2019 (6) TMI 1371 - AT - Income Tax

Tribunal Upholds Arm's Length Price for International Transaction, Rejects Nil ALP Claim

INA Bearings India Pvt. Ltd. Versus DCIT, Circle-11, Pune And (Vice-Versa)

INA Bearings India Pvt. Ltd. Versus DCIT, Circle-11, Pune And (Vice-Versa) - TMI Issues Involved:1. Determination of Arm's Length Price (ALP) for international transactions.2. Segregation vs. Aggregation of international transactions.3. Nature of services rendered (Management services vs. Stewardship activities).4. Application of prescribed methods for determining ALP.5. Validity of benchmarking and cost verification.Issue-wise Detailed Analysis:1. Determination of Arm's Length Price (ALP) for International Transactions:The core issue revolves around the determination of the ALP for the international transaction involving the payment of fees for management services. The assessee aggregated this transaction with other international transactions under Manufacturing and Trading segments and determined the ALP using the Transactional Net Margin Method (TNMM). The Transfer Pricing Officer (TPO) disagreed, insisting that the transaction should be benchmarked separately and determined its ALP at Nil, considering the services as stewardship activities.2. Segregation vs. Aggregation of International Transactions:The tribunal examined whether the TPO was justified in segregating the transaction of payment for management services from other transactions. Citing Section 92C(1) and relevant case law, it was held that the ALP should be determined on a transaction-by-transaction basis unless the transactions are closely linked. It was found that the transactions in question, involving different associated enterprises (AEs), were not closely linked and thus required separate benchmarking.3. Nature of Services Rendered (Management Services vs. Stewardship Activities):The tribunal analyzed the nature of the services rendered by the AE. The TPO had classified these services as stewardship activities, implying no payment was necessary. However, the tribunal, after reviewing the detailed descriptions and benefits of the services provided, concluded that these were indeed management support services and not stewardship activities. This conclusion was supported by the comprehensive documentation provided, including detailed invoices and minutes of meetings.4. Application of Prescribed Methods for Determining ALP:The TPO's determination of Nil ALP without applying any specific method was scrutinized. The tribunal emphasized that Section 92C mandates the use of one of the prescribed methods for determining ALP. The TPO’s failure to apply a prescribed method rendered the ALP determination invalid. The tribunal referenced the Hon’ble jurisdictional High Court's rulings, which underscored the necessity of adhering to prescribed methods.5. Validity of Benchmarking and Cost Verification:The tribunal reviewed the benchmarking analysis and cost verification reports prepared by Ernst & Young, which confirmed that the service fees were based on actual costs plus a 5% markup. The tribunal found that the authorities had not disputed the correctness of the invoices or the benchmarking process. It was concluded that even if the markup was assumed to be lower, the difference would fall within the permissible range, negating the need for any transfer pricing adjustment.Conclusion:The tribunal held that the international transaction of payment of fees for management services was at ALP, and no transfer pricing addition was warranted. The appeal by the assessee was partly allowed, and the appeal by the Revenue was dismissed. The tribunal directed the deletion of the addition sustained by the CIT(A), affirming that the services rendered were genuine, necessary, and appropriately benchmarked.