Turnover disparity and delayed receivables in transfer pricing drove exclusion of comparables and LIBOR-based recomputation.

Substantial turnover disparity was treated as a valid comparability factor in transfer pricing, because scale, economies of scale, market position, asset base and risk profile can materially affect profitability; companies with vastly higher turnover than the tested party were excluded where the operations were not broadly comparable. Delayed trade receivables from associated enterprises were treated as an international transaction, with benchmarking required after netting off receivables and payables relating to the same AE where appropriate. For foreign-currency receivables, the adjustment was recomputed using LIBOR plus a reasonable spread, reduced here to LIBOR plus 200 basis points. The result was partial relief through exclusion of selected comparables and recomputation of the receivables adjustment.

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Issues: (i) Whether companies having substantially higher turnover than the tested party could be excluded from the comparable set in transfer pricing analysis; (ii) whether interest on delayed trade receivables from associated enterprises constituted a separate international transaction and, if so, the manner of benchmarking the adjustment.

Issue (i): Whether companies having substantially higher turnover than the tested party could be excluded from the comparable set in transfer pricing analysis.

Analysis: Turnover was held to be a relevant comparability factor because scale of operations, economies of scale, market position, asset base and risk profile materially affect profitability. A mechanical turnover filter was not approved, but where the tested party had a much smaller turnover, companies with vastly larger turnover were found to be unsuitable comparables. The comparability exercise was linked to the broader FAR analysis and the need for a broadly similar scale of operations.

Conclusion: The high-turnover comparables were directed to be excluded, and this issue was decided in favour of the assessee.

Issue (ii): Whether interest on delayed trade receivables from associated enterprises constituted a separate international transaction and, if so, the manner of benchmarking the adjustment.

Analysis: Delayed receivables were treated as falling within the expanded scope of international transaction under section 92B. However, working capital adjustment was not accepted as a complete answer for all invoice-wise delays, and netting off was held permissible where receivables and payables related to the same associated enterprise. For benchmarking, the foreign-currency receivable was required to be computed with reference to LIBOR plus a reasonable spread, and the spread adopted was reduced to LIBOR plus 200 basis points.

Conclusion: The receivables adjustment was upheld in principle but recomputation was directed after netting off and by applying LIBOR plus 200 basis points, resulting in a partial relief to the assessee.

Final Conclusion: The appeal succeeded only to the extent of exclusion of selected comparables and recomputation of the receivables adjustment, while the remaining challenge did not survive.

Ratio Decidendi: In transfer pricing, substantial turnover disparity is a valid ground to exclude otherwise functionally similar companies where size materially affects profitability, and interest on delayed receivables may be benchmarked only after considering same-AE netting and a reasonable LIBOR-based spread.

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