TaxTMI 
TaxTMI 
2013 (9) TMI 401
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.... per the investment advisory agreement, the assessee was appointed as an investment advisor by Sandstone Capital LLC to provide investment advisory services in connection with investments in Indian securities. The services include analysing, investigating and identifying opportunities in India and providing recommendations on such investment opportunities in India. During the financial year under consideration, the assessee has transactions with M/s Sandstone Capital LLC., which was subsequently become the holding company of the assessee and therefore, as an Associated Enterprises (AE) of the assessee. The details of the transactions are as under: Sl.,No Particulars of transactions Amount (Rs) Rs 1 Provision of investment advisory services 30,92,69,400 2 Reimbursement of expense received 20,68,981 3.1 The Assessing Officer has made a reference to the TPO for determination of the ALP with reference to the international transactions reported in Form 3CEB. The dispute is only with respect to the determination of ALP of the transactions of investment advisory services. The assessee has determined the ALP of its investment advisory transactions with its AE ....
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....tical mean of operating profit of comparables, by using single year data instead of multiyear data as applied by the assessee has been computed by the TPO at 75.23% and accordingly made an adjustment of Rs 15,16,87,983/- 4 After receiving the TPO order dated 17.10.2011, the Assessing Officer passed a draft assessment order proposing an addition of Rs. 15,16,87,983/- on account of TP adjustment. 4.1 The assessee filed its objection against the draft assessment order before the DRP, which was rejected by the DRP while passing the directions dt 30.7.2012 and directed the Assessing Officer to proceed with the finalisation of the order as per the directions. 4.2 In pursuant to the directions of the DRP, the Assessing Officer has passed the impugned order dated 28.9.2012 whereby an addition of Rs 15,16,87,983/- has been made being the TP adjustment. 5 Before us, Shri Padriwalia, the ld Sr counsel for the assessee has submitted that the assessee and M/s Sandstone Capital LLC, USA entered into an agreement dated 5.3.2005 under which the assessee received advisory fee initially US $ 30000 and thereafter it was increased to US$ 40000 w.e.f 29.3.2006. He has further submitted that....
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....t M/s Sandstone Capital LLC., functions as an investment manager to manage the assets and investments of Sandstone Group funds. In the process of investment management, Sandstone LLC primarily acts upon the assessee's recommendation. However, the ultimate buy/sell decisions are taken by M/s Sandstone Capital LLC. M/s Sandstone Capital LLC undertakes the following routine activities; i) issue orders to brokers for investments; ii) instructs the custodian to exercise or abstain from exercising any option, privilege or right held in the investment account; iii) monitors and corrects collection of income on the investment account by the custodian; and iv) makes any other action with respect to securities or other property in the investment account needed to serve the best interest of the funds. 5.4 On the other hand, the assessee performs the functions to provide investment advisory services in connection with investments in India securities that assist Sandstone LLC to make investment decisions from time to time. 5.5 In pursuance of the Investment Advisory Agreement, the assessee primarily performs the following activities:- a) Recommending Sandstone LLC of invest....
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....terprises is provided below: i)Market Risk/Price Risk iv) Market risk arises for a business due to increased competition and relative pricing pressure, change in demand patterns and needs of customers, inability to develop/penetrate in a market etc., v) As Sandstone India carries out work on an outsourced basis, Sandstone India's exposure to market risk is minimal. Further, Sandstone India's revenue (fees) are not directly linked to the value of investments made. Therefore, Sandstone India faces limited risk in this respect. ii)Credit Risk vi)This is the risk arising from non payment of dues by customers. Since services of Sandstone India are provided to its AE, the non payment eventuality is minimised. iii) Manpower Risk vii) Any enterprise which is dependent for its success upon quality personnel with superior technical knowledge and experience is faced with this risk. Competitive market forces expose such an enterprise to the risk of losing its trained personnel. As the operations of Sandstone India rely on the quality of personnel, it faces normal level of risk in this regard. iv) Foreign currency risk viii) This risk relates to the potential impact o....
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....or taking some different operating profit by the TPO. 5.13 Apart from this, the ld Sr counsel has submitted that Crisil Ltd is basically a rating agency; though it is also in the business of research. The ld Sr counsel has pointed out that the advisory services of Crisil Ltd has been transferred to its subsidiary; therefore, only research segment is available as a comparable. The ld Sr counsel has submitted that though this is a common comparable; however, about 60% of the income is from related transactions; therefore, this comparable should be excluded. The ld Sr counsel has submitted that the TPO himself has excluded some of the comparables on the basis of these objections of related party transaction; therefore, Crisil research having related party transaction should be excluded as a comparable. 5.14 The ld Sr counsel for the assessee has further submitted that the second comparable taken by the TPO is SBI Fund Management Pvt Ltd which is an asset management company and not an advisory company. Therefore, there is no functional similarity of SBI Management Pvt Ltd with the assessee and cannot be considered as a comparable. He has referred the directors' report of the SBI ....
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.... income of this company is broking; therefore, there is no comparison of nature of business or functionality with that of the assessee. 5.18 Similarly, in the case of Shriyam Broking Intermediary Ltd, it is mainly in the stock and commodity broking. The ld Sr counsel has submitted that for the AY 2009- 10, the TPO himself has excluded broking house from the comparables. He has referred the show cause notice issued by the TPO wherein the TPO in para 6.8 excluded the broking house from the comparables. The ld Sr counsel has also referred the decision of the coordinate Benches of the Tribunal in the case of Carlyle India Advisors Private Ltd in ITA 7901/Mum/2011 vide order dated 4.4.2012. and submitted that the Tribunal has also held that the broking companies cannot be considered as comparable to the advisory and research services companies. 5.19 The next comparable taken by the TPO is ICRA Ltd. The ld Sr counsel for the assessee has submitted that the main business of the ICRA is rating services; therefore, there is no functional similarity. He has further pointed out that the major income of the company is from rating services and the segment results in respect of similar ser....
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.... Management are from management fees and there is no income from research. Further, the advisory fee, as it is evident from the P&L account of that company is very negligible and that too is for the portfolio advice. Therefore, SBI Fund Management P Ltd is totally a functionally different company to that of the assessee as the business profile is entirely different from the business of the assessee. Hence, this company does not satisfy the requirement of the transfer pricing rules and regulations to be taken as a proper comparable of the assessee for the purpose of determination of the ALP. 6.3 Similarly, Deutche Asset Management India Ltd, another comparable selected by the TPO for computation of ALP is also functionally different and therefore, cannot be considered as a comparable company of the assessee. This fact emerges from the P&L account of the said company at page 282 of the paper book which clearly shows that almost all revenues of the said company is from investment fee and therefore, there is no similarity between the business profile of the said company and the assessee. Apart from this, as pointed out by the ld Sr counsel that there are related party transactions. ....
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....advisory services. The companies, with turnover less than 1 crore, companies with RPT more than 25% were exclude. On functional analysis, companies engaged in mere financial services, investment banking, merchant banking, equity/stock broking were excluded. The companies rendering financial consultancy services, advisory services were analysed. On such analysis the above referred 4 companies were selected. The list of companies rejected on qualitative analysis is enclosed." 6.5.3 As it is clear from the contents of the above part of the show cause notice of the TPO that the companies engaged in mere financial services, investment banking, merchant banking, equity/stock broking were excluded. In view of the above facts and circumstances, we hold that M/s Shriyam Broking Intermediary Ltd and M/s Twenty-first Century Shares & Securities Ltd., cannot be considered as comparables to the assessee as these are functionally different companies having different business profiles. 6.6 The next comparable company selected by the TPO is ICRA Ltd. 6.6.1 Since the main business of ICRA Ltd is rating services; therefore, the said company is functionally different. Even otherwise, the seg....
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....ed its income is conducting research and survey, business conversion and management consultancy. Though the separate results in respect of each activity are not provided; however, prima facie, it appears that the company is in the business of marketing research and management consultancy. Therefore, as far as the functions of IDC India Ltd are concerned, the same are similar to the activity of the assessee. Therefore, in our considered view, IDC India Ltd can be considered as a good comparable for the purpose of determination of ALP. 9. Arix Consultants Pvt Ltd : The next comparable which has been rejected by the TPO is Arix Consultants Pvt Ltd on the ground that data for the Assessment Year 2007-08 is not available in the public domain and hence the company is not suitable comparable. Whatever data available which includes directors report and Annexure to the audit report and P&L account. The ld Sr counsel has further submitted that the nature of business of Arix Consultants Pvt Ltd is magazine publication and investment research. However, the income of the said company is primarily from the operations of doing consultancy. The TPO has also pointed out that the financial result....
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.... Ld Sr counsel for the assessee that there are related party transaction in the case of Arix Consultants Pvt Ltd as it is evident from the note on account at page 89 of the paper book. Therefore, in view of the fact that this company is having related party transactions, the same cannot be considered as a proper comparable. 11. Ambit Capital Pvt Ltd: This comparable has been rejected by the TPO on the ground that the company has negiligible business of advisory services and also earned more than 30% from the related parties. The ld Sr counsel has not disputed the fact that the related party transaction whereby more than 30% of the segment revenue are from related party transactions. 11.1 In the case of Ambit Capital Ltd, the ld DR has pointed that this company has more than 25% of the revenue from the related party; therefore, cannot be considered as a suitable comparable. 12. We have considered the rival submissions and relevant material on record. As admitted by the Ld Sr counsel for the assessee that there are related party transactions of more than 30% of the segment revenue; therefore, this company cannot be considered as a comparable for determination of the ALP. ....
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....ble before the TPO, then the results upto 30.6.2007 can't be compare with the transaction with AE of the assessee upto 31.3.2008. 15. Indian Venture Capital Ltd: This comparable was rejected by the TPO on the ground that the company is engaged in rendering software related services and hence is not an acceptable comparable. The TPO has also pointed out that for the year under consideration, the revenue from the service charges is only Rs 20.25 lacs which is not even a crore and hence, it cannot be taken as comparable. 15.1 The ld Sr counsel has submitted that the main business activity of the Indian Venture Capital Ltd is research and advisory, in the business strategy and investor apart from general business idea in the various fields of business and infrastructure etc. Identifying the weakness suggest ensuring improvement in the business strategy, product disclosure etc., He has referred the P&L accounts of the company and submitted that the entire income is from services charges. There is nothing to suggest that the services provided in the software services though, the TPO has taken software services as given in the notes on account. But there is nothing on the website of....
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....f Rd 32 crores, then it is not appropriate to compare this company with the assessee for the purpose of determination of ALP. Thirdly, the contemporaneous data for the FY 2007-08 were not available before the TPO. Hence, we do not find any reason to disturb the order of the authorities below, qua this comparable. 17. As we have discussed above comparables as selected by the assessee as well as by the TPO except IDC India Ltd., are not proper and suitable comparables for the purpose of determination of ALP on international transactions of the assessee. In view of the fact that for the AY 2009-10, some of the comparables are found as acceptable to both parties, therefore, we set aside this issue to the record of the Assessing Officer/TPO to determine the ALP after taking into consideration the comparables which are accepted by both the parties for the Assessment Year 2009-10 as well as considering any other suitable comparables. 18. As regards the issue of considering single year data instead of multi year data is concerned, this issue is now settled and the current year data has to be taken into consideration until and unless some exceptional circumstances are brought on recor....