Investment advisory services prevail over portfolio management in performance fee calculation. Tribunal recommends specific benchmarking methods.

The Tribunal held that the activities of the assessee were part of investment advisory services and not separate portfolio management services. It found errors in the calculation of the performance fee and recommended using the Transactional Net Margin Method for benchmarking additional functions. The Tribunal directed the inclusion of specific comparable companies and exclusion of others, resulting in a revised average margin. It concluded that the upward adjustment made by the Assessing Officer was unfounded and ordered its removal, ultimately allowing the appeal of the assessee.

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Issues Involved:

1. Upward adjustment in determining the arm’s length price (ALP) for investment advisory services.
2. Classification of activities as portfolio management services.
3. Calculation of performance fee.
4. Benchmarking method for additional functions.
5. Selection of comparable companies for transfer pricing analysis.
6. Use of contemporaneous and multiple-year data for ALP determination.

Issue-wise Detailed Analysis:

1. Upward Adjustment in Determining the Arm’s Length Price (ALP) for Investment Advisory Services:

The assessee contested the upward adjustment of Rs. 19,55,13,737 made by the Assessing Officer (AO) based on the directions of the Dispute Resolution Panel (DRP). The adjustment was primarily due to the AO's conclusion that the assessee was providing portfolio management services in addition to investment advisory services. The assessee argued that the adjustment was erroneous and not justified by the facts or law.

2. Classification of Activities as Portfolio Management Services:

The AO, based on the DRP's directions, concluded that the assessee was engaged in providing portfolio management services. This conclusion was drawn from the presence of the assessee’s employees as nominee directors on the boards of Indian investee companies. The AO argued that this warranted an additional compensation in the form of a performance fee. The assessee contended that the monitoring of investments, including the presence of nominee directors, was part of the investment advisory services and did not constitute separate portfolio management services.

3. Calculation of Performance Fee:

The AO determined that an additional performance fee of 0.25% of the total investments and divestments should be applied, resulting in an adjustment of Rs. 8,83,93,866. The assessee argued that this calculation was erroneous, as it included investments that should have been excluded, such as an additional investment in UFO Moviez India Limited and an investment in Mundra Port and SEZ Limited, which was divested in March 2009.

4. Benchmarking Method for Additional Functions:

The assessee argued that if the nominee directorships held by its employees were considered an additional function, the Transactional Net Margin Method (TNMM) should be the most appropriate method for benchmarking this function. The assessee also contended that costs related to this additional function should be excluded from the cost base while recomputing the ALP of the investment advisory services.

5. Selection of Comparable Companies for Transfer Pricing Analysis:

The AO, based on the DRP's directions, rejected certain comparable companies selected by the assessee and included additional comparable companies, resulting in a recomputed arm’s length margin of 55.06%. The assessee argued that the rejection of certain comparables and the inclusion of others were not justified. Specifically, the assessee contested the exclusion of Future Capital Investment Advisors Limited and IDC (India) Limited, which were accepted by both the Transfer Pricing Officer (TPO) and the assessee in the transfer pricing study report for FY 2009-10.

6. Use of Contemporaneous and Multiple-Year Data for ALP Determination:

The assessee argued that the AO erred 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. The AO relied only on single-year data for the year ended 31 March 2010, which the assessee contended was not appropriate.

Conclusion:

The Tribunal held that the assessee’s activities, including monitoring investments and the presence of nominee directors, were part of the investment advisory services and did not constitute separate portfolio management services. The Tribunal also found that the AO’s calculation of the performance fee was erroneous and that the TNMM should be used for benchmarking any additional functions. The Tribunal directed the inclusion of certain comparable companies and the exclusion of others, resulting in a final set of comparables with an average margin of 37.51%. The Tribunal concluded that the upward adjustment of Rs. 8,83,93,866 was without basis and directed its deletion. The appeal of the assessee was allowed.

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