Tribunal Orders Recalculation of Arm's Length Price Excluding Infosys BPO & TCS e-Serve Due to Turnover Disparities.

The Tribunal directed the TPO to recompute the Arm's Length Price (ALP) by excluding Infosys BPO Ltd. and TCS e-Serve Ltd. due to their disproportionate turnovers compared to the Assessee. Additionally, the Tribunal ruled against making a negative working capital adjustment, as the Assessee, being a captive unit, bears no working capital risk. Consequently, the Assessee's appeal was partly allowed.

---

---

Issues Involved:
1. Determination of Arm's Length Price (ALP) for international transactions.
2. Exclusion of certain comparable companies based on turnover.
3. Adjustment for negative working capital.

Detailed Analysis:

1. Determination of Arm's Length Price (ALP) for international transactions:
The Assessee filed a Transfer Pricing Study (TP Study) using the Transaction Net Margin Method (TNMM) as the Most Appropriate Method (MAM) to justify the price paid in the international transaction. The Assessee selected Operating Profit/Operating Cost (OP/OC) as the Profit Level Indicator (PLI), arriving at an OP/OC of 17.48%. The Transfer Pricing Officer (TPO) accepted TNMM and OP/OC but identified different comparable companies, resulting in an average arithmetic mean margin of 28.11%. This led to an addition of Rs. 15,34,72,676 to the Assessee's income.

2. Exclusion of certain comparable companies based on turnover:
The Assessee requested the exclusion of companies with high turnover (more than 10 times the Assessee's turnover) and low turnover (less than 1/10th of the Assessee's turnover). The Tribunal referred to the Delhi High Court's judgment in Chryscapital Investment Advisors (India) Private Limited, which emphasized that differences in turnover must materially affect the price or cost for exclusion. The Tribunal remanded the issue back to the AO/TPO to examine the turnover impact and make reasonable adjustments. The Tribunal upheld excluding Infosys BPO Ltd. and TCS e-Serve Ltd. due to their significantly higher turnovers compared to the Assessee.

3. Adjustment for negative working capital:
The Assessee argued against the negative working capital adjustment, citing that it is a captive unit funded entirely by its Associated Enterprise (AE) and has no working capital risk. The Tribunal referred to the decision in DCIT v. M/s. Software AG Bangalore Technologies P. Ltd., which held that negative working capital should not be computed and adjusted. The Tribunal agreed with this view, noting that the Assessee does not have any working capital risk, and therefore, the question of negative working capital does not arise.

Conclusion:
The Tribunal directed the TPO to recompute the ALP excluding Infosys BPO Ltd. and TCS e-Serve Ltd. and without making a negative working capital adjustment. The appeal of the Assessee was partly allowed.

---