TMI Blog2017 (1) TMI 1628X X X X Extracts X X X X X X X X Extracts X X X X ..... nging the directions of the Dispute Resolution Panel(DRP) Mumbai the assessee and the Assessing Officer(AO)have filed cross appeals for the year under consideration. Assessee- company engaged in providing non-binding investment advisory services to its Associated Enterprise(AE) filed its return of income declaring income of ₹ 4. 23 Crores. During the assessment proceedings the Assessing Officer(AO)made a reference to the Transfer Pricing Officer(TPO)to determine Arm s Length Price(ALP)of the International Transactions (IT. s). After receiving the order of the TPO the AO proposed addition of ₹ 8 43 43 300/-in his draft order. The assessee filed objections before the DRP. However the DRP upheld the orders of the AO/TPO. In pursuance of the directions of the DRP the AO completed the assessment u/s. 143(3)r. w. s. 144C of the Act on 30. 12. 2015 determining the income of the assessee at ₹ 10. 90 Crores. 2. Effective grounds of appeals filed by the AO and the assessee are inclusion and exclusion of certain comparables. During the Transfer Pricing(TP) proceedings the TPO found that the assessee had entered in to IT. s. worth ₹ 25. 24 Crores with its AE that net ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the assessee the TPO excluded CRISIL from the list of the comparables. He arrived at the final set of comparables as tabulated below: SN. Name of the comparable OP/OC (%) 1. MOIAPL 82. 55% 2. LCAPL 52. 42% 3. NBAL 47. 55% Average 60. 84%. The TPO computed the ALP as under: Operating Cost - ₹ 20. 93 corrodes Arm s Length Mean Margin- 60. 84% of the OC ALP @ 60. 84% of the OC- ₹ 33. 67 corrodes Price Charged- ₹ 25. 24 corrodes Shortfall being adjustment u/s. 92CA- ₹ 8 43 43 070/- 3. During the course of hearing before the DRP the assessee objected to rejection of four comparables and inclusion of three new comparables. After considering the submissions of the assessee and the orders of the AO/TPO the DRP held that the was not engaged in investment advisory activities that it was offering advisory and consultation services in the areas of strategy risk manage ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... BAL the DRP held that the activities of the company were functionally different from the activities of the assessee and that it was not a valid comparable. In the case of CRISIL the DRP observed that it operated into infrastructure advisory services and risks resolution undertaking feas -ibility study managing project procurement assisting with fiscal and public sector reform integrated risk management solutions advising the banks and corporate using information technology products that the infrastructure advisory division of the company had several verticals including healthcare transport and logistic in Africa and South East Asia that it was into activities totally different from the assessee and was not functionally comparable. 4. Before us the Authorised Representative (AR) made a preliminary submission and detailed submission. In his preliminary statement he argued that if ICRA and IDCL were accepted as valid comparables and if the directions of the DRP about exclusion of MOIAPL and NBAL from the final lists is approved the entire TP adjustment would be liable to be deleted and the remaining grounds would become academic that as per the agreement between the assessee and it ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... DCL was a comparable selected by the assessee for AY. 2013-14 that Transfer Pricing Study maintained by the assessee proved said fact that the return of the assessee as filed was accepted that assessee's margin of 20% earned from rendering of non-binding investment advisory services was also accepted during the AY. 2014-15 that IDCL was engaged in rendering research advisory in the areas such as CMO Advisory research Global IT Advisory Investment research services IT advisory tools and other research programmes and that same were functionally comparable to the research functions performed by the assessee for the purpose of providing non-binding investment advisory services that the direct expenses pertaining to AY. 2011-12 amounting to ₹ 5 68 92 754 related to expenses which were routine in nature and were incurred year-on-year basis that similar expenses had been incurred in the previous year as well that IDCL could not be rejected citing that the break-up of these direct expenses was not available that the annual report of IDCL [page 332 of the paperbook] mentioned 'Market research and Management Consultancy' as the only and primary reportable business segment ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d services provided by IDCL. He further argued that there was no break up of direct expenses(Rs. 5 68 92 754/-)in the account of IDCL that products of IDCL were e-products which could be subscribed and downloaded by the users online on a monthly/ quarterly/ annual basis that there was no inventory in the annual report of IDCL that 'market research and management consultancy' was the primary reportable segment of IDCL that no segmental details were available with respect to business convention income earned that the annual report of IDCL mentioned 'Royalty charges in foreign currency' under the schedule of foreign currency transactions that breakup of expenses had not been provided in the annual report that the same formed a part of 'direct expenses'. In short for the comparable selected by the assessee and excluded by the DRP in the final list he supported the order of the DRP. About MOIAPL he stated that if ICRA was to be accepted as valid comparable MOIAPL should also be considered. With regard to NBAL he relied upon the order of the TPO. 5. We have heard the rival submissions and perused the material before us. Effective grounds of appeal raised by the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... advisory services whereas MOIAPL was carrying on business of mergers and acquisitions and other related activities. The assessee is not a merchant banker like MOIAPL. In the case of Carlyle India Advisors Private Limited (supra) the Tribunal has held 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 a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t in the case of Carlyle India Advisors Private Limited (IT Appeal 1286 of 2012 dated 22. 02. 2013). Here we would also like to refer to the order of NVP Venture Capital India Private Ltd. (supra) where in a case of investment 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 Taxman ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ty which is rendering non-binding advisory investment services alone. Thus in our considered opinion the assessee is justified in seeking the exclusion of the said concern from the final set 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. Considering the above we hold that MOIAPL has to be rejected as a valid comparable from the list of the final comparables on the ground that it was engaged in merchant b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... are of the opinion that ICRA is a valid comparable and that MOIAPM and ICRA are not performing similar functions. In our opinion the argument that if ICRA is considered a valid comparable then MOIAPL should also be considered a valid comparable is devoid of merits. 5. 3. a. We find that while deciding the appeal for the AY. 2010-11 in the appellant's own case all the arguments raised by the DR with regard to IDCL were dealt with by the ITAT. It is also a fact the IDCL was accepted as a valid comparable in the subsequent AY. s. We are aware that order for the subsequent years are not elaborate order like the order for earlier years but the TPO had considered all the material with regard to IDCL while passing the thise order. Therefore same cannot be ignored treating them clean orders . So to include it the final list of comparables in the subsequent AY. s. was an informed decision of the AO. s. 5. 4. We find that while deciding the appeal for the AY. 2010-11(supra) the Tribunal had held that ICRA and IDCL should be included in the list of valid comparables that the AO had filed an appeal before the Tribunal against the inclusion of ICRA and IDCL in the final list of compa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... erational efficiencies future outlook etc. based on which consultancy or advise would given to the management of a company 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 compar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... CY SERVICES LTD. 10. Ld. DR submitted this comparable was chosen by the appellant 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 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ndering only advisory and consultancy services. The whole revenue is 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 o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rom consultancy fees. Thus a company which 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 in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a-AY. s. 2007-08 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. Inf ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 IDCL 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 conducting research and survey business conversion ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y the assessee. Considering the above we hold that ICRA and IDCL should be included in the final list of valid comparables. In our opinion the case of Teva Pharma(supra) relied upon by the DR is of no help to the department as it does not deal with an assessee that is engaged in non-binding investment consulting services. Secondly the said case was available to the department when the matter for earlier year was argued. 6. We find force in the preliminary submission of the AR that if ICRA and IDCL are accepted as comparables and if MOIAPL and NBAL are excluded from the final list the margin earned by the assessee would be within the limit of +/-5% range. We would like to recalculate the margin and it can be tabulated as under: SN. Comparable Margin% 1. ICRA 15.90% 2. IDCL 10.33% 3. LCAPL 52.42% Arithmetic Mean 26.22%. The assessee has shown margin of 20. 56% for th ..... X X X X Extracts X X X X X X X X Extracts X X X X
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