M/S. MERITOR C vs. INDIA (P) LIMITED ,BANGALOREVS.DEPUTY COMMISSIONER OF INCOME TAX, CIRCLE-4(1)(1), BANGALORE

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ITTPA 1831/BANG/2024Status: DisposedITAT Bangalore17 April 2026AY 2020-2110 pages
AI SummaryPartly Allowed

What did the Tribunal hold?

The Tribunal partly allowed the assessee's appeal. Regarding the exclusion of comparable companies based on turnover, the Tribunal found that companies with turnovers of ₹ 4,595 crores (Infosys BPM Ltd.) and ₹ 7,036 crores (Tech Mahindra Ltd.) were not truly comparable due to significant differences in scale, market presence, brand value, and economies of scale. These factors impact margin comparability. The Tribunal directed the Assessing Officer (AO) to remove these two companies from the comparable set. However, for Motif India Infotech Limited (₹ 308 crores turnover) and MSP Ltd (₹ 218 crores turnover), the Tribunal found no significant difference in turnover compared to the assessee (₹ 57 crores) and directed their retention. Regarding E care India Private Limited, the Tribunal directed its exclusion due to the non-provision of annual accounts by the TPO and its functional dissimilarity (medical transcription). Vitae Accounting Ltd. was directed to be excluded as it is engaged in bookkeeping services, making it functionally different from ITeS. Brickworks India Private Limited was also directed to be excluded as it is a KPO provider, distinct from the assessee's ITeS services. Domex E Private Limited was found to be functionally comparable and directed to be retained. Concerning interest on outstanding receivables, the Tribunal upheld the TPO's view that it is a separate international transaction requiring separate benchmarking. However, it directed the AO to compute the interest on overdue receivables applying appropriate LIBOR or Euribor rates, as the bills were stated to be prepared in foreign currency, instead of SBI PLR.

What were the facts?

The assessee, Meritor Commercial Vehicle Systems India Pvt. Ltd., filed an appeal for Assessment Year 2020-21 against an assessment order passed under Section 143(3) r.w.s. 144C(13) r.w.s. 144B of the Income Tax Act, 1961. The order was passed pursuant to directions from the Dispute Resolution Panel (DRP) and involved transfer pricing adjustments proposed by the Transfer Pricing Officer (TPO). The TPO proposed an adjustment of ₹ 28,961,255 for the arm's-length price of the ITeS segment and ₹ 45,027 for interest on delayed receivables. The assessee, a subsidiary of Meritor Inc., USA, is involved in computer-aided design and development of commercial vehicle systems. The TPO rejected the assessee's transfer pricing study, finding the data unreliable. The TPO conducted a new search, identified 17 comparable companies, and applied a median margin of 23.71% to the assessee's operating revenue of ₹ 575,472,272, resulting in a shortfall adjustment. The TPO also imputed interest on delayed receivables from associated enterprises. The DRP directed a modification, reducing the ITeS adjustment to ₹ 19,091,756, retaining the interest adjustment, leading to a total adjustment of ₹ 19,136,783 and a final total income of ₹ 106,596,743.

What were the issues?

1. Whether the Tribunal has erred in not excluding comparable companies with significantly higher turnovers than the assessee, thereby impacting the comparability analysis for the ITeS segment? (Question of law and fact, concerning Section 92CA of the Act). 2. Whether the Tribunal has erred in excluding E care India Private Limited as a comparable? 3. Whether the Tribunal has erred in excluding Vitae International Accounting Private Limited as a comparable? 4. Whether the Tribunal has erred in excluding Brickworks India Private Limited as a comparable? 5. Whether the Tribunal has erred in retaining Domex E Private Limited as a comparable? Assessee's Contentions: - Companies with significantly higher turnovers (e.g., Infosys BPO Ltd. at ₹ 4595 crores, Tech Mahindra Ltd. at ₹ 7036 crores) are not suitable comparables due to differences in scale, economies of scale, and bargaining power. A turnover filter should have been applied. - E care India Private Limited should be excluded as its annual accounts were not provided and its primary business is medical transcription, differing from the assessee's ITeS services. - Vitae International Accounting Private Limited is functionally dissimilar, generates exceptionally high profits, and displays inconsistent margins. - Brickworks India Private Limited is a knowledge process outsourcing (KPO) function, providing high-end services with highly qualified personnel, making it dissimilar to the assessee's ITeS services. Revenue's Contentions: - The learned CIT(DR) submitted that the TPO and DRP correctly held that interest on delayed receivables is a separate international transaction requiring separate benchmarking. - The learned CIT(DR) submitted that the interest should be computed at the SBI PLR of 13.62% per annum. - The learned CIT(DR) argued that whether the assessee is debt-free or does not receive interest from other non-associated enterprises is irrelevant. No independent person would allow outstanding beyond the credit period.

Which sections of the Income-tax Act were involved?

Section 143(3),Section 144C(13),Section 144B,Section 92CA,Section 143(2),Section 144C(1)

AI-generated summary — verify with the full judgment below

Income Tax Appellate Tribunal, “C” BENCH: BANGALORE

Before: SHRI PRASHANT MAHARISHI & SHRI KESHAV DUBEY

For Appellant: Ms. Megha B Sundaresh and Shri C. Ramesh, CAs
For Respondent: Dr. Divya K. J, CIT(DR)(ITAT)
Hearing: 21.01.2026Pronounced: 17.04.2026

Per Prashant Maharishi, Vice President:

1.

IT(TP)A No. 1831/Bangalore/2024 is filed by Meritor Commercial Vehicle Systems India Pvt. Ltd., (the assessee/appellant) for Assessment Year 2020 – 21 against the Assessment Order passed under section 143(3) r.w.s. 144C(13) r.w.s. 144B of the Income Tax Act, 1961 (The Act), dated 24/07/2024, by the Assessment Unit (the learned Assessing Officer) which was passed in pursuance to the direction by the learned Dispute Resolution Panel (learned DRP), Bangalore, dated 19.06.2024 on Draft Assessment Order dated 24.09.2023 wherein the transfer pricing adjustment was proposed by the learned Deputy Commissioner Of Income Tax Transfer Pricing – 2 (1) (1), Page 2 of 10 Bangalore (the learned TPO) with respect to the arm’s-length price of the international transaction of ITeS segment of ₹ 28,961,255 and interest on delayed receivable was computed at ₹ 45,027/– was made. 2. The assessee is aggrieved with the same and has preferred this appeal. 3. The assessee was incorporated in 2008 as a wholly owned subsidiary of Meritor Holdings (Barbados) Ltd, with Meritor Inc., USA as the ultimate holding company. 4. The assessee submitted its income tax return on 25 December 2020, reporting a total income of ₹ 87,459,960. Subsequently, the return was selected for scrutiny, and a notice under Section 143(2) of the Act was issued. 5. Since the assessee engaged in international transactions, a reference was made pursuant to Section 92CA of the Income Tax Act to the Transfer Pricing Officer—The Deputy Commissioner of Income Tax, Transfer Pricing 2 (1) (1), Bangalore (hereinafter referred to as the learned TPO). 6. The assessee’s functional profile indicates involvement in computer-aided design and development of commercial vehicle systems. The organization develops specialized designs for associated enterprises, with these designs integrated into the relevant products, such as horses. The assessee operates as a contract support service provider and has engaged in numerous international transactions. Total revenue amounts to ₹ 57 crores, with a net margin over operating costs recorded at 16.18%. The assessee has reported international transactions relating to IT-enabled services and has determined the transactional net margin method as the most appropriate, utilizing the profit level indicator of operating cost to operating profit. Five comparable entities were selected, exhibiting a margin of 15.77%, thereby supporting the assessee’s assertion that its international transactions are conducted at arm’s length. 7. The transfer pricing officer reviewed the transfer pricing study report and rejected it, citing that the information and data used to compute the arm’s- length price were not reliable or accurate. Of the eight filters applied by the Page 3 of 10 assessee, the officer dismissed the turnover filter for companies with turnovers between 5 crores and 250 crores as inappropriate. Additionally, the assessee did not utilize net worth or different financial year filters. Consequently, the transfer pricing officer conducted a new search, implemented independent filters, and from the five comparable companies identified by the assessee, accepted only Virinchi Ltd. (with a weighted and adjusted margin of 24.12%) sourced from the Prowess database. Using the Prowess and Ace TP databases, the officer selected 17 comparable companies whose 35th percentile margin was 18.49%, median margin was 23.71%, and 65th percentile margin was 32.78%. After issuing the show cause notice in taking the comments of the assessee, the learned transfer pricing officer applied the median margin of the comparable set at 23.71% on the taxpayer’s operating revenue of ₹ 575,472,272, determine its arm’s-length price at ₹ 604,433,527 determining the shortfall adjustment of ₹ 28,961,255/–. 8. The transfer pricing officer observed a significant delay in the collection of trade receivables from associated enterprises, necessitating the imputation of interest. The assessee argued that it does not incur any interest expenses and asserted there is no undue benefit conferred via the credit facility. Additionally, the assessee maintained that the delay was marginal and did not warrant an adjustment. However, the transfer pricing officer dismissed these arguments, determined that the delayed receipt constitutes a separate international transaction requiring benchmarking, and rejected the aggregation of transactions on the grounds that they are not closely interlinked. Consequently, the officer applied the average SBI PLR of 13.62% to three invoices, which had delays of 25, 32, and 4 days respectively, resulting in an interest computation amounting to ₹ 45,027. 9. Accordingly, a total adjustment under section 92CA of the Act was made in the amount of ₹ 2,90,06,282. Based on this, the learned Assessing Officer issued a draft assessment order under section 144C (1) of the Act dated 24 September 2023, determining the total income of the assessee at Page 4 of 10 ₹ 116,466,242. The assessee submitted an objection to the Dispute Resolution Panel–2, Bangalore (the DRP), which issued its directions on 19 June 2024. Subsequently, the Transfer Pricing Officer passed an order giving effect thereto on 11 July 2024, whereby the adjustment on the ITeS segment was restricted from ₹ 28,961,255 to ₹ 19,091,756 and the interest on delayed receivables was retained at ₹ 45,027. As a result, the total adjustment under section 92CA was limited to ₹ 19,136,783. The final assessment order, passed on 24 July 2024, determined the assessee’s total income at ₹ 106,596,743. 10. The initial contention raised by the learned authorized representative was that the assessee’s turnover is only ₹ 57 crores, whereas the learned transfer pricing officer considered comparable companies such as Infosys BPO Limited with a turnover of ₹ 4595 crores, Tech Mahindra Ltd with ₹ 7036 crores, and Motive India Infotech Limited with ₹ 308 crores and of MSP Ltd at 208 crores. It was argued that companies with such significantly higher turnovers are not suitable comparables for the assessee. The learned authorised representative referenced the guidance note issued by the Institute of Chartered Accountants of India and OECD guidelines, asserting that a turnover filter should have been applied by the learned assessing officer/transfer pricing officer, which they failed to do on the grounds that turnover does not directly impact margins. Further reference was made to page 16 of the transfer pricing officer’s order, specifically paragraph 9.1, where the application of the turnover filter was rejected. The representative pointed out that in the transfer pricing study report, the assessee itself had adopted a turnover range of ₹ 5 crores to ₹ 250 crores. She contended that the assertion by the learned transfer pricing officer that turnover does not affect profit margins of comparable companies is erroneous. She further submitted that economies of scale and bargaining power are influenced by substantial turnovers, rendering those companies unsuitable for comparison with the assessee, who operates as a captive service provider to its associated enterprises.

Page 5 of 10 11. The subsequent issue concerned the exclusion of a comparable that was not excluded by the Transfer Pricing Officer (TPO). It was submitted that E care India Private Limited had been selected by the TPO; however, the assessee objected on the grounds that the annual accounts for this company were not made available. The TPO indicated that public databases had been utilized and that the company's annual reports could be accessed therein. Furthermore, it was contended that this company is not functionally comparable, as its primary business activity is medical transcription, which differs from that of the assessee. A detailed analysis of this comparable suggests that it should be excluded from consideration. 12. The learned authorized representative argued that Vitae International Accounting Private Limited' is functionally dissimilar, generating exceptionally high profits and displaying inconsistent margins, thus warranting exclusion. However, the learned transfer pricing officer did not exclude it, stating that the company operates in data processing, manages back-office functions, and provides IT-enabled services to international clients using computer software. The authorized representative further emphasized that its primary activities involve accounting, bookkeeping, and auditing services, where it earns a margin of 97.78%, compared to only 0.22% in computer programming consultancy and related fields. This disparity demonstrates that the company has a distinct functional profile and should therefore be excluded. 13. The learned authorized representative raised objections to the inclusion of Domex E Data Private Limited, asserting that the company is functionally distinct. However, the learned Transfer Pricing Officer dismissed this contention, noting that Domex E Data Private Limited operates within the IT enabled services sector, contrary to the representative's claim that it engages in knowledge processing outsourcing. Likewise, the assessee argued that Brickworks India Private Limited, as included by the learned Transfer Pricing Officer, is functionally dissimilar and generates supernormal profits. The Page 6 of 10 learned Transfer Pricing Officer rejected this argument, stating that Brickworks India Private Limited is part of the ITeS segment, rendering the assertion that it provides KPO services without merit. 14. The authorized representative further clarified that interest calculations by the assessing officer/transfer pricing officer were limited to three invoices, alleging undue benefit to associated enterprises. She cited page 48 of the transfer pricing officer's report, which identifies only three bills with delays of 25 days, 32 days, and four days, respectively resulting in an adjustment of ₹ 45,027, based on the SBI PLR rate of 13.62%. She argued that, since these invoices are issued in foreign currencies, the assessing officer/transfer pricing officer should not have applied the SBI PLR rate. Additionally, she contended that, even otherwise, the AO/TPO ought to have exercised appropriate discretion in determining the applicable rate. 15. The learned CIT DR supported the order of the learned transfer pricing officer and submitted that there is reason given by the learned transfer pricing officer for not applying the upper turnover filter stating that the turnover of the companies in ITeS segment does not have any impact on the profitability. She relied upon the order of the learned transfer pricing officer at page No. 16 – 28 of the order she further stated that the analysis of the learned transfer pricing officer is further supported by the decision of the Honourable Delhi High Court in Agnity India technologies Ltd (2013 – LL – 0710 – 158). It was further submitted that the Honourable Bombay High Court in case of Pentair water India private limited also did not admit the substantial question of law on the turnover filter. And therefore, there is no merit in the argument of the learned authorized representative that the Infosys BPM Ltd, Tech Mahindra business services Limited, motive India Infotech private limited and MSP Ltd should be excluded. With respect to the other comparable companies such as E care Ltd, Vitae accounting services private limited, Domex E Limited and brickworks India private limited, she submitted that the Page 7 of 10 learned transfer pricing officer has provided enough reasons for not excluding those companies. 16. With respect to the computation of the outstanding receivable from the associated enterprise which are delayed for recovery, she submitted that it is a separate international transaction which is required to be benchmarked separately, it is not connected with the transaction of the assessee as not closely interlinked. She further submitted that the learned transfer pricing officer and the learned dispute resolution panel has correctly held that the interest is required to be computed at the rate of SBI PLR at the rate of 13.62% per annum. She further submitted that whether the assessee is a debt free company or is not receiving interest from any other non-associated enterprise does not merit any consideration. Her submission was that no independent person would have allowed the buyer to carry on its outstanding beyond the specified due date of recovery. She further submitted that if the days are 25/32/4 with respect to the delay, the interest is required to be imputed thereon. 17. After thoroughly reviewing the opposing arguments and examining the orders from the lower authorities, we note that the assessee's turnover amounts to Rs. 57 crores, while comparable companies such as Infosys BPM Ltd report Rs. 4,595 crores, Tech Mahindra Rs. 7,036 crores, Motive India Infotech Limited Rs. 308 crores, and MSP Ltd Rs. 218 crores. The assessing officer appropriately rejected the upper turnover filter of Rs. 250 crores proposed by the assessee but asserted that higher turnover entities need not be excluded, reasoning that in the ITeS segment, increased turnover does not affect company margins. 18. However, we find that companies with turnovers of ₹ 4,595 crores and Rs. 7,036 crores are not truly comparable to the assessee due to significant differences in scale and market presence. Specifically, Infosys BPM Ltd and Tech Mahindra possess substantial brand value and extensive customer reach, which grants them greater economies of scale and bargaining power Page 8 of 10 compared to smaller, captive service providers like the assessee. These distinctions impact margin comparability and justify exclusion. Therefore, we direct the assessing officer to remove Infosys BPM Ltd and Tech Mahindra Ltd from the set of comparables for the purpose of comparability analysis. 19. Regarding Motif India Infotech Limited, it has been observed that the company's turnover amounts to only Rs 308 crores, which is less than ten times the turnover of the assessee company. Similarly, with respect to MSP Ltd, we note that there is no significant difference between the turnover of the assessee company and Motif India Infotech Limited. Therefore, we do not accept the arguments presented by the learned authorized representative for the exclusion of these comparable companies. No additional reasons for exclusion were submitted to us. Consequently, we instruct the learned Assessing Officer to include / retain these comparables in the analysis. 20. Regarding the exclusion of E care India Private Limited, the assessee requested the company's annual report, which was not provided by the learned Transfer Pricing Officer (TPO), who indicated reliance on a public database where such reports are available. As the TPO selected this comparable, it is incumbent upon him to furnish the annual report to the assessee. The assessee contends, with reference to the company's website, that it operates in the medical transcription sector, and this point has not been disputed by either the TPO or the Dispute Resolution Panel. Therefore, due to both the non-provision of the annual accounts and the differences identified in functional analysis, we direct the learned AO to exclude this comparable from consideration. 21. With respect to Vitae Accounting Ltd we find that this is engaged in the bookkeeping services where 97% of such revenue is derived from that activity, this itself proves that it is functionally different and not providing ITeS services. Therefore, the functional profile of this company is different, the learned AO is directed to exclude the same.

Page 9 of 10 22. With respect to the Domex E private limited as well as the brickworks India private limited we find that brickworks India private limited is knowledge process outsourcing function and therefore it deserves to be excluded because it is providing high end services with highly qualified and skilled persons. Naturally assessee is providing ITeS services, therefore KPO services provider could not have been compared with the assessee company. Thus, we direct the learned AO to exclude brickworks India private limited from the comparability analysis. 23. However, with respect to Domex E private limited we did not find any such difference, and it was found to be functionally comparable and therefore the learned AO is directed to retain this comparable company. 24. With respect to the interest on outstanding receivable we find that the outstanding due from the associated enterprises are kept pending recovery beyond agreed credit period and therefore it is a separate international transaction, required to be benchmarked separately, it is also not shown to be a closely interlinked transaction and therefore we do not find any infirmity in the order of the learned transfer pricing officer in separately benchmarking it. However we find that as the bills stated to be prepared in a foreign currency, we direct the learned AO to compute the interest on overdue receivable applying appropriate LIBOR or Euribor rates. 25. No other grounds are argued before us and therefore, except as indicated above, the appeal of the assessee is allowed partly. 26. In the result, appeal of the assessee is partly allowed for statistical purposes.

Pronounced in the open court on the date mentioned on the caption page.

Sd/- Sd/- Sd/-d/- (KESHAV DUBEY) (PRASHANT MAHARISHI) Judicial Member Vice President Bangalore, Dated: 17.04.2026.

Page 10 of 10 /NS/* Copy to: 1. Appellants 2. Respondent 3. DRP 4. CIT 5. CIT(A) 6. DR, ITAT, Bangalore. 7. Guard file By order

Assistant Registrar, ITAT, Bangalore.

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