Investment Banking/ Merchant Banking activities held by the Tribunal as functionally different from provision of Investment Advisory services
The only comparable chosen by the assessee viz., M/S.IDC India Ltd., which has also been relied upon by the TPO now survives for consideration. The com parables chosen by the assessee on the basis of the contemporaneous data for A.Y 2006- 07 gives an arithmetic mean of 18.97% which we have already mentioned. This is the highest arithmetic mean of the comparable chosen by the assessee. Even if this arithmetic mean is taken to be reflecting the operating margin of the comparable companies, the same is within 5% range of the operating margin of the assessee. We find that the TPO has not given any reason whatsoever for rejecting these com parables.
As we have already explained the reasons given by the TPO does not any where mentioned as to how the com parables selected by the assessee were not functionally comparable. This Tribunal in the case of Maeserks Global Service Center India Pvt. Ltd., in ITA No.3774/M/11, has taken the view that if TPO does not reject a comparable on the ground of functional in comparability then neither the AO or the revenue can take a plea of functional in comparability of the com parables chosen by the assessee in its TP Study. We are, therefore, of the view that the assessee’s operative margin has to be held as within the range of 5% of the arithmetic mean of 18.97% of comparable companies and the same has to be accepted as ALP. For the reasons given above, the addition made by the AO and confirmed by the DRP is directed to be deleted.
INCOME TAX APPELLATE TRIBUNAL, MUMBAI
ITA NO. 7901/MUM/2011 (A.Y.2007- 08)
Carlyle India Advisors Private Limited Vs. The ACIT
Date of hearing: 28/03/2012
Date of pronouncement: 04/04/2012
ORDER
PER N.V.VASUDEVAN, J.M,
This is an appeal by the assessee against the order dated 28/10/2011 passed by the ACIT -10(1), Mumbai under section 143(3) of the Act r.w.s. 144C of the Income Tax Act, 1961(the Act). The grounds of appeal raised by the assessee read as follows:
“1.That the Assessing Officer (‘AO”) erred on facts and circumstances of the case and in law in assessing the income of the Appellant under the normal provisions of the Income Tax Act, 1961 (the Act) at Rs. 17,52,18,050 against returned income of Rs 3,80,76,259 based on the directions received from Hon’ble Dispute Resolution Panel (“DRP”) upholding the adjustment to the transfer price proposed by the learned Transfer Pricing Officer (‘TPO”).
2. That the Ld AO/TPO erred on facts and circumstances of the case and in law in proposing and the Hon’ble DRP further erred in upholding an addition of Rs 13,71,41,793 in respect of the international transactions relating to investment advisory support services alleging the same to be not at arm’s length in terms of the provisions of Sections 92C(1) and 92C(2) of the Act read with Rule 1OD of the Income-tax Rules,1962 (“the Rules”).
2.1 That the Ld AO erred on facts and circumstances of the case and in law, in not accepting the arm’s length price determined by the Appellant, and in choosing to determine the arm’s length price by making reference to the TPO even though none of the conditions laid down under section 92C(3) of the Act, were satisfied.
2.2 That the Ld AO/ TPO/ DRP erred on facts and circumstances of the case and in law in rejecting the Transfer Pricing documentation submitted by the Appellant and in not appreciating that the arm’s length price of the international transactions in relation to investment advisory support services was appropriately determined in the Transfer Pricing documentation applying Transactional Net Margin Method (‘TNMM’).
2.3 That the Ld AO/TPO/DRP erred on facts and circumstances of the case and in law by not appreciating the business model of the appellant and by comparing the activities of the Appellant, which is engaged in provision of ‘investment advisory and related support service’ to the activities undertaken by investment and merchant banks.
3. That the Ld AO/TPO/DRP erred facts and circumstances of the case and in law by not taking cognizance of the business model, functional and risk of the Appellant as outlined in the Transfer Pricing documentation and as submitted during the course of the proceedings.
3.1 That the Ld AO/TPO/DRP erred on facts and circumstances of the case and in law by rejecting the search process carried out by the Appellant, without giving adequate reasons for the rejection and further choosing comparable companies which were functionally or otherwise not comparable to the Appellant.
4. That the Ld AOITPO erred on facts and circumstances of the case and in law by proposing and the Hon’ble DRP has further erred in upholding / confirming the action the Ld AO/TPO in denying the (+/-) 5% benefit envisaged under proviso to Section 92C(2) of the Act.”
2. In so far as ground No.4 is concerned the ld. Counsel for the assessee has submitted before us that the assessee is not pressing for a standard deduction of (+/-) 5% benefit envisaged under proviso to section 92C(2) of the Act and that the benefit may be extended only to the extent that the difference between price adopted by the assessee and the ALP as determined by the TPO is within 5% range contemplated by the proviso to section 92C(2) of the Act.
3. The assessee is a company. The Carlyle Group (‘TCG’) was established in 1987 as a private global investment firm that originates, structures and acts as lead equity investor in management-led buyouts, strategic minority equity investments, equity private placements, consolidations and buildups, and growth capital financings. It is primarily engaged in the business of managing investments of High Net Worth Individuals/Institutional Investors (HNIs’). It sets up various Funds, which in turn invests in entities across the globe. TCG is a private partnership and is owned by a group of individuals and one institution, California Public Employees Retirement System (‘CaIPERS’) which owns 5.5% of the Carlyle Group. Further, each of the fund has a General Partner (‘GP’) (at times a limited partner), which is a Carlye entity. All the decisions with respect to investment by funds are made by GP who operates and manages the funds. GPs obtain advice in relation to their funds and investments from (1) Carlyle Investment Management LLC (‘Carlyle US’) (2) Carlyle Asia Investment Advisors Limited (‘Carlyle Hong Kong’) Carlyle Hong ong was incorporated as a wholly owned subsidiary of Carlyle US in Hong Kong in February 1998. It provides consulting services, including investment advisory, technology support, management consultancy and other advisory services to the GPs with respect to the investments made by the Group in the Asia-Pacific region.
4. The Assessee Carlyle India Advisors Private Limited (‘Carlyle India’) was incorporated in India in October 2000, and is a subsidiary of Carlyle Hong Kong. Carlyle India provides investment advisory related support services to Carlyle Hong Kong. It houses six investment personnel who analyze investment opportunities in growth capital and buyout deals in India. In this appeal we are concerned with the determination of Arm’s Length Price (ALP) in respect of the international transaction, viz., rendering of investment advisory and related support services by the Assessee to Carlyle Hong Kong, which is admittedly an Associate Enterprise (AE) of the Assessee.
5. Since the assessee entered into an international transaction with associate enterprise the provisions of section 92C of the Act were applicable. The assessee in support of his claim that the remuneration that it received from Carlyle Hongkong for rendering investment advisory and related support services was at ALP, filed a transfer pricing report, in which the Assessee had described the nature of the services rendered by it.
6. As already stated, Carlyle Hong Kong gives investment advisory related support services to the GPs. To primarily identify and evaluate potential investee companies in India, Carlyle Hong Kong engaged the services of the Assesssee. Carlyle Hong Kong had entered into a Services Agreement with the Assessee effective from April 1, 2006 read with letter dated April 1, 2006 exchanged between the two (‘Services Agreement’) for rendering services.
Scope of Services
As per the terms of the Advisory Agreement, Assessee inter-alia provides following services (‘the said Services’) to Carlyle Hong Kong:
a. Analysis of investments opportunities and the provision of general advice in relation thereto, as per Carlyle Hong Kong’s instructions.
b. Analysis of information to Carlyle Hong Kong on the merits, timing, structure, and appropriate terms of any acquisition or disposal of investments and general advice in relation thereto;
c. Monitoring of all investments by the Funds from time to time under the instructions of Carlyle Hong Kong, and the provisions of reports thereon to Carlyle Hong Kong;
d. Provision of information in relation to the economic and political developments in India having a bearing on investment opportunities;
e. To assist Carlyle Hong Kong in identifying external advisors and consultants, to assist them in identifying or investigating any commercial, legal, regulatory or tax matters in relation to a potential investment opportunity or divestment;
f. Assistance and support in relation to potential investment opportunities and providing related information to Carlyle Hong Kong as required.
g. Provision of such other support services incidental or related to the foregoing services, as requested by Carlyle Hong Kong from time to time.
Fees:
In consideration for the said support services provided under the Services Agreement. Carlyle Hong Kong compensates the Assessee, a monthly service fee, which is equal to 115% of actual operating expenses (including depreciation on capital assets),incurred by and for the account of Carlyle India in connection with the provision of the said Services”
7. During the previous year the Assessee had prepared research reports in respect of 33 companies whose shares are listed in Stock Exchanges in India. Ultimately TSG made investments only in shares of one company by name Allsec Technologies. The companies in respect of which the Assessee prepared research report and the research report in respect of Allsec Technologies are given in page 617 to 624 of the Assessee’s paper book. It is not in dispute that the Assessee was paid 115% of the costs it incurred in providing services to Carlyle Hong Kong. The assessee filed Transfer Pricing Study together with information/documents maintained in accordance with Sec.92D(1) of the Income Tax Act, 1961 read with Rule 10D(1) of the Income Tax Rules, 1962. In he Transfer Pricing Study the actual functions performed by it in the matter of rendering investment advisory related support services to Carlyle Hong Kong, assets employed by the assessee and the risks assumed by the assessee while rendering services to its AE have all been set out. The main aspect highlighted by the Assessee was that it is a limited risk investment advisory entity. It has no decision making authority, does not invest its own capital, does not guarantee performance, is not at risk for non-payment, and functions solely to provide advice to its customer, which itself is an investment advisor. There is no privity of contract between the Assessee and clients of Carlyle Hong Kong.
8. The assessee had chosen the transaction net margin method as most appropriate method for measuring the ALP in support of the investment advisory services rendered to its AE. It is not dispute that the TNMM is the most appropriate method for determination of ALP.
9. The Assessee searched two widely recognized corporate data bases to identify potential uncontrolled com parables in repect of its advisory/research ctivity in financial services industries viz., Prowess and Capitaline Plus updated as of February, 15th, 2007. The manner which the Assessee had carried out search process as explained in its TP Study is as follows:
Summary of Search Process – Prowess
