Facts of the Case

The present appeal was filed by the Revenue challenging the order dated 22.11.2019 passed by the Income Tax Appellate Tribunal (ITAT) for Assessment Year 2012–13. The dispute pertains to determination of Arm’s Length Price (ALP) under transfer pricing provisions in respect of international transactions undertaken by the assessee.

The core issue arose from the exclusion of Excel Infoways Ltd. as a comparable company by the ITAT during comparability analysis.

The Revenue contended that the ITAT adopted excessively stringent standards for comparability, effectively requiring an exact replica of the taxpayer, which is contrary to established transfer pricing principles.

Further, it was argued that the employee cost filter and export revenue filter were incorrectly applied, leading to wrongful exclusion of a valid comparable.

Issues Involved

  1. Whether the ITAT erred in applying stringent comparability standards in determining ALP under transfer pricing provisions.
  2. Whether exclusion of Excel Infoways Ltd. as a comparable was justified.
  3. Whether the 75% export revenue filter applied by the TPO is mandatory or flexible.
  4. Whether diminishing revenue and functional dissimilarity justify exclusion of a comparable.

Petitioner’s Arguments (Revenue)

  • The ITAT wrongly applied strict comparability standards, ignoring that exact comparables are rarely available in transfer pricing analysis.
  • Excel Infoways Ltd. was wrongly excluded despite satisfying the employee cost filter (more than 25% based on Section 133(6) information).
  • The Tribunal incorrectly computed the employee cost ratio (13.05%).
  • The export revenue filter of 75% should not be treated as sacrosanct and may be relaxed where functional similarity exists.
  • Reliance on prior Tribunal rulings (e.g., Baxter India Pvt. Ltd.) was misplaced, especially when questions of law had been framed earlier.

Respondent’s Arguments (Assessee)

  • The TPO himself had consistently applied a 75% export revenue filter, rejecting lower thresholds such as 50%.
  • Companies with export service income less than 75% were rightly excluded to ensure comparability with export-oriented entities.
  • Excel Infoways Ltd. failed the diminishing revenue filter, as reflected in declining financial performance (as shown in the chart in the ITAT order, reproduced in the judgment).
  • Functional and economic differences justified exclusion of the said company.

Court’s Findings / Order

  • The Delhi High Court emphasized that the objective of transfer pricing provisions (Chapter X of the Income Tax Act, 1961) is to determine ALP by comparing controlled transactions with comparable uncontrolled transactions.
  • The Court relied on the principle laid down in Rampgreen Solutions Pvt. Ltd. v. CIT (2015) 377 ITR 533 (Delhi) regarding strict comparability standards.
  • It held that:
    • Comparables must be similar in all material aspects, including functional profile and economic circumstances.
    • Wide deviations in Profit Level Indicators (PLI) require deeper scrutiny.
    • Flexibility under TNMM does not justify dilution of comparability standards.
  • The Court concluded that:
    • Excel Infoways Ltd. failed both:
      • 75% export revenue filter, and
      • Diminishing revenue filter (as evident from financial data table in the judgment).
  • Accordingly, no error was found in the ITAT’s order and no substantial question of law arose.

Final Order:

The appeal filed by the Revenue was dismissed.

Important Clarification

  • The Court clarified that comparability under TNMM cannot be diluted merely because of flexibility in method.
  • Functional similarity and economic comparability remain essential and non-negotiable.
  • Filters such as export revenue and financial consistency (diminishing revenue trend) are valid tools for ensuring reliability in ALP determination.

Sections / Provisions Involved

  • Section 92C – Determination of Arm’s Length Price
  • Section 133(6) – Power to call for information
  • Rule 10B of Income Tax Rules, 1962 – Comparability analysis
  • Chapter X of Income Tax Act, 1961 – Transfer Pricing Provisions

Link to download the order -https://delhihighcourt.nic.in/app/case_number_pdf/2022:DHC:2875-DB/MMH29072022ITA2342022_205241.pdf

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