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Income Tax Appellate Tribunal, K Bench, Mumbai
Before: Shri Jason P. Boaz & Shri Sandeep Gosain
This appeal by the assessee is directed against the order of the CIT(A)- 15, Mumbai dated 31.10.2014 for A.Y. 2010-11.
The facts of the case, briefly, are as under: - 2.1 The assessee, a company engaged in the business of providing investment advisory services, filed its return of income for A.Y. 2010-11 declaring income of `70,19,150/-. The return of income was processed under section 143(1) of the Income Tax Act, 1961 (in short 'the Act') and the case was taken up for scrutiny. In the course of assessment proceedings, the Assessing Officer (AO) observed from the T.P. study for the year under consideration, that the assessee earns remuneration of cost plus 15% mark up for provision of investment advisory services, inter alia, to its parent company, Siguler Guff Global LLC.
M/s. Siguler Guff India Advisors P. Ltd. 2.2 The AO observed that the assessee in its T.P. study has adopted TNMM as the most appropriate method (MAM) and selected the following comparables for justification of the arms length price (ALP) of its international transactions with its associated enterprises (AE): -
Weighted Average Operating Margin on Sr. Name of the Company operating Costs (%) No. 2010 1 Future Capital Holding Ltd. 5.52 2 Future Capital Investment Advisors 20.35 Ltd. 3 ICRA Management Consulting 0.71 Services Ltd. 4 ICRA Online Limited 32.89 5 IDC India Limited 12.72 6 Informed Technologies Limited 11.62 Arithmetic Mean 13.97 The assessee’s margin @15% being higher than those of the comparable at 13.97%, it assumed its international transactions were at arms length. 2.3 The AO on examination of the assessee’s T.P. study was of the view that the comparability analysis was deficient on certain counts and issued a show cause notice to the assessee calling for certain details, inter alia, regarding the choice of comparables adopted by it. After considering the submissions of the assessee, the AO adopted the following three comparables, thereby rejecting all comparables adopted by the assessee except one and including two new comparables chosen by him: - Sr. Name of the Company OP/OC No. 1 Motilal Oswal Investment Advisors 97.89 Pvt. Ltd. 2 Future Capital Investment Advisors 15.71 Ltd. 3 Integrated Capital Services Ltd. 69.31 Arithmetic Mean 60.97 M/s. Siguler Guff India Advisors P. Ltd. 2.4 The AO, then adopting the margin of the three comparables as per his choice @60.97%, made a T.P. adjustment of `1,90,93,859/- under section 92C(3) of the Act to the ALP of international transactions of the assessee in respect of provisions of investment advisory services. The assessment was accordingly completed under section 143(3) of the Act vide order dated 04.03.2013, wherein the income of the assessee under normal provisions was determined at `2,61,13,010/-; in view of the T.P. adjustment under section 92C(3) of the Act amounting to `1,90,83,859/-.
Aggrieved by the order of assessment dated 04.03.2013 for A.Y. 2010-11, the assessee preferred an appeal before the CIT(A)-15, Mumbai, which was dismissed vide the impugned order dated 31.10.2014.
Aggrieved by the order of the CIT(A)-15, Mumbai dated 31.10.2014 for A.Y. 2010-11 dismissing its appeal the assessee has preferred this appeal raising the following grounds: - “
1. On the facts and in the circumstances of the case and in law, the Commissioner of Income-Tax (Appeals) - 15 ('the Learned CIT(A)'), erred in upholding the action of the Deputy Commissioner of Income Tax, Circle 3(3) ('the Learned AO'), of • including two additional comparables, Integrated Capital Services Ltd. and Motilal OswaI Investment Advisors Pvt. Ltd. on an arbitrary basis without undertaking a search process, which are not functionally comparable to the Appellant; and • rejecting certain companies engaged in similar line of business as that of the appellant and which were selected by the Appellant in its transfer pricing study report, 2. for determining the arm's length price of provision of investment advisory services and thereby making an adjustment of Rs.1,90,93,859 to the said international transaction of the Appellant. The Appellant prays that the aforesaid adjustment be deleted.
3. The learned AO/CIT(A) failed to understand and appreciate the functions performed, assets employed and risks assumed by the Appellant and its AEs, thereby comparing companies engaged in merchant banking, investment banking, fund management, financial restructuring and debt syndication etc. with the Appellant,
4. On the facts and in the circumstances of the case and in law, the Learned AO erred in not accepting the economic analysis M/s. Siguler Guff India Advisors P. Ltd. undertaken by the Appellant in accordance with the provisions of the Income-tax Act, 1961 ('the Act') read with the Income-tax Rules, 1962 ('the Rules'). The Learned AO erred, in law and in facts, by determining the arm's length margin/ price by using data for financial year 2009-10 to the exclusion of prior years' data [as contemplated under Rule 1OB(4) of the Rules] which was considered by the Appellant in the transfer pricing documentation.
5. On the facts and in the circumstances of the case and in law, the Learned AO erred in holding that the price charged by the Appellant towards provision of investment advisory services was not determined in accordance with provisions of Sections 92C(1) and (2) of the Act and consequently not appreciating the fact that none of the conditions set out in Section 92C(3) of the Act are satisfied in the case.
The learned AO/CIT(A) grossly erred in disregarding the principles laid down by the Hon’ble jurisdictional Income-tax Appellate Tribunal in selecting comparable in the case of investment advisory services.
The learned AO / CIT(A) erred in considering companies having abnormally high profit margin as comparable to the Appellant.” 5.1 In the course of proceedings before us, the Learned Senior Counsel for the assessee submits that in this appeal the assessee would be mainly urging ground No. 1challenging: - (a) the inclusion of the following two companies as comparables by the AO: (i) Motilal Oswal Investment Advisors P. Ltd. (ii) Integrated Capital Services Ltd. (b) the exclusion of the following two companies from the assessee’s list of comparables by the AO: (i) IDC India Limited (ii) ICRA Management Consulting Services. 5.1.2 In respect of the other grounds 2 to 7 (supra) it was submitted that, though the same have been raised, they are not being pressed before the Bench. 6.1 The assessee company was set up on 30.12.2008 as a subsidiary of Siguler Guff LLC to provide investment research information, due diligence and other auxiliary advisory/financial services in respect of potential M/s. Siguler Guff India Advisors P. Ltd. investment opportunities in India. It has entered into a sub-advisory service agreement with Siguler Guff LLC for providing such services. Before us, the learned A.R. of the assessee submits that while selecting comparables the assessee, after a scientific and qualitative analysis, has mainly selected companies which were engaged in the rendering of services similar to corporate advisory services, strategic advisory services, etc. The assessee has specifically excluded companies which are rendering services as merchant bankers registered with SEBI, asset management companies, etc. for the reason that their functional risk profile is at wide variance with that of the assessee, which merely provides non-binding advisory services to its AE. It is submitted that the AO has rejected all but one of the comparable companies selected in the assessee’s T.P. study (supra) and included two of his own comparables (supra) without specifying the method and process by which he has undertaken the search process for identifying comparable companies. 6.2 In the order of assessment, as per the show cause notice issued, the AO required the assessee to explain as to why, inter alia, five of the six comparable companies chosen by the assessee, which includes; (i) IDC India Limited, and (2) ICR Management Consultancy Services Ltd. should not be excluded from the list of comparables and why two companies of the AO’s choice namely; (i) Motilal Oswal Investment Advisors P. Ltd. and (ii) Integrated Capital Services Ltd. be not included in the list of comparables. After considering the assessee’s reply, the AO rejected the assessee’s contentions and proceeded to include in the list of comparables the two companies of his choice namely; M/s. Motilal Oswal Investment Advisors P. Ltd. and M/s. Integrated Capital Services Ltd. The relevant facts, arguments, etc. of both parties in respect of the aforesaid four comparable companies, which are the dispute before us, are considered hereunder in seriatum. A. Assessee’s Prayer for Exclusion of comparables included by AO 7. Motilal Oswal Investment Advisors Pvt. Ltd. 7.1 This company has been included in the list of comparables by the TPO as he observed that its income is only from advisory services in the M/s. Siguler Guff India Advisors P. Ltd. field of investment just like the assessee. The inclusion of this company as a comparable was upheld by the CIT(A). According to the learned Senior Counsel for the assessee, while the assessee in the case on hand, who is providing investment advisory services for investments in India to its AE, this company’s core competence is in the field of merchant banking requiring SEBI registration. Referring to the Annual Report for F.Y. 2009- 10 and Directors Report (placed at pages 522 to 545 of paper book) it can be seen that this company derives its business income from four different business verticals, i.e. Equity capital markets, mergers and acquisitions, private equity syndications and structured debt. It also provides advice on cross border acquisitions, comprehensive investment banking solutions and transaction expertise covering private placement of equity, debt and convertible instruments in international and domestic capital markets, monitoring and advising on mergers and acquisition as professional and restructuring advisory and implementations. It is also involved in various professional activities of merchant banking like providing capital to companies in the form of share ownership instead of loans, providing advisory on corporate matters to companies including portfolio management, audit syndication, counselling on M&A etc. It is contended that the entire gamut of functions and activities conducted by this company are certainly far wider and functionally different from the investment advisory services provided by the assessee in the case on hand; where the main function is to give advice to its clients for making investment in diversified fields on a cost plus 15% mark up. Thus it is clear that the wide gamut of functions and transactions provided by Motilal Oswal Investment Advisor P. Ltd. is far wider and different from that of the assessee in the case on hand and render it not functionally comparable to the assessee in the case on hand. It is contended that mere classification of revenue as advisory fees’ will not place the company as comparable to the assessee in the case on hand, in the absence of functional and transactional similarity. It was submitted by the learned Senior Counsel that the following judicial pronouncements of the Hon'ble Courts/Tribunals, inter alia, have held that Motilal Oswal Investment M/s. Siguler Guff India Advisors P. Ltd. Advisors P. Ltd. cannot be held to be a comparable company with those providing investment advisory services: - (i) Temasek Holding Advisors (I) P. Ltd. vs. DCIT (ITA No. 776/Mum/2013 dated 25.02.2016 for A.Y. 2010-11) (ii) Carlyle India Advisors P. Ltd. vs. Addl. CIT (43 taxmann.com 184) (Mumbai Trib) (iii) Carlyle India Advisors P. Ltd. vs. DCIT (49 taxmann.com 476) (Mumbai Trib) (iv) Q India Investment Advisors Pvt. Ltd. vs. DCIT (ITA No. 923/Mum/2015 for A.Y. 2010-11) (v) NVP Venture Capital India Pvt. Ltd. vs. DCIT (ITA No. 1564/Mum2015 for A.Y. 2010-11) (vi) Bain Capital Advisors (I) P. Ltd. vs DCIT (ITA No. 413/Mum/2015 for A.Y. 2010-11) 7.2 Per contra, the learned D.R. for Revenue supported the orders of the authorities below in including Motilal Oswal Investment Advisors P. Ltd. in the final set of comparables. 7.3.1 We have heard the rival contentions and perused and carefully considered the material on record, including the judicial pronouncements cited (supra). This company, Motilal Oswal Investment Advisors P. Ltd. was included by the AO in the list of comparables on the ground that it is engaged in advisory services like the assessee. On a perusal of the Directors report it is seen that this company derives its business income from four different business verticals, i.e. equity capital market, M&A, profit equity syndication and structured debt. It also provides comprehensive investment banking solutions and transaction expertise in private placement of equity, debt and convertible investments in international and domestic markets, monitoring of mergers and acquisitions, etc. Its core competence is in merchant banking encompassing its various activities like providing capital to companies in the form of share ownership instead of loans, provides advisory on corporate matters to the companies in which they invest, activities including portfolio management, credit syndication, counselling on M&A, etc. From the above, it is evident that the gamut of functions and activities M/s. Siguler Guff India Advisors P. Ltd. provided and carried out by Motilal Oswal Investment and Advisory Pvt. Ltd. are definitely far wider and functionally very different from investment advisory services provided by the assessee in the case on hand whose core competence is only to give advice for making investments in diversified fields. In the case of Carlyle India Advisors (P) Ltd. (supra) a Coordinate Bench of this Tribunal has held that Merchant banking functions are entirely different from investment advisory services; which decision has been upheld by the Hon'ble High Court of Bombay. 7.3.2 We find that similar view was taken by a Coordinate Bench of this Tribunal in the case of Temasek Holdings Advisors (I) P. Ltd. in dated 25.02.2016 also for A.Y. 2010-11 wherein while excluding Motilal Oswal Investment Advisory Pvt. Ltd. at para 25 thereof held that its merchant banking function being entirely different from investment advisory services it is to be excluded from the list of comparable to assessee’s offering only investment advisory services. Respectfully following the decision of the Coordinate Bench in the case of Temasek Holding Advisory (I) Pvt. Ltd. (supra) which is also rendered for A.Y. 2010-11, the year under consideration in the case on hand, we direct the AO to exclude Motilal Oswal Investment Advisory Pvt. Ltd. from the list of comparables to the assessee in the case on hand who is only offering non binding investment advisory services.
Integrated Capital Services Ltd. 8.1 The company was selected and included in the final set of comparables by the AO on the ground that it is engaged in providing consultancy and advisory services. According to the learned Senior Counsel, Coordinate Benches in the cases of Q India Investment Advisors Pvt. Ltd. in ITA No. 923/Mum/2015 dated 24.04.2015 and Temasek Holding Advisors (I) P. Ltd. in ITA No. 776/Mum/2015 dated 24.02.2016, both rendered for A.Y. 2010-11, the year under consideration in the case on hand, excluded this company from the list of comparables as it was held to be functionally different since it provides consultancy services in the field of reconstruction of business, M&A, etc. which cannot be held to M/s. Siguler Guff India Advisors P. Ltd. be functionally comparable with the assessee in the case on hand, who provides only non-binding investment advisory services. In view of the above, it is submitted that this company be excluded from the list of comparables to the assessee in the case on hand. 8.2 Per contra, the learned D.R. for Revenue supported the orders of the authorities below in including this company in the final list of comparables to the assessee in the case on hand. 8.3.1 We have heard the rival contentions and perused and carefully considered the material on record; including the judicial pronouncements cited. We find that the Coordinate Bench of this Tribunal in the case of Q India Investment Advisors P. Ltd. in its order in dated 24.04.2015 for A.Y. 2010-11 (i.e. the year under consideration in the case on hand) observing that M/s. Integrated Capital Services Ltd. provides consultancy services in the field of reconstruction of business, M&A, etc. it was functionally different from a company providing only non- binding investment advisory services and therefore excluded it from the list of comparables. At paras 10 to 12 of its order the Coordinate Bench held as under: - 10. From the record we found that the assessee is engaged in providing non-binding investment advisory support services to its AE primarily with respect to the Indian market. Services rendered by assessee are in the nature of support services and are rendered in accordance with scope and requirements as communicated by its AE. However, M/s Integrated Capital Services Ltd. is found to be engaged in rendering advisory and consultancy services in the area of merger acquisition and reconstruction of business. As per its directors report for the year ending 31-3-2010 relevant to assessment year 2010- 2011 under consideration, it was rendering advisory and consulting services in the area of the merger acquisition and reconstruction of business. No segmental accounts were there so as to find out margin in the advisory services.
Ld. AR also drew our attention to the erroneous computation of net cost plus margin of M/s Integrated Capital Services Ltd. at 69.31%, which was related to the assessment year 2009-2010. Our attention was also invited to letter addressed to the DCIT, dated 9-12- 2014, wherein assessee has highlighted this mistake. As per this letter, margin of ICSL was 69.31% in the assessment year 2009- 2010, whereas there was negative margin of 4.01% in the M/s. Siguler Guff India Advisors P. Ltd. assessment year 2010-2011 under consideration. It was further submitted that while computing the arms length margin, the AO has independently considered the weighted margin of Future capital investment advisory ltd. (i.e. 20.35%) instead of single year margin of 15.71%.
We have considered rival contentions and found that ICSL is functionally dissimilar, therefore, it should be excluded from the list of comparables.......” 8.3.2 We find that the Coordinate Bench of this Tribunal in the case of Temasek Holdings Advisors (I) P. Ltd. in its order in dated 25.02.2016 for A.Y. 2010-11, following the decision of the Coordinate Bench in the case of Q India Investment Advisors P. Ltd. (supra), has excluded Integrated Capital Services Ltd. from the final list of comparables, holding it to be functionally different from a company offering investment advisory services. 8.3.3 Respectfully following the aforesaid decisions of the Coordinate Bench of this Tribunal in the cases of M/s. Q India Investment Advisors P. Ltd. in ITA No. 923/Mum/2015 dated 24.02.2015 and M/s. Temasek Holding Advisors (I) P. Ltd. in ITA No. 776/Mum/2015 dated 24.02.2016, both rendered for A.Y. 2010-11 (i.e. the assessment year under consideration in the case on hand) we direct the AO to exclude M/s. Integrated Capital Services Ltd. from the final list of comparables; as it being engaged in providing consultancy services in the field of reconstruction of business, M&A, etc. it is functionally different from the assessee in the case on hand who is engaged in the business of non- binding investment advisory services. B. Assessee’s prayer for inclusion on comparables rejected by AO 9. IDC India Limited 9.1 This company was one of the comparables chosen/adopted by the assessee as per its T.P. study. The AO rejected this company, excluding it from the final list of comparables, on the ground that it was functionally different from the assessee; being engaged in research, survey and management consulting services that are not akin to the investment M/s. Siguler Guff India Advisors P. Ltd. advisory services provided by the assessee in the case on hand. On appeal, the learned CIT(A) upheld the AO’s order. 9.2.1 The learned Senior Counsel for the assessee, explaining the profile of this company, M/s. IDC India Limited, submitted that it is primarily engaged in the business of market research and survey services and while rendering such investment advisory services it analyses financial data of potential clients, analysing market conditions, conducting research on various sectors, markets, companies, etc. It was submitted that the Hon'ble Bombay High Court in the case of Carlyle India Advisors Pvt. Ltd. (2013) (32 taxmann.com 33) (Bombay) had upheld the inclusion of M/s. IDC India Limited as functionally comparable to the functions performed by an investment advisory service provider. Reliance was also placed on the decision of the Coordinate Bench in the case of General Atlantic P. Ltd. (2013) 32 taxmann.com 178 (Mum-Trib) and Temasek Holding Advisors (I) P. Ltd. in dated 25.02.2016 for A.Y. 2010-11 where this company M/s. IDC India Limited was held to be a good comparable to companies rendering investment advisory services. 9.3 Per contra, the learned D.R. for Revenue supported the orders of the authorities below in excluding this company, M/s. IDC India Limited from the final list of comparables of the assessee in the case on hand. 9.4.1 We have heard the rival contentions and perused and carefully considered the material on record; including the judicial pronouncements cited and relied on. We find that the Coordinate Bench of this Tribunal in the case of Temasek Holdings Advisors India P. Ltd. in ITA No. 776/Mum/2015 dated 25.02.2016 has observed that this company, M/s. IDC India Limited is a good comparable to those companies engaged in investment advisory services since it is also engaged in advisory and consultancy services for the purpose of investment made in various sectors. In coming to this finding, the Coordinate Bench has placed reliance on the decision of the Hon'ble Bombay High Court in the case of Carlyle India Advisors Pvt. Ltd. (supra) which has upheld the decision of the Coordinate Bench in the same case reported in (2013) 43 taxmann.com 184 (Mum-Trib)
M/s. Siguler Guff India Advisors P. Ltd. wherein it was held that this company M/s. IDC India Limited is a good comparable with companies rendering investment advisory services. The Coordinate Bench in the case of Temasek Holdings Advisors India P. Ltd. (supra) rendered for A.Y. 2010-11; the assessment year under consideration in the case on hand, at para 22 thereof held 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 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.” 9.4.2 Respectfully following the decision of the Hon'ble Bombay High Court in the case of Carlyle India Advisors P. Ltd. (2013) 32 taxman.com 33 (Bombay) and the decision of the Coordinate Benches in the case of Carlyle India Advisors P. Ltd. (supra) and Temasek Holdings Advisors India P. Ltd. for A.Y. 2010-11 (supra), wherein this company, M/s. IDC India Limited was held to be a good comparable to those companies rendering investment advisory services, we direct the AO to include this company M/s. IDC India Limited in the list of comparables to the assessee in the case on hand.
ICRA Management Consultancy Services Ltd. 10.1 At the outset the learned Senior Counsel for the assessee had submitted that the assessee prayed for inclusion of this company, M/s.