2018 (6) TMI 1821 - AT - Income Tax

TP Adjustment - comparable selection - high percentage of related party transactions entered - HELD THAT -Crisil Limited (Research Segment) - It is now almost settled by various judicial precedents that for carrying out comparability analysis RPT filter should be around 25%. Since this issue has not been examined from this perspective therefore we are of the opinion that for examining the percentage of related party transactions matter should be remanded back to the file of TPO who shall examine this point and in case the RPT is more than 25% then this comparable cannot be included in the comparability list and hence should be excluded. With this direction issue of Crisil Limited (Research Segment) is remanded back to the file of the TPO. Brescon Corporate Advisors Ltd. are not only into advisory services but also into merchant banking financial restructuring and syndication of debt. Whereas the assessee company as discussed above is purely providing investment advisory services and none of its activities are into merchant banking. Brescon Corporate Advisory is also assisting company in special situations through recapitalisation mergers and acquisition infusion of private equity or direct investment etc. The company which is mainly carrying out merchant banking restructuring and syndication of debt cannot be held to be functionally comparable with a company which is purely into investment advisory services. There is no segmental information with regard to various streams of fees i.e. financial restructuring and re-capitalisation syndication of debt equity related advisory M A Advisory etc. In the absence of such segment information it would be very difficult to carry out in benchmarking analysis with the assessee because none of such activities are carried out by the assessee. Accordingly we direct exclusion of said comparable from the list of the comparables. Khandwala Securities Ltd . - Only few activities undertaken by it under the corporate advisory services which can said to have some similarity with those carried out by the assessee. However in totality if we take the overall streams of revenue and function carried out by this company then it would be very difficult to include such a company into a basket of comparability list and therefore at entity level and in absence of any overall segment of corporate advisory services we do not find that it should be included in the comparables. Accordingly we direct the exclusion of such comparable. India Venture Capital - We find that the principal products of this company are software product and services whereas the assessee company is purely into ITeS which is in the nature of business and investment research services. When a company is into Software development companies then ostensibly it cannot be held to be comparable with ITeS Company and on this ground alone we direct the exclusion of the said company. Disallowance on account of provision made during the year for leave encashment by the assessee u/s 43B (f) - HELD THAT - We do not find any merits in the contentions raised by the assessee that since the entire income of the assesses is exempt and therefore corresponding expenses are also exempt because from the perusal of the assessment order it is seen that no deduction u/s 10A has been claimed by the assessee and if the provision of leave encashment has not been paid then in terms of section 43B(f) such amount cannot be allowed as deduction. Accordingly the addition as confirmed by the AO in pursuance of the DRP direction is upheld. Thus on this issue the assessee s ground is dismissed.

Summary

Issues Involved:
1. Determination of the arm's-length price (ALP) for international transactions.
2. Disregard of the appellant's Transfer Pricing documentation.
3. Use of financial data of only the current year for benchmarking.
4. Denial of working capital and risk adjustments.
5. Granting of +/- 5% benefit under proviso to Section 92C(2) of the Act.
6. Disallowance of Rs. 29,31,485 under Section 43B(f).
7. Consideration of Section 10A as a deduction versus exemption.

Detailed Analysis:

1. Determination of the Arm's-Length Price (ALP):
The assessee contested the ALP determined by the Income Tax Officer (ITO) for the provision of corporate research services. The ITO had set the ALP at Rs. 30,05,63,588, whereas the assessee had determined it at Rs. 23,19,16,428. The Transfer Pricing Officer (TPO) rejected the economic analysis conducted by the assessee and selected different comparables, resulting in an upward adjustment. The Tribunal remanded the issue of Crisil Limited back to the TPO for re-examination of related party transactions (RPT) exceeding 25%. Brescon Corporate Advisors Limited and Khandwala Securities Limited were excluded from comparables due to functional dissimilarities and lack of segmental information. India Venture Capital was also excluded as it was primarily engaged in software services, unlike the assessee's ITeS.

2. Disregard of Transfer Pricing Documentation:
The TPO disregarded the appellant's Transfer Pricing documentation and conducted its own comparability analysis. The Tribunal found that the comparables chosen by the TPO were not appropriate due to high RPT and functional dissimilarities. The Tribunal directed the exclusion of certain comparables and remanded others for re-examination.

3. Use of Financial Data of Only the Current Year:
The TPO used only the financial data of the current year (FY 2007-08) for benchmarking the appellant's international transactions. The Tribunal did not specifically address this issue, implying acceptance of the TPO's approach.

4. Denial of Working Capital and Risk Adjustments:
The TPO denied the working capital and risk adjustments claimed by the assessee. The Tribunal did not adjudicate this issue as no arguments were placed before it.

5. Granting of +/- 5% Benefit:
The Tribunal did not specifically address the issue of granting the +/- 5% benefit under the proviso to Section 92C(2) of the Act.

6. Disallowance of Rs. 29,31,485 under Section 43B(f):
The AO disallowed Rs. 29,31,485 on account of provision for leave encashment under Section 43B(f). The assessee argued that the unit's income was exempt under Section 10A, and therefore, the provision should not be disallowed. The Tribunal upheld the AO's disallowance, stating that since the provision was not paid, it could not be allowed as a deduction.

7. Consideration of Section 10A as Deduction vs. Exemption:
The assessee argued that Section 10A should be considered an exemption rather than a deduction, which would affect the disallowance under Section 43B(f). The Tribunal dismissed this contention, noting that no deduction under Section 10A was claimed by the assessee.

Conclusion:
The Tribunal partly allowed the appeal, directing the exclusion or re-examination of certain comparables for ALP determination and upholding the disallowance of the provision for leave encashment under Section 43B(f). The issues of working capital and risk adjustments, as well as the +/- 5% benefit, were not adjudicated due to lack of arguments.