2016 (10) TMI 1267 - AT - Income Tax

TP Adjustment - selection of comparable - functionally dissimilarity - HELD THAT - A company engaged in investment banking activity cannot be compared to a company providing investment advisory services. We have further noted that the Tribunal, Delhi Bench, in Mckinsey Knowledge Centre India Pvt. Ltd. 2015 (3) TMI 1226 - DELHI HIGH COURT has held that if a company is functionally similar, only because of its low turnover, it cannot be rejected if such turnover filter was not applied either by the assessee or by the Transfer Pricing Officer. Companies functionally dissimilar with that of assessee need to be deselected from final list.

Issues Involved:
1. Selection and rejection of comparables by the Transfer Pricing Officer (TPO) and Dispute Resolution Panel (DRP).
2. Determination of the arm's length price (ALP) for international transactions.
3. Application of the Transactional Net Margin Method (TNMM) and the Operating Profit/Operating Cost (OP/OC) as the Profit Level Indicator (PLI).

Detailed Analysis:

1. Selection and Rejection of Comparables:
IDFC Investment Advisors Pvt. Ltd.:
- The assessee argued that IDFC is engaged in providing Portfolio Management Services (PMS) and investment banking services, which are functionally different from non-binding investment advisory services. The Tribunal noted that IDFC's revenue from different segments lacked segmental details and included brokerage expenses, making it incomparable to the assessee's activities. The Tribunal cited previous decisions (e.g., Carlyle India Advisors Pvt. Ltd., AGM India Advisors Pvt. Ltd.) to support the exclusion of IDFC as a comparable.

ICRA Online Limited:
- The assessee contended that ICRA Online Limited operates in diverse business verticals such as knowledge process outsourcing (KPO) and information services, which are not comparable to the assessee's activities. The Tribunal, referencing previous decisions (e.g., Carlyle India Advisors Pvt. Ltd., AGM India Advisors Pvt. Ltd.), agreed and excluded ICRA Online Limited from the list of comparables.

Motilal Oswal Investment Advisors Pvt. Ltd. (MOIAPL):
- The assessee argued that MOIAPL is engaged in multiple activities, including investment banking, which are functionally different from the assessee's non-binding investment advisory services. The Tribunal, citing previous decisions (e.g., Temasek Holdings Advisors India Pvt. Ltd.), excluded MOIAPL as a comparable due to its diverse functions and significant differences in activities.

Kshitij Investment Advisory Company Limited:
- The assessee pointed out that Kshitij underwent business restructuring and realignment, impacting its financial results and making it incomparable. The Tribunal, referencing previous decisions (e.g., Carlyle India Advisors Pvt. Ltd.), excluded Kshitij as a comparable due to the peculiar economic circumstances arising from its realignment.

2. Determination of the Arm's Length Price (ALP):
- The TPO had selected a new set of comparables and determined the ALP using an arithmetic mean of 42.66%, resulting in a transfer pricing adjustment. The Tribunal directed the exclusion of certain comparables (IDFC, ICRA Online, MOIAPL, Kshitij) and included others (ICRA Management Consulting Services Ltd., IDC India Ltd., Informed Technologies Ltd., Kinetic Trust Ltd.) based on functional similarity and previous acceptance in the assessee's own case.

3. Application of TNMM and OP/OC as PLI:
- The assessee adopted TNMM with OP/OC as the PLI, identifying seven comparables with an average arithmetic mean of 18.23%. The TPO rejected six out of seven comparables and selected a new set, resulting in a higher margin. The Tribunal's decision to exclude and include certain comparables was based on functional analysis, previous judicial decisions, and the principle of consistency.

ICRA Management Consulting Services Ltd.:
- The assessee argued for the inclusion of ICRA Management Consulting Services Ltd., which offers consulting/advisory services similar to the assessee's activities. The Tribunal, referencing previous decisions (e.g., Temasek Holdings Advisors India Pvt. Ltd., AGM India Advisors Pvt. Ltd.), included ICRA Management as a comparable.

IDC India Limited:
- The assessee argued that IDC India Ltd. is engaged in market research and management consultancy, functionally similar to the assessee's services. The Tribunal, citing previous decisions (e.g., Temasek Holdings Advisors India Pvt. Ltd.), included IDC India Ltd. as a comparable.

Informed Technologies Limited:
- The assessee argued that Informed Technologies Ltd. provides data management services to the financial sector, similar to the assessee's activities. The Tribunal, referencing previous decisions (e.g., Temasek Holdings Advisors India Pvt. Ltd.), included Informed Technologies as a comparable.

Kinetic Trust Limited:
- The assessee argued for the inclusion of Kinetic Trust Ltd., which is engaged in corporate consultancy and financial services. The Tribunal, citing previous decisions (e.g., Temasek Holdings Advisors India Pvt. Ltd.), included Kinetic Trust as a comparable, rejecting the Department's argument based on turnover criteria.

Conclusion:
The Tribunal directed the Assessing Officer/Transfer Pricing Officer to determine the arm's length price afresh, considering the exclusion and inclusion of specific comparables as discussed. The appeal was partly allowed, and other issues not specifically argued were dismissed as not pressed.

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