Transfer pricing: Sec. 92C - Warranty-service margins accepted on full revenue (35.71%); addition deleted; comparables restored; interest remanded.

ITAT MUMBAI - AT held that the TPO erred in ignoring revenue while assessing warranty-service margins; the assessee's accounting is accepted and margin is computed on full revenue of INR 19,16,24,516 (35.71%), so the transfer-pricing addition of INR 13,99,71,558 is deleted. For software-development services, the TPO's exclusion of several comparables was set aside and specific companies were directed to be included; TPO must verify segmental results for one group company. On notional interest for overdue receivables the issue is remanded: TPO to compute interest invoice-wise beyond the applicable grace period after receiving particulars; grace period to follow AE agreements or market practice; applicable rate: LIBOR + 200 bps.

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Issues Involved:

1. Provision of warranty services.
2. Provision of software development services.
3. Notional interest on outstanding receivables.

Summary:

Provision of Warranty Services:

The assessee, engaged in providing after-sales warranty services for medical equipment, faced a transfer pricing adjustment by the TPO, who recomputed the margin of the warranty segment by excluding significant revenue recognized in the P&L account. The Tribunal held that warranty services span multiple financial years, and the revenue must be recognized accordingly. The Tribunal found the assessee's accounting policy consistent and scientific, recognizing revenue from both current and previous financial years. The Tribunal concluded that the margin should be computed by considering the entire revenue of INR 19,16,24,516, resulting in the deletion of the transfer pricing addition of INR 13,99,71,558.

Provision of Software Development Services:

The assessee, providing software development and related support services, faced adjustments due to the TPO's rejection of several comparables and inclusion of others. The Tribunal analyzed the functional profiles and found that 10 companies selected by the TPO were not functionally comparable to the assessee. These companies included E-Infochips Ltd., Dun & Bradstreet Technologies & Data Services Pvt. Ltd., and others. The Tribunal directed the exclusion of these companies and the inclusion of 7 companies previously accepted by the TPO in other assessment years, such as C G-V A K Software & Exports Ltd. and Harbinger Systems Pvt Ltd. The Tribunal also directed the TPO to verify segmental results for Sasken Technologies Ltd. and include it if segmental results are available.

Notional Interest on Outstanding Receivables:

The TPO imputed interest on the entire outstanding receivables, treating them as indirect advances. The Tribunal directed that interest should be computed only on the actual amount outstanding beyond a grace period, which should be determined based on agreements with AEs or market practice. The Tribunal also held that the rate of interest should be Libor + 200 bps, following judicial precedents.

Conclusion:

The appeal was partly allowed, with specific directions on the computation of margins and interest, and adjustments were made based on functional comparability and accounting policies. The Tribunal emphasized the importance of accurate revenue recognition and comparability analysis in transfer pricing assessments.

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