2024 (6) TMI 811 - AT - Income Tax

TP adjustment on brokerage commission received by the assessee from its AE s - MAM selection - assessee has worked out the rate of commission to be 0.13% of the turnover in the case of clearing house transaction and 0.04% in case of futures transaction and had bench marked the said transaction using TNMM - Charging of higher rate of brokerage commission levied on overseas non AE s has to be the arm s length price for the AE s for similar services rendered by the assessee and also the method to be adopted for determination of the ALP for the said brokerage receipt i.e. whether TNMM or CUP method to be the most appropriate method - assessee s contention is that the nature of service varies from client to client depending upon various parameters and requirements and that TNMM method is the most appropriate method for bench marking the said transaction - HELD THAT - TPO whose recommendation has been followed by the ld. A.O. in passing the assessment order has not specified as to how CUP method is the most appropriate method except for the fact that in A.Y. 2004-05 the assessee has bench marked the transaction using CUP method. A.O./TPO has also not specified as to what were the comparables that was relied upon for determining the ALP of the said transaction and has also not given a specific finding as to what is the similarity in the services rendered to the AEs and non AEs provided by the assessee pertaining to the brokerage commission received by the assessee though the ld. TPO has stated in his order that TNMM method cannot be adopted in this case where the difference in product and services relate to unrelated parties are identifiable based on the documentation available with the assessee the TPO has not given a detailed finding as to how he has arrived at the said contention. Thus as this issue is a recurring one which has been dealt with by the Tribunal in assessee s case for various years we do not find any change in the circumstances or the nature of transaction entered into by the assessee with its AE during the year under consideration. We therefore deem it fit to allow these grounds of appeal raised by the assessee by holding the said transaction to be at arm s length and TNMM to be the most appropriate method for determining the arm s length price. Ground nos. 3 to 10 raised by the assessee is allowed. Payment of royalty/branding fee - Assessee had relied on the Exchange Control Regulation as per which 1% of the domestic sales and 2% for the export sales was to be charged as payment of royalty under the automatic rule for use of trade mark and brand name of a foreign collaborator without any technology transfer and has bench marked the said transaction by using TNMM method - assessee s contention was not accepted by the ld. TPO/AO for the reason that the assessee has failed to substantiate that the ownership of CLSA belongs to the Netherland entity when the said company is based in Hongkong and merely producing the brand registration letter to prove the ownership of CLSA BV is per se not sufficient -HELD THAT - As observed that the Tribunal in the earlier years has held that CLSA BV owned the brand CLSA which had facilitated the assessee to establish and promote business in the Indian industry. It was also held that the other group entities were not making payment on royalty for the reason that different entity have different arrangements in different jurisdiction and the assessee was not in commission sharing arrangement and therefore was entitled to payment of royalty. The other entities were engaged in market contributions with CLSA BV and therefore there was no necessity of payment of royalty in those cases. The Tribunal further observed that the expenditure incurred by the assessee on royalty was only 1% when compared to other comparable companies where it worked out to be more than that of the assessee and therefore held that the royalty paid by the assessee was not excessive. The Tribunal in assessee s case has held that the TNMM was the most appropriate method for bench marking the said transaction and not the internal CUP method where the transaction is not with the unrelated party but with its AE s - external CUP also could not be applied for the reason that there was no material on record pertaining to royalty made by any independent party for the brand name and due to non availability of such transactions the said method could not be considered as the most appropriate method. As the Tribunal in other years has also followed the finding of the Tribunal in earlier years with no change in facts and circumstances for the impugned year we find no justification in deviating ourselves from the finding of the tribunal in assessee s case for other years. Therefore ground nos. 11 to 16 raised by the assessee is hereby allowed. Payment of indirect cost - assessee and CLSA Hong Kong had entered into an indirect expenses reimbursement agreement for the purpose of reimbursement of indirect expenditure incurred at group level which pertains to remuneration and travel and entertainment cost of sales team stationed in London and New york who are engaged exclusively for the assessee s business - HELD THAT - As observed that the ld. A.O./TPO has not applied any of the prescribed methods mentioned in the provisions to determine the ALP of the said transactions and had rejected the ALP determined by the assessee by holding that the assessee has failed to substantiate its claim by any documentary evidences. Assessee stated that the issue of payment on indirect cost has been decided by the Tribunal in assessee s case for A.Y. 2003-04 and 2004-05 where it has been held that the assessee has bench marked the transaction by using TNMM method as one of the prescribed method u/s. 92C of the Act whereas the ld. TPO/A.O. has merely made an adhoc addition without prescribing to any of the methods as per the provisions of the Act and had thereby deleted the impugned addition. The facts of this ground is identical to that of earlier years where the Tribunal has decided this issue in favour of the assessee with no change in facts and circumstances during the year under consideration. Hence we deem it fit to direct the ld. A.O. to delete the impugned addition made on account of reimbursement of indirect overhead expenses. Therefore ground nos. 17 to 22 raised by the assessee is allowed. Addition made on outstanding securities tax - assessee during the year under consideration had received security transaction tax from its clients which is payable to the stock exchange and the same has been declared as liability in the books as on 31.03.2005 - AO observed that the assessee has not paid the STT to the stock exchange neither has it settled to the clients pursuant to a settlement of disputes of levy of STT and held the same to be the part of trading/business receipts and added the same as business income - HELD THAT - As relying on assessee own case 2020 (12) TMI 1358 - ITAT MUMBAI we hereby allow ground no. 23 raised by the assessee and therefore direct the ld. A.O. to delete the disallowance made u/s. 43B(a) of the Act. TDS u/s 194J - Disallowance of transaction charges and straight through processing (STP) charges u/s. 40(a)(ia) - assessee has not deducted TDS for the same - HELD THAT - As this issue is no longer resintegra we deem it fit to hold that the assessee was not entitled to deduct TDS u/s.194J of the Act for the transactional charges and STP charges paid to stock exchange and NDSL respectively. We therefore delete the disallowance made u/s.40(a)(ia) of the Act and allow ground nos. 24 to 26 raised by the assessee. TDS u/s 195 - disallowance of STP charges paid to Singapore entity u/s. 40(a)(ia) - assessee contends that it has paid STP charges to the Singapore entity u/s. 40(a)(ia) for which the assessee has deducted tax at source as per section 195 and had deposited the same to the Central Governmen - A.O. vide rectification order has allowed the said amount - HELD THAT - Since the issue has already been resolved we deem it fit to delete the disallowance after duly verifying the facts of this ground. Therefore ground no. 27 raised by the assessee is allowed.

Summary

Issues Involved:

1. Transfer Pricing Adjustments on Brokerage Commission
2. Payment of Royalty/Branding Fees
3. Payment of Indirect Costs
4. Addition of Outstanding Securities Transaction Tax (STT)
5. Disallowance of Transaction Charges under Section 40(a)(ia)
6. Disallowance of OASYS Global STP Charges under Section 40(a)(ia)
7. Levy of Interest under Sections 234B and 234D
8. Additional Ground related to Tax Computation under Section 115-O

Detailed Analysis:

1. Transfer Pricing Adjustments on Brokerage Commission:

The assessee challenged the rejection of the Transactional Net Margin Method (TNMM) for determining the arm's length price (ALP) of brokerage commissions received from associated enterprises (AEs). The Transfer Pricing Officer (TPO) and Assessing Officer (AO) applied the Comparable Uncontrolled Price (CUP) method instead. The Tribunal noted that the issue had been previously decided in favor of the assessee for earlier assessment years (AYs 2006-07, 2008-09, and 2011-12) where TNMM was held to be the most appropriate method. The Tribunal found no significant change in circumstances or the nature of transactions for the current year and allowed the grounds in favor of the assessee, holding TNMM as the most appropriate method.

2. Payment of Royalty/Branding Fees:

The assessee paid royalty to Credit Lyonnais Securities Asia B.V. (CLSA BV) for the use of the brand name. The TPO/AO applied the CUP method to determine the ALP, rejecting the TNMM method used by the assessee. The Tribunal noted that in previous years (AYs 2002-03, 2003-04, and 2004-05), the Tribunal had upheld TNMM as the most appropriate method for determining the ALP for the payment of royalty. The Tribunal found no change in facts and circumstances for the current year and allowed the grounds in favor of the assessee, upholding TNMM as the most appropriate method.

3. Payment of Indirect Costs:

The assessee reimbursed indirect expenses incurred by CLSA Hong Kong for remuneration and travel costs of sales teams stationed in London and New York. The TPO/AO determined the ALP of these expenses to be Nil, rejecting the TNMM method used by the assessee. The Tribunal noted that in previous years (AYs 2003-04 and 2004-05), the Tribunal had decided in favor of the assessee, holding that the TPO/AO had made an ad hoc addition without applying any prescribed methods. The Tribunal directed the deletion of the impugned addition, allowing the grounds in favor of the assessee.

4. Addition of Outstanding Securities Transaction Tax (STT):

The AO added outstanding STT to the total income of the assessee, treating it as a trading receipt. The Tribunal noted that in AY 2006-07, the Tribunal had decided in favor of the assessee, holding that the liability to pay STT is on the stock exchanges, and the assessee acts merely as an agent. The Tribunal directed the deletion of the disallowance made under section 43B(a) of the Act, allowing the ground in favor of the assessee.

5. Disallowance of Transaction Charges under Section 40(a)(ia):

The AO disallowed transaction charges paid to Bombay Stock Exchange (BSE) and National Stock Exchange (NSE) under section 40(a)(ia) for non-deduction of TDS. The Tribunal relied on the Supreme Court decision in CIT vs. Kotak Securities Ltd. [2016] 383 ITR 001 (SC), which held that no TDS is deductible under section 194J for transaction charges paid to stock exchanges. The Tribunal deleted the disallowance, allowing the grounds in favor of the assessee.

6. Disallowance of OASYS Global STP Charges under Section 40(a)(ia):

The AO disallowed STP charges paid to NSDL and a Singapore entity under section 40(a)(ia) for non-deduction of TDS. The Tribunal followed the Supreme Court decision in Kotak Securities Ltd. and deleted the disallowance for NSDL charges. For the Singapore entity, the Tribunal noted that the AO had allowed the amount in a rectification order and directed the deletion of the disallowance, allowing the grounds in favor of the assessee.

7. Levy of Interest under Sections 234B and 234D:

The assessee challenged the levy of interest under sections 234B and 234D. The Tribunal noted that this ground is consequential in nature and dismissed it as infructuous.

8. Additional Ground related to Tax Computation under Section 115-O:

The assessee raised an additional ground for computing tax payable under section 115-O in accordance with the DTAA between India and Netherlands. The Tribunal noted that the issue had been decided against the assessee by the Special Bench decision in Dy. CIT vs. Total Oil India (P.) Ltd. and the Supreme Court decision in Nestle SA. The Tribunal dismissed the additional ground.

Conclusion:

The appeal filed by the assessee was partly allowed, with significant relief granted on transfer pricing adjustments, payment of royalty/branding fees, payment of indirect costs, and disallowance of transaction charges and STP charges. The additional ground related to tax computation under section 115-O was dismissed.