TaxTMI 
TaxTMI 
2026 (9) TMI 48
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....hcare Inc., USA ("EHI"). Consequent thereto, the assessee became a wholly owned captive service provider of the EHI Group and has since been exclusively rendering Information Technology Enabled Services ("ITeS") to its Associated Enterprise ("AE"). 2.1 EHI, a company incorporated in New Jersey, USA, is engaged in developing and providing proprietary healthcare software applications, including MDNet, ARIA and other healthcare platforms on a Software-as-a-Service ("SaaS") model. The assessee functions as the dedicated offshore service delivery centre of the EHI Group and provides support services in relation to web-based electronic health record systems and allied healthcare software platforms. It operates as a limited-risk captive service provider and is remunerated on a cost-plus basis. 2.2 The services rendered by the assessee involve processing and maintaining healthcare-related information, including health records, billing records and medical coding records. 2.4 During the relevant assessment year, the assessee entered into international transactions aggregating to Rs. 16,48,46,891/-. For benchmarking the international transactions, the assessee adopted the Transaction....
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....adjustment claimed by the assessee towards extraordinary idle costs attributable to COVID-19-induced underutilisation of capacity. 4. The DRP has noted the following findings: The assessee challenged the action of the TPO before the Dispute Resolution Panel ("DRP"). The DRP, vide directions dated 12.08.2024, declined to interfere with the rejection of the capacity utilisation adjustment. 4.1 The principal reasoning adopted by the DRP was that corresponding information concerning capacity utilisation or idle costs of the comparable companies was not available in the public domain and, in the absence of such information, the adjustment claimed by the assessee could not be reliably carried out. 4.2 The DRP also made certain observations regarding the factual substantiation of the assessee's claim. It noted that the assessee's explanation regarding deployment of some manpower towards research and review of the Indian market during the COVID-19 period was not specifically reflected in the contemporaneous Transfer Pricing Study Report. It further observed that separate documentary evidence establishing the actual deployment of employees for such activities or precisel....
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....ce was placed, inter alia, upon the decisions in Demag Cranes & Components (India) Pvt. Ltd. v. DCIT [71 ITR (Trib) 259 (Del)], Terex India Pvt. Ltd. v. DCIT [ITA Nos.6775 & 6783/Del/2015], CIT v. Petro Araldite (P.) Ltd. [256 Taxman 16 (Bom)], Tokai Rika Minda India Pvt. Ltd. and Brakes India Private Limited v. DCIT [IT(TP) No.138/Chny/2024], besides the OECD Transfer Pricing Guidelines and the OECD Guidance on the Transfer Pricing Implications of the COVID-19 Pandemic. 5.3 It was further submitted that the assessee could not reasonably be expected to furnish confidential internal information of independent comparable companies. If the TPO considered such information necessary, the statutory powers available u/s. 133(6) could have been utilised for obtaining information from the concerned companies. The ld. AR accordingly prayed that the rejection of the capacity utilisation adjustment be set aside and that the abnormal idle costs attributable to the extraordinary COVID-19- induced underutilisation be appropriately excluded/adjusted while determining the operating margin. 6. The ld.DR Mr. K. Jayaganesh, CIT for the Revenue supported the orders of the TPO and DRP. It was cont....
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....t and determined the assessee's margin at 0.99%. 7.3 We find that the TPO has not rejected the assessee's claim on the basis that the expenditure was not actually incurred, was not incurred for business purposes, was fictitious or was otherwise not genuine. There is also no specific finding that the assessee did not suffer underutilisation of its manpower or infrastructure during the relevant year. The principal reason for denial of the adjustment is that comparable-company data concerning capacity utilisation or idle costs was not available in the public domain. In our considered opinion, the aforesaid approach of the TPO, as affirmed by the DRP, is legally unsustainable. 8. Regarding applicability of Rule 10B(3)of the Income Tax Rules, 1962, Rule 10B(3) expressly provides that an uncontrolled transaction shall be comparable to an international transaction if none of the differences between the transactions or between the enterprises entering into such transactions are likely to materially affect the price or cost charged or profits arising from such transactions, or if reasonably accurate adjustments can be made to eliminate the material effects of such differences.....
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....pany capacity utilisation data was not available in the public domain. 12. We also find force in the submission of the ld. AR that the assessee had furnished details of the abnormal idle costs and the methodology adopted for determining its adjusted operating margin. Significantly, neither the TPO nor the DRP has recorded a finding that: * the assessee did not suffer capacity underutilisation; * the abnormal costs claimed were fictitious or not actually incurred; * the expenditure was not incurred in the course of business; * the assessee's computation was demonstrably incorrect; or * the supporting material furnished by the assessee was unreliable. 13. The rejection has essentially proceeded on the ground that corresponding data in respect of the comparables was unavailable. In our view, the assessee cannot be required to produce confidential internal information of independent third-party companies which is not available to it. Such information is ordinarily within the control of the respective comparable companies. Once the assessee has demonstrated the existence of a material difference affecting its profitability and has furnish....
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....arables selected by the TPO, the assessee's adjusted operating margin of 14.25% is higher than the arm's length margin of 11.84%.Accordingly, the international transaction undertaken by the assessee with its AE satisfies the arm's length standard. The transfer pricing adjustment of Rs. 1,77,16,382/- has arisen solely because the TPO included the abnormal idle costs in the operating cost and consequently reduced the assessee's margin to 0.99%. Once such abnormal costs are appropriately neutralised, the assessee's adjusted margin exceeds the arm's length margin determined by the TPO himself. There is, therefore, no basis for sustaining the impugned transfer pricing adjustment. 17. In view of the foregoing discussion, we hold that: i. the extraordinary COVID-19-induced underutilisation of the assessee's manpower and infrastructure constituted a material difference affecting its operating profitability; ii. the abnormal idle costs attributable to such extraordinary underutilisation were required to be appropriately considered under Rule 10B(3); iii. the TPO/DRP erred in rejecting the adjustment merely on the ground that correspo....