2025 (7) TMI 1303 - AT - Income Tax

TP adjustment - re-characterizing the recovery of expenses from Associated Enterprises (AEs) as provision for Business Support Services - assessee is a distributor of ethical pharmaceutical products developed patented and manufactured by other related parties - as per TPO assessee had indeed incurred certain expenses on behalf of its AEs and had sought reimbursement of the same on actual basis without having any mark up thereon in the debit note raised on the AEs which has been inadvertently mentioned as business support services HELD THAT - It is pertinent to note that in the said debit note though it was mentioned as business support services inadvertantly the assessee had clearly mentioned under the column of mark up as Nil. This itself clearly goes to prove that the said recovery made from the AEs by the assessee by raising a debit note was merely reimbursement/ recovery of expenses incurred on behalf of its AEs. As per the agreement the assessee is entitled for a mark up whenever an invoice/ debit note is raised on account of business support services. The very fact that there was no mark up included in the debit note raised on the AEs goes to prove that the same does not involve business support services and could be only reimbursement of expenses. We find force in this line of argument advanced by the ld AR. Even if the alleged recovery of expenses is considered in the cost base and revenue without mark up of the business support services segment considering the benchmarking carried out by the TPO in the giving effect order for the business support services segment the revised mark up under BSS segment will be 10.18% which would be within the arms length range determined by the TPO i.e. 4.03% to 14.23% with median of 5.33%. Hence even on this count there is no requirement to make any transfer pricing adjustment even if the re-characterization of reimbursement of expenses to business support services is to be considered as correct. We hold there is absolutely no case for making any transfer pricing adjustment. Decided in favour of assessee.

Summary

ISSUES:

Whether the recovery of expenses from Associated Enterprises (AEs) characterized as Business Support Services (BSS) can be re-characterized by the tax authorities for transfer pricing adjustment.Whether the re-characterization of reimbursement of expenses as BSS with mark-up is justified under the Income Tax Act, 1961.Whether, even assuming the re-characterization is correct, a transfer pricing adjustment is warranted based on the benchmarking and arm's length range.

RULINGS / HOLDINGS:

The recovery of expenses from AEs described as business support services in the debit note was "inadvertent" and the absence of mark-up ("Nil") in the debit note demonstrates that the transaction was merely reimbursement of expenses, not provision of BSS.The assessee is entitled to a mark-up only when invoices/debit notes are raised specifically for business support services; the lack of mark-up negates the characterization as BSS.Even if the recovery of expenses is considered part of the BSS segment revenue without mark-up, the revised operating mark-up of 10.18% falls within the arm's length range of 4.03% to 14.23%, negating the need for any transfer pricing adjustment.Accordingly, the transfer pricing adjustment of Rs. 21,44,324/- made on account of re-characterization of expense recovery as BSS is not warranted.

RATIONALE:

The court applied the statutory provisions under the Income Tax Act, 1961, specifically sections relating to transfer pricing adjustments and benchmarking under section 92CA(3) and 144C(5).The decision relied on the factual matrix including the debit notes raised by the assessee, which explicitly showed "Nil" mark-up, indicating reimbursement rather than a service transaction.The court considered the benchmarking methodology adopted by the Transfer Pricing Officer (TPO), applying the Transactional Net Margin Method (TNMM) and the arm's length range determined therein.The reasoning emphasized the importance of substance over form in characterizing international transactions and the correctness of the assessee's claim that the debit note description was inadvertent.No doctrinal shift or dissent was noted; the judgment reaffirmed established transfer pricing principles and the requirement that adjustments must be based on accurate characterization of transactions and benchmarking within the arm's length range.