TaxTMI 
TaxTMI 
2026 (10) TMI 35
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.... upward TP adjustment of INR 2,28,42,451/- towards interest on outstanding receivables. 1.2 The DRP/TPO erred in law and facts by ignoring the principle of consistency by departing from the stand accepted by the revenue in the own case of the Appellant in earlier years. Erroneous rejection of Segmental workings maintained by the Appellant 1.3 Without prejudice to the above objections, the Ld. DRP/TPO failed to appreciate the detailed segmental workings maintained by the Appellant prepared using a scientific approach with appropriate allocation keys. Turnover based allocation need not be followed where more appropriate allocation keys are available 1.4 The Ld. DRP/TPO erred in law and facts by rejecting the Appellant's allocation methodology and reallocating depreciation expense based on turnover. 1.5 The Ld. DRP/ TPO erred by not appreciating the fact that an allocation based on turnover can be made only in absence of other better allocation methodologies or Appellant's failure to provide a rational allocation mechanism. Incorrect treatment of export incentives as non-operating income by Ld. TPO 1.6 The....
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.... (ii) all primary facts were fully and truly disclosed, and (iii) there is neither "under-reporting" nor "mis-reporting" as defined under section 270A(2) & (9)." 2. The assessee is a company engaged in the business of manufacturing and sale of two wheelers, three wheelers, spare parts and related products. The assessee filed a return of income for AY 2022-23 on 29.12.2022 declaring total income of Rs. 11,20,52,20,405/-. The assessee subsequently a revised return on 30.12.2022 declaring total income of Rs. 11,04,33,20,089/-. The return was processed u/s. 143(1) of the Act whereby the income was determined at Rs. 11,60,69,97,510/-. The case was selected for scrutiny and the statutory notices were duly served on the assessee. Since the assessee had international transactions, the A.O made a reference to the Transfer Pricing Officer (TPO) to compute the Arm's Length Price (ALP) of the international transactions. The TPO proposed the following adjustments: 1. Upward adjustment towards sale of 2 & 3 wheelers under vehicle segment - Rs. 12,23,89,563/-. 2. Upward adjustment towards corporate guarantee - Rs. 2,95,58,100/-. 3. Upward adjustment....
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....01.31/99.42) Rs. 6,56,04,69,100. Accordingly, an upward adjustment of Rs. 12,23,89,563 is proposed towards the international transactions of 'sale of two and three wheelers' under Vehicle segment." 6. The Ld. Authorized Representative (AR) of the assessee raised a contention that the ALP recomputed by the TPO is within the tolerance band of + or - 3% (Ground No.1.7) and in this regard submitted the following workings: 7. The Bench directed the Ld. DR to get a report from the TPO with regard to the contentions of the Ld. AR. The response received from the TPO is extracted as hereunder: "2.2 Response of the TPΟ: 2.2.1 The Hon'ble Dispute Resolution Panel dismissed the objections of the assessee vide its order u/s. 144C(5) of the Act dated 26.12.2025. In the said order, the Hon'ble DRP has directed the TPO to follow the factual report submitted by the TPO dated 12th December, 2025 after revised allocation of depreciation (Page 7 of the DRP order). [Remand report dated 12.12.2025 is enclosed as Annexure-1] 2.2.2 In the said factual report, the margin of the assessee has been computed after revised allocation of depreciation as fo....
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....rovided that where more than one price is determined by the most appropriate method, the arm's length price shall be taken to be the arithmetical mean of such prices: Provided further that if the variation between the arm's length price so determined and price at which the international transaction has actually been undertaken does not exceed five per cent of the latter, the price at which the international transaction has actually been undertaken shall be deemed to be the arm's length price." The provision for tolerance band was clarified with an amendment in the Finance (No. 2) Act, 2009. The Memorandum to the Act regarding the provisions of Section 92C is given below: "Further, the proviso to sub-section (2) of section 92C provides that where more than one price is determined by the most appropriate method, the arm's length price shall be taken to be the arithmetical mean of such prices, or, at the option of the assessee, a price which may vary from the arithmetical mean by an amount not exceeding five per cent of such arithmetical mean. The above provision has been subject to conflicting interpretation by the assessee and the ....
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....re-2], which prescribes a tolerance band of 3% for cases other than wholesale trading and 1% for cases of wholesale trading. The Notification states as follows: "In exercise of the powers conferred by the third proviso to sub-section (2) of section 92C of the Income-tax Act, 1961 (43 of 1961) (hereafter referred to as the said Act"), read with proviso to sub-rule (7) of rule 10CA of the Income-tax Rules, 1962, the Central Government hereby notifies that where the variation between the arm's length price determined under section 92C of the said Act and the price at which the international transaction or specified domestic transaction has actually been undertaken does not exceed one per cent. of the latter in respect of wholesale trading and three per cent. of the latter in all other cases, the price at which the international transaction or specified domestic transaction has actually been undertaken shall be deemed to be the arm's length price for assessment year 2022-2023. Hence, it is evident that the tolerance band of 3% does not apply to all cases and has to be read as per the provisions of 3nt proviso to Section 92C(2) along with proviso to Su....
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....d 28.06.2022. The TPO in report sought by us has rejected this claim on the ground that the tolerance band applies only where more than one arm's length price is determined and an arithmetic mean of such prices is computed, and that since only a single margin was used for comparison, there is no comparable and consequently no occasion for computing an arithmetic mean, rendering the tolerance band inapplicable. Before us, the Ld. AR submitted a working demonstrating that the variation between the margin of 1.31% adopted by the TPO and the margin declared by the assessee on the AE segment falls within the tolerance band of 3% notified under the third proviso to Section 92C(2) read with Rule 10CA(7) of the Rules, and that once this benefit is granted, no adjustment survives. From the perusal of the TP order we notice that the very basis on which the Ld. TPO has proposed the adjustment is the margin earned by the assessee on its export to non-AEs and domestic sales, which has been treated as the internal comparable for benchmarking the AE segment. We are of the view that having relied upon this very segment as the comparable to arrive at the arm's length margin, the TPO cannot ....
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....iation, manufacturing expenses are concerned, the Assessee has allocated the same on the basis of standard production cost. Though the Assessee has not given the details about standard production cost, the TPO has specifically given a finding that the employee cost allocated on the basis of standard production cost is acceptable but when it comes to depreciation, the TPO states that the said expense cannot be allocated on the basis of standard production. The TPO cannot blow hot and cold in the same breath i.e. when the TPO has accepted the basis of allocation in respect of employee cost, the TPO cannot reject the same when it comes to depreciation. In fact, when the TPO acknowledges that employees being common and therefore allocation of employee cost on the basis of standard production cost to be appropriate in the same manner when the assets are used in common between the AE and Non-AE segments in the manufacturing facility, the allocation of depreciation on the basis of standard production cost would be the most appropriate basis. This is countenanced by the TPO's acceptance of allocation of employees cost on the same basis. Therefore, the TPO cannot make a contradictory st....
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....e Tribunal as the second fact finding authority had gone into factual aspects in great detail and therefore having interpreted the law as it stood on the relevant date the order passed cannot be faulted. In the matter of guarantee commission, the adjustment made by the TPO were based on instances restricted to the commercial banks providing guarantees and did not contemplate the issue of a Corporate Guarantee. No doubt these are contracts of guarantee, however, when they are Commercial banks that issue bank guarantees which are treated as the blood of commerce being easily encashable in the event of default, and if the bank guarantee had to be obtained from Commercial Banks, the higher commission could have been justified. In the present case, it is assessee company that is issuing Corporate Guarantee to the effect that if the subsidiary AE does not repay loan availed of it from ICICI, then in such event, the assessee would make good the amount and repay the loan. The considerations which applied for issuance of a Corporate guarantee are distinct and separate from that of bank guarantee and accordingly we are of the view that commission charged cannot be called in question, in the ....
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....s covered, we direct the AO to adopt the guarantee commission as international transaction and assess the value at 0.5% as against 1%. This issue of Revenue's appeal is partly allowed." 12. Considering the facts being identical respectfully following the above decision, we direct the TPO to restrict the upward adjustment towards corporate guarantee fee to 0.5% and recompute adjustment accordingly. The grounds raised in this regard are partly allowed. Upward adjustment towards interest on outstanding receivables - Grounds No. 1.10 to 1.13: 13. The TPO observed form the financials that the assessee is having outstanding receivables of Rs. 314.06 Crores from its AE that the TPO treated the outstanding balance as loan and computed notional interest by applying LIBOR + 350 BPS i.e., 3.84% to arrive at an adjustment of Rs. 1,81,22,936/-. The TPO while doing so has allowed the credit period of 60 days. 14. The Ld. AR submitted that the assessee is having both AE and non-AE transactions and no interest is charged on the outstanding balance of Non-AE transactions. Accordingly, the Ld. AR submitted that the TPO is not correct in imputing interest for AE transactions alone. Th....
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....antially upon decisions rendered in a different factual and economic milieu. The assessment year under consideration pertains to a period significantly impacted by the aftermath of the COVID-19 pandemic, which had affected global trade cycles, supply chains and realization patterns. Therefore, the factual matrix prevailing during the relevant year cannot be ignored while evaluating the issue. 106. Further, we find considerable force in the proposition canvassed by the assessee that where TNMM has been adopted as the most appropriate method and the assessee's Profit Level Indicator is found to be superior to that of comparable uncontrolled entities, the receivables arising from such transactions ought generally to be examined in an aggregated manner with the principal international transaction. The principle of aggregation under transfer pricing jurisprudence is well recognised and has consistently been applied in cases where closely linked transactions are involved. 107. We also note that the methodology adopted by the TPO for computing the impugned adjustment by allowing only 30 days of credit, distributing the year-end receivables into twelve equal instalmen....