2014 (10) TMI 901 - AT - Income Tax

Transfer pricing adjustment - inclusion of two comparables by the TPO namely, Brescon Corporate Advisory Ltd. and Sumedha Fiscal Services Ltd., for bench marking the assessee s arm s length price - Held that - The assessee has been rendering non binding investment advisory support services to its A.E. TPG Capital L.P., the functional profile which has been incorporated in the forgoing paragraph reflects that the role of the assessee is limited to providing information and making recommendation for the investment in India. Such advisory services are not binding on its A.E. which take its own call after analysing the details and information given by the assessee. From the functional profile of Sumedha Fiscal Services Ltd., it is seen that it is mainly engaged in investment banking and security dealing. Now coming to the Brescon Corporate Advisory Ltd., it is seen that this company is a leading player in distress and special situation advisory and investment services. It assists the companies in a special situation like re capitalization, mergers and acquisition, infusion of private equity or direct investment. Its main revenue is from debt syndication and financial re structuring advisory services. Thus, such a functional profile cannot be held to be comparable at all with the services / functions performed by the assessee which are mainly on account of advisory support services of providing information and investment recommendation. In view of these functional differences, it cannot be held that the said company is comparable on FAR analysis. Accordingly, Brescon Corporate Advisory Ltd., cannot be held to be a comparable company for the purpose of bench marking the assessee s margin. Thus, both the comparable companies as taken by the Transfer Pricing Officer should be excluded from the list of financial comparables. After excluding these two comparables, the assessee s margin should be bench marked with the other list of comparables as taken by the Transfer Pricing Officer i.e., out of 10 comparables these two comparables are to be removed and based on the arithmetic means of the margin of the final set of eight comparables, the assessee s margin should be bench marked accordingly. - Decided in favour of assessee.

Issues Involved:
1. Transfer pricing adjustment of Rs. 2,39,28,647.
2. Inclusion of Brescon Corporate Advisory Ltd. and Sumedha Fiscal Services Ltd. as comparables for benchmarking the assessee's arm's length price.

Issue-wise Detailed Analysis:

1. Transfer Pricing Adjustment of Rs. 2,39,28,647:

The assessee challenged the transfer pricing adjustment of Rs. 2,39,28,647 made by the Transfer Pricing Officer (TPO). The dispute arose from the inclusion of two comparables, Brescon Corporate Advisory Ltd. and Sumedha Fiscal Services Ltd., for benchmarking the assessee's arm's length price. The assessee, engaged in rendering non-binding investment advisory support services to its Associate Enterprise (A.E.), TPG Capital Services, adopted the Transactional Net Margin Method (TNMM) with Profit Level Indicator (PLI) as OP/TC cost. The assessee's margin was 9.4%, which was benchmarked against six comparables, later updated to eight during the transfer pricing assessment proceedings. The TPO identified three additional comparables, including Brescon Corporate Advisory Ltd. and Sumedha Fiscal Services Ltd., and removed one comparable, KPIT Cummunis Global Business Solution Ltd., due to its loss-making status. The TPO's final set of ten comparables resulted in an arithmetic mean of 24.11%, leading to an upward adjustment of Rs. 2,39,28,647.

2. Inclusion of Brescon Corporate Advisory Ltd. and Sumedha Fiscal Services Ltd. as Comparables:

The assessee objected to the inclusion of Brescon Corporate Advisory Ltd. and Sumedha Fiscal Services Ltd. as comparables, arguing that their functional profiles were not comparable to the services rendered by the assessee. The assessee provided detailed objections, highlighting the differences in the nature of services and functions performed. The Assessing Officer and the learned Commissioner (Appeals) rejected the assessee's contentions, maintaining that the functions performed by the two companies were similar to those of the assessee.

Before the Tribunal, the assessee's counsel emphasized that the assessee's role was limited to providing information and investment recommendations to TPG Capital L.P., which had the discretion to accept or reject the advice. The assessee's services were non-binding, unlike the functions of Brescon Corporate Advisory Ltd. and Sumedha Fiscal Services Ltd., which were involved in investment banking, securities dealing, loan syndication, and project consultancy services. The Tribunal noted that Sumedha Fiscal Services Ltd. was primarily engaged in investment banking and security dealing, with significant income from loan syndication and project consulting services. Brescon Corporate Advisory Ltd. was a leading player in distress and special situation advisory and investment services, mainly earning revenue from debt syndication and financial restructuring advisory services.

Given these functional differences, the Tribunal concluded that both companies were not comparable to the assessee's advisory support services. The Tribunal referred to previous decisions, including Carlyle India Advisors Pvt. Ltd. and Temasek Holdings Advisories India Pvt. Ltd., where similar companies were rejected as comparables. Consequently, the Tribunal directed the exclusion of Brescon Corporate Advisory Ltd. and Sumedha Fiscal Services Ltd. from the final list of comparables. The assessee's margin was to be benchmarked with the remaining comparables, resulting in the acceptance of the assessee's appeal and the allowance of the grounds raised.

Conclusion:

The Tribunal allowed the assessee's appeal, directing the exclusion of Brescon Corporate Advisory Ltd. and Sumedha Fiscal Services Ltd. from the list of comparables for benchmarking the assessee's margin. The assessee's margin was to be benchmarked with the remaining comparables, leading to the resolution of the transfer pricing adjustment dispute in favor of the assessee.

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