2021 (12) TMI 315 - HC - Income Tax

TP Adjustment - ALP determination - rejecting comparable given by the assessee company by applying certain filters like Related Party Transactions (RPT) filter, turnover filter, export earnings filter, employee cost filter, etc . - HELD THAT - While undertaking the exercise to arrive at the arm s length price which is essentially a matter of estimate of the fair value which the Indian Company had paid or had received from its Associate Enterprise (A.E.), such exercise is required to be undertaken by the Transfer Pricing Officer (TPO) on the basis of the facts and figures relating to comparable cases of other similarly placed entities, whose relevant data is available in the public domain. As per the provisions of the Act and the Rules, the assessee company is required to furnish its own Transfer Pricing Analysis and the list of chosen comparables which may or may not be agreed to by the Revenue Authorities and they would introduce some more comparables rejecting the comparables given by the assessee company by applying certain filters like Related Party Transactions (RPT) filter, turnover filter, export earnings filter, employee cost filter, etc. to bring them within the comparable range of the cases of such comparables and generally there would be a disagreement between the assessee and the revenue in such a situation. Therefore, the entire exercise of making transfer pricing adjustments on the basis of comparables is nothing but a matter of estimate of a broad and fair guess-work of the authorities based on factual relevant materials brought before the authorities, i.e., the TPO or Dispute Resolution Panel (DRP) or ITAT, which are the fact finding authorities. See M/S. EIGHT ROADS INVESTMENT ADVISORS PVT. LTD. (FORMERLY KNOWN AS FIL CAPITAL ADVISORS INDIA PVT. LTD.) , 2019 (2) TMI 1806 - BOMBAY HIGH COURT and BARCLAYS TECHNOLOGY CENTRE INDIA PRIVATE LTD. 2018 (8) TMI 574 - BOMBAY HIGH COURT In our view, the ITAT has not committed any perversity or applied incorrect principles to the given facts and when the facts and circumstances are properly analysed and correct test is applied to decide the issue at hand, then, we do not think that questions as pressed raises any substantial questions of law.

Summary

Issues:
1. Interpretation of Rule 10B(2)(b) regarding exclusion of comparable companies.
2. Determining functional comparability under Rule 10B(2) for a specific company.
3. Justification for excluding a comparable company under Rule 10B(2)(b) based on specific criteria.

Analysis:

Issue 1:
The first substantial question of law in this appeal pertains to the interpretation of Rule 10B(2)(b) by the Income Tax Appellate Tribunal (ITAT) regarding the exclusion of M/s. Motilal Ostwal Investment Advisors Pvt. Ltd. from the set of comparable companies. The appellant questions the ITAT's justification in relying on decisions related to other companies without fully appreciating the similarities in activities between the excluded company and the assessee. The High Court observed that the ITAT's findings were factual and not perverse. The process of determining the arm's length price involves estimation based on comparable entities' data available in the public domain. Disagreements between the assessee and revenue authorities are common in selecting comparables, and adjustments are made using various filters. The court cited previous judgments to support the view that transfer pricing adjustments are estimates based on relevant factual materials before the authorities.

Issue 2:
The second question of law concerns the correctness of ITAT's conclusion on the functional comparability of M/s. IDFC India Advisors Ltd. under Rule 10B(2). The ITAT's decision to exclude this company as comparable to the assessee based on previous cases was challenged. The appellant argued that the comparable company's operations in a single segment and substantial revenue from similar activities were not adequately considered. However, the High Court found no perversity in the ITAT's approach, emphasizing the importance of analyzing facts and applying the correct test to determine the issue at hand. The court concluded that the questions raised did not amount to substantial questions of law.

Issue 3:
The third question raised in the appeal relates to the ITAT's direction not to consider the case of ICRA Online Ltd. as comparable under Rule 10B(2)(b). The appellant contested this decision based on the comparable company's engagement in activities similar to the assessee. The High Court noted that the ITAT did not commit any perversity or apply incorrect principles to the facts. When the facts and circumstances were properly analyzed, the court found no substantial legal questions raised. Consequently, the appeal was deemed devoid of merit and dismissed with no order as to costs.

In summary, the High Court upheld the ITAT's decisions, emphasizing the importance of factual analysis and correct application of tests in transfer pricing disputes. The judgments cited supported the view that transfer pricing adjustments are estimates based on relevant materials, and disagreements between the assessee and revenue authorities are common in selecting comparables.