TMI Blog2016 (2) TMI 907X X X X Extracts X X X X X X X X Extracts X X X X ..... al 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. company as 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ies 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 Addition of 3% markup additionally made over and above the comparative margin arrived at - Held that:- 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... see 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 prod ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 ₹ 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pany 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 adviso ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 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 & ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e 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 subm ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed 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 neces ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r 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 co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ver. 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 r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ation 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 th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssessee 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 func ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he 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 prof ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t 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 comparabl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ent 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. Couns ..... X X X X Extracts X X X X X X X X Extracts X X X X
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