Ad Hoc 10% TP Adjustment on Technical Services Deleted: ITAT Holds Adjustment Unsustainable, Methodologically Invalid [Read Order]

The Mumbai bench of Income Tax Appellate Tribunal ( ITAT ) Mumbai has struck down the 10% ad hoc transfer pricing (TP) adjustment made on Siemens AG’s technical service transactions with Indian associates. The Tribunal held that the Transfer Pricing Officer (TPO) failed to apply any of the prescribed methods under Section 92C of the Income Tax Act or Rule 10B of the Income Tax Rules.

Siemens AG, a non-resident company, derived income in India through royalties and fees for technical services from its Indian associated enterprises (AEs). In its transfer pricing order, the TPO noted differences between Siemens AG’s Form 3CEB disclosures and the financial statements of its Indian AEs, concluding that the company had not adequately reconciled its international transactions.

Without identifying defects in Siemens’ transfer pricing study or applying a specific method, the TPO made an ad hoc adjustment of 10% on the value of technical service transactions, which the AO subsequently confirmed. The DRP upheld the addition, citing the alleged mismatch. Aggrieved by this order, the assessee filed an appeal before the Tribunal.

Before the Tribunal, Siemens argued that it had duly maintained and submitted detailed transfer pricing documentation as required under Rule 10D(1) and 10D(3), adopting the Transactional Net Margin Method (TNMM) as the most appropriate. The difference in reported figures, it explained, arose from timing differences; the company accounted for income on a receipt basis, while its Indian AEs recorded expenses on an accrual basis.

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The assessee relied on earlier ITAT and High Court decisions, including CIT v. Johnson & Johnson Ltd. (2017) and CIT v. Merck Ltd. (2016), which held that arbitrary or percentage-based adjustments without methodical analysis are impermissible.

The Department argued that the absence of a one-to-one reconciliation justified a reasonable ad hoc addition.

However, the Tribunal found that no prescribed transfer pricing method was applied, and that the TPO had not identified any comparable transactions or benchmark analysis. It was observed that Siemens’ TP documentation had not been found defective and that, in parallel proceedings, similar transactions had already been accepted at arm’s length in the assessments of the Indian AEs.

Citing the principle that transfer pricing determinations must be based on prescribed methods and objective data, the bench, comprising Beena Pillai (Judicial Member) and Renu Jauhari (Accountant Member), held that the 10% markup was unsustainable.

The Tribunal deleted the entire addition, observing that the TPO’s approach violated both Section 92C and the arm’s length principle. The ruling reinforces that TP adjustments must rest on analysis, not assumption, particularly where the taxpayer has substantiated its methodology.

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