FLEXIBLE STEEL LACING CO. PVT. LTD.,CHENNAI vs. ACIT, CIRCLE-1, LTU, CHENNAI

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ITTPA 123/CHNY/2024Status: DisposedITAT Chennai05 May 2026AY 2021-226 pages
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What did the Tribunal hold?

The Tribunal held that the AO, TPO, and DRP were not correct in computing the ALP of the management fees at NIL without properly examining the voluminous evidence submitted by the assessee. The Tribunal noted that the assessee had provided a detailed breakdown of services and supporting documents, and had benchmarked the transaction under TNMM. The Tribunal observed that the TPO had rejected the TNMM and adopted another method, concluding that no documentary evidence was submitted. The DRP, based on a remand report from the TPO, upheld the adjustment. Citing the case of Xchanging Solutions Ltd. vs. DCIT, the Tribunal held that the issue of determining the ALP of management fees needs to be re-examined. Therefore, the Tribunal remitted the issue back to the AO with a direction to make a reference to the TPO for a fresh examination based on the submitted documents, ensuring the assessee is given a reasonable opportunity of being heard. The Tribunal expressly left undecided the issues of interest under sections 234A and 234B and penalty under section 270A, as these were contingent on the primary adjustment.

What were the facts?

The assessee, Flexible Steel Lacing Company Pvt. Ltd., is in appeal against the final order of assessment passed by the Assessment Unit (AO) under section 143(3) read with section 144C(13) of the Income Tax Act, 1961, for Assessment Year 2021-22. The dispute pertains to a downward adjustment of INR 1,60,94,876 made by the AO/TPO concerning management fees paid to an Associated Enterprise (AE). The AO/TPO determined the Arm's Length Price (ALP) of these management services as NIL. The assessee had filed objections before the Dispute Resolution Panel (DRP), which confirmed the adjustment. The assessee's appeal before the ITAT challenges these findings.

What were the issues?

1. Whether the Tribunal has the power to remit the issue of determination of the Arm's Length Price (ALP) of management fees back to the Assessing Officer (AO) for fresh examination, considering the assessee's arguments that the AO, TPO, and DRP erred in making a downward adjustment of INR 1,60,94,876 by determining the ALP as NIL without proper benchmarking, supporting rationale, or comparable data, and by disregarding the assessee's Transfer Pricing Study Report which used the Transaction Net Margin Method (TNMM) and aggregated transactions. The assessee contended that the management services were unique and beneficial, evidenced by a 24% operating margin, and that the charges were allocated scientifically with a 6% mark-up. The revenue relied on the orders of the lower authorities. 2. Whether interest levied under sections 234A and 234B is erroneous, with the assessee arguing that it should be deleted if the primary TP adjustments are deleted. 3. Whether the initiation of penalty proceedings under section 270A is erroneous, with the assessee arguing it arises from a difference of opinion and would lose merit if the primary adjustments are deleted.

Which sections of the Income-tax Act were involved?

Section 143(3),Section 144C(13),Section 234A,Section 234B,Section 270A

AI-generated summary — verify with the full judgment below

Income Tax Appellate Tribunal, ‘D’ BENCH: CHENNAI

Before: SHRI ABY T. VARKEY & MS. PADMAVATHY.S

Hearing: 29.04.2026Pronounced: 05.05.2026

आदेश / O R D E R

PER PADMAVATHY.S, A.M: This appeal and Stay Application (SA) by the assessee are against the final order of assessment passed by the Assessment Unit (in short "A.O") passed u/s. 143(3) r.w.s 144C(13) of the Income Tax Act, 1961 (in short "the Act") dated 25.10.2024 for Assessment Year (AY) 2021-22. The grounds of appeal raised by the assessee are as under: “The Appellant respectfully submits that the order of the learned Assessing Officer ('AO'), learned transfer pricing officer ('TPO') and the Hon'ble Dispute Resolution Pannel ('the DRP') in so far as it related to the addition made is concerned against the provisions of law and contrary to facts and circumstances of the case, based on the following grounds.

Ground No. 1: Downward adjustment on international transactions relating to Management Fees payment to Associated Enterprise

TP Adjustment of INR 1,60,94,876 On the facts and in the circumstances of the case and in law, the learned AO, learned TPO and the Hon'ble DRP:

1.1. erred in making a downward adjustment of INR 1,60,94,876 with respect to management fees paid to the Associated Enterprise (AE) and in concluding that the arms-length price of management service fee as NIL adopting other method without any basis, supporting rationale or comparable data and without any proper benchmarking exercise.

1.2. erred in disregarding the Transfer Pricing Study Report furnished wherein benchmarking exercise was conducted by the Assessee by aggregating all international transactions considering "Transaction Net Margin Method' as most appropriate method. Ought to have appreciated that if the transactions are inextricably linked, aggregation of such transactions is an acceptable method as per Indian Transfer Pricing regulations and as such the international transactions can be tested under Transaction Net Margin Method ('TNMM') for determination of ALP. Having accepted the ALP of other international transactions under TNMM, erred in separately benchmarking only the management charges using Other Method and determining the ALP to be Nil.

1.3. Erred in not considering the fact that despite incurring the management cost, the Appellant has an operating margin of 24% which is significantly higher than that of comparable companies. This substantial margin underscores the effective and beneficial nature of the management services rendered by the Associated Enterprise (AE).

1.4. Erred in concluding that the AE did not render management services and erroneously stating that no credible evidence were provided disregarding the documentary evidences furnished.

1.5. Erred in not appreciating mail communication and relevant evidences given as additional evidence before the Hon'ble DRP in the correct perspective and deeming it to be shareholder activity.

1.6. erred in disregarding the facts, submissions filed, need-benefit documentation, evidence and agreements furnished and erred in concluding that the Management services are routine and duplicative, not recognizing that these services are unique. 1.7. Should have acknowledged that the management charges are allocated across group companies using appropriate and scientific allocation keys, with a 6% mark-up on actual cost. Ground No. 2: Erroneous levy of interest under section 234A and Section 234B 2.1. On the facts and circumstances of the case, the learned AO has erred in law and in fact, in imposing levy of interest under section 2348 of the Act to the tune of INR 20,79,631 and excess levy of interest under section 234A to the tune of INR 96,426. On deleting the above TP adjustments, the interest under section 2348 will be deleted. Ground No. 3 Initiation of penalty proceedings under section 270A of the Act 3.1. On the facts and circumstances of the case and in law, the learned AO erred/initiating penalty proceedings under section 270A of the Act without appreciating the fact that, proposed adjustment arising from the determination of ALP of the international transactions of the Appellant Just on account of the difference of opinion. Further, the Appellant humbly submits that the penalty proceedings would lose its merit once relief claimed in the above grounds is duly granted. The Appellant prays to consider the above grounds favourably and seeks your leave to add, alter, supplement, amend, vary, withdraw or otherwise modify the ground mentioned herein above at or before the time of hearing. All the aforesaid grounds of appeal are independent, in the alternative and without prejudice to one another.”

2.

The assessee is a private limited company and is the subsidiary of Flexible Steel Lacing Company, USA. The assessee filed a return of income for AY 2021-22 on 25.01.2022 declaring a total income of Rs.10,12,37,490/-. The case was selected for scrutiny and the statutory notices were duly served on the assessee. Since the assessee had international transactions, the A.O made a reference to the Transfer Pricing Officer (TPO) to complete the Arm's Length Price (ALP) of the international transactions. The TPO made a downward adjustment towards management fees paid by the assessee while computing the ALP at Nil. The A.O passed the draft assessment order incorporating the TP adjustment. Aggrieved, the assessee filed its objections before the Disputes Resolution Panel (DRP), who confirmed the TP adjustment. The assessee is in appeal before the Tribunal against the final order of assessment passed by the A.O pursuant to the direction of the DRP.

3.

At the outset, the Ld. Authorized Representative (AR) of the assessee submitted that the TPO has not considered the various documentary evidences submitted by the assessee in support of the management fees and has arrived at the ALP at Nil stating that the assessee has not furnished Any supporting evidence. The Ld. AR further submitted that the assessee filed additional evidence containing 855 pages before the DRP and the DRP called for a remand report from the TPO. The Ld. AR also submitted that however the adjustment was upheld for the same reason that the assessee has not properly substantiated the payment of management fees. Accordingly the Ld. AR prayed that the impugned issue can be remitted back to the lower authorities to be considered afresh based on the various documentary evidences which are already part of the record.

4.

The Ld. Departmental Representative (DR), on the other hand, relied on the orders of the lower authorities.

5.

We have heard the parties, and perused the material available on record. The assessee in the TP study has bench marked the international transaction pertaining to Management Fees under TNMM method. The TPO rejected the same and adopted other method to compute the ALP at Nil. The TPO while doing so held that the assessee has not submitted any documentary evidences with regard to the impugned payments. Before the DRP, the assessee submitted additional evidences and the DRP called for a remand report. From the perusal of the remand report we notice that the TPO has stated that the nature of services are general in nature and that the assessee has not properly supported the claim with regard to rendering of services. Further the DRP based on the TPO's remand report has upheld the adjustment by holding that the assessee has not furnished sufficient evidences. In this regard we notice that the assessee in the additional evidences submitted before the DRP has given a detailed break up of each of the services rendered and the supporting documents for each of the said services (page 370 to 376 of the paper book).Therefore in our considered view the TPO/DRP are not correct computing the ALP of the Management fees at Nil without properly examining voluminous evidence submitted by the assessee and accordingly we are of the view that the issue of bench marking the management fee back needs to be re-examined. We notice that the Bangalore Bench of the Tribunal in a recent decision in the case of Xchanging Solutions Ltd., vs DCIT [(2026) 185 taxmann.com 337 (Bangalore Trib)] has held that even with regard TP issues which is to be remitted back, the only authority to whom it can be sent back is the AO only. Therefore we are remitting the above issue back to the AO with a direction to make a reference to the TPO as appropriate so that the issue of determination of ALP of the management fee can be examined afresh based on the documents submitted by the assessee and to be decided in accordance with law. Needless to say that the assessee be given a reasonable opportunity of being heard. It is ordered accordingly.

6.

In the light of our decision in the appeal as above, the stay application of the assessee has become infructuous.

7.

In the result, the appeal of assessee is allowed for statistical purposes and the stay application is dismissed as infructuous.

Order pronounced on 05th day of May, 2026 at Chennai.

Sd/- Sd/- (एबी टी. वक�) (पदमावती यस) (ABY. T. Varkey) (Padmavathy.S) लेखा लेखा सद�य लेखा लेखा सद�य सद�य /Accountant Member सद�य �याियक �याियक सद�य �याियक �याियक सद�य सद�य / Judicial Member सद�य चे�नई/Chennai, �दनांक/Dated: 05th May, 2026. EDN, Sr. P.S आदेश क� �ितिल�प अ�े�षत/Copy to: 1. अपीलाथ�/Appellant 2. ��थ�/Respondent 3. आयकर आयु�/CIT, Chennai/Madurai/Coimbatore/Salem 4. िवभागीय �ितिनिध/DR 5. गाड� फाईल/GF Digitally signed by EJTADA DURGA EJTADA DURGA NARESH NARESH Date: 2026.05.06 11:44:47 +05'30'

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