TaxTMI 
TaxTMI 
2017 (1) TMI 1628
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.... AO/TPO. In pursuance of the directions of the DRP the AO completed the assessment u/s. 143(3)r. w. s. 144C of the Act on 30. 12. 2015 determining the income of the assessee at Rs. 10. 90 Crores. 2. Effective grounds of appeals filed by the AO and the assessee are inclusion and exclusion of certain comparables. During the Transfer Pricing(TP) proceedings the TPO found that the assessee had entered in to IT. s. worth Rs. 25. 24 Crores with its AE that net operating profit margin on cost(NCP)was adopted as PLI that Transactional Net Margin Method(TNMM) was selected as the most appropriate method(MAM) that three years data of seven comparables was considered by it for determining the ALP of the IT. s. that NCP of the assessee was 20. 56% that arithmetic mean of the comparable was 13. 30% that it was claimed that transactions entered into by it were at Arm's length. Seven comparable companies selected by the assessee for the provision of non-binding investment advisory services were as follows: i. Access India Advisory Ltd. (AIAL) ii. Future Capital Investment Advisory Ltd. (FCIAL) iii. ICRA Management Consulting Services Limited(ICRA) iv. IDC(India) Limited(IDCL) v. Inform....
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....he submissions of the assessee and the orders of the AO/TPO the DRP held that the was not engaged in investment advisory activities that it was offering advisory and consultation services in the areas of strategy risk management operations improvement regulatory economic and transaction advisory. The DRP after referring to the case of Temasek held that it would not follow the order of the Tribunal delivered in the case of Sandstone Capital Advisors Private Ltd. (ITA/6315/Mum/2012 dated 06/02/2013-AY. 2008-09). With regard to IDC the DRP held that it was not engaged in the activities of providing investment advisory services that it's activities were functionally absolutely different from the functions carried out by the assessee that the activities of IDC were in an absolutely different segment from the segment to which activities of the assessee belonged to that the above facts were not available to the higher appellate authori -ties in the earlier AY. s. The DRP referred to the cases of Temasek and Carlyle India Advisors Private Ltd. (Carlyle)and held that order of the Tribunal in both the cases would not be applicable to the facts of the case under consideration. Referring to th....
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....about exclusion of MOIAPL and NBAL from the final lists is approved the entire TP adjustment would be liable to be deleted and the remaining grounds would become academic that as per the agreement between the assessee and its AE it was to be compensated at cost +20% that the functions performed by the assessee in the earlier AY. s. had remained the same in the current AY. that earning of the assessee at cost +20% was found to be at arm's length by the Tribunal wide its order dated 18/05/2016. In the detailed submissions he contended that items number 1 2 and 5 of the list of the comparables of the assessee were approved by the Tribunal as valid comparables while deciding the appeal for the earlier years that MOIAPL was rejected by the Tribunal is a valid comparable that there was no justification for including LCAPL in the final list that CRISIL was wrongly excluded from the final list of the comparable-companies that DRP had not accepted the multiple year data relied upon by the assessee. For inclusion of ICRA as a comparable to Investment Advisory services the AR relied upon the cases of Temasek Holdings Advisors (India) Private Limited (ITA/776/Mum/2015 for AY. 2010-11) Te....
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....p of these direct expenses was not available that the annual report of IDCL [page 332 of the paperbook] mentioned 'Market research and Management Consultancy' as the only and primary reportable business segment of the company that merely because the Annual Accounts used the term products it would not mean that IDCL sold products that the 'sales' mentioned in page 326 of the PB did not pertain to sale of products by IDCL as a trader or manufacturer that based on the market research and analysis conducted by it would prepare research reports for its clients for the purpose of providing consultancy services that accordingly 'sales' as mentioned in the annual report of IDCL pertained to sale of research reports by it and that same was functionally comparable to the research reports prepared by the assessee for the purpose of rendering investment advisory to its AE that no income from business convention was earned by IDCL during the year. He referred to pages 300 340 and 342 of the paper book in that regard. 4. 1. The Departmental Representative(DR)argued that there was no history of accepting Tamasek as comparable that in the case of Temasek the TPO mu....
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....lid comparable MOIAPL should also be considered. With regard to NBAL he relied upon the order of the TPO. 5. We have heard the rival submissions and perused the material before us. Effective grounds of appeal raised by the AO and the assessee are about exclud -ing/including certain comparables from the list of the valid comparables. We find that the assessee had bench marked the IT. s. by selecting four comparables that the TPO rejected all the comparables selected by the assessee that the DRP upheld the rejection of and further rejected MOIAPL and NBAL from the final list of the comparables that DRP approved LCAPL as valid comparable that the assessee had objected to exclusion of ICRA IDCL ITL and ICSL and inclusion of LCAPL that the AO had filed appeal against the exclusion of MOIAPL and NBAL from the list of comparables that the AO made an adjustment of Rs. 6 67 12 196/- 5. 1. First we would like to decide the appeal filed by the AO who has challenged the exclusion of MOIALP and NBAL. We find that the DRP had rejected NBAL is a valid comparable as it was found that it was engaged in distribution and marketing financial products that the DRP had also held that it was not fu....
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....ional activities of the merchant banking. A Merchant Banker provides capital to companies in the form of share ownership instead of loans. It also provides advisory on corporate matters to the companies in which they invest. The focus is on negotiated private equity investment. The wide range of activities include portfolio management credit syndication counseling on M&A etc. This whole range of functions and activities carried out by Motilal Oswal is definitely are far wider and much different 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 func....
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....the decision of the Tribunal as well as the judgment of the Bombay High Court relied upon by the assessee. Regarding MOIAPL assessee relied heavily on the order of the Tribunal in its own case for the AY 2008-2009 a copy of which is placed at page 282 of the paper book. On perusal of the said order of the Tribunal we find that it is decided in favour of the assessee vide ITA No. 7367/Mum/ 2012(AY 2008-2009) dated 7. 2. 2014. On perusal of para 12 of the said order of the Tribunal 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....
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....endering services across various products viz. Equity Capital Markets Mergers & Acquisitions Private Equity Syndications and Structured Debt etc. The appellant relied upon the decision of the Tribunal in the case of Carlyle India Advisors Private Limited (214 Taxmann 492) to support its plea for exclusion of the said concern from the final set of comparables. The TPO rejected the aforesaid plea on the ground that the Profit and Loss account of the said concern for the 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 assess....
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.... merchant banker. So we hold that MOIAPL is liable to be excluded from the final set of comparables. " Considering the above we hold that MOIAPL has to be rejected as a valid comparable from the list of the final comparables on the ground that it was engaged in merchant banking/ investment banking services that said fact was evident from the annual report and web site extracts of the MOIAPL that despite such dissimilarity the Accounts of the company had not provided break-up of results from the said two activities separately. MOIALP has to be excluded. Effective ground of appeal raised by the AO is decided against him. 5. 2. Now we would take up the comparables included by the assessee in its TP study and excluded by the DRP. We have already decided the issue of inclusion of MOIALP in the list of comparables while deciding the appeal filed by the AO. We would now deal with exclusion of ICRA and IDCL. We find that the ITAT in the order of Temasek for AY. 2010-11 had approved ICRA on broader functional comparability. We would like to reproduce the relevant extract of the order of the Tribunal and it reads as under: "The functions of consultancy/advisory have to be seen....
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....4. We find that while deciding the appeal for the AY. 2010-11(supra) the Tribunal had held that ICRA and IDCL should be included in the list of valid comparables that the AO had filed an appeal before the Tribunal against the inclusion of ICRA and IDCL in the final list of comparables. The DR has advanced the same arguments that were advanced last AY. the only difference is of the numbers of pages of the PB. We would like to re-produce the arguments of the DR and the relevant portion of the order of the Tribunal for the sake of completeness and same reads as under: "I T" A/ 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 ....
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....g investment banking services which were functionally not comparable to the investment advisory services rendered by the assessee that despite such dissimilarity the Accounts it did not give break-up of results from the said two activities separately that it could not be treated as a valid comparable that ICRA did not have separate segmenals that it rendered only advisory services in 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&....
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....s comparable cannot be included on account of single segment of revenue alone that is from consultancy fee but had to be analyse on FAR analysis which the TPO had done in a very elaborate manner at pages 9 to 11 of the order. Thus this comparable had rightly been rejected by the TPO. Thereafter he pointed out various other aspects as given in the Directors report of 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....
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....r net margin or had 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 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....
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....e is to be taken into consideration then on same logic Motilal Oswal should also be included in the list as it had also shown the income from consultancy and so also in other cases also. " The reference made by the DR to the Kerala High Court decision of Kalpetta Estates Ltd. [211 ITR 635] to say that res judicata 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 fr....
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....ed only 6. 17% of the total expenditure incurred during the year that payment for copyright would only show that IDCL uses certain copyrighted material while rendering services that Pg. 486 of the PB made it clear that the word products used by IDCL in its Annual Accounts referred to nothing but the areas in 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 ....
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....unctionally different from the business profile of the appellant. We further find that the Tribunal has decided the matter as follow: "8. Having considered the rival submissions as well as the relevant material on record we find that the main business 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 IDCL Ltd are concerned the same are similar to the activity of the appellant. Therefore in our considered view IDCL 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. i....