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Facts
The assessee, a wholly-owned subsidiary engaged in BPO services, reported a total income of Rs. 10,83,27,477 for AY 2022-23. The case was selected for scrutiny, and an international transaction for BPO services to its Associated Enterprises (AE) of Rs. 92,93,85,577 was examined. The TPO initially made an adjustment of Rs. 7,04,46,005, which was later increased to Rs. 8,60,29,525 based on DRP directions.
Held
The Tribunal held that the comparable company 'Bizsense Solutions Pvt Ltd' was functionally dissimilar to the assessee, as Bizsense was engaged in software design and development while the assessee provided routine ITeS services. Therefore, Bizsense should be excluded from the list of comparables for determining the Arm's Length Price (ALP).
Key Issues
Whether the comparable company 'Bizsense Solutions Pvt Ltd' is functionally similar to the assessee for the purpose of determining the Arm's Length Price (ALP) using the TNMM method?
Sections Cited
143(3), 144C(13)
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Income Tax Appellate Tribunal, ‘D’ BENCH: CHENNAI
Before: SHRI ABY T. VARKEY & MS. PADMAVATHY.S
आदेश / O R D E R
PER PADMAVATHY.S, A.M: This appeal and stay application by the assessee are against the final order of assessment passed by the assessment unit (in short "AO") passed u/s. 143(3) r.w.s. 144C(13) of the Income Tax Act, 1961 (in short "the Act") dated 30.12.2025 for Assessment Year (AY) 2022-23.
The assessee is a company and is wholly owned subsidiary of Merit Data and Technology Ltd., United Kingdom. The assessee is engaged in the SA No.74/Chny/2026 Merit Data and Technology Pvt. Ltd. :- 2 -:
1. business of providing business process outsourcing (BPO) services and the range of services provided includes data building, software publishing / consultancy, voice data handling and blended solutions. The assessee is a captive entity and does not undertake any risk. The assessee filed the return of income for A.Y 2022-23 on 29.11.2022 declaring total income of Rs.10,83,27,477/-. The case was selected for scrutiny and the statutory notices were duly served on the assessee. During the year under consideration, the assessee has declared the international transaction towards provision of BPO services to its Associated Enterprises (AE) to the tune of Rs. 92,93,85,577/-. The A.O made a reference to the TPO to determine the ALP of the said international transaction. The TPO made an adjustment of Rs.7,04,46,005/-. The assessee filed its objections before the DRP against the draft assessment order passed by the A.O incorporating the TP adjustment. Based on the directions of the DRP, the TPO passed an order giving effect whereby the TP adjustment was increased to Rs.8,60,29,525/-. The assessee is in appeal before the Tribunal against the final assessment order passed by the A.O pursuant to the directions of the DRP.
The facts pertaining to the impugned TP adjustment is that in the TP study, the assessee has used transaction net margin method as the most appropriate method. The assessee has computed its PLI based on OP/TC and for the year under consideration the margin of the assessee was arrived at 11.70%. The assessee for the purpose of benchmarking selected 34 comparables where 35th percentile and 65th percentile was arrived at 10.6% and 28.4%, respectively. Accordingly, the assessee in the TP study had stated that the price charged towards services is within arms length. The TPO rejected the comparables chosen by the assessee and conducted a fresh search SA No.74/Chny/2026 Merit Data and Technology Pvt. Ltd. :- 3 -: of comparables. The TPO arrived at final set of 23 comparables whose median was at 20.62%. Accordingly, the TPO arrived at an adjustment of Rs.7,04,46,005/-. On further appeal, the DRP did not accept the submissions of the assessee with regard to inclusions and exclusions and directed the TPO to re-compute the PLI of the comparables. The TPO passed an order giving effect based on DRP directions, whereby the TP adjustment was enhanced to Rs. 8,60,29,525/-. The assessee is in appeal before the Tribunal against the final order of assessment passed by the A.O pursuant to the directions of the DRP.
We have heard the parties, and perused the material available on record. The Ld. AR during the course of hearing submitted a chart containing the list of comparables which the assessee is praying for exclusion. The Ld. AR in this regard submitted that out of the list if one comparable namely Bizsense Solutions Pvt. Ltd (Bizsense) is excluded then the margin of the assessee would fall within the range. In this regard, we notice that the TPO has selected Bizsense as a comparable stating that the scientific search process has been followed and that Bizsense is showing revenue from IT enabled services. The TPO further held that Bizsense is passing all other filters and that strict comparability is not mandated under TNMM. We further notice that the DRP while considering the objections of the assessee with regard to the above comparable has held that: “2. Bizense Solutions Pvt Ltd: Functionally dissimilar Panel: Having considered the submissions of assessee, we have perused the annual report of M/s Bizsense Solutions Pvt. Ltd for FY 2019-20, 2020-21 & 2021-22, and noticed that during the FY 2019-20, this company was engaged in providing Design and Development Services of Software
1. Application Including Customized and Packaged Software. On perusal of annual reports of subsequent FYs 2020-21 & 2021-22, we noticed that there was no change in the nature of the business of the company. The relevant part of the annual report of FY 2019-20 is produced as follows:
Since this comparable selected by TPO is engaged in design and development of software applications, whether customized or packaged, which performs technical, knowledge-intensive, and project-based functions; it assumes higher delivery and technology risks; and may contribute to intellectual property creation. In contrast, an ITeS company provides routine, process-oriented support services with minimal risk and no IP creation. Therefore, such a software design and development company cannot be considered functionally comparable to an ITeS taxpayer. Ground rejected.”
From the perusal of the above observations, we notice that the DRP has given a finding that the comparable is functionally dissimilar. However, while concluding the DRP has held that the assessee's ground is rejected. We are therefore of the view that rejecting the ground raised for exclusion of Bizsense by the DRP is an inadvertent error since the finding of the DRP holds that Bizsense is functionally dissimilar the same needs to be excluded from the list of the comparables. The Ld. AR during the course of hearing submitted the following table in support of the claim that if Bizsense is excluded the margin of the assessee would be within arm’s length:
Considering the above facts, we direct the TPO to exclude Bizsense from the list of comparables and re-compute the ALP of the assessee considering the submission of the assessee as tabulated above.
During the course of hearing the Ld. AR did not present any further argument with regard exclusion of other comparables and therefore, the grounds raised in this regard are left open.
1. SA No.74/Chny/2026: 8. In view of our decision in the appeal as elaborated herein above the stay application filed by the assessee has become infructuous. Accordingly the same is dismissed as infructuous.
In the result, the appeal of the assessee is partly allowed and the stay application of the assessee is dismissed as infructuous.
Order pronounced on 13th day of March, 2026 at Chennai.