ITAT Orders Exclusion of Comparable as DRP Had Already Held It Functionally Different

Extreme Labs India Private Limited Vs National Faceless Assessment Centre ( ITAT Delhi)

The Delhi Income Tax Appellate Tribunal considered an appeal filed against the assessment order passed under Sections 143(3), 144C(13), and 144B of the Income Tax Act for Assessment Year 2021-22. The assessee challenged various transfer pricing adjustments and alleged non-compliance by the Assessing Officer (AO) and Transfer Pricing Officer (TPO) with the directions issued by the Dispute Resolution Panel (DRP).

The assessee, an Indian private limited company, was engaged in the business of marketing and distribution of peering software and licensing services for the right to use computer software and database services. During the relevant assessment year, it entered into an international transaction involving operational expenses towards technology and management support amounting to Rs. 10,32,25,426 with its associated enterprises. For determining the Arm’s Length Price (ALP), the assessee adopted the Transactional Net Margin Method (TNMM) and selected comparable companies based on filters relating to sales, net worth, trading sales ratio, software distribution activities and related party transactions.

The TPO accepted the filters applied by the assessee but modified the list of comparable companies by excluding certain comparables selected by the assessee and introducing additional companies. Based on the revised comparables, the TPO proposed a transfer pricing adjustment of Rs. 72,74,035 under Section 92CA(3). The Assessing Officer subsequently issued a draft assessment order incorporating the adjustment. The assessee filed objections before the DRP challenging inclusion and exclusion of several comparables. The DRP issued directions requiring exclusion or re-examination of certain companies. However, according to the assessee, the AO failed to properly implement those directions while passing the final assessment order, leading to the present appeal.

At the outset, the assessee stated that it was not pressing the ground challenging limitation under Section 153. The Tribunal accordingly dismissed that ground as not pressed.

The primary dispute before the Tribunal related to the inclusion of certain comparable companies in the final benchmarking analysis. Regarding Peoplelink Unified Communications Pvt. Ltd., the assessee argued that the company was functionally different as it was engaged in providing video conferencing solutions. The Tribunal noted that the DRP had already held that the company was functionally incomparable and had directed its exclusion. The Tribunal therefore directed the AO to exclude the company from the final list of comparables.

In relation to Zoho Corporation Pvt. Ltd., the assessee contended that the company’s related party transactions exceeded the 25% threshold adopted by the TPO, with an RPT-to-sales ratio of 40.13% during financial years 2019-20 and 2020-21. The Tribunal directed the TPO to verify the figures from the annual reports and exclude the company if the RPT filter was breached.

For Quick Heal Technologies Ltd., the assessee submitted that the company was engaged primarily in software product development relating to IT security and anti-virus products and that no segmental data for trading activities was available. The Tribunal directed the TPO to re-examine the company’s financials and exclude it if segmental information was unavailable.

The assessee also challenged inclusion of RAH Infotech Pvt. Ltd., MSR IT Solutions Pvt. Ltd., and ESDS Software Solution Ltd. on the ground that these companies failed the trading sales filter of 75% adopted by the TPO. The Tribunal directed the TPO to re-examine the trading sales ratios of these companies and exclude them if they did not satisfy the prescribed filter.

The Tribunal further considered the assessee’s objection regarding the margin applied to Compass IT Solutions and Services Pvt. Ltd. The assessee argued that the correct operating margin was 2.80%, whereas the TPO had incorrectly adopted 6.93%. The Tribunal directed the TPO to verify the figures from the company’s annual reports and apply the correct margin.

On the issue of working capital adjustment, the Tribunal observed that the DRP had already directed the AO to grant such adjustment. The AO was accordingly directed to allow working capital adjustment in accordance with the DRP’s directions.

The ground concerning non-disposal of the rectification application under Section 154 was dismissed as infructuous because the rectification petition had already been disposed of by the TPO. The Tribunal also dismissed the challenge relating to levy of interest under Sections 234A, 234B and 234C, observing that such levy was mandatory and consequential.

Accordingly, the Tribunal partly allowed the assessee’s appeal and issued directions for re-examination and exclusion of certain comparables in accordance with the DRP’s findings and the applicable filters.

FULL TEXT OF THE ORDER OF ITAT DELHI

The appeal by the assessee is directed against the Assessment Order dated 29.09.2024, passed u/s 143(3) r.w.s. 144C(13) r.w.s. 144B of the Income Tax Act, 1961 [hereinafter referred to as, “the Act”], for Assessment Year 2021-22.

2. The assessee in appeal has assailed the Assessment Order on following grounds:

“1. That the AO erred in passing the impugned assessment order dated 29 September 2024 under section 143(3) rw.s. 144C(13) read with section 144B of the Act, pursuant to the directions of the Hon’ble DRP in assessing the income of the Appellant as INR 11,968,128/- for Assessment Year (“AY’) 2021-22 as against the returned income of INR 6,746,700 declared by the Appellant.

2. On facts and in law, the impugned order passed by AD and order dated 26 September 2024 passed by TPO after giving effect to Hon’ble DRP’s directions u/s 144C of the Act, is in clear contravention to directions issued by the DRP.

a. That the TPO/AO, while imputing the TP adjustment, have erred in incorrectly computing the quantitative filters of certain comparable companies, despite the explicit direction given by the DRP for re-verification of such filters, and disregarding the Appellant’s submission on the corrected computation from the respective audited financial statement of such companies

b. That the TPO/AO have erred in incorrectly computing the operating profit margin of certain comparable companies, which have been finally selected for determining the arm’s length price, and in complete ignorance of the data available as per audited financials of the comparables, despite explicit direction given by the DRP for doing the needful.

c. That TPO/AO have erred in not allowing the working capital adjustment to the Appellant, despite explicit direction given by the DRP for doing the needful, thereby contravening the provisions of Rule 10B(1)(e)(iii) and 10B(3) of the Rules.

3. That the DRP/TPO erred in not accepting the economic analysis carried out by the Appellant and modifying screening criteria applied by the Appellant in the TP Documentation.

4. That the DRP/ TPO erred on facts and in law, in rejecting companies that are functionally comparable to the Appellant in terms of the functions performed, assets employed and risks assumed and even such approach is in violation of section 92C(3) of the Act read with Rule 108(2) of the Rules.

5. That the DRP TPO, erred on facts and in law, in selecting companies that are not comparable to the Appellant in terms of functions performed, assets employed and risks assumed, and even such approach is in violation of section 92C(3) of the Act read with Rule 10B(2) of the Rules.

6. That the IP 0 erred on facts and in law in incorrectly computing the quantitative filters of the comparable/s which have been finally selected for determining the arm’s length price of the international transaction, and in complete ignorance of the Appellant’s submission on the corrected computation from the respective audited financial statement of such companies.

7. That the TPO erred on facts and in law in incorrectly computing the margins of the comparable/s which have been finally selected for determining the arm’s length price of the international transaction, and in complete ignorance of the data available as per audited financials of the comparable/s.

8. That the TPO/AO erred on facts and in law in not allowing the working capital adjustment to the Appellant despite there being a significant difference in the working capital levels of the Appellant vis-a-vis Comparable Companies whilst thereby contravening the provisions of Rule 108(1)(e)(ii0 and Rule 10B(3) of the Rules.

9. That the jurisdictional AO, Ward 8(1) Delhi, and TPO, DC/ACIT TP 1(2)(2) Delhi have erred in not disposing off the rectification petition filed dated 23 October 2024 filed u/s 154 of the Act.

10. Without prejudice to the above grounds, the transfer pricing adjustment/addition as imputed in the Lisel assessment order is excessive.

11. On the facts and in the circumstances of the case and without prejudice to the grounds taken here-in-above, the Ld. AO grossly erred in levying interest and fee amounting to INR 111,690/-

12. On the facts and circumstances of the case and in law, the AO erred in issuing the impugned order beyond the time-limit as prescribed under section 153 of the Act. The final assessment order is, thus, time-barred, and liable to be quashed.

13. On facts and in law, the Ld AO/Ld. TPO erred on fact and in law in initiating penalty under section 270A of the Act.”

3. The assessee is an Indian Private Limited Company engaged in the business of marketing and distribution of Peering Software and Licensing Services for the right to use Computer Software and data base. During the period relevant to Assessment Year 2021-22, the assessee entered into following international transactions with its Associated Enterprises [A.E.].

To determine Arm’s Length Price [ALP] of the aforesaid transaction, the assessee applied Transactional Net Margin Method [TNMM] as the most appropriate method. Following filters were applied for selection of the comparables:

a. Companies having reported net sales equal to or more than INR 1,00,00,000/-;

b. Companies that report net worth greater than or equal to 0;

c. Companies with ratio of other Trading Sales to Sales, greater than or equal to 75%;

d. Companies engaged in software distribution; and

e. Companies having Related Party Transactions [RPT] in excess of 25%.

4. The Transfer Pricing Officer [TPO] accepted the filters applied by the assessee in selection of the comparables but made variation in the list of comparables selected by the assessee. The TPO, after excluding certain comparables as selected by the assessee, and including some additional companies, finally selected following comparable companies for benchmarking:

The TPO, after considering selected comparables, determined ALP of the international transaction and proposed an adjustment of Rs. 72,74,035/- vide order dated 21.10.2023, passed u/s 92CA(3) of the Act. The Assessing Officer passed the Draft Assessment Order on 10.12.2023 based on TP adjustment proposed by the TPO. Aggrieved by the said Draft Assessment Order, the assessee filed objections before the DRP, inter alia, assailing addition/exclusion of some of the comparables finally selected by the TPO. The DRP while examining the comparables, assailed by the assessee, gave directions to the AO to exclude/re-examine some of the comparables before passing the Final Assessment Order. The AO, in the impugned Assessment Order, failed to comply with directions of the DRP. Hence, the present appeal by the Assessee.

5. Shri Siddhesh Chaugule, appearing on behalf of the assessee, at the outset, submits that the assessee is not pressing ground No. 12 of the appeal, challenging validity of the Assessment Order on the ground of limitation. He submitted that the assessee had already filed an application dated 21.11.2025, for not pressing the legal ground on the issue of limitation.

In light of the statement made by ld. Authorised Representative [AR] of the Assessee at Bar and the aforesaid application filed by the assessee, ground of Appeal No. 12 is dismissed as not pressed.

5.1. The ld. Counsel further submits that the assessee is primarily aggrieved by inclusion of some of the comparable companies, hence, in ground No. 5 & 6 of appeal, the assessee is seeking exclusion of some of the companies selected by the TPO in the final list of comparables, as under:

a. Peoplelink Unified Communications Pvt. Ltd. — The ld. AR submits that the DRP in its directions had categorically held that the said company is functionally different. The company is primarily engaged in the business of providing video-conferencing solutions for different industries. FAR of the said company is different from the assessee. Hence, it is not a good comparable. Despite specific directions from the DRP, the AO has not excluded the said company from the final list of comparables.

b. Zoho Corporation Pvt. Ltd. — The ld. AR submits that during F.Y. 2020-21 & 2019-20, the said company reported RPT/Sales ratio of 40.13% i.e., far in excess of threshold of 25% filter limit. Thus, the said company is not a good comparable.

c. Quick Heal Technologies Ltd. — The ld. AR submits that the said company is primarily engaged in development of a security software. It is a product company engaged in development of software for IT Security and Anti-virus products. No segmental details of trading activities are available in public domain. Hence, the said company cannot be selected as a comparable.

d. RAH Infotech Private Ltd. — The ld. AR submits that the said company is liable to be rejected as a comparable as it fails the trading sales filter applied by the TPO. He submits that the Trading Sales Ratio of the company for the last three F.Ys. is less than 75%. He furnished the table indicating Trading Sales Ratio as under:

e. MSR IT Solutions Pvt. Ltd. — The ld. AR submits that this company also fails in trading sales filter as the Trading Sales Ratio of the company in the preceding 3 Financial Years i.e. F.Y. 2018-19, 2019-20 & 2020-21 is 0%. He further contended that no segmental information in the Annual Report of the Company is available with regard to trading sales.

f. ESDS Software Solution Ltd. — The ld. AR submits that this company also fails in trading sales filters as the Trading Sales Ratio of the company in the preceding 3 Financial Years i.e. F.Y. 2018-19, 2019-20 & 2020-21 is less than the benchmark adopted by the TPO . He furnished the table indicating Trading Sales Ratio is as under:

5.2. In respect of Ground No. 7 of Appeal, the ld. AR of the assessee submits that the TPO has selected Compass IT Solutions and Services Pvt. Ltd. as a comparable company. The TPO while computing Arm’s Length Price, considered the margines of company as 6.93% instead of correct margins i.e. 2.80%. He, thus, prayed for directions to the TPO to verify and apply correct margins.

5.3. In respect of Ground No. 8, the ld. AR submits that the TPO has denied working capital adjustment. The ld. AR prayed for direction to the AO to allow working capital adjustment to the assessee, in accordance with law.

5.4. In respect of Ground No. 9 of Appeal, the ld. AR submits that the assessee had filed an application u/s 154 of the Act, seeking rectification on 23.10.2024 before the TPO. Since, the said application of the assessee has been disposed off by the TPO, this Ground has become infructuous.

6. Per contra, Shri Dharam Veer Singh, representing the Department, strongly supporting the Assessment Order, prayed for dismissing appeal of the assessee.

7. We have heard the submissions made by rival sides and have examined the orders of the authorities below. The assessee in appeal has primarily assailed inclusion of some of the comparables in final list by the TPO for benchmarking international transaction undertaken by the assessee during A.Y. 2021-22. In grounds of appeal No. 5 & 6, the assessee has prayed for exclusion of some of the companies shown in the final list of comparables. Our findings on the submissions made by the assessee in respect of exclusion of the company is as under:

(a) Peoplelink Unified Communications Pvt. Ltd – We find that the DRP has directed for exclusion the said comparables observing as under:

“The comparable is primarily into the business of providing video conferencing solutions for different industries. FAR is different from the assessee. Hence, it is not a good comparable”

Thus, the DRP in an unambiguous manner has held that the said company is not a good comparable as it is functionally not comparable. The AO is directed to exclude the company from the list of comparables in compliance with directions of the DRP.

(b) Zoho Corporation Pvt. Ltd. — The ld. AR of the assessee has pointed that the said company during F.Y. 2020-21 & 2019-20 has reported RPT to sales ratio of 40.13%. The said ratio is clearly breaching the threshold limit of 25% i.e., filter selected by the TPO. The ld. AR has pointed that the aforesaid RPT Transactions are based on Annual Report of the company. The TPO is directed to examine the issue with reference to Annual Reports of Zoho Corporation Pvt. Ltd. and in case RPT Transactions are more than the limit as set out in RPT Filter, the said company be excluded from the list of comparables.

(c) Quick Heal Technologies Ltd. – The company is mainly engaged in providing IT Security and Anti-virus Products. The ld. AR of assessee has submitted that no segmental data is available with regard to trading and product development. The TPO is directed to re-examine the company’s financials and, in case no segmental data is available, the said company is directed to be deleted from the list of comparables.

(d) In respect of the following 3 companies i.e., (i) RAH Infotech Pvt. Ltd., (ii) MSR IT Solution Pvt Ltd. (iii) ESDS Corporation Pvt. Ltd., the ld. AR has pointed that these companies fail Trading Sales Filter. The TPO has approved Trading Sale Filter of 75%, whereas, as per the details furnished by the assessee, none of these companies qualify the said filter. The TPO is directed to re- examine trading sales of the above companies and in case the companies fail to qualify trading sales filter, the same be excluded from the list of comparables.

In the result, ground of appeal No. 5 & 6 are allowed protanto.

8. In Ground No. 7 of appeal, the assessee has assailed wrong margines applied by the TPO in respect of Compass IT Solutions and Services Pvt Ltd. The ld. AR of the assessee pointed that the correct margin of the company is 2.80%, whereas, the TPO has erred in applying margin of 6.93%. The TPO is directed to verify from Annual Reports of the company and apply correct margin. This ground of appeal is allowed for statistical purposes.

9. In ground No. 8 of appeal, the assessee has prayed for granting working capital adjustment. We find that the DRP while dealing with this issue has directed the AO to allow working capital adjustment. The AO is directed to grant working capital adjustment in accordance with directions of the DRP. Hence, ground No. 8 is allowed for statistical purpose.

10. In so far as ground No. 9 of appeal is concerned, the same has become infructuous as the rectification petition filed u/s 154 of the Act before the TPO was disposed off. Hence, ground No. 9 of appeal is dismissed as infructuous.

11. In ground No. 11 of appeal, the assessee has assailed charging of interest. Levy of interest u/s 234A, 234B, 234C is mandatory and consequential. Hence, ground of appeal No. 11 is dismissed.

12. In the result, appeal of the assessee is partly allowed.

Order pronounced in the Open Court on Thursday the 02′ day of April, 2026.