The Chennai Bench of the Income Tax Appellate Tribunal (ITAT) has held that the benefit of the notified 3% transfer pricing tolerance cannot be denied merely because a single internal comparable is used to determine the arm’s length price and deleted a ₹11.45 crore adjustment concerning the sale of two-wheelers and three-wheelers by TVS Motor to its associated enterprises.

The bench of Aby T. Varkey (Judicial Member) and Padmavathy S. (Accountant Member) also directed the Transfer Pricing Officer (TPO) to reduce the corporate guarantee fee rate from 1% to 0.5%. Separately, it remitted the adjustment for interest on outstanding export receivables for verification of the company’s claim that it did not charge interest from unrelated export customers either.

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The appellant/assessee, which manufactures and sells two-wheelers, three-wheelers, spare parts and related products, challenged the final assessment order dated January 31, 2026, passed under Section 143(3) read with Section 144C(13) of the Income Tax Act, 1961.

During scrutiny, the Assessing Officer referred the company’s international transactions to the TPO for determination of their arm’s length price.

Following the proceedings before the Dispute Resolution Panel (DRP), the final assessment incorporated three disputed transfer pricing adjustments: ₹11,44,80,619 for vehicle sales, ₹72,67,534 for corporate guarantee fees, and ₹2,28,42,451 for interest on outstanding receivables.

The company challenged these adjustments before the Tribunal.

For its two-wheeler and three-wheeler segment, the company adopted the Transactional Net Margin Method (TNMM), using operating profit divided by operating cost as the profit level indicator.

In its transfer pricing study, the company reported a margin of 4.98% for transactions with associated enterprises, compared with 2.18% for its non-associated enterprise segment, comprising exports to unrelated customers and domestic sales. It therefore maintained that the related-party transactions were at arm’s length.

The TPO questioned the allocation of depreciation between the segments. The company explained that it maintained plant-wise fixed asset registers and allocated depreciation according to the actual use of assets for the respective segments.

The TPO did not accept this explanation and recomputed the margins. Following revised depreciation allocation pursuant to the DRP proceedings, the associated enterprise segment’s margin was determined at minus 0.46%, while the non-associated enterprise and domestic sales segment’s margin stood at 1.31%.

The latter margin was used as the internal benchmark to make the adjustment.

Before the Tribunal, the company argued that the variation fell within the notified 3% tolerance and that the vehicle sales adjustment should consequently be deleted.

In a report sought by the bench, the TPO opposed this claim on procedural grounds and on merits. The officer maintained that the DRP’s directions had not provided for the tolerance benefit and that the final assessment had to conform to those directions.

On merits, the TPO argued that the tolerance applied only where more than one arm’s length price was determined and the arithmetic mean of those prices was adopted.

Since the company’s associated enterprise margin had been compared with a single internal margin, the officer contended that there were no multiple prices or arithmetic mean to which the tolerance could apply.

The Tribunal rejected the TPO’s interpretation.

It observed that the officer had relied on the company’s non-associated enterprise and domestic sales segment as an internal comparable to determine the arm’s length margin. Having used that segment for benchmarking, the TPO could not simultaneously claim that no comparable existed for deciding eligibility for the tolerance benefit.

Examining Rule 10CA(7), the bench held that the provision did not impose a further requirement that the dataset contain more than one value before the tolerance proviso could operate.

The Tribunal reasoned that the arithmetic mean of a dataset containing a single value remains that value itself. The tolerance proviso therefore attaches to the arithmetic mean irrespective of the number of values in the dataset.

It held that the TPO’s insistence on multiple comparables did not follow from the plain language of the rule.

After examining the company’s workings, the bench found that the variation fell within the 3% tolerance notified on June 28, 2022. Consequently, the declared transaction price was deemed to be the arm’s length price.

The Tribunal also relied on its coordinate bench’s decision in Ambattur Clothing Ltd. v. DCIT, dated July 31, 2025, which had considered the tolerance benefit in an internal TNMM comparison.

It directed deletion of the ₹11,44,80,619 vehicle segment adjustment. The remaining grounds concerning that adjustment, including depreciation allocation and treatment of export incentives, became academic and were not separately adjudicated.

The second dispute concerned a corporate guarantee provided for an associated enterprise’s outstanding loan of ₹151.58 crore.

The TPO initially adopted a guarantee rate of 1.95%, based on average Indian bank guarantee rates. The DRP reduced the rate to 1% for the actual guarantee exposure period of 175 days.

The company relied on the Tribunal’s decision in its own case for assessment year 2013–14, where a rate of 0.5% had been adopted.

Finding the facts identical, the bench followed the earlier decision and directed the TPO to restrict the corporate guarantee fee rate to 0.5% and recompute the adjustment accordingly.

The earlier decision had discussed the distinction between commercial bank guarantees and corporate guarantees issued by a holding company for its associated enterprise.

The third issue concerned outstanding receivables of ₹314.06 crore from associated enterprises.

The TPO had treated the outstanding balance as a loan and initially computed notional interest at 3.84%, applying LIBOR plus 350 basis points after allowing a 60-day credit period.

The company argued that it did not charge interest on outstanding receivables from unrelated customers and that imputing interest only on related-party receivables was therefore unjustified.

It relied on Elgi Rubber Company Ltd. v. DCIT, decided on July 7, 2026. That decision had considered the relevance of a consistent policy of not charging interest from both related and unrelated customers, together with the arm’s length treatment of the underlying transactions.

During the hearing, TVS Motor submitted a letter stating that no interest had been charged on outstanding export receivables from non-associated enterprise customers during the relevant year.

The Tribunal held that this assertion required documentary verification. It therefore remitted the issue to the TPO, directing that no interest should be charged if the company substantiated its claim concerning unrelated export customers.

The receivables adjustment was thus not finally deleted; its treatment depends on verification of the supporting evidence.

The Tribunal deleted the vehicle sales adjustment, directed recomputation of the corporate guarantee adjustment at 0.5%, and remitted the receivables issue for verification. It formally recorded the appeal as allowed for statistical purposes.

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