2017 (9) TMI 1295 - HC - Income Tax

TPA - selection of comparable - Held that - Assessee company s activities are that of a fee based investment/financial advisory service provider. Unlike merchant bankers who are involved in active financing transactions, the Assessee is only advising on financial issues, thus companies functionally different with that of assessee need to be deselected from final list of comparable with that of assessee.

Summary

Issues Involved:
1. Re-characterization of the Assessee's function as a merchant banker.
2. Inclusion of comparable companies by the TPO.
3. Addition of notional interest on outstanding receivables as an international transaction.

Issue-wise Detailed Analysis:

1. Re-characterization of the Assessee's Function as a Merchant Banker:

The Assessee, a company providing non-binding investment advisory services to its Associated Enterprise (AE), was re-characterized by the Income Tax Appellate Tribunal (ITAT) as a merchant banker. The Assessee argued that its role was limited to providing research reports and making non-binding recommendations, and it did not engage in active financing transactions like merchant bankers. The court referred to the principles laid down in the Rampgreen Solutions case, emphasizing that comparable transactions must be selected based on similarity with the controlled transaction/entity. The court concluded that the ITAT's approach was incorrect and that the Assessee's services could not be termed as those of a merchant banker. The court held that the ITAT should have determined the comparability itself rather than remanding the issue to the Transfer Pricing Officer (TPO).

2. Inclusion of Comparable Companies by the TPO:

The Assessee contested the inclusion of three comparables: Sumedha Fiscal Services Limited, Brescon Advisors Limited, and Ladderup Corporation Limited, arguing they were not functionally similar. The court analyzed the ITAT's findings:

- Sumedha Fiscal Services Limited: The ITAT acknowledged that if Sumedha's revenue from management of rights issues was substantial, it would be dissimilar to the Assessee. The court found the ITAT's decision to remand the issue to the TPO for further examination incorrect, as the relevant material was already available.
- Brescon Advisors Limited: The ITAT equated advisory services related to debt financing with financial services from debt resolution and debt syndication, which the court found to be different in nature. The court called for a deeper analysis.
- Ladderup Corporation Limited: The ITAT noted that Ladderup provided various financial and management consultancy services, but the court held that the mere appearance of similar terminologies did not constitute similar functions.

The court set aside the ITAT's findings regarding these comparables and directed the CIT (A) to reconsider their inclusion in light of the Rampgreen Solutions principles.

3. Addition of Notional Interest on Outstanding Receivables:

The ITAT upheld the addition of notional interest on outstanding receivables, treating them as international transactions. The Assessee argued that if working capital adjustment was given, separate adjustment for interest on receivables would not be required. The court referred to the Kusum Health Care case, which emphasized that not all receivables constitute international transactions and that a detailed assessment of the working capital was necessary. The court directed the CIT (A) to examine the impact of the receivables and determine whether they could be characterized as international transactions.

Conclusion:

The court allowed the appeal, holding that the ITAT erred in re-characterizing the Assessee's function, including certain comparables, and adding notional interest on receivables. The matter was remanded to the CIT (A) for a comprehensive review in line with the principles laid down in Rampgreen Solutions and Kusum Health Care. The court emphasized the need for a detailed functional analysis and consideration of all relevant factors before making such determinations.