Transfer pricing profit split method rejected for lack of evidence on functions, risks and intangibles; club membership expense allowed.

Profit split method was found unsustainable for the assessee's agency and marketing support services because the record did not show that it performed critical functions, assumed significant risks, or used valuable intangibles. The transfer pricing adjustment was therefore set aside and the arm's length price was directed to be re-determined under a suitable method after fresh factual examination, including proper consideration of TNMM. Club membership expenditure incurred for directors was treated as allowable business expenditure under settled precedent, so the 50% disallowance under section 37(1) was deleted.

---

---

Issues: (i) Whether the transfer pricing adjustment made by applying the Profit Split Method to the assessee's agency and marketing support services was sustainable, and whether the matter should be restored for fresh determination of arm's length price by a suitable method. (ii) Whether disallowance of 50% of club membership expenses claimed under section 37(1) was justified.

Issue (i): Whether the transfer pricing adjustment made by applying the Profit Split Method to the assessee's agency and marketing support services was sustainable, and whether the matter should be restored for fresh determination of arm's length price by a suitable method.

Analysis: The assessee's role in the disputed international transactions was confined to acting as a mediator between associated enterprises and Indian buyers or sellers, along with supplying market information. The finding that it performed critical functions, assumed significant risks, or used valuable intangibles was unsupported by material evidence. The reliance on the earlier Tribunal view in Li & Fung was found misplaced in light of its reversal by the jurisdictional High Court. At the same time, rejection of the Profit Split Method did not eliminate the need to determine arm's length price under an appropriate method, and the matter required a fresh factual exercise because the alternative TNMM analysis was not properly carried out.

Conclusion: The transfer pricing adjustment was set aside and the issue was restored to the Assessing Officer and Transfer Pricing Officer for fresh determination of arm's length price under a suitable method, after granting due opportunity to the assessee.

Issue (ii): Whether disallowance of 50% of club membership expenses claimed under section 37(1) was justified.

Analysis: Corporate membership fee and club expenses incurred on behalf of directors were treated as revenue expenditure in light of settled judicial precedent holding such expenditure to be allowable as business expenditure.

Conclusion: The disallowance of club membership expenses was deleted.

Final Conclusion: The appeal succeeded on the club expense issue and failed on the transfer pricing adjustment as originally made, with the latter requiring de novo determination, resulting in a partial allowance of the appeal.

Ratio Decidendi: A profit split method cannot be applied to transfer pricing unless the Revenue substantiates, with material evidence, that the assessee performed critical functions, assumed significant risks, or used valuable intangibles in the international transactions; corporate club membership expenditure may be allowable as business expenditure where incurred for business purposes.

---