Loading judgment…
No AI summary yet for this case.
Income Tax Appellate Tribunal, MUMBAI K BENCH, MUMBAI
Assessment year: 2008-09 Page 1 of 8 IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI K BENCH, MUMBAI [Coram: Pramod Kumar AM and Pawan Singh JM] Assessment year: 2008-09 ICICI Prudential Asset Management Co. Ltd. …..…………….Appellant 3rd floor, Hallmark Business Plaza Sant Dyaneshwar Marg, Bandra (East) Mumbai 400 051 [PAN: AAACI 1000 K] Vs. ………….…Respondent Additional Commissioner of Income Tax Range 2(2), Mumbai. Appearances by: Nitesh Joshi for the assessee N K Chand for the Assessing Officer Date of concluding the hearing : January 4, 2016 Date of pronouncing the order : March 31st, 2016 O R D E R Per Pramod Kumar, AM:
This appeal, filed by the assessee, calls into question correctness of the order dated 30th October 2012 passed by the Assessing Officer, in the matter of assessment under section 143(3) r.w.s. 144C(13) of the Income Tax Act, 1961, for the assessment year 2008-09.
While ground no. 11 was not pressed by the assessee, ground nos. 1 to 10, which pertain to the same issue, i.e. correctness of arm’s length price adjustment of Rs 28,71,30,628 in respect of investment advisory fees charged to the associated enterprises, are as follows: “1. The AO/TPO erred in making and the DRP erred in confirming the transfer prizing adjustment of Rs.28,71,30,628 to the income from investment advisory services.
Assessment year: 2008-09 Page 2 of 8 2. The AO/TPO/DRP failed to appreciate that in the Appellant's case there was no question of undercharging the Associated Enterprises in respect of rendering of investment advisory services, therefore, no adjustment could be made by invoking the provisions of Chapter X of the Act. The transfer pricing adjustment as made by the TPO in respect of investment advisory services is without jurisdiction as the preconditions mentioned in section 92C(3) of the Act have not been fulfilled in the present case.
3. The AO/TPO erred in rejecting and the DRP erred in upholding the rejection of Transactional Net Margin Method (TNMM) adopted by the Appellant as the most appropriate method for computation of arms length price in respect of investment advisory services.
4. Assuming without admitting that the AO/TPO/DRP were not satisfied with the mariner of determination of the profit linked indicator in the Appellant's case for the purposes of applying the TNMM method, they ought to have made appropriate adjustments to such working instead of rejecting the said method.
5. The AO/TPO erred in applying and the DRP erred in upholding the Comparable Uncontrolled Price (CUP) as the most appropriate method for determination of arms length price in respect of investment advisory services. They ought to have held that there could be no comparable in respect of such transaction.
The AO/TPO/DRP failed to appreciate that determination of fees for rendering investment advisory services is based on negotiation between the parties. Further, the business model of such services is such that the fees to be charged is influenced by several factors including the size of the mandate, timing of mandate, geography, market conditions, fund complexity, competitive position of the enterprises, future business potential, continuity of business, fee spread etc. and no reliable adjustments can be made in respect of such distinguishing factors.
7. The AO/TPO/DRP erred in holding that the fees charged by the Appellant for rendering investment advisory services to Bourse Securities, Trinidad and Taib Bank EC, Bahrain being non AE's are internal comparables and fees charged by the Appellant to its Associated Enterprises ought to have been similarly done.
The AO/TPO/DRP failed to appreciate that the transfer prising adjustments made by the TPO results in the absurd consequence where fees to be received by the Appellant for rendering investment advisory services to associated enterprises will be more than the fees received by the associated enterprises for rendering investment management services to third parties of which investment advisory rendered by the Appellant was a part.
9. Assuming without admitting that CUP method is the most appropriate method in the present case for computation of arms length price, then, instead of Assessment year: 2008-09 Page 3 of 8 taking the investment advisory fee earned by the Appellant from non AEs the Revenue should have determined the fee split ratio between the investment manager and the investment advisor in respect of transactions with non AEs and the arm's length price for rendering of investment advisory services ought to have been determined on that basis.
10. The AO/TPO/DRP erred in observing that a. There is clear cut product identity between investment advisory services rendered to associated enterprises and third parties without appreciating the investment mandate/objective of each respective fund. b. Segmental accounts for investment advisory activity have not been prepared in a rational manner without pointing out any flaws in it. c. Volume factor is not present in pricing for investment advisory by merely comparing the fee and volume of two investment mandates without appreciating the scope of work involved in each investment advisory mandates.”
As all the above grounds of appeal pertain to only one issue, i.e. arm’s length price adjustment of Rs 28,71,30,628 in respect of investment advisory fees charged by the assessee from its associated enterprises, we will take up all these grounds of appeal together.
The issue in appeal lies in a rather narrow compass of material facts. The assessee before us is a joint venture company owned by ICICI Bank Ltd, India (51%) and Prudential plc, UK (49%). The assessee is engaged in the business of rendering portfolio management services, mutual fund services and investment advisory services. During the relevant previous year, the assessee rendered investment advisory services to its AEs, namely Prudential Asset Management Singapore Limited- PCA India Infrastructure Equity Open Limited, PCA Securities Investment Trust Co Ltd, Taiwan and ICICI International Limited, Mauritius. The consideration for the services so rendered by the assessee was Rs 15,74,58,152, Rs 5,70,88,734 and Rs 58,54,867 respectively. The consideration so received was claimed to be arm’s length price on the services rendered by the assessee. The benchmarking was done under transactional net
Assessment year: 2008-09 Page 4 of 8 margin method (TNMM) on the basis of operating EBIT (earning before interest and tax) as percentage of sales, as profit level indicator. The EBIT was stated to be 97.84%. The Transfer Pricing Officer rejected this segmental working by pointing out certain infirmities in the same. It was noted that the investment advisory fee is charges as a percentage of assets under management. He then proceeded to note that while, on an average, the assessee has charged fees of 0.77% of assets under management from the independent enterprises (non- AEs), the assessee has charged, on an average, 0.51% fees from the associated enterprises. While TPO noted that there are number of factors, such as size of AUM (assets under management), complexity of the funds managed, future business potential, market conditions, fund tenure and efforts involved on the mandate, which govern the fixation of investment advisory fees, he noted that there are two independent parties to which the investment advisory services were extended during the relevant previous year. He was of the view that the fee so charged could be treated as internal CUP. He then set out the reasons as to why the CUP is most preferred method of computing the arm’s length price. The comparables adopted by the TPO, for internal CUP, were as follows:
Name AUM Rate Date of fund Bourse Securities, Trininad 25,526,366 0.80% 25 Nov 05 Tabik Bank EC 3,981,679 0.75% 31 Jul 02
It was in this backdrop that the internal CUP was adopted @ 0.78% and the arm’s length price of the investment advisory services was recomputed on that basis. Accordingly, an adjustment of Rs 28,71,30,628 was proposed. Aggrieved, assessee raised an objection before the Dispute Resolution Panel but without any success. The DRP was of the view that “generally, most service providers of non binding investment advisory services, such as those services provided by the assesse, charge compensation on cost plus basis” but “the assessee, however, has linked its fees as percentage of the fund size”. The DRP
Assessment year: 2008-09 Page 5 of 8 then added that “therefore, in the facts of this case, compensation basis being critically different, an attempt to benchmark by application of TNMM would result in erroneous results” and “TNMM is, in our view, not the MAM (most appropriate method) in this case. The DRP then concluded as follows:
“3.1.10. There is no disagreement with the assessee’s contention that the TPO does not have unfettered power to arbitrarily reject the method adopted by the assessee and replace it by another method. At the same time assessee should also not put letters on TPO by merely stating objections regarding adjustments of differences without demonstrating the exact nature of adjustments it seeks and the calculations needed for benchmarking the ALP on CUP. As regards assessee’s adoption of TNMM on the basis of segmental results, it is observed that the segmental result annexed to the audited account AS-17 does not carry a separate segment of advisory services, winch is apparently bundled together with other income under the head 'others’. Moreover, purportedly un-allocable expenses are not accounted for segment nor any scientific accounting principles have been followed to compute the operating margin from the business segment for advisory services. The discrepancy in the figures pointed out by TPO also remained to be explained by the assessee. Since, the investment advisory has not been incorporated as a separate segment in the published account and the method and amounts of allocation is not acceptable for purposes of benchmarking, the method of TNMM adopted by the assessee stands on a weaker wicket more so when internal CUP is available to TPO for benchmarking the international transactions. More so, when as slated earlier the compensation model of assessee is different from other such service providers. 3.1.11 Keeping the aforesaid in view and the fact that there is a clear-cut product identity of the investment advisory services rendered to AE as well as independent parties, similarity of price setting mechanism, common source of rendering advisory services in India to all the parties, transaction of assessee with AE offer an ideal platform applying for CUP for benchmarking the international transactions. Therefore, the decision of the TPO and subsequently the proposal of the AO to make upward adjustment of Rs.28,71,30,628/- towards international transaction involving investment advisory services is upheld and the objections of the assessee are dismissed.”
6. The assessee is aggrieved and is in appeal before us.
We have heard the rival contentions, perused the material on record and duly considered facts of the case in the light of the applicable legal position.
Assessment year: 2008-09 Page 6 of 8 8. We have noted that the TPO has proceeded to adopt the CUP method because of certain issues in applying TNMM on the facts of this case. Undoubtedly, CUP has an inherent edge over other methods of ascertaining the arm’s length price as it is most direct method, but what is sine qua non for application of CUP is a comparable uncontrolled transaction. What is being sought to be compared with a fees, in terms of percentage of asset under management, on US $ 135.83 million fund or US $ 37.75 million fund- as with AEs, the fees, in terms of percentage of assets under management, with US $ 2.55 million or US $ 0.39 million funds- as with non AEs. The volume of business is so diametrically different that the fees, in percentage terms, ceases to be comparable. There is no, and there cannot be any, dispute that managing the funds of such different sizes is not the same comparable. It is, treated as a comparable transaction because it is not the consideration, in terms of quantified amount, which is being compared, but the formulae, in accordance with which the consideration is to be computed, is being compared. That, however, proceeds on the fallacy that the quantum of work involved in transactions being compared will be moving exactly parallel to the increase or decrease in the assets under management. The quantum of work involved in investment advisory services cannot, by any stretch of logic, be governed solely by the size of the assets under management, even though the consideration for services, as a matter of practice or convenience- rather than a scientific basis, is sometimes fixed on the basis of assets under management. It is also a common practice that when AUM size is small, and the market is less competitive, the fees in percentage terms will be higher, and when AUM size is big, and the market is more competitive, the fees in percentage terms will be lower. The exercise of ascertaining the arm’s length price, simplictor on the basis of the fees in percentage terms with non AEs and without having regard to the other factors governing determination of price, is inappropriate and unsustainable in law. It is also important to bear in mind the fact though rule 10B refers to the expression ‘price’, rather than the expression ‘amount’, the connotations of ‘price’ cannot extend to a formula on the basis of which the amount is to be Assessment year: 2008-09 Page 7 of 8 quantified, in all situations- particularly when the formula on the basis of which amount is determined does not have a direct nexus with the product or service involved. What has been adopted as internal CUP, i.e. fees in percentage terms at the level of US $ 0.39 million fund and US $ 2.55 million fund, is inherently incomparable with the fees, in percentage terms at the level of US $ 135.83 million fund and US $ 37.75 million fund. We, therefore, reject the adoption of this internal CUP.
We have noted that the DRP has justified rejection of TNMM on the ground that the normal trade practice is to invoice the investment advisory services, in intra AE transactions, on cost plus basis. It is difficult to understand the rationale of this approach. What is done by other entities in similar situations is hardly relevant as long as no defects are pointed out in the applicability of the TNMM on the facts of this case. The internal CUP, as used in this case, has been found to be inappropriate and unacceptable. There is nothing else to show the suitability of any other method on the facts of this case, and, if at all there is a residuary method, or what is termed as the method of last resort, it is transactional net margin method. TNMM has almost become the 'default' method for taxpayers in recent years. In view of these discussions, in our considered view, the TNMM method, as adopted by the assessee, should have been accepted. We have also noted that the assessee has produced segmental accounts for the investment advisory services in this case. As regards the point that only salary costs are taken into account in the segmental accounts and other costs are not taken into account and other issues with respect to correct working of the TNMM, with the consent of the parties, we remit the matter to the file of the TPO for adjudication de novo on the correctness of the segmental accounts, in accordance with the law, by way of a speaking order and after giving yet another opportunity of hearing to the assessee.
In view of the above discussions, while we uphold the objection of the assessee, in principle, we remit the matter to the file of the TPO for the limited
Assessment year: 2008-09 Page 8 of 8 purposes of examining the correctness of segmental accounts- in terms of our directions above.
In the result, the appeal is allowed for statistical purposes in the terms indicated above. Pronounced in the open court today on 31st day of March, 2016.