Transfer pricing for intercompany services cannot be set at nil without evidence that the services were not received.

In transfer pricing, management fees paid under an intercompany service agreement cannot be assigned a nil arm's length price merely because the revenue authority is unconvinced about benefit received, unless there is a factual finding that the services were not received or were separately obtained and booked elsewhere. Entity-level benchmarking was rejected as the proper method because international transactions must be tested against uncontrolled transactions, and the facts indicated a composite arrangement including IT enabled services. The adjustment therefore required fresh consideration on a composite basis by the Transfer Pricing Officer and the Assessing Officer.

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Issues: Whether the arm's length price of management fees paid to an associated enterprise could be determined at nil and whether the assessee's international transactions had to be tested on a composite basis along with IT enabled services.

Analysis: The assessee had benchmarked the transactions at entity level, but such benchmarking was not accepted as the proper transfer pricing method because international transactions must be tested against uncontrolled transactions. At the same time, the management fees could not be disregarded and assigned a nil arm's length value merely on the basis that the revenue authorities were not satisfied about the benefit derived, particularly when the payment was made under an agreement describing the services and there was no finding that the same services had been separately obtained from third parties and booked elsewhere. The advance pricing agreement also showed that, in principle, the department had accepted the covered transactions, including management fees, as part of the composite arrangement, though not for the year in question.

Conclusion: The determination of the arm's length price of management fees at nil was not justified, and the matter required fresh consideration by the Transfer Pricing Officer and the Assessing Officer on a composite basis.

Final Conclusion: The assessment was set aside for reconsideration of the transfer pricing adjustment relating to management fees and IT enabled services, resulting in relief to the assessee only to the extent of remand.

Ratio Decidendi: In transfer pricing, a payment made under an intercompany service agreement cannot be assigned a nil arm's length price merely on a benefit-based objection unless there is a factual finding that the services were not received or were separately obtained and accounted for elsewhere; the transaction must be tested on the proper composite transfer pricing basis where the facts so require.

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