Transfer Pricing-Assessee's Objections On 'Functional Dissimilarity' Not Adjudicated: Delhi HC Asks TPO To Determine Comparable Entity Afresh

The Delhi High Court recently directed a Transfer Pricing Officer to determine afresh the inclusion of a comparable entity with respect to an assessee, this time taking into consideration the latter's objections on 'functional dissimilarity' of the two. A division bench of Justices Vibhu Bakhru and Swarana Kanta Sharma ruled, “Assessee's contention that E4e Healthcare is functionally dissimilar to the assessee and therefore, could not be included as a comparable, has not been considered by any authority…Accordingly, the matter is restored before the learned TPO, to the limited extent, to examine the inclusion of E4e Healthcare as a comparable entity.” As held by the High Court on earlier occasions, for purposes of benchmarking international transactions, there must be similarity of functional filters, product homogeneity and business model, in order to arrive at a suitable comparable entity, for determination of arm's length price. At the outset, the High Court noted that the very fundamental premise on which the TPO and DRP had proceeded, that the Assessee had raised an objection regarding the employee cost filter, was incorrect. It then proceeded to observe that before the ITAT, the Assessee raised a specific ground that E4e Healthcare was not functionally comparable since it was providing diverse services like software development, end-to-end solutions to the healthcare industry, etc.- in the nature of IT services and KPO services apart from IT enabled services.