Transfer Pricing-Assessee's Objections On 'Functional Dissimilarity' Not Adjudicated: Delhi HC Asks TPO To Determine Comparable Entity Afresh

A division bench of Justices Vibhu Bakhru and Swarana Kanta Sharma ruled,

“Assessee's contention that E4e Healthcare is functionally dissimilar to the assessee and therefore, could not be included as a comparable, has not been considered by any authority…Accordingly, the matter is restored before the learned TPO, to the limited extent, to examine the inclusion of E4e Healthcare as a comparable entity.”

As held by the High Court on earlier occasions, for purposes of benchmarking international transactions, there must be similarity of functional filters, product homogeneity and business model, in order to arrive at a suitable comparable entity, for determination of arm's length price (ALP).

In the case at hand, Appellant-assessee was involved in international transactions for provision of IT-enabled services. Accordingly, the Assessing Officer had made a reference under Section 92CA(1) of the Income Tax Act, 1961 to the TPO for determining the ALP for benchmarking the international transactions undertaken by the assessee.

The TPO determined some entities as comparables, including E4e Healthcare Business Services Private Limited.

The assessee objected to this, primarily on the ground that E4e Helathcare's annual report was not available in the public domain and in the absence of the same, the question whether the said entity was functionally comparable could not be ascertained.

The High Court noted that this contention was not specifically addressed by the TPO, forcing the Assessee to approach the Dispute Resolution Panel. The DRP drew an inference that since the Assessee had raised an objection regarding the employee cost filter, it was apparent that the Assessee was in the possession of the annual accounts of the company.

Assessee, before the High Court claimed that it never raised any objection regarding the E4e Healthcare not satisfying the employee filter. Assessee further claimed that it was only at the stage of appeal before the ITAT, that it got possession of the final accounts of E4e Healthcare. Nevertheless, it submitted that ITAT did not examine the contention that the functional profile of E4e Healthcare was materially different from the functional profile of the assessee.

At the outset, the High Court noted that the very fundamental premise on which the TPO and DRP had proceeded, that the Assessee had raised an objection regarding the employee cost filter, was incorrect.

It then proceeded to observe that before the ITAT, the Assessee raised a specific ground that E4e Healthcare was not functionally comparable since it was providing diverse services like software development, end-to-end solutions to the healthcare industry, etc.- in the nature of IT services and KPO (Knowledge process outsourcing) services apart from IT enabled services.

The assessee had cited Rampgreen Solutions Pvt. Ltd vs. CIT where it was held that a company engaged in provision of KPO services cannot be regarded as an appropriate comparable for the purpose of benchmarking the international transition of provision of BPO services.

“It is thus, clear that the Assessee's contention that E4e Healthcare is functionally dissimilar to the assessee and therefore, could not be included as a comparable, has not been considered by any authority. As noted above, the orders passed by the learned DRP, the learned TPO and the learned ITAT proceeded on an assumption which are ex- facie incorrect,” the High Court held and remanded the matter back to TPO.

Appearance: Advocates Neeraj Jain, Aniket D. Agrawal and Abhisek Singhvi for Appellant; SSC Debesh Panda with JSCs Zehna Khan, Vikramaditya Singh, Advocates Anauntta Shanmkar and Aditya for Respondent

Case title: Sequential Technology International India Pvt. Ltd.(Formerly Known As Omniglob Information Technologies(India)Pvt.Ltd) v. Addl. CIT, Spcl.Range-7,

Case no.: ITA 34/2020

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