TPO Cannot Ignore Documentary Proof Of Services And Fix ALP At Nil: ITAT Ahmedabad

The Ahmedabad Bench of the Income Tax Appellate Tribunal (ITAT), on 6 June, held that once a taxpayer demonstrates actual receipt of management services through documentary evidence, the Transfer Pricing Officer (TPO) cannot disregard the transaction and fix the Arm's Length Price (ALP) at nil based merely on assumptions of commercial necessity.

Vice President Dr. B.R.R. Kumar and Judicial Member Siddhartha Nautiyal dismissed the Revenue's appeal against Schaeffler India Ltd. and upheld deletion of transfer pricing adjustments aggregating to approximately Rs. 11.59 crore. The Bench observed:

“The TPO has determined ALP at Nil without applying any recognized transfer pricing methodology prescribed under section 92C of the Act, which itself is contrary to settled legal position laid down in the aforesaid judicial precedents.”

The dispute arose during assessment proceedings for AY 2013–14 when the Revenue examined international transactions between Schaeffler India and its Associated Enterprises.

Schaeffler India paid management service fees to Schaeffler Holding (China) Co. Ltd. for procurement support, supply chain management, finance, human resources, product strategy, and business support services. The company paid these fees on a cost-plus basis with a 5% markup.

The TPO rejected the assessee's aggregation under the Transactional Net Margin Method (TNMM) and separately benchmarked the management fee under the Comparable Uncontrolled Price (CUP) method. The TPO treated the services as shareholder or stewardship activities, held that no separate payment was justified, and determined the ALP of the management fee at nil, leading to an adjustment of Rs. 5.87 crore.

The TPO also made a further adjustment of Rs. 5.71 crore in the manufacturing segment after revising the comparable set and recalculating operating margins.

Before the Tribunal, Schaeffler India submitted extensive documentary evidence, including service agreements, invoices, employee allocation records, presentations, emails, workshops, and meeting reports to establish that it actually received services from its Associated Enterprise.

The Bench noted that earlier rulings in favour of Schaeffler group companies on similar issues already covered the dispute and held that the TPO cannot challenge business decisions once actual receipt of services stands proved on record.

With respect to the manufacturing segment, the Tribunal accepted the assessee's explanation that delayed localisation of clutch manufacturing led to abnormal costs and forced imports at higher prices to meet supply commitments to a non-AE customer. It held:

“Under TNMM, transfer pricing adjustment can survive only where tested party margin falls below arm's length margin of comparables. Once the assessee's margin is found to be higher than the corrected comparable margin, no further adjustment is permissible under Chapter X of the Act.”

After recalculating the comparables, the Bench found that Schaeffler India's margins already exceeded the arm's length level and held that no transfer pricing adjustment survived.

Accordingly, the ITAT upheld deletion of both adjustments and dismissed the Revenue's appeal.

For Appellant: Ms. Amrin Pathan, AR

For Respondent: Shri Sher Singh, CIT-DR