2019 (11) TMI 1029 - AT - Income Tax

TP Adjustment - administrative services and administrative and technical training services addition - determining the ALP of such services at nil was that the assessee did not need the services as the same were duplicative and that the assessee did not derive any tangible benefit from such expenditure - HELD THAT - Revenue is admitting that certain services have been received by the assessee from its AE. We find from the order of the TPO/AO that the only reason cited for determining the ALP of such services at nil was that the assessee did not need the services as the same were duplicative and that the assessee did not derive any tangible benefit from such expenditure. We find in the case of CIT vs. EKL Appliances Ltd. 2012 (4) TMI 346 - DELHI HIGH COURT has decided somewhat identical issue and held that so long as the expenditure or payment has been demonstrated to have been incurred or laid out for the purposes of business, it is no concern of the TPO to disallow the same on any extraneous reasoning. Since, in the instant case, the incurring of the expenditure is not in dispute and since the only reason given by the Revenue authorities is that the assessee did not need the services as the same were duplicative and that the assessee did not derive any tangible benefit from such expenditure and did not file sufficient details to establish that it has, in fact, received some benefit or that the AE has rendered some services, therefore,direct the A.O./TPO to delete the addition. - Decided in favour of assessee.

Issues Involved:

1. Whether the Transfer Pricing Officer (TPO) discharged his statutory onus under Section 92C(3) of the Income Tax Act before disregarding the arm's length price (ALP) determined by the assessee.
2. Adequacy of evidence provided by the assessee to prove the availing of intra-group services.
3. Jurisdictional reach of CIT(A) in questioning the commercial expediency and business decisions of the assessee.
4. Benefit derived by the assessee from availing intra-group services.
5. Nature of intra-group services received by the assessee from its associated enterprises (AEs) being 'duplicate'.
6. Necessity of intra-group services availed by the assessee from unrelated parties.
7. Consistency in the treatment of transactions in prior assessment years.
8. Dependence of ALP of intra-group services on the benefit derived by the assessee.
9. Application of the Comparable Uncontrolled Price (CUP) method by CIT(A) to benchmark the impugned transactions.

Detailed Analysis:

Issue 1: Discharge of Statutory Onus by TPO

The assessee contended that the TPO failed to establish that the conditions specified in clause (a) to (d) of Section 92C(3) were satisfied before disregarding the ALP determined by the assessee. The Tribunal found that the TPO had not adequately demonstrated the necessity of disregarding the ALP determined by the assessee, thus failing to discharge the statutory onus.

Issue 2: Adequacy of Evidence for Intra-Group Services

The TPO noted that the evidence provided by the assessee, including invoices, was insufficient to prove that the services were actually availed. The Tribunal observed that the CIT(A) admitted additional evidence and forwarded it to the A.O./TPO for a remand report. Despite this, the CIT(A) concluded that the services were not adequately substantiated by proper evidence.

Issue 3: Jurisdictional Reach of CIT(A)

The assessee argued that the CIT(A) exceeded his jurisdiction by questioning the commercial expediency and business decisions of the assessee. The Tribunal agreed, referencing the Delhi High Court decision in CIT vs. EKL Appliances Ltd., which held that the TPO should not disallow expenditure based on extraneous reasoning if it was incurred for business purposes.

Issue 4: Benefit Derived from Intra-Group Services

The TPO and CIT(A) questioned the tangible benefits derived by the assessee from the intra-group services. The Tribunal, however, emphasized that the necessity and benefit of such services need not be established, as long as the expenditure was incurred for business purposes, aligning with the Delhi High Court's stance in CIT vs. EKL Appliances Ltd.

Issue 5: Nature of Intra-Group Services as 'Duplicate'

The CIT(A) concluded that 70% of the administrative and technical training services were duplicative. The Tribunal found this reasoning flawed, as the incurrence of expenditure was not in dispute, and the services rendered by the AE were not adequately examined.

Issue 6: Necessity of Services from Unrelated Parties

The assessee claimed that certain intra-group services could not have been availed from unrelated parties. The Tribunal did not find substantial discussion on this issue in the CIT(A)'s order, indicating a lack of consideration of the business necessity and requirement for such services.

Issue 7: Consistency in Treatment of Transactions

The assessee highlighted that similar transactions in prior years were considered at arm's length. The Tribunal noted the inconsistency in the Revenue's approach, as the CIT(A) had accepted the ALP for treasury services but not for administrative and technical training services.

Issue 8: Dependence of ALP on Benefit Derived

The CIT(A) failed to prove that the ALP of intra-group services depended on the benefit derived by the assessee. The Tribunal reiterated that the benefit test is not a requisite for determining ALP, as long as the expenditure was incurred for business purposes.

Issue 9: Application of CUP Method

The Tribunal found that the TPO and CIT(A) applied the CUP method without identifying comparable uncontrolled transactions, rendering the application of the CUP method inappropriate. The ALP was arbitrarily fixed at 30% of the value without proper basis.

Conclusion:

The Tribunal set aside the order of the CIT(A) and directed the A.O./TPO to delete the addition, allowing the appeal filed by the assessee. The Tribunal emphasized that the incurrence of expenditure for business purposes should not be disallowed based on extraneous reasoning and that the TPO/CIT(A) failed to apply the CUP method appropriately.

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