SKILLNET SOLUTIONS INDIA PRIVATE LIMITED ,MUMBAI vs. DEPUTY COMMISSIONER OF INCOME TAX CIRCLE 3(3)(1), MUMBAI

आयकरअपीलीयअिधकरण, मुंबईपीठ�, मुंबई INCOME TAX APPELLATE TRIBUNAL, MUMBAI BENCHES, MUMBAI BENCH: H BEFORE SHRI OM PRAKASH KANT, ACCOUNTANT MEMBER AND SHRI ANIKESH BANERJEE, JUDICIAL MEMBER ITA 5016/MUM/2024 (िनधा�रणवष�/AssessmentYear:2021-22) SKILLNET SOLUTIONS INDIA DEPUTY COMMISSIONER OF PRIVATE LIMITED INCOME TAX CIRCLE 3(3)(1), MUMBAI Skillnet Solutions India Private Limited Aayakar Bhavan , M.K Road, Vs. 817, Raheja Chambers, Free -400020, Maharashtra Press Journal Road, Nariman Point Mumbai, -400093, Maharashtra अपीलाथ�Appellant ��थ� Respondent

Permanent Account Number of Assessee: AAFCS3362P

अपीलाथ��ारा/Appellant represented Shri. Jitendra Singh a/w Ms. by: Shivali Mhatre, ARs ��थ��ारा/Respondent represented by: Shri. Pravin Salunkhe, Sr. DR सुनवाईकीतारीख/Date of conclusion of hearing: 25-Aug-2026 घोषणाकीतारीख/Date of pronouncement: 22-Sep-2026 आदेश / ORDER PER ANIKESH BANERJEE, JUDICIAL MEMBER: The instant appeal of the assessee is directed against the final assessment order dated 06/09/2024 passed by the Ld. Assessing Officer (“Ld. AO”) u/s. 143(3) r.w.s. 144C(13) r.w.s. 144B of the Income-tax Act, 1961 (“the 1 Act”) for Assessment Year 2021-22, pursuant to the directions dated 21/08/2024 issued by the Ld. Dispute Resolution Panel-2, Mumbai (“Ld. DRP”) u/s. 144C(5) of the Act.

“1. Transfer Pricing Adjustment: INR 114,172,508/- On the facts and in the circumstances of the case and in law, the ld. TPO and the ld. AO under the directions issued by Hon’ble DRP dated 21 August 2024, erred in confirming the adjustment of INR 114,172,508/- by virtue of computation of arm’s length price of international transaction of rendering of software consultancy and support services to AE vide its impugned order dated 06 September 2024. 2. Unjust/Erroneous rejection of the segmental Profit and Loss account prepared by the appellant in its Transfer Pricing Study Report On the facts and in the circumstances of the case and in law, the Ld. TPO erred in and Hon’ble DRP further erred in rejecting the segmental profit and loss account prepared by the appellant in its Transfer Pricing Study Report bifurcated into the following: i) Services rendered to holding company viz. SkillNet Solutions Inc., USA ii) Services rendered to independent third parties and iii) Non-operating expenses 3. Erred in not considering the impact of COVID-19 pandemic on the Business of the appellant as well as the holding company a. On the facts and in the circumstances of the case and in law, the ld. TPO erred in and Hon’ble DRP further erred in not considering the impact of COVID-19 pandemic on the business of the appellant as well as the holding company as SkillNet Group provides services to companies in the retail space which severely and negatively impacted the capacity planning and implementation of the appellant for the year under consideration. b. On the facts and in the circumstances of the case and in law, the ld. TPO erred in and the Hon’ble DRP further erred in not considering all the supporting documents and evidences with regards to under-utilised capacity due to COVID-19 pandemic. c. On the facts and in the circumstances of the case and in law, the ld. TPO erred in and the Hon’ble DRP further erred in upholding/confirming the action of the ld. TPO in not considering the opportunity cost of third-party business lost by the appellant due to COVID-19 pandemic.

d. On the facts and in the circumstances of the case and in law, the Hon’ble DRP erred in not comparing three years weighted average OP/OC mark-up of comparable companies (post revenue adjustment in FY 2020-21) with the appellant’s three years weighted average OP/OC mark-up.” 2.1. The assessee subsequently raised the following additional ground:-

“1. The Final Assessment Order dated 6th September 2024 passed by Ld. AO under section 143(3) r.w.s. 144C(13) r.w.s. 144B of the Income Tax Act, 1961 is beyond the time limit prescribed under section 153(1) of the Act, thus the Final Assessment order is bad in law and ought to be quashed and the return of income filed by the Appellant be accepted and be considered as final. 2. The Appellant craves leave to add, alter or amend any of the above grounds of appeal.” 3. Brief facts of the case are that the assessee, SkillNet Solutions India Private Limited (“SKN India”), is a subsidiary of SkillNet Solutions Inc., USA (“SKN US”), and is engaged in rendering consultancy and software development related services to SKN US as well as to independent customers. The assessee filed its return of income for the year under consideration on 12/03/2022 declaring loss of Rs.8,71,94,890/-, which was processed u/s. 143(1) on 21/03/2022. The case was subsequently selected for scrutiny under CASS on account of large value of international transactions in services in comparison to the revenue from sale of services and low profitability under the Transfer Pricing Risk Parameter. Notice u/s. 143(2) was issued on 28/06/2022 followed by notice u/s. 142(1) dated 18/08/2022. Since the assessee had entered into specified international transactions, a reference u/s. 92CA(1) was made to the Ld. Transfer Pricing Officer (“Ld. TPO”) on 04/08/2022 for determination of the arm’s length price.

3.1. During FY 2020-21, the assessee reported an international transaction of rendering software consultancy and support services to SKN US amounting to Rs.29,63,02,400/-. The assessee adopted Transactional Net Margin Method (“TNMM”) as the most appropriate method with OP/OC as the Profit Level Indicator (“PLI”). In its Transfer Pricing Study Report (“TPSR”), the assessee selected 17 comparable companies. The 35th percentile and 65th percentile of the adjusted margins of the comparables were determined at 3.76% and 10.53%, respectively, with a median of 7.25%. The assessee reported its OP/OC margin at 7.71% and accordingly claimed that the international transaction was at arm’s length.

3.2. The dispute essentially arose on account of a separate segment created by the assessee in its TPSR styled as “Under-utilised capacity and Covid adjustment”, wherein expenditure aggregating to approximately Rs.11,10,69,523/- was segregated from the regular operating segments. The assessee explained before the Ld. TPO that FY 2020-21 was severely affected by the COVID-19 pandemic and that, although its manpower could not be fully deployed, employee cost and other fixed establishment expenses continued to be incurred. As per the utilisation data furnished by the assessee, total utilisation was approximately 72% and under-utilisation approximately 28%. The assessee, however, considered only 20% of the employee cost as attributable to extraordinary under-utilisation apart from certain fixed establishment expenditure for the period affected by the pandemic.

3.3. The Ld. TPO did not accept the aforesaid segmentation. According to the Ld. TPO, COVID-19 was an economy-wide phenomenon and there was no basis to assume that the assessee alone was adversely affected while the comparable companies remained unaffected. The Ld. TPO further observed that bench cost or expenditure relating to non-billable manpower is a normal feature of the software industry and that the assessee had not furnished sufficient employee-wise/time-sheet and multi-year utilisation details to establish that the entire expenditure carved out by it represented extraordinary COVID-related expenditure. The Ld. TPO accordingly reallocated the expenditure segregated by the assessee between the AE and non-AE segments in the ratio of their respective revenues. The operating cost of the AE segment was consequently recomputed at Rs.38,27,43,909/- against revenue of Rs.29,63,02,400/-, resulting in operating loss of Rs.8,64,41,509/- and OP/OC of (-)22.58%. On comparing the same with the median margin of the comparable companies at 7.25%, the Ld. TPO made an adjustment of Rs.11,41,72,508/- vide order u/s. 92CA(3) of the Act.

The computation made by the Ld. TPO is reproduced in a summarised form as under:-

Particulars Amount Rendering of services Rs.29,63,02,400/- Operating cost Rs.38,27,43,909/- Operating loss Rs.(8,64,41,509)/- Median of comparables 7.25% OP/OC of assessee (-)22.58% Difference in PLI 29.83% TP Adjustment Rs.11,41,72,508/-

3.4. Pursuant to the order of the Ld. TPO, the Ld. AO passed the draft assessment order u/s. 144C(1) dated 17/11/2023 proposing the aforesaid variation. The assessee filed its objections before the Ld. DRP on 12/12/2023. The Ld. DRP, vide directions dated 21/08/2024, upheld the action of the Ld. TPO. The Ld. DRP observed, inter alia, that by shifting the expenditure to the separate “Under-utilised capacity and Covid adjustment” segment, the operating margin of the AE segment had been artificially enhanced; that the operating expenses incurred in relation to the software development activity could not be removed from the operating cost merely on account of the pandemic; and that the reallocation made by the Ld. TPO between the AE and non-AE segments was justified. Consequent to the directions of the Ld. DRP, the Ld. AO passed the final assessment order dated 06/09/2024 sustaining the adjustment of Rs.11,41,72,508/- and determining total income at Rs.2,69,77,618/- against the returned loss of Rs.8,71,94,890/-.

4.1. The Ld. AR further referred to the financial performance of the assessee over FYs 2018-19 to 2021-22 and submitted that there was a sharp decline in revenue and profitability during FY 2020-21, whereas the surrounding years reflected materially different results. It was also submitted that SKN US itself was adversely impacted because a substantial part of its customer base was in the US retail sector, which suffered widespread store closures and contraction during the pandemic. Specific reference was made to Brooks Brothers and Tailored Brand, two customers of SKN US which underwent bankruptcy proceedings during calendar year 2020 and from whom there was substantial decline in revenue. The Ld. AR submitted that these circumstances corroborated the reduction in business available with SKN US and the resultant reduction in work outsourced to the assessee. It was emphasised that the impact of COVID-19 could not be regarded as identical for every enterprise merely because the pandemic was global; the actual effect would depend upon the customer profile, industry exposure, geography, operating model and fixed cost structure of each entity.

4.2. The Ld. AR referred to Rule 10B(1)(e) read with Rule 10B(3) of the Income-tax Rules, 1962 and submitted that where a material difference exists which affects the net profit margin, a reasonably accurate adjustment is required to eliminate the effect of such difference. Reliance was also placed upon the ICAI Transfer Pricing Guidance Note relating to COVID-19 and the OECD guidance on the transfer pricing implications of the pandemic. In support of the claim for extraordinary idle-capacity adjustment, the Ld. AR placed reliance, inter alia, upon DGS Technical Services Private Limited v. DCIT, ITA No.1095/Hyd/2024 order dated 31/10/2025; Kennametal India Ltd. v. DCIT, order dated 23/07/2026; DCIT v. Innodata Isogen India Pvt. Ltd., ITA No.5390/Del/2010; Elgi Rubber Co. Ltd. v. DCIT, IT(TP)A No.071/Chny/2026;

Sureprep (India) Pvt. Ltd. v. ITO, ITA No.9156/Mum/2025, order dated 25/08/2026; and Arcadia Consulting Services Private Limited v. ITO, IT(TP)A No.90/Chny/2024, order dated 24/08/2026. The Ld. AR accordingly submitted that the extraordinary COVID-related segment prepared by the assessee ought to be accepted and, once the same is accepted, its OP/OC of 7.71% falls within the arm’s-length range of the comparable companies and no adjustment survives.

5.1. The Ld. DR further questioned the assessee’s reliance upon the bankruptcy of Brooks Brothers and Tailored Brand. It was submitted that the two customers constituted only a limited portion of the overall revenue of SKN US and that no client-wise work-order or billing trail had been placed on record demonstrating the precise volume of work of these customers historically outsourced to the assessee. According to the Revenue, the disproportionate fall in the profitability of the assessee vis-à-vis SKN US itself indicated that the Indian entity had borne an excessive burden during the year. The Ld. DR accordingly prayed that the rejection of the separate COVID segment and the resultant TP adjustment of Rs.11,41,72,508/- be upheld.

6.1. On examination of the record, we find that the assessee’s claim is not founded merely upon the general proposition that FY 2020-21 was affected by COVID-19. The assessee had placed before the authorities its utilisation data showing approximately 72% utilisation and approximately 28% under- utilisation. The assessee has explained that despite such under-utilisation, it restricted the employee-cost adjustment to 20% and separately identified the relevant fixed establishment expenditure. The financial results placed on record further demonstrate a substantial decline in revenue and a significant deterioration in profitability during the relevant year when compared with the surrounding years. The assessee has also explained that it operates in an employee-intensive software service industry where trained manpower could not commercially be dispensed with merely because of a temporary disruption in the flow of business and, therefore, salary and other fixed costs necessarily continued despite the reduction in deployment.

6.2. The Ld. TPO rejected the adjustment substantially on the premise that COVID-19 was an economy-wide event and that the comparable companies would also have been affected. In our considered view, such generalisation cannot be determinative of the issue. The impact of an extraordinary economic event upon an enterprise would depend upon its customer profile, geographical and industry exposure, operating model, manpower deployment and fixed-cost structure. In the present case, the assessee has also placed material demonstrating the adverse impact upon SKN US and its retail-sector customer base. The substantial reduction in business from Brooks Brothers and Tailored Brand, both of whom underwent bankruptcy proceedings during the relevant period, forms corroborative material evidencing the extraordinary disruption in the business environment in which the assessee operated.

6.3. We find support for the assessee’s contention from the judicial precedents specifically relied upon by the Ld. AR. In DGS Technical Services Private Limited (supra), the Tribunal, while examining the impact of COVID-19, recognised that where business operations were severely affected while substantial salary expenditure continued to be incurred for retention of employees, such extraordinary expenditure could not necessarily be regarded as expenditure incurred in the ordinary course of business and required appropriate consideration in the transfer pricing analysis. The assessee has also relied upon Kennametal India Ltd. (supra), wherein, considering the decline in sales and profitability arising from the COVID-19 disruption, the Tribunal accepted the principle that extraordinary expenditure materially affecting comparability required suitable adjustment.

6.4. More importantly, the Ld. AR has relied upon the decision of the Coordinate Bench in Sureprep (India) Pvt. Ltd. (supra). The Coordinate Bench, while considering the effect of extraordinary economic circumstances arising during the COVID period, observed that where the assessee demonstrates that it suffered extraordinary economic circumstances affecting the tested party and establishes the consequential abnormal costs, the comparability adjustment cannot be rejected merely for want of corresponding identical information in respect of the comparable companies. The principle emerging from the said decision squarely supports the assessee’s contention that a demonstrated abnormality affecting the tested party has to be appropriately considered while determining its arm’s length margin.

6.5. The Ld. AR has further relied upon Arcadia Consulting Services Private Limited (supra), wherein the Tribunal considered the unprecedented disruption caused by COVID-19 and held that fixed costs attributable to extraordinary under-utilisation during the pandemic cannot mechanically be characterised as ordinary operating costs without examining their material impact upon profitability. It was further observed therein that non-availability of corresponding comparable-company data cannot, by itself, be a ground to deny an adjustment where the assessee demonstrates the extraordinary expenditure and its effect upon the margin. The factual principle considered therein is equally relevant to the controversy before us.

6.6. In the present case, the assessee has demonstrated through its contemporaneous operational and financial data that the relevant year involved an extraordinary degree of under-utilisation and consequential cost burden. The Ld. TPO has not brought any material on record to demonstrate that the comparable companies suffered an identical degree of idle capacity or an identical fixed-cost burden. In such circumstances, the assessee’s demonstrated abnormality cannot be disregarded merely on the presumption that, since COVID-19 affected the economy generally, all enterprises stood equally affected. The approach of reallocating the entire expenditure to the AE and non-AE segments merely in the ratio of revenue also does not address the economic difference arising from the extraordinary under-utilisation demonstrated by the assessee.

6.7. Considering the totality of the peculiar facts obtaining in the present case, the contemporaneous utilisation data placed by the assessee, the substantial deterioration in its financial performance during the relevant year, the continued employee and fixed establishment cost despite the demonstrated reduction in deployment, and the corroborative material regarding disruption in the business of its holding company and retail-sector customers, we are satisfied that the assessee has established an extraordinary under-utilisation during FY 2020-21 which materially affected the profitability of the tested transaction. Our conclusion is thus founded upon the specific evidence brought on record in the present case and not merely upon the fact that the relevant previous year coincided with the COVID-19 pandemic.

6.8. We may clarify that nothing stated herein shall be understood as laying down a general proposition that bench cost, idle manpower expenditure or fixed establishment expenditure incurred during the COVID-19 period is, in every case, liable to be excluded from operating cost. The entitlement to any comparability adjustment under Rule 10B(3) necessarily depends upon the assessee demonstrating, on the facts of the particular case, a material difference affecting the profitability of the controlled transaction and the basis on which a reasonably accurate adjustment can be made. The present conclusion is confined to the peculiar facts and material placed before us.

6.9. In the peculiar facts of the present case and considering the principles emerging from the decisions relied upon by the Ld. AR, we are of the considered view that the extraordinary under-utilisation/COVID adjustment made by the assessee deserves to be accepted. Once the same is given effect to, the OP/OC margin of the AE segment works out to 7.71%, which falls within the arm’s-length range of 3.76% to 10.53%, the median being 7.25%. Accordingly, the international transaction of rendering software consultancy and support services to the AE is at arm’s length and the consequential transfer pricing adjustment of Rs.11,41,72,508/- is directed to be deleted. Grounds Nos.1, 2 and 3(a) & 3(b) are accordingly allowed.

Order pronounced in the open court on 22nd day of September 2026. Sd/- Sd/- (OM PRAKASH KANT) (ANIKESH BANERJEE) ACCOUNTANT MEMBER JUDICIAL MEMBER Mumbai,िदनांक/Dated: 22/09/2026 Soumili, PS Copy of the Order forwarded to: 1. अपीलाथ�/The Appellant , 2. �ितवादी/ The Respondent. 3. आयकरआयु� CIT 4. िवभागीय�ितिनिध, आय.अपी.अिध., मुंबई/DR, ITAT, Mumbai 5. गाड�फाइल/Guard file. BY ORDER, //True Copy// (Asstt. Registrar), ITAT, MUMBAI