Facts of the Case

  • The assessee, engaged in IT solutions and staffing services, filed return for AY 2010–11 declaring income and paid tax under Section 115JB.
  • The Assessing Officer referred the matter to the Transfer Pricing Officer (TPO) for ALP determination due to international transactions.
  • The assessee proposed two comparables, which were rejected by the TPO.
  • The TPO introduced HCCA Business Services Pvt. Ltd. as a comparable and made adjustment of ₹1.03 crore.
  • DRP upheld TPO’s findings; ITAT also rejected assessee’s objections.
  • A rectification application under Section 254(2) was dismissed by ITAT.

Issues Involved

  1. Whether selection of a single comparable (HCCA) for transfer pricing adjustment is justified.
  2. Whether functional dissimilarity and ownership of intangibles were ignored by ITAT.
  3. Whether ITAT erred in not considering earlier precedent (LG Chemicals India Pvt. Ltd.).
  4. Whether such issues give rise to a substantial question of law.

Petitioner’s Arguments

  • HCCA is functionally different and owns intangibles, unlike the assessee.
  • ITAT failed to consider its own earlier ruling in LG Chemicals India Pvt. Ltd., where similar comparable was excluded.
  • Reliance on a single comparable is legally unsustainable.
  • ITAT ignored material facts and objections, making the order erroneous.

Respondent’s Arguments

  • Inclusion or exclusion of comparables does not raise a substantial question of law.
  • The findings of TPO, DRP, and ITAT are factual and do not warrant interference.

Court’s Findings

  • Although generally comparable selection is factual, in this case only one comparable (HCCA) formed the basis of adjustment, making it legally significant.
  • ITAT failed to:
    • Consider earlier binding precedent
    • Examine functional differences
    • Address assessee’s objections properly
  • Reliance on a single disputed comparable without proper analysis is unsustainable in law.

Court Order / Final Decision

  • Orders of ITAT, TPO, and DRP were set aside.
  • Entire matter remanded to TPO for fresh determination of transfer pricing adjustment.
  • TPO directed to reconsider inclusion/exclusion of comparables independently.
  • Decision rendered in favour of the assessee.

Important Clarifications

  • A single comparable cannot be sole basis of transfer pricing adjustment without detailed scrutiny.
  • Functional comparability and ownership of intangibles are critical factors.
  • Failure to consider precedents and relevant objections amounts to legal error.
  • Comparable selection may become a question of law when fundamental errors exist.

Link to download the order -https://delhihighcourt.nic.in/app/case_number_pdf/2019:DHC:7402-DB/SMD14052019CW51982019_160357.pdf

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