AI OCR 
TaxTMI 
TaxTMI 
TaxTMI 
2026 (5) TMI 79
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....024 is bad in law. 3. For that the Assessing Officer completed the assessment vide order passed u/s.143(3) r.w.s.144C(3) r.w.s. 144B of the Income Tax Act dated 23.10.2024 without complying with the statutory requirements of law. PLI to be computed by using the operating margin before charging depreciation and amortization 4. For that the Dispute Resolution Panel and consequently the Assessing Officer erred in rejecting the computation of PLI adopted by the appellant and computed the PLI of the appellant by considering the operating margin after charging depreciation and amortization. 5. For that the Dispute Resolution Panel and consequently the Assessing Officer failed to appreciate that the impact of software development on revenue would only be seen in the ensuing years. Upward adjustment of Revenue of Rs. 4,05,93,671/- 6. For that the Dispute Resolution Panel and consequently the Assessing Officer erred in making an upward adjustment of Rs. 4,05,93,671/- to the revenue of the appellant 7. For that the Dispute Resolution Panel and consequently the Assessing Officer erred in affirming the action of the Transfer Pricin....
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....er the transfer pricing study report (TPSR) is engaged in the business of providing telecoms products solution, consulting services and professional services. The assessee filed a return of income for A.Y 2021-22 on 01.02.2022 declaring loss at Rs. 3,37,58,584/- (being unabsorbed depreciation). The case selected for scrutiny and the statutory notices were duly served on the assessee. The A.O made a reference to the TPO to determine the Arms Length Price (in short "ALP") of the international transaction the assessee has entered into with its associated enterprises. The TPO made a TP adjustment of Rs. 4,05,93,671/-. The A.O passed the draft assessment order incorporating the TP adjustment. Aggrieved, the assessee raised objections before the Disputes Resolution Panel (DRP). The DRP rejected the objections and the A.O passed the final assessment order pursuant to the directions of the DRP against which the assessee is in appeal before the Tribunal. 3. In the TPSR, the assessee chose itself as the tested party and as per the Form-3CED filed by the assessee following is international transaction entered into by the assessee during the year under consideration: 4. Associated ....
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....is as under: S.NO. NAME OF THE COMPANY WT. AVG. OF OP/OC 1 I Services India Pvt. Ltd. 1.34 2 Kcube Consultancy Services Pvt. Ltd. 2.14 3 Ideavate Solutions Pvt Ltd 2.28 4 Datascribe Infotech Pvt. Ltd. 8.21 5 Anderson Business Solutions Pvt. Ltd. 9.61 6 Designed Products Ltd. 11.78 7 Sundaram Business Services Ltd. 11.84 8 Cheers Interactive (India) Pvt. Ltd. 11.93 9 E Care India Pvt. Ltd. 18.14 10 Tech Mahindra Business Services Ltd. [Merged] 18.86 11 Integra Software Services Pvt. Ltd. 22.36 12 Vitae International Accounting Services Pvt. Ltd. 28.16 13 Inteq B P O Services Pvt. Ltd. 29.93 14 IDS Infotech Ltd 34.86 15 C G-V A K Software & Exports Ltd. 40.98 16 TTE C India Customer Solutions Pvt. Ltd. 57.01 17 Athena Global Technologies 126.00 35TH PERCENTILE (7th) 11.78 65TH PERCENTILE (12th) 28.16 MEDIAN 18.14 7. The TPO recalculated PLI of the assessee as under: Particulars Amount (in INR) Revenue from operations 25,92, 12,831 Total Operating income 25,....
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....stomer Solutions Pvt. Ltd. 57.01 17 Athena Global Technologies 60.89 35TH PERCENTILE (7th) 11.78 65TH PERCENTILE (12th) 28.16 MEDIAN 18.14 10 Accordingly, the TPO computed the TP adjustment as below: Proportionate Adjustment Sr. No. Particulars Amount(in Rs.) 1 Operating Income(A) 25,92,12,831 2 Operating Cost(B) 25,37,72,221 3 Operating profit @ 54,40,610 4 Assessee's Profit Margin (D) 2.14 5 AE Sale (E) 25,92,12,831 6 Proportionate of AE Sale to Ol in % (F)=E/A*100 100.00 7 comparable Margin (G) 18.14 8 Expected Profit According to TPO (H)=B*G/100 4,60,34,281 9 ALP of AE Sale (I)=B+H 29,98,06,502 10 Proportionate of AE Sales (J)= I*F 29,98,06,502 11 Adjustment=J-E 4,05,93,671 EXCLUSION OF DEPRECATION FROM OPERATING COST: 11. The Ld. Authorized Representative (AR) of the assessee with regard to considering depreciation as operating expense submitted that the assessee has developed an in-house project which is a customer relationship management software and the cost incurred to develop the software fr....
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.... 14. We have heard the parties, and perused the material available on record. The assessee has developed in-house software and has accumulated towards the same from 2018. The assessee has deployed the software during the year under consideration and in the books of accounts claimed depreciation on the same. However for the purpose of computing the PLI, the assessee has treated the depreciation as non-operating i.e. cash margin is considered for the purpose of PLI. The argument of the assessee in this regard is that the use of software has not resulted in any impact in the revenue from operations being the first year of deployment. Accordingly the assessee is contending the depreciation is to be treated as extraordinary item to be excluded from the operating expenses for the purpose of benchmarking. On the other hand the contention of the revenue is that the very basis of claiming depreciation is that the asset is being put to use in the regular course of business and therefore excluding the same for PLI purpose is not correct. The revenue further contends that the Rule specifically provides that the depreciation is to be part of operating cost and therefore excluding depreciation....
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....margin in the open market; (iv) the net profit margin realised by the enterprise and referred to in sub-clause (i) is established to be the same as the net profit margin referred to in sub-clause (iii); (v) the net profit margin thus established is then taken into account to arrive at an arms length price in relation to the international transaction or the specified domestic transaction." (3) An uncontrolled transaction shall be comparable to an international transaction ^96[or a specified domestic transaction] if- (i) none of the differences, if any, between the transactions being compared, or between the enterprises entering into such transactions are likely to materially affect the price or cost charged or paid in, or the profit arising from, such transactions in the open market; or (ii) reasonably accurate adjustments can be made to eliminate the material effects of such differences. (emphasis supplied) 16 A combined perusal of the above rules makes it clear that for the purpose of comparison with uncontrolled transaction a reasonable accurate adjustment towards difference which could materially affect the net profit margin is per....
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....rofit. There is considerable support for the contention raised on behalf of the assessee in the OECD Guidelines on Transfer Pricing. The claim of depreciation can lead to great difference in computing profits of comparables as depreciation is permitted depending upon nature of plant/machinery and year of use. Obviously there are differences between the machinery employed by the taxpayer and other comparable concerns which is reflected in amount and percentage of depreciation claimed. How this variation and difference could be ignored under TP Regulations is neither shown nor explained. The assessee has debited high amount/ratio of depreciation. Other enterprises have claimed depreciation at much lower amounts. Size of the assets besides the age of the assets of comparables was leading to difference in the profit margins and in mean margin. On the contrary, claim of depreciation is eating up large chunk of profit in the case of the taxpayer. The CIT(A) has not said a word on "asset" employed and "risks" suffered by the tested party and the comparables. Thus, material differences needing suitable adjustment were ignored and a flawed analysis was carried even in appellate proceedings.....
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....bles which failed the test need to be excluded. The Ld. AR also prayed for exclusion of the following comparables on the ground of functional dissimilarity: 1. Anderson Business Solutions Pvt. Ltd. 2. Sundram Business Services Pvt. Ltd. 3. Tech Mahindra Business services Ltd., 4. Vitae International Accounting Services Pvt. Ltd., 5. Inteq BPO Services Pvt. Ltd. 20. The Ld. AR also presented the following table in support of the contention that the above comparables are functionally not similar: Name of Comparables Business of the comparable companies Anderson Business Solutions Pvt. Ltd The company is primarily engaged in providing back office accounting, book keeping & related date processing services. Page No.83 of the paper book (SCHEDULE 1 - A. Corporate Information forming part of the annual report) Sundaram Business Services Ltd. SBS offers accounting, tax, superannuation, mortgage, portfolio administration and other back office services to large and mid- size accounting firms, mortgage aggregators and investment companies in Australia, New Zealand, UK and India. Page No.84 of the paper book (NOTE - 1: Co....
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....of the lower authorities. 23. We have heard the parties, and perused the material available on record. The assessee is seeking exclusion of Tech Mahindra Business services Ltd and TTEC India Customer Solutions Pvt. Ltd on the ground that the turnover of the these comparables are significantly high when compared to the turnover of the assessee. From the perusal of the filters applied by the TPO (Page 6 of TPO order) we notice that the TPO has applied only the lower turnover filter of more than Rs. 1 crore but has not applied any upper turnover. The filters for selection of comparable companies is applied to identify a reasonable and reliable set of functionally similar entities for benchmarking the tested party and such filters must be applied having regard to the facts of each case to ensure meaningful comparability in terms of functions, assets and risks. Though there is no specific statutory rule prescribing thresholds, the judicial precedence have consistently been holding that the application of upper turnover filter is required while selecting the comparables since the turnover has an impact on the assets deployed and risks assumed. In the given case we notice that the turn....
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....services alone. It is also relevant to notice that the DRP has not considered the submissions of the assessee substantiating the fact that the assessee's income for the year under consideration is from rendering software development services. Considering the overall facts and circumstances, we are of the view that the issue of exclusion of comparables on the ground of functional dissimilarity needs to be examined afresh. Accordingly we remit the impugned issue back to the TPO with a direction to consider the exclusions sought by the assessee by calling for relevant details and decide in accordance with law. The assessee is directed to furnish the necessary details in support of the functions of the assessee and cooperate with the proceedings. It is ordered accordingly. 26. Since we have allowed the grounds raised on merits, the legal grounds have become academic and left open accordingly. 27. In result, the appeal of the assessee is allowed. Order pronounced on 11th day of February, 2026 at Chennai. ============= Document 1 COMPARISON OF PERCENTAGE OF DEPRECIATION TO PROFIT BEFORE DEPRECIATION BETWEEN THE APPELLANT AND COMPARABLES FY Ended 31.03.2021 FY Ended ....