Income Tax Appellate Tribunal - Mumbai
Royal Canin India Private ... vs Assistant Commissioner Of Income-Tax, ... on 20 May, 2026
IN THE INCOME TAX APPELLATE TRIBUNAL
"J" BENCH, MUMBAI
SHRI RAHUL CHAUDHARY, JUDICIAL MEMBER
SHRI BIJAYANANDA PRUSETH, ACCOUNTANT MEMBER
ITA No.8837/MUM/2025
(Assessment Year: 2022-2023)
Royal Canin India Private Limited
1401 & 1402, F Wing, 14th Floor,
Lotus Corporate Park, CTS, No.185/A,
Graham Firth Compound, Western Express Highway,
Goregaon (East), Mumbai - 400063. Maharashtra
[PAN:AADCR4417J] ............. Appellant
Vs
Assistant Commissioner of Income-Tax,
Circle 3(1)(1), Mumbai
Aayakar Bhavan, M. K. Road,
Mumbai - 400020. Maharashtra.
............. Respondent
Appearance
For the Appellant/Assessee : Shri K. M. Gupta &
Shri Prince Saluja
For the Respondent/Department : Shri Pankaj Kumar
Date
Conclusion of hearing : 26.02.2026
Pronouncement of order : 20.05.2026
ORDER
Per Rahul Chaudhary, Judicial Member:
1. The present appeal pertaining to Assessment Year 2022-2023 has been preferred by the Assessee challenging Final Assessment Orders, dated 30/10/2025, passed by the Assessing Officer under Section 143(3) read with Section 144C(13) read with Section 144B of the Income Tax Act, 1961 [hereinafter referred to as 'the Act'], as per the directions issued by Commissioner of Income Tax [Dispute Resolution Panel (2)], Mumbai-1 [for short 'DRP'], on 30/09/2025 under Section 144C(5) of the Act.
2. The Assessee has raised following grounds of appeal:
"General
1. That on the facts and circumstances of the case, and in law, the ITA No. 8837/Mum/2025 Assessment Year 2022-2023 impugned Assessment Order dated 30 October 2025 passed by the Additional/Joint/Deputy/Assistant Commissioner of Income Tax/Income Tax Officer, National Faceless Assessment centre, Mumbai or the Learned Assessing Officer ("Ld. AO), under section 143(3) r.w.s. 144C(13) read with section 144B of the Income Tax Act, 1961 ('the Act']) is erroneous and bad in law and barred by limitation.
2. On the facts and circumstances of the case, and in law, the Additional/Joint Commissioner of Income Tax, Transfer Pricing - Circle 3(3), Mumbai ('Ld. TPO')/Ld. AO and the Hon'ble DRP have erred in not appreciating the contentions raised by the Appellant.
Transfer Pricing Grounds
3. On the facts and circumstances of the case, and in law, the Ld. AO/Ld. TPO/Hon'ble DRP erred in enhancing the income of the Appellant by INR 31,68,47,150 by holding that the international related party transaction pertaining to payment of Franchisee Fee by the Appellant to its Associated Enterprise ('AE') namely Royal Canin SAS, France ('RC SAS") does not satisfy the arm's length principles envisaged under the Act and in doing so, have grossly erred in:
3.1. not following the mandatory statutory procedure as laid down under Rule 10B(1)(a) and Rule 10C of the Income-Tax Rules, 1962 ('the Rules') to identify the appropriate method ('MAM') and application of the same, merely based on presumptions that the arm's length price value of the transactions is 'Nil' without furnishing details of the price charged in any comparable uncontrolled transaction;
3.2. disregarding the judicial pronouncement of the Income-tax Appellate Tribunal ("Hon'ble ITAT") in Appellant's own cases for AY 2016-17, AY 2020-21 & AY 2021-22 wherein the contentions of the Appellant have been accepted with respect to the same facts on the issue of disallowance of payment of Franchisee fees;
3.3. not acknowledging the Appellant's inability to legally operate as a franchisee in India, de hors the franchise agreement and not appreciating the benefits received by the Appellant from such rights, which also includes marketing rights, trademarks and services as well;
3.4. failing to appreciate that the 'bundle of rights' provided to the Appellant include manufacturing rights, marketing rights, trademarks and services; and 2 ITA No. 8837/Mum/2025 Assessment Year 2022-2023 3.5. failing to recognise Appellant's separate benchmarking analysis carried out in the TP Documentation with respect to payment of franchisee fee, as well as not appreciating that the arm's length nature of the franchise fee paid has also been corroborated by the benchmarking analysis for purchase of finished goods wherein all the transactions (including payment of franchisee fee) have been aggregated and tested at net level.
4. On the facts and circumstances of the case and in law, the Ld. AO/Ld. TPO/Hon'ble DRP have erred in enhancing the income of the Appellant by INR 17,55,34,067 by arbitrarily disallowing the payment for Intra Group Services ("IGS"). In doing so, the Ld. AO/ TPO have grossly erred in:
4.1. not following the mandatory statutory procedure as laid down under Rule 10B(1)(a) and Rule 10C of the Rules to identify the MAM and application of the same, merely based on presumptions that the arm's length price value of the transactions is 'Nil' without furnishing details of the price charged in any comparable uncontrolled transaction;
4.2. disregarding the judicial pronouncement of the Hon'ble ITAT in Appellant's own cases for AY 2020-21 & AY 2021-22 wherein the contentions of the Appellant have been accepted with respect to the same facts on the issue of disallowance of payment for IGS:
4.3. disregarding the documentary evidences furnished and the service agreements entered into by the Appellant for availing the services from overseas AEs;
4.4. not appreciating the fact that the need for services is a commercial/business decision made by the Appellant as part of its business operations, thereby disregarding sound transfer pricing principles and relevant judicial pronouncements in India when undertaking the said adjustment:
4.5. holding that the Appellant could have availed the intra group service from third-party service providers at a lower cost which were availed from the AEs without providing any cogent basis;
and 4.6. not appreciating the fact that the arm's length nature of the payment of intra group charges has also been corroborated by the benchmarking analysis for purchase of finished goods wherein all the transactions (including payment of IGS) have been aggregated at net level.
3 ITA No. 8837/Mum/2025Assessment Year 2022-2023
5. On the facts and circumstances of the case and in law, the Ld. AO/the Hon'ble DRP have erred in enhancing the income of the Appellant by INR 9,45,21,190 by arbitrarily enhancing income on account of re-determination of arm's length margin for the transaction pertaining to purchase of goods. In doing so, the Ld. AO/ the Hon'ble DRP have grossly erred in:
5.1. rejecting the economic analysis undertaken by the Appellant in accordance with the Section 92D of the Act read with Rule 10D of the Rules without demonstrating deficiency/insufficiency in the approach followed by the Appellant;
5.2. excluding certain companies on arbitrary/frivolous grounds even though they are comparable to the Appellant and including certain companies that are not comparable to the Appellant in terms of functions performed, asset employed, and risk assumed;
5.3. rejecting the additional comparable companies proposed by the Appellant on arbitrary grounds even through they are comparable to the Appellant;
5.4. without prejudice to the other grounds of appeal, erred in re-
determining the operating margins for purchase of goods and incorrectly including franchisee fee and payment of IGS as part of the cost base without appreciating that these are already disallowed;
5.5. inadvertently considering incorrect value of sales for computation of adjustment value;
5.6. erred in not allowing the benefit of proportionate adjustment;
and 5.7. rejecting the Appellant's contention for allowance of working capital adjustment on the final comparable companies
6. That on the facts and circumstances of the case and in law, the Ld. AO/Hon'ble DRP has erred in proposing an alternate disallowance of the sums paid in respect of Franchise Fees by the Appellant to its AE(s), as being ineligible for deduction under Section 37(1) of the Act.
7. That on the facts and circumstances of the case and in law, the Ld. AO/Hon'ble DRP has erred in proposing an alternate disallowance of the sums paid in respect of intra-group service charges by the Appellant to its AE(s), as being ineligible for 4 ITA No. 8837/Mum/2025 Assessment Year 2022-2023 deduction under Section 37(1) of the Act.
Corporate Tax Grounds
8. The Ld. AO/Hon'ble DIRP has erred in making the disallowance of INR.19,87,907 under section 40(a)(ia) of the Act read with section 194C of the Art on account of short deduction of TDS without considering the fact that the said amount has already been considered as income and offered to tax by the payee and that the primary liability to pay taxes lies with the recipient of the income (payee) and not with the payer.
9. That on the facts and circumstances of the case and in law, the Ld. AO/DRP has erred in initiating the penalty under section 270A of the Act for under-reporting of income without appreciating the fact that there is no under-reporting of income by the Appellant."
3. The relevant facts in brief are as under:
3.1. The Assessee is the wholly-owned subsidiary of Royal Canin SAS, [Hereinafter referred as 'RC SAS' or Franchiser]. Both, RC SAS and the Assessee are part of Royal Canin Group which is engaged in developing, manufacturing, distributing and sales of nutrition pet food products. Royal Canin Group operates under Canin Business Model involving (a) franchisor holding intellectual property and proprietary rights related to manufacturing and marketing of RC Products, (b) manufacturing units undertaking manufacturing activity as a routine manufacturer of RC Products and (c) sales units undertaking marketing, distribution & sales in defined territories. Generally, sales units generally purchase RC Products from AEs. However, in some cases the sales units may also have manufacturing facility 3.2. It is the case of the Assessee that the Assessee operates as a sales unit engaged in marketing, sales & distribution of pet care products in India. It purchases RC Products from AEs which undertake manufacturing of RC Products to the extent permitted by the Franchisee Arrangement between the Assessee and RC SAS/Franchisor. Further, the Assessee also receives and utilized Intra Group Services received from the RC SAS/Franchisor and other AEs.5 ITA No. 8837/Mum/2025
Assessment Year 2022-2023 3.3. For the Assessment Years 2022-2023, the Assessee filed return of income on 24/11/2022. The case of the Assessee was selected for regular scrutiny. During the course of Assessment Proceedings the Assessing Officer noted that the Assessee had, inter alia, entered into the following International Transactions with its Associated Enterprises (AEs).
A. Franchisee Fees
SNo. Nature of Transaction Name of the AE Amount Method
(INR.) Adopted
Payment of Franchisee Fees RC SAS 31,68,47,150 CUP Method
Total 31,68,47,150
B. Intra Group Services
SNo. Nature of Transaction Name of the AE Amount Method
(INR.) Adopted
1. Payment for Advertisement & Mars 2,96,32,529 Other
Sales Promotion along with Information Method
Marketing Cross Charge Services Inc.
2. Payment for Employee Mars 8,838 Other
Training and Recruitment Information Method
Expenses Services Inc.
3. Payment for Professional Mars 4,06,89,558 Other
Services Information Method
Services Inc.
RC SAS 35,08,722 Other
Method
RC Korea 3,59,116 Other
Method
Mars 11,43,683 Other
Incorporated Method
Total 4,57,01,079
4. Payment for Communication Mars 8,59,47,213 Other
Charges Information Method
Services Inc.
RC SAS 69,41,195 Other
Method
5. Payment for Sales Support RC SAS 73,03,213 Other
Services Method
Total 17,55,34,067
C. Finished Goods
6
ITA No. 8837/Mum/2025
Assessment Year 2022-2023
SNo. Nature of Transaction Name of the AE Amount Method
(INR.) Adopted
Purchase of Finished Goods RC SAS 20,68,52,904 TNMM
RC South Africa 164,28,78,351 TNMM
Mars Austria OG 3,78,73,403 TNMM
RC Korea 14,71,29,002 TNMM
Total 203,47,33,660
Therefore, reference was made to Transfer Pricing Officer (TPO) under Section 92CA(1) of the Act for determining of Arms Length Price (ALP) of the International Transactions entered by the Assessee with its AEs.
3.4. The TPO, vide its Order, dated 07/01/2025, passed under Section 92CA(3) of the Act proposed transfer pricing addition of INR.49,32,81,217/- consisting of the following:
SNo. Particulars Adjustment Proposed (INR.) 1 Royalty / Franchise Fee 31,68,47,150/-
[TPO determined ALP as 'Nil' applying 'Other Method'] 2 Intra Group Services Payment 17,55,34,067/-
[TPO determined ALP as 'Nil' applying 'Other Method'] Total Adjustment 49,32,81,217/-
3.5. The above transfer pricing adjustments were incorporated by the Assessing Officer in the Draft Assessment Order, dated 07/03/2025, passed under Section 144C(1) of the Act. In addition, the Assessing Officer proposed disallowance of INR.19,87,907/- under Section 40(a)(ia) of the Act in respect of payments made without complying with tax withholding obligations under Section 194C/194J of the Act. As a result, the Assessing Officer proposed the following variations:
SNo Description Amount (INR)
1 Income as computed u/s 143(1)(a) 26,57,52,040/-
2 Disallowance made u/s 40(a)(ia) r.w.s. 194C/194J 19,87,907/-
3 Addition made u/s 92CA of the Act 49,23,81,217/-
Total Income 76,01,21,164/-
7
ITA No. 8837/Mum/2025
Assessment Year 2022-2023
3.6. Being aggrieved, the Assessee filed objections before the DRP which were disposed off vide Order, dated 30/09/2025, passed under Section 144C(5) of the Act. The DRP declined to grant any relief in relation to the transfer pricing addition proposed by the TPO and rejected the objections filed by the Assessee in this regard.
Further, the DRP issued Notice under Section 144C(8) of the Act to the Assessee proposing for enhancement of the Assessee's income by INR.94,521,190/- in relation to international; transaction of purchase of goods. After considering the response received from the Assessee, the DRP gave directions to the TPO for making margin enhancement on account of purchase of goods from AEs which was computed at INR.9,45,21,190/- by the TPO.
As a result, the TPO revised Transfer Pricing Addition to the following:
S.No. Particulars Adjustment Proposed (INR.) 1 Royalty / Franchise Fee 31,68,47,150/-
2 Intra Group Services Payment 17,55,34,067/-
Adjustment in Draft Assessment Order 49,32,81,217/-
3. Margin Enhancement [in relation to the purchase of 9,45,21,190/-
goods as directed by DRP] Revised Transfer Pricing Adjustment 58,69,02,407/-
DRP also concluded that the deduction claimed by the Assessee in respect of Franchisee Fee and Intra Group Services were not allowable as deduction under Section 37(1) of the Act on account of failure of the Assessee to fulfill need, purpose and benefit test.
3.7. Accordingly, the Assessing Officer passed the Final Assessment Order, dated 30/10/2025, under Section 144(3) read with Section 144C(13) of the Act, determining the assessed income of the Assessee as under:
S.No. Description Amount (INR)
1 Income as computed u/s 143(1)(a) 26,57,52,040/-
2 Disallowance made u/s 40a(ia) r.w.s. 194C [as 19,87,907/-
discussed in Para 3.6.1 of Final Assessment Order] 3 Addition made u/s 92CA of the Act 58,69,02,407/-
Total Income 85,46,42,354/- 8 ITA No. 8837/Mum/2025 Assessment Year 2022-2023
3.8. Being aggrieved, the Assessee has preferred the present appeal before the Tribunal on the grounds reproduced in Para 2 above.
4. We have considered the rival submissions and have perused the material on record, including the submission & note on broad propositions submitted by the Learned Authorised Representative Assessee, the decisions of the Tribunal in the case of the Assessee cited during the course of hearing as well as the order passed by the Assessing Officer, TPO and DRP on which reliance was placed by the Learned Departmental Representative.
Ground No. 3 to 3.5
5. We would first take up the Transfer Pricing Addition of INR.31,68,47,150/- made in relation to Franchisee Fee challenged by way of Ground No. 3 to 3.5 raised by the Assessee in the present appeal.
5.1. The facts relevant to adjudication of the issue under consideration are that the Assessee had a Franchisee Agreement with RC SAS. In terms of the aforesaid agreement, the Assessee paid Franchisee Fee of INR.31,68,47,150/- to RC SAS during the relevant previous year computed at the rate of 9% of net sales value of the RC Products sold in Indian territory. The TPO determined the ALP of the Franchise Fee transaction at 'Nil' concluding that there was no need to pay Franchise Fee in addition to the price for purchase of goods. The TPO reasoned as under:
(a) The Assessee does not have manufacturing facility and therefore no payment is required to be made by the Assessee to its AE for manufacturing rights
(b) The Assessee was paying the purchase price of goods manufactured by the AEs. Further, the right to sell the RC Products is embedded in the supply/purchase agreement.
Therefore, any further payment for the same would amount to double payment 9 ITA No. 8837/Mum/2025 Assessment Year 2022-2023
(c) The Appellant has not been able to substantiate the need-
benefit test with respect to payment of Franchisee Fee and therefore, is no need to pay any Franchisee Fee separately.
(d) The AEs act as a routine manufacturer and do not perform any other services for the Assessee 5.2. Before the DRP the Assessee contented, inter-alia, that Assessing Officer had failed to follow the decision of the Tribunal in the case of the Assessee for the Assessment Year 2016-2017 wherein the Tribunal had rejected the identical allegations made by the Assessing Officer. It was submitted before the DRP that the contention of the Revenue that no benefit has been drawn by the Assessee on payment of Franchise Fees to its AE's was rejected by the Tribunal. However, placing reliance upon the findings of the DRP for the Assessment Year 2020-2021 and 2021-2022, the DRP declined accept the contentions of the Assessee and rejected the objections raised by the Assessee holding as under:
"10.3 Discussion of the DRP:
This is a recurring issue and the Panel has examined the self-same matter in the case of A.Y. 2020-21 and A.Y, 2021-22.
xx xx The facts of the case are identical to the preceding A.Y. 2020-21 and 2021-22.
During the course of proceedings pertaining to the case of the Applicant for the preceding Assessment Year 2020-21, this Panel had the opportunity to examine matters identical to the present one, governed by the same arrangement. It is pertinent to note that in the course of hearing, the Learned Authorized Representative (Ld. AR) has fairly admitted that there has been no change in regards to the underlying facts and transactions between the current A.Y. and the preceding one. Consequently, the reasoning and directions that were issued by this Panel during the preceding A.Y, 2020-21 with regard to this case are herein reiterated.
xx xx This Panel approves, includes and respectfully follows the directions of 10 ITA No. 8837/Mum/2025 Assessment Year 2022-2023 the erstwhile Panel on the self-same issue. The above finding and reasoning of the DRP for the preceding A.Y. is relevant to the case of this A.Y. Therefore, the same is made applicable to the case at hand for the sake of consistency and reasonability." (Emphasis Supplied) 5.3. During the course of hearing the Learned Authorized Representative for the Assessee had placed reliance upon the decision of the Tribunal in the case of the Assessee for the Assessment Year 2020-2021 and 2021-2022. On perusal of the same we find that the Tribunal has deleted the Transfer Pricing Addition made in respect of Franchise Fee in the Final Assessment Order passed (as per the directions issued by DRP) for the Assessment Year 2020-2021 and 2021-2022. Thus, the very basis on which the DRP had proceeded to reject the objections raised by the Assessee does not survive.
5.4. Further, on perusal of material on record, we are of the view that the authorities below had failed to appreciate that the Franchise Fee was paid by the Assessee to RC SAS to enable the Assessee to operate as a sales unit in India. Therefore, it cannot be said that payment of Franchise Fee paid by the Assessee to RC SAS would amount to double payment. We also reject the contention of the Revenue that since the Assessee is paying it's AE the cost of goods purchased for sale in Indian territory, no Franchise Fee should have been paid by the Assessee. We note the that the Assessee had entered into a Franchise Fee Agreement on 29/03/2012 with RC SAS wherein the Assessee has been granted a composite right to access 'SYSTEM' which inter alia included portfolio/bundle of rights comprised of IP rights (Manufacturing), IP rights (Marketing), Marks and Services developed, maintained and/or provided by the franchisor for the use in operation of the franchisee business. Under the terms of the aforesaid agreement, the Assessee received from RC SAS (i.e. the Franchisor) the exclusive rights to the 'System' for the purpose of its own franchise business within its assigned territory on India.
5.5. The expression 'System' has been defined in the aforesaid franchisee 11 ITA No. 8837/Mum/2025 Assessment Year 2022-2023 agreement as under:
'System' Refers to a portfolio/bundle comprised of (i) IP rights (manufacturing), (ii) IP rights (marketing); (iii) Marks; and (iv) Services, developed, maintained and/or provided by the Franchisor for use in the operation of the Franchised Business.
Thus, in lieu of the franchisee fees, the Assessee got bundled intellectual property rights for its business operations, manufacturing and marketing activities which are as under:
(a) IP Rights (manufacturing): RC SAS provides IP rights required for manufacturing of products. It also provides the Standards of quality required to be maintained by the franchisee.
(b) Marketing support: RC SAS makes available to RC India continuous marketing assistance in form of various merchandising and promotional tools, and packaging materials.
Market team of RC SAS continuously performs various marketing services including market analyses, press announcements, leaflets and websites design, among others and publish the research insights on its library for RC India and other affiliates. Further, RC SAS, develops and manages all brand and product communication strategies including creation of supporting communication materials needed to explain the products in a manner that is consistent with the brand image. The aforesaid said information developed by RC SAS is received by the Assessee under the consolidated bundle of services and intangibles under the franchisee arrangement.
(c) Trade Name & Marks: Set of Trade Names, Trademarks and Products Brands owned by the Franchisor are licensed to the Assessee for use in the defined territory (i.e. India) in the present case. It is the case of the Assessee that the trademarks and trade names (and other associated elements such as 12 ITA No. 8837/Mum/2025 Assessment Year 2022-2023 domain names) are registered in the name of Franchisor.
(d) Services: Central IP management, technical, marketing and administrative services are provided by Franchisor to the Franchisee.
In addition, as per the Franchisee Agreement RC SAS was also required to render the following services to RC India
(a) Central and Regional Sales & Marketing Management and Support Functions (and Regional Teams)
(b) Service & Finance ('S&F)- Consolidation & Reporting, Tax services, Treasury & Benefit, Innovation and Operation control and IT
(c) Legal Affairs
(d) People & Organization ('P&O)
(e) Corporate Affairs Thus, clearly the Franchisee Fees paid by the Assessee to RC SAS was towards bundle of rights described herein above.
5.6. In the present case it has not been disputed by the Revenue that in terms of the Franchisee Agreement the Assessee had exclusive rights to operate business in assigned territory of India. It is admitted position that the Assessee was purchasing RC Products from AE's and selling the same in India. The Assessing Officer has recorded that the Assessee belongs to Royal Canin Group. It is apparent that the Assessee has been using the trade name and domain name with 'Royal Canin' in India. Therefore, in the facts and circumstances of the present case, we are of the view that it cannot be said that no benefit whatsoever had accrued to the Assessee on payment of Franchisee Fee during the relevant previous year. Further, we are of the view that invocation of need-purpose-benefit-test for the purpose of examining the allowability of deduction of Franchisee Fee expenses in terms of Section 37(1) of the Act would amount steeping into the 13 ITA No. 8837/Mum/2025 Assessment Year 2022-2023 shoes of the Assessee and adjudicating the prudence of incurring the Franchisee Fee expenses which falls beyond the scope of authority vested in TPO/Assessing Officer as per the provisions of the Act. So long as the requirements of Section 37(1) are satisfied and the Assessee is able to establish that the expense was incurred wholly and exclusively for the purpose of business, deduction of such expenses is to be allowed. In this regard, we deem it appropriate to refer to the decision of the Tribunal in the case of the Assessee for the Assessment Year 2016-2017 where the Tribunal had vide Order dated 22/09/2022, passed in ITA No.1298/Mum/2021 deleted the Transfer Pricing Addition made by the TPO/Assessing Officer by taking ALP of Franchisee Fee transaction as 'Nil' holding as under:
"7. We have heard the submissions made by rival sides and have examined the orders of authorities below. We have also considered various decisions on which the Id. Authorized Representative of the assessee has placed reliance to buttress his submissions. The solitary dispute in the present appeal is with respect to the adjustment made in respect of franchise fee payment by the assessee to its AE. The assessee has entered into franchisee agreement dated 29/03/2012 with Royal Canin SAS. A perusal of the said agreement shows that Sales the Franchiser apart from authorizing assessee to sell high end packed pet foods is also providing management, technical, marking and administrative support services for its own benefit as well as benefit of the franchisees. The franchisees are also required to obtain necessary licenses to the System developed and/or owned by the Franchisor. The term "System" has been defined in the said agreement to mean:
"System" refers to a portfolio/bundle comprised of (i) IP rights (manufacturing); (ii) IP rights (marketing); (iii) Marks; and (iv) Services, developed, maintained and/or provided by the Franchisor for the use in the operation of the Franchised Business."
The expressions IP Rights (manufacturing), IP Rights (Marketing) and Marks have also been defined in the agreement. The definition of same are reproduced herein under for the ready reference:
"IP Rights (manufacturing)": refers to all Research & Development related IP pertaining to industrial know-how, 14 ITA No. 8837/Mum/2025 Assessment Year 2022-2023 plant set-up, machinery and processes, patents, and technical assistance (defined by Franchisor as "hard technology"), as well as product know-how, formula and recipe (defined by Franchisor as "soft technology"), whereof a list of the date of the Agreement is reproduced and details are provided in Annex 3;
"IP Rights (marketing)": refers to all marketing related IP associated with the Franchisor's Marks (Annex 2), central brand management and strategic marketing initiatives and innovation, as well as continuous marketing support made accessible to Franchisees, as described further in Annex 4;
"Marks" means the set of Trade Names, Trademarks and product brands owned by Franchisor and licensed to Franchisee within the Franchisee's Authorized Territory as part of the System, of which a non-exhaustive list at the date of the Agreement is attached in Annex 2"
8. In proceedings before the TPO the assessee inter-alia furnished franchisee agreement. The TPO after examining franchisee agreement concluded that:
- There was no requirement for the assessee to pay any manufacturing licenses and rights when the assessee manufacturing facility; is merely a trader with no
- The AE is merely a manufacturer and does not provide any services to the assessee,
- No documents have been provided by the assessee to prove that the AE owned Trade Marks which are being used by the assessee. Separate payment for Trade Marks would amount to double payment as the assessee would always pay being the purchase price of goods manufactured by the AE;
- Right to sale is imbedded in the supply agreement, hence the assessee need not pay franchise fee separately for this right at all.
9. The TPO thus, questioned the justification for payment of franchise fee and finally determined ALP of franchise fee at Nil. It is no more res-integra that under the scheme of transfer pricing as contained in Chapter-X, the role of TPO as envisaged u/s. 92CA is computation of ALP in relation to the international transaction under section 92C of the Act. The TPO has no jurisdiction to question assessee's need or prudence for making payment for the said international transaction. The TPO failed to determine ALP of 15 ITA No. 8837/Mum/2025 Assessment Year 2022-2023 the transaction between assessee and its A.E despite the fact the assessee furnished relevant documents. From perusal of agreement on record it is evident that the A.E (Franchisor) had authorized the assessee (Franchisee) to use Trade Marks, IP Rights, Marks, etc. as part of the System. For the use of aforesaid System the assessee remunerated the A.E by way of aggregate annual franchisee fee.
10. The Hon'ble Delhi High Court in the case of CIT vs. EKL Appliances Ltd. (supra) has held that the "quantum of expenditure can no doubt to be examined by the TPO as per law but in judging liability there of as business expenditure he has no authority to disallow the entire expenditure or part thereof on the ground that the assessee has suffered continuous losses". The Hon'ble High Court further held that:
"22. Even Rule 10B(I)(a) does not authorise disallowance of any expenditure on the ground that it was not necessary or prudent for the assessee to have incurred the same or that in the view of the Revenue the expenditure was unremunerative or that in view of the continued losses suffered by the assessee in his business, he could have fared better had he not incurred such expenditure. These are irrelevant considerations for the purpose of Rule 108. Whether or not to enter into the transaction is for the assessee to decide. The quantum of expenditure can no doubt be examined by the TPO as per law but in judging the allowability thereof as business expenditure, he has no authority to disallow the entire expenditure or a part thereof on the ground that the assessee has suffered continuous losses. The financial health of assessee can never be a criterion to judge allowability of an expense; there is certainly no authority for that. What the TPO has done in the present case is to hold that the assessee ought not to have entered into the agreement to pay royalty/ brand fee, because it has been suffering losses continuously. So long as the expenditure or payment has been demonstrated to have been incurred or laid out for the purposes of business, it is no concern of the TPO to disallow the same on any extraneous reasoning. As provided in the OECD guidelines, he is expected to examine the international transaction as he actually finds the same and then made suitable adjustment but a wholesale disallowance of the expenditure, particularly on the grounds which have been given by the TPO is not contemplated or authorized."16 ITA No. 8837/Mum/2025
Assessment Year 2022-2023 10.1 The Co-ordinate Bench of the Tribunal in the case of Dresser Rand India Private Limited vs. Addl. CIT(Supra) in a case where the TPO determined the cost of services at Nil on the ground that the assessee did not need the services at all held as under:
"8. We find that the basic reason of the Transfer Pricing Officer's determination of ALP of the services received under cost contribution arrangement as 'NIL' is his perception that the assessee did not need these services at all, as the assessee had sufficient experts of his own who were competent enough to do this work. For example, the Transfer Pricing Officer had pointed out that the assessee has qualified accounting staff which could have handled the audit work and in any case the assessee has paid audit fees to external firm. Similarly, the Transfer Pricing Officer was of the view that the assessee had management experts on its rolls, and, therefore, global business oversight services were not needed. It is difficult to understand, much less approve, this line of reasoning. It is only elementary that how an assessee conducts his business is entirely his prerogative and it is not for the revenue authorities to decide what is necessary for an assessee and what is not. An assessee may have any number of qualified accountants and management experts on his rolls, and yet he may decide to engage services of outside experts for auditing and management consultancy; it is not for the revenue officers to question assessee's wisdom in doing so. The Transfer Pricing Officer was not only going much beyond his powers in questioning commercial wisdom of assessee's decision to take benefit of expertise of Dresser Rand US, but also beyond the powers of the Assessing Officer. We do not approve this approach of the revenue authorities. We have further noticed that the Transfer Pricing Officer has made several observations to the effect that, as evident from the analysis of financial performance, the assessee did not benefit, in terms of financial results, from these services. This analysis is also completely irrelevant, because whether a particular expense on services received actually benefits an assessee in monetary terms or not even a consideration for its being allowed as a deduction in computation of income, and, by no stretch of logic, it can have any role in determining arm's length price of that service. When evaluating the arm's length price of a service, it is wholly irrelevant as to whether the assessee benefits from it or not; the real question which is to be determined in such cases is whether the price of this 17 ITA No. 8837/Mum/2025 Assessment Year 2022-2023 service is what an independent enterprise would have paid for the same. Similarly, whether the AE gave the same services to the assessee in the preceding years without any consideration or not is also irrelevant. The AE may have given the same service on gratuitous basis in the earlier period, but that does not mean that arm's length price of these services is 'nil'. The authorities below have been swayed by the considerations which are not at all relevant in the context of determining the arm's length price of the costs incurred by the assessee in cost contribution arrangement. We have also noted that the stand of the revenue authorities in this case is that no services were rendered by the AE at all, and that since there is no evidence of services having been rendered at all, the arm's length price of these services is 'nil'. The Dispute Resolution Panel has also confirmed these findings of the Transfer Pricing Officer and the Assessing Officer. However, we have noted that vide letter dated 25th January 2010 (acknowledged to have been received in DRP office on 28th January 2010), the assessee has filed a huge compilation of papers, running into almost three hundred pages, including copies of reports, emails and other documents evidencing the rendering of services. Yet, the DRP simply brushed aside these documents by simply observing that "The DRP has perused the submissions of the assessee and the documents. In view of the DRP, such documents do not prove the receipt of services by the assessee .... to be provided by its AE and, accordingly, the action of the AO in treating the cost of such services at zero is confirmed. All these evidences were before the DRP, but there is not even a whisper about what was the nature of these documents, why does the DRP find these documents to be not satisfactory, what is the kind of evidence that was necessary to prove the factum of services having been availed, and what precisely is the reason that these documents cannot be relied upon.
From the aforesaid decisions it can be deduced that:
The TPO has no jurisdiction to question need of the assessee to incur any expenditure, The role of TPO is limited to determine ALP of the international transaction, The TPO cannot determine ALP at 'NIL' by applying benefit test.18 ITA No. 8837/Mum/2025
Assessment Year 2022-2023
11. In the instant case, we observe that the TPO at threshold has discarded payment of franchise fee on the ground of need of such payment. The TPO has exceeded his jurisdiction in making such observation. The TPO cannot step into the shoes of assessee to decide prudence of expenditure. The TPO failed to examine the documents furnished by assessee to benchmark the transaction by applying one of the methods specified in Chapter-X of the Act. Thus, in the facts of the case and in the light of decisions refereed above, we hold that the findings of the TPO/Assessing Officer in making adjustment in respect of franchise fee are unsustainable. The adjustment is deleted and ground No.3 of appeal is allowed." (Emphasis Supplied) 5.7. In view of above, we reject the contention of the Revenue that the Assessee was not entitled to claim deduction for Franchisee Fee expenses under Section 37(1) of the Act.
5.8. During the course of hearing the Learned Departmental Representative had, while supporting the Transfer Pricing Addition made in respect of Franchisee Fee, contended that the TPO had adopted 'Other Method' while determining ALP of the Franchisee Fee transaction during the Assessment Year 2022-2023 and therefore, the decision of the Tribunal in the case of the Assessee for the Assessment Year 2016-2017 was not applicable. On perusal of record, we find that there is no difference in the approach adopted by the TPO. For the Assessment Year 2016-2017 as well as for the Assessment Year 2022-2023 as the TPO has determined ALP of Franchisee Fee at 'Nil' applying the benefit test. The TPO had proceeded on incorrect understanding that the Assessee had not obtained any benefit on payment of Franchisee Fee. We have already noted hereinabove that the Franchisee Fee was paid by the Assessee to RC SAS for a bundle of rights which included IP Right (Manufacturing and Marketing). In our view, the TPO/Assessing Officer failed to appreciate that the manufacturing units did not own the IP rights and therefore, the Assessee could not have been charged for the IP rights by the manufacturing units supplying RC Products to 19 ITA No. 8837/Mum/2025 Assessment Year 2022-2023 the Assessee. The payment made to AEs for purchase of goods represented cost of goods manufactured and the manufacturing margin earned by the AEs in its capacity as a routine manufacture. In any case, for the Assessment Year 2022-2023, the DRP had followed the direction given by the DRP for the Assessment Year 2020-2021 and 2021-2022. The Tribunal had overturned the aforesaid findings of the DRP while deleting the Transfer Pricing Addition for both the aforesaid assessment years in appeal preferred by the Assessee. We note that for the Assessment Year 2020-2021 the transfer pricing addition was made by the TPO/Assessing Officer by placing reliance upon the 'Other Method'. Vide Order, dated 01/04/2025, passed in ITA No. 4546/Mum/2024 for the Assessment Year 2020-2021 the Tribunal deleted the transfer pricing addition in respect of Franchise Fee expenses. Identical view was taken by the Tribunal in the case of the Assessee for the Assessment Year 2021-2022 as vide Order, dated 01/04/2025, passed in ITA No. 6816/Mum/2024, the Tribunal deleted the transfer pricing addition made by the TPO/Assessing Officer by determining the ALP of Franchisee Fee as 'Nil' by applying the benefit test. In the facts and circumstances of the present case we are not persuaded to depart for the aforesaid view taken by the Co-ordinate Benches of the Tribunal in the case of the Assessee for the Assessment Years 2020-2021 and 2021-2022 in identical facts and circumstances. We find that for the Assessment Year 2022-2023 the approach adopted by the Assessee for benchmarking the transaction of Franchise Fee was identical to the approach adopted for the Assessment Year 2020-2021 & 2021-2022 which has been accepted by the Tribunal. Therefore, accepting the same, we delete the transfer pricing addition of INR.31,68,47,150/- made in respect of Franchisee Fee.
5.9. Thus. Ground No. 3 to 3.5 raised by the Assessee are allowed.
Ground No. 4 to 4.6
6. Next we would take up the Transfer Pricing Addition of 20 ITA No. 8837/Mum/2025 Assessment Year 2022-2023 INR.17,55,34,067/- made in relation to Intra Group Services (IGS) challenged by way of Ground No. 4 to 4.6 raised by the Assessee in the present appeal.
6.1. In the case of IGS also the TPO determined ALP of IGS as 'Nil' and proposed transfer pricing addition of INR.17,55,34,067/- which was confirmed by the DRP and therefore, transfer pricing addition of INR was made by in the Final Assessment Order in relation to IGS. As a result, the Assessee has carried the issue in appeal before this Tribunal.
6.2. We have considered the rival submissions and have perused the material on record.
6.3. While dealing with the issue of transfer pricing adjustment made in relation to Franchise Fee hereinabove, we have already noted herein above that the Assessee was operating in India under a franchisee model. As per the Franchisee Agreement the Assessee received a bundle of rights which entitled the Assessee to receive services from AEs for operations in India. The contention of the Assessee that the AEs merely charged cost allocated on the basis of allocation key without any mark-up has not been controverted by the TPO/Assessing Officer. The TPO has determined the ALP at 'Nil' observing that the services were not needed by the Assessee. There is nothing on record to show that the Assessee has requisite expertise or resources in India. On the other hand the Assessee has contended that the services taken from the AE were necessary for undertaking operation in India. The Assessee reaped benefit in the form of smooth operations, strict financial controls, and low operation cost on account of experience, knowledge and know-how of AEs in the pet food industry. On account of uniformity in policy, procedure and practices adopted by the RC Group, the Assessee got access to trained resources and professional expertise which was required to the Assessee's area of operation. The relevant extract of the written 21 ITA No. 8837/Mum/2025 Assessment Year 2022-2023 submission filed by the Assessee listing the documents/details filed by the Assessee reads as under:
Payment of professional services Name of the entity Amount in INR Documentary evidence RC SAS 3,508,722 - Copy of intercompany agreement for services in relation to MBS
- Copy of intercompany agreement for services in Mars Information 40,689,558 relation to scientific and regulatory affairs Services Inc. - Screenshot of Azure Information Protections ('AIP') starters guide.
RC Korea 359,116 - Screenshot of AIP training guidelines
- Screenshots of organization chart of Mars
Mars Incorporated 1,143,683 information security team
- Screenshot of service catalogues
- Copy of invoices on a sample basis
Payment for communication charges (Information Technology cost) Name of the entity Amount in INR Documentary evidence
- Copy of relevant intercompany agreements Mars Information 85,947,213 - Screenshots of access granted to IT portal and Services Inc. service requests raised evidencing the services received.
RC SAS 6,941,195 - Bifurcation of cost along with cost allocation details
- Copy of invoices on a sample basis Payment for advertisement and sales promotion expenses Name of the entity Amount in INR Documentary evidence
- Copy of relevant intercompany agreements Mars Information 29,632,529 - Copy of invoices on a sample basis Services Inc. RC SAS 7,303,213 Payment for employee training and recruitment expenses Name of the entity Amount in INR Documentary evidence Mars Information 8,838 - Copy of relevant intercompany agreements Services Inc. - Screenshots of Mars P&O guidelines, Childcare benefits policy, Associate compensation and associate position responsibilities 6.4. We note that identical issue had come up for consideration before the Co-ordinate Benches of the Tribunal in appeal preferred by the Assessee for the Assessment Years 2021-2022. On perusal of the Order, dated 28/05/2025, passed in ITA No. 6816/Mum/2024, we find that the Mumbai Bench of the Tribunal had deleted the transfer pricing addition in relation to same IGS availed by the Assessee from AEs during the Assessment Year 2021-2022 holding as under:22 ITA No. 8837/Mum/2025
Assessment Year 2022-2023 "12. Upon considering the submissions made by the assessee and analyzing the factual matrix and legal precedents cited, we find that the assessee has sufficiently demonstrated the availing and actual receipt of intra-group services through supporting documentation including invoices, agreements, and cost allocation statements. The payments made towards intra-group services were made without any markup and have been benchmarked alongside other international transactions, which collectively meet the arm's length principle. It is settled law that the necessity or commercial benefit of an expense cannot be questioned by the tax authorities when the transactions are genuine and undertaken for business purposes. The requirement of establishing a tangible commercial benefit (Benefit Test) does not emanate from the statutory provisions under the Act or under Transfer Pricing Regulations. We respectfully relied on EKL Appliances Ltd (supra) and Lumax Industries Ltd(supra) that the expenditures are genuine and fully related on the business purpose. The adjustment made on account of disallowance of payment of intra-group charges by the Ld. AO is unsustainable in law and on facts. In view of the above discussion, the adjustment made on account of disallowance of payment of intra-group charges amounting to Rs. 160,306,842/- is hereby directed to be deleted. The grounds of appeal No. 5 and 6 are accordingly allowed."
6.5. We note that for the Assessment Year 2022-2023 before us, the DRP has recorded in paragraph 11.3 of its order that there is no change in the facts and circumstances and has reiterated the directions given for the Assessment Year 2021-2022 before rejecting the objection raised by the Assessee. As noted herein above the stand taken by the Revenue was rejected by the Tribunal in appeal preferred by the Assessee against the Final Assessment Order passed for the Assessment Year 2021-2022 as per the directions of DRP for that year. For the Assessment Year 2022-2023 also the Assessee has filed relevant intra-company agreements, invoices, screenshots etc. for the various services availed by the Assessee. It is clear that for the Assessment Year 2020-2021 [ITA No.4546/Mum/2024, dated 01/04/2025] and 2021-2022 [ITA No.6816/Mum/2024, dated 28/04/2025] the Co-ordinate Benches of the Tribunal had, in identical facts and circumstances, rejected the approach adopted by the TPO 23 ITA No. 8837/Mum/2025 Assessment Year 2022-2023 and had deleted the transfer pricing addition made in respect of the IGS accepting the contention of the Assessee that the Assessee had received benefits from services received from AEs and had compensated the AEs on arm's length basis for the same. Respectfully following the same, we hold that in the facts and circumstances of the present case (a) the Assessee was entitled to claim deduction for IGS expenses in terms of Section 37(1) of the Act and (b) the transfer pricing addition of INR.17,55,34,067/- made in respect of IGS cannot be sustained. Accordingly, the aforesaid transfer pricing addition of INR.17,55,34,067/- is deleted and Ground No. 4 to 4.6 raised by the Assessee are allowed.
Ground No. 5 to 5.7
7. Next we would next take up the Transfer Pricing Addition of INR.9,45,21,190/-made in relation to Purchase of Goods challenged by way of Ground No. 5 to 5.7 raised by the Assessee in the present appeal.
7.1. The relevant facts in brief are that for benchmarking of international transaction of purchase of goods the Assessee had adopted the Transactional Net Margin Method (TNMM) as the most appropriate method and selected OP/OR as the profit level indicator. Accordingly, the Assessee compared the entity-level margin (OP/OR of RC India at 3.78%) with those of the comparable companies (ranging from 1.32% to 1.37%, with a median of 1.35%). Since RC India's operating margin exceeded the arm's length range, the purchase of goods transaction was treated as being at arm's length and was also accepted as such by the learned TPO in the transfer pricing assessment proceedings. Thus, TPO had not proposed any transfer pricing addition in relation to Purchase of Goods. However, during proceedings before the DRP, enhancement notice under Section 144C(8) of the Act was issued to the Assessee. In response the Assessee filed reply/submissions before DRP (including submission 24 ITA No. 8837/Mum/2025 Assessment Year 2022-2023 dated 25/08/2025). The Assessee also relied upon corroborative benchmarking analysis wherein the Assessee had aggregated all international transactions (including payment of Franchisee Fee and IGS). Testing entity level margins, the Assessee had contended that operating margins of the Assessee were higher than the arms length range and therefore, all the international transactions (including transaction of purchase of goods) were arm's length. Therefore, no transfer pricing addition was warranted. However, the DRP was not convinced and therefore, the Assessing Officer was directed to make margin enhancement of 5.9%. Thus, aforesaid transfer pricing addition of INR.9,44,21,190/- was made by the Assessing Officer in the Final Assessment Order as per the directions of the DRP.
7.2. We have heard both the sides on this issue. The learned Authorised Representative for the Assessee relied upon the written submission while the Learned Departmental Representative relied upon the findings of the DRP.
7.3. The Assessee has sought exclusion of two comparables from the final set selected for benchmarking the transaction of purchase of goods -
(a) Abis (Exports) India Private Limited and (b) Zeus Biotech Pvt. Ltd 7.4. Exclusion of Abis (Exports) India Private Limited has been sought on the ground that the TPO had rejected the same applying turnover filter. Despite this the DRP included the same in the final set of comparables. On perusal of record, we find the averments/submission made on behalf of the Assessee to be factually correct and therefore, we direct exclusion of Abis (Exports) India Private Limited from the list of final comparables.
7.5. The Assessee has also sought exclusion of Zeus Biotech Pvt. Ltd. It has been contended by the Assessee that the aforesaid comparables failed to pass Related Party Transaction (RPT) Filter. The Learned Authorised Representative for the Assessee stated that the 25 ITA No. 8837/Mum/2025 Assessment Year 2022-2023 RPT/Operating Revenue stood at 27.99%, 27.19% and 27.09% for the Financial Years 2019-2020, 2020-2021 and 2022-2023, respectively. We note that vide Letter, dated 25/08/2025, the Assessee had specifically stated that the Zeus Biotech Pvt. Ltd. fails RPT filter and this was accepted by the TPO. Despite the aforesaid, the DRP included Zeus Biotech Pvt. Ltd. Give the aforesaid, we direct exclusion of Zeus Biotech Pvt. Ltd from the final list of final comparables.
7.6. We find that vide Letter dated 25/08/2025, the Assessee had requested the DRP to consider the inclusion of the following 2 comparables (a) Godrej Agrovet Limited - Animal Feed (b) Simran Farms Limited. Since no finding has been given by the DRP on this issue we deem it appropriate to restore the issue of inclusion of the aforesaid two comparables back to the file of TPO/Assessing Officer for denovo adjudication. All the rights and contentions of the Assessee in this regard are left open.
7.7. The Assessee had also raised the issue of incorrect computation of margins and non-grant of working capital adjustment during the course of hearing. We note that the Assessee had specifically raised this contention before the DRP vide Letter, dated 25/08/2025. However, the same were not considered. Given the facts and circumstances of the present case and our findings/directions hereinabove, we deem it appropriate to direct the TPO/Assessing Officer to consider the computation of margins and grant working capital adjustment furnished by the Assessee for benchmarking analysis as per law.
7.8. In terms of above, Ground No. 5 to 5.7 raised by the Assessee are allowed.
Ground No. 6 & 7
8. While allowing Ground No. 3 to 3.5 and 4 to 4.6 above, we have 26 ITA No. 8837/Mum/2025 Assessment Year 2022-2023 concluded that in the fact and circumstances of the present case the provisions of Section 37(1) of the Act are not attracted in respect of payment of Franchise Fee and IGS by the Assessee to its AEs during the relevant previous year. Therefore, Ground No. 6 & 7 raised by the Assessee are allowed.
Ground No. 89. During the course of hearing the Learned Authorized Representative for the Assessee, under instruction, stated that the Assessee does not wish to press this ground. Accordingly, Ground No.9 raised by the Assessee is dismissed as not pressed.
Ground No. 910. Ground No.9 raised by the Assessee pertains to initiation of penalty proceedings and the same is dismissed as being premature.
Ground No. 1 & 2
11. Ground No.1 and 2 raised by the Assessee are general in nature and do not require separate adjudication. Further, during the course of hearing the Learned Authorized Representative for the Assessee, under instruction, stated the Assessee does not wish to press the Ground pertaining to the issue of limitation at this stage. Accordingly, Ground No.1 and 2 raised by the Assessee are dismissed as not pressed.
12. In the result, the appeal preferred by the Assessee is partly allowed.
Order pronounced on 20.05.2026.
Sd/- Sd/-
(Bijayananda Pruseth) (Rahul Chaudhary)
Accountant Member Judicial Member
मुंबई Mumbai; दिन ुं क Dated : 20.05.2026
Milan, LDC
27
ITA No. 8837/Mum/2025
Assessment Year 2022-2023
आदे श की प्रतितिति अग्रे तिि/Copy of the Order forwarded to :
1. अपील र्थी/ The Appellant
2. प्रत्यर्थी/ The Respondent.
3. आयकर आयक्त/ The CIT
4. प्रध न आयकर आयक्त/ Pr.CIT
5. दिभ गीय प्रदिदनदध, आयकर अपीलीय अदधकरण, मुं बई/ DR, ITAT, Mumbai
6. ग र्ड फ ईल / Guard file.
आिे श नस र/ BY ORDER, सत्य दपि प्रदि //True Copy// उप/सह यक पुंजीक र /(Dy./Asstt. Registrar) आयकर अपीलीय अदधकरण, मुं बई / ITAT, Mumbai 28