2020 (10) TMI 451 - AT - Income Tax

Tribunal validates TNMM method for benchmarking management services, directs AO to allow expenses

The tribunal upheld the Assessing Officer's jurisdiction, validating the use of TNMM for benchmarking management services and recognizing the legitimacy ... Arm's Length Price - Transfer pricing jurisdiction of TPO - Comparable Uncontrolled Price (CUP) method - Transactional Net Margin Method (TNMM) - Cost-to-cost reimbursement - Benefit derived test - Business expenditure wholly and exclusivelyCost-to-cost reimbursement - Benefit derived test - Business expenditure wholly and exclusively - Whether the intra group management services were actually rendered to the assessee and, if so, whether the cost to cost payments are allowable as business expenditure without disallowance on the ground of lack of benefit. - HELD THAT: - The Tribunal examined the contemporaneous material filed by the assessee showing segmented details of administrative, technical and sales support services, cost allocation sheets and the shared cost allocation agreement, and held that the assessee had filed extensive evidence of availment. The Tribunal applied precedent that a revenue authority (or TPO) cannot substitute its view for a business judgment about whether services should be availed, and that the question whether a service produced a measurable financial benefit is not a prerequisite for allowing the expense under transfer pricing provisions. On these findings the Tribunal concluded that the payments made on a cost to cost basis for services rendered from a common pool were bona fide business expenditures and could not be disallowed merely because the TPO considered benefit or need. The Tribunal therefore set aside the finding that services were not rendered or were duplicative and directed allowance of the claim. [Paras 21, 23]Payments for management services were held to have been rendered and, being cost to cost reimbursements for bona fide intra group services, are allowable as business expenditure.Arm's Length Price - Transfer pricing jurisdiction of TPO - Comparable Uncontrolled Price (CUP) method - Transactional Net Margin Method (TNMM) - Whether the TPO was justified in applying the CUP method and determining the arm's length price of the management services at nil instead of accepting the TNMM/cost allocation evidence relied upon by the assessee. - HELD THAT: - The Tribunal held that the proper task of the TPO is to determine whether the price paid by the assessee is what an independent enterprise would have paid and not to re open the commercial decision to avail services or to assess whether the assessee obtained measurable benefit. On the facts, the assessee had adopted TNMM and produced comparables and certified allocation data; the TPO applied CUP and effectively based ALP on an assessment of need/benefit rather than comparable uncontrolled transactions. The Tribunal found this approach impermissible, held that CUP was inapposite where the assessee had identified TNMM comparables and allocation methodology, and concluded that the TPO exceeded jurisdiction by valuing the transaction at nil. [Paras 22, 23]The TPO's application of CUP and determination of ALP at nil was held to be inappropriate and beyond permissible approach; the assessee's TNMM/allocated cost approach was accepted.Final Conclusion: The Tribunal allowed the appeal, directing that the assessee's cost to cost reimbursements for intra group management services for AY 2009 10 be accepted and the TPO/Assessing Officer's upward adjustment (determining ALP at nil by CUP) be set aside. Issues Involved:1. Validity of the Assessing Officer’s jurisdiction.2. Methodology for benchmarking Management Services.3. Appropriateness of the Comparable Uncontrolled Price (CUP) method.4. Disallowance of business expenses by the Transfer Pricing Officer (TPO).5. Tax evasion motive.6. Classification of Management Services as Shareholder Services.Issue-wise Detailed Analysis:1. Validity of the Assessing Officer’s jurisdiction:The assessee challenged the jurisdiction of the Assessing Officer (AO) under section 144C(4)/143(3) of the Income-tax Act, 1961. The tribunal upheld the AO's jurisdiction, finding no procedural or legal errors in the AO's actions.2. Methodology for benchmarking Management Services:The assessee used the Transactional Net Margin Method (TNMM) for benchmarking intra-group services (IGS). The TPO disagreed, arguing that the assessee failed to provide service-wise details and contemporaneous documentary evidence to substantiate the services received. The tribunal noted that the assessee provided extensive documentation, including cost allocation agreements and evidence of services rendered, supporting the use of TNMM.3. Appropriateness of the Comparable Uncontrolled Price (CUP) method:The TPO applied the CUP method, determining the Arm's Length Price (ALP) of the transaction at NIL due to a lack of evidence and perceived duplication of services. The tribunal found that the TPO's approach was inappropriate, as it did not identify comparable uncontrolled transactions. The tribunal held that the TNMM method was suitable given the nature of the services and the evidence provided.4. Disallowance of business expenses by the TPO:The TPO disallowed the entire expense of Rs. 1,94,75,937/- for management services, questioning the necessity and benefit of the services. The tribunal emphasized that the TPO's role is limited to verifying the arm's length nature of the transaction, not questioning the commercial decisions of the assessee. The tribunal found that the services were indeed rendered and beneficial to the assessee, thus allowing the expenses.5. Tax evasion motive:The TPO suggested that the payments were a device for profit shifting, as the tax rate in Denmark was higher. The tribunal dismissed this argument, noting that the assessee had deducted TDS and paid service tax, and there was no evidence of tax evasion motive.6. Classification of Management Services as Shareholder Services:The TPO and CIT(A) classified the management services as shareholder services, implying no benefit to the assessee. The tribunal rejected this classification, finding that the services were specialized, necessary for the assessee's business, and not duplicative. The tribunal referenced the CIT(A)'s findings for the subsequent year, which supported the assessee's claim.Conclusion:The tribunal concluded that the TPO exceeded his jurisdiction by determining the ALP at NIL and disallowing the expenses. The tribunal directed the AO/TPO to allow the claim of the assessee in entirety, validating the use of TNMM for benchmarking and recognizing the legitimacy of the expenses incurred for management services. The appeal of the assessee was allowed.