2020 (9) TMI 1099 - AT - Income Tax

TP Adjustment - comparable selection - functional dissimilarity - HELD THAT - Assessee provided investment advisory services, in respect of listed Indian securities to its overseas AE. Investment Advisory Services refer to the support services provided by the Indian firms to the overseas fund managers in equity and general business research. Further, equity research relates to building and maintaining valuation models, ratio analysis, competitor analysis, comparable valuation method etc. Business research includes services, such as study and analysis of the industry of the target company, company profiles and study of the macroeconomic environment of the target country, thus companies functinally dissimilar with that of assessee need to be deselected from final list. ICRA Management Consulting Services Ltd. ( IMCSL ), Informed Technologies India Ltd. ( ITIL ), IDC (India) Ltd., Ladderup Corporate Advisory Pvt. Ltd. to be included as valid comparable and direct the TPO/AO to exclude Ladderup Corporate Advisory Pvt. Ltd. from the list of comparables. M/s. Motilal Ostwal Investment Pvt. Ltd ('MOAIPL ) is to excluded as it is engaged in diversified activities and that segmental reporting is not available. New Berry Advisors Ltd. ( NBAL ) is engaged in the business of marketing and distribution of financial products. Further, the notes to the financial statement mention that the company is in the business of distribution/marketing of financial products under the head Inventories , thus to be rejected.

Summary

Issues Involved:
1. Upward Transfer Pricing Adjustment
2. Comparability of Selected Companies
3. Rejection of Assessee's Comparable Companies
4. Use of Contemporaneous and Multiple Year Data
5. Inclusion of Ladderup Corporate Advisory Pvt. Ltd.
6. Exclusion of Motilal Oswal Investment Advisors Pvt. Ltd.
7. Exclusion of New Berry Advisors Ltd.

Detailed Analysis:

1. Upward Transfer Pricing Adjustment:
The assessee challenged the upward transfer pricing adjustment of ?5,99,98,350/- made by the AO by re-computing the arm's length price (ALP) using the Transactional Net Margin Method (TNMM). The AO rejected the documentation maintained by the assessee and did not share the search process conducted by the Transfer Pricing Officer (TPO). The AO identified Ladderup Corporate Advisory Pvt. Ltd. as a comparable company, which was contested by the assessee.

2. Comparability of Selected Companies:
The Tribunal examined the comparability of several companies selected by the assessee and the TPO. The assessee argued for the inclusion of ICRA Management Consulting Services Limited (IMCSL), Informed Technologies India Ltd. (ITIL), and IDC (India) Ltd., while contesting the inclusion of Ladderup Corporate Advisory Pvt. Ltd. The Tribunal found merit in the assessee's contentions and directed the TPO/AO to include IMCSL, ITIL, and IDC (India) Ltd. as comparables, based on their acceptance in previous years and similar cases.

3. Rejection of Assessee's Comparable Companies:
The AO rejected several companies selected by the assessee, including ICRA Management Consulting Services Limited, IDC (India) Limited, Informed Technologies Limited, Integrated Capital Services Limited, Kinetic Trust Limited, Access India Advisors Limited, and Future Capital Investment Advisors Limited. The Tribunal found that some of these companies were accepted as comparables in previous years and similar cases, and directed their inclusion.

4. Use of Contemporaneous and Multiple Year Data:
The assessee argued for the use of contemporaneous and multiple year data available for computing the ALP as on the date of filing of return of income. The AO relied only on single year data for the FY ended 31 March 2011. The Tribunal's decision did not specifically address this issue, focusing instead on the comparability of the selected companies.

5. Inclusion of Ladderup Corporate Advisory Pvt. Ltd.:
The TPO included Ladderup Corporate Advisory Pvt. Ltd. as a comparable, which the assessee contested. The Tribunal found that Ladderup Corporate Advisory Pvt. Ltd. is engaged in merchant banking and investment banking services, which are not functionally comparable to the assessee's non-binding investment advisory services. The Tribunal directed the TPO/AO to exclude Ladderup Corporate Advisory Pvt. Ltd. from the list of comparables.

6. Exclusion of Motilal Oswal Investment Advisors Pvt. Ltd.:
The DRP excluded Motilal Oswal Investment Advisors Pvt. Ltd. (MOAIPL) from the list of comparables, which was contested by the Revenue. The Tribunal found that MOAIPL is engaged in merchant banking and investment banking activities, which are not functionally comparable to the assessee's advisory services. The Tribunal upheld the DRP's decision to exclude MOAIPL.

7. Exclusion of New Berry Advisors Ltd.:
The DRP excluded New Berry Advisors Ltd. (NBAL) from the list of comparables, which was contested by the Revenue. The Tribunal found that NBAL is engaged in the business of marketing and distribution of financial products, which is not functionally similar to the assessee's advisory services. The Tribunal upheld the DRP's decision to exclude NBAL.

Conclusion:
The Tribunal allowed the assessee's appeal and directed the TPO/AO to include IMCSL, ITIL, and IDC (India) Ltd. as comparables, while excluding Ladderup Corporate Advisory Pvt. Ltd., MOAIPL, and NBAL. The Revenue's appeal was dismissed. The Tribunal emphasized the principle of consistency and the need for functional comparability in selecting comparable companies for transfer pricing purposes.