2017 (4) TMI 1058 - AT - Income Tax

TPA - selection of comparable - Held that - Assessee company is engaged in the business of providing investment advisory services thus companies different with that of assessee need to be deselected from final list of comparability.

Issues Involved:

1. Inclusion of Motilal Oswal Investment Advisors Pvt. Ltd. and Integrated Capital Services Ltd. as comparables.
2. Exclusion of IDC India Limited and ICRA Management Consultancy Services Ltd. from the list of comparables.
3. Determination of the arm's length price (ALP) for provision of investment advisory services.
4. Examination of the economic analysis and functional comparability of selected companies.
5. Application of prior years' data in the transfer pricing documentation.
6. Consideration of companies with abnormally high-profit margins as comparables.

Issue-wise Detailed Analysis:

1. Inclusion of Motilal Oswal Investment Advisors Pvt. Ltd. as Comparable:

The assessee contended that Motilal Oswal Investment Advisors Pvt. Ltd. (MOIAL) should not be included as a comparable because its activities are vastly different from those of the assessee. MOIAL's functions encompass merchant banking, equity capital markets, mergers and acquisitions, private equity syndications, and structured debt, which are significantly broader and functionally different from the investment advisory services provided by the assessee. Judicial precedents, including decisions from the Hon'ble Bombay High Court and various ITAT benches, have consistently held that companies engaged in merchant banking are not functionally comparable to those providing investment advisory services. The Tribunal agreed with the assessee's contention and directed the exclusion of MOIAL from the list of comparables.

2. Inclusion of Integrated Capital Services Ltd. as Comparable:

The assessee argued that Integrated Capital Services Ltd. (ICSL) should be excluded as it provides consultancy services in the field of business reconstruction, mergers, and acquisitions, which are functionally different from the non-binding investment advisory services provided by the assessee. The Tribunal noted that previous ITAT decisions for the same assessment year (A.Y. 2010-11) had excluded ICSL on similar grounds. Consequently, the Tribunal directed the exclusion of ICSL from the list of comparables.

3. Exclusion of IDC India Limited as Comparable:

The assessee sought the inclusion of IDC India Limited, which was excluded by the AO on the grounds of functional dissimilarity. The Tribunal observed that IDC India Limited is primarily engaged in market research and survey services, which involve analyzing financial data, market conditions, and conducting research on various sectors. Previous judicial pronouncements, including decisions from the Hon'ble Bombay High Court, have upheld IDC India Limited as a good comparable for companies providing investment advisory services. The Tribunal directed the inclusion of IDC India Limited in the list of comparables.

4. Exclusion of ICRA Management Consultancy Services Ltd. as Comparable:

The assessee initially sought the inclusion of ICRA Management Consultancy Services Ltd. but later did not press this issue. The Tribunal noted that since the inclusion of other comparables (IDC India Limited) would result in the assessee’s transactions falling within the +/- 5% margin, there was no need to include ICRA Management Consultancy Services Ltd. Thus, the Tribunal held that ICRA Management Consultancy Services Ltd. should not be included in the list of comparables.

5. Determination of Arm's Length Price (ALP):

The AO had made a Transfer Pricing (T.P.) adjustment by adopting a margin of 60.97% based on the comparables selected by him, which included MOIAL and ICSL. The Tribunal, after excluding these two companies and including IDC India Limited, directed the AO to re-compute the ALP of the international transactions of the assessee in accordance with the Tribunal’s findings.

6. Examination of Economic Analysis and Functional Comparability:

The Tribunal emphasized the importance of selecting comparables that are functionally similar to the assessee. It was noted that the AO had not specified the method and process used to identify comparables and had rejected the assessee's comparables without sufficient justification. The Tribunal reiterated that functional and transactional similarity is crucial for determining comparability.

7. Application of Prior Years' Data:

The assessee argued that prior years' data should be considered in the transfer pricing documentation. However, this issue was not pressed before the Tribunal as the primary focus was on the inclusion and exclusion of specific comparables.

8. Consideration of Companies with Abnormally High-Profit Margins:

The assessee contended that companies with abnormally high-profit margins should not be considered as comparables. The Tribunal’s decision to exclude MOIAL and ICSL, which had high-profit margins, aligned with this contention.

Conclusion:

The Tribunal partly allowed the assessee’s appeal, directing the exclusion of Motilal Oswal Investment Advisors Pvt. Ltd. and Integrated Capital Services Ltd. from the list of comparables and the inclusion of IDC India Limited. The AO was instructed to re-compute the ALP of the international transactions accordingly. The Tribunal’s decision emphasized the importance of functional comparability and consistency with judicial precedents in the selection of comparables.

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