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TMI Blog2016 (6) TMI 28X X X X Extracts X X X X X X X X Extracts X X X X ..... S $ 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uch working instead of rejecting the said method. 5. The AO/TPO erred in applying and the DRP erred in upholding the Comparable Uncontrolled Price (CUP) as the most appropriate method for determination of arms length price in respect of investment advisory services. They ought to have held that there could be no comparable in respect of such transaction. 6. The AO/TPO/DRP failed to appreciate that determination of fees for rendering investment advisory services is based on negotiation between the parties. Further, the business model of such services is such that the fees to be charged is influenced by several factors including the size of the mandate, timing of mandate, geography, market conditions, fund complexity, competitive position of the enterprises, future business potential, continuity of business, fee spread etc. and no reliable adjustments can be made in respect of such distinguishing factors. 7. The AO/TPO/DRP erred in holding that the fees charged by the Appellant for rendering investment advisory services to Bourse Securities, Trinidad and Taib Bank EC, Bahrain being non AE's are internal comparables and fees charged by the Appellant to its Associ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ia Infrastructure Equity Open Limited, PCA Securities Investment Trust Co Ltd, Taiwan and ICICI International Limited, Mauritius. The consideration for the services so rendered by the assessee was ₹ 15,74,58,152, ₹ 5,70,88,734 and ₹ 58,54,867 respectively. The consideration so received was claimed to be arm s length price on the services rendered by the assessee. The benchmarking was done under transactional net margin method (TNMM) on the basis of operating EBIT (earning before interest and tax) as percentage of sales, as profit level indicator. The EBIT was stated to be 97.84%. The Transfer Pricing Officer rejected this segmental working by pointing out certain infirmities in the same. It was noted that the investment advisory fee is charges as a percentage of assets under management. He then proceeded to note that while, on an average, the assessee has charged fees of 0.77% of assets under management from the independent enterprises (non- AEs), the assessee has charged, on an average, 0.51% fees from the associated enterprises. While TPO noted that there are number of factors, such as size of AUM (assets under management), complexity of the funds managed, futur ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed to the audited account AS-17 does not carry a separate segment of advisory services, winch is apparently bundled together with other income under the head 'others . Moreover, purportedly un-allocable expenses are not accounted for segment nor any scientific accounting principles have been followed to compute the operating margin from the business segment for advisory services. The discrepancy in the figures pointed out by TPO also remained to be explained by the assessee. Since, the investment advisory has not been incorporated as a separate segment in the published account and the method and amounts of allocation is not acceptable for purposes of benchmarking, the method of TNMM adopted by the assessee stands on a weaker wicket more so when internal CUP is available to TPO for benchmarking the international transactions. More so, when as slated earlier the compensation model of assessee is different from other such service providers. 3.1.11 Keeping the aforesaid in view and the fact that there is a clear-cut product identity of the investment advisory services rendered to AE as well as independent parties, similarity of price setting mechanism, common source of render ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ve, the fees in percentage terms will be higher, and when AUM size is big, and the market is more competitive, the fees in percentage terms will be lower. 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. 9. We have noted that the DRP has justified rejection of TNMM on the ..... X X X X Extracts X X X X X X X X Extracts X X X X
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