2023 (11) TMI 804 - AT - Income Tax

TP adjustment - payment made towards intra-group services - Segregation of two transaction for different MAM application - TPO determined the ALP at nil under CUP method - assessee s aggregate approach under TNMM has been accepted by the TPO in respect of other transactions, such as, import of finished goods, import of capital goods, payment for royalty, payment for technical services, payment for application cost, payment of training fees, cost allocation from group companies, is there any necessity to segregate these two transactions including payment towards intra-group services ? - HELD THAT - TPO was not justified in selectively picking of only a couple of transactions for different treatment. Assessee has entered into 12 transactions with AE. Except one transaction, rest eleven transactions have been benchmarked by the assessee under TNMM by adopting the aggregate approach. While the TPO has accepted assessee s approach in respect of nine transactions, he has segregated two transactions including the transaction relating to intragroup services. Thus, it is not a case where the TPO has entirely disbelieved assessee s claim that the transactions are closely linked transactions. Therefore, in our view, the approach adopted by the TPO to segregate this payment made towards intra-group services is unsustainable. In the present case, the assessee has clubbed all the transactions together and adopted TNMM for benchmarking. Even otherwise also, assuming that the payment made towards intra-group services has to be benchmarked separately, it needs to be examined whether the approach of TPO in determining the ALP at nil by apply CUP method is acceptable. The main reasoning of the TPO to discard assessee s benchmarking under TNMM is, the assessee has failed to prove the need test and the benefit test. As could be seen from the materials placed on record, there is an agreement between the group entities for intra-group services. Further, in course of proceedings before the TPO, the assessee has furnished voluminous evidences, which demonstrate that the assessee has received various services such as planning services, safety and environment services, information system, procurement services, human resource services. Under the planning services, the assessee has received services relating to business planning so as to strengthen and improve regional management system and to organize and run meetings and try to resolve the common issue among group companies. Under human resource service, the assessee received help to establish system for local management, plan and run management training programs for expatriates and local management, promote global HR program, support on training at each group company regarding improvement facilities, preparation of training material, selection of internal instructor and selection of employees to attend each training and run globally common training etc. Such services have benefited the assessee in human resource development, recruitment of suitable candidates and cost saving by avoiding consultant, identify and implementing further improvements in compensation structure, human resource development and recruitment of suitable talent, effective compliance with labour laws, lesser rate of attrition thereby saving time and cost etc. The conclusion drawn by the departmental authorities are not based on materials on record, but more on conjectures and surmises. When the assessee has furnished evidences to demonstrate that services indeed were received from AEs, the departmental authorities cannot ignore such evidences. In any case of the matter, the TPO could not have determined the ALP at nil under CUP method without bringing on record any comparable uncontrolled transaction. TP adjustment made to the price paid for purchase of fixed asset - TPO has determined the ALP at the cost of the goods purchased while disallowing the mark-up. While doing so, the TPO has not benchmarked the transaction under any one of the available methods. Whereas,Commissioner (Appeals) has allowed 2% mark-up on the written down value of the expenses. Thus, as could be seen, the approach adopted both by TPO and Commissioner (A) is purely adhoc and not in accordance with Rule 10B. The fact that similar transaction was accepted by the TPO in past assessment years has not been countered by the department, though they have simply stated that each assessment, being a separate unit, the decision taken in earlier assessment years would not be applicable. The departmental authorities have failed to bring out any factual dissimilarity between the earlier years and the impugned assessment year. In any case of the matter, the approach of the TPO and learned Commissioner (A) in determining the ALP is not in accordance with the transfer pricing provisions. Therefore, we are inclined to delete the adjustment.

Summary

Issues Involved:

1. Transfer pricing adjustment on account of payment made towards intra-group services.
2. Transfer pricing adjustment made to the price paid for the purchase of fixed assets.

Issue 1: Transfer Pricing Adjustment on Intra-Group Services

The assessee, a corporate entity engaged in manufacturing automobile components, challenged the addition of Rs. 72,27,543/- as transfer pricing adjustment for intra-group services. The Transfer Pricing Officer (TPO) argued that these services should be benchmarked independently and not clubbed with other transactions. The TPO issued a show cause notice, but was not convinced by the assessee's reply, stating that no contemporaneous documentary evidence was provided to prove the actual receipt of services or the benefit derived from them. The TPO applied the Comparable Uncontrolled Price (CUP) method and determined the Arm's Length Price (ALP) to be nil, leading to the proposed adjustment.

The assessee contended that the TPO and CIT(A) erred in applying the CUP method without identifying comparable uncontrolled transactions. The assessee argued that the services received were integral to its operations and provided tangible benefits. The Tribunal found that the TPO's approach to segregate and benchmark the transaction independently was unsustainable. The Tribunal noted that the assessee had provided substantial evidence of services received and benefits derived, and the TPO's determination of ALP at nil without comparable transactions was not justified. The Tribunal held that the transfer pricing adjustment suggested by the TPO was unsustainable.

Issue 2: Transfer Pricing Adjustment on Purchase of Fixed Assets

The assessee also challenged the addition made on account of transfer pricing adjustment for the purchase of fixed assets amounting to Rs. 12,40,40,466/-. The TPO segregated this transaction and applied the CUP method, determining the ALP at nil due to the lack of documentary evidence for the mark-up applied by the AE. The CIT(A) granted partial relief by allowing a 2% mark-up on the written-down value.

The assessee argued that the transaction was benchmarked using the Transactional Net Margin Method (TNMM) and that the TPO's and CIT(A)'s approach was ad-hoc and not in accordance with Rule 10B. The Tribunal found that the TPO and CIT(A) failed to apply any method to benchmark the transaction properly and noted that similar transactions were accepted in previous years. The Tribunal held that the approach of the TPO and CIT(A) was not in accordance with transfer pricing provisions and deleted the adjustment.

Conclusion

The Tribunal allowed the appeal, holding that the transfer pricing adjustments made by the TPO and upheld by the CIT(A) were unsustainable and not in accordance with the transfer pricing provisions.