2026 (2) TMI 363 - AT - Income Tax

Transfer pricing adjustment on differential commission rates rejected; ad hoc benchmarking deleted and interest recalculated accordingly.

Transfer pricing adjustment challenged the use of commission received as the arm's length benchmark for commission paid on import and export transactions; ... TP Adjustment - differential commission rates (commission paid vis-a-vis commission received) - TPO consiedered commission received as ALP for benchmarking the commission paid by the assessee - adjustment on account of differential in the rate of commission received / paid on account of ‘Import of parts and products for resale’ and ‘Export of parts and products’ - HELD THAT:- Adjustment was done by the TPO in the order giving effect to the directions of the DRP u/s 144C of the Act. Consequent, thereupon, the same was done by the AO in the final assessment order dated 23.10.2024 in this case. Thus, the assessee was not provided any opportunity, before making this adjustment. TPO / AO as referred above in their respective order as referred made additions on an ad hoc basis applying a thumb rule without bringing on record any material to dispute about the said differential in the said commission paid / received. While doing so the TPO has considered the commission received as ALP for benchmarking the commission paid by the assessee which is not permissible as in the present case, the commission received is neither entered between persons other than AEs nor concluded in uncontrolled conditions as held in the case of Coim India (P) Ltd. [2024 (2) TMI 1489 - DELHI HIGH COURT] relied upon by the assessee. We are of the considered view that the addition is not justified and the same is deleted. Charging of interest u/s 234B and 234C are consequential in nature - AO is directed to verify and charge interest as per law after giving effect to this order. As regards, the levy of interest u/s 234A of the Act, the AO is directed to verify the correct position regarding the due date of the filing of the return and take necessary action as per law. Ground nos. 17 to 19 are partly allowed. Issues: (i) Whether the adjustment of Rs. 2,57,67,740 made by the TPO/AO in respect of differential commission rates (commission paid vis-a-vis commission received) is sustainable; (ii) Whether interest and consequential tax consequences arising from the impugned assessment require modification in view of deletions and rectifications.Issue (i): Validity of transfer pricing adjustment of Rs. 2,57,67,740 made by benchmarking commission paid against commission received.Analysis: The adjustment was not part of the draft assessment but was introduced pursuant to directions and by the TPO in the order giving effect; the assessee was not afforded an opportunity before the adjustment. The TPO benchmarked a controlled transaction (commission received) as the ALP for another controlled transaction (commission paid). The statutory definition of arm's length price under section 92/92F(ii) contemplates comparison with transactions between persons other than associated enterprises in uncontrolled conditions. Reliance on the jurisdictional High Court authority holding that comparing one controlled transaction with another controlled transaction is impermissible was considered. The TPO/AO applied an ad hoc pro-rata thumb rule without furnishing material substantiating the differential or providing opportunity to the assessee.Conclusion: The adjustment of Rs. 2,57,67,740 is deleted and the related grounds allowing deletion are upheld in favour of the assessee.Issue (ii): Consequential interest and related consequential grounds (sections 234A, 234B, 234C and penalty proceedings under section 270A).Analysis: Interest under sections 234B and 234C are consequential on the tax adjustments and require recalculation by the AO after giving effect to the deletions. The correctness of interest under section 234A depends on the verified due date of filing in light of extant circulars; penalty proceedings were held premature.Conclusion: Grounds relating to interest under sections 234B and 234C are remitted to the AO for verification and computation after giving effect. The AO is directed to verify and take action regarding interest under section 234A. The ground challenging initiation of penalty proceedings is dismissed as premature.Final Conclusion: The appeal is partly allowed by deleting the transfer pricing adjustment of Rs. 2,57,67,740 and remitting interest consequential computations to the assessing officer; other reliefs and rectifications already effected are treated as infructuous or addressed accordingly.Ratio Decidendi: A transfer pricing adjustment cannot validly benchmark a controlled transaction against another controlled transaction; arm's length price must be determined with reference to transactions between persons other than associated enterprises in uncontrolled conditions, and adjustments introduced without opportunity to be heard or supported by material are unsustainable.