Tribunal directs Transfer Pricing Officer to re-evaluate adjustments for accurate comparables

The tribunal partly allowed the assessee's appeal, directing the Transfer Pricing Officer (TPO) to re-evaluate the working capital adjustment and recompute the margins for the comparables. The tribunal emphasized the importance of accurate adjustments and functional comparability in transfer pricing analysis. The TPO was instructed to allow the working capital adjustment as per the directions for the assessment year 2009-10 and to correctly apply the employee cost filter for comparables, including Ancent Software International Ltd. The TPO was also directed to exclude only direct expenses attributable to rental income for Softsol India Ltd.

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Issues Involved:
1. Working Capital Adjustment
2. Inclusion/Exclusion of Comparables
3. Computation of Margins for Softsol India Ltd.

Detailed Analysis:

1. Working Capital Adjustment:
The main objection by the TPO was the lack of segmented financials for trade creditors and debtors specific to the IT support services segment. The DRP also rejected the adjustment due to the unavailability of daily average working capital data. However, the tribunal noted that segmental details were available and that the average working capital deployment could be computed using opening and closing balances. The tribunal directed the TPO to allow the working capital adjustment as per the DRP's directions for AY 2009-10.

2. Inclusion/Exclusion of Comparables:
- CG VAK Software & Exports Ltd.:
The TPO excluded this comparable due to employee compensation being less than 25%. The DRP upheld this, noting the absence of a specific 'salary cost' line item. However, the tribunal found that 'cost of services' primarily referred to employee costs, including contributions to PF, ESI, gratuity, and ex-gratia payments. The tribunal directed the TPO to reapply the employee cost filter correctly and include the comparable if the employee cost exceeded 25%.

- Ancent Software International Ltd.:
The TPO excluded this comparable due to a turnover of less than Rs. 1 crore. The tribunal referenced the Delhi High Court's decision in Chryscapital Investment Advisors (India) Pvt. Ltd., which held that turnover filter is not appropriate. The tribunal directed the inclusion of this comparable, noting no adverse comments on functional analysis by the lower authorities.

- Softsol India Ltd.:
The DRP increased the margin from 14.95% to 25.58%, based on the JCIT's computation, which included incorrect depreciation figures. The tribunal found the basis for attributing expenses to rental income unclear and directed the TPO to exclude only the direct expenses attributable to rental income (Rs. 23,37,991) and recompute the margins.

3. Computation of Margins for Softsol India Ltd.:
The tribunal noted discrepancies in the figures adopted for depreciation and the lack of a clear basis for attributing expenses to rental income. The tribunal directed the TPO to exclude only the direct expenses attributable to rental income and recompute the margins accordingly.

Conclusion:
The assessee's appeal was partly allowed for statistical purposes, with directions to the TPO to re-evaluate the working capital adjustment and recompute the margins for the comparables as per the tribunal's findings. The tribunal emphasized the need for accurate adjustments and functional comparability in the transfer pricing analysis.

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