TaxTMI 
TaxTMI 
2026 (4) TMI 1374
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.... infructuous. 4. The issue raised by the assessee through Ground No. 3 of its appeal is that the final assessment order passed by the AO in pursuance to the DRP direction is time barred and therefore liable to be quashed as not maintainable. 5. At the outset, we note that the learned AR before us submitted that the assessee does not wish to pursue the issue raised in the captioned ground of appeal. Hence, the impugned ground of appeal is hereby dismissed as not pressed. 6. The issue raised by the assessee through Ground No. 5 of its appeal is that the margins of the comparables companies viz-a-viz assessee company computed by the TPO/DRP are erroneous. 7. At the outset, we note that the learned AR before us submitted that the assessee does not wish to pursue the issue raised in the captioned ground. Hence, the impugned ground of appeal is hereby dismissed as not pressed. 8. The issue raised by the assessee through Ground No. 6 is that the lower authorities erred in treating the remeasurement gain on defined employee benefit plan as non- operating and exchange gain loss as operating in nature. 9. The brief facts are that the assessee TE Connectivity India Private L....
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....y linked to the normal business operations of the assessee and cannot be considered extraordinary or non-operating. 13.1 It is submitted that as per Accounting Standard (AS) 15 / Ind AS 19, remeasurement of defined benefit obligations represents adjustments to employee benefit costs. While such remeasurement is presented under Other Comprehensive Income for accounting purposes, the same does not alter its intrinsic character as an operating cost/ income for transfer pricing purposes. The nature of the item remains unchanged merely due to its presentation in financial statements. 13.2 The assessee further submits that the Learned TPO has not provided any cogent reasoning or justification for excluding such employee-related costs from operating expenses/ income. In the absence of any abnormality or extraordinary event, the remeasurement of defined benefit plans ought to be treated as operating in nature while computing operating margins. 13.3 Furthermore, the assessee also submitted objection with regarding the treatment of foreign exchange fluctuation loss as operating cost. 13.4 However, the learned DRP rejected the assessee's objection and confirmed the TPO action by o....
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....ting and therefore the assessee should not be given the benefit by holding it as operating in nature. The ld. DR vehemently supported the order of the authorities below. 17. We have heard the rival submissions of both the parties and carefully perused the materials placed on record. The issue before us is limited to the treatment of remeasurement gain on defined employee benefit plan while computing the operating margin under TNMM. 17.1 It is an undisputed fact that the remeasurement gain arises from actuarial valuation of gratuity and other defined employee benefit obligations. These obligations emanate directly from the employer- employee relationship and are intrinsically linked to the assessee's regular business operations. The liability towards gratuity is a statutory and contractual obligation incurred in the ordinary course of business and forms part of the employee cost structure of the assessee. 17.2 The learned DRP has rejected the assessee's contention mainly on the ground that actuarial gains or losses are volatile in nature, depend on actuarial assumptions and are disclosed separately in the financial statements under Ind AS. In our considered view, such reaso....
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....of the appeal are interconnected and pertains to inclusion of certain comparable companies by the assessee and exclusion of certain comparable companies of the TPO under the manufacturing segment. 17.7 The necessary facts are that the assessee, to benchmark its international transaction under the manufacturing segment, has selected 8 comparables. However, the TPO applied own search matrix for comparable selection and found that some of the assessee's comparable are not part of search matrix, some are functionally distinct and one of the assessee's comparable is persistent loss making. Hence, the TPO rejected the assessee's comparables. Thereafter, the TPO applied own search matrix, and filters and thereby proposes selecting 12 comparable companies which are detailed below: 1. Hindustan Switch Pvt. Ltd. 2. Brimer Electronics Pvt. Ltd. 3. Kaycee Industries Ltd. 4. U.K.B. Electronics Pvt. Ltd. 5. Salzar Electronics Ltd. 6. Sicame India Connectors Pvt. Ltd. 7. Kolors India Pvt. Ltd. 8. FCI Oen Connectors Ltd. 9. Panicker Switchgear Pvt. Ltd. 10. Billets Electro Werke Pvt. Ltd. 11. Four....
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....anufacturing Ltd 20.4 Likewise, the learned AR submitted that the assessee does not wish to press the issue of exclusion of following TPO's from the final list of comparables: 1. Fourfront Pvt Ltd 2. Salzar Electronics Ltd. 3. Kolors India Pvt. Ltd. 4. Panicker Switchgear Pvt. Ltd. 5. Billets Electro Werke Pvt. Ltd. 20.5 Thus effectively, out of assessee's list of comparable only 3 companies namely "Fine Line Circuits Ltd", "HPL Electric & Power Ltd- cables segment" and "Autoneum Nittoku Soundproof Products India Pvt Ltd" remain in dispute. Likewise, out of TPO's comparables only 1 company namely Sicame India Connectors Pvt. Ltd remains in dispute before us. Hence, we proceed to adjudicate the issue of inclusion of 3 assessee's comparable and exclusion of 1 TPO's comparable one by one. "Fine Line Circuits Ltd" (a comparable, assessee seeking inclusion) 20.6 We note that the TPO rejected this assessee's comparable company on the grounds that it is functionally different. 20.7 Before the learned DRP, the assessee submitted that the TPO has rejected Fine Line Circuits Ltd. as a comparable merely stating that it is functionall....
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....e TPO excluded the company Fine Line Circuit Ltd from comparable without providing cogent reason. The learned AR claimed that the impugned company deserves inclusion in the final set of comparables for the reason that it is a functionally comparable company. It is engaged in the same line of business as that of assessee i.e. manufacturers of printed circuits boards. 21. On the contrary, learned Departmental Representative vehemently supported the orders passed by the authorities below. He submitted that the TPO/AO after conducting a detailed and exhaustive analysis of the assessee's international transactions, had rightly determined the arm's length price by applying the most appropriate method and selecting proper comparables. It was further contended that the Dispute Resolution Panel (DRP), after duly considering the objections raised by the assessee, examined the factual matrix as well as the legal position and found no infirmity in the findings of the TPO. Accordingly, the DRP rightly upheld the transfer pricing adjustments, and therefore, no interference by the Tribunal is called for. 22. We have carefully considered the rival submissions and perused the materials placed....
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....this assessee's comparable company on the reasoning that it is not part of search matrix. 22.6 Before the learned DRP, the assessee argued that TPO has rejected HPL Electric & Power Ltd. (Cable segment) on the ground that it does not form part of the search strategy and is functionally different. The assessee submits that such rejection is unsustainable under both on facts and in law. 22.7 At the outset, it is submitted that the annual reports and financial information of HPL Electric & Power Ltd. are available in the public domain, being a listed company. The relevant data has been sourced from the company's official website as well as the MCA portal. Therefore, rejection on the ground of non-availability of data is factually incorrect. 22.8 It is further submitted that HPL Electric & Power Ltd. is engaged in the manufacture of wires and cables, which is one of its clearly identifiable operating segments. The assessee is also engaged in manufacturing activities involving electrical and electronic components. The wires and cables segment is functionally comparable to the assessee's manufacturing segment, as both involve similar production processes, use of comparable asset....
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....orted the orders passed by the authorities below. He submitted that the TPO/AO/ ld. DRP after conducting a detailed and exhaustive analysis of the assessee's international transactions, had rightly determined the arm's length price by applying the most appropriate method and selecting proper comparables. Accordingly, the DRP rightly upheld the transfer pricing adjustments, and therefore, no interference by the Tribunal is called for. 24. We have heard the rival contention of both the parties and perused the materials available on record. The issue before us is whether HPL Electric & Power Ltd. - Cables segment should be included in the final set of comparables. At the outset, we note that HPL Electric & Power Ltd. is a listed company and its annual reports and segmental financial information are available in the public domain. The assessee has placed on record the relevant details sourced from the company's website and the MCA portal. Therefore, rejection of the company on the ground of lack of reliable data is factually incorrect. 24.1 We further observe that HPL Electric & Power Ltd. is engaged in multiple product segments, one of which is the wires and cables segment. The ....
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....at Autoneum passes all the filters applied by the assessee. The margin computation placed on record shows that the company has earned operating profits during the relevant years. The assessee's contentions in this regard have been duly documented in section 2.6 of the submission. Accordingly, the assessee submits that Autoneum does not fail the persistent loss filter and therefore ought to be accepted as a comparable. 24.7 However, the learned DRP rejected the assessee's objection by observing as under: This company was rejected by the TPO for failing the persistent loss filter. The assessee has objected the persistent loss filter of the TPO. The assessee has contended that the loss of the companies should be considered on operating margin and not on the PBT. In this regard we have discussed in detail in the preceding para 4.1.5. Since the company fails the persistent loss filter of the TPO we do not find infirmity in the action of the TPO in rejecting this company. Ground rejected. 24.8 The learned AR before us reiterated the submission made before the authorities below. On the other hand, the learned DR supported the order of the authorities below. 24.9 We have ....
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....24.14 Further, the assessee submitted that the mark-up computation carried out by the Ld. TPO is erroneous. The assessee has provided a revised and corrected mark-up computation based on operating margins of Sicame, which shows a margin of 10.11% as against 11.03% computed by the TPO. Therefore, even otherwise, the computation adopted by the TPO is incorrect. 24.15 In view of the above, the assessee submits that Sicame India Connectors Private Limited cannot be included in the final set of comparables and prays that the objection be accepted. However, the learned DRP rejected the assessee's objection by observing as under: 4.1.4 RPT Filter: Having considered the submissions, in our view, the filter calculating the ratio of revenue transactions to total revenue or expenditure transactions to total expenses, applied by the TPO is appropriate. The application of 25% related party transaction filter finds support from the decision of the Hon'ble ITAT Bangalore in the case of M/s Supportsoft India Private Limited (IT(TP)A 1372/B/11 & 820/2012), 24/7 Customer Dot Com Private Limited (ITA No. 227/BANG/2010) and in the case of Cisco System (India) Private Limited [IT(T....
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.... placed cogent material on record, namely, extracts from the financial statements of the said company. As per these financial statements, the total related party transactions amount to Rs. 45.92 crores against total revenue from operations of Rs. 126.39 crores for FY 2019-20, resulting in an RPT ratio of 36.33%, which is clearly in excess of the threshold of 25%. 26.2 We find that before the DRP, the assessee's objection was supported by specific figures derived from the audited financial statements of the comparable company. However, the ld. DRP has not controverted or rebutted these figures by referring to any contrary material. Instead, the ld. DRP has merely observed that the TPO has verified the RPT filter and that the method adopted by the TPO for computing RPT is correct. There is no finding by the ld. DRP demonstrating how the RPT percentage computed by the assessee, based on the company's own financials, is incorrect or unreliable. In our considered view, when an assessee brings on record concrete financial data showing that a comparable breach the RPT threshold, the same cannot be brushed aside by a general observation that the TPO's method is correct, without dealing ....
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....ic transactions, even if they form part of the same segment, are outside the purview of transfer pricing provisions. 30.2 Under TNMM, benchmarking may be carried out at the segment level for the purpose of determining an arm's length margin. However, once the margin differential is determined, the consequential adjustment, if any, must be confined only to the value of international transactions. Applying the arm's length margin to the entire segment turnover would result in adjustment to non-AE transactions, which is impermissible in law. 30.3 We further observe that this principle has been consistently upheld by various judicial authorities, which have held that transfer pricing provisions cannot be used to re-compute profits from domestic transactions. Even where separate segmental margins for AE and non-AE transactions are not available, the adjustment must be reasonably apportioned to the AE transactions on a proportionate basis. 30.4 In the present case, the TPO has applied the adjustment on the entire manufacturing segment turnover, without restricting it to the international transactions. Such an approach is contrary to the scheme of the Act and leads to taxation of....
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....ars. On this basis, the TPO worked out a separate transfer-pricing adjustment towards notional interest for Rs. 4,81,120/- on delayed receivables from the AEs. 33. The aggrieved assessee preferred to file objection before the learned DRP. 34. The learned DRP in principle confirmed the view of the TPO by holding allowances of extended credit period is an international transaction and required to be separately benchmarked. The learned DRP also confirmed the rate of interest being SBI PLR for invoice raised in INR and LIBOR +450 BPS for invoice raised in foreign currency. 35. Being aggrieved by the action of the revenue authorities, the assessee is in appeal before us. 36. The learned AR before us submitted that justice will be served to the assessee if the impugned adjustment is limited to the extent of glamour +200 basis points. 37. On the other hand, the learned DR vehemently supported the orders passed by the authorities below. 38. We have heard the rival contentions of both the parties and perused the materials available on record. The first question before us arises as to whether or not the outstanding receivables from AEs are an international transaction. At t....
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....t of allowing extra credit also, the agreed prices takes care and this is not an independent international transaction requiring separate benchmarking. In transfer pricing analysis, the purpose is not to compare profit of the tested party with that of the comparables but the purpose is to compare the prices charged by the tested party with the prices charged by the comparables although when TNMM is adopted as MAM, the process of such price comparison is by comparing profits of tested party with that of the comparables and therefore, if the profit of the tested party is equal or above the profit of comparables, even after taking into account the effect of working capital adjustment and the ALP is less than the price charged by the tested party, it cannot be said that the extra credit allowed is not an independent international transaction and not required to be separately benchmarked. In our considered opinion, the first requirement is this that it has to be first decided that whether it is an independent international transaction or not and if it is found that it is not so, then obviously no separate benchmarking is required but if it is found that it is an independent internationa....
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....tional transaction, then transaction would have to be looked upon by applying the commercial principles with regard to international transactions and accordingly proceeded to take into account interest rate in terms of London Inter Bank Offer Rate [LIBOR] and it would be appropriate to take the LIBOR rate + 2%. For this purpose, we place reliance on the judgment of the Bombay High Court in the case of CIT v. Aurionpro Solutions Ltd., 99 CCH 0070 (Mum HC). It is ordered accordingly." 35.1 The above finding was further followed by coordinate bench of this Tribunal in the case of M/s IHS Global Pvt Ltd vs. ACIT bearing IT(TP) No. 1424/Bang/2024. Thereby respectfully following the view taken by this Tribunal in aforementioned cases, we hold that the appropriate rate interest shall be LIBOR + 200 Basis point. 35.2 Before parting it also important to note the TPO originally calculated the interest at Rs. 58,83,783/- only. However, the TPO passes a rectification order dated 24th April 2024 where in the TPO found the interest was calculated on all the trade receivables without providing credit period. Hence, the TPO after providing the credit period of 30 days recomputed ....
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....f of services rendered and proper cost allocation, the arm's length nature of these payments was not established. 40.2 Relying on DRP directions and judicial precedents, the TPO concluded that where no evidence of actual services and arm's length pricing is produced, the ALP can be determined at NIL. Accordingly, the ALP of Consumption-based services PTC (Rs. 14234785/-), SSR (21,67,204/-), Concur expenses (18,18,346/-) and Corporate service charges of Rs. 6,7001298/- was determined at NIL under the CUP method, resulting in a upward TP adjustment. 41. The aggrieved assessee preferred to file objection before the before the learned DRP. 42. The assessee, in the course of proceedings before the learned DRP, submitted that the Ld. TPO has accepted the nature of Information System (IS) services, the heads of services, and the allocation methodology as per the inter-company agreements and responses to the SCN. It is also an admitted position that the assessee has paid its AE only for actual direct and indirect costs incurred, without any mark-up or profit element. On the basis of documents furnished during TP proceedings, the Ld. TPO himself allowed subscription-based services ....
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.... were for business purposes, and were charged at arm's length on a cost-to-cost basis. 42.6 The learned DRP after considering the facts in totality party allowed the objection of the assessee by observing as under: 5.2 With regards to the SSR and PTC- Since the TPO has accepted the submission of the assessee with regards to the SSR projects and the pass through cost, we direct the TPO to allow the claim of the assessee to the extent it was substantiated by the assessee during the remand proceedings. 5.3 With regards to the Corporate support charges: The copy of the remand report of the TPO was forwarded to the assessee. The assessee vide submission dated 29.05.2024 submitted that the CSS received from TEL was beneficial to the assessee for the day to day operations, the assessee emphasises that the CSS services enabled the TE group to focus on their core business functions while one of the entity of the group efficiently manages the ancillary tasks and helps to achieve the strategic goals. Assessee has further submitted that the proportion of CSS is 0.86% of the total operating expenses. 5.4 Having considered the submission of the assessee and the rema....
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....issue before us is whether the TPO and the learned DRP were justified in determining the ALP of Concur expenses and Corporate Support Service (CSS) charges at NIL. 45.1 At the outset, section 92C of the Act, read with Rule 10B of the Income- tax Rules, prescribes that the ALP of an international transaction must be determined using one of the prescribed methods i.e. CUP, RPM, CPM, PSM, TNMM, or any other method notified. The statute does not permit the Revenue to determine ALP on an ad hoc basis. In the present case, the assessee had benchmarked the impugned transactions under TNMM by aggregating them with other international transactions, and its margins were claimed to be at arm's length. The lower authorities, however, disregarded this approach and applied CUP/Other Method without bringing on record any comparable uncontrolled transaction. Such an approach is contrary to Rule 10B(1)(a), which mandates the use of reliable comparable data. 45.2 It is also a settled law, as held by the Hon'ble Delhi High Court in CIT v. EKL Appliances Ltd. (345 ITR 241), that the TPO cannot question the commercial expediency of expenditure incurred by the assessee. The only requir....