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Judgment
PER S.RIFAURRAHMAN, AM:
This appeal filed by the assessee is directed against the assessment order dated 26.09.2025 passed by the Income Tax Department/ DCIT, Circle 10 (1), Delhi under section 143(3) read with section 144(C)(13)r.w.s. 144B of the Income-tax Act, 1961 (for short ‘the Act”) for Assessment Year 2022-23 pursuant to the directions of the Dispute Resolution Panel u/s 144C (5) of the Act raising following grounds of appeal :-
“1.That on the facts and circumstances of the case and in law, the Ld. AO under Section 143(3) read with section 144B and 144C(l3) of the Act is bad in law and liable to be quashed to the extent it confirms the additions disallowances made in the assessment order.
2.That on the facts of the case and in law, the Ld. Assessing Officer/ Hon'ble Dispute Resolution Panel ("Hon'ble DRP") has erred in not appreciating and not considering the information /documentary evidence furnished by the Appellant before the Hon'ble DRP during the proceedings in relation to addition/ disallowance made in the impugned assessment order.
3.That the Hon'ble DRP ignored the judicial pronouncements and erred in dismissing the grounds of objections raised by the Appellant and upholding the adjustment proposed by the Ld. Assessing Officer/ Learned Transfer Pricing Officer ("Ld. TPO") without providing any cogent reasons for the same.
Transfer Pricing
4.That the Ld. AO / Ld. TPO/ Hon'ble DRP erred in enhancing the income of the Appellant by INR 13,48,26,867/- pertaining to the provision of services that do not satisfy the arm's length principle envisaged under the Act and in doing so, have grossly erred in:
4.1.erroneously rejecting the economic analysis undertaken by the Appellant in the Transfer Pricing ("TP") documentation maintained by it in terms of section 92D of the Act read with Rule 10D of the Income-tax Rules, 1962 ("Rules");
4.2.erroneously including certain functionally dissimilar companies on arbitrary / frivolous grounds namely Tata Elxsi Limited, T T E C India Customer Solutions Private Limited and Cheers Interactive (India) Private Limited;
4.3.erroneously rejecting the corrected operating profit/operating cost ("OP/OC") margin of the Assessee computed basis the segmental accounts furnished by the Assessee during assessment proceedings. Thus, the Ld. AO / Ld. TPO/Hon'ble DRP erred in considering the margin of the Assessee as 6.26%, computed an overall entity wide basis, as against the actual margin of 13.37%; and
Other Grounds
5.That on the facts and circumstances of the case and in law, the Ld. AO has erred in charging interest under Sections 234B and 234C of the Act.
6.That on the facts and circumstances of the case and in law, the Ld. AO has erred in initiating penalty proceedings under section 270A of the Act mechanically on the additions made.”
At the time of hearing, ld. AR of the assessee brought before us the relevant facts of the case and his submissions are as under. Brief facts of the case are, Incedo Technology Solution Limited, the assessee was incorporated on May 31, 2021and is principally engaged in providing technical testing services, technical resource deployment and other related services which are in the nature of Information Technology Enabled Services (“ITeS”). During the year, the Assessee has rendered the aforesaid services amounting to Rs.4,37,60,12,050/-.The assessee provided services through its various offices located in India.
The assessee operates as a wholly owned subsidiary of Incedo Inc. and provides information technology-related services to its Associated Enterprise (“AE”) to help them deliver client contracts. In respect of these services, the assessee operates as a captive contract service provider and operates under the direction and guidance from its AE.
The summary of adjustments made by the ld. Transfer Pricing Officer (“ld. TPO”) / Assessing Officer (“Ld. AO”) post ld. Dispute Resolution Panel (“DRP”)directions in reproduced below :
Table 1: Summary of adjustment made in the AO order page no. 311 and 312of paperbook)
S. No. 1 | Nature of international transactions/ disallowance Provision of support services | Method applied TNMM | Profit Level Indicator (“PLI”) OP/OC | Tested party margin as per Ld. TPO 6.26% | Arm’s length margin as per Ld. TPO 10.66% - 27.77% | Adjustment in INR 13,48,26,867 |
| Total adjustment in TP order | 13,48,26,867 | |||||
II. Provision of support services (Ground No. 4, page 8 of Merit Appeal)
In this segment, the Assessee provides support services in connection with business and technology consulting, manpower support, system integration, software development, testing and validation services etc., covered under the umbrella of ITeS sector with its AE, namely Incedo Inc.
At the outset, the ld. AR brought to our attention the economic analysis undertaken by the Hon’ble DRP/Ld. TPO and submitted that it is grossly incorrect as the companies which have been selected are primarily engaged in design & engineering services and business process outsourcing services which are not similar to support services rendered by the Assessee.
The final list of comparable companies as selected by the ld.TPO to benchmark the transaction of provision of technical manpower support services is tabulated below:
Table 2: Comparables selected for provision of service segment in the TP order (refer page 511 of the paperbook )
| S. No. | Company Name | OP/OC (%) |
|---|---|---|
| 1 | Toxsl Technologies Pvt. Ltd. | 5.66% |
| 2 | Evoke Technologies Pvt Ltd. | 5.71% |
| 3 | Batchmaster Software Pvt. Ltd. | 5.81% |
| 4 | Infomile Technologies Ltd. | 6.04% |
| 5 | CES Ltd. | 7.39% |
| 6 | I Services India Pvt. Ltd. | 10.66% |
| 7 | Microland Ltd. | 11.36% |
| 8 | Orion India Systems Pvt. Ltd. | 14.19% |
| 9 | Great Software Laboratory Pvt. Ltd. | 17.18% |
| 10 | Cheers Interactive (India) Pvt. Ltd. | 17.66% |
| 11 | TVS Infotech Ltd. | 27.77% |
| 12 | Vitae International Accounting Pvt. Ltd. | 29.09% |
| 13 | Tech Mahindra Business Services Ltd. | 33.97% |
| 14 | Tata Elxsi Ltd. | 34.59% |
| 15 | CG-VAK Software & Exports Ltd. | 39.47% |
| 16 | TTEC India Customer Solutions Pvt. Ltd. (Formerly known as Motif India Infotech Pvt. Ltd.) | 61.19% |
| Median | 10.66% | |
| 35th percentile | 15.69% | |
| 65th percentile | 27.77% | |
It was submitted that the TPO had made Incorrect inclusion of functionally dissimilar comparables (Ground No. 4.2) and the details are submitted below:
With regard to incorrect inclusion of Tata Elxsi Limited, ld. AR submitted that this company is not functionally comparable and the company is engaged in the business of providing design and engineering services to the consumer electronics, communications & transportation industries and systems integration and support services for enterprise customers. He submitted that it also provides digital content creation for media and entertainment industry and having significant R & D activities (1.45% of revenue, NIL for Assessee). He further submitted that majority of the revenue earned from the software development (98%), presence of intangibles (Rs.2034.77 Lakhs) and significant marketing expenses (0.48%).
In this regard, ld. AR relied on the following decisions:-
Significant R & D activities
Nagarro Software Pvt. Ltd vs. ITO (ITA No. 1542/DEL/2015) (ITA No.
1608/DEL/2015) EMC Software and Services India Pvt Ltd vs. JCIT (IT(TP)A.
No.3375/Bang/2018) Motorola Solutions India Pvt Ltd (Formerly known as Motorola India Pvt Ltd) vs DCIT [ITA No.5797/DEL/2012] Ocap Chassis Parts Pvt Ltd vs. ACIT (ITA No.1928/Del/2017) Business of developing intangibles
Yahoo Software Development India Pvt. Ltd vs JCIT, [IT(TP)A No.
178/Bang/2022] Altisource Business Solutions Pvt. Ltd v. ITO, [IT(TP)A No.3368/Bang/2018] Samsung R&D Institute Bangalore Pvt. Ltd. [I.T.A No. 622 of 2017] OLF (India) Software Pvt. Ltd. v/s ACIT [IT(TP) A No. 182/Bang/2021] DCIT v/s Cisco Systems BV-India Branch [IT(IT) A No.309&426/Bang/2016] Lam Research India Pvt. Ltd v/s DCIT [405&468/Bang/2016 2011-12] LSI India Research & Development (P.) Ltd. v/s DCIT [2021] [IT(TP) APPEAL NO. 3170 (BANG) OF 2018] [124 taxmann.com 83] M/s CISCO Systems (India) Private Limited Vs. DCIT [IT(TP)A No.271/Bang/2014] 3DPLM Software Solutions Limited vs. DCIT [2014] 42 taxmann.com 333 (Bangalore – Trib.) Intoto Software India (P.) Ltd. vs. ACIT [2013] 35 taxmann.com 421 (Hyderabad – Trib.) Incurring huge marketing expense
M/s. Hyundai Motor India Engineering Pvt. Ltd (ITA No.1807/Hyd/2017) Evalueserve.Com P. Ltd, New Delhi vs ACIT, Circle-8(2) ITA No. 5148/DEL/2017
With regard to incorrect inclusion of TTEC India, ld. AR submitted that this company is not functionally comparable and the company is engaged in providing Business Process Outsourcing (“BPO”) services which include transaction processing, email management, software consultancy, voice support and technical helpdesk. Further, he submitted that it can be seen from the website that TTEC India is engaged in offering technology solutions and AI Enhanced services.
With regard to inclusion of CHEERS, ld. AR submitted that it is functionally dissimilar and the company is engaged into the business of providing information technology enabled services and other services. He submitted that the company lack of segmental information.
In this regard, ld. AR relied on the following decisions:-
Functional comparability
M/s. FIS Solutions Software (India) Private Limited (formerly known as SunGard Solutions Software (India) Private Limited), ITA No.1756/PUN/2018. M/s Mentor Graphics (Noida) Pvt. Ltd., ITA No. 1969/ D/ 2006. Sony India Private Limited vs. DCIT, ITA No. 1189/DEL/2005. Aztec Software and Technology Limited, 2007 107 ITD 141. Lack of segmental information
Steria India Ltd. Vs. Deputy Commissioner of Income-tax ([2018] 92 taxmann.com 120 (Delhi) - [AY 2010-11] Telcordia Technologies India Pvt Ltd vs ACIT ITA No.7821 /Mum/2011 Intoto Software India Private Ltd. [2013] 35 taxmann.com 421 (Hyderabad -Trib.) M/s.SAP Labs India Pvt. Ltd. Vs. ACIT (IT(TP)A No.981/ Bang/2013)
Based on the above contentions and further submitted that the final set of working capital adjusted margins are as follows:
| S. No. | Company name | Working capital adjusted margins |
|---|---|---|
| 1 | Great Software Laboratory Pvt. Ltd. | -2.15% |
| 2 | Batchmaster Software Pvt. Ltd. | 1.26% |
| 3 | Toxsl Technologies Pvt. Ltd. | 2.83% |
| 4 | Infomile Technologies Ltd. | 3.88% |
| 5 | Evoke Technologies Pvt. Ltd. | 3.99% |
| 6 | Microland Ltd. | 6.29% |
| 7 | CES Ltd. | 6.36% |
| 8 | I Services India Pvt. Ltd. | 9.25% |
| 9 | Orion India Systems Pvt. Ltd. | 9.80% |
| 10 | TVS Infotech Ltd. | 23.60% |
| 11 | Tech Mahindra Business Services Ltd. | 24.76% |
| 12 | Vitae International Accounting Pvt. Ltd. | 24.94% |
| 13 | CG-VAK Software & Exports Ltd. | 37.99% |
| Count | 13 | |
| 35th Percentile | 3.99% | |
| Median | 6.36% | |
| 65th Percentile | 9.80% | |
Based on the proposed set of comparable as mentioned above, ld. AR submitted that the OP/OC range of comparable companies is 3.99% to 9.80% with median of 6.36% as against the OP/OC of 6.26% of Assessee. Thus, the international transactions undertaken by the Assessee with the AEs, would be considered to be at arm’s length from an Indian TP regulations perspective.
It was submitted that the Ld DRP/TPO had rejected the segmental accounts submitted by the assessee, (ground no, 4.3) and the detailed submissions are as below:
Ld. AR submitted that segmental accounts prepared on a cogent basis cannot be rejected without providing any reasons for rejection of the same. He further submitted that the Segment Reporting mandated under Accounting Standard (“AS”) 17 is with the objective of reporting information on different types of product and services provided by a company as well as about the different geographical regions it operates. He submitted that on the hand, segmentation under transfer pricing would include all of the above and may additionally include:
Segregation of transactions into related and unrelated segments even if the product or services offered are identical; and Segregation of transactions into different functional/risk profile even if the product, services offered or transacting parties are identical.
Further, he submitted that while for segmental reporting as per the audited financial statements, more importance is given to the internal organization and financial reporting / management structure of the entity, for Transfer pricing purposes functional similarity is important for segmentation. Thus, it is not necessary that the segmental reporting requirements under AS 17 would always be the same for preparing a segmental account for transfer pricing purposes. Thus, the ambit of segmentation under transfer pricing is much wider than the objective of segmentation mandated under AS 17.
Ld. AR further submitted that the assessee does not report separate business segments in its audited financial statements. However, for the transfer pricing purposes, as discussed earlier, the Company has segmented its profit and loss account into AE and non-AE segments.
He submitted that the above principle is also resounded in the OECD Guidelines on application of TNMM and brought our attention to following paras of OECD Guidelines :-
Para 2.77 of the OECD Guidelines states:
“As a matter of principle, only those items that (a) directly or indirectly relate to the controlled transaction at hand and (b) are of an operating nature should be taken into account in the determination of the net profit indicator for the application of the transactional net margin method.” [Emphasis supplied]
Para 2.78 of the OECD Guidelines states:
“Costs and revenues that are not related to the controlled transaction under review should be excluded where they materially affect comparability with uncontrolled transactions. An appropriate level of segmentation of the taxpayer’s financial data is needed when determining or testing the net profit it earns from a controlled transaction (or from transactions that are appropriately aggregated according to the guidance at paragraphs 3.9-3.12). Therefore, it would be inappropriate to apply the transactional net margin method on a company-wide basis if the company engages in a variety of different controlled transactions that cannot be appropriately compared on an aggregate basis with those of an independent enterprise. [Emphasis supplied]
In this regard, ld. AR submitted that several ITAT judgments have clearly held that the segmental data, though not audited, cannot be randomly rejected and that reasonable allocation basis should be used and accepted for segmentation. The ITAT, Delhi Bench in case of Lummus Technology Heat Transfer BV (ITA No 6227/Del/2012), held as follows:
“5.Rule 10B(1)(e) of the Income Tax Rules, which deals with the Transactional Net Margin Method, provides requires that “the net profit margin realised by the enterprise (i.e. the Assessee) from an international transaction entered into with an associated enterprise is computed in relation to costs incurred or sales effected or assets employed or to be employed by the enterprise or having regard to any other relevant base” is compared with “ the net profit margin realised by the enterprise ( i.e. the Assessee) or by an unrelated enterprise from a comparable uncontrolled transaction or a number of such transactions is computed having regard to the same base” – of course, subject to comparability adjustments which could affect the amount of net profit margin in uncontrolled conditions. It is not at all necessary, as the authorities below seem to suggest, that such net profit computations, in the case of internal comparables (i.e., Assessee’s transactions with independent enterprise), are based on the audited books of accounts or the books of accounts regularly maintained by the Assessee. In our considered view, all that is necessary for the purpose of computing arm’s length price, under TNMM on the basis of internal comparables, is computation of net profit margin, subject to comparability adjustments affecting net profit margin of uncontrolled transactions, on the same parameters for the transactions with AEs as well as Non AEs, i.e. independent enterprises, and as long as the net profits earned from the controlled transactions are the same or higher than the net profits earned on uncontrolled transactions, no ALP adjustments are warranted. It is not at all necessary that such a computation should be based on segmental accounts in the books of accounts regularly maintained by the Assessee and subjected to audit. We are, therefore, of the view that the authorities below were in error in rejecting the segmental results on the ground that the segmental accounts were not audited and that these segmental accounts were not maintained in the normal course of business…………….We have noted that the allocation of expense is on the man hour basis, which is quite fair and reasonable, and that every person has to punch in hours on a specific project. We have also noted that all these details and expense allocation basis were also before the TPO and even then, no specific defects were pointed out by the TPO. Taking into account all these factors, as also entirety of the case, we are of the considered view that the TPO indeed erred in rejecting the segmental accounts and thus declining to accept the internal comparable.” [Emphasis supplied]
By placing reliance on the above order passed by the ITAT, the ld. AR submitted that the segmental P&L prepared by the Assessee should be accepted as the same has been prepared on a reasonable basis. Accordingly, the OP/OC margin of 13.37% of the Assessee are computed on basis the segmental information should be considered, in place of the OP/OC margin of 6.26%computed on an overall entity wide basis.
On the other hand, ld. DR of the Revenue relied on the orders of the lower authorities.
Considered the rival submissions and material placed on record. We observed that the TPO had bench marked the transaction of provision of support services to its AEs by adopting TNMM as the MAM and determined the margin of the assessee at 6.26% and that of comparable companies at the median of 10.66%. The TPO selected 16 comparables and determined the ALP of Rs. 13,48,26,867/-. Before us, the assessee had brought to our attention three comparables, which are not comparables based on their functionalities, the relevant contested comparables are Tata Elxsi Limited, TTEC India and CHEERS. After considering the detailed submissions, we observed as under:
a. With regard to Tata Elxsi Limited, we noticed that they are engaged in the business of providing design and engineering services to the consumer electronics, communications and transportation industries etc. It also provides digital content creation for media and entertainment industry along with R & D activities. It is observed that majority of the revenue are earned from the software development and it has substantial intangibles. Whereas the assessee is engaged in providing technical testing services, technical resource deployment and other related services which are in the nature of Information Technology Enabled Services. We observed that the coordinate bench had rejected the above company as comparables for the reason of providing significant R&D activities in the cases of Nagarro Software Pvt. Ltd (supra) and Motorola Solutions India Pvt Ltd (supra). Further on the issue of having substantial intangible assets, the ITAT Bangalore had rejected the above company as comparables in Yahoo Software Development India Pvt. Ltd (supra). Therefore, respectfully, following the above decisions, we are inclined to exclude the above comparable from the final list of comparables.
b. With regard to TTEC India, we observed that it is engaged in providing BPO services i.e., in transaction processing, email management, software consultancy, voice support and technical helpdesk. Further it is engaged in offering technology solutions and AI enhanced services, whereas the assessee is engaged in ITES services. Therefore, it cannot be compared, hence, it is excluded from the list of final comparables.
c. With regard to CHEERS, we observed that it is engaged in the business of providing information technology enabled services and other services. Further, we observed that they have not declared the segmental informations. We noticed that the above company was rejected as comparables by the coordinate bench in the case of Mentor Graphics (Noida) Pvt. Ltd (supra) and Sony India Private Limited (supra) wherein it is held that TPO cannot cherry pick comparables by ignoring fundamental differences in risk profiles and functional profiles. The issue raised by the assessee in the comparables has the similar defects in selection of companies. Similarly, the coordinate bench had rejected on the basis of lack of segmental information in the case of Steria India Ltd (supra) and the Hon’ble High Court while considering one of the comparables who had not disclosed the segmental information held as under :-
“12.With regard to the exclusion of CG Vak Software & Exports Ltd. TPO was of the view that the said company did not qualify employee cost filter as its employee cost was 5.56% which is less than 25% of total cost. Said company was making persistent losses in software services segment, a filter applied by the assessee itself it was found to be not a good comparable.
13.The ITAT considered the Annual report of said company and from the 'Profit & Loss Account' it was that the first item under head 'Income' is Income from Software Development, Services & Products', which had been split into two parts, namely, 'Overseas' and 'Domestic' markets. Under the head 'Significant Accounting Policies', said company had provided under the head 'Revenue recognition' - that the revenue from software development services and products were recognized on completion of contract or stage of completion as per the applicable terms and conditions agreed with customers. Perusal of Schedule-12 detailing 'Income from Software Development, Services & Products' in 'Overseas' market, showed that apart from earning income . from Software services, said company also earned income from 'Business process outsourcing services', which fell in the realm of IT. enabled services. 'Note no. 6 to Notes annexed and forming part of the accounts for the year further divulges that said company earned income from 'Medical transcription', which was categorized as 'Business process outsourcing' services. Directors' report under the head 'Review of Business' disclosed that: 'The contributions of business from various markets were: Software services contributed to 86% and BPO services 14%'. Since the income of said company also included income from IT. enabled services and there was no segmental information qua the software services alone, it could not be treated as a comparable.
14.This court finds that the TPO found that said company did not qualify the employee cost filter. It was making persistent losses in software services segment. Apart from earning income from Software services, said company also earned income from 'Business process outsourcing services', which fell in the realm of IT. enabled services. TPO found that there was no segmental information qua the software services alone. Consequently, exclusion of CG Yak Software & Exports Ltd. was in order and cannot be interfered with.”
Respectfully, following the above decisions, we are inclined to direct the TPO to exclude the above comparable from the final list of comparables.
Based on the above findings, we are inclined to allow the relevant grounds raised by the assessee.
Coming to the issue of segmental information submitted by the assessee before TPO, which was prepared only for the purpose of TP study and it is unaudited as well as adopted the allocation of expenses on the reasonable basis, has to be adopted and cannot be rejected on gross basis by relying on several decisions. In our view, it needs proper verification and investigation at the lower level. Since, we already adjudicated the issue of comparables, the assessee gets the relevant benefit, at this stage, we are inclined not to adjudicate and to keep this issue open.
In the result, appeal filed by the assessee is partly allowed.