Arms Length Price of management fee paid determined Nil by TPO upheld

Arms Length Price of intra group management fee paid determined Nil by TPO upheld as there was no evidence on record to prove rendition of services.

ABCAUS Case Law Citation:
ABCAUS 3002 (2019) (06) ITAT

Important Case Laws Cited/relied upon by the parties:
3M India Ltd vs. Addl. CIT, (2016) 70 taxmann.com 231
CIT vs. Lever India Exports Ltd, (2017) 78 taxmann.com 88
Gemplus India (P) Ltd vs. ACIT, 3 Taxmann.com 755
Volvo India (P) Ltd , 77 taxmann.com 207 and 89

The assessee had challenged the final assessment order passed u/s. 143(3) r.w.s. 144C (13) of the Income Tax Act, 1961 (‘the Act’).

The issue involved in the present appeal was whether or not the TPO was justified in making Arms Length Price adjustment in respect of international transaction of intra group Management and Support Service.

The TPO had suggested Arms Length Price adjustment in respect of intra group services on the ground that there was no proof in support of rendition of services for the said Management and Support Service and services were not commensurate with the amount of the fees paid.

During the course of proceedings before the TPO, assessee had submitted an agreement entered by the appellant with its Associated Enterprise in terms of which management services rendered by the appellant. The assessee company also submitted copies of correspondences in the form of emails, the assessee company had with its Associated Enterprise in an attempt to prove rendering of management services to the assessee by its Associated Enterprise.

The TPO inferred that no independent enterprise would not be willing to pay the amount of intra group service placing reliance on OECD guidelines. He held that the ALP of the management fees paid should be determined at Nil.

After receipt of the TPO order, a draft assessment order was passed by the Assessing Officer under section 143(3) r.w.s. 144C(1) of the Act proposing to make an Arms Length Price adjustment.

After receipt of the draft assessment order, objection was filed before the Dispute Resolution Panel, (‘’DRP’’) contesting that the transaction of intra group services was a closely linked with the manufacturing activity of the assessee and therefore the TPO ought to had accepted the transfer pricing study of the assessee ought not have applied CUP method in order to benchmark the transaction of intra group services and also contending that it was outside the jurisdiction of the TPO to question the necessity of intra group services.

The DRP considering the submissions of the appellant and also placing reliance on decisions of the Tribunals held that in the absence of proof for rendition of services, the TPO was justified in determining the Arms Length Price transaction of intra group services being Nil.

After receipt of the TPO order, the Assessing Officer had passed the final assessment order u/s.143(3) r.w.s. 144C(13) of the Act.

Being aggrieved, the appellant was in appeal before the Tribunal in the present appeal. It was submitted that once the expenditure was allowed u/s 37 (1) of the Act, the TPO was not justified to go into the question of necessity of expenditure as well as rendition of services, the Arms Length Price adjustment could not be determined at Nil by applying the parameters laid down in Section 37 of the Act.

The Tribunal noted that in the proceedings before the TPO, the assessee had filed certain evidences in the form of emails, in an attempt to prove the receipt of services. Considering this evidence, the TPO had given finding that the payments made are not commensurate with services rendered and the merely description of services does not establish rendition of services, further TPO observed that emails talks about setting of the targets for the assessee and these emails are in relation to regulation of the assessee company by the Associated Enterprise.

The Tribunal observed that the findings of the TPO remained, therefore, the inescapable conclusion to be drawn was that there was no evidence on record to prove rendition of services. In the circumstances, the ratio of the decisions of the Co-ordinate Bench of the Tribunal was applicable wherein it was held that payment of management fee was nothing but siphoning of the profits from India with the intention of avoiding tax. The appellant had made no effort to controvert the findings of the TPO, therefore, TPO was justified in adopting ALP at Nil.

The Tribunal further observed that the Bench had held that it is outside the scope of jurisdiction of the TPO to question the necessity, benefit of expenditure while determining the Arms Length Price of international transaction. But, once the assessee had failed to prove the rendition of services, it is nothing but sham transaction intended to shift the tax base of the country, falling within the jurisdiction of Chapter X of the Income Tax Act, 1961.

The Tribunal opined that the grounds of appeal raised contending that the management fee paid was closely linked with the main activity of the assessee could not be accepted for the reason that there was no proof of rendition of service.

Therefore, the Tribunal held that the TPO was justified in determining Arms Length Price of the management fee paid at `Nil’.

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