ITAT rules LIBOR plus markup proper benchmark for USD receivables, excludes high-turnover comparables in ITES transfer pricing

The ITAT Bangalore ruled on transfer pricing adjustments involving USD-denominated trade receivables and ITES segment comparables. For interest on receivables, the tribunal held LIBOR plus appropriate markup as the proper benchmark for international USD transactions rather than Indian interest rates. The TPO was directed to determine proper markup over LIBOR and compute interest only on receivables outstanding beyond arm's length credit periods. Regarding comparable selection for ITES segment, several companies were excluded due to high turnover filters - TCS E-Serve and Infosys BPO were deemed non-comparable due to significantly higher turnover than the assessee. The matter was remanded for examination of segment-wise data reliability and employee cost filters for remaining comparables, with directions to allow negative working capital adjustment for captive service providers.

---

---

Issues Involved:
1. Interest on receivables
2. Transfer pricing adjustment relating to Information Technology Enabled Services (ITES) segment
3. Negative working capital adjustment

Detailed Analysis:

1. Interest on Receivables:
Facts and Arguments:
The Transfer Pricing Officer (TPO) re-characterized the closing balance of receivables as an international transaction of loan, applying a 14.47% interest rate based on government bonds rated BBB by CRISIL. The assessee contended that the LIBOR rate should be applied instead, with an additional markup of 2%, as the trade receivables were USD-denominated.

Tribunal's Findings:
The Tribunal agreed with the assessee, referencing the case of M/s. Bioplus Life Sciences Private Limited v. DCIT, which supported using LIBOR + 2% for such international transactions. The Tribunal directed the TPO to determine the appropriate markup over the LIBOR rate.

Period of Interest Computation:
The Tribunal found merit in the Departmental Representative's argument that the credit period should be benchmarked against comparable companies' practices, not the agreement between the assessee and its AE. The TPO was directed to determine the arm's length credit period and compute interest only for receivables outstanding beyond this period.

2. Transfer Pricing Adjustment Relating to ITES Segment:
Facts and Arguments:
The TPO made adjustments to the ITES segment, rejecting certain comparables and selecting others. The assessee sought the exclusion of four companies (TCS E-serve Limited, Infosys BPO Limited, Universal Print Systems Limited, and Excel Infoways Limited) based on turnover and functional incompatibility.

Tribunal's Findings:
- TCS E-serve Limited and Infosys BPO Limited: The Tribunal directed their exclusion, referencing the case of M/s. Fulcrum Fund Services (India) Private Limited v. ITO, which held that companies with a turnover above Rs. 200 crores are not comparable to those with significantly lower turnover.
- Universal Print Systems Limited: The Tribunal remanded the issue back to the TPO to verify the reliability of segment information and applicability of the ruling in the case of XLHealth Corporation India Private Limited v. ACIT.
- Excel Infoways Limited: The Tribunal remanded the issue to the TPO to verify whether the company satisfies the employee cost filter, as the assessee raised new contentions regarding the reliability of data.

3. Negative Working Capital Adjustment:
Facts and Arguments:
The assessee, a captive service provider funded entirely by its AE, argued against the negative working capital adjustment made by the TPO, which artificially enhanced the ALP.

Tribunal's Findings:
The Tribunal noted that the nature of the assessee and its financial particulars were not adequately examined by the lower authorities. The issue was remanded to the AO/TPO for consideration in light of jurisdictional rulings on negative working capital adjustment for captive service providers.

Conclusion:
The appeal was partly allowed. The Tribunal directed the TPO to:
- Apply LIBOR + appropriate markup for interest on receivables.
- Exclude TCS E-serve Limited and Infosys BPO Limited from the list of comparables.
- Re-examine the comparability of Universal Print Systems Limited and Excel Infoways Limited.
- Reconsider the negative working capital adjustment in light of relevant jurisdictional rulings.

---