DCIT, CIRCLE-2(1)(1), AHMEDABAD, AHMEDABAD V. INDIANIC INFOTECH LIMITED, ISCON AHMEDABAD

ITA 1639/AHD/2024

AI Insights

The case involves the Deputy Commissioner of Income Tax, Central Circle-2(1)(1), Ahmedabad as the appellant and Indianic Infotech Ltd. as the respondent. The dispute centered on the appropriate method for benchmarking international transactions between the assessee and its Associated Enterprise (AE) for the Assessment Year 2014-15. The TPO initially rejected the PSM adopted by the assessee and applied TNMM, leading to a significant upward adjustment in the assessee's income. The CIT(A) later reversed this decision, leading to the Department's appeal to the Tribunal. The Tribunal's decision affirmed the CIT(A)'s findings, dismissing the Department's appeal.

• Counselvise Citation: [2025] 140 COUNSELVISE.COM (IT) 786854 (ITAT-AHMEDABAD)
• Duration Of Justice: 1 year(s) 2 month(s) 5 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 19-11-2025
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: D
• Assessment Year: 2014-2015
• Appeal Filed On: 13-09-2024
• Other Referred Cases: Radhasoami Satsang v. CIT, Sap Labs India Pvt. Ltd. vs. ITO, DCIT v. AMD India Pvt. Ltd., Techbooks International Pvt. Ltd., CIT v. Pentair Water India Pvt. Ltd., CIT v. Tata Power Solar Systems Ltd., Quark Systems India Pvt. Ltd., Rampgreen Solutions Pvt. Ltd. v. CIT
• Laws Referred To: Income Tax Act, 1967, Income Tax Rules, 1961
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: SAKAR SHARMA
• Assessee Lawyers: RAMESHWAR P MEENA
• Keywords: Transfer pricing; International transaction; Rule of consistency; Notional interest
• Section: 10B

Judgement Text

" IN THE INCOME TAX APPELLATE TRIBUNAL “D” BENCH, AHMEDABAD BEFORE SHRI SIDDHARTHA NAUTIYAL, JUDICIAL MEMBER & SHRI MAKARAND V. MAHADEOKAR, ACCOUNTANT MEMBER I.T.A. No.1639/Ahd/2024 (Assessment Year: 2014-15) Deputy Commissioner of Income Tax, Central Circle-2(1)(1), Ahmedabad Vs. Indianic Infotech Ltd., B-201, ISCON, Ahmedabad-380015 [PAN No.AAACI8307B] (Appellant) .. (Respondent) Appellant by : Shri Sakar Sharma, AR Respondent by: Shri Rameshwar P Meena, Sr. DR Date of Hearing 17.11.2025 Date of Pronouncement 19.11.2025 O R D E R PER SIDDHARTHA NAUTIYAL - JUDICIAL MEMBER: This appeal has been filed by the Department against the order passed by the Ld. Commissioner of Income Tax (Appeals)-11, (in short “Ld. CIT(A)”), Ahmedabad-13 vide order dated 20.07.2024 passed for A.Y. 2014-15. 2. The Department has taken the following grounds of appeal:- “1.1(a) Wh.ether on the facts and in the circumstances of the case and in law, the Ld. CIT(A)deleting the adjustment made on account of benchmarking of transactions made for Services rendered to AE amounting to Rs.2,87,24,017/- ignoring the findings of the TPO by violating provisions of section 92C(1)and 92C(2) of the Act, !967? 2.1(b) Whether on the facts and in the circumstances of the case and in law, the Ld. CIT(A) was justified in holding the PSM Method is the Most Appropriate Method (MAM) without appreciating the finding of the TPO that the assessee had failed to submit documents required as per the guidelines laid down u/s.92D r.w.r. 10D of the Income Tax rules, 1961? 3.1(c) Whether on the facts and in the circumstances of the case and in law, the Ld. CIT(A) was justified in holding the Profit Split Method is the Most Appropriate Printed from counselvise.com ITA No. 1639/Ahd/2024 DCIT vs. Indianic Infotech Ltd. Asst.Year –2014-15 - 2– method by ignoring the guidelines as laid down u/r. 10B of the Income Tax Rules, 1961? 4.1(d) Whether on the facts and in the circumstances of the case and in law, the Ld. CIT(A) was justified in rejecting company M/s. Cignity Technology Ltd. as comparable without appreciating that the same company is functionally similar to the assessee as hence the rejection as comparable is not in accordance with the provisions of Rule 10B and 10CA of the Income Tax Rules, 1962? 5.1(e) Whether on the facts and in the circumstances of the case and in law, the Ld. CIT(A) was justified in deleting TPO to adopt consolidated margin of the comparable company M/s. C.G.Vak Software & Export Ltd. without any specific finding on the functional similarity of the consolidated functions of the comparable and without appreciating that the TPO had considered the standalone business of the company as comparable and therefore the direction is in contravention to the provisions of Rule 10B and 10CA of the Income Tax Rules, 1961? 6.2(a) Whether on the facts and in the circumstances of the case and in law, the Ld. CIT(A) was justified in treating credit period of payment at 180 days as against 90 days proposed by the TPO without appreciating that assessee had failed to provide supportive agreement/document for the same? 7.2(b.) Whether on facts and in the circumstances of the case and in law, the Ld. CIT(A) has erred in rejecting the ALP of the transaction interest on receivables determined by the TPO ignoring the guidelines laid down under the I.T Act and Rules and thereby violating the ratio laid down by the Hon’ble Supreme Court in the case of Sap Labs India Pvt. Ltd. vs. ITO? 8. The appellant craves leave to amend or alter any ground or add a new ground, which may be necessary.” 3. The brief facts of the case are that the assessee company has been engaged in the business of software development and related services. For the year under consideration, the assessee filed its return declaring an income of Rs. 35,64,658/-, and the case was selected for scrutiny. During the assessment proceedings, the Transfer Pricing Officer examined the international transactions entered into by the assessee with its Associated Enterprise (AE) and found that the assessee had adopted the Profit Split Method (PSM) as the Most Appropriate Method (MAM). The assessee contended that both the entities contributed to the development and commercialization of the software and therefore PSM was the correct method. However, the TPO observed that the assessee had not submitted Printed from counselvise.com ITA No. 1639/Ahd/2024 DCIT vs. Indianic Infotech Ltd. Asst.Year –2014-15 - 3– adequate documentary evidence to substantiate the use of PSM and that the PSM is normally used only when both the parties contribute unique and valuable intangibles. After examining the FAR analysis and the transfer pricing report, the TPO held that the assessee alone undertook the software development activities and carried the associated risks, while the AE performed merely marketing functions without contributing any unique intangibles. On this basis, the TPO concluded that PSM was not appropriate in this case. The TPO further stated that PSM is meant for situations where the operations are highly integrated and comparable data is not available, whereas in the present case the availability of comparable companies made the Transactional Net Margin Method (TNMM) more suitable. The TPO therefore rejected the PSM and applied TNMM as the Most Appropriate Method. On applying TNMM, the TPO selected six comparable companies and computed an average PLI of 22.73%, as compared to the assessee’s margin of 4.89%. Since the difference was beyond the permissible tolerance limit, the TPO proposed an upward adjustment of Rs. 2,81,24,107/-. The Assessing Officer accepted the transfer pricing order and completed the assessment by determining the total income of the assessee at Rs. 3,19,63,670/-, and thereby making an addition of Rs. 2,83,99,008/-. 4. The assessee carried the matter in appeal before the CIT(A), challenging both the rejection of PSM and the selection of comparables under TNMM. The assessee argued that the TPO had accepted PSM in the immediately preceding year on identical facts and therefore the principle of consistency required that the same method be followed. The assessee relied on several judicial precedents including Radhasoami Satsang v. CIT and decisions of the Delhi ITAT in cases where PSM had been accepted as the MAM under similar factual circumstances. The Printed from counselvise.com ITA No. 1639/Ahd/2024 DCIT vs. Indianic Infotech Ltd. Asst.Year –2014-15 - 4– assessee also submitted that the AE undertook significant marketing functions, which were integral to the earning of revenue, and therefore the contribution of both entities warranted the adoption of PSM. Further, the assessee pointed out several defects in the TPO’s TNMM analysis. The assessee submitted that even though the TPO himself had applied a turnover filter of Rs. 1 crore to Rs. 500 crores, he had selected three companies—Mindtree Ltd., Tech Mahindra Ltd. and L&T Infotech Ltd.—whose turnover exceeded Rs. 500 crores by a very large margin. The assessee argued that these companies were not comparable on turnover criteria and were functionally different. The assessee also objected to the inclusion of R.S. Software (India) Ltd., which was mainly engaged in e-payment gateway and cyber-security-related software, and to the inclusion of Cigniti Technologies Ltd., which was primarily involved in software testing and publishing of readymade software. The assessee further submitted that the PLI of CG Vak Software was incorrectly computed as the standalone financials were used instead of consolidated financials, and that on a correct computation, its margin would be within the tolerance range. 5. Considering these submissions, the CIT(A) called for a remand report from the Assessing Officer. In the remand proceedings, the TPO admitted that the selection of the three high-turnover companies was inadvertent and that they should indeed be excluded. The TPO recomputed the PLI using the remaining three companies and arrived at a revised average margin of 20.69%. The assessee filed detailed rejoinders objecting even to these comparables. After examining the assessment order, the submissions, and the remand report, the CIT(A) held that R.S. Software (India) Ltd. was not comparable because its turnover was more than 15–20 times higher than that of the assessee and its business Printed from counselvise.com ITA No. 1639/Ahd/2024 DCIT vs. Indianic Infotech Ltd. Asst.Year –2014-15 - 5– was highly specialized. Similarly, Cigniti Technologies Ltd. was found to be functionally incomparable because it was engaged in software testing and publishing of standardized software products, which was fundamentally different from the assessee’s software development activities. With respect to CG Vak Software, the CIT(A) agreed with the assessee that the correct PLI on a consolidated basis was 5.45% and not 10.86% as used by the TPO. Since this PLI was within the allowable range of the assessee’s own margin of 4.89%, the CIT(A) held that no adjustment was required. In light of these findings, the CIT(A) held that the TPO was not justified in rejecting PSM, especially when the same method was accepted in the immediately preceding year. The CIT(A) therefore deleted the entire upward adjustment under section 92CA(2), holding that even under TNMM no valid comparables remained to justify the addition. The CIT(A) also considered the assessee’s challenge to the addition of Rs. 2,74,991/- towards notional interest on outstanding receivables from the AE. The assessee argued that outstanding receivables were part of the main international transaction and not a separate transaction, and therefore no separate adjustment could be made. The assessee also submitted that all amounts receivable from the AE were realized within 180 days, and only non-AE debts were outstanding beyond 180 days. The CIT(A), however, held that in view of the legal position laid down by various courts, outstanding receivables constituted a separate international transaction and were liable to be benchmarked independently. The CIT(A) referred to the decision of the Karnataka High Court in DCIT v. AMD India Pvt. Ltd. and the Delhi ITAT decision in Techbooks International Pvt. Ltd. to support this view. At the same time, the CIT(A) accepted the assessee’s factual contention that if all receivables from the AE were realized within 180 days, no notional Printed from counselvise.com ITA No. 1639/Ahd/2024 DCIT vs. Indianic Infotech Ltd. Asst.Year –2014-15 - 6– interest could be imputed. The Assessing Officer was therefore directed to verify this factual position and restrict the adjustment, if any, only to amounts outstanding beyond 180 days. Accordingly, the CIT(A) partly allowed the appeal. 6. The Department is in appeal before us against the order passed by CIT(Appeals) allowing the appeal of the assessee. 7. Before us, Ld. DR placed reliance on the observations made by the Assessing Officer in the assessment order. 8. In response, the Counsel for the assessee submitted that the additions made by the TPO and confirmed by the Assessing Officer are wholly unjustified on the merits of the case and deserve to be deleted in their entirety. He submitted that the assessee is engaged in the business of software development and export and provides customized software development services to its Associated Enterprise (AE). For benchmarking its international transactions, the assessee had applied the Profit Split Method (PSM), which was also accepted by the TPO in the immediately preceding assessment year. The Counsel for the assessee submitted that the facts and functions for the present year remained identical and therefore, on the principle of consistency laid down in several judicial precedents, the TPO was not justified in rejecting PSM without demonstrating any material change in circumstances. He submitted that both the assessee and its AE contribute significantly to the development and commercialization of software—the assessee undertakes development and the AE undertakes crucial marketing and client acquisition functions—making PSM the most appropriate method. The Counsel further submitted that even if the TPO considered TNMM as the Printed from counselvise.com ITA No. 1639/Ahd/2024 DCIT vs. Indianic Infotech Ltd. Asst.Year –2014-15 - 7– Most Appropriate Method, the manner in which the TPO selected comparables was fundamentally incorrect. The Counsel for the assessee submitted out that out of six comparables selected by the TPO, three companies—Larsen & Toubro Infotech Ltd., Mindtree Ltd. and Tech Mahindra Ltd.—were extremely large companies with turnovers ranging from ₹3,000 crores to ₹16,000 crores compared to the assessee’s turnover of only ₹21 crores. These companies had significant brand value, economies of scale, wide market presence and functioned on a business model which could not be compared with a small software development company like the assessee. He pointed out that even the TPO, in the remand proceedings before the CIT(A), admitted that these companies were wrongly selected and agreed that they required exclusion. With regard to the remaining comparables, the Counsel submitted that R.S. Software (India) Ltd. too was not comparable because it was engaged in a highly specialized business of e-payment gateway and cyber security solutions and catered to large financial institutions. Its turnover of around ₹350 crores was nearly 15 to 20 times higher than that of the assessee, making it unsuitable for comparison. He submitted that the nature of services, clientele and profitability of this company were entirely different from the assessee’s business of customized software development. Similarly, Cigniti Technologies Ltd. was also functionally different because it was engaged primarily in software testing and outsourced product development services and also enjoyed brand value as a listed company. The Counsel submitted that testing services and product development services cannot be equated with the assessee’s activities, and therefore Cigniti could not be considered comparable. The Counsel argued that CG-Vak Software & Exports Ltd. also could not be considered comparable in the manner adopted by the TPO. He submitted Printed from counselvise.com ITA No. 1639/Ahd/2024 DCIT vs. Indianic Infotech Ltd. Asst.Year –2014-15 - 8– that the TPO had wrongly computed its PLI based on standalone financials, whereas its consolidated financials showed a margin of approximately 5%, which was well within the tolerance range of the assessee’s margin of 4.89%. He further explained that CG-Vak had no international transactions with its AE and therefore was not an appropriate comparable based on the principles laid down by the Bombay High Court in Tata Power Solar Systems Ltd. and the Punjab & Haryana High Court in Quark Systems India Pvt. Ltd. The Counsel argued that companies having no controlled transactions cannot be used for benchmarking controlled transactions of the assessee. The Counsel then submitted that turnover difference is a crucial factor in the software development industry and judicial authorities have consistently held that companies with huge turnover differences cannot be considered comparable with small or mid- sized service providers. He further submitted that nearly 75% of the assessee’s total export turnover was generated from transactions with its AE, whereas the comparables had negligible controlled transactions, making them unsuitable for benchmarking under TNMM. He relied on decisions to support the proposition that such companies must be excluded. The Counsel also submitted that even assuming without admitting that any transfer pricing adjustment was warranted, the adjustment cannot exceed the margin retained by the AE. The assessee relied on judicial precedents to show that the AE’s own margin from resale of software procured from the assessee was only around 4–6%, which was completely aligned with the assessee’s PLI. Thus, there was no question of any excessive profit shifting requiring arm’s length adjustment. On the issue of interest on receivables, the Counsel submitted that no adjustment was warranted because all payments from the AE had been realized within 180 days and the assessee had already factored working capital impact into Printed from counselvise.com ITA No. 1639/Ahd/2024 DCIT vs. Indianic Infotech Ltd. Asst.Year –2014-15 - 9– its pricing. He submitted that the AE itself had not received funds from its end customers in time, and therefore the assessee cannot be expected to charge notional interest on receivables. The Counsel relied on the judgment of the Delhi High Court in PCIT v. Kusum Healthcare Pvt. Ltd., where it was held that receivables do not automatically become an international transaction unless there is clear evidence of benefit to the AE and a recurring pattern of delay. He distinguished the cases relied upon by the TPO on the ground that those cases involved written agreements specifying credit periods, which were absent in the assessee’s case. The Counsel pointed out that even the Assessing Officer, in the appeal effect order dated 27.08.2024, had accepted that no adjustment was required for interest on receivables from the AE, based on the ageing analysis showing that outstanding dues were realized within normal credit periods. The Counsel therefore submitted that there was no basis whatsoever for the Revenue to challenge the well-reasoned findings of the CIT(A), who had properly appreciated the remand report, judicial precedents and functional differences in comparables. 9. We have heard the rival contentions and perused the material on record. 10. On going through the facts of in the instant case, we are of the considered view that the Ld. CIT(Appeals) has passed a detailed and well- reasoned order after considering the assessment order, the assessee’s submissions, the remand report, the functional analysis of the comparables and the settled judicial principles governing transfer pricing. We find no infirmity in the findings of the Ld. CIT(Appeals) that would warrant any interference by us. On the issue of the Most Appropriate Method, we note that the assessee had applied the Profit Split Method (PSM), which Printed from counselvise.com ITA No. 1639/Ahd/2024 DCIT vs. Indianic Infotech Ltd. Asst.Year –2014-15 - 10– had been accepted by the TPO in the immediately preceding assessment year on identical facts. The principle of consistency, as laid down by the Hon’ble Supreme Court in Radhasoami Satsang v. CIT (1992) 193 ITR 321 (SC), requires that in the absence of any material change in facts or law, the same view should ordinarily be followed. The Ld. CIT(Appeals), after examining the FAR analysis, correctly observed that both the assessee and its AE contributed to the overall revenue generation—the assessee through software development and the AE through crucial marketing and client acquisition functions—and therefore PSM could not be rejected without demonstrating any factual distinction. We find no error in this conclusion. Even assuming TNMM to be the MAM, we find that the Ld. CIT(Appeals) has correctly held that the comparables selected by the TPO were fundamentally inappropriate. The TPO himself admitted during the remand proceedings that Larsen & Toubro Infotech Ltd., Mindtree Ltd. and Tech Mahindra Ltd. were wrongly selected due to their extraordinarily high turnovers running into thousands of crores, which is contrary to the TPO’s own turnover filter of Rs. 1 crore to Rs. 500 crore. The exclusion of entities with huge turnover is supported by the decisions of the Hon’ble Bombay High Court in CIT v. Pentair Water India Pvt. Ltd. (2016) 69 taxmann.com 180 (Bom) and the Hon’ble Karnataka High Court in PCIT v. Obopay Mobile Technology India Pvt. Ltd., ITA No. 586/2016 (Kar HC), both holding that companies with disproportionately high turnover cannot be compared with small or mid- size software development service providers. We further agree with the Ld. CIT(Appeals) that R.S. Software (India) Ltd. is not a valid comparable as it is engaged in specialized activities relating to e-payment gateway and cyber security, catering primarily to the financial sector with turnover nearly 20 times higher than that of the assessee. Printed from counselvise.com ITA No. 1639/Ahd/2024 DCIT vs. Indianic Infotech Ltd. Asst.Year –2014-15 - 11– Similarly, Cigniti Technologies Ltd., being engaged in software testing and outsourced product development, is functionally distinct and enjoys brand value as a listed entity. The exclusion of such functionally dissimilar companies is supported by the principles laid down by the Hon’ble Delhi High Court in Rampgreen Solutions Pvt. Ltd. v. CIT (2015) 60 taxmann.com 355 (Del). In respect of CG-Vak Software & Exports Ltd., the Ld. CIT(Appeals) has correctly observed that the PLI must be computed using consolidated financials, and on such correct computation the margin is only 5.45%, which is within the tolerance band of the assessee’s margin of 4.89%. Furthermore, CG-Vak has no international transactions with its AE, and the Hon’ble Bombay High Court in CIT v. Tata Power Solar Systems Ltd. (2017) 77 taxmann.com 326 (Bom) and the Hon’ble Punjab & Haryana High Court in Quark Systems India Pvt. Ltd. (2011) 11 taxmann.com 427 (P&H) have held that entities with no controlled transactions cannot be treated as comparables for benchmarking controlled transactions. 11. On these facts, we find that the Ld. CIT(Appeals) has correctly held that once all wrongly selected comparables are excluded, no valid comparables remain under TNMM to justify any adjustment, and therefore the deletion of the entire adjustment of Rs. 2,81,24,107/- under section 92CA(2) was fully justified. 12. With respect to the addition towards interest on receivables, we find that the Ld. CIT(Appeals) has applied the correct legal position. The Ld. CIT(Appeals), in our considered view has correctly directed the Assessing Officer to verify whether receivables from the AE were realized within 180 days and restrict adjustment, if any, only for amounts outstanding Printed from counselvise.com ITA No. 1639/Ahd/2024 DCIT vs. Indianic Infotech Ltd. Asst.Year –2014-15 - 12– beyond such period. This direction in our view is balanced, and legally sound. 13. Considering the above factual and legal analysis, we find that the Ld. CIT(Appeals) has passed a comprehensive, reasoned and well- founded order. The Department has brought nothing on record to rebut the detailed findings of the CIT(A), and we find no infirmity in the order of Ld. CIT(A) to call for any interference. 14. Accordingly, the appeal filed by the Department stands dismissed. 15. In the result, the appeal of the Revenue is dismissed. This Order pronounced in Open Court on 19/11/2025 Sd/- Sd/- (MAKARAND V. MAHADEOKAR) (SIDDHARTHA NAUTIYAL) ACCOUNTANT MEMBER JUDICIAL MEMBER Ahmedabad; Dated 19/11/2025 TANMAY, Sr. PS TRUE COPY आदेश की Ůितिलिप अŤेिषत/Copy of the Order forwarded to : 1. अपीलाथŎ / The Appellant 2. ŮȑथŎ / The Respondent. 3. संबंिधत आयकर आयुƅ / Concerned CIT 4. आयकर आयुƅ(अपील) / The CIT(A)- 5. िवभागीय Ůितिनिध, आयकर अपीलीय अिधकरण, अहमदाबाद / DR, ITAT, Ahmedabad 6. गाडŊ फाईल / Guard file. आदेशानुसार/ BY ORDER, उप/सहायक पंजीकार (Dy./Asstt.Registrar) आयकर अपीलीय अिधकरण, अहमदाबाद / ITAT, Ahmedabad 1. Date of dictation 19.11.2025(Dictated in dragon software) 2. Date on which the typed draft is placed before the Dictating Member 19.11.2025 3. Other Member………………… 4. Date on which the approved draft comes to the Sr.P.S./P.S 19.11.2025 5. Date on which the fair order is placed before the Dictating Member for pronouncement 19.11.2025 6. Date on which the fair order comes back to the Sr.P.S./P.S 19.11.2025 7. Date on which the file goes to the Bench Clerk 19.11.2025 8. Date on which the file goes to the Head Clerk…………………………………... 9. The date on which the file goes to the Assistant Registrar for signature on the order…………………….. 10. Date of Dispatch of the Order…………………………………… Printed from counselvise.com "