Tribunal allows appeal, disallows income decrease from arm's length price adjustment for intra-group services

The Tribunal allowed the appeal, holding that the arm's length price adjustment for intra group services would decrease the income, contravening Section 92(3) of the Income Tax Act. Consequently, the transfer pricing provisions could not be applied to intra group services, providing relief to the assessee by disallowing the adjustment and preventing erosion of the tax base.

---

---

Issues:
Determining the arm's length price adjustment for management support services received from associated enterprises (AE) abroad.

Detailed Analysis:

1. Background: The appeal concerns an assessment under section 143(3) r.w.s. 144C of the Income Tax Act, 1961, for the assessment year 2011-12. The grievance of the assessee revolves around the arm's length price adjustment of Rs. 8,40,95,610 for management support services received from its associated enterprises abroad.

2. Factual Scenario: The assessee, an Indian company, is a wholly owned subsidiary of Mercer Mauritius Limited, rendering IT enabled services to its AEs. The Transfer Pricing Officer made an ALP adjustment for IT enabled services and concluded the ALP value of intra group services received by the assessee as NIL. The DRP confirmed the ALP adjustment for intra group services, leading to the appeal.

3. Legal Analysis: The Tribunal observed that the ALP adjustment for intra group services would erode the tax base, as it would reduce the revenue from IT enabled services by 20% more than the adjustment amount. Section 92(3) prohibits computation of income based on arm's length price if it results in lowering the income compared to the previous year's entries. Therefore, the transfer pricing provisions cannot be invoked for intra group services in this case.

4. Decision: The Tribunal allowed the appeal, upholding the assessee's contention that the ALP adjustment for intra group services would decrease the income, contrary to the provisions of Section 92(3). As a result, the transfer pricing provisions could not be applied to intra group services, and the appeal was allowed.

5. Conclusion: The Tribunal's decision focused on the impact of the ALP adjustment on the assessee's income and tax base, emphasizing the application of Section 92(3) in prohibiting the computation of income based on arm's length price when it results in reducing the income chargeable to tax. The ruling provided relief to the assessee by disallowing the ALP adjustment for intra group services, considering the erosion of the tax base due to such adjustment.

---