Judgment on Exclusion of Comparables in Transfer Pricing under Income Tax Act

The Court upheld the ITAT's decision to exclude certain comparables for determining the arm's length price under the Income Tax Act. It clarified that the Revenue lacked the statutory authority to challenge such exclusions during the relevant assessment year, emphasizing legislative constraints on objections against DRP orders. The judgment underscores the legal framework governing transfer pricing adjustments and highlights the impact of legislative amendments on the Revenue's ability to contest the exclusion of comparables.

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Issues:
1. Rejection of comparables by the ITAT for determination of arm's length price (ALP).
2. Scope of powers of the ITAT while hearing an appeal regarding the exclusion of comparables by the TPO.

Issue 1:
The first issue in the judgment pertains to the rejection of three comparables by the ITAT for determining the arm's length price (ALP) of international transactions by the Assessee under Section 92CA (3) of the Income Tax Act 1961. The ITAT excluded the comparables - Aptico Limited, Global, Procurement Consultants Limited, and TSR Darashaw Limited, deeming them functionally dissimilar and justified their exclusion based on various factors. The Court, after considering Rule 10B(3)(ii) of the Income Tax Rules, 1962 and Section 92 C of the Income Tax Act 1961, did not find the issue substantial enough to warrant examination as a question of law.

Issue 2:
The second issue raised concerns the scope of powers of the ITAT when hearing an appeal regarding the exclusion of comparables by the Transfer Pricing Officer (TPO). The Revenue argued that if three out of nine comparables were to be excluded, the ITAT should have directed the TPO to redo the transfer pricing adjustment exercise afresh. However, during the relevant assessment year, there was no provision for the Revenue to appeal against the inclusion or exclusion of comparables by the TPO, which was affirmed by the Dispute Resolution Panel (DRP). The Court noted that the statutory scheme at the time did not allow the Revenue to object in such circumstances. The Court also highlighted the legislative changes introduced by the Finance Acts of 2012 and 2016, which governed the provision for filing cross objections by the Department. Ultimately, the Court dismissed the appeal, emphasizing that the legislative policy guided the insertion and deletion of provisions related to objections against DRP orders.

In conclusion, the judgment delves into the rejection of comparables by the ITAT for determining the arm's length price and the limitations on the Revenue's powers to appeal against such exclusions during the relevant assessment year. The Court's analysis provides a detailed examination of the legal framework and legislative changes impacting the Revenue's ability to challenge transfer pricing adjustments based on excluded comparables.

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