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TMI Blog2016 (2) TMI 1197X X X X Extracts X X X X X X X X Extracts X X X X ..... lity is required preferably to an appropriate business segment or transaction. Addition of 3% markup additionally made over and above the comparative margin arrived - additional mark-up applied by the TPO is without any FAR analysis or without any benchmarking exercise with any comparables and more importantly without any analysis of assessee's own facts. The assessee is providing non-binding investment advisory services to its AE and such services as highlighted by Ld. Counsel include; identifying and analyzing potential investment opportunities, evaluating and making recommendations to THPL with respect to specified investments. The monitoring functions performed by the assessee are part and parcel of the portfolio advisory services rendered by it because, the activities carried out by the assessee while undertaking portfolio monitoring activities include analysis of the latest development in the industry, ongoing performance of the industries and providing necessary information to its AE from time to time. This aspect has been noted by the ITAT, Mumbai Bench in the case of Carlyle India Advisors (P.) Ltd. (2013 (4) TMI 486 - BOMBAY HIGH COURT) and in other decisions cited ab ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d 1st April 2004 with THPL agreed to provide Investment Advisory Services. While rendering these services, the assessee provides investment recommendation in India to THPL, whereas the later retains the right of the use of investment advice or information. Hence the advisory services provided by the assessee were in the nature of non binding advisory services for which assessee was compensated with cost plus markup. The services rendered by the assessee under the Investment Advisory Agreement included the following services/functions: (a) Providing research reports, macro economic analysis and other advisory services; (b) Identifying, screening and investigating sectors of the Indian economy for investment opportunity; (c) Advising in investigation, structure, monitoring of portfolio securities/portfolio companies as the case may be; (d) Undertaking economic and market intelligence of the eligible portfolio companies including analysis and investigation of eligible portfolio companies, including their products, services, markets, management, financial solutions, competitive position market ranking, prospects for future performance and relevant industry sector; (e) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng qualitatively the nature of services provided by the companies and thereafter carried out the comparative analysis with the functions and services rendered by the assessee. The assessee has mainly selected the comparable companies which were engaged in the rendering of services similar to Corporate Advisory Services, strategic Advisory Services, Consultancy services, etc. The assessee has specifically excluded the comparable companies which were registered as merchant bankers with SEBI, asset management companies, stock brokers and like due to the reasons that their functional risk profile are significantly different from that of the assessee, which merely provides non-binding advisory services to its AE. He further submitted that, this is not the first year of transfer pricing process and the adjustments made by the TPO based on inclusion and exclusion of comparables. In the earlier years also as well as in the AYs 2008-09 and 2009-10, by and large similar companies were selected by the assessee and on the same reasoning and ground on which the TPO has made the transfer pricing adjustment in this year was also made in the earlier years. In those years, the matter has attained f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... th the rules, then same methodology has to be adopted by the TPO also. Law does not envisage differential procedure for assessee and revenue so far as selection methodology is concerned. 6. In the transfer pricing order the Ld. TPO, in the show cause notice required the assessee as to why ICRA Management Consultancy Services Ltd. and Integrated Capital Services Ltd. selected by the assessee should not be rejected and why two comparable companies, namely, Future Capital Holdings Ltd. and Motilal Oswal Investment Advisors Pvt. Ltd Capital should not be included. In response, the assessee filed detailed reply with regard to the each and every comparable sought to be excluded and included by the TPO. Assessee's reply in this regard has been noted by the TPO at paras 10.12 to 10.5. However, the TPO rejected the assessee's contention with regard to each and every comparable as per the detailed finding given from para 11.1 to para 11.5. The relevant facts and counter arguments of both the parties relating to the comparables which are in dispute before us are discussed hereinafter in brief:- (i) ICRA Management Consultancy Services Ltd. (Rejected by the TPO):- Mr. Porus Kaka, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... was accepted as comparable. He has taken a divergent view without brining any substantial material on record to show that how the facts have changed in this year. Accordingly this comparable company needs to be accepted not only on functional profile but also as a matter of consistency. (ii) Kinetic Trust Ltd. (Rejected by the TPO):-Mr. Porus Kaka, submitted that the TPO has observed that in the annual report of the Kinetic Trust, does not specify that the said company is engaged in the investment advisory; further the said company is NBFC registered with RBI; and lastly, its turnover is only ₹ 20 lakhs. To counter this TPO's observation, Mr. Kaka pointed out that firstly, Directors' report for financial year 2009-10 specifically mentions that the company has concentrated on its main activity of a corporate consultancy services and financial services. This is evident from Directors' report given at page 193 of the paper book. Merely because the said company is NBFC, the same does not change the nature of activities undertaken by the company i.e., Consultancy Services. Secondly, while selecting the list of comparables in search criteria, the assessee has not co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hile issuing his direction for AY 2010-11 without giving any opportunity to the assessee. Further, the ITAT Mumbai Bench in the assessee's own case for the assessment year 2008-09 2009-10 has accepted the IDC India as comparable company to the functions comparable by the assessee. Further, the Hon'ble Bombay High Court in the case of CIT v. Carlyle India Advisors (P.) Ltd. [2013] 357 ITR 584/214 Taxman 492/32 taxmann.com 23 had upheld IDC India as functionally comparable to the functions performed by an investment advisor. He further relied upon the decision of General Atlantic (P.) Ltd. v. Dy. CIT [2013] 32 taxmann.com 178/57 SOT 27 (Mum.). Explaining the profile and function of the company, he submitted that IDC India is engaged in the business of market research Company primarily dealing in research and survey services and products. It provides user research, vertical research, go-to market services and consultancy services which enable IT professionals, business executives and the investment community make fact based decisions on technology purchase and business strategy. The functions performed by the assessee while rendering investment advisory services include anal ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... bmitted that the Tribunal in the case of: (i) Q-India Investment Advisor (P.) Ltd. v. Dy. CIT [IT Appeal 923 (Mum) of 2015]; (ii) New Silk Route Advisors (P.) Ltd. v. Dy. CIT [2015] 55 taxmann.com 540 (Mum.) has rejected Integrated Capital as a comparable company to an Investment Advisory Services. (iii) MotilalOswal Investment Advisors Pvt Ltd.: This company has been included by the TPO and upheld by the DRP on the following points (as summarized by DRP):- (a) The company is engaged in providing high quality strategic and financial services which are used in acquiring majority equity stake, Financial Advisory services for hundred percent acquisitions, rendering advisory services for placement of equity with investors, rendering strategic financial advisory services to enhance banking fund limits of the companies. The analysis of these services shows that the strategic and financial advisory services rendered by this company are comparable with the high quality, investment advisory services rendered by the assessee company. (b) On going through the Balance Sheet of Motilal Oswal Investment Advisors Pvt Ltd, it is seen that the company has single reportable operati ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 09-10 indicates the Motilal Oswal has earned its income evenly from all these four business verticals. The annexure to the auditor's report indicates that Motilal Oswal is engaged in the business of 'merchant banking and investment/business advisory services'. The web portal of Motilal Oswal shows that it offers comprehensive investment banking solutions and transaction expertise covering private placement of equity, debt and convertible instruments in international and domestic capital markets, mergers and acquisitions advisory and restructuring advisory and implementations. Further, the web portal also indicates that, during FY 2009-10, Motilal Oswal has, inter alia, acted in various professional capacities such as arranger, merchant banker, book running leading manager, etc. The above services have been rendered by Motilal Oswal to various clients namely, Jindal Polyfilms Limited, GMR Energy Limited, Pipavav Shipyard, Jai Balaji Industries Limited, DHFL Limited, etc. Thus, it is evident from the above that Motilal Oswal is engaged in merchant banking and other similar activities, which are not at all functionally comparable to the assessee, which is engaged in render ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ons performed and risks assumed. Cost plus mark-up compensation is received for all the investment advisory services. The monitoring activity is part and parcel of the same advisory services. Moreover the activities of the assessee have also remained the same and FAR Analysis has been done on investment advisory services. Such an additional mark-up applied by the TPO is without any FAR analysis or without any benchmarking exercise with any comparables and more importantly without any analysis of assessee's own facts. Nowhere the assessee has provided any portfolio management services. The assessee only renders non-binding investment advisory services to its AE. These services include; identifying and analyzing potential investment opportunities, evaluating and making recommendations to THPL with respect to investment opportunities and monitoring and making recommendation to THPL with respect to specified investments. The monitoring functions performed by the assessee are part and parcel of the portfolio advisors services rendered by it. The activities carried out by the assessee while undertaking portfolio monitoring activities included analysis of the latest development in the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... bles chosen by the assessee needs to be examined afresh based on the information and factual analysis carried out in this year and one cannot be guided by the precedence of earlier years alone. In support of this proposition he referred and relied upon the decisions of ITAT Delhi Bench in the case of Toluna India (P.) Ltd. v. Asstt. CIT [2014] 50 taxmann.com 24/151 ITD 177, wherein the Tribunal expressed its reservation in accepting a broad proposition that, if certain benches of the Tribunal have taken a particular view for a particular comparable company, then same cannot be held to be automatically a good comparable or not comparable. The same has to be done on the functional analysis alone. Similar view was expressed in the case of Advance Power Display Systems Ltd. v. Asstt. CIT [2013] 35 taxmann.com 145/[2014] 146 ITD 761 (Mum.), wherein, it has been held that, comparability of the case is to be tested for each and every year independently and separately for the purpose of determination of ALP. The international transaction has to be compared with uncontrolled and unrelated transaction for using data relating to financial year in which international transaction has been enter ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... FC, therefore, its functions are also different. The TPO has analysed this comparable at page 11 to 13 of the order and has noted that, this company is primarily engaged investments in capital market on its own behalf and there is a huge difference in the turnover. The Ld. DR submitted that for carrying out FAR analysis, there has to be some basic critical mass, otherwise, the whole FAR tests fails. Regarding, Ld. Counsels plea that assessee has not taken any criteria of turnover, he submitted that TPO can very well apply the turnover criteria and in support of his contention, he relied upon the decision of ITAT in the case of Sandstone Capital Advisors (P.) Ltd. v. Dy. CIT [2013] 32 taxmann.com 216/[2014] 147 ITD 240 (Mum.). Lastly, he submitted that, if turnover is taken as criteria then turnover of Motilal Oswal is twice the turnover of the assessee for which the assessee has objected for inclusion. Thus there cannot be divergent approach and accordingly, this company has rightly been rejected by the TPO. Integrated Capital Services Limited: 12. With regard to this comparable, Ld. CIT DR submitted that, the Ld. Counsel has admitted that, this comparable has been held to be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... stand. Otherwise, the Tribunal order has to be followed as judicial precedence especially when rendered in assessee's own case, not once but twice in the preceding assessment years. Regarding each and every comparable, he made his detailed rejoinder and submitted that not only they have been considered to be good comparable in the earlier years but also found to be from the records. In nut shell, regarding ICRA he submitted, what is required to be seen is a core competence in which company is functioning and whether it is rendering core investment advisory services or not. Similarly in the case of Kinetic Trust Ltd, he relied upon the decision of Nortel Networks India (P.) Ltd. (supra) which has been affirmed by the Hon'ble Delhi High Court and submitted that, once no filter has been applied then one side filter cannot be applied by the TPO. The TPO is trying to cherry picked the comparables by applying filter arbitrarily for selection. Regarding Motilal Oswal, he submitted that this company is purely into investment banker and a merchant banker which is entirely different not only on functions but also on assets and risks. The assessee is giving non-binding investment advi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... most appropriate method (MAM) for determination of Arm's Length Price is Transactional Net Margin Method (TNMM) whereby ALP is determined by comparing the operating profit relevant to an appropriate base like cost, sales and assets of the tested party with the operating profit of an uncontrolled party engaged in the comparable transactions. It measures the net margin or profit earned in an uncontrolled transaction by independent entities. The assessee's margin which is based on operating profit/operating cost was at 21.4% which have been worked out in the following manner: Total revenue as per P L Income Investment advisory income 343,128,197 Other income 1,473,267 Total Income 344,601,464 Less: Non operating income Director's sitting fees (340,000) Dividend received (1,122,187) Provision for diminution in the value of Investment (11,080) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ) to (4) provides such mechanism for conducting the comparability analysis with the uncontrolled transactions. But before carrying out the comparability analysis as provided in the rules, the first and foremost requirement is the identification of the comparables from the data sources available in the public domain like Prowess or Capital Line or like. While identifying the potential comparables, the key characteristics and the features has to be identified before the search is carried out on the databases. This is a very critical process of selection which has to be done on a rational basis and scientific methodology. While carrying out the search, certain key words are to be inserted to shortlist the similar category of companies and from results thrown, quantitative filters are applied so that the unwanted comparables are weaned out and a certain range is available for carrying out qualitative comparability analysis from the comparables based on the parameters laid down in Rule 10B(2). The comparability is carried out on FAR analysis; the special characteristics of the property transferred or services provided along with the contractual terms and the economic conditions prevaili ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the assessee then same applies to the TPO also, otherwise it will always create suspicion of cherry picking of the comparables by the parties. There cannot be two different standards under the law, one for the assessee and one for the TPO. So far as selection of the comparables by the TPO, nothing has been brought on record before us, that TPO has adopted any scientific method for selection of his two comparables, i.e. Motilal Oswal Investment Advisory Pvt Ltd. and Future Capital Holdings Ltd. From the perusal of para 9.2 of the TPO's order it appears that, he has tried to picked-up the two comparables from the accept and reject matrix of companies by the assessee during its search process. Such an approach clearly indicates cherry picking, which approach cannot be accepted. 19. Here in this case, we have to analyse the comparables which are in dispute under the TNMM method, where comparability is focused on transactions rather than comparability in product as required in traditional methods. TNMM is based on net profit margin relative to an appropriate base, viz., costs, sales, assets, which the assessee makes from controlled transactions. The profitability derived from unc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 reliable result, because under TNMM the net margin are less affected by transactional differences and is more tolerant to some minor functional differences between controlled and uncontrolled transactions. However, if any unique function or property significantly affects the operating costs or net margin or has a bearing in the generation of revenue itself, then it cannot be considered to be a fit comparable for benchmarking the net margins. Here it is not the case where there is any unique functions materially affecting the revenue or net margins vis-a-vis the functions performed by ICRA. Hence on functional level it is a good comparable. As stated earlier, in the earlier years, the TPO has accepte ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... reover, from the perusal of the decision of Trilogy E Business Software India (P.) 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 ₹ 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 Networks India (P.) Ltd. (supra), the Tribunal held that a company cannot be excluded from the comparable list merely for the reason of low turnover especially, when no turnover filter was applied by either parties. The analysis in such cases has to be carried out on functional basis. Before us, it has also been brought on record that the said decision of the Tribunal in the appeal filed by the Revenue before the High Court has been upheld that is, revenue's appeal has been dismissed. Further as stated above, in the earlier years, this comparable has been held to be a good comparable by the TPO himself and Tribunal in two years have accepted to be a good ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t margins especially in the assessment year 2010-11, therefore, this company cannot be rejected and TPO is directed to include the same in the final comparability list. Integrated Capital Services Ltd: 24. This comparable has been admitted by the Ld. Counsel to have been rejected by the Tribunal Q-India Investment Advisor (P.) Ltd. (supra) and New Silk Route Advisors (P.) Ltd. (supra) therefore, this comparable company has not been contested by him. Accordingly, we hold that this comparable has rightly been rejected and shall not be included in the final comparables. 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 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rters. The TPO has added this markup on the ground that assessee in addition to investment advisory services has rendered portfolio management services, that is, it is monitoring the funds for its AE, hence for such a distinct function further upward adjustment should be made. First of all for making such transfer pricing adjustment a comparability analysis has to be done and then only margins can be benchmarked. He has not brought on record that, assessee is rendering any additional function which is not included in the investment advisory function. The TPO has to show that there are additional functions or services rendered by the assessee in this year qua the assets employed, functions performed and risks assumed. As submitted by Ld. Counsel, cost plus mark-up compensation is received for all the investment advisory services and the monitoring activity is part and parcel of the same advisory services. Moreover if the activities of the assessee have remained the same and FAR Analysis has been done on investment advisory services as in the earlier years, then how such services have become different in this year without any new material fact has not been elaborated by the TPO. We a ..... X X X X Extracts X X X X X X X X Extracts X X X X
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