2023 (1) TMI 1113 - AT - Income Tax

TP Adjustment - payments to its overseas associate enterprise AE in lieu of Receipt of Advisory Services - HELD THAT - The assessee s service agreement has remained the same throughout since 2003 onwards - We therefore conclude in this factual backdrop that the assessee has sufficiently proved to have received advisory services from its group entity(ies) and the learned lower authorities have erred in law and on facts in rejecting the same in entirety. We, accordingly, delete the impugned adjustment in these peculiar facts and circumstances. The assessee succeeds in its first and foremost grievance.

Summary

Issues Involved
1. Transfer Pricing Adjustment of Rs. 3,35,16,306/- while determining the Arm's Length Price (ALP) of international transactions in respect of "advisory services".
2. Not restricting the amount of transfer pricing adjustment to the 'transactions' between Associated Enterprises.

Detailed Analysis

Issue 1: Transfer Pricing Adjustment of Rs. 3,35,16,306/-
The primary issue in this appeal concerns the Transfer Pricing adjustment of Rs. 3,35,16,306/- made by the Assessing Officer (AO) and confirmed by the Commissioner of Income-tax (Appeals) [CIT(A)]. The adjustment pertains to the Arm's Length Price (ALP) of international transactions involving "receipt of advisory services" from the assessee's Associated Enterprise (AE).

The assessee, engaged in manufacturing car interiors and providing computer-aided design services, filed a return disclosing a loss of Rs.7,90,07,284/-. The AO scrutinized the return and referred the matter to the Transfer Pricing Officer (TPO) for determining the ALP of the international transactions, including the "receipt of advisory services" valued at Rs.3,66,82,446/-.

The TPO, after a detailed examination, concluded that the assessee could not demonstrate the actual receipt of advisory services as per the service agreement dated 02.10.2003. Consequently, the TPO determined the ALP of the advisory services to be "nil" and made an adjustment of Rs.3,66,82,466/-. The CIT(A), upon appeal, partially granted relief by estimating a cost allocation of Rs.31,72,140/-, thereby confirming the adjustment of Rs.3,35,08,058/-.

The assessee argued that the TPO's rejection of the Comparable Uncontrolled Price (CUP) method and the aggregation of transactions were incorrect. The assessee presented voluminous evidence, including e-mails, to demonstrate the receipt of advisory services. The Tribunal noted that the same issue had arisen in the previous assessment year (A.Y. 2008-09), where the coordinate bench had rejected the Revenue's stand and accepted the assessee's claim.

The Tribunal also referred to a recent order in the recipient entity's case, which confirmed that e-mails and other evidence proved the rendering of managerial and technical services. Given that the service agreement had remained consistent since 2003, the Tribunal concluded that the assessee had sufficiently demonstrated the receipt of advisory services. Therefore, the Tribunal deleted the impugned adjustment of Rs.3,35,16,306/-.

Issue 2: Not Restricting the Amount of Transfer Pricing Adjustment to the 'Transactions' Between Associated Enterprises
The CIT(A) did not restrict the transfer pricing adjustment to the value of the international transactions. The assessee contended that the adjustment should be limited to the value of the disputed transactions. However, since the Tribunal allowed the appeal on the primary issue of transfer pricing adjustment, this secondary issue became moot and was not separately adjudicated.

Conclusion
The Tribunal allowed the assessee's appeal, deleting the transfer pricing adjustment of Rs.3,35,16,306/-. The Tribunal found that the assessee had adequately demonstrated the receipt of advisory services from its AE, and the lower authorities erred in rejecting the claim. The appeal was allowed in favor of the assessee.