Tribunal excludes companies from comparables list in transfer pricing case, remits interest issue for verification.

The Tribunal partially allowed the appeal, directing the exclusion of certain companies from the list of comparables in the transfer pricing adjustment case related to software development services. Additionally, the issue of interest on delayed receivables was remitted back to the AO/TPO for further verification and adjustments based on specific details and benchmarks.

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Issues Involved:

1. Transfer Pricing Adjustment in Software Development (SWD) Segment.
2. Interest on Delayed Receivables.

Issue-wise Detailed Analysis:

1. Transfer Pricing Adjustment in Software Development (SWD) Segment:

The case pertains to the final assessment order for AY 2018-19, where the assessee, a subsidiary of Huawei Tech Investments Co. Ltd., Hong Kong, engaged in software development (SWD) services and Information Technology enabled Services (ITeS), filed a return disclosing an income of Rs.85,57,77,213. The TPO ignored the segmental financials and considered the entire operations as SWD services, arriving at a TP adjustment of Rs.82,58,40,327. The DRP partially reduced the adjustment to Rs.55,69,83,890.

The Tribunal noted that the Transaction Net Margin Method (TNMM) was accepted as the most appropriate method for determining the Arm's Length Price (ALP), with the Profit Level Indicator (PLI) being Operating Profit/Operating Cost (OP/OC). The assessee's margins were compared to selected comparable companies, concluding that the margins of 13.10% for SWD services were within arm's length.

The TPO, however, considered the entity-level financials, resulting in a margin of 13.13%. A fresh search for comparables by the TPO led to a revised set of comparables with a median margin of 23.60%, resulting in a revised TP adjustment of Rs.55,69,83,890.

The Tribunal addressed the exclusion of Infosys Ltd. and L&T Infotech Ltd. as comparables. Infosys Ltd. was excluded due to its functional differences, brand value, R&D activities, and scale of operations, which were not comparable to the assessee's captive service provider model. Similarly, L&T Infotech Ltd. was excluded due to its varied services, insufficient segmental information, brand value, acquisitions, and significant foreign expenditure, making it functionally dissimilar to the assessee.

2. Interest on Delayed Receivables:

The TPO computed notional interest on outstanding receivables at LIBOR + 450 basis points, resulting in an adjustment of Rs.6,89,46,372. The DRP directed the use of the SBI short-term deposit rate, reducing the adjustment to Rs.6,49,06,385.

The assessee contended that outstanding receivables should not be treated as a separate international transaction and that all service-related costs were embedded in the remuneration received from the AEs. The assessee argued that it did not bear working capital risk as it was fully funded by its AEs and that delayed receivables were a consequence of the main transaction, not an independent one.

The Tribunal, referencing previous judgments, held that deferred receivables constitute an independent international transaction requiring separate benchmarking. The applicable interest rate should be based on the currency of the transaction, suggesting the use of LIBOR.

The Tribunal remitted the issue back to the AO/TPO for verification of details such as the Master Service Agreement, credit period, invoicing details, and realization data. The AO/TPO was directed to consider the average receivable days of comparable companies and ensure that no TP adjustment is required if the debtors' holding period of comparables is higher than that of the assessee.

Conclusion:

The appeal was partly allowed, with the Tribunal directing the exclusion of Infosys Ltd. and L&T Infotech Ltd. from the list of comparables and remitting the issue of interest on receivables back to the AO/TPO for further verification and appropriate adjustments.

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