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TMI Blog2018 (5) TMI 1533X X X X Extracts X X X X X X X X Extracts X X X X ..... rm's Length price of the international transaction. In the said transfer pricing study, a set of five companies was considered as comparable and operating profit margin using multiple year data was calculated at 10.42%. Further, the operating profit margin of the assessee was at 12.5%. Accordingly, international transactions of the assessee were considered to be at arm's length. 2.1 During the transfer pricing assessment proceedings, on a reference being made to the Transfer Pricing Officer (TPO), the TPO rejected the transfer pricing documentation of the assessee. The TPO rejected all the five comparable companies proposed by the assessee. Based on fresh search, the TPO selected 10 new comparables and computed the Arm's Length margin at 36.36% and proposed an upward adjustment of Rs. 6,71,49,810/-. The TPO also revised the operating cost of the assessee to Rs. 20,68,41,310/- as against Rs. 19,10,21,287/- considered by the assessee in the transfer pricing study and revised the operating profit margin of the assessee to 3.90%. 2.2 Aggrieved, the assessee approached the Ld. DRP and raised numerous grounds of objection. The Ld. DRP primarily rejected the objections raised against th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... granting the benefit of working capital adjustments despite agreeing to grant the same in the TPO's order, 1.14 Not granting comparability adjustments on account of differences in risk assumed by the appellant vis a vis the comparable companies; 1.15 Not passing speaking order and not granting the effect to the DRP's directions. 2. By relying upon the action taken by the Transfer Pricing Officer without exercising their own judgment and skill 3. In levying interest based on the enhanced taxable income. All the above grounds are without prejudice to each other." 3. The Ld. AR submitted the arguments in respect of the five comparables as under: 3.01 Motilal Oswal Investment Advisors Private Ltd: It was submitted that the business of this company significantly differed from the business of the Assessee as this company is engaged in the business of providing investment banking solutions and merchant banking services which are functionally different from that of the Assessee who is engaged in the business of providing investment advisory services. The company is a registered merchant banker with SEBI. It was submitted that this fact has also been fortified by the Mumbai ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ctional profile is different from other comparables and is certainly not representative of other companies engaged in providing investment advisory services. The Ld. AR also placed reliance on a plethora of case laws in support of his contentions which were placed in the Paper Book. 3.02 Khandwala Securities Limited : It was submitted that the business of Khandwala Securities Ltd. significantly differed from the business of the Assessee. It was submitted that as per the annual report of Khandwala Securities Limited, its business operations include investment banking, corporate advisory services, institutional broking, private-client broking and investment advisory services. It was submitted that Khandwala Securities Limited is engaged in diverse business operations within the financial services industry which includes broking business which includes equity and debt broking, capital market operations business which includes structuring and executing diverse equity capital raising transactions, institutional equity sales, sales trading and research, private client broking, portfolio management services, mergers and acquisitions advisory, corporate advisory business which includes eq ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... latory compliance of the funds etc. Thus, an asset management company/fund management company is entrusted with the responsibility to invest the money of the fund in the best possible way. On the other hand, the Assessee is merely an investment advisor and is responsible for giving research based information/advice to its clients so that the clients can take informed decisions about where they should invest their money to get maximum returns and the client is not bound by the advice of the Assessee. It was further submitted that the difference between an asset management company and an investment advisor has been recognized by the Mumbai Bench of the Tribunal in the case of Temasek Holdings Advisors (I) P. Ltd vs. DCIT in ITA No. 4203/Mum/2012 and ITA No. 6504/Mum/2012 and that the same view has been ratified in the High Court judgements in cases of Carlyle India Advisors (P) Ltd. in ITA No. 1286/ 2012 and General Atlantic (P) Ltd. reported in 384 ITR 271. It was further submitted that in the present case as well, Axis Private Equity Limited acts as an investment manager/ asset manager to Axis Infrastructure Fund- 1 wherein Axis Private Equity Limited has been entrusted with the re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or the relevant previous year, the revenue of Almondz Global Securities Limited from advisory and consultancy fee constitutes only 10.79% of the total revenue and thus it fails the filter adopted by the TPO himself i.e., to reject companies whose income from fee based services is less than 75% of the total revenue. It was submitted that the business and FAR profile of the Assessee is significantly different from the corporate advisory segment of Almondz Global Securities Limited and, thus, Almondz Global Securities Limited should be excluded from the final set of comparable companies. The Ld. AR also placed reliance on a plethora of case laws in support of his contentions which were placed in the Paper Book. It was further submitted that during the relevant financial year, a subsidiary of Almondz Global Securities Limited has been amalgamated with Almondz Global Securities Limited with effect from 1 April 2006 and on account of the amalgamation, the results of Almondz Global Securities Limited for the relevant financial year cannot be used for benchmarking analysis since it fails the filter applied by the TPO himself i.e., to reject companies which are effected by peculiar economic ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... these expenses were incurred for establishing the name of the Assessee in the market and for attracting new customers. It was submitted that the Assessee had not incurred these expenses for the advancement of the business or name of its AE nor did these expenses have any relation with the services being provided by the Assessee to its AE. The Ld. AR submitted that since, these expenses had no direct or indirect relationship with the international transaction of the Assessee the expense should not be considered while computing the net profit arising from the international transaction. 3.2 With respect to brokerage, it was submitted that during the relevant previous year, the Assessee had incurred brokerage expense amounting to INR 16,28,501/-. The said brokerage was paid for hiring of office in Gurgaon at Plot no. 44, Sector 32, Gurgaon. It was submitted that Brokerage paid is an extraordinary expense being a one-time expense paid for the premises acquired to provide services not only to the AE but also to third party customers. It was further submitted that as per service agreement between the Assessee and its AE, all such expenses which were not incurred specifically for the pur ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oduced as under: Name of Comparable Items Included in Other Income while computing profitability margin Motilal Oswal Investment Advisors Private Limited * Interest Income (INR 3,134,861) Dividend Income (INR 13,008,675) Milestone Capital Advisors Private Limited * Reimbursement Income (INR 20,516,713) Rent Income (INR 519,000) Kshitij Investment Advisory Company Limited * Miscellaneous Income (INR 797,055) Khandwala Securities Limited . Sundry Credit Balances written back (INR 640,909) * Miscellaneous Income (INR 209,632) Inmacs Management Services Limited * Miscellaneous Income (INR 9,842) Almondz Global Securities Limited Segmental Data used Axis Equity Private Limited * Other Income (INR 1,818,569) Future Capital Investment Advisors Limited * Miscellaneous Income (INR 40,495) Icra Management consulting services limited * Miscellaneous Income (INR 592,000) 3.4 It was further submitted that that sundry credit balances written back amounting to INR 640,909/- added in total operating income of Khandwala Securities Advisory Company Limited is erroneous. The sundry credit balances written back for the relevant previous year amounts to INR 86,631/- only and, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t is also seen that this order of the Tribunal was followed by another Coordinate Bench of ITAT in ITA No. 2200/Mumbai/2014 for assessment year 2009-10 in the case of the same assessee vide order dated 22.02.2014. Consistent with the view taken by the Coordinate Bench of the Tribunal and also keeping in view that the department could not point out any other judicial precedent in support of its contention, we direct the Assessing Officer/TPO to exclude M/s Motilal Oswal Investment Advisors Private Limited as a comparable. 5.02 Khandwala Securities Limited: This comparable was also included by the Assessing Officer/TPO and it is the contention of the department that since this company is providing advisory services, it should be retained as a comparable. The Ld. DRP has also held in favour of this comparable being included in the final set of comparables on the ground that the FAR profile was broadly similar to that of the assessee company. On the other hand, the Ld. AR has submitted that as per annual report of Khandwala Securities Limited, the business operations include investment banking, corporate advisory services, institutional banking, investment advisory services etc. wher ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... an asset management company/fund management company, it is seen that such a company is entrusted with the responsibility of investing many of the funds in the best possible way whereas an investment advisory company only provides research based information and advises its clients to enable the clients so that the clients can take informed decisions about where they should invest their money to get maximum returns. The client is not bound by the advice of the investment advisory. The difference between an investment advisory company and an asset management company was recognized by the ITAT Mumbai Bench in the case of Temasek Holdings Advisory (I) P. Ltd. vs. DCIT in ITA Nos. 4203 and 6504/Mum/2012 for assessment years 2007-08 and 2008-09 wherein ITAT Mumbai Bench observed has observed that in case of companies engaged in asset management, the risk assumed is far more than the companies which are purely engaged in investment advisory services. The assets employed are also significant. The ITAT Delhi Bench in the case of Avenue Asia Advisors Private Limited vs. DCIT in ITA No. 6638/Del/2013 for assessment year 2009- 10 also directed exclusion of Axis Private Equity Ltd. on the groun ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... one Capital Advisors Private Limited: In respect of this company also, it is the submission of the assessee that this company is functionally different from the assessee company as this company is offering a wide profile of services such as investment advisory, portfolio management, project and property management etc. but the segmental details of the services offered were not available. It was also submitted that this company is an asset management company and therefore, the profile was significantly different from an investment advisory company like the assessee. We have perused the annual accounts of this company and we find that the contention of the assessee in this regard is correct in so far as segmental details and services offered are not available. The annual accounts also show that this company is more into asset management rather than investment advisory which is being done by the assessee. It is a settled issue that where segmental details of operating income is not available, such company cannot be considered to be a suitable comparable. This view has been held by the Hyderabad Bench of the ITAT in Sumtotal Systems India Pvt. Ltd. vs. ACIT in ITA No. 1710/Hyd/2011 fo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and in view of the fact that the assessee was earning only service income and that too from one AE, it cannot be said that these expenses did not have any nexus with earning of service income. It is our considered opinion that this conclusion by the Ld. DRP has been reached without any sound reasoning and without appreciating and duly considering the submissions made by the assessee in this regard. It will be in the fitness of things that the Ld. DRP should reconsider and re-adjudicate this issue relating to sponsorship and brokerage expenses after taking into account the settled judicial precedents as well as the evidences in this regard. Therefore, ground nos. 1.10 to 1.11 are restored to the file of the Ld. DRP for being adjudicated afresh after giving proper opportunity to the assessee to present its case. 5.2 Coming to ground no. 1.12 of the appeal which is regarding incorrect computation of operating margins of certain comparable companies, it is the contention of the assessee that the TPO has considered 'other income' or 'miscellaneous income' as part of the operating income while computing the operating profit margins of the comparable companies whereas this should not hav ..... X X X X Extracts X X X X X X X X Extracts X X X X
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