2016 (2) TMI 907 - AT - Income Tax

Tribunal directs inclusion of new comparables, removes mark-up, and upholds exclusion of others.

Tamasek Holdings Advisors India P. Ltd. Versus Deputy Commissioner of Income-tax

The Tribunal partially allowed the appeal, directing the inclusion of ICRA Management Consultancy Services Ltd., Kinetic Trust Ltd., IDC India Ltd., and ... Transfer pricing adjustment - selection of comparable - analisation of comparables which are in dispute under the TNMM method - Held that:- ICRA MANAGEMENT CONSULTANCY SERVICES LTD - 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 accepted ICRA to be a comparable and in later years the Tribunal in AY 2008-09 & 2009-10 has held ICRA Management to be good comparable qua the functions of the assessee and there being no material change on facts, functional profile or any other factor in this year, then as matter of consistency, we do not want do deviate from our findings given in the earlier years. There cannot be a pick and choose of comparables every year unless there are some material difference in facts and circumstances compelling to take a different conclusion. Thus, we hold that ICRA Management is a good comparable and should be included in the list of final comparables. Kinetic Trust Ltd. company as 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 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. As 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 comparable. Thus as a matter of consistency, we hold that Kinetic Trust Ltd. should be included in the comparability list. IDC India Ltd. - as discussed 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. Future Capital Advisors Ltd - 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 final comparability list. Integrated Capital Services Ltd comparable has rightly been rejected and shall not be included in the final comparables. Motilal Oswal Investment and Advisor Ltd cannot be put into the comparability list and is directed to be excluded as the wide range of activities include portfolio management, credit syndication, counseling on M&A, etc. This whole range of functions and activities carried out by Motilal Oswal is definitely are far wider and much different from investment advisory services where core functions is to give advices for making the investments in diversified fields Addition of 3% markup additionally made over and above the comparative margin arrived at - Held that:- We agree that 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. 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 Private Limited (2013 (4) TMI 486 - BOMBAY HIGH COURT ) and in other decisions cited above by the Ld. Counsel. Thus, we hold that no such addition or adjustment on account of extra markup can be made Issues Involved:1. Transfer Pricing Adjustment for Investment Advisory Services.2. Exclusion and Inclusion of Comparable Companies.3. Addition of Extra Mark-Up by the TPO.Detailed Analysis:1. Transfer Pricing Adjustment for Investment Advisory Services:The core issue revolves around the transfer pricing adjustment of Rs. 9,41,19,278/- for the determination of Arm's Length Price (ALP) for the provision of investment advisory services to the assessee's associate enterprise (AE). The assessee, a Private Limited Company and a 100% subsidiary of Tamasek Holdings Private Limited, Singapore, provided non-binding investment advisory services to THPL. The services included providing research reports, macroeconomic analysis, identifying investment opportunities, and monitoring portfolio companies. The assessee reported a mark-up margin of 21.4% using the Transactional Net Margin Method (TNMM) as the most appropriate method (MAM).2. Exclusion and Inclusion of Comparable Companies:The dispute includes the exclusion and inclusion of specific comparable companies to benchmark the assessee's margins. The assessee's comparables, such as ICRA Management Consultancy Services Ltd., Integrated Capital Services Ltd., and Kinetic Trust Ltd., were rejected by the TPO, while Motilal Oswal Investment Advisors Pvt. Ltd. was included.ICRA Management Consultancy Services Ltd. (Rejected by TPO):The Tribunal had previously accepted ICRA as a comparable in earlier years. The company provides consultancy in diverse areas, similar to the assessee's advisory services. The Tribunal held that the core competency in advisory services makes ICRA a good comparable, and it should be included in the final comparables.Kinetic Trust Ltd. (Rejected by TPO):The TPO rejected Kinetic Trust Ltd. due to its low turnover and registration as an NBFC. The Tribunal noted that turnover filter was not applied during the selection process, and the company's core competency in consultancy services makes it a good comparable. The Tribunal directed its inclusion in the final comparables.IDC India Ltd. (Rejected by DRP):IDC India Ltd. was accepted by the TPO but rejected by the DRP without giving the assessee an opportunity to contest. The Tribunal held that IDC India Ltd. is functionally comparable to the assessee and directed its inclusion.Future Capital Investment Advisory Ltd. (Rejected by DRP):The DRP rejected this comparable without providing an opportunity to the assessee. The Tribunal found that the company is engaged in investment advisory services and directed its inclusion.Integrated Capital Services Ltd. (Rejected by TPO):The Tribunal upheld the rejection of Integrated Capital Services Ltd. based on previous judicial decisions that found it not comparable to investment advisory services.Motilal Oswal Investment Advisors Pvt. Ltd. (Included by TPO):The TPO included Motilal Oswal, stating it provides advisory services similar to the assessee. However, the Tribunal found that Motilal Oswal operates in multiple business verticals, including merchant banking, which is not comparable to the assessee's investment advisory services. The Tribunal directed its exclusion from the comparables.3. Addition of Extra Mark-Up by the TPO:The TPO added a further mark-up of 3% over the average PLI of 37.51%, arguing that the assessee provided additional portfolio management services. The Tribunal found no evidence of additional functions beyond investment advisory services and held that the monitoring activities are part of the advisory services. The Tribunal directed the deletion of the extra mark-up.Conclusion:The Tribunal allowed the appeal in part, directing the inclusion of ICRA Management Consultancy Services Ltd., Kinetic Trust Ltd., IDC India Ltd., and Future Capital Investment Advisory Ltd. in the final comparables. It upheld the exclusion of Integrated Capital Services Ltd. and Motilal Oswal Investment Advisors Pvt. Ltd. Additionally, the Tribunal directed the deletion of the extra 3% mark-up added by the TPO.