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Issues: (i) Whether working capital adjustment in transfer pricing computation was to be granted on the basis of standalone segmental data of the assessee's India branch; (ii) whether the comparables selected for the software development services and IT enabled services segments were functionally comparable; (iii) whether deduction under section 10A was allowable to the branch on transfer of software to its foreign head office.
Issue (i): Whether working capital adjustment in transfer pricing computation was to be granted on the basis of standalone segmental data of the assessee's India branch.
Analysis: The directions of the Dispute Resolution Panel required working capital differences to be neutralised, subject to reasonably accurate payables and receivables data. The adjustment had to be computed on the relevant standalone balances of the India branch, not on consolidated figures including other project offices. The matter therefore required fresh computation on the correct segmental basis after giving the assessee an opportunity of being heard.
Conclusion: The issue was decided in favour of the assessee and remitted to the Transfer Pricing Officer for fresh computation.
Issue (ii): Whether the comparables selected for the software development services and IT enabled services segments were functionally comparable.
Analysis: The selected entities were found to differ materially from the assessee on functional profile, scale, ownership of intangibles, risk assumption, outsourcing model, and business complexity. A giant software company with significant intangibles was not comparable to a captive service provider. Likewise, companies engaged in product development, integrated hardware-software solutions, outsourced service models, or entities under financial irregularity were rejected as unsuitable comparables for benchmarking the assessee's transactions.
Conclusion: The challenged comparables were held to be not valid comparables and were excluded from the transfer pricing set of comparables.
Issue (iii): Whether deduction under section 10A was allowable to the branch on transfer of software to its foreign head office.
Analysis: The software developed by the India branch was transferred to the foreign head office as per its requirement and not sold to third parties. Following the binding jurisdictional precedent, such inter-branch transfer of software was treated as export for section 10A purposes, and the mere fact that the recipient was the head office did not defeat the exemption. The denial of deduction was therefore unsustainable and the matter was required to be reconsidered in accordance with that legal position.
Conclusion: The issue was decided in favour of the assessee and the denial of section 10A benefit was set aside for fresh adjudication.
Final Conclusion: The transfer pricing additions and the denial of the section 10A claim did not survive in their existing form, and the matters were restored for fresh decision in accordance with the directions recorded in the order.
Ratio Decidendi: For a captive service provider, comparability under transfer pricing depends on functional profile, risk, scale, intangibles and business model, and software transferred by an Indian branch to its foreign head office may qualify for section 10A treatment where it is developed for that head office and not sold to third parties.
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