Income Tax Appellate Tribunal - Chennai
Caterpillar India Private ... vs Cit(A)-20, Chennai on 7 April, 2026
आयकर अपील य अ धकरण, 'डी ' यायपीठ, चे नई
IN THE INCOME TAX APPELLATE TRIBUNAL
'D' BENCH, CHENNAI
ी मनु कुमार ग र, या यक सद य एवं ी एस. आर. रघुनाथा, लेखा सद य के सम$
BEFORE SHRI MANU KUMAR GIRI, JUDICIAL MEMBER AND
SHRI S. R. RAGHUNATHA, ACCOUNTANT MEMBER
आयकर अपील सं./IT(TP)A No.: 12/Chny/2024
नधा%रण वष%/Assessment Year: 2015-16
M/s. Caterpillar India Private ACIT,
Limited, vs. LTU-1,
7th Floor International Tech Park, Chennai.
Taramani Road,
Chennai - 600 113.
[PAN: AABCC-4615-K]
(अपीलाथ'/Appellant) (()यथ'/Respondent)
आयकर अपील सं./ITA No.: 1174/Chny/2024
नधा%रण वष%/Assessment Year: 2015-16
ACIT, M/s. Caterpillar India Private
Central Circle -3(3), vs. Limited,
Chennai. 7th Floor International Tech Park,
Taramani Road,
Chennai - 600 113.
[PAN: AABCC-4615-K]
(अपीलाथ'/Appellant) (()यथ'/Respondent)
Assessee by : Mr. Sharath Rao, Advocate
Department by : Mr. AR V Sreenivasan, CIT
सुनवाई क7 तार ख/Date of Hearing : 12.02.2026
घोषणा क7 तार ख/Date of Pronouncement : 06.04.2026
आदे श /O R D E R
PER S. R. RAGHUNATHA, AM:
These cross appeals filed by the Assessee and the Revenue are arising :-2-: IT(TP)A. No: 12/Chny/2024 & ITA No: 1174/Chny/2024 out of order of the learned Commissioner of Income Tax (Appeals), Chennai
- 20, (hereinafter referred to as "ld.CIT(A)"), dated 23.02.2024 partly allowing the appeal filed by the assessee against the assessment order dated 26.02.2020 passed u/s.143(3) r.w.s. 144C of the Income Tax Act, 1961 (hereinafter referred to as "the Act"), by the Assistant Commissioner of Income Tax, Circle 1, LTU, Chennai (in short "AO") pertaining to Assessment Year (A.Y.) 2015-16. Since, facts are identical and issues are common, for the sake of convenience, the appeal filed by the revenue and assessee are being heard together and disposed off, by this consolidated order.
2. The assessee has raised the following grounds of appeal :
The grounds of appeal stated hereunder are independent of, and without prejudice to one another 1(a) The Order passed by the Learned ('Ld.") Commissioner of Income Tax (Appeals)-20, (CIT(A)") in pursuance of the grounds filed by the Appellant against order under section 143(3) r.w.s. 92CA of the Income-Tax Act, 1961 ('the Act'), is bad in law and on facts.
1(b) The Ld. CIT(A)/AO has erred in law and on facts by failing to record an opinion that any of the conditions in section 92C(3) of the Act were satisfied and erroneously disregarded the TP study maintained by the Appellant as per section 92D of the Act read with rule 10D of the Income-tax Rules, 1962 (the Rules).
On the facts and in the circumstances of the case and in law, the Ld. TPO and Ld. AO, under the order issued by the Ld. CIT(A), erred in the following grounds:
Manufacturing of Earthmoving Equipment Segment - Adjustment-INR 185,92,87,574 2 Erroneous Rejection of Economic Adjustments 2(a) Erred in not allowing appropriate economic adjustments when applying Transactional Net Margin Method, in accordance with the provisions of Rule 10B(3) of the Rules, to eliminate the material differences between the Assessee and the comparable companies. Notional Tax Effect-INR 63,19,71,846 2(b) Erred in rejecting the idle capacity adjustment claimed by the Appellant on the ground that the Appellant had not furnished the capacity utilization of comparable companies, without appreciating the fact that the requirement to furnish capacity details in the Financial Statements has been relaxed with effect :-3-: IT(TP)A. No: 12/Chny/2024 & ITA No: 1174/Chny/2024 from FY 2012-13 by the Ministry of Corporate Affairs.
Erred in not appreciating the judicial principle of 'Impossibility of Performance, wherein the Appellant cannot be expected to provide data which are not available in public domain and shall not be penalized for the differences/relaxation in the regulations.
2(c) Erred in law and on fact by not following judicial precedents which have upheld the use of Industry capacity data as provided by Reserve Bank of India/FICCI for the purpose of computing the idle capacity adjustment.
2(d) Erred in law and on facts in arbitrarily rejecting the appellant's request to obtain the capacity utilization data from the comparable companies by virtue of powers vested with the TPO under section 133(6) of the Act as upheld by various Tribunals.
2(e) Erred in rejecting the claim for idle capacity adjustment, based on erroneous assumption that idle capacity adjustment should be provided only in the initial years of operations, without appreciating that Rule 10B(3) of the Rules does not provide any distinction between established companies and companies in the initial years of operations.
2(f) Erred in rejecting the idle capacity adjustment based on the observation that the manufacturing industry in India had grown at 1.1% in general and heavy capital goods had grown at 4.9% by relying on the Annual report published by Ministry of Industries and public enterprises for FY 2014-15. The Ld. CIT(A) failed to appreciate that even if industry has seen growth, the Appellant did not have corresponding growth in its Earthmoving equipment segment, the very reason for which the Appellant had claimed the idle capacity adjustment.
Further, the Ld. CIT(A) failed to appreciate that majority of the revenues of the Appellant flows from exports and the industry slowdown which the Appellant had referred to pertain to the economic situation of the export market and not in India.
2(g) Erred in law and on facts in not adjudicating on the claim of economic adjustment relating to low realization in export sales, without appreciating the peculiar business reasons and global economic parameters influencing the business of the Appellant for the year under consideration.
3 Provision no longer required written back 3(a) Erred in law and on facts in treating provision no longer required written back as a non-operating item without appreciating that the provisions were considered as an operating expense in the assessment years when they were created.
3(b) Erred in considering the reversal of the provisions as non-operating which would inter alia construe as double adjustment, when the Appellant had already disallowed the provisions in the year they were created and had paid taxes on the same.
:-4-: IT(TP)A. No: 12/Chny/2024
& ITA No: 1174/Chny/2024
4 Miscellaneous Receipts
4(a) Erred in considering the miscellaneous receipts under other income as non- operating without appreciating the submission made by the Appellant 5 Business Support Service Income 5(a) Erred in law and on facts in treating business support service income of INR 71,11,90.222 as a non-operating item, disregarding the detailed break-up provided by the Appellant substantiating the fact that the same is inextricably linked to the manufacturing function of the Appellant.
5(b) Erred in law and on facts in passing a non-speaking order by not considering the alternate plea of the Appellant to exclude the corresponding costs incurred in relation to the provision of the business support services.
5(c) Without prejudice, the Ld. TPO/CIT(A) failed to include business support service income of INR 24,33,31,038 out of the total business support service income of INR 71,11,90,222 while computing the margin of the Appellant, which was accepted to be relating to the manufacturing operations of the Appellant and considered as operating in nature by the Ld. TPO and CIT(A) in their orders.
6 Erroneous selection/rejection of Comparable Companies 6(a) Erred in law and on facts in selecting in Elecon Engineering Co. Ltd. without appreciating the fact that the company is functionally dissimilar to that of the Appellant.
6(b) Erred in law and on facts in arbitrarily rejecting the additional comparable companies selected by the Appellant.
Shared Services Segment Adjustment- INR 56,20,458 Notional Tax Effect- INR 19,10,394 7 Erroneous rejection/selection of Comparable Companies by the Ld. ΤΡΟ/ΑΟ 7(a) Erred in law and on facts in erroneously rejecting Allsec Technologies Ltd, as a persistent loss-making company without appreciating that the Company had earned profits in FY 2013-14, the year immediately preceding the subject financial year.
7(b) Erred in law and on facts in upholding Cross domain solutions Ltd. as a comparable company without appreciating that the Company operates under multiple business segments and the segmental information of the said company is not available in its financials.
:-5-: IT(TP)A. No: 12/Chny/2024 & ITA No: 1174/Chny/2024 7(c) Erred in law and on facts in selecting One Touch Solutions (India) Pvt. Lid. and Xavient Software Solutions (India) Pvt. Ltd. as comparable companies without appreciating that these companies are functionally dissimilar to that of the Appellant.
7(d) Without prejudice, erred in law and on facts in not considering the margins of the comparable company, Global Content Transformation Pvt Ltd as computed from Annual Reports.
Market Support Services Segment 8 No meaningful opportunity of being heard - violation of Principle of natural justice. - Adjustment- INR 28,67,00,000 Notional Effect -Tax INR 9,74,49,330 8(a) The Ld. TPO erred in law by violating the principles of natural justice and provisions of Section 92C(3) of the Act by not providing reasonable opportunity of being heard to the Appellant.
The Ld. TPO erred in proceeding with a predetermined approach while determining the Arm's length price for the marketing support services transaction and, the opportunity provided through show-cause notice was not meaningful, rather a mere formality.
9 Non-appreciation of business model and erroneous adjustment proposed Without prejudice to the above ground on Principal of Natural Justice 9(a) Erred on facts in not appreciating the business model of the Appellant and erroneously recharacterized the appellant as a commission agent when in fact it was only a Marketing Support Service provider, and thereby computing an ad hoc adjustment based on his own conjectures and surmises.
9(b) Erred in passing a non-speaking order, confirming the adjustment proposed by the TPO by placing reliance merely on the survey report and the observations of the TPO, without considering the detailed submissions filed by the Appellant clearly explaining the roles & responsibilities of the Appellant and the dealers in relation to the sales made by AEs in India.
9(c) Failed to take cognizance of the fact that the cost-plus markup pricing methodology under TNMM adopted by the Appellant were accepted by the TPO in the prior assessment years. The Ld. CIT(A)/ AO/ TPO had failed to uphold principles of consistency and has sought to make an adjustment to the Marketing and Support Services segment, when the facts and circumstances of the Appellant remained the same.
9(d) Erred on facts in adopting an erroneous exchange rate of I USD - INR 91.06 and arrived at the value of direct sales made by AEs in India through the dealer. Gainwell Commosales Pvt Ltd at INR 439.19 crores.
:-6-: IT(TP)A. No: 12/Chny/2024 & ITA No: 1174/Chny/2024 9(e) Erred in attributing commission to Parts sales made by the AEs in India, without appreciating the fact that the Appellant / AEs does not pay any commission in respect of Parts sales."
3. The revenue has raised the following grounds of appeal:
1. "The order of the Id. CITIA) is opposed to law and facts of the case 2 The ld. CITIA) has erred in considering the forex gain as operating on the there basis that the predecessors of the Id. CITIA) have considered it as operating income ignoring the justification given by the Transfer Pricing Officer during the TP Audit proceedings, that unrealised forex gain cannot be operating Income.
3 The id. CITIA! has erred in directing to delete the disallowance of provision for obsolescence of inventories without appreciating that as per Income Tax Act no provision is allowable as deduction.
31 The Id. CITIAI has failed to appreciate that the scrap income shown in various years is out of regular and routine income from sale of scraps in the assessee's business and not relatable to the inventories treated as obsolete and debited to provision for obsolescence of inventories.
4 The Id. CITIA) erred in directing to verify and allow depreciation on software licence 60% if the same is an application software without appreciating the fact that the assessee had only acquired a license to use the software and further classified the same as "intangible asset" in the books of the assessee, as such the depreciation rates as applicable to "licenses" as stated in Part B of New Appendix- 1 of the IT Rules, which 25% shall only be applicable to such acquisition of license
5. The Id. CIT(A) has erred in not appreciating that the amount reimbursed to the foreign AE for secondment of employees is in the nature of fee for technical [2:59 PM, 4/6/2026] DVani: services which calls for withholding of tax u/s 195 of the Act and since the assess has not withheld tax u/s 195 the same calls for disallowance u/s 40(a)(i) of the Act.
5.1 The CITIA) has erred in directing the AO to verify whether the assessee has deducted tax at source u/s 192 both on remuneration component that accrued to the seconded employees and reimbursement of expenses to the foreign AE and if TDS has been made on both the components, no disallowance is called for.
5.2. The ld CITA) has erred in ignoring the various clauses of the Agreement which signified that the overseas entity through the employees rendered technical, managerial and consultancy services, thus satisfied FTS as per the provisions of section 9(1)(vii) of the Act and also under DTAA?
6. For these grounds and any other ground including amendment of grounds that :-7-: IT(TP)A. No: 12/Chny/2024 & ITA No: 1174/Chny/2024 may be raised during the course of the appeal proceedings, the order of ld CIT/A), with respect to the grounds raised, may be set aside and that of the Assessing Officer be restored."
4. The brief facts of the case are that the assessee is a company and wholly owned subsidiary of Caterpillar Commercial S.A, Belgium which in turn is a wholly owned subsidiary of Caterpillar Inc. and engaged in manufacturing and selling of earthmoving equipment; diesel engines and gensets. The assessee operates in multiple segments, of which the TPO made TP additions/disallowances in 3 segments i.e. Manufacturing segment, Shared Services Segment and Marketing Support Services Segment. Further, the AO while completing the assessment has made multiple addition/disallowances viz., Disallowance of Repairs and maintenance, Disallowance of Stamp duty charges, Disallowance of Provision for Obsolescence, Restriction on quantum of depreciation on Software and Printer, Disallowance u/s.40(a)(i) of the Act on Reimbursement of Secondment cost. The ld.CIT(A) has partially allowed the appeal of the assessee and now both the assessee has filed an appeal in IT(TP)A No.12/Chny/2024 and the Revenue has filed appeal in ITA No.1714/Chny/2024. We shall first take up the Assessee's appeal.
IT(TP)A No.12/Chny/2024:
5. The Assessee has raised grounds of appeal in relation to the TP adjustments made and also raised a specific ground of appeal in legal grounds 1[1(a)] stating that TP order is barred by limitation as it is passed beyond the time limit prescribed u/s.153 of the Act. The Assessee has not pressed this ground and as such this ground is dismissed. Similarly, the Assessee had raised Grounds vide ground nos. 1(a) and 1(b) which is also not pressed as they are generic in nature and therefore, we dismiss these grounds of appeal.
6. Under Manufacturing segment, the Assessee has raised the following Grounds of appeal:
a) Ground nos. 2(a) to 2(g) Erroneous rejection of Economic Adjustments :-8-: IT(TP)A. No: 12/Chny/2024 & ITA No: 1174/Chny/2024
- Idle Capacity
b) Ground nos.3(a) to 3(b) treatment of provision no longer required written back
c) Ground No.4(a) treatment of Miscellaneous receipts as non-operating
d) Addl Ground of Appeal no.2: Customs duty adjustment
e) Addl Ground of Appeal no.4: AE and Non-AE segmentation
f) Addl Ground of Appeal no.3: Corporate tax - Provision for Obsolescence - Alternative ground on opening stock and closing stock to be recomputed
7. Brief facts in relation to manufacturing segment is that the Assessee benchmarked the international transaction under TNMM and as per TP study the PLI of the Assessee was OP/OR and for this segment the Assessee has reported an adjusted Net profit margin of 6.13% (adjusted margin after idle capacity cost) with 9 comparable companies margin in the range of 2.90% to 5.51% with a median 3.53% and thus substantiated its international transaction is at arm's length. The TPO has accepted the most appropriate method i.e. TNMM adopted by the Assessee but proposed to reject the adjustment for 'idle capacity' and considered forex gain/loss as non-operating while computing the margin of the Assessee and arrived at a revised margin of Assessee at -23.31%. Further, the TPO rejected 2 comparable of the Assessee and undertook a fresh search and brought in 4 additional comparable with totally 11 comparable margins in the range of 1.49% to 9.99% and median of 4.01% and ultimately held that the international transaction is not at arm's length.
8. In relation to the first ground of appeal i.e. 'Idle Capacity' adjustment, the brief facts as submitted by the Assessee is that within the Manufacturing division, the Assessee had two units viz., Material Handling & Underground and Building & Construction Products. Both these units together achieved a capacity of only 36.27% (2537/7000) (refer page 1,392 of paper book) of the installed capacity. Accordingly, the claim of the Assessee is that material disparities in the utilisation of capacity and the level of absorption of the fixed costs between the Assessee and the comparable companies should be :-9-: IT(TP)A. No: 12/Chny/2024 & ITA No: 1174/Chny/2024 eliminated. Accordingly, the Assessee has claimed that the capacity achieved in the immediately preceding three years is around 52.03% and therefore it has sought for considering certain fixed cost at 52.03%. However, the TPO did not grant this adjustment on the reasoning that such data is not available in respect of comparable companies. Further, TPO has also observed that the decline in MHU unit, which is in existence for a longer period of time, is much more due to the fact that the sales to AE has declined significantly. Accordingly, TPO rejected the idle capacity adjustment. The ld.CIT(A) upheld the order of the TPO by observing that the capacity details of the comparables were not furnished. Further, the ld.CIT(A) has observed that the Assessee has failed to submit any evidence to establish that its unit was shut down for 32 days nor did it provide any evidence for single shift. Also, capacity of the Assessee itself has increased from 1610 units to 2537 units and since it is not in the initial years of operation, the adjustment is unwarranted and upheld the order of the TPO in this respect.
9. The Ld.AR invited our attention to Rule 10B(3)(ii) and submitted that material differences between the transactions of the assessee being compared with that of the comparable/s that affect the profits from such transactions, then reasonably accurate adjustments ought to be made to eliminate the material effect of such differences. In this regard, the Ld.AR submitted due to industry slowdown there was drop in orders and therefore the Assessee could achieve only 36.25% of the installed capacity. The assessee does not have committed capacity in relation to AE and hence the assessee has to bear market and capacity risk. Accordingly, the assessee has in its TP document sought for idle capacity adjustment by reckoning only 52.03% of fixed cost as operating expense which is based on the assessee's own previous three years average capacity. The Ld.AR submitted that as a second approach, the capacity details of comparable companies have to be considered. Further, only details of 2 comparable a r e available in public domain, therefore the TPO could collate the data by issuing notice 133(6) for :-10-: IT(TP)A. No: 12/Chny/2024 & ITA No: 1174/Chny/2024 the remaining comparable companies and then allow appropriate adjustment. The third and last approach of the assessee is on without prejudice basis that industry average capacity as reported by RBI and FICCI could be considered for arriving at the quantum of idle capacity utilization adjustment. The Ld.AR has also refer to various judicial precedents including that of the jurisdictional Tribunal.
10. The Ld.DR on the other hand vehemently argued and emphasized that the TPO and ld.CIT(A) have brought out categorical reasoning that granting of capacity adjustment is unwarranted in the present case as the decline in the capacity is mainly due to the fact that sales to AE has reduced significantly.
11. We have considered the rival contentions perused the material available on record and gone through the orders of the authorities along with the paper books filed. The Assessee has filed additional evidence to substantiate plant shut down for 31 days and industry slowdown and no demand for manufacturing products. In this regard, we would like to reference our earlier order in Assessee's own in IT(TP).No.42/Chny/2023 dated 06.06.2025 wherein it is held as under:
"In our considered view idle capacity could arise because of various reasons like start-up phase, force majeure, recession, industry/sector specific reasoning etc. and it is not restricted to start-up phase. In the instant case, the Assessee has pointed out that due to global recession there was a decline in export sales to AE, this fact is also acknowledged by the TPO and he has also given a specific finding that only AE sales in reduced but Non-AE sales was uniform. This apart the available comparable companies average capacity is as high as 62.38% and even the industry average capacity as published by RBI and FICCI is around 70% whereas the capacity achieved by Assessee is only 23%. All these factors goes to show that due to global recession there seems to be a decline in the capacity of the Assessee, which deserves to be appropriately adjusted for idle capacity. Accordingly, we hold that idle capacity adjustment is allowable. In this regard, we find that the Assessee has proposed 3 different approaches/basis in computing the quantum of idle capacity adjustment. However, both the lower authorities have neither considered or adjudicated on the same. Hence in the interest of justice, we remit this issue to the file of TPO to factually examine and consider any one of the approaches in quantifying the amount of idle capacity adjustment. Accordingly, this ground/issue is allowed for statistical purposes."
12. Respectfully following the above decision, we hereby remit this issue to the file of the TPO to consider the additional evidence filed by the Assessee :-11-: IT(TP)A. No: 12/Chny/2024 & ITA No: 1174/Chny/2024 and if he is satisfied with same, grant the 'idle capacity' adjustment under any one of the methods as pointed in the order extracted herein above. Accordingly, this ground of appeal 2(a) to 2(g) is thus allowed for statistical purposes.
13. Since the primary economic adjustment of idle capacity adjustment is remitted to the file of the TPO, we hereby admit the additional ground on custom duty adjustment. We also note that this issue was considered in the Assessee's own case in IT(TP)A No.42/Chny/2023 vide order dated 06.06.2025 wherein it was remanded back to the TPO to examine the issue of necessity of granting custom duty adjustment in light of the principle laid down by the jurisdictional Tribunal in the case of Doowon Automotive Systems India Pvt Ltd [IT(TP)A No.7/Chny/2018.
14. Respectfully following the said decision, we remit this issue to the file of the TPO for re-examination in light of the decision in the case of Doowon Automotive Systems India Pvt Ltd (supra). The assessee is directed to furnish the necessary details/working in relation to the same. The TPO after affording sufficient opportunity to the assessee, may decide this issue in accordance with law and the judicial precedence referred to hereinabove. This ground of appeal is allowed for statistical purposes.
15. Next Ground nos.3(a) to 3(b) treatment of provision no longer required written back. The contention of the assessee is that though this provision was disallowed in the year of creation in the memo of total income, it was considered as an operating expense for transfer pricing provisions. Therefore, upon reversal of such provision which is no longer required should be treated as operating income in the subject AY upon reversal. However, the TPO has held that the details were not given in full and therefore did not agree with the contention of the Assessee. On appeal, the ld.CIT(A) has held that the Assessee was not furnished complete details and therefore the contention of the Assessee could not be accepted.
:-12-: IT(TP)A. No: 12/Chny/2024 & ITA No: 1174/Chny/2024
16. It is the contention of the Ld.AR before us that the TPO has accepted that to the extent of Rs.4.59 crores has been provided and the details for the balance has not been provided. Therefore, the Ld.AR prayed that at least to the extent of Rs.4.59 crores, the reversal should be treated as operating income. Further, in light of the details filled by the Assessee at page No.1157 of the paper book, the Ld.AR prayed that this issue may be remitted to the file of the TPO for re-examination.
17. The Ld.DR opposed the prayer of the Ld.AR and contended that the assessee having not furnished the complete details before the lower authorities does not deserve another opportunity.
18. We have heard the rival contentions and perused the material on record. Since we are remitting the main issue to the file of the TPO for re-examination, we are of the view that in the interest of justice it is necessary that the assessee should be afforded one more opportunity to furnish this evidence before the TPO along with reconciliation and proof to show that the provisions created in the earlier year where claimed as an expense for transfer pricing purposes. Based on the evidence furnished by the assessee, the TPO shall verify the extent of provision claimed as operating expense in the past AY's and whether the same is claimed as reversal in the subject AY, if the TPO's finding is in the affirmative, the provision so reversed shall be considered as operating income in the subject AY. In light of these directions/findings we direct the TPO to reconsider this issue and afford an opportunity to the Assessee and decide this issue. Of course, it is duty of the Assessee to promptly furnish the necessary details/evidence and reconciliation. Accordingly, this Ground no.3(a) & 3(b) is allowed for statistical purposes.
19. Next Ground No.4(a) treatment of Miscellaneous receipts as non- operating. The TPO has given a finding that there is a difference in the breakup of the miscellaneous income submitted during show cause notice response :-13-: IT(TP)A. No: 12/Chny/2024 & ITA No: 1174/Chny/2024 and in the response to previous notices and therefore that the TPO has held as miscellaneous income as non-operating income. Before the ld.CIT(A), the assessee was not able to file the reconciliation and therefore the ld.CIT(A) has held that in the absence of reconciliation the benefits sought for by the Assessee cannot be granted. It is the contention of the Assessee that the ld.CIT(A) has misinterpreted the breakup of miscellaneous income amounting to Rs.2.8 crores as reported in the financial statement with the bifurcation of service income of Rs.2.7 crores and other income of Rs.2.8 crores aggregating to Rs.5.32 crores which has been classified as operating revenue in the earthmoving segment in the segmental financial statement. In light of this confusion the Ld.AR prayed that this issue may be remitted back to the file of the TPO for reconsideration.
20. The Ld.DR submitted that affording one more opportunity to furnish this reconciliation is not necessary as the assessee was not able to provide the same before the lower authorities.
21. We have heard the rival contentions and perused the material on record and as held in the earlier issue we feel that in the interest of justice and fair play that this issue could also be remitted back to the file of the TPO and the Assessee is directed to furnish the appropriate and necessary reconciliation to the satisfaction of the TPO and based on the evidences submitted if the TPO is satisfied, the miscellaneous income could be considered as operating income while computing the margins of the Assessee in manufacturing segment. Accordingly, this ground no.4(a) is allowed for statistical purposes.
22. Next Additional Ground of Appeal no.4: rejection of AE and Non-AE segmentation. The TPO has given a finding that there is profit in the AE segment and the loss in the Non-AE segment, which is not substantiated. The TPO has also given a finding that there is no explanation for 38.37% COGS in AE segment vis a vis 61.38% in the domestic Non-AE segment. The TPO has :-14-: IT(TP)A. No: 12/Chny/2024 & ITA No: 1174/Chny/2024 also observed that the forex gain would have inflated the profits in the AE segment. On appeal the ld.CIT(A) has held that the entire forex gain seem to be allocated to the AE segment, however, the ld.CIT(A) was of the view that the benefit of the forex gain or loss could also be attributed to the Non-AE segment and therefore the non-allocation of the forex gain or loss to the Non AE segment has resulted in a skewed approach in allocating the expenses between the AE segment and the Non-AE segment. Accordingly, the ld.CIT(A) has not accepted the contention of the Assessee. It is the contention of the Assessee that the TPO has misunderstood the proportion of sales and COGS in the AE segment and the Non-AE segment and the details of the same are available at page number 1322 of paper book volume 3. It is the contention of the Assessee that the Assessee's sells different models in the AE segment and the Non AE segment and the details of the same are furnished at page number 1170 of the paper book volume 2. Therefore, the COGS of one model is not the same as the selling price and the COGS of another model. In this regard the Assessee also invited our attention to page number 1320 of paper book volume 3. Further the Ld.AR submitted that the forex could be allocated on the basis of the ratio laid down by this Hon'ble Tribunal in the Assessee's own case in IT(TP)A No.42/Chny/2023 dated 6.6.2025.
23. The Ld.DR contented that there is a categorical finding by the lower authorities expenses allocation between the AE segment and the Non-AE segment are not rational and therefore the contention of the Assessee ought not to be accepted.
24. We have heard the rival contentions and perused the material on record and gone through the orders of the authorities along with the paper books filed by the assessee. The assessee has furnished multiple documents in the paper book in volume 2 and 3 in support of its contention in relation to allocation of expenses between both the segments and determination of COGS. Though the assessee has furnished these details, the allocation of forex does not seem :-15-: IT(TP)A. No: 12/Chny/2024 & ITA No: 1174/Chny/2024 to have been done by the assessee which shows the fallacy in the allocation of expenses between the AE segment and the Non-AE segment. However, now before us the Ld.AR has prayed that the allocation can be done in accordance with the ratio laid down by this Tribunal in the Assessee's own case supra. Since we have already remitted the main issue in relation to redetermination of margin of the Assessee in manufacturing segment, we feel that in the interest of justice and fair play that the allocation between the AE segment and the Non-AE segment could also be remitted back to the file of the TPO for re-examination. It is the bounden duty of the Assessee to clarify each and every point raised by the TPO as well as by the ld.CIT(A) and furnish necessary document to substantiate its stand in case, if the TPO is satisfied with the explanation provided by the assessee, the TPO may consider the Segmentation of AE and Non-AE and decide the issue in accordance with law. Accordingly, the additional ground of appeal no.4 is allowed for statistical purpose.
25. Next ground no.5(a) to 5(c) Business Support Services Income. The TPO has treated Rs.71.11 crores as non-operating item. The TPO has given a finding that the assessee has not provided the cost in relation to the services in order to be excluded from the operating expenses. On appeal the ld.CIT(A) has held that the assessee has not provided item wise keys of allocation of cost. Further, the ld.CIT(A) seem to have relied on the decision of this Tribunal in the Assessee's own case for AY 2007-08 wherein it is held that service income cannot be considered as part of manufacturing income.
26. The Ld.AR submitted that the Tribunal decision in AY 2007-08 has not dealt with the relief on alternate prayer. The Ld.DR contended that the issue is already decided by this Tribunal and therefore, the same should be followed in toto.
27. We have heard the rival contentions and perused the material on record.
:-16-: IT(TP)A. No: 12/Chny/2024 & ITA No: 1174/Chny/2024 Before we consider the details filed by the Assessee, it is imperative to extract the decision of this Tribunal in Assessee's own case in ITA.No.365/Mds/2012 & 204/Mds/2012 dated 5.4.2017 "16. We have heard both the parties and perused the material on record. The contention of the assessee is that BMSS is part of manufacturing activity because it was performed by employees deployed in the manufacturing segment and the costs incurred are booked in the manufacturing segment. The TPO's view is that the nature of the activity is "services" and merely because the services were rendered by the personnel of manufacturing segment, the nature of the activity cannot change from "services" to "manufacturing". Also, it is difficult to accept the contention that people in the manufacturing segment are equipped to render general managerial and administrative support services to group companies. Merely because the assessee had booked these under manufacturing segment does not render it a character of manufacturing activity. Hence, we are of opinion that BMSS service income is certainly not derived from the manufacturing activity of the assessee's and hence should not be considered as a part of the operating income of the manufacturing segment, for computation of PLI. Therefore, the ground raised by the assessee is rejected."
28. Respectfully following the above decision, we also hold that the service income has to be considered as non-operating income. However, in so far as the alternate prayer is concerned, we find that the Tribunal has neither adjudicated on the same nor issued any directions. Accordingly, the ld.CIT(A) finding on the alternate prayer for exclusion of corresponding cost is incorrect to this extent. It is trite law that if the revenue is excluded then the corresponding expenditure should also be excluded by applying parity principles. Accordingly, we direct the TPO to exclude the corresponding expenditure. The Assessee is directed to furnish to the TPO the relevant details establishing the corresponding expenditure. Accordingly, this ground no.5(2) to 5(c) is partly allowed.
29. Next Ground no.6(a) & 6(b) exclusion of comparable M/s.Elecon Engg co Ltd. The TPO has included this company as it is into equipment mining industry. The ld.CIT(A) has also held that the said comparable company broadly falls under construction equipment and therefore it has to be included. It is the contention of the Assessee that the ld.CIT(A) and the TPO have wrongly considered the consolidated financials of this comparable company.
:-17-: IT(TP)A. No: 12/Chny/2024 & ITA No: 1174/Chny/2024 However, as per standalone financial statements of this comparable company, the revenue from the transmission equipment is negligible and the company is predominantly into the manufacture of gears and therefore it is functionally different.
30. The Ld.DR contented that under TNMM broad set of comparables could be considered as long as the function is same and in the instant case the function is manufacturing, which is the same for comparable company Elecon.
31. We have heard the rival contentions and perused the material on record. The Assessee has referred to the standalone financials that page number 87 of the annual report and the consolidated financials that page number 116 of the annual report. Apparently there seems to be multiple businesses in the said comparable and therefore, we hereby direct the TPO to verify the actual fact and contentions as put forth by the Ld.AR before us and if it is found that the said comparable is predominantly into manufacturing of gears then the said comparable should be excluded from the list of comparable companies. According to us, even the difference in the industry will be an important criteria to consider for inclusion or exclusion of comparables and in this case if it is found that the said comparable is into manufacturing of gears then it would be functionally different from manufacture of earthmoving equipment. Therefore, after factual verification, the TPO may decide this issue in accordance with our directions as here in above. Accordingly, this ground nos.6(a) & 6(b) is allowed for statistical purposes.
32. Next Ground No.7(a) to 7(d) Shared Services segment:
inclusion/exclusion of comparables: In this regard, the Ld.AR has addressed arguments only in relation to Ground No.7(a) and has not made any arguments in respect of other ground nos.7(b) to 7(d) and as such ground nos.7(b) to 7(d) are not adjudicated by us. In so far ground no.7(a) the Ld.AR has sought for inclusion of M/s.Allsec Technologies Ltd. The TPO has excluded this company :-18-: IT(TP)A. No: 12/Chny/2024 & ITA No: 1174/Chny/2024 on the ground that the company has been incurring losses in 2 out of the 3 years. The ld.CIT(A) also has held that when the company is making losses it cannot be considered as a comparable.
33. It is the contention of the Ld.AR that this company is not making consistent losses and it has earned profit in the FY 2013-14 therefore, this company should be considered as one of the comparables.
34. We have heard the rival contentions and perused the material on record and we find that this company has earned profits in the FY 2013-14 that is the year preceding to the subject assessment year and therefore this company is not incurring consistent losses. Accordingly, we are of the view that as long as this company is not making persistent losses this company could be considered as a comparable and as such, we direct the TPO to consider this company as a comparable in the final list of comparable companies. This ground no.7(a) is allowed.
35. Next ground 8(a) Marketing Support Services: Violation of natural justice as no sufficient opportunity was provided to Assessee. The Assessee renders marketing support services to Caterpillar Singapore branch for which it received Commission on the basis of cost plus markup. The TPO noted that during the year the assessee has provided marketing support services for sale of products by CSSB for Rs.880 crores for which it should have received Commission at the rate of 10%. The TPO have made adjustment of Rs.88.87 crores using CUP method. The ld.CIT(A) after obtaining the details through the TPO has reduced the rate of Commission from 10% to 3.74%.
36. It is the contention of the Ld.AR that it is incorrect to recharacterize the marketing support services segment as Commission agency. Without prejudice, the Ld.AR emphasised on the point that the Commission on part sales should be excluded. The Ld.AR also filed a copy of the TP order for AY :-19-: IT(TP)A. No: 12/Chny/2024 & ITA No: 1174/Chny/2024 2017-18 wherein at pg 62 para 6.4.1, the TPO has excluded the part sales. Accordingly, the Ld.AR pleaded that while quantifying the commission, the commission should be restricted to machine and engine sales and it should not include part sales. The Ld.AR also submitted that the TPO has incorrectly adopted the exchange rate (1 USD = INR 91.06). The Ld.DR relied on the orders of the lower authorities.
37. We have considered the rival contentions and perused the material on record. The primary prayer of the assessee is that there is a violation of natural justice as the Assessee has not been afforded sufficient opportunity by both the lower authorities. Perusal of the order of the TPO and ld.CIT(A) it is apparent that there are certain basis, data/documents relied upon by them for arriving at their decision. However, the neither the basis nor the data/documents seem to be shared with the Assessee. Since this amounts to clear violation of natural justice, we remit this issue to the file of the TPO and all the necessary documents collected by the department should be made available to the Assessee and after affording sufficient opportunity, the TPO may decide this issue in accordance with law. Of course, the TPO while re- examining this issue if he once again comes to the conclusion that commission is attributable, the TPO should maintain consistency in his stance and attribute such commission only on machine and engine sales and it cannot be extended to parts. Accordingly, this ground no. 8(a) is partly allowed.
38. Next additional ground no.3: Corporate tax: if provision for obsolescence is held to be not allowable, then opening stock and closing to be recomputed. The Ld.AR contended that this issue is squarely covered by the decision in IT(TP)A No.42/Chny/2023 dated 06.06.2025. The relevant extract is as under:
"26. Respectfully following the same, we also hold that the provision is not allowable as deduction for AY 2014-15. Nevertheless, we find that the alternate argument of the Assessee merits consideration i.e. since the provision has been disallowed in the immediately preceding year AY 2013-14 and we have also now :-20-: IT(TP)A. No: 12/Chny/2024 & ITA No: 1174/Chny/2024 disallowed the same in the subject AY 2014-15, we hereby direct the AO to rework the opening stock and closing stock of AY 2014-15 after taking into consideration the aforesaid disallowances made in AY 2013-14 & 2014-15. This ground is disposed off with the above direction."
39. Respectfully following the above decision, we hold that since the provision has been disallowed in the immediately preceding AY 2014-15 and we have also propose to disallow the same in the subject AY 2015-16, we hereby direct the AO to rework the opening stock and closing stock of AY 2015- 16 after taking into consideration the aforesaid disallowances made in AY 2014-15 & 2015-16. This ground is disposed of with the above direction.
40. Accordingly, the appeal of the assessee is partly allowed.
ITA.No.1174/Chny/2024:
41. The Revenue has raised grounds of appeal in relation to the following issues:
a. Treating forex gain as operating income
b. Disallowance of provision for Obsolescence
c. Depreciation on Software
d. Disallowance u/s.40(a)(i) for reimbursement of seconded
employees cost.
Disallowance of notional forex loss:
42. Ground No.2 relates to treatment of forex gain as operating income. The TPO has treated the unrealised forex gain of Rs.143.55 crores as non- operating income and realised forex loss of Rs.82.52 crore as operating expense. The ld.CIT(A) by following the orders of her predecessors has taken a view that the forex gain should be treated as operating income. Aggrieved by the order of ld.CIT(A) the department is in appeal that the forex gain should not be treated as operating income. It is the contention of the assessee that this issue is squarely covered in Assessee's own case for assessment year 2014-15 in IT(TP)A No.42/Chny/2023 dated 06.06.02025 at para 13 wherein it is held that forex gain or loss should be treated as operating item the relevant :-21-: IT(TP)A. No: 12/Chny/2024 & ITA No: 1174/Chny/2024 extract is as under
"3. Next ground of appeal is regarding treatment of forex loss as operating expense while computing the margin of the Appellant. The TPO has held that since in the TP documentation it is mentioned that the Appellant bears Forex risk, the Forex loss should be considered as operating in nature. Before the ld.CIT(A) the Appellant seem to have raised the contention that Forex loss in entirety should be treated as non-operating and on a without prejudice basis, the Appellant raised alternate contention that only realised Forex loss should be considered as operating in nature and unrealised Forex loss which is notional loss ought to be treated as nonoperating. In this regard, the CIT(A) had also called for a remand report from the TPO. The TPO in the remand report has submitted that though the break-up of forex losses (i.e. realised/actual and unrealised/notional) were furnished, the Assessee did not furnish substantive evidence to show that certain losses were on account of restatement. The Ld. AR and the Ld. DR reiterated the arguments raised before lower authorities. In our view, this Tribunal has been consistently holding that translation in forex loss or gain ought to be treated as operating in nature while computing the margins of the Assessee as well as the comparable companies. Accordingly, we hold in principle that forex loss should be treated as operating expense. However, whether the entire quantum of forex loss (i.e. realised/actual and unrealised/notional) should be treated as operating expense is concerned we hold it is only the actual forex translation should be considered as operating expense and we find merit in the contention of the Ld.AR. Accordingly, we hold that only actual forex loss should be treated as operating expense and the notional Forex loss should not be treated as operating expense. Accordingly, this ground of appeal is partly allowed in favour of the Appellant." (emphasis supplied)
43. Respectfully following the above decision, we hold in principle that forex gain should be treated as operating income. However, whether the entire quantum of forex gain (i.e. realised/actual and unrealised/notional) should be treated as operating income is concerned, we hold it is only the actual realized forex gain translation should be considered as operating income in the respective segments. Accordingly, this ground No.2 is partly allowed.
Disallowance of provision for Obsolescence:
44. Ground Nos.3 & 3.1 : The AO disallowed this item as according to him no provision is allowable as per the Act. The ld.CIT(A) has allowed the same as the Assessee has been consistently following this method of valuation of closing stock. The Ld.DR reiterated that this provision for obsolescence is not allowable. The Ld.AR relied on Karnataka High Court decision in the case of CIT Vs. IBM [2015] 55 taxmann.com 515 wherein provision for obsolescence :-22-: IT(TP)A. No: 12/Chny/2024 & ITA No: 1174/Chny/2024 was allowed. Further, Ld.AR contended that in case the provision is not allowed then appropriate adjustments to the opening stock and closing stock. We find that this issue is squarely covered against the Assessee by the order of this Tribunal in Assessee's own case in ITA No.2749/Chny/2017 dated 11.06.2024 wherein it is held that provision for old stock is not allowable as the loss could be allowed when it is actually sold.
"We are of the considered opinion that mere provision of old stock could not be allowed to the assessee by way of deduction in the computation of income. The assessee would be following a definite accounting policy to value the book stocks and the profit or loss arising therefrom would accrue only at the time of sale thereof."
45. Respectfully following the same, we also hold that the provision is not allowable as deduction for AY 2015-16. Nevertheless, we have allowed the alternate prayer of the Assessee raised by way of additional ground no.3 in the Assessee's appeal. Accordingly, this ground nos.3 & 3.1 is allowed.
Depreciation on Software:
46. Ground No.4 The AO has restricted that rate of depreciation on software as according to him it is in the nature of intangibles. The ld.CIT(A) allowed higher depreciation on software by following the jurisdictional High Court decision in the case of CIT Vs Computer Age Management Services P.Ltd [2019] 109 taxmann.com 134. This issue is squarely covered in favor of the Assessee by the decision of this Tribunal in ITA No.2749/Chny/2017 dated 11.06.2024.
"We find that this issue is covered in assessee's favor by the decision of Hon'ble High Court of Madras in the case of Computer Age Management Services (267 Taxman 146) wherein it has been held that where software license acquired by assessee was in nature of software application, the assessee would be eligible to claim depreciation at 60%."
47. Respectfully following the same we decide this issue against the revenue and in favour of the Assessee. This ground of appeal no.4 is :-23-: IT(TP)A. No: 12/Chny/2024 & ITA No: 1174/Chny/2024 dismissed.
Disallowance u/s.40(a)(i) for reimbursement of seconded employees cost:
48. Ground Nos.5, 5.1 & 5.2 The AO disallowed the reimbursement as according to him it is in the nature of "fees for technical services". The ld.CIT(A) allowed the same basis the fact that tax has already been deducted TDS u/s.192 of the Act and also by following the Tribunal decision in Assessee's own case for AY 2008-09. The Ld.DR vehemently argued that employees are that of the overseas entity and as such deduction of tax at source u/s.192 has no relevance. In this regard, the Ld.DR relied on Delhi High Court decision in the case of Centrica India Offshore Ltd 374 ITR 336 and SLP dismissed by the Hon'ble Supreme Court.
49. We have heard the rival contentions and perused the material on record. All the aspects pointed by the Ld.DR have already been considered by this Tribunal in Assessee's own case and we find this issue is squarely covered in favor of the Assessee by the decision of this Tribunal in ITA.No.2749/Chny/2017 dated 11.06.2024.
"Upon perusal of agreement, it emerges that the assessee has availed services of employees of its group entities. The same was to facilitate business operations of the assessee. These seconded employees have worked under the control and supervision of the assessee which is evident from the fact that the assessee, as an employer, has deducted due TDS u/s.192. Therefore, these payments have already suffered TDS. The assessee has merely reimbursed actual salary to its AE. The same were merely in the nature of reimbursements only and do not include any element of income. The risk and reward of the work performed by the deputed employees was with assessee. Therefore, Ld. DRP, in our opinion, is not correct to treat the same as Fees for Technical Services which would require separate TDS. Accordingly, impugned disallowance as made u/s 40(a)(i) stand deleted."
50. Respectfully following the same, we decide this issue against the revenue and in favor of the Assessee. This ground of appeal Nos.5, 5.1 & 5.2 are dismissed.
:-24-: IT(TP)A. No: 12/Chny/2024 & ITA No: 1174/Chny/2024
51. The Appeal of the revenue is partly allowed for statistical purposes.
Order pronounced in the open court on 06th April, 2026 at Chennai.
Sd/- Sd/-
(मनु कुमार िग र) (एस. आर. रघुनाथा)
(MANU KUMAR GIRI) (S. R. RAGHUNATHA)
ाियक सद /Judicial Member लेखासद /Accountant Member
चे ई/Chennai,
दनांक/Dated, the 06th April, 2026
JPV
आदे श की ितिलिप अ ेिषत/Copy to:
1. अ पीलाथ!/Appellant
2. +थ!/Respondent
3.आयकर आयु1/CIT- Chennai/Coimbatore/Madurai/Salem
4. िवभागीय ितिनिध/DR
5. गाडE फाईल/GF PRASANNA Digitally signed by PRASANNA VANI JETTY VANI JETTY Date: 2026.04.08 09:42:46 +05'30'