The Income Tax Appellate Tribunal (ITAT), Delhi Bench, has held that the selection or rejection of comparable companies in transfer pricing proceedings must be supported by relevant financial information and functional analysis.
“The inclusion or exclusion of comparable companies must be supported by cogent reasons based on relevant financial information and functional analysis,” the tribunal observed.
A Bench comprising Judicial Member Kavitha Rajagopal and Accountant Member Sanjay Awasthi made the observation while remanding the transfer pricing dispute involving Jones Lang LaSalle Property Consultants (India) Pvt. Ltd. for fresh examination.
The company provides real estate consultancy, property management, advisory and brokerage services. For Assessment Year 2019-20, it adopted the Transactional Net Margin Method (TNMM) and selected 19 comparable companies. The Transfer Pricing Officer (TPO) rejected these companies and selected four others: Lancor Maintenance and Services Ltd., BVG India Ltd., Interactive Manpower Solutions Pvt. Ltd. and Info Edge (India) Ltd.
The TPO initially proposed an adjustment of ₹138.65 crore towards these services, which was reduced to ₹138.08 crore following the Dispute Resolution Panel's (DRP) directions. An additional adjustment of ₹57.79 crore towards business service charges paid to associated enterprises took the aggregate adjustment to ₹195.88 crore.
The company challenged the rejection of its comparables, inclusion of allegedly functionally dissimilar companies and inconsistent application of filters, including the 70% export-income filter. It also argued that the DRP's directions to reconsider its objections had not been properly implemented. The DRP had specifically upheld Lancor's inclusion and prohibited fresh inquiry, restricting verification to material already on record.
The company urged the tribunal to delete the adjustment rather than give the Revenue another opportunity to fill gaps in its case.
The tribunal observed that TNMM required an examination of the functions performed, assets employed and risks assumed by the company and the comparable companies. It also noted that the company had not placed annual reports, financial statements or segmental information concerning the disputed companies before it.
“Merely relying upon the observations of the Ld. TPO, without furnishing the underlying financial and functional details of the comparable companies, would not be sufficient to adjudicate the issue conclusively on merits,” the tribunal observed.
It held that the alleged deficiencies in the TPO's analysis did not, by themselves, justify deleting the entire adjustment. The remand was necessary to examine objections that had not been properly adjudicated, rather than merely allowing the Revenue to improve its case.
The tribunal restored the issues concerning Grounds 13 to 20 to the Assessing Officer/TPO for fresh examination, subject to the DRP's binding directions. The authorities must consider existing material, provide the company an opportunity of hearing and pass a reasoned order without reopening matters that have attained finality.
The tribunal expressed no opinion on the ultimate inclusion or exclusion of the disputed companies and allowed the relevant grounds and appeal for statistical purposes.
For Assessee: Nageswar Rao and Pratik Rath, Advocates
For Revenue: Mahesh Kumar, CIT-DR