PARI WASHINGTON COMPANY ADVISORS PRIVATE LIMITED,CHENNAI vs. DCIT, CHENNAI

This appeal of the assessee is directed against the assessment order dated 27.12.2016, passed consequent to the direction of the DRP under Section 144C(5) of the Income-tax Act, 1961 (in short 'the Act') for the assessment year 2012-13.

Shri Raghunathan Sampath, the Ld.counsel for the assessee, submitted that the assessee is engaged in the business of non-binding investment advisory services to its Associated Enterprise at Mauritius. According to the Ld. counsel, the assessee received more than 90% of its remuneration from such advisory services. The Transfer Pricing Officer admitted that it is a non- binding advisory services with regard to Indian securities.

Referring to the direction of DRP, the Ld. counsel for the assessee submitted that the DRP admitted that if the assessee is providing only non-binding services, the case laws relied on by the assessee are squarely applicable. However, according to the Ld. counsel, the DRP found that the assessee has not furnished the details of non-binding advisory services provided to its Associated Enterprise, therefore, the DRP on ad hoc basis adopted the profit at 26.58%. For adopting 26.58%, the DRP took the profit of merchant banker at 41.58%. The Ld.counsel further submitted that merchant banking company cannot be compared with the services of the assessee. The assessee is not holding any investment. The business of the assessee is only to provide non-binding advisory service to its Associated Enterprise. According to the Ld. counsel, in the case of merchant banking, they are holding investment, therefore, the DRP cannot take 41.58% for determining arm's length price as in the case of merchant banker. Apart from that, according to the Ld. counsel, the DRP has also, on ad hoc basis, found that the mutual funds normally give annual yield of 10-12% and by giving further margin of 3% in investment, the deduction was given at 15% and the balance 26.58% was considered to advisory services.

Referring to the direction of DRP, the Ld.counsel for the assessee submitted that the DRP itself found that 41.58% ALP margin adopted in merchant banking cannot be adopted to the service rendered by the assessee which is an advisory character.

On the contrary, Smt. T.H. Vijayalakshmi, the Ld. Departmental Representative, submitted that there was difference between the study made by the TPO and the assessee. According to the Ld. D.R., the claim of the assessee that it is providing only non-binding advisory service is not substantiated by necessary material. Referring to the direction of the DRP, more particularly para 2.20.7, the Ld. D.R. submitted that the DRP found that the assessee is providing advice to its Associated Enterprise at Mauritius which is investing in the capital. Therefore, according to the Ld. D.R., comparing the activity of the assessee and with that of its Associated Enterprise was in the nature of investment banker, hence, the TPO as well as the DRP have selected the comparable companies which are engaged in the investment banking and segregation was made with regard to advisory services. Therefore, according to the Ld. D.R., it is not correct to say that the DRP made transfer pricing adjustment on ad hoc basis without comparing the available data. According to the Ld. D.R., the data was not provided by the assessee, therefore, the DRP has taken the available data on record.

We have considered the rival submissions on either side and perused the relevant material available on record. A bare reading of the order of the TPO and the direction of the DRP shows that the assessee is providing advisory service to its Associated Enterprise which is in the business of investment. In other words, the Associated Enterprise at Mauritius is making investments in Indian securities after considering the advice rendered by the assessee- company. The assessee-company is only rendering its advice after analyzing the market / economic scenario in India. The Associated Enterprise at Mauritius takes decision after considering the advice rendered by the assessee-company whether to invest in securities or not. These facts are not in dispute. Therefore, this Tribunal is of the considered opinion that the service of the assessee-company is non-binding advisory service. For the purpose of analyzing or providing advisory services, the assessee-company has to necessarily scrutinize the financials and other relevant material of the respective companies before offering its advice to its Associated Enterprise. Similarly, the investing company also analyzes the financials of the respective companies before making any decision to invest in the securities of those particular companies. In the case of the assessee-company, after making analysis, its activity ends immediately after providing its advice to its Associated Enterprise.

If the Associated Enterprise decides to make investment, then they are making investment after taking a risk. There is a distinction between the activity carried on by the investment manager and the company which is offering advisory services. In the case of the company, which is offering advisory service, it does not take any risk. It simply renders its advisory service. However, the investment manager is taking entire risk in making investment.

Under the scheme of transfer pricing, the adjustment has to be made after comparing the transaction of similarly placed companies in respect of similar business. Therefore, we are unable to uphold the adjustment made by the DRP on ad hoc basis with regard to mutual funds. Accordingly, the orders of the lower authorities are set aside and the entire issue is remitted back to the file of the Assessing Officer. The Assessing Officer shall refer the matter once again to the TPO. The TPO shall re-examine the matter afresh in the light of the material / data available on record.

In the result, the appeal filed by the assessee is allowed for statistical purposes.