ITAT Delhi Rejects Database Error-Based Comparable Exclusion in Transfer Pricing Case

The Delhi Bench of the Income Tax Appellate Tribunal (ITAT) held that a Transfer Pricing Officer (TPO) cannot mechanically reject a comparable company merely on the basis of database entries without verifying the actual audited financial statements. The Tribunal restored the issue relating to exclusion of M/s Cyber Media Research & Services Limited to the file of the TPO for fresh examination in the case of Intercontinental Hotels Group (India) Private Limited for AY 2018-19.

The dispute arose during transfer pricing proceedings where the assessee had selected Cyber Media Research & Services Limited as a comparable for benchmarking its international transactions. However, the TPO rejected the comparable on the grounds that the company was a loss-making entity, relying upon a database entry reflecting losses of Rs  41.51 lakh.

The Dispute Resolution Panel (DRP) also upheld the exclusion of the comparable. Aggrieved by the action of the tax authorities, the assessee approached the Tribunal.

Before the ITAT, the assessee submitted audited profit and loss accounts of Cyber Media Research & Services Limited, demonstrating that the company was consistently earning profits during the relevant financial year as well as preceding years. It was contended that the rejection was based solely on an incorrect database extraction without examining the actual financial statements.

The Tribunal examined the audited financial records placed before it and observed that the company was, in fact, a profit-making concern actively carrying on business operations during the relevant period. “The profit and loss accounts clearly indicated that the comparable company was earning profits and was not a persistent loss-making concern.”

The Bench held that the TPO had erred in mechanically relying upon a database line-item without undertaking proper factual verification from the audited accounts. It was observed that transfer pricing analysis requires examination of actual financial data and cannot be decided merely on the basis of unverified database entries.

The Tribunal further noted that exclusion of a comparable on incorrect factual assumptions would adversely affect the determination of the arm’s-length price and therefore required reconsideration. “The TPO cannot blindly rely upon database entries while ignoring audited financial statements placed on record by the assessee.”

Thus, the ITAT set aside the exclusion of Cyber Media Research & Services Ltd. and restored the matter to the file of the TPO for fresh adjudication after proper factual verification and after granting adequate opportunity of hearing to the assessee. The appeal was accordingly allowed for statistical purposes in favour of the assessee.

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