SC Upholds ITAT Remand on Intra-Group Services ALP Under Section 92C(3) Transfer Pricing

The Supreme Court’s recent affirmation of the ITAT’s remand in the American Express Banking Corporation (India Branch) case marks a pivotal moment for transfer pricing jurisprudence in India, especially concerning intra-group services. The Court has made it clear: before the Transfer Pricing Officer (TPO) can disregard a taxpayer’s transfer pricing study or assign a “nil” Arm’s Length Price (ALP) for intra-group services, there must be a clear, reasoned satisfaction of the conditions set out in Section 92C(3) of the Income Tax Act. This decision not only reinforces procedural discipline for tax authorities but also strengthens the position of taxpayers who maintain robust documentation and methodical benchmarking.

Key highlights:

• The TPO cannot summarily reject the taxpayer’s transfer pricing analysis or assign a nil ALP for intra-group services unless one or more of the specific conditions under Section 92C(3) are met and properly recorded.
• The TPO’s role is confined to evaluating the pricing and method—not questioning the commercial wisdom or business need for the transaction.
• The judgment places a higher onus on the TPO to document the precise reasons for disregarding the taxpayer’s study, while also raising the bar for taxpayers to maintain comprehensive evidence of service receipt, benefit, and method selection.

Context and Procedural History

The dispute arose from the Indian branch of American Express Banking Corporation’s payments for intra-group services to its overseas Associated Enterprises (AEs). The taxpayer benchmarked these payments using the Transactional Net Margin Method (TNMM), supporting its position with a detailed transfer pricing study and comparables analysis.

The TPO, however, was unconvinced. Citing insufficient evidence of actual services and benefit, the TPO invoked the Comparable Uncontrolled Price (CUP) method and determined the ALP for intra-group services as nil. The Commissioner of Income Tax (Appeals) [CIT(A)] partly reduced the adjustment, applying an ad hoc 50% approach, but did not fully accept the taxpayer’s position.

On further appeal, the ITAT found fault with both the TPO’s “nil” ALP and the CIT(A)’s arbitrary 50% reduction. The ITAT held that since the existence of services was established, the ALP could not be nil, and the matter required a fresh determination by the TPO—this time, strictly in accordance with Section 92C(3).

The Supreme Court has now upheld this remand, underscoring that the TPO must first examine and record which limb of Section 92C(3) is triggered before making any adjustment or disregarding the taxpayer’s method. This judgment is particularly relevant for Indian taxpayers and tax professionals, including those based in Delhi and Chandigarh, where transfer pricing disputes are frequently encountered.

Statutory Scaffold: Section 92C(3) and Related Rules

Section 92C(3) of the Income Tax Act is the statutory gatekeeper for transfer pricing adjustments. It empowers the TPO to disregard the taxpayer’s transfer pricing study and determine the ALP only if one or more of the following conditions are met:

• (a) The price charged or paid in the international transaction has not been determined in accordance with the prescribed methods.
• (b) The taxpayer has not maintained the required documentation as per Rule 10D.
• (c) The information or data used in the computation is unreliable or incorrect.
• (d) The taxpayer has failed to furnish information or documents requisitioned by the TPO within the specified time.

Crucially, the law mandates that the TPO must provide the taxpayer with a show-cause opportunity and record a reasoned satisfaction before proceeding with any adjustment. This procedural safeguard is not a mere formality—it is a substantive check on arbitrary or mechanical adjustments.

Key Takeaway:
The Supreme Court’s ruling re-centres Section 92C(3) as the essential threshold for any transfer pricing adjustment. Both taxpayers and tax authorities must now pay heightened attention to the statutory preconditions, documentation standards, and method selection discipline—especially in the nuanced area of intra-group services.

Issues for Determination

The Supreme Court’s decision brings several core questions into sharp focus for both taxpayers and tax authorities dealing with intra-group services:

• When can the TPO lawfully disregard the taxpayer’s transfer pricing study or method and make an ALP adjustment for intra-group services?
• Is it permissible for the TPO to assign a “nil” ALP where services are shown to exist?
• Under what circumstances can the TPO switch from TNMM to CUP for management or intra-group services?
• What evidentiary and procedural thresholds must be met—especially regarding allocation keys, benefit demonstration, and documentation?

These issues are not just academic—they directly impact how transfer pricing audits are conducted and defended.

Supreme Court’s Holding and Rationale

The Supreme Court’s affirmation of the ITAT’s remand is rooted in a disciplined reading of Section 92C(3). The Court’s key directions and reasoning are as follows:

• Threshold First:
  The TPO must explicitly examine and record which specific limb of Section 92C(3) is triggered before disregarding the taxpayer’s transfer pricing study or substituting the ALP. Generic dissatisfaction or broad-brush assertions are not enough; the TPO’s order must reflect a clear, reasoned basis for intervention.
• Nil-ALP Impermissible if Services Exist:
  Where the existence of intra-group services is established, the TPO cannot simply assign a “nil” ALP. The correct approach is to value the services using an appropriate method, not to negate their value altogether. This aligns with the principle that transfer pricing is about determining the right price—not questioning the business need or commercial wisdom behind the transaction.
• No Ad Hoc Determinations:
  The Court rejected the CIT(A)’s approach of arbitrarily reducing the adjustment to 50%. Transfer pricing adjustments must be method-driven and supported by benchmarking—not by ad hoc or percentage-based reductions.
• Method Discipline:
  If the TPO wishes to switch from the taxpayer’s chosen method (such as TNMM) to another (like CUP), there must be a demonstrable basis. The TPO must show that reliable internal or external CUPs exist and that comparability has been properly established. Merely citing CUP without applying it rigorously is not sufficient.

Alignment with Established Jurisprudence and Guidance

The Supreme Court’s approach is consistent with established Indian and international jurisprudence:

• Commercial Expediency Not Justiciable by TPO:
  As held in EKL Appliances and similar cases, the TPO’s mandate is to examine the price and method—not to second-guess the taxpayer’s business rationale or need for the service.
• OECD Guidelines on Intra-Group Services:
  The ruling echoes OECD guidance, which distinguishes between chargeable services and non-chargeable activities (such as shareholder functions or incidental group synergies). The “benefit test” is about showing a reasonable expectation of benefit—not necessarily quantifying profit or cost savings.
• Consistency with ITAT/HC Lines:
  Indian tribunals and High Courts have repeatedly held that “nil-ALP” is not sustainable where services are demonstrated, and that method selection must be justified with evidence and comparability.

Section 92C(3) Conditions: What Must the TPO Prove?

For the TPO to lawfully disregard the taxpayer’s transfer pricing study and make an adjustment, at least one of the following must be specifically established and recorded:

• (a) Method Not in Accordance:
  The taxpayer’s method is not as per Section 92C(1)/(2)—for example, using an inappropriate profit level indicator (PLI), poor comparables, or unsuitable filters.
• (b) Documentation Lapses:
  Failure to maintain or furnish required documentation under Rule 10D—such as missing agreements, absence of a functional analysis (FAR), or lack of cost allocation basis.
• (c) Unreliable or Incorrect Data:
  Use of flawed datasets, incomparable segments, or blended margins that undermine the reliability of the analysis.
• (d) Non-Furnishing of Information:
  The taxpayer fails to provide requisitioned information within the specified time, after being given a proper show-cause opportunity.

Recording of Satisfaction:
The TPO’s satisfaction must be specific, evidenced, and reasoned. Vague or boilerplate observations will not suffice. This procedural rigor is now a judicially enforced safeguard.

Method Selection for Intra-Group Services: TNMM vs CUP

When is TNMM Defensible?
TNMM is generally appropriate for integrated, back-office, or support services—especially where services are bundled, cost allocations are pooled, and reliable CUPs are scarce.

When Can CUP Prevail?
CUP may be suitable for specific, separable services where internal or external comparables exist—such as standardized third-party rates, time-writing with market benchmarks, or where the service is clearly delineated and priced in the open market.

Pros and Cons:

• TNMM: Easier to apply for multi-service bundles, but may mask differences in service intensity or value.
• CUP: Offers precision where comparables exist, but can be misapplied if reliable data is lacking or if services are not truly comparable.

The TPO must justify any switch in method with concrete evidence and a clear comparability analysis.

Key Takeaway:
The Supreme Court’s decision demands both procedural and substantive discipline from the TPO. Adjustments to ALP—especially for intra-group services—must be rooted in a clear statutory trigger, robust documentation, and a defendable method. For taxpayers, this is both a shield and a call to strengthen their transfer pricing files. Taxpayers and professionals operating in metros like Moradabad and Bareilly would benefit from awareness of these enhanced substantiation standards.

Substantiation Standards: Demonstrating Receipt and Benefit

For taxpayers, the Supreme Court’s ruling heightens the need for contemporaneous, granular documentation to substantiate both the existence and benefit of intra-group services. The days of relying on generic emails or broad assertions are over—taxpayers must now build a robust evidentiary spine that can withstand close scrutiny.

Essential Documentation Includes:

• Intercompany Agreements: Clearly define the scope, nature, and pricing of services, with explicit exclusions for shareholder or duplicative activities.
• Service Catalogues and SLAs: Detail the types of services, expected deliverables, and performance metrics (KPIs).
• Work Product Evidence: Memos, reports, toolkits, training logs, and other tangible outputs that demonstrate actual service delivery.
• Time Sheets and Cost Allocations: Transparent allocation keys (e.g., headcount, usage, transaction volume) and supporting extracts from cost centers.
• Benefit Narratives: Records showing how services were used—such as process improvements, compliance outcomes, or operational efficiencies. The “benefit test” is about a reasonable expectation of benefit, not necessarily a direct profit or cost saving.

What Not to Include:

• Shareholder Activities: Strategic oversight, group financing, or activities benefiting only the parent entity are not chargeable.
• Duplicative Services: If the Indian entity already performs the function, charges for the same from the AE are not defensible.
• Incidental Group Synergies: Passive benefits from being part of a group (e.g., brand reputation) are not chargeable services.

For more on helping companies structure such documentation, see our outsourcing services which assist businesses in maintaining compliant records.

Adequate FAR and Cost-Benefit Analysis

A Functional, Asset, and Risk (FAR) analysis is the backbone of any defensible transfer pricing file for intra-group services. Taxpayers should articulate:

• Functions: What the service provider and recipient actually do—who initiates, who executes, who benefits.
• Assets: Any intellectual property, proprietary tools, or platforms deployed in service delivery.
• Risks: Who bears delivery, quality, or compliance risks.

Cost-Benefit Memo:
Prepare a contemporaneous note explaining:

• The business need for the service.
• Alternatives considered (e.g., in-house vs. outsourced).
• The rationale for the chosen method and allocation key.
• Why the charge is reasonable in the context of the group and the market.

Allocation Logic:
Use transparent, auditable drivers (e.g., number of users, revenue share, transaction count). Reconcile allocations to AE financials and document any exclusions or pass-throughs.

Burden of Proof and Procedural Dynamics Post-Remand

Taxpayer’s Burden:

• Maintain primary documentation under Rule 10D.
• Demonstrate the existence of services, the basis of charge, and the appropriateness of the selected method with benchmarking.

TPO’s Burden:

• Explicitly record which Section 92C(3) condition is triggered, with evidence.
• Apply the most appropriate method, supported by reliable comparables.
• Avoid conclusory “nil” determinations—if services exist, they must be valued.

Onus Shifts:
Once the taxpayer establishes a coherent service narrative and method, the TPO must rebut with specific evidence and a defendable alternative method. The remand process thus recalibrates the procedural balance, ensuring neither side can rely on bare assertions.

Risks if 92C(3) Is Not Properly Recorded by TPO

• Vulnerability on Appeal: Adjustments made without a clear, reasoned 92C(3) trigger are likely to be remanded or struck down by appellate authorities.
• Scrutiny of “Nil-ALP” and Ad Hoc Adjustments: Both are now on thin ice—without methodical justification, they will not survive judicial review.
• Need for Speaking Orders: TPOs must issue detailed show-cause notices and reasoned orders to withstand scrutiny.

Practical Implications for Businesses and Advisors

What Changes on the Ground?

• Method Defense: Taxpayers must be ready to explain why TNMM or CUP is most appropriate for each service type, with supporting data.
• Segmentation and Traceability: Costs and benefits must be traceable to specific services and entities—no more pooled or opaque allocations.
• Proactive Engagement: Respond thoroughly to TPO show-cause notices, especially on filters, comparables, and data reliability.
• Strategic Levers:
• Pilot internal CUPs for standardized services.
• Build SLA/KPI frameworks to make benefits auditable.
• Consider Advance Pricing Agreements (APAs) for recurring management services.
• Prepare for Mutual Agreement Procedure (MAP) if cross-border alignment is needed.

Taxpayers seeking structured assistance may consider services offered in Gurgaon, as well as comprehensive finance services by experts in the field.

Frequently Asked Questions (Practitioner Pain Points)

1. What specific 92C(3) triggers justify disregarding the TP study?
Only if the method is not as per law, documentation is missing, data is unreliable, or information is not furnished after due notice.

2. How to avoid a “nil-ALP” determination despite qualitative services?
Demonstrate actual receipt and benefit with tangible evidence—agreements, deliverables, usage logs, and benefit narratives.

3. When can TPO validly prefer CUP over TNMM for management fees?
Where reliable, comparable uncontrolled prices exist for the specific service, and segmentation is possible.

4. What is “adequate” FAR and cost-benefit evidence in practice?
Detailed functional analysis, asset deployment, risk allocation, and a contemporaneous memo explaining business need and allocation logic.

5. How does remand recalibrate burden of proof?
Taxpayer must first establish service and method; TPO must then rebut with evidence and a reasoned alternative.

6. Consequences if TPO skips explicit 92C(3) satisfaction?
Adjustment is vulnerable to being struck down or remanded for procedural non-compliance.

7. How to document to withstand scrutiny under this judgment?
Maintain layered, contemporaneous evidence—agreements, deliverables, allocation keys, and benefit narratives.

8. Is the ruling universally binding or fact-bound?
While fact-specific, the procedural principles on 92C(3) satisfaction and method discipline are of general application.

9. Top five advisory takeaways for structuring and defending intra-group services:

• Maintain robust, contemporaneous documentation.
• Align method to service profile and data availability.
• Ensure transparent, auditable allocations.
• Respond thoroughly to TPO queries.
• Exclude shareholder/duplicative activities from charge base.

Do’s and Don’ts for Intra-Group Services Post-Judgment

Do:

• Keep contemporaneous, layered evidence.
• Align method to service profile and market realities.
• Use transparent allocation keys.
• Respond comprehensively to TPO show-cause notices.

Don’t:

• Rely on generic or incomplete documentation.
• Mix shareholder or duplicative activities in the charge base.
• Use opaque or arbitrary allocations.
• Assume TNMM always insulates from CUP scrutiny.

Key Takeaways and Closing Analysis

The Supreme Court’s decision re-centres Section 92C(3) as the gateway for transfer pricing adjustments. Unless the TPO records a specific, reasoned trigger, any adjustment—especially a “nil-ALP” or ad hoc percentage—will be on shaky ground. For taxpayers, this is both a shield and a call to action: institutionalise documentation discipline, method rigor, and service governance. For tax professionals, the judgment is a clarion call to move beyond checklists and build defensible, evidence-backed narratives for every intra-group service arrangement.