Loading judgment…
No AI summary yet for this case.
Income Tax Appellate Tribunal, “K” BENCH, MUMBAI
Before: SHRI ABY T. VARKEY, JM & SHRI O. P. KANT, AM
O R D E R PER ABY T. VARKEY, JM: These appeals are preferred by the assessee against the order of the Assessing Officer dated 30.01.2017 first for A.Y.2012-13 and assessment order dated 23.05.2017 for A.Y.2013-14 u/s 143(3) r.w. Section 144C(3) of the Income Tax Act, 1961 (hereinafter “the Act”). 2. We first take up the appeal for AY 2012-13. The grounds of appeal
preferred by the assessee read as under: - “Ground No.1 Disallowance of cost of administrative support services for internal audit support, clearing and treasury support function 1.1 On the facts and in the circumstances of the case and in law, the learned Dispute Resolution Panel (‘(DRP')/ Income Tax Officer — DCIT, Range 4(1)(1) (‘AO’) / learned Transfer Pricing Officer (‘TPO’) erred in re-computing the ALP of the international transaction of payment of administrative support service fee for internal audit support, clearing and treasury support function by the Appellant to its 2. ITA. (TP) No.2088/Mum/2017 A.Y. 2012-13 & 2013-14 Interactive Brokers (India) Pvt. Ltd. Associated Enterprises (AEs), as ‘NIL’, leading to an adjustment of Rs. 19,22,164. It is prayed that the concerned international transaction of the Appellant be considered at arm's length from an Indian TP perspective and accordingly the adjustment be deleted.
1.2 On the facts and in the circumstances of the case and in law, the DRP / AO / TPO erred in making the adjustment on account of payment of administrative support service fee for internal audit support, clearing and treasury support function by: ignoring that the Appellant had supported the claims with appropriate evidences; ignoring that there was commercial rationale and expediency in availing the services from the AEs; considering the services as duplicative in nature; considering the services as shareholder services not warranting a charge; and not basing the adjustments on machinery provisions dealing with the method and calculation of the arm's length price as contained in sub- section (1) and (2) of Section 92C of the Act read with Rules 10B and Rule 10C of the Rules. It is prayed that the adjustment be deleted.
3 On the facts and in the circumstances of the case and in law, the DRP/ AO/ TPO erred in determining the arm's length price of the International transaction of payment of administrative support service fee for internal audit support, clearing and treasury support function by the Appellant to its AE at NIL.
It is prayed that the adjustment be deleted.
Ground No. 2: Disallowance of mark-up on administrative support services received from the AEs.
3 ITA. (TP) No.2088/Mum/2017 A.Y. 2012-13 & 2013-14 Interactive Brokers (India) Pvt. Ltd. 2.1 On the facts and in the circumstances of the case and in law, the learned DRP/ AO/ TPO erred in re-computing the ALP of the mark-up on the international transaction of payment of administrative support service fee by the Appellant to its AE, as ‘NIL’, leading to an adjustment of Rs. 10,127,836. It is prayed that the mark-up of 10% charged by AE for the administrative support services be considered at arm’s length and the additions proposed by the Ld. DRP/ AO/ TPO on this account be deleted.
2.2 On the facts and in the circumstances of the case and in law, the DRP / AO / TPO erred in making the adjustment on account of mark- up on the international transaction of payment of administrative support service fee by: i. ignoring that the Appellant had supported the claims with appropriate evidences; ii. ignoring that there was commercial rationale and expediency in availing the services from the AEs; and iii. not basing the adjustments on machinery provisions dealing with the method and calculation of the arm's length price as contained in sub-section (1) and (2) of Section 92C of the Act read with Rules 10B and Rule 10C of the Rules.
2.3 On the facts and in the circumstances of the case and in law, the DRP/ AO/ TPO erred in determining the arm's length price of the mark-up on the international transaction of payment of administrative support service fee paid by the Appellant at NIL.
It is prayed that the adjustment be deleted.”
The assessee has also raised additional grounds of appeal
claiming deduction in respect of “Education Cess” and “Secondary and 4 ITA. (TP) No.2088/Mum/2017 A.Y. 2012-13 & 2013-14 Interactive Brokers (India) Pvt. Ltd. Higher Education Cess” on Income tax paid. At the time of hearing, the Ld. AR of the assessee did not wish to press this ground of appeal in light of the amendment made by the Finance Act, 2022 in this regard. And therefore, the additional ground stands dismissed.
4. We now take up Ground Nos. 1 & 2 of the appeal, which is against the transfer pricing adjustment made by the TPO in relation to disallowance of cost of administrative support services for internal audit support, clearing and treasury support functions and the disallowance of mark-up of 10% on the cost of administrative support of service received from the AEs.
5. Briefly stated, the assessee company is registered with the Securities & Exchange Board of India (SEBI), as a Stockbroker with the National Stock Exchange of India Limited in their cash and derivatives segment and also as a clearing member with the National Clearing Corporation Limited. It is also a registered depository participant with SEBI. In Form 3CEB, the assessee had reported international transactions with Associate Enterprises (AEs) involving receipt of administrative support services from IBG LLC (US), Timber Hill Securities Hong Kong Ltd and Timber Hill Europe AG. It was reported that the AEs recovered the actual costs incurred by them for rendering the services along with a mark-up of 10%. It was claimed by the assessee that the administrative support charges paid was commensurate with the benefits, which accrued to the assessee. The assessee benchmarked these intra-group services by applying the Transactional Net Margin Method (‘TNMM’) taking the assessee as 5 ITA. (TP) No.2088/Mum/2017 A.Y. 2012-13 & 2013-14 Interactive Brokers (India) Pvt. Ltd. the tested party and it was claimed that the same is at arm's length from the Indian Regulations perspective.
6. In the course of transfer pricing assessment u/s 92CA(2) of the Act, the TPO called upon the assessee to furnish copies of the agreements between the assessee and its AEs for providing intra group services, break up of services received, proof of receipt of required services, tangible benefits arising to the tax payer as a result of intra group services and cost benefit analysis. After examining the details furnished by the assessee, the TPO held that the benefits received by the assessee from these intra-group services was not substantiated and that the payment for such services was in the nature of ‘shareholder- activity’ and duplicative activities and therefore determined the ALP at NIL. Consequent thereto, the TPO also disallowed the mark-up of 10% paid by the assessee on such administrative support services.
7. Aggrieved by the draft assessment order passed u/s 144C of the Act by the AO inter alia including the transfer pricing adjustment, the assessee filed objections before the Ld. DRP. The submissions and documents furnished by the assessee were sent on remand to the TPO. After considering the remand report of the TPO, the Ld. DRP disposed off the objections raised by the assessee. The Ld. DRP held that all administrative services, except three (3) services i.e. (i) Internal audit
(ii) Clearing staff (iii) Treasury provided by IBC LLC (US), had actually been rendered by the AEs. The Ld. DRP accordingly allowed the costs reimbursed to these AEs and the corresponding TP adjustment was deleted. Only, the TP adjustment of Rs.19,22,164/- 6 ITA. (TP) No.2088/Mum/2017 A.Y. 2012-13 & 2013-14 Interactive Brokers (India) Pvt. Ltd. made in relation to payments to IBG LLC (US) was upheld by the Ld. DRP. The Ld. DRP however rejected the TNMM analysis undertaken by the assessee for benchmarking the overall mark-up of 10% on the administrative support services and accordingly upheld the TP adjustment to the extent of Rs.1,01,27,836/-. Aggrieved by the same, the assessee in now in appeal before us.
We have heard both the parties. The first dispute before us, is the transfer pricing disallowance to the extent of Rs.19,22,164/- upheld by the Ld. DRP on account of (i) Internal audit (ii) Clearing staff and (iii) Treasury, provided by IBC LLC (US). On the issue of the internal audit services, the lower authorities had observed that, the internal audit is carried out at the behest of the local management and as per the local internal audit laws. According to the TPO/Ld. DRP, the assessee was unable to show as to how the foreign AE had performed these services and therefore disregarded the same as ‘shareholder activity’. With regard to the treasury & clearing services, the lower authorities noted that these very same services had been rendered by other AEs as well, for which payment/reimbursements made by the assessee had been allowed. It was therefore held that, this payment to IBC LLC (US) was nothing but duplicity of costs and accordingly this disallowance made by the TPO was upheld.
Assailing the action of the AO, the ld. AR contended that the Revenue authorities had erred in disallowing the fees paid for intra group services to IBG LLC, USA. In this regard, he relied on the judicial pronouncements in support of his case and contended that it 7 ITA. (TP) No.2088/Mum/2017 A.Y. 2012-13 & 2013-14 Interactive Brokers (India) Pvt. Ltd. was beyond the power of the TPO to call upon the assessee to prove the nature of services received from the AE. It was submitted that, when evaluating the ALP of the services, it is wholly irrelevant as to whether the assessee benefits from it or not and the question that ought to have been determined as to whether the price of the service is what an independent enterprise would have paid. The Ld. DR placed reliance on the orders of the Revenue authorities.
We have given careful consideration to the rival submissions. It is noted that the only reasoning given by the lower authorities to disallow the payments made by the assessee towards treasury & clearing services to M/s IBG LLC was that similar services had been rendered to the assessee by other AEs as well. According to us, this could not be the sole basis for upholding the transfer pricing adjustment, as held by this Tribunal, in the case of L’Oreal India Pvt Ltd vs ACIT (133 taxmann.com 487). In the decided case, this Tribunal had an occasion to examine as to what is the approach that has to be adopted for intra-group services, including situations where duplicate services have been received from different AEs. The relevant findings of this Tribunal is as under: 5. We have heard the submissions made by rival sides and have examined the orders of authorities below. In ground No. 1 of the appeal the assessee has assailed transfer pricing adjustment on account of international marketing expenses. A perusal of the documents on record reveal that the assessee has entered into various agreements with L'Oreal SA France. The License Agreements under which the assesse has to pay royalty is in respect of use of patents and technology, marketing and distribution of L'Oreal under its brand name in India. The Service Agreement between the assessee and L'Oreal SA 8 ITA. (TP) No.2088/Mum/2017 A.Y. 2012-13 & 2013-14 Interactive Brokers (India) Pvt. Ltd. France is in respect of international marketing studies, assistance in design of packaging, development of advertisement material, etc. The TPO after having examined the agreements rather than benchmarking international transactions qua marketing service, raised question on the payments made under the agreements, alleging duplication of services.
A perusal of section 92CA of the Income-tax Act, 1961 (in short 'the Act'), shows that reference is made to the TPO under provisions of sub-section (1) of section 92CA for the computation of arm's length price in respect of the international transactions. The TPO does not enjoy unfettered powers under transfer pricing mechanism, to disallow the expenditure or to check the necessity of the transaction. The jurisdiction of TPO is limited to ascertain whether the international transaction carried out by the assessee with its AE is at arm's length by applying most appropriate method as specified under section 92C(1) of the Act. The TPO can neither question commercial expediency of the transaction nor examine whether service was needed or is duplicate in nature. Further, the TPO cannot question the quantum of benefit derived by the assesse from the payment made for international transaction. The TPO has no authority to disallow the expenditure for any extraneous reasons. The jurisdiction of the TPO is only to examine international transaction and make suitable adjustment after benchmarking the transaction in line with the provisions of section 92C of the Act.
In view of the above, we are unable to countenance the reasoning given by the lower authorities to determine the ALP of treasury and clearing services at NIL. Having held so, we however are of the view that the onus still lies upon the assessee to demonstrate that such services had indeed been rendered by the AE and the costs paid to them commensurate with the arm’s length principle. In this regard, we may gainfully refer to the decision of the Hon'ble Delhi High Court in the case of CIT v. Cushman & Wakefield (India) (P.) Ltd. (367 ITR 9 ITA. (TP) No.2088/Mum/2017 A.Y. 2012-13 & 2013-14 Interactive Brokers (India) Pvt. Ltd. 730) wherein the Hon’ble Court observed that whether a third party - in an uncontrolled transaction with the Taxpayer would have charged amounts lower, equal to or greater than the amounts claimed by the AEs, has to perforce be tested under the various methods prescribed under the Indian TP provisions. The Court held that the intra-group services being a transaction between related parties, the question whether the cost itself is inflated or not is a matter to be tested under a comprehensive transfer pricing analysis. The basis for the costs incurred, the activities for which they were incurred, and the benefit accruing to the Taxpayer from those activities must all be proved to determine first, whether, and how much, of such expenditure was for the purpose of benefit of the Taxpayer, and secondly, whether that amount meets ALP criterion.
Before us, the assessee has explained that it had received administrative support services comprising of internal audit, treasury and clearing services from its AE, IBG LLC (US). With regard to internal audit services, the Ld. AR submitted that the assessee is a regulated entity of the international IB Group, which maintains its own central internal audit function and provides support to its group entities including the assessee. He pointed out that the IB Group also provides centralized systems for collection, disbursement and investment and clearing functions for its day-to-day transactions. He thus contended that there was actual receipt of services by the assessee and therefore the lower authorities were unjustified in benchmarking these intra- group services at NIL. We however noted that, in the paper book filed 10 ITA. (TP) No.2088/Mum/2017 A.Y. 2012-13 & 2013-14 Interactive Brokers (India) Pvt. Ltd. before us, the assessee has only placed the audit questionnaire issued by NSE, inter-office memorandum prepared for internal audit & general policies of the company. No material has been placed on record, which would demonstrate the nature of activities and services rendered by M/s IBG LLC for which it was reimbursed costs along with a mark-up. Even in respect of the clearing and treasury services, the assessee has placed only sample three to four email correspondences by way of proof of services rendered by the AE to the assessee. In our considered view, these documents do not offer sufficient proof of any services being actually rendered by these AEs viz., internal audit, treasury and clearing services. In our opinion, mere filing of questionnaire issued by NSE, copies of general office policies, sample correspondences etc., are not sufficient enough to substantiate the nature of services rendered. It is also noted that, the TPO instead of examining the services provided by AEs had stressed more on the corresponding benefit derived by the assessee. According to us therefore, the primary question as to, whether intra group services have been rendered has neither been properly demonstrated by the assessee nor has it been properly analyzed by the TPO, and therefore the question of determination of its arm’s length price at this juncture does not arise.
We accordingly set aside the issue with regard to determination of ALP in respect of payments of Rs.19,22,164/- made by the assessee to IBG LLC (US) to the TPO for fresh consideration. The TPO cannot question the necessity for incurring of the expenses but has to confine 11 ITA. (TP) No.2088/Mum/2017 A.Y. 2012-13 & 2013-14 Interactive Brokers (India) Pvt. Ltd. his enquiry only with regard to the question whether the price for the services is what an independent enterprise would have paid. In such a situation the question would be to determine as to whether the costs claimed to have been apportioned between the various group companies has not been inflated or whether they are allocated on a proper basis. As a first step, the TPO ought to consider the following aspects in order to identify intra-group services requiring arm's length remuneration: - Whether services were received from related party. - What is the nature of services being rendered as also the quantum of services received by the related party. - Whether such services were provided to meet specific need of the recipient. - The economic and commercial benefits derived by the recipient from such intra-group services. - In comparable circumstances would any independent enterprise be willing to provide as well as pay the said price for such services?
The answers to above questions would determine whether an assessee has received intra-group services, which require arms' length remuneration. The determination of arm’s length price of intra group services would thus depend upon identifying the cost incurred by the group entity in rendering such services, as also if the reimbursement of the expenditure would involve charging of a mark up. If the AE 12 ITA. (TP) No.2088/Mum/2017 A.Y. 2012-13 & 2013-14 Interactive Brokers (India) Pvt. Ltd. charges a mark-up for the services rendered, then the ALP of such mark-up will also have to be determined.
For the reasons set out above, we deem it appropriate to restore this issue to the file of the TPO/AO for fresh consideration in the light of the directions given above. We therefore allow Ground No. 1 of the assessee for statistical purpose on this issue. The TPO/AO will afford opportunity of being heard to the assessee in the set aside proceedings. 16. We now deal with the issue of benchmarking of the mark-up of 10% charged by the AEs on the cost of intra-group services rendered by them to the assessee (including the costs whose reimbursements were allowed by Ld. DRP). It is noted that in the TP study, TNMM was considered as the Most Appropriate Method and the assessee was taken as the tested party. In the course of assessment however, the assessee furnished a new benchmarking study wherein foreign AE was taken as the tested party. The Ld. AR was unable to explain the reason for change in this benchmarking methodology. It is true that there is no estoppel in law, but at the same time, the assessee is required to explain as to why the TP study in which assessee was considered to be a suitable tested party was now being rejected/discarded or why foreign AE is a better suited tested party. We note that even the basis on which foreign comparables were identified is unclear from the details/secondary study submitted by the assessee. 17. On conspectus of the overall facts and circumstances, and having regard to the fact that, the assessee has not been able to explain its changing stand with regard to the manner of application of most 13 ITA. (TP) No.2088/Mum/2017 A.Y. 2012-13 & 2013-14 Interactive Brokers (India) Pvt. Ltd. appropriate method, we hold it to be a fit case to be sent back to the TPO to adjudicate this issue afresh and ascertain both the most appropriate method and its manner of application, for benchmarking the international transaction undertaken by the assessee. At this stage, we are thus not adjudicating the issue, as to which method is to be applied, and the TPO is at liberty to decide the issue after giving reasonable opportunity of hearing to the assessee as to the most appropriate method for benchmarking the mark-up charged over the cost of intra-group services, after considering the various aspects raised by the assessee. Ground No.2 of the appeal raised by the assessee is thus, allowed for statistical purposes.