Determining Transfer Pricing ALP of AE Support Services

Determining Transfer Pricing ALP of AE Support Services at NIL Without Benchmarking Is Unsustainable

Issue

Whether the Transfer Pricing Officer (TPO) and Dispute Resolution Panel (DRP) could legally determine the Arm’s Length Price (ALP) of management and business support services from Associated Enterprises (AEs) at NIL without applying an objective benchmarking method, and whether an alternate expenditure disallowance under section 37(1) was sustainable when actual service rendition and business nexus were established on record.

Facts

The assessee, a joint venture engaged in the manufacturing and trading of household cleaning products under the ‘Gala’ brand, availed business and management support services from its AEs (FHPL and FHCS GmbH) for Assessment Year 2022-23.
The services covered multiple operational functions including finance, human resources, marketing, research & development (R&D), logistics, and supply chain management.
The TPO determined the ALP of support services received from FHPL at NIL and proposed a transfer pricing adjustment.
The DRP upheld the NIL ALP determination for FHPL and enhanced the adjustment to include services received from FHCS GmbH; additionally, the DRP directed an alternate disallowance of the same expenditure under section 37(1) for lack of business nexus and proof of receipt.
The assessee benchmarked these closely linked transactions using the Transactional Net Margin Method (TNMM) at the segmental/entity level.
The assessee submitted extensive contemporaneous correspondence, cost-allocation workings, agreements, supporting documentation, and an independent professional certificate verifying the allocation methodology.
The TPO/DRP provided no Comparable Uncontrolled Price (CUP) or objective benchmarking analysis, treating the services as duplicative merely because broad function descriptions overlapped between AE arrangements.

Decision

ALP Determination at NIL Disallowed: In favour of the assessee; determining ALP at NIL cannot rest merely on the TPO’s perception that adequate benefit was not demonstrated. Without an objective benchmark or CUP, a complete departure resulting in a NIL ALP cannot be sustained.
Non-Duplicative Support Services: In favour of the assessee; function-wise differences were clearly explained across R&D, marketing, HR, and finance. Broad overlapping function names across AE arrangements do not ipso facto render services duplicative.
Deletion of Alternate Section 37(1) Disallowance: In favour of the assessee; because contemporaneous documentary evidence established actual service rendition and direct operational business nexus, the foundational premise for an alternate disallowance under section 37(1) ceased to survive.

KeyTakeaways

No Subjective Benefit Test for ALP: Revenue authorities cannot determine the ALP of intra-group support services at NIL based on perceived utility or benefit without applying a recognized transfer pricing benchmarking method.
Rendition Over broad Nomenclature: Common descriptive titles (like HR or Finance) across different AE support agreements do not automatically establish service duplication if functional distinctions are documented.
Section 37(1) Interplay: Once actual receipt and business nexus of AE support services are supported by contemporaneous records, secondary disallowances under section 37(1) cannot be sustained.

IN THE ITAT MUMBAI BENCH ‘K’

Freudenberg Galal Household Product (P.) Ltd.

Deputy Commissioner of Income-tax

ANIKESH BANERJEE, Judicial Member
and Ms. Ratna Dasgupta, Accountant Member

IT Appeal No. 8904 (Mum) of 2025
[Assessment year 2022-23]

OCTOBER 1, 2026

Nikhil Tiwari for the Appellant. Ajay Uke, Sr. AR for the Respondent.

ORDER

Anikesh Banerjee, Judicial Member.- The present appeal is filed by the assessee against the final assessment order dated 07/10/2025 passed by the Assessment Unit, Income Tax Department (hereinafter referred to as, the “Ld. AO”), u/s. 143(3) r.w.s. 144C(13) and 144B of the Income-tax Act, 1961 (hereinafter referred to as “the Act”), pursuant to the directions dated 26/09/2025 issued by the Dispute Resolution Panel-1, Mumbai (“Ld.DRP”) u/s. 144C(5) of the Act, for Assessment Year 2022-23.

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

“General:

1. erred in determining total income of the Appellant at INR 62,75,20,202 as against the returned income of INR 51,88,06,470 /- for the year under consideration;

Validity of final order passed beyond timelines prescribed u/s 153 of the Act:

2. erred in not passing the final assessment order within the time limit prescribed under section 153 of the Act which is the outer time limit for passing the final assessment order and hence, the assessment proceedings is time barred and liable to be quashed;

Transfer Pricing:

Intra group services:

General:

3. erred in making transfer pricing adjustment of INR 5,70,95,602 in respect of availing of support services from its Associated Enterprise (‘AE’) Freudenberg Household Products Limited (‘FHPL’) by determining the arm’s length price of the intra group services as NIL without undertaking comparability analysis applying one of the prescribed methods as per 92C of the Act;

4. erred in making transfer pricing adjustment of INR 5,16,18,130 in respect of availing of support services from its AE, Freudenberg Home and Cleaning Solutions GmbH (‘FHCS GmbH’) by determining the arm’s length price of the intra group services as NIL without undertaking comparability analysis applying one of the prescribed methods as per 92C of the Act;

Disregarding the benefit test documents submitted for availing of business support services:

5. erred in disregarding the documentary evidence submitted by the Appellant to substantiate actual receipt of services and benefits derived therefrom and alleging/ concluding that the Appellant failed to provide sufficient documentary evidence to demonstrate receipt of various services and benefit received by the Appellant;

6. erred in not appreciating the fact that the Appellant had received the services from AEs and benefited therefrom for the purpose of its business operations;

Disregarding the detailed group cost working submitted

7. erred in disregarding the detailed Group cost working submitted by the Appellant, outlining the total costs incurred by Freudenberg Group in rendering these services to all the group entities based on scientific allocation keys provided by the Appellant;

Disregarding the commercial expediency of the international transaction:

8. erred in not considering the commercial expediency of the international transaction of payment for support services;

Disregarding the benchmarking and economic analysis without cogent reasons

9. erred in not accepting the economic analysis conducted by the Appellant in accordance with the provisions of the Act read with the Rules, without recording any reasons to show that the conditions mentioned in clause (a) to (d) of Section 92C(3) of the Act were satisfied;

10. erred in rejecting Transactional Net Margin Method (‘TNMM’) adopted by the Appellant as the most appropriate method for the purpose of benchmarking the international transaction of payment for support services;

Disregarding the commercial nature of transaction:

11. erred in making an enhancement by an alternate disallowance for payment of support services to AE, u/s 37(1) of the Act on the ground that deduction does not pass the legal test of the said section without appreciating that the expenses were incurred wholly and exclusively for the purposes of the business;

Principle of consistency

12. erred in not appreciating the principle of consistency, as the international transaction of availing of support services from FHPL was accepted to be at arm’s length in the previous assessment years;

Levy of interest:

13. erred in levying interest of Rs 1,03,40,511 under section 234B of the Act;

14. erred in levying interest of Rs 5,40,541 under section 234C of the Act without appreciating that interest under section 234C is leviable only on returned income and not assessed income;

Initiation of penalty under section 270A of the Act:

15. erred in initiating penalty proceedings under section 270A of the Act.

The Appellant craves, to consider each of the above grounds of appeal without prejudice to each other and craves leave to add, alter, delete or modify all or any of the above grounds of appeal.

3. Brief facts of the case are that the assessee company was incorporated on 24/04/2009 and is a joint venture between Freudenberg Home and Cleaning Solutions, Germany and Gala Brush Limited, India. The assessee is engaged in the business of manufacturing and trading of household cleaning products including floor-cleaning brushes, cleaning materials, wipers, grass brooms, plastic brooms, ropes and mops, which are marketed under the “Gala” brand. For the year under consideration, the assessee filed its return of income on 27/11/2022 declaring total income of Rs.51,88,06,470/-.

3.1 The case was selected for complete scrutiny, inter alia, on account of large value of international transactions in the nature of service fees and large value of international transactions involving intangible property/intra-group services. Accordingly, a reference was made to the Ld. Transfer Pricing Officer (“Ld.TPO”) u/s. 92CA(1) of the Act for determination of the arm’s length price of the international transactions entered into by the assessee with its Associated Enterprises.

3.2 During the year under consideration, the assessee had availed various support services from its AEs, including services in the areas of finance, human resources, marketing, business support, research and development, logistics and supply chain and other operational support functions. The Ld.TPO, vide order dated 27/01/2025 passed u/s. 92CA(3) of the Act, determined the arm’s length price of the support services availed from Freudenberg Household Products Limited (“FHPL”) at NIL and proposed an adjustment of Rs.5,70,95,602/-.

3.3 Consequent thereto, the Ld.AO passed a draft assessment order dated 28/02/2025 u/s. 144C(1) of the Act incorporating the aforesaid transfer pricing adjustment. Aggrieved by the draft assessment order, the assessee filed objections before the Ld.DRP on 27/03/2025.

3.4 The Ld.DRP, vide directions dated 26/09/2025, upheld the determination of ALP at NIL in respect of the support services and further enhanced the transfer pricing adjustment by Rs.5,16,18,130/- in respect of support services availed by the assessee from Freudenberg Home and Cleaning Solutions GmbH (“FHCS GmbH”), thereby directing an aggregate adjustment of Rs.10,87,13,732/-, being Rs.5,70,95,602/- plus Rs.5,16,18,130/-. The Ld.DRP was essentially of the view that the assessee had failed to establish actual rendition and receipt of the services and that the documents furnished, including the agreements, invoices and cost allocation workings, did not satisfactorily establish the need-rendition-receipt-benefit test. The Ld.DRP also directed, as an alternative and supporting ground, disallowance of the same expenditure u/s. 37(1) of the Act, while specifically directing that there should be no double addition/disallowance.

3.5 Pursuant to the aforesaid directions of the Ld.DRP, the Ld.AO passed the impugned final assessment order dated 07/10/2025 making an aggregate addition of Rs.10,87,13,732/-on account of payments made to the AEs towards business/management support services and determined the total income of the assessee at Rs.62,75,20,202/- as against the returned income of Rs.51,88,06,470/-.

Aggrieved by the final assessment order, the assessee is in appeal before us.

4. Ground No.1 is general in nature and, therefore, does not require separate adjudication.

5. In respect of Ground No.2 challenging the validity of the final assessment order on the ground of limitation, the Ld.AR, in the written submissions filed before us, submitted that the said ground may be treated as academic in nature. Accordingly, Ground No.2 does not call for adjudication and is dismissed as academic.

6. Ground Nos.3 to 12 relate to the transfer pricing adjustment aggregating to Rs.10,87,13,732/- in respect of the intra-group support services availed by the assessee from FHPL and FHCS GmbH and the alternate disallowance of the very same expenditure u/s. 37(1) of the Act. Since these grounds arise out of a common set of facts, they are taken up together for adjudication.

6.1 The Ld.AR submitted that the assessee had furnished extensive documentation before the lower authorities in support of the international transactions. Our attention was drawn to the transfer pricing documentation placed at pages 362 to 407 of the factual paper book, inter-company agreements at pages 451 to 469, cost allocation workings at pages 518 to 523, documentary evidence pertaining to services availed from the AEs running into several hundred pages, third-party certified cost allocation methodology, details of employees of the AEs involved in rendering the services and the relevant extracts of the tax returns filed by the AEs.

6.2 The Ld.AR submitted that the services received from FHCS GmbH and FHPL were distinct in their scope and character. FHCS GmbH was stated to be providing, broadly, global-level services and strategic support, whereas FHPL was providing regional/APAC-level support and assistance in implementation. Detailed functional differentiation in relation to research and development, marketing, human resource, finance and other support functions was placed before the authorities below to demonstrate that there was no duplication of services merely because some of the broad functional descriptions were common.

6.3 It was further submitted that the assessee had placed contemporaneous documentary evidence to establish actual rendition and receipt of services. The material referred to by the Ld.AR includes correspondence concerning employee compensation review, employer-branding initiatives, APAC diversity and inclusion programmes, HR training, treasury and finance matters, profit and cash-flow review, freight-cost budgeting, liquidity management, supplychain and obsolete inventory management, SCM dashboards, procurement, sales performance, new-product-development projects, product pricing, launch and marketing strategy and market research. It was therefore submitted that the finding that the assessee had merely created a paper trail without receipt of any service was contrary to the material placed on record.

6.4 The Ld.AR further submitted that the assessee had aggregated the transaction of availing support services with its manufacturing and trading operations and benchmarked the same under TNMM. It was submitted that the operating margins earned by the assessee were higher than the margins earned by comparable companies and, therefore, the international transactions, including the support services forming an integral part of such operations, stood benchmarked at arm’s length. According to the Ld.AR, neither the Ld.TPO nor the Ld.DRP brought any comparable uncontrolled transaction on record for determining the ALP at NIL.

6.5 It was further submitted that the allocation of costs was based on allocation keys adopted by the group having regard to the nature and utilisation of the respective services. The assessee had also furnished a third-party consultant’s certificate in support of the cost allocation methodology. The Ld.AR submitted that, at the highest, any disagreement with an allocation key could warrant an arm’s length analysis by applying a prescribed method; it could not lead to the ALP of the entire transaction being mechanically determined at NIL.

6.6 As regards the alternate disallowance u/s. 37(1) of the Act, the Ld.AR submitted that the expenses were incurred in the ordinary course of business for availing services required for the assessee’s operations and were neither capital nor personal in nature nor incurred for any purpose prohibited by law. It was submitted that once the actual rendition of services and the business nexus stood demonstrated, the commercial expediency of incurring the expenditure could not be substituted by the subjective perception of the Revenue authorities.

6.7 The Ld.DR, on the other hand, relied upon the order of the Ld.TPO and the directions of the Ld.DRP. He submitted that the assessee had failed to satisfactorily demonstrate actual rendition and receipt of the services and that agreements, invoices and allocation workings by themselves could not establish receipt of services. He accordingly supported the determination of the ALP at NIL as well as the alternate disallowance u/s. 37(1) of the Act.

6.8 We have heard both sides and perused the material available on record. At the outset, it is necessary to notice that the impugned transfer pricing adjustment has ultimately proceeded on the premise that the assessee failed to establish the necessity, actual rendition, receipt and benefit arising from the intra-group services. On this premise, the entire consideration paid towards the support services has been treated as having an ALP of NIL. In our considered view, such an approach cannot substitute the statutory exercise contemplated u/s. 92C of the Act.

6.9 Section 92C of the Act mandates determination of the arm’s length price by application of one of the recognised methods prescribed thereunder read with the relevant Rules. Once the benchmarking undertaken by the assessee is sought to be rejected, the Ld.TPO is required to determine the arm’s length price by adopting the most appropriate method in accordance with law. The determination of ALP at NIL cannot rest merely upon a conclusion that, in the perception of the Ld.TPO, adequate benefit from the expenditure was not demonstrated.

6.10 . The Hon’ble jurisdictional High Court in CIT v. Lever India Exports Ltd. 535/389 ITR 70 (Bom).

6.11 In the present case, no comparable uncontrolled price or other objective benchmark has been brought on record by the Ld.TPO for arriving at the ALP of NIL. Even if the transaction was sought to be analysed under the “Other Method”, the exercise necessarily required an objective basis relatable to the price charged or paid, or which would have been charged or paid, for the same or similar uncontrolled transaction under similar circumstances. Merely characterising the evidences furnished by the assessee as insufficient cannot by itself constitute determination of an arm’s length price.

6.12 We also find substance in the contention of the assessee regarding actual rendition of services. It is not a case where the assessee merely produced an agreement and debit notes/invoices. The record, as referred to before us, contains contemporaneous correspondence concerning specific operational and business matters, besides cost-allocation workings, agreements and supporting documentation. For instance, the evidences referred to before us include communications concerning compensation review, employer-branding initiatives, APAC HR programmes, treasury and cash-flow matters, freight-cost management, supply-chain and obsolete inventory issues, SCM performance, procurement, sales performance, new-product development, pricing and marketing activities. These are specific business-related matters and cannot be brushed aside in their entirety merely by describing them as intra-group or self-generated documents.

6.13 An agreement or invoice, standing alone, may not invariably establish rendition of services. However, when such agreements and invoices are read along with contemporaneous communications evidencing advice, assistance and interaction on identifiable business functions, cost-allocation workings and details of the personnel involved in rendering such services, the evidence has to be appreciated cumulatively. In the facts before us, the blanket conclusion that no services whatsoever were rendered is not borne out from the material referred to on record.

6.14 We also note that the assessee has explained the distinction between the services rendered by FHCS GmbH and FHPL. The former performed functions at the global/group level, whereas the latter rendered regional/APAC-level support and implementation assistance. The distinction has been explained function-wise in respect of R&D, marketing, HR, finance and other support services. Merely because certain broad descriptions, such as HR, finance, marketing or R&D support, appear under both arrangements would not ipso facto render the services duplicative. For holding that expenditure represents duplicate services, the duplication is required to be identified with reference to the specific service rendered and the activity for which consideration has already been paid. No such item-wise exercise has been demonstrated in the impugned adjustment.

6.15 As regards the cost allocation, the assessee has furnished the costallocation workings and has also relied upon certification of the allocation methodology by an independent professional. Even assuming that the Ld.TPO had reservations regarding any particular allocation key or the cost base adopted by the service provider, the same was required to be examined and tested by applying the transfer pricing provisions. Such reservations could not, without further benchmarking, lead to the conclusion that the arm’s length price of the entire bundle of services was NIL.

6.16 We further find that the assessee had benchmarked the closely-linked transactions under TNMM at the segmental/entity level. The Hon’ble Bombay High Court in Cummins India Ltd. v. Asstt. CIT (Bom) has recognised, in the facts considered therein, that where TNMM has been accepted as the most appropriate method for closely linked international transactions, one element of the bundle cannot ordinarily be carved out and subjected to a wholly different benchmarking exercise without a proper basis. In the present case also, the impugned adjustment does not demonstrate, through any separate comparable analysis, as to how the consideration for the impugned services could be determined at NIL.

6.17 We may also observe that the transfer pricing provisions do not authorise substitution of the business judgment of the assessee by that of the Revenue. The Hon’ble Delhi High Court in CIT v. Cushman and Wakefield (India) (P.) Ltd 367 ITR 730 (Delhi) has drawn a distinction between determination of the ALP by the TPO and examination of the allowability of the expenditure under the normal provisions by the Assessing Officer. Similarly, the decision in CIT v. EKL Appliances Ltd. 345 ITR 241 (Delhi) recognises that the Revenue cannot determine the allowability of legitimate business expenditure merely by substituting its own perception as to whether the expenditure was commercially necessary.

6.18 Coming to the alternate disallowance u/s. 37(1) of the Act, the basis adopted by the Ld.DRP is principally the alleged absence of actual receipt of services and business nexus. We have already observed hereinabove that the material placed on record contains contemporaneous documentary evidence evidencing actual business and operational support rendered to the assessee. The nature of the services, namely finance, HR, marketing, R&D, logistics, supply-chain and other business support functions, has a direct nexus with the assessee’s business operations. There is also nothing on record to suggest that the expenditure is capital in nature, personal in nature or incurred for a purpose prohibited by law. Once the rendition of services and their nexus with the business stand established on the material placed on record, the very foundation of the alternate disallowance u/s. 37(1) ceases to survive.

6.19 We also note the assessee’s submission that similar payments towards support services from FHPL had been accepted at arm’s length in the preceding assessment years. It is settled that the principle of res judicata does not strictly apply to income-tax proceedings and each assessment year is a separate unit. Nevertheless, where the nature of the transaction and the underlying factual matrix continue to remain the same, an established position cannot be departed from without identifying a material change in facts or law. In the present case, no material distinguishing feature has been demonstrated before us so as to justify a complete departure resulting in determination of the ALP at NIL. This aspect further supports the conclusion reached by us on the basis of the independent examination hereinabove.

6.20 Considering the totality of the facts and circumstances, we are unable to sustain the determination of the ALP at NIL in respect of the support services availed from FHPL and FHCS GmbH. The transfer pricing adjustment of Rs.5,70,95,602/- in respect of FHPL and the enhancement of Rs.5,16,18,130/- in respect of FHCS GmbH, aggregating to Rs.10,87,13,732/-, are accordingly directed to be deleted. For the reasons recorded hereinabove, the alternate disallowance of the very same amount u/s. 37(1) of the Act also stands deleted. Accordingly,Ground Nos.3 to 12 are allowed.

7. Ground No.13 relates to levy of interest u/s. 234B of the Act. Levy of interest being mandatory and consequential in nature, the Ld.AO is directed to recompute the same in accordance with law after giving effect to our findings hereinabove. Ground No.13 is accordingly allowed for statistical purposes.

7.1 Ground No.14 relates to levy of interest u/s. 234C of the Act. Interest u/s. 234C is required to be computed with reference to the tax due on the returned income in accordance with the provisions of the said section. The Ld.AO is accordingly directed to verify and recompute the interest in accordance with law. Ground No.14 is allowed for statistical purposes.

8. Ground No.15 challenges initiation of penalty proceedings u/s. 270A of the Act. The ground being premature at this stage does not call for adjudication and is accordingly dismissed.

9. In the result, the appeal filed by the assessee bearing ITA No. 8904/Mum/2025 is partly allowed.