2022 (12) TMI 993 - AT - Income Tax

Tribunal decision excludes some comparables, emphasizes empirical evidence & consistent filters.

The Tribunal partially allowed the appeal, directing the exclusion of IM+ Capital Ltd. and Keynote Corporate Services Ltd. from the list of comparables. ... TP Adjustment - Comparable selection - assessee has sought exclusion of Motilal Oswal Investment Advisor Pvt. Ltd. primarily on the ground that it is functionally different from the assessee and secondly it does not qualify RPT filter - HELD THAT:- Notably, while examining the functional similarity of the aforesaid comparable in assessee’s own case in assessment year 2009-10, the Tribunal had excluded this company as a comparable. However, while deciding Revenue’s appeal [2018 (4) TMI 1510 - DELHI HIGH COURT] the Hon'ble High Court, remanded the issue relating to comparability of this company to the Tribunal for fresh consideration. The reasons being, the Hon'ble High Court was of the opinion that the formula of percentage of RPT being equal to expenses paid to related parties divided by total expenditure multiplied by 100 cannot be applied only to one particular entity without applying the same procedure in respect of all other comparables, as, it may lead to a distorted picture. As could be seen from the foresaid observations of the coordinate Bench, assessee’s contention that the RPT filter should be applied only with respect to the total expenditure did not find favour with the Bench. Thus, the claim of the assessee that this company was functionally different and also failed the RPT filter was rejected by the Bench. Basic facts relating to the comparability of this company, being more or less identical in the impugned assessment year, respectfully following the aforesaid decision of the co-ordinate Bench in assessee’s own case, we hold that Motilal Oswal Advisors Pvt. Ltd. being comparable to the assessee cannot be excluded. IM+Capitals Ltd., formerly known as Brescon Corporate Advisors be excluded from the list of comparables. M/s Keynote Corporate Services Ltd be excluded as functionally different from the assessee. Working capital and risk adjustment - We agree with the assessee that considering the nature of risk undertaken by the assessee as well as the comparables, adjustment in specific cases has to be made to the margin of the comparables on account of risk profile, however, burden is entirely on the assessee to furnish required details regarding the risk profile of the comparables to ascertain the nature of risk being undertaken by the assessee and the comparables. Since, the required details regarding the risk profile of the comparables are not properly gone into either due to lack of details furnished by the assessee or otherwise, we are inclined to restore this issue to the Assessing Officer for considering assessee’s claim of risk adjustment after examining the material on record and in accordance with settled legal principles. Needless to mention, the Assessing Officer must provide reasonable opportunity of being heard to the assessee. Issues Involved:1. Applicability of certain filters while selecting comparables.2. Risk adjustment in the computation of margins.Detailed Analysis:1. Applicability of Certain Filters While Selecting Comparables:The primary issue raised by the assessee pertains to the selection of comparables by the Transfer Pricing Officer (TPO). The assessee, engaged in providing investment advisory services to its overseas associated enterprises (AE), used the Transactional Net Margin Method (TNMM) to benchmark its transactions. The TPO, however, rejected the assessee's comparables and selected fresh ones, leading to an upward adjustment to the Arm's Length Price (ALP).The assessee contested the inclusion of three specific comparables: Motilal Oswal Investment Advisors Pvt. Ltd., IM+ Capital (formerly Brescon Corporate Advisors), and Keynote Corporate Services Ltd.Motilal Oswal Investment Advisors Pvt. Ltd.:The assessee argued that this company is functionally different due to its engagement in merchant banking and other activities, and also fails the Related Party Transaction (RPT) filter. The Tribunal, referencing a previous decision in the assessee's case, upheld the inclusion of Motilal Oswal, stating it is functionally similar and passes the RPT filter based on the sales turnover ratio.IM+ Capital Ltd.:The assessee claimed this company has a different functional profile, being involved in debt syndication and financial restructuring. The Tribunal, noting consistent rejection of this company as a comparable in previous years, directed its exclusion from the list of comparables.Keynote Corporate Services Ltd.:The assessee highlighted the company's involvement in merchant banking and the volatility of its operating margin. The Tribunal, following precedent from previous years, directed the exclusion of Keynote Corporate Services Ltd. due to functional dissimilarity and volatile profit margins.2. Risk Adjustment:The assessee sought risk adjustment, arguing it operates in a risk-free environment with guaranteed mark-ups, unlike the comparables which have diversified functions and higher risk exposure. The Tribunal acknowledged the need for risk adjustment but emphasized the burden on the assessee to provide empirical evidence regarding the risk profiles of the comparables.The Tribunal restored this issue to the Assessing Officer, instructing a thorough examination of the risk profiles and ensuring reasonable opportunity for the assessee to present its case.Conclusion:The Tribunal partially allowed the appeal, directing the exclusion of IM+ Capital Ltd. and Keynote Corporate Services Ltd. from the list of comparables. It upheld the inclusion of Motilal Oswal Investment Advisors Pvt. Ltd. and remanded the issue of risk adjustment to the Assessing Officer for further examination. The decision underscores the importance of empirical evidence in claims for risk adjustment and the need for consistent application of filters in selecting comparables.