2021 (4) TMI 1283 - AT - Income Tax

TP Adjustment - Selection of MAM - applying TNMM as selected MAM - HELD THAT - In the present case, for the impugned assessment year, we are not in agreement with selection of different method (CUP) by the TPO for bench marking one element of service, when entire services received by the assessee from its AE are tested at TNMM. In principle, we agree with the arguments of assessee that segregation of one element of services out of bunches of services received by the assessee from its AE and applying different method for bench marking transaction is not correct, most particularly when TPO has accepted transactions of the assessee with its AE are at ALP under TNMM. Fact remains that from the orders of the lower authorities, it was noticed that the TPO wanted the assessee to show that services were actually rendered by its AE to the assessee. Unless, the assessee substantiates its claim with necessary evidence including Invoices, if any, raised by the AE for rendering of services, then the claim of the assessee cannot be accepted. Therefore, we are of the considered view that the issue needs to be set aside to the file of the AO for limited purpose verification of facts with regard to rendering of services by the AE to the assessee in connection with payment of management fees. In case, the assessee produced particulars of actual receipt of services, then the TPO is directed to accept the TP study conducted by the assessee by applying TNMM as the most appropriate method and delete TP adjustment made towards management fees - Appeal filed by the assessee is allowed for statistical purposes.

Summary

Issues involved:
1. Assessment of transfer pricing adjustments on management fees paid to associated enterprises under the Income Tax Act, 1961 for the Assessment Year 2013-14.

Detailed analysis:
1. The appellant challenged the Assessment Order passed by the Assessing Officer, Transfer Pricing Officer, and Dispute Resolution Panel, arguing that the adjustments made were contrary to law, facts, and principles of equity and natural justice. The appellant specifically contested the determination of arm's length price for management services as nil, the failure to follow the directions of the Tribunal in a previous case, and the alleged violation of provisions under section 92 of the Act. The appellant also highlighted discrepancies in the treatment of management services and the lack of consideration for the nature and integral link of these services to the business.

2. The appellant adopted the Transaction Net Margin Method (TNMM) to benchmark its international transactions with associated enterprises. The Transfer Pricing Officer (TPO) accepted TNMM but suggested a downward adjustment on management fees paid to the UK entity, citing lack of evidence of services received and questioning the appropriateness of the method chosen by the appellant. The Dispute Resolution Panel (DRP) upheld the adjustment, emphasizing the need for evidence of services received and the evaluation of each transaction separately. The final Assessment Order incorporated the suggested adjustment, leading to the appellant's appeal.

3. The appellant argued that the issue was settled in their favor based on previous ITAT decisions and the judgment of the Delhi High Court in a similar case. The appellant contended that the TPO and DRP erred in applying the Comparable Uncontrolled Price (CUP) method for the adjustment without sufficient evidence of services received. The appellant emphasized the principle that when TNMM is accepted as the most appropriate method for all transactions, segregating one element for a different method like CUP is incorrect.

4. The Tribunal considered the arguments of both parties and reviewed the lower authorities' orders. While acknowledging the correctness of selecting CUP as the most appropriate method, the Tribunal found that the TPO failed to provide comparables for testing the transactions. The Tribunal agreed with the appellant's stance that segregating one element for a different method was not justified when TNMM was accepted for all transactions with associated enterprises. However, the Tribunal stressed the importance of substantiating claims with evidence, directing a verification of services rendered by the associated enterprise for the management fees. The Tribunal set aside the issue for further verification and potential deletion of the transfer pricing adjustment if evidence of services received was provided.

5. Ultimately, the Tribunal allowed the appeal for statistical purposes, emphasizing the need for substantiating claims with evidence to support transfer pricing adjustments related to management fees paid to associated enterprises. The decision was pronounced in Chennai on April 12, 2021.