Comparable With Unreliable Financials to Be Excluded in TP Case | ITAT

Case Details: Asst. Commissioner of Income-tax vs. Danfoss Industries (P.) Ltd. - [2026] 186 taxmann.com 468 (Chennai-Trib.)

Judiciary and Counsel Details

• Aby T. Varkey, Judicial Member & Ms Padmavathy. S, Accountant Member
• C. P. Solomon, JCIT for the Appellant.
• Vikram Vijayaraghavan, Adv. for the Respondent.

Facts of the Case

The assessee is a private limited company engaged in the business of purchase and sale of a wide variety of equipment of refrigeration and AC, CLT Drivers, Industries automation, and quarter control industries. The assessee’s segments of operation are classified as:

(a) Distribution segment

(b) Contract manufacturing segment

(c) EDS segment.

For the relevant assessment year, the assessee filed its return of income. Since the assessee had international transactions, the Assessing Officer (AO) referred the matter to the Transfer Pricing Officer (TPO) to determine the Arm’s Length Price (ALP) for the international transactions. TPO proposed an adjustment in the EDS segment to the tune of Rs. 2,98,96,842 and also made downward adjustment of Rs. 7,92,08,336 by computing the ALP of the support services received by the assessee at Rs. Nil.

Aggrieved by the order, the assessee preferred an appeal to the CIT(A). The CIT(A) deleted the entire TP-adjustment. Aggrieved by the order, the department preferred an appeal to the Chennai Tribunal.

ITAT Held

The Tribunal held that, during the proceedings, the TPO did not allow the working capital and risk adjustment made by the assessee and initiated a fresh search for comparables. The TPO selected the following comparables to arrive at a margin of 27.90%.

The company’s financial results have shown significant fluctuations from FY 2010-11 to 2014-15, and SEBI has found irregularities in the company’s financials.

In the Tribunal’s view, when a financial irregularity is committed, the financial results declared by the company, including its margins, cannot be relied upon.

Further, the Coordinate Benches of the Tribunal have consistently directed the TPO to exclude the comparable on the ground that, when funds are fraudulently diverted to non-business purposes, it will have a significant impact on operating margins.