3I INDIA P.LTD,MUMBAI vs. DCIT CIR 8(3)(1), MUMBAI

आयकर अपीलीय अिधकरण “के” �यायपीठ मुंबई म�। IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI BENCH “K”, MUMBAI �ी आर सी शमा�, लेखा सद�य एवं �ी अिमत शु�ला, �याियक सद�य के सम� । BEFORE SHRI R C SHARMA, ACCOUNTANT MEMBER AND SHRI AMIT SHUKLA, JUDICIAL MEMBER (Assessment year 2010-11) �ी आई इं�डया �ाइवेट �ल�मटेड Vs Deputy Commissioner of Income-tax 3i India Private Limited, Circle-8(3)(1), Room No. 3rd Floor, Nicholas Piramal 615, 6th Floor, Aayakar Tower, Bhavan, M K Road, Peninsula Corporate Park, Mumbai-400 020 G K Marg, Lower Parel, Mumbai -400 013 सं लेखा �थयी.: PAN: AACCM 4000 H अपीलाथ� (Appellant) ��यथ� (Respondent) Appellant by �ी पी जे पारद�वाला : Shri P J Pardiwalla Respondent by �म�सस ��प�दर बरार : Mrs Rupinder Brar सुनवाईक�तार�ख /Date of Hearing : 20-06-2016 घोषणाक�तार�ख /Date of Pronouncement : 16-09-2016 आदेश ORDER �ी अिमत शु�ला,�या.स :- PER AMIT SHUKLA, J. M.: The aforesaid appeal has been filed by the assessee against Final Assessment Order dated 29th December, 2014, passed by Ld. Deputy Commissioner of Income-tax -

2 �ी आई इं�डया �ाइवेट �ल�मटेड 3I India Private Limited 8(3)(1)(Assessing officer) under section 143(3) r.w.s. 144C(13) in pursuance of directions given by the Dispute Resolution Panel (DRP) under section 144C(5), vide order dated 13.11.2014, for the assessment year 2010-11. In the revised grounds of appeal, the assessee has raised following grounds:- Ground 1 “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 adjustment of Rs.19,55,13,737 in determining the arm’s length price (ALP) of the international transaction pertaining to the provision of investment advisory services to its Associated Enterprises (AE) by the Appellant.

Ground 2 The learned AO, based on the directions of the Hon’ble DRP, erred on facts and in law, in concluding that:

(a) certain activities of the Appellant are engaged in providing portfolio management services, over and above the investment advisory services provided to 3i Investments Plc (3i investments), primarily on account of the presence of the Appellant’s employees as nominee directors on the Board of the Indian Investee companies; (b) an additional compensation should be received by the Appellant in relation to the above services being a performance fee of 0.25 percent of the total investments and divestments, over and above the cost plus mark-up already being from 3i investments, as arm’s length consideration for the above services; (c) the appellant renders services not only to 3i Investments, but also to various 3i group entities, who have invested in the Indian investee companies, for which no compensation has been received by 3i India from such 3i group entities; and (d) without prejudice to the grounds in (a) to (c) above, an adjustment on account of performance fee should be computed by applying 0.25 percent on Rs.35,35,75,46,493, which erroneously includes inter alia an additional investment made in UFO Moviez India Limited in September 2010 amounting to Rs.9,17,85,930, and an investment made in Mundra Port and SEZ Limited

3 �ी आई इं�डया �ाइवेट �ल�मटेड 3I India Private Limited March 2009, that ought to be excluded Ground 3 Without prejudice to the Ground 2 above, where it is assumed that the Appellant is providing purported portfolio management services, the learned AO/the Hon’ble DRP, erred on facts and in law, on the following grounds:

(a) Not excluding the divestments made during the year while computing the adjustment on account of performance fees at the rate of 0.25 percent; (b) Not excluding the Indian investee companies, in which the Appellant’s employees were not acting as nominee directors on the Board, while computing the adjustment on account of performance fees at the rate of 0.25 percent of the total investments and divestments of the 3i group entities in India; and (c) Not recognizing that an independent provider of portfolio management services to a third party would not separately charge such third party an investment advisory fee given that the investment advisory function would ordinarily be a part of and subsumed within the activity of portfolio management services.

Ground 4 Without prejudice to the facts that the purported portfolio management function Is not an additional function and is already covered within the scope of the investment advisory services, where nominee directorships held by the Appellant’s employees on the Board of Indian investee companies is considered to be an additional function and not covered under the investment advisory agreement entered between the Appellant and 3i Investments, then the learned AO/the Hon’ble DRP erred, on facts and in law, on the following grounds:

(a) Not selecting the Transactional Net Margin Method as the most appropriate method for benchmarking such additional function; and (b) Not excluding the costs relating to such additional function from the cost base, while re-computing the ALP of the investment advisory services based on a mark-up on operating costs.

4 �ी आई इं�डया �ाइवेट �ल�मटेड 3I India Private Limited Ground 5 The learned AO, based on the directions of the Hon’ble DRP, on the fact and in law, erred in re-computing the arm’s length margin of the investment advisory services provided by the Appellant at 55.06 percent by rejecting certain comparable companies selected by the Appellant in the transfer documentation, and by selecting additional comparable companies which are functionally not comparable to the Appellant.

Ground 6 Without prejudice to the Ground 4 above, the Hon’ble DRP in its directions, on the facts and in law, erred in rejecting two comparable companies namely Future Capital Investment Advisors Limited and IDC (India) Limited, which were accepted by both the learned transfer pricing officer in its order under section 92CA(3) of the Act and by the Appellant in its transfer pricing study report for FY 2009-10.

Ground 7 The learned AO, based on the directions of the Hon’ble DRP erred, on facts and in law, in rejecting the use of contemporaneous and multiple year data available for computing the ALP as on the date of filing the return of income and relying only on the single year data (i.e. for the year ended 31 March 2010) for the purpose of determining the ALP.

Each of the grounds of appeal referred above is separate, and may kindly be considered independent of each other.

The Appellant craves leave to add, vary, omit, substitute or amend any or all of the grounds of appeal, of 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”.

2. The entire dispute of Transfer Pricing adjustment of Rs.19,55,13,737/-, revolves around firstly, adjustment of Rs.8,83,93,866/- by computing additional comparable fees at 0.25% on the ground that, assessee is also providing ‘portfolio management services’ in addition to the “non-binding investment advisory services”; and secondly, rejection of certain comparable companies selected by the assessee and 5 �ी आई इं�डया �ाइवेट �ल�मटेड 3I India Private Limited 37.51% as compared to 20% shown by the assessee.

3. The brief facts and background of the case are that, assessee company, ‘3i India Pvt. Ltd’ was incorporated on 25th July, 2005 in India and is a wholly owned subsidiary of United Kingdom based Entity, ‘3i Investments Plc’ which is a part of 3i Group Plc., UK. The Group Plc., UK is one of the world’s leading profit equity and 3i Investment Plc, UK acts as an Investment Manager to 3i Group Plc and other third parties. The assessee in India has been appointed as an investment advisor by ‘3i Investments Plc’ to provide investment advisory services in relation to the potential investment opportunities in India. 3i Investments Plc may utilize such services for the benefit of itself or for any other entities within the 3i Group. The investment advisory services rendered by 3i India, inter- alia, include the following:  Identifying and analyzing potential investment opportunities;  Evaluating and making recommendations to 3i Investments plc with respect to investment opportunities; and  Monitoring and making recommendations to 3i Investments plc with respect to specified investments made India.

4. During the year under consideration, the assessee has entered into the following international transactions:- Sr. Particular of Name of AE Amount(Rs.) Method No. Transactions adopted i) Investment 3i Investment Management Services Plc, London 73,41,16,766 TNMM

6 �ी आई इं�डया �ाइवेट �ल�मटेड 3I India Private Limited The assessee for rendering of ‘non-binding investment advisory services’, has charged ‘Cost + 20% Mark up’. To benchmark the transaction and also its profit margin, the assessee had selected TNMM as the Most Appropriate Method (MAM) and comparable companies mainly in the field of advisory services. The Profit Level Indicator (PLI) selected for benchmarking the arm’s length price (ALP) was on the base of operating profit upon operating cost (i.e. OP/OC). The assessee had shortlisted 8 comparable companies after carrying out detail search process by applying quantitative filters and qualitative analysis to benchmark the ALP of the international transaction relating to its international advisory services. Since the assessee had taken weighted average years’ margin of 8 comparables, therefore, the TPO asked the assessee to furnish margin of the comparables using single year data for the financial year 2009- 10. Accordingly, the assessee furnished the following details of the comparable companies along with their updated margins:- Sr.No. Name of the comparable (OP/OC)(%) 1 Access India Advisors Ltd. * 2 Future Capital Investment Advisors Ltd. 15.71 3 ICRA Online Ltd. 41.77 4 ICRA Management Consulting Services Ltd. 0.41 5 IDC India Ltd. 13.00 6 Informed Technologies Ltd. 25.52 7 Integrated Capital Services Ltd. -2.92 8 Kinetic Trust Ltd. 10.39 Average Margin 14.84% Assessee’s margin 20.00% *It was later submitted by the assessee that Access India Advisors Ltd. is not comparable. Hence, it was reported that, assessee’s margin of 20% meets the Arm’s Length requirement.

7 �ी आई इं�डया �ाइवेट �ल�मटेड 3I India Private Limited

5. The TPO first of all analyzed the functions performed by the assessee as per the “Investment Advisory Agreement” between the assessee and its AE, which were as under:- 2.1 The Manager appoints the Investment Advisor to be its investment advisor during the Term in the Relevant Countries.

2.2 The Investment Adviser accepts the appointment and, in connection with the appointment, agrees to provide the following services to the Manager: 2.2.1 to identify investment opportunities and to render advice to the Manager on suitable investments for each of the investors:

2.2.2 to advice the Manager on the merit, timing, structure, and appropriate terms of any acquisition or disposal of investments in Portfolio Companies or prospective Portfolio Companies (as relevant) and to advice the Manager on the arrangements for each such acquisition or disposal, subject in the case of Advised Funds to the approval of the board of directors or other duly constituted body of that Advised Fund;

2.2.3 to assist the Manager in monitoring such investments including the analysis of the performance of Portfolio Companies and to advise on divestments being considered by the Manager;

2.2.4 to advise on individuals to be appointed by any Investor as a member of the board (or similar) of Portfolio Company;

2.2.5 if required by the Manager, to advise the Manager on the exercise of any shareholder Rights applicable to any Portfolio Company;

2.2.6 if required by the Manager, to prepare material for inclusion in annual or other reports of any Investor (including __ataicas__)

2.2.7 to prepare and supply information and reports to the Manager in such medium as the Manager may reasonably request; and 2.2.8 to advise the Manager in relation to any other matter relating to the implementation of or arising from the Investment Policy of any Investor.

8 �ी आई इं�डया �ाइवेट �ल�मटेड 3I India Private Limited 2.3 In carrying out its duties hereunder the Investment, Adviser shall have regard to and shall ensure that the advice and activities comply with:

2.3.1 the Investment Policy of any Investor, if any;

2.3.2 any written notification from time to time given to the Investment Adviser by the Manager;

2.3.3 any restrictions contained in any applicable Fund Document; and 2.3.4 all 3i internal policies, practices, procedures and management plans as are from time to time applicable.

2.4 The Investment Adviser shall have no authority, and shall not be obliged, to make investment decisions on behalf of any investor. Nothing in this deed shall constitute the Investment Advisor agent of the Manager or any Investor for any purpose and, accordingly, the Investment Adviser shall have no power or authority to make or purport to make investment decisions, or to agree the terms of any proposed transaction or to enter into any transaction on behalf of or in any other way to bind another member of the 3i Group, the Manager or the Investors. The Investment Adviser acknowledges that investment decisions of an Advised Fund are made by the board or other duly constituted body of that Advised Fund and not by the Manager.

2.5 The advisory services to be provided by the Investment Adviser under this deed are to be provided to the Manager for its own benefit to enable it properly to act as manager or adviser (as the case may be) to each Investor and are not to be provided for the benefit of the Investors.

2.6 Notwithstanding any other provision of this deed, the Investment Adviser shall not, and shall not be required to, provide any services under this deed which require it to be authorized under the Financial Services and Markets Act 2000 any equivalent legislation of any other jurisdiction unless it is so authorized.

2.7 Advice given by the Investment Adviser hereunder may be rejected by the Manager in its absolute discretion.

2.8 The Manager shall provide all such information concerning the Investors and the Investment Policy of each Investor (including copies of relevant Fund Documents) as the 9 �ी आई इं�डया �ाइवेट �ल�मटेड 3I India Private Limited Investor Adviser shall reasonably request from time to time to enable it to provide its services to the Manager pursuant to this deed.

2.9 The Investment Adviser confirms it has, and will use its reasonable endeavours to maintain, in place the ability, capacity and any authorizations regarded by the law to perform the services and activities reliably and professionally (subject to clause 2.6 above).

2.10 The Investment Adviser confirms it will disclose to the Manager any developments that may have a material impact on its ability to carry out the services in compliance with applicable laws and regulatory requirements (subject only to clause 2.6)”.

Thereafter, TPO summoned the employees of the assessee company and recorded their statement under section 131 which has been incorporated by the TPO in his order from pages 4 to 6. From the statements, he inferred that the assessee was not merely providing ‘non-binding investment advisory services’ to its AE but was also doing the ‘portfolio management services’ for its AE. He also analyzed the investments made by various AEs despite the fact that ‘investment advisory agreement’ was between assessee and ‘3i Investment Plc’, London. Thus, he held that assessee has been performing Portfolio Manager’s functions for other AEs also. He observes that, this is corroborated by the fact that the AEs have appointed employee of the assessee as nominated director of the AE in the investee company in which they have invested, so that investor (AE) has proper control in which the investment has been made. These employees who were made the nominee directors are closely managing the day-to-day activities of the investee companies. Thereafter, he called for the various details of the work done by these nominee directors in which they were nominated and also required the assessee to furnish the copies of annual performance appraisal of the 10 �ी आई इं�डया �ाइवेट �ल�मटेड 3I India Private Limited TPO from pages 10 to 15 of his order. From the details submitted and the description of the functions performed by the employees as mentioned in their annual appraisal report, he deduced that, assessee has performed more than portfolio management services for the various AEs and also carried out the management of IPOs for the AEs. After detailed discussion and analysis, he came to the following conclusion: “11.9 From all the above discussion it can be understood that assessee is doing buyouts, portfolio management, restructuring for its various AEs in addition to the functions of investment advisory. Therefore the arm’s length consideration is calculated as under: 11.10 Any investment adviser has two components to the fees charged. One is a fixed fee and another is in addition to fix fee there is a performance fee. Since assessee has not charged any fees from the above referred AEs, in an arm’s length situation this can never happen. However, even for argument sake it is considered that these services were provided to 3i India PLc only, then also assessee in an Arm’s length Scenario would get Performance Fee. Therefore on a conservative basis performance fee of 0.25% of the total investment and disinvestment is taken as arm’s length consideration for the services provided by the assessee in addition to the investment advisory fees received.

12. Value of investment Rs. 3,095,22,78,193 + 905,26,8300 +350,00,00,000 = 3535,75,46,493 Arm’s length consideration = 0.25% of Rs. 3535,75,46,493 = Rs. 8,83,93,866.23/- Amount charged by assessee to AEs = Nil

11 �ी आई इं�डया �ाइवेट �ल�मटेड 3I India Private Limited Therefore difference in arm’s length consideration and actual consideration = Rs.8,83,93,866.23/- Adjustment proposed = Rs.8,83,93,866.23/- on account of performance fee for the services rendered to various AEs.

It will not be out of place to mention here that the AEs which have invested in Indian companies i.e. the investor AEs most of them are located in Mauritius”.

12 �ी आई इं�डया �ाइवेट �ल�मटेड 3I India Private Limited Informed Technologies India Ltd. 25.52% Total 225.03% Average 37.51%

“------ the Appellant is providing portfolio management services to its AE primarily on account of the assessee employees acting as nominee directors on the Board of investee companies. The DRP further concluded that the assessee may not have performed all the functions performed by a Portfolio manager. Accordingly, the DRP upheld the learned TPO’s conclusion of arbitrarily adding an additional income of 0.25% of the value of investment and 13 �ी आई इं�डया �ाइवेट �ल�मटेड 3I India Private Limited disinvestment by stating that it was required to be added since the assessee “monitoring functions” is wider than its investment advisory functions, and thus, added it to the total taxable income.

14 �ी आई इं�डया �ाइवेट �ल�मटेड 3I India Private Limited involved was mainly rejection of certain comparable companies and so far as functions were concerned, it was accepted that assessee was rendering purely non-binding advisory service and no such finding was given that assessee over and above its regular investment advisory services is also performing PMS services for which any additional fees is required to be benchmarked or adjusted and no such adjustment was made. In the subsequent year also, i.e. in the AY 2011-12, the issue revolved only on account of comparables and there was absolutely no dispute regarding computing of additional fees on account of PMS as done by the Department in this year. Thus, on same function and facts no new such adjustment is called for. He also brought on record that, in the case of assessee, there was “Advance Pricing Agreement” (APA) with CBDT u/s 92CC on 24th November, 2015, whereby right from the assessment year 2015-16 to AY 2019-20 it has been concluded that, Arm’s Length Price of the transaction of provision of ‘Non-Binding Advisory Services’ and related support services, the operating margin would be costs plus 21% markup. Thus, he submitted that, if under the APA itself it has been agreed that, the profit margin of the assessee should be at @ 21%, then in the present assessment year, the profit margin of 20% is not only reasonable but also meets the arm’s length price. He submitted that, the functions performed by the assessee in the present assessment year as well as the assessment years which are covered under the APA after detail analysis and examination are exactly the same and there are no additional functions or services in this year which are different. He further submitted that, there are various Court decisions wherein, it has been held that, if in the subsequent years the matter has been accepted by the APA despite such 15 �ी आई इं�डया �ाइवेट �ल�मटेड 3I India Private Limited TPO and DRP on record, then same principle or ALP has to be applied and accepted in this year also. In support, he relied upon few such decisions:- Sr. Name of the case law & No. Year i) Ameriprise India Pvt Ltd. ITA 2067/2016 2009-10 Delhi High Court ii) Ranbaxy Laboratories Ltd – ITA 196/Del/2013 2009-10 iii) JP Morgan Services Pvt. Ltd.-ITA No. 8987/ 2006-07 & Mum/210 & ITA No.7822/Mum/2011 2007-08 He also drew our attention to relevant finding given in these judgments.

16 �ी आई इं�डया �ाइवेट �ल�मटेड 3I India Private Limited AE in ensuring that the terms as per investment agreement with the investee companies are compiled with the investee companies and in protecting the rights of the AEs as investors. Accordingly, the aforesaid monitoring function performed by the assessee is part and parcel of the ‘investment advisory services’ rendered by it. In support of the aforesaid contention, he strongly relied upon the decision of ITAT Mumbai Bench in the case of ‘Temasek Holdings Advisors India Pvt. Ltd’ in wherein on the similar issue the Tribunal held that monitoring function are part and parcel of the investment advisory and cost + mark up compensation received gets covered under all the investment advisory services. He further relied upon the following decisions also:-  Carlyle India Advisors Private Limited v Additional Commissioner of Income-tax [24 taxman.com 176 (Mumbai)];  TPG Capital India Pvt. Ltd v ACIT (ITA No.880/Mum/2013); and  NVP Venture Capital India Pvt. Ltd v DCIT (ITA No.1564/Mum/2015).

Regarding objective of appointing nominee directors, he submitted that it was aimed at monitoring of the investee companies and these employees act in fiduciary capacity in those companies. The nominated directors were remunerated by the investee companies in the similar manner as they would remunerate to any other director. Not only that, the said remuneration paid to these employees were returned by them to the assessee company and such an amount has been offered to tax by the assessee. Thus there was no need for making any separate computation on account of additional services. He

17 �ी आई इं�डया �ाइवेट �ल�मटेड 3I India Private Limited (Portfolio Managers) Regulations”. Based on these regulations, it can be seen that the typical functions and regulatory requirements of a portfolio manager include mandatory registration requirements, acceptance of funds, investment advisory function and management and administration of portfolio. It is evident that the functions performed by the assessee as an investment advisory service provider forms only one part of the wide range of functions performed by a portfolio manager. Amongst others, one of the key differences between the portfolio manager and an investment advisor is the decision making authority available with the portfolio manager in relation to the investments/divestment to be made by the clients. In the case of the assessee, the decision making authority entirely rests with the AE. Accordingly, the risk assumed by the portfolio manager is also higher than the risk assumed by the investment advisor simplicitor. Accordingly, the assessee cannot be classified as a portfolio manager. Without prejudice, he submitted that, an independent person rendering portfolio management services to a third party would not separately charged third party for investment advisory services, because investment advisory function would ordinarily be part of the portfolio management services and it will be subsumed in the activity of PMS. Accordingly, the functions of portfolio management services would be part of ‘investment advisory services’ and hence, no separate benchmarking can be done. To buttress his point, Mr. Pardiwala referred to the decision of Hon’ble Bombay High Court in the case of Godrej Mfg. Co. Ltd. vs. DCIT, reported in 328 ITR 81 and drew our attention to page 132 of the said report and pointed out that, there the 18 �ी आई इं�डया �ाइवेट �ल�मटेड 3I India Private Limited Hon’ble Court has observed that portfolio/Investment Manager earns around 2% to 2.5% of the average value of investment. If same yardstick is applied in the case of the assessee on the average value of investment then the investment made by the AE is approximately Rs. 2,860 crores and 2.5% margin or fees will worked out to Rs.71.51 Crores. However, the assessee itself has earned more than Rs.73 Crores from its AE during the AY 2010-11. Thus, there is no question of charging separate fees.

19 �ी आई इं�डया �ाइवेट �ल�मटेड 3I India Private Limited TPO in his impugned order. Regarding APA, it was submitted that, what were the facts on which the authorities to the APA took the decision are not clear and whether PMS has been examined and factored into the pricing or not is not borne out. If assessee is acting as an investment advisory then its role and function are confined purely as an advisor and does not participate in the manner in which the assessee company has done. This is a borne out from the fact that the employee of the assessee acts as a Director in the Investee Companies and thus, assessee cannot be reckoned as sole consultant or investment advisor simplicitor. Thus, she submitted that, facts in this year should be kept in perspective and cannot be guided solely by APA, which is relevant for the subsequent years. So far as the basis of 0.25% and whether it should be subsumed in the margin of 20% or not, she submitted that, once it is principally held that, the assessee is carrying out two different functions, then this matter should be restored back to the file of the TPO to properly examine and benchmark the same by carrying out fresh analysis.

20 �ी आई इं�डया �ाइवेट �ल�मटेड 3I India Private Limited 2010-11 and also the various decisions of the Tribunal, wherein these very comparables have been considered and analyzed vis-à-vis the entities rendering investment advisory services and have given detail reasoning as to why they are to be included or excluded while analyzing the companies rendering non-binding investment advisory services.

21 �ी आई इं�डया �ाइवेट �ल�मटेड 3I India Private Limited Evaluating and making recommendations to 3i Investments plc with respect to investment opportunities; and  Monitoring and advising on divestment and investments.

The functions performed as per the “Investment Advisory Services Agreement” have been elaborated by us in the earlier part of our order. For rendering of such services, the assessee has been remunerated with Cost + 20% mark-up. This profit margin has been disturbed by making upward adjustment of Rs.19,55,13,737/-, firstly, by way of adjustment of Rs.8,83,93,866/- which has been made by computing the additional performance fees at 0.25% of the total investment and divestment on the ground that assessee is also engaged in the providing PMS, that is, Portfolio Management Services in addition to non-binding advisory services; and secondly, by inclusion and exclusion of certain comparables and thereby enhancing the profit margin to almost 55.06%. First of all, we will deal with the first issue. As discussed above, one of the main function of the assessee for rendering of the ‘investment advisory services’ is, monitoring and advising on investment/ divestments which has been treated to be the part of the “non- binding investment advisory agreement”. Once the AE acts upon the advice given by the assessee for making the investment, then assessee is asked to monitor the ongoing performance of the Investee Companies and for this purpose, employee/s of the assessee company are nominated as a Director or observer in the Investee company to participate and sit in the Board of Directors. This is done to ensure and protect the rights of the AE as an investor. It has been brought on 22 �ी आई इं�डया �ाइवेट �ल�मटेड 3I India Private Limited Directors / employees of the assessee by the investee companies have been returned back to the assessee which have been offered for tax. This contention of the assessee has not been rebutted or rejected by the Department. It is also not the case of the Revenue that the assessee has performed its function beyond the terms agreed upon in the “Investment Advisory Agreement” and rendered any addition services outside the agreement. On the facts of the present case, it cannot be held that the assessee is performing a separate function and carrying out transaction of portfolio management services as an independent and separate function besides rendering investment advisory, because monitoring of investment is embedded in the profile and function of the assessee in terms of the agreement itself. An independent ‘Portfolio Management Service’ provider to a third party would not separately charged as investment advisory fee given the fact that the investment advisory function will ordinarily be part of the PMS services and will be subsumed within the activity of portfolio management services only. If the assessee is characterized as Portfolio Manager, then as pointed out by the Ld. Counsel on the strength of the observation made in the Bombay High Court decision, in such cases, the PMS fees is around 2% to 2.5% of the average value of investments and if such a fee is taken into consideration then what assessee has received is far more than the PMS would generally charge. In any case, if the revenue is of the view that, it is a separate transaction and is not part of the investment advisory functions, then it needs to be separately benchmarked and such benchmarking can only be done by carrying out comparability analysis with uncontrolled comparable transactions under the transfer pricing provisions

23 �ी आई इं�डया �ाइवेट �ल�मटेड 3I India Private Limited Act, read with the rules. Benchmarking the price on adhoc manner and by resorting to estimate without any basis and analysis cannot be resorted for determining the Arm’s Length Price of any transaction, at least under present transfer pricing mechanism. This precise issue has been dealt in detail by the Tribunal in the case of Temasek Holding Advisors India Pvt. Ltd. (supra) in the following manner:- “26. Lastly, coming to the addition of 3% markup additionally made over and above the comparative margin arrived at by the TPO, we find that same is not tenable from any quarters. The TPO has added this markup on the ground that assessee in addition to investment advisory services has rendered portfolio management services, that is, it is monitoring the funds for its AE, hence for such a distinct function further upward adjustment should be made. First of all for making such transfer pricing adjustment a comparability analysis has to be done and then only margins can be benchmarked. He has not brought on record that, assessee is rendering any additional function which is not included in the investment advisory function. The TPO has to show that there are additional functions or services rendered by the assessee in this year qua the assets employed, functions performed and risks assumed. As submitted by Ld. Counsel, cost plus mark- up compensation is received for all the investment advisory services and the monitoring activity is part and parcel of the same advisory services. Moreover if the activities of the assessee have remained the same and FAR Analysis has been done on investment advisory services as in the earlier years, then how such services have become different in this year without any new material fact has not been elaborated by the TPO. We agree that such an additional mark-up applied by the TPO is without any FAR analysis or without any 24 �ी आई इं�डया �ाइवेट �ल�मटेड 3I India Private Limited benchmarking exercise with any comparables and more importantly without any analysis of assessee’s own facts. The assessee is providing non-binding investment advisory services to its AE and such services as highlighted by Ld. Counsel include; identifying and analyzing potential investment opportunities, evaluating and making recommendations to THPL with respect to specified investments. The monitoring functions performed by the assessee are part and parcel of the portfolio advisory services rendered by it because, the activities carried out by the assessee while undertaking portfolio monitoring activities include analysis of the latest development in the industry, ongoing performance of the industries and providing necessary information to its AE from time to time. This aspect has been noted by the ITAT, Mumbai Bench in the case of Carlyle India Advisors Private Limited (supra) and in other decisions cited above by the Ld. Counsel. Thus, we hold that no such addition or adjustment on account of extra markup can be made. Accordingly, we direct to delete the addition”.

25 �ी आई इं�डया �ाइवेट �ल�मटेड 3I India Private Limited and overall functions are concerned, it remains the same not only in the earlier years but also in subsequent years. Thus, this year no exception can be carved out to deviate from the principle of consistency; and accordingly, we hold that no separate adjustment on account of PMS can be made that too on ad-hoc basis without adhering to Transfer Pricing provisions under the Income-tax Act as well as IT Rules. Though the APA in the case of assessee has been entered from AY 2005-16 onwards but it does give an indication that the ‘Cost + Mark up’ charged by the assessee in this year (20%) is in and around the same range which has been agreed in the APA (21%). The relevant portion of the APA for the sake of ready reference is reproduced below:

6. Arm’s Length Price:

26 �ी आई इं�डया �ाइवेट �ल�मटेड 3I India Private Limited (hereinafter referred to as “ALP”) of the covered transactions shall be the operating profit margin of not less than 21% for each previous year of APA Years and Rollback Years.

The determination of ALP for Rollback Years is subject to the condition that the ALP would get modified to the extent that it does not result in reducing the total income or increasing the total loss, as the case may be, of the applicant as already declared in the return of income of the said years”.

27 �ी आई इं�डया �ाइवेट �ल�मटेड 3I India Private Limited 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 97.89% 97.89% Advisors 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

28 �ी आई इं�डया �ाइवेट �ल�मटेड 3I India Private Limited 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 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

29 �ी आई इं�डया �ाइवेट �ल�मटेड 3I India Private Limited 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. :-

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.

Motilal Oswal Investment and Advisor Ltd :-

31 �ी आई इं�डया �ाइवेट �ल�मटेड 3I India Private Limited 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 Motilal Oswal cannot be put into the comparability list and is directed to be excluded. Future Capital Investment Advisory Ltd:-

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.

21. 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.

33 �ी आई इं�डया �ाइवेट �ल�मटेड 3I India Private Limited 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.

Order pronounced in the open court on 16th September, 2016.

Sd/- Sd/- (आर सी शमा�) (अिमत शु�ला) लेखा सद�य �याईक सद�य (R C SHARMA) (AMIT SHUKLA) ACCOUNTANT MEMBER JUDICIAL MEMBER Mumbai, Date: 16th September, 2016 ��त/Copy to:- 1) अपीलाथ� /The Appellant. 2) ��यथ� /The Respondent. 3) The DIT/Addl.CIT(TP) –Concerned/II(5)___, Mumbai. 4) The Commissioner of Income Tax/DIT-TP-II ____ Mumbai. 5) �ितिनिध िवभागीय“K”, अिधकरण अपीलीय आयकर, मुंबई/ The D.R. “K” Bench, Mumbai. 6) गाड�फाईल\ Copy to Guard File. आदेशानुसार/By Order / / True Copy / /