Transfer Pricing Officer's adhoc estimation of management fees without prescribed methodology rejected by Tribunal

ITAT Mumbai ruled in favor of the assessee regarding transfer pricing adjustment of management fees paid to associated enterprise. The court held that the Transfer Pricing Officer made an adhoc unilateral estimation by assuming 750 hours of service at INR 3,000 per hour without applying prescribed methods under transfer pricing regulations. The Tribunal deleted the addition, finding that TPO failed to follow proper methodology and disregarded case facts. The decision relied on coordinate bench precedents including assessee's own earlier case and Kellogg India matter. Assessee's appeal was allowed.

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Issues Involved:
1. Adjustment of management fees paid by the assessee to its Associated Enterprise (AE) and the method of benchmarking this transaction.

Issue-wise Detailed Analysis:

1. Adjustment of Management Fees:
The primary issue in this appeal is the adjustment of Rs. 4,08,27,526/- concerning the management fees paid by the assessee to its AE, Brink's Inc. USA. The assessee, a subsidiary of Brink's Security International Inc. USA and Brink's Dutch Holding BV, is part of Brink's Global Services, which provides global risk management and secure logistics for high-value items. During the relevant period, the assessee engaged in various international transactions with its AE, including the payment of management fees amounting to Rs. 4,30,77,526/-.

To benchmark this transaction, the assessee relied on the "other method." However, the Transfer Pricing Officer (TPO) applied the Comparable Uncontrolled Price (CUP) method, as was done in the assessment years 2012-13 and 2013-14, resulting in an adjustment of Rs. 4,08,27,526/-. The Dispute Resolution Panel (DRP) upheld this adjustment, leading to the present appeal.

Arguments by the Assessee:
The assessee contended that the issue is identical to those adjudicated in its favor by the Tribunal for the assessment years 2012-13 and 2013-14. The assessee had entered into a management and technical services agreement dated 01/01/2011 and paid the management fee accordingly. The TPO and DRP had noted that the facts and submissions for the current assessment year were identical to the previous years. The assessee argued that the TPO summarily rejected the Transactional Net Margin Method (TNMM) consistently used by the assessee for benchmarking and instead proposed an adjustment under CUP without proper benchmarking with comparable uncontrolled transactions.

Arguments by the Department:
The Department defended the assessment order, arguing that the assessee had not benchmarked the international transactions properly and failed to demonstrate any benefit received from the services rendered by the AE. The Department emphasized that the assessee did not provide sufficient details and evidence of costs incurred by the AE for the services provided.

Tribunal's Findings:
The Tribunal examined the orders of the authorities below and noted that the facts for the current assessment year were similar to those in the previous years. The Tribunal referred to its earlier decisions in the assessee's own case and other similar cases, where it was held that the TPO had made an ad-hoc unilateral estimation without applying any prescribed method, which was not sustainable in law. The Tribunal emphasized that the TPO should have benchmarked the transaction using one of the prescribed methods rather than summarily rejecting the TNMM and resorting to an ad-hoc pricing approach.

The Tribunal cited the case of CLSA vs. DCIT, where it was held that any ad-hoc determination of arm's length price by the TPO without following the prescribed methods is unsustainable. The Tribunal also referred to the decision in the case of Kellogg India Pvt. Ltd., where the TPO's approach of determining the arm's length price without applying any prescribed method was rejected.

Conclusion:
Based on the consistent findings in the assessee's favor in previous years and the lack of any contrary decisions or facts, the Tribunal allowed ground No. 1 of the appeal, thereby deleting the adjustment of Rs. 4,08,27,526/-. The other grounds raised in the appeal were deemed argumentative and in support of ground No. 1, requiring no separate adjudication.

Final Judgment:
The appeal by the assessee was allowed, and the order was pronounced in the open court on January 12, 2023.

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