HITACHI ENERGY TECHNOLOGY SERVICES PRIVATE LIMITED ( FORMERLY KNOWN AS ABB POWER TECHNOLOGY SERVICES PRIVATE LIMITED ,BENGALURU vs. DCIT, CIRCLE-3(1)(1), BANGALORE

Therefore the only dispute in this appeal is addition of Rs. 7,90,04,580 on account of determination of ALP of the international transaction.

The brief facts show that assessee is a company which is formed pursuant to the demerger of the power grids business of ABB Global Industries and Services Pvt. Ltd. It carries on the business of Information Technology support services to the internal needs of power grids business of Hitachi Energy affiliates including developing software, configuration, testing activity and deputing engineers on need basis for providing IT support services. This is called IT support services activity. The assessee is also providing ITeServices [ITeS] catering to the internal needs of power grids business by primarily proving accounting, human resources, procurement and logistic support services along with finance related support to its group companies.

The assessee entered into international transaction and therefore reference was made to the ld. ACIT(TP) 1(3)(1), Bangalore [ld. TPO] on 03.11.2023. The dispute involved in this appeal is with respect to the provision of ITeS where the revenue recorded by the assessee is of Rs. 1569.50 million and earning operating profit thereon of 17.93%. The ld. TPO recomputed the margin at 14.89% considering the operating income of Rs.1569.50 million and operating expenses of

The ld. TPO found that the filter adopted by the assessee of the companies that have net fixed assets to turnover less than or equal to 200% as inappropriate filter holding that it led to rejection of good comparables. The assessee has not applied the employee cost filter of 25% as well as 75% of income from core services. It has also not applied persistent loss filter and therefore the TP Study Report [TPSR] of the assessee was rejected.

The ld. TPO adopted the appropriate filters which are not disputed here and based on that carried out fresh search on Prowess & AceTP databases and selected the final list of comparables having 35th percentile margin of 20.9%, 65th percentile margin of 28.3% and median margin of 21.84%. In this process, the ld. TPO also tested 18 comparables selected by the assessee in its TPSR and accepted 7 comparables from the set. This acceptance was on the basis of finding

The assessee was issued a show cause notice which was replied and considered and thereafter final set of 13 comparables were selected having 35th percentile margin of 20.90%, 65th percentile margin of 28.23 and median margin of 22.21%. As the taxpayer’s margin was 17.50% on the operating cost of Rs. 1335.80 million, the ALP was considered at Rs. 1632.48 million against the price received of Rs.1569.50 million computing shortfall of Rs.6,29,80,000.

The ld. TPO also found that assessee has overdue outstanding receivable which is considered to be a separate international transaction of capital financing in view of provisions of section 92B Explanation 1(c) w.e.f. 1.4.2002 and then after relying upon several judicial precedents, held that it is a separate international transaction and assessee has failed to show that it is closely linked transaction of ITeS or other services then denying the Working capital adjustment applied SBI PLR of 12.27% as the CUP benchmark on the list of several invoices raised by the assessee where the days of realisation exceeded upto 1000 days to 1 day over and above the 30 days credit period. On the basis of this, ALP on interest on overdue receivable was computed at Rs.1,60,24,580.

Consequently total adjustment u/s. 92CA was made of Rs.7,90,04,580 as per order passed by the ld. TPO on 17.10.2023 which resulted into a draft assessment order on 29.12.2023.

Same was carried out before the ld. DRP without any relief and consequently the TP adjustment as made by the ld. TPO was confirmed and is in dispute.

The assessee has raised several grounds of appeal before us. The ld. AR, Mr. Ketan Ved, CA, has also placed before us a 12 pages written note. The first submission of the assessee is with respect to ground No.11 submitting that R Systems International Ltd. (BPO) was tested for inclusion before the TPO as per page 27 – 30 of the TPO’s order and further page 14017 of the ld. DRP which was rejected for the reason that the comparable R Systems International Ltd. has different accounting year.

The ld. AR referred to several judicial precedents of the coordinate Benches wherein it is held that R Systems International Ltd. is a public listed entity which has mandate to submit quarterly financial results which could be reconstructed for the FY 2020-21 as the functions, assets and risk of that comparable is same, despite having different financial year.

The ld. DR, Dr. Divya K J, CIT(DR) submits that having different financial year, the same could not have been included.

We have carefully considered the rival contentions and find that R Systems International Ltd. having business process outsourcing services is tested by the ld. TPO being comparable selected by the assessee as per TPSR. This company having 10.52% of weighted

It is undisputed that R Systems International Ltd. has a different financial year and therefore it got excluded from the comparability analysis of the financial set of comparables by the TPO. It is apparent that if R Systems International Ltd. is public listed entity on a recognised stock exchange, it is mandatorily required to follow the provisions of clause 41 of the listing agreement and to publish its quarterly financial results, though it may be in a different format, but the claim of the assessee is that it could be reconstructed to derive at the financial results of the comparable for FY 2020-21 as that of the assessee. When this comparable undisputedly having the same FAR, crosses the filters adopted by the assessee as well as the TPO, except filter of the financial year, when data pertaining to that financial year can be reconstructed, same should be included. However, it would be the duty of the assessee to submit that reconstructed data before the ld. TPO or to show that how it computed the margin of this comparable in its TPSR. The ld. AO may verify the computation and if satisfied about the computation of margin, include the above comparable. Accordingly Ground No.11 with respect to comparable stated at Ground No.11.5 is allowed as indicated above.

The assessee also submitted that ground No.13 challenges the rejection of working capital adjustment. The ld. AR referred to para 10 of the

The ld. AR relied upon several judicial precedents and also submitted a chart of working capital adjustment showing the adjusted margin. It is submitted that if working capital adjustment is granted, 35th percentile margin would come to 15.36% instead of 15.81%, 65th percentile margin would come to 30.91% compared to 28.23% and further median margin would come down to 22.38% against 21.73%. The ld. AR submits that in view of the foregoing and specifically in the light of the aforesaid decisions, upon the inclusion of the aforesaid comparable company and the margins are recomputed considering the working

The ld. CIT(DR) submitted that the ld. TPO and the ld. DRP have given good reasons for non granting working capital adjustment. She otherwise submitted that according to the chart submitted by the assessee, it clearly shows that if working capital adjustment is granted, the margin of the comparables such as median margin is growing up from 21.73% to 22.38%.

We have carefully considered the rival contentions and find that the onus would be on the authority to compute the ALP according to Rule 10B for making reasonable accurate adjustment to the median of the comparable companies to eliminate the material effects of such differences on the price, cost or profit.

Rule 10B (3) PROVIDES THAT

Though in the present case, the assessee has given a chart, the working capital adjusted margins of the comparable company, but it is the onus of the ld. TPO when he rejects the TPSR to answer this question. Throwing the onus on the assessee on the comparables selected by the TPO is unfair and not justified.

Further the ld. TPO should have proved that the data with average working capital will not show the actual working capital employed and the difference in the working capital levels between the comparable company and the assessee cannot be measured with reasonable accuracy. He should have tested the computation given by the assessee and stated that how the assessee could compute the working capital margin and how the TPO could not. Further the uneven sales & purchases could not be the reason to reject the working capital adjustment as it is an economic reality of the business. The rejection on the ground that segmental working capital is not disclosed in the annual reports, the ld. TPO could not show any statutory requirement of such disclosure by the comparable companies. As the comparables are accepted by the ld. TPO and most of the comparable companies are rejected by him, it is for him to show that assessee does not deserve working capital adjustment with sound reasons in terms of Rule 10B (3) of the IT Rules. . Same is the case with the cost of capital also.

Accordingly we direct the ld. TPO to examine the working produced by the assessee and decide in accordance with the law by carrying out economic analysis and not rejecting the same merely on hypothetical and theoretical basis. Accordingly ground No.13 of the appeal is allowed.

Ground No.15 is with respect to the TP adjustment of Rs.160,24,580 on account of interest on delayed trade receivable. The assessee contends that it should not be considered as a separate international transaction and no interest can be imputed. It was further claimed that it should be benchmarked using a combined transaction of the services. The ld. TPO has computed the same holding it to be a separate international transaction and further the ld. DRP and the ld. TPO supported the above contention by citing plethora of judicial precedents.

The ld. AR has categorically stated that the working capital impact subsumes any excess credit period to the AEs and therefore no separate adjustment can be made. It is a combined as it is closely linked with the transaction of provision of services. Several judicial precedents were cited. The ld. AR further submitted that the accounts receivable is a result of another international transaction of provision of services and therefore cannot be a separate international transaction per se, as the debit balance only reflects that a payment has become due for such services. He further submitted that the direction of the ld. DRP to consider the credit notes, if such credit notes are mapped to outstanding receivables which was furnished by the assessee on 13.9.2024, which were not considered by the ld. TPO. He submits that the credit notes amounting to Rs.4.25 crores were not mapped by the ld. TPO despite the direction of the ld. DRP. It was further submitted that the assessee has filed rectification application also on 1.10.2025 and 7.11.2024 on such mapping, but the ld. TPO has not considered the same. It was further stated that the total interest on such credit notes amounting to Rs.93,81,984 which should have been granted as a reduction in the ALP adjustment. He further submitted that there are interest on outstanding receivable which are computed beyond the period of interest of 31.3.2021 which is pertaining to different financial year and further the ld. TPO has computed the interest considering the SBI PLR, despite the fact that invoices are prepared in foreign currency and therefore LIBOR should have been taken as the appropriate

The ld. CIT(DR) vehemently submitted that there are two parts of one transaction being outstanding due of a particular credit period and thereafter outstanding due beyond the credit period. It is not the normal business of the assessee to keep the outstanding due for more than 1000 days as stated by the ld. TPO. She referred to page 59 – 84 of the TPO’s order to show this. She further referred to para 16.16 of the TPO order stating that the taxpayer has failed to show that the transactions are closely linked. She referred to para 16 of the order and relied upon it. She also referred to the ld. DRP directions.

We have carefully considered the rival contentions and perused the orders of the ld. lower authorities. From the figures tabulated at page 59-84 of the order of the TPO it is clear that assessee has outstanding with its AEs for abnormal period of time. Some of the outstandings are due beyond 1000 days. In the TPSR the assessee has not considered such huge outstanding overdue receivable from its AE. The assessee has also not shown that even the comparable companies are also having outstanding due receivables beyond 1000 days. It is unusual and it purported the fact that assessee by keeping the outstanding due beyond the normal days is a transaction of capital financing. In normal circumstances no businessman would keep the outstanding due from its services receivable for more than the credit period granted. This clearly shows that the FAR of the sales of services of the assessee to its

Further the issue of credit notes raised by the assessee directed by the ld. DRP has not at all been considered by the TPO. Not following the direction of the DRP is a clear violation of the provisions of law. Even rectification application stated to be made twice by the assessee is also not attended. Further despite giving finding at para 16.22 that if the invoices are prepared in foreign currency, LIBOR rate should be considered as the base for imputing the interest, despite noting this fact and assessee pointing out by submitting copy of invoices, the TPO has taken SBI PLR interest @ 12.27% is grossly incorrect.

It is for the assessee to show that the transaction of provision of ITES services and of Capital Financing benign the Over due outstanding receivable are interlinked transaction and therefore those are so closely connected that , those transaction should be benchmarked together and not separately. Assessee is directed to show so, if The AO is satisfied , than he should benchmark both the above transaction together.

In view of the above facts, we direct the ld. AO to recompute and re- examine the whole issue considering all the aspects raised by the assessee before him such as being closely linked transaction so computation of working capital subsumes these transactions, issue of credit notes and thereafter applying the LIBOR rate for benchmarking

Ground Nos.17 to 19 for levy of interest are merely consequently in nature. Ground Nos. 1 to 5 except as adjudicated above are not contested and therefore these are dismissed.

Ground at sl. No.16 is missing.

As on 10.4.2025 the assessee has raised an additional ground of appeal stating that regarding application of upper turnover filter and treatment of foreign exchange gain or losses. Nothing is argued before us and therefore these additional grounds are dismissed.

The assessee has also raised an additional ground on 25.9.2025 stating that assessee has not been grated foreign tax credit. The assessee submitted that foreign tax withheld outside India for the impugned financial year is Rs.4,76,75,190 , out of which the assessee is eligible to claim credit u/s. 90/90A of the Act r.w. Rule 128 of the I.T. Rules to the extent of Rs.1,46,73,323. The assessee claimed the credit in the return of income to the extent of Rs.83,43,839 and furnished Form 67, but did not claim a sum of Rs.63,29,484 due to non-availability of foreign tax withholding certificate. As soon as these certificates were received, assessee filed an updated Form 67 on 22.8.2025. Assessee also filed rectification application on 10.9.2025 which is pending. Therefore the claim of the assessee is that assessee should be granted the foreign tax credit of Rs.63,29,484.

It is the further claim of assessee that balance sum of Rs.330,01,867 which is an ineligible credit u/s 90/90A , should be allowed as a deduction u/s. 40(a)(ii) r.w.s. 37(1) of the Act. The assessee relied on the decision of the Hon’ble Bombay High Court in 76 taxmann.com 257 and coordinate Bench decision in 174 Taxman 76. It is the further claim of the assessee that if there is an enhancement to the returned income, the corresponding enhanced foreign tax credit shall be granted on the basis of such assessed income.

The assessee contested all the above contentions for admission of the additional ground as well as allowing the claim of the assessee.

The ld. DR vehemently opposed the admission of additional ground as well as all the contentions of deduction of foreign tax credit u/s. 90/90A as well as unclaimed foreign tax credit as deduction u/s. 37(1) of the Act.

We have carefully considered the rival contention and perused the order of the ld. lower authorities. We find that in the draft assessment order the computation of tax payable was not there, therefore the same could not be agitated before the DRP, inadvertently it could also not be raised in the grounds of appeal. The issue is regarding eligibility of foreign tax credit. The assessee could not have been subjected to higher tax than due. Therefore we admit the additional ground.

The claim in the additional ground is of balance tax credit of Rs.63,29,484 and also to consider deduction of foreign tax paid u/s. 37(1) of the Act. Accordingly such ground is admitted.

The facts show that assessee has already offered the revenue as covered in foreign tax credit certificate with respect to the sum of Rs.1,70,45,320 out of which assessee is entitled to foreign tax credit of Rs.63,29,484. The AO is directed to verify the claim and decide the issue in accordance with law.

With respect to the claim of the assessee that assessee has total income of Rs.92,13,46,800 which is enhanced and therefore the foreign tax credit also deserves to be enhanced. As most of the issues of transfer pricing adjustment are restore back to the file of the ld. AO, we do not know whether there would be an enhancement of the assessed income or not. The ld. AO is directed to look into this aspect on completion of the assessment as directed above.

With respect to deduction of tax paid outside India u/s. 37(1) of the Act, those grounds and issues were not before the ld. AO and therefore the same is also restored back. The ld. AO is directed to verify, examine and then recompute the foreign tax credit available to the assessee and also to decide whether the assessee is eligible for deduction of foreign tax withheld, but not granted as credit to the assessee can be granted as deduction u/s. 37(1) of the Act or not. It is also an admitted fact that no such claim was made in the Return of Income filed. Accordingly the additional ground raised on foreign tax

The ld. AO is directed to obtain OGE from ld. TPO, pass a draft assessment order at the first instance after carrying out above directions, u/s 144C (1) of the Act to afford assessee an opportunity to contest objections before ld. DRP.

In the result, the appeal by the assessee is partly allowed as indicated above.