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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 ..... the case and in law in proposing and the Hon'ble DRP further erred in upholding an addition of Rs 13,71,41,793 in respect of the international transactions relating to investment advisory support services alleging the same to be not at arm's length in terms of the provisions of Sections 92C(1) and 92C(2) of the Act read with Rule 1OD of the Income-tax Rules,1962 ("the Rules"). 2.1 That the Ld AO erred on facts and circumstances of the case and in law, in not accepting the arm's length price determined by the Appellant, and in choosing to determine the arm's length price by making reference to the TPO even though none of the conditions laid down under section 92C(3) of the Act, were satisfied. 2.2 That the Ld AO/TPO/DRP erred on facts and circumstances of the case and in law in rejecting the Transfer Pricing documentation submitted by the Appellant and in not appreciating that the arm's length price of the international transactions in relation to investment advisory support services was appropriately determined in the Transfer Pricing documentation applying Transactional Net Margin Method ('TNMM'). 2.3 That the Ld AO/TPO/DRP erred on facts and circumstances of the case and in la ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... isions with respect to investment by funds are made by GP who operates and manages the funds. GPs obtain advice in relation to their funds and investments from (1) Carlyle Investment Management LLC ('Carlyle US') (2) Carlyle Asia Investment Advisors Limited ('Carlyle Hong Kong') Carlyle Hong Kong was incorporated as a wholly owned subsidiary of Carlyle US in Hong Kong in February 1998. It provides consulting services, including investment advisory, technology support, management consultancy and other advisory services to the GPs with respect to the investments made by the Group in the Asia-Pacific region. 4. The Assessee Carlyle India Advisors Private Limited ('Carlyle India') was incorporated in India in October 2000, and is a subsidiary of Carlyle Hong Kong. Carlyle India provides investment advisory related support services to Carlyle Hong Kong. It houses six investment personnel who analyse investment opportunities in growth capital and buyout deals in India. In this appeal we are concerned with the determination of Arm's Length Price (ALP) in respect of the international transaction, viz., rendering of investment advisory and related support services by the Assessee to Carlyl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... for the said support services provided under the Services Agreement. Carlyle Hong Kong compensates the Assessee, a monthly service fee, which is equal to 115% of actual operating expenses (including depreciation on capital assets),incurred by and for the account of Carlyle India in connection with the provision of the said Services" 7. During the previous year the Assessee had prepared research reports in respect of 33 companies whose shares are listed in Stock Exchanges in India. Ultimately TSG made investments only in shares of one company by name Allsec Technoligies. The companies in respect of which the Assessee prepared research report and the research report in respect of Allsec Technologies are given in page 617 to 624 of the Assessee's paper book. It is not in dispute that the Assessee was paid 115% of the costs it incurred in providing services to Carlyle Hong Kong. The assessee filed Transfer Pricing Study together with information/documents maintained in accordance with Sec.92D(1) of the Income Tax Act, 1961 read with Rule 10D(1) of the Income Tax Rules, 1962. In the Transfer Pricing Study the actual functions performed by it in the matter of rendering investment adviso ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... plus criteria and reason for usage No. of companies passing the criterion Total universe of companies available in Capitaline Plus as of Feb.15,2007 13,887 Identified additional companies with positive sales over the time period under consideration were selected i.e. companies for which data was not available in Prowess. 763 Selected companies classified in 'Services' Industry 429 Identified financial services companies from the above 221 Services provided by Carlyle India Ltd. being on a cost plus model; companies having Fund Based Income/Sales > 25% was rejected 24 Companies with a positive net worth were included so as to select companies whose net worth had not eroded. 22 Qualitative: Selected companies engaged in advisory/research/consultancy services in the financial services industry. 0 10. In addition to company level financial data, segmental financial data in both databases were also searched. The summary of such search is as follows: Summary of Search Process- Capitaline Plus for segmental data Criteria and reason for usage No. of segments passing the criterion in Prowess No of segments passing the criterion in Capitaline Plus Total Total segment i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ven below: Table : Arithmetic Mean No. Company Name PLI using date for FY 2006-07 1 Axix Consultants Pvt. Ltd. 5.15% 2 Quantum Advisors Pvt. Ltd. 3.26% 3 Crisil Ltd. (Segment - Information) 22.00% 4 Indian Venture Capital Ltd. 5.91% 5 IDC (India) Ltd. 15.94% Average 10.45% The Assessee pointed out that based on the financial statements for the year ended March 3l, 2007, the operating margin of the Assessee works out to 15.02% which according to the Assessee was more than the arm's length margin as computed above. Accordingly the Assessee claimed that it complies with the arms length principle required by Indian transfer pricing regulations. The assessee had also take a stand in this letter that the data available at the time of T.P Study by the assessee alone would be relevant. The assessee in this letter also furnished to the TPO the agreement between the assessee and Carrel Asia Advisors Ltd., Hon Kong. 15. In another letter dated 16/4/2010 the assessee also pointed out that it had updated the margins comparables of TP Report (original report in which the Assessee identified two comparables). The arithmetic mean of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (including assessee company) 18 2 No. of companies eliminated applying the following filters - companies not having any financial data 2 - fund based income criteria 4 3 Companies rejected in qualitative review (including assessee company) 2 No. of companies selected in Search 1 (A) 10 Search 2 1 No. of companies resulted (including assessee company) 124 2. No. of companies eliminated applying the following filters - Companies not having any financial data 6 - fund based income criteria 57 3. Companies rejected in qualitative review (including assessee company) 61 No. of companies selected in Search (B) NIL Search - 3 1. No. of companies resulted 6 2 Companies rejected in qualitative review 1 No. of companies selected in Search 1(c) 5 Total No. of companies selected 15 Accordingly the final list of companies that are selected in the above search are as under: - Search 1 - 10 companies -Search 2 - Nil companies - Search 3 - 5 Companies Total 15 companies 19. Thereafter the TPO ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... price of the investment advisory services be not determined as per the average operating margin of the above comparable companies. According to the TPO, the PLI ought to be taken on operating profit margin with respect to operating cost. As per the above search conducted by the TPO, the OP/OC came to 81%. 20. The assessee by letter dated 19/10/2010 gave its objection as to how the companies chosen by the assessee were not comparable. 21. The TPO vide an order dated 29/10/2010 passed under section 92C(a) of the Act however held that the ALP has to be determined by adopting an Arms Length Margin of 81% and accordingly 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... way of adjustment to the ALP deserves to be deleted. The learned DR relied on the order of the TPO and submitted that the TPO has given valid reasons as to why the TP study carried out by the Assessee has to be rejected. 24. We have considered the rival submissions. The provisions of the Act and the Rules that are relevant for deciding the issue have to be first seen. Sec.92. of the Act provides that any income arising from an international transaction 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 a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... computation of the arm's length price is not reliable or correct; or (d) the assessee has failed to furnish, within the specified time, any information or document which he was required to furnish by a notice issued under sub-section (3) of section 92D, the Assessing Officer may proceed to determine the arm's length price in relation to the said international transaction in accordance with sub-sections (1) and (2), on the basis of such material or information 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 o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , such transactions in the open market; or (ii) reasonably accurate adjustments can be made to eliminate the material effects of such differences. (4) The data to be used in analysing the comparability of an uncontrolled transaction with an international transaction shall be the data relating to the financial year in which the international transaction has been entered into : Provided that data relating to a period not being more than 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. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... reasons given by the Assessee as to why these companies should not be treated as comparable companies, and they are part of the reply dt.19.10.2010 filed by the Assessee before TPO (the whole reply is at pages 127 to 573 of the Assessee's paper book). On perusal of the reasons so given, we are of the view that these companies are not functionally comparable with the functions performed by the Assessee. (4) M/s. Centrum Capital Ltd: (CCL) The 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 commis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ridge Financing, Bought out Deals relating to Issue Management. Equity Research out of the above service can be compared with that of the Assessee's activity but segmental data is not available. The company's segment as reported are services, dealing in shares and other income. In the absence of specific data it is not possible to make comparison. It can therefore be safely said that that above is into Merchant Banking and 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 ma ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... TPO in his order as follows: (iii) The key differences between companies engaged in the business of investment banking /merchant banking ('IB/MB') and Carlyle India was submitted as under: Investment banking assists in Initial Public Offerings, private placement and bond offerings, acts as broker and carries through mergers and acquisitions as against Carlyle India who does not finance capital requirements 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. Merch ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ithmetic mean of 18.97% which we have already mentioned. This is the highest arithmetic mean of the comparable chosen by the assessee. Even if this arithmetic mean is taken to be reflecting the operating margin of the comparable companies, the same is within 5% range of the operating margin of the assessee. We find that the TPO has not given any reason whatsoever for rejecting these comparables. As we have already explained the reasons given by the TPO does not anywhere mentioned as to how the comparables selected by the assessee were not functionally comparable. This Tribunal in the case of Asstt. CIT v. Maersk Global Service Center India (P.) Ltd. [2011] 133 ITD 543(Mum.), has taken the view that if TPO does not reject a comparable on the ground of functional incomparability then neither the AO or the revenue can take a plea of functional incomparability of the comparables chosen by the assessee in its TP Study. We are, therefore, of the view that the assessee's operative margin has to be held as within the range of 5% of the arithmetic mean of 18.97% of comparable companies and the same has to be accepted as ALP. For the reasons given above, the addition made by the AO and confi ..... X X X X Extracts X X X X X X X X Extracts X X X X
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