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Facts
The assessee company appealed against the Final Assessment Order. The primary issue involved a payment of Rs. 27,89,936/- by the assessee to its Associated Enterprise (AE) for 'Management Fees'. The Assessing Officer (AO) and Dispute Resolution Panel (DRP) disallowed this payment, determining its Arm's Length Price (ALP) to be Nil, and consequently increased the taxable income. The assessee also challenged an addition of Rs. 37,013/- related to interest income.
Held
The Tribunal set aside the final assessment order concerning the management fees and restored the matter to the file of the AO/TPO for fresh adjudication. The assessee was given an opportunity to present evidence. The appeal related to the addition of Rs. 37,013/- was allowed, directing the AO to verify the assessee's claim regarding the reduction of electricity expenses.
Key Issues
Whether the management fees paid by the assessee to its AE were for services actually rendered and at Arm's Length Price, and whether the addition of Rs. 37,013/- as income was justified.
Sections Cited
Section 143(3), Section 144C(13), Section 144B, Section 92CA
AI-generated summary — verify with the full judgment below
Income Tax Appellate Tribunal, DELHI BENCH, H: NEW DELHI
Before: SHRI YOGESH KUMAR US & SHRI BRAJESH KUMAR SINGH
This appeal has been preferred by the assessee against the Final Assessment (hereinafter referred to as FAO) Order dated 20.09.2024 passed by the Assessing Officer (AO) under Section 143(3) read with Sections 144C(13) and section 144B of the Income-tax Act, 1961 (“the Act”), pursuant to the directions of the Hon'ble 1
ITA No.- 4925/Del/2024 OSG (India) Pvt. Ltd. Dispute Resolution Panel (DRP) order dated 28.08.2024 for the Assessment Year 2021-22.
1.1 Ground no. 1.1 of the appeal is general in nature and no specific submission has been made. Accordingly, this ground is dismissed.
Brief facts of the case: The return of income for A.Y. 2021-22 was filed by the assessee on 07.03.2022 declaring total income at Rs.9,85,29,547/-. The Company is engaged in the sale of a wide variety of tungsten solid carbide metal cutting tools, end mills, etc. by importing them from associated enterprises and selling them to non-associate enterprises.
The CASS reasons in this case were as under:
(i) High risk Indian Constituent Entity (CE) of an MNE or (ii) Indian CE of a high risk MNE or (iii) Transaction has been carried out with an entity in a jurisdiction identified as high risk and the assessee has filed Form 3CEB.
3.1 In view of the CASS reasons, the case was referred by the AO to the TPO.
3.2 During the year, the TPO noted that the assessee company had entered into the following international transactions/ with its Associated Enterprises (AEs):
ITA No.- 4925/Del/2024 OSG (India) Pvt. Ltd. S. No. International Amount (INR) Most Transaction Appropriate Method 1. Import of consumable 16212781 TNMM and raw materials 2. Import of finished 189157950 goods 3. Export of manufactured 9697933 goods 4. Commission Income 6838613 5. Management Fees 2789936 6. Import of machineries 21953 Other method 7. Foreign technician 1392828 expenses / job work/ others 8. Reimbursement of 8244887 expenses 3.3 The TPO noted that the assessee had paid a sum of Rs. 27,89, 936/- to its AE on account of ‘Management fees’. The TPO noted that as per OECD guidelines primarily the assessee had failed to substantiate that any services have been rendered by the AE for which management fee was paid and thus, the availing of services itself remains unsubstantiated. The TPO, after going through all the facts of the case issued a show cause notice dated 13.10.2023 to the assessee on the issue of Intra group services (Management Fees) of Rs. 27,89,936/-.
ITA No.- 4925/Del/2024 OSG (India) Pvt. Ltd. 3.4 Further the TPO noted that assessee had failed to provide the basis of cost allocation by AE and failed to demonstrate the authenticity of the Group policy for cost-allocation. Thus, the first to arm's length determination of these services was not fulfilled as the assessee was unaware of the costs to the AE in providing the purported services. The TPO further noted that also, the assessee had not given any analysis for what a comparable independent enterprise would have paid for such services in comparable circumstances. Thus, the AO observed that therefore, for the want of these evidences, the assessee was not able to prove the arm's length nature of this transaction.
3.5 The TPO further noted that the taxpayer had also not been able to show as to when and how the various services were requisitioned from the AEs, whether the services were actually needed by it, what benchmarking analysis was done, what cost benefit analysis was done particularly when a huge payment has been made by it to the AEs 3.6 Further, the TPO noted that the assessee submitted the group TP policy in response to notices by this office and reproduced the one-page document as under:
ITA No.- 4925/Del/2024 OSG (India) Pvt. Ltd.
3.7 From the document, the TPO noted that it was clear that only general share holder services such as investment in the share capital, non-charging of the dividend and directions of business policy of OSI by the key management have been given as ITA No.- 4925/Del/2024 OSG (India) Pvt. Ltd. the reasons for charging the management fee and it was nothing but shareholders services and hence no management fee was warranted.
3.8 Further, the TPO noted that the document also mentioned that management fee was to be charged based on Japanese Tax authority direction which further substantiated that it was nothing but shifting of profit from one jurisdiction to another.
3.9 The TPO relied upon the order of the ITAT Bangalore Bench in the case of M/s Gemplus India Pvt. Ltd. vs. The Asst. Commissioner of Income-tax in ITA No.- 352/Bang/2009 for Assessment Year 2003-04 [TS-100-ITAT-2010(Bang)], which inter-alia held that to satisfy the arm's length standard, a charge for intra group services or intangibles must at least meet the following conditions
The intragroup services or intangibles have actually been received The need for intra group services or intangibles is established. The benefit from intragroup services or intangibles is commensurate with the charge 3.10 Further, the TPO relied upon the order of the ITAT Delhi Bench in the case of M/s GE Money Financial Services (P.) Ltd. [2016] 69 taxmann.com 420 (Delhi - Trib.) which after considering the judgment of Hon'ble Delhi High Court in case of ITA No.- 4925/Del/2024 OSG (India) Pvt. Ltd. Cushman and Wakefield [2014] 46taxmann.com317(Delhi) held that "The TPO can compute NIL ALP after conducting benefit test, need test and rendition test.”
3.11 The TPO concluded as under:
In view of the above, the discussion already made above is summed up as follows: In this case, the taxpayer has failed to substantiate that services have actually been rendered to it and benefit has actually been derived by it on the basis of documentary evidence. In support of its contention, the taxpayer has merely furnished copies of certain invoices. None of the above reproduced invoices establish the requirement/specific need of the taxpayer for their services, the benefit which has accrued to the taxpayer, or that an independent party would have been willing to pay another independent party for the services purported to be received by the taxpayer. The services received are incidental being in nature of long association. It is evident from facts stated above that the taxpayer did not file any evidence to support a claim that these services were actually provided to the taxpayer at its request to meet the specific need of the taxpayer and that certain tangible and concrete benefits have actually accrued to the taxpayer. Under uncontrolled circumstances any independent enterprise having skilled and sufficiently trained manpower would not have been willing to pay any third party to do so. Thus, the services which are incidental or mere duplicity do not fall in the category of intra group services. However, without prejudice to the above discussion, it may not be impossible, however, for a group member to benefit incidentally from services being provided to one or more fellow affiliates. For example, in this case, the taxpayer might be benefited from services rendered by AE in general to its other AEs. However, such incidental benefits do not give rise to Intra Group Services and cannot be regarded as giving rise to arrangement subject to arm's length pricing as stipulated in OECD TP guidelines paragraph 7.13 under Chapter VII. These findings lead to an irresistible conclusion that payments for management services allegedly provided by the AEs are not at arm's length price. Moreover, it is seen from the details contained in the transfer pricing report of the taxpayer that the taxpayer had not conducted FAR analysis in regards to these alleged services and had failed to justify the functions performed by the AE for these payments. This is probably a reason that the receipt of alleged services has not been benchmarked under any of the five-method prescribed under the Act in the Transfer Pricing report. Furthermore, the taxpayer has at the time of requisitioning the so-called services, not carried out any cost- benefit analysis at its end. No independent party would agree to incur expenditure without independently ascertaining the value of the goods/services intended to be availed, in the market and that too at the best 7
ITA No.- 4925/Del/2024 OSG (India) Pvt. Ltd. negotiated prices. No such effort has been demonstrated to be made at the end of the taxpayer, which weighs heavily against the normal practices of business prudence. In the case of M/s Gemplus India Pvt. Ltd, which is a part of the Gemplus group, the company entered into intra group management services agreement for receipt of services in marketing and sale support and customer service support, finance, accounting and administration support and legal support. The TPO found there was no clear proof that such services had actually been rendered. Gemplus India Pvt. Ltd. had not established the benefit of these services and had already incurred expenses towards professional and consultancy services and employed qualified personnel in India for rendering similar services. The ITAT in its decision [TS-100- ITAT-2010(Bang)], held that to satisfy the arm's length standard, a charge for intra group services or intangibles must at least meet the following conditions The intragroup services or intangibles have actually been received The need for intra group services or intangibles is established. The benefit from intragroup services or intangibles is commensurate with the charge The ITAT Delhi has held in case of M/s GE Money Financial Services (P.) Ltd. [2016] 69 taxmann.com 420 (Delhi - Trib.) after considering the judgment of Hon'ble Delhi High Court in case of Cushman and Wakefield [2014] 46taxmann.com317(Delhi) that "The TPO can compute NIL ALP after conducting benefit test, need test and rendition test. The benefit test is necessary part of determining arm's length price of any international transaction. This is so because if there is no need of any services (i.e. need Test), it would not be paid by the independent parties. Similarly, if the service sare not rendered (rendition test), independent parties will definitely not pay for it, and thirdly if the services though required and are rendered but are not beneficial to the receiver (benefit test) then naturally the independent parties will not pay for such services. Similarly, the services, which one already is availing, independent parties may not pay for it as it amounts to redundancy. Therefore, as the TPO is only empowered to determine arm's length price of international transaction, as per provision of section 92(2) he is required to consider all the above aspects of the services for which AE is remunerated" These decisions clearly support the view that not only there has to be concrete evidence in support of the receipt of the service but also the payment should commensurate with the benefit. It has also been held that for such payments benefits to the payer should be direct and tangible and not in direct or incidental. This view is also supported by the OECD guidelines, the report recently published by the EU joint transfer pricing forum and the guidelines followed by various developed countries including the USA, Australia, Germany, France, UK, etc
ITA No.- 4925/Del/2024 OSG (India) Pvt. Ltd. 7.1 In view of above findings, this office has concluded that the assessee had made payments of Rs. 27,89,936/- to its AE for intra-group services (management fee), which are not found to exist fully in the case. The arm's length price of these alleged services is held to be Rs. Nil on application of CUP method as no independent enterprise would have paid any amount for services where services have not been provided and there is no demonstrable benefits. The assessing officer shall consequently increase the taxable income of the assessee by an amount of Rs. 27,89,936/-.” (emphasis supplied by us)
Aggrieved with the said order, the assessee filed its objection before the DRP. The Ld. DRP agreed with the finding of the TPO and the relevant directions of the DRP are reproduced as under:
“4.2.9 As stated at the outset there are two issues in the analysis of transfer pricing for intra-group services. One whether intra-group services (management services) have in fact been provided and second whether such services were charged for at ALP. The TPO's allegation is that the taxpayer has not been able to prove any tangible benefit was derived from the services and taxpayer has also not been able to demonstrate that the payment was at ALP. The TPO has marshalled considerable factual material after following due process. The taxpayer has been allowed adequate opportunity to place on record tangible evidence to prove that benefit was received from services rendered, and that these were necessary, not in the nature of shareholders services and not duplicative and that these were at ALP. But Taxpayer failed to discharge the onus of proving this. On similar facts in the recent case of Bombardier Transportation India P Ltd v DCIT, dt 4 November 2015, Tribunal has held confirming DRP and TPOs orders that, Extract from Bombardier Transportation India P Ltd v DCIT "From the review of the services and benefit report and the supporting documents submitted by the Assessee company, it can be seen that the assessee company is benefited from the supervision and guidance of the group's functional experts which help the Assessee company in efficiently carrying its business operations by leveraging on group synergies. In this regard, the Assessee company has attached as Annexure-2 to the synopsis submitted at the time of hearing, brief overview on the various intra- group services received by it during the year from the various Hub divisions and from the Group entities which were substantiated and validated by the intercompany service agreements entered into by the assessee company with its Associated Enterprises (AEs) along with various documentary evidences submitted before the Id. TPO and the Ld. DRP. The said Annexure also provides the resultant benefits derived by the ITA No.- 4925/Del/2024 OSG (India) Pvt. Ltd. Assessee company by availing the intra-group services- Though, the said Annexure-it show that the Assessee company was benefitted significantly from the intra-group services received from its AEs, it failed to give the supporting evidence such as invoice, confirmation from parties to prove the same. The assessee company has also undertaken a detailed cost benefit analysis in order to demonstrate the cost savings achieved by the Assessee company by availing the said services from the AEs Therefore, when AEs transact with each other, for the purpose of transfer pricing they must replicate the dynamics of market forces, as there is no concept of free lunch in business dealings. Thus, Id. DRP rightly held that the benefit test which is well recognized by OECD and other developed countries Tax regime have to be seen for allowing the payment in case of intra-Group Services. The expected benefit must be sufficiently direct and substantial so that an independent entity in similar circumstances, would be prepared to pay for it. If no benefits have been provided (or was expected to be provided), then the services cannot be charged for. Since the assessee just explained in generic nature about the benefits vis-a-vis the intra-group services payment to its AEs, therefore, we uphold the orders of id. DRP and ld. TPO"
4.2.10 Perusal of the above will show that the Tribunal has affirmed that the benefit test is well recognized and the expected benefits from intra-group services must be sufficiently direct and substantial, so that an independent entity in similar circumstances, would be prepared to pay for it. If no benefits have been provided then the services cannot be charged for, and mere explanations in generic terms about the benefits are inadequate for allowability. Taxpayer has failed to discharge the onus of proving both issues. In light of the fact matrix and support from judicial decisions supra, the objections of the taxpayer are rejected. The adjustment towards Intra- Group Services i.e. the payment for management fees is thus justified and TPOS determination of its ALP at Nil is upheld. Accordingly ground numbers 2 to 9 are rejected.” (emphasis supplied by us)
After receipt of the said direction, the AO passed the final assessment order u/s 143(3) r.w.s 144C(13) of the Act on 20.09.2024 and made an adjustment of Rs. 27,89,936/-.
Aggrieved with the said order, the assessee is in appeal before us, on the following grounds of appeal.
ITA No.- 4925/Del/2024 OSG (India) Pvt. Ltd. Transfer Pricing matters.
That on the facts and in the circumstances of the case, the Learned AO/the Hon'ble DRP erred in determining the Arm's Length Price ("ALP") of the management fees payment to NIL., and thereby proposing/confirming a transfer pricing adjustment of INR 27,89,936.
That the Learned AO/ the Hon'ble DRP erred in considering the international transactions relating to the payment of management fees in isolation of other international transaction entered into by the Appellant. Thereby the Learned AO/Hon'ble DRP erred in ignoring the application of Transactional Net Margin Method ("TNMM") as the most appropriate method and applied Comparable Uncontrolled Price Method ("CUP") as the most appropriate method.
That the Learned AO/ the Hon'ble DRP erred in considering that no Functional Analysis report was included in the Transfer Pricing documentation.
The Learned AO/Hon'ble DRP failed to provide any evidence of the comparable Uncontrolled transactions relied upon for application of the CUP method. In determining the ALP of management fees payment at NIL, the learned AO and the learned CIT(A) have erred in not undertaking any comparability analysis and providing any external comparable for the application of CUP method without providing any cogent reason of such rejection.
That the Learned AO/Hon'ble DRIP erred in not appreciating that on account of using TNMM and aggregation of closely linked transactions, each of the transactions, including the payment for management fees was at arm's length.
That the Learned AO/ Hon'ble DRP erred in transgressing the powers provided under section 92CA of the Act by arbitrarily adjudicating on the business justification for the expenses incurred by the Appellant rather than limiting to whether the international transactions were at arm's length.
That the Learned AO/ Hon'ble DRP erred in computation of arm's length price of management fees at NIL instead of Rs. 27,89,936 as computed by the Appellant by applying the TNMM based on a detailed FAR analysis.
That the Learned AO/Hon'ble DRP erred in their conclusion that no economic or commercial benefit was received by the Appellant on the payment of management fees.
That the Learned AO/Hon'ble DRP erred in questioning the need and commercial expediency of the management services, from OSG Asia Pte Ltd. ("OSG Asia" or "holding company") to the Appellant.
That the Learned AO/ Hon'ble DRP erred in not appreciating the benefit and corresponding economic or commercial value derived by the Appellant from the management services received from OSG Asia and concluding that no economic or ITA No.- 4925/Del/2024 OSG (India) Pvt. Ltd. commercial benefit was derived by the Appellant out of services for which the management fees was paid based on lack of "concrete evidence.".
The Learned AO/Hon'ble DRP have erred, on facts and circumstances of the case by questioning the commercial rationale of the legitimate business expenses incurred by the Assessee and not restricting the scope of assessment under section 92CA of the Act to determine the ALP of the international transactions by adopting one of the prescribed methods only.
During the hearing before us, the Ld. AR filed a written submission and the relevant extract of the same is reproduced as under:
“ B. SUBMISSION The key matter raised by the respective Hon'ble authorities in respect of the management fees is in respect of tangible proof that such services have been provided. During the proceeding at the Hon'ble ITAT on February 27, 2025, we had explained our position citing various judgements. We humbly submit the following for kind consideration by the Lordships.
The overall Profit Level Indicator of OSG was 19.85% as against the comparable companies of 11.34% even after paying management fees. This is an undisputed fact. (kindly refer to Page 4 of the TP Study attached as Annex 2 for ready reference).
Kindly refer Para 4.2.8 at Page 21 of the paperbook. As per the said para at line 7 it is suggested that CUP method is required to be applied. The Comparable Uncontrolled Price (CUP) method has been suggested but no comparable has been given. in a nutshell, this method compares the price for property or services in an intercompany transaction to the price of transactions entered between independent parties under comparable circumstances. Internal CUP Internal CUP requires comparable independent transactions entered by either party in the transaction under review with independent parties. For example, ACo purchases tyres from its parent company BCo. The Internal CUP method can be applied if the following data is available: ➤ ACo purchases similar tyres from other independent suppliers under comparable circumstances (i.e. similar contractual terms and market condition), or ➤BCo supplies similar tyres to other independent customers under comparable circumstances (i.e. similar contractual terms and market condition)
ITA No.- 4925/Del/2024 OSG (India) Pvt. Ltd. External CUP External CUP requires independent transactions entered by independent parties (unrelated parties) in similar conditions to the intercompany transaction that is under review. External CUP data is generally sourced using specialised databases. No comparable data was produced even once over more than one and half year to substantiate internal or external CUP.
The Gemplus India Pvt Ltd. v ACIT [2010] 3 taxmann.com 755 (Bangalore Tribunal) has been the repeatedly highlighted case since inception of the proceedings but factually the situation is not the same. A copy of the said judgement is being submitted as Annex 3 for kind perusal by your Lordships. In Gemplus case there was a split of management fees into various expenses and each of these were challenged and specific clarification was given in the Order explaining the reason for disallowance. Kindly refer to Para 9 (line 8 onwards on Page 5) and Para 19 (on Page 10) which clearly establishes the reason why the amount was disallowed. They do not apply to our situation wherein we have clearly stated that the purpose for such payment is to seek guidance at group level so as to be more competitive. This is further explained in para 4 below.
Kindly refer to Para 4.2.9 at Page 23 of the paperbook where the hon'ble DRP has raised two issues: (a) Whether service has been provided? (b) Whether such service were charged for at ALP? For (a) we have adequately explained that the services have been provided, and such services includes: Guidance on market/pursue customers/align sales strategies over common customers of the group Design of products Monitor sales performance by monthly performance review against budget and consequential changes in sales plan In respect of queries on whether services have been received we have explained the same in detail. Kindly refer to page 63 and 64 of the paperbook. For (b) at none of the stage of dispute there was determination of ALP to challenge our determination of ALP. With no internal or external comparable available, it was still decided that CUP is the best method. As we considered sales and purchases on aggregation basis under TNMM we considered the guidance towards those efforts also under TNMM, Management fees is a very small percentage of these transactions and is only 0.47% of revenue.
Benefit test highlighted at Para 4.2.10 at Page 24 of the paperbook 13 ITA No.- 4925/Del/2024 OSG (India) Pvt. Ltd. The Hon'ble TPO has not considered benefits of guidance given at a group level in the most competitive auto industry. For the sake of clarifying ourselves we wish to highlight the following undisputed facts: 5.1 The turnover of the Indian company has increased from the year of dispute (FY 2020-21) till FY 2023-24 (in four years) from Rs. 60 crores to Rs. 102 crores (up by 71%) and Profit Before tax from Rs. 9 crores to Rs. 16 crores (up by 76%), However the management fees during this period have increased only by Rs. 3.21 Lakhs. In terms of management fees to revenue also the trend is declining from 0.47% from the first year to 0.30% in FY 2023-24. Kindly refer to Annex 4 comprising of such information from FY 2021 to FY 2024. 5.2 The guidance is required as most of the purchasers have the option to procure the products from other competitors or even from other group companies. If any other OSG group company provides the same product, India will lose the GST and the Income tax benefits. The list of large customers includes Honda, Nissan, Suzuki, Yamzen (a trading house), L&T and Tata Motors. The benefit analysis cannot always be direct. This matter has been dealt with by Delhi High Court in EKL Appliance Judgement (submitted as Annex 5) in which the department was in appeal against allowance of similar expenses by the CIT (A) and thereafter by the ITAT. The Lordships may refer to Para 10 ((vi, vii and the last sub para from page 11 &12). In this case the amount was allowed even though the company was making losses continuously. Kindly refer to Para 11 at page 13, para 17 at page 19, para 19-from page 21 (6 line onwards) Para 21 and para 22 from page 22 to 24. The above judgement of the Hon'ble Delhi High Court was also referred by the Hon'ble ITAT at Hyderabad in TNS India case. (submitted as Annex 6). We request the Lordships to kindly refer to para 16 (page 13-11th line from bottom "There is no dispute....by a surgeon"). In para 16.1 at page 14 reference to EKL Appliance has been made and the opinion is "Even otherwise, High Court". Further kindly refer to para 17 on page 17.
The judgement in Hive communications by the Hon'ble Delhi High Court (submitted as Annex 7) also upheld that the expenditure should be evaluated in a reasonable and fair manner. The matter was not related to Transfer Pricing, but it is being highlighted for the purpose as a reference as to how expenditure should be evaluated before any disallowance is considered. Kindly refer to Para 11 and Para 12 at page 8.
Besides the benefit test, the ALP has been rejected because of lack of concrete evidence. These were adequately explained at each stage that movement of people were restricted due to Covid protocols internationally. We would also like to humbly submit that for guidance and review in the modern world, people neither necessarily have to travel nor send emails. Even a WhatsApp group chat is used to discuss matters besides zoom calls, etc. Hence relying entirely on evidence of a list of people visiting
ITA No.- 4925/Del/2024 OSG (India) Pvt. Ltd. or emails, in our humble submission should not be the key to ascertain actual work done.”
The Ld. CIT(DR) supported the orders of the authorities below.
We have heard both the parties and perused the material available on record. As seen above, as per the findings of the AO and the DRP as reproduced in this order and duly highlighted by us the AO computed the value of ALP at Nil on the ground that the intra- group services for which management fees of Rs. 27,89,936/- has been paid by the assessee to its AE was not established and observed that mere explanation in generic terms about the benefits were inadequate for its allowability. Further, the TPO held that if no benefits have been provided (or was expected to be provided) then the services cannot be charged for. In view of the findings of the AO with which the DRP agreed and held that the assessee had failed to discharge the onus of proving both the issues i.e. the rendering of the intra-group services (management services) by the AE to the assessee was not established and secondly, such services were not charged for at ALP.
9.1 On the other hand, the assessee relying upon various case laws submitted the benefit analysis cannot always be direct and relied upon the decision of the Hon’ble Delhi High Court in EKL Appliance Judgement (supra). It was further submitted that besides the benefit test, the ALP has been rejected because of lack of concrete
ITA No.- 4925/Del/2024 OSG (India) Pvt. Ltd. evidence which were adequately explained at each stage that movement of people were restricted due to Covid protocols internationally. It was further submitted that for guidance and review in the modern world, people neither necessarily have to travel nor send emails and even a WhatsApp group chat is used to discuss matters besides zoom calls, etc. Accordingly, it was submitted that hence relying entirely on evidences of a list of people visiting or emails, in our humble submission should not be the key to ascertain actual work done.
9.2 We observe that the AO rejected the evidences of services rendered by the assessee by way of emails / invoices and observed that they were generic emails about sharing of financial statements, reports and day to day communication between individuals of the assessee and the AE and no special service rendition proof was given through these mails. However, the AO did not highlight any such email or any invoice to support its above findings. Similarly, the assessee has also not produced any document in support of its claim of rendering of services as referred in para no. 7 of its submission as reproduced above and summarized as above in para no. 9.1 of this order.
9.3 In this regard, the Hon’ble Delhi High Court in the case of CIT vs. EKL Appliance Ltd. in ITA No.- 1068/2011 & order dated 29.03.2012, in para no. 22 observed as under:
ITA No.- 4925/Del/2024 OSG (India) Pvt. Ltd. “ Even Rule 10B(1)(a) does not authorise disallowance of any expenditure on the ground that it was not necessary or prudent for the assessee to have incurred the same or that in the view of the Revenue the expenditure was unremunerative or that in view of the continued losses suffered by the assessee in his business, he could have fared better had he not incurred such expenditure. These are irrelevant considerations for the purpose of Rule 10B. Whether or not to enter into the transaction is for the assessee to decide. The quantum of expenditure can no doubt be examined by the TPO as per law but in judging the allowability thereof as business expenditure, he has no authority to disallow the entire expenditure or a part thereof on the ground that the assessee has suffered continuous losses. The financial health of assessee can never be a criterion to judge allowability of an expense; there is certainly no authority for that. What the TPO has done in the present case is to hold that the assessee ought not to have entered into the agreement to pay royalty/brand fee, because it has been suffering losses continuously. So long as the expenditure or payment has been demonstrated to have been incurred or laid out for the purposes of business, it is no concern of the TPO to disallow the same on any extraneous reasoning. As provided in the OECD guidelines, he is expected to examine the international transaction as he actually finds the same and then make suitable adjustment but a wholesale disallowance of the expenditure, particularly on the grounds which have been given by the TPO is not contemplated or authorised.” (emphasis supplied by us)
9.4 Therefore, in view of the above judgement also relied upon by the assessee, the assessee has to demonstrate that the expenditure or payment has been incurred or laid out for the purposes of business and then only the TPO cannot disallow the same on any extraneous reasoning. As discussed above, in this case, the AO has held that no services as claimed by the assessee has been provided to the assessee by its AE and thus, the assessee failed to demonstrate that the expenditure or payment has been incurred or laid out for the purposes of business.
9.5 As regards, the claim of the assessee that a wholesale disallowance of the expenditure by the TPO cannot be contemplated or authorized has been given with ITA No.- 4925/Del/2024 OSG (India) Pvt. Ltd. a rider by the Hon’ble Court that it will depend upon the facts of the case. In the above cited case, the TPO had questioned the expenditure and reduced it to NIL on the ground that the company was making continuous losses and the financial health of assessee could not have afforded to carry out such expenses whereas in the present case, the AO has given a finding that no services as claimed by the assessee has been provided to the assessee by its AE. Therefore, the reliance by the assessee on the aforesaid case is distinguishable in the present case.
9.6 Further, as noted above, the Co-ordinate Bench of the Tribunal held in case of M/s GE Money Financial Services (P.) Ltd. [2016] 69 taxmann.com 420 (Delhi - Trib.) after considering the judgment of Hon'ble Delhi High Court in case of Cushman and Wakefield [2014] 46taxmann.com317(Delhi) held that the TPO can compute NIL ALP after conducting benefit test, need test and rendition test.
9.7 However, in view of our observations in para no. 9.2 of this order, we set aside the final assessment order of the AO/ TPO and the DRP’s directions and restore the matter to the file of the AO / TPO for deciding the issue afresh after giving a reasonable opportunity of being heard to the assessee as per law. Further, the assessee will also at liberty to submit any evidence / details in support of its claim. Ground nos. 2 to 12 of the appeal are allowed for statistical purposes.
ITA No.- 4925/Del/2024 OSG (India) Pvt. Ltd. 10. The AO had also added a sum of Rs. 55,450/- on account of ‘addition on account of receipt other than interest on securities’. The relevant extract of the order of the final assessment order in para no. 4.6 to 4.7 are reproduced as under:
“ 4.6 On verification of reply of the assessee, it was submitted that the amount of Rs.37,013/-received from Maharashtra State Distribution Co. Ltd. was set off with electricity expenses in April 2021 and submitted the copy of electricity bill for the month of April 2021. The contention of the assessee is not acceptable on the following ground: 1. No reconciliation statement is submitted by the assessee with documentary evidences, such as ledger a/c copy, bank statement by highlighting payment, etc. 4.7 In view of the above, the addition of Rs.37,013/- is made and the same is added to the total income of the assessee. Further, since the assessee has accepted the variation of Rs. 18,437/- on account of interest received from ICICI Bank Ltd., the same is also added in the total income of the assessee. Therefore, the total amount of Rs.55,450/- (37,013 + 18,437/-) is added to the total income of the assessee.”
10.1 Out of the above addition, the assessee has challenged the addition to the extent of Rs. 37,013/- and has filed the following ground of appeal:
“Matters other than transfer pricing related We have verified the two matters related to Tax deducted at source on interest. The amount of Rs.37,013 credited by Maharashtra State Distribution Company Limited was set off with electricity expenses in April 2021 and hence the same has been accounted for in the next year and expense was claimed lower. Necessary supporting was submitted in this respect. To this extent the Learned AO has erred in adding the same as income.”
10.2 The assessee in its written submission has made the following submission:
“8. Para 4.3 at page 24 of the paperbook: Corporate tax matter for Rs.37,013
ITA No.- 4925/Del/2024 OSG (India) Pvt. Ltd. We have adequately explained that the interest income was not recognized but the electricity expense was reduced by the same amount. Documents were provided in this respect and the same is being submitted as Annex 8 for the consideration of your lordships. There was also an error on our part as the said adjustment was carried out in April of the following year.”
We have heard both the parties and perused the material available on record. The assessee submitted before the AO that the interest amount of Rs.37,013/-received from Maharashtra State Distribution Co. Ltd. was set off with electricity expenses in April 2021 and submitted the copy of electricity bill for the month of April 2021 but the AO did not accept the same on the ground that no reconciliation statement was submitted by the assessee with documentary evidences, such as ledger a/c copy, bank statement by highlighting payment, etc.
11.1 On the other hand, the Ld. AR submitted that the interest income amounting to Rs. 37,013/- was not recognized but the electricity expenses was reduced by the same amount and documents were provided in this respect before the AO and the DRP and the same was also submitted as Annex 8 before us.
11.2 The above claim of the assessee and the document submitted by the assessee requires factual verification. We, therefore, set aside the order of the AO and restore the matter to the file of the AO for verifying the above claim of the assessee and if the claim of the assessee of reducing the electricity expenses is found to be correct
ITA No.- 4925/Del/2024 OSG (India) Pvt. Ltd. then to delete the said addition of Rs. 37,013/-. Ground nos. 4 to 4.7 are allowed as above.
In the result, appeal of the assessee is allowed for statistical purposes.
Order pronounced in the open court on 04th February, 2026.