Transfer pricing comparables rejected due to functional dissimilarity and turnover differences, R Systems allowed with extrapolation

The ITAT Hyderabad rejected three entities (Eclerx Services Limited, Infosys BPO Limited, and TCS E-Serve Limited) as comparables for transfer pricing adjustment, following consistent exclusions in previous assessment years due to functional dissimilarity and turnover differences. The tribunal allowed R Systems International Limited as comparable despite different accounting year, directing extrapolation of results. Two other entities (ACE BPO Services and Crystal Voxx) were rejected due to insufficient clarification. The tribunal disallowed negative working capital adjustment and set interest on outstanding receivables at LIBOR+200 points for determining arm's length price. The assessee's appeal was partly allowed.

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Issues involved:
1. Inclusion of comparables for determination of Arm's Length Price (ALP).
2. Exclusion of certain comparables based on functional dissimilarity and turnover.
3. Challenge to negative working capital adjustment.
4. Dispute regarding interest on outstanding receivables.

Inclusion of comparables for ALP determination:
The appeal involved a dispute over the inclusion of certain comparables for the determination of Arm's Length Price (ALP). The assessee contested the inclusion of four comparables, citing functional dissimilarity and disproportionate turnover. The Co-ordinate Benches of the Tribunal had previously ruled against these comparables in earlier assessment years. The Tribunal, following the precedent, excluded these four comparables from the list for the current assessment year.

Exclusion of certain comparables:
The issue also addressed the exclusion of three comparables requested by the assessee, namely R Systems International Limited (segmental), ACE BPO Services Private Limited, and Crystal Voxx Ltd., which were initially excluded by the Revenue authorities. The Tribunal directed the Assessing Officer to allow extrapolation of results for R Systems International Limited, following a precedent set by the Delhi High Court. However, the Tribunal upheld the exclusion of ACE BPO Services Private Limited and Crystal Voxx Ltd., as the assessee failed to provide sufficient evidence to justify their inclusion.

Negative working capital adjustment:
The dispute regarding negative working capital adjustment centered on whether such an adjustment should be made to the arithmetic mean margin of comparables. The Tribunal referred to a previous decision in the assessee's case for the assessment year 2010-11 and ruled that negative working capital adjustment should not be applied, as there were no new factors presented to warrant a different view for the current assessment year.

Interest on outstanding receivables:
The final issue concerned the computation of interest on outstanding receivables. The assessee argued that prior to 2013-14, no Transfer Pricing adjustment could be made on outstanding receivables by imputing notional interest. The Tribunal, referencing a decision by the Bombay High Court, directed the Assessing Officer to adopt the interest rate at LIBOR+200 points for determining the Arm's Length Price of notional interest on delayed recovery. The Tribunal partially allowed this ground of appeal.

In conclusion, the Appellate Tribunal ITAT Hyderabad partially allowed the assessee's appeal, addressing various issues related to the determination of Arm's Length Price, inclusion/exclusion of comparables, negative working capital adjustment, and computation of interest on outstanding receivables for the assessment year 2012-13 under the Income Tax Act, 1961. The Tribunal's decision was based on legal precedents, factual analysis, and adherence to consistent rulings from previous assessment years.

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