2025 (5) TMI 1642 - AT - Income Tax

TP adjustment made on account of international transactions of payment made to the AE of the assessee towards management and technical assistance services - assessee is in the business of research production processing and distribution of flavours and fragrance products - TPO accepted all the transactions at Arms Length except the international transaction on account of payments made towards management and technical assistance services to the AE. HELD THAT - As undisputed fact that the payments made by the assessee to the AE is subjected to TDS and the AE has also offered the said income to tax in India. Therefore it is not a case of shifting of profit by the assessee for over payment to the AE when the AE has offered the income to tax in India. When the assessee has filed the additional evidence in support of the claim that the payment was made by the assessee against the management and technical assistance services provided by the AE in our considered opinion the additional evidence filed by the assessee is required to be verified and examined at the level of TPO and then to determine the ALP as per T.P. provisions. TPO cannot simply ignore the agreement between the parties and formula if any provided by the AE to the assessee which is essential for the manufacturing of products. Formula once provided may not be a continuous transactions as it is not a raw material for manufacturing of the product but a matter of technical knowhow/ formula provided by the AE. Thus, TPO is directed to examine all these aspects while adjudicating this issue. Accordingly the matter is remanded to the record of the TPO for determination of ALP in the above terms. Appeal filed by the assessee is allowed for statistical purposes.

Summary

1. ISSUES PRESENTED and CONSIDERED

The core legal questions considered by the Tribunal in this appeal are:

- Whether the Transfer Pricing Officer (TPO) and the Dispute Resolution Panel (DRP) erred in making a transfer pricing adjustment of INR 2,22,20,986 to the appellant's income on account of payments for management and technical assistance services received from its Associated Enterprise (AE), and whether such adjustment is justified.

- Whether the TPO and DRP were correct in not considering an aggregate benchmarking approach under the Transactional Net Margin Method (TNMM) for the receipt of intra-group services closely linked to the appellant's manufacturing activity.

- Whether the TPO and DRP erred in ignoring that the fee for intra-group services was included in the cost base for computing net profit margin under TNMM, which was accepted as arm's length.

- Whether the TPO and DRP erred in applying an alternative method without proper benchmarking analysis and thereby misapplying Rule 10B and Rule 10C of the Income Tax Rules, 1962.

- Whether the TPO and DRP were justified in determining the Arm's Length Price (ALP) of the intra-group services to be nil without undertaking any specific benchmarking analysis.

- Whether the TPO and DRP erred in making an adverse transfer pricing adjustment resulting in double taxation, despite tax deducted at source (TDS) being withheld on the intra-group service charges.

- Whether the TPO and DRP erred in disregarding the commercial agreements and legitimate business expenses incurred by the appellant, and in questioning the commercial expediency beyond the scope of section 92CA.

- Whether the TPO and DRP erred in disregarding documentary evidence, cost allocation workings, and other factual and legal submissions provided by the appellant substantiating the "Need-Benefit-Evidence" for the intra-group services.

- Whether the TPO and DRP erred in disregarding supplementary benchmarking analysis submitted by the appellant considering the AE as the tested party.

- Whether the Assessing Officer erred in not granting credit for TDS and tax collected at source (TCS) while computing taxes payable/refundable.

- Whether the levy of interest and penalty by the Assessing Officer was justified.

2. ISSUE-WISE DETAILED ANALYSIS

Issue 1: Transfer Pricing Adjustment on Management and Technical Assistance Services

Legal Framework and Precedents: The transfer pricing provisions under the Income Tax Act, 1961, particularly sections 92CA and rules 10B and 10C of the Income Tax Rules, 1962, govern the determination of ALP for international transactions between associated enterprises. The TNMM is recognized as an appropriate method for benchmarking such transactions. The principle of arm's length price requires that transactions between related parties be priced as if they were between independent entities. Relevant precedents cited by the appellant include CIT vs. EKL Appliances Ltd, CIT vs. Cushman & Wakefield India (P) Ltd, CIT vs. Lever India Exports Ltd, and CIT vs. Johnson & Johnson Ltd, which emphasize the necessity of proper benchmarking and prohibit determination of ALP at nil without due process.

Court's Interpretation and Reasoning: The Tribunal noted that the TPO accepted all other international transactions at arm's length except the payments towards management and technical assistance services. The TPO held that the appellant failed to furnish details of the formulas or services transferred by the AE, and therefore determined the ALP of these payments to be nil. The DRP upheld this view, citing lack of substantiation and rejecting the appellant's contention regarding double taxation.

The appellant argued that the services received were integral to its manufacturing operations and aggregated these transactions under TNMM. It submitted agreements, invoices, service details, and evidence of tax deduction at source and tax payment by the AE in India. The appellant contended that the TPO lacked jurisdiction to question the genuineness of the transactions, which is within the Assessing Officer's domain.

The Revenue's counter was that the appellant failed to prove actual provision of services or transfer of formula, and that payments were based on turnover rather than actual services rendered. The Revenue relied on the agreement's clause indicating payment based on turnover and argued the services listed were general and not specific.

Key Evidence and Findings: The appellant furnished agreements, detailed invoices, correspondence, and a list of services, including management, finance, contract legislation, training, royalty, and strategic development services. The appellant also demonstrated that payments were subject to TDS and that the AE declared the income in India. The Tribunal observed that the appellant filed additional evidence during proceedings, which the TPO and DRP did not fully consider.

Application of Law to Facts: The Tribunal emphasized that aggregation of transactions under TNMM is permissible when transactions are closely linked and dependent. It found that the appellant's payments for management and technical assistance services were closely linked to manufacturing. The Tribunal held that the TPO could not disregard the agreement and the technical know-how/formula provided, which is essential for manufacturing, without proper examination. The Tribunal noted that the formula provided is not a continuous supply but a technical know-how, which must be considered differently from raw materials.

Treatment of Competing Arguments: The Tribunal rejected the Revenue's argument that payments based on turnover negate actual services, stating that the issue of genuineness and commercial expediency is beyond the TPO's scope under section 92CA and lies with the Assessing Officer. The Tribunal also rejected the DRP's confirmation of the TPO's order without examining the newly filed evidence.

Conclusions: The Tribunal remanded the matter to the TPO for verification and examination of the additional evidence filed by the appellant and directed the TPO to determine the ALP in accordance with transfer pricing provisions, considering the technical assistance and management services provided by the AE.

Issue 2: Aggregate Benchmarking Approach under TNMM

Legal Framework and Precedents: The TNMM permits aggregation of closely linked transactions for benchmarking purposes, provided the transactions are interdependent or influence pricing. This approach is recognized under the transfer pricing regulations and judicial precedents.

Court's Interpretation and Reasoning: The appellant's contention that the intra-group services are closely related to manufacturing and thus should be benchmarked on an aggregated basis was accepted by the Tribunal. The TPO's failure to consider this approach was held to be erroneous.

Application of Law to Facts: The Tribunal observed that the appellant's intra-group services are integral to manufacturing and distribution, justifying aggregation under TNMM. The TPO's selective acceptance of other transactions at arm's length but rejection of this component was inconsistent.

Conclusions: The Tribunal directed the TPO to consider the aggregate benchmarking approach under TNMM while determining ALP.

Issue 3: Inclusion of Service Fee in Cost Base for TNMM

Legal Framework and Precedents: Under TNMM, the net profit margin is computed after including all relevant costs, including fees for intra-group services, if these are at arm's length.

Court's Interpretation and Reasoning: The appellant contended that the fee for intra-group services was included in the cost base accepted by the TPO. The Tribunal found that ignoring this fact while making adjustments was incorrect.

Conclusions: The Tribunal held that the inclusion of service fees in the cost base must be considered in the transfer pricing analysis.

Issue 4: Application of Other Methods and Benchmarking Analysis

Legal Framework and Precedents: Rule 10B and Rule 10C prescribe the methods for determining ALP, requiring appropriate benchmarking analysis. Arbitrary application of other methods without supporting analysis is impermissible.

Court's Interpretation and Reasoning: The Tribunal found that the TPO applied alternative methods without providing supporting benchmarking analysis, resulting in inappropriate application of the rules.

Conclusions: The Tribunal directed the TPO to apply prescribed methods with proper benchmarking analysis.

Issue 5: Determination of ALP as Nil Without Benchmarking

Legal Framework and Precedents: ALP cannot be determined at nil without conducting the prescribed benchmarking exercise under the Act and Rules.

Court's Interpretation and Reasoning: The Tribunal held that the TPO's determination of ALP as nil without benchmarking was unjustified and contrary to law.

Conclusions: The matter was remanded for determination of ALP based on proper benchmarking.

Issue 6: Double Taxation Due to Transfer Pricing Adjustment Despite TDS

Legal Framework and Precedents: Tax deducted at source on payments to AE and the AE's declaration of income in India negate the possibility of profit shifting and double taxation.

Court's Interpretation and Reasoning: The Tribunal noted that since TDS was deducted and AE offered income to tax, the transfer pricing adjustment leading to double taxation was not justified.

Conclusions: The Tribunal directed reconsideration of the adjustment in light of TDS and tax payment by AE.

Issue 7: Disregard of Commercial Agreements and Legitimate Business Expenses

Legal Framework and Precedents: The commercial expediency of business expenses and agreements is generally within the prerogative of the taxpayer and beyond the scope of transfer pricing officers unless there is evidence of non-genuineness.

Court's Interpretation and Reasoning: The Tribunal held that the TPO and DRP erred in disregarding the commercial agreements and questioning the appellant's business decisions beyond their jurisdiction.

Conclusions: The agreements and legitimate expenses must be considered in transfer pricing analysis.

Issue 8: Disregard of Documentary Evidence and Cost Allocation Workings

Legal Framework and Precedents: Transfer pricing officers must consider all relevant documentary evidence and cost allocation details submitted by the taxpayer.

Court's Interpretation and Reasoning: The Tribunal found that the TPO and DRP failed to provide cogent and specific findings for disregarding the appellant's evidence.

Conclusions: The evidence must be duly examined on remand.

Issue 9: Disregard of Supplementary Benchmarking Analysis Considering AE as Tested Party

Legal Framework and Precedents: Benchmarking analysis may consider the AE as tested party where appropriate.

Court's Interpretation and Reasoning: The Tribunal noted that the supplementary benchmarking analysis submitted by the appellant was disregarded without adequate reason.

Conclusions: The TPO is directed to consider this analysis in determining ALP.

Issue 10: Non-Grant of Credit for TDS and TCS

Legal Framework and Precedents: Tax credits for TDS and TCS must be granted while computing tax liability.

Court's Interpretation and Reasoning: The appellant contended that the AO erred in not granting credit for TDS and TCS. The Tribunal did not specifically adjudicate this issue in detail but included it as a ground of appeal.

Issue 11: Levy of Interest and Penalty

Legal Framework and Precedents: Interest and penalty levies must be justified based on statutory provisions and facts.

Court's Interpretation and Reasoning: The appellant challenged the levy as unjustified. The Tribunal did not provide detailed reasoning on this ground but included it as a consequential ground.

3. SIGNIFICANT HOLDINGS

"The TPO cannot simply ignore the agreement between the parties and formula, if any, provided by the AE to the assessee which is essential for the manufacturing of products."

"The formula once provided may not be a continuous transaction as it is not a raw material for manufacturing of the product but a matter of technical knowhow/formula provided by the AE."

"The additional evidence filed by the assessee is required to be verified and examined at the level of TPO and then to determine the ALP as per T.P. provisions."

"Aggregation of the international transactions are permitted only when the transactions are closely linked and dependent upon each other, either the happening of transactions itself or the determination of the prices between the parties."

"The TPO cannot determine the ALP at 'Nil' without conducting the proper exercises of determination of ALP by one of the prescribed methods."

"Since the payments made by the assessee to the AE is subjected to TDS and the AE has also offered the said income to tax in India, it is not a case of shifting of profit by the assessee for over payment to the AE."

Core principles established include the necessity of proper benchmarking analysis before making transfer pricing adjustments, the importance of considering commercial agreements and legitimate business expenses, the limited jurisdiction of the TPO in questioning genuineness of transactions, and the recognition that technical assistance and management services integral to manufacturing should be appropriately valued rather than disregarded.

Final determinations on the principal issue led to remanding the matter to the TPO for re-examination of evidence and determination of ALP in accordance with the law and facts, thereby allowing the appeal for statistical purposes.