2026 (2) TMI 362 - AT - Income Tax

Transfer pricing dispute over intragroup services and noninterest receipts: assessment set aside and remitted for fresh verification and evidence.

Transfer pricing adjustment challenged on intragroup management fees where AO found no services provided; Tribunal noted assessee must prove payments were ... TP Adjustment - Intra-group services - AO computed the value of ALP at Nil on the ground that the intra- group services for which management fees has been paid by the assessee to its AE was not established - HELD THAT:- Assessee has to demonstrate that the expenditure or payment has been incurred or laid out for the purposes of business and then only the TPO cannot disallow the same on any extraneous reasoning. As discussed above, in this case, the AO has held that no services as claimed by the assessee has been provided to the assessee by its AE and thus, the assessee failed to demonstrate that the expenditure or payment has been incurred or laid out for the purposes of business. As regards, the claim of the assessee that a wholesale disallowance of the expenditure by the TPO cannot be contemplated or authorized has been given with a rider by the Hon’ble Court that it will depend upon the facts of the case. In the above cited case, the TPO had questioned the expenditure and reduced it to NIL on the ground that the company was making continuous losses and the financial health of assessee could not have afforded to carry out such expenses whereas in the present case, the AO has given a finding that no services as claimed by the assessee has been provided to the assessee by its AE. Further, as noted above Tribunal held in case of M/s GE Money Financial Services (P.) Ltd. [2016 (5) TMI 1284 - ITAT DELHI] after considering the judgment of Cushman and Wakefield [2014 (5) TMI 897 - DELHI HIGH COURT] held that the TPO can compute NIL ALP after conducting benefit test, need test and rendition test. In view of our observations in this order, we set aside the final assessment order of the AO/ TPO and the DRP’s directions and restore the matter to the file of the AO / TPO for deciding the issue afresh after giving a reasonable opportunity of being heard to the assessee as per law. Further, the assessee will also at liberty to submit any evidence / details in support of its claim. Ground nos. 2 to 12 of the appeal are allowed for statistical purposes. Addition on account of receipt other than interest on securities -Assessee submitted before the AO that the interest amount received from Maharashtra State Distribution Co. Ltd. was set off with electricity expenses in April 2021 and submitted the copy of electricity bill for the month of April 2021 but the AO did not accept the same on the ground that no reconciliation statement was submitted by the assessee with documentary evidences - HELD THAT:- The above claim of the assessee and the document submitted by the assessee requires factual verification. We, therefore, set aside the order of the AO and restore the matter to the file of the AO for verifying the above claim of the assessee and if the claim of the assessee of reducing the electricity expenses is found to be correct then to delete the said addition. Issues: (i) Whether the management fees of Rs. 27,89,936 paid to the associated enterprise were proved to have been rendered and charged at arm's length price; (ii) Whether the addition of Rs. 37,013 made as receipt set off against electricity expense is justified.Issue (i): Determination of arm's length price (ALP) of intra-group management fees of Rs. 27,89,936 and related transfer pricing adjustment.Analysis: The Tribunal reviewed the findings of the TPO, AO and DRP which concluded that the assessee failed to substantiate receipt of services and corresponding benefit, applied benefit/need/rendition tests and computed ALP at nil. The assessee contested method selection (CUP v. TNMM), alleged absence of comparable data for CUP, relied on FAR analysis and cited authorities emphasizing allowance where expenditure is for business purposes. The Tribunal found that the AO/DRP's conclusion that no services were rendered rests on record deficiencies: neither specific emails/invoices were identified by the AO to substantiate rejection nor did the assessee produce corroborative documents for the services claimed. Given the factual gaps, the Tribunal held that the matter requires fresh consideration with opportunity to the assessee to produce evidence, and therefore set aside the orders of the AO/DRP/TPO for de novo decision after hearing.Conclusion: The Tribunal set aside the transfer pricing adjustment and DRP directions regarding management fees and remanded the issue to the file of the AO/TPO for fresh adjudication after giving the assessee a reasonable opportunity to produce evidence; grounds 2 to 12 allowed for statistical purposes in favour of the assessee.Issue (ii): Addition of Rs. 37,013 treated as income on account of receipt that was claimed to be set off against electricity expense.Analysis: The assessee asserted that the amount was set off against electricity expense in the subsequent year and produced invoice/documentation; the AO disallowed the contention citing absence of reconciliation with ledger/bank evidence. The Tribunal noted that the claim requires factual verification and cannot be conclusively decided on the present record.Conclusion: The Tribunal set aside the addition and remanded the matter to the AO for verification of the assessee's claim and, if established, deletion of the addition; related grounds allowed in favour of the assessee for statistical purposes.Final Conclusion: The Tribunal partially allowed the appeal for statistical purposes by setting aside the impugned assessment adjustments and DRP directions and remanding both the transfer pricing issue (management fees) and the Rs. 37,013 receipt issue to the AO/TPO for fresh adjudication after affording the assessee a reasonable opportunity to adduce evidence.Ratio Decidendi: Where factual findings on receipt, need and benefit of intra-group services are based on an evidentiary record that lacks specific identification of documentary defects, the appropriate remedy is to set aside the assessment and remit the matter to the assessing authority for fresh decision after giving the assessee an opportunity to produce and have considered relevant evidence; transfer pricing adjustments should not be conclusively determined without such fresh consideration.