When can an entity be excluded from the list of comparables?

Last updated: 10 November 2021

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This Income Tax Appellate Tribunal case discusses the exclusion of a comparable entity from a list used for benchmarking. The Tribunal noted that the comparable entity reported an abnormally high profit of 72.45%, which deviates significantly from market averages. Guidelines from the OECD and Transfer Pricing studies suggest that entities with abnormal profits or losses should not be considered for benchmarking. Furthermore, there were differences in the business activities between the comparable and the assessee, strengthening the case for exclusion.

Court :
ITAT Delhi

Brief :
The present appeal has been f i led by the Revenue against the order of the ld. CIT(A)-44, New Delhi dated 24.11.2017.

Citation :
ITA No. 1076/Del/2018 : Asstt. Year : 2013-14

IN THE INCOME TAX APPELLATE TRIBUNAL
DELHI BENCH ‘I-1’, NEW DELHI
Before Ms. Suchitra Kamble, Judicial Member
Dr. B. R. R. Kumar, Accountant Member
(Through Video Conferencing)
ITA No. 1076/Del/2018 : Asstt. Year : 2013-14

ACIT,
Circle-6(1),
New Delhi

M/s CH2M Hill India Pvt. Ltd.,
604, Shakuntla Building, 59, Nehru
Place, New Delhi-110019

Assessee by : Sh. Ajit Jain, CA
Revenue by : Sh. Arun Kumar Yadav, Sr. DR
Date of Hearing: 10.08.2021

Date of Pronouncement: 01.11.2021

ORDER

The present appeal has been f i led by the Revenue against the order of the ld. CIT(A)-44, New Delhi dated 24.11.2017.

2. Straight to the issue: The comparable in dispute had a prof it of 72.45% which is abnormally with the market averages. The OECD guidelines and the TP studies have inbuilt provisions that abnormal profit as well as loss may not be considered for the purpose of benchmarking. Further, we find that the comparable is engaged in the business of rendering Engineering Consultancy Services including mining, project construction management, environment management and logistics whereas the assessee is primarily engaged in the Engineering technical Consultancy in the areas of water, waste management, infrastructure, oi l & gas management.

3. In the result, the appeal of the Revenue is dismissed.
Order Pronounced in the Open Court on 01/11/2021.

Please find attached the enclosed file for the full judgement

FAQ :

An entity can be excluded if it reports abnormally high profits or losses, as indicated by OECD guidelines and Transfer Pricing studies. Differences in business activities between the comparable and the assessee can also be grounds for exclusion.

The disputed comparable entity reported a profit of 72.45%.

Yes, OECD guidelines and Transfer Pricing studies include provisions that abnormal profits as well as losses may not be considered for the purpose of benchmarking.

The assessee was primarily engaged in engineering technical consultancy in the areas of water, waste management, infrastructure, and oil & gas management.

The comparable entity was engaged in rendering engineering consultancy services including mining, project construction management, environment management, and logistics.