SENSIPLE SOFTWARE SOLUTIONS PVT. LTD.,CHENNAI V. DCIT, CORPORAE CIRCLE-6(2), CHENNAI

ITTPA 104/CHNY/2024

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The case involves Sensiple Software Solutions Private Limited, a wholly owned subsidiary of Sensiple Inc., USA, engaged in software development and providing services to its associated enterprise (AE). The dispute arose from the assessment order for the assessment year 2021-22, where the TPO adjusted the arm's length price of international transactions, leading to an additional tax demand. The assessee contested the adjustments made by the TPO and upheld by the Dispute Resolution Panel (DRP), arguing that the comparables selected were not appropriate and that the adjustments were excessive. The Tribunal examined the selection criteria for comparables, including turnover and profit margin filters, and found merit in the assessee's arguments, leading to a partial allowance of the appeal.

• Counselvise Citation: [2025] 140 COUNSELVISE.COM (IT) 716746 (ITAT-CHENNAI)
• Duration Of Justice: 8 month(s) 16 day(s)
• Appeal Type: Income Tax (Transfer Pricing) Appeal
• Pronouncement Date: 19-08-2025
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: D
• Assessment Year: 2021-2022
• Appeal Filed On: 03-12-2024
• Other Referred Cases: Kumaran Systems (P) Ltd Vs DCIT [2021] 131 taxmann.com 156 (Chennai \\u2013 Trib), Bloom Energy India (P) Ltd Vs DCIT [2019] 102 taxmann.com 621 (Chennai-trib)
• Laws Referred To: Income Tax Act, 1961
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: ARV SREENIVASAN
• Assessee Lawyers: . GROUND NO. .; ARE GENERAL HENCE DISMISSED; S. JAYAKUMAR
• Keywords: Transfer pricing; Wholly owned subsidiary; Working capital adjustments
• Section: 143(3); 234B

Judgement Text

"आयकर अपीलीय अधिकरण,‘डड’ न्यायपीठ, चेन्नई IN THE INCOME TAX APPELLATE TRIBUNAL ‘D’ BENCH, CHENNAI श्री मनु क ुमार धिरर ,न्याधयक सदस्य एवं श्री एस .आर.रघुनाथा, लेखा सदस्य क े समक्ष BEFORE SHRI MANU KUMAR GIRI, JUDICIAL MEMBER AND SHRI S.R.RAGHUNATHA, ACCOUNTANT MEMBER आयकर अपील सं./IT(TP)A No.: 104/Chny/2024 धनिाारण वर्ा / Assessment Year: 2021-22 Sensiple Software Solutions Private Limited, Plot No. 9/A-15, SIPCOT IT Park, Padur Post, Chennai – 603 103. vs. Deputy Commissioner of Income Tax, Corporate Circle 6(2), Chennai. [PAN:AAGCS-4619-C] (अपीलाथी/Appellant) (प्रत्यथी/Respondent) अपीलाथी की ओर से/Appellant by : Shri. S. Jayakumar, Advocate. प्रत्यथी की ओर से/Respondent by : Shri. ARV Sreenivasan, CIT. सुनवाई की तारीख/Date of Hearing : 25.06.2025 घोर्णा की तारीख/Date of Pronouncement : 19.08.2025 आदेश /O R D E R PER S. R. RAGHUNATHA, AM : This appeal filed by the assessee is directed against the final assessment order passed by the Assessment Unit, Income Tax Department u/s. 143(3) r.w.s. 144C(13) r.w.s.144B of the Income Tax Act, 1961 (hereinafter the ‘Act’) for the assessment year 2021- 22 dated 04.10.2024 in pursuant to the directions of the Dispute Resolution Panel-2, Bengaluru dated 05.09.2024. 2. The assessee has raised the following grounds of appeal: 1) That the learned. Assessing Officer (the “Ld. AO”) and Hon’ble Dispute Resolution Panel (“the DRP”) have erred in making an addition of Rs.2,85,60,394/- to the total income of the assessee on account of difference in the Arm’s Length Price (ALP) determined by the Ld. Transfer Pricing Officer (“TPO”) and by the assessee for internation transaction entered into by the assessee with its AE. Printed from counselvise.com :-2-: IT(TP)A 104/Chny/2024 2) The Ld.AO/TPO/Hon’ble DRP have failed to appreciate the assessee’s contemporaneous TP Documentation prepared in line with Rule 10D(4) r.w.s.92F(iv) of the Act. 3) The Ld.AO/TPO/DRP have erred, in employing the lower turnover threshold of INR 1 Crore and failed to apply an upper turnover limit. 4) The Ld.AO/TPO/DRP has wrongly selected high brand value comparables that significantly exceed the scale of the assessee. 5) The Ld.AO/TPO/DRP has wrongly selected high profit earning comparables that exceeded the size of profits of the assessee. 6) The Ld.AO/TPO/DRP have erred in applying the Employee Cost filter to the Total Cost instead of Total Sales. 7) The Ld.AO/TPO/DRP failed to consider the additional comparables submitted by assessee company during the proceedings before TPO. 8) The Ld.AO/TPO/DRP ignored the objections submitted by the assessee company against the inclusion of 10 comparables which are functionally different. 9) The Ld.AO/TPO/DRP failed to consider the comparability adjustments with respect to risk adjustments and working capital adjustments put forward. 10) That on the facts and circumstances of the case and in law, the Hon’ble DRP/Ld. AO has erred in levying the interest u/s.234A and 234B of the Act and erred in withstanding the interest u/s.244A of the Act. The assessee company craves leave of this Hon’ble Bench to add any new grounds in addition to the above during the hearing of the appeal. 3. The brief facts of the case are that the Assessee is a Company is wholly owned subsidiary of Sensiple Inc., USA and it is established as captive service provider to its AE. The Assessee is engaged in the business of software development. The assessee filed its return of income for the A.Y.2021-22 on 27.02.2022 declaring a total income of Rs.31,94,330/-. The case was selected for scrutiny through CASS and accordingly statutory notices were issued to the assessee. A reference u/s.92CA(1) of the Act was made for determination of ALP in respect of specified domestic transactions reported in form No.3CEB. In the Transfer Pricing report, the Assessee has conducted a Printed from counselvise.com :-3-: IT(TP)A 104/Chny/2024 search process and identified 10 comparable Companies whose three years weighted average PLI (OP/OC) ranging from -0.36% to 14.36% and the median was 3.85%. The Assessee has computed its PLI as 2.42% and claimed the transaction is at Arm’s length. 3.1 The TPO rejected the 3 comparable companies of the assessee and arrived at 17 comparable companies and arrived at PLI ranging from 6.75% to 30.76% with arithmetic median of comparable at 19.24% against the revised PLI arrived by the assessee at 4.34% and proposed an adjustment of Rs.4,69,76,138/- (para 6.5.5 of the TPO order) by passing an order u/s.92CA(3) of the Act dated 26.10.2023. The AO issued a draft order u/s.144C(1) of the Act dated 01.12.2023 proposing to make variations as additions by providing 30 days time to accept or to file an objection to DRP. Later the assessee filed an objection before the DRP. On perusal of the objections and after providing the opportunity to the assessee the directions are issued by slightly modifying the TP adjustment proposed in the draft order of the AO by passing an order u/s.144C(5) of the Act dated 05.09.2024. According to the Directions of the DRP the AO passed an order u/s.143(3) r.w.s.144C(3) r.w.s.144B of the Act dated 04.10.2024. 4. Aggrieved by the order of the AO / DRP the assessee is before us. 5. The ld.AR for the assessee submitted the following arguments: 6. Ground No. 1. and 2 are general hence dismissed. 7. Ground No. 3 erred in not applying upper turnover filter. 7.1 The ld.AR contended that the turnover of the Assessee is Rs.33.20 crores whereas the TPO while undertaking the search has applied turnover filter of lower limit of Rs.1.00 crore but did not apply any upper turnover limit. The ld.AR objected to non-application of any upper turnover limit filter. The TPO and DRP have held that high turnover does not have any impact on the Printed from counselvise.com :-4-: IT(TP)A 104/Chny/2024 margins. The DRP also held that irrespective of high turnover certain comparable companies have made lesser profits and some comparable companies have made high profits, which clearly demonstrates that there is no impact on the profit margin of a company because of turnover. 7.2 The ld.AR contended that when the TPO is adopting a lower turnover limit filter, then there should also be an upper turnover filter. Further, high turnover companies are outliers and there is impact in the profit margin. In support of his contention, the ld.AR also relied on the jurisdictional Tribunal decision in the case of Kumaran Systems (P) Ltd Vs DCIT [2021] 131 taxmann.com 156 (Chennai – Trib) and submitted that the following comparable companies may be excluded: (i) Great Software Laboratory Pvt. Ltd. – Turnover Rs.265 Crores (Page 477-494 of Paper book-II) (ii) Tata Elxsi Ltd – Turnover Rs.1,826 Crores (Oage 571-580 of Paper Book-II) (iv) Cybage Software Private Ltd – Turnover Rs.1,143 Crores (Page 631- 646 of Paper book – II) 7.3 The ld.DR on the other hand strongly supporting order of the ld.DRP more particularly submitted that where the assessee has not made out a case as how the high or low turnover has influenced operating margin, then a comparable cannot be rejected solely on the basis of high turnover. Therefore, there is no merit in arguments taken by the ld.AR for the assessee for application of turnover filter to exclude new comparable selected by the TPO, when FAR analysis shows that the companies are carrying out similar functions as of the assessee. The Ld.DR reiterated the findings of the DRP and submitted that as long as a company is functionally comparable, irrespective of its turnover the same should be accepted. 7.4 We have heard both the sides, perused materials available on record and gone through orders of the authorities below along with the judicial Printed from counselvise.com :-5-: IT(TP)A 104/Chny/2024 precedents relied upon. It is a well settled principle of law by various decisions of Courts and Tribunal that upper turnover filter of Rs.200 crores has to be adopted, while selecting the comparable set of companies, for the purpose of benchmarking under TNMM method. We find that this issue is no more res integra as it has already been settled by the jurisdictional Tribunal in the case of Kumaran Systems (supra). The relevant extract is as under: “In this case, admittedly, the assessee has a turnover of Rs.33.24 crores, whereas the TPO has included 4 comparable whose turnover ranges from Rs.207 crores to Rs.3,032 crores, which is almost more than 6 times to 91 times of the turnover of the assessee and hence, we are of the considered view that the TPO as well as the ld.DRP has erred in not applying turnover filter for selection of comparable and hence, we direct the TPO to apply turnover filter of 0 to 200 crores for selection of comparable and recompute margin of the assessee.” Accordingly, we direct the TPO to exclude Great Software Laboratory Pvt. Ltd, Tata Elxsi Ltd and Cybage Software Private Ltd. Thus, this ground of appeal no.3 is allowed in favour of the Assessee. 8. Ground No.4 Exclusion of high brand value comparable: 8.1 The ld.AR submitted that it is seeking exclusion of two comparable viz., Tata Elxsi and Cybage Softare Private Ltd and submitted that if these companies are excluded on application of high turnover filter, this ground would become academic. Since we have already held that these comparable companies may be excluded, we are not adjudicating on this ground. Accordingly, this ground is dismissed for statistical purpose. 9. Ground no.5 Exclusion of High Profit companies 9.1 The ld.AR contended that certain comparable companies had very high and abnormal margins. The details of the same are as under: Printed from counselvise.com :-6-: IT(TP)A 104/Chny/2024 (i) Consilent Technologies Private Limited 31.32% to 89.56% (ii) Ksolves Ltd 77.95% (iii) Prolifics Corporation Pvt Ltd 32.55% to 57.81% (iv) CG VAK Software & Exports Ltd 41.76% The ld.AR relied on the jurisdictional Tribunal decision in the case of Bloom Energy India (P) Ltd Vs DCIT [2019] 102 taxmann.com 621 (Chennai-trib). 9.2 The Ld.DR contended that these comparable companies could have earned high margins by undertaking regular business operations and it also reflects the trend in the industry. The Ld.DR submitted that the assessee has not pointed any specific reason doubting the high margins and therefore these comparable companies should not be excluded on this ground. 9.3 We find this issue is no more res-integra as the jurisdictional Tribunal in the case of Bloom Energy India (P) Ltd (supra) has held as under: “4.1 We have heard the rival submissions and carefully perused the materials on record. The mean margins of the comparable companies adopted by the Ld.Revenue Authorities are as follows: The mean margin of the comparables is Name of the Company Margin (OP/OC) Acropetal Technologies Ltd 57.66 Tata Elxsi Ltd 10.53 Cades Digitech Ltd 5.37 Vama Industries Ltd (Seg) 38.05 Average 27.90 From the above it is crystal clear that the average operating margin of M/s. Acropetal Technologies Ltd., is 57.66 which is significantly high and not consistent with the other comparables. Therefore we find merit in the submission of the Ld.AR that the statement of accounts of M/s. Acropetal Technologies Ltd., during the relevant assessment year cannot be relied upon and even if it is relied upon the profit of the company is abnormally high during the relevant assessment year. Hence, we are of the Printed from counselvise.com :-7-: IT(TP)A 104/Chny/2024 considered view that for the relevant assessment year M/s. Acropetal Technologies Ltd., cannot be adopted as a comparable company. Therefore we hereby direct the Ld.AO to exclude M/s. Acropetal Technologies Ltd., while determining the ALP of the assessee. It is ordered accordingly.” 9.4 Respectfully following the above decision, we hold that high margin comparable companies as set out hereinabove should be excluded from the final set of comparable companies. Accordingly, ground no.5 is allowed. 10. Ground No.6 Employee cost filter: 10.1 The Ld. AR contended that the TPO in the SCN has indicated that he has selected comparable companies by applying employee cost filter of more than 60% of sales. However, certain comparable did not meet the said criteria. The details are as under: (i) Ksolves 44% (ii) I D S Infotech Ltd 54% (iii) Systango Technologies Ltd 59% (iv) Tata Elxsi 56% (v) Prolifics Corporation Pvt Ltd 53% (vi) Cybage Software Pvt Ltd 55% 10.2 The DRP has obtained a report from the TPO to verify this aspect. The TPO has also furnished a remand report and took a contrary stand by stating that filter was applied on total cost and not on sales and that is the most appropriate filter. 10.3 The Ld.DR relied on the remand report of the TPO and also submitted that appropriate filter ought to be applied. 10.4 We have considered the contentions of both the parties and perused the paper book referred by the ld.AR. We believe once a search Printed from counselvise.com :-8-: IT(TP)A 104/Chny/2024 is undertaken by the TPO on the basis certain filters, later the TPO cannot be allowed to completely change or alter the said filter as it will result in distorting the entire search undertaken by the TPO. Therefore, we hold that since the TPO has applied the employee cost filter in the ratio of sales, the same should be applied and the aforesaid comparable companies which does not pass the filter should be excluded. Accordingly, this ground no.6 is allowed. 11. The Ld. AR submitted that if ground nos. 3, 5 and 6 are decided in favour of the Assessee and hence all other issues become academic and therefore we are not adjudicating the same. 12. In the result the appeal of the assessee is partly allowed. Order pronounced in the court on 19th August, 2025 at Chennai. Sd/- Sd/- (मनु क ुमार धिरर) (MANU KUMAR GIRI) न्याधयक सदस्य/Judicial Member (एस. आर. रघुनाथा) (S.R.RAGHUNATHA) लेखासदस्य/Accountant Member चेन्नई/Chennai, धदनांक/Dated, the 19th August, 2025 RL आदेश की प्रधतधलधप अग्रेधर्त/Copy to: 1. अपीलाथी/Appellant 2. प्रत्यथी/Respondent 3.आयकर आयुक्त/CIT– Chennai/Coimbatore/Madurai/Salem 4. धवभािीय प्रधतधनधि/DR 5. िार्ा फाईल/GF Printed from counselvise.com "