EKA SOFTWARE SOLUTIONS PRIVATE LIMITED ,BANGALORE V. DEPUTY COMMISSIONER OF INCOME TAX, CIRCLE-2(2)(1), BANGALORE

ITTPA 1826/BANG/2024

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Eka Software Solutions Private Limited appealed against the assessment order for the assessment year 2020-21, which determined their total income significantly higher than reported. The primary issues revolved around the allocation of costs between associated enterprises (AE) and non-associated enterprises (non-AE), the application of an upper turnover filter in selecting comparable companies for transfer pricing, and the treatment of interest on overdue receivables as a separate international transaction. The Tribunal found that both the assessee and the learned Transfer Pricing Officer (TPO) had made unsupported and ad hoc allocations of costs, necessitating a detailed examination and substantiation of these allocations.

• Counselvise Citation: [2025] 140 COUNSELVISE.COM (IT) 791003 (ITAT-BANGALORE)
• Duration Of Justice: 1 year(s) 2 month(s) 18 day(s)
• Appeal Type: Income Tax (Transfer Pricing) Appeal
• Pronouncement Date: 08-12-2025
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: C
• Assessment Year: 2020-2021
• Appeal Filed On: 20-09-2024
• Laws Referred To: The Income Tax Act, 1961
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: DIVYA K J
• Assessee Lawyers: AJAY ROTTI
• Keywords: Business income; Transfer pricing; International transaction; Depreciation; Unabsorbed depreciation; Working capital adjustments

Judgement Text

"Page 1 of 11 IN THE INCOME TAX APPELLATE TRIBUNAL “C” BENCH, Bengaluru (Bangalore) BEFORE SHRI PRASHANT MAHARISHI, VICE PRESIDENT AND SHRI KESHAV DUBEY, JUDICIAL MEMBER ITA No 1826/Bang/2024 A. Y. 2020-2021 Appellant Respondent Eka Software Solutions Private Limited 4th Floor Embassy Tech Village, Phase II, Aster Building 2 A, east Tower Bengaluru 37 The Deputy Commissioner of Income Tax, Circle (2) (2) (1) Bengaluru PAN AABCE3660Q For Appellant Shri Ajay Rotti, CA For Respondent Dr. Divya K J, CIT DR Date of Hearing 11th September 2025 Date of pronouncement 8th December 2025 O R D E R PER PRASHANT MAHARISHI, VICE PRESIDENT 1. This appeal is filed by Eka software solutions private limited (the assessee/appellant) for assessment year 2020 – 21 against the assessment order passed by Assessment Unit, Income Tax Department (the learned Assessing Officer/AO) under section 143 (3 ) read with section 144C (13) read with section 144B of The Income Tax Act, 1961 (the Act) dated 23 July 2024 wherein the total income of the assessee is determined at ₹ 152,022,386/– against the returned income of the assessee at Rs. Nil. 2. Briefly stated the grounds raised by the assessee are with respect to cost allocation between non-Ae segment and AE segment, Application of upper turnover filter and subsuming the adjustments of interest on overdue receivable if working capital adjustment is granted to the assessee. 3. Facts clearly shows that assessee is a private limited company engaged in the business of developing and licensing of technology-based software products and providing of consultancy and related services. Assessee has reported the international transaction in respect of software development services and IT enabled services and therefore the reference was made to the learned Transfer Pricing Officer being The Deputy Commissioner of Income Tax Transfer Pricing – 1 (2) (1), Bengaluru [ The ld. TPO] to determine the arm's-length price of the international transaction. Printed from counselvise.com Page 2 of 11 4. The assessee has provided ITeS services of ₹ 188,613,849 and software development services of ₹ 883,433,789/–. The assessee has maintained accounts with respect to both the segments related to the associated Enterprises and nonassociated enterprises. The assessee has shown the margin earned by the assessee in ITeS segment at 14.20% and software development services at 16%. While determining the arm's-length price of the international transaction assessee adopted the Transactional Net Margin Method [ TNMM] as the Most Appropriate Method [ MAM] and adopted the Profit Level Indicator of Operating Profit to Operating Cost [ OP/OC]. The assessee conducted the search using data available for the financial year 2017 – 18 to 2019 – 20. Assessee selected eleven comparable companies for software development segment and nine comparable companies for ITeS segment based on search conducted on capitaline and prowess database. The assessee adopted the same filters for both the segments. The learned transfer pricing officer analysed the transfer pricing document and stated that the determination of the arm's-length price is not reliable as certain inappropriate filters are used. He carried out the fresh search and adopted the different filters. Based on this he analysed the eleven comparable in software development services and retained four comparable selected by the assessee. In the ITeS segment out of the ten comparable, he retained only three comparables. He carried out fresh search for both the segments. After discussion and issuing the show cause notice to the assessee, with respect to the software development segment he retained eighteen comparable companies whose 35th percentile margin was 19.91%, median margin was 23.56% and 35th percentile margin was 24.93%. With respect to the information technology enabled services segment, he selected a set of seventeen comparable whose margin was at 35th percentile 18.49%, median 23.71% and 65th percentile 32.78%. 5. However, the real dispute is with respect to the computation of the profit level indicator. The learned TPO found that assessee has entered transactions with its associated enterprises and with nonassociated enterprises. The assessee has computed the operating profit margin in software development segment with its associated enterprises at 16% and similarly with associated enterprises in ITeS segment at 14.20%. The learned TPO found that when computing the profit margin of non-AE segment, the assessee has considered operating expenses of ₹ 98,152,388/– however there is no operating revenue with non-AEs. Therefore, in non-AE segment, there is an operating loss of ₹9,39,74,396/–. Printed from counselvise.com Page 3 of 11 6. The learned TPO issued a show cause notice on 28 December 2022 and the assessee was asked to furnish the details regarding operating expenses of ₹ 98,152,388/– pertaining to non-AE segment and asked to explain why in the non- AE segment there such a huge operating expense was allocated but no operating revenue was reported. Thus, according to the TPO the cost of ₹ 98,152,388 has gone to increase the margins of AE segment in software development activities and ITeS segment. 7. The assessee explained that this expenditure has been incurred by the assessee towards efforts in pursuing the prospective customers in India. These expenses represent loaded employee cost of management, sales, and marketing teams. It may also include direct expenses identifiable with any prospects. Therefore, the assessee explained that that it has incurred the general and administration cost (including management cost) of ₹ 172,414,643/–, 50% of the general and administration cost is retained in India towards management and other administration payouts. Further out of the sales expenditure total expenditure incurred is ₹ 28,557,333/– out of which 20% of the sales expenditure is retained in India towards the prospective clients pursued by the sales and the presales team. With respect to the marketing expenditure of ₹ 62,335,995/– the assessee explained that 10% of the sales expenditure is retained in India towards the marketing expenditure incurred by the company. Thus out of the total expenditure of general and administrative cost of ₹ 172,414,643/–, the assessee considered a sum of ₹ 8,62,07,321/–, out of the sales expenditure of ₹ 28,557,333/– ₹ 5,711,467/– and out of the marketing expenditure of ₹ 62,335,995/– a sum of ₹ 6,233,600/– in all totalling to ₹ 98,152,388 was stated to be a non-AE expenditure. Thus, the claim of the assessee was that these expenses were incurred in its efforts in pursuing prospective customers in India and these expenses represent loaded employee cost of management, sales, and marketing teams. In support of the above the documentary evidence were provided with respect to few internal emails and some presentations to be made along with the list of prospective clients in India. 8. The learned transfer pricing officer on perusal of the documentary evidence provided by the assessee found that these costs have been appropriated between AE and non-AE segment in an ad hoc manner. He found that this evidence does not establish the genuineness of the efforts to pursue new clients in India, some internal emails do not prove beyond doubt that such meetings Printed from counselvise.com Page 4 of 11 with the prospective clients have happened and why the deal could not materialise. Communication with these proposed prospective clients, proof of efforts having been carried to win those clients have not been provided by the taxpayers. He further found that no list of employees working to secure plans for the taxpayer was submitted. No methodology of how the amount retained towards its efforts in India was arrived at was provided by the assessee. Thus, according to him the taxpayer did not justify why 10% of total marketing expenditure, 20% of total sales expenditure and 50% of total general and administrative cost was apportioned to the operating expenses for the non-AE segment which is incurred by the assessee as stated for pursuing new clients in India. He further noted that it is a general norm across all industries that in pursuance of new clients, sales and marketing expenditure are higher instead of general and administration cost, but in case of the assessee the opposite trend is seen and the reason behind it was not justified. The assessee was asked to justify all these issues during personal hearing but same could not be provided. Accordingly, he rejected that a sum of ₹ 98,152,388/– is incurred for non-AE segment. 9. However, the learned transfer pricing officer granted 10% of general administration cost, 10% of sales expenditure and 10% of marketing expenditure towards the efforts made by the assessee in India to pursue new clients in a non- AE segment accordingly the balance 90% he allocated to the AE segment. Thus, he imputed the cost of ₹ 71,821,591/– as cost of AE segment and a sum of Rs.2,63,30,797 as a non-AE segment cost. On this basis, he computed the margin of the assessee in software development segment at 4.39% and in ITeS segment at 4.39%. Thus, in software development segment he computed the PLI of the assessee at 4.39% whereas the median margin of the comparable set was 23.56% and therefore on operating cost of the assessee of ₹ 84,63,12,035/– the arm's-length price was computed at ₹ 1,045,703,150/– thus imputing the adjustment of shortfall of ₹ 199,391,115. Similarly, in ITeS segment the taxpayer's profit level indicator was computed at 4.39% whereas the median margin of the comparable was 23.71% and on the operating revenue of ₹ 188,613,849, the arm's-length price was considered as 22,35,29,526/– resulting into a shortfall of ₹ 34,915,677/–. Accordingly, the shortfall with respect to the above segment was computed at ₹ 199,391,115/–. Printed from counselvise.com Page 5 of 11 10. The AO further found that there is delay in a receivable from associated enterprises which was considered as a separate international transaction, the assessee did not consider it so, accordingly, did not also benchmark the same. He rejected the contention of the assessee that no separate adjustment could have been made in the transactional net margin method with respect to the above transaction, if at all it is an international transaction. Accordingly, he computed the average credit period of 30 days and computed the interest of ₹ 34,003,243/–. 11. Accordingly order under section 92CA (3) of the income tax act was passed on 22 July 2023 wherein total adjustment was proposed of ₹ 268,310,035/–. 12. Based on this the draft order under section 144C (1) of The Income Tax Act was passed on 26 September 2023 determining the total income of ₹ 341,951,494/– and granting there from the deduction of the total brought forward business losses and unabsorbed depreciation of ₹ 130,359,710/–. Accordingly, the taxable income was computed at ₹ 211,591,784/–. 13. Assessee aggrieved with the same, preferred an objection before the learned Dispute Resolution Panel – 1, Bengaluru (the learned DRP) who passed direction on 18 June 2024. Accordingly, the learned transfer pricing officer passed an Order Giving Effect [ OGE] to the direction of the learned dispute resolution panel on 5 July 2024. In this order the learned TPO carried out the direction of exclusion of some of the comparables and the verification of the margins. Based on this, in software development segment the shortfall was considered at ₹ 159,815,057 and in ITeS segment of ₹ 31,265,772/– the interest on delayed outstanding receivable from its associated enterprises was also reduced to Rs. 1,74,70,543 taking the LIBOR of 6.818%. Accordingly, the total revised adjustment under section 92CA was ₹ 208,551,372/– thus the final assessment order was passed on 23 July 2024 determining the total income at ₹ 282,382,096/–. However, there was some dispute where the assessee has shown the carried forward of losses of ₹ 61,150,895 including unabsorbed depreciation of ₹ 31,668,805 and therefore the actual carried forward business loss was determined at ₹ 29,482,090/–. Thus, the assessee has claimed carried forward business loss of ₹ 130,359,107 but the learned assessing officer computed it at ₹ 69,900,730 and therefore the total taxable income was computed at ₹ 152,022,386/–. Printed from counselvise.com Page 6 of 11 14. The assessee in appeal has raised several grounds. Before us it was submitted that ground No. 1 – 4 are general in nature and therefore those are not pressed. 15. The assessee further stated that in software development segment, no upper turnover filter has been applied and therefore it has resulted into selection of comparable companies whose turnover is not at all comparable with the assessee company. It was submitted that Mindtree Ltd, Larsen and Toubro Infotech limited, Wipro Ltd, Tata consultancy Ltd, Infosys Ltd, Nihilent Ltd, Tata Elexis Ltd are some of the comparable companies who have huge brand value and are having huge turnover compared to the turnover of the assessee. He submitted that the assessee software development segment turnover is only Rs. Eighty- eight crores. Therefore, failure to apply the upper turnover limit filter by the learned transfer pricing officer is not correct. He also submitted that there are errors in the computation of margin of the sum of the companies which are wrongly taken by the learned TPO. 16. The AR further submitted that in case of ITeS segment where the turnover of the assessee is only ₹ 18.86 crores there are computational margin errors. 17. However, his main contention is that a sum of ₹ 98,100,000, stated to be not expenditure incurred by the assessee for an AE segment of any of the business segment was considered by the learned transfer pricing officer to the extent of 90% as expenses pertaining to AE segment. He submitted that assessee has made a detailed effort to develop the India business of the assessee and therefore it has started doing activities with respect to the development of business in India. Therefore, to find new clients the assessee has started allocating time of sales team and the sales team incurred the general administrative and marketing expenses on that activity which is not pertaining to the AE segment of software development or ITeS segment. Therefore, these costs should not have been included therein. It was further stated that though the assessee substantiated the same before the learned transfer pricing officer by producing the presentation, emails and other details and substantiated that 50% of general and administration cost is incurred for India business which does not have any relationship with transaction with associated enterprises. Similarly, 20% of the sales expenditure and 10% of the marketing expenditure are also related to India business. Thus the total non-AE expenditure of ₹ 98,152,388/– has been incurred by the assessee for its India business which does not have any relationship with the AE business and therefore while computing the margin of the Printed from counselvise.com Page 7 of 11 assessee in both the segments, the learned assessing officer has reduced 7,18,21,591/– from the margins of the AE segment which has resulted into the suppressed margin computed by the learned transfer pricing officer at 4.39%. This is incorrect. 18. He further took us to the cost allocation between the non-AE segment and AE segment. He further referred to the evidence placed at page No. 1635 – 1657 showing the various emails as well as the other evidence to show that assessee is engaged in business development in India and therefore these costs should not have been included. He further referred to his objection placed at page No. 1858 before the learned dispute resolution panel where he explained the above fact. Even otherwise he submitted that it is not in dispute that the learned transfer pricing officer did not accept that assessee is developing India business which is unrelated to its associated enterprises as he himself has allocated the 10% of the total expenditure to such activity. He further referred to the direction of the learned dispute resolution panel at paragraph No. 2.4.1 wherein it was stated that the arguments were rejected without any consideration. He submits that the sum of ₹ 98,100,000 incurred by the assessee is not at all related to the AE segment and therefore it could not have been included in the margin computation of AE segment. 19. With respect to the adjustment on interest on delayed receivable he submitted that if the working capital adjustment is granted to the assessee after applying the upper turnover filter, the adjustment of ₹ 1.74 crores made by the learned transfer pricing officer pursuant to the direction of the learned dispute resolution panel will subsume in the adjustment, if any related to software development and ITeS segment. And therefore, according to him no separate adjustment is required. 20. The learned CIT DR [departmental representative] vehemently supported the order of the learned lower authorities and submitted that with respect to the applicability of upper turnover filter it is shown by the learned transfer pricing officer and also as per the direction of the learned dispute resolution panel that there is no impact on the margins as compared to the turnover and therefore upper turnover filter has rightly been not applied. With respect to the computation of the cost allocation between a non-AE segment and AE segment, the learned CIT DR vehemently supported the order of the learned transfer pricing officer as well as the direction of the learned dispute resolution panel Printed from counselvise.com Page 8 of 11 stating that when assessee has failed to substantiate the actual allocation of the cost which is on ad hoc basis, there is no infirmity in the order of the learned transfer pricing officer in assuming 10% of these expenditure as expenses incurred for non-AE segment. With respect to the computation of the working capital adjustment, the learned CIT DR vehemently supported the orders of the learned lower authorities stating that there has to be a difference in the working capital level, as well as the cost which should impact the margins of the comparable of the assessee and therefore in absence of such detail provided by the assessee, the working capital adjustment is rightly denied. 21. We have carefully considered the rival contention and perused the orders of the learned lower authorities. The first dispute at ground No. 9 of the appeal is with respect to the allocation of cost. The assessee has computed the margin of AE segment in IT services at 16% and in ITeS segment at 14.20%. It was found on verification of the statement that there is also a non-AE segment of the assessee which does not have any revenue however the assessee has considered the operating expenses of ₹ 98,152,388/– as operating expenses pertaining to non- AE segment. The claim of the assessee is that assessee is developing its own business in India and therefore for this purpose it is incurring the general administration cost, sales expenses and marketing expenditure which are not related to the business with associated enterprises. Thus, assessee submitted that 50% of its general and administration cost of ₹ 8.52 crores, 20% of sales expenditure at ₹ 57 lakhs and 10 percent of marketing expenditure at ₹ 62 lakhs are incurred for India segment. Thus, the total sum of ₹ 98,152,388 was considered as expenditure and not pertaining to AE business and therefore it could not have gone to reduce the margins of the assessee with AE segment. To support this proposition the assessee could show only some emails and some presentation which was rejected by the learned transfer pricing officer as not adequate. The learned TPO held that this is an ad hoc adjustment. However while computing the margin himself, the learned TPO granted deduction at the rate of 10% of all these expenditure to the assessee thus he bifurcated the expenditure of ₹ 263 lakhs as expenditure incurred for in the efforts and considered ₹ 718 lakhs as part of the cost of services provided to associated enterprises which has gone to reduce the computation of margin. Thus, it is apparent that the assessee has also applied ad hoc percentage for computation of cost incurred by the assessee towards its efforts to consider India business. Printed from counselvise.com Page 9 of 11 There is no basis why 50% of the expenditure of general sale and administration cost was considered similarly there is also no basis why 20% of sales expenditure and 10% of the marketing expenditures were incurred towards in the efforts. Similarly, while computing the arm's-length price even there is no basis because the learned transfer pricing officer gave only the 10% of the total cost as in the efforts. Thus, cost allocation by assessee as well as by the ld TPO both are unsupported and ad hoc. 22. In fact, the cost allocation must be done based on actual efforts put by the assessee is subject to a specified cost allocation key which is missing in the computation made by the assessee as well as the learned TPO. The specified allocation key with respect to the specified expenditure are also required to be substantiated with documentary evidence. Otherwise, it will result into an ad hoc computation of the arm's-length price of the international transactions. Before us, neither the assessee substantiated it allocation nor the ld TPO through CIT DR substantiated 10 % estimation. NO further details are produced before us. Therefore, actual cost determination being absolutely a factual analysis of verification of each expenditure and along with allocation key, which both the parties agreed to be verified by the ld AO, the issues need to be restored to the file of the ld AO or ld TPO. In view of the above facts, in absence of any other alternative, we restore this issue back to the file of the learned assessing officer with a direction to the assessee to substantiate that why the 50% of the general and administration cost, 20% of sales expenditure and 10% of marketing expenditure should be considered as cost and not allocable to the AE segment. The assessee may support this by producing the various emails, various cost allocation seeds, workforce allocation including any other evidence. The learned transfer pricing officer may examine the same object and then decide that what should be the cost which should not be allocated to the AE segment. In view of this ground No. 9 of the appeal is restored back to the file of the learned assessing officer to make a reference to the learned TPO to consider and decide afresh to compute the ALP. 23. with respect to the software development segment, we direct the learned transfer pricing officer to also apply upper turnover filter as the companies such as Mindtree Ltd, Larsen and Toubro Infotech limited, Wipro Ltd, Tata Elxis, Infosys Ltd, TCS Ltd etc. are not comparable because of their huge size and brand value associated with the name. The assessee must be granted an Printed from counselvise.com Page 10 of 11 opportunity to show the turnover of this segment and the difference in the turnover of the comparable companies. Accordingly, these grounds are also restored back to the file of the learned AO with similar direction. The learned AO is also directed to verify the margins as assessee contests that the margins are not correctly computed. 24. With respect to the interest on overdue receivable, we find that at paragraph No. 14 of the order of the learned transfer pricing officer, the assessee has objected that working capital adjustment is required to be provided to the assessee. The learned transfer pricing officer has rejected the same stating that assessee has not shown whether the comparable companies are financing their working capital by own funds or borrowed funds and whether any cost has been incurred on the working capital by the comparable company and how such cost has impacted the margins. It was further stated that in the segmental results, working capital is not separately disclosed and therefore it cannot be granted. We find that computation of the arm's-length price of an international transaction is the duty of everybody including the assessee, transfer pricing officer and every appellate authority. To compute the arm's-length price in the transactional net margin method, if the difference exists with respect to any of the parameters which can be adjusted, should be adjusted to arrive at the arm's-length price. It is a fact that the learned transfer pricing officer has considered eighteen comparable in software development segment and seventeen comparable in ITeS segment, when the learned transfer pricing officer has selected the comparable, he is duty- bound to make adjustment of working capital or any other adjustment to arrive at the correct arm's-length price. Therefore, unnecessarily shifting the onus on the assessee when the comparable are selected by the learned TPO to find out what could be the working capital adjustment is not proper. It is the duty of the learned TPO, when he has selected the comparables, to show that with evidence, that why working capital adjustment is not required or required. Accordingly, we restore this issue also back to the file of the learned AO with a direction to compute the working capital adjustment, if allowable and then if allowed, to delete the independent adjustment made on account of the interest on overdue receivable. 25. With respect to the carry forward of losses, the assessee is directed to substantiate the correct computation of such losses, ld AO may verify and grant the set off accordingly. Printed from counselvise.com Page 11 of 11 26. In view of above facts, the appeal of the assessee is allowed for statistical purposes. Order pronounced in the open court on 8th December, 2025. Sd/- Sd/- Sd/- (KESHAV DUBEY) (PRASHANT MAHARISHI) (JUDICIAL MEMBER) (VICE PRESIDENT) Bengaluru, Dated: 08.12 .2025 Dragon Copy of the Order forwarded to: The Appellant, The Respondent, The CIT, The DR ITAT & Guard File BY ORDER, True Copy// Sr. Private Secretary/ Asst. Registrar Income Tax Appellate Tribunal, Bengaluru Printed from counselvise.com "