TaxTMI 
TaxTMI 
2026 (5) TMI 291
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....ss the same as infructuous. 3. The issues raised by the revenue in Grounds Nos. 2, 3, 4, 8, 10, 12, 14, 15 and 16 are interconnected, pertain to the inclusion and exclusion of certain comparables by the Ld. CIT(A) for computing the ALP of the international transactions carried out with the AE by the assessee. 4. The brief facts of the case on hand are that the assessee, a private limited company, is engaged in providing SWD services and Marketing and Sales Support Activities (MSS) to its AEs. The assessee benchmarked its international transactions under SWD Segment & MSS Segment by adopting TNMM as the most appropriate method. The assessee worked out the PLI as OP/TC for both segments, which arrived at 10.89% and 10.12% respectively. 5. The assessee for the comparability analysis of SWD segment for determining the ALP selected 13 comparables detailed as under: (i) Akshay Software Technologies Limited (ii) Bodhtree Consulting Limited (iii) Cat Technologies Limited (iv) Comp-U-Learn Tech India Limited (v) Helios & Matheson Information Technology Limited (vi) Maveric Software Limited (vii) Silverline Technologies ....
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....le satisfies all the filters proposed by the TPO. Therefore, the same should be included in the list of comparable companies. 7.3 Accepting the contentions of the assessee, the ld. CIT(A) directed the exclusion of Acropetal Technologies Limited, e-Zest Solutions Limited, E-Infochips Limited, ICRA Techno Analytics Limited, Infosys Technologies Limited, Larsen and Toubro Infotech Limited, Persistent Systems and Solutions Limited, Persistent Systems Limited, Mindtree Limited, Sasken Communication Technologies Limited and Tata Elxsi Limited, and further directed the inclusion of Akshay Software Technologies Ltd. The List of Comparables after the order of the ld. CIT(A) was as follows: (i) Akshay Software Technologies Ltd. (ii) R S Software India Ltd (iii) Evoke Technologies Pvt Ltd 8. Aggrieved by the order of Ld. CIT(A), the Revenue preferred an appeal before us. 9. The Ld. DR before us through ground Nos. 8 & 10 submitted that the Ld. CIT(A) erred in excluding Infosys Ltd, Larsen and Toubro Infotech Ltd, Persistent Systems Ltd, Sasken Communication Technologies Limited, Mindtree Ltd and Tata Elxsi Limited on account of High turnover. The Ld. DR rel....
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.... a different risk profile, which makes them unsuitable for comparison with smaller companies. Accordingly, the Ld. AR contended that the application of an upper turnover filter, as upheld by the Hon'ble Karnataka High Court, is fully justified and the high-turnover comparables selected by the TPO deserve to be excluded. 11. Both the ld. DR and AR before us relied on the order of the authorities below as favourable to them. 12. We have heard the rival contentions of both the parties and perused the materials available on record. We find merit in the contention of the assessee that the TPO erred in not applying an upper turnover filter while selecting comparable companies. It is well settled that turnover is a relevant criterion for determining comparability, as the scale of operations has a direct bearing on profitability owing to economies of scale. Companies having significantly higher turnover enjoy cost efficiencies and market advantages which are not available to smaller entities. 12.1 It is pertinent to note that companies with very high turnover operate on a different scale and benefit from economies of scale, better market position and cost advantages, which directl....
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....t was held by the Mumbai bench that such classification of turnover range cannot be applied for selection or rejection of comparable entity. In addition, the bench also found that in the said case the company having higher turnover had average margin of 30.74% as compared to company having lower turnover having average margin of 31.36%. Hence the Mumbai bench, considering the aforesaid observation rejected the assessee's grounds for exclusion of comparable companies having turnover exceeding Rs. 200 crores, from the comparable set. 12.4 In our considered opinion, the coordinate bench of Mumbai Tribunal in the above-mentioned case more focused on mechanical application of range of turnover for classification of small, medium and large-scale companies. By mechanical application of such range, it was rightly pointed out by the bench that the entity with turnover of Rs. 199 crores will be classified as small scale whereas other entities, with turnover of Rs. 201 crores would be classified as medium scale. However, we beg to differ from the view of Hon'ble Mumbai bench. We agree that upper turnover cannot be applied mechanically as per the classification of range of turnover as discu....
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....here two views are available on an issue, the view favourable to the Assessee has to be adopted, we respectfully follow the view of the Hon'ble Bombay High Court on the issue. Respectfully following the aforesaid decision, we uphold the order of the DRP excluding 5 companies from the list of comparable companies chosen by the TPO on the basis that the 5 companies turnover was much higher compared to that the Assessee. 17.8. In view of the above conclusion, there may not be any necessity to examine as to whether the decision rendered in the case of Genisys Integrating (supra) by the ITAT Bangalore Bench should continue to be followed. Since arguments were advanced on the correctness of the decisions rendered by the ITAT Mumbai and Bangalore Benches taking a view contrary to that taken in the case of Genisys Integrating (supra), we proceed to examine the said issue also. On this issue, the first aspect which we notice is that the decision rendered in the case of Genisys Integrating (supra) was the earliest decision rendered on the issue of comparability of companies on the basis of turnover in Transfer Pricing cases. The decision was rendered as early as 5-8-2011. The de....
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....le is required to be determined on the basis of similar FAR [Functions, Assets and Risks] profile. It would be erroneous to assume that the size of an entity and its turnover has no bearing on the FAR profile. It is erroneous to suggest that a company of a huge size and a large turnover would be subjected to the same risks as that of a smaller entity, whose turnover is a small fraction of the other entity. The entities would also not be comparable when one considers the value of assets. Additionally entities having a large turnover, would have the benefit of economies of scale, which would not be available to companies with a relatively lower turnover. 12.8 In the light of the above facts, once the order of the Tribunal in the case of Robert Bosch Engineering and Business Solutions Pvt Ltd.(supra) was carried in appeal before the Hon'ble Karnataka High Court in ITA No. 146/2025, and the Hon'ble High Court declined to admit the Revenue's grounds on the turnover filter issue, the doctrine of merger comes into operation. The order of the Tribunal, to the extent it was subject matter of challenge before the Hon'ble High Court and was examined by it, stands merged with the order of t....
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.... size of the turnover and margins are not linked and the Economics of scale are relevant factor only in capital intensive companies which have substantive fixed assets in the form of plant and machinery? Regarding substantial question of law No.2: "20. We have to hold that assessee can seek exclusion of comparables which were a part of its own list, at a later stage, and therefore, we are constrained to reject the line of argument of the Ld. DR. Coming to the arguments of the Ld. AR that M/s Tata Elxsi Ltd., M/s Sasken Communication Ltd., M/s Persistent Systems Ltd., M/s L & T Infotech and M/s Infosys Ltd., had turnover in excess of Rs. 200 Crores and were to be excluded, we are of the opinion that turnover filter can be applied for selection of comparables. This has been the view consistently taken by the Co-ordinate Benches of this Tribunal in a number of cases. In the case of M/s Genisys (P.) Ltd. v. DCIT [2011] 64 DTR 225 it was held by this Tribunal as under at paras-8 to 09 of its order: 8. According to Ld. counsel for the assessee size is an important fact of an enterprise level difference. He submitted that comparables should have something simila....
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....self has rejected the companies which are making losses as comparables. This shows that there is a limit for the lower end for identifying the comparables. In such a situation, we are unable to understand as to why there should not be an upper limit also. What should be upper limit is another factor to be considered. We agree with the contention of the Ld. counsel for the assessee that the size matters in business. A big company would be in a position to bargain the price and also attract more customers. It would also have a broad base of skilled employees who are able to give better output. A small company may not have these benefits and therefore, the turnover also would come down reducing profit margin. Thus, as held by the various Benches of the Tribunal, when companies which are loss making are excluded from comparables, then the super profit making companies should also be excluded. For the purpose of classification of companies on the basis of net sales or turnover, we find that a reasonable classification has to be made. Dun & Bradstreet and NASSCOM have given different ranges. Taking the Indian scenario into consideration, we feel that the classification made by Dun & Brad....
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....bles and are liable to be excluded by applying an appropriate upper turnover filter. With this, we conclude our adjudication on the grounds relating to the Software Development (SWD) segment in favour of the assessee. 12.15 As such the Revenue is directed to exclude the companies from the list of comparable companies namely Infosys Ltd, Larsen and Toubro Infotech Ltd, Persistent Systems Ltd, Sasken Communication Technologies Limited, Mindtree Ltd and Tata Elxsi Limited. 13. Coming to the other comparable companies which are challenged on various other grounds by the Revenue. 14. Regarding the exclusion of the comparable, i.e., Acropetal Technologies Ltd., by the Ld. CIT(A), the Ld. DR submitted that the said company had been incorrectly excluded from the final set of comparables. The Ld. DR further contended that the assessee itself had accepted Acropetal Technologies Ltd. as a comparable during the proceedings before the TPO and had not raised any objection to its inclusion at that stage. Therefore, according to the Ld. DR, the assessee cannot subsequently seek exclusion of the said company at the appellate stage. Accordingly, it was submitted that the order of the Ld. CI....
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.... appellate proceedings, the Ld. CIT(A), upon examining the functional profile and quantitative filters, directed exclusion of the said company. The Revenue is now in appeal challenging such exclusion. 16.1 Before us, it has been submitted that upon a detailed examination of the annual report and in light of subsequent judicial precedents, the assessee no longer presses for inclusion of Acropetal Technologies Ltd., as the company appears to fail certain quantitative filters and exhibits functional differences. It is well-settled that transfer pricing determination is to be made on the basis of correct comparability and there is no estoppel against either party from pointing out a mistake in selection of comparables. 16.2 We note that from the annual report, revenue from software development services constitutes only 57.46% of total operating revenue and the employee cost ratio works out to 11.51%, which prima-facie indicates that the company may not satisfy the filters applied by the TPO. Further, segmental clarity regarding export revenue is not apparent in the financial statement of the comparables. In addition to the above we note that the Tribunal in the case of Aspect Tec....
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....ee. Thus, Gr. Nos. 4 is dismissed and Gr. Nos. 2 & 3 are also partly dismissed to the extent of exclusion of Acropetal. 16.3 In view of the above, we do not find any infirmity in the finding of the ld. CIT-A and accordingly, the ground raised by the assessee is hereby dismissed. 16.4 The Ld. DR submitted that the Ld. CIT(A) erred in excluding e- Zest Solutions Ltd. from the final set of comparables. It was contended that the said company is engaged in providing software development services and therefore cannot be regarded as functionally dissimilar to the assessee. The Ld. DR further submitted that merely because the company is involved in certain specialized services or emerging technologies would not render it incomparable, as the core activity remains software development services. Accordingly, the Ld. DR prayed that the said company be restored to the final set of comparables. 17. Further, regarding the exclusion of e-Zest Solutions Ltd., the Ld. AR submitted that the said company is functionally dissimilar to the assessee as it is a product engineering and software development company having special expertise in emerging technologies such as cloud computing, SaaS, bu....
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....red to the final set of comparables as contended by the Revenue. 18.1 We note that the Ld. CIT(A) excluded the said company after examining the functional profile brought on record by the Ld. AR. From the annual report, it is evident that e-Zest Solutions Ltd. is engaged in end-to-end product development and product engineering activities and provides a wide range of services such as enterprise solutions, product design and development, consulting, technology services, software product testing, web development and BPO services. The company also has specialized expertise in emerging technologies such as cloud computing, SaaS, business intelligence and mobility. In our view, such a functional profile is materially different from that of the assessee, which is admittedly engaged only in rendering routine software development services to its associated enterprise. 18.2 We also find merit in the contention that e-Zest Solutions Ltd. carries significant inventory, amounting to nearly 15% of its operating income, which further supports the conclusion that the company is engaged in product-oriented activities and not merely in providing captive software development services. Further,....
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.... information is available in the annual report. On the contrary, the revenues from software development and IT enabled services are clubbed and reported under a single segment. In the absence of proper segmental details, the company was rightly held to be functionally not comparable with the assessee, which is a captive software development service provider. It was further submitted that the company also maintains inventory and is therefore incomparable to the assessee. 19.1 It was further submitted that even if the income from software development services amounting to Rs. 19.21 crores are considered; the company fails the TPO's filter requiring more than 75% of operating revenue to be derived from software development services. 19.2 It was also submitted that the said company has consistently been excluded by coordinate benches of this Tribunal in the case of similarly placed assessees. Reliance was placed on the decisions in ACIT v. Arcot R&D Software Private Limited (supra) 111 taxmann.com 221, Commscope Networks (India) Pvt. Ltd. v. ITO reported in [2017] 83 taxmann.com 418 (Bangalore - Trib.), Principal Commissioner of Income-tax v. Saxo India (P.) Ltd. reported in [201....
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.... the facts for the year under consideration are distinguishable. 20.4 In view of the above discussion, we find no infirmity in the order of the Ld. CIT(A) in excluding the said company from the final set of comparables. Accordingly, the ground raised by the Revenue is dismissed and the cross-objection filed by the assessee on this issue is allowed. 21. The Ld. DR before us submitted that the Ld. CIT(A) erred in excluding ICRA Techno Analytics Ltd. from the final set of comparables. It was contended that the said company is engaged in providing software development and related technology services and therefore cannot be regarded as functionally dissimilar to the assessee. The Ld. DR further submitted that the presence of certain additional services would not render the company incomparable so long as the core activity remains within the broad spectrum of software development and IT services. Accordingly, it was argued that the Ld. CIT(A) was not justified in directing the exclusion of the said company from the final set of comparables. 22. With regard to ICRA Techno Analytics Ltd., the Ld. AR submitted that the annual report of the company makes it clear that it is engaged ....
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....s also engaged in functions akin to IT enabled services / KPO services. In the absence of reliable segmental information to segregate revenues arising from these diverse activities, the said company cannot be considered functionally comparable with the assessee, which is a captive software development service provider. 23.2 We also observe that coordinate benches of this Tribunal have consistently directed exclusion of ICRA Techno Analytics Ltd. in the case of similarly placed assessees. The Ld. CIT(A) has relied upon such judicial precedents, including the decisions in Applied Materials, Finastra Software, Aspect Technology, Blue Yonder, ACIT v. Arcot R&D Software Private Limited and NI Systems (India) Pvt. Ltd. v. DCIT reported in [2020] 115 taxmann.com 477 (Bangalore - Trib.). The Revenue has not brought on record any material to demonstrate that the facts for the year under consideration are distinguishable. 23.3 In view of the above discussion, we find no infirmity in the order of the Ld. CIT(A) in excluding ICRA Techno Analytics Ltd. from the final set of comparables. Accordingly, the ground raised by the Revenue is dismissed and the cross-objection filed by the assesse....
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.... perused the materials available on record. The issue before us is whether Persistent Systems and Solutions Ltd., which was excluded by the Ld. CIT(A), is liable to be restored to the final set of comparables as sought by the Revenue. 24.1 We note that the Ld. CIT(A) excluded the said company after examining its functional profile. From the material placed on record, it is evident that the company is engaged in outsourced software development activities and also earns revenue from sale of software products, royalty and licensing of products. All such revenues are reported under a single segment, and no reliable segmental information is available to segregate income arising from routine software development services. In our view, such a functional profile is materially different from that of the assessee, which is a captive software development service provider rendering services only to its associated enterprise. 24.2 We also take note of the fact that coordinate benches of this Tribunal as well as the Hon'ble High Court have consistently directed exclusion of Persistent Systems and Solutions Ltd. in the case of similarly placed assessees. The Ld. CIT(A) has relied upon such ....
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....aged in providing IT enabled services or software development services. The Ld. DR further submitted that in the absence of clear functional similarity, the said company ought not to have been included as a comparable. Accordingly, it was prayed that the order of the Ld. CIT(A) on this issue be set aside and the action of the TPO be restored. 31. Per contra, the Ld. AR before us submitted that from a bare perusal of the annual report of the said comparable, it is evident that the company is engaged in the business of software services. It was further submitted that the revenue from operations has been specifically disclosed as "software services". In support of the said contention, reliance was placed on the decision in the case of Assistant Commissioner of Income-tax, Circle-1(1)(1), Bangalore v. ABB Global Industries & Services Ltd. reported in [2021] 125 taxmann.com 88 (Bangalore - Trib.) dated 04-01-2021. 32. We have considered the rival submissions of both the parties and perused the materials available on record. The issue before us is whether Akshay Software Technologies Ltd., which was directed to be included by the Ld. CIT(A), is liable to be excluded from the final ....
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....the assessee, the details of the assessee's comparables and reason for rejection or acceptance of the same are available at pages 26 to 27 of the TPO order in tabular form. Thus, the TPO accepted only one comparable selected by the assessee, as detailed below: (i) Cybermedia India Online Limited 34.2 Thereafter, the TPO made fresh comparability analysis and selected 2 new comparables in addition to 1 assessee's comparable accepted. Accordingly, the TPO selected 3 comparables in the final set under MSS segment which are detailed as under: (i) Asian Business Exhibition and Conferences Limited (ii) Cybermedia India Online Limited (iii) ICC International Agencies Limited 34.3 Median of average weighted margin of the above-mentioned comparables arrived at 18.25% and, the TP adjustment of Rs. 45,15,361/- was made by the TPO under the MSS segment. 35. Aggrieved assessee filed an appeal before the ld. CIT(A) who inter-alia accepted the exclusion of the comparable i.e. ICC International Agencies Limited as contended by the assessee. The ld. CIT-A similarly included the comparable i.e. Concept Communications Limited as contended by the assessee. ....
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.... 153 (Bangalore - Trib.) and Finastra Software Solutions (India) (P.) Ltd. vs. Assistant Commissioner of Income-tax, Circle (4) (1) (2), Bengaluru reported in [2018] 93 taxmann.com 460 (Bangalore - Trib.) [02-05-2018] 38.3 The Ld. DR before us submitted that the finding of the Ld. CIT(A) with regard to Concept Communication Ltd. is misplaced. It was contended that the Ld. CIT(A) relied on the decision in Karl Storz (supra), wherein the comparable Concept Communication Ltd. was excluded on account of correction in margins and not on the ground of functional comparability. Therefore, according to the Ld. DR, the reliance placed by the Ld. CIT(A) on the said decision is not appropriate. 38.4 With regard to Concept Communication Limited, the ld. AR for assessee submitted that the TPO rejected the said company on the grounds of alleged functional dissimilarity, which is incorrect. It was submitted that, as evident from the annual report for financial year 2010-11, the company is engaged in rendering advertising agency services and that revenue from advertising and publicity constitutes 100% of its total revenue, thereby demonstrating that the company is comparable to the assessee.....
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....e issue of functional comparability of the said company. Thus, the ratio laid down in the said case was confined to the computation of margins and did not adjudicate upon whether Concept Communications Ltd. is functionally comparable to the assessee. In the present case, the controversy before us relates to the functional comparability of the said company with the assessee. Therefore, the decision relied upon by the Ld. CIT(A) does not advance the case of the assessee and is not applicable to the facts of the present case. 39.3 Be that as it may, even though the reliance placed by the Ld. CIT(A) on the decision in Karl Storz (supra) is not strictly applicable, we note from the materials on record that Concept Communications Ltd. is engaged in rendering advertising agency services and derives its entire revenue from such activities. It is pertinent to note that marketing support services and advertising services are closely related in nature. Both activities involve promotion of products or services, market development, brand visibility, and assisting the principal in reaching potential customers. While advertising services may specifically focus on designing and executing promot....