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2013 (11) TMI 928 - AT - Income TaxTransfer pricing adjustment - Investment advisory fees - Held that - The assessee had selected 4 comparables including CRISIL (advisory segment) which gave mean margin of 15.27% which was comparable to the margin of 15% in case of the assessee. The TPO however rejected three comparables other than CRISIL on the ground that these were not comparable and in case of CRISIL adopted both advisory and research segment for the purpose of comparison. The TPO also selected three more comparables, after conducting a further search on the basis of 'investment advisory fees' and identified three comparables i.e. Sundaram BNP Paribas Asset Management Ltd., Deutche Asset Management Ltd. and Urban Infrastructure Venture Capital The mean margin of the four comparables selected by TPO was 57.06% and on this basis the TPO recommended TP adjustment of ₹ 5,33,46,732/-. On objections filed by the assessee, the DRP-II found that the three comparables other than CRISIL selected by TPO had substantial related party transactions in each case and therefore these were not comparable. DRP-II however agreed with the TPO to consider both the advisory and research segment of CRISIL for the purpose of comparison and also agreed on Future Capital Holding Ltd. as a comparable. He also directed the TPO to allow depreciation in case of CRISIL. The new margin computed by DRP in case of Future Capital Holding Ltd. (investment advisory segment) and in case of CRISIL (advisory and research segments) came to 20.56% and 33.3% respectively. CRISIL has substantial revenue from research i.e. ₹ 116.4 crores compared to advisory revenue of only ₹ 8.76 crores. The rating revenue is also high at 130 crores. The annual report of CRISIL for the year 2007 shows that it is India's leading independent and integrated research house which meets the business research requirements of more than 600 domestic and integrated clients having unparalleled width and breadth spanning the entire economy. It has penetration rate of more than 90% in the banking segment and has collaborated with S&P in selling data and information products in India. It has a head count of 1750. In contrast, the research done by the assessee is limited to the advisory work done for only one client and it has only 18 employees out of which there are only four analysts and one trainee engaged in research. Therefore research division of CRISIL in our view is not comparable to the limited research done by the assessee. However it is also true that the assessee is also doing some research as part of its advisory duties. Therefore, results of advisory segment of CRISIL alone could not be comparable to that of the assessee which has both advisory and research functions. Further, in the absence of adequate information, it is not possible to estimate as to how much of the research revenue is related to the advisory segment. In such a situation, in our view, it will be appropriate to exclude CRISIL as a comparable. We are thus, left with only one comparable i.e., Future Capital holding Ltd. (advisory segment) which is acceptable to both the parties. It is possible to compute arm's length price on the basis of even one comparable but in such a case the assessee will not be entitled to benefit of 5% range as per the provisio to section 92C(2). This view is supported by the decision of Delhi Bench of the Tribunal in the case of Haworth (India) (P.) Ltd. v. Deputy Commissioner of Income-tax 2013 (8) TMI 421 - ITAT DELHI - AO is directed to compute the arm's length price on the basis of income of the comparable Future Capital holding Ltd. (advisory segment), without giving the benefit of 5% range - Decided partly in favour of assessee.
Issues Involved:
1. Transfer pricing adjustment of Rs.1,43,00,432/-. 2. Selection of comparables for determining the arm's-length price. 3. Inclusion of research segment of CRISIL in the comparables. 4. Computation of arm's-length price based on selected comparables. Issue-wise Detailed Analysis: 1. Transfer Pricing Adjustment of Rs.1,43,00,432/-: The assessee challenged the decision of the AO making a transfer pricing adjustment of Rs.1,43,00,432/-. The adjustment was made following the direction of the Dispute Resolution Panel-II (DRP-II). The assessee, a subsidiary of M/s. Saffron Capital Security Ltd., Mauritius, had entered into an agreement to provide investment advisory services and was remunerated at cost plus 15%. 2. Selection of Comparables for Determining the Arm's-Length Price: The assessee submitted details of its Transfer Pricing (TP) study, using the capital aline plus database and applied product criteria for comparables. The assessee identified four comparables: Sparsh BPO, Water & Power Co. Ltd. (consultancy segment), CRISIL (advisory segment), and Colwell & Salmon Communication (India) Ltd. The TPO, however, did not accept the assessee's comparables and selected additional ones: Future Capital Holding Ltd., Deutche Asset Management India Pvt. Ltd., Sundaram BNP Paribas Asset Management Ltd., and Urban Infrastructure Venture Capital Ltd., along with CRISIL (both advisory and research segments). The mean margin computed by the TPO was 57.06%, leading to a significant TP adjustment. 3. Inclusion of Research Segment of CRISIL in the Comparables: The assessee raised serious objections against the inclusion of the research segment of CRISIL, arguing that the research done by CRISIL was large-scale and high-end, whereas the assessee's research was low-end and limited to one client. The DRP-II upheld the TPO's decision to include both advisory and research segments of CRISIL. The Tribunal, however, found that CRISIL's substantial revenue from research and its extensive operations made it not comparable to the assessee's limited research activities. Consequently, the Tribunal decided to exclude CRISIL as a comparable. 4. Computation of Arm's-Length Price Based on Selected Comparables: The Tribunal noted that the assessee had no objection to the selection of Future Capital Holding Ltd. (investment advisory segment) as a comparable, with a margin of 20.56%. Given the exclusion of CRISIL, the Tribunal directed the AO to compute the arm's-length price based on the income of Future Capital Holding Ltd. (advisory segment) alone. The Tribunal also clarified that in such a case, the assessee would not be entitled to the benefit of the 5% range as per the provisio to section 92C(2). Conclusion: The Tribunal partly allowed the appeal of the assessee, directing the AO to compute the arm's-length price based on the accepted comparable, Future Capital Holding Ltd. (advisory segment), without giving the benefit of the 5% range. This decision was pronounced in the open court on 22/02/2013.
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