AO Must Consider Section 170A Modified Return And Cannot

AO Must Consider Section 170A Modified Return And Cannot Add Transfer Pricing Adjustments To MAT

Issue

Section 170A Modified Return: Whether the Assessing Officer is required to adopt a modified return filed u/s 170A post-NCLT merger scheme as the starting point for recomputing total income.
Transfer Pricing Adjustments under MAT: Whether transfer pricing adjustments made under normal tax provisions can be added back to compute book profits u/s 115JB.
Aggregation of Transactions: Whether the TPO can selectively de-aggregate closely linked intra-group marketing support services and benchmark their Arm’s Length Price (ALP) at nil under TNMM.
Tested Party Selection: Whether a foreign Associated Enterprise (AE) can be selected as the tested party if it is the least complex entity and supported by audited segmental financials.
Period & Segmental Comparability: Whether comparing an assessee’s 6-month operating margin with a 12-month margin of comparable entities without period adjustments or segmental analysis is valid.

Facts

Section 170A Modified Return: The assessee filed its original return declaring ₹29.13 crores. Post-NCLT merger approval (effective 01-10-2020), it filed a modified return u/s 170A declaring ₹8.63 crores. The AO framed the assessment based on the original return.
TP Addition to MAT: The AO added a transfer pricing adjustment of ₹72.85 crores directly to the modified book profits (₹11.34 crores) when computing MAT u/s 115JB.
Intra-Group Services Segregation: The assessee aggregated software sales and AE marketing/IT support services under TNMM. The TPO segregated intra-group services and valued them at nil, making an adjustment of ₹62.04 crores.
Tested Party Selection: The assessee selected its US AE (IVP US) as the tested party as it was the least complex entity and provided CA-certified foreign comparables. The TPO rejected IVP US and made the Indian entity the tested party.
Mismatched Period Comparison: For the post-merger 6-month period (01-04-2020 to 30-09-2020), the TPO compared the assessee’s 6-month margin with 12-month full-year margins of comparables at the entity level, ignoring available segmental data.

Decision

Section 170A Modified Return: Matter remanded. The AO must verify whether the Section 170A modified return was filed within the statutory timeline, confine the scope to the effect of the merger, and use the modified returned income as the starting point.
TP Adjustments under MAT: Partly in favor of Assessee. Transfer pricing adjustments cannot be added back to MAT book profits u/s 115JB unless specifically covered under Explanation 1. The AO was directed to delete the addition.
Aggregation of Transactions: In favor of Assessee. Marketing support and software sales are closely linked in an integrated business model; de-aggregating them and assigning a nil ALP was unjustified and was deleted.
Tested Party Selection: In favor of Assessee. IVP US was validly selected as the tested party since it is the least complex entity and no specific defect was found in its CA-certified segmental financial data.
Period & Segmental Comparability: In favor of Assessee. Comparing 6-month operational results with 12-month comparable margins without period adjustment and ignoring available segmental data distorts the analysis; the resulting TP adjustment was deleted.

Key Takeaways

Mandatory Recognition of Section 170A Returns: Upon receipt of an NCLT approval order, an AO must adopt the Section 170A modified return as the baseline for assessment rather than ignoring it in favor of the original return.
Exhaustive List for MAT Additions: Adjustments under Section 92C cannot automatically be imported into MAT calculations; book profit adjustments are strictly restricted to the statutory list in Explanation 1 to Section 115JB(2).
Integrity of TNMM Aggregation: Closely interrelated international transactions under an integrated business model should be benchmarked on an aggregated basis rather than being arbitrarily segregated to apply a “nil” ALP.
Least Complex Entity Rule & Temporal Consistency: A foreign AE can serve as the tested party if it performs fewer complex functions, provided reliable data exists. Furthermore, financial comparisons under transfer pricing must maintain identical timeframes or incorporate period adjustments.

IN THE ITAT MUMBAI BENCH ‘H’

Indus Valley Partners (India) (P.) Ltd.

Deputy Commissioner of Income-tax

Ms. Kavitha Rajagopal, Judicial Member
and MAKARAND VASANT MAHADEOKAR, Accountant Member

IT Appeal No. 6243 (Mum) of 2024
[Assessment year 2021-22]

JULY 29, 2026

Ketan Ved and Abdul Kadir Jawadwala, Ld. ARs for the Appellant. Ajay Chandra, Ld. DR for the Respondent.

ORDER

Makarand Vasant Mahadeokar, Accountant Member.- This appeal by the assessee is directed against the final assessment order dated 22.10.2024 passed by the Assessment Unit, Income Tax Department[hereinafter referred to as “Assessing Officer”], under section 143(3) r.w.s. 144C(13) read with section 144B of the Income-tax Act, 1961[hereinafter referred to as “the Act”], for Assessment Year 2021-22, pursuant to the directions issued by the learned Dispute Resolution Panel-1, Mumbai [“DRP”] under section 144C(5) of the Act dated 30.09.2024. The draft assessment order was earlier passed on 22.12.2023 under section 144C(1) of the Act. The Transfer Pricing Officer [“TPO”] had passed order under section 92CA(3) of the Act dated 28.10.2023.

Facts of the Case

2. Briefly stated, the assessee filed its return of income for Assessment Year 2021-22 on 14.03.2022 declaring total income of Rs. 29,12,86,816/- under the normal provisions of the Act and book profit of Rs. 54,37,16,690/- under section 115JB of the Act. The case was selected for complete scrutiny under CASS on the issue of “international related party transactions in services”. The assessee is stated to be engaged in the business of sale of software licences and providing related information technology services to its clients primarily in the United States. It is further recorded in the assessment order that the assessee merged with Indus Infotech Private Limited, PAN AADCK5814C, with effect from 01.10.2020 pursuant to the order of the NCLT dated 18.10.2022, and the name of the merged entity was changed to Indus Valley Partners (India) Private Limited.

3. Since the case involved international transactions with associated enterprises, a reference was made under section 92CA(1) of the Act for determination of the arm’s length price. In the draft assessment order, the Assessing Officer proposed variation in respect of transfer pricing issue of Rs. 72,56,69,275/-and further proposed disallowance of Stock Appreciation Rights expenditure of Rs. 58,17,750/-, thereby proposing assessment of total income at Rs. 1,01,69,56,091/-.

4. The assessee carried the matter before the learned DRP by filing objections. The learned DRP, vide directions dated 30.09.2024 under section 144C(5) of the Act, disposed of the objections raised by the assessee. In brief, the learned DRP dismissed the general objection challenging the validity of the draft assessment order. The objection challenging reference to the TPO under section 92CA(1) was also rejected. In respect of transfer pricing issues, the learned DRP substantially upheld the approach of the TPO on intra-group services and certain benchmarking aspects, while granting limited directions in respect of some comparable/segmental issues. The learned DRP, however, allowed the assessee’s objections in respect of Stock Appreciation Rights expenditure and directed deletion of the proposed addition of Rs. 58,17,750/-. The objection relating to consideration of revised return filed under section 170A was held to be not maintainable before the DRP as, according to the DRP, it was not a variation within the meaning of section 144C(1) of the Act.

5. In conformity with the aforesaid directions of the learned DRP, the Assessing Officer passed the final assessment order dated 22.10.2024. In the final computation, no addition was made on account of Stock Appreciation Rights expenditure, as the learned DRP had allowed the objection of the assessee on that issue. However, the Assessing Officer made variation in respect of transfer pricing issue at Rs. 72,85,37,845/- and determined total income at Rs. 1,01,98,24,661/-. The computation sheet further records deemed total income under section 115JB of the Act at Rs. 1,27,97,21,971/-.

6. Aggrieved by the aforesaid final assessment order passed pursuant to the directions of the learned DRP, the assessee is in appeal before us. The assessee has raised following grounds of appeal:

1. Erroneous consideration of returned income of the Appellant

1.1. That on the facts and circumstances of the case and in law, the Ld. AO has erred in assessing the total income of the Appellant at INR 1,019,824,661 as per the original return of income, in pursuance to the directions issued by the Ld. DRP, as against the revised returned income of INR 86,298,740 filed under section 170A for the period of 01-April-2020 to 30-September-2020 pursuant to the merger with Indus Infotech Private Limited with effect from 01-October-2020.

2. Erroneous consideration of transfer pricing adjustment in computing book profits under MAT

2.1. That on the facts and circumstances of the case and in law, the Ld. AO has erred in assessing the book profits of the Appellant at INR 1,279,721,971 under MAT provisions of the Act, in pursuance to the directions issued by the Ld. DRP, after considering the original returned book profits of INR 543,716,690, as against the modified returned income of INR 1,13,368,895 filed under section 170A for the period of 01-April-2020 to 30-September-2020 pursuant to the merger with Indus Infotech Private Limited with effect from 01-October-2020.

2.2. That on the facts and circumstances of the case and in law, the Ld. AO has erred in assessing the book profits under MAT provisions of the Appellant at an amount of INR 1,27,97,21,971 which is in excess by INR 74,67,436 even when the transfer pricing adjustment of INR 728,537,845 is added to the original returned book profits of INR 54,37,16,690.

3. Transfer Pricing Grounds

3.1. That on the facts and in the circumstances of the case and in law, the reference made by the Ld. AO suffers from jurisdictional error as the Ld. AO has not recorded any reasons in the assessment order based on which he reached the conclusion that it was “expedient and necessary” to refer the matter to the Learned Transfer Pricing Officer (“Ld. TPO”) for computation of the arm’s length price, as is required under section 92CA(1) of the Act.

3.2. That on the facts and in the circumstances of the case, the Ld. AO/ DRP/ TPO have erred in not discharging the statutory onus of establishing that the conditions specified in Clauses (a) to (d) of section 92C(3) of the Act have been satisfied before disregarding arm’s length price (“ALP”) determined by the Appellant.

Addition on account of international transaction pertaining to availing of intra-group services amounting to INR 620,444,658

3.3. That on the facts and circumstances of the case and in law, the Ld. AO/ TPO/DRP have erred in determining the arm’s length adjustment to the Appellant’s international transactions pertaining to availing of marketing support services amounting to INR 201,881,726 and availing of support services/managed/ IT consulting services amounting to INR 418,562,932 from its AEs (total adjustment of INR 620,444,658).

3.4. That on the facts and circumstances of the case and in law, the Ld. AO/ TPO/DRP have erred by applying Other Method without any basis and explanation and reduced the value of intra-group services availed from AE as NIL merely based on presumptions which is in contravention of the provisions of Rule 10B of the Rules.

3.5. That on the facts and circumstances of the case and in law, the Ld. AO/ TPO/DRP have erred by alleging that the Appellant had failed to demonstrate the receipt of services, necessity for availing such services and the benefits realized thereof, without appreciating the business model of the Appellant and the detailed submissions and documentary evidences furnished by the Appellant in this regard including the additional evidences filed by it before the DRP on 07-August-2024 and challenging the commercial wisdom of the Appellant in making such payments to its AEs.

3.6. That on the facts and circumstances of the case and in law, the Ld. AO/ TPO/DRP have erred by arbitrarily rejecting the economic/ benchmarking analysis and methodology adopted by the Appellant in its Transfer Pricing documentation (“TP documentation), being Transactional Net Margin Method (“TNMM”) as the most appropriate method (“MAM”) using the transactional approach, for benchmarking its international transaction pertaining to availing of intra-group services.

3.7. That on the facts and circumstances of the case and in law, the Ld. AO/ TPO/DRP have erred in rejecting the service provider i.e. AE as the tested party and the mark-up earned by the AE, ignoring the fact that the AE, being the service provider and the least complex entity, was rightly adopted as the tested party.

3.8. That on the facts and circumstances of the case and in law and without prejudice to the other contentions of the Appellant, the Ld. AO/ TPO/DRP has erred in proposing duplicative adjustment by on one hand determining the arm’s length price of international transactions pertaining to availing of intra-group services at NIL, and on the other hand proposing an adjustment w.r.t. international transaction of sale of software and provision of services by the Appellant adopting TNMM as the MAM wherein payment for intra-group services is one of the item of cost.

4. Addition on account of international transaction pertaining to sale of software and provision of services amounting to INR 108,093,187

4.1. That on the facts and circumstances of the case and in law, the Ld. AO/ TPO/DRP have erred in determining the arm’s length adjustment to the Appellant’s international transactions pertaining to sale of software to AE amounting to INR 47,514,729 and provision of support/ IT consulting/ managed services to AE amounting to INR 60,578,458 (total adjustment INR 108,093,187).

4.2. That on the facts and circumstances of the case and in law, the Ld. AO/ TPO/DRP have erred in arbitrarily rejecting the economic/ benchmarking analysis adopted by the Appellant in its TP documentation without any cogent and scientific basis and erred by rejecting AE viz. IVP Corporation (“IVP US”) as the tested party by ignoring the fact that the AE, being the least complex entity, was rightly adopted as the tested party. Further, the Ld. AO/ TPO/DRP have erred in not appreciating the business model of the Appellant.

4.3. That on the facts and circumstances of the case and in law and without prejudice to the other contentions of the Appellant, the Ld. AO/ TPO/DRP have erred in considering Appellant as the tested party and further taking IVP India’s margin only for the six-month period as against the twelve-month data of comparable companies used for conducting the benchmarking analysis which is not acceptable and erroneous.

4.4. That on the facts and circumstances of the case and in law and without prejudice to the other contentions of the Appellant, the Ld. AO/TPO/DRP has made erroneous application of quantitative and qualitative filters as against various filters acceptable to the Appellant in adopting the final set of comparable companies. Also, the Ld. TPO failed to apply the turnover filter uniformly to arrive at the final comparable set inspite of the clear directions issued by the Ld. DRP, without any valid reasoning.

4.5. That on the facts and circumstances of the case and in law and without prejudice to the other contentions of the Appellant, the Ld. AO/TPO/DRP erred in considering the foreign exchange fluctuation gain as a non-operating item in computing the operating margin profitability of the Appellant.

4.6. That on the facts and circumstances of the case and in law and without prejudice to the other contentions of the Appellant, the Ld. AO/TPO/DRP has erred by rejecting the fresh search of comparables engaged in provision of software development services submitted by the Appellant during the assessment proceedings, even though the comparables are functionally comparable to the Appellant and clears all the filters acceptable to the Appellant on various erroneous grounds.

4.7. That on the facts and circumstances of the case and in law and without prejudice to the other contentions of the Appellant, the Ld. AO/TPO/DRP has erred in denying the economic adjustment for differences in working capital position of the Appellant vis-a-vis comparable companies submitted by the Appellant. Further, the Ld. AO/TPO/DRP erred in denying economic adjustment to operating profit margin of the Appellant without any justification and valid basis.

Specific Grounds w.r.t international transaction pertaining to sale of software

4.8. That on the facts and circumstances of the case and in law and without prejudice to the other contentions of the Appellant, the Ld. AO/ TPO/DRP have erred in proceeding to determine the arm’s length price by conducting an independent fresh search for companies engaged in provision of software development services for benchmarking the international transaction pertaining to sale of software without adopting a valid scientific search process and selecting companies which are functionally not comparable to the Appellant/ fails certain other filters acceptable to the Appellant. No benchmarking analysis, benchmarking methodology, search criteria, accept/reject matrix and backup of margin computation of comparable companies has been provided by the Ld. TPO.

The Ld. AO/ TPO/DRP have erred in selecting following comparable companies:

(a)

Sasken Technologies Limited

(b)

Comviva Technologies Limited

(c)

Mindtree Limited

(d)

Happiest Minds Technologies Limited

(e)

Nihilent Limited

(f)

Tata Elxsi Limited

(g)

Cybage Software Private Limited

(h)

Vee Technologies Private Limited

(i)

Robosoft Technologies Private Limited

(j)

Zoho Corporation Private Limited

(k)

Orion India Systems Private Limited

(l)

Athenahealth Technology Private Limited

Specific Grounds w.r.t provision of support/ IT consulting/ managed services

4.9. That on the facts and circumstances of the case and in law and without prejudice to the other contentions of the Appellant, the Ld. AO/TPO/DRP has erred in proceeding to determine the arm’s length price by conducting an independent fresh search for companies engaged in provision of support services for benchmarking the international transaction pertaining to provision of support/IT consulting/ managed services without adopting a valid scientific search process and selecting companies which are functionally not comparable to the Appellant/ fails certain other filters acceptable to the Appellant. No benchmarking analysis, benchmarking methodology, search criteria, accept/reject matrix and backup of margin computation of comparable companies has been provided by the Ld. TPO.

The Ld. AO/ TPO/DRP have erred in selecting following comparable companies:

(a)

First Data Development Private Limited

(b)

24/7 Customer Private Limited

(c)

Integra Software Services Private Limited

(d)

Photon Interactive Private Limited

5. Erroneous computation of tax liability

5.1. That on the facts and circumstances of the case and in law, the Ld. AO has erred in making an ad-hoc adjustment of INR 4,672,091 while computing total tax liability of the Appellant in the tax computation annexed to the final assessment order without drawing any adverse inference in this regard.

6. Levy of interest u/s 234A, 234B and 234C of the Act

6.1. That on the facts and circumstances of the case and in law, the Ld. AO has erred in levying interest under sections 234A, 234B and 234C of the Act.

7. Incorrect levy of penalty u/s 270A of the Act

7.1. That on the facts and circumstances of the case, the Ld. AO has erred both in facts and in law in initiating penalty proceedings under section 270A of the Act.

Each of the above grounds are independent and without prejudice to the other grounds of appeal preferred by the Appellant.

The Appellant prays for leave to add, alter, vary, omit, substitute, or amend the above grounds of appeal, at any time before, or at, the time of hearing of the appeal.

7. Since the grounds are issue-specific, we proceed to deal with each ground separately in the succeeding paragraphs.

Ground No. 1: Erroneous consideration of returned income of the assessee

8. The learned AR submitted that the Assessing Officer in adopted the returned income as per the original return of income instead of the modified return filed by the assessee under section 170A of the Act pursuant to merger (placed on page 1400 of the paper book). It was submitted that the Assessing Officer assessed the total income at Rs. 1,01,98,24,661/- by taking the original returned income of Rs. 29,12,86,816/- as the starting point (placed on page 1305 of the paper book) , whereas the assessee had filed a modified return under section 170A of the Act declaring total income of Rs. 8,62,98,740/- for the period 01.04.2020 to 30.09.2020, consequent to merger with Indus Infotech Private Limited with effect from 01.10.2020.

9. The learned AR submitted that the assessee had originally filed its return of income on 14.03.2022 declaring total income of Rs. 29,12,86,816/- under the normal provisions of the Act and book profit of Rs. 54,37,16,690/- under section 115JB of the Act. Thereafter, pursuant to the NCLT order dated 18.10.2022 approving the merger, the assessee filed a modified return under section 170A of the Act on 30.04.2023 declaring income of Rs. 8,62,98,740/- under the normal provisions and book profit of Rs. 11,33,68,895/- under MAT provisions for the relevant period.It was further submitted that the fact of merger was not in dispute, as the draft assessment order itself records that the assessee merged with Indus Infotech Private Limited, PAN AADCK5814C, with effect from 01.10.2020 pursuant to the NCLT order dated 18.10.2022 and that the name of the merged entity was changed to Indus Valley Partners (India) Private Limited. The learned AR also pointed out that the fact of amalgamation was duly intimated to the jurisdictional Assessing Officers of both the amalgamating and amalgamated companies as well as to the CBDT vide letters dated 28.02.2023.

10. The learned AR submitted that the assessee had raised this issue before the learned DRP by way of an additional objection. However, the learned DRP did not examine the claim on merits and rejected the objection by observing that it was not a variation contemplated under section 144C(1) of the Act and that the matter fell within the powers of the Assessing Officer. The learned AR, therefore, submitted that the Assessing Officer ought to have considered the modified return filed under section 170A of the Act while framing the final assessment, and prayed that appropriate directions may be issued for re-computation of income on the basis of such modified return.

11. The learned Departmental Representative (DR) relied upon the orders of the Assessing Officer and the learned DRP.

12. We have considered the matter. Section 170A of the Act specifically deals with the effect of an order of a Tribunal, Court or Adjudicating Authority in respect of business reorganisation. The provision enables filing of a modified return by the successor within the prescribed period, where a return under section 139 has already been furnished prior to the order of business reorganisation. The statutory scheme, therefore, contemplates that once a valid modified return is filed in consequence of an order approving business reorganisation, such modified return has to be considered in accordance with law and subject to the limits of the order approving such business reorganisation. The official text of section 170A records that the successor shall furnish such modified return within six months from the end of the month in which the order was issued, in accordance with and limited to the said order.

13. In the present case, the merger with Indus Infotech Private Limited with effect from 01.10.2020 pursuant to the NCLT order dated 18.10.2022 is not a fact which is foreign to the assessment record. The draft assessment order itself records the fact of merger and the effective date thereof. Even the TPO’s observations, as reproduced in the DRP directions, clarify that the assessee got merged into Indus Infotech Private Limited vide NCLT order dated 18.10.2022, that the merger was retrospective from 01.10.2020, and that the findings and discussions in the TPO’s order were applicable only for the period 01.04.2020 to 30.09.2020, i.e., the period during which the assessee was in existence.

14. Once the factum of merger and the relevant period of existence of the assessee were noticed by the authorities themselves, the claim of the assessee that the modified return filed under section 170A of the Act should be considered could not have been rejected merely on the ground that it was not a variation falling within section 144C(1) of the Act. The starting point of computation of assessed income is not a mere academic issue. If the assessee has filed a valid modified return under section 170A of the Act, and if such return is in accordance with and limited to the order of the NCLT, the Assessing Officer is required to give effect to the same while computing the total income. The learned DRP, in our view, ought to have directed the Assessing Officer to verify the modified return and give appropriate effect in accordance with law.

15. We, therefore, restore this issue to the file of the Assessing Officer with a direction to verify the modified return stated to have been filed by the assessee under section 170A of the Act on 30.04.2023 pursuant to the NCLT order dated 18.10.2022. If the Assessing Officer finds that the said modified return has been validly filed within the time prescribed under section 170A of the Act and is confined to the effect of the merger approved by the NCLT, the Assessing Officer shall recompute the income by taking the returned income as per such modified return, namely Rs. 8,62,98,740/-, instead of the original returned income of Rs. 29,12,86,816/-, subject, however, to the transfer pricing and other adjustments as may finally survive in this order. Needless to say, the Assessing Officer shall afford reasonable opportunity of being heard to the assessee and shall pass a speaking order on this limited aspect.

16. Ground No. 1 is, accordingly, allowed for statistical purposes.

Ground No. 2: Erroneous consideration of transfer pricing adjustment in computing book profits under MAT

17. The learned AR submitted that Ground No. 2 is partly consequential to Ground No. 1, since the assessee’s modified return filed under section 170A of the Act has not been considered while computing book profit under section 115JB of the Act. It was submitted that pursuant to the merger with Indus Infotech Private Limited with effect from 01.10.2020, approved by the NCLT vide order dated 18.10.2022, the assessee filed modified return under section 170A on 30.04.2023 for the period 01.04.2020 to 30.09.2020. In the said modified return, the assessee declared income of Rs. 8,62,98,740/- under the normal provisions and book profit of Rs. 11,33,68,895/- under MAT provisions, whereas the Assessing Officer proceeded on the basis of the original returned book profit of Rs. 54,37,16,690/-.

18. It was further submitted that once the modified return filed under section 170A is accepted as valid, the book profit under section 115JB is also required to be computed with reference to such modified return and not with reference to the original return filed for the full previous year. Without prejudice, the learned AR submitted that even on the Assessing Officer’s own basis, there is an apparent computational error. The original returned book profit was Rs. 54,37,16,690/- and the transfer pricing adjustment considered in the final order was Rs. 72,85,37,845/-. Thus, even if the transfer pricing adjustment is added, the resultant book profit would work out to Rs. 1,27,22,54,535/-, whereas the Assessing Officer has adopted book profit at Rs. 1,27,97,21,971/-. Therefore, according to the learned AR, the excess amount of Rs. 74,67,436/- has been included without any basis.

19. The learned AR also placed reliance on the decision of the Co-ordinate Bench in Innovative Textiles Ltd. v. Dy. CIT (Delhi – Trib.)/ITA No. 1160/Del/2022, order dated 24.09.2025, particularly para 4, to submit that transfer pricing adjustment made in the regular computation cannot be added while determining book profit under section 115JB of the Act. The relevant observations in para 4 read as under:

“We observe that the TPO proposed TP adjustment of Rs.84,95,443/- for the year under consideration and while passing the final assessment order, the Assessing Officer made the abovesaid TP adjustment in both regular computation of income under the Income-tax Act and also made the adjustment while determining the book profit u/s 115JB of the Act. Before us, ld. AR submitted that this is a covered issue and made his detailed submissions.”

20. Accordingly, it was submitted that the computation of book profit made by the Assessing Officer is erroneous and requires to be rectified by excluding impermissible adjustment and by considering the modified return filed under section 170A of the Act.

21. The learned DR relied upon the orders of the Assessing Officer and the learned DRP.

22. We have heard the rival submissions and perused the material available on record. Ground No. 2 relates to computation of book profit under section 115JB of the Act. The first limb of the assessee’s grievance is that the Assessing Officer ought to have computed book profit with reference to the modified return filed under section 170A of the Act pursuant to the NCLT-approved merger. The assessee has stated that in the modified return filed on 30.04.2023 for the period 01.04.2020 to 30.09.2020, book profit under MAT provisions was declared at Rs. 11,33,68,895/-, whereas the Assessing Officer proceeded with the original returned book profit of Rs. 54,37,16,690/-. Since this aspect is consequential to our adjudication of Ground No. 1, the Assessing Officer shall recompute the book profit under section 115JB after first verifying and giving effect to the modified return filed under section 170A, in accordance with the directions given while disposing of Ground No. 1. The assessee’s claim before the DRP on the modified return and book profit under MAT is recorded in the DRP directions.

23. In so far as the second limb of the ground is concerned, the assessee has objected to inclusion of transfer pricing adjustment while computing book profit under section 115JB. The learned AR placed reliance on the decision of the Co-ordinate Bench in Innovative Textiles Limited(Supra) In the said decision, the Co-ordinate Bench considered a similar issue where the Assessing Officer had made transfer pricing adjustment both under the regular computation and while determining book profit under section 115JB. The Co-ordinate Bench, after taking note of the judgment of the Hon’ble Supreme Court in Apollo Tyres Limitedv. CIT 255 ITR 273 (SC), held that such transfer pricing adjustment could not be added back to book profit under section 115JB.The relevant extract from the decision in Innovative Textiles Limited reads as under:

“Considered the rival submissions and material placed on record. We observe that the TPO proposed TP adjustment of Rs.84,95,443/- for the year under consideration and while passing the final assessment order, the Assessing Officer made the abovesaid TP adjustment in both regular computation of income under the Income-tax Act and also made the adjustment while determining the book profit u/s 115JB of the Act.”

24. The Co-ordinate Bench then reproduced the ratio of the Hon’ble Supreme Court in Apollo Tyres Limited (supra)in the following words:

“Therefore, we are of the opinion that the Assessing Officer while computing the income under section 115J has only the power of examining whether the books of account are certified by the authorities under the Companies Act as having been properly maintained in accordance with the Companies Act. The Assessing Officer thereafter has the limited power of making increase and reductions as provided for in the Explanation to the said section. To put it differently, the Assessing Officer does not have the jurisdiction to go behind the net profit shown in the profit and loss account except to the extent provided in the Explanation to section 115J.”

25. The coordinate Bench further relied upon the decision in Cash Edge India Pvt. Ltd. v. ITO [IT Appeal No. 64 (Delhi) of 2015, dated 23-9-2015], wherein it was held as under:

“It is settled law that except for adjustments provided in Explanation I Section 115JB(2) of the Act, no other adjustment can be made to book profits under section 115JB of the Act. We find that the transfer pricing adjustment is not one of the adjustments contemplated under Explanation I section 115JB(2) of the Act and therefore could not have been added back to the book profits under section 115JB.”

26. The Co-ordinate Bench finally concluded as under:

“In view of aforesaid, we hold that the AO erred in adding back the transfer pricing adjustment of the book profits under section 115JB of the Act. Accordingly, this ground of the appeal raised by the assessee is allowed and the AO is directed to exclude the transfer pricing adjustment, if such adjustment survives, from the book profits computed under section 115JB of the Act.”

27. Respectfully following the aforesaid decision and the ratio laid down by the Hon’ble Supreme Court in Apollo Tyres Limited, (supra) we hold that transfer pricing adjustment made under the normal provisions of the Act cannot, by itself, be added while computing book profit under section 115JB, unless such adjustment falls within the specific additions provided in Explanation 1 to section 115JB. The Revenue has not pointed out any clause of Explanation 1 to section 115JB under which the transfer pricing adjustment can be added to the book profit. There is also no finding that the profit and loss account was not prepared in accordance with the applicable provisions of the Companies Act or that the accounts were not duly certified.

28. Accordingly, the Assessing Officer is directed to exclude the transfer pricing adjustment of Rs. 72,85,37,845/-, if it survives under the normal provisions, from the computation of book profit under section 115JB. The Assessing Officer shall thereafter recompute the book profit in accordance with law, after giving effect to our directions on Ground No. 1 relating to the modified return under section 170A.

29. Without prejudice, the assessee has also pointed out that even on the Assessing Officer’s own basis, there is an apparent computational error. The original returned book profit was Rs. 54,37,16,690/- and the transfer pricing adjustment considered in the final order was Rs. 72,85,37,845/-. Thus, even if both figures are added, the resultant amount would be Rs. 1,27,22,54,535/-, whereas the Assessing Officer has adopted book profit at Rs. 1,27,97,21,971/-. The excess amount of Rs. 74,67,436/- is therefore required to be verified. The Assessing Officer shall verify this arithmetical aspect and delete the excess amount if no lawful basis is found for the same.

30. Ground No. 2 is accordingly allowed in the above terms for statistical purposes, with a specific direction that transfer pricing adjustment shall not be added while computing book profit under section 115JB.

Grounds relating to Transfer Pricing Adjustments

31. The learned AR, with the help of written submissions and paperbook, submitted that the assessee has challenged the transfer pricing adjustment of Rs. 72,85,37,845/- made in respect of its international transactions with its associated enterprise, IVP US. Though the grounds of appeal have been divided into various sub-grounds, the learned AR submitted that the controversy substantially revolves around the rejection of the assessee’s benchmarking analysis, rejection of IVP US as the tested party, adoption of IVP India as the tested party, use of entity-level profitability, and comparison of six-month margin of the assessee with twelve-month data of the comparable companies.

32. The learned AR submitted that the assessee belongs to IVP group, which is engaged in development of software products and related activities, including software implementation, managed services and IT consulting. IVP India is engaged in software development and sale of software to IVP US. It also provides software-related support services, namely software implementation, managed services and IT consulting services, to IVP US. IVP US, on the other hand, is the customer-contracting and customer-facing entity on account of its onsite presence in the US. It distributes the software to customers, provides onsite support, maintains customer relationships and generates business leads due to its proximity to customers in the US.

33. The learned AR explained that the international transactions under consideration arise from the integrated business model of the group. Where the contract is entered into between the customer and IVP US for sale of software and provision of related services, IVP India provides software development, software sale and related support services to IVP US, and IVP US interfaces with and services the end customers in the US. Conversely, where IVP India directly contracts with customers based outside the US/UK, IVP India avails marketing support, onsite support, managed services and IT consulting support from IVP US, since IVP India’s employees are based in India and do not have onsite presence in the US.

34. It was submitted that, considering the close linkage between the transactions and the integrated nature of the business model, the assessee had adopted an aggregation approach and benchmarked the transactions by applying TNMM as the most appropriate method. IVP US was selected as the tested party, as it was the least complex entity in the transaction, performed comparatively simpler functions, assumed lesser risks, and its profitability could be reliably ascertained. According to the learned AR, the rejection of IVP US as the tested party by the TPO/DRP is contrary to the facts on record and the settled transfer pricing principles.

35. The learned AR submitted that the assessee had duly furnished the Transfer Pricing Study Report, FAR analysis, intercompany agreements, segmental financials, invoices, email communications, timesheets, customer-related documents and other supporting evidences to demonstrate the business model, receipt of services, benefit derived, aggregation approach and reliability of benchmarking. It was contended that the TPO/DRP rejected the assessee’s approach on factually incorrect premises and without properly appreciating the evidences placed on record.

36. The learned AR further submitted that the same benchmarking methodology, including aggregation approach and selection of IVP US as the tested party, had been accepted in the earlier as well as subsequent assessment years. He invited our attention to the notices issued under section 92CA(2) and 92CA(3) and the relevant TPO proceedings relating to Assessment Year 2018-19 and submitted that, in the said year, no adjustment was made in respect of the principal international transactions, except an adjustment on account of receivables. He also referred to the show-cause notice issued under section 92CA(3) for Assessment Year 2022-23 and submitted that even in the subsequent year, no adverse inference was drawn in respect of the assessee’s benchmarking methodology, aggregation approach or selection of the foreign AE as the tested party.

37. It was therefore submitted that, in the absence of any material change in the business model, functional profile, contractual arrangement or nature of international transactions, the TPO was not justified in departing from the position accepted in the earlier and subsequent years without bringing any cogent reason on record. The learned AR accordingly submitted that the benchmarking undertaken by the assessee ought to be accepted, and the transfer pricing adjustment made by the TPO/Assessing Officer deserves to be deleted.

38. The learned DR, on the other hand, also by way of written submission, strongly supported the order of the TPO/Assessing Officer and the directions of the learned DRP. It was submitted that the assessee’s contention regarding acceptance of its method in earlier or subsequent years cannot be determinative for the year under consideration, since each assessment year is a separate unit of assessment and the arm’s length price is required to be determined with reference to the facts, documents, comparables and evidences relevant for the concerned year.

39. The learned DR submitted that the TPO has examined the benchmarking undertaken by the assessee for the year under consideration and has recorded specific defects in the approach adopted by the assessee. Referring to para 6.1 of the TPO’s order, the learned DR submitted that the assessee had used TNMM and selected the foreign AE as the tested party for benchmarking various transactions, namely sale of software to IVP Corp, availing of marketing support services from IVP Corp, availing of support/managed/IT consulting services from IVP Corp, provision of support/IT consulting services to IVP Corp and provision of managed services to IVP Corp. However, the TPO found that where a foreign AE is selected as the tested party, the data of all the companies considered for the search must be independently verifiable. According to the TPO, the assessee had not provided the financials of such companies and, therefore, the search process and comparability analysis could not be independently verified.

40. The learned DR further submitted that the TPO has also recorded that audited segmental accounts of the foreign AE were not provided and, therefore, the segmental results of the AE could not be relied upon. It was submitted that the inter-company agreement stated that the price would be determined on arm’s length basis, but the assessee had not given proper clarity or explanation as to how the price was actually determined. Thus, according to the learned DR, the assessee failed to establish the reliability of its benchmarking.

41. The learned DR then referred to para 6.2 of the TPO’s order and submitted that, in respect of availing of services from AE, the assessee was specifically required to prove that the services had actually been received and that the assessee had benefited from such services. The TPO, after considering the assessee’s submissions, found that the assessee had furnished regular communication with the AE, but such communication did not establish the actual element of service delivery. It was further observed by the TPO that the benefit received from the AE had not been quantified and the assessee had not provided any information or methodology for determining the arm’s length price of such services.

42. The learned DR submitted that on account of these discrepancies, the TPO issued a show-cause notice dated 13.10.2023. Referring to para 1.1 of the show-cause notice reproduced in the TPO’s order, it was submitted that the TPO specifically noticed that the assessee had selected the foreign AE as the tested party and used foreign database for comparables on the premise that the margin of the AE was within the margin of the comparables. However, as recorded in para 1.2, selection of the foreign AE as the tested party suffered from lack of data availability. Though 286 companies were found comparable and were filtered further by applying qualitative criteria, the financials of such companies were not provided. Therefore, it was not possible to verify whether the comparables had been properly filtered.

43. The learned DR further submitted that as per para 1.3 of the show-cause notice, the assessee had provided segmental results of the AE in Annexure 5 to its reply dated 03.10.2023, but such results were not audited and, therefore, their authenticity could not be relied upon. The learned DR also referred to para 1.4, wherein the TPO observed that the TPSR mentioned that IVP Corp purchased software from India which was further resold to third parties in the USA, and therefore, back-to-back invoices showing the margins earned by IVP Corp should have been furnished. However, the same were not provided by the assessee.

44. It was submitted that in view of the above deficiencies, the TPO invoked section 92C(3)(a) of the Act and held that the prices charged in the international transactions were not determined in accordance with sub-sections (1) and (2) of section 92C. The learned DR submitted that the TPO was, therefore, justified in rejecting the benchmarking based on foreign AE as the tested party and in determining the ALP on the basis of information available on record.

45. The learned DR also referred to para 1.6 of the show-cause notice, wherein the TPO proposed benchmarking by selecting the assessee as the tested party, since reliable data of the assessee was available. It was submitted that TNMM was accepted as the most appropriate method, but the foreign AE was not accepted as the tested party due to lack of authentic and verifiable data. The TPO accordingly selected the assessee as the tested party with OP/OC as the PLI. It was further submitted that since transaction-level segmental margins of the assessee were not available, the TPO adopted entity-level margin for computing the PLI.

46. The learned DR submitted that the assessee cannot claim acceptance of foreign AE as tested party merely on the basis of proceedings in other assessment years, particularly when in the present year the assessee failed to furnish independently verifiable data, audited segmental accounts, back-to-back invoices, reliable comparable financials and quantification of benefit from intra-group services. It was submitted that transfer pricing analysis is fact-specific and year-specific, and therefore, the TPO was justified in examining the transactions independently for the year under consideration.

47. The learned DR further submitted that the assessee’s aggregation approach itself is not acceptable. It was submitted that under Rule 10A(d) of the Income-tax Rules, the expression “transaction” includes a number of closely linked transactions. However, according to the learned DR, aggregation is permissible only where the transactions are so closely connected that they cannot be evaluated adequately on a separate basis. Reliance was placed on the judgment of the Hon’ble Punjab and Haryana High Court in Knorr-Bremse India Pvt. Ltd. v. Asstt. CIT 380 ITR 307 (Punjab & Haryana)] and the decision of the Pune Bench of the Tribunal in Faurecia Automotive Seating India (P.) Ltd. v. ACIT (Pune – Trib.), wherein the principles governing aggregation of international transactions were considered. It was submitted that the transaction of outright sale of software could not be aggregated with receipt of intra-group services, as the said transactions did not fall within the circumstances in which aggregation is permissible. The learned DR therefore submitted that the TPO was justified in de-segregating the intra-group service transactions and benchmarking them separately.

48. The learned DR then submitted that the facts of the year under consideration are materially different from the earlier and subsequent years relied upon by the assessee. It was pointed out that the TPO, in the transfer pricing order, has brought out that the revenue of the assessee during the year had declined by 6%, from Rs. 2351 million in the immediately preceding financial year to Rs. 2218 million in the present year. As against such decline in revenue, the operating cost had increased by 41%, from Rs. 1408 million to Rs. 1981 million. The learned DR submitted that the break-up of operating cost revealed abnormal increase in expenditure under two heads, namely, delivery support services, which increased by 78% from Rs. 437.7 million to Rs. 779 million, and selling and marketing expenses, which increased by 144% from Rs. 126.39 million to Rs. 307.6 million.

49. It was submitted that the combined increase under the above two heads was Rs. 522.3 million, i.e. Rs. 52.23 crores/-, and that 93% of such increase was attributable to the intra-group services availed by the assessee from its associated enterprises. The learned DR therefore submitted that even if the TPO had accepted aggregation of expenditure in other assessment years, such acceptance would not fetter the TPO from rejecting aggregation in the present year, particularly when there was abnormal increase in expenditure on intra-group services in a year in which the assessee’s revenue had declined by 6%. According to the learned DR, this constituted a material change in facts and justified separate benchmarking of the intra-group service transactions.

50. The learned DR further submitted that the assessee failed to satisfy the need, rendition and benefit test in respect of intragroup services. It was submitted that the TPO had examined the evidences produced by the assessee and found that the assessee had not established actual rendition of services by the foreign AE or any commensurate economic and commercial benefit received from such services.

51. In respect of marketing support services, the learned DR submitted that the assessee claimed that such services were rendered by Shri Gurvinder Singh and Shri Gaurav Agarwal, who were stated to be employees of the foreign AE, IVP Corp. However, the TPO, after examining the emails relied upon by the assessee, found that both these persons were in fact directors/employees of the assessee company. It was pointed out that Shri Gurvinder Singh was a director of the assessee company and Shri Gaurav Agarwal was an employee of the assessee company. On this basis, the learned DR submitted that the alleged marketing support services were actually rendered by the assessee’s own director/employee and not by the foreign AE.

52. With respect to support services, managed services and IT consulting services, the learned DR submitted that the assessee had produced copies of eight invoices where the foreign AE was claimed to have assisted in raising invoices for clients and two instances where the AE was claimed to have coordinated with clients for payment of pending invoices. It was submitted that the emails referred to by the TPO showed that the invoicing team and one Shri Rahul Sharma had sent emails to the employees of the assessee for review and approval of invoices. These emails were sent from the email addresses “invoicing@ivp.in” and “rasharma@ivp.in”. The learned DR submitted that Shri Rahul Sharma was an employee of the assessee, and therefore, the evidence showed that the services were rendered by the assessee’s own personnel and not by the AE.

53. The learned DR therefore submitted that the claim of the assessee that the foreign AE had rendered services by assisting in raising invoices or coordinating with clients was not borne out from the evidence. It was argued that the emails relied upon by the assessee did not establish that any services were rendered by the AE to the assessee, nor did they establish any economic or commercial benefit to the assessee. The abnormal increase in delivery service expenditure, according to the learned DR, further supported the TPO’s conclusion.

54. In conclusion, the learned DR submitted that the intragroup service transactions were correctly de-segregated and benchmarked separately, as the facts of the year under consideration were materially different from other years. It was further submitted that the assessee failed to establish the need, actual rendition and benefit of the services claimed to have been received from the AE. The evidences relied upon by the assessee showed that the alleged services were rendered by the assessee’s own employees/director and not by the foreign AE. Therefore, the TPO was justified in benchmarking the intra-group service transactions at NIL. The learned DR accordingly prayed that the transfer pricing adjustment made by the TPO and sustained by the DRP be upheld and the grounds raised by the assessee be dismissed.

55. The learned AR, in rejoinder, submitted that the objections raised by the learned DR in the written submissions do not correctly appreciate the business model of the assessee, the nature of the international transactions, the evidence placed on record, and the consistency of the benchmarking approach accepted in other years. The learned AR submitted that the controversy regarding aggregation of international transactions, availing of marketing support services, and availing of support/managed services/IT consulting services from IVP US has already been addressed by the assessee in the paper book and in the written submissions filed before the TPO/DRP.

56. The learned AR reiterated and submitted that the assessee is engaged in software development and sale of software to IVP US. The assessee also provides software-related services, namely software implementation, managed services and IT consulting services, to IVP US. It was submitted that the assessee sells its software outside India, particularly in the US and UK, and for the purpose of selling software in the US, it avails marketing and support services from its foreign AE, IVP US. The foreign AE identifies and predicts market trends in the US, analyses customer needs, improves customer relationships and facilitates the flow of information between IVP India and its customers in the US. Thus, according to the learned AR, IVP US functions as a distributor and customer-facing support entity for IVP India.

57. The learned AR submitted that the TPO/DRP failed to appreciate that the assessee’s Transfer Pricing Study Report for the relevant assessment year contained complete FAR analysis for both activities which were aggregated, namely sale of software and marketing services availed from IVP US. Reference was made to pages 25 to 31 and 32 to 36 of the paper book. It was submitted that the FAR analysis relating to sale of software licences clearly records that all intangible assets are owned by the assessee and IVP US uses the same in rendering services. Reference was also made to page 31 of the paper book, wherein IVP India is characterised as an entrepreneur engaged in development of software and IVP Corp is characterised as a distributor of software operating in a low-risk environment.

58. The learned AR submitted that, having regard to the assessee’s business model, the international transactions of sale of software to IVP US and marketing support services availed from IVP US for sale of software are intrinsically linked. Therefore, the assessee benchmarked these transactions on an aggregation basis by applying TNMM as the most appropriate method. It was submitted that the TPO was not justified in segregating the marketing support services from the sale of software transaction and determining the arm’s length price of the marketing support services at Nil.

59. The learned AR further submitted that during the transfer pricing assessment proceedings, the TPO had specifically called upon the assessee to justify why the benchmarking of sale of software to IVP US and marketing support services availed from IVP US should not be rejected and why the arm’s length price of payment for marketing support services should not be taken at Nil by applying Other Method. In response, the assessee furnished detailed submissions dated 03.10.2023, which are placed at pages 520 to 521 of the paper book. Thus, according to the learned AR, the assessee had explained the linkage of transactions and the basis of aggregation during the assessment proceedings itself.

60. The learned AR also submitted that the aggregation approach adopted by the assessee had been accepted by the TPO in the preceding and subsequent assessment years, namely Assessment Years 2018-19 and 2022-23. It was submitted that, in those years also, the assessee had benchmarked sale of software and availing of marketing/support services from IVP US by adopting the same aggregation approach and by selecting the foreign AE as the tested party. The relevant transfer pricing study reports and the orders passed under section 92CA(3) dated 22.07.2021 and 27.01.2025 for the respective assessment years were placed on record before the Tribunal and were also available with the TPO in Volume III of the paper book.

61. The learned AR submitted that the TPO/DRP, after having accepted the aggregation approach in the preceding and subsequent assessment years, erred in rejecting the same for the captioned assessment year despite the fact that the facts prevailing in the year under consideration were the same as in the preceding and subsequent assessment years. Reliance was placed on the decision of the Hon’ble jurisdictional Bombay High Court in Cummins India Ltd. v. Assistant Commissioner of Income-tax (Bombay)/ITA No. 126 of 2023, particularly paragraphs 10 to 13, wherein the principle of consistency in transfer pricing approach was considered. It was also submitted that the SLP filed before the Hon’ble Supreme Court against the said order was dismissed by order dated 24.03.2025, Dy. CIT v. Magneti Marelli Powertain India (P.) Ltd. (SC).

62. The learned AR submitted that the inter-company agreements for sale of software licences to IVP US and the intercompany agreements for availing marketing services from IVP US were furnished before the TPO/DRP and are placed at pages 460 to 485 of the paper book. It was further submitted that during the assessment proceedings, the assessee furnished sample copies of invoices demonstrating sale of software to third parties, placed at pages 588 to 601 of the paper book. Further, during the course of hearing before us, the assessee was called upon to furnish agreements entered into by the foreign AE with third parties for sale of software. The sample copies of such third-party agreements were handed over during the course of hearing on 04.05.2026 and are placed at pages 1 to 58 of Volume IV of the paper book.

63. The learned AR submitted that the TPO/DRP rejected the aggregation approach and determined the ALP of marketing services availed from the AE at Nil merely on the ground that the assessee did not satisfy the need-benefit test. It was submitted that such approach is contrary to law and facts, as the assessee had placed on record substantial evidence to demonstrate that marketing support services were actually availed from IVP US and were integrally connected with sale of software.

64. The learned AR submitted that the assessee had filed the following documentary evidence before the TPO/DRP to substantiate availing of marketing support services from IVP US:

65. First, the assessee furnished email communications between IVP US and customers of IVP India, placed at pages 802 to 808 of the paper book. It was submitted that these emails substantiate the efforts made by IVP US personnel in generating leads, procuring customers and maintaining customer relationships for the assessee.

66. Secondly, the assessee furnished recorded sessions of webinars/seminars conducted by IVP US for potential customers of IVP India, wherein promotional material was showcased. These recorded sessions were submitted before the TPO/DRP through compact disk and were referred to at page 1410 of the paper book. It was submitted that these materials establish that IVP US assisted IVP India in reaching out to customers in the US, educating them about the products and their features, managing customer relationships and generating leads. It was further submitted that IVP US showcased promotional material depicting the attributes of IVP India’s products and their usability to customers.

67. Thirdly, the assessee furnished sample email communications between IVP US and IVP India’s potential customers for sending webinar invites, taking feedback and answering client queries, placed at pages 1415 to 1449 of the paper book. It was submitted that these emails establish the assistance provided by IVP US to IVP India by increasing customer interaction and managing business relationships with potential clients.

68. Fourthly, the assessee furnished details of attendees of webinars/seminars, placed at page 1449 of the paper book. According to the learned AR, this evidence shows that IVP US assisted IVP India in reaching out to customers, promoting its products, generating leads and identifying customers.

69. Fifthly, the assessee furnished copies of agreements entered into between the assessee and its customers acquired as a result of marketing support services availed from its foreign AE. The copies of such contracts are placed at pages 602 to 733 of the paper book. It was submitted that these agreements demonstrate that the marketing efforts of IVP US resulted in acquisition of customers and were not merely routine or duplicative activities.

70. On the basis of the above evidence, the learned AR submitted that the rejection of such crucial material by the TPO/DRP is wholly unjustified. It was submitted that the conclusion that services were duplicative, non-beneficial, or not received by the assessee is contrary to the evidence on record. The learned AR submitted that the determination of ALP of marketing support services at Nil and rejection of the aggregation approach adopted for sale of software services to IVP US and marketing services availed from IVP US is unsustainable.

71. The learned AR placed reliance on the decision of the Hon’ble Delhi High Court in CIT v. Cushman and Wakefield (India) (P.) Ltd. [2014] 367 ITR 730 (Delhi), wherein it was held that the authority of the TPO is restricted to determination of the ALP and not to determine whether there was a service or whether the assessee benefited from such service. Reference was made to paragraphs 34 and 35 of the said decision. It was submitted that the TPO cannot sit in judgment over the commercial expediency of the assessee or determine the ALP at Nil merely because, in his opinion, the assessee did not derive benefit in a particular manner.

72. It was further submitted that even otherwise, the marketing services were availed from the AE at arm’s length. Had the assessee availed such services from any other independent entity, such services would still have been intrinsically linked with the assessee’s business of sale of software. Therefore, the aggregation approach adopted by the assessee is justified both on facts and in law.

73. The learned AR submitted that the learned DR has not brought on record any material difference in facts between Assessment Years 2018-19 and 2022-23 vis-a-vis the captioned assessment year. It was submitted that the benchmarking undertaken for all the disputed international transactions remains the same in the preceding and subsequent assessment years as well as in the year under consideration.

74. The learned AR further submitted that the learned DR merely pointed out increase or decrease in revenue and expenses for the year under consideration vis-a-vis the preceding assessment year. Such increase or decrease by itself does not establish any material change in the business model, functional profile, contractual arrangement, nature of services, or benchmarking methodology. It was therefore submitted that the learned DR’s contention regarding abnormal increase in expenditure does not constitute a valid basis for rejecting the aggregation approach or the benchmarking accepted in other years.

75. The learned AR submitted that in connection with intragroup services in the form of marketing support services received from IVP US, the assessee had furnished detailed documentary evidence, as already enumerated above. It was submitted that the TPO/DRP failed to properly consider the evidence and proceeded on an incorrect assumption that Shri Gaurav Aggarwal and Shri Gurvinder Singh, who rendered marketing services on behalf of IVP US to IVP India, were employees/directors of IVP India and that, therefore, the payments made to IVP US were unjustified. Reference was made to page 521 of the appeal set/Volume I of the paper book.

76. The learned AR submitted that the above observation of the TPO/DRP is factually incorrect. The assessee had filed additional submissions dated 07.08.2024 before the DRP, wherein detailed rebuttals were furnished against the observations of the TPO along with additional evidence in respect of marketing services availed from the foreign AE. Reference was made to pages 1092 and 1127 to 1133 of the paper book. It was submitted that both the aforesaid personnel, namely Shri Gaurav Aggarwal and Shri Gurvinder Singh, were employees of IVP US and had provided assistance with marketing support to the assessee. A copy of Form W-2 of Shri Gaurav Aggarwal evidencing that he was an employee of IVP US was also furnished along with the submissions dated 07.08.2024 before the learned DRP.

77. With respect to availing of support/managed services/IT consulting support services from IVP US, the learned AR submitted that the assessee had furnished detailed documentary evidence before the TPO/DRP. The assessee furnished detailed FAR analysis in the Transfer Pricing Study Report at pages 37 to 40 of the paper book. It also furnished the Product Delivery Services Agreement between IVP India and IVP US, placed at pages 473 to 478 of the paper book.

78. The assessee also furnished sample email communications between IVP India and IVP US personnel at pages 809 to 821 of the paper book. It was submitted that the summary of these emails was also filed during the assessment proceedings and clearly establishes that IVP US was not merely raising invoices to IVP India customers, but was also supervising overdue accounts of clients, following up for recovery, and maintaining customer details. Thus, according to the learned AR, the services rendered by IVP US were real, identifiable and business-connected.

79. The learned AR further submitted that during the assessment proceedings, the assessee furnished detailed documentary evidence demonstrating that services were rendered by IVP US personnel to clients of the assessee. The details were summarised as under:

80. In the case of Shri Kunal Hemchand Savla, who rendered services in relation to Aurelius Capital Management, the assessee furnished copies of timesheets in respect of work performed for India project at pages 1458 to 1462 of the paper book, invoices raised by IVP India to its clients substantiating charges made for assistance provided by the IVP US employee at pages 1463 to 1474 of the paper book, email communications between the US employee and IVP India client substantiating that the employee had actually worked on the client project at pages 1465 to 1485 of the paper book, tickets raised by US employees on the company’s internal tool for queries and resolution required while working for Indian client projects at pages 1586 to 1590 of the paper book, and Form W-2 to substantiate that Shri Kunal was an employee of IVP US at page 1591 of the paper book.

81. In the case of Shri Roshan Hariprasad Rao, who rendered services in relation to Graham Capital, the assessee furnished copies of timesheets in respect of work performed for India project at pages 1592 to 1600 of the paper book, invoices raised by IVP India to its clients substantiating charges made for assistance provided by the IVP US employee at pages 1601 to 1645 of the paper book, tickets raised by US employees on the company’s internal tool for queries and resolution required while working for Indian client projects at pages 1646 to 1654 of the paper book, and Form W-2 to substantiate that Shri Roshan was an employee of IVP US at page 1655 of the paper book.

82. In the case of Ms. Ankita Gupta, who rendered services in relation to Hudson Bay Capital Management, the assessee furnished copies of timesheets in respect of work performed for India project at pages 1656 to 1659 of the paper book, invoices raised by IVP India to its clients substantiating charges made for assistance provided by the IVP US employee at pages 1660 to 1681 of the paper book, tickets raised by US employees on the company’s internal tool for queries and resolution required while working for Indian client projects at pages 1682 to 1702 of the paper book, and Form W-2 to substantiate that Ms. Ankita was an employee of IVP US at page 1703 of the paper book.

83. In the case of Shri Isaac Colon, who rendered services in relation to Bain Capital Credit LP, the assessee furnished copies of timesheets in respect of work performed for India project at pages 1704 to 1708 of the paper book, tickets raised by US employees on the company’s internal tool for queries and resolution required while working for Indian client projects at pages 1709 to 1715 of the paper book, and Form W-2 to substantiate that Shri Isaac was an employee of IVP US at pages 1716 to 1720 of the paper book.

84. The learned AR further submitted that, in addition to the aforesaid evidence, the assessee filed additional submissions dated 07.08.2024 before the DRP, wherein detailed rebuttals were furnished against various contentions raised by the TPO in respect of IT support/managed/consulting services availed from the foreign AE. Reference was made to pages 1138 to 1141 of the paper book.

85. The learned AR therefore submitted that the assessee had discharged the onus of proving need, rendition and benefit of the intra-group services by filing contemporaneous agreements, FAR analysis, email communications, timesheets, invoices, customer-related documents, internal ticket records and W-2 forms of IVP US employees. It was submitted that the TPO/DRP disregarded these evidences on incorrect factual premises and proceeded to determine the ALP at Nil, which is impermissible.

86. The learned AR finally submitted that, in view of the evidence furnished in respect of marketing services and support/managed/IT consulting services availed from IVP US, the TPO ought to have accepted the benchmarking adopted by the assessee and no transfer pricing adjustment ought to have been made. The learned AR therefore prayed that the transfer pricing adjustment in respect of marketing support services and support/managed/IT consulting services availed from IVP US be deleted.

87. We have considered the rival submissions and perused the material placed before us. We have also considered the judicial precedents relied upon by both sides. The transfer pricing adjustment under challenge is Rs. 72,85,37,845/-. The adjustment comprises:

(i)

Rs. 62,04,44,658/- in respect of intra-group services availed from IVP US, consisting of marketing support services of Rs. 20,18,81,726/- and support/managed/IT consulting services of Rs. 41,85,62,932/-and

(ii)

Rs. 10,80,93,187/- in respect of sale of software and provision of support/IT consulting/managed services to IVP US.

88. The assessee has challenged the adjustment through various sub-grounds, but the issues substantially revolve around aggregation of transactions, selection of foreign AE as tested party, rejection of benchmarking, determination of ALP of intragroup services at Nil, use of six-month margin of the assessee against twelve-month comparables, selection of comparables, filters, foreign exchange gain and working capital adjustment.

Ground Nos. 3.3 to 3.6: Aggregation of transactions and Nil ALP of intra-group services

89. The learned AR submitted that the assessee is engaged in software development and sale of software to IVP US and also provides software-related services, namely software implementation, managed services and IT consulting services. It was submitted that for sale of software in the US and UK, IVP US performs customer-facing functions, identifies market trends, analyses customer needs, maintains customer relationships and facilitates customer interface. Therefore, according to the assessee, sale of software to IVP US and marketing support services availed from IVP US are intrinsically linked and were rightly aggregated under TNMM.

90. The learned DR, on the other hand, submitted that aggregation cannot be accepted merely because transactions are with the same AE. According to the learned DR, the transaction of outright sale of software cannot be aggregated with receipt of intra-group services, as the assessee has not established that such transactions fall within the permissible circumstances for aggregation. Reliance was placed on Knorr-Bremse India (P.) Ltd. (supra)and Faurecia Automotive Seating India (P.) Ltd. (supra).

91. The legal position is that aggregation is permissible where transactions are closely linked. Rule 10A(d) defines “transaction” to include a number of closely linked transactions. In Faurecia Automotive Seating India (P.) Ltd., the Pune Bench, after referring to Knorr-Bremse India (P.) Ltd. (supra), observed as under:

92. We have heard the rival submissions, perused the orders of the TPO/AO and learned DRP, and considered the material referred to by both sides. We have also considered the judicial precedents cited before us. The assessee has challenged the following transfer pricing adjustments:

Particulars	MAM (as per TPO)	Transfer Pricing Adjustment (Amount in INR)
Sale of software to IVP	TNMM	4,46,46,159
Availing of marketing support services from IVP US	Other Method	20,18,81,726
Provision of support / IT consulting / managed services to IVP US	TNMM	6,05,78,458
Availing of support / managed services from IVP US	Other Method	41,85,62,932
Total:		72,85,37,845

93. Though the assessee has raised separate sub-grounds, the issues requiring adjudication are interlinked. The principal questions are:

(i)

whether the assessee was justified in aggregating sale of software and marketing/support services under TNMM

(ii)

whether IVP US could be selected as the tested party; (iii) whether the TPO was justified in determining the ALP of intra-group services at Nil

(iii)

whether the TPO was justified in adopting IVP India as tested party and comparing six-month margins with twelve-month comparable data

(iv)

whether the remaining grounds relating to filters, foreign exchange gain, working capital adjustment and comparables survive independently.

I. Aggregation of transactions

94. The learned AR submitted that the assessee is engaged in software development and sale of software to IVP US. IVP US is the customer-facing and market-facing entity in the US/UK market. It performs functions such as customer identification, market interface, product demonstration, webinars, lead generation, customer relationship management, onsite support and customer coordination. The learned AR submitted that sale of software and availing of marketing support services from IVP US are not independent or isolated transactions, but are intrinsically linked in the assessee’s business model.

95. The learned DR, on the other hand, submitted that the transaction of outright sale of software cannot be aggregated with receipt of intra-group services. According to the learned DR, Rule 10A(d) permits aggregation only of closely linked transactions and the assessee has not established that the sale of software and intra-group services fall within such category. The learned DR relied upon Knorr-Bremse India (P.) Ltd. and Faurecia Automotive Seating India (P.) Ltd. (supra)

96. Rule 10A(d) provides that the term “transaction” includes a number of closely linked transactions. Thus, the statutory framework itself recognises that, in a proper case, more than one transaction may be examined together for the purpose of benchmarking. The real test is whether the transactions are closely linked, commercially interdependent and incapable of being evaluated in isolation without distorting the ALP analysis.

97. The Hon’ble Punjab and Haryana High Court in Knorr-Bremse India (P.) Ltd. (supra), has held that several transactions between two or more AEs can form a single composite transaction if they are closely linked. In the headnote, the ratio is recorded thus: “Several transactions between „two or more’ AEs can form a single composite transaction if such transactions are closely linked.” The Hon’ble High Court also held that if it is established that sale of goods and/or provision of services formed one composite indivisible transaction, TNMM cannot be applied selectively to some components and CUP or any other method to the remaining components. At the same time, the Hon’ble Court cautioned that merely because each input or service contributes to the final business activity, it does not automatically become part of a composite transaction. The onus is on the assessee to establish the linkage. The propositions emerge from paragraphs 21, 38 and 40 to 47 of the judgment.

98. The Co-ordinate Bench in Faurecia Automotive Seating India (P.) Ltd. (supra)after considering Knorr-Bremse, held in paragraphs 6.2 and 6.3 that “transaction” may include plural transactions, but only if such transactions are closely linked. The Co-ordinate Bench observed that aggregation cannot be allowed where the connection is remote. However, the decision was rendered on its own facts, where professional charges were found not to be closely connected with transactions of purchase of raw materials, components and royalty.

99. Thus, the Revenue is correct in contending that aggregation is not automatic. However, the assessee is equally correct in submitting that neither Knorr-Bremse nor Faurecia prohibits aggregation where commercial and operational linkage is established. The test is factual and has to be applied to the record of the present case.

100. We therefore apply the following indicia for testing aggregation in the present case:

(a)

whether there is contractual and operational linkage between the transactions;

(b)

whether the transactions serve a common economic objective;

(c)

whether the functions, assets and risks are integrated;

(d)

whether the pricing policy and benchmarking are applied consistently;

(e)

whether separate benchmarking would distort the overall arm’s length analysis; and

(f)

whether the transactions have been consistently treated as linked in comparable years.

101. On examination of the record, we find that these indicia are satisfied. The TPSR and FAR analysis placed at pages 25 to 40 of the paper book (Volume – II Part 1) show that IVP India is the software developer/entrepreneur and IVP US performs marketfacing and customer-facing functions. The inter-company agreements placed at pages 460 to 485 of the paper book (Volume – II Part 1) show the contractual framework for sale of software and availing of marketing/support services. The sample invoices and customer contracts placed at pages 588 to 733 (Volume – II Part 2), e-mails at pages 802 to 821 (Volume – II Part 2), webinar material and related records placed at pages 1410 to 1449, and customer-facing documents demonstrate that IVP US was involved in customer identification, marketing outreach, webinar activity, product demonstration and customer coordination. These facts establish that the marketing support services were not remote or general services, but were directed towards promoting and supporting overseas sale of software.

102. The learned DR submitted that sale of software to IVP US and marketing support for independent customers are inherently different. We are unable to accept this contention as decisive. The assessee’s business model shows that IVP US acted as the distributor/customer-facing entity in the overseas market. The software sale, customer interface, marketing activity and product support were part of the same commercial chain. Therefore, the mere fact that the services were described separately in agreements or accounts does not sever their commercial interdependence.

103. The Hon’ble Bombay High Court in Cummins India Ltd. (supra), , has materially guided this issue. In paragraph 11, the Hon’ble Court held that once TNMM was accepted as the most appropriate method for the relevant set of international transactions, it was not open to the TPO to subject only one element to a different method. The Hon’ble Court observed that adoption of a method as most appropriate ensures application of one standard or criterion and that disturbing it by applying different methods to different elements would cause distortion and “spell chaos”.

104. In the present case, the TPO has accepted TNMM for certain transactions but carved out intra-group services and applied “Other Method” to determine their ALP at Nil. In our view, once the assessee has demonstrated that the sale of software and marketing support services are closely linked, the TPO could not have selectively de-segregated one element and benchmarked it at Nil, without first establishing that the services were independent and not part of the integrated business model.

105. We therefore hold that the assessee’s aggregation approach, in respect of sale of software and marketing support services, is justified on the facts of the present case.

II. Nil ALP of intra-group services and need-benefit-rendition test

106. The learned DR submitted that the assessee failed to establish the need, rendition and benefit of the intra-group services. According to the learned DR, the e-mails relied upon by the assessee indicated that services were rendered by the assessee’s own employees/directors and not by IVP US. It was further submitted that there was abnormal increase in intragroup service expenditure during the year and that the assessee failed to quantify the benefit derived.

107. The learned AR, in rebuttal, submitted that the assessee had furnished detailed documentary evidence. For marketing support services, the assessee filed e-mail communications between IVP US and customers of IVP India, recorded webinars/seminars, sample e-mails for webinar invites and customer queries, attendee details, customer contracts, and additional submissions before the DRP. For support/managed/IT consulting services, the assessee filed FAR analysis, product delivery service agreement, e-mails, timesheets, invoices, internal tickets and W-2 forms of IVP US employees.

108. The legal distinction between ALP determination and business expediency has been explained by the Hon’ble Delhi High Court in Cushman and Wakefield (India) (P.) Ltd. (supra). In paragraph 34, the Hon’ble Court held that the authority of the TPO is to conduct transfer pricing analysis to determine ALP and not to determine whether there is a service or not from which the assessee benefits. The said para is reproduced below:

’34.

The Court first notes that the authority of the TPO is to conduct a transfer pricing analysis to determine the ALP and not to determine whether there is a service or not from which the assessee benefits. That aspect of the exercise is left to the AO. This distinction was made clear by the ITAT in Dresser-Rand India (P.) Ltd. v. Addl. CIT [2011] 47 SOT 423 [2012] 53 SOT 173 (Mumbai) (Mum.):

“8. We find that the basic reason of the Transfer Pricing Officer’s determination of ALP of the services received under cost contribution arrangement as ‘NIL’ is his perception that the assessee did not need these services at all, as the assessee had sufficient experts of his own who were competent enough to do this work. For example, the Transfer Pricing Officer had pointed out that the assessee has qualified accounting staff which could have handled the audit work and in any case the assessee has paid audit fees to external firm. Similarly, the Transfer Pricing Officer was of the view that the assessee had management experts on its rolls, and, therefore, global business oversight services were not needed. It is difficult to understand, much less approve, this line of reasoning. It is only elementary that how an Assessee conducts his business is entirely his prerogative and it is not for the revenue authorities to decide what is necessary for an Assessee and what is not. An Assessee may have any number of qualified accountants and management experts on his rolls, and yet he may decide to engage services of outside experts for auditing and management consultancy; it is not for the revenue officers to question Assessee’s wisdom in doing so. The Transfer Pricing Officer was not only going much beyond his powers in questioning commercial wisdom of Assessee’s decision to take benefit of expertise of Dresser Rand US, but also beyond the powers of the Assessing Officer. We do not approve this approach of the revenue authorities. We have further noticed that the Transfer Pricing Officer has made several observations to the effect that, as evident from the analysis of financial performance, the assessee did not benefit, in terms of financial results, from these services. This analysis is also completely irrelevant, because whether a particular expense on services received actually benefits an Assessee in monetary terms or not even a consideration for its being allowed as a deduction in computation of income, and, by no stretch of logic, it can have any role in determining arm’s length price of that service. When evaluating the arm’s length price of a service, it is wholly irrelevant as to whether the assessee benefits from it or not; the real question which is to be determined in such cases is whether the price of this service is what an independent enterprise would have paid for the same. Similarly, whether the AE gave the same services to the assessee in the preceding years without any consideration or not is also irrelevant. The AE may have given the same service on gratuitous basis in the earlier period, but that does not mean that arm’s length price of these services is ‘nil’. The authorities below have been swayed by the considerations which are not at all relevant in the context of determining the arm’s length price of the costs incurred by the assessee in cost contribution arrangement. We have also noted that the stand of the revenue authorities in this case is that no services were rendered by the AE at all, and that since there is no evidence of services having been rendered at all, the arm’s length price of these services is ‘nil’.”‘

109. The same decision also records, on facts, that the TPO had found that no intra-group services existed because the assessee allegedly did not file evidence that services were actually provided to meet its specific need and that benefit accrued to it. The Coordinate Bench reversed such finding where e-mails and detailed cost break-up showed service rendition.

110. Thus, Cushman and Wakefield does not mean that the TPO is powerless to examine whether services were rendered. It means that if services are evidenced, the TPO cannot determine ALP at Nil merely because he considers the services unnecessary or insufficiently beneficial. His duty is to determine what an independent party would pay in a comparable situation by applying an accepted transfer pricing method.

111. The Hon’ble Punjab and Haryana High Court in Knorr-Bremse India (P.) Ltd. (supra) further held that the answer to whether a transaction is at arm’s length is not dependent upon whether the transaction results in increase in profit. It was held that mere failure to establish increase in profit does not show that the transaction is not at ALP. This proposition is reflected in paragraph 21 of the judgment.

112. The Pune Bench in Faurecia Automotive Seating India (P.) Ltd.(supra) also held that where detailed e-mail communications proved rendition of intra-group services, Nil ALP could not be sustained merely because the TPO was not satisfied with the benefit. The headnote records that detailed e-mail communications between the assessee and AEs abundantly proved that AEs rendered services and the matter was restored only for determining ALP afresh in accordance with law.

113. In the present case, the assessee has produced material far beyond a general assertion of services. The documents include webinar records, client communications, attendee details, contracts obtained through IVP US support, timesheets, invoices, tickets raised on internal systems, e-mails with clients, and W-2 forms establishing the employment of the concerned personnel with IVP US. These documents show both rendition and business connection.

114. The learned DR’s objection regarding common domain names and alleged involvement of persons associated with IVP India has been considered. In our view, use of common group domain or communication systems is not unusual in a multinational group and does not, by itself, prove non-rendition by IVP US. W-2 forms are payroll/tax records of the US entity and are credible evidence of employment. Timesheets, project references, client e-mail trails, ticket records and invoices corroborate actual participation of IVP US personnel in client-related work.

115. The learned DR also relied upon abnormal increase in intragroup service expenditure in a year in which revenue had declined. This is a factor which may justify closer scrutiny, but it cannot replace the statutory exercise of determining ALP. The TPO has not brought on record any comparable uncontrolled transaction to show that an independent enterprise would pay Nil for similar marketing support, customer relationship, managed support or IT consulting services. The determination of ALP at Nil is therefore not based on a recognised comparability analysis.

116. We therefore hold that the TPO was not justified in determining the ALP of intra-group services at Nil. The adjustment of Rs. 62,04,44,658/- in respect of marketing support services and support/managed/IT consulting services is deleted. Ground Nos. 3.3 to 3.6 are accordingly allowed.

III. Foreign AE as tested party, Ground No. 3.7 and GroundNo. 4.2

117. The learned AR submitted that IVP India is the entrepreneurial entity which develops software and owns intangibles, whereas IVP US performs comparatively less complex functions, namely customer-facing, market support, distribution and support functions. IVP US assumes lower risks and does not own or create the core software intangibles. It was therefore selected as the tested party.

118. The learned DR submitted that foreign AE could not be accepted as tested party because its data was not reliable, annual reports of foreign comparables were allegedly not furnished, and segmental results were not part of audited financial statements.

119. The legal position is that there is no absolute bar against selecting a foreign AE as tested party. In PCIT v. Almatis Alumina (P.) Ltd. [2022] 445 ITR 632 (Calcutta), the Hon’ble Calcutta High Court held, in paragraph 5, that the tested party should normally be the least complex party to the controlled transaction and that there is no bar for selection of either local or foreign party. The Court held that neither the Act nor the transfer pricing guidelines prohibit selection of a foreign AE as tested party. The headnote records the ratio that, where the assessee company is more complex compared to its foreign AE, the foreign AE could be selected as tested party.

120. In paragraph 4 of Almatis Alumina, the Hon’ble Court noted the FAR profile and observed that the assessee was a more complex entity when compared to its AE. The Court therefore found no infirmity in selection of the AE as tested party.

121. The Hon’ble Calcutta High Court in PCIT v. ITC Infotech India Ltd. (Calcutta), followed Almatis Alumina and reproduced the legal principle that the tested party should normally be the least complex party and that there is no bar for selection of either local or foreign party. The relevant para is reproduced below:

4. As could be seen from the impugned order passed by the learned Tribunal, the Tribunal noted that the issues which arise for consideration had been decided in favour of the assessee in the assessee’s own case for the assessment years 2005-06, 2006-07, 2010-11, 2011-12, 2012-13 and 2013-14. The orders passed in favour of the assessee for the assessment years 2005-06 and 2006-07 have been affirmed by this Court in the judgment CIT v. ITC, Infotech India Ltd. [2016] 384 ITR 380 (Cal.).Apart from that, the law and the subject is in favour of the respondent assessee in the light of the decision of this Court in the case of Pr. CIT v. Almatis Alumina (P.) Ltd. 445 ITR 632 (Calcutta)/ 445 ITR 632 (Cal) and the operative portion of the judgment reads as follows:-

“6. In the above decision several other decisions have been referred to and legal principle that can be culled out is that the tested party normally should be the least complex party to the controlled transaction and there is no bar for selection of tested party either local or foreign party and neither the Act nor the guidelines on transfer pricing provides so and the selection of the tested party is to further the object of the comparability analysis by making it less complex and requiring fewer adjustment. This legal principle has been rightly noted by the Tribunal. In fact, this issue had arisen only for the assessment year 2012-13and for the assessment year 2013-14, even in the transfer pricing study (TP study) the assessee had taken the associated enterprises as a tested party. However, the Assessing Officer did not agree with the assessee for the said assessment year by referring to the decision in the case of Aurionpro SolutionsLimited v. Addl. CIT [2013] 27 ITR (Trib) 276 (Mumbai); (Mum-Trib). The decision in Aurionpro Solutions Ltd was taken note of in Virtusa Consulting Services (P) Ltd. and the decision was distinguished by taking note of the issue which was involved in the said case and the discussion is in paragraph 26 of the judgment quoted above. After noting several decisions, it was held that the Indian Transfer Pricing guidelines issued by the Institute of Chartered Accountants of India vide guidance note on report under Section 92E by Institute of Chartered Accountants of India and transfer pricing guidelines issued by OECD does not prohibit associated enterprises to be a tested party. The Tribunal accepted the stand taken by the assessee that the associated enterprises can be selected as a tested party. In the light of the decision in the case of Virtusa Consulting Services (P) Ltd. as well as on the factual aspect which has been noted by the Tribunal with regard to the function, asset and risk profile of both the assessee-company and the associated enterprises, we are of the considered view that the finding rendered by the Tribunal is just, proper and legally valid.”

122. The Hon’ble Madras High Court in Virtusa Consulting Services Pvt. Ltd. vs. DCIT TS-45-HC-2021(MAD)-TP, also admitted and considered the question whether the Tribunal was justified in rejecting the approach of considering foreign AEs as tested party despite supporting material showing their least complex nature. The said decision has been noticed in Almatis Alumina.

123. Applying the above principles, we find that IVP India is functionally more complex. IVP India is engaged in software development and sale of software, owns/uses the core intangibles, performs development functions, and bears entrepreneurial risks. IVP US performs customer-facing, distribution, marketing support and onsite/customer relationship functions. It does not own or create the core software intangibles and operates in a comparatively limited-risk environment. Thus, IVP US is the least complex party for the transactions under consideration.

124. The Revenue’s objection regarding CA-certified segmental accounts is also not sufficient to reject IVP US as tested party. The assessee has placed CA-certified segmental financials of IVP US and foreign comparable data. The TPO has not brought any specific defect in the allocation methodology, reconciliation or consistency of such segmental results. Transfer pricing analysis often proceeds on segmental data. The relevant requirement is reliability, consistency and reasonableness of allocation, not necessarily separate statutory audit of each segment.

125. In Almatis Alumina, one of the questions before the Hon’ble Court was whether segmental accounts not forming part of audited financial statements could be considered. The Hon’ble Court nevertheless upheld the Tribunal’s approach where the segmental analysis was accepted on facts. The headnote records that the Tribunal’s acceptance of segmental analysis was affirmed.

126. In the present case, in absence of any specific defect shown by the TPO in the CA-certified segmental financials or foreign comparable data, the rejection of IVP US as tested party is not justified. We accordingly hold that IVP US was validly selected as tested party. Ground No. 3.7 and Ground No. 4.2 are allowed.

IV. Consistency with earlier and subsequent years

127. The learned AR submitted that the same aggregation approach and selection of IVP US as tested party were accepted in AY 2018-19 and AY 2022-23. It was pointed out that, in AY 201819, no adjustment was made except on account of receivables. For AY 2022-23 also, no adverse inference was drawn on the benchmarking approach. The relevant TPO orders/records were placed in Volume III of the paper book.

128. The learned DR submitted that each year is separate and that the facts of this year were materially different due to abnormal increase in intra-group service expenditure.

129. The principle of consistency does not mean that an incorrect approach must be perpetuated. However, where there is no material change in the business model, contractual arrangement, FAR profile, nature of transactions or benchmarking method, the Revenue must demonstrate a cogent reason for taking a different view.

130. The Hon’ble Bombay High Court in Cummins India Ltd., particularly paragraphs 12 and 13, emphasised that where the Revenue accepted the aggregation approach in other years and there was no material change in facts, a different approach in the impugned year was not justified. The Court noted that the TPO and DRP had not stated that facts were different from earlier years. The relevant paras are reproduced below:

12.

Further the Tribunal was totally incorrect in saying that accepting aggregation of royalty payment with other international transactions under the manufacturing segment for the Assessment Year 2006-2007 was in the context of an earlier agreement under which the royalty was paid. But Assessee having entered into a new agreement on 16th September 2010 with Cummins Inc. under which the technical support was received for which payment of royalty was made by Assessee for the year under consideration and hence they need not follow the earlier approach of the Tribunal. This is because the new agreement on which reliance has been placed by the Tribunal was dated 16th September 2010, and even after the said agreement was entered into, for the Assessment Year 2011-2012 to Assessment Year 2014-2015 the TPO himself had accepted the benchmark of the international transaction of payment of royalty under the aggregation approach along with transactions of the manufacturing segment. The Tribunal failed to recognize that the royalty agreement for the years under consideration was the same agreement. We have to notice that neither the TPO nor the DRP had even whispered or mentioned in their orders about any facts being different from the earlier orders. In such situation, the Tribunal was not justified in taking a different view for these three assessment orders. The Apex Court in Radhasoami Satsang v. CIT 193 ITR 321 (SC)/193 ITR 321 has held that in the absence of change in material facts, the department is bound by the previous decision.

13.

Once the Tribunal in its earlier orders has held that the transaction of payment of royalty for use of technology is inextricably linked with manufacturing activity and should be aggregated with other international transactions in the manufacturing segment for the purposes of benchmarking the same, and the TPO having accepted the aggregating of international transaction of payment of royalty with other international transactions in the manufacturing segment and not drawn any adverse inferences in respect of such aggregation of royalty payment under identical agreement, the Tribunal should have followed the order of the co-ordinate bench rendered under identical facts. More so, when in a majority of the years from the Assessment Year 2006-07 up to the Assessment Year 2014-15 it was under the very same agreement and the orders were passed after thoroughly scrutinising the international transactions entered into by assessee, the transfer pricing report obtained and the transfer pricing documentation maintained.

131. In the present case, the learned DR has referred to increase in expenditure and decline in revenue. Such financial fluctuation may justify a closer examination of the genuineness and ALP of services, but it does not constitute a change in FAR profile, business model or contractual arrangement. The Revenue has not shown that the functions of IVP India or IVP US changed in the year under consideration, or that the agreements or nature of transactions were materially different.

132. Therefore, the acceptance of the same approach in earlier and subsequent years is a strong supporting factor in favour of the assessee. The learned DR’s contention on this aspect is rejected.

Ground No. 3.8, duplicative adjustment

133. The assessee submitted that the TPO made a duplicative adjustment by determining the ALP of intra-group services at Nil and simultaneously making adjustment in respect of sale of software/provision of services under TNMM, where the intragroup service cost formed part of the operating cost base.

134. We find merit in this contention in principle. Once a cost is considered while computing operating margin under TNMM, a separate adjustment by treating the same cost at Nil would result in double adjustment unless the TPO demonstrates that the cost has not affected the margin or that separate adjustment is otherwise warranted. Since we have accepted the aggregation approach and deleted the Nil ALP adjustment, this ground is consequential. Ground No. 3.8 is allowed.

Ground Nos. 4.1 and 4.3, adjustment on sale of software and six-month margin issue

135. Ground No. 4.1 challenges adjustment of Rs. 10,80,93,187/- in respect of sale of software and provision of support/IT consulting/managed services to IVP US. Ground No. 4.3 challenges the TPO’s action of adopting IVP India as tested party and comparing IVP India’s six-month margin with twelvemonth data of comparable companies.

136. Since we have held that IVP US was rightly selected as tested party, the adjustment made by rejecting IVP US and adopting IVP India as tested party cannot survive. Even otherwise, the TPO’s approach suffers from a comparability defect. The relevant period of the assessee, in view of the merger, was 01.04.2020 to 30.09.2020. The TPO compared the assessee’s six-month margin with twelve-month data of comparables. Such comparison, without suitable period adjustment, distorts the comparability exercise. Further, when segmental data of the relevant period was available, the adoption of entity-level margin without pointing out specific defects in the segmental data is not justified.

137. The principle recognised in Almatis Alumina also supports use of segmental data where available. It is held that where segmental results are available, adjustment can be made only on the basis of the individual transaction and not on aggregation basis in the sense of entity-wide results. The relevant para is reproduced below:

The second issue is with regard to the consideration of the segmental accounts. The facts which are relevant for such purpose are that the assessee purchased goods from AE for sale to third parties and it has also been ad hoc sales of traded finished goods lying in stock to the AE. Further, the assessee has received commission at 3per cent on account of facilitating the direct sale by AE to third parties in India. So far as the nature of activities of the assessee is concerned, the assessee made purchases only from AEs and received commissions from AEs and there are three AEs in different countries and the TPO took entity level margins of the assessee and made the transfer pricing adjustment on that basis. It appears that the assessee did not raise this issue during the proceedings before the TPO. However, before the DRP the assessee has raised such an issue contending that the assessing officer failed to provide due cognizance to the fact that in relation to the purchase of the finished goods, receipt of commission and sale of finished goods, the assessee was engaged in trading functions and on the contrary selected a set of comparables having different functional profile. The DRP, on noting that such issue was raised by the assessee before it for the first time, forwarded the contention to the TPO for his consideration and submit a remand report. The TPO in his remand report held that the segmentation of profitability provided by the assessee has no basis and is far fetched and not audited. Upon consideration of the remand report submitted by the TPO, the DRP accepted the same and denied relief to the assessee for the assessment year 2012-13. However, for the assessment year 2013-14 and the subsequent assessment year 2014-15 the DRP has accepted the stand of the assessee with regard to the segmentation of the profitability. These factors were taken into consideration by the Tribunal and on facts it was noted that the adjustment can be made only on the basis of the transaction and not on aggregation and, accordingly, accepted the segmentation analysis of the assessee. Noting that the facts are same for the assessment year 201314 as well as 2014-15, hence, we find that the conclusion arrived at by the Tribunal cannot be faulted.

138. Therefore, the adjustment of Rs. 10,80,93,187/- in respect of sale of software and provision of support/IT consulting/managed services to IVP US is deleted. Ground Nos. 4.1 and 4.3 are allowed.

Ground Nos. 4.4 to 4.9

139. Ground No. 4.4 relates to filters, including turnover filter. Ground No. 4.5 relates to treatment of foreign exchange fluctuation gain. Ground No. 4.6 relates to rejection of fresh comparables. Ground No. 4.7 relates to working capital adjustment. Ground Nos. 4.8 and 4.9 relate to company-wise comparability objections.

140. These grounds arise because the TPO rejected IVP US as tested party and proceeded to benchmark the transactions by treating IVP India as tested party. Since we have held that IVP US was rightly selected as tested party and have deleted the transfer pricing adjustment on the primary issues, these grounds do not require separate adjudication and are rendered academic.

141. However, we clarify that had the TPO’s approach been sustained, each of these issues would have required independent company-wise and computation-wise adjudication. Any comparable selection exercise would have required clear working papers, consistent application of filters, proper treatment of operating/non-operating items including foreign exchange fluctuation, and appropriate working capital adjustment. In view of our decision on the primary issues, no further adjudication is required on Ground Nos. 4.4 to 4.9.

142. In view of the foregoing discussion, we hold as under:

(i)

The assessee’s aggregation approach in respect of sale of software and marketing support services is accepted.

(ii)

The determination of ALP of intra-group services at Nil is not justified on the record before us.

(iii)

IVP US was rightly selected as tested party.

(iv)

The TPO was not justified in adopting IVP India as tested party and comparing six-month margin with twelve-month comparable data.

(v)

The transfer pricing adjustment of Rs. 62,04,44,658/- in respect of intra-group services is deleted.

(vi)

The transfer pricing adjustment of Rs. 10,80,93,187/- in respect of sale of software and provision of support/IT consulting/managed services is deleted.

(vii)

Consequently, the total transfer pricing adjustment of Rs. 72,85,37,845/- is deleted.

143. Ground Nos. 3.3 to 3.8 and Ground Nos. 4.1 to 4.9 are accordingly allowed. The Assessing Officer shall give consequential effect to the above findings while recomputing the income of the assessee. Interest, if any, shall be recomputed consequentially in accordance with law. Since the transfer pricing adjustment is deleted, any penalty proceedings initiated with reference to such adjustment shall be dealt with in accordance with law after taking note of the relief granted in this order.

144. Accordingly, the appeal of the assessee is partly allowed in the terms indicated above.