WARBURG PINCUS INDIA P. LTD,MUMBAI vs. ASST CIT 3(3), MUMBAI

Captioned appeals at the instance of the assessee are directed against order passed under section 143(3) r/w section 144C(13) of the Income Tax Act, 1961 (for short "the Act"), in pursuance to the direction of the Dispute Resolution Panel–II, (DRP), Mumbai, for the assessment year 2009–10 and 2009–10.

Brief facts are, the assessee an Indian company is a subsidiary of Warburg Pincus LLC, USA, and is engaged in providing investment advisory services to its Associated Enterprise (A.E). In the previous year relevant to the assessment year under dispute, the assessee had entered into international transaction with its A.E. and earned revenue of ` 62,24,67,829, towards provision of investment advisory services. The assessee had bench marked the arm's length price of the international transaction by adopting TNMM as the most appropriate method with OP/OC as the PLI by considering itself as a tested party. Assessee had undertaken a search analysis in the data bases and short listed five companies as comparables with average margin of 18.80%. As the margin of the assessee shown at 20.33% is higher to the 3 Warburg Pincus India Pvt. Ltd.

By applying the arithmetic mean of 75.23% of the comparables to the operating cost, the Assessing Officer determined the arm's length price at ` 38,91,55,305, and the difference between the arm's

The learned Authorised Representative objecting to selection of this comparable submitted, this company basically is a credit rating agency and is listed in NSE / BSE. He submitted, company has three reportable segments i.e., rating services, information services and BPO

Learned Departmental Representative, however, relying upon the observations of the Transfer Pricing Officer submitted, if a comparable is within accept / reject matrix, there is no reason to exclude the same from being treated as a comparable. He submitted, as the Transfer Pricing Officer has found the aforesaid company to be carrying out some functions as the assessee, it has rightly been treated as a comparable.

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 Profit & Loss account of the company, a copy of which is at Page–185 of the paper book, we have noted major part of income is from rating service and from the segmental information available in the annual report, it is noticed that as far as information service division is concerned, the company has reported loss. It is further noticed, when the aforesaid company was proposed as a comparable in A.Y. 2009–10, the assessee raised similar objections and the Transfer Pricing Officer after considering the submissions of the assessee having found merit in the same did not consider it as a comparable due to functional dissimilarity. We may also observed, in case of Sandstone Capital Advisors Pvt. Ltd. (supra), the Tribunal, Mumbai Bench, while considering the issue of comparability of this company in a case relating to the very same assessment year has held

Objecting to the inclusion of this company, the learned Authorised Representative submitted, it is involved in investment management services and provides portfolio management service. In this context, the learned Authorised Representative drew our attention to the director’s report at Page–339 of the paper book and notes to accounts of the company. Learned Authorised Representative submitted, the company operates in mutual fund industry and has received awards for managing Deutsche mutual fund and is investment manager to the fund. He submitted, the company earns 57.76% of its revenue from investment management fees. He submitted, the balance income earned is in the nature of investment advisory and other misc. income. However, there are no recognisable segments

Learned Departmental Representative, however, relying upon the observations of the Transfer Pricing Officer and the DRP, justified the inclusion of this company.

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 financial statement of this company, it is noticed that major part of the revenue earned by this company is from investment fee and no segmental details are available in respect of income earned from other activities. It is to be noted that in assessee’s own case for assessment year 2009–10, the Transfer Pricing Officer himself excluded this company as comparable having found that the RPT is more than 125%. It is the contention of the assessee that in the impugned assessment year also RPT is equally high at 134.53%. Considering the aforesaid factors, the Tribunal, Mumbai Bench, in case of Sandstone Capital Advisors Pvt. Ltd. (supra), in an order passed for the very same assessment year, has excluded this company as a comparable. The same view was expressed in case of Temasek Holdings Advisors India Pvt. Ltd. (supra) for the very same assessment year. In view of the above, we exclude this company as a comparable.

Objecting to this selection of this company (wrongly mentioned as “Siyaram” by the Transfer Pricing Officer), the learned Authorised Representative submitted, this company is purely engaged in broking

Learned Departmental Representative relied upon the observations of the Transfer Pricing Officer and the DRP.

We have considered the submissions of the parties and perused the material available on record in the light of the decisions relied upon. It is seen, the Transfer Pricing Officer himself in the assessment year 2009–10 after considering the fact that 68% of the revenue is generated from share broking services had excluded this company as a comparable. The assessee has stated in the impugned assessment year 100% of the revenue earned by the company is from share broking business. That being the case, we are of the view that the company cannot be treated as a comparable. We may further note that in the case of Sandstone Capital Advisors Pvt. Ltd. (supra) and Temasek Holdings Advisors India Pvt. Ltd. (supra), the Tribunal, Mumbai Bench, while considering the comparability of this company for the very same assessment year had excluded it having found that the revenue earned is only from broking activity. In view of the aforesaid, we direct the Transfer Pricing Officer to exclude this company as a comparable.

The learned Authorised Representative objecting to the inclusion of this company submitted, as 74.11% of the revenue earned is from broking activities, the company cannot be treated as a comparable. He submitted, for the very same reason, the Transfer Pricing Officer

Learned Departmental Representative relied upon the observations of the Transfer Pricing Officer and the DRP.

Having heard the submissions of the parties and perused the material on record, we are of the considered opinion that this company cannot be treated as comparable for the very same reason on which Shriyam Broking Intermediary Ltd. was excluded as comparable. We have noted, the Tribunal, Mumbai Bench, had excluded the company expressing similar view in the following cases which are for the very same assessment year.

Accordingly, we direct exclusion of this company from the list of comparables.

Objecting to inclusion of this company, the learned Authorised Representative submitted, the company is primarily engaged in asset management activities, as it manages off–shore fund and provides portfolio management service. In this context, he referred to the director’s report of the company as submitted in the paper book. He submitted, the company earns 84.31% of its revenue from management fee and balance income is earned from portfolio advisory fees, income from investments and other misc. income. He submitted, the Transfer Pricing Officer, though, had proposed the company as a comparable in assessee’s own case for the assessment year 2009–10, however, for the aforesaid reasons, he eventually excluded it from final set of comparable. He, therefore, pleaded for exclusion of this company. In support, he relied upon the following decisions:–

Learned Departmental Representative relied upon the observations of the Transfer Pricing Officer and the DRP.

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 annual report of the company, it is noticed that the company has reported only one segment i.e., asset management services. It is further noticed that 84.31% of its income was earned from management fees. It is also a fact on record that while proposing the aforesaid company as a comparable in assessee’s own case for the assessment year 2009–10, the Transfer Pricing Officer having found that 77.87% of its revenue is from management fees earned from its own mutual fund applying the RPT filter excluded it from the final list of comparables. Thus, for the very same reason, the company cannot be a comparable in the impugned assessment year also.

Further, in the case of Sandstone Capital Advisors Pvt. Ltd. (supra), the Tribunal, Mumbai Bench, having found that almost entire receipts of the company are from management fees has excluded this 15 Warburg Pincus India Pvt. Ltd.

The learned Authorised Representative objecting inclusion of this company submitted, it has three reportable segments i.e., rating, research and advisory services. It was submitted, the company earns 46% of its income from research and 51% from rating services. Only a nominal 3.43% income is earned from advisory services. He submitted, the company has related party transaction of 60.50%. In this context, he referred to the annual report of the company. He submitted, in the relevant previous year, there was business re– structuring as its advisory services segment was transferred to a subsidiary and further two wholly owned subsidiary were merged into the company. He submitted, the assessee in its transfer pricing study had included this company as a comparable on the basis of multiple year data relating to information segment. However, the information segment was discontinued from January 2007. He submitted, the information and advisory segment of the company was rejected in 16 Warburg Pincus India Pvt. Ltd.

Learned Departmental Representative relied upon the observations of the Transfer Pricing Officer and the DRP.

We have considered the submissions of the parties and perused the material available on record in the light of the decisions relied upon. The fundamental reasons for which the assessee wants exclusion of this company are, it has no revenue from information and advisory segment and is a predominantly rating agency. Further contention is, the RPT at 60.50% is more than the threshold limit of 25%. It is noticed, in case of Sandstone Capital Advisors Pvt. Ltd. (supra), the Tribunal, Mumbai Bench, after considering the submissions of the assessee that RPT is more than 60% of income had directed the Assessing Officer to examine this fact and exclude the 17 Warburg Pincus India Pvt. Ltd.

Learned Authorised Representative objecting to rejection of this company as a comparable submitted, this company, since, is engaged in research, consulting and investment advisory services, the assessee had selected it as a comparable. Learned Authorised Representative referring to the functional profile of the company as mentioned in the annual report submitted, the company operates in a single segment i.e., market research and management consultancy. Learned Authorised Representative submitted, the company is a respected source for marketing intelligence and consulting services as per the director’s report. Referring to the Balance Sheet extract of the company, the learned Authorised Representative submitted, the business profile mentioned therein clearly demonstrate that it is 18 Warburg Pincus India Pvt. Ltd.

Learned Departmental Representative on the other hand objecting to the inclusion of this company as a comparable submitted, IDC India Ltd. is a product company, hence, cannot be considered as functionally similar to the assessee. In this context, he relied upon the decision of the Tribunal, Mumbai Bench, in Tevapharm Pvt. Ltd. v/s ACIT, [2012] 18 taxmann.com 148 (Mum.).

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 functional profile of IDC India Ltd., as mentioned in the annual report, we have noted that the company operates in a single segment i.e., market research and management consulting. It needs to be observed, in case of General Atlantic Pvt. Ltd. v/s DCIT, [2013] 32 taxmann.com 178 (Mum.), the Tribunal, Mumbai Bench, following another decision of the same Bench has found IDC India Ltd. as a comparable to an investment advisory service provider. The aforesaid decision of the Tribunal, Mumbai Bench, has been upheld by the Hon'ble Jurisdictional High Court in CIT v/s General Atlantic Pvt. Ltd., [2016] 68 taxmann.com 88 (Bom.). Similarly, the Tribunal, Mumbai Bench, in Sandstone Capital Advisors Pvt. Ltd. (supra), has found IDC India Ltd. to be functionally similar to an investment advisory service provider, hence, comparable. The same view has been expressed in Temasek Holding Advisory India Pvt. Ltd., ITA no.6504/Mum./ 2012 and Carlyle India Advisory Pvt. Ltd. v/s DCIT, [2014] 43 taxmann.com 184 (Mum.). As these decisions are for the very same assessment year, in our considered opinion, IDC India Ltd., has to be treated as a comparable to the assessee following the consistent view of the Tribunal in the decisions referred to above. As far as contention of the learned Departmental Representative that IDC

Before parting, we may observe, in the course of hearing, the learned Authorised Representative has propounded that in assessment year 2006–07, the assessee had shown a margin of cost plus 17% and the DRP has granted relief to the assessee. He submitted, in assessment year 2007–08, margin shown by the assessee at cost plus 17.5% was accepted by the Transfer Pricing Officer himself. Learned Authorised Representative submitted, the assessee had entered into advance pricing agreement (APA) under section 92CC of the Act with CBDT on 24th November 2015, wherein, the arm's length price of international transaction relating to investment advisory services

Learned Departmental Representative vehemently objecting to the aforesaid contention of the learned Authorised Representative had submitted that transfer pricing is not a gross profit issue. Therefore, there is no basis for accepting the margins of the assessee at a particular percentage, hence, nothing will turn on APA.

Having considered the submissions of the parties, we are of the view that no conclusive finding on this issue is required to be given in view of our decision on the comparables. Suffice to say, though, APA may not be of a binding nature, but, certainly it has a persuasive value. Since no other argument has been advanced by the parties on any other issues, grounds raised on other issues, except, on the issue of comparables are deemed to have not been pressed, hence, dismissed.

In the result assessee’s appeal is partly allowed. ITA no.1717/Mum./2014 – A.Y. 2009–10 31. The only issue relating to transfer pricing adjustment is in respect of selection / rejection of comparables. Before we decide the issue, it is necessary to deal with the facts.

In the impugned assessment year, the assessee had reported international transaction towards provisions of investment advisory services at ` 102,99,68,234. Adopting transactional net margin method (TNMM) as most appropriate method with operating profit to total cost as the PLI, the assessee conducted a search process in the data bases and selected seven companies as comparable. The margin shown by the assessee at 19.03% being higher than the average margin of the selected comparables, the arm's length price of the international transaction was stated to be at arm’s length. The Assessing Officer, however, rejected transfer pricing study of the assessee as well as comparable selected, inter–alia, on the ground that the assessee has used multiple year data. After rejecting the transfer pricing study of the assessee, the Assessing Officer proposed 10 comparables and after considering the objections of the assessee, the final set of comparables retained by the Transfer Pricing Officer with arithmetic mean of 58.52% are as under:–

By applying the arithmetic mean to the operating cost, the Transfer Pricing Officer determined the arm's length price of the operating cost at ` 102,99,68,234 and the resultant shortfall of ` 34,16,50,457 was considered as transfer pricing adjustment under section 92CA. In accordance with the order passed by the Transfer Pricing Officer, the Assessing Officer passed draft assessment order proposing the addition on account of transfer pricing adjustment. Though, the assessee raised objections against the draft assessment order before the DRP, however, DRP rejected objections of the assessee and in pursuance to the direction of the DRP, the impugned assessment order was passed.

Learned Authorised Representative confined his argument to selection / rejection of following comparables:–

Learned Authorised Representative objecting to the selection of this company as a comparable submitted, it is engaged in providing investment banking services, advisory in mergers and acquisitions and re–construction of business. In this context, learned Authorised Representative referred to the director’s report forming part of the annual report of the company. He submitted, the company is also engaged in business and debt re–restructuring. He submitted, as per

Learned Departmental Representative, however, justified the inclusion of the company as a comparable relying upon the observations of the Transfer Pricing Officer / DRP.

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 functional profile of this company, as mentioned in the 25 Warburg Pincus India Pvt. Ltd.

Learned Authorised Representative objecting to the inclusion of this company as a comparable submitted, it is registered with SEBI as a merchant banker, hence, it cannot be considered as a comparable to the assessee. In this context, learned Authorised Representative relied upon the following decisions:–

Learned Departmental Representative, however, justified selection of this company as a comparable.

We have considered the submissions of the parties and perused the material available on record in the light of the decisions relied

Objecting to rejection of this company as a comparable, learned Authorised Representative submitted, this company provides consulting corporate and regulatory support analysis and strategies, etc., to clients. Referring to Schedule–12 on notes to accounts forming part of annual report of the company, learned Authorised Representative submitted, the company operates in a single segment i.e., consulting services. He, therefore submitted, company being

We have considered the submissions of the parties and perused the material available on record in the light of the decisions relied upon. Though, the Transfer Pricing Officer and the DRP have excluded this company observing that it is not functionally similar to the assessee, however, on a perusal of the annual report of the company we have noticed that it is basically engaged in consulting services. The Tribunal, Mumbai Bench, in DCIT v/s Temasek Holdings Advisors India Pvt. Ltd. v/s DCIT, [2014] 47 ITR (Trib.) 311 (Mum.), while considering comparability of this company in the very same assessment year i.e., assessment year 2009–10, having found that the 29 Warburg Pincus India Pvt. Ltd.

Since no argument has been advanced by the parties on any other issues, the grounds raised on other issues, except, the issue of comparables are deemed to have not been pressed, hence, dismissed.

The only other issue surviving for consideration in this appeal as raised in grounds no.11 and 12, is in relation to addition of an amount of ` 6,98,123.

Brief facts are, during the assessment proceedings, the Assessing Officer found that the assessee has incurred expenditure of ` 76,48,947, through credit card maintained with American Express Banking Corporation. However, as per the individual transaction statement (ITS) generated from the system certain discrepancies were found in relation to the payments made, therefore, the assessee was called upon to reconcile the difference. In response, it was submitted, assessee has made payment of ` 59,47,300 to American Express Banking Corporation towards credit card bills. The A.O., therefore, concluded that the assessee could not reconcile the difference of ` 17,01,647, accordingly, proposed the addition of the said amount.

The DRP after considering the submissions of the assessee having found that the assessee did not get sufficient opportunity to reconcile the dates before the Assessing Officer directed the Assessing Officer to delete the addition to the extent of reconcile after proper verification. In the final assessment order in compliance to the direction of the DRP, the A.O. restricted the addition to ` 6,98,123.

Learned Authorised Representative at the time of hearing submitted, for the smallness of the addition and low tax effect, the assessee would prefer not to press this ground.

In view of the submissions of the learned Authorised Representative, the ground is dismissed as “not pressed”.

In the result, both the appeals are partly allowed. Order pronounced in the open Court on 13.01.2017