Tribunal's Appeal Decision: Partial success, review RPT criteria, functional dissimilarity, working capital adjustment.

The Tribunal partly allowed the appeal, directing the TPO to verify and exclude Icon Clinical Research India Pvt. Ltd. if it does not meet the 25% RPT criteria and to exclude Syngene International Ltd. due to functional dissimilarity. The Tribunal also directed the AO/TPO to compute the working capital adjustment on actuals and consider risk adjustment if justified. The treatment of pass-through costs as operating in nature was upheld based on previous decisions. Ground nos. 7 and 8 were deemed consequential and did not require adjudication.

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Issues Involved:
1. Exclusion of comparables (Icon Clinical Research India Pvt. Ltd. and Syngene International Ltd.)
2. Working Capital Adjustment
3. Treatment of recovery of pass-through costs

Detailed Analysis:

1. Exclusion of Comparables:
Icon Clinical Research India Pvt. Ltd.:
The assessee argued for the exclusion of Icon Clinical Research India Pvt. Ltd. due to its high level of Related Party Transactions (RPT), claiming it had 100% RPT, whereas the TPO's filter allowed only up to 25%. The Tribunal noted that the DRP did not verify the computation of RPT by the assessee and the TPO. It directed the TPO to verify the RPT computation and consider this comparable only if it fits within the 25% criteria.

Syngene International Ltd.:
The assessee contended that Syngene International Ltd. should be excluded as it provides contract research and manufacturing services, including dedicated R&D centers and other specialized services, making it functionally dissimilar. The Tribunal directed the TPO to exclude this company from the list of comparables.

2. Working Capital Adjustment:
The assessee sought a working capital adjustment, citing a precedent from its own case for A.Y. 2014-15, where the Tribunal granted such an adjustment. The Tribunal referenced the OECD guidelines and previous judgments, emphasizing the necessity of working capital adjustments to account for differences in time value of money between the tested party and comparables. The Tribunal directed the AO/TPO to compute the working capital adjustment on actuals and consider risk adjustment if the assessee can establish the difference in risk undertaken compared to the comparables.

3. Treatment of Recovery of Pass-through Costs:
The issue of treating the recovery of pass-through costs as operating in nature was discussed. Both parties agreed that this issue was settled by previous Tribunal decisions in the assessee's own case for A.Y. 2013-14 and A.Y. 2014-15. The Tribunal reiterated that the recovery of expenses is a separate international transaction that needs to be determined, and the TPO rightly computed the markup for such transactions.

Conclusion:
The Tribunal partly allowed the appeal, directing the TPO to verify and exclude Icon Clinical Research India Pvt. Ltd. if it does not meet the 25% RPT criteria and to exclude Syngene International Ltd. due to functional dissimilarity. The Tribunal also directed the AO/TPO to compute the working capital adjustment on actuals and consider risk adjustment if justified. The treatment of pass-through costs as operating in nature was upheld based on previous decisions. Ground nos. 7 and 8 were deemed consequential and did not require adjudication. The appeal was partly allowed, and the order was pronounced in the open court on 21st October 2022.

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