2019 (9) TMI 1027 - AT - Income Tax

Tribunal rules in favor of taxpayer, criticizes Transfer Pricing Officer's methodology.

The tribunal allowed the appeal in favor of the assessee, deleting the additions made in the final assessment order. It found that the taxpayer provided ... TP Adjustment - availing of Marketing Services and Global Infrastructure Support Services - rule of consistency- HELD THAT:- AR has submitted that no such adjustment has been proposed in the subsequent years also. In the said factual matrix, it is difficult to accept the allegations of the revenue that no such services were rendered and the assessee derived no benefits by availing the said services. These services were being availed pursuant to common agreement entered into by the assessee in Financial Year 2008-09 and therefore, disputing the same only in one year while accepting the same in other years, would only reflect contradictory approach adopted by the revenue. TPO, rejected the assessee’s methodology by stressing upon benefit test by observing that the assessee could not establish the factum of receipt of services and also could not demonstrate the corresponding benefits received by the assessee by availing these services. The said services, in the opinion of TPO, could be obtained from an independent consultant in India at lower cost and further, the assessee already had requisite expertise which is further evidenced by the fact that the assessee was acquired by its AE owing to its domain expertise. However, as noted earlier, the said services have been received by the assessee pursuant to agreements entered in Financial Year 2008-09, which has been found to be at Arm’s Length Price in the earlier two assessment years. Secondly, it was not the jurisdiction of Ld. TPO to question the assessee’s commercial wisdom to avail services in a particular manner. The assessee had placed on record plethora of documentary evidences, as enumerated by us in para 5.4, in support of the fact that the services were actually received and benefits were derived. However, the same has been disregarded and brushed aside in a very light manner which could not be held to be justified. Another aspect to be noted is that Ld. TPO has determined ALP of the transactions as Nil without applying any of the methods prescribed u/s 92C of the Act to determine the ALP. It is evident that no transfer pricing exercise was done by Ld. TPO to determine the value of the services, whatever, received by the assessee. No comment has been made on correctness or appropriateness of assessee’s TP methodology. Therefore, the approach of Ld. TPO could not be said to be in accordance with the spirit of law. We are unable to pursued ourselves to sustain the action of revenue in sustaining impugned additions in the hands of assessee. Hence, by deleting the additions of ₹ 448.47 Lacs as made in the final assessment order, we allow Ground Nos. 1 to 7 of the appeal. The suo-moto disallowance of ₹ 534.49 Lacs as made by the assessee u/s 40(a)(ia) shall be allowable in accordance with law. Issues Involved:1. Determination of Arm's Length Price (ALP) for intra-group services.2. Jurisdiction of Transfer Pricing Officer (TPO) and Assessing Officer (AO) in computing transfer pricing addition.3. Evaluation of evidence for services received and benefits derived.4. Appropriateness of Transaction Net Margin Method (TNMM) for benchmarking.5. Ad-hoc disallowance of payments and questioning commercial wisdom.6. Consistency in benchmarking payments for services across assessment years.7. Disallowance under section 40(a)(i) and its subsequent allowance.8. Computation of interest under Sections 234B and 234C.Detailed Analysis:1. Determination of ALP for Intra-Group Services:The TPO and AO, under the directions of the Dispute Resolution Panel (DRP), determined the ALP of multinational client coordination service, support services, and global infrastructure support service as Nil, making an adjustment of Rs. 9,82,97,079/-. The TPO opined that the taxpayer had to prove actual receipt and benefit of services to justify the charges paid. The DRP concurred, finding no tangible benefits/services received by the assessee.2. Jurisdiction of TPO and AO:The assessee argued that the TPO and AO exceeded their jurisdiction by computing the transfer pricing addition without applying any prescribed methods, making their orders bad in law. The TPO's role is to determine the ALP of transactions rather than question the commercial wisdom of incurring the expenditure.3. Evaluation of Evidence:The assessee submitted various documents to demonstrate receipt of services and benefits derived. However, the TPO and DRP found these documents to be general correspondences and not indicative of specific services rendered. The DRP noted that the assessee failed to demonstrate the cost incurred by the AE and its allocation among group entities.4. Appropriateness of TNMM:The assessee used TNMM as the most appropriate method for benchmarking the payment for services, which was rejected by the TPO. The TPO did not apply any prescribed method to determine the ALP as Nil, which was contested by the assessee.5. Ad-hoc Disallowance and Commercial Wisdom:The TPO made an ad-hoc disallowance of payment, questioning the commercial wisdom and expediency of the appellant. The DRP upheld this, stating that no prudent businessman would incur such high management service costs without tangible benefits.6. Consistency in Benchmarking Payments:The assessee argued that similar transactions in previous years were accepted by the TPO, and there was no change in facts. The rule of consistency was raised, emphasizing that the same methodology should be applied across assessment years.7. Disallowance under Section 40(a)(i):The assessee had disallowed Rs. 5,34,49,483/- under section 40(a)(i) for non-deduction of tax at source and argued that this amount should be allowed as an expense in the year in which tax is deducted and paid. The DRP directed the AO to verify records and grant appropriate relief to avoid double taxation.8. Computation of Interest:The AO erred in computing interest under Sections 234B and 234C. The interest being mandatory and consequential, did not require indulgence from the tribunal.Conclusion:The tribunal, after considering the submissions and material on record, found that the assessee provided sufficient documentary evidence to justify the payment for services received. The tribunal noted that similar payments were accepted in previous years, and the TPO's determination of ALP as Nil without applying any prescribed methods was not justified. The tribunal allowed the appeal, deleting the additions made in the final assessment order and allowing the disallowance under section 40(a)(i) in accordance with law. The appeal was allowed in favor of the assessee.