2025 (6) TMI 1317 - AT - Income Tax

TP Adjustment - intra-group services received by the assessee from its Associated Enterprise ( AE ) - payment of Global Client Management Fee - CIT(A) deleted addition - HELD THAT - In the present case it is an undisputed fact that ISS World Service A/S Denmark has certain large corporate clients with whom it has an arrangement for the provision of services globally. These clients are served by the ISS group entities in their respective jurisdictions. In India ISS World Service A/S has an arrangement with the assessee with respect to the management of these global clients. During the year under consideration ISS World Services A/S Denmark provided the following services to the assessee for which the assessee paid under the head Global Client Management Fees We find that similar findings have been rendered by the co-ordinate bench of the Tribunal in assessee s own case for assessment years 2015-16 and 2016-17 and the ad hoc adjustment of 50% made by the TPO on account of payment of Global Client Management Fees was deleted. Accordingly no infirmity in the findings of the learned CIT(A) in deleting the Transfer Pricing Adjustment on account of payment of Global Client Management Fees and the same are upheld. As a result grounds no. 1-3 raised in Revenue s appeal are dismissed. Computation of disallowance u/s 14A r.w. Rule 8D - AR by referring to the financial statements of the assessee forming part of the paper book submitted that if the disallowance is computed on the basis of the proportionate composite administration expenditure incurred by the assessee then the same will result in disallowance of Rs. 89, 783/- under section 14A read with Rule 8D of the Rules - HELD THAT - Since the plea of the assessee of claiming exemption of the dividend income has been accepted we deem it appropriate to restore the aspect computation of disallowance under section 14A read with Rule 8D of the Rules to the file of the jurisdictional AO for consideration afresh as per law after considering the submissions of the assessee and decisions relied upon by the learned AR. Accordingly the findings of the learned CIT(A) on this issue are set aside and ground raised in Revenue s Appeal and grounds no. 2-4 raised in assessee s cross-objection are allowed for statistical purposes.

The core legal questions considered in this judgment relate primarily to transfer pricing adjustments and the applicability of Section 14A read with Rule 8D of the Income Tax Rules, 1962. Specifically, the issues are:

1. Whether the learned Commissioner of Income Tax (Appeals) erred in deleting the transfer pricing adjustment made on account of payment of Management Support Services to the Associated Enterprise (AE), particularly considering whether such services were merely shareholder or incidental services not chargeable to the assessee.

2. Whether the principle of res judicata applies in income tax proceedings, in the context of the deletion of transfer pricing adjustments in subsequent years influencing the decision in the relevant year.

3. Whether the deletion of transfer pricing adjustment in respect of payment of Global Corporate Client Services was justified, given the findings of the Transfer Pricing Officer (TPO) that only 50% of such services were chargeable.

4. Whether the deletion of disallowance under Section 14A of the Act was correct, especially considering the assessee's investments yielding exempt dividend income and the claim for exemption under Section 10(35).

5. Whether the assessment order passed beyond the time limit prescribed under Section 153 of the Income Tax Act was valid.

6. Whether the exemption of dividend income from mutual funds under Section 10(35) was wrongly denied.

7. Whether the disallowance under Section 14A read with Rule 8D was correctly computed, including the quantum of disallowance and the basis of computation (whether only investments yielding exempt income should be considered or all investments).

Issue-wise Detailed Analysis

1. Transfer Pricing Adjustment on Management Support Services

The legal framework governing transfer pricing adjustments is contained in Sections 92C and 92CA of the Income Tax Act, 1961, which require the arm's length price (ALP) of international transactions between associated enterprises to be determined using prescribed methods, including the Transactional Net Margin Method (TNMM) applied by the assessee.

The TPO rejected the assessee's benchmarking analysis on the ground that the services rendered by the AE were in the nature of shareholder services or incidental benefits, not chargeable, and that the assessee failed to produce acceptable documentary evidence proving receipt of benefit. Consequently, the TPO computed the ALP as nil for Management Service Fees.

The assessee countered by submitting extensive documentary evidence demonstrating the receipt of valuable services such as operational management, risk management, procurement, human resources, legal advice, training modules, IT infrastructure support, and corporate governance policies, supported by email correspondences, presentations, manuals, and guidelines.

The learned CIT(A) relied on the fact that in subsequent assessment years (2015-16 to 2021-22), the TPO accepted similar transactions without adjustment, and that the Tribunal in the immediately preceding year (2013-14) had deleted a similar adjustment in the assessee's own case. The Tribunal upheld the learned CIT(A)'s findings, concluding that the assessee had substantiated the receipt and benefit of services from the AE with credible documentary evidence, thus negating the TPO's finding of mere shareholder services.

Competing arguments from the Revenue emphasized the lack of specific proof of service rendition and benefit, while the assessee relied on consistent acceptance in subsequent years and prior Tribunal decisions. The Tribunal gave greater weight to the documentary evidence and consistent judicial precedents, applying the law to facts to uphold deletion of the adjustment.

2. Transfer Pricing Adjustment on Global Client Management Fees

The TPO accepted that services were rendered and beneficial but arbitrarily allowed only 50% of the payment as at arm's length without applying any prescribed method under Section 92C(1). The assessee challenged this ad hoc adjustment.

The Tribunal referred to binding judicial precedents, including a decision of the Hon'ble Jurisdictional High Court, which mandates that the TPO must determine ALP by applying one of the prescribed methods under Section 92C and Rule 10B, and cannot make arbitrary or ad hoc adjustments. The Tribunal noted that the TPO's partial acceptance without methodical application was contrary to the statutory mandate.

The Tribunal also relied on its own coordinate bench decisions in the assessee's case where similar ad hoc adjustments were deleted. The Tribunal concluded that the TPO's partial disallowance was not sustainable in law and directed deletion of the adjustment in respect of Global Client Management Fees.

The Revenue's contention that 50% disallowance was justified was rejected as lacking basis and contrary to statutory requirements. The Tribunal emphasized adherence to prescribed transfer pricing methods and rejected arbitrary adjustments.

3. Application of Res Judicata Principle in Income Tax Proceedings

The Revenue contended that the principle of res judicata does not apply to income tax proceedings and that the deletion of adjustment in subsequent years should not influence the decision in the relevant year.

The Tribunal noted this contention but observed that the learned CIT(A) and the Tribunal had relied on consistent factual and legal findings in subsequent years and preceding years in the same case, which formed a relevant background to the decision. The principle of consistency and reliance on prior decisions in the same case was distinguished from strict res judicata application, which is generally not applicable in income tax proceedings.

The Tribunal did not find error in the CIT(A)'s approach, which was based on consistent evidence and judicial precedents rather than strict res judicata.

4. Disallowance under Section 14A read with Rule 8D and Exemption of Dividend Income

The assessee earned dividend income from mutual funds and initially offered it to tax. The AO made a disallowance under Section 14A read with Rule 8D for expenditure incurred in relation to exempt income, amounting to Rs. 50,38,950. The assessee claimed exemption of dividend income under Section 10(35) before the CIT(A), which was rejected on the ground that exemption was not claimed in the return of income.

The Tribunal referred to binding Supreme Court and High Court decisions holding that appellate authorities can entertain fresh claims for exemption even if not made in the original return. Respectfully following these precedents, the Tribunal held that the CIT(A) erred in rejecting the exemption claim at the threshold and directed the AO to allow the exemption claim as per law.

Regarding the disallowance under Section 14A, the Tribunal noted that since the dividend income is exempt, the AO is entitled to make disallowance of expenditure incurred in relation to such exempt income. However, the quantum of disallowance must be computed correctly.

The assessee submitted that only investments yielding exempt income should be considered for computing disallowance under Rule 8D, referring to a Special Bench decision. The assessee also submitted an alternative computation based on proportionate composite administrative expenditure.

The Tribunal found it appropriate to remit the issue of correct computation of disallowance to the AO for fresh consideration in light of the exemption claim and judicial precedents, allowing the grounds raised by both parties for statistical purposes.

5. Validity of Assessment Order Passed Beyond Time Limit

The assessee challenged the validity of the assessment order passed beyond the time limit prescribed under Section 153 of the Act. However, this ground was not pressed during the hearing and was left open.

Significant Holdings

"The duty of the Id. TPO is restricted only to the determination of the arm's length price of an international transaction between two related parties by applying any of the methods prescribed u/s.92C of the Act read with rule 10B of the rules. Thus, there is no provision made in the statute empowering Id. TPO for determining the ALP on a particular international transaction on an estimation basis / adhoc basis."

"The TPO's partial disallowance of Global Client Management Fees without applying any prescribed method under Section 92C(1) is contrary to the statutory mandate and is liable to be deleted."

"The appellate authority can entertain a fresh claim made by the assessee, even if such a claim was not made in return of income or by way of revised return of income."

"Since the plea of exemption of dividend income made by the assessee has now in principle been accepted, it is, therefore, pertinent to compute the disallowance of expenditure in relation to exempt income under section 14A read with Rule 8D of the Rules."

Core principles established include the mandatory application of prescribed transfer pricing methods by the TPO, prohibition of ad hoc adjustments without basis, recognition of documentary evidence substantiating receipt and benefit of services from AE, and the appellate authority's power to entertain fresh exemption claims post filing of return.

Final determinations are as follows: The transfer pricing adjustments on Management Service Fees and Global Client Management Fees were rightly deleted by the learned CIT(A) and upheld by the Tribunal; the exemption claim on dividend income is to be allowed; and the disallowance under Section 14A read with Rule 8D is to be recomputed afresh by the AO in accordance with law and judicial precedents. The appeal of the Revenue is partly allowed for statistical purposes, and the assessee's cross-objection is allowed for statistical purposes.

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