TaxTMI 
TaxTMI 
2026 (10) TMI 41
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....nd under Rule 35A of the Income -tax (Appellate Tribunal) Rules, 1963. 2. Grounds raised in this appeal are reproduced as under: "1. That on the facts and circumstances of the case and in law, the Ld. AO has erred in assessing the total income of the appellant under section 143(3) read with section 144C(13) and section 144B of the Act, for the assessment year ("AY") 2020-21 at INR 24,04,46,240 as against the returned income of NIL. under the normal provisions of Act. 2 That on the facts and in the circumstances of the case and in law, the Ld. AO has erred in not completing the assessment proceedings as per time limit prescribed under section 153(1) read with section 153(4) of the Act, thereby making the assessment proceedings barred by limitation. 3 That on the facts and circumstances of the case and in law, Ld. AO/DRP/TPO erred in aggregating the international transactions of "receipt from sub-contracts with that of "provision of support services", thereby, ignoring that these are two separate business segments of the appellant having different commercial arrangements. 4. That on facts and circumstances of the case and in law, the Ld. AO/ DRP....
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....eceivables c. ignoring the fact that the appellant is a debt-free company and it cannot be alleged that interest bearing funds were used to pass on benefit in the form of extended credit period to the AE. Note: The appellant prays for leave to add, alter, amend and/or modify any of the hearing of the appeal. of appeal at er before lobal Solutions." 3. Brief facts are that the assessee company filed its return for A.Y. 2020-21 on 7.12.2020 declaring NIL income, which was processed u/s 143(1) of the Act. The assessee is engaged in providing healthcare BPO services in USA. The services to its affiliate company are provided on cost + basis while contract services are also provided to a US- based company. The assessee's case was selected for scrutiny and a reference was made to the TPO for computing the Arm's Length Price (ALP) with regard to the international transactions. Vide order dated 25.07.2023, the TPO made total adjustment of Rs. 32,99,79,434/-. Accordingly, a draft assessment order u/s 143(3) r.w.s.144C(1) was issued by the AO on 25.09.2023 proposing the addition of Rs. 32,99,79,434/- to the returned income. 3.1 Aggrieved, the assessee filed objectio....
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....he arrangement under which AE entered into contracts with the third parties. For this segment, the assessee provides services with full market and service liability risks and gets residual remuneration after the AE retains cost plus 5% margin. 5.3 Ld. AR has also filed written submissions on the issue of aggregation as under: "29. It is submitted that the Ld. TPO/Ld. DRP have erroneously aggregated the transactions of 'provision of support services' and 'receipt from sub-contracts'. The Ld. TPO's reason for adopting the aggregation approach was that the audited segmental are not available and the services in respect of both the transactions are ITeS. It is submitted that the findings of the Ld. TPO are erroneous for the reason that the Appellant's functional profile in respect of both the transactions is different. Further, the Appellant had made a full disclosure of segmental which was certified by an independent transfer pricing specialist (refer page 139 of the paperbook for abridged P&L of nThrive Global Healthcare Services LLC; refer page 125 of the paperbook for margin workings of the Appellant). During the course of TP audit, the Appellant....
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....der particular circumstances, one single method may be chosen as the most appropriate method covering all the above transactions as the same are closely linked. 5.9 There is yet another category of transactions which may be identical or similar though not closely linked. For example, independent purchase transactions having identical or similar nature, characteristics, terms and conditions are not closely linked transactions because these transactions do not emanate from a common source. However, under particular circumstances, one single method may still be chosen as the most appropriate method covering all the above transactions. ............. 5.10 It is not uncommon to notice transactions which are not only dissimilar or unidentical but are also not linked. For example, there may be transactions of purchase, sale and provision of technical service. In such case, wherever internal comparables are available, appropriate method should be used if the circumstances so justify." (emphasis supplied) 31. Reference is also made to the guidance laid down in OECD Transfer Pricing Guidelines for multinational Enterprises and Tax Administrations 2022: ....
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....2021: 3.3.3.1 An important aspect of transfer pricing analysis is whether this analysis has to be carried out with respect to a taxpayer's individual international controlled transactions or whether a group of international controlled transactions that have a close economic nexus and are carried out between the same parties can be analyzed together for transfer pricing purposes. 3.3.3.2 The transfer pricing analysis should ideally be made on a transaction-by transaction basis. However, there are cases where separate transactions are so closely linked that such an approach would not lead to a reliable result. Where transactions are so closely interrelated or continuous that application of the arm's length principle on a transaction-by-transaction basis would become unreliable or cumbersome, transactions are often aggregated for the purpose of the analysis. 3.3.3.3 An example can be the case of transactions involving the licensing of knowhow to associated manufacturers together with the supply to the licensed associated manufacturers of components needed to exploit such know-how. In such a case, the transfer pricing analysis may be more reliable if ....
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.....) Ltd. v. ITO [2010] 7 taxmann.com 117 (Delhi) - para 14 on internal page 17 of the decision 34. It is submitted that functions and risks assumed are an important factor to be considered while deciding whether to aggregate/segregate transactions. A risk bearing entrepreneur cannot be compared with someone who is bearing limited risks qua a transaction. Reliance is placed on the decision of Hon'ble ITAT, Mumbai Bench in Bayer Material Science (P.) Ltd. v. ACIT [2012] 18 taxmann.com 60 (Mum.) - para 8 where the Hon'ble ITAT was called upon to examine whether the Ld. TPO's action of segregating the indent and trading transaction was justified. The Hon'ble ITAT upholding the Ld. TPO's action held that transactions having different functional and risk profile cannot be aggregated. 35. Applying the above principles, the aggregation of the transactions of 'provision of support services' and 'receipt from sub-contracts' is wholly unjustified. The prerequisite for aggregation is that transactions must be "closely linked," typically emanating from a common source such as a single contract or arrangement. In the Appellant's case, thes....
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....ansfer pricing adjustment is warranted. Impact of segregation approach on the transaction of 'Receipt from sub-contracts' 41. During the year under assessment, under the transaction of receipt from subcontracts (entrepreneurial segment), the Appellant received approx. 97 percent of the amount that was billed to 3rd parties by the USA AE and it was only around 3 percent of such receipts (INR 2,95,65,994/-) was retained by the AE (represents the cost incurred by it and a 5% markup thereon): Particulars Amount Paperbook reference Total third-party revenue (A) $ 11,302,978 Pg. 201 to 205 Revenue booked by Appellant () $ 10,885,763 Pg. 210 Percentage (A/B) 96.31% 5.3.2 With regard to the reasons for losses incurred from the entrepreneurial business, it has been submitted as under: "Reasons for losses in the entrepreneurial segment is on account of third party costs 40. It is further submitted that the low margins earned by the Appellant in the initial years of its operations pertain to its entrepreneurial segment and are attributable to business ramp-up and a disproportionately high employee cost b....
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....lus 14% return even in respect of a full-risk entrepreneurial activity. This would necessarily result in a reduction of the taxable profits of the Appellant in years where it earns margins substantially higher than 14 percent. Such an outcome is impermissible in view of the express mandate of section 92(3) of the Act, which provides that the transfer pricing provisions shall not apply where their application has the effect of reducing the income chargeable to tax." Lastly, it has been submitted that the rate of 5% markup is most reasonable and cannot be regard as excessive. From the chart reproduced above comparing year on year figures of margins in both the segments, it is seen that in the subsequent A.Ys., there has been substantial profit from the entrepreneurial business ranging between 15% to 23%. This shows that the loss in the year under consideration was due to the fact that this was the initial period of transition and subsequently the assessee has steadily earned profits rising to 22% in A.Y. 2022-23. 5.4 On the other hand, Ld. DR has strongly relied on the orders of the AO and the CIT(A). He has further argued that no segmental audited accounts were submitted by th....
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....587/-. Brief facts in this regard are that during the TP proceedings, the TPO recommended to enhance the assessee's income by Rs. 6,79,589/- being cumulative adjustment on account of outstanding trade receivables as per detailed calculation which has been reproduced in the assessment order. 7.1 The assessee filed objections against the same before the DRP. After considering the assessee's objection, following direction was issued by the DRP : "..............the Panel upholds six-month LIBOR Plus 400 Basis Points, i.e., 1.85% as the appropriate CUP applied by the TPO. However, for the purpose of computing the Arm's length interest on receivables, the AO/TPO is directed to exclude a period of 60 days from the total period of delay in receiving payments against invoices raised by the assessee." The AO noted that the TPO had already excluded a period of 60 days from the total period of delay in receiving payment and therefore the adjustment of Rs. 6,79,589/- was retained as it is, in the final assessment order. 7.2 In this regard, Ld. AR has made the following written submissions: "51. It is submitted that the Appellant has not taken on any external de....
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....ibunal held that the assessee being a debt free company, it would not be justifiable to presume that the borrowed funds have been utilized to pass on the facilities to its AEs and the revenue also had not brought on record that the assessee had been found paying interest to its creditors or suppliers on delayed payments. This view of the Income Tax Appellate Tribunal was upheld by a coordinate bench of this court in appeal titled Pr. CIT v. Bechtel India (P.) Ltd. [IT Appeal No. 379 of 2016, dated 21-7- 2016], observing that no substantial question of law arose as the Tribunal had returned a finding of fact to the effect that the assessee was a debt free company and a question of receiving any interest on receivable did not arise. Against the said judgment, Pr. CIT v. Bachtel India (P.) Ltd. CC No.(s) 4956 of 2017 preferred by the revenue was dismissed vide order dated 21-7-2017. 6.5 In the case of Pr. CIT v. Kusum Healthcare (P.) Ltd. [2018] 99 taxmann.com 431/[2017] 398 ITR 66 (Delhi), a coordinate bench of this court also dealt with the amendment brought in Section 92B of the Act by way of insertion of an explanation and held thus: ...... 6.6 That bein....