Functional Dissimilarity Justifies Exclusion of Comparables: Delhi HC Dismisses Revenue’s Transfer Pricing Appeal [Read Order]
The High Court noted that the DRP, whose conclusions have been that the companies/the comparables, fail the functional test as the comparables were engaged in operations other than export service undertaken by the assessee.
The Delhi High Court has recently ruled that functional dissimilarity is a ground for the exclusion of comparables and thus dismissed the revenues appeal to include the comparables in the appeal.
The assessee (respondent) M/s TCK Advisers Pvt. Ltd was providing investment advisory services to the AssociatedEnterprises (AE) Trikona Advisors Mauritius Limited (Trikona, in short). Under the consultancy agreement the assessee was engaged to provide investment advisory services to trikona as a single client and 100% of its revenue of Rs. 13,43,38,418/- was derived from the export of services and there was no domestic revenue.
The assessee acted as back office of trikona with certain specific manpower, skills sets in finance, legal, engineering and asset management. It charged its AE on a cost plus arrangement, thereby eliminating risk on the assessee.
All risks in the form of market/ business risk, credit and collection risk, capacity utilisation risk, service liability risk, human resource management risk as well as foreign exchange fluctuation risk was borne by AE and not by the assessee company
The transfer pricing officer (TPO) recommended an upward adjustment of Rs. 3,33,32,572/- on account of transfer pricing, which was accepted by the AO. The assessee filed objections before the Dispute Resolution Panel (DRP).
The DRP, partially allowed the objections of the assessee and directed the AO to reduce the addition of Rs. 6,67,02,130/- on account of proposed addition of Arms Length Price of the international transaction with its AE.
The revenue contended before the ITAT that DRP had erred in excluding six comparables namely, Ajcon Global Services Ltd., Brescon Corporate Advisors Ltd., Karvy Investors Services Ltd., Kshitij Investment Advisory Co. Ltd., Motilal Oswal Investment Advisors Pvt. Ltd., and Pushpak Financial Services Ltd. The ITAT, however, upheld the DRP’s reasoning, noting that “the functional dissimilarity of each of above comparables has not been contradicted by the appellant/revenue.
The DRP concluded that these companies failed the functional test and export turnover filter. For instance, Ajcon Global Services Ltd. was engaged in “stock market and DP operations, providing consultancy and advisory services and security trading activities,” with nil export income, whereas the tested party had 100% export income.
Similarly, Brescon Corporate Advisors Ltd. derived its entire income from debt resolution and syndication, with only 1% export income.
Motilal Oswal Investment Advisors Pvt. Ltd. had export income of 49%, below the 75% threshold applied by the DRP. Pushpak Financial Services Ltd. was registered as an NBFC with RBI, deriving income from NBFC activities and trading in shares, with nil export income.
The High Court noted that the DRP, whose conclusions have been that the companies/the comparables, fail the functional test as the comparables were engaged in operations other than export service undertaken by the assessee. The DRP’s conclusion also includes how the comparables to be excluded based on 75% export turnover test.
The Division Bench of Justice Kameswar Rao and Justice Vinod Kumar held that the findings of the DRP, accepted by ITAT, were “pure questions of facts.” Additionally, it observed that “there is a delay of 1285 in re‑filing the appeal for which there is no justifiable explanation.”
Accordingly, the appeal was dismissed.
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