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TaxTMI 
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2026 (4) TMI 916
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....ly erred both on facts and in law, in determining the income of the Appellant at INR 31,71,47,593/- (erroneously computed at INR 31,90,02,800/- in notice of demand and the computation sheet thereto) in assessment order dated 20 June 2025 issued under section 143(3) read with section 144C(13) read with section 144B of the Act as against the income of INR 30,28,03,460/-per the return of income filed by the Appellant. In doing so, the Ld. AO has erred in making an adjustment of INR 1,43,44,133/- which comprises of the Transactional Net Margin Method (TNMM') based adjustment amounting to INR 1,40,25,260/- and adjustment of INR 3,18,873/-on account of interest on overdue receivable. 3. That the Ld. AO has inadvertently considered the Appellant's total income at INR 31,90,02,800/- (in the notice of demand and the computation sheet thereto) vis-à-vis INR 31,71,47,593/- on account of inadvertency of non-consideration of the deduction claimed under section 80G of the Act, thereby resulting in an additional tax demand of INR 7,89,569/-. The Appellant has also filed a rectification application dated 25 June 2025 before the Ld. AO to pass the rectified order under secti....
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....e difference in the Appellant's working capital position vis-a-vis that of the independent comparable companies. The Hon'ble DRP in Appellant's own case for AY 2015-16, AY 2016-17 and AY 2017- 18 has granted the benefit of working capital adjustment to the Appellant. Adjustment on account of interest on overdue receivables: 13. The Ld. AO/TPO erred in imputing interest of INR 3,18,873/- on delayed receipt of outstanding receivables. 14. The Ld. AO/TPO erred in appreciating that in the facts of the Appellant, the outstanding receivables is not an international transaction, and needs to be examined with the commercial transaction as a result of which the debit balance has come into existence. 15. On the facts and circumstances of the case and in law, the Ld. AO/TPO erred in making an adjustment on account of notional interest on receivables, despite the Appellant being a debt-free company with no interest bearing borrowings, where no presumption can arise of extending a benefit to the associated enterprise. 16. The Ld. AO/TPO erred in ignoring the fact that the trade receivables ought to be netted-off with the payables....
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.... Hence, other issues would continue to be determined as per the assessment/reassessment already completed before the date of entering into BAPA. (ii) The Second would be the category where ROI has only been processed or not processed and no assessment/reassessment has taken place. In these cases, the AO/TPO is required to consider BAPA as well as non- BAPA issues while scrutinizing the ROI as per provision of section 92CD of the Act. (iii) The Third would be those instances where there was a pendency of assessment/reassessment proceeding such as 144C(11) of the Act on the date of entering into BAPA. This case is covered in this category as proceeding before the DRP is only an extension of the assessment proceeding and case has reached only till the draft assessment order stage. Hence, assessment was still pending on the date of entering into BAPA. in consequence of BAPA, with assessee filing a revised return of income under section 139(1) of the Act, AO/TPO gets a further extension of 12 months to pass the assessment order. Drawing analogy from section 92CD(4) of the Act which places embargo upon reconsideration of Non-BAPA issues where assessment/reassessment has....
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....assing draft assessment order is null and void." 7. The Ld. Counsel for the assessee further filed the following synopsis for the A.Y.2020-21 :- Background Functional profile of the Appellant refer ne page 130-31 of the paperbook for summary of functional profile of the Appellant) 1. Sumitomo Corporation India Pvt. Lid. C'Appellant) was incorporated on 15 January 1997 under the Companies Act, 1956 and is a wholly owned subsidiary of Sumitomo Corporation, Japan (SCI) The Appellant is engaged in providing trade support and advisory services mainly to its Associated Enterprises (Als') which are soga shosha companies in Japan, (refer to Internal page 1 of TP order/page 103 of the appeal set) 2 These are very low-end services and are more akin to facilitation services with minimum risks as agnimi the Als who have the decision making authority for buying and selling goods and thereby exposed to various risks, viz., foreign exchange risk, debtors risk, quality risk etc. 3. The Appellant earns service fee/ commission for the support services it provides to as Als for smooth completion of export/import business in India. It earns service fee by....
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.... and tax audit report for the Financial Year ('FY') 2019- 20. 8. The Appellant applied Transactional Net Margin Method (TNMM') as the most appropriate method for benchmarking its international transactions (reported international transactions are at page 27 of paperbook). Return on Operating Expenses i.e. Operating Profits/Operating Expenses ('OP/ OPEX') was selected as the profit level Indicator ('PLI'). In order to arrive at the arm's length price (ALP) in relation to the international transactions, the Appellant carried a benchmarking analysis wherein 14 comparable companies were identified The arm's length unadjusted OP/OPEX of these comparable companies was 1.70% (35% percentile) to 4.66% (65 percentile) with 3.12% as the median using multiple-year data, le. data for FY 2017-18, 2018-19 an 2019-20 (to the extent available at the time of preparation of TP Documentation). The Appellant computed own OP/OPEX at 24.65% (aggregated for both indent and principal business segment) for the FY 2019-20 a OP/OPEX of 24.16% (for Other AEs segment). Basis the same, the international transactions were considered to be at arm's length (Refer page 5....
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....n the "Other AF segment The Ld. TPO rejected 13 companies out of the set of 14 companies as selected by the Appellant in its TP Documentation and identified 6 additional companies to arrive at the arm's length of 31.37% (35 percentile) to 34.77% (65 percentile) with a median of 33.67% (vis-à- vis arm's length range of 1.70% (35 percentile) to 4.66% (65 percentile) with a median of 3.12%, as documented in the IP Documentation) (refer internal page 14-16 of L.d. TPO's order/page 116-118 of the appeal set Adjustment on account of interest on overdue receivables amounting to INR 3,18873 114 TPO imputed interest at the rate of 6.256% (6 months LIBOR plus 425 basis points) on outstanding receivables of the Appellant (over 60 days) from its AEs and made a transfer pricing adjustment of INR 3,18,873/-on account of the same (refer internal page 17-26 of Ld. TPO's order/page 119-128 of the appeal set), Draft assessment order dated 27 September 2023 14. The Ld. Assessing Officer ("AO') passed the draft assessment order dated 27 September 2023 incorporating the adjustments made by the Ld. TPO. Aggrieved by the draft assessment order passed ....
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....e final assessment order. The failure to comply with the aforementioned provisions contained in section 144C(1) of the Act renders the final assessment order void ab initio. Further, the omission to issue a draft order violates the principle of natural justice. It deprives the Assessee of the opportunity to respond to the proposed adjustments and approach the DRP under section 144C(2) of the Act. 21. Reliance is placed on the decision of Hon'ble High Court of Delhi in Appellant's own case for AV 2003-04 wherein the Hon'ble High Court has held that passing of draft assessment order is mandatory. Reliance Is further placed on following decisions wherein it has been held that final assessment order passed without passing a draft assessment order is null and void: PCIT v. Sumitomo Corporation India (P) Ltd. (2024) 166 taxmann.com 35 (Delhi) Pr. CIT Andrew Telecommunications (P) Ltd. 2018 SCC Online Bom 21360 PCIT v. Headstrong Services India (P.) Ltd.. (2021) 125 taomont.com 262 (Delhi) Zuari Cement Ltd. v. ACIT (TS-271-HC-2013(AP)-TP), affirmed by the Supreme Court by the dismissal of the Revenue's SLP (C) (CC No. 16694/2013] on 27th....
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.... 2017-18 has directed for the inclusion of these four companies on the basis of functional similarity (refer to page 285 of the paperbook). Therefore, the Ld. TPO's basis for rejection of this company does not survive. Since there has been no change in the functional profile of these companies, it is submitted that these four companies should be included a valid comparables on the basis of principle of consistency, 28. It is submitted that all of these companies provide similar services as those provided by the Appellant and passes all the quantitative filters applied by the Ld. TPO. The functional profile of these companies supported by the referencing from their annual reports is given below: i) Gordon Woodroffe: engaged in provision of freight transport agency services and other freight transport services. It also operates as a custom broker and freight forwarder (refer to page 146,173 of AR compilation). ii) North Eastern: engaged in provision of transportation and logistics services (refer page 205/271 of the AR compilation). iii) Patel Integrated: engaged in provision of logistic services and surface cargo transportation of goods (refer....
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....39;s own case for AV 2015-16 to AY 2017-18 has granted working capital adjustment and therefore, it should be given in the subject AY on ground of principle of consistency i) DRP finding in AY 2015-16 refer para 6.4.2.4. to 6.4.2.5. on page 229-230 of the paper book. ii) DRP findings in AY 2016-17 refer para 6.4.2.4 to 6.4.2.5 un page 245-246 of paperbook (iii) DRP's finding in AY 2017-18: refer para 5.2 on page 168 of the paperbook part 2 36. It is submitted that the facts of the Instant year are identical to the earlier years and therefore, following principle of consistency, working capital adjustment should be allowed to the Appellant in the instant year. Reliance is placed on the following decisions for the principle of consistency: Commissioner of Income-tax v. Excel Industries Ltd (2013) 38 naman.com 100 (SC) - para 28 of the Radhasoami Satsang v. CIT [1992] 60 man 248 (SC) - para 13-14 of the judgement Ground No. 13: General in nature Ground No. 14: Not pressed Ground No. 15: The Ld. AO/TPO erred in making an adjustment on account of notional interest on receivables, despite the Appellant b....
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..... CIT v. Bechtel India (P) Ltd. [IT Appeal No.379 of 2016, dated 21-7-2016] observing that no substantial question of law arose as the Tribunal had returned a finding of fact to the effect that the assessee was a debt free company and a question of receiving any interest on receivable did not arise. Against the said judgment Pr. CIT v. Bachtel India (P.) Ltd. CC No.(s) 4956 of 2017 preferred by eh revenue was dismissed vide order dated 21.07.2017. 6.6. That being so in our view the questions 2.3 and 2.4 proposed by the Applicant / revenue cannot be treated as substantial question of law for present purposes Ground No. 16: The Ld. AO/TPO erred in ignoring the fact that the trade receivables ought to be netted-off with the payables towards the AEs. 40 This ground will become academic after adjudication of Ground No. 15 or Ground No. 18. 41 Ground No. 17: The Ld. AO/TPO erred in ignoring the fact that LIBOR rate without markup should be considered for the purpose of imputing notional interest on receivables outstanding from the AEs in foreign currency, if any. This ground will become academic after adjudication of Ground No. 15 er ....
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....that in the remand proceedings it is mandatory for the AO to pass draft assessment order u/s. 144C and therefore, a final assessment order passed without passing a draft assessment order as mandated u/s. 144C is bad in law. 10. Respectfully following the said decision we hold that the Final assessment order dated 20.06.2025 passed u/s. 14(3) r.w.s. 144C(13) of the Act without passing draft assessment order is bad in law and void ab initio and accordingly the same is hereby quashed. 11. As we have quashed the final assessment order on legal issue all other grounds on merits need not be adjudicated at this stage as they become academic in nature and therefore, they are left open. 12. Now we take up the appeal for the A.Y. 2021-22 wherein the assessee has raised following grounds :- 1. That on the facts and circumstances of the case and in law, the Ld. AO erred in passing the final assessment order dated 31 October 2025 without passing the draft assessment order, which is mandatorily required under Section 144C(1) of the Act. 2. That the Ld. AO has grossly erred both on facts and in law, in determining the income of the Appellant at INR 27,48,71,418/- in ass....
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....hat the comparability analysis conducted in the Transfer Pricing Documentation (TP Documentation') of the Appellant is inappropriate and inadequate without returning a finding about existence of any of the circumstances specified in clauses (a) to (d) of sub-section (3) of section 92C of the Act. 6. The Ld. AO/TPO erred in adopting a new search criterion and erroneously applying certain additional quantitative filters. 7. The Ld. AO/TPO erred in additionally including the companies in the final comparable set which are otherwise not functionally comparable or are failing the quantitative filters. 8. The Ld. AO/TPO erred in rejecting the comparable companies selected in the TP documentation of the Appellant which are passing all the qualitative and quantitative filters, and are functionally comparable to the Appellant. 9. The Ld. AO/TPO erred in rejecting the comparable companies selected by the Appellant, which are functionally similar to the comparable companies selected by the Ld. AO/TPO, thereby applying inconsistent criteria in the comparability analysis and rendering the ALP determination arbitrary and unsustainable. 10. The Ld.....
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.... in ignoring the fact that the Appellant has already received interest amounting to INR 37,469 as trading interest. 19. That on the facts and circumstances of the case and in law, the AO erred in initiating penalty proceedings under section 270A of the Act. The above grounds of appeal are mutually exclusive and without prejudice to each other. The Appellant craves leave to add, alter, amend, or vary any of the above grounds either before or at time of hearing as we may be advised. The arguments taken herein above are without prejudice to each other. 13. Referring to ground No.1 of grounds of appeal the Ld. Counsel for the assessee submits that for the A.Y. 2021-22 the facts are identical to the A.Y. 2020-21 as a final assessment order dated 31.10.2025 was passed without passing the draft assessment order which is mandatorily required u/s. 144C(1) of the Act. 14. The Ld. Counsel for the assessee filed the following synopsis and submitted that the facts are identical to the facts for the A.Y.2020-21 :- Background / Functional profile of the Appellant (refer to page 32-36 of the paperbook for summary of functional profile of the Appellant) ....
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.... of the goods wherein inventory is held momentarily / for a short period or is merely a pass-through cost for AE principal transaction. In few trading transactions, the Appellant holds inventory and incurs incidental cost like warehousing cost and insurance cost. The income earned on principal transactions is shown in the books as trading profit. This profit is usually higher than the usual range of service fee / commission Income on account of differences in terms and conditions like volume factors, business segments, legal ownership contractual risk, foreign exchange risk etc. 5. The Appellant filed its return of income for the impugned AY on 02 March 2022 declaring a total income of INR 21,61,74,082/-. This return of income was duly supported by audited financial statements and tax audit report for the Financial Year ('FY') 2020-21. 6. The Appellant applied Transactional Net Margin Method ('TNMM') as the most appropriate method for benchmarking its international transactions (reported international transactions are at page 19 of paperbook). Return on Operating Expenses i.e. Operating Profits/Operating Expenses ('OP/ OPEX was selected as the ....
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....ssment order/page 12 of the appeal set), 10. This position has not been disturbed by the Ld. Transfer Pricing Officer (TPO) or the Ld. Dispute Resolution Panel ('DRP'). The dispute is restricted to transactions with Other AEs (i.e. AEs other than SCJ) wherein the Appellant has earned the OP/OPEX margin of 13.70%. Appellant's margin of the Other AE' segment has also been accepted by the Ld. TPO (refer internal sal page 18 of Ld. TPO's order/page 142- 143 of stay application). Ld. TPO's order dated 31 October 2023 11. The case of the Appellant was picked up for scrutiny and reference was made to the Ld. TPO. The Ld. TPO passed order dated 31 October 2023 with the following adjustments i) TNMM based adjustment amounting to INR 2,20,08,592/- in the 'Other AE' segment: The Ld. TPO rejected 10 companies out of the set of 11 companies as selected by the Appellant In its TP Documentation and identified 11 additional companies to arrive at the arm's length of 22.72% (35th percentile) to 28.43% (65th percentile) with a median of 27.26% (vis-à-vis arm's length range of 1.51% (35th percentile) to 4.10% (65th per....
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....t assessment order, Ld AO passed the final assessment order dated 31 October 2025, with an ov 2,21,26,058/- (refer internal page 6 of final assessment order/page 12 of 5. with an overall adjustment of INR 12 of the appeal set) 15. The Ld. AO/TPO, disregarding the detailed submissions made before the Ld. TPO, pressed on the fact that the Hon'ble DRP has not granted any relief on the grounds of objections raised in respect of the transfer pricing matters. The Ld. AD/TPO, in the order, also mentioned that a detailed analysis on the comparables for non-BAPA transactions, was already made in the TP order dated 31 October 2023, (refer para 3 on internal page 5 of final assessment order/page 11 of the appeal set). 16. Aggrieved by the final assessment order, the Appellant is now in appeal before this Hon'ble Tribunal, Submissions on grounds of appeal Ground No. 1: That on the facts and circumstances of the case and in law, the Ld. AO erred in passing the final assessment order dated 31 October 2025 without passing the draft assessment order, which is mandatorily required under Section 144C(1) of the Act. 17. It is submitted on a without....
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....vis-à-vis the corrected tax demand of INR 94,30,007/-, on account of: This ground has become Infructuous in light of the rectification order dated 11 February 2026 passed by the Ld. AO wherein the demand has been revised to INR 94,30,007/- after carrying out the rectification of certain mistakes apparent from record. Ground No. -6: Not pressed Ground No. 7: The Ld. AO/TPO erred in additionally including the companies in the final comparable set which are otherwise not functionally comparable or are falling the quantitative filters. Ground No. 8: The Ld. AO/TPO erred in rejecting the comparable compar companies selected in the TP documentation of the Appellant which are passing all the qualitative and quantitative filters; and are functionally comparable to the Appellant. Ground No. 9: The Ld. AO/TPO erred in rejecting the comparable companies selected by the Appellant, which are functionally similar to the comparable companies selected by the Ld. AO/TPO, thereby applying inconsistent criteria in the comparability analysis and rendering the ALP determination arbitrary and unsustainable. Ground No. 10: The Ld. AO/TPO erred in reject....
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....ged in the provision of freight, logistic and other services (refer page 2665 of AR compilation). Ground 11: That Ld. AO/TPO erred in not granting the benefit of working capital adjustment to the Appellant, to account for the difference in the Appellant's working capital position vis-a-vis that of the independent comparable companies. The Ld. DRP in Appellant's own case for AY 2015-16, AY 2016-17 and AY 2017-18 has granted the benefit of working capital adjustment to the Appellant. 26. On merits and without prejudice to the fact that the action of the TPO is incorrect, it is respectfully submitted that if the adjustment for difference in working capital position of the Appellant vis-à-vis the companies selected by the Ld. TPO along with including only the four comparable companies (Globe International Carriers Ltd., North Eastern Carrying Corporation Ltd.. Patel Integrated Logistics Ltd., Gordon Woodroffe Logistics Ltd.) on which DRP has already granted acceptance in AY 2017-18. is allowed to the Appellant, the Appellant's margin would fall within the arm's length range and the entire TP adjustment will be deleted. 27. The aforement....
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....ment on account of notional interest on receivables, despite the Appellant being a debt-free company with no interest-bearing borrowings, where no presumption can arise of extending a benefit to eh associated enterprises. 32. The Appellant is a debt-free company and no interest is payable by the Appellant to its Alpe third parties on account of anything. (for details of long-term/current liabilities of the Appellant, refer to page 95 of the paperbook, for details of expenses, refer to page 102 of the 33. Therefore, it would not be justifiable to presume that the borrowed funds have been utilized to pass on the facilities to its AEs and the L. TPO also had not brought on record that the Appellant had been found paying interest to its creditors or suppliers on its payables. Thus, the question of receiving any interest on receivable does not arise and the adjustment is completely unsustainable. 34. This issue is squarely covered in principle by decision of Hon'ble High Court of Delhi in PCIT v. Inductis India (P.) Ltd. [2023] 157 taxmann.com 87 (Delhi). The relevant paragraphs are extracted below for reference: "6.2 The fact that the respondent/....
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....round will become academic if Ground No. 14 or Ground No. 17 is allowed. Ground No. 16 With prejudice to the above grounds of appeal, the Ld. AO/TPO erred in Imputing notional interest on receivables outstanding from the AEs in foreign currency, if ignoring the fact that LIBOR rate without markup should be considered for the purpose of any This ground will become academic if Ground No. 14 or Ground No. 17 is allowed. Ground No. 17: The Ld. AO/TPO erred in ignoring that once the working capital adjustment is granted to the Appellant as was granted in the earlier years, that working capital adjustment will subsume the impact of outstanding receivables on profitability and therefore, no further imputation of interest would be warranted. 37. It is submitted that grant of working capital adjustment has been a legacy issue for the Appellant and the Hon'ble DRP itself in earlier years has granted this adjustment to the Appellant. Upon grant of working capital adjustment, the TNMM based transfer pricing adjustment will be reduced to NIL. The adjustment will factor in the impact of the receivables on the working capital and thereby on its pricing/prof....