Any Other Method – Is it available only if none of the prescribed methods are applicable?
Indian High Court in a recent decision1 has laid down important principles with regard to selection and application of the most appropriate method for computation of arm’s length price under transfer pricing law of India.
BACKGROUND
The Indian subsidiary was providing marketing support services to its group companies against receipt of commission at a fixed rate. The consideration received by the Indian subsidiary was benchmarked applying TNMM as the most appropriate method, using Operating Profit / Value Added Expenses (‘OP / VAE’) as the indicator for 2 comparison.
The tax officer, however, applied ‘Any Other Method’ for benchmarking the transaction, wherein, he came up with 7 uncontrolled commission agreements and held that the rate at which commission is charged by Indian subsidiary is less than arm’s length rate of commission. The tax officer, accordingly, computed the shortfall / deficit of commission earned by the Indian subsidiary and added in its income.
The ‘any other method’ is the sixth method introduced by the Government of India to relax the provision of CUP method which requires actual transactions for comparison; and to consider hypothetical price which would have been charged under comparable uncontrolled conditions as the arm’s length price.
The ITAT 3 reversed the addition made by the tax officer holding that –
- The tax officer (TPO) had not provided any reasons for rejecting TNMM before selecting ‘Any Other Method’, and
- TNMM was accepted as the most appropriate method in the earlier years, and it shall not be changed unless necessary due to change in law or facts, and
- Berry ratio, i.e. OP / VAE is an acceptable indicator while applying TNMM [Refer decisions4 ]
The tax officer challenged the order of ITAT before the High Court of Delhi. The High Court approved the decision of ITAT on the above reasons.
ISSUE:
In the present case, the High Court also held that – ‘Any Other Method’ can be applied only if none of the Other Methods are considered as the most appropriate method. However, this finding is contrary to the following decisions –
The ITAT in case of Toll Global Forwarding India Pvt. Ltd. held that ‘any other method’ is not a residual method and for its application, it is not necessary that all other method must fail. Interestingly, the decision of ITAT was approved by High Court as well as Supreme Court.
The Special Bench in case of Star India Ltd. held that there is no order of preference in using the methods and ‘any other method’ is neither inferior nor superior to other methods.
WHILE THE VIEW TAKEN BY THE HIGH COURT IN SABIC WAS ALSO SUPPORTED BY THE FOLLOWING:
The ICAI5 says it would be necessary to justify and document reasons for rejection of all other five methods
while selecting the ‘Other Method’ as the most appropriate method.
OECD Transfer Pricing Guidelines – In cases where other methods are used, their selection should be supported by an explanation of why OECD – recognized methods were regarded as less appropriate or non workable in the circumstances of the case and of the reason why the selected other method was regarded as providing a better solution.
The Chennai Bench of Tribunal in the case of RKM Powergen Private Limited upheld application of ‘Any Other Method’ since none of the methods were applicable to the facts of the case. Similar are the decision of many Tribunal, wherein, ‘Any other method’ is selected as the last resort as per the facts of the case.
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