Transfer pricing comparables must pass uniform turnover filters, with working capital and LIBOR-based receivables benchmarking applied consistently.

Turnover filters must be applied uniformly to comparables: high-turnover entities outside the accepted range were excluded and the comparable set was remitted for fresh verification. Working capital adjustment could not be denied merely because detailed intra-year data was unavailable; annual report opening and closing balances were sufficient, so the adjustment was allowed. Interest on outstanding foreign-currency receivables had to be benchmarked with LIBOR plus a reasonable markup, not domestic deposit rates, so the adjustment was to be recomputed accordingly. A rectification direction excluding Access Healthcare Services Pvt. Ltd. from the ITES comparable set was binding and had to be given effect.

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Issues: (i) whether the turnover filter required exclusion of the selected high-turnover comparables and whether the matter should be remitted for uniform application of that filter; (ii) whether working capital adjustment could be denied for want of detailed intra-year working capital data; (iii) whether interest on outstanding trade receivables from associated enterprises was to be benchmarked on LIBOR plus markup rather than the domestic short-term deposit rate; (iv) whether the rectification direction excluding Access Healthcare Services Pvt. Ltd. from the comparable set had to be given effect.

Issue (i): whether the turnover filter required exclusion of the selected high-turnover comparables and whether the matter should be remitted for uniform application of that filter.

Analysis: The turnover of the assessee was far below the turnover of Infosys BPM Limited, Inteq BPO Services Limited, Eclerx Services Limited and Tech Mahindra Business Services Limited. Applying the settled turnover filter of ten times on both sides of the assessee's turnover, those companies were outside the acceptable range. The same principle was also required to be applied uniformly to all comparables, and the issue therefore warranted fresh verification by the Transfer Pricing Officer.

Conclusion: The four identified comparables were held to be unsuitable, and the issue was remitted for uniform re-examination of the comparable set.

Issue (ii): whether working capital adjustment could be denied for want of detailed intra-year working capital data.

Analysis: Working capital differences materially affect margins under the transfer pricing rules. The absence of daily or monthly third-party working capital data could not by itself defeat the claim, because such information is not ordinarily available in the public domain. The adjustment could be worked out on the basis of opening and closing balances from the annual reports of comparables.

Conclusion: Working capital adjustment was directed to be granted and the ground was allowed for statistical purposes.

Issue (iii): whether interest on outstanding trade receivables from associated enterprises was to be benchmarked on LIBOR plus markup rather than the domestic short-term deposit rate.

Analysis: For foreign currency transactions, the arm's length interest rate is governed by the currency in which the receivable is to be realized, and not by domestic lending or deposit rates. The appropriate benchmark for outstanding foreign-currency receivables was therefore LIBOR with a reasonable markup, and the domestic short-term deposit rate was not the proper measure.

Conclusion: The adjustment was directed to be recomputed by applying LIBOR plus 200 basis points.

Issue (iv): whether the rectification direction excluding Access Healthcare Services Pvt. Ltd. from the comparable set had to be given effect.

Analysis: The rectification order of the Dispute Resolution Panel expressly directed exclusion of Access Healthcare Services Pvt. Ltd. from the ITES comparable set on the ground that it failed the export turnover filter. That direction was binding for giving effect to the final assessment.

Conclusion: The exclusion was directed to be implemented.

Final Conclusion: The appeal succeeded only in part. The turnover-based challenge resulted in exclusion of the identified comparables and remand for uniform re-testing, working capital adjustment was allowed, interest on receivables was to be recomputed on the LIBOR basis, and the rectification direction on Access Healthcare Services Pvt. Ltd. was to be followed.

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