2023 (9) TMI 1694 - AT - Income Tax

TP adjustment - value of international transactions in respect of payment of management fees to its Associate Enterprise (AE ) - entitlement to benefit test - rejection the TNMM method adopted by the assessee - TPO rejected the TP study of the assessee on the ground that it had not availed all the services or rather majority of services entered into by the assessee with its AE as per the umbrella agreement - HELD THAT - Tribunal in assessee s case for AY 2011-12 has considered the decision of the Hon ble Jurisdictional High Court in the case of Merck Ltd. 2016 (8) TMI 561 - BOMBAY HIGH COURT and the Tribunal s decision in the case of Nielsen (India) Pvt. Ltd. 2016 (6) TMI 172 - ITAT MUMBAI and where on identical facts it has been held that if the assessee availed even some of the services listed out in the composite agreement is suffice to prove the consideration paid to the AE s and in case of intra group service payment the TPO does not have an authority to decide whether the assessee has derived any benefit from these services or not and whether the said expenditure was incurred for the purpose of business of the assessee was to be determined by the A.O. and not by the TPO. Further it was held that the TPO is restricted only to determine whether the international transaction was at ALP. The issue in the present case is whether TP adjustment can be made in case where the assessee has availed only limited services out of bundle of services specified in the umbrella agreement is answered in favour of the assessee. TPO /A.O. has not given any justification for rejecting the TNMM method adopted by the assessee and in considering CUP as a most appropriate method. We therefore allow ground No. 1 raised by the assessee and hold that the same is at ALP. Short guarantee of tax deducted at source credited - As this ground requires factual verification as per the revised return of income filed by the assessee we hereby remand this issue back to the file of the A.O. for verifying the TDS credit and to allow the same on the merits of the case. Appeal filed by the assessee is allowed.

Summary

The core legal questions considered by the Tribunal in this appeal primarily revolve around the transfer pricing adjustment related to management fees paid by the assessee to its Associated Enterprise (AE), the correctness of the total income computation, the grant of Tax Deducted at Source (TDS) credit, and the initiation of penalty proceedings. The principal issues are:

1. Whether the transfer pricing adjustment of INR 119,52,99,430/- on account of management fees paid to the AE was justified, including the appropriateness of the benchmarking method applied (Transactional Net Margin Method (TNMM) versus Comparable Uncontrolled Price (CUP) method), the consideration of the umbrella agreement covering multiple services, and the assessment of benefits derived from such services.

2. Whether the Assessing Officer (AO) erred in computing the total income, resulting in an excess income determination and consequently a higher tax demand.

3. Whether the AO erred in granting short TDS credit amounting to INR 1,44,58,550/- as claimed by the assessee.

4. Whether the initiation of penalty proceedings under sections 274 read with 270A of the Income Tax Act, 1961 was legally sustainable.

Issue-wise Detailed Analysis:

Issue 1: Transfer Pricing Adjustment on Management Fees

Legal Framework and Precedents: The transfer pricing provisions under sections 92 to 92F of the Income Tax Act, 1961, and Rule 10A of the Income Tax Rules, 1962, govern the determination of Arm's Length Price (ALP) for international transactions between associated enterprises. The prescribed methods include TNMM and CUP among others. The Tribunal relied on precedents including the Hon'ble Bombay High Court decision in Merck Limited, the Tribunal's own earlier decision for the assessee's AY 2011-12, and the decision in AC Nielsen (India) Private Ltd., which emphasize the principle that when an umbrella agreement covers multiple services, the right to avail all services under the agreement is a relevant consideration, and non-availment of all services cannot be a basis for rejecting the transfer pricing study.

Court's Interpretation and Reasoning: The Tribunal observed that the assessee had entered into an umbrella agreement with its AE for management services encompassing ten categories, including strategic execution, vendor management, HR, finance, IT, and corporate communications. The assessee benchmarked the transaction using TNMM at the entity level, asserting that the overall margins were consistent with ALP.

The Transfer Pricing Officer (TPO) rejected the TNMM method, applying the CUP method instead, reasoning that the management fees represented a bundle of distinct services that should be benchmarked separately, and that the assessee failed to provide cost allocation details or evidence of actual services rendered. The TPO concluded the ALP for the management fees was nil, proposing an adjustment of approximately INR 121 crore.

The Dispute Resolution Panel (DRP) upheld the TPO's conclusions but granted partial relief by excluding a portion of the management fees attributable to a corporate guarantee, applying a 0.50% rate rather than the 3-4% claimed by the assessee.

The assessee contended that the management fees represented an integrated bundle of services essential to its business operations and that the TNMM method was appropriate. It provided documentary evidence of the services rendered, third-party costs incurred by the AE, and benefits derived, which were argued to exceed the fees paid. The assessee also relied on the umbrella agreement's terms and prior judicial decisions supporting the approach of considering the bundle of services as a whole.

The Departmental Representative (DR) argued that the services should be benchmarked separately, that the assessee failed to prove the services were rendered or quantify benefits, and that the TNMM method was not appropriate for such bundled services.

Key Evidence and Findings: The assessee submitted detailed documentation on the ten categories of services, third-party costs allocated to it by the AE, and the umbrella agreement. The Tribunal noted that the TPO and DRP did not provide adequate justification for rejecting the TNMM method or for applying the CUP method. The Tribunal also observed that the TPO and DRP had assumed the role of determining the allowability of expenditure rather than limiting themselves to ALP determination, which is beyond their jurisdiction.

Application of Law to Facts: The Tribunal applied the principle from Merck Limited and the assessee's own prior case for AY 2011-12, which held that the right to avail all services under an umbrella agreement is sufficient justification for the payment, and non-availment of some services cannot justify transfer pricing adjustments. The Tribunal emphasized that the TPO's role is to determine ALP, not to question the commercial wisdom or necessity of the expenditure, which is the AO's domain.

Treatment of Competing Arguments: The Tribunal rejected the Department's contention that the services should be benchmarked individually and that the assessee failed to prove receipt of services or benefits. It held that the TPO and DRP had exceeded their authority by effectively disallowing expenditure rather than determining ALP. The Tribunal also found the Department's reliance on other cases inapplicable as they did not address the issue of bundled services under an umbrella agreement.

Conclusions: The Tribunal held that the payment of management fees was at arm's length, the TNMM method was appropriate, and the transfer pricing adjustment was unwarranted. The Tribunal allowed the first ground of appeal in favor of the assessee.

Issue 2: Erroneous Computation of Total Income

The assessee contended that the AO erred by considering a total income of INR 179,67,43,310/- instead of the correct figure of INR 177,30,90,012/-, resulting in an excess tax demand. However, since the Tribunal decided in favor of the assessee on the transfer pricing issue, which significantly impacts total income, this ground was rendered academic and did not require further adjudication.

Issue 3: Short Grant of TDS Credit

The assessee claimed that the AO granted TDS credit of INR 52,46,91,071/- against a claim of INR 53,91,49,621/-, resulting in a short credit of INR 1,44,58,550/-. The Tribunal noted this issue required factual verification and accordingly remanded the matter to the AO for verification and appropriate relief on merits.

Issue 4: Penalty Proceedings

The assessee challenged the initiation of penalty proceedings under section 274 read with 270A of the Act. The Tribunal observed that this ground was consequential to the main issues and did not require separate adjudication in the present appeal.

Significant Holdings:

"From the above, it is clear that while deciding the ALP of umbrella of services what has to considered is the right of assessee that it is entitled to avail. If it avails only a few services out of the bouquet of services the TPO should not reject the TP study of the assessee on the ground that it did not avail all the services or the majority of services as mentioned in the agreement. Availing selected services from a composite agreement is sufficient for claiming the deduction. For rejecting the TP study of the assessee the TPO should prove that price shown by the assessee from the services availed was not at arm's length. Non-availing of services cannot be the basis for rejecting the claim. These are two different things and are fundamentally separate."

"The TPO and DRP have exceeded their role by deciding the allowability of expenditure rather than limiting themselves to the determination of ALP. The decision as to whether the expenditure was laid out wholly and exclusively for the purposes of business is to be determined by the AO and not the TPO."

"The payment of management fees for a bundle of services under an umbrella agreement, where the assessee has the right to avail all services, cannot be dissected and benchmarked service-wise unless the TPO proves that the price paid for services actually availed is not at arm's length."

"The Tribunal allows the ground of appeal relating to transfer pricing adjustment and holds that the payment of management fees is at arm's length."

In conclusion, the Tribunal ruled in favor of the assessee on the principal issue of transfer pricing adjustment related to management fees, remanded the TDS credit issue for factual verification, and did not adjudicate the penalty proceedings issue as it was consequential. The Tribunal emphasized the distinction between the roles of the TPO and AO and underscored the importance of respecting the commercial decisions of the assessee within the framework of transfer pricing regulations.