TaxTMI 
TaxTMI 
2026 (6) TMI 543
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....2026 2019-20, 2020-21, 2021-22 & 2022-23 M/s. Farida Classic Shoes Pvt. Ltd. 26.12.2025, 26.12.2025, 26.12.2025, 24.12.2025 IT(TP)A No.42, 43/Chny/2025 2020-21, 2022-23 M/s. Aston Shoes Pvt. Ltd. 26.12.2025, 25.12.2025 IT(TP)A No.44, 45/Chny/2025 2020-21, 2021-22 M/s India Shoes Exports Pvt. Ltd. 16.12.2025, 15.12.2025 IT(TP)A No.46, 47, 48, & 49/Chny/2025 2019-20, 2020-21, 2021-22, 2022-23, M/s Delta Shoes Pvt. Ltd. 26.12.2025, 26.12.2025, 26.12.2025, 24.12.2025 IT (TP)A No. 50, 51, 52 & 53/Chny/2025 2019-20, 2020-21, 2021-22, 2022-23 M/s Farida Shoes Pvt. Ltd. 26.12.2025, 26.12.2025, 29.12.2025, 24.12.2025 2. The brief facts emanating from the records are that the assessees' M/s. Farida Shoes Pvt. Ltd., M/s. Farida Classic Shoes Pvt. Ltd., M/s. Delta Shoes Pvt. Ltd., M/s. Aston Shoes Pvt. Ltd., and M/s. India Shoes Exports Pvt. Ltd. are companies engaged in the manufacture and export of leather footwear. They are part of the well-known Farida Group of Companies, which has a combined turnover of approximately Rs. 1,800 crores. 2.1 A search and seizure operation u/s. 132 of the Income-tax Act, 1961 (in short "the Act") ....
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....02,540 6,48,91,932 1,95,89,392 1,95,89,392 - 2022-23 8,55,90,832 N/A 10,84,51,869 2,28,61,037 2,28,61,037 - FARIDA CLASSIC SHOES PVT LTD 2019-20 18,17,77,625 8,97,30,704 20,07,39,154 1,10,08,450 1,10,08,454 2020-21 11,95,10,920 2,46,05,220 14,79,16,537 2,33,11,317 1,95,73,197 37,38,120 2021-22 4,55,20,910 4,89,97,400 7,10,96,087 2,20,98,687 2,20,98,687 - 2022-23 8,88,50,719 N/A 9,10,55,050 22,04,331 22,04,331 - DELTA SHOES PVT LTD 2019-20 5,08,25,597 5,08,25,597 5,63,55,056 55,29,459 38,16,541 17,12,915 2020-21 4,06,79,560 4,06,79,560 5,07,53,890 1,00,74,330 1,00,74,328 - 2021-22 3,08,79,800 3,08,79,800 3,46,94,403 38,14,603 38,14,608 - 2022-23 3,97,50,830 N/A 4,29,40,126 31,89,296 31,89,296 - ASTON SHOES PVT LTD 2019-20 9,16,55,088 9,16,55,088 9,88,33,148 71,78,060 47,32,678 24,45,386 2020-21 9,15,57,370 9,15,57,370 9,43,67,320 28,09,950 28,09,954 - 2022-23 8,52,89,227 N/A 10,40,57,620 1,87,68,393 1,87,68,397....
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.... 8,06,081 27,41,557 2022-23 Farida Classic Shoes Private Limited 22,04,331 22,04,331 Total 1,25,55,278 68,15,489 - 1,93,70,767 2019-20 Delta Shoes Private Limited 21,20,867 - 13,750 21,34,617 2020-21 Delta Shoes Private Limited 28,86,539 - 28,86,539 2021-22 Delta Shoes Private Limited 6,35,906 - 6,35,906 2022-23 Delta Shoes Private Limited 5,98,405 - 5,98,405 Total 62,41,717 - 13,750 62,55,467 2019-20 Aston Shoes Private Limited 47,32,678 - ....
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.... YES YES - YES Farida Shoes Private Limited 21-22 YES YES YES YES YES YES Farida Shoes Private Limited 22-23 YES YES YES YES YES YES Delta Shoes Private Limited 19-20 YES YES YES YES - Delta Shoes Private Limited 20-21 YES YES YES YES - Delta Shoes Private Limited 21-22 YES YES YES YES YES Delta Shoes Private Limited 22-23 YES YES YES YES YES Farida Classic Shoes Private Limited 19-20 YES YES YES YES - Farida Classic Shoes Private Limited 20-21 YES YES YES YES - Farida Classic Shoe....
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....021-22 Farida Shoes Private Limited ITTPA52/CHNY/2025 28,61,167 2020-21 Farida Shoes Private Limited ITTPA51/CHNY/2025 32,88,544 2019-20 Farida Shoes Private Limited ITTPA50/CHNY/2025 47,15,825 Total 1,36,93,986 2019-20 Farida Classic Shoes Private Limited ITTPA2/CHNY/2026 40,71,273 2020-21 Farida Classic Shoes Private Limited ITTPA3/CHNY/2026 43,44,198 2021-22 Farida Classic Shoes Private Limited ITTPA4/CHNY/2026 19,35,476 2022-23 Farida Classic Shoes Private Limited ITTPA5/CHNY/2026 22,04,331 Total 1,25,55,278 2019-20 Delta Shoes Private Limited ITTPA46/CHNY/2025 21,20,867 2020-21 Delta Shoes Private Limited ITTPA47/CHNY/2025 28,86,539 2021-22 Delta Shoes Private Limited ITTPA48/CHNY/2025 6,35,906 2022-23 Delta Shoes Private Limited ITTPA49/CHNY/2025 5,98,405 Total 62,41,717 2019-20 Aston Shoes Private Limited ITTPA1/CHNY/2026 47,32,678 2020-21 Aston Shoes Private Limited ITTPA42/CHNY/2025 28,09,954 2022-23 Aston Shoes Private Limited ITTPA43/C....
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.... The Email correspondence demonstrates PSPL's active role in vendor identification, price negotiation, and procurement facilitation. Further, the ld.AR drawn our attention to the independent customs import data which shows that the prices paid by the Assessee are at arm's length and, in fact, lower than comparable imports, thereby disproving any allegation of inflated purchases. 6.9 He further highlighted that there is no funds flow from PSPL to the Assessee. In fact, the agreed commission is directly received by PSPL from overseas suppliers for services rendered. Therefore, the ld.AR pointed out that the Assessee neither pays nor receives any portion of such commission. In the absence of any economic benefit or nexus, taxing such income in the hands of the Assessee is contrary to settled principles of taxation. 6.10 Further, the ld.AR argued that the AO's reliance on statements recorded during search proceedings is misplaced. A proper reading of such statements supports the Assessees' case, confirming PSPL's role as a facilitator. There is no admission indicating that PSPL acted as a conduit for routing income. Further ld.AR submitted that it is a trite law that statements a....
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....liable for commercial and analytical purposes, and serves as corroborative material capable of supporting the Assessee's position, particularly in matters involving pricing analysis and market intelligence. 6.13 Further, he drew our attention to the paper book pages nos. 2335, 2342, 2344 of Vol. VII for A.Y.2022-23, Page Nos.2355 to 2401 for A.Y.2019-20, Page Nos.2465, 2557, 2634, 2695, 2676, 2678, 2655 to 2675 for A.Y.2020-21. In view of the above arguments the ld.AR stated that the Assessees have discharged their burden through comprehensive documentation, while the Revenue has failed to rebut the same, hence he prayed for deleting the same. 6.14 Per contra, the ld.DR submitted that the director Irshad Ahmed Mecca of the Farida group, is also a director of the PSPL and hence the commission earned by him is nothing but shifting income to Singapore. Therefore, the ld.DR supported the orders of the authorities and prayed for confirming the same. 6.15 We have heard the rival contentions perused the material available on record and gone through the orders of the authorities along with paper books filed. The short issue that arises for consideration is whether the commission i....
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....indicating that the import prices were at arm's length. The Revenue has not rebutted such evidences by bringing any contrary material on record. 6.21 It is well settled that suspicion, however strong, cannot take the place of evidence. Additions under the provisions of the Act must be supported by credible and tangible material establishing accrual of income in the hands of the Assessee. In the present case, the entire edifice of the addition rests upon conjectures and presumptions without establishing any live nexus between the commission income earned by PSPL and the Assessees before us. 6.22 We also find merit in the contention of the ld.AR that in international trade practices, procurement facilitators and sourcing intermediaries commonly earn commission from suppliers for identifying buyers, coordinating supplies, quality assurance and logistics support. Merely because such intermediary entity is associated with the promoter group does not automatically render the transaction sham or colourable unless the Revenue discharges its burden through cogent evidence. 6.23 As regards the reliance placed by the Revenue on statements recorded during search proceedings, we find t....
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....the Assessees under this issue are directed to be deleted and hence the grounds raised by all the captioned Assessees on this issue are allowed. 7. Disallowance of Credit Card Expenditure: 7.1 This issue is common to the following assessees and assessment years within the Farida Group: a) AY 2019-20 to 2022-23 - M/s. Farida Shoes Pvt. Ltd. b) AY 2019-20 to 2021-22 in the case of Farida Classic Shoes Pvt. Ltd.; and c) AY 2022-23 in the case of Aston Shoes Pvt. Ltd. d) AY 2020-21 & 2021-22 in the case of India Shoes Exports Pvt Ltd. 7.2 The assessee had claimed expenditure spent through credit of the promoters to the extent of 37% after disallowing voluntarily in the computation to the tune of 63% treating it as personal expenses. However, the AO completed the assessment by disallowing the expenditure claimed by spending through credit cards to the tune of 37% also. 7.3 The ld.AR submitted that the disallowance of credit card expenses is arbitrary and ignores the assessee's bona fide conduct. He further stated that the assessee had undertaken a detailed review and suo moto disallowed approximately 63% of the expenditure where any person....
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....is incurred for the purposes of business must be judged from the perspective of the businessman and not from that of the Revenue authorities. The commercial expediency of an expenditure is to be evaluated having regard to the business needs of the Assessee. In the present case, the Learned AO has substituted his own assumptions in place of objective analysis and has disregarded the Assessee's explanation without any cogent reasoning. The AO's approach disregards this principle and substitutes it with subjective assumptions. 7.7 In view of the above, the ld.AR stated that the disallowance is arbitrary, unsupported by evidence, and liable to be deleted. Per contra, the ld. DR relied upon the findings of the AO and submitted that the assessees had failed to conclusively establish that the entire expenditure claimed was incurred exclusively for business purposes. According to the Revenue, the possibility of personal element could not be eliminated merely because partial disallowance had already been offered by the assessees. We have carefully considered the rival submissions and perused the orders of the lower authorities as well as the material available on record. The short ....
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.... expenditure resulted in any personal benefit to the directors or promoters. No finding has been recorded that the expenditure was fictitious, inflated, or unsupported by books of account. 7.13 It is equally well settled that suspicion, however strong, cannot take the place of evidence. Ad hoc disallowances made merely on conjectures and surmises are not permissible, particularly when books of account are maintained and supporting materials are available. The Hon'ble Supreme Court in the case of S.A. Builders Ltd. v. CIT reported in 288 ITR 1 has held that the expression "commercial expediency" is of wide import and the Revenue authorities cannot substitute their own wisdom in place of the businessman's decision. Similarly, various judicial precedents have consistently held that where expenditure is incurred for business purposes and the Revenue fails to establish personal use with cogent evidence, disallowance cannot be sustained merely on estimated or presumptive basis. 7.14 In the present case, the assessees have not only maintained books of account but have also voluntarily disallowed substantial expenditure wherever any personal element was perceived. In such circumstanc....
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..... 40A(3) of the Act, booked under random names, without supporting details or signed records from workers/staff. • The assessee furnished only unsigned vouchers and failed to produce proper documentary evidence to substantiate the genuineness of the expenditure. Consequently, the Assessing Officer inferred that bogus expenses could have been booked under packing and forwarding charges, though complete disallowance was not considered appropriate considering the labour-oriented nature of business. • During the course of search proceedings, statements recorded u/s. 132(4) of the Act from Shri T. Mohammed Arshad, HOD (Finance), and Shri Irshad Ahmed Mecca, Director, revealed that the impugned cash expenses did not have supporting documentary evidences and vouchers were not raised for such expenses. • The AO also noted that substantial expenditure had already been claimed separately under "salary and wages" in the audited financial statements and, therefore, booking additional labour-related expenses under packing and forwarding charges without proper evidence raised doubts regarding genuineness. • Considering the nature of business an....
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....t at Volume 8, Page 2697 of the typed set of papers. He further contended that a detailed verification of the underlying records clearly demonstrates that no individual payment exceeds the threshold of Rs. 10,000/-, thereby fully complying with the statutory requirements. 8.9 He submitted that a detailed summary of the impugned disallowance is provided at Volume 8, Page 2697 of the typed set of papers. A perusal thereof would reveal that Column 2 comprises payments duly supported by vouchers and documentary evidence, and therefore do not warrant any disallowance under Section 40A(3) of the Act. In contrast, Column 4 relates to payments for which supporting vouchers are not available, and accordingly, any disallowance, if at all, ought to be restricted to 20% as reflected in Column 3. He drew our attention to the paper book for the sake of clarity and ease of reference, wherein the relevant documents are placed on record in a year-wise chronological manner as under: • Assessment Year 2019-20: • Ledger copies: Pages 2698 to 2882 • Supporting documents: Pages 2883 to 2900 • Assessment Year 2020-21: • Ledger copies:....
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....d the estimated disallowance sustained in respect of packing and forwarding expenses allegedly unsupported by proper vouchers/evidences. The AO made the impugned addition primarily on the basis of seized Tally data, certain unsigned vouchers and statements recorded during the course of search proceedings. The DRP thereafter enhanced the disallowance by directing complete disallowance of Rs. 6,44,000/- u/s. 40A(3) of the Act and sustaining 20% disallowance in respect of the remaining expenditure of Rs. 17,90,621/-. 8.15 Upon careful consideration of the entire material on record, we find substantial merit in the submissions advanced by the ld.AR for the assessee. The provisions of section 40A(3) clearly contemplate disallowance only in cases where payment exceeding the prescribed monetary threshold is made to a person in a single day otherwise than through prescribed banking channels. The statutory requirement is person-specific and day-specific. However, in the present case, neither the AO nor the DRP has brought on record any concrete material demonstrating that any individual worker or payee received cash payment exceeding the prescribed limit on any particular day. 8.16....
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....erred in the preceding para for all the assessment years pertaining to 2019-20 to 2022-23 are allowed. 8.21 Coming to the issue of estimated disallowance of 20% on Rs. 17,90,621/- towards alleged unsupported expenditure, we note that the assessee, even before us failed to substantiate the expenditure with any of the supporting evidences / vouchers. Hence, we are of the considered opinion that the department has fairly restricted the disallowance to 20% of the expenditure claimed and hence we confirm the action of the AO and of the ld.CIT(A). Accordingly, the grounds raised by the assessee as referred in the preceding para for all the assessment years pertaining to 2019-20 to 2022-23 are dismissed. 9. Addition on Account of Stock Devaluation: 9.1 This issue pertains solely to M/s. Farida Shoes Pvt. Ltd. and relates to Assessment Years 2019-20 and 2022-23. The assessee respectfully invites the attention of the Bench to Pages 26 to 38 of the Assessment Order for AY 2019-20 and Pages 34 to 48 of the Assessment Order for AY 2022-23 in the case of the said assessee. 9.2 The brief fact of the present issue relates to the addition made on account of alleged suppression of gross....
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....erials, cancellation of export orders and rejected leather. The AO held that the assessee failed to furnish proper supporting documents to substantiate the claim of obsolescence and further noted that the assessee had allegedly sold such stock to M/s. Skywalk Shoes through unaccounted cash transactions discovered during search proceedings. 9.7 The Assessing Officer further held that: • The assessee had repeatedly carried out stock devaluation year after year; • No systematic accounting standards were followed for valuation; • No separate records were maintained for devalued stock; and • The devaluation exercise was intended to suppress gross profit and generate unaccounted cash. Accordingly, the AO treated the under-valuation of stock amounting to Rs. 27,70,647/- as suppression of gross profit and added the same to the total income of the assessee for AY 2022-23. Aggrieved by the draft assessment order passed u/s. 144C(1) of the Act, the assessee filed objections before the DRP. The DRP observed that the explanations furnished by the assessee were unsupported by verifiable evidence and stood contradicted by the seized mat....
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.... for deletion of the addition made on account of alleged stock devaluation. 9.13 Per contra, the ld.DR strongly relied upon the findings recorded by the Assessing Officer and the directions issued by the DRP. The Ld.DR submitted that incriminating materials discovered during search proceedings clearly established systematic manipulation of stock valuation by the assessee through the ERP system. Particular reliance was placed upon the seized loose sheets, ERP data and the statements recorded from Shri Chittibabu u/s. 132(4) of the Act admitting stock devaluation and absence of separate records for such stock. 9.14 The Ld.DR further submitted that the assessee had directly altered stock values through SQL commands by reducing purchase cost of leather items to arbitrary figures and approximately 5,000 entries were modified in the ERP system. According to the Revenue, such manipulation could not be regarded as genuine stock valuation carried out in accordance with accounting standards. 9.15 It was further argued that the assessee failed to furnish any independent valuation report, item-wise inventory details or documentary evidence substantiating the alleged obsolescence of....
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....rt in CIT vs Alfa Laval (India) Pvt. Ltd. has recognized the permissibility of valuation of obsolete inventory at realizable value where such valuation is supported by commercial prudence and business realities. 9.20 In the present case, we find that the AO has not disputed the existence of the stock or its subsequent sale. The assessee has placed on record invoices, ledger extracts and bank statements evidencing sale of such stock to M/s. Skywalk Shoes through banking channels. Except making general allegations regarding alleged cash transactions, the Revenue has not brought any cogent material on record conclusively establishing that the impugned stock was sold outside the books of account or that the consideration received by the assessee exceeded the disclosed value. 9.21 The principal basis adopted by the AO for making the addition is that the assessee had modified stock values in the ERP system through SQL commands and that separate ledgers were not maintained for devalued stock. However, in our considered opinion, these circumstances by themselves do not automatically establish suppression of income unless it is demonstrated that the valuation adopted by the assessee w....
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....ingly, the addition made on account of alleged manipulation of stock valuation is directed to be deleted. Thus, the grounds raised by the assessee for both the Assessment Years 2019-20 and 2022-23 are allowed. 10. Alleged Unaccounted Scrap and B-Grade Sales: 10.1 The facts in the present issue relates to the addition made towards alleged undisclosed income arising from unaccounted sale of Grade-B shoes/rejected shoes/damaged shoes by the assessee- M/s. Farida shoes Pvt. Ltd. for the FY 2021-22 relevant to AY 2022-23. The Revenue alleged that the assessee had carried out cash sales of Grade-B shoes outside the regular books of account and thereby generated unaccounted income liable to tax. 10.2 During the course of search proceedings, statements recorded from Shri Mohammed Jaweed, cashier, and Shri T.Mohammed Arshad, HOD Finance, allegedly revealed that certain sales of Grade- B shoes and damaged shoes were made in cash and were not fully recorded in the books of account. Based on such statements and seized loose sheets, the AO treated a sum of Rs. 17,71,000/- pertaining to FY 2021-22 as undisclosed income of the assessee. 10.3 The AO observed that during search proceedi....
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....ubmitted that the addition made by the AO is wholly unsustainable both on facts and in law. It was contended that the assessee had already accounted for the sale of scrap, rejected shoes and Grade-B shoes and had duly discharged applicable GST liability through DRC-03 proceedings. The assessee had also furnished ledger extracts and supporting details evidencing such disclosure. 10.9 The Ld.AR submitted that the amount of Rs. 17,71,000/- pertaining to sale of Grade-B shoes for FY 2021-22 had already been offered to tax in the return of income filed u/s. 139(1) of the Act for AY 2023-24. It was argued that once the income had already been disclosed and subjected to tax, the same amount could not again be brought to tax in AY 2022-23, as it would result in impermissible double taxation. 10.10 The Ld.AR further submitted that the Revenue authorities failed to appreciate the peculiar nature of the assessee's business, wherein rejected shoes, scrap and Grade-B products are periodically disposed of at discounted prices. The assessee had maintained details of such transactions and there was no material to establish suppression of sales over and above the amounts already disclosed. It....
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.... stated that certain sales of Grade-B and damaged shoes were effected in cash and were not fully reflected in the regular books of account. The Assessing Officer further observed that the assessee admitted sale of rejected shoes/Grade-B shoes amounting to Rs. 17,71,000/- during FY 2021-22 and accordingly treated the same as undisclosed income for the impugned assessment year. However, from the materials placed on record, it is observed that the assessee has consistently contended that the impugned transactions relating to disposal of rejected shoes, scrap and Grade-B products formed part of its regular business activities and that the corresponding income had already been disclosed in the subsequent assessment year. The assessee has also claimed to have discharged applicable GST liability through DRC-03 proceedings and furnished ledger extracts and supporting details in support of such disclosure. 10.15 We find merit in the contention of the assessee that merely because certain statements were recorded during search proceedings, the same by itself cannot automatically justify addition unless supported by cogent corroborative material establishing undisclosed income. It is a sett....
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....T liability has been discharged through DRC-03 proceedings; (iii) whether any part of the impugned sales still remains unaccounted after considering the documentary evidences produced by the assessee; and (iv) whether the addition, if sustained, would result in double taxation of the same income. The AO shall afford adequate opportunity of being heard to the assessee and decide the issue afresh in accordance with law after considering all evidences and explanations that may be furnished by the assessee and delete the additions, if it is already offered to tax in the AY 2023-24. Accordingly, the ground raised by the assessee on this issue for the FY 2021-22 relevant to AY 2022-23 is allowed for statistical purposes. 11. TRANSFER PRICING ISSUES: 11.1 The Transfer Pricing Officer ("TPO"), while determining the Profit Level Indicator ("PLI") of the assessee for the relevant assessment year, carried out various adjustments to the operating revenue as well as operating expenditure of the assessee-company. Pursuant thereto, the AO passed the final assessment order in conformity with the directions issued by the DRP. Aggrieved by the said final assessment order, ....
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.... and submitted binding judicial precedents of the Hon. ITAT which categorically held that Bad debts are operating in nature for the purpose of determination of arm's length price. The action of the Hon. DRP and learned TPO is arbitrary, contrary to settled legal position, and has resulted in an erroneous and inflated transfer pricing adjustment. 5. The learned TPO has erred in law and on facts in not giving full and proper effect to the binding directions of the Hon. DRP issued under section 144C(10) of the Act, rendering the impugned order bad in law and void ab initio. The learned TPO has erred in treating the entire miscellaneous expenses as non-operating expenses despite the fact that Hon. DRP having categorically directed that only such miscellaneous expenses which are non-operating in nature should be excluded while computing the operating margins. The learned TPO has erred in adopting a mechanical approach and has failed to identify, examine, and segregate the non-operating component of miscellaneous expenses, as specifically directed by the Hon. DRP, the order of learned of TPO is to be quashed. Alternatively, we pray before your honour to direct the learned TP....
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....rectly linked to export turnover. Without exports, such income would not exist, clearly establishing operational nexus. Therefore, the ld.AR stated that the exclusion of export incentives disproportionately impacts the assessee, given its export-heavy profile, and results in distortion of margins vis-à-vis comparables. Further, such exclusion violates the matching principle, as export-related expenses are treated as operating costs while corresponding incentives are excluded. The ld.AR relied on the judicial precedents, including recent Tribunal rulings, wherein the courts have consistently held that export incentives form part of operating income, as they arise from normal business operations and are directly linked to manufacturing and export activity, and also impact profitability by offsetting costs. The ld.AR places reliance on the recent decision of the Hon'ble Chennai Tribunal "D" Bench in the case of Hyundai Wai India Pvt Ltd Vs DCIT- IT(TP)A No.48/CHNY/2024 dated 31.12.2025 (refer to para 9 page 5 upto para 15 page 10) and also the decision of Chennai Tribunal "D" Bench in the case ZF Rane Automotive India (P.) Ltd. v. DCIT- IT(TP)A No.53/CHNY/2024 dated 04.08.2025 ....
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....t is an admitted position that this issue is common across all assessment years and entities within the Farida Group, except for the specified years of India Shoes Exports and Aston Shoes. It is also an undisputed fact that the assessee is predominantly an export-oriented entity deriving more than 90% of its revenue from exports. In contrast, many of the comparables selected by the TPO have mixed revenue streams comprising both domestic and export turnover. 12.8 The primary dispute before us is whether export incentives earned by the assessee are to be considered as operating income for transfer pricing purposes. The TPO/DRP excluded export incentives from operating income by relying upon the decision of the Hon'ble Supreme Court in Liberty India v. CIT. However, upon careful consideration, we find that the reliance placed on the said judgment is misplaced in the context of transfer pricing analysis. The Hon'ble Supreme Court in Liberty India v. CIT was concerned with the interpretation of the expression "derived from" appearing in Chapter VI-A deduction provisions, particularly section 80-IB of the Act. The said expression has been interpreted by the Hon'ble Apex Court to ha....
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....ncome and its nexus with business operations. The Tribunal categorically held that the TPO/DRP cannot exclude a particular item merely because comparable companies do not have similar income, without first examining whether such receipt forms part of normal business operations. Further, at para 5 of the said decision, the Tribunal held that export incentives are inextricably linked to manufacturing and export activities since entitlement to such incentives arises only upon carrying on such operations. The Tribunal further observed that export incentives reduce operating costs and directly impact profitability and therefore form part of operating revenue for the purpose of computation of margins under TNMM. The relevant findings of the Tribunal in the said decision are reproduced hereunder in substance: "Export incentives are derived during the course of normal business operations, are intertwined with the core activity of manufacturing and export, reduce operating costs and directly impact profitability. Therefore, such incentives form part of operating revenue for the purpose of computing margins under TNMM." 12.11 We are in respectful agreement with the aforesaid r....
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....has been further reduced to 14 and 13 respectively, on account of applying the loss filter (i.e., losses in two out of three years), against which the assessee has serious objections. The said exclusion has also been upheld by the Hon'ble DRP. (kindly refer to page 17 to 22 of DRP order dated 28.11.2025 in the case of Farida Shoes Pvt Ltd for AY:2022-23) 13.4 The ld.AR submitted that the action of the TPO/DRP in rejecting or including comparables without properly applying the persistent loss filter and without maintaining consistency across assessment years is contrary to settled principles of transfer pricing law. It is submitted that under the TNMM, normal business fluctuations, including profits and losses, are inherent and acceptable. A company incurring loss in a single year may still be functionally comparable, as such loss may arise due to business cycles, economic conditions, or other commercial factors. Therefore, exclusion of comparables merely on account of single-year loss or low margins is contrary to settled law and defeats the very purpose of comparability analysis. 13.5 The ld.AR submitted that it is a well-accepted principle that a company can be excluded fro....
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....not those with isolated or normal business losses. This establishes that loss per se is not a ground for exclusion, and only consistent loss-making entities fail the comparability test. Further, the Tribunal in Netradyne Technology India Pvt. Ltd. v. ITO [(page 6 para 6(e)] has emphasized that comparability filters must be applied uniformly and objectively, and cannot be modified or applied selectively. The Tribunal reiterated that arbitrary application of filters, including the loss filter, leads to distortion in determination of the arm's length price and is impermissible in law. Thus, it is clear that comparability analysis must be based on consistent, scientific, and uniform application of filters, and not on ad hoc exclusions. In view of the above, the ld.AR submitted that M/s. Leayan Global Pvt. Ltd., M/s. Sara Suole Pvt. Ltd., and M/s. Drish Shoes Ltd., having incurred losses in only two out of three financial years, cannot be regarded as persistent loss-making companies and, therefore, ought to be included as comparable for AY 2021-22. Similarly, Florence Shoe Company Pvt. Ltd., which has incurred losses in only two out of three years, ought to be included as a comparable f....
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....m the record, it is observed that during the remand proceedings, the TPO had finalized a set of 19 comparables for AY 2019-20, which was accepted by the assessee without objection. Similarly, for AY 2020-21, the comparable set was reduced to 17 and the same was also accepted by the assessee. However, for Ays 2021-22 and 2022-23, the TPO further reduced the comparable set to 14 and 13 companies respectively by excluding certain companies applying what has been termed as a "loss filter", i.e., companies incurring losses in two out of three years. The said action has also been upheld by the DRP. 13.11 The grievance of the assessee is that the TPO/DRP have incorrectly applied the persistent loss filter and excluded companies which are not persistent loss-making entities in the accepted legal sense. On careful consideration of the rival submissions, we find substantial merit in the contentions of the ld.AR. Under transfer pricing provisions, particularly while applying TNMM, comparability analysis is required to be carried out on a scientific, objective and consistent basis. Merely because a company incurs losses in a particular year or in isolated years, the same cannot be a reason ....
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....ion of comparables distorts the determination of arm's length price and defeats the object of transfer pricing analysis. 13.13 We also find force in the alternate contention of the assessee regarding consistency. It is an admitted position that for AY 2019- 20, the TPO himself finalized a set of 19 comparables, which stood accepted. The FAR profile of the assessee has not undergone any material change in Ays 2021-22 and 2022-23. In the absence of any change in business model, functions performed, assets employed or risks assumed, there must be consistency in the selection of comparables across years unless cogent reasons exist for deviation. The Hon'ble Courts and Tribunals have repeatedly emphasized that consistency is an important facet of transfer pricing jurisprudence. Arbitrary departure from an accepted comparable set without demonstrating material changes in facts or circumstances is impermissible and leads to distorted benchmarking results. We further note that the ld.DR neither controvert the factual submissions made by the ld.AR nor distinguish the judicial precedents relied upon by the assessee. In view of the foregoing discussion and respectfully following the judici....
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.... of the enterprise. It is submitted that no business can function without incurring such expenditure, and therefore, they clearly satisfy the test of having a direct nexus with business operations. The exclusion of these expenses from operating cost is therefore fundamentally flawed and contrary to both accounting principles and transfer pricing jurisprudence. 14.5 Despite the clear and categorical findings of the DRP, the TPO has proceeded to treat these expenses as non-operating, thereby acting in violation of binding directions issued u/s. 144C of the Act. It is settled law that the TPO/AO is bound by the directions of the DRP and cannot deviate from the same. Such non-compliance vitiates the assessment and renders the order unsustainable in law. 14.6 Further, the ld.AR stated that the issue is squarely covered by the coordinate bench decision of the Tribunal in ZF Rane Automotive India (P.) Ltd. v. DCIT- IT(TP)A No.53/CHNY/2024 dated 04.08.2025, wherein the Tribunal, while dealing with an identical issue (Page 15 para 9 to Page 17 para 9.4), has held that miscellaneous expenses are part of normal business operations and must be treated as operating expenses. The Tribunal ....
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....arida Shoes Pvt. Ltd. for AY 2022-23. The issue under consideration is common to all assessment years and entities within the Farida Group, except India Shoes Exports for AY 2021-22 and Aston Shoes Pvt. Ltd. for AYs 2019-20 and 2020-21. The dispute pertains to the treatment of miscellaneous/general administrative expenses as non-operating in nature while computing the operating margins under TNMM. 14.11 From the records, it is observed that the TPO excluded certain miscellaneous and general administrative expenses from operating cost while determining the PLI of the assessee as well as comparables. The case of the assessee is that such expenses are routine business expenditure incurred in the ordinary course of operations and therefore necessarily form part of operating costs. 14.12 On careful consideration of the submissions and factual matrix, we find substantial merit in the arguments advanced by the ld.AR. At the outset, we note that the DRP itself, while issuing directions for AY 2021-22, had categorically held that general administrative and miscellaneous expenses are operating in nature. The DRP, after examining the nature of such expenditure, specifically observed ....
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.... (c) such expenses cannot be excluded merely because they are grouped under the nomenclature "miscellaneous expenses" or because detailed break-up is not furnished. The Tribunal further held that once such expenditure is allowable as business expenditure u/s. 37 of the Act, it ordinarily forms part of operating expenditure for transfer pricing analysis as well, unless demonstrated otherwise by cogent material. 14.14 We are in respectful agreement with the aforesaid reasoning. We also find merit in the contention of the assessee that exclusion of routine operating expenditure artificially inflates the operating margins of the assessee and comparables, thereby distorting the comparability analysis under TNMM. Such exclusion defeats the very object of arriving at a fair and reliable determination of arm's length margin. Under transfer pricing principles, consistency and parity in treatment of operational items are of paramount importance. If expenses incurred in the normal course of business are selectively excluded from operating costs, the resultant PLI would cease to reflect the true operational profitability of the enterprise. 14.15 In the present case, the Revenue ....
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....hat have become irrecoverable out of sales made in the ordinary course of business. It is the submission of the ld.AR that when sales are treated as operating income, any corresponding diminution in such revenue in the form of bad debts must necessarily be treated as operating in nature. The appellant submits that the classification adopted by the TPO creates an inherent inconsistency, wherein the income side of the transaction is considered as operating, while the corresponding cost element is excluded. Such an approach is fundamentally flawed and leads to distortion in the computation of Profit Level Indicator (PLI) under the TNMM. He submitted that bad debts represent a normal business risk arising from credit sales and are an integral part of the operating cycle of any enterprise. The assessee, being engaged in regular business operations, cannot avoid such risks, and therefore, bad debts are clearly in the nature of operating expenses. Exclusion of such expenses artificially inflates the operating margins of the assessee and renders the comparability analysis unreliable. At the outset, the reasoning of TP/DRP that bad debts do not relate to the "current year's operating revenu....
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....xpenses for the purpose of margin computation. The above decision also follows earlier rulings, including the decision in Evolving Systems Networks India (P.) Ltd. IT(TP)A No.2751/Bang/2017, thereby establishing a consistent judicial position that such expenses are part of operating cost. The rationale is that these items arise from core business activities and bear a direct nexus with revenue generation. Further, he submitted that similar items such as provision for doubtful debts, Expected Credit Loss (ECL), write-offs, etc., being in the same nature, must also be treated uniformly as operating expenses. Any selective inclusion or exclusion would violate the principle of consistency and comparability. 15.6 In view of the above, the ld.AR submitted that the bad debts arise from core operating activities and represent normal business risk, the timing of recognition does not sever their nexus with business operations and they are real economic losses, not mere accounting adjustments. Therefore, the exclusion leads to artificial inflation of margins and distorted PLI and the judicial precedents support their treatment as operating in nature. It is therefore the ld.AR submitted tha....
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....sent nothing but crystallization of credit risk inherent in commercial transactions undertaken by the assessee. Every enterprise engaged in business operations involving credit sales assumes the risk of non-recovery from customers. Such risk is inseparable from normal business operations and forms an integral part of the operating cycle of the enterprise. Therefore, the write-off of bad debts cannot be viewed in isolation as a mere accounting adjustment divorced from business operations. It represents a real economic loss suffered by the enterprise arising directly from operational transactions. 15.9 We also find merit in the contention of the ld.AR that the approach adopted by the TPO/DRP leads to inconsistency and asymmetrical treatment. While the sales giving rise to such receivables are considered as operating income, exclusion of the corresponding loss arising from non-recovery artificially inflates the operating margins of the assessee. Such treatment violates the principle of matching and distorts the comparability analysis under TNMM. The observation of the TPO/DRP that bad debts do not pertain to "current year operating revenue" is, in our considered view, misplaced.....
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....dingly, considering the nature of the expenditure involved and respectfully following the judicial precedents referred to supra, we hold that bad debts, provision for doubtful debts, expected credit loss (ECL) and similar write-offs arising from business transactions are operating in nature both in the case of the assessee and comparables for the purpose of computing margins under TNMM. 15.12 The AO/TPO is therefore directed to treat such items as operating expenditure while computing the PLI of the assessee and comparables. Thus, the ground raised by all the assessees for the respective assessment years referred in para 15.1 (supra) are allowed. 16. Guest House Income and Expenses - Inconsistent Treatment: 16.1 This issue is exclusive to M/s. Farida Shoes Pvt Ltd and span across AY:2019-20 to 2022-23. 16.2 The TPO, in the original order dated 14.11.2025 (refer to page 5 & 6 of the TPOs order dated 14.11.2025 for AY: 2019-20, 2020- 21, 2021-22 and 2022-23 M/s. Farida Shoes Pvt Ltd), has treated the guest house income as non-operating in nature and accordingly excluded the same from the operating income of the assessee. However, despite such exclusion, the corresponding ....
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....atment of guest house income and corresponding guest house expenditure while computing the operating margin/Profit Level Indicator (PLI) of the assessee for transfer pricing purposes in the case of the assessee, Farida Shoes Pvt Ltd, for Assessment Years 2019-20 to 2022-23. From the records placed before us, it is noticed that the TPO, while passing the original orders dated 14.11.2025, has treated the guest house income earned by the assessee as non-operating income and accordingly excluded the same from the operating revenue for the purpose of determining the operating margin. However, it is an admitted position that the corresponding expenditure incurred in relation to the guest house activity has not been excluded from the operating expenditure and continues to form part of the operating cost base adopted by the TPO/DRP. The grievance of the assessee is that such selective exclusion of income without granting corresponding exclusion of related expenditure results in an artificial suppression of the operating margin and consequently distorts the Profit Level Indicator (PLI). According to the assessee, once a particular stream of income is held to be non-operating in nature, the ....
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....ing, the action of the authorities below in adopting an asymmetrical approach cannot be approved. Accordingly, we hold that once the guest house income has been treated as non-operating income, the corresponding guest house expenditure is also required to be excluded from the operating expenses while computing the operating margin/PLI of the assessee for transfer pricing purposes. We therefore direct the AO/TPO to recompute the operating margins of the assessee after excluding the guest house expenditure corresponding to the guest house income already treated as non-operating in nature for Assessment Years 2019-20 to 2022-23. Thus, this ground raised by the assessee for all the four assessment years 2019-20 to 2022-23 as mentioned supra in para 16.1 stands allowed for statistical purposes. 17. Rates & Taxes / License Fees - Erroneously Treated as Non- Operating: 17.1 This issue is common to the following assessees and assessment years within the Farida Group: a) AY 2019-20 to 2022-23 - M/s. Farida Shoes Pvt. Ltd. b) AY 2019-20 to 2021-22 M/s. Farida Classic Shoes Pvt. Ltd.; c) AY 2022-23 M/s. Aston Shoes Pvt. Ltd. d) AY 2020-21 M/s. India S....
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.... and contrary to the settled principles governing transfer pricing analysis. 17.6 The ld.AR submitted that Rule 10B of the Income-tax Rules, 1962 mandates consistency and comparability in the computation of margins and that any selective exclusion of expenses, especially those which are intrinsically linked to business operations, leads to a skewed and unreliable PLI, thereby defeating the very purpose of TNMM analysis. The ld.AR vehemently argued that the exclusion of such operating expenses artificially inflates the operating margins of the assessee and results in an unjustified transfer pricing adjustment. It is a settled principle that all expenses incurred in the normal course of business and relating to operating activities must be included in operating costs, unless they are clearly demonstrated to be non-recurring, extraordinary, or unrelated to business operations, which is not the case here. 17.7 In view of the above, the ld.AR submitted that the treatment of Rates & Taxes / License Fees as non-operating in the case of Farida Shoes Pvt. Ltd. is erroneous, inconsistent, and contrary to law. The said expenses ought to be included as part of operating costs both in the....
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....ax Rules, 1962. The object of TNMM is to compare like with like and to determine the arm's length margin on a consistent and uniform basis. Therefore, unless a particular expenditure is shown to be extraordinary, non-recurring, abnormal, or wholly unconnected with business operations, the same cannot be excluded from operating costs. Rates & Taxes / License Fees are expenditures which ordinarily arise in the course of regular business operations. Manufacturing and export-oriented entities cannot function without complying with statutory and regulatory requirements. Payments towards municipal taxes, statutory levies, factory licenses, regulatory permissions and similar charges are inextricably linked with the carrying on of business. Such expenses are recurring in nature and form part of the normal operational framework of the enterprise. Therefore, they cannot be characterized as non-operating merely on an adhoc basis. 17.11 We further find merit in the contention of the ld.AR that selective exclusion of such expenses from operating costs leads to distortion in the computation of operating margins. If such expenses are excluded in the case of the assessee while similar expenses ....
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....ustment is arbitrary, unsupported by any comparable analysis, and contrary to settled transfer pricing principles. The ld.AR stated that payments have been effected through proper banking channels with full regulatory compliance, including Form 15CA filings, and are supported by statements of commission on exports (Page 2325 of Volume 6). These documents conclusively establish the genuineness of the transactions, actual rendition of services, and business nexus of the expenditure. The ld.AR contended that the marketing services rendered by the AEs and Non-AEs are integral to the assessee's export-oriented business model and are neither duplicative nor in the nature of shareholder activities. The assessee operates in a competitive global environment where continuous customer engagement, sourcing of export orders, and maintenance of business relationships are critical. The services rendered have directly contributed to generation of export sales and business expansion, thereby establishing clear commercial benefit. In this context, he submitted that sales and the corresponding sales commission are intrinsically and inextricably linked. The commission expenditure is not an independent....
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..... This aspect has not been disputed by the TPO. In view of the above, the ld.AR submitted that: a) the marketing services are genuine, necessary, and supported by agreements and documentary evidence; b) the commission expenditure is an integral part of the revenue- generating process; c) the aggregation approach under TNMM adopted by the assessee is appropriate and justified; and d) the determination of ALP at NIL, as well as segregation of commission for separate benchmarking, is arbitrary and legally untenable. 18.8 In light of the facts and circumstances of the case, the detailed submissions made herein, and the settled position of law, the ld.AR prayed to: a) Delete the transfer pricing adjustment made by the Learned TPO/AO by determining the Arm's Length Price of marketing services at NIL, and accept the benchmarking undertaken by the Appellant under TNMM; b) Hold that sales commission, being intrinsically linked to sales, forms part of an integrated transaction, and accordingly reject the action of the TPO in segregating and separately benchmarking the same; c) Direct appropriate recomputation of margins by ....
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....he evidences placed before us also establish that the payments were made pursuant to actual export transactions facilitated through such agents. 18.13 It is a settled proposition of transfer pricing jurisprudence that the TPO cannot question the commercial expediency or business necessity of expenditure incurred by the assessee. The jurisdiction of the TPO is confined to determination of the ALP by applying one of the prescribed methods under the Act and Rules. Once services are shown to have been rendered and the transactions are supported by agreements and documentary evidences, the ALP cannot be determined at NIL merely on subjective assumptions that the assessee did not derive adequate benefit therefrom. 18.14 In the present case, the TPO has neither brought on record any comparable uncontrolled transaction nor applied any recognized transfer pricing methodology for arriving at NIL ALP. The adjustment has been made merely on the premise that the assessee failed to establish commensurate benefit, which in our considered opinion is legally impermissible. The determination of ALP at NIL without undertaking any benchmarking analysis is contrary to the scheme of Chapter X of t....