2013 (1) TMI 797 - AT - Income Tax

Determination of arms length price - Nature of Business - whether support services or merchant banking - Selection of comparables to determine ALP - International transaction like consultancy Services, reimbursement of expense, recovery of expenses incurred and receipt of share application money - Held that - TPO has rejected the comparables selected by the assessee on the ground that the activities of the assessee are of investment advisory services and not of support services. Held that - The primary role of the assessee is limited to collecting information, providing recommendations and advice on the basis of information collected - assessee has no functional, asset and business risk - assessee has no role in transfer of funds or investment in India - assessee has located the comparables which are in similar activity of advisory/support services - assessee is providing only advisory services and support services to its AE, who in turn takes a decision for potential investment - It is that the assesse s role is only to furnish the requisite information and not to participate in the actual decision making - Comparables selected by assessee are correct - Decided in favor of assessee Held that - As regards to the adjustment of /-5% can be made when some real and accurate effect of such differences are brought on record - assessee has not properly quantified the alleged adjustments on account of differences in asset employed and risk assumed - Decided against the assessee

Summary

Issues Involved:
1. Validity of the assessment order and notice under sections 143(3) and 144C of the Income Tax Act, 1961.
2. Transfer Pricing adjustments and comparability analysis.
3. Principles of natural justice.
4. Levy of interest under sections 234B and 234C of the Income Tax Act, 1961.

Detailed Analysis:

1. Validity of the Assessment Order and Notice:
The assessee challenged the assessment order dated 13.10.2010 passed under section 143(3) read with section 144C(13) of the Income Tax Act, 1961, pursuant to the directions of the Dispute Resolution Panel (DRP). The grounds included the issuance of an invalid notice under section 143(2) and failure to use "reasonable effort" before service of notice through affixture. The assessee also contended that objections questioning the validity of the notice could be raised at any time before the completion of the assessment.

2. Transfer Pricing Adjustments and Comparability Analysis:
The primary issue revolved around the Transfer Pricing (TP) adjustments made by the Transfer Pricing Officer (TPO) and confirmed by the DRP. The assessee, a private equity investment advisory service provider, argued that its services were akin to support services rather than investment banking or merchant banking activities. The TPO rejected the comparables selected by the assessee and instead chose comparables related to investment and merchant banking, resulting in a TP adjustment of Rs. 3,48,59,293.

The Tribunal examined the nature of the assessee's services, which included providing information and research support to its Associated Enterprise (AE), General Atlantic Service Corporation (GASC LLC). The Tribunal noted that the assessee's role was limited to providing advisory and support services without involvement in actual investment decisions or transactions. The Tribunal referred to a similar case, Carlyle India Advisors Private Ltd., where the Tribunal had rejected comparables selected by the TPO on the grounds of functional incomparability.

The Tribunal found that the assessee's activities were similar to those in the Carlyle case and concluded that only one comparable, IDC India Ltd., was appropriate. The Tribunal determined that the assessee's operating margin was within the permissible range of +/- 5% of the comparable's operating profit, thus no adjustment was required.

3. Principles of Natural Justice:
The assessee argued that the DRP's order violated principles of natural justice by disregarding requests to examine authorized representatives of comparable companies and denying the opportunity to cross-examine necessary persons. The Tribunal did not specifically address these contentions as the primary issue of TP adjustments was decided in favor of the assessee.

4. Levy of Interest under Sections 234B and 234C:
The assessee contested the levy of interest under sections 234B and 234C of the Income Tax Act. The Tribunal noted that these issues were consequential in nature and did not require specific findings.

Conclusion:
The Tribunal partly allowed the appeal, primarily in favor of the assessee on the issue of Transfer Pricing adjustments. The Tribunal followed the precedent set in the Carlyle India Advisors Private Ltd. case, determining that the comparables selected by the TPO were not appropriate, and the assessee's operating margin was within the acceptable range. The issues regarding the validity of the notice and principles of natural justice were not specifically adjudicated as the primary issue was resolved in favor of the assessee. The levy of interest under sections 234B and 234C was deemed consequential.