2023 (9) TMI 1028 - AT - Income Tax

TP Adjustment - determination of Arm s Length Price of the intra group services - comparision of manufacturing company with marketing company - assessee failed to prove the rendition of intra group services as well as benefit derived from those services - as per TPO for purposes of determination of Arm s Length Price of the intra group services, assessee must demonstrate the Need test, benefit test, rendition rest and to show that services are not duplicative in nature and are not part of shareholders‟ activity - HELD THAT - Assessee submitted the functional and economical analysis of the assessee as well as the nature of the services, however, the learned lower authorities have held that Associated Enterprises is responsible for marketing support services. Further, the email correspondence and other documents produced by the assessee were also not discussed. The assessee was considered as a distributor , but it is a manufacturer and therefore, naturally the assessee cannot be considered as a distributor. Further, determination of Arm s Length Price of marketing support services by applying the proportionate sales percentage based on the sale of comparable companies is also not a correct approach for the reasoning nature of the services rendered by Associated Enterprises to the assessee was not demonstrated to be similar. The assessee has also failed to completely demonstrate the Arm s Length Price of intra group services by satisfying need test, benefit test, rendition test, duplicative test etc . We set aside the whole issue back to the file of AO/ TPO with a direction to the assessee to substantiate the Arm s Length Price of the intra group services demonstrating the above tests / ingredients mentioned. On submission of the detail by the assessee, the learned Transfer Pricing Officer may examine and determine the Arm s Length Price in accordance with the law. TPO may examine the claim of the assessee and determine the Arm s Length Price of these intergroup services. We make it absolutely clear that Onus would be on assessee first to show that international transaction is at arm's length.

Summary

Issues Involved:

1. Adjustment of Arm's Length Price (ALP) of reimbursement of expenses for marketing support services and IT support services.
2. Determination of ALP of intra-group services.
3. Disallowance of capital expenditure.

Summary:

Issue 1: Adjustment of ALP of Reimbursement of Expenses

The assessee, engaged in manufacturing switchboard power supplies and other computer peripherals, contested the adjustment of Arm's Length Price (ALP) of reimbursement of expenses upheld by the CIT (A) of Rs. 53,744,032 on account of marketing support services and Rs. 8,431,645 on account of IT support services. The Transfer Pricing Officer (TPO) noted discrepancies in the allocation of corporate expenses and determined the ALP of these expenses significantly lower than claimed by the assessee, leading to a proposed adjustment.

Issue 2: Determination of ALP of Intra-Group Services

The TPO determined the ALP of intra-group services at Rs. 83,05,750 out of the total claimed Rs. 9,84,57,908, leading to an adjustment of Rs. 9,01,52,158. The CIT (A) upheld this adjustment, noting the absence of an agreement for a part of the financial year and the failure of the assessee to provide complete documentation proving the receipt of services. The ITAT remanded the issue back to the TPO, directing the assessee to substantiate the ALP of intra-group services by demonstrating the need, benefit, rendition, and non-duplication of services.

Issue 3: Disallowance of Capital Expenditure

The CIT (A) confirmed the disallowance of Rs. 12,60,000 as capital expenditure, following the decision of the Hon'ble Supreme Court in the case of Brooke Bond India Limited Vs. CIT. The ITAT upheld this disallowance.

Conclusion:

The ITAT remanded the primary issue of ALP adjustment for intra-group services back to the TPO for re-examination, directing the assessee to provide detailed documentation supporting the ALP. The appeals were allowed for statistical purposes, with the ITAT emphasizing the need for the assessee to demonstrate the arm's length nature of the international transactions.