Transfer pricing adjustment limited to international transactions; comparable selection and support service charges were upheld on documented facts.

Administrative support service charges paid to the holding company were held not to warrant disallowance under section 40A(2)(a) because the services were documented under an agreement and supported by emails, invoices and board minutes, while the charge was not shown to be unsupported or excessive. In transfer pricing, adjustment was confined to international transactions with associated enterprises and could not be extended to non-international transactions. FCI Technology Services Ltd. was directed to be included among comparables, as it was not shown to be a persistent loss-maker and its functional similarity was not disputed. The assessee's own PLI accepted in MAP proceedings could not be reopened, and ALP was to be recomputed accordingly.

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Issues: (i) Whether the disallowance made under section 40A(2)(a) for administrative support service charges paid to the holding company was justified; (ii) whether the transfer pricing adjustment could be made by considering the assessee's own margin and comparables across both international and non-international transactions; and whether FCI Technology Services Ltd. was to be included among comparables.

Issue (i): Whether the disallowance made under section 40A(2)(a) for administrative support service charges paid to the holding company was justified.

Analysis: The payment was supported by an administrative services agreement describing multiple support functions such as land acquisition, payroll, banking liaison, legal and taxation support, HRD, marketing, government liaison, and vendor development. The assessee produced emails, invoices, and board minutes evidencing receipt of services. The payment at 5% of net processing fees translated to about 1.31% of sales, and comparable group concerns had paid similar or higher percentages for similar services. The expenditure was therefore found to be neither unsupported nor excessive.

Conclusion: The disallowance under section 40A(2)(a) was deleted in favour of the assessee.

Issue (ii): Whether the transfer pricing adjustment could be made by considering the assessee's own margin and comparables across both international and non-international transactions; and whether FCI Technology Services Ltd. was to be included among comparables.

Analysis: Transfer pricing provisions apply only to international transactions with associated enterprises. The adjustment could not be extended to non-international transactions. On the comparable selection issue, FCI Technology Services Ltd. was held not to be a persistent loss-making company, as it had earned profit in one of the relevant years, and its functional similarity was not disputed. The assessee's own PLI accepted in MAP proceedings could not be reopened, but the comparable set could be reconsidered for the non-YCJ transactions. The matter therefore required fresh computation of ALP in accordance with these directions.

Conclusion: The transfer pricing adjustment was held to be restrictable only to international transactions, and FCI Technology Services Ltd. was directed to be included among comparables.

Final Conclusion: The assessee succeeded on the disallowance issue and partly succeeded on the transfer pricing issue, but the ALP computation was remitted for fresh working consistent with the Tribunal's directions.

Ratio Decidendi: Transfer pricing adjustment can be made only in respect of international transactions with associated enterprises, and a comparable cannot be excluded merely as a persistent loss maker where it has recorded profit in one of the relevant years and functional similarity is otherwise established.

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