2016 (11) TMI 1769 - AT - Income Tax

TP Adjustment - Comparable selection - including Motilal Oswal Investment Advisors Pvt. Ltd. (MOIAPL) IDFC Investment Advisors Limited(IDFC)and ICRA Online Ltd. (ICRA-O)as comparables for determining the Arms Length Price (ALP) - HELD THAT - We find that in the case of Carlyle India Advisors Pvt. Ltd. 2013 (4) TMI 486 - BOMBAY HIGH COURT has upheld the order of the Tribunal wherein MOIALP was held to be an invalid comparable as far as investment advisory is concerned. It was also held by the Tribunal that MOIAPL was a merchant banker and that merchant banking and investment advisory services were not similar. In the case of Carlyle India Advisors India Pvt. Ltd 2015 (11) TMI 1713 - ITAT MUMBAI for the AY. 2010-11 the Tribunal has dealt the exclusion of MOIALP and IDFC. In the case of AGM India Advisors Private Limited. 2016 (5) TMI 1335 - ITAT MUMBAI has held that ICRA-O is not a valid comparable for benchmarking non binding advisory services. Thus we are of the opinion that the TPO/DRP was not justified in including MOIAPL IDFC and ICRA-O as valid comparables for determining the ALP of the IT s. entered in to by the assessee during the year under consideration. The AO is directed to exclude all the three comparables from the final list. Effective ground of appeal is decided in favour of the assessee.

Summary

The core legal questions considered in this judgment revolve around the determination of the Arm's Length Price (ALP) for international transactions under transfer pricing regulations, specifically the validity and comparability of certain companies proposed as comparables for benchmarking investment advisory services provided by the assessee to its associated enterprises (AEs). The principal issues include:

1. Whether Motilal Oswal Investment Advisors Pvt. Ltd. (MOIAPL) is a valid comparable for determining ALP, given its business activities and functional profile.

2. Whether IDFC Investment Advisors Limited (IDFC) qualifies as a comparable company for benchmarking, considering its business operations and revenue model.

3. Whether ICRA Online Ltd. (ICRA-O) can be considered a valid comparable in the context of investment advisory services provided by the assessee.

4. The application and interpretation of relevant transfer pricing provisions, including the functional analysis requirements under Rule 10D and the tests for comparability under Section 92C of the Income Tax Act.

Issue-wise Detailed Analysis:

Issue 1: Validity of MOIAPL as a Comparable

The legal framework involves the arm's length principle under transfer pricing laws, requiring comparability in functions performed, assets employed, and risks assumed (FAR analysis). Precedents include Tribunal decisions in Carlyle India Advisors Pvt. Ltd. and Maersk Global Centres, where MOIAPL was held functionally dissimilar due to its merchant banking activities.

The Tribunal examined MOIAPL's business operations through directors' reports and financial statements, noting that despite advisory fees constituting over 99% of income, MOIAPL was engaged in diversified activities including merchant banking, capital markets, and structured finance. The absence of segmental reporting and consolidated financials obscured the precise nature of income streams. The Tribunal emphasized that merchant banking and pure investment advisory services are qualitatively distinct.

The assessee argued that MOIAPL's inclusion was improper due to functional dissimilarity and supernormal profits. The Revenue contended that advisory fees alone justified its inclusion. The Tribunal relied on prior rulings, including the assessee's own precedents, to conclude that MOIAPL is not a valid comparable because it is functionally different from the non-binding investment advisory services rendered by the assessee.

The application of law to facts led to the exclusion of MOIAPL from the comparable set, as the FAR analysis did not support its comparability. The Tribunal directed the AO/TPO to exclude MOIAPL for benchmarking purposes.

Issue 2: Validity of IDFC as a Comparable

Under the same transfer pricing principles, the Tribunal analyzed IDFC's business model. The company was registered as a Portfolio Manager with SEBI and engaged in portfolio management services, including advisory fees computed on net assets plus performance fees, distinct from the assessee's cost-plus fixed markup model.

The assessee contended that IDFC's segmental information was unavailable and that its portfolio management services were functionally different from non-binding advisory services. The Revenue argued that IDFC's investment advisory segment and advisory fees warranted its inclusion.

Precedents from the Tribunal, including Bain Capital Advisors and Carlyle India Advisors, were cited to establish that portfolio management services differ fundamentally from non-binding advisory support services. The Tribunal found IDFC's business model and revenue computation method materially different, rendering it an invalid comparable.

The Tribunal concluded that IDFC should be excluded from the comparable set and directed the AO to recompute ALP without including IDFC.

Issue 3: Validity of ICRA-O as a Comparable

The Tribunal examined ICRA-O's business activities, which included information services, outsourcing, and technology solutions, providing financial sector research and analytical services. The assessee argued that ICRA-O was functionally dissimilar, engaged in diversified services rather than pure investment advisory.

The Revenue maintained that the outsourced services segment, involving research and advisory, was comparable. However, the Tribunal referred to ICRA-O's own description and financial notes, which showed that its outsourced services primarily involved data maintenance and management rather than advisory services akin to those of the assessee.

Applying the FAR analysis and the requirement under Rule 10D for documentation to justify the true nature of transactions, the Tribunal found that the assessee failed to produce necessary documentation, and ICRA-O's activities were not comparable. The Tribunal relied on earlier decisions, including AGM India Advisors Pvt. Ltd., to support exclusion of ICRA-O.

Issue 4: Application of Transfer Pricing Provisions and FAR Analysis

The Tribunal underscored the importance of a thorough functional analysis under Rule 10D(1)(e) and the necessity of adequate documentation to justify the nature of international transactions. The assessee's failure to provide details on the cost-plus 22% markup and the AE's revenue further undermined its position.

The Tribunal also examined the Revenue's approach to selecting comparables, noting the absence of scientific or consistent methodology, such as the 75% revenue from services filter applied in some precedents. The lack of segmental financial data for comparables further complicated the comparability analysis.

The Tribunal emphasized that comparability must be based on functional similarity rather than mere nomenclature or income classification. The principles established in Sections 92C(1), (2), and (3) were applied to ensure that only functionally comparable entities were included in the benchmark set.

Treatment of Competing Arguments

The assessee's arguments rested on functional dissimilarity, lack of segmental data, and reliance on binding precedents excluding MOIAPL, IDFC, and ICRA-O. The Revenue's counterarguments focused on the presence of advisory fees, partial functional overlap, and distinctions from cited precedents.

The Tribunal carefully weighed the evidence, including directors' reports, financial statements, and prior judicial decisions. It found the assessee's contentions substantiated by factual and legal analysis, while the Revenue's arguments lacked sufficient support to overcome the functional dissimilarity and documentation deficiencies.

Conclusions

The Tribunal concluded that MOIAPL, IDFC, and ICRA-O are not valid comparables for benchmarking the assessee's international transactions of providing non-binding investment advisory services to its AEs. It directed the AO/TPO to exclude these entities from the comparable set and recompute the ALP accordingly, allowing the assessee's appeal.

Significant Holdings

The Tribunal's reasoning is encapsulated in the following verbatim excerpts:

"The activities undertaken by Motilal Oswal Investments Advisors Pvt. Ltd. stand on a different footing than the pure investment advisory services rendered by the assessee to its associate enterprise... The said company is registered with SEBI as a merchant banker... the same makes the concern as incomparable with assessee's international transaction of Provision of investment advisory related support services."

"IDFC Investment Advisors Limited is registered as a Portfolio manager with SEBI... The earnings of IDFC Investment Advisors Limited, though titled as 'advisory fee', are indeed computed on the basis of amount of fund deployed by the investee fund plus a performance fee whereas the assessee is being compensated on cost plus fixed markup basis... it would not be appropriate to compare assessee's international transaction... with that of the IDFC Investment Advisors Limited."

"ICRA Online Limited operated in two strategic lines of business, i.e. knowledge Process Outsourcing and information Services and Technology Solutions... the activities performed by the Company under the business line 'Outsourced Services' were in the nature of 'maintenance and management of data' and therefore cannot be compared with the assessee."

Core principles established include the necessity of functional comparability under FAR analysis, the requirement for adequate documentation under Rule 10D, and the inadmissibility of entities engaged in materially different business models as valid comparables for transfer pricing benchmarking.

Final determinations on each issue were that MOIAPL, IDFC, and ICRA-O were functionally dissimilar and must be excluded from the comparable set, leading to the allowance of the assessee's appeal and direction to recompute ALP accordingly.