Tribunal excludes companies from comparables list in Transfer Pricing Adjustment.

The Tribunal partially allowed the appeal by directing the exclusion of certain companies from the list of comparables used for Transfer Pricing Adjustment. Three companies, namely Infosys Ltd., Larsen & Toubro Infotech Ltd., and Persistent Systems Ltd., were found not functionally comparable to the appellant, leading to their exclusion. Genesys International Corporation Ltd. was also excluded due to its engagement in GIS-based services instead of software development services. The Tribunal instructed the Transfer Pricing Officer to recalculate the average arithmetic mean of the remaining comparables and make the necessary adjustments within the permissible range.

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Issues:
Transfer Pricing Adjustment - Exclusion of Comparable Companies

Analysis:
1. The appellant, a company providing Software Development Services and IT Enabled Services to its holding company, was involved in an international transaction. The Transfer Pricing Officer (TPO) determined the Arm's Length Price (ALP) using the Transaction Net Margin Method (TNMM) with Operating Profit/Total Cost (OP/TC) as the profit level indicator.

2. The TPO selected 10 comparable companies for comparison, resulting in an average mark-up of 22.63%. The TPO's ALP calculation led to an adjustment of Rs. 1,40,06,512 in the appellant's income, which was added by the Assessing Officer (AO).

3. The Disputes Resolution Panel (DRP) directed the exclusion of certain companies from the list of comparables. The appellant challenged the inclusion of four companies, arguing for their exclusion based on functional comparability. The Tribunal referred to a similar case and excluded three companies, namely Infosys Ltd., Larsen & Toubro Infotech Ltd., and Persistent Systems Ltd., from the list of comparables.

4. The Tribunal found that these companies were not functionally comparable to the appellant based on their business profiles and activities. The exclusion was in line with previous decisions and the provisions of Rule 10B(2) of the Income Tax Rules, 1962.

5. Additionally, the appellant sought the exclusion of Genesys International Corporation Ltd. The Tribunal determined that Genesys was not engaged in software development services but in GIS-based services, leading to its exclusion from the list of comparables.

6. The Tribunal directed the TPO to exclude the mentioned companies, recalculate the average arithmetic mean of the remaining comparables, and apply the appropriate adjustment within the permissible range. The appeal was partly allowed, and the decision was pronounced on December 21, 2018.

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