Tribunal excludes companies from comparables list, affirms working capital adjustment for captive service provider

The Tribunal partially allowed the assessee's appeal by excluding Larsen & Toubro Infotech Limited and Persistent Systems Limited from the comparables list. It upheld the exclusion of ICRA Techno Analytics and Tech Mahindra Limited due to functional dissimilarity and high turnover. Additionally, the Tribunal affirmed the decision against making a negative working capital adjustment for the assessee, a captive service provider. The Revenue's appeal was dismissed.

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Issues Involved:
1. Exclusion of Larsen & Toubro Infotech Limited and Persistent Systems Limited based on the upper turnover filter.
2. Exclusion of ICRA Techno Analytics and Tech Mahindra Limited.
3. Negative Working Capital Adjustment.

Issue-wise Detailed Analysis:

1. Exclusion of Larsen & Toubro Infotech Limited and Persistent Systems Limited based on the upper turnover filter:
The assessee, a 100% export-oriented unit providing Software Development (SWD) services to its Associate Enterprises (AEs), challenged the inclusion of Larsen & Toubro Infotech Limited and Persistent Systems Limited as comparables due to their significantly higher turnover compared to the assessee's turnover of Rs. 56.38 crore. The Tribunal noted that the AO/TPO had excluded companies with turnover less than Rs. 1 crore but did not set an upper turnover limit. Citing the Hon’ble Bombay High Court's decision in CIT v. Pentair Water Private Limited and recent Tribunal orders, the Tribunal held that companies with very high turnover cannot be compared to the assessee. Consequently, the Tribunal directed the exclusion of Larsen & Toubro Infotech Limited and Persistent Systems Limited from the list of comparables.

2. Exclusion of ICRA Techno Analytics and Tech Mahindra Limited:
- *Tech Mahindra Limited:* The CIT(A) excluded Tech Mahindra Limited after analyzing its annual report, noting that it operates in multiple segments and segmental details are not available. The Tribunal upheld this exclusion, agreeing that Tech Mahindra Limited is functionally dissimilar to the assessee and has a turnover far exceeding Rs. 200 crore.
- *ICRA Techno Analytics:* The CIT(A) excluded ICRA Techno Analytics on the grounds of functional dissimilarity and lack of segmental data. The Tribunal upheld this exclusion, noting that ICRA Techno Analytics is engaged in various activities such as web development and engineering services, making it not comparable to the assessee.

3. Negative Working Capital Adjustment:
The CIT(A) ruled that negative working capital adjustment is not appropriate for the assessee, a captive service provider operating on a cost-plus basis with its entire revenue from AEs. The Tribunal upheld this decision, noting that the assessee does not have borrowings/loans for working capital and operates without working capital risks. The Tribunal referred to the Bangalore Bench's decision in Lam Research India Pvt. Ltd., which supports the view that negative working capital adjustment should not be made for captive service providers operating on a cost-plus model.

Conclusion:
The Tribunal partly allowed the assessee's appeal by excluding Larsen & Toubro Infotech Limited and Persistent Systems Limited from the list of comparables and upheld the CIT(A)’s exclusion of ICRA Techno Analytics and Tech Mahindra Limited. The Tribunal also upheld the CIT(A)’s decision on not making a negative working capital adjustment. The Revenue's appeal was dismissed.

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