Appellate Tribunal's direction on Transfer Pricing adjustments and comparables selection

The Appellate Tribunal directed the Assessing Officer to recalculate Transfer Pricing adjustments considering only Persistent Systems Ltd. and Evoke Technologies Pvt. Ltd. The Tribunal advised accepting the Assessee's adjustment if it is lower than the recalculated amount. The Assessee's appeal was partially allowed in the case concerning Transfer Pricing adjustments and the selection of comparables.

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Issues:
Transfer Pricing adjustments made by the Transfer Pricing Officer (TPO) as modified by the Dispute Resolution Panel (DRP).

Detailed Analysis:

Issue 1: Transfer Pricing Adjustments
The appeal by the Assessee was against the order of the Assessing Officer (AO) under section 143(3) r.w.s. 144C(1) of the Income Tax Act regarding Transfer Pricing adjustments. The Assessee provided software design and development services to an Associated Enterprise (AE) and reimbursement of expenses. The Assessee disclosed an Operating Profit/Operating Cost (OP/OC) at 12.78% and provided a Transfer Pricing (TP) report with 12 comparable companies. The TPO modified the computation of PLI to 5.5%, leading to an adjustment of Rs. 2,21,03,914. The DRP further enhanced the adjustment to Rs. 2,92,71,639 by excluding certain comparables.

Issue 2: Selection of Comparables
The Assessee objected to the selection of comparables before the DRP, which excluded ten companies objected by the Assessee. After exclusion, only three comparables survived, namely Persistent Systems Ltd., Persistent Systems and Solutions Ltd., and Sasken Communication Technologies Ltd. The Assessee contested the exclusion of Persistent Systems Ltd. and Sasken Communication Technologies Ltd. based on functional dissimilarities and lack of segmental details.

Issue 3: Inclusion of Evoke Technologies Pvt. Ltd.
The Assessee argued for the inclusion of Evoke Technologies Pvt. Ltd. as a comparable company, emphasizing its functional comparability and normal business cycle expenditure increase. The DRP excluded Evoke Technologies Pvt. Ltd. due to abnormally low margins influenced by peculiar economic circumstances. However, the Tribunal found Evoke Technologies Pvt. Ltd. functionally similar to the Assessee and lacking peculiar economic circumstances, thus directing the AO to re-work the adjustment considering only Persistent Systems Ltd. and Evoke Technologies Pvt. Ltd.

Conclusion
The Tribunal allowed the Assessee's grounds, directing the AO to re-calculate the adjustment by considering only two companies, Persistent Systems Ltd. and Evoke Technologies Pvt. Ltd. The Tribunal advised accepting the suo motto adjustment made by the Assessee if the addition is less than the adjustment. Ultimately, the Assessee's appeal was partly allowed.

This comprehensive analysis covers the issues related to Transfer Pricing adjustments, selection of comparables, and the inclusion of Evoke Technologies Pvt. Ltd. in the judgment delivered by the Appellate Tribunal ITAT Hyderabad.

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