PEPPERL & FUCHS FACTORY AUTOMATION PRIVATE LIMITED,BANGALORE vs. INCOME TAX OFFICER, WARD 5(1)(1),, BENGALURU
What did the Tribunal hold?
The Tribunal held that transfer pricing adjustments must be restricted only to international transactions with Associated Enterprises (AEs) and not extended to transactions with independent third parties. The AO/TPO was directed to recompute the adjustment accordingly.
What were the facts?
The assessee, engaged in importing and selling factory automation components, benchmarked its international transactions using the TNMM method. The TPO rejected most of the assessee's comparables and included new ones, leading to a significant upward transfer pricing adjustment.
What were the issues?
Whether transfer pricing adjustments should be made at the entity level or restricted to international transactions with AEs. The validity of comparables selected by the TPO was also an issue.
Which sections of the Income-tax Act were involved?
AI-generated summary — verify with the full judgment below
Income Tax Appellate Tribunal, ‘C’ BENCH, BANGALORE
Before: SHRI WASEEM AHMED & SHRI KESHAV DUBEY
PER WASEEM AHMED, ACCOUNTANT MEMBER:
The present appeal has been instituted by the assessee against the assessment order passed by the AO u/s 143(3) r.w.s. 144C(13) of the Act, in pursuant to the directions of the Ld. DRP issued u/s 144C(5) of the Act dt. 19.09.2024
In the memo of appeal, the assessee has raised 07 grounds of appeal and 01 additional ground of appeal challenging the transfer pricing adjustment, which for the sake of brevity and convenience, we are not inclined to reproduced here.
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Ground No. 2 relate to the rejection of the transfer pricing study documentation furnished by the assessee. We note that the issues raised in these grounds are interconnected with the other transfer pricing grounds adjudicated herein below. The contentions raised therein have been examined and dealt with while deciding the respective substantive grounds. Accordingly, no separate adjudication is called for under this ground of appeal.
The issues raised by the assessee in Grounds Nos. 3 and 4 are interconnected and pertain to fresh economic analysis conducted by the TPO and inclusion and exclusion of certain comparables by the TPO and by the Ld. DRP for computing the ALP of the international transactions carried out with the AE.
The brief facts of the case are that the assessee, a private limited company, is engaged in the business of import/purchase of factory automation components such as proximity switches, connectors, encoders, control equipment, ultrasonic sensors etc from its AEs and selling them to its customers in India. The assessee benchmarked its transaction under trading segment by adopting TNNM as most appropriate method and further PLI as OP/OC which arrived at 2.73% for trading segment. The assessee for the comparability analysis under trading segment selected 08 comparables.
5.1 However, the TPO during the assessment proceeding rejected 06 comparables out of 08 comparables selected by the assessee. The assessee’s comparables accepted by the TPO are detailed as under: (1) Debak Enterprises Pvt Ltd (2) Balaji Switch Gears Pvt Ltd
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5.2 Thereafter, the TPO applied own filter and selected additional 10 comparables in addition to assessee’s 02 comparables accepted by him. The final TPO’s comparables are detailed as under: (1) Debak Enterprises Pvt Ltd (2) Balaji Switch Gears Pvt Ltd (3) Vijayesh Instruments Pvt Ltd (4) Ases Security Pvt Ltd (5) Brisk Electrosales Pvt Ltd (6) Electronika Sales Pvt Ltd (7) S B Syscon Pvt Ltd (8) Sumitron Exports Pvt Ltd (9) Exodus Information Technology Pvt Ltd (10) Vashi Integrated Solutions Ltd (11) Cirkit Electro Components Pvt Ltd (12) Vallabh Impex (India) Pvt Ltd
5.3 The average PLI/margin of the comparables companies was computed at 4.84%. Accordingly, an upward TP adjustment was made by the TPO for Rs. 2,14,83,958/- only by adding to the total income of the assessee.
The aggrieved assessee preferred to file objections before the Ld. DRP. Before the Ld. DRP, the assessee submitted that the TPO has erred in selecting certain companies as comparables which are not functionally similar to the assessee. The same is tabulated below: S.No. Name of Reasons Comparable (1) Sumitron Trades in variety of products such as label Exports Pvt Ltd dispensers, humidity controlled dry cabinets, thermal management products, contact
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lubricants, cleaning products etc. Despite being into diverse operations, no segmental information is available. (2) Exodus It is a technology solutions distributor of ProAV Information products, IoT Solution and IT Security Services. Technology Pvt Ltd (3) Electronika Engaged in distribution of electronical Sales Pvt Ltd components to on B2C model. Also engaged in designing of electronic components. (4) Vashi Engaged in provision of vendor management, Integrated substantial energy, automation and lighting Solutions Ltd solutions. (5) Cirkit Electro Primary an exporter and wholesaler of electrical Components goods Pvt Ltd
6.1 However, the Ld. DRP rejected the plea of assessee in this regard by submitting as follows: S.No. Name of DRP Observations Comparable (1) Sumitron 100% of the revenue is derived from sale of Exports Pvt Ltd electronic equipment and consumables. There is only single reportable segment and therefore there is no requirement of segmental reporting. (2) Exodus Into trading of electronic equipment such as Information camera, projector, computers etc. and hence Technology functionally similar to the assessee. Pvt Ltd
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(3) Electronika Into trading of electronic equipment and derives Sales Pvt Ltd 100% of revenue from the same. With regard to significant value addition in terms of designing of electronic components, the Ld. DRP submitted that expenditure on additions to intangibles are miniscule figures across the years and same is insignificant. (4) Vashi Engaged in provision of vendor management, Integrated substantial energy, automation and lighting Solutions Ltd solutions. (5) Cirkit Electro The assessee argued that electrical good and Components electronic goods industries are different and Pvt Ltd cannot be compared. The Ld. DRP submitted that the difference between the two industries are mainly due difference in scale of operations. Under TNMM, benchmarking is flexible with product level dissimilarities and only broad level functional comparability is tested.
Aggrieved by the directions of the Ld. DRP, the assessee filed an appeal before us.
The Ld. AR before us has filed a paper book running from page Nos. 1 to 461 and a compilation of annual report running from page Nos 1 to 621. The ld. AR for the assessee submitted that the AO/TPO and the Ld. DRP erred in selecting certain companies as comparables though they were not truly comparable to the assessee.
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8.1 In respect of Sumitron, the assessee submitted that the said company is functionally dissimilar since it is engaged in diversified business activities, including import and trading of various industrial equipment, tools, and materials such as label dispensers.
8.2 In respect of Exodus, the assessee submitted that the said company is also functionally dissimilar, as it is engaged in the business of distribution of technology solutions relating to ProAV products, IoT solutions, and IT security services.
8.3 In respect of Vashi, the assessee submitted that the said company is not comparable, as it is engaged in trading of a wide range of electrical products such as cables, motors, switchgears, and similar items.
8.4 As regards Electronika and Cirkit, the assessee submitted that adjudication on these comparables would become academic in case the assessee succeeds on the other grounds raised in the appeal.
The Ld. DR, on the other hand, vehemently supported the orders of the AO/TPO and the Ld. DRP and submitted that the comparables selected are functionally comparable to the assessee.
9.1 Regarding to Sumitron, the Ld. DR submitted that the company is engaged in trading activities similar to the assessee and mere diversification in product range does not render it functionally incomparable.
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9.2 Regard Exodus, the Ld. DR submitted that the core activity of the company is distribution of technology products and solutions, which is broadly in line with the functions performed by the assessee. It was submitted that minor differences in product profile cannot be a ground for exclusion.
9.3 Regard Vashi, the Ld. DR submitted that the company is engaged in trading of electrical and industrial products, which is comparable to the trading segment of the assessee, and therefore, it has been rightly included. In respect of Electronika and Cirkit, the Ld. DR submitted that these comparables have been selected after due analysis by the TPO and upheld by the Ld. DRP, and therefore, the same should be retained unless the assessee establishes specific functional dissimilarity.
We have heard the rival submissions of both the parties and perused the materials placed on record, including the paper book and annual reports relied upon by the assessee. Now we proceed to deal with the comparables individually in the following paragraphs.
Sumitron Exports Pvt. Ltd. 10.1 We note that the assessee has raised detailed objections before the TPO as well as the Ld. DRP, which are recorded at page Nos. 116 to 117 of the appeal set (TPO order) and page Nos. 30 to 32 of the DRP objections. The directions of the Ld. DRP are placed at page No. 22 of the appeal set. The material on record at page No. 344 of the annual report compilation shows that Sumitron is engaged in import and trading of diversified industrial equipment, tools and materials such as label dispensers, humidity controlled dry cabinets, thermal management
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products, contact lubricants, cleaning products etc. In our considered view, the product profile and nature of operations of Sumitron are significantly diversified and not comparable with the assessee, which is engaged in trading of specific electronic items like proximity sensors and barriers. The diversity in product segments and functional profile materially impacts margins and therefore affects comparability. Accordingly, we hold that Sumitron Exports Pvt. Ltd. is functionally dissimilar and direct the AO/TPO to exclude the same from the list of comparables.
Exodus Information Technologies Pvt. Ltd. 11. We observe that the assessee has consistently objected to inclusion of this company before the lower authorities, which is recorded at page No. 117 of the appeal set (TPO order) and page Nos. 32 to 34 of the DRP objections. The directions of the Ld. DRP are placed at page No. 22 of the appeal set. The materials on record at page No. 293 of the annual report compilation shows that Exodus is engaged in distribution of technology solutions such as ProAV products, IoT solutions and IT security services. The functional profile of Exodus shows that it is not a pure trading concern but is involved in distribution of complex technology solutions and services. The assessee, on the other hand, is engaged in trading of specific electronic products without involvement in such integrated solutions or services. In our view, the difference in functional profile, nature of products, and level of value addition renders Exodus not comparable to the assessee. Accordingly, we direct exclusion of Exodus Information Technologies Pvt. Ltd. from the final set of comparables.
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Vashi Integrated Solutions Ltd. 12. We have examined the submissions of the assessee and the relevant material on record. The objections raised before the TPO are recorded at page Nos. 114 to 116 of the appeal set and before the Ld. DRP at page Nos. 29 to 30 of the DRP objections. The directions of the Ld. DRP are placed at page No. 21 of the appeal set. The material on record at page No. 434 of the annual report compilation shows that Vashi is engaged in trading of a wide range of industrial electrical products such as cables, motors, switchgears etc. Further, it is also engaged in providing vendor management services, sustainable energy solutions, automation and lighting solutions.
12.1 The functional profile of Vashi indicates that it operates in a diversified business environment involving both trading and service elements with broader industrial coverage. The assessee, however, is engaged in trading of limited electronic items and does not undertake such diversified operations.
12.2 In our considered view, there is a clear functional distinction between electrical products and electronic products. Electrical products primarily deal with transmission, control and distribution of power (such as cables, motors, switchgears), whereas electronic products are based on semiconductor and sensing technology, involving signal processing, automation and precision components such as proximity sensors and barriers.
12.3 In view of the above, we find merit in the contention of the assessee that Vashi is functionally not comparable. The diversified nature of its business operations materially distinguishes it from the
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assessee. Accordingly, we direct the AO/TPO to exclude Vashi Integrated Solutions Ltd. from the list of comparables.
Electronika and Cirkit 13. The assessee has submitted that adjudication on these comparables would become academic in the event the assessee succeeds on the primary grounds relating to exclusion of other comparables. Since we have already directed exclusion of the above comparables, we are of the view that examination of Electronika and Cirkit does not survive for adjudication at this stage. Accordingly, the grounds relating to Electronika and Cirkit are treated as academic and are left open. Hence, the grounds raised by the assessee are hereby partly allowed.
Ground No.5 relates to rejection of grant of import duty adjustment
14.1 The relevant facts are that the assessee is engaged in the business of trading wherein it imports goods from AE for resale in India. The assessee incurs import duty on purchases from AEs and a portion of which is not creditable, which in turn leads to reduction on the operating margin as compared to companies that source goods from domestic market. Hence, for a valid comparison, the adjustment on account of such difference should be made between assessee and comparable companies.
14.2 However, the TPO did not consider the contentions of the assessee and proceeded to reject the request of import duty adjustment without having any cogent reason.
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Aggrieved assessee filed objections before the Ld. DRP. Before the Ld. DRP, the assessee submitted that the TPO erred in grant of import duty adjustment. The assessee requested the DRP to grant import duty adjustment for comparable companies for correct determination of ALP. The assessee also submitted the process followed by him in carrying out the import duty adjustment. The assessee relied on certain judicial precedents in this regard.
15.1 However, the Ld. DRP rejected the plea of assessee in this regard by submitting that adjustment for custom duties could disrupt the comparability of data as custom duties are often specific to the particular circumstances of each transaction and may not be uniformly applied across different transactions or companies. Further, the Ld. DRP submitted that they do not have the data of custom duty costs involved in the cases of comparables. Hence, accurate adjustments cannot be made.
Aggrieved assessee preferred an appeal before us.
The Ld. AR before us submitted that the Ld. DRP has erred in rejecting the claim of customs duty adjustment without properly appreciating the detailed submissions and workings placed on record.
17.1 The assessee further submitted that it is engaged in a pure trading activity and imports goods from its AEs for resale in India. In this process, the assessee incurs customs duty at the rate of 9.74% on such imports, a portion of which is non-creditable in nature. This results in a direct reduction in the operating margins of the assessee as compared to
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comparable companies which predominantly source goods from the domestic market and do not incur similar costs.
17.2 It was further submitted by the assessee that the import component in the case of the assessee is significantly high, i.e., 90.77% of its total purchases, whereas the comparable companies selected by the TPO have a substantially lower import ratio. Therefore, the difference in customs duty incidence creates a material difference in cost structure, which requires suitable adjustment to ensure proper comparability under the transfer pricing provisions.
17.3 The assessee further submitted that a detailed computation of customs duty adjustment along with reworked margins of the comparable companies was furnished before the Ld. DRP. The same is placed at page No. 68 of the appeal set / page No. 39 of the DRP objections and supported by detailed workings at page Nos. 424 to 426 of the paper book.
17.4 It was contended that the Ld. DRP has rejected the claim merely on the ground that data relating to customs duty of comparable companies is not available, without appreciating that the assessee had already furnished a reasonable and scientific working based on available information. The rejection is thus mechanical and without proper examination of the materials placed on record.
17.5 The Ld. AR submitted that in similar circumstances, the Bangalore Bench of the Tribunal in the case of Toyota Kirloskar Motor (P) Ltd. vs. ACIT reported in 28 taxmann.com 293 has held that such differences in
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customs duty materially affect margins and restored the issue to the file of the AO/TPO for proper verification and grant of suitable adjustment.
17.6 In view of the above, the Ld. AR prayed that the customs duty adjustment be granted, or in the alternative, the issue may be restored to the file of the AO/TPO for fresh adjudication after considering the detailed workings and submissions furnished by the assessee.
The Ld. DR, on the contrary, strongly relied upon the directions of the Ld. DRP and submitted that the claim of customs duty adjustment has been rightly rejected. The Ld. DR further submitted that the assessee has not demonstrated with reliable and comparable data that the customs duty impact in the case of comparables is materially different so as to warrant an adjustment. It was contended that customs duty is transaction-specific and depends upon multiple factors such as nature of goods, country of import, exemptions, and contractual terms, and therefore cannot be uniformly applied across all entities. In view of the above, the Ld. DR prayed that the order of the AO/TPO as upheld by the Ld. DRP be sustained.
We have carefully considered the rival submissions of both the parties and perused the materials placed on record. We note that the assessee has raised detailed submissions before the Ld. DRP seeking customs duty adjustment. The material on record shows that the assessee is engaged in trading activity and imports goods from its AEs for resale in India. In this process, the assessee incurs customs duty at the rate of 9.74%, a portion of which is non-creditable, thereby directly impacting its operating margins. It is further evident from the record that the import component in the case of the assessee is as high as 90.77%
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of its total purchases, which is significantly higher than that of the comparable companies selected by the TPO.
19.1 We also note that the assessee has furnished detailed workings of customs duty adjustment along with revised margins of the comparable companies, which are placed at page No. 68 of the appeal set / page No. 39 of the DRP objections and further supported by workings at page Nos. 424 to 426 of the paper book.
19.2 The Ld. DRP has rejected the claim primarily on the ground that data relating to customs duty of comparables is not available and therefore accurate adjustments cannot be made. However, we find that the Ld. DRP has not examined the detailed workings and methodology furnished by the assessee.
19.3 In our considered view, difference in customs duty incidence between the tested party and comparables is a relevant factor affecting the cost structure and operating margins, particularly in the case of a trading entity having significant import content. Such differences, if material, require suitable adjustment to ensure proper comparability in terms of Rule 10B of the Income-tax Rules.
19.4 We find that on similar issue, the Bangalore Bench of the Tribunal in the case of Toyota Kirloskar Motor (P) Ltd. vs. ACIT reported in 28 taxmann.com 293 has held that differences in customs duty materially affect margins and restored the issue to the file of the AO/TPO for proper examination and grant of suitable adjustment after verification. The relevant para is reproduced below: “In these factual circumstances, we remand the matt+er, of examining the necessity of whether customs duty adjustment is to
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be allowed, as claimed by the assessee, to the file of the TPO. The TPO is directed to examine the contentions of the assessee on customs duty adjustment in a holistic perspective also keeping in mind the observations made by us (supra) and in the light of the decision of the ITAT, Pune in the case of Skoda Auto (P.) Ltd.'s case (supra) relied on by the assessee and the case of Sony India Pvt. Ltd.'s case (supra) relied on by revenue.’
19.5 We also find force in the judicial precedent of Hon’ble Chennai ITAT in the case of Hwashin Automotive India (P.) Ltd. vs. Deputy Commissioner of Income-tax reported in [2024] 167 taxmann.com 437 (Chennai - Trib.) dated [12-08-2024] wherein it was held that working capital adjustment, customs duty adjustment and foreign exchange adjustment are economic adjustments and TPO should recompute these adjustments, after considering data provided by assessee in its TP study. The relevant para is reproduced below: “It was contended that customs duty adjustment was not provided to the assessee for the reason that the assessee has not provided any adjustment for customs duty in its own TP study which is without any basis, as the learned counsel for the assessee before us explained that the same is available in assessee's paper book at page 72. Similarly, the TPO has erred in not considering exchange fluctuation loss arising on foreign currency transactions as operating in nature while computing operating margin of tested party viz-a-viz comparable companies in determining ALP on the basis of forex fluctuations risk. We noted that these are economic adjustments and hence, the Assessing Officer/TPO should recompute these adjustments, after considering the data provided by the assessee in its TP study. We, after considering the facts and circumstances of the case, set aside the impugned order of CIT(A) and that of the AO and remand the matter back to the file of the Assessing Officer for de novo consideration to decide the issues of working capital adjustment, Customs duty adjustment and Foreign exchange adjustment. Therefore, the grounds raised by the assessee on the above issues are allowed for statistical purposes.”
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19.6 We further note that the Hon’ble Delhi High Court in the case of Principal Commissioner of Income-tax vs. Swatch Group (India) (P.) Ltd. reported in [2024] 166 taxmann.com 603 (Delhi) dated [30-07-2024] has upheld the principle that adjustments on account of differences in customs duty rates borne by the assessee vis-à-vis comparables are valid and permissible. The Hon’ble Court observed that such differentiations clearly merit consideration in terms of Rule 10B(2)(d) of the Income-tax Rules, as they materially affect the price and profitability of the transactions. The Hon’ble Court further held that acceptance of such adjustments by the Tribunal does not give rise to any substantial question of law. The relevant para is reproduced below: “We note that the aforesaid differentiations would have clearly merited consideration bearing in mind the language of clause (d) of Rule 10B(2) of Income Tax Rules, 1962 ["Rules"], which reads as under:- "10B(2) For the purposes of sub-rule (1), the comparability of an international transaction or a specified domestic transaction with an uncontrolled transaction shall be judged with reference to the following, namely:- (a)the specific characteristics of the property transferred or services provided in either transaction; (b)the functions performed, taking into account assets employed or to be employed and the risks assumed, by the respective parties to the transactions; (c)the contractual terms (whether or not such terms are formal or in writing) of the transactions which lay down explicitly or implicitly how the responsibilities, risks and benefits are to be divided between the respective parties to the transactions; (d) conditions prevailing in the markets in which the respective parties to the transactions operate, including the geographical location and size of the markets, the laws and Government orders in force, costs of labour and capital in the markets, overall economic development and level of competition and whether the markets are wholesale or retail." 5. In view of the aforesaid, we find that the appeal fails to raise any substantial question of law. Consequently, it shall stand dismissed.”
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19.7 Applying the above ratio to the facts of the present case, we find that the assessee is incurring substantial customs duty on imports, which is materially higher due to its import-heavy business model (90.77% of purchases), whereas the comparables selected by the TPO do not reflect similar cost structures. Therefore, the impact of customs duty is a material factor affecting profitability and cannot be ignored. Respectfully following the above decisions and considering the facts of the present case, we are of the view that the issue requires fresh examination. The assessee has already furnished workings which have not been properly verified by the lower authorities. Accordingly, we restore this issue to the file of the AO/TPO to examine the claim of the assessee for customs duty adjustment in light of the detailed workings furnished, and to grant appropriate adjustment, if found warranted, after providing adequate opportunity of being heard to the assessee. Thus, this ground of appeal of the assessee is allowed for statistical purposes.
Ground No. 6 relates to working capital adjustment
The brief facts are that during the assessment proceedings, the assessee was asked to explain how difference in working capital has impacted the profit margins of comparable companies. However, the TPO contended that the assessee was not able to explain such difference. The TPO observed that the assessee did not submit whether the comparables companies had financed their working capital by their own funds or borrowed funds. The assessee also failed to demonstrate whether any cost has been incurred on the working capital by the comparable companies. The TPO relied on the Hon’ble Chennai ITAT judicial precedent in the case of Mobis India Ltd. vs. DCIT reported in TS-235-ITAT-2013(CHNY)-TP wherein the Hon’ble ITAT rejected the
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claim of working capital adjustment of the taxpayer on the ground that impact of difference in working capital has not been demonstrated by the taxpayer. Hence, no working capital adjustment was allowed to the assessee.
Aggrieved assessee filed objections before the Ld. DRP.
Before the Ld. DRP, the assessee submitted that in terms of Rule 10B appropriate adjustments are required to be made for the differences in the controlled and the uncontrolled transactions which could affect prices charges or profitability in the open market. Therefore, working capital adjustments ought to be provided to the assessee as there exists differences in the payables and receivables position between assessee and the comparable.
23.1 The assessee also referred to the OECD guidelines 2022 para 2 to 6 Annexure to Chapter III which explain need and process of carrying out the working capital adjustments.
23.2 The assessee also relied on plethora of judgments wherein the Hon’ble Courts and Tribunals have allowed working capital adjustments to remove any inconsistencies in the comparability analysis.
23.3 The Ld. DRP, however rejected the plea of assessee and upheld the TPO reasoning, citing the reason that the assessee failed to demonstrate how difference in working capital has impacted the profit margins of comparable companies.
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23.4 The Ld. DRP further observed that ‘accounts payable’ and ‘account receivable’ shown in the balance sheet only reflects the position as at the end of the FY and as such it would not enable to measure the impact of working capital on the costs, prices or profits.
Aggrieved assessee preferred an appeal before us.
The Ld. AR submitted that appropriate working-capital adjustment ought to be granted while benchmarking the international transactions under TNMM. It was contended that differences in the levels of receivables, payables and inventory between the assessee and the comparable companies materially affect the operating margins and, therefore, suitable adjustment is mandated.
25.1 The assessee also relied upon various judicial precedents to contend that working-capital adjustment is an integral part of TNMM analysis and cannot be denied without proper examination.
Per contra, the Ld. DR submitted that the assessee has not furnished complete and reliable details for computing working-capital adjustment. It was contended that such adjustment cannot be granted as a matter of routine and must be based on proper data relating to the comparables. The Ld. DR further argued that the working-capital position of the comparables is not always available in the public domain in a reliable manner and, therefore, the TPO was justified in not granting the adjustment. It was also submitted that the assessee has not demonstrated the exact impact of working-capital differences on its margin and hence no interference with the order of the TPO is called for.
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We have considered the rival submissions of both the parties and examined the materials available on record. We find that while benchmarking the international transactions under TNMM, differences in working-capital levels between the assessee and the comparables are required to be adjusted in terms of Rule 10B(1)(e) of the Income-tax Rules, as such differences materially affect the net margins.
27.1 In the present case, the assessee has claimed that its working- capital position, including trade receivables, trade payables and inventory, is different from that of the comparables and that appropriate adjustment is warranted. However, the authorities below have not carried out a proper working-capital analysis based on average balances and comparable data. The materials available on record on page 80 and 81 of the appeal set clearly shows that the assessee has provided a summary of working capital adjusted margin of the comparables selected by the TPO.
27.2 In the interest of justice, we deem it appropriate to restore this issue to the file of the Assessing Officer / Transfer Pricing Officer for the Ltd. purpose of granting working-capital adjustment in accordance with law. The AO/TPO shall compute the adjustment after examining the average levels of receivables, payables and inventory of the assessee as well as of the comparables and after affording due opportunity of being heard to the assessee.
27.3 The TPO is directed to compute the working capital in accordance with OECD Guidelines as follows: Agilent Technologies (International) P. Ltd. vs. ACIT [2025] 172 taxmann.com 858 (Delhi - Trib.)[26-03-2025]
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(i) Compute the average of opening and closing balances of inventories, trade debtors/receivables, trade creditors/payables of both the tested party and the comparables for the relevant year on revenue account only. (ii) Compute the net working capital ratio (in percentage) after dividing the net working capital by operating cost/sales or such denominator (as is used in the PLI) both for the tested party and the comparables. (iii) Determine the difference between the tested party's ratio with that of each comparable. (iv) Multiply the above difference by the interest rate i.e., SBI Prime Lending Rate as on 30th June of the relevant financial year. (v) The above adjustments shall be added to the profit margin of comparable companies as finally determined in accordance with the directions of this Panel. (vi) Credits received from various group concerns or loans etc., should not be taken into account
27.4 Accordingly, this issue is set aside to the file of the AO/TPO for fresh determination in the light of the above directions. Thus, this ground of the assessee is allowed for statistical purposes.
Ground No. 1 and Additional Ground No. 8 are interconnected and pertains to restriction of TP adjustment to the value of international transactions.
28.1 The assessee also filed additional ground of appeal dt. 08.10.2025, numbered as additional ground no. 8 on the issue of restriction of TP adjustment to the value of international transactions.
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The assessee, in the application for admission of additional grounds, argued that the issues raised is arising from the appellate order (learned DRP) and for the adjudication of same there is no requirement of any fresh examination of facts. The issue raised in additional grounds are fundamental to the resolution of the case and necessary to correctly assessee the tax liability. Consequently, the assessee's learned AR requested that the additional ground be admitted for adjudication.
On the other hand, the learned (DR) opposed the admission of the additional grounds of appeal, arguing that these grounds had not been raised before the lower authorities.
We have heard the rival submissions of both the parties and perused the materials available on record. The Hon’ble Supreme Court in the case of National Thermal Power Co. Limited vs. CIT reported in 229 ITR 383 has held as under: “Under section 254 of the Income-tax Act, 1961, the Appellate Tribunal may, after giving both the parties to the appeal an opportunity of being heard, pass such orders thereon as it thinks fit. The power of the Tribunal in dealing with appeals is thus expressed in the widest possible terms. The purpose of the assessment proceedings before the taxing authorities is to assess correctly the tax liability of an assessee in accordance with law. If, for example, as a result of a judicial decision given while the appeal is pending before the Tribunal, it is found that a non- taxable item is taxed or a permissible deduction is denied, there is no reason why the assessee should be prevented from raising that question before the Tribunal for the first time, so long as the relevant facts are on record in respect of the item. There is no reason to restrict the power of the Tribunal under section 254 only to decide the grounds which arise from the order of the Commissioner of Income-tax (Appeals). Both the assessee as well as the Department have a right to file an appeal/cross- objections before the Tribunal. The Tribunal should not be
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prevented from considering questions of law arising in assessment proceedings, although not raised earlier.
31.1 From the above, it is evident that the view limiting the Tribunal’s jurisdiction to issues arising solely from the appeal before the Commissioner (Appeals) is too restrictive to define the Tribunal’s powers. The Tribunal undoubtedly has the discretion to permit or decline the raising of a new ground. Since the issue raised in the additional ground of appeal is necessary to consider to correctly assess the income of the assessee, and in light of the judgment cited above, we admit the additional ground raised by the assessee. Having admitted the additional grounds of appeal, now we proceed to adjudicate specific issues raised by the assessee through grounds of appeal and additional ground of appeal.
32.2 The relevant facts are that during the course of TP proceedings, the AO/TPO made an adjustment to the arm’s length price of the assessee’s transactions by applying the margin of comparable companies at the entity level / segment level, without restricting the same only to the value of international transactions entered into by the assessee with its AEs.
Aggrieved by the action of the AO/TPO, the assessee has raised an additional ground before us contending that the TP adjustment, if any, should be restricted only to the international transactions with AEs and not to the non-AE transactions. The assessee submitted that out of the total operating cost considered by TPO in his order (i.e. Rs. 98,42,86,967) only an amount to the tune of Rs. 74, 33,94,374 (i.e. 75.55%) pertains to payments made by the assessee to its AEs and the
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balance pertains to expenditure with third parties. The assessee also submitted that TP adjustment, if any, ought to be restricted as below: Particulars Ref. By TPO By Assessee OR A 1,01,17,72,813 1,01,17,72,813 OC B 98,42,86,967 98,42,86,967 OP C=A-B 2,74,85,846 2,74,85,846 OP/OR % D=C/B 2.72% 2.72% ALP (OP/OR) Median of E 4.84% 4.84% Comparables ALP for OC F= A- 96,28,03,009 96,28,03,009 (A*E) Difference I=E-D 2.12% 2.12% Adjustments J=A*I 2,14,83,958 2,14,83,958 Purchases from AE K 74,33,94,374 Purchases from AE/OC L=K/B 75.53% Proportionate Adjustment J*L 1,62,26,014
33.1 Accordingly, the assessee has prayed that the TP adjustment be restricted only to the value of international transactions.
The Ld. DR on the contrary, submitted that the TPO has applied TNMM at the entity level and once the margin of the assessee is compared with that of the comparables, the resultant difference has to be applied on the entire cost base. It was contended that segregation of AE and non-AE transactions at the margin level is not always feasible in practical terms.
We have carefully considered the rival submissions of both the parties and perused the materials placed on record. The issue involved
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in the present ground and additional ground is whether the TP adjustment is to be made at the entity level or restricted only to the international transactions entered into with AEs.
35.1 We note that the TPO has computed the adjustment by applying the margin difference on the entire operating base of the assessee without restricting the same to the value of international transactions. We find that this issue is no longer res integra and is squarely covered by the judgment of the Hon’ble Karnataka High Court in the case of Principal Commissioner of Income-tax vs. TT Steel Service India (P.) Ltd. reported in [2024] 168 taxmann.com 515 (Karnataka) dated [14-10-2024] in favor of assessee. The Hon’ble High Court, while deciding the issue, has followed the binding precedents including the decision of the Hon’ble Bombay High Court in the case of CIT v. Thyssen Krupp Industries India (P.) Ltd. reported in [2016] 70 taxmann.com 329/381 ITR 413 (Bombay), and held that under Chapter X, re-determination of income is to be done only with respect to international transactions with AEs. It was further held that the adjustment cannot be extended to transactions entered into with independent third parties, as the same would result in artificially increasing profits in respect of uncontrolled transactions, which is beyond the scope and ambit of Chapter X of the Act.
35.2 The Hon’ble High Court has also noted that the issue stands covered by earlier decisions and accordingly dismissed the appeal of the Revenue. The relevant para is reproduced below: ”In view of the fact that the issue relatable to question No.4 is covered by the judgment of the High Court of Bombay in Thyssen Krupp Industries India (P.) Ltd. (supra), and also Phoenix Mecvano (India)(P.) Ltd. (supra), which have attained finality till the Hon'ble Supreme Court, we find no merit insofar as question
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No.4 is concerned. Accordingly, the appeal being without merit is dismissed. The questions of law are answered in favour of Assessee and against the Revenue.”
35.3 Respectfully following the above binding jurisdictional precedent, we hold that the TP adjustment, if any, is required to be restricted only to the value of international transactions entered into by the assessee with its AEs. Accordingly, we direct the AO/TPO to recompute the TP adjustment by restricting the same only to AE transactions. Thus, the ground and additional ground of appeal raised by the assessee is allowed.
In the result, the appeal of assessee is hereby partly allowed.
Order pronounced in court on 16th day of April, 2026
Sd/- Sd/- (KESHAV DUBEY) (WASEEM AHMED) Judicial Member Accountant Member Bangalore Dated, 16th April, 2026 / vms / Copy to: 1. The Applicant 2. The Respondent 3. The CIT 4. The CIT(A) 5. The DR, ITAT, Bangalore. 6. Guard file By order Asst. Registrar, ITAT, Bangalore
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