TMI Blog2017 (3) TMI 1040X X X X Extracts X X X X X X X X Extracts X X X X ..... hmetic mean for the purposes of benchmarking and determining the ALP an IT. Therefore,we direct the TPO/AO and rework the adjustment considering the arithmetic mean of the brokerage paid by TOP ten FII.s for the year under appeal. Adjustments to be made to‘eliminate the material effects’ in TP exercise - Held that:- We find that the assessee stated that it was entitled to an adjustment of 0.67% marketing and sales efforts as against the 0.48% allowed by the TPO, that the marketing cost of ₹ 2.83 crores comprised of salary and related costs of two employees, that the role of those employees was restricted to Non-AE.s only. But it is found that the assessee had not produced the qualification, employment-contract details of those employees and the terms of engagement to establish the claim made by it about rendering of services by them to Non-AE client only. The TPO had reduced the adjustment by a small margin only. In absence of full details reduction made by him is held to be justifiable. It is not a case of non granting deduction at all. So,we uphold the order of the FAA.However,we agree with the assessee that in the denominator only non-AE trades should be considered, as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ind that there is no doubt about the genuineness of the transaction i. e. advancing of loan. Even if it cannot be allowed as bad loan, it has to be allowed as a business loss. The loan was advanced to the employee and it could not be recovered. So, in our opinion, same has to be allowed u/s. 28 of the Act. Reversing the order of the FAA, we decide ground in favour of the assessee. - ITA No.3077/Mum/2009 - - - Dated:- 14-12-2016 - Shri Rajendra, Accountant Member and Saktijit Dey, Judicial Member For The Revenue : Shri Shiddaramappa Kappattanvar Sr.AR For The Assessee : Shri Arvind Sonde Order u/s.254(1)of the Income- tax Act,1961(Act) PER Rajendra A. M. - Challenging the order dated 19/02/2009 of the CIT (A)-XIX, Mumbai, the assessee had filed the present appeal. Assessee-company, engaged in the business of broking and trading in shares, filed its return of income on 28/10/2003, declaring total income of ₹ 5,23,56,068/-. It is a licensed equity broking house registered with the Bombay Stock Exchange and National Stock Exchange. Its customers comprise of Foreign Institutional Investors (FII.s),Domestic Financial Institutions (FI.s), banks etc. Durin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 17,669,433,449 DVP Trades for AE 481,048,367 Self trades 1,506,329,140 19,656,810,956 Net volume of trades where marketing is involved 38,384,765,188 Cost incurred only for Non-AE.s 28,037,910 Marketing cost per rupee of volume of trade 0,00073 In percentage terms 0.07 The assessee stated that Personnel cost of ₹ 1,40,49/-pertained to employment cost of two employees exclusively engaged in sales and marketing, that the travelling cost and other expenses pertain to employees who visited potential client/existing third-party clients outside India, that it had added 18 new clients during the year due to sales and marketing efforts, that incremental progress income on from non-AE.s during the period, as compared to the previous year, was 18% of the total brokerages earned from third-party clients. The TPO observed that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... B 0.36% Arms length brokerage, the company should have earned (A+B) C 6,36,09,960/- Actual brokerage earned by the company from its AE @ 24% D 4,22,84,486/- Difference(Brokerage less earned)to be added to the company s income C-D 2,13,25,474/- The AO directed the assessee to make submissions with regard to proposed addition of ₹ 2.13 crores. In its reply, the assessee stated that as per the provisions of Indian TP legislation the most appropriate method would be the one which was best suited to the facts and circumstances of the IT.s and which provided the most reliable measure of an arm s length result in relation to the IT.s, that the TPO had applied Comparable Uncontrolled Price (CUP) method to determine the ALP, that the CUP method could be applied where a buy/sell similar goods or services in comparable transactions with on related enterprises or when unrelated enterprises by/sale similar goods or services, as was being done between the AE.s, that various factors had to b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... have considered the weighted average of brokerages rates charged while determining the arm s length brokerages rate, that he had erred in considering only the FII clients, that the functions performed /undertaken in case of broking services to overseas clients and domestic clients should have been considered, that the research inputs in general are for all the clients, that no special services were provided to FII customers, that even if third-party brokerages rate was considered as CUP the above brokerage rate charged to all client should be considered in determining the arm s length brokerage rate. 3.4. T he assessee objected to marketing and selling cost adjustments proposed by the TPO. It was argued that the TPO had erred in adjusting only 0.04% as against 0.07% to the arithmetic mean of the brokerage rate for marketing and selling costs incurred by the company for non-AE transactions, that the AE did not engage the services of any third-party broking house, that it was an exclusive broker for the AE, that it was not required to make it services to AE, that it did not incur any marketing and selling costs in respect of a transactions, that on the other hand it required exte ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l/rigidity TNM and method betrays its lake of confidence in its ALP with the AE, that under the CUP method the price of goods/services was directly compared with the price in uncontrolled transaction under similar conditions, that the quality of products or services was also comparable as it related to CH trade, that there was nothing on record to suggest that contractual terms were different from when the assessee dealt with other FII.s like Morgan Stanley,HSBC global etc., that the level of market was also the same, that the geographical market was also identical, that the transactions were in the same financial year, that there were no intangible properties associated with the services, that the foreign-exchange risks borne by the third-party as well is the related party at Mauritius were also the same, that a very high level of comparability was there in respect of the CH transactions undertaken by the assessee in respect of the AE as well is the third parties (FII.s), that what had to be seen was the level of comparability and it was not case of the assessee that they should be completely identical, that the adoption of internal CUP method by the TPO was fully justified, that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ely increase its volume without seeking any adjustment as it was already a use amount of tax-free capital gains, that it would be improper to hold that the AE would negotiate a volume discussed/adjustment when it was making tax-free profits Mauritius from the Indian stock markets, that volume adjustments were not a matter of statutory rights but of discretion depending upon the specific facts and circumstances, that no volume adjustment was required to be allowed to the assessee considering the nature of clearinghouse trades. 4.3. W ith regard to considering simple average arithmetic mean instead of weighted averages, the FAA stated that as per the provisions of section 92 arithmetic mean was to be adopted for determining ALP, that the concept of weighted average sought to be introduced by the assessee had no legal basis, that brokerage rate from third parties varied from 0.10% to 0.50% the simple arithmetic mean would be neutralize any anomalies or disadvantages to be suffered by the assessee, that the TPO had selected top-10 FIIs, after carrying out the necessary FAR analysis, and had computed the arithmetic mean. 4.4. T he assessee raised additional ground before the FAA ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ment meeting for third parties were filed either at assessment stays or at the appellate stage. He further held,with regard to the brokerages rate to Indian FI.s, that the TPO had based the adjustments on the concept of comparability, that he had identified ten FII.s with whom the assessee had dealt and who were similarly placed as that of the AE, that he had determined the brokerages at the rate of 0.40%, that he had maintained high standard of comparability, that the TPO had given detailed reason for allowing adjustment of 0.48% in place of 0.67% with regard to marketing and sales effort, that the adjustment were in the nature of an estimate and assumptions and would depend upon the facts of the case, that the TPO had rightly considered the entire volume of the AE as well as of the non-AE for determining the market value cost of adjustments, that the assessee claimed that total marketing cost comprised of salary and related costs of two employees who were exclusively engaged in marketing and sales and that the role of these employees was restricted to interacting and maintaining relationships with the third-party clients only, that there was no proof that they did not interact ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... non AE.s, that there was no need for allowing adjustment on account of volume, that there was no prior agreement with the AE about minimum volume, that the TPO had rightly selected internal third party comparables, that he was justified in rejecting the FI as comparables, that Indian comparables had not to bear the foreign exchange difference, that except for the AY.2004-05 the TPO had taken a consistent view with regard to the compara bles, that benchmarking adopted by him in the AY.2004-05 was not accordance with the provisions of section 92C of the Act. He relied upon cases of C bay system Pvt. Ltd.(152 ITD126),KSB Pump(147ITD482),ABB Lummus Heat Transfer BV(64taxmann. com. 210), Serdia Pharmaceuticals Pvt. Ltd.(44 SOT 391). 6 . We have heard the rival submissions and perused the material before us. We find that the assessee is in business of broking and trading of shares, that it had entered in to IT.s.with its AE.s, that the dispute is mainly about the IT. entered in to with the Mauritius AE, that it had selected TNMM as MAM for determining the ALP of its IT.s, that it applied weighted average NPM based on three years data, that it argued that the arithmetical mean of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e material effects should be made. Rule 10B(2) gives six methods outlined in clauses (a) to (f) of rule10B(1),while judging the comparability. Rule 10B(3), on the other hand, indicates the approach to be adopted where differences and dissimilarities are apparent. The TPO, first, has to be satisfied that such differences do not materially affect the price. . . or cost ;secondly, he has to make an attempt to make reasonable adjustment to eliminate the material effect of such differences has to be made. 6.2. C oming to the issue of MAM to be adopted for benchmarking, we would like to state that TNMM requires establishing comparability at a broad functional level. The net profit margin realised by an AE is compared with net profit margin of the uncontrolled transactions to arrive at the ALP. The TNMM is quite similar to RPM and CPM to the extent that it involves comparison of margin earned in a controlled situation with margins earned from comparable uncontrolled situation. The only difference is that, in the RPM and CPM methods,comparison is of margins of gross profits and whereas in TNMM the comparison is on margins of net profit. CUP method is considered the most direct meth ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... k are similar for the AE and the other FII.s. In short, there was a high level of comparability in the exercise done by the TPO to adopt CUP as MAM. In the case before us, the TPO had allowed the assessee adjustment towards sales and marketing expenses while applying CUP method, though the assessee is not satisfied with the percentage of adjustment and not considering the claim for volume adjustment. But, these are procedural aspects-basic fact is selection of MAM. In our opinion,considering the facts of the case,CUP was more suitable method to determine the ALP of the IT.s., for the year under consideration. So, confirming the order of the FAA,we hold that preference given by the TPO to CUP over TNMM was based on valid reasons and it does not require any interference from our side. 6.3. W e would also like to deliberate upon the selection of top ten FII.s for benchmarking and ignoring FI.s. It is true that in the AY.2004-05, the TPO had used the data of the FII.s and FI.s for benchmarking. But, in our opinion, that cannot be a basis or justification for adopting the same data for an earlier or a subsequent year. Each year is a separate year for tax purposes. Secondly, in ou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... denominator only non-AE trades should be considered, as considered in the order of the TPO for the AY.2006-07. TPO/AO is directed to rework the denominator for the year under appeal. 6.6. W ith regard to volume adjustment,we want to mention that the assessee had generated a volume of 42.7% of the total turnover from its AE.s, that the revenue earned by it from its Mauritius-AE was 35% of the total revenue, that it had sought an adjustment of 0.42% on account of volume, that the FAA rejected the claim made by it. Here, one thing is noticeable that no evidence was produced by the assessee before the Revenue authorities or us to prove that there were some agreement that could prove committed volumes between the Mauritian AE and the assessee. It is not a rule that customer giving business of higher volume are invariably allowed some concessions. Rebates/commissions/privileges are subject to understanding between the parties. Such concessions are always graded. But, same are based on some formula. Basis for claiming 0.42% adjustment is not known. It is hard to believe that being the very first year, the assessee would have not entered in to some kind of agreement with the AE to all ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uch a claim. In short,claims made by a person(Assessee/AO)have to be corroborated by some kind of evidences/(s). Nothing has been brought on record that during the year under consideration the assessee had provided EOSB to its AE. For the first time before the FAA, the assessee had raised the issue of providing EOSB to its AE. He did not advance the said arguments before the TPO or AO. We know that there is no bar in raising a new issue or new stand in appellate proceedings. But, same was not accompanied by any document. The sum and substance of the argument of the assessee is that the Non-AE.s were provided services that were research based,whereas for the AE it was just executing the orders. We are not able to persuade ourselves to agree to the proposition advanced by the assessee. No prudent person will abide by the advice given to it that is not based on research and analysis and that especially in the field of purchase and sell of equities. The volatile nature of share market is such that no one would like to invest in it until and unless scientifically analysed data is made available to it. Secondly, the amount involved is not a few hundred or thousands rupees only. The trans ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on 37 of the Act, that the loan was given to the employee towards housing loan. 7.1. A fter considering the submission of the assessee and the assessment order, during the appellate proceedings, the FAA held that a that a bad debt or an advance which could be written off under the Act should be included in the income of the assessee, that in the case under consideration the said precondition was not satisfied, that it could not be claimed as bad debts, that it could not be allowed as expenditure and that of business loss could be allowed as per the provisions of section 72 of the Act, that the income from the amount in question was not included in the return of income, same was not allowable as bad debts. Finally, he upheld the order of the AO. 7.2. B efore us, the AR argued that the assessee had advanced housing loan to one of its employees, that he resigned from the services, that after following up with the employee it wrote off the loan as there was no chance of recovery, that loss was allowable u/s.28 of the Act as business loss. The DR supported the order of the FAA. 7.3. W e have heard the rival submissions and perused the material. We find that there is no doubt ..... X X X X Extracts X X X X X X X X Extracts X X X X
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