2025 (7) TMI 176 - AT - Income Tax

TP Adjustment - payment of management fees - assessee has benchmarked the said transaction in entity level TNMM on the ground that the margin earned by the assessee at entity level was in accordance with the provision of section 92C(2) and further claimed that the same was determined at ALP - HELD THAT - The Jurisdictional Tribunal in 2023 (9) TMI 1694 - ITAT MUMBAI it was observed while following the judgment in the case of Merk Limited 2016 (8) TMI 561 - BOMBAY HIGH COURT and Nielsen (India) Pvt. Ltd 2016 (6) TMI 172 - ITAT MUMBAI that the TPO is not correct in rejecting the TP study of the assessee on the ground that the assessee has not availed all the services agreed with the AE. It is further held that the TPO can only examine the ALP of the services availed by the assessee and non-availing of services can not be the reason for rejecting the claim. It is also held that reducing the ALP on the ground that the assessee has availed only few services out of bundle of services in the umbrella agreement is not sustainable. We find force in the argument of Ld. AR that the issue of payment of management fee does not require separate benchmarking and the comparable under TNMM method based on the overall profit margin of the entity level has been accepted and no adjustment was required on that count therefore the question of CUP method over TNMM by TPO pales into insignificance. As per section 92C(i) of the Act the arm s length price in relation to international transaction shall be determined by any of the following methods being the most appropriate method having regard to the nature of transaction or class of transaction. The Six methods included CUP method as well as TNMM method. In the present case the assessee in order to arrive at arm s length price in relation to international transaction relating to the payment of management fee to the AE for the services rendered has considered the TNMM as most appropriate method. In the similar situation the Jurisdictional Tribunal in for AY 2017-18 2023 (9) TMI 1694 - ITAT MUMBAI has approved the TNMM to arrive at ALP and the CUP method adopted by the TPO was not considered to be the most appropriate method. Assessee appeal allowed. Thus we are of considered opinion that Ld. AO /Ld. TPO / Ld. DRP has committed illegality in making TP adjustment paid by the assessee to its AE on account of management fee. Assessee appeal allowed.

Summary

1. ISSUES PRESENTED and CONSIDERED

The core legal questions considered by the Tribunal were:

- Whether the Transfer Pricing Officer (TPO) and Dispute Resolution Panel (DRP) were justified in making an arm's length price (ALP) adjustment of Rs. 93,23,73,143/- on account of management fees paid by the assessee to its Associated Enterprise (AE), by rejecting the assessee's benchmarking under the Transactional Net Margin Method (TNMM) and applying the Comparable Uncontrolled Price (CUP) method instead.

- Whether the payment of management fees should be treated as a separate international transaction requiring separate benchmarking or can be aggregated with other business transactions under TNMM.

- Whether the TPO and DRP exceeded their jurisdiction by questioning the commercial wisdom of the assessee in availing management services and by rejecting the detailed evidence and benefit analysis presented by the assessee.

- Whether the denial of deduction under section 80G of the Income Tax Act was justified.

- Whether the Assessing Officer erred in granting short Tax Deducted at Source (TDS) credit.

- Whether penalty proceedings initiated under sections 274 read with 270A and 271AA of the Act were justified.

2. ISSUE-WISE DETAILED ANALYSIS

Issue 1: Transfer Pricing Adjustment on Management Fees

Relevant Legal Framework and Precedents: Section 92C(1) of the Income Tax Act prescribes methods for determining ALP, including CUP and TNMM. The law mandates selection of the Most Appropriate Method (MAM) based on the nature of transaction. The Tribunal relied on precedents including the Hon'ble Bombay High Court's decision in Merck Limited and prior Tribunal decisions in the assessee's own case for AY 2011-12 and 2017-18, which held that payment for a bundle of intra-group services under an umbrella agreement does not require separate benchmarking for each service and that TNMM is an appropriate method for such transactions.

Court's Interpretation and Reasoning: The Tribunal noted that the TPO rejected the assessee's TNMM benchmarking on grounds that the management fees covered multiple services without item-wise cost allocation and that the assessee failed to provide evidence of actual services rendered or costs incurred by the AE. The TPO applied CUP method, determining ALP as nil and making a large upward adjustment. The DRP upheld this view but allowed partial relief by excluding the corporate guarantee transaction benchmarked at 0.5%.

The Tribunal carefully examined the assessee's submissions, including documentary evidence of services rendered, the umbrella agreement covering ten categories of services, and the overall benefit derived by the assessee which exceeded the management fees paid. It emphasized the binding precedents wherein it was held that:

• The TPO's role is limited to determining ALP and not to question the commercial wisdom or necessity of incurring expenditure.
• Non-availment of all services under an umbrella agreement cannot be a basis for rejecting the entire payment or the benchmarking study.
• TNMM is an accepted method for benchmarking such bundled services when the overall profit margin is comparable to independent entities.
• The TPO and DRP erred in conflating allowability of expenditure with ALP determination, which are distinct issues.

Key Evidence and Findings: The assessee furnished quarterly invoices, presentations, and detailed categorization of services. Though the TPO criticized lack of logbooks or detailed cost data, the Tribunal found that the absence of such granular data did not justify rejection of the TNMM method or the entire claim. The assessee demonstrated benefits worth multiple times the management fees paid.

Application of Law to Facts: The Tribunal applied the principles from Merck Limited and AC Nielsen (India) Pvt. Ltd. cases, holding that the payment was for the right to avail services under the umbrella agreement, and the TPO cannot disallow or adjust on the basis that all services were not utilized or that the cost allocation was not itemized. The Tribunal found no justification for the TPO's choice of CUP method over TNMM as the MAM.

Treatment of Competing Arguments: The revenue contended that the TPO's rejection of TNMM was justified due to lack of evidence and that the CUP method was more appropriate. The Tribunal distinguished the present facts from prior cases cited by revenue and held that the principle of res judicata does not apply to transfer pricing disputes but the binding precedents from the jurisdictional Tribunal and High Court in the assessee's own case are relevant and applicable. The Tribunal rejected revenue's argument that the TPO/DRP had authority to question the commercial prudence of the assessee's business decisions.

Conclusion: The Tribunal allowed the appeal on this ground, holding the management fees payment was at arm's length and that the TNMM method adopted by the assessee was appropriate. The transfer pricing adjustment was therefore deleted.

Issue 2: Denial of Deduction under Section 80G

The Tribunal noted no objection from the revenue to the assessee's claim for deduction under section 80G and accordingly restored the ground to the Assessing Officer for fresh adjudication after providing the assessee an opportunity to be heard. The ground was allowed for statistical purposes.

Issue 3: Short Grant of TDS Credit

The Tribunal observed the dispute regarding short grant of TDS credit of Rs. 22,86,779/- and restored the matter to the Assessing Officer for fresh consideration after hearing the assessee. This ground was also allowed for statistical purposes.

Issue 4: Penalty Proceedings

The Tribunal deemed the penalty proceedings premature and disposed of this ground without specific adjudication.

3. SIGNIFICANT HOLDINGS

The Tribunal's crucial legal reasoning included the following verbatim excerpts:

"Just by describing various services, it will not suffice to justify the price charged in intra group services. The taxpayer has to prove with proper documentation and evidence that the services are actually rendered and received and that payment is commensurate with the benefit derived there from. First of all, the taxpayer has to prove that the services are rendered and received."

"While deciding the ALP of umbrella of services what has to be 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 or the majority of services as mentioned in the agreement."

"The TPO is restricted only to determine whether the international transaction was at ALP. The issue of allowability of expenditure or commercial wisdom is not within the jurisdiction of the TPO."

"The payment of management fees does not require separate benchmarking and therefore if the overall profit margin of the assessee, at the entity level, is comparable under TNMM method with comparables, no adjustment is required to be made."

Core principles established include:

• Management fees paid under an umbrella intra-group services agreement can be benchmarked using TNMM at the entity level without requiring separate benchmarking for each service.
• The TPO's role is limited to ALP determination and does not extend to questioning the commercial prudence or allowability of expenditure.
• Non-availment of all services under an umbrella agreement cannot be a ground for rejecting the ALP study or making transfer pricing adjustments.
• Binding precedents from the jurisdictional High Court and Tribunal must be followed unless distinguishable on facts.

Final determinations on each issue were:

• The transfer pricing adjustment on management fees was deleted and the TNMM method adopted by the assessee was upheld as the most appropriate method.
• The denial of deduction under section 80G and short grant of TDS credit were restored to the Assessing Officer for fresh adjudication.
• The penalty proceedings were disposed of as premature.