2025 (2) TMI 153 - AT - Income Tax

TP Adjustment - receipts of corporate services from its AE and payments made by the assessee to the secondment employees - HELD THAT - When the bench has asked about the documentary evidences in respect of the software/other tools received by assessee from its AE utilized by assessee in its manufacturing unit. Assessee contended that assessee will file each and every document before the lower authorities. Therefore we remit this issue to the file of AO for examining it afresh. So far as the argument of the assessee that the AE has paid taxes on the receipts received from Indian entity is concerned we are of the view that it would be a guiding factor but not a sacrosanct factor to prove the rendition of services by the AE. Similarly the contention of the assessee that when the adjustments are already done by applying the aggregation principle then no further adjustment qua international transaction can be made is also supportive argument. When the basic fact as to whether any services has actually been received by the assessee from its AE is not established these arguments would have no applicability. These arguments do have force provided the factum of rendition of services by the AE is proved by the assessee with documentary evidences. We are also of the firm opinion that so far as the application of Benefit test by the lower authorities is concerned we are in agreement with the submissions made by the counsel for the assessee and hold that merely because the assessee has failed to prove any benefit from the services received the disallowances cannot be made. Therefore the assessee is given one more opportunity to prove his case. Payments made to secondment employees - Again the finding of the fact as recorded by the lower authorities is that the assessee has failed to establish that documentary evidences of the assessee was actually the legal/economic owner of these employees. For this issue also we remit the matter to the file of ld AO for examining afresh in accordance with law. AO has granted lesser refund to the assessee - We direct the AO to compute the refund amount once again in accordance with law and give the credit to the assessee while finalizing the assessment. Appeal of the assessee is allowed for statistical purposes.

ISSUES PRESENTED and CONSIDERED

The core legal issues considered in this judgment include:

Whether the Transfer Pricing Officer (TPO) and Assessing Officer (AO) were justified in making adjustments to the transfer pricing of international transactions undertaken by the assessee with its Associated Enterprises (AEs).
Whether the payments made to secondment employees should be treated as salary payments under Section 192 or as Fees for Technical Services (FTS) under Section 195 of the Income Tax Act, 1961.
Whether the assessee failed to establish the rendition of services by its AEs, thereby justifying the disallowance of payments made to AEs.
Whether the assessee is entitled to a refund as claimed, and if the AO has correctly computed the refund amount.

ISSUE-WISE DETAILED ANALYSIS

Transfer Pricing Adjustments

Legal Framework and Precedents: The relevant provisions include Section 92CA for transfer pricing adjustments. The TPO relied on precedents such as Akzo Nobel India Ltd. and Godrej Consumer Projects Ltd., which emphasize the need for documentary evidence to support intra-group services.
Court's Interpretation and Reasoning: The Tribunal noted that the assessee failed to provide substantial evidence proving the actual rendition of services by its AEs. The Tribunal emphasized that mere allocation of costs without evidence of services rendered is insufficient.
Key Evidence and Findings: The assessee provided email correspondences and agreements but failed to substantiate the actual services rendered. The Tribunal found this evidence inadequate to prove the services were rendered.
Application of Law to Facts: The Tribunal remitted the issue back to the AO for a fresh examination, allowing the assessee another opportunity to provide documentary evidence proving the rendition of services.
Treatment of Competing Arguments: The Tribunal acknowledged the assessee's argument regarding the aggregation principle but held that it is only applicable if the basic fact of service rendition is established.
Conclusions: The Tribunal remitted the matter to the AO for a fresh examination, allowing the assessee to present additional evidence.

Payments to Secondment Employees

Legal Framework and Precedents: The issue revolves around the interpretation of Sections 192 and 195 of the Income Tax Act concerning salary payments versus FTS. The Tribunal considered the contractual terms and the nature of control exercised by the home country unit.
Court's Interpretation and Reasoning: The Tribunal observed that the contractual terms indicated that the home country unit retained control over the employees, suggesting the payments might be FTS rather than salary.
Key Evidence and Findings: The Tribunal noted that the assessee failed to establish itself as the legal and economic employer of the secondment employees, as required to classify payments as salary.
Application of Law to Facts: The Tribunal remitted this issue back to the AO for a fresh examination, allowing the assessee to provide evidence supporting its claim as the legal employer.
Treatment of Competing Arguments: The Tribunal considered the assessee's argument that TDS was correctly deducted under Section 192 but found the evidence insufficient to support this claim.
Conclusions: The matter was remitted to the AO for further examination, with directions to consider the evidence afresh.

Refund Computation

Legal Framework: The issue pertains to the correct computation of refund due to the assessee.
Court's Interpretation and Reasoning: The Tribunal directed the AO to recompute the refund amount in accordance with the law.
Conclusions: The AO was instructed to reassess the refund computation and provide the correct amount to the assessee.

SIGNIFICANT HOLDINGS

Core Principles Established: The Tribunal reiterated the importance of documentary evidence in substantiating claims of service rendition in transfer pricing cases. It also emphasized the need for clear evidence of employer control in determining the nature of payments to secondment employees.
Final Determinations: The Tribunal remitted both the transfer pricing and secondment employee issues back to the AO for a fresh examination, allowing the assessee to present additional evidence. The Tribunal also directed a reassessment of the refund computation.

The Tribunal's decision underscores the necessity for comprehensive documentation in transfer pricing and employment arrangements to substantiate claims and avoid disallowances. The judgment reflects a balanced approach, providing the assessee an opportunity to rectify evidentiary deficiencies while upholding the principles of tax law.

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