DCIT., CIRCLE-1(1), TIRUPATI vs. M/S. INDUS COFFEE PRIVATE LIMITED, NELLORE

During the year under consideration, the assessee company, inter alia, entered into the following international transactions:

The AO made a reference under section 92CA(1) of the Act to the Transfer Pricing Officer (for short, “TPO”) for determination of the Arm's Length Price ("ALP") of the aforesaid international transactions.

During the course of proceedings, the TPO observed that the assessee company had in its TP Study Report benchmarked the export of coffee to its Associated Enterprises (AEs) by adopting the Comparable Uncontrolled Price ("CUP") Method as the Most Appropriate Method ("MAM"). Also, the assessee company had benchmarked the External Commercial Borrowing ("ECB") transaction by adopting the CUP Method and claimed that the interest paid at six- month LIBOR plus 500 basis points was at arm's length. Insofar as the outstanding receivables from the AEs were concerned, the assessee company had not carried out any separate benchmarking on the premise that such receivables were intrinsically connected with the principal transaction of sale.

The TPO, however, rejected the benchmarking adopted by the assessee company. According to him, the CUP analysis was not reliable since the alleged comparable uncontrolled transactions represented purchases made by the foreign Associated Enterprises (AEs) from independent suppliers and not uncontrolled transactions undertaken by the assessee company itself. The TPO observed that Rule 10B contemplates comparison of the controlled transaction of the tested party with comparable uncontrolled transactions, and also the assessee company had failed to establish strict comparability in respect of volume, timing, geographical markets, product characteristics and other material factors. The TPO further observed that the assessee company had no uncontrolled export transactions of its own and, therefore, CUP could not be reliably applied.

The TPO, after having rejected the CUP Method, proceeded to determine the Arm's Length Price by applying the Transactional Net Margin Method ("TNMM"), and after carrying out an independent search, he selected five comparable companies engaged in similar business activities and arrived at an arithmetic mean operating margin of 7.27%. Applying the said margin to the operating cost of the assessee company, the TPO made an adjustment of Rs.2,87,29,344/- towards the international transaction relating to the sale of coffee to the Associated Enterprises (AEs).

Thereafter, the TPO examined the External Commercial Borrowing obtained by the assessee company from its AE. The assessee company claimed that the interest paid at six-month LIBOR plus 500 basis points was within the ceiling prescribed under the RBI Master Circular governing ECB borrowings and was also consistent with comparable third-party borrowings. However, the TPO observed that the RBI guidelines merely prescribed the maximum permissible borrowing cost for foreign exchange regulatory purposes and did not determine the Arm's Length Price (ALP) under Chapter X of the Act. According to him, the transfer pricing adjustment had to be determined independently, and the acceptable arm's length spread was only six months LIBOR plus 200 basis points.

Also, the TPO observed that an amount of Rs.18,31,26,992/- remained outstanding towards the assessee company as receivables from its Associated Enterprises on 31.03.2016. The TPO, referring to “Explanation (i)(c)” to Section 92B of the Act inserted by the Finance Act, 2012, observed that the delayed realization of trade receivables constituted a separate international transaction requiring independent benchmarking. Accordingly, the TPO, after allowing a normal credit period of sixty days, computed an adjustment of Rs.1,12,854/- by applying SBI short-term deposit rates.

Thereafter, the AO, based on the order passed under Section 92CA(3) of the Act, incorporated the transfer pricing adjustments in his draft assessment order passed under Section 144C(1) of the Act, dated 20/12/2019.

The assessee company, on receipt of the draft assessment order, dated 20/12/2019, filed a reply on 14/01/2020, and opted not to file objections before the Dispute Resolution Panel (DRP) and requested for passing a final assessment order. Accordingly, the AO passed a final assessment order under Section 143(3) r.w.s 144C(3) of the Act, dated 23/01/2020, wherein after making a transfer pricing adjustment of Rs. 5,55,37,020/- as suggested by the TPO vide his order passed u/s 92CA(3) of the Act, the loss returned by the assessee company was determined at (-) Rs. 22,37,43,280/-

Aggrieved, the assessee company carried the matter in appeal before the Commissioner of Income Tax (Appeals), who, after considering the submissions of the assessee company and examining the material available on record, deleted the transfer pricing adjustment of Rs.2,87,29,344/- relating to export of coffee to the AEs. The CIT(A) observed that the CUP Method adopted by the assessee company was acceptable in the peculiar facts of the case and that the TPO was not justified in rejecting the benchmarking carried out by the assessee company. The CIT(A) further held that the TPO had failed to properly appreciate the functional profile of the assessee company as a newly established manufacturing unit operating under severe capacity constraints during the first year of commercial production.

Apropos the External Commercial Borrowing (ECB), the CIT(A) accepted the contention of the assessee that interest paid at six months LIBOR plus 500 basis points represented an arm's length rate considering the tenure of the borrowing, the unsecured nature of the loan, the attending commercial risks and the RBI guidelines permitting such spread, and deleted the adjustment of Rs.2,66,94,822/- made by the AO/TPO.

Insofar as the delayed realization of receivables from the Associated Enterprises was concerned, the CIT(A), following the decision of the ITAT, Hyderabad Bench in OSI Systems (P.) Ltd. v. DCIT [2024] 168 taxmann.com 22 (Hyd), observed that the delayed receivables constituted a separate international transaction. However, instead of SBI short-term deposit rates adopted by the TPO for benchmarking the said transaction, the CIT(A) directed the AO/TPO to compute the adjustment by adopting LIBOR plus 200 basis points after allowing a normal credit period of sixty days.

Further, the CIT(A) deleted the addition relating to capitalization of interest earned during the pre-operative period. It was observed by him that as per the judgments of the Hon'ble Supreme Court in CIT v. Bokaro Steel Ltd. [(1999) 236 ITR 315 (SC)] and that of the Hon'ble High Court of Delhi in Indian Oil Panipat Power Consortium Ltd. v. ITO [(2009) 315 ITR 255 (Delhi)], the interest earned on temporary deployment of funds, which were inextricably linked with setting up of the manufacturing project, partook the character of a capital receipt and was liable to be adjusted against the pre-operative expenditure.

The Revenue being aggrieved with the CIT(A) order has carried the matter in appeal before us.

We have heard the Ld. Authorized Representatives of both parties, perused the orders of the authorities below and the material available on record, as well as considered the judicial pronouncements pressed into service by them to drive home their respective contentions.

Ms. Uppaluri Meena, Ld. Senior Departmental Representative (for short, “Sr. DR”) at the threshold of hearing of the appeal submitted that the same involves a delay of 70 days. Elaborating on the reason leading to the delay, the Ld Sr. DR. submitted that the same had crept in because of transfer of officers and officials in the jurisdictional hierarchy as well as the DCIT, Circle-1(1), Tirupati, handing over and taking over of charges consequent to transfers in the month of April-June 2025. It was further submitted that the copy of the CIT(A) order was not marked to the Jurisdictional PCIT, i.e., Pr. CIT, Tirupati Charge, Tirupati, and was forwarded to the CIT(IT&IP) Hyderabad. The Ld. Sr. DR submitted that the original set of the CIT(A) order was received by the concerned officer from the Addl. CIT (International Taxation) Hyderabad & Vijayawada on 25.03.2025. It was further stated that the officer concerned, after obtaining the order of CIT(A), communicated the same to the DCIT(IT & TP), Hyderabad to obtain his comments on the relief granted by the CIT(A) on IT & TP issues and to quantify the tax effect on each relief so granted. The Ld. Sr. DR submitted that thereafter approval of the Higher Authorities across the Jurisdictional Hierarchy was obtained for filing the present appeal. It was further stated that some delay had occasioned because the AO at the relevant point of time was preoccupied with a number of other urgent matters which were getting time-barred by 30.06.2025, and the records for the AY 2016-1 7 for which the appeal was to be filed were not readily traceable. The Ld. Sr. DR had drawn our attention to the affidavit, dated 08/07/2025 of the DCIT, Circle 1(1), Tirupati, wherein the aforesaid facts were deposed by him. The Ld. SR. DR submitted that as the delay in filing the present appeal had crept in because of bona fide reasons, the same, in all fairness and in the interest of justice, be condoned.

Per Contra, the Ld. Authorized Representative (for short, “AR”) for the assessee company did not object to the seeking of condonation of the delay involved in filing of the appeal by the revenue.

We have given thoughtful consideration and are of the view that as the delay in filing of the present appeal by the Revenue has crept in for bona fide reasons and unavoidable circumstances, the same merits to be condoned. Our aforesaid view is supported by the recent decision of the Hon'ble Supreme Court in the case of Vidya Shankar Jaiswal vs. The Income Tax Officer, Ward-2, Ambikapur in Special Leave Petition (Civil) Nos. 26310- 26311/2024, dated 31st January, 2025. The Hon'ble Apex Court in its aforesaid order had observed that a justice-oriented and liberal approach should be adopted while considering the application filed by an appellant seeking condonation of the delay involved in filing the appeal.

Coming to the merits of the case, we shall now first deal with the grievance of the Revenue wherein it has assailed the deletion of the transfer pricing adjustment of Rs.2,87,29,344/- relating to the export of coffee to the Associated Enterprises.

Ms. Uppaluri Meena, Ld. Senior Departmental Representative (for short, “Sr. DR”) supported the order of the AO/TPO. It was submitted by her that the assessee company had adopted the Comparable Uncontrolled Price ("CUP") Method by taking the transactions entered into by its foreign Associated Enterprises (AEs) with independent third parties as comparable uncontrolled transactions. Elaborating on her contention, the Ld. Sr. DR submitted that Rule 10B(1)(a) contemplates comparison of the price charged by the tested party in a controlled transaction with the price charged in a comparable uncontrolled transaction entered into by the same enterprise or by another enterprise, provided reliable adjustments can be made for material differences. It was submitted that as the assessee company had failed to demonstrate comparability with reference to the product specifications, contractual terms, quantity, timing of transactions, geographical markets and other economically relevant circumstances, therefore, the TPO was fully justified in rejecting the CUP Method and adopting the Transactional Net Margin Method ("TNMM") as the Most Appropriate Method (“MAM”). The Ld. Sr. DR further submitted that the assessee company was admittedly a newly established manufacturer, operating during the first year of commercial production and had suffered substantial losses. The Ld. Sr. DR submitted that the assessee’s plea regarding under-utilization of capacity could not justify adjustment in the profit level indicator (PLI) of the assessee company itself. It was submitted that if at all any adjustment was permissible, the same had to be made only in the margins of comparable companies and not in the results of the tested party. Carrying her contention further, the Ld. Sr. DR relied upon the reasoning recorded by the TPO in support of the proposition that as the assessee company had failed to furnish reliable data regarding capacity utilization of the comparable companies, therefore, no adjustment could be granted.

The Ld. Sr. DR as per the leave of the Bench had placed on record her written submissions, wherein she had supported the orders of the AO/TPO and submitted that the TPO had acted strictly within the statutory framework while rejecting the assessee’s flawed Comparable Uncontrolled Price (“CUP”) analysis and benchmarking the international transaction of sale of coffee to its Associated Enterprise (“AE”) by applying the Transactional Net Margin Method (“TNMM”). It is submitted by her that under Rule 10B(2)(a) to (d) of the Income-tax Rules, 1962, the comparability of an international transaction with an uncontrolled transaction is required to be examined having regard to four fundamental parameters, viz. (i) the specific characteristics of the property transferred or services provided; (ii) the functions performed, taking into account the assets employed and risks assumed by the respective parties; (iii) the contractual terms, whether express or implied, governing the allocation of responsibilities, risks and benefits between the parties; and (iv) the prevailing market conditions, including the geographical location, size of the market, level of competition, economic development and the regulatory environment. It is further stated that the CUP Method demands the highest degree of comparability amongst all the prescribed transfer pricing methods and that where material differences exist between the controlled and uncontrolled transactions, and such differences cannot be reliably adjusted, the CUP Method necessarily fails the statutory test and is liable to be rejected.

Elaborating further on her contention, the Ld. Sr. DR had referred to the Transfer Pricing Study Report (“TPSR”) prepared by the assessee company, and submitted that during the relevant previous year the assessee company had carried out total sales of coffee amounting to Rs. 21,93,52,328/-, out of which sales aggregating to Rs. 29,24,659/- were made to an unrelated foreign entity, viz., M/s Golden Chemical SDN. BHD. According to the Ld. Sr. DR, the assessee company had treated the aforesaid transaction with the unrelated party as an uncontrolled transaction and had benchmarked the international transaction with its AE by adopting the said internal comparable. It is further stated that the assessee company had subsequently departed from the aforesaid position before the TPO by contending that the comparison was, in fact, between the transactions entered into by its AE with the assessee company and the transactions undertaken by the AE with third parties for the purposes of applying the CUP Method. It was submitted that such a stand was wholly inconsistent with the TP Study Report. As stated by the Ld. Sr. DR, the comparable, viz, M/s Vayhan Coffee Limited, did not even find mention in the TP Study Report prepared by the assessee company. It is further stated that a perusal of the invoices produced by the assessee company clearly revealed several material differences between the controlled and uncontrolled transactions, which, according to the Ld. Sr. DR, were in clear violation of the comparability parameters prescribed under Rule 10B(2) of the Income-tax Rules, 1962, thereby rendering the direct price comparison as unreliable. In this regard, reference was made to the observations recorded by the TPO in the show cause notice dated 03.10.2019.

The Ld. Sr. DR had further stated that the invoices pertaining to M/s Vayhan Coffee Limited (supra) reflected the supply of products described as “100% Pure Agglomerated Instant Coffee - Type AUU-X-001” and “100% Pure Spray Dried Instant Coffee - Type AUU-Y-001”, whereas, as per the TP Study Report, the assessee company was engaged only in the manufacture of pure spray- dried instant coffee using Robusta coffee beans. It was, therefore, contended that the products being compared were materially different in terms of their characteristics, thereby defeating the very foundation for applying the CUP Method.

The Ld. Sr. DR had further stated in her written submissions that the assessee’s TP Study Report is conspicuously silent regarding the nature of coffee beans used by M/s Vayhan Coffee Limited. (supra). It is stated that in the absence of any material demonstrating that the products dealt with by the assessee company and the alleged comparable were identical in terms of their intrinsic characteristics, the very foundation of the CUP analysis stood vitiated. Apart from the aforesaid, the Ld. Sr. DR had pointed out significant differences in the destination ports and the geographical markets of the transactions sought to be compared. Elaborating upon her said contention, it is stated that the respective transactions were destined for different geographical markets, viz., Malaysia in the case of the assessee company and Russia/UAE in the case of the alleged comparable. Consequently, freight charges, insurance costs, port handling expenses, local port duties, market demand and other economic conditions materially varied from one destination to another. According to the Ld. Sr. DR, any comparison of prices pertaining to shipments made to different geographical markets, without carrying out reliable and quantifiable adjustments for such differences, would be contrary to Rule 10B(2)(d) of the Income-tax Rules, 1962.

It was further submitted that the commercial invoices pertaining to M/s Vayhan Coffee Limited (supra) reflected the final destination as St. Petersburg, Russia, via Pasir Gudang, whereas the assessee’s exports were destined for Malaysia. Likewise, while the port of loading in the case of the alleged comparable was Chennai Port, the assessee’s exports were routed through both Chennai Port and Krishnapatnam Port. The Ld. Sr. DR submitted that these variations in the ports of loading, destination ports and geographical markets had a direct bearing on pricing and, therefore, rendered the transactions incomparable for the purposes of applying the CUP Method.

The Ld. Sr. DR had further stated that the assessee company had sought to benchmark its international transactions by relying upon transactions undertaken by its AE with independent third parties, despite not possessing any primary or verifiable information relating to such third-party transactions. According to her, the assessee company had failed to establish, viz. (i) the origin and quality of the coffee supplied by the independent third parties, as coffee grown under different climatic and geographical conditions commands different prices; and (ii) the contractual terms governing the third-party transactions, including payment terms, delivery schedules, quantity commitments and other commercial conditions, all of which materially influence the pricing of goods.

The Ld. Sr. DR in her written submissions had also relied upon the daily and monthly price bulletins published by the Coffee Board of India, which, according to her, constitute authentic statutory data reflecting prevailing market realities. Referring to the said material, it is stated that the Coffee Board data demonstrated, viz. (i) substantial price variation amongst different varieties of coffee; (ii) significant intra-day and monthly price fluctuations; and (iii) material differences between Free-on-Board (“FOB”) prices in India and prices prevailing at destination ports. Accordingly, it is stated by the Ld. Sr. DR that the aforesaid market realities completely undermined the simplistic benchmarking exercise undertaken by the assessee company

The Ld. Sr. DR had also objected to the assessee’s selection of the foreign AE as the tested party. Referring to the aforesaid facts and material, it is stated by her that, in view of the serious deficiencies noticed in the assessee’s CUP analysis, the TPO had rightly rejected the CUP Method and adopted the TNMM, as the latter effectively addressed the deficiencies inherent in the assessee’s benchmarking analysis by, viz., (i) tolerating minor product variations; (ii) neutralising geographical and market differences; (iii) overcoming the absence of reliable third-party process and contractual data; and (iv) insulating the benchmarking exercise from market volatility.

The Ld. Sr. DR in her written submissions had further opposed the assessee’s alternate plea seeking adjustment for under-utilization of capacity in the event the TNMM was upheld. It was submitted that Rule 10B(1)(e)(iii) permits only such adjustments as materially affect the net profit margin earned in comparable uncontrolled transactions. According to the Ld. DR, the assessee company could not seek an adjustment merely on the basis of its own operational profile as reflected in its TP Study Report. The Ld. Sr. DR had submitted that the CUP Method adopted by the assessee company be rejected and the TNMM adopted by the TPO be upheld.

Per contra, Sri. Vikram Vijayaraghavan, Advocate, Ld. Authorized Representative (for short, “AR”) for the assessee company, supported the order of the CIT(A). It was submitted by him that the assessee company had adopted the CUP Method consistently in its TP Study Report and had furnished complete documentation demonstrating that the prices charged by the Associated Enterprises (AEs) while procuring identical coffee from independent suppliers constituted the best available comparable uncontrolled prices. Elaborating on his contention, the Ld. AR submitted that as the coffee exported by the assessee company was a commodity product whose pricing was substantially dependent upon internationally prevailing coffee prices, quality parameters and market conditions, the CUP represented the most direct and reliable method of benchmarking the transaction. It was further submitted that the TPO had rejected the CUP Method merely on technical considerations without demonstrating that the alleged differences materially affected the price. According to the learned AR, Rule 10B itself recognizes that reasonably accurate adjustments may be made wherever differences exist and mere existence of differences does not justify rejection of CUP. The Ld. AR submitted that, as the assessee company had commenced commercial production only during the relevant previous year and was operating at substantially lower capacity, the comparison under TNMM with long-established manufacturers, without granting suitable capacity utilization adjustment, would inevitably produce infeasible and distorted results. The Ld. AR submitted that the CIT(A) was justified in deleting the adjustment.

The assessee company in its rejoinder to the written submissions filed by the Revenue, has stated that the provisions of Rule 10B(1)(a) governing the CUP Method do not contemplate the concept of a “tested party”. It was submitted that Rule 10B(1)(a) merely requires comparison of the price charged or paid in a comparable uncontrolled transaction with the price charged or paid in the controlled transaction. The assessee company had placed reliance on Paragraph 3.24 of the OECD Transfer Pricing Guidelines, wherein it is recognized that a comparable uncontrolled transaction may either be an internal comparable or an external comparable, including a transaction between one of the parties to the controlled transaction and an independent enterprise. It was, therefore, contended that since the CUP Method is founded upon a direct comparison of prices, it necessarily provides a more reliable determination of the arm’s length price than the TNMM wherever reliable comparables are available.

The assessee company has further stated in its rejoinder that complete documentary evidence was furnished before the TPO as well as the CIT(A) to establish direct product comparability, including invoice-wise details of its own transactions and the corresponding transactions between its AE and independent third parties. According to the assessee company, such internal CUP data constituted the most reliable benchmark for determining the arm’s length price.

Responding to the Revenue’s objections regarding differences in date, geography and volume, the assessee company submitted that the invoices relied upon for benchmarking pertained to transactions undertaken during the same period, namely October, 2015 to January, 2016, thereby ensuring that the prevailing market conditions and pricing cycles remained comparable in terms of the OECD Guidelines.

As regards geographical comparability, the assessee company in its rejoinder has stated that the exports made to its AE and the corresponding sales made by independent suppliers to the same AE originated from India and were destined for neighboring markets such as Russia and Ukraine. It was contended that the mere fact that the destination ports were not identical could not, by itself, render the transactions incomparable, particularly when the exports were destined for substantially similar geographical regions. It is further stated that the quantities involved in the respective transactions ranged between approximately 14,000 kilograms and 18,000 kilograms, thereby eliminating any material volume differences. The assessee company has also emphasized that the prices charged by it to its AE were, in fact, higher than the prices at which the independent suppliers had sold comparable products to the same AE, which itself demonstrated that the assessee’s international transactions were at arm’s length. The assessee company, therefore, contended that the Revenue’s objections regarding differences in date, geography and volume were unfounded and contrary to the material available on record.

Coming to the issue of product comparability, the assessee company has stated, in its rebuttal to the Revenue’s contentions, that although different grades and varieties of coffee are commercially available in the market, the CUP analysis undertaken by it was confined only to transactions involving the same variety of instant coffee, namely, 100% pure spray-dried instant coffee manufactured from Robusta coffee beans, as evidenced from the corresponding invoices placed on record. It was, therefore, contended that the requirement of product comparability stood fully satisfied. Elaborating further, the assessee company has stated that during the relevant previous year it was engaged only in the manufacture of pure spray-dried instant coffee using Robusta coffee beans. It is pointed out that the manufacture of freeze-dried coffee was introduced by the assessee company only subsequently during F.Y. 2021-22. It was, therefore, contended that the observations of the Revenue regarding product differences were factually incorrect.

Carrying its contentions further, it is stated by the assessee company that agglomerated instant coffee is itself a form of spray-dried coffee which undergoes an additional process involving the application of steam and water, whereby the powdered coffee is converted into granulated form. It is stated that owing to the additional processing involved, agglomerated coffee ordinarily commands a higher market price than conventional spray-dried instant coffee. On the basis of the aforesaid factual position, it was contended that the comparable invoices relied upon included both spray-dried instant coffee and agglomerated instant coffee, both of which were directly comparable with the products exported by the assessee company.

Elaborating upon its aforesaid submission, the assessee company had stated that, as per its internal product classification, “100% Pure Spray-Dried Instant Coffee” was designated as “Type-1A”, whereas “100% Pure Agglomerated Instant Coffee” was classified as “Type-2D”. It was, therefore, submitted that there existed no material product difference so as to warrant rejection of the CUP Method. It was stated that a perusal of the invoices clearly established that like products had been compared on a consistent basis and, therefore, the Revenue’s objection regarding product comparability was wholly misconceived.

Summing up its submissions on the applicability of the CUP Method, the assessee company in its rejoinder had contended that the uncontrolled transactions relied upon by it satisfied the tests of comparability with regard to timing, volume, geography and product characteristics and that no material adjustments were warranted. It was, therefore, submitted that the Revenue had erred in rejecting the CUP Method, which had rightly been selected by the assessee as the Most Appropriate Method (“MAM”). Also, the assessee company had rebutted the Revenue’s objection regarding the selection of the foreign AE in the context of the CUP analysis. It was submitted that what is material under the CUP Method is whether the uncontrolled transaction relied upon is comparable to the controlled transaction and whether any material differences can be reasonably adjusted. According to the assessee company, once comparability in terms of product, timing, quantity, geographical market and contractual conditions had been demonstrated, the CUP analysis could not be rejected merely because the comparable uncontrolled transaction involved sales by an independent third party to the assessee’s AE.

It is further stated by the assessee company that the CUP provisions contemplate a transaction-level comparison and not a party-level comparison. Accordingly, where the AE is one of the parties to both the controlled transaction and the comparable uncontrolled transaction, purchases of identical products made by the AE from independent third parties constitute a valid internal CUP for benchmarking the purchases made by the same AE from the assessee company. The assessee company, therefore, reiterated that the Revenue’s objection regarding the adoption of the CUP Method and the concept of the foreign AE as the tested party was misplaced, as the CUP analysis focuses exclusively on transaction-level price comparability and not on the selection of any particular tested party.

Alternatively, it is stated by the assessee company that without prejudice to its primary contention that the CUP Method constituted the “Most Appropriate Method”, in the event the TNMM was to be upheld, an appropriate adjustment on account of under-utilization of capacity ought to be granted. It is submitted that the year under consideration was the first year of commercial operations of the assessee company and that the manufacturing facility had operated only for about five months during the relevant previous year, resulting in capacity utilization of merely about 39%. According to the assessee company, the low capacity utilization had materially distorted its cost structure and, consequently, its operating margins.

The assessee company had further submitted that the comparables selected by the TPO were long-established concerns having been in operation for more than two decades, whereas it was a newly established manufacturing entity in its first year of production. It was, therefore, contended that unless a suitable adjustment for under-utilization of capacity was granted while applying the TNMM, the comparison would not satisfy the mandate of Rule 10B of the Income-tax Rules, 1962, and would not result in a proper determination of the arm’s length price.

We have given thoughtful consideration to the contentions advanced by the Ld. Authorized Representatives of both parties regarding the transfer pricing adjustment made by the AO/TPO relating to the export of coffee to the Associated Enterprises, which, thereafter, has been vacated by the CIT(A).

At the threshold, we may herein observe that Chapter X of the Act does not prescribe any precedence amongst the recognized methods for determination of the Arm's Length Price (ALP). In fact, Section 92C of the Act read with Rule 10B merely requires adoption of the method which, having regard to the nature of the transaction, the class of associated enterprises (AEs), the functions performed, assets employed, risks assumed and availability of reliable data, provides the most reliable measure of an arm's length outcome. Therefore, neither CUP nor TNMM enjoys any statutory precedence over the other method for benchmarking international transactions, and in our view the selection of the Most Appropriate Method (MAM) necessarily depends upon the facts of each case.

In our view, the CUP Method is the most direct method of determining the Arm's Length Price where reliable comparable uncontrolled prices are available because it compares the price itself rather than the resultant profits. However, CUP also requires a relatively high degree of comparability and any material differences affecting price must either be eliminated or reasonably adjusted. On the other hand, TNMM is generally applied where exact product comparability is difficult but functional comparability is available.

Coming to the facts of the present case, we find that the TPO had rejected the CUP Method primarily on three grounds, viz, (i) the comparable transactions relied upon by the assessee company were purchases made by the foreign AEs from independent suppliers and not uncontrolled transactions entered into by the assessee company itself; (ii) strict comparability regarding volume, timing, geographical market and product characteristics had not been established; and (iii) the assessee company did not have any internal comparable uncontrolled transactions.

We have given thoughtful consideration and are unable to subscribe to the proposition that merely because the uncontrolled transactions were entered into by the foreign AEs with independent suppliers, the CUP Method automatically becomes inapplicable. We say so because Rule 10B does not mandate that only internal comparables are permissible, as external comparable uncontrolled transactions can equally constitute reliable CUPs provided sufficient information exists to establish comparability and suitable adjustments can reasonably be made. We are of the firm conviction that the real test is reliability of comparison and not the identity of the contracting party. Apart from that, we find merit in the CIT(A) observation that the TPO has not demonstrated how the alleged differences materially influenced the prices so as to render the CUP analysis wholly unreliable. In our view, the rejection of CUP cannot rest upon general observations regarding differences in geography, volume or timing without establishing that such differences materially affected the price and were incapable of adjustment, as Rule 10B itself contemplates reasonably accurate adjustments wherever differences materially affect comparability.

We also find considerable force in the observation of the CIT(A) regarding the peculiar facts involved in the case of the assessee company, viz. (i). the assessee company had admittedly commenced commercial production only during the relevant previous year; and (ii). it was operating at significantly lower capacity during its initial year of operations. We find that in transfer pricing jurisprudence it is well recognized that under-utilization of installed capacity constitutes an economically relevant factor affecting profitability. Accordingly, where TNMM is adopted for benchmarking, reasonable adjustment is ordinarily required so that abnormal fixed costs attributable to initial years of production do not distort comparison with mature manufacturing entities operating at normal capacity. Although in various judicial pronouncements it has consistently been held that such adjustment should ordinarily be made in the margins of comparable companies rather than in the tested party, but, as in the case of the assessee company before us, the practical difficulty frequently arises on account of non- availability of reliable capacity utilization data relating to comparables. In the present case, the TPO had himself accepted that no reliable information regarding capacity utilization of the comparable companies was available. However, we find that the TPO, despite so observing, after having rejected the CUP Method, had proceeded to apply TNMM, but he adopted the margins of long-established manufacturers without making any meaningful adjustment for the peculiar economic circumstances of the assessee company. In our view, such comparison cannot be regarded as yielding a reliable Arm's Length result.

We may further observe that another aspect which deserves to be considered is that the TPO has proceeded substantially on the assumption that since the AEs had procured coffee from third parties during the relevant period, the prices paid to the assessee company necessarily required adjustment. We are unable to concur with the said view of the TPO, as commercial realities governing international trade are considerably more complex, and procurement decisions may depend upon availability of quantities, quality specifications, contractual commitments, delivery schedules, customer requirements and several other commercial considerations. In our view, unless it is demonstrated that the transactions are not identical in all material respects, mere existence of third-party purchases cannot by itself justify substitution of the assessee's transfer price.

We also find that the CIT(A) has categorically observed that the assessee company had furnished transfer pricing documentation explaining the CUP analysis, and the Revenue has not been able to demonstrate that the said factual finding recorded by the said first appellate authority is either incorrect or unsupported by the record. Also, the Ld. DR has not placed before us any material to establish that the comparable prices relied upon by the assessee company were inherently unreliable or incapable of suitable adjustment. At this stage, we deem it apposite to observe that it is a settled principle that determination of the ALP cannot proceed on mere suspicion or broad assumptions and thus, where the Revenue seeks to discard the transfer pricing methodology consistently maintained by the taxpayer, the burden lies upon the TPO to demonstrate, on the basis of cogent material, that the method adopted does not produce a reliable measure of the arm's length result. However, we find that in the present case before us, the reasons given by the TPO for rejecting the CUP Method are largely general in nature and do not establish that the benchmarking undertaken by the assessee company suffered from any such serious defects as to warrant complete substitution by TNMM.

Considering the totality of the facts and circumstances involved in the present case, we are of the considered view that the CIT(A) was justified in holding that the transfer pricing adjustment of Rs. 2,87,29,344/- could not be sustained. We, thus, in terms of our aforesaid observations, uphold the order of the CIT(A), who, in our view, has rightly deleted the said adjustment.

Before parting with this issue, it would be apposite to observe that, as Section 92B r.w. Rule 10B, which regulates the selection of the Most Appropriate Method under Chapter X of the Act, does not prescribe any order of preference amongst the prescribed methods. We say so for the reason that the statute merely requires adoption of the method which, having regard to the nature of the international transaction and the availability of reliable comparable data, provides the most reliable measure of the Arm's Length Price (ALP). Therefore, once the assessee has maintained transfer pricing documentation justifying the selection of a particular method, the same cannot be discarded merely because another method is also capable of application, and the TPO is required to demonstrate, on the basis of cogent reasons, that the method adopted by the assessee does not lead to a reasonably reliable determination of the Arm's Length Price. Also, it is equally well settled that where reliable comparable uncontrolled prices are available, the Comparable Uncontrolled Price ("CUP") Method occupies a preferred position since it directly compares the price charged in the controlled transaction with the price charged in a comparable uncontrolled transaction. Unlike the Transactional Net Margin Method ("TNMM"), which compares net margins after being influenced by several operational variables, the CUP Method examines the very price of the transaction itself. As a result thereof, where reasonably reliable comparable prices exist, and material differences are either insignificant or capable of reasonably accurate adjustment, the CUP Method ordinarily provides the most direct measure of the Arm's Length Price.

We shall now deal with the Revenues grievance that the CIT(A) has erred in law and facts of the case in deleting the Transfer Pricing adjustment of Rs.2,66,94,822/- made by the AO/TPO towards interest paid by the assessee company on External Commercial Borrowings (ECBs).

Succinctly stated, the assessee company had availed External Commercial Borrowings (ECBs) from its Associated Enterprise (AE) and paid interest thereon at 6 months LIBOR plus 500 basis points. The assessee company had benchmarked the transaction under the CUP Method and claimed that the rate was within the ceiling prescribed by the Reserve Bank of India under its Master Circular governing ECBs. However, the TPO did not accept the benchmarking adopted by the assessee. According to him, the RBI guidelines merely prescribed the maximum permissible ceiling under the foreign exchange regulations and could not be adopted for determining the ALP under the Transfer Pricing provisions. The TPO, proceeding on that premise, adopted LIBOR plus 200 basis points as the arm's length rate, which, according to him, was consistently being followed by the Department in similar cases. Consequently, the TPO determined an excess payment of interest amounting to Rs.2,66,94,822/- and proposed adjustment under section 92CA of the Act.

As is borne from the record, the assessee company submitted before the CIT(A) that the borrowing was an unsecured long-term foreign currency loan carrying substantially higher risk. Elaborating further on its contention, it was submitted that the RBI Master Circular itself recognized that higher spreads were permissible depending upon the maturity period and risk profile of the borrowing. It was also submitted that the subject borrowing by the assessee company carried a tenure exceeding five years and the RBI permitted a spread of 500 basis points over LIBOR in such cases. The assessee company had also placed reliance upon the decision of the ITAT, Hyderabad in DCIT v. Devgen Seeds & Crop Technology Pvt. Ltd., ITA No. 399/Hyd/2016, dated 24th March, 2017, wherein interest at LIBOR plus 500 basis points had been accepted as being at arm's length.

As is discernible from the record, the CIT(A), after considering the rival submissions, accepted the assessee's contention. It was observed by the CIT(A) that pricing of foreign currency loans depends upon several commercial factors including tenure, security, risk perception, market conditions and the bargaining power of the contracting parties. The CIT(A) further observed that the RBI guidelines themselves recognized varying spreads depending upon the tenure of the borrowing and therefore the adoption of a uniform spread of 200 basis points by the TPO, without undertaking any comparability analysis, was not justified. Accordingly, the CIT(A), after following the order of the Tribunal DCIT v. Devgen Seeds & Crop Technology Pvt. Ltd., (supra) concluded that the assessee's benchmarking at LIBOR plus 500 basis points was within the Arm's Length Price and accordingly directed deletion of the entire adjustment.

The Ld. Sr. DR vehemently supported the order of the TPO. It was submitted by her that RBI regulations operate in an entirely different field governing external commercial borrowings under the foreign exchange law and cannot be imported into Transfer Pricing analysis. According to the Ld. Sr. DR, the determination of Arm's Length Price of the interest paid by the assessee company on ECB’s has to be made strictly in accordance with Chapter X of the Act and the Rules framed thereunder. It was further submitted that the CIT(A) had erred in relying upon RBI guidelines without conducting a proper comparability analysis as contemplated under Rule 10B.

Per contra, the learned AR supported the CIT(A) order. It was submitted by him that the CIT(A) has not merely relied upon the RBI circular but has independently considered the commercial realities governing long-term unsecured foreign currency borrowings. It was submitted that no comparable uncontrolled transaction had been brought on record by the TPO to justify the adoption of LIBOR plus 200 basis points. Elaborating further on his contention, the Ld. AR submitted that the issue is squarely covered by the decision of the jurisdictional tribunal, i.e., ITAT, Hyderabad in DCIT v. Devgen Seeds & Crop Technology Pvt. Ltd., (supra) wherein interest at LIBOR plus 500 basis points on similar borrowings had been accepted as being at arm's length.

We have given our thoughtful consideration to the contentions advanced by the Ld. Authorized Representatives of both parties on the aforesaid issue of determining the APLP of interest on ECB’s.

Admittedly, it is a matter of fact borne from record that the loan in question was denominated in foreign currency. We find that it is well settled by a long line of judicial precedents that where the loan is advanced or borrowed in foreign currency, the arm's length rate of interest has to be determined with reference to the currency in which the borrowing is denominated and not with reference to domestic lending rates prevailing in India. Our aforesaid view is fortified by the judgments of the Hon'ble High Court of Delhi in CIT v. Cotton Naturals (I) Pvt. Ltd. (2015) 231 Taxman 401 (Delhi) and that of the Hon'ble High Court of Bombay in CIT v. Tecnimont (P.) Ltd. (2018) 96 taxmann.com 223 (Bom.).

We further find that the TPO has not relied upon any uncontrolled comparable transaction demonstrating that an independent lender would have extended a similar long-term unsecured foreign currency loan at only LIBOR plus 200 basis points. In our view, the adoption of such spread appears to be based on an internal departmental practice rather than on any comparability analysis contemplated under Rule 10B of the Income-tax Rules, 1962. We are also unable to agree with the Revenue that the CIT(A) has mechanically relied upon the RBI Master Circular. Rather, a careful reading of his order reveals that the RBI guidelines have only been referred to as one of the relevant commercial indicators, recognizing that the permissible spread varies depending upon the tenure and risk profile of the borrowing. In fact, the ultimate conclusion of the CIT(A) is founded upon the commercial characteristics of the transaction coupled with the binding decision of the jurisdictional Tribunal in DCIT v. Devgen Seeds & Crop Technology Pvt. Ltd., (supra).

We find that it is trite law that Transfer Pricing provisions require determination of Arm's Length Price (ALP) on the basis of comparable uncontrolled conditions, and commercial factors such as tenure, security, currency risk, credit risk and market conditions materially influence the pricing of international borrowings. We are of the view that unless these differences are analyzed, adoption of a standard spread for every foreign currency borrowing would defeat the very object of comparability analysis prescribed under Rule 10B.

Coming to the facts of the present case before us, we find that the Revenue has not brought any material on record to demonstrate either that the findings recorded by the CIT(A) are factually incorrect or that the decision of the jurisdictional Tribunal relied upon by the CIT(A) has been reversed or distinguished on identical facts. We are of firm conviction that judicial discipline demands that binding precedents of the jurisdictional Tribunal be followed in the absence of any contrary decision of the jurisdictional High Court or the Hon'ble Supreme Court. In these circumstances, we do not find any reason to interfere with the well-reasoned findings recorded by the CIT(A) and accordingly uphold the deletion of the adjustment of Rs.2,66,94,822/- made by the AO/TPO towards interest on External Commercial Borrowings.

We shall now take up the Revenue’s grievance that the CIT(A) has erred in vacating the TP adjustment made by the AO/TPO towards interest on delayed realization of receivables from the Associated Enterprises.

Ostensibly, the TPO observed that an amount of Rs.18,31,26,992/- was outstanding towards the assessee company from its AEs as on 31.03.2016. It was observed by him that the assessee company had neither benchmarked the outstanding receivables nor charged any interest on the delayed realization of export proceeds. The TPO, referring to the “Explanation” inserted to Section 92B of the Act by the Finance Act, 2012 with retrospective effect from 01.04.2002, held that outstanding trade receivables constituted a separate international transaction requiring independent benchmarking. Thereafter, the TPO observed that although some invoices mentioned a credit period of 120 days, there was no uniformity in the contractual terms governing realization of sale proceeds. Accordingly, the TPO, following the decision of the ITAT, Bangalore Bench in Logix Micro Systems Ltd., Bangalore Vs. ITO, Bangalore, IT (TP) A No. 423 & 524/Bang/2009, dated 07/10/2010, observed that a reasonable credit period of sixty days should be allowed and any realization beyond such period represented an independent financing arrangement. For benchmarking the transaction, the TPO adopted SBI short-term deposit rates and determined an adjustment of Rs.1,12,854/-.

As is borne from the orders of the authorities below, the assessee company submitted before the CIT(A) that the receivables arose directly from the principal international transaction of sale of coffee and, therefore, could not be segregated as an independent international transaction. It was further submitted that the transaction of sale had itself been benchmarked under the Transfer Pricing provisions and no separate adjustment was warranted. Alternatively, it was submitted that if any adjustment was to be made, the interest rate should necessarily be benchmarked with reference to LIBOR since the receivables were denominated in foreign currency.

The CIT(A), after considering the submissions of the assessee company, observed that subsequent to the insertion of the “Explanation” to Section 92B of the Act, the legal position regarding delayed receivables had undergone considerable evolution. The CIT(A), relying upon the recent decision of the ITAT, Hyderabad in OSI Systems (P.) Ltd. v. DCIT (2024) 168 taxmann.com 22 (Hyderabad - Trib.), observed that the delayed receivables constituted a separate international transaction liable for independent benchmarking. However, in the same decision, the CIT(A) directed the AO to adopt LIBOR plus 200 basis points after allowing a normal credit period of 60 days, instead of adopting the SBI short- term deposit rates.

The Revenue being aggrieved with the direction of the CIT(A) substituting SBI deposit rates with LIBOR plus 200 basis points, has assailed the same before us.

The Ld. Sr. DR submitted that the assessee being an Indian company would have earned interest by placing its funds with Indian banks and, therefore, SBI short-term deposit rates represented the correct Comparable Uncontrolled Price. It was submitted that the CIT(A) has erred in relying upon LIBOR without undertaking any fresh comparability analysis.

Per Contra, the Ld. AR, on the other hand, supported the CIT(A) order and submitted that the issue is squarely covered by the decision of the ITAT, Hyderabad in OSI Systems (P.) Ltd. v. DCIT (2024) 168 taxmann.com 22 (Hyderabad - Trib.). The Ld. AR submitted that, as the receivables were admittedly denominated in foreign currency, they were therefore consistent with the law laid down by the Hon'ble High Court of Delhi in CIT Vs. Cotton Naturals (I) Pvt. Ltd. (2015) 55 taxmann.com 523 (Delhi) and the Hon'ble High Court of Bombay in PCIT Vs. In Tecnimont (P.) Ltd. (2018) 304 CTR 145 (Bom), the appropriate benchmark could only be LIBOR-based rates, not domestic deposit rates.

We have given thoughtful consideration to the aforesaid issue, i.e., determination of the ALP of the interest on the outstanding receivables.

At the outset, we find that the CIT(A) has followed the decision of the coordinate bench of the ITAT, Hyderabad in OSI Systems (P.) Ltd. v. DCIT (2024) 168 taxmann.com 22 (Hyderabad - Trib.), wherein after considering the “Explanation” to Section 92B as well as the decisions of the Hon’ble High Court of Delhi in CIT Vs. Cotton Naturals (I) Pvt. Ltd. (2015) 55 taxmann.com 523 (Delhi) and the Hon'ble High Court of Bombay in PCIT Vs. Tecnimont (P.) Ltd. (2018) 304 CTR 145 (Bom), it was held that delayed realization of receivables constitutes a separate international transaction requiring independent benchmarking. The Tribunal had further held that where the receivables are denominated in foreign currency, the appropriate benchmark would be LIBOR plus 200 basis points, after allowing a reasonable credit period of sixty days.

We have given thoughtful consideration and find ourselves in agreement with the aforesaid view. Ostensibly, the underlying principle emerging from the decisions of the Hon’ble High Court of Delhi in CIT Vs. Cotton Naturals (I) Pvt. Ltd. (2015) 55 taxmann.com 523 (Delhi) and the Hon'ble High Court of Bombay in PCIT Vs. Tecnimont (P.) Ltd. (2018) 304 CTR 145 (Bom) is that the arm's length interest rate must correspond to the currency in which the underlying debt is denominated. Once the receivables arise from export transactions denominated in foreign currency, application of domestic Indian deposit rates would not correctly reflect the arm's length conditions prevailing in comparable uncontrolled transactions.

Insofar as the claim of the Revenue that SBI deposit rates should be adopted merely because the assessee company is an Indian entity, the same cannot be accepted. As the Transfer Pricing provisions require benchmarking with reference to comparable uncontrolled conditions governing the particular international transaction, and economic characteristics of a foreign currency receivable are fundamentally different from those of a domestic rupee deposit, the two cannot be equated for determining the Arm's Length Price (ALP).

Apart from that, we find that the Revenue has not placed before us any judicial precedent of the jurisdictional High Court or the Hon'ble Supreme Court taking a view contrary to that adopted by the ITAT, Hyderabad in OSI Systems (P.) Ltd. v. DCIT (supra). Accordingly, in the absence of any contrary binding authority, judicial consistency requires us to follow the coordinate Bench decision, particularly when the facts before us are substantially similar.

We, thus, in terms of our aforesaid observations, are of the considered view that the CIT(A) was right on law and facts of the case in directing the AO/TPO to compute the adjustment, if any, by adopting LIBOR plus 200 basis points after allowing the normal credit period of sixty days, in place of SBI short-term deposit rates adopted by the TPO.

We, therefore, find no infirmity in the order of the CIT(A) on the subject issue, and uphold the same.

In the result, the appeal filed by the Revenue being devoid and bereft of any substance is dismissed.