2014 (10) TMI 864 - AT - Income Tax

Transfer pricing adjustment - issue of selection of comparables - Held that - A comparison of the functional profile of the assessee, which is extracted by us in the earlier part of this order demonstrates that it is different from the functional profile of M/s Motilal Oswal Investment Advisors P.Ltd., At page 79 of the paper book copy of the directors report presented along with the audited accounts of the company M/s Motilal Oswal Investment Advisory P.Ltd., was enclosed. A perusal of the same demonstrates that the company had unique success with its delivery capabilities in cross product border acquisition for its clients. This is in addition to providing clients with optimal solutions across various products viz. Capital market, private equity and mezzanine finance. Hence the argument of the assessee that the functional profile of M/s Motilal Oswal Investment Advisors P.Ltd., is different from the functional profile of the assessee is correct and hence has to be accepted. M/s Cyber India Research Ltd., now known as IDC Ltd., is primarily dealing with research survey services and products. It also demonstrates that Cyber India Ltd. has launched numerous media properties for the B2B communities which has made it the largest specialized media house in the country. The other functions performed by IDC and the properties held by IDC demonstrate that the functional profile is totally different from the functional profile of the assessee, which is in the activity of providing investment advisory services to its A.E. In view of the above, we are inclined to uphold the order of the TPO as upheld by the DRP and reject this claim of the assessee. TPO was right in rejecting M/s Cyber India Research Ltd. Now known as IDC as a comparable. TPO is directed to provide the benefit of 5% range to the assessee

Summary

Issues Involved:
1. Legality of the assessment order.
2. Confirmation of addition to income based on non-binding financial advisory and consultancy services.
3. Use of multiple year/prior years' data.
4. Doctrine of impossibility of performance.
5. Selection filters and rejection of comparable companies.
6. Rejection of Cyber Media Research Limited as a comparable.
7. Inclusion of Motilal Oswal Investment Advisors Ltd. as a comparable.
8. Computational errors in calculating margins.
9. Risk adjustment for low-risk service providers.
10. Treatment of reimbursement of expenses.
11. Benefit of (+/-) 5 percent range in computing ALP.
12. Initiation of penalty proceedings.
13. Levy of interest under section 234B and 234C.
14. Computational errors in calculating interest under section 234B and 234C.

Detailed Analysis:

1. Legality of the Assessment Order:
The appellant argued that the assessment order passed by the AO pursuant to the directions of the DRP is bad in law. However, this issue was not pressed further during the proceedings.

2. Confirmation of Addition to Income:
The appellant contended that the DRP and AO erred in confirming the addition of Rs. 94,516,662 to the income by holding that its international transaction did not satisfy the arm's length principle. The tribunal addressed this issue in conjunction with the selection of comparables (Ground Nos. 6 and 7).

3. Use of Multiple Year/Prior Years' Data:
The appellant's use of multiple year/prior years' data was disregarded by the DRP, AO, and TPO. This ground was dismissed as 'not pressed'.

4. Doctrine of Impossibility of Performance:
The appellant argued that the authorities disregarded the doctrine of impossibility of performance. This ground was considered general in nature and was not specifically adjudicated.

5. Selection Filters and Rejection of Comparable Companies:
The appellant claimed that the DRP and AO erred in modifying the selection filters and arbitrarily rejecting comparable companies. This issue was addressed under the broader discussion of comparable selection (Ground Nos. 6 and 7).

6. Rejection of Cyber Media Research Limited as a Comparable:
The tribunal upheld the rejection of Cyber Media Research Limited (now known as IDC) as a comparable, stating that its functional profile is different from that of the appellant, which is involved in investment advisory services.

7. Inclusion of Motilal Oswal Investment Advisors Ltd. as a Comparable:
The tribunal found that the functional profile of Motilal Oswal Investment Advisors Ltd. is not comparable to the appellant's profile. Following precedents, the tribunal directed the AO to exclude Motilal Oswal Investment Advisors Ltd. as a comparable.

8. Computational Errors in Calculating Margins:
The appellant highlighted computational errors in calculating the working capital adjusted margin of Motilal Oswal Investment Advisors Ltd. This issue was addressed by excluding Motilal Oswal Investment Advisors Ltd. as a comparable.

9. Risk Adjustment for Low-Risk Service Providers:
The appellant's request for a risk adjustment was withdrawn without prejudice to the right to claim it in future years.

10. Treatment of Reimbursement of Expenses:
Both parties agreed to set aside this issue to the AO with specific directions to consider both the income from reimbursement of expenses and the related expenditure while computing the profit level indicator (PLI).

11. Benefit of (+/-) 5 Percent Range in Computing ALP:
The tribunal directed the TPO to provide the statutory benefit of the +/- 5% range to the appellant while computing the ALP.

12. Initiation of Penalty Proceedings:
The tribunal dismissed the ground related to the initiation of penalty proceedings as premature.

13. Levy of Interest under Section 234B and 234C:
The tribunal noted that these grounds are consequential in nature and did not delve into specific adjudication.

14. Computational Errors in Calculating Interest under Section 234B and 234C:
Similar to the levy of interest, the tribunal considered these grounds as consequential and did not provide a detailed adjudication.

Conclusion:
The tribunal allowed the appeal in part, specifically directing the exclusion of Motilal Oswal Investment Advisors Ltd. as a comparable, rejecting Cyber Media Research Limited as a comparable, and providing the benefit of the +/- 5% range in computing the ALP. Other grounds were either dismissed, considered general, or set aside for further consideration by the AO. The appeal was thus partially successful for the appellant.