Transfer pricing adjustments on royalty and management support services deleted after TNMM benchmarking and supporting evidence were accepted.

Royalty-related transfer pricing adjustment was deleted because the assessee had already recovered research and product development costs from associated enterprises with a 10% markup, and the adjustment ignored that disclosed revenue. Management support services adjustment was also deleted because the assessee had benchmarked the inter-linked transactions under TNMM and supported the services with agreements, role descriptions, e-mails, allocation workings and past acceptance; isolating one element for a different method and treating the services as duplicative was held inconsistent with the grouped benchmarking approach. Both additions were therefore disallowed, giving the assessee full relief on the substantive grounds.

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Issues: (i) whether the transfer pricing adjustment on account of royalty payment was justified; (ii) whether the transfer pricing adjustment on account of management support services was justified, including the rejection of the aggregation approach and the evidences furnished.

Issue (i): whether the transfer pricing adjustment on account of royalty payment was justified.

Analysis: The assessee had incurred research and product development expenses and had already recovered the corresponding cost from its associated enterprises with a markup of 10%. The adjustment made by the Assessing Officer ignored the revenue already disclosed from the associated enterprises towards such services. The record showed that the assessee had effectively charged more than the cost incurred, and the proposed addition was based on an incomplete appreciation of the figures.

Conclusion: The royalty-related transfer pricing adjustment was deleted and the issue was decided in favour of the assessee.

Issue (ii): whether the transfer pricing adjustment on account of management support services was justified, including the rejection of the aggregation approach and the evidences furnished.

Analysis: The assessee had benchmarked its international transactions under TNMM and had substantiated the management support services by inter-company agreements, role descriptions, e-mails, allocation workings, and historical acceptance of similar charges. The unilateral segregation of only one element of the grouped transactions and its benchmarking by a different method was held inconsistent with the accepted approach. On the facts, the services were found not to be duplicate in nature and the adjustment was not supported.

Conclusion: The transfer pricing adjustment for management support services was deleted and the issue was decided in favour of the assessee.

Final Conclusion: The appeal was allowed with both transfer pricing additions deleted, resulting in complete relief to the assessee on the substantive grounds adjudicated.

Ratio Decidendi: Where an assessee has consistently benchmarked inter-linked international transactions under TNMM and substantiates the services received with contemporaneous evidence, the transfer pricing officer cannot isolate one transaction and apply a different method or make a nil-alp adjustment merely on the basis of perceived benefit or duplication.

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