TPO’s Disregard of Receipt of Intra-Group Services Cannot Replace Sec. 92C Analysis: ITAT Remands ₹5.66 Cr Disallowance [Read Order]

The Income Tax Appellate Tribunal (ITAT), Pune Bench, held that a Transfer Pricing Officer's (TPO) disregard of receipt of intra-group services cannot substitute for the statutory requirement under Section 92C to use prescribed methods to determine the arm’s-length price (ALP) and accordingly remanded the disallowance of ₹5.66 crore.

The assessee, Sempertrans India Private Limited, is a wholly owned subsidiary (99.99%) of Semperit Aktiengesellschaft Holding (SAH). The assessee filed a return declaring nil income for Assessment Year (AY) 2020-21. The AO referred two international transactions to the TPO for ALP determination under Section 92CA.

The dispute arose from transfer pricing adjustments made in respect of intra-group service payments by the assessee to its associated enterprises (AE). The TPO questioned the actual receipt of such services, observing that the assessee failed to demonstrate the benefits derived.

On this basis, the TPO determined the ALP for the intra-group services at nil and proposed an adjustment of ₹5,66,05,177. The Dispute Resolution Panel (DRP) sustained this adjustment, directing the AO to make a disallowance and assess the total income at ₹5,66,75,608, leading to the present appeal.

The appellant argued that the ALP of the intra-group services had been determined using the Transactional Net Margin Method (TNMM) and that the services were duly received and were integral to its business operations. The assessee further submitted that adequate documentation had been maintained, including agreements, invoices, and supporting evidence, to substantiate the receipt of services.

They also relied on CLSA India Pvt. Ltd. v. DCIT (2019), which held that the TPO was bound under Section 92C to determine the ALP by applying one of the prescribed methods and that ad hoc determination of nil ALP without reference to Section 92C was not sustainable.

On the other hand, the Revenue supported the DRP order, contending that the assessee had failed to establish either the actual receipt or rendition of services by the AE. They further submitted documents such as the service agreement, statement of allocation of services, and invoices, which were self-generated instruments, merely a paper trail to justify the claim. The Revenue maintained that the burden of proof lies on the assessee to demonstrate that services were rendered, which was absent; the TPO was justified in determining the ALP at nil.

The Tribunal, comprising a bench of Manish Borad (Accountant Member) and Astha Chandra (Judicial Member), observed that the TPO had not applied any of the methods prescribed under Section 92C for determining the ALP.

Instead, the adjustment was made solely based on alleged non-receipt or lack of benefit from the services of AE. The Bench observed that all services claimed by the assessee were directly linked to its day-to-day business operations, and audited accounts revealed no duplication of expenditure under any head.

The Tribunal further observed that although the assessee has furnished evidence of receipt of services, the TPO didn’t examine it to determine the ALP under a prescribed method in Section 92C. Further, the TNMM-based analysis submitted by the assessee remained unexamined as well, and the matter was restored to TPO for fresh ALP determination.

Accordingly, the appeal was partly allowed for statistical purposes.

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