Facts of the Case

The assessee, WSP Consultants India Pvt. Ltd., is a subsidiary of a Cyprus-based company engaged globally in design, engineering, and management consultancy services in infrastructure and environmental sectors. During the relevant assessment year, the assessee rendered design and engineering support services to its associated enterprise.

For determination of the Arm’s Length Price (ALP), the Transfer Pricing Officer (TPO) considered 16 comparables and proposed an adjustment of ₹6,55,34,938. Thereafter, the Dispute Resolution Panel (DRP) excluded certain comparables and introduced additional comparables, resulting in a revised transfer pricing adjustment of ₹3,87,54,545.

The assessee challenged the inclusion of three comparables before the Income Tax Appellate Tribunal (ITAT), namely:

  1. Ashok Leyland Projects Services Ltd.
  2. Kitco Ltd.
  3. Mitcon Consultancy & Engineering Services Ltd.

The ITAT accepted the assessee’s contention and excluded these comparables. Aggrieved by the ITAT’s findings, the Revenue filed an appeal before the Delhi High Court.

 Issues Involved

  1. Whether the ITAT was justified in excluding the three comparables for ALP determination?
  2. Whether exclusion of comparables constitutes a substantial question of law under Section 260A?
  3. Whether the Tribunal’s reasoning in transfer pricing comparability analysis was legally sustainable?

 Petitioner’s Arguments (Revenue’s Contentions)

The Revenue contended that:

  • The exclusion of the three comparables by the ITAT was unjustified.
  • The excluded entities were high-income comparables and should have been retained for benchmarking purposes.
  • The rationale adopted by the Tribunal lacked sufficient justification and resulted in distortion of ALP determination.

 Respondent’s Arguments (Assessee’s Contentions)

The assessee argued that:

  • Ashok Leyland Projects Services Ltd. was functionally different and had extraordinary events (merger), affecting profitability.
  • Kitco Ltd. derived substantial revenue from government undertakings, making it incomparable with the assessee’s business model.
  • Mitcon Consultancy & Engineering Services Ltd. had diversified activities beyond consultancy, and consultancy revenue was less than 75% of total revenue.

Accordingly, these entities were not functionally comparable for transfer pricing purposes.

 Court Findings / Court Order

The Delhi High Court upheld the ITAT’s order and dismissed the Revenue’s appeal. The Court held:

  • Functional similarity is the primary test for comparability under transfer pricing provisions.
  • Extraordinary events such as mergers materially affect profitability and justify exclusion of comparables.
  • Companies substantially dealing with government entities or engaged in diversified business operations may not be proper comparables.
  • Inclusion or exclusion of comparables by itself does not constitute a substantial question of law unless irrelevant factors were considered or relevant factors were ignored.

Since no such legal error was demonstrated, the Court found no merit in the Revenue’s appeal.

 Important Clarification

The judgment clarifies that:

  • Transfer pricing comparability is essentially a factual exercise.
  • High Courts will interfere only where there is perversity or substantial legal error in comparability analysis.
  • Functional differences, extraordinary events, and revenue composition remain decisive factors for exclusion of comparables.

 Sections Involved

  • Section 92C – Computation of Arm’s Length Price
  • Section 92CA – Reference to Transfer Pricing Officer
  • Section 144C – Dispute Resolution Panel
  • Section 260A – Appeal to High Court

 Related Case Laws

  1. Pr. CIT vs Ameriprise India Pvt. Ltd. – Functional comparability principles in transfer pricing.
  2. Rampgreen Solutions Pvt. Ltd. vs CIT – Functional dissimilarity as basis for exclusion of comparables.
  3. Chryscapital Investment Advisors India Pvt. Ltd. vs DCIT – Scope of judicial review in transfer pricing comparability.
  4. CIT vs Agnity India Technologies Pvt. Ltd. – Comparable selection in transfer pricing benchmarking. 

Link to download the order - https://delhihighcourt.nic.in/app/case_number_pdf/2017:DHC:6618-DB/SAS03112017ITA9352017.pdf

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