9911796707
TMI Blog2016 (9) TMI 1320X X X X Extracts X X X X X X X X Extracts X X X X ..... e assessment year 2010-11. In the revised grounds of appeal, the assessee has raised following grounds:- Ground 1 On the facts and in the circumstances of the case and in law, the learned AO based on the directions of the Hon ble DRP, erred in making an upward adjustment of ₹ 19,55,13,737 in determining the arm s length price (ALP) of the international transaction pertaining to the provision of investment advisory services to its Associated Enterprises (AE) by the Appellant. Ground 2 The learned AO, based on the directions of the Hon ble DRP, erred on facts and in law, in concluding that: ( a) certain activities of the Appellant are engaged in providing portfolio management services, over and above the investment advisory services provided to 3i Investments Plc (3i investments), primarily on account of the presence of the Appellant s employees as nominee directors on the Board of the Indian Investee companies; ( b) an additional compensation should be received by the Appellant in relation to the above services being a performance fee of 0.25 percent of the total investments and divestments, over and above the cost plus mark-up al ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ansactional Net Margin Method as the most appropriate method for benchmarking such additional function; and ( b) Not excluding the costs relating to such additional function from the cost base, while re-computing the ALP of the investment advisory services based on a mark-up on operating costs. Ground 5 The learned AO, based on the directions of the Hon ble DRP, on the fact and in law, erred in re-computing the arm s length margin of the investment advisory services provided by the Appellant at 55.06 percent by rejecting certain comparable companies selected by the Appellant in the transfer documentation, and by selecting additional comparable companies which are functionally not comparable to the Appellant. Ground 6 Without prejudice to the Ground 4 above, the Hon ble DRP in its directions, on the facts and in law, erred in rejecting two comparable companies namely Future Capital Investment Advisors Limited and IDC (India) Limited, which were accepted by both the learned transfer pricing officer in its order under section 92CA(3) of the Act and by the Appellant in its transfer pricing study report for FY 2009-10. Ground 7 The ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . 4. During the year under consideration, the assessee has entered into the following international transactions:- Sr. No. Particular of Transactions Name of AE Amount(Rs.) Method adopted i) Investment Management Services 3i Investment Plc, London 73,41,16,766 TNMM The assessee for rendering of non-binding investment advisory services , has charged Cost + 20% Mark up . To benchmark the transaction and also its profit margin, the assessee had selected TNMM as the Most Appropriate Method (MAM) and comparable companies mainly in the field of advisory services. The Profit Level Indicator (PLI) selected for benchmarking the arm s length price (ALP) was on the base of operating profit upon operating cost (i.e. OP/OC). The assessee had shortlisted 8 comparable companies after carrying out detail search process by applying quantitative filters and qualitative analysis to benchmark the ALP of the international transaction relating to its international advisory services. Since the assessee had ta ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e approval of the board of directors or other duly constituted body of that Advised Fund; 2.2.3 to assist the Manager in monitoring such investments including the analysis of the performance of Portfolio Companies and to advise on divestments being considered by the Manager; 2.2.4 to advise on individuals to be appointed by any Investor as a member of the board (or similar) of Portfolio Company; 2.2.5 if required by the Manager, to advise the Manager on the exercise of any shareholder Rights applicable to any Portfolio Company; 2.2.6 if required by the Manager, to prepare material for inclusion in annual or other reports of any Investor (including __ataicas__) 2.2.7 to prepare and supply information and reports to the Manager in such medium as the Manager may reasonably request; and 2.2.8 to advise the Manager in relation to any other matter relating to the implementation of or arising from the Investment Policy of any Investor. 2.3 In carrying out its duties hereunder the Investment, Adviser shall have regard to and shall ensure that the advice and activities comply with: 2.3.1 the Investment Policy of any Investor, if any; 2.3 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... will disclose to the Manager any developments that may have a material impact on its ability to carry out the services in compliance with applicable laws and regulatory requirements (subject only to clause 2.6) . Thereafter, TPO summoned the employees of the assessee company and recorded their statement under section 131 which has been incorporated by the TPO in his order from pages 4 to 6. From the statements, he inferred that the assessee was not merely providing non-binding investment advisory services to its AE but was also doing the portfolio management services for its AE. He also analyzed the investments made by various AEs despite the fact that investment advisory agreement was between assessee and 3i Investment Plc , London. Thus, he held that assessee has been performing Portfolio Manager s functions for other AEs also. He observes that, this is corroborated by the fact that the AEs have appointed employee of the assessee as nominated director of the AE in the investee company in which they have invested, so that investor (AE) has proper control in which the investment has been made. These employees who were made the nominee directors are closely managing the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 866/-in the aforesaid manner, the TPO proceeded to analyse the various comparable companies included by the assessee and he also gave his own set of comparables. The disputed comparables on which he asked for assessee s objections were as under:- (i) Motilal Oswal Investment Advisors P Ltd.; (Sought to be included by the TPO); (ii) ICRA Investment Management Consultancy Services Ltd.; (assessee s comparable which has been sought to be excluded by the TPO); (iii) Kinetic Trust Ltd.; (assessee s comparable which has been sought to be excluded by the TPO); and (iv) Integrated Capital Services Ltd.; (assessee s comparable which has been sought to be excluded by the TPO); Thereafter, he rejected the assessee s objection on the aforesaid comparables and after detailed discussion he rejected the inclusion of ICRA Investment Management Consultancy Services Ltd ; Kinetic Trust Ltd ; Integrated Capital Services Ltd ; and included Motilal Oswal Investment Advisors Pvt. Ltd . Thus, the final set of comparables selected by the TPO, were as under:- Future Capital Holdings Limited 29.48% Future Capital Investment Advisor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ompanies. The DRP further concluded that the assessee may not have performed all the functions performed by a Portfolio manager. Accordingly, the DRP upheld the learned TPO s conclusion of arbitrarily adding an additional income of 0.25% of the value of investment and disinvestment by stating that it was required to be added since the assessee monitoring functions is wider than its investment advisory functions, and thus, added it to the total taxable income. 9. So far as adjustment made on account of average margin of the comparables selected by the TPO, the DRP went step further and enhanced the margin of 37.51% to 55.06% by rejecting two more comparables selected by the assessee in its TP Study report which was accepted by the TPO. The summary of the comparable companies considered by the assessee, TPO and the DRP are as under:- S No Particulars Assessee s set based on single year data TPO s Set DRP s Set 1 Future Capital Investment Advisors Ltd. 15.71% 15.71% X 2 ICRA Onli ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... there was Advance Pricing Agreement (APA) with CBDT u/s 92CC on 24th November, 2015, whereby right from the assessment year 2015-16 to AY 2019-20 it has been concluded that, Arm s Length Price of the transaction of provision of Non-Binding Advisory Services and related support services, the operating margin would be costs plus 21% markup. Thus, he submitted that, if under the APA itself it has been agreed that, the profit margin of the assessee should be at @ 21%, then in the present assessment year, the profit margin of 20% is not only reasonable but also meets the arm s length price. He submitted that, the functions performed by the assessee in the present assessment year as well as the assessment years which are covered under the APA after detail analysis and examination are exactly the same and there are no additional functions or services in this year which are different. He further submitted that, there are various Court decisions wherein, it has been held that, if in the subsequent years the matter has been accepted by the APA despite such an order of the TPO and DRP on record, then same principle or ALP has to be applied and accepted in this year also. In support, he r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the investment advisory and cost + mark up compensation received gets covered under all the investment advisory services. He further relied upon the following decisions also:- * Carlyle India Advisors Private Limited v Additional Commissioner of Income-tax [24 taxman.com 176 (Mumbai)]; * TPG Capital India Pvt. Ltd v ACIT (ITA No.880/Mum/2013); and * NVP Venture Capital India Pvt. Ltd v DCIT (ITA No.1564/Mum/2015). Regarding objective of appointing nominee directors, he submitted that it was aimed at monitoring of the investee companies and these employees act in fiduciary capacity in those companies. The nominated directors were remunerated by the investee companies in the similar manner as they would remunerate to any other director. Not only that, the said remuneration paid to these employees were returned by them to the assessee company and such an amount has been offered to tax by the assessee. Thus there was no need for making any separate computation on account of additional services. He further submitted that, a portfolio manager is a highly regulated entity governed by the SEBI (Portfolio Managers) Regulations . Based on these regulations, it can be se ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er in which 0.25% of the fees on investment and divestment have been determined by them. There is no benchmarking done vis- -vis the comparable uncontrolled transaction with the independent entities and no comparability analysis has been undertaken, therefore, such a arbitrarily and ad-hoc addition is outside the scope of TP Provisions. 13. On the other hand, Ld. DR referred to the description of 3i Group as provided in their Website, wherein, it has been mentioned that 3i Group is mainly engaged in identifying and analyzing potential investment opportunities in profit making enterprises and that 3i Group is mainly engaged in evaluating and making recommendations to 3i Investments plc with respect to investment opportunities and probable growth oriented companies whereby capital investment would grow rapidly. It is not only rendering advisory services but also functioning as full-fledged portfolio monitoring. In support, she read out the various observation made by the TPO in his impugned order. Regarding APA, it was submitted that, what were the facts on which the authorities to the APA took the decision are not clear and whether PMS has been examined and factored into the pric ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt finding given in the impugned orders as well as the entire gamut of facts and materials as referred to before us. The assessee is providing Non-Binding Investment Advisory Services to its AE, 3i Investment Plc , UK. The assessee makes investment recommendation to its AE and the AE in turn retains the absolute rights whether to use the investment advice/information provided by the assessee or not. The services rendered by the assessee are largely on account of following:- * Identifying and advising on potential investment opportunities; * Evaluating and making recommendations to 3i Investments plc with respect to investment opportunities; and * Monitoring and advising on divestment and investments. The functions performed as per the Investment Advisory Services Agreement have been elaborated by us in the earlier part of our order. For rendering of such services, the assessee has been remunerated with Cost + 20% mark-up . This profit margin has been disturbed by making upward adjustment of ₹ 19,55,13,737/-, firstly, by way of adjustment of ₹ 8,83,93,866/- which has been made by computing the additional performance fees at 0.25% of the total investme ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... verage value of investments and if such a fee is taken into consideration then what assessee has received is far more than the PMS would generally charge. In any case, if the revenue is of the view that, it is a separate transaction and is not part of the investment advisory functions, then it needs to be separately benchmarked and such benchmarking can only be done by carrying out comparability analysis with uncontrolled comparable transactions under the transfer pricing provisions as prescribed under the Act, read with the rules. Benchmarking the price on adhoc manner and by resorting to estimate without any basis and analysis cannot be resorted for determining the Arm s Length Price of any transaction, at least under present transfer pricing mechanism. This precise issue has been dealt in detail by the Tribunal in the case of Temasek Holding Advisors India Pvt. Ltd. (supra) in the following manner:- 26. Lastly, coming to the addition of 3% markup additionally made over and above the comparative margin arrived at by the TPO, we find that same is not tenable from any quarters. The TPO has added this markup on the ground that assessee in addition to investment advisory service ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is part and parcel of rendering of investment advisory services which is evident from the functions performed in terms of the Investment Advisory Agreement entered between the assessee and its AE. We further agree with the contention of the Ld. Senior Counsel that, if the similar function was carried out by the assessee in the earlier years and also in the subsequent years with same FAR analysis, then particularly for this year, it cannot be held that, assessee was performing PMS services separately which was not there earlier and in subsequent years. It has not been disputed that so far as FAR and overall functions are concerned, it remains the same not only in the earlier years but also in subsequent years. Thus, this year no exception can be carved out to deviate from the principle of consistency; and accordingly, we hold that no separate adjustment on account of PMS can be made that too on ad-hoc basis without adhering to Transfer Pricing provisions under the Income-tax Act as well as IT Rules. Though the APA in the case of assessee has been entered from AY 2005-16 onwards but it does give an indication that the Cost + Mark up charged by the assessee in this year (20%) is i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e. From the chart incorporated above, it can be seen that, assessee had chosen 8 comparable companies, out of which, 3 comparables were rejected by the TPO and 2 additional comparables were added from the DRP stage and 3 comparable companies which were chosen by the assessee and accepted by the TPO, same has been further rejected by DRP, leading to set of only 3 comparable companies, the arithmetic mean of which was arrived at 55.06% as against the assessee s operating margin of 20%. The comparables selected by the assessee, TPO and DRP are illustrated in the following manner:- S No. Particulars Assessee s Set TPO s Set DRP Set 1 Access India Advisors Ltd NC NC NC 2 Future Capital Investment Advisory Ltd. 15.71% 15.71% X 3 ICRA Online Ltd. 41.77% 43.43% 41.77% 4 ICRA Management Consulting Services Ltd 0. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... : 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 has noted that its consultation or advisory operations ranges in various fields which have been tabulated by him at pages 9 to 11 of the order, which according to him assessee is not performing. On the perusal of the directors report and also the remarks of the TPO, we find that the ICRA Management is pro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... we hold that ICRA Management is a good comparable and should be included in the list of final comparables. Kinetic Trust Ltd. :- 21. This company has been rejected by the TPO on the ground that its turnover is only 24 lakhs and it is registered with the RBI as NBFC. On a lower turnover, the TPO has mainly relied upon the decision of ITAT in the case of Triology E Business. At the outset, it is noticed that in the earlier two years, the Kinetic Trust Ltd has been held to be good comparable based on its functional profile. So far as functions are concerned, it is evident from the Directors reports, which are placed in the paper book from pages 187 to 230. It is seen that, the company is concentrating on its main activity of corporate consultancy services and financial services. Being a NBFC has not changed the nature of activity undertaken by the company and its core business competency and its revenue is from consultancy services. So far as the turnover filter applied by the TPO, we find that, first of all at the time of selection process, the assessee has not considered the turnover filter for accepting or rejecting the comparables. The turnover filter cannot be one ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssessment year 2007-08 and 2009-10. Once company has been held to be good comparable consistently for three years then without any change in the material facts, it cannot be held that this comparable could be rejected in this year. Moreover, in the case of Carlyle Advisory India Ltd., ITAT Mumbai Bench, reported in 43 taxman.com 184, the Tribunal held that this company is a good comparable with the companies rendering investment advisory services. This decision of the Carlyle Advisors have also upheld by the Hon ble Bombay High Court. Moreover, we have already discussed the functions performed by the IDC India Ltd while dealing with Ld. Counsel s argument that functions of advisory services are quite similar to the functions of the assessee and, therefore, we accept the assessee s contention that this comparable cannot be rejected. Accordingly, same is directed to be included in the comparability list. Motilal Oswal Investment and Advisor Ltd :- 25. This comparable has been included by the TPO and while including the said comparable he has observed that its income is only from Advisory fees during the year and it is performing advisory services in that field of invest ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. Future Capital Investment Advisory Ltd:- 23. This company is also accepted by the TPO as good comparable, however, the DRP has rejected the same. Such a rejection by the DRP is without giving any opportunity to the assessee. From the perusal of the annual report, which has placed in the paper book from pages 263 to 272, it is seen that it is primarily engaged in rendering investment advisory services only and its operating in a single segment. Thus, there cannot be any genuine reason for rejecting the said comparable. The DRP has rejected this comparable on the ground that it is in the process of shutting down its business. However, during the year, it has continued to render the investment advisory services and the realignment agreement was effective from 1st January, 2010, the realignment is also for investment advisory activities. Thus, there is not much impact on the net margins especially in the assessment year 2010-11, therefore, this company cannot be rejected and TPO is directed to include the same in the f ..... X X X X Extracts X X X X X X X X Extracts X X X X
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