2023 (5) TMI 155 - AT - Income Tax

TPO's rejection of TNMM benchmarking for management fee payments improper without identifying comparable uncontrolled transactions

The ITAT Kolkata ruled in favor of the assessee regarding TP adjustment on management fee payments to associated enterprise. The TPO's rejection of ... TP Adjustment - international transaction of payment of management fee - TPO to disregard TNMM employed by the assessee - whether services are received as claimed and consequent benefits availed by the assessee from these services and the rate at which uncontrolled parties would have transacted for similar nature of services following CUP method? - HELD THAT:- ‘Benefit test’ does not have too much relevance in the arm's length price ascertainment. When evaluating the ALP of a service, it is wholly irrelevant as to whether the assessee benefits from it or not; the real question which is to be determined in such cases is whether the price of this service is what an independent enterprise would have paid for the same. Assessee has benchmarked the transaction on TNMM basis, and unless the revenue authorities can demonstrate that some other method of ascertaining the arm's length price on the facts of this case will be more appropriate method of ascertaining the arm's length price, the TNMM cannot be discarded. Assessee has established the arm's length nature of the management fee transaction by benchmarking its OP/OC by taking TNMM as the MAM against average industry mark-up of eight independent comparable companies. On this benchmarking exercise of the assessee duly furnished before the ld. TPO, he has not pointed out any defect in the said benchmarking exercise forming part of the Transfer Pricing document. TPO resorted to CUP method without applying the process of arriving at the same as the ‘most appropriate method’ by showing any independent comparable transaction in order to apply CUP. As per the Rule 10B(1)(a), while applying the CUP Method, as a starting point, ‘price charged or paid’ for property transferred or services provided in a comparable uncontrolled transaction, or a number of such transactions, has to be identified. TPO has not identified any such similar transactions while resorting to CUP method. We do not ascribe to such an adhoc approach adopted by the ld. TPO in the present case which is not in accordance with the prescribed regulations. No justification by the ld. TPO has been provided based on comparable data analysis to discard the TNMM arrived at by the assessee as MAM for benchmarking its international transaction with AE and adopt CUP method based on comparable data. One of the very basic pre-conditions for use of CUP method is availability of the price of the same product and service in uncontrolled conditions. In the absence of prerequisites for application of CUP method, it was not open for the ld. TPO to disregard TNMM employed by the assessee as MAM. No defects have been pointed out in application or relevance of TNMM in this case. Under these circumstances, impugned action of ld. TPO does not meet our judicial approval. As also noted that management fee expense @ 2.5% of Gross Operating Revenue paid by the assessee to AHEL under the same tripartite agreement has been accepted by the Department during the year for the similar nature of services received from AHEL - As also on record that claim of management fee expenses has been accepted by the Department and no addition has been made for the same in AY 2014-15 and AY 2015-16. On the requirement by the ld. TPO of brand valuation report, we note that it is of no consequence in arriving at the ALP of international transaction entered into by the assessee, hence irrelevant. No reason to interfere with the finding given by the ld. CIT(A) and uphold the arm’s length price determination of the brand/management fee expenses paid by the assessee to its AE, GMSPL under the provisions of section 92CA of the Act and delete the addition/disallowance so made by the ld. AO in this respect. Accordingly, grounds taken by the Department in this respect are dismissed. Disallowance u/s 14A - HELD THAT:- CIT(A) has deleted the disallowance by taking note of fact that investments made by the assessee are such which do not yield exempt income as assessee had invested in debt mutual funds. More so, the income so earned on these investments had already been offered to tax by the assessee which was accepted in the assessment. There is no exempt income earned by the assessee during the year. Thus finding given by the ld. CIT(A) on which nothing was brought on record to controvert the same by the ld. CIT(DR) in the course of hearing before us, we do not find any reason to interfere with the same - Decided against revenue. Issues Involved:1. Deletion of addition made by the AO for international transaction of payment of management fee.2. Acceptance of services received by the Assessee from its AE in lieu of management fee.3. Nature of services as stewardship and their payment justification.4. Adequacy of evidence provided by the Assessee to demonstrate receipt of services.5. Nature of management fee as commands from shareholder with controlling interest.6. Transfer pricing adjustment and arm's length nature of the transaction.7. Deletion of addition made by the AO for disallowance under section 14A.Summary:1. Deletion of Addition for Management Fee:The Tribunal addressed whether the CIT(A) was justified in deleting the addition made by the AO for the international transaction of payment of management fee of Rs. 5,14,96,223/-. The CIT(A) observed that the TPO rejected the TNMM method without reason and failed to provide comparable companies for the CUP method. The CIT(A) concluded that the TPO exceeded his jurisdiction by disallowing the management fee based on the presumption of no services rendered or benefits received.2. Acceptance of Services Received:The Tribunal considered whether the CIT(A) was justified in accepting that the Assessee received services from its AE during FY 2012-13 against payment for the management fee. The CIT(A) noted that the Assessee provided necessary evidence of services received and benefits obtained, which were accepted as legitimate business expenses.3. Nature of Services as Stewardship:The Tribunal examined whether the services were stewardship in nature and whether the Assessee would pay for such services to a third party. The CIT(A) determined that the services rendered by GMSPL were not stewardship activities but were essential for maintaining the quality and standards of the hospital's operations.4. Adequacy of Evidence Provided:The Tribunal evaluated whether the Assessee provided adequate evidence to demonstrate receipt of services. The Assessee furnished a paper book with sample documents showing the performance of services and benefits received, which the CIT(A) found satisfactory.5. Nature of Management Fee:The Tribunal reviewed whether the management fee rendered by GMSPL was more in the nature of commands from a shareholder with a controlling interest. The CIT(A) found that the services provided were necessary for the hospital's operations and not merely commands from a controlling shareholder.6. Transfer Pricing Adjustment:The Tribunal discussed whether the CIT(A) was justified in deleting the transfer pricing adjustment, stating that the transaction between the Assessee and its AE was at arm's length. The CIT(A) concluded that the TPO failed to provide comparable data to substantiate the CUP method and that the TNMM method applied by the Assessee was appropriate.7. Deletion of Disallowance under Section 14A:The Tribunal addressed the deletion of disallowance made by the AO under section 14A amounting to Rs. 15,52,365/-. The CIT(A) found that the Assessee's investments did not yield exempt income and that the income earned on these investments was already offered to tax, making the disallowance under section 14A unsustainable.Conclusion:The Tribunal upheld the CIT(A)'s findings and dismissed the Revenue's appeals for both AY 2012-13 and AY 2013-14, concluding that the Assessee's transactions were at arm's length and the disallowances made by the AO were not justified.