Pune ITAT Deletes ₹5.67 Crore TP Adjustment; TPO Cannot Cherry-Pick One Transaction While Accepting TNMM for Others

L&L Product India Private Limited Vs Assessment Unit (ITAT Pune)

Pune ITAT Deletes ₹5.67 Crore TP Adjustment; TPO Cannot Cherry-Pick One Transaction While Accepting TNMM for Others

On the issue of royalty payment, the Tribunal observed that the assessee had incurred R&D expenses of ₹2.52 crore and had already recovered ₹2.77 crore from its Associated Enterprises with a markup of about 10%. Since the assessee had already been compensated for the R&D services rendered, the additional TP adjustment of ₹23.26 lakh made by the TPO was found to be unjustified and was deleted.

Regarding management support services, the TPO had rejected the Transactional Net Margin Method (TNMM) adopted by the assessee, applied the “Other Method”, and determined the ALP of the services at virtually nil, resulting in an adjustment of ₹5.43 crore. The Tribunal held that when the assessee had benchmarked all its international transactions under a common TNMM analysis and the TPO had accepted TNMM for all other transactions, it was not permissible to isolate only one transaction and subject it to a different method. Relying on the Bombay High Court decision in Cummins India Ltd., the Tribunal held that such selective benchmarking was impermissible.

The Tribunal further noted that the assessee had furnished detailed agreements, allocation workings, executive roles, email correspondences and cost-sharing data demonstrating actual receipt of services and the basis of cost allocation. It also found that the management support costs had been consistently accepted in earlier years and that the services were neither duplicative nor unsupported. Accordingly, the entire adjustment relating to management support services was deleted.

The appeal of the assessee was therefore allowed in full, resulting in deletion of the entire transfer pricing adjustment of about ₹5.67 crore.

FULL TEXT OF THE ORDER OF ITAT PUNE

The captioned appeal at the instance of assessee pertaining to A.Y. 2021-22 is directed against the order dated 20.09.2024 passed by the Assessing Officer u/s.143(3) r.w.s.144C(13) r.w.s.144B of the Income Tax Act, 1961 (in short ‘the Act’).

2. Assessee has raised following grounds of appeal :

“1. General ground: Transfer pricing adjustment of Rs. 5,66,69,953

The Ld. AO/TPO pursuant to the directions of the Hon’ble Dispute Resolution Panel (“DRP”) has erred in law and on the facts and in circumstances of the case in making an upward adjustment of Rs. 5,66,69,953 to the value of international transactions entered by the Appellant with its Associated Enterprises (AEs).

2. Erroneous TP addition amounting to INR 23,25,657 to the international transaction of payment of royalty.

The Ld. AO/TPO pursuant to the directions of the Hon’ble DRP has erred in law and on the facts and circumstances of the case in making a proportionate upward adjustment of Rs. 23,25,657 to the value of international transactions entered by the Appellant with its Associated Enterprises (AEs).

The Appellant prays to delete the proportionate adjustment to the value of international transaction of payment of royalty.

3. Erroneous rejection of aggregation of international transaction of payment of management support services availed with the ‘Manufacturing Activity and adoption of ‘Other Method’ over TNMM as the most appropriate method as applied the Assessee.

The Ld. AO/TPO pursuant to the directions of the Hon’ble DRP has erred in law and on the facts and in circumstances of the case in making an upward adjustment of Rs. 5,43,44,296 to the value of international transactions entered by the Appellant with its Associated Enterprises (AEs) by rejecting aggregation of international transaction of payment of management support services availed with the ‘Management Activity’ and adopting ‘Other Method’ over TNMM as the most appropriate method.

The Appellant prays the Hon’ble ITAT to consider the aggregation of international transaction of payment of management support services with the ‘Manufacturing Activity and delete the transfer pricing adjustment.

4. Erroneous rejection of evidences produced before the learned TPO

The Ld. AO/TPO pursuant to the directions of the Hon’ble Dispute Resolution Panel (DRP) has erred in law and on the facts and in circumstances in rejecting the evidences produced before the Ld. TPO.

The Appellant prays the Hon’ble ITAT to consider the evidences produced and delete the transfer pricing adjustment.

5. Error by the learned TPO/AO in calculation of transfer pricing adjustment on account of payment of management support services availed

The Ld. AO/TPO pursuant to the directions of the Hon’ble Dispute Resolution Panel (DRP) has erred in law and on the facts and in circumstances in calculating the transfer pricing adjustment of payment of management support services.

Without prejudice to the other grounds of objection, the Appellant prays the Hon’ble ITAT to consider the correct transfer pricing adjustment on account of payment of management support services availed.

6. Initiation of penalty proceedings

The Ld. AO/Hon’ble DRP has erred in law and on the facts and in circumstances of the case in initiating the penalty proceedings under section 270A without consideration of the fact that the transfer pricing adjustment has been made on account of difference of opinion, interpretation of provisions of law, etc. and not due to misreporting of income by the Appellant.

The Appellant prays leave to add, alter, vary, omit, amend, substitute or delete grounds of appeal at any time before or at the time of appeal, so as to enable the Hon’ble income Tax Appellate Tribunal to decide this appeal in accordance with the law.”

3. Brief facts of the case as culled out from the records are that the assessee is a Private Limited company engaged in the business of manufacturing of Automobile parts in India and also provides Research and Product Development Support Services to affiliates of L&L Group. Return of income for A.Y.2021-22 filed u/s. 139 of the Act on 11.03.2022. Case selected for Complete Scrutiny under CASS to examine two issues namely (1) International Related Party Transactions in support of intangible property; (2) International Related Party Transactions in services. After validly servicing notices u/s. 143(2) of the Act, Transfer Pricing issues were referred to the Transfer Pricing Officer (TPO) who passed the order u/s. 92CA(3) of the Act proposing adjustments of Rs.5,67,75,140 /-. Thereafter, ld. Assessing Officer passed Draft Assessment Order on 10.11.2023 to which objections were filed by the assessee on 08.12.2023 before the Dispute Resolution Panel (DRP). Thereafter, on 30.08.2024 ld. DRP dealt with the issues raised by the assessee and after considering the order of the ld. TPO gave the directions to the Assessing Officer who finally passed the Assessment Order on 20.09.2024 making two adjustments; (1) Royalty payment using ‘Other Method’ as most appropriate method (intangible property) at Rs.23,25,657/- and also disallowed the Global Management Cost (Services) at Rs.5,43,44,296/- and assessed the income at Rs.26,18,94,123/-.

4. Aggrieved assessee is now in appeal before this Tribunal.

5. Ld. Counsel for the assessee vehemently argued referring to the written submissions placed on record and with regard to proposed transfer pricing adjustment in respect of international transaction pertaining to payment of Royalty, it is submitted that the appellant has already recovered the Product Development Cost incurred by it from the Associated Enterprises with the markup of 10% which could be verified from the fact that R&D expenses incurred by the assessee are Rs.2,51,90,242/- and the amount recovered is at Rs.2,77,09,266/- showing that the assessee has already charged 10% markup and therefore no Transfer Pricing adjustment on Royalty payment is called for.

6. So far as the issue regarding Transfer Pricing adjustment on international transactions pertaining to payment of Management Support Services is concerned, written submissions of the assessee reads as follows :

“The Appellant (and the various entities of the L & L Group to which it belongs) is engaged in the business of manufacturing automotive components. Specific details whereof are given on page Nos. 47 to 49 of the paper book which lists the various products and their functionalities.

In terms of the Intercompany Agreement on Global Management costs, various entities of the L & L Group had inter-alia agreed to share the Executive Costs – refer page Nos. 117 to 118 and 121 of the paper book. The relevant Clauses of the said Agreement are extracted hereunder for ready reference:

NOW, THEREFORE, it is hereby agreed the following

Article 1.

General Principles

(a) Each L&L company employing an Executive (“Employing Company”) shall be entitled to a reimbursement of the corresponding Executive Costs, with a five percent (5%) markup. This reimbursement shall exclude the portion of Executive Costs paid for duties fulfilled to be benefit of the Employing Company.

(b) The chargeable Executive Costs will be allocated between L&L companies which (i) benefit from the duties of the Executives, and which (ii) according to transfer pricing guidelines in force, do not earn a limited profit expressed as a fixed percentage of sales or of operating costs.

Article 2.

Allocation of Executive Costs

(a) The Executive Cost will be allocated between L&L companies based on quarterly questionnaires by each Executive.

Executive duties fulfilled to the benefit of a given company will be reported as such.

NOW, THEREFORE, it is hereby agreed the following:

Article 1.

General Principles

(a) Each L&L company employing an Executive (“Employing Company”) shall be entitled to a reimbursement of the corresponding Executive Costs, with a five percent (5%) markup. This reimbursement shall exclude the portion of Executive Costs paid for duties fulfilled to be benefit of the Employing Company.

(b) The chargeable Executive Costs will be allocated between L&L. companies which (i) benefit from the duties of the Executives, and which (ii) according to transfer pricing guidelines in force, do not earn a limited profit expressed as a fixed percentage of sales or of operating costs.

Article 2.

Allocation of Executive Costs

(a) The Executive Cost will be allocated between L&L companies based on quarterly questionnaires by each Executive.

Executive duties fulfilled to the benefit of a given company will be reported as such.

EXHIBIT 1
LIST OF EXECUTIVES

Global Management

• • On being called upon to justify the receipt of services and to explain the benchmarking of the said international transactions, the Appellant had filed the various details / evidences before the TPO/DRP as detailed earlier in the note.
  • As is evident therefrom, the Appellant had filed various evidence to justify the payment and the ALP thereof:

• • Rejection of these very crucial evidences by the TPO / DRP is incorrect to say the least and hence their conclusion of the cost allocation being arbitrary or the services being duplicate in the nature or being non-beneficial to the Appellant or not being received is completely baseless and instead contrary to the relevant records and evidence.
  • Accordingly, the arbitrary determination of the ALP of the said management support services cost of Rs. 5,46,80,710 at Rs. 3,36,414 by the TPO / DRP is unsustainable.
  • Here, the Appellant would also like to invite the attention of the Hon’ble Bench to the fact that it has been making payment of the MSS costs from AY 2018-19. Also, it is worthwhile noting that in earlier years, Mr. Nitin Mehta was on the payroll of the Appellant Company and hence in terms of the same Agreement, the Appellant was also recovering a portion of the salary of Mr. Mehta from the other entities of the Group basis, the very same allocation methodology adopted which fact cannot be disputed. The details of the MSS fees paid by the Appellant in earlier years and also the costs of Mr. Mehta recovered in the earlier years (as filed during the course of the hearing before the Hon’ble Bench) is reproduced hereunder:

• • Further, the Appellant relies on the landmark decision of the Hon’ble Delhi High Court in the case of CIT v/s. EKL Appliances Limited reported in [2012] 24 com199 (Delhi). Relevant extract from the said decision is reproduced hereunder:

……..

“22. Even Rule 10B(1)(a) does not authorise disallowance of any expenditure on the ground that it was not necessary or prudent for the assessee to have incurred the same or that in the view of the Revenue the expenditure was unremunerative or that in view of the continued losses suffered by the assessee in his business, he could have fared better had he not incurred such expenditure. These are irrelevant considerations for the purpose of Rule 108. Whether or not to enter into the transaction is for the assessee to decide. The quantum of expenditure can no doubt be examined by the TPO as per law but in judging the allowability thereof as business expenditure, he has no authority to disallow the entire expenditure or a part thereof on the ground that the assessee has suffered continuous losses. The financial health of assessee can never be a criterion to judge allowability of an expense; there is certainly no authority for that. What the TPO has done in the present case is to hold that the assessee ought not to have entered into the agreement to pay royalty/brand fee, because it has been suffering losses continuously. So long as the expenditure or payment has been demonstrated to have been incurred or laid out for the purposes of business, it is no concern of the TPO to disallow the same on any extraneous reasoning. As provided in the OECD guidelines, he is expected to examine the international transaction as he actually finds the same and then make suitable adjustment but a wholesale disallowance of the expenditure, particularly on the grounds which have been given by the TPO is not contemplated or authorised.”

• • Further, reliance is also placed on the decision of Hon’ble Delhi High Court in the case of CIT v/s. Cushman and Wakefield (India) (P.) Ltd. reported in [2014] 46 com317 (Delhi) wherein, it has been held that the authority of the TPO is restricted to the extent of determining the ALP and not to determine whether there is a service or not from which the assessee benefits – refer page Nos. 14 & 15 at paragraph Nos. 34 & 35 of the said decision.
  • The said principles have been followed time and again in various judicial precedents which are not being cited here for brevity sake.
  • Coming now to the rejection of the aggregation approach adopted by the Appellant, we would like to point out that, for the purposes of benchmarking its international transactions the Appellant had aggregated various inter-linked transactions – detailed justification in support of the approach has been given in the TPSR at page No. 63 to 64 of the paper book.
  • The TPO/DRP, after accepting the aggregation approach for other transactions, have plucked out the international transaction of the payment of MSS and rejected the benchmarking thereof under the aggregation approach. In this regard, it is submitted, is contrary to the law laid down in the following judicial precedents:

– Decision of the Hon’ble Delhi High Court in the case of Magneti Marelli v/s. DCIT reported in [2016] 75 taxmann.com 213 (Delhi). The Special leave petition [‘SLP’] filed before the Hon’ble Apex Court against the aforementioned order was also dismissed vide Order dated 3 November 2017, reported in [2018] 89 taxmann.com 8 (SC);

– Decision of the jurisdictional Bombay High Court in the case of ACIT v/s. Cummins India Limited in ITA No. 126 of 2023 refer page nos.17 to 21 at paragraph Nos. 10 to 13 of the said decision. The Special leave petition [‘SLP’] filed before the Hon’ble Apex Court against the aforementioned order was also dismissed vide Order dated 24 March 2025- reported in [2018] 89 taxmann.com 8 (SC).

– Decision of the jurisdictional Pune Bench of the ITAT in the case of Cummins India Limited v/s. ACIT in ITA No. 1256/Pun/2023 refer page Nos. 20 to 25 at paragraph Nos. 11 to 13 of the said decision.

• • Even otherwise, it will be appreciated that the MSS consists of the cross charge of senior executive fees by the AE to the Appellant. Had the Appellant employed these executives on its payroll instead of pooling the executives from the other entities of the Group, the expenses incurred by the Appellant would have fallen into the head “employee benefit expenses” which would clearly make the said expenses intrinsically linked to the business of the Appellant of manufacturing automative components, thereby justifying the aggregation approach adopted by the Appellant.

Prayer:

In the view of the foregoing and specifically in the light of the aforesaid decision(s) since the said expenses are intrinsically linked to the business of the Appellant, we request the Hon’ble Bench to uphold the aggregation approach adopted by the Appellant for benchmarking the international transactions.

Further, in the light of the evidences furnished pertaining to the expenses, no adjustment ought to have been made by the TPO. Hence, we request the Hon’ble Bench to delete the aforesaid transfer pricing adjustment vis-à-vis the international transaction of management support services fees.

7. On the other hand, ld. Departmental Representative vehemently argued supporting the order of ld. DRP.

8. We have heard the rival contentions and perused the record placed before us and carefully gone through the submissions as well as the paper book filed by the assessee.

9. Grounds of appeal No.1 raised by the assessee is general in nature which needs no adjudication.

10. Grounds of appeal No.2 raised by the assessee relates to Transfer Pricing adjustment of Rs.23,25,657/- in respect of international transaction pertaining to payment of Royalty. During the year, the assessee has paid Royalty to its Associated Enterprises at Rs.11,76,62,067/- for the use of trade mark and knowhow. Further, the assessee has incurred R&D expenses during the year at Rs.2,51,90,242/- for the Research and Product Development Support Services which are beneficial for the L&L Group. Ld. Assessing Officer in the impugned order has observed that the assessee has not charged/reimbursed for the component on Royalty which pertains to intangibles generated and based on the figures of R&D expenses incurred by Associated Enterprises, Royalty paid by Associated Enterprises and R&D expenses incurred by the assessee, ld. Assessing Officer calculated the Transfer Pricing adjustment of Rs.23,25,657/- which the assessee ought to have recovered over and above the costs incurred by it. We however going through the record placed before us including the audited balance sheet placed at pages 3 to 181 of the paper book find that the assessee has already disclosed Revenue of Rs.2,77,09,266/- received from Associated Enterprises towards services rendered in the field of R&D. It seems that ld. Assessing Officer as well as ld. DRP failed to take note of this figure of Revenue received from Associated Enterprises at Rs.2,77,09,266/-. We find that on the R&D expenses by the assessee are at Rs.2,51,90,242/-, assessee has already charged its Associated Enterprises at Rs.2,277,09,266/-which is approximately 110% of the costs incurred by the assessee. Therefore, the adjustment made by the Assessing Officer to the extent of 9.23% of the R&D expenses incurred by the appellant is uncalled for and accordingly deleted since the assessee has already offered the Revenue from its Associated Enterprises after adding markup of 10% and shown in the profit and loss account. Therefore, Grounds of appeal No.2 raised by the assessee is allowed.

11. So far as Ground of appeal No.3 is concerned, they are raised against the Transfer Pricing adjustment of Rs.5,43,44,296/- in respect of payment of Management Support Services. We observe that the assessee is part of L&L Group located in USA. The operations of the assessee are spread across France, USA, China, India and Czech Republic and Turkey. In pursuance to the Global Management Cost Agreement, the cost of the Executives of the Associated Enterprises is to be allocated to the Group entities along with markup of 5%. The assessee in the Transfer Pricing Study report has calculated the Arms Length Price (ALP) of various international transactions based on Transactional Net Margin Method (TNMM). The details indicate that for the year international transactions relating to import of raw material, export of goods, purchases of assets (software), payment of Royalty, provisions of Research and Product Development Support Services, Management Support Services and are reimbursement of expenses TNMM has been applied and except the Management Support Services, for all the remaining international transactions ld. Assessing Officer has accepted the TNMM applied by the assessee. Ld. Assessing Officer in the impugned order after considering the directions of ld. DRP has observed that the services for which the assessee has paid the Management Support Services to its Associated Enterprises are duplicate in nature, assessee has not established the benefits derived from such services, assessee has not provided actual hours spent by CEOs and Allocation Method used is arbitrary and further ld. Assessing Officer disregarded “TNMM Method” applied by the assessee and applied the “Other Method” as most appropriate method and thereafter has observed that for such kind of uncontrolled transactions no payments would have been made for the services which are not received, which are duplicate in nature or are not beneficial to the services receiving entities and thus determined the ALP of Global Management Cost as Nil.

12. Before us, ld. Counsel for the assessee has made two fold contentions in this regard firstly referring to the various judgments including the judgment of Hon’ble Delhi High Court in the case of CIT Vs. Cushman and Wakefield (India) Pvt. Ltd. (2014) 46 com317 (Delhi) and in the case of ACIT Vs. Cummins India Limited (2018) 89 taxmann.com 8 (SC) and subsequently followed by this Tribunal in the case of Cummins India Limited Vs. ACIT in ITA No.1256/PUN/2023 order dated 04.12.2025 where it has been consistently held that if the assessee had used TNMM to benchmark all its transactions, it was not open to the Transfer Pricing Officer to subject only one element to entirely different method as this would lead to chaos and detrimental to both Assessee and Revenue.

13. We find that the ratio laid down by Hon’ble Jurisdictional High Court in the case of ACIT Vs. Cummins India Limited (supra) is squarely applicable on the facts of the instant case. In that case, the assessee made payment of Royalty to its Foreign based Associated Enterprises for providing Technical Knowhow for manufacturing of Engines to be sold to the customers. The assessee Cummins India Limited benchmarked this transaction along with other transactions of export sales under overall manufacturing segment. It used TNMM to benchmark all its international transactions. Transfer Pricing Officer segregated the international transactions of payment of Royalty from other Information Technology of the assessee and used Comparable Uncontrolled Price Method (CUP) to benchmark the said transaction. Even though the Tribunal upheld the order of Transfer Pricing Officer, Hon’ble Court reversed the finding of Tribunal holding that where the assessee had used TNMM to benchmark all its international transactions it was not open to the Transfer Pricing Officer to subject only one element to payment of Royalty for use of Technology to entirely a different CUP method as this would lead to chaos and detrimental to the interests of both Assessee and Revenue.

14. Same is the situation in the given case where the assessee has benchmarked the international transactions relating to import of raw material, export of goods, purchase of assets, payment of Royalty, provision of Research and Product Development Support Services, Management Support Services and reimbursement of expenses by applying TNMM, however, ld. Transfer Pricing Officer has accepted the TNMM method for all the transactions except that for Management Support Services which is not justified in light of ration laid down by Hon’ble Jurisdictional High Court in the case of ACIT Vs. Cummins India Limited (supra) and therefore the impugned Transfer Pricing adjustment made by the Transfer Pricing Officer deserves to be deleted on this ground itself. Thus, Ground No.3 raised by the assessee is allowed.

15. Coming to Grounds of appeal No.4 and 5 which deals with merits of the case, we not that there are CFOs, CEOs, Executives for Automotive Global Strategic Marketing Business Development, Global Marketing, Global Technology, Global IP, Global IT, Corporate Finance etc. which are enrolled by L&L Headquarters and they work for all the locations of the Group Company. It has been demonstrated before us that the payment of Management Support Services is as per the Inter Company Agreements on Global Management Cost where cost of Executives is to be allocated to the Group entities along with markup of 5% and to be charged on quarterly basis. Their rolls and responsibilities are also mentioned in these Agreements. The actual steps undertaken by each employee are determined based on quarterly questionnaire filed by each of the Executives. The communications of various issues are taken up through e-mails and the Executives who are expert in their fields give their services at the global level. It is also not in dispute that the cost of such Executives and CFOs is allocated to various offices of the Group companies located in various countries based on their time given. A chart has been filed by the assessee showing that proper allocation of Stewardship Services is also made and that the cost of services of Board Chairman, CFO and CEO are allocated and major amount of their employment costs are treated as Stewardship Services and the share of the assessee company in India is only 1% to 3%. For all the remaining CEOs also share of the assessee company is ranging from 0% to 10% with exception of 25% share of Mr. Nitin Mehta who is APAC and India President located at Singapore and his time is allocated between India and China of which 63% is allocated to China and 29% to India and 8% has been charged as Stewardship Services. It has also been demonstrated that services paid are not of duplicate in nature. Further to support the correctness about the Management Support Services charged by the assessee a statement is filed providing the details of rolls and responsibilities of the Executives involved in its business, sample e-mails evidences demonstrating the receipt of services from the Global CEOs to demonstrate their involvement in the business and also data evidencing detail basis of allocation of the costs. We also note that the payment of Global Management Costs is being consistently booked by the assessee for past many years and has been accepted by Revenue authorities. It is also brought to our notice that Mr. Nitin Mehta who was previously employed on the payroll of the appellant company and for the services provided by Mr. Nitin Mehta to the L&L Group on the global basis, assessee was receiving Management Support Services fees from its Associated Enterprises and disclosed as Revenue at Rs.66,89,659, 2,53,50,719/- and Rs.3,51,73,746/- during A.Y. 2018-19 to A.Y. 2020-21. It was only from A.Y. 2021-22, that Mr. Nitin Mehta joined the office at Singapore and his salary is borne by L&L Headquarters office. In view of these facts, we are inclined to hold that ld. Transfer Pricing Officer erred in making the Transfer Pricing Adjustment for the international transaction of payment of Management Support Services and the same is uncalled for. Thus, Grounds of appeal No.4 and 5 raised by the assessee are allowed.

16. Ground of appeal No.6 relating to initiation of penalty proceedings is general and consequential in nature which needs no adjudication.

17. In the result, the appeal of the assessee is allowed.

Order pronounced on this 01^st day of June, 2026.