Case: Pr. Commissioner of Income Tax - 6 Vs. Eight Roads Investments Advisors Private Limited (Formerly Known As Fil Capital Advisors India Private Limited)

2. The respondent / assessee entered into an international transaction of non-binding investment advisory services with its Associate Enterprises (for short ‘A.E.) and earned revenue of Rs.25.83 crores during the assessment year 2010 - 2011. The assessee for the purpose of bench marking the transaction adopted Transnational Net Margin Method (for short TNMM) as an appropriate method under the provisions of Section 92C of the Act and identified seven comparable companies as comparables with their three years average weighted margin of 18.23% and operating margin being at 19.67% for the purpose of claiming the international transaction to be at armsThe Assessing Officer (for short AO) framed a draft assessment order dated 26th February 2014 making an upward revision of transfer pricing adjustment of Rs.4,96,42,540.00. The assessee approached the Dispute Resolution Panel (for short DRP) against the draft assessment order with its objections. The DRP vide order dated 7th October 2014 rejected the contentions and objections raised by the assessee in relation to upward revision of transfer pricing adjustment and directed the AO to finalize the draft assessment, resulting in passing of the impugned assessment order. The AO / Transfer Pricing Officer (for short TPO) by his final order dated 31st October 2014 rejected the transfer pricing study of the assessee on the basis of various defects and deficiencies and rejected six out of seven comparables selected by the assessee while retaining one comparable on the basis of single year data. However in the said order the TPO proceeded and selected six new comparable companies as comparables with an arithmetic mean of 42.66% of operating margin. The TPO applied the aforesaid arithmetic mean to be operating cost of the assessee and determined the arms length price of Rs.30,79,92,412.00 as against the international transaction price of Rs.25,83,49,872.00 resulting in a short fall of Rs.4,96,42,540.00. This short fall was treated as transfer pricing by the TPO.The above order was assailed by the assessee before the Tribunal. Tribunal by the impugned order dated 25th October 2016 allowed the appeal filed by the assessee in elaborate detail with respect to selection of each comparable company by the TPO and DRP and directed the AO / TPO to determine the arms length price afresh in terms of fresh directions given by the Tribunal in respect of each comparable company. Being aggrieved by the order passed by the Tribunal the revenue is in appeal before us.The assessee chose the following seven comparable companies for the purposes of benchTPO after considering various aspects of the comparable companies rejected six out of the aforesaid seven comparables chosen by the assessee. The TPO accepted only one company which was Future Capital Investment Advisors Limited and after undertaking a further detailed analysis of the entire matrix of acceptance and rejection based on profit and operating margin proposed to include five fresh / new comparables as underThe assessee approached the Tribunal against the order of the DRP. The Tribunal after a thorough analysis of each comparable offered the following reasons for inclusion of the six rejected comparables which were excluded by the TPO and DRP. For the sake of completeness, we would like to dwelve into the scrutiny and reasons given by the Tribunal in respect of each of the comparables which came to be included by the Tribunal asCOMPARABLES SELECTED BY TPO / DRP WHICH WERE REJECTED BYIDFC INVESTMENT ADVISORS PVT.the Tribunal the assessee objected to the selection of this company as a comparable by the TPO on the ground that the said company was primarily engaged in providing Portfolio Management Services (PMS). The assessee submitted that PMS and investment banking services were functionally different from investment advisory services undertaken by the assessee. The assessee company was an investment advisory service company as stated in its annual report in relation to IDFC which was actually a PMS. The assessee submitted that, functions performed by this companysuch as investment and brokerage were performed by an Investment Advisor (IA). After a detailed scrutiny of the profit and loss account of this company, it was revealed that this company was engaged in a number of activities as reported by the revenue under one segment. Unlike the assessee, the functions performed, assets employed and risks undertaken by this company were totally different than the functions performed by the assessee company. Therefore it could not be treated as a comparable. In support of the above propositions to challenge the inclusion of IDFC Investment Advisors Pvt. Ltd as comparable by the TPO / DRP, assessee relied upon the followingAGM India Advisors Pvt. Ltd. v/s DCIT, ITA no.4757/Mum./2015, A.Y. 2010-11, order dated 18th MayCarlyle India Advisors Pvt. Ltd. ITA no.1040/Mum./2015, A.Y. 2010-11, order datedBain Capital Advisors (India) Pvt. Ltd. v/s DCIT, ITA no.413/Mum./2015, A.Y. 2010-11, order datedSparkles Dhandho Advisors P. Ltd. v/s ITO, ITA no.1047/ Mum./2015, order datedCIT v/s Carlyle India Advisors Pvt. Ltd., 32 taxmann. Com 23, A.Y.General Atlantic Pvt. Ltd. v/s ACIT, ITA no.7638/Mum./2011 order datedGoldman Sachs India Securities Pvt. Ltd. v/s CIT, 69 taxmann.comTribunal after considering the submissions and more specifically findings expressed by the Tribunal, Mumbai Bench in the case of AGM India Advisors Pvt. Ltd. (supra) concluded that as seen in the case of Carlyle India Advisors Pvt. Ltd. (supra) after perusing the annual report of this company, the Tribunal had arrived at a finding that the said company was engaged in providing PMC and such services were fee based and the said company had earned revenue from different segments such as portfolio management fee, performance fee, advisory fee etc. On this basis, the Tribunal arrived at a finding that in the above scenario, where a company was remunerated on cost plus basis, it was risk insulated and therefore, on application of FAR analysis, it could be compared with other companies if there is any difference in its functions. The Tribunal refered to the observation of the Honble High Court in the case of General Atlantic Pvt Ltd. (supra) while approving the view expressed in Carlyle India Advisors Pvt. Ltd. (supra), rejected this company i.e. IDFC Investment Advorse Pvt. Ltd as aICRA Online Limitedassessee objected to the selection of this company as a comparable selected by the TPO as this company had three lines of business verticals viz. Outsource Service, Information Service and Software Products / Service. The assessee submitted that the financials of this company did not indicate the kind of service rendered by the outsource service segment and its annual report was silent thereon. The assessee submitted that information provided on the web site of this company showed that it had two strategic lines of business namely Knowledge Process Outsourcing (KPO) and Information Service and Technology Solutions. The assessee submitted that performance of the aforesaid activities made this company financially different from the assessee and hence, it could in no way be treated as comparable with the assessee company. The Tribunal on perusal of the information submitted in the annual report of this company as well as its financials, returned a finding that the functions undertaken by this company were totally different from the assessee company and therefore the company failed in the FAR analysis itself. Thus, the Tribunal rejected this company i.e.ICRA Online Limited(Segmental) as aMotilal Oswal Investment Advisors Pvt. Ltd.assessee objected to this company as a comparable selected by the TPO as it derived its business verticals from equity capital market, mergers and acquisition, private equity syndication and structural debts. The assessee submitted that as per this companys annual report, the company advised Indian Corporates on cross border acquisitions and this company was a SEBI regulated merchant Banker which provided investment banking services in the nature of acquisition equity placements, IPOs, syndication, etc. and had undertaken activities as lead manager / arranger / sole book runner etc. for various portfolios and earned investment banking fee for the same. The assessee therefore submitted that, this company was not comparable to a non-binding investment advisory and related service provider like the assessee. The Tribunal after going through the annual report of this company returned a finding that, this company was functionally different from the assessee because of the functions performed, assets employed and risk undertaken and failed in the FAR analysis. Thus, the Tribunal rejected this company i.e. MOIAPL as aKshitij Investment Advisory Companyassessee objected to this company as a comparable selected by the TPO as this company had entered into an agreement with another company namely Everstone Investment Advisors Pvt. Ltd. to realign its investment advisory activities with effect from 01st January 2010 and as a result of such joint venture, its entire business was restructured. The assessee submitted that, the profit and loss account of this company for the financial year 2010 – 2011 revealed that no revenue was earned from investment advisory business. The assessee submitted that this company had operated only for nine months during the financial year 2009 - 2010 and hence could not be compared to the assessee. The Tribunal after considering the material available on record and the decisions in Carlyle India Advisors Pvt. Ltd (supra) followed by AGM India Advisors Pvt. Ltd. (supra) returned a finding that this company could not be treated as a comparable. The Tribunal based its finding on the decisions given in the aforesaid two cases, in respect of this company pertaining to the very same assessment year and followed the decisions of the co-ordinate bench in excluding this company from the list of comparables.The assessee had suggested the following companies as comparables which were originally rejected by the TPO / DRP, but were accepted by the Tribunal as comparables after a detailedICRA Management Consulting Service Pvt.company was rejected by the TPO / DRP as comparable. This company offered consulting / advisory services through different business groups and practice areas pertaining to strategy, risk management, operations improvement, corporate advisory etc. On the basis of the profit and loss account statement of this company, the assessee submitted that this company derived its revenue from consulting fees. It was the assessees case that the functions performed by this company with respect to management consultancy service involved analysis of business and operations of a company, its profitability, operational efficiency, future outlook, etc. based on which consultancy or advise is given to the management of a company. Such functions were similar to that of a non-binding investment advisory and related services rendered by the assessee. The assessee submitted that this company had undertaken activities in other fields like business and operations, geographic research discussing the regulations laid out in the biogenerics globally, market research in respect of various products, business and operation analysis and therefore, this company ought to have been accepted as a comparable in the assessees own case by the TRO / DRP. The case of the DR was that this company operated in various verticals as also conducted its business through various practice divisions such as Government and infrastructure practice, energy practice, banking and financial service, corporate advisor practice etc. The assessee however on the basis of documentary evidence which were placed on record submitted that the service provided by this company covered a wide spectrum of activities which were essentially advisory service. Hence, this company could be determined as a comparabale. The Tribunal considered these submissions and in view of the above, following the decisions of the co-ordinate bench in the case of AGM India Advisor Pvt. Ltd. (supra) and in the decision of Temasec Holdings Advisors India Pvt. Ltd. (supra) included this company as ahis company was rejected by the TPO / DRP as comparable. This company was engaged in the business and research and certificate globally, it was provider of market intelligence advisory services and events for information technology, telecom and consumer technology markets. The assessee submitted that, this company was engaged in research and survey functions which were functionally comparable to advisory support services rendered by the assessee. The assessee submitted that, in the assessees own case for the assessment year 2009 – 2010, this company had been accepted as a comparable by the TPO / DRP and therefore there was no reason to exclude the same in the related assessment year. The Tribunal after considering the materials available on record with reference to this company rejected the submission of the DR for exclusion, by referring to a similar submission made by the department in the case of Temasec Holdings Advisors India Pvt. Ltd. (supra) and relying upon the co-ordinate bench decision in the case of AGM India Advisors Pvt. Ltd. (supra) included this company as6.3 Informed Technologiescompany was rejected by the TPO / DRP as comparable. This company collected and analysed data on financial fundamentals, corporate governance, director / executive compensation and capital market and this was similar to work done by the assessee who was involved in data analysis of potential clients, analyzing market conditions, conducting research in various sectors, markets, companies etc. After perusal of the annual report of the company and relying on the decisions passed in the case of Temasek Holdings Advisors India Pvt. Ltd. (supra), the Tribunal held that since the TPO / DRP had accepted it as a comparable in the assessees own case for assessment year 2009 – 2010, this company should not be excluded from the list ofhis company was rejected by the TPO / DRP as comparable.On the basis of annual report of this company, the fact of this company was accepted as a comparable to the asssessee by the TRO / DRP for the assessment year 2009 – 2010 was considered by the Tribunal. Referring to the decision of Temasek Holdings Advisors India Pvt. Ltd. (supra), as also the decision of the Tribunal, Delhi Bench, in Nortel Network India Pvt. Ltd. (supra) which was affirmed by the Delhi High Court in Nortel Network India Pvt. Ltd., ITA No.3043/2015, the issue of application of Turnover filter was analysed and the Tribunal concluded that if this company was functionally similar, only because of low turnover filter it could not be rejected. The Tribunal included this company as aThe Tribunal by the impugned order directed the AO / TPO to determine the arms length price afresh in terms of the directions contained in the order.

Court's reasoning:
8. At the outset, we would like to state that, the findings arrived at by the Tribunal are entirely one of facts and the revenue has failed to show as to how the said findings are perverse in any manner whatsoever.In view of the above detailed reproduction of the reasonings given by the Tribunal we find that, while undertaking the exercise to arrive at the arms length price which is essentially a matter of estimate of the fair value which the Indian Company had paid or had received from its Associate Enterprise (A.E.), such exercise is required to be undertaken by the TPO on the basis of the facts and figures relating to comparable cases of other similarly placed entities, whose relevant data is available in the public domain. As per the provisions of the Act and the Rules, the assessee company is required to furnish its own Transfer Pricing Analysis and the list of chosen comparables which may or may not be agreed to by the Revenue Authorities and they would introduce some more comparables rejecting the comparables given by the assessee company by applying certain filters like Related Party Transactions (RPT) filter, turnover filter, export earnings filter, employee cost filter, etc to bring them within the comparable range of the cases of such comparables and generally there would be a tug of war between the assessee and the revenue in such a situation. We would state that the assessee company would normally choose comparables, whose operating profit margins are less or only little more than the assessee, but the revenue would bring in comparables with higher profit margins. The TPO, may in the case of an assessee introduce and suggest comparables whose operating margins are higher than the assessee company so as to make transfer pricing adjustments in the declared income of the assessee, resulting in fetching of more revenue. From the aforesaid quoted paragraphs from the Tribunals order, it is evident that, individual cases of such comparables have been juxtaposed with the functionality of the assessee considered, analyzed and discussed by the Tribunal in respect of comparables which were excluded by the TPO as also in the case of those comparables which were included by the TPO. It is quite common to note that, while some comparables are found to be appropriate and really comparable to the facts of the assessee company, some are not and it would ultimately result in whether the correct filters have been properly applied or not or whether the most appropriate method of determination of arms length price has been adopted or not to make fair and reasonable transfer pricing adjustments in the hands of the assessee. However, the entire exercise of making transfer pricing adjustments on the basis of comparables is nothing but a matter of estimate of a broad and fair guess-work of the authorities based on factual relevant materials brought before the authorities i.e. the TPO, the DRP and the Tribunal, which are the fact finding authorities.In the case before us the TNMM method appears to have been the most popular and widely adopted method for determining the Arms Length Price in which the operating profit margin of comparable companies are considered by the authorities and applied to the case of the assessee to determine the Arms Length Price to make transfer pricing adjustments. Rules 10-A, 10-AB, 10-B, 10-C and 10-CA of the Income Tax Rules, 1962 prescribe the manner for working out Arms Length Price under the prescribed methods. From the aforesaid scheme of assessment, it is clear that the process of determination of Arms Length Price has to be undertaken by the Expert Wing of the Income Tax Department which is manned by TPO and at the higher level by a collegium of three Commissioners in the form of DRP whose orders are appealable before the Appellate Tribunal. In the above backdrop, in so far as the present case is concerned the TPO had rejected six comparable companies chosen by the assessee for bench marking namely i) Access India Advisors Limited; ii) ICRA Management Consulting Services Limited; iii) IDC (India) Limited; iv) Informed Technologies Limited; v) Integrated Capital Services Limited and vi) Kinetic Trust Limited. The Transfer Pricing Officer (TPO) only accepted one company as a comparable company being Future Capital Investment Advisors Limited but undertook a further detailed analyses and proposed to include the following five more companies as comparables namely i) Future Capital Holdings Limited (Segmental); ii)ICRA Online Limited(Segmental); iii) IDFC Investment Advisors Private Limited; iv) Kshitij Investment Advisors Limited and v) Motilal Oswal Investment Advisors Private Limited.The submissions advanced on behalf of the respective parties are mostly based upon the filters which have been applied which are essentially related to turnover filter, the comparable entities being functional entities, higher transfer pricing adjustments, transfer pricing analyses and profits declared by the companies. We have quoted the specific findings given by the Tribunal and would therefore, not like to dwelve deeper or reiterate the same. We would however like to say that the Tribunal has considered the case of each comparable company and discussed the parameters of comparables for the purposes of including the same as a comparable and / or excluding the same as comparable on the basis of the functionality of the said companies in the public domain. We find that such a detailed exercise having been undertaken by the Tribunal qua each and every comparable company, the reasons given by the Tribunal cannot be faulted with in respect of the comparablealso in the present case, the comparables suggested by the assessee which were excluded by the TPO / DRP were in fact adopted as comparables by the TPO for the financial year 2009 - 2010 in the case of the assessee itself. This aspect was also considered in the aforesaid order.On a thorough consideration we find that the rational for inclusion of the six comparables excluded by the TPO have been dealt with in extensive detail by the Tribunal and we are in agreement with the reasons recorded by the Tribunal. Further the reasons given for inclusion of the five new comparables by the TPO have been decidedly set aside by the Tribunal on the basis of decisions rendered by this Court either in the case of the assessee itself and / or in other cases after proper consideration.From the above, it is clear that the appeal filed under Section 260A of said Act is required to be entertained only on substantial question of law arising out of the order of the Tribunal, keeping in mind that we can not disturb findings of fact under Section 260A of the said Act unless such findings are shown to be ex-facie perverse and unsustainable and exhibit a total non-application of mind. We are therefore of considered opinion that the present appeal filed by the Revenue does not give rise to any substantial question of law. The appeal filed by the Revenue is found to be devoid of merit and the same is liable to be dismissed.