TaxTMI 
TaxTMI 
2026 (8) TMI 265
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....ion 144B of The Income Tax Act 1961 dated 22.12.2025 is bad in law. 2. The Ld Assessing Officer completed the assessment and passed the order u/sec 143(3) r.w.s 144C(13) read with Section 144B of The Income Tax Act 1961 without complying with the statutory requirements of Law. 3. The order of the Ld Assessing Officer passed u/sec 143(3) r.w.s 144C(13) read with Section 144B of The Income Tax Act 1961 dated 22.12.2025 is not in conformity with the Directions of the Dispute Resolution Panel and therefore bad in law. 4. The Assessing Officer and Transfer Pricing Officer erred in not recomputing the margins of the comparable companies in conformity with DRP directions. 5. The Assessing Officer and Transfer Pricing Officer erred in not recomputing the margins of the Assessee in conformity with DRP directions. 6. The Dispute Resolution Panel and consequently the Assessing officer erred in affirming the action of the Transfer Pricing officer in rejecting the Transfer Pricing study conducted by the appellant. 7. The Dispute Resolution Panel and consequently the Assessing officer erred in affirming the action of the Transfer Pricing offi....
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....eased to: a) Quash the assessment order passed u/s. 143(3) r.w.s. 144C(13) r.w.s. 144B of the Income Tax Act dated 22.12.2025 and / or b) Delete the upward adjustment of Rs. 7,56,73,824/- to the revenue of the appellant and/or c) Pass such other orders as the Hon'ble Tribunal may deem fit." 3. The brief facts of the case are that the assessee is a company engaged in the business of software development and had international transactions during the subject A.Y. 2022-23. The AO has referred the international transaction for benchmarking analysis to the Transfer Pricing Officer (in short "TPO"). The TPO has proposed two adjustments viz., Margin adjustment and attribution of interest on trade receivables. The Assessee has filed objections before the Dispute Resolution Panel (in short "DRP") against the margin adjustment and it did not challenge the addition of interest on trade receivables. The DRP has issued directions dated 26.11.2025 wherein it has granted partial relief to the Assessee. Subsequently, the AO passed the Final Assessment Order without granting the relief given by DRP. 4. The Assessee has raised two set of grounds of appeal viz., Fi....
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....international transaction is not at arm's length and made an adjustment of Rs. 7,56,73,824/-. Subsequently, the TPO has passed a rectification order dated 01.01.2025 wherein he has reduced the quantum of TP to Rs. 6,62,43,953.99. On appeal the DRP has granted certain relief but the AO passed the Final Assessment Order and made TP adjustment of Rs. 7,56,73,824/- as it was in the original TP order i.e. without even considering the relief granted by the DRP nor the rectification order passed by the TPO. 6. Aggrieved by the FAO, the Assessee has raised jurisdictional ground as well as grounds on merits of the issue. We shall decide the merits of the case and if necessary, dwell upon the jurisdictional ground. 7. Ground of appeal no. 10 in relation to Product development expenses, the Ld.AR submitted that it has incurred an expense of Rs. 2,74,48,566/- for developing "BEAK" product which is intended to cater the Non-AE segment. Further, the Ld.AR submitted that the said product is yet to evolve and therefore the Assessee has not generated any income from the same during the subject AY and accordingly, in the absence of corresponding income, the Assessee has sought for exclusion of....
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....0. We have considered the rival contentions perused the material available on record and gone through the orders of the authorities along with the paper books filed. We note that with respect of product development expenses, the Assessee has taken two arguments viz., the expenses are incurred for Non-AE segment and as such while computing the margins of the Assessee to benchmark the international transaction, the said expenses ought to be treated as non-operating expenses. Second contention of the Assessee is that product is yet to evolve and as such the expenses ought to be treated as non-operating. Upon perusal of the documents furnished by the Assessee we noticed that the Assessee has furnished the details of the employees who have dedicated their time and effort in product development, which is at Page 97 to 102 of paper book 1. The Assessee has also furnished a detailed write up at page 103 of paper book 1 about the product, email correspondences of key personnel in relation to development of product at page 106 to 109 of paper book 1, slide deck capturing the objectives of the Assessee at page 107 to 120 of paper book 1. Since the Assessee had filed these many documents befor....
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....ng wide range of information technology solutions to a global clientele in a cost effective manner. In the assessment year under consideration, the assessee engaged in information technology and Engineering solutions and services include Customer Communication Management applications, specifically assessee engaged in the business of software development and carried out the job during the financial year both to the A.E and non-A.E customers. The assessee has employed an average 250 personals employed for the services rendered of which 90 personals were recruited for future project requirements in the subsequent assessment years. Since the assessee is a software development, the main cost of the assessee is manpower cost, rent, communication expenses and travelling expenses, which normally varies in proportion to the turnover. Usually, the assessee keeps manpower more than 10% of the requirements as the additional manpower requires as and when additional orders received by assessee and also as the assessee anticipates new job order and it was very difficult to get the new trained software personal at a short duration so as to execute the job order in time, as the training of personal....
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....e claim of assessee. This impugned expenditure on employees and consultancy charges, which is not relating to the project executed and billed in the assessment year under consideration. As such, it cannot be considered as operative expenses. Further, such expenses were not incurred with reference to any specific project and it cannot be considered as work-in-progress. It is admitted that the assessee is in second year operation and comparison of financials with big undertaking, who are in pioneer in the similar kind of business, is not appropriate as the assessee was not in advantageous position as these comparables. It has to be noted that the assessee has not exercised sufficient control over the expected future benefits arising from a team of skilled staff and from training so as to consider that these items meet the identification of intangible assets. The assessee has submitted that the employee cost has increased from 46% to 61% of the total sales during the Financial year 2011-12 while it has stabilized at 68% - 69%, with increase in volume in the subsequent years. In our opinion, the assessee's business module cannot be straightway compared with other comparables, unles....
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..... AR, we direct Ld. TPO to consider the same. The assessee is directed to provide the data to substantiate the same." According to the Ld. AR, pursuant to the above directions, the TPO has allowed adjustment of the product development expenses in 2014-15. Having gone through the material placed before us and following the decision (supra), we find merit in the plea of the assessee. The TPO is directed to consider the same in light of the view taken in earlier AYs 2012-13 & 2014-15; and the assessee is directed to provide the relevant data to substantiate the same." (emphasis supplied) 11. Respectfully following the same and also on the basis of our factual findings, which is backed by TPO's finding in the remand report, we hold that product development expenses cannot be considered as operating expenses. Accordingly, we direct the TPO to exclude the product development expenses from the operating cost of the Assessee while quantifying the margin of the Assessee. Therefore, this ground of appeal no. 10 is allowed. 12. Next issue is in relation to treatment of merger/amalgamation expenses as non-operating while computing the margin of the Assessee. The TPO has....
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....d part of expansion/growth strategy, therefore these expenses cannot be considered as operating expenses while benchmarking the international transaction with AE. 14. We have considered the rival contention and perused the material on record. The fact emerging from the documents filed before the DRP and before us, is that the Assessee has incurred these expenses in course of acquisition of entities. Further, it is also evident that the expenses are in relation to acquisition of entities and as such the expenses cannot be considered to connected with the international transaction with AE. Merely because some invoices are paid after the acquisition, the DRP cannot make an assumption that those expenses are not related to M&A without bringing on record evidences contrary to the same. Further, from the details filed before the DRP which has also been verified by the TPO (page 1 to 23 and page 24 to 32 of paper book 2), it is evident the key personnel were entitled to bonuses which are directly linked to M&A obligation such as successful integration, employee retention targets, synergy realiszation, process standardization and all these are no way connected to the AE transaction. Fur....