TaxTMI 
TaxTMI 
2026 (8) TMI 127
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....officer is contrary to the facts and circumstance of the case, opposed to law and against the principles of natural justice and equity. 2. Re: Transfer Pricing Adjustment - Commission Paid to AEs a) The learned AO/TPO/DRP erred in law and on facts in determining the arm's length price of commission paid to Associated Enterprises at NIL, resulting in a transfer pricing adjustment of Rs. 2,72,03,527/-. b) The learned authorities erred in disregarding documentary evidence and in holding that no services were rendered by the Associated Enterprises. c) The learned authorities erred in ignoring business, commercial and industry realities and in concluding, without any proper benchmarking or application of a prescribed method under section 92C, that no independent enterprise would have paid such commission. d) The learned authorities erred in law in treating the commission transaction in isolation, failing to appreciate that commission is closely linked to and arises from sales and in relying on irrelevant considerations such as outstanding receivables. e) The impugned adjustment is arbitrary, unsustainable in law and liable to be dele....
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....uncontrolled analysis. c) The impugned adjustment is arbitrary, unsustainable in law and liable to be deleted. In view of the above grounds and such other additional grounds as may be adduced at time of hearing, it is prayed before the Hon'ble Income Tax Appellate Tribunal; a) to reverse the order passed by the learned authorities with an effect to delete the additions for Rs. 3,30,30,578/- made in violation of law, b) to pass such other consequential orders as the Hon'ble Income Tax Appellate Tribunal may deem fit to render justice. 3. The brief facts of the case are that the assessee, is a listed public limited company engaged in the business of manufacturing a comprehensive range of raw materials, equipment, tools and accessories predominantly used in the Tyre sector of the rubber industry, with its manufacturing facilities situated at Coimbatore, India. 4. For the Assessment Year 2022-23, the assessee filed its return of income on 25.11.2022 declaring a total income of Rs. 3,18,52,340/-. During the relevant previous year, the assessee had entered into international transactions aggregating to Rs. 42,41,66,900/- as reported in its books ....
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.... order dated 08.12.2025 giving effect thereto. Consequent upon the said order, the AO passed the final assessment order dated 12.12.2025 u/s. 143(3) r.w.s 144C(13) and 144B of the Act, determining the total income of the assessee at Rs. 6,48,82,918/-, after making the following transfer pricing adjustments: (i) Downward adjustment in respect of the international transaction pertaining to commission paid by the assessee to its AEs - Rs. 2,72,03,527/-; (ii) Upward adjustment in respect of sale of products by the assessee to its AEs - Rs. 25,94,184/-; (iii) Upward adjustment towards guarantee commission in respect of the corporate guarantee extended by the assessee to its AEs - Rs. 4,17,242/-; and (iv) Upward adjustment on account of interest on outstanding trade receivables from its AEs - Rs. 28,15,625/-. 10. Being aggrieved by the aforesaid final assessment order, the assessee is in appeal before us challenging the aforesaid additions/adjustments made therein. Accordingly, the issues are adjudicated as under: 11. We find that Ground No.1 raised by the assessee is general in nature and does not give rise to any specific grievance requiring ad....
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....roducts of the assessee, maintain customer relationships, provide after-sales support and facilitate market penetration in their respective territories. 17. It was contended that the AEs perform significant marketing and customer support functions, including identification of prospective customers, negotiation of commercial terms, procurement of purchase orders, addressing customer grievances, managing customer expectations and rendering post-sales assistance. For these services, the AEs are remunerated by way of commission linked to the sales generated through their efforts. 18. The Ld.AR further submitted that in certain instances, the AEs independently purchase goods from the assessee and sell the same in their respective territories on a principal-to-principal basis, earning their own margins from such transactions. However, insofar as the impugned transactions are concerned, the AEs function merely as order procuring and market support entities and are compensated through commission. 19. Inviting our attention to paragraph 6.3.3 of the TPO's order and paragraph 3.2 of the directions issued by the DRP, the Ld.AR submitted that the sole basis adopted by the authorit....
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.... transactions benchmarked under TNMM and proceeded to determine its ALP independently at NIL, which is impermissible in law. 25. It was further contended that there exists no statutory mandate requiring an assessee to demonstrate a cost-benefit analysis for every expenditure incurred. Once services are shown to have been rendered and the transaction has been benchmarked under a recognised transfer pricing method, the Revenue cannot substitute its own business judgment for that of the taxpayer. 26. In support of the proposition that the tax authorities cannot question the commercial expediency of an expenditure, the Ld.AR relied upon the decision of the Hon'ble Supreme Court in S.A. Builders Ltd. v. CIT [Appeal (Civil) No.5811 of 2006] and the following judicial precedents: • Boreal India Pvt. Ltd. [TS-159-ITAT-2021(Mum)-TP]; • SI Group India Ltd. [TS-525-HC-2019 (Bom)-TP]; • Lever India Exports Ltd. (78 taxmann.com 88); • EKL Appliances Ltd. (24 taxmann.com 199) (Delhi High Court); • Agro Tech Foods Ltd. [TS-136-ITAT-2021(Hyd)-TP]; • Air Liquide Engineering India Pvt. Ltd. (152 ITD 157). 27. ....
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....f the evidentiary material placed before us, we find that the assessee had furnished voluminous documentary evidence before the TPO as well as before the DRP to substantiate the rendition of services by the AEs. Such evidence includes e-mail correspondences exchanged among the end customers, the overseas AEs and the assessee company, evidencing active involvement of the AEs in negotiations, customer identification, procurement of orders, communication of technical specifications and customer requirements, coordination of dispatches, follow-up activities and post-sales support. The assessee has also placed on record copies of invoices, shipping documents, export realization certificates, details of export proceeds received and reconciliation statements demonstrating the nexus between the commission payments and the sales generated through the efforts of the AEs. 32. In our considered opinion, the aforesaid evidences unequivocally establish that the AEs had actually rendered services to the assessee and that the commission payments were made pursuant to genuine business arrangements backed by commercial substance. The documentary evidence placed on record clearly dispels the findi....
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.... Length Price independently at NIL. Such an approach runs contrary to the settled principles governing transfer pricing analysis and defeats the very purpose of adopting TNMM as the Most Appropriate Method. 36. It is by now well settled through a catena of judicial precedents that the TPO is not vested with jurisdiction to examine the commercial expediency or business prudence underlying an expenditure incurred by the assessee. The authority of the TPO is confined to determining whether the consideration paid in respect of an international transaction satisfies the arm's length standard. The Transfer Pricing provisions do not empower the TPO to sit in judgment over the necessity of incurring an expenditure, nor do they authorise the determination of Arm's Length Price at NIL merely because, in the opinion of the Revenue authorities, the assessee could have conducted its business without availing such services. 37. In the present case, the assessee has successfully demonstrated, through contemporaneous documentary evidence, the actual receipt of services from the AEs, the direct nexus between the commission payments and the export sales generated therefrom, and the ben....
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....%. Based on the revised margins, an adjustment of approximately Rs. 46 lakhs was proposed in respect of sales made by the assessee to its AEs. 45. Before the DRP, the assessee contended that foreign exchange fluctuation gains constituted operating income and that advances written off and bad debts written off, being extraordinary items, could not form part of operating costs for the purposes of computing margins under TNMM. 46. The DRP accepted the assessee's contention regarding foreign exchange fluctuation gains by placing reliance on the decisions of the Bangalore Bench of the Tribunal in SAP Labs India Pvt. Ltd. v. ACIT [(2011) 44 SOT 156] and Cisco Systems Services B.V. Engineering India Pvt. Ltd., and directed that foreign exchange gains be treated as operating in nature. 47. Insofar as advances written off are concerned, the DRP observed that such write-offs do not arise from the assessee's routine business operations, are exceptional in nature and are not directly linked with the regular provision of services or sale of goods. It therefore held that advances written off are required to be regarded as non-operating items. 48. Similarly, with respect to ba....
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....submitted that in view of the above computation, the assessee was not pressing its objections relating to inclusion or exclusion of comparables, since acceptance of its principal contention regarding treatment of advances written off and bad debts written off would itself render the transfer pricing adjustment unsustainable. 55. Per contra, the Ld.DR supported the orders of the lower authorities and submitted that the transfer pricing adjustment had been made in accordance with law and therefore deserved to be sustained. 56. We have carefully considered the rival submissions advanced by both sides, perused the orders of the lower authorities, examined the Transfer Pricing documentation placed on record and deliberated upon the material available before us. 57. At the outset, it is an undisputed position emerging from the record that the assessee, while computing its operating margins under the TNMM, had considered foreign exchange fluctuation gains/losses as part of its operating income. The TPO, however, proceeded to treat such foreign exchange fluctuations as non-operating in nature. The DRP, upon examination of the issue and relying upon settled judicial principles gove....
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....ebts written off do not arise in the ordinary course of business operations, possess an exceptional character and therefore deserve to be regarded as non-operating items for the purposes of transfer pricing analysis. The DRP further accepted the proposition that such extraordinary expenditures are incapable of reflecting the operational efficiency of an enterprise and consequently cannot constitute an appropriate component of operating costs for benchmarking under TNMM. 62. Thus, from a conjoint reading of the findings recorded by the DRP and the computation adopted by the TPO, an apparent inconsistency emerges. While the DRP proceeded on the premise that the TPO had already accorded non-operating treatment to advances written off and bad debts written off, the factual position borne out from the transfer pricing computations unmistakably demonstrates that the TPO had, in fact, treated these items as operating expenses and included the same in the operating cost base of the assessee. 63. In our considered opinion, once the DRP itself has accepted the fundamental principle that advances written off and bad debts written off are extraordinary items having no nexus with the norm....
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....them from operating costs. 68. In the facts and circumstances of the case, we are of the considered view that the advances written off amounting to Rs. 2,89,74,751/- and bad debts written off amounting to Rs. 5,04,68,380/- do not partake the character of operating expenses and, therefore, deserve to be treated as non-operating items for the purpose of computing the Profit Level Indicator (PLI). 69. Once the aforesaid items are excluded from the operating cost base, the margin earned by the assessee stands higher than the margin earned by the comparable companies adopted for benchmarking the international transactions. Accordingly, the price charged by the assessee in respect of the international transactions entered into with its Associated Enterprises is liable to be accepted as being at Arm's Length Price. 70. In view thereof, the transfer pricing adjustment of Rs. 25,94,184/- made by the AO is unsustainable in law and on facts and is hereby directed to be deleted. 71. Consequently, the grounds raised by the assessee on this issue stand allowed. 72. Ground No. 4 relates to the challenge mounted by the assessee against the transfer pricing adjustment of Rs. 4,17....
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....2009-10 in TCA Nos.590 and 591 of 2019 dated 10.12.2020, observed that corporate guarantees constitute international transactions within the meaning of section 92B of the Act. The TPO also noted that in view of Explanation (i)(e) to section 92B inserted by the Finance Act, 2012 with retrospective effect, transactions involving guarantees are covered within the ambit of international transactions even where the impact on profits, income, losses or assets may arise at a future date. 78. The TPO further proceeded on the premise that, from a financial and economic perspective, there is no material distinction between a corporate guarantee and a bank guarantee. By exercising powers u/s. 133(6) of the Act, information was collected from various banks regarding guarantee commission rates charged for similar services and, based on the arithmetic mean of such data, a rate of 1.98% was determined as the arm's length guarantee commission. 79. Applying the said rate on an amount of Rs. 2,13,97,035/-, the TPO computed an adjustment of Rs. 4,17,242/- towards corporate guarantee fees and made an upward adjustment to the value of the international transaction. The DRP affirmed the action....
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.... by arranging for issuance of SBLCs through its bankers. It is equally not in dispute that no financial obligation was triggered upon the assessee during the relevant year on account of any default committed by the AEs and that the underlying loan obligations continued to be serviced by the AEs themselves. 86. The principal contention advanced by the assessee is that the charges levied by the banks for issuance of the SBLCs had been fully recovered from the beneficiary AEs and that the TPO, on an erroneous appreciation of facts, treated the amount so recovered as the guarantee amount itself and subjected the same to a further levy of guarantee commission at 1.98%. 87. In our considered opinion, the aforesaid factual assertion made by the assessee requires verification with reference to the documentary evidence and supporting accounting records evidencing recovery of the entire bank charges from the AEs. If it is established that the amount of Rs. 2,13,97,035/- merely represents reimbursement of actual costs incurred by the assessee towards issuance of SBLCs and that the same has been fully recovered from the respective AEs, then the claim of the assessee that such recovery it....
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....ependent benchmarking exercise by allowing a credit period of 30 days, applying an interest rate of 3.84% per annum and distributing the total receivables outstanding as on 31.03.2022 into twelve monthly instalments for the purpose of computing the delay in realization. On such basis, a transfer pricing adjustment of Rs. 28,15,625/- was proposed and the same came to be affirmed by the DRP. 94. Before us, the Ld.AR assailed the adjustment on several grounds. It was submitted that delayed realization of sale proceeds is merely incidental to the principal international transaction and does not partake the character of an independent transaction warranting separate benchmarking. It was argued that commercial enterprises ordinarily factor the cost of delayed realization into their pricing and mark-up structure and do not necessarily levy interest separately upon customers. 95. It was further contended that the TPO had arbitrarily granted a credit period of only 30 days, ignoring the fact that in the assessee's business model the goods exported would themselves take approximately 30 days to reach the destination port of the AE, and therefore charging interest even before the go....
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....ht to be aggregated with the primary transaction while carrying out transfer pricing analysis. Reliance in this regard was placed upon the decisions in Indo American Jewellery Ltd., Information System Resource Centre Pvt. Ltd., Bombay Dyeing & Manufacturing Co. Ltd., Nimbus Communications Ltd., Panasonic India Pvt. Ltd., Dell International Services India Pvt. Ltd., Tally Solutions Pvt. Ltd., Xchanging Solutions Ltd., Lotus Labs Pvt. Ltd., Avnet India Pvt. Ltd., Global E-Business Operations Pvt. Ltd., Micro Inks Ltd. and Kadimi Tool Manufacturing Co. Pvt. Ltd. 99. Without prejudice, it was submitted that even if receivables were to be considered as an international transaction, the same ought to be benchmarked adopting a combined transaction approach, particularly when working capital adjustments had already been granted while determining the arm's length margin under TNMM. Reliance was placed on the decisions in Effective Teleservices Pvt. Ltd., Teejay India (P.) Ltd., Integra Software Services (P.) Ltd., Sanmina-SCI India Pvt. Ltd. and Financial Software and Systems Pvt. Ltd. 100. The Ld.DR, on the other hand, supported the orders of the lower authorities and submitted t....