ITAT Directs TPO to Reassess Intra-Group Service Payments and Arm's Length Pricing due to Insufficient Evidence [Read Order]

The Bangalore Bench of Income Tax Appellate Tribunal ( ITAT ) directed the Transfer Pricing Officer ( TPO ) to reassess the intra-group service payments and determine the arm's length price ( ALP ) after the assessee failed to provide sufficient evidence to substantiate its claim.

Decathlon Sports India Private Limited,appellant-assessee,is a subsidiary of Decathlon, France, engaged in trading sports goods. It imports goods from associated enterprises ( AEs ) and third-party vendors for resale in India.

The assessee filed a return on 13.2.2021 at Rs. NIL, which was selected for scrutiny based on transfer pricing risk parameters. A notice under section 143(2) was issued on 29.6.2021. Due to international transactions, the assessing officer referred the case to the TPO on 03.12.2021.

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The assessee used intra-group services worth Rs. 33,24,39,508, including IT support and software from Decathlon France, paying Rs. 32,98,93,858 to the French entity and Rs. 25,45,652 to a Chinese entity. The assessee claimed the payments were at arm's length, using the "Other Method" for benchmarking.

The TPO questioned this approach and asked for evidence of the services, costs, and benefits. The assessee failed to provide sufficient details. As a result, the TPO rejected the method and concluded the arm's length price was Rs. Nil.

The assessee challenged the decision before the Dispute Resolution Panel ( DRP ), which upheld the TPO's view on 20.06.2024. It agreed that the intra-group charges of Rs. 33.94 crores could not be linked with other IT services due to a lack of details and confirmed the ALP as Rs. Nil.

The assessee’s representative argued that the TPO’s dual benchmarking led to double adjustments and  referencing  a ruling in ACIT v. Yokogawa India Ltd., stating that transactions analyzed under Transactional Net Margin Method (TNMM) should not be separately tested. The representative also asserted that tax authorities could not determine service requirements and requested a remand to present further evidence.

The Departmental Representative(DR) defended the decision, stating that payments were unjustified without proof of necessity, service rendition, or benefit. It was also argued that shareholder or duplicative service costs should be borne by the AE, and without proper allocation details, the arm’s length price could only be Nil.

Read More:Transfer Pricing Adjustment shall not be made on account of Intra-Group Services available from AE for Manufacturing & Trading Services, if proven with Documentary Evidences: ITAT

The two member bench comprising Soundararajan.K ( Judicial Member ) and Prashant Maharishi ( Vice President ) reviewed the case and found that the assessee failed to justify treating intra-group service transactions as interlinked with IT services. The transfer pricing study report did not support this claim, and the services were independent, requiring separate benchmarking.

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The assessee submitted an IT service and licensing agreement, but it did not mention other services or provide evidence of benefits received or cost allocation details. The TPO issued a show cause notice, but the assessee only described the services without proving actual costs or allocation methods. The DRP upheld the TPO’s decision, stating that without proper details, the arm’s length price was rightly determined at Nil.

The tribunal ruled that businesses would not pay for services that were unnecessary, not provided, or did not offer economic benefits. It restored the issue to the TPO, directing the assessee to prove that the services were necessary, rendered, and beneficial. The assessee was also required to submit cost allocation details. The TPO was instructed to verify the information and determine the arm’s length price as per the law.

To Read the full text of the Order CLICK HERE

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