Tribunal rulings on ALP adjustments, bad debts, working capital, and interest rates for Software & IT Services

M/s. ADP Private Ltd Hyderabad Versus Dy. Commissioner of Income Tax, Circle 1 (1) Hyderabad

M/s. ADP Private Ltd Hyderabad Versus Dy. Commissioner of Income Tax, Circle 1 (1) Hyderabad - TMI Issues Involved:
1. ALP Adjustment for Software Development Services (SDS).
2. ALP Adjustment for I.T. Enabled Services (ITeS).
3. Correct computation of margins of comparable companies.
4. Exclusion and inclusion of certain comparable companies.
5. Provision for bad and doubtful debts as non-operating expenditure.
6. Denial of Working Capital Adjustment.
7. Adjustment towards interest on receivables.

Detailed Analysis:

1. ALP Adjustment for Software Development Services (SDS):
The assessee provided software development services to its group companies and selected 22 companies as comparables, reporting a margin of 18%. The TPO rejected most of these comparables and selected 13 companies with an average margin of 35.44%. The DRP directed the exclusion of certain companies and confirmed the denial of working capital and risk adjustments. The Tribunal directed the exclusion of companies such as E-Infochips Ltd and Thirdware Solutions Ltd due to functional dissimilarity, lack of segmental data, and other factors. The Tribunal also directed the inclusion of Evoke Technologies Ltd and Sagarsoft India Ltd after reconsideration.

2. ALP Adjustment for I.T. Enabled Services (ITeS):
The TPO selected 8 companies as comparables with an average margin of 35.46%, which was later reduced to 7 companies with an average margin of 33.13%. The Tribunal directed the exclusion of Infosys BPO Ltd and E-Clerx Services Ltd due to functional dissimilarity and other factors. The Tribunal also directed reconsideration for the inclusion of Informed Technologies Ltd and Ace BPO Services (P) Ltd based on the assessee's contentions.

3. Correct Computation of Margins of Comparable Companies:
The assessee sought correct computation of margins for companies such as E-Infochips Ltd, Thirdware Solutions Ltd, Persistent Systems Ltd, Tata Elxsi Ltd, Infosys BPO Ltd, and Microland. The Tribunal remitted the issue to the AO/TPO for computation of the correct margins.

4. Exclusion and Inclusion of Certain Comparable Companies:
The Tribunal directed the exclusion of companies such as E-Infochips Ltd, Thirdware Solutions Ltd, Infobeans Technologies Ltd, Infosys Ltd, Persistent Systems Ltd, and Tata Elxsi Ltd due to functional dissimilarity, lack of segmental data, and other factors. The Tribunal also directed the inclusion of Evoke Technologies Ltd and Sagarsoft India Ltd after reconsideration.

5. Provision for Bad and Doubtful Debts as Non-Operating Expenditure:
The assessee's ground regarding the provision for bad and doubtful debts as non-operating expenditure was not pressed and therefore rejected.

6. Denial of Working Capital Adjustment:
The TPO and DRP denied working capital adjustment, and the Tribunal upheld this decision as the assessee failed to substantiate the impact of working capital adjustment on its profit margins vis-à-vis comparable companies.

7. Adjustment Towards Interest on Receivables:
The TPO proposed an adjustment towards interest on receivables, which was confirmed by the DRP with a credit period of 30 days and a reasonable interest rate. The Tribunal directed that the interest rate be based on LIBOR + instead of SBIPLR rate, as the receivables were in foreign currency.

Conclusion:
The Tribunal provided detailed directions on the inclusion and exclusion of comparable companies, correct computation of margins, and adjustments towards interest on receivables. The Tribunal upheld the denial of working capital adjustment and rejected the ground regarding the provision for bad and doubtful debts as non-operating expenditure. The appeal was partly allowed for statistical purposes.