Arm's length price for intra-group services cannot be nil merely because the tax authority doubts commercial expediency.

In transfer pricing, the arm's length price of management fee for bona fide intra-group services cannot be fixed at nil merely because the revenue questions the need for, or benefit from, the services. The Tribunal held that commercial expediency is for the assessee to determine, and the TPO cannot substitute his own view where the assessee has produced material showing actual services, cost allocation and benchmarking support. As the transaction was not shown to be sham or non-genuine, the nil valuation of the fee was unsustainable and the transfer pricing adjustment had to be deleted in favour of the assessee.

---

---

Issues: Whether the transfer pricing adjustment by determining the arm's length price of management fee paid to the associated enterprise at nil was justified and whether the impugned adjustment was liable to be deleted.

Analysis: The management fee related to intra-group services rendered by the overseas headquarters, and the assessee supported the payment with explanations of the services received, cost allocation, and benchmarking under TNMM. The Tribunal noted that the revenue authorities had proceeded on need, benefit, and evidence-based objections and had essentially questioned the commercial prudence of availing the services. Referring to settled principles, the Tribunal held that it is for the assessee to decide whether to enter into a bona fide business transaction, that the TPO cannot substitute his view on commercial expediency, and that the arm's length price cannot be fixed at nil merely because the services are considered unnecessary or insufficiently beneficial in the revenue's view. The Tribunal also accepted that actual rendition of services and supporting cost allocation could not be disregarded on conjectural grounds.

Conclusion: The arm's length price determination at nil was not sustainable, and the transfer pricing adjustment was required to be deleted in favour of the assessee.

Ratio Decidendi: In determining arm's length price, the TPO cannot disallow or nil-value a bona fide intra-group service payment on grounds of perceived commercial expediency or sufficiency of benefit when the assessee has furnished supporting material and the transaction is not shown to be sham or non-genuine.

---