Transfer pricing comparables and related party filters under TNMM shaped outcomes, with several exclusions, remands, and GST depreciation allowed.

Transfer pricing comparability under TNMM required functional similarity, consistent aggregation of related party transactions, and reliable adjustments for material differences. In the software development segment, the Tribunal directed recomputation of the related party transaction filter on an aggregate basis, excluded several functionally dissimilar comparables, accepted cash profit level indicator, and remitted the risk adjustment and selected comparables for fresh consideration. In marketing support services, it excluded impugned comparables and directed implementation of the inclusion of Concept Public Relations India Ltd. Notional interest on trade receivables was remitted for recomputation under the earlier year framework. Depreciation on GST capitalised to asset cost was allowed, while goodwill depreciation from amalgamation was remitted for fresh adjudication.

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Issues: (i) Whether the related party transaction filter in the software development segment was to be applied on an aggregate basis and at 15% threshold; (ii) Whether certain comparables in the software development segment were liable to be excluded or retained, and whether cash profit level indicator and risk adjustment were to be granted; (iii) Whether a separate adjustment on account of notional interest on trade receivables was sustainable; (iv) Whether the challenged comparables in the marketing support services segment were liable to be excluded or retained, and whether the Revenue's inclusion direction in respect of one company was to be given effect; (v) Whether depreciation on goodwill arising from amalgamation was allowable; (vi) Whether depreciation on GST capitalised to the cost of capital assets was to be allowed.

Issue (i): Whether the related party transaction filter in the software development segment was to be applied on an aggregate basis and at 15% threshold.

Analysis: The Tribunal followed its earlier decision in the assessee's own case and the coordinate bench view that related party transactions are to be computed consistently on an aggregate basis by taking related party income and related party expenses together with sales. It also accepted the principle that the filter threshold should be applied in line with the binding/high court guidance relied upon in the earlier year's decision.

Conclusion: The related party transaction filter was directed to be recomputed on an aggregate basis, and the assessee succeeded on this issue.

Issue (ii): Whether certain comparables in the software development segment were liable to be excluded or retained, and whether cash profit level indicator and risk adjustment were to be granted.

Analysis: The Tribunal excluded Larsen & Toubro Infotech Ltd., Persistent Systems Ltd., Infosys Ltd., Nihilent Ltd., Infobeans Technologies Ltd., Mindtree Ltd., Acewin Agritek Ltd., Elveego Circuits Pvt. Ltd., Tata Elxsi Ltd., Wipro Ltd., and Threesixty Logica Testing Services Pvt. Ltd. on functional dissimilarity or comparable-specific grounds, and remitted Cybage Software Pvt. Ltd. for fresh consideration. It directed fresh examination of the assessee's request for inclusion of certain rejected comparables. It also directed adoption of cash profit level indicator in line with the earlier year's order and remitted the risk adjustment plea for consideration following the quantification principle laid down in the assessee's own case.

Conclusion: The assessee succeeded substantially on comparability exclusions and the cash profit level indicator claim, while Cybage Software Pvt. Ltd. and the requested inclusions were remitted for fresh consideration; risk adjustment was also remitted.

Issue (iii): Whether a separate adjustment on account of notional interest on trade receivables was sustainable.

Analysis: The Tribunal held that notional interest on receivables is an international transaction, but directed that the matter be reworked in conformity with the earlier year's decision. It further directed that where working capital adjustment subsumes outstanding receivables, no separate characterisation should be made, and for receivables outside such adjustment the interest computation should follow the specified benchmark with a reasonable credit period.

Conclusion: The separate adjustment was not finally deleted, but the matter was remitted for recomputation under the earlier year's framework.

Issue (iv): Whether the challenged comparables in the marketing support services segment were liable to be excluded or retained, and whether the Revenue's inclusion direction in respect of one company was to be given effect.

Analysis: The Tribunal excluded Axience Consulting Pvt. Ltd., Dun & Bradstreet Information Services India Pvt. Ltd., Pressman Advertising Ltd., Lintas India Pvt. Ltd., Majestic Research Services & Solutions Ltd., and Cheil India Pvt. Ltd. as functionally dissimilar to the assessee's limited marketing support functions. It also directed exclusion of the disputed comparable companies in the light of the segment's functional profile. In addition, it directed the TPO to give effect to the DRP's direction for inclusion of Concept Public Relations India Ltd. The assessee's request for inclusion of some other companies was remitted for fresh examination.

Conclusion: The assessee succeeded on the exclusion of the impugned marketing support comparables, the inclusion direction for Concept Public Relations India Ltd. was to be implemented, and the remaining inclusion requests were remitted.

Issue (v): Whether depreciation on goodwill arising from amalgamation was allowable.

Analysis: Following its own earlier order, the Tribunal noted that the goodwill claim arose from amalgamation and that the factual aspects relating to the underlying intangibles and possible double benefit required verification. It therefore did not finally uphold the disallowance and sent the issue back for fresh decision in accordance with law.

Conclusion: The issue was remitted to the AO for fresh adjudication, so the assessee did not obtain final relief on this issue at this stage.

Issue (vi): Whether depreciation on GST capitalised to the cost of capital assets was to be allowed.

Analysis: The Tribunal noted that the DRP had already directed allowance of proportionate depreciation on GST related capital assets purchased during the year and that the direction was to be followed.

Conclusion: The assessee succeeded on this issue and the AO was directed to grant the depreciation.

Final Conclusion: The appeal was allowed in part with substantial relief in the transfer pricing comparability disputes and consequential depreciation on GST capitalised, while the goodwill depreciation issue was sent back for fresh adjudication and the stay petition became infructuous.

Ratio Decidendi: In transfer pricing under TNMM, comparable selection must be controlled by functional similarity and reliable adjustments for material differences, including consistent RPT computation, while notional receivable interest and accounting-policy differences require conformity with the tested party's working capital and margin adjustments and, where necessary, remand for factual verification.

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