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Xander Advisors India Pvt. Ltd.,111, The Taj Palace, Sardar Patel Marg, New Delhi. Vs. ACIT,Circle-18(1), New Delhi.
November, 11th 2014


                   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.


  (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



    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

                                                       ITA No.5840/Del/2012

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
                                                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

                                                      ITA No.5840/Del/2012

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

                                                      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


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

                                                  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.

                                                 ITA No.5840/Del/2012

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
                                                        ITA No.5840/Del/2012

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
                                                   ITA No.5840/Del/2012

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.

                                                 ITA No.5840/Del/2012

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:-

                                                    ITA No.5840/Del/2012

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

                                                 ITA No.5840/Del/2012

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
                                                 ITA No.5840/Del/2012

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
                                                ITA No.5840/Del/2012

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

                                                  ITA No.5840/Del/2012

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
                                                    ITA No.5840/Del/2012

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


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'

                                                          ITA No.5840/Del/2012

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

                                                ITA No.5840/Del/2012

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

                                                    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

                                                 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

                                                   ITA No.5840/Del/2012

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]
Dated, 07th November, 2014.

Copy forwarded to:
  1. Appellant
  2. Respondent
  3. CIT
  4. CIT (A)
  5. DR, ITAT

                                          AR, ITAT, NEW DELHI.
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