2025 (8) TMI 745 - AT - Income Tax

Assessee's CUP Method for Intra-Group Royalty Accepted; Ad-Hoc Adjustment Deleted Under Section 92C

The ITAT Mumbai held that the assessee correctly applied the CUP method for benchmarking intra-group royalty payments for central services, supported by ... Ad-hoc transfer pricing adjustment - royalty payments for central services - HELD THAT:- Assessee has appropriately benchmarked the intra-group service payments by adopting the CUP method, which is one of the prescribed methodologies under the Income-tax Rules, and has furnished documentation substantiating the rendition of services for both assessment years under consideration. The TPO, although claiming to have applied the “Other Method,” has not brought on record any comparable transaction to substantiate the determination of the arm’s length price. TPO has resorted to an ad-hoc benchmarking approach, which is contrary to the mandate of section 92C of the Act. The Hon’ble Bombay High Court has, in several decisions, categorically held that ad-hoc transfer pricing adjustments unsupported by any of the prescribed methods are legally unsustainable. Thus, the ad-hoc transfer pricing adjustment made by the Ld. AO/TPO on account of royalty for central services is deleted. Assessee appeal allowed. 1. ISSUES PRESENTED and CONSIDERED 1. Whether the transfer pricing adjustment of Rs. 6,97,76,862/- on account of royalty paid for central services was correctly proposed by the AO and TPO under the directions of the DRP. 2. Whether the benchmarking analysis submitted by the assessee demonstrating that the payment for central services was at arm's length price (ALP) was wrongly rejected. 3. Whether the agreements submitted by the assessee as comparable instances were improperly rejected without cogent reasons. 4. Whether the AO and TPO erred in holding that no benefit accrued to the assessee despite adequate documentation supporting the claim. 5. Whether the AO and TPO failed to apply any prescribed method under the Income Tax Act to determine the ALP of payment for central services, rendering the adjustment unsustainable in law. 6. Whether the AO erred in computing interest under section 234C of the Income Tax Act. 7. Whether the initiation of penalty proceedings under section 270A of the Act was erroneous. 8. Whether the final assessment order dated 30th June 2024 was barred by limitation under section 153 of the Act. 2. ISSUE-WISE DETAILED ANALYSIS Issue 1 to 5: Transfer Pricing Adjustment on Royalty for Central Services Legal Framework and Precedents: - Section 92C of the Income Tax Act mandates determination of ALP for international transactions using prescribed methods. - Rule 10AB provides for the 'other method' for ALP determination, requiring consideration of price charged or paid in similar uncontrolled transactions under similar circumstances. - The TPO is required to apply one of the prescribed methods and cannot make ad-hoc or best judgment adjustments. - Precedents hold that ad-hoc transfer pricing adjustments without application of prescribed methods are unsustainable. - The Tribunal and High Court decisions emphasize that once receipt of services is demonstrated, the TPO cannot reject payments on the basis of lack of benefit or commercial expediency. - Benchmarks must be based on comparable uncontrolled transactions and documented evidence. Court's Interpretation and Reasoning: - The assessee entered into a non-exclusive license agreement with its AE for use of technical documentation and central services, paying royalty at 1% of estimated turnover. - The assessee benchmarked the payment using the CUP method, identifying four comparable instances with a mean margin of 4.63%, while the payment was at 1%, concluding the payment was at ALP. - The assessee submitted extensive documentary evidence demonstrating the nature, need, and benefits of central services, including treasury management, forex risk management, accounting automation, reporting, counterparty risk management, environmental sustainability, issue management, HR services, procurement support, quality management, safety, risk management, and cost-saving programs. - The TPO rejected the benchmarking and determined ALP at nil, citing lack of benefit, but failed to apply any prescribed method or identify comparable uncontrolled transactions as required by Rule 10AB. - The TPO's approach was consistent with prior years' orders and DRP directions but was found to be based on conjecture and surmises without application of statutory methodology. - The Tribunal relied on coordinate bench decisions in the assessee's own case for earlier years where identical issues were decided in favour of the assessee, deleting similar transfer pricing adjustments. - The Tribunal also relied on authoritative decisions holding that determination of ALP at nil without application of prescribed methods is legally unsustainable. - The Tribunal noted that royalty payments formed part of the cost base on which the assessee earned a mark-up, and disallowing the royalty would illogically reduce the assessee's income, contrary to tax principles. - The Tribunal found the assessee's benchmarking and documentation sufficient to demonstrate receipt and benefit of services, rejecting the AO/TPO's contrary findings as unsupported. - The Tribunal held that the TPO cannot stand in judgment on the benefit derived by the assessee once receipt of services is established. - The Tribunal accordingly deleted the transfer pricing adjustment of Rs. 6,97,76,862/- on account of central services royalty payments. Key Evidence and Findings: - Non-exclusive license and central services agreement effective from 2013. - Payment of royalty at 1% of estimated turnover. - Audited segmental accounts including central services cost in operating cost base. - CUP benchmarking with four comparables showing mean margin of 4.63%. - Detailed submissions on nature and benefits of central services covering multiple operational and strategic functions. - Prior Tribunal decisions in assessee's own case for AYs 2012-13 to 2018-19 consistently deleting similar adjustments. - Absence of any comparable uncontrolled transactions identified by TPO or DRP to justify ALP at nil. - Legal precedents disallowing ad-hoc or best judgment transfer pricing adjustments without prescribed method application. Application of Law to Facts: - The assessee complied with statutory requirements by benchmarking using CUP method and submitting detailed evidence of services rendered and benefits derived. - The TPO's determination of ALP at nil without applying a prescribed method or identifying comparable transactions violated Rule 10AB and section 92C. - The Tribunal applied binding precedents and consistent earlier decisions to hold that the transfer pricing adjustment was unsustainable. - The payment being part of the cost base on which the assessee earned mark-up further supported the payment's arm's length nature. Treatment of Competing Arguments: - The AO/TPO and DRP argued that no benefit accrued and rejected benchmarking and agreements submitted by the assessee. - The assessee rebutted with extensive documentary evidence, benchmarking analysis, and prior judicial decisions. - The Tribunal found the AO/TPO's approach cryptic, non-speaking, and contrary to statutory provisions. - The Tribunal rejected the argument that the benefit must be proven beyond receipt of services, emphasizing the legal position that receipt suffices for ALP determination. - The Tribunal declined to accept the TPO's 'other method' determination at nil where no comparable uncontrolled transactions were identified. Conclusions: - The transfer pricing adjustment on account of royalty payments for central services was not sustainable in law. - The benchmarking analysis by the assessee was acceptable and demonstrated arm's length pricing. - The TPO and AO erred in rejecting the benchmarking and agreements without cogent reasons. - The TPO failed to apply any prescribed method, rendering the adjustment invalid. - The appeal on grounds 1 to 5 is allowed, and the transfer pricing adjustment is deleted. Issue 6: Interest under Section 234C Analysis: - The ground relates to alleged error in computation of interest under section 234C, which is consequential to the primary assessment. - Since the primary transfer pricing adjustment is deleted, the interest computation issue becomes infructuous. - No separate detailed examination was required. Conclusion: - Ground 6 is dismissed as infructuous. Issue 7: Initiation of Penalty under Section 270A Analysis: - Penalty proceedings under section 270A are consequential to the assessment order. - With the deletion of the transfer pricing adjustment, the basis for penalty does not survive. - No independent examination of penalty initiation was necessary. Conclusion: - Ground 7 is dismissed as infructuous. Issue 8: Limitation of Assessment Order Analysis: - The assessee contended that the final assessment order dated 30th June 2024 was barred by limitation under section 153 of the Act. - The Tribunal noted this as a legal issue but observed that since the appeal was allowed on merits, the limitation ground became academic. - The Tribunal kept this ground open without adjudication. Conclusion: - Ground 8 is kept open and not decided in the present order.