Companies with significantly higher turnover are not comparable: ITAT Bangalore

Parametric Technology (India) Pvt. Ltd. Vs DCIT (ITAT Bangalore)

ITAT: Companies with significantly higher turnover are not comparable and directed that interest on outstanding receivables be benchmarked at LIBOR plus 200 basis points

Summary: The Tribunal in Parametric Technology (India) Pvt. Ltd. vs DCIT held that transfer pricing adjustments in the software development (SWD) and software distribution (SDS) segments must be based on proper comparability analysis, emphasizing that companies with disproportionately high turnover cannot be compared with smaller entities due to differences in scale, economies, and profitability, and accordingly directed exclusion of such comparables where the assessee’s turnover was ₹54.36 crore against comparables ranging up to ₹49,000 crore; further, in the SDS segment, it ruled that companies engaged in development and sale of proprietary software products, owning intangibles and undertaking R&D, are functionally dissimilar to a limited-risk distributor and must be excluded; on delayed receivables, it upheld that such delays beyond the agreed credit period can constitute a separate international transaction, but where invoices are in foreign currency, interest should be benchmarked using LIBOR plus 200 basis points instead of domestic SBI PLR and computed only for the actual period of delay, resulting in the appeal being partly allowed.

Facts:

• The assessee, Parametric Technology (India) Pvt. Ltd., filed the present appeal against the order passed by the Ld. AO/TPO under section 143(3) r.w. section 144C(13) of the Income-tax Act dated 10.2024 for Assessment Year 2021–22. The assessee is engaged in the business of software licenses through sale or subscription model and maintenance of software products of its ultimate holding company, PTC Inc., and had entered into international transactions with its AE. The assessee categorized its transactions into two segments, namely Software Development Segment (SWD) and Software Distribution Segment (SDS). The assessee benchmarked its transaction under SWD & SDS segment by adopting TNNM as most appropriate method and further PLI as OP/OC which arrived at 18.80% for SWD and 8.64% for SDS segment.
• In the SWD, the assessee selected eleven comparables; however, the TPO rejected eight of them and retained only three, namely CG-VAK Software and Exports Limited, Sagarsoft (India) Limited and Tata Elxsi Ltd – Software Development and Services. The TPO thereafter applied his own filters and selected eighteen additional comparables including Hurix Systems Private Limited, Evoke Technologies Limited, Indianic Infotech Limited, Orion India Systems Private Limited, Mindtree Limited, Sagarsodt, Great Software Laboratory Private Limited, Nihilent Limited, Larsen & Toubro Infotech Limited, Wipro Limited, Net4Nuts Limited, Tata Elxsi Private Limited, Infosys Limited, CG-VAK Software and Exports Limited , Aptus Software Labs Private Limited, Tata Consultancy Services Limited, Consilient Technologies Private Limited and Cybage Software Private Limited, along with the assessee’s accepted comparables.
• The average margin of such comparables was computed at 25.09% wrt SWD Segment. Accordingly, an and an upward transfer pricing adjustment of Rs.2,88,03,369 was made.
• The assessee filed objections before the Dispute Resolution Panel (DRP), contending that companies having substantially higher turnover, exceeding Rs.200 crores, could not be compared with the assessee whose turnover was only Rs.54.36 crores, and that several companies were functionally dissimilar. The DRP, however, rejected these objections and upheld the action of the TPO.
• In the Software Distribution Segment, the assessee had initially selected eleven comparables, namely Compuage Infocom Limited, Dynacons Systems and Solutions Limited, Fujisan Technologies Limited, Goldstone Technologies Limited (Software Licenses Resale), Ingram Micro India Limited, Micropoint Computers Private Limited, Redington India Limited, Savex Technologies Private Limited, Supertron Electronics Private Limited, Quick Heal Technologies Limited and Vama Industries Limited. The TPO rejected all these comparables and conducted a fresh search, selecting nine comparables, namely Crayon Software Experts India Private Limited, Designtech Systems Private Limited, Locuz Enterprise Solutions Limited, K7 Computing Private Limited, Microsoft Corporation, Tally Solutions, Innovana Thinklabs Limited, Quick Heal Technologies Limited and Zoho Corporation. Based on the same, the TPO computed an average margin of 9.76% and made an upward adjustment of Rs.14,13,85,527. The assessee contended before the DRP that the selected companies were functionally dissimilar, being engaged in development and sale of software products, owning intangibles, and undertaking research and development activities, whereas the assessee was merely engaged in distribution of software products. The DRP, however, rejected these contentions and upheld the comparables selected by the TPO.
• Further, the TPO treated the delay in realization of receivables from associated enterprises as a separate international transaction and computed notional interest by applying the SBI Prime Lending Rate at 12.27%, resulting in an adjustment of Rs.89,97,020. The assessee contended that such receivables were incidental to the principal transaction, that working capital adjustment already subsumed the same, that the credit period was reasonable, and that since the invoices were denominated in foreign currency, the adoption of SBI PLR was incorrect. The DRP, however, upheld the action of the TPO and directed recomputation. The Tribunal observed that where the underlying transactions are in foreign currency, the appropriate benchmark would be LIBOR plus basis points, and accordingly directed the TPO to recompute the interest, if any, by adopting LIBOR plus 200 basis points for the period of delay beyond the agreed credit period.
• Aggrieved by the adjustments made in both the SWD and SDS segments as well as on account of interest on receivables, the assessee preferred the present appeal before the Tribunal.

Issues:

• Whether the TPO/DRP were justified in inclusion and exclusion of comparables while conducting transfer pricing analysis for determination of ALP
• Whether companies having substantially low turnover (to say assessee company) can be subject to comparison with companies having substantially high turnover for purpose of computation of ALP.
• Whether companies engaged in development and sale of software products and owning intangibles can be considered comparable to the assessee engaged in software distribution services.
• Whether delay in realization of receivables from Associated Enterprises constitutes a separate international transaction warranting transfer pricing adjustment.
• Whether the notional interest on delayed receivables should be computed using domestic rate (SBI PLR) or LIBOR-based rate for foreign currency transactions.

Observations:

• The Tribunal observed that the issues raised by the assessee pertain to fresh economic analysis conducted by the TPO and inclusion and exclusion of certain comparables for computing the ALP of the international transactions. It was noted that comparability under Rule 10B requires examination of functions performed, assets employed and risks assumed. The Tribunal emphasised that the purpose is to select companies having broadly similar scale of operations, assets and risk profile, and that comparability analysis cannot be carried out in a mechanical manner but must depend on the facts of each case. It was in this context that the Tribunal proceeded to examine the correctness of the inclusion and exclusion of comparables by the TPO/DRP.
• The Tribunal observed that the assessee’s turnover under the SWD segment was Rs.54.36 crores, whereas the comparables selected by the TPO had turnover ranging from Rs.265 crores to Rs.49,000 crores. It was held that companies with very high turnover operate at a different scale and benefit from economies of scale, better market position and cost advantages, which directly affect their profitability. The Tribunal referred to OECD Transfer Pricing Guidelines (para 3.43) and ICAI Guidance Note (paras 5.50 and 15.4), which recognise that size is a relevant factor affecting comparability.
• The Tribunal noted that the DRP relied upon Scancafe Digital Solutions (P.) Ltd. v. Income-tax Officer, reported in [2018] 94 taxmann.com 515 (Bengaluru – Trib.), dated 12-04-2017, following Willis Processing Services (I) (P.) Ltd. v. Dy. CIT [2013] 30 taxmann.com 350 / 57 SOT 339 (Mum. – Trib.), wherein it was held that turnover bands cannot be applied mechanically. However, the Tribunal observed that those decisions do not support comparison of companies having huge differences in turnover.
• The Tribunal placed reliance on Autodesk India (P.) Ltd. v. DCIT reported in (2018) 96 taxmann.com 263, following the judgment of the Hon’ble Bombay High Court in CIT v. Pentair Water India (P.) Ltd., Tax Appeal No. 18 of 2015, judgment dated 16-9-2015, wherein turnover was held to be a relevant criterion. It further observed that in Robert Bosch Engineering and Business Solutions Pvt. Ltd. vs. DCIT in IT(TP)A No. 593/Bang/2020, the Tribunal excluded companies having turnover exceeding Rs.200 crores, and the Hon’ble Karnataka High Court in ITA No.146/2025 declined to admit the Revenue’s appeal, thereby affirming that companies having significantly large turnover cannot be compared with smaller entities. The Tribunal also relied on CIT vs. Yodlee Infotech (P.) Ltd. reported in 111 taxmann.com 121, wherein application of turnover filter was upheld. Accordingly, applying the principle of judicial discipline and doctrine of merger, the Tribunal held that companies having disproportionately high turnover compared to the assessee cannot be considered as valid comparables and are liable to be excluded.
• The Tribunal observed that the assessee is only a limited-risk distributor of software products and does not undertake any development functions. It was noted that companies such as Innovana Thinklabs Ltd., Quick Heal Technologies Ltd. and Tally Solutions Pvt. Ltd. are engaged in development and sale of proprietary software products, own significant intangibles and undertake research and development activities. These companies operate as full-fledged entrepreneurs assuming significant market and technology risks and are therefore functionally different from the assessee.
• The Tribunal referred to the decision of the coordinate bench in SAP India (P.) Ltd. v. Deputy Commissioner of Income-tax, reported in [2025] 180 taxmann.com 631, dated 17-11-2025, wherein Innovana Thinklabs Ltd. was held to be engaged in software and application development, owning products and operating in multiple jurisdictions, and was directed to be excluded. Following the same, the Tribunal held that such companies are functionally dissimilar to the assessee and directed their exclusion from the final set of comparables
• The Tribunal observed that the TPO treated the outstanding receivables from AEs as a separate international transaction in view of section 92B, which includes capital financing transactions such as receivables. It was noted that the assessee relied on Kusum Healthcare Pvt. Ltd. reported in TS-412-HC-2017(Del)-TP to contend that no separate adjustment is warranted where the underlying transaction has been accepted at arm’s length, and also relied on Highways Construction Co. Ltd. reported in 199 ITR 702 to submit that notional interest cannot be added where no real income has accrued. However, the DRP relied on Bechtel (ITA 6530/Del/2016) to hold that interest on delayed receivables beyond the stipulated period constitutes a separate international transaction. The Tribunal observed that receivables arising from services rendered to AEs may require benchmarking if there is delay beyond the agreed credit period, and accordingly upheld the principle that such receivables can be treated as a separate international transaction.
• On the issue of interest on outstanding receivables, the Tribunal observed that the TPO treated the receivables as a separate international transaction and computed interest by adopting the SBI PLR rate. It was held that where the invoices are denominated in foreign currency, the interest rate applicable to foreign currency transactions should be applied and adoption of domestic SBI PLR rate is not justified. The Tribunal observed that in such cases the appropriate benchmark rate is LIBOR plus a reasonable basis point spread. Accordingly, it directed the TPO to recompute the interest, if any, by adopting LIBOR plus 200 basis points and only for the actual period of delay beyond the agreed credit period

FULL TEXT OF THE ORDER OF ITAT BANGALORE