Income Tax Appellate Tribunal (ITAT) Mumbai in a recent judgment has held that there is a huge difference between the activities of investment advisory services and merchant banking and therefore, the comparables relating to merchant banking cannot be accepted for investment advisory services for computing ALP.

Case Details:
ITA No.1019/Mum/2014; Assessment Year:2009-10
M/s. General Atlantic Pvt. Ltd (Appellant) vs DCIT (Respondent)
Date of Order: 06-11-2015

Brief facts of the Case:
The assessee was a wholly owned subsidiary of GASC LLC based in India and providing information on industries alongwith information in relation to potential targets located in Indian Jurisdictional to its AE GASC LLC, as per the service agreement dated 31.10.2002 entered into between the parties. During the course of the Transfer Pricing proceedings, the TPO referred to certain companies as comparables which were previously considered and confirmed by the DRP in the previous assessment years 2006-07 and 2007-08. The assessee strongly objected to the inclusion of these companies as comparables stating that these companies were functionally different because they were doing investment banking as well as investment advisory. In support of its claim, the assessee submitted the Director’s report and financials of companies selected by TPO.

As per the list of comparables furnished by the assessee it has shown markup of 12.6% on cost, whereas the cost plus margins of the comparables selected for the TPO came to 46.90%. Accordingly, the TPO made an adjustment of Rs. 12,14,61,293/- to the income of the assessee on account of consultancy services. The matter travelled to DRP which directed TPO to accept 11 comparable which were similar to the activities of the assessee for computing Arm’s Length Price required for finalizing the value of international transactions. Accordingly TPO completed the ALP adjustment at Rs. 3,24,66,614/-.

Before ITAT , the assessee strongly objected to the inclusion of four companies as comparables, namely; 1. Chartered Capital & Investment Ltd. 2. Edelweiss Capital Ltd. 3. Sumedha Fiscal Services Ltd. And 4. Motilal Oswal Investment Advisors Pvt. Ltd.

Contentions of the assessee:
The contention of the assessee was that these companies were functionally different from the assessee as these companies were into merchant banking business whereas the assessee was only an investment advisory company.

Contentions of the Revenue:
The department contended that the same skill set is required for investment advisory and merchant banking therefore it cannot be said that companies selected were functional not comparable.

Question before ITAT:
Whether a merchant banker can be compared with an investment advisor?

Held:
ITAT held that all the four companies in challenge should be excluded from the final list of comparables

Important Excerpt from ITAT Judgment:
The bone of contention is whether a merchant banker can be compared with an investment advisor. It may be like comparing apples with oranges. One may say that what is the difference, both are fruits. But on second thought except that both are fruits can they be said to be on the same level playing field? The definition of investment advisor as given in Investopedia reads as under:

“As defined by the Investment Advisors Act of 1940, any person or group that makes investment recommendations or conducts securities analysis in return for a fee, whether through direct management of client assets or via written publications.

An investment advisor who has sufficient assets to be registered with the SEC is known as a Registered Investment Advisor, or RIA. Investment advisors are prohibited from disseminating advice known to be deceitful or fraudulent, and from acting as a principle on their own accounts by buying and selling securities between themselves and a client without prior written consent.”

and the definition of merchant bank given in Wikipedia is as under:

“A merchant bank is a financial institution providing capital to companies in the form of share ownership instead of loans. A merchant bank also provides advisory on corporate matters to the firms in which they invest. In the United Kingdom, the historical term “merchant bank” refers to an investment bank.”

A simple perusal of the above definition would show that there is huge difference between the functions. No doubt that in both these companies Chartered Accountants and MBAs are involved but that would not make their functions similar as they are working in different filed with different risks and remuneration. It is an undisputed fact that the assessee is engaged in the business of investment advisory, therefore, the comparables relating to merchant banking cannot be accepted.

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