2016 (6) TMI 28 - AT - Income Tax

Arm s length price adjustment in respect of investment advisory fees charged by the assessee from its associated enterprises - selection of MAM - Held that - The exercise of ascertaining the arm s length price, simplictor on the basis of the fees in percentage terms with non AEs and without having regard to the other factors governing determination of price, is inappropriate and unsustainable in law. It is also important to bear in mind the fact though rule 10B refers to the expression price , rather than the expression amount , the connotations of price cannot extend to a formula on the basis of which the amount is to be quantified, in all situations- particularly when the formula on the basis of which amount is determined does not have a direct nexus with the product or service involved. What has been adopted as internal CUP, i.e. fees in percentage terms at the level of US 0.39 million fund and US 2.55 million fund, is inherently incomparable with the fees, in percentage terms at the level of US 135.83 million fund and US 37.75 million fund. We, therefore, reject the adoption of this internal CUP. We have noted that the DRP has justified rejection of TNMM on the ground that the normal trade practice is to invoice the investment advisory services, in intra AE transactions, on cost plus basis. It is difficult to understand the rationale of this approach. What is done by other entities in similar situations is hardly relevant as long as no defects are pointed out in the applicability of the TNMM on the facts of this case. The internal CUP, as used in this case, has been found to be inappropriate and unacceptable. There is nothing else to show the suitability of any other method on the facts of this case, and, if at all there is a residuary method, or what is termed as the method of last resort, it is transactional net margin method. TNMM has almost become the default method for taxpayers in recent years. In view of these discussions, in our considered view, the TNMM method, as adopted by the assessee, should have been accepted. We have also noted that the assessee has produced segmental accounts for the investment advisory services in this case. As regards the point that only salary costs are taken into account in the segmental accounts and other costs are not taken into account and other issues with respect to correct working of the TNMM, with the consent of the parties, we remit the matter to the file of the TPO for adjudication de novo on the correctness of the segmental accounts, in accordance with the law, by way of a speaking order and after giving yet another opportunity of hearing to the assessee.

Summary

Issues Involved:
1. Correctness of arm’s length price adjustment of ? 28,71,30,628 in respect of investment advisory fees charged to the associated enterprises.

Issue-wise Detailed Analysis:

1. Correctness of Arm’s Length Price Adjustment:
The appeal challenges the order dated 30th October 2012 passed by the Assessing Officer (AO) concerning the assessment year 2008-09, specifically focusing on the arm’s length price (ALP) adjustment of ? 28,71,30,628 related to investment advisory fees charged to associated enterprises (AEs).

2. Rejection of Transactional Net Margin Method (TNMM):
The AO and Transfer Pricing Officer (TPO) rejected the TNMM adopted by the assessee, which was based on operating EBIT as a percentage of sales. The TPO pointed out infirmities in the segmental working and noted the discrepancy in fees charged to AEs (0.51%) versus non-AEs (0.77%).

3. Adoption of Comparable Uncontrolled Price (CUP) Method:
The TPO adopted the CUP method, considering it the most appropriate for determining the ALP. The internal CUP was based on fees charged to Bourse Securities, Trinidad, and Taib Bank EC, Bahrain. The TPO set the internal CUP rate at 0.78% and proposed an adjustment of ? 28,71,30,628.

4. Dispute Resolution Panel (DRP) Confirmation:
The DRP upheld the TPO’s decision, emphasizing that the assessee’s compensation model, based on a percentage of fund size, differed from the typical cost-plus basis used by other service providers. The DRP concluded that TNMM was not the most appropriate method in this case due to the lack of a separate segment for advisory services in the published accounts and the unacceptability of the allocation methods used.

5. Tribunal’s Analysis and Decision:
The Tribunal noted that the CUP method has an inherent edge but requires a comparable uncontrolled transaction. The significant difference in the volume of business between AEs and non-AEs rendered the fees in percentage terms incomparable. The Tribunal rejected the internal CUP method due to the lack of comparability and found the DRP’s justification for rejecting TNMM unconvincing. The Tribunal emphasized that TNMM should be accepted unless specific defects are identified.

6. Remittance to TPO:
The Tribunal remitted the matter to the TPO for a de novo adjudication on the correctness of the segmental accounts, directing the TPO to issue a speaking order and provide the assessee with another opportunity for a hearing.

Conclusion:
The appeal was allowed for statistical purposes, with the Tribunal upholding the objection in principle and remitting the matter to the TPO for further examination of the segmental accounts. The decision was pronounced in the open court on 31st March 2016.