DCIT (IT) 4(3)(1), MUMBAI vs. UBS AG, MUMBAI

In its appeal, the assessee has raised the following grounds:–

The only grievance of the assessee is against transfer pricing adjustment in respect of international transaction pertaining to fees received for marketing of fixed income products.

The brief facts of the case as emanating from the record are: The assessee is a Foreign Institutional Investor (FII) registered with the Securities and Exchange Board of India (‘SEBI’) for the purpose of making investment in Indian debt securities. The assessee is a tax resident of Switzerland, holding Tax Residency Certificate for the year under consideration. During the year under consideration, the assessee has a branch in India, which constitutes the Permanent Establishment of the assessee in India. The assessee filed its return of income, for the year under consideration, on 30/11/2011 declaring a total income of Rs. 114,50,48,499. The return filed by the assessee was selected for scrutiny and notice under section 143(2) was issued and served on the assessee. Subsequently, notices under section 143(2) as well as 142(1) were issued and served on the assessee. The Assessing Officer (‘AO’) made a reference under section 92CA(1) of the Act to the Transfer Pricing Officer (‘TPO’) for the determination of the arm’s length price of the international transaction reported by the assessee in Form 3CEB. In respect of international transaction pertaining to fees received for marketing of fixed income products, the assessee was asked to submit evidence of the work done by the associated

In its objections filed before the learned DRP, the assessee submitted that the TPO has completely ignored the FAR (functions performed, assets employed and risks assumed) analysis of the assessee documented in the TP study report and attributed 100% of the transaction fees for fixed income products and interest rate derivative products to the assessee for the sales and marketing functions. It was further submitted that based on the fixed income products transfer pricing policy it was considered appropriate that the marketing locations would receive 33% of the ‘market spread’ and 100% of the markup having regard to the functions performed and risks assumed by the marketing locations. Further, in respect of interest rate derivative, it was concluded that the marketing locations would receive 50% of the ‘market spread’ and 100% of the markup. The assessee also emphasised on the role performed by the assessee as well as the associated enterprises in the entire transaction and the risk analysis of the assessee vis-à-vis the associated enterprises. The learned DRP vide its directions issued under section 144C(5) of the Act rejected the objections filed by the assessee. Being aggrieved, the assessee is in appeal before us. Page | 4

During the hearing, the learned Authorised Representative (‘learned AR’) submitted that the allocation of ‘market spread’ amongst the marketing location i.e. India Branch of the assessee and its associated enterprises is based on the global transfer pricing policy, whereby 33% of ‘market spread’ in case of fixed income product and 50% of ‘market spread’ in case of interest rate derivative was allocated to the assessee. By referring to the chart, which forms part of the TPO’s order on page 3, and learned DRP’s direction on page 21, the learned AR submitted that in case the difference in the price achieved by the marketer and the price quoted by the trader is allocated to the marketer.

On the contrary, the learned Departmental Representative (‘learned DR’) vehemently relied upon the orders passed by the lower authorities and submitted that the benchmarking analysis undertaken by the assessee is not based on Profit Split Method as provided under the Rules.

We have considered the rival submissions and perused the material available on record. The assessee is a leading wealth manager in Switzerland, Europe, and the Asia-Pacific region. The assessee i.e. UBS AG is the parent entity within the UBS group. The assessee has a branch in India, namely, UBS AG, Mumbai Branch. The Indian branch commences banking operations with effect from 14/01/2009, after obtaining the necessary clearance and approvals from the RBI. The Indian branch of the assessee, inter-alia, provides marketing functions of fixed income products/interest rate derivative products to its associated enterprises. The fixed income distribution business is part of the group’s global trading activity, which involves distribution/sales and Page | 5

The fixed income products are securities, which bear a rate of interest (fixed or floating) and a set maturity. In this transaction, the distribution/marketing locations such as the Indian branch are primarily responsible for generating/originating transactions from third-party clients. This may involve either the purchase or sale of these fixed income products. As part of its function, the Indian branch performs general marketing, client relationship management, and liaison internally for trading and research. On the other hand, UBS AG, the trading location, is engaged in carrying out the function of actually executing and booking trades marketed by the distribution/marketing location like the Indian branch. As per the assessee, the expertise and knowledge base required to trade in these fixed income products resides with the trading location. It is further the submission of the assessee that the salesperson at the marketing location cannot commit to a transaction without traders at UBS AG providing a dealing price (i.e. the price at which the trader is willing to either buy or sell the specified product). Such a commitment is the responsibility of the trader and the salesperson at the marketing location does not have the flexibility to adjust the pricing provided by a trader i.e. provide a discount on the price quoted by the trader. Further, as per the assessee, significant risks including marketing risk and funding and Page | 6

The ‘market spread’ is the difference between the market price and bid/offer price. The ‘bid price’ is the price that the trader quotes to buy the product from the clients, while the ‘offer price’ is the price at which a trader is willing to sell the product to the clients. If the marketer is able to achieve the price higher than the price quoted by the trader to sell the product, the difference is allocated to the marketer. Similarly, if the marketer is able to purchase the product at a price lesser than the price quoted by the trader to buy the product, the difference is allocated to the marketer. The same is called ‘local spread’. Therefore, whatever additional markup is earned is allocated 100% to the marketer. In respect of interest rate derivatives, 50% of the ‘market spread’ was allocated to the marketer. During the year, as noted by the TPO on page 3 of its order and by the learned DRP on page 21 of its directions, the assessee executed 9 transactions of fixed income products (including interest rate derivatives). Out of these transactions, the transaction at serial No. 4 resulted in ‘local spread’ of USD 8000, and the entire amount was credited to the marketing location i.e. the Indian Branch in addition to the allocation of 50% market spread, being a transaction in derivatives. Apart from this transaction, no other transaction has resulted in ‘local spread’. It is

We find that the TPO without appreciating the FAR of the associated enterprise at the trading location allocated the entire ‘market spread’ of 11,07,404.89 USD to the assessee’s marketing location i.e. the Indian Branch. Further, the learned DRP also rejected the objections filed by the assessee on the basis that the assessee company has executed a transaction in India and therefore the entire ‘market spread’ belongs to the India Branch. We are of the considered view that the lower authorities failed to appreciate that in the entire transaction, the sales/marketing function and its activities (such as trading) cannot be separated from the other functions, all of which together are necessary elements for the assessee to realise income on these transactions. Therefore, it is necessary to take into consideration the functions performed, assets employed and risks assumed by the trader-associated enterprises, while allocating the commission. It is further pertinent to note that the entire ‘local spread’, i.e. the markup earned by the marketer either over the price offered by the trader to sell or lower than the price quoted by the trader to buy the product, is entirely allocated to the marketer. Accordingly, in view of the above, we find no merits in upholding the transfer pricing adjustment on this issue. Hence, the TPO/AO is directed to delete the transfer pricing adjustment in respect of international transaction of fees receipt for marketing of fixed income products. As a result, grounds No. 1 – 3 raised by the assessee are allowed.

The application dated 24/03/2021, by the assessee seeking admission of additional ground of appeal was not pressed during the course of the hearing. Accordingly, the aforesaid application is dismissed as not pressed.

In the result, the appeal by the assessee is allowed.

In its appeal, the Revenue has raised the following grounds:

The brief facts of the case as emanating from the record are: In the return of income, the assessee had characterised the gains amounting to Rs. 134,76,87,031 arising transfer of debt securities as capital gains and claimed

During the hearing, the learned DR vehemently relied upon the draft assessment order. On the contrary, the learned AR placed reliance upon the decisions of the coordinate bench of the Tribunal in assessee’s own case in the preceding assessment years, wherein similar issue has been decided in favour of the assessee. The learned AR further submitted that in subsequent assessment years also the receipt has been treated as capital gain. It was also submitted that the decisions of the coordinate bench of the Tribunal in assessee’s own case for the assessment years 2008–09 and 2009–10 has been accepted by the Department and no further appeal has been filed.

We have considered the rival submissions and perused the material available on record. We find that the coordinate bench of the Tribunal in assessee’s own case in the immediately preceding assessment year in DCIT vs M/s UBS AG, ITA No. 5502/Mum./2016, vide order dated 10/08/2018, by

Thus, it is evident from the record that the issue is recurring in nature and has been decided in favour of the assessee in preceding assessment years. Further, it is also evident from the assessment orders passed in the subsequent assessment years that decisions of the coordinate bench have been accepted by the Revenue and no further appeal has been filed. Therefore, respectfully following the decision rendered in assessee’s own case cited supra, we find no infirmity in the directions of the learned DRP which has rightly followed the judicial precedent in assessee’s own case. As a result, grounds raised by the Revenue are dismissed. 20. In the result, the appeal by the Revenue is dismissed. 21. To sum up, the appeal by the assessee is allowed, while the appeal by the Revenue is dismissed. Order pronounced in the open Court on 09/12/2022