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Issues: (i) Whether the six identified comparables were rightly excluded from the assessee's ITES benchmarking set. (ii) Whether the assessee was entitled to inclusion of the identified comparables and to fresh consideration of the negative working capital adjustment. (iii) Whether the disallowance of employee's contribution to PF and ESI under section 36(1)(va) was sustainable.
Issue (i): Whether the six identified comparables were rightly excluded from the assessee's ITES benchmarking set.
Analysis: Three entities were already found by a coordinate bench to be outside the ITES segment. The remaining entities were found to derive revenues from accounting, healthcare, or e-publishing activities, and one of them had also undergone a merger during the relevant year. On that factual and functional mismatch, the comparables could not be used for the assessee's ITES segment.
Conclusion: The exclusion of all six comparables was upheld in favour of the assessee.
Issue (ii): Whether the assessee was entitled to inclusion of the identified comparables and to fresh consideration of the negative working capital adjustment.
Analysis: One claimed comparable had no revenue from the ITES segment and was rightly excluded. Another comparable operated in the BPO sector, and the question whether it was truly comparable required fresh examination by the Transfer Pricing Officer. The third claimed comparable did not show any ITES activity in its revenue disclosure and was rightly excluded. As to negative working capital adjustment, the matter required factual verification on whether any working capital risk had actually been assumed.
Conclusion: The request to include one comparable was rejected, the question relating to another comparable was remanded, the third comparable was rejected, and the issue of negative working capital adjustment was remanded for fresh adjudication.
Issue (iii): Whether the disallowance of employee's contribution to PF and ESI under section 36(1)(va) was sustainable.
Analysis: The issue stood covered against the assessee by the binding decision on employee's contribution paid beyond the statutory due date, and the disallowance was therefore not open to interference.
Conclusion: The disallowance was sustained against the assessee.
Final Conclusion: The appeal succeeded only to the extent of transfer pricing relief on comparable selection, while the statutory disallowance under section 36(1)(va) was confirmed and the remaining transfer pricing issues were sent back for fresh consideration where required.
Ratio Decidendi: Functional comparability must be tested with reference to the assessee's segment and revenue profile, and where a proposed comparable lacks segmental ITES activity or is otherwise functionally dissimilar, it cannot be used for arm's length benchmarking; factual issues such as working capital adjustment may require fresh verification when the underlying risk assumption is disputed.
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