ALPHA-ELSEC DEFENCE AND AEROSPACE SYSTEMS PRIVATE LIMITED,BENGALURU V. DEPUTY COMMISSIONER OF INCOME TAX CIRCLE 1(1)(1), BANGALORE AND NATIONAL FACELESS ASSESSMENT CENTRE, BENGALURU

ITTPA 1830/BANG/2024

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The case involves Alpha-Elsec Defence & Aerospace Systems Pvt. Ltd., which appealed against the assessment order for the assessment year 2020-21, which significantly increased their assessed income based on transfer pricing adjustments. The primary contention was the incorrect application of transfer pricing methods and selection of comparable companies by the TPO. The Tribunal found that the TPO did not adequately consider the functional profile of the assessee and relied on a flawed transfer pricing study report. The Tribunal directed a re-evaluation of the comparability analysis and the arm's length price determination.

• Counselvise Citation: [2025] 140 COUNSELVISE.COM (IT) 708288 (ITAT-BANGALORE)
• Appeal Type: Income Tax (Transfer Pricing) Appeal
• Pronouncement Date: 18-07-2025
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Assessment Year: 2020-2021
• Laws Referred To: Income-tax Act, 1961
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: NEERA MALHOTRA K J DHIVYA
• Assessee Lawyers: K.R. VASUDEVAN
• Keywords: Transfer pricing; International transaction
• Section: 143(3); 234B

Judgement Text

" IN THE INCOME TAX APPELLATE TRIBUNAL “C” BENCH: BANGALORE BEFORE SHRI PRASHANT MAHARISHI, VICE PRESIDENT AND SHRI SOUNDARARAJAN K., JUDICIAL MEMBER IT(TP)A No.1830/Bang/2024 Assessment year: 2020-21 M/s. Alpha-Elsec Defence & Aerospace Systems Pvt. Ltd., No.9, Interface Accolade, Service Road, HAL II Stage, Indiranagar, Bangalore – 560 008. PAN: AAECA 7856M Vs. The Deputy Commissioner of Income Tax, Circle 1(1)(1), Bangalore. APPELLANT RESPONDENT Appellant by : Shri K.R. Vasudevan, Advocate Respondent by : Ms. Neera Malhotra / Dr. K J Dhivya, CIT(DR)(ITAT), Bengaluru. Date of hearing : 23-04-2025 Date of Pronouncement : 18-07-2025 O R D E R Per Prashant Maharishi, Vice President 1. This appeal is filed by Alpha-Elsec Defence & Aerospace Systems Pvt. Ltd. (the assessee/appellant) for the assessment year 2020-21 against the assessment order passed by the Assessment Unit, National e-Assessment Centre [ld. AO] dated 23.07.2024 for AY 2020-21 u/s. 143(3) r.w.s. 144C(13) r.w.s. 144B of the Income-tax Act, 1961 (the Act) in pursuance of the directions of the Dispute IT(TP)A No.1830/Bang/2024 Page 2 of 22 Resolution Panel-1, Bangalore [ld. DRP] issued on 27.06.2024 u/s. 144C(5) of the Act wherein the order passed u/s. 92CA(3) of the Act by the DC/ACIT(TP) 1(1)(1), Bangalore [ the ld TPO ] on 10.7.2023 proposed an adjustment of Rs.12,49,05,773 in manufacturing segment and adjustment of interest on delayed receivables of Rs.7,82,901, resulted into determination of income of Rs. 20,18,48,270 against returned income of Rs.3,91,18,230. 2. Assessee is aggrieved with the same and has filed this appeal raising the following grounds of appeal: - “That on the facts and in the circumstances of the case: General Grounds 1. The impugned order of the Ld. AO, to the extent prejudicial to the Appellant, is based on incorrect appreciation of fact and incorrect interpretation of law and therefore. is bad in law and contrary to the facts and circumstances of the case. 2. The Learned AO has erred in assessing the total income of the Appellant at INR 20,18,48,270 as against INR 3,91,18,230 claimed in return of income filed by the Appellant. Transfer Pricing Grounds 3. The learned TPO/ AO/ DRP have erred in rejecting the economic analysis undertaken by the Appellant and conducting a fresh economic analysis for the determination of the ALP in connection with the impugned international transactions. 4. The learned TPO/ AO/ DRP has erred in disregarding the segmental details prepared by the Appellant and considering the entity-wide margin for undertaking TP analysis. IT(TP)A No.1830/Bang/2024 Page 3 of 22 5. The learned TPO/ AO/ DRP have erred, in law and in facts, by applying different accounting year filter as a comparability criterion. 6 The learned TPO/ AO/ DRP have erred in law and in facts, by using manufacturing income more than 75 percent of total operating revenue as a criterion for selecting comparable companies. 7. The learned TPO/ AO/ DRP have erred, in law and in facts, by applying persistent loss filter for rejecting companies that have incurred loss for any 2 out of last 3 years. 8. The learned TPO has erred, in law and in facts. by rejecting the \"No Government-Owned companies Filter\" as a selection criterion. 9. The learned TPO has erred, in law and in facts, by rejecting of almost the entire list of companies considered as comparable in the TP study for reason that they “did not appear in TPO's search matrix\". 10. The TPO has erred. in law and fact, by using only the lower turnover filter of INR 1 Crore and not applying an upper turnover threshold as a selection criterion for comparable companies. 11 The learned TPO/ AO/ DRP have erred rejecting the following comparable companies selected by the Appellant in its TP documentation i. Mahindra Defence Navals Systems Pvt Ltd ii. Big Bang Boom Solutions Pvt Ltd iii. Deepti Electronics and Electro Optics Pvt Ltd iv. Centum Electronics Limited v. Sigma Microsystems Pvt Ltd vi. MKU Pvt Ltd 12. The learned TPO/ AO/ DRP have erred accepting the following companies that should not be considered as comparable to the Appellant, on one or more grounds i. Bharat Electronics Limited IT(TP)A No.1830/Bang/2024 Page 4 of 22 ii. General Optics (Asia) Limited iii. Lotus Wireless Technologies India Private Limited 13. The learned TPO/ AO/ DRP have erred, in law and in facts, by wrongly considering \"Bank Charges\" as Operating charges while computing the operating margins of the Appellant in the TP order. 14. The learned TPO/ AO/ DRP have erred, in facts, by wrongly computing the operating margins of some of the comparable companies considered in the TP order. 15. The learned AO / TPO/ DRP have erred, in law and in facts, by not making suitable adjustment to account for differences in working capital position of the Appellant vis-a-vis the comparables. 16. The learned TPO/ AO/ DRP have erred, in law and facts, by not making suitable adjustments to account for differences in the risk profile of the Appellant vis-a-vis the comparables. 17. The learned TPO/ AO/ DRP have erred, in law and on facts, in not considering the business/ commercial expediencies of the arrangement and re-characterizing the delayed trade receivables realizations as a loan transaction, thereby computing transfer pricing adjustment in the form of interest thereon. 18. Without prejudice to Ground No. 17, the learned AO/TPO/ DRP have erred, in law and in facts, by disregarding internal comparable data wherein the Assessee has neither charged interest for delay in collection of receivables from third- party customers nor paid any interest on outstanding payables to associated enterprises as well as third-party suppliers/ vendors. 19. Without prejudice to our above arguments, if outstanding receivables are considered as unsecured loans, benefit must be given of Circular dated 01.04.2020 through which Reserve Bank of India provides for a collection period of 9 months for export receivables which had been extended up to 15 months due to the COVID-19 pandemic. IT(TP)A No.1830/Bang/2024 Page 5 of 22 20. Without prejudice to the above. Ld. AO/TPO/DRP have erred in law and in facts by imputing a separate addition for interest on delayed collection of receivables by ignoring that the Appellant had already recovered alleged shortfall on account of delayed receivables by way of excess income received from its AEs. 21. The learned TPO/ AO/ DRP have erred. in facts, by wrongly computing the arithmetic mean of margins earned by comparable companies as identified by the Ld. TPO. 22. That the Learned TPO/ AO/ DRP has erred in not appreciating that the Appellant is a joint venture formed by investors with the primary objective of conducting commercial activities at an Arm's Length Price (ALP), and there is no motive or intention to shift profits to the foreign AE. Grounds Of Objection relating to corporate tax matters 23. The learned AO in his draft assessment order has incorrectly considered income as computed under Section 143(1) of the Act as INR 6,60.79,920 as against the amount of INR 3,91,18,230 as per the intimation under Section 143(1) of the Act received by the Company: 24. That the Learned AO has erred in not considering the disproportionate and excessive tax demand raised by the Final Assessment Order, which amounts to 12% of the total revenue of the Appellant for the assessment year 2020-21, which is not only arbitrary but also unsustainable in law and on facts. 25. That the Learned TPO/ AO/ DRP has failed to appreciate that the Appellant is a recognized MSME under the Micro, Small and Medium Enterprises Development (MSMED) Act, 2006, and such an exorbitant tax demand significantly hampers the financial stability and commercial operations of the Appellant, thereby threatening its very existence. IT(TP)A No.1830/Bang/2024 Page 6 of 22 Consequential Grounds 26. The Ld. AO has erred in initiating penalty proceedings u/s 274 r/w section 270A of the Act for underreporting of income. 27. The Ld. AO has computed interest under Section 234B INR 2,77,37,320 as against INR Nil computed by the Appellant while filing its return of income. 28. The Ld. AO has computed interest under Section 234A of the Act at INR 10,66,820 as against INR Nil computed by the Appellant while filing its return of income without appreciating that interest under Section 234A of the Act is computed having regard to \"tax due on returned income\" and not assessed income. 29. The Ld. AO has computed interest under 234C of the Act at INR 2,74,998 as against INR Nil computed by the Appellant while filing its return of income without appreciating that interest under Section 234C of the Act is computed having regard to \"tax due on returned income\" and not assessed income.” 3. The assessee is an associate of Alpha Design Technologies Private Limited [ an Indian company ] and Elbit Security systems Private Limited [ Israel Company] with a shareholding of 51% & 49% respectively. Alpha Design Technologies Private Limited is a shareholder holding 51% was engaged in manufacturing of defence equipment by one Col. H.S. Shankar. 4. Elbit Ltd and its group companies are engaged in manufacturing a wide range of defense products, including optoelectronics and electronic warfare systems. It also undertakes research and development activities relating to defense and commercial applications. It provides all the inputs about the specification and IT(TP)A No.1830/Bang/2024 Page 7 of 22 details of the products to be manufactured by the assessee company, it carries out all business development initiatives, including customer identification and interaction with and customers and the appellant dealt with its associated enterprises only. The associated enterprise and the Assessee company set all quality related parameters manufactures the products as per the direction of the AE and certifies that it conforms to the quality specifications set by the associated enterprises. All research and development activities in relation to the technology and supply of products to the and customers are undertaken by the associated enterprise and the assessee does not perform any research and development activities during the year. 5. The assessee company entered into agreement with AE for manufacture of parts of Night Vision equipment in India. The assessee filed its return of income on 30.1.2021 which was revised on 27.3.2021 at a total income of Rs.3,91,18,230. The case of assessee was selected for scrutiny and notice u/s. 143(2) was issued. 6. The assessee has entered into international transaction with its Associated enterprises namely Elbit Security Systems Ltd., Elbit Systems Electro Optics Elope Limited and Stelop Pte Ltd. The transactions are in the nature of sale of finished goods, equipment maintenance services, purchase of goods and outstanding receivables. The assessee has supplied goods to its foreign AE. IT(TP)A No.1830/Bang/2024 Page 8 of 22 7. On Transactions of sales to AE , assessee has earned on Operating Revenue of Rs.43.75 crores, OP/OC margin is 11.27%; on sale of goods with domestic AEs of Rs. 12.08 crores, the margin is 1.78%. In case of non-AE manufacturing segment on turnover of Rs. 9.45 crores, the assessee has derived margin of 2.92%. Thus, on a turnover of Rs.65.28 crores, the consolidated margin of 6.40% was earned. 8. For benchmarking, arm’s length price [ALP] of international transactions, assessee adopted Transactional Net Margin Method [TNMM] as the most appropriate method adopting Profit Level Indicator [PLI] of OP/OC, selected 11 comparable companies with a margin range of 4.29% to 14.49% and assessee’s margin of segmental profitability on AE segment was considered to be 11.27% and the assessee in its TP Study Report [TPSR] stated that international transaction of purchase and sale of goods coupled with other transactions are at arm’s length. 9. Reference was made to the ld. TPO to determine the ALP of international transactions and therefore after analysing the functions and the TP document, the ld. TPO found that there are certain inappropriate filters applied by assessee. The assessee has used filter of manufacturing income of 50% of sales instead of 75% of sales and excluded the Govt. ownership comparables. The assessee also ignored the filter of persistent loss and therefore the TPSR of assessee was rejected. IT(TP)A No.1830/Bang/2024 Page 9 of 22 10. The ld. TPO applied various filters and carried out a search on Prowess database. He put the keywords ‘Handheld Thermal Imagers, TI Based Mobile Surveillance Systems, Night Vision Equipment, Optical Sights and Optronic systems’. The TPO noted that as per the TP study report, these items are manufactured by the assessee. The ld. TPO finally reached at 4 comparables wherein he applied different previous year filter, net worth filter, persistent loss filter, core function filter, low turnover filter of Rs.1 crore, RPT filter and reached at weighted average mean margin of 26.54%. In doing so, he rejected the comparables selected by assessee. 11. Out of 11 comparables of the assessee, Mahindra Defence Navals Systems P. Ltd. was rejected as it fails different financial year filter and other 10 were rejected as those were not part of TPO search i.e., different FAR. 12. Out of 4 comparables of TPO, the assessee objected to the same stating that 2 comparables i.e., Bharat Electronics Ltd. and Bharat Dynamics Ltd. are Govt. companies having very high turnover engaged in significant R&D activities and are functionally dissimilar. The other 2 comparables were also objected to. 13. Consequently after rejecting the objections of assessee, the ld. TPO found that average margin of the comparables is 26.54% and taxpayer’s margin (OP/OC) is merely 6.22%. He computed the adjustment of Rs. 12,49,05,173 in respect of manufacturing segment. IT(TP)A No.1830/Bang/2024 Page 10 of 22 14. The ld. TPO further noted that assessee has also outstanding balance trade receivable as international transaction, but did not benchmark them separately. The ld. TPO held that 120 invoices outstanding in US $, considering the allowable credit period of 60 days, adopted the interest rate of 6.818% on the basis of mark-up of LIBOR rates, computed the interest receivable thereon on overdue interest outstanding of Rs.7,82,901. 15. Accordingly, the TPO’s order u/s 92CA(3) of the Act was passed on 10.7.2023. Based on the above, draft assessment order /s. 144C(11) of the Act was passed on 20.9.2023 determining the total income of assessee at Rs.19,17,67,990. 16. The assessee preferred objections before the ld. DRP, who passed directions on 27.6.2024 based on which the exclusion of comparable Bharat Dynamics Ltd. was accepted. Ld. DRP also directed ld. TPO to verify and adopt the figures as per annual report of the comparable and compute the PLI margin. The second adjustment of interest on delayed receivables was upheld. All other findings of the ld. TPO were also found to be correct. 17. On 5/7/2024 the ld TPO passed an order giving effect to the direction of ld DRP where in only three comparable were retained, average weighted margin of 28.18 % was computed and adjustment of The ALP on manufacturing segment was computed at Rs. 13,49,85,457/-. Interest on outstanding receivable was IT(TP)A No.1830/Bang/2024 Page 11 of 22 retained at Rs 782901/-. Thus, total TP adjustment was computed at Rs 13,57,68,359/-. 18. Based on the above, assessment order u/s. 143(3) r.w.s. 144C(13) r.w.s. 144B of the Act was passed on 23.7.2024 wherein returned income filed by assessee of Rs.3,91,18,230 which was processed u/s. 143(1)(a) at Rs.6,60,79,915 resulted into total income of Rs.20,18,48,270 wherein the only issue is variation in respect of ALP of international transaction of Rs.13,57,68,359. 19. In appeal before us, where assessee has raised in all 29 grounds of appeal, assessee has furnished 3 volumes of PB consisting 3887 pages and also furnished the case law compilation citing 19 judicial precedents and also placing 17 pages detailed note. The assessee has also placed on 19.12.2024 the functional profile and manufacturing process of assessee of 28 pages. Further on 22 April,2025 the assessee also submitted once again a note of functional profile of the assessee. 20. As per the last note submitted the assessee explained the Manufacturing process which is consisting of manufacturing subunits through integration, assembly and testing of various electrical, mechanical and optical items. The raw material of the products being manufactured can be broadly categorised as electronics, optical and mechanical items including processing, assembly of sub assembly, integration and testing the final product. The finished goods consist of the bill of materials which is required IT(TP)A No.1830/Bang/2024 Page 12 of 22 for manufacturing. The manufacturing process is divided into various stages with the outcome is semi-finished goods. The final product is assembly of various semi-finished goods produced in various stages of the production. The production order is created for each stage of production and the raw materials consumed as against the production order. The final product is then fit into the specialized jig. It is subjected to testing as per the product specification and certification of conformations. The final product is dispatched to the customer along with the certificate. 21. The ld. AR submitted that when the TPSR conducted by assessee was rejected without any reason, referring to ground no.22, if there is a TP adjustment there has to be a motive or intention to shift the profits outside the India which is absent in this case. He therefore submitted that assessee has furnished the segmental data from transactions with AE and non-AE which has been completely disregarded. Assessee was concerned that the assessee is compared with the Bharat Electronics Limited where the margin of that company is 25.01%, general optics (Asia) Ltd where the margin of 30.68% and Lotus wireless technologies India private limited was margin is 28.85%. It was submitted that all these three entities are not comparable with the assessee. He referred to the direction of the learned dispute resolution panel wherein he has raised several objection with respect to the filters, inclusion of the government companies and not applying upper turnover filter. He further submitted that the comparable selected by the assessee were IT(TP)A No.1830/Bang/2024 Page 13 of 22 rejected stating that it follows a different financial year, he referred to specifically the comparable selected by the assessee of Mahindra defence and naval systems private limited. He submitted that the previous two years data is available which is sufficient to compute the weighted average margin. This comparable also appeared in the search metrics of the learned transfer pricing officer and satisfies all the filters adopted by the learned TPO. He also referred to the comparable companies selected by the learned transfer pricing officer and submitted that with respect to Bharat Electronics Ltd which is having a turnover of hundreds of crores and it also spends ₹ 979.22 crores and research and development activities constituting 7.57% of its total revenue whereas the assessee does not have any research and development activities and therefore functionally it is not comparable. He further referred that the General optics Asia Ltd has also significant research and development activities which is constituting 5.7% of its total revenue. He further referred to a comparable selected by the learned transfer pricing officer of Lotus wireless technologies India private limited which is manufacturing wireless instruments and compare the assessee which is manufacturing products such as mobile surveillance system and radars. The learned dispute resolution panel considered these products as comparable. 22. He also argued that in the transfer pricing study report the assessee has stated assessee to be a manufacturing company which undertakes full-fledged risk but in fact it is functioning at the IT(TP)A No.1830/Bang/2024 Page 14 of 22 instruction of its associated enterprises who supplies goods to the assessee which are further modified, manufactured, assembled as per the direction of its associated enterprises and does not make any research and development value addition to the product. Therefore in no circumstances it can be compared d with the assessee company. He further submitted that the assessee has total revenue from the operations of ₹ 65.28 crores out of which sale to foreign associated enterprise is ₹ 43.74 crores and domestic associated enterprises of ₹ 12.08 crores. The supply to non-AE segment is merely 9.45 crores. It was further submitted that the operating margin of the assessee on transaction with the foreign associated Enterprises is 11.27%, with domestic associated enterprises is 1.78% and with non-AE segment is 2.92% resulting into an overall margin of 6.40%. Thus, the margin with the foreign associated enterprises’ segment is quite higher than the transaction with non-AE segment, therefore also no adjustment should have been made. 23. The learned departmental representative vehemently supported the orders of the learned lower authorities. It was submitted that the functions of the assessee is stated in the transfer pricing study report clearly shows that the assessee is a full-fledged manufacturer and therefore it is comparable with the comparable selected by the learned transfer pricing officer. He submitted that the assessee has also failed to show that how the research and development activities of the comparable companies has resulted into higher IT(TP)A No.1830/Bang/2024 Page 15 of 22 margin earned by the comparable. With respect to the transfer pricing study report furnished by the assessee, it was stated that it has not used any relevant filters and therefore it has been rightly rejected by the learned TPO. The learned departmental representative vehemently stated that the submission made by the assessee by the letter dated 21 April 2025 is clearly different from the transfer pricing study report prepared by the assessee where the functions shows that the assessee is a full-fledged risk bearing manufacturer. 24. The learned authorised representative accepted that in the transfer pricing study report perhaps the functions of the assessee are not correctly captured but now as per the note dated 21 April 2025 submitted on 22 April 2025 may be considered. 25. We have carefully considered the rival contention and perused the orders of the learned that lower authorities. As stated above the functions by the assessee as per letter dated 24 April 2025 which clearly show that assessee is merely an assembler of the product as per the direction of the associated enterprises. The assessee does not have product conceptualisation capability, business development capability, quality standards capabilities, research and development capabilities. It also manufactures electro- optic product which are used as a components and imports by the associated enterprises to be integrated and process to manufacture their final products which is sold by the associated enterprise to IT(TP)A No.1830/Bang/2024 Page 16 of 22 their end clients. The sales orders from the associated enterprises are also coupled with all necessary inputs concerning the specification and details of the products to be manufactured in accordance with the requirements of the customers which only the associated enterprises decide. The designs are provided by the associated enterprises and based on these designs the assessee estimates the cost and submits a proposal to its associated enterprises which is when approved by the associated enterprise sale order is issued and the execution is carried out as per the agreed delivery plan. The raw material is also sourced from the associated enterprises mostly and the assessee’s production team considers the proprietary nature of the raw materials sourced from the associated enterprises which are imported from associated enterprises at no cost. We have also been shown the invoices for importing goods, which clearly shows that only for the purpose of the customs duty are those invoices. Subsequently when the assessee completes the job, those materials are re-exported to the associated enterprises. The manufacturing process is also divided into two different segments of limited production and full-fledged production. Even in the full-fledged production made by the assessee the quality parameters are controlled by the associated enterprises. Even the raw materials procured by the assessee from local sources are also identified with the help of the associated enterprises only based on design requirement. Many times, the suppliers are also identified and referred to by the associated IT(TP)A No.1830/Bang/2024 Page 17 of 22 enterprises. When the parts are imported by the assessee from the associated enterprises they are imported on a free of cost basis. During the import process the value of the goods imported is solely declared for custom purposes and value is intimated to the customs authority where the end products are exported. Outbound logistics is also taken care of by the associated enterprises. This is the correct profile of the assessee. 26. In the transfer pricing study report the assessee has shown it to be a full-fledged manufacturer carrying on all the risks and rewards of manufacturing, including research and development. Regarding the functions of the assessee, the learned TPO has reproduced from the transfer pricing study report which is as under:- 2.1.3 Functions performed by Alpha Elsec India: i Deciding the corporate strategy: It involves defining the scope and direction of the corporation and the way the business operations work together to achieve particular goals of the business as a whole. In relation to its manufacturing activity, the Company is solely responsible for undertaking corporate strategy function. At the same time, the Company also ensure that its corporate strategies are in line with the overall strategy of the Group. ii. Procurement of raw materials: The activities in relation to procurement of raw materials and various input products (utilized in manufacturing process) are undertaken by the Company as per its requirements. In order to ensure the quality products, the Company's AE(s) sometimes refers certain supplier of the raw materials. In this connection, the Company's management has IT(TP)A No.1830/Bang/2024 Page 18 of 22 represented that it deals and negotiates the price with referred vendors on independent basis without having the involvement of its AE(s). iii. Manufacturing of goods: The Company's manufacturing activity is predominantly divided in two categories, viz. limited production and full-fledged production. iv. Warehousing and Inventory management: Functions relating to receipt, storage and issuing the raw material for production are performed by Alpha Elsec India. The Company maintains the inventory of raw materials on lead time basis. However, it does not maintain the inventory of finished goods as the products are manufactured and sold based on the requisition made by the AE(s). v. Logistics: The functions pertaining to inbound Logistics (in relation to procurement of raw material) are generally taken care of by the supplier of the products. Op the other hand, the Company's AE(s) are responsible for undertaking activities in relation to outbound logistics (i.e. in case of sale of finished goods), which includes packing, shipping, insurance, custom clearance and other necessary functions to coordinate the movement of finished goods from the Company's factory to the AEs premises. vi. Pricing and Negotiation: The price of finished goods sold to the AE(s) is mutually decided based on negotiation process amongst the Company arid its AE(s). While doing this, various business and commercial factors such as nature of the product; logistic; 'availability of raw material; and the ALP of the goods provided in the prevailing market conditions etc. are kept in mind. Thus, both the Company and its AE(s) equally participate in this function. vii. Invoicing and collection: Alpha Elsec India sold finished goods to its AE(s) on `Inco' basis. It is an arrangement whereby the liability of the Company gets over when the IT(TP)A No.1830/Bang/2024 Page 19 of 22 finished goods are out for delivery from the Company's factory premises. Revenue, in such a scenario, is generally recognised in the books of the Company as and when the finished goods cross the Company's factory premises. Subsequent follow-up for the realization of outstanding is done by Alpha Elsec India. The Company's AE(s), on the other hand, are responsible for invoicing to the ultimate customers. viii. Warranty and replacement support: In the instant case, the after-sales support, in relation to fix any breakdown/technical glitches that AE may face, is responsibility of the Company. In the event if the technical fault cannot be repaired and the finished product is within the warranty period, the immediate responsibility for replacing such faulty product lies with the Company. ix. General administration and management functions: The routine activities to assist in the day-to-day management of the organisation will be performed in house by Alpha Elsec India by the support team. The functions addressed below are drivers of every business and are indispensable in the economic environment. x. Provision of equipment maintenance services: During the financial year, Alpha Elsec India rendered services on behalf of its AEs to border security force within India. The services rendered are in the nature of maintenance of equipment.\" 27. On verification of the functional profile, it is apparent that the learned transfer pricing officer has not looked into the functions performed by the assessee but has merely gone on the basis of the transfer pricing study report and without verifying the same. There is no discussion about the research and development activities of IT(TP)A No.1830/Bang/2024 Page 20 of 22 the assessee, how the company operates. Thus, The learned TPO has also believed the functional profile of the assessee stated in the transfer pricing report which is not correct. There is no discussion in TP Order of the risk involved in the whole process undertaken by the assessee as well as by the AE. Had this exercise been carried out by the learned TPO, he would have reached at a conclusion that assessee is merely an assembler who does not have research and development activities but is merely doing assembling or manufacturing activity as per the direction of its associated enterprises. It is more akin to a job work or contract manufacturer. 28. Thus, without analysing the functions carried out by the assessee properly and merely looking at the transfer pricing study report prepared by the assessee which is far from the facts produced before us, the learned TPO has determined the arm’s-length price of the international transactions comparing it with large scale companies who have their own independent research and development activities and have higher turnover by multiple times. 29. As the functions carried out by the assessee explained before us, a fresh look at the comparability analysis is required. In view of the above facts, the whole issue with respect to the transfer pricing adjustment is restored back to the file of the learned transfer pricing officer/learned assessing officer with a direction to the assessee to put before the learned TPO complete manufacturing process with pricing, risk assumed by the parties, the nature of marketing IT(TP)A No.1830/Bang/2024 Page 21 of 22 activities carried out by the assessee, research and development activities etc, identification of the customers, identification of the suppliers and respective job cards. The assessee is also directed to produce the fresh comparability analysis after conducting the search relevant to the FAR of the assessee and then determine the arm’s-length price of the transaction. The learned TPO may examine the same and decide the issue afresh after granting an opportunity of hearing to the assessee. Thus Ground No 3 to 22 are allowed with above directions. 30. Ground No 1 and 2 are general in nature, Ground no 24 to 29 are also consequential or general in nature and therefore dismissed. 31. Ground no 23 is with respect to taking the correct income for the purposes of computation, Ld. AO is directed to verify and take the correct income. 32. In the result, the appeal filed by the assessee is partly allowed for statistical purposes. Pronounced in the open court on this 18th day of July 2025. Sd/- Sd/- (SOUNDARARAJAN K.) (PRASHANT MAHARISHI) JUDICIAL MEMBER VICE PRESIDENT Bangalore, Dated, the 18th July 2025. /Desai S Murthy / IT(TP)A No.1830/Bang/2024 Page 22 of 22 Copy to: 1. Appellant 2. Respondent 3. Pr. CIT 4. CIT(A) 5. DR, ITAT, Bangalore. Bye-order Assistant Registrar ITAT, Bangalore. "