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2016 (7) TMI 1497 - AT - Income TaxTPA - determining the ALP of management fees - benchmarking technique - Held that - We find that the assessee bench marked its international transactions by computing the operating margin at entity level which is not as per the provisions of Transfer Pricing because the international transactions has to be tested by comparing with uncontrolled and unrelated price. When the assessee earns the revenue of more than 50% from the non-AE clients then the bench marking of the international transactions by taking the results at entity levels is not appropriate therefore we do not approve such methodology applied by the assessee in bench marking the international transactions. TPO has segregated the ITES from management fees and found that the international transactions of ITES exclusive of management fees at arm s length. The action of the TPO in determining the ALP of management fees at NIL is not justified because the assessee has paid the management fees under the agreement wherein the services provided by the AE has been enlisted. Though the price accepted by the department under said agreement are not applicable for the year under consideration however, on principle the management fees is accepted along with the other service and the ALP for ITES as well as other services including the payment of management fees has to be determined on composite transaction basis. The TPO has not examined the matter by considering the management fees as part of the operating cost for the purpose of testing the ITES as per provisions of section 92 of the Act. Accordingly, we set aside the matter to the record of the TPO/A.O for reconsideration of the same afresh in terms of the above observations. - Appeal of the assessee is allowed for statistical purposes.
Issues:
Transfer pricing documentation, Comparable Uncontrolled Price (CUP) method vs. Transactional Net Margin Method (TNMM), Benefit received from management fees, Business model of IT enabled services, Necessity vs. arm's length nature of management fees, Acceptance of ITES and management fees as a composite transaction. Transfer Pricing Documentation: The appeal challenged the order of the Commissioner of Income Tax (Appeals) regarding the Assessment Year 2007-08. The appellant disputed the rejection of their economic analysis in the Transfer Pricing documentation supporting the arm's length nature of international transactions. Comparable Uncontrolled Price (CUP) vs. TNMM: The appellant argued that the CIT (Appeals) erred in upholding the application of CUP method over TNMM for determining the arm's length nature of management fees. They contended that detailed documents were provided to support the benefits received against the payment of management fees. Benefit Received from Management Fees: The authorities questioned the benefit derived by the appellant from management services, leading to the rejection of the ALP of management fees. The appellant emphasized proving the economic benefits received and the link between management fees and IT enabled services. Business Model of IT Enabled Services: The appellant highlighted the necessity of understanding their business model concerning IT enabled services and management fees, asserting that the receipt of services is closely tied to the provision of IT enabled services. Necessity vs. Arm's Length Nature of Management Fees: The dispute revolved around the necessity for payment of management fees versus determining the arm's length nature of such payments. The appellant argued for a focus on the arm's length nature rather than the necessity of the fees. Acceptance of ITES and Management Fees as Composite Transaction: The appellant pointed out the department's acceptance of ITES and management fees as an integrated transaction under an advance pricing agreement. They argued against segregating management fees from ITES and emphasized the composite nature of the transaction. The Tribunal found the appellant's methodology of benchmarking international transactions at the entity level inappropriate. The TPO's determination of the ALP of management fees at Nil was deemed unjustified as the appellant had paid the fees under a specific agreement listing services provided by the AE. The Tribunal emphasized that without evidence of additional expenditure on the same services, concluding that the appellant did not receive management services was unwarranted. The Tribunal referred to the Advance Pricing Agreement accepting management fees along with ITES, highlighting the composite nature of the transaction. It directed a reconsideration by the TPO/A.O to evaluate the management fees as part of operating costs for testing ITES, setting aside the matter for further review based on these observations. Ultimately, the appeal of the assessee was allowed for statistical purposes, with the decision pronounced on 25.07.2016.
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