ITAT: Excludes comparables failing turnover filter and not appearing in search matrix
Concur Technologies (India) Pvt. Ltd. Vs ACIT (ITAT Bangalore),
Summary: The ITAT Bangalore addressed multiple transfer pricing disputes relating to software development, ITeS, and marketing support services rendered by a captive service provider operating on a cost-plus model. It held that the TPO erred in selecting giant companies such as Infosys, TCS, Wipro, Mindtree, and L&T Infotech despite their turnovers running into thousands of crores, ruling that an upper turnover filter must be applied since huge size differences materially impact margins. On comparables not appearing in the TPO’s search matrix, the Tribunal held that unless flaws in the TPO’s methodology are shown, such companies cannot be added later, confirming rejection of Virinchi Ltd. and MAA Business Solutions for ITeS. The Tribunal allowed possible inclusion of R Systems, noting that calendar-year reporting cannot be a ground for exclusion when quarterly audited financials permit reconstruction. It also directed the TPO to recompute the RPT filter uniformly, impacting Saatchi & Saatchi Pvt. Ltd. The ITAT emphasised that working capital adjustment must be granted, as differences in receivables/payables directly affect TNMM margins. Finally, it held that interest on receivables may require no separate adjustment after working capital correction, and if required, must be benchmarked using Euribor, not LIBOR, since invoices were Euro-denominated.
Facts:
I. Concur Technologies (India) Private Limited (“the assessee”) is a wholly-owned subsidiary engaged in rendering Software Development Services (SWD), Information Technology Enabled Services (ITeS), and Marketing Support Services (MSS) exclusively to its Associated Enterprises (“AEs”). The assessee functions as a captive service provider, operating on a cost-plus remuneration model, with minimal business and market risk. The activities performed includes development and enhancement of software modules based on specifications received from AEs, providing back-office and technical support for SAP-related products, supporting AEs in marketing initiatives, events, trade shows, and limited localisation of promotional material.
II. The assessee filed its return of income on 12 February 2021, declaring total income of Rs. 33,33,24,140. The return was selected for scrutiny primarily on account of international transactions with AEs requiring transfer pricing examination.
III. During the relevant previous year, the assesse received Rs. 232,07,13,740 from AEs towards provision of SWD, ITeS, and MSS; paid IT infrastructure charges of Rs. 60,64,45,156 to AEs; also paid various other intra-group charges.
For benchmarking these transactions, the assessee adopted TNMM (Transactional Net Margin Method) as the Most Appropriate Method and determined a uniform operating margin of 16.31% across all three segments (SWD, ITeS, MSS), supported by a combined set of 31 comparables. Segmental financials were prepared, but the assessee’s TP Study aggregated all service segments for benchmarking.
IV. The Assessing Officer made a reference to the learned TPO u/s 92CA for determining ALP. The TPO rejected the assessee’s TP Study primarily on the grounds that:
- the assessee had aggregated functionally distinct segments without justification,
- inter-company agreements specified separate and distinct activities,
- combined benchmarking was therefore inappropriate.
Consequently, the TPO carried out a fresh search on independent databases, applied his own quantitative and qualitative filters, and identified separate sets of comparables for each segment.
V. The TPO, after applying multiple filters, selected the following comparables:
- Eighteen comparables for SWD segment (median margin 09%, at 35th–65th percentile range),
- Thirteen comparables for ITeS segment (median margin 21%),
- six comparables for MSS segment (median margin 42%).
The TPO rejected several comparables proposed by the assessee as they did not appear in the TPO’s search matrix, irrespective of functional similarity.
VI. Based on the above margins, the TPO proposed the following transfer pricing adjustments:
- SWD services: Adjustment of 1,80,49,887,
- ITeS services: Adjustment of 10,54,01,201,
- MSS services: Adjustment of 28,15,469,
- Interest on delayed receivables: 5,00,298 (computed as a separate international transaction using LIBOR + markup).
The total transfer pricing adjustment was computed at Rs. 12,67,66,855.
VII. The AO incorporated the TPO’s findings into a draft assessment order dated 28.12.2023, determining the total income at Rs. 46,00,90,995. The assessee filed objections before the DRP, challenging the selection and rejection of comparables, non-grant of risk & working capital adjustments, treatment of receivables, and disregard of segmental data.
The DRP, after considering remand reports and rejoinders, affirmed the TPO’s approach, concluding that:
- turnover differences do not materially affect margins,
- comparable companies selected by the assessee cannot be included if absent in TPO’s search matrix,
- working capital adjustment is not warranted on facts.
VIII. The DRP thus confirmed all material adjustments.
- Following DRP directions, the AO passed the final order u/s 144 r.w.s. 144C(13) r.w.s. 144B on 25.10.2024, determining total income at Rs. 46,00,90,995. The assessee remains aggrieved and filed the present appeal before the Tribunal.
Issues:
I. Whether the TPO erred in not applying an upper turnover filter, despite the assessee’s turnover of Rs. 23.91 crore being compared with companies having turnovers running into thousands of crores.
II. Whether comparables proposed by the assessee, but not appearing in the TPO’s search matrix, could be included in the final set of comparables.
III. Whether Virinchi Ltd. and MAA Business Solutions Pvt. Ltd. ought to have been included in the ITeS segment.
IV. Whether R Systems International Ltd., following a calendar-year reporting period, should be included when quarterly audited financials are available for reconstructing data for the relevant financial year.
V. Whether Saatchi & Saatchi Pvt. Ltd. fails the Related Party Transaction (RPT) filter, and what is the correct methodology for computing such RPT percentage.
VI. Whether the assessee is entitled to working capital adjustment, and whether denial of such adjustment affects the legitimacy of charging interest on delayed receivables.
VII. Whether interest on outstanding receivables requires a separate TP adjustment when ALP is determined under TNMM and when invoices are denominated in Euro, not USD.
Observations:
I. W.R.T. issue I: The Tribunal noted that the assessee’s turnover in the software development segment was Rs. 23.91 crore, whereas the TPO’s comparables included extremely large entities such as Infosys, TCS, Wipro, L&T Infotech, Tata Elxsi, Mindtree and Cybage, whose turnovers run into hundreds to thousands of crores. These companies operate with significant brand value, market dominance, large-scale operations, and different cost structures, which materially influence profitability. The TPO failed to establish that such massive size differences do not affect margins. Therefore, the Tribunal held that an upper turnover filter ought to have been applied, and all high-turnover companies were directed to be excluded from the comparable set.
II. W.R.T. issue II: The Tribunal observed that the TPO had followed a structured search process using specific databases, keywords and filters, and the assessee did not point out any flaw in that process. Allowing inclusion of companies that did not emerge from the TPO’s search matrix would amount to cherry-picking, which is contrary to comparability principles. Thus, merely because a company appears functionally similar, it cannot be inserted later unless the TPO’s search methodology is shown to be defective. Accordingly, such comparables were rightly rejected.
III. W.R.T. issue III: The Tribunal found that both Virinchi Ltd. and MAA Business Solutions Pvt. Ltd. were not present in the TPO’s search results, and the assessee had not demonstrated any inadequacy or error in the TPO’s filters or search methodology.
In the absence of such a showing, the Tribunal held that it is impermissible to include new comparables outside the search matrix at a later stage. Thus, these companies could not be included in the ITeS comparable set.
IV. W.R.T. issue IV: The Tribunal noted that although R Systems follows a calendar-year accounting cycle, it publishes quarterly audited results, making it possible to reconstruct financials for the relevant April–March period. A different financial year cannot be the sole ground for exclusion when reliable quarterly data is available. The matter was therefore restored to the TPO to verify the reconstructed figures, and if found accurate, the company shall be included as a valid comparable.
V. W.R.T. issue V: There existed inconsistency between the assessee and the TPO regarding the formula used to compute the Related Party Transaction (RPT) percentage. The Tribunal held that the RPT filter must be applied uniformly and transparently across all comparables. Since the record did not clearly reflect how the TPO applied the test, the Tribunal remitted the matter to the TPO to recompute RPT using a consistent method. Saatchi & Saatchi Pvt. Ltd. shall be retained or excluded strictly on the basis of whether it passes the correctly applied RPT threshold.
VI. W.R.T. issue VI: The Tribunal held that differences in receivable days, payable days and overall working capital levels directly influence margins under TNMM. The TPO erred in rejecting the working capital adjustment on the ground that the assessee did not prove differences, as once comparables are selected by the TPO, the onus lies on the TPO to examine and compute such adjustment.
The Tribunal therefore directed that a proper working capital adjustment must be granted, and margins recomputed accordingly.
VII. R.T. issue VII: The Tribunal observed that if working capital adjustment is granted, the impact of delayed receivables stands neutralised, and no further adjustment for interest is warranted. However, if after re-computation there remains a need for separate interest adjustment, such interest must be calculated using the correct benchmark rate, i.e., Euribor, since the invoices are raised in Euro, and not USD-linked LIBOR. Thus, the issue was restored to the TPO to recompute interest, only if necessary, and using the appropriate currency-specific benchmark.
Author Bio
