2020 (2) TMI 1608 - AT - Income Tax

TP Adjustment - determination of the arm s-length price of the intra group services at nil - HELD THAT - TPO has determined the arm s-length price of the intra group services at nil without applying any method of benchmarking the arms length price. Without applying proper method of benchmarking of the arms length price of the international transaction in accordance with the method prescribed in the act the Transfer Pricing adjustment is not sustainable. We find that the authorities below have erred in not appreciating the documents submitted by the assessee. While the TPO has not adopted any of the methods prescribed for benchmarking the international transaction, he has erred in applying the benefit test. On the other hand the assessing officer while purporting to invoke section 37(1) contradicted himself by stating that that he is not applying the benefit test, rather by raising issues of the documentation he has stepped into the shoes of the Transfer Pricing officer. DRP has also erred in holding that the agreement should have been entered into by the parties in a particular manner by incorporating several other clauses. In our considered opiionn here the dispute resolution panel exceeded its jurisdiction on this account. The format of agreement between the parties is not a subject matter of decision of DRP. The dispute resolution panel further erred in agreeing with the Transfer Pricing officer for application of benefit test for computing the arms length price of the international transaction. Accordingly in our considered opinion the Transfer Pricing adjustment is liable to be set aside as appropriate method of benchmarking the arms length price of international transaction as per the statute has not been adopted as held in the case of Johnson Johnson 2017 (4) TMI 1281 - BOMBAY HIGH COURT Invoking of benefit test in transfer pricing adjustment is also against the ratio laid down by honourable Bombay High Court in the case of Lever India Exports Ltd. 2017 (2) TMI 120 - BOMBAY HIGH COURT Appeal filed by the assessee stands allowed.

Summary

Issues:
Transfer pricing adjustment for payment of management costs to Associated Enterprises (AE) at NIL, Benefit test application, Documentation requirements, Jurisdiction of Dispute Resolution Panel (DRP)

Transfer Pricing Adjustment for Management Costs:
The assessing officer determined the arm's length price of the international transaction of payment made for administrative and management services at NIL, contrary to the amount claimed by the assessee. The Transfer Pricing Officer (TPO) reasoned that the assessee failed to provide primary evidence demonstrating the actual rendering of services by the AE and the quantification of services at arm's length conditions. The TPO highlighted the lack of evidence on the utility and quantification of services, emphasizing the necessity of actual expenditure details. The TPO also noted that the master agreement provided a broad-brush approach without specific cost details. The assessing officer disallowed the expenses under Income-tax Act and Transfer Pricing Provisions due to insufficient evidence and failure to establish the reasonableness of expenses.

Benefit Test Application:
The TPO applied the benefit test to ascertain whether the services were beneficial to the recipient and if they were actually received. The TPO emphasized the importance of evidence of service receipt for payment allowance under Income-tax Act and Transfer Pricing Provisions. The assessing officer, while discussing the disallowance of expenses, focused on the lack of specific details supporting the derivation of payments. The DRP upheld the TPO's decision citing inappropriate agreement format, lack of details, and non-compliance with the benefit test.

Documentation Requirements:
The assessing officer concluded that the issue was not solely about benefit under section 37(1) but also pertained to documentation. The authorities highlighted the importance of proper documentation and evidence to support the derivation and reasonableness of expenses. The failure to provide specific details and evidence led to the disallowance of expenses under relevant sections of the Income-tax Act.

Jurisdiction of Dispute Resolution Panel (DRP):
The ITAT Mumbai found errors in the actions of the TPO, assessing officer, and DRP. The TPO's failure to apply any benchmarking method for determining the arm's length price and the incorrect application of the benefit test were deemed unsustainable. The ITAT referenced precedent cases and jurisdictional High Court rulings to emphasize the necessity of proper benchmarking methods and the inapplicability of the benefit test in transfer pricing adjustments. The ITAT concluded that the DRP exceeded its jurisdiction by delving into the format of the agreement and agreeing with the benefit test application. Ultimately, the ITAT set aside the orders of the authorities below and decided in favor of the assessee, allowing the appeal.

This detailed analysis of the judgment highlights the key issues of transfer pricing adjustment, benefit test application, documentation requirements, and the jurisdiction of the Dispute Resolution Panel, providing a comprehensive understanding of the legal reasoning and outcomes in the case.