2025 (10) TMI 579 - AT - Income Tax

Appeal allowed for statistical purposes; market research and testing are separate international transactions; infrastructure fees need separate benchmarking and verification

Honda R&D (India) Private Limited Versus DCIT, Circle 10 (1), Delhi.

ITAT DELHI - AT held that basic market research and testing services constitute separate international transactions and were appropriately benchmarked by ... TP Adjustment - basic market research and testing services - HELD THAT:- The provisions of basic market research and testing services are separate international transactions for which TPO has benchmarked the same after studying the TP documentations and not proposed any TP adjustments. The other international transactions infrastructure services fees and reimbursement made to the AE are also a separate international transactions. Since the TP adjustments relating to basic market research and testing services are accepted by the TPO based on the financial statement for which the expenditures of infrastructure services fees and reimbursement made to the AE are also included, it does not mean that separate benchmarking and verification of the impact of TP adjustment need not be carried out by the TPO. This proposition of the AR is hereby rejected and all the international transactions have to be evaluated based on the TP provisions. It is a fact on record that assessee has also carried out two international transactions i.e. infrastructure services fees and reimbursement made to the AE has to be benchmarked by verification of various documents whether the allocation of expenditures by the AE are as per the norms and reasonableness whether the third party documents are submitted and on what basis these are allocated to the assessee. With regard to infrastructure services fees, the TPO has to benchmark on the basis of relevant information available on record as well as TP documentation submitted by the assessee. Assessee has submitted additional evidences which are not submitted before the lower authorities, we have accepted the same. We are inclined to remit the above said additional evidences to the file of AO/TPO with a direction to verify the same and redo the TP study based on the material available on record as per law. Appeal of the assessee is allowed for statistical purposes 1. ISSUES PRESENTED AND CONSIDERED 1. Whether transfer-pricing adjustments can be made separately in respect of distinct international transactions (in particular: infrastructure service fees and reimbursements of personnel costs) notwithstanding that those costs form part of the same financial statements and were considered when benchmarking a separate declared international transaction (provision of basic market research and testing services). 2. Whether the Transfer Pricing Officer (TPO) was obliged to benchmark the infrastructure service fees and reimbursements as independent international transactions and verify allocation/supporting documents for amounts charged by the Associated Enterprise (AE). 3. Whether additional evidence filed before the appellate tribunal (not earlier placed before the TPO/AO) can be admitted and remitted to the file of the AO/TPO for verification and re-study of TP issues. 4. Ancillary issues raised in grounds (time-bar, interest under sections 234A/234B, penalty under section 270A) were placed on record but not separately adjudicated because the appellant confined its primary grievance to the TP benchmarking ground and the Tribunal proceeded on that basis. 2. ISSUE-WISE DETAILED ANALYSIS Issue 1 - Separate TP adjustments for distinct international transactions despite common inclusion in financial statements Legal framework: Transfer pricing regime requires international transactions between AEs to be identified and benchmarked under section 92C (and related provisions) with arm's length principle applied separately to relevant international transactions; benchmarking and ALP determination are fact-specific exercises based on comparability and transactional characterization. Precedent Treatment: No prior judicial precedent was cited or applied in the reasoning of the Tribunal; the Tribunal relied on statutory scheme and record-based reasoning. (Followed: statutory requirement to evaluate international transactions individually.) Interpretation and reasoning: The Tribunal observed that the assessee declared multiple international transactions in Form 3CEB and TP documentation. The fact that the TPO accepted benchmarking for 'provision of basic market research and testing services' using financial statements which included infrastructure fees and reimbursements does not preclude a separate examination of those latter transactions. The Tribunal reasoned that each international transaction must be evaluated on its own facts and merits under TP provisions; inclusion of costs in the financial statement for one benchmarked transaction does not automatically validate the pricing or ALP of other declared transactions. Ratio vs. Obiter: Ratio - the Tribunal's holding that each declared international transaction must be separately evaluated for arm's length pricing, even if costs overlap in financial statements, is central to the decision. Obiter - general observations about the composition of profit & loss may be explanatory. Conclusions: The Tribunal rejected the contention that separate benchmarking was unnecessary and directed that infrastructure service fees and reimbursements be treated as separate international transactions for TP verification and benchmarking. Issue 2 - Obligation on TPO to verify allocations/supporting documents and to re-benchmark infrastructure fees and reimbursements Legal framework: TPO's role includes examining transactional characterization, allocation of costs by AE to the taxpayer, verifying third-party documentary support, and applying the most appropriate TP method with necessary comparability adjustments under section 92C and relevant rules. Precedent Treatment: No reported authorities were relied upon; the Tribunal applied the statutory mandate and principles of verification and comparability in practice. (Followed: requirement of verification and reasonableness assessment by TPO.) Interpretation and reasoning: The Tribunal found it necessary that the TPO verify whether allocations by the AE for infrastructure and personnel reimbursements were in accordance with norms and whether third-party documents justified allocations. The Tribunal accepted the Revenue's position that these are independent international transactions requiring separate benchmarking and rejected the assessee's argument that the TPO's acceptance of one benchmarked transaction precludes scrutiny of others. Ratio vs. Obiter: Ratio - TPO must verify allocation methodology and supporting documents for separately declared international transactions and perform independent benchmarking as required by TP law. Obiter - statements on what constitutes adequate allocation evidence are explanatory. Conclusions: The Tribunal directed remittance to AO/TPO to verify the additional material and redo the TP study for infrastructure service fees and reimbursements, ensuring the assessee is heard. Issue 3 - Admissibility of additional evidence before the Tribunal and remand for verification Legal framework: Appellate authority has discretion to admit additional evidence and remand matters to the assessing authority for verification where such evidence is material and was not previously available or considered, subject to fair opportunity to the other side. Precedent Treatment: No judicial precedents were invoked; the Tribunal applied its discretionary power to admit evidence and remit for fresh verification. Interpretation and reasoning: The Tribunal accepted additional evidence submitted by the assessee (auditor certificates and supporting documents) that were not placed before the AO/TPO, finding such material relevant to the verification of allocations and benchmarking. The Tribunal considered it appropriate to remit those materials to the AO/TPO with directions to verify and redo the TP work, giving the assessee a proper opportunity to be heard. Ratio vs. Obiter: Ratio - appellate authority may admit additional evidence and remit to the fact-finding authority for verification where relevant; such remand is an appropriate remedy when TP matters require further factual inquiry. Obiter - none material beyond the remand principle. Conclusions: Additional evidence was admitted and the matter was remitted to AO/TPO for re-examination and re-benchmarking; appeal allowed for statistical purposes (i.e., the Tribunal did not decide substance of adjustments but directed fresh fact-finding). Issue 4 - Other grounds (time-bar, interest, penalty) not separately decided Legal framework: Ancillary fiscal issues (limitations, interest, penalty) depend on finality of assessment and substantive adjustments; tribunals may decline to decide ancillary grounds where primary substantive matter is remitted. Precedent Treatment: Not applicable; the Tribunal limited its decision to the primary TP issue and remand remedy. Interpretation and reasoning: The assessee confined primary grievance to the TP benchmarking issue. The Tribunal therefore proceeded to adjudicate that ground and remit for fresh verification. Given the remand, it did not adjudicate ancillary grounds separately in the present order. Ratio vs. Obiter: Obiter - procedural posture that ancillary grounds await final outcome of reassessment/verification. Ratio - where substantive matter is remitted for fresh enquiry, ancillary claims flowing from that matter are not ripe for final adjudication. Conclusions: Ancillary grounds were noted but left open; the Tribunal's remand renders those issues for consideration by AO/TPO after verification and any consequent revisions in assessment.