2023 (2) TMI 1118 - HC - Income Tax

TP Adjustment - Comparable selection - exclusion of Certification Engineering International Ltd., HSCC India Ltd. and Mitcon Consultancy Engineering Services Ltd. - HELD THAT - ITAT excluded Certification Engineering International Ltd. and HSCC India Ltd. not only on the ground that these companies were government undertaking, but also on ground of functional dissimilarities with the assessee company. The ITAT excluded the Mitcon Consultancy Engineering Services Ltd. on the ground of functional dissimilarity with the assessee company as well on the ground that the same comparable was excluded by ITAT in assessee s own case for the AY 2011-12, and the said order of the ITAT was confirmed by this Court 2019 (7) TMI 1147 - DELHI HIGH COURT

Summary

Issues:
Exclusion of three companies from the list of comparable companies for determining Arm's Length Price.

Analysis:
1. The primary issue in the present Income Tax Appeal was the exclusion of three companies, namely Certification Engineering International Ltd., HSCC India Ltd., and Mitcon Consultancy & Engineering Services Ltd., from the list of comparable companies for determining the Arm's Length Price of international transactions between the assessee and its associated enterprises.

2. The Revenue contended that the ITAT erred in excluding Certification Engineering International Ltd. and HSCC India Ltd. on the basis of being government undertakings without considering that government status does not necessarily lead to enhanced profitability. The ITAT's exclusion of Mitcon Consultancy & Engineering Services Ltd. was also challenged for functional dissimilarity, despite TNMM being less sensitive to minor functional differences.

3. Upon review, the High Court found that the ITAT excluded the three companies after detailed analysis and comparison with the assessee company's profile. For Certification Engineering International Ltd., the ITAT noted the company's operations mainly focused on certification activities, third-party inspections, and safety audits, deeming it functionally dissimilar to the assessee.

4. Regarding HSCC India Ltd., the ITAT observed that the company's revenue from consultancy services was not functionally similar to the assessee's engineering design services, leading to its exclusion. The fact that HSCC India Ltd. was a government undertaking further supported its exclusion, following a similar approach taken in previous cases.

5. The ITAT's exclusion of Mitcon Consultancy & Engineering Services Ltd. was based on the company's revenue sources from consultancy fees and vocational training, which differed from the assessee's core activities. This decision was consistent with a previous order in the assessee's case for the Assessment Year 2011-12.

6. The High Court referenced a previous order confirming the exclusion of Mitcon Consultancy & Engineering Services Ltd. in the assessee's case, emphasizing the importance of functional similarity in determining comparables. The Court also cited a Karnataka High Court judgment highlighting that the issue of comparables is a question of fact, and interference is warranted only in cases of perversity in the lower authorities' reasoning.

7. Ultimately, the High Court upheld the ITAT's decision to exclude the three companies from the list of comparables, dismissing the appeal as no substantial question of law arose for consideration. The judgment reinforced the principle that functional dissimilarity and previous consistent decisions play a crucial role in determining comparable companies for transfer pricing purposes.