TNMM comparables, depreciation adjustment, and section 143(1) processing were confined to reliable data and international transactions only.

Comparability under TNMM must rest on reliable, consistent financial data: MSL Driveline Systems Ltd. was excluded because its related party disclosures were contradictory and the RPT filter was breached. Bharat Gears Ltd. and JMT Auto Ltd. could not be excluded as persistent loss-makers on a profit-before-tax basis, since TNMM focuses on operating profit and both had profits in one relevant year. Depreciation differences may require adjustment where asset base and depreciation policy materially distort margins, so the issue was remitted for verification. Transfer pricing adjustment must be confined to international transactions with associated enterprises, and adjustments under section 143(1) could not survive after notice under section 143(2) had been issued.

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Issues: (i) whether MSL Driveline Systems Ltd. was a reliable comparable in view of contradictory financial disclosures and related party transactions; (ii) whether Bharat Gears Ltd. and JMT Auto Ltd. could be excluded as persistent loss-making companies on the basis of profit before tax; (iii) whether depreciation adjustment was warranted under TNMM; (iv) whether the transfer pricing adjustment had to be restricted only to the value of international transactions; and (v) whether the adjustments made under section 143(1) could survive when notice under section 143(2) had already been issued.

Issue (i): whether MSL Driveline Systems Ltd. was a reliable comparable in view of contradictory financial disclosures and related party transactions.

Analysis: The financial statements contained inconsistent disclosures regarding related party transactions, creating doubt about the reliability of the comparable's financial data. The assessee also demonstrated that, even on the disclosed figures, the related party transaction percentage crossed the filter applied by the TPO. In transfer pricing analysis, comparability must rest on reliable and consistent data, and companies breaching the related party threshold are liable to be excluded.

Conclusion: MSL Driveline Systems Ltd. was directed to be excluded from the final set of comparables.

Issue (ii): whether Bharat Gears Ltd. and JMT Auto Ltd. could be excluded as persistent loss-making companies on the basis of profit before tax.

Analysis: The persistent loss filter was applied by reference to profit before tax, whereas the relevant measure under TNMM is operating profit. A company cannot be treated as persistently loss-making if it has earned profit in one of the relevant years. Since both comparables had earned profit in AY 2018-19, the basis for exclusion failed.

Conclusion: Bharat Gears Ltd. and JMT Auto Ltd. were held to be includible in the final set of comparables.

Issue (iii): whether depreciation adjustment was warranted under TNMM.

Analysis: The assessee operated in a capital-intensive manufacturing business and showed materially higher depreciation intensity than the comparables. Rule 10B(1)(e) permits suitable adjustments to eliminate material differences affecting net margins, and depreciation differences arising from asset base, asset age, and depreciation policy can distort comparability where reliable data is available.

Conclusion: The issue was restored to the file of the Assessing Officer/TPO for verification and grant of suitable depreciation adjustment, if justified.

Issue (iv): whether the transfer pricing adjustment had to be restricted only to the value of international transactions.

Analysis: Chapter X applies only to international transactions with associated enterprises. An entity-level adjustment cannot be extended to non-AE transactions because that would go beyond the scope of transfer pricing provisions. A consistent view in the assessee's own case also supported proportionate restriction.

Conclusion: The Assessing Officer/TPO was directed to restrict any TP adjustment only to the international transactions with associated enterprises.

Issue (v): whether the adjustments made under section 143(1) could survive when notice under section 143(2) had already been issued.

Analysis: Once regular scrutiny proceedings commence by issuance of notice under section 143(2), recourse to summary processing under section 143(1) is not permissible. As notice under section 143(2) had preceded the intimation under section 143(1), the adjustments lacked jurisdiction.

Conclusion: The adjustments made under section 143(1) were directed to be deleted.

Final Conclusion: The appeal succeeded in part on transfer pricing and processing-related issues, with one comparable excluded, two comparables directed to be included, depreciation adjustment remitted, TP adjustment confined to AE transactions, and the section 143(1) adjustments deleted; the remaining grounds not pressed were not adjudicated.

Ratio Decidendi: In transfer pricing, comparability must be based on reliable financial data and material differences affecting margins must be adjusted under Rule 10B(1)(e); persistent loss exclusion cannot rest on profit before tax when operating profit is the relevant benchmark, and summary processing under section 143(1) cannot follow issuance of notice under section 143(2).

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