2015 (7) TMI 1110 - AT - Income Tax

Intra group services rendered by the AE to the assessee - whether the activities are at arm s length? - mark-up charged by the AE on the cost - Held that - The CIT(A) has already disallowed the mark-up and determined the ALP at cost of the group services which has been contributed by the assessee. We further note the CIT(A) has noted that the fact for assessment year 2008-09, the payment of intra group services was accepted y the TPO at arm s length under the TNMM where the percentage of profit on cost of assessee at entity level was only 16.31% in comparison to the current years margin at 33.31%. For the assessment year 2008-09, the TPO has accepted the payment made for intra group services wherein held that the payment is made towards cost contribution and the taxpayer has also submitted the payment is in nature of reimbursement of allocated costs which amounts to 6.99% of the local allocation made the Filtrona UK Limited to all the AEs at a mark-up of 5.8%. As it is evident from the facts and submissions, the payment is clearly for the cost contribution and therefore, there should not be any mark-up on such allocations made by the Parent Company. Hence, for the same reason, the mark-up of 5.8% paid towards cost contribution is not at arm s length and the ALP for the markup is treated as nil. No error or illegality in the order of the CIT(A) qua this issue - Decided against revenue

Summary

Issues:
Determining arm's length price for intra group services rendered by the AE to the assessee.

Analysis:
The dispute in this case revolves around whether the intra group services rendered by the AE to the assessee are at arm's length. The assessee had various international transactions, including intra group services, which were clubbed to determine the arm's length price under the Transaction Net Margin Method (TNMM). The TPO accepted TNMM for all transactions except for intra group services. The TPO determined the ALP of group services at nil, arguing that these services did not increase the profit margin of the assessee. The assessee made the payment for intra group services with a markup of 5.8%, which the TPO disallowed entirely. The CIT(A) allowed the payment for intra group services at cost, excluding the markup, and directed the AO/TPO to adjust only to the extent of the markup on cost.

The ITAT noted that both the AO and the TPO did not dispute the actual cost of services contributed by the assessee, even though the AE allocated the cost with a markup. The TPO's determination of ALP at nil was deemed contrary to transfer pricing provisions and rules under the Act. The ITAT emphasized that the dispute was narrowed down to the ALP of the services received by the assessee, particularly focusing on the markup charged by the AE on the cost. The CIT(A) had already disallowed the markup and determined the ALP at the cost of group services contributed by the assessee. Additionally, the ITAT highlighted a similar case for the assessment year 2008-09, where the TPO accepted the payment for intra group services as reimbursement of allocated costs without a markup, indicating consistency in treatment.

Based on the facts and circumstances of the case, the ITAT found no error or illegality in the CIT(A)'s decision to accept the payment for intra group services at cost. Consequently, the appeal filed by the revenue was dismissed, affirming the CIT(A)'s order.

In conclusion, the ITAT upheld the CIT(A)'s decision regarding the arm's length pricing of intra group services, emphasizing the importance of considering the actual cost of services and rejecting any excessive markups.