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PER PAWAN SINGH, JUDICIAL MEMBER; 1. The appeal by assessee is directed against the order dated 27.01.2017 passed under section 143(3) r/w section 144C(13) of the Income Tax Mum 2017-Eight Roads Investments Pvt. Ltd. Act, 1961 (for short "the Act") for the assessment year 2012–13, passed in pursuance of direction of the Dispute Resolution, Panel-1 (DRP)
Mumbai dated 29.11.2016.
Brief facts are, the assessee a wholly owned Indian subsidiary of FIL Capital Management (Mauritius) Ltd. (FIL, Mauritius), engaged in providing non–binding investment advisory services to its overseas Associate Enterprises (A.E). The assessee also provides non-binding investment advisory services to its A.E., therefore, it is a risk mitigated entity. For the assessment year under consideration, the assessee entered into international transaction of non–binding investment advisory services with its A.E. and earned revenue of Rs. 26.58 crore. The assessee while filing return of income for the year under consideration reported international transaction with its AE. The assessee also furnished its transfer pricing report as required under the Income –tax Act. For bench marking the transaction, the assessee undertook a study by adopting Transaction Net Margin Method (TNMM) as most appropriate method with OP/OC as the Profit level indicator ( PLI). By considering itself as the tested party, the assessee undertook a search process in the data bases and identified following four comparables with average arithmetic mean of 8.82% on the basis of three year data. The Assessing Officer referred the matter to the TPO for determination of ALP of International Transaction. For benchmarking the International 2 Mum 2017-Eight Roads Investments Pvt. Ltd. Transaction, the assessee adopted TNM as most appropriate method, operating profit/operating cost was considered as profit level indicator and assessee company has taken tested party. The assessee has selected four comparable company having Arithmetic mean of three year average weighted margin of 8.82% in the following manner:
Sl.No. Name of comparable Three Single year years margin average OP/OC (FY- OP/OC 11-12) 1 Cyber Media Research Centre 9.85% -30.51% (Formerly IDC (India) Ltd. 2 ICRA Management Consulting 1.93% 6.95% Services 3 Informed Technology (India) Ltd. 17.28% 8.26% 4 Integrated Capital Services Ltd. 0.95% -1.98% Average 8.82% -4.32%
The TPO rejected all comparables of the assessee and selected/included Ladderup Corporate Advisory Pvt. Ltd. as comparable company whose OP/OC is 38.38% and accordingly, the TPO suggested the computation in the following manner:
Amount A. Operating Cost 247,253,988 B. ALP OP/OC Margin 38.38% C. ALP operating Profit (AxB) 94,896,081 D. ALP value of international transaction 342,150,069 (A+C) E. Actual value of international transaction 265,846,613 F. TP adjustment (d-e) 76,303,456
The TPO vide order dated 29.01.2016 worked out the adjustment of Rs. 7,63,03,456/-. On receipt of order of TPO, the Assessing Officer passed Mum 2017-Eight Roads Investments Pvt. Ltd. the draft assessment order proposing the aforesaid addition to the return income. The assessee exercised its option to file objection before the DRP. The objection of assessee was rejected by DRP vide direction dated 29.11.2016. In term of direction of DRP, the Assessing Officer passed the final assessment order dated 27.01.2017. Aggrieved by the additions in the assessment order, the assessee has filed the present appeal before us.
The assessee has raised the following grounds of appeal:
“Aggrieved by the order passed by the Assistant Commissioner of Income Tax, Circle - 6(2)(2), Mumbai [hereinafter referred to as the 'learned AO'], and based on the facts and circumstances of the case, Eight Roads Investment Advisors Private Limited [hereinafter referred to as 'the Appellant'] respectfully craves leave to prefer an appeal under section 253 of the Income- Tax Act, 1961 ('Act') in pursuance of the directions issued by Honorable Dispute Resolution Panel - I (,DRP'), thereby increasing the total taxable income of the Appellant to Rs 10,04,08,350 as against the total income reported in the return of income filed by the Appellant of Rs 2,39,74,420. Ground 1 That on the facts and in the circumstances of the case and in law, the learned AO, based on the directions of the Hon'ble DRP, erred in re-computing the arm's length price of the international transaction undertaken by the Appellant relating to non-binding investment advisory and related services and enhancing the cost plus mark-up from 18.26% to 38.38% as a result of rejection of com parables identified by the Appellant and including an additional comparable. Ground 2 That on the facts and in the circumstances of the case and in law, the learned AO, based on the directions of the Hon'ble DRP, erred in making an upward transfer pricing adjustment of Rs 7,63,03,456 in determining the arm's length price of the international transaction undertaken by the Appellant relating to provision of non-binding investment advisory and related services on account of the following: a) Rejecting the economic analysis undertaken and documentation maintained by the Assessee and all the companies selected as comparables by the Assessee in the transfer pricing documentation; Mum 2017-Eight Roads Investments Pvt. Ltd. b) Identifying Ladderup Corporate Advisory Private Limited (Ladderup) as an additional comparable from the search process conducted by the Assessee without considering the fact that Ladderup has earned revenues from rendering services in the nature of investment/merchant banking services; c) Rejecting the use of contemporaneous and multiple year data available for computing the ALP as on the date of filing of return of income and relying only on the single year data (i.e. for the year ended 31 March 2012) for the purpose of determining the ALP; and d) Not granting the Appellant the benefit of working capital adjustment and adjustment for difference in risk profile. The Appellant craves leave to add, alter, vary, omit, substitute or amend any or all of the above grounds of appeal
, at any time before or at, the time of the appeal, so as to enable the Hon'ble Income -Tax Appellate Tribunal to decide this appeal according to law.
6. We have heard the submission of ld. AR of the assessee and ld. DR for the revenue and perused the material available on record. The ld. AR of the assessee submits that he has two fold submissions, firstly that Ladderup Corporation Advisory Pvt. Ltd. (Ladderup) was wrongly included as a comparable and the same is not functionally comparable with the assessee. Secondly, the comparable company selected by assessee were wrongly excluded by TPO/confirmed by DRP. For inclusion of comparable selected by assessee, the ld. AR of the assessee submits that three of the comparable i.e. ICRA Management Consulting Services Limited, IDC (India) Limited and Informed Technologies Limited were held to be comparable with the assessee-company in assessee’s own case for A.Y. 2010-11 in dated 25.10.2016. The ld. AR of the assessee filed the copy of decision of Tribunal. For Ladderup, the ld. AR submits that even if this ITA No. 1415 Mum 2017-Eight Roads Investments Pvt. Ltd. comparable is retain and three comparable namely ICRA Management Consulting Services Limited, IDC (India) Limited and Informed Technologies Limited are included in final set of comparable, the average margin would be within tolerance range.
On the other hand, the ld. DR for the revenue supported the order of lower authorities. The ld. DR further submits that the TPO and the ld. DRP has given a cogent reasoning while excluding the comparable selected by assessee.
We have considered the submission of the parties and perused the material available on record. We have noted that there is no dispute about the selection of most appropriate method for bench marking of international transaction. Further there is no dispute for the calculation of assessee’s operating margin. The narrow dispute about the set of comparable and the determination of their margin. On the basis of single year margin, the assessee has arrived on average arithmetic mean of – 4.32% of four comparable selected by assessee. The ld. TPO rejected all the comparable of the assessee and adopted Ladderup whose margin is at 38.38%. We have noted that on same set of fact in assessee’s appeal for A.Y. 2010-11 in ITA No. 7403/Mum/2014 dated 25.10.2016, ICRA Management Consultancy Services Ltd. Informed Technology and IDC (India) Ltd. were held to be a good comparable. The relevant ITA No. 1415 Mum 2017-Eight Roads Investments Pvt. Ltd. part of the finding of Tribunal in respect of various comparable is extracted below:
(A) ICRA Management Consultancy Services Ltd.
We have considered the submissions of the parties and perused the material available on record in the light of the decisions relied upon. From the documentary evidences brought on record by the assessee, we have observed that the assessee is also providing non–binding investment advisory service in various sectors such as infrastructure, retail, telecommunication and networking equipment, health care, financial intermediaries, design and engineering related to infrastructure, media and communication. Thus, as could be seen, though, the service provided by the assessee covers the wide spectrum of activities, however, the nature of service is virtually one viz. advisory services. The same is the case with the comparable. Though, it is alleged by the learned Departmental Representative, the comparable is providing service through various sectors, however, the nature of service is advisory. We have also noted that absolutely similar argument was advanced by the learned Departmental Representative in relation to this comparable in case of Temasec Holdings Advisors India Pvt. Ltd. (supra) in A.Y. 2010–11. The Tribunal, after considering the submissions of the learned Departmental Representative and also the proposition advanced by him in relation to the principles of res judicata and the decision of Kalpetta Estates Ltd. (supra) relied upon by him in this regard, ultimately treated this company as a good comparable observing as under:– “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 7 Mum 2017-Eight Roads Investments Pvt. Ltd.
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 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-à-vis the functions performed by ICRA. Hence on functional level it is a good comparable. As stated earlier, in the earlier years, the Transfer Pricing Officer 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.”
Again, in the case AGM India Advisor Pvt. Ltd. (supra), the Tribunal, after considering almost similar argument of the learned Departmental Representative, followed the decision in Temasec Holdings Advisors India Mum 2017-Eight Roads Investments Pvt. Ltd.
Pvt. Ltd. (supra) upholding the company as a comparable. While doing so, the bench also took note of the decision relied upon by the learned Departmental Representative which were also cited before us. Undisputedly, the aforesaid decisions of the co–ordinate bench are for the very same assessment year i.e., assessment year 2010–11. Therefore, respectfully following the aforesaid decisions of the co–ordinate bench, we include this company as a comparable. B. IDC (India) Ltd.
We have considered the submissions of the parties and perused the material available on record in the light of the decisions relied upon. On a perusal of the information available in the website and annual report of the company, we have noted that it is primarily engaged in the business of market research and management consultancy. Therefore, the contention of the learned Departmental Representative that it is a product company may not be correct. Further, we have noted that in case of Temasec Holdings Advisors India Pvt. Ltd. (supra), the very same argument of IDC India Ltd. being a product company and provides go to market service was advanced by the learned Departmental Representative. However, rejecting such contentions of the learned Departmental Representative, Tribunal included this company as a comparable holding as under:– “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 Mum 2017-Eight Roads Investments Pvt. Ltd.
company is a good comparable with the companies rendering investment advisory services. This decision of the Carlyle Advisors have also upheld by the Hon’ble Bombay High Court. Moreover, we have already discussed the functions performed by the IDC India Ltd while dealing with Ld. Counsel’s argument that functions of advisory services are quite similar to the functions of the assessee and, therefore, we accept the assessee’s contention that this comparable cannot be rejected. Accordingly, same is directed to be included in the comparability list.”
In case of AGM India Advisors Pvt. Ltd. (supra), the co–ordinate bench after considering the very same argument advanced by the learned Departmental Representative and following the decision rendered in Temasec Holdings Advisors India Pvt. Ltd. (supra), held that the company is a good comparable. While doing so, the Tribunal had given a categorical finding that IDC India Ltd. is not a product company. Since the aforesaid decisions of the Tribunal are for the very same assessment year, they will squarely apply to the facts of the present case. Moreover, we have noted the fact that in assessee’s own case for the assessment year 2009–10, this company has been accepted as a comparable by the Transfer Pricing Officer / DRP. That being the case, we do not see any justifiable reason for excluding this company. As far as the decision rendered in case of Tevapharm Pvt. Ltd. (supra), after carefully reading the said order, we have noted that nowhere the Tribunal has held that IDC India Ltd. is a product company. On the contrary, it was excluded since the Tribunal found it functionally dissimilar to that assessee. The decision of Actis Advisors Pvt. Ltd. (supra) is also factually distinguishable, hence, would not be apply. Therefore, respectfully following the decisions of the Co–ordinate Bench of the Tribunal referred to above, we hold that IDC India Ltd. is a comparable to the assessee. C. Informed Technologies Ltd.
We have considered the submissions of the parties and perused the material available on record in the light of the decisions relied upon. On a perusal of the material on record, we have noted that this company is basically engaged Mum 2017-Eight Roads Investments Pvt. Ltd.
in providing data management service to the financial sector. Considering the aforesaid fact, the Tribunal in Temasek Holdings Advisors (I) Pvt. Ltd. (supra), while including the company as a comparable has observed as under:– “(v) Informed Technologies Ltd. This company mostly offers range of data management services to the financial sector in USA. It collects and analyses data of financial fundamentals, corporate governance and capital market. It outsource services i.e., BPO services consisting of financial data base and back office activities for research and advisory reports. Thus, the data outsourcing charges are mostly related to analysing of data based on which advise is given for the investment purpose in India. Moreover, this company has been accepted by the TPO in the year 2009–10. Thus, it is a good comparable.”
We do not find any material difference between the facts in assessee’s case and in case of Temasek Holdings Advisors (I) Pvt. Ltd. (supra) on the basis of which the Tribunal included it as a comparable. Moreover, there is no dispute that the Transfer Pricing Officer has accepted this company as a comparable in assessee’s own case for assessment year 2009–10. That being the case, in our considered opinion, the company should be treated as comparable to the assessee.
In view of the aforesaid discussion, wherein in assessee’s own case ICRA Management Consulting Services Ltd., IDC (India) Ltd. and Informed Technologies Ltd. were considered to be a comparable company, therefore, in our view all three comparable should be treated as comparable to the assessee. Therefore, following the rule of consistency, we direct the Assessing Officer/TPO to include the above three comparable as comparable and to determine ALP afresh as per the observation made hereinabove. For exclusion of Ladderup, the ld. AR Mum 2017-Eight Roads Investments Pvt. Ltd. has not seriously pressed, therefore, the ground related to exclusion thereof is treated as not pressed.
In the result, appeal of the assessee is allowed.
S.A. No. 564/Mum/2018
As we have allowed the appeal of assessee, therefore, the S.A. filed by assessee has become infructuous.
Order pronounced in the open court on 11/09/2019.