Functional comparability and LIBOR-based receivables benchmarking govern transfer pricing; disputed adjustment deleted and depreciation issue remanded.

Comparables lacking functional similarity in a captive software development services segment cannot be used for arm's length price benchmarking, so the five disputed comparables were excluded and the transfer pricing computation was recomputed. An adjustment on outstanding receivables based on SBI term deposit rates was unsustainable where prior bench rulings required LIBOR-based benchmarking for such international transactions, so the receivables adjustment was deleted. The depreciation claim linked to foreign exchange loss treated as capital expenditure required fresh examination, so that issue was remanded for reconsideration in accordance with law.

---

---

Issues: (i) Whether the comparables selected for determining the arm's length price in the software development services segment were functionally similar; (ii) Whether the adjustment on outstanding receivables by applying SBI term deposit rates was sustainable; (iii) Whether the depreciation claim linked to foreign exchange loss treated as capital expenditure required fresh adjudication.

Issue (i): Whether the comparables selected for determining the arm's length price in the software development services segment were functionally similar.

Analysis: The adjustment was examined in the context of captive software development services. The entities included as comparables were found to be not functionally similar to the assessee's segment, and prior coordinate bench decisions had already excluded them on the same reasoning. The exclusion of all five comparables was directed and the assessment was to be recomputed accordingly.

Conclusion: The issue was decided in favour of the assessee.

Issue (ii): Whether the adjustment on outstanding receivables by applying SBI term deposit rates was sustainable.

Analysis: The adjustment was considered in light of prior coordinate bench decisions holding that an arm's length price adjustment on international transactions based on SBI domestic lending or term deposit rates, rather than LIBOR, was unsustainable. On that basis, the receivables adjustment was deleted.

Conclusion: The issue was decided in favour of the assessee.

Issue (iii): Whether the depreciation claim linked to foreign exchange loss treated as capital expenditure required fresh adjudication.

Analysis: The matter was restored for fresh consideration because the foreign exchange loss had been treated as capital in nature, and the claim required re-examination according to law.

Conclusion: The issue was remanded for fresh adjudication.

Final Conclusion: The appeal succeeded on the transfer pricing issues, while the depreciation-related issue was sent back for reconsideration.

Ratio Decidendi: Comparables lacking functional similarity in a captive software development services segment cannot be used for arm's length price determination, and receivables adjustments based on domestic lending or term deposit rates are unsustainable where LIBOR-based benchmarking is applicable.

---