Intra-group management service fees pricing: can ALP be Nil, and which method applies-TP adjustment deleted

The dominant issue was whether the arm's-length price (ALP) for intra-group management service fees could be determined at Nil and what method was appropriate. The ITAT held that the assessee's cost-plus mark-ups (5% for support and 10% for managerial/technical services) were supported by reliable internal cost data, consistent with OECD guidance on low value-adding intra-group services, and corroborated by a TNMM showing the assessee's 9.96% net cost-plus margin within the interquartile range of comparables; accordingly, a Nil ALP could not be sustained. The TPO's Nil determination, made without applying Rule 10B methods, identifying comparables, or rebutting evidence of services, was set aside; the TP adjustment was deleted, with a direction to verify the TPSR benchmarking under the "Other Method."

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1. ISSUES PRESENTED AND CONSIDERED

(i) Whether the determination of the arm's length price (ALP) of payments for intra-group "management consultancy services" at NIL, without applying any of the prescribed transfer pricing methods and without comparable analysis, was sustainable.

(ii) Whether the assessee's benchmarking framework-primary reliance on "Other Method" with a corroborative aggregation-based TNMM analysis-was acceptable on the facts and material placed on record.

(iii) Whether, after the transfer pricing determination, an alternate disallowance under section 37(1) could survive in the present facts where such disallowance was directed by the DRP though not proposed in the draft assessment order and without notice, and where the ALP adjustment itself was deleted.

(iv) Whether additional legal grounds could be admitted when they raised pure questions of law not requiring fresh fact-finding.

2. ISSUE-WISE DETAILED ANALYSIS

Issue (iv): Admission of additional legal grounds

Legal framework: The Tribunal considered that additional grounds may be admitted where they are legal in nature, directly connected with validity of proceedings, and do not require investigation of new facts, applying the principle recognised in binding Supreme Court authorities cited and followed by the Tribunal.

Interpretation and reasoning: The Tribunal found that the additional grounds raised were legal issues and could be adjudicated on the existing record without verification of fresh facts. The opposition did not show any statutory bar to such admission.

Conclusion: The additional grounds were admitted.

Issue (i) & (ii): Sustainability of NIL ALP for management consultancy services and acceptance of assessee's benchmarking

Legal framework (as discussed by the Tribunal): The Tribunal examined the statutory mandate that ALP must be determined by applying one of the prescribed methods under sections 92C/92CA read with Rules 10B and 10C, including the requirement of method selection and benchmarking based on reliable data and comparability. The Tribunal also evaluated the matter through OECD-based principles expressly relied upon and applied in its reasoning, including acceptability of aggregation for closely linked transactions and the benefit-based understanding of intra-group services.

Interpretation and reasoning: The Tribunal held that the assessee's benchmarking in its transfer pricing study-using "Other Method" as primary method and a corroborative TNMM aggregation as cross-validation-was consistent with the statutory framework and the OECD principles applied by the Tribunal. The Tribunal accepted that the services formed part of an integrated suite of support functions linked with the assessee's operations and that aggregation for corroboration was permissible on these facts. It further found that the assessee had placed substantial documentation on record evidencing the nature of services and commercial relevance, and that the TPO neither undertook a cogent examination rebutting this material nor applied any prescribed method or identified any comparable uncontrolled transaction. The Tribunal concluded that determining ALP at NIL merely on alleged insufficiency of benefit/value demonstration, without applying a recognised method or comparable analysis, was inconsistent with the Act/Rules as applied by the Tribunal. The Tribunal also noted that the TPO had not verified the benchmarking contained in the transfer pricing study.

Conclusions: (a) The NIL ALP determination was unsustainable and the transfer pricing adjustment was deleted. (b) The Tribunal directed the AO/TPO to verify the assessee's benchmarking contained in the transfer pricing study by applying the "Other Method" as the primary method, while keeping in view the corroborative TNMM results as supportive validation. The related grounds were allowed for statistical purposes.

Issue (iii): Survival of alternate disallowance under section 37(1) directed by the DRP

Legal framework (as discussed by the Tribunal): The Tribunal addressed the propriety of the DRP directing an alternate disallowance under section 37(1) where such addition was not proposed in the draft assessment order and where the assessee alleged lack of opportunity/notice. The Tribunal also considered the relationship between a transfer pricing adjustment on an AE transaction and parallel disallowance under general deduction provisions in the facts as decided.

Interpretation and reasoning: The Tribunal found from the record that no section 37 disallowance was proposed in the draft assessment order and that the DRP issued directions for an alternate addition without issuing notice. Independently, the Tribunal held that, in view of its findings deleting the NIL ALP adjustment and accepting the assessee's benchmarking framework (subject to verification), no further adjustment under the general deduction provisions could survive on the same payment in the present facts.

Conclusion: The additional grounds challenging the alternate section 37 disallowance/directions were allowed, and the Tribunal held that no such further disallowance would survive.

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