Comparables Functionally Dissimilar, Receivables Subsumed in Working Capital: ITAT Deletes TP Adjustment in AMD India Case [Read Order]
The Tribunal upheld the CIT(A)’s findings that several comparables were functionally dissimilar and that notional interest on delayed receivables was already subsumed within the working capital adjustment.
AMD - TP - case - taxscan
AMD - TP - case - taxscan
The Bangalore Bench of the Income Tax Appellate Tribunal (ITAT) deleted a ₹19.63 crore adjustment proposed by the Transfer Pricing Officer (TPO) against AMD India Pvt. Ltd., as comparables were functionally dissimilar and receivables were already subsumed in the working capital.
AMD India Pvt. Ltd., a captive software development service provider to its Associated Enterprises (AEs), had declared international transactions worth ₹168.92 crore.
The company adopted the Transactional Net Margin Method (TNMM) and selected six comparables, reporting a profit margin of 12%, which it claimed was within the arm’s length range.
The TPO rejected AMD’s comparables and selected nine new companies, computing an average margin of 19.96%. After applying a working capital adjustment of 1.54%, the final arm’s length margin was pegged at 18.42%, resulting in a primary TP adjustment of ₹10.42 crore.
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The TPO treated delayed receivables from AEs as separate international transactions and imputed notional interest at 14.45%, leading to a further adjustment of ₹9.21 crore. The total TP adjustment stood at ₹19.63 crore.
On appeal, the CIT(A) excluded four comparables, Infobeans Technologies, L&T Infotech, Persistent Systems, and Mindtree, citing functional dissimilarity, lack of segmental data, and scale mismatch.
The CIT(A) also adopted Cash PLI instead of Operating Profit/Operating Cost, concluding that AMD’s margin was within the arm’s length range. Consequently, the TP adjustment for software development services was nullified.
Regarding the notional interest on receivables, the CIT(A) held that once a working capital adjustment is granted, no separate adjustment for delayed receivables is permissible. This view aligned with prevailing jurisprudence that such financial effects are already captured within the working capital framework.
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The ITAT upheld the CIT(A)’s approach on both counts. It was agreed that the excluded comparables were not functionally similar to AMD’s captive development model and lacked reliable segmental data. The Tribunal emphasised that comparability must be based on core business functions, and minor ancillary differences cannot justify inclusion.
On the receivables issue, the Tribunal concurred that the working capital adjustment inherently accounts for delays in realisation.
The two-member bench comprising Keshav Dubey (Judicial Member) and Waseem Ahamed (Accountant Member) rejected the Revenue’s argument for a separate notional interest adjustment, noting that such duplication would distort the arm’s length analysis.
The Tribunal also dismissed the Revenue’s reliance on earlier ITAT rulings that downplayed turnover as a comparability factor. It held that scale and segmental clarity are critical under TNMM, especially for specialised service providers like AMD.
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