TPO Not Justified In Treating The Value Of International Transaction Of "Payment of Corporate IT Support Services" To Be Nil: ITAT

The two-member bench headed by Pramod Kumar (Vice President) and Sandeep Singh Karhail (Judicial Member) has observed that no search was conducted to find out the independent entity in a comparable transaction and the arm's length price of the international transaction was treated to be Nil.

The appellant/assessee is in the business of providing design and engineering services and drawings relating to engineering and IT services. As per the transfer pricing study, Sulzer Management AG, an associated enterprise of the assessee, provides various IT support services, which are basic for international communication between the Sulzer Group entities, including the assessee. The various services provided by the associated enterprise to group entities are in the nature of IT infrastructure services, centralised IT management services and other IT services. The assessee has paid Rs. 2,52,49,650 to the associated enterprise for availing such IT support services.

For benchmarking purposes, the associated enterprise was considered a "tested party." The Cost Plus Method was selected as the most appropriate method with a PLI of operating profit to total expenses.

The assessee selected 68 comparables from both the APAC and EU regions, whose three-year weighted average NCP margin ranged from 4.08% (35th percentile) to 7.08% (65th percentile), with a median of 5.69%. As per the Group Transfer Pricing Policy, the associated enterprise charged cost is plus a markup of 5% for Corporate IT Support Services. The assessee has paid for the services to its associated enterprises with a markup of 5%, which is within the range of markups earned by comparable companies. The international transaction pertaining to "Payment of Corporate IT Support Services" was considered to be at arm's length.

The TPO passed the order under section 92CA(3) of the Act by applying a need–evidence–benefit test that determined the arm's length price of the international transaction to be NIL. The TPO held that in any third party case, the assessee would not have paid any amount toward services which are not availed by it or which have not benefited its business. Accordingly, TPO made an adjustment of Rs. 2,52,49,650. The DRP issued the direction under section 144C(5) and rejected the objections filed by the assessee.

The assessee contended that the assessee entered into an agreement with its associated enterprise, which was duly signed and forms part of the paper book. The agreement enlisted the various IT services to be provided by the associated enterprise. The agreement provided the remuneration model and payment terms in respect of IT services provided by the associated enterprise. The agreement provided the allocation key to be adopted for charging remuneration for IT services. As per the agreement, the associated enterprise may also engage a third party for the execution of all or part of IT services.

The ITAT held that lower authorities were not justified in holding that no services were rendered by the associated enterprise in respect of which payments were made by the assessee.

The Tribunal noted that, as per the provisions of Rule 10AB of the Income Tax Rules, 1962, the "other method" shall be the method which takes into account the price charged or uncontrolled transaction between non-associated enterprises. However, in the present case, the lower authorities, without searching for similar uncontrolled transactions between non-associated enterprises, straightaway treated the value of the international transaction as being NIL.

The ITAT allowed the appeal of the assessee.

Case Title: M/s. Sulzer Tech India Pvt. Ltd. Versus

Citation: Addl./Jt./Dy./Asstt. Commissioner Of Income Tax

Dated: 25/07/2022

Counsel For Appellant: Ravi Saeana

Counsel For Respondent: Tejinder Pal Singh

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