TaxTMI 
TaxTMI 
2026 (9) TMI 441
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.... the Income-tax Act, 1961 ('Act') and in undertaking a fresh comparability analysis (without granting reasonable opportunity / time to verify the same) and consequently making a TP adjustment of INR 22,35,37,299. 2. Erroneous Holding of AE Relationship Holding that Freyr India and Freyr Inc constitute Associated Enterprises ('AEs') within the meaning of Section 92A, despite none of the conditions prescribed under Section 92A(2) being satisfied. 3. Incorrect Reliance on Section 92A(1) without independent satisfaction of Section 92A(2) Invoking Section 92A(1) in isolation, without independently establishing the existence of any of the conditions enumerated in Section 92A(2), contrary to settled judicial position. 4. AE Relationship Cannot Be Inferred Merely from Commercial Collaboration Concluding that commercial dealings, cooperation, business association, or use of a common brand or trade name results in an AE relationship. 5. Voluntary Filing of Form 3CEB Cannot Create an AE Relationship Treating the voluntary filing of Form 3CEB on a conservative basis as conclusive evidence of an AE relationship. 6.....
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.... Ignoring the settled legal principle that TP adjustments cannot generate artificial or super-normal profits in the hands of one entity when such profits are not earned on a consolidated basis. The approach adopted violates the arm's length standard, which seeks to replicate outcomes between independent enterprises under comparable circumstances. 12. Failure to Consider Commercial and Economic Reality Failing to consider the commercial and economic realities of the business model, wherein: • Freyr India is a start-up and operates in a highly competitive regulatory services market, and • Overall profitability itself is limited. Ignoring these realities and imposing margins disconnected from business fundamentals renders the TP adjustment arbitrary and unsustainable. 13. Mechanical Application of TNMM Without Proper Benchmarking Logic Mechanically applying TNMM with Freyr India as the tested party, without examining whether such application reasonably reflects the value contributed by each entity, and without evaluating whether the resultant profit attribution aligns with the overall value chain of the busine....
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....adjustment for the differences in the functions and risks of the companies selected vis-à-vis Freyr India. 22. Incorrect TP Adjustment Computation In computing the TP adjustment on total export sales value instead of restricting it to the value of international transaction with Freyr Inc. Each of the grounds given above is independent and without prejudice to the other grounds of appeal preferred by the Appellant. The Appellant prays for leave to add, alter, vary, omit, substitute or amend the above grounds of appeal, at any time before or at, the time of hearing, of the appeal, to enable to decide this appeal according to law." 3. The brief facts of the case are that the assessee "Freyr Software Services Private Limited" is a company engaged in the business of providing regulatory compliance services to Freyr Inc., USA. The assessee filed its return of income for the assessment year 2022-23 on 29.11.2022, declaring total income of Rs. 6,35,48,410/-. During the financial year relevant to the assessment year, the assessee had entered into international transactions with its Associated Enterprise (for short "AE"), namely Freyr Inc., USA, ....
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....otal export value instead of making adjustment towards AE transactions. The Ld. DRP, vide directions issued under Section 144C(5), dated 18.12.2025, rejected most of the objections filed by the assessee including arbitrary TP adjustment by invoking Section 92C(3) of the Act, and re-characterization of transactions of the assessee as KPO transactions. The Ld. DRP had also upheld the reasons given by the Ld. TPO to consider the assessee as the tested party. Insofar as comparative analysis, the Ld. DRP upheld the comparables selected by the Ld. TPO, except in the case of Happiest Minds Technologies Limited, where the Ld. DRP has excluded Happiest Minds Technologies Limited by obtaining information under Section 133(6) of the Act. on the ground that it is predominantly engaged in IT solutions and service company. The Ld. DRP also upheld the additions made by the A.O. towards total exports instead of TP adjustment in respect of AE transactions. 7. In pursuant to the directions issued by the Ld. DRP under Section 144C(5) of the Act, the A.O. passed final assessment order under Section 143(3) r.w.s. 144C(13) r.w.s. 144B of the Act, on 29.12.2025, and determined the total income at Rs. ....
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....ins that merely for the reason that the assessee has disclosed the transactions in Form No. 3CEB, it does not constitute an AE relationship. Therefore, once the transactions of the assessee with Freyr Inc., USA do not satisfy the conditions of Section 92A(1) and Section 92A(2) of the Act, making the TP adjustment is incorrect. In this regard, they relied upon the decision of ITAT, Bangalore Bench in the case of Page Industries Limited Vs. DCIT reported in (2016) 71 taxmman.com 172 and the decision of ITAT, Ahmedabad Bench in the case of ACIT Vs. Veer Gems reported in (2017) taxmann.com 127. 11. The Ld. Counsel for the assessee, further referring to ground Nos. 7 to 15 of the assessee, submitted that the assessee has selected Freyr Inc., USA as the tested party. He further submitted that the OECD Guidelines and UN TP Manual uniformly state that the tested party should be the least complex entity for which reliable data is available, irrespective of jurisdiction. Selection should follow economic substance and FAR profile. Freyr India is functionally complex when compared to Freyr Inc., USA. Therefore, the assessee selected Freyr Inc., USA as the tested party. Even though the Ld. T....
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....es2win India Private Limited, Datamatics Business Solutions Limited, Moonfrog Labs Private Limited, Mu Sigma Business Solutions Private Limited, Happiest Minds Technologies Limited, Bridgei2i Analytics Solutions Private Limited, NGA HR India Private Limited, and PatentManiac Consulting Private Limited, even though the above companies are giant companies having diversified businesses, including IT solutions, when compared to the assessee providing domain-specific services. The Ld. TPO selected the said companies even though the assessee had raised objections to their selection. Therefore, he submitted that, if the foreign AE is accepted as the tested party, the matter may be remanded to the file of the Ld. TPO for fresh TP analysis and selection of appropriate comparables. The Ld. Counsel for the assessee further submitted that the Ld. TPO had made the TP adjustment on the total export value of Rs. 93.97 crores as against the assessee's transactions with its AE at Rs. 78.66 crores. As per Section 92 of the Act and Rule 10B(e), and further, multiple rulings mandate that TP adjustment applies strictly to international transactions with AEs and cannot extend to non-AE transactions.....
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....l with the meaning of associated enterprise. As per Section 92A(1), the term "associated enterprise", in relation to another enterprise, means any enterprise which participates, directly or indirectly, or through one or more intermediaries, in the management or control or capital of the other enterprise, or in respect of which one or more persons participate, directly or indirectly, or through one or more intermediaries, in the management or control or capital of the other enterprise. As per Section 92A(2), two enterprises shall be deemed to be associated enterprises if, at any time during the previous year, one of the conditions provided therein is satisfied. Further, as per clause (g) of Section 92A(2), where the manufacture or processing of goods or articles or business carried on by one enterprise is wholly dependent on the use of know-how, patents, copyrights, trademarks, licences, franchises, or any other business or commercial rights of similar nature, or any data, documentation, drawing or specification relating to any patent, invention, model, design or process, of which the other enterprise is the owner or in respect of which the other enterprise has exclusive rights, suc....
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.... M/s. IZMO Ltd. (formerly Logix Microsystems Ltd.) Vs. DCIT in IT(TP)A No. 453/Bang/2015, dated 29.01.2020, wherein it was held as under: "22. In Ground No.5(g) the Assessee seeks to question the very basis of the provisions of Sec.92 of the Act by contending that the transfer pricing adjustment and consequent addition to the total income would result in the profits of the Indian entity to be more than the global profits of the group and therefore the addition should be deleted. Such arguments which are against the very basis of Transfer Pricing provisions incorporated in Sec.92 Similarly in of the Act, deserves to be rejected as without merit. Grd.No.5(h) the Assessee seeks to contend that the foreign AE must be regarded as tested party. The contention is devoid of merits and is flawed for the reason that the geographical and other economic circumstances of the comparable companies outside India would be different and cannot reflect the correct ALP. In our view the aforesaid grounds are contrary to the statutory provisions of the Indian TP regulations and hence rejected." 17. Therefore, we are of the considered view that there is no merit in the arguments of the Ld. Co....