2020 (2) TMI 1735 - HC - Income Tax

Arm's Length Price Determination: Functional Similarity Criteria Upheld

The Tribunal's order focused on the exclusion of functionally dissimilar companies and inclusion of functionally similar ones in determining the arm's ... TP Adjustment - Comparable selection - HELD THAT:- Assessee entered into an international transaction of non-binding investment advisory services with its Associate Enterprises thus companies functionally dissimilar with that of assessee need to be deselected from final list. Rational for inclusion of the six comparables excluded by the TPO have been dealt with in extensive detail by the Tribunal and we are in agreement with the reasons recorded by the Tribunal. Further the reasons given for inclusion of the five new comparables by the TPO have been decidedly set aside by the Tribunal on the basis of decisions rendered by this Court either in the case of the assessee itself and / or in other cases after proper consideration. It is clear that the appeal filed under Section 260A of said Act is required to be entertained only on “substantial question of law” arising out of the order of the Tribunal, keeping in mind that we can not disturb findings of fact under Section 260A of the said Act unless such findings are shown to be ex-facie perverse and unsustainable and exhibit a total non-application of mind. We are therefore of considered opinion that the present appeal filed by the Revenue does not give rise to any substantial question of law. The appeal filed by the Revenue is found to be devoid of merit and the same is liable to be dismissed. Issues Involved:1. Exclusion of functionally dissimilar companies from comparables.2. Inclusion of functionally similar companies as comparables.3. Application of the arm’s length price determination method.4. Examination of transfer pricing adjustments and associated comparables.Issue-wise Detailed Analysis:1. Exclusion of Functionally Dissimilar Companies from Comparables:The Tribunal excluded several companies selected by the TPO on the grounds of functional dissimilarity:- IDFC Investment Advisors Pvt. Ltd.: The Tribunal found that this company was primarily engaged in Portfolio Management Services (PMS), which are functionally different from the non-binding investment advisory services provided by the assessee. The Tribunal noted that the functions, assets, and risks of IDFC were different from those of the assessee, and thus, it could not be treated as a comparable.- ICRA Online Limited (Segmental): The Tribunal observed that this company had multiple business verticals, including Outsource Service, Information Service, and Software Products/Service, which were different from the services provided by the assessee. The Tribunal concluded that the functions undertaken by ICRA Online were totally different from those of the assessee, failing the FAR analysis.- Motilal Oswal Investment Advisors Pvt. Ltd. (MOIAPL): The Tribunal noted that MOIAPL derived its business from various verticals like equity capital markets, mergers and acquisitions, and private equity syndication, which are functionally different from the non-binding investment advisory services provided by the assessee.- Kshitij Investment Advisory Company Limited: The Tribunal found that this company had undergone a business restructuring due to a realignment with another company, which impacted its financial results. The Tribunal concluded that Kshitij could not be treated as a comparable due to these peculiar economic circumstances.2. Inclusion of Functionally Similar Companies as Comparables:The Tribunal included several companies that were originally rejected by the TPO/DRP but found to be functionally similar to the assessee:- ICRA Management Consulting Service Pvt. Ltd.: The Tribunal noted that this company provided consulting/advisory services across various sectors, similar to the non-binding investment advisory services provided by the assessee. The Tribunal found that the nature of services provided by ICRA Management was advisory, making it a suitable comparable.- IDC India Limited: The Tribunal observed that IDC was engaged in market research and management consultancy, which were functionally comparable to the advisory support services rendered by the assessee. The Tribunal also noted that IDC had been accepted as a comparable in the assessee’s own case for the previous assessment year.- Informed Technologies Limited: The Tribunal found that this company provided data management services to the financial sector, which were similar to the data analysis and research functions performed by the assessee. The Tribunal included Informed Technologies as a comparable, noting that it had been accepted as such in the previous assessment year.- Kinetic Trust Limited: The Tribunal included Kinetic Trust as a comparable, rejecting the TPO’s argument based on low turnover. The Tribunal noted that the company had been accepted as a comparable in the previous assessment year and that functional similarity was more important than turnover.3. Application of the Arm’s Length Price Determination Method:The Tribunal directed the AO/TPO to determine the arm’s length price afresh, considering the Tribunal’s directions regarding the inclusion and exclusion of comparables. The Tribunal emphasized the importance of functional similarity and the proper application of filters like turnover and related party transactions.4. Examination of Transfer Pricing Adjustments and Associated Comparables:The Tribunal conducted a detailed analysis of each comparable company, considering the functions performed, assets employed, and risks undertaken (FAR analysis). The Tribunal’s findings were based on the principle that comparables should be functionally similar to the assessee to ensure a fair determination of the arm’s length price.Conclusion:The Tribunal’s order was based on a thorough analysis of the comparables and the application of relevant legal principles. The Tribunal excluded functionally dissimilar companies and included functionally similar ones, ensuring a fair and accurate determination of the arm’s length price. The Tribunal’s findings were upheld by the High Court, which found no substantial question of law arising from the Tribunal’s order. The appeal filed by the Revenue was dismissed, confirming the Tribunal’s decision.