TPO cannot aggregate different business segments for transfer pricing without proper justification, ITAT rules

ITAT Bangalore ruled on transfer pricing adjustment for software development services and IT-enabled services provided by assessee to associated enterprises. The TPO had aggregated both segments despite different functions performed. ITAT found TPO's reasoning for aggregation unjustifiable and remanded the matter back to TPO/AO for fresh consideration. The authorities were directed to recompute arm's length price margins independently for each segment based on specific functions performed, ensuring proper opportunity of hearing to the assessee.

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Issues Involved:
1. Aggregation of ITeS and SWD Segments.
2. Rejection and Inclusion of Comparables for Transfer Pricing.
3. Transfer Pricing Adjustment and ALP Computation.
4. Penalty Proceedings and Interest Levy.

Summary:

Aggregation of ITeS and SWD Segments:
The assessee argued that the ITeS segment, introduced in FY 2015-16, should not be aggregated with the SWD segment as they are functionally different. The Tribunal found that the functions performed under both segments were distinct and remanded the issue back to the Ld.TPO/AO for a fresh examination. The AO/TPO is directed to recompute the ALP margin independently for each segment based on their specific functions.

Rejection and Inclusion of Comparables for Transfer Pricing:
The Tribunal noted that the Ld.CIT(A) had accepted the exclusion of certain comparables like Infosys Ltd., Aspire Systems India Pvt. Ltd., and Persistent Systems Ltd. However, the Tribunal remanded the issue of comparables back to the Ld.AO/TPO for fresh consideration, as the aggregation of transactions was also remanded.

Transfer Pricing Adjustment and ALP Computation:
The Ld.TPO had aggregated the ITeS and SWD segments and selected 14 comparables, leading to a significant adjustment. The Tribunal found the aggregation unjustifiable and remanded the issue back to the Ld.TPO/AO for independent computation of ALP margins for each segment.

Penalty Proceedings and Interest Levy:
The Tribunal did not adjudicate on the penalty proceedings under Section 271(1)(c) and interest levied under Sections 234B and 234C, as these were consequential in nature.

Conclusion:
The appeal filed by the assessee was partly allowed for statistical purposes, and the appeal filed by the revenue was dismissed. The Tribunal remanded the issues concerning the aggregation of segments and selection of comparables back to the Ld.TPO/AO for fresh consideration.

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