Tribunal directs AO to compute arm's-length price without 5% range benefit

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.

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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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