ITAT allows transfer pricing appeal on shared service charges paid to associated enterprises

ITAT Mumbai ruled in favor of the assessee regarding transfer pricing adjustment on shared service charges paid to associated enterprises. The TPO had determined arm's length price at nil and made adjustment for entire payment. However, ITAT found that lower authorities failed to search for similar uncontrolled transactions between non-associated enterprises. Following OECD guidelines and precedent from Jabil Circuit India case, ITAT held that when services from AEs are substantiated by documentary evidence and cost allocation uses well-accepted allocation key methods, no transfer pricing adjustment is warranted. Appeal allowed.

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Issues Involved:
1. Transfer Pricing Adjustment towards payments made for availing shared services from Associated Enterprises (AE).
2. Validity of the final assessment order under section 143(3) r.w.s.144C.

Summary of Judgment:

Issue 1: Transfer Pricing Adjustment towards payments made for availing shared services from Associated Enterprises (AE)
The primary issue in this appeal is the Transfer Pricing (TP) Adjustment made towards payments by the assessee to its Associated Enterprises (AE) for availing shared services. The assessee, engaged in manpower recruitment and consultancy services, had filed its return declaring a loss and the case was selected for scrutiny. The Transfer Pricing Officer (TPO) determined the Arm's Length Price (ALP) of the international transactions to be Nil, citing inadequate evidence of services rendered and benefits received, leading to a TP Adjustment of Rs. 5,98,33,677/-. This was upheld by the Commissioner of Income Tax (Appeals) [CIT(A)].

The assessee argued that the services from AEs were necessary due to the lack of local support staff and were charged at actual cost plus a 10% markup. The assessee provided substantial documentation, including inter-company agreements, cost details, and time sheets. The TPO, however, did not benchmark these transactions with uncontrolled transactions and determined the ALP at Nil without proper analysis.

The Tribunal observed that the lower authorities were not justified in holding that no services were rendered by the AEs. The Tribunal noted that the TPO failed to conduct any benchmarking analysis and did not search for comparable uncontrolled transactions. The Tribunal referenced similar cases, emphasizing that the TPO's jurisdiction is to determine the ALP and not to question the commercial expediency of the expenditure.

The Tribunal concluded that the cost allocation based on allocation keys was in line with OECD guidelines and upheld by previous Tribunal decisions. Therefore, the Tribunal directed the AO to delete the TP adjustment on account of payment of shared service charges to the AEs.

Issue 2: Validity of the final assessment order under section 143(3) r.w.s.144C
The assessee raised an additional ground questioning the validity of the final assessment order under section 143(3) r.w.s.144C, relying on a decision by the Hon'ble Madras High Court. However, this ground was not pressed during the hearing and was not admitted for adjudication.

Conclusion:
The appeal of the assessee is allowed, and the AO is directed to delete the transfer pricing adjustment on account of payment of shared service charges to the AEs. The additional ground regarding the validity of the final assessment order was not admitted for adjudication. The judgment was pronounced in the open court on 26-12-2023.

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