Income Tax - Arm's Length Price, Transfer Pricing, TNMM, Comparable Companies, Operating Expenses, Extraordinary Expenses, Finance Costs, Foreign Exchange Losses, Interest on Receivables - The assessee company engaged in providing structural steel engineering and detailing services to its Associated Enterprise (AE). The assessee conducted a Transfer Pricing study using TNMM as the most appropriate method and selected 8 comparable companies. The Assessing Officer/Transfer Pricing Officer (TPO) rejected the assessee's Transfer Pricing study, recharacterized the services from ITeS to KPO, selected a fresh set of 3 comparable companies, and made a transfer pricing adjustment - Whether the services provided by the assessee should be characterized as ITeS or KPO - HELD - The services provided by the assessee were in the nature of ITeS and not KPO, as the assessee was primarily engaged in providing structural detailing services using software, and employed low-key employees like diploma holders. The re-characterization of the assessee's services from ITeS to KPO by the TPO/DRP was erroneous – The appeal of the assessee is partly allowed
Issue 2: Whether the TPO was justified in rejecting the assessee's Transfer Pricing documentation and conducting a fresh Transfer Pricing study - HELD - The TPO had erred in rejecting the assessee's Transfer Pricing documentation merely on the ground of one inappropriate filter, when the majority of the filters used by the assessee were appropriate. The AO is directed to accept the assessee's Transfer Pricing documentation and the selection of comparable companies.
Issue 3: Whether the TPO/DRP was correct in including certain extraordinary expenses and finance costs in the computation of the assessee's Profit Level Indicator (PLI) - HELD - The extraordinary expenses incurred by the assessee towards salaries paid to employees during the COVID-19 pandemic, when the business operations were severely impacted, should be excluded from the operating expenses for the purpose of computing the PLI. The finance costs incurred by the assessee for long-term borrowings, and not for working capital requirements, should be excluded from the operating expenses. The TPO is directed to recompute the PLI by excluding these expenses.
Issue 4: Whether the TPO/DRP was justified in including certain comparable companies in the final set of comparables - HELD - The L&T Technology Services Ltd. and XS CAD India Pvt. Ltd. were not functionally comparable to the assessee and directed the TPO to exclude these companies from the final set of comparables. The TPO is also directed to consider including NPCC Engineering Pvt. Ltd., Energy Infratech Pvt. Ltd., and AXIS CADES Technology Ltd. in the final set of comparables, upon verification of the relevant facts.
Issue 5: Whether the TPO was correct in imputing interest on outstanding receivables from the AE - HELD - The TPO was correct in allowing a standard credit period of 60 days for the purpose of imputing interest on outstanding receivables from the AE. However, the TPO is directed to compute the interest by applying the LIBOR+200 basis points, instead of the SBI short-term deposit rate, as the receivables were denominated in foreign currency.
2025-VIL-1568-ITAT-HYD
IN THE INCOME TAX APPELLATE TRIBUNAL
HYDERABAD
ITA No. 1095/Hyd/2024
Assessment Year: 2021-22
Date of Hearing: 24.09.2025
Date of Pronouncement: 31.10.2025
DGS TECHNICAL SERVICES PRIVATE LIMITED
Vs
THE DEPUTY COMMISSIONER OF INCOME TAX
Assessee by: Shri H. Srinivasulu, Advocate
Department by: Ms. U. Mini Chandran – CIT - DR
BEFORE
SHRI VIJAY PAL RAO, HON’BLE VICE PRESIDENT
SHRI MANJUNATHA G, HON’BLE ACCOUNTANT MEMBER
ORDER
PER MANJUNATHA G., A.M:
This appeal filed by the assessee is directed against the final assessment order dated 18.09.2024 passed u/s 143(3) r.w.s. 144C(13) r.w.s. 144B of the Income Tax Act 1961, (in short “the Act”) in pursuant to the directions of the Dispute Resolution Panel (in short “DRP”), dated 28.08.2024 passed u/s 144C(5) of the Act, for the A.Y 2021-22.
2. The assessee has raised the following grounds of appeal:
“1. The assessment order dated 18-09-2024 passed by the Ld AD, NFAC on the directions of Ld DRP-1, Bengaluru dated 28-08-2024 by making an adjustment u/s 92CA of Rs 24,54,09,549/-is bad in law. The Assessing Officer failed to appreciate the business model which did not result in shifting of profit by the assessce to outside India. The TO adjustment resulted in determination of Total Income of Rs 17,34,22,310/- as against the returned Loss of Rs 7,19,87,239/-,
2. The Ld TPO/Ld DRP erred in holding the assessee as a Knowledge Process Outsourcing Entity (KPO) (TeS) instead of holding the assessee as an ITeS (Low end) provider and wrongly interpreted the Rule 10TA(g) of the Income Tax Rules, 1962.
3. The Ld TPO/LA DRP failed to appreciate that the assessee did not provide the Engineering and Design Services, despite providing the evidence about the qualifications, experience and analytical skill sets of the personnel employed by it.
4. The Ld TPO/Ld DRP erred in the calculation of profit-level indicator (PLI).
4.1. The Ld AO/Ld DRP failed to accept the correct operating revenue of Rs. 51,16,93,970/- in computation of PLI. Ld TPO adopted Operating Revenue at as sum of Rs. 50,92,96,752/- wrongly. Forex Loss of Rs. 24,37,218/- was set off against other income and forex loss or income does not form a part of operating revenue/expenditure.
4.2 Ld TPO/Ld DRP erred in considering the interest expenditure or finance cost of Rs. 1,64,01,114 as operating expenditure, Correct operating expenditure is a sum of Rs. 61,97,84,246 instead of Rs. 63,61,85,360 adopted by the Ld TPO and upheld by Ld DRP.
4.3 Without prejudice, Ld TPO/Ld DRP ought to have adopted the correct operating expenditure of Rs. 61,97,84,246, and thereby the TF adjustment gets reduced from Rs. 24,08,05,786 to Rs. 21,61,18,760.
5. The Ld TPO/Ld DRP erred in not allowing the cost of idle capacity of Rs. 9,95,36,765, which was the salary paid from April 2020 to March 2021 to regular employees during the closure of business establishments in India and USA (AE) owing to the Covid-19 pandemic despite furnishing the complete details and evidence in support of claim of idle capacity.
6. The Ld TPO/LA DRP erred in rejection of the TP study of the assessee on the grounds of usage of inappropriate filters and non-application of appropriate filters. Ld TPO/Ld DRP did not appreciate that the assessee has furnished the TP study and the appropriate filters were used, namely:
A) Service income is more than 75% of its total operating revenue,
B) Forex filter,
C) RPT filter 25%.
7. The Ld TPO/Ld DRP erred in including the following comparables, which are not comparable to the assessee either functionally or for other reasons:
A. L&T Technology Services Ltd
B. XSCAD (India) Pvt Ltd
8. The Ld TPO/Ld DRP failed in not including the following comparables, which are functionally comparable:
A. Codeploy Engineering & Lid
B. E2G Engineering and Design Services (P) Ltd
C. Core Cogent Techno Engineering (P) Ltd
D. Prothious Engineering Services (P) Ltd
E. Construction Design (P) Ltd
9. The assessee requests for the inclusion of the following comparables not considered by the Ld TPO
A. Aevitas Pharmargo Tech (P) Ltd
B. Semac Consultants (P) Ltd
C. Haskoning Dhr Consulting (P) Ltd
10. The Ld TPO/Ld AO/Ld DRP erred in charging of interest on delayed receivables at a sum of INR 46,03,763.
11. The Ld TPO / LA AO/Ld DRP erred in not considering the complete details of all invoices filed in the proforma devised and there was no delay in collection of receivables as per the agreement dated 10th January 2014 with the A.E. and interest was wrongly charged
12. Without prejudice, the Ld TPO/Ld AO/Ld DRP erred in benchmarking the interest charged by SBI on receivables on deposits with it.
13. Without prejudice, the Ld TPO/Ld AO/Ld DRP ought to have appreciated that the Interest on outstanding receivables ought to have been charged at LIBOR plus 200 basis points.
14. The assessee craves leave to add, amend, omit, substitute the above grounds of appeal at any time before or at the time of hearing.
3. The brief facts of the case are that the assessee company, DGS Technical Services Pvt. Ltd., is engaged in the business of structural steel engineering and detailing services to its A.E., DGS INC. It is primarily engaged in providing structural steel detailing services, i.e., detailed plans, drawings, and other documents for the manufacture and erection of steel members, columns, beams, braces, trusses, stairs, handrails, etc., used in the construction of steel buildings, airports, warehouses, industrial plants, power plants, industrial sheds, cement plants, and commercial building structures, etc. The assessee had filed its return of income for the assessment year 2020-21, declaring current year loss at Rs. 7,19,87,239/-. The assessee has filed Form 3CB along with the return of income and reported international transactions with its Associated Enterprises (A.E.), i.e., DGS INC., for providing structural steel engineering and detailing services at Rs. 51,16,93,970/-. The assessee has conducted a Transfer Pricing study by adopting Transactional Net Margin Method (TNMM) as the most appropriate method with OP/OC @ (-)0.02%. The assessee company has selected 8 comparable with the 35th percentile (-)1.05% and the 65th percentile of 3.52% and claimed that, its international transactions with its A.E. are at arm’s length price.
4. The case was selected for scrutiny, and during the course of assessment proceedings, a reference under Section 92CA(3) of the Income-tax Act, 1961, was made to the learned Transfer Pricing Officer (for short “ Ld. TPO”) for determination of the arm’s length price of the international transactions of the assessee with its A.E. During the course of transfer pricing proceedings, the Ld. TPO rejected the TP documentation submitted by the assessee on the ground that the assessee had adopted certain inappropriate filters for selection of comparable and also computed PLI (OP/OC) by excluding certain extraordinary costs being salary paid to employees during the COVID period, finance cost, and forex loss, even though the assessee had not justified the TP study with relevant documentation. Therefore, the Ld. TPO rejected the TP study report submitted by the assessee and has conducted fresh TP study by applying search matrix and also appropriate filters, including filters for exclusion of companies whose net sales were less than Rs. 1 crore and companies who had more than 25% related party transactions of the sales. The Ld. TPO has selected final list of five comparable with a weighted average margin of 21.21% and issued a show-cause notice dated 21.09.2023 and called upon the assessee to file its objections for the selection of comparable and computation of the Profit Level Indicator (PLI). The assessee, vide its letter dated 11.10.2023, has filed its objections and opposed the re-characterization of services rendered by the assessee to its A.E. from ITeS to KPO, rejection of the TP documentation submitted by the assessee and selection of fresh comparable, and also the computation of OP/OC. The Ld. TPO, after considering the relevant objections filed by the assessee, has selected a final set of three comparable with a weighted average OP/OC of 17.90%. The Ld. TPO has also recomputed the PLI of assessee by recomputing Operating Revenue and Operating Cost by rejecting the explanation of the assessee for exclusion of extraordinary costs being salary paid to employees during the COVID period, finance cost, and forex loss, and had arrived at a PLI (OP/OC) at (-)19.95%. The Ld. TPO, after recomputing the PLI, has worked out a TP adjustment of Rs. 24,08,05,786/- in respect of provision of structural steel engineering and detailing services rendered by the taxpayer to its A.E.
5. Further, the Ld. TPO has also computed interest on receivables from the A.E on delayed realization of receivables from the A.E., after allowing a credit period of 60 days and applying the SBI short-term deposit rate, and worked out total interest receivable on delayed receivables at Rs. 46,03,763/-. The A.O., in pursuant to the order passed by the Ld. TPO under Section 92CA(3) of the Income-tax Act, 1961, dated 29.11.2023, has passed a draft assessment order under Section 144C(1) of the Income-tax Act, 1961, on 28.11.2023 and determined the total income at Rs. 17,34,22,310/- by making an adjustment under Section 92CA of the Act for Rs. 24,54,09,549/- as suggested by the Ld. TPO.
6. Against the draft assessment order passed by the A.O. under Section 144C(1) of the Act, dated 28.11.2023, the assessee has filed objections before the Dispute Resolution Panel (DRP) -1, Bengaluru, and raised various objections, including re-characterization of services rendered by the assessee to its A.E. from ITeS to KPO, rejection of TP documentation, selection of fresh comparable, and exclusion of comparable. The assessee had also challenged computation of PLI by including extraordinary costs being salary paid to employees during the COVID period, finance cost, and foreign exchange loss. The Ld. DRP, vide its directions, dated 28.08.2024 issued under Section 144C(5) of the Income-tax Act, 1961, rejected the objections filed by the assessee and upheld the reasons given by the A.O. for re-characterization of services from ITeS to KPO, adoption of fresh search matrix and selection of comparable, and objections filed by the assessee for exclusion of comparable, including L&T Technology Services Ltd. and XS CAD (India) Pvt. Ltd. The Ld. DRP has also rejected the objections filed by the assessee for computation of PLI (OP/OC) and held that, although extraordinary costs need to be excluded for computation of PLI, but because, the assessee failed to give sufficient evidence for ideal time expenses being salary paid to employees during the COVID period, the same could not be excluded for the purpose of PLI. The Ld. DRP further rejected the objections filed by the assessee towards interest on outstanding receivables from the A.E., on the ground that, the Ld. TPO has rightly computed interest on outstanding receivables from the A.E. by adopting SBI short-term deposit rate, which is an index rate adopted under Indian conditions to charge interest.
7. In pursuant to the directions received from the Ld. DRP issued under Section 144C(5) of the Act, the A.O. has passed the final assessment order under Section 143(3) r.w.s. 144C(13) and Section 144B of the Income-tax Act, 1961, dated 18.09.2024, and determined the total income of the assessee at Rs. 17,34,22,310/- by making an adjustment under Section 92CA of the Act for Rs. 24,54,09,549/-.
8. Aggrieved by the final assessment order passed by the A.O., the assessee is now in appeal before the Tribunal.
9. Ground No. 1 of the assessee’s appeal is general in nature and does not require specific adjudication and thus, Ground No. 1 of the assessee’s appeal is dismissed as infructuous.
10. The next issue that came up for our consideration from Ground Nos. 2 to 6 of the assessee’s appeal is re-characterization of services rendered by the assessee to its A.E. from ITeS to KPO, rejection of TP documentation submitted by the assessee, and selection of fresh comparable.
11. The Learned Counsel for the assessee Shri H. Srinivasulu, Advocate, referring to the business profile of the assessee, submitted that, the assessee renders back-end support services to the construction industry. Further, the assessee is engaged in the business of providing ITeS services mainly in the field of structural detailing services, as per the drawings/designs supplied by its A.E. The assessee employs software known as ‘Tekla Software’ and provides detailing services. The services rendered by the assessee to its A.E. are low-end services, for which the assessee mainly engages diploma holders for rendering services. Although all these details were furnished before the Ld. TPO, the Ld. TPO has rejected the T.P. documentation submitted by the assessee and considered the assessee as a KPO Service Provider. The Learned Counsel for the assessee, further referring to the TP documentation submitted by the assessee, argued that the Ld. TPO had rejected the TP documentation of the assessee without assigning any valid reasons. Although the Ld. TPO has stated that, the assessee had adopted inappropriate filters, but going by the order of the Ld. TPO itself, the Ld. TPO has accepted that, the majority of the filters applied by the assessee are proper filters and only in one case, i.e., the filter applied for exclusion of companies having other income more than 25% of the total income, is not an appropriate filter. Since the Ld. TPO has accepted most of the filters used by the assessee, there is no valid reason for rejection of the TP documentation submitted by the assessee. The Learned Counsel for the assessee further submitted that, the Ld. TPO, having rejected the TP documentation submitted by the assessee, has conducted a fresh TP study and selected a final set of three comparable which are totally different from the functions performed by the assessee. The Ld. TPO has retained three comparable, namely, L&T Technology Services Ltd., XS CAD (India) Pvt. Ltd., and CADSYS (India) Ltd. Out of these three comparable, L&T Technology Services Ltd. is not functionally comparable to the assessee. Although the assessee had filed objections for conducting a fresh TP study, the Ld. TPO rejected the objections filed by the assessee and has conducted fresh TP study. Therefore, it was submitted that, the TP documentation originally submitted by the assessee should be accepted and the fresh TP study conducted by the Ld. TPO should be rejected.
12. Ms. U. Mini Chandran, the Ld. CIT–DR, on the other hand, supporting the order of the Ld. DRP, submitted that, the Ld. DRP has given valid reasons for upholding the rejection of the TP documentation submitted by the assessee. The Ld. TPO has also given valid reasons for the re-characterization of services rendered by the assessee from ITeS to KPO, because the services rendered by the assessee fall under the definition of KPO, as defined under Rule 10TA of the Income-tax Rules, 1962. Further, the assessee could not explain the filters adopted for selection of comparable. Further, few comparable selected by the assessee company are not available in a database for comparison. The Ld. TPO, after considering the relevant facts, has rightly rejected the TP documentation of the assessee and thus, the reasons given by the Ld. DRP to uphold the search process adopted by the Ld. TPO should be upheld.
13. We have heard both parties, perused the material available on record, and had gone through the orders of the authorities below. There is no dispute with regard to the services rendered by the assessee to its AE. The assessee provides structural detailing services to its AE on the basis of drawings/designs supplied by the A.E. or its customers. The assessee employs a software known as ‘Tekla software’ and provides detailing services. In fact, the main drawings/designs are supplied by the A.E. or the customers. The assessee only uses the software for detailing the structural designs of the drawings/designs by employing low-key employees like diploma holders and from the nature of the services provided by the assessee to its AE, in our considered view, the services rendered by the assessee to it’s A.E. cannot be considered as KPO services as defined under Rule 10TA(e) of the Income Tax Rules, 1962. Therefore, in our considered view, the learned TPO/DRP erred in recharacterization of services rendered by the assessee from ITeS to KPO services.
14. Insofar as the rejection of the TP documentation submitted by the assessee, we find that, the assessee has adopted the Transactional Net Margin Method (TNMM) as the Most Appropriate Method (MAM) and selected eight comparable companies, with a 35th percentile of -1.05 percent and the 65th percentile of 3.52% with a median of 1.32%. The assessee has applied various filters, including those adopted by the Ld. TPO in the fresh search matrix for the selection of comparable. The Ld. TPO rejected the TP documentation submitted by the assessee only on the ground that, certain comparable selected by the assessee were not available in the database/universe considered by the Ld. TPO for benchmarking analysis In other words, the Ld. TPO has not examined the FAR analysis of the assessee company with the comparable companies selected by the assessee before rejecting the TP documentation submitted by the assessee company. Further, going by the order passed by the Ld. TPO under Section 92CA(3) of the Act, the Ld. TPO has also applied the very same filters which were adopted by the assessee for the selection of comparable. However, the only reason given by the Ld. TPO for the rejection of the TP documentation submitted by the assessee is, only one inappropriate filter applied by the assessee for exclusion of companies whose other income is greater than 25% of the total revenue of the company. In our considered view, the said filter is not even relevant for various comparable selected by the assessee for benchmarking analysis. Therefore, we are of the considered view that, the Ld. TPO has erred in rejecting the TP documentation submitted by the assessee company merely on the basis of one inappropriate filter, even though the said filter is not relevant for the companies considered by the assessee and the Ld. TPO. The Ld. DRP, without appreciating the relevant facts, has simply upheld the reasons given by the Ld. TPO for rejection of the TP documentation submitted by the assessee. Thus, we set aside the order of the Ld. DRP on this issue and direct the A.O. to accept the TP documentation submitted by the assessee for the selection of comparable.
15. The next issue that came up for our consideration from ground Nos. 4 to 6 of the assessee’s appeal relates to the computation of Profit Level Indicator (PLI), i.e., OP/OC, by re-computing operating revenue and operating cost.
16. The assessee has reported its operating revenue at Rs. 51,16,93,970/- and operating cost at Rs. 63,61,85,360/-. Further, the assessee has reduced a sum of Rs. 9,95,38,765/- towards ideal cost or exceptional cost being salary paid to employees during the COVID period from operating expenses. The assessee had also reduced Rs. 1,64,01,114/- towards interest or finance cost from operating expenditure. Thus, the assessee has computed net operating expenses of Rs. 52,02,45,481/-, against operating revenue of Rs.51,16,93,970/- to arrive at PLI of (-0.02%). The Ld. TPO recomputed PLI (OP/OC) at -19.95% by taking into account operating revenue of Rs.50,9256,753/- and operating cost of Rs.63,61,85,360/-. In the process, the Ld. TPO considered forex less of Rs.24,37,218/- as operating in nature and further, not excluded extraordinary cost being salary paid to employees during COVID period for Rs.9,95,38,765/- and also interest or finance cost of Rs.1,64,01,114/-.
17. The learned counsel for the assessee submitted that, the salary expenditure incurred during the COVID period is an extraordinary expenditure and going by the nature of business of the assessee, the same needs to be excluded for the purpose of computation of PLI. The Learned Counsel for the assessee, further referring to various documents placed on record submitted that, the assessee has furnished necessary evidence in support of ideal capacity, including relevant statements of salaries paid to various employees during COVID period. The assessee claimed that the cost of ideal capacity for Rs. 9,95,38,765/- arising owing to COVID pandemic across the globe. It is a well-known fact that, during the COVID period, many companies continued to pay salaries to their employees even though their services did not result in generation of any revenue for the company, for various reasons, including directions from the Government and also to keep the workforce intact for the purpose of the business of the assessee. The Learned Counsel for the assessee, further referring to Rule 10B(1)(e) submitted that, although the Learned TPO, in principle, appreciated the fact that, the cost of ideal capacity needs to be adjusted while computing the PLI, but failed to exclude the total cost only on the ground that, the assessee could not substantiate the claim with relevant evidences and also failed to prove that, similar ideal capacity or exceptional expenses had been considered by the comparable. But fact remains that, the assessee had furnished the relevant details before the lower authorities and proved that, it has incurred substantial salary expenses during the COVID period, and the same does not yield any revenue for the assessee. The learned counsel for the assessee further referring to the OECD Guidelines and the UN Transfer Pricing Manual submitted that, the OECD Guidelines relating to allocation of COVID-19 specific costs also recognizes the need for exclusion of exceptional expenses while computing the PLI. Since the assessee has furnished relevant details of exceptional expenditure being salaries paid to employees during the COVID period, the same needs to be excluded from the operating cost.
18. The Learned Counsel for the assessee, further referring to the finance cost, submitted that, the assessee has incurred finance cost of Rs. 1,64,01,114/-, and the same has been treated as non-operating in nature. The finance cost incurred by the assessee is not related to the working capital requirement of the assessee company, but the same has been incurred for the purpose of acquiring capital assets. He further submitted that Rule 10TA of the Income Tax Rules, 1962 defines the operating expenses which excludes interest expenses from the operating cost. Although this evidence has been furnished by the assessee before the lower authorities, but both the authorities have considered the same as operating in nature only on the ground that, the assessee is having short term borrowings, however as per the financials of the assessee, there is no interest on short-term borrowings. Therefore, he submitted that, the finance cost needs to be excluded from the operating cost.
19. The Learned Counsel for the assessee further referring to the operating revenue computed by the Ld. TPO submitted that, the assessee has computed operating revenue of Rs. 51,16,93,970/-, whereas the Ld. TPO has computed operating revenue at Rs. 50,92,96,752/- by reducing forex loss of Rs.24,37,218/-. It was contended that, forex loss is not an operating expense. Rule 10TA of the Income Tax Rules, 1962, defines the operating expenses, which excludes the loss arising from foreign currency fluctuations. Further, the OECD guidelines also recognize exclusion of forex loss from operating expenses. Although the assessee has submitted relevant details, but the Ld. DRP has simply upheld the reasons given by the Ld. TPO to include the forex loss as operating in nature. Therefore, he submitted that, the forex loss should be excluded for the purpose of computing PLI.
20. The Ld. CIT-DR, Ms. Mini Chandran for the revenue on the other hand supporting orders of the ld. DRP submitted that the assessee could not justify exclusion of extraordinary expenses being salary paid to staff during covid period with evidence. Further finance cost is on working capital requirement which evident from short term borrowings of the assessee. The forex loss is always linked to operations of the assessee and this it cannot be considered as non-operating in nature. The ld. DRP after considering relevant details has rightly rejected objections of the assessee on this issue. She, therefore submitted that the order of the ld. TOP/DRP should be upheld.
21. We have heard both parties, perused the material available on record, and had gone through the orders of the authorities below. The assessee has computed PLI of (-0.02%) after claiming ideal cost of Rs. 9,95,38,765/- towards salaries paid to employees during the COVID period. The Ld. TPO computed the operating cost by including the extraordinary cost / ideal cost being salaries paid to employees during the COVID period, on the ground that, the assessee could not substantiate the extraordinary expenses with relevant details. We find that, the business operations of the assessee’s were severely impacted due to the COVID-19 pandemic on account of the Government imposed lockdowns. Despite the suspension/reduction of operations and absence of commensurate revenue, the assessee’s continued to incur substantial salary cost towards retaining its employees. These costs were incurred not in the ordinary course of business operations, but as a measure to preserve employment and sustain long term business continuity. The salaries pertain to employees who were idle or under-utilized during the lockdown period did not contribute to production or services delivery and, hence, did not generate any operating revenue, therefore, such costs are non-recurring and abnormal in nature and are directly attributable to the extraordinary event of the COVID-19 pandemic and the same needs to be considered as non-operating in nature. The OECD Guidelines on Transfer Pricing implications of the COVID-19 pandemic recognizes that, exceptional and non-recurring costs arising from COVID-19 may warrant separate treatment. Such costs may be excluded from the computation of tested parties PLI, provided they are clearly identified and not reflective of normal business conditions. Rule 10B(1)(e)(iii) of the Income Tax Rules, 1962, allows adjustments to account for differences materially affecting comparability. Therefore, going by the facts of the present case and also the explanation offered by the assessee that, during the COVID period, it has continued to pay salaries to its employees despite non-utilization of the services of employees because of absence of relevant equipment to be provided to the employees at home, the Ld. TPO has considered the said extraordinary cost as operating in nature. Therefore, in our considered view, the expenditure incurred by the assessee being ideal cost should be treated as an extraordinary expenditure, incurred not in the regular operations of the assessee, and the same needs to be excluded from the operating cost for the purpose of computation of PLI. In this regard, it is relevant to refer to the decision of ITAT, Bangalore Bench in the case of Deputy Commissioner of Income Tax Vs. M/s Lam Research (India) Pvt. Ltd, in IT(TP)A No. 2327/Bang/2016. A similar view has also been taken by the ITAT, Delhi Bench, in the case of DCIT v. ITE Ltd. [104 Taxmann.com 281].
22. Coming back to the finance cost excluded by the assessee from the operating cost. The assessee has incurred finance cost of Rs. 1,64,01,114/- towards long-term borrowings and the same has been taken for acquiring capital assets. The assessee excluded finance cost from operating cost for the purpose of computation of PLI. The assessee has filed relevant evidence and established that, the finance cost incurred for the year under consideration pertains to long-term borrowings, but not short-term borrowings or working capital requirements. Since the finance cost is not related to the working capital requirement of the assessee, the same needs to be treated as non-operating in nature. This fact is further strengthened by Rule 10TAJ of the Income Tax Rules, 1962, which defines operating expenses and as per definition of operating cost, finance cost does not include operating expenses. The OECD Guidelines also recognize exclusion of interest cost or finance costs from the operating expenses. Since the finance cost incurred by the assessee is not paid on Overdraft account and further, the same was paid on account of long-term borrowings, in our considered view, the same should be excluded from the operating expenses for the purpose of computation of PLI. The Ld. TPO and Ld. DRP without appreciating the relevant facts, included the finance cost for the purpose of computation of PLI.
23. Insofar as the computation of operating revenue by considering the forex loss as operating in nature, in our considered view, although divergent views have been expressed by various Courts and Tribunals to consider forex loss/gain are operating in nature, but, after amendment to Rule 10TA, and the insertion of the definition of operating expenses, the forex loss has been excluded from the operating expenses. In our considered view, forex loss or income does not form part of operating revenue. As per Rule 10TA of I.T. Rules, 1962, which is applicable from the assessment year 2015-16, for the purpose of operating expenses, loss arising on account of foreign currency fluctuations has been excluded. Since the forex loss incurred by the assessee is not on account of business operations of the assessee and further, Rule 10TAJ excludes loss arisen on account of foreign currency fluctuations from the definition of operating expenses, in our considered view, the Ld. TPO / Ld. DRP have erred in including forex loss while computing the operating revenue. Therefore, we direct the Ld. TPO to exclude the forex loss for the purpose of computation of operating revenue. To sum up, we direct the Ld. TPO to recompute the PLI by adopting the operating revenue as computed by the assessee by excluding forex loss and also recompute the operating cost by excluding extraordinary / ideal cost being salaries paid to employees during the COVID period and also the finance cost. In other words, we direct the ld. TPO to accept PLI (OP/OC) of -0.02% computed by the assessee.
24. The next issue that came for our consideration from Ground No.7 of the assessee’s appeal is exclusion of comparable selected by the Ld. TPO i.e. L & T Technology Services Ltd., and XS CAD India Private Limited.
25. The learned counsel for the assessee referring to annual reports of L & T Technology Services Ltd., submitted that, the above company functionally different from assessee company. Further, L & T Technology Services Ltd., operates in five verticals i.e., transportation, telecom and hi-tech, industrial products and medical devices. The company achieved huge turnover at Rs.4,964 crores, whereas the assessee company’s turnover was at Rs.51.16 crores. Although, the Ld. TPO applied turnover filter, but applied only lower side of the turnover without considering the upper side of the turnover. If we apply turnover filter, L & T Technology Services Ltd., goes out of the final set of comparable. Therefore, he submitted that, L & T Technology Services Ltd., should be excluded from the final set of comparable. The learned counsel for the assessee further referring to XS CAD India Private Limited submitted that, the above company is functionally not comparable to the assessee company. It derives income from training and coaching services and web designing services. It also incurred substantial expenditure for Agency Commission, which is different from the assessee company. There is an extraordinary event of acquisition of XS CAD India Private Limited in Australia which subsequently changes the operating model of the above company. Since XS CAD India Private Limited is functionally different and is having extraordinary event, the same cannot be considered as comparable company.
26. The Ld. CIT–DR, on the other hand, supporting the order of the Ld. TPO and Ld. DRP submitted that, the above two companies are functionally similar to the assessee company. For the purpose of benchmarking analysis, high turnover is not a criterion for exclusion of any company. Further, intangibles carried out by any company does not affect the operating margin of any company. Therefore, on that ground, L & T Technology Services Ltd cannot be excluded. Insofar as XS CAD India Private Limited, the functional profile of the above company is similar to that of the assessee company. Although there is an extraordinary event of acquisition of another company, the assessee failed to file relevant evidence to prove that, said extraordinary evident significantly changed the operating results of the above company. The Ld. TPO and Ld. DRP after considering relevant facts, have rightly included the above companies in the list of comparable. Therefore, she submitted that, the above two companies should be included in the final set of comparable.
27. We have heard both parties, perused the material available on record, and had gone through the orders of the authorities below. Insofar as L&T Technology Services Ltd. is concerned, we find that, the above company operates in five verticals, namely transportation, telecom and hi-tech, industrial products, medical devices, etc. The above company fails the turnover filter because, the turnover of L&T Technology Services Ltd. was at Rs. 4,964 crores, whereas the turnover of the assessee company was at Rs. 51.16 crores. Although the Ld. TPO applied the turnover filter, but he has applied only the lower turnover limit of Rs. 1 crore but failed to apply the upper turnover filter for selection of any company. It is a well-settled principle of law from the decision of the ITAT Hyderabad Bench in the case of Trinity Infraventures Limited Vs. ACIT (163 taxman.com 771) that, the turnover filter should be applied from lower side and upper side. If we apply ten times of lower and upper side of the turnover, then L&T Technology Services Ltd. does not qualify under the turnover filter adopted by the Ld. TPO. Since L&T Technology Services Ltd. goes out of the list of final set of comparable on turnover filter, in our considered view, the Ld. TPO and Ld. DRP were erred in including the above company in the list of final set of comparable. Therefore, we direct the Ld. TPO to exclude L&T Technology Services Ltd. from the list of final set of comparable.
28. Insofar as XS CAD India Pvt Ltd. is concerned, upon perusal of the relevant annual reports of the assessee company and the above company, we find that, although the assessee company is engaged in engineering design services, but going by the nature of services rendered by the assessee company to it’s A.E, the assessee provides simple back-end support services to it’s A.E. on the basis of drawings and designs provided by the A.E. or its customers, whereas XS CAD India Private Limited provided Engineering design services on its own drawings. Therefore, on functional profile itself, the above company cannot be compared with the assessee company. Further, there was an extraordinary event of acquisition of a subsidiary, which has significantly impacted the operating margin of the above company. Further, XS CAD India Private Limited derives income from training and coaching services. It has also incurred significant agency commission and from the above, it is undisputedly clear that, the business model of the above company is different from that of the assessee company. Since the assessee company is a simple ITeS provider on the basis of designs and drawings supplied by the A.E. or its customers, the assessee company cannot be compared with the above company, which is engaged in providing high-end KPO services, i.e., engineering design services. Therefore, we direct the Ld. TPO to exclude XS CAD India Private Limited from the list of final set of comparable.
29. Coming back to the additional evidence filed by the assessee under Rule 29 of the Income Tax (Appellate Tribunal) Rules, 1963. The assessee filed a copy of the order passed under Section 92CA of the Income Tax Act, 1961, for the assessment year 2022-23 and submitted that, the Ld. TPO, for the assessment year 2022-23, has included NPCC Engineering Pvt. Ltd., Energy Infratech Pvt. Ltd., and AXIS CADESS Technology Ltd., in the final set of comparable upon verification of the relevant FAR analysis and filters applied for selection of comparable. Since the FAR analysis of the above three companies are similar to that of the assessee company, the above three companies should be included in the final set of comparable for the assessment year under consideration. Therefore, he submitted that, the additional evidence filed by the assessee should be admitted and appropriate directions may be given to the Ld. TPO to include the above three companies in the final list of comparable.
30. The Ld. CIT-DR, on the other hand, opposed the admission of additional evidence filed by the assessee and submitted that, the benchmarking analysis for determination of the arm’s length price should be decided on the basis of the relevant evidence filed by the taxpayer for each assessment years. Therefore, there is no question of rule of consistency and selection of same comparable for each assessment years. Since the assessee could not furnish relevant evidence to prove the inclusion of the above three companies for the assessment year 2021-22, on the basis of the subsequent year, order passed by the Ld. TPO, the above three companies cannot be included. Therefore, she submitted that, the additional evidence submitted by the assessee for inclusion of the said three companies should be rejected.
31. We have heard both parties, perused the material available on record, and had gone through the orders of the authorities below. The assessee has filed a copy of the order passed under Section 92CA(3) of the Income Tax Act, 1961, dated 27-01-2025, for the assessment year 2022-23, where the Ld. TPO has included NPCC Engineering Pvt. Ltd., Energy Infratech Pvt. Ltd., and AXIS CADES Technology Ltd. in the final list of comparable upon verification of the relevant FAR analysis and also application of appropriate filters for selection of comparable. Once the above three companies are considered to be functionally similar to the assessee company for A.Y. 2022-23, then, unless there are any changes in the facts or functions performed by the assessee company for the assessment year 2021-22, the above three companies should be included in the list of final set of comparable. Since the Ld. TPO himself accepted the fact that, the FAR analysis is similar to the assessee company, in our considered view, if there are no changes in the facts of the above three companies for the assessment year 2021-22, then the said three companies should be included in the final list of comparable for A.Y. 2021-22 also. However, the facts with regard to the relevant filters applied by the Ld. TPO for the assessment years 2021-22 and 2022-23 are similar or not is not readily available for our verification, and these facts need to be verified by the Ld. TPO. Therefore, in our considered view, the matter needs to be set aside to the file of the Ld. TPO for further verification. Thus, we admit the additional evidences submitted by the assessee for inclusion of NPCC Engineering Pvt. Ltd., Energy Infratech Pvt. Ltd., and AXIS CADES Technology Ltd., and direct the learned AO / learned TPO to verify the claim of the assessee, and if found correct, then the Ld. TPO/A.O. is directed to include the above three companies in the final list of comparable for the assessment year 2021-22.
32. The next issue that came up for our consideration from Ground Nos. 10 to 13 of the assessee’s appeal relates to interest on outstanding receivables from the AE. The Ld. TPO computed interest on outstanding receivables from the A.E. after allowing a credit period of 60 days and by applying the SBI short-term deposit rate applicable for the relevant assessment year.
33. It was the arguments of the learned counsel for the assessee that, as per the agreement with the A.E. dated 10-01-2024, the assessee has allowed a credit period of 90 days and receivables from the A.E. realized within the credit period allowed to the A.E. Therefore, the question of imputation of interest on outstanding receivables does not arise. The learned counsel for the assessee further submitted that, if at all interest needs to be computed, then the LIBOR+ appropriate basis points should be adopted instead of the SBI short-term deposit rate.
34. The Ld. CIT-DR, on the other hand, supporting the order of the Ld. TPO submitted that, the assessee could not substantiate the claim of 90 days credit period to the A.E. when compared to non AEs. The agreement with the A.E. is not relevant and what is required to be seen is whether the assessee has provided similar credit period to non-AEs or not. Since the assessee has not furnished any details to compare the credit period allowed to A.E. and non-AE, the Ld. TPO has rightly allowed 60 days credit period for computing the interest on outstanding receivables. Insofar as the rate of interest, the receivables from the A.E. is denominated in Indian currency, the appropriate rate for computing interest is the prevailing rate of interest in India i.e., the SBI short-term deposit rate. The Ld. TPO after considering the relevant facts, has rightly applied the SBI short-term deposit rate, and thus, the interest computed by the Ld. TPO on receivables from the A.E. should be upheld.
35. We have heard both parties, perused the material available on record, and had gone through the orders of the authorities below. Insofar as the credit period, the assessee claims that it has allowed 90 days credit period to the A.E. as per the agreement, dated 10.01.2014 and claimed that all receivables from the A.E. are within the credit period allowed as per the agreement and there are no outstanding receivables beyond the credit period. In our considered view, the agreement entered into by the assessee company with its A.E. is not relevant to decide whether the credit period allowed by the assessee to its A.E. is on par with third party transactions. What is relevant is the credit period allowed by the assessee to its A.E. when compared to the credit period allowed to non-AE. Since the assessee could not furnish relevant evidence to prove that the credit period allowed to non-AE and AE are similar, we cannot accept 90 days credit period as per the agreement of the assessee with its AE. Therefore, we are of the considered view that, the ld. TPO after considering relevant facts has rightly allowed standard credit period of 60 days for imputing interest on outstanding receivables. Thus, we reject the arguments of the assessee and uphold the findings of the Ld. TPO/ Ld. DRP.
36. Insofar as interest computation by applying the SBI short-term deposit rate, in our considered view, it is a well-settled principle of law by the decisions of various Courts and Tribunals that, for computing interest on outstanding receivables from A.E., the currency in which such receivables is denominated is important factor and if we go by the facts of the present case, the assessee has shown receivables from the A.E, which are denominated in foreign currency. Therefore, in our considered view, the appropriate rate to be applied for computing interest on outstanding receivables from the AE is LIBOR+ appropriate basis points. Since LIBOR+ 200 basis points is appropriate for computing interest, we direct the Ld. TPO to compute interest on outstanding receivables from A.E. by allowing standard credit period of 60 days and by applying LIBOR+200 basis points.
37. In the result, the appeal filed by the assessee is partly allowed for statistical purposes.
Order pronounced in the Open Court on 31st October, 2025.
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