TaxTMI 
TaxTMI 
2026 (5) TMI 550
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....uous and as not pressed. 4. The issues raised by the assessee in Grounds Nos. 2 to 2.3, 2.6, 2.8 and 2.10 are academic in nature and therefore the same do not require any separate adjudication. Hence, we dismiss the same. The issue in ground no. 2.4 pertains to fresh economic analysis conducted by the TPO by including a comparable namely Liquidhub Analytics Pvt. Ltd. (other inclusion not pressed) and confirmed by the Ld. DRP for computing the ALP of the international transactions carried out with the AE. 5. The brief facts of the case on hand are that the assessee, a private limited company, is engaged in provision of back-office support services (BSS) to it AEs. During the captioned AY, the assessee provided back-office support services to its AEs to the tune of Rs. 1,16,34,42,195/- only. The assessee benchmarked its transaction under BSS segment by adopting TNNM as most appropriate method and further PLI as OP/OC which arrived at 16.63% for BSS segment. The assessee for the comparability analysis under BSS segment selected 11 comparables. 5.1 However, the TPO during the assessment proceeding rejected 09 comparables out of 11 comparables selected by the assessee. The asse....
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....Dot Com Private Limited in ITA No. 227/Bang/2010 (c) Cisco System (India) Private Limited in IT(TP)A No. 271/Bang/2014 (d) Curam Software vs ITO reported in 37 Taxmann.com 141 (e) Actis Advertisers Private Limited in ITA No. 5277/Del/2011 9. Being aggrieved by the order of the AO/TPO and the directions of the Ld. DRP, the assessee preferred an appeal before us. 10. The Ld. AR before us has filed a paper book running into thousands of pages along with written submissions. The assessee submitted that the Ld. DRP erred in directing inclusion of the said company as a comparable even though it fails the RPT filter of 25% applied by the TPO. It was contended that once the RPT percentage exceeds the prescribed threshold, the company ceases to be an uncontrolled comparable and ought to be excluded from the final set. 10.1 The Ld. AR drew our attention to page 4858 of the paper book, wherein the computation of the RPT filter has been placed on record. As per the working furnished, the total related party income of Rs. 42,99,80,000 as against the total income of Rs. 1,35,23,40,000 results in an RPT ratio of 31.80%. It was submitted that since the RPT perce....
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....unds for exclusion of the said company. However, since the assessee succeeds on the issue of RPT filter itself, we are not inclined to adjudicate the remaining grounds, which are rendered academic. 12. Coming to ground No. 2.5, the assessee vide this ground has raised contentions for inclusion of certain comparables. The relevant facts are that the assessee in its TP study report has included certain comparables namely: (a) Jindal Intellicom Limited (b) Riddhi Corporate Services Limited (c) Digicall Global Private Limited 12.1 However, the TP study report was rejected by the TPO, and fresh search was conducted. The above stated comparables do not fall in the search criteria of the TPO. Hence, the same was rejected as comparables. 13. Aggrieved, assessee filed objections before the Ld. DRP. 14. Before the Ld. DRP, with regard to Jindal, Riddhi and Digicall, the assessee submitted that the said comparables are functionally comparable and passes all the quantitative filters applied by the TPO. 14.1 However, the Ld. DRP, observed that since the said comparables do not form part of search matrix of TPO, the assessee's claim for inclusion of abov....
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.... India (P.) Ltd. vs. Deputy Commissioner of Income-tax reported in [2025] 180 taxmann.com 631 (Bangalore - Trib.) dated [17- 11-2025] and Hydro BS India (P.) Ltd. vs. Deputy Commissioner of Income-tax reported in [2025] 178 taxmann.com 229 (Bangalore - Trib.) dated [04-09-2025], wherein it has been held that insertion of comparables not forming part of the accept/reject matrix or search process, without any explanation or challenge to filters, would amount to cherry picking and undermine the methodology adopted for determination of arm's length price. 18.1 At the same time, another coordinate bench in Dotgo (p.) Ltd. vs. Deputy Commissioner of Income-tax reported in [2025] 177 taxmann.com 450 (Bangalore - Trib.) dated [05-08-2025] has held that a comparable cannot be rejected merely on the ground that it does not appear in the search results, if it is otherwise functionally comparable and satisfies the relevant filters. Further, in IG Infotech (India) (P.) Ltd. vs. ACIT reported in [2023] 150 taxmann.com 470 (Bangalore - Trib.)/[2023] 102 ITR(T) 411 (Bangalore - Trib.) dated [01-11-2022] and Quicklogic Software (India) (P.) Ltd. vs. Deputy Commissioner of Income tax reported in ....
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....n as to why such comparable did not emerge in the search process or why the search itself is inadequate. * Where no such explanation is provided and the search process and filters are not challenged, inclusion of new comparables would amount to cherry picking. * Conversely, rejection of comparables solely on the ground that they do not appear in the search matrix, without examining functional similarity, is also unsustainable. * Selection or rejection of comparables without proper FAR analysis or without examining annual reports constitutes cherry picking by the TPO. 18.5 In the present case, we find that the comparables proposed by the assessee have been rejected solely on the ground that they do not form part of the search matrix, without any examination of their functional profile. At the same time, the assessee has placed material on record to demonstrate their functional similarity. In our view, such rejection is mechanical and not in accordance with Rule 10B of Income Tax Rules. Accordingly, we direct the AO/TPO to examine the comparables proposed by the assessee afresh on the basis of functional comparability, assets employed and risks assumed, ....
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....le by not including the ESOP cost in its operating cost while computing the margin under the cost-plus model. It was therefore held that the action of the TPO in including the ESOP cost as part of the operating cost for determining the arm's length price was justified, and the ground of the assessee was rejected. 23. Aggrieved by the order of the AO/TPO and the direction of the ld. DRP, the assessee preferred an appeal before us. 24. The Ld. AR before us submitted that the TPO has erred in treating the ESOP expenses as operating in nature and including the same in the operating cost of the assessee. However, the assessee alternatively submitted that if the ESOP reimbursement is considered as part of the operating cost, then the corresponding reimbursement income should also be included in the operating income of the assessee. 25. On the other hand, the ld. DR before us submitted that the ESOP incentives were granted to the employees of the assessee for the services rendered by them in the course of the assessee's business operations. Therefore, the benefit arising from such incentives is directly linked with the functions performed by the employees of the assessee. It was ....
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....2.7.2 relating to the Foreign Exchange Gain/Loss was not pressed by the Ld. AR for the assessee at the time of hearing. Accordingly, the said ground is dismissed as not pressed. 28. Ground No. 2.9 relates to working capital adjustment. 29. The relevant facts are that during the assessment proceedings, the assessee submitted that appropriate adjustments should be made to account for the differences between the controlled transactions of the assessee and the uncontrolled transactions of the comparable companies. During the proceedings, the assessee was asked to explain how differences in working capital levels have impacted the profit margins of the comparable companies and to justify the claim for working capital adjustment. 29.1 However, the TPO found that the assessee was not able to explain such difference. The TPO submitted that the assessee did not submit whether the comparables companies had financed their working capital by their own funds or borrowed funds. The assessee also failed to demonstrate whether any cost has been incurred on the working capital by the comparable companies. Hence, no working capital adjustment was allowed to the assessee. 30. Aggrieved as....
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.... 31.6 In support of this contention, the Ld. AR placed reliance on various judicial precedents of the Bangalore Bench of the Tribunal, wherein it has been consistently held that working capital adjustment should be granted when there are differences in receivables, payables and inventory between the assessee and the comparable companies. Accordingly, it was prayed that appropriate working capital adjustment be directed to be granted while computing the arm's length margin. 32. On the other hand, the Ld. DR before us submitted that the assessee has not furnished reliable data to demonstrate the impact of differences in working capital on the margins of the comparable companies. It was contended that merely showing differences in receivables and payables from the balance sheet does not automatically justify a working capital adjustment. The Ld. DR further submitted that in the absence of proper computation based on average balances and supporting data regarding the cost of funds, a reasonably accurate adjustment as contemplated under Rule 10B cannot be made. Accordingly, the Ld. DR supported the findings of the TPO and the directions of the Ld. DRP in rejecting the claim for wor....
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....initial onus lies on the TPO to examine whether there are material differences between the assessee and the comparable companies, including differences in working capital levels. While determining the arm's length price under the TNMM, adjustments are required to be made for differences which materially affect the profit margins. Working capital differences directly impact profitability and therefore must be examined. Since the TPO has selected the comparables based on his own search process and filters, he cannot simply deny working capital adjustment without proper analysis. Once the assessee points out differences in working capital, the burden shifts to the TPO to demonstrate, with reasons and data, that such differences do not materially affect the margins. If he fails to do so, he is duty-bound to grant appropriate working capital adjustment. This is because the exercise of determining arm's length price must be fair, scientific and in accordance with Rule 10B of Income Tax Rules. Accordingly, this issue is set aside to the file of the AO/TPO for fresh determination in accordance with the law and above directions. 34. Ground Nos. 3 to 5 relates to notional interest on trad....
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.... Explanation to sec. 92B of the Act, the term 'internation transaction' would specifically include within its ambit "deferred payment or receivable or any other debt arising during course of business..." and hence, non-charging or under-charging of interest on excess period of credit allowed to the AE for the realization of invoices would amount to an international transaction. The Ld. DRP further relied on plethora of judicial precedents in this regard. 36.4 With regard to interest rate, Ld. DRP gave a direction to TPO to adopt the SBI short term deposit interest rate for the period under consideration and re-compute the adjustment made on the total income. 36.5 Aggrieved by the order of the AO/TPO and the direction of ld. DRP, the assessee preferred an appeal before us. 36.6 The Ld. AR before us submitted that trade receivables should not be treated as a separate international transaction and no interest should be imputed on the same. It was submitted that the TPO has wrongly treated the outstanding trade receivables as if they were unsecured loans advanced to the AEs and accordingly computed interest on such receivables amounting to Rs. 2,57,45,073.00. 36.7 The asses....
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....ot be treated as a separate international transaction, we find that by virtue of the amendment inserted by way of Explanation to section 92B of the Act, the term "international transaction" has been expanded to specifically include within its ambit "deferred payment or receivable or any other debt arising during the course of business". Therefore, non-charging or under-charging of interest on the excess period of credit allowed to the associated enterprise for realization of invoices would fall within the scope of an international transaction under the said provision. We also note that various judicial precedents have taken a similar view that delay in realization of receivables from AEs constitutes a separate international transaction requiring benchmarking under the transfer pricing provisions. 38.1 It is an undisputed fact that the receivables arise from services rendered to AEs and the invoices were denominated in foreign currency. In such cases, the interest rate applicable to foreign currency transactions should be applied. The adoption of domestic SBI PLR rate is not justified. 38.2 The Tribunal in several cases consistently held that where the underlying transaction i....