ITAT Bangalore Excludes Multiple Comparables in SAP India TP Case; Upholds Interest on Receivables

SAP India Pvt. Ltd., engaged in the distribution of SAP software products with consulting, implementation, training, and support services, reported extensive international transactions with its associated enterprises. For A.Y. 2020-21, the case underwent transfer-pricing scrutiny. The TPO rejected the company’s benchmarking study, conducted a fresh search, and proposed large adjustments, i.e., Rs. 1,813.81 crore in the distribution segment and Rs. 41.19 crore towards interest on overdue receivables. The DRP granted partial relief on the distribution adjustment but upheld the interest component, resulting in a final assessment at Rs. 11,716.84 crore.

Aggrieved, SAP India appealed to the ITAT, raising issues relating to the incorrect implementation of DRP directions, inclusion of non-comparable companies, denial of working-capital adjustment, and the separate benchmarking of outstanding receivables.

Issue Raised: Whether the comparables selected, margins adopted, and interest adjustments on receivables were in accordance with TP principles and DRP directions.

Tribunal Ruled: The Tribunal first addressed the DRP-directed correction of Compucom Software Ltd.’s margin. It found that the TPO had not applied the segment-specific (learning solutions) margin as instructed. SAP India demonstrated, using the annual report, that the correct segmental margin differed materially from the consolidated figure. The ITAT directed the AO/TPO to recompute the margin strictly for the learning solutions segment after verification.

The Tribunal examined five disputed companies. Designtech Systems Pvt. Ltd. and Daffodil Software Pvt. Ltd. were held functionally comparable, as both were involved in software-related product sales and services. However, Quick Heal Technologies Ltd., Innovana Thinklabs Ltd., and Tally Solutions Pvt. Ltd. were excluded because they owned their own software products, undertook significant R&D, or operated as product developers rather than distributors, rendering them fundamentally different from SAP India’s profile. The assessee’s request to include four new comparables was rejected because these companies did not appear in either the assessee’s own accept-reject matrix or the TPO’s search metrics.

On interest for overdue receivables, SAP India argued that receivables should be netted off against AE payables before benchmarking, relying on favourable rulings in earlier years. The Tribunal declined to follow SAP India’s reasoning on interest for overdue receivables because no legal basis, accounting practice, or judicial rationale supported netting off. It held that outstanding receivables constitute a separate international transaction requiring independent benchmarking under the retrospective amendment.

Thus, the interest adjustment was upheld.

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