MAGICK WOODS EXPORTS PVT. LTD.,CHENNAI vs. ACIT, CORPORATE CIRCLE-4(1), CHENNAI

The assessee preferred an appeal with the following grounds of appeal: GoA Assessee’s Submission a. General Ground (GoA No. The assessee relies upon its submissions against 1) the subsequent grounds on merits. b. Legal grounds challenging Not Pressed the validity of the Impugned Order (GoA No. 2 - 3) c. Agency Commission Refer submissions in the ensuing paragraphs, Payments - TP addition of under Section II below. The key aspects are INR 18.81 Crores pursuant summarised herein for ease of reference: to the determination of NIL • Aggregation Approach – Once the arms’ length price (“ALP”) transaction net margin method (“TNMM”) is (GoA No. 4 to 7) accepted on an aggregated basis without any adjustment, it is not open to the TPO to subject only one element, i.e., agency commission, to an entirely different method, and determine its ALP at NIL. • ALP cannot be determined at NIL, applying the test of commercial expediency, when rendition of services is not disputed, there is no finding of any error in the method applied and need-benefit is substantiated with detailed evidence. d. Notional interest on overdue Refer submissions in the ensuing paragraphs, AE Receivables – INR 2.3 under Section III below. The key aspects are Crores summarised herein for ease of reference: (GoA No. 8 - 9) • No interest charged on Non-AE Receivables

The brief facts of the case emanating from the records are that the assessee, Magick Woods Exports Private Limited is an Indian company, incorporated on 27.09.2005, engaged in the manufacture and export of kitchen and bath vanity products, with its major customer base in the US market, and minimal domestic sales. The assessee has a factory in Chennai where the goods are manufactured. The assessee’s biggest customer in the US market is Menards Inc., an American big-box home improvement retail chain headquartered in Wisconsin. It is the third largest home improvement retailer, having 351 stores in the US. Owing to the large size and the retail space that they operate in, dedicated personnel were required in the US to address its requirements and ensure prompt delivery.

To meet the growing demands of the large US market, and customer requirements, Magick Woods Inc. USA (“MW Inc.”) was incorporated in March

Subsequently, the assessee, in order to keep up with the demands of a highly competitive export market with multiple players, to remain relevant and ensure survival and growth in a competitive volume driven business, entered into an agency commission agreement with MW Inc. (Paperbook Pg. 66), as it did not have a separate marketing team in the US. In terms of the said agreement, MW Inc. undertook sales and marketing activities for the sale of assessee’s products in the US, broadly comprising the following activities, for a commission of 10% on the net sales: a. Co-ordination requirements of the customers including soliciting orders b. Assisting MWEPL by participating in negotiations, c. Quality checks and screening process d. Logistics arrangements e. Inventory planning to stock out situations based on demand f. Managing customer requests for samples and g. Sales, promotion and marketing support (advertising, trade shows etc.)

The sales and marketing activities undertaken by MW Inc. are separate from and in addition to its assembly and distribution activities, whereby it independently undertakes assembly and distribution functions on its own account, as a low-risk distributor. The commission arrangement was limited to the assessee’s direct customer sales, and not for the sales made to MW Inc., for their eventual sale to the customer. Out of the assessee’s total turnover of Rs.481.27 Crores for the Impugned AY (Profit and Loss Account in Paper book Pg 4), the agency commission at 10% (i.e., 18.81 Crores) was determined only

The TPO vide show-cause notice (“SCN”) dated 13.01.2025, (Paperbook Pg. 570) required the assessee to furnish evidence for the services received and the need-benefit justification. The assessee furnished detailed submissions substantiating the same (Paperbook Pg. 540). The assessee also furnished an alternate benchmarking approach for the agency commission payments, applying the CUP method, using independent third-party commission agreements to corroborate the arms’ length position (Paperbook Pg. 76). The TPO, however, arbitrarily rejected the aggregation approach qua the agency commission, despite accepting the benchmarking and ALP determined with reference to the net margins. The agency commission payment was segregated, and the ALP thereof was purportedly determined under Other Method at NIL. No benchmarking exercise was undertaken by the TPO and his sole allegation was that the need-benefit criteria was not demonstrated. The TPO finally held that these are ‘low-value added’ services relying on Para 7.6 of OECD TP Guidelines (Pg. 5 of the TP Order). The TPO therefore did not dispute the rendition of services but merely questioned the commercial expediency thereof.

Aggrieved, the assessee furnished further evidence in support of its claim by way of additional evidence filed before the DRP, comprising Need Benefit Documentation (NBD) providing multiple e-mail correspondences and other evidence substantiating the benefit derived out of the services availed from the AE.(Paperbook Pg 86, and Pg. 98-100 for a summary of the evidence submitted in Pgs. 107 – 524).

The DRP called for a remand report from the TPO, wherein the TPO mechanically held that the AE did not play any role in furthering the sales, merely contending that no new customers were added during the year (Remand Report dated 17.11.2025 in Paperbook Pg 525). The assessee furnished a point-wise rebuttal against the TPO’s contentions in the remand report, submitting further that the TPO failed to appreciate the evidence (Paperbook Pg 528). The DRP, however, failed to appreciate the submissions and the evidence furnished by the assessee and summarily rejected its objections in a mechanical manner. For example, the DRP mechanically alleged that the services are stewardship activities, without appreciating that the service provider in the present case is a wholly owned subsidiary, i.e., MW Inc., and not the parent (para 3.7 in Pg 10 of the DRP Directions).

Aggrieved by the Final assessment order in pursuance to the directions of the DRP, the assessee is in appeal before us.

The ld.AR for the assessee submitted that it is a settled legal position that the ALP cannot be held as Nil solely for want of need-benefit. The TPO erred in judging the business rationale and the need-benefit arising from the payment of agency commission. Once the rendition of a service is demonstrated and accepted, the role of the TPO is limited to determine ALP thereof in the manner by applying the methods prescribed under the Act. The revenue authorities cannot sit over the judgements made by the assessee in running the business and that the reasonableness of the expenditure has to be judged from the point of view of the businessman and not the Revenue. Further, deduction of expenditure cannot be held to be conditional upon earning income or demonstrating an increased revenue or customer base. 12. The ld.AR submitted that the number of customers or increase in this number alone is not a valid basis to determine the necessity of an expenditure. It is a business reality that in a competitive market, even retaining the existing

The ld.AR placed reliance on the following cases wherein it was held that commercial prudence cannot be second guessed by the Revenue: i. EKL Appliances – Delhi High Court - S.No.3 in the case law compendium (“CLC”) Pg. 20 ii. Cushman and Wakefield India Pvt Ltd – Delhi High Court - S.No.4 in the CLC - Pg 30 iii. SI Group India Ltd - Mumbai High Court - S.No.6 in the CLC - Pg 69

Further, the ld.AR contended that the TPO merely stated that the transaction is benchmarked under the ‘Other Method’ without undertaking a benchmarking analysis in the prescribed manner. In this regard, the ld.AR placed reliance on the decision of the Coordinate Bench of the Tribunal in the following decisions, wherein it was held that determining ALP at NIL without any independent benchmarking is invalid: i. BorgWarner Cooling Systems India Pvt Ltd, - ITAT, Chennai - S.No.8 & 9 in CLC Pg. 93 & 106 ii. Tractors and Farm Equipment Ltd - ITAT, Chennai - S.No.12 in the CLC - Pg. 128 iii. HeidelBerg India Pvt Ltd - ITAT, Chennai - S.No.13 in the CLC - Pg. 133

Further, the ld.AR contended that the AO erred in segregating the commission payment from the overall TNMM benchmarking and subjecting the same to a different benchmarking method. In this regard, the ld.AR placed reliance on the Hon’ble Delhi High Court ruling in the case of Magneti Marelli Powertrain India Pvt Ltd (S.No.1b in CLC - Pg. 4), wherein it was held that when TNMM is used to benchmark, subjecting only one element to an entirely different method would lead to chaos and detrimental to the interest of both assessee and Revenue. The Revenue’s SLP against this decision has been dismissed by the Hon’ble Supreme Court. (S.No.1a in the CLC – Pg 2)

Further, the ld.AR submitted a detailed NBD which substantiates the services rendered by the AE and the benefit accruing to the assessee. (Pg. 107 – 524 of the Paperbook for the annexures enclosed as part of NBD). For example, in Paperbook Pg.326-332, the email correspondence shows discussions between Menards and MW Inc. on pricing and inventory items to be displayed in the open to buy event organised by the customer (Menards). Similarly, in Paperbook Pg.143, the AE identifies and gets awarded space for laydown of the products in 1000+ stores of the customer. (A brief description of the discussions under Annexure of email correspondence furnished in the NDB is captured in the chart enclosed herewith)

In summary, the ld.AR submitted that the entire case of the TPO is based on his judgement of the business necessity to incur the agency commission, where neither the receipt of services was disputed, nor the benchmarking and ALP of all other transactions were disturbed. Only the agency commission payment was segregated, and the ALP thereof was held as NIL. The said adjustment is without any legal basis, contrary to the settled judicial precedents and is liable to be deleted.

With regard to notional interest on receivables from AEs, the ld.AR submitted that during the Impugned AY, the assessee has made sales to both AEs and Non-AEs. The TPO erred in determining notional interest on AE receivables when there is uniformity in the act of the assessee in not charging interest on delayed realizations both from AEs and Non-AEs, which constitutes a valid CUP. When the assessee is not charging any interest on the receivables from its direct sales to the customer, it cannot be expected to charge interest

The ld.AR produced a statement showing ageing analysis of Non-AE receivables before the TPO (Paperbook Pg 552). An extract of the same is reproduced below for ease of reference:

The TPO, failing to appreciate the submission and made an addition towards notional interest on AE receivables. Further, the DRP erroneously and mechanically concluded that the assessee failed to furnish details in relation to non-AE receivables, when the same was on record even before the TPO (DRP Directions Pg. 20, Para 4.12).

The ld.AR contended that it is a settled position that making an addition of notional interest for AE receivables is not justified when there is uniformity in the act of not charging interest to both AE and Non-AE debtors. In this regard, the ld.AR placed reliance on the following case laws: i. Indo American Jewellery Ltd. - Mumbai High Court - S.No.14 in the CLC - Pg. 145 ii. Livingstones – Mumbai High Court - S.No.15 in the CLC - Pg. 147 iii. Sharda Spuntex Pvt Ltd - Rajasthan High Court - S.No.16 in the CLC - Pg. 149 iv. Ramco Systems Ltd – ITAT, Chennai - S.No.18 in the CLC - Pg. 154

In view of the above the ld.AR submitted that the addition towards notional interest is without any legal basis, contrary to the settled judicial precedents and is liable to be deleted.

Per contra, the ld.DR for the revenue supported the orders of the authorities and prayed for confirming the same by dismissing the appeal of the assessee.

We have considered the rival submissions, perused the orders of the lower authorities, the Transfer Pricing documentation, the Paper Book filed by the assessee, the additional evidences produced before the DRP, the judicial precedents relied upon by both parties and the material available on record. The undisputed facts emerging from the record are that the assessee is engaged in the business of manufacture and export of kitchen and bath vanity products, predominantly catering to the United States market. To facilitate its expanding business operations in the US and to meet the commercial requirements of its principal customer, namely Menards Inc., the assessee incorporated its wholly owned subsidiary, Magick Woods Inc., USA, which undertakes assembly, distribution, sales promotion and customer support activities in the United States. Subsequently, the assessee entered into an Agency Commission Agreement with the said AE, whereby the AE agreed to undertake various sales and marketing functions including customer coordination, negotiations, quality support, logistics coordination, inventory planning, promotional activities, participation in trade shows and marketing support for a commission of 10% on the direct export sales.

The assessee benchmarked the international transactions by adopting the TNMM on an aggregated basis by clubbing the export sales and payment of agency commission. It is an admitted position that the TPO accepted the overall benchmarking under TNMM and did not disturb the arm's length nature of the remaining international transactions. However, while accepting the

In our considered opinion, the approach adopted by the TPO cannot be sustained either on facts or in law. It is a settled principle of transfer pricing jurisprudence that where the international transactions are closely linked and have been benchmarked under TNMM on an aggregated basis, the Revenue cannot selectively segregate one expenditure from the basket of transactions and determine its ALP by adopting a different method, unless cogent reasons are recorded demonstrating that such segregation is warranted under Rule 10A(d) or Rule 10B of the Income-tax Rules. The Hon'ble Delhi High Court in Magneti Marelli Powertrain India Pvt. Ltd. has categorically held that once TNMM is accepted for benchmarking the international transactions, isolating one element of expenditure and benchmarking it separately would defeat the very object of aggregation and result in inconsistent transfer pricing analysis. The Special Leave Petition filed against the said judgment has also been dismissed by the Hon'ble Supreme Court.

In the present case, neither the TPO nor the DRP has assigned any legally sustainable reason for rejecting the aggregation approach. The benchmarking under TNMM has otherwise been accepted. Therefore, the segregation of only the agency commission payment is contrary to the settled principles governing transfer pricing analysis. Further, we find considerable merit in the contention of the assessee that the TPO has travelled beyond the jurisdiction conferred under Chapter X of the Act. The function of the TPO is confined to determination of the ALP by applying one of the prescribed methods under section 92C read with Rule 10B. The TPO is not empowered to question the commercial wisdom of the assessee or substitute his own perception regarding the necessity of incurring a particular expenditure. The Hon'ble Delhi

In the present case, we notice that the TPO himself has not disputed the existence of the Agency Commission Agreement nor has he recorded any finding that the services were not rendered. On the contrary, the TPO himself observed that the services constituted "low value added services." Such observation itself presupposes the existence and rendition of services. Therefore, once the rendering of services is accepted, determination of ALP at NIL solely on the ground that adequate benefit was not demonstrated becomes legally unsustainable. We further find that the assessee had furnished voluminous documentary evidence before both the TPO and the DRP in the form of Need Benefit Documentation consisting of extensive e-mail correspondences, customer interactions, pricing negotiations, inventory planning, trade show participation, promotional activities and other commercial support rendered by the AE. The Paper Book also contains several contemporaneous communications evidencing active involvement of the AE in customer management, inventory planning and securing display space for the assessee's products in the retail outlets of Menards.

The remand report submitted by the TPO merely states that no new customers were added during the year and, therefore, the AE did not contribute to the business. Such reasoning, in our view, completely ignores the commercial realities of international business. Retaining an existing strategic customer, ensuring uninterrupted supplies, managing inventories, negotiating prices, coordinating logistics and maintaining customer satisfaction are equally

The transfer pricing provisions contemplate determination of an arm's length price by comparing controlled transactions with comparable uncontrolled transactions. They do not authorize arbitrary determination of ALP at NIL merely because the Revenue entertains doubts regarding the commercial expediency of the expenditure. Having regard to the entirety of the facts, the documentary evidences placed on record, the settled legal principles governing transfer pricing, and the judicial precedents cited above, we are of the considered view that the authorities below were not justified in segregating the agency commission from the aggregated TNMM analysis and determining its ALP at NIL. Accordingly, the Transfer Pricing adjustment of Rs.18.81 Crores towards agency commission is directed to be deleted by allowing the corresponding grounds of appeal of the assessee.

Coming to the next issue, we have considered the rival submissions on the issue relating to addition towards notional interest on delayed realization of receivables from AEs. The assessee has submitted that it follows a uniform policy of not charging interest on delayed realization of receivables either from AEs or from unrelated third-party customers. Detailed ageing analysis of Non- AE receivables together with sample invoices and bank statements were produced before the TPO. However, the TPO proceeded to compute notional interest only on AE receivables without examining the treatment accorded to

In our considered opinion, the addition made by the TPO cannot be sustained.

It is now well settled through a series of judicial pronouncements that where the assessee follows a consistent commercial policy of not charging interest either from AEs or from unrelated parties, such conduct itself constitutes an internal Comparable Uncontrolled Price (CUP). In such circumstances, no transfer pricing adjustment can be made merely because the receivables pertain to AEs. The Hon'ble Bombay High Court in Indo American Jewellery Ltd. (supra) and Livingstones, the Hon'ble Rajasthan High Court in Sharda Spuntex Pvt. Ltd., (supra) and the Chennai Bench of the Tribunal in Ramco Systems Ltd. (supra) have consistently held that where similar credit terms are extended to both AE and Non-AE customers without charging interest, no separate adjustment towards notional interest is warranted.

In the present case, the Revenue has not brought on record any material demonstrating that the assessee charged interest from independent customers while foregoing such interest only in respect of AEs. In the absence of such distinguishing material, there is no basis for making a transfer pricing adjustment. Moreover, the authorities below have failed to consider the documentary evidence furnished by the assessee demonstrating the ageing pattern of Non-AE receivables. The DRP's finding that no such details were furnished is factually incorrect and contrary to the material available on record. In view of the above facts and respectfully following the judicial precedents referred to above, we hold that the adjustment towards notional interest on delayed realization of receivables from AEs is unsustainable. Accordingly, the Transfer Pricing adjustment of Rs.2.30 Crores towards notional interest is directed to be deleted by allowing the corresponding grounds of appeal of the assessee.

Ground No. 1 is general in nature and does not call for any specific adjudication. Further, the ld.AR did not press Ground Nos. 2 and 3. Accordingly, Ground No.1 is dismissed as general, and Ground Nos.2 and 3 are dismissed as not pressed.

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