The Income Tax Appellate Tribunal, Ahmedabad, has reaffirmed the primacy of consistent judicial precedent in transfer pricing disputes, deleting a Rs. 3.88 crore adjustment where the assessee’s functional profile remained unchanged and earlier rulings favored the Transactional Net Margin Method. This decision reinforces doctrinal stability in international taxation and sets a clear boundary for revenue authorities seeking to override settled jurisprudence.
Background & Facts
The Dispute
The appellant, Inductotherm (India) Pvt. Ltd., a wholly owned subsidiary of Inductotherm Technologies Inc., USA, is engaged in the manufacture and sale of industrial equipment. For Assessment Year 2020-21, the company entered into international transactions with its Associated Enterprises (AEs). The Transfer Pricing Officer (TPO) rejected the assessee’s adoption of the Transactional Net Margin Method (TNMM) at the entity level and instead applied an internal Cost Plus Method (CPM) to 240 out of approximately 9,000 product lines, resulting in an adjustment of Rs. 3,88,46,904. The Dispute Resolution Panel (DRP) upheld this adjustment, and the Assessing Officer confirmed it under section 143(3) read with sections 144C(13) and 144B of the Income Tax Act, 1961.
Key Facts
- The assessee filed its return of income on 13.02.2021 declaring total income of Rs. 175.94 crores.
- The case was selected for scrutiny under section 143(2).
- An intimation under section 143(1) was issued by the Central Processing Centre (CPC) on account of a mismatch between the tax audit report and the return, leading to an adjustment of Rs. 3,75,67,050 for reversal of provisions.
- The assessee had consistently claimed and been granted TNMM as the most appropriate method in prior assessment years from AY 2006-07 onwards.
- The TPO selected 240 product lines for internal CPM without demonstrating strict comparability or making economic adjustments under Rule 10B(3) of the Income-tax Rules, 1962.
- The assessee submitted that functional, economic, and risk profiles had not changed since prior years.
- A revised tax audit report and auditor’s certificate dated 06.06.2025 and 07.08.2025 were filed to rectify the classification error in the section 143(1) adjustment.
- The assessee claimed TDS credit of Rs. 71,86,233 and TCS credit of Rs. 91,050, which were denied by the Assessing Officer.
Procedural History
- 13.02.2021: Return of income filed for AY 2020-21.
- Date unspecified: Intimation under section 143(1) issued by CPC, making adjustment of Rs. 3,75,67,050.
- Date unspecified: Notice under section 143(2) issued.
- Date unspecified: TPO issued draft order applying internal CPM and making TP adjustment of Rs. 3,88,46,904.
- Date unspecified: Assessee filed objections before DRP.
- Date unspecified: DRP rejected objections and upheld TPO’s adjustment.
- 12.07.2024: Final assessment order passed by Assessing Officer under section 143(3) r.w.s. 144C(13) and 144B.
- 17.03.2026: Hearing before ITAT Ahmedabad.
- 27.05.2026: Judgment pronounced.
The Parties' Positions
For the Appellant
- Argued that TNMM at entity level had been consistently upheld in prior years for identical facts.
- Contended that no material change in functional, asset, or risk profile occurred in AY 2020-21.
- Asserted that the TPO’s selection of 240 product lines lacked strict comparability and failed to make required economic adjustments under Rule 10B(3).
- Submitted that DRP’s refusal to follow binding precedent was legally impermissible.
- Claimed that the section 143(1) adjustment of Rs. 3,75,67,050 resulted in double taxation, as the provisions had already been disallowed in earlier years.
- Highlighted procedural violation under section 143(1) due to non-compliance with the mandatory 30-day notice period.
- Provided revised tax audit report and auditor’s certificate to substantiate inadvertent classification error.
- Demanded full TDS and TCS credits as reflected in Form 26AS and return.
For the Respondent
- Argued that internal CPM is preferable when reliable internal data is available.
- Contended that each assessment year is independent and prior rulings do not bind the TPO or DRP.
- Maintained that CPC’s adjustments under section 143(1) are statutorily valid and independent of scrutiny proceedings.
- Submitted that procedural lapses in section 143(1) are cured if statutory conditions are substantially complied with.
- Opposed TDS/TCS credit on grounds of non-reconciliation at the time of processing.
Relief Sought
The appellant sought:
- Deletion of the transfer pricing adjustment of Rs. 3,88,46,904.
- Quashing of the section 143(1) adjustment of Rs. 3,75,67,050 on grounds of double taxation and procedural invalidity.
- Grant of full TDS credit of Rs. 71,86,233 and TCS credit of Rs. 91,050.
- Declaration that the assessment proceedings were invalid due to non-issuance of proper show-cause notice under section 144B.
The Legal Issue
The central question was whether the Transfer Pricing Officer could override a consistently applied and judicially upheld Transactional Net Margin Method (TNMM) in the absence of any material change in the assessee’s functional profile, and whether the reversal of provisions previously disallowed in earlier years could be treated as taxable income without violating the principle of double taxation.
Arguments Presented
For the Appellant
The appellant relied on multiple prior orders of coordinate benches of the Tribunal in its own case from AY 2006-07 onwards, which had consistently accepted TNMM as the most appropriate method. It argued that the TPO’s shift to internal CPM was arbitrary, lacked comparability analysis under Rule 10B(3), and violated the doctrine of consistency in tax administration. The appellant further contended that the section 143(1) adjustment violated the mandatory 30-day notice requirement under the second proviso to section 143(1), rendering it procedurally invalid. It submitted that taxing the reversal of provisions already disallowed in prior years amounted to double taxation, and that the revised tax audit report and auditor’s certificate conclusively established the error was inadvertent.
For the Respondent
The Revenue contended that internal CPM is the preferred method when reliable internal data exists, citing the OECD Transfer Pricing Guidelines. It argued that each assessment year is independent and prior rulings do not create binding precedent for subsequent years. It maintained that the CPC’s adjustments under section 143(1) are administrative in nature and do not require the same procedural safeguards as scrutiny assessments. It further submitted that the assessee’s failure to reconcile its tax audit report with the return at the time of processing justified the adjustment, and that the claim for TDS/TCS credit required verification.
The Court's Analysis
The Tribunal conducted a rigorous analysis of judicial precedent, statutory compliance, and the doctrine of consistency in tax administration. It emphasized that judicial discipline requires coordinate benches to follow binding precedents on identical facts unless stayed, reversed, or distinguished. The DRP’s justification for not following prior Tribunal orders - that the issue was pending before higher forums - was held to be legally unsustainable. The Court observed:
"In view of the consistent judicial view in assessee's own case and absence of any distinguishing facts, we hold that TNMM at entity level is the most appropriate method in the present case."
The Court further held that the TPO’s selection of 240 product lines without demonstrating strict comparability or making economic adjustments under Rule 10B(3) rendered the internal CPM methodology legally flawed. The absence of any change in the assessee’s functional profile, assets, or risk allocation over the years was decisive.
Regarding the section 143(1) adjustment, the Court acknowledged the procedural irregularity in the CPC’s failure to provide the mandatory 30-day notice. More critically, it recognized the substantive legal principle that reversal of provisions already disallowed in earlier years cannot be taxed again without violating the doctrine of double taxation. However, given the submission of a revised tax audit report and auditor’s certificate, the Court directed the Assessing Officer to verify the claim afresh, ensuring due process.
On TDS/TCS credit, the Court noted that the claim was supported by Form 26AS and other records, and that denial without verification was arbitrary. It directed the Assessing Officer to re-examine the claim with opportunity to be heard.
The Court declined to entertain the challenge to the validity of the assessment under section 144B, as no specific show-cause notice violation was substantiated with documentary evidence.
The Verdict
The appeal was allowed for statistical purposes. The transfer pricing adjustment of Rs. 3,88,46,904 was deleted. The section 143(1) adjustment of Rs. 3,75,67,050 was set aside and remanded to the Assessing Officer for verification of the revised tax audit report and auditor’s certificate, with opportunity to be heard. The claim for TDS credit of Rs. 71,86,233 and TCS credit of Rs. 91,050 was also remanded for verification from Form 26AS and supporting documents, with due opportunity to the assessee. The order was pronounced on 27.05.2026.
What This Means For Similar Cases
Precedent Overrides Revenue’s Discretion in Transfer Pricing
- Practitioners must cite prior favorable Tribunal rulings in identical factual matrices to resist arbitrary shifts from TNMM to CPM.
- Revenue authorities cannot invoke "independence of assessment years" to override binding precedent where facts are unchanged.
- Any deviation from a previously accepted method must be supported by material change in functional profile, risk, or comparability data.
Double Taxation of Reversed Provisions Is Legally Impermissible
- Reversal of provisions disallowed in prior years cannot be treated as income in the year of reversal.
- Taxpayers must retain and produce auditor’s certificates and revised tax audit reports to substantiate inadvertent errors.
- Section 143(1) adjustments must strictly comply with the 30-day notice requirement under the second proviso; failure renders the adjustment void.
TDS/TCS Credits Require Proactive Verification, Not Automatic Denial
- Denial of TDS/TCS credit without verification from Form 26AS or AIS is arbitrary and unsustainable.
- Assessing Officers must afford opportunity to be heard before rejecting such claims, even if discrepancies are suspected.
- Taxpayers should proactively file Form 26AS extracts and TDS certificates with returns to preempt disputes.
