IN THE INCOME TAX APPELLATE TRIBUNAL
DELHI BENCHES : I : NEW DELHI
BEFORE SHRI R.S. SYAL, AM AND SHRI I.C. SUDHIR, JM
ITA No.5840/Del/2012
Assessment Year : 2008-09
Xander Advisors India Pvt. Ltd., Vs. ACIT,
111, The Taj Palace, Circle-18(1),
Sardar Patel Marg, New Delhi.
New Delhi.
PAN : AAACX0403B
(Appellant) (Respondent)
Assessee By : S/Shri Mukesh Bhutani,
Vishal Kalra, &
Ms Vrinda Tulshan, Advocates
Department By : S/Shri Yogesh Verma, CIT and
N.K. Chand, CIT
ORDER
PER R.S. SYAL, AM:
This appeal by the assessee arises out of the order
passed by the Assessing Officer (AO) on 03.09.2012 u/s
143(3) read with section 144C of the Income-tax Act, 1961
ITA No.5840/Del/2012
(hereinafter also called `the Act') in relation to the
assessment year 2008-09.
2. The only issue contested in this appeal by the ld. AR qua
the addition on account of transfer pricing adjustment is
selection of three companies as comparable. Briefly stated,
the facts of the case are that the assessee was incorporated
in August, 2005 for rendering advisory services in relation to
the real estate and infrastructure sector in India. During the
year in question, it entered into international transaction of
`Provision of Investment advisory services' worth
`98,90,66,951/- to Xander Investment Management Ltd.,
Mauritius, its associated enterprise. Functional profile of the
assessee, as set out by the Transfer Pricing Officer (TPO) on
page 2 of his order, divulges that the assessee maintains an
advisory relationship with its AE by sourcing and evaluating
potential investment opportunities in India. Such
opportunities are sourced by the assessee through direct
proprietary relationship, intermediaries, electronic media and
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magazines, etc. Once a potential investment opportunity is
sourced, the broad contours are discussed with its AE. On
the basis of such discussion, the assessee is directed to
either pursue the proposal or reject the same. If the
opportunity is to be pursued, a detailed research exercise is
conducted spreading over primary research including site
visits for understanding demand-supply scenarios
benchmarking of existing projects, vis-a-vis the opportunity,
gauging competition, etc. to secondary research and,
thereafter, engaging in discussions with the Indian
counterparts in joint venture situations. Research for various
analyses as conducted by the assessee above are presented
in the form of an investment memo to its AE for suitable
decision making. Once investments are made, the assessee
is required to provide support services including maintenance
of books of account, preparation of quarterly/annual financial
statements and such other similar support services as may
be mutually agreed upon from time to time. The assessee is
remunerated at actual costs incurred with 20% mark-up. The
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ITA No.5840/Del/2012
Transactional Net Margin Method (TNMM) was employed by
the assessee to demonstrate that its international transaction
was at arm's length price (ALP). The assessee chose 17
companies as comparables which have been listed on pages
4 to 7 of the TPO's order. By considering the assessee's
submissions and other relevant material, the TPO reduced
the number of comparables to 7 out of the 17 chosen by the
assessee. These 7 companies finally chosen by the TPO with
their PLI of OP/TC, are as under:-
Sl.No. Name OP/TC (%)
1. Access India Advisors Ltd. 45.96%
2. Brescon Corporate Advisors Ltd. 87.4%
3. ICRA Management Consulting 5.35%
Services Ltd.
4. IDC India Ltd. 13.88%
5. Khandawala Securities Ltd. 80.79%
6. Sumedha Fiscal Services Ltd. 9.14%
7. Kinetic Trust Ltd. 3.54%
Average 35.15%
3. On the basis of the average OP/TC of the above seven
comparable companies at `35.15%, the TPO proposed
transfer pricing adjustment of `1,28,37,664/-. The AO
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proposed to make addition in his draft order dated
18.11.2011 on account of the above referred transfer pricing
adjustment. The assessee remained unsuccessful before the
Dispute Resolution Panel (DRP). The addition, vide the
impugned order, on this score amounting to `1.28 crore was
made by the AO.
4. At the outset, we want to make it clear that the scope of
the dispute in the present appeal on this issue, as argued by
the ld. AR, is confined only to the selection of three
companies as comparable, which have been listed at serial
nos. 2, 5 and 6 of the above table.
5. We have heard the rival submissions and perused the
relevant on record. Before espousing these three companies
for ascertaining their comparability with the assessee, we
consider it expedient to highlight the argument of the ld. AR
that the assessee is a private equity fund and hence these
three companies chosen by the TPO, which are basically
merchant banks, are not comparable. To bolster this
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ITA No.5840/Del/2012
submission, he relied on certain decisions in which it has
been so held. At this juncture, it is pertinent to note the
difference between a merchant banker and a private equity
fund.
6. A merchant bank, apart from helping businessmen in
raising finance, also renders consultancy services. It helps its
clients in raising finance through issue of shares, debentures,
bank loans, etc., from the domestic and international market.
The term "Merchant Banker` has been defined in the Rule 2
(e) of SEBI (Merchant Bankers) Rules, 1922, to mean : `any
person who is engaged in the business of Issue Management
either by making arrangements regarding selling, buying or
subscribing to Securities as Manager, Consultant, Adviser of
rendering Corporate Advisory Service in relation to such Issue
Management'. Its activities also include project counseling,
corporate counseling in areas of capital restructuring,
amalgamations, mergers, takeovers, discounting and
rediscounting of short term papers in money market and
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ITA No.5840/Del/2012
acting as brokers in stock exchange and advisers on port folio
management. On the other hand, a Private equity firm also
known as a Private equity fund (hereinafter also called the
`PE fund'), is a group of investors, which collects money from
wealthy individuals or institutions etc. for the purposes of
investing in or buying companies. PE fund is managed by
a Fund Manager. Thus, PE Fund is overall responsible for
managing the money taken from its investors. PE Fund
oversees its day-to-day operations including making
investment decisions and managing the acquired companies,
which, after acquisition, are known as portfolio companies. PE
Funds earn income by charging an annual management fee
as some percentage of the money under their management
and then some percentage of the profits when they sell
portfolio companies. Simply put, whereas, a merchant
banking is a capital raising/ advisory service, a private equity
is an investment business. To put succinctly, PE Funds are
investors and not advisors.
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7. Turning to facts of the instant case as stated by the ld.
AR and those culled out from the material on record, the
position which emerges is that there are three investors.
Xander Master Fund, a Mauritius limited liability company
(Fund), is responsible for private equity investment. It
appointed Xander Investment Management Ltd., Mauritius
(Manager) for providing overall investment advice. The
Manager sub-contracted specific activities to the assessee
(Indian Sub-Advisor). The Manager and the Indian Sub-
Advisor entered into an Agreement on 10.10.2005, under
which the assessee (Indian Sub-Advisor) undertook to provide
general advisory services to the Manager in relation to real
estate sector in India. Such services, as discussed above
include providing feedback to the Manager in relation to the
real estate investment opportunities in India; identifying the
potential vendors; negotiating with the vendors as an agent
of the Manager, finalizing deals, if the Manager is satisfied,
and; to provide actual support services, if the investment is
made by the Manager. In this three-tier hierarchy, Xander
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Master Fund is `the PE Fund', Xander Investment
Management Ltd., Mauritius, is the `Manager' and the
assessee is simply `Sub-Advisor to the Manager'. From an
overview of the nature of activities discussed above, it is
noticed that the contention of the ld. AR that the assessee
acted as a PE Fund in India, is not tenable. The Manager sub-
contracted specific activities to the assessee, which were in
the nature of advisory to him. By no stretch of imagination,
the assessee can be described as PE Fund, who, in present
facts is, Xander Master Fund. The name by which a
transaction is coined is not decisive of its character. It is the
real nature of a transaction which is always relevant and
conclusive. A bare perusal of the nature of activities carried
out by the assessee in the extant international transaction
abundantly proves that these are not that of a PE Fund. Ex
consequenti, the decisions cited by the ld. AR seeking to
canvass the exclusion of three companies on the strength of
the assesse in those cases acting as PE Funds, do not
advance his case any further. As such, we are desisting from
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considering such decisions, which were rendered drawing
distinction between a merchant banker and a PE Fund and
holding that a merchant banker cannot be considered as
comparable to a PE Fund. Be that as it may, a company
cannot be considered as comparable or incomparable on the
generality of mere description of its overall category. This
assumes more significance when a company is otherwise
entitled to pursue several lines of activities. One needs to
verify the nature of activity actually carried on for deciding its
comparability or otherwise. No nomenclature can
superimpose the real character of a transaction.
8. Now, We will take up these three companies, one by one,
for ascertaining their comparability. At this stage, it is
significant to mention that the assessee included these three
companies in its list of comparables and the TPO simply
accepted them as comparable. The assessee is now assailing
their wrongful suo motu inclusion in the list of comparables.
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Brescon Corporate Advisors Ltd:
9. The assessee requested the TPO to exclude this company
from the list of comparables by stating that it was a merchant
banking company with its main source of income from
recapitalization advisory and debt syndication. The TPO did
not accept this argument on the ground that the search
criteria included companies providing investment advisory
services and there was no need to go into further verticals.
10. We have perused the Annual accounts of this company,
a copy of which has been placed on record. This company is
engaged in carrying on merchant banking and investment
activities along with providing project advisory services. A
look at the Annual accounts of Brescon Corporate Advisors
Ltd. indicates that it has two streams of income, namely, `Fee
based financial services' and `Other income'. Details of the
revenue under `Fee based financial services' is given at page
324 of the paper book, which is as under:-
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Financial Restructuring & Recapitalisation `10.00 crore
Syndication of Debt `2.18 crore
Equity Related Advisory/M&A Advisory `2.03 crore
Due deligence advisory to Arcil Nil
Total `14.23 crore
The second stream of its income totaling `6.04 crore includes
Dividend, Interest received, Profit/loss on sale of investments
and Profit/loss arising out of dealing in shares and securities.
A close look at the composition of the gross revenue from
`Fee based financial services' transpires that some
component of `Equity related advisory/M&A advisory' prima
facie partly resembles with the services rendered by the
assessee. The ld. DR himself candidly accepted, and rightly
so, that the other components of this stream of the revenue
are of no match with that of the assessee. Now, the question
arises as to whether Brescon Corporate Advisors Ltd., under
these circumstances can be considered as comparable? At
this stage, it is pertinent to mention that the gross revenue of
this company amounts to `20.27 crore and there is no
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segmental data available either in respect of net profit from
`Fee based financial services' or `Other income'. As `Other
income' also includes income from Investment activity, being
profit/loss on sale of investment and dealing in shares and
securities, the impact of such profit/loss on the overall net
profit of the company on entity level, cannot be determined.
Even though some component of `Equity related
advisory/M&A Advisory', with the gross revenue of `2.03
crore, partly resembles with the assessee, still in the absence
of any segmental data of such composition, there can be no
valid comparison. Revenue from this component accounts
for around 10% of the total gross revenue of this company
and if we further examine this 10% component in itself, it
turns out that the same also includes M&A advisory, which is
obviously not akin to the services rendered by the assessee.
The assessee's activity, in a nutshell, is to tender advice to
the Manager about the avenues for making investment in real
estate, and, if the Manger agrees to go ahead with such
investment opportunity, then, to get involved in the process
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of finalization of the deal and then provide support services,
including maintenance of books of account etc., on the
clicking of the deal. Taking a holistic view of the factual
matrix, we do not find any rationality in including this
company in the list of comparables since no segmental data
of the advisory services by this company is available, which
component is very small vis-a-vis the entity level operations.
Availability of separate data of this segment could have
possibly made it comparable with the assessee. This
company is, therefore, directed to be excluded from the list
of comparables.
Khandawala Securities Ltd.
11. Next comes Khandawala Securities Ltd. The assessee
contended before the TPO that this company was engaged in
merchant banking activities and hence should be excluded
from the list of comparables. The TPO repelled this
contention by observing that this company was providing,
inter alia, corporate advisory services relating to real estate
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and infrastructure. That is how, this company found its way in
the list of comparables drawn by the TPO.
12. We have gone through the Annual accounts of this
company, which are available in the paper book. A perusal of
its Profit & Loss Account transpires that its income comprises
of Brokerage amounting to `7.96 crore, Corporate advisory
services amounting to `8.32 crore, Income from capital
market operations at `56.75 lac and Profit on sale of long-
term investments at `4.81 lac. Apart from these, it has other
incomes amounting to `1.10 crore, which are in the nature of
interest on fixed deposits and dividends, etc. It can be
observed from the bifurcation of the gross revenue of this
company that brokerage component is 44.21%, whereas
corporate advisory services account for 46.23% of total gross
revenue. The most crucial factor is that the accounts of this
company are again available on entity level alone. It goes
without saying that the brokerage income is totally alien to
the assessee's composition of income. If there is some
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commonality, that can be traced to the income from
`Corporate advisory services', which accounts for 46.23% of
the gross revenue. There is no data of net income of this
component on segment level, except for its gross revenue.
When we further examine the break-up of `Corporate
advisory services', which is available at page 369 of the
paper book, it comes to the fore that it includes equity capital
markets transaction execution, mergers and acquisitions
advisory, capital raising advisory and transaction execution
relating to structured finance, real estate and infrastructure.
Thus, out of total of 46% of the gross revenues of this
company lying under the overall `Corporate advisory services
division`, it is manifest that only some of the activities
undertaken by it bear some similarity to those carried on by
the assessee. However, if one may have to answer it as
comparable or incomparable in totality, we can't term it as
comparable because of the absence of any bifurcation of the
income from advisory services in this overall segment. The
fact that apart from entity level, no details of this overall
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segment of `Corporate Advisory Services' are available,
further cements our viewpoint. On the overall perspective,
this company on an entity level cannot be considered as
comparable with the assessee because of lack of any
segmental data. We, therefore, order for the exclusion of this
company from the list of comparables.
Sumedha Fiscal Services Ltd.
13. The assessee argued before the TPO that this company
could not be considered as comparable because its segment
for Consultancy services also included income from merchant
banking activity. The TPO rejected this contention by holding
that it was providing advisory services which included loans
syndication, equity placement and project consultancy
services.
14. We find from the Annual accounts of this company that it
has segmental data. Its `Income from operations' is to the
tune of `7.58 crore, which has two components, namely,
`Income from Loan syndication & consultancy services'
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amounting to `4.47 crore and `Income from capital market
operation' amounting to `3.11 crore. Page 436 of the paper
book divulges that the component titled as `Loan syndication
and consultancy services' comprises `Loan Syndication,
Merchant Banking, Restructuring & Other related advisory
services'. Obviously, the consultancy services of this
company, to some extent, can be characterized as
comparable with the assessee company. However, it can be
observed that albeit the segmental data is available but such
segment with the caption `Consultancy services' also
encompasses loan syndication, merchant banking,
restructuring and other related advisory services apart from
consultancy services. The composition of consultancy
services simpliciter in this overall segment, which is akin to
that of the assessee, is not ascertainable. Since the advisory
services are not separately identifiable from this broader
segment of consultancy services, we hold that the overall
consultancy segment of this company cannot be considered
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as comparable with the assessee. We, therefore, order for
the exclusion of this company from the list of comparables.
15. Before parting with this issue, we would like to deal with
the contention raised on behalf of the Revenue that since
these three companies were originally considered by the
assessee as comparable, it should not be allowed to resile
from its earlier stand by demanding their exclusion. In our
considered opinion, this contention deserves to be jettisoned.
Just like a situation in which the assessee chooses a company
as comparable, which can be excluded by the TPO on finding
it as incomparable, there can be no fetters on the assessee
requesting for the exclusion of a company, originally
considered by it comparable by inadvertence. After all, it is
for the TPO to examine and evaluate such contention and
then decide about its comparability on merits. To foreclose
the raising of such a contention by the assessee for further
appraisal at the TPO's end, is impermissible. The Department
cannot approbate and reprobate at the same time. The
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ITA No.5840/Del/2012
Special Bench of the Tribunal in DCIT vs. Quark Systems (P)
Ltd., (2010) 132 TTJ (Chd) (SB) has allowed the assessee to
claim exclusion of certain companies from the list of
comparables which were inadvertently included by it in its
transfer pricing study. We, therefore, reject this contention
advanced on behalf of the Revenue.
16. To sum up, we direct the exclusion of the afore referred
three companies from the list of comparables. The impugned
order is set aside pro tanto and the matter is sent back to the
TPO/AO for determining the ALP of the international
transaction by considering the remaining four companies as
comparable. It is made clear that on all other aspects, the
order of the TPO is final and unchanged.
17. The only other ground argued by the ld. AR is against
the disallowance of `2,48,589/- made by the AO u/s 14A of
the Act read with rule 8D of the I.T. Rules, 1962. The facts
apropos this ground are that the assessee earned dividend
income from mutual funds to the tune of `10.32 lac, which
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ITA No.5840/Del/2012
was claimed as exempt. The AO, on perusal of the balance
sheet, observed that the assessee made investments during
the year to the extent of `9.95 crore. It was opined that the
provisions of section 14A were attracted in this case
inasmuch as the assessee had incurred some expenditure for
making investment, which was not offered for disallowance.
Applying the mandate of rule 8D(2)(iii), the AO worked out
disallowance at 0.5% of the average value of investment as
on the first and last days of the previous year, which resulted
into an addition of `2.48 lac. The assessee is aggrieved
against this addition.
18. After considering the rival submissions and perusing the
relevant material on record, it is seen that the assessee
earned exempt income and did not offer any disallowance u/s
14A. The AO recorded proper satisfaction that the provisions
of section 14A were attracted as the assessee had incurred
some expenditure for making investment, which was not
offered for disallowance. The Hon'ble jurisdictional High
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Court in the case of Maxopp Investment Ltd. Vs. CIT (2012)
347 ITR 272 (Del) has held that the provisions of section 14A
are attracted in such situations. As the assessment year
under consideration is 2008-09, obviously, the prescription of
rule 8D would apply. In our considered opinion, the AO was
fully justified in making disallowance under clause (iii) of rule
8D at 0.5% of the average value of investments. This ground
is not allowed.
19. In the result, the appeal is partly allowed.
The order pronounced in the open court on 07.11.2014.
Sd/- Sd/-
[I.C. SUDHIR] [R.S. SYAL]
JUDICIAL MEMBER ACCOUNTANT MEMBER
Dated, 07th November, 2014.
dk
Copy forwarded to:
1. Appellant
2. Respondent
3. CIT
4. CIT (A)
5. DR, ITAT
AR, ITAT, NEW DELHI.
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