TaxTMI 
TaxTMI 
2026 (6) TMI 602
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....er dated 30 October 2025 passed by the Additional/Joint/Deputy/Assistant Commissioner of Income Tax/Income Tax Officer, National Faceless Assessment centre, Mumbai or the Learned Assessing Officer ("Ld. AO), under section 143(3) r.w.s. 144C(13) read with section 144B of the Income Tax Act, 1961 ('the Act']) is erroneous and bad in law and barred by limitation. 2. On the facts and circumstances of the case, and in law, the Additional/Joint Commissioner of Income Tax, Transfer Pricing - Circle 3(3), Mumbai ('Ld. TPO')/Ld. AO and the Hon'ble DRP have erred in not appreciating the contentions raised by the Appellant. Transfer Pricing Grounds 3. On the facts and circumstances of the case, and in law, the Ld. AO/Ld. TPO/Hon'ble DRP erred in enhancing the income of the Appellant by INR 31,68,47,150 by holding that the international related party transaction pertaining to payment of Franchisee Fee by the Appellant to its Associated Enterprise ('AE') namely Royal Canin SAS, France ('RC SAS") does not satisfy the arm's length principles envisaged under the Act and in doing so, have grossly erred in: 3.1. not followin....
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.... Appellant's own cases for AY 2020-21 & AY 2021-22 wherein the contentions of the Appellant have been accepted with respect to the same facts on the issue of disallowance of payment for IGS: 4.3. disregarding the documentary evidences furnished and the service agreements entered into by the Appellant for availing the services from overseas AEs; 4.4. not appreciating the fact that the need for services is a commercial/business decision made by the Appellant as part of its business operations, thereby disregarding sound transfer pricing principles and relevant judicial pronouncements in India when undertaking the said adjustment: 4.5. holding that the Appellant could have availed the intra group service from third-party service providers at a lower cost which were availed from the AEs without providing any cogent basis; and 4.6. not appreciating the fact that the arm's length nature of the payment of intra group charges has also been corroborated by the benchmarking analysis for purchase of finished goods wherein all the transactions (including payment of IGS) have been aggregated at net level. 5. On the facts and circumstanc....
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.... deduction of TDS without considering the fact that the said amount has already been considered as income and offered to tax by the payee and that the primary liability to pay taxes lies with the recipient of the income (payee) and not with the payer. 9. That on the facts and circumstances of the case and in law, the Ld. AO/DRP has erred in initiating the penalty under section 270A of the Act for under-reporting of income without appreciating the fact that there is no under-reporting of income by the Appellant." 3. The relevant facts in brief are as under: 3.1. The Assessee is the wholly-owned subsidiary of Royal Canin SAS, [Hereinafter referred as 'RC SAS' or Franchiser]. Both, RC SAS and the Assessee are part of Royal Canin Group which is engaged in developing, manufacturing, distributing and sales of nutrition pet food products. Royal Canin Group operates under Canin Business Model involving (a) franchisor holding intellectual property and proprietary rights related to manufacturing and marketing of RC Products, (b) manufacturing units undertaking manufacturing activity as a routine manufacturer of RC Products and (c) sales units undertaking marketing, distributio....
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....28,78,351 TNMM Mars Austria OG 3,78,73,403 TNMM RC Korea 14,71,29,002 TNMM Total 203,47,33,660 Therefore, reference was made to Transfer Pricing Officer (TPO) under Section 92CA(1) of the Act for determining of Arms Length Price (ALP) of the International Transactions entered by the Assessee with its AEs. 3.4. The TPO, vide its Order, dated 07/01/2025, passed under Section 92CA(3) of the Act proposed transfer pricing addition of INR. 49,32,81,217/- consisting of the following: S No. Particulars Adjustment Proposed (INR.) 1 Royalty / Franchise Fee [TPO determined ALP as 'Nil' applying 'Other Method'] 31,68,47,150/- 2 Intra Group Services Payment [TPO determined ALP as 'Nil' applying 'Other Method'] 17,55,34,067/- Total Adjustment 49,32,81,217/- 3.5. The above transfer pricing adjustments were incorporated by the Assessing Officer in the Draft Assessment Order, dated 07/03/2025, passed under Section 144C(1) of the Act. In addition, the Assessing Officer proposed disallowance of INR. 19,87,907/- under Section 40(a)(ia) of the Act in respect of payments made without complying wi....
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.... 58,69,02,407/- Total Income 85,46,42,354/- 3.8. Being aggrieved, the Assessee has preferred the present appeal before the Tribunal on the grounds reproduced in Para 2 above. 4. We have considered the rival submissions and have perused the material on record, including the submission & note on broad propositions submitted by the Learned Authorised Representative Assessee, the decisions of the Tribunal in the case of the Assessee cited during the course of hearing as well as the order passed by the Assessing Officer, TPO and DRP on which reliance was placed by the Learned Departmental Representative. Ground No. 3 to 3.5 5. We would first take up the Transfer Pricing Addition of INR. 31,68,47,150/- made in relation to Franchisee Fee challenged by way of Ground No. 3 to 3.5 raised by the Assessee in the present appeal. 5.1. The facts relevant to adjudication of the issue under consideration are that the Assessee had a Franchisee Agreement with RC SAS. In terms of the aforesaid agreement, the Assessee paid Franchisee Fee of INR. 31,68,47,150/- to RC SAS during the relevant previous year computed at the rate of 9% of net sales value of the RC Products so....
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....uently, the reasoning and directions that were issued by this Panel during the preceding A.Y, 2020-21 with regard to this case are herein reiterated. xx xx This Panel approves, includes and respectfully follows the directions of the erstwhile Panel on the self-same issue. The above finding and reasoning of the DRP for the preceding A.Y. is relevant to the case of this A.Y. Therefore, the same is made applicable to the case at hand for the sake of consistency and reasonability." (Emphasis Supplied) 5.3. During the course of hearing the Learned Authorized Representative for the Assessee had placed reliance upon the decision of the Tribunal in the case of the Assessee for the Assessment Year 2020-2021 and 2021-2022. On perusal of the same we find that the Tribunal has deleted the Transfer Pricing Addition made in respect of Franchise Fee in the Final Assessment Order passed (as per the directions issued by DRP) for the Assessment Year 2020-2021 and 2021-2022. Thus, the very basis on which the DRP had proceeded to reject the objections raised by the Assessee does not survive. 5.4. Further, on perusal of material on record, we are of the view that the authorities....
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....supporting communication materials needed to explain the products in a manner that is consistent with the brand image. The aforesaid said information developed by RC SAS is received by the Assessee under the consolidated bundle of services and intangibles under the franchisee arrangement. (c) Trade Name & Marks: Set of Trade Names, Trademarks and Products Brands owned by the Franchisor are licensed to the Assessee for use in the defined territory (i.e. India) in the present case. It is the case of the Assessee that the trademarks and trade names (and other associated elements such as domain names) are registered in the name of Franchisor. (d) Services: Central IP management, technical, marketing and administrative services are provided by Franchisor to the Franchisee. In addition, as per the Franchisee Agreement RC SAS was also required to render the following services to RC India (a) Central and Regional Sales & Marketing Management and Support Functions (and Regional Teams) (b) Service & Finance ('S&F)- Consolidation & Reporting, Tax services, Treasury & Benefit, Innovation and Operation control and IT (c) Legal Affairs ....
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....03/2012 with Royal Canin SAS. A perusal of the said agreement shows that Sales the Franchiser apart from authorizing assessee to sell high end packed pet foods is also providing management, technical, marking and administrative support services for its own benefit as well as benefit of the franchisees. The franchisees are also required to obtain necessary licenses to the System developed and/or owned by the Franchisor. The term "System" has been defined in the said agreement to mean: "System" refers to a portfolio/bundle comprised of (i) IP rights (manufacturing); (ii) IP rights (marketing); (iii) Marks; and (iv) Services, developed, maintained and/or provided by the Franchisor for the use in the operation of the Franchised Business." The expressions IP Rights (manufacturing), IP Rights (Marketing) and Marks have also been defined in the agreement. The definition of same are reproduced herein under for the ready reference: "IP Rights (manufacturing)": refers to all Research & Development related IP pertaining to industrial know-how, plant set-up, machinery and processes, patents, and technical assistance (defined by Franchisor as "hard technology"), as we....
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....Rights, Marks, etc. as part of the System. For the use of aforesaid System the assessee remunerated the A.E by way of aggregate annual franchisee fee. 10. The Hon'ble Delhi High Court in the case of CIT vs. EKL Appliances Ltd. (supra) has held that the "quantum of expenditure can no doubt to be examined by the TPO as per law but in judging liability there of as business expenditure he has no authority to disallow the entire expenditure or part thereof on the ground that the assessee has suffered continuous losses". The Hon'ble High Court further held that: "22. Even Rule 10B(I)(a) does not authorise disallowance of any expenditure on the ground that it was not necessary or prudent for the assessee to have incurred the same or that in the view of the Revenue the expenditure was unremunerative or that in view of the continued losses suffered by the assessee in his business, he could have fared better had he not incurred such expenditure. These are irrelevant considerations for the purpose of Rule 108. Whether or not to enter into the transaction is for the assessee to decide. The quantum of expenditure can no doubt be examined by the TPO as per law but in ju....
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....yet he may decide to engage services of outside experts for auditing and management consultancy; it is not for the revenue officers to question assessee's wisdom in doing so. The Transfer Pricing Officer was not only going much beyond his powers in questioning commercial wisdom of assessee's decision to take benefit of expertise of Dresser Rand US, but also beyond the powers of the Assessing Officer. We do not approve this approach of the revenue authorities. We have further noticed that the Transfer Pricing Officer has made several observations to the effect that, as evident from the analysis of financial performance, the assessee did not benefit, in terms of financial results, from these services. This analysis is also completely irrelevant, because whether a particular expense on services received actually benefits an assessee in monetary terms or not even a consideration for its being allowed as a deduction in computation of income, and, by no stretch of logic, it can have any role in determining arm's length price of that service. When evaluating the arm's length price of a service, it is wholly irrelevant as to whether the assessee benefits from it or not; the....
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....O cannot determine ALP at 'NIL' by applying benefit test. 11. In the instant case, we observe that the TPO at threshold has discarded payment of franchise fee on the ground of need of such payment. The TPO has exceeded his jurisdiction in making such observation. The TPO cannot step into the shoes of assessee to decide prudence of expenditure. The TPO failed to examine the documents furnished by assessee to benchmark the transaction by applying one of the methods specified in Chapter-X of the Act. Thus, in the facts of the case and in the light of decisions refereed above, we hold that the findings of the TPO/Assessing Officer in making adjustment in respect of franchise fee are unsustainable. The adjustment is deleted and ground No.3 of appeal is allowed." (Emphasis Supplied) 5.7. In view of above, we reject the contention of the Revenue that the Assessee was not entitled to claim deduction for Franchisee Fee expenses under Section 37(1) of the Act. 5.8. During the course of hearing the Learned Departmental Representative had, while supporting the Transfer Pricing Addition made in respect of Franchisee Fee, contended that the TPO had adopted 'Other Method' while det....
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....sment Years 2020-2021 and 2021-2022 in identical facts and circumstances. We find that for the Assessment Year 2022-2023 the approach adopted by the Assessee for benchmarking the transaction of Franchise Fee was identical to the approach adopted for the Assessment Year 2020-2021 & 2021-2022 which has been accepted by the Tribunal. Therefore, accepting the same, we delete the transfer pricing addition of INR. 31,68,47,150/- made in respect of Franchisee Fee. 5.9. Thus. Ground No. 3 to 3.5 raised by the Assessee are allowed. Ground No. 4 to 4.6 6. Next we would take up the Transfer Pricing Addition of INR. 17,55,34,067/- made in relation to Intra Group Services (IGS) challenged by way of Ground No. 4 to 4.6 raised by the Assessee in the present appeal. 6.1. In the case of IGS also the TPO determined ALP of IGS as 'Nil' and proposed transfer pricing addition of INR. 17,55,34,067/- which was confirmed by the DRP and therefore, transfer pricing addition of INR was made by in the Final Assessment Order in relation to IGS. As a result, the Assessee has carried the issue in appeal before this Tribunal. 6.2. We have considered the rival submissions and have perused the materi....
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....service requests raised evidencing the services received. - Bifurcation of cost along with cost allocation details - Copy of invoices on a sample basis RC SAS 6,941,195 Payment for advertisement and sales promotion expenses Name of the entity Amount in INR Documentary evidence Mars Information Services Inc. 29,632,529 - Copy of relevant intercompany agreements - Copy of invoices on a sample basis Payment for employee training and recruitment expenses Name of the entity Amount in INR Documentary evidence Mars Information Services Inc. 8,838 - Copy of relevant intercompany agreements - Screenshots of Mars P&O guidelines, Childcare benefits policy, Associate compensation and associate position responsibilities 6.4. We note that identical issue had come up for consideration before the Co-ordinate Benches of the Tribunal in appeal preferred by the Assessee for the Assessment Years 2021-2022. On perusal of the Order, dated 28/05/2025, passed in ITA No. 6816/Mum/2024, we find that the Mumbai Bench of the Tribunal had deleted the transfer pricing addition in relation to same IGS availed by the Assessee from AEs during the Asses....
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....and circumstances, rejected the approach adopted by the TPO and had deleted the transfer pricing addition made in respect of the IGS accepting the contention of the Assessee that the Assessee had received benefits from services received from AEs and had compensated the AEs on arm's length basis for the same. Respectfully following the same, we hold that in the facts and circumstances of the present case (a) the Assessee was entitled to claim deduction for IGS expenses in terms of Section 37(1) of the Act and (b) the transfer pricing addition of INR. 17,55,34,067/- made in respect of IGS cannot be sustained. Accordingly, the aforesaid transfer pricing addition of INR. 17,55,34,067/- is deleted and Ground No. 4 to 4.6 raised by the Assessee are allowed. Ground No. 5 to 5.7 7. Next we would next take up the Transfer Pricing Addition of INR. 9,45,21,190/-made in relation to Purchase of Goods challenged by way of Ground No. 5 to 5.7 raised by the Assessee in the present appeal. 7.1. The relevant facts in brief are that for benchmarking of international transaction of purchase of goods the Assessee had adopted the Transactional Net Margin Method (TNMM) as the most appropriate me....
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....d from the list of final comparables. 7.5. The Assessee has also sought exclusion of Zeus Biotech Pvt. Ltd. It has been contended by the Assessee that the aforesaid comparables failed to pass Related Party Transaction (RPT) Filter. The Learned Authorised Representative for the Assessee stated that the RPT/Operating Revenue stood at 27.99%, 27.19% and 27.09% for the Financial Years 2019-2020, 2020-2021 and 2022-2023, respectively. We note that vide Letter, dated 25/08/2025, the Assessee had specifically stated that the Zeus Biotech Pvt. Ltd. fails RPT filter and this was accepted by the TPO. Despite the aforesaid, the DRP included Zeus Biotech Pvt. Ltd. Give the aforesaid, we direct exclusion of Zeus Biotech Pvt. Ltd from the final list of final comparables. 7.6. We find that vide Letter dated 25/08/2025, the Assessee had requested the DRP to consider the inclusion of the following 2 comparables (a) Godrej Agrovet Limited - Animal Feed (b) Simran Farms Limited. Since no finding has been given by the DRP on this issue we deem it appropriate to restore the issue of inclusion of the aforesaid two comparables back to the file of TPO/Assessing Officer for denovo adjudication. All t....