TaxTMI 
TaxTMI 
2016 (1) TMI 1265
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.... Officer ("TPO"). Atment made for the international transactions relating to the provision of investment advisory services. 2. That each of the learned AO/DRP/PO erred on the facts and circumstances of the case and in law in making an addition of Rs. 32,029,913 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 10D of the Income-tax Rules, 1962 ("the Rules") 2.1 That each of the learned AO/DRP/TPO erred on the facts and circumstances of the case and in law by not appreciating the business model of the Appellant and by comparing the activities of the Appellant, which is engaged in provision of 'investment advisory and related support service' to the activities undertaken by investment banks and merchant banks. 3. That each of the learned AO/DRP/TPO erred on the facts and circumstances of the case and in law by rejecting the comparable companies selected by the Appellant, without giving adequate reasons for the rejection and further choosing "comparable" companies which were funct....
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....rred on the facts and circumstances of the case and in law by not providing the Appellant the benefit of 5% range as provided by the proviso of section 92C(2) of the Act. 14. That the learned AO erred on the facts and circumstances of the case and in law in charging interest under Sections 234B, 234C and 234D of the Act. 2. The facts in brief are that the assessee company was established in the year 2005. For the assessment year under consideration, the assessee company filed its return of income on 30.09.2009, declaring income of Rs. 5,87,81,405/-. The case was selected for scrutiny. In the return of income , the assessee claimed to have provided investment advisory and support services to its Associated Enterprises (in short 'AE'), namely, Avenue Asia Capital Management LP, which is a investment management firm based in New York, USA. The 'AE' agreed to make payment at cost plus 20% of the cost to the assessee company towards services rendered by the assessee. The Assessing Officer (in short 'AO') after taking statutory approval from the Commissioner of Income Tax, Delhi-I, New Delhi, referred the international transactions between the assessee and its 'AE' to the Tra....
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....ial Services Limited Appellant 13.29 4. Sumedha Fiscal Services Limited TPO 56.85 5. Khandwala Securities Limited TPO 39.80 6. Brescon Corporate Advisors Limited TPO 116.70 7. Ladderup Corporation Limited TPO 66.05 8. Birla Sunlife Asset Management Company Limited TPO 11.31 9. Almondz Global Securities Limited TPO 34.57 10. Axis Private Equity Limited TPO 30.42 Mean 39.13 2.2 Then the TPO determined the arm's length price of the international transaction of advisory services and made upward adjustment Rs. 3,20,29,914/-as under: Amount in INR Operating cost of the assessee 184868442 Arm's length Margin 39.13% Arm's length Price 257207463 Price received 225177550 105% of International Transaction 236436428 Shortfall 32029913.4 2.3 The TPO further proposed an adjustment of Rs. 51,34,309 for interest at the rate of 15.77 percent on the amount of receivables from the AE, holding the same as an international transaction. 2.4 In the draft assessment order issued on 28.02.2013, the Assessing Officer i....
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....so referred to page no. 300 of the assessee's paper book, which is copy of profit and loss account of the assessee for the relevant assessment year, showing revenue of Rs. 22,51,77,550 from advisory service, interest of Rs. 84,651, Miscellaneous income of Rs. 1,45,000 and other income of Rs. 4950/- and profit before tax of Rs. 3,77,64,192/-. 5.1 The ld. CIT(DR), on the other hand, submitted that the assessee was engaged in whole range of activities of advising in investment and finance, i.e., conversion of debt into equity or vice versa and providing support services. He further submitted that private equity fund generally involve in management of Investee Company through the advisory firm. He submitted that the assessee did not provide the detail of support services provided. He submitted that as per agreement third parties were appointed with consent of the AE, and thus the assessee was more than an advisory firm. 5.2 We have heard the rival submissions in respect of functional profile of the assessee. In the profit and loss account, the assessee has reported revenue from advisory activity only, but break-up of the advisory services has not been reported. The functions perf....
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....60) days after the end of each half of the Accounting Period, the Sub-Advisor is to provide a report on the financial progress and prospects for investments in the Investee Companies to the Company. The Sub-Advisor shall promptly provide notice of any event or condition, which might materially and adversely affect business and operation including any fraud, mismanagement or any other circumstances relating to an Investee Company of which the Sub-Advisor is aware of or should be aware of which could materially and adversely affect the value of the recommendations proposed by the Sub-Advisor to the Company. 5.3 From an overview of the above clauses of the agreement between the assessee and its AE, we find that during the year, the assessee was engaged in providing broadly four types of services: (i) Firstly, identify the investment opportunity in private equity, distressed debt and listed or unlisted securities and then advise or recommend to the AE for investment in identified target. (ii) Secondly, advise the investee company for financing the investment through equity or debt finance or similar financing, which include purchase of certificates of deposit, maki....
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....ivate placement, IPO investment, financing though loans, financing through bonds, reorganization of entities through merger/demerger, advice on exit strategy and engaging service providers for support services. In view of the above discussion, we uphold the action of the TPO in characterisation the functions of the assessee as advisory in investment and finance. We have also noted that the assessee was engaged in providing support services to the AE, which is clearly more than advisory in investment. We now proceed to consider the functional comparability of the comparables keeping in mind our findings of the functions of the assessee discussed above. Inclusion/ exclusion of comparables 5.5 During hearing of the case before us, the ld AR, objected to the inclusion of the seven comparables by the TPO, however, he submitted that if three comparables i.e. Sumedha Fiscal Services Ltd., Khandwala Securities Ltd. and Brescon Corporate Advisors Ltd. were excluded from the list of the comparables, profit margin of the assessee would be in the safe harbour zone and therefore he would not agitate for exclusion of other comparables. As, we did not agree with the proposal of the le....
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....he case of Maerk Global Service Center India Pvt. Ltd. (2011) 14 ITR (Trib.) 541 held that if the TPO himself does not reject comparable companies selected by the taxpayer on functional incomparability then the Revenue cannot later take the plea of incomparability. Whereas, the ld. CIT DR submitted that any ground could be raised before the Tribunal so long as they were subject matter of appeal or assessment. The CIT DR relied on number of judgments of the courts including the judgement of the supreme court in the case of NTPC reported in 229 ITR 383 in respect of the propositions to reject the three comparables chosen by the assessee. We have heard the submission of both the parties. We are not agreed with the contention of the Ld. CIT(DR) that the Revenue is at liberty to raise any ground of appeal at any stage of appellate proceeding. In this case Revenue has neither filed appeal nor any cross objection. It is settled position of law that once a respondent is not aggrieved by the impugned order, it can't be allowed to raise any additional ground in appeal. Moreover, the Tribunal in the case of Maerk Global India (P) Ltd (supra) has clearly held that the Revenue can't be allowed ....
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....ether different case. 44. In the light of the above reasons we are of the considered opinion that the learned Departmental Representative cannot be allowed to argue that certain cases included by the assessee in the list of comparables, were in fact not comparable, when the TPO himself failed to point out as to how such cases were distinguishable. The situation would have been different if the TPO had found a case to be incomparable say on account of functional test. In that case on finding such a case to be functionally similar, the ld. DR could have justifiably shown such case to be distinguishable on some other valid ground. Presently we are dealing with a situation in which the TPO, by not adversely commenting upon the assessee's comparables, impliedly accepted such cases as comparable. Now it is too late in the day for the ld. DR to argue that such cases were not comparable. If the argument on the behalf of the Revenue in this regard is allowed to be made, it will amount to permitting the ld. DR to argue contrary to what has been done by the TPO. Obviously it is not permissible within the framework of the statutory provisions. We, therefore, refuse to permit the ld. D....
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.... broad similarity of functions is required. He therefore submitted that consultancy in the field of merchant banking is broadly similar to the consultancy or advisory in investment or finance. He referred to the page 339 of the assessee's paper book, where the assessee itself has mentioned that under TNMM, the standard of comparability is less stringent as compared to other methods as only broad similarity of functions is required. 6.2 He submitted that merchant banks are also not only engaged in share issue management but provides various kinds of consultancy services which are advisory in the nature. Moreover, he submitted that Private Equity fund generally invest in high risk emerging technology area and they expect high returns from such investments, generally through sale of shares or stock, through private placement or through public offering and for that purpose they engage peoples at very high salary package, as compared to the merchant banks. He attempted to convey that yield from PE fund investment is too high as compared to Merchant banks and so the fee from advisory in investment would be higher than the fee from the merchant banking advisory or merchant banking serv....
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....agement, and to act as advisor, consultants, manager, underwriter, portfolio manager. So, the Merchant banker plays two kind of role. The first kind of role, i.e., manage issue of shares, underwriter, portfolio manager etc., which are in the nature of functions where work is executed by the Merchant banker. The second functions are in the nature of advisory or consultancy in respect of issue management etc. So, if the comparable has performed Merchant banker's role of first kind, it would be functionally different from the assessee, but if the comparable has performed Merchant banker's second kind of role, it is very much comparable being the consultancy in the nature of investment or finance. From the segment result, it is seen that the comparable has shown income from consultancy related to merchant banking and not from issue management. The fact of handling of issue management has been duly mentioned in the Annual Report of another comparable, namely, Almondz Global Securities Limited, but no such fact has been found in the Annual Report of this comparable company. Further, here the broad function of the assessee is advisory in the field of investment or finance and consultancy ....
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....o provide actual support services, if the investment is made by the Manager. In this three-tier hierarchy, Xander Master Fund is 'the PE Fund', Xander Investment Management Ltd., Mauritius, is the 'Manager' and the assessee is simply 'Sub-Advisor to the Manager'. From an overview of the nature of activities discussed above, it is noticed that the contention of the ld. AR that the assessee acted as a PE Fund in India, is not tenable. The Manager subcontracted specific activities to the assessee, which were in the nature of advisory to him. By no stretch of imagination, the assessee can be described as PE Fund, who, in present facts is, Xander Master Fund. The name by which a transaction is coined is not decisive of its character. It is the real nature of a transaction which is always relevant and conclusive. A bare perusal of the nature of activities carried out by the assessee in the extant international transaction abundantly proves that these are not that of a PE Fund. Ex consequenti, the decisions cited by the ld. AR seeking to canvass the exclusion of three companies on the strength of the assesse in those cases acting as PE Funds, do not advance his case any further. As such, ....
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....Bench, in its own wisdom, given a certain fact situation. It is difficult to have a case where the functions, assets and risk of an assessee, are same as the case decided subsequently. Seldom two business models are the same. Quoting these case laws and relying upon them as if they have laid down binding legal precedence without reference to the facts, to our mind is not only wrong but even misleading. Even in following a binding legal precedence, the Courts have cautioned that what has to be seen is whether the facts and circumstances are same. Though it is well settled, for sake of ready reference we quote following case laws:- (i) GVK Gautami Power Ltd. vs. ACIT, 336 ITR 451 (A.P.) for the proposition that observations of Court are neither to be read as Euclid's theorems nor as provisions of a statute and that too taken out of their context. The decision of the Court is only an authority for what is actually decides. What is the essence in a decision is its ratio and not every observation found therein nor what logically follows from the various observations made in it. (ii) CIT vs. V.K. Ferro Alloys Industries P. Ltd., 299 ITR 191 (A.P.)= (2008-TIOL-60-HC-AP-I....
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.... declared or stated vocally to support conclusion, not mere conclusion by which case is disposed of. (ix) CIT vs. Sun Engineering Works P. Ltd., 198 ITR 297 for the proposition that it is neither desirable nor permissible to pick out a word or a sentence from the judgment of this court, divorced from the context of the question under consideration and treat it to be the & ITA No.5680/Del/2011 complete "law" declared by this court. The judgment must be read as a whole and the observations from the judgment have to be considered in the light of the questions which were before this court. A decision of this court takes its colour from the question involved in the case in which it is rendered and, while applying the decision to a later case, the courts must carefully try to ascertain the true principle laid down by the decision of this court and not to pick out words or sentences from the judgment, divorced from the context of the questions under consideration by this court to support their reasonings. (x) Jaganmohan Rao (V.) vs. CIT, 75 ITR 373 (SC) for the proposition that Picking up word/sentence from judgment divorced from context not permissible. Judgements are t....
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....rgers and acquisitions, equity and debt issue management, portfolio management and broking, as comparable to the assessee. The functional profile of this company being different form the assessee company, the learned AR requested to exclude the company from the list of comparables relying on the decision of the Hon'ble Bombay High Court in the case of Carlyle India Advisors Pvt. Ltd. Vs. ACIT (surpa) and Xander Advisors India Pvt. Ltd Vs. ACIT (supra). 7.1 We have gone though the Annual Accounts of the comparable company, which are available on page 554 to 601 of the paper book of the assessee. A perusal of the segmental result on page 593 of the paper book, it is seen that the company has two segments, one is Investment/stock operation and another is fee based operations. On page 592, segment information has been provided, according to which, the fee based division provides financial advisory services relating to mergers and acquisition, equity and debt issue management, portfolio management and broking. So apparently, two functions have been performed under this segment, one is advisory and other is broking, which can exclude the comparable, however, we are not in agreement wi....
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....case of the assessee. We have gone through the rival submissions. The submission for relying on the cases decided by the Courts/Tribunal (supra) for treating the company (Brescon) as one of the comparables in the case of the assessee, have already been rejected by us while examining comparability of Sumedha Fiscal Securities Ltd. 8.2 We have gone through the Annual report of the company, which is available on pages 602 to 658 of the assessee's paper book. It is seen from the page 625 and 628 of the paper book that the company has shown income from fee based financial services from debt resolution and debt syndication. The other income from dividend, interest and profit from sale of investment has been shown below the profit before tax, hence, having no impact on the operating profit. We have seen from the profile of the assessee that it was engaged in advisory related to debt finance and we don't have any doubt that the term debt finance includes debt resolution and debt syndication. Further, we can't brush aside the vital fact that the AE of the assessee invest not only through private equity model but also through 'Distressed Debt' in India and thus it is natural that the a....
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....sitions, corporate Restructuring and host of the other corporate advisory services. We have also noted the information under the title performance on page 670 that the company was planning to expand its wing by venturing into merchant banking activities and broaden its horizon, which shows that during the year it was not engaged in merchant banking activities. The assessee company has also advised in respect of equity financing, debt financing, corporate restructuring, capitalisation, splitting of shares, exit strategy and also extended support services for execution of any of the these services and therefore, the activities of the assessee are functionally similar to the company, thus, we hold the company as comparable, and accordingly, we direct the TPO to retain this company as one of the comparable. Birla Sunlife Asset Management Company Limited. 10.1 Ld. AR submitted that the company is registered under SEBI (Mutual Funds) Regulations, 1996 and SEBI (Portfolio Management) Regulations, 1993 and engaged mainly to act as an investment manager to Birla Mutual Fund, and management of several investment portfolios of Birla Mutual Fund. Therefore, it may not be included in the ....
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....f debt and bonds etc. We have also noted from page 735 under the segment performance that during the year the assessee handled 2 IPOs aggregating to Rs. 148.97 crores. The handling of IPOs and underwriting of issues are the activities different from the advisory of investment and finance. Since income from handling of IPOs and underwriting commission is part of segment of corporate and finance advisory fee, it makes the segment functionally dissimilar to the assessee. As the segment of the company loses its comparability with the assessee, we direct the TPO to exclude this company from set of comparables. Axis Private Equity Limited 12. The learned AR submitted that this company acts as an Investment Manager to Axis Infrastructure Fund and engaged in asset management activities, and manages investments of off-shore funds, pension funds, provident funds and other funds. The segment data of the assessee is also not available. 12.1 We have perused the Annual Reports of the company which is placed at page nos. 869 to 890 of the assessee's paper book. It is seen from the profit and loss account placed at page no. 878, that the income has been shown as received under the head di....
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.... Undertaken 13. In Ground no. 4 of the Appeal, the assessee has requested for grant of benefit of risk adjustment. The TPO in his order held that the assessee was not a risk free entity, as according to the TPO it was facing a single customer risk of loss of revenue in the event of bankruptcy of the customer. The TPO has also claimed that the assessee had not provided any back-up calculation for claim of risk adjustment as well as comparison of risk taken by the comparables. At the time of hearing before as it was contended by the learned AR that the assessee being a captive service provider, the assessee operated in relatively risk free environment as compared to the comparables chosen by the TPO as well as by the assessee which are entrepreneurial enterprises, which undertook full range of economic risk i.e. marked risk, price risk, product risk, credit risk etc. In view of the above, the ld. AR submitted that an appropriate risk adjustment ought to have been provided by the TPO. The ld. AR in support of his claim of risk adjustment relied on the following decisions of the Tribunal: Mentor Graphics Private Limited (Noida) (P.) Ltd. vs DCIT: [2007]1091TD 101 (Del) ....
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....interest rate of 15.77% as arm's length rate of interest and applying the said rate of interest for complete year on the balance of outstanding receivables as on 31st March, 2009, made an adjustment of INR 51,34,308/- . Before the ld. DRP, the assessee pleaded that if a working capital adjustment is allowed to the assessee, then adjustment for outstanding receivables would automatically factor therein and no separate adjustment would be required. The DRP confirmed the additions proposed by the TPO. 14.2 Before us, the ld. AR contended that assessee did not function like a normal trader/manufacturer, and it merely recovered the cost incurred by it from the AE along with a mark-up. The Ld AR further contended that the receivables as on the Balance-sheet date from Avenue US were pending only for the month of March and the average collection period of the assessee was better than six of the comparable selected by TPO in the final set for computing the ALP of the international transaction of provision of investment advisory services to AE, barring two comparables which had a relatively lesser collection period as compared to the assessee. Further, he submitted that the TPO has made a....
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.... immediately remitted to the assessee as and when received from its clients. As the assessee is not having any dealings with the clients of the AE, assessee cannot be a witness for the delayed payments by AE customers. It is for the AE to see that its customers are paying in time so that it can pay the assessee in time. If the contention of the assessee is accepted, it would also mean that the AE has no working capital of its own to pay the assessee in time. It means that the AE was doing the business using the capital of assessee. AE collects money from clients as and when received even beyond normal period. It shows assessee is in fact financing the business of AE by accommodating delayed remittance of receivables. 17. As a general rule, we agree with the learned chartered accountant that what is to be assessed as income is the income earned by an assessee and not the income that could have been earned by the assessee. Thus there is a real difference between the actual and the probable. But that general rule of taxation is not as such directly applicable to the present case as the TPO was really examining the financial impact of an international transaction. What is made....
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....) ........... (c) capital financing, including any type of long-term or short-term borrowing, lending or guarantee, purchase or sale of marketable securities or any type of advance, payments or deferred payment or receivable or any other debt arising during the course of business;....' 22. On going through the relevant part of the Explanation inserted with retrospective effect from 1.4.2002, thereby also covering the assessment year under consideration, there remains no doubt that apart from any long-term or short-term lending or borrowing, etc., or any type of advance payments or deferred payments, 'any other debt arising during the course of business' has also been expressly recognized as an international transaction. That being so, the payment/non-payment of interest or receipt/non-receipt of interest on the loans accepted or allowed in the circumstances as mentioned in this clause of the Explanation, also become international transactions, requiring the determination of their ALP. If the payment of interest is excessive or there is no or low receipt of interest, then such interest expense/income need to be brought to its ALP. The expression 'debt arising durin....
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....determination of the ALP of the separate international transaction of interest on allowing the working capital adjustment in the international transaction of rendering of services. In our considered opinion, both the transactions are separate and distinct from each other. Whereas the international transaction of rendering services contemplates comparison of the price charged for rendering services by impliedly including the interest for the period allowed for realization of invoices as per the terms of the agreement, the international transaction of charging interest on late recovery of trade receivable covers the period which starts with the termination of the period of credit allowed under the agreement, which is subject matter of the international transaction of rendering of services. There is one more fallacy in the reasoning given by the DRP about the subsuming of interest income in the working capital adjustment. It is simple that working capital adjustment is ordinarily computed by considering the average of the opening and closing values of inventories, receivables and payables. The TP adjustment on account of interest on delayed realization of invoice value has nothing to ....
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....andard period would be taken care by the working capital adjustment. 14.8 The TPO has computed interest of Rs. 51,34,308/- on outstanding receivables as on closing of the year after applying the interest rate of 15.77% for a period of 365 days. This approach of the TPO is not correct. The outstanding receivable should be examined on transaction to transaction basis and outstanding period should be computed after allowing period available as per industry standard. The calculation submitted by the assessee, without prejudice, was not examined by the TPO as well as DRP. Further, in the case of the assessee, the invoices were raised by the assessee in foreign currency and the AE has enjoyed the benefit of interest in terms of LIBOR rate of interest, the LIBOR rate of interest should be considered rather than prime lending rate of interest of SBI. Accordingly, we restore the matter of computation of the adjustment to outstanding receivables to the TPO with the directions to compute interest for receivables on day to day basis beyond a period available as per industry standard and apply LIBOR rate of interest. The assessee is directed to provide all the required detail for computation....