2022 (10) TMI 1168 - AT - Income Tax

TP Adjustment - assessee has availed the services of its associated enterprises with respect to payment of regional fees and payment of management fees - assessee has benchmarked services under transactional net margin method - HELD THAT - We find that both these services are in the nature of intra group services. To prove that an independent third party would have paid for the services, assessee need to establish and demonstrate by reasonable level of evidence and documentation that these services were required (need test), those were rendered (rendition test), resulted into benefit to the assessee (benefit test) and also are not duplicative in nature. Any third independent party would not have paid for these services only if same were shareholders activity. Neither the TPO nor the assessee made any effort to demonstrate the same either in TPSR or in TP order. Both these services are required to be looked into from this angle. Payment of royalty claim of the assessee is that despite it is not a manufacturer, same are used as intangibles on the products distributed in Indian market. The royalty payments were also made in terms of the agreement. The claim of the assessee that by paying the royalty, the assessee gets a right to use trademark and knowhow to market the products in India which in term increases its customer base. The assessee also claimed that it s established with the primary object of distribution of modified starch in Indian market. Therefore, it is never to be a manufacturer. Assessee benchmarked all these above three transactions on an aggregate basis using transactional net margin method as the most appropriate method. The claim of the assessee is that net operating margin of the assessee is higher than the comparable companies and therefore it is at arm s length. TPO has determined ALP of royalty at ₹ Nil. The assessee claims that the MNE group has a global royalty policy which is common across all regions. The agreement entered into is also containing standard clauses. Picking one of the standard clause from that agreement cannot be used against the assessee. The royalty payment by using trademark and patent is only for the sale of the product. As assessee is engaged in FMCG food sector, the assessee would require know how about the product information, product specification, application and formulation for its customers. Assessee also stated that, without trademark the assessee would not earn such a markup. TPO has determined the ALP of royalty and other two IGS at ₹Nil. As of these three international transactions have not been benchmarked properly, we set aside them back to file of the learned TPO with direction to the assessee to demonstrate the requisite test for intra group services and as well as the need and benefit of the use of trademark and patent involved in payment of royalty. TPO may verify the evidence documentation produced by the assessee and then determined arm s length price of these three transactions. Appeal filed by the assessee is partly allowed for statistical purposes.

Summary

Issues:
1. Set-off of unabsorbed depreciation
2. Transfer Pricing adjustments

Set-off of unabsorbed depreciation:
The assessee objected to the non-setoff of unabsorbed depreciation against the income for the current assessment year. The appellant raised concerns about the withdrawal of set-off in the current year if allowed in the previous year. The issue revolved around the treatment of unabsorbed depreciation and its impact on the assessment.

Transfer Pricing adjustments:
The dispute centered on an upward adjustment of &8377;1,52,62,664 to the total income of the appellant concerning international transactions with Associated Enterprises (AEs). The Assessing Officer/TPO was criticized for making adjustments without proper justification, disregarding economic and benchmarking analyses, and not considering documentary evidence. The appellant argued for the arm's length price determination based on the Transactional Net Margin Method. The TPO's determination of zero value for certain transactions was contested, especially regarding royalty payments and service fees. The appellant provided detailed explanations and evidence to support the benefits received from these transactions. The Tribunal set aside the grounds related to the transfer pricing adjustments for reassessment by the TPO, emphasizing the need for a thorough evaluation of the intra-group services and the use of intangibles in royalty payments.

In conclusion, the appeal was partly allowed for statistical purposes, with specific grounds related to transfer pricing adjustments remanded back to the TPO for further examination and determination of arm's length prices. Other grounds not pressed before the Tribunal were dismissed.