Transfer pricing comparable selection must consider turnover and brand name as relevant factors for arm's length pricing

ITAT Hyderabad ruled on transfer pricing comparable selection criteria, holding that turnover and brand name are relevant factors for determining arm's length price comparables. The tribunal directed exclusion of two entities from the comparable list based on these criteria, following precedents from Karnataka HC, Delhi HC, and ITAT New Delhi. Regarding working capital adjustment denial, the matter was remanded to the Assessing Officer/TPO for fresh consideration, noting prior adjustments granted in similar cases. Grounds were allowed for statistical purposes.

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Issues Involved:
1. Exclusion of Infosys BPM Services Pvt. Ltd. and eClerx Services Ltd. as comparables.
2. Denial of working capital adjustment.

Summary:

Exclusion of Infosys BPM Services Pvt. Ltd. and eClerx Services Ltd. as comparables:

The assessee challenged the inclusion of Infosys BPM Services Pvt. Ltd. and eClerx Services Ltd. as comparables in the ITeS segment. The assessee argued that Infosys BPM Services Pvt. Ltd. is functionally different, engaged in diversified activities, and leverages significant brand value and marketing expenses. Similarly, eClerx Services Ltd. was argued to be functionally different due to its KPO services, high advertising costs, and lack of segmental data. The Tribunal considered precedents, including the assessee's own cases and other relevant judgments, and concluded that both companies should be excluded based on their functional dissimilarities, brand value, and other factors. The Tribunal directed the Assessing Officer/TPO to exclude these entities from the list of comparables.

Denial of working capital adjustment:

The assessee argued for a working capital adjustment, which was denied by the TPO and DRP on the grounds that the impact of differences in working capital requirements was not demonstrated with sufficient data. The Tribunal, referencing previous decisions, including the assessee's own cases and OECD guidelines, held that working capital adjustments should be allowed to ensure a fair comparison. The Tribunal emphasized that transfer pricing analysis involves estimation and reasonable adjustments should be made. The Tribunal directed the Assessing Officer/TPO to reconsider the issue of working capital adjustment in light of the provided guidelines and precedents.

Conclusion:

The appeal was partly allowed for statistical purposes, with directions to exclude Infosys BPM Services Pvt. Ltd. and eClerx Services Ltd. from the list of comparables and to reconsider the working capital adjustment.

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