Transfer pricing comparables: high-turnover software giants excluded, and receivables interest recomputed with a 60-day credit period.

High-turnover software giants and functionally dissimilar entities were excluded from the comparable set for benchmarking a captive software development service provider's international transactions, as turnover and FAR differences made them unreliable comparables; the remaining companies required fresh verification and remand to the TPO for a revised transfer pricing study. Trade receivables from the associated enterprise were treated as a separate international transaction and could be benchmarked independently, but notional interest had to be recomputed after allowing a 60-day credit period rather than 30 days.

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Issues: (i) Whether high-turnover software companies and functionally dissimilar companies could be included in the comparable set for benchmarking the assessee's international transactions in software development services; (ii) Whether interest on delayed trade receivables from the associated enterprise could be benchmarked separately, and if so, what credit period should be allowed.

Issue (i): Whether high-turnover software companies and functionally dissimilar companies could be included in the comparable set for benchmarking the assessee's international transactions in software development services.

Analysis: The turnover of the assessee was far below that of certain giant companies such as Infosys Ltd., LTI Mindtree Ltd., Wipro Ltd. and Cybage Software Pvt. Ltd. Applying the turnover filter, those entities were held to be not comparable. As to the remaining companies, their annual reports indicated diversified activities and differences in functional profile, requiring fresh verification of the FAR analysis and a fresh transfer pricing study by the TPO.

Conclusion: The inclusion of the four high-turnover companies was held to be unsustainable, and the issue of comparability of the remaining companies was remitted to the TPO for fresh examination; the assessee succeeded on this issue.

Issue (ii): Whether interest on delayed trade receivables from the associated enterprise could be benchmarked separately, and if so, what credit period should be allowed.

Analysis: Trade receivables from the associated enterprise were treated as a separate international transaction requiring benchmarking. However, while computing notional interest, a 30-day credit period was not accepted, and the Tribunal followed the precedent allowing a 60-day credit period before imputing interest.

Conclusion: The separate benchmarking of trade receivables was upheld, but the credit period was directed to be recomputed at 60 days; the assessee succeeded in part on this issue.

Final Conclusion: The appeal resulted in a partial relief to the assessee, with exclusion of certain comparables and a remand for fresh transfer pricing examination, along with recomputation of interest on delayed receivables on the basis of a 60-day credit period.

Ratio Decidendi: For transfer pricing comparability, giant high-turnover entities and functionally dissimilar companies cannot be used as comparables for a captive service provider, and delayed trade receivables may be benchmarked separately with a reasonable credit period before imputing interest.

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