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Facts
The assessee, engaged in manufacturing adhesive materials, filed its return of income for AY 2021-22. The TPO made an adjustment of Rs.28,46,56,870/- on account of intra-group services, holding their Arm's Length Price (ALP) to be nil.
Held
The Tribunal held that the TPO's use of a hypothetical CUP method was inappropriate, and similar issues for prior years were decided in favor of the assessee using the TNMM method.
Key Issues
Whether the TPO was justified in rejecting the TNMM method and applying a hypothetical CUP for benchmarking intra-group services, and whether the assessee's expenses were allowable.
Sections Cited
234A, 234B, 234C
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Income Tax Appellate Tribunal, “C’’ BENCH: BANGALORE
Before: SHRI WASEEM AHMED & SHRI PRAKASH CHAND YADAV
PER PRAKASH CHAND YADAV, JUDICIAL MEMBER:
Present appeal of the assessee is arising from the order of ld. AO dated 21.10.2024 for the AY 2021-22.
The assessee has raised 6 grounds of appeal, out of which ground No.1 is general in nature, which does not require any adjudication. Ground No.2 related to the challenge of validity of the assessment order being barred by limitation. However, at the time of hearing, the counsel for the assessee did not press this ground and hence this ground is dismissed as not pressed.
3. In ground Nos.3 to 5, the assessee has challenged the adjustments made by the ld. TPO qua various intra-group services
IT(TP)A No.2472/Bang/2024 Bostik India Private Limited, Bangalore Page 2 of 6 received by the assessee. In ground No.6, the assessee has challenged the levy of interest u/s 234A, 234B & 234C of the Income Tax Act, 1961 (in short “The Act”). It is settled position of law that levy of interest is mandatory and hence these grounds are decided accordingly.
Brief facts of the case as coming out from the orders of authorities below are that the assessee is a company and engaged in the business of making adhesive materials. For the impugned assessment year, it had filed its return of income electronically on 15.3.2022 declaring an income of Rs.47,67,36,960/-. Thereafter, the case of the assessee has been referred to the ld. TPO for computing the Arm’s Length Price (ALP) of international transactions executed by assessee during the year under consideration. During the course of transfer pricing proceedings, the ld. TPO took a view that the assessee failed to establish the rendition of intra group services as well as the benefits derived by the assessee from these services. Accordingly, the ld. TPO made an adjustment of Rs.28,46,56,870/-, holding that the ALP of the intra-group services would be nil.
Ld. DRP affirmed the view of the AO and thereafter the AO passed the final assessment order.
Aggrieved with the order of AO, the assessee has come up in appeal before us.
Ld. Counsel for the assessee reiterated the arguments made before the lower authorities and vehemently argued that the assessee has submitted all the documents with respect to the rendition of services as well as it is the contention of the ld. Counsel for the assessee further argued that the ld. TPO is not entitled for applying benefit test vis-à-vis expenses incurred by the assessee on account
IT(TP)A No.2472/Bang/2024 Bostik India Private Limited, Bangalore Page 3 of 6 of commercial expediency. Counsel for the assessee further pointed out that similar issue has been decided by the coordinate bench in assessee’s own case, referred to us by in the finding portion of this order.
Ld. D.R. relied upon the orders of authorities below.
After considering the rival submissions and perusing the materials available on record, we observe that similar issue has come up in assessee’s own case in IT(TP)A No.837/Bang/2016, IT(TP)A 626/Bang/2017 & IT(TP)A 2031/Bang/2017 dated 10.5.2022 for the assessment years 2011-12 to 2013-14 respectively, wherein the ITAT in its order has observed as under: “16. We have heard rival submissions and perused the material on record. The issue raised before the ITAT are as follows:-
Sl. Transactions AY 2013-14 AY 2012-13 AY 2011-12 No.
1. Nil Nil 19,97,000 Commercial services (IT Support services) 2. License 52,58,825 54,21,169 56,40,000 Technology Renewal fee 3. Management Fees 4,22,69,056 3,01,67,905 2,67,01,782 Total 4,75,27,881 3,55,89,074 3,43,38,782 16.1 We shall first adjudicate the payments made for Technology License renewal fees and management fees. With respect to the above two payments to AE, the choice of method of benchmarking, the assessee has considered TNMM as MAM and the TPO has considered `hypothetical CUP’ by rejecting TNMM. The basis of rejection of the method of benchmarking was by placing reliance on the ruling of ITAT Delhi Bench in the case of Knorr Bremse. (Refer TPO’s order at para 6.4 for A.Y.2011-12). The decision relied on by the AO / TPO was, however, carried in appeal to the Hon’ble High Court and the Hon’ble High Court vide judgment dated 06.11.2015 remanded the matter to ITAT for reconsideration, whether the transaction ought to be benchmarked separately or whether TNMM could be adopted. The Delhi Bench of the ITAT in 2011 (order dated 31.05.2018) (Refer page 556 to 575 of the paper book-3 of A.Y. 2013-2014) ruled in favour of the assessee upholding TNMM for benchmarking license fee and Management Fee. Further, the ITAT Delhi Bench for subsequent years, i.e., A.Y. 2008-09, 2009-2010 and for A.Y. 2010-2011 (page 622 to 658 of the paper book- 3) in the case of the same assessee, concluded that in the absence of proper
IT(TP)A No.2472/Bang/2024 Bostik India Private Limited, Bangalore Page 4 of 6 benchmarking being available in the public domain for the CUP method, TNMM would be the most appropriate method for benchmarking of license fee and management fee.
16.2 The subject payments (Management fee and Technology License Renewal Fee) are incurred with respect to the manufacture of industrial adhesives. It is undisputed that the assessee is engaged only in the manufacture, and marketing and therefore dependent on its group companies for intellectual property, skills, expertise, know-how, specialization and technology which are developed in-house by the group in all core areas of its business, benefits also the assessee in the form of consistency in business practice, the economics of scale with regard to global sourcing. The process improvements are also passed on by the group companies to the assessee and same is evident from facts on record. The subject payments are duly supported by agreements which details the nature of services performed by the associated enterprises to the assessee company. Given the above factual background, we find that the management fee and technology license fee are interlinked and interconnected with the business of manufacture.
16.3 The TPO /DRP in their order has expressed an inability to compute the ALP using CUP due to a lack of information in the public domain. Given the difficulty / impossibility in computing ALP using CUP and considering the close nexus between the manufacturing activity and payment of management / license fees, the method to be adopted for benchmarking the above international transactions by the assessee ought to be TNMM. The TPO is accordingly directed to consider TNMM as MAM for determination of ALP for payment of license and management fees.
16.4 The learned DR submitted that the order of the TPO as upheld by DRP has to be followed as the payments are made for continued services and the same has been availed by the assessee in the preceding years for which payments have not been made. He also highlighted that there is no change in the FAR profile of the assessee. It was also stated that the assessee has failed the service rendition test. Similarly, submissions were made with respect to payment of `Technology license renewal fee’ that the trademark was registered in 1986 and no payment was made towards it till A.Y.2011-2012. In this regard, we will follow the ruling of the coordinate bench in the case of Dresser Rand India Pvt. Ltd. in wherein it had been held that “the fact that the assessee has availed services in the preceding years without any consideration or not is irrelevant. `The AE may have given the same service on gratuitous basis in the earlier period, but that does not mean that ALP of these services are Nil’. The contention of the TPO that the assessee has not submitted the documentary evidence for the benefit received on account of services rendered is factually incorrect in view of voluminous evidences filed as a paper book. The assessee has also submitted a detailed note explaining the benefits received on account of payment of license and management fees. The TPO and the DRP have failed to consider the same in an objective manner. The Delhi High Court in CIT v EKL Appliances Ltd [2012] 24 taxmann.com 199 held that so long as the expenditure or payment has been demonstrated to have been incurred or laid out for the purpose of business, it is no concern of the TPO to disallow the same on any extraneous reasoning. The IT(TP)A No.2472/Bang/2024 Bostik India Private Limited, Bangalore Page 5 of 6 TPO and the DRP in the present case have summarily rejected the evidences and submissions of the assessee on the 'benefit test' without bringing on record any contrary material. The TPOs reasoning of constructing a hypothetical CUP based on the study of thirdparty scenario is not envisaged as per the benchmarking exercise laid out in rule 10B. The TPO has also not explained the basis or reasoning in support of his impugned conclusion that no third party would make payment for services in a hypothetical CUP. The orders passed by the lower authorities therefore cannot be sustained.
16.5 As regards payments made for commercial service (IT support services), the issue pertains to only A.Y. 20112012 (see ground 8). The assessee has submitted that the cost allocation is on the basis of a number of IT users, i.e., head count. Since centralized IT services of the TOTAL group are distributed among all divisions, subsidiaries and associates who use this facility, the basis of cost allocation is reasonable and cannot be faulted. In addition to listing the services availed, the assessee has also furnished copies of invoices evidencing payments to the AE. The AR for the assessee invited our attention to the DRP directions for the A.Y. 2012-2013 and 2013-2014, wherein relief has been allowed considering the above basis to be the scientific basis of cost allocation. We direct the TPO to consider the above evidence, and if the facts remain the same as in the case of subsequent years, allow appropriate relief to the assessee. It is ordered accordingly.
In the result, the appeals filed by the assessee are allowed for statistical purposes.”
9.1 Perusal of the above order would show that the ld. TPO has invented a new formula in computing the ALP by applying hypothetical CUP method in those years also, which were there before the ITAT. In the present case also, ld. TPO has applied hypothetical CUP for arriving at the conclusion that the ALP of the intra-group services would be nil and the method applied by the assessee i.e. TNMM is not correct method. We further find that reading of para 16 of the order of ITAT, quoted above in the table, would prove beyond doubt that similar services were also in dispute in those years. Therefore, we are of the view that since facts of the case are pari-materia with those years which are already decided by the ITAT, we are allow the appeal of the assessee following the order of the coordinate bench for AYs 2011-12 to 2013-14. Before parting,
IT(TP)A No.2472/Bang/2024 Bostik India Private Limited, Bangalore Page 6 of 6 it would be worthy to note that while giving order effect, consequent to the order of ITAT, the ld. TPO vide order dated 7.2.2025 has allowed the claim of the assessee with respect to the intra-group services expenses.
In the result, appeal of the assessee stands allowed.
Order pronounced in the open court on 16th June, 2025