TaxTMI 
TaxTMI 
2026 (7) TMI 673
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....ons of the Dispute Resolution Panel ("DRP") under section 144C of the Income-tax Act, 1961 ("the Act"), wherein a transfer pricing adjustment of Rs. 9,06,00,000/- was sustained in respect of the manufacturing segment. 2. Brief facts of the case are that the assessee is a licensed manufacturer of Coats Group in India and is primarily engaged in the manufacture of sewing threads and accessories. Coats Group plc, United Kingdom, is the ultimate holding company. The assessee undertakes manufacturing and distribution of threads and accessories both to Associated Enterprises ("AEs") and non-AEs. 3. During the relevant assessment year, the assessee entered into several international transactions with its AEs. The transactions under dispute a....
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....-AE transactions. 5. The Transfer Pricing Officer ("TPO") rejected the assessee's claim for internal TNMM without specifically rejecting the segmental data or pointing out defects therein. The TPO proceeded to apply external TNMM. The TPO rejected the capacity adjustment claimed by the assessee, including the alternative approach based on the Cost Audit Report, and allowed adjustment only to a limited extent in respect of employee cost and depreciation for a period of 45 days. The TPO treated export incentives as non-operating in nature and rejected certain comparables on quantitative filters and non-availability of data in the Prowess database. On the basis of 77 comparables with a median margin of 6.95%, and by considering the assessee....
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....gross profit margins during the relevant year were consistent with the preceding and succeeding years, and the erosion in net margin was attributable to under-absorption of fixed costs and increased SG&A expenses. The assessee relied upon multiple judicial precedents, including recent decisions of the Chennai Bench in Reynolds Pen India Pvt. Ltd., POS-Hyundai Steel Manufacturing India Pvt. Ltd., and Ambattur Clothing Ltd., wherein primacy was accorded to internal TNMM when reliable segmental data is available. 8. Per contra, ld.CIT-DR relied upon the orders of the ld.DRP and TPO. 9. The core issues that arise for our consideration are: (i) Whether the TPO/DRP were justified in rejecting internal TNMM and applying external ....
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....sactions are higher than those from non-AE transactions, the international transactions are at arm's length. COVID-19 Impact and Loss Situation The financial data placed on record shows that while the assessee incurred loss during AY 2021-22, it earned profits in both the preceding and succeeding years. The gross profit margins across the three years remain broadly consistent. The erosion in net margins during AY 2021-22 is attributable to sharp decline in revenue, under-absorption of fixed overheads, and additional COVID-19 related costs. These are extraordinary external factors. The TPO's presumption that decline in turnover is attributable to non-arm's length AE pricing is unsupported by any evidence, particularly when AE sal....
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....fic deficiency or particular line item was pointed out by the AO requiring further clarification or evidence. On perusal of the assessment order, we find that the disallowance has been made primarily on an ad hoc basis by accepting sample invoices and disallowing the balance amount without identifying specific unverifiable expenses. In our considered view, such an approach does not meet the requirement of a reasoned assessment, especially when the assessee had sought clarification as to the exact details required. In the interest of justice, we deem it appropriate to set aside this issue to the file of the AO for fresh examination. The AO is directed to verify the claim after calling for specific details and evidences and decide the i....
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....sessee failed to explain the nature of expenses. However, the assessee has submitted that ledger extracts and sample lease agreements were furnished during the assessment proceedings, clearly explaining the nature of rent expenditure. On examination of the records, we note that the assessment order does not deal with the documentary evidences submitted by the assessee and the disallowance appears to have been made without proper verification. In the interest of justice, we consider it appropriate to remand this issue back to the AO for verification of lease agreements, ledger details, and other supporting documents. The AO shall decide the issue afresh in accordance with law after granting due opportunity to the assessee. According....