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2025 (2) TMI 326 - AT - Income TaxTP Adjustment - arm s-length price adjustment with respect to the trading segment - assessee has selected foreign AE i.e. AR took us to the trading segment adjustment with respect to TPSR and the approach of the ld. TPO - whether a foreign associated Enterprises can be taken as a tested party or not? - HELD THAT -Both the parties have placed before us judicial precedent that foreign AE can be taken as a tested party but all the decisions have held the tested party only could be the party on which the transfer pricing methods can be applied in the most reliable manner and for which most reliable comparables can be found. Therefore in view of above discussion we restore ground back to the file of the learned transfer pricing officer with a direction to the assessee to substantiate the arm s-length price of the transaction of trading segment by showing with sufficient data about the foreign AE as a tested party. TPO may examine that the tested party selected by the assessee gives a reliable method and computation of arm s-length price or not. Thereafter after giving assessee an opportunity of hearing determine the arm s-length price of the international transaction of trading segment. Transaction of intragroup services - arm s-length price of which is determined by the learned TPO at rupees Nil because assessee has failed to substantiate that services were rendered by AE which resulted into benefit to the assessee and are not shareholder services - HELD THAT - Arm s-length price of an intragroup services could be determined considering whether an independent enterprise in comparable circumstances would have been willing to pay for the activity if performed for it by an independent enterprise or would have performed the activity in-house for itself. If the activity is not one for which the independent enterprise would have been willing to pay or perform for itself the activity ordinarily cannot be considered as an intra-group service under the arm s length principle. Therefore the process to be adopted by the assessee or by the TPO is on the principle of need rendition benefit economic or commercial. If the services are performed by somebody else for their own benefit naturally the assessee would not have paid it to an independent party. As it is a case of non-furnishing of the information by the assessee before the learned that lower authorities we restore the issue of determination of arm s-length price of intragroup services before the learned transfer pricing officer with a direction to the assessee to substantiate that the services were required they were rendered it resulted into some commercial or economic benefit to the assessee and those services are not to be performed as a shareholder services or duplicative services by the service provider. Assessee is also directed to produce the cost allocation statement along with the appropriate allocation key and the share of the assessee. TPO may examine the same and if it is found to be a license fees paid for various software or platforms and if the allocation key with respect to the number of users is found to be appropriate determine the arm s-length price of the international transaction of intragroup services in accordance with the law after granting assessee an opportunity of hearing. Accordingly ground number 12 20 are restored back to the file of the learned TPO with above direction. Adjustment on account of interest on delayed receivable - HELD THAT - Transaction of the overdue receivable from associated enterprises is neither an interlinked transaction nor closely linked with the transaction of the provision of services etc. Even the transfer pricing document also does not give any reason for the same. In view of this this is a separate international transaction which needs to be benchmarked separately. With respect to the argument of the learned authorised representative that the circular of the reserve bank of India dated 1/4/2020 should be made applicable wherein due to Covid 19 the time limit for recovery of the dues have been extended we find that the impugned assessment year before us is 2020 21 and therefore the above circular does not apply even otherwise for the impugned assessment year. TPO has not given any evidence or source where from the same has been adopted. However we find that when the assessee objected before the learned transfer pricing officer the assessee did not object to the period of 30 days given by the learned transfer pricing officer as appropriate rate credit period. The assessee s only objection was that it cannot be a separate international transaction and further even if it is to be considered as an international transaction the use of LIBOR to be made as the invoices are made in foreign currency. In view of this ground number 21 24 of the appeal are dismissed. Disallowance of store closure expenses - HELD THAT - When the nature of the expenditure based on the examination of the simple details and the Ledger accounts clearly shows that the expenses are incurred wholly and exclusively for the purposes of the business during the business no disallowance should have been made. The assessee himself states that it is a voluminous detail and looking at the operation and the nature of the expenditure assessee submitted sample details before the learned AO and further additional details before the learned dispute resolution panel. None of the authorities asked the assessee to produce the complete details. None of the authorities have held that any of the expenditure which is incurred by the assessee for which details are produced before them are not wholly and exclusively incurred by the assessee for the purposes of the business. Therefore we are of the view that when the assessee has demonstrated that nature of the expenditure incurred by the assessee supported by the evidence clearly shows that those are incurred wholly and exclusively for the purposes of the business no disallowance could have been made. Disallowance of set off the available brought forward business losses and unabsorbed depreciation shown by the assessee in income tax return and the tax audit report - HELD THAT - We direct the learned assessing officer to allow the set off brought forward business losses and unabsorbed depreciation of the above sum is found in accordance with the law. Accordingly ground number 29 of the appeal is allowed.
1. ISSUES PRESENTED and CONSIDERED
The core legal issues considered in the judgment are:
2. ISSUE-WISE DETAILED ANALYSIS Transfer Pricing Issues - Tested Party Selection The relevant legal framework involves the application of the Transactional Net Margin Method (TNMM) and the selection of the tested party based on the OECD guidelines. The Court noted that the tested party should be the least complex entity with the most reliable data available for comparability analysis. The assessee selected a foreign AE as the tested party, arguing it was the least complex entity. However, the Tribunal found that the assessee lacked sufficient information about the foreign AE, which was crucial for reliable comparability analysis. The Tribunal restored the issue to the Transfer Pricing Officer (TPO) to reassess the tested party selection with the newly submitted financials of the foreign AE. Intra-group Services The issue revolved around whether the intra-group services were rendered and benefited the assessee, and whether they should be benchmarked separately using the Comparable Uncontrolled Price (CUP) method. The TPO determined the ALP as NIL due to the failure of the assessee to substantiate the necessity, rendition, and benefit of the services. The Tribunal emphasized the need for the assessee to provide evidence of the services rendered, the cost allocation, and the benefit derived. The issue was remanded to the TPO for a fresh examination with specific directions to the assessee to provide necessary documentation. Interest on Delayed Receivables The Tribunal considered whether the adjustment for interest on delayed receivables was justified. The TPO treated the delayed receivables as a separate international transaction and applied an interest rate based on LIBOR plus a margin. The Tribunal upheld the TPO's approach, dismissing the assessee's arguments for treating the receivables as interlinked transactions or applying the RBI circular on extended credit periods due to COVID-19. Store Closure Expenses The Tribunal examined whether the disallowance of store closure expenses was justified. The assessee argued that these expenses were revenue in nature and deductible under Section 37(1) of the Income Tax Act. The Tribunal found that the assessee had provided sufficient evidence to demonstrate that the expenses were incurred wholly and exclusively for business purposes. Consequently, the disallowance was deleted, and the expenses were allowed. Non-utilization of Brought Forward Losses The Tribunal directed the Assessing Officer to verify and allow the set-off of brought forward business losses and unabsorbed depreciation as claimed by the assessee, provided they are found to be in accordance with the law. 3. SIGNIFICANT HOLDINGS The Tribunal established several core principles and final determinations:
The Tribunal's decision reflects a balanced approach, emphasizing the need for comprehensive documentation and evidence to support transfer pricing and tax claims. The judgment underscores the importance of adhering to established transfer pricing guidelines and legal provisions for tax deductions and adjustments.
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