DRP remand limits and transfer-pricing comparables require fresh arm's length price review on functional similarity

Under section 144C of the Income-tax Act, 1961, the Dispute Resolution Panel cannot direct fresh verification or remit objections to the Assessing Officer or Transfer Pricing Officer; its directions must address the objections before it, so the working capital adjustment direction in that form was not sustainable. The transfer-pricing exercise was also revisited on comparability, with M/s. Dynamatic Technologies Ltd. requiring reconsideration against the assessee's manufacturing profile and functional similarity, and the arm's length price to be recomputed accordingly. The matter was therefore remitted for fresh directions and reworking of the transfer-pricing analysis, without any final determination on the merits of the adjustment.

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Issues: (i) whether the Dispute Resolution Panel could direct the Assessing Officer to verify the necessary details and work out the working capital adjustment afresh; (ii) whether the inclusion of M/s. Dynamatic Technologies Ltd. as a comparable required reconsideration and reworking of the arm's length price.

Issue (i): whether the Dispute Resolution Panel could direct the Assessing Officer to verify the necessary details and work out the working capital adjustment afresh.

Analysis: Under section 144C of the Income-tax Act, 1961, the Dispute Resolution Panel is required to issue directions on the objections before it and does not have power to set aside the proposed variation or remit the matter for fresh verification by the Assessing Officer or Transfer Pricing Officer. The direction to allow working capital adjustment after verification was therefore not sustainable in that form.

Conclusion: The matter on working capital adjustment was set aside and remitted for fresh directions in accordance with section 144C, in favour of neither side on the merits.

Issue (ii): whether the inclusion of M/s. Dynamatic Technologies Ltd. as a comparable required reconsideration and reworking of the arm's length price.

Analysis: The comparability issue was examined in the light of the assessee's manufacturing profile and the earlier view that only the automobile segment of a diversified company could be compared, or alternatively another comparable with similar functions and characteristics could be selected. The appropriate course was to revisit the comparable set and recompute the arm's length price accordingly.

Conclusion: The comparable selection issue was remitted to the Assessing Officer or Transfer Pricing Officer for reworking of the arm's length price.

Final Conclusion: The dispute was not finally decided on the transfer-pricing adjustment itself, and both the Revenue appeal and the assessee's cross-objections were disposed of by remand for fresh consideration.

Ratio Decidendi: The Dispute Resolution Panel cannot direct a fresh verification and remand under section 144C, and comparability must be confined to functions and characteristics that are materially similar for arm's length pricing.

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