2016 (8) TMI 62 - AT - Income Tax

Transfer pricing adjustment - intra group services - ALP adjustment - Held that - In the light of the factual position coupled with the relief granted by the DRP on the ALP adjustment in the mark-up rate of the cost plus basis billing to the AE in respect of revenues for the IT enabled services, and in the light of the provisions of section 92(3), the transfer pricing provisions cannot be invoked in respect of intra group services, which admittedly form part of the cost base of the assessee, availed by the assessee. This is a case in which transfer pricing provisions cannot be applied because the application of ALP adjustment will indeed result in erosion of Indian tax base- as visualized by the scheme of Section 92(3) inasmuch for every rupee of ALP adjustment in intra group service, the revenue of the assessee, on the basis of application of arm s length price, will stand reduced by one and one fifth times of the ALP adjustment. Section 92(3) does not permit computation of income on the basis of arm s length price in such a situation; as a matter of fact, it prohibits application of arm s length principle in such a situation. - Decided in favour of assessee.

Summary

Issues:
Determining the arm's length price adjustment for management support services received from associated enterprises (AE) abroad.

Detailed Analysis:

1. Background: The appeal concerns an assessment under section 143(3) r.w.s. 144C of the Income Tax Act, 1961, for the assessment year 2011-12. The grievance of the assessee revolves around the arm's length price adjustment of ?8,40,95,610 for management support services received from its associated enterprises abroad.

2. Factual Scenario: The assessee, an Indian company, is a wholly owned subsidiary of Mercer Mauritius Limited, rendering IT enabled services to its AEs. The Transfer Pricing Officer made an ALP adjustment for IT enabled services and concluded the ALP value of intra group services received by the assessee as NIL. The DRP confirmed the ALP adjustment for intra group services, leading to the appeal.

3. Legal Analysis: The Tribunal observed that the ALP adjustment for intra group services would erode the tax base, as it would reduce the revenue from IT enabled services by 20% more than the adjustment amount. Section 92(3) prohibits computation of income based on arm's length price if it results in lowering the income compared to the previous year's entries. Therefore, the transfer pricing provisions cannot be invoked for intra group services in this case.

4. Decision: The Tribunal allowed the appeal, upholding the assessee's contention that the ALP adjustment for intra group services would decrease the income, contrary to the provisions of Section 92(3). As a result, the transfer pricing provisions could not be applied to intra group services, and the appeal was allowed.

5. Conclusion: The Tribunal's decision focused on the impact of the ALP adjustment on the assessee's income and tax base, emphasizing the application of Section 92(3) in prohibiting the computation of income based on arm's length price when it results in reducing the income chargeable to tax. The ruling provided relief to the assessee by disallowing the ALP adjustment for intra group services, considering the erosion of the tax base due to such adjustment.