TPO directed to exclude Infosys from comparables list in Transfer Pricing analysis. Adjustments for accurate Arm's Length Price

The Tribunal partly allowed the appeals by directing the TPO to exclude Infosys from the list of comparables for Transfer Pricing analysis. Additionally, the Tribunal instructed to adjust segmental results by excluding non-operating expenses like goodwill amortization and eliminate foreign exchange fluctuation losses from operating expenses in the segmental reporting for TP analysis. These directions aim to ensure a more accurate determination of the Arm's Length Price, taking into account the specific circumstances and financial reporting practices of the assessee.

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Issues Involved:
1. Inclusion of Infosys as a comparable company for Transfer Pricing (TP) analysis.
2. Adjustment of amortization of goodwill in the segmental results for TP purposes.
3. Treatment of foreign exchange fluctuation losses in the segmental reporting for TP analysis.

Issue-wise Detailed Analysis:

1. Inclusion of Infosys as a Comparable Company for Transfer Pricing Analysis:
The assessee contested the inclusion of Infosys Ltd. as a comparable company by the Transfer Pricing Officer (TPO). The TPO included Infosys, Wipro Technologies Ltd (segmental), and E-Zest Solutions Limited as comparables, resulting in an arithmetic mean margin of 22.72%, significantly higher than the assessee's margin of 12%. The assessee argued that Infosys, with a turnover of Rs. 25,385 crores, was not comparable due to its significantly larger size, different functions, risks, and assets. The Dispute Resolution Panel (DRP) had previously excluded Infosys in similar cases for subsequent assessment years. The Tribunal agreed with the assessee, citing consistent ITAT and court rulings that size and turnover are crucial for comparability. Thus, the Tribunal directed the TPO to exclude Infosys from the list of comparables and rework the Arm's Length Price (ALP) benchmark.

2. Adjustment of Amortization of Goodwill in the Segmental Results for TP Purposes:
The assessee claimed amortization of goodwill amounting to Rs. 45,51,139 during the year, which was disallowed in the computation of income for tax purposes. The TPO included this amortization as part of the operating expenses in the segmental results for the TP study. The assessee argued that non-operating expenses like goodwill amortization should not be included in the operating cost for TP analysis. The Tribunal noted that the amortization of goodwill is not an operating expense and should be excluded from the segmental operating cost. The Tribunal directed the TPO to allocate unallocated expenses based on the ratio of segmental revenue and exclude non-operating expenses like goodwill amortization while determining the operating profit for the TP study.

3. Treatment of Foreign Exchange Fluctuation Losses in the Segmental Reporting for TP Analysis:
The assessee reported foreign exchange fluctuation losses in its segmental results, which were later voluntarily disallowed in the computation of taxable income. The assessee argued that these losses, being non-operating expenses, should be excluded from the operating cost for TP purposes. The Tribunal observed that the forex losses were initially included in the segmental reporting as operating expenses but were subsequently disallowed in the tax computation. The Tribunal agreed with the assessee that these losses should be eliminated from the operating expenses in the segmental results. The Tribunal directed the TPO to exclude the forex losses from the operating expenses and rework the segmental operating profit accordingly.

Conclusion:
The appeals were partly allowed, with the Tribunal directing the TPO to exclude Infosys from the list of comparables, adjust the segmental results by excluding non-operating expenses like goodwill amortization, and eliminate forex losses from the operating expenses in the segmental reporting for TP analysis. The Tribunal's directions aim to ensure a more accurate and fair determination of the ALP, considering the specific circumstances and financial reporting practices of the assessee.

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