TaxTMI 
TaxTMI 
2026 (9) TMI 52
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....als, mist eliminators etc. The assessee availed intra-group services from its AES in Form of management services and sales and support services. The case of assessee was selected for the following reasons and background facts as under: S. No. Reason Background facts 1. Creditors are more than 50% of the purchases made during the year Assessee has shown large value of creditors in the balance sheet, being more than 50% of the purchases shown in P&L a/c and as a result, shown them creditors in balance sheet in order to reduce its profit/taxable income. Therefore, the genuineness of purchases and creditors may be verified. 2. Large value of international transactions in the nature of intangible property nad Intra Group Services (T.P. Risk Parameter Large payment for services received and intangible property to Associated Enterprise as compared to turnover. Here whether the transactions of assessee with associated enterprises are as per arms length principle by application of one of the prescribed methods may be verified. 3. Large other expenses claimed Assessee has claimed huge amount of expenditure under the head Other expenses instead of classifyi....
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....own by the Hon'ble Madras High Court in case of CIT v. Roca Bathroom Products (P) Ltd. (2022) 140 taxmann.com 304 (Madras). GROUNDS AGAINST TRANSFER PRICING ADJUSTMENT 3. That, on the facts and circumstances of the case and in law, the DRP/AO/ΤΡΟ has erred in making a transfer pricing adjustment of Rs. 9,70,73,612/- in respect of international transactions entered by the Appellant alleging the same to be not at arm's length in terms of the provisions of Section 92C of the Act read with Rule 10D of the Income Tax Rules, 1962 ("Rules") and has erred in taking the value to be at NIL. 4. That, on the facts and circumstances of the case and in law, the DRP/AO/TPO has erred in not accepting the economic analysis undertaken by the Appellant in accordance with the provisions of the Act read with the Rules and modifying the economic analysis and undertaking a fresh analysis thereby making an adjustment of Rs. 9,70,73,612/-. In absence of rejection of the TP documentation and without pointing on any clear and specific defects in the economic analysis undertaken by the Appellant, the adjustment is not warranted in law 5. That, in vie....
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....h is in accordance with the provisions of law and hence no adjustment/addition is warranted on the facts of the present case. 11. That, on the facts and circumstances of the case and in law, the AO has erred in levying interest under Section 234A, 234B and 234C of the Act. 12. That, on the facts and circumstances of the case and in law, the AO has crred in initiating penalty proceedings under Section 270A, 271AA & 271G of the Act." 4. Ld. Authorized Representative for appellant/assessee submitted that ground of appeal No. 1 is general in nature. So, ground of appeal No. 1 does not require separate adjudication. 5. Ld. Authorized Representative for appellant/assessee submitted that ground of appeal No. 2 regarding limitation is not pressed. As such ground of appeal No. 2 is dismissed as not pressed. 6. Ld. Authorized Representative for appellant/assessee submitted that ground of appeal No. 3 to 8 are regarding Transfer Pricing, Ld. Authorized Representative for appellant/assessee submitted synopsis as under: Facts in brief: * Munters India avails intragroup services from its AEs in the form of management services and sales and support ser....
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.... the results thereof to substantiate the appropriateness of mark- up on the intra group cost (Refer pages 277 to 1568 of Paperbook for copy of the TP report) Appellant's arguments: Key arguments: * TPO failed to appreciate that such services have helped Munters India to streamline its operations and improve efficiency, resulting in increased productivity * TPO did not review the benefit test details/ documentary evidence and cost allocation workings provided * TPO erred in rejecting the economic analysis undertaken by the Appellant without providing cogent reasons * All voluminous details/evidences were filed and no defect/deficiency has been pointed out * TPO's entire focus is on need test and benefit test which already stands examined by various judicial pronouncements. * The detailed nature of services have been provided alongwith all evidences as stated above, so the rendition of services stands establish beyond doubt * TPO did not benchmarking analysis and without any analysis applied CUP and determined the ALP at NIL, which itself calls for complete deletion of the adjustment * R....
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....s per amended provisions of sec 144B (post amendment of Finance Act 2022, TU has concurrent powers as that of the AO and has powers to determine ALP however power to make reference to TPO lies with AU only and not TPO. Arm's length margin earned at entity level substantiates that underlying costs are also at arm's length: * The Appellant is engaged in manufacturing and trading activities and had submitted certified segmental accounts during the assessment proceedings. * The learned TPO/ DRP disregarded the segmental accounts submitted and considered the entity wide operating margin to evaluate the arm's length nature of such transactions. While computing the entity wide operating margin, the learned TPO/ DRP considered all the operating expenses including the impugned intragroup services availed by the Appellant. * The entity wide operating margin was compared with working capital adjusted operating margins earned by companies accepted by the learned TPO/ DRP. * The details of the margin earned by the Appellant and the arm's length margin is as under: Entity wide margin earned by the Appellant (as computed by the learn....
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....ned in 37 (1) of the Act but also have to be examined under the special provisions contained in chapter X of the Act. The following are the crucial issues to be seen in such related party transactions: a. The taxpayer's agreement with the associated enterprises related to intra group services is to be examined to see as to what kind of services were to be provided by the AE to the taxpayer. As normally such agreements refer to a large number of services which could be rendered by the AE, the taxpayer has to specify the service(s) which is actually received by it for which the payment is made. b. Whether the expected benefit commensurate with the payment c. Whether an independent person would have paid such amount in comparable circumstances d. Contemporaneous information on the basis of which rate or payment for the service is determined. This includes the cost benefit analysis done by the taxpayer at the time of entering into agreement. Whether any benchmarking analysis was done by the taxpayer so as to compare the amount which he would have paid to an independent person under similar circumstances. e. Whether the taxpayer really ne....
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....ervices. The ITAT also impliedly upheld the CIT(A)'s decision that for benchmarking intra group payments TNMM was not the most appropriate method and the proper method was CUP. 2. M/S GAMPLUS INDIA PVT LTD. (2010-TII-55-ITAT-BANG-TP): The ITAT in the aforesaid decision upheld the determination of ALP of intra group payments at NIL by observing as under: The payments did not commensurate to the volume and quality of service; the same were independent of nature or volume of service. * Expenses were apportioned by the AE among different country centres on the basis of their own arrangements and not on the basis of actual service rendered to the individual units. * No details were available in respect of the nature of services rendered by the AE. * Assessee could not prove any commensurate benefit against the payment for services. Analysis of the transaction under TNMM not accepted by the TPO was impliedly. * Assessee's argument that company achieved higher turnover, profit, etc because of such payments did not find favour with the ITAT. The above decision is squarely applicable to the facts of the present case. 3. ....
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....ant. In related party transactions this precisely is the issue viz. whether the transactions were commercial decision and were driven by market forces and were not influenced because of the interrelationship between the assessee and the AE. In related party transactions it is not always that the same are commercial decisions but are undertaken because of their interrelationship. In this connection reference may be made to ITAT, Mumbai's decision in the case of VVF LTD (2010-TIOL-55-ITAT-MUM) wherein the ITAT held as under: "On a conceptual note, the purpose of making arm's length adjustments, in prices at which transactions have been entered into with associated enterprises, is to nullify the impact of interrelationship between the associated enterprises. Unless the method on the basis of which such hypothetical prices are computed is such that costs are to be taken into account, these hypothetical prices have nothing to do with the actual costs. CUP method seeks to ascertain arms length price by taking into account prices at which similar transactions have been entered into by the assessee with unrelated parties (Internal CUP) or at which other unrelated parties have ....
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....o computation of income from international transactions having regard to arm's length price. Other case laws cited by the assessee are not germane to the facts of this case. Hence in our considered opinion they do not help the case of the assessee." 15.7 In the case of MARUTI SUZUKI INDIA LTD (2010-TII-01-HC-DEL-TP) the Delhi high court observed as under: "73....In our opinion, if the agreement between two entities which are not independent entities, carries an obligation to use a joint trademark, either some appropriate payment needs to be made or appropriate rebate in the charges payable to it needs to be given by the foreign entity to the Indian entity, for being obliged to carry the name of the foreign entity on all its products even if it does not see any advantage from carrying that name on its products. Of course, the Department cannot insist upon such a payment in case the parties entering into the contract are independent parties. The reason why we justify such a payment by the foreign entity to the Indian entity is that, in our opinion, it is quite possible for the foreign entity on account of the managerial/financial control it exercises over the ln....
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....s. 15.11 On the question of need para 7.9 of the OECD guidelines may be referred to which states "A more complex analysis is necessary where an associated enterprise undertakes activities that relate to more than one member of the group or to the group as a whole. In a narrow range of such cases, an intra-group activity may be performed relating to group members even though those group members do not need the activity (and would not be willing to pay for it were they independent enterprises). Such an activity would be one that a group member (usually the parent company or a regional holding company) performs solely because of its ownership interest in one or more other group members, i.e. in its capacity as shareholder. This type of activity would not justify a charge to the recipient companies." 1. Para 7.17 further states "These services may be available on call and they may vary in amount and importance from year to year. It is unlikely that an independent enterprise would incur stand-by charges where the potential need for the service was remote, where the advantage of having services on-call was negligible, or where the on- call services could be obtained pro....
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.... by considering whether an independent enterprise in comparable circumstances would have been willing to pay for the activity if performed for it by an independent enterprise or would have performed the activity in-house for itself." Similarly, para 7.12 states "There are some cases where an intra-group service performed by a group member such as a shareholder or coordinating centre relates only to some group members but incidentally provides benefits to other group members. .....The incidental benefits ordinarily would not cause these other group members to be treated as receiving an intra-group service because the activities producing the benefits would not be ones for which an independent enterprise ordinarily would be willing to pay." Thus, examination of the benefit or expected benefit is necessary while determining the arm's length payment for such services. 15.14 It is further argued that when some well defined allocation key is there and where the allocation is made on the basis of the actual cost incurred the same is enough evidence that the transaction was at ALP. This argument is also not acceptable. For benchmarking the payment it has to b....
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....e taxpayer are not acceptable. Similarly, decision in the case of Dresser Rand is of no help. As per the comments above it can be seen that none of the benefits are tangible or real. A mere facade has been raised to give an impression that some vital benefit has passed to the assessee, which is actually not the case. Related parties are quite likely to give a form that will give an impression that a real service is being rendered by one to another. But the necessity to look beyond the veil is recognized across tax jurisdictions. In the above circumstances the payment of service fee is only an arrangement to change tax base without any economic substance in the transaction. This is internationally not accepted as evident from the following judgments: In Saviano VS Commissioner 765F. 2d 643,654 (7th Cir. 1985) it was observed, "the freedom to arrange one's affairs to minimize taxes does not include the right to engage in financial fantasies with the expectation that the Internal Revenue service and the Courts will play along." In Frank Lyon Co. Vs US 435,US 561,573 (1978) the Hon'ble US Supreme Court observed, "In applying the doctrine of substance ....
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....en paid but have been received by the assessee. Therefore, by the application of CUP, the arm's length of these transaction of payment of Central Support & Central IT Services is determined at 'nil'. Thus, the adjustment of Rs. 9,70,73,612/- is determined as the arm's length adjustment of the above said international transaction." 9. Inter Company Agreement from summary of agreement management services agreement are at page No. 1847 to 1879 of paper book volume 3 computation of income is at page No. 1880-1881 of paper book. Ld. TPO disallowed Intragroup services completely. 10. A co-ordinate Bench in ITA No. 1574 and 2473/Del/2018 titled as Corteva Agriscience India (P.) Ltd. vs. DCIT in order dated 12th Feb 2025, in para No. 11 to 12 observed as under: "11. A Co-ordinate Bench of the Tribunal in assessee's case titled as "Corteva Agriscience India Pvt. Ltd. vs. DCIT' ITA Nos. 6879 & 7454/Del/2017 decided on 19.12.2024 observed as under: "26. From the above, it is clearly established beyond reasonable doubt that assessee had indeed requested for rendition of services, the AEs have indeed rendered the various services to the assessee, the mann....
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....rted in 133 taxmann.com 531 (Pune Trib) dated 30-9-2021 for the Assessment Year 2009-10 had observed as under:- "7. The assessee elaborated the benefits derived by it from the services rendered by the Nalco Pacific Pte Ltd., Singapore. The TPO has tabulated the benefits claimed to have been derived by the assessee and his Remarks on page 126 onwards of his order. For example, the first category is 'Finance and Accounting'. The assessee gave description of the benefits derived by it from such services in a structured manner catering to Expense claim Reimbursement system; Cash Collection & Credit Control Training; Expense Reimbursement System; Budgeting process and Timetable; India Business Contract and Tax Training; Training for Asia Pacific Sales Improvement so on and so forth. The assessee substantiated the receipt of such services with the help of corresponding e-mails and other documents. The TPO negatived the assessee's contention by simply holding that no direct benefit was received or these were duplicate services. Similar is the position qua other services, namely, 'WPS and water services' for which the assessee stated the benefit in the nature o....
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....company Y and it does some activity to protect its investment therein, and the effect of such an activity is confined to it alone, the same would be construed as shareholder activity. A stewardship activity in general or a shareholder activity in particular in the case of two related companies, is quite different from a normal intragroup service, which is rendered for the purpose of the recipient company. Effect of a non-shareholder activity is rendered to the company receiving it, which is in sharp contrast to the effect being rendered to a company rendering such service in the case of a stewardship or shareholder activity. If we expand the scope of shareholder activity to producing some direct or indirect effect to the recipient company with the consequence of higher profits to it and the resultant higher dividends to the renderer or the shareholder company, then probably most of the activities, including even operational activities, would fall within the sweep of shareholder activity, which is an absurd proposition. In our opinion, stewardship activity or shareholder activity excludes such activities which produce any effect to the recipient company. 10. It was in 1968 ....
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....is relevant in our context, is - 'Company X establishes detailed personnel policies for its subsidiaries, including Company Y. Company X also reviews and approves the performance appraisals of Company Y's executives, monitors levels of compensation paid to all Company Y personnel, and is involved in hiring and firing decisions regarding the senior executives of Company Y. Because this personnel-related activity by Company X involves day-to-day management of Company Y, this activity does not relate solely to Company X's role as an investor of capital or a shareholder of Company Y, and therefore does not constitute a shareholder activity.' Thus it emerges even from the USA Treasury Regulations that an activity will be considered as a shareholder activity if its 'sole effect' is either to protect the renderer's capital investment in the recipient etc. or to facilitate compliance by the renderer with its own reporting, legal, or regulatory requirements. It is further manifested that activities in the nature of day to day management cannot be considered as protection of the renderer's capital investment and hence they cease to be stewardship or shareholde....