ITAT Delhi Deletes Transfer Pricing Adjustment on Commission Paid; Rejects Ad Hoc Benchmarking By TPO

The assessee, Honda Trading Corporation India Pvt. Ltd., filed its return for AY 2021-22, declaring a total income of Rs. 9.78 crore. The case was selected for complete scrutiny under CASS, primarily on transfer pricing risk parameters, and was referred to the TPO. The TPO proposed a transfer pricing adjustment of Rs. 11.57 crore in respect of the trading segment, which was later rectified under Section 154 and reduced to NIL after accepting that the assessee’s operating margin fell within the arm’s length range.

After directions issued by the DRP under Section 144C, the TPO further examined commission transactions and made a separate adjustment of Rs. 2.57 crore by comparing the percentage of commission paid on exports with the percentage of commission received on imports. This adjustment was carried into the final assessment order without granting any opportunity of hearing to the assessee. Aggrieved, the assessee challenged the adjustment before the Tribunal.

Issue Before Court: Whether a transfer pricing adjustment could be sustained by benchmarking commission paid to associated enterprises using commission received from associated enterprises, without any uncontrolled comparables and without granting the assessee an opportunity of being heard.

Tribunal’s Order: The Tribunal held that the adjustment of Rs. 2.57 crore on account of commission differential was unsustainable in law. It noted that the adjustment was not part of the original draft assessment order and was introduced only while giving effect to the DRP’s directions, thereby denying the assessee any opportunity to contest the same.

The Tribunal further observed that the TPO had applied a thumb rule and made an ad hoc adjustment without bringing any material on record to justify the differential.

The Tribunal held that the TPO had impermissibly benchmarked one controlled transaction against another controlled transaction, which is contrary to the fundamental requirement of Chapter X that arm’s length price must be determined using uncontrolled transactions. Relying on the decision of the Delhi High Court in PCIT v. Coim India (P.) Ltd., the Tribunal deleted the adjustment of Rs. 2.57 crore.

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