Tribunal remits ALP computation, excludes Infosys & Mphasis from comparables for significant differences

The Tribunal allowed the appeal for statistical purposes, remitting the matter to the TPO for a fresh computation of the ALP of international transactions, excluding Infosys Technologies Limited and Mphasis BFL Limited from the comparables list due to significant differences, particularly in size, functional profile, services offered, and nature of services. The decision was pronounced on 23rd April 2014.

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Issues:
Transfer pricing adjustment based on international transactions reported by the assessee under TNMM method with OP/OC PLI - Inclusion of Infosys Technologies Limited and Mphasis BFL Limited in the list of comparables.

Analysis:
The appeal pertains to transfer pricing adjustment made by the Assessing Officer under Section 143(3) read with Section 144C of the Income-tax Act, 1961 for the assessment year 2006-07. The assessee, a subsidiary of Lucent Inc., reported international transactions involving Software Development Services and Administrative Support Services totaling Rs. 285,80,89,000. The assessee followed the TNMM method with OP/OC PLI to benchmark its transactions. The TPO rejected multiple year data and selected eight comparables, resulting in a transfer pricing adjustment of Rs. 24,23,12,445. The DRP upheld the TPO's order, leading to the inclusion of Infosys Technologies Limited and Mphasis BFL Limited in the comparables list, against which the assessee appealed.

The Tribunal considered the arguments presented by both parties. Regarding Infosys Technologies Limited, the assessee contended that significant differences existed in size, functional profile, assets, and risks compared to the assessee. The Tribunal noted the substantial differences between the companies, such as revenue, services offered, ownership of proprietary products, and expenditure on advertising and R&D. Citing the judgment in a similar case, the Tribunal held that Infosys Technologies Limited should be excluded from comparables. The matter was remitted to the AO/TPO for further evaluation.

Concerning Mphasis BFL Limited, the AR argued for its exclusion due to differences in the nature of services offered. The Tribunal acknowledged the points raised and decided to set aside the order, directing the AO/TPO to reevaluate the comparability of Mphasis BFL Limited with the assessee.

As the AR focused solely on justifying the exclusion of these two cases, the Tribunal did not address other grounds raised in the appeal. The Tribunal ultimately set aside the order and remitted the matter to the TPO for a fresh computation of the ALP of international transactions in light of the discussion.

In conclusion, the appeal was allowed for statistical purposes, and the decision was pronounced on 23rd April, 2014.

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