TMI Blog2022 (4) TMI 1126X X X X Extracts X X X X X X X X Extracts X X X X ..... nchmarking instead of confining himself only to international transaction carried out with the AEs. The entire evidences in this regard were duly submitted by the assessee before us together with the workings thereon. Hence, the observations of the ld. TPO that the details were not made available by the assessee which warranted him to resort to entity level benchmarking is factually incorrect. Accordingly, the grounds raised by the assessee are allowed. Transfer pricing adjustment towards cost of allocation towards central and regional support services and being 50% towards software development and other IT services - HELD THAT:- It could be safely concluded that assessee had indeed availed the aforesaid services and derived benefits thereon by incurring the cost paid to AE on the basis of cost allocation based on cost allocation case depending on actual usage without any mark-up thereon. Hence, the assessee duly discharged its onus of justifying the claim of expenses paid to its AE towards cost allocation of software development and other IT services. In any case, the ld. TPO ought not to have disallowed 50% of the said expenditure on an adhoc basis. The ld. TPO is duty bound ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... xplanation has not been granted by the assessee in this regard. Hence, the disallowance made by the ld. AO treating the same as prior period expenses is hereby confirmed. - ITA No.7136/Mum/2012 And ITA No.7088/Mum/2012 - - - Dated:- 20-4-2022 - Shri Vikas Awasthy, Judicial Member And Shri M.Balaganesh, Accountant Member For the Assessee : Shri Porus Kaka / Shri Divesh Chawla / Shri Tejas Mhatre For the Revenue : Shri Satya Pinisetty ORDER PER M. BALAGANESH (A.M): These cross appeals in ITA No.7136/Mum/2012 7088/Mum/2012 for A.Y.2007-08 arises out of the order by the ld. Commissioner of Income Tax (Appeals)-15, Mumbai in appeal No.CIT(A)-15/Arr-110/11-12 dated 20/09/2012 (ld. CIT(A) in short) against the order of assessment passed u/s.143(3) r.w.s. 144C(3) of the Income Tax Act, 1961 (hereinafter referred to as Act) dated 31/01/2011 by the ld. Dy. Commissioner of Income Tax-1(1), Mumbai (hereinafter referred to as ld. AO). 2. Though the assessee has raised several grounds of appeal, the only effective issue to be decided in this appeal is with regard to the transfer pricing adjustment made in respect of international transaction on pro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and Regional support 11,842,942 9 Cost Allocation towards staff training 507,865 10 The Hongkong and Shanghai Banking Corporation Limited-Hongkong Branches Cost allocation towards software development other IT services 18,258,074 11 HSBC Investments (Hong Kong) Limited Cost allocation towards Risk Management Support. 772,686 3.1. In respect of provision of non-binding investment advisory services to its AEs and advisory fees received thereon to the extent of ₹ 10,87,40,842/-, the ld. TPO observed that during the year, the assesses has rendered non-binding investment advisory services to its associated enterprise and received a sum of ₹ 10,87,40,842/-. Based on the contractual arrangement, the assessee was allowed to earn margin as a percentage of the fund for which the assessee has provided non-binding advisory services. 3.2. Based on the functional analysis and the available comparable data, th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 11 Sundaram BNP Asset Management Company Ltd 83.66 12 UTI Asset Management Company private Limited 70.56 13 Unit trust of India Investment Advisory Services Ltd 134.17 14 Taurus Asset Management Company Ltd. -51.21 15 Tata Asset Management Limited 55.25 Arithmetic Mean 68.93 3.5. Accordingly, the ld. TPO determined the transfer pricing adjustment of ₹ 3,24,26,766/- by using Transactional Net Margin Method (TNMM) at entity level for benchmarking as under:- The entity level TNMM is worked out as under:- Particulars Amount (Rs.) Income Investment Advisory Income (AE Income) 108,740,842 Other Income as per financial (Non-AE Income) 5 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by HSBC (HK) on the basis of advisory services provided. The assessee explained the entire process involved in rendering its functions before the lower authorities as under:- HSBC HK requires details regarding potential Indian investee companies in which HSBC HK can invest. The process of selection of potential companies begins with their identification. HSBC AMC collects information regarding potential sectors across the various industries, prospective companies and capable management groups, which may be considered for evaluation purposes, bearing in mind the investment criteria of HSBC HK, Based on the investment criteria, HSBC AMC shortlists the companies based on information from its own network and various channels like newspapers, articles published in journals/maga/Jnes, bankers etc. ... HSBC AMC organises the conferences / meetings with the potential investee companies / public sector units to discuss on HSBC HK proposed investment in India. The companies (compiled as above) are then further evaluated by HSBC AMC by analyzing their past performance, growth potential of both the company and the industry in which it is operating and several othe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s Pvt. Ltd., vs. ACIT reported in 53 SOT 267(Mumbai) dated 04/04/2012. In the said Tribunal order, IDC India Ltd., which was included as a comparable by the assessee was considered as a good comparable with assessee providing non-binding investment advisory services. It is pertinent to note that services rendered by the assessee are similar with the services rendered by Carlyle India Advisors Pvt. Ltd., This Tribunal order in 53 SOT 267 was subsequently approved by the Hon ble Jurisdictional High Court reported in 32 taxmann.com 23 dated 22/02/2013. We find that in yet another decision, the Hon ble Jurisdictional High Court in the case of PCIT vs. Blackstone Advisors India Pvt. Ltd., reported in 114 taxmann.com 220 (Bombay High Court) dated 11/03/2019 had approved the decision of Mumbai Tribunal, wherein, ICRA Management Consultancy Services Ltd., was sought to be included as a good comparable with an assessee engaged in providing investment sub-advisory services which are similar to non-binding investment advisory services provided by the assessee herein. It is pertinent to note that ICRA Management Consultancy Services Ltd., was also included as a comparable by the assessee in it ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... action of the ld. CIT(A) in deleting the disallowance of ₹ 1,18,42,942/- being cost allocation towards central and regional support services and ₹ 91,29,037/- being 50% of ₹ 1,82,58,074/- towards software development and other IT services. 5.1. We have heard rival submissions and perused the materials available on record. We find that assessee has received services from HSBC (HK) and HSBC Group Investment Business Ltd., (London), (HSBC, London) towards software development and other IT services for ₹ 1,82,58,074/- and central and regional support services for ₹ 1,18,42,942/-. The assessee in its TP study report determined its international transactions with HSBC(HK) and HSBC(London) to be in consonance with arm s length principle. The assessee submitted the TP study report and other requisite information together with detailed explanations and submissions and evidences before the ld. TPO that were called upon from time to time. For providing aforesaid services, both HSBC (HK) and HSBC (London) have charged certain costs to the assessee based on appropriate allocation key. The details of cost allocation keys used for the purpose of allocation of c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... passed u/s.92CA(3) of the Act. 5.2. From the perusal of the above facts, which remain undisputed and uncontroverted by the Revenue before us, we find that the entire transfer pricing adjustment in respect of cost allocation has been made by the ld. TPO completely on an adhoc basis without carrying out the benchmarking analysis by following any of the prescribed methods provided in the statute. We find that during the year end consideration the assessee had incurred software development and other IT service related expenses of ₹ 1,82,58,074/-. It was submitted that HSBC (HK) has rendered certain technology and support services including accessing, storing or processing of data to HSBC group entities located all over the globe. An agreement dated 01/02/2006 to this effect has been entered into between the parties. The expenses incurred by HSBC (HK) for providing these services were allocated without any mark-up to the HSBC group entities based on actual usage of computer resources in terms of computer unit. It was also submitted that technology and support services were provided by the AE to the assessee from time to time pursuant to submission of work, which may include d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ervices. In any case, the ld. TPO ought not to have disallowed 50% of the said expenditure on an adhoc basis. The ld. TPO is duty bound to determine the ALP of an international transaction only by following any of the five prescribed methods provided in Rule 10B of the Income Tax Rules and not otherwise. This issue is no longer res integra in view of the decision of the Hon ble Jurisdictional High Court in the case of CIT vs. Johnson Johnson Ltd,. reported in 80 taxmann.com 337 (Bombay High Court) dated 07/03/2017 wherein it was held as under:- 4. Regarding question (D) :- (a) The respondent assessee paid to its Associated Enterprises (AE), technical know how royalty of 2%. The Transfer Pricing Officer (TPO) by order dated 24th March, 2005 restricted the technical know how royalty paid by the respondent assessee to its AE at 1% instead of 2%, as claimed. In terms of the determination dated 24th March, 2005 of the TPO on the above issue amongst others, an assessment order dated 28th March, 2005 for the subject Assessment Year was passed by Assessing Officer under Section 143(3) of the Act. (b) Being aggrieved with the order dated 28th March, 2005 of the Assessi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gional support services to HSBC group companies located all over the globe including the assessee. Under these services, HSBC London assisted HSBC Group entities to review the current business model and administration policy so as to improve the business efficiency and achieve process standardization. For these services, each of the HSBC Group entities was required to pay charges to HSBC London corresponding to the appropriate proportion of the internal operations costs (absorbing both direct and indirect cost) plus a mark-up that has been determined by HSBC London in accordance with UK and OECD transfer pricing guidelines. For providing central and regional support services, HSBC London charged 5 percent mark-up on the internal operation costs incurred by HSBC London. Based on the type of expenses, the allocation of each of HSBC London's internal operational costs was computed using appropriate allocation key. However, where HSBC London is merely passing on the charges of the third parties, no mark-up was charged by HSBC London to HSBC group entities. These costs specially include the costs of HSBC Group's internal audit function which is charged to HSBC London. 5.7. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssessee had not provided any documentary services to support its claim of payment of cost allocation charges to its AE for availing various services as detailed hereinabove. In any case as stated supra, the ld. TPO had merely determined the ALP of this international transaction at Rs.Nil without benchmarking the same by using any of the prescribed methods provided in Section 92C read with Rule 10B of the Income tax Rules. Reliance again is placed on the decision of the Hon ble Jurisdictional High Court in the case of CIT vs. Johnson Johnson Ltd., referred to supra. Accordingly, we direct the ld. TPO to delete the transfer pricing adjustment made in the sum of ₹ 1,18,42,942/- in respect of cost allocation towards central and regional support services. The ground No.2 raised by the Revenue is hereby dismissed. 6. The ground No.3 raised by the Revenue is challenging the deletion of disallowance of prior period expenses of ₹ 10,51,576/-. 6.1. We have heard rival submissions and perused the materials available on record. We find that assessee has incurred expenditure of business promotion activities like marketing expenses for promoting various schemes of HSBC mu ..... X X X X Extracts X X X X X X X X Extracts X X X X
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