TaxTMI 
TaxTMI 
2013 (9) TMI 401
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....ssee 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 by adopting TNMM as the most appropriate method and used Operating P....
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....der 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 at the time of agreement as well as at the time of increasing the advisory fee to 40000 US$, M/s Sandstone Capitals LLC, USA was not the AE of the assessee. It is only on 14.3.2008, M/s Sandstone Capitals LLC., USA bought the entire share holdings of the as....
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.... 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 investment and disposition opportunities b) Assisting in monitoring the performance of the portfolio companies; c) Performing such other duties, functions and activities as Sandstone LLC may from time to time request to perform d) Advising the investment manager in complying with ....
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.... 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 on profits that may arise because of changes in foreign exchange rates. Since Sandstone India is compensated by in USD, it faces foreign exchange risk on account of foreign exchange losses, due to foreign exchange rate movements." 5.9. It was further submitted that the assessee has carried out search by taking into....
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....re, 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 Fund Management Pvt Ltd at page 298 of the Paper Book and submitted that the said fund is only equity fund house, being fund manager and has no advisory or research services. Therefore, the entire receipts of SBI fund management are from management fee and there is no income from research. The advisory fee; though it is neglig....
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....ded 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 services are loss; therefore, this company cannot be considered as a comparable. Hence, the ld Sr counsel has submitted that in view of the objections raised by the assessee, both these comparables which are taken by the TPO should be rejected. 5.20 On the other hand, the ld CIT-DR has relied upon the order of the TPO so far as the compar....
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....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. Hence, in the facts and circumstances as discussed above, Deutche Asset Management India Ltd cannot be considered as a good comparable of the assessee for the purpose of determination of ALP of the international transactions. 6.4 Next comparables selected by the TPO is M/s Shriyam Broking Intermediary Ltd and M/s Twenty-first Century Shares & Se....
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....lysis 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 segment results of ICRA Ltd are loss; therefore, this company cannot be considered as a good comparable on the basis of the entity level results when the entire income is from the rating services. Thus, the comparable selected by the TPO for determination of the ALP are not found as proper comparables in view of the facts as discussed above. 7. The ld Sr counsel f....
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....milar 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 results of the company for the entire financial year is not available in the public domain as the data are available only upto 30.6.2007. The ld Sr counsel has fairly admitted that there are related party transaction in the case of Arix Consultants Pvt Ltd as per the details given at page 89 of the paper book. Therefore, the said comparable may not be considered on the ground o....
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....ted 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. 13 Quantum Advisors Pvt Ltd: This comparable has been rejected by the TPO on the ground that the said company is primarily engaged in floating and managing quantum mutual funds and also having basic functional difference with the assessee's function of providing investment advisory services. The TPO has also pointed out that the financial data for the Financial Year 2007-08 is not availabl....
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....he 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 the company to suggest that the company is in the software services. 15.2 The ld DR has submitted that the TPO has pointed out that the turn over of the company is only 20 lacs as against the turnover of the assessee at 32 crores. He has referred the notes on account and submitted that the main business of the said company is stated as software services. Moreover, the accounts of the company are....
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.... 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 record to show that one year data of comparable do not give true picture being influent by such circumstances. As per Rule 10B (4) for determining the ALP u/s 92C, the data to be used in analysing any comparability of uncontrolled transaction with an international transaction shall be the data relating to the Financial Year in which the international transaction has been entered into. Thus, it is manifest from the....