CIPHERCLOUD INDIA PRIVATE LIMITED (NOW KNOWN AS LOOKOUT INDIA TECHNOLOGIES PRIVATE LIMITED),HYDERABAD vs. DCIT, CIRCLE 1(1), HYDERABAD

The brief facts of the case are that the assessee company, CipherCloud India Private Limited, is a subsidiary of CipherCloud LLC, USA, engaged in the business of development, maintenance, quality assurance, customer support, professional services, consulting services, etc. The assessee company filed its return of income for A.Y. 2022-23 on 30.11.2022, declaring a total income of Rs. 9,76,76,062/-. During the financial year relevant to the assessment year under consideration, the assessee company had undertaken international transactions with its AE for providing software development services to CipherCloud Inc., USA amounting to Rs. 15,71,34,231/- and to CipherCloud LLC, USA amounting to Rs. 22,02,72,679/-, respectively. The assessee company had also reported trade receivables in relation to software development services rendered to CipherCloud LLC, USA amounting to Rs. 14,52,51,066/-. The assessee company benchmarked the international transactions with its Associated Enterprise (“AE”) by selecting Transactional Net Margin Method (“TNMM”) as the Most Appropriate Method and selected 12 comparable companies with PLI (Operating Profit/Operating Cost), having a 35th percentile of 6.27%, 65th percentile of 12.48%, and a median of 8.52%. The assessee company reported its margin at 12.05% and claimed that the international transactions with its AE were at Arm's Length Price. The assessee company further claimed that the outstanding receivables from its AE had been benchmarked by using ‘other method’ as per Rule 10AB of the Income-tax Rules, 1962 on the ground that the credit period extended to the AE was consistent with the industry standard applicable to the sector in which the assessee company operates.

The case was selected for scrutiny and, during the course of assessment proceedings, a reference under Section 92CA(1) of the Income-tax Act, 1961 was made to the Ld. TPO for determination of the Arm's Length Price of the international transactions of the assessee company with its AE. During the TP proceedings, the Ld. TPO, after considering the TP documentation submitted by the assessee company, rejected the TP documentation and passed an order under Section 92CA(3) of the Act on 31.12.2024, suggesting a TP adjustment of Rs. 4,06,98,138/- in respect of provision of IT/software development services and a further TP adjustment of Rs. 15,83,906/- towards interest on delayed trade receivables from AE.

In pursuant to the order passed by the Ld. TPO under Section 92CA(3) of the Act, the A.O. passed a draft assessment order under Section 144C(1) of the Act, on 21.01.2025, incorporating the TP adjustments suggested by the Ld. TPO. On receipt of the draft assessment order, the assessee company filed objections before the Ld. DRP-1, Bengaluru, challenging, inter alia, the selection of inappropriate comparables and exclusion of certain comparables, even though they were functionally comparable to the assessee company. The Ld. DRP, vide directions issued under Section 144C(5) of the Act, dated 20.05.2025, partly accepted the objections filed by the assessee company and directed exclusion of Athena Health Technology Private Limited, LTI Mindtree Limited, Wipro Limited, and Infosys Limited from the final set of comparables. However, the Ld. DRP rejected the objections of the assessee company in respect of TVS Next Limited, Robosoft Technologies Private Limited, Systango Technologies Limited, Cybage Software Private Limited, and Ezee Technosys Private Limited. The Ld. DRP had also rejected the objections filed by the assessee company for inclusion of certain comparables by holding that the companies selected by the assessee company in its TP study are different in FAR analysis as well as sales, RPT, and export earnings filters. Insofar as the TP adjustment on interest on delayed trade receivables from AE is concerned, the Ld. DRP had directed the A.O. to adopt LIBOR + 450 basis points for computing interest on trade receivables from AE. In pursuant to the Ld. DRP's directions issued under Section 144C(5) of the Act, the A.O. passed the final assessment order on 13.11.2025 and determined the total income at Rs. 12,65,41,770/-.

Aggrieved by the final assessment order passed by the A.O., the assessee company is now in appeal before the Tribunal.

The learned counsel for the assessee, Shri Pankaj Sancheti, C.A., referring to the various grounds of appeal filed by the assessee company, submitted that although the assessee company has raised various grounds, the issues involved in the present appeal mainly relate to Ground No. 4, which deals with exclusion of five comparable companies selected by the Ld. TPO and upheld by the Ld. DRP, and Ground No. 5, which deals with inclusion of ten comparable companies rejected by the Ld. TPO and whose rejection was upheld by the Ld. DRP. The assessee company has also challenged the TP adjustment towards interest on trade receivables from AE by way of Ground Nos. 7 to 9 of the grounds of appeal. Referring to Ground No. 4, the learned counsel for the assessee submitted that the Ld. TPO included TVS Next Limited in the final set of comparables, even though the said company is different on FAR analysis from that of the assessee company and further fails the RPT filter, if the RPT filter is computed at the aggregate level. He further submitted that the Ld. TPO included Robosoft Technologies Private Limited, although the said company also fails the RPT filter if the same is computed at the aggregate level. Similarly, the learned counsel for the assessee submitted that the Ld. TPO included Systango Technologies Limited, Cybage Software Private Limited, and Ezee Technosys Private Limited, even though the FAR analysis of the said companies is different from that of the assessee company. He further submitted that Systango Technologies Limited is a super- normal profit company and, therefore, cannot be compared with the assessee company. With regard to Ezee Technosys Private Limited, he submitted that it is a product company, as is evident from its annual report, wherein its revenue is derived from sale of products. Therefore, he submitted that TVS Next Limited, Robosoft Technologies Private Limited, Systango Technologies Limited, Cybage Software Private Limited, and Ezee Technosys Private Limited deserve to be excluded from the final set of comparables.

The Ld. CIT-DR, Shri Waseem UR Rehman, on the other hand, supporting the order of the Ld. DRP, submitted that the Ld. DRP has negated the objections filed by the assessee company for exclusion of the above companies with valid reasons. Going by the reasons given by the Ld. DRP, it appears that the functional profile/FAR analysis of the above companies is similar to the assessee company. Further, the Ld. DRP had also rejected the arguments of the assessee company on computation of the RPT filter at the aggregate level and claimed that related party transactions should be computed separately for income/receipts and expenses/payments. Further, if a company is functionally similar to the tested party, then merely for the reason of higher profits, the above companies cannot be excluded. Therefore, he submitted that there is no merit in Ground No. 4 raised by the assessee company, and thus, Ground No. 4 of the assessee company should be rejected.

We have heard both parties, perused the material available on record, and had gone through the orders of the authorities below. The assessee company challenged inclusion of TVS Next Limited in the final set of comparables on two grounds. The assessee company claims that the FAR analysis of TVS Next Limited is different from the assessee company and that it fails the RPT filter. Insofar as the FAR analysis is concerned, from the findings of the Ld. DRP in para No. 20.2, we find that, the company derives revenue from software development services and, therefore, the arguments of the assessee company that the FAR analysis of the above company is different from the assessee company cannot be accepted. As regards the RPT filter, the assessee company has computed the RPT filter by aggregating income/receipts and expenditure/payments and claimed that the related party transactions are 28.84% of the total revenue and, thus, it fails the 25% RPT filter test. The Ld. DRP computed the RPT filter separately for income/receipts and expenses/payments and claimed that the related party transactions are less than 25%. It is a well-settled principle of law by various decisions, including the decision of the ITAT, Hyderabad Bench in the case of Invesco (India) Pvt. Ltd., Vs. DCIT reported in (2025) 179 taxmann.com 216, wherein it has been clearly held that related party transactions should be computed at an aggregate level by taking into account income and expenditure as the numerator and total revenue from operations as the denominator. If we apply the above principle, TVS Next Limited fails the RPT filter test because it has related party transactions of 28.84%. Therefore, we direct the Ld. TPO to exclude TVS Next Limited from the final set of comparables.

Similarly, in the case of Robosoft Technologies Private Limited, it fails the RPT filter, going by the details submitted by the assessee company, where the related party transactions at the aggregate level constitute 37.14% of the total revenue from operations, which is above the range of 25% applied by the TPO while taking out comparables under the RPT filter. Therefore, we direct the Ld. TPO to exclude Robosoft Technologies Private Limited from the final set of comparables.

Insofar as Systango Technologies Limited, Cybage Software Private Limited, and Ezee Technosys Private Limited are concerned, the assessee company has contended exclusion of the above three companies on the ground of different FAR analysis and super-normal profits. The assessee company claims that Systango Technologies Limited is a super-normal profit company. However, upon perusal of the relevant annual report and the findings of the Ld. DRP, we find that, the company earned an average margin of 33.37% for the last three financial years, which is on par with the industry standard in this line of business. Therefore, the arguments of the learned counsel for the assessee cannot be accepted and thus, we are inclined to uphold the reasons given by the Ld. TPO/Ld. DRP to include Systango

Coming to Ground No. 5 of the assessee company's appeal, the learned counsel for the assessee, referring to Kals Information System Limited, Toxsl Technologies Private Limited, Orchasp Limited, Infomile Technologies Limited, Batchmaster Software Private Limited, Elveego Circuits Private Limited, Hurix Systems Private Limited, Kireeti Soft Technologies Limited, Celstream Technologies Private Limited and DCIS Dot Com Solutions Pvt. Ltd., which were excluded by the Ld. TPO/Ld. DRP, submitted that although the FAR analysis of the above companies is similar to that of the assessee company, the Ld. TPO/Ld. DRP excluded the above companies only on the ground that they have minimum margins and are loss-making companies, by assigning reasons which are not at all applicable to the above companies. Therefore, he submitted that the Ld. TPO/Ld. DRP erred in excluding the above companies from the final set of comparables.

The Ld. CIT-DR, on the other hand, supporting the order of the Ld. DRP, submitted that the Ld. DRP has given valid reasons for exclusion of the above companies from the final set of comparables, which is evident from the findings of the Ld. DRP, wherein the said companies have been held to be either different on FAR analysis or to fail the RPT filter or the export turnover filter. Thus, the Ld. TPO has rightly excluded the above companies from the final set of comparables.

We have heard both parties, perused the material available on record, and had gone through the orders of the authorities below. The Ld. TPO excluded Kals Information System Limited on the ground that the FAR analysis of the above company is different. Further, the Ld. DRP upheld the reasons given by the Ld. TPO on the ground that the above company caters to different geographical markets. In our considered view, going by the functions performed by the assessee company and Kals Information System Limited, the above company's FAR analysis is similar to the assessee company, and it also passes all the filters applied by the Ld. TPO. The reasons given by the Ld. DRP that it earns revenue from different geographical locations is not a valid ground for exclusion of any company because operations carried at different geographical locations do not matter when it comes to the margins, except for minor differences, which should be taken care of when we apply TNMM as the Most Appropriate Method. Therefore, in our considered view, the Ld. TPO erred in excluding Kals Information System Limited from the final set of comparables. Therefore, we direct the Ld. TPO to include Kals Information System Limited in the final set of comparables.

Coming back to Toxsl Technologies Pvt. Ltd., Orchasp Ltd., Infomile Technologies Ltd., Batchmaster Software Pvt. Ltd., Elveego Circuits Pvt. Ltd., Celstream Technologies Pvt. Ltd., and DCIS Dot Com Solutions Pvt. Ltd., although the assessee company claims that the FAR analysis of the above companies is similar to the assessee company, going by the findings of the Ld. DRP, we find that, Toxsl Technologies Pvt. Ltd. is engaged in consulting services in the area of product design, which is altogether different from software development services. Similarly, Orchasp Ltd. is into ITES and software development services, but no segmental data is available. Infomile Technologies Ltd. derives revenue from outsourcing of software development activities, which is evident from the annual report where 50% of the software development activities have been outsourced. Batchmaster Software Pvt. Ltd. also derives revenue from sale of products and services, but segmental data is not available. Elveego Circuits Pvt. Ltd. fails the RPT filter, which is evident from the annual report where remuneration to shareholder-director is nearly 50% of the total expenses.

Similarly, Celstream Technologies Pvt. Ltd., had an extraordinary event on account of payment of legal and professional fee amounting to more than 30% of the total expenses. Since there is extraordinary expenditure under the head legal and professional fee, the above company is not a suitable comparable to the assessee company. Similarly, DCIS Dot Com Solutions Pvt. Ltd. is a persistent loss-making company, which is evident from the relevant findings of the Ld. DRP, where, out of three years, it has incurred loss for the last two financial years. Therefore, it is a well-settled principle of law by the decisions of various Tribunals that a persistent loss-making company is not a suitable comparable. Therefore, we are inclined to uphold the findings of the Ld. DRP for exclusion of Toxsl Technologies Pvt. Ltd., Orchasp Ltd., Infomile Technologies Ltd., Batchmaster Software Pvt. Ltd., Elveego Circuits Pvt. Ltd., Celstream Technologies Pvt. Ltd., and DCIS Dot Com Solutions Pvt. Ltd. from the final set of comparables.

Coming back to Hurix Systems Pvt. Ltd. and Kireeti Soft Technologies Ltd., Hurix Systems Pvt. Ltd. has been excluded on the ground that it is engaged in digital learning solutions and technology-enabled solutions. However, going by the evidence submitted by the assessee company, the above company is functionally similar to the assessee company, which is evident from the FAR analysis, wherein the above company derives revenue from software development services.

Similarly, Kireeti Soft Technologies Ltd. has been excluded on the ground that it fails the export turnover filter. However, as per the information submitted by the assessee company, out of the three financial years, for the financial year 2021-22, it has marginally failed the export turnover filter, which is evident from the percentage of export sales to total turnover being 74.92%. However, for the remaining two financial years, it has export turnover of above 80%. Therefore, if we take the average export turnover of the three financial years, it passes the export turnover filter. Further, the Ld. DRP had also directed the Ld. TPO to include Kireeti Soft Technologies Ltd., subject to passing of the quantitative filters. Since it passes the export turnover filter, in our considered view, there is no reason to exclude Kireeti Soft Technologies Ltd. from the final set of comparables. Thus, we direct the Ld. TPO to include Hurix Systems Pvt. Ltd. and Kireeti Soft Technologies Ltd. in the final set of comparables.

The next issue that came up for our consideration from Ground No. 9 of the assessee company's appeal is TP adjustment in respect of interest on delayed trade receivables from AE.

The Ld. TPO computed interest on trade receivables from AE by allowing 30 days credit period and applied SBI short-term deposit rate and made TP adjustment of Rs. 15,83,906/-. The Ld. DRP accepted the findings given by the Ld. TPO in respect of interest on trade receivables. However, it directed the Ld. TPO to adopt LIBOR + 450 basis points for computing the interest.

Although the learned counsel for the assessee made various arguments, including on the ground that the assessee company is a debt-free company, fully funded by the parent company, and therefore no adjustment can be made for interest on trade receivables. Further, working capital adjustment should be allowed to arrive at a correct margin of comparables vis-à-vis the assessee company. However, he made an alternative argument and submitted that, if at all interest should be imputed, then LIBOR + 200 basis points should be adopted after allowing 60 taxmann.com 635. 24. The Ld. CIT-DR, on the other hand, supporting the order of the Ld. DRP, submitted that the Ld. DRP has rightly adopted LIBOR + 450 basis points, and therefore, the order of the Ld. DRP should be upheld.

We have heard both parties, perused the material available on record, and had gone through the orders of the authorities below. Although the learned counsel for the assessee made an argument of non-charging of interest on account of the assessee company being a debt-free company and also on working capital adjustment, in our considered view, the assessee company has failed to provide basic data with regard to the above arguments to ascertain whether the assessee company is a debt-free company or whether it can provide working capital adjustment to arrive at a correct margin of the assessee company vis-à-vis the comparables. Therefore, we reject the arguments of the learned counsel for the assessee.

Insofar as the rate of interest is concerned, it is a settled principle of law laid down in the decisions of various Benches of the Tribunal, including the decision of the ITAT, Hyderabad Bench in the case of Signode India Limited Vs. DCIT (supra), wherein the Tribunal directed the Ld. TPO to adopt LIBOR + 200 basis points after allowing 60 days credit period. Therefore, respectfully following the decision of the ITAT, Hyderabad Bench in the case of Signode India Limited Vs. DCIT (supra), we direct the Ld. TPO to compute interest on trade receivables from AE by applying LIBOR + 200 basis points after allowing 60 days credit period.

In the result, the appeal filed by the assessee company is partly allowed.

The Principal Commissioner of Income Tax, (IT & TP), Hyderabad.

The Disputes Resolution Panel-1, Bangalore 5. तवभागीयप्रतततनतर्, आयकर अिीिीय अतर्करण, हैदराबाद / DR, ITAT, Hyderabad 6. गार्ाफ़ाईि / Guard file