Disallowance of ₹4.49 Crore in Management Service Charges as Excessive: ITAT Allows Payment at Arm's Length Using Cost Plus Method [Read Order]

The Ahmedabad Bench of Income Tax Appellate Tribunal ( ITAT ) allowed payment at arm's length for ₹4.49 Crore in management service charges, ruling that the fees were reasonable and calculated at a 5% markup under the Cost-Plus Method.

The Revenue-appellant, challenged the order passed by Commissioner of Income Tax(Appeals)[CIT(A)] for the assessment year 2012-13.The primary issue concerns an adjustment of Rs. 4,48,93,558 made for Management Service Charges.

In this  case, Schaeffler India Ltd., respondent-assessee  paid management fees to Schaeffler Holding China Company (“Associated Enterprise”) and used Transaction Net Margin Method ( TNMM ) to set the transaction’s arm's length price (ALP). The Transfer Pricing Officer ( TPO ) set the ALP at Rs. NIL, treating the services as shareholder activities.

On appeal, the assessee showed details of the services, agreements, payments, invoices, and emails to support their claim. The CIT(A) removed the TPO’s adjustment, referring to a decision by the ITAT, Pune Bench in a case involving the group company "INA Bearings India Pvt. Ltd." (now merged with Schaeffler India).

Get a Copy of Direct Taxes Law and Practices Including Tax Planning with Free E-Book Access, Click Here

The case was decided in favor of the company based on an earlier ruling by the Ahmedabad ITAT in the company’s own case (ITA No. 133 to 137/Ahd/2023, dated 12.01.2024).

In that case, the company had paid Rs. 6.72 crore to Schaeffler China and Rs. 31.63 lakh to Schaeffler GmbH as management fees. The Assessing Officer claimed these payments were for “stewardship activities” that didn’t require fees, and the TPO valued the services at “NIL,” suggesting an adjustment of Rs. 7.03 crore.

The company appealed to the CIT(A), referring to a similar ruling in its group company’s case, INA Bearings India Pvt. Ltd., where the Pune ITAT decided in favor of the taxpayer. The CIT(A) compared the facts and ruled in favor of the company.

The department argued that the company hadn’t provided enough evidence to justify the payments. However, the ITAT found that the company had submitted sufficient proof, including agreements, invoices, and emails, to support its claim. It also noted that similar payments had been accepted as arm’s length in earlier years.

The two member bench comprising Suddhartha Nautiyal(Judicial Member) and Annapurna Gupta(Accountant Member)  confirmed that the services were not “stewardship activities” and that the fees were reasonable, calculated at a 5% markup under the Cost-Plus Method. The adjustments made by the TPO were dismissed, and the payments were deemed consistent with the arm’s length principle.

Get a Copy of Direct Taxes Law and Practices Including Tax Planning with Free E-Book Access, Click Here

Following the decision made by the Ahmedabad Bench tribunal in assessee’s own case the appeal filed by the Revenue was dismissed.

To Read the full text of the Order CLICK HERE

Support our journalism by subscribing to Taxscan premium. Follow us on Telegram for quick updates