DYNATRACE INDIA SOFTWARE OPERATIONS PRIVATE LIMITED,BANGALORE V. DEPUTY COMMISSIONER OF INCOME TAX, CIRCLE 2(2)(1), BANGALORE

ITTPA 2588/BANG/2024

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Dynatrace India Software Operations Pvt. Ltd. appealed against the order of the Assessing Officer (AO) which was based on the TPO's adjustments to the ALP of the company's international transactions. The TPO had included certain comparables in the TP study which the assessee argued were not functionally similar to its business. The Tribunal found that the TPO had erred in including these comparables and directed their exclusion. The Tribunal also addressed the issue of interest on delayed receivables, suggesting a re-evaluation of the net outstanding amounts.

• Counselvise Citation: [2025] 140 COUNSELVISE.COM (IT) 652916 (ITAT-BANGALORE)
• Appeal Type: Income Tax (Transfer Pricing) Appeal
• Pronouncement Date: 19-06-2025
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: C
• Assessment Year: 2021-2022
• Laws Referred To: Income-tax Act, 1961
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: VILAS V SHINDE
• Assessee Lawyers: HARSH SHAH; SHREYAS SARDESAI; A.RS; INVOKING
• Keywords: Transfer pricing; International transaction; Related party transaction
• Section: 92B; 92C

Judgement Text

"IT(TP)A No.2588/Bang/2024 Dynatrace India Software Operations Pvt. Ltd., Bangalore IN THE INCOME TAX APPELLATE TRIBUNAL “C’’ BENCH: BANGALORE BEFORE SHRI WASEEM AHMED, ACCOUNTANT MEMBER AND SHRI PRAKASH CHAND YADAV, JUDICIAL MEMBER IT(TP)A No.2588/Bang/2024 Assessment Year: 2021-22 Dynatrace India Software Operations Pvt. Ltd. Garudadri Arcade No.373, 3rd Floor 2nd Stage 2nd Phase Rajajinagar West of Chord Road Bengaluru 560 086 PAN NO : AACCC7817J Vs. DCIT Circle 2(2)(1) Bengaluru APPELLANT RESPONDENT Appellant by : Sri Harsh Shah & Sri Shreyas Sardesai, A.Rs Respondent by : Sri Vilas V Shinde, D.R. Date of Hearing : 05.06.2025 Date of Pronouncement : 19.06.2025 O R D E R PER PRAKASH CHAND YADAV, JUDICIAL MEMBER: Present appeal of the assessee is arising from the order of ld. AO dated 9.10.2024 having DIN No.ITBA/AST/S/143(3)/2024- 25/1069573673(1) and relates to assessment year 2021-22. 2. The assessee has raised following 21 grounds of appeal: 1. The learned Assessing Officer ('learned AO'), learned Transfer Pricing Officer ('learned TPO') and the Honourable Dispute Resolution Panel ('Hon'ble DRP') grossly erred in determining an adjustment of INR 7,50,21 ,743/- to the Arm's Length Price ('ALP') of the Appellant's international transactions with its Associated Enterprises ('AEs') under section 92CA of the Income-tax Act,41961 (\"the Act\"). IT(TP)A No.2588/Bang/2024 Dynatrace India Software Operations Pvt. Ltd., Bangalore Page 2 of 7 2. The learned AO/ learned TPO/ Hon'ble DRP erred in rejecting the Transfer Pricing (\"TP\") documentation maintained by the Appellant by invoking provisions of sub-section (3) of section 92C of the ACL 3. The learned AO/ learned TPO/ Hon'ble DRP erred in rejecting the comparability analysis undertaken by the Appellant and conducting a fresh search for comparable companies thereby following a non-transparent approach towards selection/rejection of the companies. 4. The learned AO/ learned TPO/ Hon'ble DRP erred in applying different financial year ending filter while selecting the comparable companies without considering the fact that the relevant data for the concerned financial year could be deduced from the corresponding financials, leading to a narrower comparable set. 5. The learned AO/ learned TPO/ Hon'ble DRP erred in selecting the companies only if the data pertaining to FY 2020-21 is available in the public databases, leading to a narrower comparable set. 6. The learned AO/learned TPO/Hon'bIe DRP erred in applying the core trading income filter of 75 percent to sales, leading to a narrower comparable set. 7. The learned AO/ learned TPO/ Hon'ble DRP erred in application of persistent loss filter, leading to a narrower comparable set. 8. The learned AO/ learned TPO/ Hon'ble DRP erred in rejecting abnormal margins filter. 9. The learned AO/ learned TPO/ Hon'ble DRP erred in the methodology adopted for application of related party transactions filter. 10. The learned AO/ learned TPO/ Hon'ble DRP erred in not applying the upper limit on turnover while selecting the comparable companies, even when lower limit on turnover has been universally accepted by both the Appellant and the learned TPO. The learned AO/ learned TPO/ Hon'ble DRP erred in not considering the underlying factor that companies having high turnover have benefits of economies of scales. Interest on Delayed Receivables 11. The learned AO/ learned TPO/ Hon'ble DRP has erred in computing the interest on delayed receivables and made an adjustment by considering them as unsecured loan. 12. The learned AO/ learned TPO/ Hon'ble DRP erred in treating a delay in receivables or deferred receivables as a separate international transaction as it does not fall within the purview of capital financing as stated under Sec. 92B of the Act. IT(TP)A No.2588/Bang/2024 Dynatrace India Software Operations Pvt. Ltd., Bangalore Page 3 of 7 13. Without prejudice to the above, the learned AO/ leamed TPO/ Hon'ble DRP erred in not appreciating the fact that TP adjustment cannot be made on hypothetical and notional basis until and unless there is some material on record that there has been under charging of real income. 14. The learned AO/ learned TPO erred in not considering the fact that the net trade receivables balance will be NIL as balance of trade payables of the Appellant is greater than trade receivables of the Appellant. 15. Without prejudice to the arguments of the Appellant that no interest ought to be charged on the receivables outstanding more than the credit period, the learned AO/ learned TPO has erred in computation of average net receivables balance. 16. The learned AO/ learned TPO has erroneously included the trade receivables outstanding from independent third parties while computing the interest on delayed receivables. Software Distribution Segment 17. The learned AO/ learned TPO/ Hon'ble DRP has erred in not rejecting the following companies on the grounds such as functional dissimilarity, presence of extra ordinary events, unavailability of segmental results etc.: - • Zoho Corporation Pvt. Ltd. • K7 Computing Pvt. Ltd. • Tally Solutions Pvt. Lt(t • Innovana Think Labs Ltd. • Quick Heal Technologies Ltd. 18. The learned AO/ learned TPO/ Hon'ble DRP erred in not accepting the following companies on the grounds such as functional similarity, companies qualifying applied filters etc.:- • Sonata Information Technology Ltd. • Computronix Infotech Pvt- Ltd. • Informatics Technologies Pvt. Ltd. • Ingram Micro India Pvt. Ltd. • Insight Business Machines Pvt. Ltd. • Rashi Peripherals Pvt. Ltd. • Redington India Ltd. • Savex Technologies Pvt. Ltd. • Compuage Infocom Ltd. • Vama Industries Ltd. • Cache Peripherals Pvt. Ltd. • Iris Computers Ltd. • Datasoft Networks Solutions Pvt. Ltd. IT(TP)A No.2588/Bang/2024 Dynatrace India Software Operations Pvt. Ltd., Bangalore Page 4 of 7 • Pc Solutions Pvt. Ltd. 19. The learned AO/ learned TPO/ Hon'ble DRP erred in computing the margin of the following companies: - • Zoho Corporation Pvt. Ltd. • K7 Computing Pvt. Ltd. • Tally Solutions Pvt. Ltd. • Innovana Think Labs Ltd. • Quick Heal Technologies Ltd. o Crayon Software Experts India Pvt. Ltd. Incorrect recording of satisfaction for levy of penalty 20. The learned AO erred in recording satisfaction for initiating penalty proceedings under section 270A and 27 IAA (l ) of the Act. 21. The learned AO erred in concluding that the Appellant has under-reporting of income and underreporting of income in consequence of misreporting.” 3. Brief facts of the case as coming out from the orders of authorities below are that the assessee company is engaged in the business of selling, marketing and maintenance of computer software. For the impugned assessment year, it has filed its return of income on 15.3.2022 declaring an income of Rs.3,09,62,737/-. The same was processed u/s 143(1) of the Income Tax Act, 1961 (in short “The Act”), later on, selected for scrutiny. Since international transactions were involved in this, the AO made a reference to the TPO for computing the ALP of the international transactions. The ld. TPO vide its order dated 27.10.2023 made certain adjustments with respect to the software distribution segment of the assessee as well as interest on delayed receivables. Thereafter, the AO passed the draft assessment order, which was challenged by the assessee before the ld. DRP. The ld. DRP vide its order dated 17.9.2014 affirmed the view of the ld. TPO and thereafter the AO passed the impugned order. 4. Aggrieved with the order of AO, the assessee has come up in appeal before us and argued that certain comparables have been wrongly included by the TPO and affirmed by the ld. DRP after IT(TP)A No.2588/Bang/2024 Dynatrace India Software Operations Pvt. Ltd., Bangalore Page 5 of 7 making certain incorrect observations The ld. Counsel for the assessee pointed out that the ld. TPO has wrongly included 5 companies named as under: 1. K7 Computing Pvt. Ltd. 2. Tally Solutions 3. Innovana Thinklabs Ltd. 4. Quick Heal Technologies Ltd. 5. Zoho Corporation 4.1 Drawing attention of the bench towards the financials of these companies, the ld. A.R. argued that the ld. TPO wrongly compared M/s. Zoho Corporation with assessee because this company is functionally different from the assessee. Further, the counsel for the assessee pointed out that 74.63% of the revenue has been earned by M/s. Zoho Corporation with its parent company and therefore, the same is not at all comparable with that of assessee. Similarly, for the other companies also, the ld. A.R. vehemently argued that the ld. TPO has erred in incorporating these companies while conducting the TP study. AR of the assessee also argued that certain comparable, which are discarded by the TPO, are required to be included for computing the ALP. 5. Ld. D.R. relied upon the orders of authorities below. 6. We have heard the rival submissions and perused the materials available on record. We observe that the ld. TPO while selecting the final set of comparable for conducting TP study has made certain incorrect observations. For instance, the ld. TPO has erred in observing that M/s. Zoho Corporation Pvt. Ltd. fails of Related Party Transaction (RPT) filter. We observe from the financials presented before us that related party transactions (RPT) of Zoho Corporation was 74.63% and therefore the observations of the TPO that M/s Zoha has no RPT is factually incorrect. Similarly, the ld. IT(TP)A No.2588/Bang/2024 Dynatrace India Software Operations Pvt. Ltd., Bangalore Page 6 of 7 TPO has wrongly observed that M/s. Zoho Corporation is functionally similar to the assessee. From the financials filed before us, we observe that the main function of Ms. Zoho Corporation is sale of software, development and licensing of computer software and also providing related maintenance services. Therefore, we are of the view that the ld. TPO has wrongly included M/s. Zoho Corporation as a comparable with that of assessee. Similarly, M/s. Quick Heal Technology Ltd. has also been wrongly included by the ld. TPO M/s. Quick Heal Technology Ltd. is engaged in the business of providing security software products. It is not akin to the business model of the present assessee. Therefore, this comparable is also required to be excluded. Similarly, the ld. TPO has wrongly included M/s. Tele Solutions Pvt. Ltd in as much as M/s. Tele Solutions Pvt. Ltd. is an accounting software which is not similar to the business model of the assessee. Therefore, M/s. Tele Solutions Ltd. is also required to be excluded we direct accordingly. Similarly, we observe other comparables M/s. Innova Think Laps Ltd. and M/s. K-7 Computing Pvt. Ltd. are also not functionally similar with that of assessee and therefore, require to be excluded from the TP study. Now if we exclude these 5 comparables from the list of final set of comparables, then only two comparables would remain there namely Crayon Software Ltd. and Lucose Enterprises Solutions. We direct the TPO to compute the ALP by restricting its TP study by including these two comparables only and then compute the ALP. It is next observed that after exclusion of these 5 comparable, the ALP of the international transaction entered into by the assessee would be at Arm’s length, we are of the view that there is no need to deal with the arguments of the assessee vis-à-vis inclusions of certain comparables. 7. So far as the issue of interest on receivables, it is the submission of the ld. Counsel for the assessee that assessee is a debt free company and hence no interest on the delayed receivables can IT(TP)A No.2588/Bang/2024 Dynatrace India Software Operations Pvt. Ltd., Bangalore Page 7 of 7 be attributable. Alternatively, the counsel for the assessee submitted that LIBOR+200 rate may kindly be applied for the receivables outstanding in the year. 8. Ld. D.R. relied upon the orders of authorities below. 9. After considering the rival submissions, we are of the view that the ld TPO would see the net balance of the outstanding as submitted before us by the ld. Counsel for the assessee and if after netting off, there remains some balance, the ld. TPO would apply LIBOR+200 interest rate on the delayed receivables. With these observations, we remit this issue to the file of ld. TPO. 10. In the result, appeal filed by the assessee is allowed as indicated above. Order pronounced in the open court on 19th June, 2025 Sd/- (Waseem Ahmed) Accountant Member Sd/- (Prakash Chand Yadav) Judicial Member Bangalore, Dated 19th June, 2025. VG/SPS Copy to: 1. The Applicant 2. The Respondent 3. The CIT 4. The DR, ITAT, Bangalore. 5 Guard file By order Asst. Registrar, ITAT, Bangalore. "