TaxTMI 
TaxTMI 
2026 (9) TMI 1151
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....s return of income for the AY 2022-23 on 03.11.2022 declaring a total income of Rs. 9,38,15,050/-. The return was processed u/s. 143(1) of the Act. Subsequently, the case was selected for scrutiny under CASS for the reason that to verify large value of international transactions in services in comparison to revenue from sale of services shown in ITR, sale of services for ITES and low profitability. Accordingly, statutory notices were issued to the assessee. The assessee had reported international transactions in its Form 3CEB in compliance with sec.92E of the Act by adopting TNMM for benchmarking to determine Arms Length Price (ALP) of its international transactions. The AO made a reference to the Transfer Pricing Officer (TPO) for determining the ALP of international transactions with the AEs. Subsequently, the TPO passed an order u/s. 92CA(3) of the Act dated 03.01.2025 by proposing upward adjustment of Rs. 2,98,45,100/- on AE sales in ITES segments and towards outstanding receivables. Subsequently, the AO passed draft assessment order on 10.02.2025, against which the assessee filed objections before the Dispute Resolution Panel (DRP). The objections of the assessee are considere....
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....ucting a fresh benchmarking analysis in determining the arm's length price. b) Incorrect inclusion: DRP/AO/TPO erred in including the following companies as comparables, despite being functionally dissimilar; Integra Software Services Pvt. Ltd Cheers Interactive (India) Pvt Vitae International Accounting Services Pvt. Ltd E Care India Pvt. Ltd Bahar Infocons Pvt. Ltd TTEC India Customer Solutions Pvt. Ltd (formerly Motif India Infotech Pvt. Ltd.) c) Incorrect rejection of comparable companies: The DRP/AO/TPO has erred in dismissing filters applied and incorrectly rejecting the following companies on basis of new search criteria without providing any cogent reasons. Cameo Corporate Services Ltd CES Ltd Silgate Solutions Ltd Allsec Technologies Ltd Athena BPO Pvt Ltd 6. TP: Computation of Notional Interest on Outstanding Receivables incorrect: a) Outstanding receivables not a loan: The DRP/TPO erred in treating outstanding receivables of the Appellant as interest free loans and charged interest of Rs 92,30,445.27/- without appreciating the facts o....
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....f the above, the ld.AR relied on the following judicial precedents of various Tribunals. (i) Rage Frameworks India Private Limited v. ACIT ITA No.674/PUN/2022 (ii) Infor (India) Private Limited v. DCIT IT(TP)A No.1341/Hyd/2024 (iii) BNY Mellon International Operations (India) Pvt. Ltd. v. NAC ITA No.699/PUN/2021 Cheers Interactive (India) Private Limited 7. The TPO in its order in page Nos. 9 and 10, stated that M/s.Cheers interactive (India) Pvt. Ltd. is providing IT enabled services in its activities and included as a comparable company in determining the ALP of the assessee's international transactions. However, the ld.AR submitted that the said company is specialized into research analytic sales and marketing services. The ld.AR took us through to the paper book page Nos.172 and 173, wherein the SBRL finance of the company shows that the revenue of the company is from information technology services, but not of ITES. Therefore, the company is engaged in the activities, which are functionally different from the assessee's activities, and therefore, the said company needs to be excluded from the comparables. In support of the argument of the ld.AR....
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.... upholding the order of the AO. 10. We have heard the rival submissions, carefully perused the orders of the TPO, the DRP, the Assessment Order, the material placed on record and the judicial precedents relied upon by the parties. The controversy involved in the present appeal essentially relates to the determination of the Arm's Length Price of the international transactions entered into by the assessee with its Associated Enterprises in the IT Enabled Services (ITES) segment. The assessee is admittedly engaged in rendering routine software development support, analytical services and Business Process Outsourcing (BPO) services exclusively to its Associated Enterprises and is remunerated on a cost-plus basis. Therefore, while selecting comparable companies under the TNMM, it is imperative that only those companies performing similar functions, employing similar assets and assuming similar risks are selected. It is a settled proposition of law that functional similarity constitutes the foremost criterion in comparability analysis, and unless a company is functionally comparable, it cannot be retained merely because it satisfies quantitative filters. The Hon'ble Courts an....
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.... information technology does not render every service comparable with ITES. We therefore find merit in the contention of the assessee that the said company is functionally distinguishable. Accordingly, Cheers Interactive (India) Private Limited deserves to be excluded from the final set of comparables. Vitae International Accounting Services Private Limited 16. We have also examined the profile of Vitae International Accounting Services Private Limited. The material placed before us demonstrates that the company is engaged in specialised accounting, bookkeeping, staffing and professional financial services. Revenue has been earned by rendering accounting and related professional services involving domain-specific expertise. 17. The assessee, however, is engaged only in routine IT enabled support services to its Associated Enterprises and is not engaged in rendering specialised accounting or financial consultancy services. It is well settled that companies providing specialised professional services involving higher skill sets and value addition cannot be compared with routine captive BPO service providers. The Pune Bench in Rage Frameworks India Pvt. Ltd. and the Hyderabad....
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....ii) CES Limited (iii) Silgate Solutions Limited Cameo Corporate Services Limited 21. The ld.AR submitted that the TPO / DRP has erroneously stated that the company fails the employee cost filter and hence rejected the comparable selected by the assessee vide TPO's order in page No.8 and DRP's directions in page No.15. The ld.AR submitted that in the annual report, employee costs embedded in the group of service costs as cost of services. Further, the ld.AR submitted that as considered by the TPO, if only employee benefit expenses considered, the average employee cost will come only meager Rs. 18,471/- per annum per employee, which is highly impractical and impossible proposition. Therefore, the company is eligible to be considered as comparable to the assessee's activities and passes the employee cost filter and hence prayed for including the same as comparable. CES Limited & Silgate Solutions Limited 22. The ld.AR stated that the employee cost filter cannot be applied to these comparables as there is no details of employee cost provided in the segmental working and the overall employee cost is not a basis for computation of segmental margin. However, the ld.TP....
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....xpenditure heads or where segmental employee cost is not separately disclosed, the same requires proper examination before arriving at any conclusion regarding failure of the employee cost filter. Cameo Corporate Services Limited 27. The ld.AR submitted that the TPO rejected the company solely on the ground that it failed the employee cost filter. However, on examination of the Annual Report, it was demonstrated that substantial employee-related expenditure had been grouped under the head 'Cost of Services' and was not separately reflected under the caption "Employee Benefit Expenses". It was further contended that if only the amount disclosed under employee benefit expenses is considered, the average employee cost works out to an insignificant amount per employee, which is commercially unrealistic and clearly indicates that employee-related costs have been accounted for under another expenditure head. 28. We find considerable merit in the aforesaid submission. The rejection of a comparable merely on the basis of the nomenclature adopted in the financial statements, without examining the composition of the expenditure, is not sustainable. The TPO has not brought an....
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....nts. Except for the application of the employee cost filter, no other functional dissimilarity has been brought on record by the Revenue for excluding the company. Once the company is found to be functionally comparable, its exclusion merely on account of non-availability of segment-wise employee cost figures cannot be sustained. The employee cost filter is intended to facilitate the identification of service-oriented companies and cannot be applied so rigidly as to defeat the objective of arriving at a reliable set of comparables. 33. In view of the foregoing discussion, we hold that Silgate Solutions Limited has been wrongly excluded by the TPO/DRP. Accordingly, we direct the AO/TPO to include Silgate Solutions Limited in the final set of comparables for the purpose of determining the Arm's Length Price. 34. The next issue raised by the assessee is computation of notional interest on outstanding receivables. In its grounds of appeal and pressed by the ld.AR. The ld.AR for the assessee submitted that the TPO / AO and DRP erred in treating the outstanding receivables from AE as a separate international transaction without appreciating that such receivables are intrinsical....
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.... (ix) PCIT vs. Inductis India Pvt Ltd - ITA No 175 (Delhi HC) of 2019 (AY 2012-13) (x) Bechtel India Pvt. Ltd., vs. DCIT in ITA No.1478/Del/2015, HCITA 379/Del/2016. (AY 2010-11 36. Per contra, the ld.DR for the Revenue submitted that the assessee has extended the credit limit to the AEs, and hence, the computation of notional interest by the TPO is in accordance with the law. Consequently, the DRP has rightly enhanced the mark up over LIBOR. Therefore, the ld.DR prayed for confirming the order of the AO by dismissing the grounds of appeal of the assessee. 37. We have heard the rival submissions, perused the orders of the authorities below and carefully examined the material available on record along with the judicial precedents relied on. The issue for our consideration is whether the TPO was justified in making an adjustment towards notional interest on outstanding receivables from the AEs by treating the same as a separate international transaction under Chapter X of the Act. The ld.AR contended that the outstanding receivables are intrinsically linked to the principal international transaction of rendering IT enabled services and, therefore, once the principal tr....
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....on'ble Delhi High Court in PCIT v. Inductis India Pvt. Ltd. has held that where the assessee is a debt-free company and no interest-bearing funds have been utilised, no transfer pricing adjustment on account of outstanding receivables is called for merely because the realization has taken place beyond the stipulated credit period. Similar principles have also been reiterated by various Benches of the Tribunal, including the decisions relied upon by the learned Authorised Representative in Freshworks Technologies Pvt. Ltd., Temenos India Pvt. Ltd., Expleo Solutions Ltd., Sanmina-SCI India Pvt. Ltd., Turbo Energy (P.) Ltd., Valeo India (P.) Ltd., CH Robinson Worldwide Freight India Pvt. Ltd., Gimpex Private Limited and Bechtel India Pvt. Ltd. 41. We also find merit in the contention of the assessee that the TPO has arbitrarily adopted a uniform credit period of 30 days without undertaking any analysis of the actual credit period prevailing in the industry or the credit period enjoyed by comparable uncontrolled enterprises. The determination of the Arm's Length Price cannot rest upon arbitrary assumptions divorced from commercial realities. Equally, the enhancement made by ....