Transfer pricing cannot be set at nil on a benefit test where contractual rights and service evidence support the payments.

Arm's length price cannot be fixed at nil on a pure benefit or necessity test where franchise fee reflects a composite contractual bundle of rights and services supported by the commercial arrangement and prior-year tribunal findings. Intra-group service payments similarly cannot be disallowed merely because the authorities consider the services unnecessary or insufficiently beneficial when contemporaneous agreements, invoices, service records, and allocation details show receipt. For purchase of goods, comparables may be excluded for filter failures, additional comparables may be examined afresh, and working capital adjustment must be considered in accordance with law. Once the transfer pricing additions fail, the related section 37(1) disallowance also falls away.

---

---

Issues: (i) Whether the transfer pricing adjustment in respect of franchisee fee could be sustained by treating the arm's length price as nil on a benefit test basis; (ii) Whether the transfer pricing adjustment in respect of intra-group services could be sustained on the footing that the services were not needed or did not yield sufficient benefit; (iii) Whether the transfer pricing adjustment in respect of purchase of goods was liable to be modified by exclusion of certain comparables, inclusion of additional comparables, and grant of working capital adjustment; (iv) Whether the alternate disallowance under section 37(1) of the Income-tax Act, 1961 in respect of franchisee fee and intra-group services could survive.

Issue (i): Whether the transfer pricing adjustment in respect of franchisee fee could be sustained by treating the arm's length price as nil on a benefit test basis.

Analysis: The franchise arrangement granted the assessee a composite bundle of rights, including manufacturing and marketing intellectual property, marks, and services, for operation of its business in India. The payment was made for use of that bundled system and not merely for a right to sell goods. The determination of arm's length price at nil on the premise that the payment was unnecessary amounted to substituting the revenue's commercial view for the assessee's business decision. The earlier coordinate bench decisions in the assessee's own cases on identical facts were followed.

Conclusion: The transfer pricing adjustment of franchisee fee was deleted and the issue was decided in favour of the assessee.

Issue (ii): Whether the transfer pricing adjustment in respect of intra-group services could be sustained on the footing that the services were not needed or did not yield sufficient benefit.

Analysis: The assessee produced inter-company agreements, invoices, screenshots, service catalogues, and allocation details evidencing receipt of services. The services were part of the operating structure under the franchise model and were obtained without markup. The authorities below could not determine the arm's length price at nil merely because, in their view, the services were not necessary or the commercial benefit was not demonstrable. The prior tribunal view in the assessee's own case for an earlier year, on similar evidence and facts, was followed.

Conclusion: The transfer pricing adjustment for intra-group services was deleted and the issue was decided in favour of the assessee.

Issue (iii): Whether the transfer pricing adjustment in respect of purchase of goods was liable to be modified by exclusion of certain comparables, inclusion of additional comparables, and grant of working capital adjustment.

Analysis: One comparable was directed to be excluded because it had been wrongly retained despite the turnover filter position, and another was directed to be excluded because it failed the related party transaction filter. As no finding had been given on the assessee's request to include two other comparables, that aspect was restored for de novo consideration. The issue of incorrect computation of margins and non-grant of working capital adjustment was also directed to be reconsidered in accordance with law.

Conclusion: The purchase-price adjustment was not sustained in its existing form, and the issue was partly decided in favour of the assessee with limited restoration for fresh adjudication.

Issue (iv): Whether the alternate disallowance under section 37(1) of the Income-tax Act, 1961 in respect of franchisee fee and intra-group services could survive.

Analysis: Once the transfer pricing adjustments on franchisee fee and intra-group services were deleted, the basis for denying deduction under section 37(1) ceased to survive. The expenditure was held to be incurred for business purposes in the assessee's commercial setting.

Conclusion: The alternate disallowance under section 37(1) was not sustained and the issue was decided in favour of the assessee.

Final Conclusion: The appeal succeeded substantially on the core transfer pricing and deduction issues, while the purchase-goods benchmarking matter was modified with partial restoration for fresh consideration, resulting in a partly allowed appeal.

Ratio Decidendi: The revenue authorities cannot determine arm's length price at nil by substituting a benefit or necessity test for the assessee's commercial decision where the transaction is supported by contractual rights and contemporaneous evidence, and comparable benchmarking must be undertaken within the statutory transfer pricing framework.

---