TaxTMI 
TaxTMI 
2026 (5) TMI 1070
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.... provisions of the Act read with the Income Tax Rules, 1962 ("Rules") and modifying /undertaking fresh analysis while determining the arm's length price and in doing so making an adjustment of INR 8,10,59,589 to the international transactions. Ground no 2 Adjustment of INR 5,07,10,089 pertaining to international transaction of provision of contract R&D services and of INR 45,77,985 pertaining to international transaction of provision of contract manufacturing services. 2. Ground against rejection of certified segmental financial information a) Not considering certified segmental financials information submitted by the Appellant. b) Without prejudice, not considering segmental margins as per audited financial statements Ground no 3-11- Without prejudice grounds for adjustment of INR 5,07,10,089 pertaining to international transaction of provision of contract R&D services and of INR 45,77,985 pertaining to international transaction of provision of contract manufacturing services. 3. Ground against applying arbitrary filters without any rationale Inter-alia use of the following additional/ modified filters in undertaking the co....
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....ifferences. Not adjusting the net margins of comparable companies for functional and risk differences in accordance with the provisions of rule 10B(1) (e) of the Rules. 11. Grounds pertaining to working capital adjustments Not adjusting the net margins of comparable companies for differences in working capital in accordance with the provisions of rule 10B(1)(e) of the rules. 12.Grounds pertaining to mark-up on reimbursements Adjustment of INR 5,16,290 a) Imputing mark-up amounting to INR 5,16,290 at the rate of 5% on reimbursement of expenses by AEs without appreciating that the same were recovered on a cost-to-cost basis b) Without prejudice, not undertaking any analysis to determine the ALP of the reimbursement transaction and marking up at the rate of 5% on ad-hoc basis. 13.Grounds pertaining to interest on ECBs - Adjustment of INR 55,38,762 a) Rejecting the benchmarking rate adopted by the Company without providing reasons and making an adjustment by considering the ALP rate of interest at LIBOR plus 200 bps b) Considering the analysis more favorable to the Revenue, without substantiating reason, w....
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....e in foreign currency and hence interest, if any, is to be benchmarked with the rates prevalent in the international market for foreign currency loans; b) Considering ad-hoc credit period of 30 days instead of the industry average credit period c) Not considering netting off of outstanding receivables and payables from/to AEs; d) Not following method of computation as held by Hon'ble ITAT in Assessee's own case for AY 2013-14 and AY 2014-15 16. Ground pertaining to brought forward business losses Not adjusting brought forward business losses pertaining to previous years of INR 116,62,76,178 against the business income computed after making the transfer pricing adjustment of INR 8,10,59,589 17. Ground on erroneous initiation of penalty under section 270A of the Act Ld. AO was not justified and rather grossly erred in law and in facts by initiating penalty proceedings under section 270A of the Act by falsely stating that the Assessee has under-reported the income." 2. Succinctly stated, the assessee company, which is a wholly owned subsidiary of "Curia Group" that was set up to provide R&D services in the field of medic....
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....aggrieved with the order passed by the AO under section 143(3) r.w.s 144C(13) of the Act, dated 30/06/2022, has carried the matter in appeal before us. 9. We have heard the Learned Authorized Representatives of both parties, perused the orders of the authorities below and the material available on record, as well as considered the judicial pronouncements that have been pressed into service by them to drive home their respective contentions. 10. Ms. Ananya Kapoor, Advocate, Learned Authorized Representative (for short, "Ld. AR") for the assessee company, at the threshold of hearing of the appeal, took us to the respective issues based on which the impugned assessment order has been assailed before us. 11. Apropos the TP adjustment of the contract research and development services made by the AO pursuant to the directions of the TPO, the Ld. AR submitted that the AO/TPO had grossly erred in law and on the facts of the case by failing to consider the certified segmental financial information submitted by the assessee company in its Transfer Pricing Study Report (TPSR). Alternatively, the Ld. AR submitted that, even otherwise, the AO/TPO had erred in failing to consider the se....
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.... business segment wise, AE and non-AE expenses are bifurcated, while for in the audited financials, the mandate of AS-17 has alone been followed, which refers to related party and non-related parties only without going into each business segment wise, Pages-480-481 of APB. The Ld. AR submitted that, even if it was to be assumed that the audited financials were incorrect, the segment result provided in the TP documentation, certified by a Cost and Management Accountant, could not have been rejected. 12. Alternatively, the Ld. AR submitted that if the TPO were to reject the segment provided in the TP documentation, the segmental margins as per the audited financial statements should have been considered. The Ld. AR to buttress her contention had relied upon various judicial pronouncements/orders, viz. (i) Hon'ble High Court of Delhi order in Nalwa Steel & Power Ltd, ITA 725/2019, dated 06/03/2024; (ii) the order of the ITAT, Hyderabad in TPSC (India) (P.) Ltd, ITA (TP) No.225/Hyd/2022, dated 18/03/2024; and (iii) the order of the ITAT, Mumbai Bench in Mylan Pharmaceuticals Private Limited, ITA No.2209/Mum/2017, dated 20/03/2020. 13. Coming to the second issue, i.e., TP adjustme....
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....ubmitted that though the outstanding receivables are not a separate international transaction, but if the same is to be so treated, then it should be benchmarked using a combined transaction approach, i.e., by combining the outstanding receivables with the main international transaction of provision of services, due to the fact that the receivables are a result of the international transactions of the assessee company. Alternatively, the Ld. AR submitted that the Tribunal in the assessee's own case for the preceding years, i.e., AY 2010-11 to AY 2014-15, had directed the AO/TPO to adopt LIBOR + 200 basis points as the applicable ALP interest rate for the purpose of imputation of interest on outstanding receivables from AEs. The Ld. AR to buttress her aforesaid contention had taken us through the orders passed by the Tribunal in the assessee's own case for AY 2010-11 to AY 2014-15 in ITA No.425/Hyd/2015, 233 & 107/Hyd/2016, 2184/Hyd/2017 and 2376/Hyd/2018, dated 26/11/2020, Page 874 of APB. 15. Coming to the last issue, the Ld. AR submitted that the AO had erred in not adjusting the brought-forward business losses of previous years of Rs. 116,62,76,178/- against the business inco....
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....ssee company in its TP documentation because, in his view, the audited financials did not match the segment results. We are unable to persuade ourselves to subscribe to the aforesaid observation of the TPO. As pointed out by the Ld. AR, and rightly so, the assessee company vide its letter, dated 23/07/2021 filed with TPO had given a detailed reason for the aforesaid impugned discrepancy, and had brought to his notice that the segment results for the TP purpose were detailed and accurate as per business segment wise, wherein AE and non- AE expenses were bifurcated whereas for audited financials, the mandate of AS-17 has alone been followed, which referred to related party and non-related party details only without getting into each business segment wise. In fact, on a conjoint perusal of the segmental information provided by the assessee company in its audited financials, Page 34 of APB, and in its TP documentation as certified by the Cost and Management Accountant, Page 483 of APB, the revenue from operations is duly reconciled. In our view, the TPO proceeded on the wrong premise and clearly overlooked the assessee company's detailed reply. Apart from that, we find substance in....
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....ointing out any discrepancy on the part of the assessee company in relation to the method of allocation of cost as adopted is supported by the judgment of the Hon'ble High Court of Delhi in the case of Principal Commissioner of Income Tax vs. NALWA Steel & Power Limited, ITA 725/2019, dated 06/03/2024. Also, a similar view had been taken by the ITAT, Hyderabad "B" Bench in the case of TPSC (India) (P.) Ltd vs. Deputy Commissioner of Income Tax (2024) 160 taxmann.com 693 (Hyderabad). It was observed that the assessee company had computed segmented operating margin on cost from rendering of design, engineering, and other related services to its AEs, but TPO used total revenue and total expenditure to determine ALP. The Tribunal remanded the matter for consideration of the details furnished by the assessee company regarding the computation of the margin for the provision of services to AEs. Further, we find that the ITAT, Mumbai "J" Bench in the case of Mylan Pharmaceuticals Private Limited vs. ACIT, Circle-7(2)(2), Mumbai, dated 20/03/2020, has held that as there was no basis for the TPO/DRP to reject the duly certified segmental results, which were submitted by the assessee company,....
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....al from RBI was well within the ceiling contemplated in the RBI circulars. In fact, we find that the RBI Master Circular on ECB and trade credits for FY 2013-14, FY 2014-15, and FY 2015-15 reveals that the interest paid by the assessee company at LIBOR + 300 basis points on ECBs borrowed from its AEs is less than the interest ceiling provided by RBI. We find that the Hon'ble High Court of Karnataka in the case of CIT vs. M/s. GE India Technology Center Pvt. Ltd., ITA No. 282 of 2013, dated 17/12/2020, observed that the RBI's approval of the rate of interest is a relevant factor in determining the ALP of that rate. Also, it was observed that, as per the settled position of law, the rate of interest should be determined on the basis of the rate of interest prevailing at the time of availing the loan. Also we find that the ITAT, Mumbai in the case of Firemenich Aromatics (India) Pvt Ltd vs. ACIT-9(3)(1), Mumbai in ITA No.7844/Mum/2019, dated 26/10/2021 had observed that the assessee company which had obtained a loan in the nature of External Commercial Borrowing (ECB) from its AEs had benchmarked the same at the interest rate of six months USD LIBOR rate + 350 basis points by rely....
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....11/2020. In the said order, it was observed that, as the assessee company had received its outstanding receivables from its AE in foreign currency, it would be just and fair to adopt LIBOR + 200 basis points as the applicable ALP interest rate for the purpose of imputing interest on outstanding receivables from AEs. Also, it was observed that the said imputation of interest is to be made on an invoice-to-invoice basis on outstanding receivables so that the period of delay in respect of each invoice could be actually worked out. For the sake of clarity, we deem it apposite to cull out the observations of the Tribunal in the aforesaid case of the assessee company for the preceding years, as under: "5.7. It would be relevant to note in the aforesaid paragraph that assessee had to receive its outstanding receivables from its AE in foreign currency, it would be just and fair to adopt LIBOR rate + 200 basis points as the applicable ALP interest rate for the purpose of imputation of interest on outstanding receivables from AEs. Needless to mention that the said imputation of interest is to be made on invoice to invoice basis on outstanding receivables so that the period of delay ....