Transfer Pricing Tribunal Ruling: Exclusion of Comparables Upheld, Interest Rate Set, Appeals Partially Allowed

The Tribunal upheld the exclusion of certain comparables for Transfer Pricing adjustments, citing functional dissimilarity and lack of segmental information, while directing the inclusion of others. Notional interest on overdue receivables was set at 6% per annum for amounts outstanding for more than 30 days, in line with established precedents. Appeals from both Revenue and Assessee, as well as cross objections, were partially allowed.

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Issues Involved:
1. Exclusion/Inclusion of comparables for Transfer Pricing (TP) adjustments.
2. Computation of notional interest on overdue receivables.

Summary:

Issue 1: Exclusion/Inclusion of Comparables for TP Adjustments

Exclusion of Comparables:
- Acropetal Technologies Ltd (Seg.): Excluded due to engagement in product development and lack of bifurcation between software development service and software product activity. Tribunal found it not a good comparable.
- E-Zest Solutions Ltd.: Excluded as it is a certified product engineering and software development company involved in high-end technical services and product development, lacking detailed segmental information.
- ICRA Techno Analytics Ltd.: Excluded due to diversified activities including software development, consultancy, and business process outsourcing without segmental information.
- Infosys Ltd. and L&T Infotech Ltd.: Excluded due to ownership of products, significant intangibles, and no segmental information between software services and products. Tribunal upheld exclusion based on functional dissimilarity.
- Persistent Systems Ltd.: Excluded due to engagement in both software product and services without disclosing segmental details.
- Sankhya Infotech Ltd.: Initially excluded by DRP for being a leading simulation and training solutions company, but Tribunal directed inclusion as its core activity is software development.
- Zylog Ltd.: Initially excluded by DRP for being predominantly engaged in on-site services and diversified activities, but Tribunal directed inclusion as its core activity is software development.

Inclusion of Comparables:
- Igate Global Solutions Ltd.: Tribunal directed inclusion as its core activity is software development services despite diversified activities.
- Sasken Communication Technologies Ltd.: Tribunal directed inclusion as it is involved in software development, and mere use of generic terms does not render it non-comparable.

Issue 2: Computation of Notional Interest on Overdue Receivables

- Assessee's Argument: No adjustment should be made for notional interest on delayed receivables, or if made, it should be limited to dues outstanding for more than 180 days at LIBOR +1.5%.
- Revenue's Argument: Interest should be computed at 12%, but DRP reduced it to 5%.
- Tribunal's Decision: Following precedents, Tribunal held that outstanding receivables are an international transaction requiring separate benchmarking, and directed computation of interest at 6% per annum for receivables outstanding for more than 30 days.

Conclusion:
The Tribunal upheld the exclusion of certain comparables and directed the inclusion of others based on functional dissimilarity and lack of segmental information. For the computation of notional interest on overdue receivables, the Tribunal directed a rate of 6% per annum for receivables outstanding for more than 30 days, aligning with established precedents. Appeals of both Revenue and Assessee, along with cross objections, were allowed in part.

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