Delhi High Court Upholds ITAT’s Decision On Selection Of Comparables For Determination Of Arm’s Length Price Of An International Transaction

The Delhi High Court had upheld the decision of the Income Tax Appellate Tribunal (ITAT) on the selection of comparables for the determination of the arm’s length price of an international transaction.

The Bench of Justice Rajiv Shakdher and Justice Girish Kathpalia observed that the Tribunal not only followed the previous orders mentioned above to maintain consistency but also examined the entire material on record to ascertain the comparability of each of the comparables with the case of the respondent or assessee pertaining to AY 2007–08.

The respondent/assessee is a company engaged in providing investment advisory services to its overseas Associated Enterprise (AE), earning revenue of Rs. 48,49,75,777 during the financial year concerning the Assessment Year (AY) 2011–12.

For the purposes of benchmarking its transactions with the AE, the assessee selected the Transactional Net Margin Method (TNMM) as the most appropriate method, and for that purpose, it selected four companies as comparables. Applying the profit level indicator of operating profit to operating cost, the mean margin of the comparables was worked out at 6.28%.

The margin shown by the respondent/assessee being much higher, to the tune of 25.84%, the Transfer Pricing Officer (TPO) did not accept the benchmarking, though he accepted the TNMM as the most appropriate method with the operating profit to operating cost as a profit level indicator.

The TPO opined that the respondent or assessee had not applied appropriate qualitative and quantitative filters, which had led to the exclusion of functionally similar comparables and the inclusion of companies that are not comparable.

The TPO proceeded to select fresh comparables independently, and in that process, it shortlisted 13 companies as comparables with an average margin of 43.01%. In the process, out of four comparables selected by the respondent or assessee, three were accepted and one was rejected by the TPO.

On the basis of the average margin of the selected comparables, the TPO proposed an upward adjustment to the arm's length price (ALP), and the same was incorporated in the draft assessment order dated December 31, 2014.

The assessee filed an application before the Dispute Resolution Panel (DRP). In terms of order, the assessee was called upon by the TPO to submit a computation of risk adjustment in respect of two comparables, namely IM+ Capital and Keynote Corporate Services Limited, and to also give a working capital adjustment, but the assessee asked the TPO to complete the process at the level of the latter.

TPO, following the recommendations of the DRP, carried out working capital adjustments and recomputed arm's length price, which led to the Assessment Order at an assessed income of Rs. 23,78,88,160 after making additions and adjustments of Rs. 11,82,53,407 as against the previous adjustments of Rs. 13,79,85,005.

The assessee filed an appeal before the Tribunal, which was disposed of by order dated May 17, 2019. Thereafter, on a miscellaneous application filed by the assessee, the Tribunal took note of rectifiable mistakes and consequently recalled the appeal order for limited purposes of deciding five grounds mainly pertaining to the issue of the applicability of certain filters while selecting comparables and risk adjustment. After hearing both sides, the tribunal passed the order.

The department contended that the selection of comparables for the determination of the arm's length price of an international transaction has to be carried out on a case-by-case basis, so the Tribunal erred in exclusion of certain comparables going simply by the judgment of the jurisdictional High Court in the case of the respondent/assessee pertaining to the AY 2007-08 to 2009-10.

The court held that the appellant/department has failed to demonstrate change, if any, in circumstances qua the assessee and/or any of the comparables in the financial year in question vis-à-vis the earlier years. There is not even a whisper alleging any such change while calling upon a fresh analysis of comparability. .

Counsel For Petitioner: Kunal Sharma

Counsel For Respondent: Mayank Aggarwal

Case Title: PCIT Versus M/S Chrys Capital Investment Advisors (India) Pvt. Ltd.

Citation: 2023 LiveLaw (Del) 1052

Case No.: ITA 588/2023

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