2019 (6) TMI 1737 - AT - Income Tax

ITAT directs inclusion of ICRA Management Consulting as comparable for transfer pricing analysis

TPG Capital India Pvt. Ltd. Versus Dy. Commissioner of Income Tax Circle–3 (3), Mumbai And Dy. Commissioner of Income Tax Circle–14 (3) (1), Mumbai Versus TPG Capital India Pvt. Ltd.

TPG Capital India Pvt. Ltd. Versus Dy. Commissioner of Income Tax Circle–3 (3), Mumbai And Dy. Commissioner of Income Tax Circle–14 (3) (1), Mumbai Versus ... The core legal questions considered in this judgment revolve around the determination of the arm's length price for international transactions involving non-binding investment advisory services, specifically:1. Whether certain companies selected as comparables for benchmarking the arm's length price are appropriate and functionally comparable to the assessee.2. The correctness of the computation of profit margins of selected comparables, particularly regarding allocation of unallocated corporate expenses.3. The validity of the assessee's claim for risk adjustment in the transfer pricing analysis.4. The propriety of excluding a newly introduced comparable by the Revenue on grounds of functional dissimilarity.Issue-wise Detailed Analysis1. Appropriateness of Selected ComparablesThe assessee challenged the exclusion or inclusion of three companies as comparables: ICRA Management Consulting Services Ltd., Future Capital Holdings Ltd., and ICRA Online Ltd. The Tribunal examined each in detail.ICRA Management Consulting Services Ltd.The Transfer Pricing Officer (TPO) excluded this company citing functional differences, a decision upheld by the Commissioner of Income Tax (Appeals). The assessee contended that this company provides similar investment advisory services and had been accepted as a comparable in prior years and related cases, including the assessee's own earlier assessments and those of sister concerns. The assessee relied on multiple precedents where this company was accepted as comparable.The Department argued absence of segmental details to confirm the nature of services, thus challenging comparability.The Tribunal reviewed the annual report and prior judicial pronouncements, noting that the company's services were substantially similar to the assessee's. The Tribunal emphasized consistency with earlier decisions where this company was accepted as comparable. Consequently, the Tribunal directed the Assessing Officer to include this company as a comparable.Future Capital Holdings Ltd.This company was accepted by both the TPO and the Commissioner (Appeals). The assessee's sole contention was that the TPO incorrectly computed its margin. The assessee submitted that the TPO's margin figure (29.48%) was overstated compared to the actual margin (16.26%) for the investment advisory segment, as established in a prior Tribunal decision concerning the same assessment year.The difference was attributed to the non-allocation of unallocated corporate expenses to the investment advisory segment by the TPO. The assessee requested a proportionate allocation to reflect a more accurate margin.The Department conceded that the assessee's claim could be verified.The Tribunal acknowledged no dispute on comparability but found merit in the assessee's claim regarding margin computation. It directed the Assessing Officer to verify the margin with due opportunity to the assessee, ensuring correct arm's length price computation.ICRA Online Pvt. Ltd.Although selected by the assessee initially, it sought exclusion of this company as a comparable upon discovering that the company's business segments (Knowledge Process Outsourcing and Information Services & Technology Solutions) are functionally different from investment advisory services.The assessee relied on precedents where this company was excluded as a comparable due to functional dissimilarity.The Department argued that since the assessee had not objected earlier, it should not be allowed to raise this issue at the Tribunal stage, emphasizing that comparability is a factual issue requiring detailed investigation.The Tribunal noted that the issue was raised for the first time at this stage and that the Departmental Authorities had not had the opportunity to examine the functional differences. Given the importance of functional comparability in transfer pricing, the Tribunal restored the issue to the Assessing Officer for fresh adjudication after giving the assessee an opportunity to be heard, directing a detailed functional analysis in line with relevant precedents.2. Computation of Profit Margins of ComparablesThe dispute regarding Future Capital Holdings Ltd. focused on whether the Transfer Pricing Officer correctly computed the profit margin by excluding unallocated corporate expenses from the investment advisory segment. The Tribunal relied on a prior Tribunal decision which allocated such expenses proportionately, resulting in a lower and more accurate margin of 16.26% instead of 29.48%.The Tribunal emphasized the necessity of factual verification and directed the Assessing Officer to consider the assessee's submissions and verify the margin accordingly, ensuring the arm's length price reflects the true profitability of the comparable.3. Claim for Risk AdjustmentThe assessee claimed that as a captive service provider to its Associated Enterprise (AE), it is a risk-mitigated entity, unlike the comparables which bear market and other risks. The assessee argued that its remuneration is on a cost-plus mark-up basis and that its income is not contingent on acceptance of advice, thereby insulating it from significant risks. It submitted a scientific working for risk adjustment under Rule 10B(1)(e)(iii) of the Income Tax Rules.The Department contended that the assessee bears certain risks such as quality risk and single customer risk, and that the risk adjustment calculation was general and not scientific.The Tribunal observed that while the Transfer Pricing Officer and Commissioner (Appeals) rejected the risk adjustment claim, they failed to properly consider the detailed submissions and the legal provisions allowing such adjustment. The Tribunal cited settled jurisprudence affirming that risk adjustments are permissible in appropriate cases, referencing decisions where similar claims were allowed or remanded for reconsideration.It was noted that the Transfer Pricing Officer had rejected a comparable on grounds of high risk, indicating risk is a relevant factor. The Tribunal agreed in principle with the assessee's claim but emphasized the need for factual verification of the risk adjustment working.The Tribunal restored the issue to the Assessing Officer for fresh consideration, directing adherence to legal principles and ensuring the assessee is heard adequately.4. Exclusion of Motilal Oswal Investment Advisors Pvt. Ltd. as ComparableThe Revenue challenged the Commissioner (Appeals)'s exclusion of this company, which was introduced as a fresh comparable by the Transfer Pricing Officer. The Commissioner (Appeals) excluded it on the basis that it is engaged in investment/merchant banking, which differs fundamentally from the assessee's investment advisory services.The Tribunal upheld the Commissioner (Appeals)'s decision, relying on judicial pronouncements that distinguish investment/merchant banking from investment advisory services as functionally dissimilar. The Tribunal held that the company's business profile makes it unsuitable as a comparable and dismissed the Revenue's appeal.Significant Holdings'Respectfully following the decisions of the Tribunal in assessee's own case as well as in case of others as cited supra, we direct the Assessing Officer to include this company as a comparable.' (Regarding ICRA Management Consulting Services Ltd.)'Therefore, we direct the Assessing Officer to factually verify assessee's claim with regard to the actual margin of the investment advisory segment of the company and, thereafter consider the same for computing the arm's length price of the assessee. However, before taking any decision on this issue, the assessee must be provided adequate opportunity of being heard.' (Regarding margin computation of Future Capital Holdings Ltd.)'In the interest of fair play and justice, we are inclined to restore the issue relating to the comparability of this company to the Assessing Officer for fresh adjudication after due opportunity of being heard to the assessee.' (Regarding ICRA Online Pvt. Ltd.)'Now, it is fairly well settled that in appropriate cases, adjustment towards risk factor can be allowed. In fact, rule 10B(1)(e)(iii) provides for such adjustment.''We uphold the decision of learned Commissioner (Appeals) in excluding this company as a comparable.' (Regarding Motilal Oswal Investment Advisors Pvt. Ltd.)The Tribunal's final determinations were:- To include ICRA Management Consulting Services Ltd. as a comparable.- To verify and adjust the margin of Future Capital Holdings Ltd. based on segmental allocation of expenses.- To remit the issue of comparability of ICRA Online Pvt. Ltd. to the Assessing Officer for fresh examination.- To allow the assessee's claim for risk adjustment to be considered afresh after factual verification.- To dismiss the Revenue's appeal and exclude Motilal Oswal Investment Advisors Pvt. Ltd. as a comparable.