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Issues: (i) Whether certain software service comparables selected in the transfer pricing analysis were liable to be excluded or remanded on grounds of functional dissimilarity and absence of reliable segmental data; (ii) whether notional interest on outstanding receivables from associated enterprises was separately bench-markable and, if so, at what rate.
Issue (i): Whether certain software service comparables selected in the transfer pricing analysis were liable to be excluded or remanded on grounds of functional dissimilarity and absence of reliable segmental data.
Analysis: The dispute on comparables turned on functional profile, turnover filters, extraordinary events and the availability of segmental information. The Tribunal held that the assessee had not disputed all of the comparables before the lower authorities and, in particular, that the challenge to some companies was not properly raised below. For E-Zest Solutions Ltd., however, the record before the lower authorities showed that the principal objection was turnover, while functional dissimilarity was not fully examined. Since the material on record did not conclusively establish comparability or non-comparability for the year under consideration, the Tribunal considered it appropriate to remand that aspect for fresh examination by the first appellate authority. As to the remaining contested companies, the Tribunal found no merit in permitting the assessee to challenge them at that stage.
Conclusion: The issue was partly decided against the assessee. E-Zest Solutions Ltd. was remanded for fresh consideration, while the challenge to the remaining comparables was rejected.
Issue (ii): Whether notional interest on outstanding receivables from associated enterprises was separately bench-markable and, if so, at what rate.
Analysis: The Tribunal considered the effect of section 92B of the Income-tax Act, 1961 and the line of authorities dealing with receivables as an international transaction. It held that delayed realization of trade receivables from associated enterprises can constitute a matter requiring transfer pricing benchmarking, especially where the receivables are substantial and no adequate transfer pricing study or comparable benchmark for the receivable period is placed on record. The assessee's reliance on LIBOR-based or loan-related benchmarks was rejected on the footing that delayed receivables and loan transactions are not identical. At the same time, the Tribunal found the 8% rate adopted by the first appellate authority to be excessive in the factual setting and reduced it to 6% so as to give a quietus to the dispute.
Conclusion: The issue was decided partly against the assessee. A separate adjustment on receivables was upheld in principle, but the rate was reduced to 6%.
Final Conclusion: The appeal succeeded only in part. One comparable issue was remanded, the exclusion challenge to the remaining comparables failed, and the receivables adjustment was sustained with modification of the interest rate.
Ratio Decidendi: In transfer pricing under TNMM, comparables must satisfy functional comparability on the available record, and delayed trade receivables from associated enterprises may require separate benchmarking as an international transaction when not already subsumed by a demonstrated working capital adjustment or comparable analysis.
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