Tribunal adjusts comparables & margins, upholds exclusions, emphasizes legal principles. Transfer pricing adjustments ordered.

The Tribunal partly allowed the appeal, directing the exclusion of certain comparables due to functional dissimilarities and upholding the exclusion of others based on involvement in R&D activities. It also instructed the reevaluation of margins for comparable companies and transfer pricing adjustments for outstanding receivables, emphasizing adherence to legal principles. The order was pronounced on 23rd March 2023.

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Issues Involved:
1. Exclusion of certain comparables from the final list.
2. Inclusion of certain comparables in the final list.
3. Correction in the margins of the comparable companies.
4. Transfer pricing adjustment with respect to outstanding receivables.

Summary:

Issue 1: Exclusion of Certain Comparables (Ground No. 1.5)
The Tribunal addressed the exclusion of Larsen & Toubro Infotech Ltd., Infosys Ltd., R Systems International Ltd., Persistent Systems Ltd., Tata Elxsi Ltd., and Infobeans Technologies Ltd. from the final list of comparables. The Tribunal found that these companies were functionally dissimilar to the assessee due to their diversified activities, significant research and development, ownership of intangible assets, and lack of segmental details. Consequently, the Tribunal directed the exclusion of these companies from the final list.

Issue 2: Inclusion of Certain Comparables (Ground No. 1.6)
The Tribunal considered the inclusion of Maveric Systems Ltd., Evoke Technologies Pvt. Ltd., and Sasken Communication Technologies Ltd. The Tribunal remanded the cases of Maveric Systems Ltd. and Evoke Technologies Pvt. Ltd. to the TPO for re-evaluation based on their annual reports and FAR analysis. However, the Tribunal upheld the exclusion of Sasken Communication Technologies Ltd. due to its involvement in R&D activities and ownership of significant patents.

Issue 3: Correction in Margins of Comparable Companies (Ground No. 1.7)
The Tribunal directed the TPO/AO to recompute the margins of the comparable companies in accordance with the law, as the assessee had provided all relevant details for verification.

Issue 4: Transfer Pricing Adjustment for Outstanding Receivables (Ground No. 2)
The Tribunal addressed the transfer pricing adjustment for outstanding receivables. The Tribunal noted that attributing interest to delayed payments is an international transaction. It directed the TPO to re-evaluate the adjustment, considering the principles laid down by the Delhi High Court in CIT vs. Cotton Naturals (I) Pvt. Ltd. The Tribunal emphasized that if working capital adjustment subsumes the outstanding receivables, no separate characterization is required. For receivables falling outside the working capital adjustment, the interest rate should be LIBOR + 300 basis points, considering a credit period of 90 days.

General Grounds (Ground Nos. 1 to 1.4)
These grounds were general in nature and did not require adjudication.

Conclusion:
The appeal filed by the assessee was partly allowed. The Tribunal provided specific directions for the inclusion/exclusion of comparables, correction of margins, and re-evaluation of transfer pricing adjustments for outstanding receivables. The order was pronounced in the open court on 23rd March 2023.

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