Examine the following transactions and discuss whether the transfer price declared by the following assessees, who have exercised a valid option for…

(1) BlueOrbit Systems Inc. held 30% voting power in TechMitra Solutions Ltd. which is not less than 26% of the voting power in BlueOrbit Systems Inc. Hence, BlueOrbit Systems Inc. and TechMitra Solutions Ltd. are deemed to be associated enterprises. Therefore, provision of system support services by TechMitra Solutions Ltd., an Indian company, to BlueOrbit Systems Inc., a foreign company, is an international transaction between associated enterprises, and consequently, the provisions of transfer pricing are attracted in this case. System support services falls within the definition of "software development services", and hence, is an eligible international transaction. Since, TechMitra Solutions Ltd. is providing software development services to a non-resident associated enterprise and has exercised a valid option for safe harbour rules, it is an eligible assessee. Since the value of international transactions entered does not exceed 100crore, TechMitra Solutions Ltd. should have declared an operating profit margin of not less than 17% in relation to operating expense, to be covered within the safe harbour rules. However, since TechMitra Solutions Ltd. has declared an operating profit margin of only 16% (i.e. 8/50 x 100), the same is not in accordance with the circumstance mentioned in Rule 10TD. Hence, it is not binding on the income-tax authorities to accept the transfer price declared by TechMitra Solutions Ltd. (2) Since NeuroCore Technologies Inc., is a foreign subsidiary of NextEra Systems India Ltd., an Indian company, both are associated enterprises. Data processing services with the use of information technology falls within the definition of “information technology enabled services", and is hence, an eligible international transaction. Since NextEra Systems India Ltd. is providing data processing services to a non-resident associated enterprise and has exercised a valid option for safe harbour rules, it is an eligible assessee. Since the aggregate value of transactions entered in the F.Y. 2024-25 exceeds 100crore but does not exceed 300crore, NextEra Systems India Ltd. should have declared an operating profit margin of not less than 18% in relation to operating expense, to be covered within the scope of safe harbour rules. In this case, since NextEra Systems India Ltd. has declared an operating profit margin of 20% (i.e. 45/225 x 100), the same is in accordance with the circumstance mentioned in Rule 10TD. Hence, the income-tax authorities shall accept the transfer price declared by NextEra Systems India Ltd. in respect of such international transaction. (3) Stratosphere Innovations., a foreign firm holds 12% interest in Pragati & Co., an Indian firm. Therefore, the condition of one enterprise, being a foreign firm, holding not less than 10% interest in another enterprise, being an Indian firm, is satisfied. Hence, Stratosphere Innovations. and Pragati & Co. are deemed to be associated enterprises. Therefore, provision of contract R & D services relating to development of internet technology by Pragati & Co., an Indian firm, to Stratosphere Innovations, a foreign firm, is an international transaction between associated enterprises, and consequently, the provisions of transfer pricing are attracted in this case. Development of internet technology falls within the meaning of "contract R&D services wholly or partly relating to software development", and hence, is an eligible international transaction. Since Pragati & Co., an Indian firm is providing contract R & D services to a non-resident associated enterprise and has exercised a valid option for safe harbour rules, it is an eligible assessee. Since the value of the international transaction does not exceed 300crore, Pragati & Co. should have declared an operating profit margin of not less than 24% in relation to operating expense, to be covered within the safe harbour rules. However, since Pragati & Co. has declared an operating profit margin of only 20% (50/250 x 100), the same is not in accordance with the circumstance mentioned in Rule 10TD. Hence, it is not binding on the income-tax authorities to accept the transfer price declared by Pragati & Co. The safe harbour rules shall not apply in respect of eligible international transactions entered into with an associated enterprise located in a notified jurisdictional area. Therefore, if in any of the cases mentioned above, the foreign entity is located in a NJA, the safe harbour rules shall not be applicable, irrespective of the operating profit margin declared by the assessee.