ICL MANAGEMENT & TRADING INDIA PRIVATE LIMITED,DELHI vs. DCIT, CIRCLE -10(1), DELHI

Though the Assessee has raised several grounds of appeal, the effective issues arising for our adjudication are two-fold, namely: (i) the transfer pricing adjustment of Rs 4,68,84,744 made to the Arm’s Length Page | 1 Price (‘ALP’) of the international transaction of purchase of specialty fertilizers from the Associated Enterprises (‘AEs’), consequent to the exclusion of two comparable companies, viz., (a) Nikhil Adhesives Limited and (b) Solvo-chem (India) Private Limited; and (ii) the adjustment of Rs 64,957 made towards notional interest on delayed receivables from the AEs.

We have heard the rival submissions and perused the materials available on record. The Assessee is a company that primarily provides marketing support services in India for products manufactured by it to group entities. During the current year, it also engaged itself in the business of trading in specialty fertilizers, chemicals, drinking water purification and rendering services as market research consultants. During the year under consideration, the Assessee purchased specialty fertilizers from its AEs. In its transfer pricing study, the Assessee benchmarked the said international transaction by adopting the Transactional Net Margin Method (‘TNMM’) and arrived at a conclusion that the margin of 2.5% as per the financial results of the Assessee is within the percentile range of Net Profit Margin of comparable companies which is in accordance with the ALP required under the applicable regulations. During the course of scrutiny assessment proceedings, the ld AO made reference u/s 92CA(1) of the Act to the ld TPO for benchmarking the international transactions of the assessee. The international transactions are carried out by the assessee as under:-

The assessee filed objections before the ld DRP against the draft assessment order. The ld DRP directed the ld TPO to include Nikhil Adhesive as a good comparable if segmental data for the trading segment is available. With regard to Solvo-Chem India Pvt. Ltd, the ld DRP held that the comparable is engaged in the manufacturing and trading operations and that it had failed to pass the “trading income to total more than 75% filter” applied by the ld TPO. The ld TPO while passing the order giving effect to the ld DRP’s directions failed to adhere to the directions of the ld DRP with regard to comparable company Nikhil Adhesive Ltd and reiterated what was proposed by him in the original order. Ultimately transfer pricing adjustment with regard to this issue was reduced by the ld TPO to Rs. 4,68,84,744/- after excluding the aforesaid two comparables and arriving the arithmetic mean margin of the comparable at 4.57%.

The ld TPO also made transfer pricing adjustment by noting that assessee was realizing its trade debts from its AE belatedly and proceeded to treat the same as an independent international transaction and imputed interest on delayed receivables at LIBOR plus 400 basis points at 4.339% and made a transfer pricing adjustment Rs.64,957. The assessee preferred objections before the ld DRP. The ld DRP relied on the decision of Hon’ble Delhi High Court in the case of McKinsey Knowledge Centre India Private Limited Vs. PCIT in ITA No. 461 and 526/2017 dated 09.08.2018 wherein, it was held that interest on belated receivables is separate international transaction requiring independent benchmarking analysis. The assessee made an argument before the ld DRP that since working capital adjustment has been given to the assessee in respect of the international transaction of rendering services to its AE, the interest on delayed receivables gets subsumed thereon and there is no requirement for separate imputation of interest for the same. But this argument of the assessee was rejected by the ld DRP. The DRP ultimately upheld the action of the ld TPO qua this issue.

In the final Assessment Order, while determining the ALP of the said transaction, the aforesaid two comparables selected by the Assessee were excluded and an arithmetic mean margin of 4.57% was arrived at resulting in an adjustment of Rs 4,68,84,744. A further addition of Rs 64,957 was made towards notional interest on delayed receivables from the AEs, treating the same as a separate international transaction. Aggrieved, the Assessee is in appeal before us.

The learned AR submits before us that the learned DRP, in its directions under section 144C(5) of the Act dated 10-9-2025 had directed the learned TPO and the learned AO to re-verify the factual position pertaining to comparable company Nikhil Adhesives Limited, observing that if the trading segment of a comparable is identified and used for the computation of the margin, then the trading income filter (as a percentage of total sales) is not required to be applied at the entity level. However, in the order giving effect to the said directions, the learned TPO took the view that the said company’s main activity is manufacturing, selling and exporting of various types of polymer adhesives, that trading accounts for only 20.6% of its total revenue, and on that basis once again excluded the company from the final set of comparables. The learned AR submits that the learned TPO has thereby failed to follow the binding directions of the learned DRP, and has re- applied at the entity level the very filter which the learned DRP had held to be inapplicable where segmental data is used. The learned AR took us through the audited financial statements of the said comparable placed at Page 350 of the Paper Book. On perusal thereof, we note that the company has reported clear and distinct segmental data in respect of its two segments, viz., (a) manufacturing of adhesives and emulsions, and (b) trading in chemicals, and that the segmental results of the trading segment are separately ascertainable therefrom.

The learned DR relied on the orders of the lower authorities.

We find at the outset that under section 144C(10) of the Act, every direction issued by the learned DRP is binding on the learned AO, and by necessary implication on the learned TPO while giving effect thereto. The learned DRP had, in terms, directed that where the trading segment of a comparable is identified and its segmental margin is used, the trading income filter need not be applied at the entity level. The learned TPO, in excluding the company on the ground that trading constitutes only 20.6% of its entity-level revenue, has done precisely what the learned DRP directed him not to do. Secondly, and on merits, since audited segmental data of the trading segment of the company is admittedly available, the composition of the company’s revenue at the entity level is of no consequence; it is the segmental margin of the trading segment, which is functionally comparable to the assessee’s trading activity, that is relevant for the benchmarking. We are, therefore, of the considered view that there is no justification for the exclusion of this company i.e. Nikhil Adhesives Limited from the final set of comparables. We hereby direct the learned AO/TPO to include Nikhil Adhesives Limited as a comparable, adopting the margin of its trading segment as per its audited segmental data.

The learned AR further submits that the other company, i.e., Solvo-chem (India) Private Limited, has been excluded by the learned TPO and the learned AO in accordance with the directions of the learned DRP, which had proceeded on the incorrect factual premise that the said company fails the trading income filter, computed as a percentage of trading sales to total sales. The learned AR took us through the audited financial statements of the said company placed at Page 468 of the Paper Book. On perusal thereof, we note that for the year under consideration, the company is engaged only in trading and not in manufacturing. Significantly, the cost of materials consumed, as per the said financial statements, is Nil, which corroborates the absence of any manufacturing activity during the year. Since it is abundantly clear from the audited financial statements that the exclusion of the said company proceeded on an incorrect appreciation of facts, and the company, being engaged purely in trading during the relevant year, satisfies the trading income filter, we hereby direct the learned AO/TPO to include Solvo- chem India Private Limited as a comparable.

The learned AO/TPO shall recompute the ALP of the international transaction of purchase of specialty fertilizers after including both the aforesaid companies in the final set of comparables, and shall delete the adjustment if the Assessee’s margin falls within the permissible range as per the second proviso to section 92C(2) of the Act. Accordingly, the Ground Nos. 3 to 3.4 are allowed.

As regards the addition made by the learned TPO and the learned AO towards notional interest on delayed receivables from the AEs, the learned AR submits that the working capital adjustment carried out in the benchmarking appropriately takes into account the impact of the outstanding receivables on the ALP determination, and hence the outstanding receivables do not require a separate determination of ALP. In this regard, he placed reliance on the judgment of the Hon’ble jurisdictional Delhi High Court in the case of Pr. CIT v. Kusum Health Care Private Limited, reported in 398 ITR 66 (Delhi), wherein it has been held that a continuing debit balance in the account of an AE does not, by itself, constitute a separate international transaction warranting an independent benchmarking, where the differential impact of the working capital of the assessee vis-à-vis its comparables has already been factored into the pricing/profitability.

The learned DR relied on the orders of the lower authorities and referred to the judgment of the Hon’ble Delhi High Court in the case of Pr. CIT v. McKinsey Knowledge Centre India Private Limited in ITA Nos. 461/2017 and 526/2017 dated 09-08-2018.

We note that the judgment relied upon by the learned DR in the case of McKinsey Knowledge Centre (supra) is distinguishable on facts, inasmuch as in that case, it was observed that interest on delayed receivables would have to be construed as a separate international transaction requiring benchmarking analysis. There is absolutely no quarrel on this proposition in the instant case. The case of the Assessee is that the working capital adjustment undertaken in the benchmarking duly subsumes the impact of the outstanding receivables from the AEs. The judgment of the Hon’ble jurisdictional High Court in Kusum Health Care (supra), relied upon by the learned AR, is directly applicable to the facts of the present case. Respectfully following the said judgment, we hereby direct the AO to delete the addition made towards notional interest on delayed receivables. Ground Nos. 4 to 4.4. are accordingly allowed.

The ground No. 5 raised by the assessee is challenging the levy of interest u/s 234B of the Act which would be consequential in nature.

Ground No. 6 raised by the assessee is challenging the initiation of penalty proceedings u/s 270A of the Act which would be premature for adjudication at this stage and hence dismissed.

In the result, the appeal of the assessee is partly allowed.