TaxTMI 
TaxTMI 
2016 (2) TMI 907
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....sion of one comparable to arrive at the mark-up margin of 37.51% as against the assessee's margin of 21.4%. The assessee in its ground no. 4 has mainly challenged the rejection of the following three comparables selected by the assessee in its TP Study report for the financial year 2009-10 relevant to assessment year 2010-11:- (i) ICRA Management Consultancy Services Ltd. (ICRA); (ii) Integrated Capital Services Ltd; (iii) Kinetic Trust Ltd. The assessee has also challenged the inclusion of one company by the TPO, M/s Motilal Oswal Investment Advisors Pvt. Ltd. as a comparable company. In ground no.5, the assessee has challenged rejection of two comparable companies by the DRP namely: (i) Future Capital Investment Advisors Limited and (ii) IDC India Ltd, which were accepted by the TPO. That apart, assessee has also challenged the addition of a further markup of 3% by the TPO over and above the comparative margin arrived at 37.51%. All other grounds revolve around these major issues only. 2. The brief facts qua the issue of Transfer Pricing adjustment are that, the assessee is a Private Limited Company incorporated in India and i....
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....alysis after adopting transactional net margin method (TNMM) as the most appropriate method (MAM) for comparing its operating margin with the external comparables engaged in financial and corporate advisory services. It has been stated before us that, assessee in its TP Study Report has under taken a very systematic approach for selection of comparables, firstly, by identifying the companies engaged in the comparable business after detailed search process using keynotes on the accepted public data (i.e. Prowess and Capital Line); secondly, by applying quantitative filter to shortlist the number of companies thrown in list; and lastly, every comparable shortlisted were analysed at qualitatively level based on the multiple year data of the financial accounts available in the public domain. The whole search process has been documented in the Transfer Pricing Study report including accept and reject matrix. The entire documentation was been stated to be done in accordance with section 92D read with Rule 10B. 4. Before us, the Ld. Senior counsel, Mr. Porus Kaka, submitted that the process for selecting the comparables by the assessee was purely transparent and was undertaken by revie....
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.... 41.77% IDC India Ltd 13.00% Informed Technologies Ltd. 25.52% Integrated Capital Services Ltd. -2.92% Kinetic Trust Ltd. 10.39% Arithmetic Mean 14.84% Shri Porus Kaka submitted that, after the computation of Arm's Length Margin by benchmarking with the comparables on scientific and qualitative analysis done in accordance with the provisions of the Act and Rules, the Ld. TPO, rejected the assessee's some of the comparables and also included his own comparable without providing any method and the process as to how he has undertaken search process for identifying the comparable companies. He has merely cherry picked the comparable companies without undertaking any fresh search and has rejected the comparables which stood accepted in the earlier years. If the search process for selecting of comparables is to be done by the assessee in accordance with the rules, then same methodology has to be adopted by the TPO also. Law does not envisage differential procedure for assessee and revenue so far as selection methodology is concerned. 6. In the transfer pricing order the Ld. TPO, in the show cause notice required the assessee as to why ICRA Managemen....
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....een dealt specifically in both the years by separate orders. He further submitted that, the analysis done by the TPO for rejecting the said comparable is not correct as he is trying to highlight the various fields and industries in which ICRA is rendering services, whereas assessee is not. Advisory services in financial and corporate sector are important and key function which needs to be analysed rather than the areas in which the services are being rendered. In case of the assessee also if the list of investments made by assessee's AE on the basis of recommendations provided by the assessee is to be seen, then the assessee has also provided non- binding advisory services in diverse fields, like infrastructure, telecom, media, banking, etc. The TPO is also not correct in holding that the Tribunal order was based on the earlier orders of the TPO where this company was accepted as comparable. He has taken a divergent view without brining any substantial material on record to show that how the facts have changed in this year. Accordingly this comparable company needs to be accepted not only on functional profile but also as a matter of consistency. (ii) Kinetic Trust Ltd....
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....netic Trust Ltd as a comparable company so far as the functions performed by the assessee. The Ld. TPO in utter disregard to the Tribunal's order has stated that the said decision of the ITAT cannot be accepted, because the finding was given on the ground that the TPO has accepted this comparable in the earlier years. This cannot be the ground for rejection, rather the Kinetic Trust Ltd is to be included as the comparable company following judicial precedence and consistency in view of the Tribunal orders for two consecutive earlier years. (iii) IDC India Ltd : At the outset, the Ld. Counsel, submitted that, the Ld. TPO has taken IDC India Ltd. as a comparable company in his Transfer Pricing Order, however, the DRP has rejected the said comparable while issuing his direction for AY 2010-11 without giving any opportunity to the assessee. Further, the ITAT Mumbai Bench in the assessee's own case for the assessment year 2008-09 & 2009-10 has accepted the IDC India as comparable company to the functions comparable by the assessee. Further, the Hon'ble Bombay High Court in the case of Carlyle India Advisors Pvt. Ltd. (32 taxman.com 33) had upheld IDC India as functionally compa....
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....y the assessee, then without any reason and without any proper search criteria by the TPO, he cannot resort to insert low turnover filter only for the purpose of cherry picking. He referred to the decision of Norton India P. Ltd. vs. Additional CIT (ITAT Delhi bench) (Supra) wherein, the Tribunal held that, the company cannot be excluded from the list of comparable mainly for the reason of having low turnover. Lastly, in the AY 2009-10, the TPO has accepted integrated capital as a comparable company to the assessee and the functions performed by the said company in AY 2010-11 are exactly similar to in AY 2009-10, therefore, the same cannot be rejected in this year. However, he submitted that the Tribunal in the case of: (i) Q-India Investment Advisor P Ltd vs DCIT (ITA 923/Mum/2015); (ii) New Silk Road P Ltd. vs DCIT (ITA 1327/M/214) has rejeted Integrated Capital as a comparable company to an Investment Advisory Services. (vi) MotilalOswal Investment Advisors Pvt Ltd.: This company has been included by the TPO and upheld by the DRP on the following points (as summarized by DRP):- a) The company is engaged in providing high quality strategi....
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....itions is not a correct proposition. The merger and acquisition related advisory services in fact are the advisory services which involves skill sets which are comparable to the investment advisory services. Hence the assessee's argument regarding non availability of segmental profits is not relevant. 7. Mr. Porus Kaka, submitted that, on the perusal of the annual report of the company, it can be seen that Motilal Oswal operates in four different business verticals, viz.,: * Equity Capital Markets; * Mergers and Acquisitions; * Private Equity Syndications; and * Structured Debt. The annual report for FY 2009-10 indicates the Motilal Oswal has earned its income evenly from all these four business verticals. The annexure to the auditor's report indicates that Motilal Oswal is engaged in the business of 'merchant banking and investment/business advisory services'. The web portal of Motilal Oswal shows that it offers comprehensive investment banking solutions and transaction expertise covering private placement of equity, debt and convertible instruments in international and domestic capital markets, mergers and acquisitions advisory and restru....
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....to be added to the average PLI of the comparable companies which was determined at 37.51% by the TPO and accordingly, the Arm's Length PLI was determined by him at 40.51%, as against assessee's operating profit of 21.4%. Thereafter, the TPO has tried to justify such an adding of a mark-up by referring to the definitions of Portfolio management services from the dictionaries came to a conclusion that, assessee is rendering an additional function which is not included in the investment advisory function. Such an action of the TPO is wholly arbitrary, because there are no additional functions or services rendered by the assessee in this year qua the assets employed, functions performed and risks assumed. Cost plus mark-up compensation is received for all the investment advisory services. The monitoring activity is part and parcel of the same advisory services. Moreover the activities of the assessee have also remained the same and FAR Analysis has been done on investment advisory services. 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.....
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....inds due support from decision of Hon'ble Supreme Court in the case of New Jahanghir Valal Mills Co. Ltd. vs CIT, reported in [1963] 49 ITR 137 which has been followed in several decisions. He further relied upon a decision of Kerala High Court in the case of CIT v. Kalpetta Estates Ltd, reported in [1995] 211 ITR 635 for the proposition that, if a fresh look is necessitated on the existing facts on a closer and more intelligent analysis then a different view can be taken. Thus, here in this case, the comparables chosen by the TPO or his reasons for the exclusion of the comparables chosen by the assessee needs to be examined afresh based on the information and factual analysis carried out in this year and one cannot be guided by the precedence of earlier years alone. In support of this proposition he referred and relied upon the decisions of ITAT Delhi Bench in the case of Toluna India P Ltd in ITA No. 5645/Del/2011, wherein the Tribunal expressed its reservation in accepting a broad proposition that, if certain benches of the Tribunal have taken a particular view for a particular comparable company, then same cannot be held to be automatically a good comparable or not comparable. ....
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....cost of ICRA. Thus, going by the qualitative human asset, then there is a huge variation, which fails the comparability tests. Accordingly, this company should not be included. 11. Kinetic Trust Ltd. : Regarding this comparable, Mr. Chand submitted that, firstly, the total revenue of the company is only Rs. 24 lakhs, whereas that of the assessee is Rs. 34.3 Crores. Thus, there is a huge gap of turnover, which affects its comparability. Secondly, this company is registered with RBI as NBFC, therefore, its functions are also different. The TPO has analysed this comparable at page 11 to 13 of the order and has noted that, this company is primarily engaged investments in capital market on its own behalf and there is a huge difference in the turnover. The Ld. DR submitted that for carrying out FAR analysis, there has to be some basic critical mass, otherwise, the whole FAR tests fails. Regarding, Ld. Counsels plea that assessee has not taken any criteria of turnover, he submitted that TPO can very well apply the turnover criteria and in support of his contention, he relied upon the decision of ITAT in the case of Sand Stone Capital Advisors Private Ltd. vs. DCIT, reported in 147 I....
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....hen there cannot be any deviation from the earlier years on the issue of comparables especially when matter has been decided from the stage of the Tribunal on same facts. If any comparable has been included or excluded by the Tribunal then same should be accepted in this year also if there are no material changes. The onus is on the Department to bring on record what is the new material fact which has come in this year, if they want to take a different stand. Otherwise, the Tribunal order has to be followed as judicial precedence especially when rendered in assessee's own case, not once but twice in the preceding assessment years. Regarding each and every comparable, he made his detailed rejoinder and submitted that not only they have been considered to be good comparable in the earlier years but also found to be from the records. In nut shell, regarding ICRA he submitted, what is required to be seen is a core competence in which company is functioning and whether it is rendering core investment advisory services or not. Similarly in the case of Kinetic Trust Ltd, he relied upon the decision of Nortel, which has been affirmed by the Hon'ble Delhi High Court and submitted that, once....
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....companies, recommending the plans for managerial and business support and furnishing performance and relevant industry sector reports. For rendering these services to its AE the assessee is remunerated with cost plus markup. In this year the assessee has earned markup margin of 21.4% which is the subject matter of transfer pricing analysis and benchmarking of the margin by carrying out comparability analysis. In this case, it is undisputed that, the most appropriate method (MAM) for determination of Arm's Length Price is Transactional Net Margin Method (TNMM) whereby ALP is determined by comparing the operating profit relevant to an appropriate base like cost, sales and assets of the tested party with the operating profit of an uncontrolled party engaged in the comparable transactions. It measures the net margin or profit earned in an uncontrolled transaction by independent entities. The assessee's margin which is based on operating profit/ operating cost was at 21.4% which have been worked out in the following manner: Total revenue as per P&L Income Investment advisory income 343,128,197 Other income 1,473,267 T....
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.... as to arrive at the appropriate price or margin for making the accurate adjustments. Rule 10B (2) to (4) provides such mechanism for conducting the comparability analysis with the uncontrolled transactions. But before carrying out the comparability analysis as provided in the rules, the first and foremost requirement is the identification of the comparables from the data sources available in the public domain like Prowess or Capital Line or like. While identifying the potential comparables, the key characteristics and the features has to be identified before the search is carried out on the databases. This is a very critical process of selection which has to be done on a rational basis and scientific methodology. While carrying out the search, certain key words are to be inserted to shortlist the similar category of companies and from results thrown, quantitative filters are applied so that the unwanted comparables are weaned out and a certain range is available for carrying out qualitative comparability analysis from the comparables based on the parameters laid down in Rule 10B(2). The comparability is carried out on FAR analysis; the special characteristics of the property trans....
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....picking of the comparables by the parties. There cannot be two different standards under the law, one for the assessee and one for the TPO. So far as selection of the comparables by the TPO, nothing has been brought on record before us, that TPO has adopted any scientific method for selection of his two comparables, i.e. Motilal Oswal Investment Advisory Pvt Ltd. and Future Capital Holdings Ltd. From the perusal of para 9.2 of the TPO's order it appears that, he has tried to picked-up the two comparables from the accept and reject matrix of companies by the assessee during its search process. Such an approach clearly indicates cherry picking, which approach cannot be accepted. 19. Here in this case, we have to analyse the comparables which are in dispute under the TNMM method, where comparability is focused on transactions rather than comparability in product as required in traditional methods. TNMM is based on net profit margin relative to an appropriate base, viz., costs, sales, assets, which the assessee makes from controlled transactions. The profitability derived from uncontrolled party engaged in similar line of business activity under similar circumstances, is the measure....
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.... like, infrastructure, telecom, media, banking etc. to enable the AE to take decision for making investments. The functions of consultancy/advisory have to be seen as its core competence area and not in the field in which such consultancy is given. 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....
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....ted the importance of applying turnover filter between the range of Rs. 1 crore to 200 crores. This does not lead to any inference that in all the matters the same criteria for applying the turnover filter should be taken between 1 crore to 200 crores. Thus, the ratio of the Tribunal decision cannot be applied universally in all the cases. Rather in the case of Nortel India Pvt Ltd vs Addl. CIT (supra), the Tribunal held that a company cannot be excluded from the comparable list merely for the reason of low turnover especially, when no turnover filter was applied by either parties. The analysis in such cases has to be carried out on functional basis. Before us, it has also been brought on record that the said decision of the Tribunal in the appeal filed by the Revenue before the High Court has been upheld that is, revenue's appeal has been dismissed. Further as stated above, in the earlier years, 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 : 22. This comparable....
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....Capital Services Ltd: 24. This comparable has been admitted by the Ld. Counsel to have been rejected by the Tribunal Q India Pvt Ltd. (supra) and New Consolidate Advisory Ltd. (supra) therefore, this comparable company has not been contested by him. Accordingly, we hold that this comparable has rightly been rejected and shall not be included in the final comparables. Motilal Oswal Investment and Advisor Ltd : 25. This comparable has been included by the TPO and while including the said comparable he has observed that its income is only from Advisory fees during the year and it is performing advisory services in that field of investment like assessee. Before us, Ld. CIT DR arguing for its inclusion submitted that, if the ICRA Management services can be included for having revenue from advisory services then on same analogy this company should also be given the same treatment. From the perusal of the directors' report, it is seen that this company derives its business income from four different business verticals, i.e. Equity capital markets, merger and acquisitions, profit equity syndications and structured debt. It also give advises on cross border acquisition. Its core co....