Tribunal partially allows appeal on transfer pricing issues, citing errors in deeming fiction application

The Tribunal partly allowed the appeal, restoring issues on intra-group services and reimbursement of expenses to the Transfer Pricing Officer for fresh adjudication. The appeal regarding adjustments for services to domestic Associated Enterprises was allowed, as transactions between domestic entities were not deemed international transactions. The Tribunal found errors in invoking deeming fiction and referred to relevant case law. Ground No.4, a general issue, required no adjudication. The delay in pronouncing the order was attributed to the COVID-19 pandemic lockdown.

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Issues Involved:
1. Adjustment on account of intra-group services.
2. Adjustment on account of reimbursement of expenses.
3. Adjustment in respect of services rendered to domestic AEs held as 'deemed International Transactions'.

Issue-wise Detailed Analysis:

1. Adjustment on Account of Intra-Group Services:
The assessee paid for intra-group services rendered by the regional headquarters, covering areas such as finance, management, operations, global sales, marketing, public relations, and legal services. The Transfer Pricing Officer (TPO) applied the Comparable Uncontrolled Price (CUP) method to benchmark the Arm’s Length Price (ALP) of these services and subsequently applied the 'benefit test', determining the ALP of such services as Nil. The Tribunal found that the TPO failed to properly analyze the support services received by the assessee and noted that the settled legal position is that the ALP of intra-group services cannot be determined at Nil. The Tribunal referenced the case of Merck Ltd. v. Dy. CIT, where the application of the benefit test was deemed irrelevant. Consequently, the Tribunal restored the issue to the TPO for fresh adjudication using the most appropriate method specified in section 92C of the Act, allowing ground No.1 for statistical purposes.

2. Adjustment on Account of Reimbursement of Expenses:
This issue is connected to the first issue as the adjustment made on account of alleged reimbursement of expenses pertains to intra-group services. Since the Tribunal restored the first issue to the TPO, it deemed it appropriate to restore the second issue as well for de-novo adjudication after affording a reasonable opportunity of hearing to the assessee, in accordance with the law. Ground No.2 was thus allowed for statistical purposes.

3. Adjustment in Respect of Services Rendered to Domestic AEs Held as 'Deemed International Transactions':
The TPO treated transactions between the assessee and its domestic AEs as deemed international transactions because the holding company of the assessee and the domestic AEs is based in Mauritius. The Tribunal noted that for a transaction to be considered an international transaction under section 92B(1), at least one of the associated enterprises must be a non-resident. In this case, all entities involved were domestic, and the TPO/DRP failed to substantiate that the transactions were influenced by the overseas holding company. The Tribunal referenced the case of CIT vs. Kodak India (P) Ltd., where it was held that transactions between domestic entities do not fall within the definition of 'International Transaction' under section 92B(2) prior to its amendment. The Tribunal concluded that the authorities had erred in invoking the deeming fiction and allowed ground No.3 of the appeal.

General Grounds:
Ground No.4 was general in nature and required no adjudication.

Conclusion:
The appeal of the assessee was partly allowed. The Tribunal restored the issues related to intra-group services and reimbursement of expenses to the TPO for fresh adjudication and allowed the appeal regarding the adjustment of services rendered to domestic AEs. The order was pronounced beyond the 90-day period due to extraordinary circumstances caused by the COVID-19 pandemic lockdown.

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