TaxTMI 
TaxTMI 
2026 (3) TMI 1730
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....case. 1. Transfer Pricing Grounds 2. Upward transfer pricing adjustment to the International Transaction of the Manufacturing Segment services rendered to the Associated Enterprises ('AE') General Ground 2.1. The AO/DRP erred in law and facts in confirming the action of the TPO in determining an upward adjustment amounting to INR 72,23,878/- to the value of international transactions in the manufacturing segment of the Appellant. Incorrect rejection of TP documentation and performance of fresh search 2.2. The AO/DRP erred in law and facts in confirming the action of the TPO of rejecting the Appellant's TP documentation and performing a fresh search resulting in the addition of new comparable companies. 2.3. The TPO/AO/DRP without appreciating the fact that having accepted all of the Appellant's comparable companies in the TP order there is no question of non-reliability of the Appellant's TP documentation/search and as such fresh benchmarking analysis is unwarranted and unsustainable in law. 2.4. The AO/DRP erred in law and facts in confirming the action of the TPO of invoking the provisions of secti....
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....lant. URA MACHINE IN 2.16. The AO/TPO erred in treating certain expenses as operating viz., Foreign exchange fluctuation inconsistent with the treatment of the said items while computing the margin of the Appellant. 3. Upward adjustment towards interest on outstanding receivables. 3.1 The AO/DRP erred in in confirming the action of the TPO in treating outstanding receivables transaction as international transaction. 3.2 The AO/DRP erred in confirming the action of the TPO in re- characterizing outstanding receivables transaction as loan to AE and erred in imputing notional interest on the same. 3.3 The AO/DRP failed to appreciate that the Appellant is not charging interest on outstanding receivables from Non-AE and as such there is no question of recovering interest on outstanding receivables from AE. 3.4 The AO/DRP failed to appreciate that the AE is not charging interest on outstanding receivables from the Appellant and as such the Appellant cannot be expected to recover interest on outstanding receivables from the AE. 3.5 Without prejudice to the above, the AO/TPO/DRP erred in not appreciating the fact that ....
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....transaction without appreciating the said payment is inextricably linked to the core business operations of the Appellant. 4.8 The AO/DRP erred in confirming the action of TPO in rejecting the aggregation approach and the Transactional Net Margin Method (TNMM) selected by the Appellant for benchmarking the professional services transaction. 4.9 The AO/DRP erred in confirming the action of TPO in adopting "other method" for independently benchmarking professional charges paid to AE. 4.10 Without prejudice to the above, the AO/DRP erred in confirming the action of TPO in incorrectly adopting "other method" i.e. contrary to the provisions of Rule 10B of the IT Rules. II. Corporate tax Grounds 5. Incorrect total income reckoned by AO: 5.1 The AO erred in inadvertently considering the total income of Rs. 10,55,53,640/- as per Section 143(1) of the Act while completing the scrutiny assessment under section 143(3) r.w.s 144C(13) of the Act instead of considering the correct total income Rs.7,31,32,239/- as per return of income. 1.1 The AO having held that the deduction of Rs. 3,26,53,038/- under section 35(1)(i) and Rs.8,66,80....
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....nterest on receivables and professional fees where retained at the same amount. The A.O passed a final assessment order incorporating the revised TP adjustment pursuant to the directions of the DRP and the assessee is an appeal against the said assessment order. TP ADJUSTMENT TOWARDS MARGINS - GROUND No.2 AND ADDITIONAL GROUND - 1 3. The assessee in the transfer pricing study (TPS) has computed the margin at 1.25% where the PLI is arrived at by operating profit/ operating cost (OP/OC). The assessee for benchmarking the transaction chosen Transaction Net Margin Method (TNMM) as the Most Appropriate Method (MAM). The assessee in the TPS chosen five comparables and the weighted average of the comparables was arrived at 2.68%. The assessee accordingly concluded that the price charged is at arms length. The TPO rejected the TPS and did an independent search whereby the TPO chose seven comparables with a median of 4%. Accordingly, the TPO arrived at the TP adjustment of Rs.19,59,000/-. The TPO while re-computing the PLI of the assessee excluded the professional fee charges from the operating expenses and held that the same is to be treated as a separate international transaction. S....
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....r: a. Comparing FY 2019-20 PLI of Brake Division, BIPL with that of FY 2019-20 PLI of comparable companies (one-year vs one-year comparison) ; (or) b. Comparing the weighted average of 3 years PLI of Brake Division, BIPL with that of 3 years PLI of comparable companies (three years vs. three years comparison). The above fair comparison results in the following: Year PLI of Brake Division, BIPL PLI of comparable companies FY 2019-20 alone 5.59 4.85 (or) Average of 3 years viz., FY 2017-18, 2018-19 and 2019-20 9.41 7.39 We find that the reasons for the severe economic slowdown during the impugned A.Y. 2020-21 were a. Switch over to BS IV to BS VI emission norms (skipping BS V) (GOI Circulars there in Page Nos.1 to 6 of Paper Book dated 28th Jan 2025); this resulted in reduction in demand for passenger and commercial during FY 2019-20. b. NBFC liquidity crisis and corresponding increase in interest rates, triggered by IL&FS default on its debt obligations (Relevant extracts from ADB's report on NBFC crisis and an NBFC's Director's report for that financial year there....
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....evailing in the market and read as follows: "Rule 10B(2) (1) ......... (2) For the purposes of sub-rule (1), the comparability of an international transaction [or a specified domestic transaction] with an uncontrolled transaction shall be judged with reference to the following, namely :- (a) the specific characteristics of the property transferred or services provided in either transaction; (b) the functions performed, taking into account assets employed or to be employed and the risks assumed, by the respective parties to the transactions; (c) the contractual terms (whether or not such terms are formal or in writing) of the transactions which lay down explicitly or implicitly how the responsibilities, risks and benefits are to be divided between the respective parties to the transactions; (d) conditions prevailing in the markets in which the respective parties to the transactions operate, including the geographical location and size of the markets, the laws and Government orders in force, costs of labour and capital in the markets, overall economic development and level of competition and whether the market....
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.... matrix, we are of the considered view that the TPO / DRP have erred in arriving at the PLI by considering the weighted average PLI of the comparable companies alone with the assessee's one-year results of the impugned A.Y. Therefore, we direct the TPO/AO to consider the data / results of the comparable companies of the impugned assessment year alone with the assessee's data / results of impugned assessment year to arrive the PLI to find out the arm's length of the transactions." 5. The ld AR also submitted that an identical view has been held by the coordinate bench for the same AY i.e., 2021-22 in the case of Brakes India Pvt. Ltd. vs. DCIT (IT(TP)A No.138/Chny/2024 dated 05.12.2025) where it has been held that: "7.0 We have noted that the facts of the present case are similar to those available in the decision of the Hon'ble Coordinate bench supra. In respectful compliance to the same and for the purposes of consistency we set aside the order of the lower authorities and direct the Ld. TPO/AO to consider the data / results of the comparable companies of the impugned assessment year alone with the assessee's data / results of impugned assessment ye....
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....S PROFESSIONAL FEE: 9. During the year under consideration, the assessee availed professional services in the nature of sourcing support services from Shibaura Machines (Shanghai) Co. Ltd. in China and paid Rs.47,16,572/-. The assessee considered the said payment as part of its operating expenses while arriving at the overall margin. The TPO held that the professional fees have to be benchmarked separately and computed the ALP at Nil to make a TP adjustment of the entire fees paid. The TPO while doing so did not consider the submissions of the assessee stating that the profession fee is paid towards rendering of services which is an integral part of the main business of the assessee. The TPO held that the nature of transaction is general in nature and categorized impugned transaction as shareholding activity for the group entities. The assessee raised objections before the DRP contending that sourcing support services from the AE has a close inter linkage with the business of the assessee and therefore, cannot be benchmarked separately. The assessee also contended treating the receipt of services as a shareholder activity. The DRP however rejected the submissions of the assessee....
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....6. Communication of updates in the drawings designed by Shibaura India with the third-party vendor. 7. Forwarding the POs raised by Shibaura India with the third-party vendors 8. Clarification on the mode and time of delivery from third party vendor to Shibaura India. 11. The Ld. Departmental Representative (DR), on the other hand, argued that the assessee has not substantiated with the proper evidences that the services have indeed been availed by the assessee. The Ld. DR also vehemently opposed the admission of additional evidence stating that the assessee had ample opportunity to submit the said details before the lower authorities which the assessee failed to do so. 12. We have heard the parties, and perused the material available on record. The assessee availed sourcing support services from its AE in China and the salary of the employees of the AE who are engaged in rendering the services is reimbursed by the assessee on cost to cost basis. The assessee treated the payment made as professional charges as part of the operating cost for the purpose arriving at its margin. The TPO carved out the professional fee charges as a separate transaction and using ot....
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....the following written submission in this regard - The nature of professional service availed is of assistance in sourcing of materials from suppliers which are essential for the manufacturing activity carried out by the Assessee. The AE assists in receiving a quote/offer from the third-party vendors for the materials required by Shibaura India, co- ordinates in customs clearance for seamless import of supplies to the Shibaura India, communicates with their local vendors/suppliers on any updates in the requirements or defects in the materials supplied etc. All these activities are integral to the Assessee and are closely interlinked to the routine manufacturing operations of the Assessee. In fact, the materials imported are majorly used for manufacture and sale of goods to third parties. Hence, segregating such a transaction and performing separate comparison will only provide a skewed picture. Therefore it has to be aggregated with other operating expenses and benchmarked under TNMM. Further it is submitted that all the other methods mandate high degree to similarity with the nature of service being rendered, which makes it almost impossible to identify comparables. Theref....
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....t the services provided are towards identifying the customers and support in customs clearance. In our considered view the services are not in the nature of shareholder activity since the same when tested as per the guidance it would be something an independent enterprise would be willing to pay for. In view of these discussions, we hold that the professional charges paid cannot be termed as a shareholder activity and accordingly direct the TPO to keep in mind our decision while re-examining the impugned issue as per the above directions. 17. The Ld. AR during the course of hearing did not press of adjudication of ground No.4 pertaining to interest on receivables due to the smallness of the amount of adjustment made by the TPO. 18. Ground No.5 pertains to incorrect total income reckoned by the A.O. In this regard, the Ld. AR submitted that the CPC made adjustment towards disallowance u/s. 35(1)(i) of the Act to the tune of Rs. 3,26,53,038/- and disallowance of Rs. 8,66,800/- u/s. 35(1)(iv) of the Act. The Ld. AR drew our attention to the observations of the A.O in the final assessment order where he has stated that: "3. During the year under consideration the assesse....