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2020 (12) TMI 1032 - AT - Income TaxTP Adjustment - payments made for intra-group services received by the Appellant - most appropriate method and Comparability analysis - HELD THAT - We direct Ld. TPO to judge the requirement of services from viewpoint of assessee as a businessman. Therefore in this regard we are of view that assessee has to substantiate that these services are required by it. We note that assessee has entered into Intra Group Service agreement with AE, which is placed at page 467 of paper book Volume II. This goes to prove that services were required by assessee. We are of considered opinion that for these services, assessee has to demonstrate and satisfy Evidence Test or rendition test and benefit test, as envisaged u/s. 92(2) of the Act, and that, services provided by AE are neither duplicative nor shareholder's activity. Ld. AO/TPO is then directed to determine Arm's length price of these services based on documents submitted by assessee by determining most appropriate method and Comparability analysis. Protective assessment u/s. 40(a)(i) for non deduction of TDS on payment made towards managerial services - We note that Ld. TPO has made adjustment in respect of payments made towards managerial services, which has been remanded for denovo consideration based on evidences/documents filed by assessee. Assessee has deducted TDS on certain payments made to AE. It is the submission of Ld. AR that balance amount, pertains to other services. Ld. AR submits that such other payments cannot be termed as technical in nature. As we have remitted the transfer pricing adjustment on same issues to Ld. TPO for denovo consideration, this issue becomes academic at this stage.
Issues Involved:
1. Transfer Pricing Ground 2. Corporate Tax Ground Issue-wise Detailed Analysis: 1. Transfer Pricing Ground: 1.1 The learned AO, TPO, and CIT(A) erred in determining the Arm's Length Price (ALP) of the international transaction and making an adjustment of ?3,03,22,402 for intra-group services received by the Appellant. 1.2 The authorities did not consider the facts submitted by the Appellant regarding the payment for intra-group services, disallowing the same by stating that the ALP for such services is nil. 1.3 The authorities erred in rejecting the economic analysis performed by the Appellant in the transfer pricing documentation, where the payment for intra-group services was aggregated with the manufacturing and trading activity and benchmarked using the Transactional Net Margin Method (TNMM). 1.4 The authorities did not appreciate that the margins earned by the Appellant in the manufacturing and trading segment, after considering payment for intra-group services, were substantially above the arm's length margin computed by the TPO. 1.5 The authorities failed to consider that the services were required by the Appellant and that the Appellant derived benefits from such services. 1.6 The authorities did not acknowledge the documentary evidence provided by the Appellant to demonstrate the receipt of services and benefits derived. 1.7 The authorities questioned the commercial expediency of the Appellant, which should not have been done. 1.8 CIT(A) erred in interpreting Article 3 of the inter-company services agreement and concluding that a separate contract for specific services was necessary. 1.9 The authorities erred in considering the Comparable Uncontrolled Price (CUP) method for benchmarking the intra-group services without providing detailed benchmarking and the basis for applying CUP as the most appropriate method. 1.10 CIT(A) erred in not accepting the evidence filed to substantiate the receipt of services, failing to appreciate that the evidence supplemented the existing evidence filed before the TPO. Analysis: The Tribunal noted that the TPO determined the ALP at nil by applying the CUP method, whereas the Appellant used the TNMM method at the aggregate level. The TPO's decision was based on the view that the services provided by the AE were not required and that there was no benefit derived from such services. The Tribunal found this approach unacceptable, emphasizing that the TPO must determine the ALP of the transaction rather than considering it nil. The Tribunal referred to the Income Tax Act, which requires the computation of the ALP for any international transaction, and highlighted that the TPO should judge the requirement of services from the viewpoint of the assessee as a businessman. The Tribunal directed the TPO to re-evaluate the necessity and benefits of the services provided by the AE, considering the evidence submitted by the Appellant. 2. Corporate Tax Ground: 2.1 The AO and CIT(A) erred in re-characterizing the payment towards managerial services as fees for technical services under Explanation 2 to Section 9(1)(vii) and Article 13 of the India-France Double Tax Avoidance Agreement (DTAA). 2.2 The authorities erred in disallowing the payment for intra-group services of ?3,03,22,402 under Section 40(a)(i) of the Income Tax Act, 1961, for non-deduction of TDS. 2.3 The authorities erred in upholding the disallowance of ?18,98,952 on which the Appellant had deducted tax at source. 2.4 The authorities erred in levying interest under Section 234B and 234D of the Act. Analysis: The Tribunal observed that the AO made a protective assessment under Section 40(a)(i) for non-deduction of TDS on payments made towards managerial services. The Tribunal noted that the TPO's adjustment in respect of payments made towards managerial services was remanded for de novo consideration based on the evidence/documents filed by the Appellant. The Tribunal also noted that the Appellant had deducted TDS on certain payments made to the AE and that the balance amount pertained to other services, which the Appellant argued were not technical in nature. As the transfer pricing adjustment was remitted to the TPO for reconsideration, the Tribunal found that the issue of TDS became academic at this stage. Conclusion: The Tribunal set aside the issues to the AO/TPO for de novo consideration and allowed the appeal filed by the assessee for statistical purposes. The order was pronounced in the open court on 25th Nov, 2020.
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