(2014) 367 ITR 730 (Del)
General conditions for revenue expenditure; determination of arm's length price; reference to the Transfer Pricing Officer
No to both. The officer's role is to price the transaction, not to decide whether the expenditure should be allowed. Deductibility is for the Assessing Officer to determine separately under the ordinary provisions.
May the Transfer Pricing Officer determine the arm's length price of intra-group services at nil on the ground that no benefit was received, and does that determination dispose of the deductibility of the payment?
The assessee reimbursed its overseas group companies for the cost of regional and global support services — including management, marketing and administrative support — on a cost allocation basis. The Transfer Pricing Officer took the view that the assessee had not demonstrated any tangible benefit from the services, determined the arm's length price at nil, and the entire payment was disallowed in consequence. The assessee contended that the officer had confused two distinct enquiries: what the services should have cost, and whether the expenditure was allowable.
The matter came before the Delhi High Court from the Tribunal, and the Court took the opportunity to delineate the respective functions of the Transfer Pricing Officer and the Assessing Officer.
For the assessee
The transfer pricing provisions supply machinery for determining whether the price charged between associated enterprises is at arm's length. Whether an expenditure was incurred for the purposes of the business and is therefore deductible is a separate question arising under the ordinary deduction provisions, on which the Assessing Officer must apply his own mind.
For the Revenue
If no benefit was derived, an independent enterprise would not have paid anything for the services, so nil is the correct arm's length price. Determining the price at nil disposes of the matter and no separate enquiry into deductibility is required.
The Court held that the two enquiries are distinct and must not be collapsed into one. The Transfer Pricing Officer's mandate is to determine the arm's length price of an international transaction by applying the prescribed methods; it is not to assess whether the expenditure satisfies the conditions for deduction. Conversely, the Assessing Officer retains the jurisdiction to examine whether a payment was laid out wholly and exclusively for the purposes of the business, and that examination is not concluded by the transfer pricing determination. The Court held that a finding of nil arm's length price founded solely on the absence of demonstrable benefit is in substance a disallowance dressed up as a pricing exercise, and is beyond the officer's function. It accepted that the benefit question is not wholly irrelevant — evidence that services were actually rendered bears on comparability and on the pricing analysis — but held that it cannot be used to determine the price at nil without a proper application of the prescribed methods. The Court also observed that cost allocation without mark-up may itself be an arm's length outcome where the services are of a shareholder or stewardship character.
Applied under Sections 165 and 166 of the IT Act 2025 for pricing, and Section 34 for deductibility. Together with EKL Appliances it forms the principal defence to nil adjustments on intra-group service and management fee arrangements, which remain among the most frequently litigated transfer pricing issues. The separation of functions it insists on also affects procedure, since each determination must be challenged on its own footing.