Tribunal excludes companies, directs deletion of negative working capital adjustments in transfer pricing appeal.

The Tribunal allowed the appeal challenging transfer pricing adjustments in software development and ITES services for the assessment year 2013-14. The Tribunal agreed to exclude three comparable companies based on turnover criteria and directed the deletion of negative working capital adjustments for both segments. The decision favored the assessee, remanding the issue back to the AO/TPO for reevaluation in line with the judgment's directions.

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Issues:
Transfer pricing adjustment in software development services and ITES services.

Analysis:
1. Transfer Pricing Adjustment in Software Development Services:
The appeal challenges the transfer pricing adjustment made in both the "Software Development Segment" and "ITES Segment" for the assessment year 2013-14. The TPO proposed significant adjustments in both segments, which the assessee did not contest, leading to the additions by the AO. The appeal primarily focused on the exclusion of three comparable companies based on turnover criteria and the deletion of negative working capital adjustment for being a captive service provider.

1.1. Exclusion of Three Comparables:
The Ld A.R argued for the exclusion of three comparable companies due to their substantial turnover, which did not align with the assessee's turnover falling below Rs.200 crores. Citing precedent from a co-ordinate bench, the Tribunal agreed with the exclusion, emphasizing that turnover is a relevant criterion for selecting comparables. The decision was in line with previous judgments that upheld the application of a turnover filter for comparability analysis.

1.2. Negative Working Capital Adjustment:
The issue of negative working capital adjustment was also raised, with the Ld A.R referring to a previous decision in the assessee's favor for AY 2012-13. The Tribunal, following the same rationale, directed the AO/TPO not to make a negative working capital adjustment, highlighting that as a captive service provider, the assessee did not bear the same risks as other companies, thus negating the need for such an adjustment.

2. Transfer Pricing Adjustment in ITES Segment:
In the ITES segment, the assessee sought the exclusion of three companies and deletion of negative working capital adjustment. The Tribunal, consistent with the decision on software development services, applied the turnover filter to exclude the companies based on turnover exceeding Rs.200 crores. Additionally, the Tribunal directed the AO/TPO not to make a negative working capital adjustment in the ITES segment, following the same reasoning as in the software development segment.

3. Final Decision:
Considering the arguments and precedents cited, the Tribunal allowed the appeal and remanded the issue of transfer pricing adjustment back to the AO/TPO for reevaluation in light of the discussions and directions provided in the judgment. The decision was pronounced in favor of the assessee on 23rd March 2022.

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