The Delhi High Court has held that the exclusion of comparables become valid as failed to demonstrate a change in circumstance from the earlier financial year and dismissed the petition of the Income Tax department.
The revenue challenged the order of the Income Tax Appellate Tribunal whereby the appeal of the respondent/assessee M/S Chrys Capital Investment Advisors (India) Pvt ltd was partly allowed.
The respondent/assessee, a company engaged in providing investment advisory services to its overseas Associated Enterprise (AE), earned revenue of Rs.48,49,75,777/- during the financial year concerning the Assessment Year (AY) 2011-12.
To benchmark its transactions with the AE, the respondent/assessee selected the Transactional Net Margin Method (TNMM) as the most appropriate method and for that purpose, selected four companies as comparables. Applying the profit level indicator of operating profit to operating cost, the mean margin of the comparables was worked out at 6.28%.
The margin shown by the respondent/assessee being much higher, to the tune of 25.84%, the Transfer Pricing Officer (TPO) did not accept the benchmarking, though accepted the TNMM as the most appropriate method with the operating profit to operating cost as profit level indicator. The TPO opined that the respondent/ assessee had not applied appropriate qualitative and quantitative filters, which had led to the exclusion of functionally similar comparables and the inclusion of companies which are not comparable.
The TPO proceeded to select fresh comparables independently and in that process listed 13 companies as comparables with an average margin of 43.01%. In the said process, out of four comparables selected by the respondent/assessee, three were accepted and one was rejected by the TPO. Based on the average margin of the selected comparables, the TPO proposed an upward adjustment to the arms-length price (ALP) and the same was incorporated in the draft assessment order dated 31.12.2014.
The respondent/assessee filed an application before the Dispute Resolution Panel (DRP) and in terms of order of DRP, the respondent/assessee was called upon by the TPO to submit a computation of risk adjustment in respect of two comparables namely IM+ Capital (formerly known as Breskon Corporate Advisors) and Keynote Corporate Services Limited and to also give working capital adjustment, but the respondent/assessee vide letter dated 26.10.2015 asked the TPO to complete the process at the level of the latter.
The TPO, following the recommendations of the DRP, carried out working capital adjustments and recomputed arms length price, which led to the Assessment Order dated 30.11.2015 under Section 143(3) read with Section 144C of the Act at an assessed income of Rs.23,78,88,160/- after making additions/adjustments of Rs.11,82,53,407/- as against the previous adjustments of Rs.13,79,85,005/.
On a miscellaneous application filed by the respondent/assessee, the Tribunal took note of rectifiable mistakes and consequently recalled the appeal order for limited purposes of deciding five grounds mainly about the issue of applicability of certain filters while selecting comparables and risk adjustment.
The tribunal held that in consonance with the earlier decision of a coordinate bench of the Tribunal about the respondent/assessee for Assessment Year 200910, the comparable namely Motilal Oswal Advisors Pvt. Ltd. could not be excluded.
The impugned order shows that the Tribunal not only followed the previous orders mentioned above to maintain consistency, but also examined the entire material on record to ascertain the comparability of each of the comparables with the case of the respondent/assessee about AY 2007-08.
A division bench comprising of Justice Rajiv Shakdher and Justice Girish Kathpalia viewed that besides, the appellant/revenue has not been able to demonstrate change, if any, in circumstances qua the respondent/assessee and/or any of the comparables in the financial year in question vis-à-vis the earlier years. There is not even a whisper alleging any such change while calling upon a fresh analysis of comparability.
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