2015 (6) TMI 961 - AT - Income Tax

Tribunal overturns Transfer Pricing adjustments, stresses comparables selection.

Goldman Sachs (India) Securities Private Limited, Versus Asst. Commissioner of Income-tax (OSD),

The Tribunal partially allowed the appeal, overturning the upward Transfer Pricing (TP) adjustments for business support services, brokerage services, and ... Upward TP adjustment pertaining to business support services rendered to its AEs - TPO accepted all the comparables but excluded Capital Trust and included Spanco - Held that:- TPO rejected Capital Trust as a comparable simply because for the two out of the last three years taken into consideration, Capital Trust was in the red and not because the nature of business had any variance with that of the assessee. When we look into the business segment of Capital Trust, we find that in the foreign consultancy segment, which we are concerned with, in the year 2004-05, it had OP/OC at 27.25%. Since the nature of services rendered by the comparable were exactly on the similar lines, as that of the assessee, though, during the year, it was in loss, cannot be disqualified as not a legitimate comparable. We are well supported by the decision, cited by the AR, in the case of Brigade Global (supra), relevant portion of which has already been reproduced earlier in the order, we hold that the assessee had rightly taken Capital Trust as a valid comparable and the revenue authorities erred in excluding the same. Apropos the inclusion of Spanco as a comparable, we find that the TPO/DRP were incorrect, because as per the results seen in the case of Spanco, they pertain to BPO segment only, as against the business of the assessee, which provides need based business support services in connection with business activities in the area of financial services carried out by the AEs. Since both these business segments cannot be equated, we hold that the revenue authorities erred in taking the financials of Spanco as a comparable case. - Decided in favour of assessee. Upward adjustment pertaining to brokerage services provided by the assessee to its AEs - Held that:- The assessee had offered list of comparables which had matched its business profile, both with, foreign owned brokers and Indian owned brokers, who were conducting that business through a common channel and according to us, each broker in either category was giving its performance in an uncontrolled regime, therefore, according to us, the adoption of CUP was the most appropriate method, adopted by the assessee to benchmark its ALP. We do not find anything contrary in the conduct and management of the business of the comparable with that of the assessee.We have also referred to the subsequent years study, wherein the average commission is at 19.86 basis charges with AEs and at 20.42 basis points with third parties, which is well within the range as per the proviso.In these circumstances, we are of the considered opinion that no adjustment is required to be made. The addition is therefore deleted.- Decided in favour of assessee. Adjustment pertaining to investment advisory Services in respect of Listed Indian companies & investment advisory /support services in respect of strategic (unlisted) investments - Held that:- TPO as well as DRP have ignored the first fact that the assessee was incorporated in September 2006 and commenced its business operation in December 2006 and most importantly, the assessee in the relevant previous year did not have the license to enter merchant banking business segment. As pointed out by the AR the TPO had adopted the comparables of those entities, whose main segment of business was merchant banking, which have been succinctly examined threadbare by the coordinate Bench in the case of Carlyle India (2012 (10) TMI 884 - ITAT, MUMBAI ), referred to by the AR. On our enquiry from the DR, even he was unable to make any contrary comments on the issue.In the light of our observations hereinabove, we are of the opinion that both DRP as well as TPO erred in adopting comparables, which had a segmental difference from the business of the assessee and therefore, we accept the benchmark adopted by the assessee to fix its ALP. We, therefore, delete the addition made by the TPO/DRP. - Decided in favour of assessee. Issues Involved:1. Upward Transfer Pricing (TP) adjustment for business support services.2. Upward TP adjustment for brokerage services.3. Upward TP adjustment for investment advisory services.Issue-wise Detailed Analysis:1. Upward TP Adjustment for Business Support Services:The primary issue was the upward TP adjustment of Rs. 1,60,45,600/- related to business support services rendered to associated enterprises (AEs). The adjustment arose due to the rejection of Capital Trust Ltd. as a comparable by the Transfer Pricing Officer (TPO) and the inclusion of Spanco Telesystems and Solutions Limited.The assessee argued that Capital Trust was wrongly excluded as it was not a persistent loss-making entity, having shown operating profits in 2005. The TPO's exclusion was based on two years of losses, which was inconsistent with judicial pronouncements. The Tribunal found that Capital Trust's services were similar to the assessee's, and its exclusion was unjustified.Conversely, Spanco was included by the TPO despite its business being primarily in BPO services, which was functionally different from the assessee's financial services. The Tribunal held that Spanco's inclusion was incorrect, as its business was not comparable.The Tribunal concluded that the revenue authorities erred in both excluding Capital Trust and including Spanco, thus deleting the adjustment and allowing the assessee's ground.2. Upward TP Adjustment for Brokerage Services:The second issue involved an upward TP adjustment of Rs. 99,49,597/- for brokerage services provided to AEs. The TPO used the Comparable Uncontrolled Price (CUP) method but only considered foreign-owned brokers as comparables, excluding Indian-owned brokers.The assessee contended that both foreign and Indian brokers should be considered, as the services provided to AEs were similar. The Tribunal agreed, noting that excluding Indian brokers would result in a mismatch and that the CUP method was appropriate. The Tribunal found no reason to sustain the adjustment and deleted it, allowing the assessee's ground.3. Upward TP Adjustment for Investment Advisory Services:The third issue concerned an upward TP adjustment of Rs. 36,534,000/- for investment advisory services. The TPO selected comparables primarily engaged in merchant banking, whereas the assessee provided investment advisory services and had not received a merchant banking license during the relevant period.The Tribunal noted that the comparables used by the TPO were functionally different, as confirmed by a previous decision in Carlyle India Advisors Private Ltd. vs ACIT. The Tribunal found that the TPO and DRP erred in adopting these comparables and accepted the benchmark adopted by the assessee, thus deleting the adjustment.Conclusion:The Tribunal allowed the appeal partly, reversing the TP adjustments for business support services, brokerage services, and investment advisory services. The Tribunal emphasized the importance of selecting appropriate comparables and adhering to judicial norms in TP cases. The order was pronounced in the open court on 23/01/2013.