2020 (1) TMI 251 - AT - Income Tax

TP Adjustment - comparable selection - HELD THAT - Assessee is engaged in providing rating support services and other support services to its AEs. It functions as a risk mitigated contract service provider. Ladderup Corporate Advisory Private Limited should be excluded from the list of comparables on account of different functionality - A perusal of Schedule 11 of the Profit Loss Account of Ladderup Corporate Advisory Private Limited shows that the main source of finance of the said comparable was by way of financial management and consultancy fees. We, therefore, find merit in the argument of the ld. Counsel for the assessee that the activities of this company was undoubtedly different from the activities of the assessee which was not into the business of financial and management consultancy fees Motilal Oswal Investment Advisors Private Limited - this company operates in four different business verticals. A perusal of the Director s Report shows that the company derives its business income from four different business verticals viz., equity capital markets, mergers and acquisitions, private equity syndication and structured debt. no segmental data is available in the annual report. A perusal of the segment reporting shows that the company is engaged in single segment and there are no reportable business segment as per AS-17. We find the assessee company is engaged in providing high end rating support and would require skilled personnel in the field of merchant banking, actuary, financial advisory, etc. The functions performed by Motilal Oswal Investment Advisors Private Limited which is into merchant banking activities, in our opinion, cannot be compared to the functions of the assessee whose functions are strictly limited to that of providing rating support services.

Issues Involved:
1. Adjustment to the total income of the appellant in respect of international transactions.
2. Acceptance of the economic analysis undertaken by the appellant.
3. Use of multiple year data versus single year data.
4. Rejection of certain comparable companies by the AO/TPO/DRP.
5. Inclusion and exclusion of specific companies as comparables.
6. Selection of companies with supernormal profits as comparables.
7. Adjustments for differences in the risk profile.
8. Levying of consequential interest under sections 234B and 234C.
9. Initiation of penalty proceedings under section 271(1)(c).

Detailed Analysis:

1. Adjustment to the Total Income:
The AO/TPO made an adjustment of INR 7,450,885 to the total income of the appellant concerning the provision of rating support services to its associated enterprises (AEs). The appellant contested this adjustment, arguing that it was not at arm's length.

2. Economic Analysis:
The appellant's economic analysis for determining the Arm's Length Price (ALP) was not accepted by the AO/TPO/DRP. The authorities modified the analysis, leading to the conclusion that the transactions were not at arm's length.

3. Use of Multiple Year Data:
The appellant used multiple year data in its Transfer Pricing (TP) documentation, which was rejected by the AO/TPO/DRP. The authorities determined the ALP using data from the financial year 2010-11, which was not available to the appellant at the time of compliance.

4. Rejection of Certain Comparables:
The AO/TPO/DRP rejected certain comparable companies identified by the appellant based on criteria such as different accounting years, employee costs being less than 25% of total costs, and diminishing revenues.

5. Inclusion and Exclusion of Specific Companies:
The appellant argued for the exclusion of Ladderup Corporate Advisory Private Limited and Motilal Oswal Investment Advisors Private Limited, which were included by the TPO and upheld by the DRP. The Tribunal found that Ladderup Corporate Advisory Private Limited operates as an investment banking firm, which is functionally different from the appellant's business. Similarly, Motilal Oswal Investment Advisors Private Limited operates in multiple business verticals, including equity capital markets, mergers and acquisitions, private equity syndication, and structured debt, making it functionally dissimilar to the appellant.

6. Selection of Companies with Supernormal Profits:
The appellant contended that the AO/TPO/DRP erred in selecting companies with supernormal profits as comparables. The Tribunal's decision to exclude Ladderup Corporate Advisory Private Limited and Motilal Oswal Investment Advisors Private Limited indirectly addressed this issue by focusing on functional dissimilarity.

7. Adjustments for Differences in Risk Profile:
The appellant argued that suitable adjustments were not made to account for differences in the risk profile between the appellant and the comparable companies. This issue was not specifically addressed in detail as the exclusion of the two comparables resolved the primary contention.

8. Levying of Consequential Interest:
The AO levied consequential interest under sections 234B and 234C of the Act. This issue was not specifically adjudicated upon due to the resolution of the primary adjustment issues.

9. Initiation of Penalty Proceedings:
The AO initiated penalty proceedings under section 271(1)(c) of the Act. This issue was also not specifically adjudicated upon due to the resolution of the primary adjustment issues.

Conclusion:
The Tribunal directed the AO/TPO to exclude Ladderup Corporate Advisory Private Limited and Motilal Oswal Investment Advisors Private Limited from the list of comparables due to functional dissimilarity. This exclusion led to the deletion of the entire adjustment, rendering other arguments academic. The appeal filed by the assessee was partly allowed.

Order Pronouncement:
The order was pronounced in the open court on 02.01.2020.

← Previous Next →