2026 (3) TMI 731 - AT - Income Tax

Transfer Pricing comparability rules: several comparables accepted; Ivycap remitted for verification, guarantee commission and withholding adjustments deleted.

Transfer pricing comparability under TNMM requires functional similarity and justified quantitative filters; five comparables proposed by the taxpayer are ... TP Adjustment - provision of investment advisory services - Arm's length determination under TNMM and comparability - transfer pricing remand for limited verification of comparable - benchmarking of guarantee commission under CUP and allocation by FAR - application of s.40(a)(i) and TDS obligation determined by law at time of payment - avoidance of double taxation by adjustment for prior year settlement Upward adjustment made towards provision of investment advisory services based on inclusion and exclusion of certain comparables in the final list of comparables - HELD THAT: - Ivycap shortlisted by ld. TPO in the final list of comparables has a different operating model when compared with the assessee both on account of related party transactions and high percentage of outsourcing expenses. The third aspect of high margin remains uncontroverted. It is also undisputed that the two aspects relating to RPT filter and high percentage of outsourcing expenses having raised for the first time by the assessee at the appellate stage for which we note that there exists a bonafide reason as ld. TPO provided a very short window to the assessee to respond to his notices as already noted above. Accordingly, in the interest of justice and fair play, we find it appropriate to remit the issue for the limited purpose of verification and examination by the ld. TPO on the aspect of RPT filter and high percentage of outsourcing expenses which would justify exclusion of the same from the final list of comparables for the purpose of arriving at ALP of this transaction. [Paras 8, 10] For the functional dissimilarity resorted to by the ld. TPO for ICRA Management and CRISIL, we find that there exists functional similarity in the nature of business in which the two comparables are engaged in. It is evidently demonstrated that they are engaged in providing advisory services similar to that of the assessee under their single segment as reported in their respective Annual Reports. Assessee had shortlisted these comparable companies considering turnover less than Rs.200 crores which is an accepted turnover filter. However, ld. TPO had applied the turnover filter of 1/10th and 10 times which is generally applied in the provisions of IT/ITES services. Since nothing has been brought on record to demonstrate how the turnover filter of Rs.200 crores does not apply in the case of assessee, we find that the above listed five comparables of the assessee ought to be included for the purpose of benchmarking of this transaction which were rejected on account of functional difference and turnover filter chosen by ld. TPO. [Para 10] Benchmarking of guarantee commission under CUP and allocation by FAR - Arm's length rate for guarantee commission received by the assessee - HELD THAT: - The Tribunal examined the factual structure whereby the India branch merely reissued a guarantee backed by a counter-guarantee from its AE and received a specified share of the total market commission (0.40% p.a. against a combined 0.69%). Having regard to the assessee's limited functions, the back-to-back risk allocation to the AE and the evidence of the contractual and billing arrangement, the Tribunal held that the TPO's external CUP-based rate of 1.55% was not appropriate as applied to the assessee and that the allocation adopted by the assessee, reflecting its FAR, should be accepted. [Paras 11, 12] The upward adjustment to the guarantee commission determined by the TPO/DRP is deleted. TDS u/s 195 - disallowance made u/s. 40(a)(i) on account of payments made to MasterCard and VISA, whereon TDS was not done - Application of sec 40(a)(i) and TDS obligation determined by law at time of payment - tax withholding liability on payments made to VISA and MasterCard in the relevant point of time - HELD THAT: - The Tribunal held that the question whether tax was deductible at source must be judged by the legal position prevailing when the payment was made or credited. Relying on the then-binding decision of Citibank N.A [2015 (11) TMI 407 - BOMBAY HIGH COURT] the Tribunal found that the assessee had no obligation to deduct tax at source in the relevant year and that subsequent developments (including the AAR ruling cited by the AO) could not make the assessee retroactively liable to withhold. both VISA and MasterCard operate from Singapore, and the relevant services are rendered entirely outside India. As such, in the absence of a permanent establishment of these entities in India, the income is not taxable in India under Article 7 of the India-Singapore DTAA. Accordingly, the provisions of section 195 of the Act are not attracted, and no disallowance can be made under section 40(a) (i) of the Act The legal maxim lex non cogit ad impossibilia comes into play to support the case of the assessee, according to which law cannot be possibly compel a person to do something which is impossible to perform [Paras 13, 14, 15] The disallowance u/s 40(a)(i) in respect of payments to VISA and MasterCard is deleted. Loan processing fees and income earned on Bank guarantee and letter of credit (LC) - Avoidance of double taxation by adjustment for prior year settlement - Reduction of income in Assessment Year 2018-19 consequent to prior-year taxation and settlement under Vivad se Vishwas - HELD THAT: - The Tribunal accepted the assessee's submission that amounts apportioned between years in view of ICDS had been earlier taxed and subsequently settled under the Vivad se Vishwas scheme for the prior year; allowing the corresponding adjustment in the assessment for the year under appeal was necessary to prevent double taxation. The Tribunal rejected the AO's reliance on procedural strictures and precedent to deny the adjustment in assessment proceedings, treating the issue as one of substantive avoidance of double taxation. [Paras 16, 17] The addition made by the AO that resulted in double taxation is deleted and the revised computation accepted. Final Conclusion: The appeal is partly allowed: transfer pricing grounds are partly allowed with inclusion of specified comparables and a limited remand for verification of Ivycap; the guarantee commission adjustment and the disallowance under section 40(a)(i) are deleted; the revised computation to avoid double taxation is accepted. Issues: (i) Whether the comparables excluded by the Transfer Pricing Officer for benchmarking provision of investment advisory services should be included and whether comparables included by the TPO (notably Ivycap Ventures Advisors Pvt. Ltd.) should be excluded for Assessment Year 2018 19; (ii) Whether the guarantee commission determined by the TPO at 1.55% (upward adjustment of Rs. 3,53,39,503) is justified; (iii) Whether payments made to VISA/MasterCard attract withholding under section 195 and disallowance under section 40(a)(i); (iv) Whether income taxed in an earlier year should be reduced to avoid double taxation for the year under consideration.Issue (i): Inclusion/exclusion of comparables for benchmarking provision of investment advisory services under TNMM.Analysis: The comparability exercise under TNMM was examined with focus on functional similarity (FAR), turnover filters and specified quantitative filters. Five comparables proposed by the assessee (Everstone Capital Advisors Pvt. Ltd., Piramal Fund Management Pvt. Ltd., SG Analytics Pvt. Ltd., CRISIL Risk & Infrastructure Solutions Ltd., and ICRA Management Consulting Services Ltd.) were evaluated against the TPO's turnover and FAR-based rejections. For Ivycap Ventures Advisors Pvt. Ltd., issues relating to related party transaction percentage and high outsourcing expenses were raised at appellate stage but supported by a bona fide explanation of limited opportunity to respond to TPO's short notice; these specific factual aspects were directed to be verified by the TPO after affording the assessee a hearing. For the other disputed comparables, functional similarity was found on the basis of annual reports and segment disclosures and the turnover filter applied by the TPO (1/10th to 10x) was held inappropriate absent justification; the assessee's turnover-based filter (up to Rs.200 crore) was accepted.Conclusion: Partly in favour of the assessee on comparables: the five comparables listed by the assessee are to be included for benchmarking; the inclusion/exclusion of Ivycap is remitted to the TPO for limited verification on RPT percentage and outsourcing expense criteria.Issue (ii): Validity of the guarantee commission rate determined by the TPO and the resulting upward adjustment.Analysis: The commercial structure, allocation of total commission between FirstRand South Africa and FirstRand India, the counter guarantee from the AE, and limited functions of the India branch were considered. The combined commission on the transaction was shown to be approximately 0.69% with the assessee receiving 0.40% (about 57% of total). The assessee performed limited processing functions and bore no substantive credit or performance risk due to counter guarantee by the AE.Conclusion: In favour of the assessee; the TPO/DRP determination of a 1.55% guarantee commission and related upward adjustment is deleted.Issue (iii): Applicability of withholding tax under section 195 and disallowance under section 40(a)(i) for payments to VISA and MasterCard.Analysis: The legal position at the time of payment/credit governs TDS obligation. Binding precedent of the jurisdictional High Court in Citibank N.A. (holding non deduction not disallowable) existed as of 31.03.2018. The subsequent AAR ruling in MasterCard's case was rendered after the relevant previous year and was not binding with appeals pending; the services relied on were standardised network services provided outside India and not transfers/rights to use intangibles or FTS attracting withholding. The impossibility of compliance with a later rendered judicial/administrative view was noted.Conclusion: In favour of the assessee; the disallowance under section 40(a)(i) in respect of payments to VISA and MasterCard is deleted.Issue (iv): Claim for reduction of income taxed in an earlier year to avoid double taxation (timing difference) arising from ICDS adjustments and settlement under Vivad Se Vishwas.Analysis: The assessee adjusted its accounting and tax treatment to avoid double taxation after the earlier year issue was settled under Vivad Se Vishwas Scheme; the revised method of recognising such income in the year of receipt was adopted consistently from AY 2018 19 onwards. The Assessing Officer's rejection for want of a revised return was assessed against the reality of double taxation and settled outcome under VSV.Conclusion: In favour of the assessee; the addition made by the Assessing Officer is deleted and the revised computation accepted to avoid double taxation.Final Conclusion: The appeal is partly allowed overall: transfer pricing ground is partly allowed (certain comparables accepted and Ivycap remitted for limited verification), guarantee commission, withholding/disallowance relating to VISA/MasterCard, and the timing/double taxation adjustment are allowed in favour of the assessee; the assessment is to be revised accordingly.Ratio Decidendi: Where TNMM is the selected method, comparability requires functional similarity and appropriate, justified filters; limited factual issues raised for the first time at appeal may be remitted for verification if there is a bona fide reason for late presentation; withholding obligations under section 195/40(a)(i) are determined by the law and binding precedent at the time of payment/credit.