Captive software comparables and foreign-currency receivables must be benchmarked by functional profile and LIBOR-based pricing.

A captive software development service provider on a cost-plus, low-risk model cannot be benchmarked against companies with materially different functions, product orientation, entrepreneurial risk, or unreliable segmental data; accordingly, Infosys Limited, Persistent Systems Limited, Tata Elxsi Limited, e-Infochips Private Limited, Wipro Limited, Nihilent Technologies Limited and Infobeans Technologies Limited were excluded as comparables. Outstanding foreign-currency receivables from associated enterprises were treated as an international transaction requiring transfer pricing benchmarking, and the appropriate benchmark was held to be LIBOR-linked rather than a domestic rupee rate, with a 60-day credit period considered reasonable. The receivables adjustment was revised on that basis, granting partial relief.

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Issues: (i) whether Infosys Limited, Persistent Systems Limited, Tata Elxsi Limited, e-Infochips Private Limited, Wipro Limited, Nihilent Technologies Limited and Infobeans Technologies Limited were functionally comparable to the assessee for transfer pricing purposes; and (ii) whether interest on outstanding receivables from associated enterprises had to be benchmarked by applying LIBOR with an appropriate credit period.

Issue (i): whether Infosys Limited, Persistent Systems Limited, Tata Elxsi Limited, e-Infochips Private Limited, Wipro Limited, Nihilent Technologies Limited and Infobeans Technologies Limited were functionally comparable to the assessee for transfer pricing purposes.

Analysis: The assessee was a captive software development service provider operating on a cost-plus model with limited risk and no intangibles. Infosys, Persistent and Tata Elxsi were excluded on the basis of earlier year findings following the same functional profile, and no change in facts or law was shown. e-Infochips was found to be engaged in embedded system development, product engineering, product sales, technical consultancy and related revenue streams, with no reliable segmental data to isolate a pure software development activity. Wipro was found to operate on a much broader and entrepreneurial scale, with diversified IT services, software products, brand-building expenditure and significant related-party transactions, making it both functionally and economically dissimilar. Nihilent was found to derive revenue from IT consultancy and business consulting, which was materially different from routine captive coding services. Infobeans was found to specialise in enterprise software development, custom application development, enterprise mobility and big data analytics, indicating a high-end and product-oriented model not comparable to the assessee.

Conclusion: The impugned comparables were directed to be excluded from the final set of comparables.

Issue (ii): whether interest on outstanding receivables from associated enterprises had to be benchmarked by applying LIBOR with an appropriate credit period.

Analysis: The receivables issue was treated as an international transaction requiring transfer pricing benchmarking. For receivables denominated in foreign currency, the appropriate benchmark was held to be the currency-linked international rate rather than a domestic rupee rate. The Tribunal preferred LIBOR-based benchmarking with an additional basis-point mark-up, and held that a 60-day credit period was reasonable for benchmarking the receivable period instead of the 30-day period adopted by the transfer pricing authorities.

Conclusion: The adjustment on receivables was modified by directing benchmarking at LIBOR plus 200 basis points with a 60-day credit period.

Final Conclusion: The transfer pricing exercise was partly corrected in favour of the assessee by excluding unsuitable comparables and revising the receivables adjustment, resulting in partial relief.

Ratio Decidendi: In transfer pricing under TNMM, captive low-risk service providers cannot be benchmarked against companies with materially different business models, product or consultancy orientation, entrepreneurial risk, or unreliable segmental data; and outstanding foreign-currency receivables are to be benchmarked by a currency-linked international interest rate with a reasonable credit period.

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