Tribunal adjusts Arm's Length Price methodology, excludes outliers and adopts PBDIT as Profit Level Indicator

The Tribunal partly allowed the appeal, directing the Assessing Officer to re-calculate the Arm's Length Price by excluding companies with extraordinarily high profits or losses and considering appropriate adjustments for differences in business functions and risks. The Tribunal also instructed the use of Profit Before Depreciation and Tax (PBDIT) as the Profit Level Indicator for determining the Arm's Length Price.

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Issues Involved:
1. Determination of arm's length price (ALP)
2. Selection of comparable companies
3. Use of non-contemporaneous data
4. Non-allowance of appropriate adjustments to comparable companies
5. Variation of 5% from the arithmetic mean

Detailed Analysis:

1. Determination of Arm's Length Price (ALP):
The primary issue raised by the assessee was the addition of Rs. 3,21,54,200 under section 92CA of the Income Tax Act, 1961, to the Information Technology Enabled Services (ITES) rendered to its Associated Enterprises (AEs). The assessee argued that the CIT(A) erred in confirming this addition without considering the objections filed. The Tribunal directed the Assessing Officer (AO) to re-calculate the ALP, considering that companies with extraordinarily high profit or loss should be excluded as comparables.

2. Selection of Comparable Companies:
The assessee contended that the Transfer Pricing Officer (TPO) and CIT(A) erred in rejecting loss-making companies and selecting high profit margin companies, which led to an inconsistent approach. The Tribunal agreed with the assessee, citing precedents such as Dy. CIT v. Quark Systems (P.) Ltd. and Teva India (P.) Ltd. v. Dy. CIT, which held that a comparable could not be excluded solely on the ground of losses. The Tribunal directed the AO to exclude companies with extraordinarily high profits or losses from the list of comparables.

3. Use of Non-Contemporaneous Data:
The assessee argued that the TPO used non-contemporaneous data for benchmarking analysis, which was not in accordance with Rule 10B(4) of the Income Tax Rules. However, this ground was not pressed by the assessee during the hearing and was subsequently dismissed.

4. Non-Allowance of Appropriate Adjustments to Comparable Companies:
The assessee claimed that the TPO and CIT(A) failed to allow adjustments for differences in business functions and risks assumed by the assessee vis-`a-vis comparables. Specifically, the assessee argued that Vishal Information Technologies Limited should be excluded as a comparable due to its significantly lower salary cost percentage, indicating a different functional profile. The Tribunal agreed, directing the AO to exclude Vishal Information Technologies from the list of comparables.

5. Variation of 5% from the Arithmetic Mean:
The assessee argued that the TPO denied the benefit of a 5% variation from the arithmetic mean as provided in the proviso to Section 92C(2) of the Act. However, this ground was not pressed by the assessee during the hearing and was subsequently dismissed.

Separate Judgments Delivered:
There was no mention of separate judgments delivered by the judges in this case.

Conclusion:
The Tribunal partly allowed the appeal, directing the AO to re-calculate the ALP by excluding companies with extraordinarily high profits or losses and by considering appropriate adjustments for differences in business functions and risks. The Tribunal also directed the AO to use the Profit Before Depreciation and Tax (PBDIT) as the Profit Level Indicator (PLI) for determining the ALP.

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