Key Facts

• The Assessee is engaged in rendering Software development and support services to group companies.

• The case for AY 2020-21 was selected for scrutiny, leading to a reference to the Transfer Pricing Officer (TPO) and accordingly a Transfer Pricing adjustment regarding interest on outstanding receivables.

• The AO also proposed certain Corporate Tax adjustment in the draft assessment order. A Final Assessment order was passed by the AO pursuant to the DRP directions under Section 144C of the Act.

• The Assessee challenged the order both on merits and on the jurisdictional ground that the final order was time-barred under Section 153.

Argument of Taxpayer

• The final assessment order (passed on 6 June 2024) exceeded the statutory deadline. For AY 2020-21, the limitation period under Section 153(1), read with the 12-month extension for TPO references under Section 153(4), expired on 31 December 2023.

• The Taxpayer relied on High Court rulings (CIT vs. Roca Bathroom Products and Shelf Drilling Ron Tappmeyer Ltd), asserting that orders passed beyond these limits are void ab initio.

Arguments of Department

• The Revenue contended that Section 144C is a self-contained code; its non-obstante clause overrides the general limitation periods in Section 153.

• Noted that the Shelf Drilling case had been challenged in the Supreme Court and remained pending with the larger bench.

Decision of Tribunal

The Hyderabad Tribunal ruled in favor of the Assessee on the legal issue of limitation:

• The Tribunal followed the “harmonious construction” principle, stating that Sections 144C and 153 are mutually inclusive rather than exclusive.

• The Tribunal affirmed that the outer time limit for completing the assessment is governed by Section 153(1) and 153(4). Since the final order for AY 2020-21 was passed in June 2024 well after the 31 December 2023, deadline—it was declared barred by limitation and quashed.

• Crucially, the Tribunal did not rule on the substantive merits of the tax adjustments because the order itself was found to be legally void due to the delay. However, the ITAT included a specific provision regarding the future of these issues:

  “we dispose of this appeal on this legal issue and keep open the other issues raised by the assessee on merits, in case the Hon’ble Supreme Court decides the issue otherwise.”

The following summary focuses specifically on the technical services for the upstream segment provided on a cost-to-cost basis:

Key Facts

• The Assessee provided core technical services, including geological, geophysical, reservoir, and project management services, related to the exploration and production of oil and gas (E & P).

• The services were rendered strictly on a “cost-to-cost” basis to the AE with no mark-up charged or offered.

• TPO rejected the at-cost principle and instead applied the same set of comparables used for Information Technology enabled Services (ITES) and proposed a TP adjustment.

• The DRP upheld the approach of the TPO and the Assessee challenged the same before the Tribunal.

Arguments of Taxpayer

• The Assessee highlighted that these services are governed by Production Sharing Contracts (PSCs) with the Government of India and other foreign governments. Under the PSC framework and global Shell group policy, technical services are remitted at cost. The taxpayer argued that these contracts have “sovereign sanctity” as they are issued by the Ministry of Petroleum & Natural Gas.

• It further emphasized that it is a standard industry practice for consortium members to provide services to each other without a profit element.

• The taxpayer contended that under Rule 10B(2)(d), the “at cost” mandate of the Government must be respected as a condition prevailing in the market.

• The Assessee used the Comparable Uncontrolled Price (CUP) method, citing the at-cost model followed by other consortium partners as a quasi-external CUP.

• Reliance was placed on the Mumbai ITAT ruling in Reliance Industries Ltd. (ITA 579/Mum/2021), where a cost-to-cost model for similar services under a PSC was accepted as being at arm’s length.

Arguments of Department

• The Revenue argued that any service provision between related parties inherently necessitates a profit mark-up to satisfy the arm’s length principle.

Decision of Tribunal

The Tribunal held that the adjustment was unsustainable in law and on facts.

• The Tribunal ruled that the TPO erred by comparing highly specialized upstream geological and project management services with generic ITES/BPO services.

• The Tribunal recognized that the at-cost model is a strong indicator of an industry norm where parties operate under a common contractual and regulatory regime.

• It noted that the Revenue had accepted this at-cost model in earlier years and for other consortium entities, and it should not be “jettisoned” in a later year without a change in facts.

• The Tribunal accepted the at-cost model as the most appropriate determination of the arm’s length price for these specialized upstream E&P services.

• Tax Tribunal Quashes Section 263 Revision: No “Prejudice to Revenue” in Cost-Plus Mark-up Model - UBS Business Solutions (India) Pvt. Ltd. vs. The Principal Commissioner of Income Tax (ITA 1407/PUN/2025)

Key Facts

• The taxpayer is a private limited company (successor to Credit Suisse Services (India) Pvt. Ltd.) providing IT and IT-enabled services (ITES) to its Associated Enterprises (AEs) outside India.

• The original assessment was completed under the Faceless Assessment Scheme (Section 143(3) r.w.s. 144B) on September 6, 2022, after being selected for “complete scrutiny” regarding refund claims and Chapter VIA deductions.

• The Principal Commissioner of Income Tax (Pr.CIT) invoked Section 263, claiming the original assessment was “erroneous and prejudicial to the interest of Revenue”.

• The Pr.CIT alleged that the AO failed to verify repairs and maintenance expenses of INR 21.02 crs suspecting they should have been capitalized as per accounting policies rather than treated as revenue expenditure.

Arguments of Taxpayer

• The Company operates as a captive service provider on a cost-plus mark-up basis. Because all costs—including repairs—are recovered from AEs with a mark-up, any reclassification of expenses to capital would actually decrease the income (mark-up on a lower cost base), meaning there is no prejudice to the Revenue.

• Computer peripherals (headsets, mice) and furniture repairs are recurring, day-to-day business expenses in the ITES industry and do not create new assets.

• Accounting policies do not override the Act regarding the allowability of expenditure under normal provisions.

Arguments of Department

• The Departmental Representative (DR) argued the AO did not ask any questions regarding the repair expenses during the initial assessment.

• Relied on The Pr.CIT contention that according to the Company’s own audit report and accounting policies, items like headsets and computer peripherals should have been capitalized.

• The Department viewed the repair amount as “exorbitant” given the low opening value of the machinery block.

Tribunal decision

The Tribunal allowed the appeal of the Assessee, setting aside the Pr.CIT’s revision order based on the following:

• The Tribunal found that 100% of the taxpayer’s revenue receipts were from its AEs, based on a cost-plus-mark-up model. Since the repairs and maintenance were part of the “operating expenditure” recovered from AEs with a mark-up, there was no loss of revenue.

• For Section 263 to be valid, an order must be both “erroneous” and “prejudicial to the interest of Revenue”. The Tribunal held that even if the AO’s enquiry was deemed inadequate, the order was not prejudicial because the current arrangement resulted in higher taxable income.

• The order under Section 263 was deemed unsustainable, rendering other grounds on merits academic.