SCHUECO INDIA PRIVATE LIMITED ,MUMBAI vs. DCIT 15(3)(2), MUMBAI

आदेश / O R D E R PER AMIT SHUKLA (J.M): This appeal has been preferred by Schueco India Private Limited against the final assessment order dated 26 September 2024 passed by the Assessing Officer under section 143(3) read with sections 144C(13) and 144B of the

2 ITA No.6012/Mum/2024 Schueco India Private Limited Income-tax Act, 1961 (“the Act”), pursuant to the directions dated 30 August 2024 issued by the learned Dispute Resolution Panel (“DRP”) under section 144C(5) of the Act, for the assessment year 2021–22. The assessee filed its return of income on 13 March 2022 declaring a total income of ₹5,50,70,329. In the final assessment order, the total income has been assessed at ₹7,84,85,252 after making an aggregate transfer-pricing adjustment of ₹2,34,14,923, comprising an adjustment of ₹1,13,63,830 in respect of payment of know- how and licence fees and a further adjustment of ₹1,20,51,093 in respect of intra-group services. The assessee has challenged both the adjustments on their factual as well as legal sustainability. Certain grounds have also been raised challenging the validity of the reference made under section 92CA(1), the jurisdiction of the Transfer Pricing Officer (“TPO”), the scope of the directions issued by the DRP under section 144C(8), and the limitation for passing the final assessment order. However, as the appeal is being examined and decided on the merits of the transfer-pricing adjustments, these legal grounds are, for the present, left open.

3 ITA No.6012/Mum/2024 Schueco India Private Limited countries. The Schueco group is engaged in the development and supply of window, door, sliding and façade systems made from aluminium, steel and other materials. The assessee carries on the business of sale and distribution of aluminium systems, steel profile systems, fittings, accessories and related products used for façades, doors and windows in residential, commercial and industrial projects. Its products are sold principally to fabricators, who use the profiles, fittings and accessories for fabrication and installation in building projects. According to the assessee, its functions are not confined to the purchase and resale of finished goods. It assists its customers and fabricators at various stages of a project by advising them on appropriate system selection and design, defining workshop and production layouts, imparting training on new system construction, and providing technical support in relation to issues arising during fabrication and execution. For discharging these functions, the assessee claims to draw upon the know-how, construction drawings, product specifications, technical information and system- related inputs developed and supplied by Schueco KG.

4 ITA No.6012/Mum/2024 Schueco India Private Limited price of the relevant sales; and, secondly, payment of ₹1,20,51,093 towards intra-group services. The latter comprised ₹93,48,993 for Small Business Solutions (“SBS”) running services, ₹11,25,875 for Customer and Project Services (“CPS”), and ₹15,76,225 for administrative support services. The assessee benchmarked the royalty transaction by applying the Comparable Uncontrolled Price (“CUP”) method. Insofar as the intra-group services were concerned, it applied the Transactional Net Margin Method (“TNMM”), treating the foreign AE as the tested party and contending that the services were charged on a cost-plus basis with a mark-up of 5 per cent. The treatment of these transactions by the assessee, the TPO and the DRP may be summarised as under:-

Nature of Adjustment Amount of Method adopted Adjustment international surviving after transaction by assessee proposed by TPO transaction DRP CUP; royalty paid at Know-how and ₹4,54,55,319 ₹4,54,55,319 ₹1,13,63,830 4% of net invoice licence fees price TNMM; AE as tested SBS running services ₹93,48,993 party TNMM; AE as tested CPS services ₹11,25,875 party Administrative TNMM; AE as tested ₹15,76,225 support services party Total intra-group TNMM; cost plus ₹1,20,51,093 ₹1,20,51,093 ₹1,20,51,093 services 5% Aggregate ₹5,75,06,412 ₹5,75,06,412 ₹2,34,14,923 adjustment

5 ITA No.6012/Mum/2024 Schueco India Private Limited October 2023. As explained by the assessee, the agreement conferred the right to use the know-how, technical data, improvements and trade marks associated with Schueco aluminium systems. The licensed know-how was stated to encompass construction drawings and specifications, technical information relating to inventions, developments, design, production and quality control, as well as other confidential information concerning Schueco products and systems. The trade-mark rights covered the Schueco name and label, names of the profile systems and product-related designations. The assessee submitted that these rights were used not only in relation to the products sold by it but also while furnishing technical guidance to fabricators and customers throughout the course of a building project. In support of its benchmarking, the assessee applied the CUP method and relied upon ten licence agreements identified through the RoyaltyRange database. Its transfer-pricing study reported an arm’s-length range of 3 per cent to 5 per cent, with a median of 4.25 per cent, as against the actual royalty rate of 4 per cent paid by the assessee.

6 ITA No.6012/Mum/2024 Schueco India Private Limited in India since September 2011 and had, over a period of about a decade, developed its own presence and goodwill in the Indian market. The TPO observed that the assessee had itself contributed towards building the group’s brand in India through its distribution and marketing activities and, therefore, questioned the commercial justification for requiring the Indian entity to pay know-how and licence fees to its AE. In response, the assessee explained the technical and commercial content of the licensed rights, the continuous product-development and testing functions undertaken by Schueco KG, the role of the Schueco Technology Centre, the technical assistance made available to the Indian entity and the significance of the brand in positioning the products in the premium segment. It further explained that it assisted customers in choosing suitable systems and resolving technical issues, and that it drew upon the AE’s construction drawings, standardised processes, fabrication information and project-specific technical support while discharging those functions.

7 ITA No.6012/Mum/2024 Schueco India Private Limited know-how or licence required for manufacturing those goods would be utilised by the manufacturing entities and not by the assessee acting as a distributor. He held that the assessee had not satisfactorily demonstrated why a distributor of finished products was required to pay royalty for manufacturing-related know-how. He further observed that the assessee had been operating in India for nearly a decade and had incurred expenditure on advertisement, publicity and sales promotion, thereby itself contributing to the recognition and development of the Schueco brand in the Indian market. According to the TPO, the assessee had also not quantified or demonstrated the marketing expenditure incurred by Schueco KG which resulted in a corresponding benefit to the Indian entity. The TPO additionally referred to the purchase of certain capital goods from the AE for imparting training to fabricators and questioned the justification for a separate recurring payment towards technical know-how when equipment intended for such training had already been purchased from the AE.

8 ITA No.6012/Mum/2024 Schueco India Private Limited of the payment at nil and proposed an adjustment of the entire amount of ₹4,54,55,319. While doing so, the TPO did not accept the assessee’s explanation that the licensed rights were used in the rendition of project-specific technical support to customers and fabricators and were not restricted to the actual process of manufacturing. He also did not accept the assessee’s reliance upon market positioning, business growth, access to technical experts, continuous training and supplier-related guidance as sufficient justification for the royalty payment.

9 ITA No.6012/Mum/2024 Schueco India Private Limited involved recycling activities, which, according to it, represented a different technological and commercial field from aluminium profiles and systems used in façades, doors and windows. Insofar as OCL India Ltd. was concerned, the DRP observed that its licence related to the manufacture of porous plugs and monolithic refractory products, and held that the mere presence of metal as a common underlying material did not establish comparability of the technology or know-how.

10 ITA No.6012/Mum/2024 Schueco India Private Limited however, did not result in any alteration of the adjustment before the final assessment order was passed.

11 ITA No.6012/Mum/2024 Schueco India Private Limited

12 ITA No.6012/Mum/2024 Schueco India Private Limited information concerning its costs and pricing was available. The services were stated to have been charged at cost plus 5 per cent, though no mark-up was applied to approximately 24 per cent of the total cost; the mark-up was stated to be confined principally to personnel cost and depreciation. Separate searches were undertaken for the three service categories. The assessee reported an arm’s-length range of 4.30 per cent to 10.25 per cent, with a median of 5.17 per cent, for SBS services; 2.33 per cent to 6.97 per cent, with a median of 3.92 per cent, for CPS services; and 1.59 per cent to 7.39 per cent, with a median of 4.57 per cent, for administrative support services. It also placed an alternative entity-level analysis, stating that its operating margin on sales was 3.8 per cent as compared with the range of 1.44 per cent to 5.80 per cent and the median of 2.81 per cent earned by companies engaged in comparable trading activities.

13 ITA No.6012/Mum/2024 Schueco India Private Limited an intra-group charge could be accepted at arm’s length only where the taxpayer demonstrated that the services had in fact been received and had conferred a benefit of economic or commercial value. He further referred to the need to exclude shareholder or stewardship activities, duplicative services, passive-association benefits, incidental group benefits and services whose availability was not of sufficient value to induce an independent enterprise to pay for them. The TPO also required evidence of the underlying costs and a rational and scientific allocation methodology connecting the relevant cost pool with the assessee.

14 ITA No.6012/Mum/2024 Schueco India Private Limited infrastructure costs were allocated by reference to the number of locations using the application and licence costs by reference to the number of users. For CPS and administrative support services, the assessee stated that the relevant costs were allocated with reference to its revenue of approximately ₹126.55 crore as a proportion of group revenue, resulting in an allocation factor of approximately 0.8 per cent. It was further submitted that the relevant administrative-service cost pool of Schueco KG was approximately €2 million, of which about €16,000 would have been allocable to the assessee on that basis, though only €14,000 was charged; similarly, against the allocable CPS cost of approximately €13,000 from a cost pool of about €1.6 million, only €10,000 was charged.

15 ITA No.6012/Mum/2024 Schueco India Private Limited Particular emphasis was placed upon the absence of employee-wise time sheets; in the TPO’s view, without time records it was not possible to understand how the AE had estimated the resources devoted to the Indian entity. He also observed that some of the claimed services appeared to represent ordinary interaction between a supplier and its customer, while others could fall within group, stewardship or duplicative activities for which an independent entity would not ordinarily pay separately.

16 ITA No.6012/Mum/2024 Schueco India Private Limited 17. The assessee objected before the DRP and relied upon the agreements, user information, system records, email correspondence, service tickets, invoices, cost workings and allocation keys furnished during the proceedings. It submitted that SBS was indispensable to its accounting, procurement, sales and inventory operations; that the centralised support of Schueco KG was required because the assessee did not maintain its own internal IT team; that CPS was actively used by its employees for customer and project management; and that the administrative services related to functions ordinarily required for the conduct of any business. It also submitted that the TPO had not identified any duplicative or shareholder activity, had not examined the category-wise evidence, and had determined the ALP at nil without undertaking the analysis contemplated by the Other Method. The assessee further pointed out that the payments were subjected to withholding tax in India and that Schueco KG had offered the receipts to tax, though these aspects were relied upon only as supporting circumstances.

17 ITA No.6012/Mum/2024 Schueco India Private Limited by the TPO, the DRP examined the allowability of the expenditure under section 37(1) of the Act. The final assessment order records that an opportunity was granted to the assessee to explain the admissibility of the expenditure and that, after considering its response, the DRP concluded that the business purpose and connection of the expenditure had not been satisfactorily established. It accordingly held that the amount not only had a nil ALP for transfer-pricing purposes but was also not allowable as a deduction under section 37(1). Giving effect to these directions, the Assessing Officer made an aggregate addition of ₹2,34,14,923, consisting of ₹1,13,63,830 towards know-how and licence fees and ₹1,20,51,093 towards intra-group services, and initiated penalty proceedings under section 270A of the Act.

18 ITA No.6012/Mum/2024 Schueco India Private Limited adjustments proceed on an erroneous conflation of the existence, commercial necessity and pricing of the international transactions. According to him, once the transactions are evidenced by agreements and their actual rendition or utilisation is established through contemporaneous material, the jurisdiction of the TPO is to determine whether the price paid is at arm’s length by applying one of the prescribed methods; the TPO cannot substitute his own perception of commercial necessity for a methodical determination of the ALP.

19 ITA No.6012/Mum/2024 Schueco India Private Limited project. The assessee also procured certain products locally from third-party vendors, for which construction drawings, product specifications, quality parameters and other technical inputs made available by Schueco KG were required. Therefore, the proposition that the know-how was used only by the manufacturing AEs and not by the assessee was factually incorrect and overlooked the manner in which the Indian business was actually conducted.

20 ITA No.6012/Mum/2024 Schueco India Private Limited product support and trade-mark rights would either have had to develop those assets at substantial cost or acquire them from a third party. The payment could not, therefore, be regarded as devoid of commercial or economic value merely because the assessee also carried out distribution and local marketing functions.

21 ITA No.6012/Mum/2024 Schueco India Private Limited purchase of certain capital goods for training fabricators was likewise said to be irrelevant, because the acquisition of training equipment and the recurring availability of technical know-how, drawings, improvements and trade-mark rights represented different economic benefits.

22 ITA No.6012/Mum/2024 Schueco India Private Limited and simultaneously substitute the median rate of 3 per cent for the actual rate of 4 per cent. It was precisely this apparent inconsistency that the assessee had pointed out in its rectification application before the DRP.

23 ITA No.6012/Mum/2024 Schueco India Private Limited he reiterated that this alternative controversy would become academic once the statutory consequence under Rule 10CA(5) was applied to the range already determined by the DRP.

24 ITA No.6012/Mum/2024 Schueco India Private Limited 26. Insofar as Rule 10CA was concerned, the learned CIT DR supported the adjustment as finally sustained by the DRP and submitted that the computation made by the Panel ought to be read in the context of the comparables found to be reliable by it. He contended that the assessee’s original benchmarking could not be accepted merely because the rate of 4 per cent fell within the range claimed in its transfer- pricing study. The comparability of the underlying licence agreements and the correct construction of the final dataset were required to be verified before the benefit of the range mechanism could be extended. He accordingly submitted that the adjustment sustained after the DRP’s directions did not call for interference. In rejoinder, the learned counsel clarified that the assessee was not seeking acceptance of the range computed in its original study; its principal submission was founded upon the 3 per cent to 4 per cent range emerging after the exclusions made by the DRP itself. Once the 65th percentile stood determined at 4 per cent, the actual rate of 4 per cent necessarily fell within the range, and no separate question of commercial prudence could override the deeming provision contained in Rule 10CA(5).

25 ITA No.6012/Mum/2024 Schueco India Private Limited determined the ALP of the entire amount at nil without evaluating the category-wise evidence. According to him, the arm’s-length character of an intra-group service charge may require examination of whether a genuine business need existed, whether the service was actually rendered, whether it provided or was reasonably expected to provide an economic or commercial benefit, whether the activity duplicated a function already performed by the recipient, and whether it represented a shareholder or stewardship function undertaken solely because of the provider’s ownership interest. However, these tests had to be applied to the actual functions and evidence. They could not be invoked in the abstract to disregard the transaction or to dispense with the statutory requirement of determining its ALP by a recognised method.

26 ITA No.6012/Mum/2024 Schueco India Private Limited team capable of hosting, maintaining or modifying the system. The software licences, infrastructure, user administration, application maintenance and backend support were centrally provided by Schueco KG. Similarly, CPS was not a general facility made available merely because the assessee belonged to the group; it was an operative customer and project-management application used by approximately 35 employees of the assessee for customer classification, project information, sales monitoring, sales steering and uniform reporting. The administrative services addressed routine business requirements relating to controlling, treasury, planning, HR, compliance, data protection, legal, tax, communication and training. Thus, each service had an identifiable connection with the day-to- day conduct of the assessee’s business.

27 ITA No.6012/Mum/2024 Schueco India Private Limited asset entries and implementation of changes necessitated by Indian GST, TCS and electronic-invoicing requirements. The documents also contained examples of network support, new financial-year series, pricing uploads, software upgrades and assistance in generating credit notes. These were contemporaneous operational records identifying the Indian employee raising the issue, the concerned AE support personnel, the nature of the request and, in several instances, the solution provided. Therefore, this was not a case in which rendition was sought to be proved merely through agreements, debit notes or generic email correspondence.

28 ITA No.6012/Mum/2024 Schueco India Private Limited systems and specialised support and could not always be traced to a particular sale or unit of revenue. The assessee’s growth over the years was relied upon as part of the commercial background and not as the sole proof of benefit.

29 ITA No.6012/Mum/2024 Schueco India Private Limited intra-group service charge where the activity was undertaken solely because of the AE’s ownership interest, such as costs of the parent’s shareholder meetings, preparation of consolidated accounts for its own reporting, raising funds to acquire or hold subsidiaries, or compliance obligations resting only upon the shareholder. However, the authorities had not identified any specific activity or amount falling within this description. They had referred generally to shareholder, stewardship and group activities without examining the actual services for which the assessee was charged. Activities such as supporting the Indian entity’s accounting software, customer-management system, statutory compliance, local tax matters, HR administration or treasury operations could not be characterised as shareholder activities merely because they were performed centrally by the parent or another group entity. If any particular element of the cost pool represented a shareholder activity, it had to be identified and excluded on the basis of evidence; the entire charge could not be reduced to nil on a general presumption.

30 ITA No.6012/Mum/2024 Schueco India Private Limited and consumption of the relevant resources. Insofar as CPS and administrative services were concerned, the assessee’s share of group revenue, stated to be approximately 0.8 per cent, was used as the allocation key. For the relevant year, the administrative-service cost pool of Schueco KG was approximately €2 million, against which the amount allocable to the assessee at 0.8 per cent was approximately €16,000; nevertheless, only €14,000 was charged. Similarly, from the CPS cost pool of approximately €1.6 million, the proportionate amount came to approximately €13,000, whereas only €10,000 was charged. A mark-up of 5 per cent was applied only to specified personnel costs and depreciation, while approximately 24 per cent of the underlying costs were passed on without any mark-up. The learned counsel submitted that the TPO’s insistence on employee-wise time sheets overlooked the fact that the principal allocation keys for the respective services were locations, users and revenue, rather than hours spent by individual employees.

31 ITA No.6012/Mum/2024 Schueco India Private Limited 6.97 per cent for CPS services, and 1.59 per cent to 7.39 per cent for administrative support services. The mark-up of 5 per cent fell within each of these ranges. Even if the Indian entity were considered as the tested party, its operating margin of 3.8 per cent was stated to be higher than the median margin of 2.81 per cent of comparable trading companies, and the service charges formed part of its operating-cost base. According to the learned counsel, the TPO rejected both analyses without undertaking any examination of the comparables, the tested party or the margins and merely invoked the Other Method. No comparable uncontrolled transaction, independent quotation, valuation, market price or other reliable economic material was identified to support a nil price. The alleged failure of the benefit test was thus used as a substitute for the determination of ALP contemplated by section 92C read with Rules 10B, 10C and 10AB.

32 ITA No.6012/Mum/2024 Schueco India Private Limited established the receipt and business use of the services, the expenditure could not be disallowed merely because the authorities considered that the assessee did not derive a sufficiently commensurate benefit. Commercial expediency had to be viewed from the standpoint of the businessperson. The fact that tax had been withheld from the remittances and the AE had filed its return of income in India was relied upon as corroborative of the disclosed and genuine nature of the transaction, though the learned counsel fairly submitted that these circumstances by themselves did not determine the ALP or conclusively establish deductibility.

33 ITA No.6012/Mum/2024 Schueco India Private Limited involved, the time devoted, the nature of each activity and the costs attributable to India. In the absence of such evidence, the TPO was justified in holding that the allocation lacked reliability.

34 ITA No.6012/Mum/2024 Schueco India Private Limited 38. On the selection of the method, the learned CIT DR submitted that the assessee had not established that the foreign AE was the least complex entity or that sufficiently reliable segmented financial information was available to treat it as the tested party. The foreign comparable companies and the basis on which they were selected also required close examination. The mere fact that the contractual mark-up of 5 per cent fell within the ranges asserted by the assessee would not establish the arm’s-length character of the total charge unless the underlying cost base, allocation and actual rendition were first shown to be reliable. He accordingly submitted that the TPO was justified in rejecting the assessee’s TNMM analysis and determining the ALP under the Other Method. He also supported the DRP’s conclusion under section 37(1), contending that the assessee had failed to establish the precise business nexus and actual services corresponding to the expenditure claimed.

35 ITA No.6012/Mum/2024 Schueco India Private Limited show that the stated allocation keys were commercially irrational. The absence of time sheets could not negate services allocated on the basis of identifiable users, locations or revenue, particularly when contemporaneous records demonstrated the actual operation of the systems and the support furnished by the AE. Above all, even if the authorities entertained doubts regarding a particular cost component or allocation key, the proper course was to determine an arm’s- length charge by applying the statutory methodology; the ALP of three operationally distinct services could not be reduced to nil through a composite conclusion that the assessee had failed the need, evidence and benefit tests.

36 ITA No.6012/Mum/2024 Schueco India Private Limited

37 ITA No.6012/Mum/2024 Schueco India Private Limited 42. The assessee paid ₹4,54,55,319 to Schueco KG at 4 per cent of the net invoice price under the know-how and licence agreement. The rights covered by the agreement, as borne out from the material placed before the authorities, were not confined merely to the use of a trade name on products purchased from the AE. They included technical know-how, construction drawings and specifications, technical information relating to product development, design, production and quality control, improvements in the Schueco systems and the right to use the associated trade marks and system names. The functional profile placed before us also shows that the assessee was not merely purchasing packaged finished goods and reselling them without any corresponding technical activity. It sold profiles, fittings and accessories to fabricators, who utilised them in the construction of façades, windows and doors, and it assisted such fabricators and customers with system selection, designs, workshop layouts, training and resolution of technical issues during the execution of projects. Certain products were also locally sourced or manufactured through third-party vendors with the aid of specifications and technical inputs originating from Schueco KG. Thus, the description of the assessee as a distributor, though broadly correct, does not by itself exhaust the functions actually undertaken by it or establish that the licensed rights had no utility in its business.

38 ITA No.6012/Mum/2024 Schueco India Private Limited 43. The TPO’s reasoning proceeds principally on the premise that technical know-how is required only by the entity physically manufacturing the product and not by an entity engaged in its distribution. Such a proposition cannot be accepted as an invariable transfer-pricing principle. The commercial use of technical information depends upon the nature of the product and the functions performed by the licensee. In the case of engineered building systems, the distributor may also require drawings, specifications, performance parameters, installation information and continuing technical support in order to advise customers, train fabricators and ensure that components are properly configured for a particular project. The fact that an associated enterprise or a third-party vendor manufactures a component does not necessarily mean that the Indian entity supplying the system and providing project-related assistance makes no use of the underlying technical information. Nor can the need for continuous access to product developments and technical improvements be negated merely because the assessee had been carrying on business in India for about a decade.

39 ITA No.6012/Mum/2024 Schueco India Private Limited TPO’s order demonstrating that the assessee had undertaken any non-routine brand-development activity, incurred advertisement expenditure beyond that ordinarily borne by an independent distributor, or developed a marketing intangible economically owned by it. Local selling and promotional expenditure incurred by a distributor to augment its own sales cannot, without further examination, lead to the conclusion that the trade mark licensed by the foreign owner had ceased to possess value or that the distributor should not pay for its use. Likewise, the purchase of certain capital goods for training fabricators cannot be equated with, or treated as a substitute for, continuing access to construction drawings, system specifications, technical improvements and trade- mark rights. These matters may be relevant while examining the functions of the parties and the comparability of licence agreements, but they do not furnish an independent method for determining the ALP at nil.

40 ITA No.6012/Mum/2024 Schueco India Private Limited contention is that, once the DRP’s own range extended up to 4 per cent, the transaction price fell within the arm’s-length range and had to be accepted under Rule 10CA(5). The issue, therefore, is not whether the original range of 3 per cent to 5 per cent claimed by the assessee in its transfer-pricing study should be accepted; it is whether the actual rate of 4 per cent can be substituted by the median after the DRP’s own exercise placed that rate within the final range.

41 ITA No.6012/Mum/2024 Schueco India Private Limited neutralised by importing the median into a case where the actual price is already within the range.

42 ITA No.6012/Mum/2024 Schueco India Private Limited take the actual rate of 4 per cent outside the range finally determined by the DRP. We, therefore, leave the comparability of those agreements open. The adjustment of ₹1,13,63,830 sustained on account of payment for know-how and licence fees is deleted, and the relevant grounds raised by the assessee are allowed.

43 ITA No.6012/Mum/2024 Schueco India Private Limited 50. There are, however, two important qualifications. First, the benefit test is not a test of hindsight. The assessee is not required to establish that every service produced an immediate increase in revenue or an arithmetically measurable profit. It is sufficient if, at the time the activity was undertaken, an independent enterprise could reasonably have expected it to enhance, preserve or facilitate its commercial position. Services relating to accounting systems, inventory control, customer information, statutory compliance, treasury, legal or human-resource functions may be necessary to operate a business even though the financial benefit from each individual activity cannot be traced to a particular sale. Secondly, an examination of need, rendition and benefit cannot dispense with the statutory pricing exercise. If a chargeable service has been rendered, the TPO must determine its ALP by applying one of the methods prescribed under section 92C read with Rules 10B and 10AB. Dissatisfaction with the degree of benefit cannot, by itself, constitute a method for arriving at nil.

44 ITA No.6012/Mum/2024 Schueco India Private Limited the commercial expediency of a transaction and substitute its own judgment for that of the assessee, though the TPO is entitled to examine the transaction and determine its arm’s- length value under the prescribed provisions. In CIT v. Cushman and Wakefield (India) (P.) Ltd. [2014] 367 ITR 730 (Delhi), it was further explained that the question whether an expenditure is deductible and the determination of the ALP fall within their respective statutory fields: the TPO determines the ALP, whereas the Assessing Officer examines deductibility under the general provisions. The authorities can certainly examine whether the alleged service was actually rendered, because a non-existent service can have no arm’s-length price; but once rendition is established, its value must be determined through the statutory methodology rather than through a general perception that the service was unnecessary or insufficiently beneficial.

45 ITA No.6012/Mum/2024 Schueco India Private Limited inventory and sales reports. The service charge covered the software licences, centrally hosted infrastructure, application maintenance, user administration, system modifications and backend support provided by the specialised team of Schueco KG. The assessee’s statement that it did not have an internal IT team independently capable of hosting and supporting the SBS application has not been displaced by any contrary material.

46 ITA No.6012/Mum/2024 Schueco India Private Limited 54. The TPO referred to some interactions as routine exchanges between a customer and supplier. That observation does not deal with the substance of the SBS service. Schueco KG was not merely supplying a finished product and responding to ordinary product-related queries; it hosted and maintained the enterprise application through which significant accounting, procurement, sales and inventory functions of the assessee were carried out. The use of the application by the Indian employees and the provision of backend technical support by the AE are complementary functions, not duplication of each other. No corresponding internal IT department or independent vendor providing the same backend services has been identified. Nor is the maintenance of the assessee’s operating and accounting systems an activity undertaken solely because Schueco KG held shares in the assessee. On the material brought on record, the SBS services satisfy the need, rendition and benefit tests and do not fail the duplicate-service or shareholder-activity tests.

47 ITA No.6012/Mum/2024 Schueco India Private Limited management, sales, project-management and operations functions, besides evidence of training and backend assistance by Schueco KG. The existence of identified Indian users and the operational use of the system for managing customer and project data demonstrate that the assessee did not receive merely an incidental benefit arising from its association with the group. Access to an operative customer- management platform, together with its maintenance and support, constitutes a service for which an independent enterprise without a comparable internal platform could reasonably be expected to pay.

48 ITA No.6012/Mum/2024 Schueco India Private Limited 57. Administrative support services require closer scrutiny because their description covers a wider set of functions, including controlling, treasury, planning and forecasting, HR reporting, compliance, data protection, legal, tax, communication and training. A broad contractual description would not, by itself, prove that each activity was rendered or was chargeable. However, the assessee did not rely only upon the agreement. It referred to the correspondence and supporting material concerning the respective functions and furnished the underlying cost pool, allocation working and invoices. The activities were stated to include preparation and coordination of management information and forecasts, investment monitoring, banking and treasury support, HR- related reporting, compliance and data-protection assistance, local legal and tax support and maintenance of transfer- pricing documentation. These are functions having an evident nexus with the conduct, regulation and administration of the Indian business.

49 ITA No.6012/Mum/2024 Schueco India Private Limited same activity for the assessee. The distinction is material. An activity does not become a shareholder activity merely because it is centrally performed by the parent entity, and an incidental group benefit cannot be presumed merely because standardised processes are used across the group. The character of the activity must be determined from the purpose it serves. Where controlling, treasury, compliance, HR, legal or tax support is directed towards the operations and obligations of the Indian entity, it constitutes a service to that entity even though centralisation may also achieve economies for the group.

50 ITA No.6012/Mum/2024 Schueco India Private Limited nature of the assessee’s business and the absence of any identified duplication, establishes the need, rendition and expected benefit of these services.

51 ITA No.6012/Mum/2024 Schueco India Private Limited service cost pool of approximately €2 million, the proportionate allocation at 0.8 per cent was stated to be approximately €16,000, although only €14,000 was charged. Against the CPS cost pool of approximately €1.6 million, the allocable amount was stated to be approximately €13,000, whereas the amount charged was €10,000. A mark-up of 5 per cent was applied only to personnel cost and depreciation, while approximately 24 per cent of the underlying expenditure was passed on without a mark-up. These figures and workings were furnished before the authorities and have not been shown to be arithmetically irreconcilable with the invoices or books. The TPO’s principal objection was the absence of employee-wise time sheets. Time records may be material where costs are allocated by reference to employee hours, but they cannot be regarded as the only permissible evidence of allocation. Where the stated keys are locations, users and relative revenue, the absence of time sheets does not, without examining and rejecting those keys on their own merits, render the entire cost allocation unreliable.

52 ITA No.6012/Mum/2024 Schueco India Private Limited level analysis showing its operating margin at 3.8 per cent against the median of 2.81 per cent earned by the selected trading comparables. The latter analysis is, at best, corroborative because entity-level profitability cannot invariably establish the arm’s-length character of every separately identifiable controlled transaction. Nevertheless, the TPO did not analyse the foreign comparables, demonstrate that the AE could not be treated as the tested party, or substitute another reliable set of comparables. The assessee’s analysis was rejected substantially because the TPO was dissatisfied with the need, evidence and benefit demonstrated for the services.

53 ITA No.6012/Mum/2024 Schueco India Private Limited external pricing material was identified. Nor was any separate value assigned to SBS, CPS or administrative support services. The entire payment was valued at nil because the assessee was held to have failed the need, evidence, benefit and computation tests.

54 ITA No.6012/Mum/2024 Schueco India Private Limited existed regarding some part of the broadly described administrative services, that could not justify attributing a nil value to SBS and CPS, whose operational use was demonstrated through identified users, system functions and support records. Transfer-pricing analysis must ordinarily follow the transaction as actually undertaken, unless aggregation is justified by close linkage. Aggregation cannot be employed merely to allow a perceived weakness in one service category to erase the value of other independently demonstrated services. On the evidence before us, the services were rendered, possessed economic or commercial utility for the assessee, were not shown to be duplicative or shareholder-related, and were charged through disclosed cost-allocation mechanisms with a mark-up falling within the ranges produced by the assessee. In the absence of a contrary benchmarking exercise by the TPO, the adjustment of ₹1,20,51,093 cannot be sustained.

55 ITA No.6012/Mum/2024 Schueco India Private Limited addresses whether the expenditure was laid out wholly and exclusively for the purposes of the assessee’s business and is not capital, personal or otherwise prohibited. A finding on one enquiry does not automatically conclude the other.

56 ITA No.6012/Mum/2024 Schueco India Private Limited proportionate to the benefit ultimately realised. The assessee is entitled to arrange its business and obtain services which it considers commercially appropriate, provided the expenditure is genuine and incurred for the purposes of business. The authorities may examine whether the services were in fact rendered and whether the expenditure has a business nexus, but cannot disallow an otherwise genuine business expenditure merely because, in their view, the assessee could have conducted its affairs differently or derived a greater benefit. Since the actual receipt and business use of the services stand demonstrated from the material on record, the alternative disallowance of ₹1,20,51,093 under section 37(1) is also unsustainable and is deleted.

57 ITA No.6012/Mum/2024 Schueco India Private Limited support services, together with the economic or commercial utility expected from them. The Revenue has not identified any specific duplication or shareholder activity forming part of the charge. The cost-allocation mechanisms have been disclosed and the contractual mark-up of 5 per cent falls within the ranges produced in the assessee’s benchmarking analysis. The TPO, after rejecting that analysis, did not undertake an objective determination under Rule 10AB and arrived at nil without identifying any comparable uncontrolled transaction or other reliable pricing material. The transfer- pricing adjustment of ₹1,20,51,093 is consequently deleted. For the reasons separately recorded, the alternative disallowance of the same amount under section 37(1) is also deleted.

58 ITA No.6012/Mum/2024 Schueco India Private Limited

Order pronounced on 5th October, 2026.

Sd/- Sd/- (G.M. DOSS) (AMIT SHUKLA) ACCOUNTANT MEMBER JUDICIAL MEMBER Mumbai; Dated 05/10/2026 KARUNA, sr.ps

Copy of the Order forwarded to : 1. The Appellant 2. The Respondent. 3. CIT 4. DR, ITAT, Mumbai 5. Guard file. //True Copy//

BY ORDER, ABHINAV Digitally signed by ABHINAV ANANT ANANT GAVANDE Date: 2026.10.15 GAVANDE 17:41:14 +05'30' (Asstt. Registrar) ITAT, Mumbai