2024 (12) TMI 195 - AT - Income Tax

ITAT Mumbai deletes transfer pricing adjustment on intra-group services, upholds commercial decision-making autonomy over fee quantum

The ITAT Mumbai ruled in favor of the assessee regarding intra-group services transfer pricing adjustment. The assessee had conducted benchmarking ... TP Adjustment - intra-group services - To substantiate the markup of 5% charged by the AE, the assessee had undertaken the benchmarking analysis which validated the arm’s length nature of the mark-up on the costs for intra-group services (IGS) - AEs (Foreign parties) were considered as tested parties for primary analysis to demonstrate that the margins earned by them compared as to independent companies were comparable - Further a secondary analysis is conducted using combined TNMM approach - HELD THAT:- We are of the considered view that it is for the assessee to determine as to whose services it desires to avail. Business decisions are at times good and profitable and at times bad and unprofitable. Business decisions, in fact do result in loss/es. Therefore, whether the decision was commercially sound or not is not relevant. The only question is whether the transaction which was entered into, was bonafide or not or whether it was a sham transaction only for the purpose of diverting profits. For this proposition, we draw support from the decision of Knorr- Bremse India Pvt. Ltd. [2016 (5) TMI 145 - PUNJAB AND HARYANA HIGH COURT] Similarly, in the case of Cushman and Wakefield (India) (P.) Ltd. [2014 (5) TMI 897 - DELHI HIGH COURT] has held that the AO/TPO cannot question the quantum of fee but can check if services were actually rendered and if they are genuine and real. Thus, we direct the AO/TPO to delete the impugned TP adjustment. Issues Involved:1. Assessment of total income.2. Transfer pricing adjustment for intra-group services.3. Disregarding the economic analysis and benefit test.4. Rejection of Transactional Net Margin Method (TNMM).5. Levy of interest under sections 234A, 234C, and 234F.6. Initiation of penalty proceedings under Section 270A(1).Issue-wise Detailed Analysis:1. Assessment of Total Income:The assessee challenged the assessment of total income at INR 266,05,70,867 as opposed to the returned income of INR 259,01,37,940. The increase was due to adjustments made by the Assessing Officer (AO) based on the directions of the Dispute Resolution Panel (DRP).2. Transfer Pricing Adjustment for Intra-group Services:The primary contention was the adjustment of INR 7,04,32,927 to the total income by treating the Arm's Length Price (ALP) of the management fee paid under an intercompany service agreement as NIL. The Transfer Pricing Officer (TPO) disregarded the assessee's benchmarking analysis and economic analysis, stating that the assessee failed to provide sufficient evidence of the benefits received from such services. The TPO argued that the transaction led to profit shifting and base erosion, which is not permissible under Indian transfer pricing provisions and OECD guidelines.3. Disregarding the Economic Analysis and Benefit Test:The TPO did not accept the economic analysis conducted by the assessee, which was meant to demonstrate that the transaction was at arm's length. The TPO also disregarded the benefit test documents submitted, alleging that the assessee failed to provide sufficient documentary evidence to demonstrate the receipt of services and benefits derived therefrom. The TPO emphasized the need for a cost-benefit analysis to determine the arm's length price.4. Rejection of Transactional Net Margin Method (TNMM):The TPO rejected the TNMM applied by the assessee, which considered the AE as the tested party. The TPO did not find the method appropriate for benchmarking the international transaction of payment of management fees. The TPO's stance was that the transaction lacked commercial expediency and did not justify the arm's length price.5. Levy of Interest under Sections 234A, 234C, and 234F:The assessee contested the levy of interest under sections 234A, 234C, and 234F of the Income Tax Act. These sections pertain to interest on late filing of return, deferment of advance tax, and late filing fee, respectively.6. Initiation of Penalty Proceedings under Section 270A(1):The initiation of penalty proceedings under Section 270A(1) was also challenged. This section deals with penalties for under-reporting and misreporting of income.Judgment Summary:The Tribunal referred to several precedents, including the decision of the Delhi High Court in the case of EKL Appliances Ltd., which emphasized that the necessity or prudence of expenditure is not a criterion for disallowance. The Tribunal highlighted that the TPO's role is to examine the international transaction as it is and make suitable adjustments, not to disallow expenditures based on extraneous reasoning.The Tribunal also cited cases like Lord India Private Limited and Schneider Electric India (P) Ltd., which reinforced that the arm's length price cannot be determined as NIL merely because the revenue authorities perceive the services as worthless or unnecessary. The Tribunal concluded that the TPO's adjustment was not justified and directed the deletion of the TP adjustment.The appeal of the assessee was allowed, and the Tribunal directed the AO/TPO to delete the impugned TP adjustment, thereby accepting the assessee's contentions regarding the arm's length nature of the management fee and the appropriateness of the TNMM method used.