TPO cannot disallow expenditure incurred for purpose of business only at a prima facie level without considering business exigencies (Hyderabad ITAT) - TNS India Pvt Ltd

Hyderabad Tribunal Ruling – Disallowance of management fees by the TPO on the basis that no tangible benefits have accrued to the assessee out of such payment – Whether TPO is justified in disallowing an expenditure in its entirety – When international transactions are benchmarked by applying TNMM[1], can individual expenses be benchmarked again using a different method – Held that, disallowance at NIL value not correct on the premise that no evidence for service availed, AO cannot question taxpayer’s business decisions – Transfer pricing adjustment does not ipso facto result in concealment of income


TNS India Pvt Ltd vs ACIT (2014-TII-24-ITAT-HYD-TP)



TNS India Pvt Ltd. (‘assessee’ or ‘the company’) is engaged in conducting quantitative and qualitative market research, having specialized divisions for media, social development, healthcare projects, opinion polls, automotive and IT & telecom sectors.  The assessee had international transactions pertaining to provision of services, payment of royalty, payment of management fees, payment of interest and reimbursement transactions with its Associated Enterprises (‘AEs’).

The Transfer Pricing Officer (‘TPO’) aggregated the international transactions pertaining to provision of services and payment of royalty, applied TNMM as the most appropriate method and determined such transactions to be at arm’s length, as the assessee’s margin was higher than that of comparable companies.  He also accepted the arm’s length nature of the interest payment and reimbursement transactions, but disallowed the entire expense on account of management fees paid by the assessee observing that the information/ explanations submitted by the assessee were insufficient to prove actual receipt of services from the AE.  He thus determined the arm’s length price (‘ALP’) of the management fees at Nil.  Before the TPO, the assessee furnished a detailed write-up of the functions performed by the AEs for the benefit of all group companies, inter-company service agreement and the basis of allocation of cost to group companies.  The category of services provided, description of services and manner in which services were supplied were detailed in the agreement.

Having regard to the adjustment made by the TPO, the Assessing Officer (‘AO’) imposed penalty u/s 271(1)(c) on such amount.

On appeal by the assessee, the CIT(A) upheld the order of the TPO.

Before the Tribunal, the assessee essentially submitted as under:

  • The assessee has received benefits in the form of global consistency in business practices, economies of scale, improvements in efficiency and access to skills, expertise on a global level and these benefits being intangible in nature, specific evidence could not be furnished to the TPO/ AO to his satisfaction for verifying the services;
  • The services rendered by the AE are relating to development of new business opportunities, strategic planning assistance, media support services, public relations services, financial administration services etc and hence, are not in the nature of shareholder activities;
  • Relying on the Supreme Court decision in the case of CIT vs Safe Deposit Co. Ltd[2]., it was contended that the true test of expenditure laid out wholly and exclusively for the business or trade is that it is incurred by assessee as incidental to that trade;
  • The TPO determined the fee payable at NIL which is in effect disallowing the entire expenditure claimed under section 37(1), which is not permitted under the Transfer Pricing Regulations;
  • TPO has already concluded arm’s length nature of international transactions by adopting TNMM as a method wherein the margin of assessee, considering the management fee as an expense, was accepted at arm’s length. Thus, it was contended that once a method was invoked by the TPO, other methods do not apply;
  • The AR also submitted a list of group companies which had paid management fees, as per which the average payment of the management fees was 6.07% which was higher than the 4.5% fee paid by the assessee.


Key observations and decision of the Tribunal:

  • Assessee has given a detailed write-up as well as details of services provided and benefits obtained, which were not contradicted.  Unless the AO steps into assessee's business premises and observes the role of these companies/ assessee's business transactions, it will be difficult to place on record the sort of advice given in day-to-day operations.  What sort of evidence satisfies the AO is also not specified;
  • TPO is to determine the ALP of a transaction and he cannot reject the entire payment under the provisions of section 92CA as held by the Hon'ble Delhi High Court in the case of EKL Appliances Ltd (2012-TII-01-HC-DEL-TP).  Thus, the Tribunal held that the TPO cannot question the business decision of payment and determine that no services were rendered;
  • The TPO invoked Rule 10B of the Income-tax Rules, 1962 to analyze the transactions under the TNMM.  Even after paying the management fee, the assessee’s PLI was found to be more than the comparable cases.  Therefore, considering that also, denial of management fees is not proper on the part of the TPO/ AO;  
  • The action of the TPO in determining the ALP at Nil is not according to the provisions of law and also on facts;
  • However, neither the TPO nor the AO examined whether the payment of management fee is according to the agreement or not.  Therefore, while allowing the ground on the question of claim of management fees as such, the quantification thereof was restored to the AO to examine the same with reference to the agreement between the parties;
  • The Tribunal also deleted penalty levied by the AO stating that mere disallowance of an amount that too on transfer pricing provisions does not attract penalty under section 271(1)(c); it is only a difference of opinion in determining the ALP.  Neither the AO nor CIT(A) considered the Explanation 7 to Sec 271(1)(c) which is material for invoking the provisions in Transfer Pricing case.  There is no discussion at all about lack of 'due diligence' in determining the ALP by assessee.  Moreover, the payment of management fees was found to be at arm’s length.


Our Comments:

In the midst of large amount of transfer pricing controversies and huge litigation, this decision will bring relief to taxpayers, many of whom have been facing adjustments on account of similar cross charges being made by their regional centers/ head offices.  Moreover, the Hon’ble Tribunal has rightly identified/ laid down the role of the TPO vis-à-vis that of the taxpayer i.e. a TPO cannot disallow expenditure incurred for the purpose of business only at a prima facie level without considering business exigencies. 

This decision also correctly brings out that transfer pricing adjustment is more a matter of opinion from two different perspectives, than merely arising out of intention to conceal income or furnish inaccurate particulars of income.


[1] Transactional Net Margin Method

[2] CIT vs Delhi Safe Deposit Co. Ltd., 133 ITR 756

04 Feb 2014