reliance
Alternative Investment Fund out of which the company has contributed only Rs.
30 lacs and Rs. 22.50 lacs respectively. It has received Rs. 31.72 crores of
advisory fees (48.84%) in foreign exchange. At no placed there is any mention
of any investment fund or investment related activity being handled by the
company. The related party transactions on a/c of advisory services rendered to
fellow subsidiaries is Rs. 8.33 crores (13.59%) only. Even if the rental
payment of Rs. 1.20 crores is taken into account, the RPT transactions are at
14.70%. The TPO has applied the RPT filter at 25%. It has been fairly settled
that, the loan transactions, security deposit and other transactions need not
be taken into account for the purpose of RPT calculation. This shows that the
company is in the business for the purpose of RPT calculation. This shows that
the company is in the business of rendering advisory services and not in the
business of managing funds.
c) On
going through the above analysis, it is clear that MotilalOswal Investment
Advisors P Ltd, is not into investment and key activity and also not in the
management of assets for others. Further, the contention of the assessee that
an investment bank assists corporations in mergers and acquisitions is not a
correct proposition. The merger and acquisition related advisory services in
fact are the advisory services which involves skill sets which are comparable
to the investment advisory services. Hence the assessee’s argument regarding
non availability of segmental profits is not relevant.
7. Mr. Porus Kaka,
submitted that, on the perusal of the annual report of the company, it can be
seen that Motilal Oswal operates in four different business verticals, viz.,:
Equity
Capital Markets;
Mergers
and Acquisitions;
Private
Equity Syndications; and
Structured
Debt.
The annual report for FY
2009-10 indicates the Motilal Oswal has earned its income evenly from all these
four business verticals. The annexure to the auditor’s report indicates that
Motilal Oswal is engaged in the business of ‘merchant banking and
investment/business advisory services’. The web portal of Motilal Oswal shows
that it offers comprehensive investment banking solutions and transaction
expertise covering private placement of equity, debt and convertible
instruments in international and domestic capital markets, mergers and
acquisitions advisory and restructuring advisory and implementations. Further,
the web portal also indicates that, during FY 2009-10, Motilal Oswal has, inter
alia, acted in various professional capacities such as arranger, merchant
banker, book running leading manager, etc. The above services have been
rendered by Motilal Oswal to various clients namely, Jindal Polyfilms Limited,
GMR Energy Limited, Pipavav Shipyard, Jai Balaji Industries Limited, DHFL
Limited, etc. Thus, it is evident from the above that Motilal Oswal is engaged
in merchant banking and other similar activities, which are not at all
functionally comparable to the assessee, which is engaged in rendering of
investment advisory services. Mr. Porous Kaka, further submitted that, in the
following decisions of the Tribunal, it has been held that Motilal Oswal
Investment Advisors Pvt. Ltd. cannot be held to be a comparable company with
the Investment Advisors.
Carlyle
India Advisors Private Limited v. Additional Commissioner of Income-tax
43taxman.com 184 (Mumbai)
Carlyle
India Advisors Private Limited v. Deputy Commissioner of Income-tax
49taxman.com 476 (Mumbai)
Bain
Capital Advisors vs. DCIT (ITA No. 1083/Mum/2014)
DCIT
vs. Arisaig Partners India (ITA NO. 1083/Mum/2014
The decision of Carlyle
India Advisors Private Limited has also been affirmed by the Hon’ble Bombay
High Court. Not only that, there are catena of decisions where it has been held
that merchant banker cannot be compared by an Investment Advisor. The lists of
such judicial decisions are as under:
Carlyle
India Advisors Private Limited v. Additional Commissioner of Income-tax 24
taxman.com 176 (Mumbai);
General
Atlantic Pvt Ltd v DCIT 32 taxman.com 178 (Mumbai – Trib);
Goldman
Sachs (India) Securities Private Limited v ACIT (ITA No. 7724/Mum/2011)
Thus, Motilal Oswal should
not be considered as comparable to the functions performed by the assessee.
8. Mr. Porus Kaka submitted
that, the TPO after inclusion and exclusion of the comparable companies and
applying higher profit margin of 37.51%, went further to hold that assessee is
providing more than investment advisors services as it is also monitoring the
investment of its AEs. Thus, for providing such personalized investment
services and non-discretionary portfolio management services, a mark-up of 3%
over and above is required to be added to the average PLI of the comparable
companies which was determined at 37.51% by the TPO and accordingly, the Arm’s
Length PLI was determined by him at 40.51%, as against assessee’s operating
profit of 21.4%. Thereafter, the TPO has tried to justify such an adding of a
mark-up by referring to the definitions of Portfolio management services from
the dictionaries came to a conclusion that, assessee is rendering an additional
function which is not included in the investment advisory function. Such an
action of the TPO is wholly arbitrary, because there are no additional
functions or services rendered by the assessee in this year qua the assets
employed, functions performed and risks assumed. Cost plus mark-up compensation
is received for all the investment advisory services. The monitoring activity
is part and parcel of the same advisory services. Moreover the activities of
the assessee have also remained the same and FAR Analysis has been done on
investment advisory services. Such an additional mark-up applied by the TPO is
without any FAR analysis or without any benchmarking exercise with any
comparables and more importantly without any analysis of assessee’s own facts.
Nowhere the assessee has provided any portfolio management services. The
assessee only renders non-binding investment advisory services to its AE. These
services include; identifying and analyzing potential investment opportunities,
evaluating and making recommendations to THPL with respect to investment
opportunities and monitoring and making recommendation to THPL with respect to
specified investments. The monitoring functions performed by the assessee are
part and parcel of the portfolio advisors services rendered by it. The
activities carried out by the assessee while undertaking portfolio monitoring
activities included analysis of the latest development in the industry ongoing
performance of the industries companies and providing necessary information to
its AE from time to time. The portfolio management functions are part and
parcel of investment advisor services and this point has been noted by the
ITAT, Mumbai Bench in the case of Carlyle India Advisors Private Limited
(supra). He also analysed the applicability of decision of Carlyle India in the
case of the assessee. He further placed reliance on following judicial
decisions where monitoring of investment was considered part of investment
advisory services. The lists of such decisions are as under:
i) TPG
Capital India Pvt. Ltd. vs ACIT (ITA No. 880/Mum/ 2013)
ii) NVP
Venture Capital India Pvt. Ltd. Vs. DCIT( ITA No.1564/Mum/2015)
Lastly,
he submitted that, the TPO has gone beyond the scope of provisions of rules for
adding extra mark-up of 3% and such an action cannot be upheld, because the
comparative analysis has to be done as per the rules only.
9. On the other hand, the
Ld. CIT DR, Mr. N.K. Chand, submitted that, the Transfer Pricing Officer (TPO)
can always improve upon its case from earlier years especially, the selection
of comparables which has to be done on the basis of information and proper
qualitative analysis for each year. The TPO is well within the jurisdiction and
power to reject the comparables which has been chosen earlier if he had
analysed the facts more deeply. After referring to the decision of Hon’ble
Supreme Court in the case of Baroda Distributor vs UOI, 155 ITR 120, he
submitted that, if a mistake has been committed then same should not be
perpetuated. Further, the principles of res judicata does not apply to Income-tax
Proceedings and this view finds due support from decision of Hon’ble Supreme
Court in the case of New Jahanghir Valal Mills Co. Ltd. vs CIT, reported in
[1963] 49 ITR 137 which has been followed in several decisions. He further
relied upon a decision of Kerala High Court in the case of CIT v. Kalpetta
Estates Ltd, reported in [1995] 211 ITR 635 for the proposition that, if a
fresh look is necessitated on the existing facts on a closer and more
intelligent analysis then a different view can be taken. Thus, here in this
case, the comparables chosen by the TPO or his reasons for the exclusion of the
comparables chosen by the assessee needs to be examined afresh based on the
information and factual analysis carried out in this year and one cannot be
guided by the precedence of earlier years alone. In support of this proposition
he referred and relied upon the decisions of ITAT Delhi Bench in the case of
Toluna India P Ltd in ITA No. 5645/Del/2011, wherein the Tribunal expressed its
reservation in accepting a broad proposition that, if certain benches of the
Tribunal have taken a particular view for a particular comparable company, then
same cannot be held to be automatically a good comparable or not comparable.
The same has to be done on the functional analysis alone. Similar view was
expressed in the case of Advance Power Display in ITA 6732 and 6542/Mum/2011,
wherein, it has been held that, comparability of the case is to be tested for
each and every year independently and separately for the purpose of determination
of ALP. The international transaction has to be compared with uncontrolled and
unrelated transaction for using data relating to financial year in which
international transaction has been entered into and not merely on the basis of
earlier years. Thereafter, he proceeded to give his counter submission with
regard to each and every comparables rejected/included by the TPO.
ICRA MANAGEMENT CONSULTANCY
SERVICES LTD.
10. Ld. DR submitted this
comparable was chosen by the assessee and rejected by the TPO. Merely because
the revenue of this company is from consulting fee that does not mean, it is
functionally comparable also. The TPO has carried out detailed comparability
analysis on FAR basis with this company vis-Ã -vis the assessee. Such a
comparison has been given in tabular form in Para 11.1 of the TPO’s order. Thus
on the basis of such an analysis, it is amply clear that, functions performed
by ICRA are different from that of the assessee and so also the assets employed
to perform the functions as well as the risk involved. If a criterion of the
revenue from consultancy fee is to be taken into consideration, then on same
logic, Motilal Oswal should also be included in the list as it has also shown
the income from consultancy and so also in other cases also. Thus, this
comparable cannot be included on account of single segment of revenue alone,
that is, from consultancy fee but has to be analyse on FAR analysis which the
TPO has done in a very elaborate manner at pages 9 to 11 of the order. Thus,
this comparable has rightly been rejected by the TPO. Thereafter, he pointed
out various other aspects as given in the Directors report of ICRA from pages
162 to 164 and submitted that the fields in which it is operating is very
diverse and has also advised in cross border M&A. Further, if the skill set
of the employees of the assessee is taken into consideration, then it would be
seen that the average salary is very high which is evident from the fact that
22 to 25 employees salary paid was more than Rs. 20 crores as compared to the
average salary cost of ICRA. Thus, going by the qualitative human asset, then
there is a huge variation, which fails the comparability tests. Accordingly,
this company should not be included.
11. Kinetic Trust
Ltd. :
Regarding this comparable,
Mr. Chand submitted that, firstly, the total revenue of the company is only
Rs.24 lakhs, whereas that of the assessee is Rs. 34.3 Crores. Thus, there is a
huge gap of turnover, which affects its comparability. Secondly, this company
is registered with RBI as NBFC, therefore, its functions are also different.
The TPO has analysed this comparable at page 11 to 13 of the order and has
noted that, this company is primarily engaged investments in capital market on
its own behalf and there is a huge difference in the turnover. The Ld. DR
submitted that for carrying out FAR analysis, there has to be some basic
critical mass, otherwise, the whole FAR tests fails. Regarding, Ld. Counsels
plea that assessee has not taken any criteria of turnover, he submitted that
TPO can very well apply the turnover criteria and in support of his contention,
he relied upon the decision of ITAT in the case of Sand Stone Capital Advisors
Private Ltd. vs. DCIT, reported in 147 ITD 240. Lastly, he submitted that, if
turnover is taken as criteria then turnover of Motilal Oswal is twice the
turnover of the assessee for which the assessee has objected for inclusion.
Thus there cannot be divergent approach and accordingly, this company has
rightly been rejected by the TPO.
12. Integrated
Capital Services Limited:
With regard to this
comparable, Ld. CIT DR submitted that, the Ld. Counsel has admitted that, this
comparable has been held to be a not a good comparable for investment advisory
services by the Tribunal in some decisions which has been referred by the
Counsel, therefore, this should be removed from the comparability list.
13. IDC India Ltd &
Future Capital Advisors Ltd.:-
For these comparables, Mr.
Chand relied upon the order of the DRP and referred to the direction given by
the DRP at para 26 and 27 of the order. Alternatively, he submitted that, if
the assessee’s contention is accepted that DRP has not given opportunity to the
assessee while rejecting these comparables, then matter should be restored back
to DRP for considering the assessee’s objection on these two comparables.
14. Motilal Oswal
Investment Advisors Pvt. Ltd.: Regarding this comparable, which has been
included by the TPO, he submitted that the annual report of the company
suggests that its revenue is only from advisory fees during the year and other
than this, there is no other income, therefore, the functions performed by the
assessee for investment advisory is quite comparable with this company. In
support, he referred to page 135 of the paper book which shows income from
operations is from advisory fees only. It has a single segment and there is no
other reportable segment as defined in AS-17. Regarding remarks of auditor’s
report that it was engaged in the business of merchant banking and bank
advisory services, he submitted that, the same has to be treated as investment
advisory services only, because this company is particularly into investment
advisory for which it receives advisory fees. Under TNMM only the similarity of
the functions is to be compared and if there is some product diversity then it
cannot be held that same is not comparable if the overall functions are the
same. Thus, this comparable has rightly been included by the TPO.
15. In the rejoinder, Mr.
Porus Kaka submitted that, if there are no new materials in this year, then
there cannot be any deviation from the earlier years on the issue of
comparables especially when matter has been decided from the stage of the
Tribunal on same facts. If any comparable has been included or excluded by the
Tribunal then same should be accepted in this year also if there are no
material changes. The onus is on the Department to bring on record what is the
new material fact which has come in this year, if they want to take a different
stand. Otherwise, the Tribunal order has to be followed as judicial precedence
especially when rendered in assessee’s own case, not once but twice in the
preceding assessment years. Regarding each and every comparable, he made his
detailed rejoinder and submitted that not only they have been considered to be
good comparable in the earlier years but also found to be from the records. In
nut shell, regarding ICRA he submitted, what is required to be seen is a core
competence in which company is functioning and whether it is rendering core
investment advisory services or not. Similarly in the case of Kinetic Trust
Ltd, he relied upon the decision of Nortel, which has been affirmed by the
Hon’ble Delhi High Court and submitted that, once no filter has been applied
then one side filter cannot be applied by the TPO. The TPO is trying to cherry
picked the comparables by applying filter arbitrarily for selection. Regarding
Motilal Oswal, he submitted that this company is purely into investment banker
and a merchant banker which is entirely different not only on functions but
also on assets and risks. The assessee is giving non-binding investment advice
to its own AE for which it is reimbursed at cost plus markup, whereas the
functions of a merchant banker are entirely different altogether. None of the
activities carried out by the Motilal Oswal, is done by the assessee. He
reiterated that in light of several judicial precedence wherein Motilal Oswal
has been held to be not comparable with investment advisory companies should be
followed and therefore, same should not be included.
16. We have heard the rival
submissions, perused the relevant findings given in the impugned orders as well
as material referred to before us. In this case it is not the first year of
transfer pricing analysis for the provision of services rendered by the
assessee to its AE, albeit in earlier year’s also by and large similar dispute
had arisen with regard to same set of comparables. The assessee is providing
non-binding investment advisory services to THPL and the later retains the
right to use such investment advisory services. As noted above the functions
performed by the assessee for rendering advisory services for the AE to take
decision for making the investments are as under:-
a)
Providing research reports, macro economic analysis and other advisory
services;
(b)
Identifying, screening and investigating sectors of the Indian economy for
investment opportunity;
(c)
Advising in investigation, structure, monitoring of portfolio
securities/portfolio companies as the case may be;
(d)
Undertaking economic and market intelligence of the eligible portfolio
companies including analysis and investigation of eligible portfolio companies,
including their products, services, markets, management, financial solutions,
competitive position market ranking, prospects for future performance and
relevant industry sector;
(e)
Undertaking due diligence of investment opportunities and submit reports and
recommendation; and
(f)
Assisting in performance review of portfolio companies, recommending the plans
for managerial and business support and furnishing performance and relevant
industry sector reports.
For rendering these
services to its AE the assessee is remunerated with cost plus markup. In this
year the assessee has earned markup margin of 21.4% which is the subject matter
of transfer pricing analysis and benchmarking of the margin by carrying out
comparability analysis. In this case, it is undisputed that, the most
appropriate method (MAM) for determination of Arm’s Length Price is Transactional
Net Margin Method (TNMM) whereby ALP is determined by comparing the operating
profit relevant to an appropriate base like cost, sales and assets of the
tested party with the operating profit of an uncontrolled party engaged in the
comparable transactions. It measures the net margin or profit earned in an
uncontrolled transaction by independent entities. The assessee’s margin which
is based on operating profit/operating cost was at 21.4% which have been worked
out in the following manner:
|
Total revenue as
per P&L
|
|
|
Income
|
|
|
Investment advisory
income
|
343,128,197
|
|
Other income
|
1,473,267
|
|
Total Income
|
344,601,464
|
|
Less: Non operating
income
|
|
|
Director’s sitting
fees
|
(340,000)
|
|
Dividend received
|
(1,122,187)
|
|
Provision for
diminution in the value of Investment
|
(11,080)
|
|
|
|
|
Total operating
income
|
343,128,197
|
|
Expenditure
|
|
|
Personnel expenses
|
192,827,925
|
|
Administrative
& Other expenses
|
84,266,329
|
|
Depreciation
|
3,622,798
|
|
Prior period
expenses
|
2,859,971
|
|
Total expenditure
|
283,577,023
|
|
Less: Non operating
expenditure
|
|
|
Donation
|
(925,000)
|
|
Total Operating
Expenditure
|
282,652,023
|
|
|
|
|
Operating Profit
|
60,476,174
|
|
Operating
Profit/Operating Cost
|
21.4%
|
Like in the earlier years,
the whole dispute revolves around inclusion or exclusion of certain
comparables, some of which have already come up for consideration up till the
stage of the Tribunal. However, before us the Ld. CIT DR has vehemently opposed
the following of the judicial precedence of the earlier years and contended
that, the entire issue of inclusion or exclusion of the comparables should be
analysed afresh, firstly because, principles of res judicata cannot be applied
in income tax proceedings, especially in such matters and secondly, on a deeper
scrutiny of facts if it is found that certain aspect has not been considered in
the earlier years, then different view or conclusion can be taken.
17. The entire substratum
of transfer pricing process is the identification of the comparable
transactions or the companies which are to be used for comparability analysis
for benchmarking the international transaction so as to arrive at arm’s length
margin or the price. The comparables can be internal, based on the information
available internally i.e. the AE may be rendering or receiving similar services
to or from an independent enterprise; or from the information obtained
externally from the public domain of the entities involved in similar business
and functions. The comparability analysis is basically a comparison of a
controlled transaction with the uncontrolled transaction so as to arrive at the
appropriate price or margin for making the accurate adjustments. Rule 10B (2)
to (4) provides such mechanism for conducting the comparability analysis with
the uncontrolled transactions. But before carrying out the comparability
analysis as provided in the rules, the first and foremost requirement is the
identification of the comparables from the data sources available in the public
domain like Prowess or Capital Line or like. While identifying the potential
comparables, the key characteristics and the features has to be identified
before the search is carried out on the databases. This is a very critical
process of selection which has to be done on a rational basis and scientific
methodology. While carrying out the search, certain key words are to be
inserted to shortlist the similar category of companies and from results
thrown, quantitative filters are applied so that the unwanted comparables are
weaned out and a certain range is available for carrying out qualitative
comparability analysis from the comparables based on the parameters laid down
in Rule 10B(2). The comparability is carried out on FAR analysis; the special
characteristics of the property transferred or services provided along with the
contractual terms and the economic conditions prevailing in the market.
Comparability has to be established with reference to the product or services,
the conditions and the enterprises. It is therefore necessary to compare the
attributes of the transactions or enterprise that would affect the conditions
in arms’ length dealings.
18. From the perusal of the
material placed before us, especially, the accept and reject matrix of the
comparables for the provision of investment advisory services, we find that
from nearly 2000 companies which were thrown in the search process, the
assessee has finally selected seven comparables after carrying out qualitative
analysis. These seven comparables with their operating margin for financial
year 2009-10 were as under:
|
Name of the company
(Comparables selected By the assessee
|
Operating margin FY
2009-10
|
|
Future Capital
Investment Advisors Ltd.
|
15.71%
|
|
ICRA Management
Consulting Services Ltd
|
0.41%
|
|
ICRA online Ltd
|
41.77%
|
|
IDC India Ltd
|
13.00%
|
|
Informed
Technologies Ltd.
|
25.52%
|
|
Integrated Capital
Services Ltd.
|
-2.92%
|
|
Kinetic Trust Ltd.
|
10.39%
|
|
Arithmetic Mean
|
14.84%
|
In support of these seven
selected comparables, the assessee has provided the entire financial data for
the relevant financial year and annual report of these comparable companies
which have been placed in the paper book. Out of these comparables, three of
them have been rejected by the TPO and two have been additionally rejected by
the DRP and two new comparables have been included by the TPO. Before analyzing
each and every comparables, in the background of the arguments made before us
and material placed on record, it is noticed that nowhere in the TPO’s order it
is mentioned what selection process has been adopted for including the two
comparables by the TPO. What are the criteria, key words, quantitative and
qualitative filters applied for selecting the comparables. If rules provides
for selection criterion of comparables, then same has to be adhered to strictly
by either parties. If a particular mechanism of search process is to be done
scientifically by the assessee then same applies to the TPO also, otherwise it
will always create suspicion of cherry picking of the comparables by the
parties. There cannot be two different standards under the law, one for the
assessee and one for the TPO. So far as selection of the comparables by the
TPO, nothing has been brought on record before us, that TPO has adopted any
scientific method for selection of his two comparables, i.e. Motilal Oswal
Investment Advisory Pvt Ltd. and Future Capital Holdings Ltd. From the perusal
of para 9.2 of the TPO’s order it appears that, he has tried to picked-up the
two comparables from the accept and reject matrix of companies by the assessee
during its search process. Such an approach clearly indicates cherry picking,
which approach cannot be accepted.
19. Here in this case, we
have to analyse the comparables which are in dispute under the TNMM method,
where comparability is focused on transactions rather than comparability in
product as required in traditional methods. TNMM is based on net profit margin
relative to an appropriate base, viz., costs, sales, assets, which the assessee
makes from controlled transactions. The profitability derived from uncontrolled
party engaged in similar line of business activity under similar circumstances,
is the measure of arm’s length results. If cost or sale is used as the base,
then profitability depends largely upon the functions performed, therefore, in
such a situation closer functionality is required preferably to an appropriate
business segment or transaction. Now we will analyse the impugned comparables
before us in light of the submissions made and in view of the background
discussed above.
ICRA Management Consulting
Services Limited:
20. At the outset, this
comparable was subject matter of consideration before the Tribunal in AY
2008-09 & 2009-10 , wherein this company was held to be good comparable
both on the ground of functional similarity and in view of principles of
consistency as it was held to be a good comparable by the TPO in the earlier
years. From the perusal of the annual report, which is appearing from pages 156
to 187 of the paper book, we find that it is essentially providing consultancy
services in diversified areas, like in government sectors, infrastructure,
energy, corporate advisory, banking and financial services, etc. It focuses on
consultancy and advisory which is its core area and competency. The revenue
generation is purely from consultancy fees which is evident from profit and
loss account as on 31st March 2010 (appearing at page 176 of the paper book).
The TPO in his order has noted that its consultation or advisory operations
ranges in various fields which have been tabulated by him at pages 9 to 11 of
the order, which according to him assessee is not performing. On the perusal of
the directors’ report and also the remarks of the TPO, we find that the ICRA
Management is providing consultancy services in a myriad areas ranging from
development, transportation, urban infrastructure, energy sector, banking and
financial services and advising cross border M&A transaction etc. Some
other observation made by the TPO is that ICRA has participated in various
international forums, partnered with foreign company in multiple projects and
has a very big client base unlike assessee. However all these facts do not
affect the core competency and functions of the said company, which is
advisory, because in all the fields it is rendering only advisory and
consultancy services. The whole revenue is again from consultancy/advisory
fees. In the instant case also, the assessee is providing Investment Advisory
Services to its AE in diverse industries like, infrastructure, telecom, media,
banking etc. to enable the AE to take decision for making investments. The
functions of consultancy/advisory have to be seen as its core competence area and
not in the field in which such consultancy is given. Under the TNMM, one has to
see the transaction undertaken are comparable or not and whether any adjustment
is required to obtain a reliable result, because under TNMM the net margin are
less affected by transactional differences and is more tolerant to some minor
functional differences between controlled and uncontrolled transactions.
However, if any unique function or property significantly affects the operating
costs or net margin or has a bearing in the generation of revenue itself, then
it cannot be considered to be a fit comparable for benchmarking the net
margins. Here it is not the case where there is any unique functions materially
affecting the revenue or net margins vis-a-vis the functions performed by ICRA.
Hence on functional level it is a good comparable. As stated earlier, in the
earlier years, the TPO has accepted ICRA to be a comparable and in later years
the Tribunal in AY 2008-09 & 2009-10 has held ICRA Management to be good
comparable qua the functions of the assessee and there being no material change
on facts, functional profile or any other factor in this year, then as matter
of consistency, we do not want do deviate from our findings given in the
earlier years. There cannot be a pick and choose of comparables every year
unless there are some material difference in facts and circumstances compelling
to take a different conclusion. Thus, we hold that ICRA Management is a good
comparable and should be included in the list of final comparables.
Kinetic Trust Ltd. :-
21. This company has been
rejected by the TPO on the ground that its turnover is only 24 lakhs and it is
registered with the RBI as NBFC. On a lower turnover, the TPO has mainly relied
upon the decision of ITAT in the case of Triology E Business. At the outset, it
is noticed that in the earlier two years, the Kinetic Trust Ltd has been held
to be good comparable based on its functional profile. So far as functions are
concerned, it is evident from the Directors’ reports, which are placed in the
paper book from pages 187 to 230. It is seen that, the company is concentrating
on its main activity of corporate consultancy services and financial services.
Being a NBFC has not changed the nature of activity undertaken by the company and
its core business competency and its revenue is from consultancy services. So
far as the turnover filter applied by the TPO, we find that, first of all at
the time of selection process, the assessee has not considered the turnover
filter for accepting or rejecting the comparables. The turnover filter cannot
be one of the tool for cherry picking by either of the parties at a later
stage, as it has to be done at the threshold level only, i.e. at the time of
search process and by applying quantitative filter. However, once turnover
filter has not been applied then comparability has to be done at qualitative
level based on FAR Analysis. If on FAR analysis there are differences on
account of either assets deployed and risk assumed materially affecting costs
or margins then probably such comparability can be rejected. But here in this
case, merely on the ground that it has a low turnover cannot be the reason or
criteria for rejection. Moreover, from the perusal of the decision of Triolgy
E. Business India Pvt Ltd.(supra), it is seen that the Tribunal on the facts of
the case highlighted the importance of applying turnover filter between the
range of Rs. 1 crore to 200 crores. This does not lead to any inference that in
all the matters the same criteria for applying the turnover filter should be
taken between 1 crore to 200 crores. Thus, the ratio of the Tribunal decision
cannot be applied universally in all the cases. Rather in the case of Nortel
India Pvt Ltd vs Addl. CIT (supra), the Tribunal held that a company cannot be
excluded from the comparable list merely for the reason of low turnover
especially, when no turnover filter was applied by either parties. The analysis
in such cases has to be carried out on functional basis. Before us, it has also
been brought on record that the said decision of the Tribunal in the appeal
filed by the Revenue before the High Court has been upheld that is, revenue’s
appeal has been dismissed. Further as stated above, in the earlier years, this
comparable has been held to be a good comparable by the TPO himself and
Tribunal in two years have accepted to be a good comparable. Thus as a matter
of consistency, we hold that Kinetic Trust Ltd. should be included in the
comparability list.
IDC India Ltd :
22. This comparable though
accepted by the TPO as a good comparable, however, the DRP has additionally
rejected this comparable. In assessment year 2008-09, the Tribunal has held to
be a good comparable, firstly, on the ground that this company is also engaged
in the advisory and consultancy services for the purpose of investment made in
various sectors and secondly, it has been found to be good comparable by the
TPO in the assessment year 2007-08 and 2009-10. Once company has been held to
be good comparable consistently for three years then without any change in the
material facts, it cannot be held that this comparable could be rejected in
this year. Moreover, in the case of Carlyle Advisory India Ltd., ITAT Mumbai
Bench, reported in 43 taxman.com 184, the Tribunal held that this company is a
good comparable with the companies rendering investment advisory services. This
decision of the Carlyle Advisors have also upheld by the Hon’ble Bombay High
Court. Moreover, we have already discussed the functions performed by the IDC
India Ltd while dealing with Ld. Counsel’s argument that functions of advisory
services are quite similar to the functions of the assessee and, therefore, we
accept the assessee’s contention that this comparable cannot be rejected.
Accordingly, same is directed to be included in the comparability list.
Future Capital Investment
Advisory Ltd:
23. This company is also
accepted by the TPO as good comparable, however, the DRP has rejected the same.
Such a rejection by the DRP is without giving any opportunity to the assessee.
From the perusal of the annual report, which has placed in the paper book from
pages 263 to 272, it is seen that it is primarily engaged in rendering
investment advisory services only and its operating in a single segment. Thus,
there cannot be any genuine reason for rejecting the said comparable. The DRP
has rejected this comparable on the ground that it is in the process of
shutting down its business. However, during the year, it has continued to
render the investment advisory services and the realignment agreement was
effective from 1st January, 2010, the realignment is also for investment
advisory activities. Thus, there is not much impact on the net margins
especially in the assessment year 2010-11, therefore, this company cannot be
rejected and TPO is directed to include the same in the final comparability
list.
Integrated Capital Services
Ltd:
24. This comparable has
been admitted by the Ld. Counsel to have been rejected by the Tribunal Q India
Pvt Ltd. (supra) and New Consolidate Advisory Ltd. (supra) therefore, this
comparable company has not been contested by him. Accordingly, we hold that
this comparable has rightly been rejected and shall not be included in the
final comparables.
Motilal Oswal Investment
and Advisor Ltd :
25. This comparable has
been included by the TPO and while including the said comparable he has
observed that its income is only from Advisory fees during the year and it is
performing advisory services in that field of investment like assessee. Before
us, Ld. CIT DR arguing for its inclusion submitted that, if the ICRA Management
services can be included for having revenue from advisory services then on same
analogy this company should also be given the same treatment. From the perusal
of the directors’ report, it is seen that this company derives its business
income from four different business verticals, i.e. Equity capital markets,
merger and acquisitions, profit equity syndications and structured debt. It
also give advises on cross border acquisition. Its core competence is in the
field of merchant banking. It also provides comprehensive investment banking
solutions and transaction expertise covering private placement of equity, debt
and convertible instruments in international and domestic capital markets,
monitoring mergers and acquisitions and advising M&A as professional and
restructuring advisory and implementations. It is also involved in various
professional activities of the merchant banking. A Merchant Banker provides
capital to companies in the form of share ownership instead of loans. It also
provides advisory on corporate matters to the companies in which they invest.
The focus is on negotiated private equity investment. The wide range of
activities include portfolio management, credit syndication, counseling on
M&A, etc. This whole range of functions and activities carried out by
Motilal Oswal is definitely are far wider and much different from investment
advisory services where core functions is to give advices for making the
investments in diversified fields. A company which is engaged in merger and
acquisitions, private equity syndication, loan/credit syndication and
performing most of the function of a Merchant Banker, then the entire functions
and transactions affects the generation of revenue and margins. Such functions
are entirely different from investment advisory services. Mere classification
of revenue as ‘advisory fees’ will not put the company in a comparable basket
sans functional similarity and transactional analysis. In case of Carlyle India
Advisors Pvt. Ltd (supra), it has been held that, the merchant banking
functions are entirely different from investment advisory services and this
decision of the Tribunal has been upheld by the Hon’ble Bombay High Court.
Thus, in view of plethora of judicial decisions as referred to by Ld. Counsel
and in view of functional differences as discussed as above, we hold that
Motilal Oswal cannot be put into the comparability list and is directed to be
excluded.
26. Lastly, coming to the
addition of 3% markup additionally made over and above the comparative margin
arrived at by, the TPO, we find that same is not tenable from any quarters. The
TPO has added this markup on the ground that assessee in addition to investment
advisory services has rendered portfolio management services, that is, it is
monitoring the funds for its AE, hence for such a distinct function further
upward adjustment should be made. First of all for making such transfer pricing
adjustment a comparability analysis has to be done and then only margins can be
benchmarked. He has not brought on record that, assessee is rendering any
additional function which is not included in the investment advisory function.
The TPO has to show that there are additional functions or services rendered by
the assessee in this year qua the assets employed, functions performed and
risks assumed. As submitted by Ld. Counsel, cost plus mark-up compensation is
received for all the investment advisory services and the monitoring activity
is part and parcel of the same advisory services. Moreover if the activities of
the assessee have remained the same and FAR Analysis has been done on
investment advisory services as in the earlier years, then how such services
have become different in this year without any new material fact has not been
elaborated by the TPO. We agree that such an additional mark-up applied by the
TPO is without any FAR analysis or without any benchmarking exercise with any
comparables and more importantly without any analysis of assessee’s own facts.
The assessee is providing non-binding investment advisory services to its AE
and such services as highlighted by Ld. Counsel include; identifying and
analyzing potential investment opportunities, evaluating and making
recommendations to THPL with respect to specified investments. The monitoring
functions performed by the assessee are part and parcel of the portfolio
advisory services rendered by it because, the activities carried out by the
assessee while undertaking portfolio monitoring activities include analysis of
the latest development in the industry, ongoing performance of the industries
and providing necessary information to its AE from time to time. This aspect
has been noted by the ITAT, Mumbai Bench in the case of Carlyle India Advisors Private
Limited (supra) and in other decisions cited above by the Ld. Counsel. Thus, we
hold that no such addition or adjustment on account of extra markup can be
made. Accordingly, we direct to delete the addition.
27. In the result the
appeal of the assessee is allowed in part. Order pronounced in the open court
on 25th February, 2016.
*****
No comments:
Post a Comment