9911796707
TMI Blog2016 (2) TMI 907X X X X Extracts X X X X X X X X Extracts X X X X ..... rk-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 v ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 assesse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 Ind ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... elhi 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 rejeted 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 P ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nclusion 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 spe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oser 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 trans ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ich 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 h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rch 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 c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 gr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... operty 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 th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... arried 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nvestment 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
