In a recent judgement, the Delhi High Court clarified transfer pricing standards under Section 92 of the Income Tax Act to showcase the importance of comparability in significant transactions. In the present case, the assessee, Fluor Daniel India Pvt Ltd, provides engineering and design services to its clients.
The assessee had declared an income of ₹198 Cr for the Assessment Year(AY) 2011-12 and reported a total sum of ₹1224 Cr as international transactions. The assessee company used the transactional net margin method (TNMM) to determine its arm-length price (ALP), which compares profit margins with those of similar selected companies in the industry.
Boost Your Business with SME IPO Funding Strategies – Enroll Now, Click here
The transfer pricing officer (TPO) rejected the company’s initial analysis and introduced new comparables that increased the ALP, which led to an addition of ₹10 Cr to the assessee’s account. This addition of the TPO was upheld by the dispute resolution panel (DRP), and this decision of the DRP was faced with an appeal before the Income Tax Appellate Tribunal (ITAT).
The ITAT ruled that four businesses, namely Kitco Ltd., Mahindra Consulting Engineers Ltd., Project and Development India Ltd., and TCE Consulting Engineers Ltd to be excluded from the list of comparables. The ITAT found these four firms were dissimilar in their function as compared to the assessee as they were engaged in high-end technical consultancy and infrastructural projects and were large-scale. The assessee company worked as a service provider under a cost-plus model.
Dissatisfied by the ITAT’s order, the revenue department approached the Delhi High Court which upheld the ITAT’s order. The court held that while TNMM allows flexibility, it does not allow comparisons with companies engaged in fundamentally different business or operational scales.
Boost Your Business with SME IPO Funding Strategies – Enroll Now, Click here
The Court observed that Kitco Ltd handled infrastructure and aviation projects, including Cochin International Airport, which involved complex operations far beyond the scope of the assessee’s engineering design services. The court held that the other three companies were also carrying out large-scale projects compared to the assessee, making them unsuitable for comparison or setting industry standards.
The court resorted to CBDT guidelines that benchmarking or comparable entities can only be relied on if they are similar in function, asset and risk profiles. The court asserted that differences in business models and revenue streams will decrease the reliability of comparability analysis.
The two-judge bench comprising Justice Vibhu Bakhru and Justice Swarana Kanta Sharma dismissed the revenue’s appeal, stating that transfer pricing analysis must be in line with comparability principles to ensure fair taxation.
Subscribe Taxscan Premium to view the JudgmentSupport our journalism by subscribing to Taxscan premium. Follow us on Telegram for quick updates
