TP: Companies with lower turnover can also be considered if they are functionally comparable – Delhi ITAT

Nortel Networks India (P.) Ltd. v Addln CIT [ITA No 4765 (DELHI) OF 2011 & 427 (DELHI) OF 2013 dated 25.02.2014] – Delhi ITAT


Assessee entered into a service agreement for the provision of marketing and after sales support services on a cost plus mark-up basis. By this agreement, assessee provides marketing and after sales support services to AEs in relation to sale of telecommunication equipments, software and other IT products to customers in India. The assessee considered TNMM as the most appropriate method and has benchmarked the transaction taking Operating profit/ Operating cost (“OP/OC”) as PLI.  TPO though accepted assessee’s TNMM method as appropriate method for the ALP, however reworked the same by applying inapplicable comparables as under:

In its transfer pricing analysis, the assessee has considered seven comparable companies, whose average unadjusted margin comes to 11.57%, TPO held two out of seven as not comparable. The Capital Trust Limited was held as not a comparable because of low revenue as and Cyber Media Events Limited because of related party transaction exceeding 25% and having diminishing revenue. DRP upheld TPOs order on the ground that the turnover of the comparable in the relevant segment is Rs. 25 Lakh and cannot be compared with the company whose revenue from business support services is more than Rs. 134 Crores. 

Assessee’s contentions:

  • Low Turnover will not make accounts unreliable. 
  • A risk mitigated contract service provider, like the assessee, is not dependent on scale or size of operations. Therefore, a turnover criterion should not be applicable in the case of the Assessee which operates on a cost plus pricing model.
  • The management of the Capital Trust Limited considers the foreign consultancy segment as a significant and separate business activity and the same has been considered by the Assessee for the purpose of the analysis.


  • A company cannot be excluded from the comparables merely for the reason of having low turnover
  • It is to be appreciated that no turnover filter was applied by either of the parties
  • The comparable has been excluded because the total turnover of this comparable is Rs. 13.92 crores. The analysis needs to be carried out on the basis of functional profile and not on an arbitrary or adhoc criteria.

Other issues:

Lack of Functional compariblity for AY 08-09: In view of fact that some of comparables selected by TPO were engineering companies providing end to end solutions and, thus, there being functional difference, impugned adjustment was to be set aside and matter was to be remanded back for disposal afresh.

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