2022 (9) TMI 146 - AT - Income Tax

ITAT overturns TPO decision on 'Nil' pricing, stresses proper benchmarking methods.

Ineos Styrolution India Ltd. Versus The DCIT, TP-I, Ahmedabad

Ineos Styrolution India Ltd. Versus The DCIT, TP-I, Ahmedabad - TMI Issues Involved:1. Transfer Pricing Adjustment for Intra-Group Services.2. Directions of the Dispute Resolution Panel (DRP) and their compliance.3. Benchmarking Methodology and Arm's Length Price (ALP) Determination.4. Justification and Evidence for Intra-Group Services.5. Jurisdiction and Methodology of Transfer Pricing Officer (TPO).6. Penalty and Interest Levied.Detailed Analysis:1. Transfer Pricing Adjustment for Intra-Group Services:The primary issue revolves around the transfer pricing adjustment of INR 309,156,218 made by the TPO in respect of payments for intra-group services availed by the assessee from its Associated Enterprises (AEs), namely INEOS Germany and INEOS Singapore. The TPO determined the ALP of these services as 'Nil,' asserting that no independent entity would pay for such services. The services in question include Global Head Office (GHO) and Regional Head Office (RHO) charges.2. Directions of the Dispute Resolution Panel (DRP) and their Compliance:The DRP confirmed most of the TPO's adjustments while providing some relief by addressing dual disallowance and incorrect additions. The DRP endorsed the TPO's findings that the services were too general and overlapped with other payments like royalties and local expenses. The DRP also upheld the TPO's rejection of the markup on cost allocations.3. Benchmarking Methodology and Arm's Length Price (ALP) Determination:The TPO rejected the benchmarking approach adopted by the assessee, which used the foreign AE as the tested party and foreign databases. The TPO determined the ALP using 'any other method,' concluding that no independent party would pay for such services. The ITAT criticized this approach, emphasizing that the TPO must use one of the prescribed methods under section 92C(1) and cannot determine the ALP at 'Nil' without proper benchmarking.4. Justification and Evidence for Intra-Group Services:The assessee provided substantial evidence, including emails and documentation, to substantiate the receipt of India-specific services from its global and regional headquarters. The ITAT found that the TPO and DRP did not fully appreciate this evidence. The ITAT highlighted that the services provided were not merely general but offered specific benefits to the Indian entity.5. Jurisdiction and Methodology of Transfer Pricing Officer (TPO):The ITAT held that the TPO took a restrictive view and failed to apply any of the prescribed methods for determining the ALP. The TPO's determination of the ALP at 'Nil' was deemed unsustainable. The ITAT cited several judicial precedents supporting the view that the TPO must use one of the prescribed methods and cannot arbitrarily determine the ALP at 'Nil.'6. Penalty and Interest Levied:The assessee contested the computation of demand and the levy of interest under sections 234B and 234C of the Act. The ITAT's decision to allow the appeal implies that these penalties and interest may be reconsidered in light of the revised assessment.Conclusion:The ITAT allowed the appeal, concluding that the TPO erred in determining the ALP at 'Nil' without applying any prescribed benchmarking method. The ITAT emphasized the need for a proper transfer pricing exercise using one of the methods prescribed under the Income Tax Act and Rules. The substantial evidence provided by the assessee demonstrated the receipt of India-specific services, and the TPO's restrictive view was not justified. The ITAT's decision mandates a reassessment of the ALP using appropriate benchmarking methods.