2013 (9) TMI 401 - AT - Income Tax

Transfer pricing adjustments - ALP - selection of comaprables - considering single year data instead of multi year data Rule 10B read with section 92C of Income Tax Act - Selection of appropriate comparables for an International transaction Held that - It is mandatory for the purpose of comparing the data of an uncontrolled transaction with an international transaction that the same should be relating to the financial year in which the international transaction has been entered into. The information, data and documents should be contemporaneous - Current year data has to be taken into consideration until and unless some exceptional circumstances are brought on record to show that one year data of comparable do not give true picture being influent by such circumstances. As per Rule 10B (4) for determining the ALP u/s 92C, the data to be used in analysing any comparability of uncontrolled transaction with an international transaction shall be the data relating to the Financial Year in which the international transaction has been entered into. Thus, it is manifest from the sub rule (4) of Rule 10B that the data of the financial year in which the international transaction has been entered into to be used for analysing comparability of uncontrolled transaction in order to determine the ALP - The proviso to sub. rule (4) of Rule 10B provides the option for considering the data relating to the period other than the financial year in which the international transaction has been entered into; but not being more than two years prior to such financial year. The proviso to sub. Rule 4 of Rule 10B does not mandate that always consider two more years data of comparables in such analysis; but has a limited role only when the data of current year reveal some exceptional facts which could have influenced on determination of the Act in relation to the transaction being compared.

Issues Involved:
1. Adjustment of Rs 15,16,87,983 to the international transaction of providing investment advisory services.
2. Selection of comparables for benchmarking the Arm's Length Price (ALP).
3. Use of single-year data versus multi-year data for determining ALP.
4. Consideration of transactions only after the date when the associated enterprise (AE) relationship was established.

Issue-wise Detailed Analysis:

1. Adjustment of Rs 15,16,87,983 to the International Transaction:
The assessee, a 100% subsidiary of Sandstone Capital LLC, USA, engaged in providing investment advisory services, contested an adjustment of Rs 15,16,87,983 made by the Assessing Officer (AO). The AO, following the Transfer Pricing Officer's (TPO) determination, adjusted the ALP of the investment advisory services provided by the assessee to its AE. The assessee had initially determined the ALP using the Transactional Net Margin Method (TNMM) with Operating Profit/Total Cost (OP/TC) as the Profit Level Indicator (PLI), selecting five comparables with an average PLI of 18.80%. The TPO, however, selected different comparables, resulting in an arithmetic mean PLI of 75.23%, leading to the substantial adjustment contested by the assessee.

2. Selection of Comparables for Benchmarking ALP:
The TPO's selection of comparables was a primary dispute. The TPO rejected the assessee's comparables and selected six new ones, including CRISL Ltd, SBI Fund Management Pvt Ltd, Deutche Asset Management India Ltd, Shriyam Broking Intermediary Ltd, Twenty-first Century Shares & Securities Ltd, and ICRA Ltd. The assessee argued that these comparables were functionally different and had significant related party transactions, making them unsuitable for comparison. The Tribunal agreed with the assessee, noting that:
- CRISL Ltd had about 60% income from related party transactions.
- SBI Fund Management Pvt Ltd and Deutche Asset Management India Ltd were asset management companies, not advisory firms.
- Shriyam Broking Intermediary Ltd and Twenty-first Century Shares & Securities Ltd were primarily in broking activities.
- ICRA Ltd was mainly a rating agency with segment results showing a loss.

The Tribunal directed the AO/TPO to verify and reconsider the comparability of CRISL Ltd and to exclude the other five companies due to functional dissimilarity or related party transactions.

3. Use of Single-Year Data versus Multi-Year Data for Determining ALP:
The Tribunal upheld the use of single-year data for determining the ALP, as mandated by Rule 10B(4) of the Income Tax Rules, 1962. The rule stipulates that the data used should relate to the financial year in which the international transaction was entered into unless exceptional circumstances justify using data from other periods. The assessee did not demonstrate any exceptional circumstances warranting the use of multi-year data.

4. Consideration of Transactions Only After the AE Relationship Was Established:
The assessee contended that only transactions post-14.03.2008, when Sandstone Capital LLC became its AE, should be considered for ALP adjustment. The Tribunal noted that this plea was raised for the first time before it and directed the AO/TPO to consider and decide this contention as per law.

Conclusion:
The Tribunal allowed the assessee's appeal for statistical purposes, directing the AO/TPO to re-evaluate the comparables and consider the assessee's plea regarding the transaction period. The Tribunal emphasized the need for functional similarity and exclusion of comparables with significant related party transactions in determining the ALP.

← Previous Next →