M/S. ELGI RUBBER CO, LTD.,COIMBATORE vs. DCIT, CORP. CIRCLE-1,, COIMBATORE

आयकर अपीलीय अधिकरण, ‘डी’ न्यायपीठ, चेन्नई IN THE INCOME TAX APPELLATE TRIBUNAL ‘D’ BENCH, CHENNAI श्री जॉजज जॉजज के, उपाध्यक्ष एवं श्री एस.आर.रघुनाथा, लेखा सदस्य के समक्ष BEFORE SHRI GEORGE GEORGE K, VICE PRESIDENT AND SHRI S.R. RAGHUNATHA, ACCOUNTANT MEMBER आयकर अपील सं./IT(TP)A No. 07/Chny/2026 ननिाारण वर्ा / Assessment Year : 2022-23 Elgi Rubber Co. Limited, The Deputy Commissioner of Super A Unit, Coimbatore Private vs. Income-tax, Corp.Cir. 1 Industrial Estate, Kuruchi Coimbatore. Coimbatore – 641 021. [PAN: AABCE9596M] (अपीलार्थी/Appellant) (प्रत्यर्थी/Respondent) अपीलार्थी की ओर से/Appellant by : S/Shri. Ramanath CA & R.Venkataraman, CA प्रत्यर्थी की ओर से/Respondent by : Shri. K.Jayaganesh, CIT सुनवाई की तारीख/Date of Hearing : 17.06.2026 घोर्णा की तारीख/Date of Pronouncement : 07.07.2026 आदेश /O R D E R PER S. R. RAGHUNATHA, AM :

The present appeal of the assessee is against the final assessment order passed by the Assessment Unit, National Faceless Assessment Centre (NaFAC) (hereinafter referred to as “the AO”) u/s.143(3) r.w.s 144C(13) and 144B of the Income-tax Act, 1961 (hereinafter referred to as "the Act"), for the Assessment Year 2022-23, dated 12.12.2025, passed in pursuance of the directions issued by the Dispute Resolution Panel–2, Bengaluru (hereinafter referred to as the “DRP”), vide order dated 25.11.2025. 2. The assessee has raised the following grounds of appeal:-

:-2-: IT(TP)A. No:07/Chny/2026 The order u/s 143(3) r.w.s 144C(13) r.w.s 144B passed by the learned assessing officer is contrary to the facts and circumstance of the case, opposed to law and against the principles of natural justice and equity. 2. Re: Transfer Pricing Adjustment – Commission Paid to AEs a) The learned AO/TPO/DRP erred in law and on facts in determining the arm’s length price of commission paid to Associated Enterprises at NIL, resulting in a transfer pricing adjustment of Rs. 2,72,03,527/-. b) The learned authorities erred in disregarding documentary evidence and in holding that no services were rendered by the Associated Enterprises. c) The learned authorities erred in ignoring business, commercial and industry realities and in concluding, without any proper benchmarking or application of a prescribed method under section 92C, that no independent enterprise would have paid such commission. d) The learned authorities erred in law in treating the commission transaction in isolation, failing to appreciate that commission is closely linked to and arises from sales and in relying on irrelevant considerations such as outstanding receivables. e) The impugned adjustment is arbitrary, unsustainable in law and liable to be deleted. 3. Re: Transfer Pricing Adjustment – Computation of ALP a) The learned AO/TPO/DRP erred in law and on facts in making a transfer pricing adjustment of Rs. 25,94,184/- in respect of international transactions relating to sale of products. b) The learned authorities erred in rejecting the Appellant’s TP study and PLI and undertaking a fresh benchmarking analysis without satisfying the conditions prescribed under section 92C(3) of the Act. c) The learned authorities erred in incorrectly classifying operating and non- operating items, thereby distorting the Appellant’s operating margins. d) The learned authorities erred in selecting and retaining functionally non- comparable companies and rejecting comparable companies selected by the Appellant, without proper FAR analysis. e) The learned authorities erred in ignoring differences in size, turnover, economies of scale and working capital, and in not granting appropriate working capital adjustment. f) The impugned transfer pricing adjustment is arbitrary, unsustainable in law and liable to be deleted. 4. Re: TP Adjustment – Corporate Guarantee a) The learned AO/TPO/DRP erred in law and on facts in making a transfer pricing adjustment of Rs. 4,17,242/- by imputing notional corporate guarantee commission allegedly chargeable from the Associated Enterprises. b) The learned authorities erred in treating corporate guarantee as a separate international transaction, in rejecting aggregation with the related

:-3-: IT(TP)A. No:07/Chny/2026 loan transaction, and in imputing hypothetical income without any real accrual or proper benchmarking under section 92C. c) The learned authorities erred in mechanically adopting a bank guarantee rate (1.95%) for corporate guarantee without comparable analysis. d) The impugned adjustment is arbitrary, unsustainable in law and liable to be deleted. 5. Re: TP Adjustment – Interest on Trade Receivables a) The learned AO/TPO/DRP erred in law and on facts in making a transfer pricing adjustment of Rs. 28,15,625/- by imputing notional interest on outstanding trade receivables from Associated Enterprises. b) The learned authorities erred in treating trade receivables as a separate international transaction and in imputing hypothetical interest income without any real accrual or comparable uncontrolled analysis. c) The impugned adjustment is arbitrary, unsustainable in law and liable to be deleted. In view of the above grounds and such other additional grounds as may be adduced at time of hearing, it is prayed before the Hon’ble Income Tax Appellate Tribunal; a) to reverse the order passed by the learned authorities with an effect to delete the additions for Rs. 3,30,30,578/- made in violation of law, b) to pass such other consequential orders as the Hon’ble Income Tax Appellate Tribunal may deem fit to render justice. 3. The brief facts of the case are that the assessee, is a listed public limited company engaged in the business of manufacturing a comprehensive range of raw materials, equipment, tools and accessories predominantly used in the Tyre sector of the rubber industry, with its manufacturing facilities situated at Coimbatore, India.

:-4-: IT(TP)A. No:07/Chny/2026 was made to the Transfer Pricing Officer ("TPO") for determination of the Arm's Length Price ("ALP") in respect of the international transactions reported in Form No.3CEB. 6. Pursuant thereto, the TPO passed an order u/s.92CA(3) of the Act dated 28.01.2025 proposing a transfer pricing adjustment of Rs.3,50,36,394/-. During the course of the proceedings, the assessee furnished from time to time the details, explanations and documentary evidences called for in compliance with the statutory notices issued by the authorities. 7. Thereafter, the AO, while incorporating the transfer pricing adjustments proposed by the TPO, passed a draft assessment order dated 13.02.2025 proposing, inter alia, the following additions/adjustments and disallowances: (i) Downward adjustment of Rs.2,72,03,527/- in respect of commission paid by the assessee to its AEs; (ii) Upward adjustment of Rs.40,00,000/- on account of sales effected by the assessee to its AEs; (iii) Upward adjustment of Rs.4,17,242/- towards corporate guarantee commission in respect of guarantees extended by the assessee to its AEs; and (iv) Upward adjustment of Rs.28,15,625/- on account of interest on trade receivables outstanding from its AEs. 8. Aggrieved by the aforesaid draft assessment order, the assessee filed an objection before the DRP u/s.144C of the Act assailing the above adjustments. The DRP, vide its directions issued u/s.144C(5) of the Act dated 25.11.2025, directed as under: (a) the additions/adjustments in dispute were sustained except in respect of Issue No. 2 above; and (b) partial relief was granted in relation to Transfer Pricing Issue No. 2 by directing the TPO to consider the assessee's contentions regarding treatment of foreign exchange fluctuation and application of the turnover filter while selecting comparables for the purpose of computing the operating profit/operating cost margin. 9. Pursuant to the directions issued by the DRP, the TPO passed an order dated 08.12.2025 giving effect thereto. Consequent upon the said order, the AO

:-5-: IT(TP)A. No:07/Chny/2026 passed the final assessment order dated 12.12.2025 u/s.143(3) r.w.s 144C(13) and 144B of the Act, determining the total income of the assessee at Rs.6,48,82,918/-, after making the following transfer pricing adjustments: (i) Downward adjustment in respect of the international transaction pertaining to commission paid by the assessee to its AEs – Rs.2,72,03,527/-; (ii) Upward adjustment in respect of sale of products by the assessee to its AEs – Rs.25,94,184/-; (iii) Upward adjustment towards guarantee commission in respect of the corporate guarantee extended by the assessee to its AEs – Rs.4,17,242/-; and (iv) Upward adjustment on account of interest on outstanding trade receivables from its AEs – Rs.28,15,625/-. 10. Being aggrieved by the aforesaid final assessment order, the assessee is in appeal before us challenging the aforesaid additions/adjustments made therein. Accordingly, the issues are adjudicated as under: 11. We find that Ground No.1 raised by the assessee is general in nature and does not give rise to any specific grievance requiring adjudication. No arguments were advanced on behalf of the assessee in support of the said ground. Accordingly, the same being general in nature, does not call for separate adjudication and is dismissed. 12. Ground No.2 raised by the assessee assails the transfer pricing adjustment of Rs.2,72,03,527/- made in respect of commission paid to its AEs. 13. The facts relating to the issue are that the TPO observed that the assessee had paid commission aggregating to Rs.2,72,03,527/- to its AEs towards sales generated through them and had benchmarked the said transaction by adopting the Transactional Net Margin Method (TNMM) on an aggregated basis along with other international transactions. 14. According to the TPO, the assessee had failed to place on record any credible documentary evidence to establish the actual rendition of services by the AEs. It was observed that, except for copies of agreements entered into with the AEs, no contemporaneous evidence demonstrating the nature of services

:-6-: IT(TP)A. No:07/Chny/2026 rendered, the efforts undertaken by the AEs, or the economic benefit derived by the assessee had been furnished. The TPO further noted that varying rates of commission had been paid to different AEs without any cogent justification. On this premise, the TPO inferred that no services had in fact been rendered by the AEs and consequently determined the ALP of the commission transactions at NIL. 15. The DRP concurred with the findings of the TPO and held that the assessee had failed to substantiate the actual rendering of services by the AEs or to demonstrate the tangible economic benefits accruing to the assessee from such payments. The DRP observed that the mere existence of agreements could not establish either the commercial necessity or the arm's length nature of the transactions. Accordingly, the downward adjustment of Rs.2,72,03,527/- was sustained. 16. The Ld.AR, appearing on behalf of the assessee submitted that the assessee, either directly or through its affiliates, markets and distributes tread rubber products through an extensive network of franchised retreaders spread across various jurisdictions including Australia, Brazil, Kenya, the Netherlands, Sri Lanka, USA, Canada and South America. In order to access overseas markets and customers, the assessee had established subsidiaries in different countries, which actively solicit orders, promote the products of the assessee, maintain customer relationships, provide after-sales support and facilitate market penetration in their respective territories. 17. It was contended that the AEs perform significant marketing and customer support functions, including identification of prospective customers, negotiation of commercial terms, procurement of purchase orders, addressing customer grievances, managing customer expectations and rendering post- sales assistance. For these services, the AEs are remunerated by way of commission linked to the sales generated through their efforts. 18. The Ld.AR further submitted that in certain instances, the AEs independently purchase goods from the assessee and sell the same in their

:-7-: IT(TP)A. No:07/Chny/2026 respective territories on a principal-to-principal basis, earning their own margins from such transactions. However, insofar as the impugned transactions are concerned, the AEs function merely as order procuring and market support entities and are compensated through commission. 19. Inviting our attention to paragraph 6.3.3 of the TPO's order and paragraph 3.2 of the directions issued by the DRP, the Ld.AR submitted that the sole basis adopted by the authorities below for making the adjustment was the alleged absence of evidence regarding actual rendition of services. 20. The Ld.AR, however, drew our attention to the detailed reply submitted before the TPO, wherein the assessee had specifically explained the nature of functions undertaken by the AEs. The Ld.AR also invited our attention to the voluminous documentary evidence placed in the paper book, particularly the e- mail correspondences exchanged among the end customers, the AEs and the assessee, spanning pages 100 to 201 of the paper book. It was submitted that these documents unequivocally demonstrate that the AEs were instrumental in procuring orders, negotiating commercial terms, forwarding purchase requirements to the assessee, coordinating supplies and facilitating realization of export proceeds. 21. The Ld.AR further pointed out that the assessee had furnished a detailed statement evidencing sales amounting to Rs.12,49,04,347/- generated through the efforts of the AEs during the relevant assessment year. It was thus contended that the findings of the lower authorities that no evidence had been produced, except agreements, were factually incorrect and contrary to the material available on record. 22. With regard to the arm's length character of the transactions, the Ld.AR submitted that the commission payments had been benchmarked under the TNMM on an aggregated basis along with other closely linked international transactions. It was argued that the commission transactions formed an integral part of the overall business model and were inextricably linked with the manufacture and sale of products undertaken by the assessee.

:-8-: IT(TP)A. No:07/Chny/2026 23. The Ld.AR placed reliance upon Rule 10A(d) of the Income-tax Rules, 1962, which recognizes aggregation of closely linked transactions, as well as paragraph 3.9 of the OECD Transfer Pricing Guidelines. The Ld.AR also relied upon the Guidance Note on Transfer Pricing issued by the ICAI and the following judicial precedents: Sony Ericsson Mobile Communications India Pvt. Ltd. (374 ITR 118) • (Delhi High Court); Societe Generale Global Solution Centre Pvt. Ltd. [TS-56-ITAT- • 2022(Bang)-TP]; SRF Ltd. [TS-166-ITAT-2021(Del)-TP]. • 24. The Ld.AR further submitted that the authorities below had effectively segregated the commission payment transaction from the basket of aggregated transactions benchmarked under TNMM and proceeded to determine its ALP independently at NIL, which is impermissible in law. 25. It was further contended that there exists no statutory mandate requiring an assessee to demonstrate a cost-benefit analysis for every expenditure incurred. Once services are shown to have been rendered and the transaction has been benchmarked under a recognised transfer pricing method, the Revenue cannot substitute its own business judgment for that of the taxpayer. 26. In support of the proposition that the tax authorities cannot question the commercial expediency of an expenditure, the Ld.AR relied upon the decision of the Hon'ble Supreme Court in S.A. Builders Ltd. v. CIT [Appeal (Civil) No.5811 of 2006] and the following judicial precedents: Boreal India Pvt. Ltd. [TS-159-ITAT-2021(Mum)-TP]; • SI Group India Ltd. [TS-525-HC-2019 (Bom)-TP]; • Lever India Exports Ltd. (78 taxmann.com 88); • EKL Appliances Ltd. (24 taxmann.com 199) (Delhi High Court); • Agro Tech Foods Ltd. [TS-136-ITAT-2021(Hyd)-TP]; • Air Liquide Engineering India Pvt. Ltd. (152 ITD 157). •

:-9-: IT(TP)A. No:07/Chny/2026 27. Per contra, the Ld.DR supported the orders of the lower authorities and submitted that the assessee had failed to furnish adequate documentary evidence establishing the actual rendition of services by the AEs. It was argued that substantial commission had been paid merely because the recipients were Associated Enterprises and that the determination of ALP at NIL was justified in the facts and circumstances of the case. 28. We have carefully considered the rival submissions advanced by both the parties, perused the orders of the authorities below, examined the material placed on record including the paper book filed by the assessee, and duly considered the judicial precedents relied upon by the parties. 29. It is an undisputed fact emerging from the record that during the year under consideration, the assessee had paid commission aggregating to Rs.2,72,03,527/- to its AEs towards services rendered in relation to procuring export orders and facilitating sales in overseas markets. The assessee had benchmarked the said international transaction by adopting the TNMM as the Most Appropriate Method and had aggregated the commission payment transaction with other closely linked international transactions, namely sales to AEs and purchase transactions, in accordance with the provisions contained in Rule 10A(d) of the Income-tax Rules, 1962. 30. From the material available on record, we find that the overseas AEs were functioning primarily as order procuring entities, marketing support service providers and facilitators for business development in their respective jurisdictions. The role performed by such AEs involved identifying prospective customers, establishing business relationships, undertaking negotiations, communicating customer requirements to the assessee, coordinating supplies, facilitating execution of orders and maintaining post-sale interactions with customers. In cases where orders were procured directly by the AEs, the sales were ultimately effected by the assessee company in India to the end customers, and the AEs were compensated by way of commission linked to such sales. The functions undertaken by these AEs were evidently limited in

:-10-: IT(TP)A. No:07/Chny/2026 nature and involved comparatively lower risks when contrasted with the functions and risks assumed by the assessee, which is a full-fledged manufacturing and exporting entity. 31. On a careful examination of the evidentiary material placed before us, we find that the assessee had furnished voluminous documentary evidence before the TPO as well as before the DRP to substantiate the rendition of services by the AEs. Such evidence includes e-mail correspondences exchanged among the end customers, the overseas AEs and the assessee company, evidencing active involvement of the AEs in negotiations, customer identification, procurement of orders, communication of technical specifications and customer requirements, coordination of dispatches, follow-up activities and post-sales support. The assessee has also placed on record copies of invoices, shipping documents, export realization certificates, details of export proceeds received and reconciliation statements demonstrating the nexus between the commission payments and the sales generated through the efforts of the AEs. 32. In our considered opinion, the aforesaid evidences unequivocally establish that the AEs had actually rendered services to the assessee and that the commission payments were made pursuant to genuine business arrangements backed by commercial substance. The documentary evidence placed on record clearly dispels the finding recorded by the TPO that the assessee had failed to establish the receipt of services and had merely relied upon inter-company agreements. The conclusion drawn by the lower authorities that no evidence was furnished except the commission agreements is, therefore, contrary to the material available on record and cannot be sustained. 33. We also find considerable force in the submissions of the Ld.AR that the assessee had generated export sales amounting to Rs.12,49,04,347/- in various overseas jurisdictions including the United States of America, Canada, Colombia, Peru, Argentina and other countries situated in North and South America through the efforts and support extended by its overseas AEs. In the facts and circumstances of the case, it would be wholly unrealistic and

:-11-: IT(TP)A. No:07/Chny/2026 commercially imprudent to assume that the assessee could have penetrated distant overseas markets, acquired customers and generated substantial export turnover without the active involvement, local presence and business facilitation services provided by entities operating within those territories. The existence of local representatives possessing knowledge of market conditions, customer preferences and business practices constitutes a legitimate commercial necessity for expanding export operations in foreign jurisdictions. 34. We further note that the assessee had benchmarked the impugned commission payments together with sales transactions and purchase transactions by adopting a combined transaction approach under TNMM. Rule 10A(d) of the Income-tax Rules specifically recognises the concept of aggregation of transactions which are so closely linked or continuous in nature that they cannot be evaluated adequately on a separate basis. The TPO has not brought on record any cogent material or convincing reasons to demonstrate that the aggregation approach adopted by the assessee was inappropriate or inconsistent with the transfer pricing provisions. 35. Once it is established that the transactions are closely interrelated and form part of an integrated business arrangement, and further once the overall profitability earned by the assessee under TNMM has been demonstrated to be at arm's length vis-à-vis comparable uncontrolled entities, there remains no justification for segregating one constituent transaction from the bundle of transactions and determining its Arm's Length Price independently at NIL. Such an approach runs contrary to the settled principles governing transfer pricing analysis and defeats the very purpose of adopting TNMM as the Most Appropriate Method. 36. It is by now well settled through a catena of judicial precedents that the TPO is not vested with jurisdiction to examine the commercial expediency or business prudence underlying an expenditure incurred by the assessee. The authority of the TPO is confined to determining whether the consideration paid in respect of an international transaction satisfies the arm's length standard.

:-12-: IT(TP)A. No:07/Chny/2026 The Transfer Pricing provisions do not empower the TPO to sit in judgment over the necessity of incurring an expenditure, nor do they authorise the determination of Arm's Length Price at NIL merely because, in the opinion of the Revenue authorities, the assessee could have conducted its business without availing such services. 37. In the present case, the assessee has successfully demonstrated, through contemporaneous documentary evidence, the actual receipt of services from the AEs, the direct nexus between the commission payments and the export sales generated therefrom, and the benchmarking of such payments under TNMM on an aggregated basis. In the absence of any material brought on record by the TPO to controvert these facts or to establish that the price paid was not consistent with arm's length standards, the determination of the Arm's Length Price of the commission payments at NIL cannot be sustained. 38. Accordingly, having regard to the totality of the facts and circumstances of the case, we hold that the action of the TPO, as affirmed by the DRP, in determining the Arm's Length Price of the commission payment at NIL is unsustainable both on facts and in law. We, therefore, direct the AO/TPO to accept the commission payment of Rs.2,72,03,527/- as having been undertaken at arm's length and consequently delete the transfer pricing adjustment made in this regard. 39. Ground No. 2 raised by the assessee is accordingly allowed. 40. In Ground No. 3, the assessee challenged the transfer pricing adjustment of Rs.25,94,184/- in respect of Sales made to AEs. 41. We find that the assessee is aggrieved by the upward transfer pricing adjustment of Rs.25,94,184/- made in respect of international transactions involving sale of goods to its AEs situated in USA, Sri Lanka, Brazil and the Netherlands. 42. The brief facts are that during the previous year relevant to the impugned assessment year, the assessee had benchmarked the aforesaid international

:-13-: IT(TP)A. No:07/Chny/2026 transactions by adopting the TNMM as the Most Appropriate Method. In its Transfer Pricing Study Report, the assessee determined its Profit Level Indicator ("PLI"), computed as Operating Profit to Operating Cost (OP/OC), at 5.91%, as against the margin of 2.84% earned by the comparable companies selected by it. Accordingly, the assessee claimed that the transactions undertaken with its AEs were at ALP. 43. The TPO, while examining the benchmarking analysis undertaken by the assessee, recomputed the operating margins by excluding foreign exchange fluctuation gains from operating income and by excluding certain expenditure items such as finance charges on borrowings, rates and taxes, advances written off and bad debts written off. Consequently, the PLI of the assessee was recomputed at (-)1.03%. 44. The TPO further included Mysore Polymers & Rubber Products Pvt. Ltd. as an additional comparable and recomputed the average margin of the comparable companies at 4.33%. Based on the revised margins, an adjustment of approximately Rs.46 lakhs was proposed in respect of sales made by the assessee to its AEs. 45. Before the DRP, the assessee contended that foreign exchange fluctuation gains constituted operating income and that advances written off and bad debts written off, being extraordinary items, could not form part of operating costs for the purposes of computing margins under TNMM. 46. The DRP accepted the assessee's contention regarding foreign exchange fluctuation gains by placing reliance on the decisions of the Bangalore Bench of the Tribunal in SAP Labs India Pvt. Ltd. v. ACIT [(2011) 44 SOT 156] and Cisco Systems Services B.V. Engineering India Pvt. Ltd., and directed that foreign exchange gains be treated as operating in nature. 47. Insofar as advances written off are concerned, the DRP observed that such write-offs do not arise from the assessee's routine business operations, are exceptional in nature and are not directly linked with the regular provision

:-14-: IT(TP)A. No:07/Chny/2026 of services or sale of goods. It therefore held that advances written off are required to be regarded as non-operating items. 48. Similarly, with respect to bad debts written off, the DRP held that such expenses arise on account of credit risks and financial decisions pertaining to earlier periods and do not reflect the operational efficiency of the enterprise during the relevant financial year. Reliance was placed upon the decision of the Tribunal in Four Soft Ltd. v. Dy. CIT [(2011) 142 TTJ 358] for the proposition that only costs relating to operational transactions with AEs should be considered for determining margins under TNMM and that bad debts written off are to be excluded while computing operating profits. 49. The DRP, however, rejected the assessee's objections seeking exclusion of Dolfin Rubber Ltd. and Mysore Polymers & Rubber Products Pvt. Ltd. from the list of comparables and also declined the request for inclusion of Tyresoles India Pvt. Ltd. as a comparable company. 50. The Ld.AR submitted that although the DRP had categorically held that advances written off and bad debts written off are non-operating in nature, the DRP proceeded on an erroneous factual premise that the TPO had already treated these items as non-operating expenses. 51. Drawing our attention to paragraphs 4.1.1 and 4.1.2 of the DRP's directions, the Ld.AR submitted that the DRP had unequivocally concluded that advances written off and bad debts written off ought to be excluded from operating costs. However, while sustaining the action of the TPO, the DRP failed to appreciate that the TPO had, in fact, included both these items within operating expenditure. 52. The Ld.AR invited our attention to the computation furnished by the assessee as well as that adopted by the TPO and demonstrated that advances written off amounting to Rs.2,89,74,751/- and bad debts written off amounting to Rs.5,04,68,380/- had been included by the TPO in operating expenses. Thus,

:-15-: IT(TP)A. No:07/Chny/2026 according to the Ld.AR, the DRP's conclusion that there was no infirmity in the approach adopted by the TPO is factually incorrect and self-contradictory. 53. It was further submitted that once these two extraordinary items are excluded from operating expenditure, in consonance with the findings recorded by the DRP itself, the assessee's PLI would stand recomputed at 5.9157%, which is significantly higher than the margin of 4.33% earned by the comparable companies. Consequently, no transfer pricing adjustment would survive. 54. The Ld.AR further submitted that in view of the above computation, the assessee was not pressing its objections relating to inclusion or exclusion of comparables, since acceptance of its principal contention regarding treatment of advances written off and bad debts written off would itself render the transfer pricing adjustment unsustainable. 55. Per contra, the Ld.DR supported the orders of the lower authorities and submitted that the transfer pricing adjustment had been made in accordance with law and therefore deserved to be sustained. 56. We have carefully considered the rival submissions advanced by both sides, perused the orders of the lower authorities, examined the Transfer Pricing documentation placed on record and deliberated upon the material available before us. 57. At the outset, it is an undisputed position emerging from the record that the assessee, while computing its operating margins under the TNMM, had considered foreign exchange fluctuation gains/losses as part of its operating income. The TPO, however, proceeded to treat such foreign exchange fluctuations as non-operating in nature. The DRP, upon examination of the issue and relying upon settled judicial principles governing transfer pricing analysis, categorically directed that foreign exchange fluctuation gains and losses, being intrinsically linked with the underlying business operations, ought to be regarded as operating items for the purposes of determination of the Profit Level Indicator (PLI). In view of the specific directions issued by the DRP and

:-16-: IT(TP)A. No:07/Chny/2026 there being no dispute raised before us on this aspect, the controversy relating to foreign exchange fluctuations no longer survives for adjudication. 58. The principal controversy requiring adjudication in the present appeal pertains to the treatment of advances written off amounting to Rs.2,89,74,751/- and bad debts written off amounting to Rs.5,04,68,380/-, aggregating to a substantial sum, while computing the operating margins of the assessee under TNMM. 59. It is observed from the records that the assessee had specifically contended before the TPO that the aforesaid write-offs represented exceptional and extraordinary items arising on account of unprecedented business disruptions caused by the Covid-19 pandemic. According to the assessee, these write-offs did not emanate from the normal and recurring business activities undertaken during the relevant previous year but constituted abnormal losses attributable to extraordinary commercial circumstances prevailing globally during the pandemic period. It was therefore argued that such items, being exceptional in nature, ought to be excluded from operating expenditure while determining the PLI under TNMM, since inclusion thereof would distort the true profitability arising from ordinary business operations and consequently impair the reliability of the comparability analysis. 60. However, a careful examination of the computation mechanism adopted by the TPO reveals that notwithstanding the aforesaid submissions of the assessee, the TPO included the advances written off as well as bad debts written off within the ambit of operating expenditure. The inclusion of these extraordinary items in operating costs had the effect of materially depressing the operating profitability of the assessee and resulted in the assessee's PLI being computed at (-)0.2965%. 61. At this juncture, it would be relevant to advert to the findings recorded by the DRP in paragraphs 4.1.1 and 4.1.2 of its directions. The DRP has unequivocally observed that advances written off and bad debts written off do not arise in the ordinary course of business operations, possess an exceptional

:-17-: IT(TP)A. No:07/Chny/2026 character and therefore deserve to be regarded as non-operating items for the purposes of transfer pricing analysis. The DRP further accepted the proposition that such extraordinary expenditures are incapable of reflecting the operational efficiency of an enterprise and consequently cannot constitute an appropriate component of operating costs for benchmarking under TNMM. 62. Thus, from a conjoint reading of the findings recorded by the DRP and the computation adopted by the TPO, an apparent inconsistency emerges. While the DRP proceeded on the premise that the TPO had already accorded non-operating treatment to advances written off and bad debts written off, the factual position borne out from the transfer pricing computations unmistakably demonstrates that the TPO had, in fact, treated these items as operating expenses and included the same in the operating cost base of the assessee. 63. In our considered opinion, once the DRP itself has accepted the fundamental principle that advances written off and bad debts written off are extraordinary items having no nexus with the normal operating activities of the assessee and are therefore liable to be treated as non-operating in nature, there remains no justification whatsoever for sustaining a computation in which such items continue to form part of operating expenditure. The very rationale underlying TNMM is to compare margins earned from ordinary business operations, and any abnormal, exceptional or non-recurring item which does not reflect the operational performance of the enterprise is required to be excluded to ensure a proper and meaningful comparability analysis. 64. We therefore find considerable force in the submissions advanced by the Ld.AR that advances written off and bad debts written off, having arisen under exceptional circumstances attributable to the Covid-19 pandemic and being admittedly extraordinary in nature, deserve to be excluded from operating costs while determining the PLI of the assessee under TNMM. 65. We further observe that the revised workings furnished before us demonstrate that upon exclusion of advances written off amounting to Rs.2,89,74,751/- and bad debts written off amounting to Rs.5,04,68,380/- from

:-18-: IT(TP)A. No:07/Chny/2026 the operating expenditure, the assessee's operating margin works out to 5.9157%. It is an admitted factual position that the arithmetic mean margin of the comparable companies selected by the TPO stands at 4.33%. Therefore, once the extraordinary items are excluded from the operating cost base, the margin earned by the assessee is found to be higher than the margin earned by the comparables. 66. It is a settled proposition of transfer pricing jurisprudence that where the operating margin earned by the tested party exceeds the margin earned by the comparable uncontrolled entities, the international transactions undertaken with its AEs necessarily satisfy the arm's length standard contemplated under Chapter X of the Act and consequently no transfer pricing adjustment survives. 67. In view of the foregoing discussion, we hold that the action of the TPO in treating advances written off and bad debts written off as operating expenditure, despite their exceptional and non-recurring character, cannot be sustained in law. We further hold that the DRP, though having correctly recognised the non- operating nature of these items, failed to grant consequential relief owing to an erroneous factual assumption that the TPO had already excluded them from operating costs. 68. In the facts and circumstances of the case, we are of the considered view that the advances written off amounting to Rs.2,89,74,751/- and bad debts written off amounting to Rs.5,04,68,380/- do not partake the character of operating expenses and, therefore, deserve to be treated as non-operating items for the purpose of computing the Profit Level Indicator (PLI). 69. Once the aforesaid items are excluded from the operating cost base, the margin earned by the assessee stands higher than the margin earned by the comparable companies adopted for benchmarking the international transactions. Accordingly, the price charged by the assessee in respect of the international transactions entered into with its Associated Enterprises is liable to be accepted as being at Arm's Length Price.

:-19-: IT(TP)A. No:07/Chny/2026 70. In view thereof, the transfer pricing adjustment of Rs.25,94,184/- made by the AO is unsustainable in law and on facts and is hereby directed to be deleted. 71. Consequently, the grounds raised by the assessee on this issue stand allowed. 72. Ground No. 4 relates to the challenge mounted by the assessee against the transfer pricing adjustment of Rs.4,17,242/- made on account of fees alleged to be chargeable in respect of the corporate guarantees furnished by the assessee in favour of its AEs. 73. The facts borne out from the record reveal that during the relevant previous year, the assessee had arranged for issuance of Standby Letters of Credit (SBLCs) through its bankers in favour of the bankers of its AEs as security for the loans availed by such AEs. The particulars of the SBLCs furnished are as under: Name of the AE Currency SBLC Amount Elgi Rubber Company LLC, USA USD 3,250,000 Elgi Rubber Company Holdings BV, EURO Netherlands 8,000,000 Elgi Rubber Resources BV, Netherlands EURO 6,000,000

:-20-: IT(TP)A. No:07/Chny/2026 75. The assessee has also placed on record that the charges levied by the Indian bankers for issuance of the SBLCs were recovered in entirety from the respective AEs by way of cross-charge. The details of such recovery are as under: Name of the AE Amount charged (Rs.) Elgi Rubber Company LLC, USA 36,57,420 Elgi Rubber Company Holdings BV, Netherlands 1,51,44,315 Elgi Rubber Resources BV, Netherlands 25,95,300 Total 2,13,97,035

:-21-: IT(TP)A. No:07/Chny/2026 data, a rate of 1.98% was determined as the arm's length guarantee commission. 79. Applying the said rate on an amount of Rs.2,13,97,035/-, the TPO computed an adjustment of Rs.4,17,242/- towards corporate guarantee fees and made an upward adjustment to the value of the international transaction. The DRP affirmed the action of the TPO and rejected the contention of the assessee that the cost incurred towards issuance of the guarantee had already been recovered from the AEs and that no separate benchmarking exercise was warranted. 80. Before us, the Ld.AR submitted that the entire premise adopted by the TPO was factually erroneous. It was argued that the sum of Rs.2,13,97,035/- represented merely the amount recovered by the assessee from its AEs towards charges levied by the Indian banks for issuance of SBLCs and did not represent the quantum of guarantee furnished. It was submitted that the actual guarantee exposure pertained to SBLCs aggregating to USD 3.25 million in favour of the American AE and Euro 14 million in favour of the Netherlands entities. 81. The Ld.AR contended that the TPO had erroneously considered the amount of Rs.2.14 crores, being the bank charges recovered from the AEs, as the value of the guarantee itself and had further applied a rate of 1.98% thereon. It was submitted that the TPO proceeded under the mistaken impression that no amount whatsoever had been recovered from the AEs for providing the SBLCs, whereas, in reality, the assessee had fully cross-charged the costs incurred from the beneficiary AEs. 82. The Ld.AR further reiterated that during the relevant year no default had occurred on the part of the AEs and consequently no additional liability, risk or financial obligation was borne by the assessee. Therefore, apart from reimbursement of the bank charges, the assessee had not incurred any independent expenditure or suffered any economic cost in connection with the issuance of the guarantees.

:-22-: IT(TP)A. No:07/Chny/2026 83. On the strength of the above submissions, it was prayed that the adjustment of Rs.4,17,242/- made towards corporate guarantee fees deserve to be deleted inasmuch as the entire expenditure incurred for obtaining the SBLCs had already been recovered from the respective AEs. 84. Per contra, the Ld.DR submitted that the factual assertions advanced by the assessee regarding cross-charging of the bank guarantee expenses require verification at the level of the AO/TPO and, therefore, the matter may appropriately be restored to the file of the lower authorities. 85. We have heard the rival submissions and carefully perused the material available on record. It is an undisputed fact that the assessee had facilitated borrowings availed by its AEs by arranging for issuance of SBLCs through its bankers. It is equally not in dispute that no financial obligation was triggered upon the assessee during the relevant year on account of any default committed by the AEs and that the underlying loan obligations continued to be serviced by the AEs themselves. 86. The principal contention advanced by the assessee is that the charges levied by the banks for issuance of the SBLCs had been fully recovered from the beneficiary AEs and that the TPO, on an erroneous appreciation of facts, treated the amount so recovered as the guarantee amount itself and subjected the same to a further levy of guarantee commission at 1.98%. 87. In our considered opinion, the aforesaid factual assertion made by the assessee requires verification with reference to the documentary evidence and supporting accounting records evidencing recovery of the entire bank charges from the AEs. If it is established that the amount of Rs.2,13,97,035/- merely represents reimbursement of actual costs incurred by the assessee towards issuance of SBLCs and that the same has been fully recovered from the respective AEs, then the claim of the assessee that such recovery itself constitutes the arm's length consideration for the guarantee arrangement merits due examination.

:-23-: IT(TP)A. No:07/Chny/2026 88. Accordingly, in the peculiar facts and circumstances of the present case, we deem it fit and proper to restore this issue to the file of the AO/TPO with a direction to verify the evidences to be furnished by the assessee demonstrating that the charges levied by the bankers for issuance of SBLCs were completely cross-charged to the respective AEs. Upon such verification, if the claim of the assessee is found to be correct, the amount recovered from the AEs towards bank charges shall be considered as representing the arm's length compensation in respect of the guarantee transaction and the consequential adjustment shall be recomputed in accordance with law. 89. Needless to state, the assessee shall be afforded adequate opportunity of being heard and permitted to furnish all supporting documents in substantiation of its claim. 90. Accordingly, Ground No. 4 is allowed for statistical purposes. 91. Ground No.5 raised by the assessee is directed against the transfer pricing adjustment of Rs.28,15,625/- made by the TPO and sustained by the DRP on account of notional interest alleged to be chargeable on outstanding trade receivables from the AEs. 92. The TPO observed that the outstanding receivables arising from transactions with the AEs constituted a separate international transaction having a bearing on the profit and loss account of the assessee inasmuch as delayed realization of sale proceeds resulted in an opportunity cost to the assessee and conferred a benefit upon the AEs in the nature of interest-free credit. According to the TPO, there were two distinct elements embedded in such transactions, namely, remuneration for the supply of goods/services and compensation for the credit period extended to the customer, and therefore the receivables transaction required independent benchmarking. 93. The TPO further relied upon the Explanation inserted to section 92B of the Act by the Finance Act, 2012 with retrospective effect from 01.04.2002, which specifically includes within the ambit of the expression "international

:-24-: IT(TP)A. No:07/Chny/2026 transaction" any receivable or debt arising during the course of business. Proceeding on the premise that the assessee had not benchmarked the outstanding receivables in its transfer pricing study, the TPO adopted an independent benchmarking exercise by allowing a credit period of 30 days, applying an interest rate of 3.84% per annum and distributing the total receivables outstanding as on 31.03.2022 into twelve monthly instalments for the purpose of computing the delay in realization. On such basis, a transfer pricing adjustment of Rs.28,15,625/- was proposed and the same came to be affirmed by the DRP. 94. Before us, the Ld.AR assailed the adjustment on several grounds. It was submitted that delayed realization of sale proceeds is merely incidental to the principal international transaction and does not partake the character of an independent transaction warranting separate benchmarking. It was argued that commercial enterprises ordinarily factor the cost of delayed realization into their pricing and mark-up structure and do not necessarily levy interest separately upon customers. 95. It was further contended that the TPO had arbitrarily granted a credit period of only 30 days, ignoring the fact that in the assessee's business model the goods exported would themselves take approximately 30 days to reach the destination port of the AE, and therefore charging interest even before the goods reached the AE would be wholly unjustified. It was also submitted that the extant regulations framed by the Reserve Bank of India permit realization of export proceeds within a period of nine months and therefore no adverse inference could be drawn merely because the receivables remained outstanding beyond the period adopted by the TPO. 96. The Ld.AR further submitted that the assessee had consistently followed a uniform business practice of not charging interest on delayed realization of receivables not only from AEs but also from certain non-AE customers, including one of its major domestic customers, namely Tamil Nadu State Transport Corporation. It was argued that such conduct constituted an internal

:-25-: IT(TP)A. No:07/Chny/2026 CUP and clearly demonstrated that the assessee had adopted a commercially expedient policy uniformly applicable to both controlled and uncontrolled transactions. Reliance was placed on a catena of judicial precedents including Integra Software Services (P.) Ltd. v. DCIT [2022] 145 taxmann.com 460 (Chennai-Trib.), Sanmina-SCI India Pvt. Ltd. [2024] 9 TMI 1921 (ITAT Chennai), Financial Software and Systems Pvt. Ltd. [2025] 8 TMI 287 (ITAT Chennai), Toshiba Technical Services International Corporation [2022] 145 taxmann.com 474 (Ahmedabad-Trib.), WNS Global Services (P.) Ltd. [2019] 103 taxmann.com 75 (Mumbai), Kusum Healthcare Pvt. Ltd., Livingstones, Indo- American Jewellery Ltd., Bausch & Lomb Eyecare (India) Pvt. Ltd., Axis Risk Consulting Services Pvt. Ltd. and Sophos Technologies Pvt. Ltd. 97. It was also argued that the authorities below had predominantly relied upon decisions rendered in the pre-COVID period and had failed to appreciate the extraordinary commercial realities and disruptions prevailing during the relevant assessment year, which continued to bear the impact of the pandemic. According to the Ld.AR, a pragmatic and business-oriented approach ought to have been adopted while examining the issue of delayed realization of export proceeds during the relevant period. 98. The Ld.AR further submitted that once the arm's length price of the principal international transaction had been accepted under the TNMM, there could not be a separate adjustment in respect of receivables emanating from such transactions. It was contended that the receivables are intrinsically linked to and arise out of the principal transaction and therefore ought to be aggregated with the primary transaction while carrying out transfer pricing analysis. Reliance in this regard was placed upon the decisions in Indo American Jewellery Ltd., Information System Resource Centre Pvt. Ltd., Bombay Dyeing & Manufacturing Co. Ltd., Nimbus Communications Ltd., Panasonic India Pvt. Ltd., Dell International Services India Pvt. Ltd., Tally Solutions Pvt. Ltd., Xchanging Solutions Ltd., Lotus Labs Pvt. Ltd., Avnet India Pvt. Ltd., Global E-Business Operations Pvt. Ltd., Micro Inks Ltd. and Kadimi Tool Manufacturing Co. Pvt. Ltd.

:-26-: IT(TP)A. No:07/Chny/2026 99. Without prejudice, it was submitted that even if receivables were to be considered as an international transaction, the same ought to be benchmarked adopting a combined transaction approach, particularly when working capital adjustments had already been granted while determining the arm's length margin under TNMM. Reliance was placed on the decisions in Effective Teleservices Pvt. Ltd., Teejay India (P.) Ltd., Integra Software Services (P.) Ltd., Sanmina-SCI India Pvt. Ltd. and Financial Software and Systems Pvt. Ltd. 100. The Ld.DR, on the other hand, supported the orders of the lower authorities and submitted that the assessee had not placed on record adequate material to establish that similar credit terms were extended to both AEs and non-AEs or that prices charged in controlled and uncontrolled transactions were identical. 101. We have heard the rival submissions, perused the orders of the authorities below and examined the material placed on record along with the judicial precedents relied upon. 102. At the outset, there is no dispute that the outstanding receivables in question arise directly from the principal international transactions entered into by the assessee with its AEs. It is equally undisputed that the international transactions themselves have been benchmarked under TNMM and that the margins earned by the assessee have been found to be at arm's length. 103. We find merit in the contention of the assessee that delayed realization of receivables is ordinarily a consequence of the underlying business transaction and commercial considerations governing the relationship between the parties. In commercial practice, enterprises frequently factor the cost of credit into the pricing mechanism and do not necessarily charge interest separately for delayed realization. The material available on record demonstrates that the assessee has consistently not charged interest on delayed receivables not only from its AEs but also from certain non-AE customers. Such uniformity in business conduct lends credence to the plea that

:-27-: IT(TP)A. No:07/Chny/2026 the assessee has adopted a consistent commercial policy applicable across categories of customers. 104. We find support for the aforesaid view from the decisions relied upon by the assessee, particularly in Integra Software Services (P.) Ltd. (supra), Toshiba Technical Services International Corporation (supra) and WNS Global Services (P.) Ltd. (supra), wherein it has been held that where no interest is charged either from AEs or non-AEs and where the margins under TNMM are accepted as being at arm's length, a separate adjustment on account of outstanding receivables may not be warranted. 105. We also find substance in the contention advanced by the Ld.AR that the DRP has relied substantially upon decisions rendered in a different factual and economic milieu. The assessment year under consideration pertains to a period significantly impacted by the aftermath of the COVID-19 pandemic, which had affected global trade cycles, supply chains and realization patterns. Therefore, the factual matrix prevailing during the relevant year cannot be ignored while evaluating the issue. 106. Further, we find considerable force in the proposition canvassed by the assessee that where TNMM has been adopted as the most appropriate method and the assessee's Profit Level Indicator is found to be superior to that of comparable uncontrolled entities, the receivables arising from such transactions ought generally to be examined in an aggregated manner with the principal international transaction. The principle of aggregation under transfer pricing jurisprudence is well recognised and has consistently been applied in cases where closely linked transactions are involved. 107. We also note that the methodology adopted by the TPO for computing the impugned adjustment by allowing only 30 days of credit, distributing the year-end receivables into twelve equal instalments and applying an interest rate of 3.84% per annum appears to have been adopted without adequate discussion regarding the commercial realities of the assessee's business model or without demonstrating the arm's length nature of such assumptions.

:-28-: IT(TP)A. No:07/Chny/2026 108. Having regard to the entirety of the facts and circumstances of the case, the consistent conduct of the assessee in not charging interest from both AEs and non-AEs, the acceptance of the primary international transactions under TNMM, and the judicial precedents cited before us, we are of the considered opinion that no separate transfer pricing adjustment is called for in respect of outstanding receivables from the AEs. 109. Accordingly, the addition of Rs.28,15,625/- made on account of notional interest on trade receivables is directed to be deleted. The ground raised by the assessee is, therefore, allowed. 110. In the result, Ground No.5 raised by the assessee stands allowed. 111. In the result, the appeal of the assessee is partly allowed for statistical purposes.

Order pronounced in the court on 07th July, 2026 at Chennai.

Sd/- Sd/- (जॉजा जॉजा के) (एस. आर. रघुनार्था) (GEORGE GEORGE K) (S. R. RAGHUNATHA) उपाध्यक्ष /VICE PRESIDENT लेखा सदस्य/ACCOUNTANT MEMBER चेन्नई/Chennai, ददनांक/Dated, the 07th July, 2026. Devadas आदेश की प्रनतललपप अग्रेपर्त/Copy to: 1. अपीलार्थी/Appellant 2. प्रत्यर्थी/Respondent 3.आयकर आयुक्त/CIT– Chennai/Coimbatore/Madurai/Salem 4. पवभागीय प्रनतननधि/DR 5. गाडा फाईल/GF DEVADAS Digitally signed by DEVADAS GOPALANACHARY GOPALANACHARY Date: 2026.07.08 18:15:48 +05'30'