Transfer pricing adjustment limited to associated enterprise transactions, while centralized IT infrastructure payments were treated as royalty.

Transfer pricing adjustment in the manufacturing segment was held to be confined to international transactions with associated enterprises, not to entity-level results; the matter was remitted to restrict the adjustment accordingly. The Tribunal also held that payments for access to a centralized and integrated IT infrastructure facility amounted to royalty under section 9(1)(vi) and the relevant treaty, because the payment was for use of equipment rather than standalone services. On that basis, the corresponding disallowance under section 40(a)(ia) was upheld for the royalty-related component.

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Issues: (i) Whether the transfer pricing adjustment in the manufacturing segment had to be confined only to the international transactions and not the entity-level transactions. (ii) Whether the payment towards IT support software and infrastructure charges was chargeable to tax in the hands of the non-resident as royalty so as to attract disallowance under section 40(a)(ia) of the Income-tax Act, 1961.

Issue (i): Whether the transfer pricing adjustment in the manufacturing segment had to be confined only to the international transactions and not the entity-level transactions.

Analysis: The adjustment was made after aggregation of the manufacturing segment and benchmarked at entity level. The Tribunal noted that the assessee accepted the rejection of the foreign associated enterprise as the tested party and also did not contest aggregation or the use of TNMM for the segment. The surviving grievance was that the adjustment should be restricted to international transactions alone. Following the earlier view in the assessee's own case, the Tribunal held that transfer pricing addition cannot extend beyond dealings with associated enterprises.

Conclusion: The issue was decided in favour of the assessee and the matter was remitted to the Assessing Officer and the Transfer Pricing Officer to confine the adjustment only to international transactions under the manufacturing segment.

Issue (ii): Whether the payment towards IT support software and infrastructure charges was chargeable to tax in the hands of the non-resident as royalty so as to attract disallowance under section 40(a)(ia) of the Income-tax Act, 1961.

Analysis: The Tribunal found that the assessee was not merely receiving isolated IT services but was paying for access to a centralized and integrated IT infrastructure facility created and maintained by the foreign associated enterprise. The cost allocation was based on user base and system load, showing payment for use of equipment rather than for standalone services. On that basis, the payment fell within the definition of royalty under section 9(1)(vi) of the Income-tax Act, 1961 and also under the relevant treaty provisions. The Tribunal further held that the legal position on software copyright royalties did not assist the assessee because the present payment related to industrial royalty for use of IT equipment. The Tribunal also held that it could examine the subject matter from the correct legal angle within its appellate powers.

Conclusion: The issue was decided against the assessee and the disallowance under section 40(a)(ia) was upheld for the amount covered by the royalty and support components.

Final Conclusion: The appeal succeeded only to the extent of restricting the transfer pricing adjustment to international transactions, while the disallowance for non-deduction of tax at source on the royalty-related payment was sustained.

Ratio Decidendi: A transfer pricing adjustment in a segment must be confined to international transactions with associated enterprises, and consideration for access to a centralized IT infrastructure facility constitutes royalty chargeable to tax in the hands of the non-resident.

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