The Mumbai Bench of the Income Tax Appellate Tribunal (ITAT) has held that a taxpayer’s claim for a COVID-19-related transfer pricing adjustment cannot be rejected merely on the general ground that the pandemic affected all enterprises. 

The bench of Beena Pillai (Judicial Member) and Jagadish (Accountant Member) observed that while the pandemic constituted a general economic circumstance, its impact need not have been identical for every enterprise, and a claim based on exceptional costs must be examined on the basis of actual expenditure, supporting evidence and the position of comparable companies.

The assessee challenged an aggregate upward transfer pricing adjustment of ₹1,95,63,658. Of this, ₹1,30,47,605 related to the preparation of US tax returns and secondment charges, while ₹65,16,053 related to software support services. The assessee also disputed the treatment of export incentives and foreign-exchange gains while computing margins and challenged the rejection of the Comparable Uncontrolled Price (CUP) method for software support services. 

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The company is a wholly owned subsidiary of SurePrep LLC, USA, and is engaged in preparing US tax returns and rendering software support services. It had filed a revised return declaring total income of ₹5,19,82,500. Following scrutiny, its international transactions were referred to the Transfer Pricing Officer for determination of their arm’s length price. 

For the US tax return preparation and secondment segment, the TPO applied the Transactional Net Margin Method (TNMM). The assessee’s operating margin was taken at (-)2.27%, against the arithmetic mean margin of 7.33% of the comparables, resulting in a proposed adjustment of ₹1,30,47,605. A further ₹65,16,053 adjustment was proposed for software support services, taking the total adjustment to ₹1,95,63,658. 

Assessee Cites Exceptional Costs During COVID-19

Before the Tribunal, the assessee argued that the relevant year had been materially affected by the COVID-19 pandemic. Due to the sensitivity of client information and stringent confidentiality obligations, it claimed that employees were required to continue working from office premises.

According to the assessee, this prevented it from securing the savings in rent, electricity and conveyance that enterprises operating under work-from-home arrangements might have enjoyed. These costs, it argued, were extraordinary and warranted an appropriate transfer pricing adjustment in accordance with OECD guidance. 

The Revenue opposed the claim, arguing that COVID-19 affected enterprises generally and that a special adjustment could not be granted merely on the basis of a general assertion. It maintained that the segmental margins had been correctly computed. 

Pandemic’s Impact Need Not Be Identical for Every Enterprise: ITAT

The ITAT held that merely because the assessment year fell during the pandemic period would not automatically entitle an assessee to a COVID-19 adjustment. At the same time, however, the claim could not be rejected simply by stating that COVID-19 affected everybody.

The Tribunal observed that although the pandemic was a general economic circumstance affecting both the tested party and comparable enterprises, “its impact need not have been identical in every case.”

According to the Bench, a specific adjustment can be permitted where the assessee identifies the additional or exceptional costs actually incurred because of the pandemic, establishes that such expenditure did not form part of normal operating costs, and demonstrates that the same cost or economic impact was absent from, or materially different in, the comparable enterprises. 

In the present case, the assessee had explained that confidentiality requirements compelled employees to attend office. However, the Tribunal found that the lower authorities had not examined the supporting evidence, the precise expenditure claimed as exceptional, or the manner in which such expenditure was treated in the comparable companies.

The Tribunal therefore held that the claim required factual verification and could not be rejected only on the observation that every enterprise faced the pandemic. 

Uniform Treatment of Forex Gain and Depreciation Essential Under TNMM

The Tribunal also found shortcomings in the computation of the profit level indicator.

It emphasised that a reliable comparison under TNMM requires operating and non-operating items to be classified uniformly for both the tested party and the comparable companies. Significantly, the DRP itself had recorded uncertainty over whether the margins of comparable companies were computed by including or excluding export incentives and foreign-exchange items.

The final assessment order also did not contain comparable-wise workings establishing parity of treatment. Similarly, the record failed to demonstrate whether depreciation was treated consistently while calculating the assessee’s margin and those of the comparable companies. 

On foreign-exchange fluctuations, the ITAT observed that gains or losses arising from revenue transactions such as trade receivables and trade payables connected with the rendering of services ordinarily have a direct nexus with operating activities, although their precise character must be determined from the underlying transaction.

Likewise, depreciation would constitute an operating cost where it relates to assets employed in the relevant operating activity.

The Tribunal stressed that parity of treatment is essential. Thus, if foreign-exchange fluctuations and depreciation are treated as operating items for the assessee, corresponding items in the comparables should also be treated as operating. Conversely, if they are excluded for the assessee, they should also be excluded for comparable companies, subject to reliable data and permissible adjustments under Rule 10B. 

Consequently, the ₹1,30,47,605 adjustment was restored to the Assessing Officer/TPO for fresh examination. The authorities were directed to examine the COVID-19 adjustment with reference to actual expenditure, contemporaneous evidence and corresponding treatment in comparable enterprises. They were also directed to recompute margins using identical and consistent classifications. Where reliable comparable data or reasonably accurate adjustments are unavailable, the suitability of the affected comparable would have to be reconsidered. 

Internal CUP Cannot Be Rejected Solely on Employee-Cost Difference

The Tribunal separately dealt with the ₹65,16,053 adjustment relating to software support services.

The assessee contended that substantially similar software support services were rendered both to its Associated Enterprise (AE) and to an independent non-AE customer. It therefore argued that internal CUP represented the most direct and reliable method for determining the arm’s length price.

The TPO had rejected CUP after noticing that employee cost in the AE segment was 3.13 times that of the non-AE segment. The assessee argued that Rule 10B(1)(a) was concerned with comparing the prices charged for services rather than merely comparing cost bases or profit margins. 

Examining the issue, the ITAT observed that internal CUP compares the price charged in a controlled transaction with that charged in a comparable uncontrolled transaction, after reasonably accurate adjustments for material differences.

Therefore, where an assessee provides software support services both to its AE and an independent customer, an internal CUP would ordinarily constitute a direct benchmark if the transactions are sufficiently comparable and reliable adjustments can be made. 

The Tribunal cautioned, however, that merely describing the services as similar would not be enough. The authorities must examine the contractual scope, actual functions performed, assets employed, risks assumed, employee skill levels and deployment, volume and duration of transactions, geographic markets, business circumstances and other material terms. 

Employee Cost Relevant, But Not Conclusive

The ITAT acknowledged that a substantial difference in employee costs between AE and non-AE segments was a relevant indicator and warranted examination of whether the nature, intensity or value of the respective services was materially different.

However, it categorically held that employee cost by itself does not conclusively establish that the prices are incomparable.

According to the Tribunal, CUP could not be rejected merely by comparing the taxpayer’s cost bases without examining the underlying agreements, invoices and services actually rendered. Equally, the assessee’s assertion that the services were similar could not simply be accepted without verification of the supporting material. 

The Tribunal found that the orders of the lower authorities did not contain the necessary transaction-by-transaction analysis.

It further observed that if CUP were ultimately found unreliable, the selection of TNMM as the most appropriate method would have to be supported by a reasoned analysis under Section 92C read with Rule 10C. The benchmarking exercise must also compare like profit-level indicators and should not compare a net margin with a mark-up used merely for fixing the invoice price. 

Accordingly, the ₹65,16,053 adjustment was also set aside and restored to the AO/TPO. The authorities were directed to examine agreements and invoices relating to the AE and non-AE, the FAR analysis and the actual nature of the services. If the controlled and uncontrolled transactions are found comparable and material differences can reasonably be adjusted, the Tribunal directed that internal CUP should be applied. 

If CUP is found unreliable, the AO/TPO must record specific reasons, determine the most appropriate method in accordance with Section 92C and Rule 10C and carry out fresh benchmarking after giving the assessee a reasonable opportunity of being heard. Both transfer pricing grounds were consequently allowed for statistical purposes. 

ITAT Rejects Limitation Challenge to Final Assessment Order

The assessee had additionally contended that the final assessment order was barred by limitation because the time prescribed under Section 153 allegedly expired on March 31, 2025, whereas the final order was passed on October 10, 2025.

The Revenue relied on Section 144C(13A), retrospectively inserted by the Finance Act, 2026, to contend that once the draft assessment order had been forwarded within the limitation period prescribed under Section 153, the time for passing the final assessment order following DRP directions was governed by Sections 144C(12) and 144C(13). 

Accepting this contention, the ITAT explained that where the draft assessment order under Section 144C(1) is forwarded within the period permitted by Section 153, the final assessment does not become time-barred merely because it is completed after the general Section 153 limitation period.

In this case, the draft assessment order was passed and forwarded on February 10, 2025, before the Section 153 deadline of March 31, 2025. The DRP subsequently issued directions on September 29, 2025. Under Section 144C(13), the AO was required to pass the final order within one month from the end of the month in which those directions were received.

Since the final assessment order was passed on October 10, 2025, the Tribunal held that it was within the permissible period. The limitation challenge was accordingly dismissed. 

Appeal Partly Allowed for Statistical Purposes

Ultimately, the Mumbai ITAT restored both transfer pricing adjustments—aggregating ₹1.95 crore—to the AO/TPO for fresh examination in accordance with its directions, while rejecting the assessee’s challenge to the final assessment order on limitation.

The appeal was therefore partly allowed for statistical purposes. 

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