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Facts
The assessee, an Indian subsidiary of Caterpillar Inc., paid ₹10,78,94,831 to its Associated Enterprises (AEs) for intra-group business support services. The Assessing Officer (AO) and Transfer Pricing Officer (TPO) disputed the arm's length nature of these payments, alleging lack of benefit and documentation.
Held
The Tribunal observed that the assessee failed to substantiate the actual receipt and benefit of services. While the assessee argued for TNMM method, the TPO rightly applied the CUP method. The Tribunal upheld the TPO's decision to treat the ALP as Nil due to insufficient evidence of services rendered and tangible benefits.
Key Issues
Whether the TPO was justified in rejecting the TNMM method and adopting the CUP method, and subsequently determining the ALP of intra-group services as Nil due to lack of substantiation of services received and benefits derived.
Sections Cited
92CA, 92, 10B(1)(a), 10B(1)(e)
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Income Tax Appellate Tribunal, ‘B’ BENCH, BANGALORE
Before: SHRI WASEEM AHMED & SHRI SOUNDARARAJAN K
PER WASEEM AHMED, ACCOUNTANT MEMBER:
The appeal filed by the assessee is against the Final Assessment order dated 27/06/2024 in DIN No. ITBA/AST/S/143(3)/2024-25/ 1066124976(1) for the assessment year 2020-21.
2. The interconnected issue raised by the assessee is that the AO/TPO/DRP erred in determining the ALP at NIL value of the international transaction representing business support services.
3. The facts in brief are that the assessee, a private limited company incorporated in India on October 5, 2018, under the Companies Act,
IT(TP)A No.1621/Bang/2024 Page 2 of 14 2013, is an indirect subsidiary of Caterpillar Inc., a company based in the USA. The assessee is engaged in providing financing to customers in the Indian market for Caterpillar's earthmoving, construction, industrial equipment, and power systems.
4. During the relevant financial year, the assessee entered into various international transactions with its associated enterprises (AEs). Consequently, the AO referred the matter to the Transfer Pricing Officer (TPO) under section 92CA of the Income Tax Act.
The TPO found that the assessee made a payment of ₹10,78,94,831 towards cost contribution to the AE for intra-group services. The TPO based on the assessee’s submission found that the expenses were incurred at group level and thereafter allocated to different company of the group based on capital employed, tangible fixed assets, net sales and blended average of net sales. The assessee has benchmarked the transaction at entity level by applying TNMM Method and accordingly claimed the same at ALP.
5.1 The TPO after considering the materials available, OECD Guidelines, UN Transfer pricing guidelines and considering treatment of the intra group services in countries such as Australia, Canada, France, Germany, USA, Nigeria etc has observed that the application of the ALP is crucial in determining whether the charges paid by the taxpayer for intra-group services are justified. The TPO emphasizes that the charges paid by the assessee must reflect that would have been levied between independent parties under comparable circumstances. It is essential to assess whether the services provided confer a direct and substantial economic or commercial benefit to the recipient, as an independent .
IT(TP)A No.1621/Bang/2024 Page 3 of 14 entity in similar circumstances that the parties would only be willing to pay for such services if they derive a tangible advantage.
5.2 The taxpayer must establish that the services were actually rendered and that the benefits obtained are commensurate with the payments made. Merely describing the services does not suffice; proper documentation and evidence must substantiate the claim. If no benefit is derived or expected to be derived, the payment of service charge cannot be justified. Additionally, if the entity receiving the services could have performed them internally or would not have paid to an independent entity for the same, then the charge is deemed unjustified.
5.3 The TPO also noted that the determination of an ALP charge should consider not only the cost of providing the service but also the recipient’s willingness to pay for such services. When expenditure is incurred for the benefit of the group as a whole, the cost should not be allocated to a single entity unless a direct benefit is demonstrated. Expenses related to stewardship or shareholder activities should not be charged, and duplicate services should be avoided. Therefore, the payment for intra-group services shall be treated Arm’s Length only when it is substantially proved that such services were actually received, and that the taxpayer derived a direct benefit. If these criteria are not met, the Arm’s Length Price of such payments may be treated as either nil or reduced accordingly.
5.4 The TPO further observed that the assessee was asked to prove that services were actually rendered by the AEs to justify payment of intra-group charges but failed to provide tangible evidence, such as: o Clear documentation of costs incurred.
IT(TP)A No.1621/Bang/2024 Page 4 of 14 o Basis for quantification of service value. o Adequate records to verify indirect costs.
5.5 The TPO also observed that the payment was made based on allocation of expenses in the ratio of capital employed, fixed and net sales etc meaning thereby that the payment was not made for actual rendering of services and consequentially no commensurate benefit was received by the assessee. The TPO was of the view that expenses incurred at group level was in the nature of stakeholder activities to promote the interest of group standard. Therefore, there was no requirement for separate payment for intra group services.
5.6 The TPO found that that assessee has submitted invoices, transfer pricing reports, and service details in response to the Show Cause Notice and classified expenses into administrative and technical assistance services. However, assessee’s documentation did not sufficiently justify the payments, as they did not clearly establish a direct benefit to the Indian entity. No substantial documentary evidence was provided to prove that these services led to an increase in sales revenue. Further, the assessee’s Employee Benefit Expenses in India were already high (₹9,49,28,000 in salaries), despite assessee paying AE more than the employee benefit expenses on account intra group services. The TPO found that most of the services provided were general training, accounting support, and system adoption. No specific evidence was found proving that these services led to profit enhancement for the Indian entity. Instead, these services appeared to benefit the AE rather than the assessee. Thus, the assessee failed the "Benefit Test" under OECD and UN guidelines. Accordingly, the ALP determination is unnecessary.
IT(TP)A No.1621/Bang/2024 Page 5 of 14 5.7 The TPO further observed that each class of transaction must be analyzed separately rather than applying a broad-based TNMM at the enterprise level. While TNMM is suitable for certain cases, it does not automatically mean that all transactions within an enterprise are at arm’s length. Instead, specific transactions such as management fees, intra- group fees, and professional expenses must be analysed separately using appropriate methods like the Comparable Uncontrolled Price (CUP) method. Accordingly, the TPO rejected the assessee argument that the intra group services fees transaction is at ALP as the same is aggregated under TNMM. The TPO in holding so referred the various decision of ITAT specifically, the ITAT Delhi bench ruling in case of Knorr Bremse India Pvt. Ltd. vs. ACIT (reported in 27 taxmann.com 16) and reinforced that each international transaction with an associated enterprise should be benchmarked separately, and cross-subsidization of high and low- priced transactions is not allowed. Thus, the TPO held that the fee for intra group services require a distinct analysis under the CUP method.
5.8 In view of the above observation, the TPO finally concluded that the assessee failed to demonstrate the actual receipt of services from its AE for which a payment of Rs. 10,78,94,831/- was made. No substantial or tangible commercial benefit was proved by the assessee, and no credible documentation was provided to justify the nature of services rendered. The TPO, using the CUP method, determined that no third party would have made such a payment under similar circumstances. Consequently, the ALP of the intra group business support service charges was determined as NIL, leading to a complete adjustment of Rs. 10,78,94,831/- under section 92CA of the Act.
IT(TP)A No.1621/Bang/2024 Page 6 of 14
Aggrieved assessee preferred to file objections before the ld. DRP.
The appellant assessee before the learned DRP submitted that it (CFSIPL), is a part of the Caterpillar Group and began full-fledged operations in FY 2019-20 India. As a part of the Caterpillar Group's centralized service model, it availed essential business support services from multiple overseas AEs, including Caterpillar Financial entities in China, Australia, Singapore, and the U.S. These services encompassed Accounting, Legal, HR & Recruitment, Treasury & Risk Management, and Marketing & Business Development, which were critical for efficient business operations.
The TPO, however, erroneously concluded that the appellant failed to substantiate the services received from AEs and determined the ALP as NIL. The assessee strongly refutes this conclusion, arguing that extensive documentary evidence was provided, which included the following: • Copy of invoices substantiating payments made to AEs.
• Copy of intercompany agreements outlining service arrangements. • Extract copy email correspondences evidencing ongoing service requests. • Copy of service tickets demonstrating actual services availed. • Business presentations detailing training, workflow, and progress.
• Operational improvements showcasing increased efficiency due to these services.
IT(TP)A No.1621/Bang/2024 Page 7 of 14
The assessee further highlights the significant benefits derived from these support services, categorizing them into distinct operational areas which are detailed as under: 1. Human Resource Services – The centralized recruitment function provided access to highly qualified candidates, standardized HR policies, and compliance with labor regulations, leading to better performance monitoring and talent management.
2. Information Technology (IT) Services – The integration of IT infrastructure enhanced efficiency, reliability, security compliance, and minimized operational disruptions through global support.
3. Legal Support Services – The centralized legal team helped in contract drafting, litigation strategy, compliance with RBI and taxation laws, and ensured adherence to ethical business practices.
Accounting & Finance Services – The appellant benefitted from budget monitoring, financial modelling, credit analysis, and SOP implementation, reducing duplication of efforts across business units.
5. Overall Commercial Benefits – The appellant successfully achieved cost savings, improved service execution, operational efficiency, and access to specialized expertise through the centralized service model.
Besides the above the assessee also provided key financial indicators demonstrating the impact of business support services on revenue growth, profitability, and loan portfolio expansion, as illustrated below:
IT(TP)A No.1621/Bang/2024 Page 8 of 14
FY 2019- FY 2020- FY 2021- Parameter 20 21 22 Revenue from Operations (₹ 69,442 4,30,183 7,88,947 in ‘000) Growth YoY (%) - 519.49% 83.40% Profit/(Loss) Before Tax (₹ in (2,82,130) 50,102 -75,342 ‘000) Loan Portfolio (₹ in ‘000) 15,47,343 68,33,112 93,96,241 Growth YoY (%) - 341.60% 37.51%
On the strength of the above figures the assessee contended that there was direct business impact of the intra group support services, thereby disproving the TPO’s assertion that no benefit was derived.
The appellant contended that the TPO has wrongly applied the “benefit test,” which is not within its legal authority under the Act. By questioning the commercial rationale behind the appellant’s business decisions, the TPO has exceeded its jurisdiction (ultra vires). The appellant provided substantial proof of services rendered and benefits received, but the TPO incorrectly categorized these as stakeholder activities instead of business support services.
Additionally, the appellant had conducted a transfer pricing study through an independent consultant, who thoroughly analysed functions, risks, and assets and determined the ALP using the Transactional Net Margin Method (TNMM) as the Most Appropriate Method (MAM) in accordance with section 92 of the Income Tax Act. However, the TPO arbitrarily rejected TNMM and adopted the Comparable Uncontrolled .
IT(TP)A No.1621/Bang/2024
Page 9 of 14 Price (CUP) method without providing any cogent reasons. Furthermore, the TPO failed to present any comparable independent transactions or empirical evidence to justify the NIL ALP determination, making the analysis unreliable.
Relief Sought from the DRP
Given the flawed analysis and arbitrary approach taken by the TPO, the appellant requests the Learned DRP to: 1. Reject the TPO’s approach in disallowing the business support services.
Restore TNMM as the Most Appropriate Method (MAM) for determining the ALP.
Reverse the NIL ALP adjustment of ₹10,78,94,831/-, recognizing the legitimate business support services received.
14.1 The appellant strongly asserts that the TPO’s determination lacks legal standing and fails to consider the substantial evidence provided, thereby warranting an appropriate correction by the Learned DRP. However, the learned DRP rejected the contention of the appellant by observing as under: 2.2.4 The business support service charges paid by the assessee to its AE is a distinct and separate international transaction. The payment is made in the form of Business support services is a class of its own and requires separate benchmarking analysis. The TNMM method is not the MAM for benchmarking this transaction. As per rule 10B(1)(e) the TNMM is applied in the cases where the net profit margin realised by the enterprise from an international transaction entered into with an Associated enterprise is computed in relation to costs incurred or sales effected or assets employed or to be employed by the enterprise or having regard to any other relevant base. The net profit margin realised by the enterprise or by an unrelated enterprise from a comparable uncontrolled transaction or a number of such transactions is computed having regard to the same base.
IT(TP)A No.1621/Bang/2024
2.2.5 The TPO has rightly selected comparable uncontrolled price method (CUP) under rule 10B(1)(a). Under CUP method the price charged or paid for services provided in a comparable uncontrolled transaction or a number of such transactions is identified. Such price is adjusted to account for difference if any between the international transaction and the comparable uncontrolled transaction which would materially affect the price in the open market. The adjusted price arrived at is taken to be an Arm’s Length Price in respect of services provided in the International Transaction. The TPO has taken CUP method for benchmarking the transaction using the benefit test. The Most Appropriate Method for determination of ALP of this transaction of the assessee is concerned is an expense transaction and therefore, CUP would be the MAM. 2.2.6 Further, we note that as the assessee failed to substantiate receipt of services, and also failed to demonstrate the economic and commercial benefits on account of these payments, the question of commercial expediency does not arise and accordingly, we do not find infirmity in the TPO’s action to determine the ALP at NIL, by way of hypothetical CUP; as this is not a case where services have been provided but the TPO determined the ALP at NIL. An independent enterprise would not make payment for services that have been neither received nor any economic or commercial benefit accrued to the enterprise. We note that the ALP determination has been made taking into consideration what an independent enterprise would do when it had not availed the services or when it had not availed any commercial or economic gain. We find support for such a view in the decisions of the Bangalore ITAT in the case Cranes Software (52 taxmann.com19); Mumbai ITAT in Deloitte Consulting (22 taxmann. Com 107) and of the Kerala High Court in the case of MIL Controls Limited. The observation in these cases are relevant for discussion here under:- Cranes Software [52 taxmann.com19 (Bangalore - Trib.)] (the relevant Paras) **************************** Deloitte Consulting {22 taxmann.com 107 (Mumbai)} (the relevant Paras) ************************* Hon’ble High Court of Kerala ( 20 taxmann.com 813 in the case of MIL Controls Ltd ************************* 2.2.7 We have also noted that in the case of Gemplus India (P) Ltd. [2010] 3 taxmann.com 755 the Hon'ble ITAT, Bangalore has held that the expenses were apportioned by Singapore affiliate among different country centres on basis of their own agreements and not on basis of actual services rendered to individual unit. It was very imperative on part of assessee to establish before TPO that payments were made commensurate to volume and quality of services and such costs were comparable. Since there were no details available on record in respect of nature of services rendered by Singapore affiliate to assessee company, TPO was justified in making adjustment of ALP holding that ALP of the said transaction is ‘Nil’. 2.2.8 Again, in the case of Herbalife international India (P.) Ltd. [2017] 81 taxmann.com 178 (Bangalore - Trib.), the Hon'ble Tribunal held that where assessee had only described nature of technical know-how and administrative services received but did not conclusively prove that it actually received same, Assessing Officer was justified in adopting ALP in respect of payment of administrative services and royalty at Nil.
IT(TP)A No.1621/Bang/2024
2.2.9 In view of the above discussion, the Panel finds that the TPO has rightly rejected the TNMM as Most Appropriate Method and selected Comparable Uncontrolled Price Method. Further, as the assessee failed to prove the rendition of alleged services to it by the AE, the tangible benefits that accrued to the assessee from the so-called services and in view of the judicial pronouncements discussed above, we uphold the decision of the TPO to consider the ALP at NIL for the concerned International Transaction. Accordingly, this ground of objection is hereby rejected.
Being aggrieved by the direction of Ld. DRP and assessment order, the assessee is in appeal before us.
The learned AR before us filed a paper book running from pages 1 to 1516 and submitted that the expenses incurred on business support services was at arm length on comparison with the foreign companies comparables engaged in similar line of activity. To this effect, the learned AR drew our attention on page 185 of the paper book. The learned AR also drawn attention on page 1090 of the paper book wherein the assessee vide letter dated 31 May 2023 has made detailed representation justifying the arm length price of the business support services. As per the learned AR, there was growth in the business operation of the assessee on account of availing the business support services from the AE and filed a comparative chart of different assessment years placed on page 1103 of the paper book. As per the ld. AR, in earlier years, similar expenses claimed by the assessee were not disturbed by the revenue. As per the Ld. AR there were actual business support services received by the assessee which are evident from the invoices placed on pages 1137, 1440 and 1150 of Paper book besides the exchange of emails.
On the other hand, the learned DR submitted that the assessee could not demonstrate whether the services were actually received by .
IT(TP)A No.1621/Bang/2024 Page 12 of 14 the assessee. In the absence of such documents, the learned DR supported the order of the authorities below but raised no objection if the issue is set aside the issue to the file of the TPO for fresh adjudication as per the provisions of law.
We have heard the rival contentions of both parties and perused the materials available on records. From the preceding discussion, we note that during the relevant financial year, the assessee entered into various international transactions with its AE, including payment for intra-group services. The payment for intra-group services was disputed by the TPO. As such the TPO rejected the appellant’s working of benchmarking of Intra Group service charges aggregating with other transactions using TNMM and determined the ALP of the same at NIL (₹0), after applying the CUP method. The TPO concluded that the appellant failed to substantiate the receipt of services and benefit of services and observed that the allocation of costs appeared formulaic. The view of the TPO was also confirmed by the ld. DRP. Now, the issues which needs to be addressed are as below:
1. 1. Whether the transaction in dispute can be aggregated with other transactions for computing the ALP in the given facts and circumstances.
2. Whether the TPO was justified in rejecting the TNMM as the Most Appropriate Method (MAM) and adopting the CUP method.
3. Whether the TPO was correct in determining "Nil" ALP for the management charges.
4. Whether the appellant sufficiently demonstrated the receipt of services and their benefits against the actual services. .
IT(TP)A No.1621/Bang/2024 Page 13 of 14 18.1 While determining the Arm’s Length Price (ALP) of international transactions under transfer pricing regulations, aggregation of transactions is often necessary provided transactions are closely linked functionally or economically. Likewise, transactions of similar type (e.g., sale of goods, services, intangibles) can be aggregated.
18.2 However, unconnected transactions refer to international transactions between associated enterprises (AEs) that lack economic, functional, or contractual interdependence. These transactions do not influence each other and, therefore, cannot be aggregated for determining the Arm’s Length Price (ALP). In the case on hand, the transaction being management support services is separate and independent to the other international transactions of the assessee, therefore the same cannot be aggregated with other transaction for working out the ALP.
Regarding question Nos. 2, 3, and 4 we note that the assessee applied TNMM after aggregating all the transactions which is a widely accepted method under Rule 10B of the Income Tax Rules. The TPO, however, applied the CUP method for determining the ALP of the transaction on hand. But the TPO found that there was no service received by the assessee and accordingly the TPO has taken NIL value of the transaction on hand. In this regard, we note that the assessee was to demonstrate the actual services received before making claim in the profit and loss account. Simply filing the Master agreement, statement of work, invoice of the AE and few emails by the assessee do not ipso facto establish the fact of receiving of services from the AE. Moreover, it has been held by the lower authorities that the impugned business support charges represent the allocation of the cost which is .
IT(TP)A No.1621/Bang/2024 Page 14 of 14 nothing but the shareholders services. There is lack of supporting documents to draw the conclusion whether the impugned cost is an allocation of cost or represents the services availed by the assessee. In this backdrop, we are inclined to restore the issue to the file of the TPO for fresh/ de-novo adjudication as per the provisions law without getting from influenced from the above discussion. Hence, the ground of appeal of the assessee is allowed for statistical purposes.
In the result, the appeal of the assessee is allowed for statistical purposes.
Order pronounced in court on 4th day of February, 2025