Wells Fargo Real Estate Advisors P. Ltd, ... vs Assessee

आयकर अपील य अ धकरण, "के"खंडपीठ मंब ु ई INCOME TAX APPELLATE TRIBUNAL,MUMBAI - K BENCH सव ी आई पी बंसल , या यक सद य एवं राजे , लेखा सद य Before S/Sh. Vijay Pal Rao,Judicial Member & Rajendra,Accountant Member आयकर अपील सं/.ITA No.1093/Mum/2014, नधारण वष/Assessment Year-2009-10 Wells Fargo Real Estate Advisors Dy. CIT, Range-10(1) Private Limited ( previously known as Room No.455, Aayakar Bhavan, Wachovia Management Services Private Vs M.K. Road nd Limited)203, 2 Floor, Plot No.C-59 Mumbai-400 020.

G-Block, Bandra Kurla Complex Bandra (East),Mumbai-400 051.

PAN: AAACW 7131 M (अपीलाथ /Assessee) ( यथ / Respondent) नधा रती ओर से/Assessee by : Shri M.P. Lohia राज व क ओर से/ Revenue by : Shri N.K. Chand-CIT सुनवाई क तार ख/ Date of Hearing : 19- 05 -2015 घोषणा क तार ख / Date of Pronouncement : 27-05-2015 आयकर अ ध नयम,1961 क धारा 254(1)के अ तगत आदे श Order u/s.254(1)of the Inco me-tax Act,1961(Act) लेखा सद य राजे के अनुसार PER RAJENDRA, AM-

Challenging the order dt.20.1.2014 completed by the Assessing Officer(AO) completed u/s. 143 (3)r.w.s 144C (13) of the Act, the assessee has raised following Grounds of Appeal:

Aggrieved by the order passed by the Deputy Commissioner of Income-tax Range -10(1). Mumbai ('AO') in pursuance of the directions issued by Dispute Resolution Panel - I ('DRP'), Mumbai under section 143(3) read with section 144C(13) of the Income-tax Act,1961(' Act'), the Appellant respectfully submits that the learned AO erred in passing the order on the following grounds:

1.In making an upward transfer pricing adjustment of Rs 61,790,764/- in determining the arm's length price (ALP) of the international transaction pertaining to investment advisory/ support services provided by the Appellant to its overseas Associated Enterprises (AE) by rejecting comparables selected by the Appellant, inter alia, on following grounds:

i. Rejecting the search process adopted and documentation maintained by the Appellant for the international transaction for the purpose of determining arm's length price; ii. Not providing a detailed search process undertaken to arrive at the final set of comparable companies;

iii.Adopting a set of comparable companies inter-alia engaged in rendering merchant banking/ investment banking and management consultancy in turnaround & restructuring, mergers and amalgamations etc. which are not comparable to the assesse.

iv. Rejecting the multiple year data and relying only on the single year data (i.e. for the year ended March 2009);

v. Considering companies with supernormal profits as comparable to the Appellant vi. Considering comparable companies having substantial related party transactions as comparable to the Appellant.

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2. Without prejudice to above grounds, in not granting the benefit of the provisions of section 92C(2) (i.e variation of +/ - 5 percent) of the Act in computing the revised ALP for the international transactions pertaining to provision of investment advisory services to its AEs.

3. The Appellant craves leave to add, alter, vary, omit, substitute or amend any or all of the above grounds of appeal, at 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. Vide its letter dt. 5.11.2014 the assessee has raised following additional grounds of appeal:

"1.The Hon'ble DRP has erred in not adjudicating and thereby not accepting IDC Limited as comparable to the appelant's finctions, without appreciating the facts and circumstances of the case. (Refer para 2 of the letter filed with DRP-II letter dated 17 January 2014 and 7 March 2014)."

During the course of hearing before us authorised representative (AR) of the assessee did not press grounds No.1.(i), 1.(ii), 1.(iv).Hence,same stand dismissed as not pressed. It was further stated that Ground No.1.(iii) was the effective ground as far as Ground No.1 was concerned, that the other grounds were of consequential nature.

2.Assessee-company,engaged in three business activities namely investment advisory segment, wholesale credit and treasury segment and retail financial services segment, filed its return of income on 30.9.2009 ,declaring total income of Rs.4,09,91,773/-.The AO completed the assessment u/s.143(3) of the Act on 20.1.2014,determining the income of the assessee at Rs.10, 27,81,540/-.

3.Effective ground of appeal is about upward Transfer Pricing (TP) adjustment of Rs.6,17, 90, 764/-in determining the Árm's-Length-Price (ALP) of the international transactions pertaining to investment advisory/support services provided by the assessee to its overseas Associated Enterprises(AE).In the TP study the assessee adopted seven comparables namely-Birla Sun Life Asset Management Co. Ltd.,Credible Management & Consultants Pvt. Ltd., D S P Block Rock Investment Managers Ltd., Edelweiss Securities Ltd.,ICRA Management Consulting Services Ltd., SREI Capital Markets Ltd., Sumedha Fiscal Services Ltd.The AO made a reference,u/s.92 CA(1) of the Act, to the Transfer Pricing Officer(TPO) for the computation of ALP of the interna

-tional transactions entered into by the assessee.The TPO tabulated the international transactions of the assessee in following manner:-

SN Nature of AE with which transaction Value of Most Transaction undertaken transaction Appropriate (in Rs.) Method 1. Finanical support Wachovia Development 69,32,335 TNMM services Corporation, USA 2. Service income Wachovia Development 18,15,66,918 TNMM Corporation, USA 3. Reimbursement of Various AEs 4,10,69,549 TNMM expenses(paid)

He found that financial result for the year under consideration were as follows:

Description Amount(Rs.) Operating Revenues 18,21,24,386 Operating Expenses 15,38,70,269 Operating profit 2,82,54,117 2 1093-/14-Wells-AY :09-10

OP/TC (PLI) 18.36%

After going through the details filed by the assessee,the TPO held that the operating profit to the total cost ratio was to be taken as Profit Level Indicator (PLI) in TNMM analysis, that the PLI of the assessee was at 18.36% on cost, that the average PLI of the comparables was 14.67% as per the analysis of the TP document,that the price charged by the assessee for its international transactions was higher than the arithmetical mean price, that the price charged had to be treated as at arm's length,that the PLI of the comparables was arrived by considering weighted average margin of 3 years i.e. data for the FY.s 06-07 to 08-09.Referring to Rule 10(4) of the Income Tax,Rules,1962(Rules)the TPO held that it was mandatory to use only the current year data, that the assessee did not consider the data for AY-09-10 in any of the seven comparables, that the TP documentation was vitiated by not using current year data, that the assessee had considered such comparables that were functionally different from it.Vide his letter,dt.19.12.2010,the TPO proposed to reject the TP study carried out by the assessee, as per the provisions of section 92C (3)(c) r.w.s.92CA(3) of the Act.The assessee objected to determination of the ALP of the international transaction by the TPO and filed submissions in that regard.After considering the submissions,he held that there were pertinent defects in the selection of comparables by the assessee, that the determination of ALP by it was unreliable, that the assessee had correctly followed the TNMM as the most appropriate method, that it did not use the current year data in one of the seven comparable selected by it, that it also used the earlier year data along with the current year data,that investment advisory services industry in India was not of cyclic nature, that no facts had been got on record to justify use of earlier year data, that the entire comparability exercise undertaken by the assessee was vitiated.The TPO applied certain filters and held that the comparables applied by the assessee could not be accepted as appropriate comparables for benchmarking the ALP of the transactions.

He further held that from the search process followed by it, as narrated in the TP study report, it had used the prowess and capital line database for finding comparables and using key-phrases, that it did not use the crucial key-phrase i.e. investment advisory services while searching comparables. The TPO made further search in the data base available in public domain.Vide his letter,dt.17.1.2007,he asked the assessee to explain as to why the transactions entered by it with the AE should not be benchmarked for determining ALP with reference to the arithmetic mean of the PLIs (OP/TC) of Motilal Oswal Investment Advisors Pvt. Ltd.(MOIAPL), Future Capital Investment Advisors Ltd.(FCIAL)and Integrated Capital Services Ltd.(ICSL).

He directed the assessee to submit annual report of the company for the FY 2008-09 and to compute the PLI of operating profit margin on operating cost after excluding effects of foreign exchange fluctuation, non-operating items and extra ordinary items. The assessee vide its letter dt.13.1.2013 objected to considering the comparable selected by the TPO. After considering the objections of the assessee the TPO considered following comparable:

Sl.No. Name of the company PLIassesseeOP/TC(%) 1. Motilal Oswal Investment Advisors Pvt. Ltd. 82.44 2. Future Capital Investment Advisors Ltd. 23.40 3. Integrated Capital Services Ltd. 69.72 Arithmetical Mean Margin 58.52

Finally,the TPO computed the APL as under : 3 1093-/14-Wells-AY :09-10

Arm's Length mean margin 58.52% on cost Operating Cost Rs.15,38,70,269/- Arms Length Mean Margin 58.52% of the Operating Cost Arms Length Price @ 158.52% of operating cost Rs.24,39,15,150/- Price charged Rs.18,21,24,386/- Shortfall being adjustment u/s. 92CA Rs.6,17,90,764/-

The shortfall of Rs.6.17 crores was treated as TP adjustment in respect of price charged in rendering investment advisory and support services to the AEs for the FY 2008-09.After receiving the order of the TPO,the AO sent the draft order to the assessee.

4.Challenging the draft order of the AO,before the Dispute Redressal Panel(DRP),the assessee raised three grounds of appeal as well as additional grounds of appeal.It made submission before the DRP about MOIAPL and argued that it was engaged in provision of Merchant Banking services,that it was offering comprehensive Investment Banking solutions and transaction expertise covering private placement of equity,debt and convertible instruments covering international & domestic capital markets, mergers & acquisitions advisory and restructuring advisory & implementations,that the income of MOIAPL was largely from cross border and M&A activity and the related financing solutions.About ICD,the assessee argued that it provided restructuring advisory and turnaround management advices,that those activities would generate higher revenue as compared to purely investment advisory provided by the assessee. In this connection, it had relied upon the decision in the case of General Atlantic Pvt.Ltd. and Carlyle India Advisors Pvt. Ltd.It was also contended that there were various anomalies in the search process conducted by the TPO,that MOIAPL,ICSL were earning supernormal profits 82.44% and 69.79% respectively,that those comparable should be rejected.The assessee placed reliance on the following judicial precedents for exclusion of companies with significant related party transactions:

1.24/7 Customer.Com Pvt. Ltd (ITA No. 227/ Bang/2010),

2.Benetton India Pvt. Ltd.(144 TTJ 449),

3.M/s Willis Processing Services (I) P Ltd.(ITA No. 4429 & 4547/Mum/2012),

4.M/s LG Soft India Private Limited[IT(TP)A No. 1121/ Bang/ 2011],

5.Sony India Pvt. Ltd (118 TTJ 865),

6.M/s CSR India Pvt. Ltd. V. ITO 11(1) [IT(TP)A No.1119/Bang/2011].

After considering the submissions of the assessee, the draft order of the AO and the order of the TPO the DRP held in terms of functions performed, MOIAPL appeared to be similar to the assessee,that it had entered into various projects where it had provided advise relating to financial matters and also helped in raising funds through debts,that it had advised clients on financial restructuring and giving over view of the Indian Financial markets,that in one of the project it had helped a client in obtaining a joint venture partner,that the assessee had performed the service of analysing "the various financial option, review and financing of models for its c1ients,that MOIAPL also performed similar activity and helped its clients in raising funds through various methods,that the TPO had rightly included the same in the final list of comparables. The DRP did not pass any direction with regard to Integrated Capital Services Ltd. and Fututre Capital Investment Advisors Ltd.

5.During the course of hearing before us,Authorised Representative (AR) stated that that transactions with AE was within the arm's length range under the provisions of section 92 of the 4 1093-/14-Wells-AY :09-10

Act,that the TPO had rejected seven comparables selected by the assessee, that he introduced three new comparables, that no opportunity was given to the assessee in that regard, that the TPO had discussed as what was the basis for selecting the three comparable, that he did not give the job profile of the comparables selected by him, that the DRP has discussed the order of the TPO with regard to MOIAPL only, that it failed to give any direction about the remaining 2 comparables selected by the TPO and objected to by the assessee, that the assessee was not a merchant banker like MOIAPL, that merger and acquisitions were the main activities of MOIAPL, that assessee was basically engaged in the business of investment advisory, that DRP had not given any direction about IDC, that remand report was called for. He referred to pg. no.14, 20, 64, 88, 199, 200,362-364, 145, 142. It was also argued that the assessee had filed an application u/s. 154 of the Act before the DRP. In that regard the AR referred to pg. No.191 and 350 of the paper book.He referred to cases of Carlyle India Advisors Private Limited( ITA/2200/ Mum/2014-AY.2009-10, dt.22.8.2014),NVP Venture Capital India Private Ltd. (ITA/1564/ Mum/2015 AY.2010-11, dt.30.4.2015), Sandstone Capital Advisors Pvt. Ltd. (ITA/6315/ Mum/ 2012AY.2008-09,dt.06.2.2013)and Q-India Investment Advisors Private Limited(ITA/923/ Mum/2015 AY 2010-11,dt.24.4.2015).Departmental representative supported the order of the DRP and the AO. He referred to the service level agreement entered into by the assessee on 24. 11.2008 and contended that job-profile of the assessee was similar to the functions performed by the 3 companies selected by the TPO that function of Carlyle were not similar to the functions performed by the assessee.

6.We have heard the rival submissions and perused the material before us.We find that on 07. 12.2012 the assessee had submitted its profile and analysis of the functions performed, assets utilised and risks assumed. As per the FAR the assessee would identify opportunity for parent company to participate in equity security particularly relating to commercially physical projects in the real estate sector,that it was sharing business intelligence, market research, compliance of regional regulatory requirement so as to assist its AE,that it would not conclude any contract on behalf of the AE nor was it facilitating external commercial borrowings in real estate business . We find that the TPO had rejected the comparable selected by the assessee and had adopted three new comparables.As far as MOIAPL is concerned,there is no doubt that the job profile of both the companies are different.The assessee is engaged in investment advisory services,whereas MOIAPL was carrying on business of mergers and acquisitions and other related activities. The assessee is not a merchant banker like MOIAPL.In the case of Carlyle India Advisors Private Limited (supra),the Tribunal has held that MOIAPL cannot be taken as a valid comparable in cases,where the assessee is rendering advisory servcies.In that matter the Tribunal held as under :

"8.We have heard both the parties and perused the orders of the Revenue Authorities as well as the relevant material placed before us. It is an undisputed fact that the assessee is engaged in the business of rendering investment advisory and related services to its principal Carlyle Hong Kong. The dispute raised in ground no.4 relates to whether (i) KLG Capital Services Ltd (KLG); (ii) KJMC Corporate Advisors (India) Limited (KJMC) and (iii) Motilal Oswal Investment Advisors Pvt Ltd (MOIAPL)are functionally comparable cases or not considering the decision of the Tribunal as well as the judgment of the Bombay High Court relied upon by the assessee. Regarding MOIAPL, assessee relied heavily on the order of the Tribunal in its own case for the AY 2008-2009, a copy of which is placed at page 282 of the paper book. On perusal of the said order of the Tribunal, we find that it is decided in favour of the assessee vide ITA No.7367jMumj2012 (AY 2008-2009), dated 7.2.2014. On perusal of para 12 of the said order of the Tribunal, which contains the operational part, we find the same is relevant and the Tribunal has given its finding under the facts which are 5 1093-/14-Wells-AY :09-10

similar to that of the AY under consideration. The MOIAPL,which has engaged in the business of merchant banking is not a good comparable for determining the ALP. Relevant contents of the said para 12 are reproduced here for the sake of completeness of this order which read as under:

"12...... .The only dispute is whether Motilal Oswal Investment Advisors Pvt Ltd can be considered as a comparable for determination of ALP.A perusal of three comparables considered by the TPO shows that M/s. Future capital Investment Advisors Ltd., has operating profit at 21.79% whereas OPM of Motilal Oswal Investment Advisors Pvt Ltd is 72.33%. The comparables used by the TPO themselves are showing extreme OPM.A perusal of the Directors report of Motilal Oswal Investment Advisors Pvt Ltd shows that during the year under consideration, the said company has completed 23 assignments successfully as against 14 completed in the immediately preceding year. A close look at the financial statements of the said company show that the income from operations have been shown only as advisory fees whereas it is admittedly an undisputed facts that the said company is engaged in diversified activities. Segmental reporting is not available. Profit and loss account appears to be only of consolidated accounts. The said company is registered with SEBI as a merchant banker and the Directors report show that it is into takeover, acquisitions, disinvestments etc. In the absence of specific data it is not possible to make comparison. It can therefore, be safely said that the said company being into merchant banking and cannot be considered as a comparable. We, accordingly, direct the AO not to consider Mottial Oswal Investment Advisors Pvt Ltd as a comparable for determination of ALP...... "

9.Considering the above, we direct the AO to exclude the MOIAPL from the list of the comparables for determination of ALP of the said transaction."

The Hon'ble Jurisdictional High Court has dismissed the appeal filed by the Department in the case of Carlyle India Advisors Private Limited (IT Appeal 1286 of 2012,dt.22.2.2013). Here,we would also like to refer to the order of NVP Venture Capital India Private Ltd. (supra),where in a case of investment advisory the comparable of MOIAPL was rejected by the Tribunal.In that matter the Tribunal had held as under :-

"7.We have carefully considered the rival submissions.We find that the assessee has been consistently canvassing before the lower authorities that Motilal Oswal Investment Advisors Private limited be excluded from the final set of comparables on the ground that its activities'are functionally incomparable to the activity of Provision of investment advisory services being rendered by the assessee to its Associated Enterprises. In fact, before the TPO, assessee pointed out that the said concern was engaged in providing comprehensive investment banking solutions and that it was rendering services across various products, viz. Equity Capital Markets, Mergers & Acquisitions, Private Equity Syndications and Structured Debt, etc. The appellant relied upon the decision of the Tribunal in the case of Carlyle India Advisors Private Limited (214 Taxmann 492), to support its plea for exclusion of the said concern from the final set of comparables. The TPO rejected the aforesaid plea on the ground that the Profit and Loss account of the said concern for the year under consideration showed that the only stream of income was from advisory services and not from any activity of merchant banking and, therefore, the said concern was carrying out only advisory services and, according to him, the said concern was includible in the final set of comparables. The DRP also accepted the position that the said concern was engaged in advisory services which are broadly comparable to the assessee's activities under test.

8.We have perused the relevant material on record. It is starkly evident that the said concern M/s. Motilal Oswal Investment Advisors Private limited is engaged in qualitatively different and diversified business activities, whereas the activities of the assessee are confined to rendering non-binding investment advisory for its Associated Enterprises. No doubt, both the concerns may be in the business of rendering advisory services,so,however, it would also be necessary to evaluate

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the manner and the specific sectors,in which such services are being rendered by the two concerns.It is revealed from the Annual Financial Statement of Motilal Oswal Investment Advisors Private limited that the said concern is engaged in rendering services in diversified fields, viz. Equity Capital Markets, Mergers & Acquisitions, Private Equity Syndications and Structured Debt,etc.In the case of Carlyle India Advisors Private Limited(supra) for A.Y.2008-09, the Tribunal concluded that though the said concern was declaring a solitary stream of operating income under the head 'advisory fee', but undisputedly it was engaged in diversified fields and the financial results for each segment were not available. The Tribunal also found that the said concern was registered with SEBI as a Merchant Banker, and that it was carrying on merchant banking activities.In our considered opinion, the afore-said features with respect to the activities of the M/s. Motilal Oswal Investment Advisors Private limited (supra) noted by the Tribunal in the case of Carlyle India Advisors Private Limited (supra) for assessment year 2008-09, are clearly emerging in the instant year too and, therefore, it cannot be said to be a concern which is comparable to an entity which is rendering non-binding advisory investment services alone. Thus, in our considered opinion, the assessee is justified in seeking the exclusion of the said concern from the final set of comparables on account of functional dissimilarities. In fact, in other precedents cited by the Id. Representative for the assessee,the said concern has also been excluded from the set of comparables under similar circumstances.

9. In conclusion, on the basis of the afore-said discussion and having regard to the precedents noted above, we hold that M/s. Motilal Oswal Investment Advisors Private Limited (supra) is liable to be excluded from the final set of comparables."

Following the above orders,we hold that job profile of MOIAPL was different as compared to the activities undertaken by the assessee.It was rendering investment advisory services, specifically related with real estate business whereas MOIPAL is a merchant banker.So,we hold that MOIAPL is liable to be excluded from the final set of comparables. It is further found that the TPO selected two more comparables,besides MOIAPL,while dete

-rmining the TP adjustments.We find that the assessee had objected to the inclusion of those two comparables before the DRP. The DRP has not given any direction in that regard. The DRP had passed order about MOIAPL only and has not mentioned anything in favour or against the inclusion of the remaining two comparable. In our opinion, the DRP,being a appellate forum,is supposed to decide the issue raised before it by the assessee. Not only the DRP failed to pass a speaking order about those two comparable,but it also did not pass a rectification order with regard to the application filed by the assessee,u/s.154 0f the Act. Therefore,we are of the opinion,that in the interest of justice matter should be restored back to the file of the DRP who would give a clear direction about the remaining two comparab- les selected by TPO and objected by the assessee.The DRP would afford a reasonable opportunity of hearing to the assessee before deciding the appeal.Additional ground of appeal raised by the assessee,before the DRP was not adjudicated upon.We direct the DRP to decide the same.

Effective ground of appeal filed by the assessee stands allowed in favour of the assessee in part.The additional ground filed by the assessee before us is related to the main ground and hence,stands allowed for statistical purposes.

As a result,appeal filed by the assessee stands partly allowed.

फलतः नधा रती वारा दा खल क गई अपील मंजूर क जाती है . 7 1093-/14-Wells-AY :09-10

Order pronounced in the open court on 27th,May,2015. आदे श क घोषणा खल ु े यायालय म दनांक 27 May ,2015 को क गई ।

Sd/- Sd/- ( वजय पाल राव /Vijay Pal Rao) (राजे / RAJENDRA) या यक सद य / JUDICIAL MEMBER लेखा सद य / ACCOUNTANT MEMBER मुंबई/Mumbai, दनांक/Date: 27.05.2015 व. न.स.Jv, Sr.PS आदे श क त ल प अ े षत/Copy of the Order forwarded to : 1.Appellant /अपीलाथ 2. Respondent / यथ

3.The concerned CIT(A)/संब ध अपील य आयकर आयु त, 4.The concerned CIT /संब ध आयकर आयु त

5.DR "A" Bench, ITAT, Mumbai / वभागीय त न ध, ए खंडपीठ,आ.अ. याया.मुंबई

6.Guard File/गाड फाईल स या पत त //True Copy// आदे शानस ु ार/ BY ORDER, उप/सहायक पंजीकार Dy./Asst. Registrar आयकर अपील य अ धकरण, मंब ु ई /ITAT, Mumbai.

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