FAR Analysis Mandatory For TP Comparables, Mere “Functional Comparability” Insufficient: ITAT Delhi

On 3 July, the Delhi Bench of the Income Tax Appellate Tribunal (ITAT) held that in transfer pricing analysis, a company cannot be included as a comparable merely on the basis of a general assertion that it is “functionally comparable”, and that a proper Functions, Assets and Risks (FAR) analysis is mandatory before inclusion.

Accountant Member Ramit Kochar and Judicial Member Raj Kumar Chauhan partly allowed an appeal by A. Hartrodt India Private Limited for statistical purposes and restored the matter to the Dispute Resolution Panel (DRP) for fresh adjudication. The Bench observed:

“After carefully going through the contentions of both the parties and perusing the material on record, we are of the considered view that inclusion of comparable is to be based on FAR analysis which will include analyzing functions, assets deployed and risks assumed... Merely saying that the comparable is functionally comparable is not sufficient but FAR analysis is required to be done... Thus, we are restoring the matter back to the file of ld. DRP for fresh adjudication on merits in accordance with law.”

The taxpayer, engaged in international freight forwarding and logistics services, had challenged the inclusion of Cargo Service Center India Pvt. Ltd. and Unique Speditor Pvt. Ltd. as comparables for determining the arm's length price of its international transactions. It contended that both entities carried out broader logistics and cargo handling operations and were therefore not comparable to a pure freight forwarding business.

The Tribunal held that comparability under the Transactional Net Margin Method (TNMM) cannot be based merely on broad sectoral similarity. It reiterated that a proper FAR analysis: covering functions performed, assets deployed, and risks assumed, is essential to determine whether entities are truly comparable.

It further noted that material on record indicated that the two companies were engaged in activities beyond ordinary freight forwarding, requiring factual verification. Therefore, it restored the issue to the DRP for fresh examination after undertaking a detailed FAR analysis and granting the taxpayer an opportunity of hearing.

The Bench also admitted the taxpayer's claim for working capital adjustment, though it had not been pressed before the DRP, and restored the issue for adjudication on merits.

Accordingly, the ITAT partly allowed the appeal for statistical purposes.

Appearance for the Assessee: Shri Ankit Arora, Chartered Accountant (CA) Ms. Vandana Gupta, Chartered Accountant (CA)

Appearance for the Revenue: Shri Dharam Veer Singh, Commissioner of Income Tax – Departmental Representative (CIT-DR)