Arm's length pricing cannot be fixed at nil when accepted cost-plus pricing includes the management-support service cost.

A nil arm's length price for management support services cannot be sustained where the service cost forms part of the accepted cost base under a cost-plus model. The transactional net margin method and the operating margin for the information-technology enabled services segment were accepted, with the management-support cost included in that base. Determining the service value at nil without functional, asset and risk analysis was impermissible. Excluding the cost would also reduce revenue recoverable from the associated enterprise and lower taxable income; therefore, section 92(3) barred the adjustment. The nil arm's length price adjustment was deleted.

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Issues: Whether a transfer-pricing adjustment determining the arm's length price of management support services received from an associated enterprise at nil could be sustained where the service cost formed part of the accepted cost base for cost-plus pricing of services rendered by the assessee.

Analysis: The transactional net margin method and the 15% operating margin for the information-technology enabled services segment were accepted, and the management-support service cost was included in that accepted cost base. Determination of the service transaction at nil without a functional, asset and risk analysis was impermissible. Removal of that cost from the cost base would correspondingly reduce the revenue recoverable by the assessee from its associated enterprise under the accepted cost-plus model, resulting in a reduction of taxable income. Section 92(3) consequently prohibited application of the arm's length principle in those circumstances.

Conclusion: The nil arm's length price adjustment for management support services was deleted in favour of the assessee.

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