ALP Cannot Be Determined at Nil Without Comparable Analysis: ITAT Ahmedabad

Styrenix Performace Materials Ltd. Vs ACIT (ITAT Ahmedabad)

ITAT deletes transfer pricing adjustment relating to intra-group services by following its earlier decisions

Facts:

• The present appeal was filed by Styrenix Performance Materials Ltd. (formerly known as INEOS Styrolution India Limited) against the order dated 09.2024 passed by the Dispute Resolution Panel-2, Mumbai for Assessment Year 2021-22. The assessee is engaged in the business of manufacturing, trading and sale of engineering thermoplastics and is one of the leading producers of ABS and SAN products in India. It forms part of the INEOS Styrolution Group, a multinational group engaged globally in the styrenics business. The assessee filed its return of income on 24.02.2022 declaring total income of Rs. 3,65,38,69,610/-. The case was selected for scrutiny assessment and a reference under section 92CA of the Income-tax Act, 1961 was made by the Assessing Officer to the Transfer Pricing Officer (TPO) for determination of the Arm’s Length Price (ALP) of international transactions entered into by the assessee with its Associated Enterprises (AEs).
• During the course of transfer pricing proceedings, the TPO examined the international transactions relating to intra-group services availed by the assessee from its Associated Enterprises, namely INEOS Styrolution Group GmbH, Germany and INEOS Styrolution APAC Pte. Ltd., Singapore. The assessee had incurred expenditure towards Global Head Office (GHO) non-IT services, GHO IT services and Regional Head Office (RHO) services received from the aforesaid overseas group entities. Upon examination of these transactions, the TPO proposed an aggregate transfer pricing adjustment of Rs. 17,11,13,551/-, comprising Rs. 7,11,17,906/- towards GHO non-IT services, Rs. 43,19,415/- towards GHO IT services and Rs. 9,56,76,320/- towards RHO services.
• The TPO observed that the assessee had claimed to have received various centralized services from its overseas group entities including services relating to chief executive management, finance and treasury, global strategy support, procurement assistance, regulatory affairs, technology and operations support, engineering and project management, corporate communication, legal support, human resources and IT support services. The assessee submitted that these services were rendered under a centralized multinational structure and that the overseas group entities had deployed managerial and technical expertise for the benefit of all group entities including the Indian entity. The assessee further contended that the payments had been benchmarked under the Transactional Net Margin Method (TNMM) by treating the overseas service provider as the tested party and comparing the net cost-plus margins earned by comparable independent enterprises.
• The TPO, however, was not satisfied with the benchmarking analysis and evidences furnished by the assessee. According to the TPO, the assessee had failed to establish the actual rendition of services and the commensurate economic benefit derived therefrom. The TPO further observed that several of the services allegedly rendered by the overseas group entities were either duplicative in nature or constituted shareholder activities for which an independent enterprise would not ordinarily agree to make payment. Particular emphasis was placed on costs allocated towards the activities of the Group CEO, CFO, Global Financial Controller and Risk Management personnel. The TPO was of the view that these functions primarily related to stewardship and shareholder oversight activities undertaken to protect the interests of the parent company and did not provide any direct business benefit to the Indian entity.
• The TPO further observed that despite repeated opportunities, the assessee had failed to furnish sufficient documentary evidence directly demonstrating the actual rendition of services to the Indian entity. Although the assessee produced sample emails, presentations, internal communication documents and benefit-test analyses, the TPO held that such materials merely reflected generalized group-level communications, broad policy guidelines and management discussions. According to the TPO, these documents did not conclusively establish that independent and chargeable services had in fact been rendered to the assessee. On this basis, the TPO concluded that no independent enterprise would have agreed to pay for several of the services in question and therefore determined the Arm’s Length Price of substantial portions of the intra-group services at Nil.
• In relation to GHO non-IT services amounting to Rs. 7,11,17,906/-, the TPO held that the assessee had failed to demonstrate any specific economic or commercial benefit arising from services relating to global strategy, CEO support, treasury, finance, legal and corporate communication functions. According to the TPO, many of these activities constituted shareholder functions and stewardship activities performed by the parent company for safeguarding its investment interests. Similarly, in respect of GHO IT services amounting to Rs. 43,19,415/-, the TPO held that the assessee had not adequately substantiated the actual use and benefit derived from the centralized IT support services. With regard to RHO services amounting to Rs. 9,56,76,320/- availed from INEOS Singapore, the TPO once again concluded that the assessee had failed to establish the necessity of such services or their independent commercial value and accordingly determined the ALP of these services at Nil, resulting in the proposed adjustment.
• Aggrieved by the transfer pricing adjustment proposed by the TPO, the assessee filed objections before the Dispute Resolution Panel (DRP), Mumbai challenging the proposed adjustment in respect of the intra-group services availed from its Associated Enterprises.
• Before the DRP, the assessee contended that the TPO had proceeded on an erroneous assumption that no services had been rendered by the overseas group entities and that the transfer pricing adjustment had been made without properly appreciating the multinational business structure of the INEOS Styrolution Group. The assessee submitted that it operated as part of a globally integrated business model wherein centralized managerial, technical, financial, operational and IT support services were rendered by group entities for the benefit of all operating subsidiaries, including the Indian entity. It was argued that the TPO had ignored the commercial realities of the group structure and the support functions provided by the overseas entities.
• The assessee further submitted before the DRP that the impugned payments related to GHO non-IT services, GHO IT services and RHO services rendered by the overseas Associated Enterprises. Detailed explanations were furnished regarding the exact nature of services rendered under each segment, including strategic management support, treasury and finance functions, legal and compliance support, procurement coordination, engineering and operational support, human resources assistance, technology support and centralized IT infrastructure services. The assessee asserted that the overseas Associated Enterprises had deployed specialized managerial and technical resources and that the Indian entity had derived substantial economic and commercial benefits from such services in the conduct of its business operations.
• The assessee also submitted that the benchmarking analysis undertaken under the Transactional Net Margin Method (TNMM) had not been properly rebutted by the TPO. According to the assessee, the TPO had determined the Arm’s Length Price of the services at Nil without applying any of the prescribed methods under section 92C of the Act read with Rule 10B of the Income-tax Rules. It was contended that such determination of ALP without following a recognized transfer pricing methodology was contrary to the statutory framework governing transfer pricing assessments.
• The DRP considered the submissions made by the assessee, the transfer pricing order passed by the TPO and the material available on record. Upon examination of the evidence, the DRP observed that the assessee had furnished documentary evidence demonstrating receipt of various centralized support services from its overseas Associated Enterprises. The DRP noted that the material produced by the assessee included emails, operational coordination documents, management support records, IT service communications and finance and treasury support materials, all of which reflected actual interaction between the overseas group entities and the Indian entity. The DRP further noted that the assessee had explained the basis of cost allocation and had furnished allocation keys adopted by the group entities for charging the costs of such services.
• At the same time, the DRP examined the observations of the TPO regarding the allegedly duplicative nature of certain services and the characterization of some functions as shareholder activities. The DRP observed that certain activities undertaken by the parent group entities could arguably contain elements of stewardship or shareholder oversight functions. However, the DRP found that the TPO had adopted an excessively broad approach in determining the Arm’s Length Price of the services at Nil without carrying out a proper analysis of each category of services independently. The DRP further observed that the mere existence of an incidental shareholder benefit does not automatically justify the conclusion that no independent service had been rendered to the assessee.
• The DRP also took note of the fact that similar issues had arisen in the assessee’s own case in earlier assessment years and that relief had been granted by the Tribunal after considering substantially similar facts and evidences. However, notwithstanding these observations, the DRP substantially upheld the action of the TPO. The DRP held that, based on the material produced before it, the assessee had not fully established the direct and quantifiable economic benefit arising from all components of the services for which payments had been made. Consequently, the DRP sustained the transfer pricing adjustment of Rs. 17,11,13,551/-, comprising Rs. 7,11,17,906/- towards GHO non-IT services, Rs. 43,19,415/- towards GHO IT services and Rs. 9,56,76,320/- towards RHO services. Pursuant to the directions of the DRP, the Assessing Officer passed the final assessment order incorporating the aforesaid transfer pricing adjustment.

Issues: