LUMEN IT INDIA PRIVATE LIMITED,BANGALORE vs. ASSESSMENT UNIT, INCOME TAX DEPARTMENT, NEW DELHI / THE ASSESSING OFFICER, CIRCLE 4(1)(1), BANGALORE, BANGALORE

This appeal is filed by Lumen IT India Private Limited [ The Assessee/Appellant] against the assessment order passed under section 143(3) read with sections 144C(13) and 144B of the Income Tax Act. The return filed by the assessee on 31 December 2022, declaring a total income of ₹95,60,96,740, was assessed at ₹103,28,49,374 after making a transfer pricing adjustment of ₹7,67,52,834 on account of interest on overdue trade receivables. 2. The Assessee has raised the following grounds of appeal:

That on the facts and circumstances of the case and in law, the Impugned Order of the Ld. AO dated December 29, 2025, in so far as it is prejudicial to the Appellant, is without jurisdiction, violative of principles of natural justice, erroneous in facts and law, unsustainable and hence is liable to be quashed as such.

The Ld. TPO, Ld. AO and the Ld. Panel (together referred to as the 'Lower Authorities') erred in making an adjustment towards interest on overdue receivables, to the extent of INR 7,67,52,634/-, arising from providing SWD and ITES Services to its AEs. Further, the lower authorities also erred in re-characterizing the same as an unsecured interest-free loan granted to the AEs.

The lower authorities erred in proposing an upward TP adjustment towards interest on overdue receivables without appreciating that the provisions of Chapter X of the Act are extraneous to the facts of the present case.

Without prejudice, the lower authorities failed to appreciate that a separate adjustment is unwarranted, the lower authorities not appreciating the fact that such receivables are closely linked to the primary transactions relating to SWD segment and ITES segment which have already been held to be arm's length price by the Ld. TPO. Accordingly, interest on delayed receivables should not be tested separately as a transaction or recharacterized as an unsecured loan transaction.

The lower authorities failed to appreciate that Transactional Net Marginal Method ("TNMM") with an appropriate working capital adjustment has been undertaken for benchmarking the SWD and ITES services, which will subsume the receivables/ payables.

The lower authorities erred in making an addition towards the notional interest on overdue receivables without undertaking a benchmarking analysis based on similar uncontrolled transactions and without adopting any of the prescribed methods under the Act and the related rules.

Without prejudice, the lower authorities erred in arbitrarily adopting London Interbank Offered Rate ("LIBOR") plus 450 basis point rates at 5.37% to benchmark the interest on overdue receivables, without appreciating that the same is without any proper basis. On a without prejudice basis, should the Hon'ble Tribunal continue to treat overdue receivables as an international transaction, the rate adopted ought to be LIBOR plus 300 basis points or lesser.

On the facts and in the circumstances of the case and in law, the Ld. AO has erred in initiating penalty proceedings under section 274 read with section 271B of the Act, for the alleged failure to get the accounts audited, and to furnish the audit report as required under section 44AB.

On the facts and in the circumstances of the case and in law, the Ld. AO erred in concluding that the provisions of section 271B are applicable, despite the Appellant having duly furnished the tax audit report under section 44AB, albeit belatedly.

On the facts and in the circumstances of the case and in the law, the Ld. AO erred in disregarding the Appellant's explanation for the delay in furnishing the audit report as not genuine.

On the facts and in the circumstances of the case and in the law, the Ld. AO ought to have appreciated that the delay in furnishing the tax audit report was on account of reasonable cause.

Briefly stated, Assessee is formerly known as CenturyLink Technologies India Private Limited, is engaged in providing software development services, including maintenance and testing services, to group companies of Qwest Corporation and Qwest Communications Corporation. Assessee’s return of income was selected for scrutiny, and notice under section 143(2) of the Act was issued on 1 August 2023. 3. Assessee has entered into international transactions relating to software development services and information technology enabled services. The matter was referred to the Transfer Pricing Officer, who proposed an upward adjustment of ₹42,94,26,571, ₹24,96,40,000 comprising transaction adjustments of and ₹5,77,80,000 in respect of software development services and ITES, respectively, and a further adjustment of ₹12,20,06,571 towards interest on overdue receivables from associated enterprises. 4. Consequently, a draft assessment order was passed on 28 February 2025. Assessee filed objections before the Dispute Resolution Panel, which issued directions, pursuant to which the Transfer Pricing Officer passed the order giving effect on 16 December 2025. In that order, the international transactions relating to software development services and ITES were held to be at arm’s length. Accordingly, the only issue remaining for our consideration is the adjustment on account of interest on overdue receivables from associated enterprises, which was reduced to ₹7,67,52,634. Based on this, the learned Assessing Officer passed the final assessment order, which is under challenge before us.

The learned authorized representative, Shri Darpan Kripalani, submitted that ground no. 1 is general in nature and that ground nos. 8 to 11, being miscellaneous grounds, are not pressed. We find that ground no. 1 is general, while ground nos. 8 to 11 are either consequential or premature. Accordingly, these grounds are dismissed. 6. The only surviving issue concerns the transfer pricing adjustment of ₹7,67,52,634 towards interest on overdue receivables. The learned authorized representative submitted that no separate adjustments are warranted, as the outstanding receivables from associated enterprises are closely connected with the primary transactions in the software development and ITES segments, which the learned Transfer Pricing Officer has already accepted as being at arm’s length. Accordingly, interest on overdue receivables could not be tested separately as an independent transaction. He further submitted that the assessee adopted the Transactional Net Margin Method as the most appropriate method for benchmarking software development and ITES services and that, once working capital adjustment is granted, no separate adjustment would survive. Without prejudice, he contended that the learned Transfer Pricing Officer arbitrarily adopted LIBOR plus 450 basis points, resulting in an interest rate of 5.37%, for benchmarking the interest. If any adjustment is nevertheless made, he submitted that it should be restricted to LIBOR plus 200 basis points. In support, he relied on several judicial precedents in which coordinate benches have held LIBOR plus 200 basis points to be an appropriate benchmark for interest on overdue receivables. 7. The learned departmental representative strongly supported the orders of the lower authorities and submitted that overdue receivables constitute a separate international transaction under the Income Tax Act and, therefore, require independent benchmarking. She further submitted that there is no infirmity in the order of the learned Transfer Pricing Officer or in the directions of the learned Dispute Resolution Panel, as the outstanding amounts were receivable from associated enterprises are overdue. According to her, the assessee had entered into a capital financing transaction, which could not be aggregated with the software development and ITES transactions. She therefore submitted that the orders of the lower authorities call for no interference. 8. We have carefully considered the rival submissions and perused the orders of the lower authorities. The learned Transfer Pricing Officer discussed the issue in paragraph 10 of his order while considering the working capital adjustment. He observed that rule 10B of the Income Tax Rules, 1962 permits reasonably accurate adjustments to uncontrolled comparable transactions to eliminate material differences affecting price, cost, or profit. However, he placed the burden on the assessee to show that differences in working capital between it and the comparable companies affected its profit margin and that the adjustment could be computed with reasonable accuracy. 9. A plain reading of paragraph 5.5 of the TPO’s order shows that he invoked section 92C(3)(c) and rejected the transfer pricing study prepared by the assessee. The learned TPO then selected the comparable companies and examined whether the some of the assessee’s comparable could be adopted for determining the arm’s length price of the international transactions in the software development and ITES segments. In paragraph 10, he held that the assessee had not established that working capital differences between it and the comparable companies affected profitability. We fail to see how the burden could be placed on the assessee when the learned TPO, rejected the TPSR of the assessee, selected his own comparable set , himself selected the comparables and had access to the relevant database and annual accounts of those companies. The learned TPO relied only on a general observation that the assessee had not shown whether the comparable companies financed their working capital through own funds or borrowings, whether any cost was incurred on such working capital, and how such cost affected their margins. On that basis, he rejected the assessee’s request for a working capital adjustment. 10. When the assessee challenged the learned TPO’s findings before the learned Dispute Resolution Panel, Assessee raised several objections as recorded in paragraph 15 of the objections. One of the objections was that the learned TPO failed to appreciate that, under the Transactional Net Margin Method, working capital adjustment subsumes receivables and payables and, therefore, no separate adjustment for notional interest on receivables is required. Without prejudice, the assessee also objected to the adoption of LIBOR plus 450 basis points, resulting in a rate of 5.37%, for which no basis was provided by the learned TPO. The learned DRP recorded its finding in paragraph 15.1; however, the discussion is confined largely to judicial precedents. The learned DRP appears to have overlooked that the dispute before it involved a commercial issue with economic significance and could not be decided merely by relying on judicial precedents rendered on different facts. Further it did not adjudicate on any of the issues raised by the assessee but merely held that it is a separate international transaction. 11. In the present case, it is undisputed that the assessee rendered software development and ITES services, and that the outstanding receivables from associated enterprises arose from those transactions. Further, for determining the arm’s length price of the ITES and software development segments, appropriate adjustments are required under rule 10B of the Income Tax Rules. Although the learned TPO referred to these provisions, he declined to apply them while determining the arm’s length price of the ITES and software development segments. The learned DRP also did not adjudicate this ground on its merits and instead decided the issue on the basis of judicial precedents that have no direct relevance to the grant of working capital adjustment to the assessee. 12. It is also undisputed that, after the directions of the learned DRP, the margins of the ITES and software development segments were held to be at arm’s length in the assessee’s case. However, we fail to understand how the arm’s length price could have been determined by the learned TPO and the learned DRP without giving full effect to the working capital adjustment in respect of the comparable companies. Had such adjustment been granted, the correct arm’s length price of the relevant international transactions would have been determined. It is not in dispute that the overdue receivables from associated enterprises arose only from the international transactions and are closely linked to them. Therefore, denial of working capital adjustment to the assessee is not in accordance with the provisions of the Income Tax Act and the transfer pricing rules. 13. Accordingly, we direct the learned Assessing Officer to grant the assessee the working capital adjustment and thereafter determine the arm’s length price of the international transactions. Once such working capital adjustment is granted, no further adjustment is required on account of interest on overdue receivables from associated enterprises. We also direct the assessee to furnish the working capital adjustment computation before the learned Assessing Officer, if the same is available. Accordingly, ground nos. 2 to 7 of the assessee’s appeal are allowed.

In the result, the appeal filed by the assessee is partly allowed.