Internal TNMM preferred over external comparables where segmental data is reliable; transfer pricing adjustment deleted.

Where reliable segmental data for AE and non-AE transactions is available, internal TNMM must be preferred over external comparables unless cogent reasons justify rejection; the transfer pricing adjustment was therefore unsustainable and deleted. Losses linked to extraordinary COVID-19 disruptions, including shutdowns and under-absorption of fixed costs, did not by themselves indicate non-arm's length pricing. Disallowances of miscellaneous expenses, repairs and maintenance, rent, and bad debts were set aside because the assessment order did not identify specific defects or item-wise allowability issues; the matters were remanded for fresh verification with supporting evidence and hearing.

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Issues: (i) Whether internal TNMM had to be preferred over external TNMM where reliable segmental data for AE and non-AE transactions was available, and whether the transfer pricing adjustment sustained on that basis was justified; (ii) Whether the disallowances of miscellaneous expenses, repair and maintenance expenses, rent expenses, and bad debts written off required deletion or remand for fresh verification.

Issue (i): Whether internal TNMM had to be preferred over external TNMM where reliable segmental data for AE and non-AE transactions was available, and whether the transfer pricing adjustment sustained on that basis was justified.

Analysis: Rule 10B(1)(e) read with Rule 10B(2) of the Income-tax Rules, 1962 contemplates benchmarking with comparable uncontrolled transactions, and internal comparables are to be preferred where reliable segmental results are available. The assessee had furnished segmental profitability for AE and non-AE transactions, and no specific defect was pointed out in the segmental accounts. The rejection of internal TNMM without cogent reasons, followed by mechanical adoption of external TNMM, was not justified. The loss during the relevant year was attributable to extraordinary COVID-19 related factors, including shutdowns, reduced shifts, and under-absorption of fixed costs, and not to manipulation of inter-company pricing.

Conclusion: Internal TNMM was the most appropriate method, the transfer pricing adjustment was not sustainable, and the addition was directed to be deleted in favour of the assessee.

Issue (ii): Whether the disallowances of miscellaneous expenses, repair and maintenance expenses, rent expenses, and bad debts written off required deletion or remand for fresh verification.

Analysis: The disallowances were made without identifying specific defects in the evidence or particular items requiring further verification. For each claim, the records indicated that supporting material had been furnished, but the assessment order did not contain item-wise examination or clear findings on allowability. The proper course was to re-examine the claims after calling for specific details and supporting documents and after granting due opportunity of hearing.

Conclusion: The disallowances were set aside for fresh adjudication by the Assessing Officer, and the grounds were allowed for statistical purposes.

Final Conclusion: The appeal succeeded on the transfer pricing issue and the remaining claims were restored for fresh consideration, resulting in a partial allowance of the assessee's appeal.

Ratio Decidendi: Where reliable segmental data is available, internal comparables under TNMM cannot be rejected without cogent reasons, and losses arising from extraordinary external events by themselves do not justify a transfer pricing adjustment absent evidence of non-arm's length pricing.

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