2020 (1) TMI 1187 - AT - Income Tax

Tribunal rules in favor of appellant, sets aside authorities' nil arm's length price determination

Millward Brown Market Research Services India Private Limited Versus DCIT-10 (2) (2) Mumbai

The Tribunal set aside the authorities' orders determining the arm's length price at nil, ruling in favor of the appellant. The Tribunal emphasized that ... TP Adjustment - method of benchmarking of international transaction - determination of arm's length price of royalty by resorting to estimation by the Transfer Pricing Officer - determining arms length price at nil - assessee submitted that the Transfer Pricing officer has determined the arms length price of the international transaction in this case to be nil, without applying any method whatsoever - assessee has submitted voluminous document showing the services however they have been summarily dismissed on the ground that the benefit accruing to the assessee has not been established - HELD THAT:- Admittedly the Transfer Pricing officer has exceeded his jurisdiction. Hence the TPO's proposition that the documents submitted by the assessee do not provide the benefit obtained by the assessee and hence they have to be rejected and arm's-length price is to be determined as nil is not at all sustainable. The learned departmental representative in this regard could not submit anything against the proposition that Transfer Pricing officer has erred in applying the benefit test. Authorities below have totally erred in rejecting the assessee's documents and submissions on the ground that they do not prove the benefit obtained by the assessee. That the services have been rendered is very much evident from the documents submitted to the authorities below. The assignment to the TPO was to benchmark the international transaction and compute the arm’s length price. Instead of performing his statutory duties the TPO sat into the shoes of the Assessing Officer and rejected the documents on the ground that they do not prove the benefit test. This action has been upheld by the DRP. This approach is not sustainable. Submission of learned Counsel of the assessee is also correct that the authorities below have summarily rejected the assessee’s claim without applying any method of benchmarking international transaction as specified in section 92C of the Act. Duty of the Transfer Pricing Officer is restricted only to the determination of arm's length price of an international transaction between two related parties by applying any of the methods prescribed under section 92C of the Act r/w rule 10B of the Rules. Thus, there is no provision under the Act empowering the Transfer Pricing Officer to determine the arm's length price on estimation basis (which in this case is nil), that too, by entertaining doubts with regard to the business expediency of the payment and in the process stepping into the shoes of the Assessing Officer for making disallowance under section 37(1) of the Act. This, in our considered opinion, is not in conformity with the statutory provision, hence, unacceptable. The Transfer Pricing Officer is duty bound to determine the arm's length price of the international transaction by adopting one of the method prescribed under the statute and cannot deviate from the restrictions/conditions imposed under the statute. As relying on M/S. JOHNSON & JOHNSON LTD. [2017 (3) TMI 1520 - BOMBAY HIGH COURT] transfer pricing adjustment at nil fails on both counts. Firstly on the account of benefit test which is not to be applied by the TPO and secondly none of the method of benchmarking the international transaction as specified in section 92C has been applied. - Decided in favour of the assessee. Issues Involved:1. Determination of total taxable income.2. Transfer pricing adjustment under Section 92C(4).3. Reference to the Transfer Pricing Officer (TPO).4. Disregarding the Benefit Test Documentation.5. Rejecting the Appellant's economic analysis.6. Use of method for benchmarking the international transaction.7. Sufficient opportunity of being heard.8. Penalty proceedings under Section 271(1)(c).Detailed Analysis:Determination of Total Taxable Income:The appellant contested the determination of its total taxable income at INR 8,79,71,230 against INR 4,86,31,434 as reported in its return. The appeal was directed against the order of the Assessing Officer (AO) dated 25.1.2016, passed under Section 143(3) read with Section 144C(13) for A.Y. 2011-12, pursuant to the direction of the Dispute Resolution Panel (DRP) dated 21.12.2015.Transfer Pricing Adjustment under Section 92C(4):The appellant argued that the AO erred in making a transfer pricing adjustment of INR 3,91,71,499 on the premise that the international transactions with its Associated Enterprises (AEs) were not at arm's length. The TPO had made an adjustment towards intra-group service charges paid by the appellant to its AEs, contending that no benefits except IT support had been received by the appellant.Reference to the Transfer Pricing Officer (TPO):The appellant contended that the reference made by the AO to the TPO was not in accordance with the provisions of Section 92CA(1) and that none of the conditions set out in Section 92C(3) were satisfied. The appellant argued that the TPO erred in rejecting the transfer pricing analysis carried out by the appellant and in re-determining the arm's length price.Disregarding the Benefit Test Documentation:The appellant argued that the TPO erred in disregarding the submission and documentary evidence filed to substantiate the receipt of intragroup services from its AE. The appellant maintained that the benefit test is not a condition for benchmarking the international transaction with AE and that the commercial rationale for availing such services was not appreciated.Rejecting the Appellant's Economic Analysis:The appellant contended that the TPO erred in disregarding the economic analysis undertaken by the appellant using the Transactional Net Margin Method (TNMM) for determination of the ALP of allocation of costs towards operational expenses. The TPO hypothetically applied the Comparable Uncontrolled Price (CUP) method without providing cogent reasons and rejected the use of AEs as the tested party without considering the functional profiles of the appellant and its AEs.Use of Method for Benchmarking the International Transaction:The appellant argued that the TPO erred in not conducting the analysis of selecting the Most Appropriate Method (MAM) as prescribed under Rule 10C and not documenting the same as prescribed under Rule 10D, thereby holding the arm's length price of the said international transaction at Nil.Sufficient Opportunity of Being Heard:The appellant contended that the TPO erred in not providing sufficient opportunity of being heard while determining the ALP of the said international transaction at Nil.Penalty Proceedings under Section 271(1)(c):The appellant argued that the AO erred in initiating penalty proceedings under Section 271(1)(c) of the Act.Tribunal's Findings:Intra-group Services:The Tribunal noted that the appellant had received various services from MB Inc. and MB Singapore, including marketing and client communication, IT, and operating management support. The appellant had paid a total of INR 3,91,71,499 towards costs recharged as operational expenses by its AEs. The TPO's adjustment was based on the contention that no benefits except IT support had been received by the appellant.The Tribunal found that the TPO had exceeded his jurisdiction by applying the benefit test, which is the domain of the AO under Section 37(1) of the Act. The Tribunal emphasized that the TPO's duty is to benchmark the international transaction and compute the arm's length price using one of the prescribed methods under Section 92C. The Tribunal held that the TPO's determination of the ALP at nil without applying any method was not sustainable.Rejection of Economic Analysis:The Tribunal agreed with the appellant that the authorities had erred in rejecting the appellant's economic analysis without applying any method of benchmarking the international transaction as specified in Section 92C. The Tribunal noted that the TPO's rejection of the appellant's documents and submissions on the ground that they did not prove the benefit obtained was not justified.Conclusion:The Tribunal set aside the orders of the authorities below determining the ALP at nil and decided the issue in favor of the appellant. The Tribunal allowed the appellant's appeal partly, emphasizing that the TPO must apply one of the prescribed methods under Section 92C to determine the ALP.Order Pronouncement:The order was pronounced in the Court on 08.1.2020.Result:The appeal was partly allowed in favor of the appellant.