2025 (10) TMI 572 - AT - Income Tax

Taxpayer wins: GAM support included with core operations under TNMM, 5% mark-up upheld and addition deleted

M/s. Haworth India Pvt Ltd. Versus Deputy Commissioner of Income Tax, Corporate Circle-1 (1), Chennai

ITAT (Chennai) allowed the appeal, holding the taxpayer reasonably quantified benefit from AE-provided Global Account Management (GAM) support and validly ... TP Adjustment - downward adjustment towards payment of Global Account Management Charges (GAM) - selection of MAM - HELD THAT:- The assessee has reasonably quantified the benefit derived by demonstrating that around 50% of its total revenue was derived from the support received from the AE. The mark up of 5% placed by assessee and its group companies also appears to be more or less reasonable and in fact the TPO in AY 2016-17 has undertaken a benchmarking analysis and concluded that the mark-up of 5% is at arms length. It has also been noted that the assessee has not paid any commission separately. It appears that the Assessee instead of paying marketing commission it is paying GAM Charges. We note that the substance over form of the transaction merits consideration. The very fact that the revenue has allowed the charges in the past, their disallowance and that too on identical facts would not be a fair exercise. We find sufficient force in the argument of the assessee that since the appellant is dependent on the Global Account Management support for manufacturing/trading, the said transaction is inextricably connected with core business operation and as such it cannot be segregated and benchmarked independently. As the assessee’s core business activity and sale is inextricably linked/dependent on the Global Account Management service from its AEs, the payment of these charges cannot be segregated and benchmarked separately. The judicial precedence discussed hereinabove also support this line of thinking. Accordingly, in respectful compliance to the same, we hold that the Assessee has rightly aggregated and benchmarked this transaction under TNMM. TPO having accepted the overall TNMM analysis, was not right in excluding Global Account Management charges for separate benchmarking analysis. Accordingly, we set aside the order of lower authorities and direct the Ld.AO to delete the impugned addition on account of downward adjustment of payment of management fees towards global account management charges - Decided in favour of assessee. ISSUES PRESENTED AND CONSIDERED 1. Whether the Global Account Management (GAM) charges paid to Associated Enterprises (AEs) are bona fide, integral business expenses and therefore liable to be accepted at arm's length as part of the overall TNMM benchmarking, rather than being segregated and subjected to a separate 'other method' benchmarking by the Transfer Pricing Officer (TPO) resulting in a downward adjustment. 2. Whether the TPO was permissible in applying a different transfer pricing method to a single element (GAM charges) when TNMM had been accepted as the most appropriate method for all other international transactions. 3. Whether principles of consistency and previous acceptance of the 5% mark-up in earlier assessment years require acceptance of the same treatment and mark-up in the present assessment year. 4. Whether the evidence produced (agreements, invoices, emails, cost break-ups, revenue linkages) sufficed to demonstrate that GAM services provided active, non-stewardship support that generated substantial revenue, thereby justifying the payment and its benchmarking under TNMM. ISSUE-WISE DETAILED ANALYSIS Issue 1 - Whether GAM charges are integrally linked to core business and entitled to TNMM treatment Legal framework: Transfer Pricing regime requires determination of Arm's Length Price (ALP) using most appropriate method; TNMM may be applied where it is appropriate to benchmark overall profitability. Transactions integrally linked to core business may be aggregated for benchmarking. Precedent treatment: The Tribunal followed prior decisions of co-ordinate benches (AVO Carbon; Bonfiglioli; Siemens Gamesa) and higher court dicta emphasising that corporate or support services intrinsically linked to manufacturing/sales cannot be separately demarcated for independent benchmarking. The Tribunal treated those precedents as applicable and followed them. Interpretation and reasoning: The Court examined records showing a single agreement for management support (GAM + IT), invoices, e-mails, detailed cost break-ups and a reconciliation demonstrating substantial revenue (˜50% of total, Rs.113.52 crores) attributable to customers identified/serviced via GAM. The evidence was found substantive, not vague, and showed active services (not mere stewardship). Given the demonstrable revenue linkage and the integrated nature of services with core business operations, the Tribunal held that GAM charges are inextricably connected to the principal business activity and cannot be carved out for separate benchmarking. Ratio vs. Obiter: Ratio - where a service provided by AEs demonstrably contributes to core business revenue and the transaction is part of an integrated service arrangement, it must be aggregated with other transactions and benchmarked under the accepted overall method (TNMM). Obiter - descriptive remarks on commercial efficacy of AE over third parties. Conclusion: GAM charges were rightly aggregated with other international transactions and benchmarked under TNMM; the TPO's separate exclusion and downward adjustment were not justified. Issue 2 - Permissibility of applying a different method to a single element after TNMM acceptance Legal framework: Transfer pricing principles require selection of the most appropriate method for ALP determination. Once TNMM is accepted as most appropriate for overall international transactions, treating a single component by a different method risks inconsistent ALP determination. Precedent treatment: The Tribunal relied on authority holding that having accepted TNMM as the most appropriate method, it is impermissible to subject one element to a different method (citing Delhi High Court reasoning in Magneti Marelli and related tribunal authorities). Those authorities were followed. Interpretation and reasoning: The Tribunal reasoned that permitting different methods within the same ALP computation would produce distortion and chaos, undermining reliability and consistency of transfer pricing results. Since the TPO accepted TNMM for the broader set of transactions, the TPO could not legitimately exclude GAM charges for separate CUP or other method benchmarking absent distinct factual justification. The TPO's characterization of GAM as stewardship and its rejection of evidence lacked sufficient basis. Ratio vs. Obiter: Ratio - TPO cannot separately benchmark a single integral component by a different method once TNMM has been accepted for the overall transaction set, absent compelling factual distinction. Obiter - policy observations on administrative difficulties of multiple methods within same year. Conclusion: The TPO erred in applying a different benchmarking method to GAM charges after acceptance of TNMM; the downward adjustment was set aside. Issue 3 - Application of principle of consistency and prior acceptance of 5% mark-up Legal framework: While res judicata does not strictly apply to successive assessment years, consistency principles and appellate precedent support maintaining an established factual/transactional treatment across years where core facts remain the same and prior determination was accepted. Precedent treatment: The Tribunal applied settled jurisprudence (including Apex Court guidance on consistency across assessment years, as cited) and recognized that prior acceptance of a 5% mark-up in earlier years (by TPO in AY 2016-17 and 2017-18) should inform treatment in the present year absent material change. Interpretation and reasoning: The Tribunal found that facts and transactional substance remained consistent across years, mark-up (5%) was the same, and substantial evidentiary parity existed. The earlier benchmarking in favour of the assessee weighed against reversing stance in the present year; ad hoc change by the TPO without distinguishing facts was inappropriate. Ratio vs. Obiter: Ratio - where substantive facts and transactional structure remain the same and prior ALP treatment was accepted, principles of consistency require continuation of that treatment unless proper factual justification for change is shown. Obiter - discussion on limits of strict res judicata in tax assessments. Conclusion: The 5% mark-up previously accepted and the prior TNMM treatment supported acceptance of the same treatment in the subject year; the TPO's contrary finding was unjustified. Issue 4 - Sufficiency of evidence to rebut characterization as stewardship and to demonstrate active service and benefit Legal framework: For inter-company service charges, the payer must show receipt of services and benefit; evidence may include agreements, invoices, communications, cost break-ups and linkage of revenue to services rendered. Precedent treatment: Tribunal relied upon documentary evidence and prior case law where comparable evidentiary quality supported acceptance of corporate/service charges as part of core business operations. Those precedents were followed and applied to the facts. Interpretation and reasoning: The Tribunal examined extensive documentary material produced by the taxpayer and found it substantial: single service agreement, detailed invoices, emails, cost allocations, and explicit listing of 206 transactions showing revenue linked to GAM support. The Tribunal rejected the TPO's view that submissions were vague or merely stewardship, concluding that AE provided active services materially contributing to revenue generation. The Tribunal also noted that no separate marketing commission was paid and that GAM charges effectively represented the marketing/commission function at a lower cost than presumed third-party alternatives. Ratio vs. Obiter: Ratio - adequate contemporaneous documentation demonstrating receipt of active support services and revenue linkage will justify treating inter-company service charges as compensable and includable within the accepted benchmarking method. Obiter - comparative commercial observations about third-party commission levels. Conclusion: The evidence sufficed to establish active, revenue-generating GAM services; the characterization as stewardship was incorrect and did not justify the downward adjustment. Overall Disposition Given the integrated nature of the services, substantive documentary proof of benefit and revenue linkage, prior acceptance of TNMM and a consistent 5% mark-up in earlier years, and applicable precedents preventing piecemeal method application, the Tribunal set aside the downward adjustment and directed deletion of the impugned addition of Rs. 5,08,36,826/-. The appeal was allowed in favour of the assessee on this issue.