2017 (10) TMI 1521 - AT - Income Tax

TP Adjustment - selection of comparable - direction of the DRP to consider IDC Ltd. (ICDL) as a valid comparable - HELD THAT - IDCL was accepted as a valid comparable in the earlier year. No fresh facts have been brought on record proving that there were distinguishing facts of the year under appeal vis-a-vis facts of earlier year. Principles of tax jurisprudence stipulate that rule of consistency should be adhered to as far as possible. In the case of Carlyle India Advisory Pvt. Ltd. 2013 (4) TMI 486 - BOMBAY HIGH COURT has held that IDCL was a valid comparable for benchmarking investment advisory, as it was carrying out research/ consultancy activities. In the matters of General Atlantic Private Limited 2013 (1) TMI 797 - ITAT MUMBAI and Sandstone Capital Advisors Pvt. Ltd. 2013 (9) TMI 401 - ITAT MUMBAI the Tribunal has held that, for comparing investment advisory services, IDCL was to be considered a good comparables. We are of the opinion that the DRP had rightly held that IDCL was a valid comparable for benchmarking investment advisory services. So, confirming its order, we decide the effective ground of appeal against the AO. Exclusion of FCHL from the final list - If the principle is adopted for working out the RPT, it would be less than 25% and thus can be considered a valid comparable. So, Reversing the order of the TPO/AO, we decide the first effective ground of appeal in favour of the assessee. Inclusion of MOIAPL as a comparable company - MOIAPL is into merchant banking, and therefore, is functionally different to that of the assessee which is engaged in the business of non-binding advisory services. Therefore, in our opinion, the assessee is engaged in the function of non-binding advisory services whereas MOIAPL is into the merchant banking, capital markets, finance markets etc. Therefore, we find the MOIAPL is functionally dissimilar and therefore, the same should be excluded for benchmarking the international transactions. Accordingly, AO / TPO is directed to exclude the same. Whether single comparable can be adopted to test the validity of ALP of the IT? - We find that in the cases of J P Morgan Advisors India (P. )Ltd. 2019 (7) TMI 76 - ITAT MUMBAI , General Atlantics P. Ltd. 2016 (3) TMI 736 - BOMBAY HIGH COURT and Pino Bisazza Glass (P. )Ltd. 2013 (9) TMI 300 - ITAT AHMEDABAD the Tribunal has held that even a single comparable can be considered a valid comparable for determining the ALP of IT.s. Considering the fact that we have held that FCHL and IDCL are valid comparables, we hold that the AO was not justified in making the TP adjustment. Here, we would also like to mention that if only IDCL is taken as a comparable the mean of PLI would be (7. 29%), as against 5. 81% of the assessee. As it is within the range of ( /-)5%. If HCHL is also considered the assessee would be in the safe harbour. Seen from both the angles, it is evident the IT's entered in to by the assessee are within permissible limits. So, we reverse the order of the AO, passed in pursuance of the directions of the DRP, as far these two entities are concerned and hold them to be valid comparables. The RPT issue, as discussed earlier, is decided in favour of the assessee.

Summary

Issues Involved:
1. Consideration of IDC Ltd. (IDCL) as a valid comparable.
2. Exclusion of Future Capital Holding Ltd. (FCHL) from the final list of comparables.
3. Inclusion of Motilal Oswal Investment Advisors Pvt. Ltd. (MOIAPL) as a comparable company.
4. Validity of using a single comparable to test the Arm’s Length Price (ALP) of international transactions (ITs).

Detailed Analysis:

1. Consideration of IDC Ltd. (IDCL) as a Valid Comparable:
The Tribunal examined whether IDCL was a suitable comparable for benchmarking investment advisory services. The Transfer Pricing Officer (TPO) had rejected IDCL, citing its strategic tie-up with IDC-Inc. and its engagement in research and survey services rather than investment advisory services. However, the Dispute Resolution Panel (DRP) accepted IDCL as it was involved in research and advisory services. Referring to the annual report and previous orders, the Tribunal upheld that IDCL was a valid comparable, emphasizing the principle of consistency in tax jurisprudence. The Tribunal noted that the correct mean of profit for IDCL was 10.45%, not 13.70% as computed by the TPO.

2. Exclusion of Future Capital Holding Ltd. (FCHL) from the Final List of Comparables:
The Tribunal addressed the exclusion of FCHL based on the Related Party Transaction (RPT) filter. The TPO had rejected FCHL, stating it failed the 25% RPT filter. However, the assessee argued that the RPT percentage was only 11.46%. The Tribunal referred to the case of PTC Software (India) Pvt. Ltd., where it was established that the denominator for RPT calculation should be total sales when there are no RPT expenses. Applying this principle, the Tribunal concluded that FCHL’s RPT was below 25%, making it a valid comparable. Thus, the Tribunal reversed the TPO/AO's order and included FCHL as a valid comparable.

3. Inclusion of Motilal Oswal Investment Advisors Pvt. Ltd. (MOIAPL) as a Comparable Company:
The Tribunal reviewed whether MOIAPL should be included as a comparable. The TPO had included MOIAPL, but the DRP excluded it based on the Tribunal's earlier decision, which found MOIAPL functionally dissimilar due to its involvement in merchant banking and capital markets. The Tribunal reiterated that MOIAPL’s activities were not comparable to the assessee’s non-binding advisory services. Consequently, the Tribunal directed the exclusion of MOIAPL from the list of comparables.

4. Validity of Using a Single Comparable to Test the ALP of ITs:
The Tribunal considered whether a single comparable could be used to determine the ALP of ITs. Citing previous cases like J P Morgan Advisors India (P.) Ltd., General Atlantics P. Ltd., and Pino Bisazza Glass (P.) Ltd., the Tribunal affirmed that a single comparable could be valid for determining the ALP. Given that IDCL and FCHL were deemed valid comparables, the Tribunal held that the assessee's ITs were within permissible limits. The Tribunal reversed the AO's order, confirming that the ITs were at arm's length.

Conclusion:
The Tribunal dismissed the appeal filed by the AO and allowed the appeal of the assessee, confirming that IDCL and FCHL were valid comparables and excluding MOIAPL. The Tribunal upheld that a single comparable could be used to test the ALP of ITs, ensuring the assessee's transactions were within permissible limits. The order was pronounced on 25th October 2017.