2024 (5) TMI 947 - AT - Income Tax

TPO cannot make adhoc estimations for ALP determination after rejecting benchmarking analysis without proper basis

ITAT Mumbai held that TPO's adhoc estimation for determining ALP was unjustifiable after rejecting assessee's benchmarking analysis without proper basis. ... TP Adjustment - ALP determination - TPO rejected the entire benchmarking analysis done by the assessee and then proceeded to conclude ALP on some adhoc estimation - need and benefit test under heads of 'services' HELD THAT:- We find that assessee before the authorities below has given all the details and evidences in support of not only on the rendition of services but also need and benefit test which we find that, all stands fully satisfied in this case. In so far as duplicative services also, it has been submitted that not a single activity done which are into duplicative in nature and neither there is any services which are in the nature of stewardship of shareholders activity. From the perusal of PWC AUP reports, we find that detailed analysis has been done about the cost for only those services which had benefitted the assessee and separate benchmarking analysis has been done for each of the AEs for various services rendered by them. The approach of the TPO after discovering all those evidences to adopt that adhoc estimation of man hours is highly unjustifiable was it is neither based on any method nor analysis for the documents simply rejecting the documents without any proper basis or reasoning cannot be sustained so as to justify some adhoc estimation. Benchmarking approach conducted by the assessee for intra-group services, from the perusal of the reports specially by the benchmarking performed by the independent auditor, KPMG, it is seen that direct and indirect costs have been clearly identified which has been incurred and allocated by the AEs and which has been charged alongwith mark-up. The cost plus mark-up charged by the AEs have been compared with similar cost plus mark-up charged by the independent comparable companies. TPO had sought to reject the assessee’s benchmarking using AE as a tested party, holding that AE is providing services to its group entities including the assessee only and it is not providing the services to any unrelated third parties, therefore, it is only captive service provider and the search provided by the assessee does not satisfy whether search has been made for service provider, because AE is providing risk free services whereas the purpose is profit making. Though prima facie reasoning given by the TPO may appear to be correct, however, in all the cases of captive service business based in India, Software Development Company, TPO here in India use profit making companies for benchmarking. If one captive entity is providing services to other captive entity then its comparison of controlled transaction with another controlled transaction cannot be done. Even for the captive service provider, the cost plus mark up has to be seen from the independent entities, whether the profit margin for providing such services are at arm’s length vis-à-vis the assessee. Further, as noted above, the Tribunal has rejected TPOs contention in the earlier years that foreign AE cannot be treated as tested party. The assessee has taken benchmarking analysis, firstly at entity level TNMM as well as TNMM analysis by taking foreign AE as tested party to substantiate the arm’s length price. By taking foreign AE as tested party transaction by transaction benchmarking approach has been adopted for each international transaction which is justified method and accordingly, in line with the earlier years we upheld the benchmarking analysis of the assessee using foreign AE as tested party. As per critical aspects of Rule 10AB, Sixth method does not permit TPO to determine the ALP of best judgment basis or estimation basis but he has to arrive at ALP based on above parameters.By adopting adhoc basis also, TPO has not even followed the CUP method at this stage. This Tribunal has already rejected adhoc determination of TP adjustment in assessee’s own case. Though the approach of the ld. TPO has been rejected in the earlier years, however, for these years, independently also we have examined all the evidences on the nature of services rendered but also tested need and benefit test, duplicative test with the evidences. Requirements to satisfy these tests have been elaborately demonstrated including allocation of the cost as well as detailed analysis for benchmarking of the margins for each and every cost which has been applied by the independent auditors. No shortcoming or defect in such allocations and therefore, we have no reason to reject the benchmarking analysis done by the assessee duly supported by independent report of PWC AUP and KPMG. Accordingly, based on aforesaid analysis and details of various intra-group services duly substantiated by the evidence and the benchmarking analysis, we do not find any reason to justify the TP adjustments made by the TPO based on adhoc estimation. Disallowance of MAT credit entitlement - HELD THAT:- This issue is directed to be verified by the AO to examine the MAT credit entitlement and allow in accordance with law. Disallowance u/s. 14A r.w.r. 8D - assessee had earned dividend income and the entire dividend has been estimated earlier as assessee filed computation of income and income tax return for the year under consideration - HELD THAT:- Once, the assessee itself has not claimed dividend income as exempt then there is no question of making any disallowance u/s. 14A r.w.r.8D, accordingly, the same is deleted. Issues involved:1. Transfer pricing adjustment on international transaction of intragroup services.2. Disallowance of MAT credit entitlement.3. Disallowance u/s 14A r.w.r. 8D.Summary:1. Transfer pricing adjustment on international transaction of intragroup services:The assessee, CLSA India Pvt. Ltd., challenged the transfer pricing adjustments made for the A.Ys. 2013-14, 2014-15, 2015-16, and 2016-17. The primary issue was the arm's length price (ALP) determination for intragroup services rendered by CLSA Hong Kong, CLSA UK, CLSA Singapore, and CLSA USA. The assessee provided extensive documentation, including service level agreements, cost allocation keys, and reports from PwC and KPMG, to justify the payments and the benchmarking of the transactions. The TPO rejected the assessee's benchmarking and made adjustments based on an adhoc estimation of man hours and hourly rates. The Tribunal found that the assessee had demonstrated the need, benefit, and receipt of services, and the TPO's approach was unjustified. The Tribunal upheld the assessee's benchmarking analysis using foreign AE as the tested party and deleted the TP adjustments for all the years under consideration.2. Disallowance of MAT credit entitlement:For A.Y. 2014-15, the assessee raised an issue regarding the disallowance of MAT credit entitlement of Rs. 1,53,51,465/-. The Tribunal directed the AO to verify the MAT credit entitlement and allow it in accordance with the law.3. Disallowance u/s 14A r.w.r. 8D:In A.Y. 2016-17, the assessee contested the disallowance of Rs. 69,55,000/- made u/s 14A r.w.r. 8D. The Tribunal noted that the assessee had not claimed any dividend income as exempt and, therefore, there was no basis for the disallowance. Consequently, the disallowance was deleted.Decision:The Tribunal allowed all the appeals filed by the assessee, deleting the TP adjustments and the disallowance u/s 14A r.w.r. 8D, and directed the AO to verify and allow the MAT credit entitlement for A.Y. 2014-15.