Tribunal remands transfer pricing dispute for fresh assessment, emphasizing arm's length pricing principles.

The Tribunal set aside the disallowance of the cost of administrative support services and mark-up on services received from Associated Enterprises, remanding both issues to the Transfer Pricing Officer for fresh consideration. The Tribunal emphasized that the TPO's role is to assess arm's length pricing, not question the necessity or benefits of services. The decision allowed the appeal of the assessee for statistical purposes, directing a reevaluation focusing on the pricing and benefits derived from the services.

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Issues Involved:
1. Disallowance of cost of administrative support services for internal audit support, clearing, and treasury support functions.
2. Disallowance of mark-up on administrative support services received from the Associated Enterprises (AEs).

Issue-wise Detailed Analysis:

1. Disallowance of Cost of Administrative Support Services:

Ground No.1: The assessee challenged the disallowance of administrative support service fees for internal audit support, clearing, and treasury support functions, amounting to Rs. 19,22,164. The Dispute Resolution Panel (DRP), Assessing Officer (AO), and Transfer Pricing Officer (TPO) had re-computed the Arm's Length Price (ALP) of these services as 'NIL', leading to the adjustment.

Findings: The assessee company, registered with SEBI, reported international transactions with AEs involving receipt of administrative support services. The AEs recovered actual costs with a 10% mark-up. The TPO, during the transfer pricing assessment, questioned the substantiation of benefits received from these services, labeling them as 'shareholder-activity' and duplicative, thus determining the ALP at NIL. The DRP upheld this adjustment for services provided by IBG LLC (US) but allowed costs reimbursed to other AEs.

Tribunal's Observation: The Tribunal noted that the lower authorities disallowed payments for internal audit services, clearing, and treasury services on the grounds of duplicity and lack of substantiation. However, it emphasized that the TPO's jurisdiction is limited to examining whether the international transaction is at arm's length, not to question the necessity or benefit derived from the services. The Tribunal cited the case of L'Oreal India Pvt Ltd vs ACIT, highlighting that the TPO cannot disallow expenditure based on commercial expediency or duplication of services.

Decision: The Tribunal set aside the issue to the TPO for fresh consideration, directing the TPO to focus on whether the price for the services is what an independent enterprise would have paid. The TPO must identify the nature of services, the costs incurred, and the benefits derived by the assessee. The Tribunal allowed Ground No.1 for statistical purposes.

2. Disallowance of Mark-up on Administrative Support Services:

Ground No.2: The assessee contested the disallowance of the 10% mark-up on administrative support services, amounting to Rs. 10,127,836. The DRP/AO/TPO had re-computed the ALP of the mark-up as 'NIL'.

Findings: The assessee initially applied the Transactional Net Margin Method (TNMM) with itself as the tested party. However, during the assessment, a new benchmarking study was submitted with the foreign AE as the tested party. The DRP upheld the TP adjustment, rejecting the TNMM analysis.

Tribunal's Observation: The Tribunal noted the inconsistency in the assessee's benchmarking methodology. The assessee failed to explain the reason for changing the tested party from itself to the foreign AE. The Tribunal emphasized that the TPO must ascertain the most appropriate method and its application for benchmarking the international transaction.

Decision: The Tribunal remanded the issue to the TPO for fresh adjudication, allowing the TPO to decide the most appropriate method after giving the assessee a reasonable opportunity of hearing. The Tribunal allowed Ground No.2 for statistical purposes.

Conclusion: The Tribunal allowed the appeal of the assessee for statistical purposes, remanding both issues to the TPO for fresh consideration and adjudication.

Order Pronouncement: The order was pronounced in the open court on 28/07/2022.

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