2021 (3) TMI 680 - AT - Income Tax

Tribunal partially allows Revenue's appeal and assessee's cross-objections. Fresh order required on salary costs.

The appeal by the Revenue is partly allowed, and the cross-objections by the assessee are partly allowed for statistical purposes. The Tribunal directed ... TP Adjustment - selection of MAM - CIT-A upholding the application of the CUP Method to determine the ALP of the brokerage charged - CIT(A) held that the assessee is entitled to 5% benefit for the impugned assessment year in respect of adjustment made on clearing house trades - average of rates charged to third party FIIs and domestic clients - HELD THAT:- Comparable uncontrolled transactions which involve a transaction between one of the enterprises and an uncontrolled party, are referred to as internal comparables. Comparable uncontrolled transactions which involve a transaction between two parties, neither of which is an associated enterprise, are called external comparables. CUP cannot be applied on basis of comparable uncontrolled transactions- internal or external- that are undertaken in different geographical markets as compared to the market in which the controlled transactions is undertaken.t is crystal clear that the assessee's transactions are with overseas FIIs and hence comparison with other overseas FIIs would alone be appropriate. The fact remains that domestic third party transactions are not comparable with the overseas FIIs on account of geographic differences. Thus the 1(a) of cross-objection is rejected. Volume adjustments - A perusal of the documents filed before us clearly indicates that the assessee, while determining the rate charged individually in respect of the various third party FIIs has considered the weighted average rate, which takes into account the volumes. Further, as per the information collected by the TPO, which was also provided to the assessee, ABN Amro Asia Equity (India) Ltd. has charged an average brokerage rate of 0.40% in respect of clearing house trades of ₹ 2831 crores with overseas FIIs. DSP Merrill Lynch Ltd. has charged a brokerage rate of 0.44% for clearing house trade of ₹ 2103 crores with overseas FIIs. Thus significant volume of transactions were being undertaken at these rates in India between unrelated parties. In view of the above facts, the Ld. CIT(A) has rightly confirmed the negation of volume discount raised by the assessee. Thus the 1(b) of cross-objection is rejected. Salary costs - TPO concluded that no portion of the salary costs can be considered as being incurred for marketing for third parties - Salary cost of research personnel need to be re-examined. Therefore, we set aside the order of the Ld. CIT(A) on the above issue and restore the matter to the file of the AO/TPO for making a fresh order after giving reasonable opportunity of being heard to the assessee. We direct the assessee to file the relevant documents/evidence before the AO/TPO. Thus the ground of cross objections raised by the assessee in respect of salary cost of research personnel i.e 1(c) is allowed for statistical purposes. Similarly, the 1st ground of appeal filed by the revenue is allowed for statistical purposes, on the reasons that the tax authorities have proceeded to examine the actual rate charged by the assessee to its AE in Mauritius and compare the same with the rates charged by it to third parties. CIT(A) held that the applicant will be entitled to 5% benefit for the impugned assessment year in respect of adjustment made on clearing house trades - Where the variation between ALP as determined with reference to transfer pricing rules and the transaction price is less than 5%, no attempt can be made to substitute ALP for the transaction price in view of section 92C(2). But this rule can have no application, where it exceeds 5%, so as to reduce excess by 5% as claimed by the assessee. In other words, where the difference exceeds 5%, there can be no application of tolerance limit of 5% as decided by the Tribunal in Global Vantage P. Ltd. v. DCIT [2009 (12) TMI 668 - ITAT DELHI] Thus for the impugned assessment year, tolerance limit of 5% u/s 92C is not a standard deduction to be reduced from the additions made on account of ALP. After the insertion of sub section 2A to section 92C, with retrospective effect from 1-4-2002, +/- 5 % will not be a standard deduction.In view of the above provisions in the Act, the additional ground filed by the revenue is allowed. Disallowance of trading loss on share transaction - AO in his order has stated that the trading of shares by the assessee-company comes within the ambit of the Explanation to section 73 and accordingly disallowed the trading loss - HELD THAT:- In the instant case, Explanation to section 73 referred by the AO is not applicable as the assessee is not engaged in 'business' of purchase/sale of shares of other companies - loss was incurred on account of error trades in respect of dealings of clients and not on own account and the loss incurred in course of carrying on share broking business is in line with accepted market practices. Further, we find that no expenditure has been incurred by the assessee in respect of error trades. In such a situation, disallowance on account of loss on share trading and ad-hoc disallowance of ₹ 5,00,000/-, not supported by any reasonable basis has been rightly deleted by the Ld. CIT(A). Thus the 2nd and 3rd ground of appeal filed by the revenue are dismissed. Issues Involved:1. Transfer-pricing adjustments.2. Application of the Comparable Uncontrolled Price (CUP) Method.3. Rejection of Transactional Net Margin Method (TNMM).4. Volume adjustments in brokerage rates.5. Salary costs of research personnel.6. 5% benefit on Arm's Length Price (ALP).7. Trading loss and its classification under Explanation to section 73 of the Income-tax Act.Detailed Analysis:1. Transfer-pricing adjustments:The appeal by the Revenue and the cross-objection by the assessee revolve around transfer-pricing adjustments. The primary international transactions in question involve brokerage charges by the assessee on transactions undertaken on behalf of its group entities in India.2. Application of the Comparable Uncontrolled Price (CUP) Method:The Transfer Pricing Officer (TPO) rejected the TNMM applied by the assessee, arguing that there was a clear market rate for broking services, making the CUP method more appropriate. The TPO emphasized that the CUP method is the most direct method and preferable to other indirect methods.3. Rejection of Transactional Net Margin Method (TNMM):The TPO rejected the TNMM for several reasons, including the unreliability of the data used by the assessee and the non-comparability of the functions performed by the comparable cases. The CIT(A) upheld the TPO's application of the CUP method and rejected the assessee's contentions regarding volume adjustments and salary costs.4. Volume adjustments in brokerage rates:The assessee argued for volume adjustments, citing significant differences in the volume of trades executed for the AE compared to third parties. However, the CIT(A) and TPO found that the assessee had not provided specific evidence to support this claim. The TPO noted that significant volumes of transactions were undertaken at standard rates in India between unrelated parties, negating the need for volume discounts.5. Salary costs of research personnel:The TPO and CIT(A) both concluded that no portion of the salary costs could be considered as incurred for marketing for third parties. The assessee failed to provide documentary evidence to support its claim that the salary costs were related to marketing activities for third-party transactions. The CIT(A) and TPO both disregarded the salary costs of research personnel attributable to clearing trades for third-party clients.6. 5% benefit on Arm's Length Price (ALP):The CIT(A) allowed the assessee a 5% benefit on the ALP for the impugned assessment year. However, the Tribunal noted that the tolerance limit of 5% under section 92C is not a standard deduction to be reduced from the additions made on account of ALP. The Tribunal allowed the additional ground filed by the Revenue, clarifying that the 5% benefit is not applicable where the difference exceeds 5%.7. Trading loss and its classification under Explanation to section 73 of the Income-tax Act:The AO disallowed the trading loss of Rs. 40,82,623/- incurred by the assessee, classifying it under the Explanation to section 73. The CIT(A) allowed the assessee's appeal, stating that the loss was incidental to the share broking business and not speculative. The Tribunal upheld the CIT(A)'s decision, noting that the loss was incurred due to dealing errors and was in line with accepted market practices.Conclusion:The appeal by the Revenue is partly allowed, and the cross-objections by the assessee are partly allowed for statistical purposes. The Tribunal directed the AO/TPO to re-examine the salary costs of research personnel and make a fresh order after giving the assessee a reasonable opportunity to present evidence. The Tribunal also clarified the application of the 5% benefit on ALP and upheld the CIT(A)'s decision on the trading loss issue.