2025 (2) TMI 226 - AT - Income Tax

International transactions for business support services cannot be aggregated with unconnected transactions for transfer pricing ALP determination

The ITAT Bangalore held that international transactions for business support services cannot be aggregated with other unconnected transactions when ... TP Adjustment - determining the ALP at NIL value of the international transaction representing business support services - assessee has benchmarked the transaction at entity level by applying TNMM Method and accordingly claimed the same at ALP - HELD THAT:- While determining the Arm’s Length Price (ALP) of international transactions under transfer pricing regulations, aggregation of transactions is often necessary provided transactions are closely linked functionally or economically. Likewise, transactions of similar type (e.g., sale of goods, services, intangibles) can be aggregated. Unconnected transactions refer to international transactions between associated enterprises (AEs) that lack economic, functional, or contractual interdependence. These transactions do not influence each other and, therefore, cannot be aggregated for determining the Arm’s Length Price (ALP). In the case on hand, the transaction being management support services is separate and independent to the other international transactions of the assessee, therefore the same cannot be aggregated with other transaction for working out the ALP. Most Appropriate Method (MAM) - Whether the TPO was justified in rejecting the TNMM as the Most Appropriate Method (MAM) and adopting the CUP method? - We note that the assessee was to demonstrate the actual services received before making claim in the profit and loss account. Simply filing the Master agreement, statement of work, invoice of the AE and few emails by the assessee do not ipso facto establish the fact of receiving of services from the AE. It has been held by the lower authorities that the impugned business support charges represent the allocation of the cost which is nothing but the shareholders services. There is lack of supporting documents to draw the conclusion whether the impugned cost is an allocation of cost or represents the services availed by the assessee. In this backdrop, we are inclined to restore the issue to the file of the TPO for fresh/ de-novo adjudication as per the provisions law without getting from influenced from the above discussion. Hence, the ground of appeal of the assessee is allowed for statistical purposes. ISSUES PRESENTED and CONSIDEREDThe core legal issues considered in this judgment include:1. Whether the transaction in dispute can be aggregated with other transactions for computing the Arm's Length Price (ALP) in the given facts and circumstances.2. Whether the Transfer Pricing Officer (TPO) was justified in rejecting the Transactional Net Margin Method (TNMM) as the Most Appropriate Method (MAM) and adopting the Comparable Uncontrolled Price (CUP) method.3. Whether the TPO was correct in determining the ALP for the management charges as 'Nil'.4. Whether the appellant sufficiently demonstrated the receipt of services and their benefits against the actual services received.ISSUE-WISE DETAILED ANALYSIS1. Aggregation of Transactions for ALP DeterminationThe Tribunal considered whether the disputed transaction could be aggregated with other transactions for ALP computation. The legal framework allows for the aggregation of transactions if they are economically or functionally linked. However, unconnected transactions that lack economic, functional, or contractual interdependence cannot be aggregated. In this case, the Tribunal found that the management support services were separate and independent from other international transactions, thus precluding aggregation for ALP determination.2. Rejection of TNMM and Adoption of CUP MethodThe Tribunal analyzed the TPO's decision to reject TNMM and adopt the CUP method. The TNMM is a widely accepted method under Rule 10B of the Income Tax Rules, often used when transactions are aggregated. However, the TPO applied the CUP method, arguing that the intra-group services were not actually received and thus had no value. The Tribunal noted that the assessee failed to demonstrate the actual receipt of services, which justified the TPO's decision to use the CUP method.3. Determination of 'Nil' ALP for Management ChargesThe Tribunal examined the TPO's determination of a 'Nil' ALP for the management charges. The TPO concluded that the assessee did not receive any substantial or tangible commercial benefit from the services purportedly provided by the associated enterprise (AE). The Tribunal found that the documentation provided by the assessee, such as invoices and email correspondences, did not sufficiently establish the receipt of services or their benefits. Consequently, the Tribunal upheld the TPO's determination of a 'Nil' ALP.4. Demonstration of Receipt of Services and BenefitsThe Tribunal considered whether the appellant sufficiently demonstrated the receipt and benefits of the services. The appellant argued that it provided extensive documentation, including invoices and service agreements, to substantiate the services received. However, the TPO found that these documents did not conclusively prove the actual receipt of services or any commercial benefit. The Tribunal agreed with the TPO, noting the lack of substantial evidence to support the appellant's claims.SIGNIFICANT HOLDINGSThe Tribunal's significant holdings include the following:- The Tribunal held that the management support services transaction was independent and could not be aggregated with other transactions for ALP determination.- The Tribunal upheld the TPO's rejection of TNMM in favor of the CUP method due to the lack of evidence demonstrating the receipt of services.- The Tribunal concluded that the TPO correctly determined the ALP for the management charges as 'Nil' due to insufficient evidence of services received and benefits derived.- The Tribunal noted that the appellant failed to provide substantial evidence proving the actual receipt and benefits of the intra-group services.In conclusion, the Tribunal restored the issue to the file of the TPO for fresh adjudication, allowing the appeal for statistical purposes. The Tribunal emphasized the need for the appellant to provide adequate documentation and evidence to substantiate the receipt and benefits of the intra-group services. The Tribunal's decision underscores the importance of thorough documentation and evidence in transfer pricing disputes, particularly concerning intra-group services and the determination of ALP.