TPO exceeded jurisdiction examining management service fee under section 37 instead of determining arm's length price under section 92CA

ITAT Mumbai held that TPO exceeded jurisdiction by examining management service fee payment to associated enterprises under section 37 instead of determining arm's length price (ALP) under section 92CA. TPO's role is limited to ALP determination for covered transactions, not examining allowability of expenses. The TPO issued questionnaire under section 37 provisions, which falls outside his domain, and determined benchmarking value at nil without proper ALP working. Matter was restored to TPO for proper ALP determination per statutory scheme with reasonable opportunity for assessee to present transfer pricing study and comparables.

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Issues Involved:
1. General Ground
2. Transfer Pricing
3. Additional Ground: Limitation and Validity of Assessment Order

Summary:

General Ground:
The order of the learned Assessing Officer (AO), National Faceless Assessment Centre, in pursuance of the order of the learned Transfer Pricing Officer (TPO) and the directions of the learned Dispute Resolution Panel (DRP), is contrary to law, facts, and circumstances of the case and is liable to be quashed.

Transfer Pricing:
The learned AO/DRP erred in confirming the action of the learned TPO of making an adjustment to the transfer price of the Appellant in respect of the payment of management service fee of INR 3,01,42,197/- to Associated Enterprises (AEs), holding that this international transaction does not satisfy the arm's length principle envisaged under the Act. The specific errors include:

- 2.1 Disregarding the evidence placed on record by labeling them as 'regular common communication between AEs' and adopting a prejudicial approach in concluding that the Appellant failed to furnish proof of expenses incurred by AEs along with proof of benefits derived.
- 2.2 Ignoring the principle that it is not the domain of the learned TPO to question the rendition of service and benefit arising therefrom.
- 2.3 Concluding the arm's length price (ALP) of this international transaction to be NIL without following any of the prescribed methods and disregarding the Transactional Net Margin Method (TNMM) analysis undertaken by the Appellant in its TP Study.
- 2.4 Holding that the comparable companies selected by the Appellant are not similar by wrongly trying to find similarity between the business of comparables and the business of the Appellant while the business of comparables ought to have been compared with the intra-group services received.

The Tribunal found that the TPO did not carry out an exercise relating to the determination of ALP with reference to the method adopted by the assessee along with records submitted. Instead, the TPO's questionnaire focused on provisions of section 37 of the Act, which is beyond his domain. The Tribunal allowed Ground Nos. 2.1 and 2.2, restoring the matter back to the file of TPO for determination of ALP as per the scheme of law. Ground Nos. 2.3 and 2.4 were dismissed as academic.

Additional Ground:
The final assessment order dated 24 January 2022 passed by the Ld. AO u/s 143(3) r.w.s. 144C(13) of the Act is barred by limitation and therefore, is void-ab-initio, bad in law, and liable to be quashed. However, the application for the additional ground was rejected as it was not pressed by the assessee.

Conclusion:
The appeal of the assessee is allowed for statistical purposes, and the matter is restored to the file of TPO for fresh determination of ALP. Order pronounced in the open court on 8th May 2024.

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