PCIT Vs Fluor Daniel India Pvt Ltd (Delhi High Court)
Conclusion: AO was directed to exclude certain comparable companies in view of highly technical capabilities of executing infrastructure development projects vis-a-vis that of assessee who was rendering engineering and related services as a subcontract limited to specific functions as per the requirement of its affiliate.
Held: Assessee had declared an income of ₹198 Cr for the Assessment Year(AY) 2011-12 and reported a total sum of ₹1224 Cr as international transactions. It used the transactional net margin method (TNMM) to determine its arm-length price (ALP), which compared profit margins with those of similar selected companies in the industry. TPO rejected the company’s initial analysis and introduced new comparables that increased the ALP, which led to an addition of ₹10 Cr to assessee’s account. This addition of TPO was upheld by the dispute resolution panel (DRP), and this decision of the DRP was faced with an appeal before the Income Tax Appellate Tribunal (ITAT). ITAT ruled that four businesses, namely Kitco Ltd., Mahindra Consulting Engineers Ltd., Project and Development India Ltd., and TCE Consulting Engineers Ltd to be excluded from the list of comparables as these four firms were dissimilar in their function as compared to the assessee as they were engaged in high-end technical consultancy and infrastructural projects and were large-scale whereas assessee company worked as a service provider under a cost-plus model. Dissatisfied by the ITAT’s order, Department approached the Delhi High Court which upheld the ITAT’s order. It was held that while the TNMM method was broadly tolerant to certain functional dissimilarity as the method entailed comparison was based on net margins. However, it was essential that the broad functional profile of the comparables were similar. It would be erroneous to compare companies with different functionalities as similar only on the ground that TNMM was a more tolerant method. It was noted that Kitco Ltd handled infrastructure and aviation projects, including Cochin International Airport, which involved complex operations far beyond the scope of the assessee’s engineering design services. The court held that the other three companies were also carrying out large-scale projects compared to assessee, making them unsuitable for comparison or setting industry standards. The court resorted to CBDT guidelines that benchmarking or comparable entities could only be relied on if they were similar in function, asset and risk profiles. The court asserted that differences in business models and revenue streams would decrease the reliability of comparability analysis. AO was directed to exclude this company, in view of highly technical capabilities of executing infrastructure development projects vis-a-vis that of assessee who was rendering engineering and related services as a subcontract limited to specific functions as per the requirement of its affiliate.
