2026 (1) TMI 351 - AT - Income Tax

Intra-group service charges paid to an associated enterprise-whether services were actually rendered-deduction allowed; ALP remitted for fresh review.

The dominant issue was whether intra-group services from an AE were actually rendered so as to justify deduction of the service charges. On review of the ... Disallowance of expenditure claimed for availing Intra Group Services from its AE - Determining whether intra-group services have been actually rendered? - TPO observed that assessee has to prove that the services are rendered and received - second aspect of Intra Group Services is the quantification of such services in terms of actual expenditure, incurred and commensurate benefits derived therefrom - thirdly ALP of such services, if the same requires payments of Arms Length - HELD THAT :- It has been an admitted fact that for carrying out the business activity of the level of assessee in appeal before us, the task is not only to procure goods, manufacture and sale but there are many minute workings which are required to be done by the companies adopting the international standards and other requirement for Export of Goods. For each of the business activity including the incurring of cost, acquiring of companies assets, export sales, employees and the responsibilities, financial aspects, quality checks, accounting of the transaction of SAH based software and also of getting the regular report about each sphere of the business activity, assessee is required to take the services which can be either from third party but then it would have its own cost. In the instant case, assessee being part of the SAH group, they have centralized system of providing the services to their Semperit entities. As gone through the audited profit and loss account and notice that there is no duplicity of expenditure claimed by the assessee and whatever expenses have been claimed in the services rendered under the Intra Group Services have not been claimed under any other head. We notice that the alleged Intra Group Services do not fall in the category of shareholder/stewardship activities, they are not duplicate services, they are not services that provide incidental benefits, i.e. the services performed by one Group Member for a particular Group Member or set of Group Members nor it is in the nature of on call services. Assessee has not received any services from its AE is uncalled for. We hold that the assessee has incurred expenditure in the form of services received from its AEs which have been shown under the head Intra Group Services and has the assessee not taken these services from its AE, then it would have incurred cost for making payment to a third party. Since the ALP adopted by the assessee based on TNM method has not been examined by the ld. TPO in light of the prescribed method, the issue therefore needs to be restored to the file of ld. TPO for necessary examination of the ALP. We therefore hold that alleged expenditure have been incurred towards Intra Group Services. Grounds of appeal No.6 to 15 raised by the assessee are allowed for statistical purposes. Whether DRP erred in upholding the action of the TPO in applying other method inappropriately and further erred by not bringing on record any comparable data as mandated by section 92C r.w. Rule 10B and Rule 10C of the Rule D? - For arriving at such ALP, one of the method prescribed u/s.92C(1) of the Act needs to be applied. Assessee in the instant case had adopted TNM method and has filed TP study report making reference to various comparables in order to strengthen its valid claim of expenditure under the head Intra Group Services. We are therefore of the considered view that the decision referred and relied on by assessee in the case of CLSA India (P) Ltd [2019 (1) TMI 1351 - ITAT MUMBAI] is not applicable on the facts of the instant case. Further in the preceding paras, we have restored the issue of determination of ALP of the alleged expenditure to the file of ld. TPO for examining the correctness of the ALP calculated by the assessee adopting TNM method. We therefore fail to find any merit in Ground No.5 raised by the assessee and the same is dismissed. 1. ISSUES PRESENTED AND CONSIDERED (i) Whether the payment claimed as 'Intra Group Services' was liable to be treated as having no services received so as to justify determination of ALP at 'Nil' and corresponding disallowance of the expenditure. (ii) Whether, on the facts found, the determination of ALP required restoration to the TPO for examining the assessee's benchmarking under TNMM, since the TPO/DRP had not tested the ALP by examining the assessee's adopted method after first deciding on receipt of services. (iii) Whether the grievance that 'Other Method' was applied inappropriately and without comparable data warranted interference, or was liable to be rejected on the facts. (iv) Whether the claim of set-off of brought forward business loss and unabsorbed depreciation required restoration to the Assessing Officer for verification and decision in accordance with law. 2. ISSUE-WISE DETAILED ANALYSIS Issue (i) & (ii): Receipt of intra-group services; sustainability of 'Nil' ALP; necessity of remand to examine ALP under TNMM Legal framework (as discussed in the judgment): The Court addressed transfer pricing examination of international transactions and the requirement that ALP determination follows the prescribed approach, noting that ALP analysis follows after accepting that services were actually received. The Court also examined the characterization of services as shareholder/stewardship, duplicative, incidental, or otherwise. Interpretation and reasoning: The Court evaluated the detailed material placed on record regarding the nature of services (covering, inter alia, IT, procurement, operational excellence, treasury, HR, quality, engineering/maintenance, accounting/consolidation, legal/insurance, risk management/internal audit, and segment technical/commercial assistance). The Court found these services to be connected with day-to-day business operations, export and compliance requirements, and governance/standardization needs of an entity operating at the assessee's scale. It further noted that the expenditure was not shown to be duplicated elsewhere in the accounts and that the services did not fall within shareholder/stewardship activities, duplicative services, incidental benefits, or on-call services. On these findings, the Court held that the conclusion that no services were received was unjustified. Since the TPO had not examined the assessee's TNMM-based benchmarking (having stopped at the 'no services received' conclusion), the Court held that ALP determination should be revisited by the TPO by examining the assessee's adopted method and the material supporting it. Conclusions: The Court held that the assessee had incurred expenditure towards intra-group services and that the 'no services received/ALP Nil' approach could not be sustained on the facts. The matter of determining ALP was restored to the TPO for examination of the ALP computed by the assessee under TNMM. The related grounds were allowed for statistical purposes. Issue (iii): Challenge to use of 'Other Method' and absence of comparable data Legal framework (as discussed in the judgment): The Court considered the contention that 'Other Method' was inappropriately applied and that comparable data was not brought on record, in the context of the statutory requirement to apply a prescribed method for ALP determination. Interpretation and reasoning: The Court distinguished the relied-upon precedent on the basis that, in the present case, the TPO had not actually carried out a computation by applying an unprescribed methodology to arrive at ALP; rather, the TPO's determination proceeded on the premise that no services were received and therefore ALP would be Nil. The Court reasoned that the step of selecting and applying an ALP method arises only after acceptance of receipt of services, and once services are found to have been received, ALP must be tested by applying a prescribed method; here, the assessee had adopted TNMM and filed supporting benchmarking material which had not yet been examined by the TPO. Therefore, the specific complaint that the 'Other Method' was wrongly applied did not warrant relief on these facts. Conclusions: The ground challenging the 'Other Method' application and lack of comparable data was dismissed, while the ALP determination itself was remanded for fresh examination under the assessee's TNMM benchmarking. Issue (iv): Set-off of brought forward business loss and unabsorbed depreciation Legal framework (as discussed in the judgment): The Court treated the claim as requiring factual verification by the jurisdictional Assessing Officer. Interpretation and reasoning: The Court noted that the assessee sought restoration for verification of brought forward losses and unabsorbed depreciation and that there was no objection from the revenue. It directed the assessee to furnish necessary details and proof, including relevant returns and audit report material, for examination. Conclusions: The issue was restored to the Assessing Officer to verify and allow the set-off if found in accordance with law. The related grounds were allowed for statistical purposes.