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Income Tax Appellate Tribunal, MUMBAI BENCH “K”, MUMBAI
Before: SHRI C.N. PRASAD, HONBLE & SHRI G. MANJUNATHA, HONBLE
O R D E R PER C.N. PRASAD (JM) 1. This appeal is filed by the assessee against the order of the Dispute Resolution Panel–II, Mumbai [hereinafter for short “DRP”] dated 29.11.2013 for the A.Y. 2009-10.
Assessee has raised the following grounds in its appeal: - “1. The learned AO and Honourable DRP failed to appreciate that the arm's length price (ALP) as determined by the Appellant should have been accepted, as the jurisdictional pre-condition in section 92C(3) of the Act before the learned 2 IT(TP)A NO.1292/MUM/2014 (A.Y: 2009-10) M/s. 3i India Private Limited transfer pricing officer could proceed to determine the ALP was not fulfilled in its case.
2. The learned AO, based on the directions of the Honourable DRP, erred on facts and in law, in making an upward adjustment of Rs 55,191,720 in determining the ALP of the international transaction of investment advisory services rendered by the Appellant, on the following grounds: 2.1 In rejecting the comparable companies, namely Access India Advisors Limited, ICRA Management Consulting Services Limited and Kinetic Trust Limited, selected by the Appellant in the transfer pricing documentation to benchmark the international transaction of provision of investment advisory services to its AE; 2.2 In rejecting the use of contemporaneous and multiple year data available for computing the arm's length price as on the date of filing the return of income and in relying only on the single year data (i.e. for the year ended 31 March 2009) for the purpose of determining the ALP; and 2.3. Without prejudice to the grounds 1, 2.1 and 2.2 above, the learned AO erred in computing the ALP without considering the ±5 percent variation from the ALP as permitted to the Appellant under the provisions of section 92C(2)of the Act.”
At the outset, Ld. Counsel for the assessee submits that both the Transfer Pricing Officer [for short “TPO”] and the DRP have rejected the comparable companies namely Access India Advisors Limited, ICRA Management Consulting Services Limited and Kinetic Trust Limited selected by the assessee in the transfer pricing documentation for benchmarking the international transactions of provision of non-binding investment advisory services to its Associate Enterprises [for short “AE”]. Ld. Counsel for the assessee submits that in assessee’s own case in ITA.No. 581/Mum/2015 dated 16.09.2016 for the A.Y. 2010-11 the Tribunal directed the TPO to include ICRA Management Consulting 3 IT(TP)A NO.1292/MUM/2014 (A.Y: 2009-10) M/s. 3i India Private Limited Services Limited and Kinetic Trust Limited as comparable companies for the purposes of benchmarking the international transactions for provision of non-binding investment advisory services to its AE. Therefore, it is submitted since the Tribunal had already in assessee’s own case directed to include ICRA Management Consulting Services Limited and Kinetic Trust Limited as comparable companies the same direction may be given for the A.Y. 2009-10. Ld. Counsel for the assessee further submits that the then DRP in the directions for the A.Y. 2010-11 also pointed out that the position for rejection of ICRA Management Consulting Services Limited remains the same for the A.Y.2010-11 as was in A.Y. 2009-10. Similarly, from the DRP’s directions for A.Y. 2009-10 and A.Y. 2010-11 it is clear that the reason for rejection of Kinetic Trust Limited has remained same for both the years, there is no change in the facts. It is further submitted that if these two comparables are included the Arithmetic mean of the comparable companies falls within the ± 5% variation and thus the international transactions for provision of non-binding investment advisory services can be considered to be at arm’s length.
Ld. DR vehemently supported the orders of the authorities below.
We have heard the rival submissions and perused the orders of the authorities below. On a perusal of the decision of the Tribunal for the 4 IT(TP)A NO.1292/MUM/2014 (A.Y: 2009-10) M/s. 3i India Private Limited A.Y. 2010-11 in dated 16.09.2016 we find that the Tribunal held as under: - “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 has been further rejected by DRP, leading to set of only 3 comparable companies, the arithmetic mean of which was arrived at 55.06% as against the assessee’s operating margin of 20%. The comparables selected by the assessee, TPO and DRP are illustrated in the following manner:- S Particulars Assessee’s TPO’s DRP’ No Set Set Set 1 Access India Advisors Ltd NC NC NC 2 Future Capital Investment 15.71% 15.71% X Advisory Ltd. 3 ICRA Online Ltd. 41.77% 43.43% 41.77% 4 ICRA Management Consulting 0.41% X X Services Ltd 5 IDC (India) Ltd. 13.00% 13.00% Rejected 6 Informed Technologies Limited 25.52% 25.52% 25.52% 7 Integrated Capital Services Ltd. -2.52% X X 8 , Kinetic Trust Limited 10.39% X X 9 Future Capital Holdings Limited 29 .48% Rejected 10 Motilal Oswal Investment Advisors 97.89% 97.89% Pvt. Ltd. Arithmetic mean 14.84% 37.51% 55.06% Applicant's operating margin 20.00% 20.00% 20.00% Before us, the assessee has finally contested the following comparables for inclusion and exclusion:- i. ICRA Management Consulting Services Ltd- for inclusion ii. IDC (India) Ltd. - for inclusion iii. Kinetic Trust Limited - for inclusion iv. Integrated Capital Services Ltd.- for inclusion v. Motilal Oswal Investment Advisors Pvt. Ltd.- for exclusion vi. Future Capital Holdings Ltd. –For inclusion
In support of the exclusion and inclusion of these comparables Ld. Counsel has heavily relied upon the decision in the case of Temasek Holdings Advisors India P Ltd. (supra) rendered on exactly similar set of facts and host of other decisions. We find that, in the said case the Tribunal in its decision while considering similar functions of an entity rendering non-binding investment advisory services has dealt with similar set of comparables in detail after 5 IT(TP)A NO.1292/MUM/2014 (A.Y: 2009-10) M/s. 3i India Private Limited considering the various gamuts of arguments and also the annual report of the comparable companies relevant for the AY 2010-11. The relevant observation and finding of the Tribunal on these comparables are reproduced hereunder: - ICRA Management Consulting Services Limited:
“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 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 infrastructure, energy sector, banking and financial services and advising cross border M&A transaction etc. Some other observation made by the TPO is that ICRA has participated in various international forums, partnered with foreign company in multiple projects and has a very big client base unlike assessee. However all these facts do not affect the core competency and functions of the said company, which is advisory, because in all the fields it is rendering only advisory and consultancy services. The whole revenue is again from consultancy/advisory fees. In the instant case also, the assessee 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 6 IT(TP)A NO.1292/MUM/2014 (A.Y: 2009-10) M/s. 3i India Private Limited 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 years the Tribunal in AY 2008-09 & 2009-10 has held ICRA Management to be good comparable qua the functions of the assessee 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. 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 done at the threshold level only, i.e. at the time of search process and by applying quantitative filter. However, once turnover filter has not been applied then comparability has to be done at qualitative level based on FAR Analysis. If on FAR analysis there are differences on account of either assets deployed and risk assumed materially affecting costs or margins then probably such comparability can be rejected. But here in this 7 IT(TP)A NO.1292/MUM/2014 (A.Y: 2009-10) M/s. 3i India Private Limited case, merely on the ground that it has a low turnover cannot be the reason or criteria for rejection. Moreover, from the perusal of the decision of Triolgy E. Business India Pvt 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 India Pvt. Ltd vs. Addl. CIT (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 party. 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 consistency, we hold that Kinetic Trust Ltd. should be included in the comparability list. IDC India Ltd:- 22. This comparable though accepted by the TPO as a good comparable, however, the DRP has additionally rejected this comparable. In assessment year 2008-09, the Tribunal has held to be a good comparable, firstly, on the ground that this company is also engaged in the advisory and consultancy services for the purpose of investment made in various sectors and secondly, it has been found to be good comparable by the TPO in the assessment year 2007-08 and 2009-10. Once company has been held to be good comparable consistently 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 8 IT(TP)A NO.1292/MUM/2014 (A.Y: 2009-10) M/s. 3i India Private Limited 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, 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 four different business verticals, i.e. Equity capital markets, merger and acquisitions, profit equity syndications and structured debt. It also give advises on cross border acquisition. Its core competence is in the field of merchant banking. It also provides comprehensive investment banking solutions and transaction expertise covering private placement of equity, debt and convertible instruments in international and domestic capital markets, monitoring mergers and acquisitions and advising M&A as professional and restructuring advisory and implementations. It is also involved in various professional 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 the 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 functions are entirely different from investment advisory services and this decision of the Tribunal has been upheld by the Hon’ble Bombay High Court. Thus, in view of plethora of judicial decisions as referred to by Ld. Counsel and in view of functional differences as discussed as above, we hold that 9 IT(TP)A NO.1292/MUM/2014 (A.Y: 2009-10) M/s. 3i India Private Limited Motilal Oswal cannot 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 dispute will apply here in this case also, because there is not much difference in the function performed. It has also been pointed out that, these comparable companies have also been dealt in several other decisions while analyzing the functions of the companies rendering investment advisory services, the copy of which was filed separately by the Ld. Counsel. Since we have already taken note of the aforesaid decision, therefore, we are not analyzing the other decisions.
In view of the aforesaid finding and following the aforesaid decision, we hold as under: (i) ICRA Management Consultancy Services Ltd is directed to be included in the comparability list; (ii) Kinetic Trust Ltd. should be included as comparable (iii) IDC India Ltd. should be included as comparable; (iv) Future Capital Investment Advisors should be included; and lastly; (v) Motilal Oswal Investment Advisors Ltd. is directed to be excluded. Accordingly, the TPO is directed to benchmark the assessee’s margin with final list of comparable companies and if they are within the range of ± 5%, then the entire adjustment should be deleted. In view of our finding, we are not separately adjudicating the various grounds of appeal.”
10 IT(TP)A NO.1292/MUM/2014 (A.Y: 2009-10) M/s. 3i India Private Limited 6. Respectfully following the above decision, we direct the TPO to benchmark the assessee margin with the final list of comparable companies by including ICRA Management Consulting Services Limited and Kinetic Trust Limited in the final list of comparable companies and if it is found that they are within the range of ±5% the entire adjustment should be deleted.
In the result, appeal of the assessee is allowed as indicated above.