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2016 (5) TMI 1335
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....TPO)to determine the Arm's Length Price(ALP)of such transactions. 2. During the Transfer Pricing(TP)proceedings, the TPO found that the assessee had earned a cost plus margin of 20% and had benchmarked the said transaction using Transactional Net Margin Method(TNMM)as the most appropriate method. The single year margin of the four comparable companies selected by the assessee for the provision of non-binding investment advisory services were as follows: i. ICRA Management Consulting Services Limited(ICRA@)0. 41%), ii. IDC(India) Limited(IDCL@13%), iii. Future Capital Holdings Limited(FCHL@16. 37%), iv. Mecklai Financial & Commercial Services Limited(MFCSL@20. 43%). The Arithmetic Mean of the comparables was arrived at 12. 55%. It was claimed that the transactions were at Arm's Length. However, the TPO was not convinced with the selection of the comparables of the assessee. He selected following seven comparables and the margin of those comparables was calculated as under: SN. Comparable margin 1. Future Capital Investment Advisors Ltd. (FCIAL) 15. 71% 2. Future Capital Holdings Ltd. -Segment-Investment advisory 31. 68% 3. IDFC Inve....
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....rability in the characteris - tics of the services provided by the assessee viz-a-viz IDCL. 3. c. The assessee had objected the inclusion of KIACL as a comparable at the time of TP proceedings. But, the TPO held that KIACL had earned income from investment advisory activities, that the argument of the assessee with regard to business realignment impacting the performance of the company was not correct. Before the FAA, the assessee argued that annual report of KIACL suggested that it had realigned its investment advisory business to Everstone Investment Advisors Pvt. Ltd. , that the P&L Account of the company for AY 2011-12 indicated that it had earned no revenue from Investment Advisory services, that pursuant to realignment no further revenue were earned from investment advisory services, that it had earned 93. 16% of its advisory fee from its controlled entities. After considering the available material, the FAA held that KIACL earned income from investment advisory fee, that it was the only reportable segment. He further referred to the notes on accounts on KIACL and held that it was a functionally comparable company. 3. d. In case of ICRA-O, the TPO considered the outsour....
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.... that IDFCL was registered as a portfolio manager with SEBI to carryout portfolio management services, that during the year ended on 31. 3. 2010 IDFCL had earned 50. 26% of its income(Rs. 13. 56crores)from PMS, 40. 13%from Perform - ance fee(Rs. 10. 82 crores) and 9. 60% from advisory fees(Rs. 2. 59crores), that no segmental information was published in the annual report. The FAA held that IDFCL was engaged into portfolio management services which were distinct from provision of investment advisory support. he directed the AO to exclude it from the list of the comparables. Accordingly, the FAA prepared a final set of comparable with the revised margin for the year under consideration and same read as under :- S. No. Name of comparable F. Y. 2009-10 OP/TC (%) 1. Future Capital Investment Advisors Ltd. 15. 71 2. Future Capital Holdings Ltd. (Segment-Investment advisory) 31. 68 3. ICRA Management Consulting Services Limited 0. 41 4. IDC (India) Limited 13. 00 5. Kshitij Investment Advisory Co. Ltd. 32. 33 6. MotilalOstwal Investment Advisors Pvt. Ltd. 97. 87 7. Mecklai Financial & Commercial Services Limited 20. 4....
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....Revenue is not absolute; but it has to be considered in the facts and circumstances of each case, No doubt in a situation of the type before us, the burden lies on the assessee to justify exclusion of Kshitij Investment Advisory Co. Ltd, considering the fact that initially assessee had-taken it as a good comparable; Our aforesaid approach is founded on a well accepted proposition that in the course of determination of correct tax liability, it is impermissible for the Revenue to take advantage of an ignorance or mistake of the assessee in offering certain amount as income, which is more than the legally due amount. Notably, there cannot be a estoppel against the statute and it is a trite law that no tax can be levied or collected from a subject except by an authority of law. We may hasten to add here that we are not saying that on each and every aspect of the assessment declared in the return of income, an assessee is entitled to turn around and argue differently before the income tax authorities; rather, there has to be justifiable reasons shown by the assessee, duly supported by law or facts, whereby the change in stand is merited. In the present case, what the assessee ....
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....ll employees to Everstone Investment Advisory Pvt. Ltd. The averments in the Directors Report suggest that post-realignment, the concern is only evaluating its options to commence business operations either in some other line or . in the similar line of investment advisory services. What we are trying to emphasize is that there is no averment in the Directors Report to suggest that the said concern has actually carried out any investment advisory services post-realignment w. e. f. 1. 1. 2010. In fact, in the course of hearing' before-us, the Ld. Representative for the assessee pointed out that a perusal of the Annual Report for subsequent financial year of 2010-11 showed no 'such operations by the said concern. Therefore, considering the aforesaid fact situation, the instant financial year of the said-concern is containing peculiar economic circumstances and the same has to be taken into consideration while evaluating the rationale for its inclusion as a comparable. Before us, the Representative also pointed out that the said restructuring/realignment which has taken place w. e. f 1. 1. 2010, did impact the financial results inasmuch as the income from operations of the sai....
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....erent from investment advisory services where core functions is to give advices for making the investments in diversified fields. A company which is engaged in merger and acquisitions, private equity syndication, loan/credit syndication and performing most of the function of a Merchant Banker, then the entire functions and transactions affects the generation of revenue and margins. Such functions are entirely different from investment advisory services. Mere classification of revenue as 'advisory fees' will not put the company in a comparable basket sans functional similarity and transactional analysis. In case of Carlyle India Advisors Pvt. Ltd (supra), it has been held that, the merchant banking functions are entirely different from investment advisory services and this decision of the Tribunal has been upheld by the Hon'ble Bombay High Court. Thus, in view of plethora of judicial decisions as referred to by Ld. Counsel and in view of functional differences as discussed as above, we hold that Motilal Oswal cannot be put into the comparability list and is directed to be excluded. " In the case of Wells Fargo Real Estate Advisors Pvt. Ltd. (supra)similar view was taken as under:....
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....nal, which contains the operational part, we find the same is relevant and the Tribunal has given its finding under the facts which are similar to that of the AY under consideration. The MOIAPL, which has engaged in the business of merchant banking is not a good comparable for determining the ALP. Relevant contents of the said para 12 are reproduced here for the sake of completeness of this order which read as under: "12.... . . . The only dispute is whether Motilal Oswal Investment Advisors Pvt Ltd can be considered as a comparable for determination of ALP. A perusal of three comparables considered by the TPO shows that M/s. Future capital Investment Advisors Ltd. , has operating profit at 21. 79% whereas OPM of Motilal Oswal Investment Advisors Pvt Ltd is 72. 33%. The comparables used by the TPO themselves are showing extreme OPM. A perusal of the Directors report of Motilal Oswal Investment Advisors Pvt Ltd shows that during the year under consideration, the said company has completed 23 assignments successfully as against 14 completed in the immediately preceding year. A close look at the financial statements of the said company show that the income from operations hav....
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....e year under consideration showed that the only stream of income was from advisory services and not from any activity of merchant banking and, therefore, the said concern was carrying out only advisory services and, according to him, the said concern was includible in the final set of comparables. The DRP also accepted the position that the said concern was engaged in advisory services which are broadly comparable to the assessee's activities under test. 8. We have perused the relevant material on record. It is starkly evident that the said concern M/s. Motilal Oswal Investment Advisors Private limited is engaged in qualitatively different and diversified business activities, whereas the activities of the assessee are confined to rendering non-binding investment advisory for its Associated Enterprises. No doubt, both the concerns may be in the business of rendering advisory services, so, however, it would also be necessary to evaluate the manner and the specific sectors, in which such services are being rendered by the two concerns. It is revealed from the Annual Financial Statement of Motilal Oswal Investment Advisors Private limited that the said concern is engaged i....
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....f the FAA, we decide first effective ground of appeal in favour of the assessee. 5. Remaining two grounds dealing with 234B interest and concealment penalty are consequential in nature. ITA/4801/Mum/2015: 6. Now, we would like to take up the appeal of the AO, who has objected the inclusion and exclusion of the comparables in the final list. He has challenged the inclusion ICRA and IDCL and exclusion of ICRA-O and IDFCL. 6. a. First we would take up the matter of ICRA. In that regard, the DR argued that page 437, 438 and 462 of the PB showed that ICRA was engaged in rendering consultancy services to companies other than in financial sector i. e. urban develop - ment, water sector etc. , that it was also engaged in cross border mergers and acquisi -tions transactions(Pg. 493 of the PB), that the annual report of ICRA(Pg. 432-461 of the PB)did not provide for any segmental information, that if MOIAPL was rejected as a comparable on that ground ICRA should also be rejected, that the Tribunal order of Temasek(supra)relied upon by the FAA pertained to AY. 2007-08 and 2008-09, that same should not be applied to the year under consideration. He placed reliance on the Kerala Hig....
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....varied fields, that hence the argument that because ICRA had no segmentals it must be rejected as MOIAPL is liable to be rejected was devoid of merits, that the DR, during his argument, failed to mention that the Tribunal had upheld the acceptance of ICRA as a comparable in the case of Temasek for AY. 2010-11 as well, which had been argued by the DR himself, that the Tribunal had taken a note of the fact that ICRA was rendering consultancy/advisory services in various sectors and after considering these facts, it adjudged ICRA to be a good comparable, that ICRA should be accepted as a functionally comparable company to the non-binding investment advisory services provided by the assessee. He referred to the cases of Temasek Holdings Advisors Private Limited(ITA/4203/Mum/2012 &6504/SSMum/2012-AY. s. 2007-08&2008- 09), M/s Blackstone Advisors Private Ltd. (ITA/1581/Mum/2016-AY. 2008-09). 6. a. i. We have heard the rival submissions and perused the material before us. Before proceeding futher, we would like to mention that the assessee is engaged in providing non-binding investment advisory services to its AE. As per the Agreement dated 08. 06. 2009 the assessee was to provide repo....
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....ICRA from pages 162 to 164 and submitted that the fields in which it is operating is very diverse and had also advised in cross border M&A. Further, if the skill set of the employees of the appellant is taken into consideration, then it would be seen that the average salary is very high which is evident from the fact that 22 to 25 employees salary paid was more than Rs. 20 crores as compared to the average salary 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. XXXXXXX "20. At the outset, this comparable was subject matter of consideration before the Tribunal in AY 2008-09 & 2009-10, wherein this company was held to be good comparable both on the ground of functional similarity and in view of principles of consistency as it was held to be a good comparable by the TPO in the earlier years. From the perusal of the annual report, which is appearing from pages 156 to 187 of the paper book, we find that it is essentially providing consultancy services in diversified areas, like in government sectors, infrastructure, energy, corporate advisory,....
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.... good comparable. As stated earlier, in the earlier years, the TPO had accepted ICRA to be a comparable and in later years the Tribunal in AY 2008-09 & 2009-10 had held ICRA Management to be good comparable qua the functions of the appellant and there being no material change on facts, functional profile or any other factor in this year, then as matter of consistency, we do not want do deviate from our findings given in the earlier years. There cannot be a pick and choose of comparables every year unless there are some material difference in facts and circumstances compelling to take a different conclusion. Thus, we hold that ICRA Management is a good comparable and should be included in the list of final comparables. " It is further pertinent to note here that it is not in dispute that the functional profile of Temasek(supra)was comparable with the assessee. We have compared the functional profiles of both the companies for the AY. 2010-11 and have found them almost same, that ICRA was accepted as a comparable in the assessee 's own case in subsequent years i. e. in the AY. s. 2012-13 and 2013-14, that the Tribunal had consistently accepted ICRA a valid comparable in other ....
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.... does not apply to income-tax proceedings is not relevant in the said proceedings as there are no new material placed on records by the DR with regards to the change in functional profile of ICRA or Temasek Holdings Advisors (India) Private Limited. After considering the same arguments the Tribunal had held, as stated earlier, that ICRA was a valid comparable for investment advisory company and had emphasized on following the rule of consistency. We find that in the subsequent years ICRA has been accepted a valid comparable, that all the arguments raised by the DR in the matter of Tamasek for the AY. 2010-11, have been dealt extensively by the Tribunal, that it had rejected the arguments raised by the DR. Respectfully following the orders of the Tribunal delivered in the cases mentioned in earlier paragraphs, we hold that the order of the FAA does not suffer from any legal or factual infirmity. So, confirming his order we hold that he had rightly included ICRA in the list of valid comparables. 6. b. With regard to IDCL the DR argued that it was a product company, that it would follows AS-9 to recognise revenue, that the payment of copyright reflected that IDCL was buying copy....
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.... which it provides research/advisory viz. Infrastructure Technology Segment (Global IT), Finance (Investment Research Advisory), Marketing (CMO Advisory), that the sale income referred to by the DR related to the sale of various research reports which are prepared by IDCL on the basis of the research, analysis and survey undertaken by them, that IDCL could not be concluded to be a product company, that the three page hand-out titled "About IDC Go-to-Market Services", submitted by the DR pertained to and provided information in connection with IDC Inc. and not IDCL, that the Web site print outs titled "IDC's Go-to-Market Services include"were prints of a web site taken on 16. 12. 2015, that the information did not relate to the year under consideration and hence could not be relied upon, that there was nothing in the printouts which suggeseds that IDCL was a product company or that it was not a valid comparable to the assessee. 6. b. i. We have heard the rival submissions and perused the material before us. We find that while adjudicating the appeal of Tamasek for the AY. 2010-11 the Tribunal had held as under : "This comparable though accepted by the TPO as a good c....
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....iness of the assessee from which it had derived 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 appellant. Therefore, in our considered view, IDC India Ltd can be considered as a good comparable for the purpose of determination of ALP. " It is found that the annual report of IDCL(at Note 13 on page 482 of the PB), mentions the following: "The Company is engaged in the business of 'Market research and Management Consultancy which is identified as the only and primary business segment of the company' Further all the operating facilities located in (India) " 6. b. ii. We are of the opinion that IDCLwas not a product company, that had it been a trader of products it would have "stock" appearing in its Balance Sheet, that it was a fact that no such opening or closing stock was appearing in the Balance Sheet, that the sai....
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....investment advisory services. The AR contended that ICRA-O did not provide any advisory or consultancy services at all, that it was engaged in three business lines namely Outsourced services, information services and software products and services, that ICRA-Online did not provide any advisory/consultancy services, that the services provided by it only such services and hence could not be considered a valid comparable, that as a company providing medical transcription services cannot be compared to a company running hospitals, that ICRA-O providing analytical support could not be compared with the assessee which rendered advisory/consultancy services, that the KPO business segment consisted of various activities other than research and analytics like Data Extraction, Aggregation, Electronic Conversion of Financial Statements, Validation and Analysis, Accounting and Finance which were functionally not comparable to the assessee's activity of rendering non-binding investment advisory services, that the annual report of the company did not provide any segmentation or bifurcation of the KPO segment into research and analytics services vis-a-vis any other services, that page 489 of ....
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....and it reads as under: "We have carefully considered the rival submissions on this aspect. A perusal of the Director's report of IDFC Investment Advisors Ltd for the instant year reveals that it is registered as a Portfolio manager with SEBI whereby it is carrying out Portfolio Management Services envisaged-under the SEBI [Portfolio Managers Regulations, 1993. The detailed activities enumerated in the Directors Report show that it was offering Portfolio Management Services for the domestic retail investors in different fields. The aforesaid clearly establishesthat it is engaged in managing offunds in its portfolio management platform. In fact, in notes to the accounts, annexed to the Annual Financial Statements, the narration about the nature of operations being carried out is quite significant...... however, it is also noticed that said concern receives 'advisory fee' computed on the basis of net assets of the fund plus a performance fee. The narration of business operations contained in the notes to accounts clearly establishes a distinction between the business model being pursued by the said concern and the appellant for rendering investment advisory relate....
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....Private Limited (supra), the Tribunal has observed as follow: "Regarding IDFC, it is demonstrated before us that the said company is engaged in rendering of services as Portfolio Manager, whose functions are intimately different from that of the functions of non-binding advisory services rendered by the assessee to its AEs. The fact of rejection of the same as a good comparable to a case of similar services as in the case of the appellant, ....... After hearing both the parties and on perusal of the said decision of the Tribunal in the case of Bain Capital Advisors(India)Private Limited (supra), order dated 15. 5. 2015, we find the para 8 is relevant in this regard and for the sake of completeness of this order the same is extracted as under: In view of the above, we direct the AO to re-compute the arm's length adjustment after excluding IDFC from the list of comparables. " 7. We find that the assessee objected to the inclusion of ICRA-O and IDFC on the ground that the TPO had applied no scientific method in arriving at the said two companies, that the companies had been cherry- picked by the TPO and he had not furnished the process applied by whic....