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Income Tax Appellate Tribunal, “K” Bench, Mumbai
Before: Shri Pramod Kumar & Shri Ravish Sood
PER RAVISH SOOD, JM
The present appeal filed by the assessee is directed against the order passed by the CIT(A)-55, Mumbai dated 30.04.2015, which in turn arises from the order passed by the A.O under Sec. 143(3) of the Income Tax Act, 1961 (for short „Act‟), dated 20.03.2006 for A.Y. 2003-04. The impugned order has been assailed on the following grounds of appeal before us:
“The Appellant respectfully craves leave to prefer an appeal under Section 253(1) of the Income-tax Act, 1961 ('the Act'), against the order passed by the learned Commissioner of Income-tax (Appeals) - 10 ['CIT(A)'] under Section 250 of the Act dated April 30, 2015, received by the Appellant on July 2, 2015, and based on the facts and circumstances of the case, the Appellant respectfully submits that the learned CIT(A) has erred on the following grounds, each of which are independent and without prejudice to each other:
2 CLSA India Private Limited Vs. ACIT, Range-4(1)
Common Grounds 1. On the facts and circumstances of the case and in law, the orders passed by learned Transfer Pricing Officer ('TPO'), the learned Assessing Officer ('AO') and the learned CIT(A) are bad in law and void ab initio; 2. On the facts and circumstances of the case and in law, the learned TPO / the learned AO / learned CIT(A) erred in assessing the total income of the Appellant at INR 35,84,28,360 as against returned income of INR 32,82,16,610 filed by the Appellant. Transfer Pricing Grounds- 3. On the facts and circumstances of the case and in law, the learned AO / learned TPO / learned CIT(A) erred in rejecting the Transfer Pricing ('TP') analysis undertaken by the Appellant; 4. On the facts and circumstances of the case and in law, the learned TPO I learned AO I learned CIT(A) failed to appreciate that under the provisions of Section 92CA(3) of the Act, the TPO is required to determine the arm's length price in relation to the international transactions in accordance with Section 92C(3) of the Act; 5. On the facts and circumstances of the case and in law, the learned TPO/learned A.O/ learned CIT(A) erred by the failing to discharge the burden of proof while concluding that Transactional Net Margin Method ('TNMM') is not the Most Appropriate Method ('MAM') for the determination of the arm's length price ('ALP') in respect of the international transaction pertaining to payment of royalty / branding fees and payment of referral fees; Payment of royalty I branding fees - INR 49,38,615 6. The learned TPO / learned AO I learned CIT(A) have erred on facts and in law in enhancing the income of the Appellant by INR 49,38,6 15 by holding that the international transaction of payment of royalty/ branding fees to Associated Enterprises ('AEs') does not satisfy the arm's length principle envisaged under the Act 7. On the facts and circumstances of the case and in law, learned CIT(A) erred in not following the Hon'ble Tribunal's decision in the Appellant's case for AY 2002-03 where TNMM was accepted as the MAM for the determination of the ALP of the international transaction of payment of royalty / branding fees; 8. On the facts and circumstances of the case and in law, the learned TPO I learned AO I learned CIT(A) has erred in applying the Comparable Uncontrolled Price ('CUP') method as the MAIM for benchmarking the international transaction of payment of royalty I branding fees 9. On the facts and circumstances of the case and in law, the learned TPO I learned AO I learned C!T(A) erred in applying data pertaining to controlled transactions as the internal CUP, not appreciating that for benchmarking international transactions, the comparable data should be pertaining to uncontrolled transactions or for uncontrolled comparable companies; 3 CLSA India Private Limited Vs. ACIT, Range-4(1) 10. On the facts and circumstances of the case and in law, the learned TPO I learned AO I learned CIT(A) failed to appreciate the fact that the payment of royalty is allowed by the Reserve Bank of India, is permissible under Exchange Control Regulations and hence the adjustment of INR 49,38,615 was unwarranted 11. On the facts and circumstances of the case and in law, the learned TPO / learned AO learned CIT(A) failed to consider the evidence filed during the course of proceedings; Payment of referral fees - TNR 2,14,36,8 14 12. The learned TPO I learned AO I learned CIT(A) have erred on facts and in law in enhancing the income of the Appellant by INR 21,436,814 by holding that the international transaction of payment of referral fees to AE5 does not satisfy the arm's length principle envisaged under the Act 13. On the facts and circumstances of the case and in law, the learned TPO I learned AO I learned CIT(A) erred in not appreciating that significant part of its brokerage business of the Appellant is through the transactions executed by the FIl's which are referred to the Appellant by AEs; 14. On the facts and circumstances of the case and in law, the learned TPO I learned AO I learned CIT(A) erred in not appreciating the Functions, Assets and Risk ('FAR') profile of the Appellant vis-vis the AEs; 15. On the facts and circumstances of the case and in law, the learned TPO I learned AO I learned CIT(A) erred in not appropriately applying any of the five prescribed methods as per Section 920(1) of the Act for determining the arm's length price of the international transaction pertaining to payment of referral fees; 16. On the facts and circumstances of the case and in law, the learned TPO I learned AO learned CIT(A) failed to consider the evidence filed during the course of proceedings: Loss incurred from error trades - INR 33,46,816 17. On the facts and circumstances of the case and in law, the learned AO I learned CIT(A) erred in disallowing the loss of INR 7,36,483 from error trades of equity shares on account of dealing in securities in the ordinary course of the stock broking business of the Appellant Additionally, learned AO has erroneously ruled that the Appellant is in the business of purchase and sale of securities and consequently the loss of INR 7,36,483 from error trades is speculative in nature; 18. On the facts and circumstances of the case and in law, the learned AO/ learned CIT(A) erred in adding an amount of INR 26,10,333 on an ad-hoc basis as estimated expenditure attributable to the error trades; SEBI merchant banking license fees - INR 1,66,666 19. On the facts and circumstances of the case and in law, the learned AO / learned ClT(A) erred in not allowing deduction of a sum of INR 1,66,666 being SEBI merchant banking license fees attributable to the AY 2003-04 pursuant to the CIT(A) order dated December 22, 2004 for AY 2001-02; 4 CLSA India Private Limited Vs. ACIT, Range-4(1)
On the facts and circumstances of the case and in law, the learned AO I learned CIT(A) erred in not considering and giving effect to the directions of learned CIT(A) in its order dated December 22, 2004 for A.Y. 2001-02 wherein directions were given to allow the sum of INR 1,66,666/- in A.Y. 2003-04 The Appellant craves for leave toad, amend, vary, omit or substitute any of the aforesaid grounds of appeal
at any time before or at the time of hearing of the appeal, so as to enable the Hon‟ble Income tax Appellate Tribunal to decide this appeal according to law. For the above and other grounds and reasons which may be submitted during the course of hearing of this appeal, the appellant requests that the appeal be allowed as prayed.”
2. Briefly stated, the assessee company which is engaged in the business of share and stock broking had filed its return of income for A.Y. 2003-04 on 11.11.2003 declaring a total income of Rs.32,82,16,610/-. The return of income filed by the assessee company was processed as such under Sec. 143(1) of the Act. Subsequently, the case of the assessee was selected for scrutiny assessment under Sec. 143(2) of the Act.
During the course of the assessment proceedings the A.O observing that the assessee had entered into international transactions with its associated concerns (AEs) during the year under consideration, therein, made a reference to the DIT(Transfer Pricing), Mumbai (for short „TPO‟) vide his letter dated 18.10.2005 for determining the Arm‟s Length Price (ALP) of the said transactions. The TPO after deliberating on the submissions of the assessee, vide his order under Sec. 92CA(3) of the Act, dated 07.03.2006 inter alia suggested the following adjustments as regards the ALP of the international transactions carried out by the assessee during the year under consideration : Sr. No. Particulars 1. The ALP of the international transactions relating to payment of brand fee by the assessee to its AE, viz. CLSA BV, Netherland was computed by the TPO at nil as against that shown by the assessee by applying TNMM as the most appropriate method at Rs.49,38,615/-. 2. The ALP of the referral services received by the assessee from its AE viz. CLSA, Hong Kong was determined by the TPO at Rs.nil as against that shown by the assessee by applying TNMM as the most appropriate method at Rs. 2,14,36,814/-.
5 CLSA India Private Limited Vs. ACIT, Range-4(1)
Accordingly, the TPO suggested an upward revision of the ALP of the aforesaid international transactions of the assessee.
After receiving the order passed by the TPO under Sec. 92CA(3), dated 07.03.2006, the A.O passed an order under Sec.143(3), dated 20.03.2006, therein making an addition towards ALP of the aforementioned international transactions aggregating to an amount of Rs. 2,63,75,429/-. Apart from that, the A.O inter alia disallowed the assessee‟s claim of loss on account of transactions in shares amounting to Rs.7,36,483/- by treating the same as a speculative loss within the meaning of the „Explanation‟ to Sec. 73 of the Act. Also, the proportionate expenditure attributable to the aforesaid speculative transactions of Rs. 26,10,333/- was disallowed by the A.O while framing the assessment. Lastly, the A.O declined to allow the claim for deduction of the SEBI Merchant banking license fee of Rs.1,66,666/- that was claimed by the assessee pursuant to the directions given by the CIT(A), vide his order dated 22.12.2004 while disposing off the assessee‟s appeal for A.Y. 2001-02. On the basis of his aforesaid deliberations the A.O assessed the income of the assessee company vide his order passed under Sec. 143(3), dated 20.03.2006 at Rs.35,84,28,360/-.
Aggrieved, the assessee assailed the assessment order before the CIT(A). Insofar the additions made by the A.O towards TP adjustments suggested by the TPO, vide his order passed under Sec. 92CA(3), dated 07.03.2006 were concerned, the CIT(A) not finding any infirmity therein upheld the same. As regard the disallowance of the assessee‟s claim for deduction on account of loss of Rs.7,36,483/- suffered in respect of transactions in shares, the CIT(A) not finding favour with the contentions advanced by the assessee sustained the same. On the basis of his observation that the loss borne by the assessee by transacting in shares was a speculative loss, the disallowance of the proportionate expenses of Rs. 26,10,333/- that was attributed by the A.O to carrying out of the speculative transactions by the 6 CLSA India Private Limited Vs. ACIT, Range-4(1) assessee was also upheld by the CIT(A). As regards the disallowance of the assessee‟s claim for deduction of SEBI Merchant Banking License Fee of Rs. 1,66,666/- relatable to the year under consideration, the CIT(A) not being persuaded to subscribe to the claim of the assessee also upheld the same. Accordingly, the appeal filed by the assessee was dismissed by the CIT(A).
The assessee being aggrieved with the order of the CIT(A) has carried the matter in appeal before us. The ld. Authorized Representative (for short „A.R‟) for the assessee took us through the relevant facts pertaining to the issues which had been assailed before us. Adverting to the determination of the ALP of the referral fees received by the assessee from its AE, viz. CLSA, Hong Kong by the AO/TPO at Rs. Nil, as against that determined by the assessee by adopting TNMM as the MAM at Rs. 2,14,36,814/-, it was submitted by the ld. A.R that the TPO had blatantly exceeded his jurisdiction as well as drawn inferences which were contrary to the material borne from the record. It was averred by the ld. A.R that though the assessee had filed voluminous details and evidence to prove rendition of the referral services by its AE viz. CLSA Ltd, Hong Kong, however, the lower authorities had simply brushed aside the same and drawn adverse inference in the hands of the assessee on the ground that no supporting material in context of receipt of the aforesaid services by the assesseee from its AE was available on record. In order to drive home his aforesaid claim the ld. A.R took us through the details of the documentary evidence that was filed by the assessee as “additional evidence” before the CIT(A) to demonstrate the functions which were carried out by its AE, viz. CLSA, Hong Kong, in lieu whereof the referral fees was paid to the latter. Further, the ld. A.R assailed the determination of the ALP by the TPO without applying any one of the prescribed methods contemplated in Sec. 92C(1) of the Act at Rs.nil, as against that determined by the assessee by applying TNMM as MAM at an amount of Rs. 2,14,36,814/-. In order to buttress his aforesaid claim the ld. A.R relied on certain judicial pronouncements of the Hon‟ble High Court of Bombay viz. (i) CIT Vs. Merck 7 CLSA India Private Limited Vs. ACIT, Range-4(1) Ltd. (ITA No.272 of 2014), dated 08.08.2016; (ii) CIT vs. Lever India Exports Ltd. (ITA No.1306,1307 & 1349 of 2014), dated 23.01.2017; (iii) CIT Vs. Johnson & Johnson Ltd. (ITA No.1030 of 2014), dated 07.03.2017; and (iv) CIT Vs. Kodak India Pvt. Ltd. (ITA No.15 of 2014), dated 11.07.2016. It was submitted by the ld. A.R that the Hon‟ble High Court in its aforementioned judicial pronouncements had categorically held that a TPO is not permitted to determine the ALP of the international transactions without following any one of the methods prescribed under Sec.92C(1) of the Act. Apart from that, it was submitted by the ld. A.R that the revenue was even otherwise not vested with any jurisdiction to question the commercial wisdom of the assessee or replace its own assessment of the commercial viability of the transactions as against that of the assessee. Adverting to the scope of jurisdiction of the TPO, it was submitted by the ld. A.R that on a reference made by the A.O the TPO is vested with the jurisdiction under Sec. 92CA(1) of the Act to only determine the ALP of an international transaction and is divested from commenting on the commercial wisdom or viability of such transactions carried out by the assessee. Accordingly, it was submitted by the ld. A.R that as the assessee had conducted a transfer pricing study in respect of the referral fees received by it from its AE, viz. CLSA, Hong Kong in compliance with the arm‟s length standard prescribed under the I.T Act and the rules, therefore, the TPO had clearly exceeded his jurisdiction in dislodging the same and adopting the ALP of the aforesaid international transactions at Rs.nil without adopting any one of the prescribed methods provided in Sec. 92C(1) of the Act, as against that shown by the assessee at an amount of Rs. 2,14,36,814/-. As regards the determination of ALP of the royalty paid by the assessee towards brand fee to its AE, viz. CLSA BV, Netherland by the TPO without following any prescribed method contemplated under Sec. 92C(1) at Rs.nil, as against that shown by the assessee by applying TNMM as the MAM at Rs. 49,38,615/-, the assessee assailed the validity of the jurisdiction exercised by the TPO on the basis of his contentions which were advanced by him in context of referral services received by the assessee from its AE. Further, it was submitted by 8 CLSA India Private Limited Vs. ACIT, Range-4(1) the ld. A.R that the A.O/TPO had erred in not appreciating the fact that as the payment of brand fee by the assessee to its AE viz. CLSA BV, Netherland was allowed by the Reserve Bank of India (for short “RBI”) and also permissible under the Exchange Control Regulations, thus, there was no basis for making any adjustment in the backdrop of the CBDT Circular No.6-P, dated 06.07.1968. It was averred by the ld. A.R that as the payment of brand fees was duly approved by the RBI under the Exchange Control Regulation and was in accordance with the laws and the Government orders then in force, therefore, the payment therein made by the assessee duly complied with the arm‟s length principle as mentioned under Rule 10B(2)(d) of the Income Tax Rules, 1962. Apart from that, it was submitted by the ld. A.R that the issue pertaining to the determination of the ALP of the royalty/ brand fee paid by the assessee to its AE viz. CLSA BV, Netherland had earlier came up before the Tribunal in the assessee‟s own case for A.Y 2002-03. It was submitted by the ld. A.R that the Tribunal while disposing off the appeal of the revenue for A.Y. 2002-03 in dated 22.02.2013 had therein held the payment of royalty/brand fees by the assessee to its aforesaid AE i.e CLSA, BV, Netherland @ 1% of its net receipts as being at arm‟s length. As regards the disallowance of the assessee‟s claim for deduction of loss incurred on error trade, it was submitted by the ld. A.R that as the said loss was incurred by the assessee in the ordinary course of its business of share and stock broking, therefore, the same was rightly claimed as a deduction as a business loss. Accordingly, it was submitted by the ld. A.R that the A.O/CIT(A) had erred in treating the aforesaid loss incurred by the assessee on account of error trade as a speculation loss. In support of his aforesaid contention the ld. A.R relied on certain judicial pronouncements viz. (i) CIT-4 Vs. HSBC Securities & Capital Markets (I) Pvt. Ltd. (2015) 379 ITR 146 (Bom); (ii) Parkar Securities ltd. Vs. DCIT, Circle 2(5) (2006) 102 TTJ 235 (Ahd); and (iii) ACIT Vs. Subhash Chandra Shorewala (2004) 91 TTJ 57 (Del). Lastly, it was submitted by the ld. A.R that the lower authorities had erred in not following the directions that were given by the CIT(A) while disposing off 9 CLSA India Private Limited Vs. ACIT, Range-4(1) the assessee‟s appeal for A.Y. 2001-02, vide his order dated 22.12.2004, as per which a proportionate deduction of the SEBI merchant banking license fees of Rs.1,66,666/- (1/3rd of Rs. 5,00,000/-) was to be allowed as a deduction to the assessee during the year under consideration. In order to buttress his aforesaid claim the ld. A.R took us through the order of the CIT(A) for A.Y. 2001-02, Page 545 – 560 of the assessee‟s paper book (for short „APB‟).
Per contra, the ld. Departmental Representative (for short „D.R‟) relied on the orders of the lower authorities. It was submitted by the ld. D.R that as the assessee on the basis of supporting documentary evidence had failed to substantiate the rendition of referral services to the assessee by its AE, viz. CLSA, Hong Kong., therefore, the TPO had rightly taken the ALP of the same at Rs. nil. Also, a similar contention was advanced by the ld. D.R in support of the view taken by the lower authorities in determining the ALP of the royalty/brand fees paid by the assessee to its AE viz. CLSA BV, Netherland at Rs. nil. As regards the disallowance of the loss claimed by the assessee in respect of purchase and sale of shares, it was submitted by the ld. D.R that as the same was covered by the „Explanation‟ to Sec. 73 of the Act, therefore, the lower authorities had rightly held the same as a speculative loss. In the backdrop of his aforesaid contention it was averred by the ld. D.R that as the appeal filed by the assessee was devoid and bereft of any force, therefore, the same did not merit acceptance.
We have heard the authorized representatives for both the parties, perused the orders of the lower authorities and the material available on record, as well as the judicial pronouncements that have been pressed into service by them to drive home their respective contentions. We shall first deal with the disallowance of the assessee‟s claim for deduction of SEBI Merchant License fee of Rs.1,66,666/-. Briefly stated, the assessee in the period relevant to A.Y. 2001-02 had paid an amount of Rs.5,00,000/- to SEBI as one time registration fee towards merchant banking license. Observing, that the 10 CLSA India Private Limited Vs. ACIT, Range-4(1) registration fee was an upfront payment of registration for a period of 3 years, the A.O, therefore, allowed 1/3rd of the aforesaid expense as a revenue expenditure and disallowed the balance amount of Rs.3,33,333/-. On appeal, the assessee did not object to the disallowance of the aforesaid amount of Rs.3,33,333/- but requested that a direction may be given to allow deduction of amount of Rs.1,66,666/- each in A.Y. 2002-03 and A.Y. 2003-04. Accepting the aforesaid request of the assessee, we find, that the CIT(A) while disposing off the assessee‟s appeal for A.Y. 2001-02, vide his order passed in appeal No. CIT(A) (iv)/Circle 4/51/2004-05, dated 22.12.2004 had directed the A.O to allow deduction of Rs.1,66,666/- each in A.Y. 2002-03 and A.Y. 2003-04. On a perusal of the records, we find, that the A.O vide his order dated 07.03.2011 had allowed deduction of SEBI merchant banking license fees of Rs.1,66,666/- to the assessee in A.Y 2002-03. However, during the year under consideration, the A.O, had not complied with the directions given by the CIT(A) while disposing off the assessee‟s appeal for A.Y. 2001-02 and had not allowed the deduction of Rs. 1,66,666/- i.e 1/3rd of the one time registration fees of Rs. 5,00,000/-. On appeal, we find that the CIT(A) without giving any cogent reason had upheld the aforesaid disallowance of the assessee‟s claim of deduction. We have given a thoughtful consideration to the aforesaid issue before us and are unable to persuade ourselves to subscribe to the view taken by the lower authorities. As observed by us hereinabove, the CIT(A) while disposing off the assessee‟s appeal for A.Y. 2001-02 in appeal No. CIT(A)(iv)/Cir. 4/51/2004-05, dated 22.12.2004 had categorically directed that deduction of 1/3rd of the one time registration fees of Rs.5,00,000/- paid by the assessee to SEBI towards merchant banking license be allowed in A.Y 2002- 03 & A.Y 2003-04. In the backdrop of the aforesaid clear and unequivocal direction given by the CIT(A) while disposing off the assessee‟s appeal for A.Y 2001-02, we are of the considered view that there was no justification on the part of the lower authorities in not allowing the assessee‟s claim for deduction of Rs.1,66,666/- (i.e 1/3rd of Rs.5,00,000/-). Accordingly, we direct the A.O to allow the assessee‟s claim for deduction of Rs.1,66,666/- i.e 1/3rd of the 11 CLSA India Private Limited Vs. ACIT, Range-4(1) registration fees of Rs. 5 lac that was paid by it towards merchant banking license fees to SEBI in the period relevant to A.Y. 2001-02. We thus in terms of our aforesaid observations „set aside‟ the order of the CIT(A) in context of the aforesaid issue under consideration and vacate the disallowance of Rs. 1,66,666/- made by the A.O. The Grounds of appeal No. 19 & 20 are allowed in terms of our aforesaid observations.
9. We shall now advert to the claim of the assessee that the A.O/CIT(A) had erred in disallowing the assessee‟s claim for deduction of loss from error trades of equity shares on account of dealing in securities in the ordinary course of its share and stock broking business. Also, we shall deal with the inextricably interlinked disallowance of the proportionate expenditure of Rs. 26,10,333/- made by the A.O by attributing the said amount on an ad hoc basis to carrying on of speculation business by the assessee. As observed by us hereinabove, the assessee is engaged in the business of share and stock broking. On a perusal of the profit and loss account of the assessee, it was gathered by the A.O that the assessee had claimed a deduction of business loss of Rs. 7,36,483/- on sale of shares. Being of the view that the assessee company was inter alia engaged in share trading business, the A.O called upon it to explain as to why the aforesaid loss may not be held as a speculative loss within the meaning of „Explanation‟ to Sec.73 of the Act. In reply, it was submitted by the assessee that it was not in the business of purchase and sale of shares and was required to purchase the shares in the course of its business as that of share broking due to business exigency. Accordingly, it was the claim of the assessee before the A.O that as it was not carrying on the business of purchase and sale of shares, therefore, the „Explanation‟ to Sec. 73 would not be attracted. In order to support its aforesaid claim the assessee drew support from the CBDT Circular No. 204, dated 24.07.1976, wherein the purpose and intent of inserting the „Explanation‟ to Sec. 73 had been looked into. Apart from that, the assessee relied on the judgment of the Hon‟ble High Court of Karnataka in the case of 12 CLSA India Private Limited Vs. ACIT, Range-4(1) Mysore Rolling Mills Pvt. Ltd. Vs. CIT (1992) 195 ITR 404 (Kar), wherein the High Court had observed that the transactions of purchase and sale of shares on account of reasons other than an intention to earn profit would not come within the purview of the „Explanation‟ to Sec. 73 of the Act. Accordingly, it was submitted by the assessee that as it was not carrying on the business of purchase and sale of shares, and the purchase and subsequent sale of shares carried out by it was incidental to its business of share broking, therefore, the „Explanation‟ to Sec. 73 would not be attracted. However, the A.O was not persuaded to subscribe to the aforesaid claim of the assessee. Observing, that the assessee which was inter alia engaged in share trading business did not fall within the exclusions contemplated in Sec.73 of the Act, the A.O declined to accept the claim of the assessee that the loss on account of transactions in shares had arisen pursuant to its basic activities as that of a broker and treated the same as speculation loss within the meaning of „Explanation‟ to Sec. 73 of the Act. Also, the A.O disallowed a proportionate expenses of Rs.26,10,333/- on the basis of his working carried out at Para 6.8 of his order by attributing the same to the speculative transactions carried out by the assessee in shares.
We have given a thoughtful consideration to the aforesaid issue before us in the backdrop of the contentions advanced by the authorised representatives for both the parties. Admittedly, the assessee is engaged in the business of share and stock broking. On a perusal of the records, we find, that the purchase and subsequent sale of shares carried out by the assessee was incidental to its business of share broking. As such, our indulgence in the present case has been sought by the assessee for adjudicating as to whether or not the loss incurred on account of error trade conducted by it in its status as that of a broker on behalf of its clients is to be held as a business loss. Issue in hand had earlier came up before a coordinate bench of the Tribunal i.e ITAT, Ahmedabad bench „B‟ in the case of Parkar Securities Ltd. Vs. DCIT, Circle 2 (5) (2006) 102 TTJ 235 (Ahd). In the aforesaid case, it was 13 CLSA India Private Limited Vs. ACIT, Range-4(1) observed by the Tribunal that in order to invoke the „Explanation‟ to Sec. 73 the purchase and sale of shares of other companies must have been carried out by the assessee as an activity of business. It was observed by the Tribunal, that the assessee company which was engaged in the business of share broking had carried out purchase of shares and their consequential sale thereof, as an eventuality, which had occurred in the course of its broking business. As observed by the Tribunal, certain clients for whom the assessee was working as a broker had disowned certain share transactions, and thus, under compulsion the same had to be honoured by the assessee. Elaborating on the reasons for honouring of the aforesaid share transactions, it was noticed by the Tribunal that the assessee had no other alternative but to accept those transactions as its own, because, if it would had not so done then its license as a broker with Stock Exchange could have been terminated/suspended and also its relations with the aforementioned clients from whom it was expecting good earnings in the shape of brokerage in future would have been severed. In the backdrop of the aforesaid facts, it was held by the Tribunal that the aforesaid transactions of purchase/sale of shares which were adopted by the assessee under compulsion could not be termed as a business of purchase and sale of shares of other companies within the meaning of „Explanation‟ to Sec.73 of the Act. We find that a similar issue had also came up before the ITAT, Mumbai “H” Bench in the case of HSBC Securities and Capital Markets (I) Pvt. Ltd. Vs. Addl. CIT, Rage 4(1), Mumbai [ITA No.6979/Mum/2008; dated 29.06.2012]. In the said case the Tribunal had restored the matter to the file of the A.O, for the reason, that neither of the lower authorities had dealt with the claim of the assessee that as the loss on account of shares transactions had occurred on account of error trade conducted by the assessee on behalf of its clients, thus, the same had to be accepted as a business loss. On further appeal by the revenue, the Hon‟ble High Court of Bombay in its order passed while disposing off the appeal of the revenue in CIT- 4 Vs. HSBC Securities & Capital Markets (India) Pvt. Ltd. (2015) 379 ITR 146 (Bom) after deliberating on the 14 CLSA India Private Limited Vs. ACIT, Range-4(1) observations recorded by the Tribunal observed, that the Tribunal had held that in case the loss on the purchase and sale of shares was found to have occurred on account of error trade conducted by the assessee on behalf of its clients, then, the same had to be accepted as a business loss. In the backdrop of the aforesaid observations of the Tribunal, it was observed by the Hon‟ble High Court that as the issue had been restored by the Tribunal to the file of the A.O for verifying as to whether the loss had occurred on account of error trade conducted by the assessee on account of its clients, therefore, no substantial question of law did arise therefrom. As such, the Hon‟ble High Court had impliedly approved the view that was taken by the Tribunal while restoring the matter to the file of the A.O i.e in case if the loss had occurred on account of error trade conducted by the assessee on behalf of its clients, then, the assessee‟s claim of having suffered a business loss had to be accepted. Also, we find that the ITAT, Delhi „F‟ in the case of ACIT Vs. Subhash Chandra Shorewala (2004) 91 TTJ 57 (Del), had observed, that in case where the assessee being a share broker is faced with a situation wherein some of his clients anticipating certain losses had not owned up the transactions, then, the consequential loss incurred by the assessee to honour the commitments is to be viewed as an integral part of carrying on of his business as that of a share broker, and thus, is not liable to be held as a speculation loss. Fact situation in the case of the assessee before us remains the same as was therein involved in the aforementioned cases. In the case before us the assessee had incurred the loss on account of transactions in shares not because it was in the business of purchase and sale of shares, but, for the reason, that it was required to purchase the shares due to certain business exigencies. As such, in our considered view, as the assessee company was not carrying on the business of purchase and sale of shares, and was pushed into carrying out the aforesaid share transactions on account of a business exigency, therefore, the provision of the „Explanation‟ to Sec. 73 of the Act would not be attracted in its case. Our aforesaid view is not only fortified by the abovementioned judicial pronouncements but also by the 15 CLSA India Private Limited Vs. ACIT, Range-4(1) CBDT Circular No. 204, dated 24.07.1976, wherein the intention for introducing the „Explanation‟ to Sec. 73 had been looked into. Accordingly, we are of a strong conviction that as the assessee had carried out the transactions of purchase and sale of shares on account of a business exigency and not with an intention to earn profit, therefore, the same would not come within the purview of „Explanation‟ to Sec.73 of the Act. We thus not being able to persuade ourselves to subscribe to the view taken to the contrary by the lower authorities that the loss on account of transactions in shares of Rs.7,36,483/- incurred by the assessee was to be held as speculation loss within the meaning of „Explanation‟ to Sec. 73 of the Act, therein, set aside the same and direct the A.O to allow the assessee‟s claim for deduction of business loss of Rs. 7,36,483/- on account of transactions in shares. As we have concluded that the loss on account of transaction in shares cannot be held to be speculation loss, therefore, disallowance of the proportionate expenditure of Rs. 26,10,333/- that had been attributed by the lower authorities to the aforesaid speculative transactions also cannot be sustained and is consequentially deleted. Resultantly, the disallowance of the assessee‟s claim of share trading loss of Rs.7,36,483/- and expenses of Rs.26,10,333/- therein aggregating to Rs.33,46,816/- [Rs.7,36,483/-(+) Rs.26,10,393/-] is hereby deleted. The Grounds of appeal No. 17 & 18 are allowed in terms of our aforesaid observations.
11. We shall now advert to the claim of the Ld. A.R that the A.O/TPO had erred in determining the ALP of the royalty/branding fees paid by the assessee to its AE viz. CLSA, Netherland at Rs.nil, as against that claimed by the assessee at Rs.49,38,615/-. As is discernible from the orders of the lower authorities the assessee had paid a royalty of Rs.49,38,615/- for the use of brand name to Credit Lyonnais Securities Asia BV, Netherlands (for short “CLSA BV, Netherland”). As per the TP study report the assessee had paid the branding fees as per the terms of the “branding agreement” that was entered into with its AE, viz. CLSA BV, Netherland w.e.f 19.02.2002. It has 16 CLSA India Private Limited Vs. ACIT, Range-4(1) been the claim of the assessee before the lower authorities that as the brand “CLSA” was a well respected brand name in the brokerage and securities market worldwide, therefore, the use of the same had given the assessee company an identity readily recognisable in the brokerage and securities market, and thus, was immensely beneficial to its business. As per the “branding agreement” entered into by the assessee with CLSA BV, Netherland, the assessee in return for using of the brand name “CLSA” and other attributes had agreed to pay to its AE, viz. CLSA, BV, Netherland a brand fee calculated @ 1% of its gross receipts. The assessee company had used TNMM for benchmarking the aforesaid international transactions i.e payment of royalty/branding fees by comparing its net profit margin at entity level with that of the other broking entities. As the average of the net profit margin of the comparable companies was worked out by the assessee as per its TP study report at 15.97% as against its net profit margin of 54.81%, therefore, it had claimed the payment of royalty/branding fee of Rs.49,38,615/- as being at arm‟s length. However, the TPO was not persuaded to accept the payment of the royalty/branding fee by the assessee to its AE viz. CLSA, BV. Netherland as being at arm‟s length. As observed by the TPO, neither of the other CLSA group entities were paying any royalty to CLSA, BV, Netherland for the use of the brand for their business. It was further observed by the TPO that while for the other group entities were using the “CLSA” logo/brand worldwide since 1980, the assessee i.e CLSA India which was incorporated on 21.11.194 was comparatively a young member of the organisation. It was further observed by the TPO that the assessee could not submit any documentary evidence to prove the ownership of the brand by CLSA BV, Netherland specifically when the CLSA was a Hong Kong based group. As regards the assessee‟s claim that as it had obtained the RBI approval for payment of the royalty/brand fee, therefore, the payment so made adhered to the government regulations, and thus, as per Rule 10B(2)(d) was at arm‟s length, however, did not find favour with the TPO. Observing, that the approval granted by the RBI was just a permission for making the payment as 17 CLSA India Private Limited Vs. ACIT, Range-4(1) per the extant exchange control policy, the TPO was of the view that the same on such standalone basis would not justify the principles of arm‟s length. Further, observing that neither any of the uncontrolled entity with whom the CLSA group had a partnership or any other controlled entity of the group had paid any brand fee to CLSA BV, Netherlands, the TPO was of the view that on the basis of the said fact the ALP of the consideration paid for use of the brand name by the assessee company i.e CLSA India could safely be computed at nil. Observing, that the data regarding comparable transactions was available, the TPO was of the view that Comparable Uncontrolled Price method (CUP) was the most direct and reliable method for benchmarking the aforesaid transaction i.e payment of royalty/brand fee by the assessee to its AE, viz. CLSA BV, Netherland. As regards adoption of TNMM by the assessee for benchmarking the aforesaid international transactions, the TPO was of the view that comparison of the net profit margin of the assessee at an entity level with that of the other broking entities without separately and independently benchmarking the transaction pertaining to payment of brand fee could not be accepted. Accordingly, the TPO determined the ALP of the aforesaid international transaction relating to payment of royalty/brand fee by the assessee to its AE, viz. CLSA BV, Netherlands at Rs. Nil, as against that computed by the assessee at Rs. 49,38,615/-.
We have deliberated at length on the issue under consideration, and as pointed out by the ld. A.R, find, that the issue pertaining to the determination of the ALP of the royalty/ brand fee paid by the assessee to its AE viz. CLSA BV, Netherland had earlier came up before the Tribunal in the assessee‟s own case for A.Y 2002-03. The Tribunal while disposing off the appeal of the revenue for A.Y. 2002-03 in dated 22.02.2013 had therein held the payment of royalty/brand fees by the assessee to its aforesaid AE i.e CLSA BV, Netherland @ 1% of its net receipts as being at arm‟s length. The Tribunal while concluding as hereinabove had duly taken cognizance of the fact that no other subsidiary of the CLSA group was paying any 18 CLSA India Private Limited Vs. ACIT, Range-4(1) royalty/brand fees to the aforesaid AE viz. CLSA BV, Netherland. As in the case for the year under consideration, the TPO in the aforesaid case of the assessee for A.Y. 2002-03 observing that no brand fee was being paid by any other subsidiary to CLSA BV, Netherlands, had thus, treated the same as an internal CUP of the royalty payment. However, the Tribunal held that the approach adopted by the TPO/AO was incorrect as the international transactions in the case of the assessee had to be compared with an uncontrolled transaction. Accordingly, in the backdrop of the fact that the TPO had treated a transaction between the related parties as an internal CUP, the Tribunal had therein rejected the same. It was observed by the Tribunal that though there can be an internal CUP provided the transaction was with an unrelated party, but then, comparing the transaction in the case of the assessee with transactions of CLSA BV, Netherland with its another associated enterprises could not be accepted as an internal CUP. Apart from that, it was observed by the Tribunal that lack of a transaction could not be construed as a transaction. As regards the external CUP, it was observed by the Tribunal that as the TPO had not placed any material on record that no payment of royalty was made by any independent party for using brand name/trade name, therefore, such non availability of comparable transaction could not be considered as a transaction, and therein, form a basis of selection of a comparable transaction. Further, the Tribunal while disposing off the aforesaid appeal in the assessee‟s own case for A.Y. 2002-03 had approved the adoption of TNMM by the assessee as the MAM for benchmarking the aforesaid international transaction. For the sake of clarity, the observations recorded by the Tribunal while disposing off the aforesaid appeal in the assessee‟s own case in context of the aforesaid issue under consideration is reproduced as under:
“8. We have perused the records and considered the rival contentions carefully. The dispute raised in this ground is regarding transfer pricing adjustment made by AO in respect of royalty paid by the assessee to CLSA BV of which 19 CLSA India Private Limited Vs. ACIT, Range-4(1) the assessee is a subsidiary. The royalty amounting to Rs.7,11,466/- @ 1% of net receipt has been paid by the assessee during the year from 19.2.2002 to 31.2.2002. The assessee had not paid any royalty earlier as the same was not permitted by the erstwhile Foreign Exchange Regulation Act (FERA). However, later when FERA was replaced by FEMA, government allowed payment of royalty and therefore assessee started making payment of royalty to the parent company which is incorporated in Netherlands, after taking approval from RBI. Since the assessee had entered into an international transaction with an associate enterprise, the matter was referred to TPO who has made transfer pricing adjustment using CUP method. The TPO noted that no other subsidiary of CLSA BV anywhere in the world had paid any royalty. Therefore, he had treated this as internal CUP of royalty payment. Further, since the assessee could not give any information regarding similar payment of royalty by any broking company, the TPO treated the same as external CUP of no payment of royalty. Accordingly, he has considered the entire payment as excessive and made adjustment on this account which was followed by the AO. 8.1 In our view the approach adopted by TPO/AO is not correct. International transaction in case of the assessee has to be compared with uncontrolled transactions. There can be an internal CUP provided, the transaction is with an unrelated party. But comparing the transaction in case of the assessee with transactions of CLSA BV with another associate enterprise cannot be considered as internal CUP. Moreover, lack of transaction cannot be considered as a transaction. Regarding external CUP also, TPO has not placed any material on record to show that no payment of royalty has been made by any independent party for using brand name/trade name. Non availability of a comparable transaction can not be considered as transaction and cannot be the basis of selection of comparable transaction. Further, CUP method can not be applied if the relevant information is not available. This view is also supported by the decision of Mumbai Bench of the Tribunal in Cabot India Ltd. vs. DCIT on which the ld. Sr. Counsel has placed reliance. We, therefore agree with the finding of CIT(A) that CUP method on the facts of the case could not be applied. We are unable to accede to the request of the ld. CIT-DR, the matter may be restored to AO/TPO to find out a comparable transaction for application of CUP method. No such comparable transaction has been brought on record even by AO or by DRP, though the assessee had clearly stated that no such information was available. No such comparable case has been placed by the ld. CIT-DR even before us. The issue, therefore, cannot be restored for making roving inquiries. 8.2 The ld. CIT-DR has placed reliance on the decision of the Tribunal in the case of M/s. Knorr Bremse (I) Pvt. Ltd. (supra), has argued that in case the assessee does not show that transaction by transaction approach was not possible and there has been no real or tangible benefit for carrying on international transactions with the AEs. CUP method can be adopted with preference to TNMM. It has been pointed out that in that case it was also held that TPO was justified in taking ALP at nil. We have perused the said judgment. There cannot be any dispute about applicability of CUP method when transaction by transaction approach was possible but the method can be applied only when information is available for application of CUP method. In the cited case, the Tribunal had upheld the order of TPO determining ALP at nil on the basis of CUP method as in that case there was material to show that no real or tangible benefit had been derived by the assessee from the transaction with the AEs and benefit if any was only incidental. The present 20 CLSA India Private Limited Vs. ACIT, Range-4(1) case is different. In this case, though the AO observed that the trade name/brand name CLSA was not protected in any country including India and the assessee could not give any document to prove ownership of the brand by CLSA BV, CIT(A) on detailed examination of the matter has given a finding that the CLSA brand was owned by CLSA BV and the same was also registered in India. CIT(A) has also given a finding that CLSA strongly strived to maintain as well as enhance its brand value which had earned recognition in India and Asian markets. There is no material produced before us to controvert the said finding. In the broking business, brand does promote the business and as rightly observed by CIT(A) it is one of the profit drivers within the industry. Thus it cannot be said that the assessee had not derived any benefit from use of brand. The decision of the Tribunal relied upon by the ld. CIT-DR, therefore, cannot be applied to the facts of the present case. 8.3 We also find that the AO without any detailed examination as to why other CLSA entities were not making any payment of royalty, rushed to apply the CUP method which as we have held could not be applied for the lack of proper information. CIT(A) has examined the matter in detail as to why other CLSS entities were not paying royalty which was because of the fact that CLSA had different arrangement in different jurisdictions. CLSA was present in 13 markets out of which India, Korea and Taiwan had capital market regulation which required FIIs to contract directly with a domestic CLSA entity. In other jurisdictions, a single contract model was followed as per which client in particular country willing to buy securities in other countries has to place order in CLSA entity in the home country which shares commission with CLSA unit of the other country. In Korea, there was commission sharing arrangement whereas CLSA Taiwan operated as a branch which books the commission and it is charged an allocation of certain head office expenses. In India there was no commission sharing arrangement and payment of royalty was therefore permitted. CIT(A) on examination of the arrangement/system followed by CLSA BV has also given a finding that in other jurisdictions, CLSA entities were making market contributions. Therefore only on the ground that other CLSA units did not pay any royalty, it could not be held that payment of royalty by the assessee was not justified. 8.4 CIT(A) has also examined the business development system followed by other comparable companies in India and has given a finding that these companies on average were incurring business development expenditure which was 6.4% of brokerage turnover whereas similar expenditure incurred by the assessee was only 1.28% including royalty of 1% paid by the assessee . Therefore expenditure incurred by the assessee on royalty and business development could not be considered as excessive compared to the comparable parties. CIT(A) has also applied the TNMM method for benchmarking international transactions. There are 29 comparables selected details of which have already been given earlier which gave an average margin of -5.5% and, in case, loss making companies were excluded, the average margin came to 16.06% whereas in case of the assessee the margin declared was 57.58%. CIT(A) has therefore held that no TP adjustment is required to be made in case of the assessee with which, on the facts of case, we fully agree. We, therefore, see no infirmity in the order of CIT(A) in deleting the addition made and the same is therefore, upheld.”
21 CLSA India Private Limited Vs. ACIT, Range-4(1) As the facts and the issue pertaining to determination of the ALP as regards the consideration paid towards royalty/brand fee by the assessee to its AE viz. CLSA BV, Netherland remains the same as was there before the Tribunal in the aforementioned case of the assessee for A.Y. 2002-03, we, therefore, finding no reason to take a different view therein respectfully follow the same. Independent of our aforesaid observations, we may herein further observe, that as the assessee has received the specific approval from the RBI for making payments @ 1% of gross receipts towards royalty/brand fee to its AE viz. CLSA BV, Netherland, the same, thus, was in conformity with the law and the government regulations as were then so applicable at the time of making of such payment. Accordingly, in the backdrop of the aforesaid facts it can safely be concluded that the aforesaid international transactions of payment of royalty/brand fee by the assessee to its AE, viz. CLSA BV, Netherland was to be held as being at arm‟s length. Our aforesaid view is fortified by the CBDT Circular No. 6-P, dated 06.07.1968, wherein, in context of the provisions of Sec. 40A(2)(b) it was therein clarified that where the scale of remuneration of a director of a company had been approved by the Company Law Administration, there would be no question of disallowance of any part thereof in the income tax assessment of the company, on the ground, that the remuneration was unreasonable or excessive. On a similar analogy, it can safely be concluded that now when the payment of the royalty/brand fees by the assessee to its AE viz. CLSA BV, Netherlands had been approved by the RBI, the same, thus, on the said ground also could safely be held to be at arm‟s length. In fact, the aforesaid CBDT Circular had been pressed into service by the ITAT, Pune in the case of Kinetic Honda Motor Limited Vs. JCIT, 77 ITD 396. In the aforesaid case, the Tribunal while dislodging the view taken by the A.O and the CIT(A), had observed, that when the payments made by an assessee are approved by one wing of the government, then, there would be no question of treating such payment as excessive or unreasonable having regard to the legitimate business needs. For the sake of 22 CLSA India Private Limited Vs. ACIT, Range-4(1) clarity the observation of the Tribunal in the aforementioned case is culled out as under :
It would be value to suggest that by virtues of its 51 percent holding Honda was able to exercise influence not only on the assessee but also on the Government of India. According to the Assessing Officer and the Commissioner (Appeals), the Govt‟s approval had no weight as the person granting approval were not experts on income- tax. This was mere simplification of the matter. In the context of Section 40A(2)(b), the CBDT in Circular No. 6-P dated 6-7-1968 stated that when payments are approved by one wing of the Government, there is not question of such payment being treated as excessive or unreasonable having regard to the legitimate business needs. The principle behind this view is applicable with equal force to Section 37(1) also. Lightly brushing aside the Government approval in the manner done by the lower authorities would set a dangerous precedent and accordingly, could not be approved. In the above light, the above impugned addition having no justification was to be deleted.
Accordingly, in the backdrop of our aforesaid deliberations we are of the considered view that the determining of the ALP of the royalty/brand fee paid by the assessee to its AE viz. CLSA BV, Netherland at Rs.nil by the TPO, as against that shown by the assessee at Rs.49,38,615/- cannot be sustained and is liable to be vacated. Resultantly, the Grounds of appeal Nos. 6 to 11 are allowed in terms of our aforesaid observations.
13. We shall now deal with the claim of the assessee that the A.O/TPO had erred in law and the facts of the case in determining the ALP of the referral services received by the assessee from its AE, viz. CLSA Ltd., Hong Kong at Rs. nil, as against that claimed by the assessee as being at arm‟s length at an amount of Rs. 2,14,36,814/-. Briefly stated, the assessee which is engaged in the business of share & stock broking had entered into a “Referral agreement”, dated 07.02.2003, applicable w.e.f 01.01.2003 with its AE viz, CLSA Ltd., Hong Kong. As per the aforesaid referral agreement the foreign AE, viz. CLSA Ltd., Hong Kong would refer to the assessee company institutional clients based outside India who would desire to purchase/sell or otherwise deal in securities listed or approved for trading on the NSE/BSE, and in lieu thereof, the assessee would pay a referral fees equivalent to 30% of the brokerage fees that would be earned by it. On being queried by the lower authorities, it was submitted by the assessee before them that as its AE 23 CLSA India Private Limited Vs. ACIT, Range-4(1) i.e CLSA Ltd., Hong Kong had built and maintained a strong reputation amongst Foreign Portfolio Investors (FPIs) and Global Institutional Investors, therefore, the assessee pursuant to the aforesaid referral agreement entered into with its AE had benefitted by procuring substantial business from the FPIs and global investors as were referred to it by the said AE. It was submitted by the assessee that a payment of one time referral fees by it to its AE viz. CLSA Ltd., Hong Kong would not mean that the FPI client of the AE would be obligated to always execute its transactions through the assessee. Elaborating on the aforesaid aspect, it was submitted by the assessee that the FIIs were neither bound to deal with its AE, viz. CLSA Ltd., Hong Kong or execute their transactions through the assessee. It was submitted by the assessee that as the FII‟s would spread their business amongst various brokers and in turn broking entities in India and had a wide choice available with them for executing their transactions through the competitors of CLSA, Hong Kong, therefore, the assessee had no exclusivity. It was submitted by the assessee that as every competing global broker and brokerage entity in India would aim to capture the business to be transacted by the FIIs, therefore, it was very critical that such global institutional investors were convinced on a regular basis to execute their transactions through CLSA Ltd., Hong Kong and the assessee company. On the basis of the aforesaid factual position, the assessee tried to impress upon the lower authorities that in order to facilitate procuring of the business of the global institutional investors the role of its AE viz. CLSA Ltd., Hong Kong was very crucial and in fact indispensable. As regards the referral fees that was paid by the assessee @ 30% of the brokerage fees earned on each executed transaction, it was submitted by the assessee before the lower authorities that the same was well within the reasonable limits. In order to drive home its claim as regards the reasonabless of the referral fees that was paid by the assessee to its AE, viz. CLSA Ltd., Hong Kong, it was submitted by the assessee that the same could safely be gathered from the fact that as per the bye laws and regulations of the Stock Exchange the brokers were permitted to pay to the remisier (referral) a 24 CLSA India Private Limited Vs. ACIT, Range-4(1) maximum share @ 50% of the brokerage charged to the clients introduced by them. The assessee had benchmarked the referral fees transactions by using entity-wide analysis with TNMM as the most appropriate method. As the average margin of the selected companies was arrived at 15.97% as against the net margin of 54.81% of the assessee, therefore, it was claimed by the assessee that the aforesaid transaction with its AE was consistent with the arm‟s length principle.
In the course of the proceedings it was observed by the TPO that the referral agreement, dated 07.02.2003 entered into between the assessee and its AE, viz. CLSA Ltd., Hong Kong inter alia revealed the following terms:
CLSA HK has in the said agreement stated that it has contacts with a number of persons outside India who desire to purchase, sell or otherwise deal in securities listed or approved for trading on the NSE, and In the agreement it is also stated that CLSA HK has referred, and may from time to time in the future refer to CLSI such persons outside India. Such persons referred by CLSA HK to CLSI will require the transactions to be executed by CLSI and settled directly with its custodian. In consideration of CLSA HK referring these persons to CLSI, CLSI agrees to pay to CLSA HK for each executed transactions in respect of the persons referred to CLSI, a referral fee @ 30% of the amount of commission received by it in respect of each such executed transaction.”
It was observed by the TPO that the AE, viz. CLSA Ltd., Hong Kong had been referring clients to the assessee in the years preceding the aforesaid agreement without charging the Indian entity i.e the assessee for such referrals. In the backdrop of his aforesaid observations the TPO called upon the assessee to put forth an explanation as regards the justification for the payment of referral fees to its aforesaid AE, viz. CLSA Ltd., Hong Kong during the year under consideration. Also, the assessee was called upon to clarify as to whether the other AEs were also paying similar referral fees to CLSA Ltd., Hong Kong, and as to whether the latter had incurred any cost for arranging the said referrals. Lastly, the assessee was also directed to furnish the basis of deciding the rate of the referral fees along with the complete details of the clients which were referred by its AE, viz. CLSA Ltd., Hong Kong along with 25 CLSA India Private Limited Vs. ACIT, Range-4(1) the details of the trade volume and calculations of the referral fees. However, the reply filed by the assessee did not find favour with the TPO for the reasons discussed by him at length in the body of his order passed under Sec.92CA(3), dated 07.03.2006. In fact, it was observed by the TPO that as the assessee had neither furnished any specific answers to certain crucial questions nor furnished any evidence to substantiate the basis of the referral agreement itself or the circumstances leading to the same, therefore, he was constrained to infer viz. (i) that as no correspondence trail had been produced by the assessee which could substantiate its claim that referral services were infact rendered by its AE, viz. CLSA Ltd., Hong Kong, therefore, there was no certainty as regards the genuineness of its said claim; (ii) that as no details of the costs incurred for the services rendered by the AE, viz. CLSA Ltd., Hong Kong were furnished by the assessee despite having been specifically directed, therefore, it could not be proved that any costs had actually been incurred by the aforesaid AE for arranging such referrals, and thus, the cost pertaining to rendering of the aforesaid referral services was to be taken as zero; (iii) that as the assessee itself was treating the referral fees as “compensation on an ongoing basis for such referral function” calculated on a certain cost base, therefore, the “Cost Plus Method” (CPM) would be the most appropriate method to benchmark the aforesaid international transaction of receipt of referral services by the assessee from its AE, viz. CLSA Ltd., Hong Kong; (iv) that as no cost had been proved to have been incurred by the AE on the rendition of the aforesaid referral services, therefore, there was no other option but to determine the costs of the aforesaid international transaction of rendering of referral services as nil; (v) that if the cost of the referral services was worked out at nil then there would be no question for compensation for such nil cost, and hence, the value of the said international transaction was to be determined at Rs.nil; and (vi) that the support drawn by the assessee from the Stock Exchange rules which permitted the brokers to pay to the remisier (referral) a maximum share of 50% of the brokerage charged to the clients introduced by them could not be accepted as a valid 26 CLSA India Private Limited Vs. ACIT, Range-4(1) yardstick for benchmarking the reasonableness of the referral fee of 30% of the brokerage paid by the assessee to its aforesaid AE, viz. CLSA Ltd., Hong Kong. On the basis of his aforesaid deliberations it was concluded by the TPO that the assessee could not be establish from the transfer pricing angle that it had acted as an independent enterprise functioning in an uncontrolled environment while agreeing to pay the referral fees of Rs.2,14,36,814/- to its AE, viz. CLSA Ltd., Hong Kong for services which it had hitherto received free of charge. Accordingly, the TPO being of the view that the payment of the referral fees was not found to be arm‟s length therein determined the ALP of the same at Rs.nil.
We have deliberated at length on the aforesaid issue pertaining to determination of the ALP of the referral services received by the assessee from its AE viz. CLSA, Hong Kong by the A.O/TPO at Rs.nil, as against that shown by the assessee at an amount of Rs. 2,14,36,814/-. We find that the assessee had primarily assailed the aforesaid action of the TPO on two counts, viz. (i). that the A.O/TPO had erred in concluding that the assessee had failed to place on record documentary evidence which would substantiate receipt of referral services by the assessee from its AE, viz. CLSA Ltd., Hong Kong; and (ii). that the TPO had gravely erred in law in determining the ALP of the referral services at Rs.nil without applying any one of the prescribed methods provided in Sec. 92C(1) of the Act.
We shall first deal with the claim of the assessee that it had placed on record substantial documentary evidence which proved to the hilt that it had received referral services from its AE, viz. CLSA Ltd., Hong Kong in lieu whereof a referral fees of Rs. 2,14,36,814/- was therein paid to the latter as per the terms of the referral agreement, dated 07.02.2003 (applicable w.e.f 01.01.2003). On a perusal of the records, we find, that the assessee in order to substantiate rendering of the referral services by its aforementioned AE, viz. CLSA, Hong Kong to the assessee compny had furnished the following 27 CLSA India Private Limited Vs. ACIT, Range-4(1) documentary evidence as „additional evidence‟ U/rule 46A in the course of the proceedings before the CIT(A): Snapshot from CLSA Group website capturing research capabilities (refer PB 192 – 193) List of different research activities undertaken by the CLSA HK (refer PB 194- 195) Sample daily research publication titled as 'Asia Morning Line - Today's best ideas in Asian equities' dated May 5, 2011 (refer PB 196-209); Sample referral fee invoice raised by CLSA HK in respect of which there has been a payment of referral fees (refer PB 210-233) (also submitted before the learned TPO); A copy of the referral agreement between the Appellant and CLSA HK dated February 7, 2003 (refer PB 234-236) (also submitted before the learned TPO); Research publication prepared by the CL.SA Chief Strategist titled 'Asia Maxima -Quarterly Review and Asset Allocation' (refer PB 237-265); (wherein Indian markets are also discussed) (refer PB Pg. 260 -265); Copy of agreement between CLSA HK and CLSA Inc, USA (refer PB 266- 294); Copy of the advice provided by DHS to the Appellant on payment of referral fees (refer PB 295-299); Copy of the Board Resolution dated January 8, 2003 of the Appellant in respect of the referral agreement (refer PB 300); Copy of the referral agreement between CLSA HK and CLSA Korea (refer PB 301 -303) Copy of National Tax Service Audit Report in respect of the referral arrangement between CLSA HK and CLSA Korea for the year 2008 (refer PB 304-305); Details of opening up of accounts by top 6 CLSA foreign institutional clients and Trades undertaken by them (refer PB 306-310); Details of the cost involved in rendering of the services in the referral agreement by CLSA HK (refer PB 311); Details evidencing that the relationship management of the top 6 foreign institutional clients of the Appellant is situated abroad and managed by CLSA HK (refer PB 312-313); Extract of Section 15a-6 of US Securities and Exchange Commission Rules which provide for appointment of a US broker dealer for US institutional investors (refer PB 314-316); Screenshots from the order managing screen showing the execution of trade orders (refer PB 316) Copy of the order passed by the Hon'ble CIT(A) dated January 4, 2011 in connection with the brand fee paid the Appellant in A.Y. 2002 -03 (refer PB 317 -338); Affidavit of Mr. Rajendra Mehta dated May 11, 2011 (refer PB 339-342); Affidavit of Mr. Andrew Ross who was the legal counsel to the CEO / Chairman of CLSA HK (refer PB 343-345); 28 CLSA India Private Limited Vs. ACIT, Range-4(1) Affidavit of Mr. Donald Skinner, Director of Cash Equities Segment, CLSA HK dated May 11, 2011 (refer PB 346-351); 16. Still further, the assessee vide his submission dated 20.02.2012 had submitted certain more documents by way of „additional evidence‟ U/rule 46A before the CIT(A), as under: “Affidavit of Ms Sonal Jain, Country Head of CLSA India dated 16 February 2012 (refer PB Pg. 378 to 381) List of Key Relationship Mangers (KRM) of top FII clients (refer PB Pg. 382 to 391) List of roadshows conducted for FII clients (refer PB Pg. 392 to 395) List of various communications with a FII client named „Templeton Global Equity‟ (refer PB Pg. 392 to 400) List of various communications with a FII client named „Capital International Inc‟ (refer PB Pg. 401 to 404) Details of support provided to a client named „Templeton Global Equity‟ (refer PB Pg.405 to 417) Details of meetings attended by FII clients with respect to India securities, sample clients named „Fidelity investment International‟ and „Templeton Global Equity‟ (refer PB Pg. 418 to 420) List of India specific roadshows conducted and attended by clients (refer PB Pg. 418 to 443) A report by PWC identifying the costs incurred by CLSA HK towards referring clients to CLSA India (refer PB Pg. 444 to 451)” On receipt of the aforesaid „additional evidence‟ the CIT(A) had remanded the same under Rule 46A to the TPO and had called for his comments. In reply, the TPO filed three “remand reports” wherein he without appreciating the aforesaid documentary evidence and also the directions of the CIT(A) summarily rejected the aforesaid documentary evidence, for the reasons, viz. (i). that as the assessee had an opportunity to submit the aforesaid documents in the course of the TP proceedings/assessment proceedings, therefore, the same may not be entertained by admitting the same in the course of the appellate proceedings; and (ii). that the documentary evidence filed by the assessee did not demonstrate the factum of any actual referrals made by the AE, viz. CLSA Ltd., Hong Kong to the assessee company. On a perusal of the records, we find, that the TPO vide his letter dated 21.07.2011 filed with the CIT(A), had stated, that the assessee in the course of the original 29 CLSA India Private Limited Vs. ACIT, Range-4(1) TP proceedings had only furnished a note with respect to the referral fees and had not addressed the queries which were specially raised vide order, entries dated 06.12.2005 and 16.12.2005. It was further stated by the TPO, that as the assessee despite having been afforded more than 3 months time period to furnish the reply had willingly chosen not to do so, therefore, it could not now be allowed to present the aforesaid documents by way of „additional evidence‟ in the course of the appellate proceedings. Further, the TPO vide his letter dated 11.01.2012 filed with the CIT(A), had stated, that as in the earlier years also referral services were being rendered by the overseas entity to the assessee without charging of any fee, therefore, the TPO in the absence of any justification of raising of charges by the AE on the assessee for making the referrals during the year under consideration had correctly taken the arm‟s lenght value of the services rendered by the AE to the assessee at Rs. nil. Further, it was stated by the TPO that the assessee acting upon the advise by Delloite Haskins & Sells (for short “DHS”), dated 03.02.2003 had though started making the payments towards referral fees to its AE, viz. CLSA Ltd., Hong Kong, however, the fact that such payments were made from the month of January, 2003, therein revealed that the said referral fee was paid even prior to having been so advised by DHS. Further, It was stated by the assessee that as the assessee had not demonstrated as to which FII clients were referred by its AE, viz. CLSA Ltd., Hong Kong, therefore, it was not possible to know as to which clients were the „referred clients‟ and which clients were „direct clients‟. As such, it was stated by the TPO that the assessee had adopted “hands–on approach” and had shared 30% of the commission received from all FIIs with its AE, viz. CLSA Ltd., Hong Kong. On the basis of his aforesaid claim, it was submitted by the TPO that de hors any material which would reveal that the foreign clients had actually been referred to the assessee by its AE, viz. CLSA Ltd., Hong Kong, its claim of having been paid the referral fees to the latter could not be accepted. Also, the TPO objected to the payments of the referral fees by the assessee to its AE, viz. CLSA Ltd., Hong Kong, in respect of certain CLSA group companies and its 30 CLSA India Private Limited Vs. ACIT, Range-4(1) associate enterprises. As such, the TPO submitted before the CIT(A) that the “additional evidence” filed by the assessee U/rule 46A with respect to referral fees may be rejected. Lastly, the TPO in respect of the second set of “additional evidence” furnished by the assessee with the CIT(A) therein filed a “remand report”, dated 20.12.2013. In his said report the TPO objected to the filing of the second set of “additional evidence” by the assessee vide its letter dated 20.02.2012. Referring to the documents filed by the assessee by way of an “additional evidence”, vide its letter dated 20.02.2012 it was stated by the TPO that as the assessee had failed to demonstrate that it was prevented by a sufficient cause from producing the aforesaid evidence in the course of the original proceedings before the A.O/TPO, therefore, the same did not merit to me admitted as “additional evidence” U/rule 46A in the course of the appellate proceedings. On merits, the TPO objected to the documents filed by the assessee on the ground that as either they were in the nature of self-serving documents or were not contemporaneous, thus, the same lacked any evidentiary value. Adverting to the documents filed by the assessee, it was also stated by the TPO that the same did not prove that the expenses therein incurred by its AE, viz. CLSA Ltd., Hong Kong were for the benefit of the assessee company.
We find that the aforesaid documents filed by the assessee as “additional evidence” U/rule 46A were in all fairness admitted by the CIT(A). In our considered view, the assessee by drawing support from the voluminous documentary evidence that was filed before the CIT(A) as „additional evidence‟ U/rule 46A, had therein substantiated the factum of receipt of referral services from its AE, viz. CLSA Ltd., Hong Kong, along with the tangible benefits derived therefrom. Although the aforesaid documents were filed by the assessee as “additional evidence” in two parts before the CIT(A), however, we are of a strong conviction that the same clearly dispels the doubts raised by the A.O/TPO as regards the rendition of the referral services by the AE, viz. CLSA Ltd., Hong Kong to the assessee during the year under 31 CLSA India Private Limited Vs. ACIT, Range-4(1) consideration. As is discernible from the records, we find, that the TPO on being confronted with the aforesaid “additional evidence”, had however, in neither of his three remand reports been able to place on record any such material which would dislodge the factum of rendition of referral services by the AE, viz. CLSA Ltd., Hong to the assessee during the year under consideration and therein prove to the contrary that no such referral services were therein factually rendered. Except for claiming that the documents filed by the assessee did not demonstrate that any actual referrals were made by the AE, viz. CLSA Ltd., Hong Kong, to the assessee, we find, that the said hollow claim of the TPO is not backed by any concrete material which would support the same. On the basis of the aforesaid observations, we are unable to concur with the view taken by the lower authorities that the assessee had failed to substantiate receipt of referral services from its the AE, viz. CLSA Ltd., Hong Kong during the year under consideration on the basis of any supporting documentary evidence.
Apart from the fact that the view taken by the lower authorities that the assessee had failed to substantiate on the basis of supporting documentary evidence its claim of having received referral services from its AE, viz. CLSA Ltd., Hong Kong had been vacated by us, we even otherwise are unable to concur with the manner in which the TPO had without following any one of the prescribed methods provided in Sec.92C(1) of the Act, therein determined the ALP of the referral services at Rs.nil as against that shown by the assessee by applying TNMM as the MAM at Rs.2,14,36,814/-. We have given a thoughtful consideration to the contentions of the ld. A.R as regards the invalid assumption of jurisdiction by the TPO for determining the ALP of the referral services rendered by the AE, viz. CLSA Ltd., Hong Kong at RS. Nil i.e without adopting any one of the prescribed method contemplated in Sec. 92C(1) of the Act, and are persuaded to subscribe to the same. As observed by us hereinabove, the assessee had duly conducted a transfer pricing study and by applying TNMM as the MAM had therein demonstrated that the international 32 CLSA India Private Limited Vs. ACIT, Range-4(1) transaction of rendition of referral services by the AE, viz. CLSA Ltd., Hong Kong to the assessee was as per the arm‟s length standard prescribed under the I.T Act and the rules. However, we find, that the TPO had without applying any one of the methods prescribed in Sec.92C(1) of the Act, had therein determined the ALP of the aforesaid international transaction of rendition of referral fees by the AE, viz. CLSA Ltd., Hong Kong to the assessee at Rs.nil, as against that worked out by the assessee after applying TNMM as the MAM at an amount of Rs.2,14,36,814/-. We are unable to concur with the aforesaid manner in which the TPO had determined the ALP of the referral services rendered by the AE, viz. CLSA, Hong Kong to the assessee at Rs.nil. In our considered view, on a reference made under Sec. 92CA(1) of the Act to the TPO, the latter therein is obligated to benchmark the international transactions of the assessee only after applying any one of the prescribed methods provided in Sec. 92C(1) of the Act. Under no circumstances the TPO can benchmark the transactions at nil or in an ad hoc manner by dispensing with the statutory obligation cast upon him to take recourse to and therein determine the ALP by applying any one of the methods prescribed under Sec. 92C(1) of the Act. Our aforesaid view is fortified by the judgments of the Hon‟ble High Court of Bombay in the case of viz. (i) CIT Vs. Merck Ltd. (ITA No.272 of 2014), dated 08.08.2016; (ii) CIT vs. Lever India Exports Ltd. (ITA No.1306,1307 & 1349 of 2014), dated 23.01.2017; (iii) CIT Vs. Johnson & Johnson Ltd. (ITA No.1030 of 2014), dated 07.03.2017; and (iv) CIT Vs. Kodak India Pvt. Ltd. (ITA No.15 of 2014), dated 11.07.2016. Accordingly, in the backdrop of our aforesaid deliberations, we are unable to sustain the determination of the ALP of the aforesaid international transaction of rendering of referral fees by the AE, viz. CLSA Ltd., Hong Kong to the assessee at Rs.nil, i.e without following any one of the prescribed methods provided in Sec.92C(1) of the Act. Resultantly, the Grounds of appeal Nos. 12 to 16 are allowed.
33 CLSA India Private Limited Vs. ACIT, Range-4(1) 20. The Grounds of appeal Nos. 1 to 5 as stated by the Ld. A.R as being in the nature of general grounds are dismissed as not pressed.
Resultantly, the appeal filed by the assessee is allowed in terms of our aforesaid observations.
Order pronounced in the open court on 14/12/2020.