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Income Tax Appellate Tribunal, “K” BENCH, MUMBAI
This appeal is filed by CLSA India Ltd (the appellant) against the order passed by the Commissioner of income tax (appeals) – 15, Mumbai (the learned CIT A) dated 7/1/2014 for assessment year 2008 – 09.
Assessee has raised following Grounds of appeal:-
“1. On the facts and circumstances of the case and in law, the learned AO/TPO/CIT(A) erred in rejecting the Transfer Pricing (TP) analysis undertaken by the Appellant.
On the facts and circumstances of the case and in law, the learned AO/TPO/CIT(A) erred in rejecting TNMM as the MAM for the determination of the ALP of the international transaction of brokerage commission received by the Appellant from its AEs.
4. On the facts and circumstances of the case and in law, the learned AO / TPO/CIT(A) has erred in applying the Comparable Uncontrolled Price (CUP) method as the MAM for benchmarking the international transaction of brokerage commission received by the Appellant from its AES, failing to appreciate the following: a. There are key differences between the Functions Performed, Assets Employed and Risk Assumed ('FAR') in respect of transactions executed by the Appellant with AEs vis-à-vis non-AEs. a. Brokerage rates differ inter alia based on clients, volume of transactions, geographical differences, nature of services offered to each client and client relationships,
5. On the facts and circumstances of the case and in law, the learned AO / TPO/CIT(A) erred in adopting the non-AE Foreign Institutional Investors (FIIs) brokerage rate as an internal CUP for benchmarking the international transaction of brokerage commission received by the Appellant from its AEs.
6. On the facts and circumstances of the case and in law, the learned AO / TPO / CIT(A) erred in not appreciating that the broking services provided by the Appellant to non-AE Domestic Institutional Investors ("DIls') has a higher degree of comparability with the broking services provided AES as compared to the broking services provided to non-AE FIIs for the purpose of application of an internal CUP.
On the facts and circumstances of the case and in law, the learned AO / TPO/CIT(A) erred in not appreciating the evidence filed by the Appellant, which demonstrates the difference in the functions undertaken for servicing non-AE FIls and non-AE Dils, and thereby in not granting an adjustment in respect of the costs incurred towards such additional functions for the purposes of applying the internal CUP for benchmarking the international transaction
8. On the facts and circumstances of the case and in law, the learned AO / TPO/CIT(A) erred in concluding that there should have been a separate charge for the additional services provided by the Appellant to the non-AEs, thereby failing to appreciate that higher rate of brokerage charged to such non-AEs includes a charge for such additional services.
9. On the facts and circumstances of the case and in law, the learned AO / TPO/CIT(A) erred in concluding that the Appellant was required to provide documentary evidence to establish that while raising invoices, certain services were not provided to a set of its clients while certain services were provided to another set of clients, thereby failing to appreciate the general industry practice.
On the facts and circumstances of the case and in law, the learned CIT(A) erred by stating that the affidavits were being submitted during the course of the appellate proceedings as additional evidence, whereas the affidavits were in fact submitted before the learned TPO during the course of the TP proceedings.
On the facts and circumstances of the case and in law, the learned AO/TPO/CIT(A) erred in not applying an appropriate turnover filter and granting volume discount for the purposes of applying the
Facts shows that assessee has entered into an international transactions of brokerage commission of ₹ 570,842,965 with its associated enterprises, assessee benchmark the about transaction using the transactional net margin method (TNMM) as the most appropriate method. These transactions are related to rendering of equity broking services to its associated enterprises. Assessee has rendered services on two segments where the broking activities are undertaken i.e. Cash and future and options. The assessee has charged a brokerage income of ₹ 566,041,039/– in the cash segment and Rs. 1, 26,31,468/– in the future and options segment. The rate
The learned transfer-pricing officer questioned the assessee regarding the brokerage commission charged by the assessee for rendering similar services to overseas non-associated enterprises. He found that assessee has charged 0.23% in cash segment, 0.029% in future, and options segment from its non-associated enterprises. Therefore he found that rate of commission charged by the assessee from overseas non associated enterprise is more than the rate of commission charged from the associated enterprise while rendering equity broking services. Accordingly assessee was show caused to propose an adjustment of ₹ 427,723,876/–.
Assessee objected to the same by various replies. However the learned transfer pricing officer rejected the contentions of the assessee for following reasons:-
(i) The assessee has submitted that while carrying out the business of equity broking, it is concerned with the brokerage income earned as a whole rather than the rate thereof. However, while applying cup method, it is the price of the product or services, which is to be considered rather than the value resulting as a result of transacting products and services. The assessee is of course, free to follow any model for his business. But when a particular method is considered most appropriate, which in this case is CUP , then the The assessee also cannot ask for adjustment like volume discount et cetera as the rate of brokerage and volumes do not show hundred percent correlations. Also, the assessee has a capacity to The assessee has benchmark the broking transactions on the basis of TNMM. In this regard it should be pointed out that wherever possible cup method is always preferable over TNMM. The OECD guidelines clearly hold that a cup method is always preferable to any other method because the comparison of control transactions with an uncontrolled transaction is made on the basis of price itself.
(iii) The use of TNMM to benchmark this transaction is not desirable because, whereas, it is manageable to identify the difference in products and services rendered to the unrelated parties on the basis of documentation being available with the assessee, the same cannot be the case when comparable selected from an external database because the specific characteristics of the services and the terms thereof will remain unobtainable in those cases.
Consequent to that the draft assessment order u/s 144C read with Section 143 (3) of the act was passed on 23/12/2011 wherein certain other corporate additions/disallowances were made and total income was computed at ₹ 3,978,250,390/–.
As assessee did not file any objection, consequently assessment order u/s 143 (3) of the act was passed on 3/2/2012.
10. Aggrieved, assessee preferred an appeal before the Commissioner of income tax (appeals) – 15, Mumbai challenging the rejection of transactional net margin method adopted by the assessee and adoption of cup method as the most appropriate method by the learned transfer-pricing officer. The learned CIT (A) decided the issue as Under:- a. In grounds of appeal, 2, 3, and 4 the appellant has contended that the AO was not justified in rejecting the TNMM. The appellant submitted the FAR analysis to strengthen its argument that the cup method could not have been the most appropriate b. The appellant contended that Indian transfer pricing regulations do not provide for any priority of methods and hence TNMM applied by it was the best method. However, as discussed by the TPO in his order on Page 6, the TNMM was not found suitable. Further even as per the OECD guidelines where the cup method is readily available same has to be preferred over other method of benchmarking. It is true that Under the Indian transfer pricing regulations, there is no hierarchy of methods to be adopted while determining the ALP. The OECD two in its revised/updated guidelines released in July, 2010 has removed the here are key of methods and thereby Ltd the status of profit-based methods like TNMM which were hitherto methods of last resort. However, the key thing which has to be borne in c. The appellant also contended that TNMM should have been accepted, since its TP study was undertaken by an independent external consultant. In this regard, it is mentioned that the argument of the appellant has no force since the consultant is always an d. The appellant further argued that no circumstances as enumerated under clause (a) to (d) of Section 92C (3) have been pointed out by the TPO to reject the TP study report. In this regard it is mentioned that in para 5.1.3 of his order on Page 5 and 6, the AO has discussed in detail the basis for rejection of TNMM and applying cup method. Hence, this contention of the appellant is factually incorrect. e. The appellant contended that the adjustment was required to be made relating to economic circumstances since the appellant is remunerated by non-AES for the significant additional functions performed to service non-AE clients vis-à-vis is the limited services performed to service AEs. In this regard, it is mentioned that the appellant has not brought on record any evidence that it has charged any specific price for such services performed to the non-AE. No separate billing for the same has been made. Thus, the contention of the appellant being not supported by any documentary evidences is not acceptable. f. The appellant further contended that overall margin earned by it is higher in this year since due to regulatory reasons it does not bear all the costs of the functions performed to the non-AE. In this regard, it is mentioned that the appellant has not g. The appellant has referred to the various factors in negotiating the price to be charged to each client to state that there are no standard brokerage rates charged by appellant to each individual client. However as submitted in the submission itself, these factors are based on discussions with the business team of the appellant which negotiates contracts with AE’s and non-AE clients. Obviously, there is no document supporting the contention of the appellant and hence same being not verifiable is not acceptable. h. Accordingly, in view of the discussion as above, ground number 2, 3 and 4 of appeal raised by the appellant are dismissed.
11. Accordingly, the learned CIT – A upheld the adoption of CUP as the most appropriate method. Further, he also referred to the direction of the learned dispute resolution panel in assessee’s own case for assessment year 2006 – 07 where the action of the AO in applying CUP method was confirmed.
The learned it authorised representative after referring to the various paragraphs of the order of the learned transfer pricing officer as well as the learned CIT – A state that in case of assessee for assessment year 2006 – 07 in ITA number 8431/M/2010 identical issue arose. The coordinate bench wide order dated 14/12/2020 wide paragraph number 14 onwards relying on the order of the coordinate bench in assessee’s own case in ITA number 920/M/2016 for assessment year 2011 – 12 dated 3 February 2020 has upheld the transactional net margin method as the most appropriate method and deleted the addition. Therefore, this appeal is squarely covered in favour of the assessee as far as the most appropriate method is concerned.
The learned departmental representative also supported the order of the learned transfer pricing officer, learned CIT – A and learned DRP for assessment year 2006 – 07 and submitted that the cup method is the most appropriate method in the transactions entered into by the assessee of brokerage.
We have carefully considered the rival contentions and perused the orders of the lower authorities. We have also carefully gone through the orders of the coordinate bench in assessee’s own case for assessment year 2006 – 07 and 2011 – 12. We find that the coordinate bench in ITA number 902/M/2016 in assessee’s own case for “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 / learned AO / Hon'ble DRP has erred in law and in facts by: 5.1.rejecting the TNMM as the MAM for the determination of the ALP of the international transaction of brokerage commission received by the Appellant from its AEs in respect of non-Direct Market Access ('DMA') transactions. 5.2.inappropriately applying the Comparable Uncontrolled Price ('CUP') method while computing the ALP. 5.3.not granting appropriate economic adjustments in order to eliminate the differences in the Functions, Assets and Risk ('FAR') profile of the transactions undertaken with the AEs vis-a-vis non-AEs.” 11. Facts in brief, as stated earlier, the assessee is in the business of equity broking both in the Bombay Stock Exchange and the National Stock Exchange. It also rendered services to AEs and also to non-AEs. The non-AEs are based in India and also overseas. There are principally two segments where the broking activities are undertaken i.e. cash and F&O. The assessee has shown to have charged a total brokerage of ₹ 22,77,50,526/- from the AEs in cash segment. The rate of commission works out to be 0.138% of the turnover and the assessee has benchmarked this transaction by using TNMM. The TPO observed that assessee has also rendered similar services to the overseas non-AEs, from whom the assessee charged commission/brokerage @ 0.250%. The rate of commission charged by the assessee from overseas non-AE is more than the rate of commission
By the above order of the coordinate bench has deleted the adjustment of arm’s-length price of the brokerage income on identical facts and circumstances. The learned departmental representative could not show us any reason to deviate from the same. The judicial discipline also
In view of our above decision, other grounds of appeal becomes merely academic and do not require any adjudication.
Accordingly, the appeal of the assessee is allowed.
Order pronounced in the open court on 28.06.2022.