2023 (8) TMI 1580 - AT - Income Tax

TP Adjustment - analyzing the arm s length analysis of intra-group services - Evidence for Services Rendered - HELD THAT - What is required to be seen while analyzing the arm s length analysis of intra-group services that it needs to satisfy prima facie following tests broadly i) need test; ii) rendition test; iii) benefit test; iv) duplicative services test; and v) shareholders activity test. In the transfer pricing study report assessee has given not only given the detailed business overview and the activities carried out by the assessee but also what were the services which were required for carrying out those activities. As seen that the assessee had clearly established the need and the benefit derived from each and every services and also produced huge documentary evidences for actual rendition of services. Thus it cannot be held that either there was no rendition of services or there is no benefit derived by the assessee from these services. It is not necessary for the assessee to prove that for each and every benefit except for proving prima facie what benefit has been derived for carrying out the activities and the need of such services. If these are proved and substantiated by the documentary evidences then it cannot be held that the entire payment made for receiving such services is to be adjusted holding that transaction should be Nil . Assessee had also demonstrated objective analysis of each of the Intragroup services rendered and resulting into some kind of qualitative and quantitative benefit. Even the cost allocation i.e. charging method is also appears to be based on proper allocation key which too demonstrated with the actual cost. Accordingly the entire adjustment which has been made by the ld. TPO/ AO is directed to be deleted. Assessee appeal allowed.

Summary

Issues Involved:

1. Transfer Pricing Adjustment on Availing Technical Services.
2. Benchmarking of International Transactions.
3. Documentation and Evidence for Services Rendered.
4. Need, Rendition, and Benefit Tests for Intra-Group Services.
5. Cost Allocation Methodology.

Issue-Wise Detailed Analysis:

1. Transfer Pricing Adjustment on Availing Technical Services:

The primary issue in the appeal was the transfer pricing adjustment of INR 1,05,96,650/- related to the availing of technical services from the Assessee's Associated Enterprise (AE), Lord Asia Pacific Limited (LAPL). The Transfer Pricing Officer (TPO) determined that the Arm's Length Price (ALP) for these services should be 'Nil' due to insufficient evidence of services rendered and benefits received, leading to an upward adjustment of the entire payment.

2. Benchmarking of International Transactions:

The Assessee's transfer pricing documentation benchmarked the transaction of availing technical services by aggregating it with other international transactions, such as the purchase of raw materials and finished goods, using the Transactional Net Margin Method (TNMM). The Assessee argued that the services were necessary for its business operations, including marketing, sales, human resources, finance, and legal services, and were consistent with agreements with other AEs.

3. Documentation and Evidence for Services Rendered:

The TPO required the Assessee to provide documentary evidence to prove the services rendered, the nature of these services, and comparable transactions of independent parties. The Assessee submitted various documents, including internal audit reports, meeting minutes, technical inputs, and email correspondences, to demonstrate the receipt and benefit of services. However, the TPO and the Dispute Resolution Panel (DRP) found these submissions insufficient, leading to the adjustment.

4. Need, Rendition, and Benefit Tests for Intra-Group Services:

The Tribunal emphasized the importance of satisfying the need, rendition, and benefit tests for intra-group services. The Assessee demonstrated that the services were necessary for business operations and provided substantial benefits, supported by documentary evidence. The Tribunal found that the services were neither duplicative nor shareholder activities, and the Assessee had established the need and benefit derived from each service.

5. Cost Allocation Methodology:

The Assessee provided evidence of the cost allocation methodology used by LAPL, which included audited accounts, allocation keys based on turnover, and financial statements of other Lord Group entities. The Tribunal noted that the cost allocation was supported by proper documentation and was based on a reasonable allocation key. The Assessee's submissions demonstrated the actual cost incurred and the allocation among various group entities.

Conclusion:

The Tribunal concluded that the Assessee had adequately demonstrated the need, rendition, and benefit of the services availed, supported by substantial documentary evidence. The cost allocation methodology was found to be proper and justified. Consequently, the Tribunal directed the deletion of the entire transfer pricing adjustment made by the TPO/AO, allowing the appeal in favor of the Assessee.