Transfer pricing on intra-group services and TNMM margins: nil ALP and manufacturing adjustment both rejected for lack of support

Actual receipt of intra-group management support services was proved by agreements, invoices, time sheets, e-mails and related records, so the TPO could not treat the payment as stewardship expenditure or fix the arm's length price at nil without applying a recognised transfer pricing method; the adjustment was deleted. In the manufacturing segment, the tested party's margin, after correcting abnormal costs and comparable analysis, remained higher than the comparable margin under TNMM, so no transfer pricing addition survived; that adjustment was also deleted.

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Issues: (i) Whether the transfer pricing adjustment on account of management support service fees was sustainable when the assessee had produced documentary evidence of actual receipt of services and the TPO determined the arm's length price at nil by treating the services as stewardship activities. (ii) Whether the transfer pricing adjustment in the manufacturing segment survived when the assessee's margin, after consideration of abnormal costs and corrected comparable analysis, exceeded the comparable margin under TNMM.

Issue (i): Whether the transfer pricing adjustment on account of management support service fees was sustainable when the assessee had produced documentary evidence of actual receipt of services and the TPO determined the arm's length price at nil by treating the services as stewardship activities.

Analysis: The assessee had furnished service agreements, invoices, allocation workings, time sheets, e-mails, presentations and other records to show actual rendition of business support services relating to procurement, supply chain management, finance, human resources, operations and business development. The TPO disregarded this material and treated the payment as shareholder or stewardship expenditure, while also determining the arm's length price at nil without applying a recognized transfer pricing method. The same arrangement had already been accepted in the assessee's group cases, where similar services were held to be normal business services and not stewardship activities, and the payment at actual cost plus markup was treated as at arm's length.

Conclusion: The transfer pricing adjustment for management support service fees was not sustainable and was rightly deleted.

Issue (ii): Whether the transfer pricing adjustment in the manufacturing segment survived when the assessee's margin, after consideration of abnormal costs and corrected comparable analysis, exceeded the comparable margin under TNMM.

Analysis: The assessee benchmarked the manufacturing segment under TNMM and sought normalization of extraordinary costs arising from exceptional business circumstances relating to supply of clutch parts. The TPO rejected the adjustment, modified the comparable set and computed a higher comparable margin, but the remand proceedings and appellate scrutiny revealed errors in the computation of comparables. After correction, the comparable margin was found to be lower than the assessee's margin even on the TPO's revised basis, showing that the tested party's transactions were already at arm's length. Under TNMM, no transfer pricing addition survives where the tested party margin is higher than the corrected comparable margin.

Conclusion: The manufacturing segment adjustment was not sustainable and was rightly deleted.

Final Conclusion: The Revenue's challenge failed on both transfer pricing issues, and the relief granted by the first appellate authority was sustained in full.

Ratio Decidendi: Where actual receipt of intra-group services is established by reliable evidence, the arm's length price cannot be fixed at nil without applying a prescribed transfer pricing method, and under TNMM no adjustment is warranted if the tested party's margin is not below the corrected comparable margin.

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