Recently, the Income Tax Appellate Tribunal (ITAT) Mumbai has ruled in favor of Otis Elevator Company (India) Limited[1] (‘the Assessee’), whereby it was held that the transfer pricing adjustment on the payment of management fees to AE under section 37(1) of the Act cannot be made on the ground that claim of deduction does not pass the legal test, without appreciating that the expenses were incurred wholly and exclusively for the purposes of the business.
The Revenue had challenged the necessity and benefit of the services rendered by AE, arbitrarily setting the Arm’s Length Price (ALP) at NIL. The assessee, provided a robust benchmarking analysis and substantial evidence of the services’ legitimacy.
The Tribunal observed that the Revenue’s role is not to question the prudence of business expenditures but to ascertain their genuineness. The ITAT invoked established legal precedents to reinforce that business decisions are the domain of the company, not to be second-guessed by tax authorities.
By emphasizing the need for objective assessment of actual services and their relevance, the Tribunal rejected the Revenue’s “NIL ALP” determination. It acknowledged the qualitative and quantitative benefits derived from intra-group services, aligning with the principles of fair cost allocation as per OECD guidelines.
The ITAT concluded that the company met all tests of need, benefit, and evidence. ITAT annulled the erroneous adjustment of INR 7.04 crores (~ USD 830,000), allowing the appeal.
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[1]Otis Elevator Company (India) Limited [I.T.A. No. 3337/Mum/2024]
