TP Adjustments on Aggregated Royalty, Intra-Group Services, and Receivables Deleted while Working Capital Adjustment Remanded

ORDER

Waseem Ahmed, Accountant Member.- The present appeal has been instituted by the assessee against the assessment order passed by the AO u/s 143(3) r.w.s. 144C(13) of the Act, in pursuant to the directions of the Ld. DRP issued u/s 144C(5) of the Act dt. 23.03.2025.

2. In the memo of appeal, the assessee has raised 10 grounds of appeal challenging the transfer pricing adjustment and corporate issues, which for the sake of brevity and convenience are not reproduced here.

3. At the outset, we note that the ground No. 1 raised by the assessee is general in nature and does not require any separate and independent adjudication.

4. Ground Nos. 2.1 and 2.2 relate to the rejection of the transfer pricing study documentation furnished by the assessee. We note that the issues raised in these grounds are inter-connected with the other transfer pricing grounds adjudicated herein below. The contentions raised therein have been examined and dealt with while deciding the respective substantive grounds. Accordingly, no separate adjudication is called for under these grounds of appeal.

5. The issues raised by assessee in Ground Nos. 3.1 and 3.2 are inter-connected and pertains to the treatment of certain items as non-operating in nature.

6. The brief facts of the case are that the assessee is a Pvt. Ltd. company. During the period under consideration, the assessee has divided its international transactions into 4 segments namely:

6.1 The TPO in computation of margin of assessee and of comparables companies treated provision for doubtful debts and rates & taxes as non-operating in nature which as a result affected the operating profit and therefore PLI of assessee and the comparable companies.

7. Being aggrieved, the assessee filed objections before the Ld. DRP.

8. Before the Ld. DRP, the assessee submitted that TPO in computation of margin of assessee and of comparables companies treated provision for doubtful debts and rates & taxes as non-operating in nature. Regarding the provision of doubtful debts, the assessee contended that a company creates a provision in respect of certain debts which may not be realised. If a provision is created in respect of debts arising out of operating activities of the company, it should form part of operating expense as they are regular operational expenditure incurred by any company. The assessee also relied on various judicial precedents in this regard.

8.1 Regarding rates and tax, the assessee contended that a company accounts all TDS filing charges, duties and fees paid to any authorities under rates and taxes as per Generally Accepted Accounting Principal (GAAP). Hence, rates and taxes arising out of operating activities of the company should form part of operating expenses as they are regular operational expenditure incurred by any company.

9. However, the ld. DRP regarding the provision for doubtful debts, observed that provisions are not an ascertained liability and cannot be conceived as operating in nature. The said provision is only an accounting treatment and have no direct nexus to the operating income. The Ld. DRP relied on various judicial precedents in this regard.

9.1 Regarding the rates and taxes, the ld. DRP observed that the same are not related to normal operations of the assessee and are non-operating in nature in terms of Rule 10TA(i) of the Income Tax Rules.

10. Being aggrieved by the order of the AO/ direction of the ld. DRP, the assessee preferred an appeal before us.

11. The Ld. AR before us filed 2 paper books namely Factual paper book running from pages 1 to 1306 and Legal Paper Book running from pages 1 to 442 and a chart having 9 pages and submitted that the Provision for doubtful debts should be treated as operating in nature as the same has not been challenged by the department in past years except for AY 2018-19. The assessee further relied on judicial precedents wherein Provision for doubtful debts was considered as operating in nature.

11.1 Regarding rates and taxes, the Ld. AR submitted that these are arising out of regular operational expenditure incurred by assessee such as custom duties, road tax charges etc. Therefore, the same should be considered as operating expenses.

12. On the other hand, the Ld. DR before us submitted that the Provision for doubtful debts cannot be considered as operating in nature as the same represents a provision for anticipated losses and does not arise from the normal operational activities of the assessee. It was further contended that such provisions are contingent in nature and do not have a direct nexus with the revenue-generating operations of the assessee. Therefore, the same ought to be treated as non-operating in nature.

12.1 With regard to rates and taxes, the Ld. DR submitted that certain components included therein are not directly linked to the core business operations of the assessee and may include statutory levies or charges which are not incurred wholly and exclusively for operational purposes. Accordingly, it was argued that such expenses should not be automatically classified as operating in nature and require careful examination.

13. We have considered the rival submissions of both the parties and perused the materials on record. The dispute relates to the treatment of provision for doubtful debts and rates & taxes while computing the operating margins of the assessee and the comparable companies.

13.1 As regards the provision for doubtful debts, we note that provision for doubtful debts has a direct relation with the sales made by a company. Accordingly, in the same way, the amount of sales is an item of operating revenue, the amount of provision for doubtful debts, having direct link with the sales, is also an item of operating expense. In our considered opinion, Provision for doubtful debts cannot be treated as a non-operating expense.

13.2 We note that the assessee has contended that the provision for doubtful debts was not disputed by the Revenue in the earlier years and therefore, on the principle of consistency, the same should also be accepted in the year under consideration. We find merit in the contention of the assessee.

13.3 Further, we find merit in the contention of the assessee that the same arises in the ordinary course of business and is intrinsically linked to sales and realization of trade receivables. The Bangalore Bench in AMD India (P.) Ltd. v. Dy. CIT [2025]  (Bangalore – Trib.) has held that provision for bad and doubtful debts constitutes a normal business expense connected with operating activity and is therefore to be regarded as operating in nature for the purpose of computing margins under TNMM. The relevant para is reproduced below for the sake of convenience:

“10.3 We have heard the rival contentions & perused the material available on record. We are of the considered opinion that the Provision for bad and doubtful debts is normal business expenses linked to sales and should be considered as operating in nature. This view is supported by various decisions. The tribunal in the case ofACI Worldwide Solutions (supra) it is held as below: “8. As far as the exclusion of provision of bad and doubtful debts from the operating cost of the comparable companies is concerned, the Ld. Counsel for the assessee brought to our notice that while considering the international transaction in the distribution segment, the TPO has himself considered provision for bad and doubtful debts as part of the operating expenditure and by the same logic he should have treated provision for bad and doubtful debts as part of the operating cost in the hands of the comparable companies also. As far as the software development segment of the assessee is concerned, there is no provision for bad and doubtful debts. The Ld. Counsel for the assessee filed before us copy of the decision of the Hon’ble Karnataka High Court in the case of Principal CIT v. Business Process Outsourcing India Pvt. Ltd. , (2018) taxcorp (DT) 73195 (HC Karnataka) wherein in an appeal against the order of the Tribunal holding that provision for bad and doubtful debts should be considered as part of the operating expenditure, the Hon’ble High Court confirmed the order of the Tribunal and dismissed the appeal of the Revenue as one notgiving rise to any substantial question of law.

9. In the light of the aforesaid decision, we are of the view that provision for bad and doubtful debts should be treated as operating expense while computing the PLI OP/OC of the comparable companies which ultimately remains for comparison. We hold and direct accordingly.”

13.4 Respectfully following the principle of consistency as well as the judicial precedents relied upon by the assessee, we direct the AO/TPO to treat the provision for doubtful debts as operating in nature while computing the operating margin.

13.5 Regarding the rates and taxes, we note that the assessee has demonstrated that such expenditure comprises statutory levies such as customs duty, road tax and similar charges incurred in connection with its regular business operations. These expenses are directly relatable to the carrying on the business and cannot be regarded as extraneous or non-operating items. We therefore hold that rates and taxes forming part of routine operational expenditure shall also be treated as operating in nature while computing the margins.

13.6 Moreover, the Revenue has placed reliance on Rule 10TA of the Income-tax Rules to contend that the expenses classified under the head “rates and taxes” should be treated as non-operating in nature. However, on a plain reading of clause (j) of Rule 10TA, it is evident that the rule specifically excludes only “expense on account of income-tax” from the scope of operating expenses. The expression “income-tax” refers to tax on profits and cannot be equated with “rates and taxes” which are generally statutory levies incurred in the course of normal business operations. Such expenses arise during the ordinary conduct of business and have a direct nexus with operational activities of the assessee. Therefore, in our considered view, the reliance placed by the Revenue on Rule 10TA to treat “rates and taxes” as non-operating is misplaced. Thus, the said expenses are directed to be treated as operating in nature while computing the operating margin. Accordingly, we direct the AO/TPO to recompute the operating margins of the assessee as well as of the comparable companies by treating both the provision for doubtful debts and rates & taxes as operating items and thereafter determine the arm’s-length price in accordance with law. Hence, the grounds of appeal of the assessee are hereby allowed.

14. Ground Nos. 3.3 to 3.4 relates to the filters used in TP study report. We note that the issues raised in these grounds are interconnected with the other transfer pricing grounds adjudicated herein below. The contentions raised therein have been examined and dealt with while deciding the respective substantive grounds. Accordingly, no separate adjudication is called for under these grounds.

15. The issues raised by the assessee in Ground Nos. 4.1 to 4.7 are interconnected and pertain to fresh economic analysis conducted by the TPO and inclusion and exclusion of certain comparables by the TPO and by the Ld. DRP for computing the ALP of the international transactions carried out with the AE.

16. Ground No. 4.2 is related to Software and Engineering Design (SWD) segment.

17. The assessee benchmarked its transactions with AE under SWD segment by adopting TNNM as most appropriate method and further PLI as OP/OC was arrived at 9.96%. The assessee for the comparability analysis selected 17 comparables.

18. However, the TPO was not satisfied with the TP report of the assessee and hence, the TPO rejected the same. Thereafter, the TPO, during the assessment proceedings, rejected 14 comparables out of 17 assessee’s comparables. The assessee’s comparables accepted by the TPO are detailed as under:

19. Thereafter, the TPO applied own filter and selected additional 15 comparables in addition to assessee’s 3 comparables accepted by him. The final TPO’s comparables are detailed as under:

20. The average PLI/margin of the comparables companies was computed at 25.09%. Accordingly, an upward TP adjustment was made by the TPO for Rs. 125,69,66,832/- only which was added to the total income of the assessee.

21. The aggrieved assessee preferred to file objections before the Ld. DRP.

22. Before the Ld. DRP, the assessee submitted that the TPO has erred in selecting certain companies as comparables which were otherwise not comparables, the same is tabulated below:

22.1 The assessee further submitted that the TPO erred in rejecting certain companies selected by it (assessee) as comparables and the same should be included in the comparable set which are detailed as under:

23. The Ld. DRP, regarding the turnover criteria, observed that high turnover does not have an impact on margins of the company. The Ld. DRP in support of his view relied on various judicial precedents in this regard. Consequently, the ld. DRP rejected the plea of assessee in this regard as well.

23.1 The Ld. DRP regarding the comparables to be rejected based on FAR as per the assessee mentioned above, observed that the said companies are engaged in rendering SWD services in different verticals and very well comparable with the assessee. The same facts were substantiated by the Ld. DRP from the annual report of the comparable companies. The Ld. DRP also referred to the notes to financial statements on revenue recognition wherein the primary source of revenue for comparable companies were from SWD and related services only. Hence, they are similar and functionally comparable to that of assessee.

23.2 Regarding the companies selected by it (assessee) for inclusion in the final set of comparables, the Ld. DRP observed that the said comparables were not part of search matrix of TPO. Once the TP study report of assessee is rejected, the assessee can only ask for comparables which appear in the list of TPO search matrix else it will amount to cherry picking which will further lead to endless litigations. Hence, the ld. DRP rejected the plea of assessee in this regard.

24. Being aggrieved by the order of the AO/ direction of the ld. DRP, the assessee preferred an appeal before us.

25. The Ld. AR before us submitted that the lower turnover limit of Rs. 1 crore has been applied by the TPO and the same is also consistent with the TP study report of the assessee. The ld. AR further requested to apply the additional filter of reasonable upper limit on turnover being 10 times of the turnover. The ld. AR of assessee relied on certain judicial precedents wherein upper limit on turnover being 10 times of the turnover has been applied by the Hon’ble Bombay High Court in the case of CIT v. Pentair Water India (P.) Ltd.  381 ITR 216 (Bombay High Court) and Hon’ble Bangalore ITAT case in Asstt. CIT v. McAfee Software (India) (P.) Ltd. [2016]   (Bangalore – Trib.).

25.1 The ld. AR of assessee further submitted that comparables selected by TPO and further upheld by the Ld. DRP are liable to be excluded from the list of comparables of the assessee as the FAR analysis is entirely not comparable and dissimilar to the FAR of the assessee.

25.2 In addition, the ld. AR argued that the certain companies selected by it (assessee) should be included in the comparable set which are detailed as under:

25.3 However, the ld. AR at the time of hearing submitted that the assessee does not want to press the inclusion of certain comparables namely E-zest Solutions Ltd., Happiest Minds Technologies Pvt. Ltd., Issumation Technologies Pvt. Ltd. and Sasken Technologies Ltd.

25.4 Regarding Infomile Technologies Ltd., the assessee submitted that the said comparable was accepted to be functionally similar by TPO in assessee’s own case for AY 2018-19. Hence, there being no change in the facts and circumstances, the same ought to be included in the final list of comparables.

25.5 Regarding KALS information systems Ltd. and Rheal Software Ltd., the assessee submitted that the said comparables are part of search matrix of assessee’s TP study, and it was accepted to be functionally similar by TPO in assessee’s own case for AY 2018-19. Further, the said comparables are engaged in the business of software development and related trainings. Hence, there being no change in the facts and circumstances, the same ought to be included in the final list of comparables.

25.6 Regarding Yudiz Solutions Pvt. Ltd., the assessee submitted that the said comparable is part of search matrix of assessee’s TP study. Further, the said comparable is engaged in the business of software development services. Hence, the same ought to be included in the final list of comparables.

26. On the other hand, the Ld. DR before us strongly supported the order of the TPO as well as the directions of the Ld. DRP. It was submitted that the TPO has undertaken a detailed search process by applying appropriate filters and has selected comparables based on objective criteria. The learned DR contended that the rejection of assessee’s comparables and inclusion of additional companies was done after examining their functional profile, financials, and segmental information from annual reports.

26.1 On the issue of turnover filter, the learned DR argued that turnover, by itself, is not a decisive factor under TNMM and does not materially affect profit margins if companies are otherwise functionally comparable. It was further submitted that the assessee’s reliance on a fixed upper turnover filter of 10 times is arbitrary and not mandated under the Act or Rules.

26.2 With respect to functional dissimilarity, the learned DR submitted that the companies selected by the TPO are engaged in software development services, which is broadly comparable to the assessee’s activities. Minor differences in service offerings or scale do not warrant exclusion under TNMM. It was also contended that the assessee is attempting to selectively include/exclude comparables to suit its margin, which amounts to cherry picking.

26.3 Regarding inclusion of new comparables, the learned DR emphasized that once the assessee’s TP study is rejected, the benchmarking must be based on the TPO’s search matrix. Allowing inclusion of companies outside the search process without challenging the filters would disturb the integrity of the TP analysis. Accordingly, the learned DR prayed that the order of the TPO/DRP be upheld.

27. We have heard the rival contentions of both the parties and perused the materials available on record. From the preceding discussion, we find that the issue on hand relates to the inclusion and the exclusion of certain comparables which have already been discussed above. At the outset, we note that the assessee has pressed only certain comparables to be included and excluded on the grounds of comparability, dissimilarity of functions and turnover. Now we proceed to deal with each comparable individually in the paragraphs, as enumerated below:

27.1-2 Regarding the inclusion of Infomile Technologies Ltd., KALS information systems Ltd., Rheal Software Ltd., and Yudiz Solutions Pvt. Ltd., we note that the said comparable companies were rejected by the TPO and further upheld by the Ld. DRP on the sole reasoning that the said comparables were not part of search matrix of TPO and assessee can select only those comparables which appears in the accept-reject matrix of the TPO, else, it would amount to cherry picking.

27.3 In this regard, at the outset, we note that there are divergent views expressed by co-ordinate benches on this issue. In Concur Technologies (India) (P.) Ltd. v. Asstt. CIT  (Bangalore – Trib.), the Tribunal has emphasised that inclusion of comparables outside the search matrix may amount to cherry picking and disturb the comparability process. Similar reasoning is found in SAP India (P.) Ltd. v. Dy. CIT  (Bangalore – Trib.) and Hydro BS India (P.) Ltd. v. Dy. CIT [2025]   (Bangalore – Trib.), 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.

27.4 At the same time, another coordinate bench in Dotgo (P.) Ltd. v. Dy. CIT (Bangalore – Trib.) 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. v. ACIT [2023]  (Bangalore – Trib.) and Quicklogic Software (India) (P.) Ltd. v. Dy. CIT  (Bangalore – Trib.), the Tribunal has cautioned that selection or rejection of comparables without proper examination of functions, assets and risks or without analysing annual reports amounts to cherry picking on the part of the TPO itself. Thus, from the above decisions, it is evident that the concept of “cherry picking” is not confined to one side alone and cannot be understood in a narrow or mechanical manner.

27.5 In our considered view, the correct approach lies in appreciating the scheme of section 92C of the Act read with Rule 10B of the Act. The determination of arm’s length price is fundamentally based on comparability of functions performed, assets employed and risks assumed. The law does not mandate that comparables must necessarily originate from a particular database search or search matrix. The search matrix is only a tool for identification of potential comparables and cannot be elevated to a statutory condition governing inclusion or exclusion.

27.6 At the same time, we are conscious that transfer pricing analysis is a structured exercise and cannot be rendered arbitrary. The search matrix represents a systematic process involving application of filters and step-by-step elimination. Therefore, comparables cannot be introduced at a later stage in an ad hoc manner, without demonstrating how they satisfy the filters or why they did not emerge in the search process. Such unexplained inclusion would amount to cherry picking, as held in SAP India and Hydro BS India (supra).

27.7 Similarly, the TPO cannot rely upon the search matrix to justify selection or rejection of comparables without undertaking proper FAR analysis. Mechanical application of filters or superficial examination of comparables, without analysing their actual functions and financials, would also amount to cherry picking, as held in IG Infotech and Quicklogic Software (supra). Accordingly, the following principles emerge:

27.8 In the present case, we find that the comparables proposed by the assessee, namely Infomile Technologies Ltd., KALS Information Systems Ltd., Rheal Software Ltd. and Yudiz Solutions Pvt. Ltd., have been rejected solely on the ground that they do not form part of the search matrix, without any examination of their functional profile. In our view and in the light of the case laws discussed above, we hold that such rejection is mechanical and not in accordance with Rule 10B of the Income-tax Rules.

27.9 Besides the above, it is necessary to analyse the details for each of the comparables for inclusion discussed above in the paragraphs given below:

27.10 We find merit in the contention of the assessee in including Infomile Technologies Ltd. The functional profile of the Infomile Technologies Ltd. is comparable with that of the assessee as the same is engaged in the business of providing software services. Further, the said comparable was functionally accepted by the Hon’ble Bangalore ITAT in assessee’s own case for AY 2018-19 in Wipro GE Healthcare (P.) Ltd. v. ACIT   (Bangalore – Trib.)/IT(TP)A No. 803/Bang/2022. The same can be substantiated from page 529 of the legal paper book or page 31 of the order of the Hon’ble ITAT. As there has been no material change either in the facts of the assessee or in the functional profile of Infomile Technologies Ltd., the principle of consistency applies, Therefore, the said comparable ought to be included in the list of comparables.

27.11 We find merit in the contention of the assessee in including KALS information systems Ltd. The material on record at page 1076 of factual paper book clearly shows that the said comparable is involved in the business of software development and related training. Further, we also note that the said comparable is part of search matrix and the same is evident from accept reject matrix at page 99 of the factual paper book. Further, the said comparable was functionally accepted by the Hon’ble Bangalore ITAT in assessee’s own case for AY 2018-19 in IT(TP)A No. 803/Bang/2022. The same can be substantiated from page 529 of the legal paper book or page 31 of the order of the Hon’ble ITAT. Therefore, the said comparable ought to be included in the list of comparables.

27.12 We find merit in the contention of the assessee in including Rheal Software Ltd. The material on record at page 1069 of factual paper book clearly shows that the said comparable is involved in the business of software development and maintenance. Further, we also note that the said comparable is part of search matrix and the same is evident from accept reject matrix at page 99 of the factual paper book. Further, the said comparable was functionally accepted by the Hon’ble Bangalore ITAT in assessee’s own case for AY 2018-19 in IT(TP)A No. 803/Bang/2022. The same can be substantiated from page 529 of the legal paper book or page 31 of the order of the Hon’ble ITAT. Therefore, the said comparable ought to be included in the list of comparables.

27.13 We find merit in the contention of the assessee in including Yudiz Solutions Pvt. Ltd. The material on record at page 1077 of factual paper book clearly shows that the said comparable is involved in the business of software development services offering web, mobile, game and block chain solutions. Further we also note that the said comparable is part of search matrix and the same is evident from accept reject matrix at page 99 of the factual paper book. Therefore, the said comparable ought to be included in the list of comparables.

27.14 Considering the functional similarities of the comparables companies discussed above and the absence of any contrary material brought by the Revenue, we hold that these comparables are liable to be included in the final set. Accordingly, the AO/TPO is directed to include the aforesaid companies in the list of comparables.

27.15 The assessee, in response to the show cause notice issued by the TPO, submitted that Aptus Software Labs Pvt. Ltd. is engaged in infrastructure management, network operations, cloud computing, engineering and QA services, and therefore is not functionally comparable with the assessee, which is engaged in software development services. The TPO, however, relying on the annual report of the said company, held that the company is primarily engaged in software development services and derives major revenue from such activities, and accordingly retained it as a comparable. Hence the said comparable is functionally comparable.

27.16 Before the Ld. DRP, the assessee reiterated the same contentions. The Ld. DRP observed that the assessee had relied on website data to determine the functional profile, and further held, based on the annual report, that the company derives its revenue from rendering services and that its assets are predominantly related to computers and software. Accordingly, the Ld. DRP upheld the inclusion of the said comparable.

27.17 Before us, the Ld. AR submitted that both the TPO and the Ld. DRP erred in including the said company, as it is functionally different and primarily engaged in infrastructure management, network operations, cloud computing, engineering and QA services.

27.18 We have considered the submissions and perused the materials on record. From the documents placed at page 1087 of the factual paper book, it is evident that the said company is engaged in infrastructure management, network operations, cloud computing, engineering and QA services. On the other hand, the assessee is engaged in software development services. Considering the difference in functional profile, we find merit in the contention of the assessee. Accordingly, Aptus Software Labs Pvt. Ltd. is directed to be excluded from the list of comparables.

27.19 The assessee, in response to the show cause notice issued by the TPO, submitted that the said comparable had been rejected by the Hon’ble Bangalore Tribunal in the assessee’s own case for AY 2017-18 in Wipro GE Healthcare (P.) Ltd. v. Dy. CIT [IT Appeal No. 291 (Bang.) of 2022, dated 15-3-2023]/IT(TP)A 291/Bang/2022 vide order dated 15-03-2023. It was contended that the company is functionally different as it is engaged in voice products, video codec, IP-based fax solutions and lawful interception transcoder services, and therefore, the same is not comparable with the assessee, which is engaged in software development services.

27.20 The TPO, however, relying on the annual report of the company, observed that it is engaged in information technology design and development services and that it has only one reportable segment, namely software development. Accordingly, the TPO held the company to be functionally comparable. With regard to the Tribunal order relied upon by the assessee, the TPO observed that the matter is pending before the Hon’ble High Court and has not attained finality.

27.21 Before the Ld. DRP, the assessee reiterated the same submissions. The Ld. DRP, based on the annual report, observed that the company is engaged in rendering IT design and development services and derives its revenue from such services. Accordingly, the Ld. DRP upheld the inclusion of the said comparable.

27.22 Before us, the Ld. AR submitted that both the TPO and the Ld. DRP erred in including the said company, as it is functionally different and engaged in specialised products and services such as voice products, video codec, IP-based fax solutions and lawful interception transcoder.

27.23 We have considered the submissions and perused the materials on record. From the documents placed at page 1083 of the factual paper book, it is evident that the company is engaged in specialised products and services such as voice products, video codec, IP-based fax solutions and lawful interception transcoder. Further, the company fails the export filter, as its entire revenue is derived from domestic sales. On the other hand, the assessee is engaged in software development services for its associated enterprises. Considering the functional differences as well as failure of the export filter, we find merit in the contention of the assessee. Similarly, the ITAT in the own case (supra) of the assessee not considered as comparable. Accordingly, Consilient Technologies Pvt. Ltd. is directed to be excluded from the list of comparables.

27.24 The assessee, in response to the show cause notice issued by the TPO, submitted that Cybage Software Pvt. Ltd. is functionally dissimilar and had been rejected by the Hon’ble Bangalore Tribunal in the assessee’s own case for AY 2018-19 on account of significant high margins and functional differences. It was therefore contended that the said company is not comparable.

27.25 The TPO, however, relying on the annual report of the company, observed that the entire revenue is derived from the software development services segment and accordingly held the company to be functionally comparable with the assessee.

27.26 Before the Ld. DRP, the assessee reiterated that the said company is functionally different as it is engaged in services such as Gen AI, architectural services, cloud, CRM, enterprise mobility, etc., and therefore cannot be compared with the assessee. The Ld. DRP, however, referring to the annual report, observed that the company is engaged in software development services and derives its entire revenue from such activities. With regard to the contention of abnormal profits, the Ld. DRP relied on the decision of the Bangalore Tribunal in Trilogy E-Business Software India (P.) Ltd. v. Dy. CIT 140 ITD 540 (Bangalore–Trib.), and held that if a company is functionally similar, high margins alone cannot be a ground for exclusion.

27.27 Before us, the Ld. AR submitted that the said company is functionally dissimilar and has been rejected by the Tribunal in the assessee’s own case in earlier years.

27.28 We have considered the submissions and perused the material on record. We find merit in the contention of the assessee in excluding Cybage Software Pvt. Ltd. The said comparable has been held to be functionally dissimilar in the assessee’s own case for AY 2018-19 in IT(TP)A No. 803/Bang/2022 dated 17.05.2023, as evident from page 543 of the legal paper book or page 44 of the said order. Respectfully following the same, we direct exclusion of Cybage Software Pvt. Ltd. from the list of comparables.

27.29 The assessee, in response to the show cause notice issued by the TPO, submitted that Great Software Laboratory Pvt. Ltd. is engaged in providing software development services with expertise in cloud applications, communication, identity management and systems technologies, and therefore is not comparable with the assessee.

27.30 The TPO, however, relying on the annual report of the company, observed that the company derives its revenue from IT services comprising computer programming, consultancy and related services. It was further noted that approximately 99% of the revenue is from software development services and not from software products. Accordingly, the TPO held the company to be functionally comparable.

27.31 Before the Ld. DRP, the assessee submitted that it is engaged in the provision of software engineering and design services and not merely routine software services, and therefore the said comparable, being involved in specialised activities, is not comparable. The Ld. DRP, referring to the annual report, observed that the principal business activity of the company is computer programming consultancy and related services, and that the entire revenue is derived from sale of services. It was further observed that there is no revenue from sale of products and that differences in skill set or billing rates within software development services do not materially affect margins. Accordingly, the Ld. DRP upheld the inclusion of the said comparable.

27.32 Before us, the Ld. AR submitted that the company is functionally different as it is engaged in specialised software development services with expertise in cloud applications, communication, identity management and system technologies, as evidenced from the material placed at page 1072 of the factual paper book.

27.33 We have considered the submissions and perused the materials on record. We find merit in the contention of the assessee in excluding Great Software Laboratory Pvt. Ltd. The material on record at page 1072 of the factual paper book clearly shows that the company is engaged in specialised software development services with expertise in cloud applications, communication, identity management and systems technologies. On the other hand, the assessee is engaged in routine software development services. Considering the functional differences, we direct exclusion of the said company from the list of comparables.

27.34 The assessee, in response to the show cause notice issued by the TPO, submitted that Indianic Infotech Ltd. is engaged in web development, mobile applications, UI/UX consultancy, AI, DevOps, QA, IoT and marketing services, and therefore, the same is not comparable with the assessee.

27.35 The TPO, however, relying on the annual report of the company, observed that the company is engaged in software development services and accordingly held it to be functionally comparable.

27.36 Before the Ld. DRP, the assessee reiterated that the company is engaged in diversified activities such as web development, mobile applications, UI/UX consultancy, AI, DevOps, QA, IoT and marketing services, and therefore, the same is functionally different. The Ld. DRP, however, referring to the annual report, held that the company derives its revenue from software development services and accordingly upheld its inclusion.

27.37 Before us, the Ld. AR submitted that the company is engaged in offshore development centre services, solution design and development, mobile development and cloud development, as evident from page 1084 of the factual paper book, and therefore, the same is functionally different from that of the assessee.

27.38 We have considered the submissions and perused the materials on record. We find merit in the contention of the assessee in excluding Indianic Infotech Ltd. The materials on record at page 1084 of the factual paper book clearly shows that the said company is engaged in offshore development centre services, solution design and development, mobile development and cloud development. On the other hand, the assessee is engaged in software development services. Considering the functional differences, the said comparable is directed to be excluded from the list of comparables.

27.39 The assessee, in response to the show cause notice issued by the TPO, submitted that Net4nuts Ltd. is engaged in offshore development centre services, solution design and development, mobile development and cloud development, and therefore is not comparable with the assessee.

27.40 The TPO, however, relying on the annual report of the company, observed that the company derives its revenue from the software development segment and accordingly held it to be functionally comparable.

27.41 Before the Ld. DRP, the assessee reiterated that the company is engaged in offshore development centre services, solution design and development, mobile development and cloud development, and therefore is functionally different.

27.42 The Ld. DRP, referring to the annual report, observed that approximately 98% of the revenue is from software development services and that the main object of the company is to carry on software development services. Accordingly, the Ld. DRP upheld the inclusion of the said comparable.

27.43 Before us, the Ld. AR submitted that the company is engaged in offshore development centre services, solution design and development, mobile development and cloud development, as evident from page 1086 of the factual paper book, and therefore is functionally different from the assessee.

27.44 We have considered the submissions and perused the material on record. We find merit in the contention of the assessee in excluding Net4nuts Ltd. The material on record at page 1086 of the factual paper book clearly shows that the company is engaged in offshore development centre services, solution design and development, mobile development and cloud development. On the other hand, the assessee is engaged in software development services. Considering the functional differences, Net4nuts Ltd. is directed to be excluded from the list of comparables.

27.45 The assessee, in response to the show cause notice issued by the TPO, submitted that Nihilent Ltd. has been held to be functionally dissimilar in the assessee’s own case for AY 2018-19 and AY 2016-17 by this Tribunal in IT(TP)A No. 803/Bang/2022 dated 17.05.2023 and Wipro GE Healthcare (P.) Ltd. v. Dy. CIT   (Bangalore–Trib.)/IT(TP)A No. 285/Bang/2021 dated 03.02.2023. It was further submitted that the company is engaged in advanced analytics, artificial intelligence, blockchain, business intelligence, data science and cloud services, and therefore, the same is not comparable with the assessee.

27.46 The TPO, however, relying on the annual report of the company, observed that the company derives its revenue from software development services and accordingly held it to be functionally comparable.

27.47 Before the Ld. DRP, the assessee reiterated that the company is engaged in specialised services such as advanced analytics, artificial intelligence, blockchain, business intelligence, data science and cloud services. The Ld. DRP, referring to the annual report, observed that the company is engaged in software development services and business consulting in the area of enterprise transformation, change and performance management, and also provides IT-related services. It was further observed that there is no information regarding product development in the annual report. Accordingly, the Ld. DRP upheld the inclusion of the said comparable.

27.48 Before us, the Ld. AR submitted that the company is engaged in specialised services such as advanced analytics, artificial intelligence, blockchain, business intelligence, data science and cloud services, and further placed reliance on the orders of this Tribunal in the assessee’s own case for AY 2018-19 and AY 2016-17, wherein the said company has been held to be functionally dissimilar.

27.49 We have considered the submissions and perused the materials on record. We find merit in the contention of the assessee in excluding Nihilent Ltd. The materials on record clearly show that the company is engaged in advanced analytics, artificial intelligence, blockchain, business intelligence, data science and cloud services. On the other hand, the assessee is engaged in software development services. Further, the said company has been held to be functionally dissimilar in the assessee’s own case for AY 2018-19 and AY 2016-17 in IT(TP)A No. 803/Bang/2022 dated 17.05.2023 and IT(TP)A No. 285/Bang/2021 dated 03.02.2023. The relevant extract is reproduced as under:

“The assessee sought exclusion of Nihilent Ltd. as a comparable on the ground that it is functionally dissimilar vis-a-vis assessee. This objection was also raised before the Ld. DRP but rejected. The assessee relied upon website of the company which is made available at page A412 of the paper book wherein Nihilent Ltd. is shown to be engaged in providing advanced analytics, artificial intelligence, blockchain, business intelligence, data signs, cloud services etc. The annual financials of this company available at page A412 & A413 of the paper book shows that it is rendering Enterprise transformation and change management, Digital transformation services and Enterprise IT services but segmental financials are not available as is apparent from its financials available at page A305, A412 & A413 of the paper book. When this company is into various segments but segmental financials are not available it cannot be a valid comparable vis-a-vis assessee which is a routine software development service provider working on cost + markup model, hence ordered to be excluded…..”

27.50 Respectfully following the same, and there being no change in the facts and circumstances, we reverse the order of the authorities below and direct exclusion of Nihilent Ltd. from the list of comparables.

27.51 The assessee, in response to the show cause notice issued by the TPO, submitted that Orion India Systems Ltd. is engaged in providing services such as data analytics, artificial intelligence, cybersecurity, QA, cloud and infrastructure services, and therefore is not comparable with the assessee.

27.52 The TPO, however, relying on the annual report of the company, observed that the company is engaged in software development activities and accordingly held it to be functionally comparable.

27.53 Before the Ld. DRP, the assessee reiterated that the company is engaged in specialised services such as data analytics, artificial intelligence, cybersecurity, QA, cloud and infrastructure services, and therefore, the same is functionally different. The Ld. DRP, however, referring to the annual report, observed that the company operates in the software development segment and derives its earnings from sale of services. It was further held that under TNMM, functional similarity is more relevant than product similarity. Accordingly, the Ld. DRP upheld the inclusion of the said comparable.

27.54 Before us, the Ld. AR submitted that the company is engaged in specialised services such as data analytics, artificial intelligence, cybersecurity, QA, cloud and infrastructure services, as evident from page 1085 of the factual paper book and therefore is functionally different from the assessee.

27.55 We have considered the submissions and perused the material on record. We find merit in the contention of the assessee in excluding Orion India Systems Ltd. The material on record at page 1085 of the factual paper book clearly shows that the company is engaged in providing data analytics, artificial intelligence, cybersecurity, QA, cloud and infrastructure services. On the other hand, the assessee is engaged in software development services. Considering the functional differences, Orion India Systems Ltd. is directed to be excluded from the list of comparables.

27.56 The assessee, in response to the show cause notice issued by the TPO, submitted that Tata Elxsi Ltd. has been held to be functionally dissimilar in the assessee’s own case for AY 2018-19 in IT(TP)A No. 803/Bang/2022 dated 17.05.2023, and therefore, the same is not comparable.

27.57 The TPO, however, observed that the company provides various services using the same platform of software development and hence is functionally similar to the assessee. It was further held that software development is a broad industry vertical and differences in specific functions or horizontals do not materially affect comparability under TNMM. The TPO also stated that the assessee has selectively objected to this company based on a narrow functional matrix, while not applying the same standard to other comparables.

27.58 Before the Ld. DRP, the assessee reiterated that Tata Elxsi Ltd. is functionally dissimilar and relied on the Tribunal’s order in its own case for AY 2018-19. It was further submitted that the assessee is engaged in software engineering and design services, which is different from the activities of the said company.

27.59 The Ld. DRP, however, referring to the annual report, observed that the company operates in software development services and system integration and support segments. It was noted that the company provides design and engineering services to industries such as consumer electronics, communications and transportation, and that the substantial portion of its revenue is derived from software development services. It was further observed that the company earns revenue from rendering services and not from product sales. Accordingly, the Ld. DRP upheld the inclusion of the said comparable.

27.60 Before us, the Ld. AR submitted that the said company has already been held to be functionally dissimilar in the assessee’s own case for AY 2018-19 in IT(TP)A No. 803/Bang/2022 dated 17.05.2023.

27.61 We have considered the submissions and perused the materials on record. We find merit in the contention of the assessee in excluding Tata Elxsi Ltd. The said comparable has been held to be functionally dissimilar in the assessee’s own case for AY 2018-19 in IT(TP)A No. 803/Bang/2022 dated 17.05.2023, as evident from page 542 of the legal paper book or page 42 of the said order. Respectfully following the same, we direct exclusion of Tata Elxsi Ltd. from the list of comparables.

27.62 Regarding the contention of the ld. AR for the exclusion of the companies based on the turnover, namely

27.63 We note that 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.

27.64 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 directly affect their profitability. Size of the company is a recognized factor for comparability, as differences in turnover and market share influence pricing and margins. Though in our considered view, turnover filters cannot be applied mechanically and must depend on the facts of each case, keeping in mind the turnover of the tested entity. The purpose is to select companies with a broadly similar scale of operations, assets and risk profile. This approach is in line with the OECD Transfer Pricing Guidelines in para 3.43 which states that Size criteria in terms of Sales, Assets or Number of Employees. The size of the transaction in absolute value or in proportion to the activities of the parties might affect the relative competitive positions of the buyer and seller and therefore comparability and the guidance note on transfer pricing issued by ICAI in para 5.50 states that under TNMM where margins are to be compared, the margin of a 1,000 crore company cannot be compared with that of a 10 crore company. The two most obvious reasons are the size of the two companies and the relative economies of scale under which they operate.

27.65 Further paragraph 15.4 of the ICAI Guidance Note on Transfer Pricing emphasizes significant differences in company size and turnover, such as comparing Rs. 1,000 crore entity to a Rs. 10 crore entity materially affects profitability and comparability under Rule 10B(2) of Income Tax Rule. Thus, the application of an upper turnover filter becomes necessary to ensure a fair comparison.

27.66 The Tribunal has taken a consistent view that large or medium scale companies with substantially higher turnover cannot be compared. For the ready reference, the view taken by the coordinate bench of this Tribunal in Autodesk India (P.) Ltd. v. Dy. CIT    (Bangalore–Trib.) reads as under:

“17.7. We have considered the rival submissions. The substantial question of law (Question No. 1 to 3) which was framed by the Hon’ble Delhi High Court in the case of Chryscapital Investment Advisors (India) (P.) Ltd., (supra) was as to whether comparable can be rejected on the ground that they have exceptionally high profit margins or fluctuation profit margins, as compared to the Assessee in transfer pricing analysis. Therefore as rightly submitted by the Ld. counsel for the Assessee the observations of the Hon’ble High Court, in so far as it refers to turnover, were in the nature of obiter dictum. Judicial discipline requires that the Tribunal should follow the decision of a nonjurisdiction High Court, even though the said decision is of a non-jurisdictional High Court. We however find that the Hon’ble Bombay High Court in the case of CIT v. Pentair Water India (P.) Ltd. Tax Appeal No. 18 of 2015 judgment dated 16-9-2015 has taken the view that turnover is a relevant criterion for choosing companies as comparable companies in determination of ALP in transfer pricing cases. There is no decision of the jurisdictional High Court on this issue. In the circumstances, following the principle that where 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 ofturnover in Transfer Pricing cases. The decision was rendered as early as 5-8-2011. The decisions rendered by the ITAT Mumbai Benches cited by the Ld. DR before us in the case of Willis Processing Services (supra) and Capegemini India (P.) Ltd. (supra) are to be regarded as per incurium as these decisions ignore a binding co-ordinate bench decision. In this regard the decisions referred to by the Ld. counsel for the Assessee supports the plea of the Ld. counsel for the Assessee. The decisions rendered in the case of M/S.NTT Data (supra), Societe Generale Global Solutions (supra) and LSI Technologies (supra) were rendered later in point of time. Those decisions follow the ratio laid down in Willis Processing Services (supra) and have to be regarded as per incurium. These three decisions also place reliance on the decision of the Hon’ble Delhi High Court in the case of Chriscapital Investment (supra). We have already held that the decision rendered in the case of Chriscapital Investment (supra) is obiter dicta and that the ratio decidendi laid down by the Hon’ble Bombay High Court in the case of Pentair (supra) which is favourable to the Assessee has to be followed. Therefore, the decisions cited by the Ld. DR before us cannot be the basis to hold that high turnover is not relevant criteria for deciding on comparability of companies in determination of ALP under the Transfer Pricing regulations under the Act. For the reasons given above, we uphold the order of the CIT(A) on the issue of application ofturnover filter and his action in excluding companies by following the ratio laid down in the case of Genisys Integrating (supra)”.

27.67 Further, we find that this Tribunal subsequently in the case of Robert Bosch Engineering and Business Solutions (P.) Ltd. v. Dy. CIT [IT(TP)A No. 593/Bang/2020, dated 9-12-2024] followed the decision in the case of Autodesk India (P.) Ltd. (supra). Against the order of the Tribunal, the revenue filed an appeal before the Hon’ble Karnataka High Court in ITA No.146/2025). In the said case, the Hon’ble High Court did not admit the Revenue’s grounds of appeal on this issue by observing as under:

“10. Indisputably, a company that has a significantly large turnover cannot be considered as a comparable with an assessee, whose turnover is a small fraction of that of the said entity.

11. The question whether the entities are comparable 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.

27.68 The Hon’ble High Court has categorically observed that a company having significantly large turnover cannot be compared with a small entity and that size and turnover have a direct bearing on FAR analysis, asset base, risk profile and economies of scale.

27.69 Now coming to the facts of the present case, in this regard we note that the turnover of the assessee is Rs. 996.15 crores from SWD segment whereas the turnover of the comparables namely

are much higher that of the assessee. Accordingly, relying on the judicial discipline supra, we note that he turnover of the companies viz. Larsen and Toubro Infotech Ltd., Wipro Ltd., Infosys Ltd., and Tata Consultancy Services Ltd., are far higher than that of the assessee company. Since the assessee falls under category of companies having significantly higher turnover than that of the assessee, the above comparables need to be excluded.

27.70 We also find force in the contention of the assessee regarding application of an upper turnover filter of 10 times. The Hon’ble Bombay High Court in the case of Pentair Water (India)(P.) Ltd. (supra) has held that turnover is a relevant factor for determining comparability, as companies operating at different scales cannot be compared on a like-to-like basis. Further, the coordinate benches of the Bangalore Tribunal in the case of McAfee Software (India)(P.) Ltd. (supra) have accepted the application of a turnover range of up to 10 times for ensuring proper comparability. In view of the above, we direct the AO/TPO to apply an upper turnover filter of 10 times of the assessee’s turnover and recompute the list of comparables accordingly. The relevant para of Bangalore ITAT judgment is reproduced below:

“10.9 These two companies are found comparable in many orders of the Coordinate Benches, but excluded on the basis of turnover filter of Rs. 200 Crores limit in Sunquest Information Systems (India) (P.) Ltd.’s case (supra), we have considered the same. Assessee’s turnover is about 63 Crores. The turnover of Igate Global Solutions Ltd., (Seg) is about 405 crores and L & T Infotech Ltd is of 562 Crores. This is with the range of ten times the upper limit. Moreover, Assessee Counsel has not pressed on turnover filter of Rs. 200 Crores. Therefore, these two are retained.”

27.71 Regarding Mindtree Ltd., We also note that the turnover of Mindtree is not more than ten times the upper limit of the turnover filter. However, it is still significantly higher than that of the assessee. Considering the substantial difference in scale of operations, we are of the view that the said company should be excluded from the list of comparables.

27.72 Before parting, we note that the coordinate bench of this Tribunal in the case of Scancafe Digital Solutions (P.) Ltd. v. ITO   (Bengaluru – Trib.) followed the decision of Mumbai bench order in the case of Willis Processing Services (I) (P.) Ltd. v. Dy. CIT   (Mumbai). The Mumbai bench held the classification of large, medium and small companies based on turnover of more than 2000, 200 to 2000 crores and 1 to 200 by Dun & Bradstreet was not made in the context of comparables under TP Regulations. It was observed that as per such classification of small, medium and large-scale company-based on the range of turnover, an entity having Rs. 1 crore of turnover can be compared to the entity having turnover of Rs. 200 crores. But another entity having turnover of Rs. 199 crores cannot be compared with the entity having turnover of Rs. 201 crores. Therefore, it 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.

27.73 In our considered opinion, the coordinate bench of Mumbai Tribunal in the above-mentioned case was 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 discussed above, but at the same time a company having substantially low turnover such as appellant assessee with turnover of Rs. 996.1562 crores with other companies having higher turnover than that of assessee cannot be compared. In the present case, the assessee’s turnover from software development services is Rs. 996.1562 crores, whereas several of the comparables selected by the TPO have substantially higher turnover. In view of the above discussion, we reject the order of the TPO/AO insofar as it relates to the exclusion and inclusions of the comparables. As such we direct the TPO/AO to include and exclude the comparables as mentioned in the table below:

27.74 In view of the above elaborated discussion, the final list of comparables after the above inclusion/exclusion along with adjusted margin is as follows:

27.75 Considering the above detailed discussion, we reverse the order of the authorities below to the extent and in the manner discussed above. Hence, the grounds raised by the assessee are partly allowed.

28. Coming to Ground No. 4.3, the assessee benchmarked its transaction under ITeS segment by adopting TNNM as most appropriate method and further PLI as OP/OC which arrived 14.46%. The assessee for the comparability analysis selected 18 comparables.

29. The TPO during the assessment proceeding rejected 12 comparables out of 18 assessee’s comparables. The assessee’s comparables accepted by the TPO are detailed as under:

29.1 Thereafter, the TPO applied own filter and selected 07 additional comparable in addition to assessee’s 06 comparables accepted by him. The final TPO’s comparables are detailed as under:

29.2 The average PLI/margin of the comparables companies was computed at 22.21%. Accordingly, an upward TP adjustment was made by the TPO for Rs. 28,06,679/- only which was added to the total income of the assessee.

30. The aggrieved assessee preferred to file objection before the Ld. DRP. Before the Ld. DRP, the assessee submitted that the TPO erred in including and excluding certain comparable companies.

31. Regarding Datamatics, Tech Mahindra, CES Ltd, TTEC India, the assessee before ld. DRP submitted that the said comparables fail the turnover limit filter of Rs. 50 crores. The turnover of the said comparables is as follows:

31.1 On the other hand, the turnover of the assessee from ITeS Segment is Rs. 4.14 crores only. Therefore, the said companies are not comparable and ought to be deleted from the list of comparables.

Exclusion of Anderson Business Solutions Pvt. Ltd.

31.2 Regarding Anderson Business Solutions Pvt. Ltd., the assessee submitted that the said comparable is functionally dissimilar as the comparable is providing different types of services not relating to ITeS Services. On the other hand, the assessee in respect of ITeS Segment performs mainly auto sourcing set-ups & maintenance, support on supplier quality and collaboration system, supplier addition, purchase order management, vendor master management etc. Therefore, the said company not comparable and ought to be deleted from the list of comparables.

Exclusion of Savitriya Technologies Pvt. Ltd.

31.3 Regard Savitriya Technologies Pvt. Ltd., the assessee submitted that the said comparable is functionally different as it is engaged in the business of providing software development, custom application development etc. Therefore, the said company is not comparable and ought to be deleted from the list of comparables.

Exclusion of Vitae International Accounting Services Pvt. Ltd.

31.4 Regarding Vitae International Accounting Services Pvt. Ltd., the assessee submitted that the said comparable is functionally different as it is engaged in the business of providing accounting, book-keeping and auditing services and 98% of the revenue derived by it is from these services only. Therefore, the said company is not comparable and ought to be deleted from the list of comparables.

Exclusion Inteq BPO Services Pvt. Ltd.

31.5 Regarding Inteq BPO Services Pvt. Ltd., the assessee submitted that the said comparable is functionally different as it is engaged in the business of BPO services and not ITeS. Therefore, the said company is not comparable and ought to be deleted from the list of comparables.

Inclusion of Microland Ltd.

31.6 Regarding Microland Ltd., the assessee submitted that the said comparable is functionally comparable as it is engaged in the provision of enterprises services management, streamlining digital services etc. and it is also part of search matrix of TPO. Therefore, the said company is comparable and ought to be included in the list of comparables.

32. However, the Ld. DRP, regarding turnover criteria, observed that high turnover does not have an impact on margins of the company. The Ld. DRP relied on various judicial precedents in this regard.

32.1 Further, regarding functional dissimilarity, the ld. DRP observed that the said comparables derive revenue from IT enabled services. The Ld. DRP substantiated the same from the annual reports of the comparables available in the public domain.

32.2 Further, regarding the inclusion of comparable namely Microland limited, the Ld. DRP observed that the said comparable was not part of search matrix of TPO. Once the TP study report of assessee is rejected, the assessee can only ask for comparables which appear in the list of TPO search matrix else it will amount to cherry picking which will further lead to endless litigations. Hence, ld. DRP rejected the plea of assessee in this regard.

33. Aggrieved by the order of the AO/TPO, the assessee preferred an appeal before us.

34. The Ld. AR before us submitted that the lower turnover limit of Rs. 1 crore has been applied by the TPO and the same is also consistent with the TP study report of the assessee. The assessee further requested to apply the additional filter of reasonable upper limit on turnover of Rs. 50 crores. The assessee relied on certain judicial precedents wherein upper limit on turnover has been applied by the Hon’ble Courts.

34.1 The assessee further submitted that comparables selected by TPO and further upheld by the Ld. DRP are liable to be excluded from the list of comparables of the assessee as the FAR are entirely not comparable and dissimilar to the assessee.

34.2 The assessee further submitted that comparable Microland Limited excluded by TPO and further upheld by the Ld. DRP is liable to be included in the list of comparables of the assessee as the said comparable is involved in the provision of enterprise service management, streamlining digital services which is akin to the ITes activities carried out by the assessee.

35. The Ld. DR on the other hand supported the orders of the TPO/AO and the directions of the ld. DRP and submitted that the companies sought to be excluded by the assessee are all engaged in ITeS/BPO activities and therefore are functionally comparable. It was contended that as per Rule 10TA(e) of the Income-tax Rules, services such as accounting, back-office operations, and BPM services fall within the ambit of ITeS. Accordingly, companies like Anderson Business Solutions Pvt. Ltd. and Vitae International Accounting Services Pvt. Ltd., engaged in accounting and staffing services, are covered under ITeS. Further, Savitriya Technologies Pvt. Ltd., based on its annual report, is engaged in ITeS/BPO services, and Inteq BPO Services Pvt. Ltd. is involved in BPM services akin to back-office support. The ld. DR emphasized that audited financial statements are more reliable than website data relied upon by the assessee and argued that minor functional differences should not warrant exclusion of otherwise comparable companies.

36. We have heard the rival contentions of both the parties and perused the materials available on record. At the outset, we note that the assessee has only pressed the following companies before us:

Exclusion of Anderson Business Solutions Pvt. Ltd.

36.1 The assessee, in response to the show cause notice issued by the TPO, submitted that Anderson Business Solutions Pvt. Ltd. is engaged in providing accounting services and therefore, the same is not comparable with the assessee.

36.2 The TPO, however, referring to Rule 10TA of the Income-tax Rules (safe harbour provisions), observed that the definition of ITeS includes revenue accounting services and accordingly held the said company to be functionally comparable.

36.3 Before the Ld. DRP, the assessee submitted that the said comparable is engaged in accounting services, whereas the assessee is engaged in ITeS activities such as auto sourcing set-ups and maintenance, supplier quality support, supplier addition, purchase order management and vendor master management. It was further submitted, based on the annual report, that the said company is engaged in accounting services. The Ld. DRP, however, observed that the assessee had relied only on website data and not on the annual report, and accordingly held that the company is engaged in ITeS and upheld its inclusion.

36.4 Before us, the Ld. AR submitted that the company is engaged in accounting services, as evident from pages 1092 and 1093 of the factual paper books.

36.5 We have considered the submissions and perused the materials on record. We find merit in the contention of the assessee in excluding Anderson Business Solutions Pvt. Ltd. The materials on record at pages 1092 and 1093 of the factual paper books clearly show that the company is engaged in providing accounting services. On the other hand, the assessee is engaged in ITeS activities such as auto sourcing set-ups and maintenance, supplier quality support, supplier addition, purchase order management and vendor master management. Considering the differences in functional profile under FAR analysis, we hold that the said company is not comparable. Accordingly, Anderson Business Solutions Pvt. Ltd. is directed to be excluded from the list of comparables.

36.6 The assessee, in response to the show cause notice issued by the TPO, submitted that Savitriya Technologies Pvt. Ltd. is engaged in software development, custom application development, application integration/migration/maintenance and software testing, and therefore, the same is not comparable with the assessee.

36.7 The TPO, however, relying on the annual report, observed that the company is engaged in ITeS and BPO services and accordingly held it to be functionally comparable.

36.8 Before the Ld. DRP, the assessee reiterated, based on website information, that the company is engaged in software development and related activities. The Ld. DRP, referring to the Director’s Report in the annual report, observed that the company is engaged in ITeS and BPO services and accordingly upheld its inclusion.

36.9 Before us, the Ld. AR submitted that the company is engaged in software development and related services, as evident from pages 1094 and 1095 of the factual paper books.

36.10 We have considered the submissions and perused the materials on record. We find merit in the contention of the assessee in excluding Savitriya Technologies Pvt. Ltd. The materials on record at pages 1094 and 1095 of the factual paper book clearly shows that the company is engaged in software development, custom application development, application integration/migration/maintenance and software testing. On the other hand, the assessee is engaged in ITeS activities such as auto sourcing set-ups and maintenance, supplier quality support, supplier addition, purchase order management and vendor master management. Considering the differences in functional profile under FAR analysis, we hold that the said company is not comparable. Accordingly, Savitriya Technologies Pvt. Ltd. is directed to be excluded from the list of comparables.

36.11 The assessee, in response to the show cause notice issued by the TPO, submitted that Vitae International Accounting Services Pvt. Ltd. is a global staffing provider for accounting and pension firms worldwide and therefore, the same is not comparable with the assessee.

36.12 The TPO, however, relying on the annual report, observed that the company is engaged in ITeS and derives its revenue from ITeS services, and accordingly held it to be functionally comparable.

36.13 Before the Ld. DRP, the assessee reiterated that the company is a global staffing provider for accounting and pension firms worldwide. The Ld. DRP, referring to Note No. 1 of the financial statements and the provisions of Rule 10TA(e), observed that the company is engaged in ITeS and accordingly upheld its inclusion.

36.14 Before us, the Ld. AR submitted that the company is engaged in global staffing services for accounting and pension firms, as evident from pages 1096 and 1097 of the factual paper books.

36.15 We have considered the submissions and perused the materials on record. We find merit in the contention of the assessee in excluding Vitae International Accounting Services Pvt. Ltd. The material on record at pages 1096 and 1097 of the factual paper books clearly shows that the company is a global staffing provider for accounting and pension firms worldwide. On the other hand, the assessee is engaged in ITeS activities such as auto sourcing set-ups and maintenance, supplier quality support, supplier addition, purchase order management and vendor master management. Considering the differences in functional profile under FAR analysis, we hold that the said company is not comparable. Accordingly, Vitae International Accounting Services Pvt. Ltd. is directed to be excluded from the list of comparables.

36.16 The assessee, in response to the show cause notice issued by the TPO, submitted that Inteq BPO Services Pvt. Ltd. is functionally different as it is engaged in core BPO functions and therefore, the same is not comparable with the assessee.

36.17 The TPO, however, relying on the annual report, observed that the company derives its revenue from ITeS comprising BPO services and accordingly held it to be functionally comparable.

36.18 Before the Ld. DRP, the assessee submitted that though the TPO has stated that the company is engaged in ITeS, the extract relied upon in the TPO’s order clearly shows that the company is wholly engaged in BPO services and not comparable with the assessee’s ITeS activities. The Ld. DRP, however, observed that the company derives its revenue from BPM services which are akin to ITeS and, referring to Rule 10TA(e), held that back-office operations fall within the definition of ITeS. Accordingly, the Ld. DRP upheld the inclusion of the said comparable.

36.19 Before us, the Ld. AR submitted that the company is engaged in core BPO functions, as evident from page 1099 of the factual paper book, and therefore, the same is functionally different from the assessee.

36.20 We have considered the submissions and perused the materials on record. We find merit in the contention of the assessee in excluding Inteq BPO Services Pvt. Ltd. The material on record at page 1099 of the factual paper book clearly shows that the company is engaged in core BPO functions. On the other hand, the assessee is engaged in ITeS activities such as auto sourcing set-ups and maintenance, supplier quality support, supplier addition, purchase order management and vendor master management. Considering the differences in functional profile under FAR analysis, we hold that the said company is not comparable. Accordingly, Inteq BPO Services Pvt. Ltd. is directed to be excluded from the list of comparables.

36.21 Regarding other comparables, namely Datamatics, Tech Mahindra, CES Ltd. and TTEC India, the same are excluded based on turnover filter. Detailed discussion on the applicability of the turnover filter has already been dealt with in paragraph No. 27.62 of this order. Accordingly, these companies are directed to be excluded from the list of comparables.

36.22 We note that the issue relating to the said comparable also arises on the ground that it does not form part of the search matrix adopted by the TPO. Since, we have already dealt with this aspect in detail in paragraph 27.3 of this order. At this juncture, it is necessary to analyse the details relating to the comparable for inclusion in the paragraph given below:

36.23 We find merit in the contention of assessee for inclusion of Microland Ltd. The material on record at page 1088 of factual paper book clearly shows that the said comparable is involved in the provision of enterprise service management, streamlining digital services. Further, we also note that the said comparable is part of search matrix of the assessee and the same is evident from accept reject matrix at page 415 of the factual paper book. Accordingly, the said comparable is liable to be included in the list of comparables.

36.24 In view of the above discussion, we reject the order of the TPO/AO insofar as it relates to the exclusion and inclusions of the comparables. As such we direct the TPO/AO to include and exclude the comparables as mentioned in the table below:

36.25 In view of the above elaborated discussion, the final list of comparables after the above inclusion/exclusion along with adjusted margin is as follows:

36.26 Considering the above detailed discussion, we reverse the order of the authorities below to the extent and in the manner discussed above. Hence, the grounds raised by the assessee are partly allowed.

37. Coming to Ground No. 4.4, The assessee benchmarked its transaction under Distribution Segment by adopting TNNM as most appropriate method and further PLI as OP/OC was arrived at 4.01%. The assessee for the comparability analysis selected 08 comparables. The TPO during the assessment proceeding rejected 07 comparables out of 08 assessee’s comparables. The assessee’s comparable accepted by the TPO is detailed as under:

38. Thereafter, the TPO applied own filter and selected 07 additional comparables in addition to assessee’s 01 comparable accepted by him. The final TPO’s comparables are detailed as under:

38.1 The average PLI/margin of the comparables companies was computed at 8.52%. Accordingly, an upward TP adjustment was made by the TPO for Rs. 103,84,94,355/- only which was added to the total income of the assessee.

39. The aggrieved assessee preferred to file objection before the Ld. DRP.

40. Before the Ld. DRP, the assessee submitted that the TPO erred in excluding and including certain comparable companies as the said are and are not functionally comparable. As per the assessee, the list of the companies not fit for comparables mentioned below,

40.1 The assessee submitted that the said comparables are functionally not comparable to that of assessee. The said comparables are engaged in the trading of dental products, retail trading of medical products, dental services, manufacturing of medical equipment, trading in diagnostics kits, support services, etc.

40.2 Regarding inclusion of Pika Medical Pvt. Ltd., the assessee submitted that the said comparable is functionally comparable and ought to be included in the final set of comparables.

40.3 Regarding Biomedicon Services (India) Pvt. Ltd. and Hicks Thermometers (India) Pvt. Ltd., the assessee submitted that comparables are functionally comparables and were part of search matrix also and therefore, the same ought to be included in the final set of comparables.

41. However, the Ld. DRP rejected the plea of assessee in this regard. The Ld. DRP referring to the annual reports of the comparables observed that the said comparables, for which assessee sought exclusion, are engaged in the business of trading of medical equipment which is same that of assessee.

41.1 Regarding inclusion of comparables, viz. Biomedicon Services and Hicks Thermometers, the Ld. DRP submitted that the said comparables do not form part of search matrix of TPO, and assessee can only ask comparable companies out of the TPO’s search matrix. Therefore, without going into the comparability of the said comparables, the Ld. DRP rejected the plea of assessee for inclusion of the said comparable.

41.2 Regarding Pika Medical, the Ld. DRP referring to annual report of the said comparable observed that it is not functionally comparable as it is engaged in the medical equipment and providing services of pre- and post-sale of medical equipment.

42. Aggrieved by the order/ direction of the AO/ ld. DRP, the assessee preferred an appeal before us.

43. The ld. AR for the assessee submitted that comparables selected by TPO and further upheld by the Ld. DRP are liable to be excluded from the list of comparables of the assessee as the FAR are entirely not comparable and dissimilar to the assessee.

43.1 Regarding exclusion of Dental Avenue, the assessee submitted that the TPO itself has stated that the company is a wholesaler of dental filling of materials & other products and the same was rejected by TPO in his order for AY 2022-23. Hence, the same should be excluded from the final list of comparables.

43.2 Regarding exclusion of IDS Denmend, the assessee submitted that the said comparable is functionally not comparable as it is engaged in the business of dental cements and other fillings bone reconstruction cements. Hence, the same should be excluded from the final list of comparables.

43.3 Regarding exclusion of MDD Medical Systems, the assessee submitted that the said comparable is functionally not comparable as it is engaged in the business of providing support services. Hence, the same should be excluded from the final list of comparables.

43.4 Regarding exclusion of Narang Medical, the assessee submitted that the said comparable is functionally not comparable as it is engaged in the business of manufacturing of medical equipment and the nature of products of comparable is in the nature of consumables rather than equipment. Hence, the same should be excluded from the final list of comparables.

43.5 Regarding exclusion of Stryker India, the assessee submitted that the said comparable is functionally not comparable as it is engaged in the business of wholesale trade services. Further, this comparable also fails the RPT Filter. Hence, the same should be excluded from the final list of comparables.

43.6 The assessee further contended that certain comparables ought to be included in the list of comparables as they pass the FAR analysis and other quantitative filters required for TP purposes.

43.7 Regarding inclusion of Biomedicon Services, the assessee submitted that the said comparable is part of search matrix of assessee. Further, it is also comparable as it is involved in the trading of medical and surgical equipment. Hence, the same should be included in the final list of comparables.

43.8 Regarding inclusion of Hicks Thermometers, the assessee submitted that the said comparable is part of search matrix of assessee. Further, it is also comparable as it is involved in the trading of medical and surgical equipment. Further, the same comparable was accepted by TPO in his order for AY 2017-18. Hence, the same should be included in the final list of comparables.

43.9 Regarding inclusion of Pika Medical, the assessee submitted that the comparable is involved in the trading of medical and surgical equipment. Hence, the same should be included in the final list of comparables.

44. On the other hand, the Ld. DR supported the orders of the TPO/AO and the directions of the ld. DRP, contending that the comparables selected were functionally similar to the assessee, as all were engaged broadly in the trading and distribution of medical equipment. It was submitted that under TNMM, strict product similarity is not required and broad functional comparability is sufficient. The ld. DR argued that companies such as Dental Avenue India Pvt. Ltd., IDS Denmed Pvt. Ltd., MDD Medical Systems (India) Pvt. Ltd., Narang Medical Ltd., Schiller Healthcare India Pvt. Ltd. and Stryker India Pvt. Ltd. were rightly included, as their activities fall within the same distribution segment.

44.1 Further, the DR contended that the assessee cannot seek inclusion of new comparables such as Biomedicon Services, Hicks Thermometers and Pika Medical if they do not form part of the TPO’s search matrix. It was also submitted that minor functional differences or variation in product lines do not materially affect comparability under TNMM. Accordingly, the DR prayed for upholding the order of the TPO/DRP.

45. We have heard the rival contentions of both the parties and perused the materials available on record. At the outset, we note that the assessee has only pressed the following comparables for inclusion and exclusion:

45.1 With regard to Biomedicon and Hicks, we note that the issue relating to the said comparables also arises on the ground that it does not form part of the search matrix adopted by the TPO. Since, we have already dealt with this aspect in detail in paragraph 27.3 of this order. At this juncture, it is necessary to analyse the details for the comparables for inclusion discussed above in the paragraph given below: Inclusion of Biomedicon Services (India) Pvt. Ltd. and

45.2 We find merit in the contention of the assessee in inclusion of Biomedicon Services (India) Pvt. Ltd. The material on record at page 1100 of factual paper book clearly shows that the said comparable is involved in the trading of medical and surgical equipment. Further, we also note that the said comparable is part of search matrix of the assessee and the same is evident from accept reject matrix at page 432 of the factual paper book. Accordingly, the said comparable is liable to be included in the list of comparables.

45.3 We find merit in the contention of the assessee in inclusion of Hicks Thermometers (India) Pvt. Ltd. The material on record at page 1101 of factual paper book clearly shows that the said comparable is involved in the trading of medical and surgical equipment. Further we also note that the said comparable is part of search matrix of the assessee and the same is evident from accept reject matrix at page 432 of the factual paper book. We also note that the said comparable has been accepted by the ITAT in assessee’s own case for AY 2017-18 in IT(TP)A No. 291/Bang/2022 dated 15.03.2023. The same can be substantiated from page 441 of legal paper book or page 17 of the order copy of the Hon’ble Tribunal. Accordingly, the said comparable is liable to be included in the list of comparables.

45.4 We find merit in the contention of the assessee in inclusion of Pika Medical Pvt. Ltd. The material on record at page 1102 of factual paper book clearly shows that the said comparable is involved in the trading of medical and surgical equipment. We also note that the TPO himself has mentioned that the said comparable company is engaged in trading activities. Hence, the said company is a valid comparable and liable to be included in the list of comparables.

45.5 The assessee, in response to the show cause notice issued by the TPO, submitted that Dental Avenue India Pvt. Ltd. is engaged in providing dental services and therefore is not comparable with the assessee.

45.6 The TPO, however, observed that the company is a wholesaler of dental filling material and other products and held that both the assessee and the comparable are engaged in distribution of medical equipment. It was further held that under TNMM, exact product similarity is not required and accordingly the company was treated as comparable.

45.7 Before the Ld. DRP, the assessee submitted that the TPO himself has stated that the company is a wholesaler of dental filling material and other products, whereas the assessee is engaged in a different line of activity. The Ld. DRP, however, referring to the annual report, upheld the inclusion of the said company, reiterating that under TNMM, product similarity is not mandatory.

45.8 Before us, the Ld. AR submitted that the company is engaged in providing dental services, as evident from page 1103 of the factual paper book.

45.9 We have considered the submissions and perused the materials on record. We find merit in the contention of the assessee in excluding Dental Avenue India Pvt. Ltd. The material on record at page 1103 of the factual paper book clearly shows that the company is engaged in providing dental services. On the other hand, the assessee is engaged in the distribution segment and deals in medical products such as medical diagnostic imaging equipment, ultrasound systems, patient monitoring systems, X-ray systems and MRI tables for resale without any modification. Further, the said comparable has been rejected by the TPO himself in AY 2022-23. Considering the functional differences, we direct exclusion of Dental Avenue India Pvt. Ltd. from the list of comparables.

45.10 The assessee, in response to the show cause notice issued by the TPO, submitted that IDS Denmed Pvt. Ltd. is engaged in dental cements, fillings and bone reconstruction materials, and therefore is not comparable with the assessee.

45.11 The TPO, however, observed that both the assessee and the said company are engaged in distribution of medical equipment and held that under TNMM, it is not necessary that companies deal in identical products. Accordingly, the company was treated as comparable.

45.12 Before the Ld. DRP, the assessee reiterated that the company is engaged in dental cements, fillings and bone reconstruction materials, as evident from the screenshots placed on record. The Ld. DRP, however, referring to the annual report, observed that the company is engaged in trading of medical equipment and upheld its inclusion.

45.13 Before us, the Ld. AR submitted that the company is engaged in dental cements, fillings and bone reconstruction materials, as evident from page 1109 of the factual paper book.

45.14 We have considered the submissions and perused the materials on record. We find merit in the contention of the assessee in excluding IDS Denmed Pvt. Ltd. The material on record at page 1109 of the factual paper book clearly shows that the company is engaged in dental cements, fillings and bone reconstruction materials. On the other hand, the assessee is engaged in the distribution segment and purchases medical products such as medical diagnostic imaging equipment, ultrasound systems, patient monitoring systems, X-ray systems and MRI tables for resale without any modification. Considering the functional differences, IDS Denmed Pvt. Ltd. is directed to be excluded from the list of comparables.

45.15 The assessee, in response to the show cause notice issued by the TPO, submitted that MDD Medical Systems (India) Pvt. Ltd. is engaged in providing medical support services and therefore is not comparable with the assessee.

45.16 The TPO, however, referring to the annual report and financial statements, observed that 100% of the revenue of the company is derived from sale of products and that the entire revenue as per the profit and loss account arises from trading activities. Accordingly, the TPO held the company to be functionally comparable.

45.17 Before the Ld. DRP, the assessee reiterated that the company is engaged in providing support services. The Ld. DRP, however, referring to the annual report, observed that the company is engaged in trading of medical equipment and derives its entire revenue from the same segment. It was further held that under TNMM, functional similarity is more relevant than product similarity. Accordingly, the Ld. DRP upheld the inclusion of the said comparable.

45.18 Before us, the Ld. AR submitted that the company is engaged in providing support services such as LED OP lights, wall panels, doors and hospital furniture, as evident from page 1110 of the factual paper book.

45.19 We have considered the submissions and perused the materials on record. We find merit in the contention of the assessee in excluding MDD Medical Systems (India) Pvt. Ltd. The material on record at page 1110 of the factual paper book clearly shows that the company is engaged in providing support services such as LED OP lights, wall panels, doors and hospital furniture. On the other hand, the assessee is engaged in the distribution segment and purchases medical products such as medical diagnostic imaging equipment, ultrasound systems, patient monitoring systems, X-ray systems and MRI tables from GEHC manufacturers for resale to external customers without any further modification. Considering the functional differences, MDD Medical Systems (India) Pvt. Ltd. is directed to be excluded from the list of comparables.

45.20 The assessee, in response to the show cause notice issued by the TPO, submitted that Narang Medical Ltd. is engaged in manufacturing of medical equipment and that its products are in the nature of consumables rather than equipment. Accordingly, it was contended that the said company is not comparable with the assessee.

45.21 The TPO, however, observed that the company is engaged in sale of X-ray machines and integrated dental treatment equipment along with related accessories. It was further held that both the assessee and the comparable are distributors of electromedical equipment, particularly imaging-related equipment, and therefore, same are functionally similar. The TPO also noted that under TNMM, exact product similarity is not required, and broad functional similarity is sufficient. Accordingly, the company was treated as comparable.

45.22 Before the Ld. DRP, the assessee submitted that the company is engaged in manufacturing of medical equipment and therefore is not comparable. The Ld. DRP, however, referring to the annual report, observed that the company is engaged in trading of X-ray machines and integrated dental treatment equipment. It was further held that under TNMM, functional similarity is more relevant than product similarity. Accordingly, the Ld. DRP upheld the inclusion of the said comparable.

45.23 Before us, the Ld. AR submitted that the company is engaged in manufacturing of medical equipment and that its products are in the nature of consumables, as evident from pages 1104 and 1105 of the factual paper book.

45.24 We have considered the submissions and perused the materials on record. We find merit in the contention of the assessee in excluding Narang Medical Ltd. The material on record at pages 1104 and 1105 of the factual paper book clearly shows that the company is engaged in manufacturing of medical equipment and its products are in the nature of consumables. On the other hand, the assessee is engaged in the distribution segment and purchases medical products such as medical diagnostic imaging equipment, ultrasound systems, patient monitoring systems, X-ray systems and MRI tables from GEHC manufacturers for resale without any modification. Considering the functional differences, Narang Medical Ltd. is directed to be excluded from the list of comparables.

45.25 We note that, at the time of hearing, the assessee did not press this comparable, hence the same is dismissed as not pressed.

45.26 The assessee, in response to the show cause notice issued by the TPO, submitted that Stryker India Pvt. Ltd. is engaged in wholesale trade services of medical equipment and further fails the related party transaction (RPT) filter, as its RPT exceeds 25% of its turnover. Accordingly, it was contended that the said company is not comparable.

45.27 The TPO, however, relying on the annual report, observed that the company is engaged in trading of medical equipment and held that it satisfies the RPT filter. Accordingly, the company was treated as comparable.

45.28 Before the Ld. DRP, the assessee submitted that though the TPO has described the company as engaged in trading, its primary activity is wholesale trade services. With regard to RPT, it was contended that the comparable fails the 25% threshold. The Ld. DRP, however, referring to the annual report, held that the company is engaged in trading of medical equipment and further observed that the assessee had adopted a combined approach for computing RPT, whereas it should have been computed individually. Accordingly, the Ld. DRP upheld the inclusion of the said comparable.

45.29 Before us, the Ld. AR submitted that the company is engaged in wholesale trade services of medical equipment, as evident from page 1108 of the factual paper book, and further that it fails the RPT filter, as its related party transactions exceed 25% of turnover.

45.30 We have considered the submissions and perused the materials on record. We find merit in the contention of the assessee in excluding Stryker India Pvt. Ltd. The material on record at page 1108 of the factual paper book clearly shows that the company is engaged in wholesale trade services of medical equipment. On the other hand, the assessee is engaged in the distribution segment and purchases medical products such as medical diagnostic imaging equipment, ultrasound systems, patient monitoring systems, X-ray systems and MRI tables from GEHC manufacturers for resale without any modification. Further, the company fails the RPT filter, as its related party transactions exceed 25% of its turnover. Considering the functional differences as well as failure of the RPT filter, Stryker India Pvt. Ltd. is directed to be excluded from the list of comparables.

45.31 In view of the above discussion, we reject the order of the TPO/AO insofar as it relates to the exclusion and inclusions of the comparables. As such we direct the TPO/AO to include and exclude the comparables as mentioned in the table below:

45.32 Before parting, it is necessary to note that the Tribunal in the own case of the assessee in earlier years has adopted gross margin for determining the ALP. The contention of the gross margin was also raised by the assessee before the ld. DRP with the necessary details as evident from page No. 39 of the DRP order and the same was not disputed by the ld. DRP. However, The Ld. DRP did not give any finding in this regard.

45.33 We note that the coordinate benches of this Tribunal, in the assessee’s own case for AY 2018-19 in IT(TP)A No. 803/Bang/2022 dated 17.05.2023 have adopted the gross margin for determining ALP. We also note that while giving effect to the said order for AY 2017-18 the TPO has compared the gross margins of the assessee with those of the comparables and Net margin (erroneously) for AY 2018-19. In the absence of any change in facts or circumstances, the principle of consistency requires that the same method be followed. Accordingly, we direct the TPO to compare the gross margin of the assessee with that of the comparables, using the same set of comparables as referred to in the table at para 45.32 of this order. The relevant para of the Hon’ble Bangalore ITAT is reproduced below:

“In view of the above, since the facts and law are the same and on the parity of reasoning the TP adjustment in the trading segment is to be deleted. Alternatively, the direction given by the Tribunal for AY 2012-13 in IT(TP)A 703/Bang/2021 and AY 2016-17 in ITA 285/Bang/2021 dated 03.02.2023 and for AY 2017-18 in ITA 291/Bang/2022 dated 15.03.2023 extracted supra be followed for the impugned year as well.”

45.34 Considering the above detailed discussion, we reverse the order of the authorities below to the extent and in the manner discussed herein above. Accordingly, the grounds raised by the assessee are partly allowed.

46. Coming to Ground No. 4.4.3, we note that the assessee, without prejudice, has contended that any transfer pricing adjustment, if warranted, should be restricted only to the international transactions with associated enterprises. Since we have decided the main grounds in favour of the assessee, this ground becomes infructuous.

46.1 Nevertheless, we observe that it is a settled position of law, as held in the case of CIT v. Hindustan Unilever Ltd. [2016]  [2017] 394 ITR 73 (Bombay), wherein the Hon’ble Bombay High Court has held that while determining the arm’s length price of international transactions, benchmarking has to be restricted only to transactions with associated enterprises and not to the entire turnover. We also note that the SLP filed against the said judgment has been dismissed by the Hon’ble Supreme Court in CIT v. Hindustan Unilever Ltd.  . In view of the above, the ground raised by the assessee is rendered infructuous and does not call for any separate adjudication. Hence, the ground of appeal of the assessee is partly allowed for statistical purpose.

47. Coming to Ground No. 4.5, The assessee benchmarked its transaction under Manufacturing Segment adopting TNNM as most appropriate method and further PLI as OP/OC was arrived at 13.74%. The assessee for the comparability analysis selected 11 comparables.

48. The TPO during the assessment proceeding rejected 10 comparables out of 11 assessee’s comparables. The assessee’s comparables accepted by the TPO are detailed as under:

48.1 Thereafter, the TPO applied own filter and selected 06 additional comparable in addition to assessee’s 01 comparable accepted by him. The final TPO’s comparables are detailed as under:

48.2 The average PLI/margin of the comparables companies was computed at 15.79%. Accordingly, an upward TP adjustment was made by the TPO for Rs. 16,45,71,400/- only.

49. The aggrieved assessee preferred to file objection before the Ld. DRP.

50. Before the Ld. DRP, the assessee submitted that the TPO erred in excluding and including certain comparable companies as the said are not functionally comparable.

50.1 The assessee further contended that the TPO erred in applying the export filter of 75% i.e. none of the comparable companies has exports more than 75% of the total turnover. The Export % of total turnover was submitted as follows:

50.2 The assessee with respect to Sahajanand Medical Technologies Ltd. submitted that the said company fails the RPT filter of 25% of turnover. Hence, the same ought to be excluded from the list of comparables.

50.3 The assessee before the Ld. DRP requested for inclusion of 6 comparables namely:

51. Regarding the comparable namely M/s Agappe Diagnostics Ltd., the Ld. DRP rejected the plea of assessee for exclusion of the said comparable by stating that the said company performs functions similar to that of assessee.

51.1 Further, regarding the comparable namely Sahajanand Medical Technologies Ltd., the Ld. DRP submitted that the RPT Sales/Total turnover percentage is 15.80% therefore the comparable does not fail the RPT filter. Hence, the plea of assessee was rejected.

51.2 Regarding the inclusion of comparables requested by assessee, the Ld. DRP submitted that the said comparables do not form part of search matrix of TPO, and assessee can only ask comparable companies out of the TPO’s search matrix. Therefore, without going into the comparability of the said comparables, the Ld. DRP rejected the plea of assessee for inclusion of the said comparables.

52. Aggrieved by the order/ direction of the AO/TPO/ ld. DRP, the assessee preferred an appeal before us.

53. The Ld. AR before us submitted for inclusion/exclusion of certain comparables on various grounds. Regarding the inclusion of Allied Medical, the assessee submitted that the said comparable is a part of search matrix of assessee. Further, it is engaged in the business of manufacturing of anaesthesia, operation theatre etc. Hence, the same should be included in the final list of comparables.

53.1 Regarding the inclusion of Centenial Surgical, the assessee submitted that the said comparable is engaged in the business of manufacturing of sterile needle structures. Hence, the same should be included in the final list of comparables.

53.2 Regarding the inclusion of Hemant Surgical, the assessee submitted that the said comparable is engaged in the business of manufacturing of critical medical care equipment. Hence, the same should be included in the final list of comparables.

53.4 Regarding the inclusion of Iscon Surgical, the assessee submitted that the said comparable is a part of search matrix. Further, it is engaged in the business of manufacturing of various equipment and medical instruments. Hence, the same should be included in the final list of comparables.

53.5 Regarding the inclusion of Mediplus India, the assessee submitted that the said comparable is a leading manufacturer of Cathether etc. Hence, the same should be included in the final list of comparable.

53.6 Regarding inclusion of Ploy Medicure, the assessee submitted that the said comparable is a part of search matrix. Further, it is engaged in the business of manufacturing medical devices. Hence, the same should be included in the final list of comparables.

54. The Ld. DR supported the orders of the TPO/AO and the directions of the DRP, contending that the selection and rejection of comparables were carried out in accordance with prescribed filters and based on reliable data from audited financial statements. It was submitted that the companies excluded by the assessee were rightly rejected due to failure of filters such as export earnings and related party transactions. The DR further argued that companies like Agappe Diagnostics Ltd. and Sahajanand Medical Technologies Ltd. are functionally comparable as they operate in the same broad segment of medical devices and diagnostics. With respect to inclusion of new comparables, it was contended that the assessee cannot seek inclusion of companies outside the search matrix adopted by the TPO. The DR also submitted that differences in product lines or presence of R&D expenditure do not materially affect comparability under TNMM unless substantial impact on margins is demonstrated.

55. We have heard the rival contentions of both the parties and perused the materials available on record. At the outset, we note that, the assessee has only pressed for the following comparables namely:

55.1 Since, the ld. AR did not press all the comparables for the inclusion and exclusion as challenged before the authorities below other than the ones discussed above, hence the contentions of the assessee relating to other comparables is hereby dismissed.

55.2 Regarding the comparables namely, Allied, Iscon, and Poly Medicure, we note that the issue relating to the said comparables also arises on the ground that it does not form part of the search matrix adopted by the TPO. Since, we have already dealt with this aspect in detail in paragraph 27.3 of this order. So, at this juncture, it is necessary to analyse the details for the comparables for inclusion discussed above in the paragraph given below:

55.3 Regarding Allied Medical Ltd, we find merit in the contention of the assessee for inclusion of said comparable. The material on record at page 1111 of factual paper book clearly shows that the said comparable is involved in the manufacturing of medical equipment. We also note that the said comparable was part of search matrix also and the same can be substantiated from page 599 of factual paper book. Hence, the said company is a valid comparable and liable to be included in the list of comparables.

55.4 We find merit in the contention of the assessee in including M/s Centenial Surgical Suture Ltd. The material on record at 1112 of factual paper book clearly shows that Centenial Surgical Suture Ltd. is engaged in manufacturing of sterile needled sutures and surgical equipment. Further, the assessee is engaged in contract manufacturing of medical products such as medical diagnostic imaging equipment, ultrasound systems, patient monitoring & X-Ray systems, MRI Tables etc. Therefore, the said comparable stands included on account of functional comparability.

55.5 We find merit in the contention of the assessee in including Hemant Surgicals Industries Ltd. The material on record at page 1113 of factual paper book clearly shows that said comparable is engaged in manufacturing of critical medical care equipment like dialysis machine, ventilators, anesthesia machine, etc. Further, the assessee is engaged in contract manufacturing of medical products such as medical diagnostic imaging equipment, ultrasound systems, patient monitoring & X-Ray systems, MRI Tables etc. Therefore, the said comparable stands included on account of functional comparability.

55.6 We find merit in the contention of the assessee in including Iscon Surgicals Ltd. The material on record at page 1117 of factual paper book clearly shows that said comparable is engaged in manufacturing medical devices and equipment. Further, the assessee is engaged in contract manufacturing of medical products such as medical diagnostic imaging equipment, ultrasound systems, patient monitoring & X-Ray systems, MRI Tables etc. We also note that the said comparable was part of search matrix and the same can be substantiated from page 753 of the factual paper book. Therefore, the said comparable stands included on account of functional comparability.

55.7 We find merit in the contention of the assessee in including Mediplus (India) Ltd. The material on record at page 1114 clearly shows that said comparable is engaged in manufacturing of catheter etc. Further, the assessee is engaged in contract manufacturing of medical products such as medical diagnostic imaging equipment, ultrasound systems, patient monitoring & X-Ray systems, MRI Tables etc. Therefore, the said comparable stands included on account of functional comparability.

55.8 We find merit in the contention of the assessee in including Poly Medicure Ltd. The material on record at page 1115 and 1116 of factual paper book clearly shows that said comparable is engaged in manufacturing medical devices and equipment. Further, the assessee is engaged in contract manufacturing of medical products such as medical diagnostic imaging equipment, ultrasound systems, patient monitoring & X-Ray systems, MRI Tables etc. We also note that the said comparable was part of search matrix of assessee and the same can be substantiated from page 599 of the factual paper book. Therefore, the said comparable stands included on account of functional comparability. Exclusion of Agappe Diagnostics Ltd.

55.9 The Ld. AR submitted that the research and development (R&D) expenditure of the said comparable company is around 10% of its total other expenses. According to the Ld. AR, such a significant level of R&D spending clearly shows that the company is engaged in activities involving innovation, product development, quality improvement and process enhancement. It was further submitted that these functions indicate a different risk profile and asset base compared to the assessee. On the other hand, the assessee has not incurred any expenditure on research and development and is engaged in routine activities. Therefore, it was contended that the said comparable is not functionally similar to the assessee. In support of this contention, reliance was placed on the annual report placed at page 1119 of the factual paper book.

55.10 The Ld. DR, on the contrary, submitted that the mere existence of research and development expenditure cannot be a ground for exclusion of the comparable. It was contended that such expenses form part of normal business operations and do not materially affect comparability under TNMM. The Ld. DR further submitted that the assessee has not demonstrated how the R&D expenditure has significantly impacted the margins of the said company. It was also argued that in the absence of segmental bifurcation, the company continues to remain broadly comparable as it is engaged in similar line of business. Accordingly, the inclusion of the said comparable was justified.

55.11 We have considered the rival submissions of both the parties and perused the materials available on record. We find merit in the contention of the assessee that the comparable has incurred significant research and development expenditure amounting to around 10% of its total other expenses, which indicates involvement in innovation-driven activities such as product development, process improvement and quality enhancement. Such functions require deployment of higher-end assets and involve greater risks, which are not comparable with the assessee who is engaged in routine activities without any R&D expenditure. In our considered view, such functional differences materially impact the profitability of the comparable and render it unsuitable for comparison under TNMM. In this regard, we draw support from the decision of the Bangalore Tribunal in the case of NXP India (P.) Ltd. v. Dy. CIT [2020]   (Bangalore – Trib.), wherein companies having significant R&D activities were held to be functionally different from routine service providers. The relevant para is reproduced below:

“In the present case also, Infosys Limited is engaged in a leading global technology services corporation. The company provides business consulting, technology, engineering and outsourcing services to help clients build tomorrows enterprise. In addition, the company offers software products for the banking industry. It owns high brand value at Rs.56,286 crore in the year 2012 and percentage of brand value to revenue is 1.67% and brand value as a percentage of market capitalization is 34.2%, and also incur huge amount for research and development at Rs.5 crore as a capital expenditure and Rs.655 crore as a revenue expenditure for the year ended 31st March, 2012. Therefore, it cannot be said to be a comparable. We, therefore, direct the TPO to exclude Infosys Limited from the list of comparables.”

55.12 In view of the above, we hold that the presence of significant research and development expenditure in the comparable company clearly demonstrates its involvement in high-end, innovation-driven activities, which are materially different from the routine ITeS functions performed by the assessee. The assessee, being a low-risk service provider without any R&D functions, cannot be compared with a company undertaking product development and process innovation involving higher risks and specialized assets. Such differences have a direct bearing on profitability and violate the principle of functional comparability under the TNMM. Respectfully following the ratio laid down by the coordinate bench in the case of NXP India (P.) Ltd., we direct the exclusion of the said comparable from the final set of comparables. Accordingly, the TPO/AO is directed to recompute the arm’s length price after excluding this company.

55.13 The assessee, in response to the show cause notice issued by the TPO, submitted that Sahajanand Medical Technologies Ltd. fails the related party transaction (RPT) filter and therefore, the same is not comparable.

55.14 The TPO, however, examined the RPT for three years, namely FY 2020-21, 2019-20 and 2018-19, and observed that the RPT sales/revenue and RPT expenses to total expenses are within the acceptable range. Accordingly, the company was treated as comparable. Before the Ld. DRP, the assessee reiterated that the company fails the RPT filter. The Ld. DRP, however, upheld the findings of the TPO and retained the comparable.

55.15 Before us, the Ld. AR submitted that apart from RPT, the company is functionally different as it is engaged in manufacturing of balloon catheter cardiac stents, valves and occludes. It was further submitted that the company has significant research and development expenditure of around 9% of total expenses and incurs expenses on clinical trial services, as evident from page 1118 of the factual paper book.

55.16 We have considered the submissions and perused the materials on record. We find merit in the contention of the assessee in excluding Sahajanand Medical Technologies Ltd. The material on record at page 1118 of the factual paper book clearly shows that the company is engaged in manufacturing of balloon catheter cardiac stents, valves and occludes. On the other hand, the assessee is engaged in contract manufacturing of medical products such as medical diagnostic imaging equipment, ultrasound systems, patient monitoring systems, X-ray systems and MRI tables. Further, the company has significant R&D expenditure of around 9% of total expenses and incurs clinical trial expenses, indicating involvement in high-end and innovation-driven activities. Considering these functional differences, the said comparable is directed to be excluded from the list of comparables. In view of the above discussion, we reject the order of the TPO/AO insofar as it relates to the exclusion and inclusions of the comparables. As such we direct the TPO/AO to include and exclude the comparables as mentioned in the table below:

55.17 In view of the above elaborated discussion, the final list of comparables after the above inclusion/exclusion along with adjusted margin is as follows:

55.18 In view of the above discussion, we reject the order of the TPO/AO to the extent it pertains to the inclusion and exclusion of comparables and direct the TPO/AO to modify the final set in accordance with our findings. The TPO/AO is directed to recompute the arm’s length price accordingly. Hence, the grounds raised by the assessee are partly allowed.

56. During the assessment proceeding, the assessee asked for providing working capital adjustment while calculating the ALP of its international transactions. Therefore, the TPO called upon assessee to show as to how difference in working capital has impacted profit margins of each of the comparable companies. The Transfer Pricing Officer (TPO) during the proceedings found that the assessee was unable to sufficiently explain the differences in working capital between itself and the comparable companies. Specifically, the TPO observed that the assessee did not provide information regarding whether the comparable companies financed their working capital through their own funds or by borrowing. Furthermore, the assessee failed to demonstrate whether any costs had been incurred by the comparable companies in relation to their working capital.

56.1 As a result, the TPO held that in the absence of clarity and evidence on these aspects, the assessee cannot be given any working capital adjustment as prayed by it (the assessee). The TPO relied on the Hon’ble Chennai ITAT judicial precedent in the case of Mobis India Ltd. v. Dy. CIT  (Chennai – Trib.)/TS-235-ITAT-2013(CHNY)-TP wherein the Hon’ble ITAT rejected the claim of working capital adjustment of the taxpayer on the ground that impact of difference in working capital has not been demonstrated by the taxpayer. Hence, no working capital adjustment was allowed to the assessee.

57. Aggrieved assessee filed objections before the Ld. DRP.

58. Before the Ld. DRP, the assessee submitted that appropriate adjustments are required to be made for the differences in the controlled and the uncontrolled transactions which could affect prices charges or profitability in the open market. The assessee further submitted that in its own case of AY 2018-19 in IT(TP)A No. 803/Bang/2022 dated 17.05.2023, the Hon’ble ITAT Bangalore has provided that working capital adjustment should be granted to the Assessee. The assessee also referred to the OECD guidelines which explains the need and process of carrying out the working capital adjustments. The assessee also relied on plethora of judgments wherein the Hon’ble Courts and Tribunals have allowed working capital adjustments to remove any inconsistencies in the comparability analysis.

59. The Ld. DRP, however rejected the plea of assessee and upheld the TPO reasoning, citing the reason that the assessee failed to demonstrate how difference in working capital has impacted the profit margins of comparable companies.

60. Aggrieved by the order of the AO/TPO and the direction of the ld. DRP, the assessee preferred an appeal before us.

61. The Ld. AR before us submitted that appropriate working capital adjustment ought to be granted while benchmarking the international transactions under TNMM. It was contended that differences in the levels of receivables, payables and inventory between the assessee and the comparable companies materially affect the operating margins and, therefore, suitable adjustment is mandated.

61.1 The Ld. AR further submitted that the Bangalore Bench of the Tribunal, in the assessee’s own case for AY 2018-19 in IT(TP)A 803/Bang/2022 dated 17.05.2023, has adjudicated this issue and directed that working-capital adjustment be granted. It was argued that in the absence of any change in facts, the same view ought to be followed for the year under consideration. The assessee also relied upon various judicial precedents to contend that working-capital adjustment is an integral part of TNMM analysis and cannot be denied without proper examination.

62. Per contra, the Ld. DR before us supported the orders of the TPO and direction of ld. DRP and submitted that the assessee failed to discharge the onus of demonstrating the impact of working capital differences on profit margins. It was contended that mere quantitative differences in receivables, payables, and inventory do not automatically warrant adjustment unless their effect on margins is substantiated with reliable data. The Ld. DR emphasized that the assessee did not provide details regarding the cost of funds, financing pattern, or whether comparables incurred working capital costs, which are essential for computing any adjustment. In absence of such critical inputs, the claim remains unverified and speculative. Reliance was placed on judicial precedent to argue that working capital adjustment is not automatic and must be supported by proper analysis. Therefore, the TPO was justified in denying the adjustment, and the DRP rightly upheld the same.

63. We have considered the rival submissions of both the parties and examined the materials available on record. We find that while benchmarking the international transactions under TNMM, differences in working-capital levels between the assessee and the comparables are required to be adjusted in terms of Rule 10B(1)(e) of the Income-tax Rules, as such differences materially affect the net margins.

63.1 In the present case, the assessee has contended that its working capital position, including trade receivables, trade payables and inventory, differs from that of the comparables and therefore appropriate adjustment is required. We find that the authorities below have not carried out a proper working capital analysis based on average balances and comparable data. From pages 175 to 185 of the factual paper book, it is evident that the assessee has placed sufficient material on record to justify the claim of working capital adjustment and has also explained that such adjustment is mandated for determination of ALP in terms of Rule 10B(1)(e) and Rule 10B(3) of the Income-tax Rules. Therefore, the rejection of the claim by the AO/TPO and the Ld. DRP on the ground that necessary details were not furnished is not justified and appears to be a generic observation without proper examination of the material on record.

63.2 At the same time, we also note that in the assessee’s own case for AY 2018-19 in IT(TP)A No. 803/Bang/2022 dated 17.05.2023, this Tribunal has directed grant of working capital adjustment. In order to maintain consistency, we are of the considered view that the assessee is entitled to working capital adjustment in the year under consideration as well. Accordingly, we restore this issue to the file of the TPO with a direction to grant working capital adjustment in accordance with law. The assessee is also directed to furnish all necessary details and supporting documents before the TPO for proper computation of such adjustment. The relevant paragraph is reproduced below:

“The aforesaid margins are arrived by the TPO without providing for working capital adjustment. The working capital adjustment has not been allowed by the TPO for reasons mentioned in para 18 of the TPO order. The Tribunal in a host of cases has allowed the working capital adjustment on actual basis. Reference is drawn in the case of EIT Services India Pvt Ltd v. JCIT in ITA 3399/Bang/2018 dt.28.09.2021 wherein the Tribunal has held as under:

14.15 In view of the said decision, we direct the ld. DRP to allow the working capital adjustment.”

63.3 In view of the above and in the interest of justice and fair play, we deem it appropriate to restore this issue to the file of the AO/TPO for the limited purpose of granting working capital adjustment in accordance with law. The AO/TPO shall compute the adjustment after examining the average levels of receivables, payables and inventory of the assessee as well as of the comparables, and after affording due opportunity of being heard to the assessee. Accordingly, this issue is set aside to the file of the AO/TPO for fresh determination of ALP in the light of the above directions. Hence, the ground of appeal of the assessee is allowed for statistical purposes.

Ground No. 6 Notional Interest on delayed receivables.

64. The TPO treated the delay in realization of trade receivables from the AEs as unsecured loans advanced to the AEs and, accordingly, computed notional interest for the period of such delay during the year under consideration. In doing so, the Ld. TPO placed reliance on the provisions of section 92B of the Act, wherein the definition of “international transaction” was retrospectively amended to include capital financing transactions arising in the course of business.

64.1 The TPO computed notional interest for the captioned AY by applying the Libor+450 Basis Points applicable for the Assessment year 2021-22 at the rate of 5.19% and, on such basis, determined the total notional interest adjustment at Rs. 2,19,67,307/- only.

65. Aggrieved by the order passed by Ld. TPO, the assessee raised objections before the Hon’ble DRP.

66. Before the Ld. DRP, the assessee submitted the interest on delayed receivables should not be considered a separate international transactions reason being they represent only a consequence of the principal international transaction i.e. sales. The assessee also relied on the judgment of Hon’ble Delhi High Court in the case of Pr. CIT v. Kusum Health Care (P.) Ltd. [2018]  [2017] 398 ITR 66 (Delhi)/TS-412-HC-2017(Del)-TP wherein the Hon’ble Court held that separate adjustment on the pretext of o/s receivable is unjustified when the comparables are accepted and TP of underlying transaction i.e. sale of goods is also accepted. Similar reliance was also placed by the assessee on various other judicial prudence.

66.1 Further, the assessee before the Ld. DRP submitted that the interest on trade receivables should not be computed when the trade payables are more in comparison to the trade receivables. Furthermore, the assessee contented that if it all interest is calculated on trade receivables, it should be net of trade payables i.e. Trade receivables less trade payables.

66.2 The assessee further contented that outstanding trade receivables cannot be categorised as an advancement of loan to the AEs. The assessee referred to the OECD guidelines in para 1.143 which emphasizes that tax authorities should recognise and appreciate the actual transactions undertaken by a taxpayer. The assessee relied on the judicial precedent in the Highways Construction Co. (P.) Ltd. v. CIT [1993] 199 ITR 702 (Gauhati) wherein the Hon’ble Guwahati High Court has held there is no provision in the IT Act that empowers tax authorities to include interest, which is neither due nor collected.

66.3 Further, the assessee contended that amount of outstanding receivables gets adjusted in the working capital adjustments and hence, no addition is required to be made separately thereon.

67. The Ld. DRP, with regard to contention of the assessee regarding whether the interest on delayed receivables constitutes a separate international transaction, observed that the amendment inserted by way of Explanation to sec. 92B of the Act i.e. 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 courts in this regard.

67.1 With regard to contention of assessee that interest on delayed receivables gets adjusted within working capital adjustment and a separate adjustment is not required, the Ld. DRP submitted that working capital adjustment have no impact on determination of ALP on interest receivables beyond stipulated credit period. The ld. DRP relied on the judgment of Hon’ble Delhi ITAT in case of Bechtel India (P.) Ltd. v. Asstt. CIT  (Delhi – Trib.)/ITA 6530/Del/2016 wherein the ITAT held that interest for credit period allowed as per the agreement is absorbed in the price charged for rendering of services. Therefore, non-realisation of invoice value beyond the stipulated period is a separate international transaction whose ALP is required to be determined. Granting of working capital adjustment is confined to the international transaction of rendering of services, whose ALP is separately determinable. On the other hand, the international transaction of interest receivable from its AEs for late realization of invoices beyond such stipulated period is a separate international transaction. Allowing working capital adjustment in the international transaction of rendering of services can have no impact on the determination of ALP of the international transaction of interest on receivables from AEs beyond the stipulated period allowed as per agreement.

68. Aggrieved by the order/ directions of the AO/ Ld. DRP, the assessee preferred an appeal before us.

69. The Ld. AR before us submitted that outstanding trade receivables arise only as a consequence of the principal international transaction of sale and form part of the ordinary business cycle from AEs and cannot be considered as a separate international transaction.

69.1 The Ld. AR further submitted that the assessee had substantial trade payables and that even the AEs had not charged any interest on outstanding balances payable by the assessee. Therefore, there was no financing benefit extended to the AEs. It was contended that while benchmarking the operating margin under TNMM, the working-capital position had already been considered and, hence, the impact of receivables stood neutralised. According to the Ld. AR, making a separate adjustment towards interest would amount to double counting.

69.2 It was also submitted that outstanding trade receivables cannot be re-characterised as loans in the absence of any loan agreement or separate financing arrangement. The Ld. AR contended that the TPO’s approach of treating trade receivables as unsecured advances was contrary to settled principles of transfer-pricing jurisprudence.

69.3 Further, the assessee submitted that as on the closing date 31.3.2021, the assessee is a debt free company and it does not have any borrowing from external sources and therefore it has not incurred any interest cost during the subjected AY. The assessee relied in judicial precedents of PCIT v. Inductis India Private Limited and Bechtel India (P.) Ltd. (supra).

69.4 Without prejudice, the assessee submitted that interest cannot be levied on delayed receivables when the assessee has delayed payables from the said AEs. The assessee also submitted a summary of trade receivables and trade payables in this regard.

69.5 Without prejudice, the Ld. AR submitted that the TPO arbitrarily assumed a credit period of 30 days, whereas the assessee had demonstrated that a credit period of 33 days was well within normal industry practice. It was argued that no material had been brought on record to show that the credit terms allowed to AEs were more favourable than those granted to non-AEs.

69.6 Without prejudice to the above, the Ld. AR submitted that the TPO erred in computing interest on the entire turnover of the assessee instead of restricting the computation only to overdue AE receivables beyond the permissible credit period and only in respect of international transactions.

69.7 Without Prejudice, The Ld. AR also challenged the adoption of LIBOR plus 450 basis points, contending that the rate was applied mechanically without examining the currency of the receivables or placing any comparable data on record to justify such spread.

70. On the other hand, the Ld. DR supported the orders of the TPO/AO and the DRP, contending that delayed realization of trade receivables from AEs constitutes a separate international transaction under the Explanation to section 92B of the Act, which includes deferred payments and receivables. It was submitted that non-charging of interest amounts to extending financial accommodation to AEs and must be benchmarked independently under transfer pricing provisions. Accordingly, the TPO was justified in computing notional interest using LIBOR plus basis points, which was rightly upheld by the DRP.

71. We have considered the rival submissions of both the parties and examined the manner in which the adjustment has been made by the TPO. Regard the contention of the assessee that the interest on delayed receivables should not 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.

71.1 However, we are also not ignorant of the fact that mere inclusion of receivables within the ambit of “international transaction” under section 92B does not automatically warrant an adjustment.

71.2 We note that the assessee has contended that being a debt-free company, no notional interest can be imputed on delayed receivables from its AEs. We find merit in this contention. The Hon’ble Delhi High Court in the case of Pr. CIT v. Inductis India (P.) Ltd.   (Delhi) has held that where the assessee is a debt-free company, the question of charging notional interest on receivables does not arise and such TP adjustment is liable to be deleted. The said view has attained finality, as the SLP filed by the Revenue has been dismissed by the Hon’ble Supreme Court in Pr. CIT v. Inductis India (P.) Ltd.  (SC). The relevant para of Hon’ble Delhi HC judgment is reproduced below:

“Earlier, in similar circumstances, the issue came up before the Income Tax Appellate Tribunal in the case of Bechtel India (P.) Ltd. v. Dy. CIT  (Delhi – Trib.) and the Tribunal held that the assessee being a debt free company, it would not be justifiable to presume that the borrowed funds have been utilized to pass on the facilities to its AEs and the revenue also had not brought on record that the assessee had been found paying interest to its creditors or suppliers on delayed payments. This view of the Income Tax Appellate Tribunal was upheld by a coordinate bench of this court in appeal titled Pr. CIT v. Bechtel India (P.) Ltd. [IT Appeal No. 379 of 2016, dated 21-7-2016], observing that no substantial question of law arose as the Tribunal had returned a finding of fact to the effect that the assessee was a debt free company and a question of receiving any interest on receivable did not arise. Against the said judgment, Pr. CIT v. Bachtel India (P.) Ltd. CC No.(s) 4956 of 2017 preferred by the revenue was dismissed vide order dated 21-7-2017.”

71.3 In the present case, it is an undisputed fact that the assessee is a debt-free company and the Revenue has not brought any material on record to show that the assessee has incurred any interest cost or that any benefit has been passed on to the AE. Mere delay in realization of receivables, without demonstrating any impact on profitability or existence of a financing arrangement, cannot justify a TP adjustment in the give facts and circumstances. Accordingly, respectfully following the binding decisions of the Hon’ble Delhi High Court in Inductis India (P.) Ltd. (supra) as affirmed by the Hon’ble Supreme Court, we hold that no adjustment on account of notional interest on delayed receivables is warranted. The addition made by the TPO is therefore directed to be deleted. In view of the above, the ground raised by the assessee is allowed.

72. The brief facts are that the assessee paid Rs. 23,03,28,908/- as royalty to its associated enterprise during the relevant assessment year. The assessee clubbed this royalty payment with its other purchase and sale transactions and benchmarked them together under the TNMM at the enterprise level. According to the assessee, the royalty was paid for using manufacturing technology and technical knowhow and therefore it was closely connected with the manufacturing activity and could not be separated for the benchmarking independently.

72.1 However, The TPO did not agree with this approach. According to him, royalty relates to a special and valuable intangible asset and therefore it should be examined as a separate international transaction instead of being aggregated with manufacturing transactions. The TPO further stated that the correct method for benchmarking royalty was the CUP method and not TNMM.

72.1 The TPO also alleged that the associated enterprise did not even own the technology for which royalty was claimed to have been paid. On this basis, he questioned the commercial justification of the payment itself.

72.2 Further, the TPO treated the assessee as only a contract manufacturer and not a licensed manufacturer. He stated that a contract manufacturer only manufactures goods for the group and normally should not bear the cost of royalty for group intangibles. According to him, the responsibility to pay royalty should lie with the entity which exploits the intellectual property and not with the assessee.

72.3 The TPO also observed that the TNMM adopted by the assessee was unreliable because the comparable companies available in the public database did not possess similar intangibles as those allegedly licensed by the associated enterprise to the assessee.

72.4 On the basis of all these reasons, the TPO determined the arm’s length price of the royalty payment at NIL and made a transfer pricing adjustment of Rs.23,03,28,908 by adding to the total income of the assessee.

73. Aggrieved assessee filed objections before the Ld. DRP.

74. The assessee before ld. DRP submitted that it has obtained manufacturing technology from its associated enterprise, GEMS GTC. The AE provides advanced technology for manufacturing sophisticated medical equipment. In a normal third-party situation, no company would allow another party to use its technical know-how free of cost. Since the Assessee is neither the legal nor the economic owner of the technology, it is required to pay royalty for using the same.

74.1 The Assessee further submits that the royalty payment is closely connected with its other international transactions in the contract manufacturing segment and was therefore aggregated with those transactions and benchmarked under the TNMM in the transfer pricing documentation.

74.2 Since the royalty was paid for use of manufacturing technology, it was dependent upon and inseparable from the manufacturing function. Accordingly, being a “closely linked transaction” as contemplated under Rule 10A(d) of the Rules, it was required to be aggregated with the manufacturing transactions and benchmarked together under TNMM. The Ld. TPO erred in rejecting this approach and in proposing to determine the arm’s length price of the royalty at NIL.

74.3 The Assessee explains that the royalty was paid in consideration for technology received from the AE, which the Assessee uses in its manufacturing operations. The AE owns the technical knowhow for producing sophisticated medical equipment and licenses the same to the Assessee. The assessee does not conduct any research and development and does not have the capability to develop such technology. On the other hand, the AE continuously invests in R&D and upgrades the technology to meet global medical standards and customer requirements. Considerable effort and cost are incurred by the AE in developing this technology. No independent third party would provide such high-end technical know-how free of charge.

74.4 The Assessee relies on orders of the ld. CIT(A) in its own case for AY 2002-03, 2003-04 and 2004-05, where the issue of royalty was examined. In those years, the TPO had made an adjustment in one year but accepted the royalty in other years. The ld. CIT(A) observed that this showed inconsistency in the TPO’s approach and held that arm’s length price cannot be determined without selecting an appropriate method and identifying comparable uncontrolled transactions. The ld. CIT(A) also stated that ALP should be determined keeping in mind commercial reality and business expediency.

74.5 Based on these observations, the Assessee submits that although those orders related to trademark royalty, the same principles apply to technical royalty. The TPO, by proposing to disallow the entire royalty, failed to appreciate the Assessee’s business model and has acted arbitrarily.

74.5 The Assessee further submits that the TPO did not select a proper method as required under Indian transfer pricing regulations and the directions of the CIT(A). Instead, the TPO merely proposed to disallow the royalty without carrying out any proper arm’s length analysis. The Assessee had undertaken a detailed benchmarking study in its TP report, which ought to have been accepted, and the rejection of the same is unjustified.

74.6 The Assessee also points out that the TPO has not carried out any comparability analysis or detailed search process, which is mandatory for applying CUP. The TPO did not perform the most appropriate method analysis under Rule 10C, nor did he document the same under Rule 10D. Further, the ALP was determined without following the procedure prescribed for CUP under Rule 10B(1)(a).

74.7 The Assessee submits that TNMM is the most appropriate method for benchmarking the royalty payment and that the TPO erred in rejecting the economic analysis in the TP documentation.

74.8 It is further submitted that the royalty transaction is closely linked with other international transactions in the contract manufacturing segment and was therefore aggregated under TNMM as the most appropriate method.

74.9 The Assessee referred to section 92B of the Act and Rule 10A(d), which states that a transaction includes a group of closely linked transactions. Therefore, transactions which are closely connected and interwoven should not be separated for benchmarking purposes. The TPO’s attempt to segregate the royalty transaction is contrary to the functional profile and nature of the Assessee’s business.

74.10 The Assessee also referred to section 92C(1) and Rule 10A(d), which provide that ALP should be determined by selecting the most appropriate method having regard to the nature of the transaction or class of transactions.

74.11 It was submitted that the royalty was paid for obtaining manufacturing know-how and forms an integral and inseparable part of the manufacturing process. Hence, it cannot be benchmarked separately.

74.12 The Assessee relied on paragraph 3.9 of the OECD Transfer Pricing Guidelines, which recognise that where transactions such as licensing of manufacturing know-how and supply of components are closely linked, they may be evaluated together using the most appropriate method.

74.13 The Assessee placed reliance on judicial precedents where TNMM was accepted for royalty transactions. It relied on the Bombay High Court decision in Cummins India Ltd. v. Asstt. CIT (Bombay), which held that once TNMM is accepted as the most appropriate method, the TPO cannot apply CUP only to the royalty element. It was also held that closely linked transactions should be benchmarked together and that consistency should be followed in years where the same agreement had been examined earlier.

74.14 Reliance was also placed on the Delhi High Court ruling in Sony Ericsson Mobile Communications India (P.) Ltd. v. CIT  374 ITR 118 (Delhi)., which held that closely connected or continuous transactions can be aggregated for benchmarking in view of section 92C and Rule 10A(d) of Income Tax Rules.

74.15 The Assessee therefore submits that it correctly aggregated the royalty transaction with other manufacturing transactions and demonstrated that the same was at arm’s length.

74.16 The Assessee further submits that CUP is not the most appropriate method for benchmarking royalty because no two technologies are identical and reliable comparable data is generally unavailable.

74.17 Reference was made to Rule 10B(2) and Rule 10B(3), which require close comparability and availability of reliable data or adjustments. The assessee submitted that such reliable comparable data is not available for royalty agreements involving unique technologies, and therefore CUP cannot be applied.

74.18 It was submitted that under Rule 10C, selection of the most appropriate method depends on availability and reliability of data, degree of comparability and ability to make adjustments. These conditions are not satisfied for applying CUP in the present case.

74.19 The assessee also submitted that the TPO cannot question the commercial expediency of the royalty payment and can only examine whether the price paid is at arm’s length. Reliance was placed on the Delhi High Court decision in CIT v. EKL Appliances Ltd.  345 ITR 241 (Delhi), which held that the TPO cannot disallow an expenditure merely because he considers it unnecessary or commercially unwise.

74.20 Accordingly, the Assessee submits that the TPO cannot determine the ALP of royalty at NIL without selecting a proper method and carrying out an arm’s length analysis.

74.21 The Assessee also relied on earlier orders of the ITAT in its own case for AY 2005-06 and 2006-07 in Wipro GE Healthcare (P.) Ltd. v. ACIT [IT (TP) Appeal Nos. 701 & 702 (Bang.) of 2021, dated 5-8-2022], where the issue was remanded to the TPO/AO to reconsider the royalty benchmarking in light of earlier years. The Tribunal had directed that if no comparable is found for royalty, the payment should be considered along with other international transactions and benchmarked under TNMM.

75. However, the Ld. DRP rejected the assessee’s arguments on the royalty issue. It held that in an uncontrolled or third-party situation, a contract manufacturer would not normally pay royalty. According to the ld. DRP, royalty should be paid by the entity which actually exploits the intellectual property and earns the residual profits from such exploitation, namely a licensed manufacturer or an entrepreneur manufacturer.

75.1 With regard to the assessee’s reliance on earlier orders of the ITAT Bangalore in its own case for AY 2005-06 and 2006-07 IT(TP)A No. 701 and 702/Bang/2021 dated 05.08.2022, where the matter was remanded to the TPO/AO for reconsideration of royalty benchmarking in light of earlier years, the ld. DRP observed that the facts in the present year were different from those earlier years. On that basis, the ld. DRP rejected the assessee’s objection and did not accept the reliance placed on the earlier Tribunal orders.

76. Aggrieved by the order/ direction of the AO/ ld. DRP, the assessee preferred an appeal before us.

77.1 The Ld. AR before us submitted that the royalty payment was not an independent transaction but was closely linked with the contract-manufacturing activity of the assessee. Accordingly, the assessee had aggregated the royalty transaction with other international transactions of the contract-manufacturing segment and benchmarked the same under TNMM in its transfer-pricing study.

77.2 The assessee contended that the segregation of royalty and its separate benchmarking by the TPO was contrary to Rule 10A(d) of Income Tax Rules, which permits aggregation of closely linked transactions. It was submitted that the royalty was paid for use of manufacturing technology and technical know-how, which formed an inseparable and fundamental part of the manufacturing process. Therefore, once the manufacturing segment had been tested under TNMM and found to be at arm’s length, no separate adjustment on account of royalty was warranted.

77.3 Without prejudice, the Ld. AR argued that the application of CUP by the TPO was wholly unjustified. It was submitted that technology is a unique intangible and no two technologies can ever be identical. Hence, royalty agreements cannot be compared mechanically without demonstrating close comparability as required under Rule 10B. The Ld. AR pointed out that the TPO had not identified any comparable uncontrolled transaction, nor carried out any scientific search process or detailed comparability analysis before determining the ALP of the royalty at NIL.

77.4 The Ld. AR further submitted that the TPO failed to undertake the mandatory exercise of selecting the most appropriate method under Rule 10C. No cogent reasons were recorded for rejecting TNMM adopted by the assessee or for preferring CUP in the facts of the case. Instead, the royalty was simply disallowed in entirety, which is impermissible under the transfer-pricing provisions.

77.5 It was further submitted that under Indian transfer-pricing regulations, the TPO is only empowered to examine whether the price paid is at arm’s length and cannot question the commercial expediency of the transaction. The Ld. AR submitted that the assessee had received valuable manufacturing technology from its AE, without which it could not have carried out its operations, and therefore payment of royalty was a normal commercial arrangement. Determining the ALP at NIL without undertaking any benchmarking exercise amounts to substituting the business judgment of the assessee which is contrary to law.

77.6 The Ld. AR also submitted that the assessee had relied upon judicial precedents which recognise that where transactions are closely linked, they ought to be aggregated and benchmarked together under TNMM and that CUP cannot be applied in absence of reliable comparable data.

78. On the other hand, the Ld. DR supported the orders of the TPO and DRP, contending that the assessee wrongly aggregated the royalty transaction with manufacturing activities under TNMM without proving that they were closely linked under Rule 10A(d). It was argued that royalty, being payment for use of valuable intangibles, is a distinct international transaction requiring separate benchmarking. The assessee, being a contract manufacturer with limited functions and risks, should not bear royalty costs, which in an uncontrolled scenario would be borne by the principal entity exploiting the intellectual property. The Ld. DR justified the use of CUP as the most appropriate method for benchmarking royalty and submitted that TNMM was inappropriately applied. It was further contended that the assessee failed to demonstrate actual receipt or benefit of technology and did not provide reliable comparables. Therefore, determination of ALP at NIL was justified.

79. We have carefully considered the rival submissions, perused the materials placed on record and examined the orders of the lower authorities on this issue. The dispute before us relates to the transfer-pricing adjustment of Rs. 23,03,28,909 made by the TPO by determining the arm’s length price of royalty payment to the associated enterprise at NIL, which has been confirmed by the Ld. DRP.

79.1 At the outset, we note that, the assessee has referred to order u/s 92CA dated 22.10.2025 in its own case for AY 2018-19, wherein the TPO after following the Hon’ble Bangalore ITAT order in IT(TP)A No. 803/Bang/2022 dated 17.05.2023 allowed royalty in distribution segment. In this regard, we observe that in the said order, the royalty payment has been allowed in distribution segment. However, in the year under appeal, the assessee has asked for royalty payment under manufacturing segment. Hence, the same is misplaced as the facts are different in the current year.

79.2 The undisputed fact is that the royalty was paid for use of manufacturing technology and technical know-how which enabled the assessee to carry out its contract-manufacturing activities. The assessee aggregated this royalty transaction with other international transactions of the contract-manufacturing segment and benchmarked the same under TNMM in its transfer-pricing study on the ground that the royalty was closely linked and inseparable from the manufacturing function.

79.3 In our considered view, where the payment of royalty is intrinsically connected with the manufacturing activity and is an integral part of the operating structure of the tested segment, such transaction cannot be viewed in isolation. Rule 10A(d) of the Income-tax Rules specifically provides that a “transaction” includes a number of closely linked transactions. Once the assessee has demonstrated that the royalty was paid for manufacturing know-how and formed a fundamental part of the production process, aggregation of the same with the manufacturing segment for benchmarking under TNMM cannot be faulted.

79.4 We also find force in the contention of the Ld. AR that the TPO has not brought on record any reliable comparable uncontrolled transaction for application of the CUP method. The TPO has neither carried out a detailed search process nor undertaken a comparability analysis as mandated under Rule 10B, nor recorded any proper reasons for selecting CUP as the most appropriate method in terms of Rule 10C. Determination of ALP at NIL, without identifying any comparable transaction or carrying out a proper benchmarking exercise, is not permissible under the transfer-pricing provisions.

79.5 We further observe that the TPO has essentially questioned the necessity of the royalty payment and proceeded to disallow the same in entirety. It is settled law that in transfer-pricing proceedings, the role of the TPO is limited to examining whether the price paid for a transaction is at arm’s length and not to decide the commercial expediency of the expenditure. In the present case, the materials on record show that the assessee utilised the technical know-how received from its AE in carrying out its manufacturing operations. Therefore, the approach of determining the ALP of the royalty at NIL merely on the ground that the assessee is a contract manufacturer cannot be sustained.

79.6 As regards the reasoning adopted by the Ld. DRP that in an uncontrolled situation royalty would not be borne by a contract manufacturer, we are of the view that such a general proposition cannot, by itself, justify rejection of the assessee’s benchmarking without undertaking a proper functional and economic analysis of the specific arrangement and without identifying any comparable uncontrolled transactions. Transfer-pricing adjustment has to be founded on cogent benchmarking analysis and not on presumptions.

79.7 We also find force in judicial precedent in the case of Dy. CIT v. Toyota Kirloskar Motor (P.) Ltd  (Bangalore – Trib.) wherein the Hon’ble Karnataka HC has held no separate adjustment is required for payment of royalty if TNMM approach has been adopted at entity level which included royalty also. The relevant para is reproduced below:

“Considering the above observations and arguments, we uphold the order of the DRP and no separate adjustment is required for the payment of royalty if the TNMM approach has been adopted at entity level as decided by the coordinate bench of the Tribunal in the assessee’s own case noted supra, therefore ground Nos.8 to 15 become academic in nature, accordingly, we allow ground nos.8 to 15.”

79.8 In view of the above discussion, we hold that the TPO was not justified in segregating the royalty transaction, rejecting TNMM adopted by the assessee and determining the arm’s length price of the royalty payment at NIL by invoking CUP. Consequently, the transfer pricing adjustment of Rs. 23,03,28,909 sustained by the Ld. DRP is directed to be deleted.

Ground No. 8 Adjustment on account of intra group services for Rs. 2,11,18,518.

80. The brief facts are that the assessee paid Rs. 5,52,27,486/- towards intra group service fee to its AE. The same was benchmarked using the TNMM as the MAM. The assessee before the TPO submitted the nature, reason and amount of each transaction undertaken by the assessee.

80.1 However, the TPO observed that the assessee had given only a general explanation about the intra-group services and had not supported the same with proper documentary evidence. According to the TPO, the assessee failed to substantiate the nature and benefit of the services allegedly received from its AE.

80.2 The TPO further held that these services were in the nature of shareholder activities and did not provide any real benefit to the assessee’s business operations. On this basis, the TPO accepted IT Support Services Cross Charges to the tune of Rs. 3,41,08,968 and disallowed the remaining amount of Rs. 2,11,18,518 paid towards intra group service fees and made a corresponding transfer-pricing adjustment at NIL using the CUP method as MAM.

81. Aggrieved assessee filed objections before the DRP.

82. The assessee submitted that the intra-group service transactions were tested as part of the overall segmental profit and loss while benchmarking its main business activities such as contract manufacturing, distribution, engineering design, software services and ITES.

82.1 The assessee submitted that the Ld. TPO wrongly stated in the TP order that the intra-group services were routine in nature, constituted shareholder activities and were duplicative. It was further alleged by the TPO that the assessee already had its own accounting team and that no documentary evidence had been maintained for the services allegedly provided by the AEs. On this basis, the TPO treated the services as shareholder activities and benchmarked the entire expenditure at NIL.

82.2 In response, the assessee explained that during the year it had availed several services from its group companies. The broad nature of these services included trademark billing, recharge of legal service costs, accounting support services, enterprise-standard services from global operations, financial and accounting services, translation of technical manuals, regulatory compliance services, marketing digital services, rework charges and similar operational support services.

82.2 The assessee clarified that shareholder activity refers to activities performed by a parent or holding company purely because of its ownership interest in the subsidiary and which an independent third party would not have been hired to perform. In other words, such activities are undertaken in the capacity of a shareholder and not for meeting the commercial or operational needs of the subsidiary.

82.3 It was submitted that in the present case, a detailed party wise break-up of the services received along with a brief description of each service had been provided in the paper book. From the said details, it was evident that the services received from group companies were beneficial to the assessee and to the group as a whole and were not routine shareholder activities. These were genuine support services which helped the assessee to operate efficiently, and in their absence, the assessee would have had to deploy additional manpower and incur higher costs. Therefore, the services could not be characterised as shareholder activities.

82.4 Accordingly, the assessee submitted that the intra-group service transactions were at arm’s length for the following reasons: first, similar cross-charges had been accepted as being at arm’s length in earlier transfer-pricing assessments; second, sample copies of agreements and invoices had already been submitted to demonstrate the genuineness of the transactions; and third, the assessee had derived clear business benefits from the services, which supported its day-to-day operations.

83. The Ld. DRP referring to OECD TP Guidelines – Chapter VII observed that to claim deductibility of intra-group services, the company as well as the AE should maintain adequate documentation in order to verify the claim of such services. The Ld. DRP further submitted that the assessee has failed to produce such documentation both at TPO stage and DRP stage. Merely submitting Email Communications, Tickets, Vise copies of employees who travelled abroad in support of intra-group services cannot be considered as sufficient and appropriate evidences.

83.1 The Ld. DRP also concluded that the intra-group services claimed by the assessee fall within the category of shareholder activities as described in the OECD Guidelines. On this basis, the ld. DRP upheld the action of the TPO in treating the services as shareholder in nature and in applying the CUP method as the most appropriate method for benchmarking the transaction. Hence, the ld. DRP rejected the objections of the assessee.

84. Aggrieved by the order/ direction of the AO/TPO/ Ld. DRP, the assessee preferred an appeal before us.

85. The Ld. AR before us submitted that the TPO erred in making a transfer-pricing adjustment of Rs. 2,11,18,518/- in respect of intra-group service charges by determining the arm’s length price of such services at NIL and by holding that no benefit was derived by the assessee. It was submitted that this conclusion was reached despite the fact that the services were admittedly availed by the assessee and were demonstrably used to optimise its operations, reduce costs and improve its competitive position in the market.

85.1 The Ld. AR further submitted that the services were not routine in nature and therefore ought to have been accepted as being at arm’s length. It was contended that the Ld. DRP erred in upholding the action of the TPO.

86. On the other hand, the Ld. DR supported the orders of the TPO/AO and the direction of the ld. DRP, contending that the assessee failed to substantiate the receipt of intra-group services with adequate documentary evidence. It was submitted that only general explanations, emails and invoices were furnished, which do not establish actual rendition or business benefit. The ld. DR further argued that the services were either duplicative or in the nature of shareholder activities, as the assessee had its own resources. Accordingly, it was contended that the TPO rightly applied the CUP method and determined the arm’s length price at NIL, which was correctly upheld by the ld. DRP.

87. We have carefully considered the rival submissions of both the parties and perused the materials available on record. The issue before us relates to the adjustment made by the TPO by determining the arm’s length price of intra-group service charges at NIL on the ground that no benefit was derived by the assessee and that the services were in the nature of shareholder activities.

87.1 From the preceding discussion, we note that the assessee has claimed having availed various support services from its associated enterprises and has furnished detailed information regarding the nature of such services along with supporting agreements, invoices and partywise breakup, placed at pages 1141 to 1208 of the factual paper book. We note that at page 1141 of the factual paper book, the assessee has provided a summary table containing the name of the AE, country, nature of services and the amount. For the sake of convenience, the said table is reproduced below:

87.2 The services included accounting and finance support, legal and regulatory assistance, technical documentation, marketing support, enterprise-wide operational services and re-work charges. These services, in our view, are in the nature of operational and business support services and cannot be brushed aside merely by branding them as shareholder activities.

87.3 We also note that the TPO and the Ld. DRP have primarily rejected the claim on the ground that the assessee did not derive sufficient benefit from such services. In this regard, it is settled that the TPO cannot step into the shoes of the businessman and decide whether the assessee required such services or whether the expenditure was commercially prudent. The jurisdiction of the TPO is confined to determining whether the price paid is at arm’s length. Once the assessee demonstrates that services were actually received and were used for its business operations, the transaction cannot be disregarded in entirety.

87.4 We further observe that the ALP of the transaction has been determined at NIL without carrying out any proper benchmarking exercise and without identifying any comparable uncontrolled transaction for application of the CUP method. Neither the TPO nor the DRP has undertaken a detailed comparability analysis as prescribed under Rule 10B or recorded reasons for selection of CUP as the most appropriate method in terms of Rule 10C. Such an approach, in our view, is not in accordance with the statutory framework governing transfer-pricing determination.

87.5 As regards the allegation that the services were shareholder activities, we find that no specific service has been analysed individually to demonstrate that the same was performed merely in the capacity of a shareholder and did not provide any commercial benefit to the assessee. A general observation based on OECD guidelines, without examining the actual nature of services rendered in the present case, is not sufficient to sustain the disallowance.

87.8 In view of the above, we hold that the action of the TPO in determining the ALP of the intra-group service charges at NIL and the confirmation thereof by the Ld. DRP cannot be sustained. Accordingly, the transfer-pricing adjustment made on this account is directed to be deleted and the ground raised by the assessee is allowed.

Ground No. 9 relates to disallowance of tax not deducted u/s 40(a)(ia) of the Act

88. The brief facts are that the assessee claimed deduction of Rs. 62,42,96,784/- towards rent payments during the year. Out of the said amount, tax was deducted at source on payments aggregating to Rs. 61,85,28,155/-. The balance sum of Rs. 57,68,629/- was stated by the assessee to be outside the scope of TDS under the applicable provisions, on the ground that such payments related to purchase of equipment or goods and rent expenses incurred in foreign countries, on which tax was not deductible in India.

88.1 However, the AO did not accept the assessee’s explanation regarding non-deduction of tax at source on the amount of Rs. 57,68,629/-. The AO accordingly invoked section 40(a)(ia) of the Act and disallowed 30% of the said amount, being Rs. 17,30,589/-, and added the same to the total income of the assessee.

89. Aggrieved assessee filed objections before the Ld. DRP.

90.1 Before the DRP, the assessee, more or less, reiterated the same before the Ld. DRP as done before AO.

91. The Ld. DRP observed that the assessee did not submit the sufficient evidence to substantiate its claim and confirmed the addition made by the AO.

92. Aggrieved assessee preferred an appeal before us.

93. The Ld. AR submitted that a detailed breakup of the disputed rental expenses amounting to Rs. 57,68,629/- was furnished before the lower authorities, containing particulars such as description of services, vendor names, invoice dates and amounts. It was contended that these details clearly demonstrate that the said payments were not liable for deduction of tax at source.

93.1 The Ld. AR further submitted that certain payments represented purchase of equipment or materials from vendors and therefore did not partake the character of rent requiring deduction of tax under the relevant provisions. It was also submitted that some portion of the rent was paid outside India, and since the same was not chargeable to tax in India, no obligation to deduct tax at source arose.

93.2 The Ld. AR also pointed out that copies of purchase invoices were produced on a sample basis to substantiate the nature of the transactions and to show that the payments were not in the nature of rent attracting TDS provisions.

94. The Ld. DR before us submitted that the assessee failed to conclusively prove that the impugned payments were not in the nature of rent liable for TDS. It was contended that mere submission of invoices and breakup details does not establish the true character of the transactions. The Ld. DR argued that substance over form should prevail, and payments for use of assets or facilities would fall within the ambit of rent. It was further submitted that the assessee did not furnish sufficient evidence to support its claim regarding purchase transactions or non-taxability of overseas payments. Accordingly, the disallowance was justified.

95. We have considered the rival submissions and perused the material placed on record. The disallowance u/s 40(a)(ia) of the Act has been made in respect of payments aggregating to Rs. 57,68,629/- on which tax was not deducted at source.

95.1 We find that the assessee furnished a detailed breakup of the said payments along with particulars such as vendor names, description of transactions, invoice dates and amounts. The assessee has also produced sample purchase invoices to substantiate that part of the expenditure represented purchase of equipment or materials and was not in the nature of rent attracting deduction of tax at source.

95.2 We further note that certain payments were made outside India and the Revenue has not brought any material on record to show that such payments were chargeable to tax in India so as to trigger the obligation to deduct tax at source. In the absence of any finding by the AO that the said sums were chargeable to tax under the Act, the provisions of section 40(a)(ia) of the Act could not have been invoked.

95.3 The AO has made the disallowance merely by rejecting the assessee’s explanation, without controverting the documentary evidence furnished or establishing that the impugned payments were in fact liable for deduction of tax at source.

95.4 In view of the above facts and evidences placed on record, we hold that the disallowance of Rs. 17,30,589/- made u/s 40(a)(ia) is unsustainable.

95.5 Accordingly, the same is directed to be deleted and this ground of appeal is allowed.

Ground No. 10 relates to additions made pursuant to the intimation issued u/s 143(1) of the Act.

96. At the time of hearing, the Ld. AR submitted that the issue has already been rectified by the Assessing Officer by passing an order u/s 154 of the Act dated 19.08.2025 and, therefore, the ground does not survive for adjudication. The Ld. AR accordingly stated that the ground is not pressed.

97. In view of the submission made, this ground is dismissed as not pressed.

98. In the result, the appeal of assessee is partly allowed for statistical purposes.