2024 (12) TMI 390 - HC - Income Tax

TP Adjustment - Selection of comparables for benchmark analysis - HELD THAT - Undisputedly, Kitco Ltd. was working in divisions like infrastructure, tourism, aviation, IT services, HRD and financial services, which were not similar to the functions performed by the Assessee. As noted above, the Assessee was engaged in engineering and design services. Whilst the TNMM method is broadly tolerant to certain functional dissimilarity as the method entails comparison is based on net margins. It is essential that the broad functional profile of the comparables are similar. It would be erroneous to compare companies with different functionalities as similar only on the ground that TNMM is a more tolerant method. TCE Consulting Engineers Ltd. is concerned, the Tribunal accepted that the said company was providing high end technical services, which were also not comparable with the functions performed by the Assessee. Similarly, the ITAT also examined the FAR comparability of Project and Development India Ltd. and Mahindra Consulting Engineers Ltd. on the basis of their respective FAR analysis. Project and Development India Ltd. is concerned, the learned ITAT concluded that it could not be compared with the limited functions as performed by the Assessee. A similar view was also expressed in respect of Mahindra Consulting Engineers Ltd. The relevant extract of the decision of the learned ITAT setting out the reasons for excluding the said two entities as comparables for the purposes of benchmarking the ALP. The findings of the learned ITAT are in consonance with the ALP provisions under Section 92C of the Act.

Summary

Issues:
1. Appeal against transfer pricing adjustment.
2. Selection of comparables for benchmark analysis.
3. Functional dissimilarity of selected comparables.
4. Exclusion of certain comparables based on functional dissimilarity.

Analysis:
1. The appeal was filed by the Revenue against an order passed by the Income Tax Appellate Tribunal (ITAT) regarding a transfer pricing adjustment for the assessment year 2011-12. The Assessee, a subsidiary of a US Company, contested the enhancement of its returned income by the Transfer Pricing Officer (TPO) and filed objections before the Dispute Resolution Panel (DRP) which were the subject matter of the appeal.

2. The Assessee used the transactional net margin method (TNMM) for transfer pricing analysis, selecting eight comparable entities with an average mean profit level indicator (PLI) of 6.99%. The TPO, however, conducted its own analysis and selected seven comparables, directing an enhancement of the Assessee's income based on the benchmark analysis.

3. The Assessee objected to the inclusion of four companies as comparables, arguing that their functional profiles were dissimilar. The DRP rejected these objections, stating that TNMM method was tolerant to functional dissimilarity. However, the ITAT examined each comparable individually.

4. The ITAT excluded Kitco Ltd., TCE Consulting Engineers Ltd., Project and Development India Ltd., and Mahindra Consulting Engineers Ltd. as comparables based on their functional dissimilarity with the Assessee. The ITAT's decision was based on a detailed analysis of the functions, assets, and risks of each company, aligning with the arm's length pricing (ALP) provisions under Section 92C of the Income Tax Act.

In conclusion, the High Court upheld the ITAT's decision to exclude certain comparables due to functional dissimilarity, emphasizing the importance of aligning comparables' functional profiles with that of the Assessee. The judgment dismissed the appeal, stating that no substantial question of law arose in the matter.