INCOME TAX OFFICER, CHENNAI vs. KAAR TECHNOLOGIES INDIA PVT LTD, CHENNAI

Since both appeals emanate from a common order and involve interconnected issues, they were heard together and are disposed of by this common order for the sake of convenience and brevity.

The brief facts of the case emanating from the records are that the assessee is a company engaged in the business of implementing and customising SAP software for customers located across the globe, principally in the Middle East. For the assessment year under consideration, the assessee filed its return of income on 29.11.2016 admitting a total income of Rs.6,41,35,760/-. The return was processed u/s.143(1) of the Act and the case was thereafter selected for scrutiny.

As the assessee had entered into international transactions with its associated enterprises, a reference was made to the Transfer Pricing Officer (TPO) u/s.92CA(1) of the Act. In its transfer pricing study, the assessee benchmarked the provision of information technology related services applying the Transactional Net Margin Method ("TNMM") as the most appropriate method, selected eleven comparables and arrived at a weighted average PLI of the comparables at 8.84% as against its own operating margin of 9.62% on operating costs, and accordingly claimed that its international transactions were at arm's length.

The AO additionally examined the claim of relief u/s.90 of the Act in respect of taxes withheld in Saudi Arabia, China, Qatar, Kuwait and Oman. Holding that credit for taxes paid abroad could not exceed that part of the Indian income-tax which is attributable to the income which may be taxed in the source State, the AO computed the admissible relief on a proportionate basis by reference to the total income returned, and disallowed excess relief of Rs.53,16,818/-.

A draft assessment order was passed on 18.12.2019 u/s.144C(1) of the Act. The Dispute Resolution Panel-2, Bengaluru,(the DRP) vide order in F.No.134/DRP-2/BANG/2019-20 dated 26.02.2020, treated the objections filed by the assessee as invalid. Consequently, the final assessment order came to be passed on 27.02.2020 determining the total income at Rs.18,86,17,972/-.

In the first appeal, the ld.CIT(A) dealt with each comparable company individually and, by the impugned order, partly allowed the appeal. In substance, the ld.CIT(A) held as under:

Aggrieved by the portion of the order that went against it, the assessee is in appeal in IT(TP)A No.21/Chny/2025, principally assailing the retention of R Systems International Ltd. in the final set, the rejection of its own comparables, the alleged infirmity in the profit level indicator and the median adopted by the

The Revenue, on its part, is in appeal in ITA No. 2449/CHNY/2025 on the following grounds, in substance:

We have heard the rival submissions of the learned Authorised Representative (ld.AR) for the assessee and the learned Departmental Representative (ld.DR), perused the material available on record and the orders of the authorities below, including the transfer pricing order, the draft and final assessment orders and the written submissions filed before the first appellate authority.

The core of the Revenue's grievance is that the ld.CIT(A) has misapplied TNMM by insisting upon a closer degree of functional similarity than that method requires. We are unable to accept this contention.

The exclusion of the four comparables rests on an altogether different and narrower footing, namely, functional dissimilarity coupled with the absence of segmental results. Tolerance of routine cost differences under TNMM does not dispense with the threshold requirement of comparability of functions performed, assets employed and risks assumed prescribed by Rule 10B(2) of the Income Tax Rules, 1962. TNMM operates at the level of net margins, but it presupposes that the tested party and the comparable are engaged in broadly the same line of activity; it is not a solvent in which every functional difference dissolves. Where an entity derives its revenues from software product development, licensing, high-end design services or proprietary intellectual property, and its segmental results are not available in the public domain, the entity-level margin thrown up by its financials is not a margin referable to services comparable with those of a routine SAP support and ITeS provider such as the assessee. The exercise of stripping such an entity out of the comparable set is therefore not a departure from TNMM but an application of it.

Tested on that basis, the findings recorded by the ld.CIT(A) are supported by material on record and by the decisions relied upon:

These are findings of fact arrived at upon an examination of the annual reports and the functional profile of each company. Nothing has been placed before us to demonstrate that any of these findings is contrary to the record, or that the decisions relied upon are distinguishable on facts. In our considered view, the conclusion reached by the ld.CIT(A) is a plausible view on the material available, and indeed the correct one. It calls for no interference.

The assessee, for its part, invites us to exclude R Systems International Ltd. and to include the six comparables selected by it and rejected by the TPO. Here again, we find that the ld.CIT(A) has applied a consistent standard to both sides.

As regards R Systems International Ltd., the ld.CIT(A) has, on a perusal of the transfer pricing study of the assessee itself, found that the assessee had identified the IT service segment as the relevant industry and had employed key words in Appendix E(a) which include information technology enabled services and business process outsourcing; that the standalone turnover satisfies the upper turnover filter of ten times; and that the objections based on assets deployed, borrowing cost and geographical area were not shown to have any demonstrable effect on net margins. On the mismatch of the accounting year, the settled position is that a company which is otherwise functionally comparable cannot be excluded solely for that reason where quarterly audited results are available in the public domain Capita India (P.) Ltd. [2025] 173 taxmann.com 723 (Mum. – Trib.) and XL India Business Services (P.) Ltd. [2018] 97 taxmann.com 77 (Delhi – Trib.). Significantly, the ld.CIT(A) did not stop at upholding the inclusion; he directed the assessee to produce the quarterly results and the TPO to recompute the financial results on a financial-

As regards the assessee's own comparables, the exclusions have been sustained for reasons that are of a piece with those on which the Revenue's comparables were excluded, diversified activities without segmental results in the case of TVS Infotech Ltd., which additionally records export turnover of only 56.84% as noticed in Zedo (India) (P.) Ltd. [2023] 148 taxmann.com 158 (Mum. – Trib.); engagement in software development as distinct from ITeS in the case of Evoke Technologies Pvt. Ltd., Sankhya Infotech Ltd. and Tejora Technologies Ltd.; failure of the export turnover filter, which was not contested before the first appellate authority, in the case of Globaledge Software Ltd., the adoption of a 75% export turnover filter having been approved in PCIT v. Convergys India Services (P.) Ltd. [2022] 142 taxmann.com 276 (Delhi); and engagement in specialised research, analytics and sales and marketing solutions in the case of Cheers Interactive (India) Pvt. Ltd. The assessee cannot ask that a strict test of functional comparability be applied to the Revenue's comparables and a relaxed one to its own.

The grounds relating to the profit level indicator, the computation of the median and the quantification of the adjustment are consequential to the composition of the final comparable set and require no separate adjudication; they will work themselves out when the TPO gives effect to the directions contained in the impugned order.

The grounds urging that the draft and the final scrutiny assessment orders were passed beyond the period of limitation and without jurisdiction are without substance. For the assessment year 2016-17, where a reference is made to the TPO, the extended period for completion of assessment expired on 31.12.2019, and the draft order u/s.144C(1) of the Act was passed on 18.12.2019, well within time. The DRP having treated the objections as invalid by its order dated 26.02.2020, the final order dated 27.02.2020 is squarely

The ground alleging violation of the principles of natural justice is equally untenable. The record shows that notices u/s.250 of the Act were issued on 07.03.2025 and 29.04.2025, written submissions were filed on 18.04.2025 and through e-proceedings thereafter, and the Authorised Representative appeared and was heard. The impugned order deals with each contention company by company. Adequate opportunity was plainly afforded.

Grounds 1, 13, 16, 17 and 19 of the assessee's appeal are general in nature and do not require separate adjudication.

The issue arising from the Revenue's third ground is whether credit for taxes paid abroad may be computed by reference to income which is exempt u/s.10AA of the Act. This question is no longer res integra. The Hon'ble Karnataka High Court in Wipro Limited [2015] 62 taxmann.com 26 has held that income falling u/s.10A of the Act is chargeable to tax u/s.4 of the Act and is includible in the total income u/s.5 of the Act, the exemption operating only to suspend the collection of tax for a stipulated period, and that an assessee is therefore entitled to credit for income-tax paid in a foreign country even in relation to income which is exempt in India. The same view has been reiterated in CGI Information Systems and Management Consultants (P.) Ltd. [2023] 153 taxmann.com 527 (Karnataka). The ld.CIT(A) has done no more than follow these binding pronouncements. The Revenue has not brought to our notice any contrary decision of a jurisdictional High Court or of the Hon'ble Supreme Court. It bears mention that the direction of the ld.CIT(A) is only to recompute the credit by including the income exempt u/s.10AA of the Act; the ceiling prescribed by the respective Double Taxation Avoidance Agreements, namely that the deduction shall not exceed that part of the Indian tax attributable to the income which may be taxed in the source State, continues to operate. Accordingly the corresponding grounds are dismissed.