2025 (10) TMI 1059 - AT - Income Tax

Transfer-pricing addition set aside; ALP for intra-group services to be computed using taxpayer's TNMM benchmarking after verification, s.37 disallowance overturned

ITAT MUMBAI - AT set aside the transfer-pricing addition and directed the TPO to compute the ALP of intra-group services (IGS) using the corroborative ... TP Adjustment - benchmarking analysis taking Indian entity as tested party and TNMM (as opposed to ‘Other Method’) - determining the arm's length price (ALP) of intra-group services as NIL - rejection of the corroborative benchmarking analysis of the Assessee - Assessee submitted that the authorities below had failed to appreciate the Transfer Pricing Study Report (TPSR) and the supporting documentation furnished by the Assessee - TPO rejected all the contentions and supporting documents submitted by the Assessee holding that the Assessee had failed to satisfy the need, purpose, rendition and benefit test - As concluded by the TPO that no third party would have made payment to AEs in such situation and therefore, ALP of BSS and BTS was ‘Nil’ HELD THAT:- In the facts of the present case we are not inclined to accept the contention of the Revenue that approach adopted by the TPO can be regarded as equivalent to adopting ‘Other Method’ the Assessee has furnished primary Benchmarking Analysis (taking foreign AE as tested party) as well as the corroborative benchmarking analysis (taking the Indian entity as tested party). Corroborative benchmarking analysis done by the Assessee by taking the Indian entity as the tested party; with TNMM as Most Appropriate Method; and OP/Sales as PLI was rejected by the TPO/Assessing Officer by simply taking ALP of BSS/BTS as ‘Nil’. During the course of hearing, clarification was sought from the Revenue in relation to the same and opportunity was granted to the AO to file report on the corroborative benchmarking analysis furnished by the Assessee. Availing the said opportunity, vide Letter dated 25/09/2025, clarification/report was from furnished by the Revenue which has been taken into consideration. We are of the view that the aforesaid clarification/report does not advanced the stand taken by the Revenue. In the aforesaid clarification/report it has been reiterated that during the assessment proceedings, the Assessee had failed to establish the need/purpose/benefit/rendition of IGS and therefore, ALP of IGS was determined ‘Nil’. Thus, the benchmarking undertaken by the Assessee was liable to be rejected. DRP itself had accepted that benchmarking analysis taking Indian entity as tested party and TNMM (as opposed to ‘Other Method’) could be considered for determining ALP of IGS payments made by the Assessee to its AEs. Only reason for the rejection of the corroborative benchmarking analysis of the Assessee is based upon the conclusion of the TPO/DRP that the Assessee had failed to satisfy the need/purpose/benefit/rendition test. Since we have accepted the contentions of the Assessee in this regard and have overturned the aforesaid finding of TPO/DRP by following the decision of the Tribunal in the case of the Assessee for the Assessment Year 2013-2014 [2024 (1) TMI 1032 - ITAT MUMBAI] the stand taken by the Revenue cannot be accepted. We have already concluded hereinabove that the Assessee had discharge the burden to satisfy that the need, purpose, rendition and benefit test for the relevant previous year by furnishing relevant documents and details during the proceedings before the TPO and DRP. Therefore, for the same reasons, even the directions given by the DRP to disallow deduction for IGS payments under Section 37 of the Act cannot be sustained. Accordingly, the Transfer Pricing Addition is set aside with the directions to the TPO to compute the ALP as per the corroborative benchmarking analysis after verifying the computation of PLI. ISSUES PRESENTED AND CONSIDERED 1. Whether the Transfer Pricing Officer (TPO)/Dispute Resolution Panel (DRP) was justified in determining the arm's length price (ALP) of intra-group services (Business Support Services and Business Technology Services) as NIL, despite the assessee's transfer pricing documentation, allocation methodology and benchmarking analyses. 2. Whether the intra-group service (IGS) payments are allowable as deduction under Section 37 of the Act where the TPO/DRP concluded that no services were rendered. 3. Whether allocation keys and cost-plus (5%) mark-up methodology applied by the assessee for allocation of centralised group costs is permissible under the transfer pricing provisions and OECD guidance. 4. Whether the assessee discharged the burden to satisfy the need/purpose/rendition/benefit tests for IGS and whether the revenue could substitute commercial prudence for ALP determination. 5. Whether an addition under Section 41 resulting in alleged double inclusion of income is permissible without verification of whether the amount already forms part of total income. 6. Ancillary/procedural: whether grounds on limitation (Section 153) and lack of personal hearing required separate adjudication (grounds not pressed or general). ISSUE-WISE DETAILED ANALYSIS Issue 1 - ALP determination: whether ALP could be fixed at NIL. Legal framework: Determination of ALP under Chapter X (Sections 92C, 92CA) and Rules 10A-10E; prescribed methods including TNMM; TPO's role limited to determining ALP based on most appropriate method and comparables; revenue to demonstrate non-arm's-length on statutory parameters. Precedent treatment: Tribunal precedent in the assessee's own earlier year (AY 2013-14) held TPO/DRP not justified in fixing ALP at NIL where substantial documentary evidence, allocation workings and benchmarking were on record; coordinate bench decisions (e.g., Sulzer Tech, Jabil Circuit) and High Court observations on limits of TPO's role were relied upon and followed. Interpretation and reasoning: The Tribunal examined the total record - TP study report, intercompany agreements, invoices, detailed cost allocation workings, emails/screenshots, ticket snapshots, employee headcount and benchmarking (primary: AE as tested party; corroborative: Indian entity as tested party using TNMM). The TPO/DRP's conclusion of ALP = NIL rested on alleged failure to prove rendition/benefit and on purported discrepancies, but no independent benchmarking or search for uncontrolled comparables was performed by revenue to justify NIL determination. The Tribunal held that treating value as NIL without searching for comparable uncontrolled transactions or applying a valid method was not sustainable. DRP itself acknowledged TNMM or other methods could be used, undermining revenue's position. OECD guidance permits allocation keys and approximations for centralised services; coordinate Tribunal jurisprudence endorses allocation keys where substantiated. Ratio vs. Obiter: Ratio - TPO/DRP cannot fix ALP at NIL merely by asserting non-rendition without conducting appropriate benchmarking or demonstrating inadequacy of taxpayer's method when substantial supporting material exists. Obiter - observations on commercial expediency and generalized criticisms of allocation keys where already addressed by OECD/precedents. Conclusion: The determination of ALP as NIL is set aside. Transfer pricing addition of INR 19,42,69,527 is deleted and the matter remitted to TPO to recompute ALP by verifying the corroborative benchmarking (TNMM) and computation of Profit Level Indicator (PLI). Issue 2 - Allowability under Section 37: whether IGS payments are deductible. Legal framework: Section 37 permits deductions for bona fide business expenditure not covered by other provisions; separate exercise from ALP determination - AO/TPO limited to ALP determination under Chapter X; disallowance under Section 37 requires AO to justify non-allowability on statutory parameters. Precedent treatment: Tribunal and High Court authorities cited (including the assessee's earlier year and Lever India Exports reasoning) confirm that TPO's role is confined to ALP and not to test genuineness/commercial expediency for Section 37; Revenue cannot convert ALP finding into Section 37 disallowance without material contradicting receipt/benefit. Interpretation and reasoning: Having accepted that services were rendered and benefits accrued (documented agreements, invoices, emails, IT-ticket snapshots, absence of local support staff), Tribunal rejected DRP's direction to disallow IGS payments under Section 37. Revenue cannot sit in the assessee's chair to challenge commercial prudence where receipt and benefit are substantiated; Section 37 disallowance could not be sustained in face of accepted documentation and accepted benchmarking avenues. Ratio vs. Obiter: Ratio - Direction to disallow under Section 37 cannot stand where TPO/DRP's ALP finding is vacated and receipt/benefit are substantiated; disallowance under Section 37 is a separate exercise and cannot be a substitute for proper ALP determination. Conclusion: DRP's direction to disallow IGS payments under Section 37 is set aside; deduction to be considered consistent with recomputed ALP and applicable provisions. Issue 3 - Use of allocation keys and cost-plus mark-up for centralised services. Legal framework: OECD Transfer Pricing Guidelines (Chapter VII) recognise cost allocation techniques and use of appropriate allocation keys (headcount, turnover) for intra-group services where direct measurement is impractical; Chapter X statutory methods permit TNMM and other methods if most appropriate. Precedent treatment: Tribunal decisions (Jabil Circuit and others) upheld allocation keys and cost allocation methods consistent with OECD guidance; the assessee's earlier Tribunal decision accepted similar allocation methodology. Interpretation and reasoning: The Tribunal accepted the assessee's allocation methodology (service cost and pass-through cost; direct/regional/pool allocation; 5% cost-plus markup) as prima facie acceptable where supported by agreements, headcount data and allocation workings. Discrepancies noted by revenue were not sufficient to discard an otherwise documented allocation method in absence of contrary material or unrebutted evidence of non-rendition. Ratio vs. Obiter: Ratio - Well-documented allocation keys consistent with OECD guidance are permissible; revenue must demonstrate specific infirmities that invalidate the allocation key or benchmarking to displace the assessee's methodology. Conclusion: Allocation keys and the 5% cost-plus approach accepted for purposes of recomputation; TPO to verify PLI computations and apply corroborative benchmarking as directed. Issue 4 - Burden of proof: need/purpose/rendition/benefit tests and revenue's role. Legal framework: Taxpayer must substantiate international transactions and arm's-length nature; revenue must support any adverse finding with material, appropriate application of methods and comparables. TPO's jurisdiction is confined to ALP; not to reassess commercial expediency in the guise of TP adjustment. Precedent treatment: Tribunal earlier order and cited authorities emphasize that mere assertion by revenue that services were not rendered is insufficient where substantial documentary evidence exists and no comparative search was undertaken. Interpretation and reasoning: Tribunal found that assessee furnished extensive evidence (agreements, invoices, emails, IT system tickets, employee headcount, cost allocations, benchmarking). Revenue's objections (vague discrepancies, absence of AE cost ledgers) did not negate the documentary trail of rendition/benefit. Consequently, the Tribunal disagreed with revenue's substitution of commercial judgment for ALP determination. Ratio vs. Obiter: Ratio - Burden to displace a documented TP position lies on revenue, which must perform methodical exercise (comparables search, method application) rather than relying on negative inferences; where burden is met by taxpayer with primary and corroborative benchmarking, ALP cannot be fixed at NIL without cogent contrary material. Conclusion: The assessee discharged burden on need/purpose/rendition/benefit; revenue's contrary finding reversed and ALP recomputation ordered per corroborative benchmarking. Issue 5 - Section 41 addition (double inclusion). Legal framework: Section 41 applies to income that is again credited or included; AO must verify whether amount was already offered to tax before making addition to avoid double taxation. Interpretation and reasoning: Assessee contended the INR 4,38,873 had already been offered to tax. Tribunal directed AO to verify factual averment and delete the addition if the amount formed part of total income, observing that double inclusion cannot be sustained without verification. Ratio vs. Obiter: Ratio - AO must verify whether the contested amount was already included in total income before making an addition under Section 41; deletion ordered subject to verification. Conclusion: Ground relating to Section 41 allowed for statistical purposes with direction to delete addition upon verification. Issue 6 - Procedural/ancillary grounds. Legal framework & reasoning: Grounds relating to limitation under Section 153 and denial of personal hearing were not pressed at hearing; general grounds requiring no separate adjudication were disposed of accordingly. Conclusion: Grounds on limitation and natural justice dismissed/not pressed; general grounds disposed as not requiring separate decision.