Fees For Technical Services + CUP vs. TNMM + Importance Of FAR Analysis & PLI

To constitute “fees for technical services”, it is necessary that some sort of ‘managerial’, ‘technical’ or ‘consultancy’ services should have been rendered in consideration. The terms ‘managerial’, ‘technical’ or ‘consultancy’ do not find a definition in the Income-tax Act, 1961 and need to be interpreted based on their understanding in common parlance. Services rendered under a Buying Services Agency agreement are routine services offering procurement assistance. They consist of negotiating between the Principal and the manufacturers for purchase of merchandise. The fees for such services does not constitute "fees for technical services" u/s 9(1)(vii).

See also ADIT vs. BHEL-GE-Gas Turbine Servicing (ITAT Hyderabad)

(i) For comparability analysis, the Comparable Uncontrolled Method (CUP) is better than the TNMM, especially if internal CUP instances are available;

(ii) the assessee’s argument that "weighted average arithmetic mean" of brokerage rates as compared to the "simple average arithmetic mean" of such rates should be adopted is not acceptable because the First Proviso to s. 92C refers only to "arithmetic mean" of more than one ALP and does not require the volume of the relevant transactions to be taken into consideration;

(iii) under Rule 10B(1)(a)(ii) adjustments to account for difference, if any, between the international transaction and the comparable uncontrolled transaction which could materially affect the price in the open market have to be made. However, the onus is on the assessee to make out a case for such adjustment (on account of differences in marketing function, research functions and differences in volumes) supported by relevant facts & figures & documentary evidence.

(i) The FAR analysis gives the basis of broad characterization for e.g. Manufacturer, Service Provider, Distributor, etc with a further sub-characterization including low-risk service provider, high risk service provider; Full-Fledged manufacturer, contract manufacturer, etc. These characterizations are vitally important to determine the arm’s length price of international transactions;

(ii) The Dept has proceeded on the erroneous premise that the assessee is a risk bearing AE and its functions are not in the nature of a service provider only. The FAR attributable to assessee are far greater than what are claimed. It is also assumed that the assessee has developed substantial intangibles in the form of human resources and supply chain and enjoys location advantages. The fact is that the assessee is only a low risk procurement support service provider;

(iii) The arm’s length pricing (method & Profit Level Indicator (PLI)) should be the one which reflects commercial and economic realities of the industry and does not lead to aburd results. The Dept’s choice of PLI of percentage of FOB value of goods procured by parent results in absurd and distorted results. The appropriate PLI is net profit/ total cost as adopted by the assessee.

(iv) On the Q of percentage of mark-up to be applied to the assessee’s cost, in a comparable instance of Li & Fung vs. DCIT 12 ITR (Trib) 748, the rate of 32% was applied as opposed to the rate of 15% applied by the assessee. The said rate has to be applied to the assessee’s case well.