2017 (3) TMI 1174 - AT - Income Tax

Tribunal directs adjustments to comparables, dismisses penalty grounds. Arm's Length Price to be determined.

The Tribunal allowed the appeal in part, directing the AO/TPO to exclude certain comparables due to functional dissimilarity and related party ... Transfer pricing adjustment - arm's length price - comparability analysis - transactional net margin method - bench-marking under Rule 10B - related party transactions and functional comparability - condonation of delay - penalty proceedings prematureCondonation of delay - Delay of 38 days in filing the appeal was condoned. - HELD THAT: - The assessee filed evidence including an affidavit and an acknowledgement showing that the memorandum of appeal was inadvertently filed with the office of the Departmental Representative instead of the Tribunal and that the mistake was bona fide. The Tribunal considered the factual material and held that the delay arose from a bona fide mistake on the part of the assessee's office, was not due to any laches by the assessee, and that the appeal was filed immediately upon discovery of the mistake. Consequently the application for condonation of delay was allowed. [Paras 2]Delay of 38 days condoned and the appeal admitted to regular hearing.Comparability analysis - related party transactions and functional comparability - bench-marking under Rule 10B - Five comparables added by the TPO (Crisil Ltd., ICRA Ltd., SBI Fund Management Pvt. Ltd., Sundaram Asset Management Co. Ltd., Deutsche Asset Management India Ltd.) were excluded as functionally incomparable or tainted by significant related party transactions, and therefore cannot be used for benchmarking. - HELD THAT: - The Tribunal examined the functional profile, segmental disclosures and related party transaction (RPT) percentages of each TPO-added comparable and considered precedent from coordinate benches and High Court decisions relied upon by the parties. It found that: Crisil's advisory segment had been transferred to a subsidiary and the company had high RPT; ICRA's principal business was rating rather than advisory; SBI Fund Management, Sundaram AMC and Deutsche Asset Management were primarily asset managers deriving major income from management/investment fees rather than the advisory services comparable to the assessee. Coordinate-bench and High Court authorities supported exclusion where functional profile and RPT rendered a company unsuitable as a comparable. On these bases the Tribunal concluded that the TPO had wrongly included these five entities and directed their exclusion.Crisil Ltd., ICRA Ltd., SBI Fund Management Pvt. Ltd., Sundaram Asset Management Co. Ltd., and Deutsche Asset Management India Ltd. excluded from the comparable set selected by the TPO.Comparability analysis - transactional net margin method - bench-marking under Rule 10B - Four comparables rejected by the TPO (Future Capital Holdings Ltd., ICRA Management Consulting Services Ltd., KPIT Cummins Global Business Solutions Ltd., IDC (India) Ltd.) were restored to the assessee's comparable set. - HELD THAT: - The Tribunal reviewed the grounds on which the TPO excluded these comparables and the authorities relied upon. It held that: Future Capital, though loss-making in the subject year, had made profits in the preceding year and therefore was not a persistent loss-making company; ICRA Management Consulting's RPT was 14%, below the 25% yardstick relied upon to justify exclusion, and it was not a persistent loss maker; KPIT Cummins' incurrence of loss in the relevant year did not make it a persistent loss-making concern; and IDC India Ltd. had been accepted in preceding years and the adverse reliance on third party website material was misplaced. Applying these factual findings and the Tribunal's precedents on persistence of losses and functional comparability, the Tribunal set aside the TPO/AO/CIT(A) findings excluding these comparables and directed that they be included for benchmarking.Future Capital Holdings Ltd., ICRA Management Consulting Services Ltd., KPIT Cummins Global Business Solutions Ltd., and IDC (India) Ltd. to be included as comparables for determination of ALP.Transfer pricing adjustment - arm's length price - Appeal partly allowed: the AO/TPO is directed to give consequential effect to the Tribunal's directions and determine the arm's length price accordingly; several grounds were not pressed or treated as consequential/premature. - HELD THAT: - The assessee expressly did not press grounds challenging the TPO's selection process and related matters (Grounds 2-5, 7 and 9), and the Tribunal treated those as not pressed. Ground 10 (interest) was noted as consequential and Ground 11 (initiation of penalty proceedings) was dismissed as premature because it did not arise from the impugned order. Having reconstituted the comparable set by excluding the five TPO-added companies and restoring the four challenged by the TPO, the Tribunal remitted the matter to the AO/TPO to recompute ALP and give consequential effect to the directions.Appeal partly allowed; matter remitted to AO/TPO to determine ALP in accordance with the Tribunal's directions; unpressed grounds dismissed and penalty ground held premature.Final Conclusion: The Tribunal condoned the 38 day delay, excluded five comparables added by the TPO as functionally incomparable or tainted by significant RPT, restored four comparables wrongly excluded by the TPO, and directed the AO/TPO to give consequential effect and redetermine the arm's length price for A.Y.2009-10; several grounds were not pressed and penalty proceedings were held premature. Issues Involved:1. Transfer Pricing Adjustment2. Arm's Length Price (ALP) Determination3. Rejection of Comparables4. Addition of New Comparables5. Condonation of Delay6. Levy of Interest under Section 234B and 234C7. Initiation of Penalty Proceedings under Section 271(1)(c)Detailed Analysis:1. Transfer Pricing Adjustment:The Commissioner of Income-tax (Appeals) [CIT(A)] upheld the action of the Deputy Commissioner of Income-tax (AO) and the Transfer Pricing Officer (TPO) in making an addition of Rs. 7,17,85,793/- by way of transfer pricing adjustment, alleging the non-binding investment advisory services transaction of the appellant was not at arm's length as per Sections 92C(1) and 92C(2) of the Income Tax Act, 1961 read with Rule 10B of the Income-tax Rules, 1962.2. Arm's Length Price (ALP) Determination:The CIT(A) supported the AO's decision to refer to the TPO for determining the ALP, despite the appellant's contention that none of the conditions under section 92C(3) were satisfied. The TPO rejected four comparables selected by the appellant and added five new comparables, concluding that the average profit margin (OP/OC) of the eight comparables was 42.94%, leading to the adjustment.3. Rejection of Comparables:The TPO rejected four comparables provided by the appellant due to dissimilar business profiles or being loss-making entities. The CIT(A) upheld this rejection, agreeing that the comparables were not functionally similar, had significant related party transactions, or were loss-making.4. Addition of New Comparables:The TPO added five new comparables, which the CIT(A) upheld, stating that the TPO's process was detailed and considered the appellant's objections. The appellant contested the inclusion of these comparables, arguing they were not functionally similar.5. Condonation of Delay:The appeal involved a delay of 38 days. The delay was attributed to a bona fide mistake by the office of the appellant, as supported by an affidavit and acknowledgment from the office of the Departmental Representative. The Tribunal condoned the delay, considering it was not due to any lapses on the appellant's part.6. Levy of Interest under Section 234B and 234C:The CIT(A) upheld the AO/TPO's action of levying interest under Section 234B and Section 234C. The appellant sought suitable directions to delete or reduce the interest.7. Initiation of Penalty Proceedings under Section 271(1)(c):The CIT(A) upheld the initiation of penalty proceedings under Section 271(1)(c), which the appellant contested.Judgment:The Tribunal found substantial force in the appellant's contentions regarding the rejection and addition of comparables. It directed the exclusion of certain comparables selected by the TPO, such as Crisil Ltd., ICRA Ltd., SBI Fund Management Ltd., Sundaram Asset Management Ltd., and Deutche Asset Management India Ltd., due to functional dissimilarity and significant related party transactions. The Tribunal also directed the inclusion of comparables like Future Capital Holding, ICRA Management Consulting Services Ltd., KPIT Cummins Global Business Solution Ltd., and IDC India Ltd., which were initially rejected by the TPO.The Tribunal allowed the appeal in part, directing the AO/TPO to give consequential effect and determine the ALP accordingly. The grounds related to the initiation of penalty proceedings and levy of interest were dismissed as premature or consequential. The appeal was pronounced in the open court on 08/02/2017.