TMI Blog2016 (5) TMI 1335X X X X Extracts X X X X X X X X Extracts X X X X ..... 7; 5. 71 Crores. During the assessment proceedings, the AO found that the assessee had entered in to International Transaction(IT. s)with its Associate Enterprise(AE). He made a reference to the Transfer Pricing Officer (TPO)to determine the Arm s Length Price(ALP)of such transactions. 2. During the Transfer Pricing(TP)proceedings, the TPO found that the assessee had earned a cost plus margin of 20% and had benchmarked the said transaction using Transactional Net Margin Method(TNMM)as the most appropriate method. The single year margin of the four comparable companies selected by the assessee for the provision of non-binding investment advisory services were as follows: i. ICRA Management Consulting Services Limited(ICRA@)0. 41%), ii. IDC(India) Limited(IDCL@13%), iii. Future Capital Holdings Limited(FCHL@16. 37%), iv. Mecklai Financial Commercial Services Limited(MFCSL@20. 43%). The Arithmetic Mean of the comparables was arrived at 12. 55%. It was claimed that the transactions were at Arm s Length. However, the TPO was not convinced with the selection of the comparables of the assessee. He selected following seven comparables and the margin of those comparables ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd management consultancy and that it was functionally different from the assessee, that the function of IDCL were not exactly similar to the business of investment advisory. The assessee argued that IDCLwas engaged primarily in the business of research and survey service and products that the function of both the companies were similar. The FAA further mentioned that the assessee had relied upon the cases of Sandstone Capital Advisors Pvt. Ltd. (ITA/ 6315/ Mum/2012)and Tamasek (supra). Relying upon the order of Sandstone Capital Advisors(supra)and Tamasek (supra), he held that there was sufficient degree of comparability in the characteris - tics of the services provided by the assessee viz-a-viz IDCL. 3. c. The assessee had objected the inclusion of KIACL as a comparable at the time of TP proceedings. But, the TPO held that KIACL had earned income from investment advisory activities, that the argument of the assessee with regard to business realignment impacting the performance of the company was not correct. Before the FAA, the assessee argued that annual report of KIACL suggested that it had realigned its investment advisory business to Everstone Investment Advisors Pvt. Ltd ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the case of Carlyle India Advisors Pvt. Ltd. (ITA/2200/M/2014-AY-9-10) and stated that Tribunal had rejected MOIAPL as a comparable to investment advisory services. The FAA held that MOIAPL provided strategic and financial advisory services to its top 10 clients, that same was comparable to the investment advisory services rendered by the assessee. Rejecting the claim of the assessee, he held that it should be accepted as a valid comparable . 3. f. The assessee had objected to the inclusion of IDFCL as a comparable in the final set of comparable companies, during the TP proceedings. Before the FAA, it submitted that IDFCL was registered as a portfolio manager with SEBI to carryout portfolio management services, that during the year ended on 31. 3. 2010 IDFCL had earned 50. 26% of its income(Rs. 13. 56crores)from PMS, 40. 13%from Perform - ance fee(Rs. 10. 82 crores) and 9. 60% from advisory fees(Rs. 2. 59crores), that no segmental information was published in the annual report. The FAA held that IDFCL was engaged into portfolio management services which were distinct from provision of investment advisory support. he directed the AO to exclude it from the list of the comparab ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... advisory services in a series of cases namely Temasek Holding advisors India Pvt. Ltd. (AY. 2010-11), Carlyle India Advisors Pvt. Ltd. (supra), Wells Fargo Real Estate Advisors Pvt. Ltd. (ITA/1093/ Mum/2014 (AY. 2009 -10). 4. a. We find that KIACL was rejected as a comparable for investment advisory services in the case of Carlyle India Advisors Pvt. Ltd. for the AY 2010-11 (supra). We would like to reproduce the relevant portion of the order and same reads as under : 22. We have carefully considered the rival stands on the issue of exclusion of Kshitij Investment Advisory Company Ltd. from the final set of comparables. The first and the foremost resistance articulated by the Revenue to oppose the exclusion of the said concern from the final set of comparables is the fact that such concern was included by the assessee itself as a comparable in its Transfer Pricing Study. As per the Revenue, since the said concern has been adopted by the assessee as a comparable, it is impermissible for the assessee to raise a plea asking for its exclusion in the process of determination of average margins under the TNM method. In our considered opinion, the proposition being canvassed by t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... omparable with the tested transactions. We have carefully considered the aforesaid plea set up by the Revenue and in this context we may briefly refer to the Business Review outlined in the Directors Report of the said concern, placed at page 536 of the Paper Book. It is stated therein that the investment advisory business has been realigned and an the employees have been transferred to Everstone Investment Advisors Pvt. Ltd. during the year under considera - tion w. e. f 1. 1. 2010. The note also suggests that the said concern did not enter into any non-compete agreement with Everstone Investment Advisors Pvt. Ltd. but as free to pursue any activity, including the activity in relation to investment advisory services. The aforesaid aspect has been highlighted by the Revenue to say that the said concern continues to be in the business of rendering investment advisory services and, therefore, the restructuring does not impact the comparability of the concern. In our considered opinion, the appreach of the Revenue in this context is quite flawed. Firstly, it is not disputed that the activity of investment advisory services has been realigned which included the transfer of all ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 di ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d that MOIAPL cannot be taken as a valid comparable in cases, where the assessee is rendering advisory servcies. In that matter the Tribunal held as under : 8. We have heard both the parties and perused the orders of the Revenue Authorities as well as the relevant material placed before us. It is an undisputed fact that the assessee is engaged in the business of rendering investment advisory and related services to its principal Carlyle Hong Kong. The dispute raised in ground no. 4 relates to whether (i) KLG Capital Services Ltd (KLG);(ii) KJMC Corporate Advisors (India) Limited (KJMC) and(iii)Motilal Oswal Investment Advisors Pvt Ltd(MOIAPL)are functionally comparab-le cases or not considering the decision of the Tribunal as well as the judgment of the Bombay High Court relied upon by the assessee. Regarding MOIAPL, assessee relied heavily on the order of the Tribunal in its own case for the AY 2008-2009, a copy of which is placed at page 282 of the paper book. On perusal of the said order of the Tribunal, we find that it is decided in favour of the assessee vide ITA No. 7367/Mum/ 2012(AY 2008-2009), dated 7. 2. 2014. On perusal of para 12 of the said order of the Tribunal, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt advisory the comparable of MOIAPL was rejected by the Tribunal. In that matter the Tribunal had held as under :- 7. We have carefully considered the rival submissions. We find that the assessee has been consistently canvassing before the lower authorities that Motilal Oswal Investment Advisors Private limited be excluded from the final set of comparables on the ground that its activities are functionally incomparable to the activity of Provision of investment advisory services being rendered by the assessee to its Associated Enterprises. In fact, before the TPO, assessee pointed out that the said concern was engaged in providing comprehensive investment banking solutions and that it was rendering services across various products, viz. Equity Capital Markets, Mergers Acquisitions, Private Equity Syndications and Structured Debt, etc. The appellant relied upon the decision of the Tribunal in the case of Carlyle India Advisors Private Limited (214 Taxmann 492), to support its plea for exclusion of the said concern from the final set of comparables. The TPO rejected the aforesaid plea on the ground that the Profit and Loss account of the said concern for the year under consid ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... et of comparables on account of functional dissimilarities. In fact, in other precedents cited by the ld. Representative for the assessee, the said concern has also been excluded from the set of comparables under similar circumstances. 9. In conclusion, on the basis of the afore-said discussion and having regard to the precedents noted above, we hold that M/s. Motilal Oswal Investment Advisors Private Limited (supra) is liable to be excluded from the final set of comparables. Following the above orders, we hold that job profile of MOIAPL was different as compared to the activities undertaken by the assessee. It was rendering investment advisory services, specifically related with real estate business whereas MOIPAL is a merchant banker. So, we hold that MOIAPL is liable to be excluded from the final set of comparables. Respectfully, following the above, we hold that KIACL and MOIAPL were wrongly included in the list of valid comparables. Both are functionally different from the assessee. Activities carried out the assessee for the year under appeal are distinct and quite separate from the activities of those companies. So, reversing the order of the FAA, we decide fi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mpany which were functionally similar to the activities performed by the assessee for rendering investment advisory services, that Note 12 of the annual report of ICRA clearly mentioned that it had only one business segment i. e. consulting services and had no other primary reportable segment (pg. 460 of the PB). Moreover, the product description provided in the annual report specifies Management Consultancy Services as the only product offered by the company (Pg. 461 of the PB). With regard to the Pg. 439 of the PB, the AR stated that ICRA had only rendered advisory services in case of Asia's leading company in the Metals and Energy sector cross border M A transaction. He further argued that MOIAPL had been rejected on the ground that it was engaged in merchant banking investment banking services which were functionally not comparable to the investment advisory services rendered by the assessee, that despite such dissimilarity the Accounts it did not give break-up of results from the said two activities separately, that it could not be treated as a valid comparable, that ICRA did not have separate segmenals, that it rendered only advisory services in varied fields, that hen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the TPO. Merely because the revenue of this company is from consulting fee that does not mean, it is functionally comparable also. The TPO had carried out detailed comparability analysis on FAR basis with this company vis-a-vis the appellant. Such a comparison had 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 had 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 had to be analyse on FAR analysis which the TPO had done in a very elaborate manner at pages 9 to 11 of the order. Thus, this comparable had 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s again from' consultancy/advisory fees. In the instant case also the appellant 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 had 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 had 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 earli ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ich had provided management, consultancy services in diverse fields can be held as comparable to investment advisory companies as the appellant while giving investment advisory services too analyses the various sectors of industries while recommending for investment. At a functional level this company can be very well said to be a good comparable as it is purely on advisory services rendering company. Moreover, this company had been held to be to the Investment Advisor Ltd in the Temasek Holdings Advisors (India) Pvt Ltd (supra) . We further find that the very argument of the DR that were advanced before us, were considered and rejected by the ITAT in the case of Temasek for AY. 2010-11. We find that the ITAT records the DR's submission as under: 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 had also shown the income from consultancy and so also in other cases also. The reference made by the DR to the Kerala High Court decision of Kalpetta Estates Ltd. [211 ITR 635] to say that res judicata does not apply to income-tax proceedings is not rele ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 2008-09), that the activities and functions of IDCL from the AY. 2008- 09, have remained unchanged including the during the year under consideration. He referred to the annual report of IDCL for the year ending 31. 03. 2008 and stated that Page 469 of the PB showed that IDCL had income from sales and services, that because the Annual Accounts used the term sales it did not mean that IDCL sold products as any trader or manufacturer would, that the Pg. 482 clearly mentioned that the company was engaged in rendering market research and management consultancy services, that as a service provider is also required to follow AS-9, that it was incorrect to say that following AS would show that IDCL was a trader or manufacturer of products, that expenses incurred towards the copyright were considered to be operating in nature and formed only 6. 17% of the total expenditure incurred during the year, that payment for copyright would only show that IDCL uses certain copyrighted material while rendering services, that Pg. 486 of the PB made it clear that the word products used by IDCL in its Annual Accounts referred to nothing but the areas in which it provides research/advisory viz. Infrastru ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... be included in the comparability list. We find that IDCL had been accepted by the TPO as a valid comparable to the assessee for the AY. s. 2012-13 and 2013-14. It is found that the very arguments of the DR narrated above were urged before the ITAT in the case of Sandstone Capital Advisors Private Limited(supra)as under: 7. 1. 1 Per contra, Shri Ajeet Kumar Jain, Ld. CIT DR had submitted that in the case of IDC India Ltd. , the income had been shown in the P L account under the head 'sales and services' income. The description of sales had not been given in the records. He had further pointed out that as per the Schedule to the Balance Sheet; the general business profile of [DC India Ltd is given as (conversion income and management consultancy) conduct of research and survey, business functions and management consultancy; therefore, this company is functionally different from the business profile of the appellant. We further find that the Tribunal has decided the matter as follow: 8. Having considered the rival submissions as well as the relevant material on record, we find that the main business of the assessee from which it had derived its income is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oere, in our opinion they have no evidentiary value for deciding the issues arising for the year under appeal. Document A-5, is a newspaper article dated 10. 03. 2011 and hence has no relevance to the year under consideration. In any event it only conveys that IDCL's name was changed to Cyber Media Research Ltd. In our opinion, this fact would have no effects on IDCL's comparability with the assessee. Considering the above, we hold that the FAA was justified in holding that IDCL should be accepted as a functionally comparable company to the non-binding investment advisory services provided by the assessee. 6. c. With regard to ICR-O, the DR submitted that the activities performed by it were analytical in nature which helped in taking financial decisions and therefore were akin to investment advisory services. He referred to page 489 of the paper book for the purpose of demonstrating the scope of outsourced services rendered by it. He also referred to page 500 of the paper book which showed that the income earned by ICRA-O was from fee based services and hence it could be considered as comparable to the investment advisory services. The AR contended that ICRA-O did not ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... financial planners and IF As. Our analysts help distributors, banks and AMCs formulate and deliver various analytical reports on fund performance, event updates and economic outlook 6. d. With regard to IDFC, the DR placed reliance on the order of the TPO and stated that the functions performed by IDFC were similar to the functions of the assessee. The AR contended that the non-comparability of IDFC to companies engaged in Investment Advisory was no longer a dispute, that it had been reconfirmed by the ITAT in the cases Carlyle(India)Advisors Private Limited (supra), Bain Capital Advisors (India) Private Limited (ITA/413/Mum/ 2015) Sparkles Dhandho Advisors Private Limited (ITA/1047/M/2015for AY. 2010-11), that the FAA had rejected IDFC as comparable to investment advisory services rendered by the assessee and had stated that IDFC was registered as a Portfolio Manager with SEBI, that the DR did not make any submission as to why and how the order of the FAA was incorrect. 6. d. 1. After hearing the rival submissions we would like to refer to the order of Carlyle (India) Advisors Private Limited (supra)and it reads as under: We have carefully considered the rival submi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Limited from the final set of comparables. In view of the aforesaid discussion: in our view, IDFC Investment Advisors Limited deserves to be excluded from the final set of comparables for the purpose of computing the arm's length price of the appellant's international transaction of the provision of investment advisory related support services to the associated enterprise. Thus, in this case also, appellant succeeds . We further find that in the matter of Bain Capital Advisors (India) Private Limited (supra), the Tribunal has held as under: IDFC rendered portfolio management services for hybrid infrastructure portfolio, agriculture opportunities portfolio and farm fork portfolio. IDFC is registered as portfolio manager with SEBL. Thus, IDFC is functionally different from the assessee which is engaged merely in non-binding investment advisory support services. Since, IDFC is functionally different, we direct the AO to exclude the IDFC from the list of comparables for computing arms' length adjustment. It is found that while deciding the appeal of Sparkles Dhandho Advisors Private Limited (supra), the Tribunal has observed as follow: Regarding IDFC, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ology solutions provider and caters for some of the biggest names in the financial services sector in(India) and abroad, which is a testimony to its product quality, commitment and credibility . From the above description it is clear that ICRA-O operated in two strategic lines of business, i. e. knowledge Process Outsourcing and information Services and Technology Solutions, with a list of reputed global and domestic clients. Note c(iii)on Pg. 507 of the PB also proves that the activities performed by the Company under the business line Outsourced Services were in the nature of maintenance and management of data and therefore cannot be compared with the assessee. As far as IDFC is concerned, we would like to mention that a portfolio manager is a body corporate who pursuant to a contract or arrangement with a client would advises or direct or undertake on behalf of the client-whether as a discretionary portfolio manager or otherwise. FAR analysis of a Portfolio Manager cannot be compared with an assessee engaged in the business of providing investment advisory services. The Tribunal has in the cases discussed at paragraph 6. d. a. held that IDFC was not a valid comparable. ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
