24 June 2024


High Court of Delhi

Principal Commissioner Of Income vs. Open Solutions Software Services



Direct Taxation

Assessee has right to challenge inclusion of comparable, even if it clears the filters

By way of the present appeal under Section 260A of the Income Tax Act, 1961 ('the Act'), the Appellant (Revenue) assails the impugned order passed by the Income Tax Appellate Tribunal ('ITAT'). The grievance of the Appellant is against the exclusion of four comparables introduced by the Transfer Pricing Officer ('TPO') for benchmarking the international transaction of rendition of software services by the Respondent.

From the exposition of law in Rampgreen Solutions Pvt. Ltd. v. CIT and the other judgments, it is clear that even while applying the TNM method, comparables cannot be picked on the basis of broad classification under various heads, and that the actual functional profile of the comparable must be similar, if not same, to that of the taxpayer-assessee. In comparability analysis, the business environment; demand and supply of the services; assets employed, and, competence to provide different services are factors which would have a material bearing on the profitability of the entities and, therefore, regard must be had to such factors.

In the application of the TNM method, broad similarity in the domain of services is not enough and the overall FAR analysis of the comparable sought to be used must be similar with the taxpayer-assessee. On a perusal of the impugned order passed by the ITAT, present Court finds that none of the comparables have been excluded solely on the ground of high turnover. The primary reason for excluding the four comparables in question is on account of the dissimilarity in the overall profile of the said comparables with the Respondent-assessee.

In view of the above, it emerges that none of the comparables have been excluded on the ground of high turnover alone. The test of functional similarity applied by the Tribunal is in consonance with the legal position. Therefore, there is no merit in the contentions urged by the Revenue. Equally meritless is the contention of the Revenue regarding the bar to challenge the comparables after the acceptance of the filters. The filters are applied to narrow down the search to find the comparables that are closest to the assessee. The use of filters has to be necessarily validated from the annual reports. Since the TPO would have to do this exercise on the basis of the actual data in the report of the comparables, he would surely have the freedom to adopt or reject the comparables. It cannot held that merely because a comparable clears the filters, its inclusion in the list of comparables is immune to challenge by the assessee. The appeal is dismissed.

Tags : Comparables Exclusion Legality

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