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Income Tax Appellate Tribunal, MUMBAI BENCH “K”, MUMBAI
Before: MRS. DIVA SINGH & SHRI RIFAUR RAHMAN
wherein the correctness of the order dated 15.03.2017 of Commissioner of Income Tax (Appeals)-56, Mumbai [hereinafter referred to as ‘the CIT(A)’] pertaining to 2010-11 Assessment Year (AY) is assailed on the following grounds:
1. Whether on the facts of the case and in law the learned CIT(A) erred in holding that M/s. Kshitij Investment Advisory Company Ltd. is not a comparable company to benchmark the transaction of the assessee and has erred in directing to exclude this comparable from the set of the comparables, especially considering the fact that the Ld. CIT(A) has accepted M/s. Future Capital Investment Advisors Ltd. and M/s. Future Capital Holdings Ltd. as comparables on the same set of facts i.e. happening of a extraordinary events.
Page 2 of 36 2. Whether on the facts of the case and in law the learned CIT(A) erred in holding that M/s. IDC (India) Ltd. is a comparable company to benchmark the transaction of the assessee and has erred in directing to include this comparable from the set of the comparables, especially considering the fact that the ITAT Mumbai in the case of M/s. Carlyle India Advisors Pvt. Ltd. Vs. ACIT which was relied upon the CIT(A) has not adjudicated the comparability of M/s. IDC(India) Ltd.. Further the CIT (A) also erred in placing reliance on the case of M/s. General Atlantic Pvt. Ltd. vs DCIT and M/s. Warburg Pincus Indpia Pvt. Ltd. wherein IDC India was held to be a comparables for benchmarking the transaction of investment advisory.
3. Whether on the facts of the case and in law the learned CIT(A) erred in holding that M/s. IDFC Investment Advisor Ltd. is not a comparable company to benchmark the transaction of the assessee and has erred in directing to exclude this comparable from the set of the comparables, especially considering the fact that the Annual report of IDFC clearly reflects fees from advisory services.
The appellant craves leave to add, amend, vary, omit or substitute any of the aforesaid grounds of appeal
at any time before or at the time of hearing of appeal.
2. For the sake of completeness, it be mentioned that the present appeal had come up for hearing on 23.11.2021. On the said date, it was adjourned on the oral request of the assessee.
Accordingly, it next came up for hearing on 24.11.2021.
On the next date Mr. Senthil Kumaran appearing on behalf of the Revenue invited attention to the TPO’s order.
Addressing the inclusion/exclusion of comparables sought he relied upon the said order. It was his submission that the CIT(A) ignoring the valid reasons of the TPO qua these comparables, has passed the order which is challenged by the Revenue in the present proceedings.
3.1 The arguments which have been advanced on behalf of the Revenue, we propose to address when we take up the specific comparables under challenge in the present proceedings.
Page 3 of 36 4. Mr. Madhur Agrawal appearing on behalf of the assessee inviting attention to the impugned order, on the other hand heavily relied thereon. Apart from that it was submitted that for inclusion/exclusion of the comparables, various orders of the ITAT were relied upon by the CIT(A). Copies of some of these orders have been filed in the case law Paper Book running into 171 pages. It was submitted that some of these decisions have been upheld by the jurisdictional High Court when challenged by the Revenue. I t was further submitted that there is no contrary view on these set of facts and circumstances qua these comparables pertaining to the very same assessment year.
4.1 Further heavy reliance was placed on a recent decision rendered by the Hon'ble Bombay High Court in the case of Eight Road Investment Advisors Pvt. Ltd. (formerly known as (FIL Capital Advisors Ltd.0 (2020) 424 ITR 563 (Bombay) copy filed at pages no. 2 to 59 of the case law Paper Book. The jurisdictional High Court in the said decision, it was submitted, was seized of similar arguments based on relevant facts qua these comparables for the very same assessment year i.e. 2010-11 assessment year. Thus, it was argued that the legal position stands confirmed.
Placing heavy reliance thereon, it was submitted that the said decision fully supports the decision to include/exclude
Page 4 of 36 the comparables which have been challenged by the Revenue in the present proceedings.
4.2 The Chart highlighting the comparable-wise supporting decisions at page 1 of the Paper Book was relied upon.
4.3 We shall take up the relevant arguments advanced specifically in support of the impugned order qua the specific comparables when the comparables come up for adjudication.
Before addressing the grievance posed in the appeal, certain necessary facts need to be set out. The inclusion/exclusion of comparables under consideration is relatable to the Investment Research and Advisory services.
Perusal of the record shows that the TPO has noted that the assessee is a 100% subsidiary of Citibank Overseas Investment Corporation, which in turn is a 100% subsidiary of Citibank N. A., USA. The assessee is registered as a non- banking finance company with the Reserve Bank of India and is engaged in the business of providing finance against assets such as vehicles, construction equipments, shares, units etc. It also provides funding by way of equity and debt to companies in the information technology se ctor. It operates through a network of more than 20 branches located in various cities of India.
Page 5 of 36 6. In the year under consideration, following international transactions were reported by the assessee:
The issues for consideration in the present proceedings are qua the arm’s length transactions for the Investment Research and Advisory Services.
7.1 The TPO agreed with the assessee's TP Study Report to the extent that Transactional Net Margin Method (‘TNMM’) was the most appropriate method to determine the arm’s length price for its international transaction pertaining to this activity.
Page 6 of 36 7.2 Based on the search process adopted in the TP Study, the assessee selected six functionally comparable companies having an average arithmetic mean of 15.68%.
7.3 The TPO directed the assessee to update its margin of TP study comparables using single year data. As a result thereof the assessee arrived at a mean margin of 15.56%:
Sr. No. Name of the Company FY 2009-10 OP / TC (%) 1 Future Capital Investment Advisors Ltd. 16.75 2 Future Capital Holdings Ltd.-Investment 15.21 3 Cyber Media Research Ltd. (formerly IDC India 14.72 Ltd) Arithmetic Mean 15.56 7.4 The assessee claiming to have operating profit/total cost (OP/TC margin) of 12.61% based on its segmental profit still considered the transactions to be within the Arm’s Length as the arithmetic mean of the comparables was 15.56% and applying the proviso to section 92C(2) of the Income Tax Act, 1961, was well within range.
The TPO considering the updated study accepted the selection of the tested parties and also the most appropriate method, however, he issued a Show Cause Notice to the assessee requiring it to explain why the three comparables finally relied upon by the assessee in its TP study should not be rejected and instead following four comparables should not be instead included;
Page 7 of 36 i) Kshitij Investment Advisory Co. Ltd. (‘Kshitij’), ii) IDFC Investment Advisors Limited (‘IDFC’), iii.Ladderup Corporate Advisory Private Limited (‘Ladderup’) and iv) Motilal Oswal Investment Advisory Private Limited (‘Motilal’) (emphasis supplied as Sl. No. (iii) and (iv) not relevant for the present proceedings. Reference made only for completeness). 9. It is noticed that the assessee’s OP/TC margin was also tinkered with, however, since the said issue is not arising in the present appeal, we deem it appropriate to confine our attention to the inclusion/selection ultimately under challenge in the proceedings.
Record shows that ultimately the TPO agreed with the and also exclude Ladderup and Motilal and finally calculated the OP/TC mean of 24.82% of the following four companies:
Sr. No. Name of the Company Comparable selected by the TPO (%) 1 Future Capital Investment Advisors 14.75 2 Kshitij Investment Advisory Co. Ltd. 31.60 3 Future Capital Holdings Ltd. 16.35 4 IDFC Investment Advisors Ltd. 36.61 Arithmetic Mean 24.82 10.1. As a result thereof, the assessee was subjected to an upward adjustment of Rs. 11.75 Crore.
The assessee carried the issue in appeal before the First Appellate Authority canvassing that the comparables were functionally dissimilar. The assessee’s role, it was argued, was limited to providing research and advisory related
Page 8 of 36 services. It was submitted that it did not face any market risk, credit risk, foreign exchange risk or any legal and statutory risk etc. Further, the assessee was stated to be a captive service provider receiving an assured return remunerated on a steady cost plus basis, hence exclusion of the following comparable was sought :
(i) “Kshitij Investment Advisory Company; and (ii) IDFC Investment Advisory Ltd. was sought; and 11.1 The assessee also sought inclusion of :
The ld Commissioner (Appeals) considering the submissions, facts and legal precedent allowed the appeal of the assessee. The relief granted qua the aforesaid comparables is under challenge by the Revenue in the present proceedings.
In the said background disregarding the sequence of grounds, the comparables sought to be excluded are first being taken up.
Ground No. 1: Inclusion of Kshitij Investment Advisory Co. Ltd
The first comparable sought to be included by the Revenue which has been excluded by the CIT(A) addressed in Ground No. 1 namely Kshitij Investment Advisory Co. Ltd. is taken up first.
Page 9 of 36 14.1 The CIT-DR inviting attention to pages 10 to 13 of the TPO’s order submitted that each of the assessee's objections to the exclusion of Kshitij Investment Advisory Co. Ltd. had been addressed and dealt with by the TPO himself. Relying on the order, it was submitted that the TPO had examined the assessee’s objection to the said comparable which was posed on the grounds of related party transactions and found it to be not maintainable as the said comparable had passed the RPT filter of 25% set by the TPO.
14.2 It was further submitted that the said comparable infact was appearing in the assessee’s initial accept/reject report and offered by the assessee itself, hence, the assessee cannot be permitted to subsequently seek its exclusion.
14.3 It was also submitted that in the facts of the case, the TPO had called forth for Information u/s 133(6) from the said company of the details of its top customers etc. on the basis of which it was noticed that the income from operations was in the nature of advisory fees and was received from 4 clients only. Hence, considering the segmental data, it was claimed to be a good comparable.
14.4 It was submitted that the initial objections of the assessee that the said comparable was rendering service in the area of Mall Management was also found to be not Page 10 of 36 correct as it could be said to be advisory fees received from a Mall Management company.
14.5 Referring to the TPO’s order it was submitted that the objection of the assessee that Kshitij Investment Advisory Co. Ltd. had provided services to Kshitij Venture Capital Fund has also been considered and rejected on facts by the TPO.
14.6 Referring to the order, it was submitted that the TPO has cared to extract in the order Note-8 Schedule-14 of the Notes of Accounts from the Annual Report of Kshitij Investment Advisory Co. Ltd. and has notice d that the related party disclosure does not mention the name of Kshitij Venture Capital Fund. For ready reference, the specific factual finding of the TPO extracted in the order was relied upon. This is reproduced hereunder for completeness :
On going through the note 8, Schedule 14 Notes of Accounts to the Annual Report of Kshitij, the related party disclosure, does not find mention of the name Kshitij Venture Capital Fund. The said note as appearing in the Annual Report is reproduced as under:
Page 11 of 36 Hence, the contention of the assessee on this point is rejected.
The ld. AR on the other hand has relied heavily upon the impugned order. It has also been vehemently argued that the order is fortified by the decision of the jurisdictional High Court in the case of Eight Roads accordingly, it was submitted, was fully covered in assessee’s favour.
15.1 Reliance was also placed on the decisions of the ITAT which have been appended in the Paper Book and are on similar facts as they pertain to the very same assessment year on same set of facts and circumstances. These decisions were heavily relied upon over and above the decision of the jurisdictional High Court in the case of Eight Roads Investment Advisors Pvt Ltd (F ormerly known as F IL Capital Advisors I ndia Pvt. Ltd.) cited supra (copy available at pages 2-59). These decisions are the orders of the ITAT in the case of AGM India Advisors Private Limited [ITA no. 4801/MUM/2015] - AY 2010-11 ( copy available at pages 60- 89); in the case of J.P. Morgan Advisors India Pvt. Ltd. [ITA no. 990/MUM/2014, IT (TP)A No. 1754/MUM/2014 and IT (TP)A No. 1597/MUM/2015]- AY 2009-10 and 2010-11 ( copy available at pages 90-140); in the case of Carlyle India Advisors Private Limited [ITA no. 1040/MUM/2015 and ITA
Page 12 of 36 no. 1517/MUM/2015]-AY 2010-11 ( copy available at pages 141-162); in the case of Helix Investments Advisors India Pvt. Ltd [ITA no. 5564/MUM/2015 and IT A no. 5563/MUM/2015]-AY 2010-11 and 2011-12 ( copy available at pages 163-171) which all support the view taken by the CIT(A).
15.2. Attention was invited to the Chart of Issues filed and available at Paper Book page 1, it was his submission that similar position of facts and law had been considered by the Hon’ble Bombay High Court in Eight Roads Investment Advisors Pvt Ltd. which supports the exclusion of Kshitij objections raised on behalf of the assessee which it was submitted, were found to be correct by the CIT(A) considering the legal precedent on the same set of facts, relief has been granted to the assessee. It was submitted that in the face of the stamp of approval on these very set of facts and circumstances given by the jurisdictional High Court, ground of the Revenue, it was his prayer, may be dismissed.
We have heard the rival submissions and peruse d the material available on record. It is seen that Kshitij Investment Advisory Co. Ltd. been excluded by the CIT(A) for Page 13 of 36 the reasons set out in para 11.4 at pages 17 to 21 of his order.
16.1. It is seen that the assessee has reiterated before the First Appellate Authority that Kshitij Investment Advisory Co. Ltd. is not functionally comparable to the assessee as it is catering its investment advisory and strategy services to retain Real Estate business and for developing Malls in India.
16.2 The assessee has also objected before the First Appellate Authority for the inclusion of the said comparable on the ground that it has undergone re-structuring wherein it has re-aligned its Investment Advisory business to 16.3 The assessee has also canvassed relying upon business review forming part of the Directors’ Report of the said company and submitted that all employees of the Investment Advisory business have been transferred to Everstone Investment Advisors Pvt. Ltd. during the year under consideration w.e.f. 01.01.2010. Hence, peculiar economic circumstances were pleaded.
16.4 In the said background, relying upon the various orders of the Co-ordinate Be nches on the said issue, exclusion of the said comparable was directed by the CIT(A).
Page 14 of 36 16.5 On a consideration of facts and position of law as available, we do not find any merit in the arguments of the ld. Sr.DR. Addressing first the argument that the said comparable was included by the assessee initially and hence, should not be excluded, we hold that the argument is flawed, naive and misdirected. At this stage, we are of the view that it is no longer necessary to cite from the CBDT Guidelines/Notifications which have been sufficiently addressed settling the legal principles that the tax authorities should not build their case on the foundation of mistakes and ignorances of the tax payers. Even otherwise, considering the issues how a tax authority in an egalitarian and welfare State should function, we are of the view that mistakes and ignorances of the parties cannot be permitted to be the building blocks on which decisions to justify inclusions/exclusions of comparable should be built. These mistakes on facts/law cannot be used to justify administrative action whenever called forth or questioned before a judicial Forum. The guiding spirit of judicial conscience by which decision making/adjudication should be governed even when judicial mistakes are noticed can be best addressed by making a reference to the oft quoted decision of the Apex Court in the case of Hotel Balaji & Ors.
Page 15 of 36 V s State of A.P. & Ors. AIR 1993 Supreme Court 1048 wh ere th eir Lordships in un equi vocal terms h el d as under :
"12. ...'2. ...To perpetuate an error is no heroism. To rectify it is the compulsion of judicial conscience. In this, we derive comfort and strength from the wise and inspiring words of Justice Bronson in Pierce v. Delameter (A.M.Y. at page 18:
"a Judge ought to be wise enough to know that he is fallible and, therefore, ever ready to learn: great and honest enough to discard all mere pride of opinion and follow truth wherever it may lead: and courageous enough to acknowledge his errors". 16.6 We may also refer to the decision of the Apex Court in the State of Orissa Vs Mamta Mohanty (2011) 3 SCC 436 wherein the Court while referring to the settled legal proposition that Article 14 is not meant to perpetuate illegality and that it also does not envisage negative equality in para 57 thereof reiterated the legal position on the judicial mistakes etc. in pronouncements, the Court holding that to perpetuate an error is no heroism and opining that to rectify it is the compulsion of judicial conscience held :
“This principle also applies to judicial pronouncements. Once the court comes to the conclusion that a wrong order has been passed, it becomes the solemn duty of the court to rectify the mistake rather than perpetuate the same”. 16.7 This oft quoted legal axiom has often been cited by the Apex Court and the Hon'ble High Courts namely that there is no heroism in perpetuating an error and considering not only the compulsions by which a judicial conscience is to be exercised but also adhering to the Page 16 of 36 principles guiding a Judge we find on examining the aforesaid argument of the Revenue advanced repeatedly before the ITAT is obdurate and devoid of merit. The aims and objects by which the welfare state is expe cted to be guided by needs to be always kept in focus and aligning their functioning with these aims is expected from the authorities functioning in the name of the State.
16.8 We, accordingly, strongly repel this banal argument.
We are of the view that no judicial precedent needs to be cited in the face of the plethora of decisions available in the public domain on this issue to hold that inclusion/exclusion of a comparable on incomplete set of facts when shown to be factually and incorrectly included has to be considered judiciously and fairly in a judicial order. The mere fact that a comparable was offered as a good comparable and subsequently pleaded to be incorrectly included has to be considered on facts and evidences. The irrefutable complete facts when finally made available which admittedly were not available in the public domain at the time of accept/reject matrix cannot be blocked on the specious plea that it was self offered. Change of facts is a valid ground which the assessee can well argue on the basis of evidences and supporting facts. The fact of ignorant self inclusion by itself does not act as a bar or stop the assessee from pleading
Page 17 of 36 wrongful inclusion based on cogent and relevant facts. The prayer, if warranted on facts has to be examined and if so warranted has to be allowed. The very inclusion of a comparable shared in good faith but in ignorance cannot act as an estoppel to subsequently seek its exclusion on facts.
16.9 Considering the entire conspectus of facts and circumstances before us which have been appreciated by the jurisdictional High Court also, we hold that the exclusion of Kshitij Investment Advisory Co. Ltd. on the peculiar economic circumstances arising on account of re-structuring and re-alignment of the business with Everstone Investment Advisors and transfer of its employees etc. fully justifies its exclusion on facts. The insistence of the Revenue justifying its inclusion on the grounds that the said comparable was introduced at the early stages by the assessee itself, we hold cannot be a valid justification in the face of unrebutted, irrefutable factual circumstances pleaded and considered.
Accordingly, we find no infirmity in the exclusion of the said comparable.
16.10 We further find support from the decision of the jurisdictional High Court in Eight Roads Investment Advisors P.Ltd. which has been relied upon by the ld. AR and we note that the Revenue in the present proceedings has not cared to distinguish its case from the facts of the said decision.
Page 18 of 36 16.10.1 On a reading of the aforesaid decision, it is seen that in the facts of the said case, the TPO therein had also placed reliance on information sought from the said comparable company u/s 133(6) as is evident from Ground No. 6.7 before the Hon’ble High Court. Considering the law laid down by the Hon’ble Court, we find that similar reasons mandating the exclusion of the said comparable by the ITAT have been upheld by the Court which reasons on facts, we find fully support the present finding. Accordingly, Ground No.1 of the Revenue is dismissed.
Ground No. 3 : Inclusion of IDFC Investment Advisors Ltd. 17. Vide Ground 3, the Revenue seeks inclusion of IDFC Investment Advisors Ltd. where this comparable has been directed to be excluded by the CIT(A).
17.1 The ld. Sr.DR addressing the ground submitted that the First Appellate Authority has incorrectly held the said company to be not a valid comparable. For the said submission, reliance was placed upon para 7.3 page 14-15 of the TPO’s order.
17.2 In the facts of the present case also, as in M/s Kshitij Investment Advisory Co. Ltd. it was submitted that the TPO had sought information from the company u/s 133(6) of the Income Tax Act. Considering the information made available,
Page 19 of 36 it was submitted the TPO noticed that the said company was rendering Investment advisory services and Portfolio Management out of the total earnings of Rs. 13 Cr odd only Rs. 85 lacs was from Portfolio management service s and 96% of this was from the top 10 clients. Thus, it was submitted that it has been incorrectly excluded as fees from PMS was merely 6% of fees collected from the top 10 clients. It is for this purpose, it was submitted that different segmentals were not maintained by the comparable company. This Information sought u/s 133(6) it was submitted has been confronted to the assessee.
17.4 On the basis of these facts, it was submitted the TPO had concluded that the said company is rendering Investment Advisory services and the activities were held to be comparable.
17.5 Accordingly, the objections of the assessee that the segmental information was not available it was submitted, may be ignored as it is not relevant on facts. In the said factual background, it was his prayer that the inclusion of the said comparable may be directed.
The ld. AR reiterated his submissions which remain the same as in ground No. 1 of the Revenue. Herein also, it was submitted that the judicial precedent is available and has Page 20 of 36 been relied upon by the ld. CIT(A). The impugned order on this count also it was argued was fully supported by the decision of the jurisdictional High Court also and no contrary fact or legal precedent has been cited by the Revenue to upset this position. Accordingly, it was his prayer that the ground No. 3 of the Revenue may be dismissed.
We have heard the submissions and seen the record. We note that before the First Appellate Authority also, the assessee reiterated that the said comparable be excluded on the grounds that the company was functionally not comparable.
19.1 This submission has been supported on the argument that it is engaged in Portfolio Management Services and is registered as a Portfolio Manager with SEBI.
19.2 The fact that active exercise was done towards this aim was further submitted by citing before the respective authorities that the said company was running the following schemes during this period:
• IDFC Hybrid Infrastructure Portfolio ("HIP"): The investment objective of HIP is to invest in permitted securities / instruments issued by companies operating in the Infrastructure space, and endeavor to achieve risk adjusted medium to long term capital appreciation. • IDFC Growth Portfolio ("IGP"): This portfolio shall endeavour to invest in companies that are expected to benefit from the consumption boom.
Page 21 of 36 • IDFC Agriculture Opportunities Portfolio ("AOP"): This portfolio shall endeavour to invest in companies that are expected to benefit from agriculture and agri-products related opportunities. • IDFC Farm to Fork Portfolio ("FOFP"): This portfolio shall endeavour to invest in companies that are expected to benefit from the growth in prices of food and food-related products. 19.3 It is further seen that considering the Annual Reports available in the Public domain, it was canvassed that infact the fees from investment advisory services was only about 10%. Following extract of the Report considered by the CIT(A) was relied upon :
19.4 It is further seen the assessee before the CIT(A) addressing the Annual Report of M/s IDFC Inv estment Advi sors Ltd. Further argued for its exclusion highlighting the fact that the ‘advisory fee’ received by it was structured on the basis of net assets of the fund plus performance fee. The assessee, it was submitted, on the other hand’ as per record was compensated on a cost plus basis. Based on these facts, it was argued that the business model of the assessee company vis-a-vis M/s IDFC Inv estment Advisors Ltd. was functionally dissimilar. Considering these facts, it is seen
Page 22 of 36 that the CIT(A) held that the said company would not be an appropriate comparable and consequently directed its exclusion.
19.5 On going through the judicial precedent cited, we find that consistently there is judicial precedent available in favour of the assessee holding that the business model of PMS and non binding Advisory Services are different and not comparable. The functions and activities of a PMS and a non binding advisory service cannot be equated. The fee models of the two are entirely distinguishable. The fees in PMS is structured not only on the basis of AUM (Assets under Management) but it is also benchmarked on performance having different rates for hurdles to be met. In the case of the Advisory Services like the present assessee, it is a matter of fact that it has been compensated on a cost plus basis. Thus, we find that not only the business model of the two companies is `entirely distinguishable and not comparable but even otherwise, it is seen that risks assumed by the two different concerns/businesses are entirely different. The assessee admittedly is risk insulated and a PMS on the contrary by its very nature of activity is exposed to all the market risks on account of market volatility etc.
Hence, the FAR is entirely distinguishable. We have seen that all along consistently considering near identical facts,
Page 23 of 36 there is judicial precedent available at large accepting the fact that similar advisory services rendered to its AE which are non binding cannot be compared to companies having “Advisory Fee” which actually is performance structured. The mere fact that said companies are also calling this fees as “Advisory Fees” cannot be held to determine that the nature of these two different types of re ceipts are identical to the Advisory fees received on a Cost Plus mark up basis by a non binding advisory companies. Simplistic short cuts of blind application of all types of “advisory fees” cannot be lumped together in one category. The nature of functions, assets and risks necessarily have to be looked into impartially. In the facts we have seen that the FAR of the two different businesses are entirely distinguishable. The nomenclature of “advisory fees” used shall not be the sole determinative factor. We find on going through the material available on record that this consistent factual legal distinction has not been controverted by the Revenue by citing any contrary decision or referring to any contrary fact. In the case of M/s IDFC Investment Advisors Ltd. it is seen that number of activities are reported under this one segment and this is a consistent finding available on record in the various orders of the ITAT as well as the aforesaid decision of the jurisdictional High Court.
Page 24 of 36 19.6 Thus, reliance placed by the Revenue in the present proceedings on information obtained u/s 133(6) for the purposes of the present proceedings, we hold is not relevant.
On considering the facts we are of the firm view that the FAR analysis of an assessee rendering non binding services to its AE admittedly compensated on a Cost Plus basis cannot be held to be comparable to a PMS wherein so called “advisory fees” are based on fluctuating AUM and the tone and the tenor of fees generated/earned is set by the performance hurdles etc. settled between the parties. Such a company admittedly is exposed to a higher market risks, economic risks etc. vis-a-vis a company like the present company providing non-binding advisory services which is risk insulated. Thus, we find no infirmity in the order.
19.7 We further note that similar position of law has been affirmed by the jurisdictional High Court in the case of Eight Roads Invest ment Advisors P .Ltd. wherein these very reasons have been considered while adjudicating ground No. 6.3 before them. These facts have set out at length in paras 5.6 and 11.3 of their decision.
19.8 Accordingly, for the detailed reasons given hereinabove, we are of the considered view that the order of the CIT(A) in directing the exclusion of IDFC Investment
Page 25 of 36 Advisors Ltd. is fully justified. The departmental ground No. 3, accordingly, fails on this ground.
Ground No. 2 : Exclusion of IDC (India)Ltd.
The last challenge posed by the Revenue to the direction of inclusion with the prayer for exclusion of IDC (India) Ltd. is posed in ground No. 2 before us.
20.1 Referring to the Ground the Ld. Sr.DR submitted that the order of the CIT(A) in directing the inclusion of IDC (India) Ltd. is challenged by the Revenue as all arguments of the assessee seeking its inclusion stood rejected by the TPO.
It was submitted that citing clear unambiguous reasons, the TPO had rejected the comparable after duly addressing each of assessee's objections.
20.2 Addressing the primary reason for its exclusion by the TPO, it was submitted that the TPO took note of the fact that it was rendering Market Research and Management Consultancy Agency related services and was infact not rendering investment advisory services.
20.3 It was further submitted that the comparable was to be excluded as its Annual Report disclosed ‘nil’ RPT transactions. This disclosure, it was submitted was incorrect and not reliable.
Page 26 of 36 20.4 Further, it was also submitted that the introduction of the said comparable by the assessee was on the basis of search conducted in F.Y. 2011-12 and not on the basis of contemporaneous documentation.
20.5 Accordingly, it was his submission that the said comparable excluded by the TPO may be upheld overturning the findings of the CIT(A).
The ld. AR carrying us through the factual arguments advanced before the CIT(A) also submitted that the very basis for the exclusion of the said comparable namely applicability of RPT was missing. Referring to the record, it was submitted that the TPO had set the RPT filter at 25% and this company admittedly did not clear the RPT filter of the TPO fixed at 25%. Thus the argument that disclosure was incorrect was meaningless. It was submitted that as per the best calculations of the TPO, the same could be stretched to 11.25% or 16.25%. Notwithstanding the assessee's stand that these were arbitrary calculations and incorrect but the debate thereon, even otherwise, it was submitted, was meaningless as the bar fixed by the TPO was 25% hence this exercise has no relevance. It was submitted that even if for a moment without conceding the calculation of the TPO are taken to be correct, even then it does not clear the necessary threshold. For ready reference, our specific
Page 27 of 36 attention was invited to the following facts noticed at page 26 of the impugned order. Same is reproduced hereunder for completeness :
“Further, Appellant also contends that the Ld. TPO had also erred in not giving cognisance to the its contentions in relation to NIL transaction value of the related party transaction ('RPT') appearing in the financials (RPT disclosure). The Ld. TPO incorrectly alleged that the company had entered into a related party transaction by deriving the transaction value considering the difference between the opening and closing outstanding balance of sundry debtors as per the RPT schedule. Based on his analysis, the Ld. TPO considered the derived transaction value for determining the RPT/ Sales ratio of 11.24%. Additionally, the Ld. TPO erred in arriving at the RPT/Sales ratio of 16.25% considering the outstanding sundry debtors as on March 31, 2010 to be the related party transaction value. In this regard, the Appellant contends that it would be inappropriate to disregard audited financials maintained by the company and question the reliability of the same. In the addition to the above and on a without prejudice basis, in any event based on the Ld. TPO's analysis if the RPT/Sales filter of 25% was to be adopted, the aforementioned calculations (i.e. 11.25% or 16.25%), would not exceed the threshold limit set. Having regard to the foregoing submission made by the Appellant and the various decision of the jurisdictional Tribunal, it is observed by me that the activities of Cyber Media are comparable to the activities carried out by the Appellant. Accordingly the Ld. TPO be directed to include it in the final set of comparables.”
21.1 It was also submitted that the contemporaneous date was updated for all the companies.
21.2 Accordingly, it was his prayer that in the face of the consistent judicial precedent in the similarity of functions and the facts on record qua the filter applied wherein admittedly the threshold bar was not met, the impugned order may be upheld dismissing the departmental appeal.
Page 28 of 36 22. We have heard the submissions and perused the material available on record. We, on a consideration of the entire conspectus of facts available on records and in the face of consistent legal precedent in favour of the assessee hold that the departmental ground No. 2 in the absence of any distinguishable fact or position of law also has to be dismissed. The reasons for coming to the said conclusion, we propose to address hereinafter in the following paragraphs.
22.1 It is seen that the ld Sr.DR has sought its exclusion on the grounds that disclosure in the Annual Report for RPT by the said company was shown to be ‘Nil’ and hence, it was held to be an unreliable disclosure. Further, it has been argued that Market Research and Management services were not identical or comparable to Investment Advisory Services.
Apart from that, it has been submitted that contemporaneous data was not relied upon.
22.2 Addressing the objections pose d on the grounds of RPT/Sales Filter it is seen that the Annual Report of the said comparable reflected ‘Nil’ RPT disclosure. It is a fact on record that the TPO fixed the bar at 25%. Thus, whether RPT/Sales ratio was 11.25% or 16.25%, we find ultimately has no relevance or applicable to the issue at hand. The elephant in the room which cannot be ignored needs to be Page 29 of 36 addressed namely the RPT/sales filter was set at 25% and this non-negotiable fundamental bar has not been crossed.
Hence, the whole exercise of seeking its exclusion on the grounds of TPO’s filter itself is a meaningless argument. We have seen that even after the best efforts of the Revenue, the RPT could not be so pulled up or stretched to satisfy the requirement fixed. As in the face of the bar fixed at 25%, the calculations so put forward are a self goal. The calculations consequently become irrelevant in the face of the RPT bar fixed at 25%. At the cost of repetition, the fact remains that even if the Revenue’s arguments are accepted that RPT disclosure as ‘nil’ is incorrect and the best possible calculations made available by the Revenue of RPT of 16.25% is accepted, even then the bar of 25% is still not cleared.
Thus, the argument is a meaningless exercise having no relevance.
22.3 Examining the next departmental objection, we note that apart from the bald argument that Investment Advisory Services are not similar to Market Research Services, no effort has been made by the Revenue to support their case.
On the contrary, we have seen and there is consistent legal precedent available in various orders of the ITAT relied upon by the CIT(A) wherein it has been categorically held that for the purposes of FAR, comparison in the two set of services,
Page 30 of 36 there is a similarity in as much that the fee base is cost plus mark up and thus in the absence of any factual argument to the contrary, we find that the challenge is devoid of merit.
22.4 We find that the orders relied upon fully support the view taken. We have also noted that no contrary view, distinguishing fact or precedent has been cited before us for our consideration.
22.5 The decision of the Hon’ble Bombay High in the case of Eight Roads Investment Advisors P.Ltd. which has been relied upon by the assessee, we have seen also further fortifies our view. Their Lordships have considered therein the facts and reasons as considered by the ITAT extracted by the jurisdictional High Court in para 6.2 and 11.6 while adjudicating upon ground No. 6.10 before the Court. The dismissal of departmental appeal fully clinches the issue in favour of the assessee.
22.6 The allegation that the contemporaneous data has not been relied upon, we have seen, is not borne out from the record. Accordingly, we find that on this ground too, the Revenue fails.
Addressing the grounds raised, we are moved before parting to call for administrative introspective and reflections in the filing of the appeals. In that endeavours,
Page 31 of 36 we deem it appropriate to quote from the aforesaid decision of the jurisdictional High Court in the case of Eight Roads Investment Advisors P.Ltd. (cited supra) wherein in para 10, their Lordships quoted the sage advice rendered by their Lordships of the Karnataka High Court dated 25.06.2018 in of 2015 alongwith ITA No. 537 of 2015 in the case of Principal Commissi oner of Income Tax V s M/s Softbrands India P.Ltd. wherein referring in the perspective of international trade and transactions enumerated in the Special Provisions relating to Avoidance of Tax in Chapt er X of t he Income Tax Act in Sections 92 to 94-B with regard to assessment to be done for computation of income from international transactions on the principles of 'Arm's Length Price' extracted para 3 to 6 from the said decision highlighted the “ever increasing international trade and transactions particularly in the Sof tware Industries. Noting that “Bangalore being the Silicon Valley of India. Where many big, small and medium industries had their office, Bangalore is a hub of this service Industry and essentially the Indian companies have business linkages with large companies spread world wide….. In the said backdrop, the Court felt the need and the necessity to point out that ;
“5……The implementation of the Tax laws in this field in a smooth, clear and quick manner is of utmost importance to build an image of an efficient Tax Administration both at Departmental level and in Judicial Courts so Page 32 of 36 that the economic activity in such borderless trade thrives and enures to the benefit of the Indian economy at large and Software Industry in particular. (emphasis supplied)
23.1 These salutary words of wisdom and import quoted by the jurisdictional High Court, we are of the view, should be given due consideration and reflection at the administrative level. The need and necessity of urgently aligning the tax administration towards greater efficiency and certainty we believe, cannot be deferred any longer. Time has come to heed the greater judicial wisdom of their Lordships on a priority basis more so by an economy raring to be a 5 trillion economy. We are in respectful agreement with the higher judicial view expressed. Filing of appeals on issues which have consistent legal precedence available sends out a message of mindless administrative obduracy striking at the very foundation of certainty and finality. We may also draw strength from para 54 of the aforesaid decision of the Hon'ble Karnataka High Court in the case of M/s Sof tbrands India Pvt. Ltd. ( cited supra) extracted by the jurisdictional High Court in para 21. Their Lordships taking note of t he procedure of assessment under Chapter X relati ng to international transactions noticed that:
“54…….A huge, cumbersome and tenacious exercise of Transfer Pricing Analysis has to be undertaken by the Corporate Entities who have to comply with the various provisions of the Act and Rules with a huge Data Bank and in the first instance they have to satisfy that the profits or the income from transactions
Page 33 of 36 declared by them is at Arm's length' which analysis is invariably put to test and inquiry by the Authorities of the Department and through the process of Transfer Pricing Officer (TPO) and Dispute Resolution Panel (DRP) and the Tribunal at various stages, the assessee has a cumbersome task of compliance and it has to satisfy the Authorities that what has been declared by them is true and fair disclosure and much of the Transfer Pricing Adjustments is not required but, the Tax Authorities have their own view on the other side and the effort on the part of the Tax Revenue Authorities is always to extract more and more revenue…….” (emphasis supplied) 23.2 These observations made on the strength of their years of experience and wisdom, to our minds should call for serious introspection and reflection while filing appeals.
Their Lordships further noticed that this process of making huge Transf er Pricing Adjustments results i n multi- layer litigation at multiple F ora. They have judicially noticed that after the lengthy process of the same, the matter reaches the Tribunal which al so takes its own time to decide such app eal s. The Court noticed that in the course of this disp ute resoluti on, much has already been lost in the form of time, man-hours and money, besides giving an adverse picture of the sluggish Dispute Resol ution p rocess through these channels. To our minds, these pearls of wisdom quoted by the jurisdictional High Court from the decision of the Karnataka High Court are valuable words borne out from the ocean of experience available with the two Hon'ble High Courts and should not be allowed to be lost in vain.
Ex ecut ive/administrative notice of these judicial observations must necessarily be undertak en. Especially, so by an economy aiming t o reach a 5 trillion bar. We again
Page 34 of 36 quoting from the same para, the words of advice rendered by the Hon'ble Karnataka High Court and reiterated by the jurisdictional High Court in the matter of filing of appeals after highlighting the sage judicial advice leave the issue for consideration for the appropriate authorities. Their Lordships in the said para further deemed it necessary to note “if appeals under Section 260-A of the Act were to be lightly entertained by High Court against the findings of the Tribunal, without putti ng it to a strict scrutiny of the ex istence of the substantial questions of law, it is likely to open the flood-gates for this litigation to spill over on the dockets of the High Courts and up to the Supreme Court, where such further delay may further cause serious damage to the demand of expeditious judicial dispensation in such cases.”
On giving our serious consideration to the issues agitated by the Revenue in the present appeal, we find that the level of scrutiny expected to have been given in the filing of the appeals possibly still needs to be fine tuned and brought up to mark so as to align with the aims of a developing economy raring to enter the 5 trillion dollar space. The legal precedent available on the following issues agitated by the Revenue in the present appeal needs serious consideration;
Page 35 of 36 a) there is no estoppell for seeking exclusion of self proposed comparable offered as a good comparable at the early stages when subsequent irrefutable facts and evidences demonstrate that the said comparable was to be excluded; b) Similarly in the face of settled legal precedent without controverting facts that the two different fees based models wherein one was compensated on a cost plus mark up and the other was rewarded on performances linked to hurdle rates and fluctuating AUM, the filing of appeal becomes an exercise in futility as the foundational facts remain uncontroverted and the legal precedent on the issue stands consistently in favour of the assessee; c) where differences in FAR remain uncontroverted, the functions, asset and risks of the two business models has repeatedly been held to be not comparable for a merchant banking company/PMS concern vis-à-vis non binding investment advisory to AEs, the filing of appeal similarly is a wasted exercise; d) where exclusion of a comparable on account of prevalence of unique economic peculiarities on account of amalgamation restructuring, re-aligning of businesses like absorption of the employee infrastructures etc. with the new company as has been pleaded on facts and considered judicially becomes a binding legal precedent, these facts have repeatedly been given judicial recognition in as much as that on account of these factors for the specific assessment year under consideration, the comparable admittedly was considered dissimilar and incapable of being considered as a valid comparable. Filing of appeal without any distinction on facts becomes a mechanical exercise.
Page 36 of 36 25. In the above factual background and available legal precedent, it is our considered opinion that in the matter of filing appeals, serious consideration at the administrative level is required to be undertaken.
Accordingly, the appeal of the Revenue is dismisse d.
The said order was pronounced on 17.02.2022.