EXTERRO R & D PRIVATE LIMITED,COIMBATORE V. ACIT CORPORATE CIRCLE 1, COIMBATORE

ITTPA 83/CHNY/2024

AI Insights

The case involves Exterro R & D Private Limited, a wholly owned subsidiary of Exterro Inc., USA, engaged in software development, which appealed against the final assessment order for the Assessment Year 2021-22. The appeal was primarily against the transfer pricing adjustments made by the TPO, who rejected the Assessee's adopted Cost Plus Method and adopted the Transactional Net Margin Method (TNMM) instead. The TPO identified 11 comparable companies and proposed a significant adjustment to the Assessee's income. The DRP modified the TPO's adjustment slightly, which the AO then implemented. The Assessee contested various aspects of the transfer pricing adjustments and the application of certain filters in selecting comparables.

• Counselvise Citation: [2025] 140 COUNSELVISE.COM (IT) 773091 (ITAT-CHENNAI)
• Duration Of Justice: 10 month(s) 11 day(s)
• Appeal Type: Income Tax (Transfer Pricing) Appeal
• Pronouncement Date: 22-09-2025
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: D
• Assessment Year: 2021-2022
• Appeal Filed On: 11-11-2024
• Other Referred Cases: Pentair Water India Pvt Ltd vs. 69 taxmann.com 180, Kumaran Systems
• Laws Referred To: Income Tax Act, 1961
• Result in Favour of: Matter Remanded
• Court: TRIBUNAL
• Department Lawyers: ARV SREENIVASAN
• Assessee Lawyers: . GROUND NO. . IS GENERAL; HENCE DISMISSED; S.RAMACHANDRAN
• Keywords: Transfer pricing; International transaction; Wholly owned subsidiary
• Section: 92B

Judgement Text

" आयकर अपीलीय अिधकरण, ‘डीʼ \u0011ा यपीठ, चे\u0016ई IN THE INCOME TAX APPELLATE TRIBUNAL ‘D’ BENCH, CHENNAI \u0018ी मनु क ुमा र िग र, \u0011ा ियक सद एवं \u0018ी एस.आर.रघुना था , लेखा सद क े सम( BEFORE SHRI MANU KUMAR GIRI, JUDICIAL MEMBER AND SHRI S.R.RAGHUNATHA, ACCOUNTANT MEMBER आयकर अपील सं./IT(TP)A No.: 83/Chny/2024 िनधा )रण वष) / Assessment Year: 2021-22 Exterro R & D Private Limited, 104-1st Floor, Vilankuruchi Village, TIDLE Park, Coimbatore – 641 014. vs. ACIT, Corporate Circle – I Coimbatore. [PAN: AADCE-1292-N] (अपीलाथ\u0007/Appellant) (\b यथ\u0007/Respondent) अपीला थ+ की ओर से/Appellant by : Shri. S. Ramachandran, C.A. -.थ+ की ओर से/Respondent by : Shri. ARV Sreenivasan, CIT. सुनवा ई की ता रीख/Date of Hearing : 03.07.2025 घोषणा क\u0007 तार ख/Date of Pronouncement : 22.09.2025 आदेश /O R D E R PER S. R. RAGHUNATHA, AM : This appeal filed by the Assessee is directed against the final assessment order passed by the Assessment Unit, Income Tax Department u/s.143(3) r.w.s. 144C(13) r.w.s.144B of the Income Tax Act, 1961 (hereinafter the ‘Act’) for the Assessment Year 2021- 22 dated 23.10.2024 pursuant to the directions of the Dispute Resolution Panel-2, Bengaluru dated 19.09.2024. 2. The brief facts of the case are that the Assessee is a Company, wholly owned subsidiary of Exterro Inc., USA and it is established as captive service provider to its AE. The Assessee is engaged in the business of software development. The Assessee filed its return of income for the A.Y.2021-22 on 19.01.2022 declaring a total income of Rs.83,74,000/-. The case was selected for scrutiny through CASS and accordingly statutory notices were issued to the Printed from counselvise.com :-2-: IT(TP)A No.:83 /Chny/2024 Assessee. A reference u/s.92CA(1) of the Act was made for determination of ALP in respect of international transactions reported in form No.3CEB. In the Transfer Pricing report, the Assessee has adopted Cost Plus Method as the most appropriate method and claimed the transaction is at Arm’s length. 3. The TPO rejected the CPM and adopted TNMM as the most appropriate method. Further, the TPO had undertaken a fresh search and identified 11 comparable companies and arrived at PLI of 17.29% against the revised PLI of the Assessee at 4.07% and proposed an adjustment of Rs.3,10,28,373/- by passing an order u/s.92CA(3) of the Act dated 20.10.2023. The AO issued a draft order u/s.144C(1) of the Act dated 28.12.2023 proposing to make variations as additions by providing 30 days time to accept or to file an objection to DRP. Later the Assessee filed an objection before the DRP. 3.1 On perusal of the objections and after providing the opportunity to the Assessee the directions are issued by slightly modifying the TP adjustment proposed in the draft order of the AO by passing an order u/s.144C(5) of the Act dated 19.09.2024. According to the Directions of the DRP, the AO passed an order u/s.143(3) r.w.s.144C(3) r.w.s.144B of the Act dated 23.10.2024. 4. Aggrieved by the order of the AO / DRP the Assessee is before us. 5. The ld.AR for the Assessee submitted the following arguments: 6. Ground No. 1. is general, hence dismissed. 7. Ground No.2: Reimbursement of expenses – Section 92B not attracted: 7.1 The Assessee has raised a new plea before the lower authorities that its functions are limited to acting as an agent i.e. it disbursed the money received from the holding company as per directions and has done nothing else. The Printed from counselvise.com :-3-: IT(TP)A No.:83 /Chny/2024 Ld.AR reiterated the stand taken before the lower authorities and submitted that there is no requirement to do transfer pricing adjustment. 7.2 The Ld. DR contended that the Assessee cannot take different stance at different stages and submitted that at this stage the character of the Assessee cannot be changed. 7.3 We have heard the rival submissions and perused the material available on record. From the findings of the lower authorities, we observe that the functions performed by the Assessee has been documented as software development services in the TP documentation. However, during the course of assessment and now before us the Assessee is taking a contrary stand that the functions performed by the Assessee does not tantamount to a service and therefore it cannot be regarded as an international transaction. Though the Ld.AR canvassed this contention, he has not brought on record any evidence or material to prove that the services rendered by the Assessee is not in the nature of a software development. Apart from the above, the DRP has rendered a finding intercompany entered into by the Assessee clearly mentions that the functions performed by the Assessee is in the nature of software development. In view of the above, we do not agree with the new stand taken by the Assessee and we also believe that the Assessee cannot take contrary positions during the course of assessment/appeal. Therefore, we hold that the functions performed by the Assessee has been rightly upheld by the lower authorities as a software development. Accordingly, we dismiss this particular ground of appeal no.2. 8. Ground No.3 Omission to consider Keerthi Soft Technologies Ltd as a comparable: 8.1 The Ld.AR pleaded that Keerti soft was engaged in the business of computer software and IT services and the company does not own any intangibles and therefore it should be considered as a comparable. 8.2 The Ld.DR relied on the findings of the DRP. Printed from counselvise.com :-4-: IT(TP)A No.:83 /Chny/2024 8.3 We have perused the material on record and we find that the DRP has given a categorical finding that the comparable Keerthi Soft has undertaken software services and it has also done implementation of ERP and SAP and according to the DRP if the company is involved in implementation it cannot be considered as part of development of software and even in the description of the company itself it is mentioned that it is into computer software and IT services therefore when there is an additional activity of services being provided, the function of the said comparable cannot be simply treated as a software developer. The Ld. AR is not able to controvert the finding of the DRP, therefore we uphold the order of the lower authorities. Accordingly, this ground of appeal no.3 is dismissed. 9. Ground No.4: Employee cost filter should be applied at the rate of 80%: 9.1 The Ld.AR pleaded that the employee cost of the Assessee is around 84.9% and since software development is dependent on employees, the cost of employees would normally be very high therefore the higher percentage of employee cost filter should have been adopted whereas the TPO has incorrectly considered the employee cost filter of 60%. 9.2. The Ld. DR relied on the findings of the DRP and submitted that this the standard filter which is normally applied. 9.3 We have heard the rival contentions and perused the material available on record. We find that though the Assessee has taken this argument that the employee cost filter of 80% should be adopted, we find that when it comes to inclusion of comparable companies the employee cost filter of 80% has not been applied by the Assessee. In this regard, the DRP has included 2 comparable out of the 3 comparable which the Assessee has sought inclusion and in one comparable (i.e. Toxsl Technologies Private Limited) which the DRP has held that it can be included, had employee cost to turnover ratio of around Printed from counselvise.com :-5-: IT(TP)A No.:83 /Chny/2024 64.55%. We find that the Assessee cannot take contrary stand for inclusion of comparable and exclusion of comparable. Accordingly, we do not interfere with order of lower authorities. Therefore, this ground of appeal No.4 is dismissed. 10. Ground No.5 to 7: Functionally different comparable companies should be excluded: 10.1 The Ld.AR pleaded that the following three comparable are functionally different: i) C G Vak Software & Exports Ltd – it has offshore services ii) Systango Technologies Ltd – provides services for web/blockchain iii) K.Solves India Ltd –provides software solutions & abnormal growth 10.2 The Ld DR relied on the findings of the lower authorities. 10.3 We have Heard the rival contentions and plus the material available on record. We find that the DRP has given a categorical finding that the annual report of the all the 3 comparable companies have specifically disclosed that these companies are engaged in the business of software development. Since the Assessee is not able to controvert the finding of the DRP, we hereby uphold the order of the lower authorities. Accordingly, this ground of appeal number 5 is dismissed. 11. Ground No.8 Mistake committed by TPO: 11.1 The Assessee has raised contention that the TPO while giving effect to the directions of the DRP has incorrectly adopted the OP/OC and it has already filed an application for rectification and the same is pending before the authorities as on the date of filing of this appeal. Since the Assessee has already filed a rectification application, we do not interfere with the same at this stage. Accordingly, this ground of appeal is dismissed. Printed from counselvise.com :-6-: IT(TP)A No.:83 /Chny/2024 12. Ground No. 8 erred in not applying upper turnover filter: 12.1 The ld.AR contended that the turnover of the Assessee is Rs.24.43 crores whereas the TPO while undertaking the search has applied turnover filter of lower limit of Rs.1.00 crore but did not apply any upper turnover limit. The ld.AR objected to non-application of any upper turnover limit filter. The TPO and DRP have held that high turnover does not have any impact on the margins. The DRP also held that irrespective of high turnover certain comparable companies have made lesser profits and some comparable companies have made high profits, which clearly demonstrates that there is no impact on the profit margin of a company because of turnover. 12.2 The ld.AR contended that when the TPO is adopting a lower turnover limit filter, then there should also be an upper turnover filter. Further, high turnover companies are outliers and there is impact in the profit margin. In support of his contention, the ld.AR also relied on multiple Tribunal decisions and Bombay High Court decision in the case of Pentair Water India Pvt Ltd reported in 69 taxmann.com 180 and submitted that the following comparable companies may be excluded: (i) Great Software Laboratory Pvt. Ltd. – Turnover Rs.265 Crores and (ii) Sasken Technologies Ltd (Rs.425.79 crores). 12.3 The Ld. DR on the other hand strongly supporting order of the Ld. DRP more particularly submitted that where the Assessee has not made out a case as how the high or low turnover has influenced operating margin, then a comparable cannot be rejected solely on the basis of high turnover. Therefore, there is no merit in arguments taken by the ld.AR for the Assessee for application of turnover filter to exclude new comparable selected by the TPO, when FAR analysis shows that the companies are carrying out similar functions as of the Assessee. The Ld. DR reiterated the findings of the DRP and submitted that as long as a company is functionally comparable, irrespective of its turnover the same should be accepted. Printed from counselvise.com :-7-: IT(TP)A No.:83 /Chny/2024 12.4 We have heard both the sides, perused materials available on record and gone through orders of the authorities below along with the judicial precedents relied upon. It is a well settled principle of law by various decisions of Courts and Tribunal that upper turnover filter of Rs.200 crores has to be adopted, while selecting the comparable set of companies, for the purpose of benchmarking under TNMM method. We find that this issue is no more res integra as it has already been settled by the jurisdictional Tribunal in the case of Kumaran Systems (supra). The relevant extract is as under: “In this case, admittedly, the assessee has a turnover of Rs.33.24 crores, whereas the TPO has included 4 comparable whose turnover ranges from Rs.207 crores to Rs.3,032 crores, which is almost more than 6 times to 91 times of the turnover of the assessee and hence, we are of the considered view that the TPO as well as the ld.DRP has erred in not applying turnover filter for selection of comparable and hence, we direct the TPO to apply turnover filter of 0 to 200 crores for selection of comparable and recompute margin of the assessee.” 12.5 Accordingly, we direct the TPO to exclude Great Software Laboratory Pvt. Ltd and Sasken Technologies Ltd. Thus, this ground of appeal no.8 is allowed in favour of the Assessee. 13. Ground No.10 & 11(a) Deduction claimed u/s.10AA: 13.1 The limited prayer of the Ld. AR is that the DRP has already held that the deduction should be granted at the rate of 50% as per profit reported in the return of income, which has not been given effect to by the AO. The Ld.DR fairly accepted that appropriate directions may be issued. 13.2 As per Section 144C(10) of the Act, the AO is mandated to complete the assessment in line with the directions issued by the DRP. Accordingly, we hold that the AO should follow the DRP directions in this regard. Accordingly, this ground of appeal is allowed for statistical purposes. Printed from counselvise.com :-8-: IT(TP)A No.:83 /Chny/2024 14. Ground No.11(b) Non grant of MAT credit: 14.1 The AO is hereby directed to verify and allow the MAT credit in accordance with law. Accordingly, this ground of appeal is allowed for statistical purposes. Accordingly, this ground of appeal is allowed for statistical purposes. 15. In the result the appeal of the Assessee is partly allowed. Order pronounced in the open court on 22nd September, 2025 at Chennai. Sd/- Sd/- (मनु क ुमार \u000fग\u0011र) (MANU KUMAR GIRI) \u0012या\u0014यक सद\u0017य/JUDICIAL MEMBER (एस. आर. रघुनाथा) (S. R. RAGHUNATHA) लेखासद\u0017य/ACCOUNTANT MEMBER चे\u0012नई/Chennai, दनांक/Dated, the 22nd September, 2025 RL आदेश की -ितिलिप अ2ेिषत/Copy to: 1. अपीला थ+/Appellant 2. -.थ+/Respondent 3.आयकर आयुA/CIT– Chennai/Coimbatore/Madurai/Salem 4. िवभा गीय -ितिनिध/DR 5. गा ड) फा ईल/GF Printed from counselvise.com "