PATHPARTNER TECHNOLOGY PRIVATE LIMTIED ,BANGALORE vs. DEPUTY COMMISSIONER OF INCOME TAX, CIRCLE-3(1)(1), BANGALORE

PER WASEEM AHMED, ACCOUNTANT MEMBER:

The present appeal has been instituted by the assessee against the assessment order passed by the AO u/s 143(3) r.w.s. 144C(13) of the Act, in pursuant to the directions of the Ld. DRP issued u/s 144C(5) of the Act dt. 24.09.2024

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8.1 The average PLI/margin of the comparables companies was computed at 25.09%. Accordingly, an upward TP adjustment was made

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by the TPO for Rs. 5,61,19,488/- only by adding to the total income of the assessee.

10.1 However, the Ld. DRP rejected the plea of assessee by contending that turnover does not have any impact on the profitability of software companies. The Ld. DRP relied on various judicial precedents wherein it was held that when a company is functionally comparable to that of assessee, the same cannot be excluded merely because its turnover was at a higher or a lower level.

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12.1 The ld. AR for the assessee regarding turnover filter submitted that the TPO has considered companies having high turnover in selecting the comparable companies, thus failed to apply the turnover filter used by the assessee in its TP Study Document to exclude companies having turnover more than the limit i.e. 10 times and those with less than 1/10th of the turnover of the tested party. The assessee placed reliance on various judicial precedents in this regard.

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precedents relied upon by the assessee and submitted that each case must be decided on its own facts.

14.1 It is pertinent to note that companies with very high turnover operate on a different scale and benefit from economies of scale, better market position and cost advantages, which directly affect their profitability. Size of the company is a recognized factor for comparability, as differences in turnover and market share influence pricing and margins. Though in our considered view turnover filters cannot be applied mechanically and must depend on the facts of each case, keeping in mind the turnover of the tested entity. The purpose is to select companies with a broadly similar scale of operations, assets and risk profile. This approach is in line with the OECD Transfer Pricing Guidelines in para 3.43 which states that Size criteria in terms of Sales, Assets or Number of Employees. The size of the transaction in absolute value or in proportion to the activities of the parties might affect the relative competitive positions of the buyer and seller and therefore comparability. Similarly, the guidance notes on transfer pricing issued by ICAI in para 5.50 states that under TNMM where margins are to be

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compared, the margin of a 1,000 crores company cannot be compared with that of a 10 crores company. The two most obvious reasons are the size of the two companies and the relative economies of scale under which they operate.

14.2 Further paragraph 15.4 of the ICAI Guidance Note on Transfer Pricing emphasizes significant differences in company size and turnover, such as comparing Rs. 1,000 crore entity to a Rs. 10 crore entity materially affects profitability and comparability under Rule 10B(2) of Income Tax Rule.

14.3 In the present case, the assessee’s turnover from software development services is Rs. 72.39 crores, whereas several of the comparables selected by the TPO have substantially higher turnover. In such circumstances, the application of an upper turnover filter becomes necessary to ensure a fair comparison. The Tribunal has taken a consistent view that large or medium scale companies with substantially higher turnover cannot be compared. For the ready reference, the view taken by the coordinate bench of this Tribunal in Autodesk India (P) Ltd. v. DCIT reported in (2018) 96 taxmann.com 263 reads as under: "17.7. We have considered the rival submissions. The substantial question of law (Question No. 1 to 3) which was framed by the Hon'ble Delhi High Court in the case of Chryscapital Investment Advisors (India) (P.) Ltd., (supra) was as to whether comparable can be rejected on the ground that they have exceptionally high profit margins or fluctuation profit margins, as compared to the Assessee in transfer pricing analysis. Therefore as rightly submitted by the Ld. counsel for the Assessee the observations of the Hon'ble High Court, in so far as it refers to turnover, were in the nature of obiter dictum. Judicial discipline requires that the Tribunal should follow the decision of a non- jurisdiction High Court, even though the said decision is of a non-jurisdictional High Court. We however find that the Hon'ble Bombay High Court in the case of CIT v. Pentair Water India (P.) Ltd. Tax Appeal No. 18 of 2015 judgment dated 16-9-2015 has taken the view that turnover is a relevant criterion for choosing companies as comparable companies in determination of ALP in

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transfer pricing cases. There is no decision of the jurisdictional High Court on this issue. In the circumstances, following the principle that where two views are available on an issue, the view favourable to the Assessee has to be adopted, we respectfully follow the view of the Hon'ble Bombay High Court on the issue. Respectfully following the aforesaid decision, we uphold the order of the DRP excluding 5 companies from the list of comparable companies chosen by the TPO on the basis that the 5 companies turnover was much higher compared to that the Assessee. 17.8. In view of the above conclusion, there may not be any necessity to examine as to whether the decision rendered in the case of Genisys Integrating (supra) by the ITAT Bangalore Bench should continue to be followed. Since arguments were advanced on the correctness of the decisions rendered by the ITAT Mumbai and Bangalore Benches taking a view contrary to that taken in the case of Genisys Integrating (supra), we proceed to examine the said issue also. On this issue, the first aspect which we notice is that the decision rendered in the case of Genisys Integrating (supra) was the earliest decision rendered on the issue of comparability of companies on the basis of turnover in Transfer Pricing cases. The decision was rendered as early as 5-8-2011. The decisions rendered by the ITAT Mumbai Benches cited by the Ld. DR before us in the case of Willis Processing Services (supra) and Capegemini India (P.) Ltd. (supra) are to be regarded as per incurium as these decisions ignore a binding co-ordinate bench decision. In this regard the decisions referred to by the Ld. counsel for the Assessee supports the plea of the Ld. counsel for the Assessee. The decisions rendered in the case of M/S.NTT Data (supra), Societe Generale Global Solutions (supra) and LSI Technologies (supra) were rendered later in point of time. Those decisions follow the ratio laid down in Willis Processing Services (supra) and have to be regarded as per incurium. These three decisions also place reliance on the decision of the Hon'ble Delhi High Court in the case of Chriscapital Investment (supra). We have already held that the decision rendered in the case of Chriscapital Investment (supra) is obiter dicta and that the ratio decidendi laid down by the Hon'ble Bombay High Court in the case of Pentair (supra) which is favourable to the Assessee has to be followed. Therefore, the decisions cited by the Ld. DR before us cannot be the basis to hold that high turnover is not relevant criteria for deciding on comparability of companies in determination of ALP under the Transfer Pricing regulations under the Act. For the reasons given above, we uphold the order of the CIT(A) on the issue of application of turnover filter and his action in excluding companies by following the ratio laid down in the case of Genisys Integrating (supra)".

14.4 Further, we find that this Tribunal subsequently in the case of Robert Bosch Engineering and Business Solutions Pvt. Ltd. vs. DCIT in IT(TP)A No. 593/Bang/2020 followed the decision in the case of Autodesk India (P) Ltd. (Supra) and excluded the company with turnover exceeding 200 crores from the comparable set. Against the order of the

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Tribunal, the revenue filed an appeal before the Hon’ble Karnataka High Court in ITA No. 146/2025. In the said case, the Hon’ble High Court did not admit the Revenue’s grounds of appeal on this issue by observing as under: “10. Indisputably, a company that has a significantly large turnover cannot be considered as a comparable with an assessee, whose turnover is a small fraction of that of the said entity. 11. The question whether the entities are comparable is required to be determined on the basis of similar FAR [Functions, Assets and Risks] profile. It would be erroneous to assume that the size of an entity and its turnover has no bearing on the FAR profile. It is erroneous to suggest that a company of a huge size and a large turnover would be subjected to the same risks as that of a smaller entity, whose turnover is a small fraction of the other entity. The entities would also not be comparable when one considers the value of assets. Additionally entities having a large turnover, would have the benefit of economies of scale, which would not be available to companies with a relatively lower turnover.

14.5 The Hon’ble High Court has categorically observed that a company having significantly large turnover cannot be compared with a small entity and that size and turnover have a direct bearing on FAR analysis, asset base, risk profile and economies of scale.

14.6 Likewise, we also find that the Hon’ble Jurisdictional High Court of Karnataka also taken similar view in the case of CIT vs. Yodlee Infotech (P.) Ltd. reported in 111 taxmann.com 121 and has dismissed the revenue’s ground of appeal on the issue of exclusion of comparable companies with turnover exceeding Rs. 200 crores. The relevant question raised by the Revenue and finding of the bench reads as under: (2) Whether on the facts and in the circumstances of the case the Tribunal is right in law in accepting the claim of assessee to adopt turnover filter of Rs.200 Crores following the decision of Co-ordinate Bench in the case of M/s. Genisys Pvt. Ltd v. DCIT reported in 64 DTR page 225 even when said decision has not reached finality and without appreciating that the turnover is not a relevant filter in the software industry, as the size of the turnover and margins are not linked and the Economics of scale are relevant factor only in capital intensive companies which have substantive fixed assets in the form of plant and machinery?

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Regarding substantial question of law No.2: "20. We have to hold that assessee can seek exclusion of comparables which were a part of its own list, at a later stage, and therefore, we are constrained to reject the line of argument of the learned DR. Coming to the arguments of the learned AR that M/s Tata Elxsi Ltd., M/s Sasken Communication Ltd., M/s Persistent Systems Ltd., M/s L & T Infotech and M/s Infosys Ltd., had turnover in excess of Rs. 200 Crores and were to be excluded, we are of the opinion that turnover filter can be applied for selection of comparables. This has been the view consistently taken by the Co-ordinate Benches of this Tribunal in a number of cases. In the case of M/s Genisys (P.) Ltd. v. DCIT [2011] 64 DTR 225 it was held by this Tribunal as under at paras-8 to 09 of its order: 8. According to learned counsel for the assessee size is an important fact of an enterprise level difference. He submitted that comparables should have something similar or equivalent and should possess same or almost the same characteristics. To use a simile, he submitted that a Maruti 800 car cannot be compared to a Benz car, even though both are cars only. He submitted that unusual pattern, stray cases, wide disparities have to be eliminated as they do not satisfy the test of comparability. Companies operating on large scale benefit from economies of scale, higher risk taking capabilities, robust delivery and business models as opposed to the smaller or medium sized companies and therefore, size matters. Two companies of dissimilar size therefore, cannot be assumed to earn comparable margins and the impact of difference in size could be removed by a quantitative adjustment to the margins or price being compared if it is possible to do so reasonably accurately. He submitted that size as one of the selection criteria has also been approved by various Benches of the Tribunal, in the following cases: 8.1 He further submitted that size as a criteria for selection of comparables is also recommended by OCED in its TP guidelines. The observation of OCED in para 3.43 of the chapter on guidelines reads as follows: ** ** ** 8.2 The learned counsel for the assessee submitted that similar observations were also made by ICAI in para 15.4 of TP guidance note. He submitted that TPO's range of Rs. 1 crore to infinity has resulted in selection of companies like M/s Infosys which is having a turnover of Rs. 9,028 crores which is 1,1007 times bigger than the assessee company which has a turnover of Rs. 8.15 crores. He further submitted that NASSCOM has also categorized the companies based on the turnover as follows: 8.3 The learned Departmental Representative rebutted this argument and submitted that the Act or Rules does not provide for the turnover filter. He submitted that as rightly pointed out by the TPO in the case of service sector, the size of the company does not matter because, the infrastructure layout is very less and it will not affect the profit ratio in any way. He drew out attention to the particular portion of TPO's order wherein the TPO has the reasoning given for rejecting the turnover filter. 9. Having heard both the parties and having considered the rival contentions and also the judicial precedents on the issue, we find that the TPO himself has rejected the companies which are making losses as comparables. This shows that there is a limit for the lower end for identifying the comparables. In such a situation, we are unable to understand as to why there should not be an upper limit also. What should be upper limit is another factor to be considered. We

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agree with the contention of the learned counsel for the assessee that the size matters in business. A big company would be in a position to bargain the price and also attract more customers. It would also have a broad base of skilled employees who are able to give better output. A small company may not have these benefits and therefore, the turnover also would come down reducing profit margin. Thus, as held by the various Benches of the Tribunal, when companies which are loss making are excluded from comparables, then the super profit-making companies should also be excluded. For the purpose of classification of companies on the basis of net sales or turnover, we find that a reasonable classification has to be made. Dun & Bradstreet and NASSCOM have given different ranges. Taking the Indian scenario into consideration, we feel that the classification made by Dun & Bradstreet is more suitable and reasonable. In view of the same, we hold that the turnover filter is very important and the companies having a turnover of Rs. 1 Crore to Rs. 200 crores have to be taken as a particular range and the assessee being in the range having turnover of Rs. 8.15 crores, the companies which also have turnover of Rs. 1 to Rs. 200 crores only should be taken into consideration for the purpose of making TP study." The appeal filed by the Revenue against the judgment of the Hon'ble Tribunal in the case of Genisys (P.) Ltd. v. Dy.CIT [2011] 64 DTR 225 has been considered by this Court in ITA No.17/2012 and the same has been dismissed on 09.07.2018 as no substantial questions of law arose for consideration.

14.7 In view of the above detailed discussion and after relying on the judicial discipline supra, we note that the turnover of the companies viz. S.No. Name of Comparable T/O in Rs. Crores 1. Mindtree Ltd. 7,967.80 2. Larsen and Toubro Infotech Ltd 11,562.80 3. Wipro Ltd. 50,299.40 4. Tata Elxsi Ltd 1,826.16 5. Infosys Ltd. 85,912.00 6. Tata Consultancy Services Ltd. 1,35,963.00 7. Nihilent Ltd. 334.63

are far higher than that of the assessee company. Hence, the same are liable to be deleted from the list of comparable companies.

14.8 Before parting, it is important to note that on the reasoning given above, the other three comparable companies viz Athenahealth

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Technology Pvt. Ltd., Great software laboratory Pvt. Ltd. and Cybage Software Pvt. Ltd. selected by the assessee are also liable to be excluded from the list of comparables. At the time of hearing the ld. AR agreed for exclusion of these three companies. Hence, we exclude the same. Thus, the ground of appeal of the assessee is partly allowed.

16.1 The Ld. TPO computed notional interest on the average receivables of the assessee for the captioned AY by applying the SBI PLR applicable for the captioned Assessment year at the rate of 12.27% after allowing a credit period of 60 days and, on such basis, determined the total notional interest adjustment at Rs. 3,28,481/- only.

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transaction on the reasoning that it represents only a consequence of the principal international transaction i.e. sales. Assessee placed reliance on various judicial precedents in this regard.

18.1 The assessee also submitted that it does not charge any interest from third parties with respect to any delay in the receipt of trade receivables arising from sale of software services

18.2 The assessee, without prejudice, also contended that since the invoices are raised in foreign currency, interest computation, if any, ought to be made shall be made with reference to LIBOR Rates.

18.3 The Ld. DRP, with regard to contention of the assessee regarding whether the interest on delayed receivables constitutes a separate international transaction, observed that the amendment inserted by way of Explanation to sec. 92B of the Act, the term ‘internation transaction’ would specifically include within its ambit “deferred payment or receivable or any other debt arising during course of business…” and hence, non-charging or under-charging of interest on excess period of credit allowed to the AE for the realization of invoices would amount to an international transaction. The Ld. DRP further relied on plethora of judicial precedents in this regard.

18.4 Regarding interest rate, Ld. DRP gave a direction to TPO to adopt the 6 months LIBOR rate + 350 basis point for the period under consideration and re-compute the adjustment made on the total income. Accordingly, the notional interest from trade receivables post DRP orders was reduced to Rs. 93,239/- only.

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20.1 The assessee also submitted that the working capital adjustment already takes into account the impact of receivables and payables. Therefore, any alleged excess credit period stands subsumed in the working capital adjustment. Hence, no separate adjustment for interest on delayed receivables is required.

20.2 The assessee further submitted that the TPO/AO erred in computing notional interest on outstanding receivables without considering the corresponding payables to AEs. It was contended that the assessee is both a debtor and a creditor in its dealings with AEs, and therefore, the transactions cannot be viewed in isolation. The delay in realization of receivables is effectively offset by the credit period enjoyed on payables, and hence a netting off approach ought to be adopted.

20.3 Without prejudice, the assessee submitted that if at all interest is to be computed, the same should be done by applying LIBOR plus 200 basis points, as held in several judicial precedents. Accordingly, the

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assessee requested the Bench to direct the TPO to recompute the interest on trade receivables by applying LIBOR plus 200 basis points.

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scope of an international transaction under the said provision. We also note that various judicial precedents have taken a similar view that delay in realization of receivables from AEs constitutes a separate international transaction requiring benchmarking under the transfer pricing provisions. Further, we note that working capital adjustment is computed on the basis of opening and closing balances of receivables and payables. However, delayed realization of receivables has to be examined on a transaction-to-transaction basis.

22.1 If an invoice is raised during the year and the amount is realised within the same financial year, but beyond the agreed credit period, such delay may not be fully reflected in the working capital adjustment. This is because working capital adjustment is calculated with reference to the balances as on the first and last day of the financial year, and not with reference to each individual invoice.

22.2 Therefore, to that limited extent, the contention of the assessee that all delays in receivables automatically get subsumed in the working capital adjustment cannot be fully accepted.

22.3 With regard to the contention of assessee regarding net off, we take a note that the approach adopted by the TPO is not entirely justified. Where the assessee has both receivables and payables with the same AE, the impact of delay cannot be examined in isolation. If the assessee is also enjoying credit from the same AE, the real benefit, if any, has to be determined on a net basis. Ignoring the payables would result in an artificial and inflated adjustment which does not reflect the true economic substance of the transaction.

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22.4 With regard to the contention of assessee regarding net off, we take a note that the approach adopted by the TPO is not entirely justified. Where the assessee has both receivables and payables with the same AE, the impact of delay cannot be examined in isolation. If the assessee is also enjoying credit from the same AE, the real benefit, if any, has to be determined on a net basis. Ignoring the payables would result in an artificial and inflated adjustment which does not reflect the true economic substance of the transaction. The above view finds strong support from the decision of the coordinate bench of the Tribunal in the case of ACIT vs. Avery Dennison (I) (P.) Ltd. reported in [2021] 133 taxmann.com 536 (Delhi - Trib.) dated [11-10-2021], wherein it was held that where the assessee has a net balance payable to AEs, the adjustment on account of interest on receivables does not survive if payables are not factored in. The said decision has been affirmed by the Hon’ble Delhi High Court in Principal Commissioner of Income-tax vs. Avery Dennision (I) (P.) Ltd. reported in [2023] 154 taxmann.com 454 (Delhi) dated [20-09-2022], which has further held that where debtor days of non-AEs are higher than those of AEs and no interest is charged from non-AEs, the assessee is justified in not charging interest from AEs as well. The SLP filed by the Revenue against the said judgment has also been dismissed by the Hon’ble Supreme Court in Principal Commissioner of Income-tax vs. Avery Dennison (I) (P.) Ltd. reported in [2023] 154 taxmann.com 455 (SC)/[2023] 295 Taxman 314 (SC) dated [11-08- 2023], thereby lending finality to the issue.

22.5 At the same time, we hold that such netting off is permissible only where receivables and payables pertain to the same AE. Netting across

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different AEs cannot be allowed, as each AE is a separate entity and the terms of transactions may differ.

22.6 The Tribunal in several cases consistently held that where the underlying transaction is in foreign currency, the appropriate benchmark rate is LIBOR plus a reasonable basis point spread. We find force in the following judicial precedents in the jurisdictional Bangalore ITAT in the case of Synechron Technologies (P.) Ltd vs. ACIT [2025] 175 taxmann.com 404 (Bangalore - Trib.) [04-06-2025]. The relevant para is reproduced below:

“We have heard the rival submissions and perused the materials available on record. So far as the argument of assessee that the transaction of outstanding receivables is not an international transaction, we do not find any force in this argument because now there are so many judgements on this issue, wherein it has been held that the transactions of outstanding receivables is an international transaction. So far as the applicability of rate is concerned, we observe that TPO has erred in applying LIBOR+450 basis points as a rate of interest, therefore, we modify this rate of interest to the tune of LIBOR+200 basis points, in the interest of justice and direct the TPO to calculate the interest attributable to the outstanding receivables accordingly.”

22.7 Accordingly, we direct the TPO to recompute the interest on delayed receivables, if any, by adopting LIBOR plus 200 basis points. Interest shall be computed only for the actual period of delay beyond the agreed credit period after considering the payables in the manner discussed above. The TPO shall grant reasonable opportunity to the assessee while recomputing the adjustment. This ground of appeal of the assessee is allowed for statistical purposes.

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Order pronounced in court on 29th day of April, 2026.

Sd/- Sd/- (KESHAV DUBEY) (WASEEM AHMED) Judicial Member Accountant Member Bangalore Dated, 29th April, 2026 / vms / Copy to: 1. The Applicant 2. The Respondent 3. The CIT 4. The CIT(A) 5. The DR, ITAT, Bangalore. 6. Guard file By order Asst. Registrar, ITAT, Bangalore

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