ORANGE SCAPE TECHNOLOGIES PVT. LTD.,CHENNAI vs. DCIT, CIRCLE-1, LTU,, CHENNAI

PER MANU KUMAR GIRI, JM:

The captioned appeal by the assessee for Assessment Year (AY' in short)

2021-22 arising out of final assessment order dated 24.09.2024 passed by

Assessing Officer, u/s.143(3) r.w.s. 144C(13) r.w.s.144B of the Act pursuant

to the directions of Ld. Dispute Resolution Panel-2, Bengaluru (‘DRP' in short)

u/s.144C(5) of the Act dated20.08.2024.

Associated Enterprises (‘AEs' in short), the same have been referred to

Transfer Pricing Officer (‘TPO' in short) DC/ACIT(TP)-2(2), Chennai for determination of Arm's Length Price (‘ALP' in short). The TPO passed an order

u/s.92CA(3) on 26.10.2023 proposing certain Transfer Pricing (TP)adjustment.

Incorporating the same, Draft assessment order was passed on 16.11.2023

which was further subjected to Assessee's objections before DRP. Pursuant to

the directions of DRP dated 20.08.2024, final assessment order has been

passed on 24.09.2024.

11 December 2003. The assessee is primarily engaged in the business of

development of software applications including cloud-based workflow

management software. The assessee has conceptualized and developed a

digital workspace platform viz., Kissflow which is a platform with which,

users can manage, optimize and track all the daily activities and operations

of the company viz., project tracking, status updates, etc. Kissflow is being

sold to customers by OrangeScape Group on a subscription basis. Kissflow

Inc. USA (“Kissflow US”) is a wholly owned subsidiary of the assessee and

is engaged in provision of administrative support services to the Assessee,

in the nature of billing, processing and collecting subscription fees from the

customers, etc., Dates of orders passed in relation to subject AY 2021-22 S Particulars Date of order

1 TPO order passed under section 92CA(3) of the Act 26October 2023 Draft AO passed order under section 143(3) r.w.s. 92CA 16November 2 of the Act 2023 Directions of Hon’ble Dispute Resolution Panel (‘DRP’) 3 20August 2024 under section 144C(1) of the Act Final AO order passed under section 143(3) r.w.s. 144C 24 September 4 of the Act 2024

ground No.2 as to validity of final assessment order passed beyond

. timelines prescribed under section 153 of the Act. The ld. DR, CIT has not

objected to the same. Hence, in the light of statement made by the ld.

Counsel for the assessee, ground No.2 is dismissed as not pressed.

AY 2022-23 has accepted the same foreign AE as tested party. The ld. AR

for the assessee submitted that there is only one AE of the assessee. The

assessee has consistently applied the same methodology of selecting

foreign AE as tested party for AY 2021-22 and AY 2022-23. The ld. AR for

the assessee has referred page 115 and 136 of factual paper book 1 and

page 7 and 30 of factual paper book 2. She further submitted that the

functional profile of the Assessee and the AE had not undergone any

change from AY 2021-22 to AY 2022-23 (Refer page 133 and 135 of

factual paper book 1 and page 26, 27, 28 and 29 of factual paper book

2). The ld. counsel drew our attention to the fact that during the course

of assessment proceedings for AY 2022-23, the ld. TPO has accepted the

approach of selecting foreign AE as tested party. (Refer page 68 to 71 of

factual paperbook. In this regard, the ld. counsel relied upon the decision

of the Hon’ble Madras High Court, in the case of Virtusa Consulting

Services Private Limited, wherein the Hon’ble Court has remitted the

. issue of choice of tested party to the TPO to decide afresh having regard

to orders passed in the subsequent assessment years.

The DRP opined that if AEs are taken as tested party, financials are

required to be extracted for comparables of all AEs. There are multiple

AEs that perform a variety of functions and undertake variety of risks.

FAR analysis cannot be conducted for comparables in case of each and

every AE and reliable and authentic information on foreign comparables

are not easily available. Factors as per Rule 10B 2(d) cannot be tested for

a foreign AE considered as tested party. Decision rendered in Virtusa

Consulting Services Private Limited is distinguishable on facts.(Refer page

26 and 27 of appeal document).

The ld. counsel further submitted that the ld. DRP failed to

appreciate the fact that during AY 2020-21, Kissflow US is the only

foreign AE of the Assessee (Refer page 96 of factual paper book 1). Even

though the assessee has given the detailed FAR analysis of the assessee

and the AEs (refer page 130 to 135 of factual paper book 1) and the

assessee has submitted the TP study report to the ld. TPO and the ld.

DRP failed to appreciate the same in right prospective during the course

of assessment proceedings. The learned counsel further submitted that

the assessee has chosen it’s AE (Kissflow US) as the tested party and the

. comparable companies selected are in the North American region(Refer

page 146 of factual paper book). Hence, the geographical location, size of

market, laws and government orders in force, cost of labour and capital,

overall economic development and level of competition, wholesale/ retail

market, as applicable to the tested party are applicable to the comparable

companies. The ld. counsel for the assessee has also sought support of

the case law in the decision of Virtusa Consulting Services in TCA No.996

of 2018 referred supra which is applicable to the facts of the present

case. The ld. counsel submitted that CUP method used by Virtusa in the

TP study report, was for the Citi Bank segment as against the subsidiary

segment which is the subject matter of appeal with the Madras High

Court.(Refer Page 16 and 17 of case law paper book, wherein the

grounds of appeal taken with the High Court is mentioned). Further, the

Hon’ble Madras High Court has opined that, when the TPO himself have

not attached any sanctity to the TP documentation as submitted by

assessee, could not have foreclosed the assessee from canvassing the

issue that the subsidiaries are least complex entity. It is stated that the

assessee shall change the approach used in the TP study report when the

same has not been considered by the TPO. However, theld. DRP has

erred in not considering similar facts of the case of Virtusa Consulting

Services Pvt Ltd.

. Further, the Ld. counsel for the assessee argued that tested party

would be the least complex of the transacting entities. However, the DRP

was also of the view that the least complex entity is to be taken as the

tested party. (Refer page 26 of appeal paper book). As per the functional

profile, it can be observed that all the key strategic and management

functions are carried out by the assessee while the AE merely provides

administrative support services. Further, all the key risks are assumed by

the assessee while Kissflow US bears minimal business risk. As per

Indian TP provisions do not give priority to the selection of either the

Indian entity or the foreign AE as the tested party. (Refer Page 74 of

appeal paper book).The Hon’ble Madras High Court, in the case of

Virtusa’s held that the Tribunal has not considered the decision in the

case of Ranbaxy Laboratories Limited, wherein it has been held that the

tested party should be the least complex entity and that there is no bar

on selection of tested party (local or foreign party) (page 30, 33 and 35

of case law paper book). She placed reliance is placed on ICAI Guidance

note on report under Section 92E of the Income Tax Act, 1961, OECD TP

Guidelines, UN TP Guidelines. (Refer Page 75 to 77of appeal paper book).

The ld. counsel for the assessee cited following rulings wherein foreign

AE tested party approach is accepted: -

• Virtusa Consulting Services Private Limited (TCA 996 of 2018)

. • Bahwan CyberTek Private Limited [ITA No. 290/Mds/2017] • ITC Infotech India Ltd [TS-40-HC-2024(CAL)-TP] • TCG Digital Solutions (P) Ltd [TS-122-HC-2024(CAL)-TP] The ld. counsel for the assessee also cited following rulings

wherein ITAT accepted the approach followed in subsequent year: -

• Delta Power Solution India P Ltd [TS-132-ITAT-2016(DEL)- TP]/ I.T.A No 3004/Del/2013 • Gulf Oil Corporation Ltd [TS-576-ITAT-2015(HYD)-TP]/ ITA No. 11/Hyd/2014 • Raymond Limited [TS-803-ITAT-2022(Mum)-TP]/ ITA NO.2660/MUM/2008 (A.Y.2002-03) Per contra, the ld. DR, CIT has relied upon the impugned orders of the AO and DRP and pleaded for the dismissal of appeal of the assessee. He has read out the relevant portions of the DRP.

Our adjudication on the rejection of Foreign AE (Kissflow US) as tested party: It is undisputed fact that during the course of assessment

proceedings for AY 2022-23, the TPO has accepted the approach of

selecting foreign AE as tested party as seen from the page 68 to 71 of

factual paper book. We also note that the TPO's decision of not disputing

the tested party selection for AY 2022-23, despite having the same

information as for AY 2021-22, indicates that the approach is in

compliance with the applicable transfer pricing regulations. The

acceptance of the Assessee’s approach of adopting foreign AE as the

tested party for AY 2022-23, by logical extension and for judicial

. consistency it applies equally to AY 2021-22. Hence, respectfully following

the rulings of the Tribunals in the cases of Delta Power Solution India

P.Ltd [TS-132-ITAT-2016(DEL)-TP]/ I.T.A No 3004/Del/2013 [Pg 138-143

of case law paper book], Gulf Oil Corporation Ltd [TS-576-ITAT-

2015(HYD)-TP]/ ITA No. 11/Hyd/2014 [Pg 144-163 of case law paper

book] and Raymond Limited [TS-803-ITAT-2022(Mum)-TP]/ ITA

NO.2660/MUM/2008 (A.Y.2002-03) [Pg 164-200 of case law paper book],

we direct the AO to adopt the same approach as the TPO has accepted

for AY 2022-23 aforeign AE as tested party.

B. The next issue i.e, Ground No.5, rejection of comparable companies selected by the assessee despite the comparable being broadly similar to the AE. The DRP in remand report has rejected the comparable selected by

the assessee for the reason that the natures of business of the

comparable companies are not similar to that of the AE (Page 196 of the

factual paper book 1).

The ld. Counsel for the assessee submitted that there is broad

similarity of functions sufficient for TNMM. Comparables are comparable

under broad criteria can be accepted in the absence of comparable

engaged in exact similar business of the tested party. The ld. Counsel for

the assessee has placed reliance on the provisions of the Act and OECD

TP guidelines (Page 178 and 179 of factual paper book 1). She further

. submitted that the TPO ought to have distinguished between core

business and supporting business (Page 180 to 184 of factual paper book

1).

Further, the same set of comparable companies used by the

Assessee in AY 2021-22 is used in AY 2022-23, and the ld. TPO did not

have any adverse comments/ findings. The TPO, in the remand report

has rejected the comparable selected by the Assessee since the natures

of business of the comparable companies are not similar to that of the AE

(Page 196 of factual paper book 1). In this regard, the ld. counsel has

relied on the following case laws:-

Walvoil Fluid Power India Pvt Ltd [TS-147-ITAT-2022(Bang)-TP]/ IT(TP)A No.1901/Bang/2017 Marubeni-Itochu Steel India Pvt Ltd [TS-56-ITAT-2016(DEL)-TP]/ITA No.1716/Del/2014 Lionbridge Technologies Pvt Ltd [TS-984-ITAT-2017(Mum)-TP]/ ITA No. 1291/MUM/2017 Per contra, the Ld. DR, CIT has relied upon the impugned orders of

the AO and DRP and vehemently pleaded for the dismissal of appeal of

the assessee.

Our adjudication on the comparables being broadly similar to the AE: It is undisputed fact that the same set of comparable companies

used by the Assessee in AY 2021-22 is used in AY 2022-23, and the TPO

did not have any adverse comments/ findings. However, the TPO, in the

. remand report has rejected the comparable companies selected by the

Assessee for the reason that the natures of business of the comparable

companies are not similar to that of the AE. We also note that the TPO

has never denied that broad similarities of functions are not sufficient for

the TNMM. We also find that the TPO did not have any adverse

comments/ findings in AY 2022-23 when the same set of comparable

companies is used by the Assessee as issued in AY 2021-22.

Improvement in remand report by TPO is not justified when originally not

taken any adverse inference. Further the TPO cannot blow hot and cold

at same breath. We have also gone through the table wherein assessee

has elaborated the business of the comparable companies in North

America region and its classification to supporting business functions.

Therefore, we find by logical extension and for judicial consistency it

applies equally to AY 2021-22. Furthermore, respectfully following the

rulings of the Tribunals in the cases of Walvoil Fluid Power India Pvt Ltd

[TS-147-ITAT-2022(Bang)-TP]/ IT(TP)A No.1901/Bang/2017[Pg 201-227

of case law paper book], Marubeni-Itochu Steel India Pvt Ltd [TS-56-

ITAT-2016(DEL)-TP]/ITA No.1716/Del/2014and Lionbridge Technologies

Pvt Ltd [TS-984-ITAT-2017(Mum)-TP]/ ITA No. 1291/MUM/2017 [Pg 228-

238 of case law paper book], we hold that broad functional similarity is

sufficient for TNMM analysis and hence, direct the AO to adopt the same

. approach as the TPO had accepted the comparable companies for the AY

2022-23.

C. The next issue i.e, Ground No.6 raised by the assessee is in regard to transfer pricing adjustment exceeding the overall global profits earned by the assessee’s group.

DRP findings (page 28 of appeal paper book):

The quantum of group transactions were between related parties is not

known. Business lines, economic analysis, business strategy and market

dynamics of the various group entities is also not known. Statutory audited

financial statement and income tax returns of all group entities have not been

provided. Unless the reliable and authentic data of profits are available, no

credence can be given to the claim regarding consolidated profitability at the

group level and the accuracy thereof.

The Ld. counsel for the assessee submitted that transfer pricing

adjustment of Rs.3,25,69,360/- has exceeded the balance profit of the

assessee group in the value chain. The assessee had submitted the statutory

audited standalone and consolidated financial statements to the DRP and to

the TPO (Page 444 of factual paper book 1, and page 56 and 80 of appeal

paper book).

. The AE has not been audited in the US (since it is not mandatory) and

hence the management signed the financial statement of the AE which has

been submitted to the TPO during the course of assessment proceedings.

Further, the income tax return of the AE filed in the USA was also

submitted to the TPO (page 414 to 443 of factual paper book 1).The

contention of the DRP that the quantum of group transactions between related

parties is not known, is not acceptable as the quantum of transactions is

directly available in the financial statement of the assessee.

Rationale of restriction of TP adjustment amount:

The assessee had paid taxes by considering the standalone profit (as

per the financial statement) as base to arrive at the taxable income as per the

Act. (page 38 and 453 of factual paper book 1).In a situation, wherein the

foreign AE is not compensated for it’s administrative functions, the profit

amount that can be repatriated to India is only Rs.12,03,949/- (difference

between consolidated profit and standalone profit), being the residual profit in

the whole value chain of the assessee’s group. Further, any adjustment

exceeding Rs.12,03,949/-, would result in a situation wherein the commercial

expediency of the assessee’s business decision is questioned, i.e., challenging

the price at which products are eventually sold to third party customers, which is beyond the purpose and scope of the Indian transfer pricing

regulations(page 79 to 81 of Appeal paper book).

In support of her contentions, the ld. counsel for the assessee has relied upon

the following case laws: • Global VantedgePvt. Ltd. [TS-1-SC-2014-TP] • Global Vantedge P. Ltd [TS-55-HC-2013(DEL)-TP] • Unilog Content Solutions Private Limited [TS-212-ITAT-2023(Bang)-TP] • Trigyn Technologies Limited [TS-143-ITAT-2022Mum-TP] • TP Omniglobe Information Technologies[TS-311-ITAT-2019DEL-TP] Per contra the ld.DR supported the orders of the TPO and DRP and prayed

for confirming the same.

We have heard the rival contentions perused the material available on

record and gone through the orders of the authorities along with the

paper book and case laws relied on. We find that the issue is covered by

the decision “TP Omniglobe Information Technologies[TS-311-ITAT-

2019DEL-TP]”, wherein the Delhi Tribunal has held as under:

“18. Ld. DRP reached the conclusion that TP adjustment cannot exceed the amount of margin retained by the AE. Ld. AR for the taxpayer contended that this issue is covered in favour of the taxpayer by the decision rendered by the coordinate Bench of the Tribunal in the case of HCL Technologies BPO Ltd. vs. ACIT - Court and Hon'ble Supreme Court. Operative part of which is as under :- "11. Without prejudice to the assessee company's contention that the adjustment made by the TPO in not sustainable, it was submitted that the adjustment at best could be made only to the extent of Rs. 11,960,457, being the amount which has been retained by the associated enterprise. 12. The Ld. CIT(A) in his order restricted the Transfer Pricing adjustment to Rs. 1.19 crores holding as under: "The Transfer Pricing Officer has computed an adjustment of Rs.17.04 crores while the value of international transactions is Rs.13,00,89,632. The total revenue received by the associated enterprises in respect of BPO services rendered by the appellant amounting to Rs.13,00,89,632 is Rs.14,20,50,089. In other words, the associated enterprise has retained Rs. 1, 19,60,457 out of the total proceeds received from the customers. The adjustment computed by the TPO in the order passed under section 92CA(3) of the Act at best cannot exceed the net amount retained by the associated enterprises in respect 'of international transactions, i.e., gross revenue' received from the end customers less amount paid' to the appellant and, other operating expenses. It is observed that the gross revenue received from the end customers in respect of various contracts, the associated enterprise have retained only Rs. 1,19,60,457 at their end and the balance has been passed on to the appellant." 12.3 The issue has been considered in the recent decision of Delhi Bench of the Tribunal in the case of DCIT vs. Global Vantedge P. Lid., wherein, the Tribunal held that adjustment on account of arm's length price of international transactions cannot exceed the maximum arm's length price, i.e., the amount received by the associated enterprise from the customer and the actual value of international transactions, i.e., the amount received by the assessee in respect of international transactions. 12.4 In view of the same I am of the considered view that the adjustment to the income of the appellant has to be restricted to Rs.1,19,60,457- being the amount retained by the associated enterprises." 13. Aggrieved with this order, the Revenue had come up in the present appeal. Ld. D.R. placed reliance on the order of Ld. CIT(A) and had prayed for quashing of CIT(A)'s order on this issue. On the other hand, Ld. Sr. Counsel submitted that the appellant could not have expected to receive from the customers of the AEs of the appellant, anything more than the amount paid by some customer to the AE, if the appellant were to be obtain the contracts for services from the customers directly, i.e., without the involvement of the AEs of the appellant. Thus, at the most the consideration received by the appellant from the AEs may be replaced by the consideration received by the AEs from its customers, for the services provided by the appellant; the price charged by AEs to the customers being the CUP. Reliance is placed in this regard on the decision of the Hon'ble Delhi High Court in the case of Sony India P. Ltd. vs. CBDT (Delhi) ; 288 ITR 52 has at pages 61-62, observed as under: "The concept of transfer pricing leading to tax avoidance has been acknowledged in the Act only recently. It is a concomitant of the operations of multinational corporations (MNCs) that set up base by incorporating a local subsidiary in a country where they seek to operate. It is often seen that the MNC transfers goods and services to its local subsidiary at a price not reflective of the market price (or arm's length price as if is referred to in the present context) and in turn the subsidiary is able to avoid, partly or wholly, payment of the local tax, Alth9ugh the expression "transfer price" has not been defined in the Act,' it is 'understood to mean "that price which is arrived at when two associated or related' enterprises deal with each other". 14. Reference was made to the Finance Minister's Budget Speech for the year 2001 that the presence of multinational enterprises in India and their ability to allocate profits in different jurisdictions by controlling prices in intra-group transactions has made the issue of transfer pricing a matter of serious concern. The purpose of inserting these provisions is therefore to determine the arm's length price (ALP) of an international transaction involving an MNC and its local associate." 15. Reliance is placed on the decision of Delhi Bench of the Tribunal in the case of DCIT vs Global Vantedge P. Lid., (ITA No. 1432 & 2321/0ell2009 and 116/0eI/2011), wherein, the Hon'ble Tribunal held that adjustment on account of arm's length price of international transactions cannot exceed the amount received by the associated enterprise from the customer and the actual value of international transactions, i.e., the amount received by the assessee in respect of international transactions. The Hon'ble Jurisdictional High Court vide order dated 14-03-2013 (in ITA Nos. 1828/2010, 1829/2010 & 1254/2011) had dismissed the Revenue's appeal against the said order of the Tribunal. The Special Leave Petition (SLP) of the Revenue against the said order has also been dismissed by the Supreme Court vide order dated 02-01-2014 (CC No. 22166 of 2013). 16. Further reliance in this regard is placed on the following observation of the Hon'ble Delhi bench of the Tribunal in the case of Li & Fung (India) Pvt. Ltd. vs. DC IT (ITA No 5156/DeI/2010): 17. The Hon'ble Delhi High Court recently vide order dated 16-12-2013 (in ITA No.306/2012), while adjudicating on the said decision of the Tribunal, held in paragraph 40 of the order that "the approach of the TPO and the tax authorities in essence imputes notional adjustment / income in the assessee's hands on the basis of a fixed percentage of the free on board value of export made by unrelated party vendors. " ..... 18. Reliance in this regard is also placed on the recent decision of Delhi Bench of the Tribunal in the case of Hyper Quality India Pvt. Ltd. vs. ACIT (ITA No. 5630/0ell2011 ), wherein, it has been held as under: "7. Ld. TPO erred in evaluating FAR (Functions performed, Assets. employed and Risk assumed) analysis which has been summarily confirmed by DRP. To support its case, assessee furnished split financials of the appellant and its AE. Whereas the appellant has been able to earn profit in India its counterpart the AE has continuously sustained losses. There being no element of profit in the hands of the AE, there is no case of shifting of profits, practicable or probable. Invoking a higher ALP on the appellant is only anticipatory and complete ignorance of fact. The facts and figures produced before the Ld. TPO establish that there is no commercial profit available in the hands of the AE. In absence of profit availability, the any enhancement of the ALP results in artificial profit anticipated by the Ld. TPO and not earned by the Appellant. The order of the LD, TPO in enhancing the ALP offered by the appellant is in ignorance of valid FAR and factual considerations and is bad in law and facts." 19. Reliance in this regard is placed on the recent decision of Delhi High Court in case of Sony Ericsson Mobile Communications India Pvt. Ltd. vs. CIT III (ITA No. 16/2014) where in it has been held that the arm's length seeks to correct distortion and shifting of profits of tax the actual income earned by a resident. The Hon'ble Delhi High Court held as under: '77. As a concept and principle Chapter X does not artificially broaden, expand or deviate from the concept of "real income". "Real income", as held by the Supreme Court in Poona Electricity Supply Company Limited versus CIT, [1965J 57 ITR 521 (SC), means profits arrived at on commercial principles, subject to the provisions of the Act. Profits and gains should be true and correct profits and gains, neither under nor over stated. Arm's length price seeks to correct distortion and shifting of profits to tax the actual income earned by a resident/domestic AE. The profit which would have accrued had arm's length conditions prevailed is brought to tax. Misreporting, if any, on account of non-arm's length conditions resulting in lower profits, is corrected. XXX (xii) When segmentation or segregation of a bundled transaction is required, the question of set off and apportionment must be examined realistically and with a pragmatic approach. Transfer pricing is an income allocating exercise to prevent artificial shifting of net incomes of controlled taxpayers and to place them on parity with uncontrolled, unrelated taxpayers. The exercise undertaken should not result in over or double taxation. Thus, the Assessing Officer/TPO can segregate AMP expenses as an independent international transaction, but only after elucidating grounds and reasons for not accepting the bunching adopted by the assessed, and examining and giving benefit of set off. Section 92(3) does not bar or prohibit set off." 20. In view of the aforesaid, it is respectfully submitted that the adjustment shall be restricted to Rs. 1.19 crores. 21. We have head rival submissions and perused the material on record. Ld. CIT(A) had followed the ratio laid down in the case of Global Ventedge P. Ltd. (supra) (in I.T.A. No. 1432 & 2321 / Del/2009 and 116/Del/2011). This decision was affirmed by both Hon'ble High Court and Hon'ble Supreme Court and his ratio was followed in subsequent decisions as submitted earlier and, therefore, the order of Ld. CIT(A) on this issue is reasonable and we do not find any reason to interfere with this finding of Ld. CIT(A) and hence, the grounds of appeal filed by revenue are dismissed. Accordingly, appeal filed by revenue is dismissed." 19. So, following the decision rendered by the coordinate Bench of the Tribunal in HCL Technologies BPO Ltd. vs. ACIT (supra, affirmed by Hon'ble Delhi High Court and Hon'ble Supreme Court, we are of the considered view that ld. DRP has rightly held that transfer pricing adjustment should not exceed the amount of margin retained by the AE.

. Consequently, findings returned by the ld. DRP are hereby confirmed. So, ground no.2 is determined against the Revenue. 20. Resultantly, the appeal filed by the Revenue is dismissed.” In the present facts and circumstances of the case and respectfully

following the judicial precedents (supra), the findings of the DRP are hereby

reversed by allowing the ground of the assessee.

The next issue i.e, Ground No.8 raised by the assessee is in regard to D. selection of inappropriate companies identified by TPO as comparable to assessee. DRP contentions:

The TPO in the order has mentioned that independent search has been

conducted and has provided the list of comparable selected by it. (page 28

and 29 of appeal document).

The Ld. counsel for the assessee submitted that the TPO has erred in

picking non-comparable companies without providing the detailed search

process. The search process containing date of search, keywords adopted,

number of initial companies identified by undertaking the search, etc., was not

provided to the assessee and hence the assessee was unable to verify

whether the search conducted by the TPO is complete and accurate in all

aspects. In support of the above contention of the assessee the ld.AR relied

on the following decisions: • Polaris Consulting Services Ltd [W.P. No 23564 and 24796 of 2011] • M/s.Genisys Integrating Systems (India) Pvt. Ltd Vs. DCIT (ITA No. 1231(Bang)/2010)

. • M/s.Siemens Building Technologies (P.) Ltd v. Income-tax Officer,Ward 6(3)(2) (ITAT Mumbai [2011] 43 SOT 21 (Mum.) (URO) The Ld. DR supported the orders of the TPO / DRP and prayed for

confirming the same.

On perusal of the submissions made by both the parties and relying on

the judicial precedents (supra) we are of the considered view that the

TPO has erred in selecting the comparable companies which are not

similar to the functionalities of the assessee. Therefore, we direct the

TPO / DRP to exclude such companies as comparable companies.

E. The next issue i.e, Ground No.9 raised by the assesseeis in regard to use of certain filters by the TPO.: DRP Findings: Employee cost filter (page 29 and 30 of appeal paper book)

The Software development services and ITeS are mainly rendered

by employees. The Companies engaged in provision of similar services will

require a minimum level of expenditure as personnel expense.

Different financial year ending filter (page 30-32 of appeal paper book)

The Filter is applied to rule out the effect of differences in

economic and market conditions in different time period. To use companies

having different financial year as comparable, data for 2 financial years needs

to be extracted, and segregated which is a difficult exercise.

Persistent loss making companies (page 32 to 33 of appeal paper book)

. Relied on judicial precedents wherein the Tribunal have noted that huge

losses suffered by the company over a period of several years would be a

significant factor to justify exclusion of the company as comparable.

The ld. AR for the assessee submitted that the TPO had adopted certain

filters that are arbitrary and fanciful in nature (Page 86 to 89 of appeal paper

book). The ld.AR for the assessee submitted that employee cost is not

necessarily a true indicator of comparability of companies or their profitability.

He also submitted that there are no universally accepted norms that govern

the disclosure of employee costs in the profit & loss account. According to

him, application of the filter warrants detailed review of the employee costs

and accounting treatment. He further submitted that in case of companies

wherein there is more than one segment, it is not possible to identify

employee cost allocated to comparable segment.(Page 89 to 91 of appeal

paper book).

There is no evidence on record to demonstrate as to why the operating

results of the companies would differ in span of 3/6 months as compared to 31st March of the financial year ending of the assessee has been brought out

by the TPO. In the absence of evidence available to the contrary that there

has been a significant impact in the operating margins due to change in

different reporting/ accounting period, it would be incorrect to disregard

. companies using this filter. Rule 10B(2) of the Income Tax Rules, 1962

provides that data relating to the financial year should be considered. The

term “relating to” the financial year, thus includes any assessee whose year

ends between 1 April 2020 to 31 March 2021. The term data relating to

financial year is distinct from ‘data of the financial year’.

In case of a situation where the tested party’s financial year is

01.01.2020 to 31.12.2020, application of the filter would reject all the companies with the financial year ending 31stMarch 2021 and hence the

number of comparable companies available after using the filter is very

limited(Page 91 to 94 of appeal paper book).

The Profit/ losses varies due to different factors such as marketing strategy,

quality of products/ services, etc.,

The Companies with going concern issue operates under different

conditions as compared to tested party as against companies with short-term

business losses. Persistent loss-making filter means consistent loss in 3 years

and not in any one or 2 out of 3 years (Refer page 91 to 93 of appeal paper

book).

The ld.AR relied on the following decisions, wherein the various courts and

tribunals have held that the use of employee cost filter is inappropriate and

. also persistent loss-making filter means consistent loss in 3 years and not in

any one or 2 out of 3 years: • Polaris Consulting Services Ltd [W.P. No 23564 and 24796 of 2011] • Mentor Graphics (Noida) Pvt.Ltd’s case (2007-TIOL-382-ITAT-DEL) • Hellosoft India Pvt. Ltd.’s case (ITA No.645/Hyd/2009) • Infinera India Ltd.’s case (IT(TP)A No.294/Bang/2013 • SumitomoChemical India Private Limited [TS-169-ITAT-2015(Mum)-TP] • Cheminova India Limited [TS-375-ITAT-2020(Mum)-TP] • MOL Maritime (India) Pvt Ltd [TS-416-ITAT-2020(Mum)-TP] • Morgan Stanley Advantage Services P. Ltd [TS-336-ITAT-2021(Mum)-TP] • Inteva Products India Automotive Private Limited [TS-696-ITAT-2020(Bang)- TP] • Yazaki India Private Limited [TA No.621/PUN/2014]

The Ld. DR supported the orders of the TPO / DRP and prayed for confirming the same.

On perusal of the submission by both the parties, we find that the issue is

squarely covered by the judicial precedents supra and hence we are of the

considered view that the filters applied for selecting the comparable

companies in respect of loss making companies and employee cost is not

appropriate and hence we direct the TPO / DRP to consider the comparable

after removing employee cost and loss making filters while selecting the

comparable companies.

F. The next issue i.e, Ground No.10 raised by the assesseeis in regard to inclusion of functionally different comparables:

KSOLVES INDIA PVT.LTD:

TPO / DRP Findings: (Page 33 and 34 of appeal paper book)

. The TPO/DRP included the above company as the company is engaged

in computer programming, consultancy and related activities and 100% of

revenue is derived from the said services.

Further, the TPO/DRP stated that the activities of the company is single

business segment i.e. Software development services and hence segmental

reporting not required.

However, the TPO/DRP stated that the high profitability cannot be

criteria for exclusion of companies when it is functionally comparable to the

assessee.

The ld. AR for the assessee contended that as per the website, the

company is engaged in IT and ITeS services. However, as per annual report,

the company operates in a single business segment.

In the absence of segmental information, the company cannot be

considered as comparable (page 117 of the appeal paperbook).

Further, the ld.AR argued that the supernormal profits are not

representative of industry trends (page 117 of appeal paperbook) and hence

cannot be treated such companies as comparable.

. In support of the above arguments the ld.AR relied on the decision of

the Chennai Tribunal in the case of Brigade corporation India Pvt ltd [TS-236-

ITAT-2014(Chny)-TP].

CONSILIENT TECHNOLOGIES PVT.LTD:

TPO / DRP Findings: (Page 35 and 36 of appeal paper book)

The TPO/DRP included the above company as the company has passed

export earning filter with the assessee and is engaged in IT design and

development services. Further, the TPO/DRP stated that the activities of the

company is a service provider and does not carry inventory.

The ld.AR submitted that the financials of the comparable are not

reliable, since under ‘revenue from operations’ break-up, the entire revenue is

shown as domestic revenue (page 119 of appeal paper book). However, the

foreign exchange earnings are entirely from the revenue from operations

(page 35 of appeal paper book)

Further, the comparable company is functionally different, since the

activities of the company is designing and development of video, voice and fax

technologies and also offers a range of products related to the same. (page

120 of appeal paper book)

GREAT SOFTWARE LABORATORY PVT LTD:

. TPO / DRP Findings: (Page 36 and 44 of appeal paper book)

The TPO/DRP included the above company as the company is engaged

in Principal activity of the company is computer programming, consultancy and

related activities. Further, the TPO/DRP stated that the revenue is entirely

from sale of services and not from sale of products.

However, the TPO/DRP stated that the high turnover is not a relevant

filter in the software industry. Further the TPO / DRP considered that the

lower turnover filter of Rs.1.00 crore is appropriate since the margins of

companies fluctuate due to narrow base by relying on various judicial

precedents.

The ld.AR added that the high turnover offers benefits such as ability to

bid for bigger projects/ engagements, wherein the size/volume/ turnover of an

enterprise is a minimum qualifying requirement and hence cannot be treated

as comparable.

The ld.AR pointed out that the company’s turnover is more than 8 times

when compared to the assessee’s turnover (page 125of appeal paper book).

The TPO/DRP has excluded comparable with high turnover in the TPO order.

(page 169 to 172of appeal paper book)

The ld.AR stated that the company is engaged in product and

performance engineering, applications management services, and user

. experience design (page 122of appeal paper book), which is functionally

dissimilar with the activities of the assessee. The nature of services rendered

is a knowledge process outsourcing service as per Safe Harbour Rules (page

124of appeal paper book).

Further, the ld.AR pointed out that the segmental information of the

company is not available as per the published financials (page 124 of appeal

paper book).

In support of the above arguments the ld.AR relied on the following decision

of various Tribunals: • Kumaran Systems P. Ltd. [TS-337-ITAT-2021(CHNY)-TP] • Altair Engineering India Pvt Ltd [TS-24-ITAT-2023(Bang)-TP] • Sprinklr India Private Ltd [TS-25-ITAT-2023(Bang)-TP]

I D S INFOTECH LIMITED: TPO / DRP Findings: (page 45 of appeal paper book)

The TPO / DRP considered this Company as comparable stating that the

activities of the company are providing IT and IT related in various verticals.

The ld.AR contended that the services provided by the company are not

similar to that of assessee (page 127 of appeal paper book)

Further, the ld.AR pointed out that as per the annual report of the company,

the company is into IT and ITeS. But no segmental details are available in the

report. (page 128 of appeal paper book)

SYSTANGO TECHNOLOGIES LIMITED:

TPO / DRP Findings: (page 45 of appeal paper book)

The TPO / DRP considered that the above company is primarily engaged

in software development services and earns majority of its revenue from this

activity and treated as comparable.

The ld.AR contended that the no detailed information about the services

in the annual report of the Company. Further, as per the website of the

Company it is into web development, data engineering, digital marketing,

block chain, consulting, staff augmentation, etc., (page 129 of appeal paper

book).

SAGARSOFT LIMITED:

TPO / DRP Findings: (page 45 and 46 of appeal paper book)

The TPO / DRP considered that the above company’s principal business

activity is computer programming, consultancy and related activities. Further,

the TPO /DRP stated that the company is having a single segment of activities

that is software development and consultancy, and the entire revenue from

software development services. The DRP also asserted that the information in

website cannot be given complete credence and hence considered the said

company as valid comparable.

. The ld.AR contended that the company is engaged in software

development and consultancy. (Page 130-131 of appeal paper book). Further,

there is no detailed information about segmental revenue / break up available

as per the annual report.

DATA COLLECTION INFOTECH (INDIA) PRIVATE LIMITED:

TPO / DRP Findings: (page 46 and 47 of appeal paper book)

The TPO / DRP considered that the above company’s entire revenue

from operations is from software services and hence no requirement of

providing segmental reporting and hence considered the said company as

valid comparable.

The ld.AR contended that the company is engaged into KPO services

and hence functionally dissimilar to the activities of the assessee. (page 133 of

appeal paper book). Further, as per annual report, the company is engaged in

software development and ITeS services. However, no segmental details are

available (page 134 of appeal paper book).

Per contra, the ld.DR in respect of the above referred inclusion of

comparable companies relied on the orders of the TPO / DRP and prayed for

confirming the same.

We have heard the rival contentions perused the material available on

record and gone through the orders of the authorities along with the case laws

relied on both the parties. In the present facts and circumstances of the case,

. the inclusion of the Ksolves India Pvt ltd, Consilient Technologies pvt ltd, Great

Software laboratories pvt ltd, IDS Infotech ltd, Systango Technologies ltd,

Sagarsoft Ltd and Data Collection Infotech (India) Pvt Ltd are not appropriate

when compared to the activities and turnover of the assessee. Therefore, we

are of the considered view that the TPO / DRP have erred in including these

companies as valid comparable companies to the assessee and hence we are

inclined to exclude the same and accordingly direct the TPO to exclude these

companies and recompute the PLI.

G. The next issue i.e, Ground No.11 raised by the assessee is in regard to error in margin computation of comparable companies:

The DRP had directed to the TPO to compute margins of the

comparable as per the annual reports of the companies.

The ld.AR submitted that the TPO have erred in margin computation

of the following comparable:

• Rheal Software Private Limited • Batchmaster Software Private Limited • Toxsl Technologies Private Limited • Macrosoft I T Solutions India Private Limited • Data Collection Infotech (India) Private Limited • Sagarsoft (India) Limited • Great software laboratory Private Limited IDS Infotech Limited

Per contra the ld.DR relied on the order of the TPO.

. We note that the DRP had given a clear direction to compute the

margins of the above comparable companies based on the annual report

of the respective companies. However, as per the submission of the

ld.AR, the margins have been erroneously computed and hence we direct

the TPO to consider the Annual report of the respective companies as

directed by the DRP and recompute the margins in accordance with law.

H. The next issue i.e, Ground No.12: Not granting working capital adjustment : The TPO / DRP contended that the assessee has not furnished the

impact of the adjustment on price, cost or profits is not demonstrated to the

margins. Further contended that Accounts payable and receivable reflects

position at the end of financial year and hence the same cannot be considered

for working capital adjustment.

On the other hand the ld.AR submitted that the TPO and AO have grossly

erred in not providing for working capital adjustment in relation differences in

working capital position of the assessee vis-à-vis the comparable companies to

determine the ALP of the international transactions. Further submitted that the

company selling on cash basis would receive lower price than a company

selling the same goods on credit terms because selling on credit terms

subjects the seller to the capital cost that will be reflected in the price and

. hence the working capital adjustment is essential and prayed for allowing the same. The ld.AR relied on the following decisions which squarely covered in favour the assessee’s facts of the case:

• Virtusa consulting services pvt. Ltd [IT(TP)A No.25/Chny/2020] • Visual Graphics Computing services india Pvt ltd [TS-709-HC-2020- MAD-TP] • M/s.Genisys Integrating Systems (India) Pvt. Ltd Vs. DCIT (ITA No. 1231(Bang)/2010) • Mobis India Ltd [ITA No.2112/Mds/2011] Per contra, the company has not provided the break up of the Accounts receivables and hence prayed for confirming the same. We note that the facts of the assessee’s case is identical with the facts of the referred case supra and respectfully following the same we direct the AO/TPO to grant the working capital adjustment to compute the margin.

Order pronounced on 06th day of June, 2025 at Chennai. Sd/- Sd/- (एस. आर. रघुनाथा) (मनु कुमार िग�र) (Manu Kumar Giri) (S.R. Raghunatha) �ाियक सद� / Judicial Member लेखा लेखा सद�य लेखा लेखा सद�य सद�य /Accountant Member सद�य चे�नई/Chennai, �दनांक/Dated: 06th June, 2025. EDN/-

. आदेश क� �ितिल�प अ�े�षत/Copy to: 1. अपीलाथ�/Appellant 2. ��थ�/Respondent 3. आयकर आयु�/CIT, Chennai /Madurai/Coimbatore/Salem 4. िवभागीय �ितिनिध/DR 5. गाड� फाईल/GF