2017 (3) TMI 1660 - AT - Income Tax

Arm s Length Price(ALP) for the transactions pertaining to investment advisory services - exclusion of four comparables - Held that - In view of the proposition in Quark Systems P. Ltd. 2009 (10) TMI 591 - ITAT CHANDIGARH we are unable to accept the contention of the learned CIT-DR that assessee is precluded from contesting a comparable which initially figured in its own set of comparables provided the assessee gives a cogent reason for exclusion of certain comparables based on FAR analysis and also on the basis of judicial pronouncements. In such cases there cannot be estoppels on objecting the inclusion/exclusion of such comparables. Assessee company is engaged in providing non-binding investment advisory services to its Associate Enterprise (AE) viz. J P Morgan Securities (Asia Pacific) Limited Hong Kong and J P Morgan Chase Bank N.A. Mumbai Branch, thus companies functionally with that of assessee need to be deselected from final list.

Summary

Issues Involved:
1. Transfer pricing adjustment for investment advisory services.
2. Selection of comparable companies.
3. Use of inappropriate filters/criteria and keywords in evaluating comparable companies.
4. Non-granting of credit for tax deducted at source.
5. Levy of consequential additional interest under sections 234B and 234C of the Income Tax Act.

Detailed Analysis:

1. Transfer Pricing Adjustment for Investment Advisory Services:
The assessee company, engaged in providing non-binding investment advisory services to its Associate Enterprise (AE), reported international transactions amounting to ?2,45,47,331. The assessee adopted the Transactional Net Margin Method (TNMM) and selected eight comparable companies with an arithmetic mean of 18.91%, claiming its margin was at arm's length. However, the Transfer Pricing Officer (TPO) rejected the assessee's comparables and conducted a fresh search, identifying eight new comparables, leading to a transfer pricing adjustment of ?53,04,358. The Dispute Resolution Panel (DRP) further modified the list of comparables, resulting in a final arithmetic mean of 27.18%.

2. Selection of Comparable Companies:
The assessee challenged four of the five comparables upheld by the DRP: Centrum Capital Limited, Keynote Corporate Services Limited, SREI Capital Markets Limited, and Sumedha Fiscal Services Limited. The Tribunal noted that these companies were primarily engaged in merchant banking activities, which are functionally different from non-binding investment advisory services. Citing previous Tribunal decisions, including Carlyle India Advisors Private Limited v. ACIT and General Atlantic Pvt. Ltd. v. DCIT, the Tribunal held that these companies could not be considered good comparables for benchmarking the assessee's margin.

3. Use of Inappropriate Filters/Criteria and Keywords:
The Tribunal addressed the CIT-DR's contention that the assessee could not challenge comparables initially selected by itself. It was held that the assessee is not precluded from raising objections if cogent reasons are provided. The Tribunal emphasized the importance of a proper FAR (Functions, Assets, and Risks) analysis and the need for comparables to stand the test of functional similarity.

4. Non-Granting of Credit for Tax Deducted at Source:
Regarding the issue of non-granting of credit for tax deducted at source amounting to ?1,222,588, the Tribunal directed the Assessing Officer (AO) to dispose of the assessee's rectification petition filed under section 154, which was still pending.

5. Levy of Consequential Additional Interest:
The issue of consequential additional interest under sections 234B and 234C, amounting to ?673,557 and ?17,697 respectively, was admitted by both parties to be consequential. Therefore, the Tribunal dismissed this ground as it would depend on the final outcome of the other issues.

Conclusion:
The Tribunal partly allowed the appeal, directing the TPO to benchmark the assessee's margin with only one comparable, IDC (India) Ltd., and to address the pending rectification petition regarding the non-granting of tax credit. The Tribunal's decision emphasized the need for functional comparability in transfer pricing analysis and upheld the assessee's right to challenge initially selected comparables based on cogent reasons and judicial precedents.