DEUTSCHE ASSET MANAGEMENT (INDIA) P. LTD, MUMBAI V. DCIT CIR 2(1), MUMBAI

ITA 7717/MUM/2010

• Counselvise Citation: [2012] 119 COUNSELVISE.COM (IT) 9303 (ITAT-MUMBAI)
• Duration Of Justice: 2 year(s) 1 month(s) 2 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 12-12-2012
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: K
• Next Hearing Date: 06-12-2012
• Assessment Year: 2006-2007
• Appeal Filed On: 10-11-2010
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Assessee Lawyers: P J PARDIWALA SHRI NIRAJ SETH
• Keywords: Depreciation; Transfer pricing; International transaction; Valuation report; Unabsorbed depreciation
• Section: 143(3); 244A

Judgement Text

1 M/S. DEUSTSCHE ASSET MANAGEMENT (INDIA) PRIVATE LIM ITED ITA 7717/M/2010 IN THE INCOME TAX APPELLATE TRIBUNAL K BENCH : MUMBAI BEFORE SHRI R.S. SYAL, ACCOUNTANT MEMBER AND SHRI VIVEK VARMA, JUDICIAL MEMBER ITA NO. 7717/MUM/2010 (ASSESSMENT YEAR: 2006-07) M/S. DEUSTSCHE ASSET MANAGEMENT (INDIA) PRIVATE LIMITED, 222, KODAK HOUSE, DR. D.N. ROAD MUMBAI -400 051 PAN: AABCD 5226 D VS DCIT, CIR-2(1)(2), AAYAKAR BHAVAN, M.K. ROAD, MUMBAI -400 020 APPELLANT RESPONDENT APPELLANT BY: SHRI P.J. PARDIWALA, SHRI NIRAJ SETH RESPONDENT BY: SHRI AJEET KUMAR JAIN MS SAGMITA NISAD DATE OF HEARING: 06.12.2012 DATE OF PRONOUNCEMENT: 12.12.2012 O R D E R PER VIVEK VARMA, J.M. THIS IS AN APPEAL AGAINST THE DIRECTIONS UNDER SECT ION 144C OF THE INCOME TAX ACT, 1961, DATED 15.07.2010, WHEREIN THE ASSESSEE HAS RAISED THE FOLLOWING GROUNDS: 1. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CA SE AND IN LAW, THE LEARNED TRANSFER PRICING OFFICER (TPO) AND THE DEPUTY COMMI SSIONER OF INCOME-TAX - 2(1), MUMBAI (HEREINAFTER REFERRED TO AS THE AO) UN DER DIRECTIONS ISSUED BY THE HONBLE DISPUTE RESOLUTION PANEL (DRP), ERRED IN MAKING AN ADDITION OF RS. 8,195,981 TO THE APPELLANTS TOTAL INCOME BASED ON THE PROVISIONS OF CHAPTER X OF THE INCOME-TAX ACT, (THE ACT). 2. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CAS E AND IN LAW, THE LEARNED TPO ERRED AND THE HONBLE DRP FURTHER ERRED IN UPHOLDIN G/CONFIRMING THE ACTION OF THE TPO OF ARBITRARILY EQUATING THE MARKETING SUPPO RT SERVICES RENDERED BY THE APPELLANT WITH THE FUND MANAGEMENT SERVICES RENDERE D BY DEUTSCHE ASSET MANAGEMENT (ASIA) LIMITED. 3. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CAS E AND IN LAW, THE LEARNED TPO ERRED AND THE HONBLE DRP FURTHER ERRED IN UPHOLDIN G/CONFIRMING THE ACTION OF 2 M/S. DEUSTSCHE ASSET MANAGEMENT (INDIA) PRIVATE LIM ITED ITA 7717/M/2010 THE TPO OF USING INTERNAL CONTROLLED TRANSACTION TO BENCHMARK ANOTHER CONTROLLED TRANSACTION ENTERED INTO BY APPELLANT WI TH ITS ASSOCIATED ENTERPRISE. 4. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CAS E AND IN LAW, THE LEARNED TPO ERRED BY IGNORING, AND THE HONBLE DRP FURTHER ERRE D IN ARBITRARILY REJECTING THE NET COST PLUS (NCP) MARK-UP COMPUTATION FOR NON- BUILDING ADVISORY SERVICES SUBMITTED BY THE APPELLANT DURING THE COURSE OF ASS ESSMENT PROCEEDINGS BASED ON FACTUALLY ERRONEOUS REASONS AND WITHOUT FI NDING ANY DEFICIENCIES IN THE PROFIT SPLIT METHODOLOGY (USING REVENUE AS A BA SE) FOLLOWED BY THE APPELLANT. 5. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CAS E AND IN LAW, THE HONBLE DRP ERRED IN REJECTING THE OBJECTION OF THE APPELLANT T HAT THE TPO HAS ARBITRARILY SELECTED FUNCTIONALLY NON-COMPARABLE COMPANIES (WHI CH IS EVIDENT FROM THE ANNUAL REPORTS OF THE ALLEGED COMPARABLE COMPANIES) FOR BENCHMARKING NON BINDING ADVISORY SERVICES RENDERED BY THE APPELLANT . 6. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CAS E AND IN LAW, THE LEARNED TPO ERRED AND THE HONBLE DRP FURTHER ERRED IN CONFIRMI NG THE ACTION OF THE TPO IN DENYING THE BENEFIT/REDUCTION OF 5 PERCENT FROM THE ARITHMETIC MEAN AS PROVIDED IN PROVISO TO SECTION 92C(2) OF THE ACT, W HILE COMPUTING THE ADJUSTMENT TO THE TOTAL INCOME OF THE APPELLANT. 7. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CAS E AND IN LAW, THE LEARNED TPO ERRED AND THE HONBLE DRP FURTHER ERRED IN CONFIRMI NG THE ACTION OF THE TPO IN NOT STATING ANY REASONS TO SHOW THAT EITHER OF THE CONDITIONS MENTIONED IN CLAUSES (A) TO (D) OF SECTION 92C(3) OF THE ACT WER E SATISFIED BEFORE MAKING AN ADJUSTMENT TO THE INCOME OF THE APPELLANT. THE APPELLANT PRAYS THAT THE ADJUSTMENT IN RELATION TO TRANSFER PRICING MATTERS MADE BY THE LEARNED AO/TPO AND UPHELD THE H ONBLE DRP BE DELETED. 8. (A) THE AO WHILE PASSING THE ORDER DATED 20 TH AUGUST, 2010 UNDER SECTION 143(3) PURSUANT TO THE DIRECTIONS OF THE DRP ERRED IN NOT RECORDING CARRY FORWARD OF THE SHORT TERM CAPITAL LOSS OF RS 2,80,2 15 AND BUSINESS OF RS. 2,86,78,070 (PER IMPUGNED ORDER) FOR BEING SET OFF IN THE SUBSEQUENT YEARS. (B) THE AO ERRED IN NOT RECORDING THE BROUGHT FORWA RD UNABSORBED DEPRECIATION OF AY 2003-04 OF RS. 21,02,819 FOR BEING CARRIED FO RWARD TO SUBSEQUENT YEARS. THE APPELLANT PRAYS THAT THE AO BE DIRECTED SUITAB LY IN THE MATTER. 9. THE AO ERRED IN NOT ISSUING THE REFUND OF RS. 1, 71,27,188 DETERMINED VIDE THE ORDER UNDER SECTION 143(3) DATED 20 TH AUGUST, 2010. THE APPELLANT PRAYS THAT THE AO BE DIRECTED TO ISS UE THE REFUND AFTER GRANTING INTEREST UNDER SECTION 244A UPTO DATE OF RECEIPT OF REFUND AS AGAINST UPTO DATE OF THE ORDER. 10. THE AO BE DIRECTED TO COMPENSATE THE APPELLANTS BY GRATING INTEREST U/S 244A ON INTEREST U/S 244A FOR LOSS OF REVENUE/POTENTIAL INCOME SUFFERED, ON ACCOUNT OF NON ISSUE OF REFUND THAT WAS RIGHTLY DUE, HAD TH E REFUND BEEN RECEIVED ON TIME. 2. GROUNDS NO. 1 TO 7 CONCERNS TP ISSUES AND GROUND S NO. 8, 9 & 10 CONCERNS DOMESTIC TAX ISSUES. 3. APROPOS GROUNDS NO. 1 TO 7 ARE AGAINST THE ADDIT ION OF RS. 8,195,981/-, SUGGESTED BY THE TPO AND SUSTAINED BY THE DRP. THE FACTS ARE THAT THE ASSESSEE IS AN ASSET MANAGEMENT COMPANY, P ROMOTED BY DEUTSCHE ASSETS MANAGEMENT ASIA LTD. (DAMAL), BASED IN SINGA PORE, HAVING 75% SHARE HOLDING OF THE INDIAN COMPANY (INSTANT ASSESS EE), TO PROVIDE NON 3 M/S. DEUSTSCHE ASSET MANAGEMENT (INDIA) PRIVATE LIM ITED ITA 7717/M/2010 BINDING ADVISORY SERVICES FOR MANAGING THE PORTFOLI O OF SECURITIES OF SUCH FUND FLOATED BY DEUTSCHE INDIA EQUITY FUND (DWS SUB -FUND) WITHOUT ANY ATTACHMENT OF FINANCIAL RISK. ON BEING REFERRED TO THE TPO, IT WAS EXPLAINED BY THE ASSESSEE THAT (EXTRACTED) , DURING THE YEAR ENDED 31 MARCH 2006, THE ASSESSEE HAS RENDERED FOLLOWING SERVICES TO ASSOCIATED ENTERPRISES. THE DESCRIPTIO N OF SERVICES ALONG WITH THE COMPENSATION RECEIVED BY THE ASSESSEE IS MENTIONED BELOW SR. NO. NAME OF ASSOCIATED ENTERPRISES NATURE OF TRANSACTION COMPENSATION FOR THE SERVICES OF THE ASSESSEE 1 DEUTSCHE ASSET MANAGEMENT (ASIA) LIMITED PROVISION OF NON BINDING ADVISORY SERVICES ONE-HALF OF THE TOTAL FEES RECEIVED BY DAMAL FOR DWS PREMIER INVESTMENTS FUNDS (DWS) 2 DEUTSCHE BANK AG FRANKFURT (DB FRANKFURT) PROVISION OF MARKETING SUPPORT SERVICES ONE-THIRD OF THE TOTAL FEES RECEIVED BY DB FRANKFURT FROM RESERVE BANK OF INDIA (RBI) THE ASSOCIATED ENTERPRISE ACTS AS THE FUND MANAGER OF DEUTSCHE INDIA EQUITY FUND AN INDIA DEDICATED OFFSHORE FUND INVESTING INTO IND IAN SECURITIES. THE ASSOCIATED ENTERPRISE HAS APPOINTE D THE ASSESSEE TO PROVIDE NON-BINDING ADVISORY SERVICES FOR MANAGEMENT OF POR TFOLIO OF SECURITIES OF SUB FUND FLOATED BY DWS PREMIER INVESTMENTS FUNDS (DWS SUB FUND). FOR PROVISION OF THESE SERVICES, THE ASSOCIATED ENTERPR ISE PAYS 50 PER CENT OF THE FEES RECEIVED FROM DWS SUB FUND TO THE ASSESSEE. IT IS PERTINENT TO NOTE THAT THE ASSESSEE DOES NOT UNDERTAKE ANY FORM OF FINANCIAL RISK AS IT MERELY RENDERS NON BINDING ADV ICES AND THE ASSOCIATED ENTERPRISE HAS THE COMPLETE DISCRETION T O ACT/NOT TO ACT UPON THE INVESTMENT ADVICE PROVIDED BY THE ASSESSEE . FURTHER THE ASSESSEE EMPLOYS ONLY ROUTINE TANGIBLE ASSETS REQUI RED TO PERFORM NON BINDING ADVISORY SERVICES. FURTHER DURING THE COURSE OF ASSESSMENT PROCEEDINGS , THE ASSESSEE ALSO SUBMITTED A DETAILED SUBMISSION ON THE FUNCTIO NS PERFORMED BY THE ASSESSEE AND DAMAL IN CASE OF DWS MANDATE. THE RELEVANT EXTRACT OF THE SUBMISSIONS MADE BY THE ASSESSEE TO THE TPO VIDE LETTER DATED 23 OCTOBER 2009 IS GIVEN BELOW : FUNCTION PERFORMED BY ASSOCIATED ENTERPRISE 1. TO SOURCES THE INVESTORS FOR THE FUND 2. TO ASSIST THE FUND TO MARKET AND SALE VARIOUS PRODU CTS OF THE FUND 3. TO INVESTS THE MONEY AS PER THE INVESTMENT OBJECTIV ES OF THE FUND I.E. TO ACHIEVE CAPITAL APPRECIATION IN THE ME DIUM TO LONG TERM BY INVESTING IN DIVERSIFIED PORTFOLIOS WHICH I N ITS OPINION HAVE SIGNIFICANT ASSETS, BUSINESS, PRODUCTION ACTIV ITIES TRADING OR OTHER BUSINESS INTEREST. 4. TO INVEST IN OFFSHORE INSTRUMENTS SUCH AS AMERICAN DEPOSITORY RECEIPTS AND GLOBAL DEPOSITORY RECEIPTS. 5. TO EVALUATE THE QUALITY OF MANAGEMENT OF THE INVEST ED COMPANY FROM TIME TO TIME BOTH FROM MACRO AND MICRO PERSPECTIVE. THIS ALSO INCLUDES VISIT TO THE INVESTED COMPANY. 6. TO IDENTIFY CHANGES WHICH INCLUDE MANAGEMENT CHANGE , PRODUCT INNOVATION, INDUSTRY ACTIVITY, COMPETITOR ACTIVITY, COMPETITOR ENTRY AND RESTRUCTURING. 4 M/S. DEUSTSCHE ASSET MANAGEMENT (INDIA) PRIVATE LIM ITED ITA 7717/M/2010 7. TO PERFORMS OTHER FUND MANAGEMENT ACTIVITIES WHICH INCLUDE ACTIVITIES RELATING TO ORDER PLACEMENT AND SETTLEMENT OF TRADE S, COMPUTATION OF DAILY NET ASSET VALUE ETC. 8. TO ASSISTS IN COMPLYING WITH THE REQUIREMENT OF REG ULATORY AND STATUTORY FILING FROM TIME TO TIME. 9. TO MAKE INVESTMENT DECISION AFTER DUE DILIGENCE . WE HAVE ALSO ATTACHED THE COPY OF THE PROSPECTUS IS SUED BY THE DEUTSCHE INDIA EQUITY FUND ANNEXUREI. FURTHER IT IS ALSO PERTINENT TO NOTE THAT THE ASSOC IATED ENTERPRISE HAS ABOUT 65 EMPLOYEES IN ITS PAY ROLL. THUS FROM THE ABOVE, IT IS EVIDENT THAT THE ASSOCIATED ENTERPRISE ACTS AS FUND MANAGER AND ASSI STS THE FUND IN SERVING CLIENTS ACROSS THE GLOBE AND TO DEVELOP NEW PRODUCTS TO MEET CLIENTS INVESTMENT NEEDS . FUNCTIONS PERFORMED BY THE ASSESSEE WE REITERATE OUR SUBMISSION MADE VIDE SUBMISSION LE TTER DATED 7 OCTOBER 2009 THAT THE ASSESSEE HAS BEEN APPOINTED BY THE ASSOCIA TED ENTERPRISE TO PROVIDE NON-BINDING ADVISORY SERVICES. THE FUNCTIONS PERFOR MED BY THE ASSESSEE ARE MENTIONED BELOW: PROVIDE RESEARCH REPORTS AND RECOMMENDATIONS TO DAM AL ON VARIOUS SECURITIES IN PORTFOLIO; REVIEW SECURITIES AND THEIR PERFORMANCE COMPRISING THE PORTFOLIO, PROVIDE COMMENTARY ON STOCKS/SECURITIES IN THE PORT FOLIO PROVIDE DAMAL WITH INVESTMENT ADVICE OR RECOMMENDAT ION IN CONNECTION WITH THE INVESTMENT OF THE FUND AND ASSE TS COMPRISING TO PORTFOLIO; ASSISTS DAMAL IN PREPARATION OF THE MINUTES OF MEET INGS; PROVIDE UPDATE ON ECONOMY, MARKET OUTLOOK, MARKET R EVIEW, INVESTMENT STRATEGIES AND OPPORTUNITIES TO ENABLE DAMAL TO MAK E INFORMED INVESTMENT DECISIONS IN A TIMELY MANNER; AND REVIEW VALUATION REPORTS PREPARED BY DAMAL. 2.2 MARKETING SERVICES RENDERED BY THE ASSESSEE DB FRANKFURT, ANOTHER ASSOCIATED ENTERPRISE WAS APP OINTED BY RESERVE BANK OF INDIA (RBI) TO ACT AS INVESTMENT MANAGER FOR THE FOREIGN EXCHANGE FUNDS HELD BY RBI. DB FRANKFURT HAS APPOI NTED THE ASSESSEE TO PROVIDE MARKETING SUPPORT SERVICES. THE EXTRACT OF THE SUBMISSION MADE BY THE ASSESSEE TO THE TPO VIDE LET TER DATED 23 OCTOBER 2009 IS GIVEN BELOW: THE FOLLOWING PARAGRAPHS ENTAIL THE FUNCTIONS PERFORMED BY THE ASSOCIATED ENTERPRISE AND THE ASSE SSEE. FUNCTIONS PERFORMED BY ASSOCIATED ENTERPRISE THE ASSOCIATED ENTERPRISE ACTS AS AN INVESTMENT MAN AGER FOR THE FOREIGN EXCHANGE FUNDS HELD BY THE RESERVE BANK OF INDIA (RBI). THE ASSOCIATED ENTERPRISE UNDERTAK ES NECESSARY RESEARCH AND ANALYSIS AND PERFORMS ALL TH E REQUIRED ACTIVITIES FOR MANAGEMENT OF THE FOREIGN EXCHANGE FUNDS OF THE RBI. FUNCTIONS PERFORMED BY THE ASSESSEE THE COMPANY MERELY ASSISTS THE ASSOCIATED ENTERPRIS E IN COORDINATING MEETINGS WITH RBI WHEN THE PERSONNEL O F THE ASSOCIATED ENTERPRISE VISIT IN INDIA. HOWEVER, THE EMPLOYEES OF THE ASSOCIATED ENTERPRISE RARELY VISIT IN INDIA, HENCE; THE COORDINATION EFFORTS DONE BY THE ASSESSEE ARE MINIMAL. IT IS ALSO PERTINENT TO NOTE THAT THE COMPANY HAS NOT EMPLOYED EMPLOYEE SPECIFICALLY TO PERFORM SUCH COORDINATION SERVICES. MOREOVER, THE ASSESSEE EMPLOYS ONLY ROUTINE TANGIBL E ASSETS REQUIRED TO PERFORM MARKETING SUPPORT SERVIC ES. 5 M/S. DEUSTSCHE ASSET MANAGEMENT (INDIA) PRIVATE LIM ITED ITA 7717/M/2010 4. ON BEING ASKED BY THE TPO TO SUBMIT THE FUNCTION S PERFORMED BY THE ASSESSEE, THE ASSESSEE VIDE LETTER DATED 27.10.2009 , DEUTSCHE EQUITY INDIA FUND IS A FUND PROMOTED BY MUTUAL FUND BASED OUT OF SINGAPORE AND MANAGED BY DEUTSCHE ASSE T MANAGEMENT ASIA LTD. THE ASSOCIATED ENTERPRISE ACTS AS THE FUND MANAGER OF DEUTSCHE INDIA EQUITY FUND . ALL THE INVESTORS OF THE FUND ARE BASED OUTSIDE INDIA. DEUTSCHE INDIA EQUITY FUND IS AN INDIA DEDICATED OFFSHORE FUND INVESTING INTO INDIAN SECURITIES. THE ASSOCIATED ENTERPRISE HAS APPOINTED THE ASSESSEE TO PROVIDE NON-BINDING A DVISORY SERVICES FOR MANAGEMENT OF PORTFOLIO OF SECURITIES OF SUB FU ND FLOATED BY DWS PREMIER INVESTMENTS FUNDS (DWS SUB FUND). FOR PROVISION OF THESE SERVICES, THE ASSOCIATED ENT ERPRISE PAYS 50 PER CENT OF THE FEES RECEIVED FROM DWS SUB FUND TO THE ASSESSEE. IT IS PERTINENT TO NOTE THAT THE ASSESSEE DOES NOT UNDERTAKE ANY FORM OF FINANCIAL RISK AS IT MERELY RENDERS NON BINDING ADV ICES AND THE ASSOCIATED ENTERPRISE HAS THE COMPLETE DISCRETION T O ACT/ NOT TO ACT UPON THE INVESTMENT ADVICE PROVIDED BY THE ASSESSEE . PLEASE FIND BELOW THE FEW SAMPLE ADVICES PROVIDED BY THE ASSESS EE WHICH WERE REJECTED BY ASSOCIATED ENTERPRISE FOR YOUR REFERENC E AS ANNEXURE 1. FURTHER, THE ASSESSEE HAS EARNED THE MARK-UP OF 385 .30 PER CENT MARK-UP FROM PROVISION OF THE NON BINDING ADVISORY SERVICES. THE COMPUTATION OF THE SAME IS TABULATED BELOW: PARTICULARS AMOUNT REVENUE 24,588,000 TOTAL OPERATING INCOME 24,588,000 EXPENDITURE EMPLOYEE COSTS 1,103,201 OPERATING COSTS 2,874,434 OVERHEAD 1,070,955 DEPRECIATION 18,000 TOTAL OPERATING EXPENDITURE 5,066,590 NET OPERATING PROFIT 19,521,410 NCP % 385.30 HOWEVER IN CASE OF NON-BINDING ADVISORY SERVICES, T HE ASSOCIATED ENTERPRISES PERFORM THE FOLLOWING ACTIVITIES IN ADD ITION TO THE CO- ORDINATION ACTIVITIES: TO SOURCES THE INVESTORS FOR THE FUND ON AN ON G OING BASIS WHEREAS IN THE CASE OF RBI MANDATE IT IS LIAISONING SUPPORT WI TH ONE CLIENT. ACTIVE MARKETING OF THE FUND PERFORMANCE TO RETA IN EXISTING INVESTORS AND TO ATTRACT NEW INVESTORS TO THE FUND TO INVESTS THE MONEY AS PER THE INVESTMENT OBJEC TIVES OF FUND. TO EXECUTE CLIENTS ORDER, PLACEMENT AND SETTLEME NT OF TRADES, TO COMPUTE DAILY NET ASSET VALUE OF THE CLIENT AND SEND REPORTS TO THE CLIENT TO MANAGE THE CASH HOW OF THE FUND TO MAINTAIN THE ACCOUNTS AND RECORDS OF THE FUND TO GET THE ACCOUNTS OF THE FUND AUDITED TO INVEST IN OFFSHORE INSTRUMENTS SUCH AS AMERICA N DEPOSITORY RECEIPTS AND GLOBAL DEPOSITORY RECEIPTS AND KEEP RE CORDS OF THE SAME TO IDENTIFY CHANGES IN THE, INDUSTRY, TO EVALUATE THE QUALITY OF MANAGEMENT OF THE INV ESTED COMPANY. TO ASSISTS IN COMPLYING WITH THE STATUTORY FILING AS REQUIRED IN THE OFFSHORE JURISDICTION 6 M/S. DEUSTSCHE ASSET MANAGEMENT (INDIA) PRIVATE LIM ITED ITA 7717/M/2010 BASED ON ABOVE WE SUBMIT THAT THE SERVICES PERFORME D BY THE ASSOCIATED ENTERPRISES IN CASE OF DWS SUB FUND AND THE SERVICES RENDERED BY THE ASSESSEE IN CASE OF MARKETING SUPPORT ACTIVITIES CANNOT BE COMP ARED BASED ON THE ABOVE FUNCTION, ASSET AND RISK ANALYSI S AND HAVING REGARD TO THE COMMERCIAL AND ECONOMIC FACTORS THE A SSESSEE CONSIDER THE COMPENSATION RECEIVED IN RESPECT OF NON-BINDING ADVISORY SERVICES AND MARKETING SUPPORT SERVICES BASED ON THE REVENUE SPLIT RATIO OF5O:50 RATIO AND 1/3RD: 2 /3 TO BE AT ARM S LENGT H FROM THE INDIAN TRANSFER PRICING PERSPECTIVE. 5. THE TPO, AFTER CONSIDERING THE DETAILED REPLY, O BSERVED, WITH REFERENCE TO THE ABOVE TRANSACTION, CONTROLLE D INTERNAL COMPARABLE HAS BEEN USED TO BENCHMARK THE INVESTMENT ADVISORY SERVICE PROVIDED BY THE ASSESSEE, BECAUSE THE ASSESSEE HAS NOT PROVI DED ITS COST BASE FOR RENDERING THE ABOVE SERVICE. HAD THE ASSESSEE G IVEN THE COST BASE, THEN COST PLUS MARK UP OF 39.85% WOULD HAVE BEEN AP PLIED ON THE BASIS FOR THE FOLLOWING COMPARABLES TO BENCHMARK TH E ALP FOR ADVISORY SERVICES. ANALYSIS OF ASSESSEES SUBMISSION: THE OFFICE HAS PERUSED THE SUBMISSION MADE BY THE A SSESSEE. HOWEVER THE ASSESSEES CONTENTIONS ARE REJECTED ON ACCOUNT OF THE FOLLOWING REASONS: FROM THE PERUSAL OF FUNCTIONS PERFORMED BY THE ASSE SSEE IT IS OBSERVED THAT ASSESSEE AND AE PERFORM SIMILAR FUNCTIONS IN T HE MARKETING SUPPORT SERVICE AND ADVISORY RELATED TRANSACTIONS R ESPECTIVELY. IT IS NOTED THAT IN BOTH THE CASES THE SERVICES ARE ADVISORY IN NATURE. ADVISORY SERVICES ARE ALWAYS NON-BINDING. IT IS UPT O THE OTHER PARTY WHETHER TO ACCEPT AND ACT ON IT OR NOT. THE ASSESSE E BY SIMPLY LABELING THE ADVISORY SERVICES AS NONBINDING TRIED TO DIFF ERENTIATE BETWEEN BOTH THE SERVICES, WHICH IS NOT ACCEPTABLE. THE FUN CTIONS DISCHARGED IN BOTH THE CASES ARE RELATED TO INVESTMENT, AND ADVIC E IS GIVEN WITH REFERENCE TO INVESTMENT. HENCE, THE CONTENTION OF THE ASSESSEE IS REJECTED A ND THE REP RETAINED BY DEUTSCHE ASSET MANAGEMENT (ASIA) LIMITED IS REDU CED FROM 50% TO 1/3RD OF FEES IN LINE WITH THE ARRANGEMENT ENTERED BY ASSESSEE WITH DEUTSCHE BANK AG FRANKFURT FOR MARKETING SUPPORT SE RVICE RELATED TRANSACTION. THUS AN ADJUSTMENT IS MADE TO THE TOTAL INCOME OF T HE ASSESSEE. THE COMPUTATION OF ADJUSTMENT IS AS FOLLOWS: PARTICULARS AMOUNT ADVISORY FEES RECEIVED BY THE ASSESSEE BEING 50 PER CENT OF THE TOTAL FEES A 24,587,944 ADVISORY FEES RECEIVED BY THE AE OF THE ASSESSEE BEING 50 PER CENT OF THE TOTAL FEES B 24,587,944 TOTAL FEES C=A+B 49,175,888 ARMS LENGTH FEES TO BE RECEIVED BY THE ASSESSEE C*2/3 32,783,926 ACTUAL FEES RECEIVED BY THE ASSESSEE A 24,587,944 ADJUSTMENT D=C-A 8,195,981 OTHER INTERNATIONAL TRANSACTION OTHER INTERNATIONAL TRANSACTIONS ENTERED INTO BY TH E ASSESSEE ARE CONSIDERED TO BE AT ARMS LENGTH AND ACCORDINGLY NO ADJUSTMENT IS MADE TO THE TOTAL INCOME OF THE ASSESSEE. 7 M/S. DEUSTSCHE ASSET MANAGEMENT (INDIA) PRIVATE LIM ITED ITA 7717/M/2010 THUS, AN ADJUSTMENT OF RS. 8,195,981/- IS MADE TO T HE TRANSACTION VALUES OF THE ASSESSEE. 6. THE TPO, THEREFORE, SUGGESTED AN ADJUSTMENT OF R S. 8,195,981 TO BE MADE TO THE TRANSACTION VALUE. 7. THE MATTER WAS TAKEN UP BEFORE THE DRP, WHO ACCE PTED THE FINDINGS/OBSERVATIONS MADE BY THE TPO, WHEREIN THE PANEL HELD, AFTER A CAREFUL PERUSAL OF THE DETAILED FACTS OF T HE CASE AND THE REASONING GIVEN BY THE ASSESSING OFFICER, THE PANEL IS OF THE VIEW THAT THE ASSESSING OFFICER HAS RIGHTLY REJECTED THE NET COST PLUS METHOD SUGGESTED BY THE ASSESSEE BECAUSE PROPER SEPARATE A CCOUNT ARE NOT AVAILABLE. SINCE THE ASSESSING OFFICER HAS NOT MAD E FINAL COMPARISON WITH ANY NON-RELATED PARTIES, THE ASSESSEES OBJECT IONS AT POINT D IS INFRUCTUOUS. ACCORDINGLY, THE ASSESSING OFFICER IS DIRECTED TO COMPLETE THE ASSESSMENT AS PROPOSED IN THE DRAFT ORDER. 8. THE ASSESSEE IS NOW BEFORE ITAT AGAINST THE ORD ER OF THE DPR. 9. BEFORE US, SENIOR COUNSEL REITERATED THE SUBMIS SIONS MADE BEFORE THE TPO AND THE DRP ON THE SERVICES PROVIDED BY THE ASS ESSEE COMPANY. IT WAS POINTED OUT THAT AS PER THE SUBMISSIONS MADE BEFORE THE REVENUE AUTHORITIES, THAT, SERVICES RENDERED BY THE ASSESSE E WERE ENTIRELY AT VARIANCE, WITH THAT OF THE SERVICES PERFORMED BY DA MAL, WHOSE FEE COMPARISON WAS BEING SOUGHT BY THE TPO/DRP. THE AR REFERRED TO THE, FUNCTIONS PERFORMED BY ASSOCIATED ENTERPRISE : THE ASSOCIATED ENTERPRISE ACTS AS AN INVESTMENT MANAGER FOR THE FOREIGN EXCHANGE F UNDS HELD BY THE RESERVE BANK OF INDIA (RBI). THE ASSOCIATED ENTERPRISE UNDE RTAKES NECESSARY RESEARCH AND ANALYSIS AND PERFORMS ALL THE REQUIRED ACTIVITI ES FOR MANAGEMENT OF THE FOREIGN EXCHANGE FUNDS OF THE RBI. FUNCTIONS PERFORMED BY THE ASSESSEE : THE COMPANY M ERELY ASSISTS THE ASSOCIATED ENTERPRISE IN COORDINATING MEETINGS WITH RBI WHEN THE PERSONNEL OF THE ASSOCIATED ENTERPRISE VISIT IN INDIA. HOWEVE R, THE EMPLOYEES OF THE ASSOCIATED ENTERPRISE RARELY VISIT IN INDIA, HENCE; THE COORDINATION EFFORTS DONE BY THE ASSESSEE ARE MINIMAL. IT IS ALSO PERTINENT T O NOTE THAT THE COMPANY HAS NOT EMPLOYED EMPLOYEE SPECIFICALLY TO PERFORM SUCH COORDINATION SERVICES. 8 M/S. DEUSTSCHE ASSET MANAGEMENT (INDIA) PRIVATE LIM ITED ITA 7717/M/2010 MOREOVER, THE ASSESSEE EMPLOYS ONLY ROUTINE TANGIBL E ASSETS REQUIRED TO PERFORM MARKETING SUPPORT SERVICES. HE FURTHER REFERRED TO THE AGREEMENT THIS AGREEMENT IS MADE ON 19 NOVEMBER 2004 BETWEEN (1) DEUTSCHE ASSET MANAGEMENT (ASIA) LIMITED OF 20 RAFFLES PLACE, #27- 01 OCEAN TOWERS. SINGAPORE 048620 (THE INVESTMENT M ANAGER); AND (2) DEUTSCHE ASSET MANAGEMENT (INDIA) PVT. LTD. OF FIOOR GROUND, HAZARIMAL SOMANI MARG FORT, MUMBAI. INDIA (THE IN VESTMENT ADVISER) WHEREAS (A) THE INVESTMENT MANAGER HAS BEEN APPOINTED AS DI SCRETIONARY INVESTMENT MANAGER OF THE PORTFOLIOS OF DEUTSCHE IN DIA EQUITY FUND (DIEF), AN SINGAPORE AUTHORISED UNIT TRUST ESTABL ISHED UNDER THE UMBRELLA, DEUTSCHE PREMIER INVESTMENTS FUNDS; AND (B) THE INVESTMENT MANAGER REQUIRES THE SERVICES OF A SPECIALIST INVESTMENT ADVISER TO HELP IT IN THE MANAGEMENT OF PART OR ALL OF DIEFS PORTFOLIO AND ACCORDINGLY, THE INVESTMENT MANAGER W ISHES TO DELEGATE TO THE INVESTMENT ADVISER THE PERFORMANCE OF CERTAI N OF ITS POWERS ARID DUTIES IN RELATION TO DIEF INVESTMENT ADVICE AND INVESTMENT GUIDELINES 3. THE INVESTMENT ADVISER WILL RENDER ADVICE TO THE INVESTMENT MANAGER IN CONNECTION INVESTMENT OF THE PORTFOLIO, HAVING REGARD TO THE INVESTMENT GUIDELINES AND RESTRICTIONS IN THE FUND DOCUMENT OR AS NOTIFIED BY THE INVESTMENT MANAGER TO THE INVESTMEN T ADVISER (THE INVESTMENT GUIDELINES). IN ADDITION, WITHOUT LIMI TING THE GENERALITY OF THE FOREGOING, THE INVESTMENT ADVISER WILL: (A) REPORT TO THE INVESTMENT MANAGER ON THE PORTFOL IO, IN ACCORDANCE WITH SECTION 4; (B) REVIEW THE MONIES AND ASSETS COMPRISING THE POR TFOLIO WHENEVER THE INVESTMENT ADVISER SHALL DEEM THIS DESIRABLE OR NEC ESSARY (OR AT THE REQUEST OF THE INVESTMENT MANAGER); AND (C) PROVIDE THE INVESTMENT MANAGER WITH INVESTMENT ADVICE OR RECOMMENDATIONS IN CONNECTION WITH THE INVESTMENT OF THE MONIES AND ASSETS COMPRISING THE PORTFOLIO WHENEVER THE INVES TMENT ADVISER DEEMS THIS DESIRABLE OR NECESSARY (OR AT THE REQUES T OF THE INVESTMENT MANAGER). THE INVESTMENT ADVISER INVESTMENT ADVICE AND RECOMM ENDATIONS UNDER THIS SECTION SHALL BE NON BINDING AND MAY BE GIVEN BY TELEPHONE, IN WRITING OR AT PERIODIC MEETINGS ATTENDED REPRESENTA TIVES OF THE INVESTMENT MANAGER AND THE INVESTMENT ADVISER, OR I N SUCH OTHER MANNER AS THE INVESTMENT MANAGER AND THE INVESTMENT ADVISER MAY AGREE. THE INVESTMENT MANAGER SHALL HAVE THE COMPLE TE DISCRETION TO ACT I NOT TO ACT UPON THE INVESTMENT AD GIVEN BY TH E INVESTMENT ADVISER. 3.2 AMENDMENTS TO THE INVESTMENT GUIDELINES OF DIEF MAY BE NOTIFIED AT ANY TIME BY THE INVESTMENT MANAGER ON WRITTEN NO TICE TO THE INVESTMENT ADVISER. 3.3 THE INVESTMENT ADVISER WILL NOT EFFECT ANY PORT FOLIO TRANSACTIONS ON BEHALF OF THE INVESTMENT MANAGER AND IT SHALL BE TH E SOLE RESPONSIBILITY OF THE INVESTMENT MANAGER TO EXECUTE , RECORD, SETTLED AND DO ALL SUCH INCIDENTAL ACTS AS MAY BE REQUIRED FOR EFFECTING THE TRANSACTIONS. 3.4 NOTWITHSTANDING ANYTHING CONTAINED IN THIS AGRE EMENT, THE INVESTMENT ADVISER RESERVES THE RIGHT TO OFFER ADVI SORY SERVICES OR ANY OTHER PORTFOLIO RELATED SERVICES TO ANY OTHER P ERSON, ENTITY IRRESPECTIVE OF ITS LOCATION. 9 M/S. DEUSTSCHE ASSET MANAGEMENT (INDIA) PRIVATE LIM ITED ITA 7717/M/2010 10. HE FURTHER POINTED OUT THAT IT WAS CLARIFIED TO THE TPO VIDE LETTER DATED 23.10.2009, THAT THE FUNCTION OF THE ASSESSEE WAS D IFFERENT FROM THAT OF ITS AE AT SINGAPORE, AND THEREFORE, THE ASSESSEE CONTEN DED THAT REVENUE ALLOCATION CANNOT BE COMPARED WITH THE AE AT SINGAP ORE. 11. THE DR ON THE OTHER HAND REFERRED TO THE FORM 3 CEB REPORT UNDER RULE 10E AND POINTED OUT THAT THE ASSESSEE HAD ACTU ALLY NOT ADOPTED ANY METHOD FOR BENCHMARKING THE ALP, WHEREAS, THE TPO H AD JUSTIFIABLY ADOPTED CONTROLLED INTERNAL COMPARABLE TO BENCHMARK THE ALP TO ARRIVE AT THE TP ADJUSTMENT. HE ALSO POINTED OUT THAT THE ASSESSEE H AS ALSO NOT SHOWN ANY BASIS FOR MARK UP. THE DR, THEREFORE, SUBMITTED THA T BOTH THE AUTHORITIES HAD FAIRLY TREATED THE ASSESSEE. 12. AT THE MOMENT, WE ARE CONCERNED WITH ONLY TWO I NTERNATIONAL TRANSACTIONS ENTERED INTO BY THE ASSESSEE COMPANY O UT OF OTHER TRANSACTIONS, I.E. THE MARKETING FEE AND ADVISORY F EE RECEIVED BY THE ASSESSEE, ON WHICH THE ADDITION HAS BEEN MADE. ON H EARING THE ARGUMENTS OF EITHER SIDE, AND ON PERUSAL OF THE SUBMISSIONS A ND THE AGREEMENTS ENTERED INTO BY THE ASSESSEE AND TAKING INTO ACCOUN T DISTINCTION DRAWN BY THE ASSESSEE/AR, BETWEEN THE SERVICES RENDERED BY D AMAL AND THE ASSESSEE TO ITS PRINCIPAL, MADE BY THE ASSESSEE BEFORE THE R EVENUE AUTHORITIES AND NOW, BEFORE US, WE ARE CONVINCED THAT FEE RECEIVED BY THE ASSESSEE FOR PROVIDING MARKETING AND ADVISORY SERVICES CANNOT BE EQUATED WITH THE SERVICES OF AN INVESTMENT MANAGER. HENCE, THE DECIS ION OF THE TPO, SUSTAINED BY THE DRP CANNOT BE ACCEPTED. 13. IN THE RESULT, WE ACCEPT THE ALP ARRIVED AT B Y THE ASSESSEE AND WE, THEREFORE, DIRECT THE AO TO DELETE THE ADDITION MAD E. 14. IT WAS POINTED OUT BY THE AR THAT IN THE SUCC EEDING YEAR SIMILAR ADJUSTMENT WAS MADE AND DRP HAS DELETED THE ADDITIO N MADE, WHICH WAS ENTIRELY BASED ON THE FACTS OF THE EXISTING AGREEME NT. THIS, ALSO IS A GOOD ENOUGH REASON FOR DELETING THE IMPUGNED ADDITION, M ADE IN THE CURRENT YEAR. 10 M/S. DEUSTSCHE ASSET MANAGEMENT (INDIA) PRIVATE LIM ITED ITA 7717/M/2010 15. GROUNDS NO. 1 TO 7 ARE, THEREFORE ALLOWED, IN F AVOUR OF THE ASSESSEE. 16. GROUNDS NO. 8(A) & (B) PERTAIN TO NON RECORDING OF CARRY FORWARD OF STCG OF RS. 2,80,215, BUSINESS LOSS OF RS. 2,86,78, 070 AND BROUGHT FORWARD DEPRECIATION OF RS. 21,02,819. 17. WE HAVE PERUSED THE ASSESSMENT ORDER AND THE OR DER OF THE DRP. WE FIND THAT THE PURSUANT TO THE DRPS ORDER, THE AO HA S NOT ALLOWED ANY ADJUSTMENT TOWARDS STCG, BUSINESS LOSS AND CARRY FO RWARD OF DEPRECIATION. WE, THEREFORE, DIRECT THE AO TO VERIFY THE FACTS ON EACH OF THE THREE IMPUGNED USERS AND PASS AN APPROPRIATE ORDER IN ACCORDANCE W ITH LAW, AFTER ALLOWING REASONABLE OPPORTUNITY TO THE ASSESSEE. 18. GROUNDS NO. 8(A) & (B) ARE, THEREFORE TREATED A S ALLOWED FOR STATISTICAL PURPOSES. 19. GROUNDS NO. 9 & 10 ARE WITH RESPECT TO THE DIRE CTION TO BE GIVEN TO THE AO TO ALLOW REFUND ALONG WITH THE INTEREST UPTO DAT E. 20. AS THE ISSUE DOES NOT EMANATE FROM THE ORDERS O F THE EITHER AUTHORITIES, WE CANNOT TAKE ANY DECISION ON SUCH AN ISSUE. WE, THEREFORE, REFRAIN OURSELVES FROM TAKING ANY DECISION ON THE I SSUES IMPUGNED BEFORE US. 21. IN THE RESULT, THE APPEAL AS FILED BY THE ASSES SEE IS TREATED AS PARTLY ALLOWED. ORDER PRONOUNCED IN THE OPEN COURT ON 12/12/2012. SD/- SD/- ( R.S. SYAL ) ACCOUNTANT MEMBER ( VIVEK VARMA ) JUDICIAL MEMBER MUMBAI, DATE: 12/12/2012 11 M/S. DEUSTSCHE ASSET MANAGEMENT (INDIA) PRIVATE LIM ITED ITA 7717/M/2010 CHAVAN* COPY TO: 1) THE APPELLANT. 2) THE RESPONDENT. 3) THE CIT (A)-CONCERNED____ / ADDL. CIT (TP) I(2)/CIT /DIT CONCERNED ______, MUMBAI. 4) THE CIT CONCERNED ___, ADDL. CIT (TP) I(2)/CIT/DIT CONCERNED ______, MUMBAI. 5) THE D.R. K BENCH, BOMBAY. BY ORDER / / TRUE COPY / / ASSTT. REGISTRAR I.T.A.T., MUMBAI *CHAVAN