2019 (5) TMI 402 - AT - Income Tax

TP Adjustment - selection of comparable - main three issues are viz. (i). exclusion of comparables selected by the assessee in its TP study report for benchmarking its non binding investments advisory services rendered to its AE; (vi) functional profile of Ladder up Corporate Advisory Pvt. Ltd. selected as a comparable by the TPO is similar to that of the assessee; and (iii). non granting the benefit of economic/risk adjustments to the assessee - HELD THAT - The three companies which were selected by the assessee as comparables for benchmarking the ALP of its international transactions, but were rejected by the lower authorities viz. (i) IDC India Ltd; (ii) ICRA Management Consulting Services Ltd; and (iii) Mecklai Financial Services Ltd are good comparable and safely be taken as a comparable to a company providing non-binding investment advisory services. We are of the considered view that the TPO/DRP had erred in excluding the aforementioned company. We thus in terms of our aforesaid observations being of the considered view that as the aforementioned company i.e. Ladderup Corporate Advisory Pvt. Ltd. which was carrying on merchant banking and investment banking activity was functionally different from the assessee that was providing nonbinding investment advisory services and thus could not have been selected as a comparable for benchmarking the international transactions of the assessee during the year under consideration had wrongly been selected as a comparable for benchmarking the nonbinding investment advisory services provided by the assessee to its A.E during the year under consideration. We thus in terms of our aforesaid observations direct the A.O/TPO to exclude the aforementioned company i.e Ladderup Corporate Advisory Pvt. ltd. from the final list of the comparables and recompute the ALP of the international transactions of the assessee for the year under consideration. We have given a thoughtful consideration and are of the considered view that now when the comparables selected by the TPO/DRP have been excluded by us from the final list of comparables, hence the seeking of risk adjustment by the assessee in the backdrop of the fact that the comparables selected by the TPO/DRP unlike the assessee are entrepreneurs and undertake full range of economic risks does no longer subsists and for the said reason is rejected. Exclusion of comparable selected by assessee - Alomndz Global Securities Ltd. - Crisil Risk Infrastructure Solutions Limited - ICRA Management Consulting Services Ltd. HELD THAT - directed the AO/TPO to include these in comparable also directed the AO/TPO to exclude e-Clerx Services Ltd and Hartron Communications Ltd. In terms of our aforesaid observations we direct the A.O/TPO to recompute the ALP of the international transactions of the assessee after including/excluding the aforementioned companies from the final list of the comparables. In case the ALP of the assessee is found to be within the safe harbour margin of /- 5% of the mean margin of the final list of comparables then no TP adjustment would be called for in hands of the assessee.

Issues Involved:
1. Transfer Pricing Adjustments
2. Selection of Comparables
3. Re-characterization of Assessee's Activities
4. Application of Export Turnover Filter
5. Risk Adjustments
6. Computation of Margins

Detailed Analysis:

1. Transfer Pricing Adjustments:
The primary issue in both assessment years, 2012-13 and 2013-14, revolved around the transfer pricing adjustments made by the AO/TPO. The AO assessed the income of the appellant at ?23,03,13,353/- for AY 2012-13 and ?37,90,90,780/- for AY 2013-14, against the returned income of ?11,41,30,410/- and ?18,44,01,430/- respectively. The adjustments were primarily related to the provision of non-binding investment advisory and related support services, which were alleged to be not at arm's length.

2. Selection of Comparables:
The AO/TPO rejected the comparables selected by the assessee and instead included companies that the assessee argued were not functionally similar. The Tribunal directed the inclusion of IDC (India) Ltd., Mecklai Financial Services Ltd., and ICRA Management Consulting Services Ltd. as comparables while excluding Ladderup Corporate Advisory Pvt. Ltd., e-Clerx Services Ltd., and Hartron Communications Ltd. due to functional dissimilarities.

3. Re-characterization of Assessee's Activities:
The TPO/DRP re-characterized the assessee as a high-end ITeS/KPO entity instead of recognizing it as a provider of non-binding investment advisory services. The Tribunal upheld the assessee's contention that it was providing non-binding investment advisory services, as there was no change in the functions performed, assets employed, and risks assumed (FAR) compared to previous years.

4. Application of Export Turnover Filter:
The Tribunal held that the export turnover filter was not relevant in the case of the assessee since the services were rendered for the AE in India, and the investments were also to be made in India. This view was consistent with the DRP's direction for AY 2012-13.

5. Risk Adjustments:
The assessee argued for risk adjustments on the grounds that it operated in a virtually risk-free environment compared to the entrepreneurial comparables selected by the TPO/DRP. The Tribunal rejected this claim, stating that the need for risk adjustments did not subsist as the comparables selected by the TPO/DRP had been excluded.

6. Computation of Margins:
The Tribunal directed the AO/TPO to rework the ALP of the international transactions after including/excluding the aforementioned companies from the final list of comparables. If the ALP was found to be within the safe harbour margin of +/- 5% of the mean margin of the final list of comparables, no TP adjustment would be necessary.

Conclusion:
The Tribunal partly allowed the appeals for both AY 2012-13 and AY 2013-14, directing the AO/TPO to recompute the ALP of the international transactions after including/excluding the specified comparables. The Tribunal emphasized the importance of maintaining consistency in the selection of comparables and the characterization of the assessee's activities, rejecting the application of new filters and the need for risk adjustments in the given context.

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