SENTIEO INDIA PRIVATE LIMITED,DELHI vs. DEPUTY COMMISSIONER OF INCOME TAX, NEW DELHI

The assessee has raised the following grounds of appeal:- “General 1. On the facts and circumstances of the case and in law, the Honourable Dispute Resolution Panel (Hon'ble DRP'), the Learned Transfer Pricing Officer ('Ld. TPO') and the Assessment Unit (hereinafter collectively to be referred as "Revenue") erred in making an adjustment of INR 3,86,68,595 (Post honourable DRP giving relief of INR 1,357,965) to the total income of the Appellant on account of the difference in the arm's length price (ALP) of its international related party transactions under the provisions of Section 92CA(4) of the Indian Income-tax Act, 1961 ('the Act'). Legal Grounds 2. On the facts and in the circumstances of the case and in law, the Ld. AO has erred in not passing the final assessment order in conformity with the directions issued by the Hon'ble DRP thereby the learned AO has violated the mandatory provisions of section 144C (13) of the Act. Accordingly, the final assessment order is bad in law and deserves to be quashed. 3. On the facts and circumstances of the case and in law, the learned AO has erred in passing the final assessment order dated 19 December 2025 beyond the time limit as prescribed u/s 153 of the Act. Accordingly, the said final assessment order is bad in law and deserves to be quashed. 4. On the facts and circumstances of the case and in law, the learned DRP has erred in issuing manually signed DRP directions dated 27 November 2025 thereby violating CBDT Instruction No.01/2018 dated 12.02.2018. Accordingly, the said DRP directions are bad in law and deserve to be quashed. Consequently, the final assessment order dated 19 December 2025 passed in pursuance to the said DRP directions is also bad in law and deserves to be quashed.

Brief facts are that the assessee is a resident company and a wholly owned subsidiary of Sentieo Inc., USA and was incorporated in January, 2015. The assessee is engaged in providing back office support/IT enabled data management services to its foreign Associated Enterprise (AE). The assessee filed its return of income for the year under consideration dated 28th October, 2022 declaring total income at Rs.5,41,86,300/-. The assessee’s case was selected for scrutiny under CASS, inter alia, on account of large-value international transaction in services vis-à-vis revenue from ITES and low profitability along with disallowance u/s 40A(7) of the Act as being lesser in ITR than the Audit Report. The Ld. AO observed that the assessee has entered into international transactions for which reference was made to the Ld. TPO u/s 92CA of the Act with regard to provisions of back office support services amounting to Rs.40,40,59,493/- which was benchmarked by adopting Transactional Net Margin Method (TNMM) as the most appropriate method with OP/OC as PLI. The assessee’s TP study reflected an operating margin of 7.64% and selected six comparables with stated median margin of 6.05%. The Ld. TPO rejected the assessee’s benchmarking analysis thereby issuing show cause notice dated 26.12.2024. The ld. TPO challenged the assessee’s selection of comparables and filters employed which comparables are tabulated hereinunder:-

The Ld. TPO finally rejected FCS Software Solutions Ltd., on the ground that it had negative PBT in two out of three years while TechN Vision Ventures Ltd., Cambridge Technology Enterprises Ltd. And Trigyn Technologies Ltd., were rejected on RPT filter. Further, Iris Business Services Ltd., and We Win Ltd., were initially retained by the Ld. TPO. The Ld. TPO also conducted a fresh search 5 and substantially enlarged the comparable set for which the assessee objected among other things to several companies on account of turnover filter and functional dissimilarity. The Ld. TPO, however, considered turnover differences by itself cannot invalidate comparability to finally reject a comparable under TNMM and proceeded on the premise that broad functional comparability was more material, specifically with comparables such as CSM Technologies Pvt. Ltd., NINtec Systems Ltd., Aabsys Information Technologies Pvt. Ltd., and CG-VAK Software & Exports Ltd., which the assessee contended were functionally different. The Ld. TPO retained the same on the ground that they satisfied the filters and were broadly and functionally comparable. The Ld. TPO rejected the assessee’s proposal for including certain additional comparables, namely, GSS Infotech Ltd., Cadsys India Ltd., on RTP filter, Plada Infotech Services Ltd., on the service income filter and accepted Groarc Industries India Ltd., as satisfying the quantitative filters. The Ld. TPO rejected certain other companies on the service- income filter. The Ld. TPO arrived at a set of 19 comparables having a 35 percentile of 16.03%, median of 18.37% and 65 percentile of 21.11%. The ld. TPO computed the arm’s length operating profit at Rs.6,84,10,810/- and ALP at Rs.44,08,15,870/- by applying median margin of 18.37% to an operating cost of Rs.37,24,05,060/- as against the price charged by the assessee at Rs.40,23,88,900/- thereby proposing a TP adjustment of Rs.3,84,26,970/- with respect to the back 6 office support services. With regard to the second TP issue pertaining to outstanding on the receivables from AE, the Ld. TPO treated the delay in realisation beyond 60 days as requiring separate benchmarking for the total outstanding receivables at Rs.16,46,55,551/- and computed the interest by adopting six month’s LIBOR of 0.339% plus 425 basis points aggregating to 4.589%. The Ld. TPO consequently proposed a further adjustment of Rs.15,99,590/- towards interest on delayed receivables stating that the assessee has not raised any contention against the computation vide its reply dated 07.01.2025. The ld. TPO, vide order dated 17.01.2025, passed u/s 92CA(3) of the Act, proposed an aggregate adjustment of Rs.4,00,26,560/- comprising Rs.3,84,26,970/- towards back office support services and Rs.15,99,590/- towards interest on receivables. The Ld. AO passed the draft assessment order dated 28.02.2025 u/s 144C(1) of the Act which confined only to transfer pricing adjustment. Aggrieved by the draft assessment order, the assessee filed its objection before the Hon’ble DRP u/s 144C(2) of the Act challenging the transfer pricing adjustment and the Hon’ble DRP disposed of the objection vide its direction dated 27.11.2025 u/s 144C(5) of the Act. Pursuant to the Hon’ble DRP’s direction, the Ld. TPO passed an order giving effect dated 01.12.2025 where the aggregate transfer pricing adjustment stood reduced from Rs.4,00,26,560/- to Rs.3,86,68,595/- with a reduction of Rs.13,57,965/-. The ld. AO, thereafter, passed the final assessment order dated 19.12.2025 u/s 143(3) 7 r.w.s. 144C(13) and 144B of the Act, incorporating the revised TP adjustment of Rs.3,86,68,595/-, thereby determining the total income at Rs.9,28,54,895/- as against the returned income of Rs.5,41,86,300/-. The Ld. AO also initiated penalty proceedings u/s 270A of the Act. Aggrieved by the final assessment order, the assessee is in appeal before us challenging the impugned order on the abovementioned grounds.

Before us, the Ld. AR for the assessee submitted that Grounds No.2 and 3 would not be pressed and ground No.4 is to be kept open. As ground Nos.1, 5 and 6 are general in nature, the same requires no separate adjudication.

The Ld. AR commenced his arguments on ground No.7 where the assessee has challenged the AO/TPO’s action in rejecting the comparable companies selected by the assessee stating that the comparables failed the filters applied by the AO/TPO. The Ld. AR furnished a chart of comparables where the comparable company named Plada Infotech Services Ltd, selected by the assessee was rejected by the Ld. TPO stating that as per the data available on public domain, the comparable company failed the ‘service income to total income’ filter of at least 75%, which, according to the Ld. AR, is erroneous for the fact that the said comparable company has earned its entire revenue from sale of services amounting to 100% from services for which the assessee relied on the revenue schedule of the said comparable for FY 2021-22 and FY 2020-21. The Ld. AR contended that Plada Infotech Services Ltd., passes the said filter and, hence, the Ld. AR prayed that the same ought to be accepted as a comparable company. The Ld. AR further argued that in case of the comparable company Athishay Ltd., also, the entire revenue has been from sale of services which amounts to 99% of its total revenue and, hence, both the said comparables have been rejected by the Ld. TPO stating that they failed the service ‘income to total income filter of at least 75% which is factually incorrect. The Ld. AR prayed that these two comparables be accepted.

The Ld. DR, on the other hand, controverted the said fact and stated that the Hon’ble DRP has already directed the Ld. TPO to re-verify whether these two comparables pass the service income filter. The Ld. DR further contended that the Ld. AO/TPO, after duly analysing the same has rejected these two comparables as not having satisfied the 75% ‘service income to total income’ filter. The Ld. DR relied on the order of the lower authorities.

We have heard the rival submissions and perused the material available on record. It is observed that the Hon’ble DRP in the objection raised by the assessee with regard to the exclusion of these two comparables has directed the AO/TPO to re-verify whether the said comparables pass the service income filter which was the sole reason for exclusion of the said comparables by the Ld. TPO. Subsequent to the Hon’ble DRP’s direction, there is no finding of the Ld. AO/TPO pertaining to the said comparables as to whether or not the Ld. TPO/AO has examined the fact if these two comparables satisfy the ‘service income to total income’ filter of at least 75%, which, according to the assessee, is almost 100% as per the data available in public domain. Therefore, we deem it fit to direct the Ld. TPO/AO to verify whether these two comparables satisfy the service income to total income of at least 75% filter as per the available data. Hence, ground No.7 raised by the assessee is hereby allowed for statistical purpose.

Ground No.8 pertains to the Ld. TPO considering new set of comparable companies by applying new filters or modifying the existing filter which, according to the assessee, was done without sharing the search process undertaken by the Ld. TPO/AO for proposing the transfer pricing adjustment, where the assessee is completely unaware of such search process and in Ground No.9, the assessee has challenged the comparable companies selected by the Revenue as having been failed the quantitative filters applied by the Ld. TPO/AO and in ground No.10, the assessee challenges that the Ld. TPO has failed to apply an appropriate turnover filter of 1/10th to 10 times of the assessee’s turnover while selecting the comparables.

We have heard the rival submissions and perused the material available on record. The assessee has challenged the comparables companies selected by the Ld. TPO/AO, namely,

The second issue pertains to the outstanding trade receivables treated as a separate international transaction as per Section 92B of the Act as unsecured loan issued to related parties for which the Revenue has determined interest rate as LIBOR + 425 BPS. The assessee’s contention that the outstanding receivables are not a separate international transaction and, hence, no ALP should be determined on the interest has been rejected by the lower authorities for the reason that the assessee had substantial outstanding receivables from its associated enterprises and the delay in realisation, since has exceeded the credit period of 60 days for which the assessee has not charged any interest on such delayed payments is against the provisions of Explanation (i)(c) to Section 92B of the Act introduced by the Finance Act, 2012 applicable retrospectively for any debt arising during the course of business which is not realised within agreed credit period, thereby constituting an international transaction of financing and, hence, the same would tantamount to be a separate international transaction on which the interest due on the said receivables ought to be benchmarked. The assessee’s contention that these are not a separate international transaction has been decided against the assessee by the decision of the Hon’ble jurisdictional High Court in the case of Mckinsey Knowledge Centre India Pvt. Ltd. Vs. PCIT which was relied upon by the Ld. DR. On perusal of the said decision it has been held that the amendment to the Explanation to Section 92B of the Act, vide Finance Act, 2012, as being applicable retrospectively where in case of any delay in the realisation of the a trade debt arising from the sale of goods or services in the course of carrying on the business, the transfer pricing adjustment towards interest income whether short-charged or uncharged is determinable thereby reiterating that the same is a separate international transaction which has to be benchmarked independently. Without prejudice, the Ld. AR argued that the interest rate is determinable at LIBOR + 200 BPS points rather than the TPO’s mark up of 425 BPS on six month’s LIBOR.

It is observed that various coordinate Benches have given finding on the issue of re-characterising certain trade receivables as unsecured loan and thereby computing notional interest on such trade receivables by holding that outstanding receivables is akin to loan advanced by assessee to foreign AE by relying on various decisions of the Hon’ble High Court and has determined the interest on such outstanding receivables by applying LIBOR + 200 BPS after duly considering the actual receivables from the AE. Since the outstanding receivables are treated to be loan advanced, we would place reliance on the decision of the Hon’ble High Court of Bombay in the case of CIT Vs. Aurionpro Solutions Ltd., ITA No.1869 of 2014, order dated 09th June, 2017, which has upheld LIBOR + 2% for determining the arm’s length interest on loan advances. We, therefore, direct the Ld. TPO/AO to determine the actual arm’s length credit period in accordance with the agreement entered into by the assessee with the AE, and calculate only the actual excess delay by benchmarking appropriately to the currency of the receivable with the justification for the spread, rather than mechanically accepting LIBOR + 425 BPS along with invoice to invoice computation applying LIBOR + 200 BPS to foreign currency receivables. Therefore, these grounds of appeal raised by the assessee are hereby allowed on the above terms.

Grounds No.1, 5 and 6 are general in nature. Grounds No.2 and 3 are not pressed. As the assessee has not enhanced any argument on Ground No.4, the same is not adjudicated and is hereby rendered academic in nature. Grounds No.14 and 15 are consequential and does not require any separate adjudication.

In the result, the appeal filed by the assessee is hereby partly allowed for statistical purpose.