CAE SIMULATION TECHNOLOGIES PRIVATE LIMITED,BANGALORE vs. DEPUTY COMMISSIONER OF INCOME TAX, CIRCLE 2(2)(1), BANGALORE

PDF · subscribers
ITTPA 2494/BANG/2024Status: DisposedITAT Bangalore19 December 2025AY 2021-228 pages
AI SummaryPartly Allowed

What did the Tribunal hold?

The Tribunal held that for better comparability, large turnover companies should not be compared with small companies. It acknowledged that determining 'large' and 'small' is subjective and no rigid formula applies. The Tribunal directed the exclusion of Larsen & Toubro Info tech Limited, Mindtree Limited, Wipro Limited, Infosys Limited, TCS Limited, Tata Elxsi Ltd, Cybage Software Ltd, and Nihilent Limited from the comparable set due to their significantly higher turnovers compared to the assessee. Regarding Aptus Software Labs Private Limited, the Tribunal found it functionally not comparable due to its diversified activities (infrastructure management, cloud computing, etc.) compared to the assessee's software development services, and directed its exclusion. On the issue of interest on overdue receivables, the Tribunal directed the computation of interest at LIBOR + 200 basis points, noting the lack of specific reasoning by the TPO for the 450 basis points addition and the limited risk involved with the holding company. The Tribunal allowed grounds 18 to 21 of the appeal concerning this issue. The Tribunal did not expressly leave any issue undecided.

What were the facts?

The assessee, M/s. CAE Simulation Technologies Pvt. Ltd., filed its return of income for assessment year 2021-22 at Rs. 1,93,22,170/-. The assessee, a subsidiary of Canadian entities, provides contract software development services on a time and material basis. The assessee adopted the Transactional Net Margin Method (TNMM) with operating profit/operating cost as the profit-level indicator, reporting a margin of 14%. The Transfer Pricing Officer (TPO) rejected the assessee's transfer pricing analysis, adopted TNMM, but computed a higher margin of 25.09% based on a revised set of 18 comparables, resulting in a transfer pricing adjustment of Rs. 1,15,93,170/-. The Dispute Resolution Panel (DRP) provided no relief. The final assessment order was passed on 18.10.2024, retaining this adjustment. The assessee is in appeal against this adjustment.

What were the issues?

1. Whether the Tribunal should apply an upper turnover filter in selecting comparable companies for transfer pricing analysis, and if so, whether certain companies with significantly higher turnovers than the assessee should be excluded? (Question of law and fact, turning on principles of transfer pricing comparability). - Assessee's contention: Companies with significantly higher turnovers (e.g., Rs. 3.86 crores to Rs. 50,299 crores) compared to the assessee's Rs. 12.63 crores turnover should be excluded, citing judicial precedents. Specific companies like Mindtree, Wipro, Infosys, TCS, etc., are challenged. - Revenue's contention: An upper turnover limit filter cannot be applied as turnover does not impact margins in the software development segment, a view supported by the TPO and DRP. 2. Whether the inclusion of Aptus Software Labs Private Limited as a comparable is justified, given its diversified activities? - Assessee's contention: Aptus Software Labs is functionally dissimilar due to diversified activities and should be excluded, relying on a coordinate bench decision. - Revenue's contention: Not explicitly recorded. 3. Whether the interest charged on outstanding trade receivables from associated enterprises at LIBOR + 450 basis points is sustainable, or if it should be reduced to LIBOR + 200 basis points? - Assessee's contention: The interest rate should be reduced to LIBOR + 200 basis points, citing judicial precedents. The TPO's addition of 450 basis points over LIBOR lacks reasoning, and there is limited risk as the amount is due from the holding company. - Revenue's contention: The TPO correctly took LIBOR + 450 basis points, and there is no reason to reduce it to 200 basis points.

Which sections of the Income-tax Act were involved?

Section 143(3),Section 144C(13),Section 144B

AI-generated summary — verify with the full judgment below

Income Tax Appellate Tribunal, ‘C’ BENCH : BANGALORE

Before: SHRI PRASHANT MAHARISHI, VICE – & SHRI SOUNDARARAJAN K.

For Appellant: Shri Ketan Ved. CA, Shri Aseem Sharma, CIT-DR

IN THE INCOME TAX APPELLATE TRIBUNAL ‘C’ BENCH : BANGALORE BEFORE SHRI PRASHANT MAHARISHI, VICE – PRESIDENT AND SHRI SOUNDARARAJAN K., JUDICIAL MEMBER IT(TP)A No. 2494/Bang/2024 Assessment Year : 2021-22

M/s. CAE Simulation Technologies Pvt. Ltd., The Deputy Commissioner of Survey No. 26,27, Income Tax, Defense Complex, IVC Road, Circle 2(2)(1), Vs. Bandaramanahalli Village, Uganavadi, Bangalore B.O.Devaganahalli, Bangalore – 562110 PAN: AACCC6086F APPELLANT RESPONDENT

Assessee by : Shri Ketan Ved. CA : Shri Aseem Sharma, CIT-DR Revenue by

Date of Hearing : 14-10-2025 Date of Pronouncement : 19-12-2025

ORDER PER PRASHANT MAHARISHI, VICE – PRESIDENT 1. This appeal is filed by M/s. CAE Simulation Technologies Private Limited (the Assessee/Appellant) against the Assessment Order passed by the Deputy Commissioner of Income Tax, Circle – 2 (2) (1), Bangalore for assessment year 2021–22 wherein the return of income filed by the assessee at Rs. 1,93,22,170/- is assessed u/s. 143 (3) r.w.s. 144C(13) r.w.s. 144B of the Income Tax Act, 1961 (the Act) on 18.10.2024 wherein the total income is computed at Rs. 3,09,93,317/–. The assessee is aggrieved and has preferred appeal as per grounds of appeal as under.

2.

The fact shows that the assessee is a subsidiary of CAE International Holdings Ltd, Canada and CAE Incorporation Canada. It has a master software licence and software development agreement dated 24.02.2006 and subsequent amendments to the said

IT(TP)A No. 2494/Bang/2024 Page 2 of 8 agreement with CAE Incorporation Canada for the provision of the contract software development services. The Assessee is compensated on a time and material basis for the provision of contract software development services.

3.

The Assessee filed its return of income on 15-03-2022 declaring total income at Rs. 1,93,22,170/–. The Assessee has entered into an international transaction with its associated enterprises of rendering of contract software development services. Assessee adopted transactional net margin method, Profit level indicator of operating profit/operating cost having the margin at 14%. The Assessee selected 26 comparables whose weighted average margin at 35th percentile was computed at 6.33%, 65th percentile margin at the rate of 14.51% and median margin at 7.77%. Thus, the Assessee in its transfer pricing study report stated that the international transaction of rendering of software development services is at arm's-length.

4.

The reference was made to the Ld. Transfer Pricing Officer who after examining of the transfer pricing study report rejected the transfer pricing analysis of the Assessee, however, adopted the transactional net marginal method as the most appropriate method and also accepted the profit level indicator of operating profit/operating cost. However he computed the margin of the Assessee at 14.58% instead of 14% by the Assessee. On fresh search he selected the set of comparables of 18 comparable companies wherein the margin of those comparables at 35th percentile was 19.95% and 65th percentile was 32.14% with a median margin of 25.09%. The Ld. Transfer Pricing Officer based on the above analysis of operating revenue of Rs. 12,63,47,637/- adopted the margin of 25.09% amounting to rupees 2,76,67,558/- and determined the arm's-length price of the operating income at Rs. 13,79,40,807/- thereby making a transfer pricing adjustment of Rs. 1,15,93,170/–.

5.

Accordingly, the transfer pricing adjustment was made as per the draft assessment order passed under section 143 (3) r.w.s. 144C (1) of the Act on 18.12.2023. As the objections filed before the Ld. Dispute Resolution Panel did not give any relief to the Assessee, final Assessment Order was passed on 18.10.2024 retaining the above adjustment. Therefore, the issue in this appeal is the transfer pricing adjustment of Rs. 1,15,93,170/– being the adjustment on account of arm's-length price of software development services income of the Assessee.

IT(TP)A No. 2494/Bang/2024 Page 3 of 8

6.

The Ld. Authorised Representative submitted that as per ground No. 10 and 15, the Assessee challenges that there are various companies having huge turnover compared to the turnover of the Assessee which are included by the Ld. Transfer Pricing Officer in the set of comparables. He submits that comparing the huge turnover companies with the Assessee Company is not proper. He also explained the importance of upper turnover filter to be applied in transfer pricing adjustments. It was a submission that the turnover of the Assessee is merely Rs. 12.63 crores in the software development segment. He submitted that the comparison is made with the companies with huge turnover. He submits that that the Ld. Transfer Pricing Officer has included the companies having turnover starting from Rs. 3.86 crores to Rs. 50,299 crores in the comparability analysis. He relied upon the several judicial precedents and submitted that companies having the huge turnover should be excluded from the comparability analysis. He challenged the inclusion of Mind tree Limited, Great Software Laboratory Private Limited, Nihilent Limited, Larsen & Toubro Infotech Limited, Wipro Limited, Tata Elxsi Limited, Infosys Limited, TCS Limited and Cybage Software Private Limited.

7.

He further stated that the Ld. Transfer Pricing Officer has also included Aptus Software Labs Private Limited in the comparability set which is functionally dissimilar as it is engaged in diversified activities. He further referred to the decision of the coordinate bench in Dotgo Private Limited versus DCIT in IT(TP)A No. 2096/Bangalore/2024 wherein the above company was excluded. Therefore, he submitted that this comparable should also be excluded.

8.

He submitted that on exclusion of the aforesaid comparable companies, the margin earned by the comparable companies would be 10.44% and accordingly the margin of the Appellant in 14.58% would fall within the comparable range and no transfer pricing order/adjustment would survive. He also gave a computation to this effect.

9.

He further referred to ground No. 18 to 21 stating that the trade receivable which are outstanding have been considered as a separate international transaction and the Ld. Transfer Pricing Officer has charged interest by considering the LIBOR + 450 basis points. He submitted that the adjustment is not sustainable as the Ld. Transfer Pricing Officer has included the huge margin over and above liable. He submitted that the

IT(TP)A No. 2494/Bang/2024 Page 4 of 8 several judicial precedents have kept the interest on trade receivable at the rate of the LIBOR + 200 basis points.

10.

The Ld. Departmental Representative Shri Aseem Sharma, CIT-DR vehemently supported that upper turnover limit filter cannot be applied. This is so because of the reason that the Ld. Transfer Pricing Officer and the Ld. Dispute Resolution Panel has given a detailed reasoning that why upper turnover filter is not applied for the reason that, in software development segment turnover does not impact the margin. If the margins are not impacted then a company with huge turnover can also be compared with the company with a small turnover. He supported the above reasoning of the Ld. Dispute Resolution Panel and the Ld. Transfer Pricing Officer.

11.

With respect to the computation of interest on overdue receivable from associated enterprises he submitted that the Ld. Transfer Pricing Officer has correctly taken the LIBOR + 450 basis points and there is no reason that the above should be reduced to 200 basis points.

12.

We have carefully considered the rival contentions and perused the orders of the Ld. lower authorities. In the present case, the only issue that arises is the applicability of the upper turnover filter. A turnover filter in transfer pricing comparability analysis refers to selecting or excluding potential comparable companies based on differences in turnover. This is necessary because substantial variations in turnover can materially influence the determination of the Arm’s Length Price (ALP). For example, a company with a turnover exceeding ₹ 1,000 crore cannot be considered comparable to another company with a turnover of only ₹ 1 crore. The larger company would typically enjoy stronger bargaining power, the ability to handle large and complex contracts, greater risk-taking capacity, and access to more skilled resources. In contrast, a small company may not be able to undertake transactions of a similar scale or complexity. Therefore, while determining the ALP of controlled transactions undertaken by the smaller company, applying an appropriate turnover filter becomes essential to ensure meaningful and reliable comparability. 13. In the case of service companies such as the assessee, the learned TPO and DRP have taken the view that turnover filters should not be applied. Their reasoning is that service companies typically do not incur significant fixed costs and that employees constitute

IT(TP)A No. 2494/Bang/2024 Page 5 of 8 the primary assets, with costs directly linked to the manpower deployed. Relying on the chart furnished by the Department, the Tribunal further observed that there is no linear correlation between turnover and profit margins in the service sector; therefore, the concept of economies of scale does not apply in the same manner as in manufacturing entities. 14. We state that turnover filters are a recognized quantitative criterion in comparability analysis. The core question is whether companies with substantially higher turnovers can be regarded as comparable to entities with relatively smaller turnovers. It is undisputed that the lower turnover threshold of ₹ 1 crore is accepted by both the assessee and the learned TPO to exclude insignificant or abnormally small companies. Therefore, if a lower turnover filter is considered essential to improve comparability, the application of an upper turnover filter logically follows the same principle. 15. When both upper and lower turnover filters are applied, they streamline the set of comparables by excluding companies that are either too small or excessively large relative to the tested party. Large-turnover companies generally enjoy economies of scale, stronger market presence, higher bargaining power, and greater capacity to undertake large-volume contracts. These characteristics fundamentally differentiate them from smaller service providers. Consequently, including such large entities in the comparability set would distort the determination of the Arm’s Length Price for the tested entity. 16. Para number 3.43 in OECD Guidelines on Transfer Pricing (2022) says that in practice, both quantitative and qualitative criteria are used to include or reject potential comparable. Examples of qualitative criteria are found in product portfolios and business strategies. The most commonly observed quantitative criteria are 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. Naturally higher turnover multiple times also shows that comparable company has higher market share compared to the tested entity. Naturally, higher market share gives freedom of selling larger volumes even at strained margins. The various studies carried out by NASSCOM and Dun Bradstreet supports it. Though such studies have compartmentalised turnover filter of Rs. 1-200 hundred crores. Naturally in transfer pricing analysis lower turnover filter and upper turnover filter cannot be fixed and how

IT(TP)A No. 2494/Bang/2024 Page 6 of 8 to adopt the same depends upon the facts of each case looking at the turnover of the tested entity. In fact, the purpose of applying a filter is to have a manageable level of independent business concern having broadly similar level of turnover, intangibles, employees, and other assets. Guidance note issued by ICAI also advocates the same reasoning for adopting turnover filter. 17. In fact, to arrive at an arm's-length price, economies of scale should be similar/ comparable. Therefore, the upper turnover filter is necessarily required to be employed for better determination of arm's-length price. Honourable Bombay High Court in case of Pentair Water India Pvt Ltd [TS-566-HC-2015(BOM)-TP] and Honourable Delhi High Court in Agnity Technologies [TS-189-HC-2013(DEL)-TP] has also accepted the fact that if the turnover of the comparable is multiple times compared to the turnover of the tested entity, such comparable company should be excluded from comparability analysis. Several decisions of the coordinate benches were also pressed before us wherein the upper turnover filter is upheld for comparability analysis. Further the issue before the Honourable Delhi High court in Chryscapital Investment Advisors (India) Pvt Ltd [TS-173-HC-2015(DEL)-TP relied up on by the ld. TPO was with respect to super normal profits and not applicability of filters of Turnover. This issue has been considered by the Hon'ble Karnataka High Court in PCIT v. Softbrands India Pvt. Ltd. in 406 ITR 513 holding that giant companies cannot be compared with small size companies. 18. Further some of these companies also have huge brand value as those belong to very large groups, which have different capabilities of influencing customers and getting niche advantage, so, not comparable with the small company like assessee, who provides service to its holding company, does not need any leverage of brand, even if it has. Therefore, also same are excluded. 19. We have also examined the analysis made by the ld. TPO by considering the annual accounts of some of the large ITES companies. The claim of the ld. TPO is that increase in turnover did not impact margins. With respect to Infosys limited it says that with the increase in turnover of the company for the year 2002 to 2022 margins were hovering around 40 % only. In case of Wipro turnover increased from 2002-2022 to 20 times margins have reduced. In case of TCS, turnover of the company increased by 20 times, but margins hovered around 38%. When above analysis looked at from the tables produced, wide variation in margin from 63.30 % to 29.25 % in case of Infosys,

IT(TP)A No. 2494/Bang/2024 Page 7 of 8 in case of Wipro limited from 62.20 % to 19.96 % and in case of TCS 76.43 % to 35.85 % for all these years were noted. But those variations were ignored by the ld. TPO and looked at the block of years, without justification profit variation in each of the years. Thus, the above analysis does not give any indication that increase in turnover does not have any impact on profitability. The purpose of upper turnover filter is to just minimize the size of comparable set, is not appreciated by ld. TPO. It is not denied that all these three comparable are comparable with each other! 20. Thus, we hold that for better comparability, large turnover companies should not be compared with the small companies. However what is large and what is small, what amount of turnover is comparable with the assessee would always be subjective. No straight jacket formulae can be applied and no analysis such as Rs. 1 to Rs 200 crores in one bucket as suggested by some studies are also resulting in absurdities. It may also happen that very few comparables remain if the upper turnover filter is applied rigidly. Thus, it is a subjective analysis .

21.

In view of the above findings, we direct the Ld. Transfer Pricing Officer to exclude the comparables i.e. Larsen & Toubro Info tech Limited [ Rs 11562 Cr] , Mindtree Limited [ Rs 7697 Cr], Wipro Limited [ Rs. 50299 Cr], Info Sys Limited [ Rs. 85912 cr], TCS Limited [ Rs. 135963 cr ], Tata Elxis Ltd [ Rs 1826 cr], Cybage Software Ltd [ Rs. 1142 Cr] Nihilent Limited [ Rs 334 Cr ] challenged before us.

22.

With respect to the Aptus Software Labs Private Limited, we find that the above company is engaged in the activities of infrastructure management, cloud computing, content management systems, network operations Centre, quality assurance services. These are activities which are different from the software development services carried out by the Assessee of merely ₹ 12.63 crores. Accordingly we hold that this company is functionally not comparable and deserves to be excluded.

23.

With respect to the computation of interest on overdue receivable taken by the Ld. Transfer Pricing Officer and the Ld. Dispute Resolution Panel at LIBOR + 450 basis points are required to be reduced to LIBOR + 200 basis points. On perusal of para no 16.2 of the order of the ld TPO, We do not find any reason given by the Ld. Transfer Pricing Officer with respect to addition of 450 basis points over LIBOR rate[ rate 5.186 %] . Further, we find that assessee has not raised any such objections before the dl

IT(TP)A No. 2494/Bang/2024 Page 8 of 8 DRP. Ground no 52 of objection did not contain this arguments. The amount of advance is due from the holding company therefore there is a limited risk or absolutely no risk in the transaction. Assessee before us also did not give any reason why the rate should be LIBOR + 200. However this supported by several judicial precedents cited before us. Therefore, looking to the smallness of amount and give a quietus to the issue, we direct the Ld. Transfer Pricing Officer/Assessing Officer to compute the interest on overdue receivable at the LIBOR + 200 basis points. Accordingly ground No. 18 to 21 of the appeal is allowed.

24.

In view of the above facts appeal of the assessee is partly allowed.

Order pronounced in the open court on 19th December 2025.

Sd/- Sd/- (SOUNDARARAJAN K.) (PRASHANT MAHARISHI) JUDICIAL MEMBER VICE-PRESIDENT Bangalore, Dated, the 19th December 2025. *TNTS* Copy to: 1. Appellant 2. Respondent 3. CIT 4. DR, ITAT, Bangalore 5. CIT(A) By order

Assistant Registrar, ITAT, Bangalore

More judgments on Section 144C(13)

All 3,426 judgments and leading authorities on Section 144C(13) →

Recent GST High Court judgments

Search GST case law →