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2024 (12) TMI 1566 - AT - Income TaxTP adjustment - administrative support services (intra group services ) availed by the assessee from its Associated Enterprises (AEs) - selection of MAM - HELD THAT - Assessee had indeed requested for rendition of services the AEs have indeed rendered the various services to the assessee the manner in which those services were rendered are also elaborated in the aforesaid chart the cost benefit analysis made by the assessee for deriving the said services and benefits derived by the assessee out of rendition of services. Payments made to AEs were duly subjected to withholding tax by the assessee in India. This also goes to prove that the AE had indeed rendered services to the assessee and this tax withheld by the assessee on the rendition of services had been duly accepted by the income tax department in the TDS assessments of the assessee company and no doubts or any adverse inference were drawn or entertained thereon. In the income tax assessment the income tax department cannot challenge or cannot doubt the very rendition of services by the AE to the assessee. TPO had accepted the rendition of services rendered by US AE to the assessee and accepted the same to be at arm s length price. Only the services rendered by Asia Pacific AEs were subjected to dispute in the instant case which had been elaborately dealt by the assessee in the aforesaid chart by proving all the essential elements such as need for services rendition of services manner in which services were rendered cost benefit analysis and benefits derived by the assessee out of such rendition of services. Hence the assessee was duly justified in making payment of administrative support services charges to its AEs. Accordingly the entire payment deserves to be allowed. TPO having applied CUP method for benchmarking the international transaction of administrative support service charges segment had not brought any comparables to justify the ALP of these services to be at Rs Nil. That itself goes to prove that the entire TP adjustment made by the TPO deserves to be deleted on that count itself. Hence assessee is indeed entitled for making payment of administrative support service charges to its AEs and the same is hereby accepted to be at ALP in the facts and circumstances of the instant case. As decided in AT Kearney Ltd (India Branch Office) 2024 (3) TMI 1443 - DELHI HIGH COURT wherein it was held that where assessee had incurred expenses in respect of intra group services (IGS) to its AE and had submitted detailed break-up of such costs and rendering of services was an aspect which was neither questioned nor doubted Tribunal was right in deleting adjustment on account of payment of IGS. Thus the entire TP adjustment made by the revenue on account of administrative support services segment deserves to be deleted. TP Adjustment - provision of research and engineering support services segment - TPO had arrived at the comparables margin of 36.78 % and accordingly proceeded to make an adjustment - HELD THAT - Preliminary objection made by the assessee before the Learned TPO that M/s Mahindra Consulting Engineers Limited is functionally not comparable with that of functions performed by the assessee herein is proved correct.
The core legal questions considered in this appeal revolve around the determination of arm's length price (ALP) for intra-group services (IGS) and transfer pricing adjustments under the Income-tax Act, 1961. Specifically, the issues include whether the payments made for administrative support services, research and engineering support services, and other intra-group services availed from Associated Enterprises (AEs) are at arm's length, the appropriateness of the transfer pricing methods applied by the authorities, and the selection and exclusion of comparable companies for benchmarking purposes. Further, the nature of services-whether they constitute core business intra-group services or stewardship/shareholder activities-and the consequent tax implications were also examined.
The first issue concerns the transfer pricing adjustment on administrative support services availed by the assessee from its AEs. The assessee used the Transactional Net Margin Method (TNMM) with operating profit to operating cost (OP/OC) as the profit level indicator (PLI), claiming a 5% markup and comparables with margins of 4.44%, thus asserting that payments were at ALP. The Transfer Pricing Officer (TPO), however, rejected this analysis, finding that the assessee failed to demonstrate the receipt and necessity of these services. The TPO characterized the payments as duplicative or shareholder/stewardship activities, which do not warrant payment, and applied the Comparable Uncontrolled Price (CUP) method, determining the ALP at nil. In analyzing this issue, the Court considered the relevant provisions under sections 144C and 143(3) of the Income-tax Act, 1961, and the transfer pricing regulations governing intra-group services. The Court observed that the TPO's rejection was based on the assessee's failure to provide contemporaneous evidence of service receipt, cost-benefit analysis, and necessity. The TPO emphasized criteria such as the nature of services, tangible benefits, benchmarking, and whether independent parties would pay similar amounts. The TPO concluded that the payments were not justified and thus disallowed them. The assessee countered by submitting extensive documentary evidence, including emails, presentations, travel records, job descriptions, and cost allocation methodologies, demonstrating the receipt, nature, and benefits of the services rendered by AEs. The assessee also highlighted that withholding taxes were deducted on these payments, indicating acceptance of the transactions by tax authorities. Further, the assessee argued that the business segments benefiting from these services were held at arm's length in prior assessments and that the payments reflected genuine business needs, not tax evasion motives. The Court examined the detailed chart submitted by the assessee, which elaborated on various categories of services-product technical, marketing, finance, business support, legal, safety, IT, accounting, HR, and others-describing the manner of service delivery, benefits derived, and cost-benefit analysis. The Court found this evidence credible and sufficient to establish that the services were indeed rendered and necessary for the assessee's business operations. It also noted that the TPO did not bring forward any comparables to justify the nil ALP determination under the CUP method, undermining the adjustment. In support of its reasoning, the Court relied on a coordinate bench decision involving similar intra-group services, where it was held that services producing effects on the recipient company are not stewardship or shareholder activities and thus warrant consideration as intra-group services. The Court referred to the US Treasury Regulations on section 482, emphasizing the "sole effect" test for shareholder activities and clarifying that day-to-day management activities do not qualify as shareholder activities. The Court observed that the services in question facilitated the assessee's business operations and were not solely for protecting the capital investment of the AEs. Further, the Court cited a recent jurisdictional High Court ruling affirming that where the rendition of intra-group services is not disputed and detailed evidence is furnished, transfer pricing adjustments disallowing such payments are unwarranted. Following this precedent, the Court held that the entire transfer pricing adjustment on administrative support services deserved to be deleted, allowing the assessee's grounds and dismissing the revenue's corresponding appeals. The second major issue pertains to the transfer pricing adjustment on research and engineering support services segment. The assessee applied TNMM with OP/OC as PLI and selected four comparables with an average margin of negative 20.55%, claiming the 5% margin on services received as ALP. The TPO rejected these comparables and selected a different set with an average margin of 36.78%, leading to a substantial upward adjustment. The Court scrutinized the comparability of the companies selected by the TPO, focusing on the functional profile, related party transactions (RPT), and economic circumstances. The assessee challenged the inclusion of Mahindra Consulting Engineers Ltd., arguing it was functionally dissimilar, engaged primarily in infrastructure consultancy unrelated to the assessee's contract research and engineering services, and had significant related party transactions. The Court agreed with the assessee, relying on the TPO's own observations and prior Tribunal decisions, which held Mahindra Consulting Engineers Ltd. to be functionally dissimilar and unsuitable as a comparable. The Court further upheld the exclusion of other companies like Alphageo India Ltd., Stup Consultants Pvt. Ltd., Semac Ltd., Mitcon Consultancy Services Ltd., Kirloskar Consultants Ltd., and Computronics Financial Services (India) Ltd., based on functional dissimilarity, abnormal economic circumstances, or failure to meet the service income filter criteria. Conversely, the Court accepted the inclusion of Mavens Biotech Ltd., recognizing its functional similarity with the assessee. The Court noted that the revenue failed to produce contrary evidence challenging these exclusions and inclusions. Consequently, the Court dismissed the revenue's grounds challenging the CIT(A)'s selection of comparables for the research and engineering support services segment. Other grounds raised by the assessee, including challenges to the selection of comparables for administrative support services and the use of CUP versus TNMM methods, were either not pressed or treated as general and did not require specific adjudication. In conclusion, the Court held that the payments made by the assessee for intra-group administrative support services were at arm's length, supported by detailed evidence of service receipt, necessity, and benefits. The transfer pricing adjustment disallowing these payments was set aside. Regarding research and engineering support services, the Court upheld the CIT(A)'s exclusion of certain comparables and inclusion of others, dismissing the revenue's challenge. The transfer pricing adjustments on these grounds were accordingly modified or dismissed. Crucial legal reasoning preserved verbatim includes the TPO's criteria for examining intra-group services: "1. 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 which is actually received by it for which the payment is made. 2. Whether the taxpayer really needed such services or not. If so, what direct or tangible benefit it has derived? 3. 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. 4. Whether an independent person would have paid such amount in comparable circumstances 5. Whether the expected benefit commensurates with the payment 6. Whether the taxpayer has separately incurred any expenditure on similar services and if so the necessity of making further payment to the AE for the same activity or it is a duplicate payment 7. Whether the payment is in the nature of shareholders activity or largely for the benefit of the AE 8. Whether the AE is rendering such services to other AEs or independent parties and if so the rate / amount charged from such persons 9. The cost incurred by the AE for providing such services and the basis of allocation key 10. If the AE has charged any markup on such payments the arm's length margin is also examined." Core principles established include:
Final determinations on each issue are:
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