Y MEDIA LABS PRIVATE LIMITED,BENGALURU vs. INCOME-TAX OFFICER CIRCLE-7(1)(1), BENGALURU, BENGALURU

In this appeal, the assessee has raised the following grounds: - 1. On the facts and circumstances of the case and in law, the Dispute Resolution Panel (‘Hon’ble DRP’) erred in upholding the transfer pricing adjustment of Rs. 4,95,37,058/-to the taxable income of the Appellant as made by the Transfer Pricing Officer (‘Ld. TPO’) on account of transfer pricing matters. The impugned order passed by the ld. assessing officer (‘AO’) incorporating the transfer pricing adjustment, to the extent prejudicial to the Appellant, is bad in law, contrary to the facts and circumstances of case and is to be quashed. 2. The Hon’ble DRP/ld. TPO erred in law and on facts in upholding the fresh search, for identifying comparable companies, carried out by ld. TPO for the software development services rendered by the Appellant to the Associated enterprise, while disregarding the search process conducted by the Appellant at the time of preparation of the TP documentation maintained by the Appellant.

Ground No. 1 is general in nature. Therefore, the same needs no separate adjudication.

During the hearing, the learned Authorised Representative (“learned AR”), at the outset, wishes not to press Grounds No. 2, 3, 4, 6, and 9. Accordingly, these grounds are dismissed as not pressed.

The issue arising Ground No. 5, raised in assessee’s appeal, pertains to the transfer pricing adjustment in relation to the international transaction of “Provision of Software Development Services”.

The brief facts of the case pertaining to this issue, as emanating from the record, are: The assessee is a private limited company and is engaged in Software Development Services. For the year under consideration, the assessee filed its return of income on 29.12.2022, declaring a total income of Rs. 8,34,94,660/-. The return filed by the assessee was selected for scrutiny, and statutory notice under section 143(2) of the Act were issued. Pursuant to the reference by the Assessing Officer (“AO”) under section 92CA(1) of the Act, the Transfer Pricing Officer (“TPO”) issued notices under section 92CA(2) of the Act calling for prescribed documentation maintained by the assessee. From the documents furnished by the assessee for the year under consideration, it was noticed that the assessee has entered into the following international transactions with its associated enterprise: -

For benchmarking the international transaction of “Provision of Software Development Services”, the assessee adopted the Transactional Net Margin Method (“TNMM”) as the most appropriate method with the Profit Level Indicator (“PLI”) of Operating Profit to Operating Cost (“OP/OC”). By considering itself the tested party, the assessee identified 7 comparable companies. As the assessee’s Operating Margin of 14.73% was within the 35th to 65th percentile range of Operating Margin of comparable companies, i.e. 11.34% to 20.76%, the assessee claimed that the international transaction of “Provision of Software Development Services” is at Arm’s Length Price (“ALP”).

During the transfer pricing adjustment proceedings, the TPO, by applying additional filters, arrived at a set of 21 companies, which were considered comparable to the assessee for benchmarking the international transaction of “Provision of Software Development Services”. The TPO also re-computed the Operating Margin of the assessee at 11.98% after considering the segmental financials. Since the 35th and 65th percentile range of 21 companies considered as comparable by the TPO ranged between 20.18% to 32.72%, with a median of 23.87%, the TPO by applying the Arms’s Length Margin proposed an adjustment of Rs. 6,71,69,124/- in respect of international transaction of “Provision of Software Development Services”, vide order dated 21.01.2025 passed under section 92CA(3) of the Act.

In conformity, the AO passed the draft assessment order dated 4.02.2025, under section 144C(1) of the Act, after, inter alia, incorporating the transfer pricing adjustment proposed by the TPO. While deciding the assessee’s objections against the additions/disallowances made by the TPO/AO, the learned DRP, vide its directions dated 18.11.2025, granted partial relief to the assessee. In conformity with the directions issued by the learned DRP, the AO passed the impugned final assessment order on 23.12.2025 under section 143(3) r.w.s. 144C(13) r.w.s. 144B of the Act. Being aggrieved, the assessee is in appeal before us.

During the hearing, the learned AR submitted that if 7 companies, i.e. Celstream Technologies Pvt. Ltd., Rheal Software Pvt. Ltd., Kals Information Systems Pvt. Ltd., Great Software Laboratory Pvt. Ltd., Orchasp Ltd., Toxsl Technologies Pvt. Ltd. and Brain Teclabs Pvt. Ltd., identified by the assessee from the fresh search details provided by the TPO during the proceedings before the learned DRP, are directed to be included and if 5 companies, i.e. Happiest Minds Technologies Ltd., Robosoft Technologies Pvt. Ltd., I D S Infotech Ltd., Cybage Software Pvt. Ltd. and Nintec Systems Ltd., are directed to be excluded, then the international transaction of “Provision of Software Development Services” shall be at arm’s length and the entire transfer pricing adjustment made in respect thereof shall be deleted.

Accordingly, in view of the submissions made by the learned AR, we have confined our findings in Ground No. 5 only in respect of the aforementioned comparable companies, which are sought to be included/excluded by the assessee. Further, the other issues raised in Ground No. 5 are treated as not pressed and are kept open for adjudication if they arise in the assessee’s case in the future.

We have considered the oral/written submissions of both sides and perused the material available on record.

Before proceeding further, it is relevant to delineate the profile of the assessee. In this regard, it is pertinent to note the functions performed by the assessee in relation to international transaction of “Provision of Software Development Services”, which are stated in the Transfer Pricing Study Report, as follows: -

In this regard, it is also pertinent to note the functions performed by the associated enterprise in relation to international transaction of “Provision of Software Development Services”, which are stated in the Transfer Pricing Study Report as follows: - “FUNCTIONS PERFORMED BY YML USA a) Identifying the needs, conceptualization and preparation of methodologies: The services offered are customized services which are developed to suit the customer’s requirements. YML USA development team is responsible for conceptualization and developing of methodologies or processes to provide comprehensive software development services. b) Research and development:

Thus, the comparative functions of the assessee and its associated enterprise can be tabulated as follows: - Function Category YML India YML USA Conceptualization or Preparation of √√√ Methodologies - Research and development √√√ - Marketing and brand building √√√ - Requirement gathering and analysis √√√ - Price Negotiation √√√ - Entering into contract with ultimate client √√√ - Software design and development services √√√ √√ Testing and validation √√√ √ After sales service √√√ √

In this regard, it is also pertinent to note certain relevant clauses of the Software Development Services Agreement dated 01.08.2020 entered into between the assessee and its associated enterprise, which read as follows: - ARTICLE 2 AGREEMENT TO PROVIDE SERVICES 2.1 Performance of Services: Recipient may, from time to time, request that Provider provide software development and other services for Recipient in accordance with the Specifications. Provider agrees to use commercially reasonable efforts to complete the services and deliver to Recipient on or before the delivery date therefore in accordance with the terms of this agreement. 2.2 Recipient right to review work in progress: Recipient shall be entitled, but not obligated, to conduct periodic onsite reviews with reasonable notice and during normal business hours, of the software development work being performed under the terms of this Agreement. 2.3 Modifications to Specifications: Provider agrees and acknowledges that Recipient shall be entitled to modify the specifications form time to time as reasonably necessary to ensure adequate performance of, and end user satisfaction with, the Deliverables, as determined in Recipient’s discretion.

From the perusal of the functions performed by the assessee in relation to the international transaction of “Provision of Software Development Services” and the relevant clauses of the agreement entered into between the assessee and its associated enterprise, it is evident that the assessee is engaged in providing contract software development services to its associated enterprise, playing a very limited role in the software development lifecycle and does not develop any product of its own. It is further evident that the software products are conceptualised, marketed, and distributed by the associated enterprise, and the assessee carries out only the operational work as outsourced by the associated enterprise. Further, all the activities of the assessee in this regard are based on the specifications and guidance provided by the associated enterprise, all of which are subject to periodic onsite reviews of the software development work undertaken by the assessee. Further, the associated enterprise is also entitled to modify the specifications from time to time to ensure adequate end-user satisfaction. It is also pertinent to note that all the significant research and development is undertaken by the associated enterprise on its account for the intended software development. Thus, only in respect of design, development, testing, validation and after-sales services, the assessee provides services to the associated enterprise. It is further pertinent to note that the assessee does not own any significant intangibles, and all valuable intellectual property rights and other marketing intangibles, such as brands, processes, know-how, technical data, software, and operating/quality standards, are owned by the associated enterprise.

Having arrived at the aforesaid conclusion, we shall now deal with the companies sought to be included as comparable by the assessee for benchmarking the international transaction of “Provision of Software Development Services”.

During the hearing, the learned AR submitted that this company is engaged in providing software development services and thus is comparable to the assessee. It was further submitted that the TPO/DRP have also accepted certain companies, such as Happiest Minds Technologies Ltd., which are engaged in diverse activities. On the other hand, the learned Department Representative (“learned DR”) vehemently relied upon the findings of the learned DRP in respect of this company.

We have considered the submissions of both sides and perused the materials available on record. From the perusal of the Annual Report of Celstream Technologies Pvt. Ltd., forming part of the Paper Book Volume - V from Pages 685 – 686, we find that this company is engaged in providing software development services in Big Data Analytics, Cloud Computing, Embedded systems, Internet of Things, Machine Learning, Mobile Computing, Web Applications and other digital technologies to leading technology firms. Thus, we find merits in the findings of the learned DRP that this company is operating in diverse activities and performs the entire product development lifecycle from concept to end-of-life. Accordingly, we are of the considered view that the scale of operations of this company is quite wide and complex in diverse domains. On the contrary, as noted in the foregoing paragraphs, the assessee in the present case is merely a contract software development service provider to its associated enterprise, performing a limited role in the entire software development lifecycle. Accordingly, we are of the considered view that Celstream Technologies Pvt. Ltd. is not functionally comparable to the assessee. Therefore, we uphold the findings of the TPO/AO to exclude Celstream Technologies Pvt. Ltd. as a comparable for benchmarking the international transaction of “Provision of Software Development Services”.

During the hearing, the learned AR submitted that this company is engaged in providing software development services and is generating its operating revenue only from the software development services. The learned AR, by referring to the findings of the learned DRP on Page – 6 of its directions, submitted that this company was compared not with the assessee, but with NTT – India, and therefore, the findings of the learned DRP are completely misplaced. On the other hand, the learned DR vehemently relied upon the order passed by the learned authorities and submitted that this company was rightly excluded for the purpose of benchmarking the international transaction.

We have considered the submissions of both sides and perused the materials available on record. From the perusal of the Annual Report of Rheal Software Pvt. Ltd. for the financial year ending 31.03.2022, forming part of the Paper Book Volume – V from Pages 682 – 684, we find that this company is engaged in providing software development services. Further, the entire revenue of this company is only from one segment, i.e. software development services. We do not find any description in the Annual Report of Rheal Software Pvt. Ltd. which supports the findings of the learned DRP that this company is involved in a broad range of software development. From the material placed on record, it is evident that this company is primarily a software development company. Therefore, we direct the TPO/AO to include Rheal Software Pvt. Ltd. as a comparable for benchmarking the international transaction of “Provision of Software Development Services”.

The next company sought to be included as a comparable by the assessee is Kals Information Systems Pvt. Ltd. During the proceedings before the learned DRP, the assessee objected to the rejection of Kals Information Systems Pvt. Ltd. as comparable for benchmarking the international transaction. The learned DRP, vide its directions issued under section 144C(5) of the Act, rejected the objection filed by the assessee and held that this company is not comparable to the assessee as its export profile is concentrated in the Asian market. Being aggrieved, the assessee has sought inclusion of this company as a comparable.

During the hearing, the learned AR submitted that this company is engaged in providing information technology and software services. Further, it was submitted that the company's operating revenue is mainly from information technology and software business services. On the other hand, the learned DR vehemently relied upon the findings of the learned DRP in respect of this company.

We have considered the submissions of both sides and perused the materials available on record. From the perusal of the Annual Report of this company for the financial year under consideration, which forms part of the Paper Book from Pages 696 – 700, we find that Kals Information Systems Pvt. Ltd. was engaged in information technology and software business. Further, we find that the company is generating its operating revenue from information technology and software business services. It is pertinent to note that no material has been placed on record by the Revenue to show how the export concentration in the Asian market has rendered this company not comparable, when its functions are similar to the assessee, i.e. “Provision of Software Development Services”. Accordingly, we direct the TPO/AO to include Kals Information Systems Pvt. Ltd. as a comparable for benchmarking the international transaction of “Provision of Software Development Services”.

During the hearing, the learned AR submitted that this company is engaged in providing software development services and therefore it is comparable to the assessee. On the other hand, the learned DR vehemently relied upon the findings of the learned DRP in respect of this company.

We have considered the submissions of both sides and perused the materials available on record. From the perusal of the Annual Report of Great Software Laboratory Pvt. Ltd., forming part of the Paper Book on Page 690 – 695, we find that this company is engaged in the business of providing software development services. We further find that the company claims to provide design and development services for software applications, including customised and packaged software. As noted in the foregoing paragraph, the software developed by the assessee, even though it is in accordance with the specifications issued by the associated enterprise, is as per the end-user satisfaction. Further, it was noted that the associated enterprise was also entitled to modify the specifications from time to time as reasonably necessary to ensure end-user satisfaction with the deliverables. Thus, from the plain reading of the scope of work of the assessee as provided in the Software Development Services Agreement entered into with the associated enterprise, it is evident that the software development by the assessee under the supervision and instructions of the associated enterprise is also as per the customer’s need. Accordingly, we do not find any basis in the learned DRP's findings to exclude this company as a comparable. Therefore, the TPO/AO is directed to include Great Software Laboratory Pvt. Ltd. as a comparable for benchmarking the international transaction of “Provision of Software Development Services”.

During the hearing, the learned AR submitted that Orchasp Ltd. is engaged in providing software development services and the majority of its revenue is from export of software development services. Further, learned AR submitted that the TPO/learned DRP have accepted companies like Happiest Minds Technologies Ltd. as valid comparables, which are also similar to Orchasp Ltd. On the other hand, the learned DR vehemently relied upon the findings of the learned DRP in respect of this company.

We have considered the submission of both sides and perused the materials available on record. From the perusal of the Annual Report of Orchasp Ltd. for the relevant financial year, forming part of the Paper Book Volume – V from Pages 701 – 705, we find that this company has claimed to have derived revenue primarily from software development, maintenance of software/hardware and allied services, sale of software licenses, subscription from services and e-commerce. From the financials of this company, we find that there are no segmental bifurcations of the revenue earned from the aforesaid streams. Thus, in the absence of relevant segmental information of Orchasp Ltd., we are of the considered view that this company cannot be considered as comparable for benchmarking the international transaction of “Provision of Software Development Services”. Accordingly, we uphold the findings of the TPO in excluding this company as comparable for the purpose of benchmarking the international transaction of “Provision of Software Development Services”.

During the hearing, the learned AR submitted that this company is engaged in providing software development services and its operating revenue is only from software development services. On the other hand, the learned DR vehemently relied upon the findings of the learned DRP in respect of this company.

We have considered the submission of both sides and perused the materials available on record. From the perusal of the Annual Report of Toxsl Technologies Pvt. Ltd. for the financial year 2020-21, forming part of the Paper Book from Pages 706 – 709, we find that this company is engaged in software development services and has recognised its revenue in books as per the assignment of software development services. We further find that this company earns all its revenue from software development services. Further, from the findings of the learned DRP, we also note that this company was engaged in design and development of customer software solutions, which is similar to the assessee company, as noted in the foregoing paragraphs. Further, we do not find any material to support the findings of the learned DRP that this company undertakes end-to-end software and IT consulting services. Accordingly, we are of the considered view that Toxsl Technologies Pvt. Ltd. is functionally comparable to the assessee. Therefore, we direct the TPO/AO to include Toxsl Technologies Pvt. Ltd. as a comparable for benchmarking the international transaction of “Provision of Software Development Services”.

During the hearing, the learned AR submitted that the assessee has sought the inclusion of this company as a comparable on the basis of the fresh search details provided by the TPO and thus there is no basis in the findings of the learned DRP in rejecting the inclusion of this company as a comparable on the basis of absence of relevant financials. The learned AR submitted that despite the aforesaid facts, the assessee has now placed on record the complete Annual Report of Brain Teclabs Pvt. Ltd., as per which this company is engaged in providing software development services, and therefore, is functionally comparable to the assessee. On the other hand, the learned DR vehemently relied upon the findings of the learned DRP in respect of this company.

Having considered the submission of both sides and perused the materials available on record, it is evident that in respect of Brain Teclabs Pvt. Ltd., the relevant financials/Annual Report for the year under consideration has not been examined by any of the lower authorities. Therefore, even though the assessee has sought the inclusion of this company as a comparable on the basis of fresh search details provided by the TPO, we are of the considered view that the Annual Report/financials of this company require verification for the purpose of testing the comparability of this company with the assessee. Accordingly, we restore the matter to the file of the TPO/AO for the limited purpose of examination of the Annual Report/financials of this company. We further direct that if upon examination of the Annual Report/financials of Brain Teclabs Pvt. Ltd., it is found that this company satisfies all the filters as applied by the TPO, we direct that this company be considered as comparable for the purpose of benchmarking the international transaction of “Provision of Software Development Services”, as there is no dispute regarding the fact that Brain Teclabs Pvt. Ltd. is engaged in providing software development services. 24 With the above directions, the impugned order qua this company is set aside, and the matter is restored to the file of the TPO/AO.

To sum up, we direct inclusion of Rheal Software Pvt. Ltd., Kals Information Systems Pvt. Ltd., Great Software Laboratory Pvt. Ltd. and Toxsl Technologies Pvt. Ltd. for benchmarking the international transaction of “Provision of Software Development Services”. Insofar as Celstream Technologies Pvt. Ltd. and Orchasp Ltd. are concerned, in view of our findings in the foregoing paragraphs, the same are directed to be excluded for benchmarking the international transaction of “Provision of Software Development Services”. As regards Brain Teclabs Pvt. Ltd., the matter is restored to the file of the AO/TPO for necessary verification/examination as directed.

We shall now deal with the submissions in respect of the companies which are sought to be excluded by the assessee for the purpose of benchmarking the international transaction of “Provision of Software Development Services”.

As noted in the foregoing paragraphs, during the hearing, the learned AR sought exclusion of Happiest Minds Technologies Ltd., Robosoft Technologies Pvt. Ltd., I D S Infotech Ltd., Cybage Software Pvt. Ltd. and Nintec Systems Ltd.

The first company which is sought to be excluded by the assessee is Happiest Minds Technologies Ltd. This company was selected as a comparable by the TPO vide its order passed under section 92CA(3) of the Act. The learned DRP, vide its directions, rejected the objections filed by the assessee and held that this company is involved in computer programming consultancy and related activities. Further, it was held that 100% of the revenue of this company is only from the segment of computer programming and related activities, which is comparable to the assessee. Therefore, the learned DRP upheld the findings of the TPO in including this company in the final list of comparables for benchmarking the international transaction of “Provision of Software Development Services”. Being aggrieved, the assessee has sought exclusion of this company.

During the hearing, the learned AR submitted that Happiest Minds Technologies Ltd. operates in different segments and also possesses significant brand value and market presence, resulting in a materially different functional and risk profile. Accordingly, the learned AR submitted that this company is not comparable to the assessee. On the other hand, the learned DR vehemently relied upon the order passed by the lower authorities in respect of this company.

We have considered the submission of both sides and perused the materials available on record. From the perusal of the Annual Report of Happiest Minds Technologies Ltd., forming part of the Paper Book Volume – V from Pages 748 – 757, we find that this company has claimed to have expertise in core technologies (cloud mobile, UI/UX, hardware and embedded, DevOps) and emerging technologies (Blockchain, AI, edge computing, drones and computer vision) across EduTech, Hi-Tech, media and entertainment, healthcare and life sciences, industry and manufacturing sectors. Further, we find that this company is providing end- to-end digital offerings in respect of Cloud migration, Blockchain, AI, virtual and augmented reality, edge computing, digital twin and data science as a service. Thus, we find that the scale of operations of this company is quite wide and complex and is engaged in diverse domains. Therefore, we are of the considered view that Happiest Minds Technologies Ltd. is not functionally comparable to the assessee, which is merely a contract software development service provider performing a very limited role in the entire software development lifecycle. Thus, TPO/AO is directed to exclude Happiest Minds Technologies Ltd. for benchmarking the international transaction of “Provisions of Software Development Services”.

During the hearing, the learned AR reiterating the submissions of the assessee made before the learned DRP, submitted that this company has related party transactions of 25.39% of its total revenue during the year under consideration. Therefore, it was submitted that this company fails RPT filter applied by the TPO. The learned AR further submitted that this company has incurred advertisement expenditure constituting 4.14% of the total cost, which indicates significant marketing intensity of this company. On the other hand, the learned DR vehemently relied upon the order passed by the lower authorities in respect of this company.

We have considered the submission of both sides and perused the materials available on record. From the perusal of the relevant extracts of the Annual Report of Robosoft Technologies Pvt. Ltd., for the financial year 2021-22, we find that this company primarily derives its revenue from software development and services and from the licensing of software products. As per the assessee, the related party transactions of this company are more than 25%, which has been applied by the TPO as a filter. As per the assessee, total value of RPT is Rs. 68,39,03,133/- and the total revenue earned by this company for the year under consideration was Rs. 2,69,39,59,170/-. Therefore, from the aforesaid details, we agree with the submissions of the assessee that this company fails 25% RPT filter applied by the TPO. Accordingly, the TPO/AO is directed to exclude Robosoft Technologies Pvt. Ltd. for benchmarking the international transaction of “Provision of Software Development Services”.

During the hearing, the learned AR submitted that this company is engaged in providing various services and there is no segmental data pertaining to the “Provision of Software Development Services”. On the other hand, the learned DR vehemently relied upon the order passed by the lower authorities in respect of this company.

From the perusal of the relevant extracts of Annual Report of I D S Infotech Ltd. for the financial year 2021-22, forming part of the Paper Book Volume – V from Pages 759 – 760, we find that this company is engaged in providing IT and IT related services in various verticals such as publishing and content, legal and IP, healthcare and software research and 29 development services. However, from the segmental information available on Page 760 of the Paper Book, we find that there is no segmental bifurcation of the revenue earned from “Provision of Software Development Services”. In this segmental reporting, the assessee claims that it has only one business segment, i.e. IT and IT enabled services. Thus, in the absence of relevant segmental information of I D S Infotech Ltd., which is comparable to the assessee’s international transaction under consideration, we are of the considered view that this company cannot be considered for benchmarking the international transaction of “Provision of Software Development Service”. Accordingly, we direct the TPO/AO to exclude I D S Infotech Ltd. for benchmarking the international transaction pertaining to “Provision of Software Development Services”.

During the hearing, the learned AR submitted that this company is engaged in rendering a diversified range of services such as digital product engineering, technology solutions, platform and integrations, IT support services including ITeS and BPO services. The learned AR further submitted that the financial statements of this company do not provide segmental information pertaining to its various lines of business. On the other hand, the learned DR vehemently relied upon the order passed by the lower authorities in respect of this company.

We have considered the submission of both sides and perused the materials available on record. From the perusal of the relevant extracts of financial statements of Cybage Software Pvt. Ltd. for the financial year 2021-22, we find that this company is engaged in providing information technology consulting and support services. Further, from the financial statements, as noted by the learned DRP on Page 49 of directions, we find that the company has separately reported the revenue from software services and the revenue from sale of products. Therefore, we do not find any basis in the submissions of the learned AR that there is no segmental information of the revenue earned by this company. As regards the submissions of the learned AR that this company is rendering diversified range of services, we do not find any material supporting the said contention on record. Therefore, we are of the considered view that Cybage Software Pvt. Ltd. has correctly been considered as comparable for benchmarking the international transaction of “Provision of Software Development Services” by the TPO/AO. Accordingly, the order passed by the lower authorities in respect of this company is upheld.

During the hearing, the learned AR submitted that this company is engaged in rendering services involving future engineering technologies including cognitive AI and IoT. Thus, it was submitted that this company is not functionally comparable to the assessee. On the other hand, the learned DR vehemently relied upon the order passed by the lower authorities in respect of this company.

Having considered the submission of both sides and perused the materials available on record, we find that Nintec Systems Ltd. has claimed itself to be delivering software development services and solutions in its 32 Annual Report for the year under consideration, the relevant extracts of which have been placed on record by the assessee in Paper Book Volume – V on Page 761. Further, the company has claimed to be specialised in offshore/onshore software product development, software migration, multimedia design and development, application development and maintenance, and web design. Therefore, having considered the functional profile of this company, we are of the view that Nintec Systems Ltd. is functionally comparable to the assessee and there is no material available on record which substantiates the submissions of the learned AR. Accordingly, the findings of the TPO/AO considering Nictec Systems Ltd. as comparable to the assessee for benchmarking the international transaction of “Provision of Software Development Services” are upheld.

To sum up, we direct Happiest Minds Technologies Ltd., Robosoft Technologies Pvt. Ltd. and I D S Infotech Ltd. be excluded while benchmarking the international transaction of “Provision of Software Development Services”. While the directions of the TPO/AO considering Cybage Software Pvt. Ltd. and Nintec Systems Ltd. as comparable for benchmarking the international transaction of “Provision of Software Development Services” are upheld. Accordingly, Ground No. 5 raised in assessee’s appeal is partly allowed for statistical purposes.

Ground No. 7, raised in assessee’s appeal, pertains to the transfer pricing adjustment on account of outstanding trade receivables from the associated enterprise.

The brief facts of the case pertaining to this issue, as emanating from the record, are: During the transfer pricing adjustment proceedings, it was observed that certain invoices raised by the assessee to its associated enterprise have not been paid, and there is a delay in the receivables for the software development services rendered by the assessee. The TPO, vide order passed under section 92CA(3) of the Act, held that the assessee has provided benefit to its associated enterprise by way of advancement of an interest-free loan in the garb of delayed receipt of receivables, which funds could have been otherwise deployed for at least earning interest income. The TPO held that the assessee has incurred costs in connection with benefits and services provided to the associated enterprise by way of delayed receipt of receivables. Accordingly, the TPO held that the delay in receipt of receivables from the associated enterprise is an international transaction under section 92B(1) read with clause (v) of section 92F of the Act. The TPO also rejected the plea of the assessee to benchmark the receivable transaction using a combined transaction approach. Thus, the TPO, allowing a 30-day credit period, computed interest at 12.26% (i.e., @LIBOR + 450 BPS) for the delayed receipt of receivables from the associated enterprise. Accordingly, the TPO computed the arm’s length interest on outstanding receivables at Rs. 1,60,41,320/-. In conformity, the AO passed the draft assessment order under section 144C(1) of the Act. The learned DRP, vide its directions, upheld the findings of the TPO in levying the interest on outstanding receivables from the associated enterprise. However, as regards the computation of such interest, the 34 learned DRP directed the TPO to consider the details of invoices submitted by the assessee. In conformity with the directions of the learned DRP, the TPO computed the arm’s length interest on outstanding receivables at Rs. 32,11,870/- and the same was added to the total income of the assessee vide impugned final assessment order. Being aggrieved, the assessee is in appeal before us.

We have considered the submissions of both sides and perused the material available on record. In the present case, there is no dispute that the outstanding trade receivables from the associated enterprise pertain only to the international transaction of “Provision of Software Development Services”, as there was no other international transaction between the assessee and its associated enterprise. Further, there is no dispute among the parties that delayed trade receivables constitute an international transaction under the Act. Thus, the international transaction of outstanding receivables is closely linked with the main transaction of “Provision of Software Development Services”. Therefore, both international transactions need to be benchmarked using a combined-transaction approach.

In the present case, it is evident from the record that all the companies selected as comparables by the assessee in its Transfer Pricing Study Report were rejected by the TPO and all the companies which ultimately formed part of the final set of comparables for the purpose of benchmarking were selected by the TPO. Further, the additional comparables sought to be included by the assessee were also drawn from the fresh details submitted by the TPO during the proceedings before the learned DRP. Therefore, since the comparables were selected by the TPO, it can reasonably be presumed that the segmental working capital details of each comparable are also available with the TPO. However, the TPO did not compute any working capital adjustment. At this stage, it is pertinent to note that as per Rule 10B(3)(ii) of the Income Tax Rules, 1962 (“the Rules”), an uncontrolled transaction shall be comparable to an international transaction if reasonably accurate adjustments can be made to eliminate the material effects of such differences. Further, TNMM benchmarking, as per Rule 10B(1)(e) of the Rules, also supports adjustments to take into account the differences, if any, between the international transaction and the comparable uncontrolled transactions.

As the impact of the receivables gets factored into the taxpayer’s working capital and thereby on its pricing/profitability vis-à-vis that of its comparables, we direct the TPO/AO to compute and grant working capital adjustment in respect of the international transaction of “Provision of Software Development Services”. Once a working capital adjustment is granted under TNMM benchmarking, the impact of delayed receivables is subsumed in the profitability analysis, and no separate adjustment for notional interest on receivables is warranted. We order accordingly. As a result, Ground No. 7 raised by the assessee is allowed for statistical purposes.

Ground No. 8, raised in assessee’s appeal, pertains to consideration of incorrect total income in the computation sheet and notice of demand. During the hearing, the learned AR submitted that the assessee has already filed a rectification application under section 154 of the Act on this aspect. Accordingly, the AO is directed to correctly compute the income of the assessee, as per law, after adopting the correct figures of income. As a result, Ground No. 8 raised in assessee’s appeal is allowed for statistical purposes.

The issue arising Ground No. 10 pertains to levy of interest under section 234A, 234B and 234C of the Act, which is consequential in nature. Therefore, this ground needs no separate adjudication.

In the result, the appeal by the assessee is partly allowed for the statistical purposes. Order pronounced in the open court on 18-Aug-2026.