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2016 (6) TMI 28 - ITAT MUMBAI

2016 (6) TMI 28 - ITAT MUMBAI - TMI - Armís length price adjustment in respect of investment advisory fees charged by the assessee from its associated enterprises - selection of MAM - Held that:- The exercise of ascertaining the armís length price, simplictor on the basis of the fees in percentage terms with non AEs and without having regard to the other factors governing determination of price, is inappropriate and unsustainable in law. It is also important to bear in mind the fact though rule .....

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rable with the fees, in percentage terms at the level of US $ 135.83 million fund and US $ 37.75 million fund. We, therefore, reject the adoption of this internal CUP.

We have noted that the DRP has justified rejection of TNMM on the ground that the normal trade practice is to invoice the investment advisory services, in intra AE transactions, on cost plus basis. It is difficult to understand the rationale of this approach. What is done by other entities in similar situations is hardl .....

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In view of these discussions, in our considered view, the TNMM method, as adopted by the assessee, should have been accepted. We have also noted that the assessee has produced segmental accounts for the investment advisory services in this case. As regards the point that only salary costs are taken into account in the segmental accounts and other costs are not taken into account and other issues with respect to correct working of the TNMM, with the consent of the parties, we remit the matter to .....

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2012 passed by the Assessing Officer, in the matter of assessment under section 143(3) r.w.s. 144C(13) of the Income Tax Act, 1961, for the assessment year 2008-09. 2. While ground no. 11 was not pressed by the assessee, ground nos. 1 to 10, which pertain to the same issue, i.e. correctness of arm s length price adjustment of ₹ 28,71,30,628 in respect of investment advisory fees charged to the associated enterprises, are as follows: 1. The AO/TPO erred in making and the DRP erred in confir .....

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jurisdiction as the preconditions mentioned in section 92C(3) of the Act have not been fulfilled in the present case. 3. The AO/TPO erred in rejecting and the DRP erred in upholding the rejection of Transactional Net Margin Method (TNMM) adopted by the Appellant as the most appropriate method for computation of arms length price in respect of investment advisory services. 4. Assuming without admitting that the AO/TPO/DRP were not satisfied with the mariner of determination of the profit linked .....

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AO/TPO/DRP failed to appreciate that determination of fees for rendering investment advisory services is based on negotiation between the parties. Further, the business model of such services is such that the fees to be charged is influenced by several factors including the size of the mandate, timing of mandate, geography, market conditions, fund complexity, competitive position of the enterprises, future business potential, continuity of business, fee spread etc. and no reliable adjustments ca .....

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re fees to be received by the Appellant for rendering investment advisory services to associated enterprises will be more than the fees received by the associated enterprises for rendering investment management services to third parties of which investment advisory rendered by the Appellant was a part. 9. Assuming without admitting that CUP method is the most appropriate method in the present case for computation of arms length price, then, instead of taking the investment advisory fee earned by .....

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investment mandate/objective of each respective fund. b. Segmental accounts for investment advisory activity have not been prepared in a rational manner without pointing out any flaws in it. c. Volume factor is not present in pricing for investment advisory by merely comparing the fee and volume of two investment mandates without appreciating the scope of work involved in each investment advisory mandates. 3. As all the above grounds of appeal pertain to only one issue, i.e. arm s length price a .....

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ory services. During the relevant previous year, the assessee rendered investment advisory services to its AEs, namely Prudential Asset Management Singapore Limited- PCA India Infrastructure Equity Open Limited, PCA Securities Investment Trust Co Ltd, Taiwan and ICICI International Limited, Mauritius. The consideration for the services so rendered by the assessee was ₹ 15,74,58,152, ₹ 5,70,88,734 and ₹ 58,54,867 respectively. The consideration so received was claimed to be arm .....

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ceeded to note that while, on an average, the assessee has charged fees of 0.77% of assets under management from the independent enterprises (non- AEs), the assessee has charged, on an average, 0.51% fees from the associated enterprises. While TPO noted that there are number of factors, such as size of AUM (assets under management), complexity of the funds managed, future business potential, market conditions, fund tenure and efforts involved on the mandate, which govern the fixation of investme .....

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Bank EC 3,981,679 0.75% 31 Jul 02 5. It was in this backdrop that the internal CUP was adopted @ 0.78% and the arm s length price of the investment advisory services was recomputed on that basis. Accordingly, an adjustment of ₹ 28,71,30,628 was proposed. Aggrieved, assessee raised an objection before the Dispute Resolution Panel but without any success. The DRP was of the view that generally, most service providers of non binding investment advisory services, such as those services provid .....

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tion that the TPO does not have unfettered power to arbitrarily reject the method adopted by the assessee and replace it by another method. At the same time assessee should also not put letters on TPO by merely stating objections regarding adjustments of differences without demonstrating the exact nature of adjustments it seeks and the calculations needed for benchmarking the ALP on CUP. As regards assessee s adoption of TNMM on the basis of segmental results, it is observed that the segmental r .....

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, the investment advisory has not been incorporated as a separate segment in the published account and the method and amounts of allocation is not acceptable for purposes of benchmarking, the method of TNMM adopted by the assessee stands on a weaker wicket more so when internal CUP is available to TPO for benchmarking the international transactions. More so, when as slated earlier the compensation model of assessee is different from other such service providers. 3.1.11 Keeping the aforesaid in v .....

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28/- towards international transaction involving investment advisory services is upheld and the objections of the assessee are dismissed. 6. The assessee is aggrieved and is in appeal before us. 7. We have heard the rival contentions, perused the material on record and duly considered facts of the case in the light of the applicable legal position. 8. We have noted that the TPO has proceeded to adopt the CUP method because of certain issues in applying TNMM on the facts of this case. Undoubtedly .....

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The volume of business is so diametrically different that the fees, in percentage terms, ceases to be comparable. There is no, and there cannot be any, dispute that managing the funds of such different sizes is not the same comparable. It is, treated as a comparable transaction because it is not the consideration, in terms of quantified amount, which is being compared, but the formulae, in accordance with which the consideration is to be computed, is being compared. That, however, proceeds on t .....

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It is also a common practice that when AUM size is small, and the market is less competitive, the fees in percentage terms will be higher, and when AUM size is big, and the market is more competitive, the fees in percentage terms will be lower. The exercise of ascertaining the arm s length price, simplictor on the basis of the fees in percentage terms with non AEs and without having regard to the other factors governing determination of price, is inappropriate and unsustainable in law. It is al .....

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US $ 2.55 million fund, is inherently incomparable with the fees, in percentage terms at the level of US $ 135.83 million fund and US $ 37.75 million fund. We, therefore, reject the adoption of this internal CUP. 9. We have noted that the DRP has justified rejection of TNMM on the ground that the normal trade practice is to invoice the investment advisory services, in intra AE transactions, on cost plus basis. It is difficult to understand the rationale of this approach. What is done by other e .....

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