TaxTMI 
TaxTMI 
2025 (11) TMI 2058
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.... facts in disregarding the Transactional Net Margin Method adopted by the Appellant in its Transfer Pricing documentation maintained under section 920 of the Act read with Rule 100 of the Income Tax Rules, 1962 ('Rules') for determining the arm's length nature of International transaction pertaining to payment towards management support services in the nature of Human Resources ('HR'), Information Technology ('IT'), Legal, and Finance, Tax & Admin support services received from its Associated Enterprises ('AEs'). Further, the Learned TPO erred in concluding that no proper benchmarking analysis was furnished by the Appellant in relation to management fees without appreciating the fact that the same has been submitted during the assessment proceedings. 2.2. The Hon'ble DRP and the Learned TPO erred in law and on facts in adopting the "Other Method" as per Rule 10AB, without bringing on record any comparable transaction / data to justify the methodology adopted. 2.3. The Hon'ble DRP and Learned TPO erred on facts in not understanding the business of the Appellant and failed to appreciate the need for Management ser....
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....come amounting to INR 88,000,000 as per order u/s 92CA(3) and INR 39,513 u/s 36(1)(va) of the Act, considering the abovesaid adjustments as under-reporting of income. The Appellant craves leave to add, alter, amend or withdraw all or any of the Grounds of Appeal herein above and to submit such statements, documents and papers as may be considered necessary either at or before the hearing of this appeal as per the law. The Appellant therefore prays that the aforesaid additions to the returned income of the Appellant be deleted." Brief facts of the case are as under: 2. The assessee is engaged in the business of manufacture of special welding electrodes, gas brazing rods and fluxes, atomized metal powder alloys, flux-cored continuous wires, polymer compounds and wear resistant plates. The assessee offers state- of-the-art welding products in manual and semi-automatic range for joining (ferrous & non-ferrous metals), wear facing, brazing, and soldering. The assessee also offers total solution for all repair needs through a scientific and time-tested approach to process industries across segments The assessee's products include flux cored wire, wear plates, ....
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.... as required in the table provided in the show cause notice, the management support agreement, evidence of receipt of services, copies of management fee invoices and copies of the tedious challan. The assessee had submitted that in the transit study report it used DNA and aggregated international transaction pertaining to the payment of management support charges which was inextricably linked to its manufacturing functions. It was submitted that the net profit margin earned by the associate derived from its manufacturing activity which when compared with the net profit margin achieved by independent companies that perform similar function assessee was at arms length. It was submitted that assessee had earned a net profit margin of 14.83% after including the management fees while the margins earned by the comparable companies ranged between 2.45% to 4.49% with a median of 3.11%. The assess either submitted that the margin order by the assessee was above the arms length range of the weighted average of the independent comparables. 2.7 The assessee had also provided a supplementary benchmarking approach wherein it had undertaken an independent benchmarking analysis with regard to t....
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....e 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. The nature of services as claimed by these documents reveal that they are general correspondences between the assessee and its AE. On perusal of the contents of these documents, it is clear that these are general notes and exchange of information. The nature of communication in these documents is of the nature which would be entered into between the group entities of any group. They are not of the nature to show any specific services rendered by the AE, for which any separate charge needs to be paid by the assessee to its AE. In fact, if one closely observes the nature of services from the documents produced, it is clear that the purported services for which payment is claimed are in the nature of shareholder/ duplicative/ incidental services only. Further, the details placed on record are general comments which do not demonstrate any specific benefit received by it from the services rendered for which the payment is claimed. Further, even if for argument's sake, it is taken that these documents show that some services have b....
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.... of Rs. 3.1 crore of the payment for IT support services, an amount of Rs. 1.8 crore are towards third party costs which are paid at cost-to-cost basis. Thus, the remaining payment of Rs. 8,80,00,000/- paid by the assessee towards services from its AE is treated as an adjustment to ALP to the international transaction on account of receipt of management support service. Hence total adjustments on International Transaction of assessee is proposed as under- S. No. Transaction Adjustment proposed 1 Payment of Management Rs. fees Rs. 8,80,00,000/- Total Rs. 8,80,00,000/- Assessing officer is requested to initiate the penalty for concealment of income under relevant sections of Act. 3. On receipt of transfer pricing order under section 92CA(3), the Ld.AO passed draft assessment order on 26/12/2023, by incorporating proposed adjustment by Ld.TPO. The Ld.AO further made disallowance of Rs. 39,513/- under section 36(1)(va) of the act. 4. On receipt of the draft assessment order, associated objections before the DRP's. 4.1 The DRP after considering the submissions of the assessee observed and held as under: ....
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...., 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. 8.3.7 Hence the the assessee should be in a position to provide documentation which is also the mandate of section 92D 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 comparables for benchmarking the ALP of such international transactions. 8.3.8 Here in this case, the assessee has only tried to benchmark the transaction by TNMM by which a margin will be applied, but the very base of cost has been questioned by the TPO in order to satisfy the above principals as laid down. Hence the rejection of TNMM and adoption of other method' by the Id TPO is found to be correct. 8.3.9 We find that the Id TPO has rightly required the assessee to prove the need benefit of the transactions and since the same could not be satisfactorily explained by the assessee, treating the transactions as nil using other method is foun....
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...., the Revenue cannot approbate and reprobate in respect of the same transaction, having accepted the income in the hands of the AE, it cannot simultaneously disallow corresponding expenditure in the hands of the assessee. 6.3 The Ld.AR submitted that, the transfer pricing officer invoked "other method" as defined under Rule 10 AB of the Income tax Rules to benchmark the ALP of the transaction relating to management services. He submitted that, the Ld.TPO did not bring on record a single comparable uncontrolled transaction that reflect a similar service arrangement and price. Instead the Ld. TPO arbitrarily concluded the ALP of the services received at nil and justified the same without any reference to actual comparable data. 6.4 The Ld.AR submitted that this approach is in violation of Rule 10AB and is also contrary to the settled principles of law that require any adjustment to be based on cogent data and analysis. The Ld.AR placed reliance on the decision of coordinate bench of this Tribunal as well as a jurisdictional High Court in following cases: 1. decision of Hon'ble Bombay High Court in case of Merk Ltd reported in (2016) 73 taxmann.com 23 2.....
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....arm's length nature of the transaction under TNMM; ● LinkedIn profiles and experience of senior management officials from ESAB Group involved in service delivery. 6.8 He submitted that, the DRP directed the Ld.TPO to review these evidences during the remand proceedings. The Ld.AR submitted that Ld.TPO, vide remand report, acknowledged receipt of these documents but reiterated his earlier conclusions. 6.9 The Ld.AR submitted that, the Ld.TPO rejected assessee's benchmarking analysis without fulfilling any of the mandatory preconditions under Section 92C(3). He submitted that the Ld.TPO failed to demonstrate that: ● the Assessee's method is not as per prescribed methods; or ● the data used was unreliable; or ● or the application of the method is incorrect; or ● the assessee failed to maintain proper documentation. 6.10 The Ld.AR submitted that without such finding, the Ld. TPO cannot reject assessee's TP study to substitute his own. 7. On the contrary, the Ld. DR summarized his arguments in a written submission which is scanned and reproduced as under: To, The Hon&....
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.... within them each quarter. The assessee has failed to provide the cost split and the detailed working to arrive at. Further the said details have not been filed in response to the said show cause also." 1.3. Further, even in the current proceedings, in support of the claims of the costs incurred by the AE and evidences in support of the allocation as per the keys used, all that has been submitted is a report titled; "Independent Report on Review of Management Cost Allocation for EWAC Alloys Limited Limited," dated 4 July 2024 (i.e. prepared almost four years after the close of the relevant financial year). This has been described on behalf of the assessee as a "cost allocation certification" but it has clearly been mentioned in the report that the reviewer is not at all responsible for contents of the report and that this review assures of nothing. In other words, not even a single factual findings that may be there has been certified and there is no mention of having relied upon any document. There is no mention of what was the source for the claims that have been made and it is apparent that not even a single document of AE was examined before preparing this report. The ....
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....ange of activities conducted by it, and the cost applicable to such activities have not been provided. Instead a broad-brush approach at flatly 'equating' the costs relatable to the revenue generated has been provided. Whilst several e-mails from Mr. Arshpreet Choudhary were placed on record, they evidence the fact that certain services were rendered. That constitutes only the first part of the exercise - the second aspect is to relate the cost of specific activities conducted to the benefit incurred by the assessee, rather than allocate cost from a common pool or basket of revenue generated through an unexplained percentage relation to the revenue generated. The basis for the costs incurred, the activities for which they were incurred, and the benefit accruing to the assessee from those activities must all be proved to determine first, whether, and how much, of such expenditure was for the purpose of benefit of the assessee (deductible under Section 37 of the Act), and secondly, whether that amount passed muster under a transfer pricing analysis." Para 37 "At this point, it is noteworthy that the circumstance that the assessee had market research faciliti....
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.... extrapolated to arrive at the Arm's Length Price (e.g. applying the net cost margin on a cost base which has been incurred from transactions entered into with 3rd parties). This is the initial and most basic information, mandated to be maintained under the Transfer Pricing provisions and in absence of the same, the reliability of a Transfer Pricing claim is nil. This anchor or neutral transaction is the most basic thing that the assessee has to bring on record with applicable evidences and the same would have been the cost incurred by the AE in the case. In failing to bring out such a basic information, the assessee failed in making even a basic case. Accordingly, owing to the assessee's failure to produce evidence substantiating either the costs purportedly incurred by the AE or the allocation keys, the assessee's arguments are liable to be rejected. 2. Ground 2 -Assessee failed to submit Evidences in support of having satisfied the need, rendition and benefit tests 2.1. In respect of the Benefit Test it is humbly submitted that this test does not talk about a distant theoretical expectation of an increased profit or other commercial benefit, but it ....
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....still end up incurring losses (in spite of genuinely receiving services), there it can not be argued that because of the impugned services no benefit has been received by the recipient. 2.3. In this respect the attention is invited to Rule 10D(1), clause (d) and the same is reproduced below- "Information and documents to be kept and maintained under section 92D. 10D. (1) Every person who has entered into an international transaction or a specified domestic transaction shall keep and maintain the following information and documents, namely: (a) ... (d) the nature and terms (including prices) of international transactions or specified domestic transactions entered into with each associated enterprise, details of property transferred or services provided and the quantum and the value of each such transaction or class of such transaction" Thus it is apparent that the details of quantum and value (or quantity and quality) are to be provided and not just copies of vague communications between the employees of the assessee. 2.4. At this juncture the statutory burden imposed by Rule 10D(1)(d) has to be read with the tribunal ju....
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....e. No such effort was made. No ALP was computed by the assessee." 2.6. Reference is also made to the case of Crane Software International Ltd. [IT(TP)A No. 1594/Bang/2012], where the Bangalore Bench held that absent proof of service, the agreements between affiliates "could be best considered only as self-effectuating documents" and that the ALP is 'zero. "relevant part from para 9 is reproduced below: "When assessee is not able to bring on record anything to show any services to have been rendered by AE to it and there are no documentations to show any services to have been received from AE, in our opinion it will be fair conclusion that no services were in fact rendered the by AEs to the assessee. There is no dispute that both the AEs were subsidiaries of the assessee. Therefore, the agreements between such subsidiaries, which have been brought before us as well as lower authorities for justifying the payments could be best considered only as self-effectuating documents. There was considerable onus on the assessee to show that actual services were rendered by its subsidiaries. It is a well settled principle of law that a court has to go into substance and no....
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....t element; at best they evidence information-sharing, which OECD guidance treats as a shareholder (non-chargeable) activity. 2.8.3.3. Pages 489 - 515 - A compliance manual to the U.S. Sarbanes-Oxley Act, having no relevance to an entity operating in India. In short they are jurisdiction-specific governance documents that relate to the AE's own statutory obligations in the United States; they neither concern the assessee's Indian business nor reflect any service rendered to it. 2.8.3.4.Pages 517 - 578 - Access-Control Policy, Cloud-Computation Policy, Information-Technology Master Policy, Manage-Operation Policy and other internal policies followed by the Associated Enterprise, without explaining the assessee's role therein. Every company frames such policies to safeguard its systems and servers; their mere existence does not constitute a service rendered to the assessee. 2.8.4. Pages 579 - 586 - Details of HR Heads - they have no probative value in determining an arm's-length charge and cannot be relied upon for transfer-pricing purposes. 2.8.5. Pages 587 - 610 - COVID-19 guidelines ending in a message from the CEO; the same guide....
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....t, prepared by a Chennai-based Chartered Accountant, expressly disclaims all responsibility for its contents and offers no assurance whatsoever. Not a single factual finding is certified; no document is cited as a source; and the reviewer states that the exercise was limited to noting the cost-allocation methodology without reviewing any underlying evidence. Even within the workings, no basis has been disclosed for the specific percentages adopted. 2. Argument 3 - Once the taxpayer fails to substantiate cost, allocation, need, rendition and benefit, the law directs the Transfer-Pricing Officer to adopt the Comparable Uncontrolled Price method and to record a NIL arm's-length price 2.1. The Transfer-Pricing Officer's findings culminate in paragraph 16 of the order, where he holds that (i) no cost details or allocation workings were provided, (ii) no evidence of request, rendition or benefit exists, and (iii) on those facts the only defensible arm's- length price is NIL. That analytic path is identical to the ratio of the Mumbai Bench in Lintas India Pvt. Ltd. v. ACIT [ITA no. 398/Mum/2019], Paragraph 17 of that decision, reproduced in full, states: ....
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....sessee has fulfilled the above criteria or not. It is always necessary to maintain a full-proof document of every business activity. however, if the document is not available of particular business activity, there is nothing wrong as whole world will presume that it is not done. If that be the case, the determination of arm's-length price at Rs. nil is proper." 2.2. Those 2 paragraphs i.e. 17 and 18, map seamlessly onto the evidentiary record in this appeal. The assessee submitted no time-sheets, no log-sheets, no job-cards, no signed-off deliverables, no benefit analysis and no allocation mathematics. The four "specific tests" referenced in Lintas (proof of request, rendition, benefit and market comparability) are the same tests the TPO articulated in his show-cause. Consequently, adopting the CUP method and fixing a NIL price is not merely permissible; it is mandated by the only tribunal authority directly on point. The OECD Transfer-Pricing Guidelines (2022) reinforce the conclusion. Paragraph 7.6 states: "Under the arm's length principle, the question whether an intra-group service has been rendered ... should depend on whether the activity pr....
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....pective group member with economic or commercial value to enhance or maintain its business position. ... If the activity is not one for which the independent enterprise would have been willing to pay or perform for itself, the activity ordinarily should not be considered as an intra-group service under the arm's length principle." 2.3. Further, in respect of shareholder activities in para 7.9 the following has been described- "This type of activity would not be considered to be an intra-group service, and thus would not justify a charge to other group members." Further in para 7.12 while talking about incidental benefits, the following is there- "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." Further, while talking about Centralised Services in para 7.14, the following is there "These types of activities ordinarily will be considered intra-group services because they are the type of activities that independent e....
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....benefit test, converge on a single juridical outcome. Because the taxpayer has offered no quantitative or qualitative evidence of request, rendition, benefit or market comparability, the CUP benchmark is zero. The Transfer-Pricing Officer applied that benchmark; his NIL arm's-length price is therefore correct. Yours faithfully Sd/- (Bhagirath Ramawat) Jt. CIT (Sr. AR), ITAT-10, "K" Bench, Mumbai 8. In rejoinder to the above submissions of the revenue, the Ld.AR summarized his arguments in following manner. 23 June 2025 The Hon'ble Members of ITAT, K Bench, Mumbai - 400 005 Dear Sir, Appellant : EWAC Alloys Limited ('EWAC India' / 'the Appellant' / 'the Company') - Assessment Year ('AY') 2021-22 Subject : Response to submission made by Department dated 20.06.2025 PAN : AAACE2470R Reference : i. ITAT Appeal No. 6677/Mum/2024 ii. Submission made by department dated 20.06.2025 We refer to the submission made by the Ld. Department Representative for the Assessment Year 2021-22. Please find below our detailed responses: Observation 1....
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....ansaction for separate benchmarking without assigning cogent reasons for rejecting the TNMM lacks justification. It is respectfully submitted that under the TNMM, the determination of arm's length price is based on overall profitability and does not necessitate a transaction-specific evaluation of the need or benefit derived. Further we would like to reiterate that TPO doesn't have jurisdiction to question the commercial decision of the Appellant for incurring any expense. The Appellant wishes to draw reference to the case of NTT India Pvt Ltd [TS-366-ITAT-2025(Mum)- TP] where it was held that "27. As per section 92C(i) of the Act, the arm's length price in relation to international transaction shall be determined by any of the following methods, being the most appropriate method, having regard to the nature of transaction or class of transaction. The six methods included CUP method as well as TNMM method. In the present case the assessee in order to arrive at arm's length price in relation to international transaction relating to the payment of management fee to the AE for the services rendered has considered TNMM as most appropriate method. In si....
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.... where the Appellant compared the mark up charged by similar service providers in European region with the mark up of 5% on indirect costs charged, which yielded a range of 3.96% to 9.57%, with a median of 5.37%. The Appellant has been charged at 5% on indirect costs, which falls well within this range, further validating the appropriateness and fairness of the charges. The supplementary benchmarking analysis forms a part of the paperbook at Pg. no 308 - 323. TPO's remarks: Ground 2 - Assessee failed to submit evidence in support of having satisfied the need rendition and benefits tests Appellant' s response: i. Overview of Group Services and Operational Need for Services from ESAB Group The Appellant respectfully submits that the ESAB Group provides a comprehensive suite of services to its member entities with the objective of achieving economies of scale, ensuring high-quality service delivery, leveraging senior management expertise, and avoiding duplication of efforts. These services span across key business functions such as management, accounting, IT, HR, legal, and finance, and are essential for the efficient and effective ....
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....s, and Corporate Functions Rizal Marquez Vice President Global HRIS & Payroll Strategy Terry Sharp Senior Director HR Operations Eleanor Attan Director Global Talent Development Robin Kaszak Director Corporate Compensation & Global Benefits Carman Callahan Director Executive Compensation Melissa McInnis Equity Plan Administrator Human Resources - Compensation Erin Fleming Talent Specialist Human Resources - Talent Brad Tandy Vice President General Counsel (Legal) Curtis Jewell Vice President General Counsel (Legal) Thomas Bolek Senior Director Legal Rita Herring Corporate Paralegal Legal Erin Crockett Director Global Trade Compliance (Legal) John Magee Trade Compliance Tariff Engineer Global Trade Compliance(Legal) EWAC India personnel execute and implement the decisions and strategy formulated by the business heads in the Group. The business growth for the entire Group in terms of adding new clients, growing the existing client relationships, determining business strategy, etc. is driven by the AEs. The managerial personnel responsible for EWAC India's ....
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.... significantly contributed to the Appellant's operational efficiency and profitability. These services, delivered within the Group framework, ensure confidentiality, consistency in standards, and administrative convenience. The Appellant benefits from the Group's deep domain expertise and leverages synergies across entities to maintain uniform operational practices. iv. Specific Services Received and Their Benefits ● IT Services During FY 2020-21, the Appellant incurred Rs.3.1 crores in IT costs, including Rs.1.8 crores for third- party licenses recharged at cost, which was accepted by the TPO. The Group provided critical IT infrastructure and cybersecurity support during the COVID-19 pandemic, enabling virtual operations and ensuring business continuity. Strategic IT governance and project oversight further enhanced resilience, with total IT spend amounting to only 2% of revenue demonstrating cost efficiency and high value. ● HR Services The Appellant received extensive HR support, including global safety protocols, compensation restructuring, and workforce planning. Specialized leadership in resourcing, rewards, and....
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....nning managerial, IT, HR, finance, tax, and legal functions have been critical to its operational success and strategic decision- making. Given the organizational structure and limited internal resources, the support from the Group has been not only necessary but also highly beneficial in enhancing the Appellant's efficiency, compliance, and profitability. TPO's remarks: Ground 3 - Once the taxpayer fails to substantiate cost, allocation. need, rendition and benefit, the law directs the Transfer-Pricing Officer to adopt the Comparable Uncontrolled Price method and to record a NIL arm's-length price. Appellant' s response: The Appellant respectfully submits that comprehensive documentation including detailed cost allocation workings, need-benefit analyses, and supporting agreements was duly furnished to the Ld. TPO across multiple submissions. Despite this, the Ld. TPO has disregarded these substantive materials and proceeded to determine the arm's length price at NIL, citing lack of evidence, and has applied the "Other Method" in the final order dated 26/10/2023. This stands in stark contrast to the Ld. DR's submi....
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....ssessee before the lower authorities is provided below: Particulars Reference in Paper Book Copy of Management Support Services Agreement executed with AE Pages 180-194 Pages 263-264, Cost allocation methodology and workings 304-305, and 749 Supplementary benchmarking analysis for payment of management charges Pages 308-323 Summary of department-wise services availed from AE and benefits accrued (including employee profiles of leadership personnel rendering the services) Annexure 1 (Excel Sheet) 9.3 The assessee submitted that the above evidences substantiate the nature of services received, the business benefits derived, and the cost allocation methodology adopted by the AE. It was contended that the payment for management services formed part of an aggregated TNMM analysis, wherein the arm's length range of comparable margins was 2.45% to 4.49% (median 3.11%), while the assessee earned a net profit margin of 14.83%, significantly above the arm's length range. Hence, the transaction was claimed to be at arm's length, and the adjustment unwarranted. The assessee further argued that the Ld. TPO did not fully consider the d....
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....s necessary and beneficial in enhancing the assessee's efficiency, compliance, and profitability. 9.10 It was further submitted that during the transfer pricing proceedings, a supplementary benchmarking analysis specific to management charges was also conducted. In this analysis, the assessee compared the mark-ups charged by similar service providers in the European region with the 5% mark-up on indirect costs applied by the AE. The comparable range of mark- ups was found to be 3.96% to 9.57%, with a median of 5.37%, indicating that the charges levied by the AE were well within the arm's length range. 9.11 However, the Ld.TPO held that the evidences furnished were largely generic in nature, comprising routine emails, information exchanges, and internal presentations, which did not conclusively demonstrate the specific need or tangible benefit to the assessee. The Ld.TPO therefore determined the ALP of the impugned payment at NIL. 10. Having examined both sides, it is noted that Chapter VII of the OECD Transfer Pricing Guidelines (2020) prescribes a two- step analysis for intra-group services: 1. Whether a service has in fact been rendered and has provided ....
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....gements. 10.5 In this backdrop, a complete determination of the remaining portion of management charges at NIL appears inconsistent with the OECD's balanced framework, which emphasises that intra- group services must be evaluated on their nature, necessity, and benefit, and not summarily disregarded in the absence of exact quantification. The OECD Transfer Pricing Guidelines (2020) recognise that routine or low value-adding services, such as managerial, HR, IT, or legal coordination may not yield direct measurable outcomes, but nonetheless provide economic or operational advantages warranting appropriate compensation, provided that allocation keys are reasonable and documentation demonstrates the context of benefit. 10.6 Given the evidence placed on record such as the service agreement, cost allocation workings, supplementary benchmarking analysis, and correspondence showing group-level functional support it cannot be concluded that no services were rendered. At the same time, the benefit and need for certain elements (especially within HR, IT, and legal functions) may warrant closer scrutiny to ensure the absence of duplicative or shareholder-related activities. 10.7 ....