2021 (9) TMI 1243 - AT - Income Tax

TP Adjustment - payment made for intra group services - CIT(A) directed the TPO to grant 50% of the adjustment claimed by the assessee on account of intra-group services - scope of commercial expediency - HELD THAT - Since the issue has already been decided by the Tribunal 2020 (2) TMI 1567 - ITAT DELHI favour of the assessee by deleting 50% of disallowance sustained by the Ld. CIT(A) therefore in view of the Order of the Tribunal we do not find any infirmity in the Order of the Ld. CIT(A) in deleting the adjustment on account of payment of intra group service to A.E. Ground Nos. 1 to 3 of the appeal of the Revenue are accordingly dismissed. Reimbursement payment from the operating cost - international transaction relating to provision of management consultancy services provided to AEs and reimbursement of expenses from AEs - HELD THAT - As decided in own case 2020 (2) TMI 1567 - ITAT DELHI .restored the issue to the file of A.O./TPO with a direction to verify the analysis done by them in subsequent years and find-out as to whether this company is functionally similar or dissimilar to that of the assessee company and decide the issue as per fact and law.

Summary

Issues Involved:
1. Deletion of additions made by the Transfer Pricing Officer (TPO) regarding payment for intra-group services.
2. Re-characterization of inter-group services transactions by the TPO.
3. Exclusion of reimbursement payments from operating costs and their tax implications under Section 195 of the Income Tax Act.

Issue-wise Detailed Analysis:

1. Deletion of Additions Made by the TPO Regarding Payment for Intra-Group Services:
The Revenue challenged the deletion of additions made by the TPO concerning payments for intra-group services. The TPO had proposed an upward adjustment of Rs. 6,66,77,478/- using the Comparable Uncontrolled Price (CUP) method, arguing that the assessee did not demonstrate a cost-benefit analysis for the services received from its Associated Enterprises (AEs). The CIT(A) directed the TPO to grant 50% of the adjustment claimed by the assessee, referencing judicial precedents like CIT vs. EKL Appliances Ltd. and others, which established that the TPO cannot question the commercial wisdom of the assessee. The Tribunal upheld the CIT(A)'s order, noting that the Tribunal had previously ruled in favor of the assessee for similar issues in earlier assessment years, thereby directing the deletion of the entire addition.

2. Re-characterization of Inter-Group Services Transactions by the TPO:
The TPO's re-characterization of inter-group services transactions was contested. The CIT(A) held that the TPO's authority is limited to determining the Arm's Length Price (ALP) for international transactions and cannot question the commercial expediency of the assessee's decisions. The Tribunal supported this view, citing the Delhi High Court's judgment in EKL Appliances, which discourages the restructuring of legitimate business transactions by tax authorities. The Tribunal found that the CIT(A)'s decision to grant 50% of the adjustment was justified and consistent with judicial precedents, leading to the dismissal of the Revenue's appeal on this ground.

3. Exclusion of Reimbursement Payments from Operating Costs and Their Tax Implications:
The Revenue argued against the exclusion of reimbursement payments from operating costs, asserting that such payments should attract withholding tax under Section 195 of the Income Tax Act. The TPO had included reimbursement payments in the operating costs, leading to an upward adjustment. The CIT(A) partly deleted this adjustment by accepting some comparables from both the TPO and the assessee. The Tribunal noted that the assessee had provided detailed explanations and evidence to support the exclusion of these payments, emphasizing that they were pass-through costs incurred for administrative convenience without any profit element. The Tribunal referenced various decisions, including the OECD Guidelines and the case of DCIT vs. Cheil Communications India Pvt. Ltd., supporting the exclusion of such costs from operating expenses. Consequently, the Tribunal restored the issue to the A.O./TPO for fresh adjudication, directing them to verify the analysis and decide as per the facts and law.

Conclusion:
The Tribunal upheld the CIT(A)'s decisions on both the deletion of additions related to intra-group services and the exclusion of reimbursement payments from operating costs. The Tribunal dismissed the Revenue's appeals on these grounds while allowing the issue of reimbursement payments for statistical purposes, directing further verification by the A.O./TPO. The Tribunal emphasized the importance of adhering to judicial precedents and the proper scope of the TPO's authority in transfer pricing matters.