TPO cannot arbitrarily value management fees at 'Nil' or treat

TPO cannot arbitrarily value management fees at ‘Nil’ or treat interest on receivables as a standalone transaction.

Issue

Whether the Transfer Pricing Officer (TPO) was legally justified in reducing the Arm’s Length Price (ALP) of management fees and royalty payments to ‘Nil’, making a separate adjustment for interest on outstanding receivables, and disallowing late employee PF/ESI contributions under the Income-tax Act for Assessment Year 2020-21?

Facts

Management Fees: The assessee paid management charges to its Associated Enterprise (AE) and demonstrated the actual receipt/rendition of these services through both direct and circumstantial evidence. The TPO used the Comparable Uncontrolled Price (CUP) method to value these services at ‘Nil’.
Royalty Payments: The assessee paid royalty to its AE on sales made to both AEs and independent third parties, benchmarking the transactions collectively under the Transactional Net Margin Method (TNMM). The TPO rejected this bundled approach and applied the CUP/Other Method to entirely disallow the royalty.
Interest on Receivables: The assessee had outstanding book receivables due from its AEs. The TPO treated the delayed realization of these invoices as a separate, distinct international transaction and imputed interest on them.
PF/ESI Contributions: The assessee deposited employee contributions toward Provident Fund (PF) and Electronic State Insurance (ESI) after the strict due dates specified under the respective welfare legislations, but before filing its tax return.

Decision

Management Fees: In favour of Assessee. Setting the ALP of management services at ‘Nil’ via the CUP method is invalid when the assessee provides clear factual proof of service delivery.
Royalty Payments: Partly in favour of Assessee. The absolute disallowance of royalty by the TPO was struck down. Taking a pragmatic middle ground, the court allowed the royalty payments at a flat rate of 5% on all categories of sales (both AE and non-AE transactions).
Interest on Receivables: In favour of Assessee. Outstanding receivables are not standalone international transactions for separate interest imputation; they must be subsumed and evaluated as part of the overall working capital adjustment for ALP computation.
PF/ESI Contributions: In favour of Revenue. Employee contributions deposited after the timelines mandated by specific welfare statutes cannot be allowed as a deduction, regardless of when the tax return is filed.

KeyTakeaways

No ‘Nil’ Value Shortcuts for TPOs: If a taxpayer produces documentation proving that management services were rendered, the transfer pricing authorities cannot arbitrarily declare the transaction’s commercial value to be ‘Nil’.
Receivables are Part of Working Capital: Delayed payments from AEs should be factored directly into working capital adjustments during benchmarking rather than being carved out as separate interest-bearing transactions.
Strict Statutory Deadlines for Welfare Funds: Late deposits of employee PF/ESI contributions trigger automatic tax disallowances, reinforcing that the relaxation under section 43B does not extend to money held in a fiduciary capacity by employers.

IN THE ITAT DELHI BENCH ‘I’

Gates India (P.) Ltd.

Assessment Unit, Income-tax Department

ANUBHAV SHARMA, Judicial Member
and Naveen Chandra, Accountant Member

IT Appeal No. 3829 (Delhi) of 2024
[Assessment year 2020-21]

JUNE 3, 2026

Rohit Tiwari, Ms. Shivani and Ms. Tanya, Advs. for the Appellant. Nikhil Kumar Govila, CIT (DR) for the Respondent.

ORDER

Naveen Chandra, Accountant Member. – The above captioned appeal is preferred by the assessee against the order dated 26.07.2024, passed by Assessment Unit, (hereinafter referred to as ‘ld. AO), passed u/s 143(3) r.w.s. 144C(13) of the Income Tax Act, 1961 (hereinafter ‘the Act’) in pursuance to direction of Ld. Dispute Resolution Pannel-1, New Delhi (in short ld. ‘DRP’) pertaining to Assessment Year 2020-21.

2. The assessee has raised following grounds of appeal:-

“1. That on the facts and circumstances of the case and in law, the final assessment order passed by the Ld. AO under Section 143(3) read with section 144C(13) and section 144B of the Act is bad in law and liable to be quashed.

2. That on the facts and circumstances of the case and in law, the Ld. AO has erred in assessing the total income of the Appellant under Section 143(3) read with section 144C(13) and section 144B of the Income-tax Act, 1961, for AY 2020-21, at INR 75,18,44,091 as against the income reported in the return of income (“ROI”) amounting to IN 63,39,49,430.

3. That the Ld. AO/ Learned Deputy/ Assistant Commissioner of Income-tax, Transfer Pricing Officer- 2(1)(1) (“Ld. TPO”/ Learned Dispute Resolution Panel (“Ld. DRP”) have erred in enhancing the income of the Appellant by IN 6,89,10,495 in relation to payment of management charges to its AEs. In doing so, Ld. AO/ Ld. TPO/ Ld. DRP have grossly erred in:

3.1. rejecting the aggregation approach adopted by the Appellant to benchmark its international transactions in the TP documentation maintained in terms of section 92D of the Act read with Rule 10D of the Income-tax Rules, 1962 (“the Rules”);

3.2. contravening the conditions laid in Section 92C(3)(c) of the Act, by citing incongruous reasons to allege that the Appellant has not derived any tangible or direct benefit from management services and has failed to furnish evidence to demonstrate the actual receipt of management services. Further, the Ld. AO/ Ld. TPO/ Ld. DRP have conveniently overlooked the supporting evidences and arguments that the Appellant filed during the course of the assessment proceedings to support the arm’s length nature of management services;

3.3. challenging the commercial/ business wisdom of the Appellant in relation to payment of management charges;

3.4. segregating the ‘payment of management charges’ transaction and arbitrarily determining arm’s length price as Nil through application of Comparable Uncontrolled Price (“CUP”) Method in contravention of the provisions of Rule 10B of the Rules; and

3.5. disregarding prior years’ favourable TP orders passed in Appellant’s own case with respect to payment of management charges;

4. That the Ld. TPO/ Ld. AO, while passing order giving effect to Ld. DRP’s directions, have grossly erred in holding that the management services availed by the Appellant are duplicative/ shareholder services, without clearly bringing out item wise, which services fall within the ambit of duplicative/shareholder services and which of those fall outside it, despite clear directions by the Ld. DRP in this regard;

5. That on the facts and circumstances of the case and in law, the Ld. TPO/ Ld. AO/ Ld. DRP have erred in enhancing the income of the Assessee by IN 3,81,00,000 on account of payment of royalty in relation to sales made by the Assessee to its AEs. In doing so, Ld. TPO/ Ld. AO/ Ld. DRP have grossly erred in:

5.1. rejecting the aggregation approach adopted by the Assessee to benchmark its international transactions in the TP documentation maintained in terms of section 92D of the Act read with Rule 10D of the Rules;

5.2. disregarding that the Assessee operates as a licensed manufacturing entity, bearing entrepreneurial risks with respect to its business, and frivolously holding that the position of the Assessee in respect of manufactured goods sold to the AEs is that of a contract manufacturer’;

5.3. ignoring the fact that functional, asset and risk (“FAR”) profile of the Assessee is similar for sales made to unrelated parties as well as AEs;

5.4. not appreciating the substance on ground in terms of the fact that the sales made by the Assessee to its AEs are on a principal-to-principal basis, and also driven by open market conditions just as sales made to unrelated parties;

5.5. holding that the benefit of producing goods by the Assessee is reaped by the AEs;

5.6. reducing the arm’s length price (“ALP”) on this account to Nil, thereby depriving the licensor i.e., Gates Corporation, of its right to earn return on these sales in return for the research and development investments made over the years;

5.7. not considering that identical payment of royalty on account of sales made by sister concern of the Assessee to foreign AEs was held to be allowable by the Indian Revenue Authorities.

6. That on the facts and circumstances of the case and in law, the Ld. TPO/ Ld. AO/ Ld. DRP have erred in enhancing the income of the Assessee by IN 72,08,000 on account of payment of royalty in relation to sales made by the Assessee to third parties. In doing so, Ld. TPO/ Ld. AO/Ld. DRP have grossly erred in:

6.1. rejecting the aggregation approach adopted by the Assessee to benchmark its international transactions in the TP documentation maintained in terms of section 92D of the Act read with Rule 10D of the Rules;

6.2. holding that the terms of certain license agreements (intellectual property used, product involved etc.), furnished by the Assessee as part of its supplementary analysis for benchmarking royalty payment on third party sales, are different vis-a-vis intercompany royalty agreement entered between the Appellant and its Associated Enterprise, and thus, not comparable; and

6.3. not providing the Assessee with a reasonable opportunity of being heard, or to furnish its rebuttals, with respect to allegations made by the Ld. TPO in its order giving effect to Ld. DRP’s directions, thereby violating the principles of natural justice.

7. That on the facts and circumstances of the case and in law, the Ld. TPO/ Ld. AO/ Ld. DRP have erred in enhancing the income of the Appellant by IN 55,19,818 by imputing interest on outstanding receivables from the AEs. In doing so, Ld. TPO/ Ld. AO/ Ld. DRP have grossly erred in:

7.1. ignoring the fact that the working capital adjustment will adequately test the opportunity cost of delay in realization of receivables and the same has to be accounted for, so as to neutralize the impact of embedded interest in the receivables, and post undertaking working capital adjustment, a separate adjustment for outstanding receivables is not warranted;

7.2. re-characterization of overdue receivables amount as a deemed loan and treating it as a separate international transaction;

7.3. not appreciating the fact that arm’s length price determination for outstanding receivables is subsumed within the arm’s length price determination of the principal international transaction itself;

7.4. not appreciating the fact that the Assessee has a consistent policy of not charging any interest on receivables from AEs as well as third parties; and

7.5. ignoring various judicial pronouncements around the issue of imputed interest on outstanding receivables.

8. That on the facts and circumstances of the case and in law the Ld. AO/ Ld. DRP has erred in upholding the additions of INR 53,45,950 owing to the employee’s contribution deposited beyond the due date (prescribed under PF and ESI Act) but within the due date as per the Act.

In doing so:

8.1. The Ld. AO has erred by not taking cognizance to the facts of the case that the employees contribution with respect to PF & ESI was delayed by 1-4 days only as the due date of deposit prescribed under PF & ESI Act was falling on Sunday/ gazetted holiday or during the peak COVID-19 lockdown period, and the said delay is covered by the Section 10 of the General Clauses Act, 1977 as well as the Section 4 of the Limitation Act, 1963 as per which if any due date falls on a day when any Court or Income Tax Office is closed then such due date shall be the next working day when the Court or the Income tax Office reopens

8.2. The Ld. AO has failed to appreciate that amendments via Finance Act 2021 i.e. inserting Explanation 5 to section 43B of the Act and Explanation 2 to section 36(1)(va) of the Act were effective AY 2021-22 and onwards.

9. The Ld. NFAC has erred in facts and in law by non-grant of credit of regular assessment tax of INR 24,17,317.

10. That on the facts and circumstances of the case and in law, the Ld. AO has erred in charging interest under Section 234A, 234B and 234C of the Act.

11. That on the facts and circumstances of the case and in law, the Ld. AO has erred in initiating penalty proceedings under section 274 read with section 270A of the Act, thereby violating the provisions of section 144C of the Act.

3. Brief facts of the case are that the assessee Gates India Private Limited (“Gates India” or “Assessee” or “Company” or “A”) is engaged in the business of manufacturing, trading, and marketing of rubber hoses and hose assembly at its owned facilities at Lalru (Punjab), Faridabad (Haryana) and Pune (Maharashtra).

4. The TPO has made the following TP adjustments:

s. No.	Nature of adjustment	Amount as per TP order (INR)	Amount as per OGE to DRP Directions(INR)	Methodology adopted by ‘A’	Methodology adopted by the Ld. TPO
1	Intra Group Services (“IGS”)	68,910,495	68,910,495	Transactional Net Margin Method (“TNMM”) -Aggregation approach	CUP Method
2	Payment of Royalty on sales to AE	38,100,000	38,100,000	TNMM-Aggregation approach	Other Method
3	Payment of Royalty on sales to third parties	7,208,000	7,208,000	TNMM-Aggregation approach	CUP Method
4	Interest on outstanding receivables	5,519,818	5,519,818	Not Applicable	CUP method -1nterest charged @ 6 month- LIBORplus400 bps
Total		112,530,313	119,738,313

5. The first issue of Intra Group Services (‘IGS’) has been decided in favour of the assessee by the Co-ordinate Bench of the Tribunal in Gates India (P.) Ltd. v. ACIT (Delhi – Trib.)/ITA No.2379/Del/2022 vide order dated 22.08.2024 in Assessment Year 2018-19 vide paras 20 to 24, which is reproduced as under:-.

“20. In the light of the delineations made above, we find considerable merit in the plea of the assessee that determining the value of management services at ‘Nil’ by resorting to CUP method runs contrary to the factual matrix as well as overwhelming legal position enunciated in this regard. On facts, the assessee has reasonably demonstrated the rendition of services against the management charges paid to its AE by direct and circumstantial evidences inter-company namely agreement, emails correspondence, invoices, payments and substantive improvement in the revenue and profitability.

21. At this juncture, we also advert to the findings rendered by the DRP. On perusal, it is found that the DRP has passed a nondescript and cryptic order in a summary manner which reads as under:

“4.2.3 The Panel has considered the rival averments as above. The Panel does not find any infirmity in the IPO’s order and hence, is not inclined to intervene with it. Accordingly, the assessee’s objections are rejected and the TPO’s action is upheld. However, the TPO is directed to consider the assessee’s contention that disregarding prior years favourable TP orders passed in Assessee’s own case with respect to payment of management charges as the TPO has not recorded any observations on this issue in the order; by passing a speaking order.”

22. Ostensibly, no independent reasons whatsoever have been cited by the DRP while upholding the action of the TPO. The DRP is completely swayed with the adjustment made by the TPO without objectively examining the factual matrix and applicability of CUP method in the light of judicial precedents and treating the value of services rendered at ‘Nil’. Such arbitrary exercise by the DRP without showing any application of mind cannot be countenanced in any manner. The directions made are neither clear nor implemented by the TPO and TP adjustment earlier made was mechanically reiterated.

23. In the peculiar facts of the case and legal position analysed, the DRP directions are required to be set aside and the adjustment made by the TPO on account of intra group services are liable to be cancelled and reversed. The value of transactions towards management charges under TNMM methodology adopted by assessee thus stands reinstated.

24. The adjustments made towards payment of management services in question are quashed.”

Respectfully following the decision of the Co-ordinate Bench of the Tribunal dated 22.08.2024 for Assessment Year 2018-19, we order accordingly. Ground 3 & 4 are allowed.

6. The second issue of payment of Royalty on sales made to AE and third parties is covered in favour of the assessee vide order of the Tribunal for AY 2021-22, in Gates India (P.) LTD. v. Assessment Unit, NFAC [ITA No.5350(Del) OF2024, DATED 7-5-2025], wherein the Tribunal has directed to charge royalty at 5%, which is similar to royalty paid to non-AEs. The relevant paragraph of the Tribunal is reproduced as under:-

“22. With respect to the royalty payment to its AE vis-a-vis sales made to AE as well as sale made to third party is concerned, we are of the view that the ld. TPO as well as ld. DRP are not correct in disallowing the entire payment of royalty. Since, the assessee is paying this royalty in previous year also and no disallowance has been made. The TPO as well as the ld. Dispute Resolution Panel are not correct in holding that the assessee was contract manufacturer with respect to the sales made to its AE. However, in the interest of justice, we are of the view that the other method applied by the TPO is not correct in disallowing the entire payment of royalty. However, adopting a pragmatic approach, we direct that the payment of royalty made by the assessee to its AE should be allowed @ 5% on all sale transactions i.e. with respect to the sales made to AEs and sales made to non-AEs.”

Respectfully following the decision of the Co-ordinate Bench of the Tribunal dated 07.05.2025 for Assessment Year 2021-22, we order accordingly. Ground 5 and 6 are partly allowed.

7. The third issue with respect to interest on receivables has been allowed by the Tribunal vide orders for Assessment Years 2018-19 and 2021-22 placing reliance on the decision of the Hon’ble High Court in the case of Pr. CIT v. Kusum Health Care (P.) Ltd. [2018] /[2017] 398 ITR 66 (Delhi). The relevant paragraph of the Tribunal order dated 07.05.2025 for Assessment year 2021-22 are as under:-

“23. So far as the chargeability of interest on outstanding receivables is concerned, we are of the view that the assessee should be given working capital adjustment as held by Hon’ble Delhi High Court in the case of Kusum Healthcare Pvt. Ltd. (supra), and then if any shortcoming is there, the ALP is to be determined after giving effect to the working capital adjustment. We direct the TPO to provide working capital adjustment to the assessee and determined the ALP of interest on outstanding receivables afresh.”

Respectfully following the decision of the Co-ordinate Bench of the Tribunal dated 07.05.2025 for Assessment Year 2021-22, we order accordingly. Ground 7 is allowed.

8. With respect to addition on account of disallowance of employee contribution to PF, deducted by the company from its employees, and deposited in state exchequer beyond the due date prescribed in the PF Act, the same is upheld following the decision of the hon’ble Supreme Court in the case of Checkmate Services (P.) Ltd. v. CIT [2022] 448 ITR 518 (SC) (SC). The ground 8 is accordingly dismissed.

9. In the result, the appeal in ITA 3829/Del/2024 is partly allowed.