2020 (7) TMI 822 - AT - Income Tax

TP adjustment made on account of intra-group services - assessee has purportedly received support services from its regional headquarter primarily in the areas of management of human resources sale debt management and collection advertisement and marketing legal services etc. - TPO applied benefit test on the intra-group services received by the assessee and determined the ALP of such services at Nil - HELD THAT - We find that the TPO has failed to properly analyse the support services received by the assessee from its regional headquarter - The settled legal position now is that the ALP of intra group services cannot be determined at Nil . The benefit test analysis which was earlier accepted has now been held to be redundant. The Tribunal in the case of Merck Ltd. 2016 (3) TMI 1105 - ITAT MUMBAI has held the concept of benefit test as irrelevant. The Tribunal held that by applying befit test ALP of intra-group services cannot be determined at Nil . Thereafter in various decisions by the Tribunal the application of benefit test analysis has been rejected. Thus we deem it appropriate to restore the issue back to the file of TPO for fresh adjudication and for determination of ALP of intra-group services by applying most appropriate method specified in section 92C of the Act. Ground No.1 of the appeal is thus allowed for statistical purposes. Adjustment in respect of reimbursement of expenses - Since we have restored ground No.1 to the TPO we deem it appropriate to restore ground No.2 of the appeal as well to the TPO for de-novo adjudication after affording reasonable opportunity of hearing to the assessee. Adjustment made in respect of loans extended by the assessee to domestic group companies held as deemed International Transaction - HELD THAT - A bare perusal of the meaning of international transaction defined in section 92B (1) would show that a transaction would fall within the ambit of international transaction if either or both the associated enterprises are nonresident. In the present case none of the AEs i.e. neither the assessee nor the domestic group companies with which the assessee had entered into transaction are non-residents. All the companies are domestic entities and are subject to tax under the provisions of the Act. In the present case the authorities below have failed to take note of the fact that the transactions in question are within domestic entities only. No overseas entity is involved in the transaction. Unless the conditions set out in subsection (1) are satisfied the provisions of subsection (2) cannot be invoked. The authorities below in the present case have erred in invoking deeming fiction solely on the premise that since shareholders of overseas holding company are holding shares of the assessee and AEs in substance the transaction between the assesse and the domestic group entities would fall within the ambit of deemed international transaction . Deeming provisions cannot be invoked by expanding the latitude of expressions used in the section. The authorities below have failed to take into consideration the fact that all group entities are companies incorporated in India having separate legal existence. Except for common shareholding no material has been relied on by the TPO/DRP to substantiate that the transaction between the entities was influenced by the overseas holding company. The findings of the lower authorities are based on conjectures and surmises. The authorities below have travelled too far to bring the transactions between the assessee and domestic entities within the domain of deemed international transaction under section 92B (2) of the Act (prior to amendment). We find merit in ground no.3 of the appeal according the same is allowed.

Summary

Issues Involved:
1. Adjustment on account of intra-group services.
2. Adjustment on account of reimbursement of expenses.
3. Adjustment in respect of services rendered to domestic AEs held as 'deemed International Transactions'.

Issue-wise Detailed Analysis:

1. Adjustment on Account of Intra-Group Services:
The assessee paid for intra-group services rendered by the regional headquarters, covering areas such as finance, management, operations, global sales, marketing, public relations, and legal services. The Transfer Pricing Officer (TPO) applied the Comparable Uncontrolled Price (CUP) method to benchmark the Arm’s Length Price (ALP) of these services and subsequently applied the 'benefit test', determining the ALP of such services as Nil. The Tribunal found that the TPO failed to properly analyze the support services received by the assessee and noted that the settled legal position is that the ALP of intra-group services cannot be determined at Nil. The Tribunal referenced the case of Merck Ltd. v. Dy. CIT, where the application of the benefit test was deemed irrelevant. Consequently, the Tribunal restored the issue to the TPO for fresh adjudication using the most appropriate method specified in section 92C of the Act, allowing ground No.1 for statistical purposes.

2. Adjustment on Account of Reimbursement of Expenses:
This issue is connected to the first issue as the adjustment made on account of alleged reimbursement of expenses pertains to intra-group services. Since the Tribunal restored the first issue to the TPO, it deemed it appropriate to restore the second issue as well for de-novo adjudication after affording a reasonable opportunity of hearing to the assessee, in accordance with the law. Ground No.2 was thus allowed for statistical purposes.

3. Adjustment in Respect of Services Rendered to Domestic AEs Held as 'Deemed International Transactions':
The TPO treated transactions between the assessee and its domestic AEs as deemed international transactions because the holding company of the assessee and the domestic AEs is based in Mauritius. The Tribunal noted that for a transaction to be considered an international transaction under section 92B(1), at least one of the associated enterprises must be a non-resident. In this case, all entities involved were domestic, and the TPO/DRP failed to substantiate that the transactions were influenced by the overseas holding company. The Tribunal referenced the case of CIT vs. Kodak India (P) Ltd., where it was held that transactions between domestic entities do not fall within the definition of 'International Transaction' under section 92B(2) prior to its amendment. The Tribunal concluded that the authorities had erred in invoking the deeming fiction and allowed ground No.3 of the appeal.

General Grounds:
Ground No.4 was general in nature and required no adjudication.

Conclusion:
The appeal of the assessee was partly allowed. The Tribunal restored the issues related to intra-group services and reimbursement of expenses to the TPO for fresh adjudication and allowed the appeal regarding the adjustment of services rendered to domestic AEs. The order was pronounced beyond the 90-day period due to extraordinary circumstances caused by the COVID-19 pandemic lockdown.