Nil ALP Without Benchmarking Invalid for Head Office Services: Gujarat HC

PCIT Vs Ineos Styrolution India Limited (Gujarat High Court)

Summary: The Gujarat High Court, in a common order dated 5 March 2024, dismissed two appeals filed by the Revenue under Section 260A of the Income-tax Act, 1961, against the orders of the Ahmedabad Bench of the Income Tax Appellate Tribunal for Assessment Years 2017-18 and 2018-19. The dispute concerned transfer pricing adjustments relating to Global Head Office (GHO) services and Regional Head Office (RHO) services received by INEOS Styrolution India Limited from its overseas group entities. The Revenue challenged the deletion of adjustments of ₹9,76,70,814 towards GHO services and ₹21,14,85,404 towards RHO services for AY 2017-18, and ₹6,97,69,928 towards GHO services and ₹21,64,01,560 towards RHO services for AY 2018-19.

The assessee was engaged in manufacturing plastic granules used in industries including automobiles, home appliances, electronics, construction and healthcare. Being part of the Germany-headquartered INEOS Styrolution Group, it received various management and support services from its Global Head Office in Germany and Regional Head Office in Singapore. The costs of these services were allocated among benefiting group entities under a predetermined allocation formula. The Transfer Pricing Officer questioned the actual rendition of services, the supporting documentation and the commercial justification for the expenditure. He considered that the assessee had failed to establish sufficient India-specific benefits and determined the arm’s length price of disputed services at Nil, resulting in substantial transfer pricing adjustments.

The assessee challenged these adjustments before the Dispute Resolution Panel and subsequently before the Tribunal. After examining voluminous documentary evidence, including correspondence, emails, service agreements and records of support provided by overseas personnel, the Tribunal concluded that India-specific services had actually been rendered. These included treasury functions, financial and controlling support, information technology assistance, CFO-related functions, regional management and business management support. The Tribunal observed that the Transfer Pricing Officer had adopted an excessively restrictive approach by treating the services as general group-level activities and disregarding evidence demonstrating their relevance to the Indian business. It further held that the existence of some general services did not justify concluding that no India-specific services had been received.

The Tribunal also examined the statutory requirements for determining the arm’s length price under Section 92C of the Income-tax Act and Rule 10AB of the Income-tax Rules, 1962. It held that the Transfer Pricing Officer could not determine the value of an international transaction at Nil merely by applying subjective tests of necessity, benefit or commercial expediency. Even under the prescribed ‘other method’, the determination required consideration of prices charged or payable in comparable uncontrolled transactions between independent enterprises. Since the Transfer Pricing Officer had neither identified comparable transactions nor undertaken an appropriate benchmarking exercise, the Nil valuation was legally unsustainable. The Tribunal accordingly deleted the disputed adjustments, relying on several judicial precedents concerning intra-group services and transfer pricing methodology.

Before the High Court, the Revenue argued that the assessee had not furnished adequate evidence establishing the actual receipt of services and that the allocation of costs and markups charged by the overseas entities were unjustified. It questioned the 6% markup on Global Head Office costs and 5% markup on Regional Head Office costs, contending that independent parties would not have paid such amounts in comparable circumstances. The assessee maintained that the Tribunal had properly appreciated the documentary evidence and recorded findings of fact establishing the receipt of India-specific services. It further submitted that the Transfer Pricing Officer had failed to follow the prescribed statutory methodology while determining the arm’s length price at Nil.

The Gujarat High Court upheld the Tribunal’s findings. It observed that Rule 10AB required consideration of comparable uncontrolled transactions and that the Transfer Pricing Officer had made no attempt to identify an independent enterprise or comparable transaction before assigning a Nil value to the services. The Court accepted the Tribunal’s factual conclusion that the assessee had demonstrated receipt of India-specific services through substantial supporting material. It reiterated that once the rendition of services was established, a transfer pricing adjustment could not be sustained without applying a prescribed benchmarking method. Finding no ground for interference with the Tribunal’s decision, the High Court dismissed the Revenue’s appeals, thereby sustaining the deletion of the disputed GHO and RHO service adjustments for both assessment years.

Cases Discussed

1. Henkel Chambord Surface Technologies Ltd. v. ACIT, [2021] 125 taxmann.com 65 (ITAT Mumbai): The Tribunal relied on this decision for the principle that the Transfer Pricing Officer (TPO) cannot determine the arm’s length price (ALP) of regional management services at Nil without applying a method prescribed under Section 92C(1). Documentary evidence of services, including agreements and invoices, must be duly considered.
2. Merck Ltd. v. DCIT, [2016] 69 taxmann.com 45 (ITAT Mumbai): The Tribunal referred to this decision to explain that services cannot be disregarded merely because the TPO considers them general in nature or believes they could have been performed internally. The existence of actual services must be evaluated from contractual arrangements and supporting evidence.
3. Sabic Innovative Plastics India (P.) Ltd. v. ACIT, [2017] 88 taxmann.com 810 (ITAT Ahmedabad): Relied upon for the proposition that the TPO cannot reject intra-group management service payments solely on a subjective assessment of their commercial worth when reasonable evidence establishes the rendition of services.
4. AT & T Global Network Services (India) (P.) Ltd. v. DCIT, [2017] 86 taxmann.com 158 (ITAT Delhi): The Tribunal considered this ruling on the evidentiary requirements for intra-group support services. Agreements, assignments, service records and invoices can substantiate receipt of services. The taxpayer cannot be subjected to an excessive evidentiary burden merely because the service provider is an associated enterprise.
5. TNS India (P.) Ltd. v. ACIT, [2014] 48 taxmann.com 128 (ITAT Hyderabad): Cited for the distinction between the TPO’s authority to determine the ALP and the power to reject the entire expenditure. The TPO’s statutory responsibility is to benchmark the international transaction in accordance with the prescribed transfer pricing provisions.
6. PPG Coatings India (P.) Ltd. v. DCIT, [2022] 139 taxmann.com 165 (ITAT Mumbai): Relied upon for the requirement that the ALP must be determined using a prescribed statutory method. A Nil valuation unsupported by the prescribed benchmarking exercise cannot be sustained.
7. Adama India (P.) Ltd. v. DCIT, [2021] 128 taxmann.com 365 (ITAT Hyderabad): The Tribunal considered this decision in which management services received from an associated enterprise were supported by evidence of their use in day-to-day business operations. In the absence of effective rebuttal by the Revenue, determining their ALP at Nil was held unsustainable.
8. Megger India Pvt. Ltd. v. DCIT, ITA No. 6886/Mum/2018 (ITAT Mumbai): Referred to for the principle that a transfer pricing adjustment made without applying a prescribed benchmarking method is legally unsustainable.
9. CIT v. EKL Appliances Ltd., [2012] 345 ITR 241 (Delhi High Court): Relied upon for the principle that the TPO cannot substitute his own judgment for the commercial decisions of the taxpayer or reject expenditure merely because the expected benefit was not demonstrated to his satisfaction. The judgment was also discussed through the Gujarat High Court’s decision in Tudor India.
10. PCIT, Gandhinagar v. Tudor India Private Limited, Tax Appeal No. 106 of 2019, decided on 27 August 2019 (Gujarat High Court): The High Court relied upon its earlier decision concerning intra-group management services, the evidentiary value of correspondence demonstrating rendition of services and the limits of the TPO’s authority to question commercial decisions. The Court applied its reasoning while upholding the Tribunal’s factual findings in the present case.
11. PCIT, Bangalore v. Softbrands India (P.) Ltd., [2018] 406 ITR 513 (Karnataka High Court): Discussed through Tudor India regarding the scope of appeals under Section 260A in transfer pricing matters. The decision concerned the distinction between factual findings and substantial questions of law. The Supreme Court subsequently clarified that transfer pricing findings are not automatically immune from examination under Section 260A where statutory guidelines have not been followed or findings are perverse.
12. Eastern Investment Ltd. v. CIT, [1951] 20 ITR 1 (Supreme Court): Discussed through EKL Appliances for the principle that expenditure need not necessarily produce profits or an immediate financial return to qualify for deduction. The commercial judgment underlying expenditure cannot be rejected merely because the transaction proves unremunerative.
13. CIT v. Walchand & Co. (P.) Ltd., [1967] 65 ITR 381 (Supreme Court): Discussed through EKL Appliances concerning commercial expediency. Revenue authorities cannot determine the reasonableness of business expenditure simply by substituting their own assessment of what the taxpayer should have spent.
14. Hughes v. Bank of New Zealand, [1938] 6 ITR 636: Referred to in the discussion reproduced from EKL Appliances regarding expenditure incurred in the course of business. An expenditure does not cease to be business expenditure merely because it does not produce a corresponding financial return.
15. CIT v. Rajendra Prasad Moody, [1978] 115 ITR 519 (Supreme Court): Discussed through EKL Appliances for the proposition that deductibility of expenditure does not invariably depend upon actual generation of income. The principle was relevant to the broader discussion concerning commercial benefit and the purpose of expenditure.
16. Sassoon J. David & Co. (P.) Ltd. v. CIT, [1979] 118 ITR 261 (Supreme Court): Discussed through EKL Appliances for the interpretation of business expenditure and commercial expediency. The decision supports the proposition that expenditure need not be compulsory or unavoidable merely to qualify as expenditure incurred for business purposes.
17. Yanfeng India Automotive Interior Systems Pvt. Ltd., ITA No. 1429/Ahd/2019, order dated 17 January 2023 (ITAT Ahmedabad): Specifically invoked by the Revenue in its proposed substantial questions of law for AY 2017-18. The Revenue contended that this decision permitted a Nil ALP where sufficient supporting evidence of services was not furnished. However, the High Court upheld the Tribunal’s finding that INEOS had produced substantial material establishing receipt of India-specific services and that the TPO had failed to undertake proper benchmarking.