Assessee wins appeal on transfer pricing adjustments for intra-group services after TPO rejected TNMM method

ITAT Bangalore allowed the assessee's appeal regarding transfer pricing adjustments for intra-group services. The TPO had applied a hypothetical CUP method to determine ALP as nil, rejecting the assessee's TNMM method. The tribunal followed its earlier coordinate bench decisions for AYs 2011-12 to 2013-14, finding the facts pari-materia. The TPO had subsequently allowed the assessee's claim for intra-group services expenses while giving effect to the ITAT order.

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The core legal questions considered in this appeal include:

• Whether the assessment order passed by the Assessing Officer (AO) was barred by limitation.
• Whether the adjustments made by the Transfer Pricing Officer (TPO) regarding intra-group services received by the assessee were justified, particularly the application of the Arm's Length Price (ALP) and the choice of transfer pricing method.
• Whether the levy of interest under sections 234A, 234B, and 234C of the Income Tax Act, 1961, was appropriate and mandatory.
• The applicability and correctness of the benefit test in determining the ALP for intra-group services.
• The validity of the TPO's adoption of a hypothetical Comparable Uncontrolled Price (CUP) method over the Transactional Net Margin Method (TNMM) for benchmarking intra-group transactions.

Regarding the limitation issue, the assessee initially challenged the validity of the assessment order on the ground that it was barred by limitation. However, this ground was not pressed during the hearing and was consequently dismissed as not pressed.

The principal dispute centered on the transfer pricing adjustments made by the TPO concerning various intra-group services. The TPO held that the assessee failed to establish the rendition of services and the benefits derived, resulting in an adjustment of Rs. 28,46,56,870/- by treating the ALP of intra-group services as nil. The AO and the Dispute Resolution Panel (DRP) upheld this view, leading to the final assessment order.

The assessee contended that it had submitted comprehensive documentary evidence demonstrating the rendition of services and the benefits received. It argued that the TPO was not entitled to apply the benefit test to expenses incurred out of commercial expediency. The assessee further submitted that the TNMM was the appropriate method for benchmarking these transactions and cited precedents from coordinate benches where similar issues had been decided in the assessee's favor.

The Tribunal examined prior rulings involving the same assessee for assessment years 2011-12 to 2013-14, where similar intra-group service payments-specifically for commercial services (IT support), technology license renewal fees, and management fees-were under scrutiny. In those cases, the Tribunal had rejected the TPO's reliance on a hypothetical CUP method and upheld the use of TNMM as the most appropriate method for benchmarking, given the absence of reliable public domain comparables for CUP.

The Tribunal noted that the payments for management fees and technology license renewal fees were closely linked to the assessee's core manufacturing business. The group companies provided intellectual property, know-how, and process improvements essential to the assessee's operations. These services were supported by detailed agreements outlining the nature of services rendered. The Tribunal found that the TPO had failed to adequately justify the rejection of TNMM and the adoption of a hypothetical CUP method. The TPO's reasoning lacked explanation and did not conform to the benchmarking principles prescribed under Rule 10B of the Income Tax Rules.

Regarding the benefit test, the Tribunal observed that the TPO and DRP summarily dismissed the extensive evidence submitted by the assessee without bringing any contradictory material on record. The Tribunal referred to a ruling of the Delhi High Court which held that if an expenditure is incurred for the purpose of business, it is not the TPO's concern to disallow it on extraneous grounds. The Tribunal also cited a precedent that the fact that services were availed gratuitously in earlier years does not negate the ALP of such services in the relevant year.

On the issue of commercial services (IT support), the Tribunal observed that the cost allocation was based on a reasonable and scientific basis-number of IT users (headcount)-and that invoices substantiated payments to the associated enterprise. The Tribunal directed the TPO to consider this evidence and grant relief if the facts remained consistent with subsequent years where relief had been allowed.

In the present case, the Tribunal found that the TPO had once again applied a hypothetical CUP method to arrive at a nil ALP for intra-group services, rejecting the assessee's use of TNMM. Given the identical factual matrix and the prior decisions of coordinate benches in the assessee's own cases, the Tribunal held that the appeal deserved to be allowed by following those precedents. The Tribunal also noted that the TPO, in compliance with earlier orders, had subsequently allowed the claim of the assessee with respect to intra-group service expenses.

Regarding the levy of interest under sections 234A, 234B, and 234C, the Tribunal reaffirmed the settled legal position that such levy is mandatory and upheld the interest charges accordingly.

In conclusion, the Tribunal allowed the appeal of the assessee on the transfer pricing adjustments related to intra-group services, directing the TPO to apply the TNMM method as the most appropriate for benchmarking and to consider the evidence submitted by the assessee regarding service rendition and benefits derived. The Tribunal dismissed the limitation ground as not pressed and upheld the mandatory levy of interest under the relevant provisions of the Income Tax Act.

Significant holdings include the following verbatim reasoning:

"The TPO and the DRP in the present case have summarily rejected the evidences and submissions of the assessee on the 'benefit test' without bringing on record any contrary material."

"The TPO's reasoning of constructing a hypothetical CUP based on the study of third party scenario is not envisaged as per the benchmarking exercise laid out in rule 10B."

"The fact that the assessee has availed services in the preceding years without any consideration or not is irrelevant. The AE may have given the same service on gratuitous basis in the earlier period, but that does not mean that ALP of these services are Nil."

"So long as the expenditure or payment has been demonstrated to have been incurred or laid out for the purpose of business, it is no concern of the TPO to disallow the same on any extraneous reasoning."

The core principles established are:

• The TNMM is an appropriate method for benchmarking intra-group service transactions where CUP comparables are not reliably available.
• The benefit test requires objective consideration of evidence submitted by the assessee; mere failure to demonstrate benefits without contrary evidence does not justify disallowance.
• The TPO cannot invent a hypothetical CUP without adequate justification and proper application of prescribed transfer pricing rules.
• Interest under sections 234A, 234B, and 234C is mandatory once the conditions for levy are met.

Final determinations on each issue are as follows:

• The limitation objection was dismissed as not pressed.
• The transfer pricing adjustments disallowing intra-group service expenses were set aside, directing the TPO to apply TNMM and consider the assessee's evidence.
• The levy of interest under the relevant sections of the Income Tax Act was upheld as mandatory.

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