2016 (11) TMI 1625 - AT - Income Tax

TP Adjustment - comparable selection - HELD THAT - Motilal Oswal Investment Advisors Pvt. Ltd is primarily in the business of Merchant Banking and, therefore, is not functionally comparable with the business of the assessee being investment advisory to its AE. IDFC - assessee is engaged in business of providing investment research and advisory services to Bain Mauritius, on a non-exclusive and non-binding basis, in connection with potential investment opportunities in India. IDFC rendered Portfolio Management services for hybrid infrastructure portfolio, agriculture opportunities portfolio and farm fork portfolio. IDFC is registered as portfolio manager with SEBI. Thus, IDFC is functionally different from the assessee which is engaged merely in non-binding investment advisory support services. Since, IDFC is functionally different, we direct the AO to exclude the IDFC from the list of comparables CRA Online Limited operated in two strategic lines of business, i. e. knowledge Process Outsourcing and information Services and Technology Solutions, with a list of reputed global and domestic clients. we direct the AO to exclude above mentioned three comparables from the final list. Effective ground of appeal is decided in favour of the assessee.

Summary

Issues Involved:
1. Inclusion of certain comparables for determining the Arm's Length Price (ALP) of International Transactions (IT).
2. Functional comparability of Motilal Oswal Investment Advisors Pvt. Ltd. (MOIAPL), IDFC Investment Advisors Ltd. (IDFC), and ICRA Online Ltd. (ICRA-O) with the assessee.

Issue-wise Detailed Analysis:

1. Inclusion of Certain Comparables for Determining the ALP of IT:

The primary issue revolves around the inclusion of specific comparables to determine the ALP of the International Transactions (IT) entered by the assessee. The assessee, a wholly-owned subsidiary of a Singapore-based company, filed its return of income declaring a total income of ?2.63 crores. During the assessment proceedings, the Assessing Officer (AO) referred the matter to the Transfer Pricing Officer (TPO) to determine the ALP of IT, resulting in an adjustment of ?1.83 crores. The AO issued a draft assessment order, which the assessee challenged before the Dispute Resolution Panel (DRP). The DRP upheld the inclusion of three additional comparables proposed by the TPO, leading to the final assessment order determining the income at ?4.47 crores.

2. Functional Comparability of MOIAPL, IDFC, and ICRA-O with the Assessee:

MOIAPL:
The TPO included MOIAPL in the list of comparables, arguing that it was functionally similar to the assessee. However, the Tribunal previously held that MOIAPL, engaged in merchant banking, was not functionally comparable to companies providing investment advisory services. This decision was supported by earlier cases, including Carlyle India Advisors Private Limited and Acumen Fund Advisory Services India Private Limited, which excluded MOIAPL due to its engagement in diversified activities and lack of segmental reporting. Consequently, the Tribunal directed the AO to exclude MOIAPL from the list of comparables.

IDFC:
The Tribunal found that IDFC was engaged in portfolio management services, which differed significantly from the non-binding investment advisory services provided by the assessee. The earnings of IDFC were based on the net assets of the fund plus a performance fee, contrasting with the cost-plus-fixed-markup basis of the assessee. Previous decisions, including Bain Capital Advisors (India) Private Limited, supported the exclusion of IDFC from the list of comparables due to its distinct business model. The Tribunal, therefore, directed the AO to exclude IDFC from the final set of comparables.

ICRA-O:
The assessee contended that ICRA-O was not functionally comparable as it provided diversified services, including knowledge process outsourcing and information services. The Tribunal noted that ICRA-O's activities, such as data maintenance and management, were not comparable to the investment advisory services rendered by the assessee. Previous cases, including Sparkles Dhando Advisors Pvt. Ltd., supported this view, leading the Tribunal to direct the AO to exclude ICRA-O from the list of comparables.

Conclusion:
The Tribunal concluded that the TPO/DRP was not justified in including MOIAPL, IDFC, and ICRA-O as valid comparables for determining the ALP of the IT entered by the assessee. The Tribunal directed the AO to exclude these three comparables from the final list, resulting in the appeal being decided in favor of the assessee. The order was pronounced in the open court on 11th November 2016.