Arm's length pricing cannot reduce taxable income when management-service costs underpin accepted cost-plus billing to associated enterprises.

A nil arm's length price adjustment for management support services was unsustainable where the management fee formed part of the operating cost base for cost-plus billing to associated enterprises. Excluding that cost while retaining the accepted mark-up would proportionately reduce service revenue and operating profit, thereby reducing taxable income rather than increasing it. Transfer-pricing provisions cannot be applied where the arm's length computation reduces income chargeable to tax or increases loss. The adjustment was therefore 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 management fee formed part of the cost base for cost-plus billing to associated enterprises.

Analysis: The management fee was included in the operating cost base on which the assessee earned a 15% mark-up from its associated enterprises. Removing that cost while retaining the accepted cost-plus margin correspondingly reduced the assessee's service revenue and operating profit. Consequently, the proposed adjustment reduced income chargeable to tax rather than augmenting it. Section 92(3) precludes application of transfer-pricing provisions where arm's length computation reduces taxable income or increases loss.

Conclusion: The nil arm's length price adjustment for management fees was unsustainable and was deleted, in favour of the assessee.

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