2024 (8) TMI 1176 - AT - Income Tax

TPO's nil valuation of management charges to associated enterprise overturned due to proven service rendition and improved profitability

ITAT Delhi allowed the assessee's appeal on transfer pricing adjustments. The tribunal held that TPO's determination of management charges paid to ... TP adjustment - management charges paid to its AE towards intra group services - AO benchmarked by applying TNMM method - HELD THAT:- We find considerable merit in the plea of the assessee that determining the value of management services at ‘Nil’ by resorting to CUP method runs contrary to the factual matrix as well as overwhelming legal position enunciated in this regard. On facts, the assessee has reasonably demonstrated the rendition of services against the management charges paid to its AE by direct and circumstantial evidences inter-company namely agreement, emails correspondence, invoices, payments and substantive improvement in the revenue and profitability. Ostensibly, no independent reasons whatsoever have been cited by the DRP while upholding the action of the TPO. DRP is completely swayed with the adjustment made by the TPO without objectively examining the factual matrix and applicability of CUP method in the light of judicial precedents and treating the value of services rendered at ‘Nil’. Such arbitrary exercise by the DRP without showing any application of mind cannot be countenanced in any manner. The directions made are neither clear nor implemented by the TPO and TP adjustment earlier made was mechanically reiterated. DRP directions are required to be set aside and the adjustment made by the TPO on account of intra group services are liable to be cancelled and reversed. The value of transactions towards management charges under TNMM methodology adopted by assessee thus stands reinstated. The adjustments made towards payment of management services in question are quashed. TP Adjustment - imputed interest on delayed receivables beyond the period of 60 days - HELD THAT:- Recently, the Delhi Bench of the Tribunal in the case of ERM India (P) Ltd. vs. National e-assessment Centre [2021 (9) TMI 1422 - ITAT DLEHI] after following the judgment of Kusum Healthcare [2017 (4) TMI 1254 - DELHI HIGH COURT] held that once the working capital adjustment is given, it subsumes the interest on receivable and no separate benchmark is to be made. DRP in the instant case has already directed the TPO/AO to allow working capital adjustment. One of the main features of such working capital adjustment is that it takes into account both debtors and creditors. If after making working capital adjustment to the PLI of comparable enterprises, the profit margins of Tax Payers compares well with the adjusted PLIs of comparable enterprises then it can be contended that overdue receivables do not have any adverse impact on profitability of Tax payer and imputing notional interest on overdue receivables is not warranted. The assessee has worked the PLI after working capital adjustment and even after the working capital adjustment as directed by DRP, the PLI is still better vis-a-vis comparables. The impact of imputed interest costs on account of high credit period would thus get offset by the higher profits earned. Therefore, no rationale exists for separate benchmarking of interest on outstanding receivable. The adjustment as made by AO/TPO deserves thus to be deleted. Decided in favour of assessee. Issues Involved:1. Adjustment on account of management charges paid to Associated Enterprises (AEs) towards intra-group services.2. Transfer Pricing Adjustment on account of imputed interest on delayed receivables.Detailed Analysis:Issue 1: Adjustment on Account of Management ChargesBackground:The assessee, engaged in manufacturing, trading, and marketing of rubber hoses, filed a return declaring total income under normal provisions. The case was selected for scrutiny, and the Transfer Pricing Officer (TPO) made adjustments relating to management charges paid to its AE and imputed interest on outstanding receivables. The Dispute Resolution Panel (DRP) upheld these adjustments, leading to the final assessment order. The assessee appealed to the Tribunal.Assessee's Contentions:- The assessee argued that the management services are centralized and intra-group services integral to its business operations.- The Transactional Net Margin Method (TNMM) was adopted for all intra-group transactions, including management services, which was accepted by the TPO/AO in previous years.- The TPO segregated management services and applied the Comparable Uncontrolled Price (CUP) method, assigning a 'Nil' value, which the assessee contended was incorrect.- The assessee provided contemporaneous evidence, including emails and agreements, to substantiate the receipt of services and argued that the costs were cost-efficient and in line with OECD guidelines.- The assessee cited various judgments, including Sony Ericson Mobile Communication vs. CIT and Magneti Marelli Power Train India vs. CIT, to support the use of TNMM over CUP for closely linked transactions.Revenue's Contentions:- The TPO and DRP contended that the assessee failed to provide sufficient evidence of services received and the cost-benefit analysis.- The TPO applied the CUP method due to the lack of specific evidence and determined the ALP of management services at 'Nil.'- The Revenue relied on various tribunal decisions supporting the segregation of transactions and applying CUP for management services.Tribunal's Findings:- The Tribunal found that the assessee provided sufficient evidence of services received and the benefits derived, including increased profitability.- The Tribunal noted that the TPO did not identify any comparable uncontrolled transaction to justify the application of CUP method.- The Tribunal emphasized that the TPO's role is to determine the ALP, not to question the commercial wisdom of the assessee.- The Tribunal criticized the DRP for passing a summary order without objective examination.- The Tribunal concluded that the management services should not be segregated from other intra-group services and upheld the TNMM method adopted by the assessee.Conclusion:The Tribunal quashed the adjustments made towards payment of management services and reinstated the value of transactions under the TNMM methodology.Issue 2: Transfer Pricing Adjustment on Account of Imputed Interest on Delayed ReceivablesBackground:The TPO made an adjustment for imputed interest on delayed receivables beyond 60 days, treating it as an international transaction and applying Libor + 400 BPS.Assessee's Contentions:- The assessee argued that outstanding receivables are not independent transactions but part of the sales transactions already benchmarked under TNMM.- The assessee contended that no interest was charged on delayed receivables even from third parties.- The DRP directed to allow working capital adjustment, which was not followed by the TPO/AO.Tribunal's Findings:- The Tribunal noted that the Hon'ble Delhi High Court in Kusum Healthcare Pvt. Ltd. and other cases held that receivables are not automatically international transactions and emphasized the importance of working capital adjustments.- The Tribunal found that the working capital adjustment subsumes the interest on receivables, making separate benchmarking unnecessary.- The Tribunal observed that the DRP's directions were not implemented, and the PLI after working capital adjustment was still better than comparables.Conclusion:The Tribunal deleted the adjustment for imputed interest on delayed receivables, adjudicating in favor of the assessee.Result:The appeal of the assessee was allowed, and the adjustments made by the TPO/AO were quashed.