TMI Blog2020 (3) TMI 1133X X X X Extracts X X X X X X X X Extracts X X X X ..... most appropriate method to determine the ALP of brokerage earned from AEs. We find merit in the submission that TNMM is the correct method and internal CUP would entail adhoc adjustment to price in so far as broking commission from AE and Non AEs are concerned. Operating model of J P Morgan India Pvt. Ltd. [ 2014 (2) TMI 1215 - ITAT MUMBAI] is not comparable to that of the assessee as majority of the income in the case of J P Morgan India Pvt. Ltd was from related parties, whereas in the case of the assessee significant revenue is from third party FII clients Assessee could not have generated business from FII clients without the support of CLSA group resources, for which it is paying intra group service charges. Hence, in such a case, TNMM could be used as the most appropriate method. In view of these facts and circumstances, we are of the view that assessee has rightly followed the TNMM as the most appropriate method and the decision of the co-ordinate Bench in the case of J P Morgan India Pvt Ltd. [ 2014 (2) TMI 1215 - ITAT MUMBAI] is not applicable to the present set of facts of the assessee. Accordingly, we are inclined to set aside the order of the DRP and direct t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the order of the DRP-1, Mumbai, dated 26.11.2015, u/s. 144C(5) of the Income Tax Act, 1961 (hereinafter referred to as the Act ) relating to A.Y. 2011-12. 2. Ground nos. 1 to 3 are general in nature and require no adjudication. 3. Ground nos. 4 read as under: Availing of intra-group services 4. On the facts and circumstances of the case and in law, the learned TPO / learned AO / Hon'ble DRP has erred in proposing / upholding an adjustment to the Arm's Length Price ('ALP') determined by the Appellant in respect of the international transactions in connection with availing of intra-group services by the Appellant from its Associated Enterprises ('AEs'). In doing so, the learned TPO / learned AO / Hon'ble DRP has erred in law and in facts by: 4.1.rejecting Transactional Net Margin Method (TNMM') as the Most Appropriate Method ('MAM') for the determination of the ALP. 4.2.not appropriately applying any of the prescribed methods as per Section 92C(1) of the Act. 4.3.not appreciating the voluminous documentary evidence, details of cost incurred by the AEs, details of allocation keys used by the AEs etc filed by the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... vide order u/s. 92CA(3), dated 30.01.2015, determined an adjustment of ₹ 151,68,82,394/- to be made to the transactions value of the transactions of the assessee with its AE. The Assessing Officer has computed the total income of the assessee under sub section (4) of section 92C in accordance with Arms Length Price determined by the TPO u/s. 92CA(3 of the Act. The adjustment comprised the following: Sr No. Particulars Amount 1 Provision of brokerage services 21,73,90,712/- 2 Availing of intra group services 127,38,29,995/- 3 Provision of IT support services 1,57,55,055/- 4 Provision of sub-advisory services 99,06,632/- Total Adjustments 151,68,82,394/- Ultimately, the assessment was framed by the Assessing Officer vide order, dated 28.01.2016, passed u/s. 143(3) r.w.s. 144C(13) of the Act, inter alia, making an addition of ₹ 151,68 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... anies margin justified that the mark-up charged by the AEs was at arm's length. 6. The learned counsel for the assessee submitted that despite assessee having submitted all necessary evidences qua the international transactions and transfer pricing report, the TPO has not followed any of the prescribed method u/s 92C of the Act, and, thus came to the conclusion that the arm s length price of the fees paid by the assessee to the Associate Enterprises is nil, which is wrong and against the provisions of the Act. The learned AR also submitted that the DRP has erred in upholding the order of the TPO wherein none of the prescribed methods was followed for determining the ALP of the international transactions with the Associate Enterprise. The assessee further submitted that payment of intra-group services is closely interlinked with brokerage income. Unless the assessee avails these intragroup services, it cannot earn brokerage income from FII clients. The learned AR submitted that assessee s case is covered by the decision of the Tribunal in its own case for A.Y. 2012-13, wherein the co-ordinate Bench has held that the order of the DRP in upholding the transfer pricing adjustmen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y. The learned AR while rebutting the arguments of the learned DR on the issue of non-applicability of decision of the Tribunal for A.Y. 2012-13, contended that the assessee vide submission dated 21.01.2015 filed detailed documentation to demonstrate rendition of intra group services by the AEs to the assessee. All these evidences were examined by the TPO as well as the DRP and after examination they brushed them aside giving generic reasons. The learned AR also submitted that the assessee also furnished PWC AUP report obtained by the assessee which states that services were actually received and cost incurred by the AE, basis of allocation etc. Referring to page 26 of the order of the TPO, the learned AR submitted that the TPO has never alleged that no evidences were provided or that no services have been rendered. 8. We have hearing the parties and perusal the material available on record including the decision of the co-ordinate Bench in ITA No. 1182/Mum/2017 for A.Y. 20212-13. We observe that identical issue was involved in that year and that coordinate Bench have decided the issue in favour of the assessee by observing as under: 10. We have heard the rival submis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... TPO asked the assessee to submit the details of Intra Group Services and substantiate the ALP for the same along with the relevant supporting documents. The assessee was further asked to show cause as to why similar adjustment should not be made particularly in the light of the fact that similar adjustment on Intra Group payments was confirmed by the Ld. DRP in the A.Y. 2011-12 under the similar set of facts. 12. In response to the said query, the assessee submitted that it has entered into separate service level agreements with the CLSA service providers, pursuant to which the following services were rendered by them during the year relevant to the assessment year under consideration:- Broking Management, Client Management, CLSA U, Communications, Compliance, Credit Risk Management, Development Squad, Event Marketing, Finance and Accounting, Future Options Management Support Services, Human Resources, Information Technology, Internal Audit, International Sales and Sales Trading Support, Legal, Management, Market Risk Management, Operational Risk Management, Regional Algorithm Busi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... p services. The assessee has submitted transfer pricing study report which is available at page 43 to 74 of the paper book submitted by the assessee. The transfer pricing study report reveals that the net profit margins of the identified comparable companies range between -2.88 and 25.13% and the arithmetic mean of the NPMs of comparable companies is 10.40%. On the other hand, the net profit margin of the assessee company for the financial year ended March 31, 2011 at entry level was 26.09%. In the light of the aforesaid facts, there is no merit in the findings of the Ld. TPO that the margin earned by the assessee at an entry level is not in accordance with the provisions of section 92C(2) of the Act. Under these circumstances, the action of the Ld. DRP in confirming the transfer pricing adjustment done by the Ld. TPO is not justified. The assessee has also submitted a supplementary analysis i.e. AUP report from Price Waterhouse Coopers (PWC) which certifies the cost and markup charged by AEs and KPMG benchmarking report, which determines arm s length markup for services availed. So, there is merit in the contention of the Ld. counsel that the assessee has complied with all require ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h price. If, on the other hand, it is established that the sale of various goods and/or the provision of services formed one composite indivisible transaction, TNM method cannot be applied selectively to some of the component and the CUP or any other method to the remaining component. 44 in the present case, all the items tabulated above were not provided by the same entity. They were provided by different entities. That these entities were all part of the same group is not determinative of the issue whether they were part of a single international transaction. Each party to the group is a separate legal entity. We do not rule out the possibility of these being a single international transaction where goods are sold and/or services are supplied by various entities within a group under a single transaction. That, however, would depend upon the facts of each case. The onus would be on the assessee to establish that though the goods were supplied and/ or the services were rendered by different legal entities they were part of an international transaction pursuant to an understanding between the various members of the group. This would be an issue of fact for the determination of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... so in their order dated 06.11.2015 in the case Knorr- Bremse India Pvt. Ltd. ITA No. 172 182 of 2013 have clearly laid down the criteria for aggregation of different transaction and also for bench marking of intra-group services. It has been held in this case, that intra group services cannot be benchmarked applying entity level TNMM but it has to be benchmarked applying CUP. Therefore, on facts of this case the transactions cannot be aggregated. Hence, objections regarding rejection of entity level TNMM and application of CUP are rejected. 17. The Ld DRP has upheld the transfer pricing adjustment made by the Ld.TPO in the light of the judgments of the Hon ble High Court of Delhi in Sony Ericsson s case (supra) and the P H High Court in the case Knorr- Bremse India Pvt. Ltd.(supra) in which it has been held that the answer to the issue whether a transaction is at an arm s length is not dependent on whether the transaction results in the assessee s profit. But the only important aspect which is to be seen is whether the transaction entered into is bona fide or the same has been entered into for the purpose of diverting the profits. The Ld. DRP has further relied on the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 7.46 Rest of the department constitutes 20% allocation so 2000 man hours are estimated. 5 Broking Management 37815450 2.58 6 Legal 32086984.3 2.19 7 Events Marketing 18507639.4 1.26 8 Client Management 14499282.2 0.99 9 CLSA U 12405574.2 0.85 10 Futures Options Management Support 11789552.8 0.80 11 Human Resources 10720135.2 0.73 12 Credit Risk Management 10106024.4 0.69 13 Regional Algorithm Business Support 9183280.17 0.63 14 Tax Planning and Manage ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... earlier at 10,000 Hours at para 5.8.2 20. From the observations of the Ld. TPO, it is clear that TPO has made the transfer pricing adjustment purely on estimation basis without any supporting material. Though the Ld. TPO has mentioned that arms length price has determined by applying CUP method but in fact the Ld. TPO has not come up with any comparables to justify the application of cup method. The Ld. TPO has not brought on record any material to substantiate that the AE provided the similar services to an independent enterprise in comparable circumstances. The Ld. TPO has also not brought on record any instance where comparable services were provided to an independent enterprise in the recipient market. So in view of the fact that the Ld. TPO has, in fact, not applied the CUP method to determine the arm s length price of the transaction, there is no reason to reject the TNMM method applied by the assessee. The Hon ble jurisdictional High Court in the case of Johnson Johnson Ltd. (supra) while dealing with the issue of determination of arm s length price of royalty on estimation basis by the TPO held as under:- (d) We find that the impugned order of the Tribunal uph ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... brought on record to substantiate that the AE provided the similar services to an independent enterprise in comparable circumstances. He also did not bring on record any instance where comparable services were provided to an independent enterprise in the recipient market. Therefore, in our opinion, in the assessee s case the CUP method was not the most appropriate method. On the contrary, the assessee rightly applied the TNMM method as most appropriate method because it was difficult to apply the CUP method or the cost plus method. Therefore, the TNMM was the most appropriate method in the absence of a CUP which is applicable where the nature of the activities involved, assets used, and risk assumed is comparable to those undertaken by an independent enterprise. 22. Section 92C(1) of the Act, contemplates that the arms length price in relation to an international transaction shall be determined by comparable uncontrolled price method; resale price method; cost plus method; profit split method; transactional net margin method or such other method as may be prescribed by the Board. Hence, the TPO is bound to determine the ALP by following one of the prescribed methods, ho ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... unal has rightly declined to restore the similar issue to Assessing Officer for redetermining ALP by adopting one of the methods as listed out in section 92C of the Act. The relevant paras of the order of the Hon ble Court reads as under:- 10. We must also record the fact that the ALP was arrived at by the Transfer Pricing Officer (TPO) by not adopting any of the methods prescribed under section 92C of the Act. The method to determine the ALP adopted was not one of the prescribed methods for computing the ALP. It was not even any method prescribed by the Board. At the relevant time, i.e. for A.Y. 2008-09 Section 92C of the Act did not provide for other method as provided in Section 92(c)(I)(f) of the Act. The impugned order of the Tribunal holds that the method adopted by the Revenue to determine the ALP was alien to the methods prescribed under Section 92C of the Act. In the above circumstances, the Tribunal declined to restore the issue to the Assessing Officer for re-determining the ALP by adopting one of the methods as listed out in Section 92C of the Act. This finding of the Tribunal has also not been challenged by the Revenue. 11. In view of the fact that the Reven ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed AEs margin and Bench marking including PWC-AUP report for both the years and used TNMM to justify ELP. However, on the other hand, TPO has followed no prescribed method as envisaged by section 92 C of the Act. Therefore, we are inclined to hold that adjustment made by the TPO is bad in law and, accordingly, deleted. Further the TPO has not determined the ALP of the international transactions in accordance with the provisions of section 92C of the Act. There is no reason to disapprove the Transactional Net Margin Method applied by the assessee as the most appropriate method. Accordingly, ground no.4 is allowed. 10. Ground no.5 reads as under: Receipt of brokerage commission 5. On the facts and circumstances of the case and in law, the learned TPO / learned AO / Hon'ble DRP has erred in proposing / upholding an adjustment to the ALP determined by the Appellant in respect of the international transaction in connection with receipt of brokerage commission by the Appellant from its AEs. In doing so, the learned TPO / learned AO / Hon'ble DRP has erred in law and in facts by: 5.1.rejecting the TNMM as the MAM for the determination of the ALP of the int ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... earch teams based outside India, corporate access and investor forums and applications software development and IT support are performed by the AEs for non-AE Fll clients of the assessee. (C) The detailed FAR analysis submitted by the assessee highlights the key differences between transactions executed for its AE and non-AE clients and establishes that AEs and non-AE transactions are different and not directly comparable for the purposes of CUP. As per the assessee, the non-AE transactions are also not comparable within each other which are evidenced by the variations in the brokerage rates charged to non AEs as per the samples brokerage rates provided by the assessee. (D) The nature of services rendered to clients varies in terms of corporate access, analyst access, research, regularity of business, sales and trading coverage, client's creditworthiness etc. and hence the service rendered and the rate charged for that cannot be compared from one client to another. Thus, the application of the CUP method is not supported under the given facts and circumstances of the case and hence cannot be selected as the most appropriate method. (E) The brokerage rate received ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... clusion that the assessee is providing broking services to AEs and Non-AEs. The services provided by the brokers mainly include trade execution. There is a direct internal comparable available in the form of brokerages charged from the third parties. The assessee has argued that the choice of most appropriate method lies with the assessee. The opinion expressed by the assessee is correct to an extent if there is proper application of the principals laid down in the provisions of the I.T Act. As per the assessee, the CUP method could not have been applied because of the reasons mentioned in the TP documentation report, which are reproduced below: a) Marketing/ origination activity in relation to non-AE Flls b) Significant research function centralized at Hong Kong and used by non-AE FIIIS c) Centralized business support provided d) As per circular issued by NSE, the assessee is not allowed to pass any commission to its AEs for services provided. 13. However, the learned TPO rejected the reply of the assessee by citing the following reasons: a) The assessee is easily relying on marketing and origination activities provided by the overseas AEs. No direct evidence has ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... jected the CUP method citing functional differences. However, as discussed above the functions performed by the assessee company is almost similar for both Non-AEs and AE clients. (vi) In a CUP method, reasonable and accurate adjustments are allowed for better comparability. Instead of working out adjustments at the time of the TP report, it has altogether rejected the CUP method which makes the TP report non-reliable as the choice of most appropriate method has not been done in the manner prescribed u/s 92C(1) (2) of the IT Act. (vii) The assessee has submitted on without prejudice basis that the rate charged from the Non-AE DIls may be taken as comparable. This is not correct as the customers are not located in India. The AEs are more comparable to Non-AE FIIs. Therefore the rate charged from the Non-AE FIls is taken as comparable. (viii) There is not much difference in credit risk as well because the assessee takes margin money both from AE and non-AE. Finally, the TPO took the ALP at 0.250% as against the brokerage of 0.138% charged by the assessee from the AEs and thus the adjustment of ₹ 21,73,90,771/- was made to the income of the assessee as proposed by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in place of TNMM. The argument of the assessee that same brokerage services are to be provided to the AEs and Non-AEs though the functions are different, was rejected by the DRP as it failed to demonstrate as to how the functions as brokerage activities are different between AEs and Non-AEs. The learned DR further submitted that in the case of J P Morgan India Pvt. Ltd., (supra), there was difference in the activities in the services rendered by the assessee to the AEs and Non-AEs and the same was demonstrated before the appellate authorities. However, no such difference in activities has been established by the assessee before the TPO/DRP in the present case. Considering all the above, the learned DR contended that the orders of the TPO and DRP be upheld. 16. We have heard the parties and perused material on record. We observed that the assessee being an institutional brokerage house has earned significant brokerage commission from FII clients, which included AE and Non AE enterprises. The transactions from Non-AE FII clients, the assessee is required to provide broader range of services viz-a-viz services to AE FII clients did not include marketing and international sales ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ned TPO/learned AO/ Hon'ble DRP has erred in law and in facts by: 6.1. rejecting the TP documentation maintained and the detailed FAR analysis and benchmarking analysis conducted by the Appellant. 6.2. disregarding multiple / prior year data considered by the Appellant in determining the ALP and adopting the financial data for a single year [ie, the Financial Year ('FY') 2010-11] of the comparable companies despite the fact that the same were not available to the Appellant at the time of preparing the TP documentation. 6.3. rejecting certain comparable companies identified by the Appellant in its TP documentation using unreasonable comparability criteria and contrary to facts as evidenced by the audited financial statements of the said companies. 6.4. applying certain additional filters and finalizing the TP order while considering companies as comparable to the Appellant despite such companies failing the test of comparability. 6.5. not granting working capital and risk adjustment. 6.6. not considering the upper range of 5 percent from the value of the international transaction, as allowed under the Act and the Incometax Rules, 1962 (' ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fit margin of 7.46%, 8.80% and 6.42% for the year ending March 2009, 2010 and 2011 respectively. The learned AR further submitted that TPO himself admitted that the margin of this year is 6.42 % by referring to page 41 of the TPO s order. We find merit in the arguments of the learned AR that the company cannot be excluded merely because it has incurred loss. The case is supported by the decision of Hon ble Bombay High Court in the case of CIT vs. Welspun Zucchi Textile Limited [2017] 391 ITR 221 (Bom); Pune Bench of the Tribunal in the case of Bobst India Pvt. Ltd. vs. DCIT [2015] 63 taxmann.com 339 and the decisions of Mumbai Benches of the Tribunal in the case of TPG Capital India Pvt. Ltd. vs. DCIT [2017] 79 taxman.com 101 and Walt Disney Co. (India) Pvt. Ltd. vs. DCIT [2017] 188 TTJ 100. In view of the ratio laid down in the said decisions, we are in agreement with the learned counsel of the assessee that C G Vak Software and Exports Limited should be included in the list of comparables. 21. It was submitted by the counsel of the assessee that out of nine comparables selected by the TPO if three comparables viz Infosys Ltd., Zylog System Ltd. and Wipro Technologies Ltd. were ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Hon ble Jurisdictional High Court, we are of the view that Infosys Ltd. and Zylog System Ltd. are to be excluded from the list of comparables. 23. Wipro Technologies Limited: The TPO has observed that activities of the company comprise of software related support services, primarily information technology software solutions/maintenance and technology support services. Further, he also observed that 94% of its income is export income. The TPO held it to be a valid comparable, which was also upheld by the DRP. The learned AR submitted before the Bench that all transactions of Wipro Technologies Limited are controlled transactions. It was incorporated on 15th Sept. 2004 as Citi Technologies Services Limited as a subsidiary of Citicorp Banking Corporation and later on pursuant to share purchase agreement dated 21.01.2009, all the sares of Wipro technology Services Limited were purchased by its holding company Wipro Limited. This company is currently providing services to Citigroup entities globally, which is considered as on segment. Hence in view of the prior arrangement between Wipro Limited and Citicorp, the transactions are controlled as per section 92B(2). The learned co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rporate Advisory Private Limited and computed an addition of ₹ 99,06,632/- However, the DRP did not agree for the inclusion of comparable companies from assessee s transfer pricing study report and allowed exclusion of one TPO comparable company i.e. Motilal Investment Advisors Pvt. Ltd. According, as per the directions of the DRP the TPO computed the addition at ₹ 67,62,961/-. 26. The learned AR submitted before us that the TPO has himself accepted the fact that Ladderup Corporate Advisory Private Limited is into investment banking business and, hence, comparing the same with non-binding advisory services is wrong. The TPO included the said comparable on the ground that the company is providing similar kind of services as that of the assessee. The learned AR submitted that the DRP, on the other hand, observed that said company has acquired merchant banking activity only in July 2010, there is no evidence that during the year 2010-11 any income has been received from merchant banking and merely registering with SEBI as a merchant banker does not mean income is earned from merchant banking. The learned AR further submitted that Ladderup Corporate Advisory Private Limi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d. and Goldman Sachhs (India) Securities Pvt Ltd. (supra), has held that merchant banking business cannot be company to nonbinding investment advisory services Respectfully, following the ratio laid down by the Hon ble Jurisdictional High Court and the co-ordinate Benches, we direct the TPO to exclude Ladderup Corporate Advisory Private Limited from the list of comparables. 29. Similarly, the assessee has argued before us that for the inclusion of Mecklai Financial Services Ltd., ICRA Management Consulting Services Ltd and IDC India Ltd. The learned AR submitted that if these companies are included as comparables by the TPO then the transactions with the AEs would be within the ALP. In the case of Mecklai Financial Services Ltd, the TPO rejected the said comparable by applying the loss making filter as the company had incurred losses in F.Y. 2010-11. The learned DRP upheld the order of the TPO excluding the said comparable on the ground that the assessee is providing services of equity based investment and not providing any advisory for risk, currency future brokering or consultancy services to corporate and institution. The learned DRP observed that the said company is provi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ve. Accordingly, we direct the TPO to hold Mecklai Financial Services as a valid comparable. 33. In the case of ICRA Management Consulting Services Ltd. the TPO observed that it is in the business of providing management consulting and advisory services to clients, who are corporate, banks, government, multi-lateral agencies, institutional investors etc. According to the TPO, the services provided by this company are in no way related to the services provided by the assessee and, therefore, it was rejected as a comparable. The DRP observed that the company is providing consultancy services and engaged in management consultancy. The learned DRP relied on the decision of the Tribunal in the case of Sandstone Capital Advisors Pvt. Ltd. in ITA NO. 6315/Mum/2012, wherein in has been held to be company that is into rating services, which is not comparable to investment advisory services, and rejected the comparable. Further the DRP also noted a fact that the same company was rejected by his predecessor in A.Y. 2010-11 also. 34. Similarly, in the case of IDC India Ltd., the TPO observed that the company is engaged in the business of research, survey service and products. It provi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to computers. Balance amount of repairs and maintenance expenditure amounting to INR 84,67,973 does not relate to computers. 9. Without prejudice to Grounds 7 and 8 above, on the facts and circumstances of the case and in law, the learned AO / Hon'ble DRP has erred in allowing depreciation at the rate of 25 percent on repairs and maintenance expenditure, disallowed and accordingly capitalized, amounting tolNR 3,59,00,484 relating to computers as against the applicable rate of depreciation of 60 percent as prescribed under Rule 5 of the Rules read with Section 32 of the Act. 37. The facts in brief are that the assessee has debited a sum of ₹ 4,43,68,457/- on account of repairs and maintenance charges of computers. The AO asked the assessee as to why the expenses should not be treated as capital expenditure. The assessee vide letter dated 18.02.2015 submitted that the expenses were towards maintenance of serves, UPS, control systems, spare part purchases, monitoring and maintenance of telecommunication equipment, monthly charges towards onsite support services, license fees to vendors relating to trading systems, risk management systems etc. The assessee also ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
