Tribunal directs exclusion of comparables, working capital adjustment, leaves Most Appropriate Method open for future adjudication.

M/s. Atlas Healthcare Software India Pvt. Ltd. Versus. ACIT, Circle-2 (1), Kolkata.

M/s. Atlas Healthcare Software India Pvt. Ltd. Versus. ACIT, Circle-2 (1), Kolkata. - TMI Issues:
Transfer pricing adjustment based on TNMM method, selection of comparables, exclusion of certain companies from the list of comparables, working capital adjustment.

Transfer Pricing Adjustment based on TNMM Method:
The appellant, engaged in software development services, appealed against a transfer pricing adjustment made by the Assessing Officer using the Transactional Net Margin Method (TNMM). The appellant argued that the Comparable Uncontrolled Price Method (CUP) should be the Most Appropriate Method (MAM). The appellant requested the issue of MAM to be open for adjudication in a future year. The appellant also contended that if certain comparable companies were excluded and Working Capital Adjustment provided, the Arm's Length Price (ALP) would fall within the acceptable margin range.

Selection of Comparables:
The appellant challenged the selection of comparables by the Transfer Pricing Officer (TPO) and proposed excluding certain companies. The appellant argued for the exclusion of companies like Axit IT & T Limited, Zylog Systems (India) Limited, E-Infochips Limited, Thirdware Solutions Limited, and Infinite Computer Solutions (India) Limited due to functional differences and lack of comparability. The appellant cited previous tribunal decisions to support the exclusion of these companies.

Exclusion of Certain Companies from List of Comparables:
The Tribunal examined each company proposed for exclusion by the appellant. Following previous tribunal decisions and considering the functional differences and lack of comparability, the Tribunal directed the exclusion of Axit IT & T Limited, Zylog Systems (India) Limited, E-Infochips Bangalore Ltd., Thirdware Solutions Ltd., and Infinite Computer Solutions (India) Ltd. from the list of comparable companies.

Working Capital Adjustment:
The Dispute Resolution Panel (DRP) directed the Assessing Officer (AO)/TPO to provide the benefit of working capital adjustment to the assessee. However, it was noted that the AO/TPO did not implement this direction. The Tribunal emphasized that the DRP's direction is binding on the TPO and directed the TPO to implement the working capital adjustment as directed. The appeal was partly allowed on this ground for statistical purposes.

In conclusion, the Tribunal partially allowed the appellant's appeal, directing the exclusion of certain companies from the list of comparables and instructing the TPO to implement the working capital adjustment as directed by the DRP. The issue of the Most Appropriate Method for determining the Arm's Length Price was left open for adjudication in a future year.