ITAT Upholds Deletion of Transfer Pricing Adjustment on Carried Interest; Remands Case to AO on GST Rectification

ITAT Upholds Deletion of Transfer Pricing Adjustment on Carried Interest; Remands Case to AO on GST Rectification

The assessee, a wholly owned subsidiary, is registered as a stockbroker with the Securities and Exchange Board of India (SEBI) and holds a merchant banking license that allows it to offer securities underwriting and corporate finance services in India. It also provides Information Technology-enabled Services (ITeS) to certain affiliated companies through its Bangalore branch. For the Assessment Year 2021-22, the assessee filed its income tax return on 25 February 2022, reporting a total income of Rs. 372,794,730,000. The case was selected for scrutiny, and notices were were issued under sections 143(2) and 142(1) of the Income Tax Act, 1961.

Thereafter, the Assessing Officer (AO) under section 92CA(1) and the Transfer Pricing Officer (TPO) issued an order dated 09.10.2023 under section 92CA(3), proposing a transfer pricing adjustment of Rs. 14,84,49,910. The AO issued a draft assessment order dated 20 December 2023 under section 144C(1), incorporating the proposed adjustments. After following the directions of the Dispute Resolution Panel (DRP) under section 144C(5), the AO finalised the assessment with an order dated 24.10.2024 under Section 143(3), combined with sections 144C(13) and 144B, determining the total income at Rs. 408,922,198,000. The assessee has now filed this appeal against that order. Aggrieved by the same, the assessee has preferred the present appeal.

Issues Before ITAT:

1. Whether including employees’ carried interest in the cost base (and thereby increasing the operating cost) for computing ALP of non-binding investment advisory services was justified, leading to an upward TP adjustment of Rs. 19,80,000.
2. Whether the comparability set for ITeS benchmarking (specifically the exclusion of R Systems International Ltd. on account of different FY ending) was sustainable or required reconsideration.
3. Whether the GST refund added under intimation (Rs. 33,356,4406) requires adjudication in view of a pending rectification (and whether interest under s.234A was rightly levied).
4. Whether the penalty under S. 270A was maintainable at this stage.

Tribunal’s Ruling: The Tribunal noted that functional similarity should not be disregarded solely due to a different financial year ending if reliable extrapolated data can be provided. Citing CIT v. McKinsey Knowledge Centre India Pvt. Ltd., it directed the assessee to furnish extrapolated March-ending results for R Systems to the TPO, remanding the issue for fresh adjudication. Other comparability issues on that ground were treated as not pressed.

On the GST refund addition, the Tribunal refrained from merit-based adjudication, as the issue did not arise from the impugned orders, instead directing the AO to decide the pending section 154 application promptly. Interest under section 234A was to be levied only if delay in filing was established after verification. The penalty ground under section 270A was dismissed as premature.

Therefore, the appeal was partly allowed for statistical purposes.

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