2025 (11) TMI 1060 - AT - Income Tax

Transfer pricing adjustments set aside; ITES remand for FAR review and 18% MAP margin; manufacturing remand under Rule 10B filters

ITAT, Ahmedabad set aside the AO/TPO's upward TP adjustments in the ITES and manufacturing segments and remitted both issues for fresh determination. For ... TP Adjustment - upward adjustment to the value of international transactions u/s 92CA(3) - In respect of the ITES Segment Adjustment, AO and the TPO held that the international transaction of providing back-office support services by the assessee to its associated enterprises was not at arm’s length, resulting in an upward adjustment - HELD THAT:- Tribunal in the assessee’s own case for Assessment Year 2007–08 in [2024 (9) TMI 17 - ITAT AHMEDABAD] the Tribunal, after detailed consideration of the facts and the assessee’s submissions, held that since a part of the ITES transactions of the assessee with its UK Associated Enterprises had been resolved through the Mutual Agreement Procedure (MAP) under Article 27 of the India–UK Double Taxation Avoidance Agreement, and the Competent Authorities of both countries had agreed upon a margin of 18% on operating cost, the same benchmark could, in principle, be extended to non-UK transactions, provided that the functional, asset, and risk (FAR) profiles were found to be similar. Thus, we hold that the issue relating to the transfer pricing adjustment in the ITES segment requires fresh examination by the TPO/AO. The TPO shall undertake a detailed FAR analysis of the ITES transactions entered into by the assessee with non-UK Associated Enterprises for the relevant year and determine whether the functional and economic characteristics of such transactions are comparable with those of the UK transactions already covered under the MAP resolution dated 18 August 2016. If, upon such examination, it is found that the factors influencing the price are similar, the same margin of 18% on operating cost, as agreed under the MAP resolution between the Indian and UK Competent Authorities, shall be applied for determining the arm’s length price of the ITES segment for non-UK transactions as well. We, therefore, set aside the findings of the lower authorities on this issue and restore the matter to the file of the Assessing Officer/TPO for a fresh determination of the arm’s length price of the ITES segment in accordance with law and in the light of the directions contained herein. The assessee shall be afforded reasonable opportunity of being heard and to furnish necessary documentation in support of its contentions. Ground allowed for statistical purposes. Disallowance of Management Charges - Addition made by AO/TPO in respect of the international transaction involving payment of management charges to the Associated Enterprise (AE), UK - TPO determined the arm’s length price (ALP) of this transaction at nil on the reasoning that the assessee failed to establish the actual receipt of services and the benefits derived therefrom, and that the allocation of management charges among group entities was arbitrary - HELD THAT:- Tribunal in the assessee’s own case for Assessment Year 2007–08 in [2024 (9) TMI 17 - ITAT AHMEDABAD] as found from the letter of the CBDT that payment of management charges by the assessee to TI Group Automatic System Ltd., UK was settled at 30% of TP adjustment - As this ground has been withdrawn by the assessee, the same is dismissed as withdrawn. TP adjustment of manufacturing segment of the assessee - TPO rejecting several comparables selected by the assessee and including new ones, which according to him, were functionally comparable - HELD THAT:- In light of these findings and directions of the Co-ordinate Bench in the assessee’s own case for AY 2007–08 (supra), we are of the considered view that the issue relating to the transfer pricing adjustment in the manufacturing segment for the present assessment year also requires a fresh determination by the TPO/AO. TPO shall undertake a detailed analysis of functional, asset, and risk (FAR) parameters and verify whether the comparables adopted by the assessee or those included by the TPO are functionally and economically comparable, keeping in mind the product profile and raw material usage of the assessee. TPO shall specifically apply appropriate related party transaction filters, import/export filters, and turnover filters in accordance with Rule 10B(2) and Rule 10B(3) of the Income-tax Rules, 1962. Accordingly, the issue relating to the transfer pricing adjustment in the manufacturing segment is restored to the file of the AO/TPO for fresh determination. ISSUES PRESENTED AND CONSIDERED 1. Whether the transfer pricing adjustments under section 92C(3) read with section 92CA(3) could be sustained without establishing the statutory preconditions for invoking those provisions. 2. Whether the TP adjustment to the ITES (back-office support) segment was justified: (a) recharacterisation of services as high-end KPO versus low-end ITES; (b) rejection of the assessee's comparables and selection of alternate comparables by the TPO; (c) rejection of use of multiple-year data under Rule 10B(4); (d) reliance on non-public data obtained under section 133(6); and (e) applicability of a MAP-determined margin for UK transactions to non-UK transactions. 3. Whether the ALP of management charges paid to an AE could be held at nil where the taxpayer failed to substantiate receipt and benefit of services, and whether a MAP resolution accepting a percentage of fees displaces the adjustment. 4. Whether the manufacturing-segment TP adjustment was sustainable: (a) validity of rejecting taxpayer's comparables and inclusion of TPO's comparables; (b) application of appropriate filters (turnover, related party, export/import, extraordinary events) and FAR analysis; and (c) impact of prior DRP/tribunal directions in related assessment years. ISSUE-WISE DETAILED ANALYSIS Issue 1 - Preconditions for invoking s.92C(3)/92CA(3) Legal framework: Section 92C(3) read with section 92CA(3) permits the TPO to make transfer pricing adjustments where international transactions are not at arm's length; statutory conditions and procedural rules govern when and how such adjustments are to be made. Precedent treatment: Decision applied the established principle that the adjusting authority must satisfy statutory preconditions and conduct proper FAR/benchmarking analyses; no novel overruling of precedent. Interpretation and reasoning: The Court noted the assessee's general challenge to the invocation of TP provisions but treated the challenge as subsumed within the detailed segmental issues (ITES, management charges, manufacturing). The Tribunal required that the TPO/AO undertake specified analyses (FAR, comparability) before making adjustments, indicating that mere assertions without proper analysis do not satisfy statutory preconditions. Ratio vs. Obiter: Ratio - adjustments must be founded on proper FAR and benchmarking analyses satisfying statutory requirements; Obiter - none substantial beyond procedural insistence. Conclusions: General grounds dismissed as unnecessary of separate adjudication; substantive relief granted only where the lower authorities failed to carry out or were directed to revisit required analyses (see Issues 2 and 4). Issue 2 - ITES segment TP adjustment Legal framework: Transfer pricing assessment under s.92C/92CA and Rules 10B(2)-(4); FAR (functional, asset, risk) analysis; MAP under DTAA and Rule 44H for competent authority settlements. Precedent Treatment: The Tribunal relied on its coordinate-bench decisions and other ITAT decisions (e.g., J.P. Morgan; Dell) holding that a MAP-determined margin may be extended to non-MAP transactions only after FAR comparability is demonstrated; these precedents were followed, not distinguished. Interpretation and reasoning: - Recharacterisation: The TPO reclassified services as high-end KPO and rejected the assessee's characterization as low-end ITES. The Tribunal did not substitute its own factual view at first instance but required fresh FAR analysis to test whether UK and non-UK transactions are comparable. - Comparables selection and statistical treatment: The Tribunal observed disputes over rejection of the assessee's proposed comparables and the introduction of new comparables by the TPO. It emphasised application of Rule 10B filters and robust functional comparability; where lower authorities failed to carry out adequate FAR comparison or to disclose full benchmarking reasoning, the matter required remand. - Multiple-year data: The TPO rejected multiple-year data under Rule 10B(4) for lack of demonstrated influence on current-year pricing. The Tribunal did not adopt a categorical rule but required proper justification for rejecting multi-year data; it remitted for fresh consideration consistent with rules and precedents. - Use of non-public section 133(6) data: The Tribunal noted the TPO used non-public data but that such information had been provided to the assessee for rebuttal; no finding of procedural unfairness was sustained that warranted outright rejection on record, but transparency and opportunity to rebut were required. - MAP applicability: A MAP settlement fixed 18% on operating cost for UK transactions. Applying precedents, the Tribunal held that the MAP margin can be applied to non-UK transactions only if a FAR analysis shows factors influencing price are similar; remitted to TPO/AO to undertake FAR comparison and, if similarity established, to apply MAP margin to non-UK transactions. Ratio vs. Obiter: Ratio - MAP outcomes may be extended to other transactions only after demonstrable FAR parity; the TPO must apply Rule 10B filters and properly disclose and justify comparable selection and statistical treatments. Obiter - commentary on non-public data use stressing necessity of providing opportunity to rebut. Conclusions: ITES adjustment set aside for statistical purposes; remitted to TPO/AO for fresh FAR and benchmarking analysis. If FAR parity between UK and non-UK transactions is established, MAP margin of 18% on operating cost to be applied to non-UK transactions. Issue 3 - Management charges disallowance (ALP held nil) Legal framework: ALP determination for management/technical service payments; requirement to prove receipt of service and demonstrable, specific benefits; relevance of cost allocation methodology and supporting documentary evidence; MAP and competent authority settlements under DTAA/Rule 44H. Precedent Treatment: Tribunal relied on its earlier coordinate-bench decision in the assessee's own case and on MAP settlement; prior judicial decisions referenced by counsel were considered but the controlling factor was the MAP resolution. Interpretation and reasoning: The TPO held ALP nil for lack of evidence of receipt and benefit; CIT(A) affirmed. The assessee relied on MAP resolution where competent authorities accepted 70% of management fees as ALP. The Tribunal observed that where a MAP settlement is reached and relief is granted under the DTAA/Rule 44H, the corresponding TP adjustment in the assessment year is displaced to the extent of the MAP settlement. The assessee withdrew challenge to that extent and the ground was treated as dismissed/withdrawn. Ratio vs. Obiter: Ratio - a binding MAP/competent authority resolution accepting part of the management fee must be given effect to in the assessment process; where taxpayer accepts MAP relief, corresponding appeal grounds may be withdrawn/dismissed. Obiter - emphasis that factual substantiation remains necessary absent MAP relief. Conclusions: Ground dismissed as withdrawn in light of MAP settlement accepting 70% of management fees; relief accorded to the assessee to the extent of MAP resolution. Issue 4 - Manufacturing segment TP adjustment Legal framework: TNMM/FAR and Rule 10B(2)-(4) for comparables selection; filters for related-party transactions, turnover, extraordinary events, and import/export orientation; binding effect of DRP directions in related assessments. Precedent Treatment: The Tribunal repeatedly applied its coordinate-bench reasoning in the assessee's own earlier years, treating those decisions as guiding authorities and directing conformity with their analytical approach (product comparability, import/export filters, related party transaction thresholds). Interpretation and reasoning: - Comparability and filters: The Tribunal analysed that certain comparables rejected by the TPO were properly rejected for functional dissimilarity (different product, raw material, or persistent losses), while some exclusions/inclusions required re-examination (e.g., related party transaction thresholds, export orientation). Emphasis was placed on application of Rule 10B filters and on examining functional/economic impacts rather than mechanical inclusion/exclusion. - DRP/earlier findings: Where the DRP or coordinate-bench had given directions in related assessment years (e.g., removal of export earnings, allowance of management fees), the Tribunal required the TPO/AO to have regard to those directions and to conduct fresh FAR/benchmarking consistent with prior findings, remitting the matter where lower authorities had not done so. Ratio vs. Obiter: Ratio - comparability decisions must be founded on product, functional, asset and risk analysis and consistent application of Rule 10B filters; prior coordinate-bench/DRP findings in closely related assessments are material and may require fresh determination in the instant year. Obiter - cautionary remarks on avoiding arbitrary selection and ensuring disclosure of benchmarking analysis to respect natural justice. Conclusions: Manufacturing-segment adjustment set aside for statistical purposes and remitted to the TPO/AO for fresh determination applying FAR analysis, Rule 10B filters, and directions in the coordinate-bench decisions; assessee to be given opportunity to be heard and to supply documentation.