2022 (5) TMI 1338 - AT - Income Tax

ITAT directs TPO to apply TNMM for ALP determination, emphasizes evidence-based assessments

The ITAT allowed the appeals, directing the TPO to adopt TNMM for determining the ALP for Technology License Renewal fees and Management fees. The ITAT ... TP Adjustment - payments made for Technology License renewal fees and management fees - whether the transaction ought to be benchmarked separately or whether TNMM could be adopted? - HELD THAT:- The subject payments (Management fee and Technology License Renewal Fee) are incurred with respect to the manufacture of industrial adhesives. It is undisputed that the assessee is engaged only in the manufacture, and marketing and therefore dependent on its group companies for intellectual property, skills, expertise, know-how, specialization and technology which are developed in-house by the group in all core areas of its business, benefits also the assessee in the form of consistency in business practice, the economics of scale with regard to global sourcing. The process improvements are also passed on by the group companies to the assessee and same is evident from facts on record. The subject payments are duly supported by agreements which details the nature of services performed by the associated enterprises to the assessee company. Given the above factual background, we find that the management fee and technology license fee are interlinked and interconnected with the business of manufacture. Given the difficulty / impossibility in computing ALP using CUP and considering the close nexus between the manufacturing activity and payment of management / license fees, the method to be adopted for benchmarking the above international transactions by the assessee ought to be TNMM. The TPO is accordingly directed to consider TNMM as MAM for determination of ALP for payment of license and management fees. The contention of the TPO that the assessee has not submitted the documentary evidence for the benefit received on account of services rendered is factually incorrect in view of voluminous evidences filed as a paper book. The assessee has also submitted a detailed note explaining the benefits received on account of payment of license and management fees. The TPO and the DRP have failed to consider the same in an objective manner. The Delhi High Court in CIT v EKL Appliances Ltd. [2012 (4) TMI 346 - DELHI HIGH COURT] held that so long as the expenditure or payment has been demonstrated to have been incurred or laid out for the purpose of business, it is no concern of the TPO to disallow the same on any extraneous reasoning. The TPO and the DRP in the present case have summarily rejected the evidences and submissions of the assessee on the 'benefit test' without bringing on record any contrary material. TPOs reasoning of constructing a hypothetical CUP based on the study of third party scenario is not envisaged as per the benchmarking exercise laid out in rule 10B. TPO has also not explained the basis or reasoning in support of his impugned conclusion that no third party would make payment for services in a hypothetical CUP. The orders passed by the lower authorities therefore cannot be sustained. Payments made for commercial service (IT support services), the issue pertains to only A.Y. 2011- 2012 (see ground 8). The assessee has submitted that the cost allocation is on the basis of a number of IT users, i.e., head count. Since centralized IT services of the TOTAL group are distributed among all divisions, subsidiaries and associates who use this facility, the basis of cost allocation is reasonable and cannot be faulted. In addition to listing the services availed, the assessee has also furnished copies of invoices evidencing payments to the AE. The AR for the assessee invited our attention to the DRP directions for the A.Y. 2012-2013 and 2013-2014, wherein relief has been allowed considering the above basis to be the scientific basis of cost allocation. We direct the TPO to consider the above evidence, and if the facts remain the same as in the case of subsequent years, allow appropriate relief to the assessee. Issues Involved:1. Determination of Arm's Length Price (ALP) for international transactions.2. Appropriateness of Transactional Net Margin Method (TNMM) versus Comparable Uncontrolled Price (CUP) method.3. Justification and documentation of payments for intra-group services including Technology License Renewal fees, Management fees, and Commercial Services (IT support services).Detailed Analysis:1. Determination of Arm's Length Price (ALP) for International Transactions:The assessee company, a wholly-owned subsidiary of Bostik Australia Pvt. Ltd., engaged in manufacturing industrial adhesives, had its assessments for the years 2011-2012 to 2013-2014 scrutinized due to international transactions with Associated Enterprises (AEs). The Assessing Officer (AO) referred the matter to the Transfer Pricing Officer (TPO) under section 92CA(1) to determine the ALP. The assessee utilized the TNMM method, which the TPO accepted for certain transactions but rejected for intra-group services payments, opting instead for the CUP method.2. Appropriateness of Transactional Net Margin Method (TNMM) versus Comparable Uncontrolled Price (CUP) Method:The TPO rejected TNMM for intra-group services payments, including Technology License Renewal fees and Management fees, proposing CUP as the most appropriate method. The TPO's rationale included the lack of substantial and commercial benefit to the taxpayer, absence of documentary proof, and hypothetical CUP construction. The Dispute Resolution Panel (DRP) upheld the TPO's decision, emphasizing the need for separate transaction approaches and questioning the payments' justification, given their absence in prior years.However, the ITAT referenced the Delhi High Court's judgment remanding a similar case (Knorr Bremse) back to ITAT, which upheld TNMM for benchmarking license and management fees. The ITAT found that the payments were integral to the assessee's business and that the TPO/DRP failed to objectively consider the evidence provided.3. Justification and Documentation of Payments for Intra-group Services:The assessee provided detailed submissions, agreements, and invoices to justify the payments for intra-group services. The TPO's rejection of these submissions was found to be factually incorrect, as substantial evidence was provided. The ITAT emphasized that the reasonableness of the expenditure should be viewed from the businessman's perspective, not the Revenue's, and criticized the TPO's hypothetical CUP construction.For IT support services payments in the year 2011-2012, the ITAT noted that the cost allocation based on head count was reasonable and consistent with subsequent years where relief was granted. The ITAT directed the TPO to consider the evidence and allow appropriate relief if the facts remained consistent.Conclusion:The ITAT allowed the appeals for statistical purposes, directing the TPO to adopt TNMM as the most appropriate method for determining the ALP for Technology License Renewal fees and Management fees, and to reassess the IT support services payments based on the provided evidence and consistent facts from subsequent years. The ITAT's decision emphasized the need for objective consideration of evidence and adherence to established legal principles in transfer pricing assessments.