Loading judgment…
Facts
Teejay India Private Limited, an SEZ unit in Visakhapatnam engaged in manufacturing knitted fabrics, filed its income tax return for AY 2021-22. The Assessing Officer (AO), based on a Transfer Pricing Officer (TPO) order and Dispute Resolution Panel (DRP) recommendations, made additions/disallowances related to transfer pricing adjustments (royalty payments, interest on External Commercial Borrowings, notional interest on outstanding receivables) and disallowance of leasehold amortization. The assessee appealed these adjustments.
Held
The Tribunal allowed the appeal in part. It directed the AO to delete upward adjustments for notional interest on outstanding receivables (Ground 1) and leasehold amortization charges (Ground 4), following its own consolidated order for previous assessment years. For interest on ECB, the Tribunal upheld the ALP at LIBOR + 200 basis points as determined by the DRP (Ground 3 was dismissed). Regarding royalty payments (Ground 2), while concurring with the assessee that a separate adjustment was inappropriate as royalty was part of operating cost for TNMM, the matter was remanded to the AO for reconciliation of a discrepancy in operating cost figures and fresh adjudication.
Key Issues
Whether transfer pricing adjustments for notional interest on outstanding receivables, interest on External Commercial Borrowings (ECB), and royalty payments were justified; and whether disallowance of leasehold amortization charges was correct.
Sections Cited
143(3), 144C(13), 144B, 143(1), 92CA(3), 92C(1), 92B
AI-generated summary — verify with the full judgment below
Income Tax Appellate Tribunal, VISAKHAPATNAM “DIVISION” BENCH, VISAKHAPATNAM
Before: SHRI RAVISH SOOD, HON’BLE & SHRI OMKARESHWAR CHIDARA, HON’BLE
आदेश /O R D E R
PER RAVISH SOOD, JM:
The present appeal filed by the assessee-company is directed against the order passed by the Assessing Officer (for short, “AO”) under section 143(3)
I.T.A.No.533/VIZ/2024 Teejay India Private Limited r.w.s. 144C(13) r.w.s. 144B of the Income Tax Act, 1961 (for short, “the Act”] dated 30.10.2024 for the AY 2021-22. The assessee-company has assailed the impugned order of assessment on the following grounds of appeal before us: -
1. That the order of the Additional/Joint/Deputy/Assistant Commissioner of Income Tax/Income-Tax Officer, National e-Assessment Centre, New Delhi ('learned AO') to the extent prejudicial to the Appellant, is bad in law, contrary to the facts and circumstances of the case and is liable to be quashed
2. That on the facts and circumstances of the case, the learned AO erred in concluding assessed income as INR 42,64,55,272 after making adding up disallowances to the Assessed Income as per intimation order u/s 143(1) of the Income-tax Act, 1961 (the Act).
3. That the learned Dispute Resolution Panel-1, Bengaluru ('learned DRP') erred in not appreciating that the order of the learned Deputy Commissioner of Income-tax DC/ACIT TP-3, Hyderabad ('learned TPO') passed under Section 92CA of the act is contrary to law and thus liable to be quashed 4. That on facts and in the circumstances of the case, the learned AO/ learned TPO and the learned DRP erred in making an upward adjustment to the transfer price of the Appellant's international transactions of INR 20,72,84,822 in respect of payment of royalty, INR 31,16,642 in respect of payment of interest on ECB and INR 86,54,646 on account of imputation of notional interest on outstanding receivables. Further, the learned AO and the learned DRP erred in disallowing an amount of INR 23,47,826 towards amortization of leasehold rights.”
Succinctly stated, the assessee-company, which is a fully owned subsidiary of Ocean Mauritius Limited, which in turn is held by Teejay Lanka PLC and was set up in July 2007 in a Special Economic Zone (SEZ) in Visakhapatnam, is engaged in the manufacture and sale of Knitted fabrics for AEs as well as third party customers. The assessee-company e-filed its return of income for the AY 2021-22 on 13.03.2022, declaring an income of Rs. 20,06,72,068/-. Subsequently, the case of the assessee-company was selected for scrutiny
Page. No 2
I.T.A.No.533/VIZ/2024 Teejay India Private Limited assessment for verification of certain issues, viz. (i) large specified domestic transactions; and (ii) international transactions in respect of intangible property.
During the course of the assessment proceedings, the AO, made a reference to the DC/ACIT – TP-3, Hyderabad (for short “TPO”) for determining the Arm’s Length Price (for short, “ALP”) in respect of all the transactions reported by the assessee-company in its Transfer Pricing Study Report (for short, “TPSR”) in its Form 3CEB.
The TPO vide his order passed under section 92CA(3) of the Act, dated 31.10.2023, analysed the International Transactions in detail and proposed total adjustment under section 92CA of the Act of Rs. 21,90,56,110/- viz., (i). Payment of royalty for technical support services: Rs. 20,72,84,822/-; (ii). Interest on External Commercial Borrowings (for short “ECB”): Rs. 31,16,642/-; and (iii) Interest on trade receivables: Rs. 86,54,646/-.
Thereafter, the A.O vide his order passed under section 144C(1) of the Act, dated 08.12.2023 passed a draft assessment order wherein he determined the income of the assessee-company under the normal provisions at Rs.42,64,55,272/- after making certain additions/disallowances, viz. (i) Transfer pricing adjustment as per order passed by the TPO under section 92CA(3) of the Act, dated 31.10.2023: Rs.21,90,56,110/-; and (ii) Disallowance of amortization of leasehold rights: Rs.23,33,312/-.
Page. No 3
I.T.A.No.533/VIZ/2024 Teejay India Private Limited 6. Aggrieved, the assessee company objected to the additions/disallowances proposed by the A.O vide his draft order passed under section 143(3) r.w.s. 144C(1) of the Act dated 08.12.2023 before the Dispute Resolution Panel-1, Bangalore (for short, “DRP”). However, the DRP did not find favour with the contentions advanced by the assessee-company and upheld the additions/ disallowances made by the AO/TPO.
Thereafter, the AO vide his order passed under section 143(3) r.w.s. 144C(13) r.w.s. 144B of the Act, dated 30.10.2024 determined the income of the assessee-company at Rs. 42,64,55,272/- after making the aforesaid additions/ disallowances viz., (i) Disallowance of amortization of leasehold rights: Rs.23,33,312/-; and (ii) Transfer Pricing adjustment as per the order passed by the TPO under section 92CA(3) of the Act dated 31.10.2023: Rs.21,90,56,110/-.
The assessee-company aggrieved with the order passed by the A.O under Section 143(3) r.w.s 144C(13) r.w.s 144B of the Act, dated 30.10.2024, has carried the matter in appeal before us.
We have heard the Learned Authorised Representatives of both parties, perused the orders of the authorities below and the material available on record, as well as considered the judicial pronouncements that have been pressed into service by the Ld.AR to drive home his contentions.
Page. No 4
I.T.A.No.533/VIZ/2024 Teejay India Private Limited 10. Shri Darpan Kirpalani, CA., Learned Authorized Representative (for short “Ld.AR”) for the assessee, at the threshold of hearing of the appeal submitted that three of the issues (out of four issues) involved in the present appeal are squarely covered by the consolidated order passed by the Tribunal in the assessee’s own case for the A.Y.2017-18 and A.Y. 2018-19 in & 155/VIZ/2022 dated 23.01.2023 Page Nos. 995 to 1025 of the assessee’s paper book (APB). Elaborating on his contention, the Ld. AR submitted that the Tribunal, regarding the issue of imputation of notional interest on outstanding receivables, had based on identical facts as were involved in the case before them for the aforementioned preceding years, drawn support from its earlier order passed in the case of M/s. Devi Sea Food Limited v. DCIT in dated 09.09.2022 and had held that when the Transactional Net Margin Method (TNMM) is considered as the most appropriate method, which was also not disputed by the revenue, then, the net margin thereunder would take care of such notional interest cost. The Ld. AR submitted that the Tribunal had, based on its aforesaid observations, directed the TPO to consider the working capital adjustment and its impact on the profits of the assessee vis-à-vis its comparables. The Ld. AR submitted that the Tribunal, based on its aforesaid observation, had concluded that no upward adjustment on the outstanding receivable was required and had directed the AO to delete the upward adjustment made towards overdue receivables from its AE. The Ld.AR to buttress his contention had drawn our attention to the order passed by the Page. No 5
I.T.A.No.533/VIZ/2024 Teejay India Private Limited Tribunal in the aforementioned preceding years in & 155/VIZ/2022 dated 23.01.2023 at Page No. 22 and Para No. 23 of the order.
Coming to the issue of adjustment made to the income of the assessee- company in respect of interest paid on ECB’s availed by the assessee from its AE of Rs. 31,16,642/-, the Ld.AR submitted that the said issue is also covered by the order passed by the Tribunal in the assessee’s own case for the preceding years i.e., A.Y. 2017-18 and A.Y. 2018-19 in & 155/VIZ/2022 dated 23.01.2023. The Ld. AR submitted that involving identical facts in the abovementioned preceding years, the Tribunal had, by drawing support from its order in the case of Dr. Reddy’s Laboratories Limited v. Addl. CIT in and dated 02.01.2017 and the decision of the ITAT, Hyderabad bench in the case of Infotech Enterprises Limited v. Addl. CIT in dated 16.01.2014, observed that as per the Master Circular that was relied upon by the assessee, the RBI had prescribed the maximum cap interest on ECB’s with different tenures. The Ld.AR submitted that the Tribunal, based on its aforesaid observations, had upheld the view taken by the DRP, which had determined the ALP of the interest on ECB’s as LIBOR + 200 basis points by considering it as rational based on certain judicial pronouncements. The Ld. AR submitted that the view taken by the DRP in the case of assessee-company for the subject year, wherein it had adopted the LIBOR + 200 basis points as Arm’s length rate for benchmarking the payment of interest
Page. No 6
I.T.A.No.533/VIZ/2024 Teejay India Private Limited on the ECB’s availed by the assessee-company from its AE, is covered by the aforesaid order of the Tribunal. The Ld.AR had drawn our attention to Page No. 20 - Para No. 20 of the aforesaid order of the Tribunal in & 155/VIZ/2022 dated 23.01.2023.
Coming to the issue of disallowance of land leasehold amortisation charges of Rs. 23,47,826/- by the AO/DRP, the Ld.AR submitted that involving identical facts, the Tribunal had allowed the assessee’s claim for deduction of proportionate share of amortisation of leasehold charges amounting to Rs. 23,47,826/- for both the aforementioned years, i.e., AY 2017-18 & AY 2018-19. Elaborating on his contention, the Ld.AR submitted that the assessee-company had paid a sum of Rs. 5.40 crores for a period of 23 years for taking the land on lease. Although the A.O had observed that the aforesaid one-time lumpsum payment cannot be apportioned during the impugned assessment year and claimed as a revenue expenditure, but the Tribunal had dislodged his view and observed that the leasehold charges paid by the assessee company shall be proportionately claimed as revenue expenditure over the lease period and thus allowed the assessee’s claim for amortizing of leasehold charges of Rs.23,47,826/- as a revenue expenditure during both the said years. The Ld. AR to fortify his contention had drawn our attention to the observations of the Tribunal recorded at Page No. 24 - Para 27 of the order passed in & 155/VIZ/2022 dated 23.01.2023 (Page No.1018 of assessee paper book).
Page. No 7
I.T.A.No.533/VIZ/2024 Teejay India Private Limited 13. Apropos the disallowance of the royalty paid by the assessee-company for technical support services of Rs. 20,72,84,822/-, the Ld.AR submitted that the AO/TPO, while making the aforesaid addition, had erred in rejecting the benchmarking analysis furnished by the assessee and determined the ALP of the said International Transaction at Nil. Elaborating on his contention, the Ld.AR submitted that both the AO/TPO had erred in challenging the commercial expediency of the aforementioned expenditure that was incurred by the assessee- company, which, though, was incurred wholly and exclusively for the purpose of its business operations. Apart from that, the Ld.AR submitted that the AO/TPO/DRP had erred in proposing/upholding the aforesaid adjustment to the ALP determined by the assessee company in support of its international transactions in connection with payment of royalty to its AE without applying any of the prescribed methods as per section 92C(1) of the Act, and also not bringing on record any comparable uncontrolled transactions.
Apart from that, the Ld.AR submitted that as the assessee-company has filed an application for entering into a Unilateral Advanced Pricing Agreement (for short “APA”) with the CBDT, and the transaction of payment of royalty and the relevant assessment year is covered under the purview of the said application. It was brought to our notice by the Ld. AR that, involving identical facts, the Tribunal in the assessee’s own case for the preceding years, i.e., AY 2017-18 & AY 2018-19 in & 155/VIZ/2022 dated 23.01.2023 had after taking
Page. No 8
I.T.A.No.533/VIZ/2024 Teejay India Private Limited cognizance of the aforesaid facts remitted the matter back to file of the A.O to decide the case on merits subject to the final outcome of the Advanced Pricing Agreement with CBDT by the assessee-company. The Ld.AR had drawn our attention to the observations recorded by the Tribunal at Page No. 19 - Para 18 of its aforesaid order passed in & 155/VIZ/2022 dated 23.01.2023.
Alternatively, the Ld.AR submitted that the assessee-company in its audited financial statements for the subject year, i.e., year ending 31.03.2024 had, inter alia, claimed deduction of royalty expenses of Rs. 20,72,84,822/- under the head “Other Expenses”. The Ld.AR to support his aforesaid contention had drawn our attention to the copy of the financial statements of the assessee-company along with the bifurcated details of the “Other Expenses” Page No. 849 of APB. The Ld.AR in the backdrop of the aforesaid facts had drawn our attention to the order passed by the TPO under section 92CA(3) of the Act dated 31.10.2023, wherein at Para No. 3 of his order he had observed that as per the audited financial statements of the assessee-company the Profitability Level Indicator (for short, “PLI”) i.e., OP/OC worked out at 6.73%. The Ld.AR submitted that the TPO, while so observing, had taken “Operating Cost” of the assessee-company at Rs. 442,18,25,702/- [as against Rs. 444,28,79,332/- claimed by the assessee company in its financial statements]. The Ld.AR submitted that the operating cost of Rs.444.18 crores (Approx.) considered by the TPO included the royalty expenses of Rs. 20.72 Crores (Approx.) and the same formed part of the “Other Expenses”
Page. No 9
I.T.A.No.533/VIZ/2024 Teejay India Private Limited disclosed in the profit and loss account. The Ld. AR on being confronted with the fact that there was a variance between the expenses disclosed by the assessee- company in its “profit and loss account” at Rs. 444,28,79,332/- as against that taken by the TPO in his order passed under section 92CA(3) of the Act at Rs. 442,18,25,702/-, submitted that though the said variance was of Rs.2,10,53,630/- , but the royalty expenditure as claimed by the assessee-company was substantially higher i.e., Rs.20,72,84,822/-. The Ld. AR based on his contentions, had tried to impress upon us that, as the royalty expenses of Rs. 20.72 Crores (approx.) was included in the “Operating Cost” that was considered by the TPO for computing the PLI (OP/OC) of 6.73%, there was no justification on his part to have thereafter separately benchmarked the ALP of the said royalty expenditure and make a separate addition in the hands of the assessee-company. The Ld. AR to buttress his contention had drawn support from the order of the ITAT Delhi Bench in the case of Samsung India Electronics Pvt., Ltd. v. DCIT in dated 29.07.2024.
Per contra, Shri Badicala Yadagiri, Learned Commissioner of Income Tax, (DR) (for short “Ld. DR”) relied upon the orders of the authorities below.
We have heard the Learned Authorised Representatives of both parties, perused the orders of the authorities below and the material available on record,
Page. No 10
I.T.A.No.533/VIZ/2024 Teejay India Private Limited as well as considered the judicial pronouncements that were pressed into service by the Ld.AR to drive home his contentions.
We shall first deal with the Ld. AR’s contention that the AO/DRP had erred in making an adjustment of Rs. 86,54,646/- to the income of the assessee- company in respect of the notional interest on its outstanding receivables. We find that, as stated by the Ld.AR, and rightly so, the aforesaid issue is squarely covered by the order passed by the Tribunal in the assessee’s own case for the A.Y.2017-18 and A.Y. 2018-19 vide its consolidated order, dated 23.01.2023. As observed by us hereinabove, the Tribunal in its aforesaid order for the preceding years had, after drawing support from its earlier order passed in the case of M/s. Devi Sea Food Limited v. DCIT in dated 09.09.2022, observed that as the Transactional Net Margin Method (TNMM) is considered as the most appropriate method, which was also not disputed by the Revenue, then the net margin thereunder would take care of such notional interest cost. The Tribunal, based on its aforesaid observations, had concluded that no upward adjustment on the outstanding receivables was called for in the hands of the assessee-company and had directed the AO to delete the adjustment made towards overdue receivables from its AE. For the sake of clarity, we deem it apposite to cull out the observations of the Tribunal, as under: -
“22. We have heard both the sides and perused the material available on record and the orders of the Ld. Revenue Authorities. In Ground No.8.1 the assessee contested that the receivables is not an international transaction
Page. No 11
I.T.A.No.533/VIZ/2024 Teejay India Private Limited under the provisions of section 92B of the Act. While deciding on the identical issue the ITAT in the case of M/s. Devi Sea Foods Limited vs. DCIT in ITAT No.75/Viz/2022, dated 9/9/2022, held as follows: “7……….There is no dispute with regard to the fact that receivables is included under the definition of international transaction consequent to the amendments made by the Finance Act, 2012 w.e.f 1/4/2002. Therefore we are of the considered view that there is no merit in the argument of Ld AR that receivables is not an international transaction……….” Consistently following the above decision this ground No 8.1 raised by the assessee is dismissed 23. The assessee also submitted that working capital adjustment was rejected by the Ld. TPO. Further, we find that the dispute is with respect to selection of comparables and not with respect to selection of method adopted by the assessee. In the decision of M/s. Devi Sea Foods Limited (supra) the Tribunal has held that when TNM method is considered as the most appropriate method which was also not disputed by the Revenue the net margin thereunder would take care of such notional interest cost. Further, we also direct the Ld. TPO to consider the working capital adjustment and its impact on the profits of the assessee vis-à-vis its comparables. We are therefore of a considered view that no upward adjustment on the outstanding receivables is required and therefore we direct the Ld. AO to delete the upward adjustment made towards overdue receivables from AE. The contention of the Ld. AR that the assessee does not pay interest in relation to outstanding payable to AEs is of no relevance. Further, the Ld. DRP has provided a notional credit period of 30 days which is reasonable in the instant case. Accordingly this ground raised by the assessee is partly allowed for statistical purposes.”
We, thus, respectfully follow the aforesaid view taken by the Tribunal in the assessee’s own case for the above-mentioned preceding years and on the same terms, direct the AO to delete the upward adjustment by him towards overdue receivables by the assessee-company from its AE. The Ground of appeal No. 1 is allowed in terms of our aforesaid observations.
Page. No 12
I.T.A.No.533/VIZ/2024 Teejay India Private Limited 20. Apropos the determination of the ALP for benchmarking the payment of interest on ECB by the A.O / TPO as LIBOR + 200 basis points, we find that as conceded by the Ld.AR, the said issue is also squarely covered by the order passed by the Tribunal in the case of assessee-company for the preceding years i.e., A.Y. 2017-18 and A.Y. 2018-19 in & 155/VIZ/2022 dated 23.01.2023. We find that the Tribunal in the assessee’s own case for the aforementioned preceding years had, after drawing support from the case of Dr. Reddy’s Laboratories Limited v. Addl. CIT in and dated 02.01.2017 and Infotech Enterprises Limited v. Addl. CIT in dated 16.01.2014, had observed that as per the Master Circular, the RBI had prescribed the maximum cap on the interest on ECB of different tenures. The Tribunal, based on its aforesaid observations, concluded that DRP had rightly determined the ALP as LIBOR + 200 basis points and had declined to interfere with the view taken by him. For the sake of clarity, we deem it apposite to cull out the observations of the Tribunal in its aforesaid order, as under:
“19. With respect to Ground No.7 ie., payment of interest on ECB, the Ld. AR submitted that the ALP should be considered as LIBOR + 300 basis points as per the RBI Master Circular. The Ld. AR relied on the Coordinate Bench of the Tribunal at Bangalore in IT(TP)A No. 2207/Bang/2016 in the case of M/s. Tuppadahalli Energy India Pvt Ltd vs Deputy Commissioner of Income Tax, dated 13/10/2017. Per contra, the Ld. DR submitted that LIBOR + 200 basis points is considered as appropriate and it was also confirmed by the Ld. DRP. He therefore pleaded that the order of the Ld. DRP may be upheld on this issue.
Page. No 13
I.T.A.No.533/VIZ/2024 Teejay India Private Limited 20. We have heard both the sides and perused the material available on record. The Ld. AO relied on the decision of the ITAT in Dr. Reddy’s Laboratories Limited vs. Addl. CIT in and 85/H/2013 dated 2/1/2017 and the decision of the ITAT, Hyderabad in the case of Infotech Enterprises Limited vs. Addl. CIT in dated 16/1/2014. We find from the Master Circular relied on by Ld AR, that RBI prescribed the maximum cap interest on ECBs with different tenures. Therefore, the Ld. DRP has rightly determined the ALP as LIBOR + 200 basis points considering it rational based on several judicial decisions while directing the Ld TPO to adopt the interest rate @ LIBOR + 200 basis points. We are therefore not inclined to interfere with the order of the Ld. DRP and hence this ground raised by the assessee is dismissed.”
We, thus, respectfully follow the aforesaid view taken by the Tribunal and uphold the determinations of the arm’s length rate for benchmarking payment of interest on ECB at LIBOR + 200 basis points by the A.O/DRP. The Ground of Appeal No. 3 is dismissed in terms of our aforesaid observations.
22. We shall now deal with the Ld. AR’s claim that the AO/DRP had erred in disallowing the assessee’s claim for deduction of land lease holding amortisation charges of Rs. 23,47,826/-.
We find that the aforesaid issue is covered by the order passed by the Tribunal in the assessee’s own case for the preceding years, i.e., A.Y. 2017-18 and A.Y. 2018-19 in & 155/VIZ/2022 dated 23.01.2023. The Tribunal in its aforementioned order, while disposing of the said appeals, had observed that the leasehold charges paid by the assessee company were to be allowed as revenue expenditure over the lease period. Accordingly, the Tribunal had, based on its aforesaid observations, allowed the claim of the assessee
Page. No 14
I.T.A.No.533/VIZ/2024 Teejay India Private Limited company for amortisation of the leasehold charges. For the sake of clarity, we deem it apposite to cull out the observations of the Tribunal, as under:
“26. Ground No.11 relates to disallowance of leasehold amortization charges. The Ld. AR submitted that the assessee has taken the land on lease in 2009 for a period of 23 years and has paid a sum of Rs. 5.40 Crs. The Ld. AR submitted that the assessee is entitled to amortize these leasehold charges during the entire period of lease which should not and cannot be considered as capital expenditure. The Ld. AR submitted that various judicial precedents have held that the lease hold charges of land for a long term lease shall be amortized over the period of lease. Per contra, the Ld. DR relied on the order of the Ld. DRP.
We have heard both the sides and perused the material available on record. Admittedly the assessee has paid a sum of Rs. 5.40 Crs for a period of 23 years for taking the land on lease. It is the case of the Ld. AO that it is one time lumpsum payment and a prior period expenditure which cannot be apportioned during the impugned assessment year as revenue expenditure. The assessee has claimed proportionate share of amortization of leasehold charges amounting to Rs. 23,47,826/- for the relevant assessment year. There are various judicial pronouncements as submitted by Ld AR, with respect to amortization of the leasehold charges over the lease period, and therefore we are of the considered view that the leasehold charges paid by the assessee shall be proportionately claimed as revenue expenditure, over the lease period and hence the amortization of leasehold charges claimed by the assessee for Rs. 23,47,826/- for the relevant assessment year shall be allowed as revenue expenditure during the impugned assessment year. We therefore allow this ground raised by the assessee.”
As the facts involved on the aforesaid issue in the case of assessee- company for the subject year before us remain the same as was there before the Tribunal in the aforementioned preceding years, i.e., A.Y. 2017-18 and A.Y.2018-19 in & 155/VIZ/2022 dated 23.01.2023, therefore, we respectfully follow the same and direct the A.O to vacate the disallowance of the assessee’s claim for deduction of lease holding amortization charges of Rs.
Page. No 15
I.T.A.No.533/VIZ/2024 Teejay India Private Limited 23,47,826/-. The Ground of Appeal No.4 is allowed, in terms of our aforesaid observations.
25. We shall now deal with the Ld. AR’s claim that the AO / DRP had erred in making an adjustment of Rs. 20,72,84,822/- to the income of the assessee- company by disallowing the payment of royalty to its AE in relation to the assistance that it had received from them during the subject year. As observed by us hereinabove, the AO has claimed that as the TPO vide his order under section 92CA(3) of the Act had worked out its PLI i.e., OP/OC at 6.73% after taking the operating cost at Rs.442.18 crores (supra), which, inter alia, included the “royalty expenses” of Rs.20.72 crores (supra), therefore, it was not open to him to have separately benchmarked the royalty expenditure and made the impugned addition in the case of the assessee-company.
We have thoughtfully considered the aforesaid contention of the Ld.AR and principally concur with him. In our view, as the transactions like royalty etc., have been aggregated under TNMM and benchmarked against the independent third party comparables, therefore, the TPO could not have thereafter separately benchmarked the royalty expenditure and made a separate adjustment. Our aforesaid view is fortified by the order of the ITAT, Delhi Bench in the case of Samsung India Electronics Pvt., Ltd. v. DCIT in dated 29.07.2024, wherein it is held as under: -
Page. No 16
I.T.A.No.533/VIZ/2024 Teejay India Private Limited “65. ……… Secondly, the TPO has already accepted TNMM for the Manufacturing segment as a whole. There are numerous international transactions in this segment - all these transactions like royalty, purchase of raw materials etc. have been aggregated under TNMM and benchmarked against independent third party comparables. In these circumstances, cherry-picking of one particular transaction like royalty and subjecting the same to a separate benchmarking and adjustment under CUP results in an impermissible double adjustment - once under TNMM and another CUP. This is contrary to the provisions which mandate adoption of only one method as the most appropriate method. A licensing arrangement where technical know-how is used for manufacturing is an inextricable part of the entire segment and we do not find any infirmity in bundling the same with the other transactions of this segment. At the end of the day, if the segment is generating arm’s length level of operating profits which is equivalent or more than profit margin of the comparables, there can be no cause for the Revenue to carry out an exercise of the present kind. Grounds 29-32 are disposed of in terms of the aforesaid observations.”
27. Although we principally concur with the contention advanced by the Ld. AR on the aforesaid issue, but are of the considered view that as the “operating cost” taken by the TPO at Rs. 442,18,25,702/- for determining the PLI of the assessee-company, i.e., OP/OC is not in conformity with the total expenses booked by the assessee-company in its books of accounts at Rs. 442,28,79,332/-, which discrepancy, the Ld.AR, despite having been specifically queried, had failed to reconcile, therefore, the matter requires to be set-aside to the file of the AO for fresh adjudication in terms of our aforesaid observations, subject to reconciliation of the aforesaid discrepancy by the assessee company before him, i.e., adoption of the operating cost (OC) of Rs.442.18 cores by the TPO while analyzing the financial results of the assessee-company for determining the PLI i.e., OP/OC, as against the total expenses booked by the assessee-company in its Page. No 17
I.T.A.No.533/VIZ/2024 Teejay India Private Limited profit and loss account for the subject year at Rs.442.28 crores (approx.). The Ground of Appeal No. 2 is allowed for statistical purposes, in terms of our aforesaid observations.
Resultantly, the appeal filed by the assessee company is partly allowed in terms of our aforesaid observations.
Order pronounced in the open court on 18th February, 2026.
Sd/- Sd/- (ओंकारेश्वर धिदारा) (रिीश सूद) (RAVISH SOOD) (OMKARESHWAR CHIDARA) न्याधयक सदस्य/JUDICIAL MEMBER लेखा सदस्य /ACCOUNTANT MEMBER Dated: 18..02.2026 *Giridhar, Sr.PS आदेश की प्रनतनलनप अग्रेनर्त/ Copy of the order forwarded to:- 1. निर्धाररती/ The Assessee : Teejay India Private Limited Plot No. 15, Brandix APSEZ, Pudimadaka Road Atchutapuram Mandal Visakhapatnam – 530011 Andhra Pradesh 2. रधजस्व/ The Revenue : DCIT-CIRCLE - 5(1) Visakhapatnam 3. The Principal Commissioner of Income Tax 4. नवभधगीयप्रनतनिनर्, आयकरअपीलीयअनर्करण, नवशधखधपटणम /DR,ITAT, Visakhapatnam 5. The Commissioner of Income Tax गधर्ाफ़धईल / Guard file 6. आदेशधिुसधर / BY ORDER
Sr. Private Secretary ITAT, Visakhapatnam
Page. No 18