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TMI Blog2016 (1) TMI 1265X X X X Extracts X X X X X X X X Extracts X X X X ..... AE, based on requirement for executing the intended task. (iv) Fourthly, monitor the performance of Investee Company and advise the AE in respect of exit strategy from investment In view of the above summary of activities carried out by the assessee, we do not agree with the contention of the Ld AR that the assessee was merely a nonbinding investment advisory service provider as against characterisation by the TPO as fee based investment and financial advisory service provider. In addition to the advisory, the assessee was also engaged in providing support services to the AE for execution of advisory. The assessee was engaged in providing advice for financing the investment in the investee company and the advice for financing included all kind of possible modes of equity and debt financing. Companies dissimilar with that of assessee need not be selected as comparable. Working capital adjustment - Held that:- While making comparison of the assessee with the comparables, the economic adjustments are important in eliminating material differences in functions, assets, and risk between the assessee and the comparables to increase the comparability. As the request of the assess ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ithout giving adequate reasons for the rejection and further choosing comparable companies which were functionally or otherwise not comparable to the Appellant. 4. That each of the learned AO/DRP/TPO erred on the facts and circumstances of the case and in law by not providing a relief on account of difference in the risk profiles between the appellant and the comparable companies selected by the TPO for the purpose of determination of an arm s length price. 5. That each of the learned AO/DRP/TPO erred on the facts and circumstances of the case and in law by not taking into account the judicial precedents (including that of Carlyle India Advisors Private Limited Vs ACIT, Mumbai, ITA No. 1286/Mum/2012) which is squarely applicable) deal with similar facts and functions as those of the Appellant. Adjustment made in relation to outstanding receivables 6. That each of the learned AO/DRP/TPO erred on the facts and circumstances of the case and in law by levying interest of INR 5,134,309/- on the amount of outstanding receivables. 7. That each of the learned AO/DRP/TPO erred on the facts and circumstances of the case and in law by considering the outstanding ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... international transactions between the assessee and its AE to the Transfer Pricing Officer (in short the TPO ) for determination of arm s length price of the transaction. The TPO took note of the profile of the assessee from transfer pricing study, agreement with the AE and financial statement filed by the assessee and then characterized the assessee company as fee based investment/ financial advisory service provider. The TPO accepted the Transactional Net Margin Method i.e. TNMM applied by the assessee for benchmarking its international transaction and used Net Operating Profit Mark-up on cost (OP/TC) as the profit level indicator. The TPO observed that the assessee earned OP/TC of 21.93% in the year under consideration as against the average OP/TC of 17.48% in respect of eight comparables identified in the transfer pricing documentation filed by the assessee, having detail as under: S. No. Comparable Margin (%) 1. Ambit Capital Private Limited 27.33 2. CRISIL Limited 32.03 3. Future C ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... TPO 66.05 8. Birla Sunlife Asset Management Company Limited TPO 11.31 9. Almondz Global Securities Limited TPO 34.57 10. Axis Private Equity Limited TPO 30.42 Mean 39.13 2.2 Then the TPO determined the arm s length price of the international transaction of advisory services and made upward adjustment ₹ 3,20,29,914/-as under: Amount in INR Operating cost of the assessee 184868442 Arm's length Margin 39.13% Arm's length Price 257207463 Price received 225177550 105% of International Transaction 236436428 Shortfall 32029913.4 2.3 The TPO further proposed an adjustment of ₹ 51,34,309 for interest at the rate of 1 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Unlisted Securities in India. The ld. AR further submitted that for rendering the aforementioned services the assessee company was compensated on the basis of cost plus 20% mark up. The ld AR also referred to page no. 300 of the assessee s paper book, which is copy of profit and loss account of the assessee for the relevant assessment year, showing revenue of ₹ 22,51,77,550 from advisory service, interest of ₹ 84,651, Miscellaneous income of ₹ 1,45,000 and other income of ₹ 4950/- and profit before tax of ₹ 3,77,64,192/-. 5.1 The ld. CIT(DR), on the other hand, submitted that the assessee was engaged in whole range of activities of advising in investment and finance, i.e., conversion of debt into equity or vice versa and providing support services. He further submitted that private equity fund generally involve in management of Investee Company through the advisory firm. He submitted that the assessee did not provide the detail of support services provided. He submitted that as per agreement third parties were appointed with consent of the AE, and thus the assessee was more than an advisory firm. 5.2 We have heard the rival submissions in respec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f providing the services in the Republic of India and to the reputation of the Company and its members. ARTICLE IV REPORTS 4.1 As soon as available, but in any event, within six (60) days after the end of each half of the Accounting Period, the Sub-Advisor is to provide a report on the financial progress and prospects for investments in the Investee Companies to the Company. The Sub-Advisor shall promptly provide notice of any event or condition, which might materially and adversely affect business and operation including any fraud, mismanagement or any other circumstances relating to an Investee Company of which the Sub-Advisor is aware of or should be aware of which could materially and adversely affect the value of the recommendations proposed by the Sub-Advisor to the Company. 5.3 From an overview of the above clauses of the agreement between the assessee and its AE, we find that during the year, the assessee was engaged in providing broadly four types of services: (i) Firstly, identify the investment opportunity in private equity, distressed debt and listed or unlisted securities and then advise or recommend to the AE for investment in identified target. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... us, we find that the area of the advisory of the assessee is not limited to advisory in investment in equity fund, it includes advisory in respect of investment through private placement, IPO investment, financing though loans, financing through bonds, reorganization of entities through merger/demerger, advice on exit strategy and engaging service providers for support services. In view of the above discussion, we uphold the action of the TPO in characterisation the functions of the assessee as advisory in investment and finance. We have also noted that the assessee was engaged in providing support services to the AE, which is clearly more than advisory in investment. We now proceed to consider the functional comparability of the comparables keeping in mind our findings of the functions of the assessee discussed above. Inclusion/ exclusion of comparables 5.5 During hearing of the case before us, the ld AR, objected to the inclusion of the seven comparables by the TPO, however, he submitted that if three comparables i.e. Sumedha Fiscal Services Ltd., Khandwala Securities Ltd. and Brescon Corporate Advisors Ltd. were excluded from the list of the comparables, profit m ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... appeal, though he submitted that it was within the purview of the Tribunal to accept the new ground. He further submitted that The Tribunal while considering the decision in the case of Maerk Global Service Center India Pvt. Ltd. (2011) 14 ITR (Trib.) 541 held that if the TPO himself does not reject comparable companies selected by the taxpayer on functional incomparability then the Revenue cannot later take the plea of incomparability. Whereas, the ld. CIT DR submitted that any ground could be raised before the Tribunal so long as they were subject matter of appeal or assessment. The CIT DR relied on number of judgments of the courts including the judgement of the supreme court in the case of NTPC reported in 229 ITR 383 in respect of the propositions to reject the three comparables chosen by the assessee. We have heard the submission of both the parties. We are not agreed with the contention of the Ld. CIT(DR) that the Revenue is at liberty to raise any ground of appeal at any stage of appellate proceeding. In this case Revenue has neither filed appeal nor any cross objection. It is settled position of law that once a respondent is not aggrieved by the impugned order, it can t be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he scope of argument of the Departmental Representative should be confined to supporting or defending the impugned order and he cannot be permitted to set up an altogether different case. 44. In the light of the above reasons we are of the considered opinion that the learned Departmental Representative cannot be allowed to argue that certain cases included by the assessee in the list of comparables, were in fact not comparable, when the TPO himself failed to point out as to how such cases were distinguishable. The situation would have been different if the TPO had found a case to be incomparable say on account of functional test. In that case on finding such a case to be functionally similar, the ld. DR could have justifiably shown such case to be distinguishable on some other valid ground. Presently we are dealing with a situation in which the TPO, by not adversely commenting upon the assessee s comparables, impliedly accepted such cases as comparable. Now it is too late in the day for the ld. DR to argue that such cases were not comparable. If the argument on the behalf of the Revenue in this regard is allowed to be made, it will amount to permitting the ld. DR to argue cont ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hand, submitted that the assessee has chosen TNMM as the most appropriate method for benchmarking of international transactions and under this method broad similarity of functions is required. He therefore submitted that consultancy in the field of merchant banking is broadly similar to the consultancy or advisory in investment or finance. He referred to the page 339 of the assessee s paper book, where the assessee itself has mentioned that under TNMM, the standard of comparability is less stringent as compared to other methods as only broad similarity of functions is required. 6.2 He submitted that merchant banks are also not only engaged in share issue management but provides various kinds of consultancy services which are advisory in the nature. Moreover, he submitted that Private Equity fund generally invest in high risk emerging technology area and they expect high returns from such investments, generally through sale of shares or stock, through private placement or through public offering and for that purpose they engage peoples at very high salary package, as compared to the merchant banks. He attempted to convey that yield from PE fund investment is too high as compared ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt banker. As per section 3(2)(a) of the SEBI (Merchant Bankers) Regulation Act,1992, Category-I Merchant banker is to carry on activity of issue management, and to act as advisor, consultants, manager, underwriter, portfolio manager. So, the Merchant banker plays two kind of role. The first kind of role, i.e., manage issue of shares, underwriter, portfolio manager etc., which are in the nature of functions where work is executed by the Merchant banker. The second functions are in the nature of advisory or consultancy in respect of issue management etc. So, if the comparable has performed Merchant banker s role of first kind, it would be functionally different from the assessee, but if the comparable has performed Merchant banker s second kind of role, it is very much comparable being the consultancy in the nature of investment or finance. From the segment result, it is seen that the comparable has shown income from consultancy related to merchant banking and not from issue management. The fact of handling of issue management has been duly mentioned in the Annual Report of another comparable, namely, Almondz Global Securities Limited, but no such fact has been found in the Annual R ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dentifying the potential vendors; negotiating with the vendors as an agent of the Manager, finalizing deals, if the Manager is satisfied, and; to provide actual support services, if the investment is made by the Manager. In this three-tier hierarchy, Xander Master Fund is the PE Fund , Xander Investment Management Ltd., Mauritius, is the Manager and the assessee is simply Sub-Advisor to the Manager . From an overview of the nature of activities discussed above, it is noticed that the contention of the ld. AR that the assessee acted as a PE Fund in India, is not tenable. The Manager subcontracted specific activities to the assessee, which were in the nature of advisory to him. By no stretch of imagination, the assessee can be described as PE Fund, who, in present facts is, Xander Master Fund. The name by which a transaction is coined is not decisive of its character. It is the real nature of a transaction which is always relevant and conclusive. A bare perusal of the nature of activities carried out by the assessee in the extant international transaction abundantly proves that these are not that of a PE Fund. Ex consequenti, the decisions cited by the ld. AR seeking to canvass t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... coming to a conclusion that particular method is most appropriate method etc. are not legal interpretations but only solution found by the Bench, in its own wisdom, given a certain fact situation. It is difficult to have a case where the functions, assets and risk of an assessee, are same as the case decided subsequently. Seldom two business models are the same. Quoting these case laws and relying upon them as if they have laid down binding legal precedence without reference to the facts, to our mind is not only wrong but even misleading. Even in following a binding legal precedence, the Courts have cautioned that what has to be seen is whether the facts and circumstances are same. Though it is well settled, for sake of ready reference we quote following case laws:- (i) GVK Gautami Power Ltd. vs. ACIT, 336 ITR 451 (A.P.) for the proposition that observations of Court are neither to be read as Euclid s theorems nor as provisions of a statute and that too taken out of their context. The decision of the Court is only an authority for what is actually decides. What is the essence in a decision is its ratio and not every observation found therein nor what logically follows from t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rat Co-operative Bank Ltd. vs. CIT, 250 ITR 229 (Guj.) for the proposition that for SC s decision to be law has to be declared or stated vocally to support conclusion, not mere conclusion by which case is disposed of. (ix) CIT vs. Sun Engineering Works P. Ltd. , 198 ITR 297 for the proposition that it is neither desirable nor permissible to pick out a word or a sentence from the judgment of this court, divorced from the context of the question under consideration and treat it to be the ITA No.5680/Del/2011 complete law declared by this court. The judgment must be read as a whole and the observations from the judgment have to be considered in the light of the questions which were before this court. A decision of this court takes its colour from the question involved in the case in which it is rendered and, while applying the decision to a later case, the courts must carefully try to ascertain the true principle laid down by the decision of this court and not to pick out words or sentences from the judgment, divorced from the context of the questions under consideration by this court to support their reasonings. (x) Jaganmohan Rao (V.) vs. CIT, 75 ITR 373 (SC) for the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... without appreciating that the segment comprises of assignment based income on account of services relating to mergers and acquisitions, equity and debt issue management, portfolio management and broking, as comparable to the assessee. The functional profile of this company being different form the assessee company, the learned AR requested to exclude the company from the list of comparables relying on the decision of the Hon ble Bombay High Court in the case of Carlyle India Advisors Pvt. Ltd. Vs. ACIT (surpa) and Xander Advisors India Pvt. Ltd Vs. ACIT (supra). 7.1 We have gone though the Annual Accounts of the comparable company, which are available on page 554 to 601 of the paper book of the assessee. A perusal of the segmental result on page 593 of the paper book, it is seen that the company has two segments, one is Investment/stock operation and another is fee based operations. On page 592, segment information has been provided, according to which, the fee based division provides financial advisory services relating to mergers and acquisition, equity and debt issue management, portfolio management and broking. So apparently, two functions have been performed under this seg ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of Carlyle India Advisors Pvt. Ltd. Reported in 56 Taxmann.com 417 (Del), and therefore, the comparable can t be rejected in the case of the assessee. We have gone through the rival submissions. The submission for relying on the cases decided by the Courts/Tribunal (supra) for treating the company (Brescon) as one of the comparables in the case of the assessee, have already been rejected by us while examining comparability of Sumedha Fiscal Securities Ltd. 8.2 We have gone through the Annual report of the company, which is available on pages 602 to 658 of the assessee s paper book. It is seen from the page 625 and 628 of the paper book that the company has shown income from fee based financial services from debt resolution and debt syndication. The other income from dividend, interest and profit from sale of investment has been shown below the profit before tax, hence, having no impact on the operating profit. We have seen from the profile of the assessee that it was engaged in advisory related to debt finance and we don t have any doubt that the term debt finance includes debt resolution and debt syndication. Further, we can t brush aside the vital fact that the AE of the as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... any s main focus was on fee based activities which include Debt Syndication, IPO Advisory, Private Equity Placement, Merger and Acquisitions, corporate Restructuring and host of the other corporate advisory services. We have also noted the information under the title performance on page 670 that the company was planning to expand its wing by venturing into merchant banking activities and broaden its horizon, which shows that during the year it was not engaged in merchant banking activities. The assessee company has also advised in respect of equity financing, debt financing, corporate restructuring, capitalisation, splitting of shares, exit strategy and also extended support services for execution of any of the these services and therefore, the activities of the assessee are functionally similar to the company, thus, we hold the company as comparable, and accordingly, we direct the TPO to retain this company as one of the comparable. Birla Sunlife Asset Management Company Limited. 10.1 Ld. AR submitted that the company is registered under SEBI (Mutual Funds) Regulations, 1996 and SEBI (Portfolio Management) Regulations, 1993 and engaged mainly to act as an investment mana ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... segment comprises of services of merchant banking, underwriting, corporate and infrastructure advisory, loan syndication fees and arranger of debt and bonds etc. We have also noted from page 735 under the segment performance that during the year the assessee handled 2 IPOs aggregating to ₹ 148.97 crores. The handling of IPOs and underwriting of issues are the activities different from the advisory of investment and finance. Since income from handling of IPOs and underwriting commission is part of segment of corporate and finance advisory fee, it makes the segment functionally dissimilar to the assessee. As the segment of the company loses its comparability with the assessee, we direct the TPO to exclude this company from set of comparables. Axis Private Equity Limited 12. The learned AR submitted that this company acts as an Investment Manager to Axis Infrastructure Fund and engaged in asset management activities, and manages investments of off-shore funds, pension funds, provident funds and other funds. The segment data of the assessee is also not available. 12.1 We have perused the Annual Reports of the company which is placed at page nos. 869 to 890 of the as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... his issue. But, the assessee has taken ground for adjustment of risk, so, now we deal the ground no. 4 raised by the assessee. Adjustment for Risk Undertaken 13. In Ground no. 4 of the Appeal, the assessee has requested for grant of benefit of risk adjustment. The TPO in his order held that the assessee was not a risk free entity, as according to the TPO it was facing a single customer risk of loss of revenue in the event of bankruptcy of the customer. The TPO has also claimed that the assessee had not provided any back-up calculation for claim of risk adjustment as well as comparison of risk taken by the comparables. At the time of hearing before as it was contended by the learned AR that the assessee being a captive service provider, the assessee operated in relatively risk free environment as compared to the comparables chosen by the TPO as well as by the assessee which are entrepreneurial enterprises, which undertook full range of economic risk i.e. marked risk, price risk, product risk, credit risk etc. In view of the above, the ld. AR submitted that an appropriate risk adjustment ought to have been provided by the TPO. The ld. AR in support of his claim of risk adju ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing the average prime lending rate for financial year 2008-09 plus 300 basis points as the Comparable Uncontrolled Price (CUP), computed interest rate of 15.77% as arm s length rate of interest and applying the said rate of interest for complete year on the balance of outstanding receivables as on 31st March, 2009, made an adjustment of INR 51,34,308/- . Before the ld. DRP, the assessee pleaded that if a working capital adjustment is allowed to the assessee, then adjustment for outstanding receivables would automatically factor therein and no separate adjustment would be required. The DRP confirmed the additions proposed by the TPO. 14.2 Before us, the ld. AR contended that assessee did not function like a normal trader/manufacturer, and it merely recovered the cost incurred by it from the AE along with a mark-up. The Ld AR further contended that the receivables as on the Balance-sheet date from Avenue US were pending only for the month of March and the average collection period of the assessee was better than six of the comparable selected by TPO in the final set for computing the ALP of the international transaction of provision of investment advisory services to AE, barring t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e, we cannot accept the contention of the assessee that, the AE was not retaining any funds of assessee in its hands and the funds are immediately remitted to the assessee as and when received from its clients. As the assessee is not having any dealings with the clients of the AE, assessee cannot be a witness for the delayed payments by AE customers. It is for the AE to see that its customers are paying in time so that it can pay the assessee in time. If the contention of the assessee is accepted, it would also mean that the AE has no working capital of its own to pay the assessee in time. It means that the AE was doing the business using the capital of assessee. AE collects money from clients as and when received even beyond normal period. It shows assessee is in fact financing the business of AE by accommodating delayed remittance of receivables. 17. As a general rule, we agree with the learned chartered accountant that what is to be assessed as income is the income earned by an assessee and not the income that could have been earned by the assessee. Thus there is a real difference between the actual and the probable. But that general rule of taxation is not as such directly ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... arified that- (i) the expression international transaction shall include- (a) (b) .. (c) capital financing, including any type of long-term or short-term borrowing, lending or guarantee, purchase or sale of marketable securities or any type of advance, payments or deferred payment or receivable or any other debt arising during the course of business; . 22. On going through the relevant part of the Explanation inserted with retrospective effect from 1.4.2002, thereby also covering the assessment year under consideration, there remains no doubt that apart from any long-term or short-term lending or borrowing, etc., or any type of advance payments or deferred payments, any other debt arising during the course of business has also been expressly recognized as an international transaction. That being so, the payment/non-payment of interest or receipt/non-receipt of interest on the loans accepted or allowed in the circumstances as mentioned in this clause of the Explanation, also become international transactions, requiring the determination of their ALP. If the payment of interest is excessive or there is no or low receipt of interest, then such in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ansaction, impliedly disapproves the view canvassed by the DRP in obliterating the determination of the ALP of the separate international transaction of interest on allowing the working capital adjustment in the international transaction of rendering of services. In our considered opinion, both the transactions are separate and distinct from each other. Whereas the international transaction of rendering services contemplates comparison of the price charged for rendering services by impliedly including the interest for the period allowed for realization of invoices as per the terms of the agreement, the international transaction of charging interest on late recovery of trade receivable covers the period which starts with the termination of the period of credit allowed under the agreement, which is subject matter of the international transaction of rendering of services. There is one more fallacy in the reasoning given by the DRP about the subsuming of interest income in the working capital adjustment. It is simple that working capital adjustment is ordinarily computed by considering the average of the opening and closing values of inventories, receivables and payables. The TP adjust ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt of working capital adjustment. The receivables outstanding within the industry standard period would be taken care by the working capital adjustment. 14.8 The TPO has computed interest of ₹ 51,34,308/- on outstanding receivables as on closing of the year after applying the interest rate of 15.77% for a period of 365 days. This approach of the TPO is not correct. The outstanding receivable should be examined on transaction to transaction basis and outstanding period should be computed after allowing period available as per industry standard. The calculation submitted by the assessee, without prejudice, was not examined by the TPO as well as DRP. Further, in the case of the assessee, the invoices were raised by the assessee in foreign currency and the AE has enjoyed the benefit of interest in terms of LIBOR rate of interest, the LIBOR rate of interest should be considered rather than prime lending rate of interest of SBI. Accordingly, we restore the matter of computation of the adjustment to outstanding receivables to the TPO with the directions to compute interest for receivables on day to day basis beyond a period available as per industry standard and apply LIBOR rate ..... X X X X Extracts X X X X X X X X Extracts X X X X
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