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TMI Blog2016 (9) TMI 1320X X X X Extracts X X X X X X X X Extracts X X X X ..... ssociated 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 already being from 3i investments, as arm's length consideration for the above services; (c) the appellant renders services not only to 3i Investments, but also to various 3i group entities, who have invested in the Indian investee companies, for which no compensation has been received by 3i India from such 3i group entities; and (d) without prejudice to the grounds in (a) to (c) above, an adjustment on account of performance fee should be computed by applying 0.25 perc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ertain 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 learned AO, based on the directions of the Hon'ble DRP erred, on facts and in law, in rejecting the use of contemporaneous and multiple year data available for computing the ALP as on the date of filing the return of income and relying only on the single year data (i.e. for the year ended 31 March 2010) for the purpose of determining the ALP. Each of the grounds of appeal referred above is separate, and may kindly be considered independent of each other. The Appellant craves leave to add, vary, omit, substitute or amend any or all of the grounds of appeal, of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 taken weighted average years' margin of 8 comparables, therefore, the TPO asked the assessee to furnish margin of the comparables using single year data for the financial year 2009- 10. Accordingly, the assessee furnished the following details of the comparable companies along with their updated margins:- Sr.No. Name of the comparable (OP/OC)(%) 1 Access India Advisors Ltd. * 2 Future Capital Investment Advisors Ltd. 15.71 3 ICRA Online Ltd. 41.77 4 ICRA Management Consulting Services Ltd. 0.41 5 IDC India Ltd. 13.00 6 Informed Technologies Ltd. 25.52 7 Integrated Capital Services Ltd. -2.92 8 Kinetic Trust Ltd. 10.39 Average Margin 14.84% Assessee's margin 20.00% *It was later submitted by the assessee that Acces ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ternal policies, practices, procedures and management plans as are from time to time applicable. 2.4 The Investment Adviser shall have no authority, and shall not be obliged, to make investment decisions on behalf of any investor. Nothing in this deed shall constitute the Investment Advisor agent of the Manager or any Investor for any purpose and, accordingly, the Investment Adviser shall have no power or authority to make or purport to make investment decisions, or to agree the terms of any proposed transaction or to enter into any transaction on behalf of or in any other way to bind another member of the 3i Group, the Manager or the Investors. The Investment Adviser acknowledges that investment decisions of an Advised Fund are made by the board or other duly constituted body of that Advised Fund and not by the Manager. 2.5 The advisory services to be provided by the Investment Adviser under this deed are to be provided to the Manager for its own benefit to enable it properly to act as manager or adviser (as the case may be) to each Investor and are not to be provided for the benefit of the Investors. 2.6 Notwithstanding any other provision of this deed, the Investment Ad ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... opies of annual performance appraisal of the form submitted by its employees, details of which have been dealt by the TPO from pages 10 to 15 of his order. From the details submitted and the description of the functions performed by the employees as mentioned in their annual appraisal report, he deduced that, assessee has performed more than portfolio management services for the various AEs and also carried out the management of IPOs for the AEs. After detailed discussion and analysis, he came to the following conclusion: "11.9 From all the above discussion it can be understood that assessee is doing buyouts, portfolio management, restructuring for its various AEs in addition to the functions of investment advisory. Therefore the arm's length consideration is calculated as under: 11.10 Any investment adviser has two components to the fees charged. One is a fixed fee and another is in addition to fix fee there is a performance fee. Since assessee has not charged any fees from the above referred AEs, in an arm's length situation this can never happen. However, even for argument sake it is considered that these services were provided to 3i India PLc only, then also assessee in an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the assessee 611763971 Operating Profit of the assessee 122352795 OP/OC of assessee 20.00% OP/OC of comparables Arm's length profit =37.51%*OC 229472665.5 Arm's length income =ALP profit + ALP Cost 841236636.5 Difference in Actual income and ALP income 107119870.5 5% of transaction value 36705838.3 Adjustment proposed 107119870.5 Therefore, an adjustment proposed to the transaction of receipt of investment advisory fee by assessee from 3i Investment Plc is Rs. 107119870.5. Conclusion: Sr. No. Transaction Adjustment proposed 1 Adjustment on account of Performance Fee Rs.8,83,93,866.23 2 Transaction of receipt of investment advisory fee Rs.10,71,19,870.5 Total Rs.19,55,13,736.73 8. From the stage of the DRP, so far as the upward adjustment of Rs. 8,83,93,866/- by computing the additional fee @ 0.25% of the total average investment on the ground that assessee is providing additional portfolio management service in addition to non-binding advisory services, the DRP held that:- "------ the Appellant is providing portfolio management services to its AE primarily on account of the assessee employees acting as nominee directors on ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sue revolved only on account of comparables and there was absolutely no dispute regarding computing of additional fees on account of PMS as done by the Department in this year. Thus, on same function and facts no new such adjustment is called for. He also brought on record that, in the case of assessee, 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. H ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on the similar issue the Tribunal held that monitoring function are part and parcel of 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ransactions. Neither the TPO nor the DRP has provided the manner in which 0.25% of the fees on investment and divestment have been determined by them. There is no benchmarking done vis-à-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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ow: 16. We have considered the rival submissions, perused the relevant 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 Rs. 19,55,13,737/-, firstly, by way of adjustment of Rs. 8,83,93,866/- which has been made by computing the additi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cases, the PMS fees is around 2% to 2.5% of the average 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 ass ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... services needs to be benchmarked as the same 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' ch ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 0.41% X X 5 IDC (India) Ltd. 13.00% 13.00% Rejected 6 Informed Technologies Limited 25.52% 25.52% 25.52% 7 Integrated Capital Services Ltd. -2.52% X X 8 Kinetic Trust Limited 10.39% X X 9 Future Capital Holdings Limited 29.48% Rejected 10 Motilal Oswal Investment Advisors Pvt. Ltd. 97.89% 97.89% Ar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the TPO, we find that the ICRA Management is providing consultancy services in a myriad areas ranging from development, transportation, urban infrastructure, energy sector, banking and financial services and advising cross border M&A transaction etc. Some other observation made by the TPO is that ICRA has participated in various international forums, partnered with foreign company in multiple projects and has a very big client base unlike assessee. However all these facts do not affect the core competency and functions of the said company, which is advisory, because in all the fields it is rendering only advisory and consultancy services. The whole revenue is again from consultancy/advisory fees. In the instant case also, the assessee is providing Investment Advisory Services to its AE in diverse industries like, infrastructure, telecom, media, banking etc. to enable the AE to take decision for making investments. The functions of consultancy/advisory have to be seen as its core competence area and not in the field in which such consultancy is given. Under the TNMM, one has to see the transaction undertaken are comparable or not and whether any adjustment is required to obtain a r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ables. The turnover filter cannot be one of the tool for cherry picking by either of the parties at a later stage, as it has to be done at the threshold level only, i.e. at the time of search process and by applying quantitative filter. However, once turnover filter has not been applied then comparability has to be done at qualitative level based on FAR Analysis. If on FAR analysis there are differences on account of either assets deployed and risk assumed materially affecting costs or margins then probably such comparability can be rejected. But here in this case, merely on the ground that it has a low turnover cannot be the reason or criteria for rejection. Moreover, from the perusal of the decision of Triolgy E. Business India Pvt Ltd.(supra), it is seen that the Tribunal on the facts of the case highlighted the importance of applying turnover filter between the range of Rs. 1 crore to 200 crores. This does not lead to any inference that in all the matters the same criteria for applying the turnover filter should be taken between 1 crore to 200 crores. Thus, the ratio of the Tribunal decision cannot be applied universally in all the cases. Rather in the case of Nortel India Pvt. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that field of investment like assessee. Before us, Ld. CIT DR arguing for its inclusion submitted that, if the ICRA Management services can be included for having revenue from advisory services then on same analogy this company should also be given the same treatment. From the perusal of the directors' report, it is seen that this company derives its business income from four different business verticals, i.e. Equity capital markets, merger and acquisitions, profit equity syndications and structured debt. It also give advises on cross border acquisition. Its core competence is in the field of merchant banking. It also provides comprehensive investment banking solutions and transaction expertise covering private placement of equity, debt and convertible instruments in international and domestic capital markets, monitoring mergers and acquisitions and advising M&A as professional and restructuring advisory and implementations. It is also involved in various professional activities of the merchant banking. A Merchant Banker provides capital to companies in the form of share ownership instead of loans. It also provides advisory on corporate matters to the companies in which they inves ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... same in the final comparability list". The aforesaid decision qua the comparables in dispute will apply here in this case also, because there is not much difference in the function performed. It has also been pointed out that, these comparable companies have also been dealt in several other decisions while analyzing the functions of the companies rendering investment advisory services, the copy of which was filed separately by the Ld. Counsel. Since we have already taken note of the aforesaid decision, therefore, we are not analyzing the other decisions. 21. In view of the aforesaid finding and following the aforesaid decision, we hold as under: (i) ICRA Management Consultancy Services Ltd is directed to be included in the comparability list; (ii) Kinetic Trust Ltd. should be included as comparable ; (iii) IDC India Ltd. should be included as comparable; (iv) Future Capital Investment Advisors should be included; and lastly; (v) Motilal Oswal Investment Advisors Ltd. is directed to be excluded. Accordingly, the TPO is directed to benchmark the assessee's margin with final list of comparable companies and if they are within the range of +/- 5%, then the entire adjustme ..... X X X X Extracts X X X X X X X X Extracts X X X X
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