TaxTMI 
TaxTMI 
2016 (2) TMI 1197
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....le 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 is 100% subsidia....
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....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 reviewing qualitatively the nature of services provided by the companies and thereafter carried out the comparative anal....
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.... -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 Management Consultancy Services Ltd. and Integrated Capital Services Ltd. selected by the assessee should not be r....
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....t, 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. (Rejected by the TPO):-Mr. Porus Kaka, submitted that the TPO has observed that in t....
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....ccepted the Kinetic 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 CIT v. Carlyle India Advisors (P.) Ltd. [2013] 357 ITR 584/214 Taxma....
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....erating in a single revenue segment of consultancy and advisory services. Secondly, when no turnover filter has been applied by 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 Norten Networks India (P.) Ltd. (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. v. Dy. CIT [IT Appeal 923 (Mum) of 2015]; (ii) New Silk Route Advisors (P.) Ltd. v. Dy. CIT [2015] 55 taxmann.com 540 (Mum.) has rejected Integrated Capital as a comparable company to an Investment Advisory Services. (iii) MotilalOswal Investment Advisors Pvt Ltd.: This company has be....
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....ctivity and also not in the management of assets for others. Further, the contention of the assessee that an investment bank assists corporations in mergers and acquisitions 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 t....
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.... the investment of its AEs. Thus, for providing such personalized investment services and non-discretionary portfolio management services, a mark-up of 3% over and above is required 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 ....
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....#39;ble Supreme Court in the case of Distributors (Baroda) (P.) Ltd. v. Union of India [1985] 155 ITR 120/22 Taxman 49, he submitted that, if a mistake has been committed then same should not be perpetuated. Further, the principles of res judicata does not apply to Income-tax Proceedings and this view finds due support from decision of Hon'ble Supreme Court in the case of New Jehangir Vakil Mills Co. Ltd. v. CIT [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. [1995] 211 ITR 635/78 Taxman 265 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.) ....
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....ted that the fields in which it is operating is very diverse and has also advised in cross border M&A. Further, if the skill set of the employees of the assessee 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. Kinetic Trust Ltd.: 11. 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 analys....
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....company is particularly into investment advisory for which it receives advisory fees. Under TNMM only the similarity of the functions is to be compared and if there is some product diversity then it cannot be held that same is not comparable if the overall functions are the same. Thus, this comparable has rightly been included by the TPO. 15. In the rejoinder, Mr. Porus Kaka submitted that, if there are no new materials in this year, then 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 cons....
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....ic and market intelligence of the eligible portfolio companies including analysis and investigation of eligible portfolio companies, including their products, services, markets, management, financial solutions, competitive position market ranking, prospects for future performance and relevant industry sector; (e) Undertaking due diligence of investment opportunities and submit reports and recommendation; and (f) Assisting in performance review of portfolio 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....
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....olved in similar business and functions. The comparability analysis is basically a comparison of a controlled transaction with the uncontrolled transaction so 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 com....
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....so, otherwise it will always create suspicion of cherry 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 b....
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.... is providing Investment Advisory Services to its AE in diverse industries 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....
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....decision of Trilogy E Business Software India (P.) Ltd. (supra), it is seen that the Tribunal on the facts of the case highlighted 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 Networks India (P.) Ltd. (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 con....
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....the assessment year 2010-11, therefore, this company cannot be rejected and TPO is directed to include the same in the final comparability list. Integrated Capital Services Ltd: 24. This comparable has been admitted by the Ld. Counsel to have been rejected by the Tribunal Q-India Investment Advisor (P.) Ltd. (supra) and New Silk Route Advisors (P.) 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....
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....PO has added this markup on the ground that assessee in addition to investment advisory services has rendered portfolio management services, that is, it is monitoring the funds for its AE, hence for such a distinct function further upward adjustment should be made. First of all for making such transfer pricing adjustment a comparability analysis has to be done and then only margins can be benchmarked. He has not brought on record that, assessee is rendering any additional function which is not included in the investment advisory function. The TPO has to show that there are additional functions or services rendered by the assessee in this year qua the assets employed, functions performed and risks assumed. As submitted by Ld. Counsel, cost plus mark-up compensation is received for all the investment advisory services and the monitoring activity is part and parcel of the same advisory services. Moreover if the activities of the assessee have remained the same and FAR Analysis has been done on investment advisory services as in the earlier years, then how such services have become different in this year without any new material fact has not been elaborated by the TPO. We agree that su....