Facts of the Case

The Revenue filed an appeal under Section 260A of the Income-tax Act challenging the order dated 17.01.2019 passed by the Income Tax Appellate Tribunal for Assessment Year 2011-12. The assessee, Fluor Daniel India Pvt. Ltd., is a captive service provider engaged in providing engineering and design services exclusively to its associated enterprises and is remunerated on a cost-plus basis.

During the relevant year, the assessee reported international transactions including provision of services, receipt of services, training costs, payment of software charges, and reimbursements. The assessee adopted the Transactional Net Margin Method (TNMM) and claimed that its margins were at arm’s length.

The Transfer Pricing Officer rejected the assessee’s benchmarking analysis and selected seven comparables, resulting in a proposed transfer pricing adjustment of ₹10,05,97,632. The Dispute Resolution Panel upheld the inclusion of four comparables, namely Kitco Ltd., Mahindra Consulting Engineers Ltd., Project and Development India Ltd., and TCE Consulting Engineers Ltd.

On appeal, the ITAT excluded all four companies holding them to be functionally dissimilar. Aggrieved, the Revenue approached the High Court.

Issues Involved

Whether the ITAT was justified in excluding certain companies as comparables on the ground of functional dissimilarity despite the application of TNMM, and whether such exclusion raised any substantial question of law.

Petitioner’s Arguments

The Revenue contended that TNMM is tolerant to functional differences and that the ITAT erred in excluding the comparables merely on the basis of functional dissimilarity. It was argued that the DRP had correctly held that the differences were not significant and that the ITAT’s findings were perverse.

Respondent’s Arguments

The assessee submitted that it was a low-risk captive service provider rendering limited engineering and design services on a cost-plus basis, whereas the excluded companies were engaged in executing large-scale, complex infrastructure and engineering projects, assuming substantial risks and owning significant assets. It was argued that such entities could not be compared even under TNMM due to lack of broad functional similarity.

Court Order / Findings

The Delhi High Court examined the detailed findings of the ITAT and noted that each of the four excluded companies was engaged in high-end engineering, consultancy, and infrastructure projects, operating independently and assuming entrepreneurial risks. The Court observed that Kitco Ltd. operated across multiple sectors such as infrastructure, tourism, aviation, IT services, HRD and financial services, which were not comparable to the assessee’s limited engineering design functions.

The Court further upheld the ITAT’s findings regarding TCE Consulting Engineers Ltd., Project and Development India Ltd., and Mahindra Consulting Engineers Ltd., noting that these entities provided high-end technical and consultancy services and executed complex projects directly for clients, unlike the assessee which functioned as a captive service provider.

The Court clarified that although TNMM is broadly tolerant to certain functional dissimilarities, broad functional comparability remains an essential requirement and companies with materially different functional profiles cannot be treated as comparables merely because TNMM is applied.

The Court held that the ITAT’s findings were based on proper FAR analysis and were in consonance with Section 92C of the Act.

Important Clarification

The High Court clarified that TNMM does not dispense with the requirement of functional comparability. Even under TNMM, entities engaged in high-end engineering and infrastructure development cannot be compared with captive service providers rendering limited engineering and design services on a cost-plus basis.

Final Outcome

The appeal filed by the Revenue was dismissed. The Delhi High Court held that no substantial question of law arose from the ITAT’s order and upheld the exclusion of the four companies as comparables for transfer pricing purposes.

Link to download order - https://www.mytaxexpert.co.in/uploads/1769857293_THEPR.COMMISSIONEROFINCOMETAX3VsFLUORDANIELINDIAPVT.LTD..pdf

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