TaxTMI 
TaxTMI 
2026 (9) TMI 37
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....transfer pricing matters. The impugned order passed by the ld. assessing officer ('AO') incorporating the transfer pricing adjustment, to the extent prejudicial to the Appellant, is bad in law, contrary to the facts and circumstances of case and is to be quashed. 2. The Hon'ble DRP/ld. TPO erred in law and on facts in upholding the fresh search, for identifying comparable companies, carried out by ld. TPO for the software development services rendered by the Appellant to the Associated enterprise, while disregarding the search process conducted by the Appellant at the time of preparation of the TP documentation maintained by the Appellant. 3. The Hon'ble DRP/ld. TPO erred in law and on facts in upholding the comparability analysis carried out by the ld. TPO, wherein the search strategy adopted is inconsistent with and does not match the search details and filters applied by the ld. TPO himself, for identifying comparable companies in respect of the software development services rendered by the Appellant to its Associated Enterprise. The fresh search details provided by the learned TPO are not in accordance with the search strategy outlined in the Show Cau....
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....ances of the case and in law, and without prejudice to the above grounds, the Hon'ble DRP/ld. TPO erred in upholding: a) Selection of nine functionally dissimilar comparable comparables {Nintec Systems Ltd., Apttus Software Pvt. Ltd., Q S G Technologies Pvt. Ltd., Happiest Minds Technologies Ltd., Systango Technologies Ltd., Robosoft Technologies Pvt. Ltd., I D S Infotech Ltd., C G-V A K Software & Exports Ltd., and Cybage Software Pvt. Ltd.} on the basis of the fresh search carried out by ld.TPO. b) Rejection of seven functionally comparable companies {Celstream Technologies Pvt. Ltd., Rheal Software Pvt. Ltd., Kals Information Systems Pvt. Ltd., Great Software Laboratory Pvt. Ltd., Orchasp Ltd., Toxsl Technologies Pvt. Ltd., and Brain Teclabs Pvt. Ltd.} identified by the Appellant from the fresh search details provided by the learned TPO during the proceedings before the Ld. DRP. Despite the fact that these companies satisfied all the quantitative filters applied by the learned TPO in the fresh search, they were not included in the final set of comparables. The Appellant appeals to the Hon'ble ITAT to reject the 9 functionally dissimilar companies (as m....
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....ome assessed in the order. 9. On the facts and circumstances of the case and in law, and without prejudice to any of the other grounds made above, the Appellant humbly request for granting of adequate risk adjustments to nullify the impact of differences in the risk profiles, of the Appellant (i.e., captive service provider assuming limited risks) and that of comparable companies (i.e., entrepreneurial risk assuming entities) selected by the Ld. TPO, on the operating margins of the comparable companies. 10. On the facts and circumstances of the case and in law, the Ld. AO has erred in levying interest under section 234A, 234B, and 234C of the Act corresponding to the aforementioned addition to the total income. 3. Ground No. 1 is general in nature. Therefore, the same needs no separate adjudication. 4. During the hearing, the learned Authorised Representative ("learned AR"), at the outset, wishes not to press Grounds No. 2, 3, 4, 6, and 9. Accordingly, these grounds are dismissed as not pressed. 5. The issue arising Ground No. 5, raised in assessee's appeal, pertains to the transfer pricing adjustment in relation to the international transaction of "Provi....
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....national transaction of "Provision of Software Development Services", vide order dated 21.01.2025 passed under section 92CA(3) of the Act. 9. In conformity, the AO passed the draft assessment order dated 4.02.2025, under section 144C(1) of the Act, after, inter alia, incorporating the transfer pricing adjustment proposed by the TPO. While deciding the assessee's objections against the additions/disallowances made by the TPO/AO, the learned DRP, vide its directions dated 18.11.2025, granted partial relief to the assessee. In conformity with the directions issued by the learned DRP, the AO passed the impugned final assessment order on 23.12.2025 under section 143(3) r.w.s. 144C(13) r.w.s. 144B of the Act. Being aggrieved, the assessee is in appeal before us. 10. During the hearing, the learned AR submitted that if 7 companies, i.e. Celstream Technologies Pvt. Ltd., Rheal Software Pvt. Ltd., Kals Information Systems Pvt. Ltd., Great Software Laboratory Pvt. Ltd., Orchasp Ltd., Toxsl Technologies Pvt. Ltd. and Brain Teclabs Pvt. Ltd., identified by the assessee from the fresh search details provided by the TPO during the proceedings before the learned DRP, are directed to be incl....
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.... the Transfer Pricing Study Report as follows: - "FUNCTIONS PERFORMED BY YML USA a) Identifying the needs, conceptualization and preparation of methodologies: The services offered are customized services which are developed to suit the customer's requirements. YML USA development team is responsible for conceptualization and developing of methodologies or processes to provide comprehensive software development services. b) Research and development: The software development and design process involve a number of stages that broadly include user experience design, software requirement analysis, high level and low-level designing, coding, testing and maintenance. Every stage is mentioned below in detail: * Requirement analysis or feasibility study encompasses all the tasks that go into the instigation, scoping and definition of a new or altered system. This is an important part of the system design process, whereby requirement engineers and business analysts, along with systems engineers or software developers identify the needs or requirements of a client. Once the client's requirements have been identified, the creative team ....
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....is of current situation and help customer. e) Price Negotiation: The customers are identified by marketing team of YML USA and keeping in view various economic factors price is negotiated by it. f) Entering into contract with the ultimate clients With regard to the international business of the clients all over the globe, it is the YML USA who is entering into contracts and managing customer relationship with the clients. YML India is responsible for all local, general and administrative functions. However, it may be guided by Y Media Labs LLC on a need basis." 12. Thus, the comparative functions of the assessee and its associated enterprise can be tabulated as follows: - Function Category YML India YML USA Conceptualization or Preparation of Methodologies - √√√ Research and development - √√√ Marketing and brand building - √√√ Requirement gathering and analysis - √√√ Price Negotiation - √√√ Entering into contract with ultimate client - √√√ Software design and development s....
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.... assessee. Further, the associated enterprise is also entitled to modify the specifications from time to time to ensure adequate end-user satisfaction. It is also pertinent to note that all the significant research and development is undertaken by the associated enterprise on its account for the intended software development. Thus, only in respect of design, development, testing, validation and after-sales services, the assessee provides services to the associated enterprise. It is further pertinent to note that the assessee does not own any significant intangibles, and all valuable intellectual property rights and other marketing intangibles, such as brands, processes, know-how, technical data, software, and operating/quality standards, are owned by the associated enterprise. Therefore, having considered the functions performed, assets employed and risks assumed by the assessee in relation to the international transaction of "Provision of Software Development Services", we are of the considered view that the assessee provides contract software development services to its associated enterprise. 15. Having arrived at the aforesaid conclusion, we shall now deal with the companies ....
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....e product development lifecycle from concept to end-of-life. Accordingly, we are of the considered view that the scale of operations of this company is quite wide and complex in diverse domains. On the contrary, as noted in the foregoing paragraphs, the assessee in the present case is merely a contract software development service provider to its associated enterprise, performing a limited role in the entire software development lifecycle. Accordingly, we are of the considered view that Celstream Technologies Pvt. Ltd. is not functionally comparable to the assessee. Therefore, we uphold the findings of the TPO/AO to exclude Celstream Technologies Pvt. Ltd. as a comparable for benchmarking the international transaction of "Provision of Software Development Services". b) Rheal Software Pvt. Ltd. 18. The next company which is sought to be included by the assessee is Rheal Software Pvt. Ltd. During the proceedings before the learned DRP, the assessee objected to the rejection of Rheal Software Pvt. Ltd. as comparable for benchmarking the international transaction. The learned DRP, vide its directions issued under section 144C(5) of the Act, held that this company is involved in a....
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....ternational transaction. The learned DRP, vide its directions issued under section 144C(5) of the Act, rejected the objection filed by the assessee and held that this company is not comparable to the assessee as its export profile is concentrated in the Asian market. Being aggrieved, the assessee has sought inclusion of this company as a comparable. 22. During the hearing, the learned AR submitted that this company is engaged in providing information technology and software services. Further, it was submitted that the company's operating revenue is mainly from information technology and software business services. On the other hand, the learned DR vehemently relied upon the findings of the learned DRP in respect of this company. 23. We have considered the submissions of both sides and perused the materials available on record. From the perusal of the Annual Report of this company for the financial year under consideration, which forms part of the Paper Book from Pages 696 - 700, we find that Kals Information Systems Pvt. Ltd. was engaged in information technology and software business. Further, we find that the company is generating its operating revenue from information ....
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.... foregoing paragraph, the software developed by the assessee, even though it is in accordance with the specifications issued by the associated enterprise, is as per the end-user satisfaction. Further, it was noted that the associated enterprise was also entitled to modify the specifications from time to time as reasonably necessary to ensure end-user satisfaction with the deliverables. Thus, from the plain reading of the scope of work of the assessee as provided in the Software Development Services Agreement entered into with the associated enterprise, it is evident that the software development by the assessee under the supervision and instructions of the associated enterprise is also as per the customer's need. Accordingly, we do not find any basis in the learned DRP's findings to exclude this company as a comparable. Therefore, the TPO/AO is directed to include Great Software Laboratory Pvt. Ltd. as a comparable for benchmarking the international transaction of "Provision of Software Development Services". e) Orchasp Ltd. 27. The next company sought to be included as a comparable by the assessee is Orchasp Ltd. During the proceedings before the learned DRP, the assesse....
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....rable for benchmarking the international transaction. The learned DRP, vide its directions, held that this company is engaged in diversified business activities, mainly IT-enabled services, including design and development of custom software solutions, website development and mobile application development. The learned DRP further noted that this company provides technology consulting and IT services to help businesses achieve operational efficiency. The learned DRP held that this company undertakes end-to-end software and IT consulting services, involving independent development of software applications and platforms. Thus, the learned DRP held that this company is not functionally comparable to the assessee, and accordingly, upheld the findings of the TPO in excluding this company as comparable for benchmarking the international transaction of "Provision of Software Development Services". Being aggrieved, the assessee has sought inclusion of this company as a comparable. 31. During the hearing, the learned AR submitted that this company is engaged in providing software development services and its operating revenue is only from software development services. On the other hand,....
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....tails provided by the TPO and thus there is no basis in the findings of the learned DRP in rejecting the inclusion of this company as a comparable on the basis of absence of relevant financials. The learned AR submitted that despite the aforesaid facts, the assessee has now placed on record the complete Annual Report of Brain Teclabs Pvt. Ltd., as per which this company is engaged in providing software development services, and therefore, is functionally comparable to the assessee. On the other hand, the learned DR vehemently relied upon the findings of the learned DRP in respect of this company. 35. Having considered the submission of both sides and perused the materials available on record, it is evident that in respect of Brain Teclabs Pvt. Ltd., the relevant financials/Annual Report for the year under consideration has not been examined by any of the lower authorities. Therefore, even though the assessee has sought the inclusion of this company as a comparable on the basis of fresh search details provided by the TPO, we are of the considered view that the Annual Report/financials of this company require verification for the purpose of testing the comparability of this compan....
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....of this company is only from the segment of computer programming and related activities, which is comparable to the assessee. Therefore, the learned DRP upheld the findings of the TPO in including this company in the final list of comparables for benchmarking the international transaction of "Provision of Software Development Services". Being aggrieved, the assessee has sought exclusion of this company. 40. During the hearing, the learned AR submitted that Happiest Minds Technologies Ltd. operates in different segments and also possesses significant brand value and market presence, resulting in a materially different functional and risk profile. Accordingly, the learned AR submitted that this company is not comparable to the assessee. On the other hand, the learned DR vehemently relied upon the order passed by the lower authorities in respect of this company. 41. We have considered the submission of both sides and perused the materials available on record. From the perusal of the Annual Report of Happiest Minds Technologies Ltd., forming part of the Paper Book Volume - V from Pages 748 - 757, we find that this company has claimed to have expertise in core technologies (cloud ....
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.... the materials available on record. From the perusal of the relevant extracts of the Annual Report of Robosoft Technologies Pvt. Ltd., for the financial year 2021-22, we find that this company primarily derives its revenue from software development and services and from the licensing of software products. As per the assessee, the related party transactions of this company are more than 25%, which has been applied by the TPO as a filter. As per the assessee, total value of RPT is Rs. 68,39,03,133/- and the total revenue earned by this company for the year under consideration was Rs. 2,69,39,59,170/-. Therefore, from the aforesaid details, we agree with the submissions of the assessee that this company fails 25% RPT filter applied by the TPO. Accordingly, the TPO/AO is directed to exclude Robosoft Technologies Pvt. Ltd. for benchmarking the international transaction of "Provision of Software Development Services". (iii) I D S Infotech Ltd. 45. The next company which is sought to be excluded by the assessee is I D S Infotech Ltd. This company was considered as a comparable by the TPO vide its order passed under section 92CA(3) of the Act. The learned DRP, vide its directions, re....
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....uter related support activities. Therefore, rejecting the objections filed by the assessee, the learned DRP held that this company is functionally comparable to the assessee as it is also engaged in business of software development services. Being aggrieved, the assessee has sought exclusion of this company. 49. During the hearing, the learned AR submitted that this company is engaged in rendering a diversified range of services such as digital product engineering, technology solutions, platform and integrations, IT support services including ITeS and BPO services. The learned AR further submitted that the financial statements of this company do not provide segmental information pertaining to its various lines of business. On the other hand, the learned DR vehemently relied upon the order passed by the lower authorities in respect of this company. 50. We have considered the submission of both sides and perused the materials available on record. From the perusal of the relevant extracts of financial statements of Cybage Software Pvt. Ltd. for the financial year 2021-22, we find that this company is engaged in providing information technology consulting and support services. Fu....
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....by the assessee in Paper Book Volume - V on Page 761. Further, the company has claimed to be specialised in offshore/onshore software product development, software migration, multimedia design and development, application development and maintenance, and web design. Therefore, having considered the functional profile of this company, we are of the view that Nintec Systems Ltd. is functionally comparable to the assessee and there is no material available on record which substantiates the submissions of the learned AR. Accordingly, the findings of the TPO/AO considering Nictec Systems Ltd. as comparable to the assessee for benchmarking the international transaction of "Provision of Software Development Services" are upheld. 54. To sum up, we direct Happiest Minds Technologies Ltd., Robosoft Technologies Pvt. Ltd. and I D S Infotech Ltd. be excluded while benchmarking the international transaction of "Provision of Software Development Services". While the directions of the TPO/AO considering Cybage Software Pvt. Ltd. and Nintec Systems Ltd. as comparable for benchmarking the international transaction of "Provision of Software Development Services" are upheld. Accordingly, Ground No....
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....dered the submissions of both sides and perused the material available on record. In the present case, there is no dispute that the outstanding trade receivables from the associated enterprise pertain only to the international transaction of "Provision of Software Development Services", as there was no other international transaction between the assessee and its associated enterprise. Further, there is no dispute among the parties that delayed trade receivables constitute an international transaction under the Act. Thus, the international transaction of outstanding receivables is closely linked with the main transaction of "Provision of Software Development Services". Therefore, both international transactions need to be benchmarked using a combined-transaction approach. 58. In the present case, it is evident from the record that all the companies selected as comparables by the assessee in its Transfer Pricing Study Report were rejected by the TPO and all the companies which ultimately formed part of the final set of comparables for the purpose of benchmarking were selected by the TPO. Further, the additional comparables sought to be included by the assessee were also drawn from....