TP Adjustments Reworked – ITAT Strikes Down Wrong Comparables, Demands Parity & Scientific Analysis

DRG Analytics and Insights Pvt. Ltd. Vs ACIT (ITAT Bangalore)

TP Adjustments Reworked – ITAT Strikes Down Wrong Comparables, Demands Parity & Scientific Analysis

In the case of DRG Analytics and Insights Pvt. Ltd., the Bangalore ITAT dealt with multiple transfer pricing (TP) issues relating to comparables, ESOP costs, working capital adjustment, and interest on receivables.

On comparables, the Tribunal held that:

• A company (Liquidhub Analytics Pvt. Ltd.) must be excluded since its Related Party Transactions (RPT) exceeded the 25% threshold adopted by the TPO himself.
• Once a filter is applied, it must be applied uniformly, and violation makes the comparable unreliable.

On inclusion/exclusion of comparables, ITAT laid down important principles:

• Search matrix is only a tool, not the final authority.
• FAR analysis (Functions, Assets, Risks) is supreme.
• Rejecting or including comparables mechanically = “cherry picking” (whether by TPO or assessee).
• Matter restored to examine comparables based on functional similarity, not mere database presence.

On ESOP cost adjustment, ITAT delivered a key ruling:

• If ESOP cost is treated as operating cost, then corresponding reimbursement must be treated as operating income.
• One-sided adjustment by TPO distorts cost-plus model and is impermissible.

On working capital adjustment:

• Cannot be denied casually; requires scientific computation based on averages.
• Matter remanded to AO/TPO with clear methodology (average WC, SBI PLR linkage, etc.).

On interest on receivables:

• Delay in receivables = separate international transaction (post Sec. 92B amendment).
• However, since invoices were in foreign currency, LIBOR + 200 bps to be applied (not SBI PLR).
• Also clarified that working capital adjustment does not fully subsume receivable delays.

FULL TEXT OF THE ORDER OF ITAT BANGALORE

The present appeal has been instituted by the assessee against the order of the Ld. AO/TPO u/s 143(3) r.w.s. 144C(13) of the Act dt. 06.06.2024 for the AY 2020-21

2. In the memo of appeal, the assessee has raised as many as six and additional grounds of appeal challenging the addition made on the issue of Transfer pricing adjustments, we for the sake of brevity and convenience, are not inclined to reproduce the same here.

3. At the outset, we note that Ground Nos. 1 to 1.2 are general in nature and does not call for any specific adjudication. Similarly, the additional ground No. 7 raised by the assessee was not pressed. Accordingly, the same are dismissed as infructuous and as not pressed.

4. The issues raised by the assessee in Grounds Nos. 2 to 2.3, 2.6, 2.8 and 2.10 are academic in nature and therefore the same do not require any separate adjudication. Hence, we dismiss the same. The issue in ground no. 2.4 pertains to fresh economic analysis conducted by the TPO by including a comparable namely Liquidhub Analytics Pvt. Ltd. (other inclusion not pressed) and confirmed by the Ld. DRP for computing the ALP of the international transactions carried out with the AE.

5. The brief facts of the case on hand are that the assessee, a private limited company, is engaged in provision of back-office support services (BSS) to it AEs. During the captioned AY, the assessee provided back-office support services to its AEs to the tune of Rs. 1,16,34,42,195/- only. The assessee benchmarked its transaction under BSS segment by adopting TNNM as most appropriate method and further PLI as OP/OC which arrived at 16.63% for BSS segment. The assessee for the comparability analysis under BSS segment selected 11 comparables.

5.1 However, the TPO during the assessment proceeding rejected 09 comparables out of 11 comparables selected by the assessee. The assessee’s comparables accepted by the TPO are detailed as under:

(i) Allsec Technologies Limited

(ii) Sundaram Business Services Limited

5.2 Thereafter, the TPO applied own filter and selected 12 additional comparable companies inclusive of 2 assessee’s comparables. The final TPO’s comparables are detailed as under:

(i) Allsec Technologies Limited

(ii) Sundaram Business Services Limited

(iii) Course5 Intelligence Limited

(iv) Anderson Business Solutions Private Limited

(v) Quantum Consumer Solutions Private Limited

(vi) Megri Soft Limited

(vii) Datamatics Business Solutions Limited

(viii) Ennoble Ip Consultancy Private Limited

(ix) WNS Information Services India Private Limited

(x) Axience Consulting Private Limited

(xi) Liquidhub Analytics Private Limited

(xii) Domex E-Data Private Limited

5.3 The average PLI/margin of the comparables companies computed at 15.96% with respect to BSS Segment. Accordingly, an upward TP adjustment was made by the TPO for Rs. 2,88,03,369/- only.

6. Aggrieved by the order of the AO/TPO the assessee filed objections before the Ld. DRP

7. Regard the comparable namely, Liquidhub Analytics Private Limited, the assessee submitted that the said company fails the RPT filter of 25% applied by the TPO. It was pointed out that for the relevant assessment year, the RPT to total sales ratio of the company worked out at 44.98%, as evident from its annual report. According to the assessee, since the RPT percentage exceeds the threshold of 25%, the company ought to be excluded from the final list of comparables.

8. On the other hand, the Ld. DRP observed that while computing the RPT ratio, the assessee had aggregated both related party revenue transactions and related party expenditure transactions and compared the same with total sales. However, the TPO had considered only related party revenue transactions as a percentage of total revenue for the purpose of applying RPT filter. The ld. DRP upheld the approach of the TPO and rejected the plea of the assessee. The Ld. DRP rejected the plea of assessee in this regard by relying on the following judicial precedents wherein RPT filter of 25% has been upheld:

(a) Supportsoft India Private Limited in IT(TP)A No. 1372/Bang/2011

(b) 24/7 Customer Dot Com Private Limited in ITA No. 227/Bang/2010

(c) Cisco System (India) Private Limited in IT(TP)A No. 271/Bang/2014

(d) Curam Software vs ITO reported in 37 com 141

(e) Actis Advertisers Private Limited in ITA No. 5277/Del/2011

9. Being aggrieved by the order of the AO/TPO and the directions of the Ld. DRP, the assessee preferred an appeal before us.

10. The Ld. AR before us has filed a paper book running into thousands of pages along with written submissions. The assessee submitted that the Ld. DRP erred in directing inclusion of the said company as a comparable even though it fails the RPT filter of 25% applied by the TPO. It was contended that once the RPT percentage exceeds the prescribed threshold, the company ceases to be an uncontrolled comparable and ought to be excluded from the final set.

10.1 The Ld. AR drew our attention to page 4858 of the paper book, wherein the computation of the RPT filter has been placed on record. As per the working furnished, the total related party income of Rs. 42,99,80,000 as against the total income of Rs. 1,35,23,40,000 results in an RPT ratio of 31.80%. It was submitted that since the RPT percentage exceeds the threshold of 25% applied by the TPO, the said company ought to be excluded from the list of comparables.

10.2 Per contra, the Ld. DR submitted that the assessee has incorrectly computed the RPT ratio by aggregating both related party income and expenditure. It was contended that the TPO had considered only related party revenue transactions as a percentage of total operating revenue for applying the RPT filter. According to the Ld. DR, if the same methodology is followed, the RPT percentage of Liquidhub Analytics Private Limited falls within the permissible threshold of 25%. Therefore, the company was rightly retained in the final set of comparables. The Ld. DR accordingly supported the directions of the Ld. DRP, and the approach adopted by the TPO.

11. We have considered the rival submissions of both the parties and perused the materials placed on record. The limited controversy before us is whether Liquidhub Analytics Private Limited satisfies the RPT filter of 25% applied by the TPO.

11.1 From page 4858 of the paper book, we note that the total related party income of Rs. 42,99,80,000 as against total income of Rs. 1,35,23,40,000 results in an RPT ratio of 31.80%. Even if one were to consider the figures as discussed before the DRP, the RPT percentage admittedly exceeds the threshold of 25% adopted by the TPO himself. Once the TPO has chosen to apply a 25% RPT filter, the same has to be applied uniformly to all comparables. A company having related party transactions beyond such threshold cannot be regarded as an uncontrolled comparable.

11.2 We also note that the judicial precedents relied upon by the ld. DRP, namely Supportsoft India Private Limited, 24/7 Customer Dot Com Private Limited, Cisco System (India) Private Limited, Curam Software vs ITO, and Actis Advertisers Private Limited, lay down the principle that a 25% RPT filter is reasonable. However, those decisions do not deal with the specific controversy regarding the manner of computation of the RPT ratio. Therefore, reliance placed on those decisions to justify inclusion of a company whose RPT exceeds 25% is misplaced.

11.3 In view of the above discussion, we hold that Liquidhub Analytics Private Limited fails the RPT filter of 25% applied by the TPO and is liable to be excluded from the final set of comparables.

11.4 The assessee has raised various other grounds for exclusion of the said company. However, since the assessee succeeds on the issue of RPT filter itself, we are not inclined to adjudicate the remaining grounds, which are rendered academic.

12. Coming to ground No. 2.5, the assessee vide this ground has raised contentions for inclusion of certain comparables. The relevant facts are that the assessee in its TP study report has included certain comparables namely:

(a) Jindal Intellicom Limited

(b) Riddhi Corporate Services Limited

(c) Digicall Global Private Limited

12.1 However, the TP study report was rejected by the TPO, and fresh search was conducted. The above stated comparables do not fall in the search criteria of the TPO. Hence, the same was rejected as comparables.

13. Aggrieved, assessee filed objections before the Ld. DRP.

14. Before the Ld. DRP, with regard to Jindal, Riddhi and Digicall, the assessee submitted that the said comparables are functionally comparable and passes all the quantitative filters applied by the TPO.

14.1 However, the Ld. DRP, observed that since the said comparables do not form part of search matrix of TPO, the assessee’s claim for inclusion of above stated other comparables amount to cherry picking. According to the Ld. DRP, the assessee could only seek inclusion of those companies from within the TPO’s search matrix which were wrongly rejected and cannot propose fresh companies/ comparables altogether. and hence, the ld. DRP rejected the plea of assessee in this regard.

15. Aggrieved by the order of the AO/TPO and the direction of the ld. DRP, the assessee preferred an appeal before us.

16. Before us, the Ld. AR submitted that both the TPO and the Ld. DRP has erred in excluding Jindal, Riddhi and Digicall on a limited ground that the said comparables do not form part of TPO search matrix. The assessee further submitted that Jindal, Riddhi and Digicall, fulfils the comparability criteria and equally passes all the filters applied by the TPO and requested the said comparables to be included in the final set of comparables.

17. Per contra, the Ld. DR before us submitted that once the TPO has rejected the TP study report of the assessee and carried out an independent search by applying specific filters and search criteria, the assessee cannot seek inclusion of new comparables which were not part of the search matrix. It was contended that permitting such inclusion would amount to selective cherry picking of companies favourable to the assessee. The Ld. DR further submitted that the assessee has not demonstrated any defect in the search process adopted by the TPO. Therefore, the rejection of Jindal Intellicom Limited, Riddhi Corporate Services Limited and Digicall Global Private Limited by the TPO and the Ld. DRP is justified.

18. We have carefully considered the rival submissions and perused the material available on record. The issue for consideration is whether comparables can be included or excluded solely on the basis of their presence or absence in the search matrix and what constitutes “cherry picking” in the context of transfer pricing analysis. At the outset, we note that there are divergent views expressed by coordinate benches on this issue. In Concur Technologies (India) (P.) Ltd. vs. Assistant Commissioner of Income-tax, reported in [2025] 180 com 447 (Bangalore – Trib.) dated [11-11-2025], the Tribunal has emphasised that inclusion of comparables outside the search matrix may amount to cherry picking and disturb the comparability process. Similar reasoning is found in SAP India (P.) Ltd. vs. Deputy Commissioner of Income-tax reported in [2025] 180 taxmann.com 631 (Bangalore – Trib.) dated [17­11-2025] and Hydro BS India (P.) Ltd. vs. Deputy Commissioner of Income-tax reported in [2025] 178 taxmann.com 229 (Bangalore – Trib.) dated [04-09-2025], wherein it has been held that insertion of comparables not forming part of the accept/reject matrix or search process, without any explanation or challenge to filters, would amount to cherry picking and undermine the methodology adopted for determination of arm’s length price.

18.1 At the same time, another coordinate bench in Dotgo (p.) Ltd. vs. Deputy Commissioner of Income-tax reported in [2025] 177 taxmann.com 450 (Bangalore – Trib.) dated [05-08-2025] has held that a comparable cannot be rejected merely on the ground that it does not appear in the search results, if it is otherwise functionally comparable and satisfies the relevant filters. Further, in IG Infotech (India) (P.) Ltd. vs. ACIT reported in [2023] 150 taxmann.com 470 (Bangalore – Trib.)/[2023] 102 ITR(T) 411 (Bangalore – Trib.) dated [01-11-2022] and Quicklogic Software (India) (P.) Ltd. vs. Deputy Commissioner of Income tax reported in [2022] 142 taxmann.com 482 (Bangalore – Trib.) dated [27-07-2022], the Tribunal has cautioned that selection or rejection of comparables without proper examination of functions, assets and risks or without analysing annual reports amounts to cherry picking on the part of the TPO itself.

18.2 Thus, from the above decisions, it is evident that the concept of “cherry picking” is not confined to one side alone and cannot be understood in a narrow or mechanical manner. In our considered view, the correct approach lies in appreciating the scheme of section 92C read with Rule 10B of the Act. The determination of arm’s length price is fundamentally based on comparability of functions performed, assets employed and risks assumed. The law does not mandate that comparables must necessarily originate from a particular database search or search matrix. The search matrix is only a tool for identification of potential comparables and cannot be elevated to a statutory condition governing inclusion or exclusion.

18.3 At the same time, we are conscious that transfer pricing analysis is a structured exercise and cannot be rendered arbitrary. The search matrix represents a systematic process involving application of filters and step-by-step elimination. Therefore, comparables cannot be introduced at a later stage in an ad hoc manner, without demonstrating how they satisfy the filters or why they did not emerge in the search process. Such unexplained inclusion would amount to cherry picking, as held in SAP India and Hydro BS India (supra).

18.4 Similarly, the TPO cannot rely upon the search matrix to justify selection or rejection of comparables without undertaking proper FAR analysis. Mechanical application of filters or superficial examination of comparables, without analysing their actual functions and financials, would also amount to cherry picking, as held in IG Infotech and Quicklogic Software (supra). Accordingly, the following principles emerge:

• The search matrix is a guiding tool and provides a structured starting point, but it is not conclusive.
• Functional comparability under FAR analysis is the primary test for inclusion or exclusion.
• Inclusion of comparables outside the search matrix is not impermissible per se, but such inclusion must be supported by cogent reasoning, demonstration of functional similarity, and an explanation as to why such comparable did not emerge in the search process or why the search itself is inadequate.
• Where no such explanation is provided and the search process and filters are not challenged, inclusion of new comparables would amount to cherry picking.
• Conversely, rejection of comparables solely on the ground that they do not appear in the search matrix, without examining functional similarity, is also unsustainable.
• Selection or rejection of comparables without proper FAR analysis or without examining annual reports constitutes cherry picking by the TPO.

18.5 In the present case, we find that the comparables proposed by the assessee have been rejected solely on the ground that they do not form part of the search matrix, without any examination of their functional profile. At the same time, the assessee has placed material on record to demonstrate their functional similarity. In our view, such rejection is mechanical and not in accordance with Rule 10B of Income Tax Rules. Accordingly, we direct the AO/TPO to examine the comparables proposed by the assessee afresh on the basis of functional comparability, assets employed and risks assumed, and not to reject them merely on the ground of non-inclusion in the search matrix. However, the assessee shall also demonstrate, with supporting material, how such comparables satisfy the filters. Only upon such verification, the comparables be included or excluded in accordance with law. Hence, the ground of appeal of the assessee is allowed for statistical purposes.

19. Ground No. 2.7.1 and supplementary additional ground No. 8 raised vide letter dated 15-07-2025 relate to ESOP expenses incurred by assessee’s AE.

20 . The relevant facts are that during FY 2016–17, the assessee’s AE, Decision Resources Inc. (DRI), granted ESOPs to the employees of the assessee under the “Decision Resources, Inc. Equity Incentive Plan”. Subsequently, due to a change in the ultimate ownership of the DRG Group during FY 2019–20, the said ESOP plan was terminated. As part of the termination, the AE, at its discretion, compensated eligible employees of the assessee by granting a long-term incentive aggregating to Rs. 6,05,44,154.00 which was disbursed through the assessee. However, the TPO, while computing the margin of the assessee included an amount to the tune of Rs. 6,05,44,154 in the income base of the assessee and recomputed the margin at 14.09%.

21. Aggrieved assessee filed objections before the Ld. DRP

22. Before the Ld. DRP, the assessee submitted that it merely facilitated the disbursement of the amount received from the AE to the concerned employees and had neither any obligation nor any liability in respect of such ESOP settlement. Since the entire cost was incurred and accounted for by the AE, the assessee did not route the said amount through its profit and loss account or include it in its cost base while computing the mark-up on costs for transfer pricing purposes.

22.1 However, the Ld. DRP rejected the contentions of the assessee by observing that the ESOP incentives were granted to the employees of the assessee as a reward for the services rendered by them to the AE. Therefore, such incentives are closely linked to the functions performed by the employees and cannot be treated as unrelated to the operations of the assessee. Hence, the cost relating to ESOP incentives is directly connected with the services rendered by the assessee and should form part of the operating cost. Accordingly, the DRP held that the assessee violated the arm’s length principle by not including the ESOP cost in its operating cost while computing the margin under the cost-plus model. It was therefore held that the action of the TPO in including the ESOP cost as part of the operating cost for determining the arm’s length price was justified, and the ground of the assessee was rejected.

23. Aggrieved by the order of the AO/TPO and the direction of the ld. DRP, the assessee preferred an appeal before us.

24. The Ld. AR before us submitted that the TPO has erred in treating the ESOP expenses as operating in nature and including the same in the operating cost of the assessee. However, the assessee alternatively submitted that if the ESOP reimbursement is considered as part of the operating cost, then the corresponding reimbursement income should also be included in the operating income of the assessee.

25. On the other hand, the ld. DR before us submitted that the ESOP incentives were granted to the employees of the assessee for the services rendered by them in the course of the assessee’s business operations. Therefore, the benefit arising from such incentives is directly linked with the functions performed by the employees of the assessee. It was contended that merely because the ESOP cost was borne by the AE would not alter the character of the expenditure for transfer pricing purposes. The Ld. DR further submitted that under the cost-plus model, all employee-related costs attributable to the services rendered by the assessee are required to be considered as operating costs. Accordingly, the action of the TPO and the directions of the Ld. DRP were justified.

26. We have heard the rival submissions of both the parties and perused the materials available on record. The key issue for our consideration is whether the ESOP cost incurred by the AE in respect of the employees of the assessee should be considered while determining the arm’s length price of the international transaction.

26.1 It is an undisputed fact that the ESOP settlement amount was incurred by the AE and the assessee merely acted as a facilitator in disbursing the said amount to its employees. The TPO, however, treated the ESOP compensation as a cost attributable to the services rendered by the assessee and accordingly considered the same while determining the arm’s length price.

26.2 At the same time, we notice that the TPO has made the adjustment only by increasing the income of the assessee without correspondingly adjusting the cost base. Once it is the case of the Revenue that ESOP cost forms part of the operating cost of the assessee, then under the cost-plus model the same must necessarily be reflected both in the cost base as well as in the revenue base. In other words, if a particular expenditure is considered as part of operating cost for the purpose of transfer pricing analysis, the corresponding reimbursement must also be considered as part of operating revenue.

26.3 In the present case, the adjustment has been made only on one side of the transaction, which distorts the cost-plus mechanism adopted for determining the arm’s length price. Such a one-sided adjustment is not in accordance with the transfer pricing principles. Therefore, if the ESOP cost is to be treated as part of operating cost, the corresponding amount ought to be considered as part of the operating revenue as well. Accordingly, we direct the AO/TPO to maintain parity between the cost base and the income base while computing the arm’s length price in respect of the ESOP cost. Hence, the ground of appeal of the assessee is allowed.

27. Ground No. 2.7.2 relating to the Foreign Exchange Gain/Loss was not pressed by the Ld. AR for the assessee at the time of hearing. Accordingly, the said ground is dismissed as not pressed.

28. Ground No. 2.9 relates to working capital adjustment.

29. The relevant facts are that during the assessment proceedings, the assessee submitted that appropriate adjustments should be made to account for the differences between the controlled transactions of the assessee and the uncontrolled transactions of the comparable companies. During the proceedings, the assessee was asked to explain how differences in working capital levels have impacted the profit margins of the comparable companies and to justify the claim for working capital adjustment.

29.1 However, the TPO found that the assessee was not able to explain such difference. The TPO submitted that the assessee did not submit whether the comparables companies had financed their working capital by their own funds or borrowed funds. The assessee also failed to demonstrate whether any cost has been incurred on the working capital by the comparable companies. Hence, no working capital adjustment was allowed to the assessee.

30. Aggrieved assessee filed objections before the Ld. DRP.

31. Before the Ld. DRP, the assessee referred to the decision in the case of Mentor Graphics (Noida) Pvt. Ltd. in ITA No. 1969/Delhi/2006, wherein the Hon’ble Delhi High Court held that, depending on the facts of each case, appropriate adjustments such as working capital, risk and growth adjustments may be required to eliminate differences between controlled and uncontrolled transactions. The assessee further submitted that several judicial precedents have allowed working capital adjustment, and therefore such adjustment ought to be granted in the present case as well.

31.1 However, the Ld. DRP observed that Rule 10B of the Rules provides for making reasonably accurate adjustments to uncontrolled transactions to eliminate the material effects of differences on price, cost or profits. The assessee has claimed working capital adjustment on the ground that there are differences in receivables and payables between the assessee and the comparable companies.

31.2 However, the Ld. DRP noted that the assessee was not able to demonstrate, with proper data or supporting material, how such differences in working capital have materially affected the price, cost or profit. The Ld. DRP further observed that the receivables and payables shown in the balance sheet only reflect the position as on the last day of the financial year. Such figures, by themselves, do not establish the actual impact of working capital on profitability during the year.

31.3 It was also observed that the cost attributable to working capital would differ from enterprise to enterprise, depending on the cost of funds and economic conditions in which the enterprise operates. In view of these observations, the Ld. DRP held that a reasonably accurate adjustment could not be made in the present case. The assessee had also failed to demonstrate material differences warranting such adjustment. Accordingly, the Ld. DRP upheld the reasoning of the TPO and rejected the claim of the assessee for working capital adjustment.

31.4 Aggrieved by the order of the AO/TPO and the direction of ld. DRP, the assessee preferred an appeal before us.

31.5 The Ld. AR before us submitted that working capital adjustment ought to be granted to the assessee. It was contended that both the TPO and the Ld. DRP erred in rejecting the claim for working capital adjustment.

31.6 In support of this contention, the Ld. AR placed reliance on various judicial precedents of the Bangalore Bench of the Tribunal, wherein it has been consistently held that working capital adjustment should be granted when there are differences in receivables, payables and inventory between the assessee and the comparable companies. Accordingly, it was prayed that appropriate working capital adjustment be directed to be granted while computing the arm’s length margin.

32. On the other hand, the Ld. DR before us submitted that the assessee has not furnished reliable data to demonstrate the impact of differences in working capital on the margins of the comparable companies. It was contended that merely showing differences in receivables and payables from the balance sheet does not automatically justify a working capital adjustment. The Ld. DR further submitted that in the absence of proper computation based on average balances and supporting data regarding the cost of funds, a reasonably accurate adjustment as contemplated under Rule 10B cannot be made. Accordingly, the Ld. DR supported the findings of the TPO and the directions of the Ld. DRP in rejecting the claim for working capital adjustment.

33. We have considered the rival submissions of both the parties and examined the materials available on record. While benchmarking international transactions under the TNMM, differences in working capital levels between the assessee and the comparable companies are required to be adjusted in terms of Rule 10B(1)(e) of the Income-tax Rules, as such differences materially affect the net profit margins.

33.1 In the present case, the assessee has contended that its working capital position, including trade receivables, trade payables and inventory, is materially different from that of the comparables. However, we find that the authorities below have not carried out a proper working capital analysis based on average balances and comparable data. The rejection of the claim without undertaking a scientific computation is not justified.

33.2 Hence, in the interest of justice and fair-play, we deem it appropriate to restore this issue to the file of the AO/TPO for the limited purpose of granting working capital adjustment in accordance with law. The AO/TPO is directed to compute the working capital adjustment in line with the principles laid down in Agilent Technologies (International) P. Ltd. vs. ACIT reported in [2025] 172 taxmann.com 858 (Delhi – Trib.), as detailed under:

(i) Compute the average of opening and closing balances of inventories, trade receivables and trade payables of both the tested party and the comparables for the relevant year, considering only revenue account items.

(ii) Compute the net working capital as a percentage of operating cost/sales (whichever denominator is used in the PLI) for both the assessee and the comparables.

(iii) Determine the difference between the working capital ratio of the assessee and that of each comparable.

(iv) Multiply such differences by the appropriate interest rate, i.e., SBI Prime Lending Rate as on 30^th June of the relevant financial year.

(v) Add the resulting adjustment to the profit margin of each comparable as finally determined.

(vi) Loans, advances or other financing transactions shall not be considered for this purpose.

33.3 The AO/TPO shall grant due opportunity of being heard to the assessee while carrying out the above exercise. In the present case, the comparables have been selected by the TPO. Therefore, the initial onus lies on the TPO to examine whether there are material differences between the assessee and the comparable companies, including differences in working capital levels. While determining the arm’s length price under the TNMM, adjustments are required to be made for differences which materially affect the profit margins. Working capital differences directly impact profitability and therefore must be examined. Since the TPO has selected the comparables based on his own search process and filters, he cannot simply deny working capital adjustment without proper analysis. Once the assessee points out differences in working capital, the burden shifts to the TPO to demonstrate, with reasons and data, that such differences do not materially affect the margins. If he fails to do so, he is duty-bound to grant appropriate working capital adjustment. This is because the exercise of determining arm’s length price must be fair, scientific and in accordance with Rule 10B of Income Tax Rules. Accordingly, this issue is set aside to the file of the AO/TPO for fresh determination in accordance with the law and above directions.

34. Ground Nos. 3 to 5 relates to notional interest on trade receivables.

34.1 The relevant facts of the case are that the TPO treated the delay in realization of trade receivables from the AEs as unsecured loans advanced to the AEs and, accordingly, computed notional interest for the period of such delay during the year under consideration. In doing so, the Ld. TPO placed reliance on the provisions of section 92B of the Act, wherein the definition of “international transaction” was retrospectively amended to include capital financing transactions arising in the course of business.

34.2 The Ld. TPO computed notional interest on the average receivables of the assessee for the captioned AY by applying the SBI PLR applicable for the captioned Assessment year at the rate of 13.27% after allowing a credit period of 30 days and, on such basis, determined the total notional interest adjustment at Rs. 2,57,45,073/- only.

35. Aggrieved assessee filed objections before the Ld. DRP.

36. Before the Ld. DRP, the assessee submitted the interest on delayed receivables should not be considered a separate international transactions reason being they represent only a consequence of the principal international transaction i.e. sales. The assessee also relied on the judgment of Hon’ble Delhi High Court in the case of Kusum Healthcare Pvt. Ltd. reported in TS-412-HC-2017(Del)-TP wherein the Hon’ble Court held that separate adjustment on the pretext of o/s receivable is unjustified when the comparables are accepted and TP of underlying transaction i.e. sale of goods is also accepted. Similar reliance was also placed by the assessee on various other judicial precedents. The assessee also submitted that it is a debt free company, since it does not carry any interest on its funds, interest on delayed receipts from AE is not warranted.

36.1 Further, the assessee contended that the amount of outstanding receivables gets adjusted in the working capital adjustments and hence, addition is not required separately thereon.

36.2 The assessee, without prejudice, also contended that since the invoices are raised in foreign currency, interest computation, if any, ought to be made shall be made with reference to LIBOR Rates.

36.3 The Ld. DRP, with regard to contention of the assessee regarding whether the interest on delayed receivables constitutes a separate international transaction, observed that the amendment inserted by way of Explanation to sec. 92B of the Act, the term ‘internation transaction’ would specifically include within its ambit “deferred payment or receivable or any other debt arising during course of business…” and hence, non-charging or under-charging of interest on excess period of credit allowed to the AE for the realization of invoices would amount to an international transaction. The Ld. DRP further relied on plethora of judicial precedents in this regard.

36.4 With regard to interest rate, Ld. DRP gave a direction to TPO to adopt the SBI short term deposit interest rate for the period under consideration and re-compute the adjustment made on the total income.

36.5 Aggrieved by the order of the AO/TPO and the direction of ld. DRP, the assessee preferred an appeal before us.

36.6 The Ld. AR before us submitted that trade receivables should not be treated as a separate international transaction and no interest should be imputed on the same. It was submitted that the TPO has wrongly treated the outstanding trade receivables as if they were unsecured loans advanced to the AEs and accordingly computed interest on such receivables amounting to Rs. 2,57,45,073.00.

36.7 The assessee further submitted that the TPO has computed interest by adopting the SBI PLR rate. It was submitted that all invoices during the relevant assessment year were raised in foreign currency. Therefore, if any adjustment is warranted, the rate applicable to foreign currency denominated transactions, i.e., LIBOR, should be applied and not the domestic SBI PLR rate.

36.8 The assessee also submitted that the working capital adjustment already takes into account the impact of receivables and payables. Therefore, any alleged excess credit period stands subsumed in the working capital adjustment. Hence, no separate adjustment for interest on delayed receivables is required.

36.9 Without prejudice, the assessee submitted that if at all interest is to be computed, the same should be done by applying LIBOR plus 200 basis points, as held in several judicial precedents. Accordingly, the assessee requested the Bench to direct the TPO to recompute the interest on trade receivables by applying LIBOR plus 200 basis points.

37. On the other hand, the Ld. DR before us submitted that the TPO has rightly treated the outstanding receivables from AEs as a separate international transaction in view of the Explanation inserted to section 92B of the Act, which specifically includes deferred payments or receivables arising during the course of business. It was contended that the assessee had allowed an extended credit period to its AEs without charging any interest, which is not consistent with the arm’s length principle. The Ld. DR further submitted that such delay results in a financing benefit to the AE and therefore warrants benchmarking. Accordingly, the Ld. DR supported the adjustment made by the TPO and the directions of the Ld. DRP.

38. We have considered the rival submissions of both the parties and perused the materials available on record. The TPO has treated the outstanding trade receivables from AEs as a separate international transaction and computed interest thereon by adopting the SBI PLR rate. The ld. AR before us submitted that the interest on delayed receivables should not be treated as a separate international transaction. It was further contended that the rate adopted by the TPO is not correct, as the invoices were raised in foreign currency. At the outset, with regard to the contention of the assessee that the interest on delayed receivables should not be treated as a separate international transaction, we find that by virtue of the amendment inserted by way of Explanation to section 92B of the Act, the term “international transaction” has been expanded to specifically include within its ambit “deferred payment or receivable or any other debt arising during the course of business”. Therefore, non-charging or under-charging of interest on the excess period of credit allowed to the associated enterprise for realization of invoices would fall within the scope of an international transaction under the said provision. We also note that various judicial precedents have taken a similar view that delay in realization of receivables from AEs constitutes a separate international transaction requiring benchmarking under the transfer pricing provisions.

38.1 It is an undisputed fact that the receivables arise from services rendered to AEs and the invoices were denominated in foreign currency. In such cases, the interest rate applicable to foreign currency transactions should be applied. The adoption of domestic SBI PLR rate is not justified.

38.2 The Tribunal in several cases consistently held that where the underlying transaction is in foreign currency, the appropriate benchmark rate is LIBOR plus a reasonable basis point spread. We find force in the following judicial precedents in the jurisdictional Bangalore ITAT in the case of Synechron Technologies (P.) Ltd vs. ACIT [2025] 175 taxmann.com 404 (Bangalore – Trib.) [04-06-2025]. The relevant para is reproduced below:

“We have heard the rival submissions and perused the materials available on record. So far as the argument of assessee that the transaction of outstanding receivables is not an international transaction, we do not find any force in this argument because now there are so many judgements on this issue, wherein it has been held that the transactions of outstanding receivables is an international transaction. So far as the applicability of rate is concerned, we observe that TPO has erred in applying LIBOR+450 basis points as a rate o f interest, therefore, we modify this rate of interest to the tune of LIBOR+200 basis points, in the interest of justice and direct the TPO to calculate the interest attributable to the outstanding receivables accordingly. ”

38.3 Accordingly, we direct the TPO to recompute the interest on delayed receivables, if any, by adopting LIBOR plus 200 basis points. Interest shall be computed only for the actual period of delay beyond the agreed credit period. The TPO shall grant reasonable opportunity to the assessee while recomputing the adjustment.

38.4 Further, we note that working capital adjustment is computed on the basis of opening and closing balances of receivables and payables. However, delayed realisation of receivables has to be examined on a transaction-to-transaction basis.

38.5 If an invoice is raised during the year and the amount is realised within the same financial year, but beyond the agreed credit period, such delay may not be fully reflected in the working capital adjustment. This is because working capital adjustment is calculated with reference to the balances as on the first and last day of the financial year, and not with reference to each individual invoice.

38.6 Therefore, to that limited extent, the contention of the assessee that all delays in receivables automatically get subsumed in the working capital adjustment cannot be fully accepted. Hence, the ground of the assessee’s appeal is allowed in part in the above terms.

39. Ground No. 6 relating to levy of interest u/s 234A, 234B and 234C of the Act is consequential in nature. The AO is directed to recompute the interest, if any, while giving effect to this order, as per law.

40. In the result, the appeal of assessee is partly allowed for statistical purposes.

Order pronounced in court on 29^th day of April, 2026