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Income Tax Appellate Tribunal, MUMBAI BENCHES “K”, MUMBAI
Before: Shri C N Prasad & Shri Rajesh Kumar
IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI BENCHES “K”, MUMBAI
Before Shri C N Prasad, Judicial Member & Shri Rajesh Kumar, Accountant Member ITA No.902/Mum/2016 Assessment Year : 2011 -12 CLSA India P. Ltd., DCIT Cir 4(1)(1), (Formerly CLS India Ltd) Mumbai Vs. 8/F, Dalamal House, Nariman Point, Mumbai 400 021.
PAN AAACC2262K (Appellant) (Respondent)
Appellant By : Mr Mukesh Butani, Ms Karishma Phatarphekar & Mr Harsh Shah Respondent By : Ms Jothilakshmi Nayak Date of Hearing :27.09.2019 Date of Pronouncement : 03.02.2020
O R D E R Per Rajesh Kumar, Accountant Member
This appeal by the assessee is directed against the order of the DRP-1, Mumbai, dated 26.11.2015, u/s. 144C(5) of the Income Tax Act, 1961 (hereinafter referred to as “the Act”) relating to A.Y. 2011-12.
Ground nos. 1 to 3 are general in nature and require no adjudication.
Ground nos. 4 read as under:
“Availing of intra-group services
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 Arm's Length Price ('ALP') determined by the Appellant in respect of the international transactions in connection with availing of intra-group services by the Appellant from its Associated
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Enterprises ('AEs'). In doing so, the learned TPO / learned AO / Hon'ble DRP has erred in law and in facts by: 4.1.rejecting Transactional Net Margin Method (TNMM') as the Most Appropriate Method ('MAM') for the determination of the ALP. 4.2.not appropriately applying any of the prescribed methods as per Section 92C(1) of the Act. 4.3.not appreciating the voluminous documentary evidence, details of cost incurred by the AEs, details of allocation keys used by the AEs etc filed by the Appellant. 4.4.not considering the benefits derived by the Appellant and also disregarding the commercial expediency of the Appellant. 4.5.determining the ALP as 'Nil'.
The facts in brief are that the assessee company was incorporated on 21.11.1994 under the Companies Act, 1956. It is a part of the CLSA group, which is an Asia brokerage house, having its regional headquarters in Hong Kong. The assessee is engaged in the business of institutional equity broking and has membership of the Bombay Stock Exchange Limited (BSE) and the National Stock Exchange Limited (NSE). The assessee’s customers comprise of Foreign Institutional Investors (FII) and Domestic Institutional Investors (DII). The assessee did not have international sales presence and the capability of maintain client relationships with global FII clients. The assessee does not have the resources to undertake activities like regional research, or various other global back office functions. In order to serve the clients effectively, expertise at global/regional level is required to be maintained. The resources available with the assessee for sales, research, back office were purely for localised work and not capable to carry out the specialised global/regional activities. In order to overcome the said problems, the assessee entered into separate agreements with CLSA Limited, Honk Kong (CLSA Hong Kong) and CLSA Singapore Pte Limited (CSLA Singapore), who have capability to maintain the global client relationships and thus, provide services in the nature of international equity sales, sales trading support, dealing support and regional research as well as a range of back office support services. The assessee filed its return of income on 25.11.2011 declaring total income at Rs 214,39,00,518/-, which was processed u/s. 143(1) of the Income tax Act, 1961. Thereafter, the case was selected for scrutiny and the AO issued notice u/s. 143(2) and 142(1) of the Act,
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which were duly served on the assessee. The AO observed that the assessee had entered into international transactions with Associated Enterprises (AE) during the year, which have been listed in the auditor’s report in Form No. 3CEB filed along with the return of income. In order to determine the arm’s length price of these transactions, the matter was referred to the Jt. CIT Transfer Pricing-2(3), Mumbai (TPO). The TOP vide order u/s. 92CA(3), dated 30.01.2015, determined an adjustment of Rs 151,68,82,394/- to be made to the transactions value of the transactions of the assessee with its AE. The Assessing Officer has computed the total income of the assessee under sub section (4) of section 92C in accordance with Arms Length Price determined by the TPO u/s. 92CA(3 of the Act. The adjustment comprised the following:
Sr No. Particulars Amount 1 Provision of brokerage services 21,73,90,712/- 2 Availing of intra group services 127,38,29,995/- 3 Provision of IT support services 1,57,55,055/- 4 Provision of sub-advisory services 99,06,632/- Total Adjustments 151,68,82,394/-
Ultimately, the assessment was framed by the Assessing Officer vide order, dated 28.01.2016, passed u/s. 143(3) r.w.s. 144C(13) of the Act, inter alia, making an addition of Rs 151,68,82,394/-
As stated above, assessee entered into separate agreements with CLSA Limited, Honk Kong (CLSA Hong Kong) and CLSA Singapore Pte Limited (CSLA Singapore), in order to provided services in the nature of international equity sales, sales trading support, dealing support and regional research as well as a range of back office support services to international clients. The consideration paid by the assessee to CLSA Hong Kong and CLSA Singapore for the services rendered under the respective agreements with the said AE was on the basis of cost plus a mark-up. In terms of the said agreements, the assessee availed the following services which were integral to serve its clients:
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• Broking Management • Information Technology • Client Management • Internal Audit • Communications • International Sales and Sales Trading Support • Compliance • Legal • Credit Risk Management • Management • Event Marketing • Operational Risk Management • Finance and Accounting • Regional Research • Human Resources • Tax Planning and Management
During the year the assessee made a payment of Rs 127,38,29,995/- for availing such group services. The assessee had benchmarked this international transactions using Transactional Net Margin Method (hereinafter referred to as TNMM) as Most Appropriate Method ( hereinafter referred to as MAM) based on the methodologies, which were duly explained to the TPO vide submission dated 30.12.2014. In the Transfer Pricing Study Report, the assessee considered itself as the tested party and adopted Operating Profit/Operating Cost as the Profit Level Indicator. Since the assessee’s margin of 11.78% was better than the comparable companies' margin of 5.46%, the transactions were considered to be at arm's length. As an alternative approach, the assessee had also benchmarked these transactions by considering the foreign AEs as the tested parties and based on comparable companies margin justified that the mark-up charged by the AEs was at arm's length.
The learned counsel for the assessee submitted that despite assessee having submitted all necessary evidences qua the international transactions and transfer pricing report, the TPO has not followed any of the prescribed method u/s 92C of the Act, and, thus came to the conclusion that the arm’s length price of the fees paid by the assessee to the Associate Enterprises is nil, which is wrong and against the provisions of the Act. The learned AR also submitted that the DRP has erred in upholding the order of the TPO wherein none of the prescribed methods was followed for determining the ALP of the international transactions with the Associate Enterprise. The assessee further submitted that payment of intra-group services is closely interlinked with brokerage income. Unless the assessee avails these intra- group services, it cannot earn brokerage income from FII clients. The learned AR
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submitted that assessee’s case is covered by the decision of the Tribunal in its own case for A.Y. 2012-13, wherein the co-ordinate Bench has held that the order of the DRP in upholding the transfer pricing adjustment made by the TPO on estimation basis without following any prescribed method is bad in law. In the light of the said decision, the learned AR submitted that ground no. 4 may therefore be allowed in favour of the assessee by deleting the adjustment made of Rs 127,38,27,995/-
The learned DR, on the other hand, submitted that the issue is not covered by the decision of the co-ordinate Bench for A.Y. 2012-13 as the assessee has not carried out any benchmarking based on foreign AEs as tested party in A.Y. 2011-12. The learned DR submitted that in A.Y. 2012-13 the assessee has considered foreign AE as tested party and, accordingly carried out Benchmarking whereas in A.Y. 2011- 12, the assessee has aggregated all its transactions and chosen itself as the tested party and carried out benchmarking. The ld DR further submitted that since assessee has benchmarked its transactions separately, the Tribunal in A.Y. 2012-13 upheld the MAM method adopted by the assessee. The learned AR rebutting the arguments of the learned DR submitted that they were factually incorrect in stating that for A.Y. 2011-12 the assessee has not benchmarked its transactions considering foreign AE as the tested party. The learned AR filed two submissions dated 30th Dec. 2014 and 21st January 2015 (copies filed at page 713 of paper- book vol 2 and page no 1943 of paper-book vol (4) with the TPO wherein it has explained its benchmarking approach considering foreign AEs as the tested parties. The learned DR also stated that in A.Y. 2012-13 the Tribunal has not decided the question as to whether the assessee has availed intra group services from its AEs. For this purpose, the DR has referred to para 17 of the Tribunal order for AY 2012- 13. As per the DR in AY 2011-12, TPO has determined the ALP as Nil since assessee could not produce any evidence of rendering services by AEs. As the Tribunal in its order for AY 2012-13, did not examine the issue of actual rendition of services by AEs, it cannot be treated as a covered issue. He further contended that in any case, rendition of services is a fact, which needs to be examined on a year on year basis and thus, is not covered by the order of the co-ordinate Bench. The learned AR submitted that the TPO in its order at page 11 has submitted that the assessee has
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also submitted supplementary analysis, wherein the AE was taken as tested party. The learned AR while rebutting the arguments of the learned DR on the issue of non-applicability of decision of the Tribunal for A.Y. 2012-13, contended that the assessee vide submission dated 21.01.2015 filed detailed documentation to demonstrate rendition of intra group services by the AEs to the assessee. All these evidences were examined by the TPO as well as the DRP and after examination they brushed them aside giving generic reasons. The learned AR also submitted that the assessee also furnished PWC AUP report obtained by the assessee which states that services were actually received and cost incurred by the AE, basis of allocation etc. Referring to page 26 of the order of the TPO, the learned AR submitted that the TPO has never alleged that no evidences were provided or that no services have been rendered.
We have hearing the parties and perusal the material available on record including the decision of the co-ordinate Bench in ITA No. 1182/Mum/2017 for A.Y. 20212-13. We observe that identical issue was involved in that year and that co- ordinate Bench have decided the issue in favour of the assessee by observing as under:
“10. We have heard the rival submissions and also perused the material on record including the cases relied upon the parties. The first issue pertains to the assessee’s objection raised before the Ld. DRP on the ground that the Ld. TPO has wrongly rejected the TNMM followed by the assessee in its transfer pricing analysis. Brief facts and material which need necessary mention for the purpose of deciding the issues involved are that the assessee company incorporated under the companies Act 1956, is primarily engaged in the business of equity broking and has membership of Bombay stock exchange and the National stock exchange. The assessee’s customers comprise of foreign institutional investors (FIIs) and domestic institutional investors (DIIs). As contended by the Ld. counsel for the assessee, since the assessee had no international sales presence or capability to maintain client relationship with FIIs on global basis or internal resources to undertake various activities like regional research or perform various back-office functions, it entered into agreements with CLSA Ltd. Hong Kong and CLSA Singapore private Ltd., which had the capacity to maintain the client relationship on global basis for providing services in the nature of international equity sales and sales trading support, dealing sport and regional research as well as a range of back-office support services. In the year relevant to the assessment year
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under consideration, the assessee made payment of Rs. 146,67,42,784/- for availing these intra group services. The assessee benchmarked the said international transaction using TNMM as the most appropriate method considering itself as the tested party and adopted operating profit (OP)/operating cost (OC) as the profit level indicator (PLI). Since the assessee’s margin of 26.09% was better than the comparable companies margin of 10.14% the assessee claimed the transition to be at arm’s length. Alternatively, the assessee also benchmarked the said transaction by considering the AEs as the tested party and based on comparable companies margin justified that the markup charged by the AE’s are at arm’s length. 11. Since, CLSA India had paid Rs. 129,30,35,428/- to CLSA Hong Kong and Rs. 17,37,07,356/- to CLSA Singapore for providing operational support to CLSA affiliates including the assessee during the year relevant to the assessment year under consideration, the Ld. TPO asked the assessee to submit the details of Intra Group Services and substantiate the ALP for the same along with the relevant supporting documents. The assessee was further asked to show cause as to why similar adjustment should not be made particularly in the light of the fact that similar adjustment on Intra Group payments was confirmed by the Ld. DRP in the A.Y. 2011-12 under the similar set of facts. 12. In response to the said query, the assessee submitted that it has entered into separate service level agreements with the CLSA service providers, pursuant to which the following services were rendered by them during the year relevant to the assessment year under consideration:- Broking Management, Client Management, CLSA U, Communications, Compliance, Credit Risk Management, Development Squad, Event Marketing, Finance and Accounting, Future & Options Management Support Services, Human Resources, Information Technology, Internal Audit, International Sales and Sales Trading Support, Legal, Management, Market Risk Management, Operational Risk Management, Regional Algorithm Business Support, Regional Research, Tax Planning and Management.
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To substantiate its claim, the assessee inter alia submitted transfer pricing study report, copy of audited financials, copies of service level agreement entered into with CLSA, Hong Kong and CLSA, Singapore, description of services and summary of benefits, supplementary analysis KPMG benchmarks, documentary evidence to prove services rendered by the intragroup under the heads administration, broking management, client management, communications, compliance, credit risk management, developed squad, events marketing, finance, Human Resources, Information Technology, internal audit, internal sales and sales trading support, legal, Management, Operational Risk Management and Regional Research. The assessee also submitted description of the various services, head-wise breakup of the payments and cost allocation as per keys provided in agreement. 14. As pointed out by the Ld. counsel, the assessee has benchmarked the transaction with entry-level TNMM. It has benchmarked the transaction separately by adopting AE as tested party and using foreign data base. We notice that the arithmetic mean of the comparable companies was 10.14% and the assessee had earned net profit margin of 26.09%. As pointed out by the Ld. counsel, the margin earned by the assessee company at an entry level is in accordance with the provisions of section 92C(2) of the Act. But the Ld. TPO did not accept the entry level benchmarking of the cost contribution holding that the cost contribution constitutes a small part of the total transactions at the entry level, therefore, the profit margin at the entry level cannot be the basis for determining the ALP of the cost contribution. The profit at entry level is affected by various other factors therefore the TNMM is not the most appropriate method to benchmark the transaction of cost contribution. Secondly, the Ld. TPO held that under the transfer pricing provisions, each international transaction has to be benchmarked separately. 15. We further notice that the assessee has benchmarked the transaction by using foreign comparable companies i.e., by using AE as tested party. As pointed out by the Ld. counsel for the assessee, the assessee has separately benchmarked its various international transactions including the transaction of payment of intra group services. The assessee has submitted transfer pricing study report which is available at page 43 to 74 of the paper book submitted by the assessee. The transfer pricing study report reveals that the net profit margins of the identified comparable companies range between -2.88 and 25.13% and the arithmetic mean of the NPMs of comparable companies is 10.40%. On the other hand, the net profit margin of the assessee company for the financial year ended March 31, 2011 at entry level was 26.09%. In the light of the aforesaid facts, there is no merit in the findings of the Ld. TPO that the margin earned by the assessee at an entry level is not in accordance with the provisions of section 92C(2) of the Act. Under these
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circumstances, the action of the Ld. DRP in confirming the transfer pricing adjustment done by the Ld. TPO is not justified. The assessee has also submitted a supplementary analysis i.e. AUP report from Price Waterhouse Coopers (PWC) which certifies the cost and markup charged by AEs and KPMG benchmarking report, which determines arm’s length markup for services availed. So, there is merit in the contention of the Ld. counsel that the assessee has complied with all requirements as prescribed under the Act and the Rules and the TP analysis has been carried out as per the provisions of law. We are therefore of the considered view that the assessee has discharged its onus by demonstrating that the transaction is at the arms length in accordance with the provisions of section 92C of the Act and has maintained the prescribed documentation in support of such compliance. 16. On the other hand the Ld. DRP has upheld the findings of the Ld. TPO rejecting the objections filed by the appellant/assessee. The operative part of the findings of the Ld. DRP read as under: “3.3.1 We have considered the facts of the case and submissions made by the assessee. We find that the issues at hand are squarely covered against the assessee in its own case for A.Y. 2011-12, by the decision of DRP-I (WZ), Mumbai holding as under:- “We have considered the facts of the case and the submissions made. As per the provisions of section 92C of the Act, the arm’s length price in relation to an international transaction shall be determined by adopting any of the prescribed five methods, being the most appropriate method ‘(MAM) having regard to the nature of transaction or class of transactions or class of associated persons or functions performed by such persons or such other relevant factors as may be prescribed. Each transaction is to be examined separately and independently. Different transactions cannot be bundled up together. Only those transactions which are closely interlinked, interrelated, interlaced, inter-wined, inter-connected, inter-dependent and continuous can be grouped and bundled together for bench marking provided the said transactions can be evaluated and adequately compared an aggregate basis. Otherwise the bunching of independent and different transactions is not permitted. P&H High Court also in the case of Knorr Bremse India Pvt. Ltd. in ITA Nos. 182 and 172 of 2013 in their order dated 06.11.2015 have held as under:- “43 It follows, therefore, that if the TPO had correctly come to the conclusion that the said five items were not connected to the rest, he was justified in determining the arm’s length price thereof separately from and independent of the others. It would be
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neither logical nor rational in that event to club several independent and unconnected transactions for the purpose of determining the arm’s length price. If, on the other hand, it is established that the sale of various goods and/or the provision of services formed one composite indivisible transaction, TNM method cannot be applied selectively to some of the component and the CUP or any other method to the remaining component. 44 in the present case, all the items tabulated above were not provided by the same entity. They were provided by different entities. That these entities were all part of the same group is not determinative of the issue whether they were part of a single international transaction. Each party to the group is a separate legal entity. We do not rule out the possibility of these being a single international transaction where goods are sold and/or services are supplied by various entities within a group under a single transaction. That, however, would depend upon the facts of each case. The onus would be on the assessee to establish that though the goods were supplied and/ or the services were rendered by different legal entities they were part of an international transaction pursuant to an understanding between the various members of the group. This would be an issue of fact for the determination of the authorities under the Act.” 1.1. The various international transactions of the assessee are: (i) Brokerage (ii) IT support services, (iii) Fees for sub-advisory services,(iv) Payment for intra-groups services (v) Interest (vi) Reimbursement of expenses and (vii) Bank charges. These transactions cannot be said to be closely inter-linked, interrelated, interlaced, inter-wind, inter-connected and inter-dependent and also they cannot be evaluated and adequately compared on aggregate basis. All these transactions are different and independent of each other. They are also provided to different entities. Therefore, they cannot be bunched together for benchmarking by applying TNMM at entity level. Therefore the benchmarking of the assessee is neither scientific nor permitted as per law. Hence, the TPO has rightly rejected the entity level TNMM. The same is hereby upheld. 1.2. All these transactions can be independently examined and benchmarked applying CUP. Hence, the TPO has rightly applied CUP in respect of these transactions. ITAT Mumbai in the case of Goldman Sachs (India) Securities Private Limited v ACIT (ITA No.7724/Mum/2011) has upheld the application of CUP in the case of brokerage transactions similar to those of the assessee. Further, ITAT Bangalore in the case of M/s Fosroc Chemicals India Private Limited in IT (TP) A No. 148/Bang/2014 for AY 2009-10 in their
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order dated 10.04.2015 has upheld application of CUP as MAM for benchmarking of payment for technical and management services. 1.3. ITAT Bangalore in Fosroc Chemicals India case supra has also held that aggregation of different international transactions would depend on the nature of services received by the assessee and how the different segment of the assessee benefited from the services received. The test whether to adopt a combined transaction approach or to evaluate the international transaction on a transaction-by-transaction basis is to see whether the transaction can be evaluated adequately on a separate basis. Though the ITAT has not answered the question aggregation of transactions in this case but emphasis has been laid on preference for separate benchmarking. 1.4. Further, Delhi High Court in Sony Ericsson’s case in ITA No. 16/2014 in the order dated 16.03.2015 has clearly laid down the criteria for aggregation of the different transactions. P&H High Court also in their order dated 06.11.2015 in the case Knorr- Bremse India Pvt. Ltd. ITA No. 172 & 182 of 2013 have clearly laid down the criteria for aggregation of different transaction and also for bench marking of intra-group services. It has been held in this case, that intra group services cannot be benchmarked applying entity level TNMM but it has to be benchmarked applying CUP. Therefore, on facts of this case the transactions cannot be aggregated. Hence, objections regarding rejection of entity level TNMM and application of CUP are rejected.” 17. The Ld DRP has upheld the transfer pricing adjustment made by the Ld.TPO in the light of the judgments of the Hon’ble High Court of Delhi in Sony Ericsson’s case (supra) and the P&H High Court in the case Knorr- Bremse India Pvt. Ltd.(supra) in which it has been held that the answer to the issue whether a transaction is at an arm’s length is not dependent on whether the transaction results in the assessee’s profit. But the only important aspect which is to be seen is whether the transaction entered into is bona fide or the same has been entered into for the purpose of diverting the profits. The Ld. DRP has further relied on the decision of the ITAT Mumbai in the case of Goldman Sachs (India) Securities Private Limited v ACIT (ITA No. 7724/Mum/2011) and ITAT Bangalore in the case of M/s Fosroc Chemicals India Private Limited in IT (TP) A No. 148/Bang/2014 for AY 2009-10 in which the Tribunal has upheld the application of CUP as MAM for benchmarking of payment for technical and management services. In the light of the above findings of the Ld. DRP the following question arise: (a) whether the Ld. TPO has determined the ALP in this case by following comparable uncontrolled price (CUP) method as the most appropriate method and (b) whether the Ld. DRP has
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rightly upheld the transfer pricing adjustment made by the Ld. TPO? 18. In order to determine the said questions, it is important to see as to whether the Ld. TPO has determined the arm’s length price of the international transactions by following one of the prescribed methods which is the most appropriate in the light of the facts and the circumstances of the case? We notice that the Ld. TPO has estimated the man hours of services rendered by the AE to the assessee at 10000 hours and applying the rate of 3000 per hours determined the arms length compensation of the services rendered by the AE to the assessee at Rs. 3,00,00,000/-. The relevant part of the order passed u/s 92CA(3) of the Act is reproduced as under: “5.8.2 Though no concrete evidence of receipt of service has been provided by the assessee as detailed above, on a without prejudice basis it is estimated that, at the very best, the AE could have devoted a maximum of the following man hours in respect of various services claimed to be availed by the assessee
Sl Department Total Share Remarks of the TPO NO. in % 1 International Sales and sale 774477979 52.80 These three departments Trading Support constitutes 80% of allocation, 8000 man 2 Regional Research 248699719 16.96 hours are estimated 3 Management 16213236 11.05 4 Information Technology 109448954 7.46 Rest of the department 5 Broking Management 37815450 2.58 constitutes 20% allocation so 2000 man hours are 6 Legal 32086984.3 2.19 estimated. 7 Events Marketing 18507639.4 1.26 8 Client Management 14499282.2 0.99 9 CLSA U 12405574.2 0.85 10 Futures & Options 11789552.8 0.80 Management Support 11 Human Resources 10720135.2 0.73 12 Credit Risk Management 10106024.4 0.69 13 Regional Algorithm Business 9183280.17 0.63 Support 14 Tax Planning and Management 8796597.54 0.60 15 Compliance 5334397.79 0.36 16 Operational Risk Management 4286031.08 0.29 17 Finance & Accounting 3741284.96 0.26 18 Internal Audit 1356363.47 0.09 18 Development Squad 1299073.45 0.09 20 Market Risk Management 1119912.22 0.08 21 Communications -11063811 -0.75 This is negative, so man hours are not allocated Total 1466742784 100 10000 1
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The Ld. TPO has justified the method of estimating the hours devoted by the AE in respect of various services claimed to be availed by the assessee holding as under:- “5.11.2 In the absence of all these details regarding the number of employees working with the AE, the salaries paid to these employees, the educational qualification of these employees, the number of hours dedicated by these employees towards the services rendered to the assessee, the undersigned is constrained to go by estimation to the best judgment, to quantify the value of the services if at all any being rendered by the AE to the assessee. Without prejudice to the contention of the undersigned, regarding the services being rendered by the AE to the assessee. However after considering the evidence filed by the assessee, as a matter of abundant precaution, the undersigned proceeds to make a reasonable estimate, of whatever little services that can be said to have been rendered in the facts and circumstances of this case. Having regard to the nature of services which are claimed to have been rendered in the instant case, the undersigned estimates the salary for such an employer at Rs. 3000 per hour. To the best of my judgment, the number of man hours rendered by the employees towards rendering of these services to the assessee, is estimated earlier at 10,000 Hours at para 5.8.2” 20. From the observations of the Ld. TPO, it is clear that TPO has made the transfer pricing adjustment purely on estimation basis without any supporting material. Though the Ld. TPO has mentioned that arms length price has determined by applying CUP method but in fact the Ld. TPO has not come up with any comparables to justify the application of cup method. The Ld. TPO has not brought on record any material to substantiate that the AE provided the similar services to an independent enterprise in comparable circumstances. The Ld. TPO has also not brought on record any instance where comparable services were provided to an independent enterprise in the recipient market. So in view of the fact that the Ld. TPO has, in fact, not applied the CUP method to determine the arm’s length price of the transaction, there is no reason to reject the TNMM method applied by the assessee. The Hon’ble jurisdictional High Court in the case of Johnson & Johnson Ltd. (supra) while dealing with the issue of determination of arm’s length price of royalty on estimation basis by the TPO held as under:- “(d) We find that the impugned order of the Tribunal upholding the order of the CIT (A) in the present facts cannot be found fault with. The TPO is mandated by law to determine the ALP by following one of the methods prescribed in section 92C of the Act read with Rule 10B of the Income Tax Rules. However, the aforesaid exercise of determining the ALP in respect of the
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royalty payable for technical knowhow has not been carried out as required under the Act. Further, as held by the CIT (A) and upheld by the impugned order of the Tribunal, the TPO has given no reasons justifying the technical knowhow royalty paid by the Assessing Officer to its Associated Enterprise being restricted to 1% instead of 2%as as claimed by the respondent assessee. This determination of ALP of technical knowhow royalty by the TPO was ad-hoc and arbitrary as held by the CIT (A) and the Tribunal”. 21. Hence, from the plain reading of the relevant provisions and the ratio laid down by the Hon’ble jurisdictional High Court, it can be concluded that the law does not permit the TPO to determine the arm’s length price on estimation basis. We are therefore, of the considered view that the arms length determined by the Ld. TPO is not in accordance with the provisions of the Act and the ratio of law laid down by the Hon’ble jurisdictional High Court. On the other hand the intra group services are closely linked to the business of the assessee and the assessee’s benchmarking approach is based on TNMM. Further as pointed out by the Ld. counsel, the Delhi Bench of the Tribunal in the case of Knorr Bremse India P. Ltd. vs. AICT 77 taxmann.com 101 (Delhi Tri), has held that payment of intra group services may be benchmarked using TNMM. The observations of the Tribunal are as under:- “18. As regards to the application of method for determining the Arm’s Length Price, we are of the view that the method to be used to determine arm’s length price for intra- group services should be in accordance with the guidelines in Chapter- I, II & III ÖECD Transfer Pricing Guidelines” which provides the various methods to be applied and the CUP method is likely to be a most appropriate method where there is a comparable service provided between independent enterprises in the recipient’s market or by the AEs providing the services to an independent enterprise in comparable circumstances. In the present case, the TPO although applied the CUP method but nothing was brought on record to substantiate that the AE provided the similar services to an independent enterprise in comparable circumstances. He also did not bring on record any instance where comparable services were provided to an independent enterprise in the recipient market. Therefore, in our opinion, in the assessee’s case the CUP method was not the most appropriate method. On the contrary, the assessee rightly applied the TNMM method as most appropriate method because it was difficult to apply the CUP method or the cost plus method. Therefore, the TNMM was the most appropriate method in the absence of a CUP which is applicable where the nature of the
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activities involved, assets used, and risk assumed is comparable to those undertaken by an independent enterprise.” 22. Section 92C(1) of the Act, contemplates that the arms length price in relation to an international transaction shall be determined by comparable uncontrolled price method; resale price method; cost plus method; profit split method; transactional net margin method or such other method as may be prescribed by the Board. Hence, the TPO is bound to determine the ALP by following one of the prescribed methods, however, we notice that in the present case the Ld. TPO has not followed any prescribed methods and made the transfer pricing adjustment by estimating the man hours and the cost of service per hour. We therefore, find merit in the contention of the Ld. Counsel that any ad-hoc determination of arms length price by the Ld TPO u/s section 92 de-hors section 92C(1) of the Act cannot be sustained. The contention of the Ld. counsel is further supported by the judgment of the Hon’ble jurisdictional High Court in the case of Commissioner of Income Tax vs. Merck Ltd. 389 ITR 70 (Mum). In the said case the Hon’ble High Court decline to interfere with the findings of the Mumbai Bench of the Tribunal that the transfer pricing adjustment made by the TPO without following one of the prescribed methods makes the entire transfer pricing adjustment unsustainable in law. The grievance of the revenue was that the consideration paid to the AE is only attributable to the services received / availed. 23. In the light of the facts of the case, provisions of the Law and the cases discussed in the foregoing paras, we are of the considered view that the transfer pricing adjustment made by the Ld. TPO on ad hoc basis is not sustainable in law. Since, the order passed by the TPO u/s 92 CA(3) of the Act is not sustainable, the Ld. DRP ought to allowed the objection filed by the assessee. Hence, we decide both the questions mentioned in para No 17 (supra) in negative and further hold that the assessment order passed by the AO pursuant to the directions passed by the Ld DRP u/s 144(5) of the Act, is not sustainable in law. 24. Now the issue arises as to whether the legal infirmity in the impugned order can be cured by restoring the issue to the Ld. TPO? On the said issue the Ld. counsel for the assessee heavily relied on the judgment of the Hon’ble Jurisdictional High Court, delivered in CIT vs. Kodak India Pvt. Ltd.,(supra) in which the coordinate Bench had declined to restore the issue similar to the present case to the file of TPO holding that the methods as prescribed by the legislature are mandatory and not directory and when the mandatory provision is either superseded or ignored it affects the jurisdiction. Since, the TPO did not adhered to the prescribed methods consciously, another innings to rectify the mistake cannot be allowed. The Hon’ble High court held that the Tribunal has rightly declined to restore the similar issue to Assessing Officer for re- determining ALP by adopting one of the methods as listed out in section
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92C of the Act. The relevant paras of the order of the Hon’ble Court reads as under:- “10. We must also record the fact that the ALP was arrived at by the Transfer Pricing Officer (TPO) by not adopting any of the methods prescribed under section 92C of the Act. The method to determine the ALP adopted was not one of the prescribed methods for computing the ALP. It was not even any method prescribed by the Board. At the relevant time, i.e. for A.Y. 2008-09 Section 92C of the Act did not provide for other method as provided in Section 92(c)(I)(f) of the Act. The impugned order of the Tribunal holds that the method adopted by the Revenue to determine the ALP was alien to the methods prescribed under Section 92C of the Act. In the above circumstances, the Tribunal declined to restore the issue to the Assessing Officer for re-determining the ALP by adopting one of the methods as listed out in Section 92C of the Act. This finding of the Tribunal has also not been challenged by the Revenue. 11. In view of the fact that the Revenue has accepted the order of the Tribunal on its findings on facts on the two issues as pointed out hereinabove as well as the refusal of the Tribunal to restore the issue of determination of ALP to the TPO by following one of the methods prescribed under the issue of determination of ALP to the TPO by following one of the methods prescribed under Section 92C of the Act. Thus, the question as formulated for our consideration even if answered in favour of the Revenue would become academic in the present facts. Thus, we see no reason to entertain this appeal. However, we make it clear that the issues of law which has been raised in the present appeal are left open for consideration in an appropriate case.” 25. In view of the judgment of the Hon’ble jurisdiction High Court, the issue cannot be restored to the file of the Ld. TPO to determine the arm’s length price by applying most appropriate method out of the prescribed methods under the provisions of law. 26. Hence, in the light of the facts and circumstances of the case and the ratio laid down by the courts of law discussed above, we hold that since the TPO has not made the transfer pricing adjustment by following the mandatory provisions of the law and determined the same on estimation basis, action of the Ld. DRP in upholding the TP adjustment so made by the Ld. TPO is bad in law. So far as the cases relied upon by the Ld. DR is concerned, we are of the considered view that the facts of the said cases are different from the facts of the present case. Since, the Ld. TPO has not determined the arm’s length price in accordance with the provisions of law, there is no reason to hold that the TNMM method applied by the
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assessee is not the most appropriate method within the meaning of section 92C of the Act. 27. We therefore, decide Ground No. 3 to 3.4 of the appeal in favour of the assessee and allow the appeal of the assessee and direct the AO to delete the upward adjustment of Rs. 143,67,42,784/- confirmed by the Ld. DRP.” 9. We have considered the facts for A.Y. 2011-12 viz-a-viz A.Y. 2012-13. Only difference in these two years is that in A.Y. 2012-13, the TPO has given allowance on the basis of adhoc rate per hour and in A.Y. 2011-12, the TPO has made it nil on adhoc basis. The assessee has provided evidences in both the years of services received and benefits. Also assessee has provided AEs margin and Bench marking including PWC-AUP report for both the years and used TNMM to justify ELP. However, on the other hand, TPO has followed no prescribed method as envisaged by section 92 C of the Act. Therefore, we are inclined to hold that adjustment made by the TPO is bad in law and, accordingly, deleted. Further the TPO has not determined the ALP of the international transactions in accordance with the provisions of section 92C of the Act. There is no reason to disapprove the Transactional Net Margin Method applied by the assessee as the most appropriate method.
Accordingly, ground no.4 is allowed.
Ground no.5 reads as under:
Receipt of brokerage commission
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.
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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.”
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 Rs 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 charged from AE while rendering equity broking services. Accordingly, a show cause notice was issued to the assessee as to why the ALP of the brokerage commission received from AEs should not be benchmarked under CUP method of 0.25% in line with the brokerage commission received from the overseas non-AEs. The assessee replied to the show cause notice is reproduced as under:
“(A) The assessee has submitted that TNMM is the most appropriate method for benchmarking the above transaction. The assessee submitted that it has given due consideration to all the facts and circumstances related to the transactions that it executed for AE and has earned a margin on operating income of 15.44% as compared to the average margin on operating income of 16.27% earned by independent comparable India brokerage houses.
(B) A number of functions namely, client origination activities, dedicated sales and sales trading staff in the New York, London and Hong Kong sales offices of CLSA that cover the India market, centralized client support functions, research teams based outside India, corporate access
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and investor forums and applications software development and IT support are performed by the AEs for non-AE Fll clients of the assessee.
(C) The detailed FAR analysis submitted by the assessee highlights the key differences between transactions executed for its AE and non-AE clients and establishes that AEs and non-AE transactions are different and not directly comparable for the purposes of CUP. As per the assessee, the non-AE transactions are also not comparable within each other which are evidenced by the variations in the brokerage rates charged to non AEs as per the samples brokerage rates provided by the assessee.
(D) The nature of services rendered to clients varies in terms of corporate access, analyst access, research, regularity of business, sales and trading coverage, client's creditworthiness etc. and hence the service rendered and the rate charged for that cannot be compared from one client to another. Thus, the application of the CUP method is not supported under the given facts and circumstances of the case and hence cannot be selected as the most appropriate method.
(E) The brokerage rate received by the assessee from its non-AE clients remunerates the assessee for functions that are performed by the AEs for such clients on account of the Indian regulatory environment applicable to sharing of commission by brokers.
(F) As per the assessee, the degree of comparability is to be judged taking into account the FAR of the parties, the economic, business and regulatory environment, among others. Further, reasonable accurate adjustments are to be made to take into account the differences and where such adjustments are not reliably quantifiable; CUP method should not be used.
(G) The assessee submitted that it has discharged its onus by demonstrating compliance with the arm's length price in accordance with Sections 92C(1) & (2) of the Act and has maintained the prescribed documentation in support of its compliance. The onus is on the TPO to establish why cash equity transactions executed by the assessee for unrelated Flls should be considered a suitable benchmark to establish an arm's length brokerage rate for cash equity transactions executed by the assessee for its AEs. H) In case CUP is considered as the most appropriate method, the assessee submitted on a without prejudice basis, that reasonable and accurate adjustments should be made to enhance the comparability/ eliminate the material differences, as between the transactions that the assessee executes for its AE and non AE FU clients. In other words, the commission rate received by the assessee from its non AE FU clients
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remunerates it for functions that are performed by its AEs for such clients. In other words, the assessee also receives commission income from its non AE FU clients for functions that it does not perform and hence the internal CUP so identified, needs to be adjusted to reflect the fact that the remuneration received by the assessee from its non AE clients compensates it for functions that are performed offshore for those clients by the AEs. Based on the above argument, the assessee submitted the adjustment working to the comparable CUP.
(I) The Assessee further submitted adjustments based on volume, submitting that the average rate of only Top 10 clients in each category should be considered as a CUP or by only considering clients who have had a turnover of higher than 2000 crores.” 12. The TPO after considering the reply of the assessee came to the conclusion that the assessee is providing broking services to AEs and Non-AEs. The services provided by the brokers mainly include trade execution. There is a direct internal comparable available in the form of brokerages charged from the third parties. The assessee has argued that the choice of most appropriate method lies with the assessee. The opinion expressed by the assessee is correct to an extent if there is proper application of the principals laid down in the provisions of the I.T Act. As per the assessee, the CUP method could not have been applied because of the reasons mentioned in the TP documentation report, which are reproduced below:
a) Marketing/ origination activity in relation to non-AE Flls b) Significant research function centralized at Hong Kong and used by non-AE FIIIS c) Centralized business support provided d) As per circular issued by NSE, the assessee is not allowed to pass any commission to its AEs for services provided.
However, the learned TPO rejected the reply of the assessee by citing the following reasons:
a) The assessee is easily relying on marketing and origination activities provided by the overseas AEs. No direct evidence has been produced to establish that the clients are serviced by the global office, In support of its
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claim it has submitted a list of sales corporate, road shows in foreign countries and visit of one of its analysts /to India. It has also submitted an affidavit by former employees.
b) After going through the evidences, the following finding is given:-
(i) Not a single evidence has been filed to prove that the client management was done for the benefit of the assessee company. It is well known that the CLSA Group is involved in cross border investment banking and M&A deals. Therefore, it has to maintain managers for client management as well as sale and is any benefit has accrued to the assessee company, the same is only incidental.
(ii) The assessee has filed some printouts of the so-called meetings conducted but not a single evidence is filed to prove the purpose of the meeting or what has transpired during the meeting pertaining to the assessee company.
(iii) The list of road shows and meeting with clients are enclosed. Again these evidences do not prove that the purpose of these road shows and meetings were for the benefit of the assessee company. It is well known that the CLSA Group is involved in raising private equity for private equity investment as well as its own investment in various entities. It is also involved in cross border investment banking and M&A deals. Therefore it has to maintain managers for client management as well as sale and is any benefit has accrued to the assessee company, the same is only incidental.
(iv) The assessee has filed various research reports generated by its AEs to prove that the research is provided by the AE. This is not correct as the assessee company has its own research sitting in India. Therefore, it is more likely to prepare research report on Indian market and in fact it must be feeding it AE who may be compiling the research generated by the Indian
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entity. Even if it is assumed that the research is done by AE even then it is for all the public at large which are used by both Non-AEs and AEs. It is also seen that in all the reports submitted by the assessee company, the research relating to India, has been providing by the assessee company. Therefore there is no direct nexus between the research done by the AE and the benefit accruing to the assessee company.
(v) The assessee in TP report, rejected the CUP method citing functional differences. However, as discussed above the functions performed by the assessee company is almost similar for both Non-AEs and AE clients.
(vi) In a CUP method, reasonable and accurate adjustments are allowed for better comparability. Instead of working out adjustments at the time of the TP report, it has altogether rejected the CUP method which makes the TP report non-reliable as the choice of most appropriate method has not been done in the manner prescribed u/s 92C(1) & (2) of the IT Act.
(vii) The assessee has submitted on without prejudice basis that the rate charged from the Non-AE DIls may be taken as comparable. This is not correct as the customers are not located in India. The AEs are more comparable to Non-AE FIIs. Therefore the rate charged from the Non-AE FIls is taken as comparable.
(viii) There is not much difference in credit risk as well because the assessee takes margin money both from AE and non-AE.
Finally, the TPO took the ALP at 0.250% as against the brokerage of 0.138% charged by the assessee from the AEs and thus the adjustment of Rs 21,73,90,771/- was made to the income of the assessee as proposed by the TPO.
The learned AR submitted before the Bench that the TPO has thrust the CUP method upon the assessee without analysing whether any reasonable and accurate
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adjustment would be worked out to iron out difference between the AE and Non-AE transactions. The learned AR submitted that the TPO itself has held that there are no differences between the Non-AE and AE transactions and thereby brushing aside the detailed submissions dated 27.10.2014 filed before the TPO, explaining the facts. It was also submitted that if it is not possible to eliminate the differences between the transactions, the method has to be rejected and a method has to be analysed as documented in the transfer pricing analysis. The learned AR further argued that in this case the TPO ought to have rejected the CUP method. The learned AR further submitted that in the case of JP P Morgan India (P) Ltd. v. ACIT [2014] 44 taxmann.com 466 (Mum), the CUP method was held to be the most appropriate method by ironing out the difference between the AE and Non-AE transactions. This exercise has not been done in the case of the assessee and, therefore, the CUP method cannot be considered as the most appropriate method. The learned AR further submitted that if the Bench is of the view that CUP method should be adopted as the most appropriate method based on a non-binding precedent in the case of J P Morgan India (P) Ltd. (supra), similar adjustments to the cost structure should be allowed to iron out the differences between the AE and Non-AE transactions. The learned AR vehemently pointed out that the decision of co-ordinate Bench in the case of J P Morgan India (P) Ltd. (supra), has no binding precedence despite order of Hon’ble Bombay High Court, as the High Court has refused to admit the appeals and merely affirmed the orders of lower authorities including the CIT(A) and the Tribunal. The learned AR prayed that the TNMM may be adopted as the most appropriate method and, without prejudice, if CUP method is to be adopted as the most appropriate method the adjustments to the cost structure be allowed to iron out the differences between the AE and Non-AE transactions.
The learned DR, on the other hand, submitted that the assessee has bench marked the transaction by using TNMM and since the assessee is rendering similar services to overseas AEs, the TPO has rightly proposed the CUP method in place of TNMM. The argument of the assessee that same brokerage services are to be provided to the AEs and Non-AEs though the functions are different, was rejected
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by the DRP as it failed to demonstrate as to how the functions as brokerage activities are different between AEs and Non-AEs. The learned DR further submitted that in the case of J P Morgan India Pvt. Ltd., (supra), there was difference in the activities in the services rendered by the assessee to the AEs and Non-AEs and the same was demonstrated before the appellate authorities. However, no such difference in activities has been established by the assessee before the TPO/DRP in the present case. Considering all the above, the learned DR contended that the orders of the TPO and DRP be upheld.
We have heard the parties and perused material on record. We observed that the assessee being an institutional brokerage house has earned significant brokerage commission from FII clients, which included AE and Non AE enterprises. The transactions from Non-AE FII clients, the assessee is required to provide broader range of services viz-a-viz services to AE FII clients did not include marketing and international sales support. We find that the assessee is dependent on the overall CLSA group resources without which the brokerage from FII clients could not have materialized. The assessee also filed submission dated 27.10.2014 before the TPO providing detailed explanation with regard to the differences in services provided to the AE and Non-AEs and explanation in support that TNMM was the most appropriate method to determine the ALP of brokerage earned from AEs. We find merit in the submission that TNMM is the correct method and internal CUP would entail adhoc adjustment to price in so far as broking commission from AE and Non AEs are concerned. We also find merit in the contention of the AR that if the decision in the case of J P Morgan India Pvt. Ltd. (supra), is to be followed, then adjustments to the cost structure should be allowed to iron out the differences between the AE and Non-AE transactions. Under these circumstances, we are of the view that operating model of J P Morgan India Pvt. Ltd. is not comparable to that of the assessee as majority of the income in the case of J P Morgan India Pvt. Ltd was from related parties, whereas in the case of the assessee significant revenue is from third party FII clients. We also noted that assessee could not have generated business from FII clients without the support of CLSA group resources, for which it is paying intra group service charges. Hence, in such a case, TNMM
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could be used as the most appropriate method. In view of these facts and circumstances, we are of the view that assessee has rightly followed the TNMM as the most appropriate method and the decision of the co-ordinate Bench in the case of J P Morgan India Pvt Ltd. (supra) is not applicable to the present set of facts of the assessee. Accordingly, we are inclined to set aside the order of the DRP and direct the TPO/AO to delete the adjustment of brokerage income of Rs 21,73,90,712/-.Ground no.5 is allowed.
Ground no.6 reads as under:
“Provision of sub-advisory services and information technology ('IT') support services
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 provision of sub-advisory services and IT support services by the Appellant to its AEs. In doing so, the learned TPO/learned AO/ Hon'ble DRP has erred in law and in facts by:
6.1. rejecting the TP documentation maintained and the detailed FAR analysis and benchmarking analysis conducted by the Appellant.
6.2. disregarding multiple / prior year data considered by the Appellant in determining the ALP and adopting the financial data for a single year [ie, the Financial Year ('FY') 2010-11] of the comparable companies despite the fact that the same were not available to the Appellant at the time of preparing the TP documentation.
6.3. rejecting certain comparable companies identified by the Appellant in its TP documentation using unreasonable comparability criteria and contrary to facts as evidenced by the audited financial statements of the said companies.
6.4. applying certain additional filters and finalizing the TP order while considering companies as comparable to the Appellant despite such companies failing the test of comparability. 6.5. not granting working capital and risk adjustment.
6.6. not considering the upper range of 5 percent from the value of the international transaction, as allowed under the Act and the Income- tax Rules, 1962 ('the Rules').
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The facts of the case in brief are that the assessee is providing two different types of services to its AE i.e. IT support services and, secondly, sub-advisory services. The TPO has proposed an addition on account of provision of both these services. With regard to the IT support services to its AE, the assessee has used TNMM to benchmark the transaction, which has been accepted by the TPO. The profit level indicator used was operating profit divided by operating cost. The assessee’s margin was 18% (plus 5% = 23.9%) and the TPO has shortlisted the following comparables:
Operating Name of the Company Profit/Operating Cost Acropetal Technologies Limited 22.06% Infosys Limited 43.75% KALS Information Systems Limited 9.95% Larsen and Toubro Infotech Limited 18.28% Zylog System Limited 26.90% Wipro Technologies Limited 55.46% Thirdware Solutions Limited 16.01%
The DRP neither allowed any exclusion of comparable companies identified by the TPO nor allowed any inclusion of comparable companies from the assessee’s transfer pricing study. However, he directed the TPO to compute the margins of the comparable companies after considering the foreign exchange fluctuation as operating in nature. Thus, based on the DRP’s directions the TPO computed the addition of Rs 1,49,08,248/-
The TPO rejected GC Vak Software and Exports Limited as comparable on the ground that the said company incurred losses in the software segment. The TPO also observed that it had 85% of the business from North America and due to economic slow down in the said region CG VAK faced difficulty and suffered losses in the subsequent year also. The DRP upheld the rejection of the comparable by the TPO on the ground that there was persistent losses in the comparable software
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segment and other income included foreign currency income of Rs 46 lacs, which is unallowable.
The learned AR submitted before the Bench that the said comparable is not a persistent loss maker. He referred to page nos. 442 & 781 of the paper-book, which shows the profit margin of 7.46%, 8.80% and 6.42% for the year ending March 2009, 2010 and 2011 respectively. The learned AR further submitted that TPO himself admitted that the margin of this year is 6.42 % by referring to page 41 of the TPO’s order. We find merit in the arguments of the learned AR that the company cannot be excluded merely because it has incurred loss. The case is supported by the decision of Hon’ble Bombay High Court in the case of CIT vs. Welspun Zucchi Textile Limited [2017] 391 ITR 221 (Bom); Pune Bench of the Tribunal in the case of Bobst India Pvt. Ltd. vs. DCIT [2015] 63 taxmann.com 339 and the decisions of Mumbai Benches of the Tribunal in the case of TPG Capital India Pvt. Ltd. vs. DCIT [2017] 79 taxman.com 101 and Walt Disney Co. (India) Pvt. Ltd. vs. DCIT [2017] 188 TTJ 100. In view of the ratio laid down in the said decisions, we are in agreement with the learned counsel of the assessee that C G Vak Software and Exports Limited should be included in the list of comparables.
It was submitted by the counsel of the assessee that out of nine comparables selected by the TPO if three comparables viz Infosys Ltd., Zylog System Ltd. and Wipro Technologies Ltd. were excluded then OP/OC of assessee would be higher than the arithmetic mean OP/OC of the remaining comparables.
Infosys Ltd. & Zylog System Ltd: The assessee argued that the said companies are functionally different as they are engaged into software products and services and segmental data is not available for software services. Moreover, they have significant brand value unlike the assessee. Thus, these companies are not comparable with that of the assessee for the reasons that their functions are different, have significant brand value and wide marketing network. In the case of Infosys Ltd., the TPO observing that the brand building expenses is only 0.37% of the total revenue and, hence, brand is not created on account of marketing expenses but superior services, brushed aside the contention of the assessee. The
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DRP upheld the order of the TPO by holding that assessee is also into software product development activity, which includes software integration, development, application software development, CLSA application, maintenance and support, infrastructure management etc. Similarly, in the case of Zylog Systems Ltd., the TPO observed that this company is primarily providing services and thus considered it as a valid comparable, which was upheld by the DRP. The learned counsel submitted before the Bench that the company is into software development and hardware products and is not a comparable to the business model of the assessee, which is into software services. The learned counsel relied on following decisions of the co-ordinate Benches of the Tribunal, wherein the said companies have been excluded from the list of valid comparables.
• Ness Technologies India Private Limited vs. DCIT [2016] 76 taxmann.com 209 • Orange Business Services India Solutions Private Limited. Vs. DCIT [2016] 71 taxmann.com 206 • Clear 2 Pay India (P.) Ltd vs. ITO [2018] 95 taxmann.com 284 • Alcatel Lucent India Limited vs. DCIT [2016] 74 taxmann.com 105
Similarly, the learned AR relied on the following judgments of Hon’ble Jurisdictional High Court wherein it has been held that a company involved in software product cannot be compare to a company providing software development services :
• CIT vs. PTC Ltd. [2017] 395 ITR 176 • CIT vs. Principal Global Services P Ltd. [2018] 95 taxmann.com 315
On these facts and ratio laid down by the Tribunal and the Hon’ble Jurisdictional High Court, we are of the view that Infosys Ltd. and Zylog System Ltd. are to be excluded from the list of comparables.
Wipro Technologies Limited: The TPO has observed that activities of the company comprise of software related support services, primarily information technology software solutions/maintenance and technology support services. Further, he also observed that 94% of its income is export income. The TPO held it
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to be a valid comparable, which was also upheld by the DRP. The learned AR submitted before the Bench that all transactions of Wipro Technologies Limited are controlled transactions. It was incorporated on 15th Sept. 2004 as Citi Technologies Services Limited as a subsidiary of Citicorp Banking Corporation and later on pursuant to share purchase agreement dated 21.01.2009, all the sares of Wipro technology Services Limited were purchased by its holding company Wipro Limited. This company is currently providing services to Citigroup entities globally, which is considered as on segment. Hence in view of the prior arrangement between Wipro Limited and Citicorp, the transactions are controlled as per section 92B(2). The learned counsel further pointed out that in the same assessment year i.e. 2011-12, this company has been excluded by the Hon’ble Bombay High Court in the case of CIT vs. Pentair Water India (P.) Ltd. [2016] 381 ITR 216 (Bom) and the Tribunal in the following cases:
• Ness Technologies India Private Limited vs. DCIT [2016 76 taxmann.com 209 • Orange Business Services India Solutions Private Limited vs. DCIT [2016] 71 taxmann.com 206 • Clear 2 Pay India (P) Ltd. vs. Income Tax Officer [2018] 95 taxmann.com 284 • Alcatel Lucent India Limited v. DCIT [2016] 74 taxmann.com 105
On perusal of the facts of the case and the ratio laid down in various decisions as discussed above, we observe that Infosys and Zylog are also into software products and do not have separate segments for software services. Therefore, they are not functionally comparable to the assessee’s transactions of providing IT support services. Therefore, in our view, they are liable to be excluded from the list of comparables. With regard to Wipro Technologies, it has been held in the above cases the company has controlled transactions and liable to be excluded. Therefore, following the decisions of co-ordinate Benches for similar A.Y. 2011-12, we are of the view that Wipro Technology Ltd should be excluded from the list of comparables. As regards CG-VAK Softwares and Exports Ltd , we are in agreement with the learned counsel for the assessee that the same should be
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included in the list of comparables. The learned counsel demonstrated that on including CG-VAK Softwares and Exports Ltd and excluding Infosys, Zylog and Wipro, the assessee’s margin is higher than the remaining comparables.
The other issue challenged by the assessee before us is against the addition of Rs 67,62,961/- with regard to sub-advisory services. The assessee is providing investment services to its AE and Non-AEs. The assessee has used TNMM to benchmark these transactions. The TPO has not disturbed the benchmarking method used by the assessee. However, he did not agree with the assessee’s margin, which is 26% on the basis of the following comparables:
• Crisil Ltd. • ICRA Management Consulting Services Ltd. • IDC (India) Ltd. • Mecklai Financial Services Ltd. The TPO rejected all the comparable companies and identified only two comparables viz. Motilal Investment Advisors Pvt. Ltd. and Ladderup Corporate Advisory Private Limited and computed an addition of Rs 99,06,632/- However, the DRP did not agree for the inclusion of comparable companies from assessee’s transfer pricing study report and allowed exclusion of one TPO comparable company i.e. Motilal Investment Advisors Pvt. Ltd. According, as per the directions of the DRP the TPO computed the addition at Rs 67,62,961/-.
The learned AR submitted before us that the TPO has himself accepted the fact that Ladderup Corporate Advisory Private Limited is into investment banking business and, hence, comparing the same with non-binding advisory services is wrong. The TPO included the said comparable on the ground that the company is providing similar kind of services as that of the assessee. The learned AR submitted that the DRP, on the other hand, observed that said company has acquired merchant banking activity only in July 2010, there is no evidence that during the year 2010-11 any income has been received from merchant banking and merely registering with SEBI as a merchant banker does not mean income is earned from merchant banking. The learned AR further submitted that Ladderup Corporate Advisory Private Limited is not a public limited company hence, the financials are
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providing only numbers. There s no Director’s report, which discuss the nature of activities carried out by the company. In such scenario, relevant information can only be found on the website, which clearly shows that the company has executed investment banking deals in the year under consideration. The learned AR further referred to the services provided by this company under two category i.e. Investment banking and Debt Capital. The learned AR further submitted that the said company has executed Private Equity placement for a customers, sale of strategic equity of customer, provided demerger advisory to customers etc. Therefore, the learned AR submitted that the said AE is not a good comparable as the said company is not into the kind of services the assessee is providing. The learned AR relied on the following Tribunal decisions:
• McKinsey Knowledge Centre Private Limited v. DCIT [2017] 77 taxmann.com 154 • Mount Kellett Capital Management India (P.) Ltd. [2018] 100 taxmann.com 367 • Wells Fargo Real Estate Advisors (P.) Ltd. v. DCIT [2018] 90 taxmann.com 18 • DCIT v. General Atlantic (P.) Ltd. [2018] 91 taxmann.com 406 • ACIT v. Blackstone Advisors India (P.) Ltd. [2019] 101 taxmann.com 116 Temasek Holdings Advisors India (P.) Ltd. v. DCIT [2017] 87 taxmann.com 168 • Carlyle India Advisors Pvt. Ltd. v. ACIT [IT(TP)A No.2410/Mum/2017] The learned AR further relied on the following judgments of the Hon’ble Bombay High Court wherein it has held that companies involved in merchant banking business cannot be compared to non-binding investment advisory services • PCIT v. New Silk Route Advisors P. Ltd. [ITA No. 216 of 2016] • CIT v. General Atlantic Private Ltd. [ITA No. 1993 of 2013] • CITv. Goldman Sachs (India) Securities PvL Ltd. [ITA No. 2222 of 2013]
The learned DR, on the other hand, relied on the orders of lower authorities.
After hearing both the parties and going the material available on record as also the decisions cited, we observe that in the above cases, the co-ordinate Bench has held that Ladderup Corporate Advisors has to be excluded as the said company is into investment banking business and not rendering non-binding investment services. Similarly, Bombay High Court in the case of New Silk Route Advisors P.
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Ltd General Atlantic Private Ltd. and Goldman Sachhs (India) Securities Pvt Ltd. (supra), has held that merchant banking business cannot be company to non- binding investment advisory services
Respectfully, following the ratio laid down by the Hon’ble Jurisdictional High Court and the co-ordinate Benches, we direct the TPO to exclude Ladderup Corporate Advisory Private Limited from the list of comparables.
Similarly, the assessee has argued before us that for the inclusion of Mecklai Financial Services Ltd., ICRA Management Consulting Services Ltd and IDC India Ltd. The learned AR submitted that if these companies are included as comparables by the TPO then the transactions with the AEs would be within the ALP. In the case of Mecklai Financial Services Ltd, the TPO rejected the said comparable by applying the loss making filter as the company had incurred losses in F.Y. 2010-11. The learned DRP upheld the order of the TPO excluding the said comparable on the ground that the assessee is providing services of equity based investment and not providing any advisory for risk, currency future brokering or consultancy services to corporate and institution. The learned DRP observed that the said company is providing advisory services in completely different and unrelated sector and it is also a consistently loss making company.
The learned AR submitted that the observation of the TPO and the DRP that the company is consistently loss making is wrong as it had profit of 12.64%, 16.41 and 0.17% in March 2009, March 2010 and March 2011 respectively. The learned AR further submitted that product similarity is not important when the method selected is TNMM. Further, it was submitted that the perusal of the website extract of the company clearly states that it is into advising clients in relation to foreign exchange in the same way assessee is involved in advising clients albeit relating to equity securities. The learned AR submitted that functions of a foreign exchange advisor are similar to an investment advisor. Their functions involve researching, analysing, present the information by way of report, make recommendations based on the analysis and report, monitor the solution given etc. The learned AR therefore, prayed that considering all these aspects of Mecklai Financial Services
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Ltd. , it may be included as a good comparable. The learned AR further stated that the said company has been included as a comparable by the Tribunal in the case of AGM India Advisors Private Limited vs. DCIT [2016] 70 taxmann.com 219. It was further stated that a company cannot be excluded merely because it has incurred loss, unless it is a consistent loss making one. In support of this contention, reliance was placed on the decision of Hon’ble Bombay High Court in the case of CIT vs. Welspun Zucchi Textile Limited [2017] 391 TR 211. To defend the argument on the issue of product similarity does not matter if the method followed is TNMM, learned AR relied on the decision of Diageo India (P) Ltd. vs. DCIT [2013] 28 ITR(T) 242.
The learned DR relied on the order of the authorities below.
We have both the sides and perused material on record. We do not find force in the observation of the TPO that the said company is a persistent loss making company, which is clear from pages 561 and 577 of the paper-book. It has incurred loss only during the year. We also find merit in the argument of the learned AR that product similarity is not important when the method selected for benchmarking is TNMM. The case of the assessee is supported by the case laws, which has been discussed above.
Accordingly, we direct the TPO to hold Mecklai Financial Services as a valid comparable.
In the case of ICRA Management Consulting Services Ltd. the TPO observed that it is in the business of providing management consulting and advisory services to clients, who are corporate, banks, government, multi-lateral agencies, institutional investors etc. According to the TPO, the services provided by this company are in no way related to the services provided by the assessee and, therefore, it was rejected as a comparable. The DRP observed that the company is providing consultancy services and engaged in management consultancy. The learned DRP relied on the decision of the Tribunal in the case of Sandstone Capital Advisors Pvt. Ltd. in ITA NO. 6315/Mum/2012, wherein in has been held to be company that is into rating services, which is not comparable to investment advisory
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services, and rejected the comparable. Further the DRP also noted a fact that the same company was rejected by his predecessor in A.Y. 2010-11 also.
Similarly, in the case of IDC India Ltd., the TPO observed that the company is engaged in the business of research, survey service and products. It provides user research, vertical research, and consulting services which enable IT professionals, business executives to make cost based decisions on technology purchases and business strategy. Hence, the TPO was of the opinion that it is in no way comparable with that of the assessee. Before the DRP, the plea of the assessee was rejected on the ground that the said company is not engaged in the business of providing investment advisory services. The learned DR distinguishes the case of the assessee with that of Carlyle India Advisors Pvt. Ltd. n ITA NO. 7901/Mum/2011, stating that there was no discussion by the Tribunal on comparability of this company as department and assessee had accepted this company. However, it does set a precedent as each year is different and comparability has to be judged accordingly. He upheld the order of the TPO.
Before us, the learned AR placed reliance on the following decisions, wherein the ICRA Management Consulting Services Ltd. and IDC India Ltd. are accepted to be a comparable to non-binding investment advisory activity:
• AGM India Advisors Private Limited DCIT [2017] 79 taxmann.com 86 • Goldman Sachs India Private Limited v. ACIT [2017] 78 taxmann.com 142 • DCITv. General Atlantic (P.) Ltd. [2018] 91 taxmann.com 406 • ACIT v. Blackstone Advisors India (P.) Ltd. [2019] 101 taxmann.com 116 • Carlyle India Advisors Pvt. Ltd. v. ACIT [IT(TP)A No.2410/Mum/2017]
We have perused all these case laws and find that the Tribunal has held these two companies as a valid company in case of non-binding investment advisory companies. Respectfully following the said decisions, we direct the TPO to include these two companies viz. ICRA Management Consulting Services Ltd. and IDC India Ltd. as valid comparables. The AO is directed accordingly .The ground no.6 is allowed.
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Ground nos. 7 to 9 read as under:
On the facts and circumstances of the case and in law, the learned AO / Hon'ble DRP has erred in disallowing the expenditure, in the nature of repair and maintenance, of INR 4,43,68,457 by treating the same as capital in nature.
Without prejudice to Ground 7, on the facts and circumstances of the case and in law, the learned AO / Hon'ble DRP has erred in considering the entire repairs and maintenance expenditure amounting to INR 4,43,68,457 towards computers as against INR 3,59,00,484 pertaining to computers. Balance amount of repairs and maintenance expenditure amounting to INR 84,67,973 does not relate to computers. 9. Without prejudice to Grounds 7 and 8 above, on the facts and circumstances of the case and in law, the learned AO / Hon'ble DRP has erred in allowing depreciation at the rate of 25 percent on repairs and maintenance expenditure, disallowed and accordingly capitalized, amounting tolNR 3,59,00,484 relating to computers as against the applicable rate of depreciation of 60 percent as prescribed under Rule 5 of the Rules read with Section 32 of the Act.” 37. The facts in brief are that the assessee has debited a sum of Rs 4,43,68,457/- on account of repairs and maintenance charges of computers. The AO asked the assessee as to why the expenses should not be treated as capital expenditure. The assessee vide letter dated 18.02.2015 submitted that the expenses were towards maintenance of serves, UPS, control systems, spare part purchases, monitoring and maintenance of telecommunication equipment, monthly charges towards onsite support services, license fees to vendors relating to trading systems, risk management systems etc. The assessee also submitted the list vendors from whom the services were availed. The AO further asked the assessee to submit sample invoices. Thus, the AO observed that the assessee has not clarified the nature of expenses in support of its claim. In the absence of the supporting documents, the AO treated the expenditure of Rs 4,43,68,457/- as capital in nature and added it to the total income of the assessee. The assessee filed objection before the DRP, who issued following directions on the issue:
“7.3 The DRP has issued directions on this issue as under: We have considered the facts of the case and submissions made. The AO has made the disallowance for the reasons that the assessee has not
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furnished the evidence in support of the expenses claimed. Before the panel also noted that the assessee has not furnished any such evidence in support of the expenses during hearing also. It is imperative on the assessee to submit the details/evidence in support of the expenses claimed. But such onus has not been discharge. Therefore disallowance made by the AO is hereby upheld. Alternatively, the assessee has urged that the AO be directed to allow depreciation on the expenses held to be capital in nature. The AO is directed to allow depreciation at appropriate rates as applicable.” 7.4 In view of the above, the addition proposed disallowance vide draft assessment order dated 19.02.2015 is confirmed at Rs.3,32,76,343/- after allowing depreciation 25 percent.”
Now the assessee has submitted before us that the assessee has filed additional evidence before the Tribunal vide application dated 16.09.2016 in support of its claim of repairs and maintenance of computers of Rs 4,43,68,457/-. The learned AR requested before the Bench that the same may kindly be admitted as they have bearing on the correct appreciation on the issue, and accordingly may be set aside to the file of the AO for fresh adjudication. The learned AR submitted that the expenses were revenue in nature. The learned AR also contended that if these expenses were in case held as capital in nature then depreciation @60% may be allowed in so far as it relates to computers. The learned DR, on the other hand, opposed the contentions of the learned AR and prayed before the Bench that the order of the DRP may be upheld on the issue as it has also directed to allow 25% as depreciation expenses.
After hearing both the parties, we find that additional evidences have been filed which have bearing on the issue involved and accordingly, we remit the issue back to the file of the AO to decide the same in the light of these fresh evidences as per facts and law . Needless to mention that in case, the AO finds these expenses to be in capital in nature, then the assessee may be allowed depreciation on that part of the capital expenditure @60% in terms of provisions of the Income tax Rules.
Accordingly, this ground is allowed for statistical purposes.
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In the result, the appeal is allowed.
Order pronounced in the open court on this day of 3rd February, 2020.
Sd/- Sd/- (C N Prasad) (Rajesh Kumar) JUDICIAL MEMBER ACCOUNTANT MEMBER Mumbai, Dated : 3rd February, 2020 SA Copy of the Order forwarded to : 1. The Appellant. 2. The Respondent. 3. The CIT(A), Mumbai. 4. The CIT 5. The DR, ‘K’ Bench, ITAT, Mumbai BY ORDER
//True Copy// (Assistant Registrar) Income Tax Appellate Tribunal, Mumbai