TMI Blog2021 (3) TMI 680X X X X Extracts X X X X X X X X Extracts X X X X ..... riate. The fact remains that domestic third party transactions are not comparable with the overseas FIIs on account of geographic differences. Thus the 1(a) of cross-objection is rejected. Volume adjustments - A perusal of the documents filed before us clearly indicates that the assessee, while determining the rate charged individually in respect of the various third party FIIs has considered the weighted average rate, which takes into account the volumes. Further, as per the information collected by the TPO, which was also provided to the assessee, ABN Amro Asia Equity (India) Ltd. has charged an average brokerage rate of 0.40% in respect of clearing house trades of ₹ 2831 crores with overseas FIIs. DSP Merrill Lynch Ltd. has charged a brokerage rate of 0.44% for clearing house trade of ₹ 2103 crores with overseas FIIs. Thus significant volume of transactions were being undertaken at these rates in India between unrelated parties. In view of the above facts, the Ld. CIT(A) has rightly confirmed the negation of volume discount raised by the assessee. Thus the 1(b) of cross-objection is rejected. Salary costs - TPO concluded that no portion of the salary costs ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on account of error trades in respect of dealings of clients and not on own account and the loss incurred in course of carrying on share broking business is in line with accepted market practices. Further, we find that no expenditure has been incurred by the assessee in respect of error trades. In such a situation, disallowance on account of loss on share trading and ad-hoc disallowance of ₹ 5,00,000/-, not supported by any reasonable basis has been rightly deleted by the Ld. CIT(A). Thus the 2nd and 3rd ground of appeal filed by the revenue are dismissed. - ITA No. 9033/MUM/2010, Cross Objection No. 179/MUM/2011 - - - Dated:- 16-3-2021 - Shri Vikas Awasthy (Judicial Member) And Shri N.K. Pradhan (Accountant Member) For the Assessee : Mr. Dhanesh Bafna, AR For the Revenue : Mr. Uodhal Raj Singh,DR ORDER N.K. PRADHAN, ACCOUNT MEMBER 1. The appeal filed by the Revenue and cross objection by the assessee are directed against the order of the Commissioner of Income-tax (Appeals)-15, Mumbai [in short 'CIT(A)'] and arise out of order u/s. 143(3) of the Income-tax Act 1961, (the 'Act'). Since common issues are involved, we are proce ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ot pressed. Having considered the above submission and facts of the case, the second ground in the cross-objection is dismissed as not pressed. 3. Briefly stated, the facts of the case are that the assessee filed its return of income for the AY 2003-04 on 28/11/2003 declaring total income of ₹ 27,54,04,365/-. The assessee is a part of UBS group and is a securities broking company and was incorporated in India on 15/02/1996. The assessee is a leading broking house in India, servicing the needs of FIIs and domestic mutual funds. The assessee is an indirectly owned 100% subsidiary of UBS Switzerland and hence, all its transactions with the other group entities of the UBS fall under the category of international transactions. During the previous year 2002-03 relevant to the AY 2003-04, the assessee has entered into transactions with Swiss Finance Corporation and UBS AG long-term India investment fund. Both these entities are Foreign Institutional Investors (FIIs) based in Mauritius. The main international transactions entered into by the assessee is on account of the brokerage charged by it on its group entities for the transactions undertaken by it on their behalf in India ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in connection with the third party transactions entered into by it. The assessee has mainly considered costs on account of membership and subscription, salary costs, communication costs and travelling costs. The TPO, for the purpose of making adjustments to the brokerage rate considered the costs incurred on account of travelling, communication, membership and subscription. Finally, the TPO increased the total income of the assessee by a sum of ₹ 1,93,27,020/-. The AO, by following the order of the TPO made an adjustment of ₹ 1,93,27,020/-. 4. Aggrieved by the order of the AO, assessee filed an appeal before the Ld. CIT(A). We find that vide order dated 05/10/2010, the Ld. CIT(A) upheld the CUP Method adopted by the TPO. Further, the Ld.CIT(A) rejected the contentions of the assessee regarding volume adjustments. Regarding the contentions of the assessee in respect of salary costs of equity sales and equity research personnel, the Ld.CIT(A) held that (i) the salary cost of research personnel incurred towards third party clients for the purpose of carrying out the brokerage adjustment as research is a function which is equally applicable to SFC as well as unrelate ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Cross Objection 1(a) Cross Objection 1(b) Cross Objection 1(c) Brokerage rate charged by the Respondent to its AE 0.28 0.28 0.28 0.28 0.28 Brokerage rate charged by the Respondent to unrelated FIIs 0.39 0.39 0.34 0.35 0.39 Less : Adjustment on account of marketing function granted by TPO (0.04) (0.04) (0.04) (0.04) (0.04) Less: Adjustment on account of salary cost of : - Sales Personnel - (0.04) (0.04) (0.04) (0.04) -Research Personnel - ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... see undertakes the marketing function, if any, in respect of both the related party transactions as well as third party transactions. Therefore, it is pleaded by him that the order of the Ld. CIT(A) in respect of salary costs be set aside and the order passed by the TPO/AO be restored. The Ld. DR further explains that the Ld. CIT(A) is not correct in allowing the benefit of 5% on ALP at the option of the assessee even though section 92C(2A) clarifies that 5% is not a standard deduction. 7. We have heard the rival submissions and perused the relevant materials on record. The reasons for our decisions are given below. As mentioned earlier, the assessee has relied on the order of the Tribunal in the case of Morgan Stanley India Company Pvt. Ltd. (supra). In that case, the Tribunal vide order dated 25-2-2020 held as under: 21. Ground 6 relates to reducing the arm's length price in respect of brokerage rate charge for Morgan Stanley Dean Witter Mauritius Limited. The Ld.AR of the assessee submits that assessee is a broker/dealer of Bombay Stock Exchange and National Stock Exchange. Assessee is having institutional clients, locally and globally. During the relevant asses ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 47,35,557 47,35,557 Transfer pricing Adjustment (C*D) 1,18,53,866 Nil 5,913 658 22. The Ld.AR explained that TPO granted an adjustment of marketing cost to the extent of 0.1076%, which is approximately 30% of weighted average rate charged to third party client. However, Ld. CIT(A) granted adjustment of 40% with respect to marketing cost adjustment for significant volume and research cost and granted relief to the assessee. The Ld.AR further submits that geographical location of market is of no consequence in judging comparability of an uncontrolled transaction for purpose of applying CUP method. The difference in geographical location cannot be reason enough to discard comparables. Geographical location of service recipient to be irrelevant consideration, because the consulting services provided by the assessee would remain the same whether the service receiver is located in X country or 'Y' country as long as service provider is in India. Reliance is placed on the following judicial precedents to support the said contention:- SI Group-Ind ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... arm's length price by applying CUP method. And suggested adjustment of R₹ 1,18,59,779/- in arm's length price. On receipt of report of the TPO, the AO made addition of ₹ 1,18,59,779/- in respect of arm's length price while passing the assessment order. The assessee filed appeal before CIT(A). Before CIT(A), the assessee besides other contentions, stated that CUP method cannot be used as it is for determination of ALP of assessee's transactions with its AE as it is difficult to make accurate adjustments for itself as compared to other trades/transactions and TNMM on the overall basis should have been considered, being more reliable and accurate method in assessee's case. The Ld. CIT(A), after considering the submissions of assessee concluded that CUP is the most appropriate method which should be applied to the proper adjustment instead of using TNMM which is an indirect method. 27. On the grounds of comparability of comparables, concluded that domestic independent client should be considered for comparability purpose. The assessee further stated that if CUP is to be applied, then appropriate adjustment need to be made for lesser function performe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Further, the TPO has not considered any adjustment for the high volume of business given by MSDW Mauritius to the appellant. The total volume of trades (for purchases and sale) generated by MSDW Mauritius is ₹ 1316 crores. As noted by the TPO on page 8 of his order, the business provided by MSDW Mauritius is approximately 15% of the total business volume of total trades. The next highest client accounts for only 3.77% of the total business volume. It is well settled commercial principle that 'as volume increases, the price decreases'. The TPO has dealt with this issue on para 2 of page 8 in his order. The TPO has picked out certain instances where even though the volume has increased there is no decrease in the brokerage rate and accordingly has not considered any adjustment for volume differences. I am unable to agree with the TPO to the extent that one cannot disregard well-settled commercial principle based on certain stray instances. The fact that 'as volume increases, the price decreases' is a well-established commercial principle and accordingly due weightage/adjustment should be given for the huge volume of business given by MSDW Mauritius. As per ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 0.2080% Arm's length price (i.e. adjusted average rate for uncontrolled trades) 0.2107% 0.2542% Trades for MSDW Mauritius 131,622,693 4,735,557 Commission Amount 31,343,868 11,379 Rate charged To MSDW Mauritius 0.2381% 0.2403% Diff in ALP and rate charged to MSDW 0.0139% Addition 658 Considering the arm's length price determined on the above factors, the brokerage rate charged by the appellant to MSDW Mauritius for 'Clearing House' trades meets with the arm's length principle. However, the brokerage rate charged by the appellant to MSDW Mauritius for 'DVP' trades does not meet with the arm's length principle and consequently, the addition of ₹ 658 is therefore confirmed. 29 Before us, the Ld. DR for the revenue could not bring out any fact to enable us to take a different view. No contrary law is br ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of competition, availability of substitute products, consumer purchasing power, etc. which could have a bearing on the price. 7.4 Comparable uncontrolled transactions which involve a transaction between one of the enterprises and an uncontrolled party, are referred to as internal comparables. Comparable uncontrolled transactions which involve a transaction between two parties, neither of which is an associated enterprise, are called external comparables. CUP cannot be applied on basis of comparable uncontrolled transactions- internal or external- that are undertaken in different geographical markets as compared to the market in which the controlled transactions is undertaken. 7.5 For the purposes of sub-rule (1) of rule 10B, the comparability of an international transaction or the specified domestic transaction with an uncontrolled transaction shall be judged, as per sub-rule (2) with reference to the following namely:- (a) the specific characteristics of the property transferred or services provided in either transaction; (b) the functions performed, taking into account assets employed or to be employed and the risks assumed, by the respective parties to the transa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... has considered a sum of ₹ 6.53 crores as salary costs on account of marketing for third party business. However, as recorded by the TPO, as per the table provided at annexure 3 of the letter dated 16-1-2006, a sum of ₹ 1.94 crores has been considered as being incurred for third party clearing house transactions and a sum of ₹ 2.60 crores has been considered as being incurred for related party clearing house transactions. Thus the TPO held that no portion of the salary costs can be considered as being incurred for marketing for third parties on the reasons that (i) though the assessee was specifically requested vide office letter dated 21-2-2006 to provide documentary evidence to show that the said sum of ₹ 6.53 crores was incurred on account of marketing activity relating to third party overseas FIIs for comparison, no documentary evidence in this regard could be provided by the assessee, (ii) the assessee itself contends that for its related party transaction no marketing activities were undertaken by it. Even than a salary cost of ₹ 2.60 crores has been attributed to its related party clearing house transactions which indicates that salary costs hav ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ks Total employee cost equity research team A 3,32,99,500/- Page No. 94 of the Paper Book (Enclosed herewith) Turnover of all unrelated party trades executed by USB B 71,36,23,68,841/- Page No. 10 of CIT(A) order (Enclosed as Annexure 3 to Summary Chart) Turnover of clearing house unrelated party trades executed by USB C 29,38,01,23,671/- Page No. 10 of CIT(A) order (Enclosed as Annexure 3 to Summary Chart) Total salary cost attributable to Clearing Trades for unrelated parties D=A* C/B 1,37,09,514/- Further marketing cost adjustment on account of equity research salary cost attributable towards unrelated party Clearing House trades E=D/C 0.05% 11. As mentioned earlier, the Ld. counsel has relied on the order of the Tribunal in the case of Mor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he variation between ALP as determined with reference to transfer pricing rules and the transaction price is less than 5%, no attempt can be made to substitute ALP for the transaction price in view of section 92C(2). But this rule can have no application, where it exceeds 5%, so as to reduce excess by 5% as claimed by the assessee. In other words, where the difference exceeds 5%, there can be no application of tolerance limit of 5% as decided by the Tribunal in Global Vantage P. Ltd. v. DCIT [2010] 1 ITR (Trib.) 326 (Delhi). Thus for the impugned assessment year, tolerance limit of 5% u/s 92C is not a standard deduction to be reduced from the additions made on account of ALP. After the insertion of sub section 2A to section 92C, with retrospective effect from 1-4-2002, +/- 5 % will not be a standard deduction. In view of the above provisions in the Act, the additional ground filed by the revenue is allowed. 14. Finally we turn to the 2nd and 3rd grounds of appeal filed by the revenue which read as under : 2. On the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred in overlooking the fact that the explanatory notes to the Finance Act, 2005 clear ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... htly disallowed on estimate the expenses of ₹ 5,00,000/- pertaining to the share trading activity of the assessee. Thus it is argued by the Ld. DR that the order passed by the AO be affirmed. 17. On the other hand, the Ld. counsel submits that during the financial year 2002-03, the assessee incurred loss on account of dealing errors such as non-execution of minimum contract quantity/amount, dealing errors by staff etc. In such circumstances, the client disowns shares and the assessee is forced to purchase/sell the shares due to such errors and in the process there has been a loss of ₹ 35,82,623/-. It is stated by him that the Ld. CIT(A) in assessee's own case for AY 2001-02 and AY 2002-03 has held that the share trading loss is allowable as business loss. Thus the Ld. counsel relies on the order of the Ld. CIT(A). 18. We have heard the rival submissions and perused the relevant materials on record. In the instant case, Explanation to section 73 referred by the AO is not applicable as the assessee is not engaged in business of purchase/sale of shares of other companies. Further loss was incurred on account of error trades in respect of dealings of clients and ..... X X X X Extracts X X X X X X X X Extracts X X X X
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