3M Electro & Communications India Pvt. Ltd.(“Assessee”) paid royalty and business support service charges to its AE and benchmarked both transactions by aggregating them with the manufacturing segment under TNMM. The TPO accepted the manufacturing segment under TNMM but segregated the royalty and business support service transactions and determined their ALP at Nil. The DRP deleted both TP adjustments, against which the Revenue filed an appeal before the Chennai ITAT.
Assessee’s Contentions | Revenue’s Contentions | Tribunal’s Judgment |
Royalty and business support services were closely linked to the manufacturing segment and were correctly benchmarked along with the manufacturing segment under TNMM. | The assessee failed to substantiate the receipt of technology, IP and business support services; therefore, the TPO rightly determined the ALP at Nil.
| Royalty and business support services formed an integral part of the manufacturing operations and could not be benchmarked separately after accepting TNMM.
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The assessee furnished the IP agreement, service agreement, debit notes and cost allocation details, and royalty was within the RBI-prescribed limits, establishing the genuineness of the transactions | RBI-approved royalty rates and the documents furnished were insufficient to establish that the transactions were at arm's length. Therefore, the TPO determined the ALP of both transactions at Nil.
| As the Revenue failed to bring any evidence on record to establish that the services were not rendered, the ALP could not be determined at Nil merely on the basis of perceived inadequacy of evidence. |
Ruling Summary -
Chennai ITAT held that royalty and intra-group business support services that are closely linked to manufacturing operations cannot be segregated from the manufacturing segment after the TPO has accepted TNMM, and their ALP cannot be separately determined at Nil.
The Tribunal further held that once the taxpayer substantiates the transactions through agreements, supporting documents and cost allocation workings, the TPO must apply a prescribed transfer pricing method. Determining the ALP at Nil without comparable analysis or evidence that no services were received is unsustainable.
