2019 (5) TMI 1069 - HC - Income Tax

Transfer Pricing Adjustment for staffing segment - exclusion of the comparables suggested by the Assessee and in approving the TP adjustment as proposed by the TPO only on the basis of one comparable objected to by the Assessee on account of it being functionally different from the Assessee - HELD THAT - Since the entire TP Adjustment has hinged only on one comparable, viz., HCCA the objection to the inclusion of which by the Assessee required a detailed consideration, the Court is of the view that the impugned order dated 11th July 2018 of the ITAT cannot be sustained in law. The question of law is accordingly answered in the negative i.e. in favour of the Assessee and against the Revenue. The Court notes that in the impugned order, the ITAT has remanded to the TPO the consideration of one of the comparables proposed by the Assessee viz., Ma Foi Management Consultants Ltd. and one other as suggested by the DRP i.e. Nirbhay Management Services Pvt. Ltd. The Court is of the view that the entire issue of determining the TP adjustment if any in respect of the transactions in the staffing segment of the Assessee should be considered afresh by the TPO uninfluenced by his earlier order. Accordingly this Court remands the entire issue of determining the TP adjustment if any in respect of the transactions in the staffing segment of the Assessee to the TPO for a fresh determination. The TPO will examine afresh the question of inclusion and/or exclusion of comparables as proposed by the Assessee and the Revenue.

Summary

Issues:
Transfer Pricing Adjustment for international transaction involving the Petitioner/Appellant's staffing segment.

Analysis:
The case involves Transfer Pricing Adjustment for the Appellant's staffing segment. The Appellant, engaged in providing IT solutions and staffing services, filed a return for AY 2010-2011. The Assessing Officer referred the case to the Transfer Pricing Officer (TPO) due to international transactions. The TPO recommended an adjustment based on a comparable, HCCA, which the Appellant contested. The Dispute Resolution Panel (DRP) and the Income Tax Appellate Tribunal (ITAT) upheld the TPO's decision. The Appellant argued that HCCA was not a suitable comparable due to functional differences, citing a previous ITAT decision. The ITAT dismissed the Appellant's appeal, leading to the current Writ Petition (WP).

The main issue is whether the ITAT was justified in excluding the comparables suggested by the Appellant and approving the TP adjustment based solely on HCCA, objected to by the Appellant for functional differences. The Court found that the ITAT did not adequately consider the functional disparity between the Appellant and HCCA, crucial for the TP adjustment. The Court ruled in favor of the Appellant, stating that the ITAT's decision was not legally sound due to the reliance on a single comparable without thorough examination.

The Court remanded the issue to the TPO for a fresh determination, setting aside the ITAT's and related orders. The TPO is instructed to reconsider the TP adjustment for the Appellant's staffing segment, including the inclusion/exclusion of comparables proposed by both the Appellant and the Revenue. The Court emphasized an unbiased reassessment by the TPO, free from the influence of previous orders, to ensure a fair and accurate determination of the TP adjustment.

In conclusion, the Court's decision favored the Appellant, highlighting the need for a comprehensive review of the TP adjustment for the staffing segment. The case underscores the importance of considering functional comparability and conducting a fair assessment by the TPO to determine an appropriate arm's length price for international transactions.