Functionally dissimilar companies cannot be selected as comparables.

The present appeal has been filed by the assessee against the final assessment order passed subsequent to the directions of the Ld. Dispute Resolution Panel-III, New Delhi dated 26.11.2013 and pertains to assessment year 2009-10. 2. Brief facts of the case are that the assessee is engaged in rendering research, management consultancy and advisory services to clients interested in investing in India. During the assessment year under consideration, it rendered services to only one Associated Enterprise (AE) namely SPI Partners Ltd., Jersey, Channels Islands. As per the Transfer Pricing Study, Transactional Net Margin Method (TNMM) was considered as the Most Appropriate Method to determine the Arm’s Length price of the international transaction. In the said transfer pricing study, a set of five companies was considered as comparable and operating profit margin using multiple year data was calculated at 10.42%.

Further, the operating profit margin of the assessee was at 12.5%. Accordingly, international transactions of the assessee were considered to be at arm’s length.

2.1 During the transfer pricing assessment proceedings, on a reference being made to the Transfer Pricing Officer (TPO), the TPO rejected the transfer pricing documentation of the assessee. The TPO rejected all the five comparable companies proposed by the assessee. Based on fresh search, the TPO selected 10 new comparables and computed the Arm’s Length margin at 36.36% and proposed an upward adjustment of Rs. 6,71,49,810/-. The TPO also revised the operating cost of the assessee to Rs. 20,68,41,310/- as against Rs. 19,10,21,287/- considered by the assessee in the transfer pricing study and revised the operating profit margin of the assessee to 3.90%.

2.2 Aggrieved, the assessee approached the Ld. DRP and raised numerous grounds of objection. The Ld. DRP primarily rejected the objections raised against the draft assessment order but issued directions to the TPO/Assessing Officer to exclude Brescon Corporate Advisors Limited being functionally incomparable and accept IDC (India) Ltd. as being functionally comparable to the assessee.

2.3 Now, the assessee has approached the ITAT and is challenging 5 comparables by raising the following ground of appeal:-

“On the facts and in the circumstances of the case and in law, the Transfer Pricing Officer (TPO)/ the Assessing Officer (AO) and the Hon’ble Dispute Resolution Panel (DRP) have erred :

Transfer Pricing Adjustment :

1. In determining the adjustment of INR 4,88,23,670 to the value of the international transaction of provision of investment advisory services and consequently enhancing the taxable income of the appellant :

In determining the above adjustment, have, in particular erred in :

1.1 Rejecting the transfer pricing documentation as maintained by the appellant;

1.2 Using financial information of the comparable companies relating to the financial year 2008-09 although such information was not available when the appellant maintained documentation as per the requirement of the act;

1.3 Applying inappropriate filters in order to select comparable companies;

1.4 Rejecting the filters applied by the appellant for selection of comparable companies while preparing TP documentation;

1.5 Rejecting certain functionally comparable companies selected by the appellant,

1.6 Retaining certain companies as comparable companies although not functionally comparable to the appellant;

1.7 Retaining certain companies engaged in diversified businesses as functionally comparable companies, although relevant segmental information is not available;

1.8 Retaining certain companies with very high turnover as functionally comparable companies: while applying threshold turnover filter;

1.9 Retaining certain high/super profit making companies as functionally comparable companies;

1.10 Treating certain expenses not related to the transaction with AE as a part of the operating cost while computing profitability of the appellant;

1.11 Adopting an inconsistent approach with respect to certain issues in the absence of any significant changes in the facts and circumstances of the case from previous year;

1.12 Not correctly computing the operating margins of certain comparable companies;

1.13 Not granting the benefit of working capital adjustments despite agreeing to grant the same in the TPO’s order,

1.14 Not granting comparability adjustments on account of differences in risk assumed by the appellant vis a vis the comparable companies;

1.15 Not passing speaking order and not granting the effect to the DRP’s directions.

2. By relying upon the action taken by the Transfer Pricing Officer without exercising their own judgment and skill 3. In levying interest based on the enhanced taxable income.

All the above grounds are without prejudice to each other.”

3. The Ld. AR submitted the arguments in respect of the five comparables as under:

3.01 Motilal Oswal Investment Advisors Private Ltd: It was submitted that the business of this company significantly differed from the business of the Assessee as this company is engaged in the business of providing investment banking solutions and merchant banking services which are functionally different from that of the Assessee who is engaged in the business of providing investment advisory services. The company is a registered merchant banker with SEBI. It was submitted that this fact has also been fortified by the Mumbai Bench of the Tribunal in the case of Carlyle India Advisors Private Limited in ITA No. 2200/Mum/2014. It was further submitted that the TPO has reproduced and relied on the website extract of the company which clearly mentions that the company offers comprehensive investment banking solutions.

Thus, the fact that the company is engaged in the business of investment banking has not been disputed by the TPO. It was also submitted that the only argument of the TPO is that the corporate finance advisory forms the core of all the services offered by Motilal Oswal Investment Advisors Private Ltd. It was submitted that investment banking services significantly differ from investment advisory services and this contention is also supported by the Mumbai Bench of the Tribunal in the case of General Atlantic Pvt. Ltd vs. DCIT in ITA No./1019/Mum/2014 wherein the Mumbai Tribunal has highlighted that the functional and risk profile of an investment banker is not comparable to an investment advisor. It was further submitted that this contention has also been upheld by the Mumbai Tribunal in the case of Carlyle India Advisers Private Limited in ITA No. 7901/Mum/2011 and ratified by the Hon’ble Mumbai High Court in ITA No. 1286/ 2012. The Ld. AR further submitted that the TPO has observed that there is no mention of the word ‘underwriting’ in the annual report but then underwriting income is not the only source of income from where an investment banking company earns its revenue. An investment bank may also assist and advise companies in relation to Mergers and Acquisitions, raising and structuring capital for which it would get advisory income only. It was submitted that merely on account of the fact that an investment banking company is not providing underwriting service it cannot be made comparable to a company providing investment advisory services. The Ld. AR argued that these points coupled with the fact that Motilal Oswal Investment Advisors Private Ltd has earned super normal profits during the year warrants rejection of the company since it raises considerable doubts about the functionality of the company and its comparability with that of the Assessee. It was also submitted that the OP/TC margin of Motilal Oswal Investment Advisors Private Ltd is significantly higher than the other companies selected by the TPO himself which corroborate the contention that the functional profile is different from other comparables and is certainly not representative of other companies engaged in providing investment advisory services. The Ld. AR also placed reliance on a plethora of case laws in support of his contentions which were placed in the Paper Book.

3.02 Khandwala Securities Limited : It was submitted that the business of Khandwala Securities Ltd. significantly differed from the business of the Assessee. It was submitted that as per the annual report of Khandwala Securities Limited, its business operations include investment banking, corporate advisory services, institutional broking, private-client broking and investment advisory services. It was submitted that Khandwala Securities Limited is engaged in diverse business operations within the financial services industry which includes broking business which includes equity and debt broking, capital market operations business which includes structuring and executing diverse equity capital raising transactions, institutional equity sales, sales trading and research, private client broking, portfolio management services, mergers and acquisitions advisory, corporate advisory business which includes equity capital market transaction execution, mergers and acquisitions advisory and capital raising advisory. The Ld. AR further submitted that loss on account of stock valuation and loss from market operations amounting to INR 47,36,865 and INR 35,42,917 justified the Assessee’s contention that Khandwala Securities Limited is engaged in a diversified business operations with major share of revenue arising from Capital market operations. It was also submitted that since the Assessee is engaged in the business of provision of investment advisory services, the business of the Assessee cannot be considered as comparable to the business of Khandwala Securities Limited. The Ld. AR submitted that furthermore, the TPO has used the entity level margins of Khandwala Securities Limited for the purpose of computing the arm’s length price but while analyzing the annual report its is observed that the income earned by Khandwala Securities Limited is fee based from functionally diversified services ranging from brokerage, corporate advisory services and income from capital market operations which is significantly different from the operations of the Assessee. The Ld. AR also placed reliance on a plethora of case laws in support of his contentions which were placed in the Paper Book.

3.03 Axis Private Equity Limited : The Ld. AR submitted that the business of Axis Private Equity Limited significantly differed from the business of the Assessee as Axis Private Equity Limited is an asset management/fund management company whereas the Assessee is merely an investment advisor. It was further submitted that the TPO has retained Axis Private Equity Limited as a comparable to the Assessee by simply stating that as per the income statement of Axis Private Equity Limited it earns revenue as management fee. It was submitted that fund managers/ asset managers usually earn management fee from their funds on the basis of the fund size invested. Thus, management fee earned by Axis Private Equity Limited significantly differs from advisory fee earned by the Assessee which is based on a fixed cost plus mark up. The Ld. AR further submitted that as per Securities and Exchange Board of India (Mutual Funds) Regulations, 1996 the main obligations of an asset management company/ fund management company are to take investment decisions on behalf of the funds, to advertise the funds, to ensure regulatory compliance of the funds etc.

Thus, an asset management company/fund management company is entrusted with the responsibility to invest the money of the fund in the best possible way. On the other hand, the Assessee is merely an investment advisor and is responsible for giving research based information/advice to its clients so that the clients can take informed decisions about where they should invest their money to get maximum returns and the client is not bound by the advice of the Assessee. It was further submitted that the difference between an asset management company and an investment advisor has been recognized by the Mumbai Bench of the Tribunal in the case of Temasek Holdings Advisors (I) P. Ltd vs. DCIT in ITA No. 4203/Mum/2012 and ITA No. 6504/Mum/2012 and that the same view has been ratified in the High Court judgements in cases of Carlyle India Advisors (P) Ltd. in ITA No. 1286/ 2012 and General Atlantic (P) Ltd. reported in 384 ITR 271. It was further submitted that in the present case as well, Axis Private Equity Limited acts as an investment manager/ asset manager to Axis Infrastructure Fund- 1 wherein Axis Private Equity Limited has been entrusted with the responsibility to invest money on behalf of the Fund It was submitted that further, during the year, investments made on behalf of the fund have also been transferred to the fund. It was reiterated that the Assessee merely advises its clients in relation to the companies where it should invest its funds and the Assessee cannot bind its AE by its advice and cannot invest funds on behalf of its AE. The Ld. AR submitted that the remuneration of Axis Private Equity Limited is dependent on the fund size of Axis Infrastructure Fund-1 as is evident from its annual report for FY 2009-10 which has been relied upon by the TPO himself. It was submitted that, thus, Axis Private Equity Limited follows a different revenue model wherein the revenue earned by Axis Private Equity Limited is not dependent on the cost or functions performed by Axis Private Equity Limited but is dependent on the fund size invested by it. The Ld. AR also submitted that the TPO in his show cause notice, has himself, proposed to reject companies which are charging fixed fee instead of a rate based on the evaluation of services and Axis Private Equity Limited should be rejected from the set of comparable companies on account of said criteria as well. It was further argued that apart from the above, Axis Private Equity Limited is earning its entire revenue from Axis Infrastructure Fund which has been promoted by the Axis Bank which is the promoter of Axis Private Equity Limited as well. Thus, it was submitted, 98% of the revenue of Axis Private Equity Limited for the relevant previous year is earned from related parties and, accordingly, the said company fails the related party transaction filter adopted by the TPO which aims to reject companies having related party transactions of more than 25% of the sales. The Ld. AR also placed reliance on a plethora of case laws in support of his contentions which were placed in the Paper Book.

3.04 Almondz Global Securities Limited (Segmental) : The Ld. AR submitted that the business of Almondz Global Securities Limited significantly differed from the business of the Assessee as the corporate finance and advisory fee segment selected by the TPO includes revenue from provision of merchant banking, investment advisory, and loan syndication fee all of which cannot be considered as remotely comparable to the business of the Assessee. It was further submitted that for the relevant previous year, the revenue of Almondz Global Securities Limited from advisory and consultancy fee constitutes only 10.79% of the total revenue and thus it fails the filter adopted by the TPO himself i.e., to reject companies whose income from fee based services is less than 75% of the total revenue. It was submitted that the business and FAR profile of the Assessee is significantly different from the corporate advisory segment of Almondz Global Securities Limited and, thus, Almondz Global Securities Limited should be excluded from the final set of comparable companies. The Ld. AR also placed reliance on a plethora of case laws in support of his contentions which were placed in the Paper Book. It was further submitted that during the relevant financial year, a subsidiary of Almondz Global Securities Limited has been amalgamated with Almondz Global Securities Limited with effect from 1 April 2006 and on account of the amalgamation, the results of Almondz Global Securities Limited for the relevant financial year cannot be used for benchmarking analysis since it fails the filter applied by the TPO himself i.e., to reject companies which are effected by peculiar economic circumstances like mergers and acquisitions.

The Ld. AR also placed reliance on numerous orders of the ITAT for supporting the contention that companies being affected by mergers and acquisitions should be rejected as comparable.

These case laws are a part of the paper book filed by the assessee and are not being enumerated for the sake of brevity.

3.05 Milestone Capital Advisors Private Ltd: The Ld. AR submitted that the business of Milestone Capital Advisors Private Ltd significantly differed from the business of the Assessee. It was submitted that this company is offering a wide profile of services such investment advisory, portfolio management, project and property management, as mentioned in its draft red herring prospectus and, therefore, it should ideally not be selected in the final set of comparable companies in the absence of segmental details of the services offered. The Ld. AR also placed reliance on a plethora of case laws in support of his contentions which were placed in the Paper Book. It was further submitted that Milestone Capital Advisors Private Ltd is an asset management company and has several funds under management a profile which is significantly different from an investment advisory company. The Ld. AR reiterated his submissions and arguments regarding the difference between an asset management/investment management company and an investment advisory company.

3.1 In relation to ground number 1.10, the Ld. AR submitted that the TPO has erred in treating certain expenses like depreciation, sponsorship, advertisement, audit fee, filing fee etc. which were not incurred specifically in relation to the international transaction in question as part of operating cost while computing the operating profit margin of the Assessee.

The Ld. AR submitted that now the assessee was challenging the inclusion of sponsorship expenses and brokerage only and the challenge to the remaining expenses was not being pressed. With respect to the sponsorship expenses it was submitted that during the relevant previous year, Assessee had incurred sponsorship expenses amounting to INR 56,22,267/- and these expenses should be excluded from the cost while computing the net profit arising from the international transaction. It was submitted that the Assessee had sponsored promising chess players and certain chess tournaments during the year under consideration and these expenses were incurred for establishing the name of the Assessee in the market and for attracting new customers. It was submitted that the Assessee had not incurred these expenses for the advancement of the business or name of its AE nor did these expenses have any relation with the services being provided by the Assessee to its AE. The Ld. AR submitted that since, these expenses had no direct or indirect relationship with the international transaction of the Assessee the expense should not be considered while computing the net profit arising from the international transaction.

3.2 With respect to brokerage, it was submitted that during the relevant previous year, the Assessee had incurred brokerage expense amounting to INR 16,28,501/-. The said brokerage was paid for hiring of office in Gurgaon at Plot no. 44, Sector 32, Gurgaon. It was submitted that Brokerage paid is an extra- ordinary expense being a one-time expense paid for the premises acquired to provide services not only to the AE but also to third party customers. It was further submitted that as per service agreement between the Assessee and its AE, all such expenses which were not incurred specifically for the purpose of provision to AE were not qualified to form part of the cost, which was marked up for the purpose of computing remuneration for the provision of services to AE. Since, brokerage paid in relation to the premises acquired would be used for rendering services to third party as well, thus, brokerage expense is not a specific cost incurred to render services to AE and thereby warrants exclusion while computing the operating cost in relation to international transaction undertaken by Assessee with the AE. It was further submitted that said expense had long term benefit associated with it and AE did not reimburse this expense. Reliance was placed on order of the Bench of Mumbai Tribunal in the case of Chemtex Global Engineers P. Ltd in ITA 3590/Mum/2010 wherein it was held that, one time extra-ordinary expenses, which are not standard expenses for earning income, ought not to be taken into consideration while computing total operating cost.

3.3 With respect to ground no. 1.12 regarding incorrect computation of operating profit margins of comparable companies, the Ld. AR submitted that the TPO has considered 'other income’ or 'miscellaneous income’ as part of operating income while computing the operating profit margins of the comparable companies. It was submitted that ‘other income’ or ‘miscellaneous income’ should not be considered as part of operating income of the comparable companies because as per Schedule VI of the Companies Act, 1956 (applicable for the relevant financial year), the revenue from operations are disclosed separately in the profit and loss account whereas other income includes income like interest income, dividend income, net gain/loss from investments and other non- operating income, all of which are not related to the normal business operations of the company and, thus, should not be included while computing the operating profit margins of the companies. Reliance was placed on a number of orders of the various benches of the ITAT wherein it has been held that other income’ or miscellaneous income’ should not be considered as operating income while computing the operating profits of the Assessee as well as the comparable companies. The Ld. AR also submitted a chart to demonstrate where and how the TPO had erred in including other income while computing the profitability margin of the comparable companies. The chart is being reproduced as under:

Name of Comparable Items Included in Other Income while computing

profitability margin Motilal Oswal Investment Advisors Private

Limited.,

• Interest Income (INR 3,134,861)

• Dividend Income (INR 13,008,675)

Milestone Capital Advisors Private Limited

• Reimbursement Income (INR 20,516,713)

• Rent Income (INR 519,000)

Kshitij Investment Advisory Company Limited • Miscellaneous Income (INR 797,055)

Khandwala Securities Limited Sundry Credit Balances written back (INR 640,909).

• Miscellaneous Income (INR 209,632)

Inmacs Management Services Limited • Miscellaneous Income (INR 9,842)

Almondz Global Securities Limited Segmental Data used Axis Equity Private Limited • Other Income (INR 1,818,569)

Future Capital Investment Advisors Limited • Miscellaneous Income (INR 40,495) Icra Management consulting services limited • Miscellaneous Income (INR 592,000)

3.4 It was further submitted that that sundry credit balances written back amounting to INR 640,909/- added in total operating income of Khandwala Securities Advisory Company Limited is erroneous. The sundry credit balances written back for the relevant previous year amounts to INR 86,631/- only and, thus, should be corrected accordingly.

3.5 Ld. AR also submitted that ground no. 1.13, 1.14 and ground no. 3 were not being pressed.

4. In response, the Ld. CIT DR placed extensive reliance on the observations of the Assessing Officer/TPO as well as the directions of the Ld. DRP in respect of the five comparables being contested by the assessee as well as the grounds relating to treatment of non-includible cost like sponsorship expenses and brokerage in computing the operating cost which were being contested by the assessee before the Tribunal. The Ld. CIT DR also vehemently argued that operating profit margins of the comparable companies had been correctly computed by the lower authorities.

5. We have heard the rival submissions and have perused the material available on record. We now take up the comparables being contested by the assessee one by one:

5.01 Motilal Oswal Investment Advisors Private Limited:

It has been submitted by the Ld. AR that this company is functionally different from the assessee company as the assessee is engaged in the business of providing investment advisory services whereas Motilal Oswal Investment Advisors Private Limited is engaged in the business of providing banking solutions and merchant banking services. This company was included by the TPO on the ground that at the core of all the services was corporate finance advisory. The Ld. DRP has also held that FAR profile of this company was broadly similar to that of the assessee company and that further TNMM takes care of some functional difference as only broad functional similarity is to be considered under TNMM. It is seen that ITAT Delhi Bench in the case of Actis Advisers Private Limited vs. ACIT, New Delhi in ITA No. 1998/Del/2014 for assessment year 2009- 10 has excluded Motilal Oswal Investment Advisors Private Limited. It is undisputed that the assessee company is into advisory services only Motilal Oswal Investment Advisors Private Limited is providing clients with a variety of services and has delivery capacity in cross border product acquisition for its client. The ITAT Delhi Bench in the case of Actis Advisers Private Limited vs. ACIT (supra) while excluding this company placed reliance on the order of ITAT Mumbai Bench in the case of Carlyle India Advisors Pvt. Ltd. vs. DCIT in ITA No. 7367/Mumbai/2012 for assessment year 2008-09 vide order dated 22.8.2014. It is also seen that this order of the Tribunal was followed by another Coordinate Bench of ITAT in ITA No. 2200/Mumbai/2014 for assessment year 2009-10 in the case of the same assessee vide order dated 22.02.2014. Consistent with the view taken by the Coordinate Bench of the Tribunal and also keeping in view that the department could not point out any other judicial precedent in support of its contention, we direct the Assessing Officer/TPO to exclude M/s Motilal Oswal Investment Advisors Private Limited as a comparable.

5.02 Khandwala Securities Limited:

This comparable was also included by the Assessing Officer/TPO and it is the contention of the department that since this company is providing advisory services, it should be retained as a comparable. The Ld. DRP has also held in favour of this comparable being included in the final set of comparables on the ground that the FAR profile was broadly similar to that of the assessee company. On the other hand, the Ld. AR has submitted that as per annual report of Khandwala Securities Limited, the business operations include investment banking, corporate advisory services, institutional banking, investment advisory services etc. whereas the assessee is engaged only in providing investment advisory services. Our attention has been drawn to annual report of Khandwala

Securities Limited where indeed the business operations have been stated to include investment banking, corporate advisory services, institutional broking, private client broking along with the investment advisory services. It is also seen that the business of the Khandwala Securities Limited includes equity and debt broking, structuring and executing diverse equity capital risk transaction, institutional equity sales, sales training and research, portfolio management services, mergers and acquisitions advisory etc. We also note that the TPO has used entity level margins of Khandwala Securities Limited for the purpose of computing the Arm’s Length Price wherein the income earned by Khandwala Securities Limited is very functionally diversified service as mentioned above. We further note that the ITAT Delhi Bench in the case of Avenue Asia Advisors Pvt. Ltd. vs. DCIT in ITA 6638/Del/2013 for assessment year 2009-10 had directed exclusion of this company on the ground that this company had substantial percentage of revenue from brokerage. In the case of the assessee, it is noted that the assessee company does not have revenue from brokerage but only from investment advisory services. This company has also been excluded by the Mumbai Bench in the case of Carlyle India Advisors Pvt. Ltd. in ITA No. 7901/Mumbai/2011 as a comparable on the ground that its income is very akin as security and stock brokers. We also note that this company was also excluded as a comparable in the case of M/s Goldman Sachs (India) Securities Limited Pvt. Ltd. vs. DCIT in ITA No. 222/Mumbai/2014 for assessment year 2009-10 by ITAT Mumbai Bench. This order of ITAT Mumbai in the case of Goldman Sachs (India) Securities Limited was also upheld by the Hon’ble High Court of Bombay. Therefore, respectfully following the judicial precedents as discussed in the preceding paragraphs, we direct the Assessing Officer/ TPO to exclude this comparable from the final set of comparables.

5.03 Axis Private Equity Ltd.:

The main thrust of assessee’s argument against this company being selected as comparable is that whereas the assessee is merely an investment advisory, Axis Private Equity Ltd. is an asset management/fund management company. If we analyse the functions of an asset management company/fund management company, it is seen that such a company is entrusted with the responsibility of investing many of he funds in the best possible way whereas an investment advisory company only provides research based information and advises its clients to enable the clients so that the clients can take informed decisions about where they should invest their money to get maximum returns. The client is not bound by the advice of the investment advisory. The difference between an investment advisory company and an asset management company was recognized by the ITAT Mumbai Bench in the case of Temasek Holdings Advisory (I) P. Ltd. vs. DCIT in ITA Nos. 4203 and 6504/Mum/2012 for assessment years 2007-08 and 2008-09 wherein ITAT Mumbai Bench observed has observed that in case of companies engaged in asset management, the risk assumed is far more than the companies which are purely engaged in investment advisory services. The assets employed are also significant. The ITAT Delhi Bench in the case of Avenue Asia Advisors Private Limited vs. DCIT in ITA No. 6638/Del/2013 for assessment year 2009- 10 also directed exclusion of Axis Private Equity Ltd. on the ground that this company had carried the activity of managing directly or indirectly investments, managing mutual funds, venture capital fund, off shore fund, pension fund, provident fund, insurance fund etc. A similar view was taken by the ITAT Delhi Bench in the case of Mckinsey Knowledge Centre India Pvt. Ltd. vs. DCIT in ITA No. 6648/Del/2016 for assessment year 2012-13 wherein this company was directed to be excluded as a comparable. Therefore, based on the work profile of the assessee and respectfully following the above mentioned judicial precedents, we direct the TPO/Assessing Officer to exclude Axis Private Equity Ltd. for the purpose of comparability analysis. 5.04 Almondz Global Securities Limited:

In case of this company, it has been submitted that this company is also functionally different from the assessee as this company is into corporate finance and advisory services. A perusal of the annual report of this company shows that the corporate advisory and fee segment includes revenue from merchant banking, investment advisory and loan syndication fee which cannot be considered to be comparable to the business of the assessee. It is also seen from a perusal of the annual accounts of this company that the revenue from advisory and consultancy fee constitutes only 10.79% of the total revenue of the company and, thus, it fails the filter adopted by the TPO himself to reject the companies whose income from fee based services is less than 75% of the total revenue. It is further seen that the Delhi Bench of the ITAT in the case of Avenue Asia Advisors Private Limited vs. DCIT in ITA No. 6648/Del/2016 for assessment year 2009-10 had directed exclusion of this company from the list of comparables on the ground that the segment data in respect of finance and advisory comprised merchant banking, underwriting, corporate and infrastructure advisory and loan syndication fee and arranger of debts/bonds etc. along with handling of IPOs and underwriting commission. The Bench directed the TPO to exclude this company from the set of comparables as the segment of the company loses its comparability with the assessee. On same reasoning and duly noting the same functional dissimilarity and also respectfully following the order of the Coordinate Bench in this case, we direct the Assessing Officer/TPO to exclude this company from the final set of comparables.

5.05 Milestone Capital Advisors Private Limited:

In respect of this company also, it is the submission of the assessee that this company is functionally different from the assessee company as this company is offering a wide profile of services such as investment advisory, portfolio management, project and property management etc. but the segmental details of the services offered were not available. It was also submitted that this company is an asset management company and therefore, the profile was significantly different from an investment advisory company like the assessee. We have perused the annual accounts of this company and we find that the contention of the assessee in this regard is correct in so far as segmental details and services offered are not available. The annual accounts also show that this company is more into asset management rather than investment advisory which is being done by the assessee. It is a settled issue that where segmental details of operating income is not available, such company cannot be considered to be a suitable comparable.

This view has been held by the Hyderabad Bench of the ITAT in Sumtotal Systems India Pvt. Ltd. vs. ACIT in ITA No. 1710/Hyd/2011 for assessment year 2007-08 wherein it directed exclusion of Avani Cimcon Technologies Limited on the ground that segmental details of the operating income was not available. A similar view was taken by the ITAT Hyderabad Bench in the case of Capital IQ Information System (India) Pvt. Ltd. in ITA No. 124/Hyd/2014 and ITA 170/Hyd/2014 for assessment year 2009-10 wherein the Bench directed exclusion of Eclerx Services Ltd. from the list of comparables as there was no segmental data for diversified service portfolio. Therefore, in such a situation since the segmental data of the services being offered by Milestone Capital Advisors Private Limited is not available, we have no other option but to direct the Assessing Officer/TPO to exclude this company form the final list of comparables.

5.1 Coming to ground nos. 1.10 and 1.11 which challenge the treatment of certain expenses not related to the transaction with AE as part of the operating cost, the assessee has challenged the action of the TPO in treating depreciation, sponsorship, advertisement, audit fee etc. as part of the operating cost. However, at the time of arguments, the Ld. AR has submitted that he was only pressing challenge to

sponsorship expenses and brokerage paid during the year and was praying for them being excluded from the operating cost and other expenses were not being pressed. The Ld. AR has submitted that the sponsorship expenses amounting to Rs. 56,22,267/- pertain to sponsorship of chess tournament and were incurred for establishing the name of the assessee in the market and for attracting new customers. It has been submitted that these were not incurred for the advancement of the name of the AE but they relate to the services being provided by the assessee to the AE. With respect to brokerage amounting to Rs. 16,28,501/-, it has been submitted that these expenses were paid for acquiring premises and it was a one-time expense incurred by the assessee. It has also been submitted that the brokerage expenses were also not specifically incurred for the purpose of the work to the AE and were not part of the cost. It has also been submitted that these expenses had long terms benefits associated with it and they were not reimbursable by the AE. The Ld. DRP while rejecting the objections raised by the assessee in this regard has only noted that it has duly considered the arguments of the assessee and in view of the fact that the assessee was earning only service income and that too from one AE, it cannot be said that these expenses did not have any nexus with earning of service income. It is our considered opinion that this conclusion by the Ld. DRP has been reached without any sound reasoning and without appreciating and duly considering the submissions made by the assessee in this regard. It will be in the fitness of things that the Ld. DRP should reconsider and re-adjudicate this issue relating to sponsorship and brokerage expenses after taking into account the settled judicial precedents as well as the evidences in this regard. Therefore, ground nos. 1.10 to 1.11 are restored to the file of the Ld. DRP for being adjudicated afresh after giving proper opportunity to the assessee to present its case.

5.2 Coming to ground no. 1.12 of the appeal which is regarding incorrect computation of operating margins of certain comparable companies, it is the contention of the assessee that the TPO has considered ‘other income’ or ‘miscellaneous income’ as part of the operating income while computing the operating profit margins of the comparable companies whereas this should not have been considered as part of the operating income It is seen that ITAT Bangalore Bench in the case of Hewlett-Packard (India) Software Operation P. Ltd. in ITA 1682/Bang/2012 for assessment year 2008-09 had restored the matter for re-computing the operating margin of the comparable companies after accepting the assessee’s claim that miscellaneous income was not operational in nature. A similar view has been held by the ITAT Mumbai Bench in the case of DHL Express (India) Private Limited in ITA No. 7360/Mum/2010 wherein miscellaneous income like interest income, rent received, dividend received, penalty collected, rent deposits written back, foreign exchange fluctuation and profit on sale of assets were held to be not forming part of operational income. Therefore, keeping in mind, the judicial precedents as well as the submissions of the assessee in this regard, we restore ground no. 1.12 to the file of the Assessing Officer/TPO for re-computing the operating profit margin of the remaining comparable companies after giving due opportunity to the assessee to present its case.

5.3 Acordingly, ground nos. 1.10, 1.11 and 1.12 stand allowed for statistical purposes.

6. In the final result, the assessee’s appeal stands partly allowed in terms of our Para wise observations and directions.

Order pronounced in the open court on 21st May, 2018.

Sd/- Sd/-

(N.K.SAINI) (SUDHANSHU SRIVASTAVA)

ACCOUNTANT MEMBER JUDICIAL MEMBER

Date: 21.05.2018