Income Tax Appellate Tribunal - Chennai
Shibaura Machine India Pvt. ... vs Dcit, Corporate Ward-3(1),, Chennai on 17 March, 2026
आयकर अपीलीय अिधकरण, 'डी' ायपीठ, चे ई।
IN THE INCOME TAX APPELLATE TRIBUNAL
'D' BENCH: CHENNAI
ाियक सद एवं सु ी पदमावती यस, लेखासद के सम#
ी एबी टी. वक ,
BEFORE SHRI ABY T. VARKEY, JUDICIAL MEMBER AND
MS. PADMAVATHY.S, ACCOUNTANT MEMBER
आयकर अपील सं ./IT(TP)A No.97/Chny/2024
िनधा%रण वष% /Assessment Year: 2021-22
M/s. Shibaura Machine India Pvt. Ltd., The Dy. Commissioner of Income
No.65, (PO Box No.5), Vs. Tax,
Chennai - Bangalore Highway, Corporate Ward-3(1),
Sembarambakkam B.O., Chennai.
Tiruvallur - 600 123.
PAN: AAACL 6155E
(अपीलाथ /Appellant) ( यथ /Respondent)
अपीलाथ की ओर से/ Appellant by : Mr. S.P. Chidambaram, Advocate
)*थ की ओर से /Respondent by : Mr. ARV Sreenivasan, CIT
सुनवाई की तारीख/Date of Hearing : 11.03.2026
घोषणाकी तारीख /Date of Pronouncement : 17.03.2026
आदे श / O R D E R
PER PADMAVATHY.S, A.M:
This appeal by the assessee is against the final order of assessment passed by the assessment unit (in short "AO") passed u/s. 144C(13) r.w.s 143(3) of the Income Tax Act, 1961 (in short "the Act") dated 27.09.2025 for Assessment Year (AY) 2021-22. The grounds raised by the assessee are as under:
"1. The Appellant objects to the Final Assessment Order dated 27.09.2024, passed under section 143(3) r.w.s. 144C (13) r.w.s 144B of the Income-tax IT(TP) No.97/Chny/2024 Shibaura Machine India Pvt. Ltd.-2-
Act, 1961 ('the Act') by the Assessment Unit, Income Tax Department, National Faceless Assessment Centre (NFAC) ('the Assessing Officer'/'AO'), which is erroneous and contrary to law, facts and circumstances of the case.
1. Transfer Pricing Grounds
2. Upward transfer pricing adjustment to the International Transaction of the Manufacturing Segment services rendered to the Associated Enterprises ('AE') General Ground
2.1. The AO/DRP erred in law and facts in confirming the action of the TPO in determining an upward adjustment amounting to INR 72,23,878/- to the value of international transactions in the manufacturing segment of the Appellant.
Incorrect rejection of TP documentation and performance of fresh search 2.2. The AO/DRP erred in law and facts in confirming the action of the TPO of rejecting the Appellant's TP documentation and performing a fresh search resulting in the addition of new comparable companies.
2.3. The TPO/AO/DRP without appreciating the fact that having accepted all of the Appellant's comparable companies in the TP order there is no question of non-reliability of the Appellant's TP documentation/search and as such fresh benchmarking analysis is unwarranted and unsustainable in law.
2.4. The AO/DRP erred in law and facts in confirming the action of the TPO of invoking the provisions of section 92C(3) of the Income Tax Act, 1961.
2.5. The TPO erred in not providing the search parameters basis which the compaR companies were selected by him.
Incorrect inclusion of Polymechplast Machine Limited 2.6. The AO/DRP erred in confirming the action of the TPO in addition of comparable company namely, Polymechplast Machine Limited which is fimctionally ми comparable to the Appellant.
2.7. The AO/DRP erred in confirming the action of TPO in adding a comparable company namely viz., Polymechplast Machine Limited, whose turnover is 5 times lower than that of the Appellant.
Incorrect non-exclusion of Kabra Extrustion Technik Limited 2.8. The AO/DRP erred in not excluding Kabra Extrusion Technik Limited which is functionally not comparable to the Appellant.
IT(TP) No.97/Chny/2024 Shibaura Machine India Pvt. Ltd.
-3-2.9. The TPO/AO/DRP ought to have excluded Kabra Extrusion Technik Limited due to abnormal margin fluctuations and as such the company is not a comparable to the appellant.
Risk Adjustment 2.10. The AO/TPO erred in not granting market risk adjustment on account of differences in the functional and risk profile of the Appellant vis-à-vis comparable companies.
Incorrect computation of Appellant's margin by the TPO in the Giving effect order.
2.11. The AO/TPO erred in exceeding his jurisdiction while giving effect to the directions of the DRP.
2.12. The AO/TPO grossly erred in incorrectly computing the margin of the appellant while giving effect to the DRP directions.
2.13. The AO/TPO ought to have appreciated the fact that the appellant's margin was neither contested before the DRP nor the DRP has provided any specific directions to recompute the margin of the Appellant and as such the TPO erred in recomputing the same while giving effect to the directions of the DRP.
Incorrect computation of margin of the comparable companies by the TPO in the Giving effect order.
2.14. The AO/TPO erred in not computing the margin of the comparable companies from annual reports while passing the giving effect order to the DRP directions.
2.15. The AO/TPO erred in treating certain expenses as non-operating viz., bad debts written-off, entertainment expenses, Provision for doubtful debts and inconsistent with the treatment of the said items while computing the margin of the Appellant.
URA MACHINE IN 2.16. The AO/TPO erred in treating certain expenses as operating viz., Foreign exchange fluctuation inconsistent with the treatment of the said items while computing the margin of the Appellant.
3. Upward adjustment towards interest on outstanding receivables.
3.1 The AO/DRP erred in in confirming the action of the TPO in treating outstanding receivables transaction as international transaction.
3.2 The AO/DRP erred in confirming the action of the TPO in re- characterizing outstanding receivables transaction as loan to AE and erred in imputing notional interest on the same.
IT(TP) No.97/Chny/2024 Shibaura Machine India Pvt. Ltd.
-4-3.3 The AO/DRP failed to appreciate that the Appellant is not charging interest on outstanding receivables from Non-AE and as such there is no question of recovering interest on outstanding receivables from AE.
3.4 The AO/DRP failed to appreciate that the AE is not charging interest on outstanding receivables from the Appellant and as such the Appellant cannot be expected to recover interest on outstanding receivables from the AE.
3.5 Without prejudice to the above, the AO/TPO/DRP erred in not appreciating the fact that the overall intercompany outstanding payables (INR 1,50,34,303) with AE is more than that of the overall outstanding intercompany receivables (INR 25,36,785) from AE and as such imputing interest only on outstanding receivables from AE is unwarranted and unsustainable.
3.6 Without prejudice to the above and assuming without admitting, that interest on outstanding receivables from AE is thrusted/sustained then appropriate adjustment/set off ought to be granted for interest on outstanding payable to AE.
3.7 The AO/DRP/TPO failed to appreciate that the working capital adjusted margins of the Appellant subsumes the interest on outstanding receivables from AE.
3.8 Without prejudice to the above, the AO/DRP erred in computation of notional interest on outstanding receivables by adopting LIBOR plus 350 BPS which is high and arbitrary.
3.9 The AO/DRP erred in computation of notional interest on outstanding receivables by adopting a very less credit period of 30 days which is very low and arbitrary.
4. Downward adjustment towards Payment of Professional Charges 4.1 The AO/DRP erred in confirming the action of the TPO by making a downward adjustment amounting to INR 47,16,572/- to the international transaction for the payment relating to Professional charges paid by the Appellant to its AE.
4.2 The AO/DRP/TPO erred in determining the arm's length pricing of the transaction of professional service availed as "NIL".
4.3 The AO/DRP/TPO grossly erred in disallowing the payment of professional fees paid for availing sourcing support services from China.
4.4 The TPO/AO/DRP erred in concluding that the Appellant did not get any tangible benefits from the said services without appreciating the fact IT(TP) No.97/Chny/2024 Shibaura Machine India Pvt. Ltd.
-5-that the Appellant has derived the benefit of identifying the right products from the right suppliers.
4.5 The AO/DRP/TPO failed to appreciate the fact that the payment of professional fees pertains to specific services rendered by the AE, which has resulted in tangible and measurable benefits to the Appellant.
4.6 The AO/DRP erred in not appreciating the evidences furnished by the Appellant demonstrating the actual availment of service.
4.7 The AO/DRP erred in confirming the action of TPO in segregating the professional charges paid to AE as an independent international transaction without appreciating the said payment is inextricably linked to the core business operations of the Appellant.
4.8 The AO/DRP erred in confirming the action of TPO in rejecting the aggregation approach and the Transactional Net Margin Method (TNMM) selected by the Appellant for benchmarking the professional services transaction.
4.9 The AO/DRP erred in confirming the action of TPO in adopting "other method" for independently benchmarking professional charges paid to AE.
4.10 Without prejudice to the above, the AO/DRP erred in confirming the action of TPO in incorrectly adopting "other method" i.e. contrary to the provisions of Rule 10B of the IT Rules.
II. Corporate tax Grounds
5. Incorrect total income reckoned by AO:
5.1 The AO erred in inadvertently considering the total income of Rs.
10,55,53,640/- as per Section 143(1) of the Act while completing the scrutiny assessment under section 143(3) r.w.s 144C(13) of the Act instead of considering the correct total income Rs.7,31,32,239/- as per return of income.
1.1 The AO having held that the deduction of Rs.3,26,53,038/- under section 35(1)(i) and Rs.8,66,800/- under section 35(1)iv) of the Act are allowable and it is in accordance with law ought not to have reckoned the total income quantified under section 143(1) of the Act wherein these amounts were not allowed.
1.2 The DRP ought to have appreciated that when the AO has considered the aforos issues in the draft assessment order, DRP erred in not adjudicating on the same.
1.3 Without prejudice to the above, the DRP ought to have appreciated that intimation under section 143(1) of the Act legally gets merged with the draft IT(TP) No.97/Chny/2024 Shibaura Machine India Pvt. Ltd.
-6-assessment order and as such the DRP ought to have adjudicated on the same.
1.4 Without prejudice to the above and assuming without admitting, the AO ought to have reckoned revised total income of Rs.10,49,18,480/- quantified by the CPC in the suo-motto rectification order dated 22/05/2024.
The Appellant craves leave to add, alter, amend, substitute, rescind, modify and/or withdraw in any manner whatsoever all or any of the foregoing grounds of appeal at or before the hearing of the appeal."
2. The assessee is a company engaged in manufacturing of plastic injection moulding machineries and auxiliary equipments. The assessee is a subsidiary of Shibaura Machine Co. Ltd., Japan. The assessee filed the return of income for AY 2021-22 on 15.03.2022 declaring total income of Rs. 7,31,32,239/-. The return was processed u/s. 143(1) assessing income at Rs.10,55,53,640/-. Subsequently, the case was selected for scrutiny and the statutory notices were duly served on the assessee. Since the assessee had international transactions with its Associate Enterprises (AEs), the A.O made a reference to the Transfer Pricing Officer (TPO) to determine the Arms Length Price (ALP). The TPO proposed for TP adjustment of Rs. 19,59,000/- towards margins, adjustment towards interest on receivables to the tune of Rs.13,306/- and downward adjustment towards professional fees of Rs.47,16,572/-. The TPO also made on protective basis an upward adjustment towards margin amounting to Rs.21,03,000/-. The A.O passed a draft assessment order incorporating the TP adjustments. Aggrieved, the assessee filed its objection before the Disputes Resolution Panel (DRP). The TPO passed an order giving effect as per the directions of the DRP, whereby the upward adjustment towards margin was revised to Rs.17,54,000/- and the other adjustment towards interest on receivables and professional fees where retained at the same amount. The A.O passed a final assessment order IT(TP) No.97/Chny/2024 Shibaura Machine India Pvt. Ltd.
-7-incorporating the revised TP adjustment pursuant to the directions of the DRP and the assessee is an appeal against the said assessment order.
TP ADJUSTMENT TOWARDS MARGINS - GROUND No.2 AND ADDITIONAL GROUND - 1
3. The assessee in the transfer pricing study (TPS) has computed the margin at 1.25% where the PLI is arrived at by operating profit/ operating cost (OP/OC). The assessee for benchmarking the transaction chosen Transaction Net Margin Method (TNMM) as the Most Appropriate Method (MAM). The assessee in the TPS chosen five comparables and the weighted average of the comparables was arrived at 2.68%. The assessee accordingly concluded that the price charged is at arms length. The TPO rejected the TPS and did an independent search whereby the TPO chose seven comparables with a median of 4%. Accordingly, the TPO arrived at the TP adjustment of Rs.19,59,000/-. The TPO while re-computing the PLI of the assessee excluded the professional fee charges from the operating expenses and held that the same is to be treated as a separate international transaction. Subsequent to the directions of the DRP, where the median was recomputed at 3.58% and the TP adjustment towards margin was revised to Rs.17,54,000/-.
4. The Ld. AR, at the outset, submitted that for the purpose of benchmarking the weighted average margins of three years of the comparables is compared with the margin of the assessee for the year under consideration. The Ld. AR further submitted year under consideration is part of the covid period where the margins of the assessee are affected and therefore, cannot be compared with weighted average of three years margins of comparables. Accordingly, the Ld. AR prayed that the margins of the comparables for AY 2021-22 alone should be compared with that of the IT(TP) No.97/Chny/2024 Shibaura Machine India Pvt. Ltd.
-8-assessee considering the abnormal situation arising out of covid. The Ld. AR in this regard placed reliance on the decision of Coordinate Bench in the case of Brakes India Pvt. Ltd. v. DCIT (IT(TP)A No.47/Chny/2024 dated 03.06.2025), where it has been held that:
"8. We have heard the rival contentions perused the material available on record gone through the orders of the lower authorities along with the paper books filed and case laws relied upon. The grievance of the assessee is that the TPO has not given economic adjustment to arrive at the PLI for the Financial Year 2019-20 relevant to Assessment Year 2020-21, since the automobile industry faced severe slowdown. We find that the assessee in their TP report has conducted a search process for its Brakes Division and identified 6 comparable whose 3 years weighted average PLI (OP/OC) ranging from -0.36% to 14.36% and median was 3.85%. The assessee computed its PLI as 5.30% and claimed the transaction is at arm's length. However, the TPO rejected the TP report of the assessee and applied the TNMM method as the Most Appropriate Method. The TPO considered the 3- year weighted average margin of the new comparable companies chosen to arrive at range for determination of arm's length. The arithmetic mean arrived at 9.23% of comparable companies against the PLI of the assessee at 5.30%. The main contention of the ld.AR is the assessee for the Brakes Division the TPO comparing 3 years weighted average PLI of comparable companies (where two normal years are there) with that of recessionary year (FY 2019-20) PLI of Brake Division, will not be an equitable comparison. Hence, the assessee prayed for:
a. Comparing FY 2019-20 PLI of Brake Division, BIPL with that of FY 2019-20 PLI of comparable companies (one-year vs one-year comparison) ; (or) b. Comparing the weighted average of 3 years PLI of Brake Division, BIPL with that of 3 years PLI of comparable companies (three years vs. three years comparison).
The above fair comparison results in the following:
Year PLI of Brake PLI of comparable
Division, BIPL companies
FY 2019-20 alone 5.59 4.85
(or)
Average of 3 years viz., FY 2017-18, 2018-19 9.41 7.39
and 2019-20
We find that the reasons for the severe economic slowdown during the impugned A.Y. 2020-21 were a. Switch over to BS IV to BS VI emission norms (skipping BS V) (GOI Circulars there in Page Nos.1 to 6 of Paper Book dated 28th Jan 2025); this resulted in reduction in demand for passenger and commercial during FY 2019-20.
b. NBFC liquidity crisis and corresponding increase in interest rates, triggered by IL&FS default on its debt obligations (Relevant extracts from ADB's report on NBFC crisis and an NBFC's Director's report for that financial year there in Pages 14 to 16 in Paper Book dated 28th Jan 2025). This resulted in a reduction in sale of both passenger and commercial vehicles. The downturn in these segments also affected the business of the Assessee.
IT(TP) No.97/Chny/2024 Shibaura Machine India Pvt. Ltd.-9-
c. Changes in axle norms allowing higher payload in commercial vehicle (CV), in turn increased the payload of both single and multi axle vehicles (Gross Vehicle Weight was increased) and with higher capacity available for each vehicle, fresh demand for vehicles went down affecting our sale of commercial vehicle brakes in FY 2019-20 (relevant GOI Notification in Pages 7 to 13 in paper book dated 28th Jan 2025).
d. Increase in third party insurance premiums for motor vehicles (relevant IRDA Notification there in Pages 17 to 26 of paper book dated 28th Jan 2025). The increase in third party premiums has also resulted in a reduction in demand for passenger vehicles.
8.1 We appreciate the reasons mentioned above, that the automotive segment
- OE vehicle sales and auto component industry got drastically impacted in FY 2019-20 (as compared to FY 2018-19) and as per the statistics shown by SIAM AND ACMA, there was 18% degrowth in passenger vehicles and 29% in commercial vehicles. Apart from that 47% degrowth in heavy commercial vehicles and 27% in light commercial vehicles (where Brakes India's presence is significant).
8.2 On perusal of submission made by the assessee, we find that sale of Brake Division of Brakes India Private Limited (BIPL) in FY 2019-20 witnessed 18% decrease over previous year and resultant reduction in profitability with fixed cost remaining more or less the same.
8.3 Considering the above facts of extraordinarily recessionary year - FY 2019-20 (AY 2020-21), the TPO comparing 3 years weighted average PLI of comparable companies (where two normal years are there) with that of PLI of Brake Division of only impugned assessment years data, will not be an equitable comparison. Therefore, the TPO has to consider either weighted average of 3 years of both the comparable companies with weighted average of 3 years PLI of Brake Division or Comparing FY 2019-20 PLI of Brake Division, BIPL with that of FY 2019-20 PLI of comparable companies.
8.4 We note that the I.T Rules under Rule 10B(2) and 10B(3) require reasonable adjustments to be made to eliminate, material affects due to conditions prevailing in the market and read as follows:
"Rule 10B(2) (1) .........
(2) For the purposes of sub-rule (1), the comparability of an international transaction 94[or a specified domestic transaction] with an uncontrolled transaction shall be judged with reference to the following, namely:--
(a) the specific characteristics of the property transferred or services provided in either transaction;
(b) the functions performed, taking into account assets employed or to be employed and the risks assumed, by the respective parties to the transactions;
(c) the contractual terms (whether or not such terms are formal or in writing) of the transactions which lay down explicitly or implicitly how the responsibilities, risks and benefits are to be divided between the respective parties to the transactions;
(d) conditions prevailing in the markets in which IT(TP) No.97/Chny/2024 Shibaura Machine India Pvt. Ltd.
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the respective parties to the transactions operate, including the geographical location and size of the markets, the laws and Government orders in force, costs of labour and capital in the markets, overall economic development and level of competition and whether the markets are wholesale or retail.
Rule 10B(3) (3) An uncontrolled transaction shall be comparable to an international transaction 96[or a specified domestic transaction] if--
(i) none of the differences, if any, between the transactions being compared, or between the enterprises entering into such transactions are likely to materially affect the price or cost charged or paid in, or the profit arising from, such transactions in the open market;
or " (emphasis supplied) 8.5 Further, we also find that the OECD guidelines (page 48 of PB dt. 06.01.2025) specifically states reasonable adjustments to be made to eliminate material effects wherever differences arise due to conditions prevailing in markets, capacity utilization etc. Therefore, from the reading of the above rules, we are of the view that when the market conditions were not conducive for FY 2019-20 as compared to earlier years i.e. FY 2018-19 and FY 2017-18, an equitable comparison should be either take the assessee's FY 2019-20 and comparable FY 2019-20 alone or compare 3 years viz FY 2017-18, 2018-19 and 2019-20 for both assessee and comparable companies.
8.6 In respect of the DRP's observation on the Notification dated 19.10.2015 (S.O.2860 (E)) that the concept of multiple year data and range would take care of the issue at hand. We are of the view that the Notification which in fact clearly holds in clause (2) referring to "Data set to be constructed under Rule 10C(A)"
wherein it clearly states the manner of choosing previous two years has to be on the basis of there being similar comparable, uncontrolled transactions.
8.7 In the case on hand there is not similar comparable uncontrolled transactions in the previous two years and hence the data of average 3 years cannot be considered for only the comparable companies. Thus, the plain reading of the Notification itself would entitle that there has to be comparability viz a viz Rule 10B(2) and 10B(3) applications for the previous financial years to even be considered.
8.8 Therefore, the Notification supports the assessee's contentions along with the I.T Rules under Rule 10B(2) and 10B(3) and the OECD guidelines require reasonable adjustments to be made to eliminate, material affects due to conditions prevailing in the market and capacity utilization.
In the above factual matrix, we are of the considered view that the TPO / DRP have erred in arriving at the PLI by considering the weighted average PLI of the comparable companies alone with the assessee's one-year results of the impugned A.Y. Therefore, we direct the TPO/AO to consider the data / results of the comparable companies of the impugned assessment year alone with the assessee's data / results of impugned assessment year to arrive the PLI to find out the arm's length of the transactions."
IT(TP) No.97/Chny/2024 Shibaura Machine India Pvt. Ltd.
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5. The ld AR also submitted that an identical view has been held by the coordinate bench for the same AY i.e., 2021-22 in the case of Brakes India Pvt. Ltd. vs. DCIT (IT(TP)A No.138/Chny/2024 dated 05.12.2025) where it has been held that:
"7.0 We have noted that the facts of the present case are similar to those available in the decision of the Hon'ble Coordinate bench supra. In respectful compliance to the same and for the purposes of consistency we set aside the order of the lower authorities and direct the Ld.TPO/AO to consider the data / results of the comparable companies of the impugned assessment year alone with the assessee's data / results of impugned assessment year to arrive the PLI to find out the arm's length of the transactions. The ground of appeal no.3 raised by the assessee is therefore allowed."
6. The Ld. Departmental Representative (DR), on the other hand, relied on the orders of the lower authorities.
7. We have heard the parties, and perused the material available on record. The assessee through additional ground is praying for comparison for PLI margin for AY 2021-22 with the PLI for the comparable companies for the single impugned AY 2021-22 as per Rule 10B of the Income-tax Rules. The additional grounds raised are pure legal issue, which does not require investigation of new facts. Hence, placing reliance on the judgment of the Hon'ble Apex Court in the case of National Thermal Power Co. Ltd. v. CIT (1998) 229 ITR 383 (SC), we admit the additional grounds.
8. With regard to the margin adjustments proposed by the TPO, the contention of the assessee is that the weighted average margin of the comparables for the last three years are compared with the margin of the assessee for AY 2021-22 which is an extraordinary year due to covid pandemic. The Ld. AR during the course of hearing submitted that the IT(TP) No.97/Chny/2024 Shibaura Machine India Pvt. Ltd.
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assessee experienced 17% declined in sales during FY 2020-21 due to unstable market conditions attributable to covid outbreak. The Ld. AR further submitted the operations of the assessee were completely shut down in Q.1 of FY 2020-21 due to lockdowns and travel restrictions which had cascading impact on the operations of the assessee for the entire year. The assessee accordingly is praying for comparison of one year margin (i.e. AY 2021-22) of the comparable with that of the assessee. From the perusal of the order of the coordinate bench in the case of Brakes India Pvt. Ltd. (supra), we notice that the coordinate bench has directed the TPO/AO to compare the margins for the impugned AY alone since the income tax rules read with the OECD guidelines required the reasonable adjustment to be made to eliminate material effects due to conditions prevailing in the market/capacity utilization due to the pandemic situation. Respectfully following the above ratio laid down by the coordinate bench, we direct the AO/TPO to consider the margin/results of the comparable companies of the impugned AY alone with that of the assessee to compute the ALP of the transactions.
DOWNWARD ADJUSTMENT OF PAYMENT TOWARDS PROFESSIONAL FEE:
9. During the year under consideration, the assessee availed professional services in the nature of sourcing support services from Shibaura Machines (Shanghai) Co. Ltd. in China and paid Rs.47,16,572/-. The assessee considered the said payment as part of its operating expenses while arriving at the overall margin. The TPO held that the professional fees have to be benchmarked separately and computed the ALP at Nil to make a TP adjustment of the entire fees paid. The TPO while doing so did not consider the submissions of the assessee stating that the profession fee is paid towards rendering of services which is an integral part of the main business of the IT(TP) No.97/Chny/2024 Shibaura Machine India Pvt. Ltd.
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assessee. The TPO held that the nature of transaction is general in nature and categorized impugned transaction as shareholding activity for the group entities. The assessee raised objections before the DRP contending that sourcing support services from the AE has a close inter linkage with the business of the assessee and therefore, cannot be benchmarked separately. The assessee also contended treating the receipt of services as a shareholder activity. The DRP however rejected the submissions of the assessee stating that the services availed from AE cannot be aggregated under TNMM and requires separate analysis. The DRP further held that the services availed are in the nature of management controlled activity and did not result in any tangible benefit to the assessee. The DRP also held that the assessee has not substantiated with proper documentary evidences supporting the availing of services from the AE.
10. The Ld. AR submitted that the AE provides the support on the request from the assessee for sourcing particular material from the region. The Ld. AR further submitted that the AE identifies suitable suppliers in the particular region for specific material requirement communicate the requirement to suppliers and acts as a mediator for the assessee for importing materials for which a fee is being paid to the AE. The assessee also reimburses on cost to cost basis fixed salary cost paid by the AE to its employees based out of China who provide support in the above services and the same is claimed by the assessee as professional service fees. The Ld. A.R argued that the shareholding activities provide economic benefit only to the ultimate parent company and any activities performed by other entities in the group shall be charged to the parent company. The Ld. AR further argued that in the instant case the materials imported from China with the sourcing support provided by the AE are used for manufacturing activity of the assessee for domestic sale.
IT(TP) No.97/Chny/2024 Shibaura Machine India Pvt. Ltd.
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The Ld. AR also argued that the impugned transaction is not executed with the primary intent of benefiting the shareholders but to avail the technical expertise for identifying suitable suppliers for sourcing specific material. The Ld. AR during the course of hearing submitted the following list of additional evidences and further submitted that the same could not be submitted the lower authorities due to paucity of time.
S.no Summary of Mail Evidence Communication of Defect/ materials rejected at time of GRN with the third-party
1. vendor
2. Assistance in sharing of Drawings/ design to third party vendor Assistance in getting quote/offer from third party vendors for the drawings designed
3. by Shibaura India Confirmation on the delivery date for the parts shipped to Shibaura India from
4. abroad.
5. Support in delivering parts to Shibaura India in critical circumstances. Communication of updates in the drawings designed by Shibaura India with the
6. third-party vendor.
7. Forwarding the POs raised by Shibaura India with the third-party vendors Clarification on the mode and time of delivery from third party vendor to Shibaura
8. India.
11. The Ld. Departmental Representative (DR), on the other hand, argued that the assessee has not substantiated with the proper evidences that the services have indeed been availed by the assessee. The Ld. DR also vehemently opposed the admission of additional evidence stating that the assessee had ample opportunity to submit the said details before the lower authorities which the assessee failed to do so.
12. We have heard the parties, and perused the material available on record. The assessee availed sourcing support services from its AE in China and the salary of the employees of the AE who are engaged in rendering the services is reimbursed by the assessee on cost to cost basis. The assessee treated the payment made as professional charges as part of the operating cost for the purpose arriving at its margin. The TPO carved out the professional IT(TP) No.97/Chny/2024 Shibaura Machine India Pvt. Ltd.
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fee charges as a separate transaction and using other method arrived at the ALP as Nil. The TPO while doing so, held that availing of professional services is a shareholder activity and that the assessee has not provided proper evidences in support of the claim that such services have been utilised by the assessee. The contention of the assessee is two fold one being the professional fee charges cannot be treated as a separate international transaction and that the availing of such services is not a shareholder activity. The assessee further contends that by availing the impugned services, the assessee is able to import materials from the right supplier and the materials imported are used in the manufacturing activity for domestic sales. Accordingly the assessee is arguing that the professional fees is an integral part of the business of the assessee and therefore cannot be treated as a separate international transaction. The OECD guidance for Transfer Pricing provides for the following guidelines with regard to separating the international transaction for bench marking -
(i) Segmentation is required where the tested party performs more than one type of business activity where the financials include revenues and costs from different functions or business lines, and the use of aggregated results may distort the arm's length analysis.
(ii) Segmentation is required where non-comparable transactions are included in the company's accounts and they materially affect the profit indicator used for benchmarking. The segmentation of financial data may be required to eliminate significant non-comparable transactions when performing comparability adjustments where without segmentation, the comparison with independent companies performing only the tested function would become unreliable.
13. In essence the separate bench marking is required where costs, revenues and risks associated with the controlled transaction can be separately identified and compared with an uncontrolled transaction. Therefore in our view if the assessee is able to establish the benefits derived from the specific transaction separately then we are of the view that the said international IT(TP) No.97/Chny/2024 Shibaura Machine India Pvt. Ltd.
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transaction needs to be benchmarked separately. In the given case the claim of the assessee is that the professional charges paid are interlinked with the business of the assessee and therefore cannot be benchmarked. The Ld AR also made the following written submission in this regard -
The nature of professional service availed is of assistance in sourcing of materials from suppliers which are essential for the manufacturing activity carried out by the Assessee. The AE assists in receiving a quote/offer from the third-party vendors for the materials required by Shibaura India, co- ordinates in customs clearance for seamless import of supplies to the Shibaura India, communicates with their local vendors/suppliers on any updates in the requirements or defects in the materials supplied etc. All these activities are integral to the Assessee and are closely interlinked to the routine manufacturing operations of the Assessee. In fact, the materials imported are majorly used for manufacture and sale of goods to third parties. Hence, segregating such a transaction and performing separate comparison will only provide a skewed picture. Therefore it has to be aggregated with other operating expenses and benchmarked under TNMM. Further it is submitted that all the other methods mandate high degree to similarity with the nature of service being rendered, which makes it almost impossible to identify comparables. Therefore, the most preferred option is to adopt the residual method i.e. TNMM by aggregating the professional services fees with other operating expenses. The TPO has adopted "other method" without assigning any reasons as why such method is considered as "most appropriate method" and the TPO has not brought in any comparables to justify the ALP of "nil".
14. Since the assessee has now furnished the additional evidence in support of the nature of service and rendering of service by the assessee, we are of the view that the impugned issue needs to be re-examined in the interest of natural justice and fair play. The TPO is therefore directed to examine the evidences submitted by the assessee and decide whether the impugned transaction is required to be benchmarked separately keeping in mind the guidelines and the nature of services elaborated herein above. The TPO if decides that the transaction is required to be benchmarked separately, then the TPO is further directed to carry out a proper benchmarking exercise to determine the ALP of the transaction. Needless to say that the assessee be given a reasonable opportunity of being heard.
IT(TP) No.97/Chny/2024 Shibaura Machine India Pvt. Ltd.
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15. With regard to whether the impugned transaction is a shareholder activity it is relevant to consider the following submissions of the assessee regard the nature of services -
"In case of professional services availed by the Assessee, the Assessee negotiates and enters into independent agreement/contract with the suppliers and in this process, the AE is not involved in the negotiation process. The AE is being paid only for the professional services rendered by it in identifying suppliers for requisite materials and support in custom clearance of good imported from China to bridge the linguistic barrier and help in smooth processing of good imported therein which is part and parcel of the manufacturing activity carried out by the Assessee. The said transaction is not executed with the primary intent of benefitting shareholders rather such technical expertise is required for identifying suitable suppliers and sourcing specific materials."
16. The key test as per OECD Guidance for an activity to be classifies as shareholder activity is that whether the activity provides a benefit that an independent enterprise would be willing to pay for. From the perusal of the nature of services as elaborated above, it is clear that the services provided are towards identifying the customers and support in customs clearance. In our considered view the services are not in the nature of shareholder activity since the same when tested as per the guidance it would be something an independent enterprise would be willing to pay for. In view of these discussions, we hold that the professional charges paid cannot be termed as a shareholder activity and accordingly direct the TPO to keep in mind our decision while re-examining the impugned issue as per the above directions.
17. The Ld. AR during the course of hearing did not press of adjudication of ground No.4 pertaining to interest on receivables due to the smallness of the amount of adjustment made by the TPO.
18. Ground No.5 pertains to incorrect total income reckoned by the A.O. In this regard, the Ld. AR submitted that the CPC made adjustment towards IT(TP) No.97/Chny/2024 Shibaura Machine India Pvt. Ltd.
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disallowance u/s. 35(1)(i) of the Act to the tune of Rs. 3,26,53,038/- and disallowance of Rs. 8,66,800/- u/s. 35(1)(iv) of the Act. The Ld. AR drew our attention to the observations of the A.O in the final assessment order where he has stated that:
"3. During the year under consideration the assessee has claimed deduction of Rs.3,26,53,038/-u/s 35(1)(i) of the I.T. Act and Rs. 8,66,800/- u/s 35(1)(iv) of the I.T. Act. The eligibility of the deduction u/s 35(1)(i) and 35(1)(iv) were sought to be verified. As per the details and documents filed on 19.12.23 and 20.12.23 the claim of deductions as above are found to be in order and no adverse inference is called for."
19. The Ld. AR further submitted that though the A.O has held that no adverse inference is called for in the assessment order has inadvertently considered the income processed u/s. 143(1) which included the impugned disallowances to arrive at the income assessed u/s. 143(3) of the Act. The Ld. AR prayed for direction to the A.O in this regard.
20. From the above observation of the A.O, it is clear that the A.O has stated that no disallowance is warranted u/s. 35(1)(i) and 35(1)(iv) of the Act. However, in the computation sheet, the A.O has considered the income computed u/s. 143(1) of the Act to make further adjustments to arrive at the assessed income u/s. 143(3) of the Act. Therefore, we see merit in the submission that the amount mentioned in the computation sheet which includes the above disallowance is an inadvertent mistake on the part of the AO. Accordingly, we direct the A.O to re-compute the assessed income of the assessee after deleting the disallowances in accordance with his own findings as recorded in the assessment order (refer extraction herein above).
21. The assessee vide letter dated 02.02.2026 raised an additional ground pertaining to the legal contention that the final assessment order of the TPO is not passed within the timeline as provided u/s. 153 of the Act and therefore, IT(TP) No.97/Chny/2024 Shibaura Machine India Pvt. Ltd.
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barred limitation. However, during the course of hearing the Ld. AR did not press for the admission of the said ground and therefore, the same is not admitted for adjudication.
22. In the result, the appeal of the assessee is partly allowed.
Order pronounced on 17th day of March, 2026 at Chennai.
Sd/- Sd/-
(एबी टी. वक ) (पदमावती यस)
(ABY. T. Varkey) (Padmavathy.S)
याियक सद य / Judicial Member लेखा सद य /Accountant Member
चे नई/Chennai, दनांक/Dated: 17th March, 2026.
EDN, Sr. P.S
आदे श क ितिल प अ े षत/Copy to:
1. अपीलाथ /Appellant
2. थ /Respondent
3. आयकर आयु /CIT, Chennai/Madurai/Coimbatore/Salem
4. िवभागीय ितिनिध/DR
5. गाड फाईल/GF Digitally signed by EJTADA DURGA EJTADA DURGA NARESH NARESH Date: 2026.03.25 12:13:15 +05'30'