Transfer pricing comparables in arm's length pricing: turnover filter over ?200 crore upheld; notional interest timing clarified

In determining arm's length price, the Tribunal held that a proposed comparable was functionally dissimilar to the assessee and could not be included; the challenge to its exclusion was rejected. On comparables selection, it held that applying a turnover filter excluding entities with turnover exceeding ?200 crores is a valid comparability criterion; the TPO was directed to exclude such high-turnover comparables and redo the TP analysis, allowing the ground for statistical purposes. On notional interest on delayed receivables, since the payment due date did not fall within the relevant assessment year, no adjustment could be made in that year on the principle that income must be taxed in the correct year; however, for the subsequent year, the TPO was directed to apply 6-month LIBOR plus 300 basis points.

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ISSUES PRESENTED AND CONSIDERED

1. Whether a proposed comparable (Infomile Technology P. Ltd.) could be included in the comparables set for transfer pricing determination, having regard to functional comparability with the assessee.

2. Whether the turnover filter of excluding companies having turnover exceeding Rs. 200 crores is a valid filter that must be applied for selection/exclusion of comparables, and whether a fresh transfer pricing study is required on that basis.

3. Whether an adjustment on account of interest on delayed receivables could be made in the impugned assessment year when the due date of payment and the relevant delay did not fall within that year; and, if not, what interest benchmark should be applied in the subsequent year.

ISSUE-WISE DETAILED ANALYSIS

1. Inclusion of Infomile Technology P. Ltd. as a comparable

Interpretation and reasoning: The Court examined the assessee's request to incorporate Infomile Technology P. Ltd. in the transfer pricing comparables. On reviewing the functional profile, the Court found that the functions of Infomile Technology P. Ltd. were not akin to the functions of the assessee. Functional dissimilarity was treated as determinative against inclusion.

Conclusion: The request to include Infomile Technology P. Ltd. as a comparable was rejected.

2. Application of turnover filter (exclusion of comparables with turnover > Rs. 200 crores) and direction for fresh TP study

Legal framework (as discussed in the judgment): The Court considered the appropriateness of applying a turnover filter while selecting comparables for determining the arm's length price, including the contention that comparables beyond a specified turnover range should be excluded.

Interpretation and reasoning: The Court accepted the assessee's contention that a turnover filter is relevant for comparability analysis and held that the turnover filter of Rs. 200 crores is a valid filter that "has to be applied" for selecting comparables. It therefore required exclusion of those comparables whose turnover exceeds Rs. 200 crores and directed that the transfer pricing analysis be redone after applying this filter.

Conclusion: The Court directed the transfer pricing authority to exclude comparables having turnover above Rs. 200 crores and to conduct a fresh transfer pricing study in accordance with law. The related grounds were allowed for statistical purposes.

3. Interest on delayed receivables-year of taxability and benchmark rate

Interpretation and reasoning: The Court examined the assessee's contention that the interest on receivables related to a period not falling in the impugned assessment year. On the material referenced, the Court found that the due date of payment was not in the impugned assessment year and therefore no adjustment for interest on delayed receivables was required in that year. The Court applied the principle that correct income must be taxed in the correct year. However, the Court also issued a direction regarding the benchmark for computing such interest in the subsequent year.

Conclusion: No adjustment for interest on delayed receivables was to be made in the impugned assessment year; the transfer pricing authority was directed to apply six months LIBOR + 300 basis points in the subsequent assessment year. The assessee's contention was accepted in part.

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