ASSISTANT COMMISSIONER OF INCOME TAX, CIRCLE-1(1)(1), VADODARA, VADODARA vs. M/S SCHAEFFLER INDIA LIMITED, VADODARA

The Revenue has raised the following grounds of appeal:

During the transfer pricing proceedings, the TPO primarily examined two segments namely the manufacturing segment and the payment of management service fees made by the assessee to its Associated Enterprises. The assessee had benchmarked its manufacturing segment under the Transactional Net Margin Method (TNMM) and had aggregated the payment of management service fees along with manufacturing transactions by

However, the TPO rejected the aggregation approach adopted by the assessee and held that the transaction relating to management service fees was required to be benchmarked separately. The TPO further rejected TNMM as the Most Appropriate Method for benchmarking management service fees and instead applied Comparable Uncontrolled Price (CUP) method. According to the TPO, the services allegedly rendered by the Associated Enterprise were in the nature of shareholder activities or stewardship services which did not require separate compensation. The TPO further observed that the assessee had not demonstrated any specific commercial need for such services and that many of the activities were merely duplicative in nature because the assessee already had its own management structure and experienced personnel. The TPO also doubted whether any tangible benefit had actually accrued to the assessee from such services. On these grounds, the TPO determined the Arm’s Length Price of management service fees at Nil and proposed transfer pricing adjustment of Rs.5,87,74,700/-.

Based upon the transfer pricing order passed under section 92CA(3), the Assessing Officer completed the assessment under section 143(3) read with section 144C and assessed total income at Rs.18,27,09,138/- as against returned income of Rs.6,67,94,270/-. The Assessing Officer incorporated the transfer pricing adjustments recommended by the TPO and also initiated penalty proceedings under section 271(1)(c) of the Act.

Aggrieved by the assessment order, the assessee preferred appeal before the CIT(Appeals). During the appellate proceedings, the assessee filed written submissions challenging both the transfer pricing adjustments relating to management service fees as well as manufacturing segment. The assessee submitted that the TPO erred in treating the management support services as shareholder or stewardship activities. The assessee submitted that the Associated Enterprise was functioning as a regional centre of excellence and

The CIT(A) called for remand report from the TPO and thereafter examined the issue. The CIT(A) noted that identical issue had already been adjudicated in favour of group entities of the assessee including INA Bearings India Pvt. Ltd. and Schaeffler India Ltd. for earlier assessment years. The CIT(A) reproduced findings of the Pune Tribunal wherein the Tribunal had

The CIT(A) further noted that the Tribunal in group company’s case had categorically held that the TPO exceeded his jurisdiction by determining Arm’s Length Price at Nil without applying any recognized method prescribed under section 92C of the Act. The Tribunal had also held that once actual rendition of services is established, the TPO cannot question the commercial expediency or business necessity of such services. The Tribunal had also observed that the payment mechanism adopted by Schaeffler China based on actual cost plus 5% markup itself satisfied Cost Plus Method and the same was within arm’s length range.

After considering the detailed submissions and judicial precedents, the CIT(A) accepted the contentions of the assessee and held that the management support services received from Schaeffler Holding (China) Co. Ltd. were genuine business services and not stewardship or shareholder activities. The CIT(A) held that the assessee had furnished documentary evidences viz. invoices, employee-wise service details, time allocation,

The Ld. CIT(A), while adjudicating Grounds relating to transfer pricing adjustment of Rs.5,71,40,169/- in the manufacturing segment, carried out a examination of the approach adopted by the TPO both in recomputing the assessee’s operating margin as well as in modifying the comparable set. The assessee had benchmarked its manufacturing transactions by applying TNMM as the Most Appropriate Method and had shown operating margin of 5.80% after excluding abnormal and extraordinary cost of goods sold amounting to Rs.5.35 crore relating to supply of YC5 clutch parts to Maruti Suzuki. The assessee submitted that due to delay in commencement of localization/manufacturing facility, the assessee was compelled to import YC5 parts from its Associated Enterprise at substantially higher prices in order to honour commitments made to Maruti Suzuki and to avoid business losses and reputational damage. The assessee submitted that such extraordinary costs arose due to exceptional business circumstances involving a non-AE customer and therefore required normalization while benchmarking the manufacturing segment. However, the TPO rejected the assessee’s claim for abnormal cost adjustment, recomputed the operating margin at 4.52% and also rejected several comparables selected by the

During appellate proceedings, the CIT(A) examined the transfer pricing study, documentary evidences, remand report of the TPO and revised comparable analysis in great detail. The CIT(A) noted that the assessee had substantiated the extraordinary business circumstances by furnishing project reports, localization plans, presentations and supporting records demonstrating that the increased cost was commercially driven and had no relation to manipulation of international transactions. The CIT(Appeals) further observed that the TPO had selected comparables without proper search process or detailed functional analysis and that even the computation of margins of selected comparables suffered from factual and computational errors. During remand proceedings, the TPO himself revised the average comparable margin from 9.79% to 6.74%. Thereafter, after considering the assessee’s rejoinder and correcting errors in computation of comparable margins, in particular in case of Hindustan Composites Ltd., the CIT(A) found that the correct average operating margin of comparable companies worked out to only 3.64%. Since the assessee’s operating margin even on the TPO’s revised basis remained at 4.52%, which was higher than the corrected comparable margin of 3.64%, the CIT(A) held that the manufacturing transactions were already at arm’s length and therefore no transfer pricing adjustment survived. Accordingly, the entire addition of Rs.5,71,40,169/- made by the TPO in the manufacturing segment was deleted.

We have heard the rival contentions and perused the material on record. The grievance of the Revenue in the present appeal is against the action of the Ld. CIT(A) in deleting the transfer pricing adjustment of Rs.5,87,74,700/- made on account of management support service fees and further deleting the transfer pricing adjustment of Rs.5,71,40,169/- made in the manufacturing segment.

Upon careful consideration of the facts available on record, we find no infirmity in the well-reasoned order passed by the Ld. CIT(A).

So far as the adjustment relating to management support services is concerned, we find that the assessee had entered into arrangement with Schaeffler Holding (China) Co. Ltd. for availing specialized management and business support services relating to procurement, supply chain management, finance, operational management, human resources, product strategy and business development. The assessee had furnished documentary evidences including service agreements, invoices, employee-wise allocation details, presentations, workshop reports, e-mails, time sheets and cost allocation workings substantiating actual rendition of services by the Associated Enterprise. However, the TPO overlooked the entire evidentiary material and proceeded to determine the Arm’s Length Price of such services at Nil by characterizing them as shareholder/stewardship activities.

The Tribunal further held:- “The payment to Schaeffler Holding (China) Co. Ltd. at the actual costs incurred in providing such services plus 5% mark-up is at ALP, which does not require any transfer pricing addition.” 20. We further find that the Ahmedabad Bench of the Tribunal in the case of Schaeffler India Ltd. v. ACIT in ITA Nos.133 to 137/Ahd/2022 and ITA Nos.147 to 150/Ahd/2022 vide order dated 12.01.2024 has also followed the aforesaid Pune Bench decision and upheld deletion of identical transfer pricing adjustment relating to management support services received from the same Associated Enterprise. The Tribunal in the aforesaid decisions categorically held that once actual rendition of services is established through documentary evidences, the TPO cannot determine ALP at Nil merely on subjective perception regarding commercial expediency of the expenditure. The Tribunal further observed that the TPO cannot step into the shoes of businessman and question the necessity of business expenditure.

Coming to the transfer pricing adjustment of Rs.5,71,40,169/- made in the manufacturing segment, we find that the assessee benchmarked its manufacturing transactions by applying TNMM and had shown operating margin at 5.80% after excluding extraordinary and abnormal cost of goods sold relating to YC5 clutch parts supplied to Maruti Suzuki. The assessee submitted before the lower authorities that due to delay in commencement of localization facility, it had to import such clutch parts from its Associated Enterprise at substantially higher prices in order to fulfil commitments made to Maruti Suzuki and to avoid business losses and reputational damage. The assessee further demonstrated that such extraordinary costs arose on account of exceptional business circumstances involving non-AE dealings and therefore required normalization while determining operating margins under TNMM.

Thus, even on the basis of TPO’s own revised computation, the assessee’s operating margin at 4.52% remained higher than the corrected comparable margin of 3.64%. The Ld. CIT(A) therefore rightly held that the manufacturing transactions of the assessee were already at arm’s length and consequently no transfer pricing adjustment survived. We find that the findings recorded by the Ld. CIT(A) are based upon detailed appreciation of remand report, revised comparable analysis and documentary evidences placed on record. The Revenue has failed to point out any factual or legal infirmity in such findings.

At this stage, it would also be relevant to note that under TNMM, transfer pricing adjustment can survive only where tested party margin falls below arm’s length margin of comparables. Once the assessee’s margin is found to be higher than the corrected comparable margin, no further adjustment is permissible under Chapter X of the Act.

In view of the aforesaid facts and respectfully following the binding decisions rendered in assessee’s own group cases, we find no infirmity in the order passed by the Ld. CIT(A) deleting the transfer pricing adjustments both in respect of management support services as well as manufacturing segment. Accordingly, all the grounds raised by the Revenue are dismissed.

In the result, the appeal of the Revenue is dismissed. This Order pronounced in Open Court on 26/05/2026