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Order u/s.254(1)of the Income-tax Act,1961(Act) सद�य, राजे�� अनुसार/ PER Rajendra A.M.- लेखा सद�य राजे�� केकेकेके अनुसार लेखा लेखा लेखा सद�य सद�य राजे�� राजे�� अनुसार अनुसार Challenging the order dated 19/02/2009 of the CIT (A)-XIX, Mumbai, the assessee had filed the present appeal.Assessee-company,engaged in the business of broking and trading in shares,filed its return of income on 28/10/2003,declaring total income of Rs.5,23,56,068/-.It is a licensed equity broking house registered with the Bombay Stock Exchange and National Stock Exchange. Its customers comprise of Foreign Institutional Investors (FII.s),Domestic Financial Institutions (FI.s), banks etc.During the year under consideration,it provided the stock broking services with respect of Clearing House (CH)trades to its associated enterprise(AE)namely M/s. ABN Amro Asia(Mauritius)Ltd.The Assessing Officer(AO)completed the assessment u/s.143(3) of the Act, on 22/ 02/2006,determining its income at Rs.7,39,40,340/-.
Before us,the Authorised Representative (AR) stated that the assessee was not interested in pressing Grounds 2.1 and 3.1. and Ground no 9(considering the smallness of tax effect).Hence, these grounds stand dismissed as not pressed.
2.During the assessment proceedings,the AO found that the assessee had entered into Inter - national Transactions (IT.s) with its AE.s.To determine the Arm’s Length Price(ALP) of such transactions,he made a reference to the Transfer Pricing Officer (TPO).After receiving the order of the TPO, the AO made an adjustment of Rs. 2.13 crores to the total income of the assessee.
3077/M/09 RBS Equities (India)Ltd.
3.First Effective Ground is about Transfer Pricing(TP)adjustments.During the TP proceedings, the assessee furnished the details of marketing functions performed by it along with the expenses incurred by it and the details read as under: Total volume of trades (CH and Clearing House (Rs.) DVP Trade (Rs.) Total (Rs.) DVP trades) Trades with controlled parties:AE.s 17,669,433,449 481,048,367 18,150,481,816 Self trade 1,506,329,140 1,506,329,140 17,669,433,499 1,987,377,507 9,656,810,956 Total Trades with controlled parties (A) 23,339,687,638 15,045,077,550 38,384,765,188 Trades with Non AEs (B) 41,009,121,087 17,032,455,058 58,041,576,144 Total Trades (A)+(B) Particulars Amount(Rs.) Total volume of trades (CH and DVP trades) 58,041,576,144 Less:Trades where marketing is not involved CH Trades for AE 17,669,433,449 DVP Trades for AE 481,048,367 Self trades 1,506,329,140 19,656,810,956 Net volume of trades where marketing is involved 38,384,765,188 Cost incurred only for Non-AE.s 28,037,910 Marketing cost per rupee of volume of trade 0,00073 0.07 In percentage terms The assessee stated that Personnel cost of Rs.1,40,49/-pertained to employment cost of two employees exclusively engaged in sales and marketing,that the travelling cost and other expenses pertain to employees who visited potential client/existing third-party clients outside India,that it had added 18 new clients during the year due to sales and marketing efforts, that incremental progress income on from non-AE.s during the period,as compared to the previous year, was 18% of the total brokerages earned from third-party clients.The TPO observed that the assessee was asking for adjustment of .07 basis points on account of sales and marketing efforts for difference between the unrelated and related businesses,that the contention of the assessee that no market - ing and sales efforts were required in case of dealing with AE was not acceptable in totality,that it was logical to assume that sales and marketing efforts required in case of new clients was higher as compared to the old clients, that it was not possible that the marketing and sales department would not have made any efforts in securing business from the AE.s. In order to give adjustment in respect of sales and marketing expenses the TPO made following calculation:
Particulars Amounts(Rs.) Total volume of trades (CH and DVP trades) (AE % Non AE) A 58,041,576,144/- Total Marketing Cost Incurred B 2,80,37,910/- Marketing cost per rupee of volume of trade (B/A) C 0.00048 Total Marketing Cost In percentage terms .048%
3077/M/09 RBS Equities (India)Ltd.
The TPO held that company had spent an amount at the rate of .048% per rupee volume of trade for AE as well as non-AE businesses.He considered an adjustment of 0.048% reasonable as per the provisions of Rule10B(1)(a)(ii) of the Income Tax Rules,1962(Rules)and accordingly reduc - ed from the arithmetic mean of the brokerages charged by the assessee from its top ten FII customers.The arm’s length brokerages rate that the company should have charged from its AE, according to TPO,was as under:
Arithmetic mean of the brokerage earned by the assessee from its top ten FII customers 0.408% Less: % of marketing costs incurred for Non-Ae.s as discussed above 0.048% Arms length Brokerage rate 0.36% Taking the basis of brokerages rate of 0.36% the TPO made the following adjustment: Particulars Amounts(Rs.) Clearing House Trades for AE A 17,669,433,449/- Arms length brokerage rate percentage B 0.36% Arms length brokerage, the company should have earned (A+B) C 6,36,09,960/- Actual brokerage earned by the company from its AE @ 24% D 4,22,84,486/- Difference(Brokerage less earned)to be added to the company’s income C-D 2,13,25,474/- The AO directed the assessee to make submissions with regard to proposed addition of Rs. 2.13 crores.In its reply, the assessee stated that as per the provisions of Indian TP legislation the most appropriate method would be the one which was best suited to the facts and circumstances of the IT.s and which provided the most reliable measure of an arm’s length result in relation to the IT.s,that the TPO had applied Comparable Uncontrolled Price (CUP) method to determine the ALP,that the CUP method could be applied where a buy/sell similar goods or services in compa - rable transactions with on related enterprises or when unrelated enterprises by/sale similar goods or services,as was being done between the AE.s,that various factors had to be considered before determining whether the transactions were comparable or not, that/broking was a price sensitive business,that the ability to attract and retain customer was largely dependent on the progress rates charged,that the range of brokerages rate charged by it rains between 0.50% to 0.17%, that the highest rate of progress charged to an FI was 0.40% which was four times the brokerages charged to a third-party independent FI,that the level of services rendered by the company in case of FII.s and customers were the same,that the use of progress rate as a benchmark was inapp -ropriate,that the CUP was not the appropriate method to determine the ALP of brokerage rate,that TNMM was the most appropriate method which used Net Profit Margin (NPM) as the Profit Level Indicator(PLI),that the weighted averages NMP earned by 14 broadly comparable 3
3077/M/09 RBS Equities (India)Ltd. independent companies based on three years data (AY.2000-01 to 2003-04)ranged from 1.31% to 25. 22% with an arithmetic mean of 11.60%, that the assessee had earned NPM of 24.87%, that it’s transaction with the AE worked at arm’s length,that the standalone margin of the broadly comparables ranged from -1.32% to 29.89% with an arithmetic mean of 8.65% for the year ended on 31/03/2003.The assessee further argued that even if CUP was to be applied,adjustment for volume of business transaction with the AE should be given and the fact that it had acted as an exclusive broker in India for its AE should also be considered,that during the year under appeal it had earned 35% brokerages income from its AE, that the turnover from AE constituted 42.7% of the total turnover,that the volume of business procured from AE was not comparable to the volume procured from the third parties,that the second-best brokerage income from the third- party was approximately 9%. It referred to the provisions of Rule 10B(3)of the Rules and argued that brokerages rate in equity broking business was volume driven.It referred to brokerages rate charged by third-party broking entities and stated that the TPO had not allowed volume adjust - ment in absence of documentary evidences,that mere absence of evidences did not automatically suggest that no adjustment should be made on account of volume of business procured from AE, that the TPO had heard in considering only simple averages of the brokerages rates charged to FII clients,that he should have considered the weighted average of brokerages rates charged while determining the arm’s length brokerages rate,that he had erred in considering only the FII clients,that the functions performed /undertaken in case of broking services to overseas clients and domestic clients should have been considered,that the research inputs in general are for all the clients,that no special services were provided to FII customers,that even if third-party brokerages rate was considered as CUP the above brokerage rate charged to all client should be considered in determining the arm’s length brokerage rate. 3.4.The assessee objected to marketing and selling cost adjustments proposed by the TPO. It was argued that the TPO had erred in adjusting only 0.04% as against 0.07% to the arithmetic mean of the brokerage rate for marketing and selling costs incurred by the company for non-AE transa- ctions,that the AE did not engage the services of any third-party broking house,that it was an exclusive broker for the AE,that it was not required to make it services to AE, that it did not incur any marketing and selling costs in respect of a transactions, that on the other hand it required extensive marketing activities to get the new clients and maintain the existing clients,
3077/M/09 RBS Equities (India)Ltd. that an adjustment of 0.07% should be made to the average brokerages rate of non-AE transact - tions over and above the volume adjustments.
After considering the submission of the assessee, the AO held that the ALP of the IT.s ,entered into by the assessee,determined by the TPO did not require any interference from his side. Finally,he made an addition of Rs. 2,13,25, 474/- to the income of the assessee 4.Aggrieved by the order of the AO,the assessee preferred an appeal before the First Appellate Authority(FAA).Before him,the assessee argued that TNMM was the MAM to determine the ALP,that even if CUP was considered an appropriate method,volume adjustment should have been provided,that TPO had wrongly applied the simple averages instead of weighted averages of brokerages rates with regard to CH trades,that the TPO had erred in not considering the brokerage rates charged to Indian FI.s to determine the ALP,that the functions and risks were similar as far as brokerages rate of CH were concerned.
4.1.He observed that ABN Amro,having its head quarter in Netherlands had established its subsidiary in Mauritius for carrying out its business of trading in stocks and securities in India on which there was no capital gains tax in Mauritius, that the AE had no business interest in Mauritius and would maintain a token presence there giving rise to the presumption that it was meant to shift the profits from India to Mauritius, that by charging lower book is rate from its AE it was in all likelihood shifting its business profits liable for tax in India to an offshore jurisdic - tions.He held that CUP method was the most direct and reliable way to apply the ALP,that it was preferable to either of the other methods,that the assessee had dealt with FII, that the TPO had collected details of top ten clients and arrived at an average brokerage rate of 0.40%, that the TPO applied internal CUP,as the taxpayer entered into transaction with unrelated parties where the services provided were that of CH trades and all of them being FII.s were similarly placed, that the AE was also an FII and should not have been reluctant for adoption of the most direct and reliable method for determining the ALP,that the very fact that the assessee was trying to take refuse in the general/rigidity TNM and method betrays its lake of confidence in its ALP with the AE,that under the CUP method the price of goods/services was directly compared with the price in uncontrolled transaction under similar conditions,that the quality of products or services was also comparable as it related to CH trade,that there was nothing on record to 5
3077/M/09 RBS Equities (India)Ltd. suggest that contractual terms were different from when the assessee dealt with other FII.s like Morgan Stanley,HSBC global etc.,that the level of market was also the same,that the geographical market was also identical,that the transactions were in the same financial year, that there were no intangible properties associated with the services,that the foreign-exchange risks borne by the third-party as well is the related party at Mauritius were also the same,that a very high level of comparability was there in respect of the CH transactions undertaken by the assessee in respect of the AE as well is the third parties (FII.s), that what had to be seen was the level of comparability and it was not case of the assessee that they should be completely identic - al,that the adoption of internal CUP method by the TPO was fully justified,that on the facts of the case there was no merit on the objections taken by the assessee in that regard, that the internal comparables were available,that the data maintained and supplied by the assessee for such uncontrolled transactions was more complete and reliable than the data of the independent enterprises which had been selected by the assessee as comparables under TNMM.
4.2.With regard to the submission of the assessee that volume adjustment to be allowed,if CUP was to be applied, the FAA observed that the assessee had generated a volume of 42.7% of the total turnover from its AE, that the revenue earned by it from its Mauritius-based AE was 35% of the total revenue, that the assessee was entitled to adjustment because of the higher volume, that it had sought an adjustment of 0.42% on account of volume, that the volume shown from the AE was higher than the volumes shown from the other parties, that there were no agreement or document regarding committed volumes between the two associated enterprises, that volume was just an accident, that India was emerging market and stock markets were booming, that volumes had happened on its own and it could not be said that prices of services charged was negotiated in real-time with regard to any volume, the assessee itself and argued that stock markets were extremely volatile and the investment decisions needed to be evaluated cautiously, that it was not possible for any investor in stock market to foresee the quantum of investments, that volume adjustment / discounts were also used as a competitive strategic to secure the customer loyalty or could be given under duress to last powerful buyers, that the relationship between the assessee and its AE was such that loyalty was assured and there was no question of duress, that there was no need for any adjustment, that volume adjustments/discounts meant a deduction from the published list price of the goods/services, that in the case under consideration there was no such 6
3077/M/09 RBS Equities (India)Ltd. thing as list price and from the brokerages rate charged from the top-10 FII.s indicated that it varied from 0.17% to 0.50%, that the assessee had charged 0.17% brokers from the client with whom it had the minimum turnover, that is the turnover was smaller than the rate of charging brokerage would be higher, that if the market was booming the volume would automatically go up, the AE would definitely increase its volume without seeking any adjustment as it was already a use amount of tax-free capital gains, that it would be improper to hold that the AE would negotiate a volume discussed/adjustment when it was making tax-free profits Mauritius from the Indian stock markets, that volume adjustments were not a matter of statutory rights but of discretion depending upon the specific facts and circumstances, that no volume adjustment was required to be allowed to the assessee considering the nature of clearinghouse trades.
4.3.With regard to considering simple average arithmetic mean instead of weighted averages,the FAA stated that as per the provisions of section 92 arithmetic mean was to be adopted for determining ALP, that the concept of weighted average sought to be introduced by the assessee had no legal basis, that brokerage rate from third parties varied from 0.10% to 0.50% the simple arithmetic mean would be neutralize any anomalies or disadvantages to be suffered by the assessee, that the TPO had selected top-10 FIIs, after carrying out the necessary FAR analysis, and had computed the arithmetic mean.
4.4.The assessee raised additional ground before the FAA’s and had sought adjustment on account of research function undertaken and providing services to third-party clients. It was argued that the assessee was providing Full-Service Broking(FSB) to third parties, that it had undertaken fundamental analysis and technical analysis for its non-AE’s,that it had not applied these analysis while dealing with its AE.
The FAA observed that the assessee had introduced a new concept of FSB,that neither before the TPO or the AO the assessee had sought to bifurcate its business under two heads namely FSB and Execution Only Services Broking (EOSB),that as per the assessee FSB included marketing research,coordinating,management,meetings,order-execution and settlement,that such services were rendered only to third parties,that it was difficult to accept the fact that the Mauritius-based AE would have traded on stock and securities without any research,that AE of the assessee,like any other such entities doing similar business,would have to undertake financial and technical 7
3077/M/09 RBS Equities (India)Ltd. analysis before making investment in such volatile and highly unpredictable business of secureti -es and stocks,that the turnover of the assessee with the AE was 42.7%,that it was difficult to accept the contention of the assessee that such huge amount of trade would have been undertaken by the AE without any fundamental and technical analysis,that to create artificial distinction between AE and non-AE on this service was not proper,that the claim of the assessee that research and advisory costs incurred by the assessee was purely for non-AE business had to be rejected,that the assessee could not have risked its AE’s profit without undertaking any in-depth research about the sector along with historical prices and volumes,that if such ad hoc adjustments were to be allowed the whole exercise of comparability and determination of ALP would be rendered nugatory,that the submissions of the assessee in that regard were only conjunctions and estimates,that it had not furnished any data in that regard,that the other areas i.e. coordinating management meetings order exhibitions and settlement were routine matters,that these activities did not contribute much economically,that they were not value-added activities which required higher charging price,that no evidence in form of contractual agreement of any marketing research coordinating management meeting for third parties were filed either at assessment stays or at the appellate stage.
He further held,with regard to the brokerages rate to Indian FI.s,that the TPO had based the adjustments on the concept of comparability,that he had identified ten FII.s with whom the assessee had dealt and who were similarly placed as that of the AE,that he had determined the brokerages at the rate of 0.40%, that he had maintained high standard of comparability,that the TPO had given detailed reason for allowing adjustment of 0.48% in place of 0.67% with regard to marketing and sales effort,that the adjustment were in the nature of an estimate and assump - tions and would depend upon the facts of the case, that the TPO had rightly considered the entire volume of the AE as well as of the non-AE for determining the market value cost of adjustmen - ts,that the assessee claimed that total marketing cost comprised of salary and related costs of two employees who were exclusively engaged in marketing and sales and that the role of these employees was restricted to interacting and maintaining relationships with the third-party clients only,that there was no proof that they did not interact with the AE during the year under appeal, that it had not furnished the names qualifications,employment contract details and the terms of engagement to establish that the two so-called personnel were exclusively engaged in marketing 8
3077/M/09 RBS Equities (India)Ltd. and sales with third parties only,that the argument was not supported by any material evidence and had to be rejected,that the computation of 0.73% of adjustment sought under the head was without any material evidence,that the TPO had been very fair and reasonable in allowing an adjustment of 0.48% looking at the nature of services rendered in respect of marketing and sales.
5.Before us,the AR argued that it had applied TNMM,that the weighted average NPM earned by 14 broadly independent companies based on three year data ranged 1.31to 25.25%,that the arithmetical mean was 11.60%,that the assessee had earned NMP of 24.87% during the year under appeal,that there was no justification in rejecting TNMM and adopting CUP,that the assessee was charging very low brokerage from its AE,that the TPO had arranged the arithmetic mean in a peculiar way,that only arithmetic mean of transactions should have been taken for determining the ALP,that he had wrongly selected TOP the FII.s for benchmarking,taken the arithmetic mean of top ten FII.s, that while completing the order for the AY.2004-05 identical issue was decided by the TPO,that he had not given any reason for departing from the stand taken for that year.With regard to marketing adjustments,he argued that the dispute was about the denominator,that marketing expenditure was incurred for non-AE.s only,that the TPO decided that it should be considered for non AE.s as well as for the AE.s,that the approach adopted by TPO was incorrect,that the assessee was not giving any research services to the AE,that the TPO had not allowed adjustment for volume.
The Departmental Representative argued that the TPO had rightly preferred CUP over TNMM as appropriate method,that the TPO had not accepted the fact that the assessee was in the field of execution only,that big groups would have to maintain centralised and research analysis establish -ment,that the assessee was artificially differentiating between FSB and ‘execution only services, that it was rendering all the services to all its clients,it had not furnished the evidence as to what services were rendered to AÉ.s and non AE.s,that there was no need for allowing adjustment on account of volume,that there was no prior agreement with the AE about minimum volume,that the TPO had rightly selected internal third party comparables,that he was justified in rejecting the FI as comparables, that Indian comparables had not to bear the foreign exchange difference, that except for the AY.2004-05 the TPO had taken a consistent view with regard to the compara - bles,that benchmarking adopted by him in the AY.2004-05 was not accordance with the 3077/M/09 RBS Equities (India)Ltd. provisions of section 92C of the Act.He relied upon cases of C bay system Pvt.Ltd.(152 ITD126),KSB Pump(147ITD482),ABB Lummus Heat Transfer BV(64taxmann. com. 210), Serdia Pharmaceuticals Pvt.Ltd.(44 SOT 391).
6.We have heard the rival submissions and perused the material before us.We find that the assessee is in business of broking and trading of shares,that it had entered in to IT.s.with its AE.s,that the dispute is mainly about the IT.entered in to with the Mauritius AE,that it had selected TNMM as MAM for determining the ALP of its IT.s,that it applied weighted average NPM based on three years data,that it argued that the arithmetical mean of the comparables was 11.60%,that it had earned NMP of 24.87% and that the IT.s entered into were at arm’s length, that the TPO rejected the claim made by it and adopted CUP as MAM,that he found that the arithmetic mean of the brokerage earned by the assessee from its top ten FII.s was 0.408%,that he applied arm’s length brokerage rate of .36% to the CH transactions of Rs.1766.94 crores, that the assessee worked out marketing-cost per rupee of volume of trade at 0. 00073(in % term 0.07percent), that the TPO worked out sales and marketing expenses adjustment @.048%,that he made an upward adjustment of Rs.2.13 crores to the income of the assessee and same was adopted by the AO,that the assessee argued that if CUP was to be adopted certain adjustments had to be allowed,that the FAA upheld the order of the TPO/AO,that before him the assessee raised additional ground about providing EOBS to the AE,that the FAA decided the issue against him and also held that no adjustment could be allowed for volume of business. 6.1.In our opinion,basic two issues,to be decided by us,are selection of MAM and adjustment to be allowed for determining the ALP of the IT.s.entered in to by the assessee during the year under appeal.We would also like to decide the related issues with these two main issues. It is said that Transfer pricing is not an exact science,but,a method of legitimate quantification which requires exercise of judgment on the part of the tax administration and the taxpayer. It is method and formula-based and, therefore, is rational and scientific.However,it is not a perfect or infallible exercise and therefore the Act and the Rules have provided that while finding out the fair and true market value of the transaction certain adjustment,if required, should be made.For that purpose we have to consider Rule 10B(2)and (3)of the Rules.The crucial expression giving insight into what was intended by the provision of the Rule can be seen by the use of the 3077/M/09 RBS Equities (India)Ltd. expression ‘none of the differences if any between the transactions being compared, or between the enterprises entering into such transactions are likely to materially affect the price or cost charged or paid in such transactions in the open market’.The other exercise which the TPO has to necessarily perform is that if there are some differences,an attempt to ‘adjust’ them to ‘eliminate the material effects’should be made.Rule 10B(2) gives six methods outlined in clauses (a) to (f) of rule10B(1),while judging the comparability.Rule 10B(3),on the other hand,indicates the approach to be adopted where differences and dissimilarities are apparent.The TPO, first,has to be satisfied that such differences do not ‘materially affect the price. . . or cost’;secondly, he has to make an attempt to make reasonable adjustment to eliminate the material effect of such differences has to be made.
6.2.Coming to the issue of MAM to be adopted for benchmarking, we would like to state that TNMM requires establishing comparability at a broad functional level.The net profit margin realised by an AE is compared with net profit margin of the uncontrolled transactions to arrive at the ALP.The TNMM is quite similar to RPM and CPM to the extent that it involves comparison of margin earned in a controlled situation with margins earned from comparable uncontrolled situation.The only difference is that,in the RPM and CPM methods,comparison is of margins of gross profits and whereas in TNMM the comparison is on margins of net profit. CUP method is considered the most direct method for determining the ALP.Under this method, the price at which controlled transaction is carried out is compared to the price obtained in comparable uncontrolled transaction.An uncontrolled price is the price agreed between unconnec -ted parties for the transfer of goods or services.CUP can be internal or external.Under this method the properties of a product and accompanying circumstances and conditions have to be evaluated for comparison.Even a minor change in the properties of the products/ nature of services, circumstances of trade can affect the whole exercise.Product/service comparability is the absolutely key. Pricing of a product/service is a very subjective exercise and is true value, as received by the receiver,can differ from that received by others in the market place.CUP method requires a high degree of comparability along with the quality of the product or service, contractual terms,level of market, geographical market in which the transaction takes place,date of transaction,intangible property associated with the sale etc.Thus,it is clear that,broader 11
3077/M/09 RBS Equities (India)Ltd. business functions,and not just the product/service comparability have to be considered in CUP method.Not only this,the TPO has to take in to consideration the differences into account and examine as to whether these differences could be ironed out by way of making permissible adjustments for achieving comparability.
6.2.1.We find that for the year under appeal the TPO had used the data available in the TP study report of the assessee,that he selected ten FII.s who had entered in to CH transactions with it,that there was high degree of comparability between the functions performed by the comparables and assessee.He took in to consideration factors like year of the business transactions, geographical location of the country where both of them had carried out business-they all were based in Mauritius and had availed services of the assessee in India.The assessee had not pointed out the factors would justify for not relying upon the data of the FII.s.If the terms and conditions of CH trade for the assessee and the FII.s were same then there was no justification for adopting any other method.It is not the case of the assessee that the AE was provided certain exclusive services that required use of intangible assets and thus the comparison got vitiated. Foreign exchange risk are similar for the AE and the other FII.s.In short,there was a high level of comparability in the exercise done by the TPO to adopt CUP as MAM.
In the case before us,the TPO had allowed the assessee adjustment towards sales and marketing expenses while applying CUP method,though the assessee is not satisfied with the percentage of adjustment and not considering the claim for volume adjustment.But,these are procedural aspects-basic fact is selection of MAM.In our opinion,considering the facts of the case,CUP was more suitable method to determine the ALP of the IT.s.,for the year under consideration. So, confirming the order of the FAA,we hold that preference given by the TPO to CUP over TNMM was based on valid reasons and it does not require any interference from our side.
6.3.We would also like to deliberate upon the selection of top ten FII.s for benchmarking and ignoring FI.s.It is true that in the AY.2004-05,the TPO had used the data of the FII.s and FI.s for benchmarking.But,in our opinion,that cannot be a basis or justification for adopting the same data for an earlier or a subsequent year.Each year is a separate year for tax purposes.Secondly, in our opinion,FI.s should not be compared with FII.s operating from Mauritius.Geographical and 12
3077/M/09 RBS Equities (India)Ltd. functional differences of the FII.s and FI.s cannot be ignored while determining the ALP.We do not find any infirmity in selection of top ten FII.s as valid comparables for the year under appeal, as there was high degree of comparability between the assessee and the FII.s.
6.4.We find that in the year under consideration,the TPO had used arithmetic mean of weighted average brokerage paid by each of the comparable third party for benchmarking,that in the AY. 2004-05,he had taken the weighted average brokerage of all the comparables.In our opinion, the method adopted by the TPO for the year under appeal is more scientific,than the method approved in the subsequent AY. But,we find merit in the argument of the assessee that only arithmetic mean and not the ‘arithmetic mean of weighted average’should be considered to benchmark and determine the ALP.Proviso to section 92C(2)of the Act also approves the use of arithmetic mean for the purposes of benchmarking and determining the ALP an IT.Therefore,we direct the TPO/AO and rework the adjustment considering the arithmetic mean of the brokerage paid by TOP ten FII.s for the year under appeal.
6.5.Now,we would like to deal with issue of adjustments to be made to‘eliminate the material effects’ in TP exercise.The assessee is not satisfied with the adjustment allowed to it under the head sales and marketing expenditure.It has also agitated the issue of not allowing the volume adjustment.We find that the assessee stated that it was entitled to an adjustment of 0.67% marketing and sales efforts as against the 0.48% allowed by the TPO,that the marketing cost of Rs.2.83 crores comprised of salary and related costs of two employees,that the role of those employees was restricted to Non-AE.s only.But it is found that the assessee had not produced the qualification,employment-contract details of those employees and the terms of engagement to establish the claim made by it about rendering of services by them to Non-AE client only.The TPO had reduced the adjustment by a small margin only.In absence of full details reduction made by him is held to be justifiable.It is not a case of non granting deduction at all.So,we uphold the order of the FAA.
3077/M/09 RBS Equities (India)Ltd.
6.5.1.However,we agree with the assessee that in the denominator only non-AE trades should be considered,as considered in the order of the TPO for the AY.2006-07.TPO/AO is directed to rework the denominator for the year under appeal.
6.6.With regard to volume adjustment,we want to mention that the assessee had generated a volume of 42.7% of the total turnover from its AE.s,that the revenue earned by it from its Mauritius-AE was 35% of the total revenue,that it had sought an adjustment of 0.42% on account of volume, that the FAA rejected the claim made by it.Here,one thing is noticeable that no evidence was produced by the assessee before the Revenue authorities or us to prove that there were some agreement that could prove committed volumes between the Mauritian AE and the assessee.It is not a rule that customer giving business of higher volume are invariably allowed some concessions. Rebates/commissions/privileges are subject to understanding between the parties.Such concessions are always graded.But,same are based on some formula.Basis for claiming 0.42% adjustment is not known.It is hard to believe that being the very first year,the assessee would have not entered in to some kind of agreement with the AE to allow it commission for higher volume.We cannot forget the year under appeal was the period when Indian share market was booming and was fast emerging as new destination for investment.Just because the Mauritian AE had given it business of 35% of the total business no adjustment can be allowed without some kind of document/agreement proving such understanding. Besides, volume adjustment can be allowed to ensure loyalty of the customer.In the case under considera - tion buyer is the AE of the assessee,so,loyalty was assured.A perusal of the records reveal that brokerages rate charged from the top ten FII.s varied from 0.17% to 0.50%, that the assessee had charged 0.17% brokers from the client with whom it had the minimum turnover.As per the established business norms, rate of brokerage rate would be higher for smaller turnover.But,the assessee has not followed the said general rule.Thus,there is no evidence to prove that it was following any fixed pattern about allowing volume discount with its clients.We agree with the FAA that it goes against the normal human behavior that an Mauritian-AE would negotiate a volume discount/adjustment when it earning making tax-free income in Mauritius from the Indian stock markets.Definitely,it had would have been allowed had it been documented by the parties.So,we affirm the decision of the FAA that the assessee should not be allowed any volume discount. 14
3077/M/09 RBS Equities (India)Ltd.
6.7.Lastly we would like to deliberate upon the additional ground raised by the assessee before the FAA.The assessee has claimed,before him,that it was offering EOSB services to its AE and to the Non-AE it was rendering FBS and the FAA had rejected the claim made by it.We are of the opinion that as per the provisions of section 92 of the Act,the onus is on the assessee to prove the claim made by it about the ALP of the IT.s.It is duty of the claimant to prove,with some cogent evidence,that statement made by it about a particular fact is correct and not merely an assertion.Evidences speak for themselves.Same could be in form of confirmations/letteres/ agreements/e-mails etc.But,they should primarily prove the existence of certain facts.It is true that in the proceedings under the Act strict rules of the Evidence Act are not applicable.But,it does not mean that a claim made by the assessee/AO should be accepted without verifying the veracity of such a claim.In short,claims made by a person(Assessee/AO)have to be corroborated by some kind of evidences/(s).Nothing has been brought on record that during the year under consideration the assessee had provided EOSB to its AE.For the first time before the FAA,the assessee had raised the issue of providing EOSB to its AE.He did not advance the said arguments before the TPO or AO.We know that there is no bar in raising a new issue or new stand in appellate proceedings.But,same was not accompanied by any document.The sum and substance of the argument of the assessee is that the Non-AE.s were provided services that were research based,whereas for the AE it was just executing the orders.We are not able to persuade ourselves to agree to the proposition advanced by the assessee.No prudent person will abide by the advice given to it that is not based on research and analysis and that especially in the field of purchase and sell of equities.The volatile nature of share market is such that no one would like to invest in it until and unless scientifically analysed data is made available to it.Secondly,the amount involved is not a few hundred or thousands rupees only.The transactions with the AE are huge- more than 40% of the total business carried out by the assessee for the year under consideration was from the AE.It goes against the normal human nature that for such a valuable customer any businessman will give advice without making sound research about the equities to be purchased or sold.If the assessee had simply bought and disposed off the shares as per the instructions of the AE,then the charges for rendering such services should have been very meager.Besides,why the AE would prefer to the abide by advice that is not based on research and analysis rather than take an informed decision.All these surrounding circumstances are preventing us to accept the 3077/M/09 RBS Equities (India)Ltd. argument that the assessee was providing execution only services to the AE.One more thing to be remembered here is that the year under consideration is one of the initial years when the assessee had started providing investment advices to its client,including its AE.For establishing itself in the competitive market of equities all the players would concentrate on market research and data analysis.Though the details of transactions entered in to by the AE with the parties,other than the assessee,for purchasing/selling equities for the year under consideration are not available. Otherwise,it would have given a fare idea about the services availed by it from the India based investor advisors.No correspondence has been produced before us that could prove that there was difference between the services rendered by the assessee to its AE.s and non-AE.s.We are not commenting upon the papers submitted by it for the subsequent AY.s.We would consider them while deciding the appeals for those years.Therefore,we confirm the order of the FAA in that regard and hold that there is no evidence to prove that the AE was provided execution only services for the year under appeal.
Considering the peculiar facts and circumstance of the case,we decide the effective ground of appeal(Gs.OA-2 to 8-except Grounds ),raised by the assessee with regard to determination of ALP,in it favour,in part.
7.Next ground (Ground of appeal No.10) is about disallowing of write-off of irrecoverable loan of Rs.2.58 lakhs advanced to the employee of the assessee.The AO had disallowed the claim on the ground that same was not trade debt and hence was not allowable u/s.36 (1) read with section 37 of the Act, that the loan was given to the employee towards housing loan.
7.1.After considering the submission of the assessee and the assessment order, during the appellate proceedings,the FAA held that a that a bad debt or an advance which could be written off under the Act should be included in the income of the assessee,that in the case under consideration the said precondition was not satisfied, that it could not be claimed as bad debts, that it could not be allowed as expenditure and that of business loss could be allowed as per the provisions of section 72 of the Act,that the income from the amount in question was not included in the return of income, same was not allowable as bad debts. Finally, he upheld the order of the AO.
3077/M/09 RBS Equities (India)Ltd.
7.2.Before us,the AR argued that the assessee had advanced housing loan to one of its employees,that he resigned from the services,that after following up with the employee it wrote off the loan as there was no chance of recovery,that loss was allowable u/s.28 of the Act as business loss.The DR supported the order of the FAA.
7.3.We have heard the rival submissions and perused the material.We find that there is no doubt about the genuineness of the transaction i.e. advancing of loan.Even if it cannot be allowed as bad loan,it has to be allowed as a business loss.The loan was advanced to the employee and it could not be recovered.So,in our opinion,same has to be allowed u/s. 28 of the Act.Reversing the order of the FAA,we decide ground no.10 in favour of the assessee.
8.Next two grounds deal with levy of interest u/s.234 of the Act and initiation of penalty proceedings u/s.271(1)(c)of the Act respectively.As the first is consequential and second is premature,so,both are not being adjudicated.