Case summary, Income Tax

ITAT Mumbai decides: Can TPO ignore the benchmarking method proposed by the Assessee without providing valid reasoning for suggesting an alternate method?

Issue: Whether DRP’s confirmation of the TPO’s proposed adjustment to the ALP holds good?

Case Name: Brinks India Pvt. Ltd. v. DCIT


  • The assessee is a part of Brinks Global Services, which provides global risk management and secures logistics for valuables.
  • The assessee company filed its return of income for the assessment year (AY) 2012-13 declaring total income of INR 28,91,46,998/-. A reference u/s 92CA(1) was made by the AO to the Transfer Pricing Officer (TPO) for determination of Arm’s Length Price (ALP) with reference to all the transactions referred in Form 3CEB filed by the assessee.
  • In the year 2012-13, the assessee had paid management fees to its Associated Enterprises i.e. INR 3,53,07,309/- to Brink’s Incorporated USA and INR 53,18,313/- to Brink’s Asia Pacific Ltd. Hong Kong.
  • On being questioned by the TPO, the assessee stated that under an agreement dated 01.01.2011, AEs will be providing certain services like Accounting, Management & Operations, Legal, Financial, etc which will yield certain benefits to the assessee like improvement in efficiency, reduction in cost and so on.

  • TPO was not convinced with the reply and observed that the assessee had not conducted any benchmarking of the transaction separately and had relied on a global report and agreement which according to the TPO was not acceptable under TP provisions.
  • Further, the TPO stated the following:
  • Management fees constitute a separate class of transaction and hence should be benchmarked separately.
  • The benchmarking to be done following the Comparable Uncontrolled Price Method.
  • For availing of the services, the assessee filed only the Brink’s Global & Regional Services Report.
  • While assessee has provided a description of various services for which the payment was made, no actual evidence consisting of receipt of service has been furnished to justify the price paid or to determine the ALP.
  • The assessee had failed to file particulars associated with the services availed, such as the fee given to employees and the number of hours worked. The TPO, hence, estimated that 750 man-hours would have been devoted with respect to the various services availed by the assessee and INR 3000 per hour would have been paid to the employees. The TPO hence arrived at the figure of INR 22,50,000 by applying the CUP method and made an adjustment of INR 3,83,75,622 to the transaction on account of corporate cost allocation charges paid.
  • AO incorporated the TPO’s order and issued a draft order.
  • The assessee filed objections before the Dispute Resolution Panel (DRP). The DRP held that the TPO has rightly determined the ALP of the intragroup services at INR 22.50 lakhs. The AO, then following the direction of the DRP, made an addition of INR 3,83,75,622/- on account of transfer pricing.
  • Hence, the assessee filed an appeal before the ITAT.

Revenue’s Arguments

  • The assessee did not benchmark the international transactions which amount to a violation of the law.
  • The assessee did not show how the various transactions are closely linked and how they cannot be assessed adequately on a separate basis.
  • The assessee did not show that specific services were rendered by the AE for which payment was to be done.
  • Nothing has been placed before the TPO or the DRP to show that these services rendered by the AE were beneficial for the assessee.
  • The assessee has not submitted any details and evidence of costs actually incurred by the AE in providing the services to the assessee.
  • The assessee has also not provided separate details of costs paid for each service stated to have been availed; all that is stated is that costs incurred by AE have been reimbursed on an allocation basis. No evidence of the same has been furnished.

Assessee’s Arguments

  • The assessee has consistently been benchmarking all of its transactions with the AE under Transactional Net Margin Method (TNMM) for the past seven years and from AY 2009-10 to 2011-12.
  • The assessee has inter alia submitted its working, calculation, allocation, method, rational and business expediency, details of services provided by the AE and break up of the cost of different services before the TPO via report titled “Brinks Global & Regional Services 2011”.
  • The AO wrongly made an adjustment to the ALP of management fees by holding that CUP method is the most appropriate method and doing an ad-hoc unilateral estimation of INR 22,50,000/- by assuming arbitrarily 750 hours @ INR 3000/- per hour without providing the basis of this estimate and without considering the documents submitted in respect of actual costs.
  • The Assessee relies on the decisions of Kellogg India v. DCIT, CLSA India Pvt. Ltd. v. DCIT and Firmenich Aromatics India v. DCIT.

Tribunal’s Judgement

  • Holding TNMM as the most appropriate method, the assessee has consistently been benchmarking all of its transactions with the AE under TNMM from the beginning, for now over seven years.
  • The assessee had submitted before the TPO that its operating revenue is Rs.168.88 crores and the operating profit is Rs.21.78 crores; the profit level indicator i.e. OP/OR works out to 12.90% for the year under consideration. The assessee submitted working of it before the TPO. It also submitted the arithmetic mean of the profit level indicator of the comparables which worked out to 4.86% for the year under consideration. Hence, the assessee had submitted before the TPO its working, calculation, allocation, method, rational and business expediency.
  • The TPO has resorted to ad-hoc unilateral pricing of management fees by summarily rejecting the TNMM.
  • TPO should not have summarily rejected the TNMM in respect of management fees paid/payable by the assessee to its AE and proposed an adjustment under the CUP method, without benchmarking with comparable uncontrolled transactions.
  • The addition of INR 3,83,75,622/- made by the AO as an adjustment on account of transfer pricing is deleted and the appeal is allowed.
  • In arriving at the decision the Tribunal relied on the decisions quoted by the assessee.

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