ELANCO INNOVATION AND ALLIANCE CENTRE INDIA LLP ,BENGALURU vs. DEPUTY COMMISSIONER OF INCOME-TAX, CIRCLE 2(2)(1), BANGALORE, BENGALURU

In this appeal, the assessee has raised the following grounds: -

The brief facts of the case are that the assessee is a Limited Liability Partnership firm. For the year under consideration, the assessee filed its return of income on 21.11.2022, declaring a total income of Rs. 7,97,55,290/-. The return filed by the assessee was selected for scrutiny, and statutory notice under section 143(2) of the Act was issued and served on the assessee. During the assessment proceedings, on perusal of Form No. 3CEB filed by the assessee, it was observed that the assessee has entered into large-value international transactions with its associated enterprises. Accordingly, the Assessing Officer (“AO”) made a reference to the Transfer Pricing Officer (“TPO”) under section 92CA(1) of the Act for determination of Arm’s Length Price of the international transactions entered into by the assessee. From the documents furnished by the assessee during the transfer pricing proceedings, it was observed that the assessee has entered into the following international transactions with its associated enterprises: -

After considering the submissions filed by the assessee, the TPO, vide order dated 30.12.2024 passed under section 92CA(3) of the Act, made a total transfer pricing adjustment of Rs. 7,49,44,524/-, as follows: - Sl.No Description Adjustment u/s 92CA (In Rs.) 1 IT enabled Services Segment 7,48,72,652 2 Interest on delayed receivables 71,872 Total adjustment u/s 92 CA 7,49,44,524

In conformity, the AO passed the draft assessment order dated 01.02.2025 under section 144C(1), incorporating the transfer pricing adjustment proposed by the TPO. The learned DRP, vide its directions issued under section 144C(5) of the Act, inter alia, rejected the objections filed by the assessee. In conformity with the directions issued by the learned DRP, the AO passed the impugned final assessment order on 17.12.2025 under section 143(3) r.w.s. 144C(13) r.w.s. 144B of the Act. Being aggrieved, the assessee is in appeal before us.

In Ground No. A, the assessee has challenged the validity of the final assessment order on the ground that the same is barred by limitation and has been passed beyond the time period prescribed under section 153 of the Act. In light of the recent amendment by the Finance Act, 2026, whereby sub-section (13A) was inserted in section 144C of the Act, with retrospective effect from 01.04.2009, we are of the considered view that the impugned final assessment order in the present case was passed within the prescribed limitation period as provided under the Act. Accordingly, Ground No. A raised by the assessee is dismissed.

In Ground No. B, the assessee has raised several grounds challenging the transfer pricing adjustment made by the AO/TPO pursuant to the directions issued by the learned DRP. Each of these grounds has been dealt with separately in the following paragraphs.

Ground No. 1 and 2, raised in the assessee’s appeal, are general grounds. Therefore, the same need no separate adjudication.

Ground No. 3, raised in assessee’s appeal, pertains to the transfer pricing adjustment in relation to international transaction of “Provision of ITeS”.

The brief facts of this case pertaining to this issue, as emanating from the record, are: During the year under consideration, the assessee entered into an international transaction of “Provision of ITeS” to its associated enterprises. For benchmarking the said international transaction, the assessee adopted the Transactional Net Margin Method (“TNMM”) as the most appropriate method with the Profit Level Indicator (“PLI”) of Operating Profit to Operating Cost (“OP/OC”). By considering itself the tested party, the assessee identified 9 comparable companies. As the assessee’s Operating Margin of 12% was within the 35th to 65th percentile range of Operating Margin of comparable companies, i.e. 6.47% to 12.33%, with a median of 11.78%, the assessee claimed that the international transaction of “Provision of ITeS” is at Arm’s Length Price.

The learned DRP, vide its directions dated 18.11.2025, partially agreed with the objections filed by the assessee and directed the inclusion of one company as comparable, which was excluded by the TPO while benchmarking the international transaction of “Provision of ITeS”. Thus, pursuant to the directions issued by the learned DRP, the final set of comparables has 12 companies. In conformity with the directions issued by the learned DRP, the AO passed the impugned final assessment order, inter alia, incorporating the total transfer pricing adjustment of Rs. 7,42,02,686.

During the hearing, the learned Authorised Representative (“learned AR”) submitted that while computing the Operating Margin of the assessee, the TPO erroneously included expenses recovered by the assessee from its associated enterprises in respect of Employee Stock Options awarded to its employees by the associated enterprises. The learned AR submitted that

Accordingly, in view of the submissions made by the learned AR, we have confined our findings in Ground No. 3 only in respect of the aforesaid issues. Further, the other issues raised in Ground No. 3 are treated as not pressed and are kept open for adjudication if they arise in the assessee’s case in the future.

We have considered the oral/written submissions of both sides and perused the material available on record.

As regards the issue pertaining to the computation of Operating Margin of the assessee, raised in Ground No. 3.3, we find that the holding company of the assessee, i.e., Elanco Animal Health Inc., U.S.A., launched a Restricted Stock Unit Plan (“RSU”), pursuant to which the employees of the assessee were granted RSUs. As per the assessee, to facilitate the 10 payment of taxes to the Government in respect of RSUs granted to its employees, it was discharging the employees' withholding tax liabilities on behalf of the associated enterprises. Thus, during the year under consideration, the assessee recovered the tax liability from its associated enterprises on a cost-to-cost basis. As per the assessee, such expenses are non-operating in nature and not linked to any day-to-day activities of the assessee. Thus, it is the plea of the assessee that such expenses recovered from the associated enterprises should not be included while computing the PLI of the assessee.

Having considered the submissions and perused the material available on record, we find that the expenditure recovered from the associated enterprises was not the expenditure incurred on issuance of RSU and, in fact, the same was TDS required to be paid by the issuer, i.e. the associated enterprises, to the Government exchequer. However, in the present case, the assessee paid the same to the Government and recovered the same from the associated enterprises. Thus, since the same was recovery of expenditure incurred by the assessee on cost-to-cost basis, which has no connection with the services rendered by the assessee to its associated enterprises, we are of the considered view that the recovery of such expenses, in the present case, is non-operating in nature and therefore needs to be excluded for computation of PLI of the assessee. We find that even the ESOP expenses are consistently held to be non-operating expenses by the Coordinate Benches of the Tribunal for the purpose of computing Operating Margin. In this regard, gainful reference can be made to the 11 decision of the Coordinate Bangalore Bench of the Tribunal in Amazon Development Centre (India) Pvt. Ltd. vs. CIT (TP), reported in (2023) 155 taxmann.com 597 (Bangalore – Trib.). Accordingly, Ground No. 3.3. raised in assessee’s appeal is allowed.

Before dealing with the submissions pertaining to the exclusion of companies for the purpose of benchmarking the international transaction of “Provision of ITeS”, it is pertinent to note the functions performed by the assessee in relation to the international transaction of “Provision of ITeS”, and the same are stated in the Transfer Pricing Study Report, as follows: -

Thus, from the functional profile of the assessee as recorded in the Transfer Pricing Study Report, it is evident that in respect of international transaction of “Provision of ITeS”, the assessee is not only rendering services in the nature of documentation support, which included medical writing of scientific documents of different types and checking the accuracy of the data in the documents but also is organizing and analysing data using various IT tools. The assessee is also performing data processing, integration of data and provisioning of inputs to the analytics team and marketing team of Elanco Group. Further, the assessee also analyses and considers country-specific data, as each local market has unique variables impacting revenue potential. The assessee also supports global finance mainly in two areas, namely, reporting, financing, and supply chain, wherein, after receiving requirements from stakeholders, the assessee generates the desired output in the form of reports, templates, and dashboards.

Having noted the functions performed by the assessee in respect of the international transaction of “Provision of ITeS”, we shall now deal with the companies sought to be excluded as comparable by the assessee for benchmarking the aforesaid international transaction.

The first company sought to be excluded by the assessee is Tech Mahindra Business Services Ltd. This company was selected as a comparable by the TPO, vide order passed under section 92CA(3) of the Act, on the basis that the principal business of this company is in IT-enabled Services. Accordingly, it was held that this company is functionally comparable to the assessee. The learned DRP, vide its directions, rejected the objections filed by the assessee and upheld the findings of the TPO in respect of functional comparability of this company with the assessee. The learned DRP also rejected the objections raised by the assessee challenging the comparability of this company on the basis that it has earned high turnover and owns intangibles. Being aggrieved, the assessee has sought the exclusion of this company for benchmarking the international transaction of “Provision of ITeS”.

During the hearing, the learned AR submitted that Tech Mahindra Business Services Ltd. is engaged in providing voice-based call services and hosts of other services which are completely different from that of the business of the assessee. Reiterating the submissions made before the lower authorities, the learned AR submitted that the turnover of Tech Mahindra Business Services Ltd. is 15 times the turnover of the assessee. On the other hand, the learned DR vehemently relied upon the order passed by the lower authorities in respect of this company.

We have considered the submissions of both sides and perused the material available on record. From the perusal of the Annual Report of Tech Mahindra Business Services Ltd., forming part of the Paper Book Volume – 1 from Pages 867 – 924, we find that this company provides voice-based call centre services to Hutchison 3G UK Ltd. Further, we find that this company earns revenue only from voice-based call centre services, and there is no other revenue stream. Thus, we find that this company was performing routine IT-enabled Services. On the other hand, as noted in the foregoing paragraphs, the assessee is rendering diverse services to its associated enterprises, which are technical in nature. Therefore, even though Tech Mahindra Business Services Ltd. was performing voice-based call centre services, which are considered as IT-enabled Services as per Rule 10TA of the Income Tax Rules, 1962, the same cannot be said to be functionally comparable to the wide range of activities performed by the assessee. Thus, without going into other submissions made by learned AR, we are of the considered view that Tech Mahindra Business Services Ltd. is not functionally comparable to the assessee. Accordingly, we direct the AO/TPO to exclude Tech Mahindra Business Services Ltd. for benchmarking the international transaction of “Provision of ITeS”.

The next company which is sought to be excluded by the assessee is Sutherland Global Services Pvt. Ltd. This company was considered as comparable by the TPO, vide its order passed under section 92CA(3) of the Act, on the basis that this company is predominantly related to Information Technology Enabled/Business Process Outsourcing Services only, which is functionally comparable to the assessee. The learned DRP, vide its directions, rejected the objections filed by the assessee and upheld the findings of the TPO, considering this company as comparable to the assessee. Being aggrieved, the assessee has sought the exclusion of this company as comparable for benchmarking the international transaction of “Provision of ITeS”.

During the hearing, the learned AR submitted that this company is engaged in providing Information Technology and consulting services and also has a presence of products. Thus, it was submitted that this company cannot be considered comparable to the assessee. On the other hand, the learned DR vehemently relied upon the order passed by the lower authorities in respect of this company.

We have considered the submissions of both sides and perused the material available on record. From the perusal of the Annual Report of Sutherland Global Services Pvt. Ltd. for the year under consideration, forming part of the Paper Book Volume 1 from Pages 925 – 1524, we find that this company was engaged in rendering only Information Technology services. Thus, we are of the considered view that this company cannot be considered as comparable to the assessee. Accordingly, we direct the AO/TPO to exclude Sutherland Global Services Pvt. Ltd. for benchmarking the international transaction of “Provision of ITeS”.

The next company which is sought to be excluded by the assessee is TTEC India Customer Solutions Pvt. Ltd. This company was considered as comparable by the TPO, vide its order passed under section 92CA(3) of the Act, on the basis that the principal business activity of this company is mentioned as IT-enabled Services. The learned DRP, vide its directions, rejected the objections filed by the assessee and upheld the findings of the TPO in considering this company as comparable to the assessee. Being aggrieved, the assessee has sought the exclusion of this company as comparable for benchmarking the international transaction of “Provision of ITeS”.

During the hearing, the learned AR submitted that this company is engaged in providing services in the nature of business process outsourcing, voice support and technical helpdesk, which is functionally different from IT-enabled Services provided by the assessee. The learned AR further submitted that the turnover of this company is substantially higher than the turnover of the assessee. On the other hand, the learned DR vehemently relied upon the order passed by the lower authorities in respect of this company.

We have considered the submissions of both sides and perused the material available on record. From the perusal of the Annual Report of TTEC India Customer Solutions Pvt. Ltd. for the year under consideration, forming part of the Paper Book Volume 7 from Pages 637 - 866, we find that this company is engaged in Business Process Outsourcing (“BPO”) services which include transaction processing, email management, software consultancy, voice support and technical helpdesk. On the other hand, as noted in the foregoing paragraphs, the assessee is rendering diverse services to its associated enterprises, which are technical in nature. Therefore, we are of the considered view that even though the functions performed by TTEC India Customer Solutions Pvt. Ltd. are in the nature of IT-enabled Services, the same cannot be said to be comparable to the wide range of technical services provided by the assessee. Accordingly, without going into any other submission made by the learned AR, we are of the considered view that TTEC India Customer Solutions Pvt. Ltd. is not functionally comparable to the assessee. Thus, we direct the AO/TPO to 20 exclude TTEC India Customer Solutions Pvt. Ltd. for benchmarking the international transaction of “Provision of ITeS”.

The next company which is sought to be excluded by the assessee is Domex E-Data Pvt. Ltd. This company was considered as comparable by the TPO, vide its order passed under section 92CA(3) of the Act, on the basis that the revenue from operations of this company is from IT-enabled Services. The learned DRP, vide its directions, rejected the objections filed by the assessee and upheld the findings of the TPO, considering this company as comparable to the assessee. Being aggrieved, the assessee has sought the exclusion of this company as comparable for benchmarking the international transaction of “Provision of ITeS”.

During the hearing, the learned AR submitted that this company is engaged in the provision of Knowledge Process Outsourcing services (“KPO”) consisting of data analysis, technical editing, deep indexing of scientific and technical research papers, which is functionally different from the functions of the assessee. On the other hand, the learned DR vehemently relied upon the order passed by the lower authorities in respect of this company.

We have considered the submissions of both sides and perused the material available on record. From the perusal of the Annual Report of Domex E-Data Pvt. Ltd. for the year under consideration, forming part of the Paper Book Volume 7 from Pages 584 - 610, we find that this company is into the business of providing knowledge processing services such as patent analysis, technical editing, deep indexing of scientific and technical research papers etc. Further, this company helps the publishers and pharmaceutical companies maximise the value of their information assets. Insofar as the assessee is concerned, as noted in the foregoing paragraphs, it is engaged in documentation support in the nature of preparation/editing of decks/writeups, submission of regulatory dossier packages, publishing and statistical analysis, computational modelling by simulation and support in marketing and other financial analytics, etc. The various IT-enabled Services rendered by the assessee to its associated enterprises, as categorised in the Transfer Pricing Study Report, are medical writing, document management, statistics, commercial analytics and marketing services, responding to any adverse events or product complaints, generating reports on finance and supply chain. Therefore, we are of the considered view that the functions performed by Domex E-Data Pvt. Ltd. are of a similar nature to those performed by the assessee, and even though both have claimed to render IT-enabled Services, these services are technical in nature. Accordingly, we are of the considered view that Domex E-Data Pvt. Ltd. is functionally comparable to the assessee. Thus, the findings of the lower authorities in considering Domex E-Data Pvt. Ltd. as comparable to the assessee for benchmarking the international transaction of “Provision of ITeS” are upheld. From a careful perusal of the decisions relied upon by the learned AR in support of exclusion of this company, we find that the same are not for the year under consideration before us, and the functional profile of the taxpayer, in these decisions, is also not similar to that of the assessee in the present case. Thus, we are of the considered view that these decisions are rendered in a different factual matrix and are not applicable to the present case.

The last company which is sought to be excluded by the assessee is Sagacious Research Pvt. Ltd. This company was considered as comparable by the TPO, vide its order passed under section 92CA(3) of the Act, on the basis that this company is in the IT-enabled Services segment and is functionally comparable to the assessee. The learned DRP, vide its directions, rejected the objections filed by the assessee and upheld the findings of the TPO, considering this company as comparable to the assessee. Being aggrieved, the assessee has sought the exclusion of this company as comparable for benchmarking the international transaction of “Provision of ITeS”.

During the hearing, the learned AR submitted that this company is engaged in the business of consultancy services and research and development management consultancy in the intellectual property domain, which is considered as knowledge process outsourcing activities, which is functionally different from the IT-enabled Services provided by the assessee. On the other hand, the learned DR vehemently relied upon the order passed by the lower authorities in respect of this company.

To sum up, we direct Tech Mahindra Business Services Ltd., Sutherland Global Services Pvt. Ltd., TTEC India Customer Solutions Pvt. Ltd., and Sagacious Research Pvt. Ltd. to be excluded while benchmarking the international transaction of “Provision of ITeS”. While the findings of the AO/TPO considering Domex E-Data Pvt. Ltd. as a comparable to the assessee for benchmarking the international transaction of “Provision of ITeS” are upheld. Accordingly, Ground No. 3.15 raised in assessee’s appeal challenging the inclusion of companies for benchmarking the international transaction of “Provision of ITeS” is partly allowed.

Ground No. 4, raised in assessee’s appeal, pertains to the transfer pricing adjustment on account of outstanding trade receivables from the associated enterprises.

The brief facts of the case pertaining to this issue, as emanating from the record, are: During the transfer pricing adjustment proceedings, it was observed that certain invoices raised by the assessee to its associated enterprise have not been paid, and there is a delay in the receivables for services rendered by the assessee. The TPO, vide order passed under section 92CA(3) of the Act, held that the assessee has provided benefit to its associated enterprise by way of advancement of an interest-free loan in the garb of delayed receipt of receivables, which funds could have been otherwise deployed for at least earning interest income. The TPO held that the assessee has incurred costs in connection with benefits and services provided to the associated enterprise by way of delayed receipt of receivables. Accordingly, the TPO held that the delay in receipt of receivables from the associated enterprise is an international transaction under section 92B(1) read with clause (v) of section 92F of the Act. The TPO also rejected the plea of the assessee to benchmark the receivable transaction using a combined transaction approach. Thus, the TPO, allowing a 30-day credit period, computed interest at 5.37% (i.e., @LIBOR + 450 BPS) for the delayed receipt of receivables from the associated enterprise. Accordingly, the TPO computed the arm’s length interest on outstanding receivables at Rs. 71,872/-. In conformity, the AO passed the draft assessment order under section 144C(1) of the Act. The learned DRP, vide its directions, upheld the findings of the TPO in levying the interest on outstanding receivables from the associated enterprise. In conformity, the AO, inter alia, passed the impugned final assessment order. Being aggrieved, the assessee is in appeal before us.

We have considered the submissions of both sides and perused the material available on record. We find that the term “international transaction” is defined in the Explanation to section 92B of the Act, and it specifically includes “deferred payment or receivable”. Therefore, we do not find any infirmity in the findings of the lower authorities in treating delayed trade receivables as an international transaction. In the present case, it is pertinent to note that out of three international transactions undertaken by the assessee with its associated enterprises, only in respect of the international transaction of “Provision of ITeS”, the assessee raised the invoices on its associated enterprises, as the other two international transactions are “Receipt of Capital Contribution”, for which no invoice is required, and “Purchase of Computer Consumables”, for which the invoice would be raised by the associated enterprises. Therefore, we are of the considered view that the outstanding trade receivables from the associated enterprises pertain only to the international transaction of “Provision of ITeS”. Thus, the international transaction of outstanding receivables is closely linked to the main international transaction of “Provision of ITeS”, and both transactions need to be benchmarked using a combined- transaction approach.

In the present case, it is evident from the record that the TPO did not grant any working capital adjustment. At this stage, it is pertinent to note that as per Rule 10B(3)(ii) of the Income Tax Rules, 1962 (“the Rules”), an uncontrolled transaction shall be comparable to an international transaction if reasonably accurate adjustments can be made to eliminate the material effects of such differences. Further, TNMM benchmarking, as per Rule 10B(1)(e) of the Rules, also supports adjustments to take into account the differences, if any, between the international transaction and the comparable uncontrolled transactions.

As the impact of the receivables gets factored into the taxpayer’s working capital and thereby on its pricing/profitability vis-à-vis that of its comparables, we direct the AO/TPO to compute and grant a working capital adjustment in respect of the international transaction of “Provision of ITeS”. Once a working capital adjustment is granted under TNMM benchmarking, the impact of delayed receivables is subsumed in the profitability analysis, and no separate adjustment for notional interest on delayed receivables is warranted. We order accordingly. As a result, Ground No. 4 raised in assessee’s appeal is allowed for statistical purposes.

The issues arising in Grounds No. 5,6 and 7 pertain to the levy of interest under section 234B, section 234D and section 244A of the Act, which is consequential in nature. Therefore, these grounds need no separate adjudication.