|CORAM:||I. C. Sudhir (JM), R. S. Syal (AM)|
|CATCH WORDS:||Comparables, Manger, Merchant Banker, PE Fund, Transfer Pricing|
|COUNSEL:||Mukesh Bhutani, Vishal Kalra, Vrinda Tulshan|
|DATE:||November 7, 2014 (Date of pronouncement)|
|DATE:||November 8, 2014 (Date of publication)|
|FILE:||Click here to download the file in pdf format|
|Though there is a functional difference between a PE Fund and a Merchant Banker, A manager or a sub-advisor to the PE Fund cannot be equated with the PE Fund so as not to be comparable with Merchant Bankers|
(i) 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 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.
(ii) 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 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 subcontracted 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 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.