Transfer Pricing: Nil ALP for Support Services & Double TP Adjustment 2026

What Happened?

The Income Tax Appellate Tribunal (ITAT) Mumbai recently delivered a significant ruling on transfer pricing involving the assured-margin model. The tribunal deleted a nil Arm's Length Price (ALP) adjustment for support services provided between related entities, while simultaneously allowing working-capital adjustments and excluding functionally dissimilar comparables from the transfer pricing analysis. This decision clarifies how the "real services" doctrine interacts with India's transfer pricing regulations under the Income Tax Act 2025.

Background & Legal Context

Transfer pricing rules under Section 92 of the Income Tax Act 2025 (and previously Section 92 of the 1961 Act) require that transactions between related parties must be valued at Arm's Length Price (ALP). The ALP is determined by comparing related-party transactions with comparable transactions between unrelated parties.

The Assured-Margin Model is a transfer pricing method used when a service provider (typically the parent or holding company) provides support services to a subsidiary. Under this model, the service provider claims to earn a certain assured margin on the cost incurred. However, when the tribunal concluded that services had "nil value" or were merely "real services" (meaning the actual cost incurred without any markup), it created a compliance challenge.

Key sections involved:

• Section 92(1) of IT Act 2025 – Definition of ALP and transfer pricing obligation
• Section 92C – Methods to compute ALP (Comparable Uncontrolled Price Method and others)
• Rule 10A of Income Tax Rules 2025 – Documentation requirements for transfer pricing

The tribunal's ruling addresses a critical gap: what happens when the assessing officer adjusts a nil valuation but also makes a separate working-capital adjustment? This creates a situation where the taxpayer faces dual taxation on the same transaction—a clear violation of the "no double taxation" principle embedded in transfer pricing jurisprudence.

What Does This Mean for You?

For Multinational Enterprises (MNEs) and Transfer Pricing:

• Nil Valuation is Risky: If your company claims that related-party support services have nil ALP or zero markup, the revenue authority can now challenge this more aggressively. You must document why these services have no commercial value or why no margin is charged. Merely stating "real services" without proper functional analysis (functions performed, assets employed, risks assumed) will not suffice.
• Double Adjustment Protection: This ruling provides critical protection against double transfer pricing adjustments. If the assessing officer has already adjusted your ALP upward on support services, they cannot simultaneously claim a working-capital adjustment on the same transaction. You can now cite this ITAT judgment to resist dual adjustments during assessment (AY 2025-26 onwards).
• Comparable Selection Matters: The tribunal's decision to exclude "functionally dissimilar comparables" means that when you file your transfer pricing study, you must carefully select comparables that match your company's functions, assets, and risk profile. A software support company cannot be compared with a manufacturing support company, even if both are providing "support services."
• Working Capital Adjustment Implications: The ruling's approval of working-capital adjustments (while disallowing nil ALP) suggests that the tribunal accepts that support services may require working-capital funding. If you provide inter-company services on credit (i.e., you invoice but payment is delayed), the tribunal now recognizes this as a legitimate basis for separate working-capital pricing adjustments under Transfer Pricing regulations.
• Documentation is Critical: Under Rule 10A of IT Rules 2025, your transfer pricing documentation must now clearly separate (a) the ALP adjustment for the service itself, and (b) any working-capital adjustment. If both are lumped together in your documentation, the assessing officer may use this ambiguity to make both adjustments, claiming one is the main ALP and the other is an add-on.

Practical Example: Company A (parent in USA) provides IT support to Company B (subsidiary in India) for ₹50 lakhs annually. Company A claims nil markup (cost = ₹50 lakhs, ALP = ₹50 lakhs). However, Company B pays 90 days late, creating a working-capital gap of ₹12.5 lakhs. The assessing officer may attempt to:

• Adjust the nil ALP to include a 15% markup (₹7.5 lakhs), AND
• Separately adjust for working-capital financing costs

This ITAT ruling now prevents such dual adjustments. You can claim either the working-capital adjustment OR the ALP adjustment, but not both on the same transaction for the same period.

What Should You Do Now?

Immediate Actions (Next 30 Days):

• Review Your Transfer Pricing Study: If you have an ongoing transfer pricing case involving support services or the assured-margin model, review your documentation immediately. Ensure you have clearly separated the ALP valuation from working-capital adjustments. If they are combined, request your TP advisor to file a supplementary study.
• Audit Your Open Years: If you have filed transfer pricing studies for AY 2024-25 or AY 2025-26 where the assessing officer has made both ALP and working-capital adjustments on the same support service transaction, this ruling is now your defensive weapon. File a revision request under Section 139(5) of IT Act 2025 or use it in an appeal before the ITAT.
• Update Your Comparable Database: The emphasis on excluding "functionally dissimilar comparables" means your transfer pricing study must be more rigorous. If you used generic industry comparables, you may need to refine them to match your specific functions and risks.
• Real Services Documentation: If you claim nil or minimal markup on "real services," prepare a detailed functional analysis document explaining: (1) What specific services are provided? (2) Who performs them? (3) What assets are employed? (4) What risks are borne? (5) Why is no margin charged? This burden of proof now rests with you.

Medium-Term Steps (60-90 Days):

• Engage a transfer pricing specialist to rerun your intercompany pricing analysis using this judgment as a reference point.
• If you are under audit, cite this ITAT judgment proactively in your response letters to the assessing officer.
• Consider requesting Advance Pricing Agreement (APA) discussions with the Central Board of Direct Taxes (CBDT) if you have large inter-company service transactions.

Key Takeaways

• Nil ALP valuations for support services are now under greater scrutiny. You must provide robust functional analysis and comparable data to justify zero or minimal markups under the assured-margin model.
• Double transfer pricing adjustments are prohibited. The assessing officer cannot adjust both the ALP and working-capital components for the same support service transaction in the same fiscal year. This protects taxpayers from cumulative TP penalties.
• Comparables must be functionally similar. Generic or dissimilar comparables will be rejected. Your transfer pricing study must use benchmarks that match your specific business functions and risk profile.
• Working-capital adjustments are now recognized as separate from ALP adjustments. If support services are provided on credit terms, you can separately claim financing charges, but not in addition to an ALP markup on the service cost itself.
• This ruling applies to assessment years from AY 2025-26 onwards and can be cited in appeals for prior open years. Update your compliance and documentation strategy immediately to align with this ITAT decision.

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