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Facts
Optiva India Technologies Private Limited, a subsidiary of Optiva Inc., Canada, engaged in Software development and Support services, filed its e-return for A.Y. 2018-19. During scrutiny, the TPO made a transfer pricing adjustment of INR 6,58,00,557/- by modifying the set of comparable companies and filters used to calculate the Arm's Length Price (ALP) for international transactions with its Associated Enterprises. The assessee's PLI was reworked to 12.42% by the TPO, leading to an upward adjustment based on a median of 20.06% from 12 comparables.
Held
The Tribunal directed the Assessing Officer/Transfer Pricing Officer to exclude all five disputed comparable companies (Cybage Software Pvt. Pvt. Ltd., Nihilent Ltd., Infobeans Technologies Ltd., E-Infochips Pvt. Ltd., and Ninestars Information Technologies Ltd.) from the list of comparables. It was held that these companies were either functionally dissimilar or had already been excluded in the assessee's own case in previous assessment years or in other similar cases. Consequently, the TPO/AO must recompute the median PLI and ALP based on the revised set of comparables.
Key Issues
The key legal issue was the validity of the Transfer Pricing adjustment made by the AO/TPO, specifically challenging the selection criteria, filters applied, and the inclusion/exclusion of certain comparable companies, which led to an upward adjustment to the Arm's Length Price of the assessee's international transactions.
Sections Cited
143(3), 144C(13), 143(1)(a), 143(2), 142(1), 92CA(2), 92D(3), 270A
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Income Tax Appellate Tribunal, PUNE BENCHES “C”, PUNE
Before: DR.MANISH BORAD & MS. ASTHA CHANDRA
आदेश / ORDER
PER DR. MANISH BORAD, ACCOUNTANT MEMBER :
The captioned appeal at the instance of assessee pertaining to A.Y. 2018-19 is directed against the order dated 21.06.2022 passed u/s.143(3) r.w.s.144C(13) of the Income-tax Act, 1961 (in short ‘the Act’)
Assessee has raised following grounds of appeal :
“General 1. On the facts and circumstances of the case, the Learned ('Ld.') Assessing Officer ('AO') /Transfer Pricing Officer ('TPO') erred in disregarding the analysis conducted by the Appellant for determining the arm's length price of its international transactions thereby making a transfer pricing adjustment amounting to INR 6,58,00,557.
Modification of existing quantitative filters / Application of new quantitative filters
2. On the facts and circumstances of the case, the Ld. AO/TPO erred in modifying the quantitative filters applied by the Appellant as well as introducing additional quantitative filters to modify the set of comparable companies identified by the Appellant in its TP Study report.
2.1. On the facts and circumstances of the case, the Ld. AO/TPO erred in application of a filter wherein only the companies with income from services to operating revenue greater than 75% are selected.
2.2. On the facts and circumstances of the case, the Ld. AO/TPO erred in application of employee cost filter, thereby rejecting companies having employee cost to operating cost ratio of less than 25%.
2.3. On the facts and circumstances of the case, the Ld. AO/TPO erred in modifying the turnover filter of 'INR 1 crore to INR 1000 crores' applied by the Appellant to 'INR 11.69 crores to INR 1,169.4 crores', thereby rejecting companies having a turnover lower than INR 11.69 crores as well as companies having a turnover greater than INR 1,169.4 crores.
2.4. On the facts and circumstances of the case, the Ld. AO / TPO erred in modifying the export turnover filter of 25% applied by the Appellant to 75%, thereby rejecting the companies having an export turnover to operating turnover ratio of lesser than 75%.
2.5. On the facts and circumstances of the case, the Ld. AO / TPO erred in the application of 25% gross intangible to sales filter, thereby rejecting companies having gross intangibles to operating revenue ratio greater than 25%.
2.6. On the facts and circumstances of the case, the Ld. AO / TPO erred in application of the different accounting year filter, thereby rejecting companies having accounting year different from that of the Appellant.
2.7. On the facts and circumstances of the case, the Ld. AO/TPO erred in rejecting companies having branch office abroad/Onsite operations with significant forex spending.
2.8. On the facts and circumstances of the case, the Ld. AO/TPO erred in application of diminishing revenue filter thereby rejecting companies having a trend of decreasing revenue in the last three years.
2.9. On the facts and circumstances of the case, the Ld. AO/TPO erred in application of 33.33% gross receivables to operating revenue filter thereby rejecting companies having gross receivables to operating revenue for a period of four months greater than 33.33% Comparable Specific.
3. On the facts and circumstances of the case, the Ld. AO/TPO erred in selecting companies which are functionally dissimilar to the Appellant as well as rejecting companies which are functionally similar to the Appellant. 3.1. On the facts and circumstances of the case, the Ld. AO/TPO erred in selecting Ninestars Information Technologies Ltd., as a comparable company: • by erroneously treating it as functionally similar to the Appellant; • by disregarding the fact that the company fails the export turnover filer applied by the Ld. TPO 3.2. On the facts and circumstances of the case, the Ld. AO/TPO erred in selecting E-Zest Solutions Ltd., as a comparable company: • by erroneously treating it as functionally similar to the Appellant; • by disregarding the fact that the company fails the export turnover filer applied by the Ld. TPO. 3.3. On the facts and circumstances of the case, the Ld. AO/TPO erred in selecting Nihilent Ltd., as a comparable company: • by erroneously treating it as functionally similar to the Assessee; • by disregarding the fact that the company fails the foreign expenditure filter, wherein companies with Branch Office Abroad/On site operations with significant forex spending are rejected; applied by the Ld. TPO. 3.4. On the facts and circumstances of the case, the Ld. AO / TPO erred in selecting Gwynniebee India Pvt. Ltd., as a comparable company: • by erroneously treating it as functionally similar to the Appellant; • by disregarding the fact that the company has unreliable financial statements for the year under consideration on one hand the financial statements disclose that the Company is only providing services to its holding company and its entire trade receivables is due from its holding Company and on the other hand the RPT schedule has not disclosed transaction with its Associated Enterprise. 3.5. On the facts and circumstances of the case, the Ld. AO/TPO erred in selecting Infobeans Technologies Ltd., as a comparable company: • by erroneously treating it as functionally similar to the Appellant;
• by disregarding the fact that the company undertakes Research & Development ('R&D') activity; • by disregarding the fact that the Company has experienced abnormal growth 3.6. On the facts and circumstances of the case, the Ld. AO/TPO erred in selecting E-Infochips Pvt. Ltd., as a comparable company by disregarding the fact that the Company is not functionally similar to the Appellant 3.7. On the facts and circumstances of the case, the Ld. AO/TPO erred in selecting Cybage Software Pvt. Ltd., as a comparable company: • by disregarding the fact that the Company is not functionally similar to the Appellant; • by disregarding the fact that the company fails the foreign expenditure filter, wherein companies with Branch Office Abroad/On site operations with significant forex spending are rejected; applied by the Ld. TPO 3.8. On the facts and circumstances of the case, the Ld. AO/TPO erred in rejecting TATA Elxsi as a comparable company by disregarding the fact that the Company is functionally similar to the Appellant. 3.9. On the facts and circumstances of the case, the Ld. AO / TPO erred in rejecting IDBI Intech Ltd (IT segment), as a comparable company: • by disregarding the fact that the Company is functionally similar to the Appellant; by • by disregarding the fact that the Company fails the export turnover filter applied by the Ld. TPO 3.10. On the facts and circumstances of the case, the Hon'ble DRP erred in directing the Ld. AO/TPO in rejecting R Systems International Ltd.: • on the basis of the accounting year of the Company being different from that of the Appellant; • by disregarding the fact that the Hon'ble DRP in the Appellant's own case for AY 2010-11 directed the Ld. AO/TPO to include the said Company in the list of comparable companies. 3.11. On the facts and circumstances of the case, the Ld. AO/TPO erred in rejecting Compucom Software Ltd., as a comparable company: • by disregarding the fact that the Company is functionally similar to the Appellant;
• by erroneously modifying the export turnover filter of 25% applied by the Assessee to 75%; • by erroneously applying the employee cost filter. 3.12. On the facts and circumstances of the case, the Ld. AO/TPO erred in rejecting Silverline Technologies Limited., as a comparable company: • by disregarding the fact that the Company is functionally similar to the Appellant; • by disregarding the fact that the company does not fail the export turnover filter applied by the Ld. TPO. 3.13. On the facts and circumstances of the case, the Ld. AO / TPO has erred in rejecting Akshay Software Technologies Ltd.: • by disregarding the fact that the Company is functionally comparable to the Appellant; • by erroneously applying the forex expenditure filter; • by disregarding the fact that the Ld. TPO in the Appellant's own case for AY 2011-12 had included the said Company in the list of comparable companies, which was confirmed by DRP 3.14. On the facts and circumstances of the case, the Ld. AO/ TPO erred in rejecting KALS Information Systems Ltd.: • by disregarding the fact that the Company is functionally comparable to the Appellant; • by erroneously modifying the turnover filter of 'INR 1 crore to INR 1000 crores applied by the Appellant to 'INR 11.69 crore to 1169.4 crores'. 3.15. On the facts and circumstances of the case, the Ld. AO/TPO erred in rejecting Sankhya Infotech Ltd.: • by disregarding the fact that the Company is functionally comparable to the Appellant; • by erroneously applying the foreign expenditure filter, wherein companies with Branch Office Abroad/On site operations with significant forex spending are rejected; • by erroneously applying the gross intangible filter. Incorrect computation of Profit Level Indicator ('PLI')
4. On the facts and circumstances of the case, the Ld. AO/TPO erred in computing the margins of the companies considered as comparable while disregarding the correct computation submitted by the Appellant.
Reliance on website of companies
On the facts and circumstances of the case, the Ld. AO/TPO erred in stating that reliance cannot be placed on the website of the Companies for the purpose of undertaking analysis to determine comparability with the Appellant.
Working capital adjusted operating margins of comparable companies
6. On the facts and circumstances of the case, the Ld. AO/TPO erred in erroneously concluding that the Appellant had requested for a working capital adjustment.
7. Without prejudice to Ground no. 6, based on the facts and circumstances of the case, the Ld. AO/TPO erred in undertaking the working capital adjustment without providing the working/back-up computation and documents of the unadjusted as well as adjusted margins of the companies considered as comparable.
Risk adjustment
8. On the facts and circumstance of the case, the Ld. AO/TPO erred by not granting the risk adjustment to the Appellant disregarding the differences in the risk profile of the Appellant vis-à-vis the comparable companies.
Consideration of severance pay cost as operating
9. On the facts and circumstance of the case, the Ld. AO/TPO erred in considering the severance pay cost as an operating expense thereby incorrectly recomputing Appellant's operating margin as 12.42% against the correct operating margin of 18.81%.
Opportunity of being heard
10. On the facts and circumstances of the case, the Ld. AO/TPO erred in not providing the computations in relation to various search filters applied for companies selected as comparable and thereby depriving the Appellant of any opportunity of being heard in case of any factual error as to such computations, if any.
Levy of penalty
11. The Ld. AO has erred in law and in fact by issuing notice for levy of penalty under section 270A of the Act for under reporting of income. Prayer The Appellant craves leave to add, alter, supplement, amend, vary, withdraw, or otherwise modify the ground mentioned herein above at or before the time of hearing. All the aforesaid grounds of appeal are independent, in the alternative and without prejudice to one another.”
Brief facts of the case are that the assessee is a Private Limited Company incorporated as a subsidiary of Optiva Inc., Canada and is working to support the Global operations of Optiva group in the field of Software development and Support services. Assessee company filed its e-return of income for A.Y. 2018-19 on 30.11.2018 declaring taxable income at Rs.21,84,52,590/-. Return processed u/s.143(1)(a) of the Act on 01.10.2019. Thereafter, case selected for scrutiny under CASS followed by validly serving statutory notices u/s.143(2)/142(1) of the Act. During the year, assessee undertook international transactions with its Associated Enterprises and as per Form 3CEB the total of such transactions amounted to Rs.117.02 crore (approx.). Ld. Assessing Officer made a reference to the Transfer Pricing Officer (TPO) for computing the Arms Length Price (ALP) in relation to the international transactions undertaken by the assessee with its Associated Enterprises. Ld. TPO issued notice u/s.92CA(2) and u/s.92D(3) of the Act. Details as called for were filed by the assessee. Ld. TPO observed that the Profit Level Indicator (PLI) of the assessee as per Transfer Pricing Study Report (TPSR) is 18.81%. Assessee in support of its correctness of the ALP with Associated Enterprises submitted the list of comparables for the TP study justifying its ALP. Thereafter, ld. TPO introduced some comparables from its side for the purpose of calculating ALP. Ld. TPO has re-worked PLI of the assessee at 12.42% and then as per the final set of comparables ld. TPO calculated the median at 20.06% and accordingly calculated the upward adjustment relating to Software Development services at Rs.8,50,44,064/-. Ld. AO incorporated the finding of ld. TPO and framed the Draft Assessment order on 07.09.2021 against which assessee went before the Dispute Resolution Panel (DRP) and ld. DRP passed the order on 12.05.2022 and the directions given by ld. DRP were communicated by the AO and in place of Transfer Pricing adjustment recommended by ld. TPO at Rs.8,50,44,064/- final upward adjustment was made at Rs.6,58,00,557/-. For arriving this amount, the median has been calculated at 18.75% in which 12 comparables have been included.
Now against the final upward adjustment of Rs.6,58,00,557/-, the assessee is in appeal before this Tribunal. Though the assessee has raised series of grounds of appeal running into almost 6 pages extracted (supra) but the effective surviving grievance elucidated by the Ld. Counsel for the assessee is for the exclusion of following comparables :
Sl.No. Name of comparable company Margin/ weighted OP/OC 1 Cybage Software Pvt. Pvt. Ltd. 60.01% 2 Nihilent Ltd. 22.82% 3 Infobeans Technologies Ltd. 27.30% 4 E-Infochips Pvt. Ltd. 57.88% 5 Ninestars Information Technologies 16.91% Ltd.
5. Ld. Counsel for the assessee at the outset submitted that most of the comparables referred above have already been held by this Hon’ble Tribunal to be excluded from the list of comparables in assessee’s own case as the comparables are functionally different. Further, if the above comparables are excluded the revised median will be much lower and would justify that the international transactions carried out by the assessee with its Associated Enterprises are at Arm’s Length Price.
On the other hand, ld. Departmental Representative supported the orders of the lower authorities.
We have heard the rival contentions and perused the record placed before us. The only issue for consideration is whether the following comparables are to be excluded from the final set of comparables for the purpose of calculating ALP of the international transactions carried out by the assessee with its Associated Enterprises :
Sl.No. Name of comparable company 1 Cybage Software Pvt. Pvt. Ltd. 2 Nihilent Ltd. 3 Infobeans Technologies Ltd. 4 E-Infochips Pvt. Ltd. 5 Ninestars Information Technologies Ltd.
We observe that the assessee is engaged in the field of Software Development and Support services to its Associated Enterprises. In the written submissions, Ld. Counsel for the assessee has referred to various decisions of this Tribunal in assessee’s own case where the very same comparables have been examined in order dated 23.09.2021 for A.Y. 2014-15, ITAT No.194/PUN/2021 order dated 21.07.2022 for A.Y. 2016-17 and order dated 07.10.2022 for A.Y. 2017-18.
From going through the above decisions of this Tribunal, we find that the comparables namely (1) Cybage Software Pvt. Pvt. Ltd. (2) Nihilent Ltd. (3) Infobeans Technologies Ltd. and (4) E- Infochips Pvt. Ltd. stands already examined by this Tribunal in assessee’s own case for A.Yrs. 2014-15, 2016-17 and 2017-18 and after examining the functionality of the assessee company vis-a-vis the comparables it has been consistently held that all the above referred four companies are not to be included as comparables in the case of assessee for calculating the ALP of the international transactions carried out with its Associated Enterprises. We therefore direct the Assessing Officer/Transfer Pricing Officer to exclude all these four comparable companies namely (1) Cybage Software Pvt. Pvt. Ltd. (2) Nihilent Ltd. (3) Infobeans Technologies Ltd. and (4) E-Infochips Pvt. Ltd. from the list of comparables.
The last comparable which remains for our adjudication is Ninestars Information Technologies Ltd. Before us, Ld. Counsel for the assessee referring to the decision of this Tribunal in the case of M/s. Persistent Systems Ltd. – order dated 02.11.2023 has submitted that it is functionally dis- similar because Ninestars Information Technologies Ltd. is involved in provision of content services, analytical services, Tech Services, Software Consultancy etc., and this Tribunal while adjudicating the matter in the case of M/s. Persistent Systems Ltd. has held that since of M/s. Persistent Systems Ltd. is engaged in the business of Software Development and related services it is functionally different from the activities carried out by Ninestars Information Technologies Ltd. Relevant Finding of this Tribunal in the case of M/s. Persistent Systems Ltd. (supra) reads as under :
“16. The DRP has upheld the selection of Ninestar Information Technologies Ltd., as comparable in para 7.2(e) as under:
"We find that in the notes forming part of the financial statements of the company, under the heading 'Corporate Information', it has been stated that, Ninestar Information Technologies Ltd. is the world's leading digital transformation solution company and the number one offshore global media media monitoring solutions provider. Thus, from the Annual Report of Ninestars, it is clear that the company is engaged in provision of software development services. Even if the company is catering to customers in publication, communication and other industries to which the assessee is not catering to, it does not affect its comparability. What is to be seen is whether the assessee and the companies selected as comparables are providing services which fall under the same category (software development services, in the present case), M/s.Persistent Systems Limited [A] and it is not material whether the companies selected are catering to the same industry/segment(s) as the assessee. Since the company is found to be engaged in provision of software development services, the contentions of the assessee regarding functional non- comparability are rejected. Also the assessee is also engaged in product development and related activities and hence we find that this comparable has been rightly selected as functionally comparable to the assessee under TNMM method, which enables broad comparability. Hence we approve the selection of this company as a valid comparable and accordingly reject this ground of objection raised by the assessee."
16.1 The ld.AR submitted that it is functionally dis-similar. Ninestar Information Technologies Ltd., is involved in provision of content services, analytical services, Tech Services, Software Consultancy etc., therefore, the ld.AR pleaded that it is not functionally comparable.
16.2 We have studied the Annual Report of Ninestar Information Technologies Ltd. There is only one finding in the Annual Report i.e."Revenue is primarily derived from digitisation and related services"[Page No.5948 of the Paper Book]. In the table of the Annual Report, descriptions of services is referred as 'Software Services'[Page 5850 of Paper Book].
16.3 Thus, on perusal of the Annual Report which is at Page No.5850 to 5949 of the Paper Book filed by the assessee, we M/s.Persistent Systems Limited [A] could not specifically observe that Ninestar Information Technologies Private Ltd., is in the business of Software Development Services. Therefore, based on the cryptic information available in the Audit Report, it is not possible to understand actual functions performed by Ninestar Information Technologies Pvt. Ltd. Hence, Ninestar Information Technologies Pvt. Ltd., is held to be functionally not comparable with the assessee. Accordingly, the TPO is directed to delete the comparable.”
Now from going through the above finding of this Tribunal in the case of M/s. Persistent Systems Ltd. (supra), we find that since the nature of activity carried out by M/s. Persistent Systems Ltd. is similar to the activity carried out by the assessee, i.e. Software Development and support services, we therefore following the decision of this Tribunal and Rule of Consistency hold that Ninestars Information Technologies Ltd. is not a good comparable and deserves to be excluded from the list of comparables. We direct the Assessing Officer/Transfer Pricing Officer to exclude the said company from the list of comparables.
To conclude, all the five comparables which have been included by the ld. Assessing Officer/Transfer Pricing Officer, namely (1) Cybage Software Pvt. Pvt. Ltd. (2) Nihilent Ltd. (3) Infobeans Technologies Ltd. (4) E-Infochips Pvt. Ltd. and (5) Ninestars Information Technologies Ltd. are hereby directed to be excluded from the list of comparables. In light of our directions, necessary computation at the Assessing Officer/Transfer Pricing Officer’s level shall follow to calculate the median PLI and ALP of the alleged international transactions. Effective grounds of appeal raised by the assessee are allowed.
In the result, appeal of the assessee is allowed.
Order pronounced on this 25th day of June, 2025.