2019 (6) TMI 1736 - AT - Income Tax

TP Adjustment - MAM selection - assessee had applied TNMM method and had aggregated all the transactions including transaction of purchase of raw material along with payment for Intra group services and had held that the arm s length price of international transactions were at nil. However the TPO had applied CUP method HELD THAT - As coming to the facts of present case which are similar to the facts before the Tribunal in assessee s own case relating to assessment year 2009-10 2018 (3) TMI 2014 - ITAT PUNE and applying the same parity of reasoning we reverse the orders of authorities below in applying CUP method to arrive at the arm s length price of transactions of Intra group services at nil. There is no merit in the upward adjustment made in the hands of assessee on account of two segments i.e. Marketing Services and Administrative Services. Reversing the same we direct the Assessing Officer/TPO to apply TNMM method to determine and benchmark the transactions on aggregate basis along with other transactions. Consequently no adjustment to be made in the hands of assessee on account of said segment of payment for Intra group services. Appeal of assessee is allowed.

Summary

ISSUES PRESENTED and CONSIDERED

The core legal issues considered in this judgment are:

1. Whether the determination of the Arm's Length Price (ALP) for the international transactions pertaining to payments made to Associated Enterprises (AEs) for intra-group services (specifically marketing and administrative services) at INR Nil by the Transfer Pricing Officer (TPO) was justified.

2. Whether the rejection of the Transactional Net Margin Method (TNMM) adopted by the assessee in favor of the Comparable Uncontrolled Price (CUP) Method by the TPO for determining the ALP was appropriate.

3. Whether the assessee company was required to make payments to its AEs for marketing and administrative services, and whether the reimbursement of expenditure by the assessee was justified.

4. Whether the assessee demonstrated significant services received from its AE in respect of marketing and administrative services to justify the payments made.

5. Whether the aggregation of intra-group transactions with other international transactions by the assessee for determining the ALP was appropriate.

ISSUE-WISE DETAILED ANALYSIS

Issue 1: Determination of ALP at INR Nil

The legal framework involves the application of the Income-tax Act, 1961, specifically section 92C, which governs the determination of the ALP for international transactions. The TPO determined the ALP for intra-group services at INR Nil, leading to an upward adjustment.

The Tribunal referenced a prior decision in the assessee's case for the assessment year 2009-10, where it was held that the TPO erred in determining the cost of intra-group services at nil without considering the voluminous data substantiating the services rendered. The Tribunal emphasized that the authorities should not step into the shoes of the assessee to ascertain the need for services unless there is doubt over the genuineness of payments.

In the present case, the Tribunal found that the authorities erred in determining the ALP at nil without sufficient justification, especially when similar issues were resolved in favor of the assessee in previous years.

Issue 2: Rejection of TNMM and Application of CUP Method

The TPO rejected the TNMM adopted by the assessee and applied the CUP method. The Tribunal noted that the assessee had aggregated the intra-group transactions with other international transactions and determined the ALP using TNMM, which was consistent with prior years' practices.

The Tribunal found no merit in the TPO's application of the CUP method, as it was inconsistent with the approach validated in earlier assessments. The Tribunal directed the application of TNMM for benchmarking the transactions on an aggregate basis.

Issue 3: Justification of Payments to AEs

The Tribunal examined whether the payments made for marketing and administrative services were justified. The assessee provided evidence of services received and the economic benefit derived, which the Tribunal found credible.

The Tribunal concluded that the payments were justified, reversing the TPO's determination of nil value for the services.

Issue 4: Demonstration of Services Received

The assessee submitted various evidences, including independent accountant certificates and cost allocation methods, to demonstrate the receipt of services. The Tribunal found that the evidence supported the assessee's claims of receiving significant services from its AE.

The Tribunal held that the authorities erred in ignoring this evidence and determining the ALP at nil.

Issue 5: Aggregation of Transactions

The Tribunal considered the assessee's approach of aggregating intra-group transactions with other international transactions for determining the ALP. The Tribunal found this approach consistent with prior assessments and appropriate for the current case.

The Tribunal directed the authorities to apply TNMM on an aggregate basis, rejecting the separate benchmarking of intra-group services using the CUP method.

SIGNIFICANT HOLDINGS

The Tribunal held that the authorities erred in determining the ALP of intra-group services at nil and making an upward adjustment. The Tribunal emphasized, "There is no merit in the upward adjustment made in the hands of assessee on account of two segments i.e., Marketing Services and Administrative Services." The Tribunal directed the application of TNMM on an aggregate basis, consistent with prior years.

The Tribunal established the principle that authorities should not question the need for services unless there is doubt over the genuineness of payments, and that consistent application of methods across assessment years is crucial.

The final determination was to reverse the authorities' orders and allow the appeal, directing no adjustment in the hands of the assessee for the intra-group service payments.