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Sankalp Semiconductor Private Limited appealed against the assessment order for the assessment year 2020-21, which included significant transfer pricing adjustments and disallowances. The primary contention revolved around the TPO's adjustments related to the arm's length pricing of international transactions, including the provision of IT services, interest on delayed receivables, and corporate guarantees. The Tribunal examined various grounds including the validity of the TPO's reference, the characterization of the company, and the appropriateness of selected comparables. The Tribunal's decision involved a detailed analysis of the TPO's methodology and the application of legal precedents, leading to a mixed outcome where some of the TPO's adjustments were upheld while others were modified or set aside.
Appeal Details
Counselvise Citation
[2025] 140 COUNSELVISE.COM (IT) 785256 (ITAT-BANGALORE)
Assessee PAN
Bench
Appeal Number
CRN Number
Duration Of Justice
1 year(s) 2 month(s) 5 day(s)
Appellant
Respondent
Appeal Type
Income Tax (Transfer Pricing) Appeal
Pronouncement Date
27-10-2025
Appeal Filed By
Assessee
Order Result
Partly Allowed
Bench Allotted
C
Assessment Year
2020-2021
Appeal Filed On
21-08-2024
Judgement Text
" IN THE INCOME TAX APPELLATE TRIBUNAL “C” BENCH : BANGALORE BEFORE SHRI PRASHANT MAHARISHI, VICE PRESIDENT AND SHRI KESHAV DUBEY, JUDICIAL MEMBER IT(TP)A No.1564/Bang/2024 Assessment year : 2020-21 Sankalp Semiconductor Private Limited, Plot No. 9, Survey No. 89, Aryabhatta Tech Park, Navanagar, Hubli, Dharwad, Karnataka, 580025 PAN: AAJCS 3690Q Vs. The Deputy Commissioner of Income Tax, Circle 1(1) & TPS, Hubli. APPELLANT RESPONDENT Revenue by : Shri Nageshwar Rao, Sr. Advocate Respondent by : Dr. Divya K J, CIT(DR)(ITAT), Bengaluru. Date of hearing : 30.07.2025 Date of Pronouncement : 27.10.2025 O R D E R Per Prashant Maharishi, Vice President 1. This appeal is filed by Sankalp Semiconductor Private Limited (the assessee/appellant) for the assessment year 2020-21 against the assessment order u/s. 143(3) r.w.s. 144C(13) r.w.s. 144B of the Income -Tax Act, 1961 [the Act] dated 25.7.2024 passed by the Assessment Unit, Income Tax Department determining the total Printed from counselvise.com IT(TP)A No.1564/Bang/2024 Page 2 of 64 income of the assessee at Rs. 33,66,82,538/- against the Returned income of Rs. 14,93,11,280/-. 2. The assessee filed its return of income on 22.1.2021 at a total income of Rs. 14,93,11,280/-. Assessment was made making the addition of (i) TP adjustment of Rs. 15,34,97,051 on account of determination of arm’s length price [ALP] of international transaction entered into by the assessee comprising of (a) Provision of IT Services — INR 15,08.00,000/- , (b) Interest on delayed receivables - 19.94.051/- and (c) Corporate Guarantee — 7.03.000/- and (ii) addition of Rs. 3,38,74,207/- was made on account of disallowance of lease rent expenditure as there are multiple entries in the accounts. 3. The assessee aggrieved with the same is in appeal before us raising the following grounds:- “Present appeal u/s 253 is against final assessment order dated 25.07.2024 (impugned order) passed u/s 143(3) no s 144 C(13) r.w.s 144 B ( bearing DIN ITBA/AST/S/143(3)/2024-25/1067010295(1) in relation to Assessment year 2020-2021 Following grounds are without prejudice to each other In the facts and circumstances of the case and in law 1. Impugned order is passed beyond time-limit specified under provisions of section 153 of the Act (i e. September 30, 2023) and is time barred, null and void. 2 Ld. AO has erred in determining total income of the Appellant at INR 33,66,82,538 by making the following adjustment to returned income. i) Transfer Pricing adjustment of INR 15,34,97.051: Printed from counselvise.com IT(TP)A No.1564/Bang/2024 Page 3 of 64 ii) Disallowance of actual lease rent expenditure amounting to INR 3.88,74,207 Part I — Transfer Pricing Matters 3 The Hon'ble DRP and the Ld. TPO/ Ld AO have erred, in law and on facts and circumstances of the case, in making an adjustment of INR 15.34,97.0511- to the total income of the Appellant in respect of • Provision of IT Services — INR 15,08.00,000/- • Interest on delayed receivables - 19.94.051/- • Corporate Guarantee — 7.03.000/- 4 Impugned order erred in not accepting economic analysis undertaken by the Appellant in accordance with the provisions of the act read with the Income-tax Rules, 1962 ('the Rules\"), and in modifying the same 5 Impugned order erred in treating exceptional/extraordinary bonuses paid to employees and cost towards ESOP expense as operating cost for purposes of working out Appellant margin. 6 Impugned order erred in considering miscellaneous income, other comprehensive income and provision for doubtful debts, bad debts. rates and taxes as non-operating item for computing operating margins for comparison. Further margin computation of comparable companies suffers from several errors. 7 In the garb of fresh search and analysis impugned order erred in adopting inappropriate selection criteria/ filters leading to inclusion of companies providing engineering and design services as comparable to provision of IT services transactions, wrongly rejecting companies selected by Appellant on adhoc basis, resorting to cherry picking of comparable despite these companies being functionally dissimilar. 7a - List of wrongfully accepted companies which are to be excluded' a) Mahindra Consulting Engineers Ltd b) Sikraft Infotech Pvt Ltd c) TATA Elxsi Limited Printed from counselvise.com IT(TP)A No.1564/Bang/2024 Page 4 of 64 d) WoodIndia Engg. & Projects Pvt. Ltd e) X S Cad India Pvt. Ltd f) L&T Technology Services Ltd g) Cadsys (India) Ltd 7b - List of comparable wrongfully rejected which are to be included: a) Rheal Software Private Limited (-Rheal Software') b) Batchmaster Software Private Limited (\"Batchmaster) c) Evoke Technologies Private Limited (-Evoke\") d) Issummation Technologies Private Limited ('Issummation\") e) TVS Next Limited (formerly TVS Infotech Limited) (\"TVS\") f) Harbinger Systems Private Limited('Harbinger\") g) R Systems International Limited (Information Technology service segment) (*R Systems\") h) Hurix Systems Private Limited (\"Hurix\") i) Infomile Technologies Limited (`Infomile\") j) Great software laboratory Pvt Ltd (-Great Software') k) Orion India Systems Pvt Ltd (\"Orion') l) CG-Vak Software & Exports Ltd ('CG-Vak\") m) Hotcocoa Software Pvt Ltd (\"Hotcocoa\") n) Inteq Software Pvt Ltd (\"Inteq”) 7c - Without prejudice to the fact that Appellant is engaged In provision of IT Services, list of additional companies engaged in engineering and design services which are to be included a) Prothious Engineering Services Pvt Ltd (\"Prothious') b) Axiscades Engineering Technologies Limited (\"Axiscades\") 8 Impugned order erred in failing to make appropriate adjustments to account for differences in working capital employed by the Appellant vis-a-vis comparable companies and risk differences 9 Without prejudice. impugned order erred in not limiting TP adjustment to controlled transactions 10 Without prejudice impugned order erred in rejecting alternative benchmarking using foreign AE as tested party purely based on incorrect presumptions and by ignoring to consider material on record Printed from counselvise.com IT(TP)A No.1564/Bang/2024 Page 5 of 64 11 Without prejudice impugned order erred in not limiting adjustment to the total global profits from provision of IT Service. 12 Impugned order erred in: • Disregarding commercial expediency/ business rationale of corporate guarantee provided • Not considering corporate guarantee as intra group services • Rejecting the benefit test analysis undertaken by Appellant • Without prejudice. even if the adjustment is to be made then the same should be made on the balance amount 13 Impugned order erred in: • Rejecting the economic analysis undertaken by Appellant wherein receivables arising from inter-company transactions have been benchmarked by treating it as closely linked to respective transactions • Recharacterizing outstanding receivables as loan advances to AE • Not considering accounts receivable / accounts payable arising out of international transactions as closely linked to main transactions • Rejecting computation of ALP based on uncontrolled (third- party) scenario - No interest has been charged on receivables outstanding from unrelated parties • Disregarding provisions under section 92CE vide Finance Act 2017 and the corresponding rules under Rule 10CB issued by the Central Board of Direct Taxes (\"CBOT') Part II — Corporate tax matters 14 Disallowance with respect to actual lease rent expenditure amounting to INR 3,38,74,207 Impugned order is not in conformity with directions issued by Ld DRP to allow actual lease rent expenditure amounting to INR 3,88,74.207/- Ld. AO ignored to consider complete reconciliation explaining audited financials drawn up in consonance with Ind- AS 116 as also all documentation provided in support of claim. 15. Impugned order is result of process unknown to law and is in violation of provisions of law to the extent It is based on Printed from counselvise.com IT(TP)A No.1564/Bang/2024 Page 6 of 64 remand report from JAO when draft order. entire assessment, as also final assessment order are passed u/s 144 B. 16. Disallowance of deduction to the extent of INR 3.20.594 claimed by the Appellant under section 35DD of the Act. Impugned order erred in rejecting deduction claimed u/s 35 DD towards 1/5\" Stamp duty incurred in connection with amalgamation, proceeding on wrong notions 17 Short-grant of tax deducted at source to the extent of INR 41,840 Ld. AO has erred in granting credit for tax deducted at source ('TDS\") of INR 4,16,71,065 only as against credit of INR 4.17.12.905 claimed by the Appellant in its return of income Ned for the subject AY, thereby resulting in short grant of TDS amounting to INR 41,840. 18 Consequential levy of Interest under Section 234A and section 234B of the Act Ld AO has erred in levying consequential interest under section 234A of the Act for INR 8,61,302 and under section 2348 of the Act for INR 2,23.93,852 19 Initiation of Penalty Proceedings Ld AO has erred in initiating penalty proceedings under section 270A of the Act against the Appellant. The above grounds of appeal are mutually exclusive and without prejudice to each other. The Appellant craves leave to add. amend, vary, omit or substitute, withdraw any of the aforesaid grounds of appeal at any time before or at the time of hearing of the appeal. The Appellant prays for appropriate relief based on the said grounds of appeal and the facts and circumstances of the case.” 4. Ground Nos. 1 is as under Printed from counselvise.com IT(TP)A No.1564/Bang/2024 Page 7 of 64 “Impugned order is passed beyond time-limit specified under provisions of section 153 of the Act (i e. September 30, 2023) and is time barred, null and void. 5. This Ground is raised challenging that assessment order passed is barred by limitation. On this Ground, assessee has submitted a letter dated 8.10.2024 and same was confirmed by the ld. AR that assessee is not pressing the issue of limitation which is supported by the decision of Hon’ble Madras High Court in the case of Roca Bathroom Products Private Limited [TS-473-HC-2022(MAD)]. Therefore Ground no 1 is dismissed. 6. Ground No 2 is general in nature and separate grounds are raised where several contentions are challenged separately, therefore , this ground is dismissed. 7. On Transfer pricing issues , Assessee has contested that it has raised an additional ground no 20 as per letter dated 8.10.2025 wherein it is mentioned that the impugned order is time barred as no valid reference appears to have been made to the ld. TPO as prescribed u/s. 92CA of the Act. The Ground is as under: - “ impugned order is time barred as no valid reference appears to have been made to Ld. TPO as prescribed u/s 92 CA of the act. Printed from counselvise.com IT(TP)A No.1564/Bang/2024 Page 8 of 64 8. It was argued that it is a jurisdictional ground and therefore may be decided. Assessee relied upon several judicial precedents that jurisdictional ground can be raised at any time. 9. The ld CIT DR vehemently objected stating that no such issue was raised before ld AO/ TPO or DRP and now it cannot be raised after such a long time. 10. On hearing the parties, we find that the ground raised is on jurisdictional issue and therefore the same is admitted. 11. The brief facts of the case show that assessee company provides design services for semiconductor industry such as analog and mixed signal design services for data converters, custom clocking circuits and power management modules. As per the profile of the assessee, it performs the functions of System & software design, Implementation & Unit Testing, Integration & System Testing. The general management function carried out by the assessee is Corporate strategy determination, Finance, Accounting, Treasury & Legal function, Human Resource Management Function. 12. The assessee received a notice u/s. 143(2) of the Act dated 29.6.2021. As the National Faceless Assessment Scheme was implemented, the case was assigned to the Assessment Unit Wing wherein a notice u/s. 142(1) was issued on 7.2.2022 electronically through centralised system of the department. Printed from counselvise.com IT(TP)A No.1564/Bang/2024 Page 9 of 64 13. In Form 3CEB filed by the assessee, it was noted that assessee has entered into international transaction with its AE and thereafter a reference was made to the Transfer pricing officer [ the ld TPO ] as per provisions of section 92CA(1) of the Act after obtaining statutory approval from the PCIT for determination of the ALP. Such reference was made from the AO Technical Unit. 14. It was found that assessee has entered into international transaction of provision of IT Services amounting to Rs. 38,40,50,845/-. The margin of the assessee being Operating Profit/Operating Cost (OP/OC) was found to be 18.22 % as per annexure 6 of TPSR. In its TP Study Report [TPSR], the assessee adopted Transaction net Margin Method [ TNMM] as the most appropriate method considering the profit level Indicator [ PLI] of operating Profit to operating cost [OP/OC] ratio selecting itself to be a tested party, also combining the IT services segment and intercompany account receivable together as per para 5.1.3 of the TPSR, selected 15 comparable companies whose weighted average margin based on three years’ financial statement is 18.22%. For the purpose of benchmarking, Capitaline Neu and Ace Tp database was used and stated International Transaction to be at Arm's length. 15. The ld. TPO, on examination of the TPSR and annual accounts of the assessee, recomputed the margin at para 2.1.2 of the TP order at 12.06%. The ld. TPO further examined the filters adopted by the assessee and held that out of 13 filters used by the assessee, 10 are Printed from counselvise.com IT(TP)A No.1564/Bang/2024 Page 10 of 64 appropriate and 3 are not appropriate. The TPO also noted that the business profile and TPSR show that assessee is providing ‘Engineering & Design services’ as per the company overview reported at para 7.1 of the ‘Notes to the annual accounts’ and further in the ‘revenue recognition policy’ also, assessee has stated that revenue is recognised of providing design services to semiconductor business. The ld. TPO also looked at the background given in the segment reporting of annual accounts at para 1.1 wherein it is stated that assessee was incorporated on 31.10.2025 and is primarily engaged in providing a range of design services in the semiconductor space. The company offers integrated portfolio of services to its clients in key domains including digital, analog, high speed physical interface IP, Embedded memory compiler, EDA and modelling. Therefore the ld. TPO proceeded to benchmark the transaction classified under ‘Engineering & Design Services’. The TPO challenged the export filter ,nature of the business and rejected the TPSR. He carried out the fresh search using 7 filters, also examining 15 comparable selected by the company, used Prowess & Capitaline database, used the keywords of ‘Design and Programming of Custom Software, Analysis Design and Programming of Custom Software, Consultancy, Analysis, Design and Programming of Custom Software, Consultancy on the Best Solution and Production of Software to realize this Solution, Architectural & Engineering Activities & Related Technical Consultancy etc. He carried out the search on 11.5.2023, reached at a final set of 6 comparable from Printed from counselvise.com IT(TP)A No.1564/Bang/2024 Page 11 of 64 Prowess and Capitaline databases. He also used AceTP database and thereafter reached at 10 comparable companies whose margin was arrived at 35th percentile of 22.49% and 65th percentile at 30.15% and at median of 26.64%. Based on this search process, show cause notice was issued to the assessee. 16. The assessee objected to the inclusion of L&T Technology Services, X S Cad India P. Ltd., Tata Elxsi Ltd., Taal Tech India P. Ltd., Mahindra Consulting Engineers Ltd., KPIT Technologies Ltd., Sikraft Infotech P. Ltd., Wood India Engg. & Projects P. Ltd., ASM Technologies Ltd. & Cadsys (India) Ltd. Thus assessee objected to all the 10 comparable selected by the TPO. Assessee also objected regarding the computation of the margin of the assessee. 17. On computation of assessee’s margin, the ld. TPO found that assessee has paid one time additional bonus of Rs. 402 lakhs and also share based payment to employees of Rs. 952 lakhs. Assessee in annexure 6 of TPSR while computing margin, has increased margin by the above amount stating it to be extraordinary expense. When questioned, it was submitted that assessee treated them as extraordinary expenses as those are on account of acquisition of assessee by HCL Technologies Ltd. and hence treated them as non- operative. The ld. TPO after considering the explanation of the assessee held that share based payment to employees is not claimed as deduction, the cost related to the vested shares was accepted as assessee did not claim it as deduction. with respect to the unvested Printed from counselvise.com IT(TP)A No.1564/Bang/2024 Page 12 of 64 shares as on 31.3.2020 amounting to Rs.2.76 crores out of Rs. 9.52 crores were held to be operating expenditure, based on accounting and disclosures in accounts as staff cost. Further the bonus payment of Rs. 4,02,00,000 was also considered as operating expenses. 18. The assessee claimed that write back of provision for doubtful debt as well as other miscellaneous income is to be considered as operational revenue. The ld. TPO rejected the same stating that debts may pertain to different period than the year under consideration and this view is also backed by safe harbour rule. 19. Assessee claimed that it has entered into transaction with AEs which is only 26.36% of the total revenue and therefore even otherwise the TP adjustment should be restricted to the above transaction only. The ld. TPO held that as the arm’s length margin is derived through TNMM approach, there is no reason to suspect that non-AE transaction would lead to profit shifting. Further if TP adjustment is restricted to AE transaction, it implies that rest of the profit shifting has happened only in non-AE transaction, which is not logically feasible. Accordingly this argument was rejected. 20. The assessee also requested for working capital adjustment which the TPO did not allow stating that it was not demonstrated by assessee that there is difference in working capital and there is cost of it. 21. Based on this, finally 8 comparable were retained whose median margin was 23.58%, 35th percentile at 17.79% and 65th percentile at Printed from counselvise.com IT(TP)A No.1564/Bang/2024 Page 13 of 64 32.49%. Accordingly operating revenue of Rs. 146.69 lakhs was having arm’s length value of Rs. 16,176 lakhs and accordingly adjustment of Rs. 1508 lakhs was made in the Engineering & Design segment of the taxpayer. 22. The ld. TPO also found that assessee has outstanding receivable from its AE beyond the specified due dates and therefore held it to be a separate international transaction required to be separately benchmarked, accordingly such interest was benchmarked at Rs. 19,94,051/-. The ld. TPO noted that the invoices are in US $ and accordingly same was computed considering LIBOR. 23. The ld. TPO also found that assessee is also providing corporate guarantee to its US entity of $ 95,000 in favour of Interra Inc. and therefore stated it to be an independent international transaction for which corporate guarantee fee should have been received by the assessee @ 2% and accordingly computed the ALP of the same at Rs. 14,06,000/-. 24. Accordingly the total adjustment u/s. 92CA of the Act of Rs. 15,42,00,051 was made by order u/s. 92 CA(3) of the Act dated 20.7.2023. Based on this draft assessment order, order u/s. 144C(1) of the Act was also passed on 5.9.2023 wherein the total income of the assessee was computed at Rs. 33,91,51,465/-. 25. The assessee filed objection before the ld. DRP which issued a direction on 4.6.2024 and based on that an order giving effect was Printed from counselvise.com IT(TP)A No.1564/Bang/2024 Page 14 of 64 passed by the TPO on 14.6.2024. As per the same adjustment with respect to Engineering & Design Services segment was retained at Rs. 15,08,00,000, interest on delayed receivable is also retained at Rs. 19,94,051, however the corporate guarantee was reduced to Rs. 7,03,000 @ 1% instead of 2% based on applicable safe harbor rule . Thus the total adjustment of Rs. 15,34,97,051/- was made. The final order was passed determining total income at Rs. 33,66,82,538. This order is under challenge. 26. The first jurisdictional issue is Whether reference made by the Assessment Unit to the Ld TPO is Invalid and hence the assessment order is invalid. [Ground No 20] 27. The ld. AR vehemently referred to additional ground No. 20 to be decided first. He stated that the order passed by the TPO on 20.7.2023 at para 2 states that reference u/s. 92CA of the Act has been received from the AO (Technical Unit). He submitted that the AO being a Technical Unit has made a reference to the TPO. It was his submission that the provisions of section 130 of the Act enables the CBDT for notifying the scheme for Faceless jurisdiction of the income tax authorities. He referred to the clause (a) & (b) of section 130 (1) of the Act. He then referred to the Scheme framed vide Notification dated 28.3.2022 and then referred to provisions of section 144B of the Act. He specifically referred to clause (vi) of section 144B(1) to state that where a request is made by the Assessment Unit under clause (b) of clause (iv), the request shall be Printed from counselvise.com IT(TP)A No.1564/Bang/2024 Page 15 of 64 assigned by NFAC through automated allocation system and further clause (b) provides such request shall be to a technical unit through an automated allocation system. He further referred to section 144B(3) where in clause (iv), the Technical Unit is empowered for transfer pricing audit. He then referred to the provisions of section 144B(4) stating what are the authorities in the assessment unit, verification unit, technical unit and the review unit specified. He thereafter referred to clause (vi) of section 144B(6) as well as provisions of section 144B(8) wherein the powers are assigned to the authorities in charge of National Faceless Assessment Centre to approve the case of the AO with prior approval of the Board. Based on this, he referred to the order passed in the impugned case. Coming to the TP order passed in this case by the ACIT, TP-2(2)(1), Bangalore, who is a physical authority who does not have any power to pass an order and how the allotment of the TP audit was made to an authority physically when the process is faceless. Accordingly he submitted hat the process prescribed is not followed and therefore reference made by the TPO to the ACIT, TP(2)(2)(1), Bangalore is invalid and therefore the whole TP adjustment made deserves to be quashed. Secondly, if T P Order is held to be invalid and quashed , consequent assessment order, as assessee is not an eligible assessee u/s 144C (13 ) also gets barred by limitation in absence of any variation. 28. The ld. CIT(DR) submitted that there is a complete compliance of the Scheme, provisions of the I.T. Act and therefore the argument of the Printed from counselvise.com IT(TP)A No.1564/Bang/2024 Page 16 of 64 ld. AR deserves to be dismissed. The ld. DR referred to the report of the ld. AO dated 8.11.2024 which accompanies the order sheet entries. She referred to the order sheet entry dated 20.11.2021 where the proposal for TPO reference was made from Assessment Unit, it went to Range Assessment Unit and on 25.11.2021 the proposal was approved from the CIT (Assessment Unit). She further referred to the order sheet entry dated 3.12.2021 wherein the Technical Assistance Unit from National Faceless Assessment Centre sent to Technical Unit only. She further referred to the letter dated 30.11.2021 from National Faceless Assessment Centre, Delhi to the Technical Unit wherein the copy of TP report in Form no 3CEB, copy of the approval was sent. She further referred to the letter dated 7.6.2022 from the Technical Unit of the Income Tax Department to the ld. TPO i.e., ACIT, TP(2)(2)(1), Bangalore stating the reference is received from Assessment Unit. She further referred to the similar letter dated 9.3.2022 & 12.7.2023. Accordingly she categorically submitted that there is complete compliance with the law. The ld. CIT(DR) further stated that as per the provisions of section 144B(3), 144B(1), 144B(vi) and further provisions of the Act clearly show that Assessment Unit sent a proposal for TPO reference on 20.11.2021 to PCIT (Assessment Unit) for approval, who approved the proposal on 25.11.2021 and therefore thereafter the proposal for Technical Assistance has gone to Technical Unit, National Faceless Assessment Centre to the TPO as the complete order sheet shows. Therefore the reference was Printed from counselvise.com IT(TP)A No.1564/Bang/2024 Page 17 of 64 according to the provisions of law as clearly seen from the order sheet noting. She further submitted with regard to the contention of the assessee that TPO assistance in determining the ALP should also be faceless that there is no such provision. She further referred to the provisions of section 92CA of the Act and stated that all the specific provisions of the Act has been followed meticulously in this case. Therefore the argument advanced by the ld. AR is devoid of any merit. 29. The ld CIT (DR) further stated that identical arguments were advanced by the same counsel in Ucweb Mobile Private Limited, Gurgaon vs Assessment Unit, Income Tax in [ITA No. 3945/Del/2024 [Assessment Year: 2020-21] which is decided by order dated 30.5.2025 wherein the Coordinate Bench vide para 10 has dismissed this ground. She further submitted that it is the same counsel who argued that case and has not brought this case to the notice of the ITAT but arguing the case on the same lines. It was further stated that, fairly, the Ld AR should have brought this to the notice of the bench. Accordingly, that decision of the ITAT also binds this Bench and for this reason also, this ground deserves to be dismissed. 30. In the rejoinder, the ld. AR vehemently reiterated the arguments and submitted that in Faceless Assessment Scheme a separate procedure is prescribed which is complete and if not followed, then the order deserves to be cancelled. He submitted that in the present case, there Printed from counselvise.com IT(TP)A No.1564/Bang/2024 Page 18 of 64 is a clear violation of the process set up. With respect to the decision of the Coordinate Bench cited by the ld. CIT(DR), he submitted that Miscellaneous Application is pending for disposal against decision cited by the ld DR as the assessee did not argue the case conclusively before that bench as the issue was to be decided on merits of the case . He submitted that miscellaneous application is heard, and order is awaited. So that decision will not bind the ITAT. He promised to submit the copy of the MA order in that case to the bench. 31. We have carefully considered the rival contentions and perused the orders of the ld. lower authorities and find that the issue is squarely covered by the decision of the coordinate Bench in Ucweb Mobile Private Limited, Gurgaon vs Assessment Unit, Income Tax in [ITA No. 3945/Del/2024 [Assessment Year: 2020-21] on 30 May, 2025] in para 5 to 10 as under:- “ 5. Ground No. 1 is in relation to the limitation as according to assessee, the reference made to the TPO was not in accordance with law. 6. Before us, ld.AR of the assessee submitted that the order is barred by limitation as reference made to TPO was invalid. He drew our attention to the order of TPO wherein in First para of the order, the TPO observed that reference was received from AO- Technical Unit for determining the ‘Arm’s Length Price’ u/s 92CA(3) in respect to the International transactions entered into by the assessee. He further submits that as per section 144B of the Act, there is no provision that Technical Unit can make reference to TPO, as Technical Unit itself is authorised to perform functions of providing technical assistance on transfer pricing issues and itself is a Technical Unit. Thus, delegation by one Technical Unit Printed from counselvise.com IT(TP)A No.1564/Bang/2024 Page 19 of 64 under faceless regime to TPO is not permissible as per the provisions of Act. Under these circumstances, ld. AR submits that extended period of limitation u/s 153(4) of the Act of Twelve months (12 months) would not be available in absence of valid reference to TPO. He thus prayed that the order being barred by limitation and therefore, deserves to be quashed. 7. Per contra, the ld. CIT DR submits that under faceless assessment regime, there is no difference between the AO who completed the assessment and AO technical unit and both are functioning to complete / assists the assessment proceedings. According to ld. CIT DR, there is no error in making reference to the TPO by the AO-Technical Unit who assisted the AO - Assessment unit on technical issues to complete the assessment and in this process, has made reference to TPO for determination of arm’s length price of international transactions. Thus, the consequent proceedings are not barred by limitations and he prayed accordingly. 8. After careful consideration of the facts and arguments of both the parties, to decide this issue, we first examine the provisions of section 92CA(1) of the Act which are as under: 92CA. Reference to Transfer Pricing Officer (1) Where any person, being the assessee, has entered into an international transaction or specified domestic transaction in any previous year, and the Assessing Officer considers it necessary or expedient so to do, he may, with the previous approval of the Principal Commissioner or Commissioner, refer the computation of the arm's length price in relation to the said international transaction or specified domestic transaction under section 92C to the Transfer Pricing Officer. (10) …….…. Explanation.—For the purposes of this section, \"Transfer Pricing Officer\" means a Joint Commissioner or Deputy Commissioner or Assistant Commissioner authorised by the Board to perform all or any of the functions of an Assessing Officer specified in sections 92C and 92D in respect of any person or class of persons. 9. Sub-section (3) of section 144B of the Act, provides the scope and role of various units under faceless assessment such as National Faceless Assessment Centre (NFAC), Regional Faceless Assessment Centres, Assessment Units (AU), Verification Units Printed from counselvise.com IT(TP)A No.1564/Bang/2024 Page 20 of 64 (VU), Technical Units (TU) and Review Unit (RU). The relevant role of Technical Units (TU) as defined in clause (v) of sub- section (3) of section 144B is as under (v) technical units, as it may deem necessary to facilitate the conduct of faceless assessment, to perform the function of providing technical assistance which includes any assistance or advice on legal, accounting, forensic, information technology, valuation, transfer pricing, data analytics, management or any other technical matter which may be required in a particular case or a class of cases, under this section; 10. Section 92CA(1) of the Act empowers the Assessing Officer to make reference to TPO for the computation of arm's length price of international transactions. Further, the TPO as defined in explanation to section 92CA to be the person authorized by board to perform functions of AO specified in section 92C. In sub- section 3 of section 144B, roles of Technical unit is clearly spelt out according to which, functions of technical unit includes assistance or advice on transfer pricing issues. During the course of performing such function, the technical unit can obtain advice from the TPO on the issue of determination of Arm’s Length price of international transaction as they are expert in this field. Thus, the reference by technical unit to TPO is in accordance with the provisions of the Act and therefore, consequent orders passed are not barred by limitations. Accordingly, Ground of appeal No. 1 of the assessee is dismissed.” 32. Now it has also come to our notice that against the order of the ITAT assessee preferred miscellaneous application in MA No M.A. 183/Del/2025 [In ITA No. 3945/Del/2024][Assessment Year : 2020- 21] which is dismissed on 06/08/2025 as under :- “The assessee has filed Miscellaneous Application under section 254(2) of the Income Tax Act, 1961 (\"the Act\") against the appellate order passed by the Tribunal in ITA No. 3945/Del/2024 order dated 30.05.2025 for the Assessment Year 2020-21 under section 254(1) of the Act. Printed from counselvise.com IT(TP)A No.1564/Bang/2024 Page 21 of 64 2. In this application, it is stated that the order of Tribunal contained a mistake apparent on record to the extent that the AR of the assessee has not concluded his arguments in respect to Ground No.1 and proceeded to make submission on merits. Thus, the Jurisdictional ground taken in Ground of appeal No. 1 was not concluded and was kept open for adjudication for any other appeal. It is thus, prayed that the order of the Tribunal in rejecting Ground No. 1 of appeal of the assessee constitute a mistake apparent on record u/s 254(2) of the Act and it is requested to modify the conclusion taken in Ground No. 1 by us. Reliance is placed on the judgement of Hon'ble Supreme Court in the case of Honda Siel Power Products Ltd. vs CIT [2007] 295 ITR 466 (SC). Further reliance placed on the judgement of Hon'ble Supreme Court in the case of S.Nagaraj and Ors. vs State of Karnataka & Ors. [1993] Supp. (4) SCC 595 wherein it is held was that \"technicalities cannot come in the way of doing justice by correcting errors and it is legal and constitutional obligation of the Court to set it right buy recalling its order.\" He thus, prayed accordingly. 3. On the other hand, Ld.Sr.DR for the Revenue objected to the M.A. filed by the assessee and submits that during the course of hearing. Ld.AR advanced certain arguments in respect of Ground of appeal No.1 taken and counter arguments were also made by Ld. CIT DR. If the assessee was not willing to pursue Ground of appeal No.1, the same should be withdrawn or not pressed which has not been done therefore, there is no error in Printed from counselvise.com IT(TP)A No.1564/Bang/2024 Page 22 of 64 the order of Tribunal and M.A. filed by the assessee deserves to be dismissed. 3. Heard the contentions of both parties and perused the material available on record. From the perusal of record, we find that during the course of hearing, Ld.AR of the assessee made submission on Ground of appeal No.1 taken with regard to jurisdiction and thereafter, proceeded to argue on the merits of the case. From the records, it is seen that the assessee has not withdrawn Ground No.1. Moreover, in the written synopsis filed before us, a brief submission is made in respect of Ground of appeal No.1 taken by the assessee which reads as under:- GROUND NO. 1: ASSESSMENT TIME BARRED IN ABSENCE OF VALID REFERENCE ΤΟ ΤΡΟ 7. \"Impugned order is barred by limitation as reference made to TPO is invalid. Extended period of limitation under section 153(4) of the Act of 12 months would not be available in absence of valid reference to TPO. 8. Jurisdiction invoked to conduct faceless assessment under section 144 B by issuance of section 143(2) notice can only be transferred to jurisdictional AO by following prescription under section 144B(8). Further section 144B details functions of Assessment Unit, Technical unit, Verification Unit and Review Unit (section Printed from counselvise.com IT(TP)A No.1564/Bang/2024 Page 23 of 64 1448(3)]. Section 130 facilitates concurrent jurisdiction for faceless assessment officers. Careful consideration of section 144B would show that there is no provision for Technical Unit to make reference to TPO, as Technical Unit itself is authorised to perform functions of providing technical assistance for transfer pricing. Further delegation by one TPO (Technical Unit under faceless regime) to TPO (erstwhile physical assessment regime) is not permissible on a plain reading of provisions of Act. 9. Appellant bona fide believes that it would succeed on this jurisdictional challenge itself. However, since repeated adjournments were being taken by Respondent-Department on pretext of obtaining inputs from field offices in relation to technical ground (kindly refer to order sheets dated 16.01.2025 and 05.03.2025). solely in the interest of expediting consideration of its Appeal, Appellant is also making submissions on all the grounds of appeal relating to merits. Appellant prays for consideration of all grounds including jurisdictional ground as briefly mentioned above and in the event Hon'ble Tribunal grants relief on grounds relating to merit, Appellant prays that it may kindly be permitted to reserve its right to contest above technical ground before appropriate forums, should the need arise at later stages of litigation/future date.\" Printed from counselvise.com IT(TP)A No.1564/Bang/2024 Page 24 of 64 4. Since this Ground of appeal is not withdrawn by the assessee and submissions were also put forth therefore, adjudication of ground of appeal is not an error. Further, it is also is to be kept in mind that while passing the order, every ground of appeal should be considered and disposed of which has been done in the instant case and if any ground is left unanswered, there might be a situation where the assessee/ Revenue file MA for adjudication of the same. Thus, we find no error in the order of the Co-ordinate Bench in ITA No. 3945/Del/2024 for AY 202- 021 accordingly, M.A filed by the assessee is dismissed. 5. In the result, M.A. filed by the assessee is dismissed.” 33. Thus, we find that this issue is squarely covered against the assessee by the above decision. 34. In this case unlike case before Delhi benches, assessee completely argued his case. Though nothing else is required to be stated in that ground however we also find that the arguments of the ld AR does not sustain for following further reasons. a) The Order sheet entries shown by the ld DR clearly shows that there is complete compliance of the provision of section 144B of the act. The ld CIT DR explained step by step process of referring which was found to be flawless and in accordance with the provisions of the Act. Printed from counselvise.com IT(TP)A No.1564/Bang/2024 Page 25 of 64 b) When the order sheet entries were shown to the ld Counsel, no infirmities were pointed out. there is no rejoinder on the same. C) No provisions were shown before us by assessee that the Transfer pricing assessment needs to be made in faceless manner. d) Though provision of section 92 CA (8) to (10) are enacted with effect from 1/11//2020 but no such schemes are framed. 35. Thus, ground No. 20 of the appeal is dismissed holding reference to be valid in accordance with the provisions of the act and assessment order is also passed in time as assessee is an 'eligible assessee'. 36. Second issues argued is on ground no 5 of the appeal as under :- 5 Impugned order erred in treating exceptional/extraordinary bonuses paid to employees and cost towards ESOP expense as operating cost for purposes of working out Appellant margin. 37. On the merits of the case, the ld. AR submitted that the ld. TPO has not considered that Employee Stock Option Cost arising on acquisition of assessee by HCL, unvested portion should also have been considered the non-operating expenses. He referred to the TPSR page 49 and also page 35 of the appeal set where in the issue sis discussed by the dl TPO in his order. He further referred to P&L Printed from counselvise.com IT(TP)A No.1564/Bang/2024 Page 26 of 64 account of the assessee to show the transaction and also Note No. 4.36 of the financial statements. He further referred to the letter dated 26.7.2023 placed at page 938 of PB regarding explanation submitted before the ld. TPO and also referred to DRP direction at page 112-116 of the appeal set. In the end, he submitted that the Coordinate Bench decision in Capgemini in TS-45-ITAT-2013 at para 2.2, 2.6 & 5.2 covers the issue in favour of the assessee. Therefore even unvested portion of the ESOP Scheme should also be considered as non-operating expenditure and to this extent, the profit margin of the assessee reduced by the TPO is not correct. 38. He further stated that a sum of Rs. 4,02,00,000 has also been considered as operating expenditure which the assessee says that it is onetime payment and therefore should not have been considered as operating expenditure by the TPO. He referred to page 939 of PB and also page 37 of the appeal set as well as the DRP direction at para 3.3 to 3.4 and thereafter relying upon the decision of Capgemini (supra) stating that these expenditure are also not operating expenditure and should not be considered in computation of the margin. 39. The ld CIT DR referred to the order of the ld TPO and directions of the ld DRP on this issues and stated that the ld TPO has given detailed reasons and therefore those items cannot be considered as operating expenses. She submitted that except computation of margin at page no 230 of the paper boo being annexure 6 of the Printed from counselvise.com IT(TP)A No.1564/Bang/2024 Page 27 of 64 TPSR, there is no whisper in the whole T P study report about why this expenditure is non operating. Assessee has computed the margin by reducing the above sums from the cost of the assessee without assigning any reason. When assessee was questioned, it has come out with the explanation before ld TPO. She submitted that decision of ITAT relied up on does not apply to the facts of the case. 40. We have carefully considered the rival contention and the orders of the ld. Lower Authorities. The learned TPO has dealt with this issue at page number 27 of 67 of his order. The learned transfer pricing officer noted that assessee has bifurcated the expenses as non- operating. He noted that assessee has incurred one-time additional bonus, retention bonus, retention bonus against phantom stock option plan of ₹ 402.21 lakhs and further share-based payments to employees of ₹ 952.13 lakhs totalling to ₹ 1354.43 lakhs. The claim of the assessee is that for share-based payments to its employees it is a part of share purchase agreement with HCL Ltd who has agreed to acquire the shares allotted or to the allotted to the employees of the assessee at the rate of ₹ 241 per share. The assessee has booked an additional one-time ESOP cost in its books based on difference between the agreed purchased right by HCL Ltd at ₹ 241/- per share and earlier market value/exercise price per share was ₹ 74/–. Further share-based payments to employees are of two types (i) share-based payments on unvested shares and (ii) Share based payments on vested share. The breakup of additional one-time ESOP cost is provided that the value of unvested shares as on 31 March 2020 is ₹ Printed from counselvise.com IT(TP)A No.1564/Bang/2024 Page 28 of 64 27,599,590/- and vested/options exercised during the year is ₹ 67,613,151/- totalling to ₹ 95,212,741/–. Assessee explained the difference of both in the following manner: – vested share are shares of employees which are totally in Demat accounts of the employees and assessee does not have any authority over them. However, those were acquired by the HCL at ₹ 241/– from the employees. Correspondingly, assessee has made a notional entry of the difference between agreed price by HCL at the rate of ₹ 241/- and earlier fair market value/exercise price portion of ₹ 74/–. The entry for vested shares is only for accounting purposes and therefore the same has not been claimed as deduction. The notional entry with respect to vested shares is disallowed in income tax return from the computation of total income furnished by the assessee. Since the cost with respect to share-based payments to employees was not claimed as deduction, the cost relating to vested shares was accepted to be not impacting margin and the same is treated by the learned transfer pricing officer as non-operating expenditure. There is no dispute on this issue. 41. However the dispute is with respect to the unvested shares which are still with the trust of the assessee. Correspondingly the assessee is claiming that the valuation of the share price from ₹ 74 share to ₹ 241 per share should also be treated as an extraordinary expenditure. To understand, whether the amount is extraordinary or not, the learned TPO explained that ESOP expenses are booked every year in its profit and loss account which is claimed as deduction by the Printed from counselvise.com IT(TP)A No.1564/Bang/2024 Page 29 of 64 assessee. The assessee explained that it gave ESOP nominal price to the employees which will vest over a certain period of time, let us say 10 years. After every year unvested shares are valued at the difference between the fair value of the shares and the nominal price is booked as a deductible expenses. The same is done for all the years , this year also as is the case with the other years. The assessee has claimed the difference between the share price at which HCL agreed to acquire shares at the rate of ₹ 241 per share which is the fair value and the nominal price as deductible expenses. These practices carried by the taxpayer every year and is not a one-time practice. Therefore the learned TPO rejected the explanation of the assessee to treat share-based payments towards vested shares as extra ordinary expenditure. The learned transfer pricing officer has considered unvested shares difference as not an extraordinary expenditure. 42. With respect to the bonuses paid to the employees for various reasons, the learned TPO noted that assessee has also paid bonus to some of its employees which is in the form of retention bonus. As the bonus to employees happen time to time and the forms part of the employee benefit expenses for which assessee’s claim for deduction is allowed every year, therefore same is also not an extraordinary expenses. The claim of the assessee with respect to the bonus expenditure was also considered as operating expenses. Printed from counselvise.com IT(TP)A No.1564/Bang/2024 Page 30 of 64 43. The direction of the learned dispute resolution panel at paragraph number 4.4 has categorically held that as the dispute only relates to the treatment for unvested shares those are with the assessee/trust it was held that as the assessee value the same year to year and difference between the fair value of the shares and the nominal value is booked as a deductible expenses, the same process has been followed in the current year also by the assessee. Since this practices carried by the assessee every year and it is not a one-time practice, therefore it cannot be said that these expenses are extraordinary in nature and cannot form part of the operating cost. The learned DRP further held that these expenses are also accepted by the learned transfer pricing officer according to the accounting policy of the assessee and the TPO has also not adopted differential policy towards comparable and the arm’s-length range derived from the comparable take care of any variation that arise due to different financial circumstances. Therefore this ground of objection rejected. 44. The learned authorised representative vehemently supported before us that the issue is squarely covered in favour of the assessee by the decision of the coordinate bench in case of Capgemini Limited ITA No. 7861/Mum/2011 Assessment Year : 2007-08 where in facts are as under :- “2.6 The TPO thereafter computed the operating margin in case of the assessee. It was noted by him that the operating income of the assessee was Rs. 557.69 crores and operating expenses Printed from counselvise.com IT(TP)A No.1564/Bang/2024 Page 31 of 64 were Rs. 523.91 crores. This gave operating profit as percentage of operating cost at 6.44% whereas the assessee had taken the operating margin at 13.9%. The TPO noted that the assessee had excluded the one time expenditure on ESOP amounting to Rs. 46,41,96,501/- which had been debited to P/L Account and which resulted into increased margin. The assessee explained that Kanbay International (Erstwhile parent company of KSIL) had implemented stock option schemes from time to time starting since 1998 for the eligible employees of KSIL and as per scheme 1/4th of the options granted to the employees vested in July each year. These options were exercisable within a given time frame within 10 years but in most cases individuals chose to substantially defer exercise until well after the vesting date since that deferred taxation during a period of expected appreciation in the value of the shares. The assessee estimated that on average vested options would normally be expected to be exercised over at least a five year period. It was pointed out that on February 8th 2007, Kanbay International was acquired by Capgemini Group Worldwide and as per terms of acquisition, employees of KSIL were treated as having exercised all the stock options in Kanbay International for consideration of USD 29 per share resulting in an accelerated exercise of options. The consideration was paid immediately for all options that had vested as on that date which resulted Printed from counselvise.com IT(TP)A No.1564/Bang/2024 Page 32 of 64 into an exceptional cost of Rs. 46,41,96,501/- in the month of February 2007. Assessee treated the ESOP cost, as exceptional in nature arising out of acquisition. The assessee, therefore, in the TP study excluded these costs for AY .07-08 the purpose of computation of margin in case of the assessee and this exceptional cost was amortized over a period of five years starting from Financial Year 2007-08 in TNMM analysis of subsequent years. 2.6.1 TPO however did not accept the claim of the assessee of making adjustment while computing its margin on account of ESOP cost. It was observed by him that any adjustment in this regard had to be made in accordance with rules. He referred to Rule 10B(1)(e)(iii) as per which adjustment on account of any difference between international transaction and comparable uncontrolled transaction or between enterprises entering into such transactions could be made only in case of comparable uncontrolled transactions. The TPO thus concluded that there was no provision for making adjustment in the margin in case of the assessee which had to be computed as per accounting principles. It was further observed by him that the assessee this year had claimed ESOP expenses of Rs.46,41,96,501/- against accelerated ESOP cost in addition to similar expenses of Rs.23,90,49,510/- booked as part of personal cost. The ESOP cost in assessment year 2006-07 was only Rs.10,35,30,274/- and in assessment year 2005-06 it was Printed from counselvise.com IT(TP)A No.1564/Bang/2024 Page 33 of 64 Rs.36,02,49,446/-. The assessee had placed reliance on the decision of the Pune Bench of the Tribunal in the case of Skoda Auto India Pvt. Ltd. vs. ACIT (30 SOT 319) in support of the claim for adjustment in case of margin of the assessee. The TPO distinguished the case on the ground that in that case it was held that adjustment could be made on account of functional differences but in the present case there was no functional difference between the international transactions or between the enterprises. The TPO AY .07-08 further observed that the profit level indicator adopted in case of TNMM has to be an indicator which would be real profit. Any indicator which may indicate increased profit or reduced loss by non- consideration of certain factors will not represent the actual state of affairs and by taking such indicators, any benchmarking done shall have no meaning under law. The TPO, therefore, rejected the claim of the assessee for making adjustment on account of accelerated ESOP cost. 3.1 Reverting to the issue of wrong margin adopted by TPO in case of the assessee, it was submitted that AO had wrongly considered the one time AY .07-08 ESOP cost debited by the assessee to the P/L Account while computing the margin. The said ESOP cost had been incurred by the assessee on account of acquisition of KSIL Worldwide by the Capgemini Group on 8.2.2007 resulting into accelerated exercise of ESOP options by the employees which otherwise on average could have been Printed from counselvise.com IT(TP)A No.1564/Bang/2024 Page 34 of 64 exercised over the subsequent five year period. It was an exceptional item of expenditure incurred by the assessee towards the end of financial year which was duly mentioned by the auditors in their report in para-5 of Schedule-15 as exceptional item pertaining to February 2007. Therefore, deducting such exceptional expenditure would not give the normal business profit which is required to be considered for the purpose of comparison. It was pointed out that it was because of this extraordinary expenditure that ESOP cost during the year had increased to 70.25 crores compared to 10.25 crores in the immediate preceding years. The ld. Sr. Counsel also referred to monthly expenditure on account of ESOP placed at page-6 of the paper book which showed that expenditure varied during the year from nil in January 2007 to maximum of Rs.6.10 crores in December 2006. It was also pointed out that this extraordinary ESOP cost had been amortized by the assessee over the subsequent 5 year period starting from assessment year 2008-09 which had been reduced from the profit while working out TP adjustments in the subsequent years as was clear from the details given at page-76 of the paper book which had been filed before TPO vide letter dated 28.10.2010. It was further submitted that the exceptional ESOP cost had been claimed by the assessee in the P/L account as same had been incurred during the year and not Printed from counselvise.com IT(TP)A No.1564/Bang/2024 Page 35 of 64 to reduce any tax liability because assessee was otherwise eligible for exemption under section 10A of the Act. 2 We first deal with the issue of computation of margin in case of the assessee for the purpose of comparison with the comparable. The TPO computed the margin as per profit declared in P/L account which gave net margin of 6%. The case of the assessee is that in the P/L Account, a sum of Rs. 46,41,96,501/- had been debited on account of extraordinary ESOP cost. This extraordinary ESOP cost had been incurred in the month of Feb.'2007 on account of acquisition of KSIL Worldwide by Capgemini Group on 8.2.2007 which resulted into accelerated exercise of ESOP options by the employees which otherwise could have, on average, been exercised over subsequent five year period. It was, therefore, urged that this being an exceptional item should be excluded from P/L account for the purpose of computation of margin. The authorities below have not accepted the request of the assessee on the ground that, under the provisions of Rule 10B(1)(e)(iii), an adjustment could be made only in case of comparables and not in case of the assessee. No dispute has been raised by the authorities below or ld. CIT-DR that this was a one-time cost incurred by the assessee due to acquisition. We also note from the monthly expenditure on ESOP cost for the relevant year that normal ESOP cost fluctuated between nil cost in January 2007 to the maximum of Rs.6.1 crores in December 2006. We further note that total ESOP cost in the immediate preceding year was only Rs.10.25 crores and only because of exceptional item this year, ESOP cost had gone up to Rs.70.25 crores. There cannot be any dispute that comparison of margin between assessee and comparable has to be made under identical conditions. No case has been AY .07-08 made by the revenue before us that any of the comparable, have claimed, any extraordinary item of expenditure on account of ESOP cost. Therefore, in our view, for the purpose of making proper comparison of the margin, one- time ESOP cost incurred by the assessee due to acquisition Printed from counselvise.com IT(TP)A No.1564/Bang/2024 Page 36 of 64 by Capgemini group towards the end of the year i.e. in Feb. 2007 has to be excluded. There is nothing in the Rules that prohibits adjustment in the margin of the assessee to remove impact of any extraordinary factors. AY .07-08 Toyota Kirloskar Motors Pvt. Ltd. (supra) in which adjustment made in case of the assessee on account of special warranty of Rs.15.90 crores which was found to be extraordinary expenditure of non- recurring nature to overcome the defects in the exhaust system, was upheld by the Tribunal. 5.2.2 Therefore, the view taken by the lower authorities that no adjustment could be made to the margin of the assessee on account of any extraordinary factors can not be upheld. It is also pertinent to point out here that the assessee has amortized this one-time ESOP cost over the subsequent five year period which was reduced from the profit of the assessee for the purpose of computation of transfer pricing adjustment. We, therefore, do not agree with the action of authorities below in not excluding the one-time ESOP cost and accordingly direct the AO to exclude the one time ESOP cost while computing margin in case of the assessee. The margin after excluding ESOP cost is stated to be 16.6% which may be verified by the AO” [underline supplied by us] 45. As per 'Notes to financial statements' for the period 31st of March 2020, Note No (K) relating to Equity settled stock-based compensation represents the cost related to stock awards granted to employees. The company measures stock-based compensation cost at Grant date, based on the estimated fair value of the award and recognises the cost net of estimated features on a straight-line basis over the requisite service. For each separately vesting portion of the award, as if award was in substance, multiple awards. The company estimates the fair value of stock option using the discounted cash flow valuation model. The cost is recorded under the head employee Printed from counselvise.com IT(TP)A No.1564/Bang/2024 Page 37 of 64 benefit expenses in the statement of profit and loss with corresponding increase in ‘share-based payment reserve’. Thus, as per the accounting policy of the company, it is a normal staff cost. 46. In the profit and loss account t employee benefit expenses at note number 4.19 provides for share-based payments to employees (referred 4.36) of ₹ 952.13 lakhs. Note number 4.36 of the accounts relates to the employee stock option wherein the assessee has four schemes. The salient feature of all the plans are explained there. According to schemes, number of options granted of 35,450, 6,29,000, 7,20,500 and 122,500 shares in each of these schemes. The movement in the each of the scheme and the cost recorded under the plans were also stated that. The movement in the options under all these four schemes are also provided. In the end it is mentioned that for the purposes of the valuation of the fair value of shares, the company has used discounted cash flow method. Further it is mentioned that value averaging fair value of the company options granted during the year ended on 31st of March 2019 is ₹ 241/– per share (previous year Rs. 74/–). The company has 1,54,800 outstanding options as at 31st of March 2020. Towards the outstanding options the company has recognised the sum of ₹ 335.24 lakhs and has classified as ESOP reserve. The balance liability as on 31 March 2020 is Rs Nil and as on 31st of March 2019 is ₹ 356.01 lakhs. Whole of the disclosure in the annual accounts of the company it is nowhere mentioned that out of the total cost of ESOP part of it is non-operational or extraordinary expenses. It states Printed from counselvise.com IT(TP)A No.1564/Bang/2024 Page 38 of 64 categorically that it is the normal expenditure of the assessee company. Thus, the accounts adopted by the company also do not have any extraordinary impact on the profit because of the ESOP plan. 47. In the income and expenditure account also it has not mentioned that there is an extra ordinary expenditure incurred by the assessee. The auditor’s report also do not show that these expenditure is extraordinary. Thus the annual accounts of the assessee and the auditor’s report wherein as categorically held that this is an ordinary business expenditure of the assessee. 48. In the transfer pricing study report placed annexure 6 of the report (page number 230 of the paper) the assessee has computed non- operating expenditure and reduced it from the total expenditure amounting to ₹ 1354.43 lakhs stated to be an extraordinary expenses. In the transfer pricing study report at page number 32 of the report , it is mentioned that as per the information provided by Sankalp India , the company earns an operating margin of 18.22% on operating cost for provision of IT services transaction (detailed computation enclosed in annexure 6 ). Thus there is no whisper in the transfer pricing study report that why the sum of ₹ 1354.43 lakhs is considered as an extraordinary expenditure except in the computation of margin same is reduced. 49. As per letter dated 3 June 2023, the assessee explained the computation of the assessee’s margin. The assessee after the Printed from counselvise.com IT(TP)A No.1564/Bang/2024 Page 39 of 64 computation of ₹ 1354.43 lakhs merely stated that the above- mentioned expenses are incurred because of the acquisition of assessee company by HCL technologies Ltd. These expenses merely by acquisition of the assessee by HCL not incurred in the normal course of operations and hence the same are liable to be considered as non-operating. It also tried to explain by showing the number of percentage of the share-based payments to the total employee cost. However, No where it is shown in the transfer pricing study report, in annual accounts as well as before the ld TPO that this is not an operating expenditure incurred by the assessee. Against this, the learned transfer pricing officer and the learned dispute resolution panel has given a detailed accounting policy and mechanism by which the assessee showing these expenditure as normal expenditure incurred by the assessee. 50. The decision of the coordinate bench is of Capgemini India ( P ) Ltd [ supra] relied upon by the learned authorised representative, we find that the facts in that case are different . The facts clearly show that in that particular case Capgemini acquired another company which has an option scheme for its eligible employees and as per that ESOP granted to the employees which were liable for vesting within time frame of 10 years but were not exercised. The assessee acquired a company vide agreement dated 8 February 2007 and as per terms of acquisition the consideration was paid. The consideration paid immediately for all the options that had vested as on the date of acquisition by the assessee of another company resulting into an Printed from counselvise.com IT(TP)A No.1564/Bang/2024 Page 40 of 64 exceptional cost of ₹ 46.41 crores. These facts are coming from paragraph number 2.6 of the order. Situation was reverse in this case as assessee was acquired by HCL and assessee is claiming the cost of ESOP. In that case Capgemini Acquired another company, incurred cost, paid it and claiming it to be exceptional cost. In the present case assessee was acquired by somebody else and assessee has made a provision. Such provision has not been paid or there is no payment at all of the above cost. The exceptional cost in that case was amortised over a period of five years starting from the financial year 2007-08 which is also exhibited in the analysis of TPSR of subsequent years. In the present case, as there is no payment, there is no question of amortisation of the same. In that case the auditor has also mentioned in the audit report that there is an exceptional cost incurred by the assessee as per paragraph number 5 of schedule 15. Before us, in the present neither the auditor nor the assessee treated it as an exceptional cost or extraordinary cost in its annual account. There is no whisper that the cost incurred by the assessee on employee stock option plan is an extraordinary cost in TPSR also. The assessee disclosed it as normal expenditure. Thus, the facts of Capgemini [supra] do not apply in this case. 51. Merely because there is an acquisition of the assessee, the provision made for the employee stock option scheme does not become a non- operating expenditure. It is rightly classified by the assessee as staff cost. Printed from counselvise.com IT(TP)A No.1564/Bang/2024 Page 41 of 64 52. In view of above we do not find any infirmity in the order of the learned transfer pricing officer and the direction of the learned dispute resolution panel in treating the employee stock option plan provision made by the assessee as operating expenditure as it is a staff cost of the assessee which is provided in the books of accounts according to the regularly and consistently followed accounting practices as per the accounting policy disclosed and the notes on accounts. Same is the case of other staff cost such as retention bonus etc. Accordingly ground number 5 of the appeal of the assessee is dismissed. 53. Ground no 6 is as under: - Impugned order erred in considering miscellaneous income, other comprehensive income and provision for doubtful debts, bad debts. rates and taxes as non-operating item for computing operating margins for comparison. Further margin computation of comparable companies suffers from several errors. 54. The LD AR stated that sum of Rs. 88.45 lakhs being the miscellaneous income earned by the assessee has not been taken by the TPO as operating revenue which is write back of the provision for bad and doubtful debts/ Miscellaneous income. He submitted that as doubtful debts have arisen out of business and provision is considered as operating expenditure, write back of the same is also considered to be operating revenue and margin should be increased to that extent. He further referred to the order of the TPO and Printed from counselvise.com IT(TP)A No.1564/Bang/2024 Page 42 of 64 direction of the DRP and submitted that both of them misread and did not consider the same as operating income. 55. The learned departmental representative vehemently supported the order of the learned TPO and the direction of the learned dispute resolution panel submitting that write back of the provision for doubtful debts could not be the operating revenue. 56. We have carefully considered the rival contentions and perused the orders of the learned lower authorities. The facts shows that assessee has reversed the original provision made for doubtful debts and considered it as an operational income. The learned TPO refused to consider the above explanation because it is merely a provision and not the actual expenses incurred during the previous year concerned and moreover the debts may pertain to different. Year then the year under consideration and therefore he rejected the same. He further relied upon the decision of the coordinate benches in case of Delhi, Telcordia technologies private limited (2012) 22 taxmann.com 96 and Thyssen Krupp India private limited TS – 46 – IT 18 – 2013 (2013) 33 taxmann.com 107. When the matter reached before the learned dispute resolution panel, as per paragraph number 5 objection number 5 the panel also agreed with the observation of the learned transfer pricing officer holding that assessee's justification is very vague and general. The assessee has not gone into specifics of the items to prove its point and make it clear why it considers these expenses to be operating in nature. The learned Printed from counselvise.com IT(TP)A No.1564/Bang/2024 Page 43 of 64 transfer pricing officer has adopted a uniform approach towards the assessee albeit as well as the comparable companies. We carefully find that the assessee has debited in the earlier years the provisions for doubtful debts and has reduced its margin which is now reversed in subsequent years and the amount is credited to the profit and loss account considering it as an operational income. When the provision was made it was to be considered as an operating expenditure naturally when the provision is written back it should also be considered as an operating expenses. It was not shown that when the provision was made it was not considered as operating expenses, thus, decision relied up on do not apply. We do not find any other reason envisaged by the learned TPO or the learned dispute resolution panel and therefore we agree with the contention of the learned authorised representative that miscellaneous income and provision for doubtful debts written back should be considered as operating income. Accordingly ground number 6 of the appeal is allowed. 57. The next ground 9 is with respect to the argument of the learned authorised representative that even otherwise the impugned order should have limited the transfer pricing adjustment to the controlled transactions only. He submitted that assessee also requested the ld. TPO to restrict the addition only to the extent of AE transaction which are only 26.36% of the total revenue. The TPO rejected the same and the DRP also disposed of the same in Objection No.9. He submits that this issue is squarely covered in favour of assessee by Printed from counselvise.com IT(TP)A No.1564/Bang/2024 Page 44 of 64 the decision of the Hon’ble Bombay High Court in the case of CIT v. Hindustan Unilever Ltd. reported in TS-538-HC-2016. Therefore the assessee must be granted the benefit of adjustment to the extent of AE transaction only. 58. The learned CIT DR vehemently objected to the same and submitted that there is no principal that in transfer pricing adjustment the addition is required to be restricted only to the extent of transaction with associated enterprises. It was submitted that it is neither provided in the rules in the act and there is no logic in restricting the transfer pricing adjustment to the extent of only associated enterprises transaction. 59. We have carefully considered the rival contention and perused the orders of the learned lower authorities. We find that assessee has submitted before the learned transfer pricing officer that the transfer pricing adjustment has to be restricted to the associated enterprise transaction only. To this the learned transfer pricing officer commented that one of the basic assumptions in transfer pricing is that the transaction between non associated enterprises are not tainted. The arm’s-length margin derived through transactional net margin method approach indicates what the operating profit percentage should have been. Given the fact that there is no reason or logic to suspect that a NON AE transaction would lead to profit shifting, the variation in the profit would solely be attributable to deficit payments received from the associated enterprise for sales Printed from counselvise.com IT(TP)A No.1564/Bang/2024 Page 45 of 64 made to them. If the transfer pricing adjustment is restricted to associated enterprise transactions, that implies that the rest of the profits shift has happened in the non-AE transaction which is not logically feasible. Therefore he rejected the contention of the assessee. 60. The learned dispute resolution panel in paragraph number 9.2 considered the submission of the assessee and held as under: – “9.2 having considered the submission of the assessee and on perusal of the international transactions undertaken by the assessee, it is seen that the panel that the taxpayer provides services to both associated enterprise and non-associated enterprises. On the basis of the benchmarking carried out, the TPO reached to a conclusion that the margins earned by the taxpayer are less than the margins of the comparable companies. Accordingly, an adjustment has been made to the profits of the taxpayer. The assessee wants that the adjustment should be restricted to International transactions only. In this regard, the assessee has submitted computation of adjustment restricting only to International transactions. However, the bifurcations of sales and cost between associated enterprises and non associated enterprises are not based on statutory audit. In order to consider the argument of the assessee that the adjustment should be restricted to only to associated enterprise transactions, the onus lies on the assessee to provide the Printed from counselvise.com IT(TP)A No.1564/Bang/2024 Page 46 of 64 segmental audited accounts and reliable computation of the profits and margins on transaction with AE and non-AEs. Needless to say, the segmental should be backed by its sound back up documents, allocation keys, etc. 9.3 the TPO has followed the transactional net margin method, selected appropriate comparables and made an adjustment after considering the relevant factors of tested party that i.e. assessee in comparison to the comparable as per the transfer pricing regulations. The TPO has worked out the arm’s-length cost as against the operating cost. The excess/shortfall has been adjusted to bring the profit of the assessee (tested party) on par with comparables. 9.4 further the assessee has not given any details regarding related to sales drawing quantitative relationship between segment wise cost and revenue. It is not correct recourse to arrive at the revenue realised relatable to the control cost by mere reliance on the macro cost and sales details. Hence, the data made available by the assessee is not suffice to arrive at a proportionate adjustment to be made with respect to AE transactions only. Accordingly the principle of proportionality is not relevant to the facts of the case and hence the case laws relied on by the assessee are distinguishable. 9.5 further, for a while, if the claim of the proportionate adjustment to restrict the international transaction with AE’s Printed from counselvise.com IT(TP)A No.1564/Bang/2024 Page 47 of 64 were to be considered, the arm’s-length price will never be attained in view of the details reasoning given above and in the absence of breakup of bifurcations of sales and cost between associated enterprises and non-associated enterprises. Further, the transaction with non-AEs were presumed to be at arm’s- length and therefore no arm’s-length price is required to be determined in that transaction. Applying the TNMM, the adjustment under section 92 CA has already been arrived by the TPO following transactional net margin method by selecting comparable is which are placed similarly in terms of functions, assets and risk. As discussed above, the proportionate adjustment is ideally feasible when the sales and relatable cost are audited and available with necessary documents. In this case, the complete details are not made available and hence it is not possible to consider the argument of the assessee. 9.6 as regard the assessee's reliance on the decision of the various courts, the above actual metrics was not brought to the knowledge of honourable courts and so those decisions cannot be relied upon and apply to the case of the assessee. Further the accounts of the assessee are not audited for a segment abnormally segment separately and hence the cost allocation between these two segments is not verifiable. In the backdrop of the above analysis, the adjustment in effect is done only to international transaction while normally transactions are presumed to be at arm’s-length in absence of segmental data. Printed from counselvise.com IT(TP)A No.1564/Bang/2024 Page 48 of 64 Considering the above actual position, the objection of the assessee is not accepted and therefore we uphold the adjustment made by the TPO.\" 61. Before us the assessee has relied upon the decision of honourable Bombay High Court in case of CIT versus Hindustan Unilever limited (2017) 394 ITR 73 wherein the order of the coordinate bench in Hindustan Unilever Ltd versus ACIT (2013) 22 ITR (T) 737 (Mumbai) was upheld. Further the learned authorised representative relied upon the decision of FMC India (P) Ltd versus assistant Commissioner of income tax (2023) 146 taxmann.com 200 (Bangalore) wherein at paragraph number 19.1 the coordinate bench has held that adjustment is required to be restricted to the international transactions relating to import of materials and finished goods entered with associated enterprises. On careful consideration of the above decision of the coordinate bench we find that it has been delivered following the decision of the coordinate bench in case of Hindustan Unilever Ltd versus additional Commissioner of income tax (2012) 20 taxmann.com 142 wherein it has been held that the honourable Bombay High Court did not admit the appeal of the revenue on this issue as ld Counsel for revenue gave up this issue. On careful consideration of the decision of the honourable High Court we find that at paragraph number three (a) with respect to the question number (a) which is with respect to whether on the facts and circumstances of the case and in law the ITAT was right in holding that benchmarking should be done only on the associated Printed from counselvise.com IT(TP)A No.1564/Bang/2024 Page 49 of 64 enterprises transaction and not for the entire turnover. The learned counsel for the revenue stated that all three questions dealt with the issue of justify ability of application of arm’s-length price only to a transaction and not to all transaction. He further admitted that the issue raised therein with regard to the transfer pricing adjustment stand concluded against the revenue and in favour of the respondent assessee by the decision of this court in CIT versus Tata jewellers exports private limited and therefore that ground was not admitted. 62. The coordinate bench in paragraph number 30 of the decision held as under:- “30. Provisions of section 92 provides that \"any income arising from an international transaction shall be computed having regard to the ALP\". Thus, the ALP has to be on international transaction and not in relation to assessee's entire sales or turnover. The second proviso to section 92C, though brought in statute by the Finance Act, 2009, w.e.f. 1st October 2009, provides that \"if the variation between ALP so determined and the price at which international transaction has actually been undertaken shall be deemed to be the ALP\", however, the same is indicative of the preposition that the ALP is to be determined only on international transaction. This, inter alia, means that the statute itself provides that the adjustment arising out of ALP should be with regard to international transaction and not on the entire turnover of the assessee. The transfer pricing mechanism Printed from counselvise.com IT(TP)A No.1564/Bang/2024 Page 50 of 64 revolves around international transaction where it has to be seen whether such transactions are at arm's length price or not. The presumption is that transactions with the independent parties are always at arm's length price, however, it is with regard to related parties i.e., A.Es, only one has to see whether such a transaction is at arm's length. The profit margin from the international transaction with the A.E. has to be seen in relation to the uncontrolled transaction with the independent parties. What is to be compared is the international transactions of the assessee with its related parties and not for its entire transaction with non-related parties also. Therefore, ALP has to be seen only with regard to international transaction with A.Es and not on the entire turnover/sales. We, thus, agree with the contentions of the learned Sr. Counsel that bench marking should be done only on A.E. transactions and not for the entire turnover.” 63. In that case the learned authorised representative relied upon the following judicial precedents as mentioned in paragraph number 18 of that order :- “After referring to the above, he further submitted that the TPO, in fact, was required to benchmark only the transactions with the A. Es and not the entire sales. In support of this contention that TP adjustment should be restricted to value of international transactions only he relied upon various decisions Printed from counselvise.com IT(TP)A No.1564/Bang/2024 Page 51 of 64 of the Tribunal in IL Jin Electronics India (P.) Ltd. v. Asstt. CIT [2010] 36 SOT 227 (Delhi), Lionbridge Technologies (P.) Ltd. v. Dy. CIT [2012] 137 ITD 197/ 23 taxmann.com 373 (Mum.), Penzoil Quaker State India Ltd. v. Dy. CIT, ITA no.8885/Mum./2010.” 64. In IL Jin Electronics India (P.) Ltd. v. Asstt. CIT [2010] 36 SOT 227 (Delhi) while dealing with the alternative argument of the assessee it was held as under:- “15. The assessee has also taken one alternative ground out of the total raw materials consumed by the assessee for manufacturing print circuit boards, only 45.51 per cent of the total raw materials were imported through assessee’s associate concerns, and, therefore, any adjustment, if any called for, can only be made to the 45.51 per cent of the total turnover, and not to the total turnover of the assessee. After considering the facts of the case, we do not find any difficulty in accepting this contention of the assessee that at best only 45.51 per cent of the operating profit can be attributed to imported raw material acquired from assessee’s associate concerns. In the present case, the Assessing Officer has calculated the operating profit on the entire sales of the assessee, which in our considered opinion, is not justified, when it is admitted position that only 45.51 per cent of raw material has been acquired by the assessee from its associate concerns for the purpose of Printed from counselvise.com IT(TP)A No.1564/Bang/2024 Page 52 of 64 manufacturing items. The assessee has stated that the operating profit if applied to 45.51 per cent of the turnover would come to Rs. 35,52,573 as against operating profit of Rs. 24,35,175 booked by the assessee, and the difference thereof would only be called for to be made as addition to the profit shown by the assessee. We, therefore, direct the Assessing Officer to modify the assessment and make the adjustment only to the extent of difference in the arm’s length operating profit with adjusted profit with reference to the 45.51 per cent of the turnover, and not to the total turnover of the assessee. Therefore, to this extent, the addition made by the Assessing Officer and further confirmed by the CIT(A) is reduced. We order accordingly.” 65. If we carefully look at the provisions of income tax rules, it does not suggest that after finding a difference between the margins of the assessee and the comparable company, further adjustment is required to be restricted only to the percentage of the international transaction. This is so for the reason that if that is done, it is presumed that the difference in the price (margin) is partly on account of transaction with an independent party (non-AE transactions). Thus if it is done, there is a basic presumption that the transactions entered into by the assessee with non-associated (independent parties) are also not at arm’s-length. There is no basis to hold so. Such an presumption will make the whole accounts of the assessee tainted. Further, there is no jurisprudence available that such restriction is also required to be made in case of all other Printed from counselvise.com IT(TP)A No.1564/Bang/2024 Page 53 of 64 methods other than transactional net margin method. Thus, we find merit in the arguments of the ld TPO and LD DRP, but judicial precedents, are heavily against the revenue. 66. Therefore, respectfully following the decision of the coordinate bench, we direct the learned assessing officer/transfer pricing officer to restrict the adjustment to the extent of transactions with associated enterprises only. Accordingly ground number 9 of the appeal is allowed. 67. The learned authorised representative further submitted that the learned transfer pricing officer is not correct in granting the working capital adjustment to the assessee as per ground number 8. 68. The learned CIT DR referred to page number 29 of the transfer pricing officer’s order wherein the working capital adjustment was denied to the assessee holding that segmental working capital is not disclosed in the annual reports and further the cost of capital is different from different companies has not been established. She therefore submitted that the working capital adjustment has rightly been denied to the assessee. 69. We have carefully considered the rival contention and also perused the order of the learned transfer pricing officer wherein as per paragraph number 18, he has dealt with this issue denying the working capital adjustment to the assessee as the assessee has failed to establish whether the comparable companies have financed their Printed from counselvise.com IT(TP)A No.1564/Bang/2024 Page 54 of 64 working capital by own funds or borrowed funds and further whether any cost has been incurred on the working capital by the comparable companies and if so, what is the cost of such working capital. We find that the learned transfer pricing officer has rejected the transfer pricing study report prepared by the assessee and has included his own comparable. Therefore it is for the transfer pricing officer to decide that whether the assessee is entitled to the working capital adjustment or not. As the comparable is introduced by the learned transfer pricing officer the onus lies on the transfer pricing officer to negatively prove that the comparable companies did not financed their working capital by borrowed funds and further there is no cost incurred by them. In view of the above facts, we restore this ground to the file of the learned transfer pricing officer/learned assessing officer to work out whether there is any working capital adjustment to be granted to the assessee or not. Accordingly ground number 8 of the appeal is allowed with above direction. 70. Ground number 7 of the appeal is with respect to the characterisation of the assessee, it says that in the garb of fresh search and analysis impugned order or in adopting inappropriate selection criteria/filters leading to inclusion of companies providing engineering and design services as comparable to provision of IT services transactions, wrongly rejecting companies selected by appellant on ad hoc basis and resorted to cherry picking of comparable despite these companies being functionally dissimilar. Printed from counselvise.com IT(TP)A No.1564/Bang/2024 Page 55 of 64 71. The learned authorised representative argued that the TPO has wrongly classified the assessee as Engineering & Design Services company wherein the assessee is merely software development services company. He further referred to page 606 of the order of the TPO as well as reply of the assessee at page 616 stating that the assessee is not engaged in Engineering & Design Services. He further submitted that the DRP in para 7.3 has held that assessee is primarily engaged in Design Services is incorrect. He therefore objected that recognising the services by the ld. lower authorities is not correct. According to him, TPSR furnished by the assessee clearly show the characterisation of the business of the assessee which is software development services. 72. The learned CIT DR vehemently supported the order of the learned transfer pricing officer stating that at paragraph number 5.2 of the order of the learned TPO the company over view has been extracted wherein it is stated by the assessee that assessee is primarily engaged in providing a range of design services to semiconductor industry. Further in revenue recognition it was stated that revenue from business of providing design services to semiconductor industries recognises revenue from time and material and fixed price contracts. She further referred to the segment reporting and also the background of the company wherein it is specifically mentioned that assessee is primarily engaged in providing a range of design services in the semiconductor space. Therefore the learned transfer pricing officer has proceeded to benchmark the transaction of the taxpayer Printed from counselvise.com IT(TP)A No.1564/Bang/2024 Page 56 of 64 under engineering and design services. She further referred to the transfer pricing study report wherein an under annexure 3A research metrics of the assessee on capitalline neo-and Ace TP database clearly shows that the assessee has also taken the 'design and engineering software services ' as search criteria. Therefore now the assessee cannot say that the right characterisation made by the learned transfer pricing officer on the basis of the annual accounts of the assessee and transfer pricing study report is incorrect. 73. We have carefully considered the rival contention and perused the orders of the learned lower authorities. We find that according to the notes to financial statements for the year ended 31st of March 2020 as per paragraph number 1.1 in company overview it is stated that assessee is primarily engaged in providing a range of design services to semiconductor industry. Further in revenue recognition policy it is mentioned that revenue from business of providing design services to semiconductor industries comprises revenue from time and material and fixed price contracts. Therefore in the annual account the assessee has classified itself as a design service provider. 74. Coming to the transfer pricing study report in paragraph number 2.4 overview of the company assessee shows that it is an advanced technology service provider offering comprehensive solutions from concept to prototype, in the semiconductor space, that offers any integrated portfolio of services to its clients in key domains including digital, analog, high-speed physical interface IP, embedded Printed from counselvise.com IT(TP)A No.1564/Bang/2024 Page 57 of 64 memory compiler, EDA and modelling. It is further stated that assessee is the preferred semiconductor design service partner to several Fortune 500 companies in automotive, consumer Electronics, industrial Internet of things and medical electronic space (page number 57 of the paper book, page number 10 of transfer pricing study report). While analysing transaction at paragraph number 4.1.1 wherein the nature and terms of the international transactions are described, assessee itself stated that it provides semiconductor design services to its associated enterprises and shares are part of total revenue order by the AE from the end customers. 75. The master service agreement dated 1 April 2014 with its US associated enterprises also provided for the provision of semiconductor design and related services. At paragraph number 4 the assessee has categorically classified itself as provision of semiconductor design and related services as it service. 76. Further it search metrics performed on different databases on the segment of designing services (page number 1-6 of annexure 3A of the TPSR ). 77. In view of the above facts, we do not find any reason to find any fault with the learned transfer pricing officer and the learned dispute resolution panel in classifying the assessee as provider of design services. Accordingly ground number 7 to that extent is dismissed. Printed from counselvise.com IT(TP)A No.1564/Bang/2024 Page 58 of 64 78. Arguing ground number 7A the assessee objected to the inclusion of Mahindra consulting engineers Ltd. , L&T Technology Services Ltd. and Tata Elxsi Ltd and submitted that all of them are high turnover companies and therefore should not have been included as comparable. With respect to Tata Elxsi Ltd., he submitted that it owns a Tata brand and therefore has advantageous reach in the market compared to the assessee and therefore should be excluded. 79. The learned CIT DR vehemently supported the orders of the learned lower authorities. He submitted that the assessee has stated that L & T technology services Ltd has a huge brand value as the taxpayer has failed to demonstrate as to how the brand value impact on financial results achieved by the comparable company and therefore the objection is rejected. It was submitted that assessee has not produced anything to show that the brand value does make an impact on the profitability in the case of this comparable. Similarly arguments she referred for tata Elxis Ltd. With respect to the Mahindra consulting engineers Ltd it was submitted that the argument of the assessee that it fails export filter is not correct whereas the margin of only financial year 2019 – 20 are taken for the consideration. 80. We have carefully considered the rival contention and perused the orders of the learned that lower authorities. We find that that the assessee has entered into an international transaction of ₹ 38.40 crores whereas the turnover of L & T Technology services a limited Printed from counselvise.com IT(TP)A No.1564/Bang/2024 Page 59 of 64 and Tata Elxsi Limited are huge. As per the margin computation made by the learned transfer pricing officer , the turnover of Tata Elxsi Ltd is 459,309 lakhs, and turnover of L & T technology services Ltd is ₹ 51813 million. Therefore, companies with such a huge turnover are not comparable with the turnover of the assessee company. There is no empirical study available which clearly shows that the companies with higher turnover does not impact the margins of the assessee. In view of the above facts we direct the learned transfer pricing officer to exclude both these companies from the comparability analysis. 81. With respect to the Mahindra consulting engineers Ltd, the assessee challenged the same before the learned transfer pricing officer stating that it is functionally different and fails export filter for financial year 2017 – 18 and 2018 – 19. The learned transfer pricing officer accepted that this comparable company fails export filter for financial year 2017 – 18 and 2018 – 19 and therefore while comparing the margin he took only the margin for financial year 2019 – 20. The assessee also challenged that the comparable company fails the related party transaction filter. However there is no finding of the learned transfer pricing officer on this ground. The learned dispute resolution panel also considered the objection of the assessee as per paragraph number 8.6 and found that the assessee and the comparable company are functionally similar. However, there is no finding with respect to the related party transaction a filter the comparable company failing the same. We on the limited data Printed from counselvise.com IT(TP)A No.1564/Bang/2024 Page 60 of 64 available before us find that this comparable company has a turnover of Rs 20,75,06,830/- for F Y 2019-20. Thus, compared to the turnover of the assessee, it has lesser turnover. Further the functions of this comparable are also like the functions of the assessee company. Pagers no 23 of TPO's order and Para no 8.6 of the directions of the ld DRP shows that this comparable company is functionally similar. In view of the above facts, we restore this comparable back to the file of the learned assessing officer/transfer pricing officer to consider the explanation of the assessee with respect to whether this comparable company fails a related party filter or not. If it fails, it requires to be excluded. 82. Accordingly ground number 7A is partly allowed as indicated above. 83. As per ground number 13, the learned authorised representative vehemently objected about adjustment on account of interest on overdue receivable. With respect to the issue of interest on receivable, he submitted that if the working capital adjustment is granted to the assessee, the addition to that extent would automatically obliterate. 84. The learned CIT DR vehemently supported the order of the learned transfer pricing officer and also direction of the learned dispute resolution panel. She submitted that outstanding overdue from an associated enterprises is a separate international transaction which required to be benchmarked and the learned transfer pricing officer has correctly benchmark the same. Printed from counselvise.com IT(TP)A No.1564/Bang/2024 Page 61 of 64 85. As we have already restored the issue of granting of the working capital adjustment to the assessee after verification, this ground is also connected with the same for the reason that if working capital adjustment is found to be eligible to the assessee, this adjustment is subsumed in that working capital adjustment. If the learned transfer pricing officer finds that the working capital adjustment is not required to be granted to the assessee, the separate adjustment with respect to the interest on overdue receivable will stand. Therefore, the said adjustment will solely depend on the decision of the learned transfer pricing officer as per ground number 8 of the appeal which is restored back to the file of the learned AO/TPO. Accordingly ground number 13 is allowed as indicated above. 86. Ground number 12 is with respect to the corporate guarantee adjustment made by the learned transfer pricing officer at the rate of 2% which is restricted by the learned dispute resolution panel to the extent of 1%. The brief facts of the case shows that the taxpayer assessee provided a corporate guarantee in favour of its US entity for an amount of US$ 95,000 which was continued during the financial year 2019 – 20. The assessee has not charged any guarantee commission. The learned transfer pricing officer held it to be an international transaction and computed rate of corporate guarantee fee at the rate of 2% amounting to ₹ 1,406,000/–. The learned dispute resolution panel considered that the arm’s-length price of the provision of corporate guarantee by the associated to its associated enterprise constitutes an international transaction and has to be Printed from counselvise.com IT(TP)A No.1564/Bang/2024 Page 62 of 64 benchmarked as per the transfer pricing regulations. However the panel noted that that the transfer pricing officer while adopting the safe harbour rate has not taken the correct value of guarantee commission as prescribed by the said rules. The rates applicable for assessment year 2020 – 21 are as per rule 10 DD (2A) read with subrule 3B. In view of the same the panel directed the learned transfer pricing officer to adopt the correct rate as per safe harbour rules if the same is the basis on which he has determined the arm’s- length price for corporate guarantee commission. Accordingly the rate applicable was taken and the adjustment with respect to the poster DRP direction of ₹ 703,000 was made with respect to the arm’s-length price of the corporate guarantee. We do not find any infirmity in the order of the learned lower authorities so far as considering the same as an international transaction. Hhowever, looking at the judicial precedents and as the assessee has given a corporate guarantee to its subsidiary company for obtaining loans, we find that the computation of the arm’s-length price at the rate of 0.5% of the guaranteed amount would be appropriate. This is so because assessee has not furnished the annual accounts of the subsidiary company or its credit rating; therefore, benchmarking the same at this stage would not be possible. Accordingly we direct the learned transfer pricing officer to compute the arm’s-length price of the corporate guarantee taking the rate of 0.5%. Accordingly ground number 12 of the appeal is partly allowed. 87. Ground No. 17 is with respect to short grant of TDS as under: - Printed from counselvise.com IT(TP)A No.1564/Bang/2024 Page 63 of 64 ‘Ld. AO has erred in granting credit for tax deducted at source ('TDS\") of INR 4,16,71,065 only as against credit of INR 4.17.12.905 claimed by the Appellant in its return of income Ned for the subject AY, thereby resulting in short grant of TDS amounting to INR 41,840.” 88. After hearing the parties, the AO is directed to grant credit of TDS after proper verification of the sum of Rs. 41,840. The ld. AO should verify the difference arising against the claim of assessee of Rs. 4,17,12,905 and TDS credit granted by the AO of Rs. 4,16,71,065. Thus, ground No. 17 is allowed as indicated above. 89. Ground No 18 is on the issue of levy of interest and Ground no 19 is against initiation of penalty proceedings. Chargeability of interest is consequential and Initiation of penalty is premature and hence both these grounds are dismissed. No other grounds were argued before us and therefore all other grounds are dismissed. 90. In the result, the appeal by the assessee is partly allowed. Pronounced in the open court on this 27th day of October, 2025. Sd/- Sd/- ( KESHAV DUBEY ) ( PRASHANT MAHARISHI ) JUDICIAL MEMBER VICE PRESIDENT Bangalore, Dated, the 27th October 2025. /Desai S Murthy / Printed from counselvise.com IT(TP)A No.1564/Bang/2024 Page 64 of 64 Copy to: 1. Appellant 2. Respondent 3. Pr. CIT 4. CIT(A) 5. DR, ITAT, Bangalore. By order Assistant Registrar ITAT, Bangalore. Printed from counselvise.com "
Other Referred Cases
Roca Bathroom Products Private Limited [TS-473-HC-2022(MAD)], Ucweb Mobile Private Limited, Gurgaon vs Assessment Unit, Income Tax [ITA No. 3945/Del/2024], Capgemini vs ACIT [TS-45-ITAT-2013], Hindustan Unilever Ltd vs ACIT [2013] 22 taxmann.com 737, Toyota Kirloskar Motors Pvt. Ltd. vs ACIT [2013] 33 taxmann.com 107, FMC India (P) Ltd vs ACIT [2023] 146 taxmann.com 200
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