Tribunal directs TPO to exclude contested comparables in transfer pricing appeal

The Tribunal allowed the appeal, directing the Transfer Pricing Officer (TPO) to exclude four contested comparable companies and to re-examine the Profit Level Indicator (PLI) for the assessee's international transactions. The disputed comparables, including E-Infochips Bangalore Ltd., Kals Information Systems Ltd., Tata Elxsi Ltd., and L & T Infotech Ltd., were deemed incomparable due to functional differences and lack of segmental data. The Tribunal's decision favored the assessee, with the order pronounced in open court on 08.01.2016.

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Issues Involved:

1. Transfer Pricing Adjustment
2. Selection of Comparable Companies

Detailed Analysis:

1. Transfer Pricing Adjustment:

The appeal concerns the transfer pricing adjustment made by the Assessing Officer (AO) and Transfer Pricing Officer (TPO) under section 143(3) read with section 144C(5) of the I.T. Act, following the directions given by the Dispute Resolution Panel (DRP). The primary issue is the inclusion and rejection of certain comparable companies in the determination of the Arm's Length Price (ALP) for the assessee's international transactions.

2. Selection of Comparable Companies:

a. E-Infochips Bangalore Ltd.:

The assessee objected to the inclusion of E-Infochips Bangalore Ltd., arguing that the company is functionally different, engaged in both software development services and ITES, and lacks segmental information. The TPO included it based on later year's annual report, despite the absence of public domain information for FY 2009-10. The Tribunal found that the company is not comparable due to its engagement in multiple segments and lack of segmental data, directing its exclusion from the comparables.

b. Kals Information Systems Ltd.:

The assessee contended that Kals Information Systems Ltd. is engaged in the development of software and software products, making it functionally different. The TPO included it based on its classification as a software development service provider. The Tribunal noted that the company's activities and inventories indicate it is engaged in software product development, thus not comparable to the assessee. Consequently, the Tribunal directed the exclusion of this company.

c. Tata Elxsi Ltd. (Seg.):

The assessee argued that Tata Elxsi Ltd. specializes in embedded software development and has multiple segments, making it functionally different. The TPO included it based on its revenue from software development services. The Tribunal, referencing previous ITAT decisions, found that the company's complex activities and lack of segmental data make it incomparable. The Tribunal directed the exclusion of Tata Elxsi Ltd. from the comparables.

d. L & T Infotech Ltd.:

The assessee objected to L & T Infotech Ltd. on grounds of functional dissimilarity and lack of segmental information. The TPO included it based on its software development services revenue. The Tribunal, considering the DRP's exclusion of this company in a similar case (M/s. Sumtotal Systems India Pvt. Ltd.), found that the absence of segmental details and the mixed nature of its revenues render it incomparable. The Tribunal directed the exclusion of L & T Infotech Ltd. from the comparables.

Conclusion:

The Tribunal allowed the appeal, directing the TPO to exclude the four contested comparables (E-Infochips Bangalore Ltd., Kals Information Systems Ltd., Tata Elxsi Ltd., and L & T Infotech Ltd.) and to re-examine whether the Profit Level Indicator (PLI) determined is within the permissible range under section 92C(2) of the Act. The appeal of the assessee was thus allowed, and the order was pronounced in open court on 08.01.2016.

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