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TMI Blog2020 (3) TMI 1133X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 Appellant. 4.4.not considering the benefits derived by the Appellant and also disregarding the commercial expediency of the Appellant. 4.5.determining the ALP as 'Nil'. 4. The facts in brief are that the assessee company was incorporated on 21.11.1994 under the Companies Act, 1956. It is a part of the CLSA group, which is an Asia brokerage house, having its regional headquarters in Hong Kong. The assessee is engaged in the business of institutional equity broking and has membership of the Bombay Stock Exchange Limited (BSE) and the National Stock Exchange Limited (NSE). The assessee's customers comprise of Foreign Institutional Investors (FII) and Domestic Institutional Investors (DII). T ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt 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 Rs. 151,68,82,394/- 5. As stated above, assessee entered into separate agreements with CLSA Limited, Honk Kong (CLSA Hong Kong) and CLSA Singapore Pte Limited (CSLA Singapore), in order to provided services in the nature of international equity sales, sales trading support, dealing support and regional research as well as a range of back office support services to international clients. The consideration paid by the assessee to CLSA Hong Kong and CLSA Singapore for the services rendered under the respective agreements with the said AE was on the basis of cost plus a mark-up. In terms of the said agreements, the assessee availed the following services which were integral to serve its clients: * Broking Management * Information Technology * Client Management * Internal Audit * Communications * International Sales and Sales Trading Support * Compliance * Legal * Credit Risk Management * Management * Event Marketing * Operational Risk Management * Finance and Accounting * Regional Research * Human Re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . The learned DR, on the other hand, submitted that the issue is not covered by the decision of the co-ordinate Bench for A.Y. 2012-13 as the assessee has not carried out any benchmarking based on foreign AEs as tested party in A.Y. 2011-12. The learned DR submitted that in A.Y. 2012-13 the assessee has considered foreign AE as tested party and, accordingly carried out Benchmarking whereas in A.Y. 2011- 12, the assessee has aggregated all its transactions and chosen itself as the tested party and carried out benchmarking. The ld DR further submitted that since assessee has benchmarked its transactions separately, the Tribunal in A.Y. 2012-13 upheld the MAM method adopted by the assessee. The learned AR rebutting the arguments of the learned DR submitted that they were factually incorrect in stating that for A.Y. 2011-12 the assessee has not benchmarked its transactions considering foreign AE as the tested party. The learned AR filed two submissions dated 30th Dec. 2014 and 21st January 2015 (copies filed at page 713 of paperbook vol 2 and page no 1943 of paper-book vol (4) with the TPO wherein it has explained its benchmarking approach considering foreign AEs as the tested parties ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ts and material which need necessary mention for the purpose of deciding the issues involved are that the assessee company incorporated under the companies Act 1956, is primarily engaged in the business of equity broking and has membership of Bombay stock exchange and the National stock exchange. The assessee's customers comprise of foreign institutional investors (FIIs) and domestic institutional investors (DIIs). As contended by the Ld. counsel for the assessee, since the assessee had no international sales presence or capability to maintain client relationship with FIIs on global basis or internal resources to undertake various activities like regional research or perform various back-office functions, it entered into agreements with CLSA Ltd. Hong Kong and CLSA Singapore private Ltd., which had the capacity to maintain the client relationship on global basis for providing services in the nature of international equity sales and sales trading support, dealing sport and regional research as well as a range of back-office support services. In the year relevant to the assessment year under consideration, the assessee made payment of Rs. 146,67,42,784/- for availing these intra gr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ry evidence to prove services rendered by the intragroup under the heads administration, broking management, client management, communications, compliance, credit risk management, developed squad, events marketing, finance, Human Resources, Information Technology, internal audit, internal sales and sales trading support, legal, Management, Operational Risk Management and Regional Research. The assessee also submitted description of the various services, head-wise breakup of the payments and cost allocation as per keys provided in agreement. 14. As pointed out by the Ld. counsel, the assessee has benchmarked the transaction with entry-level TNMM. It has benchmarked the transaction separately by adopting AE as tested party and using foreign data base. We notice that the arithmetic mean of the comparable companies was 10.14% and the assessee had earned net profit margin of 26.09%. As pointed out by the Ld. counsel, the margin earned by the assessee company at an entry level is in accordance with the provisions of section 92C(2) of the Act. But the Ld. TPO did not accept the entry level benchmarking of the cost contribution holding that the cost contribution constitutes a small par ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . 16. On the other hand the Ld. DRP has upheld the findings of the Ld. TPO rejecting the objections filed by the appellant/assessee. The operative part of the findings of the Ld. DRP read as under: "3.3.1 We have considered the facts of the case and submissions made by the assessee. We find that the issues at hand are squarely covered against the assessee in its own case for A.Y. 2011-12, by the decision of DRP-I (WZ), Mumbai holding as under:- "We have considered the facts of the case and the submissions made. As per the provisions of section 92C of the Act, the arm's length price in relation to an international transaction shall be determined by adopting any of the prescribed five methods, being the most appropriate method '(MAM) having regard to the nature of transaction or class of transactions or class of associated persons or functions performed by such persons or such other relevant factors as may be prescribed. Each transaction is to be examined separately and independently. Different transactions cannot be bundled up together. Only those transactions which are closely interlinked, interrelated, interlaced, inter-wined, inter-connected, inter-dependent and continuou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt and also they cannot be evaluated and adequately compared on aggregate basis. All these transactions are different and independent of each other. They are also provided to different entities. Therefore, they cannot be bunched together for benchmarking by applying TNMM at entity level. Therefore the benchmarking of the assessee is neither scientific nor permitted as per law. Hence, the TPO has rightly rejected the entity level TNMM. The same is hereby upheld. 1.2. All these transactions can be independently examined and benchmarked applying CUP. Hence, the TPO has rightly applied CUP in respect of these transactions. ITAT Mumbai in the case of Goldman Sachs (India) Securities Private Limited v ACIT (ITA No.7724/Mum/2011) has upheld the application of CUP in the case of brokerage transactions similar to those of the assessee. Further, ITAT Bangalore in the case of M/s Fosroc Chemicals India Private Limited in IT (TP) A No. 148/Bang/2014 for AY 2009-10 in their order dated 10.04.2015 has upheld application of CUP as MAM for benchmarking of payment for technical and management services. 1.3. ITAT Bangalore in Fosroc Chemicals India case supra has also held that aggregation of di ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng question arise: (a) whether the Ld. TPO has determined the ALP in this case by following comparable uncontrolled price (CUP) method as the most appropriate method and (b) whether the Ld. DRP has rightly upheld the transfer pricing adjustment made by the Ld. TPO? 18. In order to determine the said questions, it is important to see as to whether the Ld. TPO has determined the arm's length price of the international transactions by following one of the prescribed methods which is the most appropriate in the light of the facts and the circumstances of the case? We notice that the Ld. TPO has estimated the man hours of services rendered by the AE to the assessee at 10000 hours and applying the rate of 3000 per hours determined the arms length compensation of the services rendered by the AE to the assessee at Rs. 3,00,00,000/-. The relevant part of the order passed u/s 92CA(3) of the Act is reproduced as under: "5.8.2 Though no concrete evidence of receipt of service has been provided by the assessee as detailed above, on a without prejudice basis it is estimated that, at the very best, the AE could have devoted a maximum of the following man hours in respect of various services ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the salary for such an employer at Rs. 3000 per hour. To the best of my judgment, the number of man hours rendered by the employees towards rendering of these services to the assessee, is estimated 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. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... recipient's market or by the AEs providing the services to an independent enterprise in comparable circumstances. In the present case, the TPO although applied the CUP method but nothing was 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 me ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sdiction. Since, the TPO did not adhered to the prescribed methods consciously, another innings to rectify the mistake cannot be allowed. The Hon'ble High court held that the Tribunal 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 o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 12, the TPO has made it nil on adhoc basis. The assessee has provided evidences in both the years of services received and benefits. Also assessee has provided 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 / ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e New York, London and Hong Kong sales offices of CLSA that cover the India market, centralized client support functions, research 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 circ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of higher than 2000 crores." 12. The TPO after considering the reply of the assessee came to the conclusion 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 relyin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... E and the benefit accruing to the assessee company. (v) The assessee in TP report, rejected 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 adjustmen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ar services to overseas AEs, the TPO has rightly proposed the CUP method 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es by the Appellant to its AEs. In doing so, the learned 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 a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ned 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 excluded then OP/OC of assessee would be higher than the arithmetic mean OP/OC of the remaining comparables. 22. Infosys Ltd. & Zylog System Ltd: The assessee argued that the said companies are functionally different as they are engaged into software products and services and segm ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion 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 counsel further pointed out that in the same assessment year i.e. 2011-12, this company has been excluded by the Hon'ble Bombay High Court in the case of CIT vs. Pentair Water India (P.) Ltd. [2016] 381 ITR 216 (Bom) and the Tribunal in the following cases: * Ness Technologies India Private Limited ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... directions of the DRP the TPO computed the addition at Rs. 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 Limited is not a public limited company hence, the financials are providing only numbers. There s no Director's report, which discuss the nature of activities carried out by the company. In such scenario, relevant information can only be found on the website, which clearly shows that the company has executed investment bankin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 providing advisory services in completely different and unrelated sector and it is also a consistently loss making company. 30. The learned AR submitted that the observation of the TPO and the DRP that the company is consistently loss making is wrong as it had profit of 12.64%, 16.41 and 0.17% in March 2009, March 2010 and March 2011 res ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... al 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 provides user research, vertical research, and consulting services which enable IT professionals, business executives to make cost based decisions on technology purchases and business strategy. Hence, the TPO was of the opinion that it is in no way comparable with that of the assessee. Before the DRP, the plea of the assessee was rejected on the grou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ture, 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 Rs. 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 submitted the list vendors from whom the services were availed. The AO further asked the assessee to submit sample invoices. Thus, the AO observed that the assessee has not clarified the nature of expenses in support of its claim. In the absence of the supporting documents, the AO treated the expenditure of Rs. 4,43,68,457/- as capital in nature and added it to the to ..... X X X X Extracts X X X X X X X X Extracts X X X X
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