TaxTMI 
TaxTMI 
2012 (10) TMI 884
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....AO/TPO erred on facts and circumstances of the case and in law in proposing and the Hon'ble DRP further erred in upholding an addition of Rs 13,71,41,793 in respect of the international transactions relating to investment advisory support services alleging the same to be not at arm's length in terms of the provisions of Sections 92C(1) and 92C(2) of the Act read with Rule 1OD of the Income-tax Rules,1962 ("the Rules"). 2.1 That the Ld AO erred on facts and circumstances of the case and in law, in not accepting the arm's length price determined by the Appellant, and in choosing to determine the arm's length price by making reference to the TPO even though none of the conditions laid down under section 92C(3) of the Act, were satisfied. 2.2 That the Ld AO/TPO/DRP erred on facts and circumstances of the case and in law in rejecting the Transfer Pricing documentation submitted by the Appellant and in not appreciating that the arm's length price of the international transactions in relation to investment advisory support services was appropriately determined in the Transfer Pricing documentation applying Transactional Net Margin Method ('TNMM'). 2.3 That the Ld AO/TPO/DRP erred....
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....s a limited partner), which is a Carlye entity. All the decisions with respect to investment by funds are made by GP who operates and manages the funds. GPs obtain advice in relation to their funds and investments from (1) Carlyle Investment Management LLC ('Carlyle US') (2) Carlyle Asia Investment Advisors Limited ('Carlyle Hong Kong') Carlyle Hong Kong was incorporated as a wholly owned subsidiary of Carlyle US in Hong Kong in February 1998. It provides consulting services, including investment advisory, technology support, management consultancy and other advisory services to the GPs with respect to the investments made by the Group in the Asia-Pacific region. 4. The Assessee Carlyle India Advisors Private Limited ('Carlyle India') was incorporated in India in October 2000, and is a subsidiary of Carlyle Hong Kong. Carlyle India provides investment advisory related support services to Carlyle Hong Kong. It houses six investment personnel who analyse investment opportunities in growth capital and buyout deals in India. In this appeal we are concerned with the determination of Arm's Length Price (ALP) in respect of the international transaction, viz., rendering of investment ad....
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....ces, as requested by Carlyle Hong Kong from time to time. Fees: In consideration for the said support services provided under the Services Agreement. Carlyle Hong Kong compensates the Assessee, a monthly service fee, which is equal to 115% of actual operating expenses (including depreciation on capital assets),incurred by and for the account of Carlyle India in connection with the provision of the said Services" 7. During the previous year the Assessee had prepared research reports in respect of 33 companies whose shares are listed in Stock Exchanges in India. Ultimately TSG made investments only in shares of one company by name Allsec Technoligies. The companies in respect of which the Assessee prepared research report and the research report in respect of Allsec Technologies are given in page 617 to 624 of the Assessee's paper book. It is not in dispute that the Assessee was paid 115% of the costs it incurred in providing services to Carlyle Hong Kong. The assessee filed Transfer Pricing Study together with information/documents maintained in accordance with Sec.92D(1) of the Income Tax Act, 1961 read with Rule 10D(1) of the Income Tax Rules, 1962. In the Transfer Pricin....
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....s engaged in advisory/research/consultancy services in the financial services industry 1 Summary of search process - capitaline plus criteria and reason for usage No. of companies passing the criterion Total universe of companies available in Capitaline Plus as of Feb.15,2007 13,887 Identified additional companies with positive sales over the time period under consideration were selected i.e. companies for which data was not available in Prowess. 763 Selected companies classified in 'Services' Industry 429 Identified financial services companies from the above 221 Services provided by Carlyle India Ltd. being on a cost plus model; companies having Fund Based Income/Sales > 25% was rejected 24 Companies with a positive net worth were included so as to select companies whose net worth had not eroded. 22 Qualitative: Selected companies engaged in advisory/research/consultancy services in the financial services industry. 0 10. In addition to company level financial data, segmental financial data in both databases were also searched. The summary of such search is as follows: Summary of Search Process- Capitaline Plus for segmental....
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....ted in 4 comparable companies. Using the data for FY 2006-07, the assessee has calculated the arithmetic mean of the said 4 comparable companies. The combined set of 4 new and one comparable (from earlier documentation) using F.Y.2006-07 data are given below: Table : Arithmetic Mean No. Company Name PLI using date for FY 2006-07 1 Axix Consultants Pvt. Ltd. 5.15% 2 Quantum Advisors Pvt. Ltd. 3.26% 3 Crisil Ltd. (Segment - Information) 22.00% 4 Indian Venture Capital Ltd. 5.91% 5 IDC (India) Ltd. 15.94% Average 10.45% The Assessee pointed out that based on the financial statements for the year ended March 3l, 2007, the operating margin of the Assessee works out to 15.02% which according to the Assessee was more than the arm's length margin as computed above. Accordingly the Assessee claimed that it complies with the arms length principle required by Indian transfer pricing regulations. The assessee had also take a stand in this letter that the data available at the time of T.P Study by the assessee alone would be relevant. The assessee in this letter also furnished to the TPO th....
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....ed at a set of 124 comparable the TPO did not consider any one of them as comparables. (iii) Search-3: The TPO thereafter by using the search word asset management activities ultimately arrived at a set of five comparables. 18. The summary of the search conducted by the TPO is as follows: C- SUMMARY: SEARCH 1 1. No. of companies resulted (including assessee company) 18 2 No. of companies eliminated applying the following filters - companies not having any financial data 2 - fund based income criteria 4 3 Companies rejected in qualitative review (including assessee company) 2 No. of companies selected in Search 1 (A) 10 Search 2 1 No. of companies resulted (including assessee company) 124 2. No. of companies eliminated applying the following filters - Companies not having any financial data 6 - fund based income criteria 57 3. Companies rejected in qualitative review (including assessee company) 61 No. of companies selected....
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.... Ltd. Investment banking Jun.2006 48% Edelwiss Capital Ltd. Agency Business Mar.2007 106% Keynote Corporate Services Ltd. Services Mar.2007 156% Khandwala Securities Ltd. Fee Based Operations Mar.2007 128% Sumedha Fiscal Services Ltd. Consultancy Mar 2007 36% 95% Overall Annual Company Name Pbt/exp. total Mar 07 Chartered Capital & Investment Ltd. 84% L&T Capital Co. Ltd. 85% SREI Capital Market Ltd. 5% 58 All Companies 81% The Assessee was accordingly called upon to show cause as to why arm's length price of the investment advisory services be not determined as per the average operating margin of the above comparable companies. According to the TPO, the PLI ought to be taken on operating profit margin with respect to operating cost. As per the above search conducted by the TPO, the OP/OC came to 81%. 20. The assessee by letter dated 19/10/2010 gave its objection as to how the companies chosen by the assessee were not comparable. 21. The TPO vide an order dated 29/....
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....ssessee and highlighted as to how the search process, the functions, assets and risks analysis had been, according to him, rightly carried out by the Assessee. His submission was that the out of the 8 comparable companies chosen by the TPO, three companies were already rejected by him in his earlier hearing. He has given no reasons as to how he ultimately again came to the conclusion that these companies were comparable. His submission was that the comparable companies chosen by the TPO were not functionally comparable with that of the Assessee and in this regard took us through the relevant submissions made before the TPO. He filed a gist of legal propositions and relied on several orders of the Tribunal and submitted that both on facts and in law, the addition made by way of adjustment to the ALP deserves to be deleted. The learned DR relied on the order of the TPO and submitted that the TPO has given valid reasons as to why the TP study carried out by the Assessee has to be rejected. 24. We have considered the rival submissions. The provisions of the Act and the Rules that are relevant for deciding the issue have to be first seen. Sec.92. of the Act provides that any income a....
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....rtaken does not exceed five per cent of the latter, the price at which the international transaction has actually been undertaken shall be deemed to be the arm's length price. (3) Where during the course of any proceeding for the assessment of income, the Assessing Officer is, on the basis of material or information or document in his possession, of the opinion that- (a) the price charged or paid in an international transaction has not been determined in accordance with sub-sections (1) and (2); or (b) any information and document relating to an international transaction have not been kept and maintained by the assessee in accordance with the provisions contained in sub-section (1) of section 92D and the rules made in this behalf; or (c) the information or data used in computation of the arm's length price is not reliable or correct; or (d) the assessee has failed to furnish, within the specified time, any information or document which he was required to furnish by a notice issued under sub-section (3) of section 92D, the Assessing Officer may proceed to determine the arm's length price in relation to the said international transaction in acco....
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....h lay down explicitly or implicitly how the responsibilities, risks and benefits are to be divided between the respective parties to the transactions; (d) conditions prevailing in the markets in which the respective parties to the transactions operate, including the geographical location and size of the markets, the laws and Government orders in force, costs of labour and capital in the markets, overall economic development and level of competition and whether the markets are wholesale or retail. (3) An uncontrolled transaction shall be comparable to an international transaction if- (i) none of the differences, if any, between the transactions being compared, or between the enterprises entering into such transactions are likely to materially affect the price or cost charged or paid in, or the profit arising from, such transactions in the open market; or (ii) reasonably accurate adjustments can be made to eliminate the material effects of such differences. (4) The data to be used in analysing the comparability of an uncontrolled transaction with an international transaction shall be the data relating to the financial year in which the int....
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....ualitative review and for the reason that its income is from merchant banking services. (ii) M/s. Khandwala Securities Ltd., on the ground that the company on a qualitative review and for the reason that its income is from acting as Security and stock brokers. (iii) M/s. Sumedha Fiscal Services Ltd. on the ground that the company on a qualititative review and for the reason that its income is from loan syndication and project consultancy services. In the final list the TPO has included these companies as comparable companies. The TPO has given no reasons whatsoever for changing his stand. Apart from the above, the Assessee in its submissions dated 19.10.2010 filed before the TPO had highlighted as to how these companies are not functionally comparable with that of the Assessee. The TPO has not even considered these objections. We have seen the reasons given by the Assessee as to why these companies should not be treated as comparable companies, and they are part of the reply dt.19.10.2010 filed by the Assessee before TPO (the whole reply is at pages 127 to 573 of the Assessee's paper book). On perusal of the reasons so given, we are of the view that these compa....
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....que for mid market companies across the country. The Company's main revenue stream consists of Issue management fees, underwriting fees. The company's primary segment consists of 3 main activities viz. Services, Dealing in shares and other income. Service Description: Managing of Public Issue of Securities, Underwriting, Project Appraisal, Equity Research, Capital Structuring/Re-structuring, Loan & Lease Syndication, Corpora Advisory Services, Mergers & Acquisition, Placement Services, Portfolio Management. Debenture Trustee, Managing /advising on International Offerings of Debt/Equity, i.e. GOR, ADR, bonds and other instruments, Private Placement of securities, Corporate Advisory Services related to Securities Market e.g. Takeovers, Acquisitions, Disinvestments etc., Advisory services for Projects, International Financial Advisory services. Warehousing/Parking of Securities, Bridge Financing, Bought out Deals relating to Issue Management. Equity Research out of the above service can be compared with that of the Assessee's activity but segmental data is not available. The company's segment as reported are services, dealing in shares and other income. In the absence of spec....
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....n as to why comparables were rejected. It has further been the TPO's observation that out of segmental search of 424 companies (Prowess) and 136 Companies (Capital Line) only one company was selected by the assessee and no reasons were assigned for rejecting the rest. This is factually incorrect because in the chart given in the earlier part of this order, we have extracted the summary of the reasons given in the TP study carried out by the Assessee, as to why the broader search data was narrowed down to only 2 comparables. The TPO has also found fault with the other methodology adopted by the assessee which are not germane to the issue before the TPO. The TPO has thereafter referred to the show-cause notice dated 15/10/2010, wherein the TPO confronted the asessee with 8 comparables. The TPO has also referred to the reply given by the assessee. The objections of the assessee are summarized by the TPO in his order as follows: (iii) The key differences between companies engaged in the business of investment banking /merchant banking ('IB/MB') and Carlyle India was submitted as under: Investment banking assists in Initial Public Offerings, private placement and bond offerings, a....