Tribunal directs exclusion of companies, fresh comparability check, no negative working capital adjustments. Bad debts as operating expenses.

The Tribunal partly allowed the assessee's appeal by directing the AO to exclude certain companies from the comparables list, verify the comparability of other companies afresh, and not make negative working capital adjustments. The provision for bad and doubtful debts was to be considered as part of operating expenses for margin computation. The appeal was treated as allowed for statistical purposes.

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Issues Involved:
1. Validity of the assessment order.
2. Transfer Pricing Adjustments.
3. Selection and rejection of comparable companies.
4. Use of filters and data for comparability analysis.
5. Working capital and risk adjustments.
6. Computation of interest under section 234B.

Detailed Analysis:

1. Validity of the Assessment Order:
The assessee challenged the final assessment order dated 27 October 2017, passed under sections 143(3), 144C(5), and 144C(13) of the IT Act, as being "bad in law and void ab-initio." However, this ground was not pressed during the hearing.

2. Transfer Pricing Adjustments:
The assessee contested the transfer pricing adjustment of Rs. 1,97,72,254 on account of providing Information Technology enabled Services (ITeS) to its associated enterprises (AEs). The TPO rejected the transfer pricing documentation maintained by the assessee and conducted a fresh economic analysis, leading to an adjustment.

3. Selection and Rejection of Comparable Companies:
- Inclusion of Capgemini Business Services (India) Limited and Hartron Communications Limited:
The assessee argued that these companies were functionally dissimilar. The Tribunal found that Capgemini Business Services was involved in diversified operations and lacked segmental information for ITeS services. Hartron Communications provided multiple services, and its auditor had qualified its report on non-compliance with Accounting Standard-15. The Tribunal directed the AO to exclude these companies from the comparables list.

- Exclusion of Ace BPO Services Private Limited, Informed Technologies India Limited, Jindal Intellicom Limited, and Crystal Voxx Ltd:
The Tribunal directed the AO/TPO to verify the comparability of these companies afresh. Ace BPO Services and Informed Technologies were found to be engaged in ITeS services, and their comparability needed verification. Jindal Intellicom's inclusion was to be reconsidered based on its acceptance in previous assessment years. Crystal Voxx Ltd's comparability was to be verified due to its engagement in BPO services.

4. Use of Filters and Data for Comparability Analysis:
The assessee did not press the grounds related to the use of different financial year-end filters and the rejection of multiple-year data.

5. Working Capital and Risk Adjustments:
- Working Capital Adjustment:
The Tribunal found that the AO and DRP erred in not allowing working capital adjustment due to a negative working capital. Citing previous Tribunal decisions, it was held that negative working capital adjustment should not be made when the assessee does not bear working capital risks. The AO was directed to adopt the correct figures for average receivables/payables.

- Risk Adjustment:
The assessee did not press the ground related to risk adjustment.

6. Computation of Interest under Section 234B:
The ground related to the computation of interest under section 234B was consequential and did not require separate adjudication.

Conclusion:
The Tribunal partly allowed the assessee's appeal, directing the AO to exclude certain companies from the comparables list, verify the comparability of other companies afresh, and not make negative working capital adjustments. The provision for bad and doubtful debts was to be considered as part of operating expenses for margin computation. The appeal was treated as allowed for statistical purposes.

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