Transfer pricing segmental data and receivables adjustments require verification, working capital analysis, and proper foreign-currency benchmarking.

In transfer pricing analysis, Chartered Accountant-certified segmental financial statements for software development cannot be discarded merely because they are unaudited or show margin variation; the allocation method and expense apportionment must first be tested for reliability, and the data may require verification before any arm's length price redetermination. Separate adjustment for overdue receivables must also be assessed within the overall transfer pricing framework, including working capital adjustment. If working capital adjustment is allowed, the separate receivables addition may not survive; if not, foreign-currency invoices should be benchmarked with an appropriate foreign-currency rate rather than a domestic lending rate.

---

---

Issues: (i) Whether the rejection of the assessee's Chartered Accountant-certified segmental financial statements for the software development segment was justified for determining the arm's length price; (ii) Whether the separate adjustment made on overdue receivables was sustainable and whether working capital adjustment and foreign-currency benchmarking required reconsideration.

Issue (i): Whether the rejection of the assessee's Chartered Accountant-certified segmental financial statements for the software development segment was justified for determining the arm's length price.

Analysis: The assessee had maintained segmental results for AE and non-AE businesses, and the evidence before the lower authorities included a Chartered Accountant-certified segmental analysis. The rejection was based substantially on the absence of audit status and on wide margin variation between the two segments. Such grounds, by themselves, were insufficient to discard the evidence at the threshold. The segmental allocation methodology and the basis of expense apportionment required proper examination, and the evidence could not be rejected without first testing its reliability and, if necessary, calling for further clarification or verification.

Conclusion: The rejection of the segmental financial statements was not sustained. The issue was restored to the Assessing Officer for fresh examination and redetermination of the arm's length price after considering the segmental data.

Issue (ii): Whether the separate adjustment made on overdue receivables was sustainable and whether working capital adjustment and foreign-currency benchmarking required reconsideration.

Analysis: The receivables adjustment had to be examined in the context of the transfer pricing exercise as a whole. The claim for working capital adjustment required reconsideration on the basis of the comparables selected and the principles governing arm's length computation. If working capital adjustment was found allowable, the separate receivables adjustment would not survive. If not, the transaction could still be treated as a separate international transaction, but the benchmark could not rest on State Bank of India PLR when the invoices were in foreign currency; a foreign-currency benchmark such as LIBOR with appropriate markup was indicated.

Conclusion: The receivables issue was allowed to the extent of requiring reconsideration of working capital adjustment and foreign-currency benchmarking, with consequential impact on the addition.

Final Conclusion: The appeal succeeded only in part, with the transfer pricing additions not finally upheld and the matter remitted for fresh determination on the identified issues.

Ratio Decidendi: Chartered Accountant-certified segmental results cannot be discarded merely because they are unaudited or show margin variation, and a separate receivables adjustment must be tested in the light of the transfer pricing analysis, including working capital effects and appropriate foreign-currency benchmarking.

---