Tax Hotline May 02, 2012

Investment Advisors and Investment Bankers not comparable rules Mumbai Tribunal

The Mumbai Income Tax Appellate Tribunal (“ITAT”) recently pronounced its ruling in favor of the taxpayer, an investment advisory company in the case of Carlyle India Advisors Private Limited v. The ACIT1, rejecting the arm’s length price (“ALP”) and the comparables chosen by the Transfer Pricing Officer (“TPO”). The ITAT held that companies providing investment advisory services and investment banking services are functionally not comparable. Further, the ITAT held that the TPO must provide reasons in order to reject the comparables chosen by the taxpayer while arriving at the ALP in an international transaction.


The Carlyle Group (“TCG”) is a private global investment firm that sets up various funds, which in turn invests in entities across the globe. TCG operates on a private partnership structure wherein the general partners, who operate and manage the funds, obtain advice in relation to their funds and investments from Carlyle Investment Management LLC (“Carlyle US”) and Carlyle Asia Investment Advisors Limited (“Carlyle Hong Kong”). Carlyle Hong Kong is a wholly owned subsidiary of Carlyle US and provides consulting services, including investment advisory, technology support, management consultancy and other advisory services to the general partners for investments made by TCG in the Asia-Pacific region. Similarly, Carlyle India Advisors Private Limited (“Carlyle India”), a subsidiary of Carlyle Hong Kong provides investment advisory related support services to the latter in furtherance of a Services Agreement (“Agreement”) entered into between the said parties, effective from April 1, 2006.

As per the terms of the Agreement, Carlyle India inter alia provided the following services to Carlyle Hong Kong, in consideration of which Carlyle India received a monthly service fee which was equal to 115% of actual operating expenses incurred by Carlyle India for providing the services enumerated below:

  1. Analyzing investment opportunities, providing related general advice and information on the merits, timing, structure, and appropriate terms of any acquisition or disposal of investments;
  2. Monitoring (all) fund investments from time to time upon instructions;
  3. Providing information in relation to the economic and political developments in India having a bearing on investment opportunities;
  4. Assisting Carlyle Hong Kong in identifying external advisors and consultants, to assist them in identifying or investigating any commercial, legal, regulatory or tax matters in relation to a potential investment opportunity or divestment; and
  5. Providing other support services incidental or related to the above.


For Assessment Year 2007-08, in the transfer pricing study filed by Carlyle India, the Transaction Net Margin Method (“TNMM”) was adopted as the most appropriate method to arrive at the ALP, which worked out to 15.02% of Carlyle India’s operating margin. This ALP was rejected by the TPO, who conducted a fresh search of comparable companies and arrived at an ALP of 81% using the TNMM method.

The issue in the present case was the determination of ALP in respect of the international transaction, viz., rendering of investment advisory and related support services by the Carlyle India to Carlyle Hong Kong, an ‘associate enterprise’ as defined in the Income Tax Act, 1961 (“Act”).


The Indian transfer pricing provisions is broadly in line with the OECD guidelines and is embodied in Chapter X, Sections 92 to 92 F of the Act2. According to the provisions of the Act and the Income Tax Rules, 1962, the consideration payable to an associated enterprise in any international transaction needs to be an ALP arrived at by choosing the most appropriate method depending on the specific facts of each case. The Act prescribes the criteria for determining what is an ‘international transaction’, an ‘associated enterprise’, as well as the method to arrive at an ALP. The taxpayer has the discretion to choose the method that is most appropriate to the transaction. If the TPO disagrees with the ALP and / or the comparables chosen by the taxpayer to arrive at the ALP, reasons have to be provided for any (upward) adjustment made to the ALP.


Carlyle India argued that the TPO had erred in rejecting the ALP of 15.02% and the transfer pricing documentation submitted by it. Carlyle India contended that the TPO did not appreciate its business model by comparing its activities inter alia to the activities undertaken by investment and merchant banks. The main aspect highlighted was that it is a limited risk investment advisory entity which means it has no decision making authority, neither does it invest its own capital, did not guarantee performance or bear the risk for non-payment. Carlyle India’s functions were limited to providing advice to its customer, which itself is an investment advisor (Carlyle Hong Kong). Further, it was pointed out that there is no privity of contract between Carlyle India and clients of Carlyle Hong Kong.

The TPO, without providing reasons for rejecting the comparable companies chosen by Carlyle India, adopted comparable companies (which according to the TPO were) functionally comparable with the international transaction in question. The TPO had used three search criteria to arrive at the list of comparables by using the search words asset management / capital management / investment management /fund management / fund managers / investment managers and services, mutual funds, other financial services, business consultancy services and financial consultancy services.


The ITAT accepted both the method (TNMM) and the ALP (15.02%) adopted by Carlyle India. The ITAT, rejected the fresh comparables chosen by the TPO on numerous grounds such as lack of segment wise financials, insignificant advisory fee earnings (when compared to the overall revenue of the comparable) and critically perhaps on the ground that providing investment advisory services could not be compared to investment banks given the inherent difference in the services performed by them. The ITAT accepted the arguments advanced by Carlyle India in relation to the difference in the functions performed, risks undertaken and assets owned by it vis-à-vis investment banks. The ITAT noted the fact that some of the comparables chosen by the TPO are not engaged in rendering investment advisory services. Further, the ITAT objected to the fact that the TPO had not given any reason whatsoever for rejecting these comparables.


In its ruling, the ITAT has emphasized the need for assessing officers / transfer pricing officers to provide reasoned orders and the need to abide by the principles of natural justice. The comparable companies chosen by the taxpayer cannot be blindly rejected by the revenue officer without valid justification. The ITAT in this case, methodically analyzed whether each company chosen by the TPO was performed similar functions worthy of being compared to the taxpayer. This reinforces the need on both the taxpayer and the revenue officer to carefully examine the companies – whether they perform similar functions or not, for undertaking the comparability analysis while conducting a transfer pricing study. Given that the data / databases available while conducting such transfer pricing studies may not be entirely accurate, the need to qualitatively examine the results is paramount. Today, with the growing number of big-ticket litigation prevalent in the realm of transfer pricing, in an increasingly globalized economy, this ruling is a welcome relief as it not only provides the much needed respite to investment advisory companies but also seeks to usher a great degree of logic, method and accountability to the process of highly complex number crunching exercises undertaken to determine an ALP. This ruling may hopefully reverse the trend of making (unnecessary) upward adjustments to the ALP in the investment advisory sector, which has witnessed an escalating upward ALP in an attempt to convince the revenue officers of compliance with the (uncertain) Indian transfer pricing regulations.

– Aditi Mukundan & Abhay Sharma 
You can direct your queries or comments to the authors


1 ITA NO. 7901/MUM/2011(A.Y.2007-08), Date of Pronouncement April 4, 2012.

2 The Indian Government introduced the new transfer pricing provisions in the Union Budget for the year 2001-02.

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