TaxTMI 
TaxTMI 
2025 (9) TMI 1618
X X X X Extracts X X X X
X X X X Extracts X X X X
....ircumstances of the case and in contrary to law, the Ld. AO pursuant to the directions issued by the Hon'ble DRP, erred in: 2.1. Upholding / confirming the action of Ld. TPO by making an addition of INR 2,68,67,091 to the Appellant's income in connection with payments made by the Appellant to its Associated Enterprise ('AEs'), towards availing Research and Development ('R&D') and Other Support services and thereby determining a total income of INR 79,57,47,314 in the order dated 23 October 2024. 2.2. Not stating any reasons to show that either of the conditions mentioned in clause (a) to (d) of section 92C(3) of the Act were satisfied before proposing an adjustment of INR 2,68,67,091/- to the total income of the Appellant. 2.3. Upholding/ confirming the action of Ld. TPO, by determining the Arm's Length Price ('ALP') of the payment for services at an arbitrary and ad-hoc basis i.e., 50 percent of the transaction value and disregarding the detailed benchmarking approach and the methodology adopted by the Appellant in its TP documentation maintained under section 92D of the Act read with Rule 10D of the Income Tax Rules, ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....nd production of pharmaceutical products. General Atlantic is the major shareholder of Rubicon Group which operates out of India, USA and Canada. The case was selected for scrutiny for verification of large value international transactions. A reference was made by the AO to the TPO to compute the arm's length price (ALP) u/s. 92CA of the Act in relation to the international transactions and the specified domestic transactions undertaken by the assessee with its Associated Enterprises (AEs) during the year under consideration. Vide order dated 29.10.2023 u/s. 92CA(3) the TPO proposed total adjustment on account of ALP of Rs. 5,06,96,789/-. The assessee had adopted the TNMM to benchmark the transactions by taking the AE as the tested party whereas Ld. TPO rejected the same and applied 'other method'. 4. Aggrieved with the order of TPO and the draft assessment order issued by the Ld. AO, the assessee filed objections before Ld. DRP, Mumbai. In pursuance to the directions of the DRP, the proposed adjustment of Rs. 5,06,96,789/- in the draft order was modified to Rs. 2,68,67,091/- while making the final assessment vide order u/s. 143(3) r.w.s. 144C(13) R.w.s 144(B) of the Act dated 2....
X X X X Extracts X X X X
X X X X Extracts X X X X
....d Other Support Services from the Associated Enterprise ("AE"), AdvaGen Pharma Ltd., USA. 2. Rule 10AB explicitly provides that: "For the purposes of clause (f) of sub-section (1) of section 92C, the other method for determination of the arm's length price in relation to an international transaction or a specified domestic transaction shall be any method which takes into account the price which has been charged or paid, or would have been charged or paid, for the same or similar uncontrolled transaction, with or between non associated enterprises, under similar circumstances, considering all the relevant facts." 3. Despite applying this method, the TPO has not brought on record a single comparable uncontrolled transaction that reflects a similar service arrangement and price. Instead, the TPO arbitrarily concluded that only 50% of the value of such services was justified without any reference to actual comparable or market data. 4. The transaction value for the R&D support services from AdvaGen was INR 5,45.96,531, and for Other Support Services was INR 4,97,97,048. The TPO proceeded to accept only 50% of these transaction values, thereby pro....
X X X X Extracts X X X X
X X X X Extracts X X X X
....od (TNMM) as the Most Appropriate Method ("MAM") for benchmarking its international transactions. The international transactions included: • • Export of finished goods (INR 16,62,16,808), • Availing of R&D support services (INR 5,15,96,531 from AdvaGen and INR 15,56,11,377 from Rubicon Canada), and • Other support services (INR 4,97,97,048). 2. These transactions were considered closely linked and were benchmarked on an aggregated basis. The Assessee, using itself as the tested party, reported a Net Cost Plus (NCP) margin of 36.65%, which is significantly higher than the 65th percentile of comparable (14.5%) and well above the median (12.02%). 3. This clearly indicates that the Assessee's transactions, in aggregate, were at arm's length. The R&D and other support services were part of the manufacturing cost base, and the high profitability demonstrates that no transfer pricing adjustment is warranted. 4. The Honourable Delhi Tribunal in Samsung India Electronics Put. Ltd ITA 9482/DEL/2019 held that once margins under TNMM are shown to be at arm's length, the cherry picking of a single transac....
X X X X Extracts X X X X
X X X X Extracts X X X X
....PO's powers under Section 92CA. The TPO is not empowered to make disallowances under Section 37, which falls within the jurisdiction of the Assessing Officer (AO). 4. The Hon'ble Delhi High Court in EKL Appliances Ltd. v. CIT [345 ITR 241] clearly held that the TPO's jurisdiction is restricted to determining the ALP, and he cannot question the commercial expediency of transactions unless sham or bogus. 5. Therefore, the adhoc disallowance of 50% of the service charges on the basis of perceived benefit or sufficiency of evidence is beyond jurisdiction and is liable to be struck down. IV. That No Further Remand is Warranted as the TPO Has Already Examined the Evidences Twice 1. During the TP assessment proceedings and again in the remand proceedings before the Dispute Resolution Panel ("DRP"), the Assessee has filed comprehensive evidences including: • • Detailed case studies evidencing need of the services by the Assessee and benefit received thereon, • Email communications, presentations, meetings, • Inter-company signed service agreements • Copies of inter-company as we....
X X X X Extracts X X X X
X X X X Extracts X X X X
....enses. 4. Hold that the TPO has, in effect, applied the "Other Method" under section 92C(1)(f) without bringing on record any comparable uncontrolled transaction as required under Rule 10AB. Such an approach is contrary to law and the binding jurisdictional precedents." 7. Ld. DR on the other hand, has strongly relied on the orders of the lower authorities and has argued that the Ld. AO was justified in making the impugned adjustment as adequate evidences were not submitted for services rendered, utilisation of services and rendition of services. He has vehemently argued that the rejection of TNMM method was justified and adoption of 'other method' for need benefit test was rightly made by the Ld. AO. Ld. DR placed reliance on the observations of Ld. DRP while rejecting the assessee's arguments with regard to other support services which are reproduced below: "8.3.12. The Panel notes that most of the services rendered by the AE are duplicative as the assessee has sufficient manpower to perform these functions. The assessee has produced various evidences in support of its Mergers and Acquisition services availed by it from the AE. But it is also a fact that the ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ut making any payment indicates that payments are not for actual services rendered nor for any additional benefit to be derived • The quality of evidences weighs importantly as mere email correspondences produced by the assessee to substantiate the receipt of services do not substantiate the separate payments. • The complete onus was on the assessee to establish receipt of the intra-group service. • The TPO can conclude based on the evidences whether any independent party would make payment in the absence of any need, benefit or rendering of services and if the decision is in the negative, then benchmarking at nil can be considered as a form of CUP or other method as no independent party would be willing to make the payment in same conditions. Hence the assessee should be in a position to provide documentation which is also the mandate of section 920 of the Act, in respect of the international transactions. This would enable the TPO to not only determine the nature of services but would also enable him to correctly apply the Function, Asset and Risk ("FAR") test and determine the correct comparable for benchmarking the ALP of such int....
X X X X Extracts X X X X
X X X X Extracts X X X X
....nts, summaries, and guidelines issued (consisting of standard procedures and steps to be followed) etc. These documents are general in nature, and there is no evidence of actual rendition or specific services to the Applicant or, receipts of the specific services by the Applicant (iv) Inter-company Service Agreement: The Inter-company services agreement is broad and vague. A large no. of services have been listed in it, and it has no bearing to the current A.Y. of the exact set of claimed services. Further, the Agreement, as entered between AEs as per Group Policy, does not carry any independent value. Further, the copy of methodology and calculation of the allocation of management fees is also a theoretical document. The inter-company agreement, entered between Associated Enterprises, do not carry the force of conviction, as compared to a third party agreement. (v) Allocation Keys are not Evidence of Receipt: Further, it is noteworthy that the applicant has contended that the Allocation of group cost across different departments or entities have been made as per varied parameters. For example, in the IT department, costs have been allocated base....
X X X X Extracts X X X X
X X X X Extracts X X X X
....stify the prices charged for intra-group services. The applicant has outlined various services without disclosing the actual amounts expended by the AE for each of these services. (ix) No Comparable: Moreover, the applicant has not presented any comparable cases to justify why any party would make such payments without evidence of services being rendered or benefits accruing. Hence the applicant's case suffer from absence of application of any method prescribed under the Income Tax Act. 1961/the Income Tax Rules. 1962. (x) The applicant has not been able to provide sufficient evidence demonstrating that the payments made correspond only to the benefits received or align with prices charged between independent parties dealing at arm's length. The evidence provided lacks details about the actual costs incurred for the nature of services rendered by the AE to the applicant. In an arm's length scenario, payment is determined not only by the service provider's willingness to accept a certain price but also by the service recipient's willingness to pay. The applicant has referenced various services to support the aforementioned invoices with....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ransfer pricing compliance. In the case at hand, it is evident that the applicant has not adhered to transfer pricing principles in several key respects: (1) Failure of Value/Price Disclosure: The applicant has failed to provide any clear documentation or evidence of the value or price associated with the services purportedly rendered. Without such information, it is impossible to assess whether the charges levied match with arm's length principles. (ii) Absence of Cost Disclosure: Similarly, the applicant has not presented any information regarding the costs incurred by the service provider AEs in providing the so-called services. Cost analysis is essential for establishing a basis for pricing and ensuring compliance with transfer pricing regulations. (iii) Non-Provision of Comparable Instances: The applicant has not furnished any comparable instances of the so-called (GS services in question, nor have they provided any documentation regarding the determination of the arm's length price for these services. Comparability analysis is a fundamental aspect of transfer pricing, essential for benchmarking transactions against....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ulations in the US and timely delivery of its products. Further, the AE also liasoned with third party logistics service provider with regards to collection of products of the Assessee from the India port for delivery to US port. Thus, the AE does all the liasoning and end-to-end process with the third-party logistics service provider including all customs clearances, supply chain management and logistics management for the products of the Assessee to be sold in US market. This helped the Assessee in terms of cost savings and helped in focusing its core business activates. • • Accounting services: The AE assisted the Assessee in managing the accruals and reconciliations for its US based distributors, timely updation of the transactions, thereby ensuring that there are no revenue or credit leakages. This benefited the Assessee to have a true and fair position of the financials with its distributor which helped the Assessee further in its decision making. Further, the Assessee does not have to keep separate team in India for the same resulting in improved efficiency of its employees and focus on core business operations. T....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ase, any ongoing liability or litigations etc. and future bus future business plans. Based on these and other relevant parameters, the AE assessed whether the merger would result into required synergies for the Assessee. Before the TPO the assessee produced the documents like copy of the inter company agreement for the various services, need benefit analysis and cost details. The Ld. TPO concluded that evidences produced do not sufficiently demonstrate the rendering of any service by the AE to the Assessee for which any payment would be made by an independent party in an arm's-length scenario. Accordingly, the Ld. TPO determined the ALP at 50% of the transaction value. As additional evidences, the assessee produced further details of various M & A deals done by the assessee. The TPO in his remand report pointed out that the Service Agreement between the assessee and its AE is sort of an umbrella agreement wherein all kinds of Services relating to the segment in which assessee operates are Included. However, the assessee did not furnish specific details of the services rendered by the AE, the service wise details of the costs incurred by the AE along with evide....