M/S. RAVSOFT SOLUTIONS PVT. LTD.,CHENNAI V. DCIT, CORPORATE CIRCLE-1, LTU, CHENNAI

ITTPA 109/CHNY/2024

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The case involves M/s. Ravsoft Solutions Private Limited, a subsidiary of Ravsoft Inc, USA, which provides software development and testing services for medical imaging. The company contested the TPO's adjustment of Rs.5.96 Crores to its income for the assessment year 2021-22, arguing that the selected comparables were not functionally similar and that the TPO had improperly excluded certain expenses as non-operating. The DRP had earlier directed the TPO to adopt margins from the annual reports of comparables, which the TPO did but with modifications that the Tribunal found unjustified. The Tribunal's decision emphasized the importance of functional comparability and adherence to the DRP's directions without arbitrary exclusions.

• Counselvise Citation: [2025] 140 COUNSELVISE.COM (IT) 653005 (ITAT-CHENNAI)
• Appeal Type: Income Tax (Transfer Pricing) Appeal
• Pronouncement Date: 17-06-2025
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: D
• Assessment Year: 2021-2022
• Other Referred Cases: Visual Graphics Computing Services India Ltd vs. DCIT, HP PPS Services India Pvt. Ltd vs. DCIT, SanDisk India Device Design Centre Pvt. Ltd. v. ITO, Metric Stream Infotech India (P) Ltd vs. DCIT, Marlabs Innovation (P) Ltd vs. DCIT, Red Hat India (P.) Ltd vs. DCIT
• Laws Referred To: Income Tax Act, 1961
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: V. SREENIVASAN; C.I.T
• Assessee Lawyers: K. PRASANNA
• Keywords: Transfer pricing; International transaction; Wholly owned subsidiary
• Section: 143(3); 154; 92C

Judgement Text

"आयकर अपीलीय अिधकरण,‘डी’ Ɋायपीठ,चेɄई IN THE INCOME TAX APPELLATE TRIBUNAL ‘D’ BENCH, CHENNAI ŵी एस एस िवʷनेũ रिव, Ɋाियक सद˟ एवं ŵी एस. आर. रघुनाथा, लेखा सद˟ क े समƗ BEFORE SHRI S.S. VISWANETHRA RAVI, JUDICIAL MEMBER AND SHRI S. R. RAGHUNATHA, ACCOUNTANT MEMBER आयकर अपील सं./IT (TP)A No.: 109/CHNY/2024 िनधाŊरण वषŊ/Assessment Year: 2021-22 M/s. Ravsoft Solutions Private Limited, Tidel Park Limited, No.4, Canal Bank Road, Taramani Tidel Park, Mambalam, Chennai – 600 113. Vs. The Deputy Commissioner of Income Tax, Corporate Circle 1, LTU, Chennai. [PAN: AAECR-7274-G] (अपीलाथŎ/Appellant) (ŮȑथŎ/Respondent) अपीलाथŎ की ओर से/Appellant by : Shri K. Prasanna, C.A. ŮȑथŎ की ओर से/Respondent by : Shri AR.V. Sreenivasan, C.I.T. सुनवाई की तारीख/Date of Hearing : 15.05.2025 घोषणा की तारीख/Date of Pronouncement : 17.06.2025 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 14.10.2024 in pursuant to the directions of the Dispute Resolution Panel- 2, Bengaluru dated 09.09.2024. 2. The assessee has raised the following grounds:- - 2 - IT(TP)A No.109/CHNY/2024 1. General Ground 1.1 The Learned Transfer Pricing Officer (‘Ld. TPO’) erred in law and facts in rejecting the Transfer Pricing study (TP Study) conducted by the appellant without providing any opportunity to the appellant and carried out an independent search in violation of provisions of Section 92C (3) of the Act. 2. Upward adjustment to the international transactions: 2.1 Functional comparability  The Ld. TPO erred in law and facts by selecting few companies as comparable without adequately considering the functional difference between the comparables to that of the appellant.  The Ld. TPO erred in understanding that the comparable selected by the appellant is engaged in various kind of services and not confined to software development 2.2 Application of Turnover Filter  The Ld. TPO has erred in selecting comparable companies without factoring in their volume and scale of the comparable companies to that of the appellant.  The Ld. TPO has erred in applying the upper turnover filter in an selective/ inconsistent manner.  The Ld. TPO has erred in not applying the upper turnover filter, while he has applied the lower turnover filter. 2.3 Application of Other Filters  The Ld. TPO erred in selecting few Comparable companies which does not satisfy employee filter or export filter applied for search of comparable companies. 2.4 Non Granting of Risk adjustments  The Ld. TPO erred in not allowing the risk adjustment, overlooking the fact that the appellant is a captive service provider not exposed to risk, unlike the independent comparables are risk-bearing entities. 2.5 Inconsistency in computation of operating margin of the Comparable Companies  The Ld. TPO has erred in re-computing the margins of the Comparable Companies (OP/OC) based on the data as per the Annual reports filed with the Ministry off corporate affairs. - 3 - IT(TP)A No.109/CHNY/2024  The Ld. TPO failed to disclose the methodology used for computing margins of independent Companies selected as comparable. 2.6 Other Aspects  The Ld.TPO erred in law and facts by selecting few companies that are adopting different accounting standards as compared to that of the appellant. 3. The Appellant craves leave to add, alter, vary, omit, amend or delete one or more of the above grounds of appeal at any time before, or at the time of, hearing of the appeal. 3. The brief facts of the case are that the assessee company M/s.Ravsoft Solutions India Private Limited is a wholly owned subsidiary of Ravsoft Inc, USA (Ravsoft USA). M/s.Ravsoft USA is engaged in assisting the development of medical Imaging and Analysis Software for customers in USA. Their domain experience includes Pictures Archiving and Communications Systems (PACS), Modality Specific Software and their major customers include Merge Inc and Life Image Inc. The Group has expertise in DICOM and HL7 standards, the two standards used in the medical field to ensure interoperability (Page 32 of Paper Book). 4. The assessee is engaged in the business of providing development and testing services that Ravsoft USA offshores. The software development for image archiving or DICOM standards are carried out remotely from India. During the year, the assessee had entered into international transactions amounting to Rs.32.24 Crores (Page 7 of Paperbook). The assessee earned an operating margin (OP/OC) of 7.49%. The assessee filed its return of income on 09.02.2022 declaring total income of Rs.1,99,04,330/-. The return of income processed u/s.143(1) of the Act on 29.06.2022 and subsequently the case was selected for complete scrutiny and accordingly the statutory notices were issued. Later the case was referred to the TPO through technical - 4 - IT(TP)A No.109/CHNY/2024 unit on 20.07.2022 after obtaining due approval from the ld.PCIT (AU) for determination of Arm’s Length Price. Transfer Pricing Assessment 5. The Transfer Pricing Officer (TPO) made adjustments by carrying out independent search and arrived at an arm’s length range of 17.08% to 27.31% with a median of 19.24% (Page 77 of Paperbook). The TPO made a transfer pricing adjustment of Rs.3.25 Crores by passing an order u/s.u/s.92CA(3) of the Act dated 05.10.2023. Pursuant to TPO’s order the AO issued a draft assessment order u/s.144C(1) of the Act dated 12.12.2023 incorporating the variation proposed on the basis of inference drawn. Aggrieved by the order, the assessee filed objections before the Dispute Resolution Panel(‘DRP’), which inter-alia, include the following:  The TPO had erroneously selected few comparable companies without applying upper turnover filter.  The TPO erred in selecting a few comparable companies that provide diversified services and are not functionally similar.  The TPO had incorrectly computed the margins of the comparable companies without considering the figures as per annual reports/ audited financial statements. 6. The DRP rejected the arguments of the assessee by observing as follows:  Turnover filter is not appropriate unless the reasons for margins are specifically quantified.  Software Functionality is not required to be bifurcated between high-end vs. low-end, as the cost of employees will take care of the differences in functionality. 7. However, based on the objections raised by the assessee regarding proper consideration of margins of the comparable companies as per annual reports, the DRP directed the TPO to adopt the annual reports of the Comparable to compute the - 5 - IT(TP)A No.109/CHNY/2024 operating margins by passing an order u/s.144C(5) of the Act dated 09.09.2024 (Pg 120 of Paper book) 8. The TPO while recomputing the margins as per the direction of DRP, incorrectly computed the margin of the comparable companies without properly adopting the amounts from the annual reports and computed revised operating margins of the Comparable Companies which resulted in a range of 18.33% to 29.87% with a median of 27.37%. (as againt arm’s length range of 17.08% to 27.31% with a median of 19.24% originally computed by the TPO). The TPO recomputed the transfer pricing adjustment to Rs.5.96 Crores as against the original upward adjustment of Rs.3.25 crores by passing an order to give effect to the directions u/s.144C of the Act dated 23.09.2024 (Page 163 – 165 of Paperbook). Consequent to the order of the TPO, the AO passed a final assessment order u/s.143(3) r.w.s.144C(13) r.w.s. 144B of the Act dated 14.10.2024 by including the upward adjustment of the ALP to the tune of Rs.5.96 crores to the return of income. Aggrieved by the order of the AO the assessee is before us. 9. The ld.AR for the assessee submitted that there is an inconsistency in the order of TPO / DRP in Computing the Operating Margins of Comparable (Ground 2.5). During the course of the TP assessment as well as before the DRP, the assessee objected to the inconsistencies in the computation of operating margins of the Comparable Companies. The DRP had directed that the TPO must adopt annual reports while computing the margins (Pg 120 of Paperbook). 10. Further, the ld.AR drew our attention to the directions of the DRP, wherein it has been merely directed the TPO to re-compute the margins as per the annual reports. However, the TPO in its giving effect order to the DRP directions dated 23.09.2024, while re-computing the margins, had arbitrarily excluded certain expenses treating them - 6 - IT(TP)A No.109/CHNY/2024 as non-operating in nature. This has resulted in a high range of comparable operating margins and higher transfer pricing adjustment (Section 154 rejection order). 11. In this regard, the ld.AR emphasized that the TPO while passing the original transfer pricing order dated 05.10.2023 (Page 77 of the Paperbook) had not excluded any specific expenses as non-operating in nature. However, without a specific direction from the DRP, the TPO in its giving effect order dated 23.09.2024 had excluded certain expenses treating them as non-operating in nature while computing the operating margin, which is in violation of the directions passed by the DRP. 12. Further, ld.AR stated that the comparable operating margins (including median) are more than the safe harbour rules (SHR) for software development services. In case of an eligible assessee turnover less than Rs.100 Crores, the expected operating margin is 17%, whereas the arm’s length price arrived by TPO is 27.37%, which is 10% more than the SHR. Although, SHR is not applicable to the assessee, still a contextual analysis shows that the range adopted by the TPO is extreme and arbitrary. The ld.AR also submitted that the TPO had picked up the case for transfer pricing assessment proceedings for AY 2022-23 (subsequent AY of the impugned assessment year) for the similar international transactions entered by the assessee with its AE and has proposed to make adjustment by issuing show cause notice dated 28.10.2024 (page 286 to 291 of the Paperbook). However, based on the submissions made by the assessee, the TPO dropped the adjustments proposed in the show cause notice and accepted the PLI of the assessee to be at arm’s length price vide its order dated 25.11.2024 (Page 301 to 304 of the Paperbook). 13. The ld.AR submitted that out of the companies excluded and included by the TPO and DRP prayed to - 7 - IT(TP)A No.109/CHNY/2024  To exclude two comparable companies selected by the TPO on account of high turnover (Para 3.2 of the Synopsis).  To exclude five comparable companies selected by the TPO on account of services being diversified in nature and not functionally similar with that of the assessee (Para 3.3 of the Synopsis). 14. Further, the ld.AR stated that, if the above-mentioned companies are excluded from the final list of comparable selected by the TPO, then the total comparable to be benchmarked for arm’s length price would be eight (8). The operating margins (OP/OC) of those eight (8) comparable as computed based on the annual reports would range from 5.31% (35th percentile) to 9.84% (65th percentile) with a median of 7.74%. The PLI of the Appellant for the subject AY is 7.49% (Page 151 of the Paperbook). Hence, the PLI of the assessee would fall within the range of the comparable and hence the prayed that the TP adjustment shall be deleted. 15. In light of the above, the Ld.AR submitted that there is an inconsistency in the application of the Turnover Filter. As mentioned earlier, the assessee's turnover from software development is Rs.32.24 Crores. During the course of transfer pricing proceedings, and DRP proceedings, the assessee had objected to including certain companies as comparable on account of significant turnover. The TPO accepted these arguments on a selective basis and excluded only couple of companies from comparable on account of significant turnover. (Page 76 of Paperbook) where (a) Tata Elxsi Ltd and (b) Infosys Ltd were excluded. 16. The details of turnover of the comparable companies and the assessee is plotted in Page 169 of Paperbook, wherein it can be observed that (i) Cybage Software Pvt Ltd and (ii) Sasken Technologies Ltd turnover is more than 10 times of the turnover of - 8 - IT(TP)A No.109/CHNY/2024 assessee. The details of the turnover of these two companies vis-à-vis the assessee’s turnover for the subject FY and preceding two FYs is given below: Amount in Rs. Crores FY Assessee Cybage Software Sasken Technologies FY 2020-21 32.24 1,142.64 392.46 FY 2019-20 26.63 1,004.74 416.71 FY 2018-19 23.00 862.95 414.67 17. Therefore, the above-mentioned two companies (i.e. Cybage Software and Sasken Technologies) had to be excluded from the list of comparable on account of difference in turnover. 18. The ld.AR relied on the Hon’ble Madras High Court decision in the case of Visual Graphics Computing Services India Ltd (2020) 274 Taxman 481, wherein the court had held that turnover filter is a relevant factor to consider the comparability (Para 9 of Page 66 of Case Law Paperbook). 18.1 The ld.AR relied on the following decisions, wherein similar proposition is held: Case Name Citation Para Ref. Case Law Paper book 1 Pentair Water India (P) Ltd Bombay High Court – (2016) 69 taxmann.com 180 9 72 2 Acusis Software India (P) Ltd Karnataka High Court 14-15 76 3 iMedx Information Services (P.) Ltd Hyderbad ITAT 16 – 17 111 - 9 - IT(TP)A No.109/CHNY/2024 19. Hence, ld.AR pleaded to direct the TPO to exclude the above two companies, namely Cybage Software and Sasken Technologies, on account of the huge difference in turnover. 20. Per contra, the ld.DR for the revenue relied on the orders of the TPO / DRP and prayed for confirming the same. 21. We have heard the rival contentions perused the material available on record and gone through the orders of the authorities along with submissions and case laws relied upon by both the parties. 22. Firstly, we note that the TPO, while following the directions of the DRP has stretched his power to recompute the margins of the comparable companies by excluding certain expenses treating them as non-operating in nature as against the direction of the DRP to re-compute the margins as per the annual reports. We find that this action of the TPO cannot be countenanced as this has resulted in a high range of comparable operating margins and higher transfer pricing adjustment (Section 154 rejection order). Hence, we direct the TPO to follow the direction of the DRP and recompute the margins as per the annual reports of the comparable companies without any modifications in the margins. 23. On perusal of the financials the company we note that the impugned financial year 2020-21, Cybage Software and Sasken Technologies has a turnover of Rs.1,142 crores and Rs.392 Crores respectively. Similarly, the turnover of Cybage Software for F.Y.2018-19 and 2019-20 were Rs.862 crores and Rs.1,004 crores respectively and the turnover of Sasken Technologies for F.Y.2018-19 and 2019-20 were Rs.416 crores and Rs.414 crores respectively, when compared to the turnover of the assessee for - 10 - IT(TP)A No.109/CHNY/2024 F.Y.2018-19 and 2019-20 was only Rs.23 crores and Rs.26 crores respectively. Accordingly, companies with turnover of greater than Rs.200 Crores are to be excluded from the comparable set. Therefore, considering the present facts and judicial precedents as discussed supra, we direct the AO/TPO to exclude Cybage Software and Sasken Technologies from the comparable by allowing the related grounds of appeal of the assessee. 24. The next issue raised by the assessee that the TPO / DRP erred in including the companies engaged in diversified and dissimilar functions as comparable companies in computing the margins. The ld.AR submitted that during the course of TP proceedings as well as DRP proceedings, the assessee had objected to selection of few comparable by the TPO on the basis of diversified/ dissimilarity in the functions performed by such comparable while the assessee is not engaged in diversified activities. However, both the TPO as well as the DRP had failed to consider the assessee’s arguments. The ld.AR submitted that the functions performed by the assessee are summarized below. Functions performed by Ravsoft India: 25. The assessee is engaged in the business of development and testing of medical imaging software that are compliant with DICOM and HL7 standards. The assessee is a captive service provider rendering the software development and testing services to its parent entity, Ravsoft USA. The services are carried out remotely from India (Page 32 of the Paperbook). Functions performed by the comparable Companies: 26. The ld.AR submitted that the summary of the assessee’s objection against functional dissimilarity of the comparable and the DRP’s findings are provided below. - 11 - IT(TP)A No.109/CHNY/2024 Great Software Laboratory Pvt. Ltd. a. Assessee’s objection: 27. The Company is engaged in high end functions which are diversified in nature and ranges from  Digital engineering (software engineering, digital product engineering, cloud engineering);  Technology services (which are in the field of cybersecurity, data analytics, cloud enablement, artificial intelligence, machine learning engineering). 28. The Company caters to various industries which are ranging from healthcare, hi- tech, Banking, Finance and Service Industry, life sciences, telecom and manufacturing (Page 201 to 212 of the Paperbook). b. DRP findings: 29. Low end to high end services provided by the comparable company is mainly on account of differences in skills, qualifications and pay structure of employees. The skill set and the language required for both computer programming and software development are broadly similar. Hence, such differences in qualifications and pay structures of employees does not materially affect the margin of the comparable (Page 138 and 139 of the Paperbook). IDS Infotech Ltd a. Assessee’s objection: 30. The Company is engaged in high end functions which are diversified in nature and ranges from,  Healthcare services (Revenue cycle management, patient scheduling to claims and billing using AI enhanced services, Safety Data Sheet services for global chemical compliance and management). - 12 - IT(TP)A No.109/CHNY/2024  Digital technology solutions (web and mobile expertise, cloud infrastructure, data integration to various industries)  Environment, Health and Safety Services  Content management and publishing services  Engineering services (design engineering, manufacturing engineering, data management and quality engineering, technical documentation and publication services) (Page 213 to 235 of the Paperbook). b. DRP findings: 31. The Assessee has not submitted the complete set of the annual report of the comparable (Page 139 of the Paperbook). K Solves India Ltd a. Assessee’s objection: 32. The Company is engaged in high end functions which are diversified in nature and ranges from,  Generative AI and machine learning  Big Data  Saledforce Services  Dev Ops  Microservices  Odoo  Cross Platform  Openshift development, etc. (Page 236 to 249 of the Paperbook) b. DRP findings: 33. The comparable company is 100% engaged in providing software development services as per the information provided in the annual report (Page 140 of the Paperbook). Systango Technologies Ltd - 13 - IT(TP)A No.109/CHNY/2024 a. Assessee’s objection: 34. The Company is engaged in high end functions which are diversified in nature and ranges from,  Generative AI  Blockchain and Web 3  Data Engineering  Cloud Engineering  Staff Augmentation  App development and management  DevOps (Page 259 to 269 of the Paperbook) b. DRP findings: 35. The comparable company is 100% engaged in providing software development services as per the information provided in the annual report (Page 139 and 140 of the Paperbook). Consilient Technologies Pvt. Ltd a. Assessee’s objection: 36. The Company is also engaged in developing various software products like Voice, Audio and Video Codecs, VoLTE voice engine, VoIP call Decoder, SIP Soft Modem Server, etc. (page 170 of the Paper book). 36.1 Further, the Company is engaged in high end functions which are diversified in nature and ranges from,  Customising and porting services (adding new configuration, implementing new features, modifying interfaces, integrating with device drivers, etc.)  Performance Optimisation Services (comprehensive performance optimisation, minimising CPU load and memory usage, architectural to code level optimisation, etc.) (Page 171 to 185 of the Paperbook). - 14 - IT(TP)A No.109/CHNY/2024 b. DRP findings: 37. The comparable company is 100% engaged in providing IT design and software development services as per the information provided in the annual report (Page 141 and 142 of the Paperbook). 38. The ld.AR submitted that since the comparable companies mentioned above are engaged in diversified and high-end functions like digital engineering, cloud engineering, generative AI, machine learning, Big Data, app development, etc. the activities are high end in nature that cannot be compared to the assessee which is engaged in routine software development activities. The activities conducted by assessee were not creative in nature that the requirement of medical image archiving is already prescribed under the medical industry. Therefore, there is no significant value addition or creativity when the services are provided. Unlike the assessee, the companies selected by the TPO were engaged in advanced technologies like big data, AI, machine learning etc., which require significant creativity and application of knowledge etc. and hence the margin of these companies cannot be compared with the assessee. 39. Further, the ld.AR stated that the segmental financial information for such comparable are not available in their annual report, hence, these companies shall not be considered as comparable. 40. The ld.AR stated that as regards the allegation for non filing of annual report before the DRP, the assessee would like to inform that the complete set of annual reports of all the comparable have been furnished with the DRP vide email dated 15.07.2024 and the DRP himself had referred to annual report for certain comparable. - 15 - IT(TP)A No.109/CHNY/2024 The assessee places reliance on the Bangalore Tribunal rulings in the case of HP PPS Services India Pvt. Ltd vs. DCIT [2023] 146 taxmann.com 201 (Para 6, 8 and 9 of Page 16 and 17 of the Case Law Paperbook) and SanDisk India Device Design Centre Pvt. Ltd. v. ITO [2022] 136 taxmann.com 348 (Para 19 of Page 27 of the Case Law Paperbook) has held that company engaged in diversified services should be excluded from list of comparable for IT service provider. 41. The ld.AR further relied on the below-mentioned rulings in which it was held that companies engaged in diversified services shall not be considered as comparable. # Case Name Citation Para Ref Page in Case Law PaperBook 1 Metric Stream Infotech India (P) Ltd Bangalore ITAT – [2022] 143 taxmann.com 407 12 & 13 43 2 Marlabs Innovation (P) Ltd Bangalore ITAT – [2020] 116 taxmann.com 725 16 55 & 56 3 Red Hat India (P.) Ltd Mumbai ITAT – [2022] 140 taxmann.com 274 7.1 to 7.3 61 42. In light of the above arguments, the ld.AR submitted that the above-mentioned companies cannot be regarded as comparable and prayed to direct the TPO to exclude the above following companies from the comparable Companies: 1. Great Software Laboratory Pvt. Ltd. 2. IDS Infotech Ltd 3. K Solves India Ltd 4. Systango Technologies Ltd 5. Consilient Technologies Pvt. Ltd 43. Per contra the ld.DR relied on the orders of the TPO and DRP and prayed for confirming the same. - 16 - IT(TP)A No.109/CHNY/2024 44. We have heard the rival submissions and perused the materials available on record. After hearing both the parties, we are of the opinion that comparable companies Great Software Laboratory Pvt. Ltd., IDS Infotech Ltd., K Solves India Ltd., Systango Technologies Ltd and Consilient Technologies Pvt. Ltd., came for consideration are involved in the business activities dissimilar to the activities of the assessee. On perusal of the annual reports of the above comparable companies in the paper book references made supra, we find that the business activities carried out are high end functions which are diversified in nature. 45. We find that the assessee is engaged in the business of development and testing of medical imaging software that are compliant with DICOM and HL7 standards, catering only as captive service provider rendering the software development and testing services to its parent entity, Ravsoft USA and these services are carried out remotely from India. 46. However, M/s.Great Software Laboratory Pvt. Ltd. is carrying on the business of high end functions which are diversified in nature and ranges from Digital engineering (software engineering, digital product engineering, cloud engineering); Technology services (which are in the field of cybersecurity, data analytics, cloud enablement, artificial intelligence, machine learning engineering). Further, the Company caters to various industries which are ranging from healthcare, hi-tech, Banking, Finance and Service Industry, life sciences, telecom and manufacturing (Page 201 to 212 of the Paperbook). 47. The contention of the DRP in considering the comparable company is providing low end to high end services is mainly on account of differences in skills, qualifications - 17 - IT(TP)A No.109/CHNY/2024 and pay structure of employees, is not acceptable reason, when the basic function is not similar. 48. In respect of the services provided by the IDS Infotech Ltd is high end functions which are diversified in nature and ranges from, Healthcare services like Revenue cycle management, patient scheduling to claims and billing using AI enhanced services, Safety Data Sheet services for global chemical compliance and management and Digital technology solutions like web and mobile expertise, cloud infrastructure, data integration to various industries and also Environment, Health and Safety Services, Content management and publishing services, Engineering services including design engineering, manufacturing engineering, data management and quality engineering, technical documentation and publication services. Though the assessee has provided the details of annual report, the DRP has not considered stating that complete set of the annual report of the comparable are not submitted. 49. We find that the Company K Solves India Ltd is engaged in high end functions which are diversified in nature and ranges from Generative AI and machine learning, Big Data, Saledforce Services, Dev Ops, Microservices, Odoo, Cross Platform and Openshift development, etc. 50. However, the DRP has not noticed the various range of activities carried out by the comparable company, considering the same as the company is having 100% software development services. 51. The next comparable company included by the TPO was Systango Technologies Ltd, is engaged in high end functions which are diversified in nature and ranges from Generative AI, Blockchain and Web 3, Data Engineering, Cloud Engineering, Staff - 18 - IT(TP)A No.109/CHNY/2024 Augmentation, App development and management, DevOps. However, the DRP has not noticed the various range of activities carried out by the comparable company, considering the same as the company is having 100% software development services. 52. The next company included as comparable was M/s.Consilient Technologies Pvt. Ltd is also engaged in developing various software products like Voice, Audio and Video Codecs, VoLTE voice engine, VoIP call Decoder, SIP Soft Modem Server, etc. Further, the Company is engaged in high end functions which are diversified in nature and ranges from Customising and porting services like adding new configuration, implementing new features, modifying interfaces, integrating with device drivers and Performance Optimisation Services like comprehensive performance optimisation, minimising CPU load and memory usage, architectural to code level optimisation, etc. It is pertinent to further note that the TPO had picked up the case for transfer pricing assessment proceedings for AY 2022-23 (subsequent AY) for the similar international transactions entered by the assessee with its AE and has proposed to make adjustment by issuing show cause notice dated 28.10.2024 (page 286 to 291 of the Paperbook). However, based on the submissions made by the assessee, the TPO had dropped the adjustments proposed in the show cause notice and accepted the PLI of the assessee to be at arm’s length price vide its order dated 25.11.2024 (Page 301 to 304 of the Paperbook). 53. Considering the above discussion, we are of the considered view that the above comparable companies included are functionally dissimilar and hence we do not subscribe to the decision of the TPO and also of DRP. We find that the decision of the Bangalore Tribunal in the case of HP PPS Services India Pvt. Ltd vs. DCIT [2023] 146 - 19 - IT(TP)A No.109/CHNY/2024 taxmann.com 201, has clearly laid down the ratio that the functionally dissimilar companies cannot be considered as comparable. 54. Further, in the case of SanDisk India Device Design Centre Pvt. Ltd. v. ITO [2022] 136 taxmann.com 348, Bangalore Tribunal also held that the company engaged in diversified services should be excluded from list of comparable for IT service provider, the relevant extract is given below : “The remaining 3 companies out of the 9 comparable companies sought to be excluded in ground 6.1 are ICRA Techno Analytics Ltd., Kals Information Systems Ltd., and Persistent Systems and Solutions Ltd. As far as the comparability of these 3 companies with a company rendering software development services such as the assessee, the Tribunal in the case of Electronics for Imaging India (P.) Ltd., (supra) rendered its decision with reference to Assessment Year 2010-11 and considered these 3 companies as not comparables. It is also relevant to point out that the very same set of 11 comparable companies were chosen by the TPO in the case of the assessee in this case and the assessee in the case of Electronics for Imaging India (P.) Ltd. (supra) Vide paragraph 15 of the aforesaid decision, ICRA Techno Analytics Ltd., was held to be a company engaged in the diversified activities of software development, consultancy engineering services, web development and hosting and substantially diversified itself into domain of business and business process outsources and hence not comparable with a SWD service provider. Vide paragraph 23 of the very same order, Kals Information Systems Ltd., was held to be a company engaged in software development product and therefore cannot be compared with a SWD service provider such as the assessee. Vide paragraph 61 of the very same order, Persistent Systems and Solutions Ltd., was held to be not comparable for the reason that the revenue earned by this company was from sale of software services as well as sale of software products and no segmental details were available. Respectively following the aforesaid decision, we hold that the aforesaid 3 companies have to be excluded from the list of comparable companies.” 55. Therefore, in the present facts and circumstances of the case, we are of the considered view that the comparable companies (1) Great Software Laboratory Pvt. Ltd., (2) IDS Infotech Ltd., (3) K Solves India Ltd., (4) Systango Technologies Ltd and (5) Consilient Technologies Pvt. Ltd., included by the TPO/DRP is not acceptable as these companies are functionally dissimilar. Being so, we direct the AO/TPO to exclude - 20 - IT(TP)A No.109/CHNY/2024 these five comparable companies. Directed accordingly by allowing the related grounds of appeal of the assessee. 56. In the result the appeal filed by the assessee is allowed. Order pronounced in the open court on 17th June, 2025 at Chennai. Sd/- Sd/- (एस एस िवʷनेũ रिव) (S.S. VISWANETHRA RAVI) Ɋाियक सद˟/Judicial Member (एस.आर. रघुनाथा) (S.R. RAGHUNATHA) लेखा सद˟/ACCOUNTANT MEMBER चेɄई/Chennai, िदनांक/Dated, the 17th June, 2025 SP आदेश की Ůितिलिप अŤेिषत/Copy to: 1. अपीलाथŎ/Appellant 2. ŮȑथŎ/Respondent 3. आयकरआयुƅ /CIT, Chennai 4. िवभागीय Ůितिनिध/DR 5. गाडŊ फाईल/GF. "