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TMI Blog2016 (5) TMI 1335X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 was calculated as under: SN. Comparable margin 1. Future Capital Investment Advisors Ltd. (FCIAL) 15. 71% 2. Future Capital Holdings Ltd. -Segment-Investment advisory 31. 68% 3. IDFC Investment Advisors Ltd. ( IDFCL) 36. 62% 4. ICRA Online Ltd. (ICRA-O) 41. 77% ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed 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. , that the P&L Account of the company for AY 2011-12 indicated that it had earned no revenue from Investment Advisory services, that pursuant to realignment no further revenue were earned from investment advisory services, that it had earned 93. 16% of its advisory fee from its controlled entities. After considering the available material, the FAA held that KIACL earned income from investment advisory fee, that it was the only reportable segment. He further referred to the notes on accounts on KIACL and held that it was a functionally comparable company. 3. d. In case of ICRA-O, the TPO considered the outsource service segment for comparability purpose, as it dealt with investment research analysis and advisory services. He observed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 1. 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 comparables. Accordingly, the FAA prepared a final set of comparable with the revised margin for the year under consideration and same read as under :- S. No. Name of comparable F. Y. 2009-10 OP/TC (%) 1. Future Capital Investment Advisors Ltd. 15. 71 2. Future Capital Holdings Ltd. (Segment-Investment advisory) 31. 68 3. ICRA Management Consulting Services Limited 0. 41 4. IDC (India) Limited 13. 00 5. Kshitij Investment Advisory Co. Ltd. 32. 33 6. MotilalOstwal Investment Advisors Pvt. Ltd. 97. 87 7. Mecklai Financial & Commercial Services Limited 20. 43 Arithmetic Mean 30. 20 He recomputed the TP adjustment at Rs. 1. 47crores as below: Operating cost Rs. 14, 46, 12, 507/- Arm's Length Mean Margin 30. 20% of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ory Co. Ltd, considering the fact that initially assessee had-taken it as a good comparable; Our aforesaid approach is founded on a well accepted proposition that in the course of determination of correct tax liability, it is impermissible for the Revenue to take advantage of an ignorance or mistake of the assessee in offering certain amount as income, which is more than the legally due amount. Notably, there cannot be a estoppel against the statute and it is a trite law that no tax can be levied or collected from a subject except by an authority of law. We may hasten to add here that we are not saying that on each and every aspect of the assessment declared in the return of income, an assessee is entitled to turn around and argue differently before the income tax authorities; rather, there has to be justifiable reasons shown by the assessee, duly supported by law or facts, whereby the change in stand is merited. In the present case, what the assessee is claiming is that there has been a restructuring / realignment of investment advisory business being carried out by Kshitij Investment Advisory Co. Ltd which has impacted the financial results thereby rendering the said concern a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... similar line of investment advisory services. What we are trying to emphasize is that there is no averment in the Directors Report to suggest that the said concern has actually carried out any investment advisory services post-realignment w. e. f. 1. 1. 2010. In fact, in the course of hearing' before-us, the Ld. Representative for the assessee pointed out that a perusal of the Annual Report for subsequent financial year of 2010-11 showed no 'such operations by the said concern. Therefore, considering the aforesaid fact situation, the instant financial year of the said-concern is containing peculiar economic circumstances and the same has to be taken into consideration while evaluating the rationale for its inclusion as a comparable. Before us, the Representative also pointed out that the said restructuring/realignment which has taken place w. e. f 1. 1. 2010, did impact the financial results inasmuch as the income from operations of the said concern for the year under consideration reduced to Rs. 17, 23, 10, 815/- from Rs. 26, 47, 96, 102/- in the immediately preceding year. Considering the entire conspectus facts and circumstances, in our view, the assessee company is jus ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... orming most of the function of a Merchant Banker, then the entire functions and transactions affects the generation of revenue and margins. Such functions are entirely different from investment advisory services. Mere classification of revenue as 'advisory fees' will not put the company in a comparable basket sans functional similarity and transactional analysis. In case of Carlyle India Advisors Pvt. Ltd (supra), it has been held that, the merchant banking functions are entirely different from investment advisory services and this decision of the Tribunal has been upheld by the Hon'ble Bombay High Court. Thus, in view of plethora of judicial decisions as referred to by Ld. Counsel and in view of functional differences as discussed as above, we hold that Motilal Oswal cannot be put into the comparability list and is directed to be excluded. " In the case of Wells Fargo Real Estate Advisors Pvt. Ltd. (supra)similar view was taken as under: "6. We have heard the rival submissions and perused the material before us. We find that on 07. 12. 2012 the assessee had submitted its profile and analysis of the functions performed, assets utilised and risks assumed. As per the FAR the asse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ood comparable for determining the ALP. Relevant contents of the said para 12 are reproduced here for the sake of completeness of this order which read as under: "12.... . . . The only dispute is whether Motilal Oswal Investment Advisors Pvt Ltd can be considered as a comparable for determination of ALP. A perusal of three comparables considered by the TPO shows that M/s. Future capital Investment Advisors Ltd. , has operating profit at 21. 79% whereas OPM of Motilal Oswal Investment Advisors Pvt Ltd is 72. 33%. The comparables used by the TPO themselves are showing extreme OPM. A perusal of the Directors report of Motilal Oswal Investment Advisors Pvt Ltd shows that during the year under consideration, the said company has completed 23 assignments successfully as against 14 completed in the immediately preceding year. A close look at the financial statements of the said company show that the income from operations have been shown only as advisory fees whereas it is admittedly an undisputed facts that the said company is engaged in diversified activities. Segmental reporting is not available. Profit and loss account appears to be only of consolidated accounts. The said company i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t of comparables. The DRP also accepted the position that the said concern was engaged in advisory services which are broadly comparable to the assessee's activities under test. 8. We have perused the relevant material on record. It is starkly evident that the said concern M/s. Motilal Oswal Investment Advisors Private limited is engaged in qualitatively different and diversified business activities, whereas the activities of the assessee are confined to rendering non-binding investment advisory for its Associated Enterprises. No doubt, both the concerns may be in the business of rendering advisory services, so, however, it would also be necessary to evaluate the manner and the specific sectors, in which such services are being rendered by the two concerns. It is revealed from the Annual Financial Statement of Motilal Oswal Investment Advisors Private limited that the said concern is engaged in rendering services in diversified fields, viz. Equity Capital Markets, Mergers & Acquisitions, Private Equity Syndications and Structured Debt, etc. In the case of Carlyle India Advisors Private Limited(supra) for A. Y. 2008-09, the Tribunal concluded that though the said concern was ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and exclusion of the comparables in the final list. He has challenged the inclusion ICRA and IDCL and exclusion of ICRA-O and IDFCL. 6. a. First we would take up the matter of ICRA. In that regard, the DR argued that page 437, 438 and 462 of the PB showed that ICRA was engaged in rendering consultancy services to companies other than in financial sector i. e. urban develop - ment, water sector etc. , that it was also engaged in cross border mergers and acquisi -tions transactions(Pg. 493 of the PB), that the annual report of ICRA(Pg. 432-461 of the PB)did not provide for any segmental information, that if MOIAPL was rejected as a comparable on that ground ICRA should also be rejected, that the Tribunal order of Temasek(supra)relied upon by the FAA pertained to AY. 2007-08 and 2008-09, that same should not be applied to the year under consideration. He placed reliance on the Kerala High Court decision of Kalpetta Estates Ltd. (211 ITR 635)to say that res-judicata did not apply to income-tax proceedings. The AR argued that the issue is directly covered by the order of the Tribunal delivered in the case of Temasek(ITA/7761Mum/2015-AY. 2010-11), that ICRA's comparability to compa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 0-11 as well, which had been argued by the DR himself, that the Tribunal had taken a note of the fact that ICRA was rendering consultancy/advisory services in various sectors and after considering these facts, it adjudged ICRA to be a good comparable, that ICRA should be accepted as a functionally comparable company to the non-binding investment advisory services provided by the assessee. He referred to the cases of Temasek Holdings Advisors Private Limited(ITA/4203/Mum/2012 &6504/SSMum/2012-AY. s. 2007-08&2008- 09), M/s Blackstone Advisors Private Ltd. (ITA/1581/Mum/2016-AY. 2008-09). 6. a. i. We have heard the rival submissions and perused the material before us. Before proceeding futher, we would like to mention that the assessee is engaged in providing non-binding investment advisory services to its AE. As per the Agreement dated 08. 06. 2009 the assessee was to provide reports on a timely basis containing news and information on investment areas including industries and/or other specified areas that may interest the Investment Manager, to provide nonbinding advisory services to the Investment Manager in respect of potential investment and divestment opportunities in India or ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at 22 to 25 employees salary paid was more than Rs. 20 crores as compared to the average salary cost of ICRA. Thus, going by the qualitative human asset, then there is a huge variation, which fails the comparability tests. Accordingly, this company should not be included. XXXXXXX "20. At the outset, this comparable was subject matter of consideration before the Tribunal in AY 2008-09 & 2009-10, wherein this company was held to be good comparable both on the ground of functional similarity and in view of principles of consistency as it was held to be a good comparable by the TPO in the earlier years. From the perusal of the annual report, which is appearing from pages 156 to 187 of the paper book, we find that it is essentially providing consultancy services in diversified areas, like in government sectors, infrastructure, energy, corporate advisory, banking and financial services, etc. It focuses on consultancy and advisory which is its core area and competency. The revenue generation is purely from consultancy fees which is evident from profit and loss account as on 31st March 2010 (appearing at page 176 of the paper book). The TPO in his order had noted that its consultatio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. " It is further pertinent to note here that it is not in dispute that the functional profile of Temasek(supra)was comparable with the assessee. We have compared the functional profiles of both the companies for the AY. 2010-11 and have found them almost same, that ICRA was accepted as a comparable in the assessee 's own case in subsequent years i. e. in the AY. s. 2012-13 and 2013-14, that the Tribunal had consistently accepted ICRA a valid comparable in other Investment Advisory cases. While deciding the appeals of Tamasek for the AY. s. 2007-08 and 2008- 09, the Tribunal has held as under: "51(i)............ This company is engaged in operations of advisory services and is offering consultation service in the area of strategy, risk management, operations, improvement regulatory econom ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or investment advisory company and had emphasized on following the rule of consistency. We find that in the subsequent years ICRA has been accepted a valid comparable, that all the arguments raised by the DR in the matter of Tamasek for the AY. 2010-11, have been dealt extensively by the Tribunal, that it had rejected the arguments raised by the DR. Respectfully following the orders of the Tribunal delivered in the cases mentioned in earlier paragraphs, we hold that the order of the FAA does not suffer from any legal or factual infirmity. So, confirming his order we hold that he had rightly included ICRA in the list of valid comparables. 6. b. With regard to IDCL the DR argued that it was a product company, that it would follows AS-9 to recognise revenue, that the payment of copyright reflected that IDCL was buying copyrighted products and selling the same, that that it had income from business conventions, that that it dealt in products. . He referred to the Pg. 469, 475, 481, 484-486 of the paper book . He also referred to Website print outs titled "IDC's Go-to-Market Services. . ". In his reply, the AR argued that the FAA had considered the activities performed by the asse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... luded to be a product company, that the three page hand-out titled "About IDC Go-to-Market Services", submitted by the DR pertained to and provided information in connection with IDC Inc. and not IDCL, that the Web site print outs titled "IDC's Go-to-Market Services include"were prints of a web site taken on 16. 12. 2015, that the information did not relate to the year under consideration and hence could not be relied upon, that there was nothing in the printouts which suggeseds that IDCL was a product company or that it was not a valid comparable to the assessee. 6. b. i. We have heard the rival submissions and perused the material before us. We find that while adjudicating the appeal of Tamasek for the AY. 2010-11 the Tribunal had held as under : "This comparable though accepted by the TPO as a good comparable, however, the DRP has additionally rejected this comparable. In assessment year 2008-09, the Tribunal had held to be a good comparable, on the ground that this company is also engaged in the advisory and consultancy services for the purpose of investment made in various sectors and secondly, it has been found to be good comparable by the TPO in the assessment year 20 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... erned, the same are similar to the activity of the appellant. Therefore, in our considered view, IDC India Ltd can be considered as a good comparable for the purpose of determination of ALP. " It is found that the annual report of IDCL(at Note 13 on page 482 of the PB), mentions the following: "The Company is engaged in the business of 'Market research and Management Consultancy which is identified as the only and primary business segment of the company' Further all the operating facilities located in (India) " 6. b. ii. We are of the opinion that IDCLwas not a product company, that had it been a trader of products it would have "stock" appearing in its Balance Sheet, that it was a fact that no such opening or closing stock was appearing in the Balance Sheet, that the said fact clearly demonstrated that IDCL was not a product company as suggested by the DR. Analysis of page 469 of the PB reveal that it was clear that there is no income from business convention earned by IDCL during the year. In these circumstances, by using the word Products IDCL would not become a trader or a manufacturer of products. The underlying functions/activities performed with respect to rese ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ble, that as a company providing medical transcription services cannot be compared to a company running hospitals, that ICRA-O providing analytical support could not be compared with the assessee which rendered advisory/consultancy services, that the KPO business segment consisted of various activities other than research and analytics like Data Extraction, Aggregation, Electronic Conversion of Financial Statements, Validation and Analysis, Accounting and Finance which were functionally not comparable to the assessee's activity of rendering non-binding investment advisory services, that the annual report of the company did not provide any segmentation or bifurcation of the KPO segment into research and analytics services vis-a-vis any other services, that page 489 of the PB did not provide any description of activities performed under the caption "Outsourced Services", that on that count alone the company deserved to be rejected, He referred to the web site of ICRA-O which reads as under: "Knowledge Process Outsourcing (KPO):The Knowledge Process Outsourcing (KPO) Division at ICRON provides financial and analytical services and support to clients in the areas of Data Extracti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hat it was offering Portfolio Management Services for the domestic retail investors in different fields. The aforesaid clearly establishesthat it is engaged in managing offunds in its portfolio management platform. In fact, in notes to the accounts, annexed to the Annual Financial Statements, the narration about the nature of operations being carried out is quite significant...... however, it is also noticed that said concern receives 'advisory fee' computed on the basis of net assets of the fund plus a performance fee. The narration of business operations contained in the notes to accounts clearly establishes a distinction between the business model being pursued by the said concern and the appellant for rendering investment advisory related support services to itsassociate enterprise. The earnings of IDFC investment Advisers Limited, though titled as 'advisory fee', are indeed computed on the basis of amount of fund deployed by the investee fund plus a performance fee whereas the assessee is being compensated on cost plus fixed mark-up basis. On account of this difference in the business 'model of IDFC Investment Advisers Limited, it would not be appropriate t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ... After hearing both the parties and on perusal of the said decision of the Tribunal in the case of Bain Capital Advisors(India)Private Limited (supra), order dated 15. 5. 2015, we find the para 8 is relevant in this regard and for the sake of completeness of this order the same is extracted as under: In view of the above, we direct the AO to re-compute the arm's length adjustment after excluding IDFC from the list of comparables. " 7. We find that the assessee objected to the inclusion of ICRA-O and IDFC on the ground that the TPO had applied no scientific method in arriving at the said two companies, that the companies had been cherry- picked by the TPO and he had not furnished the process applied by which he had come to select the said two companies, that such an approach to select comparables was impressible in law and on that count alone the said two companies should be rejected, that the FAA had rejected ICRA-O as comparable to investment advisory services rendered by the assessee and had stated assessee's knowledge process outsourcing division provided financial and analytical services and support to clients in the areas of Data Extraction, Aggregation, Ele ..... X X X X Extracts X X X X X X X X Extracts X X X X
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