ITAT Hyderabad Strikes Down ₹5.10 Crore Transfer Pricing Adjustments in Adama India Pvt. Ltd. vs DCIT

Overview of the Dispute

The Hyderabad Bench of the Income Tax Appellate Tribunal, in the matter of Adama India Pvt. Ltd. Vs DCIT (ITAT Hyderabad), adjudicated upon two significant transfer pricing adjustments for Assessment Year 2013-14. The appeal arose from an order of the CIT(A)-1, Hyderabad dated 18.02.2019 passed in case no. 299/2018-19, under proceedings initiated under Section 143(3) read with Section 92CA(3) and Section 92CA(5) of the Income Tax Act, 1961.

The Tribunal ultimately ruled in favour of the assessee on both grounds, directing deletion of the aggregate transfer pricing adjustment amounting to approximately ₹5.10 crore — comprising ₹2,84,58,356 on account of management services received from overseas associated enterprises and ₹2,26,05,726 on account of notional interest imputed on overdue receivables from such associated enterprises.

Background and Factual Matrix

Adama India Pvt. Ltd. had entered into international transactions with its overseas associated enterprises (AEs) involving the receipt of management services. For transfer pricing purposes, the assessee had aggregated these management service transactions with its manufacturing operations and benchmarked them collectively using the Transactional Net Margin Method (TNMM). The assessee maintained that the management services were inextricably connected to its core manufacturing activities and that disaggregating them for separate benchmarking would introduce distortions in the comparability analysis.

The Transfer Pricing Officer (TPO), however, took a divergent position and insisted that management services constituted a distinct international transaction requiring independent benchmarking. Upon calling for additional submissions, the TPO concluded that the assessee had failed to substantiate the actual commercial benefit derived from these services and accordingly determined the Arm's Length Price (ALP) of the management services at NIL, resulting in an upward adjustment of ₹2,84,58,356.

The assessee's appeal before CIT(A) did not yield relief, with the appellate authority affirming the TPO's approach without independent reasoning. The matter was then carried before the ITAT.

Ground 1: Transfer Pricing Adjustment on Receipt of Management Services

Position Adopted by the Assessing Officer and TPO

The TPO rejected the assessee's aggregated TNMM approach and determined the ALP of management services at NIL on the following reasoning:

  • The TP documentation maintained by the assessee did not satisfy the criteria under Rule 10B and the benchmarking analysis was considered unreliable.
  • The assessee had only produced an intercompany agreement, intercompany invoices, and email exchanges — which the TPO found insufficient to establish actual receipt of services.
  • The assessee could not demonstrate tangible commercial benefit received in proportion to the payment made.
  • Several case laws relied upon by the assessee — including Safran Aerospace India Pvt. Ltd. (ITA No. 1261/Bang/2010), TNS India Pvt. Ltd. (ITA No. 944/Hyd/2007 and connected appeals), AWB India Pvt. Ltd. (ITA No. 4454/Del/2011), and AXA Technologies Shared Services Pvt. Ltd. (IT(TP)A No. 659/Bang/2012) — were brushed aside as fact-specific and inapplicable.

The TPO elaborated that the benefit test for management services requires the assessee to demonstrate that:

  1. The intangible services were actually received.
  2. The payment reflects charges that would reasonably be levied between independent parties under comparable circumstances.
  3. An independent party in a similar situation would willingly pay for such services.
  4. The payment resulted in direct and substantial economic or commercial value to the assessee.
  5. Quantifiable benefit — either in the current year or in future years — can be established through profitability analysis.