TaxTMI 
TaxTMI 
2026 (5) TMI 212
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....the TPO and inclusion and exclusion of certain comparables by the TPO and by the learned DRP for computing the ALP of the international transactions carried out by the assessee with its AE. 5. The brief facts of the case in hand are that the assessee, a private limited company, is engaged in the business of providing back-office support services to its AEs on cost-plus basis. The assessee has divided its transactions in 2 segments mainly: (a) BPO Services (b) Technical Support Services ('TSS') which is not in dispute. 6. The assessee benchmarked its transaction under BPO segment by adopting TNNM as most appropriate method and further PLI as OP/OC which was arrived at 18.51%. The assessee for the comparability analysis under BPO segment selected 17 comparables with a median of 9.58% and 35th & 65th Percentile being 7.26% and 11.59% respectively. However, the TPO during the assessment proceedings accepted 03 comparables out of 17 comparables selected by the assessee. The assessee's comparables accepted by the TPO are detailed as under: 1. Sundaram Business Services Limited 2. CES Limited 3. Tech Mahindra Business Services Limited ....
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....ssessee is engaged only in routine BPO services provided to its associated enterprise. The assessee does not provide any high-end or knowledge-based services. 9.2 It was also submitted that the annual report of Datamatics Business Solutions Limited does not clearly explain what exact activities are carried out under its BPM segment. Further, the annual report does not provide proper segment-wise break-up of its different business activities. Therefore, it is not possible to determine the margin of comparable services separately. 9.3 The assessee further before the Ld. DRP submitted that the said comparable has abnormal fluctuation in its margins. It is a well- established principle in transfer pricing that comparables should be selected only if they provide a reliable benchmark. If a company has abnormal margins due to extraordinary events, one-time transactions, or other exceptional circumstances, its results may not reflect the correct arm's length position. Therefore, such companies should not be included in the final set of comparables. 9.4 The assessee relied on judicial precedents in support of its contention. Reliance was placed on the decision of the Mumbai Bench o....
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....nt financial year for comparison purposes. 9.10 The assessee further submitted that R Systems International Limited is functionally similar, as it is engaged in providing IT services as well as Business Process Outsourcing services. The relevant segmental information is available in the public domain. Therefore, its margin can be properly compared with that of the assessee. 9.11 It was also submitted that the said company satisfies all the quantitative filters applied by the TPO. Accordingly, the assessee requested the Ld. DRP to direct the inclusion of M/s R Systems International Limited in the final set of comparables. 9.12 However, the Ld. DRP, after considering the submissions of the assessee with regard to Datamatics Business Solutions Limited, did not accept the objections. The Ld. DRP observed that as per the annual report, the revenue of the said comparable from IT enabled services is 100%. The company is engaged in the business of ITES as well as software development. 9.13 With regard to the plea of the assessee that the company has abnormal fluctuation in profits, the Ld. DRP held that the concept of range, weighted average of three years' data, and tolerable ....
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....he objection raised by the assessee. Accordingly, the Ld. DRP rejected the plea of the assessee for inclusion of R Systems International Limited in the final set of comparables. 11. Aggrieved by the directions of the Ld. DRP and the final assessment order passed pursuant thereto, the assessee has preferred the present appeal before us. 12. The Ld. AR before us submitted that Datamatics Business Solutions Limited should not be selected as a comparable company. It was submitted that the said company is functionally different from the assessee. The company is engaged in providing IT enabled services and Business Process Management services, which include high-end KPO services such as search analytics and other knowledge-based services. 12.1 It was further submitted that no proper segmental details are available in respect of the diversified activities carried out by the said company. In the absence of clear segmental information, the margin of comparable activities cannot be properly determined. 12.2 The Ld. AR also submitted that in the assessee's own case for Assessment Year 2017-18 in IT(TP)A No. 958/Bang/2022, the Bangalore Bench of the ITAT had directed exclusion of D....
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....led services. It was further submitted that detailed segmental information of the company is available in the public domain. Therefore, its financial results can be properly considered for comparability analysis. The assessee also submitted that the said company satisfies all the quantitative filters applied by the TPO, such as turnover, employee cost, export revenue and RPT filters. 12.9 It was further submitted that for Assessment Year 2020-21, the Hon'ble DRP had directed the TPO to include Micro Land Limited in the final set of comparables, as it satisfied all the filters applied by the TPO. Further, for Assessment Years 2017-18 and 2018-19, the TPO himself had accepted the said company in the final set of comparables of the assessee. Accordingly, the assessee submitted that Micro Land Limited ought to be included in the final set of comparables for the year under consideration. 13. On the other hand, the Ld. DR before us vehemently supported the order of the authorities below. 14. We have considered the rival submissions and perused the materials on record. From the preceding discussion, we note that the issue before us is revolving around the inclusion and the exclus....
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....arious co-ordinate benches of the Tribunal have held that where quarterly financial data is available, the margins for the relevant financial year can be reasonably computed by using such quarterly results. Therefore, a company cannot be rejected solely on the ground that it follows a different accounting year, if reliable quarterly data is available for proper comparison. In holding so, we place our reliance on the order of Concurr Technologies vs. ACIT reported in (2025) 180 Taxmann.com 447 (Bangalore) for AY 2021-22 wherein it was held as under: The next contention of the assessee is that R Systems International Limited which is part of the comparability study of the assessee as well as the TPO but is excluded for the simple reason that it follows a different accounting year. It is found that the above company is a listed entity wherein according to clause 41 of the listing agreement with the stock exchanges, the quarterly audited results reviewed by the auditor are made public. Therefore, if the data is available in the public domain, and assessee is in a position to reconstruct the financial data for the respective financial year comparable to the assessee's finan....
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....g to the comparability analysis in case of ITeS segment the assessee has stated that when Virinchi Ltd and MAA Business Solutions Private Limited should be included. Virinchi Limited was part of the transfer pricing study report prepared by the assessee whereas the MAA Business Solutions Private Limited is an addition comparable produced during assessment proceedings. We find that Virinchi Limited is not part of the TPO search metrics and similarly is the MAA Business Solutions Private Limited was also not found place in the search matrix of the learned transfer pricing officer. As we have already held that if the comparable companies are not finding place in the search matrix of the learned transfer pricing officer where there is no allegation that the search matrix adopted by the learned transfer pricing officer is inappropriate, so far as selection of the keywords, filters, etc., the incorporation of any company stating that it is comparable and therefore it should be included amounts to cherry picking. And therefore, the contention of the assessee for inclusion of the above company as well as suggestion of further inclusion of 11 companies in the market support services segment....
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....levels have impacted the profit margins of the comparable companies and to justify the claim for working capital adjustment. 16.3 However, the TPO contended that the assessee was not able to explain such difference. The TPO submitted that the assessee did not submit whether the comparables companies had financed their working capital by their own funds or borrowed funds. The assessee also failed to demonstrate whether any cost has been incurred on the working capital by the comparable companies. The TPO relied on the Hon'ble Chennai ITAT judicial precedent in the case of Mobis India Limited vs. DCIT reported in TS-235-ITAT-2013(CHNY)-TP wherein the Hon'ble ITAT rejected the claim of working capital adjustment of the taxpayer on the ground that impact of difference in working capital has not been demonstrated by the taxpayer. Hence, no working capital adjustment was allowed to the assessee. 17. Aggrieved assessee filed objections before the Ld. DRP. 18. Before the Ld. DRP, the assessee referred to the decision in the case of Mentor Graphics (Noida) Pvt. Ltd. in ITA No. 1969/Delhi/2006, wherein the Hon'ble Delhi High Court held that, depending on the facts of each case, appr....
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....n, cost of capital, market share and business strategy. These factors cannot be fully captured merely from year-end receivables and payables balances. Further, there is no uniform accounting practice to clearly segregate whether receivables and payables relate purely to revenue transactions or include capital items. Therefore, the balances shown in the financial statements may not accurately reflect the working capital employed for operational purposes. It was also observed that the cost attributable to working capital would differ from enterprise to enterprise, depending on the cost of funds and economic conditions in which the enterprise operates. 18.8 In view of these observations, the Ld. DRP held that a reasonably accurate adjustment could not be made in the present case. The assessee had also failed to demonstrate material differences warranting such adjustment. Accordingly, the Ld. DRP upheld the reasoning of the TPO and rejected the claim of the assessee for working capital adjustment. 19. Aggrieved by the order of the AO/TPO and the direction of ld. DRP, the assessee preferred an appeal before us. 20. The Ld. AR before us submitted that working capital adjustment ....
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....ion of the claim without undertaking a scientific computation is not justified. 22.2 Hence, in the interest of justice and fair-play, we deem it appropriate to restore this issue to the file of the AO/TPO for the limited purpose of granting working capital adjustment in accordance with law. The AO/TPO is directed to compute the working capital adjustment in line with the principles laid down in Agilent Technologies (International) P. Ltd. vs. ACIT reported in [2025] 172 taxmann.com 858 (Delhi - Trib.), as detailed under: (i) Compute the average of opening and closing balances of inventories, trade receivables and trade payables of both the tested party and the comparables for the relevant year, considering only revenue account items. (ii) Compute the net working capital as a percentage of operating cost/sales (whichever denominator is used in the PLI) for both the assessee and the comparables. (iii) Determine the difference between the working capital ratio of the assessee and that of each comparable. (iv) Multiply such difference by the appropriate interest rate, i.e., SBI Prime Lending Rate as on 30th June of the relevant financial year. ....
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....djustment at Rs. 11,79,491/- only. 24. Aggrieved assessee filed objections before the Ld. DRP. 25. Before the Ld. DRP, the assessee submitted that it had entered into international transactions of rendering ITES services amounting to Rs. 519.52 crores with its AEs. It was submitted that the receivables arising in the books of the assessee are directly linked to these international transactions for the provision of ITES services. 25.1 The assessee further submitted that the weighted average collection period for realising the receivables was only 22.69 days, which is well within the credit period of 30 days allowed by the TPO. Therefore, there is no delay warranting any separate adjustment on account of interest on receivables. 25.2 Without prejudice, the assessee submitted that as on 31 March 2021, it also had trade payables outstanding towards its AEs, on which no interest was charged by the AEs. It was further submitted that the assessee follows a uniform policy of not charging interest on overdue balances, whether from AEs or from third parties. Similarly, no interest was charged on any third-party receivables or payables. 25.3 The assessee also pointed out that t....
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....RP further relied on plethora of judicial precedents in this regard. 26.1 Further, on the plea of the assessee that it has not charged any interest from either AEs or non-AEs and therefore no interest should be imputed on AE transactions, the Ld. DRP did not accept the contention. 26.2 The Ld. DRP observed that the assessee failed to submit complete details regarding the AE transactions, such as the terms of service, agreed credit period, payment terms, and relevant agreements or supporting documents. In the absence of such materials, the Ld. DRP held that the claim of the assessee cannot be accepted. Accordingly, the Ld. DRP rejected the plea of the assessee in this regard. 27. Aggrieved by the order of the AO/TPO and the direction of ld. DRP, the assessee preferred an appeal before us. 28. The Ld. AR before us submitted that trade receivables should not be treated as a separate international transaction and no interest should be imputed on the same. It was submitted that the TPO has wrongly treated the outstanding trade receivables as if they were unsecured loans advanced to the AEs and accordingly computed interest on such receivables amounting to Rs. 11,94,991.00 on....
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....not correct, as the invoices were raised in foreign currency. 30.1 It is an undisputed fact that the receivables arise from services rendered to AEs and the invoices were denominated in foreign currency. In such cases, the interest rate applicable to foreign currency transactions should be applied. The adoption of domestic SBI PLR rate is not justified. 30.2 The Tribunal in several cases has consistently held that where the underlying transaction is in foreign currency, the appropriate benchmark rate is LIBOR plus a reasonable basis point spread. 30.3 Accordingly, we direct the TPO to recompute the interest on delayed receivables, if any, by adopting LIBOR plus 200 basis points. Interest shall be computed only for the actual period of delay beyond the agreed credit period. The TPO shall grant reasonable opportunity to the assessee while recomputing the adjustment. 30.4 Further, we note that working capital adjustment is computed on the basis of opening and closing balances of receivables and payables. However, delayed realisation of receivables has to be examined on a transaction-to-transaction basis. 30.5 If an invoice is raised during the year and the amount is rea....
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.... subsumed in the final assessment order passed under section 143(3) read with section 144C(13) read with section 144B of the Act. 31.7 In support of its contention, the assessee placed reliance on decisions of the Bangalore Bench of the Tribunal, wherein it has been held that issues arising from adjustments made under section 143(1) can be adjudicated in an appeal arising from the final assessment order passed under section 143(3) read with section 144C(13) of the Act. 32. Aggrieved assessee filed objections before the DRP. 33. Before the Ld. DRP, it was submitted that the adjustment made by the CPC under section 143(1) was incorrect, as there was no difference between the amount reported in the return of income and the tax audit report. 33.1 The assessee once again clarified that the amount relating to bonus or commission payable to employees had been properly disclosed in the tax audit report under Clause 26(i)(a) and was also correctly reported in the return of income under the relevant schedule. It was submitted that the deduction was allowable, as the amount had been paid during the year. 33.2 The assessee also submitted that the adjustment made under section 14....
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....e return of income and the tax audit report. It was contended that the CPC is empowered to make prima facie adjustments where inconsistencies are evident from the record. The ld. DR argued that unless the assessee clearly demonstrates that the deduction under section 43B was correctly claimed and disclosed, the adjustment cannot be disturbed. It was further submitted that such adjustment is permissible within the scope of section 143(1) of the Act. Accordingly, the DR prayed that the disallowance be sustained. 36. We have considered the rival submissions of both the parties and examined the materials available on record. We find merit in the contention of the Ld. AR that though the disallowance originated from processing under section 143(1) of the Act by CPC, the same stands merged with the final assessment order passed under section 143(3) read with section 144C(13) of the Act. The Assessing Officer has adopted the income determined under section 143(1) as the starting point in the draft and final assessment order. Therefore, the adjustment has become part of the final assessed income. 36.1 In this regard, reliance placed on the decision of the Bangalore Bench of the Tribun....
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.... any appeal before the learned CIT(A) under the bona fide belief that the matter may picked up under scrutiny. Furthermore, the assessee has brought to the notice of the NFAC about the adjustment made under section 143(1) of the Act which can be verified from the details available on pages 367 to 371 of the appeal set. 44.4 In view of the above discussion and considering the factual position supported by documentary evidence, we direct the Assessing Officer to delete the disallowance of Rs. 30,30,210/- made under section 36(1)(va) of the Act. Accordingly, Ground No. 9 raised by the assessee is allowed." 36.2 The Tribunal in Ariba Technologies India (P.) Ltd. also distinguished the decision in Areca Trust (supra), by holding that where the assessee had withdrawn the appeal against the intimation passed under section 143(1) of the Act, the issue had attained finality. However, where no such finality has occurred and the issue has been specifically brought to the notice of the authorities during assessment proceedings, the matter can be examined in appeal arising from the final assessment order. 36.3 On merits, the assessee has demonstrated that the amount in question w....
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....erefore, it was contended that there was no delay in filing the return and no liability to pay self-assessment tax. Accordingly, levy of interest under section 234A of the Act amounting to Rs. 9,84,716 in the final assessment order is incorrect and contrary to the CBDT Circular. 40. On the contrary, the Ld. DR before us supported the order of the authorities below. 41. We have considered the rival submissions of both the parties and perused the materials available on record. It is not in dispute that the assessee was required to furnish a report under section 92E of the Act and therefore the original due date for filing the return of income under section 139(1) was 30 November 2021. It is also not in dispute that the CBDT, vide Circular No. 01/2022 dated 11 January 2022, extended the due date for filing the return to 15 March 2022. 41.1 The assessee filed its return of income on 14 March 2022, which is within the extended due date. Therefore, there was no delay in filing the return. 41.2 The said CBDT Circular further clarifies that no interest under section 234A of the Act shall be levied where the self-assessment tax payable does not exceed Rs. 1,00,000. In the presen....