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TMI Blog2012 (10) TMI 884X X X X Extracts X X X X X X X X Extracts X X X X ..... pted as ALP - addition made by the AO and confirmed by the DRP is directed to be deleted - the reasons given by the TPO does not anywhere mentioned as to how the comparables selected by the assessee were not functionally comparable. - decided in favor of assessee. - IT Appeal NO. 7901 (MUM.) of 2011 - - - Dated:- 4-4-2012 - N. V. VASUDEVAN, AND N. K. BILLAIYA, JJ. Porus F. Kaka, Vishal Kalra and Mukesh Butani for the Appellant. Ajit Kumar Jain for the Respondent. ORDER N.V. Vasudevan, Judicial Member - This is an appeal by the assessee against the order dated 28/10/2011 passed by the ACIT -10(1), Mumbai under section 143(3) of the Act r.w.s. 144C of the Income Tax Act, 1961(the Act). The grounds of appeal raised by the assessee read as follows: "1. That the Assessing Officer ('AO") erred on facts and circumstances of the case and in law in assessing the income of the Appellant under the normal provisions of the Income Tax Act, 1961 (the Act) at Rs. 17,52,18,050 against returned income of Rs 3,80,76,259 based on the directions received from Hon'ble Dispute Resolution Panel ("DRP") upholding the adjustment to the transfer price proposed by the learned Tra ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... In so far as ground No.4 is concerned the ld. Counsel for the assessee has submitted before us that the assessee is not pressing for a standard deduction of (+/-) 5% benefit envisaged under proviso to section 92C(2) of the Act and that the benefit may be extended only to the extent that the difference between price adopted by the assessee and the ALP as determined by the TPO is within 5% range contemplated by the proviso to section 92C(2) of the Act. 3. The assessee is a company. The Carlyle Group ('TCG') was established in 1987 as a private global investment firm that originates, structures and acts as lead equity investor in management-led buyouts, strategic minority equity investments, equity private placements, consolidations and buildups, and growth capital financings. It is primarily engaged in the business of managing investments of High Net Worth Individuals/Institutional Investors (HNIs'). It sets up various Funds, which in turn invests in entities across the globe. TCG is a private partnership and is owned by a group of individuals and one institution, California Public Employees Retirement System ('CaIPERS') which owns 5.5% of the Carlyle Group. Further, each of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Services') to Carlyle Hong Kong: a. Analysis of investments opportunities and the provision of general advice in relation thereto, as per Carlyle Hong Kong's instructions b. Analysis of information to Carlyle Hong Kong on the merits, timing, structure, and appropriate terms of any acquisition or disposal of investments and general advice in relation thereto; c. Monitoring of all investments by the Funds from time to time under the instructions of Carlyle Hong Kong, and the provisions of reports thereon to Carlyle Hong Kong; d. Provision of information in relation to the economic and political developments in India having a bearing on investment opportunities; e. To assist Carlyle Hong Kong in identifying external advisors and consultants, to assist them in identifying or investigating any commercial, legal, regulatory or tax matters in relation to a potential investment opportunity or divestment; f. Assistance and support in relation to potential investment opportunities and providing related information to Carlyle Hong Kong as required. g. Provision of such other support services incidental or related to the foregoing services, as requeste ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 2007. The manner which the Assessee had carried out search process as explained in its TP Study is as follows: Summary of Search Process - Prowess Criteria and reason for usage No. of companies passing the criterion Total universe of companies available in Prowess as of Feb.15,2007 9,801 Companies with positive sales for the time period under consideration were selected 3,988 Companies classified under 'Financial and leasing services' and 'Business Services' alongwith specific sub-classification in Prowess (Refer para 8.2) were selected as to capture all possible comparables within this industry. 655 Selecting companies classified under the sub-industry as mention in para 8.2 above to arrive at a closer set of comparable companies. 641 Services provided by Carlyle India Ltd., being on a cost plus model; companies having fund Based Income/Sales 25% was rejected. 329 Companies with Trading Sales/Sales and Manufacturing Sales/Sales gtreater than 5% were eliminated. 287 Companies with a positive net worth were included so as to select companies whose net w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rvices in the financial services industry 1 -- 1 11. Thus the assessee arrived at the following two comparable companies: Arm's Length Results S.No. Name of the Company Average PLI 1 IDC (India) Ltd. 13.16% 2 Crisil Ltd 16.44% Mean 14.80% 12. The above analysis shows that the mean return on total cost of comparable companies is 14.80%. Since, prices of international transactions of assessee that achieve a return of 15.02%, is more than 14.80%, the assessee claimed that it meets with the arm's length standard required under the Indian Regulations. 13. The AO referred the case to the TPO for determination of ALP in respect of the international transaction with the AE. By a notice dated 13/11/2009 the TPO called for contemporaneous data relevant for A.Y 2007-08. The assessee's T.P Study was filed alongwith report in Form No.3CEB dated 17/10/2007. In doing T.P Study the data available for the period from April 1st, 2004 to Feb. 15th 2007 had been used. The TPO was of the view that it was only the data for the previous year relevant to A.Y ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 02% as against 18.97% comparable companies. The Assessee pointed out that it has an option as per the proviso to section 92C(2) of the Income-tax Act, 1961 to adopt a price which is within the range of +/- 5% of the comparable companies. Accordingly the price adopted by the Assessee for its international transactions is within the ALP range and gave the following computation in this regard: Particulars Amount (Rs.) Operating Income (A) Total Cost (B) 239,077,478 207,855,962 Profit before Taxation (A)-(B) = (C) 31,221,516 Operating Profit/Total cost (C) /(B) (%) 15.02% Arithmetic Mean of comparables (D) 18.97% Working of Arm's Length range: Particulars Amount (Rs.) Arms Length price of services (ALP) 247,286,238 Application of the range ALP x 95% 234,921,926 17. The TPO thereafter gave sets of comparable companies which according to the TPO were functionally comparable with that of the international transaction in question. The TPO had used three search criteria to arrive at the list of comparables given ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hereafter the TPO arrived at arithmetic mean of the margin of these comparable as follows: Net Profit Margin for the Assessment year 2007-08 on the contemporaneous data: S. No. Name of the company 2007-08 1. Canbank Investment Management Services Ltd. 82.26 2. HDFC Asset Management Company Ltd. 53.73 3. IL FS Investment Managers Ltd. 50.45 4. Jeevan Bima Sahayog Asset Management Co. Ltd. NA 5. Kotak Mahindra Asset Management Co. Ltd. 17.53 6. Principal PNB Asset Management Company Pvt. Ltd. 25.35 7. Prudential ICICI Asset Management Co. Ltd. 30.36 8. Reliance Capital Asset Management Ltd. 37.74 9. SREI Venture Capital Ltd. 79.33 10. SBI Fund Management Pvt. Ltd. 39.76 11. Sundaram BNP Asset Mngt. Co. Ltd. 15.91 12. Tata Asset Management Limited 43.38 13. Taurus Asset Management Company Ltd. 9.19 14. Unit Trust of India Investment Advisory ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ngly determined the addition on account of adjustment to ALP. The addition to the total income of the assessee on account of adjustment of ALP was follows: Amount in (Rs.) Turnover (Service Fees) (A) 23,90,77,498 Total Cost (TC) (B) 207,855,962 Operating Profit (OP) (C) 31,221,516 OP/TC*100 15.02% Arm's length margin (D) 81% Arms Length service fee (E) + (B)*(D)=(B) 37,62,19,291 5% lower limit of F (F) 324,510,964 Amount of adjustment (E) - (A) 13,71,41,793 The assessee has received service fees of Rs. 239,077,4981- from its AE for investment advisory and related support services. The arms length value of these services was calculated at Rs. 37,62,19,2911-. Thus, an adjustment of Rs. 13,71,41,793/- was being made to the income of the assessee. 22. In his order the TPO has observed that the TP study report of the assessee is being rejected for the reasons discussed in para 6D. However, in para 6D of the order of the TPO it is seen that the TPO has not found fault with the two compar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... shall be computed having regard to the arm's length price. Sec.92-B provides that "international transaction" means a transaction between two or more associated enterprises, either or both of whom are non-residents, in the nature of purchase, sale or lease of tangible or intangible property, or provision of services, or lending or borrowing money, or any other transaction having a bearing on the profits, income, losses or assets of such enterprises, and shall include a mutual agreement or arrangement between two or more associated enterprises for the allocation or apportionment of, or any contribution to, any cost or expense incurred or to be incurred in connection with a benefit, service or facility provided or to be provided to any one or more of such enterprises. Sec.92-A defines what is an Associated Enterprise. In the present case there is no dispute that the transaction between the Assessee and its group companies in Germany whereby the Assessee provided services in the form of contract testing and research services was an international transaction attracting the provisions of Sec.92 of the Act. Sec.92C provides the manner of computation of Arm's length price in an internati ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion or document available with him: 25. Rule 10B of the IT Rules, 1962 prescribes rules for Determination of arm's length price under section 92C. "10B. (1) For the purposes of sub-section (2) of section 92C, the arm's length price in relation to an international transaction shall be determined by any of the following methods, being the most appropriate method, in the following manner, namely :- ( a ) to ( d )** ** ** ( e ) transactional net margin method, by which,- ( i ) the net profit margin realised by the enterprise from an international transaction entered into with an associated enterprise is computed in relation to costs incurred or sales effected or assets employed or to be employed by the enterprise or having regard to any other relevant base; ( ii ) the net profit margin realised by the enterprise or by an unrelated enterprise from a comparable uncontrolled transaction or a number of such transactions is computed having regard to the same base; ( iii ) the net profit margin referred to in sub-clause (ii) arising in comparable uncontrolled transactions is adjusted to take into account the differences, if any, betw ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... an two years prior to such financial year may also be considered if such data reveals facts which could have an influence on the determination of transfer prices in relation to the transactions being compared." 26. A reading of the provisions of Rule 10B(2) of the Rules shows that uncontrolled transaction has to be compared with international transaction having regard to the factors set out therein. Before us there is no dispute that the TNMM is the most appropriate method for determining the ALP of the international transaction. The disputes are with regard to the comparability of the comparable relied upon by the TPO and whether the difference between ALP (being the highest arithmetic mean of the three proposed by the Assessee viz., 18.97%) and the Price adopted by the Assessee would be less than 5% plus or minus contemplated by the second Proviso to Sec.92C(2) of the Act and consequently there would be no need to make any adjustment to the price adopted by the Assessee in respect of the international transaction entered into with its AE. 27. We will now consider 8 comparable cases selected by the TPO and see whether they can be functionally compared with that of the asse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he nature of services provided by this system is investment banking. In a letter dated 15/10/2010 the TPO has himself accepted that asset management companies are not functionally comparable with that of the assessee. Nevertheless the TPO has proceeded to consider this company as a comparable. CCL is a leading investment bank, offering' comprehensive financial services composing fund raising by way of equity and debt for corporate, Government undertakings and state entities. The main income stream of the said company is' Syndication Fee, Brokerage commission-and income from trading in bonds. CCL is engaged in the business of Merchant Banking and Investment Banking and the income generated by the company is syndication fees and brokerage commission as against the Assessee which is engaged in the business of investment advisory and related support services, and is compensated on a cost-plus basis for the activities it performs. Hence, this company cannot be considered as a comparable. (5) Edelweiss Capital Ltd. : Description as per Website: It is the practice of -this core thought that has led to Edelweiss becoming one of the leading financial services company in India. I ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd cannot be considered as a comparable. (7) L T Capital Company Ltd. (LTCC) LTCC is the investment banking outfit of "L T Group of companies". It has a Project Advisory Team, which has been providing value added services to State Governments, Public Sector organisations, L T and other corporate on financing of Infrastructure projects. Financial advisory services in respect of projects offered include Syndication of finance, cash flow modeling, strategic financial planning, assisting in bank negotiations etc. The analysis of income from operations in Profit and Loss account indicates that income from consultancy account 6.34% of the total income whereas the major income comprises of Arranger's fee, portfolio management services fees, syndicaton fees - money markets. The above mentioned facts highlights that the company is primarily into Portfolio Management, Mutual fund Distribution and Merchant Banking. Further, it has substantial related party actions. Hence, the said company cannot be considered as a comparable. (8) S.R.E.I Capital Markets Ltd., (SREI CAPS) SREI Caps, a wholly owned subsidiary of SREI Infrastructure Finance Limited (SREI). SREI Caps is a full-scale ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of an enterprise. Investment bankers provide a wide array of services, including underwriting the issuance of equity or debt to aid a company having financial difficulties. In view of the risk undertaken by the underwriter. they are compensated a specified premium. The said activity is much riskier than simply advising clients, an activity which involves considerably less risk. The underwriting activity would follow the principle of "Higher the risk. Higher the return" Further, in certain cases, for large or risky issues a number of investment bankers get together as a group, they are referred to as syndicate which means a temporary association of investment bankers brought together for the purpose of selling new securities. Carlyle India does not perform the said act. Merchant banking also includes loan syndication, providing venture capital and mezzanine financing, corporate advisory services (includes exploring the refinancing alternatives of the client and evaluate cheaper sources of funds; advise clients on rehabilitation and turnaround management, different hedging strategies and suggests the appropriate strategy, etc.) as against Carlyle India who does pure research a ..... X X X X Extracts X X X X X X X X Extracts X X X X
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