2023 (1) TMI 1089 - HC - Income Tax

TP Adjustment - comparable selection - exclusion of Motilal Oswal Advisors India Pvt. Ltd (MOIALP) and the inclusion of IDC India Limited (IDCL) and ICRA Management Consulting Services Ltd (ICRA) as comparables for benchmarking of Arms Length Price (ALP) of investment advisory services rendered by the Respondent - HELD THAT - Admittedly, the Respondent-assessee is engaged in the business of non-binding investment advisory services as against Motilal Oswal Advisors India Pvt. Ltd, which is engaged in merchant banking, securities brokering and other IT-enabled services. DRP held that Motilal Oswal Advisors India Pvt. Ltd (MOIALP) be taken out from the list of valid comparables. In regard to ICRA Management Consultancy Services (ICRA) and IDC India Limited (IDCL), DRP held that the functions performed by ICRA were different from the functions carried out by the Petitioner and ICRA was providing consultancy services and was engaged in management consultancy and therefore, could not be considered as comparable. As regards IDCL, it was held that the same was not engaged in activities of providing investment advisory services and was functionally different from the functions of the assessee. The Tribunal, however, placed reliance upon AGM India Advisors Pvt. Ltd. 2020 (6) TMI 300 - BOMBAY HIGH COURT wherein it was held that ICRA and IDC were functionally similar to that of the Petitioner in the said Petition as it was providing non-binding investment advisory services. Insofar as Motilal Oswal Advisors India Pvt. Ltd. (MOIALP) is concerned, it has already been held to be not comparable in the case of the assessee itself, in Income Tax Appeal No.30 of 2017, decided 10 June 2019, wherein it has been held that the said company was engaged in merchant banking and registered and established as merchant banker. This view has also been taken in Principal Commissioner of Income Tax Vs. NVP Venture Capital India (P) Ltd. 2018 (9) TMI 1182 - BOMBAY HIGH COURT Be that as it may, the questions A, B and C as suggested do not give rise to any substantial questions of law.

Summary

Issues:
1. Exclusion of M/s Acropetal Technology as comparable for ITeS.
2. Inclusion of M/s CG VAK software and Exports Ltd as a comparable for ITeS.
3. Inclusion of M/s R Systems Ltd as a comparable for ITeS.
4. Allowance of discount on issue of ESOP as deduction.
5. Exclusion of Motilal Oswal Investment Advisors Pvt. Ltd. as comparable for benchmarking ALP.
6. Inclusion of ICRA Management Consulting Services Ltd and IDC India Ltd. as comparables for benchmarking ALP.

Exclusion of M/s Acropetal Technology as Comparable for ITeS:
The Tribunal directed the Assessing Officer (AO) to exclude M/s Acropetal Technology (AT) as a comparable for ITeS due to its engagement in high-end engineering design services. However, the Revenue argued that AT was involved in three different segments, including ITeS, and its segmental results were available for comparison. The issue revolved around the comparability of AT's activities with the assessee's, emphasizing the need for accurate comparisons in determining comparables for transfer pricing purposes.

Inclusion of M/s CG VAK Software and Exports Ltd as Comparable for ITeS:
The Tribunal instructed the AO to include M/s CG VAK Software and Exports Ltd (CVSEL) as a comparable for ITeS, despite persistent losses in the comparable segment and failing the turnover filter of Rs.1 Crore. This decision raised questions regarding the criteria for selecting comparables and the relevance of financial performance in determining comparability for transfer pricing analysis.

Inclusion of M/s R Systems Ltd as Comparable for ITeS:
The ITAT directed the AO to include M/s R Systems Ltd (RSL) as a comparable for ITeS, even though RSL had a different year-end than the assessee, and its audited results were not available quarter-wise for reliable comparison. This issue highlighted the challenges in selecting comparables with different financial reporting periods and the importance of accurate and comparable financial data for transfer pricing analysis.

Allowance of Discount on Issue of ESOP as Deduction:
The ITAT's decision to allow the discount on the issue of Employee Stock Ownership Plan (ESOP) as a deduction for the current year raised questions about the treatment of ESOP expenses for tax purposes. This issue underscored the complexities involved in determining deductible expenses related to employee benefits, such as ESOPs, and the impact on the company's tax liability.

Exclusion and Inclusion of Comparables for Benchmarking ALP:
The issues surrounding the exclusion of Motilal Oswal Investment Advisors Pvt. Ltd. (MOIALP) and the inclusion of ICRA Management Consulting Services Ltd and IDC India Ltd. as comparables for benchmarking Arms Length Price (ALP) of investment advisory services focused on the functional similarity of these companies with the respondent. The debate centered on whether the functions performed by these comparables aligned with the respondent's business activities, emphasizing the importance of selecting appropriate comparables for accurate transfer pricing analysis.

Conclusion:
The judgment addressed various issues related to the selection of comparables for transfer pricing analysis, the treatment of ESOP expenses, and the benchmarking of Arms Length Price for investment advisory services. The decision highlighted the complexities and challenges in determining comparables and deductible expenses for tax purposes, emphasizing the need for accurate financial data and functional similarity in transfer pricing analysis.