ITAT Delhi Orders Re-examination and Exclusion of Comparables in Transfer Pricing Dispute — Extreme Labs India Private Limited
Background and Overview
The Delhi Bench of the Income Tax Appellate Tribunal recently adjudicated upon an appeal arising from a transfer pricing dispute for Assessment Year 2021-22. The case involved Extreme Labs India Private Limited Vs National Faceless Assessment Centre, where the core controversy revolved around whether the Assessing Officer (AO) had properly implemented the directions issued by the Dispute Resolution Panel (DRP) while passing the final assessment order under Section 143(3) read with Section 144C(13) and Section 144B of the Income Tax Act, 1961.
The assessee, an Indian private limited company, was engaged in marketing and distribution of peering software, licensing services for the right to use computer software, and database services. The central allegation was that the AO and Transfer Pricing Officer (TPO) had disregarded explicit DRP directions while finalizing the benchmarking analysis for the relevant international transaction.
Nature of the International Transaction and Benchmarking Approach
During Assessment Year 2021-22, the assessee entered into an international transaction with its Associated Enterprises (AEs) involving payment of operational expenses towards technology and management support amounting to Rs. 10,32,25,426.
To determine the Arm's Length Price (ALP) of this transaction, the assessee applied the Transactional Net Margin Method (TNMM) as the most appropriate method. The following filters were adopted for the selection of comparable companies:
- Companies reporting net sales of Rs. 1,00,00,000 or more
- Companies with net worth greater than or equal to zero
- Companies with a ratio of trading sales to total sales of 75% or more
- Companies engaged in software distribution activities
- Companies with Related Party Transactions (RPT) not exceeding 25% of sales
TPO's Modifications and Proposed Adjustment
While the TPO broadly accepted the filters applied by the assessee, he independently modified the comparable set — excluding certain companies chosen by the assessee and introducing additional ones. The final list of comparables selected by the TPO, along with their operating profit to operating revenue (OP/OR) ratios, was as follows:
| S. No. | Company Name | OP/OR (%) |
|---|---|---|
| 1 | DC Infotech & Communication Ltd. | 3.02 |
| 2 | Sonata Information Technologies Limited | 3.05 |
| 3 | Ifixture Technologies Pvt. Ltd. | 3.69 |
| 4 | RAH Infotech Private Limited | 4.55 |
| 5 | Compass IT Solutions and Services Pvt Ltd. | 6.93 |
| 6 | Peoplelink Unified Communications Pvt. Ltd. | 10.81 |
| 7 | MSR IT Solution Pvt. Ltd. | 15.05 |
| 8 | Unistal Systems Pvt Ltd. | 15.29 |
| 9 | ESDS Software Solution Ltd. | 17.23 |
| 10 | Quick Heal Technologies Ltd. | 32.94 |
| 11 | Zoho Corporation Pvt Ltd. | 42.63 |
Based on this revised comparable set, the TPO proposed a transfer pricing adjustment of Rs. 72,74,035 vide order dated 21.10.2023 passed under Section 92CA(3) of the Income Tax Act, 1961. The AO subsequently passed a Draft Assessment Order dated 10.12.2023 incorporating this adjustment.