2017 (8) TMI 642 - AT - Income Tax

Transfer pricing adjustment - whether the payment made by the assessee under the head management service should be allowed or not? - TPO and DRP sustained the additions even after 2nd round of proceedings - DRP observed that TPO had rightly rejected the TNM method that intra group services had to be benchmarked separately that the TPO had rightly applied the CUP method that the evidences produced by the assessee indicated that some incidental benefit might have been accrued to it. Held that - while deciding the ALP of umbrella of services what has to considered is the right of assessee that it is entitled to avail. If it avails only a few services out of the boquet of services the TPO should not reject the TP study of the assessee on the ground that it did not avail all the services or the majority of services as mentioned in the agreement. Availing selected services from a composite agreement is sufficient for claiming the deduction. For rejecting the TP study of the assessee the TPO should prove that price shown by the assessee from the services availed was not at arm s length. Non-availing of services cannot be the basis for rejecting the claim. These are two different things and are fundamentally separate. In the case under consideration the TPO or the DRP has not stated that payment made by the assessee to its AE were not at Arm s length. Therefore we decide the first ground of appeal in favour of the assessee. Addition on account of non reconciliation of TDS statement and the computation of income -Held that - Before us the AR stated that due to mistakes committed by some of the deductors of tax mismatch of income had occurred that proper verification was not done by the AO in that regard. The DR stated that the issue could be decided on merits. In our opinion in the interest of justice matter should be remanded back to the file of the AO for fresh adjudication. He is directed to afford a reasonable opportunity of hearing to the assessee. The assessee would submit all the necessary documents to reconcile the TDS statement with computation of income. Second ground of appeal is decided in favour of the assessee in part.

Summary

Issues Involved:

1. Transfer Pricing Adjustment
2. Addition on Account of Non-Reconciliation of TDS Statement and Computation of Income

Issue-wise Detailed Analysis:

1. Transfer Pricing Adjustment:

The primary issue concerns the Transfer Pricing (TP) adjustment of ?8.27 crores. During the assessment proceedings, the Assessing Officer (AO) found that the assessee had entered into International Transactions (ITs) with its Associated Enterprises (AEs) valued at over ?50 crores. The AO referred the matter to the Transfer Pricing Officer (TPO) to determine the Arm’s Length Price (ALP) of the ITs. The TPO found that the assessee had used the Transactional Net Margin Method (TNMM) for benchmarking certain transactions, showing a margin of 9.87% against comparables' margin of 4.35%. However, the TPO rejected the TNMM method for management fees and applied the Comparable Uncontrolled Price (CUP) method, suggesting a total adjustment of ?8,39,98,906/-.

The assessee filed objections before the Dispute Resolution Panel (DRP), arguing that the TPO had incorrectly apportioned the total management fee and failed to appreciate the value of the bundle of services received. The DRP observed that the assessee had not provided a complete break-up of the fees charged by the AE and upheld the TPO's application of the CUP method, allowing a minor adjustment, thus restricting the addition to ?8.27 crores.

In appeal, the assessee argued that the services availed from the AE were bundled and overlapping, and referred to various judicial precedents to support their claim that the payments should be allowed. The Tribunal referred to the case of Merck Ltd., where the Bombay High Court held that the entire consideration paid to the AE was for the right to avail services listed in the agreement, regardless of whether all services were availed. Similarly, in AC Nielsen (India) Private Ltd., it was held that the TPO's role is to determine the ALP, not to question the necessity of the expenditure. The Tribunal concluded that the TPO and DRP had overstepped their roles by disallowing the expenditure instead of determining the ALP, and decided the issue in favor of the assessee.

2. Addition on Account of Non-Reconciliation of TDS Statement and Computation of Income:

The second issue involved an addition of ?31.50 lakhs due to non-reconciliation of the TDS statement with the computation of income. The assessee argued that the mismatch was due to errors by some tax deductors and that proper verification was not done by the AO. The Tribunal agreed that the matter should be remanded back to the AO for fresh adjudication, directing the AO to provide a reasonable opportunity for the assessee to reconcile the TDS statement with the computation of income.

Conclusion:

The appeal was partly allowed. The Tribunal ruled in favor of the assessee on the TP adjustment issue, emphasizing that the TPO should determine the ALP without questioning the necessity of the expenditure. On the TDS reconciliation issue, the matter was remanded back to the AO for fresh adjudication. The order was pronounced in the open court on 16th August 2017.