2018 (4) TMI 1510 - HC - Income Tax

TPA - Comparable selection criteria - excluding the two comparables i.e. Keynote Corporate Service Ltd. and Motilal Oswal Investment Advisors Pvt. Ltd. - Held that - This Court notices that for AY 2007-08, undoubtedly, there were some special reasons inasmuch as Keynote Corporate Service Ltd had undergone amalgamation with another entity. In these circumstances, the question whether Keynote Corporate Service Ltd figures are to be included or not, requires fresh determination, having regard to the specific issue of functional similarity; the matter is therefore, remitted to ITAT. It is open to the ITAT to consider the findings with respect to the preceding years after the amalgamation. ITAT will record its appropriate findings year-wise on the issue of functional similarity. With respect to the inclusion of Motilal Oswal Investment Advisors Pvt. Ltd. ITAT appears to have adopted the formula of percentage of RPT being equal to expenses paid to related parties divided by total expenditure multiplied by 100, only in the case of this entity. While doing so, the ITAT followed its previous ruling in SunGard Solutions (India) (P) Ltd. vs. Dy. DIT, (2014 (12) TMI 429 - ITAT PUNE). This Court is of the opinion that adopting one procedure for only one entity and adopting another for all other entities or comparables can lead to a distorted picture. In these given circumstances this issue too is remanded to the ITAT for fresh consideration.

Summary

Issues:
1. Exclusion of Keynote Corporate Service Ltd. and Motilal Oswal Investment Advisors Pvt. Ltd. as comparables in transfer pricing/ALP determination.

Analysis:
The primary issue in this case revolved around the exclusion of two entities, Keynote Corporate Service Ltd. and Motilal Oswal Investment Advisors Pvt. Ltd., as comparables in the transfer pricing/ALP determination process. The Tribunal (ITAT) had excluded Keynote Corporate Service Ltd. due to abnormally high profits reported, which the Revenue argued should not be the sole reason for exclusion if the entities were functionally similar. The appellant contended that judgments post the decision in Chryscapital Investment Advisors (India) Pvt. Ltd. vs. Dy. Commissioner of Income Tax highlighted the functional dissimilarity of Keynote Corporate Service Ltd. from the assessee's business. The High Court observed that each year's findings might guide but not conclusively determine the issue, remitting the matter back to ITAT for fresh determination considering functional similarity year-wise, especially after the amalgamation of Keynote Corporate Service Ltd. with another entity.

Regarding the inclusion of Motilal Oswal Investment Advisors Pvt. Ltd., the Tribunal had excluded it based on a 25% profits threshold filter, which the Revenue argued was not uniformly applied across all entities. The ITAT's adoption of different formulas for determining related party transactions (RPT) for Motilal Oswal Investment Advisors Pvt. Ltd. compared to other entities was deemed to potentially distort the comparison. The High Court opined that such disparate treatment could lead to a skewed analysis and remanded the issue back to ITAT for a fresh review.

In conclusion, the appeal was allowed, and the ITAT was directed to reconsider the financial similarity/dis-similarity of the entities, especially in light of developments post AY 2007-2008. The judgments highlighted the importance of consistent and comprehensive analysis in transfer pricing cases, emphasizing the need for a thorough evaluation of functional similarity and uniform application of criteria across comparable entities to ensure a fair and accurate determination of arm's length pricing.