TaxTMI 
TaxTMI 
2016 (9) TMI 1320
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....the provision of investment advisory services to its Associated Enterprises (AE) by the Appellant. Ground 2 The learned AO, based on the directions of the Hon'ble DRP, erred on facts and in law, in concluding that: (a) certain activities of the Appellant are engaged in providing portfolio management services, over and above the investment advisory services provided to 3i Investments Plc (3i investments), primarily on account of the presence of the Appellant's employees as nominee directors on the Board of the Indian Investee companies; (b) an additional compensation should be received by the Appellant in relation to the above services being a performance fee of 0.25 percent of the total investments and divestments, over and above the cost plus mark-up already being from 3i investments, as arm's length consideration for the above services; (c) the appellant renders services not only to 3i Investments, but also to various 3i group entities, who have invested in the Indian investee companies, for which no compensation has been received by 3i India from such 3i group entities; and (d) without prejudice to the grounds in (a) to (c) a....
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....fact and in law, erred in re-computing the arm's length margin of the investment advisory services provided by the Appellant at 55.06 percent by rejecting certain comparable companies selected by the Appellant in the transfer documentation, and by selecting additional comparable companies which are functionally not comparable to the Appellant. Ground 6 Without prejudice to the Ground 4 above, the Hon'ble DRP in its directions, on the facts and in law, erred in rejecting two comparable companies namely Future Capital Investment Advisors Limited and IDC (India) Limited, which were accepted by both the learned transfer pricing officer in its order under section 92CA(3) of the Act and by the Appellant in its transfer pricing study report for FY 2009-10. Ground 7 The learned AO, based on the directions of the Hon'ble DRP erred, on facts and in law, in rejecting the use of contemporaneous and multiple year data available for computing the ALP as on the date of filing the return of income and relying only on the single year data (i.e. for the year ended 31 March 2010) for the purpose of determining the ALP. Each of the grounds of appeal referre....
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....rged 'Cost + 20% Mark up'. To benchmark the transaction and also its profit margin, the assessee had selected TNMM as the Most Appropriate Method (MAM) and comparable companies mainly in the field of advisory services. The Profit Level Indicator (PLI) selected for benchmarking the arm's length price (ALP) was on the base of operating profit upon operating cost (i.e. OP/OC). The assessee had shortlisted 8 comparable companies after carrying out detail search process by applying quantitative filters and qualitative analysis to benchmark the ALP of the international transaction relating to its international advisory services. Since the assessee had taken weighted average years' margin of 8 comparables, therefore, the TPO asked the assessee to furnish margin of the comparables using single year data for the financial year 2009- 10. Accordingly, the assessee furnished the following details of the comparable companies along with their updated margins:- Sr.No. Name of the comparable (OP/OC)(%) 1 Access India Advisors Ltd. * 2 Future Capital Investment Advisors Ltd. 15.71 3 ICRA Online Ltd. 41.77 4 ICRA Management Consulting Services Ltd. ....
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....t its duties hereunder the Investment, Adviser shall have regard to and shall ensure that the advice and activities comply with: 2.3.1 the Investment Policy of any Investor, if any; 2.3.2 any written notification from time to time given to the Investment Adviser by the Manager; 2.3.3 any restrictions contained in any applicable Fund Document; and 2.3.4 all 3i internal policies, practices, procedures and management plans as are from time to time applicable. 2.4 The Investment Adviser shall have no authority, and shall not be obliged, to make investment decisions on behalf of any investor. Nothing in this deed shall constitute the Investment Advisor agent of the Manager or any Investor for any purpose and, accordingly, the Investment Adviser shall have no power or authority to make or purport to make investment decisions, or to agree the terms of any proposed transaction or to enter into any transaction on behalf of or in any other way to bind another member of the 3i Group, the Manager or the Investors. The Investment Adviser acknowledges that investment decisions of an Advised Fund are made by the board or other duly constituted body of ....
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....irector of the AE in the investee company in which they have invested, so that investor (AE) has proper control in which the investment has been made. These employees who were made the nominee directors are closely managing the day-to-day activities of the investee companies. Thereafter, he called for the various details of the work done by these nominee directors in which they were nominated and also required the assessee to furnish the copies of annual performance appraisal of the form submitted by its employees, details of which have been dealt by the TPO from pages 10 to 15 of his order. From the details submitted and the description of the functions performed by the employees as mentioned in their annual appraisal report, he deduced that, assessee has performed more than portfolio management services for the various AEs and also carried out the management of IPOs for the AEs. After detailed discussion and analysis, he came to the following conclusion: "11.9 From all the above discussion it can be understood that assessee is doing buyouts, portfolio management, restructuring for its various AEs in addition to the functions of investment advisory. Therefore the arm's le....
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....ded 'Motilal Oswal Investment Advisors Pvt. Ltd'. Thus, the final set of comparables selected by the TPO, were as under:- Future Capital Holdings Limited 29.48% Future Capital Investment Advisors Ltd 15.71% Motilal Oswal Investment Advisors Pvt Ltd. 97.89% ICRA Online Ltd. 43.43% IDC (India) Ltd. 13% Informed Technologies India Ltd. 25.52% Total 225.03% Average 37.51% 7. Accordingly, he made the upward adjustment in the following manner:- Operating Income of the assessee 734116766 Operating Cost of the assessee 611763971 Operating Profit of the assessee 122352795 OP/OC of assessee 20.00% OP/OC of comparables Arm's length profit =37.51%*OC 229472665.5 Arm's length income =ALP profit + ALP Cost 841236636.5 Difference in Actual income and ALP income 107119870.5 5% of transaction value 36705838.3 Adjustment proposed 107119870.5 Therefore, an adjustment proposed to the transaction of receipt of investment advisory fee by assessee from 3i Investment Plc is Rs. 107119870.5. Conclusion: Sr. No. Transaction Adjustment proposed 1 Adjustment on account of ....
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....Senior Counsel Mr. Percy Pardiwala after explaining the entire facts and background of the case as discussed above, submitted that, this is not the first year of TP, as in the assessment year 2008-09 no TP adjustment was made by the Department and in the AY 2009-10, the issue involved was mainly rejection of certain comparable companies and so far as functions were concerned, it was accepted that assessee was rendering purely non-binding advisory service and no such finding was given that assessee over and above its regular investment advisory services is also performing PMS services for which any additional fees is required to be benchmarked or adjusted and no such adjustment was made. In the subsequent year also, i.e. in the AY 2011-12, the issue revolved only on account of comparables and there was absolutely no dispute regarding computing of additional fees on account of PMS as done by the Department in this year. Thus, on same function and facts no new such adjustment is called for. He also brought on record that, in the case of assessee, there was "Advance Pricing Agreement" (APA) with CBDT u/s 92CC on 24th November, 2015, whereby right from the assessment year 2015-16 to AY ....
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.... as a director or an observer, which facilitates the portfolio monitoring process. These discussions or information obtained from the investee companies are shared with the AEs. The Assessee's interaction with the management of portfolio companies may also assist the AE in ensuring that the terms as per investment agreement with the investee companies are compiled with the investee companies and in protecting the rights of the AEs as investors. Accordingly, the aforesaid monitoring function performed by the assessee is part and parcel of the 'investment advisory services' rendered by it. In support of the aforesaid contention, he strongly relied upon the decision of ITAT Mumbai Bench in the case of 'Temasek Holdings Advisors India Pvt. Ltd' in ITA No.776/Mum/2015, wherein on the similar issue the Tribunal held that monitoring function are part and parcel of the investment advisory and cost + mark up compensation received gets covered under all the investment advisory services. He further relied upon the following decisions also:- * Carlyle India Advisors Private Limited v Additional Commissioner of Income-tax [24 taxman.com 176 (Mumbai)]; * TPG Capital India Pvt. ....
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....urt in the case of Godrej Mfg. Co. Ltd. vs. DCIT, reported in 328 ITR 81 and drew our attention to page 132 of the said report and pointed out that, there the Hon'ble Court has observed that portfolio/Investment Manager earns around 2% to 2.5% of the average value of investment. If same yardstick is applied in the case of the assessee on the average value of investment then the investment made by the AE is approximately Rs. 2,860 crores and 2.5% margin or fees will worked out to Rs. 71.51 Crores. However, the assessee itself has earned more than Rs. 73 Crores from its AE during the AY 2010-11. Thus, there is no question of charging separate fees. 12. Lastly he submitted that, Transfer Pricing adjustment in such cases cannot be made without benchmarking the same with comparable uncontrolled transactions. Neither the TPO nor the DRP has provided the manner in which 0.25% of the fees on investment and divestment have been determined by them. There is no benchmarking done vis-à-vis the comparable uncontrolled transaction with the independent entities and no comparability analysis has been undertaken, therefore, such a arbitrarily and ad-hoc addition is outside the scope of TP....
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....ar 2010-11 and also the various decisions of the Tribunal, wherein these very comparables have been considered and analyzed vis-à-vis the entities rendering investment advisory services and have given detail reasoning as to why they are to be included or excluded while analyzing the companies rendering non-binding investment advisory services. 15. On the other hand, on the issue of comparables the Ld. CIT DR strongly relied upon the order of the DRP and submitted that, independent facts needs to be examined for every case and the material and facts on record which have been discussed in the impugned orders are the relevant consideration rather than following the Tribunal order rendered in the case of a different assessee. Thus, strong reliance was placed on the orders of the authorities below: 16. We have considered the rival submissions, perused the relevant finding given in the impugned orders as well as the entire gamut of facts and materials as referred to before us. The assessee is providing Non-Binding "Investment Advisory Services" to its AE, '3i Investment Plc', UK. The assessee makes investment recommendation to its AE and the AE in turn retains the absolute r....
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....of the present case, it cannot be held that the assessee is performing a separate function and carrying out transaction of portfolio management services as an independent and separate function besides rendering investment advisory, because monitoring of investment is embedded in the profile and function of the assessee in terms of the agreement itself. An independent 'Portfolio Management Service' provider to a third party would not separately charged as investment advisory fee given the fact that the investment advisory function will ordinarily be part of the PMS services and will be subsumed within the activity of portfolio management services only. If the assessee is characterized as Portfolio Manager, then as pointed out by the Ld. Counsel on the strength of the observation made in the Bombay High Court decision, in such cases, the PMS fees is around 2% to 2.5% of the average value of investments and if such a fee is taken into consideration then what assessee has received is far more than the PMS would generally charge. In any case, if the revenue is of the view that, it is a separate transaction and is not part of the investment advisory functions, then it needs to be separat....
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....nd making recommendations to THPL with respect to specified investments. The monitoring functions performed by the assessee are part and parcel of the portfolio advisory services rendered by it because, the activities carried out by the assessee while undertaking portfolio monitoring activities include analysis of the latest development in the industry, ongoing performance of the industries and providing necessary information to its AE from time to time. This aspect has been noted by the ITAT, Mumbai Bench in the case of Carlyle India Advisors Private Limited (supra) and in other decisions cited above by the Ld. Counsel. Thus, we hold that no such addition or adjustment on account of extra markup can be made. Accordingly, we direct to delete the addition". 17. Thus, in view of the aforesaid decision, we hold that no separate PMS services needs to be benchmarked as the same is part and parcel of rendering of investment advisory services which is evident from the functions performed in terms of the "Investment Advisory Agreement" entered between the assessee and its AE. We further agree with the contention of the Ld. Senior Counsel that, if the similar function was carried out by ....
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....ss than 21% for each previous year of APA Years and Rollback Years. The determination of ALP for Rollback Years is subject to the condition that the ALP would get modified to the extent that it does not result in reducing the total income or increasing the total loss, as the case may be, of the applicant as already declared in the return of income of the said years". 18. Whence, on similar functions and the transactions the Arm's length price has been agreed at 21% which if compared with the margin of 20% in this year, then same is not at variance, therefore, it can be held that the assessee's margin of 20% for the functions performed are at Arm's Length Price. Accordingly, we hold that, upward adjustment of Rs. 8,83,93,866/- is without any basis and is directed to be deleted. 19. Now, we come to various comparable companies, which are being disputed before us by the assessee. From the chart incorporated above, it can be seen that, assessee had chosen 8 comparable companies, out of which, 3 comparables were rejected by the TPO and 2 additional comparables were added from the DRP stage and 3 comparable companies which were chosen by the assessee and accepted by the TPO, same h....
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....ribunal 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, banking and financial services, etc. It focuses on consultancy and advisory which is its core area and competency. The revenue generation is purely from consultancy fees which is evident from profit and loss account as on 31st March 2010 (appearing at page 176 of the paper book). The TPO in his order has noted that its consultation or advisory operations ranges in various fields which have been tabulated by him at pages 9 to 11 of the order, which according to him assessee is not performing. On the perusal of the directors' report and also the remarks of the TPO, we find that the ICRA Management is providing consultancy services in a myriad areas ranging from development, transportation, urban....
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.... comparables. Kinetic Trust Ltd. :- 21. This company has been rejected by the TPO on the ground that its turnover is only 24 lakhs and it is registered with the RBI as NBFC. On a lower turnover, the TPO has mainly relied upon the decision of ITAT in the case of Triology E Business. At the outset, it is noticed that in the earlier two years, the Kinetic Trust Ltd has been held to be good comparable based on its functional profile. So far as functions are concerned, it is evident from the Directors' reports, which are placed in the paper book from pages 187 to 230. It is seen that, the company is concentrating on its main activity of corporate consultancy services and financial services. Being a NBFC has not changed the nature of activity undertaken by the company and its core business competency and its revenue is from consultancy services. So far as the turnover filter applied by the TPO, we find that, first of all at the time of selection process, the assessee has not considered the turnover filter for accepting or rejecting the comparables. The turnover filter cannot be one of the tool for cherry picking by either of the parties at a later stage, as it has to be....
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....istently for three years then without any change in the material facts, it cannot be held that this comparable could be rejected in this year. Moreover, in the case of Carlyle Advisory India Ltd., ITAT Mumbai Bench, reported in 43 taxman.com 184, the Tribunal held that this company is a good comparable with the companies rendering investment advisory services. This decision of the Carlyle Advisors have also upheld by the Hon'ble Bombay High Court. Moreover, we have already discussed the functions performed by the IDC India Ltd while dealing with Ld. Counsel's argument that functions of advisory services are quite similar to the functions of the assessee and, therefore, we accept the assessee's contention that this comparable cannot be rejected. Accordingly, same is directed to be included in the comparability list. 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, i....
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....not be put into the comparability list and is directed to be excluded. Future Capital Investment Advisory Ltd:- 23. This company is also accepted by the TPO as good comparable, however, the DRP has rejected the same. Such a rejection by the DRP is without giving any opportunity to the assessee. From the perusal of the annual report, which has placed in the paper book from pages 263 to 272, it is seen that it is primarily engaged in rendering investment advisory services only and its operating in a single segment. Thus, there cannot be any genuine reason for rejecting the said comparable. The DRP has rejected this comparable on the ground that it is in the process of shutting down its business. However, during the year, it has continued to render the investment advisory services and the realignment agreement was effective from 1st January, 2010, the realignment is also for investment advisory activities. Thus, there is not much impact on the net margins especially in the assessment year 2010-11, therefore, this company cannot be rejected and TPO is directed to include the same in the final comparability list". The aforesaid decision qua the comparables in disput....