3M ELECTRO AND COMMUNICATIONS INDIA PRIVATE LIMITED,BANGALORE vs. DCIT, PONDICHERRY

आयकर अपील�य अ�धकरण, ‘डी’ �यायपीठ, चे�नई IN THE INCOME TAX APPELLATE TRIBUNAL ‘D’ BENCH, CHENNAI �ी जॉज� जॉज� के, उपा�य� एवं �ी एस.आर.रघुनाथा, लेखा सद�य के सम� BEFORE SHRI GEORGE GEORGE K, VICE PRESIDENT AND SHRI S.R. RAGHUNATHA, ACCOUNTANT MEMBER

आयकर अपील सं./ITA No.: 1690/CHNY/2016 �नधा�रण वष�/Assessment Year: 2011-12 The Deputy Commissioner of 3M Electro & Communications Income Tax, Vs. India P. Ltd., Circle-1, Concorde Block, UB City, Puducherry. No.24, Vittal Mallaya Road, Bengaluru – 560 001. PAN: AAACP 1896N (अपीलाथ�/Appellant) (��यथ�/Respondent) & आयकर अपील सं./ITA No.: 746/CHNY/2017 �नधा�रण वष�/Assessment Year: 2012-13 3M Electro & The Deputy Commissioner of Communications India P. Vs. Income Tax, Ltd., Circle-1, Concorde Block, UB City, Puducherry. No.24, Vittal Mallaya Road, Bengaluru – 560 001. PAN: AAACP 1896N (अपीलाथ�/Appellant) (��यथ�/Respondent) राज�व क� ओर से /Revenue by : Shri K. Jayaganesh, CIT �नधा�रती क� ओर से/Assessee by : Shri S.P. Chidambaram, Advocate सुनवाई क� तार�ख/Date of Hearing : 16.06.2026 घोषणा क� तार�ख/Date of Pronouncement : 29.06.2026

- 2 - ITA Nos.1690/CHNY/2016 & & 746/CHNY/2017 3m Electro & Communications India P Ltd आदेश /O R D E R PER GEORGE GEORGE K:

These appeals filed by the Revenue and assessee arise out of the final assessment orders dated 30.12.2015 & 27.01.2017, passed under section 143(3) r.w.s.144C of the Income Tax Act, 1961 (hereinafter called ‘the Act’). The relevant Assessment Years are 2011-12 & 2012-13.

ITA No.1690/CHNY/2016 (Assessment year 2011-12) 3. The appeal filed by the Department is delayed by 129 days. The AO has filed an affidavit stating therein the reasons for belated filing of this appeal. On perusal of the reasons stated in the condonation petition, we are of the view that there is sufficient cause for late filing of this appeal and no latches can be attributed to the Department. Hence, we condone the delay in filing this appeal and proceed to dispose off the appeal on merits.

- 3 - ITA Nos.1690/CHNY/2016 & & 746/CHNY/2017 3m Electro & Communications India P Ltd 4. Brief facts in relation to the above case are as follows: The assessee is a private limited company and is a part of the 3M group, headquartered in the USA. It is a subsidiary company of 3M Communications, France. The assessee is engaged in the manufacture of telecommunication, electrical and electronic products (‘EET’) and trading of filtration and EET products. For the assessment year 2011-12, return of income was filed on 18.11.2011 declaring income of Rs.10,80,01,985/-. The assessment was selected for scrutiny and notice u/s.143(2) of the Act was issued. During the course of assessment proceedings, the case was referred to the Transfer Pricing Officer (TPO) to determine the Arm’s Length Price (ALP) of the international transactions undertaken by the assessee with its AEs. The TPO vide his order dated 23.01.2015 made downward adjustment of Rs.3,02,19,244/- in relation to royalty payment and business support service charges by treating these payments as ‘nil’ (Rs.1,76,98,957/- towards royalty payments and Rs.1,25,20,287/- towards business support charges). On receipt of TPO’s order, the AO passed the final assessment order on 25.02.2015 incorporating the TP adjustment proposed by the TPO. Against the draft assessment order, assessee filed objections before the DRP on 27.03.2015. The DRP vide its order dated 26.11.2015 directed the

- 4 - ITA Nos.1690/CHNY/2016 & & 746/CHNY/2017 3m Electro & Communications India P Ltd AO to delete the TP adjustment proposed by the TPO on both counts namely royalty payment and business support service payments. Pursuant to the DRP’s directions, the impugned final assessment order was passed on 30.12.2015.

- 5 - ITA Nos.1690/CHNY/2016 & & 746/CHNY/2017 3m Electro & Communications India P Ltd 6. Out of the above grounds, Ground Nos.1 & 8 raised by the Revenue are general and no specific adjudication is called for and hence, the same are dismissed. Ground Nos.2 to 5 relates to royalty payment of Rs.1,76,98,957/-, which the TPO treated as ‘nil’ for the purpose of TP adjustment. Ground Nos.6 & 7 relates to the business support services / management service charges of Rs.1,25,20,287/- which was also treated by the TPO as ‘nil’ for the purpose of TP adjustment. We shall adjudicate the above issues as under:

Royalty Payment (Ground Nos.2 to 5) 7. The assessee company had entered into an intellectual property agreement on 01.04.2009 with 3M IFC whereby it was granted the license to carry out the manufacturing activity and market such products under 3M brand. A copy of the agreement has been placed on record at page 78 of Paper Book-I filed in connection with the assessment year 2011-12. It was submitted that the said agreement continued to remain in force during the year under consideration and governed the relationship between the assessee and its AE. The Ld.AR submitted that the assessee operated as a licensed manufacturer and distributor of products under the 3M brand and was substantially dependent upon the technology, technical know-how,

- 6 - ITA Nos.1690/CHNY/2016 & & 746/CHNY/2017 3m Electro & Communications India P Ltd intellectual property and brand support provided by its Associated Enterprise. In consideration of the rights granted under the Intellectual Property Agreement, the assessee paid royalty to 3M USA for the use of such intellectual property in the course of its manufacturing and business operations. It was further submitted that the royalty was paid at rates which were within the limits prescribed by the Reserve Bank of India under Press Note No. 9 (2000). The details of the royalty rates paid by the assessee company to 3M USA and the royalty rates prescribed by the RBI as per Press Note 9, (2000) are detailed below:- Nature Royalty Rate Royalty Rate Charged by 3M Prescribed by RBI USA (Press Note 9, 2000 Series) Use of production intangibles in the 5% of NSV 5% of NSV production of manufactured products (Domestic manufactured products) Use of production intangibles in the 8% of NSV 8% of NSV production of manufactured products (Exported manufactured products) Use of trademark / brand name of the 1% of NSV 1% of NSV foreign collaborator (Domestic Sales)

The Ld.AR further submitted that, in its Transfer Pricing Study, the assessee had aggregated the royalty transaction with its manufacturing segment and benchmarked the combined transactions

- 7 - ITA Nos.1690/CHNY/2016 & & 746/CHNY/2017 3m Electro & Communications India P Ltd under the Transactional Net Margin Method (TNMM). According to the assessee, the payment of royalty was intrinsically and inextricably linked to its manufacturing operations, as the manufacture and sale of products could not have been undertaken without access to the technology, know-how and intellectual property licensed by the AE. Accordingly, the royalty transaction was considered to be closely interrelated with the manufacturing activities and was benchmarked on an aggregated basis. It was contended that the Transfer Pricing Officer (TPO), in the order passed u/s.92CA of the Act dated 27.01.2015, did not reject the assessee’s adoption of TNMM for benchmarking the manufacturing segment, nor did he dispute the arm’s length nature of the overall margins earned by the assessee. However, the TPO proceeded to carve out the royalty payment from the aggregated transactions and determined the Arm’s Length Price thereof at Nil. The primary reasons assigned by the TPO were that the assessee was allegedly not a licensed manufacturer and that adequate details regarding the products in respect of which royalty had been paid were not furnished before him.

- 8 - ITA Nos.1690/CHNY/2016 & & 746/CHNY/2017 3m Electro & Communications India P Ltd (DRP). Upon consideration of the material available on record, including the Intellectual Property Agreement, the DRP observed that the assessee had been granted a valid licence to manufacture and market products under the 3M brand and that the assessee was, in fact, undisputedly utilizing the trademarks, technology and intellectual property belonging to the 3M Group in the course of its business operations. The DRP further noted that the assessee had furnished the relevant details pertaining to the royalty payment, including the basis of computation, the products in respect of which royalty was paid and the corresponding break-up of such payments. The Panel observed that these details were available on record and that the TPO had not brought any material evidence to controvert or disprove the factual submissions made by the assessee. The DRP was therefore of the view that the determination of the Arm's Length Price of the royalty payment at Nil was not supported by any cogent reasoning or comparable analysis. Accordingly, the DRP accepted the contentions of the assessee and directed the Assessing Officer/TPO to delete the transfer pricing adjustment made in respect of the royalty payment.

- 9 - ITA Nos.1690/CHNY/2016 & & 746/CHNY/2017 3m Electro & Communications India P Ltd 9. Aggrieved by the directions issued by the DRP and the consequential relief granted to the assessee, the Revenue is in appeal before the Tribunal. The Ld.DR supported the order of the TPO and submitted that the assessee had failed to furnish any cogent evidence demonstrating the actual receipt of technology, know-how, intellectual property or other intangible assets from its AE for which royalty was paid. Referring to Form No.3CEB and the transfer pricing documentation, the Ld.DR contended that the assessee had not disclosed the nature of the intangible property, details of the rights acquired or the basis for the royalty payment despite specific queries raised by the TPO. The learned DR further submitted that the DRP erred in accepting the assessee's CUP analysis based on the royalty arrangement of Gujarat Fluorochemicals Ltd., as the transaction was not comparable in terms of the nature of intellectual property, contractual terms and pricing mechanism. It was argued that the assessee had failed to establish comparability and therefore the CUP analysis could not be relied upon. The Ld. DR also contended that RBI-approved royalty rates cannot be regarded as a benchmark for determining the arm's length price under the transfer pricing provisions, as RBI guidelines serve a different regulatory purpose and do not substitute the comparability analysis mandated under Rule

- 10 - ITA Nos.1690/CHNY/2016 & & 746/CHNY/2017 3m Electro & Communications India P Ltd 10B of the Income-tax Rules. It was further submitted that reliance placed by the assessee on the transfer pricing order passed in the case of 3M India Limited was misplaced, as each transfer pricing assessment is fact-specific and has to be decided on the basis of the evidence available on record. The Ld.DR emphasized that the TPO had not questioned the commercial expediency of the payment but had determined the ALP at Nil solely on account of the assessee's failure to substantiate the receipt of any technology or intellectual property warranting the royalty payment. Accordingly, it was prayed that the order of the DRP be set aside and the adjustment made by the TPO be restored.

- 11 - ITA Nos.1690/CHNY/2016 & & 746/CHNY/2017 3m Electro & Communications India P Ltd wholly dependent upon its Associated Enterprise for the use of technology, technical assistance, trademarks, brand-related intangibles and other intellectual property rights. According to the Ld.AR, the manufacturing as well as marketing activities of the assessee are intrinsically linked to the technology and intellectual property licensed by the AE. Therefore, the royalty payment forms an integral part of the manufacturing operations and cannot be viewed as a standalone transaction. The Ld.AR further submitted that the assessee had furnished the details of products on which royalty was paid and demonstrated that the products were manufactured and sold under the 3M brand. It was also submitted that similar intellectual property agreements entered into by 3M with its overseas affiliates were placed on record, which established that the royalty charged to the assessee was comparable and, in fact, lower than the rates charged to other group entities.

- 12 - ITA Nos.1690/CHNY/2016 & & 746/CHNY/2017 3m Electro & Communications India P Ltd prescribed under RBI Press Note No.9 (2000 Series), which further supports the arm's length nature of the transaction. The Ld.AR also placed reliance on the decision of the Chennai Bench of the Tribunal in the case of Aban Offshore Ltd., vs. DCIT reported in [2016] 76 taxmann.com 147 (Chennai-Trib) and various other judicial precedents in support of the proposition that where royalty rates are within the range of royalty rate prescribed by the RBI, the royalty payments ought to be accepted at Arm’s length. Accordingly, it was prayed that the order of the DRP deleting the transfer pricing adjustment be upheld.

- 13 - ITA Nos.1690/CHNY/2016 & & 746/CHNY/2017 3m Electro & Communications India P Ltd manufacturing and marketing operations are carried on by utilizing the intellectual property licensed by its AE. Thus, the royalty payment is intrinsically linked to the manufacturing activities of the assessee and cannot be viewed in isolation. We further find that the assessee had benchmarked its manufacturing segment by aggregating the royalty transaction under the TNMM. Significantly, the TPO has not rejected the benchmarking analysis adopted by the assessee nor has he disturbed the arm's length nature of the overall margins earned by the manufacturing segment. Having accepted the profitability of the manufacturing segment under TNMM, the TPO was not justified in carving out a single expenditure item and benchmarking the same separately without demonstrating that such transaction was not closely linked to the manufacturing operations.

- 14 - ITA Nos.1690/CHNY/2016 & & 746/CHNY/2017 3m Electro & Communications India P Ltd circumstances warranting such segregation. The relevant observation of the Tribunal reads as under:- "20.0 We have noted the facts of the present case are akin to those available in judicial precedence discussed herein above. Thus, as the assessee’s business is inextricably link with technology receipt from its AEs and hence the royalty payment which is connected to such technology transfer cannot be segregated and bench marked separately. The judicial precedence discussed hereinabove also support this line of thinking. Accordingly, in respectful compliance to the same, we direct the Assessing Officer to aggregate Royalty Payments and benchmark the same under Transactional Net Margin Method (TNMM)” .”

- 15 - ITA Nos.1690/CHNY/2016 & & 746/CHNY/2017 3m Electro & Communications India P Ltd be sustained. We also note that the DRP, upon examination of the material available on record, has recorded a finding that the assessee was granted license rights to manufacture and market products under the 3M brand and that the relevant details regarding royalty payments were available before the TPO.

6.5 In view of the above discussion, we are of the opinion that the payment is made in accordance with agreement entered into by the parties, which is evident from the record and it was subjected to TDS, disallowance is not justified. Accordingly, we allow the ground raised by the assessee.”

- 16 - ITA Nos.1690/CHNY/2016 & & 746/CHNY/2017 3m Electro & Communications India P Ltd 16. Similar view has been taken by various orders of the Tribunal which are as under:- i. ITAT, Hyderabad in the case of Shakti Hormann (P.) Ltd., vs. ACIT reported in [2025] 174 taxmann.com 427 (Hyderabad – Trib.) ii. ITAT, Bangalore in the case of Walvoil Fluid Power India (P) Ltd., vs. DCIT reported in [2022] 142 taxmann.com 324 (Bangalore – Trib.) iii. ITAT, Ahmedabad in the case of DCIT vs. Invida India (P.) Ltd., reported in 163 taxmann.com 510 (Ahmedabad – Trib) iv. ITAT, Mumbai in the case of ACIT vs. Netafim Irrigation India (P.) Ltd., reported in [2019] 106 taxmann.com 61 (Mumbai-Trib)

Business Support Services (Ground Nos.6 & 7) 18. The assessee vide agreement dated 01.04.2009, had entered into business support services. Copy of the said agreement is placed on record at page 137 of the Paperbook submitted for assessment year 2011-12. On perusal of the said agreement, we notice that assessee had availed various services from its AE and also provided services to its AE’s. For the said receipt of services, assessee was

- 17 - ITA Nos.1690/CHNY/2016 & & 746/CHNY/2017 3m Electro & Communications India P Ltd making payment and for providing services, payments were received from the AE of the assessee company. The details of services availed and provided by the assessee company and the compensation paid / received are detailed below:- Particulars Compensation Laboratory, technical assistance and Cost plus 6 percent manufacturing services Selling and Marketing services Cost plus 6 percent Information Technology services Cost to cost Routine Administrative services Cost to cost Foreign service employee expenses Cost to cost

- 18 - ITA Nos.1690/CHNY/2016 & & 746/CHNY/2017 3m Electro & Communications India P Ltd 20. The assessee filed objections before the DRP. The DRP directed the AO to delete the TP adjustment made on account of treating the business support services expenditure as ‘nil’. The DRP held that assessee company had furnished the details of services rendered along with the cost allocation before the DRP and the same is on record. The DRP also noted that cost allocation to the assessee company constituted only 0.62% of the total cost incurred by 3M USA. Further, the DRP observed that when receipts and provision of services were under the same agreement and when the TPO has accepted income, has erred in denying the expenditure under the same agreement.

- 19 - ITA Nos.1690/CHNY/2016 & & 746/CHNY/2017 3m Electro & Communications India P Ltd DR, despite specific requisitions, the assessee failed to furnish any evidence regarding the actual costs incurred by the AE or the basis on which such costs were allocated to the assessee. It was contended that this fundamental evidence was necessary to verify the arm's length nature of the payments and was not produced at any stage of the proceedings. The Ld.DR further submitted that the DRP had proceeded on certain incorrect factual assumptions while granting relief to the assessee. Referring to the directions of the DRP, it was argued that the Panel incorrectly recorded that a sum of Rs.71,40,380/- represented income from management services rendered by the assessee. However, as per the transfer pricing study and the FAR analysis, the said amount represented reimbursement of salary and travel expenses incurred by the assessee on behalf of group entities and was merely an incidental transaction unconnected with its core business activities. Therefore, according to the learned DR, the DRP's finding was contrary to the material available on record.

- 20 - ITA Nos.1690/CHNY/2016 & & 746/CHNY/2017 3m Electro & Communications India P Ltd sum of Rs.65,00,000/- represented a provision which had been added back in the computation of income and that only the balance amount of Rs.60,20,287/- was claimed as deduction during the year. However, on verification of the computation of income placed in the paper book, no such add-back was found to have been made. Therefore, the learned DR contended that the relief granted by the DRP was based on an incorrect appreciation of facts and deserved to be reversed.

- 21 - ITA Nos.1690/CHNY/2016 & & 746/CHNY/2017 3m Electro & Communications India P Ltd support services received from the AE were closely linked and integral to the manufacturing operations of the assessee and, therefore, were rightly aggregated with the manufacturing segment for benchmarking purposes under TNMM. Since the TPO had accepted the overall margins of the assessee as being at arm's length, no separate adjustment in respect of business support services was warranted. In support of this proposition, reliance was placed on the decision of the Chennai Bench of the Tribunal in Haworth India Pvt. Ltd. v. DCIT in IT(TP)A No.23/Chny/2024 dated 20.08.2025. It was also submitted that the assessee had both received and rendered services under the same agreement and that the Revenue could not selectively accept the income arising therefrom while disregarding the corresponding expenditure. The Ld.AR, therefore, strongly supported the findings of the DRP and prayed for dismissal of the Revenue's appeal.

- 22 - ITA Nos.1690/CHNY/2016 & & 746/CHNY/2017 3m Electro & Communications India P Ltd manufacturing support, selling and marketing support, IT services and routine administrative services. The assessee had furnished before the DRP copies of the agreement, debit notes raised by the AE, details of services received, cost allocation workings and the basis for allocation of costs and mark-up. The DRP, after examining the material placed on record, recorded a categorical finding that the assessee had substantiated the receipt of services and the basis of cost allocation. The Revenue has not brought any material before us to demonstrate that the findings recorded by the DRP are factually incorrect.

- 23 - ITA Nos.1690/CHNY/2016 & & 746/CHNY/2017 3m Electro & Communications India P Ltd the support services received from the AE were closely linked to and formed an integral part of its manufacturing operations. The assessee had benchmarked the international transactions on an aggregated basis under TNMM and the TPO has accepted the overall profitability of the manufacturing segment as being at arm's length. In such circumstances, without demonstrating that the aggregation adopted by the assessee was inappropriate, the TPO was not justified in isolating a single class of transactions and making a separate adjustment. The Hon'ble Chennai Bench of the Tribunal in the case of Haworth India Pvt. Ltd. (supra) has held that where intra-group services are closely linked with the principal business operations and the overall margins are accepted under TNMM, a separate adjustment by determining the ALP at Nil is not warranted in the absence of material showing that the services were not rendered. The ratio of the said decision squarely applies to the facts of the present case. The relevant finding of the Tribunal reads as follows:- “8.0 We find sufficient force in the argument of the assessee that since the appellant is dependent on the Global Account Management support for manufacturing/trading, the said transaction is inextricably connected with core business operation and as such it cannot be segregated and benchmarked independently. We have noted the decision of this Tribunal in the case of Siemens Gamesa Renewable Power (P.) Ltd v. DCIT 155 taxmann.com 406 holding as under: “Admittedly the business of the assessee is a consolidated one. The services referred under ‘Corporate Services” are intrinsically linked to its manufacturing and sales activity. These two services cannot be

- 24 - ITA Nos.1690/CHNY/2016 & & 746/CHNY/2017 3m Electro & Communications India P Ltd separately demarcated. Corporate services are the services rendered, which has helped the assessee in generating the business in respect of marketing and trading. This being so, in view of the decision of Hon’ble Delhi High Court in the case of CIT vs. EKL Appliances Ltd., referred to supra, the ld. Assessing Officer is directed to allow the assessee’s claim of the Corporate Services expenditure incurred by assessee”

ITA No.746/CHNY/2017 (Assessment Year 2012-13) 27. The assessee has raised the following two issues in this appeal i. Adjustment made towards Royalty payments ii. Adjustment made towards Business Support Services

- 25 - ITA Nos.1690/CHNY/2016 & & 746/CHNY/2017 3m Electro & Communications India P Ltd 28. We find that the issues relating to the transfer pricing adjustments on account of royalty payment and business support services are identical to those considered by the Tribunal in the assessee’s own case for the immediately preceding assessment year 2011-12. The DRP, while deciding the objections for the year under consideration, merely relied upon its directions for the earlier year and held the issues against the assessee on the ground that the Revenue had not accepted the decision rendered for the preceding assessment year. However, for the assessment year under consideration, there is no statutory right of appeal available to the Revenue against the directions issued by the DRP. Further, it is an admitted fact that the royalty and business support service payments were made under the very same agreements that governed the transactions in assessment year 2011-12 and that the assessee had actually received the services. Therefore, determination of the arm’s length price of such transactions at nil is not justified.

- 26 - ITA Nos.1690/CHNY/2016 & & 746/CHNY/2017 3m Electro & Communications India P Ltd para Nos.12 to 17 & 24 to 26, shall apply mutatis mutandis to the year under consideration. Accordingly, the transfer pricing adjustments made on these counts are directed to be deleted and the grounds raised by the assessee are allowed.

Order pronounced in the open court on 29th June, 2026 at Chennai.

Sd/- Sd/- (एस.आर. रघुनाथा) (जॉज� जॉज� के) (S.R. RAGHUNATHA) (GEORGE GEORGE K) उपा�य� /VICE PRESIDENT लेखा सद�य/ACCOUNTANT MEMBER चे�नई/Chennai, �दनांक/Dated, the 29th June, 2026 RSR, Sr.PS आदेश क� ��त�ल�प अ�े�षत/Copy to: 1. िनधा�रती /Assessee 2. राज� /Revenue 3. आयकर आयु�त /CIT, Chennai 4. �वभागीय ��त�न�ध/DR 5. गाड� फाईल/GF. By Order Digitally signed by REKHA REKHA SENTHIL RAJ SENTHIL RAJ Date: 2026.07.02 09:52:15 +05'30'