Tribunal excludes comparables, adjusts Profit Level Indicator, partially allows revenue appeal.

The Tribunal upheld the exclusion of Bharat Electronics Ltd., MIC Electronics Ltd., and Bharat Heavy Electricals Ltd. as comparables under the TNMM method due to functional and size disparities. Additionally, the Tribunal directed the reconsideration of the Profit Level Indicator by excluding depreciation from operating expenses, in line with judicial precedents. The appeal by the revenue was partly allowed for statistical purposes.

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Issues Involved:
1. Exclusion of Bharat Electronics Ltd., MIC Electronics Ltd., and Bharat Heavy Electricals Ltd. as comparables under the TNMM method.
2. Inclusion of depreciation as part of operating expenses for determining the Profit Level Indicator (PLI).

Issue-wise Detailed Analysis:

1. Exclusion of Bharat Electronics Ltd., MIC Electronics Ltd., and Bharat Heavy Electricals Ltd. as comparables:

The revenue challenged the decision of the Dispute Resolution Panel (DRP) to exclude Bharat Electronics Ltd., MIC Electronics Ltd., and Bharat Heavy Electricals Ltd. as comparables for the assessee under the Transactional Net Margin Method (TNMM). The DRP had excluded these companies on the grounds of functional differences and size disparities. Specifically, the DRP noted that Bharat Electronics Ltd. manufactures radar communication equipment and other advanced systems for defense use, which are not comparable to the Frequency Control Products (FCP) manufactured by the assessee. Additionally, Bharat Heavy Electricals Ltd. is engaged in the manufacture of power station equipment and other diverse activities, making it significantly different from the assessee's business. MIC Electronics Ltd. was also considered functionally different due to its involvement in LED display systems and other unrelated products. The Tribunal upheld the DRP’s decision, agreeing that the functional differences and size disparities justified the exclusion of these companies as comparables.

2. Inclusion of depreciation as part of operating expenses for determining the Profit Level Indicator (PLI):

The revenue also contested the DRP’s decision to exclude depreciation from operating expenses when determining the PLI. The DRP had agreed with the assessee’s submission that depreciation should not be considered as part of operating expenses, citing substantial variations in the method of charging depreciation between the assessee and the comparable companies. The DRP referenced the decision of the Andhra Pradesh and Telangana High Court in the case of BA Continuum India Pvt. Ltd., which supported the exclusion of depreciation to arrive at a correct comparability. The Tribunal reviewed the submissions and the relevant case law, including decisions in Honeywell Technology Solutions Lab v. DCIT and 24/7 Customer.com (P.) Ltd. v. Dy. CIT, which supported the view that differences in depreciation methods impact operating profits. Consequently, the Tribunal directed the Assessing Officer (AO) and the Transfer Pricing Officer (TPO) to reconsider the determination of PLI by excluding depreciation, in line with the cited precedents.

Conclusion:

The Tribunal upheld the DRP’s decision to exclude Bharat Electronics Ltd., MIC Electronics Ltd., and Bharat Heavy Electricals Ltd. as comparables due to functional differences and size disparities. Additionally, the Tribunal directed the AO/TPO to reconsider the determination of PLI by excluding depreciation from operating expenses, following established judicial precedents. The appeal by the revenue was thus partly allowed for statistical purposes.

Pronouncement:

The judgment was pronounced in the open court on July 20, 2018.

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